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Half Year Financial Report June 30, 2015 Table of contents I ACTIVITY REPORT ....................................................... II CONSOLIDATED FINANCIAL STATEMENTS ............ III STATUTORY AUDITORS’ REVIEW REPORT ON THE 2015 HALF- YEAR FINANCIAL INFORMATION ............ IV STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF- YEAR FINANCIAL REPORT ....................... I Activity Report / Half-Year 2015 ACTIVITY REPORT – HALF YEAR 2015 CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS This report includes certain terms that are used by AXA in analyzing its business operations and, therefore, may not be comparable with terms used by other companies; these terms are defined in the glossary provided at the end of this document. Certain statements contained herein are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please refer to AXA’s Registration Document for the year ended December 31, 2014, for a description of certain important factors, risks and uncertainties that may affect AXA’s business. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise. Half Year 2015 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2015 FINANCIAL MARKET CONDITIONS IN THE FIRST HALF OF 2015 The first half of 2015 started with the implementation of new policies by the Swiss National Bank (SNB) and the European Central Bank (ECB) which both had significant consequences on the financial markets. On January 15, 2015, the SNB decided to discontinue the minimum exchange rate of 1.20 Swiss Franc per Euro and lower interest rate on sight deposit balances to -0.75%. As a consequence, the Swiss Franc increased sharply against the Euro. On January, 22, the ECB announced its intention to expand its asset purchase programme to sovereign bonds in order to fulfil the ECB’s price stability mandate. The announcement pushed the euro lower and led to a volatile period for all asset classes, with notably strong gains recorded in the European and Japanese stock markets, while the bond markets endured a volatile and ultimately negative first half, impacted by the Greek debt situation as well as the expectations of interest rate increase by the US Federal Reserve in the second half of the year. In Europe, Greece was the major point of attention as the government elected in January 2015 vowed to renegotiate the terms of its debt restructuring. As successive summits failed to find an agreement between Greece and its creditors, volatility across financial markets heightened and interest rates in Southern Europe increased. In June, Prime Minister Tsipras called for a referendum on the creditors’ latest proposals; banks were ordered to close until after the vote and capital controls were introduced. Although electors voted in majority against the creditors’ proposals, Prime Minister Tsipras agreed on new terms with the creditors; they were approved by the Greek Parliament and are currently (as of August 4, 2015) in the process of being implemented. As a result, tensions on the financial markets eased in July. In the US, disappointing GDP figures showed that the economy had contracted slightly in the first quarter of the year. The timing of the first US interest rates rise since 2006 has been one of the main focus areas for investors since the Fed brought its bond-purchasing programme to an end in October 2014. Accordingly, the Fed’s confidence that the economic recovery was on track prompted investors to worry that a rate rise was imminent. However, the Fed left rates unchanged at its June policy meeting, but most commentators still expect a rise before the end of the year, partly due to better-than-expected jobs figures in May. In emerging markets, a number of central banks maintained or added to their accommodative stances. India, South Korea and Russia were among those to cut rates in an effort to boost growth or combat low inflation. In China the story was one of decelerating GDP growth, monetary intervention from the central bank, and market volatility, particularly in the domestic A-share market. Nevertheless, Chinese equities performed relatively well over the first half of the year, with investors anticipating stimulatory measures from the Chinese authorities in response to the slowing economy. The People’s Bank of China cut the reserve-requirement ratio for banks by 100 basis points in April and followed this with a smaller cut at the end of June for banks with a large proportion of agriculture-related lending. The central bank also cut interest rates twice over the period, in May and at the end of June. This followed a sharp sell-off in Chinese stocks from the middle of June, as investors grew concerned that equity valuations had become stretched. Although the sell-off was remarkably steep, it was insufficient to erase the gains made earlier in the year. Stock Markets Equity markets had mixed performance in 1H15 as Japan and Europe experienced strong gains while the US stocks remained flat. The MSCI World Index increased by 3%. The Dow Jones Industrial Average index in New York decreased by 1.1% and the S&P 500 index increased by 0.2% in the first half of 2015. The FTSE 100 index in London decreased by 0.7% in the first half of 2015. The EUROSTOXX 50 index in Eurozone increased by 8.8% and the Nikkei index in Tokyo increased by 16%. The MSCI G7 index increased by 2.7% and the MSCI Emerging index increased by 4.3%. The S&P 500 implied volatility index (VIX) decreased from 19.2% on December 31, 2014 to 18.2% on June 30, 2015. The S&P 500 realized volatility index decreased from 13.8% on December 31, 2014 to 11.2% on June 30, 2015. Bond Markets The US 10-year T-bond yield increased by 18 bps to 2.35% compared to December 31, 2014. The 10-year German Bund yield increased by 22 bps to 0.76%. The French 10-year government bond yield increased by 36 bps to 1.20%. The 10-year Japanese government bond yield increased by 14 bps to 0.47%. The 10-year Belgium government bond increased by 40 bps to 1.22%. All comparisons are versus December 31, 2014. The 10-year government bond yields in the Eurozone peripheral countries increased more steeply: Italy increased by 42 bps to 2.30%, Spain increased by 70 bps to 2.31%, Greece increased by 584 bps to 15.44%, Half Year 2015 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2015 Ireland increased by 40 bps to 1.64% and Portugal increased by 29 bps to 2.98%. All comparisons are versus December 31, 2014. Conversely, the Swiss 10-year government bond yield decreased by 19 bps to 0.13% compared to December 31, 2014 following the SNB’s decisions announced early 2015. In Europe, the iTRAXX Main spreads increased by 12 bps to 75 bps compared to December 31, 2014 while the iTRAXX Crossover decreased by 19 bps to 327 bps. In the United States, the CDX Main spread Index increased by 4 bps to 70 bps. The Euro interest rates implied volatility index (based on 10x10 Euro swaptions) decreased from 38.4% on December 31, 2014 to 33.7% on June 30, 2015. Exchange rates Euro depreciated against main currencies compared to 2014, as shown below: End of Period Exchange Rate Average Exchange Rate June 30, 2015 December 31, 2014 June 30, 2015 June 30, 2014 (for €1) (for €1) (for €1) (for €1) U.S. Dollar 1.11 1.21 1.12 1.37 Japanese Yen (x100) 1.36 1.45 1.34 1.40 British Sterling Pound 0.71 0.78 0.73 0.82 Swiss Franc 1.04 1.20 1.06 1.22 Russian Ruble 62.43 72.60 65.28 46.16 OPERATING HIGHLIGHTS Significant acquisitions AXA COMPLETED THE ACQUISITION OF A 7% STAKE IN AFRICA RE On March 17, 2015, AXA announced that it completed the acquisition of a 7.15% stake in African Reinsurance Corporation (“Africa Re”), the leading reinsurance company in Africa1, for a total consideration of USD 61 million (or Euro 54 million2). Africa Re is the #1 reinsurer in Africa, operating across the continent. It was founded in 1976 by the member states of the African Union and the African Development Bank (ADB). Africa Re’s current shareholding comprises 41 member states, the ADB and more than 100 African insurance and reinsurance companies, together holding a 75% stake in the company, as well as other development finance institutions and strategic partners. Africa Re is a growing and profitable company, with gross written premiums of Euro 505 million and net income of Euro 64 million in 20133. Africa Re has strong reinsurance market shares across the continent4, notably in countries identified as key priorities for AXA, such as Nigeria and Egypt. This transaction allows AXA to increase its exposure to the fast growing reinsurance and insurance markets in Africa, in line with its Ambition AXA strategy, by participating in the successful and profitable development of Africa Re. Moreover, AXA expects to benefit from the extensive knowledge of the local markets and the expertise of Africa Re’s management team. AXA CONFIRMED ITS INTENTION TO INCREASE ITS STAKE IN ITS INDIAN INSURANCE JOINT-VENTURES WITH BHARTI ENTERPRISES TO 49% FROM 26% On March 12, 2015, following the approval of the Insurance Bill by the Indian Parliament, AXA confirmed its intention to increase its stake in its Indian Life and general insurance joint-ventures with Bharti Enterprises to 49% from 26%, subject to finalization of negotiations, entering into legally binding agreements, as well as closing conditions including regulatory approvals. 1 Source: Africa Re Information Memorandum, based on 2013 gross written premiums. 2 EUR 1 = USD 1.13 as of February 19, 2015. 3 Using yearly average Forex rates (source: Bloomberg). Source: Africa Re’s 2013 annual report. 4 Africa Re’s 2013 Property & Casualty reinsurance market shares: Nigeria, 28.5%; Egypt, 9.1%. Source: Africa Re Information Memorandum, based on 2013 gross written premiums. Half Year 2015 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2015 AXA COMPLETED THE ACQUISITION OF BRE INSURANCE, MBANK’S PROPERTY & CASUALTY SUBSIDIARY IN POLAND On March 30, 2015, AXA announced that it completed the acquisition of 100% of BRE Insurance1, mBank’s Property & Casualty subsidiary in Poland. Consequently, AXA and mBank have launched their 10-year exclusive Property & Casualty and Life Protection distribution agreements in the country. Final consideration amounted to PLN 580 million (or Euro 140 million2). AXA TO ACCELERATE IN BRAZIL THROUGH THE ACQUISITION OF THE P&C LARGE COMMERCIAL RISKS INSURANCE SUBSIDIARY OF SULAMÉRICA On May 22, 2015, AXA announced that it entered into an agreement with SulAmérica S.A. to acquire 100% of its Large Industrial and Commercial risks insurance subsidiary, SulAmérica Companhia de Seguros Gerais, for a total consideration of BRL 135 million3 (or Euro 40 million4). The scope of the transaction includes Marine Hull, Marine Cargo and Property5. AXA expects to include the acquired operations within AXA Corporate Solutions Brazil and Latin America (“AXA CS Brazil”). This transaction increases AXA’s exposure to the Brazilian market and its strong growth prospects. SulAmérica’s Large risks insurance business would bring significant positions in Marine (#2 player in Hull in Brazil 6) and a strong footprint over Rio and South Brazil, thus complementing AXA CS Brazil’s current coverage of the Sao Paulo state and accelerating its development. Moreover, SulAmérica’s highly experienced underwriting teams would reinforce AXA’s local expertise and know-how. SulAmérica’s Large Industrial and Commercial risks insurance operations have a successful growth track record in the Brazilian market, achieving a 12% average annual growth in terms of revenues over the past two years, reaching BRL 220 million in 2014 (or Euro 70 million7). Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory and antitrust approval and is expected to take place in the fourth quarter of 2015. Significant Disposals TERMINATION OF THE SALE AND PURCHASE AGREEMENT BETWEEN AXA, CERTINVEST AND SIF TRANSILVANIA On July 3, 2015, the agreement with Certinvest and SIF Transilvania to sell AXA’s Life & Savings insurance operations in Romania, which was announced on December 18, 2014, lapsed. AXA is reviewing its strategic options considering the interests of its clients and employees in Romania. Other AXA LAUNCHES A €200 MILLION VENTURE CAPITAL FUND TO FOSTER INNOVATION AND IMPROVE CUSTOMER EXPERIENCE On February 25, 2015, AXA announced the launch of AXA Strategic Ventures (AXA SV), a €200 million venture capital fund dedicated to investing AXA Group money in budding strategic innovations in the insurance, asset management, financial technology and healthcare service industries. Led by François Robinet, with a presence in San Francisco, New York, London, Paris, Zurich and Berlin, and some plans to launch a presence in Asia in the near future, AXA SV will have on-the-ground coverage of investment opportunities across the globe on behalf of AXA Group companies. AXA is launching AXA SV in order to harness technological disruption for the benefit of AXA Group companies. The quality of interactions with customers is a priority for the Group. Complementing internal efforts to improve customer experience by bringing in new approaches, technologies and business models being developed by young innovative companies can only lead to stronger results. The Group will aim to provide these start-up companies with funding expertise and market access, bringing together their entrepreneurial agility and the experience of a global leader in financial services. 1 BRE Ubezpieczenia Towarzystwo Ubezpieczen I Reasekuracji S.A. 2 EUR 1 = PLN 4.1275. 3 Subject to price adjustment at completion. 4 EUR 1 = BRL 3.3646 as of May 20, 2015. 5 Property includes Fire, Diversified Risks, General Liability and Engineering for middle to large corporates. 6 Source: Superintendência de Seguros Privados (SUSEP - Superintendence of Private Insurance). 7 2014 yearly average Forex rate: EUR 1 = BRL 3.1221. Half Year 2015 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2015 AXA GLOBAL LIFE ANNOUNCED THE SUCCESSFUL PLACEMENT OF €285 MILLION OF BONDS TO PROTECT THE GROUP AGAINST EXTREME EVENTS IN LIFE On April 28, 2015, AXA Global Life announced the successful placement by a newly formed Irish special purpose vehicle (Benu Capital) of €285 million of excess mortality notes to institutional investors. There are two different classes of notes with a scheduled maturity in January 2020: the Class A notes, for an amount of €135 million, and the Class B notes, for an amount of €150 million, each class providing protection at different risk levels. This transaction provides AXA Global Life with two fully collateralized, 5-year protections against extreme mortality risk in France, Japan, and the United States. The notes use an index trigger structure specific to each covered country. Each country index is based on mortality data published by official statistical agencies and weighted by gender and age bands to closely replicate the risk of the AXA Group's portfolio. AXA RATINGS On May 9, 2014, Moody’s Investors Services reaffirmed the ‘Aa3’ insurance financial strength ratings of AXA’s main operating subsidiaries. The rating agency has also changed the outlook from negative to stable on all ratings. On October 15, 2014, S&P affirmed long-term ratings on AXA Group core subsidiaries at ‘A+’ with the outlook revised to Positive from Stable. On November 4, 2014, Fitch reaffirmed all AXA entities' Insurer Financial Strength ratings at ‘AA-’ with a stable outlook. SHARE REPURCHASE PROGRAM Since 31 December, 2014, AXA has repurchased 30.9 million of its own shares for a total amount of Euro 701.4 million principally in connection with equity compensation arrangements and employee share plan offerings. On June 19, 2015, the Board of Directors canceled 10.8 million shares. The remaining shares were held as treasury shares as of June 30, 2015. to neutralize the dilutive impact of shares issued US DEPARTMENT OF LABOUR RULE The U.S. Department of Labor issued a proposed rule in April 2015 that could, if adopted, substantially expand the range of activities that would be considered to be fiduciary investment advice under ERISA. Depending on the breadth of the final rule, the investment-related information and support that AXA US affiliated advisors and employees could provide to plan sponsors, participants, and IRA holders on a non- fiduciary basis could be substantially limited compared to what is allowed under current law. This could have an adverse impact on the level and type of services AXA US can provide, as well as the nature and amount of compensation and fees that AXA US and its affiliated advisors receive for investment-related services to plans and IRAs. The exact nature and scope of the impact under any new final rule is undeterminable at this time. Consequently, management is not in a position at this time to quantify the potential impact of these rules on the new sales of AXA US with any degree of precision, however, based on the information currently available to it, management estimates that the range of potential impacts on the new sales of AXA US could be from 10% to 30% of APE (which would have represented 2% to 7% of the Group's consolidated APE for the half year ended June 30th, 2015). This estimate does not reflect any potential mitigating actions such as reducing expenses and expanding sales of products unaffected by these rules. RELATED - PARTY TRANSACTIONS During the first half of the fiscal year 2015, there were (1) no modifications to the related-party transactions described in Note 28 "Related-party transactions" of the audited consolidated financial statements for the fiscal year ended December 31, 2014 included in the full year 2014 Registration Document (pages 325 and 326) filed with the Autorité des marchés financiers and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com), which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2015, and (2) no new transaction concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2015. RULES APPLICABLE TO CONFLICT OF INTERESTS According to the provisions of the Board of Directors’ Bylaws and the recommendations of the Afep-Medef Code, it is reminded that each member of the Board of Directors shall be required to inform the Company of any situation concerning her/him which may create a conflict of interests with the Company or the companies of the AXA Group and to abstain from voting on the related resolution. Half Year 2015 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2015 Risk factors The principal risks and uncertainties faced by the Group are described in detail in Section 3.1 “Regulation” and Section 3.2 "Risk factors" included in the full year 2014 Registration Document (respectively in pages 152 to 156 and pages 157 to 170) filed with the Autorité des marchés financiers and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com). The description contained in these Sections of the 2014 Registration Document remains valid in all material respects at the date of the publication of this Report regarding the appreciation of the major risks and uncertainties affecting the Group on June 30, 2015 or which management expects could affect the Group during the remainder of 2015. Events subsequent to June 30, 2015 AXA ACCELERATES ITS DEVELOPMENT IN EGYPT THROUGH A PARTNERSHIP WITH COMMERCIAL INTERNATIONAL BANK On July 12, 2015, AXA announced that it will enter into a partnership with Commercial International Bank (“CIB”) whereby AXA will benefit from a 10-year exclusive Life & Savings distribution agreement with CIB in Egypt, focusing more specifically on Unit-Linked and Protection & Health insurance. As part of the transaction, AXA will acquire 100% of Commercial International Life Insurance Company (“CIL”), a leading Egyptian Life insurance player, jointly owned by Legal & General (55%) and CIB (45%), for a cash consideration of EGP 763 million (or Euro 88 million1), subject to price adjustment at completion. In addition, AXA will pay to CIB an access fee and commissions under the bancassurance agreement. With its ca. 628,000 retail and 60,000 corporate customers, CIB is the #1 private-sector bank in Egypt2, relying on an extensive network composed of 166 branches and 10,000 points of sales3. It has built a highly reputable brand and a robust market position with a clear ambition to accelerate its presence in the retail banking segment. Thus, CIB represents a unique partner for AXA to benefit from the high growth prospects of the Egyptian market. CIL is the #3 Life & Savings insurance player in Egypt with a 15% market share4 and offers both Unit-Linked and Protection products. It is a fast-growing company with 23% annual premium growth from 2012 to 2014, and a strong business performance over the first six months of the fiscal year 20155. Due to the excellent positioning of CIB in Egypt, this transaction will allow AXA to accelerate its development in Egypt, following the grant of its preliminary non-life insurance license in March 2015, and more generally to pursue the strengthening of its footprint in the Middle East and Africa. It will also support the shift in business mix towards more Unit-Linked and Protection & Health products, in line with the Ambition AXA strategy. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to take place by the end of 2015. AXA COMPLETED THE ACQUISITION THE PRIVATE MEDICAL INSURANCE BUSINESS OF SIMPLYHEALTH On August 3, 2015, AXA announced that it completed the acquisition of the private medical insurance business of Simplyhealth. Simplyhealth has been operating in the UK PMI market for 13 years. Employing around 400 people in Bristol, it provides health cover for over 200,000 people, individually and through its SME and corporate customers. The acquisition will further strengthen AXA’s presence in the UK healthcare market and clearly evidences its continuing commitment to being the preferred provider in each of its key strategic business areas. AXA ENTERS INTO EXCLUSIVITY FOR THE POTENTIAL ACQUISITION OF GENWORTH LIFESTYLE PROTECTION INSURANCE On July 22, 2015, AXA announced that it entered into exclusive negotiation with Genworth Financial for the terms of its potential acquisition of 100% of Genworth Lifestyle Protection Insurance, which would be for a total cash consideration of €475 million. The proposed transaction is subject to customary conditions, including completing a works council consultation process and obtaining required regulatory approvals, and should be finalized before the end of 2015. 1 EUR 1 = EGP 8.6241 as of July 9, 2015. 2 Source : Central Bank of Egypt - #1 private-sector bank in terms of loans and deposits. 3 CIB financial communication as of March 2015. 4 Source: Egyptian Financial Supervisory Authority – Excluding Health insurance. 5 CIL’s fiscal year ends on June 30 of each year. Half Year 2015 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2015 REVENUES & EARNINGS SUMMARY Consolidated gross revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 June 30, 2015 / June 30, 2014 (a) Life & Savings 31,919 29,039 55,345 1.5% o/w. gross written premiums 30,982 28,300 53,806 o/w. fees and revenues from investment contracts with no participating feature 203 159 327 Property & Casualty 18,183 16,820 29,460 1.4% International Insurance 2,162 1,966 3,292 6.9% Asset Management 1,956 1,593 3,326 5.9% Banking (b) 302 287 564 5.0% Holdings and other companies 0 0 n/a TOTAL 54,521 49,705 91,988 1.8% Revenues are disclosed net of intercompany eliminations. (a) Changes are on a comparable basis. (b) Excluding (i) net realized capital gains or losses and (ii) change in fair value of assets under fair value and of options and derivatives, net banking revenues and total consolidated revenues would respectively amount to €300 million and €54,520 million for half year 2015 and €286 million and €49,703 million for half year 2014. Consolidated gross revenues amounted to €54,521 million as of June 30, 2015, up 10% compared to June 30, 2014 on a reported basis or up 2% on a comparable basis. The comparable basis mainly consisted in the adjustment of: (i) the foreign exchange rate movements (€-3.7 billion or -7.4 points) mainly due to Euro depreciation against USD and CHF and (ii) the acquisition of Colpatria's insurance operations in Colombia in 2014 (€-0.2 billion or -0.4 point). Half Year 2015 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings Annual Premium Equivalent 1 Annual Premium Equivalent (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 June 30, 2015 / June 30, 2014 (a) TOTAL 3,687 3,181 6,477 4.7% G/A Protection & Health 1,360 1,207 2,395 2.4% G/A Investment & Savings 455 478 999 7.5% Unit-Linked 1,350 1,115 2,298 8.1% Funds & other 522 381 786 17.6% Mature markets 3,007 2,668 5,341 3.4% High growth markets 680 513 1,136 11.8% (a) Changes are on a comparable basis. Total Life & Savings New Business APE amounted to €3,687 million, up 16% on a reported basis or up 5% on comparable basis. The increase in Unit-Linked sales was primarily driven by the ongoing success of hybrid products2 and commercial initiatives in Continental Europe and in South-East Asia, India and China, partly offset by lower sales in the United Kingdom. The growth in Protection & Health products was primarily due to higher sales in France and China, which more than offset the continuing repositioning of the Swiss Group life product mix. Mutual funds & Others increased mainly following an exceptional sale of a large contract in France. This was partly offset by a significant decrease in General Account Savings, in line with the strategic focus on Protection & Health and Unit Linked products. In high growth markets, APE grew by 12% mainly driven by South-East Asia, India and China (+25% or €+56 million). In mature markets, growth was mainly driven by France (+13% or €+97 million), AXA MPS (+28% or €+43 million) and the US (+6% or €+37 million), partly offset by the United Kingdom (-16% or €-61 million), Switzerland (-14% or €-32 million) and Spain (-24% or €-13 million). Unit-Linked APE (€1,350 million, 37% of total) up 8% (or €+91 million) mainly driven by (i) France (€+49 million) as a result of commercial efforts and reflecting the success of hybrid products2 and the new structured funds offer, (ii) MedLA (€+49 million) primarily at AXA MPS driven by the continuing success of hybrid products2, (iii) South-East Asia, India and China (€+23 million) mainly in Indonesia and Singapore, (iv) Japan (€+23 million) due to higher sales of Protection with Savings products, (v) Germany (€+15 million) due to higher sales of hybrid products2 and (vi) the US (€+11 million) mainly from sales growth in Employer Sponsored products, partly offset by (vii) the UK (€-65 million) mainly reflecting the lower corporate pension scheme sales and (viii) Hong Kong (€-17 million) driven by the negative impact from the implementation of significant regulatory changes in 2015. Protection & Health APE (€1,360 million, 37% of total) up 2.4% (or €+29 million) driven by (i) France (€+38 million) following an increase in Group business, (ii) South-East Asia, India and China (€+33 million) mainly in China from single premium Term product as well as a new Whole Life product, partly offset by (iii) Switzerland (€-39 million) driven by Group Life due to the strategic shift from full protection schemes to semi-autonomous employee benefit solutions. General Account Savings APE (€455 million, 12% of total) down 8% (or €-36 million) driven by (i) France (€-22 million), (ii) Belgium (€-16 million) and (iii) Spain (€-16 million) in line with the strategy of curtailing sales, partly offset by (iv) Hong Kong (€+17 million) and Italy (€+10 million). Funds & other APE (€522 million, 14% of total) up 18% (or €+67 million) mainly driven by (i) France (€+31 million) from assumed business on one large account and (ii) the US (€+22 million) reflecting increased sales in advisory accounts. 1 Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premium, in line with EEV methodology. APE is Group share. 2 Hybrid products: savings products allowing clients to invest in both Unit-Linked and General Account funds. Half Year 2015 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty Revenues (in Euro million) June 30, 2015 June 30, 2014 June 30, 2015 / June 30, 2014 (a) TOTAL 18,183 16,820 1.4% Personnal Lines o/w Motor o/w Non-Motor 10,231 6,180 4,051 9,605 5,739 3,866 2.0% 2.9% 0.7% Commercial Lines o/w Motor o/w Non-Motor 7,876 1,568 6,308 7,155 1,466 5,689 0.4% -2.4% 1.1% Mature Markets Direct High Growth Market 14,082 1,389 2,712 13,349 1,202 2,269 0.5% 6.8% 3.6% (a) Changes are on a comparable basis. Property & Casualty gross revenues amounted to €18,183 million were up 8% on a reported basis and up 1% on a comparable basis. Personal lines revenues increased by 2%, primarily in Direct, Germany, United Kingdom & Ireland and Asia. Commercial lines revenues were stable with growth in the United Kingdom & Ireland and Germany, offset by Mediterranean & Latin American Region and Belgium. Overall, average tariff increases amounted to 2%. Personal lines (56% of P&C gross revenues) increased by 2% on a comparable basis. Motor revenues grew by €163 million or +3% as a result of higher volumes in Direct and Asia and tariff increases in mature markets and Direct, partly offset by lower volumes in the Mediterranean and Latin American Region: Direct (+7%) driven by higher new business and tariff increases in Direct UK and France along with higher renewals in South Korea and Spain following a price re-positioning; Germany (+6%) driven by tariff increases and higher volumes;  United Kingdom & Ireland (+13%) mainly driven by higher new business and renewals along with tariff increases; Asia (+6%) driven by a strong increase in car and motorcycle sales in Malaysia;  Partly offset by Mediterranean & Latin American Region (-2%) reflecting lower volume in mature markets mainly following lower renewals and pruning actions in Spain. Non-Motor revenues increased by €27 million or +1% mainly driven by tariff increases across the board, partly offset by lower volumes in mature markets: Mediterranean & Latin American Region (+3%) driven by higher volumes in Health in Mexico and Spain; Germany (+2%) mainly driven by tariff increases in Household;  Asia (+9%) reflecting growth in personal accident policies in Malaysia and campaign for Travel insurance in Hong Kong; Partly offset by United Kingdom & Ireland (-2%) mainly driven by the run- off of certain partnership arrangements. Commercial lines (43% of P&C gross revenues) were stable. Non-Motor revenues grew by €64 million or +1% as a result of tariff increases across the board. United Kingdom & Ireland (+3%) reflecting tariff increases in Health and higher new business in Liability; Mediterranean & Latin American Region (2%) mainly driven by tariff increases in Health in the Gulf region, Property in Turkey and Health and Property in Spain; Germany (2%) mainly driven by Property;  Asia (5%) driven by higher volumes in Health;  Partly offset by Belgium (-4%) stemming from less favorable premium adjustments, mostly in Workers Compensation. Half Year 2015 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2015 Motor revenues decreased by €-36 million or -2%. Mediterranean & Latin American Region (-11%) reflecting lower renewals and pruning actions in major markets; Partly offset by United Kingdom & Ireland (+9%) principally due to increased new business volumes despite a highly competitive market. International Insurance revenues International Insurance revenues amounted to €2,162 million up 10% on a reported basis and up 7% on a comparable basis driven by (i) AXA Assistance up 20% (or €+100 million) to €608 million driven by higher new business across all geographies and (ii) AXA Corporate Solutions Assurance up 2% (or €+33 million) to €1,451 million driven by favorable portfolio developments in all lines of business and a positive timing effect in Liability, partly offset by higher cancellations in Property, Liability and Marine. Asset management revenues and Assets under Management Asset Management revenues increased by 23% on a reported basis or by 6% (or €+94 million) on a comparable basis to €1,956, mainly driven by higher management fees at both AB and AXA IM as a result of higher average Asset Under Management (AUM). AB revenues up 29% (or €+294 million) on a reported basis or up 5% (or €+48 million) on a comparable basis to €1,324 million mainly driven by higher management fees (€+44 million) as a result of higher average AUM (+6%). AB AUM increased by 11% (or €46 billion) from year-end 2014 to €459 billion mainly driven by (i) €+36 billion favorable foreign exchange rate impact, (ii) €+7 billion net inflows and (iii) €+3 billion market appreciation primarily from equity markets. AXA Investment Managers revenues up 12% (or €+68 million) on a reported basis or up 8% (or €+46 million) on a comparable basis to €632 million. Excluding distribution fees (retroceded to distributors) and on a comparable basis, gross revenues increased by 6% (or €+30 million) mainly driven by (i) higher management fees (€+44 million) as a result of higher average AUM, partly offset by (ii) lower performance fees (€-8 million) mainly due to an unfavorable market trend in structured finance. AXA Investment Managers AUM increased by 11% (or €+71 billion) from year-end 2014 to €694 billion mainly driven by (i) €+28 billion net inflows, (ii) €+25 billion favorable foreign exchange rate impact and (iii) €+17 billion market appreciation reflecting lower interest rates combined with rising stock markets. Net banking revenues Net banking revenues up 5% (or €+14 million) on a comparable basis to €302 million driven by higher operating revenues from banking activities. Half Year 2015 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2015 CONSOLIDATED UNDERLYING EARNINGS, ADJUSTED EARNINGS AND NET INCOME (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross written premiums 51,166 46,944 86,267 Fees and revenues from investment contracts without participating feature 203 159 327 Revenues from insurance activities 51,369 47,103 86,595 Net revenues from banking activities 299 244 452 Revenues from other activities 2,852 2,316 4,834 TOTAL REVENUES 54,521 49,663 91,880 Change in unearned premium reserves net of unearned revenues and fees (4,312) (4,266) (289) Net investment result excluding financing expenses (a) 12,961 14,066 27,917 Technical charges relating to insurance activities (a) (47,400) (45,895) (92,229) Net result of reinsurance ceded (541) (363) (762) Bank operating expenses (31) (37) (78) Insurance acquisition expenses (5,406) (4,607) (9,605) Amortization of value of purchased life business in force (108) (57) (120) Administrative expenses (5,024) (4,428) (9,030) Valuation allowances on tangible assets Change in value of goodwill (2) (1) (3) Other (109) (75) (220) Other operating income and expenses (58,620) (55,463) (112,047) OPERATING EARNINGS BEFORE TAX 4,549 4,001 7,462 Net income from investments in affiliates and associates 71 91 164 Financing expenses (253) (266) (519) UNDERLYING EARNINGS BEFORE TAX 4,367 3,826 7,107 Income tax expenses (1,069) (900) (1,726) Minority interests (196) (148) (321) UNDERLYING EARNINGS 3,102 2,777 5,060 Net realized capital gains or losses attributable to shareholders 382 335 442 ADJUSTED EARNINGS 3,485 3,112 5,503 Profit or loss on financial assets (under fair value option) & derivatives (250) 37 225 Exceptional operations (including discontinued operations) (64) (45) (188) Goodwill and other related intangible impacts (42) (55) (345) Integration and restructuring costs (52) (41) (170) NET INCOME 3,077 3,008 5,024 (a) For the periods ended June 30, 2015 and June 30, 2014, "the change in fair value of assets backing contracts with financial risk borne by policyholders" impacted the net investment result for respectivly €+6,078 million and €+5,613 million, and benefits and claims by the offsetting amounts respectively. Half Year 2015 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2015 Group underlying earnings Underlying, Adjusted earnings and Net Income (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Life & Savings 1,862 1,651 3,132 Property & Casualty 1,286 1,226 2,158 International Insurance 126 135 208 Asset Management 222 184 403 Banking 56 68 106 Holdings and other companies (a) (451) (486) (947) UNDERLYING EARNINGS 3,102 2,777 5,060 (a) Includes notably CDOs and real estate companies. Group underlying earnings amounted to €3,102 million, up 12% versus 1H14 on a reported basis. On a constant exchange rate basis, underlying earnings increased by 2% mainly driven by Life & Savings and Asset Management segments. Life & Savings underlying earnings amounted to €1,862 million. On a reported basis, Life & Savings underlying earnings were up €212 million (or +13%). On a comparable basis, Life & Savings underlying earnings increased by €36 million (or +2%) mainly attributable to France (€+24 million), Japan (€+23 million), Hong Kong (€+14 million) and the United Kingdom & Ireland (€+11 million), partly offset by the United States (€-13 million), the Mediterranean and Latin American Region (€-13 million) and Germany (€-11 million). Stable investment margin with (i) Germany (€+26 million) mainly due to a change in regulation in Life implemented in the second half of 2014 leading to a change in allocation of part of the policyholder participation from investment margin to net technical margin and (ii) Switzerland (€+7 million) due to a decrease in interest credited in Individual Life business driven by the strategic shift towards products with lower guarantee, offset by (iii) the United States (€-17 million) due to lower distribution from private equity investments and lower reinvestment yields on fixed income assets, (iv) Hong Kong (€-6 million) driven by higher interest credited to policyholders and (v) France (€-6 million) due to lower reinvestment yields and average asset base. Higher Fees and Revenues (€+344 million or +10%): o Unit-Linked management fees were up €46 million mainly driven by (i) the United States (€+28 million) and France (€+8 million) as a result of higher average Separate Account balance; o Loadings on premiums and mutual funds were up €271 million mainly in (i) France (€+167 million) driven by higher Unearned Revenues Reserves amortization due to the change in interest rates assumptions (more than offset by a higher amortization of Deferred Acquisition Costs), (ii) the Mediterranean and Latin American Region (€+53 million) as consequence of higher surrenders at AXA MPS, (iii) Hong Kong (€+28 million) mainly driven by new business and in-force growth and (iv) South East Asia, India and China (€+12 million) driven by in-force growth in G/A Protection & Health mainly in Singapore; o Other revenues were up €27 million mainly driven by (i) France (€+12 million) and (ii) the United States (€+6 million). Higher net technical margin (€+106 million or +23%) mainly attributable to (i) the United States (€+83 million) primarily explained by favorable mortality results, (ii) France (€+51 million) due to exceptional positive reserve developments in Group Protection, partly offset by the non-repeat of 1H14 reserve release in Retirement, partly offset by (iii) Germany (€-27 million) mainly due to one-off transaction costs (€-22 million) relating to a new hedging strategy for GMxB products and a higher share of policyholders’ participation in Life due to the above-mentioned change in regulation. Higher expenses (€-338 million or +11%) as a result of: o Higher acquisition expenses (€-271 million) mainly in (i) France (€-172 million) reflecting higher Deferred Acquisition Costs amortization due to the change in interest rates assumptions mentioned above (partly offset by a change in Unearned Revenue Reserve) and (ii) the United States (€-80 million) primarily resulting from a higher baseline amortization of Deferred Acquisition Costs and the reclassification of some acquisition costs. Half Year 2015 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2015 o Higher administrative expenses (€-68 million) mainly due to the combined effects of inflation, business growth and investments partly offset by the effects of cost savings programs. Higher tax expenses and minority interests (€-30 million or +6%) driven by higher pre-tax underlying earnings as well as lower positive tax one-off mainly in the United States (€+94 million in 1H15 vs. €+121 million in 1H14) and Japan (€+15 million in 1H15 vs. €0 million in 1H14). Property & Casualty underlying earnings amounted to €1,286 million. On a reported basis, Property & Casualty underlying earnings were up €60 million (or +5%). Excluding Colombia and Ukraine and on a constant exchange rate basis, Property & Casualty underlying earnings were stable as higher underlying earnings in the United Kingdom & Ireland (€+21 million) and Germany (€+10 million) were partly offset by lower underlying earnings in Belgium (€-21 million) and Asia (€-7 million). Higher net technical result (€+93 million or +15%) driven by: o Current year loss ratio improved by 0.4 point as a result of lower Nat Cat charges (-1.6pts) as 2014 was notably impacted by ELA hailstorm (€241 million), partly offset by deteriorated claims experience in Germany mainly due to higher natural events, notably Niklas storm (€33 million), higher attritional and large losses in Commercial lines in Belgium, and higher frequency and average claims costs in Turkey, Mexico and the Gulf region; o Higher positive prior year reserve developments by 0.5 point to -1.8 points (compared to - 1.3 points in 1H14); o Higher expense ratio by 0.3 point to 26.2% driven by (i) acquisition expense ratio up 0.2 point mainly as a consequence of higher new business in the United Kingdom & Ireland and Germany, and (ii) administrative expenses ratio up 0.1 point as the effect of cost savings programs was more than offset by inflation and investment costs. o As a result, the combined ratio improved by 0.6 point to 95.1% while current combined ratio improved by 0.1 point to 96.9%. Lower investment result (€-87 million or -8%) primarily driven by (i) France (€-60 million) mainly due to the non-repeat of exceptional distributions from mutual funds in 1H14 and (ii) Germany (€-25 million) with lower reinvestment yields as well as the non-repeat of an exceptional interest profit on a tax claim in 1H14. Lower tax expenses and minority interests (€+6 million or -1%) driven by lower pre-tax underlying earnings mainly in Belgium, Turkey and Mexico. International insurance underlying earnings amounted to €126 million. On a constant exchange rate basis, underlying earnings decreased by €14 million (or -11%) mainly attributable to (i) AXA Corporate Solutions Assurance (€-10 million) mainly reflecting a deteriorated loss ratio as well as lower investment result and (ii) AXA Corporate Solutions Life Reinsurance (€-7 million) mainly due to less favorable reserve developments on the run-off portfolios. Asset Management underlying earnings amounted to €222 million. On a constant exchange rate basis, underlying earnings increased by €11 million (or +6%) attributable to AXA IM (€+7 million) and AB (€+4 million), both due to higher management fees net of variable compensation. Banking underlying earnings amounted to €56 million. On a constant exchange rate basis, underlying earnings decreased by €12 million (or -17%) attributable to Belgium (€-11 million) mainly as a result of lower capital gains and the unfavorable timing effect of the one-shot booking of bank levies (€-33 million) in accordance with new accounting standards (IFRIC 21). Holdings and other companies underlying earnings amounted to €-451 million. On a constant exchange rate basis, underlying earnings increased by €35 million (or +7%) mainly attributable to the US Holdings (€+69 million) mainly driven by lower financial charges due to loan refinancing with AXA SA, partly offset by AXA SA (€-49 million) mainly reflecting higher financial charges due to the above-mentioned loans renegotiation (mainly the US holdings) in the context of low interest rate environment as well as the continuing investments in the Group digital capabilities. Half Year 2015 Financial Report 16 I ACTIVITY REPORT – HALF YEAR 2015 Group adjusted earnings to net income Group net realized capital gains attributable to shareholders amounted to €382 million. On a constant exchange rate basis, Group net capital gains and losses attributable to shareholders increased by €30 million mainly due to: €+7 million higher realized capital gains to €471 million mainly driven by higher realized gains on equities (€+46 million), partly offset by lower realized gains on real estate (€-25 million); €+12 million lower impairments to €-86 million mainly driven by fixed income (€+17 million) and real estate (€+8 million), partly offset by higher impairments of equities (€-14 million) mainly on BMPS; €+12 million less unfavorable intrinsic value to €-2 million related to equity hedging derivatives. As a result, adjusted earnings amounted to €3,485 million (or +12%). On a constant exchange rate basis, adjusted earnings increased by €87 million (+3%). Net income amounted to €3,077 million (or +2%). On a constant exchange rate basis, net income decreased by €220 million (-7%) mainly as a result of:  higher adjusted earnings (€+87 million), partly offset by; an unfavorable change in fair value of financial assets and derivatives in 1H15 compared to a favorable change in fair value of derivatives net of foreign exchange rate movements in 1H14; down €298 million to €-250 million which can be analyzed as follows: o €-411 million from the change in fair value of hedging derivatives not eligible for hedge accounting under IAS 39, mainly attributable to interest rates increases; o €+118 million from the change in fair value of assets accounted for under fair value option; o €+43 million following foreign exchange rate movements notably driven by a favorable change in fair value of economic hedge derivatives not eligible for hedge accounting under IAS 39; higher negative impact from exceptional operations and restructuring costs (€-26 million) to €-115 million; lower negative impact from goodwill and other intangibles (€+17 million) to €-42 million mainly reflecting the non-repeat of the impairment of Ukraine P&C goodwill in 1H14. Half Year 2015 Financial Report 17 I ACTIVITY REPORT – HALF YEAR 2015 CONSOLIDATED SHAREHOLDERS’ EQUITY As of June 30, 2015, consolidated shareholders' equity totalled €66.9 billion. The movements in shareholders' equity since December 31, 2014 are presented in the table below: Shareholders' Equity At December 31, 2014 65,219 Share Capital 4 Capital in excess of nominal value (17) Equity-share based compensation 12 Treasury shares sold or bought in open market (465) Deeply subordinated debt (including interests charges) (154) Fair value recorded in shareholders' equity (1,973) Impact of currency fluctuations 3,447 Payment of N-1 dividend (2,317) Other (2) Net income for the period 3,077 Actuarial gains and losses on pension benefits 82 At June 30, 2015 66,913 SHAREHOLDER VALUE Earnings per share (“EPS”) June 30, 2015 June 30, 2014 December 31, 2014 June 30, 2015 / June 30, 2014 (a) (in Euro million except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,438.0 2,449.5 2,417.9 2,432.9 2,420.5 2,432.2 Net income (Euro per Ordinary Share) 1.20 1.19 1.18 1.18 1.95 1.94 1% 2% Adjusted earnings (Euro per Ordinary Share) 1.37 1.36 1.23 1.22 2.15 2.14 11% 12% Underlying earnings (Euro per Ordinary Share) 1.21 1.20 1.09 1.08 1.96 1.95 11% 11% Half Year 2015 Financial Report 18 I Return On Equity (“ROE”) June 30, 2015 ROE 9.5% Net income group share 3,077 Average shareholders' equity 65,069 Adjusted ROE 16.1% Adjusted earnings (a) 3,331 Average shareholders' equity (b) 41,270 Underlying ROE 14.3% Underlying earnings (a) 2,948 Average shareholders' equity (b) 41,270 (a) Including adjustement to reflect net financial charges related to undated debt (recorded through shareholders' equity). (b) Excluding fair value of invested assets and derivatives and undated debt (both recorded through shareholders' equity). Half Year 2015 Financial Report ACTIVITY REPORT – HALF YEAR 2015 (in Euro million) June 30, 2014 June 30, 2015 / June 30, 2014 11.1% 1.7 pts 3,008 54,107 16.8% 0.6 pts 2,964 35,315 14.9% 0.6 pts 2,629 35,315 19 I ACTIVITY REPORT – HALF YEAR 2015 LIFE & SAVINGS SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income attributable to AXA’s Life & Savings segment for the periods indicated: Life & Savings segment (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) 32,006 29,100 55,469 APE (Group share) 3,687 3,181 6,477 Investment margin 1,385 1,314 2,609 Fees & revenues 4,294 3,561 7,461 Net technical margin 589 461 769 Expenses (3,836) (3,207) (6,726) Amortization of VBI (108) (57) (120) Other 64 57 111 Underlying earnings before tax 2,388 2,129 4,105 Income tax expenses / benefits (470) (429) (887) Minority interests (56) (49) (86) Underlying earnings Group share 1,862 1,651 3,132 Net capital gains or losses attributable to shareholders net of income tax 202 163 292 Adjusted earnings Group share 2,064 1,813 3,424 Profit or loss on financial assets (under FV option) & derivatives 63 79 114 Exceptional operations (including discontinued operations) (15) 28 30 Goodwill and other related intangibles impacts (7) (8) (13) Integration and restructuring costs (11) (8) (31) Net income Group share 2,094 1,906 3,524 (a) Before intercompany eliminations. Gross Revenues amounted to € 31,919 million net of intercompany eliminations as of June 30, 2015. Consolidated Gross Revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 France 8,254 7,535 15,148 United States 6,761 5,489 11,470 United Kingdom 383 303 645 Japan 2,002 1,895 3,801 Germany 3,317 3,308 6,670 Switzerland 5,372 4,878 6,726 Belgium 1,021 1,041 1,813 Central & Eastern Europe (a) 161 152 320 Mediterranean and Latin American Region (b) 3,176 3,366 6,389 Hong Kong 1,221 892 1,972 South-East Asia, India and China (c) 257 157 336 Other (d) 81 84 180 TOTAL 32,006 29,100 55,469 Intercompany transactions (87) (61) (124) Contribution to consolidated gross revenues 31,919 29,039 55,345 o/w. high growth markets 1,973 1,441 3,209 o/w. mature markets 29,946 27,598 52,136 (a) Includes Poland, Hungary, Czech Republic and Slovakia. (b) Mediterranean and Latin American Region includes Italy, Spain, Portugal, Greece, Turkey, Morocco, Mexico and Colombia. (c) South-East Asia, India & China include Singapore and non bancassurance subsidiaries in Indonesia. (d) Other correspond to Luxembourg, AXA Life Invest Services, Architas and Family Protect . Half Year 2015 Financial Report 20 I ACTIVITY REPORT – HALF YEAR 2015 Underlying earnings (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 France 421 397 768 United States 513 431 760 United Kingdom 27 13 28 Japan 230 198 363 Germany 72 84 162 Switzerland 166 150 307 Belgium 91 88 156 Central & Eastern Europe (a) 18 24 40 Mediterranean and Latin American Region (b) 78 91 193 Hong Kong 185 136 282 South-East Asia, India and China (c) 72 60 119 Other (d) (12) (21) (45) UNDERLYING EARNINGS 1,862 1,651 3,132 o/w. high growth markets 278 232 459 o/w. mature markets 1,585 1,419 2,673 (a) Includes Poland, Hungary, Czech Republic and Slovakia. (b) Mediterranean and Latin American Region includes Italy, Spain, Portugal, Greece, Turkey, Morocco, Mexico and Colombia. (c) South-East Asia, India & China include Indonesia, Thailand, Philippines, China, India and Singapore. (d) Other correspond to Luxembourg, AXA Life Invest Services, Architas and Family Protect. Half Year 2015 Financial Report 21 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – France (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 8,254 870 583 929 367 (1,292) - 5 592 (169) (1) 421 72 493 47 (9) - - 532 7,535 765 589 741 316 (1,091) - 4 559 (161) (1) 397 66 463 10 - (4) - 469 15,148 1,584 1,195 1,624 586 (2,317) - 11 1,098 (328) (2) 768 108 876 6 - (4) - 878 (a) Before intercompany eliminations. Gross Revenues amounted to € 8,225 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €719 million (+10%) to €8,254 million: Unit-Linked revenues (21% of gross revenues) increased by €480 million (+39%), mainly as a result of increased commercial efforts and reflecting the success of hybrid products1 and the new structured funds offer. The Unit-Linked share in Individual Savings premiums increased by 9 points to 39%, above the market average of 22%; G/A Protection & Health revenues (42% of gross revenues) increased by €87 million (+3%) driven by a €94 million increase in Group Protection & Health from both tariff and volume increases, and a €17 million increase in Individual Protection reflecting positive portfolio developments. Individual Health decreased by €24 million following the termination of an assumed business with a French mutual insurer (€-10 million) and negative portfolio developments (€-14 million), ahead of a change in regulation (implementation of the Accord National Interprofessionel (ANI) starting January 1st, 2016); G/A Savings revenues (33% of gross revenues) decreased by €178 million (-6%), in line with the strategy to focus on Unit-Linked products and as a result of the non-repeat of large contracts underwritten in 1H14 in Group Retirement; Other revenues (4% of gross revenues) increased by €312 million mainly following an exceptional sale of a large contract. APE increased by €105 million (+14%) to €870 million. On a comparable basis, APE increased by €97 million (+13%): Unit-Linked sales (22% of APE) increased by €49 million (+35%) driven by Individual Savings (+42%) as a result of commercial success of Hybrid products1 and the success of the new structured funds offer; G/A Protection & Health sales (44% of APE) increased by €38 million (+11%) mainly driven by a €43 million increase in Group Protection & Health reflecting developments in Health, ahead of a change in regulation resulting in the implementation of the above-mentioned ANI implementation starting January 1st, 2016, and growth of traditional French Protection businesses. Individual Protection sales rose by €4 million (+13%) reflecting volume growth (+12%). Individual Health sales decreased by €10 million (-17%) ahead of the ANI implementation; 1 Hybrid products: savings products allowing clients to invest in both Unit-Linked and General Account funds. Half Year 2015 Financial Report 22 I ACTIVITY REPORT – HALF YEAR 2015 G/A Savings sales (30% of APE) decreased by €22 million (-8%) in line with the strategy to focus on Unit-Linked products and as a result of the non-repeat of large contracts underwritten in 1H14 in Group Retirement ; Other sales (4% of APE) increased by €31 million mainly stemming from an exceptional sale of a large contract. Investment margin decreased by €6 million (-1%) to €583 million as the decrease in investment income driven by lower reinvestment yields and a lower average asset base on fixed income assets was partly offset by the decrease in interest credited to policyholders. Fees & revenues increased by €188 million (+25%) to €929 million mainly due to a €135 million opening adjustment in Unearned Revenues Reserves following the update of financial assumptions (more than offset in Deferred Acquisition Costs) as well as €23 million higher fees on Unit-Linked business, driven by a higher average asset base, and €30 million positive volume effect in Group Protection. Net technical margin increased by €51 million (+16%) to €367 million due to exceptional positive reserve developments in Group Protection (€90 million), partly offset by the non-repeat of favorable reserve developments in Individual Savings in 1H14. Expenses increased by €201 million (+18%) to €-1,292 million mainly due to a €169 million increase in amortization of Deferred Acquisition Costs (partly offset in Unearned Revenues Reserves) and higher commissions (€45 million) in line with higher volumes. The underlying cost income ratio increased by 2.5 points to 68.7%. Income tax expenses increased by €8 million (+5%) to €-169 million mainly driven by the increase in pre-tax underlying earnings. Underlying earnings increased by €24 million (+6%) to €421 million. Adjusted earnings increased by €30 million (+7%) to €493 million, mainly driven by higher underlying earnings and higher net realized capital gains. Net income increased by €63 million (+13%) to €532 million mainly driven by the increase in adjusted earnings, a favorable change in the fair value of economic hedge derivatives not eligible for hedge accounting (€+43 million), a positive change in the fair value of forex derivatives not eligible for hedge accounting (€+24 million), partly offset by a less favorable change in the fair value of mutual funds (€-30 million). Half Year 2015 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations - United States (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share Average exchange rate : 1.00 € = $ 6,761 838 275 1,325 (69) (953) (2) - 575 (62) - 513 (8) 505 18 - (0) (0) 523 1.116 5,489 634 241 1,034 (139) (700) (9) - 427 4 (0) 431 (13) 418 11 21 (1) (1) 449 1.371 11,470 1,355 493 2,185 (425) (1,403) (9) - 842 (81) - 760 (14) 746 19 26 (1) (9) 782 1.332 (a) Before intercompany eliminations. Gross Revenues amounted to € 6,761 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €1,273 million (+23%) to €6,761 million. On a comparable basis, gross revenues increased by €15 million (0%): Variable Annuity revenues (70% of gross revenues) decreased by €27 million (-1%) due to the non- repeat of premium adjustment in annuity separate account in 1H14, partly offset by strong sales of Employer Sponsored products; Life revenues (21% of gross revenues) increased by €25 million (+2%) primarily driven by higher sales of G/A Protection products; Asset Management fees (7% of gross revenues) increased by €12 million (+3%), reflecting improved market conditions and higher sales; Mutual Fund revenues (2% of gross revenues) increased by €5 million (+5%), reflecting higher advisory fees received and an increase in sales. APE increased by €204 million (+32%) to €838 million. On a comparable basis, APE increased by €37 million (+6%): Variable Annuity sales (55% of APE) increased by €11 million (+3%) due to sales growth in Employer Sponsored business; Life sales (11% of APE) increased by €5 million (+7%) driven by increased sales in G/A Protection products (+13%), reflecting increased sales of Indexed Universal Life products; Mutual Funds sales (34% of APE) increased by €22 million (+11%), reflecting increased advisory account sales. Investment margin increased by €34 million (+14%) to €275 million. On a constant exchange rate basis, investment margin decreased by €17 million (-7%) mainly explained by lower income distributions from private equity investments and lower reinvestment yields from fixed income assets, partially offset by higher income from indexed products due to higher average asset base. Fees & revenues increased by €291 million (+28%) to €1,325 million. On a constant exchange rate basis, fees & revenues increased by €44 million (+4%) mainly driven by higher fees (€+28 million) reflecting higher average Separate Account balances. Net technical margin increased by €70 million (+50%) to €-69 million. On a constant exchange rate basis, net technical margin increased by €83 million (+60%) mainly due to favorable mortality results. Half Year 2015 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2015 Expenses increased by €253 million (+36%) to €-953 million. On a constant exchange rate basis, expenses increased by €76 million (+11%): Expenses excluding Deferred Acquisition Costs amortization increased by €26 million as a result of investment in Employee Benefits business in line with strategy, partially offset by the effects of cost savings programs; Deferred Acquisition Costs amortization increased by €50 million to €179 million, primarily driven by a reclassification of some acquisition costs (€26 million) and by a higher baseline amortization. Amortization of VBI decreased by €7 million (-74%) to €-2 million. On a constant exchange rate basis, amortization of VBI decreased by €7 million. As a result, the underlying cost income ratio remained constant at 62.4%. Income tax expenses increased by €66 million from a tax benefit of €4 million to a tax expense of €-62 million. On a constant exchange rate basis, income tax expenses increased by €54 million, reflecting higher pre-tax underlying earnings and lower positive tax one-offs (€94 million in 1H15 compared to €121 million in 1H14) . Underlying earnings increased by €82 million (+19%) to €513 million. On a constant exchange rate basis, underlying earnings decreased by €13 million (-3%). Adjusted earnings increased by €87 million (+21%) to €505 million. On a constant exchange rate basis, adjusted earnings decreased by €7 million (-2%) driven by lower underlying earnings partially offset by lower impairments on fixed income assets. Net income increased by €74 million (+16%) to €523 million. On a constant exchange rate basis, net income decreased by €23 million (-5%) due to lower adjusted earnings and to the non-repeat of 2014 gain on the closed MONY transaction portfolio. Half Year 2015 Financial Report 25 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations - United Kingdom (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share Average exchange rate : 1.00 € = £ 383 346 2 163 4 (164) - - 5 22 (0) 27 0 28 (3) - (0) (1) 23 0.733 303 369 2 153 2 (150) - - 7 6 (0) 13 1 14 1 - (0) (3) 11 0.821 645 704 4 316 (1) (310) - - 9 19 (0) 28 1 29 3 - (0) (4) 28 0.809 (a) Before intercompany eliminations. Gross Revenues amounted to € 380 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €80 million (+26%) to €383 million. On a comparable basis, gross revenues increased by €38 million (+13%) mainly driven by Variable Annuity products (€+39 million) due to new business growth as well as higher regular premiums on SunLife Protection business (€+7 million) and increased recurring revenues on investment business driven by higher average asset base (+9%). APE decreased by €24 million (-6%) to €346 million. On a comparable basis, APE decreased by €61 million (- 16%) mainly due to lower Corporate Pension Investment business (€-46 million) reflecting an increased level of regular premium business written in 1Q14 as well as a decrease in offshore sales (€-10 million). This was partly offset by the growth of the Elevate platform business (€+2 million) in both the IFA and AXA Self Investor businesses. Investment margin was in line with prior year at €2 million. Fees & revenues increased by €10 million (+7%) to €163 million. On a constant exchange rate basis, fees & revenues decreased by €7 million (-5%) mainly due to a reclassification of SunLife revenues to technical margin, partly offset by the growth of regular fees from the Elevate and Architas businesses. Net technical margin increased by €2 million to €4 million. On a constant exchange rate basis, net technical margins increased by €2 million mainly driven by the reclassification of SunLife revenues from fees & revenues to technical margin (€+6 million), partly offset by a reduction in technical margin on the Variable Annuity products. Expenses increased by €14 million (+10%) to €-164 million. On a constant exchange rate basis, expenses decreased by €3 million (-2%) mainly due to the effects of the costs savings program, partly offset by general expense increases due to business growth inititiatives. As a result, the underlying cost income ratio increased by 1.3 points to 96.9%. Income tax benefits increased by €16 million to €22 million. On a constant exchange rate basis, income tax benefit increased by €14 million due to a higher positive tax one-off. Underlying earnings increased by €14 million to €27 million. On a constant exchange rate basis, underlying earnings increased by €11 million. Adjusted earnings increased by €14 million to €28 million. On a constant exchange rate basis, adjusted earnings increased by €11 million mainly due to higher underlying earnings. Half Year 2015 Financial Report 26 I ACTIVITY REPORT – HALF YEAR 2015 Net income increased by €12 million to €23 million. On a constant exchange rate basis, net income increased by €10 million mainly driven by higher adjusted earnings. Half Year 2015 Financial Report 27 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – Japan (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share Average exchange rate : 1.00 € = Yen (a) Before intercompany eliminations. Gross Revenues amounted to 2,002 million net of intercompany eliminations as of June 30, 2015. 2,002 194 0 665 43 (370) (11) - 326 (92) (5) 230 0 230 (32) - - - 198 134.222 1,895 175 0 628 33 (347) (17) - 297 (97) (2) 198 0 198 16 - - - 214 140.410 3,801 361 0 1,264 69 (729) (48) - 556 (189) (4) 363 (5) 358 (13) - - - 344 140.509 Gross revenues increased by €107 million (+6%) to €2,002 million. On a comparable basis, gross revenues increased by €19 million (+1%): Protection revenues (46% of gross revenues) increased by €34 million (+4%) mainly reflecting higher revenues from the in-force of Term, Term Rider and Whole Life products, and new business sales in Unit-Linked Protection products (€+60 million), partly offset by a decrease in the in-force revenues from the portfolios of Increasing Term products, Endowment products (run-off portfolios) and Group Life products (€-25 million); Health revenues (39% of gross revenues) increased by €20 million (+3%) driven by higher revenues from the in-force portfolio, partly offset by lower new business sales; Investment & Savings revenues (15% of gross revenues) decreased by €35 million (-11%) mainly as a consequence of lower sales of Variable Annuity products (€-21 million), in line with the strategy of curtailing sales and a decrease in the in-force run-off portfolio of Fixed Annuity products (€-14 million). APE increased by €20 million (+11%) to €194 million. On a comparable basis, APE increased by €13 million (+8%): Protection sales (61% of APE) increased by €21 million (+22%) driven by higher sales of Unit-Linked Protection products following increased commercial efforts (€+25 million); Health sales (34% of APE) decreased by €6 million (-8%) mainly reflecting lower sales of Medical Whole Life products due to increased competition; Investment & Savings sales (4% of APE) decreased by €2 million (-21%) due to lower sales of Variable Annuity products through the bancassurance channel following the above-mentioned curtailing strategy. Investment margin remained stable at €0 million. Fees & revenues increased by €37 million (+6%) to €665 million. On a constant exchange rate basis, fees & revenues increased by €8 million (+1%) mainly due to higher loadings on premiums driven by a better business mix and increased retention in the G/A Protection & Health business. Half Year 2015 Financial Report 28 I ACTIVITY REPORT – HALF YEAR 2015 Net technical margin rose by €10 million (+32%) to €43 million. On a constant exchange rate basis, net technical margin increased by €8 million (+26%) mainly due to improved hedging results in Variable Annuity reflecting lower equity market volatility (€+13 million). Expenses increased by €23 million (+7%) to €-370 million. On a constant exchange rate basis, expenses increased by €7 million (+2%) due to a VAT rate increase and higher commissions in line with APE growth, partly offset by the effects of cost savings programs. Amortization of VBI decreased by €5 million (-32%) to €-11 million. On a constant exchange rate basis, amortization of VBI decreased by €6 million (-35%) mainly due to the non-repeat of 1H14 assumption changes. As a result, the underlying cost income ratio decreased by 1.1 point to 53.9%. Income tax expenses decreased by €6 million (-6%) to €-92 million. On a constant exchange rate basis, income tax expenses decreased by €10 million (-10%) due to positive tax one-offs (€+15 million) mainly driven by the decrease in the corporate tax rate, partly offset by higher pre-tax underlying earnings. Underlying earnings increased by €32 million (+16%) to €230 million. On a constant exchange rate basis, underlying earnings increased by €23 million (+11%). Adjusted earnings increased by €32 million (+16%) to €230 million. On a constant exchange rate basis, adjusted earnings increased by €23 million (+11%) due to higher underlying earnings. Net income decreased by €16 million (-7%) to €198 million. On a constant exchange rate basis, net income decreased by €24 million (-11%) due to higher adjusted earnings more than offset by an unfavorable change in the fair value of mutual funds and economic hedge derivatives not eligible for hedge accounting. Half Year 2015 Financial Report 29 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – Germany (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 3,317 182 92 147 15 (100) (41) - 113 (41) 0 72 23 95 (1) - - (1) 92 3,308 176 67 155 42 (118) (10) - 136 (52) (0) 84 (5) 78 9 11 - - 99 6,670 373 116 303 43 (211) (21) - 230 (68) 0 162 19 181 51 11 - (1) 242 (a) Before intercompany eliminations. Gross Revenues amounted to € 3,300 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €9 million (+0%) to €3,317 million: Life revenues (58% of gross revenues) decreased by €21 million (-1%) to €1,910 million driven by lower single and regular premiums in G/A Savings business. This was partly offset by higher Unit- Linked single and regular premiums due to higher new business from the new hybrid savings product 1 launched in 2014; Health revenues (42% of gross revenues) increased by €30 million (+2%) to €1,408 million due to tariff increases in full benefit insurance to cover medical inflation. APE increased by €6 million (+3%) to €182 million: Life sales (64% of APE) increased by €9 million (+9%) to €117 million due to sales of the above- mentioned new hybrid savings product1 launched in 2H14, partly compensated by the decrease in G/A Savings; Health sales (36% of APE) decreased by €4 million (-5%) to €65 million driven by lower sales of full benefit insurance products while volumes of supplementary insurance products remained stable. Investment margin increased by €26 million (+38%) to €92 million mainly due to a new regulation in the Life business implemented in the second half of 2014 leading to a change in allocation of policyholder participation from investment margin to net technical margin and due to a higher investment income in Health from a higher average asset base. Fees & revenues decreased by €8 million (-5%) to €147 million due to lower loadings on premiums in Life G/A Savings as a result of the decrease in portfolio and lower new business in Health. Net technical margin decreased by €27 million (-64%) to €15 million mainly due to one-off transaction costs relating to a new hedging strategy for Variable Annuity GMxB products and a higher share of policyholder participation in Life business due to the above-mentioned change in regulation, partly offset by a higher mortality margin in Health. 1 Hybrid products: savings products allowing clients to invest in both Unit-Linked and General Account funds. Half Year 2015 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2015 Expenses decreased by €17 million (-15%) to €-100 million mainly from a one-off impact from a reduction in the deferred policyholder participation in Life business mainly related to Deferred Acquisition costs and lower general administrative expenses due to the effects of cost savings programs, partly offset by accelerated Deferred Acquisition Costs amortization as a result of updated lower interest rate assumptions. Amortization of VBI increased by €31 million (+320%) to €-41 million due to a one-off impact from updated assumptions due to lower interest rates. As a result, the underlying cost income ratio increased by 7.2 points to 55.5%. Income tax expenses decreased by €11 million (-22%) to €-41 million due to lower pre-tax underlying earnings. Underlying earnings decreased by €11 million (-14%) to €72 million. Adjusted earnings increased by €16 million (+21%) to €95 million due to higher net realized capital gains, partly offset by the decrease in underlying earnings. Net income decreased by €6 million (-6%) to €92 million as the increase in adjusted earnings was more than compensated by an unfavorable change in the fair value of fixed income securities and economic hedge derivatives not eligible for hedge accounting. Half Year 2015 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – Switzerland (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share Average exchange rate : 1.00 € = Swiss Franc 5,372 220 133 180 94 (166) (35) - 206 (40) - 166 43 208 (0) - (4) - 204 1.056 4,878 222 107 149 72 (129) (13) - 186 (37) - 150 43 193 14 - (3) - 204 1.221 6,726 329 187 305 162 (271) (7) - 376 (69) - 307 43 351 50 - (7) - 394 1.215 (a) Before intercompany eliminations. Gross Revenues amounted to € 5,367 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €493 million (+10%) to €5,372 million. On a comparable basis, gross revenues decreased by €234 million (-5%): Group Life revenues (89% of gross revenues) decreased by €206 million (-5%) to €4,764 million driven by lower single premiums from full protection scheme contracts (€-157 million) due to the strategic shift from full protection schemes to semi-autonomous employee benefit solutions; Individual Life revenues (11% of gross revenues) decreased by €27 million (-5%) to €608 million due to the non-repeat of strong sales in 1H14 (€-30 million). APE decreased by €2 million (-1%) to €220 million. On a comparable basis, APE decreased by €32 million (- 14%): Group Life sales (69% of APE) decreased by €29 million (-18%) driven by the strategic shift from full protection schemes to semi-autonomous employee benefit solutions; Individual Life sales (31% of APE) decreased by €2 million (-4%) driven by the non-repeat of strong sales in 1H14. Investment margin increased by €25 million (+23%) to €133 million. On a constant exchange rate basis, investment margin increased by €7 million (+7%) due to a decrease in interest credited in Individual Life driven by the strategic shift towards products with lower guarantees. Fees & revenues increased by €32 million (+21%) to €180 million. On a constant exchange rate basis, fees & revenues increased by €7 million (+5%) mainly resulting from higher loadings on premiums in Individual Life. Net technical margin rose by €21 million (+29%) to €94 million. On a constant exchange rate basis, net technical margin increased by €9 million (+12%) mainly due to a favorable development of disability claims experience in Individual Life. Expenses increased by €37 million (+29%) to €-166 million. On a constant exchange rate basis, expenses increased by €15 million (+11%) mainly due to higher acquisition expenses driven by the higher amortization of Deferred Acquisition Costs in Individual Life attributable to the decrease in interest rates. Half Year 2015 Financial Report 32 I ACTIVITY REPORT – HALF YEAR 2015 Amortization of VBI increased by €21 million (+159%) to €-35 million. On a constant exchange rate basis, amortization of VBI increased by €17 million (+124%) mainly driven by updated model assumptions in Individual Life attributable to the above-mentioned decrease in interest rates. As a result, the underlying cost income ratio increased by 6.1 points to 49.3%. Income tax expenses increased by €4 million (+10%) to €-40 million. On a constant exchange rate basis, income tax expenses decreased by €2 million (-5%) driven by lower pre-tax underlying earnings. Underlying earnings increased by €16 million (+11%) to €166 million. On a constant exchange rate basis, underlying earnings decreased by €6 million (-4%). Adjusted earnings increased by €15 million (+8%) to €208 million. On a constant exchange rate basis, adjusted earnings decreased by €13 million (-7%) mainly driven by lower underlying earnings and lower net realized capital gains. Net income increased by €1 million (0%) to €204 million. On a constant exchange rate basis, net income decreased by €27 million (-13%) mainly driven by lower adjusted earnings as well as a negative change in the fair value of economic interest rate hedge derivatives not eligible for hedge accounting. Half Year 2015 Financial Report 33 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – Belgium (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 1,021 63 164 69 16 (121) (1) - 127 (36) (0) 91 52 144 (8) (0) - (3) 132 1,041 72 167 67 10 (121) 0 - 122 (35) (0) 88 71 158 30 - - (1) 186 1,813 125 342 139 16 (268) (9) - 220 (64) (0) 156 111 266 27 - - (7) 287 (a) Before intercompany eliminations. Gross Revenues amounted to € 1,021 million net of intercompany eliminations as of June 30, 2015. Gross revenues decreased by €20 million (-2%) to €1,021 million. G/A Protection & Health revenues (43% of gross revenues) increased by €31 million (+8%) mainly driven by higher renewals in Group Life Protection; Unit-linked revenues (36% of gross revenues) increased by €53 million (+17%) mainly driven by higher sales of Oxylife Invest and Oxylife Opportunity hybrid products1; G/A Savings revenues (21% of gross revenues) decreased by €104 million (-33%) mainly due to lower sales of the Oxylife Secure hybrid products1. APE decreased by €10 million (-13%) to €63 million. G/A Protection & Health (20% of APE) increased by €3 million (+32%) driven by higher sales of Group Life Protection; Unit-Linked (56% of APE) increased by €3 million (+10%) driven by higher sales of Oxylife Invest and Oxylife Opportunity hybrid products1; G/A Savings (24% of APE) decreased by €16 million (-52%) mainly due to lower new business of the Oxylife Secure hybrid product1 and pension products. Investment margin decreased by €4 million (-2%) to €164 million as lower investment income was almost fully offset by lower credited interest. Fees & revenues increased by €2 million (+3%) to €69 million. Net technical margin rose by €7 million (+70%) to €16 million due to longevity reserve strengthening in 1H14. Expenses decreased by €1 million (-1%) to €-121 million:  Acquisition expenses were stable at €50 million; Administrative expenses decreased by €1 million (-1%) to €-71 million as higher overhead costs driven by salary inflation were compensated by the effects of cost savings programs. 1 Hybrid products: savings products allowing clients to invest in both Unit-Linked and General Account funds. Half Year 2015 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2015 Amortization of VBI increased by €1 million to €-1 million due to updated lower interest rate assumptions. As a result, the underlying cost income ratio decreased by 0.9 point to 49.0%. Income tax expenses increased by €1 million (+3%) to €-36 million due to the increase in pre-tax underlying earnings. Underlying earnings increased by €4 million (+5%) to €91 million. Adjusted earnings decreased by €14 million (-9%) to €144 million mainly due to lower net realized capital gains (€-18 million) principally on fixed income assets partly offset by higher underlying earnings. Net income decreased by €55 million (-29%) to €132 million mainly due to (i) lower adjusted earnings, (ii) an unfavorable change in fair value of interest rates derivatives not eligible for hedge accounting (€-17 million), (iii) an unfavorable change in the fair value of mutual funds and other assets (€-13 million) and (iv) an unfavorable change in the foreign exchange derivatives (€-6 million). Half Year 2015 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – Central & Eastern Europe (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 161 41 4 86 21 (89) (0) - 22 (4) (0) 18 0 18 (0) - (1) (0) 17 152 41 4 79 20 (72) (1) - 30 (5) (0) 24 0 25 (0) - (1) (0) 24 320 82 6 143 39 (138) (1) - 48 (8) (0) 40 1 40 (0) - (1) (1) 38 (a) Before intercompany eliminations. Gross Revenues amounted to € 161 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €9 million (+6%) to €161 million. On a comparable basis, gross revenues increased by 8 million (+5%), mainly driven by higher sales in G/A Protection & Health business in the Czech Republic (€+4 million) and from Bancassurance channel in Poland (€+2 million). APE remained stable at €41 million. On a comparable basis, APE remained stable at €40 million driven by higher sales in G/A Protection & Health business in the Czech Republic fully offset by lower Unit-Linked new business in Poland. Underlying earnings decreased by €6 million (-25%) to €18 million. On a constant exchange rate basis, underlying earnings decreased by €6 million (-26%) mainly driven by the non-repeat of one-off partial release of the guaranteed fund following a change of regulation in the pension funds in Poland, partly offset by higher performance fees from the pension funds in Slovakia. Adjusted earnings decreased by €6 million (-26%) to €18 million. On a constant exchange rate basis, adjusted earnings decreased by €6 million (-26%) driven by lower underlying earnings. Net income decreased by €7 million (-29%) to €17 million. On a constant exchange rate basis, net income decreased by €7 million (-30%), mainly driven by lower adjusted earnings. Half Year 2015 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – Mediterranean & Latin American Region (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 3,176 316 124 324 51 (324) (5) - 170 (41) (51) 78 4 82 16 - (0) (1) 97 3,366 271 117 257 77 (266) (6) - 179 (42) (46) 91 (0) 91 (3) (0) 1 (1) 87 6,389 570 242 506 198 (576) (11) - 359 (86) (80) 193 29 222 (23) (0) (0) (2) 196 (a) Before intercompany eliminations. Gross Revenues amounted to € 3,173 million net of intercompany eliminations as of June 30, 2015. Scope: Italy, Spain, Portugal, Greece, Turkey, Mexico, Morocco, and Colombia are fully consolidated; Colombia was fully consolidated since April 2, 2014. In the comments below, the comparable basis includes Colombia for 2014 contribution only for Gross Revenues. Gross revenues decreased by €190 million (-6%) or €268 million (-8%) on a comparable basis to €3,176 million: Mature markets were down €287 million (-9%) with (i) lower sales of Unit-Linked Savings (€-338 million) mainly due to lower “Protected Unit” product sales at AXA MPS, partly offset by (ii) G/A Savings (€+30 million) with increased volumes in hybrid products1 at AXA MPS and AXA Italy, partly offset by lower Pure G/A Savings products in Spain and (iii) G/A Protection & Health (€+22 million) mainly driven by higher sales at AXA MPS. High growth markets increased by €19 million (+6%) mainly due to (i) higher sales in G/A Savings (€+10 million) in Morocco and Colombia, and (ii) G/A Protection & Health (€+7 million) especially in Mexico as a result of a timing effect of a number of large accounts and growth in Whole Life business, partly offset by Colombia from a decrease of coinsurance share. APE increased by €45 million (+17%) or €44 million (+16%) on a constant exchange rate basis to €316 million: Mature markets sales were up €42 million (+17%) to €291 million driven by Unit-Linked Savings (€+48 million) mainly due to higher sales of Pure UL at AXA MPS and Spain, partly offset by lower G/A Savings (€-5 million) due to lower sales in Spain mitigated by higher volume of hybrid products1 at AXA MPS and AXA Italy. High growth markets increased by €1 million (+6%) to €25 million. 1 Hybrid products: savings products allowing clients to invest in both Unit-Linked and General Account funds. Half Year 2015 Financial Report 37 I ACTIVITY REPORT – HALF YEAR 2015 Investment margin increased by €7 million (+6%) to €124 million. On a constant exchange rate basis, investment margin increased by €5 million (+5%) mainly driven by higher investment income and a decrease of guaranteed rates in flexible portfolios in Spain. Fees & revenues increased by €67 million (+26%) to €324 million. On a constant exchange rate basis, fees & revenues increased by €64 million (+25%) largely driven by AXA MPS from higher Unearned Revenues Reserve amortization (which was partly offset in Deferred Acquisition Costs) mainly reflecting higher surrenders. Net technical margin decreased by €26 million (-33%) to €51 million. On a constant exchange rate basis, net technical margin decreased by €39 million (-50%) mainly driven by increased large claims in Protection business in Mexico. Expenses increased by €58 million (+22%) to €-324 million. On a constant exchange rate basis, expenses increased by €37 million (+14%): Mature markets expenses increased by €34 million mainly driven by AXA MPS reflecting higher Deferred Acquisition Costs amortization in line with increased surrenders; High growth markets expenses increased by €4 million due to higher administrative expenses in Mexico. Amortization of VBI remained stable at €-5 million. As a result, the underlying cost income ratio increased by 5.7 points to 66.0%. On a constant exchange rate basis, the underlying cost income ratio increased by 3.8 points to 65.8%. Income tax expenses decreased by €1 million (-2%) to €-41 million. On a constant exchange rate basis, income tax expenses increased by €2 million (+6%) due to lower deductible charges, partly offset by a more favorable country mix. Underlying earnings decreased by €13 million (-14%) to €78 million. On a constant exchange rate basis, underlying earnings decreased by €13 million (-14%). Adjusted earnings decreased by €9 million (-10%) to €82 million. On a constant exchange rate basis, adjusted earnings decreased by €9 million (-10%) driven by lower underlying earnings, partly offset by the non-repeat of impairments on fixed income assets. Net income increased by €10 million (+11%) to €97 million. On a constant exchange rate basis, net income increased by €8 million (+10%) as the decrease in adjusted earnings was more than offset by a favorable impact from exchange rate movements on assets denominated in foreign currencies. Half Year 2015 Financial Report 38 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – Hong Kong (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share Average exchange rate : 1.00 € = Hong Kong Dollar 1,221 281 1 322 41 (161) (11) - 193 (8) - 185 (0) 185 24 (1) - - 208 8.652 892 226 7 240 24 (125) (2) - 145 (8) - 136 (0) 136 (11) (0) - - 126 10.633 1,972 515 3 541 70 (301) (13) - 300 (19) - 282 - 282 (10) (1) - - 270 10.328 (a) Before intercompany eliminations. Gross Revenues amounted to € 1,205 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €329 million (+37%) to €1,221 million. On a comparable basis, gross revenues increased by €102 million (+12%) mainly due to higher revenues from G/A Protection & Health products (€+51 million) stemming from both new business sales and in-force growth, Unit-Linked products (€+23 million) due to strong in-force growth, and G/A Savings products (€+20 million) due to the successful launch of a new comprehensive savings plan. APE increased by €55 million (+25%) to €281 million. On a comparable basis, APE increased by €3 million (+1%) mainly due to (i) G/A Savings products (€+17 million) driven by the successful launch of a new comprehensive savings plan, and (ii) stable sales in G/A Protection & Health, partly offset by (iii) lower Unit- Linked products (€-17 million) due to the implementation of significant regulatory changes impacting products features and commission levels starting from January 1st , 2015, partly offset by exceptional sales of several large contracts and the carry-over of accelerated sales in anticipation of the regulatory changes. Investment margin decreased by €6 million to €1 million. On a constant exchange rate basis, investment margin decreased by €6 million as higher investment income driven by higher average asset base was more than offset by higher interest credited to policyholders. Fees & revenues increased by €83 million (+35%) to €322 million. On a constant exchange rate basis, fees & revenues increased by €23 million (+9%) driven by an increase in loadings on premiums stemming from both new business and in-force growth. Net technical margin rose by €17 million (+71%) to €41 million. On a constant exchange rate basis, net technical margin increased by €9 million (+39%) driven by better claims experience for of G/A Protection & Health products and higher surrender margin from Unit-Linked products driven by a strong portfolio growth in recent years. Expenses increased by €36 million (+29%) to €-161 million. On a constant exchange rate basis, expenses increased by €6 million (+5%) mainly as a result of higher overhead costs driven by salary and rental inflation. Amortization of VBI increased by €9 million to €-11 million. On a constant exchange rate basis, amortization of VBI increased by €7 million mainly due to assumption changes. As a result, the underlying cost income ratio increased by 0.5 point to 47.1%. Income tax expenses were stable at €-8 million. Half Year 2015 Financial Report 39 I ACTIVITY REPORT – HALF YEAR 2015 Underlying earnings increased by €48 million (+35%) to €185 million. On a constant exchange rate basis, underlying earnings increased by €14 million (+10%). Adjusted earnings increased by €48 million (+35%) to €185 million. On a constant exchange rate basis, adjusted earnings increased by €14 million (+10%) due to higher underlying earnings. Net income increased by €82 million (+65%) to €208 million. On a constant exchange rate basis, net income increased by €43 million (+34%) driven by higher adjusted earnings (€+14 million) and a favorable change in the fair value of interest rate hedging derivatives not eligible for hedge accounting (€+34 million). Half Year 2015 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations – South-East Asia, India & China (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) APE (Group share) Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 257 333 72 16 87 3 (5) (1) (4) 79 157 225 60 (0) 60 1 (3) - (0) 57 336 466 119 (0) 118 2 (6) - (6) 108 Scope: (i) for gross revenues: Singapore and non-bancassurance subsidiaries in Indonesia, on a 100% share basis; (ii) for APE, underlying earnings, adjusted earnings and net income: China, India, Indonesia, Thailand, Philippines and Singapore, on a group share basis. Malaysian operations are not consolidated. Gross Revenues increased by €99 million (+63%) to €257 million. On a comparable basis, gross revenues increased by €68 million (+43%) driven by higher revenues from Unit-Linked products in Singapore (€+53 million) following the new partnership with SingPost implemented in January 2015. G/A Protection & Health products were up by €14 million due to higher renewals in Singapore and Indonesia. APE increased by €108 million (+48%) to €333 million. On a comparable basis, APE increased by €56 million (+25%) mainly driven by: Strong performance in China (€+35 million), particularly from G/A Protection & Health products;  Higher sales in Indonesia (€+12 million), Singapore (€+11 million) and Philippines (€+4 million) mainly from Unit-Linked products; Partly offset by a decrease in Thailand (€-7 million) reflecting a focus on more profitable products. Underlying earnings increased by €12 million (+20%) to €72 million. On a comparable basis, underlying earnings increased by €2 million (+3%) mainly due to:  Business growth in Indonesia (€+5 million), Singapore (€+1 million) and Philippines (€+1 million); Partly offset by lower investment performance in Thailand (€-2 million) and India (€-2 million). Adjusted earnings increased by €27 million (+46%) to €87 million. On a comparable basis, adjusted earnings increased by €14 million (+24%) mainly driven by higher underlying earnings and higher net realized capital gains from China (€+13 million). Net income increased by €22 million (+39%) to €79 million. On a comparable basis, net income increased by €10 million (+17%) mainly due to higher adjusted earnings. Half Year 2015 Financial Report 41 I ACTIVITY REPORT – HALF YEAR 2015 Life & Savings operations - Other The following tables present the operating results for the other Life & Savings operations of AXA: Consolidated Gross Revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Luxembourg 62 65 143 AXA Life Invest Services 14 11 23 Family Protect 6 7 14 Other (1) 0 1 TOTAL 81 84 180 Intercompany transactions (13) (10) (22) Contribution to consolidated gross revenues 68 73 159 Underlying, Adjusted earnings and Net Income (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Luxembourg 4 4 7 AXA Life Invest Services (4) (8) (18) Family Protect (10) (17) (34) Other (1) (0) (0) UNDERLYING EARNINGS (12) (21) (45) Net realized capital gains or losses attributable to shareholders 1 0 0 ADJUSTED EARNINGS (11) (21) (45) Profit or loss on financial assets (under Fair Value option) & derivatives 0 1 1 Exceptional operations (including discontinued operations) (0) Goodwill and related intangible impacts Integration and restructuring costs NET INCOME (11) (20) (44) FAMILY PROTECT Underlying earnings as well as adjusted earnings and net income increased by €6 million to €-10 million mainly due to lower acquisition cost following implementation of strict cost management controls. 1 AXA LIFE INVEST SERVICES Underlying earnings, adjusted earnings and net income increased by €4 million (+46%) to €-4 million due to an increase in revenues while expenses remained flat. 1 AXA Life Invest Services aim to promote Unit-Linked products with guarantees through third party bank partnerships. Half Year 2015 Financial Report 42 I ACTIVITY REPORT – HALF YEAR 2015 PROPERTY & CASUALTY SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income attributable to AXA’s Property & Casualty segment for the periods indicated. (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share (a) Before intercompany eliminations. Gross Revenues amounted to € 18,183 million net of intercompany eliminations as of June 30, 2015. 18,404 70.8% 69.0% 4,820 26.2% 1,071 1,825 (515) 5 (30) 1,286 155 1,441 (9) 1 (35) (34) 1,364 17,044 71.2% 69.9% 4,331 25.9% 1,115 1,719 (502) 29 (19) 1,226 151 1,378 (20) (0) (48) (23) 1,286 29,762 71.5% 70.9% 8,660 26.0% 2,133 3,044 (883) 47 (50) 2,158 142 2,300 (128) (3) (332) (104) 1,734 Consolidated Gross Revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 France 3,394 3,355 6,101 United Kingdom & Ireland 2,522 2,202 4,132 Germany 2,486 2,404 3,824 Switzerland 2,880 2,485 2,795 Belgium 1,109 1,126 2,051 Central & Eastern Europe - Luxembourg (a) 66 87 149 Mediterranean and Latin American Region (b) 3,959 3,733 7,486 Direct (c) 1,391 1,202 2,361 Asia (d) 597 449 862 TOTAL 18,404 17,044 29,762 Intercompany transactions (221) (224) (303) Contribution to consolidated gross revenues 18,183 16,820 29,460 o/w. high growth markets o/w. Direct o/w. mature markets 2,712 1,389 14,082 2,269 1,202 13,349 4,721 2,361 22,378 (a) Central & Eastern Europe includes Reso (Russia). (b) Mediterranean and Latin American Region includes other than Direct operations in Italy, Spain, Portugal, Greece, Turkey, Morocco, Gulf Region, Mexico and Colombia. (c) Direct business in France, Belgium, Spain, Portugal, Italy, Poland, United Kingdom, South Korea and Japan. (d) Asia includes Hong Kong, Malaysia, Singapore. Half Year 2015 Financial Report 43 I ACTIVITY REPORT – HALF YEAR 2015 (in Euro million) Combined Ratio June 30, 2015 June 30, 2014 December 31, 2014 Total 95.1% 95.8% 96.9% France 94.3% 96.3% 97.2% United Kingdom & Ireland 96.9% 98.0% 98.4% Germany 92.9% 94.8% 95.6% Switzerland 85.6% 86.4% 89.1% Belgium 93.2% 91.5% 93.8% Central & Eastern Europe - Luxembourg (a) 98.5% 101.7% 104.6% Mediterranean and Latin American Region (b) 99.3% 98.8% 100.1% Direct (c) 99.2% 98.9% 98.2% Asia (d) 92.8% 93.6% 93.9% Mature 93.6% 94.9% 96.1% Direct 99.2% 98.9% 98.2% High growth 100.2% 99.0% 100.2% (a) Excluding RESO - RESO combined ratio amounted to 101.5% as of June 30, 2015. (b) Mediterranean and Latin American Region includes other than Direct operations in Italy, Spain, Portugal, Greece, Turkey, Morocco, Gulf Region, Mexico and Colombia. (c) Direct business in France, Belgium, Spain, Portugal, Italy, Poland, United Kingdom, South Korea and Japan. (d) Asia includes Hong Kong, Singapore, Malaysia and Thailand. Underlying earnings (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 France 281 274 471 United Kingdom & Ireland 151 116 234 Germany 204 193 347 Switzerland 262 223 397 Belgium 110 131 215 Central & Eastern Europe - Luxembourg (a) 7 17 29 Mediterranean and Latin American Region (b) 182 184 279 Direct (c) 56 53 124 Asia (d) 33 35 61 UNDERLYING EARNINGS 1,286 1,226 2,158 o/w. high growth markets 86 124 199 o/w. Direct 56 53 124 o/w. mature markets 1,143 1,049 1,835 (a) Central & Eastern Europe includes Reso (Russia). (b) Mediterranean and Latin American Region includes other than Direct operations in Italy, Spain, Portugal, Greece, Turkey, Morocco, Gulf Region, Mexico, Lebanon and Colombia. (c) Direct business in France, Belgium, Spain, Portugal, Italy, Poland, the United Kingdom, South Korea and Japan. (d) Asia includes India, Hong Kong, Malaysia, Singapore and Thailand. Half Year 2015 Financial Report 44 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations – France (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 3,394 72.1% 70.8% 863 23.5% 264 432 (151) - (0) 281 28 309 (9) - - - 301 3,355 73.8% 73.2% 786 23.1% 325 434 (160) - (0) 274 28 302 (31) - - - 271 6,101 74.1% 74.2% 1,557 23.0% 589 756 (284) - (1) 471 56 528 (69) - - - 458 (a) Before intercompany eliminations. Gross Revenues amounted to € 3,342 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €39 million (+1%) to €3,394 million: Personal lines (55% of gross revenues) were stable at €1,849 million, as tariff increases in all segments were offset by lower volumes driven by a strong competition in the market; Commercial lines (45% of gross revenues) were stable at €1,492 million as tariff increases and increase in the new business in the international segment were offset by lower volumes notably in Construction in a context of selective underwriting. Net technical result increased by €77 million (+10%) to €863 million: the current accident year loss ratio decreased by 1.7 points to 72.1% mainly driven by lower Nat Cat charge (€59 million in 1H14 related to ELA hailstorm), partly offset by an increase in average cost in Motor; the all accident year loss ratio decreased by 2.3 points to 70.8% due to less unfavorable prior year reserve developments in Construction, partly offset by less favorable reserve developments in Liability. Expense ratio increased by 0.4 point to 23.5% mainly due to the non-repeat of reduced commissions in 1H14. The enlarged expense ratio decreased by 0.5 point to 29.6%, due to lower claims handling costs. As a result, the combined ratio decreased by 1.9 points to 94.3%. Net investment result decreased by €60 million (-19%) to €264 million mainly due to the non-repeat of an exceptional distribution from mutual funds in 1H14 (€-67 million). Income tax expenses decreased by €9 million (-6%) to €-151 million mainly due to higher dividends taxed at a reduced tax rate. As a result, underlying earnings increased by €7 million (+3%) to €281 million. Adjusted earnings increased by €7 million (+2%) to €309 million driven by higher underlying earnings. Net income increased by €30 million (+11%) to €301 million driven by higher adjusted earnings (€+7 million), the positive change in the fair value on credit funds (€+19 million) and a positive forex impact (€+5 million). Half Year 2015 Financial Report 45 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations - United Kingdom & Ireland (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share Average exchange rate : 1.00 € = £ (a) Before intercompany eliminations. Gross Revenues amounted to € 2,452 million net of intercompany eliminations as of June 30, 2015. 2,522 68.1% 67.1% 739 29.8% 116 187 (35) - (0) 151 9 161 (9) - (1) - 151 0.733 2,202 70.2% 69.1% 620 28.9% 105 144 (28) - (0) 116 19 135 (11) - (1) (2) 122 0.821 4,132 69.4% 69.1% 1,284 29.3% 223 290 (56) - (0) 234 (2) 231 (9) - (2) (11) 210 0.809 Gross revenues increased by €320 million (+15%) to €2,522 million. On a comparable basis, gross revenues increased by €86 million (+4%): Personal lines (43% of the total premiums) were up 2% to €1,091 million. (i) Motor was up 13% to €327 million principally due to higher volumes in Great Britain, tariff increases and a new partnership in the Republic of Ireland. (ii) Non-Motor was down 2% to €764 million. (a) Health was up 8% to €418 million following strong growth in Great Britain and internationally. (b) Property was down 7% to €231 million due to the run-off of certain partnership arrangements. (c) Personal Other was down 21% to €115 million principally due to the loss of a partnership arrangement on Travel; Commercial lines (55% of the total premiums) were up 4% to €1,395 million. (i) Motor was up 9% to €276 million principally due to increased new business volumes despite a highly competitive market. (ii) Non-Motor was up 3%. (a) Property was up 3% to €332 million due to improved renewal rates. (b) Health was up 6% to €560 million due to growth in Great Britain and internationally. (c) Liability was up 9% to €118 million driven by increased new business volume. (d) Other was down 23% to €50 million due to a reduction in the retrocession of AXA Pool. Net technical result increased by €119 million (+19%) to €739 million. On a constant exchange rate basis, net technical result increased by €46 million (+7 %): the current year loss ratio decreased by 1.8 points to 68.1% due to a decrease in Nat Cat charges and other weather related claims (-3.4 points). These improvements were partly offset by deterioration in both Personal and Commercial Motor (+1.4 points) due to unfavorable claims experience in the UK as well as an increase in frequency of Personal Injury claims in Ireland; the all accident year loss ratio decreased by 1.9 points to 67.1% mainly driven by the decrease in current year loss ratio. Expense Ratio increased by 0.8 point to 29.8% mainly driven by an increase in the acquisition expense ratio (+0.6 point) reflecting an increase in commissions and an increase in the administrative expense ratio (+0.2 point) reflecting higher property and project costs. The enlarged expense ratio was up 0.8 point at 32.5%. Half Year 2015 Financial Report 46 I ACTIVITY REPORT – HALF YEAR 2015 As a result, the combined ratio was down 1.1 points to 96.9%. Net investment result increased by €12 million (+11%) to €116 million. On a constant exchange rate basis, net investment result increased by €1 million. Income tax expenses increased by €7 million (+27%) to €-35 million. On a constant exchange rate basis, income tax expenses increased by €4 million (+14%) reflecting higher pre-tax underlying earnings. Underlying earnings increased by €35 million (+30%) to €151 million. On a constant exchange rate basis, underlying earnings increased by €21 million (+18%). Adjusted earnings increased by €25million (+19%) to €161 million. On a constant exchange rate basis, adjusted earnings increased by €11 million (+8%) reflecting higher underlying earnings partly offset by lower net realized capital gains. Net Income increased by €29 million (+24%) to €151 million. On a constant exchange rate basis, net income increased by €15 million (+12%) due to higher adjusted earnings and a favorable change in the fair value of foreign exchange hedging derivatives not eligible for hedge accounting (€+4 million). Half Year 2015 Financial Report 47 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations – Germany (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 2,486 66.7% 64.1% 701 28.8% 152 291 (87) - (0) 204 16 219 (20) - (2) (9) 188 2,404 66.9% 66.5% 637 28.3% 178 277 (84) - (0) 193 12 205 14 - (2) (2) 215 3,824 66.8% 66.7% 1,274 28.9% 326 494 (146) - (1) 347 8 356 (9) - (4) (11) 332 (a) Before intercompany eliminations. Gross Revenues amounted to € 2,454 million net of intercompany eliminations as of June 30, 2015. Gross revenues increased by €82 million (+3%) to €2,486 million: Personal lines (52% of gross revenues) were up 4% to €1,426 million driven by tariff increases and higher volumes, mainly in Motor; Commercial lines (32% of gross revenues) were up 2% to €869 million, mainly in Property;  Other lines (17% of gross revenues) were up 5% to €454 million mainly driven by Art insurance. Net technical result increased by €64 million (+10%) to €701 million: the current accident year loss ratio improved by 0.2 point to 66.7% mainly reflecting improved claims handling costs. The favorable impact of lower Nat Cat events was fully offset by higher attritional claims driven by natural events, notably Niklas storm (€33 million, not qualifying as Nat Cat event); the all accident year loss ratio decreased by 2.3 points to 64.1% due to positive prior year claims development in medical liability. Expense ratio increased by 0.5 point to 28.8% mainly due to higher commissions. Enlarged expense ratio is up by 0.6 point to 32.0%. As a result, the combined ratio was down by 1.9 points to 92.9%. Net investment result decreased by €26 million (-15%) to €152 million driven by lower reinvestment yields and the non-repeat of an exceptional interest profit on a tax claim in 1H14. Income tax expenses increased by 2 million (+3%) to €-87 million due to higher pre-tax underlying earnings. As a result underlying earnings increased by €11 million (+6%) to €204 million. Adjusted earnings increased by €15 million (+7%) to €219 million mainly driven by the increase in underlying earnings and higher net realized capital gains. Net income decreased by €27 million (-12%) to €188 million mainly due to the change in fair value of fixed income funds as a result of higher interest rates and corporate spreads widening, more than offsetting the increase in adjusted earnings. Half Year 2015 Financial Report 48 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations – Switzerland (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share Average exchange rate : 1.00 € = Swiss Franc (a) Before intercompany eliminations. Gross Revenues amounted to € 2,872 million net of intercompany eliminations as of June 30, 2015. 2,880 69.1% 62.1% 612 23.5% 103 336 (71) - (2) 262 47 309 (1) - (13) - 294 1.056 2,485 69.3% 62.6% 519 23.8% 93 282 (58) - (2) 223 42 265 (1) - (12) - 252 1.221 2,795 68.3% 64.3% 996 24.8% 196 500 (100) - (3) 397 43 441 (0) - (25) - 416 1.215 Gross revenues increased by €395 million (+16%) to €2,880 million. On a comparable basis, gross revenues increased by €7 million (+0%): Personal lines (53% of the gross revenues) were up €6 million to €1,544 million as a consequence of volume growth mainly in Motor, partly offset by a negative price effect in Motor as well as in Household; Commercial lines (47% of the gross revenues) were up €2 million to €1,348 million driven by volume growth mainly in Liability and Workers’ Compensation despite a highly competitive market. Net technical result increased by €93 million (+18%) to €612 million. On a constant exchange rate basis, net technical result increased by €10 million (+2%):  the current accident year loss ratio decreased by 0.2 point to 69.1% driven by lower large claims; the all accident year loss ratio decreased by 0.5 point to 62.1% in line with the improvement in the current accident year loss ratio and due to a higher positive prior year reserve development. Expense ratio improved by 0.3 point to 23.5%. The acquisition expense ratio decreased by 0.2 point mainly due to lower commissions and the administrative expense ratio decreased by 0.1 point driven by the effects of cost savings programs. As a result, the enlarged expense ratio improved by 0.6 point to 26.9%. As a result, the combined ratio improved by 0.8 point to 85.6%. Net investment result increased by €9 million (+10%) to €103 million. On a constant exchange rate basis, net investment result decreased by €5 million (-5%) mainly driven by the appreciation of the Swiss Franc and lower reinvestment yields on fixed income assets. Income tax expenses increased by €14 million (+23%) to €-71 million. On a constant exchange rate basis, income tax expenses increased by €4 million (+7%) driven by higher pre-tax underlying earnings. Underlying earnings increased by €39 million (+18%) to €262 million. On a constant exchange rate basis, underlying earnings increased by €4 million (+2%). Adjusted earnings increased by €44 million (+17%) to €309 million. On a constant exchange rate basis, adjusted earnings increased by €3 million (+1%) mainly driven by higher underlying earnings. Half Year 2015 Financial Report 49 I ACTIVITY REPORT – HALF YEAR 2015 Net income increased by €42 million (+17%) to €294 million. On a constant exchange rate basis, net income increased by €3 million (+1%) mainly driven by higher adjusted earnings. Half Year 2015 Financial Report 50 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations – Belgium (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 1,109 67.0% 62.6% 376 30.7% 92 160 (50) - - 110 38 148 29 - (1) (9) 167 1,126 67.1% 61.6% 393 29.9% 109 195 (65) - - 131 32 163 (4) - (1) (4) 154 2,051 67.7% 63.1% 759 30.7% 193 321 (106) - - 215 34 249 (64) - (2) (20) 163 (a) Before intercompany eliminations. Gross Revenues amounted to € 1,094 million net of intercompany eliminations as of June 30, 2015. Gross revenues decreased by €17 million (-2%) to €1,109 million: Personal lines (48% of the gross revenues) were stable at €534 million driven by negative net new contracts offset by tariff increases; Commercial lines (50% of the gross revenues) were down 2% to €561 million mainly due to less favorable premium adjustments principally in Workers’ Compensation;  Other lines (2% of the gross revenues) were down 11% to €21 million. Net technical result decreased by €16 million to €376 million: the current accident year loss ratio decreased by 0.1 point to 67.0% driven by the non-repeat of Nat Cat events which occurred in 1H14, almost completely offset by an increase in both large losses and attritional losses driven by Commercial lines; the all accident year loss ratio increased by 1.0 point to 62.6% as a result of less positive prior year reserve developments. Expense ratio was up 0.7 point to 30.7% driven by higher acquisition costs. Enlarged expense ratio was up 0.8 point to 38.5%. As a result, the combined ratio was up by 1.7 points to 93.2%. Net investment result decreased by €16 million (-15%) to €92 million mainly due to lower revenues from inflation-linked bonds. Income tax expenses decreased by €14 million (-22%) to €-50 million, mainly as a result of lower pre-tax underlying earnings. Underlying earnings decreased by €21 million (-16%) to €110 million. Adjusted earnings decreased by €15 million (-9%) to €148 million mainly due to lower underlying earnings partly compensated by higher net realized capital gains. Net income increased by €13 million (+9%) to €167 million mainly due to lower adjusted earnings more than offset by a favorable change in the fair value of inflation derivatives. Half Year 2015 Financial Report 51 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations – Central & Eastern Europe and Luxembourg Consolidated Gross Revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Luxembourg TOTAL Intercompany transactions Contribution to consolidated gross revenues 66 66 - 66 64 87 - 87 101 149 - 149 Underlying, Adjusted earnings and Net Income (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Luxembourg Reso (Russia) (a) 2 4 3 13 3 26 UNDERLYING EARNINGS 7 17 29 Net realized capital gains or losses attributable to shareholders (1) (0) 5 ADJUSTED EARNINGS 6 16 34 Profit or loss on financial assets (under Fair Value option) & derivatives Exceptional operations (including discontinued operations) Goodwill and related intangibles impacts Integration and restructuring costs (6) - (0) - 4 - (20) - 3 - (270) - NET INCOME (a) Reso accounted for using the equity method. AXA's share of profit is recognized in income statement. (1) (0) (233) Reso (Russia) Underlying earnings decreased by €9 million to €4 million. On a constant exchange rate basis, underlying earnings decreased by €7 million mainly driven by lower net technical result (€-11 million), partly offset by higher investment income (€+2 million) and lower expenses (€+1 million). The combined ratio increased by 3.2 points to 101.5%. Adjusted earnings decreased by €10 million to €3 million. On a constant exchange rate basis, adjusted earnings decreased by €9 million mainly driven by lower underlying earnings and lower net realized capital gains. Net income decreased by €19 million to €-4 million. On a constant exchange rate basis, net income decreased by €21 million mainly driven by lower adjusted earnings and an unfavorable change in the fair value of hedging derivatives as a result of RUB depreciation. Half Year 2015 Financial Report 52 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations – Mediterranean & Latin American Region (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 3,959 73.4% 73.6% 1,032 25.7% 260 288 (89) 2 (19) 182 12 195 6 0 (8) (12) 181 3,733 72.3% 73.3% 948 25.5% 232 276 (80) 1 (13) 184 14 198 8 - (7) (11) 188 7,486 73.6% 74.7% 1,924 25.5% 455 445 (134) 3 (35) 279 (2) 277 14 (3) (17) (26) 246 (a) Before intercompany eliminations. Gross Revenues amounted to € 3,926 million net of intercompany eliminations as of June 30, 2015. Scope: (i) Italy, Spain, Portugal, Greece, Turkey, Mexico, Morocco, Gulf Region and Colombia are fully consolidated; (ii) Lebanon is consolidated under the equity method and contributes only to the underlying earnings, adjusted and net income; (iii) Colombia was fully consolidated since April 2,2014. In the comments below, the comparable basis includes Colombia for 2014 contribution only for Gross Revenues. Gross revenues increased by €226 million (+6%) to €3,959 million. On a comparable basis, gross revenues decreased by €34 million (-1%) due to a decline in mature markets (-5% or €-87 million), partly offset by high growth markets (+3% or €+52 million) principally driven by Health; Personal lines (52% of gross revenues) were stable at €2,078 million as lower revenues in Spain (€- 57 million) from negative volume impact were offset by increases in high growth markets especially in Mexico (€+29 million) from tariff increases in Health and positive volume impact in Motor as well as Turkey (€+16 million) mainly reflecting improved mix towards higher average premiums products in Motor; Commercial lines (47% of gross revenues) were down 2% to €1,863 million mainly reflecting selective underwriting in Spain and Portugal and the non renewal of a large account in Colombia, partly offset by the Gulf Region mainly driven by tariff increases, favorable timing effect on renewals in Health and higher volumes in Motor; Other lines (0% of gross revenues) were up 66% to €18 million. Net technical result increased by €83 million (+9%) to €1,032 million. On a constant exchange rate basis, net technical result decreased by €18 million (-2%): the current accident year loss ratio increased by 1.0 point to 73.4% mainly due to adverse claims experience in motor in Turkey, partly offset by an improvement in Personal lines in Spain with lower average costs in motor and lower frequency in non-Motor business as well as selective underwriting in Portugal especially in Commercial lines; this was partly offset by the non-repeat of Nat Cat events which occurred in 1H14 (-0.2 point). the all accident year loss ratio increased by 0.2 point to 73.6% mainly reflecting the increase of the current accident year loss ratio, partly offset by more favorable prior year reserve developments. Expense ratio increased by 0.4 point to 25.7% due to higher acquisition expenses (+0.4 point). High growth markets expense ratio deteriorated by 0.5 point due to an increased commission rate. Half Year 2015 Financial Report 53 I ACTIVITY REPORT – HALF YEAR 2015 Enlarged expense ratio deteriorated by 0.4 point to 28.4%. As a result, combined ratio was up 0.6 point to 99.3%. Net investment result increased by €28 million (+12%) to €260 million. On a constant exchange rate basis, net investment result increased by €12 million (+5%) mainly driven by a positive seasonality impact on mutual funds distribution. Income tax expenses increased by €9 million (+11%) to €-89 million. On a constant exchange rate basis, income tax expenses increased by €2 million (+2%) mainly due to a decrease in deductible amounts in Mexico, partly offset by decrease of pre-tax underlying earnings. Underlying earnings decreased by €2 million (-1%) to €182 million. On a constant exchange rate basis, underlying earnings decreased by €5 million (-3%). Adjusted earnings decreased by €4 million (-2%) to €195 million. On a constant exchange rate basis, adjusted earnings decreased by €7 million (-3%) mainly driven by lower underlying earnings and lower net realized capital gains. Net income decreased by €6 million (-3%) to €181 million. On a constant exchange rate basis, net income decreased by €9 million (-5%) mainly driven by lower adjusted earnings. Half Year 2015 Financial Report 54 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations – Direct business (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 1,391 77.2% 77.5% 288 21.7% 63 73 (21) 4 (0) 56 1 57 0 0 (3) (3) 51 1,202 77.4% 76.5% 265 22.3% 55 68 (18) 4 (0) 53 4 57 2 (0) (1) (1) 56 2,361 78.2% 76.7% 539 21.5% 115 157 (41) 8 (0) 124 (3) 121 6 - (2) (8) 117 (a) Before intercompany eliminations. Gross Revenues amounted to € 1,389 million net of intercompany eliminations as of June 30, 2015. Direct business includes operations in the UK (24% of total Direct gross revenues), France (22%), South Korea (22%), Japan (14%), Spain (6%), Italy (5%), Poland (4%), Belgium (3%) and Portugal (1%). Gross revenues increased by €189 million (+16%) to €1,391 million. On a comparable basis, gross revenues increased by €82 million (+7%): Personal Motor (86% of gross revenues) was up €78 million (+7%) to €1,202 million mainly driven by improved retention and higher new business in the UK (+16% or €+35 million), and South Korea (+10% or €+22 million) and business growth in France (+8% or €+16 million), Japan (+7% or €+11million) and Spain (+6% or €+5 million); Personal Non-Motor (14% of gross revenues) was up €6 million (+3%) to €192 million mainly supported by Health following higher personal accident sales in South Korea. Net technical result increased by €23 million (+9%) to €288 million. On a constant exchange rate basis net technical result increased by €7 million (+3%): the current accident year loss ratio decreased by 0.4 point to 77.2% due to (i) lower Nat Cat (-1.1 points) due to the non-repeat of unfavorable weather condition in 1H14, partly offset by (ii) a deterioration of the attritional and large loss ratios (+0.9 point) mainly due to lower reinsurance results in France, higher reinsurance costs in the UK and an increase in claims frequency in South Korea; the all accident year loss ratio increased by 0.7 point to 77.5% mainly as a result of unfavorable prior year reserve developments in South Korea. Expense ratio decreased by 0.5 point to 21.7% mainly driven by a reduction in the acquisition costs in the UK and South Korea. Enlarged expense ratio decreased by 0.7 point to 27.3%. As a result, the combined ratio was up 0.2 point to 99.2%. Net investment result increased by €8 million (+14%) to €63 million. On a constant exchange rate basis, net investment result increased by €3 million (+6%). Half Year 2015 Financial Report 55 I ACTIVITY REPORT – HALF YEAR 2015 Income tax expenses increased by €2 million (+12%) to €-21 million. On a constant exchange rate basis, income tax expenses increased by €1 million (+7%) reflecting higher pre-tax underlying earnings. Underlying earnings increased by €3 million (+6%) to €56 million. On a constant exchange rate basis, underlying earnings were stable. Adjusted earnings stable at €57 million. On a constant exchange rate basis, adjusted earnings decreased by €3 million (-5%). Net income decreased by €6 million (-10%) to €51 million. On a constant exchange rate basis, net income decreased by €8 million (-14%) mainly due to lower adjusted earnings and the recurring amortization of intangible assets relating to the partnership with mBank in Poland. Half Year 2015 Financial Report 56 I ACTIVITY REPORT – HALF YEAR 2015 Property & Casualty operations - Asia (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 597 66.9% 63.4% 195 29.5% 17 55 (10) (5) (8) 33 5 38 1 - (7) (0) 32 449 67.8% 65.7% 135 27.9% 11 36 (7) 10 (4) 35 1 36 (0) - (3) (4) 30 862 68.4% 66.2% 281 27.7% 23 74 (13) 10 (10) 61 2 63 (1) - (9) (28) 26 (a) Before intercompany eliminations. Gross Revenues amounted to € 589 million of intercompany eliminations as of June 30, 2015. Scope: (i) for gross revenues and combined ratio: Hong Kong, Malaysia, Singapore and Thailand, on a 100% share basis; (ii) for underlying earnings, adjusted earnings and net income: China, India, Hong Kong, Malaysia, Singapore and Thailand, on a group share basis. Indonesia operations are not consolidated. China and India are consolidated through equity method. Thailand is changed from equity method to consolidation method for the first time in 2015 as of January 1st. China was consolidated through equity method for the first time in 2014 as of February 20th. In the comments below, the comparable basis includes (i) the 6-month results (January-June) in 2014 for Thailand and (ii) the restated 6-month results in 2014 for China. Gross revenues increased by €148 million (+33%) to €597 million. On a comparable basis, gross revenues increased by €27 million (+6%): Personal lines (47% of the gross revenues) were up €17 million (+8%) to €278 million driven by (i) Motor (€+8 million) as a result of positive new business growth notably reflecting the increase in car and motorcycle sales in Malaysia and by (ii) Non Motor (€+9 million) due to a growth in the Health and Travel businesses in Hong Kong and Malaysia; Commercial lines (53% of the gross revenues) were up €10 million (+4%) to €319 million mainly driven by Health (€+11 million) from volume increases in Malaysia, Hong Kong and Singapore. Net technical result increased by €61 million to €195 million. On a comparable basis, net technical result increased by €17 million (+11%): the current accident year loss ratio improved by 0.8 point to 66.9% due to the non-repeat of a Nat Cat charge (-0.9 point) in Hong Kong and Singapore driven by ELA hailstorm in 1H14 (participation to Group pool); the all accident year loss ratio improved by 1.3 points to 63.4% mainly due to higher positive prior year reserve developments. Expense ratio deteriorated by 1.6 points to 29.5%. On a comparable basis, expense ratio deteriorated by 1.1 points mainly driven by higher administrative expenses (+1.0 point) mainly reflecting digital investment in Singapore and Thailand. Half Year 2015 Financial Report 57 I ACTIVITY REPORT – HALF YEAR 2015 Enlarged expense ratio deteriorated by 1.1 points to 32.4% on a comparable basis. As a result, the combined ratio improved by 0.2 point to 92.9% on a comparable basis. Net investment result increased by €6 million to €17 million. On a comparable basis, the net investment result increased by €3 million mainly benefiting from a higher yield on fixed income assets in Malaysia as well as a better asset mix in Singapore and Hong Kong. Income tax expenses increased by €3 million to €-10 million. On a comparable basis, income tax expenses increased by €1 million due to higher pre-tax underlying earnings. Underlying earnings decreased by €3 million to €33 million. On a comparable basis, underlying earnings decreased by €6 million, including a €8 million decrease from investments in affiliates and associates, driven by India due to reserves strengthening (€-5 million) and China due to higher marketing expenses (€-2 million). Adjusted earnings increased by €2 million to €38 million. On a comparable basis, adjusted earnings decreased by €1 million driven by lower underlying earnings, partly offset by higher net realized capital gains. Net income increased by €2 million to €32 million. On a comparable basis, net income increased by €2 million as the decrease in adjusted earnings was more than offset by lower integration costs in China. Half Year 2015 Financial Report 58 I ACTIVITY REPORT – HALF YEAR 2015 INTERNATIONAL INSURANCE SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income for the International Insurance Segment for the periods indicated: Consolidated Gross Revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 AXA Corporate Solutions Assurance 1,459 1,379 2,131 AXA Global Life and AXA Global P&C 77 77 102 AXA Assistance 682 558 1,155 Other (a) 26 25 52 TOTAL 2,244 2,039 3,440 Intercompany transactions (82) (73) (148) Contribution to consolidated gross revenues 2,162 1,966 3,292 (a) Including AXA Liabilities Managers and AXA Corporate Solutions Life Reinsurance Company. Underlying, Adjusted earnings and Net Income (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 AXA Corporate Solutions Assurance 78 86 147 AXA Global Life and AXA Global P&C 7 7 (1) AXA Assistance 12 11 23 Other (a) 29 32 39 UNDERLYING EARNINGS 126 135 208 Net realized capital gains or losses attributable to shareholders 27 28 35 ADJUSTED EARNINGS 153 163 244 Profit or loss on financial assets (under Fair Value option) & derivatives (9) 6 23 Exceptional operations (including discontinued operations) 0 (0) (2) Goodwill and related intangibles impacts Integration and restructuring costs (3) (2) (4) NET INCOME 142 166 261 (a) Including AXA Liabilities Managers and AXA Corporate Solutions Life Reinsurance Company. Half Year 2015 Financial Report 59 I ACTIVITY REPORT – HALF YEAR 2015 AXA Corporate Solutions Assurance (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 Gross revenues (a) Current accident year loss ratio (net) All accident year loss ratio (net) Net technical result before expenses Expense ratio Net investment result Underlying earnings before tax Income tax expenses / benefits Net income from investments in affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share (a) Before intercompany eliminations. Gross Revenues amounted to € 1,451 million net of intercompany eliminations as of June 30, 2015. 1,459 84.0% 81.6% 228 15.9% 89 119 (40) - (1) 78 11 89 (13) - - - 77 1,379 82.5% 81.1% 215 16.0% 95 128 (41) - (1) 86 26 112 6 - - - 118 2,131 86.1% 81.4% 386 16.5% 181 225 (76) - (2) 147 31 178 24 - - - 201 Gross revenues increased by €81 million (+6%) to €1,459 million. On a comparable basis, gross revenues increased by €33 million (+2%) notably in Liability (+11%) due to an earlier renewal of a major account and Property (+9%) driven by portfolio developments, partly offset by a decrease in Motor (-7%) due to focus on profitability and Construction (-5%) mainly due to cancellations. Net technical result increased by €13 million (+6%) to €228 million. On a constant exchange rate basis, net technical result increased by €13 million (+6%): the current accident year loss ratio increased by 1.6 points to 84.0% driven by higher large losses mainly in Property and Aviation; the all accident year loss ratio increased by 0.5 point to 81.6% mainly due to the increase of the current accident year loss ratio, partly offset by higher prior year reserve developments. Expense ratio decreased by 0.1 point to 15.9%. Enlarged expense ratio decreased by 0.2 point to 19.6%. As a result, the combined ratio deteriorated by 0.4 point to 97.6%. Net investment result decreased by €6 million (-6%) to €89 million. On a constant exchange rate basis, net investment result decreased by €6 million (-7%) mainly due to lower reinvestment yields on fixed income assets in a low interest rates environment. Income tax expenses decreased by €1 million (-2%) to €-40 million. On a constant exchange rate basis, income tax expenses decreased by €1 million (-2%) thanks to a more favorable country mix. As a result, underlying earnings decreased by €8 million (-9%) to €78 million. On a constant exchange rate basis, underlying earnings decreased by €10 million (-12%). Adjusted earnings decreased by €23 million (-20%) to €89 million. On a constant exchange rate basis, adjusted earnings decreased by €25 million (-23%) mainly due to lower underlying earnings as well as lower net realized capital gains mainly on equities. Net income decreased by €41 million (-35%) to €77 million. On a constant exchange rate basis, net income decreased by €44 million (-37%) mainly due to a lower adjusted earnings and a negative foreign exchange rate impact driven by a depreciation of the Euro against major currencies. Half Year 2015 Financial Report 60 I ACTIVITY REPORT – HALF YEAR 2015 AXA Global Life and AXA Global P&C1 Underlying earnings remained stable at €7 million mainly due to better technical result in AXA Global P&C offset by higher expenses related to the development of AXA Global Life. Adjusted earnings remained stable at €7 million mainly as a result of stable underlying earnings. Net income increased by €1 million to €11 million mainly due to more favorable impact from change in the fair value of invested assets. AXA Assistance Gross revenues increased by €124 million (+22%) to €682 million. On a comparable basis, primarily adjusted from the disposal of ADHAP, gross revenues increased by €100 million (+20%) mainly driven by strong developments in New Business & E-Commerce Business combined with in-force growth in Motor, Home and Travel activities. Underlying earnings increased by €1 million (+14%) to €12 million mainly driven by strong growth of business and better expense management in all the regions . Adjusted earnings increased by €2 million (+21%) to €13 million mainly driven by higher underlying earnings. Net income increased by €5 million to €10 million mainly driven by higher adjusted earnings and more favorable foreign exchange impact. Other international activities Underlying Earnings decreased by €3 million to €29 million. On a constant exchange rate basis, underlying earnings decreased by €6 million primarily due to the non-repeat of favourable reserve developments on run- off portfolios in 1H14. Adjusted Earnings increased by €11 million to €44 million. On a constant exchange rate basis, adjusted earnings increased by €5 million as lower underlying earnings were more than offset by higher net realized capital gains. Net income increased by €11 million to €44 million. On a constant exchange rate basis, net income increased by €6 million driven by higher adjusted earnings. 1 Gathers both central teams from Life & Savings and Property & Casualty global business lines in addition to Group reinsurance operations. Half Year 2015 Financial Report 61 I ACTIVITY REPORT – HALF YEAR 2015 ASSET MANAGEMENT SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income for the Asset Management Segment for the periods indicated: Consolidated Gross Revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 AB 1,378 1,069 2,259 AXA Investment Managers 798 707 1,462 TOTAL 2,176 1,776 3,722 Intercompany transactions (221) (183) (396) Contribution to consolidated gross revenues 1,956 1,593 3,326 Underlying, Adjusted earnings and Net Income (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 AB 108 83 193 AXA Investment Managers 115 101 211 UNDERLYING EARNINGS 222 184 403 Net realized capital gains or losses attributable to shareholders ADJUSTED EARNINGS 222 184 403 Profit or loss on financial assets (under Fair Value option) & derivatives 7 7 25 Exceptional operations (including discontinued operations) 0 (1) (2) Goodwill and related intangibles impacts Integration and restructuring costs (1) (2) (7) NET INCOME 228 188 419 Half Year 2015 Financial Report 62 I ACTIVITY REPORT – HALF YEAR 2015 AB June 30, 2015 June 30, 2014 (in Euro million) December 31, 2014 Gross revenues 1,378 1,069 2,259 Net investment result (4) (2) (7) Total revenues 1,374 1,067 2,252 General expenses Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share (a) Before intercompany eliminations. Gross Revenues amounted to € 1,324 million net of intercompany eliminations as of June 30, 2015. (1,096) 278 (68) (103) 108 0 108 1 0 0 (1) 108 (857) 211 (54) (74) 83 0 83 (2) 0 0 (1) 80 (1,771) 481 (116) (172) 193 0 193 (2) 0 0 (2) 188 Assets under Management ("AUM") increased by €46 billion from year-end 2014 to €459 billion at June 30, 2015 as a result of €36 billion favorable foreign exchange rate impact, €7 billion of net inflows (mainly from Institutional clients), and €3 billion market appreciation. Gross revenues increased by €309 million (+29%) to €1,378 million. On a comparable basis, gross revenues increased by €48 million (+5%) mainly due to (i) higher investment management fees (+7%) resulting from a 6% increase in average AUM and (ii) higher Institutional Research Services fees (+2%). Net investment result decreased by €2 million to €-4 million. On a constant exchange rate basis, net investment result decreased by €2 million. General expenses increased by €240 million (+28%) to €-1,096 million. On a constant exchange rate basis, general expenses increased by €36 million (+4%) due to higher compensation expenses resulting from increased revenues. The underlying cost income ratio improved by 0.5 point to 76.4%. Income tax expenses increased by €14 million (+26%) to €-68 million. On a constant exchange rate basis, income tax expenses increased by €1 million (+2%) due to higher pre-tax underlying earnings, partly offset by a more favorable country mix. Underlying and adjusted earnings increased by €24 million (+29%) to €108 million. On a constant exchange rate basis, underlying and adjusted earnings increased by €4 million (+5%). AXA ownership of AB at June 30, 2015 remains unchanged from December 31, 2014 level at 62.7%. Net income increased by €28 million (+35%) to €108 million. On a constant exchange rate basis, net income increased by €8 million (+10%) mainly due to higher adjusted earnings. Half Year 2015 Financial Report 63 I ACTIVITY REPORT – HALF YEAR 2015 AXA Investment Managers (“AXA IM”) June 30, 2015 June 30, 2014 (in Euro million) December 31, 2014 Gross revenues 798 707 1,462 Net investment result (8) (6) (12) Total revenues 790 700 1,450 General expenses Underlying earnings before tax Income tax expenses / benefits Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under FV option) & derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share (598) 193 (73) (5) 115 0 115 6 0 0 0 120 (543) 158 (52) (5) 101 0 101 10 (1) 0 (1) 108 (1,123) 328 (108) (10) 211 0 211 27 (2) 0 (5) 231 (a) Before intercompany eliminations. Gross Revenues amounted to € 632 million net of intercompany eliminations as of June 30, 2015. Comparable basis in the comments below refers to constant foreign exchange rate restatement, excluding distribution fees retroceded. Assets under Management ("AUM") increased by €71 billion from December 31, 2014 to €694 billion at the end June 30, 2015, mainly as a result of market appreciation combined with foreign exchange rate impact (€42 billion) and net inflows (€28 billion) driven by inflows from Third party clients (€+26 billion) mainly from Asian Joint Ventures (€+19 billion). Gross revenues increased by €91 million (+13%) to €798 million. On a comparable basis, net revenues increased by €30 million (+6%) to €571 million, mainly driven by higher management fees (€+44 million or +9%) as a result of higher average assets (+11%), partly offset by performance fees (€-8 million or -28%) mainly due to unfavorable timing effect in 2015. Net investment result decreased by €1 million (-16%) to €-8 million. On a comparable basis, net investment result increased by €1 million (+15%). General expenses increased by €56 million (+10%) to €-598 million. On a comparable basis, general expenses increased by €32 million (+8%) mainly due to higher staff cost due to an increase in both average salary and average FTE. The underlying cost income ratio improved by 2.4 points to 68.1%. On a comparable basis, the underlying cost income ratio improved by 0.6 point. Income tax expenses increased by €20 million (+38%) to €-73 million. On a comparable basis, income tax expenses increased by €15 million (+29%) driven by the increase in pre-tax underlying earnings and unfavorable tax one-offs. Underlying earnings increased by €14 million (+14%) to €115 million. On a comparable basis, underlying earnings increased by €7 million (+7%). Adjusted earnings increased by €14 million (+14%) to €115 million. On a comparable basis, adjusted earnings increased by €7 million (+7%) in line with the increase in underlying earnings. Net income increased by €12 million (+11%) to €120 million. On a comparable basis, net income increased by €5 million (+5%) mainly explained by higher adjusted earnings. Half Year 2015 Financial Report 64 I ACTIVITY REPORT – HALF YEAR 2015 BANKING The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and the net income attributable to AXA’s banking activities for the periods indicated: Consolidated Gross Revenues (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 AXA Banks (a) 287 274 533 Belgium (b) 213 197 356 France 66 50 119 Hungary (4) 16 37 Germany 12 11 21 Other 2 2 5 TOTAL 288 276 538 Intercompany transactions 13 12 26 Contribution to consolidated gross revenues 302 287 564 (a) Of which AXA Bank Europe and its branches: €213 million. (b) Includes commercial activities in Belgium and shared services of AXA Bank Europe (treasury and support functions). Underlying, Adjusted earnings and Net Income (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 AXA Banks (a) 58 70 108 Belgium (b) 54 65 99 France 2 2 4 Hungary Germany 2 3 5 Other (2) (2) (2) UNDERLYING EARNINGS 56 68 106 Net realized capital gains or losses attributable to shareholders (0) (1) 0 ADJUSTED EARNINGS 56 67 106 Profit or loss on financial assets (under Fair Value option) & derivatives (7) (14) (19) Exceptional operations (including discontinued operations) (8) (33) (126) Goodwill and related intangibles impacts Integration and restructuring costs (2) (1) (11) NET INCOME 40 19 (49) Half Year 2015 Financial Report 65 I ACTIVITY REPORT – HALF YEAR 2015 Belgium Net banking revenues increased by €17 million (+9%) to €213 million. Operating net banking revenues increased by €18 million (8%) mainly due to one-off prepayment indemnities (€+18 million) driven by refinancing as well as higher commercial results of Retail activities and exceptionally high Intermediation activities, partially offset by lower net realized capital gains. Underlying earnings decreased by €11 million (-18%) to €54 million. Strong operating Net banking revenues (€+18 million) and lower distribution commissions (€+2 million) were more than offset by the unfavourable timing effect of the one shot booking of bank levies in accordance with the accounting standard ( €-33 million). Adjusted earnings decreased by €12 million (-18 %) to €54 million due to the decrease in underlying earnings. Net Income decreased by €13 million (-23%) to €45 million driven by the decrease in adjusted earnings as well as the negative forex result change (€-7 million) and higher restructuring costs (€-2 million), partially offset by the positive change in fair value of interest rates derivatives (€6 million). France Net banking revenues increased by €16 million (+31%) to €66 million. Operating net banking revenues increased by €3 million to €66 million mainly driven by higher interest income on retail loans primarily on mortgages, as a consequence of growth of in-force business following the strong level of new credit production during the last two years, partly offset by higher commissions paid on new refinancing operations. Underlying earnings remained stable at €2 million as the improvement in cost of risk was more than offset by an increase in expenses to support growth. Adjusted earnings increased by €1 million to €2 million. Net income increased by €9 million to €2 million, as a result of an increase in adjusted earnings and non- repeat of the unfavorable impact from interest rates changes in 2014 on hedging instruments not eligible to hedge accounting. Hungary Net income increased by €26 million to €-8 million. On a constant exchange rate basis, net income increased by € 26 million due to non-repeat of the €18 million one-off provision in 2014 as well lower cost of risk (€+14 million) due to an improvement of the portfolio quality, partially offset by a negative forex result (€-6 million). Germany Net banking revenues remained stable (+2%) at €12 million. Underlying earnings remained stable (-17%) at €2 million. Adjusted earnings decreased by €1 million (-26%) to €2 million. Net income remained stable (-8%) at €2 million. Half Year 2015 Financial Report 66 I ACTIVITY REPORT – HALF YEAR 2015 HOLDINGS AND OTHER COMPANIES The Holdings and other companies consist of AXA’s non-operating companies, including mainly the AXA parent company, AXA France Assurance, AXA Financial, AXA United Kingdom Holdings, AXA Germany Holdings and AXA Belgian Holding. Underlying, Adjusted earnings and Net Income (in Euro million) June 30, 2015 June 30, 2014 December 31, 2014 AXA (408) (360) (680) Other French holding companies (16) (26) (33) Foreign holding companies (26) (101) (234) Other (0) 0 0 UNDERLYING EARNINGS (451) (486) (947) Net realized capital gains or losses attributable to shareholders (1) (6) (27) ADJUSTED EARNINGS (452) (493) (974) Profit or loss on financial assets (under Fair Value option) & derivatives (296) (21) 210 Exceptional operations (including discontinued operations) (41) (39) (85) Goodwill and related intangibles impacts 0 0 0 Integration and restructuring costs (2) (5) (14) NET INCOME (791) (558) (864) AXA SA1 Underlying earnings decreased by €49 million to €-408 million mainly driven by (i) lower interest income following the renegotiation of entities’ financing conditions (mainly the US Holdings) in the context of a lower interest rate environment, largely offset in AXA US Holdings segment, as well as (ii) the continuing investment in the Group digital capabilities, partly offset by (iii) management of interest rate positions. Adjusted earnings decreased by €38 million to €-409 million mainly driven by underlying earnings evolution. Net income decreased by €330 million to €-737 million mainly driven by: €-289 million mainly from a change in the fair value of interest rate and foreign exchange economic derivatives not eligible for hedge accounting; €-38 million from adjusted earnings evolution. Other French holding companies AXA FRANCE ASSURANCE Underlying earnings increased by €5 million to €-15 million due to lower tax expenses resulting from lower intercompany dividends received. Adjusted earnings and net income increased by €5 million to €-15 million in line with the increase in underlying earnings. OTHER FRENCH HOLDINGS Underlying earnings increased by €4 million to €-1 million mainly due to lower financial charges. Adjusted earnings increased by €3 million to €-2 million driven by underlying earnings evolution. 1 All the figures are after tax. Half Year 2015 Financial Report 67 I ACTIVITY REPORT – HALF YEAR 2015 Net income decreased by €8 million to €-26 million mainly due to a change in the fair value of foreign exchange economic derivatives not eligible for hedge accounting. Foreign Holding Companies AXA FINANCIAL INC. Underlying earnings increased by €70 million (+101%) to €0 million. On a constant exchange rate basis, underlying earnings increased by €69 million (+101%) mainly driven by (i) lower interest expense following the renegotiation of financing conditions with AXA SA in the context of a lower interest rate environment, (ii) lower debt positions and (iii) positive one-off correction of real estate income, partially offset by (iv) higher share- based compensation expenses. Adjusted earnings increased by €70 million (+101%) to €0 million. On a constant exchange rate basis, adjusted earnings increased by €69 million (+101%), in line with underlying earnings evolution. Net income increased by €80 million (+103%) to €2 million. On a constant exchange rate basis, net income increased by €80 million (+102%) reflecting higher adjusted earnings and a favorable change in fair value of cross currency swaps. AXA UK HOLDINGS Underlying earnings decreased by €2 million to €-6 million. On a constant exchange rate basis, underlying earnings decreased by €1 million. Adjusted earnings decreased by €6 million to €-6 million. On a constant exchange rate basis, adjusted earnings decreased by €5 million reflecting the decrease in underlying earnings and lower net realised gains. Net income decreased by €4 million to €0 million. On a constant exchange rate basis, net income decreased by €4 million mainly due to the decrease in adjusted earnings. GERMAN HOLDING COMPANIES Underlying earnings and Adjusted earnings increased by €1 million to €-4 million. Net income increased by €13 million to €4 million driven by adjusted earnings and a favorable change in fair value of hedging derivatives related to pensions not eligible for hedge accounting. BELGIAN HOLDING COMPANY Underlying earnings and Adjusted earnings increased by €1 million to €-4 million. Net income increased by €1 million (+12%) to €-4 million. MEDITERRANEAN AND LATIN AMERICAN REGION HOLDINGS Underlying earnings and Adjusted earnings increased by €3 million (+15%) to €-17 million. On a constant exchange rate basis, underlying earnings increased by €3 million (+15%) mainly reflecting lower expenses. Net income increased by €7 million (+28%) to €-17 million. On a constant exchange rate basis, net income increased by €7 million (+28%), mainly driven by higher adjusted earnings and non-repeat of favorable change in the fair value of hedging derivatives not eligible for hedge accounting. Half Year 2015 Financial Report 68 I ACTIVITY REPORT – HALF YEAR 2015 OUTLOOK Despite an environment continuing to be characterized by market volatility and extremely low interest rates, AXA believes that it remains well positioned to successfully conclude its Ambition AXA plan in 2015. In Life and Savings, the negative impact of low interest rates should be offset by an improved business mix, with positive flows in Protection and Health and Unit Linked products and negative flows in General Account savings products. In Property and Casualty, a modest growth of the top line, coming more from price increases than from net new inflows of contracts, combined with disciplined underwriting should contribute to an improved combined ratio, partly offset by lower investment income. In Asset Management, the strong momentum of positive flows, supported by good investment performance across most asset classes should continue to support growth in earnings. AXA’s Economic Solvency position is expected to remain resilient and the Solvency 2 internal model approval process is on track for validation before the end of 2015. While continuing to focus its efforts on fulfilling the Ambition AXA plan, AXA is also building the foundations of tomorrow’s growth. The company will continue to allocate capital effectively between markets and business lines, invest in its digital transformation and pursue expense efficiency programs. These elements should enable AXA to continue creating lasting shareholder value and offering an attractive return. Half Year 2015 Financial Report 69 I ACTIVITY REPORT – HALF YEAR 2015 GLOSSARY The split between high growth market and mature market is detailed below: The notion of High Growth market includes the following countries: Central & Eastern countries (Poland, Czech Republic, Slovakia, Russia), Hong Kong, South-East Asia (Singapore, Indonesia, Thailand, Philippines, Malaysia), India, China, and the Mediterranean and Latin American Region (Morocco, Turkey, Gulf, Mexico, Lebanon, Colombia), excluding Direct operations. The notion of Mature Market includes the following countries: the United States, the United Kingdom, Ireland, Benelux, Germany, Switzerland, Japan, Italy, Spain, Portugal, Greece and France. COMPARABLE BASIS FOR REVENUES AND ANNUALIZED PREMIUMS EQUIVALENT On a comparable basis means that the data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis). It also means that data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). ADJUSTED EARNINGS Adjusted earnings represent the net income (Group share) before the impact of: Exceptional operations (primarily change in scope and discontinued operations) Integration and restructuring costs related to material newly acquired companies as well as restructuring and associated costs related to productivity improvement plans Goodwill and other related intangibles, and Profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets. Derivatives related to invested assets: Include all foreign exchange derivatives, except the ones related to currency options in earnings hedging strategies which are included in underlying earnings, Exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy, And also exclude derivatives involved in the economic hedging of realized gains and impairments of equity securities and real estate backing general account and shareholders’ funds, for which cost at inception, intrinsic value and pay-off flow through adjusted earnings, and only time value flows through net income when there is no intention to sell the derivatives in the short term (if not, flows through adjusted earnings). UNDERLYING EARNINGS Underlying earnings correspond to adjusted earnings excluding net capital gains or losses attributable to shareholders. Net capital gains or losses attributable to shareholders include the following elements net of tax: Realized gains and losses and change in impairment valuation allowance (on assets not designated under fair value option or trading assets), Cost at inception, intrinsic value and pay-off of derivatives involved in the economic hedging of realized gains and impairments of equity securities and real estate backing general account and shareholders’ funds, Half Year 2015 Financial Report 70 I ACTIVITY REPORT – HALF YEAR 2015 Related impact on policyholder participation (Life & Savings business), DAC and VBI amortization or other reactivity to those elements if any (Life & Savings business) and net of hedging if any. Earnings per share Earnings per share (EPS) represent AXA's consolidated earnings (including interest charges related to undated debts recorded through shareholders’ equity), divided by the weighted average number of outstanding ordinary shares. Diluted earnings per share (diluted EPS) represent AXA's consolidated earnings (including interest charges related to undated debts recorded through shareholders’ equity), divided by the weighted average number of outstanding ordinary shares, on a diluted basis (that is to say including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Return On Equity (“ROE”) The calculation is prepared with the following principles: For net income ROE: Calculation is based on consolidated financial statements, i.e. shareholders’ equity / “Undated Subordinated Debts” TSDI) and Other Comprehensive Income “OCI”, and net income not reflecting any interest charges on TSS / TSDI. including undated subordinated debt (“Super Subordinated Debts” TSS For adjusted and underlying ROE: o All undated subordinated debts (TSS / TSDI) are treated as financing debt, thus excluded from shareholders’ equity o Interest charges on TSS / TSDI are deducted from earnings o OCI is excluded from the average shareholders’ equity. Life & Savings Margin Analysis Life & Savings margin analysis is presented on an underlying basis. Even though the presentation of Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. As a result, the operating income under the Margin Analysis is equal to that reported in AXA’s Statement of Income for the segment. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Margin Analysis as set out below. For insurance contracts and investment contracts with Discretionary Participation Features (DPF): o Gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees and Revenues” and “Net Technical Margin”. o Policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”. o The “Investment margin” represents the net investment result in the Statement of Income and is adjusted to take into account the related policyholders’ participation (see above) as well as changes in specific reserves linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees and Revenues”. o Change in URR (Unearned Revenues Reserves – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis. Half Year 2015 Financial Report 71 I ACTIVITY REPORT – HALF YEAR 2015 For investment contracts without DPF: o Deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the underlying Statement of Income within Gross consolidated revenues on a separate line, and in Margin analysis in the lines “Fees & Revenues” and “Net Technical margin”. o Change in UFR (Unearned Fees Reserves - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis. Underlying Investment margin includes the following items: Net investment income Interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income. Underlying Fees & Revenues include: Revenues derived from mutual fund sales (which are part of consolidated revenues), Loadings charged to policyholders on premiums / deposits and fees on funds under management for separate account (Unit-Linked) business, Loadings on (or contractual charges included in) premiums / deposits received on all general account product lines, Deferral income such as capitalization net of amortization of URR (Unearned Revenue Reserve) and UFR (Unearned Fee Reserve), Other fee revenues, e.g., fees received on financial planning or sales of third party products. Underlying Net Technical margin includes the following components: Mortality/morbidity margin: The amount charged to the policyholder in respect of mortality/morbidity for the related period less benefits and claims. It is equal to the difference between income for assuming risk and the actual cost of benefits. This margin does not include the claims handling costs and change in claims handling cost reserves, Surrender margin: The difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination, GMxB (Variable Annuity guarantees) active financial risk management is the net result from GMxB lines corresponding to explicit charges related to these types of guarantees less cost of hedge. It also includes the unhedged business result, Policyholder bonuses if the policyholder participates in the risk margin, Ceded reinsurance result, Other changes in insurance reserves are all the reserves strengthening or release coming from changes in valuation assumptions, additional reserves for mortality risk and other technical impacts such as premium deficiency net of derivative if any. Underlying Expenses are: Acquisition expenses, including commissions and general expenses allocated to new business, related to insurance products as well as to other activities (e.g., mutual fund sales), Capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF, Half Year 2015 Financial Report 72 I ACTIVITY REPORT – HALF YEAR 2015 Amortization of acquisition expenses on current year and prior year new business, including the impact of interest capitalized: amortization charge for Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF, Administrative expenses, Claims handling costs, Policyholder bonuses if the policyholder participates in the expenses of the company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins, as well as amortization of other intangibles related to the in-force business Life & Savings underlying cost income ratio: Underlying expenses plus underlying VBI amortization divided by "underlying" operating margin, where "Underlying" operating margin is the sum of (i) Underlying Investment margin; (ii) Underlying Fees and revenues, and (iii) Underlying Net technical Margin (all items defined above). Property & Casualty (including AXA Corporate Solutions Assurance) Underlying net investment result includes the net investment income less the recurring interests credited to insurance annuity reserves. Underlying net technical result is the sum of the following components: Earned premiums, gross of reinsurance, Claims charges, gross of reinsurance, Change in claims reserves, including claims handling costs reserves, gross of reinsurance, excluding the recurring interests credited to insurance annuity reserves, Claims handling costs, Net result of ceded reinsurance. Current accident year loss ratio net of reinsurance is the ratio of: current year claims charge gross of reinsurance + claims-handling costs + result of reinsurance ceded on current accident year, excluding the recurring interests credited to the insurance annuity reserves, to Earned revenues, gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: all accident years claims charge gross of reinsurance + claims-handling costs + result of reinsurance ceded on all accident years excluding the recurring interests credited to the insurance annuity reserves, to Earned revenues, gross of reinsurance. Underlying expense ratio is the ratio of: Underlying expenses (excluding claims handling costs), to Earned revenues, gross of reinsurance. Underlying expenses include two components: expenses (including commissions) related to acquisition of contracts (with the related acquisition expense ratio) and all other expenses (with the related administrative expense ratio). Underlying expenses exclude customer intangible amortization and integration costs related to material newly acquired companies. The enlarged expense ratio is the sum of the expense ratio and claims handling cost ratio. Half Year 2015 Financial Report 73 I ACTIVITY REPORT – HALF YEAR 2015 The underlying combined ratio is the sum of the underlying expense ratio and the all accident year loss ratio. Asset Management Net New Money: Inflows of client money less outflows of client money. Net New Money measures the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying Cost Income Ratio: (general expenses net of distribution revenues) / (gross revenues excluding distribution revenues). Assets Under Management (AUM) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers and AllianceBernstein. AUM only includes funds and mandates which generate fees and exclude double counting. Banking Net New Money is a banking volume indicator. It represents the net cash flows of customers’ balances in the bank, with cash inflows (collected money) and cash outflows (exiting money). It includes market effect and capitalized interests over the period. Net operating revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of « fair-value-P&L » assets and of hedging instruments. Half Year 2015 Financial Report 74 I CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 II Consolidated financial statements / Half Year 2015 Half Year 2015 Financial Report 75 II II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION .......................................................................................... 77 II.2 CONSOLIDATED STATEMENT OF INCOME ..................................................................................................................... 79 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ................................................................................. 80 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ............................................................................................ 81 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS ........................................................................................................... 83 NOTE 1 ACCOUNTING PRINCIPLES ........................................................................................................................................... 85 1.1 General information ............................................................................................................................ 85 1.2 General accounting principles............................................................................................................. 85 NOTE 2 SCOPE OF CONSOLIDATION ........................................................................................................................................ 87 2.1 Consolidated companies ..................................................................................................................... 87 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT .................................................................................. 91 3.1 Consolidated Statement of Income by segment ................................................................................. 92 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES ..................................................................................................... 94 4.1 Mbank acquisition ............................................................................................................................... 94 4.2 Hong Kong pension disposal .............................................................................................................. 94 4.3 Increase in ownership of Bharti........................................................................................................... 94 NOTE 5 INVESTMENTS .................................................................................................................................................................. 95 5.1 Breakdown of investments .................................................................................................................. 95 5.2 Investment in real estate properties .................................................................................................... 96 5.3 Unrealized gains and losses on financial investments ....................................................................... 97 5.4 Financial investments subject to impairment ...................................................................................... 98 5.5 Investments/Fair value ........................................................................................................................ 99 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS ...................................................................................101 6.1 Impact of transactions with shareholders ......................................................................................... 101 6.2 Comprehensive income for the period .............................................................................................. 104 6.3 Change in minority interests ............................................................................................................. 106 NOTE 7 FINANCING DEBT ..........................................................................................................................................................108 NOTE 8 NET INCOME PER ORDINARY SHARE .....................................................................................................................109 Half Year 2015 Financial Report 76 II II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in Euro million) Notes June 30, 2015 December 31, 2014 (a) Goodwill 16,976 16,053 Value of purchased business in force (b) 2,424 2,297 Deferred acquisition costs and equivalent 23,154 21,119 Other intangible assets 3,304 3,149 Intangible assets 45,858 42,618 Investments in real estate properties 20,290 18,610 Financial investments 498,345 480,959 Assets backing contracts where the financial risk is borne by policyholders (c) 198,885 181,082 5 Investments from insurance activities 717,521 680,651 5 Investments from banking and other activities 40,778 39,535 Investments accounted for using the equity method 2,006 1,842 Reinsurers' share in insurance and investment contracts liabilities 19,874 18,895 Tangible assets 1,399 1,322 Deferred tax assets 1,637 1,406 Other assets 3,036 2,728 Receivables arising from direct insurance and inward reinsurance operations 17,082 14,688 Receivables arising from outward reinsurance operations 832 871 Receivables - current tax 1,562 1,511 Other receivables 14,698 13,501 Receivables 34,174 30,570 4 Assets held for sale 1,321 1,181 Cash and cash equivalents 24,230 22,048 TOTAL ASSETS 888,798 840,069 Note: All invested assets are shown net of related derivative instruments impact. (a) Reso Garantia is accounted for using the equity method in the Group consolidated financial statements on the basis of an annual closing at September 30. Given significant movements in the Russian ruble exchange rate between September 30, 2014 and December 31,2014, the balance sheet used as a basis of the equity method has been translated using December 31 exchange rate. (b) Amounts are gross of tax. (c) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. Half Year 2015 Financial Report 77 II II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 (in Euro million) Notes June 30, 2015 December 31, 2014 (a) Share capital and capital in excess of nominal value 26,106 26,610 Reserves and translation reserve 37,730 33,585 Net consolidated income - Group share 3,077 5,024 Shareholders’ equity – Group share 66,913 65,219 Minority interests 3,732 2,815 6 TOTAL SHAREHOLDERS' EQUITY 70,645 68,034 Subordinated debt 7,859 7,146 Financing debt instruments issued 615 1,586 7 Financing debt (b) 8,475 8,733 Liabilities arising from insurance contracts 397,072 371,474 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (c) 155,012 142,042 Total liabilities arising from insurance contracts 552,084 513,516 Liabilities arising from investment contracts with discretionary participating features 33,386 33,669 Liabilities arising from investment contracts with no discretionary participating features 530 481 Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders 3,584 4,053 Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 40,834 35,246 Total liabilities arising from investment contracts 78,334 73,449 Unearned revenue and unearned fee reserves 3,071 3,037 Liabilities arising from policyholders' participation and other obligations 45,106 48,491 Derivative instruments relating to insurance and investment contracts (1,969) (2,837) LIABILITIES ARISING FROM INSURANCE AND INVESTMENT CONTRACTS 676,626 635,656 Liabilities arising from banking activities (b) 39,213 37,402 Provisions for risks and charges 12,881 12,656 Deferred tax liabilities 5,181 5,741 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders 11,049 10,241 Other debt instruments issued, notes and bank overdrafts (b) 3,082 1,993 Payables arising from direct insurance and inward reinsurance operations 7,946 8,831 Payables arising from outward reinsurance operations 12,633 12,538 Payables – current tax 1,479 1,616 Collateral debts relating to investments under a lending agreement or equivalent 22,911 21,331 Other payables 15,637 14,352 Payables 74,737 70,902 4 Liabilities held for sale 1,040 946 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 888,798 840,069 (a) Reso Garantia is accounted for using the equity method in the Group consolidated financial statements on the basis of an annual closing at September 30. Given significant movements in the Russian ruble exchange rate between September 30, 2014 and December 31,2014, the balance sheet used as a basis of the equity method has been translated using December 31 exchange rate. (b) Amounts are shown net of related derivative instruments impact. (c) Includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. Half Year 2015 Financial Report 78 II II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 II.2 CONSOLIDATED STATEMENT OF INCOME (in Euro million, except EPS in Euro) Notes June 30, 2015 June 30, 2014 Gross written premiums 51,166 46,944 Fees and charges relating to investment contracts with no participating features 203 159 Revenues from insurance activities 51,369 47,103 Net revenues from banking activities 300 286 Revenues from other activities 2,852 2,316 Revenues (a) 54,521 49,705 Change in unearned premiums net of unearned revenues and fees (4,297) (4,269) Net investment income (b) 7,455 7,600 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (c) 1,555 1,107 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (d) 5,177 6,884 of which change in fair value of assets with financial risk borne by policyholders (e) 6,078 5,613 Change in investments impairment (f) (209) (221) Net investment result excluding financing expenses 13,979 15,370 Technical charges relating to insurance activities (e) (48,453) (46,639) Net result from outward reinsurance (541) (363) Bank operating expenses (22) (50) Acquisition costs (5,409) (4,606) Amortization of the value of purchased business in force (110) (58) Administrative expenses (5,211) (4,472) Change in goodwill impairment and other intangible assets impairment (55) (69) Other income and expenses (8) (114) Other operating income and expenses (59,809) (56,371) Income from operating activities before tax 4,394 4,435 Income from investment accounted for using the equity method 88 99 Financing debts expenses (g) (213) (365) Net income from operating activities before tax 4,269 4,169 Income tax (985) (1,010) Net consolidated income after tax 3,284 3,159 Split between : Net consolidated income - Group share 3,077 3,008 Net consolidated income - Minority interests 207 151 8 Earnings per share 1.20 1.18 8 Fully diluted earnings per share 1.19 1.18 (a) Gross of reinsurance. (b) Net of investment management costs and including gains/losses from derivatives hedging variable annuities. (c) Includes impairment releases on investments sold. (d) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (f) Excludes impairment releases on investments sold. (g) Includes net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). Half Year 2015 Financial Report 79 II II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2015 June 30, 2014 Reserves relating to changes in fair value through shareholders' equity (1,969) Translation reserves 3,593 Items that may be reclassified subsequently to Profit or Loss 1,624 Employee benefits actuarial gains and losses 82 Items that will not be reclassified subsequently to Profit or Loss 82 Net gains and losses recognized directly through shareholders' equity 1,706 Net consolidated income 3,284 Split between: Net consolidated income - Group share 3,077 Net consolidated income - Minority interests 207 TOTAL COMPREHENSIVE INCOME (CI) 4,990 Split between: Total comprehensive income - Group share 4,633 Total comprehensive income - Minority interests 357 Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Half Year 2015 Financial Report 4,047 546 4,593 (455) (455) 4,138 3,159 3,008 151 7,297 7,033 263 80 II II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests Shareholders 'equity opening January 1, 2015 (b) 2,442,277 2.29 5,593 21,515 (164) 15,327 400 6,472 (2,960) 19,038 65,219 2,815 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (c) 1,875 - - - - - - - - 2.29 - - - - - - - - 4 - - - - - - - - (17) 12 - - - - - - - - (465) - - - - - - - - - - - - - - - - - - - - - - - - (38) - - (154) - - - - - - - - - - - - - - - - 35 4 (17) 12 (465) (38) - - (154) 35 - - - - - - - 560 Dividends paid (2,317) (2,317) Impact of transactions with shareholders 1,875 2.29 4 (5) (465) (192) (2,282) (2,939) 560 Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Net consolidated income Total Comprehensive Income (CI) - - - - - - - - - - (1,872) - - (1,872) (101) - - (101) 400 - - 400 3,047 - - 3,047 82 3,077 3,159 (1,973) 3,447 82 3,077 4,633 4 146 0 207 357 Shareholders' equity closing June 30, 2015 2,444,152 2.29 5,597 21,510 (629) 13,455 299 6,680 88 19,915 66,913 3,732 Note: amounts are presented net of impacts of shadow accounting and its effects on policyholders' participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), and equity components of compounded financial instruments (e.g convertible bonds) (see Note 6.1.1.c). (b) Reso Garantia is accounted for using the equity method in the Group consolidated financial statements on the basis of an annual closing at September 30. Given significant movements in the Russian ruble exchange rate between September 30, 2014 and December 31,2014, the balance sheet used as a basis of the equity method has been translated using December 31 exchange rate. (c) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2015 Financial Report 81 II Share Capital (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Shareholders 'equity opening January 1, 2014 2,417,865 2.29 5,537 21,170 (188) Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) 3,855 - - - - - - - - 2.29 - - - - - - - - 9 - - - - - - - - 31 15 - - - - - - - - 28 - - - - - Dividends paid Impact of transactions with shareholders 3,855 2.29 9 46 28 Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Net consolidated income - - - - - - - - - - Total Comprehensive Income (CI) Shareholders' equity closing June 30, 2014 2,421,720 2.29 5,546 21,216 (160) NB : amounts are presented net of impacts of shadow accounting and its effects on policyholders' participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), and equity components of compounded financial instruments (e.g convertible bonds) (see Note 6.1.2.c). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2015 Financial Report CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 Attributable to shareholders Other reserves Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests 8,488 162 5,418 (4,973) 17,310 52,923 2,521 - - - - - - - - - - - - - - - - - - - (44) - 962 (148) - - - - - - - - - - - - - - - - 53 9 31 15 28 (44) - 962 (148) 53 - - - - - - - (187) (1,960) (1,960) 770 (1,906) (1,053) (187) 3,943 8 3,950 97 - - 3,943 - - 8 132 - - 132 398 - - 398 (455) 3,008 2,553 530 (455) 3,008 7,033 16 (0) 151 263 12,430 170 6,320 (4,575) 17,957 58,903 2,597 82 II Avec et sans PB discrétionnaire II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2015 June 30, 2014 Operating income including discontinued operation before tax 4,269 4,169 Net amortization expense (a) 434 278 Change in goodwill impairment and other intangible assets impairment (b) 21 Net change in deferred acquisition costs and equivalent (579) (795) Net increase / (write back) in impairment on investments, tangible and other intangible assets 199 234 Change in fair value of investments at fair value through profit or loss (5,827) (7,639) Net change in liabilities arising from insurance and investment contracts (c) 13,773 14,230 Net increase / (write back) in other provisions (d) (205) (57) Income from investment accounted for using the equity method (88) (99) Adjustment of non cash balances included in the operating income before tax 7,708 6,173 Net realized investment gains and losses (913) (364) Financing debt expenses 213 365 Adjustment for reclassification to investing or financing activities (699) 1 Dividends recorded in profit or loss during the period (1,889) (1,694) Investment income & expense recorded in profit or loss during the period (e) (6,294) (6,537) Adjustment of transactions from accrued to cash basis (8,184) (8,230) Net cash impact of deposit accounting 1,554 773 Dividends and interim dividends collected 2,277 1,833 Investment income (e) 9,969 9,572 Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (3,074) (2,010) Net operating cash from banking activities Change in operating receivables and payables Net cash provided by other assets and liabilities (f) Tax expenses paid 486 (2,158) (1,197) (689) (902) (2,695) (1,679) (501) Other operating cash impact and non cash adjustment 661 154 Net cash impact of transactions with cash impact not included in the operating income before tax 7,829 4,545 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 10,923 6,657 Consolidation and purchase of subsidiaries and affiliated companies, net of cash acquired 202 (483) Deconsolidation and disposal of subsidiaries and affiliated companies, net of cash ceded (11) 33 Net cash related to changes in scope of consolidation 191 (450) Sales of debt instruments (f) 43,943 28,601 Sales of equity instruments and non consolidated investment funds (f) (g) 15,191 12,763 Sales of investment properties held directly or not (f) 210 506 Sales and/or repayment of loans and other assets (f) (h) 14,574 13,131 Net cash related to sales and repayments of investments (f) (g) (h) 73,918 55,001 Purchases of debt instruments (f) (46,150) (27,727) Purchases of equity instruments and non consolidated investment funds (f) (g) (15,516) (13,140) Purchases of investment properties held direct or not (f) (1,028) (1,067) Purchases and/or issues of loans and other assets (g) (h) (17,204) (14,653) Net cash related to purchases and issuance of investments (f) (g) (h) (79,898) (56,587) Sales of tangible and intangible assets 20 1 Purchases of tangible and intangible assets (191) (162) Net cash related to sales and purchases of tangible and intangible assets (172) (161) Half Year 2015 Financial Report 83 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 Increase in collateral payable / Decrease in collateral receivable 37,341 Decrease in collateral payable / Increase in collateral receivable (36,431) Net cash impact of assets lending / borrowing collateral receivables and payables 910 NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES (5,052) Issuance of equity instruments 231 Repayments of equity instruments (302) Transactions on treasury shares (460) Dividends payout (2,556) Interests on undated subordinated debts paid (131) Acquisition / sale of interests in subsidiaries without change in control 54 Net cash related to transactions with shareholders (3,163) Cash provided by financial debts issuance (1) Cash used for financial debts repayments (1,033) Interests on financing debt paid (i) (381) Net interest margin of hedging derivatives on financing debt Net cash related to Group financing (1,415) NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (4,578) NET CASH PROVIDED BY DISCONTINUED OPERATIONS 0 CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 21,631 Net cash provided by operating activities 10,923 Net cash provided by investing activities (5,052) Net cash provided by financing activities (4,578) Impact of change in consolidation method and of reclassifications as held for sale 18 Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents 748 CASH AND CASH EQUIVALENT AS OF JUNE 30 (j) 23,690 (a) Includes premiums/discounts capitalization and relating amortization, amortization of investment and in the contest of owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes gains/losses from derivatives hedging variable annuities. (f) Includes related derivatives. (g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (j) Net of bank overdrafts. (in Euro million) June 30, 2015 June 30, 2014 Cash and cash equivalent 24,230 Bank overdrafts (a) (539) Cash and cash equivalent as of June 30 (b) 23,690 (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts). Half Year 2015 Financial Report 10,684 (12,599) (1,915) (4,112) 1,034 (35) 57 (2,156) (103) 4 (1,199) 920 (2,205) (310) 0 (1,594) (2,794) 20,477 6,657 (4,112) (2,794) 0 537 20,765 21,756 (991) 20,765 84 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 1 ACCOUNTING PRINCIPLES 1.1 General information AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, the Americas, Asia and Africa. The list of the main entities included in the scope of the AXA’s consolidated financial statements is provided in Note 2 of the notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all notes were finalized by the Board of Directors on August 3, 2015. 1.2 General accounting principles AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2015. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2014. The 2015 half-year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2014 annual financial report. Amendments published and adopted on January 1, 2015 The application of the amendments below as of January 1, 2015 had no material impact on the Group’s consolidated interim financial statements. Preparation of financial statements The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2014. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non-current items. As for most insurance companies, expenses are classified by destination in the income statement. Half Year 2015 Financial Report 85 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the notes are expressed in Euro million. Half Year 2015 Financial Report 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 2 SCOPE OF CONSOLIDATION 2.1 Consolidated companies 2.1.1 MAIN FULLY CONSOLIDATED COMPANIES June 30, 2015 December 31, 2014 Parent and Holding Companies Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France AXA Parent company Parent company AXA Asia 100.00 100.00 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA France Assurance 100.00 100.00 100.00 100.00 Oudinot Participation 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 AXA Technology Services 99.99 99.99 99.99 99.99 United States AXA Financial, Inc. 100.00 100.00 100.00 100.00 AXA America Holding Inc. 100.00 100.00 100.00 100.00 United Kingdom Guardian Royal Exchange Plc 100.00 99.98 100.00 99.98 AXA UK Plc 100.00 99.98 100.00 99.98 AXA Equity & Law Plc 99.96 99.96 99.96 99.96 Asia/Pacific (excluding Japan) National Mutual International Pty Ltd 100.00 100.00 100.00 100.00 AXA Financial Services (Singapore) 100.00 100.00 100.00 100.00 AXA India Holding 100.00 100.00 100.00 100.00 Germany Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 Belgium AXA Holdings Belgium 100.00 100.00 100.00 100.00 Luxembourg AXA Luxembourg SA 100.00 100.00 100.00 100.00 Finance Solutions SARL 100.00 100.00 100.00 100.00 The Netherlands Vinci BV 100.00 100.00 100.00 100.00 Mediterranean and Latin American Region AXA Mediterranean Holding SA AXA Holding Maroc S.A. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 AXA Turkey Holding A.S. 100.00 100.00 100.00 100.00 Half Year 2015 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 Life & Savings and Property & Casualty Change in scope June 30, 2015 Voting rights percentage Group share of interests December 31, 2014 Group share of interests Voting rights percentage France AXA France IARD AXA France Vie AXA Protection Juridique 99.92 99.77 98.51 99.92 99.77 98.51 99.92 99.77 98.51 99.92 99.77 98.51 United States AXA Equitable Life Insurance Company AXA Re Arizona Company 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 United Kingdom AXA Insurance UK Plc AXA PPP Healthcare Limited AXA Isle of Man Limited AXA Wealth Limited Architas Multi-Manager Limited AXA Portfolio Services Limited 100.00 100.00 100.00 100.00 100.00 100.00 99.98 99.98 99.98 99.98 99.98 99.98 100.00 100.00 100.00 100.00 100.00 100.00 99.98 99.98 99.98 99.98 99.98 99.98 Ireland AXA Insurance Limited AXA Life Europe Limited AXA Life Invest Reinsurance 100.00 100.00 100.00 99.98 100.00 100.00 100.00 100.00 100.00 99.98 100.00 100.00 Asia/Pacific (excluding Japan) AXA Life Insurance Singapore AXA China Region Limited AXA General Insurance Hong Kong Ltd. AXA Insurance Singapore PT AXA Life Indonesia MLC Indonesia AXA Affin General Insurance Berhad (a) 100.00 100.00 100.00 100.00 100.00 100.00 43.63 100.00 100.00 100.00 100.00 100.00 100.00 43.63 100.00 100.00 100.00 100.00 100.00 100.00 43.63 100.00 100.00 100.00 100.00 100.00 100.00 43.63 AXA Insurance Public Company Limited (Thailand) From Equity Method to Full Consolidation in 2015 99.31 99.31 99.31 99.31 Japan AXA Life Insurance Sale of shares to minority interests 98.02 98.02 99.02 99.02 Germany AXA Versicherung AG AXA Art AXA Lebensversicherung AG Pro Bav Pensionskasse Deutsche Ärzteversicherung AXA Krankenversicherung AG DBV Deutsche Beamten-Versicherung AG 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Belgium Ardenne Prévoyante AXA Belgium SA Servis SA Les Assurés Réunis Merged with AXA Belgium SA 100.00 100.00 - 100.00 100.00 100.00 - 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Luxembourg AXA Assurances Luxembourg AXA Assurances Vie Luxembourg 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Mediterranean and Latin American Region AXA Vida, S. A. de Seguros (Spain) AXA Aurora Vida, S.A. de Seguros (Spain) AXA Seguros Generales, S. A. (Spain) AXA Interlife (Italy) AXA Assicurazioni e Investimenti (Italy) AXA MPS Vita (Italy) AXA MPS Danni (Italy) AXA MPS Financial (Italy) AXA Colpatria Capitalizadora (Colombia) AXA Colpatria Seguros de vida (Colombia) AXA Colpatria Seguros (Colombia) AXA Portugal Companhia de Seguros SA AXA Portugal Companhia de Seguros de Vida SA AXA Assurance Maroc AXA Hayat ve Emeklilik A.S. (Turkey) AXA Sigorta AS (Turkey) AXA Cooperative Insurance Company (Gulf) AXA Insurance (Gulf) B.S.C.c. AXA Insurance A.E. (Greece) AXA Seguros S.A. de C.V. (Mexico) 99.84 99.97 99.90 100.00 100.00 50.00 + 1 voting right 50.00 + 1 voting right 50.00 + 1 voting right 51.00 51.00 51.00 99.73 95.09 100.00 100.00 92.61 50.00 50.00 99.98 100.00 99.84 99.81 99.90 100.00 100.00 50.00 50.00 50.00 51.00 51.00 51.00 99.49 94.89 100.00 100.00 92.61 34.00 50.00 99.98 100.00 99.84 99.97 99.90 100.00 100.00 50.00 + 1 voting right 50.00 + 1 voting right 50.00 + 1 voting right 51.00 51.00 51.00 99.73 95.09 100.00 100.00 92.61 50.00 50.00 99.98 100.00 99.84 99.81 99.90 100.00 100.00 50.00 50.00 50.00 51.00 51.00 51.00 99.49 94.89 100.00 100.00 92.61 34.00 50.00 99.98 100.00 Switzerland AXA Life (previously Winterthur Life) AXA-ARAG Legal Assistance AXA Insurance (previously Winterthur Swiss Insurance P&C) 100.00 66.67 100.00 100.00 66.67 100.00 100.00 66.67 100.00 100.00 66.67 100.00 Central and Eastern Europe AXA Czech Republic Pension Funds AXA Czech Republic Insurance AXA Poland 99.99 100.00 100.00 99.99 100.00 100.00 99.99 100.00 100.00 99.99 100.00 100.00 Half Year 2015 Financial Report 88 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 AXA Poland Pension Funds AXA Slovakia AXA Ukraine Deconsolidation 100.00 100.00 - 100.00 100.00 - 100.00 100.00 50.17 100.00 100.00 50.17 Direct (b) Avanssur (France and Poland) Kyobo AXA General Insurance Co. Ltd. (South Korea) AXA Non Life Insurance Co. Ltd. (Japan) Touring Assurances SA (Belgium) Hilo Direct SA de Seguros y Reaseguros (Spain) Quixa S.p.A (Italy) Seguro Directo Gere Companhia de Seguros SA (Portugal) Minority interests buyout 100.00 99.65 100.00 100.00 100.00 100.00 100.00 100.00 99.65 98.02 100.00 100.00 100.00 100.00 100.00 99.61 100.00 100.00 100.00 100.00 100.00 100.00 99.61 99.02 100.00 100.00 100.00 100.00 (a) AXA Group exercises control in accordance with shareholders' agreements. (b) UK Direct activities is part of AXA Insurance UK Plc. June 30, 2015 December 31, 2014 International Insurance (entities having worldwide activities) Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA Corporate Solutions Assurance (sub-group) AXA Global P&C AXA Global Life AXA Assistance SA (sub group) Portman Insurance Ltd. Colisée RE AXA Corporate Solutions Life Reinsurance Company 98.75 100.00 100.00 100.00 100.00 100.00 100.00 98.75 100.00 100.00 100.00 100.00 100.00 100.00 98.75 100.00 100.00 100.00 100.00 100.00 100.00 98.75 100.00 100.00 100.00 100.00 100.00 100.00 June 30, 2015 December 31, 2014 Asset Management (entities having worldwide activities) Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA Investment Managers (sub group) AB (sub group) (a) Minority interests buyout 96.29 62.69 96.23 62.69 96.17 62.65 96.11 62.65 (a) The increase in the Group Share of interests is related to the share-based compensation programs for which the shares buy-back are slightly higher than the shares granted to employees at June 30, 2015. June 30, 2015 December 31, 2014 Banking Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France AXA Banque 100.00 99.89 100.00 99.89 Germany AXA Bank AG 100.00 100.00 100.00 100.00 Belgium AXA Bank Europe (sub group) 100.00 100.00 100.00 100.00 June 30, 2015 December 31, 2014 Other Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France CFP Management 100.00 100.00 100.00 100.00 Consolidated investment funds and real estate companies As of June 30, 2015, investment funds represented a total of €104,143 million invested assets (€98,458 million at the end of 2014), corresponding to 276 investment funds mainly in France, Japan, Germany and Belgium and mainly relating to the Life & Savings segment. As of June 30, 2015, 21 consolidated real estate companies corresponded to a total of €6,207 million invested assets (€7,515 million at the end of 2014), mainly in France, Germany and Japan. In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2015, these liabilities amounted to €11,049 million (€10,241 million as of December 31, 2014). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholder’s equity amounted to €774 million as of June 30, 2015 (€40 million as of December 31, 2014). Half Year 2015 Financial Report 89 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 2.1.2 MAIN INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30, 2015 December 31, 2014 Life & Savings and Property & Casualty Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie (previously NSM Vie) Natio Assurances 39.98 50.00 39.98 49.96 39.98 50.00 39.98 49.96 Asia/Pacific Philippines AXA Life Insurance Corporation Krungthai AXA Life Insurance Company Ltd 45.00 50.00 45.00 50.00 45.00 50.00 45.00 50.00 ICBC-AXA Life Insurance Co. Ltd 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services Bharti AXA Life Bharti AXA General Insurance Company Limited (India) 49.00 26.00 26.00 49.00 26.00 26.00 49.00 26.00 26.00 49.00 26.00 26.00 AXA Tian Ping 50.00 50.00 50.00 50.00 Russia Reso Garantia (RGI Holdings B.V.) 39.34 39.34 39.34 39.34 Mediterranean and Latin American Region AXA Middle East SAL (Lebanon) 51.00 51.00 51.00 51.00 Asset Management (entities having worldwide activities) Kyobo AXA Investment Managers Company Limited Minority interests buyout 50.00 48.12 50.00 48.06 Investment funds and real estate entities accounted for using the equity method As of June 30, 2015, real estate companies accounted for using the equity method amounted to €215 million invested assets (€243 million at the end of 2014) and investment funds accounted for using the equity method amounted to €4,454 million invested assets (€4,324 million at the end of 2014), mainly in the United States, France, Belgium, United Kingdom, Japan and Switzerland. Half Year 2015 Financial Report 90 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT The AXA’s Chief Executive Officer and the Deputy Chief Executive Officer are both members of the Board of Directors. They are assisted by a Management Committee in the day-to-day operational management of the Group and by an Executive Committee to consider Group strategy. The financial information relating to AXA's business segments and holding Company activities reported to the Board of Directors twice a year is consistent with the presentation provided in the consolidated financial statements. Given the activities of AXA, the operating results are presented on the basis of five operating business segments: Life & Savings, Property & Casualty, International Insurance, Asset Management and Banking. An additional "Holding companies" segment includes all non-operational activities. Life & Savings: AXA’s Life & Savings products include a broad range of Investment and Savings products as well as Protection and Health products marketed to individual and commercial clients. The Life & Savings products offered by AXA include Term life, Whole life, Universal life, endowment, deferred annuities, immediate annuities, and other investment-based products. The Health products offered include critical illness and permanent health insurance products. The types and specificities of the products offered by AXA vary from market to market. The Life & Savings segment aggregates ten geographic operating components: France, the United States, the United Kingdom, Japan, Germany, Switzerland, Belgium, the Mediterranean and Latin American Region, Asia (excluding Japan) and other countries. Property & Casualty: This segment includes a broad range of products including mainly motor, household, property and general liability insurance for both personal and commercial customers (commercial customers being mainly small to medium-sized companies). In some countries, this segment includes health products. The Property & Casualty segment aggregates nine geographical operating components (France, Germany, the United Kingdom and Ireland, Switzerland, Belgium, the Mediterranean and Latin American Region, Central and Eastern Europe, Asia and Other countries) and one operating component for the Direct business. International Insurance: This segment’s operations include insurance products that notably relate to AXA Corporate Solutions Assurance. These products provide coverage to large national and international corporations. This segment also includes assistance activities, life reinsurance activities in run-off primarily AXA Corporate Solutions Life Reinsurance Company and the Group Property & Casualty run-off managed by AXA Liabilities Managers. The Asset Management segment includes diversified asset management (including investment fund management) and related services offered by AXA Investment Managers and AB entities, which are provided to a variety of institutional investors and individuals, including AXA’s insurance companies. The Banking segment includes banking activities (mainly retail banking, mortgage loans, savings) conducted primarily in France, Belgium and Germany. The Holding companies segment includes all non-operational activities. The inter-segment eliminations include only operations between entities from different segments. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. Half Year 2015 Financial Report 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 In this document, “Insurance” covers the three insurance segments: Life & Savings, Property & Casualty and International Insurance. The term “Financial Services” includes both the Asset Management segment and the Banking segment. 3.1 Consolidated Statement of Income by segment June 30, 2015 (in Euro million) Life & savings Property & Casualty International Insurance Asset Management Banking Holding companies Inter- segment eliminations Gross written premiums 31,035 18,369 2,096 (335) Fees and charges relating to investment contracts with no participating features 203 Revenues from insurance activities 31,238 18,369 2,096 (335) Net revenues from banking activities 287 13 Revenues from other activities 768 34 148 2,176 2 (276) Revenues 32,006 18,404 2,244 2,176 288 (597) Change in unearned premiums net of unearned revenues and fees (1,248) (2,858) (295) 105 Net investment income (a) 6,285 1,085 114 5 (0) 115 (148) Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (b) of which change in fair value of assets with financial risk borne by policyholders 1,281 5,591 6,079 227 31 42 (23) 14 3 (452) 2 15 (0) Change in investments impairment (147) (43) (7) (13) Net investment result excluding financing expenses 13,011 1,301 126 18 (0) (347) (131) Technical charges relating to insurance activities (36,870) (10,189) (1,488) 93 Net result from outward reinsurance (101) (586) 13 134 Bank operating expenses (22) Acquisition costs (2,488) (2,659) (276) 13 Amortization of the value of purchased business in force (109) (1) Administrative expenses (1,467) (1,450) (130) (1,528) (337) (515) 217 Change in goodwill impairment and other intangible assets impairment (9) (45) (2) Other income and expenses (75) 5 18 (169) 121 158 (66) Other operating income and expenses (41,119) (14,925) (1,863) (1,699) (238) (357) 391 Income from operating activities before tax 2,650 1,922 212 496 50 (703) (232) Income from investment accounted for using the equity method 83 3 0 1 1 Financing debt expenses (30) (4) (4) (17) (4) (386) 232 Net income from operating activities before tax 2,703 1,920 208 479 47 (1,089) (0) Income tax (540) (529) (65) (143) (6) 298 0 Net consolidated income after tax 2,163 1,391 143 336 41 (791) Split between : Net consolidated income - Group share 2,094 1,364 142 228 40 (791) (0) Net consolidated income - Minority interests 69 28 1 108 1 (0) 0 (a) Includes gains/losses from derivatives hedging variable annuities within Life & Savings and International Insurance segments. (b) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders'equity. Half Year 2015 Financial Report TOTAL 51,166 203 51,369 300 2,852 54,521 (4,297) 7,455 1,555 5,177 6,078 (209) 13,979 (48,453) (541) (22) (5,409) (110) (5,211) (55) (8) (59,809) 4,394 88 (213) 4,269 (985) 3,284 3,077 207 92 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 June 30, 2014 (in Euro million) Life & savings Property & Casualty International Insurance Asset Management Banking Holding companies Inter- segment eliminations Gross written premiums 28,333 17,014 1,912 (315) Fees and charges relating to investment contracts with no participating features 159 Revenues from insurance activities 28,492 17,014 1,912 (315) Net revenues from banking activities 274 0 12 Revenues from other activities 608 29 128 1,776 2 (227) Revenues 29,100 17,044 2,039 1,776 276 0 (530) Change in unearned premiums net of unearned revenues and fees (1,433) (2,649) (297) 110 Net investment income (a) 6,467 1,119 115 (6) (0) 220 (316) Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (b) of which change in fair value of assets with financial risk borne by policyholders 829 6,837 5,617 229 (21) 44 11 27 6 34 (4) (4) Change in investments impairment (182) (23) (3) (13) Net investment result excluding financing expenses 13,951 1,303 168 21 (0) 246 (319) Technical charges relating to insurance activities (36,098) (9,666) (1,019) 144 Net result from outward reinsurance 276 (416) (281) 57 Bank operating expenses (50) (0) Acquisition costs (1,932) (2,437) (245) 8 Amortization of the value of purchased business in force (58) Administrative expenses (1,299) (1,320) (120) (1,269) (199) (454) 189 Change in goodwill impairment and other intangible assets impairment (10) (58) (1) Other income and expenses (55) 3 13 (137) (5) 105 (39) Other operating income and expenses (39,176) (13,892) (1,652) (1,407) (254) (349) 358 Income from operating activities before tax 2,443 1,806 258 390 22 (103) (381) Income from investment accounted for using the equity method 63 31 0 0 5 Financing debts expenses (51) (4) (4) (17) (5) (665) 380 Net income from operating activities before tax 2,455 1,833 254 373 17 (762) (0) Income tax (498) (526) (86) (109) 3 205 0 Net consolidated income after tax 1,957 1,307 168 265 20 (558) Split between : Net consolidated income - Group share 1,906 1,286 166 188 19 (558) Net consolidated income - Minority interests 51 21 2 76 1 0 (a) Includes gains/losses from derivatives hedging variable annuities within Life & Savings and International Insurance segments. (b) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders'equity. Half Year 2015 Financial Report TOTAL 46,944 159 47,103 286 2,316 49,705 (4,269) 7,600 1,107 6,884 5,613 (221) 15,370 (46,639) (363) (50) (4,606) (58) (4,472) (69) (114) (56,371) 4,435 99 (365) 4,169 (1,010) 3,159 3,008 151 93 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 mBank acquisition On March 30, 2015, AXA announced that it completed the acquisition of 100% of BRE Insurance(1), mBank’s Property & Casualty subsidiary in Poland. Consequently, AXA and mBank have launched their 10-year exclusive Property & Casualty and Life Protection distribution agreements in the country. Final consideration amounted to PLN 580 million (or Euro 140 million(2)).The acquired operations have been fully consolidated in the Direct segment since March 30, 2015. In accordance with IFRS 3 - Business Combinations, adjustments can be made within twelve months of the acquisition date if new information becomes available to complete the initial accounting. 4.2 Hong Kong pension disposal On November 7, 2014, AXA announced it has entered into an agreement with The Principal Financial Group (“The Principal”) to sell its Mandatory Provident Fund (MPF) and Occupational Retirement Schemes Ordinance (ORSO) businesses in Hong Kong (Life and Savings). In conjunction, The Principal would enter into an exclusive distribution agreement with AXA proprietary networks in Hong Kong, for relevant MPF and ORSO mandatory schemes, for 15 years. Under the terms of the agreement, the total cash consideration payable at closing would amount to HKD 2.6 billion (€270 million)(3). Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to take place in the third quarter of 2015. The assets and liabilities of the MPF and ORSO businesses classified as held for sale separately from other assets and liabilities in the consolidated statements of financial positions as of June 30, 2015. 4.3 Increase in ownership of Bharti On March 12, 2015, following the approval of the Insurance Bill by the Indian Parliament, AXA confirmed its intention to increase its stake in its Indian Life and general insurance joint-ventures with Bharti Enterprises to 49% from 26%, subject to finalization of negotiations, entering into legally binding agreements, as well as closing conditions including regulatory approvals. As of June 30, 2015, the ownership interest held by AXA in the joint venture remained unchanged in comparison to the previous closing. 1 BRE Ubezpieczenia Towarzystwo Ubezpieczen I Reasekuracji S.A. 2 EUR 1 = PLN 4.1275. 3 EUR1 = HKD 9.6200 as of November 6, 2014. Half Year 2015 Financial Report 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 5 INVESTMENTS 5.1 Breakdown of investments Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately. Insurance June 30, 2015 Other activities Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value Investment in real estate properties at amortized cost Investment in real estate properties designated as at fair value through profit or loss (a) Macro-hedge and other derivatives 25,884 1,018 19,272 1,018 2.69% 0.14% 2,287 674 1.65% 28,171 1,018 19,946 1,018 Investment in real estate properties 26,902 20,290 2.83% 2,287 674 1.65% 29,190 20,964 Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (b) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (c) 369,406 39,213 726 6,323 369,406 39,213 726 5,923 51.48% 5.47% 0.10% 0.83% 9,073 548 27 3,512 9,073 548 27 3,512 22.25% 1.34% 0.07% 8.61% 378,479 39,761 754 9,835 378,479 39,761 754 9,436 Debt instruments 415,668 415,268 57.88% 13,161 13,161 32.27% 428,828 428,429 Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (a) Equity instruments held for trading 17,168 8,608 84 17,168 8,608 84 2.39% 1.20% 0.01% 1,635 422 1,635 422 4.01% 1.03% 18,804 9,029 84 18,804 9,029 84 Equity instruments 25,860 25,860 3.60% 2,057 2,057 5.04% 27,917 27,917 Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (a) Non consolidated investment funds held for trading 7,199 5,596 140 7,199 5,596 140 1.00% 0.78% 0.02% 135 273 487 135 273 487 0.33% 0.67% 1.20% 7,334 5,869 628 7,334 5,869 628 Non consolidated investment funds 12,935 12,935 1.80% 895 895 2.19% 13,830 13,830 Other assets designated as at fair value through profit or loss, held by consolidated investment funds 11,215 11,215 1.56% 146 146 0.36% 11,361 11,361 Macro-hedge and other derivatives 1,024 1,024 0.14% (166) (166) 0.41% 858 858 Financial investments 466,703 466,303 64.99% 16,092 16,092 39.46% 482,795 482,395 Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (a) Loans held for trading Loans at cost (d) Macro-hedge and other derivatives (0) 0 - 33,567 (0) 0 - 32,042 0.00% 0.00% - 4.47% - 0 - 25,580 32 - 0 - 23,979 32 - 0.00% - 58.80% 0.08% (0) 0 - 59,147 32 (0) 0 - 56,021 32 Loans 33,567 32,042 4.47% 25,612 24,011 58.88% 59,179 56,053 Assets backing contracts where the financial risk is borne by policyholders 198,885 198,885 27.72% 198,885 198,885 INVESTMENTS 726,057 717,521 100.00% 43,992 40,778 100.00% 770,049 758,298 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 527,172 518,635 72.28% Life & Savings Property & Casualty 450,769 69,052 443,291 67,996 61.78% 9.48% International Insurance 7,351 7,349 1.02% cg (a) Assets measured at fair value under the fair value option. (b) Includes assets measured at fair value notably under the fair value option. (c) Eligible to the IAS 39 Loans and Receivables measurement category. (d) Mainly relates to mortgage loans and policy loans. Half Year 2015 Financial Report % (value balance sheet) 2.63% 0.13% 2.76% 49.91% 5.24% 0.10% 1.24% 56.50% 2.48% 1.19% 0.01% 3.68% 0.97% 0.77% 0.08% 1.82% 1.50% 0.11% 63.62% 0.00% 0.00% - 7.39% 0.00% 7.39% 26.23% 100.00% 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 Insurance December 31, 2014 Other activities Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value Investment in real estate properties at amortized cost Investment in real estate properties designated as at fair value through profit or loss (a) Macro-hedge and other derivatives 23,491 1,023 17,587 1,023 2.58% 0.15% 1,898 613 1.55% 25,390 1,023 18,200 1,023 Investment in real estate properties 24,514 18,610 2.73% 1,898 613 1.55% 26,413 19,223 Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (b) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market ( c) 361,872 39,077 301 5,156 361,872 39,077 301 4,939 53.17% 5.74% 0.04% 0.73% 9,863 767 24 1,952 9,863 767 24 1,952 24.95% 1.94% 0.06% 4.94% 371,734 39,845 325 7,108 371,734 39,845 325 6,891 Debt instruments 406,406 406,189 59.68% 12,607 12,607 31.89% 419,013 418,795 Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (a) Equity instruments held for trading 15,046 7,990 162 15,046 7,990 162 2.21% 1.17% 0.02% 1,381 407 1,381 407 3.49% 1.03% 16,428 8,398 162 16,428 8,398 162 Equity instruments 23,199 23,199 3.41% 1,789 1,789 4.52% 24,987 24,987 Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (a) Non consolidated investment funds held for trading 6,825 4,985 35 6,825 4,985 35 1.00% 0.73% 0.01% 25 253 477 25 253 477 0.06% 0.64% 1.21% 6,850 5,238 511 6,850 5,238 511 Non consolidated investment funds 11,844 11,844 1.74% 756 756 1.91% 12,600 12,600 Other assets designated as at fair value through profit or loss, held by consolidated investment funds 8,828 8,828 1.30% 202 202 0.51% 9,031 9,031 Macro-hedge and other derivatives 1,098 1,098 0.16% (165) (165) 0.42% 933 933 Financial investments 451,375 451,158 66.28% 15,188 15,188 38.42% 466,563 466,346 Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (a) Loans held for trading Loans at cost (d) Macro-hedge and other derivatives (0) 0 - 31,386 (0) 0 - 29,801 0.00% 0.00% - 4.38% - 0 - 25,656 9 - 0 - 23,725 9 - 0.00% - 60.01% 0.02% (0) 0 - 57,043 9 (0) 0 - 53,526 9 Loans 31,386 29,801 4.38% 25,666 23,734 60.03% 57,052 53,535 Assets backing contracts where the financial risk is borne by policyholders 181,082 181,082 26.60% 181,082 181,082 INVESTMENTS 688,358 680,651 100.00% 42,753 39,535 100.00% 731,110 720,187 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 507,276 499,569 73.40% Life & Savings Property & Casualty 433,198 66,366 426,435 65,424 62.65% 9.61% International Insurance 7,711 7,710 1.13% (a) Assets measured at fair value under the fair value option. (b) Includes assets measured at fair value notably under the fair value option. (c) Eligible to the IAS 39 Loans and Receivables measurement category. (d) Mainly relates to mortgage loans and policy loans. 5.2 Investment in real estate properties Investment in real estate properties include buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, excluding the impact of all derivatives: June 30, 2015 December 31, 2014 (in Euro million) Gross value Amortization Impairment Carrying value Fair value Gross value Amortization impairment Carrying value Investment in real estate properties at amortized cost Insurance 22,131 (2,196) (593) 19,342 25,954 20,220 (2,013) (620) 17,587 Other activities 925 (251) (0) 674 2,287 858 (245) (0) 613 All activities 23,056 (2,447) (593) 20,016 28,242 21,078 (2,258) (620) 18,200 Half Year 2015 Financial Report % (value balance sheet) 2.53% 0.14% 2.67% 51.62% 5.53% 0.05% 0.96% 58.15% 2.28% 1.17% 0.02% 3.47% 0.95% 0.73% 0.07% 1.75% 1.25% 0.13% 64.75% 0.00% 0.00% - 7.43% 0.00% 7.43% 25.14% 100.00% Fair value 23,491 1,898 25,390 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 Opening value 620 633 2,258 2,112 Increase for the period 29 50 133 227 Write back following sale or reimbursement (11) (42) (86) Write back following recovery in value (20) (44) Others(a) (35) (9) 98 5 Closing value 593 620 2,447 2,258 (a) Includes change in scope and the effect of changes in exchange rates. 5.3 Unrealized gains and losses on financial investments Excluding the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: (in Euro million) June 30, 2015 December 31, 2014 INSURANCE Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 324,676 5,926 13,289 6,136 369,120 6,325 17,058 7,218 369,120 5,926 17,058 7,218 46,148 402 3,886 1,111 1,704 2 118 28 310,952 4,991 11,867 5,969 363,619 5,208 15,135 6,934 363,619 4,991 15,135 6,934 53,424 219 3,357 986 757 2 90 21 (in Euro million) June 30, 2015 December 31, 2014 OTHER ACTIVITIES Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 9,063 3,512 1,336 117 9,320 3,512 1,635 135 9,320 3,512 1,635 135 275 309 18 19 10 9,973 1,952 1,103 11 10,268 1,952 1,381 25 10,268 1,952 1,381 25 316 280 14 20 1 (in Euro million) June 30, 2015 December 31, 2014 TOTAL Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 333,739 9,438 14,626 6,253 378,439 9,838 18,693 7,353 378,439 9,438 18,693 7,353 46,423 402 4,195 1,129 1,723 2 127 28 320,925 6,943 12,971 5,980 373,888 7,160 16,516 6,959 373,888 6,943 16,516 6,959 53,740 219 3,637 1,000 778 2 91 21 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. Half Year 2015 Financial Report 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 5.4 Financial investments subject to impairment 5.4.1 BREAKDOWN OF FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). June 30, 2015 December 31, 2014 Cost before impairment and revaluation to fair value (a) Impairment Cost after impairment but before revaluation to fair value (b) Revaluation to fair value (c) Carrying value Cost before impairment and revaluation to fair value (a) Impairment Cost after impairment but before revaluation to fair value (b) Revaluation to fair value (c) Carrying value (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market 333,677 9,439 (844) (0) 332,833 9,438 45,646 (3) 378,479 9,436 320,720 6,953 (788) 319,932 6,953 51,802 (61) 371,734 6,891 Debt instruments 343,116 (844) 342,271 45,643 387,915 327,672 (788) 326,885 51,741 378,625 Equity instruments available for sale 16,753 (2,128) 14,626 4,178 18,804 15,093 (2,123) 12,971 3,457 16,428 Non consolidated investment funds available for sale 7,313 (1,060) 6,253 1,081 7,334 6,930 (950) 5,980 870 6,850 Loans held to maturity Loans available for sale 0 (0) (0) (0) 0 (0) (0) (0) Loans at cost (d) 57,177 (595) 56,582 (561) 56,021 54,870 (647) 54,223 (697) 53,526 Loans 57,178 (596) 56,582 (561) 56,021 54,871 (648) 54,223 (697) 53,526 TOTAL 424,360 (4,628) 419,731 50,341 470,073 404,567 (4,508) 400,059 55,371 455,429 (a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans. 5.4.2 CHANGE IN IMPAIRMENT ON FINANCIAL INVESTMENTS (in Euro million) January 1, 2015 Increase for the period Write back following sale or reimbursement Write back following recovery in value Other (a) June 30, 2015 Impairment - Debt instruments 788 86 (55) (4) 29 844 Impairment - Equity instruments 2,123 96 (188) 97 2,128 Impairment - Non consolidated investment funds 950 22 (10) 98 1,060 Impairment - Loans 648 24 (1) (33) (42) 596 TOTAL 4,508 227 (253) (37) 183 4,628 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. (in Euro million) January 1, 2014 Increase for the period Write back following sale or reimbursement Write back following recovery in value Other (a) December 31, 2014 Impairment - Debt instruments 1,078 135 (465) (23) 63 788 Impairment - Equity instruments 2,380 388 (684) 39 2,123 Impairment - Non consolidated investment funds 1,029 49 (100) (29) 950 Impairment - Loans 621 123 (21) (57) (18) 648 TOTAL 5,108 694 (1,271) (80) 56 4,508 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. Half Year 2015 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 5.5 Investments/Fair value Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o (i) are readily available including last transaction prices but relate to assets for which the market is not always active, or o (ii) values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or used by the Group in the limited cases of application of mark to model valuations. 5.5.1 INVESTMENTS RECOGNIZED AT FAIR VALUE Among financial investments measured at fair value in the consolidated statement of financial position (excluding derivatives, investment funds consolidated by equity method and contracts where the financial risk is borne by policyholders), i.e. €473 billion as of June 30, 2015 (€462 billion as of December 31, 2014): €318 billion were determined directly by reference to an active market (€298 billion at the end of 2014), i.e. level 1 assets and €155 billion related to assets not quoted in an active market/no active market (€164 billion at the end of 2014), i.e. level 2 and level 3 assets of which level 3 assets amounted to €13 billion (€11 billion at the end of 2014). At June 30, 2015, Italian government bonds were reclassified from level 2 to level 1 consistent with sustained improved market liquidity for those instruments. For all other sovereign bonds, trends observed in 2014 were confirmed in the first semester of 2015 with an acceleration of Eurozone peripheral countries’ spread contraction and liquidity improvement. These market indicators will continue to be followed to assess the sustainability of those improvements. Therefore, the classification as at June 30, 2015 is maintained similar to the one as at December 31, 2014. Half Year 2015 Financial Report 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 Additionally, as of June 30, 2015, other assets were transferred between level 1 and level 2. The reclassifications were mainly related to other bonds for which spread widened and narrowed throughout the period. Transfer in and out of the level 3 category and other movements From January 1, 2015 to June 30, 2015, the amount of level 3 assets increased to €13.2 billion, representing 2.8% of the total assets at fair value (2.4% at the end of 2014 i.e.€10.9 billion). Main movements relating to level 3 assets to be noted were the following: €+1.8 billion of new investments; €-0.3 billion of asset sales; €+0.3 billion transfers in level 3 category due to less observable data; €-0.1 billion transfers out of level 3 category due to more observable data; €+0.2 billion of change in unrealized gains and losses; €+0.3 billion of other movements (forex impact, changes in scope…). 5.5.2 INVESTMENTS RECOGNIZED AT AMORTIZED COST Among financial investments measured at amortized cost in the consolidated statement of financial position i.e. €98 billion as of June 30, 2015 (€90 billion as of December 31, 2014): €0.2 billion were determined directly by reference to an active market (€0.05 billion at the end of 2014), i.e. level 1 assets and €98 billion related to assets not quoted in an active market/no active market (€90 billion at the end of 2014), i.e. level 2 and level 3 assets of which level 3 assets amounted to €41 billion (€39 billion at the end of 2014). Half Year 2015 Financial Report 100 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The Consolidated Statement of changes in Equity is presented as a primary financial statement. 6.1 Impact of transactions with shareholders 6.1.1 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2015 a) SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2015, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: Stock option exercise of 13 million shares for €232 million; The cancellation of 11 million shares for €244 million; Share-based payments for €12 million. b) TREASURY SHARES As of June 30, 2015, the Company and its subsidiaries owned approximately 21 million AXA shares, representing 0.8% of the share capital, an increase of 20 million shares compared to December 31, 2014. As of June 30, 2015, the carrying value of treasury shares and related derivatives was €629 million and there was no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. In addition, as of June 30, 2015, 2 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €39 million and their market value €46 million at the end of June 2015. c) UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debt issued by the Group do not qualify as liabilities under IFRS. Undated subordinated debt instruments are classified in shareholders’ equity at their historical value as regards credit spread and interest rates and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2015, the change in other reserves was due to: €-154 million in interest expense related to the undated subordinated debt (net of tax); €+401 million from foreign exchange rate fluctuations. Half Year 2015 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 As of June 30, 2015 and December 31, 2014, undated subordinated debt recognized in shareholders’ equity broke down as follows: June 30, 2015 December 31, 2014 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in Euro million) October 29, 2004 - 375 M € 6.0% 375 375 375 375 December 22, 2004 - 250 M € 6.0% 250 250 250 250 January 25, 2005 - 250 M € 6.0% 250 250 250 250 July 6, 2006 - 1,000 M € 5.8% (a) 431 426 431 426 July 6, 2006 - 500 M £ 6.7% (a) 257 356 257 324 July 6, 2006 - 350 M £ 6.7% 350 492 350 449 October 26, 2006 - 600 M A$ (of which 300M A$ 7.5%) 600 409 600 402 November 7, 2006 - 150 M A$ 7.5% 150 103 150 101 December 14, 2006 - 750 M US$ 6.5% 750 668 750 615 December 14, 2006 - 750 M US$ 6.4% 750 668 750 615 October 5, 2007 - 750 M€ 6.2% (a) 335 331 335 331 October 16, 2007 - 700 M £ 6.8% (a) 219 306 219 279 Novembre 7,2014 – 984 M€ 3.941% (a) 984 981 984 981 Novembre 7,2014 – 724 M£ 5.453% (a) 724 1 015 724 927 May 20, 2014 - 1,000 M€ - 3.9% 1 000 997 1 000 997 January 22, 2013 - 850 M US$, 5.5% 850 754 850 695 Undated notes -625 M €, variables rates 625 625 625 625 Undated notes - 27,000 M JPY, 3.3% 27 000 197 27 000 186 Undated notes- 375 M US$, variables rates 375 335 375 309 Sub-Total Undated Subordinated Debt 9 536 9 135 Equity component of convertible debt (2017) 95 95 95 95 TOTAL 9 630 9 230 (a) These undated Deeply Subordinated notes were part of the liability management exercice launched on October 29,2014. In addition to the nominal amounts shown above, shareholders’ equity included net accumulated financial expenses of: €-2,870 million as of June 30, 2015; €-2,716 million as of December 31, 2014. Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step up clauses with effect from a given date d) DIVIDENDS PAID At the shareholders’ meeting held on April 30, 2015, shareholders approved a dividend distribution of 0.95€ per share corresponding to €2,317 million with respect to the 2014 financial year. Half Year 2015 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 6.1.2 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2014 a) SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2014, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: Stock option exercise of 2 million shares for €36 million; Share based payments for €15 million b) TREASURY SHARES As of June 30, 2014, the Company and its subsidiaries owned approximately 1 million AXA shares, representing 0.03% of the share capital, a decrease of 3 million shares compared to December 31, 2013. As of June 30, 2014, the carrying value of treasury shares and related derivatives was €160 million. This included €0.9 million relating to AXA shares held by consolidated mutual funds (69,818 shares) not backing contracts where the financial risk is borne by policyholders. In addition, as of June 30, 2014, 2 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €40 million and their market value €36 million at the end of June 2014. c) UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES During the first half of 2014, the change in other reserves was due to: €+997 million from the issuance of a new subordinated debt (net of fees); €-35 million from the exercise of a redemption call on undated subordinated debt; €-148 million in interest expense related to the undated subordinated debt (net of tax); €+132 million from foreign exchange rate fluctuations. d) DIVIDENDS PAID At the shareholders’ meeting held on April 23, 2014, shareholders approved a dividend distribution of 0.81€ per share corresponding to €1,960 million with respect to the 2013 financial year. Half Year 2015 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 6.2 Comprehensive income for the period The Statement of Comprehensive Income, presented as primary financial statements, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2015 a) RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled €-7,619 million, of which a €-8,262 million decrease in unrealized capital gains on debt securities which was mainly driven by interest rates and corporate spreads increase, partially offset by an increase in equity unrealized gains of €+527 million in line with the market rally. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: (in Euro million) June 30, 2015 December 31, 2014 (a) Gross unrealized gains and losses (b) 49,868 57,487 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (28,859) (33,973) Shadow accounting on Deferred Acquisition Costs (c) (965) (1,246) Shadow accounting on Value of purchased Business In force (176) (178) Unallocated unrealized gains and losses before tax (d) 19,867 22,091 Deferred tax (5,985) (6,762) Unrealized gains and losses (net of tax) - Assets available for sale 13,882 15,328 Unrealized gains and losses (net of tax) - Equity accounted companies 158 140 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 14,040 15,469 Minority interests' share in unrealized gains and losses (e) (165) (154) Translation reserves (f) (420) 12 UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) 13,455 15,327 (a) Reso Garantia is accounted for using the equity method in the Group consolidated financial statements on the basis of an annual closing at September 30. Given significant movements in the Russian ruble exchange rate between September 30, 2014 and December 31,2014, the balance sheet used as a basis of the equity method has been translated using December 31 exchange rate. (b) Unrealized gains and losses on total available for sale invested assets including loans. (c) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (d) Including unrealized gains and losses on assets held for sale operations. (e) Including foreign exchange impact attributable to minority interests. (f) Group share Half Year 2015 Financial Report 104 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 As of June 30, 2015, most of the unrealized gains on assets available for sale related to the Life & Savings segment. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2015: June 30, 2015 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Gross unrealized gains and losses (a) 16,552 8,246 4,339 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (12,369) (7,080) (3,508) Shadow accounting on Deferred Acquisition Costs (b) (255) 0 (26) Shadow accounting on Value of purchased Business In force 0 0 (96) Unallocated unrealized gains and losses before tax 3,927 1,165 709 Deferred tax (1,321) (364) (149) Unrealized gains and losses (net of tax) - Assets available for sale 2,606 802 560 Unrealized gains and losses (net of tax) - Equity accounted companies 43 0 0 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 2,649 802 560 Minority interests' share in unrealized gains and losses (c) (7) 0 0 Translation reserves (d) 0 0 (250) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) 2,642 802 310 (a) Unrealized gains and losses on total available for sale invested assets including loans. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2015 and December 31, 2014 broke down as follows: (in Euro million) June 30, 2015 December 31, 2014 (a) Unrealized gains and losses (net of tax) 100%, opening 15,469 8,426 Transfer in the income statement on the period (b) (449) (538) Investments bought in the current accounting period and changes in fair value (1,473) 7,228 Foreign exchange impact 478 219 Change in scope and other changes 17 133 Unrealized gains and losses (net of tax) 100%, closing 14,040 15,469 (a) Reso Garantia is accounted for using the equity method in the Group consolidated financial statements on the basis of an annual closing at September 30. Given significant movements in the Russian ruble exchange rate between September 30, 2014 and December 31,2014, the balance sheet used as a basis of the equity method has been translated using December 31 exchange rate. (b) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period, and debt instruments discount premium impacts. b) CURRENCY TRANSLATION RESERVE The group share translation reserves movement (€+3,447 million) was mainly driven by Switzerland (€+1,529 million), United States (€+1,021 million), the United Kingdom (€+507 million), Asia (€+313 million), Japan (€+161 million) and AXA IM (€+180 million) and partly offset by the Company (€-389 million) driven by a change in fair value of hedging of net investments in foreign operations. Half Year 2015 Financial Report 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 c) EMPLOYEE BENEFITS ACTUARIAL GAINS AND LOSSES The total impact of employee benefits actuarial gains for the first half year 2015 amounted to €+82 million net group share, mostly due to the increase in discount rates. 6.2.2 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2014 a) RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The increase of gross unrealized gains and losses on assets available for sale totaled €+15,447 million, of which €+15,291 million increase in unrealized capital gains on debt securities which was mainly driven by interest rates and corporate spreads decrease. b) CURRENCY TRANSLATION RESERVE The group share translation reserves movement (€+530 million) was mainly driven by Japan (€+238 million), the United Kingdom (€+193 million), Switzerland (€+89 million), the United States (€+71 million), MedLa (€+45 million) and Asia excluding Japan (€+28 million), partly offset by Russia (€-72 million), and by the Company (€-121 million) driven by a change in fair value of hedging of net investments in foreign operations. c) EMPLOYEE BENEFITS ACTUARIAL GAINS AND LOSSES The total impact of employee benefits actuarial loss for the first half year 2014 amounted to €-455 million net group share, mostly due to the decrease in discount rates. 6.3 Change in minority interests Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than shareholders’ equity items. 6.3.1 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2015 The €+917 million increase in minority interests to €+3,732 million was mainly driven by the comprehensive income and transactions with minority interests’ holders:  The comprehensive income for the period notably included the following: o Net income attributable to minority interests for €+207 million; o Foreign exchange movements for €+146 million; o Reserves relating to changes in fair value through shareholders’ equity for €+4 million;  Transactions with minority interests’ holders, mainly included: o Minority interest qualified as equity resulting from the consolidation of a new consolidated investment fund for €+734 million; o Minorities interest acquisition of 1% share of AXA Life Insurance Japan for €+52 million; o Dividend pay out to minorities interests’ holders for €-242 million. Half Year 2015 Financial Report 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 6.3.2 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2014 The €76 million increase in minority interests to €2,597 million was mainly driven by the comprehensive income and transactions with minority interests’ holders:  The comprehensive income for the period notably included the following: o Net income attributable to minority interests for €+151 million; o Reserves relating to changes in fair value through shareholders’ equity for €+97 million; o Foreign exchange movements for €+16 million;  Transactions with minority interests’ holders, mainly included: o Dividend pay out to minorities for €-197 million; o The acquisition of Colpatria in Colombia for +43 million. Half Year 2015 Financial Report 107 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 7 FINANCING DEBT Carrying value (in Euro million) June 30, 2015 December 31, 2014 AXA Debt component of subordinated convertible notes, 3.75% due 2017 (€) Subordinated notes, 5.25% due 2040 (€) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) U.S. registered redeemable subordinated debt, 7.125% 2020 (£) Subordinated debt, 5.625% due 2054 (£) Derivatives relating to subordinated debts (a) AXA Financial Surplus notes, 7.70 %, due 2015 AXA Bank Europe Subordinated debt maturity below 10 years fixed rate 7,446 1,661 1,300 1,000 1,082 457 1,054 891 179 179 133 54 Undated Subordinated debt fixed rate 78 AXA-MPS Vita and Danni 76 Subordinated notes, euribor 6 months + 81bp 76 Other subordinated debt (under €100 million) 26 Subordinated debt 7,859 AXA Euro Medium Term Notes, due through 2015 AXA Financial 313 Senior notes, 7%, due 2028 313 AXA UK Holdings GRE: Loan Notes, 6.625%, due 2023 214 214 Other financing debt instruments issued (under €100 million) 88 Other financing debt instruments issued (under €100 million) 133 Derivatives relating to other financing debt instruments issued (a) (46) Financing debt instruments issued 615 TOTAL FINANCING DEBT (b) 8,475 (a) Hedging instruments according to IAS 39 and economic hedge derivatives which are not qualified as hedge under IAS 39. (b) Excluding accrued interest on derivatives. Half Year 2015 Financial Report 6,714 1,622 1,300 1,000 993 417 963 418 165 165 165 68 97 76 76 26 7,146 1,000 1,000 288 288 196 196 102 155 (53) 1,586 8,733 108 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2015 NOTE 8 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: The calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period. The calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2015 June 30, 2014 Net income Group share 3,077 3,008 Undated subordinated debt financial charge (154) (148) Net income including impact of undated subordinated debt A 2,923 2,860 Weighted average number of ordinary shares (net of treasury shares) - opening 2,442 2,414 Increase in capital (excluding stock options exercised) (b) 1 Stock options exercised (b) 6 1 Treasury shares (b) (10) 2 Share purchase program (b) Weighted average number of ordinary shares B 2,438 2,418 BASIC NET INCOME PER ORDINARY SHARE C = A / B 1.20 1.18 Potentially dilutive instruments : Stock options 9 7 Other 3 8 Fully diluted - weighted average number of shares (c) D 2,449 2,433 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 2,923 2,860 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 1.19 1.18 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. As of June 30, 2015, net income per ordinary share stood at €1.20 on a basic calculation, and at €1.19 on a fully diluted basis. As of June 30, 2014, net income per ordinary share stood at €1.18 on a basic calculation, and at €1.18 on a fully diluted basis. Half Year 2015 Financial Report 109 II STATUTORY AUDITORS’ REVIEW III Statutory auditors’ review report on the 2015 Half-Year Financial Information Half Year 2015 Financial Report 110 III STATUTORY AUDITORS’ REVIEW PricewaterhouseCoopers Audit 63, rue de Villiers 92208 Neuilly-sur-Seine Cedex Mazars 61, rue Henri Regnault 92075 Paris La Défense Cedex STATUTORY AUDITORS’ REVIEW REPORT ON THE 2015 HALF-YEAR FINANCIAL INFORMATION To the Shareholders AXA S.A. 25 avenue Matignon 75008 Paris In compliance with the assignment entrusted to us by your General Meeting and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code (Code monétaire et financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the six months ended June 30, 2015 ; the verification of the information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - the standard of IFRSs as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information given in the half-year management report on the condensed half-year consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements Neuilly-sur-Seine and Courbevoie, August 4, 2015 The Statutory Auditors French original signed by* Half Year 2015 Financial Report 111 III STATUTORY AUDITORS’ REVIEW PricewaterhouseCoopers Audit Mazars Michel Laforce Xavier Crépon Jean-Claude Pauly Gilles Magnan This is a free translation into English of the Statutory Auditors’ review report issued in French and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Half Year 2015 Financial Report 112 III STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR REPORT IV Statement of the person responsible for the Half-Year Financial Report Half Year 2015 Financial Report 113 IV STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and a description of the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 5, 2015. Henri de Castries Chairman & Chief Executive Officer Person responsible for financial information Denis Duverne Deputy Chief Executive Officer, in charge of Finance, Strategy and Operations Half Year 2015 Financial Report 114 IV

Semestriel, 2015, Insurance, AXA

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AXA

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Half Year Financial Report June 30, 2016 Table of contents I ACTIVITY REPORT ..................................................... 3 II CONSOLIDATED FINANCIAL STATEMENTS ........ 85 III STATUTORY AUDITORS’ REVIEW REPORT ON THE 2016 HALF- YEAR FINANCIAL INFORMATION ...... 122 IV STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF- YEAR FINANCIAL REPORT ................. 125 ACTIVITY REPORT – HALF YEAR 2016 I Activity Report / June 30, 2016 Half Year 2016 Financial Report 3 I ACTIVITY REPORT – HALF YEAR 2016 CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS This report includes certain terms that are used by AXA in analyzing its business operations and, therefore, may not be comparable with terms used by other companies; these terms are defined in the glossary provided at the end of this document. Certain statements contained herein are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please refer to AXA’s Registration Document for the year ended December 31, 2015, for a description of certain important factors, risks and uncertainties that may affect AXA’s business. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise. Half Year 2016 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2016 FINANCIAL MARKET CONDITIONS IN THE FIRST HALF OF 2016 The first semester was one of the most turbulent in equity markets since 2008. Chinese stocks recorded significant losses in January on renewed concerns over China growth perspectives, and other major benchmark indices followed. Most markets recovered in the following months, posting solid gains from April to mid-June, to see sharp losses at the end of the second quarter as a consequence of the outcome of the United Kingdom referendum on European Union (EU) membership. However, in the last days following the vote, markets staged strong recoveries. Oil prices significantly recovered after the sharp drop at the end of 2015 and beginning of 2016 as discussions between Russia and Saudi Arabia led to the world’s two biggest oil producers agreeing to freeze output in an attempt to stabilise prices. Government bond markets moved higher and yields declined over the period as caution returned to financial markets on worries about the global economic climate. In the United States, after the January rout, stocks rallied and touched a 2016 high by the end of March. The US Federal Reserve calmed anxiety about future US interest rate rises by insisting that these would be slow and would track improvements in the economy. Although inflation remained below target levels, US employment data was strong. At both the May and June meetings of the Federal Reserve, it was decided to keep interest rates on hold, but positive remarks were made about the health of the US economy. The picture in Europe was also relatively optimistic. Stocks tumbled in January, but by March, stocks were rising and the euro had gained in strength. In the region as a whole, unemployment was down, industrial production was up and the European Central Bank (ECB) has set interest rates at record lows. For most of the period, both Europe and the United Kingdom posted gains on their respective stock markets despite the political uncertaintly linked to United Kingdom referendum on EU membership. Towards mid-June, markets and sterling rose steeply as polls suggested the ‘remain’ vote would win. But when the ‘leave’ vote prevailed, equities and sterling fell hard and led markets around the world sharply downwards. However, in the last days of the month, equities rallied once again as the economic news from the region and, in particular, the United Kingdom, remained relatively robust. In Asia, China showed few signs of emerging from its downturn. The annual growth forecast was revised down, and on several occasions, the People’s Bank of China (PBoC) had to inject much-needed liquidity into the system to prevent bond defaults. Elsewhere, the Bank of Japan (BoJ) moved to a negative interest rate for commercial bank accounts, and there were fears that the country could move back into recession. Negative interest rates did not prevent a rise in the yen, which led to lowered exports and a stock market drop. Stock Markets Equity markets posted mixed results in 1H16 as the United States and the United Kingdom experienced gains while most of the European stocks suffered losses. The MSCI World Index decreased by 1.9%. The Dow Jones Industrial Average index in New York increased by 2.9% and the S&P 500 index increased by 2.7% in the first half of 2016. The FTSE 100 index in London increased by 4.2% in the first half of 2016, the EUROSTOXX 50 index in the Eurozone decreased by 12.3% and the Nikkei index in Tokyo decreased by 18.2%. The MSCI G7 index decreased by 1.2% while the MSCI Emerging index increased by 2.1%. The S&P 500 implied volatility index (VIX) decreased from 18.2% on December 31, 2015 to 15.6% on June 30, 2016. The S&P 500 realized volatility index decreased from 18.6 % on December 31, 2015 to 13.4% on June 30, 2016. Half Year 2016 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2016 Bond Markets In most mature economies, government bond yields decreased since December 31, 2015: the US 10- year T-bond yield decreased by 78 bps to 1.49%, the 10-year German Bund yield by 76 bps to -0.13%, the French 10-year government bond yield by 79 bps to 0.20% and the 10-year Belgium government bond yield by 74 bps to 0.24%. The 10-year government bond yields declined also in most of the Eurozone peripheral countries: -33 bps to 1.27% in Italy, -18 bps to 8.22% in Greece and -61 bps to 0.54% in Ireland while it increased by 55 bps to 3.09% in Portugal. The Swiss 10-year government bond yield also decreased by 50 bps to -0.57%. In Europe, the iTRAXXs main spreads increased by 6 bps to 84 bps compared to December 31, 2015 and the iTRAXX Crossover by 51 bps to 365 bps. In the United States, the CDX main spread index decreased by 11 bps to 77 bps. The Euro interest rates implied volatility index (based on 10x10 Euro swaptions) increased from 33.8% as of December 31, 2015 to 46.3% as of June 30, 2016. Exchange Rates End of Period Exchange Rate Average Exchange Rate June 30, 2016 December 31, 2015 June 30, 2016 June 30, 2015 (for €1) (for €1) (for €1) (for €1) U.S. Dollar 1.11 1.09 1.12 1.12 Japanese Yen 114 131 124 134 British Sterling Pound 0.83 0.74 0.78 0.73 Swiss Franc 1.08 1.09 1.10 1.06 OPERATING HIGHLIGHTS Significant Acquisitions AXA COMPLETED THE ACQUISITION OF CHARTER PING AN IN THE PHILIPPINES On April 4, 2016, AXA announced that it had completed the acquisition of 100% of Charter Ping An Insurance Co. (“CPA”), the #5 non-life insurer in the Philippines (1), for a total amount of €40 million (2). This acquisition allows AXA to offer Property & Casualty insurance products alongside its current range of Life & Savings products. AXA also extends its successful bancassurance partnership with GT Capital and Metrobank, the #2 bank in the country (3), to include the distribution of Property & Casualty insurance products. (1) Source: Philippines Insurance Commission. (2) EUR 1 = 52.2981 PHP as of March 31st, 2016. (3) Source: Central Bank of Philippines. Half Year 2016 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2016 Significant Disposals DISPOSAL OF TWO REAL ESTATE PROPERTIES IN THE US In 2015, the two buildings, “787 7th Avenue” and “1285 Avenue of Americas”, were reclassified as held for sale. On January 27, 2016, AXA Financial executed the sale of the “787 7th Avenue” fully-owned property, at a sale price of $1,950 million. On May 23, 2016, AXA Financial executed the sale of the “1285 Avenue of Americas” (owned at 50%) for a total sale price of $1,650 million. At 1H16, a total net exceptional gain for the sale of the two buildings is recorded in net income for €963 million after tax ($1,075 million after tax). AXA TO SELL ITS HUNGARIAN BANKING OPERATIONS On February 3, 2016, AXA announced that it had entered into an agreement with OTP Bank Plc to sell its Hungarian banking operations. AXA Bank Hungary is a branch of AXA Bank Europe, managing a credit portfolio put in run-off in 2011, as well as daily banking operations. As this transaction was expected to result in an exceptional loss of €80 million accounted for in net income, a provision had been booked in the Group consolidated financial statements as of December 31, 2015. As of June 30, 2016, the provision amounted to €79m. Completion of the transaction is subject to customary conditions, including obtaining required regulatory approvals, and should be finalized during the second semester of 2016. AXA COMPLETED THE SALES OF ITS PORTUGUESE OPERATIONS On April 1, 2016, AXA announced that it had completed the sale of its Portuguese operations to Ageas, including in particular its entire stake in AXA Portugal Companhia de Seguros SA (“P&C Business”), AXA Portugal Companhia de Seguros de Vida SA (“Life & Savings Business”) as well as AXA Global Direct Seguros y Reaseguros, the Portuguese branch of its direct operations (“Direct Business”) (1). The total cash consideration amounted to €189 million. AXA recorded an exceptional positive impact of €0.1 billion at the closing date, which is accounted for in net income. AXA EXPANDED OPERATIONS IN AFRICA BY LAUNCHING A LLOYD’S SPECIALTY INSURANCE VENTURE WITH CHAUCER On April 19, 2016, AXA targeted the rapidly expanding market for African specialty insurance by partnering with Chaucer, a Lloyd’s specialty insurance group. The new venture, named “AXA Africa Specialty Risks”, will be dedicated to covering specialty insurance lines in Africa, covering business such as political risks, energy and infrastructures. (1) AXA owned 99.7% of the P&C business, 95.1% of the Life business and 100.0% of the Direct business. Half Year 2016 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2016 Both partners are strongly complementary: AXA will bring to the partnership its marketing capabilities, a strong distribution network - AXA is already present in eight African countries - as well as the first global brand in the insurance sector, as ranked by Interbrand (1). Chaucer has strategic alignment towards specialty insurance, strong Lloyd’s underwriting expertise, extensive partnership management experience and established relationships with corporate clients, banks and business producers. The partnership will initially involve AXA’s new Lloyd’s Special Purpose Syndicate 6130 sharing business with Chaucer’s established Syndicate 1084. AXA will continue to work with Chaucer to develop the ability to establish its own Lloyd's business in the future. AXA TO SELL ITS UK OFFSHORE INVESTMENT BONDS BUSINESS BASED IN THE ISLE OF MAN TO LIFE COMPANY CONSOLIDATION GROUP On April 28, 2016, AXA announced that it had entered into an agreement with Life Company Consolidation Group to sell its offshore investment bonds business based in the Isle of Man (“AXA Isle of Man”). Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to occur in the second semester 2016. AXA TO SELL ITS WRAP PLATFORM BUSINESS TO STANDARD LIFE PLC On May 4, 2016, AXA announced that following a strategic review of the UK Life & Savings market conducted by AXA UK, it had agreed to sell its wrap platform business (‘Elevate’) to Standard Life plc. This transaction follows the announcement made on April 28 for the disposal of its UK offshore investment bonds business (‘AXA Isle of Man’). Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to occur in the second semester 2016. AXA also confirmed that it was engaged in discussions for the disposal of its remaining UK Life & Savings assets, namely its direct protection business (‘SunLife’) and its traditional (non-platform) investment and pension business. AXA UK Property & Casualty, Health and Asset Management (‘Architas’) operations were not included in the scope of the strategic review, nor of these transactions. The overall consideration for the sale of the UK Life & Savings businesses included in the contemplated transactions would amount to ca. GBP 633 million (or ca. €790 million). These transactions would generate an exceptional negative Profit & Loss impact of ca. €0.4 billion accounted for in net income. AXA TO SELL ITS INVESTMENT, PENSIONS AND DIRECT PROTECTION BUSINESSES IN THE UK TO PHOENIX GROUP HOLDINGS On May 27, 2016, AXA announced that it had entered into an agreement with Phoenix Group Holdings to sell its (non-platform) investment and pensions business and its direct protection business (“Sunlife”) in the UK. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to occur in the second semester 2016. (1)The Best Global Brands ranking calculates the value of a brand based on three criteria: its financial performance, the strength of its brand and the role of the brand in the purchase of products and services. Half Year 2016 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2016 Capital Operation SHARE REPURCHASE PROGRAM In order to meet its obligation to deliver shares and to eliminate the dilutive effect of certain share-based compensation schemes (1), AXA bought 20,100,000 shares for €460 million on February 2nd, 2016. These shares will either be delivered to the beneficiaries of share-based compensation schemes or cancelled, all in accordance with the share repurchase program (2). Other AFRICA INTERNET GROUP AND AXA PARTNER TO PROVIDE INSURANCE PRODUCTS AND SERVICES TO AFRICAN CUSTOMERS On February 8, 2016, AXA and Africa Internet Group (“AIG”), a leading e-commerce group in Africa announced a partnership whereby AXA would become the exclusive provider of insurance products and services through Jumia and other AIG online and mobile platforms in Africa. As part of the partnership, AXA will also invest €75 million and own approximately 8% of the capital of AIG. Completion of the transaction, including the closing of a previous investment round, took place on March 21, 2016. AXA LAUNCHED A GLOBAL INITIATIVE TO SCALE UP ITS PROTECTION OF TOMORROW’S EMERGING MIDDLE CLASS On February 11, 2016, AXA announced a business initiative to contribute to financial inclusion and better serve the middle class of tomorrow by accelerating the development of its Emerging Customer insurance offer across high-growth markets. Building upon its existing micro-insurance schemes developed locally across Asia, Africa and Latin America that currently protect over 3 million emerging customers, AXA has decided to allocate dedicated resources and expertise to address this growth segment, and develop offerings encompassing Life & Savings, Health, Property & Casualty insurance as well as Assistance. This business is expected to develop innovative solutions, be it in terms of partnerships, products and services, distribution channels or operating models, in order to better address the needs of this client segment. To accelerate the scaling-up of this initiative, AXA has increased to 46% its participation in MicroEnsure, a UK-based leader in the mobile micro-insurance space serving over 20 million emerging customers through partnerships with mobile network operators, banks and microfinance institutions in 17 countries across Asia and Africa. MicroEnsure will become the platform of choice for AXA to develop its emerging customer insurance offer. AXA ANNOUNCED THE SUCCESSFUL PLACEMENT OF €1.5 BILLION DATED SUBORDINATED NOTES DUE 2047 On March 24, 2016, AXA announced the successful placement of €1.5 billion of Reg S subordinated notes due 2047 to institutional investors to refinance, in advance, part of its outstanding debt. The initial spread over swap is 275 basis points. The initial coupon has been set at 3.375% per annum corresponding to a reoffer yield of 3.462%. It will be fixed until the first call date in July 2027 and floating thereafter with a margin including a 100 basis points step-up. Settlement of the notes took place on March 30, 2016. (1) Stock-options plans and performance shares plans (including the AXA Miles plan). (2) AXA share repurchase program has been authorized by the Shareholders’ Meeting of April 30, 2015. Half Year 2016 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2016 The notes will be treated as capital from a regulatory and rating agencies’ perspective within applicable limits. The transaction has been structured for the notes to be eligible as Tier 2 capital under Solvency II. AXA ANNOUNCED THE SUCCESSFUL PLACEMENT OF €500 MILLION SENIOR NOTES DUE 2028 On May 11, 2016, AXA announced the successful placement of €500 million of Reg S senior notes due 2028 to institutional investors to refinance, in advance, part of its outstanding debt. The spread over swap is 55 basis points, corresponding to a fixed coupon of 1.125% per annum. Settlement of the notes took place on May 13, 2016. MANAGEMENT TEAM RENEWAL On March 21, 2016, AXA announced that Henri de Castries, Chairman and Chief Executive Officer of AXA, has decided to retire on September 1, 2016. Following a comprehensive succession planning process led by AXA's Compensation and Governance Committee, AXA's Board of Directors unanimously decided to separate the functions of Chairman of the Board of Directors and Chief Executive Officer, and approved the appointments of Denis Duverne as Non-Executive Chairman of the Board of Directors and Thomas Buberl as Chief Executive Officer of AXA and a member of AXA's Board of Directors and co- opted to replace Henri de Castries, both effective upon Henri de Castries’ retirement on September 1, 2016. From March 21, 2016, Thomas Buberl joined the Group Head Office in Paris and was appointed Deputy CEO (“Directeur Général Adjoint”). He works closely with Henri de Castries and Denis Duverne to ensure an effective leadership transition. On May 27, 2016, AXA announced a series of appointments to form a new management team that will support Thomas Buberl, incoming CEO, in the definition and implementation of the Group’s strategy and management of its global operations. The new Management Committee, AXA's senior executive governance body, notably reflects the strategic importance of the Group’s interactions with its customers and its transformation ambition. It reinforces the role of large countries (Large Markets) and Global Business Lines, while the Group’s Regions are repositioned to focus on the development of emerging and smaller markets (Emerging Markets), in Asia and in the rest of the world. FOCUS AND TRANSFORM: AXA NEW AMBITION 2020 STRATEGY On June 21, 2016, AXA held an investor conference in Paris, during which the new management team presented its strategic plan “Ambition 2020”. The new 5-year plan is articulated around two strategic priorities: focus and transform. The first priority is a continued and immediate focus on sustainable earnings growth over the plan based on selective growth, cost efficiencies, technical margin improvement and an active management of capital and cash. These initiatives will position AXA to grow earnings and increase dividends, even in a context of continued low interest rates. At the same time, AXA will accelerate the transformation of its business model based on initiatives related to meeting rapidly evolving customer expectations in the digital world, moving from a payer model to a partner model, and adapting its workforce capabilities in order to succeed in this ambition. AXA defined clear main financial objectives for 2020E, with an Underlying earnings per share CAGR between 3% and 7%, cumulative Group Operating Free Cash Flows at Euro 28-32 billion between 2016E and 2020E, an adjusted return on equity between 12% and 14% over the period 2016E-2020E and Euro Half Year 2016 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2016 2.1 billion pre-tax cost savings by 2020E. AXA also confirmed its Solvency II ratio target range of 170% - 230%. The above-mentioned range of 3% to 7% underlying earnings per share CAGR reflects cautious assumptions for interest rates with an annual impact ranging between -5% (corresponding to interest rates remaining at June 21, 2016, levels over the next 5 years) and -1% (reflecting a modest rise in interest rates over the next 5 years). A series of measures under management control (e.g. efficiencies, margin improvement, topline growth, M&A) are targeted to contribute 8% underlying earnings per share CAGR, more than offsetting interest rates headwinds. AXA RATINGS On October 29, 2015, S&P reaffirmed the financial strength ratings on AXA Group core subsidiaries at ‘A+’ with a Positive outlook. On June 28, 2016, Fitch reaffirmed all AXA entities' Insurer Financial Strength ratings at ‘AA-’ with a Stable outlook. On July 25, 2016, Moody’s Investors Services reaffirmed the ‘Aa3’ insurance financial strength ratings of AXA’s main operating subsidiaries with a Stable outlook. US DEPARTMENT OF LABOR RULE The U.S. Department of Labor (the “DOL”) issued a final rule on April 6, 2016 that expands the range of activities that would be considered to be fiduciary investment advice under the Employee Retirement Income Security Act of 1974 ("ERISA") when AXA US affiliated advisors and employees provide investment-related information and support to retirement plan sponsors, participants, and Individual Retirement Account (“IRA”) holders. Implementation of the rule will be phased starting April 2017, although certain aspects of the rule covering existing business will not become effective until January 2018. The potential impacts to AXA US business, operations and customer interactions under the new rule will be determined once they complete an assessment of the rule, but it is likely to result in adverse changes to the level and type of services they provide, as well as the nature and amount of compensation and fees that AXA US and their affiliated advisors and firms receive for investment-related services to retirement plans and IRAs. Management estimates that the potential impact of the Final Rule on the new sales of AXA US would amount to ca. -10% of AXA US APE in 2017 with an expected diminishing impact thereafter following mitigating actions. RELATED - PARTY TRANSACTIONS During the first half of the fiscal year 2016, there were (1) no modifications to the related-party transactions described in Note 28 "Related-party transactions" of the audited consolidated financial statements for the fiscal year ended December 31, 2015 included in the full year 2015 Registration Document (pages 331 and 332) filed with the Autorité des marchés financiers and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com), which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2016, and (2) no new transaction concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2016. Half Year 2016 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2016 Risk Factors The principal risks and uncertainties faced by the Group are described in detail in Section 3.1 “Regulation” and Section 3.2 "Risk factors" included in the full year 2015 Registration Document (respectively in pages 154 to 159 and pages 160 to 176) filed with the Autorité des marchés financiers and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com). The description contained in these Sections of the 2015 Registration Document remains valid in all material respects at the date of the publication of this Report regarding the appreciation of the major risks and uncertainties affecting the Group on June 30, 2016 or which Management expects could affect the Group during the remainder of 2016. Events subsequent to June 30, 2016 AXA TO SELL ITS SERBIAN OPERATIONS TO VIENNA INSURANCE GROUP On July 7, 2016, AXA announced that it had entered into an agreement with Vienna Insurance Group to sell both its Life & Savings and Property & Casualty operations in Serbia and exit the Serbian market. Under the terms of the agreement, Vienna Insurance Group AG(1) would acquire 100% of the life (AXA Životno osiguranje Ado) and non-life (AXA Neživotno osiguranje Ado) entities. The parties agreed not to disclose the terms and conditions of the transaction. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals. (1) Vienna Insurance Group AG is the holding company of the Vienna Insurance Group. Half Year 2016 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2016 REVENUES & EARNINGS SUMMARY Consolidated Gross Revenues (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (c) December 31, 2015 published December 31, 2015 restated (c) June 30, 2016 / June 30, 2015 restated (a) & (c) Life & Savings 31,040 31,919 31,722 59,211 58,816 (1.7%) o/w. gross written premiums o/w. fees and revenues from investment contracts with no participating feature Property & Casualty 30,270 116 18,602 30,982 203 18,183 30,881 133 18,183 57,376 371 31,265 57,167 239 31,265 3.7% International Insurance 2,298 2,162 2,162 3,615 3,615 5.1% Asset Management 1,799 1,956 1,956 3,822 3,822 (7.6%) Banking (b) 297 302 302 621 621 (1.5%) Holdings and other companies n/a TOTAL 54,036 54,521 54,324 98,534 98,139 0.2% Revenues are disclosed net of intercompany eliminations. (a) Changes are on a comparable basis. (b) Excluding (i) net realized capital gains or losses and (ii) change in fair value of assets under fair value and of options and derivatives, net banking revenues and total consolidated revenues would respectively amount to €295 million and €54,034 million for half year 2016 and €300 million and €54,322 million for half year 2015 restated. (c) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Consolidated gross revenues amounted to €54,036 million as of June 30, 2016, down 0.5% compared to June 30, 2015 on a reported basis or up 0.2% on a comparable basis. The comparable basis mainly consisted in the adjustment of: (i) the foreign exchange rate movements (€+0.7 billion or +0.7 point) mainly due to the appreciation of average Euro exchange rates against CHF, MXN and GBP, (ii) the acquisition of Genworth in France in 2015 (€-0.4 billion or -0.1 point), (iii) the sale of the Portuguese operations in 2016 (€-0.2 billion or +0.1 point) and (iv) the acquisition of Simplyhealth in the United Kingdom & Ireland in 2015 (€-0.1 billion or -0.2 point). In the comments below, reported figures, changes on a constant exchange rate basis and changes on a comparable basis are restated in order to reflect the disposal of the United Kingdom Life & Savings operations retroactively accounted for as discontinued operations. As a consequence, both 1H16 and 1H15 profit & loss contribution from the United Kingdom Life & Savings operations are flowing through net income, but do not impact gross revenues, APE, underlying earnings and adjusted earnings. Half Year 2016 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings Annual Premium Equivalent (1) Annual Premium Equivalent (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (b) December 31, 2015 published December 31, 2015 restated (b) June 30, 2016 / June 30, 2015 restated (a) & (b) TOTAL 3,274 3,687 3,362 7,376 6,478 (1.9%) G/A Protection & Health 1,326 1,360 1,343 2,681 2,645 5.9% G/A Investment & Savings 745 455 455 943 943 21.9% Unit-Linked 939 1,350 1,187 2,811 2,232 (17.8%) Funds & Other 265 522 377 941 658 (20.9%) Mature markets 2,575 3,007 2,682 6,075 5,177 (5.1%) High growth markets 699 680 680 1,301 1,301 11.2% (a) Changes are on a comparable basis. (b) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Total Life & Savings New Business APE amounted to €3,274 million, down 3% on a reported basis and down 2% on a comparable basis. The decrease in Unit-Linked sales was primarily driven by unfavorable financial market conditions in the Mediterranean & Latin American Region, Belgium and France as well as the implementation of significant regulatory changes in Hong Kong. Funds & Other decreased mainly following lower advisory account sales in the United States combined with the non-repeat of the exceptional sale of a large contract in France in 1H15. This was partly offset by an increase in G/A Savings primarily driven by higher sales in South-East Asia, India & China, Japan and Hong Kong. The growth in G/A Protection & Health products was primarily driven by higher sales in France mainly resulting from an increase in International Employee Benefits and domestic business combined with the exceptional sale of a large contract in Switzerland. In high growth markets, APE grew by 11% mainly driven by South-East Asia, India & China (+28% or €+94 million), partly offset by Hong Kong (-8% or €-20 million). In mature markets, APE decreased by 5% mainly driven by AXA MPS (-36% or €-70 million), France (-6% or €-50 million), Belgium (-61% or €-38 million) and the United States (-2% or €-17 million), partly offset by Japan (+19% or €+38 million). G/A Protection & Health APE (€1,326 million, 40% of total) up 6% (or €+74 million) notably from (i) France (€+28 million) mainly resulting from an increase in International Employee Benefits and domestic business, (ii) Switzerland (€+24 million) driven by the exceptional sale of a large contract, (iii) Spain (€+14 million) driven by the launch of a new product in 2015 and (iv) Hong Kong (€+11 million) driven by the exceptional sale of a large Group Health contract. G/A Savings APE (€745 million, 23% of total) up 22% (or €+135 million) notably from (i) China (€+93 million) following higher Chinese New Year sales of whole life and single premium term products, (ii) Japan (€+43 million) due to the success of new G/A capital light (2) savings products launched in the second half of 2015 and (iii) Hong Kong (€+24 million) mainly driven by the launch of a new generation of savings plans. Unit-Linked APE (€939 million, 29% of total) down 18% (or €-203 million) notably from (i) AXA MPS (€-95 million) driven by lower Protected Unit product sales reflecting unfavorable financial market conditions, (ii) Hong Kong (€-55 million) mainly due to the non-repeat of both the exceptional sale of several large contracts and the carryover of accelerated sales in anticipation of January 1, 2015 regulatory changes and (iii) Belgium (€-29 million) and France (€-27 million) driven by unfavorable financial market conditions, partly offset by (iv) the United States (€+24 (1)Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premium, in line with EEV methodology. APE is Group share. (2) Capital light: General Account Savings products which, at inception, create more AFR than the economic capital they consume. Half Year 2016 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2016 million) mainly driven by higher sales of non-GMxB investment-only individual and employer sponsored products. Funds & Other APE (€265 million, 8% of total) down 21% (or €-70 million) notably from (i) the United States (€-43 million) due to lower advisory account sales and (ii) France (€-30 million) driven by the non-repeat of the exceptional sale of a large contract in 1H15. Property & Casualty Revenues (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 June 30, 2016 / June 30, 2015 (a) TOTAL 18,602 18,183 31,265 3.7% Personal Lines o/w Motor o/w Non-Motor 10,326 6,214 4,112 10,231 6,180 4,051 18,057 10,357 7,701 4.0% 4.4% 3.4% Commercial Lines o/w Motor o/w Non-Motor 8,194 1,608 6,586 7,876 1,568 6,308 13,005 2,783 10,222 2.6% 9.0% 1.0% Mature Markets Direct High Growth Markets 14,407 1,451 2,743 14,082 1,389 2,712 23,374 2,732 5,159 2.0% 6.2% 11.0% (a) Changes are on a comparable basis. Property & Casualty gross revenues were up 2% on a reported basis and up 4% on a comparable basis to €18,602 million. Personal lines revenues increased by 4%, primarily in the Mediterranean & Latin American Region, Direct, the United Kingdom & Ireland, France, Germany and Asia. Commercial lines revenues increased by 3% with growth in the Mediterranean & Latin American Region, the United Kingdom & Ireland and Germany. Overall, tariffs increased by 5%. Personal lines (56% of P&C gross revenues) increased by 4% (or €+406 million) on a comparable basis. Motor revenues increased by 4% (€+269 million) as a result of tariff increases in the Mediterranean & Latin American Region, Direct, the United Kingdom & Ireland and Germany, partly offset by a negative product mix impact in the Mediterranean & Latin American Region: Mediterranean & Latin American Region (+8%) reflecting significant tariff increases mainly in Turkey in order to improve selectivity and profitability, partly offset by lower volumes in mature markets mainly in Spain following pruning actions; Direct (+8%) mainly driven by Japan, the United Kingdom, Poland, France and Spain following a price re-positioning; The United Kingdom & Ireland (+13%) mainly driven by tariff increases in both the United Kingdom and Ireland, partly offset by lower volumes in the United Kingdom; Asia (+5%) as a result of positive new business growth in Malaysia;  Germany (+2%) driven by tariff increases in renewal business. Non-Motor revenues increased by 3% (or €+137 million) mainly driven by tariff increases across the board as well as a positive product mix impact and higher volumes: France (+6%) driven by the extension of a reinsurance treaty and tariff increases in Household and Property; The United Kingdom & Ireland (+4%) driven by higher new business volumes in Household and higher volumes and tariff increases in Health in the United Kingdom; Half Year 2016 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2016 Mediterranean & Latin American Region (+3%) mainly reflecting tariff increases in Mexico, Spain and Turkey in order to restore profitability for Health products, partly offset by lower volumes in Colombia reflecting pruning actions; Asia (+12%) mainly from Hong Kong as a consequence of higher new business volumes in Health. Commercial lines (44% of P&C gross revenues) increased by 3% (or €+206 million) on a comparable basis. Motor revenues increased by 9% (or €+140 million): Mediterranean & Latin American Region (+14%) reflecting tariff increases in Turkey, the Gulf region, Mexico and Spain; The United Kingdom & Ireland (+22%) due to higher new business volumes in the United Kingdom as well as tariff increases in Ireland. Non-Motor revenues increased by 1% (or €+66 million) refecting tariff increases across the board: Germany (+5%) mainly driven by higher volumes in Property;  Mediterranean & Latin American Region (+2%) mainly driven by Health reflecting higher volumes in Mexico, Turkey and Colombia, partly offset by the loss of large accounts in the Gulf Region; partly offset by: France (-2%) from lower volumes in Construction in a context of selective underwriting. Health Revenues (as reported in Life & Savings or Property & Casualty segments) Health gross revenues up 2% on reported basis and up 3% on a comparable basis to €6,240 million driven by (i) Mexico up 26% (or €+69 million) to €280 million mainly driven by tariff increases, (ii) Germany up 4% (or €+54 million) to €1,462 million mainly due to tariff increases and higher new business in full benefit insurance, (iii) France up 3% (or €+47 million) to €1,670 million from Group business due to both tariff and volume increases, partly offset by a decrease in Individual business impacted by negative portfolio developments due to a change in regulation following the Accord National Interprofessionnel starting on January 1st, 2016, and (iv) the United Kingdom & Ireland up 3% (or €+33 million) to €1,065 million driven by both Group and Individual businesses due to growth in Great Britain and internationally, partly offset by (v) the Gulf Region down 22% (or €-68 million) to €244 million mainly due to the loss of large accounts in Group business. International Insurance Revenues International Insurance revenues up 6% on a reported basis and up 5% on a comparable basis to €2,298 million driven by (i) AXA Corporate Solutions Assurance up 4% (or €+65 million) on a comparable basis to €1,546 million mainly driven by Liability and Property and (ii) AXA Assistance up 8% (or €+47 million) on a comparable basis to €646 million mainly driven by the change in accounting methodology of a large contract combined with strong developments in new business and in-force growth in Motor and Home activities. Half Year 2016 Financial Report 16 I ACTIVITY REPORT – HALF YEAR 2016 Asset Management Revenues and Assets Under Management Asset Management revenues decreased by 8% on both reported and comparable basis to €1,799 million driven by both AB and AXA IM mainly stemming from lower management fees as a result of lower average Asset Under Management (AUM) reflecting an adverse market performance. Asset Management Average AUM decreased by 3% (or €-37 billion) on a comparable basis from year- end 2015 to €1,042 billion mainly driven by AXA IM (-5% or €-31 billion) as a result of partial withdrawal of Friends Life assets in 2015 and AB (-1% or €-6 billion) due to lower market levels as well as adverse foreign exchange impact as Euro strengthened against major currencies. Asset Management net inflows amounted to €+19 billion in 1H16 mainly driven by AXA IM (€+17 billion) due to inflows from Asian Joint Ventures (€+16 billion or €+7 billion on a Group share basis) and AB (€+2 billion) due to inflows from fixed income. AB revenues were down 8% (or €-107 million) on a comparable basis to €1,216 million mainly driven by lower investment management fees as a result of lower average AUM, lower Institutional Research Services fees due to lower market levels and trading volumes and lower distribution fees mainly from the retail channel. AB AUM increased by 4% (or €+18 billion) from year-end 2015 to €473 billion as a result of €+26 billion market appreciation and €+2 billion net inflows, partly offset by €-10 billion unfavorable foreign exchange rate impact. AXA Investment Managers revenues decreased by 7% (or €-41 million) on a comparable basis to €583 million, mainly driven by lower management fees as a result of lower average assets, partly offset by higher transaction fees and higher performance fees. AXA Investment Managers AUM increased by 1% (or €+10 billion) from year-end 2015 to €679 billion mainly driven by €+17 billion net inflows, partly offset by €-8 billion market, foreign exchange and scope impacts. Net Banking Revenues Net banking revenues were down 2% (or €-5 million) mainly driven by lower net revenues from banking activities. Half Year 2016 Financial Report 17 I ACTIVITY REPORT – HALF YEAR 2016 CONSOLIDATED UNDERLYING EARNINGS, ADJUSTED EARNINGS AND NET INCOME GROUP SHARE (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (b) December 31, 2015 published December 31, 2015 restated (b) Gross written premiums Fees and revenues from investment contracts without participating feature 51,003 116 51,166 203 51,065 133 91,938 371 91,730 239 Revenues from insurance activities 51,119 51,369 51,198 92,309 91,968 Net revenues from banking activities 210 299 299 560 560 Revenues from other activities 2,622 2,852 2,826 5,609 5,554 TOTAL REVENUES 53,951 54,521 54,323 98,478 98,083 Change in unearned premium reserves net of unearned revenues and fees (4,543) (4,312) (4,328) (247) (281) Net investment result excluding financing expenses (a) 10,856 12,961 12,132 16,875 16,247 Technical charges relating to insurance activities (a) (45,678) (47,400) (46,507) (85,045) (84,296) Net result of reinsurance ceded (72) (541) (541) (881) (881) Bank operating expenses (26) (31) (31) (71) (71) Insurance acquisition expenses (5,450) (5,406) (5,300) (10,406) (10,190) Amortization of value of purchased life business in force (84) (108) (108) (153) (153) Administrative expenses (4,816) (5,024) (4,986) (9,752) (9,681) Valuation allowances on tangible assets (0) 0 0 Change in value of goodwill (2) (2) (2) (4) (4) Other (38) (109) (109) (588) (586) Other operating income and expenses (56,165) (58,620) (57,583) (106,900) (105,864) OPERATING EARNINGS BEFORE TAX 4,099 4,549 4,544 8,205 8,185 Net income from investments in affiliates and associates 105 71 71 174 174 Financing expenses (113) (253) (253) (500) (500) UNDERLYING EARNINGS BEFORE TAX 4,091 4,367 4,362 7,879 7,859 Income tax expenses (861) (1,069) (1,091) (1,943) (1,990) Minority interests (167) (196) (196) (362) (362) UNDERLYING EARNINGS GROUP SHARE 3,063 3,102 3,075 5,574 5,507 Net realized capital gains or losses attributable to shareholders 301 382 382 433 433 ADJUSTED EARNINGS GROUP SHARE 3,364 3,485 3,457 6,008 5,941 Profit or loss on financial assets (under fair value option) & derivatives (647) (250) (250) (229) (231) Exceptional operations (including discontinued operations) 626 (64) (36) 91 158 Goodwill and other related intangible impacts (45) (42) (42) (74) (74) Integration and restructuring costs (91) (52) (52) (178) (177) NET INCOME GROUP SHARE 3,207 3,077 3,077 5,617 5,617 (a) For the periods ended June 30, 2016 and June 30, 2015 restated, "the change in fair value of assets backing contracts with financial risk borne by policyholders" impacted the net investment result for respectively €+425 million and €+5,252 million, and benefits and claims by the offsetting amounts respectively. (b) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Half Year 2016 Financial Report 18 I ACTIVITY REPORT – HALF YEAR 2016 Group Underlying Earnings (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (a) December 31, 2015 published December 31, 2015 restated (a) Life & Savings 1,915 1,862 1,835 3,503 3,436 Property & Casualty 1,176 1,286 1,286 2,230 2,230 International Insurance 86 126 126 193 193 Asset Management 213 222 222 458 458 Banking 60 56 56 97 97 Holdings and other companies (387) (451) (451) (906) (906) UNDERLYING EARNINGS 3,063 3,102 3,075 5,574 5,507 (a) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Group underlying earnings amounted to €3,063 million, stable versus 1H15 restated on a reported basis. On a constant exchange rate basis, underlying earnings were stable as higher underlying earnings from the Life & Savings and Holdings segments were offset by a lower contribution from Property & Casualty and International Insurance segments. Life & Savings underlying earnings amounted to €1,915 million. On a reported basis, Life & Savings underlying earnings were up €80 million (or +4%). Excluding the contribution of Genworth and the activities in Portugal and on a constant exchange rate basis, Life & Savings underlying earnings increased by €70 million (or +4%) mainly attributable to Germany (€+54 million), Japan (€+23 million), Belgium (€+22 million), South East Asia, India & China (€+16 million) and Hong Kong (€+13 million), partly offset by the United States (€-49 million) and the Mediterranean & Latin American Region (€-4 million), mainly resulting from: Lower investment margin (€-35 million or -3%) primarily in (i) Germany (€-18 million) mainly driven by lower reinvestment yields as well as a timing effect on private equity dividends and (ii) France (€-14 million) as a consequence of lower reinvestment yields, partly offset by a decrease in interests credited to policyholders. This was partly offset by (iii) Belgium (€+22 million) mainly reflecting a favorable timing effect on the distribution of mutual fund dividends, as well as lower credited interests and policyholder bonus allocation. Lower fees & revenues (€-268 million or -6%): o Loadings on premium and mutual funds were down €158 million mainly in (i) the Mediterranean & Latin American Region (€-78million) mainly as a consequence of lower Unearned Revenues Reserves amortization at AXA MPS (partly offset in Deferred Acquisition Costs) mainly reflecting lower Protected Unit product surrenders, (ii) Japan (€-53 million) mainly due to a reclassification of loadings on premium to surrender margin (€-73 million) and (iii) France (€-44 million) mainly due to a lower opening adjustment (€- 77 million) in Unearned Revenues Reserves (more than offset in Deferred Acquisition Costs); o Unit-Linked management fees were down €78 million mainly driven by (i) the United States (€-96 million) reflecting lower average separate account balances linked to a lower average equity market level, partly offset by (ii) France (€+11 million) from a positive volume effect; o Other revenues were down €32 million mainly driven by (i) France (€-17 million) and (ii) Hong Kong (€-15 million). Lower net technical margin (€-3 million or stable) mainly attributable to (i) France (€-98 million) mainly due to the non-repeat of exceptional positive reserve developments in Group Protection, (ii) the United States (€-66 million) due to unfavorable Variable Annuity GMxB results, partly offset by (iii) Japan (€+78 million) mainly due to the above-mentioned reclassification from loadings on premium (€+73 million) as well as an improved mortality experience in Protection and Unit-Linked and (iv) Germany (€+54 million) due to an improved margin for Variable Annuity GMxB products (€+48 million). Lower expenses (€+170 million or -5%) as a result of: Half Year 2016 Financial Report 19 I ACTIVITY REPORT – HALF YEAR 2016 o Lower administrative expenses (€+115 million) mainly due to the positive impacts of cost savings programs, as well as lower asset-based sales compensation in the United States; o Lower acquisition expenses (€+54 million) mainly in France (€+95 million) reflecting lower Deferred Acquisition Costs amortization (partly offset by a change in Unearned Revenues Reserves for €-77 million), partly offset by Germany (€-54 million) mainly due to the non- repeat of the favorable one-off impact of the reduction of the deferred policyholder participation rate in 1H15 in Life. Lower tax expenses and minority interests (€+163 million or -30%) driven by lower pre-tax underlying earnings and higher positive tax one-offs mainly in the United States (€+94 million in 1H15 and €+154 million in 1H16) and Germany (€0 million in 1H15 and €+35 million in 1H16), partly offset by Japan (€+15 million in 1H15 and €+9 million in 1H16). Property & Casualty underlying earnings amounted to €1,176 million. On a reported basis, Property & Casualty underlying earnings were down €110 million (or -9%). Excluding the contribution of Genworth and the activities in Portugal and on a constant exchange rate basis, Property & Casualty underlying earnings decreased by €82 million (or -6%) mainly attributable to Germany (€-56 million), Belgium (€-49 million) and the United Kingdom & Ireland (€-40 million), partly offset by Direct (€+51 million). Lower net technical result (€-128 million or -17%) driven by: o Current year loss ratio deteriorated by 1.0 point as a result of (i) higher Nat Cat charges (+0.7 point) mainly in Germany (€66 million due to Marine and Elvira storms) and in France (€52 million due to the June floods) combined with (ii) a deteriorated claims experience (+0.3 point) due to Belgium as a consequence of the floods in May and June 2016 (€27 million) and in March 2016 (€24 million), the Mediterranean & Latin American Region due to a deterioration in Motor in Turkey and Italy, as well as the United Kingdom mainly in Commercial Motor reflecting an increase in average costs; the terrorist attacks o Higher positive prior year reserve developments by 0.4 point to -2.2 points (compared to -1.8 points in 1H15) with positive developments in Direct, mainly in the United Kingdom (€+53 million) and in France (€+48 million), as well as in the Mediterranean & Latin American Region (€+37 million), mainly in Turkey (€+29 million) due to less unfavorable prior year reserve development in Motor; o Higher expense ratio by 0.3 point to 26.4% driven by (i) the acquisition expense ratio up 0.4 point mainly driven by higher commissions notably in the Mediterranean & Latin Region, partly offset by (ii) the administrative expense ratio down 0.1 point mainly reflecting the positive impacts of cost savings programs; o As a result, the combined ratio deteriorated by 0.9 point to 96.0% while current year combined ratio deteriorated by 1.3 points to 98.2%. Lower investment result (€-31 million or -3%) primarily driven by (i) the United Kingdom & Ireland (€-11 million) with lower income from alternative assets and corporate bonds and (ii) the Mediterranean & Latin American Region (€-7 million), notably in Italy and Spain mainly due to the non-repeat of positive seasonality impact of mutual fund distributions in 1H15. Lower tax expenses and minority interests (€+60 million or -11%) mainly driven by lower pre- tax underlying earnings. Health underlying earnings (as reported in Life & Savings or Property & Casualty segments) decreased by 5% (or €-11 million) on a comparable basis to €224 million mainly driven by (i) lower results from equity-method entities in Asia, (ii) lower investment results in the UK and Japan, partly offset by (iii) a higher technical result driven by higher volumes. Combined ratio remained stable at 95.5%. International insurance underlying earnings amounted to €86 million. On a constant exchange rate basis, underlying earnings decreased by €40 million (or -32%) mainly attributable to (i) AXA Corporate Solutions Assurance (€-31 million) mainly due to lower prior year adjustments and (ii) Other international activities (€-9 million) mainly due to unfavorable developments on run-off portfolios. Half Year 2016 Financial Report 20 I ACTIVITY REPORT – HALF YEAR 2016 Asset Management underlying earnings amounted to €213 million. On a constant exchange rate basis, underlying earnings decreased by €7 million (or -3%) attributable to AB (€-10 million) reflecting lower revenues, partly offset by lower compensation expenses, partly offset by AXA Investment Managers (€+3 million) mainly due to lower taxes. Banking underlying earnings amounted to €60 million. On a constant exchange rate basis, underlying earnings increased by €4 million (or +7%) mainly attributable to Belgium (€+3 million) as a result of a positive timing effect on bank levies and improved cost of risk, partly offset by lower operating net banking revenues. Holdings and other companies underlying earnings amounted to €-387 million. On a constant exchange rate basis, underlying earnings increased by €64 million (or +14%) mainly driven by AXA SA (€+59 million) as a consequence of lower financial charges reflecting the interest rate management program implemented in a context of a lower interest environment. Group Adjusted Earnings to Net Income Group net realized capital gains attributable to shareholders amounted to €301 million. On a constant exchange rate basis, Group net realized capital gains and losses attributable to shareholders decreased by €81 million mainly due to: €+12 million higher realized capital gains to €479 million mainly driven by higher realized capital gains on real estate (€+28 million), partly offset by lower realized gains on fixed income assets (€-13 million) to €101 million; €-111 million higher impairments to €-194 million mainly driven by equity securities (€-102 million); €+18 million more favorable intrinsic value to €+16 million related to equity hedging derivatives. As a result, adjusted earnings amounted to €3,364 million (or -3%). On a constant exchange rate basis, adjusted earnings decreased by €71 million (or -2%). Net income amounted to €3,207 million (or +4%). On a constant exchange rate basis, net income increased by €125 million (+4%) mainly as a result of: positive exceptional and discontinued operations impacts (€+637 million) to €626 million mainly due to the gain on the sale of two real estate properties in New York (€+1.0 billion) and the sale of AXA Portugal (€+0.1 billion), partly offset by the anticipated loss related to the disposal of the United Kingdom Life & Savings operations (€-0.4 billion); partly offset by a more unfavorable change in the fair value of financial assets and derivatives net of foreign exchange impacts; down €396 million to €-647 million which can be analyzed as follows: o €-130 million from the change in fair value of assets accounted for under fair value option driven by the change in fair value of equity and private equity funds; o €-357 million from the change in fair value of hedging derivatives not eligible for hedge accounting under IAS 39; o €-160 million following adverse foreign exchange rate movements on investments denominated in foreign currencies as well as an unfavorable change in fair value of economic hedge derivatives not eligible for hedge accounting under IAS 39;  higher negative impact from integration and restructuring costs (€-40 million) to €-91 million. lower adjusted earnings (€-71 million); Half Year 2016 Financial Report 21 I ACTIVITY REPORT – HALF YEAR 2016 CONSOLIDATED SHAREHOLDERS’ EQUITY As of June 30, 2016, consolidated shareholders' equity totalled €74.1 billion. The movements in shareholders' equity since December 31, 2015 are presented in the table below: (in Euro million) Shareholders' Equity At December 31, 2015 68,475 Share Capital (5) Capital in excess of nominal value (90) Equity-share based compensation 11 Treasury shares sold or bought in open market (143) Deeply subordinated debt interests charges (140) Fair value recorded in shareholders' equity 6,756 Impact of currency fluctuations (338) Payment of N-1 dividend (2,656) Other (158) Net income for the period 3,207 Actuarial gains and losses on pension benefits (827) At June 30, 2016 74,093 SHAREHOLDER VALUE Earnings per share (“EPS”) (in Euro million ) June 30, 2016 June 30, 2015 published June 30, 2015 restated (a) December 31, 2015 published December 31, 2015 restated (a) June 30, 2016 / June 30, 2015 published (in Euro million ) Basic Fully diluted Basic Fully diluted Basic Fully diluted Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares Net income (Euro per Ordinary Share) Adjusted earnings (Euro per Ordinary Share) Underlying earnings (Euro per Ordinary Share) (a) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. 2,415 2,441 2,422 2,429 2,449 2,438 2,438 2,449 2.18 2.19 1.19 1.20 1.19 1.27 1.20 1.27 1.35 1.34 2.35 1.33 2.34 1.37 1.35 1.36 1.20 1.21 1.19 1.21 2.17 2.16 1.21 1.20 2,429 2.19 2.32 2.14 2,441 2.18 2.31 2.13 5.9% (2.3%) 0.1% 6.1% (2.1%) 0.3% Half Year 2016 Financial Report 22 I ACTIVITY REPORT – HALF YEAR 2016 Return On Equity (“ROE”) (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (c) June 30, 2016 / June 30, 2015 restated (c) ROE 9.1% 9.5% 9.5% (0.3 pt) Net income 3,207 3,077 3,077 Average shareholders' equity 70,209 65,069 65,069 Adjusted ROE 14.6% 16.1% 16.0% (1.4 pt) Adjusted earnings (a) 3,224 3,331 3,303 Average shareholders' equity (b) 44,225 41,270 41,270 Underlying ROE 13.2% 14.3% 14.2% (0.9 pt) Underlying earnings (a) 2,923 2,948 2,921 Average shareholders' equity (b) 44,225 41,270 41,270 (a) Including an adjustment to reflect net financial charges related to undated debt (recorded through shareholders' equity). (b) Excluding fair value of invested assets and derivatives and undated debt (both recorded through shareholders' equity). (c) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Half Year 2016 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2016 LIFE & SAVINGS SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share attributable to AXA’s Life & Savings segment for the periods indicated: Life & Savings segment (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (b) December 31, 2015 published December 31, 2015 restated (b) Gross revenues (a) 31,146 32,006 31,806 59,403 59,003 APE (Group share) 3,274 3,687 3,362 7,376 6,478 Investment margin 1,339 1,385 1,384 2,784 2,780 Fees & revenues 3,906 4,294 4,152 8,386 8,097 Net technical margin 629 589 582 609 594 Expenses (3,555) (3,836) (3,691) (7,246) (6,957) Amortization of VBI (84) (108) (108) (153) (153) Other 80 64 64 138 138 Underlying earnings before tax 2,315 2,388 2,384 4,518 4,498 Income tax expenses / benefits (360) (470) (492) (917) (963) Minority interests (40) (56) (57) (98) (99) Underlying earnings Group share 1,915 1,862 1,835 3,503 3,436 Net capital gains or losses attributable to shareholders net of income tax 140 202 202 259 259 Adjusted earnings Group share 2,055 2,064 2,037 3,762 3,695 Profit or loss on financial assets (under FV option) & derivatives (191) 63 63 (121) (122) Exceptional operations (including discontinued operations) (392) (15) 12 212 279 Goodwill and other related intangibles impacts (11) (7) (7) (11) (11) Integration and restructuring costs (26) (11) (11) (35) (33) Net income Group share 1,435 2,094 2,094 3,808 3,808 (a) Before intercompany eliminations. (b) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Half Year 2016 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2016 Consolidated Gross revenues (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (e) December 31, 2015 published December 31, 2015 restated (e) France 7,820 8,254 8,254 16,077 16,077 United States 6,923 6,761 6,761 13,622 13,622 United Kingdom 383 706 Japan 2,597 2,002 2,002 4,194 4,194 Germany 3,342 3,317 3,317 6,684 6,684 Switzerland 5,119 5,372 5,372 7,177 7,177 Belgium 614 1,021 1,021 1,716 1,716 Central & Eastern Europe (a) 144 161 161 298 298 Mediterranean & Latin American Region (b) 2,858 3,176 3,176 5,709 5,709 Hong Kong 1,262 1,221 1,221 2,540 2,540 South-East Asia, India & China (c) 290 257 257 522 522 Other (d) 177 81 264 160 466 TOTAL 31,146 32,006 31,806 59,403 59,003 Intercompany transactions (106) (87) (84) (192) (187) Contribution to consolidated gross revenues 31,040 31,919 31,722 59,211 58,816 High growth markets 1,984 1,973 1,973 4,001 4,001 Mature markets 29,056 29,946 29,749 55,210 54,815 (a) Includes Poland, Czech Republic and Slovakia. (b) Mediterranean & Latin American Region includes Italy, Spain, Portugal, Greece, Turkey, Morocco, Mexico and Colombia. (c) South-East Asia, India & China revenues include Singapore and non bancassurance subsidiaries in Indonesia. (d) Other correspond to Luxembourg, AXA Life Invest Services, Architas, Family Protect and AXA Life Europe UK. (e) Restated: restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. The remaining Life & Savings business in the UK have been reclassified in Other countries. Underlying earnings (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (e) December 31, 2015 published December 31, 2015 restated (e) France 418 421 421 824 824 United States 464 513 513 854 854 United Kingdom (e) 0 27 (0) 75 0 Japan 273 230 230 412 412 Germany 126 72 72 165 165 Switzerland 159 166 166 328 328 Belgium 114 91 91 163 163 Central & Eastern Europe (a) 14 18 18 33 33 Mediterranean & Latin American Region (b) 68 78 78 173 173 Hong Kong 198 185 185 353 353 South-East Asia, India & China (c) 83 72 72 145 145 Other (d) (2) (12) (12) (22) (14) UNDERLYING EARNINGS 1,915 1,862 1,835 3,503 3,436 High growth markets 305 278 278 548 548 Mature markets 1,611 1,585 1,557 2,955 2,888 (a) Includes Poland, Czech Republic and Slovakia. (b) Mediterranean & Latin American Region includes Italy, Spain, Portugal, Greece, Turkey, Morocco, Mexico and Colombia. (c) South-East Asia, India & China earnings include Indonesia, Thailand, Philippines, China, India and Singapore. (d) Other corresponds to Luxembourg, AXA Life Invest Services, Architas, Family Protect and AXA Life Europe UK. (e) Restated: restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. The remaining Life & Savings business in the UK have been reclassified in Other countries. Half Year 2016 Financial Report 25 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – France (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 7,820 8,254 16,077 APE (Group share) 858 870 1,767 Investment margin 573 583 1,191 Fees & revenues 880 929 1,815 Net technical margin 320 367 714 Expenses (1,201) (1,292) (2,523) Amortization of VBI Other 5 5 9 Underlying earnings before tax 577 592 1,207 Income tax expenses / benefits (157) (169) (380) Minority interests (1) (1) 2 Underlying earnings Group share 418 421 824 Net capital gains or losses attributable to shareholders net of income tax 37 72 114 Adjusted earnings Group share 455 493 939 Profit or loss on financial assets (under FV option) & derivatives (50) 47 67 Exceptional operations (including discontinued operations) 37 (9) (18) Goodwill and other related intangibles impacts (1) Integration and restructuring costs (12) Net income Group share 429 532 988 (a) Before intercompany eliminations. Gross Revenues amounted to €7,767 million net of intercompany eliminations as of June 30, 2016. In the comments below, the comparable basis excludes the contribution of Genworth activities, consolidated starting from December 31, 2015. Gross revenues decreased by €434 million (-5%) to €7,820 million. On a comparable basis, gross revenues decreased by €512 million (-6%): G/A Protection & Health revenues (46% of gross revenues) increased by €109 million (+3%) driven by a €101 million increase in Group Protection & Health driven by both tariff and volume increases and a €22 million increase in Individual Protection reflecting a significant growth in new contracts. impacted by negative portfolio developments due to a change in regulation following the Accord National Interprofessionnel starting on January 1st, 2016; Individual Health decreased by €14 million, G/A Savings revenues (34% of gross revenues) decreased by €150 million (-5%) in line with the strategy to focus on products with a significant Unit-Linked component; Unit-Linked revenues (20% of gross revenues) decreased by €198 million (-12%) reflecting unfavorable market conditions; Funds & other revenues (0.2% of gross revenues) decreased by €297 million due to the non- repeat of the exceptional sale of a large contract in 1H15. APE decreased by €13 million (-1%) to €858 million. On a comparable basis, APE decreased by €50 million (-6%): G/A Protection & Health sales (52% of APE) increased by €28 million (+7%) mainly driven by a €21 million (+7%) increase in Group Protection & Health mainly resulting from an increase in International Employee Benefits and domestic business. Individual Protection sales rose by €4 million (+11%) reflecting an increase in new contracts and a higher average premium. Individual Half Year 2016 Financial Report 26 I ACTIVITY REPORT – HALF YEAR 2016 Health sales increased by €3 million (+7%), in line with the strategy to focus on self-employed and retirees; G/A Savings sales (29% of APE) decreased by €21 million (-8%), in line with the strategy to focus on products with a significant Unit-Linked component; Unit-Linked sales (19% of APE) decreased by €27 million (-14%) reflecting unfavorable market conditions; Funds & other sales (0.2% of APE) decreased by €30 million due to the non-repeat of the exceptional sale of a large contract in 1H15. Investment margin decreased by €11 million (-2%) to €573 million. On a comparable basis, investment margin decreased by €14 million (-2%) mainly due to lower reinvestment yields, partly offset by a decrease in interests credited to policyholders. Fees & revenues decreased by €49 million (-5%) to €880 million. On a comparable basis, fees & revenues decreased by €50 million (-5%) mainly due to a lower opening adjustment (€-77 million) in Unearned Revenues Reserves (more than offset in Deferred Acquisition Costs), partly offset by a €35 million increase in loadings on premium in Protection driven by higher volumes (€12 million) and a change in the loading rate (€24 million, fully offset in net technical margin). Net technical margin decreased by €47 million (-13%) to €320 million. On a comparable basis, net technical margin decreased by €98 million (-27%) mainly due to the non-repeat of exceptional positive reserve developments in Group Protection in 1H15 and a higher claim ratio partly driven by the above- mentionned change in the loading rate (€24 million fully offset in fees & revenues). Expenses decreased by €91 million (-7%) to €-1,201 million. On a comparable basis, expenses decreased by €129 million (-10%) mostly due to the decrease in amortization of Deferred Acquisition Costs (€+99 million, partly offset in Unearned Revenues Reserves) as well as lower general expenses (€24 million). As a result, the underlying cost income ratio decreased by 1.0 point to 67.7%. On a comparable basis, the underlying cost income ratio decreased by 1.0 point. Income tax expenses decreased by €12 million (-7%) to €-157 million. On a comparable basis, income tax expenses decreased by €21 million (-12%) driven by lower pre-tax earnings and a decrease in the corporate tax rate from 38% to 34.43%. Underlying earnings decreased by €3 million (-1%) to €418 million. On a comparable basis, underlying earnings decreased by €11 million (-3%). Adjusted earnings decreased by €38 million (-8%) to €455 million. On a comparable basis, adjusted earnings decreased by €46 million (-9%) driven by lower underlying earnings and lower net realized capital gains (€-35 million), mainly on equities. Net income decreased by €103 million (-19%) to €429 million. On a comparable basis, net income decreased by €109 million (-21%) driven by lower adjusted earnings, as well as an unfavorable change in the fair value of both mutual funds and interest rate and foreign exchange derivatives not eligible for hedge accounting, partly offset by realized gains on the disposal of AXA Portugal. Half Year 2016 Financial Report 27 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations - United States (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 6,923 6,761 13,622 APE (Group share) 821 838 1,656 Investment margin 263 275 581 Fees & revenues 1,239 1,325 2,572 Net technical margin (135) (69) (725) Expenses (944) (953) (1,505) Amortization of VBI (9) (2) (2) Other Underlying earnings before tax 413 575 921 Income tax expenses / benefits 51 (62) (67) Minority interests 0 Underlying earnings Group share 464 513 854 Net capital gains or losses attributable to shareholders net of income tax 33 (8) (5) Adjusted earnings Group share 497 505 849 Profit or loss on financial assets (under FV option) & derivatives (10) 18 (29) Exceptional operations (including discontinued operations) 8 Goodwill and other related intangibles impacts (0) (0) (0) Integration and restructuring costs (2) (0) (2) Net income Group share 493 523 818 Average exchange rate : 1.00 € = $ 1.116 1.116 1.119 (a) Before intercompany eliminations. Gross Revenues amounted to €6,921 million net of intercompany eliminations as of June 30, 2016. Gross revenues increased by €162 million (+2%) to €6,923 million. On a comparable basis, gross revenues increased by €163 million (+2%): Variable Annuity revenues (71% of gross revenues) increased by €209 million (+4%) due to strong sales of non-GMxB investment-only individual and employer sponsored products; Life revenues (20% of gross revenues) decreased by €4 million (0%) primarily driven by lower sales of G/A Protection products, partly offset by higher renewal premiums; Asset Management fees (7% of gross revenues) decreased by €37 million (-7%) reflecting unfavorable market conditions and lower average asset balances; Mutual funds revenues (2% of gross revenues) decreased by €5 million (-4%) reflecting lower advisory fees and lower sales. APE decreased by €17 million (-2%) to €821 million. On a comparable basis, APE decreased by €17 million (-2%): Variable Annuity sales (60% of APE) increased by €34 million (+7%) mainly due to higher sales of non-GMxB investment-only individual and employer sponsored products; Mutual funds sales (30% of APE) decreased by €42 million (-15%) due to lower advisory account sales reflecting unfavorable market conditions; Life sales (10% of APE) decreased by €9 million (-10%) driven by lower sales in G/A Protection products. Half Year 2016 Financial Report 28 I ACTIVITY REPORT – HALF YEAR 2016 Investment margin decreased by €12 million (-4%) to €263 million. On a constant exchange rate basis, investment margin decreased by €12 million (-4%) mainly driven by lower distributions from private equity investments and lower reinvestment yields on fixed income assets. Fees & revenues decreased by €86 million (-7%) to €1,239 million. On a constant exchange rate basis, fees & revenues decreased by €86 million (-6%) mainly due to lower fees (€-96 million) reflecting lower average separate account balances linked to a lower average equity market level. Net technical margin fell by €66 million (-96%) to €-135 million. On a constant exchange rate basis, net technical margin decreased by €66 million (-96%) mainly due to unfavorable Variable Annuity GMxB results. Expenses decreased by €9 million (-1%) to €-944 million. On a constant exchange rate basis, expenses decreased by €9 million (-1%): Expenses excluding Deferred Acquisition Costs amortization decreased by €37 million due to lower asset-based sales compensation as a result of lower average balances and lower mutual funds products sales; Deferred Acquisition Costs amortization increased by €27 million due to the one-off impact of the updated expected future interest margin assumptions of G/A Protection products partly offset by the non-repeat of a reclassification of some acquisition costs in 1H15. Amortization of VBI increased by €7 million to €-9 million. On a constant exchange rate basis, amortization of VBI increased by €7 million. As a result, the underlying cost income ratio increased by 7.3 points to 69.8%. Income tax expenses decreased by €113 million from a tax expense of €-62 million to a tax benefit of €51 million. On a constant exchange rate basis, income tax expenses decreased by €113 million, primarily due to a decrease in pre-tax earnings and higher positive tax one-offs (€94m in 1H15 and €154m in 1H16). Underlying earnings decreased by €49 million (-10%) to €464 million. On a constant exchange rate basis, underlying earnings decreased by €49 million (-10%). Adjusted earnings decreased by €8 million (-2%) to €497 million. On a constant exchange rate basis, adjusted earnings decreased by €8 million (-2%) driven by lower underlying earnings, partly offset by higher net realized capital gains on fixed income assets. Net income decreased by €29 million (-6%) to €493 million. On a constant exchange rate basis, net income decreased by €29 million (-6%) due to lower adjusted earnings as well as mark-to-market effects. Half Year 2016 Financial Report 29 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations - United Kingdom (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (b) December 31, 2015 published December 31, 2015 restated (b) Gross revenues (a) 383 706 APE (Group share) 346 935 Investment margin 2 6 Fees & revenues 163 336 Net technical margin 4 13 Expenses (164) (325) Amortization of VBI Other Underlying earnings before tax 5 30 Income tax expenses / benefits 22 45 Minority interests 0 (0) (0) (0) (0) Underlying earnings Group share 0 27 (0) 75 (0) Net capital gains or losses attributable to shareholders net of income tax 0 (0) 0 Adjusted earnings Group share 0 28 (0) 75 (0) Profit or loss on financial assets (under FV option) & derivatives (3) (2) Exceptional operations (including discontinued operations) (403) 28 67 Goodwill and other related intangibles impacts (0) (0) Integration and restructuring costs (1) 0 (2) 0 Net income Group share (403) 23 28 72 67 Average exchange rate : 1.00 € = £ 0.779 0.733 0.733 0.731 0.731 (a) Before intercompany eliminations. (b) Restated: Restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Following the disposal announcements during the first semester, the United Kingdom Life & Savings contribution has been restated as discontinued operations for both 2015 and 2016. As a consequence, the profit and loss contribution of the business has been recognized in net income. Net income decreased by €431 million to €-403 million. On a constant exchange rate basis, net income decreased by €457 million mainly reflecting the anticipated loss related to the disposal of the United Kingdom Life & Savings operations (€-0.4billion). Half Year 2016 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – Japan (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 2,597 2,002 4,194 APE (Group share) 252 194 418 Investment margin (0) 0 35 Fees & revenues 656 665 1,319 Net technical margin 130 43 48 Expenses (389) (370) (782) Amortization of VBI (7) (11) (23) Other Underlying earnings before tax 390 326 597 Income tax expenses / benefits (114) (92) (180) Minority interests (4) (5) (5) Underlying earnings Group share 273 230 412 Net capital gains or losses attributable to shareholders net of income tax 0 0 (0) Adjusted earnings Group share 273 230 411 Profit or loss on financial assets (under FV option) & derivatives (63) (32) (119) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 210 198 292 Average exchange rate : 1.00 € = Yen 124.482 134.222 135.357 (a) Before intercompany eliminations. Gross Revenues amounted to €2,597 million net of intercompany eliminations as of June 30, 2016. Gross revenues increased by €595 million (+30%) to €2,597 million. On a comparable basis, gross revenues increased by €407 million (+20%): G/A Protection & Health revenues (67% of gross revenues) increased by €9 million (+1%) mainly reflecting higher in-force revenues from Term, Term Rider and Nursing Care Rider products (€+23 million), partly offset by a decrease in the in-force revenues from the portfolios of Increasing Term, Increasing Term Rider, Whole Life, Endowment (run-off portfolios) and Group Life products (€-13 million); G/A Savings revenues (27% of gross revenues) increased by €438 million (+212%) mainly due to the success of new G/A capital light(1) Single Premium Whole Life products (€+430 million) launched in the second half of 2015; Unit-Linked revenues (7% of gross revenues) decreased by €40 million (-20%) due to lower sales of Variable Annuity products (€-81 million) in line with the strategic decision to stop sales, partly offset by higher new business in Unit-Linked Protection products (€+40 million). APE increased by €58 million (+30%) to €252 million. On a comparable basis, APE increased by €38 million (+19%): (1) Capital light:General Account Savings products which, at inception, create more AFR than the economic capital they consume. Half Year 2016 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2016 G/A Protection & Health sales (58% of APE) decreased by €9 million (-6%) mainly due to lower new business sales in Health in the context of strong competition and in Protection with Savings in line with the strategy of curtailing sales; Unit-Linked sales (24% of APE) increased by €3 million (+7%) driven by higher sales of Unit- Linked Protection products (€+13 million) reflecting client appetite and continued commercial efforts, partly offset by Variable Annuity products (€-10 million) following the above-mentioned strategic decision to stop sales; G/A Savings sales (19% of APE) increased by €43 million (+100%) due to the success of new G/A capital light(1) Single Premium Whole Life products (€+43 million) launched in the second half of 2015. Investment margin remained stable to €0 million. Fees & revenues decreased by €9 million (-1%) to €656 million. On a constant exchange rate basis, fees & revenues decreased by €57 million (-9%) mainly due to a reclassification of loadings on premium to surrender margin (€-73 million), partly offset by increased new business in Unit-Linked products and higher Unearned Revenues Reserves amortization of Variable Annuity products (mostly offset in Deferred Acquisition Costs amortization). Net technical margin increased by €87 million (+203%) to €130 million. On a constant exchange rate basis, net technical margin increased by €78 million (+181%) mainly due to the above-mentioned reclassification (€+73 million) as well as an improved mortality experience in Protection and Unit-Linked as well as a positive one-off model change impact in Term Rider (€+10 million), partly offset by deteriorated hedging results in Variable Annuity products reflecting higher equity market volatility. Expenses increased by €18 million (+5%) to €-389 million. On a constant exchange rate basis, expenses decreased by €10 million (-3%) mainly due to timing differences of non-payroll expenses, partly offset by higher Deferred Acquisition Costs amortization (more than offset by higher Unearned Revenues Reserves amortization) and higher digital investments. Amortization of VBI decreased by €5 million (-41%) to €-7 million. On a constant exchange rate basis, amortization of VBI decreased by €5 million (-45%) due to in-force growth. As a result, the underlying cost income ratio decreased by 3.6 points to 50.3%. Income tax expenses increased by €22 million (+24%) to €-114 million. On a constant exchange rate basis, income tax expenses increased by €14 million (+15%) due to higher pre-tax underlying earnings, and lower positive tax one-off (€+15 million in 1H15 and €+9 million in 1H16) mainly driven by the decrease in corporate tax rate. Underlying earnings increased by €42 million (+18%) to €273 million. On a constant exchange rate basis, underlying earnings increased by €23 million (+10%). Adjusted earnings increased by €42 million (+18%) to €273 million. On a constant exchange rate basis, adjusted earnings increased by €23 million (+10%). Net income increased by €12 million (+6%) to €210 million. On a constant exchange rate basis, net income decreased by €3 million (-2%) as higher adjusted earnings were more than offset by an unfavorable change in the fair value of mutual funds and economic hedge derivatives not eligible for hedge accounting. (1) Capital light:General Account Savings products which, at inception, create more AFR than the economic capital they consume. Half Year 2016 Financial Report 32 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – Germany (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 3,342 3,317 APE (Group share) 191 182 Investment margin 74 92 Fees & revenues 144 147 Net technical margin 69 15 Expenses (140) (100) Amortization of VBI (20) (41) Other Underlying earnings before tax 127 113 Income tax expenses / benefits (1) (41) Minority interests (0) 0 Underlying earnings Group share 126 72 Net capital gains or losses attributable to shareholders net of income tax 28 23 Adjusted earnings Group share 154 95 Profit or loss on financial assets (under FV option) & derivatives 13 (1) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs (1) (1) Net income Group share 167 92 (a) Before intercompany eliminations. Gross Revenues amounted to €3,325 million net of intercompany eliminations as of June 30, 2016. Gross revenues increased by €24 million (+1%) to €3,342 million. On a comparable basis, gross revenues increased by €24 million (+1%): Life revenues (56% of gross revenues) decreased by €30 million (-2%) to €1,879 million driven by lower single premiums mainly from hybrid products (1) and lower revenues from the run-off portfolio of Protection with Savings products, partly offset by higher regular premiums from hybrid (1) and Pure Protection products; Health revenues (44% of gross revenues) increased by €54 million (+4%) to €1,462 million mainly due to tariff increases and higher new business in full benefit insurance. APE increased by €9 million (+5%) to €191 million. On a comparable basis, APE increased by €9 million (+5%): Life sales (62% of APE) increased by €2 million (+2%) to €119 million mainly driven by higher Unit-Linked regular premiums, partly offset by lower single premiums from hybrid products (1);  Health sales (38% of APE) increased by €7 million (+10%) to €72 million driven by higher sales of full benefit and supplementary insurance products. Investment margin decreased by €18 million (-20%) to €74 million mainly due to lower reinvestment yields and a timing effect on private equity dividends. (1) Hybrid: Savings product allowing clients to invest in both Unit-Linked and General Account funds. Half Year 2016 Financial Report 6,684 373 178 269 37 (184) (50) 249 (84) 0 165 30 195 (10) (0) (1) 184 33 I ACTIVITY REPORT – HALF YEAR 2016 Fees & revenues decreased by €3 million (-2%) to €144 million mainly from Health due to an increase in policyholder participation, partly offset by higher volumes. Net technical margin increased by €54 million (+362%) to €69 million mainly due to an improved margin for Variable Annuity GMxB products (€+48 million) reflecting the new hedging strategy implemented in 1H15 and the non-repeat of related one-off transaction costs. Expenses increased by €40 million (+40%) to €-140 million mainly due to the non-repeat of the favorable one-off impact of the reduction in the deferred policyholder participation in 1H15 in Life. Amortization of VBI decreased by €21 million (-51%) to €-20 million due to the non-repeat of the unfavorable one-off impact of updated lower interest rate assumptions in 1H15. As a result, the underlying cost income ratio increased by 0.2 point to 55.7%. Income tax expenses decreased by €40 million (-97%) to €-1 million mainly due to positive tax one-offs (€+35 million). Underlying earnings increased by €54 million (+75%) to €126 million. Adjusted earnings increased by €60 million (+63%) to €154 million mainly due to higher underlying earnings as well as higher net realized capital gains from fixed income assets (€+8 million). Net income increased by €75 million (+81%) to €167 million due higher adjusted earnings and a favorable change in the fair value of fixed income securities and economic hedge derivatives not eligible for hedge accounting. Half Year 2016 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – Switzerland (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 5,119 5,372 7,177 APE (Group share) 204 220 313 Investment margin 115 133 205 Fees & revenues 173 180 348 Net technical margin 95 94 225 Expenses (151) (166) (326) Amortization of VBI (33) (35) (44) Other Underlying earnings before tax 199 206 408 Income tax expenses / benefits (39) (40) (80) Minority interests 0 Underlying earnings Group share 159 166 328 Net capital gains or losses attributable to shareholders net of income tax (3) 43 42 Adjusted earnings Group share 156 208 370 Profit or loss on financial assets (under FV option) & derivatives (53) (0) (5) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (4) (4) (7) Integration and restructuring costs Net income Group share 100 204 358 Average exchange rate : 1.00 € = Swiss Franc 1.096 1.056 1.078 (a) Before intercompany eliminations. Gross Revenues amounted to €5,119 million net of intercompany eliminations as of June 30, 2016. Gross revenues decreased by €252 million (-5%) to €5,119 million. On a comparable basis, gross revenues decreased by €55 million (-1%): Group Life revenues (92% of gross revenues) increased by €112 million (+2%) to €4,699 million driven by the successful closing of a large contract; Individual Life revenues (8% of gross revenues) decreased by €172 million (-28%) to €420 million driven by lower sales of the single premium Protect Star product and the strategic decision to stop sales of Protect Invest product. APE decreased by €16 million (-7%) to €204 million. On a comparable basis, APE increased by €2 million (+1%): Group Life sales (78% of APE) increased by €22 million (+16%) driven by the exceptional sale of a large contract; Individual Life sales (22% of APE) decreased by €21 million (-31%) driven by lower sales of the single premium Protect Star product. Investment margin decreased by €18 million (-13%) to €115 million. On a constant exchange rate basis, investment margin decreased by €13 million (-10%) due to lower reinvestment yields on fixed income assets, higher foreign exchange hedging costs and lower private equity distributions, partly offset by a lower policyholder participation. Half Year 2016 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2016 Fees & revenues decreased by €8 million (-4%) to €173 million. On a constant exchange rate basis, fees & revenues decreased by €1 million (-1%) mainly from lower loadings on premium in Group Life. Net technical margin increased by €1 million (+1%) to €95 million. On a constant exchange rate basis, net technical margin increased by €5 million (+5%) mainly due to a lower policyholder bonus allocation in Group Life, partly offset by a lower favorable development of the disability claims experience in Individual Life. Expenses decreased by €15 million (-9%) to €-151 million. On a constant exchange rate basis, expenses decreased by €9 million (-6%) mainly due to the non-repeat of accelerated amortization of Deferred Acquisition Costs in 1H15 as well as lower administrative expenses due to the positive impacts of cost savings programs. Amortization of VBI decreased by €2 million (-5%) to €-33 million. On a constant exchange rate basis, amortization of VBI remained stable. As a result, the underlying cost income ratio decreased by 1.3 points to 48.0%. Income tax expenses decreased by €1 million (-3%) to €-39 million. On a constant exchange rate basis, income tax expenses remained stable. Underlying earnings decreased by €6 million (-4%) to €159 million. On a constant exchange rate basis, underlying earnings remained stable. Adjusted earnings decreased by €52 million (-25%) to €156 million. On a constant exchange rate basis, adjusted earnings decreased by €46 million (-22%) mainly driven by lower net realized capital gains on equity and fixed income assets. Net income decreased by €105 million (-51%) to €100 million. On a constant exchange rate basis, net income decreased by €101 million (-49%) mainly driven by lower adjusted earnings, an unfavourable change in the fair value of alternative investments and convertible bonds (€-30 million) and interest rate and foreign exchange derivatives not eligible for hedge accounting (€-25 million). Half Year 2016 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – Belgium (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 614 1,021 APE (Group share) 24 63 Investment margin 186 164 Fees & revenues 64 69 Net technical margin 20 16 Expenses (111) (121) Amortization of VBI (3) (1) Other Underlying earnings before tax 157 127 Income tax expenses / benefits (43) (36) Minority interests (0) (0) Underlying earnings Group share 114 91 Net capital gains or losses attributable to shareholders net of income tax 29 52 Adjusted earnings Group share 142 144 Profit or loss on financial assets (under FV option) & derivatives 3 (8) Exceptional operations (including discontinued operations) (0) Goodwill and other related intangibles impacts Integration and restructuring costs (3) (3) Net income Group share 143 132 (a) Before intercompany eliminations. Gross Revenues amounted to €614 million net of intercompany eliminations as of June 30, 2016. Gross revenues decreased by €407 million (-40%) to €614 million. On a comparable basis, gross revenues decreased by €407 million (-40%): G/A Protection & Health revenues (65% of gross revenues) decreased by €39 million (-9%) mainly due to lower renewals in Group Protection; G/A Savings revenues (24% of gross revenues) decreased by €64 million (-30%) mainly due to lower sales of the Oxylife Secure hybrid product (1); Unit-Linked revenues (11% of gross revenues) decreased by €303 million (-82%) mainly due to lower sales of the Oxylife Invest hybrid product (1). APE decreased by €38 million (-61%) to €24 million. On a comparable basis, APE decreased by €38 million (-61%): G/A Protection & Health sales (45% of APE) decreased by €2 million (-13%) mainly due to lower new business in Group Protection; G/A Savings sales (30% of APE) decreased by €8 million (-52%) mainly due to lower new business in the Oxylife Secure hybrid product (1). Unit-Linked sales (25% of APE) decreased by €29 million (-83%) reflecting lower sales of the Oxylife Invest hybrid product (1). (1) Hybrid products: Savings product allowing clients to invest in both Unit-Linked and General Account funds. Half Year 2016 Financial Report 1,716 100 318 139 32 (243) (5) 241 (78) 0 163 62 225 (39) (0) (11) 174 37 I ACTIVITY REPORT – HALF YEAR 2016 Investment margin increased by €22 million (+14%) to €186 million driven by higher investment income mainly due to a favorable timing effect on the payment of mutual funds dividends, as well as lower credited interests and policyholder bonus allocation. Fees & revenues decreased by €5 million (-7%) to €64 million reflecting lower gross revenues. Net technical margin increased by €4 million (+26%) to €20 million mainly driven by higher prior year reserve release. Expenses decreased by €10 million (-8%) to €-111 million: Administrative expenses decreased by €6 million (-8%) to €-65 million driven by lower overhead costs due to the positive impacts of cost savings programs as well as lower commissions; Acquisition expenses decreased by €4 million (-8%) to €-45 million mainly due to lower commissions and overhead costs driven by lower volumes. Amortization of VBI increased by €2 million to €-3 million as a result of unfavorable financial assumptions update. As a result, the underlying cost income ratio decreased by 6.9 points to 42.0%. Income tax expenses increased by €8 million (+22%) to €-43 million driven by higher pre-tax underlying earnings. Underlying earnings increased by €22 million (+24%) to €114 million. Adjusted earnings decreased by €1 million (-1%) to €142 million as higher underlying earnings were more than offset by lower net realized capital gains (€-22 million) mainly on equities. Net income increased by €11 million (+9%) to €143 million mainly driven by a favorable change in the fair value of foreign exchange and interest rates derivatives not eligible for hedge accounting. Half Year 2016 Financial Report 38 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – Central & Eastern Europe (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 144 161 APE (Group share) 35 41 Investment margin 2 4 Fees & revenues 65 86 Net technical margin 22 21 Expenses (72) (89) Amortization of VBI (0) (0) Other Underlying earnings before tax 17 22 Income tax expenses / benefits (3) (4) Minority interests (0) (0) Underlying earnings Group share 14 18 Net capital gains or losses attributable to shareholders net of income tax 0 0 Adjusted earnings Group share 14 18 Profit or loss on financial assets (under FV option) & derivatives (0) (0) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (2) (1) Integration and restructuring costs (0) Net income Group share 13 17 (a) Before intercompany eliminations. Gross Revenues amounted to €144 million net of intercompany eliminations as of June 30, 2016. Gross revenues decreased by €17 million (-11%) to €144 million. On a comparable basis, gross revenues decreased by €15 million (-9%): Czech Republic & Slovakia revenues (55% of gross revenues) decreased by €3 million (-4%) mainly driven by (i) lower G/A Savings sales due to lower performance fees on Slovak Pension Funds and (ii) lower Unit-Linked single premium sales, partly offset by (iii) higher Funds & other sales resulting from higher management fees on Czech Pension Funds and (iv) strong sales in G/A Protection & Health; Poland revenues (45% of gross revenues) decreased by €12 million (-14%) mainly driven by lower G/A Protection & Health and Unit-Linked revenues resulting from a change in regulation. APE decreased by €6 million (-15%) to €35 million. On a comparable basis, APE decreased by €5 million (-13%): Czech Republic APE (54% of APE) remained stable;  Poland APE (46% of APE) decreased by €5 million (-23%) from lower Unit-Linked sales (€-3 million) resulting from a change in regulation and lower G/A Protection & Health sales (€-2 million) due to lower inflows from bancassurance partnerships. Underlying earnings decreased by €4 million (-23%) to €14 million. On a constant exchange rate basis, underlying earnings decreased by €4 million (-23%) mainly driven by lower revenues in Poland following a change in regulation. Adjusted earnings decreased by €4 million (-22%) to €14 million. On a constant exchange rate basis, adjusted earnings decreased by €4 million (-21%) driven by lower underlying earnings. Half Year 2016 Financial Report 298 78 7 160 40 (166) (1) 40 (7) 0 33 (0) 32 (0) (3) (2) 28 39 I ACTIVITY REPORT – HALF YEAR 2016 Net income decreased by €4 million (-24%) to €13 million. On a constant exchange rate basis, net income decreased by €4 million (-23%) mainly due to lower adjusted earnings. Half Year 2016 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – Mediterranean & Latin American Region (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 2,858 3,176 APE (Group share) 237 316 Investment margin 116 124 Fees & revenues 244 324 Net technical margin 54 51 Expenses (273) (324) Amortization of VBI (5) (5) Other 1 Underlying earnings before tax 137 170 Income tax expenses / benefits (34) (41) Minority interests (35) (51) Underlying earnings Group share 68 78 Net capital gains or losses attributable to shareholders net of income tax 18 4 Adjusted earnings Group share 86 82 Profit or loss on financial assets (under FV option) & derivatives (7) 16 Exceptional operations (including discontinued operations) (33) Goodwill and other related intangibles impacts (0) (0) Integration and restructuring costs (2) (1) Net income Group share 44 97 (a) Before intercompany eliminations. Gross Revenues amounted to €2,853 million net of intercompany eliminations as of June 30, 2016. Scope: (i) Italy, Spain, Greece, Turkey, Mexico, Morocco, and Colombia are fully consolidated; (ii) Nigeria is consolidated under the equity method and contributes only to the underlying earnings, adjusted earnings and net income. In the comments below, the comparable basis excludes the contribution of AXA Portugal which was sold on April 1st, 2016. Gross revenues decreased by €318 million (-10%) to €2,858 million. On a comparable basis, gross revenues decreased by €202 million (-6%): AXA MPS down €218 million (-11%) mainly driven by lower sales of Unit-Linked products (€-784 million) with lower Protected Unit product sales due to unfavorable market conditions, partly offset by higher sales of capital light (1) G/A Savings products (€+466 million);  Italy down €113 million (-30%) mainly due to lower sales of G/A Savings products; partly offset by  Spain up €119 million (+32%) mainly driven by higher sales in G/A Protection & Health driven by the launch of a new product in 2015. APE decreased by €79 million (-25%) to €237 million. On a comparable basis, APE decreased by €68 million (-22%): (1)Capital light: General Account Savings products which, at inception, create more AFR than the economic capital they consume. Half Year 2016 Financial Report 5,709 560 246 586 124 (611) (11) 2 338 (74) 90 173 3 176 5 5 (2) 184 41 I ACTIVITY REPORT – HALF YEAR 2016 AXA MPS down €70 million (-36%) driven by lower sales of Unit-Linked products with lower Protected Unit product sales due to unfavorable market conditions, partly offset by higher sales of capital light (1) G/A Savings products; Italy down €12 million (-26%) due to lower sales in G/A Savings products; partly offset by  Spain up €9 million (+23%) driven by higher sales in G/A Protection & Health driven by the launch of a new product in 2015. Investment margin decreased by €7 million (-6%) to €116 million. On a comparable basis, investment margin increased by €1 million (+1%). Fees & revenues decreased by €80 million (-25%) to €244 million. On a comparable basis, fees & revenues decreased by €65 million (-21%) mainly driven by lower Unearned Revenues Reserves amortization at AXA MPS (partly offset in Deferred Acquisition Costs) mainly reflecting lower Protected Unit product surrenders. Net technical margin increased by €3 million (+5%) to €54 million. On a comparable basis, net technical margin increased by €10 million (+21%) mainly driven by Mexico (€+12 million) with improved mortality margin reflecting pruning actions and lower large claims impact. Expenses decreased by €51 million (-16%) to €-273 million. On a comparable basis, expenses decreased by €30 million (-9%) driven by lower Deferred Acquisition Costs amortization at AXA MPS (more than offset in Unearned Revenues Reserves) in line with decreased surrenders. Amortization of VBI remained stable at €-5 million. On a comparable basis, amortization of VBI remained stable. As a result, the underlying cost income ratio increased by 1.0 point to 67.0%. On a comparable basis, the underlying cost income ratio increased by 1.3 points. Income tax expenses decreased by €7 million (-18%) to €-34 million. On a comparable basis, income tax expenses decreased by €4 million (-11%), driven by lower pre-tax earnings. Underlying earnings decreased by €10 million (-13%) to €68 million. On a comparable basis, underlying earnings decreased by €4 million (-5%). Adjusted earnings increased by €4 million (+5%) to €86 million. On a comparable basis, adjusted earnings increased by €10 million (+13%) driven by higher net realized capital gains in Spain and Italy. Net income decreased by €53 million (-55%) to €44 million. On a comparable basis, net income decreased by €46 million (-49%) as the increase in adjusted earnings was more than offset by a reduction of the goodwill following the disposal of AXA Portugal and the non-repeat of favorable foreign exchange impacts. The realized gain on the disposal of AXA Portugal is accounted for in France Life & Savings, AXA SA and AXA Corporate Solutions Assurance. (1)Capital light products: General Account Savings products which, at inception, create more AFR than the economic capital they consume. Half Year 2016 Financial Report 42 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – Hong Kong (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 1,262 1,221 2,540 APE (Group share) 227 281 525 Investment margin (0) 1 0 Fees & revenues 338 322 678 Net technical margin 47 41 100 Expenses (170) (161) (392) Amortization of VBI (6) (11) (18) Other Underlying earnings before tax 208 193 369 Income tax expenses / benefits (10) (8) (16) Minority interests 0 Underlying earnings Group share 198 185 353 Net capital gains or losses attributable to shareholders net of income tax (0) (0) 0 Adjusted earnings Group share 198 185 353 Profit or loss on financial assets (under FV option) & derivatives (23) 24 2 Exceptional operations (including discontinued operations) (0) (1) 236 Goodwill and other related intangibles impacts Integration and restructuring costs Net income Group share 174 208 591 Average exchange rate : 1.00 € = Hong Kong Dollar 8.670 8.652 8.679 (a) Before intercompany eliminations. Gross Revenues amounted to €1,245 million net of intercompany eliminations as of June 30, 2016. In the comments below, the comparable basis excludes the contribution of the retirement scheme business sold on September 1st, 2015. Gross revenues increased by €41 million (+3%) to €1,262 million. On a comparable basis, gross revenues increased by €121 million (+11%): G/A Protection & Health revenues (70% of gross revenues) increased by €55 million (+7%) from both new business sales and in-force growth; Unit-Linked revenues (22% of gross revenues) increased by €25 million (+10%) mainly due to higher sales of products with significant protection component; and G/A Savings revenues (9% of gross revenues) increased by €41 million (+55%) due to the launch of a new generation of savings plans. APE decreased by €54 million (-19%) to €227 million. On a comparable basis, APE decreased by €20 million (-8%) mainly due to: Unit-Linked sales (13% of APE) decreased by €55 million (-65%) mainly due to the non-repeat of both the exceptional sale of several large contracts and the carryover of accelerated sales in anticipation of January 1, 2015 regulatory changes; partly offset by G/A Protection & Health sales (63% of APE) increased by €11 million (+8%) mainly due to the sale of a large Group Health contract; and G/A Savings sales (24% of APE) increased by €24 million (+76%) mainly driven by the launch of a new generation of savings plans. Half Year 2016 Financial Report 43 I ACTIVITY REPORT – HALF YEAR 2016 Investment margin decreased by €1 million to €0 million. On a constant exchange rate basis, investment margin decreased by €1 million as higher investment income driven by higher average asset base was more than offset by higher interest credited to policyholders. Fees & revenues increased by €15 million (+5%) to €338 million. On a constant exchange rate basis, fees & revenues increased by €16 million (+5%) due to new business and in-force growth in G/A Protection & Health products leading to higher loadings on premium and higher Unearned Revenues Reserves amortization (offset in Deferred Acquisition Costs) due to one-off lapse assumption change, in line with higher Unit-Linked surrenders, and temporary reactivity to market experience. Net technical margin increased by €6 million (+13%) to €47 million. On a constant exchange rate basis, net technical margin increased by €6 million (+14%) mainly driven by higher surrender margin from Unit- Linked and G/A Protection & Health products. Expenses increased by €9 million (+6%) to €-170 million. On a constant exchange rate basis, expenses increased by €10 million (+6%) mainly due to higher Deferred Acquisition Costs amortization (offset in Unearned Revenues Reserves). Amortization of VBI decreased by €5 million (-43%) to €-6 million. On a constant exchange rate basis, amortization of VBI decreased by €5 million (-43%) mainly due to the non-repeat of assumption changes in 1H15. As a result, the underlying cost income ratio decreased by 1.2 points to 45.9%. Income tax expenses increased by €2 million (+23%) to €-10 million. On a constant exchange rate basis, income tax expenses increased by €2 million (+24%) mainly due to higher taxable income. Underlying earnings increased by €13 million (+7%) to €198 million. On a constant exchange rate basis, underlying earnings increased by €13 million. Adjusted earnings increased by €13 million (+7%) to €198 million. On a constant exchange rate basis, adjusted earnings increased by €13 million due to higher underlying earnings. Net income decreased by €33 million (-16%) to €174 million. On a constant exchange rate basis, net income decreased by €33 million driven by an unfavorable change in the fair value of interest rate hedging derivatives not eligible for hedge accounting (€-50 million), partly offset by higher adjusted earnings (€+13 million). Half Year 2016 Financial Report 44 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations – South-East Asia, India & China (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 290 257 APE (Group share) 412 333 Underlying earnings Group share 83 72 Net capital gains or losses attributable to shareholders net of income tax (2) 16 Adjusted earnings Group share 80 87 Profit or loss on financial assets (under FV option) & derivatives (6) 3 Exceptional operations (including discontinued operations) (5) Goodwill and other related intangibles impacts (3) (1) Integration and restructuring costs (2) (4) Net income Group share 70 79 (a) Before intercompany eliminations. Gross Revenues amounted to €290 million net of intercompany eliminations as of June 30, 2016. Scope: (i) for gross revenues: Singapore and non-bancassurance subsidiaries in Indonesia, on a 100% share basis; (ii) for APE, underlying earnings, adjusted earnings and net income: China, India, Indonesia, Thailand, Philippines and Singapore, on a Group share basis. Malaysian operations are not consolidated. Gross revenues increased by €33 million (+13%) to €290 million. On a comparable basis, gross revenues increased by €40 million (+16%) driven by: Singapore up €37 million driven by G/A Protection & Health (€+21 million) due to higher sales mainly through the agency channel and Unit-Linked (€+12 million) due to higher renewals combined with higher sales; Indonesia up €4 million driven by G/A Protection & Health (€+5 million) due to higher renewals. APE increased by €79 million (+24%) to €412 million. On a comparable basis, APE increased by €94 million (+28%) mainly driven by China (€+93 million) due to strong sales of G/A Savings products. Underlying earnings increased by €11 million (+15%) to €83 million. On a constant exchange rate basis, underlying earnings increased by €16 million (+22%) mainly due to: Change in presentation (€+13 million) mainly due to a change in policyholder bonus allocation in China; In-force portfolio growth in Thailand (€+4 million);  Better market performance in the Philippines (€+2 million); partly offset by  Lower investment performance in Indonesia (€-4 million). Adjusted earnings decreased by €7 million (-8%) to €80 million. On a constant exchange rate basis, adjusted earnings decreased by €2 million (-3%) mainly due to lower net realized capital gains in China (€-18 million), partly offset by higher underlying earnings (€+16 million). Net income decreased by €9 million (-12%) to €70 million. On a constant exchange rate basis, net income decreased by €5 million (-7%) mainly due to lower adjusted earnings and an unfavorable change in the fair value of financial assets (€-3 million). Half Year 2016 Financial Report 522 646 145 14 159 10 (5) (5) (7) 151 45 I ACTIVITY REPORT – HALF YEAR 2016 Life & Savings operations - Other The following tables present the operating results for the other Life & Savings operations of AXA: Consolidated Gross revenues (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (a) December 31, 2015 published December 31, 2015 restated (a) Luxembourg 62 62 62 126 126 AXA Life Invest Services 14 14 14 27 27 Family Protect 6 6 7 7 Other UK Life 102 183 306 Other (1) (1) (1) (0) (0) TOTAL 177 81 264 160 466 Intercompany transactions (13) (13) (13) (24) (26) Contribution to consolidated gross revenues 164 68 251 136 440 (a) Restated: restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2016 June 30, 2015 published June 30, 2015 restated (a) December 31, 2015 published December 31, 2015 restated (a) Luxembourg 4 4 4 7 7 AXA Life Invest Services (1) (4) (4) (8) (8) Family Protect (2) (10) (10) (20) (20) Other UK Life (2) 0 8 Other (1) (1) (1) (1) (1) Underlying earnings Group share (2) (12) (12) (22) (14) Net realized capital gains or losses attributable to shareholders 1 1 1 0 0 Adjusted earnings Group share (1) (11) (11) (22) (14) Profit or loss on financial assets (under Fair Value option) & derivatives 4 0 (3) (1) (5) Exceptional operations (including discontinued operations) Goodwill and related intangible impacts (2) (0) (0) Integration and restructuring costs (5) (2) (8) (8) Net income Group share (4) (11) (16) (31) (27) (a) Restated: restatement of the UK Life & Savings contribution as discontinued operations following the disposal announcements during the first semester. FAMILY PROTECT Underlying earnings and adjusted earnings increased by €9 million to €-2 million mainly due to lower expenses following the strategic decision to redeploy insurance portfolios and resources within the Group and to close the entity at the end of 2016. Net income increased by €5 million to €-5 million mainly driven by higher adjusted earnings, partly offset by restructuring costs in line with the above-mentioned strategic decision. Half Year 2016 Financial Report 46 I ACTIVITY REPORT – HALF YEAR 2016 AXA LIFE INVEST SERVICES (1) Underlying earnings, adjusted earnings and net income increased by €3 million (+75%) to €-1 million driven by lower expenses. OTHER UK LIFE (2) Underlying earnings and adjusted earnings decreased by €3 million to €-2 million. On a constant exchange rate basis, underlying earnings and adjusted earnings decreased by €3 million mainly due to higher expenses due to growth in the Architas business, partly offset by higher fees and revenues. Net income increased by €3 million to €-1 million. On a constant exchange rate basis, net income increased by €3 million as lower adjusted earnings were more than offset by a favorable change in the fair value of economic derivatives not eligible for hedge accounting. (1) AXA Life Invest Services aim to promote Unit-Linked products with guarantees through third party partnerships. (2) Other UK Life correspond to AXA Life Europe and Architas. Half Year 2016 Financial Report 47 I ACTIVITY REPORT – HALF YEAR 2016 PROPERTY & CASUALTY SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share attributable to AXA’s Property & Casualty segment for the periods indicated. (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 18,775 18,404 31,518 Current accident year loss ratio (net) 71.1% 70.8% 71.2% All accident year loss ratio (net) 69.0% 69.0% 70.1% Net technical result before expenses 4,866 4,820 9,340 Expense ratio 27.0% 26.2% 26.1% Net investment result 1,006 1,071 2,019 Underlying earnings before tax 1,628 1,825 3,194 Income tax expenses / benefits (442) (515) (955) Net income from investments in affiliates and associates 19 5 30 Minority interests (29) (30) (39) Underlying earnings Group share 1,176 1,286 2,230 Net capital gains or losses attributable to shareholders net of income tax 152 155 131 Adjusted earnings Group share 1,327 1,441 2,361 Profit or loss on financial assets (under FV option) & derivatives (139) (9) (48) Exceptional operations (including discontinued operations) 25 1 (5) Goodwill and other related intangibles impacts (34) (35) (64) Integration and restructuring costs (46) (34) (113) Net income Group share 1,133 1,364 2,132 (a) Before intercompany eliminations. Gross Revenues amounted to €18,602 million net of intercompany eliminations as of June 30, 2016. Consolidated Gross revenues (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 France 3,750 3,394 6,077 United Kingdom & Ireland 2,610 2,522 4,879 Germany 2,549 2,486 3,945 Switzerland 2,797 2,880 3,109 Belgium 1,114 1,109 2,029 Central & Eastern Europe - Luxembourg 70 66 104 Mediterranean & Latin American Region (a) 3,836 3,959 7,533 Direct (b) 1,453 1,391 2,735 Asia (c) 597 597 1,108 TOTAL 18,775 18,404 31,518 Intercompany transactions (173) (221) (254) Contribution to consolidated gross revenues 18,602 18,183 31,265 High growth markets Direct Mature markets 2,743 1,451 14,407 2,712 1,389 14,082 5,159 2,732 23,374 (a) Mediterranean & Latin American Region includes other than Direct operations in Italy, Spain, Portugal, Greece, Turkey, Morocco, Gulf Region, Mexico, Colombia and Brazil. (b) Direct business in France, Belgium, Spain, Portugal, Italy, Poland, United Kingdom, South Korea and Japan. (c) Asia includes Hong Kong, Malaysia, Singapore and Thailand. Half Year 2016 Financial Report 48 I ACTIVITY REPORT – HALF YEAR 2016 Combined Ratio (in %) June 30, 2016 June 30, 2015 December 31, 2015 Total 96.0% 95.1% 96.2% France 95.1% 94.3% 95.3% United Kingdom & Ireland 98.7% 96.9% 97.6% Germany 96.6% 92.9% 93.6% Switzerland 85.5% 85.6% 86.0% Belgium 99.7% 93.2% 91.0% Central & Eastern Europe - Luxembourg (a) 98.1% 98.5% 97.0% Mediterranean & Latin American Region (b) 99.2% 99.3% 102.8% Direct (c) 94.9% 99.2% 98.0% Asia (d) 93.2% 92.8% 94.0% High growth markets 100.8% 100.2% 105.6% Direct 94.9% 99.2% 98.0% Mature markets 95.2% 93.6% 94.0% (a) Excluding RESO - RESO combined ratio amounted to 88.8% as of June 30, 2016. (b) Mediterranean & Latin American Region includes other than Direct operations in Italy, Spain, Portugal, Greece, Turkey, Morocco, Gulf Region, Mexico, Colombia and Brazil. (c) Direct business in France, Belgium, Spain, Portugal, Italy, Poland, United Kingdom, South Korea and Japan. (d) Asia includes Hong Kong, Singapore, Malaysia and Thailand. Underlying earnings (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 France 291 281 507 United Kingdom & Ireland 106 151 273 Germany 147 204 378 Switzerland 247 262 503 Belgium 61 110 241 Central & Eastern Europe - Luxembourg (a) 25 7 37 Mediterranean & Latin American Region (b) 167 182 103 Direct (c) 103 56 135 Asia (d) 30 33 53 UNDERLYING EARNINGS 1,176 1,286 2,230 High growth markets 91 86 (32) Direct 103 56 135 Mature markets 982 1,143 2,127 (a) Central & Eastern Europe includes Reso (Russia). (b) Mediterranean & Latin American Region includes other than Direct operations in Italy, Spain, Portugal, Greece, Turkey, Morocco, Gulf Region, Mexico, Lebanon, Colombia and Brazil. (c) Direct business in France, Belgium, Spain, Portugal, Italy, Poland, the United Kingdom, South Korea and Japan. (d) Asia includes India, Hong Kong, China, Malaysia, Singapore and Thailand. Half Year 2016 Financial Report 49 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations – France (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 3,750 3,394 6,077 Current accident year loss ratio (net) 70.8% 72.1% 72.2% All accident year loss ratio (net) 68.3% 70.8% 71.7% Net technical result before expenses 1,049 863 1,699 Expense ratio 26.9% 23.5% 23.6% Net investment result 275 264 503 Underlying earnings before tax 434 432 786 Income tax expenses / benefits (143) (151) (279) Net income from investments in affiliates and associates Minority interests (0) (0) (1) Underlying earnings Group share 291 281 507 Net capital gains or losses attributable to shareholders net of income tax 57 28 44 Adjusted earnings Group share 347 309 551 Profit or loss on financial assets (under FV option) & derivatives (21) (9) (19) Exceptional operations (including discontinued operations) 7 Goodwill and other related intangibles impacts Integration and restructuring costs (17) Net income Group share 316 301 532 (a) Before intercompany eliminations. Gross Revenues amounted to €3,706 million net of intercompany eliminations as of June 30, 2016. In the comments below, the comparable basis excludes the contribution of Genworth activities, consolidated starting from December 31, 2015. Gross revenues increased by €356 million (+10%) to €3,750 million. On a comparable basis, gross revenues increased by €22 million (+0.7%): Personal lines (57% of gross revenues) were up 3% to €1,902 million, as higher revenues from assumed business as well as tariff increases in most segments were partly offset by lower volumes driven by a strong competition in the context of Hamon law; Commercial lines (43% of gross revenues) were down 2% to €1,450 million, as tariff increases and increase in new international business were more than offset by lower volumes notably in Construction in a context of selective underwriting. Net technical result increased by €186 million (+22%) to €1,049 million. On a comparable basis, net technical result remained stable: the current accident year loss ratio increased by 1.7 points to 70.8% mainly driven by a higher Nat Cat charge (€52 million) due to the June floods; the all accident year loss ratio increased by 0.1 point to 68.3% due to favorable prior year reserve developments, offsetting the increase of the current accident year loss ratio. Expense ratio increased by 3.4 points to 26.9%. On a comparable basis, expense ratio decreased by 0.1 point mainly driven by lower general expenses. Enlarged expense ratio increased by 2.7 points to 32.3%. On a comparable basis, enlarged expense ratio decreased by 0.3 point due to lower general expenses. Half Year 2016 Financial Report 50 I ACTIVITY REPORT – HALF YEAR 2016 As a result, the combined ratio increased by 0.8 point to 95.2%. On a comparable basis, the combined ratio improved by 0.1 point. Net investment result increased by €10 million (+4%) to €275 million. On a comparable basis, net investment result increased by €8 million (+3%) driven mainly by a timing effect in dividend distribution from mutual funds. Income tax expenses decreased by €7 million (-5%) to €-143 million. On a comparable basis, income tax expenses decreased by €3 million (-2%) mainly due to a decrease in the corporate tax rate from 38% to 34.43%. Underlying earnings increased by €10 million (+3%) to €291 million. On a comparable basis, underlying earnings increased by €13 million (+5%). Adjusted earnings increased by €38 million (+12%) to €347 million. On a comparable basis, adjusted earnings increased by €42 million (+14%) driven by higher underlying earnings and higher net realized capital gains (€+27 million), mainly on equities. Net income increased by €15 million (+5%) to €316 million. On a comp arable income increased by €26 million (+9%) mainly driven by higher adjusted earnings partly offset by an unfavorable change in the fair value of mutual funds and economic derivatives not eligible for hedge accounting (€-13 million) as well as higher restructuring costs (€-10 million). basis, net Half Year 2016 Financial Report 51 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations - United Kingdom & Ireland (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 2,610 2,522 Current accident year loss ratio (net) 69.5% 68.1% All accident year loss ratio (net) 69.4% 67.1% Net technical result before expenses 717 739 Expense ratio 29.3% 29.8% Net investment result 100 116 Underlying earnings before tax 131 187 Income tax expenses / benefits (25) (35) Net income from investments in affiliates and associates Minority interests (0) (0) Underlying earnings Group share 106 151 Net capital gains or losses attributable to shareholders net of income tax 6 9 Adjusted earnings Group share 111 161 Profit or loss on financial assets (under FV option) & derivatives (25) (9) Exceptional operations (including discontinued operations) 16 Goodwill and other related intangibles impacts (2) (1) Integration and restructuring costs Net income Group share 101 151 Average exchange rate : 1.00 € = £ 0.779 0.733 (a) Before intercompany eliminations. Gross Revenues amounted to €2,566 million net of intercompany eliminations as of June 30, 2016. In the comments below, the comparable basis excludes the contribution of Simplyhealth in 2016 as the first consolidation took place at the end of 2015. Gross revenues increased by €88 million (+3%) to €2,610 million. On a comparable basis, gross revenues increased by €170 million (+7%): Commercial lines (57% of gross revenues) were up 5% to €1,482 million: o Non-Motor was up 1% to €1,161 million: (i) Property was up 3% to €320 million due to increased new business and improved retention, (ii) Health was up 3% to €635 million due to growth in Great Britain and internationally, and (iii) Liability was up 11% to €124 million mainly driven by improved retention rates, partly offset by (iv) Other was down 48% to €22 million due to a reduction in the retrocession of the Group Pool; o Motor was up 22% to €321 million principally due to increased new business volumes and higher retention rates. Personal lines (43% of gross revenues) were up 6% to €1,128 million: o Non-Motor was up 4% to €767 million: (i) Health was up 4% to €430 million following strong growth in Great Britain and internationally and (ii) Property was up 6% to €232 million reflecting increased volumes in Great Britain; o Motor was up 13% to €361 million due to tariff increases as well as an increase in new business volumes mostly in the Republic of Ireland. Net technical result decreased by €22 million (-3%) to €717 million. On a constant exchange rate basis, net technical result increased by €19 million (+3%): the current year loss ratio increased by 1.2 points to 69.5% due to a deterioration in Commercial Motor (+2.8 points) reflecting an increase in average costs in Great Britain, and in Health (+1.6 points) due to claims seasonality and a change of business mix following the acquisition of Half Year 2016 Financial Report 4,879 69.8% 69.4% 1,438 28.3% 227 339 (66) (0) 273 10 283 (32) (2) (31) 219 0.731 52 I ACTIVITY REPORT – HALF YEAR 2016 Simplyhealth, partly offset by an improvement in Commercial Property (-1.2 points) driven by tariff increases; the all accident year loss ratio increased by 2.3 points to 69.4% due to the increase in the current year loss ratio and lower positive prior year reserve developments (+1.0 point). Expense ratio decreased by 0.5 point to 29.3% driven by a decrease in the administrative expense ratio (-0.5 point) to 8.6% due to increased volumes and the positive impacts of cost savings programs. The acquisition expense ratio remained stable at 20.6% as the increase in commission ratio (+0.3 point) due to an increase in profit share commissions in Great Britain, increased broker business in the Republic of Ireland and further growth in Health, was offset by increased volumes and the positive impacts of cost savings programs. Enlarged expense ratio decreased by 0.6 point to 31.9%. As a result, the combined ratio deteriorated by 1.8 points to 98.7%. Net investment result decreased by €17 million (-14%) to €100 million. On a constant exchange rate basis, net investment result decreased by €11 million (-10%) due to lower income from alternative assets and corporate bonds. Income tax expenses decreased by €10 million (-28%) to €-25 million. On a constant exchange rate basis, income tax expenses decreased by €8 million (-24%) mainly reflecting lower pre-tax underlying earnings. Underlying earnings decreased by €46 million (-30%) to €106 million. On a constant exchange rate basis, underlying earnings decreased by €40 million (-26%). Adjusted earnings decreased by €49 million (-31%) to €111 million. On a constant exchange rate basis, adjusted earnings decreased by €43 million (-27%) reflecting lower underlying earnings (€-40 million), as well as lower net realized capital gains mainly driven by higher impairment charges on equities. Net income decreased by €50 million (-33%) to €101 million. On a constant exchange rate basis, net income decreased by €44 million (-29%) due to lower adjusted earnings (€-43 million) and an unfavorable change in the fair value of interest rate derivatives not eligible for hedge accounting (€-17 million), partly offset by an exceptional income received following the sale of two real estate properties in New York (€+17 million). Half Year 2016 Financial Report 53 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations – Germany (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 2,549 2,486 3,945 Current accident year loss ratio (net) 68.5% 66.7% 67.4% All accident year loss ratio (net) 68.0% 64.1% 65.4% Net technical result before expenses 642 701 1,364 Expense ratio 28.6% 28.8% 28.2% Net investment result 144 152 290 Underlying earnings before tax 213 291 543 Income tax expenses / benefits (65) (87) (165) Net income from investments in affiliates and associates Minority interests (0) (0) (1) Underlying earnings Group share 147 204 378 Net capital gains or losses attributable to shareholders net of income tax 1 16 (13) Adjusted earnings Group share 148 219 365 Profit or loss on financial assets (under FV option) & derivatives (7) (20) (32) Exceptional operations (including discontinued operations) (1) Goodwill and other related intangibles impacts (2) (2) (5) Integration and restructuring costs (5) (9) (11) Net income Group share 133 188 315 (a) Before intercompany eliminations. Gross Revenues amounted to €2,517 million net of intercompany eliminations as of June 30, 2016. Gross revenues increased by €63 million (+3%) to €2,549 million. On a comparable basis, gross revenues increased by €64 million (+3%): Personal lines (58% of gross revenues) were up 2% to €1,452 million mainly driven by tariff increases in both Motor and Non-Motor; Commercial lines (36% of gross revenues) were up 4% to €905 million mainly in Property driven by SME business and a positive timing effect; Other lines (6% of gross revenues) were up 1% to €160 million mainly driven by higher volumes in Art Insurance. Net technical result decreased by €59 million (-8%) to €642 million: the current accident year loss ratio increased by 1.7 points to 68.5% mainly reflecting the unfavorable impact of Nat Cat events (+3.3 points or €66 million) from Marine and Elvira storms. Natural events declined by 2.3 points, notably due to the impact of the Niklas storm in 1H15, partly offset by increased average costs mainly in Motor; the all accident year loss ratio increased by 3.8 points to 68.0% due to higher current accident year loss ratio and the non-repeat of favorable prior year claims development in 1H15. Expense ratio decreased by 0.2 point to 28.6% mainly due to the positive impacts of cost savings programs. Enlarged expense ratio increased by 0.2 point to 32.2% mainly due to higher claims handling costs. As a result, the combined ratio deteriorated by 3.6 points to 96.6%. Net investment result decreased by €8 million (-6%) to €144 million due to lower reinvestment yields. Income tax expenses decreased by €21 million (-25%) to €-65 million due to lower pre-tax underlying earnings. Half Year 2016 Financial Report 54 I ACTIVITY REPORT – HALF YEAR 2016 Underlying earnings decreased by €56 million (-28%) to €147 million. Adjusted earnings decreased by €71 million (-32%) to €148 million mainly driven by lower underlying earnings and lower net realized gains from real estate assets. Net income decreased by €55 million (-29%) to €133 million as a result of lower adjusted earnings and an unfavorable change in the fair value of private equity funds, partly offset by a favorable change in the fair value of fixed income assets as a result of lower interest rates. Half Year 2016 Financial Report 55 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations – Switzerland (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 2,797 2,880 Current accident year loss ratio (net) 68.5% 69.1% All accident year loss ratio (net) 61.8% 62.1% Net technical result before expenses 591 612 Expense ratio 23.7% 23.5% Net investment result 93 103 Underlying earnings before tax 318 336 Income tax expenses / benefits (69) (71) Net income from investments in affiliates and associates Minority interests (2) (2) Underlying earnings Group share 247 262 Net capital gains or losses attributable to shareholders net of income tax 40 47 Adjusted earnings Group share 286 309 Profit or loss on financial assets (under FV option) & derivatives (36) (1) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (12) (13) Integration and restructuring costs Net income Group share 239 294 Average exchange rate : 1.00 € = Swiss Franc 1.096 1.056 (a) Before intercompany eliminations. Gross Revenues amounted to €2,789 million net of intercompany eliminations as of June 30, 2016. Gross revenues decreased by €83 million (-3%) to €2,797 million. On a comparable basis, gross revenues increased by €23 million (+1%): Personal lines (53% of gross revenues) were up 1% to €1,504 million driven by Motor due to higher volumes, partly offset by the shift of some customers from the Personal fleet to the new Commercial fleet product; Commercial lines (47% of gross revenues) were up 1% to €1,307 million driven by new business and selective renewals of contracts in Workers’ Compensation as well as higher volumes in Motor mainly driven by the above-mentioned shift of customers. Net technical result decreased by €21 million (-4%) to €591 million. On a constant exchange rate basis, net technical result increased by €1 million (+0%): the current accident year loss ratio decreased by 0.7 point to 68.5% driven by an improvement of the attritional loss ratio in Motor as well as in Workers’ Compensation; the all accident year loss ratio decreased by 0.3 point to 61.8% as a consequence of an improved current accident year loss ratio, partly offset by a lower positive prior year reserve development. Expense ratio increased by 0.2 point to 23.7% mainly driven by higher commissions partly offset by the positive impacts of cost savings programs. Enlarged expense ratio increased by 0.3 point to 27.1%. As a result, the combined ratio improved by 0.1 point to 85.5%. Net investment result decreased by €9 million (-9%) to €93 million. On a constant exchange rate basis, net investment result decreased by €6 million (-6%) mainly driven by higher foreign exchange hedging costs, lower private equity distributions as well as lower reinvestment yields on fixed income assets. Half Year 2016 Financial Report 3,109 67.3% 61.0% 1,216 25.0% 194 631 (124) (4) 503 45 548 (19) (26) 504 1.078 56 I ACTIVITY REPORT – HALF YEAR 2016 Income tax expenses decreased by €2 million (-3%) to €-69 million. On a constant exchange rate basis, income tax expenses remained stable. Underlying earnings decreased by €15 million (-6%) to €247 million. On a constant exchange rate basis, underlying earnings decreased by €6 million (-2%). Adjusted earnings decreased by €22 million (-7%) to €286 million. On a constant exchange rate basis, adjusted earnings decreased by €12 million (-4%) mainly driven by lower underlying earnings and higher impairments on equities. Net income decreased by €55 million (-19%) to €239 million. On a constant exchange rate basis, net income decreased by €46 million (-16%) mainly driven by lower adjusted earnings and an unfavourable change in the fair value of alternative investments (€-16 million) and interest rate and foreign exchange derivatives not eligible for hedge accounting (€-20 million). Half Year 2016 Financial Report 57 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations – Belgium (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 1,114 1,109 2,029 Current accident year loss ratio (net) 71.1% 67.0% 67.7% All accident year loss ratio (net) 68.5% 62.6% 60.4% Net technical result before expenses 320 376 805 Expense ratio 31.2% 30.7% 30.6% Net investment result 83 92 178 Underlying earnings before tax 87 160 361 Income tax expenses / benefits (26) (50) (120) Net income from investments in affiliates and associates Minority interests Underlying earnings Group share 61 110 241 Net capital gains or losses attributable to shareholders net of income tax 54 38 37 Adjusted earnings Group share 115 148 278 Profit or loss on financial assets (under FV option) & derivatives (40) 29 13 Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (1) (1) (1) Integration and restructuring costs (10) (9) (28) Net income Group share 64 167 261 (a) Before intercompany eliminations. Gross Revenues amounted to €1,102 million net of intercompany eliminations as of June 30, 2016. Gross revenues increased by €5million to €1,114 million. On a comparable basis, gross revenues increased by €8 million (+1%): Commercial lines (52% of gross revenues) were up 1% to €576 million mainly driven by business growth in SMEs; Personal lines (47% of gross revenues) were down 1% to €523 million driven by negative net new contracts, partly offset by tariff increases; Other lines (1% of gross revenues) were down 13% to €19 million. Net technical result decreased by €56 million to €320 million: the current accident year loss ratio increased by 4.1 points to 71.1% driven by the May and June floods (€27 million) and the terrorist attacks in March 2016 (€24 million); the all accident year loss ratio increased by 5.9 points to 68.5% as a result of lower positive prior year reserve developments. Expense ratio increased by 0.5 point to 31.2% driven by higher acquisition costs. Enlarged expense ratio increased by 0.1 point to 38.7%. As a result, the combined ratio deteriorated by 6.4 points to 99.7%. Net investment result decreased by €9 million (-10%) to €83 million due to lower revenues from bonds as a result of lower reinvestment rates. Income tax expenses decreased by €25 million (-49%) to €-26 million mainly as a result of lower pre-tax underlying earnings. Underlying earnings decreased by €49 million (-44%) to €61 million. Adjusted earnings decreased by €33 million (-22%) to €115 million mainly due to lower underlying earnings, partly offset by higher net realized capital gains on equities. Half Year 2016 Financial Report 58 I ACTIVITY REPORT – HALF YEAR 2016 Net income decreased by €103 million (-62%) to €64 million mainly due to lower adjusted earnings as well as an unfavorable change in the fair value of inflation derivatives not eligible for hedge accounting (€- 70 million). Half Year 2016 Financial Report 59 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations – Central & Eastern Europe and Luxembourg Consolidated Gross revenues (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Luxembourg 70 66 Reso (Russia) TOTAL 70 66 Intercompany transactions Contribution to consolidated gross revenues 70 66 Underlying, Adjusted earnings and Net Income Group share (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Luxembourg Reso (Russia) (a) 3 23 2 4 Underlying earnings Group share 25 7 Net realized capital gains or losses attributable to shareholders (3) (1) Adjusted earnings Group share 23 6 Profit or loss on financial assets (under Fair Value option) & derivatives (7) (6) Exceptional operations (including discontinued operations) Goodwill and related intangibles impacts (0) (0) Integration and restructuring costs Net income Group share 16 (1) (a) Reso accounted for using the equity method. AXA's share of profit is recognized in the income statement. RESO (RUSSIA) Underlying earnings increased by €19 million to €23 million. On a constant exchange rate basis, underlying earnings increased by €23 million, driven by a higher net technical result due to higher sales and an improvement of the loss ratio, partly offset by higher expenses and taxes. The combined ratio improved by 12.7 points to 88.8%. Adjusted earnings increased by €17 million to €20 million. On a constant exchange rate basis, adjusted earnings increased by €21 million mainly driven by higher underlying earnings, partly offset by lower net realized capital gains. Net income increased by €17 million to €13 million. On a constant exchange rate basis, net income increased by €19 million, mainly driven by higher adjusted earnings, partly offset by an unfavorable change in the fair value of hedging derivatives not eligible for hedge accounting. Half Year 2016 Financial Report 104 104 104 6 31 37 (6) 31 11 (0) 42 60 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations – Mediterranean & Latin American Region (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 3,836 3,959 7,533 Current accident year loss ratio (net) 73.6% 73.4% 73.9% All accident year loss ratio (net) 72.6% 73.6% 76.5% Net technical result before expenses 969 1,032 1,803 Expense ratio 26.6% 25.7% 26.3% Net investment result 230 260 462 Underlying earnings before tax 257 288 247 Income tax expenses / benefits (73) (89) (130) Net income from investments in affiliates and associates 1 2 7 Minority interests (18) (19) (21) Underlying earnings Group share 167 182 103 Net capital gains or losses attributable to shareholders net of income tax (3) 12 11 Adjusted earnings Group share 164 195 114 Profit or loss on financial assets (under FV option) & derivatives 1 6 34 Exceptional operations (including discontinued operations) (3) 0 (3) Goodwill and other related intangibles impacts (6) (8) (8) Integration and restructuring costs (12) (12) (30) Net income Group share 142 181 107 (a) Before intercompany eliminations. Gross Revenues amounted to €3,811 million net of intercompany eliminations as of June 30, 2016. Scope: (i) Italy, Spain, Greece, Turkey, Mexico, Morocco, Gulf Region, Colombia and Brazil are fully consolidated; (ii) Nigeria and Lebanon are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income; (iii) Brazil was fully consolidated as of January 1st, 2016. In the comments below, the comparable basis excludes the contributions of Brazil and Portugal. Gross revenues decreased by €123 million (-3%) to €3,836 million. On a comparable basis, gross revenues increased by €260 million (+7%). Personal lines (52% of gross revenues) were up 6% to €2,024 million, Commercial lines (46% of gross revenues) were up 6% to €1,769 million, and Other lines (2% of gross revenues) were up 47% to €66 million. The overall increase was driven by: Turkey up €187 million (+38%) mainly driven by tariff increases in Motor and new large accounts in Commercial Health; Mexico up €106 million (+14%) driven by tariff increases in Health and new large accounts in Commercial Motor; partly offset by The Gulf Region down €32 million (-6%) mainly due to the loss of large accounts in Commercial Health; Italy down €16 million (-2%) mainly due to tariff decreases in Personal Motor in a context of strong competition. Net technical result decreased by €63 million (-6%) to €969 million. On a comparable basis, net technical result increased by €21 million (+2%): the current accident year loss ratio increased by 0.4 point to 73.6% mainly due to (i) adverse claims experience in Motor in both Turkey and Italy, partly offset by (ii) an improvement in Mexico driven by tariff increases in Health and a decrease in frequency and average costs in Motor; the all accident year loss ratio decreased by 0.6 point to 72.6% driven by less unfavorable prior year reserve developments in Motor in Turkey. Half Year 2016 Financial Report 61 I ACTIVITY REPORT – HALF YEAR 2016 Expense ratio increased by 0.9 point to 26.6%. On a comparable basis, expense ratio increased by 0.9 point mainly driven by Spain and the Gulf Region due to negative volume effects and Mexico due to staff and IT cost increases to support growth. Enlarged expense ratio increased by 1.0 point to 29.5%. On a comparable basis, enlarged expense ratio increased by 1.0 point. As a result, the combined ratio remained stable at 99.2%. On a comparable basis, the combined ratio deteriorated by 0.3 point. Net investment result decreased by €30 million (-11%) to €230 million. On a comparable basis, net investment result decreased by €9 million (-3%) mainly due to the non-repeat of positive seasonality impacts of mutual fund distributions in 1H15. Income tax expenses decreased by €15 million (-17%) to €-73 million. On a comparable basis, income tax expenses decreased by €10 million (-12%) mainly driven by lower pre-tax earnings. Underlying earnings decreased by €15 million (-8%) to €167 million. On a comparable basis, underlying earnings decreased by €11 million (-6%). Adjusted earnings decreased by €31 million (-16%) to €164 million. On a comparable basis, adjusted earnings decreased by €26 million (-13%) mainly driven by lower underlying earnings and higher impairments on equities. Net income decreased by €39 million (-22%) to €142 million. On a comparable basis, net income decreased by €33 million (-17%) due to lower adjusted earnings and an unfavorable change in the fair value of mutual funds, partly offset by favorable foreign exchange impacts. Half Year 2016 Financial Report 62 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations – Direct business (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 1,453 1,391 2,735 Current accident year loss ratio (net) 76.7% 77.2% 78.2% All accident year loss ratio (net) 73.1% 77.5% 76.9% Net technical result before expenses 363 288 607 Expense ratio 21.8% 21.7% 21.1% Net investment result 58 63 124 Underlying earnings before tax 127 73 176 Income tax expenses / benefits (29) (21) (50) Net income from investments in affiliates and associates 4 4 8 Minority interests (0) (0) (0) Underlying earnings Group share 103 56 135 Net capital gains or losses attributable to shareholders net of income tax (3) 1 (2) Adjusted earnings Group share 100 57 132 Profit or loss on financial assets (under FV option) & derivatives (3) 0 (5) Exceptional operations (including discontinued operations) 6 0 (1) Goodwill and other related intangibles impacts (4) (3) (7) Integration and restructuring costs (2) (3) (12) Net income Group share 97 51 108 (a) Before intercompany eliminations. Gross Revenues amounted to €1,451 million net of intercompany eliminations as of June 30, 2016. Direct business includes operations in the United Kingdom (23% of total Direct gross revenues), France (22%), South Korea (19%), Japan (17%), Spain (6%), Poland (5%), Italy (4%) and Belgium (3%). In the comments below, the comparable basis excludes the contribution of Portugal. Gross revenues increased by €62 million (+4%) to €1,453 million. On a comparable basis, gross revenues increased by €86 million (+6%): Personal Motor (86% of gross revenues) was up €93 million (+8%) to €1,265 million driven by (i) Japan (€+36 million or +20%) due to a refinement in accounting methodology as well as higher average premiums, (ii) the United Kingdom (€+24 million or +8%) from tariff increases and improved retention, (iii) Poland (€+17 million or +39%) reflecting strong volumes on new business from direct sales and growth through the bancassurance partnership with mBank, (iv) France (€+14 million or +6%) from the positive impact of the Hamon law on new business, and (v) Spain (€+11 million or +12%) due to higher retention and higher new business for Flexirapid following the new tariff implemented in October 2015, partly offset by (vi) South Korea (€-11 million or -4%) due the implementation of a pruning strategy to restore profitability; Personal Non-Motor (14% of gross revenues) was up €2 million (+1%) to €201 million mainly due to France (€+4 million or +4%) reflecting a strong increase in renewals. Net technical result increased by €76 million (+26%) to €363 million. On a comparable basis, net technical result increased by €84 million (+29%): the current accident year loss ratio improved by 0.3 point to 76.7% mainly driven by the United Kingdom following tariff increases in Motor and a more favorable claims experience in Property and Poland due to a change in product mix following the acquisition of AXA Ubezpieczenia, partly offset by Belgium and France driven by higher natural events and South Korea driven by an increase in severity on Motor bodily injury; Half Year 2016 Financial Report 63 I ACTIVITY REPORT – HALF YEAR 2016 the all accident year loss ratio decreased by 4.4 points to 73.1% mainly as a result of higher positive prior year reserve developments in the United Kingdom. Expense ratio increased by 0.1% to 21.8%. On a comparable basis, expense ratio remained stable. Enlarged expense ratio decreased by 0.1 point to 27.1%. On a comparable basis, enlarged expense ratio decreased by 0.2 point. As a result, the combined ratio improved by 4.3 points to 94.9%. On a comparable basis, the combined ratio improved by 4.4 points. Net investment result decreased by €5 million (-7%) to €58 million. On a comparable basis, net investment result decreased by €2 million (-4%). Income tax expenses increased by €8 million (+39%) to €-29 million. On a comparable basis, income tax expenses increased by €9 million (+44%) mainly reflecting higher pre-tax underlying earnings. Underlying earnings increased by €46 million (+82%) to €103 million. On a comparable basis, underlying earnings increased by €51 million (+90%). Adjusted earnings increased by €43 million (+75%) to €100 million. On a comparable basis, adjusted earnings increased by €47 million (+83%) mainly due to higher underlying earnings. Net income increased by €46 million (+91%) to €97 million. On a comparable basis, net income increased by €51 million (+100%) mainly driven by higher adjusted earnings. Half Year 2016 Financial Report 64 I ACTIVITY REPORT – HALF YEAR 2016 Property & Casualty operations - Asia (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 597 597 1,108 Current accident year loss ratio (net) 68.1% 66.9% 67.0% All accident year loss ratio (net) 62.5% 63.4% 64.6% Net technical result before expenses 200 195 377 Expense ratio 30.7% 29.5% 29.3% Net investment result 21 17 36 Underlying earnings before tax 57 55 100 Income tax expenses / benefits (10) (10) (19) Net income from investments in affiliates and associates (10) (5) (16) Minority interests (8) (8) (12) Underlying earnings Group share 30 33 53 Net capital gains or losses attributable to shareholders net of income tax 3 5 6 Adjusted earnings Group share 32 38 59 Profit or loss on financial assets (under FV option) & derivatives (0) 1 0 Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (7) (7) (15) Integration and restructuring costs (0) (1) Net income Group share 25 32 44 (a) Before intercompany eliminations. Gross Revenues amounted to € 590 million net of intercompany eliminations as of June 30, 2016. Scope: (i) for gross revenues and combined ratio: Hong Kong, Malaysia, Singapore and Thailand, on a 100% share basis; (ii) for underlying earnings, adjusted earnings and net income: China, India, Hong Kong, Malaysia, Singapore and Thailand, on a group share basis. Indonesia operations are not consolidated. China and India are consolidated through equity method. Gross revenues remained stable at €597 million. On a comparable basis, gross revenues increased by €23 million (+4%) mainly in Malaysia (€+25 million or +15%) driven by (i) Personal lines (€+16 million) mainly in Motor (€+14 million) as a result of positive new business growth as well as (ii) Commercial lines (€+9 million) from new large accounts in Property (€+6 million) and Health (€+3 million). Net technical result increased by €5 million to €200 million. On a constant exchange rate basis, net technical result increased by €14 million (+7%): the current accident year loss ratio increased by 1.2 points to 68.1% due to worsening claims experience in Commercial Motor in Singapore and in Personal Motor and Commercial Health in Thailand, combined with higher large losses in Commercial Property in Malaysia; the all accident year loss ratio improved by 0.7 point to 62.7% due to higher positive prior year reserve developments arising from Singapore and Hong Kong. Expense ratio increased by 1.2 points to 30.7%. On a constant exchange rate basis, expense ratio increased by 1.1 points driven by higher administrative expenses (+1.0 point) mainly as a consequence of transformation investments in Hong Kong, Singapore and Thailand. Enlarged expense ratio increased by 1.0 point to 33.5%. On a constant exchange rate basis, enlarged expense ratio increased by 0.9 point. As a result, the combined ratio increased by 0.3 point to 93.2%. On a constant exchange rate basis, the combined ratio increased by 0.4 point. Half Year 2016 Financial Report 65 I ACTIVITY REPORT – HALF YEAR 2016 Net investment result increased by €4 million to €21 million. On a constant exchange rate basis, net investment result increased by €5 million mainly driven by a positive change in asset mix in Singapore as well as higher average asset bases in Hong Kong and Malaysia. Income tax expenses remained stable at €-10 million. On a constant exchange rate basis, income tax expenses remained stable, in line with pre-tax underlying earnings. Underlying earnings decreased by €3 million (-9%) to €30 million. On a constant exchange rate basis, underlying earnings decreased by €3 million, including a €6 million decrease from affiliates and associates, driven by India (€-4 million). Restating from the change of the Group share in Bharti from 26% to 49% in December 2015, underlying earnings increased by €5 million (+22%). Adjusted earnings decreased by €5 million (-14%) to €32 million. On a constant exchange rate basis, adjusted earnings decreased by €5 million driven by lower underlying earnings as well as lower net realized capital gains mainly in China. Net income decreased by €7 million (-22%) to €25 million. On a constant exchange rate basis, net income decreased by €6 million driven by lower adjusted earnings and an unfavorable foreign exchange impact in Singapore. Half Year 2016 Financial Report 66 I ACTIVITY REPORT – HALF YEAR 2016 INTERNATIONAL INSURANCE SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share for the International Insurance segment for the periods indicated: Consolidated Gross revenues (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 AXA Corporate Solutions Assurance 1,552 1,459 2,265 AXA Global Life and AXA Global P&C 82 77 85 AXA Assistance 724 682 1,371 Other (a) 24 26 51 TOTAL 2,382 2,244 3,772 Intercompany transactions (84) (82) (157) Contribution to consolidated gross revenues 2,298 2,162 3,615 (a) Including AXA Liabilities Managers and AXA Corporate Solutions Life Reinsurance Company. Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 AXA Corporate Solutions Assurance 48 78 134 AXA Global Life and AXA Global P&C 12 7 21 AXA Assistance 7 12 25 Other (a) 20 29 13 Underlying earnings Group share 86 126 193 Net realized capital gains or losses attributable to shareholders 14 27 34 Adjusted earnings Group share 100 153 227 Profit or loss on financial assets (under Fair Value option) & derivatives (23) (9) 11 Exceptional operations (including discontinued operations) 6 0 (1) Goodwill and related intangibles impacts Integration and restructuring costs (12) (3) (11) Net income Group share 70 142 226 (a) Including AXA Liabilities Managers and AXA Corporate Solutions Life Reinsurance Company. Half Year 2016 Financial Report 67 I ACTIVITY REPORT – HALF YEAR 2016 AXA Corporate Solutions Assurance (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 1,552 1,459 2,265 Current accident year loss ratio (net) 85.3% 84.0% 85.8% All accident year loss ratio (net) 86.2% 81.6% 82.8% Net technical result before expenses 179 228 391 Expense ratio 16.5% 15.9% 15.8% Net investment result 88 89 173 Underlying earnings before tax 53 119 205 Income tax expenses / benefits (4) (40) (69) Net income from investments in affiliates and associates Minority interests (1) (1) (2) Underlying earnings Group share 48 78 134 Net capital gains or losses attributable to shareholders net of income tax 13 11 21 Adjusted earnings Group share 61 89 155 Profit or loss on financial assets (under FV option) & derivatives (22) (13) 7 Exceptional operations (including discontinued operations) 6 Goodwill and other related intangibles impacts Integration and restructuring costs (2) (6) Net income Group share 42 77 156 (a) Before intercompany eliminations. Gross Revenues amounted to €1,546 million net of intercompany eliminations as of June 30, 2016. In the comments below, the comparable basis excludes the contribution of Brazil activities consolidated starting from January 1st, 2016. Gross revenues increased by €92 million (+6%) to €1,552 million. On a comparable basis, gross revenues increased by €65 million (+4%), notably in Liability (+14%) and Property (+12%), partly offset by negative evolutions in Motor (-6%) and Construction (-7%) due to a focus on profitability, and Aviation/Space (-7%) due to market rate decreases. Net technical result decreased by €49 million (-22%) to €179 million. On a comparable basis, net technical result decreased by €56 million (-25%): the current accident year loss ratio increased by 1.5 points to 85.3% driven by higher large losses in Liability, partly offset by lower large losses in Aviation/Space and lower attritional losses in Property; the all accident year loss ratio increased by 4.8 points to 86.2% mainly due to lower prior year adjustments. Expense ratio increased by 0.6 point to 16.5%. On a comparable basis, expense ratio remained stable. Enlarged expense ratio increased by 0.4 point to 20.0%. On a comparable basis, enlarged expense ratio decreased by 0.1 point. As a result, the combined ratio deteriorated by 5.2 points to 102.7%. On a comparable basis, the combined ratio deteriorated by 4.8 points. Net investment result decreased by €1 million (-1%) to €88 million. On a comparable basis, net investment result decreased by €2 million (-3%) mainly due to lower income from fixed income assets in a low interest rates environment. Income tax expenses decreased by €35 million (-89%) to €-4 million. On a comparable basis, income tax expenses decreased by €34 million (-84%) due to lower pre-tax underlying earnings and positive tax one-offs (€6 million). Half Year 2016 Financial Report 68 I ACTIVITY REPORT – HALF YEAR 2016 Underlying earnings decreased by €31 million (-39%) to €48 million. On a comparable basis, underlying earnings decreased by €29 million (-37%). Adjusted earnings decreased by €28 million (-32%) to €61 million. On a comparable basis, adjusted earnings decreased by €26 million (-29%) driven by lower underlying earnings, partly offset by higher net realized capital gains, mainly on equities. Net income decreased by €35 million (-45%) to €42 million. On a comparable basis, net income decreased by €27 million (-36%) mainly driven by lower adjusted earnings and an unfavorable change in the fair value of mutual funds. AXA Global Life and AXA Global P&C (1) Underlying earnings increased by €5 million to €12 million mainly due to an improved technical margin at AXA Global Life. Adjusted earnings increased by €5 million to €12 million mainly due to higher underlying earnings. Net income decreased by €2 million to €9 million as the increase in adjusted earnings (€+5 million) was more than offset by an unfavorable change in the fair value of financial assets (€-7 million). AXA Assistance Gross revenues increased by €42 million (+6%) to €724 million. On a comparable basis, gross revenues increased by €47 million (+8%) mainly driven by the change in accounting methodology of a large contract combined with strong developments in new business and in-force growth in Motor and Home activities. Underlying earnings decreased by €5 million (-45%) to €7 million mainly driven by higher commissions ratio and higher corporate tax rate due to country mix. Adjusted earnings decreased by €6 million (-47%) to €7 million driven by lower underlying earnings. Net income decreased by €14 million to €-4 million mainly driven by lower adjusted earnings combined with restructuring costs in Germany. Other international activities Underlying earnings decreased by €9 million to €20 million. On a constant exchange rate basis, underlying earnings decreased by €9 million mainly driven by unfavorable developments on run-off portfolios. Adjusted earnings decreased by €24 million to €20 million. On a constant exchange rate basis, adjusted earnings decreased by €23 million driven by lower underlying earnings and lower net realized capital gains. Net income decreased by €21 million to €23 million. On a constant exchange rate basis, net income decreased by €21 million driven by lower adjusted earnings. (1) Gathers both central teams from Life & Savings and Property & Casualty global business lines in addition to Group reinsurance operations. Half Year 2016 Financial Report 69 I ACTIVITY REPORT – HALF YEAR 2016 ASSET MANAGEMENT SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share for the Asset Management segment for the periods indicated: Consolidated Gross revenues (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 AB 1,270 1,378 2,690 AXA Investment Managers 766 798 1,604 TOTAL 2,036 2,176 4,295 Intercompany transactions (237) (221) (473) Contribution to consolidated gross revenues 1,799 1,956 3,822 Underlying, Adjusted earnings and Net income Group Share (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 AB 98 108 224 AXA Investment Managers 116 115 234 Underlying earnings Group share 213 222 458 Net realized capital gains or losses attributable to shareholders Adjusted earnings Group share 213 222 458 Profit or loss on financial assets (under Fair Value option) & derivatives 28 7 10 Exceptional operations (including discontinued operations) 12 0 27 Goodwill and related intangibles impacts Integration and restructuring costs (4) (1) (13) Net income Group share 249 228 482 Half Year 2016 Financial Report 70 I ACTIVITY REPORT – HALF YEAR 2016 AB (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 1,270 1,378 2,690 Net investment result (7) (4) (13) Total revenues 1,264 1,374 2,678 General expenses (1,009) (1,096) (2,105) Underlying earnings before tax 255 278 573 Income tax expenses / benefits (64) (68) (138) Minority interests (93) (103) (210) Underlying earnings Group share 98 108 224 Net capital gains or losses attributable to shareholders net of income tax 0 0 Adjusted earnings Group share 98 108 224 Profit or loss on financial assets (under FV option) & derivatives 26 1 (1) Exceptional operations (including discontinued operations) 0 0 Goodwill and other related intangibles impacts 0 0 Integration and restructuring costs (4) (1) (10) Net income Group share 120 108 213 Average exchange rate : 1.00 € = $ 1.116 1.116 1.119 (a) Before intercompany eliminations. Gross Revenues amounted to €1,216 million net of intercompany eliminations as of June 30, 2016. Assets under Management ("AUM") increased by €18 billion from year-end 2015 to €473 billion at June 30, 2016 as a result of €26 billion market appreciation and €2 billion net inflows, partly offset by €10 billion unfavorable foreign exchange rate impact. Gross revenues decreased by €108 million (-8%) to €1,270 million. On a comparable basis, gross revenues decreased by €107 million (-8%) due to (i) lower investment management fees (-7%) resulting from a 1% decrease in average AUM and an unfavorable shift in product mix and (ii) lower Institutional Research Services fees (-3%) due to lower market levels and trading volumes and (iii) lower distribution fees (-14%) due to lower average AUM in retail mutual funds. Net investment result decreased by €2 million to €-7 million. On a constant exchange rate basis, net investment result decreased by €2 million. General expenses decreased by €87 million (-8%) to €-1,009 million. On a constant exchange rate basis, general expenses decreased by €87 million (-8%) due to lower compensation expenses resulting from lower revenues and lower promotion and servicing expenses. As a result, the underlying cost income ratio increased by 0.3 point to 76.7%. Income tax expenses decreased by €4 million (-6%) to €-64 million. On a constant exchange rate basis, income tax expenses decreased by €4 million (-6%) as a result of lower pre-tax underlying earnings. Underlying earnings and adjusted earnings decreased by €10 million (-9%) to €98 million. On a constant exchange rate basis, underlying earnings and adjusted earnings decreased by €10 million (-9%). AXA ownership of AB at June 30, 2016 was 63.8%, compared to 62.8% at December 31, 2015. Net income increased by €12 million (+11%) to €120 million. On a constant exchange rate basis, net income increased by €12 million (+11%) as lower adjusted earnings were more than offset by an exceptional realized capital gain on the sale of a seed capital investment (€28 million). Half Year 2016 Financial Report 71 I ACTIVITY REPORT – HALF YEAR 2016 AXA Investment Managers (“AXA IM”) (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 Gross revenues (a) 766 798 1,604 Net investment result (9) (8) 1 Total revenues 757 790 1,606 General expenses (590) (598) (1,226) Underlying earnings before tax 168 193 380 Income tax expenses / benefits (49) (73) (135) Minority interests (3) (5) (10) Underlying earnings Group share 116 115 234 Net capital gains or losses attributable to shareholders net of income tax 0 0 Adjusted earnings Group share 116 115 234 Profit or loss on financial assets (under FV option) & derivatives 2 6 11 Exceptional operations (including discontinued operations) 12 0 27 Goodwill and other related intangibles impacts 0 0 Integration and restructuring costs 0 0 (2) Net income Group share 130 120 269 (a) Before intercompany eliminations. Gross Revenues amounted to €583 million net of intercompany eliminations as of June 30, 2016. Comparable basis in the comments below refers to constant foreign exchange rate restatement, excluding distribution fees retroceded. Assets under Management ("AUM") increased by €10 billion from December 31, 2015 to €679 billion at the end of June 30, 2016, driven by net inflows of €17 billion mostly from third party clients (€+20 billion) mainly from Asian joint ventures (€+16 billion), partly offset by market, forex and scope impacts (€7 billion). Gross revenues decreased by €23 million (-3%) to €766 million. On a comparable basis, net revenues remained stable at €607 million (€-1 million), mainly driven by lower management fees (€-22 million or - 4%) as a result of lower average assets (-5%) mainly due to the partial withdrawal of Friends Life assets, offset by higher transaction fees (€+11 million or +87%) and higher performance fees (€+9 million or +43%) mainly due to favorable timing effect in 2016. Net investment result decreased by €1 million (-19%) to €-9 million. On a comparable basis, net investment result decreased by €1 million (-16%). General expenses decreased by €8 million (-1%) to €-590 million. On a comparable basis, general expenses increased by €20 million (+5%) mainly due to higher staff costs resulting from an increase in both average salary and average FTE. The underlying cost income ratio increased by 4.4 points to 72.4%. On a comparable basis, the underlying cost income ratio increased by 4.4 points mainly due to the partial withdrawal of Friends Life assets (+2.3 points). Income tax expenses decreased by €24 million (-32%) to €-49 million. On a comparable basis, income tax expenses decreased by €23 million (-32%) mainly driven by the non-repeat of unfavorable tax one- offs in 2015 (€11 million) as well as a favorable one-off in 2016 (€8 million). Underlying earnings increased by €1 million (+1%) to €116 million. On a comparable basis, underlying earnings increased by €3 million (+3%). Adjusted earnings increased by €1 million (+1%) to €116 million. On a comparable basis, adjusted earnings increased by €3 million (+3%) in line with higher underlying earnings. Half Year 2016 Financial Report 72 I ACTIVITY REPORT – HALF YEAR 2016 Net income increased by €9 million (+8%) to €130 million. On a comparable basis, net income increased by €12 million (+10%) mainly explained by higher adjusted earnings as well as exceptional fees related to the partial withdrawal of Friends Life assets. Half Year 2016 Financial Report 73 I ACTIVITY REPORT – HALF YEAR 2016 BANKING SEGMENT The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share attributable to AXA’s banking activities for the periods indicated: Consolidated Gross revenues (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 AXA Banks (a) 276 287 Belgium (b) 187 213 France 70 66 Hungary 11 (4) Germany 8 12 Other 2 2 TOTAL 278 288 Intercompany transactions 19 13 Contribution to consolidated gross revenues 297 302 (a) Of which AXA Bank Europe and its branches: €198 million. (b) Includes commercial activities in Belgium and shared services of AXA Bank Europe (treasury and support functions). Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 AXA Banks 61 58 Belgium 57 54 France 2 2 Hungary Germany 3 2 Other (1) (2) Underlying earnings Group share 60 56 Net realized capital gains or losses attributable to shareholders 0 (0) Adjusted earnings Group share 60 56 Profit or loss on financial assets (under Fair Value option) & derivatives (9) (7) Exceptional operations (including discontinued operations) 6 (8) Goodwill and related intangibles impacts Integration and restructuring costs (2) (2) Net income Group share 55 40 Half Year 2016 Financial Report 581 402 152 6 22 5 586 35 621 99 90 5 4 (2) 97 0 97 33 (71) (10) 49 74 I ACTIVITY REPORT – HALF YEAR 2016 Belgium Net banking revenues decreased by €26 million (-12%) to €187 million. Operating net banking revenues decreased by €27 million (-12%) mainly driven by (i) continuous prepayments and refinancings which led to lower interest income on mortgage loans, (ii) lower intermediation activities, partly offset by (iii) higher commercial results from improved retail commercial margin and strong new credit production, as well as (iv) higher net realized capital gains. Underlying earnings increased by €3 million (+5%) to €57 million due to (i) a positive timing effect on bank levies (€+25 million) and (ii) an improved cost of risk (€+11 million), partly offset by (iii) lower operating net banking revenues (€-27 million) and (iv) higher distribution commissions (€-4 million). Adjusted earnings increased by €3 million (+5%) to €57 million due to higher underlying earnings. Net income increased by €3 million (+7%) to €48 million due to higher adjusted earnings. France Net banking revenues increased by €4 million (+6%) to €70 million. Operating net banking revenues increased by €5 million (+8%) to €71 million mainly driven by higher interest income on retail loans, primarily on mortgages as a consequence of in-force growth following the strong level of new credit production during the last years, and higher fees due to the increase in early repayment of loans. Underlying earnings and adjusted earnings remained stable to €2 million, as an increase in operating expenses to support business growth was offset mainly by an improvement in the cost of risk and an increase in operating net banking revenues. Net income decreased by €1 million (-37%) to €1 million as a result of an unfavorable change in the fair value of debt and hedging instruments. Hungary Net income increased by €15 million to €7 million. On a constant exchange rate basis, net income increased by €15 million mainly due to the non-repeat of the negative foreign exchange result in 1H15 (€+6 million), lower bank levies (€+4 million) and an improved cost of risk (€+2 million). Germany Net banking revenues decreased by €3 million (-29%) to €8 million. Underlying earnings increased by €1 million (+51%) to €3 million. Adjusted earnings increased by €1 million (+66%) to €3 million. Net income decreased by €2 million to €0 million. Half Year 2016 Financial Report 75 I ACTIVITY REPORT – HALF YEAR 2016 HOLDINGS AND OTHER COMPANIES The Holdings and other companies consist of AXA’s non-operating companies, including mainly the AXA parent company, AXA France Assurance, AXA Financial, AXA United Kingdom Holdings, AXA Germany Holdings and AXA Belgian Holding. Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2016 June 30, 2015 December 31, 2015 AXA (349) (408) (833) Other French holding companies 2 (16) (16) Foreign holding companies (41) (26) (58) Other 0 (0) 1 Underlying earnings Group share (387) (451) (906) Net realized capital gains or losses attributable to shareholders (5) (1) 9 Adjusted earnings Group share (392) (452) (897) Profit or loss on financial assets (under Fair Value option) & derivatives (312) (296) (115) Exceptional operations (including discontinued operations) 969 (41) (71) Goodwill and related intangibles impacts Integration and restructuring costs (1) (2) 3 Net income Group share 264 (791) (1,080) AXA SA (1) Underlying earnings increased by €59 million to €-349 million mainly driven by lower financial charges mainly reflecting the interest rate management program implemented in a context of a lower interest environment, partly offset by the impact of the external debt issuance program. Adjusted earnings increased by €54 million to €-355 million mainly driven by higher underlying earnings, partly offset by higher impairment on equities. Net income increased by €147 million to €-590 million mainly driven by (i) higher adjusted earnings, (ii) a realized gain related to the disposal of AXA Portugal, as well as (iii) a less unfavorable change in the fair value of interest rate and foreign exchange economic derivatives not eligible for hedge accounting. Other French holding companies AXA FRANCE ASSURANCE Underlying earnings increased by €10 million to €-5 million due to the decrease of the tax on dividends received from subsidiaries. Adjusted earnings and net income increased by €9 million to €-6 million in line with the increase in underlying earnings. (1) All the figures are after tax. Half Year 2016 Financial Report 76 I ACTIVITY REPORT – HALF YEAR 2016 OTHER FRENCH HOLDINGS Underlying earnings and adjusted earnings increased by €9 million to €8 million mainly due to lower financial charges. Net income increased by €11 million to €-15 million mainly driven by higher adjusted earnings. Foreign holding companies AXA FINANCIAL INC. Underlying earnings and adjusted earnings decreased by €44 million to €-43 million. On a constant exchange rate basis, underlying earnings and adjusted earnings decreased by €44 million mainly driven by lower rental income due to the sale of two real estate properties in New York, partly offset by lower share-based compensation expenses. Net income increased by €917 million to €919 million. On a constant exchange rate basis, net income increased by €917 million reflecting the exceptional net capital gain on the sale of two real estate properties in New York. AXA UK HOLDINGS Underlying earnings increased by €2 million (+30%) to €-4 million. On a constant exchange rate basis, underlying earnings increased by €2 million (+26%) mainly driven by lower pension costs. Adjusted earnings increased by €2 million (+29%) to €-4 million. On a constant exchange rate basis, adjusted earnings increased by €1 million (+25%) mainly due to higher underlying earnings. Net Income decreased by €10 million to €-11 million. On a constant exchange rate basis, net income decreased by €11 million due to an unfavorable change in the fair value of foreign exchange hedging derivatives not eligible for hedge accounting (€-17 million). GERMAN HOLDING COMPANIES Underlying earnings increased by €27 million to €23 million mainly due to one-off interest profits on tax claims and lower pension costs. Adjusted earnings increased by €33 million to €29 million driven by higher underlying earnings and higher net realized capital gains. Net income decreased by €1 million to €4 million as higher adjusted earnings were more than offset by an unfavorable change in the fair value of hedging derivatives related to pensions not eligible for hedge accounting. BELGIAN HOLDING COMPANY Underlying earnings and adjusted earnings decreased by €2 million to €-5 million. Net income increased by €2 million to €-2 million driven by a favorable change in the fair value of foreign exchange derivatives not eligible for hedge accounting, partly offset by lower adjusted earnings. Half Year 2016 Financial Report 77 I ACTIVITY REPORT – HALF YEAR 2016 MEDITERRANEAN & LATIN AMERICAN REGION HOLDINGS Underlying earnings increased by €4 million (+26%) to €-12 million. On a constant exchange rate basis, underlying earnings increased by €4 million (+26%) mainly driven by lower financing debt expenses. Adjusted earnings decreased by €1 million (-4%) to €-17 million. On a constant exchange rate basis, adjusted earnings decreased by €1 million (-4%) as higher underlying earnings were more than offset by higher impairments on equities. Net income decreased by €20 million (-116%) to €-37 million. On a constant exchange rate basis, net income decreased by €20 million (-116%) mainly driven by an unfavorable change in the fair value of hedging derivatives not eligible for hedge accounting. Half Year 2016 Financial Report 78 I ACTIVITY REPORT – HALF YEAR 2016 OUTLOOK AXA’s continued discipline has positioned the company well to remain resilient and strong in an environment characterized by continued market volatility and extremely low rates. AXA’s Solvency II position should remain strong and resilient to external shocks. Under its new strategic plan, the company will focus actively on four clearly identified growth drivers (efficiency, business growth, technical margin improvement and M&A), continue to allocate capital effectively and pursue the transformation of its business model. This should enable AXA to continue creating lasting shareholder value and offer an attractive return. Half Year 2016 Financial Report 79 I ACTIVITY REPORT – HALF YEAR 2016 GLOSSARY The split between high growth markets and mature markets is detailed below: The notion of High Growth markets includes the following countries: Central & Eastern countries (Poland, Czech Republic, Slovakia, Russia), Hong Kong, South-East Asia (Singapore, Indonesia, Thailand, Philippines, Malaysia), India, China, and the Mediterranean & Latin American Region (Morocco, Turkey, the Gulf Region, Mexico, Lebanon, Colombia, Brazil), excluding Direct operations. The notion of Mature markets includes the following countries: the United States, the United Kingdom, Ireland, Belgium, Luxembourg, Germany, Switzerland, Japan, Italy, Spain, Portugal, Greece and France. Comparable basis for revenues and Annualized Premiums Equivalent On a comparable basis means that the data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis). It also means that data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Adjusted Earnings Adjusted earnings represent the net income (Group share) before the impact of: Exceptional operations (primarily change in scope and discontinued operations);  Integration and restructuring costs related to material newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; Goodwill and other related intangibles; and  Profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets. Derivatives related to invested assets: Include all foreign exchange derivatives, except the ones related to currency options in earnings hedging strategies which are included in underlying earnings; Exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy; and Exclude derivatives involved in the economic hedging of realized gains and impairments of equity securities and real estate backing general account and shareholders’ funds, for which cost at inception, intrinsic value and pay-off flow through adjusted earnings, and only time value flows through net income when there is no intention to sell the derivatives in the short term (if not, flows through adjusted earnings). Underlying Earnings Underlying earnings correspond to adjusted earnings excluding net capital gains or losses attributable to shareholders. Net capital gains or losses attributable to shareholders include the following elements net of tax: Realized gains and losses and change in impairment valuation allowance (on assets not designated under fair value option or trading assets); Half Year 2016 Financial Report 80 I ACTIVITY REPORT – HALF YEAR 2016 Cost at inception, intrinsic value and pay-off of derivatives involved in the economic hedging of realized gains and impairments of equity securities and real estate backing general account and shareholders’ funds; Related impact on policyholder participation (Life & Savings business); and  DAC and VBI amortization or other reactivity to those elements if any (Life & Savings business) and net of hedging if any. Earnings per share Earnings per share (EPS) represent AXA's consolidated earnings (including interest charges related to undated debts recorded through shareholders’ equity), divided by the weighted average number of outstanding ordinary shares. Diluted earnings per share (diluted EPS) represent AXA's consolidated earnings (including interest charges related to undated debts recorded through shareholders’ equity), divided by the weighted average number of outstanding ordinary shares, on a diluted basis (that is to say including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Return On Equity (“ROE”) The calculation is prepared with the following principles: For net income ROE: Calculation is based on consolidated financial statements, i.e. shareholders’ equity including undated subordinated debt (“Super Subordinated Debts” TSS / “Undated Subordinated Debts” TSDI) and Other Comprehensive Income “OCI”, and net income not reflecting any interest charges on TSS / TSDI. For adjusted and underlying ROE: o All undated subordinated debts (TSS / TSDI) are treated as financing debt, thus excluded from shareholders’ equity. Interest charges on TSS / TSDI are deducted from earnings. o o OCI is excluded from the average shareholders’ equity. Life & Savings Margin Analysis Life & Savings margin analysis is presented on an underlying basis. Even though the presentation of Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. As a result, the operating income under the Margin Analysis is equal to that reported in AXA’s Statement of Income for the segment. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Margin Analysis as set out below. For insurance contracts and investment contracts with Discretionary Participation Features (DPF): o Gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees and Revenues” and “Net Technical Margin”. o Policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”. Half Year 2016 Financial Report 81 I ACTIVITY REPORT – HALF YEAR 2016 o The “Investment margin” represents the net investment result in the Statement of Income and is adjusted to take into account the related policyholders’ participation (see above) as well as changes in specific reserve linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees and Revenues”. o Change in URR (Unearned Revenues Reserves – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis. For investment contracts without DPF: o Deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the underlying Statement of Income within Gross consolidated revenues on a separate line, and in Margin analysis in the lines “Fees & Revenues” and “Net Technical margin”. o Change in UFR (Unearned Fees Reserves - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis. Underlying Investment margin includes the following items: Net investment income; and  Interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income. Underlying Fees & Revenues include: Revenues derived from mutual fund sales (which are part of consolidated revenues);  Loadings charged to policyholders on premiums / deposits and fees on funds under management for separate account (Unit-Linked) business; Loadings on (or contractual charges included in) premiums / deposits received on all general account product lines; Deferral income such as capitalization net of amortization of URR (Unearned Revenues Reserves) and UFR (Unearned Fee Reserves); and Other fee revenues, e.g., fees received on financial planning or sales of third party products. Underlying Net Technical margin includes the following components: Mortality/morbidity margin: respect of mortality/morbidity for the related period less benefits and claims. It is equal to the difference between income for assuming risk and the actual cost of benefits. This margin does not include the claims handling costs and change in claims handling cost reserves; the amount charged to the policyholder in Surrender margin: the difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination; GMxB (Variable Annuity guarantees) active financial risk management is the net result from GMxB lines corresponding to explicit charges related to these types of guarantees less cost of hedge. It also includes the unhedged business result; Policyholder bonuses if the policyholder participates in the risk margin;  Ceded reinsurance result; and Half Year 2016 Financial Report 82 I ACTIVITY REPORT – HALF YEAR 2016 Other changes in insurance reserves are all the reserves strengthening or release coming from changes in valuation assumptions, additional reserves for mortality risk and other technical impacts such as premium deficiency net of derivative if any. Underlying Expenses are: Acquisition expenses, including commissions and general expenses allocated to new business, related to insurance products as well as to other activities (e.g., mutual fund sales); Capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; Amortization of acquisition expenses on current year and prior year new business, including the impact of interest capitalized: amortization charge for Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; Administrative expenses;  Claims handling costs; and  Policyholder bonuses if the policyholder participates in the expenses of the company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins, as well as amortization of other intangibles related to the in-force business. Life & Savings underlying cost income ratio: Underlying expenses plus underlying VBI amortization divided by "underlying" operating margin, where "Underlying" operating margin is the sum of (i) Underlying Investment margin, (ii) Underlying Fees and revenues, and (iii) Underlying Net technical Margin (all items defined above). Property & Casualty (including AXA Corporate Solutions Assurance) Underlying net investment result includes the net investment income less the recurring interests credited to insurance annuity reserves. Underlying net technical result is the sum of the following components: Earned premiums, gross of reinsurance;  Claims charges, gross of reinsurance;  Change in claims reserves, including claims handling costs reserves, gross of reinsurance, excluding the recurring interests credited to insurance annuity reserves; Claims handling costs; and  Net result of ceded reinsurance. Current accident year loss ratio net of reinsurance is the ratio of: Current year claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on current accident year, excluding the recurring interests credited to the insurance annuity reserves; to Earned revenues, gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: All accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding the recurring interests credited to the insurance annuity reserves; to Earned revenues, gross of reinsurance. Underlying expense ratio is the ratio of: Underlying expenses (excluding claims handling costs); to Half Year 2016 Financial Report 83 I ACTIVITY REPORT – HALF YEAR 2016 Earned revenues, gross of reinsurance. Underlying expenses include two components: expenses (including commissions) related to acquisition of contracts (with the related acquisition expense ratio) and all other expenses (with the related administrative expense ratio). Underlying expenses exclude customer intangible amortization and integration costs related to material newly acquired companies. The enlarged expense ratio is the sum of the expense ratio and claims handling cost ratio. The underlying combined ratio is the sum of the underlying expense ratio and the all accident year loss ratio. Asset Management Net New Money: Inflows of client money less outflows of client money. Net New Money measures the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying Cost Income ratio: (general expenses net of distribution revenues) / (gross revenues excluding distribution revenues). Assets Under Management (AUM) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers and AB. AUM only includes funds and mandates which generate fees and exclude double counting. Banking Net New Money is a banking volume indicator. It represents the net cash flows of customers’ balances in the bank, with cash inflows (collected money) and cash outflows (exiting money). It includes market effect and capitalized interests over the period. Net operating revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of « fair-value-P&L » assets and of hedging derivatives. Half Year 2016 Financial Report 84 I CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 II Consolidated financial statements Half Year 2016 Half Year 2016 Financial Report / 85 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION .......................................................................................... 87 II.2 CONSOLIDATED STATEMENT OF INCOME ..................................................................................................................... 89 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ................................................................................. 90 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ............................................................................................ 91 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS ........................................................................................................... 93 NOTE 1 ACCOUNTING PRINCIPLES ........................................................................................................................................... 95 1.1 General information ............................................................................................................................. 95 1.2 General accounting principles ............................................................................................................. 95 NOTE 2 SCOPE OF CONSOLIDATION......................................................................................................................................... 97 2.1 Consolidated companies ..................................................................................................................... 97 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT ............................................................................... 101 3.1 Consolidated Statement of Income by segment ............................................................................... 102 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES .................................................................................................. 104 4.1 United Kingdom Life & Savings businesses disposal ....................................................................... 104 4.2 Hungarian banking operations disposal ............................................................................................ 105 4.3 AXA Portugal disposal ....................................................................................................................... 105 NOTE 5 INVESTMENTS ............................................................................................................................................................... 106 5.1 Breakdown of investments ................................................................................................................ 106 5.2 Investment in real estate properties .................................................................................................. 107 5.3 Unrealized gains and losses on financial investments ...................................................................... 108 5.4 Financial investments subject to impairment .................................................................................... 109 5.5 Investments/Fair value ...................................................................................................................... 110 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS .................................................................................. 113 6.1 Impact of transactions with shareholders .......................................................................................... 113 6.2 Comprehensive income for the period .............................................................................................. 116 6.3 Change in minority interests .............................................................................................................. 118 NOTE 7 FINANCING DEBT ......................................................................................................................................................... 120 NOTE 8 NET INCOME PER ORDINARY SHARE .................................................................................................................... 121 Half Year 2016 Financial Report 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in Euro million) June 30, 2016 December 31, 2015 Goodwill 16,355 17,062 Value of purchased business in force (a) 2,221 2,364 Deferred acquisition costs and equivalent 22,147 24,028 Other intangible assets 3,212 3,277 Intangible assets 43,935 46,731 Investments in real estate properties 20,869 20,369 Financial investments 537,291 500,311 Assets backing contracts where the financial risk is borne by policyholders (b) 164,380 194,601 5 Investments from insurance activities 722,540 715,282 5 Investments from banking and other activities 38,162 37,579 Investments accounted for using the equity method 2,228 2,306 Reinsurers' share in insurance and investment contracts liabilities 13,935 19,734 Tangible assets 1,437 1,432 Deferred policyholders' participation assets 0 88 Deferred tax assets 1,061 2,083 Other assets 2,498 3,603 Receivables arising from direct insurance and inward reinsurance operations 17,312 16,566 Receivables arising from outward reinsurance operations 906 878 Receivables - current tax 777 866 Other receivables 15,332 14,263 Receivables 34,328 32,573 4 Assets held for sale (c) 27,879 2,988 Cash and cash equivalents 33,162 26,275 TOTAL ASSETS 918,666 887,070 Note: All invested assets are shown net of related derivative instruments impact. (a) Amounts are gross of tax. (b) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) As of June 30, 2016, amounts include assets of AXA Bank Hungary and United Kingdom Life & Savings operations for which the disposal process was not finalized at period-end. As of December 31, 2015, amounts include assets of Portuguese operations, AXA Bank Hungary and two real estate properties in the United States for which the disposal process was not finalized at this date. Half Year 2016 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 Notes (in Euro million) June 30, 2016 December 31, 2015 Share capital and capital in excess of nominal value 25,854 26,094 Reserves and translation reserve 45,032 36,765 Net consolidated income - Group share 3,207 5,617 Shareholders’ equity – Group share 74,093 68,475 Minority interests 4,912 4,166 6 TOTAL SHAREHOLDERS' EQUITY 79,005 72,641 Subordinated debt 7,512 7,465 Financing debt instruments issued 1,114 624 Financing debt owed to credit institutions 0 0 7 Financing debt (a) 8,625 8,089 Liabilities arising from insurance contracts 415,198 398,776 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (b) 148,981 152,079 Total liabilities arising from insurance contracts 564,179 550,856 Liabilities arising from investment contracts with discretionary participating features 33,425 33,142 Liabilities arising from investment contracts with no discretionary participating features 1,451 538 Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 3,510 12,279 3,362 39,564 Total liabilities arising from investment contracts 50,665 76,606 Unearned revenue and unearned fee reserves 2,505 3,084 Liabilities arising from policyholders' participation and other obligations 58,458 46,222 Derivative instruments relating to insurance and investment contracts (3,706) (1,641) LIABILITIES ARISING FROM INSURANCE AND INVESTMENT CONTRACTS 672,100 675,127 Liabilities arising from banking activities (a) 33,574 32,639 Provisions for risks and charges 13,687 12,659 Deferred tax liabilities 7,548 5,156 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders 11,355 10,525 Other debt instruments issued, notes and bank overdrafts (a) 2,923 3,692 Payables arising from direct insurance and inward reinsurance operations 7,498 9,760 Payables arising from outward reinsurance operations 6,609 12,917 Payables – current tax 1,430 1,662 Collateral debts relating to investments under a lending agreement or equivalent 30,435 25,635 Other payables 17,110 14,509 Payables 77,359 78,700 4 Liabilities held for sale (c) 26,768 2,059 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 918,666 887,070 (a) Amounts are shown net of related derivative instruments impact. (b) Includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) As of June 30, 2016, amounts include liabilities of AXA Bank Hungary and United Kingdom Life & Savings operations for which the disposal process was not finalized at period-end. As of December 31, 2015, amounts include the liabilities of Portuguese operations and AXA Bank Hungary for which the disposal process was not finalized at this date. Half Year 2016 Financial Report 88 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 II.2 CONSOLIDATED STATEMENT OF INCOME Notes (in Euro million, except EPS in Euro) June 30, 2016 June 30, 2015 (restated) (a) Gross written premiums 51,003 51,065 Fees and charges relating to investment contracts with no participating features 116 133 Revenues from insurance activities 51,119 51,198 Net revenues from banking activities 295 300 Revenues from other activities 2,622 2,826 Revenues (b) 54,036 54,324 Change in unearned premiums net of unearned revenues and fees (4,543) (4,313) Net investment income (c) 8,180 7,454 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (d) 3,311 1,555 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (e) 1,935 4,350 of which change in fair value of assets with financial risk borne by policyholders (f) 425 5,252 Change in investments impairment (g) (398) (209) Net investment result excluding financing expenses 13,027 13,151 Technical charges relating to insurance activities (f) (46,583) (47,560) Net result from outward reinsurance (72) (541) Bank operating expenses (22) (22) Acquisition costs (5,512) (5,303) Amortization of the value of purchased business in force (84) (110) Administrative expenses (4,886) (5,173) Change in goodwill impairment and other intangible assets impairment and amortization (56) (55) Other income and expenses (54) (8) Other operating income and expenses (57,267) (58,772) Income from operating activities before tax 5,253 4,390 Income (net of impairment) from investment accounted for using the equity method 92 88 Financing debts expenses (h) (229) (213) Net income from operating activities before tax 5,117 4,265 Income tax (1,316) (1,008) Net operating income 3,800 3,257 4 Result from discontinued operations net of tax (i) (404) 27 Net consolidated income after tax 3,396 3,284 Split between : Net consolidated income - Group share 3,207 3,077 Net consolidated income - Minority interests 189 207 8 8 Earnings per share (j) Fully diluted earnings per share (j) 1.27 1.27 1.20 1.19 (a) The contribution of discontinued United Kingdom Life & Savings operations is reclassified on a separate line of the income statement in order to present a comparable basis. (b) Gross of reinsurance. (c) Net of investment management costs and including gains/losses from derivatives hedging variable annuities. (d) Includes impairment releases on investments sold. (e) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (f) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (g) Excludes impairment releases on investments sold. (h) Includes net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). (i) Relates to the discontinued United Kingdom Life & Savings operations. (j) Refer to Note 8 for the split of earning per share between continuing and discontinued operations. Half Year 2016 Financial Report 89 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2016 June 30, 2015 Reserves relating to changes in fair value through shareholders' equity 6,806 Translation reserves (365) Items that may be reclassified subsequently to Profit or Loss 6,441 Employee benefits actuarial gains and losses (830) Items that will not be reclassified subsequently to Profit or Loss (830) Net gains and losses recognized directly through shareholders' equity 5,611 Net consolidated income 3,396 Split between: Net consolidated income - Group share 3,207 Net consolidated income - Minority interests 189 TOTAL COMPREHENSIVE INCOME (CI) 9,008 Split between: Total comprehensive income - Group share 8,798 Total comprehensive income - Minority interests 210 Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Half Year 2016 Financial Report (1,969) 3,593 1,624 82 82 1,706 3,284 3,077 207 4,990 4,633 357 90 II II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share Capital (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Shareholders' equity opening January 1, 2016 2,426,458 2.29 5,557 21,094 (209) Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) (2,239) - - - - - - - - 2.29 - - - - - - - - (5) - - - - - - - - (90) 11 - - - - - - - - (143) - - - - - Dividends paid Impact of transactions with shareholders (2,239) 2.29 (5) (78) (143) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Net consolidated income - - - - - - - - - - Total Comprehensive Income (CI) Shareholders' equity closing June 30, 2016 2,424,219 2.29 5,551 21,016 (352) Note: amounts are presented net of impacts of shadow accounting and its effects on policyholders' participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), and equity components of compounded financial instruments (e.g convertible bonds) (see Note 6.1.1.c). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2016 Financial Report CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 Attributable to shareholders Other reserves Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests 12,774 368 6,550 29 22,311 68,475 4,166 - - - - - - - - - - - - - - - - - - - (14) - - (140) - - - - - - - - - - - - - - - - (144) (5) (90) 11 (143) (14) - - (140) (144) - - - - - - - 536 (2,656) (2,656) (154) (2,800) (3,180) 536 6,594 162 6,756 50 - - 6,594 - - 162 (255) - - (255) (83) - - (83) (827) 3,207 2,380 (338) (827) 3,207 8,798 (27) (2) 189 210 19,368 530 6,141 (54) 21,891 74,093 4,912 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests Shareholders 'equity opening January 1, 2015 (b) 2,442,277 2.29 5,593 21,515 (164) 15,327 400 6,472 (2,960) 19,038 65,219 2,815 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares 1,875 - - - - 2.29 - - - - 4 - - - - (17) 12 - - - - (465) - - - - - - - - - - - - (38) - - - - - - - - 4 (17) 12 (465) (38) - - - - Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt (154) (154) Others (including impact on change in scope) (c) 35 35 560 Dividends paid (2,317) (2,317) Impact of transactions with shareholders 1,875 2.29 4 (5) (465) (192) (2,282) (2,939) 560 Reserves relating to changes in fair value through shareholders' equity (1,872) (101) (1,973) 4 Translation reserves Employee benefits actuarial gains and losses Net consolidated income Total Comprehensive Income (CI) - - - - - - - - - - - - (1,872) - - (101) 400 - - 400 3,047 - - 3,047 82 3,077 3,159 3,447 82 3,077 4,633 146 0 207 357 Shareholders' equity closing June 30, 2015 2,444,152 2.29 5,597 21,510 (629) 13,455 299 6,680 88 19,915 66,913 3,732 Note: amounts are presented net of impacts of shadow accounting and its effects on policyholders' participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), and equity components of compounded financial instruments (e.g convertible bonds) (see Note 6.1.2.c). (b) Reso Garantia is accounted for using the equity method in 2014 in the Group consolidated financial statements on the basis of a closing at September 30. Given significant movements in the Russian ruble exchange rate between September 30, 2014 and December 31,2014, the balance sheet used as a basis of the equity method has been translated using December 31 exchange rate. (c) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2016 Financial Report 92 II Avec et sans PB discrétionnaire II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2016 June 30, 2015 Operating income including discontinued operations before tax 4,714 4,269 Net amortization expense (a) 380 434 Change in goodwill impairment and other intangible assets impairment (b) 409 Net change in deferred acquisition costs and equivalent (690) (579) Net increase / (write back) in impairment on investments, tangible and other intangible assets 391 199 Change in fair value of investments at fair value through profit or loss (2,005) (5,827) Net change in liabilities arising from insurance and investment contracts (c) 13,446 13,773 Net increase / (write back) in other provisions (d) (26) (205) Income (net of impairment) from investment accounted for using the equity method (92) (88) Adjustment of non cash balances included in the operating income before tax 11,812 7,708 Net realized investment gains and losses (4,151) (913) Financing debt expenses 229 213 Adjustment for reclassification to investing or financing activities (3,923) (699) Dividends recorded in profit or loss during the period (1,494) (1,889) Investment income & expense recorded in profit or loss during the period (e) (7,386) (6,294) Adjustment of transactions from accrued to cash basis (8,880) (8,184) Net cash impact of deposit accounting (104) 1,554 Dividends and interim dividends collected 1,798 2,277 Investment income (e) 11,036 9,969 Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (2,601) (3,074) Net operating cash from banking activities Change in operating receivables and payables Net cash provided by other assets and liabilities (f) Tax expenses paid 684 (4,055) 2,182 (902) 486 (2,158) (1,197) (689) Other operating cash impact and non cash adjustment (2,628) 661 Net cash impact of transactions with cash impact not included in the operating income before tax 5,409 7,829 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 9,132 10,923 Purchase of subsidiaries and affiliated companies, net of cash acquired 1 202 Disposal of subsidiaries and affiliated companies, net of cash ceded 183 (11) Net cash related to changes in scope of consolidation 184 191 Sales of debt instruments (f) 40,479 43,943 Sales of equity instruments and non consolidated investment funds (f) (g) 16,919 15,191 Sales of investment properties held directly or not (f) 5,237 210 Sales and/or repayment of loans and other assets (f) (h) 15,307 14,574 Net cash related to sales and repayments of investments (f) (g) (h) 77,943 73,918 Purchases of debt instruments (f) (45,704) (46,150) Purchases of equity instruments and non consolidated investment funds (f) (g) (15,616) (15,516) Purchases of investment properties held direct or not (f) (3,868) (1,028) Purchases and/or issues of loans and other assets (g) (h) (15,828) (17,204) Net cash related to purchases and issuance of investments (f) (g) (h) (81,015) (79,898) Sales of tangible and intangible assets 5 20 Purchases of tangible and intangible assets (752) (191) Net cash related to sales and purchases of tangible and intangible assets (747) (172) Increase in collateral payable / Decrease in collateral receivable 48,575 37,341 Decrease in collateral payable / Increase in collateral receivable (45,732) (36,431) Net cash impact of assets lending / borrowing collateral receivables and payables 2,842 910 93 Half Year 2016 Financial Report CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES (793) Issuance of equity instruments 19 Repayments of equity instruments (460) Transactions on treasury shares (4) Dividends payout (2,838) Interests on undated subordinated debts paid (155) Acquisition / sale of interests in subsidiaries without change in control (66) Net cash related to transactions with shareholders (3,503) Cash provided by financial debts issuance 2,057 Cash used for financial debts repayments (51) Interests on financing debt paid (i) (171) Net interest margin of hedging derivatives on financing debt 3 Net cash related to Group financing 1,838 Other financing cash impact and non cash adjustment NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (1,665) NET CASH PROVIDED BY DISCONTINUED OPERATIONS (39) CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 25,630 Net cash provided by operating activities 9,132 Net cash provided by investing activities (793) Net cash provided by financing activities (1,665) Net cash provided by discontinued operations (39) Impact of change in consolidation method and of reclassifications as held for sale (k) (308) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents (101) CASH AND CASH EQUIVALENT AS OF JUNE 30 (j) 31,856 (a) Includes premiums/discounts capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes gains/losses from derivatives hedging variable annuities. (f) Includes related derivatives. (g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (j) Net of bank overdrafts. (k) In 2016, amounts include the assets and liabilities related to discontinued United Kingdom Life & Savings operations for which the disposal process is not finalized as of June 30, 2016. In 2015, amounts include the liabilities of Portuguese operations and AXA Bank Hungary for which the disposal process was not finalized at year-end. (in Euro million) June 30, 2016 June 30, 2015 Cash and cash equivalent 33,162 Bank overdrafts (a) (1,306) Cash and cash equivalent as of June 30 (b) 31,856 (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts). Half Year 2016 Financial Report 94 (5,052) 231 (302) (460) (2,556) (131) 54 (3,163) (1) (1,033) (381) (1,415) (4,578) 21,631 10,923 (5,052) (4,578) 18 748 23,690 24,230 (539) 23,690 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 1 ACCOUNTING PRINCIPLES 1.1 General information AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, the Americas, Asia and Africa. The list of the main entities included in the scope of the AXA’s consolidated financial statements is provided in Note 2 of the notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all notes were finalized by the Board of Directors on August 2, 2016. 1.2 General accounting principles AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2016. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2015. The 2016 half-year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2015 annual financial report. Amendments published and adopted on January 1, 2016 The application of the amendments below as of January 1, 2016 had no material impact on the Group’s consolidated interim financial statements. Amendments Publication date Effective for annual periods beginning on or after Topic IFRS 11- Joint Arrangements May 6, 2014 January 1, 2016 the Guidance on how acquisition of an Interest in a joint operation that constitutes a business. to account for IAS 16 - Property, Plant, and Equipment and IAS 38 - Intangible Assets May 12, 2014 January 1, 2016 Clarification of the principle for the basis of depreciation and amortization as being the expected pattern of consumption of the future economic benefits of an asset. Annual Improvements to IFRSs 2012 - 2014 Cycle September 25, 2014 January 1, 2016 Collection of amendments in response to issues that are not part of a major project. to IFRSs IAS 1 - Presentation of Financial Statements December 18, 2014 January 1, 2016 Improvement of presentation and disclosure in financial reports. The amendments are designed to encourage entities to apply professional judgment in determining what information financial statements. For example, materiality should apply to the whole of financial statements knowing that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. to disclose in their Half Year 2016 Financial Report 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 Preparation of financial statements The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2015. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non-current items. As for most insurance companies, expenses are classified by destination in the income statement. All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the notes are expressed in Euro million. Half Year 2016 Financial Report 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 2 SCOPE OF CONSOLIDATION 2.1 Consolidated companies 2.1.1 MAIN FULLY CONSOLIDATED COMPANIES June 30, 2016 December 31, 2015 Parent and Holding Companies Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France AXA Parent company Parent company AXA Asia 100.00 100.00 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA France Assurance 100.00 100.00 100.00 100.00 Oudinot Participation 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 AXA Technology Services 99.99 99.99 99.99 99.99 Genworth Financial European Group Holdings 100.00 100.00 100.00 100.00 United States AXA Financial, Inc. 100.00 100.00 100.00 100.00 AXA America Holding Inc. 100.00 100.00 100.00 100.00 United Kingdom Guardian Royal Exchange Plc 100.00 99.98 100.00 99.98 AXA UK Plc 100.00 99.98 100.00 99.98 AXA Equity & Law Plc 99.96 99.96 99.96 99.96 Asia/Pacific (excluding Japan) National Mutual International Pty Ltd 100.00 100.00 100.00 100.00 AXA Financial Services (Singapore) 100.00 100.00 100.00 100.00 AXA India Holding 100.00 100.00 100.00 100.00 Germany Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 Belgium AXA Holdings Belgium 100.00 100.00 100.00 100.00 Luxembourg AXA Luxembourg SA 100.00 100.00 100.00 100.00 The Netherlands Vinci BV 100.00 100.00 100.00 100.00 Mediterranean and Latin American Region AXA Mediterranean Holding SA AXA Holding Maroc S.A. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 AXA Turkey Holding A.S. 100.00 100.00 100.00 100.00 Half Year 2016 Financial Report 97 II Life & Savings and Property & Casualty France AXA France IARD AXA France Vie AXA Protection Juridique Financial Assurance Company Limited (Genworth) Financial Insurance Company Limited (Genworth) United States AXA Equitable Life Insurance Company AXA Re Arizona Company United Kingdom AXA Insurance UK Plc AXA PPP Healthcare Limited AXA Isle of Man Limited AXA Wealth Limited Architas Multi-Manager Limited AXA Portfolio Services Limited Ireland AXA Insurance Limited AXA Life Europe Limited AXA Life Invest Reinsurance Asia/Pacific (excluding Japan) AXA Life Insurance Singapore AXA China Region Limited AXA General Insurance Hong Kong Ltd. AXA Insurance Singapore PT AXA Life Indonesia MLC Indonesia AXA Affin General Insurance Berhad (a) AXA Insurance Public Company Limited (Thailand) Japan AXA Life Insurance Germany AXA Versicherung AG AXA Art AXA Lebensversicherung AG Pro Bav Pensionskasse Deutsche Ärzteversicherung AXA Krankenversicherung AG DBV Deutsche Beamten-Versicherung AG Belgium Ardenne Prévoyante AXA Belgium SA Les Assurés Réunis (b) Luxembourg AXA Assurances Luxembourg AXA Assurances Vie Luxembourg Mediterranean and Latin American Region AXA Vida, S. A. de Seguros (Spain) AXA Aurora Vida, S.A. de Seguros (Spain) AXA Seguros Generales, S. A. (Spain) AXA Interlife (Italy) AXA Assicurazioni e Investimenti (Italy) AXA MPS Vita (Italy) AXA MPS Danni (Italy) AXA MPS Financial (Italy) AXA Colpatria Capitalizadora (Colombia) AXA Colpatria Seguros de vida (Colombia) AXA Colpatria Seguros (Colombia) AXA Colpatria Medicina Prepagada (Colombia) AXA Portugal Companhia de Seguros SA AXA Portugal Companhia de Seguros de Vida SA AXA Assurance Maroc AXA Hayat ve Emeklilik A.S. (Turkey) AXA Sigorta AS (Turkey) AXA Cooperative Insurance Company (Gulf) AXA Insurance (Gulf) B.S.C.c. AXA Insurance A.E. (Greece) AXA Seguros S.A. de C.V. (Mexico) AXA Seguros participacoes LTDA (Brazil) Switzerland AXA Life CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 June 30, 2016 December 31, 2015 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests 99.92 99.77 98.51 100.00 100.00 99.92 99.77 98.51 100.00 100.00 99.92 99.77 98.51 100.00 100.00 99.92 99.77 98.51 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.98 99.98 99.98 99.98 99.98 99.98 100.00 100.00 100.00 100.00 100.00 100.00 99.98 99.98 99.98 99.98 99.98 99.98 100.00 100.00 100.00 99.98 100.00 100.00 100.00 100.00 100.00 99.98 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 43.63 100.00 100.00 100.00 100.00 100.00 100.00 43.63 100.00 100.00 100.00 100.00 100.00 100.00 43.63 100.00 100.00 100.00 100.00 100.00 100.00 43.63 99.31 99.31 99.31 99.31 98.69 98.69 98.69 98.69 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Deconsolidation 100.00 100.00 - 100.00 100.00 - 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Disposal Disposal 99.84 99.97 99.90 100.00 100.00 50.00 + 1 voting right 50.00 + 1 voting right 50.00 + 1 voting right 51.00 51.00 51.00 51.00 - - 100.00 100.00 92.61 50.00 50.00 99.98 100.00 100.00 99.84 99.81 99.90 100.00 100.00 50.00 50.00 50.00 51.00 51.00 51.00 51.00 - - 100.00 100.00 92.61 34.00 50.00 99.98 100.00 100.00 99.84 99.97 99.90 100.00 100.00 50.00 + 1 voting right 50.00 + 1 voting right 50.00 + 1 voting right 51.00 51.00 51.00 51.00 99.73 95.09 100.00 100.00 92.61 50.00 50.00 99.98 100.00 - 99.84 99.81 99.90 100.00 100.00 50.00 50.00 50.00 51.00 51.00 51.00 51.00 99.49 94.89 100.00 100.00 92.61 34.00 50.00 99.98 100.00 - Scope entry 100.00 100.00 100.00 100.00 Half Year 2016 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 AXA-ARAG Legal Assistance AXA Insurance (previously Winterthur Swiss Insurance P&C) 66.67 100.00 66.67 100.00 66.67 100.00 66.67 100.00 Central and Eastern Europe AXA Czech Republic Pension Funds AXA Czech Republic Insurance AXA Poland AXA Poland Pension Funds 99.99 100.00 100.00 100.00 99.99 100.00 100.00 100.00 99.99 100.00 100.00 100.00 99.99 100.00 100.00 100.00 AXA Slovakia 100.00 100.00 100.00 100.00 Direct (c) Avanssur (France and Poland) Kyobo AXA General Insurance Co. Ltd. (South Korea) AXA Non Life Insurance Co. Ltd. (Japan) Touring Assurances SA (Belgium) AXA Global Direct Seguros y Reaseguros SAU (Spain) AXA Global Direct Seguros y Reaseguros SAU branch (Italy) AXA Global Direct Seguros y Reaseguros SAU branch (Portugal) AXA Ubezpieczenia TUIR S.A (Poland) Relution Disposal 100.00 99.71 100.00 100.00 100.00 100.00 - 100.00 100.00 99.71 98.69 100.00 100.00 100.00 - 100.00 100.00 99.66 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.66 98.69 100.00 100.00 100.00 100.00 100.00 (a) AXA Group exercises control in accordance with shareholders' agreements. (b) Deconsolidation due to immateriality. (c) UK Direct activities is part of AXA Insurance UK Plc. June 30, 2016 December 31, 2015 International Insurance (entities having worldwide activities) Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA Corporate Solutions Assurance (sub-group) AXA Global P&C AXA Global Life AXA Assistance SA (sub group) Portman Insurance Ltd. Colisée RE AXA Corporate Solutions Life Reinsurance Company 98.75 100.00 100.00 100.00 100.00 100.00 100.00 98.75 100.00 100.00 100.00 100.00 100.00 100.00 98.75 100.00 100.00 100.00 100.00 100.00 100.00 98.75 100.00 100.00 100.00 100.00 100.00 100.00 June 30, 2016 December 31, 2015 Asset Management (entities having worldwide activities) Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA Investment Managers (sub group) AB (sub group) Minority interests buyout Minority interests buyout 97.04 63.76 96.97 63.76 96.29 62.83 96.23 62.83 June 30, 2016 December 31, 2015 Banking Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France AXA Banque AXA Banque Financement 100.00 65.00 99.89 64.93 100.00 65.00 99.89 64.93 Germany AXA Bank AG 100.00 100.00 100.00 100.00 Belgium AXA Bank Europe (sub group) 100.00 100.00 100.00 100.00 June 30, 2016 December 31, 2015 Other Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France CFP Management 100.00 100.00 100.00 100.00 Half Year 2016 Financial Report 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 Consolidated investment funds and real estate companies As of June 30, 2016, investment funds represented a total of €108,097 million invested assets (€106,740 million at the end of 2015), corresponding to 299 investment funds mainly in France, Japan, Germany and Belgium and mainly relating to the Life & Savings segment. As of June 30, 2016, 23 consolidated real estate companies corresponded to a total of €8,799 million invested assets (€7,980 million at the end of 2015), mainly in France, Germany and Japan. In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2016, these liabilities amounted to €11,355 million (€10,525 million as of December 31, 2015). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholder’s equity amounted to €1,965 million as of June 30, 2016 (€1,194 million as of December 31, 2015). 2.1.2 MAIN INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30, 2016 December 31, 2015 Life & Savings and Property & Casualty Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie (previously NSM Vie) Natio Assurances 39.98 50.00 39.98 49.96 39.98 50.00 39.98 49.96 Asia/Pacific Philippines AXA Life Insurance Corporation Krungthai AXA Life Insurance Company Ltd 45.00 50.00 45.00 50.00 45.00 50.00 45.00 50.00 ICBC-AXA Life Insurance Co. Ltd 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services Bharti AXA Life Bharti AXA General Insurance Company Limited (India) 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 AXA Tian Ping 50.00 50.00 50.00 50.00 Russia Reso Garantia (RGI Holdings B.V.) 39.34 39.34 39.34 39.34 Mediterranean and Latin American Region AXA Middle East SAL (Lebanon) AXA Mansard Insurance plc (Nigeria) Relution 51.00 77.79 51.00 77.79 51.00 77.51 51.00 77.51 Asset Management (entities having worldwide activities) AXA Investment Managers Asia Holdings Private Limited Minority interests buyout (a) 49.00 47.52 49.00 47.15 Kyobo AXA Investment Managers Company Limited Relution 50.00 48.49 50.00 48.12 (a) Minority interests buyout of the holding controled by the group. Investment funds and real estate entities accounted for using the equity method As of June 30, 2016, real estate companies accounted for using the equity method amounted to €151 million invested assets (€169 million at the end of 2015) and investment funds accounted for using the equity method amounted to €3,561 million invested assets (€7,164 million at the end of 2015), mainly in the United States, France, Belgium, United Kingdom, Japan and Switzerland. Half Year 2016 Financial Report 100 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT The AXA’s Chief Executive Officer and the Deputy Chief Executive Officer are both members of the Board of Directors. They are assisted by a Management Committee in the day-to-day operational management of the Group and by an Executive Committee to consider Group strategy. The financial information relating to AXA's business segments and holding Company activities reported to the Board of Directors twice a year is consistent with the presentation provided in the consolidated financial statements. Given the activities of AXA, the operating results are presented on the basis of five operating business segments: Life & Savings, Property & Casualty, International Insurance, Asset Management and Banking. An additional "Holding companies" segment includes all non-operational activities. Life & Savings: AXA’s Life & Savings products include a broad range of Investment and Savings products as well as Protection and Health products marketed to individual and commercial clients. The Life & Savings products offered by AXA include Term life, Whole life, Universal life, endowment, deferred annuities, immediate annuities, and other investment-based products. The Health products offered include critical illness and permanent health insurance products. The types and specificities of the products offered by AXA vary from market to market. The Life & Savings segment aggregates ten geographic operating components: France, the United States, the United Kingdom, Japan, Germany, Switzerland, Belgium, the Mediterranean and Latin American Region, Asia (excluding Japan) and other countries. Property & Casualty: This segment includes a broad range of products including mainly motor, household, property and general liability insurance for both personal and commercial customers (commercial customers being mainly small to medium-sized companies). In some countries, this segment includes health products. The Property & Casualty segment aggregates nine geographical operating components (France, Germany, the United Kingdom and Ireland, Switzerland, Belgium, the Mediterranean and Latin American Region, Central and Eastern Europe, Asia and Other countries) and one operating component for the Direct business. International Insurance: This segment’s operations include insurance products that notably relate to AXA Corporate Solutions Assurance. These products provide coverage to large national and international corporations. This segment also includes assistance activities, life reinsurance activities in run-off primarily AXA Corporate Solutions Life Reinsurance Company and the Group Property & Casualty run-off managed by AXA Liabilities Managers. The Asset Management segment includes diversified asset management (including investment fund management) and related services offered by AXA Investment Managers and AB entities, which are provided to a variety of institutional investors and individuals, including AXA’s insurance companies. The Banking segment includes banking activities (mainly retail banking, mortgage loans, savings) conducted primarily in France, Belgium and Germany. The Holding companies segment includes all non-operational activities. The inter-segment eliminations include only operations between entities from different segments. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. In this document, “Insurance” covers the three insurance segments: Life & Savings, Property & Casualty and International Insurance. The term “Financial Services” includes both the Asset Management segment and the Banking segment. Half Year 2016 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 3.1 Consolidated Statement of Income by segment June 30, 2016 (in Euro million) Life & savings Property & Casualty International Insurance Asset Management Banking Holding companies Inter-segment eliminations TOTAL Gross written premiums 30,346 18,740 2,233 (317) 51,003 Fees and charges relating to investment contracts with no participating features 116 116 Revenues from insurance activities 30,462 18,740 2,233 (317) 51,119 Net revenues from banking activities 276 19 295 Revenues from other activities 685 35 149 2,036 2 (284) 2,622 Revenues 31,146 18,775 2,382 2,036 278 (582) 54,036 Change in unearned premiums net of unearned revenues and fees (1,224) (3,078) (312) 71 (4,543) Net investment income (a) 7,093 1,059 116 3 (0) 126 (219) 8,180 Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (b) of which change in fair value of assets with financial risk borne by policyholders 1,249 2,478 426 280 (227) 30 (7) 114 1,641 (469) 111 45 (0) 3,311 1,935 425 Change in investments impairment (245) (116) (6) (0) 3 (34) (398) Net investment result excluding financing expenses 10,576 996 133 118 3 1,264 (63) 13,027 Technical charges relating to insurance activities (34,762) (10,361) (1,546) 86 (46,583) Net result from outward reinsurance 94 (450) 140 143 (72) Bank operating expenses (22) (22) Acquisition costs (2,365) (2,836) (324) 14 (5,512) Amortization of the value of purchased business in force (84) (84) Administrative expenses (1,372) (1,452) (138) (1,438) (207) (516) 237 (4,886) Change in goodwill impairment and other intangible assets impairment (10) (43) (2) (56) Other income and expenses 190 4 (222) (138) 14 215 (116) (54) Other operating income and expenses (38,309) (15,139) (2,090) (1,578) (215) (301) 364 (57,267) Income from operating activities before tax 2,190 1,555 113 576 66 963 (209) 5,253 Income (net of impairment) from investment accounted for using the equity method 68 18 0 5 0 92 Financing debt expenses (19) (4) (4) (84) (3) (324) 210 (229) Net income from operating activities before tax 2,239 1,568 109 497 63 639 1 5,117 Income tax (360) (405) (38) (132) (7) (375) (1,316) Net operating income 1,880 1,164 71 365 56 264 1 3,800 Result from discontinued operations net of tax (c) (403) (1) (404) Net consolidated income after tax 1,476 1,164 71 365 56 264 3,396 Split between : Net consolidated income - Group share 1,436 1,133 70 249 55 264 3,207 Net consolidated income - Minority interests 41 31 1 116 1 (0) 189 (a) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings and the International Insurance segments. (b) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (c) Relates to the discontinued United Kingdom Life & Savings operations. Half Year 2016 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 June 30, 2015 Restated (a) (in Euro million) Life & savings Property & Casualty International Insurance Asset Management Banking Holding companies Inter-segment eliminations TOTAL Gross written premiums 30,934 18,369 2,096 (335) 51,065 Fees and charges relating to investment contracts with no participating features 133 133 Revenues from insurance activities 31,067 18,369 2,096 (335) 51,198 Net revenues from banking activities 287 13 300 Revenues from other activities 739 34 148 2,176 2 (273) 2,826 Revenues 31,806 18,404 2,244 2,176 288 (595) 54,324 Change in unearned premiums net of unearned revenues and fees (1,264) (2,858) (295) 105 (4,313) Net investment income (b) 6,283 1,085 114 5 (0) 118 (148) 7,457 Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity 1,281 227 42 3 2 1,555 Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 4,765 5,252 31 (23) 14 (452) 15 (0) 4,350 5,252 Change in investments impairment (147) (43) (7) (13) (209) Net investment result excluding financing expenses 12,183 1,301 126 18 (0) (344) (131) 13,154 Technical charges relating to insurance activities (35,976) (10,189) (1,488) 92 (47,560) Net result from outward reinsurance (102) (586) 13 134 (541) Bank operating expenses (22) (22) Acquisition costs (2,381) (2,659) (276) 13 (5,303) Amortization of the value of purchased business in force (109) (1) (110) Administrative expenses (1,429) (1,450) (130) (1,528) (337) (515) 216 (5,173) Change in goodwill impairment and other intangible assets impairment (9) (45) (2) (55) Other income and expenses (75) 5 18 (169) 121 158 (66) (8) Other operating income and expenses (40,080) (14,925) (1,863) (1,699) (238) (357) 389 (58,772) Income from operating activities before tax 2,645 1,922 212 496 50 (700) (231) 4,393 Income from investment accounted for using the equity method 83 3 0 1 1 88 Financing debts expenses (30) (4) (4) (17) (4) (386) 232 (213) Net income from operating activities before tax 2,698 1,920 208 479 47 (1,086) 1 4,268 Income tax (563) (529) (65) (143) (6) 295 (1,011) Net operating income 2,135 1,391 143 336 41 (791) 1 3,257 Result from discontinued operations net of tax 28 (1) 27 Net consolidated income after tax 2,163 1,391 143 336 41 (791) 3,284 Split between : Net consolidated income - Group share 2,094 1,364 142 228 40 (791) 0 3,077 Net consolidated income - Minority interests 69 28 1 108 1 (0) (0) 207 (a) The contribution of discontinued United Kingdom Life & Savings operations is reclassified on a separate line of the Statement of Income in order to present a comparable basis. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings and the International Insurance segments. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. Half Year 2016 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 United Kingdom Life & Savings businesses disposal Following a strategic review conducted by AXA on the United Kingdom Life & Savings market, AXA made the following announcements:  On April 28, 2016, AXA entered into an agreement with Life Company Consolidation Group to sell its offshore investment bonds business based in the Isle of Man (“AXA Isle of Man”) ;  On May 4, 2016, AXA agreed to sell its wrap platform business (‘Elevate’) to Standard Life plc ;  On May, 27, 2016, AXA entered into an agreement with Phoenix Group Holdings to sell its (non- platform) investment and pensions business and its direct protection business (“Sunlife”) in the UK. Completions of these transactions are subject to customary closing conditions, including the receipt of regulatory approvals, and are expected to occur in the second semester 2016. The overall consideration for the sale of the United Kingdom Life & Savings businesses would amount to ca. GBP 633 million (or ca. €790 million). These transactions would generate an exceptional negative impact of ca. €0.4 billion. The operations affected by these transactions are treated as discontinued operations in AXA’s consolidated financial statements as of June 30, 2016. The major classes of assets and liabilities of the discontinued United Kingdom Life & Savings business operations classified as ‘Held for Sale’ included the following as of June 30, 2016 (amounts are presented net of intercompany balances with other AXA entities): (in Euro million) June 30, 2016 Goodwill Other intangible assets Investments Other assets Cash and cash equivalents Total assets held for sale (in Euro million) June 30, 2016 Liabilities arising from insurance and investment contracts Other liabilities Total liabilities held for sale As of June 30, 2016, Other Comprehensive Income amounted to €-23 million. Half Year 2016 Financial Report 104 177 1,002 25,335 118 281 26,912 25,600 660 26,261 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 The statement of income of the United Kingdom Life & Savings business operations classified as ‘Discontinued operations’ is as follows as of June 30, 2016 and June 30, 2015: (in Euro million) June 30, 2016 June 30, 2015 Revenues 186 Change in unearned premiums net of unearned revenues and fees 15 Net investment result excluding financing expenses 909 Other operating income and expenses (a) (1,512) Income from operating activities before tax (402) Income arising from investments in associates - Equity method Financing debts expenses Net income from operating activities before tax (402) Income tax (2) Net consolidated income after tax (404) Split between : Net consolidated income - Group share (404) Net consolidated income - Minority interests (0) (a) including an exceptional loss of €0.4 billion on the sale, coming mainly from goodwill impairment. The statement of cash flows of the discontinued United Kingdom Life & Savings business operations is as follows as of June 30, 2016: (in Euro million) June 30, 2016 Net cash provided/(used) by operating activities Net cash provided/(used) by investing activities Net impact of foreign exchange fluctuations Net cash provided/(used) by discontinued operations 4.2 Hungarian banking operations disposal On February 3, 2016, AXA announced that it has entered into an agreement with OTP Bank Plc to sell its Hungarian banking operations. AXA Bank Hungary is a branch of AXA Bank Europe, managing a credit portfolio put in run-off in 2011, as well as daily banking operations. As this transaction is expected to result in an exceptional loss of €0.1 billion, a provision was booked in the Group consolidated financial statements as of December 31, 2015. Completion of the transaction is subject to customary conditions, including obtaining required regulatory approvals, and should be finalized during the second semester of 2016. 4.3 AXA Portugal disposal On April 1, 2016, AXA announced that it had completed the sale of its Portuguese operations to Ageas, including in particular its entire stake in AXA Portugal Companhia de Seguros SA (“P&C Business”), AXA Portugal Companhia de Seguros de Vida SA (“Life & Savings Business”) as well as AXA Global Direct Seguros y Reaseguros, the Portuguese branch of its direct operations (“Direct Business”) (1) .The total cash consideration amounted to €189 million. AXA recorded a gain of €0.1 billion at the closing date. (1) AXA owned 99.7% of the P&C business, 95.1% of the Life business and 100% of the Direct business. Half Year 2016 Financial Report 105 197 16 830 (1,039) 4 4 23 27 27 0 (337) 330 (31) (39) II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 5 INVESTMENTS 5.1 Breakdown of investments Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately: Insurance June 30, 2016 Other activities Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Investment in real estate properties at amortized cost Investment in real estate properties designated as at fair value through profit or loss (a) Macro-hedge and other derivatives 27,731 1,214 19,655 1,214 2.72% 0.17% 188 126 0.33% 27,918 1,214 19,781 1,214 2.60% 0.16% Investment in real estate properties 28,945 20,869 2.89% 188 126 0.33% 29,133 20,995 2.76% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (b) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (c) 401,858 40,867 1,173 7,100 401,858 40,867 1,173 6,791 55.62% 5.66% 0.16% 0.94% 7,748 1,310 28 1,465 7,748 1,310 28 1,465 20.30% 3.43% 0.07% 3.84% 409,606 42,177 1,202 8,565 409,606 42,177 1,202 8,256 53.85% 5.54% 0.16% 1.09% Debt instruments 450,998 450,689 62.38% 10,552 10,552 27.65% 461,549 461,241 60.63% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (a) Equity instruments held for trading 15,379 8,536 66 15,379 8,536 66 2.13% 1.18% 0.01% 1,457 426 1,457 426 3.82% 1.12% 16,836 8,962 66 16,836 8,962 66 2.21% 1.18% 0.01% Equity instruments 23,982 23,982 3.32% 1,883 1,883 4.93% 25,865 25,865 3.40% Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (a) Non consolidated investment funds held for trading 7,654 4,130 272 7,654 4,130 272 1.06% 0.57% 0.04% 116 128 356 116 128 356 0.30% 0.33% 0.93% 7,770 4,258 628 7,770 4,258 628 1.02% 0.56% 0.08% Non consolidated investment funds 12,056 12,056 1.67% 599 599 1.57% 12,656 12,656 1.66% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 13,522 13,522 1.87% 387 387 1.01% 13,909 13,909 1.83% Macro-hedge and other derivatives 2,284 2,284 0.32% (471) (471) 1.23% 1,812 1,812 0.24% Financial investments 502,841 502,533 69.55% 12,951 12,951 33.94% 515,792 515,483 67.76% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (a) Loans held for trading Loans at cost (d) Macro-hedge and other derivatives 0 - - 38,603 (0) 0 - - 34,758 0.00% 0.00% - - 4.81% - 0 - 27,041 (0) - 0 - 25,086 (0) - 0.00% - 65.73% 0.00% 0 0 - 65,645 (0) (0) 0 0 - 59,843 (0) 0.00% 0.00% 0.00% - 7.87% 0.00% Loans 38,603 34,758 4.81% 27,041 25,086 65.73% 65,645 59,843 7.87% Assets backing contracts where the financial risk is borne by policyholders 164,380 164,380 22.75% 164,380 164,380 21.61% INVESTMENTS 734,769 722,540 100.00% 40,180 38,162 100.00% 774,949 760,702 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 570,389 558,160 77.25% Life & Savings Property & Casualty 492,210 70,799 481,188 69,595 66.60% 9.63% International Insurance 7,380 7,376 1.02% (a) Assets measured at fair value under the fair value option. (b) Includes assets measured at fair value notably under the fair value option. (c) Eligible to the IAS 39 Loans and Receivables measurement category. (d) Mainly relates to mortgage loans and policy loans. Half Year 2016 Financial Report 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 Insurance December 31, 2015 Other activities Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Investment in real estate properties at amortized cost 27,103 19,262 2.69% 192 126 0.33% 27,295 19,388 2.58% Investment in real estate properties designated as at fair value through profit or loss (a) 1,107 1,107 0.15% 1,107 1,107 0.15% Macro-hedge and other derivatives Investment in real estate properties 28,210 20,369 2.85% 192 126 0.33% 28,402 20,495 2.72% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (b) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (c) 369,011 39,861 868 6,044 369,011 39,861 868 5,829 51.59% 5.57% 0.12% 0.81% 8,835 587 24 1,192 8,835 587 24 1,192 23.51% 1.56% 0.06% 3.17% 377,846 40,448 892 7,235 377,846 40,448 892 7,020 50.19% 5.37% 0.12% 0.93% Debt instruments 415,784 415,569 58.10% 10,638 10,638 28.31% 426,422 426,207 56.61% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (a) Equity instruments held for trading 16,681 9,180 76 16,681 9,180 76 2.33% 1.28% 0.01% 1,486 407 1,486 407 3.95% 1.08% 18,167 9,587 76 18,167 9,587 76 2.41% 1.27% 0.01% Equity instruments 25,937 25,937 3.63% 1,893 1,893 5.04% 27,830 27,830 3.70% Non consolidated investment funds available for sale 7,424 7,424 1.04% 125 125 0.33% 7,549 7,549 1.00% Non consolidated investment funds designated as at fair value through profit or loss (a) 5,720 5,720 0.80% 187 187 0.50% 5,906 5,906 0.78% Non consolidated investment funds held for trading 250 250 0.04% 474 474 1.26% 724 724 0.10% Non consolidated investment funds 13,394 13,394 1.87% 785 785 2.09% 14,179 14,179 1.88% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 11,394 11,394 1.59% 156 156 0.42% 11,550 11,550 1.53% Macro-hedge and other derivatives 914 914 0.13% (409) (409) 1.09% 505 505 0.07% Financial investments 467,424 467,209 65.32% 13,063 13,063 34.76% 480,487 480,272 63.79% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss Loans held for trading Loans at cost (d) Macro-hedge and other derivatives 0 - - 34,563 (0) 0 - - 33,103 0.00% 0.00% - - 4.63% - 0 - 26,093 48 - 0 - 24,342 48 - 0.00% - 64.78% 0.13% 0 0 - 60,656 48 (0) 0 0 - 57,444 48 0.00% 0.00% 0.00% - 7.63% 0.01% Loans 34,563 33,103 4.63% 26,142 24,390 64.90% 60,704 57,493 7.64% Assets backing contracts where the financial risk is borne by policyholders 194,601 194,601 27.21% 194,601 194,601 25.85% INVESTMENTS 724,798 715,282 100.00% 39,396 37,579 100.00% 764,194 752,860 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 530,197 520,681 72.79% Life & Savings Property & Casualty 454,522 68,429 446,173 67,264 62.38% 9.40% International Insurance 7,245 7,244 1.01% (a) Assets measured at fair value under the fair value option. (b) Includes assets measured at fair value notably under the fair value option. (c) Eligible to the IAS 39 Loans and Receivables measurement category. (d) Mainly relates to mortgage loans and policy loans. 5.2 Investment in real estate properties Investment in real estate properties include buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, excluding the impact of all derivatives: June 30, 2016 December 31, 2015 (in Euro million) Gross value Amortization Impairment Carrying value Fair value Gross value Amortization impairment Carrying value Fair value Investment in real estate properties at amortized cost Insurance 22,435 (2,247) (593) 19,596 27,671 22,053 (2,196) (611) 19,246 27,087 Other activities 126 (0) 126 188 126 (0) (0) 126 192 All activities 22,561 (2,247) (593) 19,722 27,859 22,179 (2,196) (611) 19,371 27,278 Half Year 2016 Financial Report 107 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2016 December 31, 2015 June 30, 2016 December 31, 2015 Opening value 611 620 2,196 2,258 Increase for the period 13 93 113 247 Write back following sale or reimbursement (2) (15) (18) (58) Write back following recovery in value (24) (26) Others(a) (4) (61) (44) (250) Closing value 593 611 2,247 2,196 (a) Includes change in scope, reclassification to held for sale and the effect of changes in exchange rates. 5.3 Unrealized gains and losses on financial investments Excluding the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: (in Euro million) June 30, 2016 December 31, 2015 INSURANCE Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale 335,214 6,777 12,762 404,067 7,086 15,386 404,067 6,777 15,386 69,532 312 2,826 679 3 202 326,036 5,825 13,473 370,743 6,040 16,676 370,743 5,825 16,676 47,148 227 3,360 2,441 12 158 Non consolidated investment funds available for sale 6,793 7,663 7,663 893 23 6,533 7,447 7,447 951 37 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (in Euro million) June 30, 2016 December 31, 2015 OTHER ACTIVITIES Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale 7,902 1,465 1,109 8,194 1,465 1,457 8,194 1,465 1,457 309 350 16 2 8,859 1,192 1,144 9,145 1,192 1,486 9,145 1,192 1,486 298 0 343 12 0 Non consolidated investment funds available for sale 108 116 116 8 118 125 125 9 2 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (in Euro million) June 30, 2016 December 31, 2015 TOTAL Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale 343,116 8,242 13,871 412,261 8,551 16,843 412,261 8,242 16,843 69,841 312 3,176 695 3 204 334,895 7,017 14,617 379,888 7,232 18,162 379,888 7,017 18,162 47,446 227 3,703 2,453 12 158 Non consolidated investment funds available for sale 6,900 7,779 7,779 901 23 6,651 7,572 7,572 960 39 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. Half Year 2016 Financial Report 108 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 5.4 Financial investments subject to impairment 5.4.1 BREAKDOWN OF FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). June 30, 2016 December 31, 2015 Cost before impairment and revaluation to fair value (a) Impairment Cost after impairment but before revaluation to fair value (b) Revaluation to fair value (c) Carrying value Cost before impairment and revaluation to fair value (a) Impairment Cost after impairment but before revaluation to fair value (b) Revaluation to fair value (c) Carrying value (in Euro million) Debt instruments available for sale 342,355 (547) 341,808 67,798 409,606 334,558 (632) 333,926 43,921 377,846 Debt instruments (at cost) that are not quoted in an active market (c) 8,243 (0) 8,242 14 8,256 7,019 (0) 7,019 1 7,020 Debt instruments 350,598 (548) 350,050 67,812 417,862 341,577 (632) 340,945 43,922 384,867 Equity instruments available for sale 16,393 (2,522) 13,871 2,965 16,836 16,761 (2,144) 14,617 3,550 18,167 Non consolidated investment funds available for sale 7,989 (1,088) 6,900 870 7,770 7,705 (1,054) 6,652 897 7,549 Loans held to maturity (0) (0) (0) (0) (0) (0) Loans available for sale 0 (0) 0 0 0 (0) 0 0 Loans at cost (d) 60,898 (238) 60,660 (817) 59,843 58,320 (239) 58,082 (637) 57,444 Loans 60,899 (238) 60,660 (817) 59,843 58,321 (239) 58,082 (637) 57,444 TOTAL 435,878 (4,396) 431,482 70,830 502,312 424,364 (4,069) 420,295 47,732 468,026 (a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans. 5.4.2 CHANGE IN IMPAIRMENT ON FINANCIAL INVESTMENTS (in Euro million) January 1, 2016 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) June 30, 2016 Impairment - Debt instruments 632 13 (65) (28) (5) 548 Impairment - Equity instruments 2,144 346 (113) 144 2,522 Impairment - Non consolidated investment funds 1,054 79 (45) 1 1,088 Impairment - Loans 239 27 (1) (33) 5 238 TOTAL 4,069 466 (223) (61) 145 4,396 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. (in Euro million) January 1, 2015 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) December 31, 2015 Impairment - Debt instruments 788 126 (317) (16) 51 632 Impairment - Equity instruments 2,123 392 (339) (31) 2,144 Impairment - Non consolidated investment funds 950 74 (33) 63 1,054 Impairment - Loans 648 67 (30) (77) (367) 239 TOTAL 4,508 659 (720) (93) (285) 4,069 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. Half Year 2016 Financial Report 109 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 5.5 Investments/Fair value Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or  used by the Group in the limited cases of application of mark to model valuations. Half Year 2016 Financial Report 110 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 5.5.1 INVESTMENTS RECOGNIZED AT FAIR VALUE The breakdown by valuation method of investments recognized at fair value excluding derivatives and assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2016 December 31, 2015 Assets quoted in an active market Assets not quoted in an active market or no active market Assets quoted in an active market Assets not quoted in an active market or no active market Fair value determined directly by reference to active market (level 1) Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) TOTAL Fair value determined directly by reference to active market (level 1) Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) TOTAL (in Euro million) Debt instruments 290,352 121,551 358 412,261 263,441 116,187 260 379,888 Equity instruments 12,902 1,709 2,232 16,843 14,411 1,147 2,604 18,162 Non consolidated investment funds 1,071 5,545 1,163 7,779 1,063 5,512 997 7,572 Loans 0 0 0 0 Financial investments and loans available for sale 304,325 128,805 3,753 436,883 278,915 122,846 3,861 405,622 Investments in real estate properties 1,214 1,214 1,107 1,107 Debt instruments 23,919 17,410 785 42,114 23,435 16,206 843 40,484 Equity instruments 3,461 694 4,807 8,962 3,957 795 4,837 9,589 Non consolidated investment funds 162 2,943 1,131 4,237 270 4,610 1,086 5,967 Other assets held by consolidated investment funds designated as at fair value through profit or loss 3,283 6,393 4,131 13,807 2,006 6,266 3,289 11,561 Loans 0 0 0 0 Financial investments and loans designated as at fair value through profit or loss 30,826 28,654 10,854 70,334 29,667 28,984 10,056 68,707 Debt instruments 334 849 1 1,184 264 659 1 925 Equity instruments 66 0 66 76 0 77 Non consolidated investment funds 354 273 0 628 451 273 0 724 Loans Financial investments and loans held for trading 755 1,122 2 1,878 792 932 2 1,726 TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE 335,905 158,581 14,609 509,096 309,374 152,762 13,918 476,054 Note: this table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. For Sovereign bonds, trends observed in 2015 were confirmed in the first semester of 2016. The market indicators will continue to be followed to assess the sustainability of those improvements. Therefore, the classification as at June 30, 2016 is maintained similar to the one as at December 31, 2015. At June 30, 2016 the net transfers between Level 1 and Level 2 was €1,667 million. This amount was comprised of €10,459 million transferred investments from Level 2 to Level 1 and €8,792 transferred from Level 1 to Level 2. The reclassifications were mainly related to changes in liquidity indicators observed in the market for corporate bonds throughout the period. Transfer in and out of the level 3 category and other movements From January 1, 2016 to June 30, 2016, the amount of level 3 assets increased to €14.6 billion, representing 2.9% of the total assets at fair value (2.9% at the end of 2015 i.e. €13.9 billion). Main movements relating to level 3 assets to be noted were the following: €+1.5 billion of new investments;  €-0.5 billion of asset sales;  €+0.2 billion transfers in level 3 category due to less observable data;  €-0.5 billion transfers out of level 3 category due to more observable data;  €-0.3 billion of change in net realized and unrealized gains and losses;  €+0.2 billion of other movements (forex impact, changes in scope…). Half Year 2016 Financial Report 111 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 5.5.2 INVESTMENTS RECOGNIZED AT AMORTIZED COST Assets quoted in an active market June 30, 2016 Assets not quoted in an active market or no active market Assets quoted in an active market December 31, 2015 Assets not quoted in an active market or no active market Fair value determined directly by reference to active market (level 1) Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) TOTAL Fair value determined directly by reference to active market (level 1) Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) TOTAL (in Euro million) Debt instruments held to maturity Loans held to maturity Financial investments and loans held to maturity Investments in real estate properties at amortized cost 0 27,859 0 27,859 0 27,278 0 27,278 Debt instruments at cost (loans & receivables) 906 5,470 2,174 8,551 407 4,950 1,875 7,232 Loans at amortized cost 59 27,444 38,983 66,485 43 23,779 37,511 61,334 Financial investments and loans at amortized cost 965 60,773 41,157 102,895 451 56,006 39,387 95,844 TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST Note: this table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. 965 60,773 41,157 102,895 451 56,006 39,387 95,844 Half Year 2016 Financial Report 112 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The Consolidated Statement of changes in Equity is presented as a primary financial statement. 6.1 Impact of transactions with shareholders 6.1.1 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2016 a) SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2016, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: stock option exercise of 1.4 million shares for €19 million; cancellation of 4.9 million shares for €117 million; shares distributed of 1.3 million under AXA Miles for €3 million (reclassified from other reserves); share-based payments for €11 million. b) TREASURY SHARES As of June 30, 2016, the Company and its subsidiaries owned approximately 8 million AXA shares, representing 0.3% of the share capital, an increase of 6 million shares compared to December 31, 2015. As of June 30, 2016, the carrying value of treasury shares and related derivatives was €352 million and there was no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. As of June 30, 2016, 2 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €42 million and their market value €40 million at the end of June 2016. c) UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debts issued by the Group do not qualify as liabilities under IFRS. Undated subordinated debt instruments are classified in shareholders’ equity at their historical value as regards credit spread and interest rates and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2016, the change in other reserves was due to: €-140 million in interest expense related to the undated subordinated debt (net of tax); €-255 million from foreign exchange rate fluctuations. Half Year 2016 Financial Report 113 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 As of June 30, 2016 and December 31, 2015, undated subordinated debt recognized in shareholders’ equity broke down as follows: June 30, 2016 December 31, 2015 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in Euro million) October 29, 2004 - 375 M€ 6.0% 375 375 375 375 December 22, 2004 - 250 M€ 6.0% 250 250 250 250 January 25, 2005 - 250 M€ 6.0% 250 250 250 250 July 6, 2006 - 1,000 M€ 5.8% (a) 431 426 431 426 July 6, 2006 - 500 M£ 6.7% (a) 257 305 257 345 July 6, 2006 - 350 M£ 6.7% 350 423 350 477 October 26, 2006 - 600 MA$ (of which 300 MA$ 7.5%) 600 399 600 400 November 7, 2006 - 150 MA$ 7.5% 150 100 150 100 December 14, 2006 - 750 MUS$ 6.5% 750 673 750 686 December 14, 2006 - 750 MUS$ 6.4% 750 673 750 686 October 5, 2007 - 750 M€ 6.2% (a) 335 331 335 331 October 16, 2007 - 700 M£ 6.8% (a) 219 263 219 296 November 7, 2014 - 984 M€ 3.941% (a) 984 981 984 981 November 7, 2014 - 724 M£ 5.453% (a) 724 873 724 983 May 20, 2014 - 1,000 M€ - 3.9% 1,000 997 1,000 997 January 22, 2013 - 850 MUS$, 5.5% 850 760 850 775 Undated notes -625 M€, variables rates Undated notes - 27,000 MJPY, 3.3% 625 27,000 625 237 625 27,000 625 206 Undated notes - 375 MUS$, variables rates 375 338 375 344 Sub-Total Undated Subordinated Debt 9,278 9,533 Equity component of convertible debt (2017) 95 95 95 95 TOTAL 9,373 9,628 (a) These undated Deeply Subordinated notes were part of the liability management exercise launched on October 29, 2014. In addition to the nominal amounts shown above, shareholders’ equity included net accumulated financial expenses of: €-3,161 million as of June 30, 2016; €-3,021 million as of December 31, 2015. Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step-up clauses with effect from a given date. d) DIVIDENDS PAID At the shareholders’ meeting held on April 27, 2016, shareholders approved a dividend distribution of €1.10 per share corresponding to €2,656 million with respect to the 2015 financial year. Half Year 2016 Financial Report 114 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 6.1.2 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2015 a) SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2015, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: stock option exercise of 13 million shares for €232 million; the cancellation of 11 million shares for €244 million; share-based payments for €12 million. b) TREASURY SHARES As of June 30, 2015, the Company and its subsidiaries owned approximately 21 million AXA shares, representing 0.8% of the share capital, an increase of 20 million shares compared to December 31, 2014. As of June 30, 2015, the carrying value of treasury shares and related derivatives was €629 million and there was no AXA shares held by consolidated mutual funds not backing contracts where the financial risk is borne by policyholders. In addition, as of June 30, 2015, 2 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €39 million and their market value €46 million at the end of June 2015. c) UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES During the first half of 2015, the change in other reserves was due to: €-154 million in interest expense related to the undated subordinated debt (net of tax); €+401 million from foreign exchange rate fluctuations. d) DIVIDENDS PAID At the shareholders’ meeting held on April 30, 2015, shareholders approved a dividend distribution of €0.95 per share corresponding to €2,317 million with respect to the 2014 financial year. Half Year 2016 Financial Report 115 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 6.2 Comprehensive income for the period The Statement of Comprehensive Income, presented as primary financial statements, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2016 a) RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The increase in gross unrealized gains and losses on assets available for sale totaled €23,538 million, of which a €24,152 million increase in unrealized capital gains on debt securities which was mainly driven by interest rates and corporate spreads increase, partially offset by a decrease in equity unrealized gains on equity securities of €-632 million in line with the financial market. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: June 30, 2016 December 31, 2015 (in Euro million) Gross unrealized gains and losses (a) 72,998 49,459 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (41,396) (29,459) Shadow accounting on Deferred Acquisition Costs (b) (2,246) (1,072) Shadow accounting on Value of purchased Business In force (231) (155) Unallocated unrealized gains and losses before tax 29,125 18,773 Deferred tax (8,707) (5,630) Unrealized gains and losses (net of tax) - Assets available for sale 20,418 13,142 Unrealized gains and losses (net of tax) - Equity accounted companies (c) 86 210 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 20,504 13,352 Minority interests' share in unrealized gains and losses (d) (187) (133) Translation reserves (e) (949) (445) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (c) 19,368 12,774 (a) Unrealized gains and losses on total available for sale invested assets including loans. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including unrealized gains and losses on assets held for sale operations. (d) Including foreign exchange impact attributable to minority interests. (e) Group share. Half Year 2016 Financial Report 116 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 As of June 30, 2016, most of the unrealized gains on assets available for sale related to the Life & Savings segment. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2016: June 30, 2016 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Japan Life & Savings Belgium Life & Savings Gross unrealized gains and losses (a) 23,326 11,050 5,638 8,250 7,805 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations Shadow accounting on Deferred Acquisition Costs (b) (17,050) (410) (9,400) (4,618) (33) (503) (474) (5,877) (95) Shadow accounting on Value of purchased Business In force (113) (85) (17) Unallocated unrealized gains and losses before tax 5,866 1,650 875 7,187 1,816 Deferred tax (1,977) (501) (184) (2,029) (571) Unrealized gains and losses (net of tax) - Assets available for sale Unrealized gains and losses (net of tax) - Equity accounted companies UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL Minority interests' share in unrealized gains and losses (c) 3,889 31 3,921 (10) 1,149 1,149 0 691 691 5,158 5,158 (70) 1,246 1,246 (1) Translation reserves (d) 0 (231) (438) (0) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (a) Unrealized gains and losses on total available for sale invested assets including loans. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. 3,911 1,149 460 4,650 1,245 The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2016 and December 31, 2015 broken down as follows: June 30, 2016 December 31, 2015 (in Euro million) Unrealized gains and losses (net of tax) 100%, opening (a) 13,352 15,469 Transfer in the income statement on the period (b) (405) (809) Investments bought in the current accounting period and changes in fair value 7,175 (1,928) Foreign exchange impact 510 497 Change in scope and other changes (127) 123 Unrealized gains and losses (net of tax) 100%, closing 20,504 13,352 (a) Reso Garantia is accounted for using the equity method in the Group consolidated financial statements on the basis of a closing at September 30. Given significant movements in the Russian ruble exchange rate between September 30, 2014 and December 31,2014, the balance sheet used as a basis of the equity method has been translated using December 31 exchange rate. (b) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period, and debt instruments discount premium impacts. b) CURRENCY TRANSLATION RESERVE The group share translation reserves movement (€-338 million) was mainly driven by the United Kingdom (€-613 million), the United States (€-285 million), MedLA (€-156 million), AXA IM (€-95 million) and the Company (€-54 million) due to change in fair value of hedges related to net investments in foreign operations and foreign exchange impact in subordinated debts (€-255 million), partly offset by Japan (€+1,180 million). Half Year 2016 Financial Report 117 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 c) EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial losses for the first half year 2016 amounted to €-827 million net group share, mostly due to the decrease in discount rates effect, and partly offset by net gains coming from plan assets outperformance above the opening average discount rate used to calculate the interest income on assets. 6.2.2 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2015 a) RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease of gross unrealized gains and losses on assets available for sale totaled €-7,619 million, of which €-8,262 million decrease in unrealized capital gains on debt securities which was mainly driven by interest rates and corporate spreads increase, partially offset by an increase in equity unrealized gains on equity securities of €+527 million in line with the financial market. b) CURRENCY TRANSLATION RESERVE The group share translation reserves movement (€+3,447 million) was mainly driven by Switzerland (€+1,529 million), the United States (€+1,021 million), the United Kingdom (€+507 million), Asia (€+313 million), AXA IM (€+180 million) and Japan (€+161 million), partly offset by the Company (€-389 million) due to change in fair value of hedges related to net investments in foreign operations. c) EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year 2015 amounted to €+82 million net group share, mostly due to the decrease in discount rates. 6.3 Change in minority interests Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than shareholders’ equity item. 6.3.1 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2016 The €+746 million increase in minority interests to €+4,912 million was mainly driven by the comprehensive income and transactions with minority interests’ holders: the comprehensive income for the period notably included the following: o net income attributable to minority interests for €+189 million; o o foreign exchange movements for €-27 million; reserves relating to changes in fair value through shareholders’ equity for €+50 million. transactions with minority interests’ holders, mainly included: o minority interests qualified as equity resulting from an increase of the value of minority interests’ holdings, in particular following the consolidation of a new funds for €+610 million; o dividend payout to minority interests’ holders for €-178 million. Half Year 2016 Financial Report 118 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 6.3.2 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2015 The €+917 million increase in minority interests to €+3,732 million was mainly driven by the comprehensive income and transactions with minority interests’ holders: the comprehensive income for the period notably included the following: o net income attributable to minority interests for €+207 million; o o foreign exchange movements for €+146 million; reserves relating to changes in fair value through shareholders’ equity for €+4 million; transactions with minority interests’ holders, mainly included: o minority interest qualified as equity resulting from the consolidation of a new consolidated investment fund for €+734 million; o minority interest acquisition of 1% share of AXA Life Insurance Japan for €+52 million; o dividend payout to minority interests’ holders for €-242 million. Half Year 2016 Financial Report 119 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 7 FINANCING DEBT Carrying value (in Euro million) June 30, 2016 December 31, 2015 AXA Debt component of subordinated convertible notes, 3.75% due 2017 (€) Subordinated notes, 5.25% due 2040 (€) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) U.S. registered redeemable subordinated debt, 7.125% 2020 (£) Subordinated debt, 5.625% due 2054 (£) Derivatives relating to subordinated debts (a) Subordinated debt, 3.375%, due 2047(€) AXA Bank Europe Subordinated debt maturity below 10 years fixed rate Undated Subordinated debt fixed rate AXA-MPS Vita and Danni Subordinated notes, EURIBOR 6 months + 81bp Other subordinated debt (under €100 million) 7,314 1,742 1,300 1,000 1,126 393 907 (655) 1,500 103 41 62 71 71 24 Subordinated debt 7,512 AXA Euro Medium Term Note, due through 2028 AXA Financial Senior notes, 7%, due 2028 AXA UK Holdings GRE: Loan Notes, 6.625%, due 2023 Other financing debt instruments issued (under €100 million) Other financing debt instruments issued (under €100 million) 500 500 314 314 182 182 117 135 Derivatives relating to other financing debt instruments issued (a) (18) Financing debt instruments issued 1,114 TOTAL FINANCING DEBT (b) 8,625 (a) Hedging instruments in accordance with IAS 39 and economic hedge derivatives not eligible for hedge accounting. (b) Excluding accrued interest on derivatives. Half Year 2016 Financial Report 120 7,256 1,701 1,300 1,000 1,148 443 1,022 642 - 116 46 70 71 71 22 7,465 - 321 321 206 206 97 136 624 - 321 321 206 206 97 136 624 8,089 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2016 NOTE 8 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: the calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period. the calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2016 June 30, 2015 Net income Group share 3,207 3,077 Undated subordinated debt financial charge (140) (154) Net income including impact of undated subordinated debt A 3,067 2,923 Weighted average number of ordinary shares (net of treasury shares) - opening 2,424 2,442 Increase in capital (excluding stock options exercised) (b) 1 Stock options exercised (b) 1 6 Treasury shares (b) (7) (10) Share purchase program (b) (4) Weighted average number of ordinary shares B 2,415 2,438 BASIC NET INCOME PER ORDINARY SHARE C = A / B 1.27 1.20 Potentially dilutive instruments : Stock options 6 9 Other 1 3 Fully diluted - weighted average number of shares (c) D 2,422 2,449 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 3,067 2,923 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 1.27 1.19 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. As of June 30, 2016, net income per ordinary share stood at €1.27 on both basic and fully diluted basis, of which €1.44 attributable to continuing operations and €-0.17 from discontinued operations on both basic and fully diluted basis. As of June 30, 2015, net income per ordinary share stood at €1.20 on a basic calculation (of which €1.19 attributable to continuing operations and €0.01 from discontinued operations) and €1.19 on a fully diluted basis (of which €1.18 attributable to continuing operations and €0.01 from discontinued operations). Half Year 2016 Financial Report 121 II STATUTORY AUDITORS’ REVIEW – HALF YEAR 2016 III Statutory auditors’ review report on the 2016 Half-Year Financial Information Half Year 2016 Financial Report 122 III STATUTORY AUDITORS’ REVIEW – HALF YEAR 2016 PricewaterhouseCoopers AuditMazars 63, rue de Villiers 92208 Neuilly-sur-Seine Cedex 61, rue Henri Regnault 92075 Paris La Défense Cedex STATUTORY AUDITORS’ REVIEW REPORT ON THE 2016 HALF-YEAR FINANCIAL INFORMATION To the Shareholders AXA S.A. 25 avenue Matignon 75008 Paris In compliance with the assignment entrusted to us by your General Meeting and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code (Code monétaire et financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the six months ended June 30, 2016 ; the verification of the information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - the standard of IFRSs as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information given in the half-year management report on the condensed half-year consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements Neuilly-sur-Seine and Courbevoie, August 3, 2016 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit Mazars Half Year 2016 Financial Report 123 III STATUTORY AUDITORS’ REVIEW – HALF YEAR 2016 Xavier Crépon Jean-Claude Pauly Maxime Simoen This is a free translation into English of the Statutory Auditors’ review report issued in French and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Half Year 2016 Financial Report 124 III STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT IV Statement of the person responsible for the Half-Year Financial Report Half Year 2016 Financial Report 125 IV STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and a description of the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 4, 2016. Henri de Castries Chairman & Chief Executive Officer Person responsible for financial information Denis Duverne Deputy Chief Executive Officer, in charge of Finance, Strategy and Operations Half Year 2016 Financial Report 126 IV

Semestriel, 2016, Insurance, AXA

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Half Year Financial Report / June 30, 2017 TABLE OF CONTENTS I. Activity Report………………………………………. II. Consolidated financial statements ……………….. III. Statutory auditors’ review report on the 2017 Half Year Financial Information …….. 125 IV. Statement of the person responsible for the Half Year Financial Report ……………………………….. 127 3 86 I. Activity Report June 30, 2017 Half Year 2017 Financial Report ACTIVITY REPORT – HALF YEAR 2017 / 3 I ACTIVITY REPORT – HALF YEAR 2017 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND THE USE OF NON-GAAP FINANCIAL MEASURES Certain statements contained herein may be forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans, expectations or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause AXA’s actual results to differ materially from those expressed or implied in the forward looking statements. Please refer to Part 4 - “Risk factors and risk management” of AXA’s Registration Document for the year ended December 31, 2016, for a description of certain important factors, risks and uncertainties that may affect AXA’s business and/or results of operations. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise, except as part of applicable regulatory or legal obligations. In addition, this report refers to certain non-GAAP financial measures, or alternative performance measures, used by management in analyzing AXA’s operating trends, financial performance and financial position and providing investors with additional information that management believes is useful and relevant regarding AXA’s results. These alternative performance measures generally have no standardized meaning and therefore may not be comparable to similarly labelled measures used by other companies. As a result, none of these non-GAAP financial measures should be considered in isolation from, or as a substitute for, the Group’s consolidated financial statements and related notes prepared in accordance with IFRS. A reconciliation from non-GAAP financial measures underlying earnings and adjusted earnings to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided in the page 16 of this report. Adjusted Return on Equity is reconciled to the financial statements in the table set forth on page 22 of this report. Other non-GAAP financial measures used on this report are defined in the Glossary on pp. 80-85. Half Year 2017 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2017 GOVERNANCE AND REPORTING CHANGES In order to reflect the evolutions in the governance of the Group which took place in 2016 and in line with Full Year 2016 Activity Report, the following changes have been implemented in the financial statements which have therefore been retroactively restated: Spain and Italy, which were formerly reported within the Mediterranean & Latin American Region, are now reported on a standalone basis. The former Mediterranean & Latin American Region has been renamed the Europe, Middle East, Africa & Latin America Region. It regroups all entities from the former Mediterranean & Latin American Region (except Spain and Italy) as well as all entities formerly included in Central and Eastern Europe, as well as Luxembourg and Russia. The International Insurance segment is no longer reported separately. Entities which were part of this segment have been reallocated as follows: o AXA Corporate Solutions Assurance, AXA Assistance, AXA Liabilities Managers and AXA Global P&C are now part of the Property & Casualty segment; o AXA Global Life and AXA Corporate Solutions Life Reinsurance Company are now part of the Life & Savings segment. High Growth markets have been renamed Emerging markets. In addition, in the Life & Savings segment, some Protection products with Unit-Linked features which were previously classified under the Unit-Linked Line of Business are now classified under the Protection & Health Line of Business. Half Year 2017 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2017 Market Environment FINANCIAL MARKET CONDITIONS IN THE FIRST HALF OF 2017 Financial markets improved during the first half of 2017, buoyed by the reflationary agenda of the Trump administration, improving macroeconomic trends in Europe and the election of Macron in France. However, the unclear consequences of the Brexit vote last year in the United Kingdom, and uncertainties on monetary policies from central banks and the outlook for interest rates continued to weigh. In the United States, economic data improved further with unemployment falling to a 44-year low. The US Federal Reserve raised interest rates by 25 basis points in March and again in June, increasing its benchmark interest rate range to 1.00-1.25%. Markets were fuelled by optimism surrounding Donald Trump’s reflationary agenda, including tax cuts and infrastructure spending. However, optimism started to fade in the second quarter amid mounting uncertainties around the ability of the US administration to get its new policies through Congress. The ongoing Senate investigation into Russia’s alleged involvement in the US election and heightened political tension over Syria and North Korea also weighed on markets. The US dollar weakened over the period, namely in the second quarter, marking its largest quarterly decline since 2010. In Europe, centrist and pro-European candidate Emmanuel Macron won both the presidential and parliamentary elections in France. Equity markets responded positively and investors in French government bonds welcomed the news, which triggered a dip in yields, narrowing the spread over German Bunds. German yields, meanwhile, rose from 0.21% to 0.47% over the period, reflecting a view that the European Central Bank (ECB) would soon normalize its monetary policy. Although the ECB cut its inflation forecasts, GDP growth for the region was at its highest since 2015, unemployment stood at an 8-year low of 9.3% and consumer confidence reached a 16-year high. In the United Kingdom, the first semester was dominated by politics. Uncertainty increased in April after Prime Minister Theresa May called a general election to strengthen her position ahead of the Brexit negotiations with the European Union (EU), but the result in June failed to secure the Conservatives a larger majority. The period also saw the triggering of Article 50, which initiated the two-year countdown to the UK’s separation from the EU. In Japan, GDP grew by 1% (annualized) in the first quarter, which was below expectations of 2.2%. Nevertheless the Bank of Japan (BoJ) raised its GDP growth forecast for 2017 to 1.6%. The yen was flat against the US dollar over the period. Disappointing manufacturing data supported comments made by the Bank of Japan’s (BoJ) policymakers arguing in favor of continuing Japan’s expansionary monetary policy. In emerging markets, the International Monetary Fund’s (IMF) growth forecast for Asia in 2017 was revised upwards in May to 5.5% and the organization upgraded its forecasts for China twice, to 6.6% and 6.7% in April and June respectively. Subsequently, Chinese stocks climbed to a 18-month high after MSCI announced that mainland A-shares would be added to its emerging market indices in 2018. India made a powerful recovery from the shock of its demonetization program in November 2016 and equities rallied supported by the budget in February, which was viewed as pro-business by investors. Argentina issued a new 100-year bond – a further attempt to regain credibility after its default in 2001. Equities in Qatar were rocked when several of its neighbours in the Middle East, led by Saudi Arabia, cut diplomatic and military ties with the nation. Stock Markets Equity markets in the United States, Japan and Europe posted gains in 1H17. The MSCI World Index increased by 7.1%. The Dow Jones Industrial Average index increased by 8.0% and the S&P 500 index increased by 8.2% in the first half of 2017. The FTSE 100 index in London increased by 2.4% in the first half of 2017. The EUROSTOXX 50 index in the Eurozone increased by 4.6% and the Nikkei index in Tokyo increased by 4.8%. The MSCI G7 index increased by 6.9% and the MSCI Emerging index increased by 13.7%. The S&P 500 implied volatility index (VIX) decreased from 14.0% on December 31, 2016, to 11.2% on June 30, 2017. The S&P 500 realized volatility index decreased from 10.2% on December 31, 2016, to 7.5% on June 30, 2017. Half Year 2017 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2017 Bond Markets In most mature economies, except the US, government bond yields increased since December 31, 2016. The 10-year German Bund yield increased by 26 bps to 0.47%, the 10-year Belgium government bond yield increased by 25 bps to 0.81%, the 10-year Swiss government bond yield increased by 18 bps to -0.03% and the French 10-year government bond yield increased by 14 bps to 0.82%, while the 10-year US T-bond yield decreased by 14 bps to 2.30%. The 10-year government bond yields increased also in most of the Eurozone peripheral countries: +34 bps to 2.16% in Italy, +14 bps to 1.53% in Spain and +10 bps to 0.87% in Ireland while it decreased by 170 bps to 5.43% in Greece and by 74 bps to 3.03% in Portugal. In Europe, the iTRAXX Main spreads decreased by 16 bps to 56 bps compared to December 31, 2016, while the iTRAXX Crossover decreased by 42 bps to 247 bps. In the United States, the CDX Main spread Index decreased by 6 bps to 61 bps. The Euro interest rates implied volatility index (based on 10x10 Euro swaptions) decreased from 76.3% as of December 31, 2016 to 46.8% as of June 30, 2017. Exchange Rates End of Period Exchange rate Average Exchange rate June 30, 2017 December 31, 2016 June 30, 2017 June 30, 2016 (for €1) (for €1) (for €1) (for €1) US Dollar 1.14 1.05 1.08 1.12 Japanese Yen 128 123 122 124 British Sterling Pound 0.88 0.85 0.86 0.78 Swiss Franc 1.09 1.07 1.08 1.10 Half Year 2017 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2017 Operating Highlights Significant Disposals AXA COMPLETED THE SALE OF ITS UK P&C COMMERCIAL BROKER BLUEFIN TO MARSH On January 2, 2017, AXA announced that it had completed the sale of Bluefin Insurance Group Ltd (“Bluefin”), its P&C commercial broker in the United Kingdom, to Marsh. AXA recorded an exceptional negative impact of €82 million, accounted for in the 2016 net income. AXA COMPLETED THE SALE OF ITS ROMANIAN OPERATIONS TO VIENNA INSURANCE GROUP On April 28, 2017, AXA announced that it had completed the sale of its Life & Savings insurance operations in Romania to Vienna Insurance Group and exited the Romanian market. Vienna Insurance Group’s subsidiaries BCR Life and Omniasig acquired 100% of AXA Life Insurance SA(1). Capital / Debt operations / Other AXA RATINGS On September 9, 2016, Moody’s Investors Service reaffirmed the ‘Aa3’ insurance financial strength ratings of AXA’s principle insurance subsidiaries, maintaining a stable outlook. On May 10, 2017, S&P Global Ratings affirmed its long-term financial strength rating of AXA’s core operating subsidiaries to ‘AA-’ with a stable outlook. On May 31, 2017, Fitch reaffirmed AXA’s core entities’ insurer financial strength ratings at ‘AA-’, maintaining a stable outlook. AXA ANNOUNCED THE SUCCESSFUL PLACEMENT OF $1 BILLION DATED SUBORDINATED NOTES DUE 2047 On January 11, 2017, AXA announced the successful placement of $1 billion of Reg S subordinated notes due 2047 to institutional investors to refinance, in advance, part of its outstanding debt. The initial coupon has been set at 5.125% per annum. It will be fixed until the first call date in January 2027 and floating thereafter with a margin including a 100 basis points step-up. The notes have been swapped into Euro over 10 years at a rate of 2.80%, corresponding to a 209 basis points spread over swap. Settlement of the notes took place on January 17, 2017. The notes will be treated as debt from an IFRS perspective and as capital from a regulatory and rating agencies’ perspective within applicable limits. The transaction has been structured for the notes to be eligible as Tier 2 capital under Solvency II. CHANGE IN THE BODILY INJURY DISCOUNT RATE IN THE UNITED KINGDOM On February 27, 2017, the Lord Chancellor and Secretary of State for Justice in the United Kingdom announced her decision to decrease the discount rate used when calculating future financial losses in the form of a lump sum in bodily injury cases ("Ogden rate") from 2.5% to -0.75% starting from March 20, 2017. After having analyzed the impact of this change in discount rate on prior year results, AXA considers its existing reserves to be sufficient. (1) AXA Life Insurance SA is the AXA Life & Savings operating entity in Romania. Half Year 2017 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2017 AXA ANNOUNCED ITS INTENTION TO IPO ITS US OPERATIONS On May 10, 2017, AXA announced its intention to list a minority stake of its US operations (1) (expected to consist of its US Life & Savings business and AXA Group’s interest in AB) in the first semester of 2018, subject to market conditions. To enhance the capitalization of the US operations ahead of the IPO, about $1 billion of outstanding debt owed by AXA US to AXA Group will be converted into equity. The proceeds of the transaction will be reinvested in the Group’s priority lines of business, including Health, Capital-light Savings, Protection and P&C Commercial lines, in line with the Ambition 2020 strategy, and/or potentially returned to shareholders depending on acquisition opportunities and market conditions. SHARE REPURCHASE PROGRAM In order to meet its obligation to deliver shares and to eliminate the dilutive effect of certain share-based compensation schemes (2), on May 10, 2017, AXA decided to buy back a maximum of 37,000,000 shares. These shares will either be delivered to the beneficiaries of share-based compensation schemes or canceled, all in accordance with the share repurchase program (3). As of June 30, 2017, this program was completed with the purchase of 37,000,000 shares. US DEPARTMENT OF LABOR RULE On April 6, 2016, the US Department of Labor (the “DOL”) issued a final rule that significantly expanded the range of activities that would be considered to be fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (“ERISA”). Pursuant to the new regulation, advisors and employees, including those affiliated with AXA US, who provide investment-related information and support to retirement plan sponsors, participants, and Individual Retirement Account (“IRA”) holders would be subject to enhanced fiduciary duty obligations and requirements. In February 2017, the DOL was directed by memorandum (the “President’s Memorandum”) to review the fiduciary rule and determine whether the rule should be rescinded or revised, in light of the new administration’s policies and orientations. In response, on March 2, 2017, the DOL published a notice soliciting comments on the examination described in the President’s Memorandum, which were due by April 17, 2017. In addition, on April 4, 2017, the DOL announced that the applicability date of the fiduciary rule was deferred from April 10, 2017 until June 9, 2017. The fiduciary rule was partially implemented on June 9, 2017, with a transition period for certain requirements that are due to take effect on January 1, 2018. On July 6, 2017, the DOL published a request for information in connection with its examination of the fiduciary rule, which included a request for comments on further delaying implementation of the Rule. Comments on this request were due by July 21, 2017, or August 7, 2017, depending on the issue. The outcome of the foregoing cannot be anticipated at this time. While the extent of implementation of the rule remains uncertain, and is currently subject to judicial challenge, Management continues to evaluate its potential impact on AXA US. If fully implemented as planned, the new fiduciary rule may affect the range of services provided by AXA US and its affiliated advisors and firms, as well as the nature and amount of compensation and fees such entities receive which may have a significant adverse effect on AXA US’s business and operations. Risk Factors The principal risks and uncertainties faced by the Group are described in detail in Section 4.1 "Risk Factors" and Section 6.3 “General Information” included in the full year 2016 Registration Document (respectively on (1) Expected NYSE listing of AXA America Holdings, Inc., which is expected to consist of the AXA US Life & Savings business and the AXA Group’s interest in AllianceBernstein LP and AllianceBernstein Holding LP (“AB”). AXA America Corporate Solutions Inc. is not expected to be part of the IPO. (2) Stock-options plans and performance shares plans. (3) AXA share repurchase program was authorized by the Shareholder’s Meeting of April 26, 2017. Half Year 2017 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2017 pages 178 to 189 and pages 381 to 390) filed with the Autorité des marchés financiers and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com). The descriptions contained in these sections of the 2016 Registration Document remain valid in all material respects at the date of the publication of this Report regarding the appreciation of the major risks and uncertainties affecting the Group on June 30, 2017, or which Management expects could affect the Group during the remainder of 2017. Related-Party Transactions During the first semester 2017, there were (1) no modifications to the related-party transactions described in Note 28 "Related-party transactions" of the audited consolidated financial statements for the fiscal year ended December 31, 2016, included in the full year 2016 Registration Document (pages 359 and 360) filed with the Autorité des marchés financiers and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com), which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2017, and (2) no new transaction concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2017. Events Subsequent to June 30, 2017 AXA COMPLETED THE SALE OF AXA LIFE EUROPE LIMITED’S OFFSHORE INVESTMENT BONDS BUSINESS TO LIFE COMPANY CONSOLIDATION GROUP On July 3, 2017, AXA announced that it had completed the sale of AXA Life Europe Limited’s offshore investment bonds business to Harcourt Life International dac (recently renamed to Utmost Ireland dac), a subsidiary of Life Company Consolidation Group. Half Year 2017 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2017 ACTIVITY & EARNINGS INDICATORS Gross Revenues (in Euro million) June 30, 2017 June 30, 2016 restated (c) June 30, 2017 / June 30, 2016 restated (a) & (c) December 31, 2016 Life & Savings 31,118 31,063 (1.2%) 60,282 o/w. gross written premiums 30,259 30,295 58,686 o/w. fees and revenues from investment contracts with no participating feature 108 115 219 Property & Casualty 20,983 20,876 1.4% 35,604 Asset Management 1,941 1,799 6.1% 3,710 Banking (b) 240 297 (16.0%) 596 Holdings and other companies n/a TOTAL 54,283 54,035 (0.0%) 100,193 Revenues are disclosed net of intercompany eliminations. (a) Changes are on a comparable basis. (b) Excluding (i) net realized capital gains or losses and (ii) change in the fair value of assets under fair value option and derivatives, net banking revenues and total consolidated revenues respectively amounted to €323 million and €54,365 million for half year 2017 and €211 million and €53,949 million for half year 2016 restated. (c) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of the International Insurance segment into the Life & Savings and the Property & Casualty segments. Consolidated gross revenues amounted to €54,283 million as of June 30, 2017, up 0.5% compared to June 30, 2016, on a reported basis or stable on a comparable basis. The comparable basis mainly consists in the adjustments of: (i) the foreign exchange rate movements (€-0.2 billion or -0.4 point) mainly due to the depreciation of average Euro exchange rates against USD and CHF, (ii) the consolidation of the Poland Property & Casualty business in 2016 (€-0.1 billion or -0.1 point) and (iii) the acquisition of Liberty Ubezpieczenia in Direct Poland in 2016 (€-0.1 billion or -0.1 point). In addition, within the Life & Savings segment, both 2016 and 2017 reported figures include the reclassification of some Protection products with Unit-Linked features which were previously classified under the Unit-Linked Line of Business under the Protection & Health Line of Business, mainly in Japan, South-East Asia, India & China and the United States. This reclassification amounted to €875 million in 1H16 and €926 million in 1H17 gross revenues and to €162 million in 1H16 and €195 million in 1H17 APE. In the comments below, reported figures, changes on a constant exchange rate basis and changes on a comparable basis are restated in order to reflect the disposal of the AXA Life Europe United Kingdom and Ireland operations retroactively accounted for as discontinued operations. As a consequence, both 2016 and 2017 profit & loss contribution from the AXA Life Europe United Kingdom and Ireland operations are flowing through net income, but do not impact gross revenues, APE, underlying earnings and adjusted earnings. Half Year 2017 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2017 Life & Savings Annual Premium Equivalent (1) (in Euro million) June 30, 2017 June 30, 2016 restated (b) June 30, 2017 / June 30, 2016 restated (a) & (b) December 31, 2016 Total 3,330 3,266 1.2% 6,600 Protection & Health 1,539 1,488 0.9% 2,949 G/A Savings 614 745 (15.7%) 1,438 Unit-Linked 845 769 11.0% 1,549 Funds & Other 332 265 21.8% 664 Mature markets 2,638 2,567 2.1% 5,194 Emerging markets 692 699 (2.1%) 1,406 (a) Changes are on a comparable basis. (b) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of a part of the International Insurance segment into the Life & Savings segment. Life & Savings New Business APE was up 2% on reported and up 1% on comparable basis to €3,330 million. The increase in Unit-Linked sales was primarily driven by higher sales in France mainly in real estate funds and discretionary mandates as well as in the United States mainly resulting from non-GMxB Variable Annuity products. Funds & Other increased in the United States reflecting favorable market conditions. The growth in Protection & Health sales was primarily driven by France from higher Group business and Hong Kong reflecting the continued focus on this segment, partly offset by Switzerland resulting from the non-repeat of the sale of a large contract in 1H16. This was partly offset by the decrease in G/A Savings primarily driven by Hong Kong, Italy, and Japan in the context of new regulatory requirements effective late 2016. In mature markets, APE grew by 2% mainly driven by the United States (+13% or €+105 million) and France (+7% or €+56 million), partly offset by Switzerland (-12% or €-25 million), Japan (-10% or €-25 million), Italy (- 15% or €-24 million) and Spain (-28% or €-14 million). In emerging markets, APE decreased by 2% mainly driven by Hong Kong (-5% or €-12 million) in line with the decision to curb sales of some traditional G/A Savings products and South-East Asia, India & China (-2% or €-7 million) mainly from Thailand resulting from the decision to stop sales of a G/A Protection with Savings product. Unit-Linked APE (€845 million, 25% of total) up 11% (or €+83 million) notably from (i) France (€+40 million) reflecting higher sales in real estate funds and discretionary mandates as well as Group Savings, (ii) the United States (€+36 million) resulting from strong sales of non-GMxB Variable Annuity products and (iii) South-East Asia, India & China (€+12 million) mainly in Singapore; Funds & Other APE (€332 million, 10% of total) up 22% (or €+58 million) driven by the United States (€+58 million) reflecting favorable market conditions; Protection & Health APE (€1,539 million, 46% of total) up 1% (or €+13 million) notably from (i) France (€+30 million) resulting from higher Group business driven by international markets, (ii) Hong Kong (€+23 million) reflecting the continued focus on this segment and (iii) the United States (€+9 million), partly offset by (iv) Switzerland (€-21 million) mainly driven by the non-repeat of the sale of a large contract in 1H16, (v) South-East Asia, India & China (€-14 million) mainly from Thailand resulting from the decision to stop sales of a G/A Protection with Savings product and (vi) Spain (€- 12 million); G/A Savings APE (€614 million, 18% of total) down 16% (or €-114 million) notably from (i) Hong Kong (€-31 million) in line with the decision to curb sales of some traditional G/A Savings products, (ii) Italy (€-31 million) mainly at AXA MPS as a consequence of the difficulties faced by Banca Monte dei Paschi di Siena and its ongoing restructuration, (iii) Japan (€-22 million) in the context of new regulatory requirements effective late 2016 and (iv) France (€-13 million). (1) Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premium, in line with EEV methodology. APE is Group share. Half Year 2017 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2017 Property & Casualty Revenues (in Euro million) June 30, 2017 June 30, 2016 restated (b) June 30, 2017 / June 30, 2016 restated (a) & (b) December 31, 2016 TOTAL 20,983 20,876 1.4% 35,604 Personal Lines o/w Motor o/w Non-Motor 10,363 6,181 4,182 10,326 6,214 4,112 0.7% ( 0.7%) 2.9% 18,105 10,398 7,708 Commercial Lines o/w Motor o/w Non-Motor 10,577 2,082 8,495 10,465 2,094 8,371 2.3% 1.1% 2.6% 17,217 3,659 13,558 Mature markets Emerging markets Direct 16,844 2,644 1,496 16,681 2,743 1,451 2.3% ( 3.5%) 0.8% 27,606 5,134 2,864 (a) Changes are on a comparable basis. (b) Restated: Reclassification of a part of the International Insurance segment into the Property & Casualty segment. Property & Casualty gross revenues were up 1% on both reported and comparable basis to €20,983 million. Commercial lines revenues increased by 2% with growth in the United Kingdom & Ireland, AXA Corporate Solutions Assurance, Switzerland and Germany, partly offset by the EMEA-LATAM Region mostly driven by Turkey Motor Third Party Liability. Personal lines revenues increased by 1%, primarily in the United Kingdom & Ireland, Italy, Germany, Spain and Direct, partly offset by the EMEA-LATAM Region. Overall, tariffs increased by 2%. Commercial lines (50% of P&C gross revenues) increased by 2% (or €+241 million) on a comparable basis. Non-Motor revenues increased by 3% (or €+218 million) mainly reflecting tariff increases across the board as well as a positive product mix impact: AXA Corporate Solutions Assurance (+6%) driven by strong business growth notably in Property, Marine, and Liability; The United Kingdom & Ireland (+4%) mostly as a result of growth in Health and tariff increases in Liability; Germany (+4%) mainly in Property driven by new business in SME and Mid Market;  Switzerland (+2%) reflecting higher volumes and positive price effects mainly in Workers' Compensation; The EMEA-LATAM Region (+2%) mainly driven by new business in Brazil and Poland, partly offset by the Gulf Region due to the loss of large accounts in Health. Motor revenues increased by 1% (or €+23 million) mainly reflecting tariff increases in the United Kindgom & Ireland, France and the EMEA-LATAM Region, partly offset by a negative product mix impact in France: The United Kingdom & Ireland (+15%) mainly due to increased new business volumes and higher retention rates; Belgium (+12%) reflecting growth in Mid Market and SME segments;  AXA Assistance (+4%) mainly driven by new business; partly offset by:  The EMEA-LATAM Region (-9%) mainly driven by a decrease in Third Party Liability in Turkey following a change in market conditions due to the implementation of a cap on premiums by the government starting from April 12, 2017, partly offset by new business in the Gulf Region. Half Year 2017 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2017 Personal lines (49% of P&C gross revenues) increased by 1% (or €+72 million) on a comparable basis. Non-Motor revenues increased by 3% (or €+118 million) driven by tariff increases across the board as well as higher volumes, partly offset by a negative product mix impact: The EMEA-LATAM Region (+17%) mainly driven by tariff increases in Health in Mexico;  Germany (+2%) mainly due to tariff increases;  Direct (+4%) mainly from higher volumes in South Korea and France. Motor revenues decreased by 1% (€-47million) as a result of negative product mix and volume impacts, partly offset by tariff increases in Direct, the United Kingdom & Ireland, Germany and France: The EMEA-LATAM Region (-20%) mainly from Turkey driven by a decrease in Third Party Liability following a change in market conditions due to the implementation of a cap on premiums by the government starting from April 12, 2017; France (-2%) driven by lower volumes stemming from a strong competition, partly offset by tariff increases; partly offset by:  The United Kingdom & Ireland (+6%) due to tariff increases and higher retention rates in Ireland;  Italy (+5%) mainly due to higher volumes as a consequence of business from new agencies;  Spain (+3%) mainly driven by higher new business and higher retention in a favorable market environment. Health Revenues (as reported in Life & Savings and Property & Casualty segments) Health gross revenues up 5% on reported basis and up 6% on comparable basis to €6,523 million with (i) France up 11% (or €+181 million) to €1,880 million mainly driven by Group business due to tariff and volume increases in both international and domestic markets, (ii) Germany up 6% (or €+91 million) to €1,553 million mainly due to tariff increases and new business in full benefit insurance, (iii) the United Kingdom & Ireland up 7% (or €+71 million) to €1,029 million driven by both Group and Individual businesses in Great Britain and internationally and (iv) Mexico up 11% (or €+30 million) to €298 million mainly driven by tariff increases, partly offset by (v) the Gulf Region down 21% (or €-50 million) to €199 million mainly due to the loss of large accounts in Group business. Asset Management Revenues and Assets under Management Asset Management revenues increased by 8% on a reported basis and 6% on a comparable basis (or €+110 million) to €1,941 million from AB (€+78 million) and AXA Investment Managers (€+33 million) both mainly driven by higher management fees. Asset Management Average AUM increased by 5% on a comparable basis (or €+49 billion) to €1,102 billion driven by AXA Investment Managers (+7% or €+41 billion) and AB (+2% or €+8 billion) due to market appreciation and net inflows. Asset Management net inflows were flat driven by AB (€+4 billion) mainly due to inflows from the Retail channel, partly offset by AXA Investment Managers (€-4 billion) mainly due to outflows from Asian Joint Ventures (€-4 billion). AB revenues were up 6% on a comparable basis (or €+78 million) to €1,333 million mainly driven by higher management fees as a result of higher management fee bps. AB AUM decreased by 5% (or €-26 billion) from year-end 2016 to €460 billion as a result of €-37 billion unfavorable foreign exchange impact and €-22 billion negative scope impact due to the transfer of AXA Japan advisory mandate to AXA Investment Managers, partly offset by €+29 billion market appreciation and €+4 billion net inflows. Half Year 2017 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2017 AXA Investment Managers revenues increased by 6% on a comparable basis (or €+33 million) to €607 million mainly driven by higher management fees as result of higher average assets under management combined with a better product mix. AXA Investment Managers AUM increased by 3% (or €+18 billion) from year-end 2016 to €735 billion as a result of €+22 billion positive scope impact due to the transfer of AXA Japan advisory mandate from AB and €+12 billion market appreciation, partly offset by €-11 billion unfavorable foreign exchange impact and €-4 billion net outflows. Net Banking Revenues Net banking revenues were down 19% (or €-57 million) mainly driven by an unfavorable change in the fair value of debt and hedging instruments in France, as well as an unfavorable change in the fair value of own debt and lower commercial margin in Belgium. Half Year 2017 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2017 UNDERLYING EARNINGS, ADJUSTED EARNINGS AND NET INCOME GROUP SHARE (in Euro million) June 30, 2017 June 30, 2016 restated (c) December 31, 2016 Gross written premiums 51,058 51,003 94,220 Fees and revenues from investment contracts without participating feature 108 115 219 Revenues from insurance activities 51,166 51,118 94,439 Net revenues from banking activities 321 210 513 Revenues from other activities 2,879 2,622 5,164 TOTAL REVENUES (a) 54,365 53,949 100,115 Change in unearned premium reserves net of unearned revenues and fees (4,602) (4,543) (348) Net investment result excluding financing expenses (b) 16,112 10,824 23,674 Technical charges relating to insurance activities (b) (51,300) (45,645) (93,727) Net result of reinsurance ceded (295) (72) (590) Bank operating expenses (35) (26) (58) Insurance acquisition expenses (5,282) (5,450) (11,394) Amortization of value of purchased life business in force (28) (84) (169) Administrative expenses (4,964) (4,816) (9,769) Valuation allowances on tangible assets 0 (0) (0) Change in value of goodwill (3) (2) (5) Other 209 (38) 218 Other operating income and expenses (61,696) (56,133) (115,492) OPERATING EARNINGS BEFORE TAX 4,178 4,098 7,949 Net income from investments in affiliates and associates 144 105 239 Financing expenses (124) (112) (252) UNDERLYING EARNINGS BEFORE TAX 4,199 4,091 7,937 Income tax expenses (858) (861) (1,908) Minority interests (170) (167) (340) UNDERLYING EARNINGS GROUP SHARE 3,171 3,063 5,688 Net realized capital gains or losses attributable to shareholders 307 301 415 ADJUSTED EARNINGS GROUP SHARE 3,478 3,364 6,103 Profit or loss on financial assets (under fair value option) & derivatives (154) (647) (118) Exceptional operations (including discontinued operations) 39 626 387 Goodwill and other related intangible impacts (44) (45) (89) Integration and restructuring costs (51) (91) (454) NET INCOME GROUP SHARE 3,268 3,207 5,829 (a) Including (i) net realized capital gains or losses and (ii) change in the fair value of assets under fair value option and derivatives, total consolidated revenues respectively amounted to €54,283 million for half year 2017 and €54,035 million for half year 2016 restated. (b) For the periods ended June 30, 2017 and June 30, 2016 restated, "the change in fair value of assets backing contracts with financial risk borne by policyholders" impacted the net investment result for respectively €+8,852 million and €+393 million, and benefits and claims by the offsetting amounts respectively. (c) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of the International Insurance segment into the Life & Savings and the Property & Casualty segments. ALTERNATIVE PERFORMANCE MEASURES Underlying earnings, Adjusted earnings and Adjusted Return on Equity are Alternative Performance Measures as defined in ESMA’s guidelines issued in 2015. A reconciliation from non-GAAP financial measures Underlying earnings and Adjusted earnings to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided in the above table. Adjusted Return on Equity is reconciled to the financial statements in the table set forth on page 22 of this report. Adjusted Earnings Adjusted earnings represent the net income (Group share) as disclosed in Part 2 – “Consolidated Financial Statements” of the Financial Report, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests:  integration and restructuring costs related to material newly-acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill and other related intangibles; exceptional operations (primarily changes in scope and discontinued operations); Half Year 2017 Financial Report 16 I ACTIVITY REPORT – HALF YEAR 2017 profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets. Adjusted Return on Equity The Adjusted Return on Equity (“Adjusted RoE”) is calculated as adjusted earnings including net financial charges related to undated subordinated debt (recorded through shareholders’ equity as disclosed in Part 2.4 – “Consolidated Statement of Changes in Equity” of the Financial Report) divided by the weighted average shareholders’ equity. The weighted average shareholders’ equity: is based on opening shareholders’ equity adjusted for weighted average impact of capital flows (including dividends); excludes reserves relating to the change in the fair value of financial investments available for sale as disclosed in Part 2.4 – “Consolidated Statement of Changes in Equity”; excludes undated subordinated debt as disclosed in Part 2 – “Note 6 Shareholders’ Equity and Minority Interests” of the Financial Report. Underlying Earnings Underlying earnings correspond to adjusted earnings excluding net capital gains or losses attributable to shareholders, and including the following elements net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowance (on assets not designated under fair value option or trading assets); cost at inception, intrinsic value and pay-off of derivatives involved in the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds. For further information on those indicators, see the Glossary of this report. Group Underlying Earnings (in Euro million) June 30, 2017 June 30, 2016 restated (a) December 31, 2016 Life & Savings 1,984 1,903 3,507 Property & Casualty Asset Management 1,347 236 1,274 213 2,514 416 Banking 52 60 78 Holdings and other companies (448) (387) (827) UNDERLYING EARNINGS GROUP SHARE 3,171 3,063 5,688 (a) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of the International Insurance segment into the Life & Savings and the Property & Casualty segments. Group underlying earnings amounted to €3,171 million, up €107 million (or +4%) versus 1H16 on a reported basis. On a constant exchange rate basis, underlying earnings increased by €86 million (or +3%) driven by Property & Casualty, Life & Savings and Asset Management. Life & Savings underlying earnings amounted to €1,984 million. On a reported basis, Life & Savings underlying earnings were up €81 million (or +4%). On a constant exchange rate basis, Life & Savings underlying earnings increased by €50 million (or +3%) mainly attributable to AXA Corporate Solutions Life Reinsurance (€+27 million), South East Asia, India & China (€+20 million), France (€+14 million) and the United States (€+7 million), partly offset by Germany (€-26 million) and Japan (€-23 million), resulting from: Half Year 2017 Financial Report 17 I ACTIVITY REPORT – HALF YEAR 2017 Lower investment margin (€-40 million or -3%) mainly in (i) France (€-28 million) and (ii) Germany (€-22 million) primarily resulting from lower reinvestment yields on fixed income assets and (iii) Belgium (€-11 million) mainly driven by lower investment income due to the non-repeat of exceptional mutual funds dividends in 1H16, partly offset by (iv) the United States (€+18 million) mainly driven by higher asset base, partly offset by lower reinvestment yields on fixed income assets; Higher fees and revenues (€+27 million or +1%): o Loadings on premiums and mutual funds were down €99 million mainly in (i) Hong Kong (€-38 million) from the non-repeat of the impact of an Unearned Revenue Reserve of one-off lapse assumption update in 1H16, as well as lower Unearned Revenue Reserve amortization in 1H17 (both offset in Deferred Acquisition Costs), (ii) Italy (€-30 million) driven by lower Unearned Revenue Reserve amortization as a consequence of lower Protected Unit surrenders (partly offset in Deferred Acquisition Costs) and (iii) the United States (€-24 million), o Unit-Linked management fees were up €91 million mainly driven by (i) the United States (€+40 million) reflecting higher average separate account balances and (ii) France (€+35 million) reflecting a higher asset base as well as higher loadings on premiums, o Other revenues were up €35 million mainly driven by the United States (€+14 million) and France (€+13 million); Lower net technical margin (€-88 million or -14%) mainly attributable to the United States (€-135 million) primarily due to unfavorable mortality model updates; Lower expenses (€+42 million or -1%): o Lower acquisition expenses (€+109 million) mainly in (i) Germany (€+40 million) mainly due to lower Deferred Acquisition Cost amortization which was linked in 1H16 to unfavorable interest rate assumption update, (ii) the United States (€+37 million) mainly driven by the non-repeat of the one-off impact of the updated expected future interest margin assumptions of G/A Protection products, (iii) Italy (€+37 million) due to a reclassification from acquisition to administrative expenses and lower Deferred Acquisition Cost amortization in line with lower surrenders (more than offset in Unearned Revenue Reserve), and (iv) Hong Kong (€+30 million) due to lower Deferred Acquisition Cost amortization (more than offset in Unearned Revenue Reserve), partly offset by (v) France (€-34 million) mainly due to higher commissions in line with volume growth, o Higher administrative expenses (€-67 million) mainly due to (i) the United States (€-26 million) mainly from higher asset-based sales compensation as a result of higher average balances, (ii) Italy (€-27 million) due to a reclassification from acquisition to administrative expenses and (iii) Hong Kong (€-9 million); Lower amortization of VBI (€+57 million or -68%) notably in Switzerland (€+32 million) mainly driven by negative interest rate assumption update in Group Life in 1H16 and Germany (€+12 million);  Higher underlying earnings arising from investment in associates – Equity Method (€+8 million or +10%) mainly reflecting the growth of the portfolio in Thailand (€+9 million); Lower tax expenses and minority interests (€+47 million or -12%) mainly driven by a lower effective tax rate, notably in France and the United States. Tax one-offs remained stable. Property & Casualty underlying earnings amounted to €1,347 million. On a reported basis, Property & Casualty underlying earnings were up €72 million (or +6%). On a constant exchange rate basis, Property & Casualty underlying earnings increased by €81 million (or +6%) mainly attributable to the EMEA-LATAM Region (€+46 million), Belgium (€+29 million), Germany (€+26 million), AXA Corporate Solutions Assurance (€+25 million), and France (€+20 million), partly offset by Direct (€-30 million), AXA Liabilities Managers (€-15 million) and Italy (€-10 million), resulting from: Higher net technical result (€+58 million or +9%): o Lower current year loss ratio by 1.5 points as a result of (i) an improved claims experience (-0.9 point) mainly from the EMEA-LATAM Region driven by Turkey and Brazil, as well as Belgium due to favorable weather conditions, lower large claims and lower claims handling costs, combined with (ii) lower Nat Cat charges (-0.6 point) mainly in France and Germany due to the absence of major Nat Cat events in 2017, Half Year 2017 Financial Report 18 I ACTIVITY REPORT – HALF YEAR 2017 o Lower positive prior year reserve development by 1.2 points to -0.7 point (compared to - 1.9 points in 1H16) mainly driven by the EMEA-LATAM Region (€-63 million, mainly in Turkey), Direct (€-45 million, mainly in the United Kingdom), AXA Liabilities Managers (€-31 million), Switzerland (€-21 million), Germany (€-19 million), and the United Kingdom & Ireland (€-19 million), o Stable expense ratio at 26.7% with (i) the administrative expense ratio up 0.4 point mainly from AXA Corporate Solutions Assurance due to a reclassification of expenses from acquisition expenses following a change in allocation keys and AXA Assistance driven by a change in business mix combined with the costs incurred in relation with the set-up of AXA Partners, offset by (ii) the acquisition expense ratio down 0.3 point mainly from the United Kingdom & Ireland driven by a decrease in commissions due to a change in business mix and lower aggregator fees in direct business, o Lower enlarged expense ratio by 0.2 point to 31.3%, o As a result, the combined ratio decreased by 0.2 point to 96.1% while current year combined ratio improved by 1.5 points to 96.9%; Higher net investment result (€+18 million or +2%) primarily driven by (i) the EMEA-LATAM Region (€+36 million) mainly from Turkey as a result of both higher interest rates and average asset base, partly offset by (ii) France (€-10 million) due to lower dividend distribution from mutual funds and lower revenues on fixed income assets; Higher tax expenses and minority interests (€-16 million or +3%) mainly driven by higher pre-tax underlying earnings. Health underlying earnings (as reported in the Life & Savings and Property & Casualty segments) amounted to €255 million. On a constant exchange rate basis, underlying earnings increased by €28 million (or +13%) mainly driven by an improved technical result combined with higher volumes in France and in the EMEA- LATAM Region as well as higher results from equity-method entities in Asia, partly offset by lower investment results. The combined ratio improved by 0.4 point to 95.1%. Asset Management underlying earnings amounted to €236 million. On a constant exchange rate basis, underlying earnings increased by €22 million (or +10%) attributable to both AXA Investment Managers (€+16 million) and AB (€+7 million) primarily reflecting higher revenues and higher investment result. Banking underlying earnings amounted to €52 million. On a constant exchange rate basis, underlying earnings decreased by €8 million (or -13%) mainly attributable to Belgium (€-6 million) as a consequence of a lower commercial margin in the context of a low interest rate environment. Holdings and other companies underlying earnings amounted to €-448 million. On a constant exchange rate basis, underlying earnings decreased by €59 million (or -15%) mainly driven by AXA SA (€-39 million) as a consequence of higher financial charges mainly due to dated subordinated debt issued in 2016 and in the beginning of 2017. Half Year 2017 Financial Report 19 I ACTIVITY REPORT – HALF YEAR 2017 Group Adjusted Earnings to Net Income Group net realized capital gains attributable to shareholders amounted to €307 million. On a constant exchange rate basis, Group net realized capital gains and losses attributable to shareholders increased by €8 million mainly due to:  €+128 million lower impairments to €-66 million mainly driven by equity securities (€+140 million), partly offset by real estate (€-22 million) and fixed income assets (€-8 million); €-58 million more unfavorable intrinsic value to €-42 million related to equity hedging derivatives; €-63 million lower net realized capital gains to €415 million mainly driven by equity securities (€- 150 million) and fixed income assets (€-137 million), partly offset by alternative investments (€+142 million) and real estate (€+86 million). As a result, adjusted earnings amounted to €3,478 million, up €114 million (or +3%). On a constant exchange rate basis, adjusted earnings increased by €94 million (or +3%). Net income amounted to €3,268 million, up €61 million (or +2%). On a constant exchange rate basis, net income increased by €42 million (or +1%) mainly as a result of: higher adjusted earnings (€+94 million);  a less unfavorable change in the fair value of financial assets and derivatives net of foreign exchange impacts; up €489 million to €-154 million: o €-180 million unfavorable change in the fair value of foreign exchange derivatives not eligible for hedge accounting under IAS 39 net of foreign exchange rate movements on investments denominated in foreign currencies, o €-101 million from the change in the fair value of interest rate and credit derivatives not eligible for hedge accounting under IAS 39, o €+127 million from the change in the fair value of assets accounted for under fair value option driven by equity and private equity funds;  lower integration and restructuring costs (€+38 million) to €-51 million; lower impact from exceptional and discontinued operations (€-581 million) to €39 million mainly due to the non-repeat of several major transactions which occurred in 1H16: the sales of two real estate properties in New York (€+1.0 billion) and of AXA Portugal (€+0.1 billion), partly offset by the disposal of the United Kingdom Life & Savings operations (€-0.4 billion). Half Year 2017 Financial Report 20 I ACTIVITY REPORT – HALF YEAR 2017 SHAREHOLDERS’ EQUITY As of June 30, 2017, consolidated shareholders' equity amounted to €68.0 billion. The movements in shareholders' equity since December 31, 2016 are presented in the table below: (in Euro million) Shareholders' Equity At December 31, 2016 70,597 Share Capital (3) Capital in excess of nominal value (52) Equity-share based compensation 12 Treasury shares sold or bought in open market (666) Change in equity component of compound financial instruments (95) Deeply subordinated debt (including accumulated interests charges) (117) Fair value recorded in shareholders' equity (235) Impact of currency fluctuations (2,313) Payment of N-1 dividend (2,808) Other (41) Net income for the period 3,268 Actuarial gains and losses on pension benefits 407 At June 30, 2017 67,956 Half Year 2017 Financial Report 21 I ACTIVITY REPORT – HALF YEAR 2017 SHAREHOLDER VALUE Earnings per share (“EPS”) June 30, 2017 June 30, 2016 published June 30, 2016 restated (a) December 31, 2016 June 30, 2017 / June 30, 2016 restated (a) (in Euro except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,411 2,419 2,415 2,422 2,415 2,422 2,416 2,423 Net income (Euro per Ordinary Share) 1.31 1.30 1.27 1.27 1.27 1.27 2.30 2.30 2.9% 2.9% Adjusted earnings (Euro per Ordinary Share) 1.39 1.39 1.34 1.33 1.34 1.33 2.42 2.41 4.4% 4.4% Underlying earnings (Euro per Ordinary Share) 1.27 1.26 1.21 1.21 1.21 1.21 2.24 2.24 4.6% 4.6% (a) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement. Return On Equity (“ROE”) (in Euro million) June 30, 2017 June 30, 2016 published June 30, 2016 restated (c) June 30, 2017 / June 30, 2016 restated (c) ROE 9.5% 9.1% 9.1% 0.4 pt Net income 3,268 3,207 3,207 Average shareholders' equity 68,472 70,209 70,209 Adjusted ROE 14.7% 14.6% 14.6% 0.1 pt Adjusted earnings (a) 3,361 3,224 3,224 Average shareholders' equity (b) 45,782 44,225 44,225 Underlying ROE 13.3% 13.2% 13.2% 0.1 pt Underlying earnings (a) 3,054 2,923 2,923 Average shareholders' equity (b) 45,782 44,225 44,225 (a) Including an adjustment to reflect net financial charges related to undated debt (recorded through shareholders' equity). (b) Excluding fair value of invested assets and derivatives and undated debt (both recorded through shareholders' equity). (c) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement. Half Year 2017 Financial Report 22 I ACTIVITY REPORT – HALF YEAR 2017 SEGMENT INFORMATION Life & Savings segment The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share attributable to AXA’s Life & Savings segment for the periods indicated: (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 31,238 31,163 60,459 APE (Group share) 3,330 3,266 6,600 Investment margin 1,317 1,347 2,669 Fees & revenues 3,995 3,905 8,008 Net technical margin 520 612 1,498 Expenses (3,564) (3,565) (7,796) Amortization of VBI (27) (84) (169) Other 88 80 178 Underlying earnings before tax 2,329 2,295 4,388 Income tax expenses / benefits (309) (352) (804) Minority interests (36) (40) (76) Underlying earnings Group share 1,984 1,903 3,507 Net capital gains or losses attributable to shareholders net of income tax 177 140 250 Adjusted earnings Group share 2,161 2,042 3,757 Profit or loss on financial assets (under Fair Value option) & derivatives (16) (192) 34 Exceptional operations (including discontinued operations) (2) (391) (447) Goodwill and other related intangibles impacts (9) (11) (20) Integration and restructuring costs (13) (26) (128) NET INCOME GROUP SHARE 2,122 1,422 3,196 (a) Before intercompany eliminations. (b) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of a part of the International Insurance segment into the Life & Savings segment. Half Year 2017 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2017 Consolidated Gross revenues (in Euro million) June 30, 2017 June 30, 2016 restated (d) December 31, 2016 France 8,077 7,799 17,095 United States 7,730 6,926 14,305 Japan 2,433 2,597 5,161 Germany 3,397 3,342 6,697 Switzerland 4,945 5,119 7,044 Belgium 562 614 1,210 Italy 1,454 2,026 3,412 Spain 309 501 798 EMEA-LATAM Region (a) 600 537 1,095 Hong Kong 1,319 1,262 2,769 South-East Asia, India & China (b) 347 290 606 Other (c) 64 151 267 TOTAL 31,238 31,163 60,459 Intercompany transactions (119) (100) (177) Contribution to consolidated gross revenues 31,118 31,063 60,282 Mature markets 28,985 29,079 56,020 Emerging markets 2,134 1,984 4,262 (a) EMEA-LATAM Region includes Greece, Turkey, Morocco, Mexico, Colombia, Poland, Czech Republic, Slovak Republic and Luxembourg. (b) South-East Asia, India & China revenues include Singapore and non bancassurance subsidiaries in Indonesia. (c) Other corresponds to AXA Life Invest (excluding Germany & Japan), Architas, AXA Global Life and AXA Corporate Solutions Life Reinsurance Company. (d) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of a part of the International Insurance segment into the Life & Savings segment. Underlying earnings Group share (in Euro million) June 30, 2017 June 30, 2016 restated (d) December 31, 2016 France 432 419 774 United States 484 462 905 Japan 256 273 480 Germany 100 126 223 Switzerland 169 159 287 Belgium 111 114 182 Italy 38 40 76 Spain 24 19 44 EMEA-LATAM Region (a) 28 29 49 Hong Kong 204 198 366 South-East Asia, India & China (b) 106 83 174 Other (c) 33 (20) (52) UNDERLYING EARNINGS GROUP SHARE 1,984 1,903 3,507 Mature markets 1,650 1,598 2,924 Emerging markets 334 305 583 (a) EMEA-LATAM Region includes Greece, Turkey, Morocco, Mexico, Colombia, Poland, Czech Republic, Slovak Republic and Luxembourg. (b) South-East Asia, India & China earnings include Indonesia, Thailand, Philippines, China, India and Singapore. (c) Other corresponds to AXA Life Invest (excluding Germany & Japan), Architas, AXA Global Life, AXA Corporate Solutions Life Reinsurance Company and Family Protect. (d) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of a part of the International Insurance segment into the Life & Savings segment. Half Year 2017 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2017 Property & Casualty segment The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share attributable to AXA’s Property & Casualty segment for the periods indicated. (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 21,242 21,132 35,970 Current accident year loss ratio (net) 70.1% 71.6% 70.8% All accident year loss ratio (net) 69.4% 69.7% 69.6% Net technical result before expenses 5,468 5,375 10,800 Expense ratio 26.7% 26.7% 26.9% Net investment result 1,126 1,129 2,202 Underlying earnings before tax 1,825 1,764 3,431 Income tax expenses / benefits (491) (479) (915) Net income from investments in affiliates and associates 42 19 48 Minority interests (31) (29) (51) Underlying earnings Group share 1,347 1,274 2,514 Net capital gains or losses attributable to shareholders net of income tax 136 166 175 Adjusted earnings Group share 1,482 1,440 2,688 Profit or loss on financial assets (under Fair Value option) & derivatives (4) (162) 66 Exceptional operations (including discontinued operations) (6) 31 27 Goodwill and other related intangibles impacts (34) (34) (69) Integration and restructuring costs (25) (59) (297) NET INCOME GROUP SHARE 1,412 1,216 2,415 (a) Before intercompany eliminations. Gross Revenues amounted to €20,983 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification of a part of the International Insurance segment into the Property & Casualty segment. Consolidated Gross revenues (in Euro million) June 30, 2017 June 30, 2016 restated (e) December 31, 2016 France 3,685 3,750 6,786 United Kingdom & Ireland 2,515 2,610 4,716 Germany 2,601 2,549 4,045 Switzerland 2,883 2,797 3,095 Belgium 1,127 1,114 2,095 Italy 815 777 1,564 Spain 866 850 1,577 EMEA-LATAM Region (a) 2,193 2,279 4,239 Direct (b) 1,498 1,453 2,866 Asia (c) 593 597 1,111 AXA Corporate Solutions Assurance 1,639 1,552 2,325 AXA Assistance 740 724 1,449 Other (d) 87 81 103 TOTAL 21,242 21,132 35,970 Intercompany transactions (258) (257) (366) Contribution to consolidated gross revenues 20,983 20,876 35,604 Mature markets 16,844 16,681 27,606 Emerging markets 2,644 2,743 5,134 Direct 1,496 1,451 2,864 (a) EMEA-LATAM Region includes Greece, Turkey, Morocco, the Gulf Region, Mexico, Colombia, Brazil, Poland and Luxembourg. (b) Direct business in France, Belgium, Spain, Italy, Poland, United Kingdom, South Korea and Japan. (c) Asia includes Hong Kong, Malaysia, Singapore and Thailand. (d) Other corresponds to AXA Liabilities Managers and AXA Global P&C. (e) Restated: Reclassification of a part of the International Insurance segment into the Property & Casualty segment. Half Year 2017 Financial Report 25 I Combined Ratio (in %) June 30, 2017 Total 96.1% France 94.0% United Kingdom & Ireland 98.6% Germany 94.8% Switzerland 85.4% Belgium 96.0% Italy 95.3% Spain 97.8% EMEA-LATAM Region (a) 101.7% Direct (b) 97.9% Asia (c) 97.9% AXA Corporate Solutions Assurance 99.2% AXA Assistance 97.1% Mature markets Emerging markets Direct 95.0% 101.3% 97.9% (a) EMEA-LATAM Region includes Greece, Turkey, Morocco, the Gulf Region, Mexico, Colombia, Brazil, Poland and Luxembourg. (b) Direct business in France, Belgium, Spain, Italy, Poland, United Kingdom, South Korea and Japan. (c) Asia includes Hong Kong, Singapore, Malaysia and Thailand. (d) Restated: Reclassification of a part of the International Insurance segment into the Property & Casualty segment. Underlying earnings Group share (in Euro million) June 30, 2017 France 310 United Kingdom & Ireland 102 Germany 174 Switzerland 245 Belgium 90 Italy 56 Spain 49 EMEA-LATAM Region (a) 116 Direct (b) 71 Asia (c) 22 AXA Corporate Solutions Assurance 73 AXA Assistance 13 Other (d) 26 UNDERLYING EARNINGS GROUP SHARE 1,347 Mature markets 1,147 Emerging markets 129 Direct 71 (a) EMEA-LATAM Region includes Greece, Turkey, Morocco, the Gulf Region, Mexico, Colombia, Brazil, Poland and Luxembourg. (b) Direct business in France, Belgium, Spain, Italy, Poland, the United Kingdom, South Korea and Japan. (c) Asia includes India, Hong Kong, China, Malaysia, Singapore and Thailand. (d) Other corresponds to AXA Liabilities Managers and AXA Global P&C. (e) Restated: Reclassification of a part of the International Insurance segment into the Property & Casualty segment. Half Year 2017 Financial Report ACTIVITY REPORT – HALF YEAR 2017 June 30, 2016 restated (d) December 31, 2016 96.4% 96.5% 95.2% 94.5% 98.7% 98.9% 96.6% 97.3% 85.5% 86.2% 99.7% 95.2% 93.3% 94.7% 96.4% 98.0% 102.5% 102.9% 94.9% 96.8% 93.2% 95.3% 102.7% 101.2% 97.7% 98.0% 95.8% 100.8% 94.9% 95.6% 101.8% 96.8% June 30, 2016 restated (e) December 31, 2016 291 598 106 203 147 286 247 474 61 179 66 110 55 92 71 144 103 168 30 49 48 122 7 13 45 75 1,274 2,514 1,080 2,173 91 172 103 168 26 I ACTIVITY REPORT – HALF YEAR 2017 Asset Management segment The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share for the Asset Management segment for the periods indicated: Consolidated Gross revenues (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 AB 1,391 1,270 2,642 AXA Investment Managers 776 766 1,545 TOTAL 2,167 2,036 4,187 Intercompany transactions (227) (237) (476) Contribution to consolidated gross revenues 1,941 1,799 3,710 Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 AB 107 98 191 AXA Investment Managers 129 116 225 Underlying earnings Group share 236 213 416 Net realized capital gains or losses attributable to shareholders Adjusted earnings Group share 236 213 416 Profit or loss on financial assets (under Fair Value option) & derivatives (3) 28 31 Exceptional operations (including discontinued operations) 58 12 36 Goodwill and related intangibles impacts (1) Integration and restructuring costs (13) (4) (9) NET INCOME GROUP SHARE 277 249 474 Half Year 2017 Financial Report 27 I ACTIVITY REPORT – HALF YEAR 2017 Banking segment The following tables present the consolidated gross revenues, underlying earnings, adjusted earnings and net income Group share attributable to AXA’s banking activities for the periods indicated: Consolidated Gross revenues (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 AXA Banks 227 276 Belgium 166 187 France 45 70 Hungary 11 Germany 16 8 Other 2 2 TOTAL 229 278 Intercompany transactions 11 19 Contribution to consolidated gross revenues 240 297 Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 AXA Banks 53 61 Belgium 51 57 France 1 2 Germany 2 3 Other (1) (1) Underlying earnings Group share 52 60 Net realized capital gains or losses attributable to shareholders (1) 0 Adjusted earnings Group share 51 60 Profit or loss on financial assets (under Fair Value option) & derivatives (26) (9) Exceptional operations (including discontinued operations) (1) 6 Goodwill and related intangibles impacts Integration and restructuring costs 1 (2) NET INCOME GROUP SHARE 24 55 Half Year 2017 Financial Report 550 375 141 13 21 6 556 40 596 80 74 1 5 (2) 78 (0) 78 19 18 (15) 100 28 I ACTIVITY REPORT – HALF YEAR 2017 Holdings and other companies The Holdings and other companies consist of AXA’s non-operating companies, including mainly the AXA parent company, AXA France Assurance, AXA Financial, AXA United Kingdom Holdings, AXA Germany Holding, AXA Belgian Holding and EMEA-LATAM Region Holdings. Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 AXA (388) (349) (773) Other French holding companies 1 2 5 Foreign holding companies (60) (41) (59) Other (0) 0 0 Underlying earnings Group share (448) (387) (827) Net realized capital gains or losses attributable to shareholders (5) (5) (9) Adjusted earnings Group share (453) (392) (836) Profit or loss on financial assets (under Fair Value option) & derivatives (104) (312) (268) Exceptional operations (including discontinued operations) (9) 969 752 Goodwill and related intangibles impacts Integration and restructuring costs (1) (1) (5) NET INCOME GROUP SHARE (567) 264 (357) Half Year 2017 Financial Report 29 I ACTIVITY REPORT – HALF YEAR 2017 SEGMENT INFORMATION BY ENTITY Life & Savings segment LIFE & SAVINGS OPERATIONS - FRANCE (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 8,077 7,799 17,095 APE (Group share) 891 856 1,824 Investment margin 545 573 1,151 Fees & revenues 929 878 1,771 Net technical margin 320 321 492 Expenses (1,222) (1,197) (2,390) Amortization of VBI Other 0 5 9 Underlying earnings before tax 572 578 1,032 Income tax expenses / benefits (139) (158) (256) Minority interests (1) (1) (2) Underlying earnings Group share 432 419 774 Net capital gains or losses attributable to shareholders net of income tax 102 37 105 Adjusted earnings Group share 534 456 879 Profit or loss on financial assets (under Fair Value option) & derivatives 14 (54) 16 Exceptional operations (including discontinued operations) (0) 37 2 Goodwill and other related intangibles impacts Integration and restructuring costs (4) (12) (29) NET INCOME GROUP SHARE 544 427 868 (a) Before intercompany eliminations. Gross Revenues amounted to €8,009 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification of AXA Life Europe operations into AXA Life Invest (included in Life & Savings – Other). Gross revenues increased by €279 million (+4%) to €8,077 million. On a comparable basis, gross revenues increased by €247 million (+3%): Protection & Health revenues (48% of gross revenues) increased by €162 million (+4%) to €3,815 million reflecting an increase in Group business (€+130 million) driven by tariff and volume increases in both international and domestic markets as well as in Individual business (€+31 million) due to higher renewals; Unit-Linked revenues (23% of gross revenues) increased by €341 million (+23%) to €1,838 million mainly stemming from Individual Savings (€+289 million) reflecting higher sales in real estate funds and discretionary mandates. At 1H17, Unit-Linked revenues contributed 42.6% of total Individual Savings revenues, compared to 29.7% on average for the market. Group Savings increased by €52 million due to a significant growth in premiums on existing contracts; G/A Savings revenues (30% of gross revenues) decreased by €175 million (-7%) to €2,422 million, in line with the strategy to focus on products with a significant Unit-Linked component; Funds & Other revenues (0% of gross revenues) decreased by €81 million, impacted by a premium adjustment on a large contract underwritten in December 2016. Half Year 2017 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2017 APE increased by €35 million (+4%) to €891 million. On a comparable basis, APE increased by €56 million (+7%): Protection & Health sales (52% of APE) increased by €30 million (+7%) to €460 million mainly stemming from growth in Group business (€+40 million) driven by international markets, partly offset by a decrease in Individual business (€-10 million) reflecting the continuing impact in Health of Accord National Interprofessionnel; Unit-Linked sales (23% of APE) increased by €40 million (+25%) to €201 million mainly stemming from Individual Savings (€+27 million) reflecting higher sales in real estate funds and discretionary mandates, as well as Group Savings (€+13 million); G/A Savings sales (26% of APE) decreased by €13 million (-5%) to €229 million, in line with the strategy to focus on products with a significant Unit-Linked component; Funds & Other sales (0% of APE) decreased by €2 million. Investment margin decreased by €28 million (-5%) to €545 million. On a constant exchange rate basis, investment margin decreased by €28 million (-5%) mainly due to lower reinvestment yields on fixed income assets. Fees & revenues increased by €51 million (+6%) to €929 million. On a constant exchange rate basis, fees & revenues increased by €51 million (+6%) mainly due to higher Unit-Linked management fees reflecting a higher asset base as well as higher loadings on premiums in line with revenues growth, partly offset by a lower opening adjustment (€-28 million) in Unearned Revenue Reserve (more than offset in Deferred Acquisition Costs). Net technical margin remained stable at €320 million. On a constant exchange rate basis, net technical margin increased by €5 million (+1%). Expenses increased by €24 million (+2%) to €-1,222 million. On a constant exchange rate basis, expenses increased by €29 million (+2%) mainly due to higher commissions, in line with volume growth, and higher general expenses linked to an increase in regulatory costs, partly offset by a higher opening adjustment (€+32 million) in Deferred Acquisition Costs (partly offset in Unearned Revenue Reserve). As a result, the underlying cost income ratio increased by 0.5 point on both reported and constant exchange rate basis to 68.1%. Income tax expenses decreased by €19 million (-12%) to €-139 million. On a constant exchange rate basis, income tax expenses decreased by €19 million (-12%) driven by a lower average tax rate and lower pre-tax underlying earnings. Underlying earnings increased by €13 million (+3%) to €432 million. On a constant exchange rate basis, underlying earnings increased by €14 million (+3%). Adjusted earnings increased by €78 million (+17%) to €534 million. On a constant exchange rate basis, adjusted earnings increased by €79 million (+17%) driven by higher underlying earnings and higher net realized capital gains. Net income increased by €117 million (+27%) to €544 million. On a constant exchange rate basis, net income increased by €118 million (+28%) mainly driven by higher adjusted earnings, a favorable change in the fair value of mutual funds and derivatives not eligible to hedge accounting, and lower restructuring costs, partly offset by the non-repeat of the realized gain on the disposal of AXA Portugal in 1H16. Half Year 2017 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - UNITED STATES (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 7,730 6,926 14,305 APE (Group share) 953 821 1,732 Investment margin 295 268 562 Fees & revenues 1,307 1,239 2,650 Net technical margin (286) (143) 124 Expenses (962) (945) (2,382) Amortization of VBI (0) (9) (10) Other Underlying earnings before tax 353 410 945 Income tax expenses / benefits 130 52 (40) Minority interests (0) (0) 0 Underlying earnings Group share 484 462 905 Net capital gains or losses attributable to shareholders net of income tax (12) 33 8 Adjusted earnings Group share 471 495 913 Profit or loss on financial assets (under Fair Value option) & derivatives 63 (10) (37) Exceptional operations (including discontinued operations) 8 1 Goodwill and other related intangibles impacts (0) (0) (0) Integration and restructuring costs (4) (2) (13) NET INCOME GROUP SHARE 530 491 863 Average exchange rate : € 1.00 = $ 1.083 1.116 1.105 (a) Before intercompany eliminations. Gross Revenues amounted to €7,727 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification of Accident & Health run-off portfolio from the International Insurance segment into the United States Life & Savings operations. Gross revenues increased by €804 million (+12%) to €7,730 million. On a comparable basis, gross revenues increased by €574 million (+8%): Variable Annuity revenues (72% of gross revenues) increased by €463 million (+9%) to €5,572 million due to higher sales of non-GMxB Variable Annuity products, partly offset by a decrease in GMxB Variable Annuity sales; Asset Management fees (7% of gross revenues) increased by €49 million (+11%) to €518 million reflecting favorable market conditions and higher average asset balances; Life revenues (19% of gross revenues) increased by €46 million (+3%) to €1,505 million due to higher renewals and higher first year premiums; Mutual funds revenues (2% of gross revenues) increased by €17 million (+15%) to €135 million reflecting higher advisory fees and higher sales. APE increased by €133 million (+16%) to €953 million. On a comparable basis, APE increased by €105 million (+13%): Mutual funds sales (32% of APE) increased by €58 million (+32%) to €307 million due to higher advisory account sales reflecting favorable market conditions; Variable Annuity sales (57% of APE) increased by €37 million (+8%) to €547million mainly due to strong sales of non-GMxB Variable Annuity products, partly offset by a decrease in GMxB Variable Annuity sales; Life sales (11% of APE) increased by €10 million (+12%) to €99 million driven by higher sales in Protection. Half Year 2017 Financial Report 32 I ACTIVITY REPORT – HALF YEAR 2017 Investment margin increased by €27 million (+10%) to €295 million. On a constant exchange rate basis, investment margin increased by €18 million (+7%) mainly driven by higher asset base, partly offset by lower reinvestment yields on fixed income assets. Fees & revenues increased by €69 million (+6%) to €1,307 million. On a constant exchange rate basis, fees & revenues increased by €30 million (+2%) mainly due to higher Unit-Linked management fees reflecting higher average separate account balances. Net technical margin decreased by €143 million to €-286 million. On a constant exchange rate basis, net technical margin decreased by €135 million primarily due to unfavorable mortality model updates. Expenses increased by €17 million (+2%) to €-962 million. On a constant exchange rate basis, expenses decreased by €11 million (-1%): Expenses excluding Deferred Acquisition Cost amortization increased by €21 million due to higher asset-based sales compensation as a result of higher average balances; Deferred Acquisition Cost amortization decreased by €32 million due to the non-repeat of interest margin assumption changes of Protection products. Amortization of VBI decreased by €9 million to €0 million. On a constant exchange rate basis, amortization of VBI decreased by €9 million. As a result, the underlying cost income ratio increased by 3.2 points on both reported and constant exchange rate basis to 73.2%. Income tax benefits increased by €78 million to €+130 million. On a constant exchange rate basis, income tax benefits increased by €74 million due to higher positive tax settlements (€204 million in 1H17 vs. €154 million in 1H16) as well as a lower effective tax rate. Underlying earnings increased by €21 million (+5%) to €484 million. On a constant exchange rate basis, underlying earnings increased by €7 million (+2%). Adjusted earnings decreased by €24 million (-5%) to €471 million. On a constant exchange rate basis, adjusted earnings decreased by €38 million (-8%) as higher underlying earnings were more than offset by higher impairments. Net income increased by €39 million (+8%) to €530 million. On a constant exchange rate basis, net income increased by €23 million (+5%) as lower adjusted earnings were more than offset by favorable mark-to-market effects. Half Year 2017 Financial Report 33 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - UNITED KINGDOM (in Euro million) June 30, 2017 June 30, 2016 restated (a) December 31, 2016 Gross revenues APE (Group share) Investment margin Fees & revenues Net technical margin Expenses Amortization of VBI Other Underlying earnings before tax Income tax expenses / benefits Minority interests 0 0 (0) Underlying earnings Group share 0 0 (0) Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share 0 0 (0) Profit or loss on financial assets (under Fair Value option) & derivatives Exceptional operations (including discontinued operations) (1) (403) (439) Goodwill and other related intangibles impacts Integration and restructuring costs NET INCOME GROUP SHARE (1) (403) (439) Average exchange rate : € 1.00 = £ 0.860 0.779 0.819 (a) Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement. Following the announcements of the disposals both in 2016 and 2017, the United Kingdom Life & Savings contribution has been restated as discontinued operations in respective periods. As a consequence, the profit and loss contribution of the business has been recognized in net income. Net income increased by €402 million to €-1 million. On a constant exchange rate basis, net income increased by €402 million reflecting the non-repeat of the realized loss related to the disposal of the United Kingdom Life and Savings operations in 1H16. Half Year 2017 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - JAPAN (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 2,433 2,597 5,161 APE (Group share) 232 252 499 Investment margin 0 (0) 0 Fees & revenues 663 656 1,327 Net technical margin 118 130 241 Expenses (402) (389) (870) Amortization of VBI (8) (7) (17) Other Underlying earnings before tax 371 390 682 Income tax expenses / benefits (112) (114) (195) Minority interests (3) (4) (6) Underlying earnings Group share 256 273 480 Net capital gains or losses attributable to shareholders net of income tax 0 0 19 Adjusted earnings Group share 256 273 499 Profit or loss on financial assets (under Fair Value option) & derivatives 27 (63) 69 Exceptional operations (including discontinued operations) (0) Goodwill and other related intangibles impacts Integration and restructuring costs NET INCOME GROUP SHARE 283 210 568 Average exchange rate : € 1.00 = Yen 121.695 124.482 121.228 (a) Before intercompany eliminations. Gross Revenues amounted to €2,433 million net of intercompany eliminations as of June 30, 2017. Gross revenues decreased by €164 million (-6%) to €2,433 million. On a comparable basis, gross revenues decreased by €219 million (-8%): G/A Savings revenues (17% of gross revenues) decreased by €187 million (-31%) to €422 million mainly due to lower new business in the G/A capital light Single Premium Whole Life product in the context of new regulatory requirements effective late 2016; Unit-Linked revenues (2% of gross revenues) decreased by €50 million (-48%) to €55 million due to lower new business from the Unit-Linked component of the above-mentioned product; Protection & Health revenues (80% of gross revenues) increased by €17 million (+1%) to €1,956 million mainly due to higher new business in Protection with Savings Unit-Linked products (€+47 million) driven by strong promotion and higher in-force revenues from Health products (€+6 million), partly offset by lower in-force revenues from Protection with Savings G/A products (€-33 million). APE decreased by €20 million (-8%) to €232 million. On a comparable basis, APE decreased by €25 million (- 10%): G/A Savings sales (11% of APE) decreased by €22 million (-47%) to €25 million due to lower new business in the G/A capital light Single Premium Whole Life product in the context of new regulatory requirements effective late 2016; Protection & Health sales (89% of APE) decreased by €3 million (-1%) to €207 million mainly due to lower new business in Health in a very competitive market. Investment margin remained stable at €0 million. Fees & revenues increased by €7 million (+1%) to €663 million. On a constant exchange rate basis, fees & revenues decreased by €8 million (-1%) mainly due to lower Unearned Revenue Reserve amortization (mostly offset in Deferred Acquisition Cost amortization). Half Year 2017 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2017 Net technical margin decreased by €12 million (-9%) to €118 million. On a constant exchange rate basis, net technical margin decreased by €15 million (-11%) mainly due to a less favorable mortality margin and the non-repeat of assumption update in 1H16 (€10 million), partly offset by in-force growth. Expenses increased by €13 million (+3%) to €-402 million. On a constant exchange rate basis, expenses increased by €4 million (+1%) mainly due to the timing difference of non-payroll expenses, partly offset by lower Deferred Acquisition Cost amortization (fully offset in Unearned Revenue Reserve amortization). Amortization of VBI increased by €2 million (+23%) to €-8 million. On a constant exchange rate basis, the amortization of VBI increased by €1 million (+20%). As a result, the underlying cost income ratio increased by 2.2 points on both reported and constant exchange rate basis to 52.5%. Income tax expenses decreased by €2 million (-2%) to €-112 million. On a constant exchange rate basis, income tax expenses decreased by €5 million (-4%) mainly due to lower pre-tax underlying earnings, partly offset by the non-repeat of the tax one-off related to the decrease in the corporate tax rate in 1H16 (€9 million). Underlying earnings decreased by €17 million (-6%) to €256 million. On a constant exchange rate basis, underlying earnings decreased by €23 million (-8%). Adjusted earnings decreased by €17 million (-6%) to €256 million. On a constant exchange rate basis, adjusted earnings decreased by €23 million (-8%) due to lower underlying earnings. Net income increased by €73 million (+35%) to €283 million. On a constant exchange rate basis, net income increased by €67 million (+32%) as lower adjusted earnings were more than offset by a favorable change in the fair value of both mutual funds and interest rate hedging derivatives not eligible for hedge accounting. Half Year 2017 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - GERMANY (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 3,397 3,342 6,697 APE (Group share) 184 191 382 Investment margin 52 74 147 Fees & revenues 138 144 310 Net technical margin 64 69 124 Expenses (105) (140) (257) Amortization of VBI (8) (20) (35) Other Underlying earnings before tax 141 127 289 Income tax expenses / benefits (41) (1) (65) Minority interests (0) (0) (1) Underlying earnings Group share 100 126 223 Net capital gains or losses attributable to shareholders net of income tax 15 28 44 Adjusted earnings Group share 116 154 267 Profit or loss on financial assets (under Fair Value option) & derivatives (20) 13 25 Exceptional operations (including discontinued operations) (1) Goodwill and other related intangibles impacts Integration and restructuring costs (0) (1) (29) NET INCOME GROUP SHARE 96 167 262 (a) Before intercompany eliminations. Gross Revenues amounted to €3,377 million net of intercompany eliminations as of June 30, 2017. Gross revenues increased by €55 million (+2%) to €3,397 million. On a comparable basis, gross revenues increased by €52 million (+2%): Life revenues (54% of gross revenues) decreased by €39 million (-2%) to €1,824 million mainly driven by G/A Savings (€-34 million) from hybrid products as lower single premiums were partly offset by higher regular premiums; Health revenues (46% of gross revenues) increased by €91 million (+6%) to €1,553 million mainly due to tariff increases and higher new business in full benefit insurance, notably in the civil service segment. APE decreased by €7 million (-4%) to €184 million. On a comparable basis, APE decreased by €7 million (-4%): Life sales (61% of APE) decreased by €7 million (-6%) to €112 million mainly driven by G/A Savings (€- 6 million) from hybrid products as lower single premiums were partly offset by higher regular premiums; Health sales (39% of APE) remained stable at €72 million as higher new business in full benefit insurance, notably in the civil servant segment, was offset by lower sales in supplementary dental products in the broker channel. Investment margin decreased by €22 million (-30%) to €52 million mainly due to lower reinvestment yields on fixed income assets. Fees & revenues decreased by €6 million (-4%) to €138 million as tariff increases in Health were more than offset by an increase in policyholder participation. Net technical margin decreased by €5 million (-7%) to €64 million mainly due to a lower margin in Variable Annuity GMxB products, partly offset by tariff increases in Health. Expenses decreased by €35 million (-25%) to €-105 million mainly due to lower Deferred Acquisition Cost amortization from negative interest rate assumption update in 1H16. Half Year 2017 Financial Report 37 I ACTIVITY REPORT – HALF YEAR 2017 Amortization of VBI decreased by €12 million (-59%) to €-8 million resulting from interest rate assumption update. As a result, the underlying cost income ratio decreased by 11.2 points to 44.5%. Income tax expenses increased by €40 million to €-41 million mainly due to the non-repeat of positive tax one-offs in 1H16 (€35 million). Underlying earnings decreased by €26 million (-21%) to €100 million. Adjusted earnings decreased by €39 million (-25%) to €116 million driven by lower underlying earnings as well as lower net realized capital gains. Net income decreased by €71 million (-43%) to €96 million mainly due to lower adjusted earnings and an unfavorable change in the fair value of economic hedging derivatives not eligible for hedge accounting. Half Year 2017 Financial Report 38 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - SWITZERLAND (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 4,945 5,119 7,044 APE (Group share) 182 204 301 Investment margin 114 115 212 Fees & revenues 172 173 347 Net technical margin 89 95 203 Expenses (164) (151) (333) Amortization of VBI (1) (33) (77) Other Underlying earnings before tax 210 199 351 Income tax expenses / benefits (42) (39) (63) Minority interests 0 0 (0) Underlying earnings Group share 169 159 287 Net capital gains or losses attributable to shareholders net of income tax 21 (3) 7 Adjusted earnings Group share 189 156 294 Profit or loss on financial assets (under Fair Value option) & derivatives (36) (53) (24) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (4) (4) (7) Integration and restructuring costs (1) NET INCOME GROUP SHARE 150 100 262 Average exchange rate : € 1.00 = Swiss Franc 1.077 1.096 1.089 (a) Before intercompany eliminations. Gross Revenues amounted to €4,945 million net of intercompany eliminations as of June 30, 2017. Gross revenues decreased by €175 million (-3%) to €4,945 million. On a comparable basis, gross revenues decreased by €261 million (-5%): Group Life revenues (92% of gross revenues) decreased by €243 million (-5%) to €4,536 million mainly driven by the non-repeat of the sale of a large G/A Protection with Savings contract in 1H16; Individual Life revenues (8% of gross revenues) decreased by €18 million (-4%) to €409 million driven by lower sales of single premium G/A Savings products, partly offset by higher sales of regular premium Protection products in line with the strategy. APE decreased by €22 million (-11%) to €182 million. On a comparable basis, APE decreased by €25 million (- 12%): Group Life sales (78% of APE) decreased by €19 million (-12%) to €142 million mainly driven by the non-repeat of the sale of a large G/A Protection with Savings contract in 1H16; Individual Life sales (22% of APE) decreased by €7 million (-14%) to €40 million mainly driven by lower sales of single premium G/A Savings products. Investment margin decreased by €1 million (-1%) to €114 million. On a constant exchange rate basis, investment margin decreased by €3 million (-3%) mainly driven by lower reinvestment yields on fixed income assets and higher foreign exchange hedging costs, partly offset by a lower allocation of policyholder participation. Fees & revenues remained stable at €172 million. On a constant exchange rate basis, fees & revenues decreased by €3 million (-2%) mainly from lower loadings on premiums in Group Life. Net technical margin decreased by €6 million (-6%) to €89 million. On a constant exchange rate basis, net technical margin decreased by €8 million (-8%) mainly driven by a less favorable development of the disability and mortality claims experience in Individual Life. Half Year 2017 Financial Report 39 I ACTIVITY REPORT – HALF YEAR 2017 Expenses increased by €13 million (+9%) to €-164 million. On a constant exchange rate basis, expenses increased by €10 million (+7%) mainly due to higher amortization of Deferred Acquisition Costs in Individual Life. Amortization of VBI decreased by €32 million to €-1 million. On a constant exchange rate basis, amortization of VBI decreased by €32 million mainly driven by a negative interest rate assumption update in Group Life in 1H16. As a result, the underlying cost income ratio decreased by 4.1 points on both reported and constant exchange rate basis to 43.9%. Income tax expenses increased by €2 million (+6%) to €-42 million. On a constant exchange rate basis, income tax expenses increased by €2 million (+4%) mainly driven by higher pre-tax underlying earnings. Underlying earnings increased by €9 million (+6%) to €169 million. On a constant exchange rate basis, underlying earnings increased by €6 million (+4%). Adjusted earnings increased by €33 million (+21%) to €189 million. On a constant exchange rate basis, adjusted earnings increased by €30 million (+19%) driven by higher underlying earnings as well as higher net realized capital gains. Net income increased by €50 million (+50%) to €150 million. On a constant exchange rate basis, net income increased by €47 million (+48%) mainly driven by higher adjusted earnings as well as a favorable change in the fair value of alternative investments. Half Year 2017 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - BELGIUM (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 562 614 1,210 APE (Group share) 23 24 55 Investment margin 175 186 342 Fees & revenues 63 64 134 Net technical margin 21 20 22 Expenses (104) (111) (224) Amortization of VBI (2) (3) (8) Other Underlying earnings before tax 153 157 266 Income tax expenses / benefits (42) (43) (84) Minority interests 0 0 0 Underlying earnings Group share 111 114 182 Net capital gains or losses attributable to shareholders net of income tax 56 29 50 Adjusted earnings Group share 167 142 232 Profit or loss on financial assets (under Fair Value option) & derivatives (6) 3 5 Exceptional operations (including discontinued operations) 0 Goodwill and other related intangibles impacts (0) Integration and restructuring costs 2 (3) (40) NET INCOME GROUP SHARE 163 143 197 (a) Before intercompany eliminations. Gross Revenues amounted to €561 million net of intercompany eliminations as of June 30, 2017. Gross revenues decreased by €52 million (-8%) to €562 million. On a comparable basis, gross revenues decreased by €53 million (-9%): Unit-Linked revenues (3% of gross revenues) decreased by €50 million (-73%) to €18 million mainly due to lower sales of the Oxylife Invest hybrid product, in line with the strategy to focus on protection and pension products; G/A Savings revenues (24% of gross revenues) decreased by €11 million (-7%) to €137 million mainly due to lower sales of the Oxylife Secure hybrid product, in line with the strategy to focus on protection and pension products; Protection & Health revenues (73% of gross revenues) increased by €9 million (+2%) to €407 million mainly driven by higher renewals in Group Protection. APE decreased by €1 million (-5%) to €23 million. On a comparable basis, APE decreased by €1 million (-5%): Unit-Linked sales (7% of APE) decreased by €4 million (-72%) to €2 million reflecting lower sales of the Oxylife Invest hybrid product, in line with the strategy to focus on protection and pension products; Protection & Health sales (41% of APE) decreased by €2 million (-14%) to €9 million mainly due to lower new business in Group Protection; G/A Savings sales (52% of APE) increased by €5 million (+66%) to €12 million mainly driven by higher new business in pension products, in line with the strategy to focus on protection and pension products. Investment margin decreased by €11 million (-6%) to €175 million driven by lower investment income due to the non-repeat of exceptional mutual funds dividends in 1H16, partly offset by lower credited interests and policyholder bonus allocation. Fees & revenues decreased by €2 million (-3%) to €63 million reflecting lower gross revenues. Net technical margin remained stable at €21 million (+2%). Half Year 2017 Financial Report 41 I ACTIVITY REPORT – HALF YEAR 2017 Expenses decreased by €7 million (-6%) to €-104 million reflecting the positive impacts of cost savings as well as lower commissions. Amortization of VBI decreased by €1 million to €-2 million as a result of favorable financial assumption update. As a result, the underlying cost income ratio decreased by 1.2 points to 40.8%. Income tax expenses decreased by €2 million (-3%) to €-42 million driven by lower pre-tax underlying earnings. Underlying earnings decreased by €2 million (-2%) to €111 million. Adjusted earnings increased by €25 million (+18%) to €167 million as lower underlying earnings were more than offset by higher net realized capital gains. Net income increased by €20 million (+14%) to €163 million mainly driven by higher adjusted earnings, partly offset by an unfavorable change in the fair value of foreign exchange and interest rate derivatives not eligible for hedge accounting. Half Year 2017 Financial Report 42 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - ITALY (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 1,454 2,026 3,412 APE (Group share) 135 160 300 Investment margin 76 75 144 Fees & revenues 124 145 288 Net technical margin 26 24 49 Expenses (134) (144) (288) Amortization of VBI (1) (2) (3) Other Underlying earnings before tax 91 99 189 Income tax expenses / benefits (21) (23) (46) Minority interests (33) (36) (67) Underlying earnings Group share 38 40 76 Net capital gains or losses attributable to shareholders net of income tax (0) 10 12 Adjusted earnings Group share 38 50 88 Profit or loss on financial assets (under Fair Value option) & derivatives (0) (8) (14) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs (0) (0) (2) NET INCOME GROUP SHARE 37 41 73 (a) Before intercompany eliminations. Gross Revenues amounted to €1,454 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification of AXA Life Europe operations into AXA Life Invest (included in Life & Savings – Other). Gross revenues decreased by €571 million (-28%) to €1,454 million. On a comparable basis, gross revenues decreased by €571 million (-28%): G/A Savings revenues (72% of gross revenues) decreased by €529 million (-34%) to €1,049 million mainly at AXA MPS as a consequence of the difficulties faced by Banca Monte dei Paschi di Siena and its ongoing restructuration; Unit-Linked revenues (21% of gross revenues) decreased by €50 million (-14%) to €312 million mainly at AXA MPS driven by a shift in new business towards pure investment contracts not accounted for as gross revenues; Protection & Health revenues (6% of gross revenues) increased by €8 million (+9%) to €93 million mainly due to higher new business on Protection with Savings products launched in December 2016 mainly at AXA MPS. APE decreased by €24 million (-15%) to €135 million. On a comparable basis, APE decreased by €24 million (- 15%): G/A Savings sales (46% of APE) decreased by €31 million (-33%) to €62 million mainly at AXA MPS as a consequence of the difficulties faced by Banca Monte dei Paschi di Siena and its ongoing restructuration; Unit-Linked sales (41% of APE) remained stable at €55 million;  Protection & Health sales (13% of APE) increased by €7 million (+66%) to €18 million mainly due to the success of Protection with Savings products launched in December 2016 mainly at AXA MPS. Investment margin increased by €1 million (+2%) to €76 million mainly driven by lower interests credited to policyholders. Fees & revenues decreased by €21 million (-15%) to €124 million mainly due to lower Unearned Revenue Reserve amortization as a consequence of lower Protected Unit product surrenders (partly offset in Deferred Acquisition Costs), partly offset by higher Unit-Linked management fees. Half Year 2017 Financial Report 43 I ACTIVITY REPORT – HALF YEAR 2017 Net technical margin increased by €2 million (+7%) to €26 million. Expenses decreased by €10 million (-7%) to €-134 million, mainly driven by lower Deferred Acquisition Cost amortization (more than offset in Unearned Revenue Reserve) in line with lower surrenders, partly offset by higher commissions on Unit-Linked reserves. As a result, the underlying cost income ratio increased by 0.1 point to 59.6%. Income tax expenses decreased by €3 million (-11%) to €-21 million. Underlying earnings decreased by €2 million (-5%) to €38 million. Adjusted earnings decreased by €12 million (-24%) to €38 million driven by lower underlying earnings as well as lower net realized capital gains. Net income decreased by €4 million (-11%) to €37 million as lower adjusted earnings were partly offset by a favorable change in the fair value of hedging derivatives not eligible for hedge accounting. Half Year 2017 Financial Report 44 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - SPAIN (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 309 501 APE (Group share) 36 50 Investment margin 22 19 Fees & revenues 39 39 Net technical margin 15 11 Expenses (43) (42) Amortization of VBI (2) (2) Other Underlying earnings before tax 32 25 Income tax expenses / benefits (8) (6) Minority interests (0) (0) Underlying earnings Group share 24 19 Net capital gains or losses attributable to shareholders net of income tax 0 8 Adjusted earnings Group share 24 27 Profit or loss on financial assets (under Fair Value option) & derivatives (4) (4) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts Integration and restructuring costs (0) (1) NET INCOME GROUP SHARE 20 22 (a) Before intercompany eliminations. Gross Revenues amounted to €306 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification of AXA Life Europe operations into AXA Life Invest (included in Life & Savings – Other). Gross revenues decreased by €192 million (-38%) to €309 million. On a comparable basis, gross revenues decreased by €191 million (-38%): Protection & Health revenues (28% of gross revenues) decreased by €147 million (-63%) to €87 million mainly due to the non-renewal of large and non-profitable Protection with Savings contracts;  G/A Savings revenues (31% of gross revenues) decreased by €90 million (-49%) to €95 million mainly due to the decrease in interests credited in line with the strategy to focus towards Unit-Linked business in a low interest rate environment; Unit-Linked revenues (39% of gross revenues) increased by €45 million (+60%) to €120 million reflecting the acceleration of new business in line with the above-mentioned strategy. APE decreased by €14 million (-28%) to €36 million. On a comparable basis, APE decreased by €14 million (- 28%): Protection & Health sales (30% of APE) decreased by €12 million (-52%) to €11 million mainly due to the non-repeat of the sale of large and non-profitable Protection with Savings contracts in 1H16;  G/A Savings sales (17% of APE) decreased by €9 million (-60%) to €6 million mainly due to the decrease in interests credited in line with the strategy to focus towards Unit-Linked business in a low interest rate environment; Unit-Linked sales (42% of APE) increased by €6 million (+76%) to €15 million reflecting the acceleration of new business in line with the above-mentioned strategy. Investment margin increased by €2 million (+12%) to €22 million mainly driven by lower interests credited to policyholders. Fees & revenues remained stable at €39 million. Net technical margin increased by €4 million (+38%) to €15 million mainly driven by an improved mortality margin in Annuities and Individual Protection. Expenses remained stable at €-43 million. Half Year 2017 Financial Report 798 86 40 79 29 (86) (3) 58 (14) (0) 44 8 52 11 (3) 60 45 I ACTIVITY REPORT – HALF YEAR 2017 Amortization of VBI remained stable (-7%) to €-2 million. As a result, the underlying cost income ratio decreased by 5.7 points to 58.0%. Income tax expenses increased by €2 million (+26%) to €-8 million mainly driven by higher pre-tax underlying earnings. Underlying earnings increased by €5 million (+27%) to €24 million. Adjusted earnings decreased by €3 million (-10%) to €24 million as higher underlying earnings were more than offset by lower net realized capital gains. Net income decreased by €3 million (-11%) to €20 million mainly driven by lower adjusted earnings. Half Year 2017 Financial Report 46 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - EMEA-LATAM REGION (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 600 537 1,095 APE (Group share) 63 62 118 Investment margin 29 28 57 Fees & revenues 127 127 256 Net technical margin 55 47 84 Expenses (169) (163) (332) Amortization of VBI (2) (2) (4) Other 0 1 0 Underlying earnings before tax 39 38 62 Income tax expenses / benefits (12) (9) (13) Minority interests 1 0 (0) Underlying earnings Group share 28 29 49 Net capital gains or losses attributable to shareholders net of income tax (4) 1 (2) Adjusted earnings Group share 24 30 47 Profit or loss on financial assets (under Fair Value option) & derivatives (24) 4 10 Exceptional operations (including discontinued operations) (33) Goodwill and other related intangibles impacts (2) (2) (4) Integration and restructuring costs (1) (0) (1) NET INCOME GROUP SHARE (3) (0) 53 (a) Before intercompany eliminations. Gross Revenues amounted to €600 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification of AXA Life Europe operations into AXA Life Invest (included in Life & Savings – Other). Scope: (i) Colombia, Mexico, Luxembourg, Czech Republic, Slovak Republic, Poland, Morocco, Greece and Turkey are fully consolidated; (ii) Nigeria is consolidated under the equity method and contributes only to the underlying earnings, adjusted earnings and net income. Gross revenues increased by €63 million (+12%) to €600 million. On a comparable basis, gross revenues increased by €54 million (+10%), mainly driven by:  Morocco (€+14 million or +26%) driven by higher sales of G/A Savings products;  Colombia (€+8 million or +7%) driven by higher sales in Protection & Health, partly offset by lower sales of G/A Savings products. Luxembourg (€+30 million or +48%) mainly due to a large Group Unit-Linked account; APE increased by €2 million (+3%) to €63 million. On a comparable basis, APE increased by €4 million (+6%) mainly driven by (i) higher Unit-Linked sales in Turkey, (ii) higher Mutual funds sales in the Czech Republic and the Slovak Republic, partly offset by (iii) lower Protection & Health sales in Mexico due to the non-repeat of large Group Protection accounts underwritten in 1H16. Investment margin increased by €1 million (+4%) to €29 million. On a constant exchange rate basis, investment margin increased by €2 million (+7%) mainly in Mexico. Fees & revenues remained stable at €127 million. On a constant exchange rate basis, fees & revenues increased by €1 million (+1%). Net technical margin increased by €8 million (+16%) to €55 million. On a constant exchange rate basis, net technical margin increased by €5 million (+11%) mainly driven by the non-repeat of reserve strengthening in Colombia in 1H16. Expenses increased by €7 million (+4%) to €-169 million. On a constant exchange rate basis, expenses increased by €6 million (+4%) driven by higher commissions in Colombia, in line with volume growth in Protection & Health. Half Year 2017 Financial Report 47 I ACTIVITY REPORT – HALF YEAR 2017 Amortization of VBI remained stable at €-2 million. On a constant exchange rate basis, amortization of VBI remained stable. As a result, the underlying cost income ratio decreased by 0.1 point to 81.4%. On a constant exchange rate basis, the underlying cost income ratio decreased by 0.3 point. Income tax expenses increased by €3 million (+30%) to €-12 million. On a constant exchange rate basis, income tax expenses increased by €3 million (+29%) due to negative tax one-offs. Underlying earnings decreased by €1 million (-4%) to €28 million. On a constant exchange rate basis, underlying earnings decreased by €1 million (-3%). Adjusted earnings decreased by €6 million (-19%) to €24 million. On a constant exchange rate basis, adjusted earnings decreased by €5 million (-18%) driven by lower underlying earnings as well as lower net realized capital gains. Net income decreased by €3 million to €-3 million. On a constant exchange rate basis, net income decreased by €3 million mainly driven by lower adjusted earnings and unfavorable foreign exchange impacts, partly offset by the non-repeat of goodwill reduction following the disposal of AXA Portugal. Half Year 2017 Financial Report 48 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - HONG KONG (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 1,319 1,262 2,769 APE (Group share) 222 227 536 Investment margin 0 (0) 0 Fees & revenues 323 338 638 Net technical margin 47 47 146 Expenses (154) (170) (378) Amortization of VBI (3) (6) (11) Other Underlying earnings before tax 214 208 396 Income tax expenses / benefits (11) (10) (30) Minority interests 0 0 (0) Underlying earnings Group share 204 198 366 Net capital gains or losses attributable to shareholders net of income tax (1) (0) (5) Adjusted earnings Group share 202 198 360 Profit or loss on financial assets (under Fair Value option) & derivatives 0 (23) 6 Exceptional operations (including discontinued operations) (0) (0) (0) Goodwill and other related intangibles impacts (1) (0) Integration and restructuring costs NET INCOME GROUP SHARE 202 174 366 Average exchange rate : € 1.00 = Hong Kong Dollar 8.421 8.670 8.589 (a) Before intercompany eliminations. Gross Revenues amounted to €1,303 million net of intercompany eliminations as of June 30, 2017. Gross revenues increased by €57 million (+5%) to €1,319 million. On a comparable basis, gross revenues increased by €20 million (+2%): Protection & Health revenues (86% of gross revenues) increased by €94 million (+9%) to €1,140 million from both new business sales and in-force growth; Unit-Linked revenues (6% of gross revenues) decreased by €71 million (-49%) to €76 million mainly due to lower single premiums and the prolonged impact of regulatory changes; G/A Savings revenues (8% of gross revenues) decreased by €4 million (-4%) to €100 million. APE decreased by €5 million (-2%) to €222 million. On a comparable basis, APE decreased by €12 million (- 5%): G/A Savings sales (4% of APE) decreased by €31 million (-79%) to €8 million in line with the decision to curb sales of some traditional G/A Savings products; Unit-Linked sales (4% of APE) decreased by €4 million (-32%) to €8 million mainly due to the prolonged impact of regulatory changes; Protection & Health sales (93% of APE) increased by €23 million (+13%) to €205 million reflecting the continued focus on this segment, partly offset by the non-repeat of the sale of a large Group Health contract in 1H16. Investment margin remained stable at €0 million. Fees & revenues decreased by €14 million (-4%) to €323 million. On a constant exchange rate basis, fees & revenues decreased by €24 million (-7%) as new business and in-force growth in Protection & Health were more than offset by the non-repeat of the favorable impact of an Unearned Revenue Reserve one-off lapse assumption update in 1H16, as well as lower Unearned Revenue Reserve amortization in 1H17 (both offset in Deferred Acquisition Costs). Half Year 2017 Financial Report 49 I ACTIVITY REPORT – HALF YEAR 2017 Net technical margin increased by €1 million (+1%) to €47 million. On a constant exchange rate basis, net technical margin decreased by €1 million (-2%) mainly due to lower lapses mostly offset by an improved claims experience. Expenses decreased by €16 million (-10%) to €-154 million. On a constant exchange rate basis, expenses decreased by €21 million (-12%) mainly due to lower Deferred Acquisition Cost amortization (offset in Unearned Revenue Reserve). Amortization of VBI decreased by €3 million (-54%) to €-3 million. On a constant exchange rate basis, amortization of VBI decreased by €3 million (-56%). As a result, the underlying cost income ratio decreased by 3.6 points on both reported and constant exchange rate basis to 42.2%. Income tax expenses remained stable at €-11 million. On a constant exchange rate basis, income tax expenses remained stable. Underlying earnings increased by €6 million (+3%) to €204 million. On a constant exchange rate basis, underlying earnings remained stable. Adjusted earnings increased by €5 million (+2%) to €202 million. On a constant exchange rate basis, adjusted earnings decreased by €1 million (-1%). Net income increased by €27 million (+16%) to €202 million. On a constant exchange rate basis, net income increased by €22 million (+12%) mainly due to a more favorable change in the fair value of interest rate hedging derivatives not eligible for hedge accounting. Half Year 2017 Financial Report 50 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - SOUTH-EAST ASIA, INDIA & CHINA (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 347 290 APE (Group share) 409 412 Underlying earnings Group share 106 83 Net capital gains or losses attributable to shareholders net of income tax 6 (2) Adjusted earnings Group share 111 80 Profit or loss on financial assets (under Fair Value option) & derivatives (29) (6) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (3) (3) Integration and restructuring costs (2) NET INCOME GROUP SHARE 79 70 (a) Before intercompany eliminations. Gross Revenues amounted to €347 million net of intercompany eliminations as of June 30, 2017. Scope: (i) for gross revenues: Singapore and non-bancassurance subsidiaries in Indonesia, on a 100% share basis; (ii) for APE, underlying earnings, adjusted earnings and net income: China, India, Indonesia, Thailand, Philippines and Singapore, on a Group share basis. Malaysian operations are not consolidated. Gross revenues increased by €57 million (+20%) to €347 million. On a comparable basis, gross revenues increased by €52 million (+18%): Singapore up €53 million driven by Unit-Linked (€+38 million) due to higher single premium sales from SingPost and agency channels, and Protection & Health (€+10 million) due to higher renewals; Indonesia down €1 million driven by Protection & Health (€-1 million) due to lower renewals. APE decreased by €4 million (-1%) to €409 million. On a comparable basis, APE decreased by €7 million (-2%) mainly driven by Thailand (€-12 million) following the decision to stop sales of a G/A Protection with Savings product and China (€-5 million) due to lower sales of traditional G/A Savings products, partly offset by Singapore (€+10 million) and Philippines (€+6 million) both mainly driven by higher sales of Unit-Linked products. Underlying earnings increased by €23 million (+28%) to €106 million. On a constant exchange rate basis, underlying earnings increased by €20 million (+24%) mainly driven by: Singapore (€+13 million) driven by strong new business, in-force growth and positive one-off regulatory changes relating to the mortality table; Thailand (€+9 million) driven by the growth of the in-force portfolio. Adjusted earnings increased by €31 million (+39%) to €111 million. On a constant exchange rate basis, adjusted earnings increased by €28 million (+34%) driven by higher underlying earnings as well as higher net realized capital gains. Net income increased by €9 million (+13%) to €79 million. On a constant exchange rate basis, net income increased by €7 million (+9%) mainly due to higher adjusted earnings as well as a favorable foreign exchange impact in India, partly offset by an unfavorable change in the fair value of financial assets in Thailand and China. Half Year 2017 Financial Report 606 754 174 3 177 (38) (5) (2) 132 51 I ACTIVITY REPORT – HALF YEAR 2017 LIFE & SAVINGS OPERATIONS - OTHER The following tables present the operating results for the other Life & Savings operations: Consolidated Gross revenues (in Euro million) June 30, 2017 June 30, 2016 restated (a) December 31, 2016 AXA Life Invest (excluding Germany and Japan) 10 96 155 AXA Global Life 2 2 3 Other UK Life 32 33 68 Other (b) 20 19 41 TOTAL 64 151 267 Intercompany transactions (8) (7) (13) Contribution to consolidated gross revenues 56 144 253 (a) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of a part of the International Insurance segment into the Life & Savings segment. (b) Other corresponds to AXA Corporate Solutions Life Reinsurance Company and Architas. Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2017 June 30, 2016 restated (a) December 31, 2016 AXA Life Invest (excluding Germany and Japan) 5 (6) (18) Family Protect (2) (1) AXA Global Life 4 (3) (14) Other UK Life 2 (0) 2 Other (b) 21 (8) (21) Underlying earnings Group share 33 (20) (52) Net realized capital gains or losses attributable to shareholders (5) (0) 0 Adjusted earnings Group share 27 (20) (51) Profit or loss on financial assets (under Fair Value option) & derivatives (1) 7 5 Exceptional operations (including discontinued operations) (0) (10) Goodwill and related intangible impacts (0) (3) (3) Integration and restructuring costs (5) (5) (8) NET INCOME GROUP SHARE 21 (20) (68) (a) Restated: Restatement of the AXA Life Europe UK and Ireland contribution as discontinued operations following the disposal announcement and reclassification of a part of the International Insurance segment into the Life & Savings segment. (b) Other corresponds to AXA Corporate Solutions Life Reinsurance Company and Architas. AXA LIFE INVEST (1) Underlying earnings increased by €12 million to €5 million mainly due to an improved margin as well as lower expenses as a result of the decision to stop sales of the Secure Advantage product. Adjusted earnings increased by €12 million to €5 million. Net income increased by €1 million to €0 million as higher adjusted earnings were offset by less favorable change in the fair value of interest rate derivatives not eligible for hedge accounting as well as restructuring costs linked to the decision to stop sales of the Secure Advantage product. AXA GLOBAL LIFE Underlying earnings increased by €8 million to €4 million mainly driven by an improved technical margin and lower administrative expenses. (1) AXA Life Invest includes all AXA Life Europe entities except Germany and Japan. Half Year 2017 Financial Report 52 I ACTIVITY REPORT – HALF YEAR 2017 Adjusted earnings and net income increased by €3 million to €-1 million driven by higher underlying earnings, partly offset by lower net realized capital gains. AXA CORPORATE SOLUTIONS LIFE REINSURANCE Underlying earnings increased by €27 million on a constant exchange rate basis to €21 million mainly driven by an improved technical margin on the run-off portfolio. Adjusted earnings and net income increased by €28 million on a constant exchange rate basis to €21 million driven by higher underlying earnings. OTHER UK LIFE (1) Underlying earnings and adjusted earnings increased by €2 million to €2 million. On a constant exchange rate basis, underlying and adjusted earnings increased by €2 million due to higher fees & revenues and reduced rebates to investment managers. Net income increased by €3 million to €2 million. On a constant exchange rate basis, net income increased by €3 million due to higher adjusted earnings. (1) Other UK Life includes Architas UK. Half Year 2017 Financial Report 53 I ACTIVITY REPORT – HALF YEAR 2017 Property & Casualty segment PROPERTY & CASUALTY OPERATIONS - FRANCE (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 3,685 3,750 6,786 Current accident year loss ratio (net) 69.4% 70.9% 69.4% All accident year loss ratio (net) 67.0% 68.3% 67.2% Net technical result before expenses 1,066 1,048 2,208 Expense ratio 27.0% 26.9% 27.3% Net investment result 264 275 517 Underlying earnings before tax 458 434 885 Income tax expenses / benefits (149) (143) (287) Net income from investments in affiliates and associates Minority interests (0) (0) (1) Underlying earnings Group share 310 291 598 Net capital gains or losses attributable to shareholders net of income tax 28 57 50 Adjusted earnings Group share 338 347 648 Profit or loss on financial assets (under Fair Value option) & derivatives (11) (21) 9 Exceptional operations (including discontinued operations) 1 7 5 Goodwill and other related intangibles impacts Integration and restructuring costs (6) (17) (31) NET INCOME GROUP SHARE 321 316 632 (a) Before intercompany eliminations. Gross Revenues amounted to €3,644 million net of intercompany eliminations as of June 30, 2017. Gross revenues decreased by €65 million (-2%) to €3,685 million. On a comparable basis, gross revenues decreased by €17 million (-0.5%): Personal lines (52% of gross revenues) were down 1% to €1,891 million as lower volumes in Motor driven by strong competition, were partly offset by higher volumes in assumed business as well as tariff increases in most segments; Commercial lines (48% of gross revenues) remained stable at €1,753 million as higher volumes in assumed business and tariff increases in most segments were offset by lower volumes notably in Motor and Credit & Lifestyle Protection in a context of selective underwriting. Net technical result increased by €18 million (+2%) to €1,066 million. On a constant exchange rate basis, net technical result increased by €38 million (+4%): the current accident year loss ratio decreased by 1.8 points to 69.4% mainly driven by the absence of Nat Cat events (€52 million in 1H16), the cancellation of unprofitable partnerships in Credit & Lifestyle Protection and lower claims handling costs, partly offset by higher natural events (€-47 million); the all accident year loss ratio decreased by 1.6 points to 67.0% due to a less favorable prior year reserve development mainly in Credit & Lifestyle Protection. Expense ratio increased by 0.1 point to 27.0%. On a constant exchange rate basis, expense ratio increased by 0.5 point driven by a higher acquisition expense ratio reflecting a change in business mix within Credit & Lifestyle Protection. Enlarged expense ratio improved by 0.6 point to 31.7%. On a constant exchange rate basis, enlarged expense ratio improved by 0.4 point due to lower claims handling costs, partly offset by an increase in the expense ratio. As a result, the combined ratio improved by 1.2 points to 94.0%. On a constant exchange rate basis, the combined ratio improved by 1.2 points. Half Year 2017 Financial Report 54 I ACTIVITY REPORT – HALF YEAR 2017 Net investment result decreased by €11 million (-4%) to €264 million. On a constant exchange rate basis, net investment result decreased by €11 million (-4%) driven by lower dividend distribution from mutual funds and lower revenues on fixed income assets. Income tax expenses increased by €5 million (+4%) to €-149 million. On a constant exchange rate basis, income tax expenses increased by €6 million (+4%) driven by higher pre-tax underlying earnings. Underlying earnings increased by €19 million (+7%) to €310 million. On a constant exchange rate basis, underlying earnings increased by €20 million (+7%). Adjusted earnings decreased by €10 million (-3%) to €338 million. On a constant exchange rate basis, adjusted earnings decreased by €9 million (-2%) as higher underlying earnings were more than offset by lower net realized capital gains. Net income increased by €6 million (+2%) to €321 million. On a constant exchange rate basis, net income increased by €6 million (+2%) as lower adjusted earnings were more than offset by a less unfavorable change in the fair value of mutual funds as well as lower restructuring costs. Half Year 2017 Financial Report 55 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - UNITED KINGDOM & IRELAND (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 2,515 2,610 4,716 Current accident year loss ratio (net) 70.3% 69.5% 69.2% All accident year loss ratio (net) 71.1% 69.4% 70.3% Net technical result before expenses 656 717 1,363 Expense ratio 27.5% 29.3% 28.6% Net investment result 87 100 191 Underlying earnings before tax 119 131 241 Income tax expenses / benefits (17) (25) (38) Net income from investments in affiliates and associates Minority interests (0) (0) (0) Underlying earnings Group share 102 106 203 Net capital gains or losses attributable to shareholders net of income tax 18 6 11 Adjusted earnings Group share 120 111 214 Profit or loss on financial assets (under Fair Value option) & derivatives (2) (25) 17 Exceptional operations (including discontinued operations) (3) 16 16 Goodwill and other related intangibles impacts (2) (2) (3) Integration and restructuring costs (2) (15) NET INCOME GROUP SHARE 110 101 229 Average exchange rate : € 1.00 = £ 0.860 0.779 0.819 (a) Before intercompany eliminations. Gross Revenues amounted to €2,463 million net of intercompany eliminations as of June 30, 2017. Gross revenues decreased by €95 million (-4%) to €2,515 million. On a comparable basis, gross revenues increased by €116 million (+5%): Commercial lines (57% of gross revenues) were up 7% to €1,441 million: o Non-Motor was up 4% to €1,099 million: (i) Health up 7% to €614 million due to volume growth within Great Britain and internationally, (ii) Liability up 6% to €119 million reflecting tariff increases, and (iii) Property remained stable at €289 million, o Motor was up 15% to €342 million principally due to increased new business volumes and higher retention rates; Personal lines (43% of gross revenues) were up 2% at €1,073 million: o Non-Motor was up 1% to €703 million: (i) Health up 7% to €415 million following strong growth in Great Britain and internationally, partly offset by (ii) Property down 7% to €199 million reflecting the exit of a scheme and the impact of tariff increases and business mix within Great Britain, o Motor was up 6% to €370 million principally due to tariff increases and higher retention rates in Ireland. Net technical result decreased by €60 million (-8%) to €656 million. On a constant exchange rate basis, net technical result decreased by €1 million: the current year loss ratio increased by 0.8 point to 70.3% due to a deterioration in severity as a consequence of the change of the discount rate used when calculating future financial losses in the form of a lump sum in bodily injury cases (‘Ogden rate’), which was only partly offset by on-going tariff increases; the all accident year loss ratio increased by 1.6 points to 71.1% driven by the increase in current year loss ratio and prior year reserve increases (+0.8 point). Expense ratio improved by 1.7 points to 27.5%. On a constant exchange rate basis, expense ratio improved by 1.6 points due to (i) a lower administrative expense ratio (-0.9 point) as a result of the positive impacts of Half Year 2017 Financial Report 56 I ACTIVITY REPORT – HALF YEAR 2017 cost savings and (ii) a lower acquisition expense ratio (-0.7 point) reflecting a decrease in commissions due to a change in business mix. Enlarged expense ratio improved by 1.5 points to 30.4%. On a constant exchange rate basis, enlarged expense ratio improved by 1.4 points. As a result, the combined ratio improved by 0.1 point to 98.6%. On a constant exchange rate basis, the combined remained stable. Net investment result decreased by €13 million (-13%) to €87 million. On a constant exchange rate basis, net investment result decreased by €5 million (-5%) due to higher foreign exchange hedging costs. Income tax expenses decreased by €8 million (-33%) to €-17 million. On a constant exchange rate basis, income tax expenses decreased by €7 million (-27%) mainly due to lower pre-tax underlying earnings. Underlying earnings decreased by €3 million (-3%) to €102 million. On a constant exchange rate basis, underlying earnings increased by €4 million (+4%). Adjusted earnings increased by €8 million (+8%) to €120 million. On a constant exchange rate basis, adjusted earnings increased by €18 million (+16%) driven by higher underlying earnings and higher net realized capital gains. Net income increased by €9 million (+9%) to €110 million. On a constant exchange rate basis, net income increased by €18 million (+18%) mainly due to a favorable change in the fair value of interest rate derivatives not eligible for hedge accounting and higher adjusted earnings, partly offset by the non-repeat of an exceptional income received in 1H16 following the sale of two real estate properties in New York (€17 million). Half Year 2017 Financial Report 57 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - GERMANY (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 2,601 2,549 4,045 Current accident year loss ratio (net) 66.3% 68.5% 67.4% All accident year loss ratio (net) 66.8% 68.0% 69.0% Net technical result before expenses 679 642 1,257 Expense ratio 28.0% 28.6% 28.4% Net investment result 146 144 306 Underlying earnings before tax 253 213 414 Income tax expenses / benefits (79) (65) (128) Net income from investments in affiliates and associates Minority interests (1) (0) (0) Underlying earnings Group share 174 147 286 Net capital gains or losses attributable to shareholders net of income tax 65 1 7 Adjusted earnings Group share 239 148 293 Profit or loss on financial assets (under Fair Value option) & derivatives 32 (7) (2) Exceptional operations (including discontinued operations) (3) Goodwill and other related intangibles impacts (2) (2) (4) Integration and restructuring costs (1) (5) (69) NET INCOME GROUP SHARE 267 133 216 (a) Before intercompany eliminations. Gross Revenues amounted to €2,576 million net of intercompany eliminations as of June 30, 2017. Gross revenues increased by €52 million (+2%) to €2,601 million. On a comparable basis, gross revenues increased by €58 million (+2%): Commercial lines (36% of gross revenues) were up 3% to €928 million mainly due to Property driven by new business in SME and Mid Market; Personal lines (57% of gross revenues) were up 1% to €1,473 million mainly driven by tariff increases in both Motor and Non-Motor; Other lines (7% of gross revenues) were up 4% to €200 million mainly driven by assumed business from Commercial lines and higher volumes in Art Insurance. Net technical result increased by €37 million (+6%) to €679 million. On a constant exchange rate basis, net technical result increased by €36 million (+6%): the current accident year loss ratio decreased by 2.1 points to 66.3% resulting from the absence of Nat Cat events (€66 million in 1H16), partly offset by higher natural events (€-25 million); the all accident year loss ratio decreased by 1.2 points to 66.8% mainly due to an unfavorable prior year reserve development. Expense ratio improved by 0.6 point to 28.0% due to the positive impacts of cost savings. Enlarged expense ratio improved by 0.7 point to 31.5%. As a result, the combined ratio decreased by 1.8 points to 94.8%. Net investment result increased by €3 million (+2%) to €146 million. Income tax expenses increased by €14 million (+21%) to €-79 million due to higher pre-tax underlying earnings. Underlying earnings increased by €26 million (+18%) to €174 million. Adjusted earnings increased by €90 million (+61%) to €239 million driven by higher underlying earnings and higher net realized capital gains. Net income increased by €134 million (+100%) to €267 million mainly due to higher adjusted earnings and a favorable change in the fair value of economic hedging derivatives not eligible for hedge accounting. Half Year 2017 Financial Report 58 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - SWITZERLAND (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 2,883 2,797 3,095 Current accident year loss ratio (net) 67.0% 68.5% 66.1% All accident year loss ratio (net) 61.7% 61.8% 61.7% Net technical result before expenses 607 591 1,191 Expense ratio 23.7% 23.7% 24.6% Net investment result 86 93 173 Underlying earnings before tax 317 318 601 Income tax expenses / benefits (69) (69) (123) Net income from investments in affiliates and associates Minority interests (2) (2) (4) Underlying earnings Group share 245 247 474 Net capital gains or losses attributable to shareholders net of income tax 14 40 42 Adjusted earnings Group share 260 286 516 Profit or loss on financial assets (under Fair Value option) & derivatives (18) (36) (18) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (11) (12) (24) Integration and restructuring costs (2) NET INCOME GROUP SHARE 231 239 473 Average exchange rate : € 1.00 = Swiss Franc 1.077 1.096 1.089 (a) Before intercompany eliminations. Gross Revenues amounted to €2,876 million net of intercompany eliminations as of June 30, 2017. Gross revenues increased by €87 million (+3%) to €2,883 million. On a comparable basis, gross revenues increased by €36 million (+1%): Commercial lines (47% of gross revenues) were up 2% to €1,360 million driven by higher volumes and positive price effects mainly in Workers' Compensation; Personal lines (53% of gross revenues) were up 0.5% to €1,538 million as higher volumes in all major lines of business were partly offset by negative price effects. Net technical result increased by €17 million (+3%) to €607 million. On a constant exchange rate basis, net technical result increased by €6 million (+1%):  the current accident year loss ratio decreased by 1.5 points to 67.0% driven by lower attritional losses; the all accident year loss ratio decreased by 0.1 point to 61.7% driven by a lower positive prior year reserve development. Expense ratio remained stable on both reported and constant exchange rate basis at 23.7%. Enlarged expense ratio increased by 0.1 point on both reported and constant exchange rate basis to 27.2%. As a result, the combined ratio remained stable on both reported and constant exchange rate basis at 85.4%. Net investment result decreased by €7 million (-8%) to €86 million. On a constant exchange rate basis, net investment result decreased by €9 million (-10%) mainly driven by lower reinvestment yields on fixed income assets. Income tax expenses remained stable at €-69 million. On a constant exchange rate basis, income tax expenses decreased by €1 million (-1%). Underlying earnings decreased by €1 million (-1%) to €245 million. On a constant exchange rate basis, underlying earnings decreased by €6 million (-2%). Half Year 2017 Financial Report 59 I ACTIVITY REPORT – HALF YEAR 2017 Adjusted earnings decreased by €27 million (-9%) to €260 million. On a constant exchange rate basis, adjusted earnings decreased by €31 million (-11%) driven by lower underlying earnings and lower net realized capital gains. Net income decreased by €8 million (-3%) to €231 million. On a constant exchange rate basis, net income decreased by €12 million (-5%) mainly driven by lower adjusted earnings, partly offset by a favorable change in the fair value of alternative investments. Half Year 2017 Financial Report 60 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - BELGIUM (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 1,127 1,114 2,095 Current accident year loss ratio (net) 65.1% 71.1% 68.9% All accident year loss ratio (net) 63.3% 68.5% 64.8% Net technical result before expenses 374 320 741 Expense ratio 32.7% 31.2% 30.5% Net investment result 87 83 154 Underlying earnings before tax 128 87 254 Income tax expenses / benefits (38) (26) (76) Net income from investments in affiliates and associates Minority interests Underlying earnings Group share 90 61 179 Net capital gains or losses attributable to shareholders net of income tax (23) 54 57 Adjusted earnings Group share 66 115 235 Profit or loss on financial assets (under Fair Value option) & derivatives (2) (40) 25 Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (1) (1) (2) Integration and restructuring costs 7 (10) (108) NET INCOME GROUP SHARE 70 64 150 (a) Before intercompany eliminations. Gross Revenues amounted to €1,116 million net of intercompany eliminations as of June 30, 2017. Gross revenues increased by €14 million (+1%) to €1,127 million. On a comparable basis, gross revenues increased by €14 million (+1%): Commercial lines (52% of gross revenues) were up 3% to €594 million due to growth in the SME and Mid Market segments; Personal lines (47% of gross revenues) were up 2% to €534 million driven by a new distribution agreement with a wholesale broker and tariff increases, partly offset by lower volumes in the traditional broker channel; Other lines (2% of gross revenues) were down 7% to €17 million. Net technical result increased by €54 million (+17%) to €374 million: the current accident year loss ratio decreased by 6.0 points to 65.1% due to more favorable weather conditions, lower large claims and lower claims handling costs; the all accident year loss ratio decreased by 5.1 points to 63.3% as a result of lower positive prior year reserve development. Expense ratio increased by 1.5 points to 32.7% due to the reallocation of some claims handling costs to administrative expenses. Enlarged expense ratio increased by 0.1 point to 38.8%. As a result, the combined ratio decreased by 3.7 points to 96.0%. Net investment result increased by €3 million (+4%) to €87 million. Income tax expenses increased by €12 million (+47%) to €-38 million driven by higher pre-tax underlying earnings. Underlying earnings increased by €29 million (+47%) to €90 million. Adjusted earnings decreased by €49 million (-42%) to €66 million as higher underlying earnings were more than offset by lower net realized capital gains on equities. Net income increased by €6 million (+9%) to €70 million as lower adjusted earnings were more than offset by a favorable change in the fair value of inflation derivatives not eligible for hedge accounting as well as a favorable change in the fair value of mutual funds. Half Year 2017 Financial Report 61 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - ITALY (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 815 777 1,564 Current accident year loss ratio (net) 67.4% 68.4% 68.2% All accident year loss ratio (net) 67.3% 65.3% 65.8% Net technical result before expenses 255 265 525 Expense ratio 28.0% 28.0% 28.9% Net investment result 52 57 103 Underlying earnings before tax 89 108 184 Income tax expenses / benefits (27) (36) (64) Net income from investments in affiliates and associates Minority interests (6) (6) (10) Underlying earnings Group share 56 66 110 Net capital gains or losses attributable to shareholders net of income tax (1) (4) (8) Adjusted earnings Group share 55 62 103 Profit or loss on financial assets (under Fair Value option) & derivatives (3) (1) (1) Exceptional operations (including discontinued operations) 3 3 Goodwill and other related intangibles impacts Integration and restructuring costs (1) (1) (8) NET INCOME GROUP SHARE 51 63 96 (a) Before intercompany eliminations. Gross Revenues amounted to €810 million net of intercompany eliminations as of June 30, 2017. Gross revenues increased by €37 million (+5%) to €815 million. On a comparable basis, gross revenues increased by €40 million (+5%): Personal lines (80% of gross revenues) were up 4% to €653 million due to higher volumes as a consequence of business from new agencies; Commercial lines (19% of gross revenues) were up 8% to €153 million mainly driven by positive prior year premium adjustments; Other lines (1% of gross revenues) were down 6% to €11 million mainly stemming from lower assumed business. Net technical result decreased by €10 million (-4%) to €255 million. the current accident year loss ratio decreased by 1.0 point to 67.4% mainly driven by selective underwriting measures in Property and Liability, as well as an improved claims management in Motor; the all accident year loss ratio increased by 2.0 points to 67.3% due to a lower positive prior year reserve development. Expense ratio remained stable at 28.0%. Enlarged expense ratio increased by 0.1 point to 30.9%. As a result, the combined ratio increased by 2.0 points to 95.3%. Net investment result decreased by €5 million (-8%) to €52 million mainly due to lower reinvestment yields on fixed income assets. Income tax expenses decreased by €10 million (-27%) to €-27 million mainly due to lower pre-tax underlying earnings as well as the decrease in the corporate tax rate from 27.5% to 24%. Underlying earnings decreased by €10 million (-15%) to €56 million. Adjusted earnings decreased by €6 million (-10%) to €55 million driven by lower underlying earnings, partly offset by lower net realized capital losses. Net income decreased by €12 million (-19%) to €51 million mainly due to lower adjusted earnings as well as an unfavorable change in the fair value of mutual funds and derivatives not eligible for hedge accounting. Half Year 2017 Financial Report 62 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - SPAIN (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 866 850 1,577 Current accident year loss ratio (net) 70.7% 69.4% 70.1% All accident year loss ratio (net) 71.4% 69.6% 71.1% Net technical result before expenses 226 239 456 Expense ratio 26.4% 26.9% 26.9% Net investment result 47 45 90 Underlying earnings before tax 64 73 122 Income tax expenses / benefits (16) (18) (29) Net income from investments in affiliates and associates Minority interests (0) (0) (0) Underlying earnings Group share 49 55 92 Net capital gains or losses attributable to shareholders net of income tax 1 (0) (3) Adjusted earnings Group share 49 54 89 Profit or loss on financial assets (under Fair Value option) & derivatives (0) (7) 3 Exceptional operations (including discontinued operations) (0) (0) Goodwill and other related intangibles impacts (2) (3) (5) Integration and restructuring costs (7) (11) (25) NET INCOME GROUP SHARE 39 34 61 (a) Before intercompany eliminations. Gross Revenues amounted to €863 million net of intercompany eliminations as of June 30, 2017. Gross revenues increased by €16 million (+2%) to €866 million. On a comparable basis, gross revenues increased by €23 million (+3%): Personal lines (73% of gross revenues) were up 3% to €640 million mainly driven by (i) both higher new business and retention in Motor (+3%) and Health (+9%) in a favorable market environment, partly offset by (ii) lower new business growth in Household (-1%); Commercial lines (26% of gross revenues) were up 2% to €227 million driven by (i) higher renewals in Liability (+9%) and Health (+8%), partly offset by (ii) adverse timing effects in Motor (-7%); Other lines (1% of gross revenues) were down 57% to €5 million mainly due to lower premiums on assumed business. Net technical result decreased by €13 million (-5%) to €226 million: the current accident year loss ratio increased by 1.3 points to 70.7% due to higher large losses and higher Nat Cat charges, partly offset by an improvement in attritional claims; the all accident year loss ratio increased by 1.8 points to 71.4% due to an unfavorable prior year reserve development. Expense ratio improved by 0.5 point to 26.4% driven by a lower administrative expense ratio reflecting the positive impacts of cost savings. Enlarged expense ratio improved by 0.4 point to 31.2%. As a result, the combined ratio increased by 1.3 points to 97.8%. Net investment result increased by €1 million (+3%) to €47 million mainly due to an exceptional dividend distribution from mutual funds. Income tax expenses decreased by €3 million (-15%) to €-16 million due to lower pre-tax underlying earnings. Underlying earnings decreased by €6 million (-11%) to €49 million. Adjusted earnings decreased by €5 million (-10%) to €49 million driven by lower underlying earnings combined with lower net realized capital gains. Net income increased by €5 million (+15%) to €39 million as lower adjusted earnings were more than offset by a positive change in the fair value of mutual funds as well as lower restructuring costs. Half Year 2017 Financial Report 63 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - EMEA-LATAM REGION (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 2,193 2,279 4,239 Current accident year loss ratio (net) 73.1% 77.0% 76.2% All accident year loss ratio (net) 75.4% 76.5% 77.0% Net technical result before expenses 513 480 959 Expense ratio 26.3% 25.9% 25.9% Net investment result 154 131 261 Underlying earnings before tax 118 80 141 Income tax expenses / benefits (20) (20) (33) Net income from investments in affiliates and associates 33 24 56 Minority interests (15) (13) (21) Underlying earnings Group share 116 71 144 Net capital gains or losses attributable to shareholders net of income tax 6 (1) (14) Adjusted earnings Group share 123 70 131 Profit or loss on financial assets (under Fair Value option) & derivatives 5 1 19 Exceptional operations (including discontinued operations) (2) (6) (6) Goodwill and other related intangibles impacts (5) (4) (8) Integration and restructuring costs (5) (1) (4) NET INCOME GROUP SHARE 114 61 131 (a) Before intercompany eliminations. Gross Revenues amounted to €2,181 million net of intercompany eliminations as of June 30, 2017. Scope: (i) Mexico, the Gulf Region, Turkey, Colombia, Morocco, Luxembourg, Brazil, Poland and Greece are fully consolidated; (ii) Russia, Nigeria and Lebanon are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income; (iii) Poland is fully consolidated since January 1, 2017. In the comments below, the comparable basis includes the contribution of Poland in 2016. Gross revenues decreased by €86 million (-4%) to €2,193 million. On a comparable basis, gross revenues decreased by €83 million (-4%). Personal lines (34% of gross revenues) were down 5% to €756 million, Commercial lines (66% of gross revenues) were down 2% to €1,449 million and Other lines (0% of gross revenues) were down 13% to €7 million: Turkey down €186 million (-31%) mainly due to a decrease in Motor Third Party Liability reflecting a change in market conditions following the implementation of a cap on premiums by the government starting from April 12, 2017; Brazil up €48 million (+193%) driven by new business in Commercial lines;  Mexico up €20 million (+3%) mainly due to tariff increases in Personal Health;  The Gulf Region up €19 million (+4%) driven by new business in Commercial Motor, partly offset by the loss of large accounts in Commercial Health; Poland up €10 million (+25%) mainly driven by tariff increases in Commercial lines. Net technical result increased by €33 million (+7%) to €513 million. On a comparable basis, net technical result increased by €25 million (+5%): the current accident year loss ratio decreased by 3.2 points to 73.1% mainly driven by (i) Turkey due to an improvement in Motor following 2016 tariff increases and a decrease in frequency as well as lower large losses in Property and (ii) Brazil reflecting a favorable business mix; the all accident year loss ratio decreased by 0.3 point to 75.4% driven by a less favorable prior year reserve development in Motor in Turkey. Expense ratio increased by 0.3 point to 26.3%. On a comparable basis, expense ratio improved by 0.2 point mainly driven by (i) a lower acquisition expense ratio (-0.5 point) mainly in Mexico reflecting the positive impacts of cost savings, partly offset by (ii) a higher administrative expense ratio (+0.3 point) mostly driven by a negative country mix impact. Half Year 2017 Financial Report 64 I ACTIVITY REPORT – HALF YEAR 2017 Enlarged expense ratio increased by 0.2 point to 28.5%. On a comparable basis, enlarged expense ratio improved by 0.3 point. As a result, the combined ratio improved by 0.8 point to 101.7%. On a comparable basis, the combined ratio improved by 0.5 point. Net investment result increased by €23 million (+18%) to €154 million. On a comparable basis, net investment result increased by €35 million (+27%) mostly driven by Turkey as a result of both higher interest rates and average asset base. Income tax expenses remained stable at €-20 million (+1%). On a comparable basis, income tax expenses increased by €2 million (+9%) primarily due to higher pre-tax underlying earnings. Underlying earnings increased by €45 million (+63%) to €116 million. On a comparable basis, underlying earnings increased by €46 million (+63%). Adjusted earnings increased by €52 million (+74%) to €123 million. On a comparable basis, adjusted earnings increased by €52 million (+73%) driven by higher underlying earnings as well as higher net realized capital gains. Net income increased by €53 million (+87%) to €114 million. On a comparable basis, net income increased by €57 million (+92%) mainly driven by higher adjusted earnings as well as favorable foreign exchange impacts. Half Year 2017 Financial Report 65 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - DIRECT BUSINESS (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 1,498 1,453 2,866 Current accident year loss ratio (net) 76.8% 76.7% 76.9% All accident year loss ratio (net) 76.5% 73.1% 75.0% Net technical result before expenses 339 363 691 Expense ratio 21.4% 21.8% 21.8% Net investment result 58 58 115 Underlying earnings before tax 89 127 203 Income tax expenses / benefits (24) (29) (43) Net income from investments in affiliates and associates 6 4 9 Minority interests (0) (0) (0) Underlying earnings Group share 71 103 168 Net capital gains or losses attributable to shareholders net of income tax 5 (3) (2) Adjusted earnings Group share 76 100 166 Profit or loss on financial assets (under Fair Value option) & derivatives 2 (3) 7 Exceptional operations (including discontinued operations) (1) 6 4 Goodwill and other related intangibles impacts (3) (4) (8) Integration and restructuring costs (5) (2) (11) NET INCOME GROUP SHARE 70 97 157 (a) Before intercompany eliminations. Gross Revenues amounted to €1,496 million net of intercompany eliminations as of June 30, 2017. Direct business includes operations in France (22% of total Direct gross revenues), the United Kingdom (19%), South Korea (19%), Japan (16%), Poland (10%), Spain (6%), Italy (4%) and Belgium (3%). In the comments below, the comparable basis includes the contribution of Liberty Ubezpieczenia activities in Poland starting from January 1, 2016. Gross revenues increased by €45 million (+3%) to €1,498 million. On a comparable basis, gross revenues increased by €11 million (+1%): Personal Motor (87% of gross revenues) was up €3 million to €1,310 million driven by (i) Poland (€+37 million or +36%) following strong increase in average premiums from direct sales and growth through the bancassurance partnership with mBank, (ii) Spain (€+9 million or +9%) driven by new business and a higher retention rate, and (iii) France (€+4 million or +2%) due to higher average premiums and new business, partly offset by (iv) the United Kingdom (€-17 million or -6%) reflecting lower new business volumes, (v) Japan (€-15 million or -6%) due to a refinement of accounting methodology, (vi) South Korea (€-9 million or -4%) due to the implementation of a new strategy targeting clients with a low risk profile, and (vii) Italy (€-7 million or -11%) due to a decrease in market average premium; Personal Non-Motor (13% of gross revenues) was up €9 million (+4%) to €200 million driven by (i) South Korea (€+2 million or +5%) driven by higher new business from Casualty products, (ii) the United Kingdom (€+2 million or +5%) reflecting improved retention in Household and (iii) France (€+2 million or +2%) mainly due to the positive performance of the partnership with BNP Paribas. Net technical result decreased by €25 million (-7%) to €339 million. On a constant exchange rate basis, net technical result decreased by €24 million (-7%): the current accident year loss ratio remained stable at 76.8% mainly from (i) the United Kingdom due to a deterioration in (a) Motor as a consequence of the change of the discount rate used when calculating future financial losses in the form of a lump sum in bodily injury cases (‘Ogden rate’), partly offset by tariff increases, and (b) Household reflecting high levels of inflation in water leakage perils, fully offset by (ii) Spain with the positive impact of new insurance regulation on attritional losses and (iii) South Korea from a favorable evolution of the business mix; the all accident year loss ratio increased by 3.4 points to 76.5% mainly driven by the United Kingdom due to an adverse prior year reserve development in Motor. Half Year 2017 Financial Report 66 I ACTIVITY REPORT – HALF YEAR 2017 Expense ratio improved by 0.4 point to 21.4%. On a constant exchange rate basis, expense ratio improved by 0.4 point driven by the United Kingdom mainly due to a lower acquisition expense ratio following a decrease in commissions and lower aggregator fees. Enlarged expense ratio improved by 0.4 point on both reported and constant exchange rate basis to 26.8%. As a result, the combined ratio increased by 3.0 points on both reported and constant exchange rate basis to 97.9%. Net investment result remained stable at €58 million. On a constant exchange rate basis, net investment result increased by €2 million (+3%) driven by a higher dividend distribution in France. Income tax expenses decreased by €5 million (-17%) to €-24 million. On a constant exchange rate basis, income tax expenses decreased by €4 million (-16%) driven by lower pre-tax underlying earnings. Underlying earnings decreased by €32 million (-31%) to €71 million. On a constant exchange rate basis, underlying earnings decreased by €30 million (-29%). Adjusted earnings decreased by €24 million (-24%) to €76 million. On a constant exchange rate basis, adjusted earnings decreased by €22 million (-22%) as lower underlying earnings were partly offset by higher net realized capital gains. Net income decreased by €27 million (-28%) to €70 million. On a constant exchange rate basis, net income decreased by €24 million (-25%) mainly due to lower adjusted earnings. Half Year 2017 Financial Report 67 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - ASIA (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 593 597 1,111 Current accident year loss ratio (net) 69.8% 68.1% 68.3% All accident year loss ratio (net) 65.4% 62.5% 64.1% Net technical result before expenses 187 200 389 Expense ratio 32.5% 30.7% 31.2% Net investment result 19 21 42 Underlying earnings before tax 31 57 93 Income tax expenses / benefits (6) (10) (12) Net income from investments in affiliates and associates 2 (10) (18) Minority interests (5) (8) (14) Underlying earnings Group share 22 30 49 Net capital gains or losses attributable to shareholders net of income tax 1 3 5 Adjusted earnings Group share 23 32 55 Profit or loss on financial assets (under Fair Value option) & derivatives 4 (0) (1) Exceptional operations (including discontinued operations) Goodwill and other related intangibles impacts (8) (7) (15) Integration and restructuring costs (1) NET INCOME GROUP SHARE 19 25 39 (a) Before intercompany eliminations. Gross Revenues amounted to €586 million net of intercompany eliminations as of June 30, 2017. Scope: (i) for gross revenues and combined ratio: Hong Kong, Malaysia, Singapore and Thailand, on a 100% share basis; (ii) for underlying earnings, adjusted earnings and net income: China, India, Hong Kong, Malaysia, Singapore and Thailand, on a group share basis. Indonesia and Philippines operations are not consolidated. China and India are consolidated under the equity method. Gross revenues decreased by €5 million (-1%) to €593 million. On a comparable basis, gross revenues decreased by €10 million (-2%). Commercial lines (50% of gross revenues) were down 4% to €297 million and Personal lines (50% of gross revenues) were up 1% to €296 million: Malaysia (€-12 million or -7%) driven by (i) Commercial lines (€-6 million) mainly from Motor and Property and (ii) Personal lines (€-5 million) mainly from Motor due to market competition and lower new business; Thailand (€+1 million or +3%) driven by Commercial lines (€+2 million) from new large accounts in Property; Singapore (€+1 million or +0.4%) driven by (i) Personal lines (€+5 million) mainly as a result of new business growth in Motor and Health, partly offset by (ii) Commercial lines (€-4 million) due to pruning of large accounts in Health. Net technical result decreased by €13 million (-7%) to €187 million. On a constant exchange rate basis, net technical result decreased by €15 million (-7%): the current accident year loss ratio increased by 1.6 points to 69.8% due to worsening claims experience in Singapore from Commercial Property and Health as well as in Thailand from Commercial Property due to natural events; the all accident year loss ratio increased by 2.8 points to 65.4% due to a less favorable prior year reserve development in Singapore and Thailand. Expense ratio increased by 1.9 points to 32.5%. On a constant exchange rate basis, expense ratio increased by 1.8 points mostly driven by higher commissions following changes in business mix. Enlarged expense ratio increased by 2.6 points to 36.1%. On a constant exchange rate basis, enlarged expense ratio increased by 2.5 points due to a higher expense ratio and higher claims handling costs. As a result, the combined ratio increased by 4.7 points to 97.9%. On a constant exchange rate basis, the combined ratio increased by 4.6 points. Half Year 2017 Financial Report 68 I ACTIVITY REPORT – HALF YEAR 2017 Net investment result decreased by €2 million (-7%) to €19 million. On a constant exchange rate basis, net investment result decreased by €2 million (-7%) mainly driven by lower reinvestment yields on fixed income assets in Singapore. Income tax expenses decreased by €5 million (-45%) to €-6 million. On a constant exchange rate basis, income tax expenses decreased by €4 million (-44%) mainly due to lower pre-tax underlying earnings. Underlying earnings decreased by €7 million (-25%) to €22 million. On a constant exchange rate basis, underlying earnings decreased by €7 million (-24%) mainly driven by lower pre-tax underlying earnings, partly offset by better results from affiliates and associates reflecting a higher net technical result in India and China. Adjusted earnings decreased by €9 million (-29%) to €23 million. On a constant exchange rate basis, adjusted earnings decreased by €9 million (-28%) mainly driven by lower underlying earnings. Net income decreased by €6 million (-23%) to €19 million. On a constant exchange rate basis, net income decreased by €5 million (-22%) driven by lower adjusted earnings, partly offset by a positive change in the fair value of foreign exchange derivatives not eligible to hedge accounting in Singapore. Half Year 2017 Financial Report 69 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - AXA CORPORATE SOLUTIONS ASSURANCE (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 1,639 1,552 2,325 Current accident year loss ratio (net) 83.1% 85.3% 85.7% All accident year loss ratio (net) 81.7% 86.2% 83.4% Net technical result before expenses 239 179 383 Expense ratio 17.5% 16.5% 17.8% Net investment result 94 88 182 Underlying earnings before tax 104 53 155 Income tax expenses / benefits (30) (4) (32) Net income from investments in affiliates and associates Minority interests (1) (1) (2) Underlying earnings Group share 73 48 122 Net capital gains or losses attributable to shareholders net of income tax 24 13 25 Adjusted earnings Group share 97 61 146 Profit or loss on financial assets (under Fair Value option) & derivatives (16) (22) 4 Exceptional operations (including discontinued operations) (1) 6 6 Goodwill and other related intangibles impacts Integration and restructuring costs (2) (8) NET INCOME GROUP SHARE 80 42 149 (a) Before intercompany eliminations. Gross Revenues amounted to €1,634 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification from the International Insurance segment into the Property & Casualty segment. Gross revenues increased by €87 million (+6%) to €1,639 million. On a comparable basis, gross revenues increased by €86 million (+6%) notably in Property (+15%), Marine (+3%), Liability (+3%) and Motor (+5%), supported by the strong business growth in Brazil (+55%), partly offset by Construction (-19%) due to actions undertaken to protect the profitability. Net technical result increased by €60 million (+34%) to €239 million. On a constant exchange rate basis, net technical result increased by €57 million (+32%): the current accident year loss ratio decreased by 2.1 points to 83.1% driven by lower large losses in all lines of business except Construction; the all accident year loss ratio decreased by 4.3 points to 81.7% mainly due to positive prior year adjustments, partly offset by the impact of the change of the discount rate used when calculating future financial losses in the form of a lump sum in bodily injury cases (‘Ogden rate’) in the United Kingdom (€-14 million). Expense ratio increased by 0.9 point to 17.5%. On a constant exchange rate basis, expense ratio increased by 0.8 point mainly driven by investments to sustain business growth in Brazil as well as higher project investment costs. Enlarged expense ratio increased by 0.9 point to 20.9%. On a constant exchange rate basis, enlarged expense ratio increased by 0.8 point. As a result, the combined ratio decreased by 3.5 points to 99.2%. On a constant exchange rate basis, the combined ratio decreased by 3.6 points. Net investment result increased by €6 million (+6%) to €94 million. On a constant exchange rate basis, net investment result increased by €5 million (+5%) mainly due to the exceptional distribution from mutual funds. Income tax expenses increased by €26 million to €-30 million. On a constant exchange rate basis, income tax expenses increased by €25 million mainly due to higher pre-tax underlying earnings as well as lower positive tax one-offs. Underlying earnings increased by €26 million (+54%) to €73 million. On a constant exchange rate basis, underlying earnings increased by €25 million (+53%). Half Year 2017 Financial Report 70 I ACTIVITY REPORT – HALF YEAR 2017 Adjusted earnings increased by €36 million (+59%) to €97 million. On a constant exchange rate basis, adjusted earnings increased by €36 million (+59%) driven by higher underlying earnings and higher net realized capital gains. Net income increased by €38 million (+90%) to €80 million. On a constant exchange rate basis, net income increased by €38 million (+90%) mainly driven by higher adjusted earnings and a less unfavorable change in the fair value of mutual funds, partly offset by higher negative foreign exchange impacts. Half Year 2017 Financial Report 71 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - AXA ASSISTANCE (in Euro million) June 30, 2017 June 30, 2016 restated (b) December 31, 2016 Gross revenues (a) 740 724 1,449 Underlying earnings before tax 23 18 34 Income tax expenses / benefits (11) (12) (22) Net income from investments in affiliates and associates 1 0 1 Minority interests 0 (0) 0 Underlying earnings Group share 13 7 13 Net capital gains or losses attributable to shareholders net of income tax (0) 0 0 Adjusted earnings Group share 13 7 14 Profit or loss on financial assets (under Fair Value option) & derivatives (2) (1) (2) Exceptional operations (including discontinued operations) 0 Goodwill and other related intangibles impacts Integration and restructuring costs (3) (10) (17) NET INCOME GROUP SHARE 8 (4) (5) (a) Before intercompany eliminations. Gross Revenues amounted to €653 million net of intercompany eliminations as of June 30, 2017. (b) Restated: Reclassification from the International Insurance segment into the Property & Casualty segment. Gross revenues increased by €16 million (+2%) to €740 million. On a comparable basis, gross revenues increased by €3 million (+0.5%) mainly driven by (i) new business in Motor and (ii) new business and in-force growth in Health, as well as in Europe, France and America. Underlying earnings increased by €6 million (+98%) to €13 million driven by an improved claims experience and higher positive prior year reserve development as well as a lower corporate tax rate due to a more favorable country mix. Adjusted earnings increased by €6 million (+94%) to €13 million driven higher underlying earnings. Net income increased by €12 million to €8 million mainly driven by higher adjusted earnings combined with lower restructuring costs in Europe. Half Year 2017 Financial Report 72 I ACTIVITY REPORT – HALF YEAR 2017 PROPERTY & CASUALTY OPERATIONS - OTHER Consolidated Gross revenues (in Euro million) June 30, 2017 June 30, 2016 restated (a) December 31, 2016 AXA Liabilities Managers 2 2 AXA Global P&C 84 80 TOTAL 87 81 Intercompany transactions Contribution to consolidated gross revenues 87 81 (a) Restated: Reclassification of a part of the International Insurance segment into the Property & Casualty segment. Underlying, Adjusted earnings and Net income Group share (in Euro million) June 30, 2017 June 30, 2016 restated (a) December 31, 2016 AXA Liabilities Managers AXA Global P&C 13 12 29 15 Underlying earnings Group share 26 45 Net realized capital gains or losses attributable to shareholders (1) 0 Adjusted earnings Group share 25 45 Profit or loss on financial assets (under Fair Value option) & derivatives 7 1 Exceptional operations (including discontinued operations) Goodwill and related intangibles impacts Integration and restructuring costs (0) NET INCOME GROUP SHARE 32 46 (a) Restated: Reclassification of a part of the International Insurance segment into the Property & Casualty segment. AXA LIABILITIES MANAGERS Underlying earnings decreased by €16 million to €13 million. On a constant exchange rate basis, underlying earnings decreased by €15 million reflecting less favorable development of run-off reserves. Adjusted earnings decreased by €17 million to €12 million. On a constant exchange rate basis, adjusted earnings decreased by €17 million driven by lower underlying earnings and lower net realized capital gains. Net income decreased by €18 million to €14 million. On a constant exchange rate basis, net income decreased by €18 million mainly driven by lower adjusted earnings. AXA GLOBAL P&C Underlying earnings and adjusted earnings decreased by €3 million (-19%) to €12 million mainly driven by a lower net technical margin. Net income increased by €4 million (+33%) to €18 million as lower adjusted earnings were more than offset by a more favorable change in the fair value of mutual funds and foreign exchange impact. Half Year 2017 Financial Report 6 97 103 103 47 28 75 4 79 4 3 86 73 I ACTIVITY REPORT – HALF YEAR 2017 Asset Management Segment AB (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 1,391 1,270 2,642 Net investment result 18 (7) (5) Total revenues 1,409 1,264 2,637 General expenses (1,125) (1,009) (2,021) Underlying earnings before tax 284 255 616 Income tax expenses / benefits (78) (64) (220) Minority interests (99) (93) (205) Underlying earnings Group share 107 98 191 Net capital gains or losses attributable to shareholders net of income tax 0 0 Adjusted earnings Group share 107 98 191 Profit or loss on financial assets (under Fair Value option) & derivatives 2 26 23 Exceptional operations (including discontinued operations) 0 0 Goodwill and other related intangibles impacts 0 0 Integration and restructuring costs (5) (4) (5) NET INCOME GROUP SHARE 105 120 210 Average exchange rate : € 1.00 = $ 1.083 1.116 1.105 (a) Before intercompany eliminations. Gross Revenues amounted to €1,333 million net of intercompany eliminations as of June 30, 2017. Assets under Management ("AUM") decreased by €26 billion from year-end 2016 to €460 billion as a result of €-37 billion unfavorable foreign exchange rate impact and €-22 billion change in scope impact related to the transfer of the AXA Life Japan advisory mandate to AXA IM, partly offset by €29 billion market appreciation and €4 billion net inflows mainly from retail clients. Gross revenues increased by €121 million (+9%) to €1,391 million. On a comparable basis, gross revenues increased by €80 million (+6%) due to higher investment management fees (+9%) resulting from a favorable product mix and higher average AUM, higher distribution fees (+4%) due to higher average AUM in retail mutual funds, partly offset by lower Institutional Research Services fees (-8%) due to lower trading volumes in the United States. Net investment result increased by €25 million to €18 million. On a constant exchange rate basis, net investment result increased by €24 million due to higher investment income on funds and lower interest expense. General expenses increased by €115 million (+11%) to €-1,125 million. On a constant exchange rate basis, general expenses increased by €82 million (+8%) due to one-off charges linked to reduction of real estate footprint (€-36 million), higher compensation expenses from higher revenues, higher promotion and servicing expenses. The underlying cost income ratio increased by 1.2 points on both reported and constant exchange rate basis to 76.5%. Income tax expenses increased by €14 million (+23%) to €-78 million. On a constant exchange rate basis, income tax expenses increased by €12 million (+19%) due to higher pre-tax underlying earnings. Underlying earnings and adjusted earnings increased by €10 million (+10%) to €107 million. On a constant exchange rate basis, underlying earnings and adjusted earnings increased by €7 million (+7%). AXA ownership of AB at June 30, 2017 was 64.6%, compared to 63.7% at December 31, 2016. Net income decreased by €15 million (-12%) to €105 million. On a constant exchange rate basis, net income decreased by €18 million (-15%) as higher adjusted earnings were more than offset by the non-repeat of exceptional realized capital gain on the sale of a seed capital investment (€28 million). Half Year 2017 Financial Report 74 I ACTIVITY REPORT – HALF YEAR 2017 AXA INVESTMENT MANAGERS (“AXA IM”) (in Euro million) June 30, 2017 June 30, 2016 December 31, 2016 Gross revenues (a) 776 766 1,545 Net investment result (11) (9) (17) Total revenues 765 757 1,527 General expenses (579) (590) (1,201) Underlying earnings before tax 186 168 327 Income tax expenses / benefits (54) (49) (96) Minority interests (3) (3) (5) Underlying earnings Group share 129 116 225 Net capital gains or losses attributable to shareholders net of income tax 0 0 Adjusted earnings Group share 129 116 225 Profit or loss on financial assets (under Fair Value option) & derivatives (5) 2 8 Exceptional operations (including discontinued operations) 58 12 36 Goodwill and other related intangibles impacts (1) 0 0 Integration and restructuring costs (8) 0 (4) NET INCOME GROUP SHARE 172 130 265 (a) Before intercompany eliminations. Gross Revenues amounted to €607 million net of intercompany eliminations as of June 30, 2017. Comparable basis in the comments below refers to constant foreign exchange rate restatement, excluding distribution fees. Assets under Management ("AUM") increased by €18 billion from December 31, 2016, to €735 billion at the end of June 30, 2017, driven by €22 billion positive scope impact related to the transfer of the AXA Life Japan advisory mandate from AB as well as €4 billion net inflows from third party clients, partly offset by net outflows mainly from Asian joint ventures (€-4 billion) and Main Fund (€-3 billion). Gross revenues increased by €10 million (+1%) to €776 million. On a comparable basis, net revenues increased by €32 million (+5%) to €622 million, mainly driven by higher management fees (€+61 million or +12%) as a result of higher average assets under management (+7%) and a better product mix, partly offset by lower performance fees (€-19 million) and lower transaction fees (€-5 million). Net investment result decreased by €3 million (-29%) to €-11 million. On a comparable basis, net investment result decreased by €2 million (-18%). General expenses decreased by €11 million (-2%) to €-579 million. On a comparable basis, net general expenses increased by €9 million (+2%) to €-424 million mainly due to higher staff costs following business development initiatives launched in 2016, partly offset by lower non-staff costs. The underlying cost income ratio decreased by 1.8 points to 69.6%. On a comparable basis, the underlying cost income ratio decreased by 1.7 points. Income tax expenses increased by €5 million (+10%) to €-54 million. On a comparable basis, income tax expenses increased by €5 million (+11%) driven by higher pre-tax underlying earnings. Underlying earnings and adjusted earnings increased by €13 million (+11%) to €129 million. On a comparable basis, underlying earnings and adjusted earnings increased by €16 million (+13%). Net income increased by €43 million (+33%) to €172 million. On a comparable basis, net income increased by €46 million (+35%) mainly driven by higher adjusted earnings and a positive adjustment to the deferred consideration linked to the disposal of AXA Private Equity in 2013. Half Year 2017 Financial Report 75 I ACTIVITY REPORT – HALF YEAR 2017 Banking Segment BELGIUM Net banking revenues decreased by €21 million (-11%) to €166 million. Operating net banking revenues decreased by €9 million (-4%) to €186 million mainly driven by (i) lower commercial margins on current and savings accounts as a result of the low interest rate environment and (ii) lower derivatives intermediation activities, partly offset by (iii) higher commercial results from strong sales of mutual funds. Underlying earnings and adjusted earnings decreased by €6 million (-11%) to €51 million mainly due to (i) lower operating net banking revenues (€-9 million) and (ii) higher distribution commissions (€-7 million) due to increased retail credit volumes and strong sales of mutual funds, partly offset by (iii) lower administrative expenses (€+5 million) and (iv) lower bank levies (€+2 million). Net income decreased by €12 million (-24%) to €36 million mainly due to (i) lower adjusted earnings and (ii) an unfavorable change in the fair value of own debt, partly offset by (iii) a favorable change in the fair value of interest rate derivatives. FRANCE Net banking revenues decreased by €26 million (-37%) to €45 million. Operating net banking revenues decreased by €1 million (-1%) to €70 million as new business growth on retail loans was more than offset by lower interest income in a context of a low interest rate environment. Underlying earnings and adjusted earnings decreased respectively by €1 million to €1 million and by €2 million to €0 million. Net income decreased by €16 million to €-15 million as a result of an unfavorable change in the fair value of debt and hedging instruments. HUNGARY Net income decreased by €7 million to €0 million due to the sale of the Hungarian operations in November 2016. GERMANY Net banking revenues increased by €8 million to €16 million. Operating net banking revenues remained stable at €13 million. Underlying earnings and adjusted earnings decreased by €1 million to €2 million. Net income increased by €4 million to €4 million driven by a favorable change in the fair value of interest rate swaps. Half Year 2017 Financial Report 76 I ACTIVITY REPORT – HALF YEAR 2017 Holdings and other companies AXA SA Underlying earnings decreased by €39 million to €-388 million mainly driven by higher financial charges mainly due to dated subordinated debt issued in 2016 and in the beginning of 2017. Adjusted earnings decreased by €34 million to €-388 million mainly driven by lower underlying earnings, partly offset by the absence of impairments in 2017. Net income increased by €93 million to €-497 million as lower adjusted earnings were more than offset by a favorable change in the fair value of interest rate and foreign exchange economic derivatives not eligible for hedge accounting. OTHER FRENCH HOLDING COMPANIES AXA FRANCE ASSURANCE Underlying earnings decreased by €2 million on both reported and constant exchange rate basis to €-7 million. Adjusted earnings and net income decreased by €1 million to €-7 million. On a constant exchange rate basis, adjusted earnings and net income decreased by €2 million. OTHER FRENCH HOLDINGS Underlying earnings and adjusted earnings remained stable at €8 million. Net income increased by €22 million to €7 million due to the non-repeat of costs linked to the restructuring of the participation in Bharti AXA General Insurance in 2016. FOREIGN HOLDING COMPANIES AXA FINANCIAL INC. Underlying earnings decreased by €4 million (-9%) to €-47 million. On a constant exchange rate basis, underlying earnings decreased by €2 million (-6%) mainly driven by lower rental income due to the sale of two real estate properties in New York in 1H16 and higher share-based compensation expenses. Adjusted earnings decreased by €5 million (-11%) to €-48 million. On a constant exchange rate basis, adjusted earnings decreased by €3 million (-8%) driven by lower underlying earnings. Net income decreased by €962 million to €-43 million. On a constant exchange rate basis, net income decreased by €961 million reflecting the non-repeat of the exceptional net capital gain realized in 1H16 on the sale of two real estate properties in New York. AXA UK HOLDINGS Underlying earnings increased by €7 million to €2 million. On a constant exchange rate basis, underlying earnings increased by €7 million reflecting higher tax one-offs (€+9 million) combined with lower pension costs (€+6 million), partly offset by lower investment result following the restructuring of Group loans (€-6 million). Adjusted earnings increased by €7 million to €2 million. On a constant exchange rate basis, adjusted earnings increased by €7 million driven by higher underlying earnings. Net income increased by €9 million to €-2 million. On a constant exchange rate basis, net income increased by €9 million driven by higher adjusted earnings, a gain on the sale of the United Kingdom Life & Savings Half Year 2017 Financial Report 77 I ACTIVITY REPORT – HALF YEAR 2017 operations following a price adjustment (€+1 million), and a favorable change in the fair value of foreign exchange hedging derivatives not eligible for hedge accounting (€+1 million). GERMAN HOLDING COMPANY Underlying earnings decreased by €8 million to €15 million mainly due to lower dividends from fixed income funds and the non-repeat of one-off interest profits on tax claims. Adjusted earnings decreased by €16 million to €13 million mainly due to lower underlying earnings and lower net realized capital gains. Net income increased by €6 million to €10 million as lower adjusted earnings were more than offset by a favorable change in the fair value of hedging derivatives related to pensions not eligible for hedge accounting. BELGIAN HOLDING COMPANY Underlying earnings decreased by €9 million to €-14 million as a result of tax expenses on dividends, partly offset by lower administrative expenses. Adjusted earnings decreased by €9 million to €-15 million driven by lower underlying earnings. Net income decreased by €12 million to €-15 million due to lower adjusted earnings as well as an unfavorable change in the fair value of foreign exchange derivatives not eligible for hedge accounting. EMEA-LATAM REGION HOLDINGS Underlying earnings decreased by €7 million to €-13 million. On a constant exchange rate basis, underlying earnings decreased by €7 million. Adjusted earnings decreased by €3 million to €-14 million. On a constant exchange rate basis, adjusted earnings decreased by €3 million as lower underlying earnings were partly offset by higher net realized capital gains. Net income increased by €15 million to €-16 million. On a constant exchange rate basis, net income increased by €15 million as lower adjusted earnings were more than offset by the non-repeat of an unfavorable change in the fair value of hedging derivatives not eligible for hedge accounting in 1H16. Half Year 2017 Financial Report 78 I ACTIVITY REPORT – HALF YEAR 2017 Outlook AXA remains focused on the four earnings growth levers (efficiency, growth, technical margin and capital management) of its Ambition 2020 plan and on the transformation of its business model around its priority lines of business (Health, Capital-light Savings, Protection and P&C Commercial lines). AXA’s Solvency II position and free cash flow generation should remain strong and resilient to external shocks thanks to robust underwriting policies, a high quality asset portfolio and disciplined capital allocation. With its clear Ambition 2020 strategy and demonstrated resilience to changing economic conditions, AXA is well positioned to create lasting shareholder value and offer an attractive return. Half Year 2017 Financial Report 79 I ACTIVITY REPORT – HALF YEAR 2017 Glossary This glossary includes definitions of non-GAAP financial measures, or alternative performance measures (APMs), that management believes are useful to understand the Group’s business and analyse the Group’s performance. The scope of the following definitions of APMs remains unchanged compared to prior periods. All APMs are indicated by an asterisk*. Scope and comparable basis EMERGING AND MATURE MARKETS The split between emerging and mature markets is detailed below: Emerging markets include the following countries: the Europe, Middle East, Africa & Latin America Region (Mexico, Colombia, Nigeria, Brazil, Morocco, Turkey, the Gulf Region, Lebanon, Poland, Czech Republic, Slovak Republic and Russia), Hong Kong, South-East Asia (Singapore, Indonesia, Thailand, Malaysia and Philippines), India and China, excluding Direct operations. Mature markets include the following countries: France, the United States, the United Kingdom, Ireland, Japan, Germany, Switzerland, Belgium, Italy, Spain, Greece, Luxembourg, AXA Corporate Solutions Assurance and AXA Assistance. COMPARABLE BASIS FOR REVENUES AND ANNUAL PREMIUM EQUIVALENT “On a comparable basis” means the following: data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis); data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Earnings and Capital ADJUSTED EARNINGS* Adjusted Earnings represent the net income (Group share) as disclosed in Part 2 – “Consolidated Financial Statements” of the Financial Report, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: integration and restructuring costs related to material newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill and other related intangibles; exceptional operations (primarily change in scope and discontinued operations);   profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets. Derivatives related to invested assets: include all foreign exchange derivatives, except the ones related to currency options in earnings hedging strategies which are included in underlying earnings; exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy; and Half Year 2017 Financial Report 80 I ACTIVITY REPORT – HALF YEAR 2017 exclude derivatives involved in the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds, for which cost at inception, intrinsic value and pay-off flow through adjusted earnings, and only time value flows through net income when there is no intention to sell the derivatives in the short term (if not, flows through adjusted earnings). UNDERLYING EARNINGS* Underlying Earnings correspond to Adjusted Earnings excluding net capital gains or losses attributable to shareholders and including the following elements net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowances (on assets not designated under fair value option or trading assets); and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities backing General Account assets and shareholders’ funds. EARNINGS PER SHARE Earnings per share (EPS) represent AXA's consolidated earnings (after interest charges related to undated debts recorded through shareholders’ equity), divided by the weighted average number of outstanding ordinary shares. Diluted earnings per share (diluted EPS) represent AXA's consolidated earnings (after interest charges related to undated debts recorded through shareholders’ equity), divided by the weighted average number of outstanding ordinary shares, on a diluted basis (i.e. including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). RETURN ON EQUITY The calculation of Return on Equity (“RoE”) is based on following principles: for net income RoE: calculation is based on consolidated financial statements, i.e. shareholders’ including undated subordinated debt (“Super Subordinated Debts” TSS/“Undated equity Subordinated Debts” TSDI) and Other Comprehensive Income “OCI”, and net income not reflecting any interest charges on TSS/TSDI; for adjusted RoE* and underlying RoE: o all undated subordinated debts (TSS/TSDI) are treated as financing debt, thus excluded from o o shareholders’ equity, interest charges on TSS/TSDI are deducted from earnings, reserves relating to the change in the fair value of financial investments available for sale are excluded from the average shareholders’ equity. FREE CASH FLOWS Free Cash Flows are defined as a measure of dividend capacity calculated as the sum of earnings and required capital change. AFR (AVAILABLE FINANCIAL RESOURCES) Surplus derived from a Solvency II balance sheet. It is defined as the excess of market value of assets over best estimate liabilities and Risk Margin as per Solvency II regulation. Half Year 2017 Financial Report 81 I ACTIVITY REPORT – HALF YEAR 2017 REGULATORY SOLVENCY RATIO This ratio is calculated as per Solvency II regulation, and is equal to the total of available financial resources (AFR) divided by the Group solvency capital requirement. The solvency capital requirement is set at a level ensuring that insurers and reinsurers are able to meet their obligations towards policyholders and beneficiaries over the next 12 months, with a 99.5% probability. The denominator of the ratio can calculated either through a standard formula or through an internal model. AXA is using an internal model. DEBT GEARING Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed in percentage. Debt Gearing is used by the Management of the Group to measure the financial leverage and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt and undated subordinated debt) by total capital employed (shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus gross debt). Segment LIFE & SAVINGS HYBRID AND G/A CAPITAL LIGHT PRODUCTS Hybrid products: Savings products allowing clients to invest in both Unit-Linked and General Account funds; G/A Capital light products: General Account Savings products which, at inception, create more AFR than the economic capital they consume. NET INFLOWS Life & Savings Net Inflows are defined as the collected premiums (including risk premiums, fees and revenues), net of surrenders, maturities, claims paid and other benefits paid. This definition is applicable to all Life and Savings products, with the exception of Mutual Funds products. APE (ANNUAL PREMIUM EQUIVALENT) It represents 100% of new regular premiums plus 10% of single premium, in line with EEV methodology. APE is Group share. NBV (NEW BUSINESS VALUE) The value of newly issued contracts during the current year. It consists of the present value of future profits after the costs of acquiring business, less (i) an allowance for the time value of financial option and guarantees, (ii) cost of capital and non-financial risks. AXA calculates this value net of tax. MARGIN ANALYSIS Life & Savings margin analysis is presented on an underlying earnings basis. Even though the presentation of the Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. As a result, the operating income under the Margin Analysis is equal to that reported in AXA’s Statement of Income for the segment. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Margin Analysis as set out below: Half Year 2017 Financial Report 82 I ACTIVITY REPORT – HALF YEAR 2017 For insurance contracts and investment contracts with Discretionary Participation Features (DPF): o gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees and Revenues” and “Net Technical Margin”; o policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”; the “Investment margin” represents the net investment result in the Statement of Income and is adjusted to take into account the related policyholder participation (see above) as well as changes in specific reserves linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees and Revenues”; change in URR (Unearned Revenue Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis. o o For investment contracts without DPF: o deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the underlying Statement of Income within Gross Consolidated Revenues on a separate line, and in Margin Analysis in the lines “Fees & Revenues” and “Net Technical Margin”; change in UFR (Unearned Fee Reserve - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin analysis. o Underlying investment margin includes the following items: net investment income; and  interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income. Underlying fees & revenues include:  revenues derived from mutual fund sales (which are part of consolidated revenues); loadings charged to policyholders on premiums / deposits and fees on funds under management for separate account (Unit-Linked) business; loadings on (or contractual charges included in) premiums / deposits received on all general account product lines; deferred income such as capitalization net of amortization of URR (Unearned Revenue Reserve) and UFR (Unearned Fee Reserve); and other fee revenues, e.g., fees received on financial planning or sales of third party products. Underlying net technical margin includes the following components: mortality/morbidity margin: respect of mortality/morbidity for the related period less benefits and claims. It is equal to the difference between income for assuming risk and the actual cost of benefits. This margin does not include the claims handling costs and change in claims handling cost reserves; surrender margin: the difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination; the amount charged to the policyholder in GMxB (Variable Annuity guarantees) active financial risk management is the net result from GMxB lines corresponding to explicit charges related to these types of guarantees less cost of hedging. It also includes the unhedged business result; policyholder bonuses if the policyholders participates in the risk margin;  ceded reinsurance results; and Half Year 2017 Financial Report 83 I ACTIVITY REPORT – HALF YEAR 2017 other changes in insurance reserves are all the reserve strengthening or release coming from changes in valuation assumptions, additional reserves for mortality risk and other technical impacts such as premium deficiencies net of derivatives if any. Underlying expenses are: acquisition expenses, including commissions and general expenses allocated to new business, related to insurance products as well as to other activities (e.g., mutual fund sales); capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; amortization of acquisition expenses on current year and prior year new business, including the impact of interest capitalized: amortization charge for Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; administrative expenses; claims handling costs; and   policyholder bonuses if the policyholder participates in the expenses of the Company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins. Life & Savings underlying cost income ratio: Underlying expenses plus underlying VBI amortization divided by "underlying" operating margin, where "Underlying" operating margin is the sum of (i) Underlying Investment margin, (ii) Underlying Fees and revenues, and (iii) Underlying Net technical Margin (all items defined above). PROPERTY & CASUALTY PROFITABILITY ANALYSIS Underlying net investment result includes the net investment income less the recurring interests credited to insurance annuity reserves. Underlying net technical result is the sum of the following components:   earned premiums, gross of reinsurance; claims charges, gross of reinsurance; change in claims reserves, including claims handling cost reserves, gross of reinsurance, excluding the recurring interests credited to insurance annuity reserves;  claims handling costs; and  net result of ceded reinsurance. Current accident year loss ratio net of reinsurance is the ratio of: current year claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on current accident year, excluding the recurring interests credited to the insurance annuity reserves; to earned revenues, gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding the recurring interests credited to the insurance annuity reserves; to earned revenues, gross of reinsurance. Underlying expense ratio is the ratio of: underlying expenses (excluding claims handling costs); to  earned revenues, gross of reinsurance. Underlying expenses include two components: expenses (including commissions) related to acquisition of contracts (with the related acquisition expense ratio) and all other expenses (with the related Half Year 2017 Financial Report 84 I ACTIVITY REPORT – HALF YEAR 2017 administrative expense ratio). Underlying expenses exclude customer intangible amortization and integration costs related to material newly acquired companies. The enlarged expense ratio is the sum of the underlying expense ratio and claims handling costs ratio. The underlying combined ratio is the sum of the underlying expense ratio and the all accident year loss ratio. ASSET MANAGEMENT Net inflows: Inflows of client money less outflows of client money. Net inflows are used by the Management to measure the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying cost income ratio: (general expenses excluding distribution related expenses)/(gross revenues excluding distribution fees received). Assets under management (AUM) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers and AB. AUM only includes funds and mandates which generate fees and exclude double counting. BANKING Net new money is a banking volume indicator. It represents the net cash flows of customers’ balances, with cash inflows (collected money) and cash outflows (exiting money). It includes market effect and capitalized interests over the period. Net operating revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of « fair-value-P&L » assets and of hedging derivatives. Half Year 2017 Financial Report 85 I CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 II. Consolidated financial statements / June 30, 2017 Half Year 2017 Financial Report 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 TABLE OF CONTENTS II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION.............................................................88 II.2 CONSOLIDATED STATEMENT OF INCOME……………………………………………………….…..90 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME………………....………....91 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY…………………………………..92 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS…………………………………………...94 NOTE 1 Accounting Principles…………………………………………………………………….……….…96 1.1 General information……………………………………………………………….………………………..96 1.2 General accounting principles……………………………………….…………………………………....96 NOTE 2 Scope of consolidation………………………………………………….………………….…......100 2.1 Consolidated companies…………………………………………….…………………………………100 NOTE 3 Consolidated statement of income by segment…………………………………………...104 3.1 Consolidated Statement of Income by segment…………………………………………..............105 NOTE 4 Transactions in consolidated entities……………………………………………….107 4.1 United Kingdom Life & Savings business disposal…………………………………………………..107 NOTE 5 Investments…………………………………………………………………………… .109 5.1 Breakdown of investments………………………………………………………………………...……..109 5.2 Investment in real estate properties………………………………………………………...………….111 5.3 Unrealized gains and losses on financial investments……………………………………………….111 5.4 Financial investments subject to impairment…………………………………………...……...…..112 5.5 Investments/Fair value…………………………………………………………………………...…….113 NOTE 6 Shareholders’ equity and minority interests ………...……………………………........…...116 6.1 Impact of transactions with shareholders…………………………………………………………...116 6.2 Comprehensive income for the period………………………………………………………………..119 6.3 Change in minority interests…………………………………………………………………………..….122 NOTE 7 Financing debt………………………………………………………………….……...123 NOTE 8 Net income per ordinary share…………………………………..……....……………...124 Half Year 2017 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in Euro million) June 30, 2017 December 31, 2016 Goodwill 15,941 16,684 Value of purchased business in force (a) 2,113 2,209 Deferred acquisition costs and equivalent 24,019 24,132 Other intangible assets 3,210 3,266 Intangible assets 45,282 46,292 Investments in real estate properties (b) 22,579 21,379 Financial investments 521,689 530,730 Assets backing contracts where the financial risk is borne by policyholders (c) 174,610 175,292 5 Investments from insurance activities 718,878 727,402 5 Investments from banking and other activities 35,683 35,459 Investments accounted for using the equity method 2,261 2,245 Reinsurers' share in insurance and investment contracts liabilities 13,643 14,988 Tangible assets 1,467 1,513 Deferred policyholders' participation assets 0 146 Deferred tax assets 1,201 1,417 Other assets 2,668 3,077 Receivables arising from direct insurance and inward reinsurance operations 17,680 16,418 Receivables arising from outward reinsurance operations 1,130 1,000 Receivables - current tax 1,117 1,071 Other receivables 13,217 17,416 Receivables 33,143 35,906 4 Assets held for sale (d) 1,361 1,100 Cash and cash equivalents 26,728 26,314 TOTAL ASSETS 879,648 892,783 Note: All invested assets are shown net of related derivative instruments impact. (a) Amounts are gross of tax. (b) On January 1, 2017, Real estate loans were reclassified from Loans at cost to Investment in real estate properties at amortized cost for a total of €0.5bn. (c) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (d) As of June 30, 2017 and December 31, 2016, amounts include the assets of discontinued AXA Life Europe UK & Ireland operations for which the disposal process was not finalized at period-end. Half Year 2017 Financial Report 88 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 Notes (in Euro million) June 30, 2017 December 31, 2016 Share capital and capital in excess of nominal value 25,149 25,885 Reserves and translation reserve 39,539 38,883 Net consolidated income - Group share 3,268 5,829 Shareholders’ equity – Group share 67,956 70,597 Minority interests 5,739 5,283 6 TOTAL SHAREHOLDERS' EQUITY 73,696 75,880 Subordinated debt 7,052 7,818 Financing debt instruments issued 1,072 1,109 Financing debt owed to credit institutions 0 0 7 Financing debt (a) 8,124 8,927 Liabilities arising from insurance contracts 413,750 414,569 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (b) 159,301 160,222 Total liabilities arising from insurance contracts 573,051 574,791 Liabilities arising from investment contracts with discretionary participating features 32,385 32,466 Liabilities arising from investment contracts with no discretionary participating features Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 2,563 3,665 12,072 2,382 3,593 11,917 Total liabilities arising from investment contracts 50,685 50,358 Unearned revenue and unearned fee reserves 2,701 2,565 Liabilities arising from policyholders' participation and other obligations 45,357 49,488 Derivative instruments relating to insurance and investment contracts (2,976) (1,903) LIABILITIES ARISING FROM INSURANCE AND INVESTMENT CONTRACTS 668,817 675,299 Liabilities arising from banking activities (a) 32,070 31,743 Provisions for risks and charges 12,039 13,735 Deferred tax liabilities 6,375 6,187 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders Other debt instruments issued, notes and bank overdrafts (a) 12,404 3,077 11,503 3,194 Payables arising from direct insurance and inward reinsurance operations 7,883 10,356 Payables arising from outward reinsurance operations 6,833 6,628 Payables – current tax 927 1,057 Collateral debts relating to investments under a lending agreement or equivalent 29,734 30,402 Other payables 16,736 16,962 Payables 77,594 80,101 4 Liabilities held for sale (c) 933 910 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 879,648 892,783 (a) Amounts are shown net of related derivative instruments impact. (b) Includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) As of June 30, 2017 and December 31, 2016, amounts include the liabilities of discontinued AXA Life Europe UK & Ireland operations for which the disposal process was not finalized at period-end. Half Year 2017 Financial Report 89 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 II.2 CONSOLIDATED STATEMENT OF INCOME Notes (in Euro million, except EPS in Euro) June 30, 2017 June 30, 2016 Restated (a) Gross written premiums 51,058 51,003 Fees and charges relating to investment contracts with no participating features 108 115 Revenues from insurance activities 51,166 51,118 Net revenues from banking activities 238 295 Revenues from other activities 2,879 2,622 Revenues (b) 54,283 54,035 Change in unearned premiums net of unearned revenues and fees (4,598) (4,543) Net investment income (c) 6,170 8,180 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (d) 908 3,311 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (e) 9,942 1,902 of which change in fair value of assets with financial risk borne by policyholders (f) 8,852 393 Change in investments impairment (g) (120) (398) Net investment result excluding financing expenses 16,901 12,995 Technical charges relating to insurance activities (f) (51,737) (46,550) Net result from outward reinsurance (295) (72) Bank operating expenses (35) (22) Acquisition costs (5,313) (5,512) Amortization of the value of purchased business in force (27) (84) Administrative expenses (5,041) (4,885) Change in goodwill impairment and other intangible assets impairment and amortization (57) (56) Other income and expenses 225 (54) Other operating income and expenses (62,280) (57,235) Income from operating activities before tax 4,306 5,253 Income (net of impairment) from investment accounted for using the equity method 106 92 Financing debts expenses (h) (183) (229) Net income from operating activities before tax 4,229 5,116 Income tax (789) (1,316) Net operating income 3,440 3,800 4 Result from discontinued operations net of tax (i) (1) (404) Net consolidated income after tax 3,440 3,396 Split between : Net consolidated income - Group share 3,268 3,207 Net consolidated income - Minority interests 171 189 8 8 Earnings per share (j) Fully diluted earnings per share (j) 1.31 1.30 1.27 1.27 (a) The contribution of discontinued AXA Life Europe UK and Ireland operations is reclassified on a separate line of the income statement in order to present a comparable basis. (b) Gross of reinsurance. (c) Net of investment management costs and including gains/losses from derivatives hedging variable annuities. (d) Includes impairment releases on investments sold. (e) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (f) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (g) Excludes impairment releases on investments sold. (h) Includes net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). (i) Relates to the discontinued United Kingdom Life & Savings operations. (j) Refer to Note 8 for the split of earnings per share between continuing and discontinued operations. Half Year 2017 Financial Report 90 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2017 June 30, 2016 Reserves relating to changes in fair value through shareholders' equity (264) Translation reserves (2,516) Items that may be reclassified subsequently to Profit or Loss (2,781) Employee benefits actuarial gains and losses 408 Items that will not be reclassified subsequently to Profit or Loss 408 Net gains and losses recognized directly through shareholders' equity (2,373) Net consolidated income 3,440 Split between: Net consolidated income - Group share 3,268 Net consolidated income - Minority interests 171 TOTAL COMPREHENSIVE INCOME (CI) 1,067 Split between: Total comprehensive income - Group share 1,128 Total comprehensive income - Minority interests (61) Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Half Year 2017 Financial Report 6,806 (365) 6,441 (830) (830) 5,611 3,396 3,207 189 9,008 8,798 210 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests Shareholders' equity opening January 1, 2017 (b) 2,425,149 2.29 5,554 20,983 (297) 14,643 197 8,137 61 21,318 70,597 5,283 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (c) (1,170) - - - - - - - - 2.29 - - - - - - - - (3) - - - - - - - - (52) 12 - - - - - - - - (666) - - - - - - - - - - - - 0 - - - - - - - - - - - (27) (95) - - - - - - - - - - - - - - - - - (117) (14) (3) (52) 12 (666) (27) (95) - (117) (14) - - - - - - - 518 Dividends paid (2,808) (2,808) Impact of transactions with shareholders (1,170) 2.29 (3) (40) (666) 0 (122) (2,939) (3,769) 518 Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Net consolidated income Total Comprehensive Income (CI) - - - - - - - - - - (388) - - (388) 154 - - 154 (245) - - (245) (2,068) - - (2,068) 407 3,268 3,675 (235) (2,313) 407 3,268 1,128 (30) (204) 1 171 (61) Shareholders' equity closing June 30, 2017 2,423,979 2.29 5,551 20,944 (963) 14,255 351 7,771 (2,007) 22,054 67,956 5,739 Note: amounts are presented net of impacts of shadow accounting and its effects on policyholders' participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI) (see Note 6.1.1.c). (b) Accumulated financial expenses up to 2016 on undated subordinated debts (TSS, TSDI) have been reclassified from Other to Undistributed profits and other reserves for €-3,288 million (c) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2017 Financial Report 92 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests Shareholders' equity opening January 1, 2016 (b) 2,426,458 2.29 5,557 21,094 (209) 12,774 368 9,571 29 19,290 68,475 4,166 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares (2,239) - - - - 2.29 - - - - (5) - - - - (90) 11 - - - - (143) - - - - - - - - - - - - (14) - - - - - - - - (5) (90) 11 (143) (14) - - - - Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt (b) (140) (140) Others (including impact on change in scope) (c) (144) (144) 536 Dividends paid (2,656) (2,656) Impact of transactions with shareholders (2,239) 2.29 (5) (78) (143) (14) (2,940) (3,180) 536 Reserves relating to changes in fair value through shareholders' equity 6,594 162 6,756 50 Translation reserves Employee benefits actuarial gains and losses Net consolidated income Total Comprehensive Income (CI) - - - - - - - - - - - - 6,594 - - 162 (255) - - (255) (83) - - (83) (827) 3,207 2,380 (338) (827) 3,207 8,798 (27) (2) 189 210 Shareholders' equity closing June 30, 2016 (b) 2,424,219 2.29 5,551 21,016 (352) 19,368 530 9,302 (54) 18,730 74,093 4,912 Note: amounts are presented net of impacts of shadow accounting and its effects on policyholders' participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), equity components of compounded financial instruments (e.g convertible bonds) (see Note 6.1.2.c). (b) Accumulated finance expenses up to 2015 and finance expenses from January 1, 2016 to June 30, 2016 on undated subordinated debts (TSS, TSDI) have been reclassified from Other to Undistributed profits for €-3,021 million and €-140 million respectively. (c) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2017 Financial Report 93 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2017 June 30, 2016 Operating income including discontinued operations before tax 4,228 4,714 Net amortization expense (a) 233 380 Change in goodwill impairment and other intangible assets impairment (b) 409 Net change in deferred acquisition costs and equivalent (922) (690) Net increase / (write back) in impairment on investments, tangible and other intangible assets 114 391 Change in fair value of investments at fair value through profit or loss (9,645) (2,005) Net change in liabilities arising from insurance and investment contracts (c) 17,499 13,446 Net increase / (write back) in other provisions (d) (820) (26) Income (net of impairment) from investment accounted for using the equity method (106) (92) Adjustment of non cash balances included in the operating income before tax 6,353 11,812 Net realized investment gains and losses (1,282) (4,151) Financing debt expenses 183 229 Adjustment for reclassification to investing or financing activities (1,099) (3,923) Dividends recorded in profit or loss during the period (1,773) (1,494) Investment income & expense recorded in profit or loss during the period (e) (4,144) (7,386) Adjustment of transactions from accrued to cash basis (5,917) (8,880) Net cash impact of deposit accounting 387 (104) Dividends and interim dividends collected 2,059 1,798 Investment income (e) 7,368 11,036 Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (2,523) (2,601) Net operating cash from banking activities Change in operating receivables and payables Net cash provided by other assets and liabilities (f) Tax expenses paid 626 (3,498) 6,021 (654) 684 (4,055) 2,182 (902) Other operating cash impact and non cash adjustment (1,897) (2,628) Net cash impact of transactions with cash impact not included in the operating income before tax 7,888 5,409 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 11,453 9,132 Purchase of subsidiaries and affiliated companies, net of cash acquired 1 Disposal of subsidiaries and affiliated companies, net of cash ceded 183 Net cash related to changes in scope of consolidation (0) 184 Sales of debt instruments (f) 29,210 40,479 Sales of equity instruments and non consolidated investment funds (f) (g) 22,724 16,919 Sales of investment properties held directly or not (f) 849 5,237 Sales and/or repayment of loans and other assets (f) (h) 17,129 15,307 Net cash related to sales and repayments of investments (f) (g) (h) 69,913 77,943 Purchases of debt instruments (f) (30,159) (45,704) Purchases of equity instruments and non consolidated investment funds (f) (g) (25,584) (15,616) Purchases of investment properties held direct or not (f) (1,735) (3,868) Purchases and/or issues of loans and other assets (g) (h) (17,439) (15,828) Net cash related to purchases and issuance of investments (f) (g) (h) (74,917) (81,015) Sales of tangible and intangible assets 14 5 Purchases of tangible and intangible assets (208) (752) Net cash related to sales and purchases of tangible and intangible assets (194) (747) Increase in collateral payable / Decrease in collateral receivable 56,575 48,575 Decrease in collateral payable / Increase in collateral receivable (56,566) (45,732) Net cash impact of assets lending / borrowing collateral receivables and payables 9 2,842 Half Year 2017 Financial Report 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES (5,189) (793) Issuance of equity instruments 49 19 Repayments of equity instruments (962) (460) Transactions on treasury shares (1) (4) Dividends payout (2,948) (2,838) Interests on undated subordinated debts paid (135) (155) Acquisition / sale of interests in subsidiaries without change in control (135) (66) Net cash related to transactions with shareholders (4,132) (3,503) Cash provided by financial debts issuance 946 2,057 Cash used for financial debts repayments (1,781) (51) Interests on financing debt paid (i) (12) (171) Net interest margin of hedging derivatives on financing debt 15 3 Net cash related to Group financing (831) 1,838 Other financing cash impact and non cash adjustment NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (4,964) (1,665) NET CASH PROVIDED BY DISCONTINUED OPERATIONS 5 (39) CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 25,734 25,630 Net cash provided by operating activities 11,453 9,132 Net cash provided by investing activities (5,189) (793) Net cash provided by financing activities (4,964) (1,665) Net cash provided by discontinued operations 5 (39) Impact of change in consolidation method and of reclassifications as held for sale (k) (6) (308) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents (929) (101) CASH AND CASH EQUIVALENT AS OF JUNE 30 (j) 26,103 31,856 (a) Includes premiums/discounts capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes gains/losses from derivatives hedging variable annuities. (f) Includes related derivatives. (g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (j) Net of bank overdrafts. (k) In 2017, amounts include the assets and liabilities related to discontinued AXA Life Europe UK & Ireland operations for which the disposal process was not finalized as of June 30, 2017. In 2016, amounts include the assets and liabilities related to discontinued United Kingdom Life & Savings operations for which the disposal process was not finalized as of June 30, 2016. (in Euro million) June 30, 2017 June 30, 2016 Cash and cash equivalent 26,728 33,162 Bank overdrafts (a) (626) (1,306) Cash and cash equivalent as of June 30 (b) (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts). 26,103 31,856 Half Year 2017 Financial Report 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 1 ACCOUNTING PRINCIPLES 1.1 General information AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, the Americas, Asia and Africa. The list of the main entities included in the scope of the AXA’s consolidated financial statements is provided in Note 2 of the notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all notes were finalized by the Board of Directors on August 2, 2017. 1.2 General accounting principles AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2017. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2016. The 2017 half-year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2016 annual financial report. Standard published since January 1, 2017 but not yet effective IFRS 17 Insurance contracts, published on May 18, 2017 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS4 Insurance contracts. The new standard applies to insurance contracts issued, to all reinsurance contracts and to investment contracts with discretionary participating features provided the entity also issues insurance contracts. It requires to separate the following components from insurance contracts: (i) embedded derivatives, if they meet certain specified criteria; (ii) distinct investment components; and (iii) distinct performance obligations to provide non-insurance goods and services. These components should be accounted for separately in accordance with the related standards. The standard defines the level of aggregation to be used for measuring the insurance contract liabilities and the related profitability. Indeed, IFRS 17 requires to identify portfolios of insurance contracts, which comprise contracts that are subject to similar risks and are managed together. Afterward, each portfolio of insurance contracts issued shall be divided into three groups:  contracts that are onerous at initial recognition; contracts that at subsequently; and the remaining contracts in the portfolio. initial recognition have no significant possibility of becoming onerous Contracts that are issued more than one year apart should not be in the same group. IFRS17 requires a current measurement model, where the general model is based on the following “building blocks”: the fulfilment cash flows (FCF), which comprise Half Year 2017 Financial Report 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 o probability-weighted estimates of future cash flows, o an adjustment to reflect the time value of money (i.e., discounting) and the financial risks associated with those future cash flows o and a risk adjustment for non-financial risk; the contractual service margin (CSM). The CSM represents the unearned profit for a group of insurance contracts and will be recognised as the entity provides services in the future. The CSM cannot be negative at inception; any net negative amount of the fulfilment cash flows at inception will be recorded in profit or loss immediately. At the end of each subsequent reporting period the carrying amount of a group of insurance contract is remeasured to be the sum of: the liability for remaining coverage, which comprises the FCF related to future services and the CSM of the group at that date; and the liability for incurred claims, which is measured as the FCF related to past services allocated to the group. The CSM is adjusted subsequently for changes in cash flows related to future services but the CSM cannot be negative, so changes in future cash flows that are greater than the remaining CSM are recognised in profit or loss. Interest is also accreted on the CSM at rates locked in at initial recognition of a contract ( i.e discount rate used at inception to determine the present value of the estimated cash flows). Moreover, the CSM will be released into profit or loss based on coverage units, reflecting the quantity of the benefits provided and the expected coverage duration of the remaining contracts in the group. However, for some groups of contracts, a simplified premium allocation approach (PAA) is permitted for the measurement of liability for the remaining coverage if it provides a measurement that is not materially different from the general model or if the coverage period is one year or less. With the PAA, the liability for remaining coverage corresponds to premiums received at initial recognition less acquisition costs. The general model remains applicable for the measurement of incurred claims. The variable fee approach (VFA) is a mandatory model for measuring contracts with direct participation features (also referred to as ‘direct participating contracts’). A contract has a direct participation feature if it meets all three requirements below: the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; the entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items. This assessment of whether the contract meets these criteria is made at inception of the contract and not reassessed subsequently. For these contracts, the CSM is adjusted for (i) changes in the variable fee (entity’s share in underlying items that corresponds to the revenue of the insurer), (ii) for the time value of money and (ii) for effect of changes in financial risks not arising from underlying items (such as options and guarantees). In terms of presentation, the amounts recognised in the statements of financial performance have to be disaggregated into: an insurance service result, comprising insurance revenue and insurance service expenses (i.e incurred claims and other incurred insurance service expense), and insurance finance income or expenses. IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021. Earlier application is permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial instruments have also been applied. The Standard has to be applied retrospectively unless impracticable, in which case two options are possible: Half Year 2017 Financial Report 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 either the Modified retrospective approach: based on reasonable and supportable information available without undue cost and effort to the entity, certain modifications are applied to the extent full retrospective application is not possible, but still with the objective to achieve the closest outcome to retrospective application; or the Fair value approach: the CSM is determined as the positive difference between the fair value determined in accordance with IFRS 13 and the fulfilment cash flows (any negative difference would be recognised in retained earnings at the transition date). The method of implementation of IFRS 17 and its potential impact on the Group’s consolidated financial statements are currently being evaluated within the Group. Amendments published with an effective date January 1, 2017 but not yet endorsed by the European Union The following amendments are not expected to have a material impact on the Group’s consolidated financial statements. Amendments Publication date Effective for annual periods beginning on or after Topic IFRS 11- Joint Arrangements May 6, 2014 January 1, 2016 Guidance on how to account for the acquisition of an Interest in a joint operation that constitutes a business. IAS 16 - Property, Plant, and Equipment and IAS 38 - Intangible Assets Annual Improvements to IFRSs 2012 - 2014 Cycle May 12, 2014 September 25, 2014 January 1, 2016 January 1, 2016 Clarification of the principle for the basis of depreciation and amortization as being the expected pattern of consumption of the future economic benefits of an asset. Collection of amendments to IFRSs in response to issues that are not part of a major project. IAS 1 - Presentation of Financial Statements December 18, 2014 January 1, 2016 Improvement of presentation and disclosure in financial reports. The amendments are designed to encourage entities to apply professional judgment in determining what information to disclose in their financial statements. For example, materiality should apply to the whole of financial statements knowing that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. Half Year 2017 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 Preparation of financial statements The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2016. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non-current items. As for most insurance companies, expenses are classified by destination in the income statement. All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the notes are expressed in Euro million. Half Year 2017 Financial Report 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 2 SCOPE OF CONSOLIDATION 2.1 Consolidated companies 2.1.1 MAIN FULLY CONSOLIDATED COMPANIES June 30, 2017 December 31, 2016 Parent and Holding Companies Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France AXA Parent company Parent company AXA Asia 100.00 100.00 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA France Assurance 100.00 100.00 100.00 100.00 Oudinot Participation 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 AXA Technology Services 99.99 99.99 99.99 99.99 Genworth Financial European Group Holdings 100.00 100.00 100.00 100.00 United States AXA Financial, Inc. 100.00 100.00 100.00 100.00 AXA America Holding Inc. 100.00 100.00 100.00 100.00 United Kingdom Guardian Royal Exchange Plc 100.00 99.98 100.00 99.98 AXA UK Plc 100.00 99.98 100.00 99.98 AXA Equity & Law Plc 99.96 99.96 99.96 99.96 Asia/Pacific (excluding Japan) National Mutual International Pty Ltd 100.00 100.00 100.00 100.00 AXA Financial Services (Singapore) 100.00 100.00 100.00 100.00 AXA India Holding 100.00 100.00 100.00 100.00 Germany Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 Belgium AXA Holdings Belgium 100.00 100.00 100.00 100.00 The Netherlands Vinci BV 100.00 100.00 100.00 100.00 EMEA-LATAM Region AXA Mediterranean Holding SA AXA Luxembourg SA AXA Holding Maroc S.A. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 AXA Turkey Holding W.L.L 100.00 100.00 100.00 100.00 Half Year 2017 Financial Report 100 II Life & Savings and Property & Casualty France AXA France IARD AXA France Vie AXA Protection Juridique Financial Assurance Company Limited (Genworth) Financial Insurance Company Limited (Genworth) AXA Corporate Solutions Assurance (sub-group) AXA Global P&C AXA Global Life AXA Assistance SA (sub group) Colisée RE United States AXA Equitable Life Insurance Company AXA Re Arizona Company AXA Corporate Solutions Life Reinsurance Company United Kingdom AXA Insurance UK Plc AXA PPP Healthcare Limited Architas Multi-Manager Limited Portman Insurance Ltd. Ireland AXA Insurance Limited AXA Life Europe Limited AXA Life Invest Reinsurance Asia/Pacific (excluding Japan) AXA Life Insurance Singapore AXA China Region Limited AXA General Insurance Hong Kong Ltd. AXA Insurance Singapore PT AXA Life Indonesia MLC Indonesia AXA Affin General Insurance Berhad (a) AXA Insurance Public Company Limited (Thailand) Japan AXA Life Insurance Germany AXA Versicherung AG AXA Art AXA Lebensversicherung AG Pro Bav Pensionskasse Deutsche Ärzteversicherung AXA Krankenversicherung AG Belgium Ardenne Prévoyante AXA Belgium SA Spain AXA Vida, S. A. de Seguros AXA Aurora Vida, S.A. de Seguros AXA Seguros Generales, S. A. Italy AXA Interlife AXA Assicurazioni e Investimenti AXA MPS Vita AXA MPS Danni AXA MPS Financial EMEA-LATAM AXA Colpatria Capitalizadora (Colombia) AXA Colpatria Seguros de vida (Colombia) AXA Colpatria Seguros (Colombia) AXA Colpatria Medicina Prepagada (Colombia) AXA Assurance Maroc AXA Hayat ve Emeklilik A.S. (Turkey) AXA Sigorta AS (Turkey) AXA Cooperative Insurance Company (Gulf) AXA Insurance (Gulf) B.S.C.c. AXA Insurance A.E. (Greece) AXA Seguros S.A. de C.V. (Mexico) AXA Czech Republic Pension Funds AXA Czech Republic Insurance AXA Poland AXA Poland Pension Funds CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 Change in scope June 30, 2017 Voting rights percentage Group share of interests December 31, 2016 Group Voting share of rights interests percentage 99.92 99.77 98.51 100.00 100.00 98.75 100.00 100.00 100.00 100.00 99.92 99.77 98.51 100.00 100.00 98.75 100.00 100.00 100.00 100.00 99.92 99.77 98.52 100.00 100.00 98.75 100.00 100.00 100.00 100.00 99.92 99.77 98.51 100.00 100.00 98.75 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.98 99.98 99.98 100.00 100.00 100.00 99.98 99.98 99.98 100.00 100.00 100.00 100.00 Liquidated 100.00 100.00 - 99.98 100.00 - 100.00 100.00 100.00 99.98 100.00 100.00 Acquisition of shares 100.00 100.00 100.00 100.00 100.00 100.00 46.87 100.00 100.00 100.00 100.00 100.00 100.00 46.87 100.00 100.00 100.00 100.00 100.00 100.00 45.41 100.00 100.00 100.00 100.00 100.00 100.00 45.41 Capital increase 99.38 99.38 99.31 99.31 98.69 98.69 98.69 98.69 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.85 99.97 99.90 99.85 99.82 99.90 99.85 99.97 99.90 99.85 99.82 99.90 100.00 100.00 50.00 + 1 voting right 50.00 + 1 voting right 50.00 + 1 voting right 100.00 100.00 50.00 50.00 50.00 100.00 100.00 50.00 + 1 voting right 50.00 + 1 voting right 50.00 + 1 voting right 100.00 100.00 50.00 50.00 50.00 51.00 51.00 51.00 51.00 100.00 100.00 92.61 50.00 50.00 99.98 100.00 99.99 100.00 100.00 100.00 51.00 51.00 51.00 51.00 100.00 100.00 92.61 34.00 50.00 99.98 100.00 99.99 100.00 100.00 100.00 51.00 51.00 51.00 51.00 100.00 100.00 92.61 50.00 50.00 99.98 100.00 99.99 100.00 100.00 100.00 51.00 51.00 51.00 51.00 100.00 100.00 92.61 34.00 50.00 99.98 100.00 99.99 100.00 100.00 100.00 Half Year 2017 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 AXA Slovakia 100.00 100.00 100.00 100.00 AXA Assurances Luxembourg AXA Assurances Vie Luxembourg 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Switzerland AXA Life AXA-ARAG Legal Assistance AXA Insurance (previously Winterthur Swiss Insurance P&C) 100.00 66.67 100.00 100.00 66.67 100.00 100.00 66.67 100.00 100.00 66.67 100.00 Direct (b) Avanssur (France and Poland) Kyobo AXA General Insurance Co. Ltd. (South Korea) AXA Non Life Insurance Co. Ltd. (Japan) Touring Assurances SA (Belgium) AXA Global Direct Seguros y Reaseguros SAU (Spain) AXA Global Direct Seguros y Reaseguros SAU branch (Italy) AXA Ubezpieczenia TUIR S.A (Poland) 100.00 99.71 100.00 100.00 100.00 100.00 100.00 100.00 99.71 98.69 100.00 100.00 100.00 100.00 100.00 99.71 100.00 100.00 100.00 100.00 100.00 100.00 99.71 98.69 100.00 100.00 100.00 100.00 (a) AXA Group exercises control in accordance with shareholders' agreements. (b) UK Direct activities is part of AXA Insurance UK Plc. Asset Management (entities having worldwide activities) AXA Investment Managers (sub group) AB (sub group) Change in scope Minority interest buyout Relution June 30, 2017 Voting rights percentage 97.51 64.57 Group share of interests 97.44 64.57 December 31, 2016 Group Voting share of rights percentage interests 97.04 63.74 96.97 63.74 Banking Change in scope June 30, 2017 Voting rights percentage Group share of interests December 31, 2016 Group Voting share of rights interests percentage France AXA Banque AXA Banque Financement 100.00 65.00 99.89 64.93 100.00 65.00 99.89 64.93 Germany AXA Bank AG 100.00 100.00 100.00 100.00 Belgium AXA Bank Belgium (sub group) 100.00 100.00 100.00 100.00 Other Change in scope June 30, 2017 Voting rights percentage Group share of interests December 31, 2016 Group Voting share of rights interests percentage France CFP Management 100.00 100.00 100.00 100.00 Consolidated investment funds and real estate companies As of June 30, 2017, investment funds represented a total of €131,061 million invested assets (€110,280 million at the end of 2016), corresponding to 293 investment funds mainly in France, Japan, Germany and Belgium and mainly relating to the Life & Savings segment. As of June 30, 2017, 24 consolidated real estate companies corresponded to a total of €11,057 million invested assets (€9,413 million at the end of 2016), mainly in France, Germany and Japan. In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2017, these liabilities amounted to €12,404 million (€11,503 million as of December 31, 2016). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholder’s equity amounted to €2,507 million as of June 30, 2017 (€2,136 million as of December 31, 2016). Half Year 2017 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 2.1.2 MAIN INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD Companies accounted for using the equity method listed below exclude investment funds and real estate entities: Life & Savings and Property & Casualty Change in scope June 30, 2017 Voting rights percentage Group share of interests December 31, 2016 Group Voting share of rights interests percentage France Neuflize Vie (previously NSM Vie) Natio Assurances 39.98 50.00 39.98 49.96 39.98 50.00 39.98 49.96 Asia/Pacific Philippines AXA Life Insurance Corporation Krungthai AXA Life Insurance Company Ltd 45.00 50.00 45.00 50.00 45.00 50.00 45.00 50.00 ICBC-AXA Life Insurance Co. Ltd 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services Bharti AXA Life Bharti AXA General Insurance Company Limited (India) 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 49.00 AXA Tian Ping 50.00 50.00 50.00 50.00 Russia Reso Garantia (RGI Holdings B.V.) 39.34 39.34 39.34 39.34 EMEA-LATAM Region AXA Middle East SAL (Lebanon) AXA Mansard Insurance plc (Nigeria) 51.00 77.79 51.00 77.79 51.00 77.79 51.00 77.79 Asset Management (entities having worldwide activities) AXA Investment Managers Asia Holdings Private Limited Kyobo AXA Investment Managers Company Limited AXA SPDB Investment Managers Company limited Relution Relution Relution 49.00 50.00 39.00 47.75 48.72 38.00 49.00 50.00 39.00 47.52 48.49 37.82 Investment funds and real estate entities accounted for using the equity method As of June 30, 2017, real estate companies accounted for using the equity method amounted to €153 million invested assets (€167 million at the end of 2016) and investment funds accounted for using the equity method amounted to €5,764 million invested assets (€4,777 million at the end of 2016), mainly in the United States, France, Belgium, United Kingdom, Japan and Switzerland. Half Year 2017 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT AXA’s Chief Executive Officer is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA's business segments and Holding Companies reported to the Board of Directors twice a year is consistent with the presentation provided in the consolidated financial statements. Given the new governance structure of AXA, it was decided that the International Insurance segment would no longer be reported separately. Please refer to the Note 1.6 “Segment reporting” of the audited consolidated financial statements for the fiscal year ended December 31, 2016 included in the full year 2016 Registration Document filed with Autorité des marchés financiers for more detailed information. The operating results are presented on the basis of four operating business segments: Life & Savings, Property & Casualty, Asset Management and Banking. An additional Holding companies segment includes all non-operational activities. Life & Savings: AXA’s Life & Savings products include a broad range of Investment and Savings products as well as Protection and Health products marketed to individual and commercial clients. The Life & Savings products offered by AXA include term life, whole life, universal life, endowment, deferred annuities, immediate annuities, and other investment-based products. The Health products offered include critical illness and permanent health insurance products. The types and specificities of the products offered by AXA vary from market to market. The Life & Savings segment consists of twelve geographic operating entities: France, the United States, the United Kingdom until the sale, Japan, Germany, Switzerland, Belgium, EMEA-LATAM Region, Italy, Spain, Asia (excluding Japan) and others. Property & Casualty: This segment includes a broad range of products including mainly motor, household, property and general liability insurance for both personal and commercial customers (commercial customers being mainly small to medium-sized companies). In some countries, this segment includes health products. The Property & Casualty segment consists of ten geographical operating entities (France, Germany, the United Kingdom and Ireland, Switzerland, Belgium, EMEA-LATAM Region, Italy, Spain, Asia and other entities) and three entities being present in multiple countries (AXA Global Direct, AXA Assistance and AXA Corporate Solutions Assurance). The Asset Management segment includes diversified asset management (including investment fund management) and related services offered by AXA Investment Managers and AB, which are provided to a number of institutional investors and individuals, including AXA’s insurance companies. The Banking segment includes banking activities (mainly retail banking, mortgage loans, savings) conducted primarily in France, Belgium and Germany. The Holding companies segment includes all non-operational activities. The inter-segment eliminations include only operations between entities from different segments. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. In this document, “Insurance” covers the two insurance segments: Life & Savings and Property & Casualty. Half Year 2017 Financial Report 104 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 3.1 Consolidated Statement of Income by segment June 30, 2017 (in Euro million) Life & Savings Property & Casualty Asset Management Banking Holding Companies Inter-segment eliminations TOTAL Gross written premiums 30,349 21,040 (331) 51,058 Fees and charges relating to investment contracts with no participating features 108 108 Revenues from insurance activities 30,457 21,040 (331) 51,166 Net revenues from banking activities 227 11 238 Revenues from other activities 781 201 2,167 2 (273) 2,879 Revenues 31,238 21,242 2,167 229 (593) 54,283 Change in unearned premiums net of unearned revenues and fees (1,287) (3,382) 71 (4,598) Net investment income (a) 4,964 1,162 8 (0) 90 (55) 6,170 Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (b) of which change in fair value of assets with financial risk borne by policyholders 719 10,098 8,852 210 (105) 0 93 (0) (22) (142) 2 (2) 0 908 9,942 8,852 Change in investments impairment (68) (23) (29) (120) Net investment result excluding financing expenses 15,713 1,245 101 (0) (103) (56) 16,901 Technical charges relating to insurance activities (40,065) (11,799) 126 (51,737) Net result from outward reinsurance 134 (551) 123 (295) Bank operating expenses (35) (35) Acquisition costs (2,192) (3,130) 9 (5,313) Amortization of the value of purchased business in force (27) (27) Administrative expenses (1,339) (1,626) (1,574) (194) (533) 225 (5,041) Change in goodwill impairment and other intangible assets impairment (11) (43) (4) (57) Other income and expenses 257 (38) (151) 18 230 (90) 225 Other operating income and expenses (43,243) (17,186) (1,729) (211) (304) 393 (62,280) Income from operating activities before tax 2,421 1,919 540 17 (406) (184) 4,306 Income (net of impairment) from investment accounted for using the equity method 62 33 9 2 106 Financing debt expenses (6) (9) (45) (2) (306) 184 (183) Net income from operating activities before tax 2,478 1,942 504 15 (710) 0 4,229 Income tax (318) (498) (125) 10 142 (789) Net operating income 2,160 1,444 379 25 (567) 3,440 Result from discontinued operations net of tax (c) (1) (1) Net consolidated income after tax 2,159 1,444 379 25 (567) 3,440 Split between : Net consolidated income - Group share 2,122 1,412 277 24 (567) 3,268 Net consolidated income - Minority interests 38 32 101 1 0 171 (a) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings segment. (b) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (c) Relates to the discontinued United Kingdom Life & Savings operations. Half Year 2017 Financial Report 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 June 30, 2016 Restated (a) (in Euro million) Life & Savings Property & Casualty Asset Management Banking Holding Companies Inter-segment eliminations TOTAL Gross written premiums 30,371 20,948 (317) 51,003 Fees and charges relating to investment contracts with no participating features 115 115 Revenues from insurance activities 30,486 20,948 (317) 51,118 Net revenues from banking activities 276 19 295 Revenues from other activities 677 184 2,036 2 (277) 2,622 Revenues 31,163 21,132 2,036 278 (575) 54,035 Change in unearned premiums net of unearned revenues and fees (1,225) (3,388) 71 (4,543) Net investment income (b) 7,083 1,187 3 (0) 126 (220) 8,180 Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity 1,249 311 1,641 111 3,311 Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 2,445 394 (233) 114 (469) 45 (0) 1,902 393 Change in investments impairment (245) (122) (0) 3 (34) (398) Net investment result excluding financing expenses 10,532 1,142 118 3 1,265 (64) 12,995 Technical charges relating to insurance activities (34,757) (11,879) 86 (46,550) Net result from outward reinsurance 101 (316) 143 (72) Bank operating expenses (22) (22) Acquisition costs (2,363) (3,160) 11 (5,512) Amortization of the value of purchased business in force (84) (84) Administrative expenses (1,379) (1,580) (1,438) (207) (516) 235 (4,885) Change in goodwill impairment and other intangible assets impairment (10) (43) (2) (56) Other income and expenses 191 (219) (138) 14 215 (117) (54) Other operating income and expenses (38,302) (17,197) (1,578) (215) (301) 357 (57,235) Income from operating activities before tax 2,168 1,689 576 66 964 (210) 5,253 Income from investment accounted for using the equity method 68 19 5 0 92 Financing debts expenses (18) (9) (84) (3) (325) 210 (229) Net income from operating activities before tax 2,218 1,699 497 63 639 0 5,116 Income tax (352) (451) (132) (7) (375) (1,316) Net operating income 1,866 1,248 365 56 264 0 3,800 Result from discontinued operations net of tax (d) (403) (0) (404) Net consolidated income after tax 1,463 1,248 365 56 264 (0) 3,396 Split between : Net consolidated income - Group share 1,422 1,216 249 55 264 (0) 3,207 Net consolidated income - Minority interests 41 32 116 1 (0) 189 (a) The contribution of the discontinued AXA Life Europe UK and Ireland operations is reclassified on a separate line of the statement of income and the International Insurance segment is reclassified in the Life & Savings and Property & Casualty segments in order to present a comparable basis. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings segment. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (d) Relates to the discontinued United Kingdom Life & Savings operations. Half Year 2017 Financial Report 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 United Kingdom Life & Savings business disposal On July 3, 2017, AXA announced that it had completed the sale of AXA Life Europe Limited’s offshore investment bonds business to Harcourt Life International dac (recently renamed to Utmost Ireland dac), a subsidiary of Life Company Consolidation Group. The operations affected by these transactions are treated as discontinued operations in AXA’s consolidated financial statements as of June 30, 2017. As of June 30, 2017, the major classes of assets and liabilities of the discontinued United Kingdom Life & Savings operations for which the disposal process was not finalized as of June 30, 2017, included the following (amounts are presented net of intercompany balances with other AXA entities): (in Euro million) June 30, 2017 Goodwill Other intangible assets Investments Other assets Cash and cash equivalents Total assets held for sale 2 913 0 16 931 (in Euro million) June 30, 2017 Liabilities arising from insurance and investment contracts Other liabilities Total liabilities held for sale 926 6 933 As of June 30, 2017, Other Comprehensive Income amounted to €-0.1 million. The statement of income of the United Kingdom Life & Savings business operations classified as ‘Discontinued operations’ (including both operations for which the disposal process was not finalized as of June 30, 2017 and operations for which the sale was completed in 2016) is as follows: (in Euro million) June 30, 2017 June 30, 2016 Restated (a) Revenues Change in unearned premiums net of unearned revenues and fees Net investment result excluding financing expenses Other operating income and expenses (b) Income from operating activities before tax Financing debts expenses Net income from operating activities before tax Income tax Net consolidated income after tax Split between : Net consolidated income - Group share Net consolidated income - Minority interests (a) Restated to include the contribution of discontinued AXA Life Europe UK and Ireland operations. (b) including an exceptional loss of €0.4 billion on the sale, coming mainly from goodwill impairment during HY16. 1 0 46 (47) (1) - (1) 187 15 941 (1,545) (402) 0 (402) 0 (2) (404) (1) (1) - (404) (0) Half Year 2017 Financial Report 107 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 The statement of Cash Flows of the discontinued United Kingdom Life & Savings business operations as of June 30, 2017 is as follows: (in Euro million) Net cash provided/(used) by operating activities Net cash provided/(used) by investing activities Net impact of foreign exchange fluctuations Net cash provided/(used) by discontinuing operations June 30, 2017 Half Year 2017 Financial Report 4 0 - 5 108 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 5 INVESTMENTS 5.1 Breakdown of investments Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately: June 30, 2017 Investments as per Consolidated Statement of Financial Position Other activities Insurance Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Investment in real estate properties at amortized cost (a) (f) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives 30,029 1,279 21,300 1,279 2.96% 0.18% 388 306 0.86% 30,418 1,279 21,606 1,279 2.86% 0.17% Investment in real estate properties 31,308 22,579 3.14% 388 306 0.86% 31,697 22,885 3.03% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) (g) Debt instruments 379,248 41,108 784 8,014 379,248 41,108 784 7,773 52.76% 5.72% 0.11% 1.08% 4,393 629 26 895 4,393 629 26 895 12.31% 1.76% 0.07% 2.51% 383,641 41,737 810 8,909 383,641 41,737 810 8,669 50.84% 5.53% 0.11% 1.15% 429,154 428,913 59.66% 5,944 5,944 16.66% 435,097 434,857 57.63% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 17,728 10,494 43 17,728 10,494 43 2.47% 1.46% 0.01% 1,067 446 1,067 446 2.99% 1.25% 18,795 10,940 43 18,795 10,940 43 2.49% 1.45% 0.01% Equity instruments 28,264 28,264 3.93% 1,512 1,512 4.24% 29,777 29,777 3.95% Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 8,751 5,310 313 8,751 5,310 313 1.22% 0.74% 0.04% 91 299 249 91 299 249 0.25% 0.84% 0.70% 8,842 5,609 562 8,842 5,609 562 1.17% 0.74% 0.07% Non consolidated investment funds 14,373 14,373 2.00% 639 639 1.79% 15,013 15,013 1.99% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 15,220 15,220 2.12% 142 142 0.40% 15,361 15,361 2.04% Macro-hedge and other derivatives 924 924 0.13% (234) (234) 0.65% 690 690 0.09% Sub total Financial instruments (excluding Loans) 487,935 487,695 67.84% 8,003 8,003 22.43% 495,938 495,698 65.69% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) (f) (g) Macro-hedge and other derivatives - - - 35,076 0 - - - 33,994 0.00% - - - 4.73% - - - 29,166 (0) - - - 27,374 (0) - - - 76.71% 0.00% - - - 64,241 (0) 0 - - - 61,368 (0) 0.00% - - - 8.13% 0.00% Loans 35,076 33,994 4.73% 29,166 27,374 76.71% 64,241 61,368 8.13% Total Financial instruments 523,011 521,689 72.57% 37,169 35,377 99.14% 560,179 557,066 73.83% Assets backing contracts where the financial risk is borne by policyholders 174,610 174,610 24.29% 174,610 174,610 23.14% INVESTMENTS 728,929 718,878 100.00% 37,557 35,683 100.00% 766,486 754,561 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 554,319 544,268 75.71% Life & Savings 476,690 467,864 65.08% Property & Casualty (a) Includes infrastructure investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and Receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. (f) On January 1, 2017, Real estate loans were reclassified from Loans at cost to Investment in real estate properties at amortized cost for a total of €0.5bn. (g) On January 1, 2017, Infrastructure and mid-cap loans were reclassified from Loans at cost to Debt instruments (at cost) that are not quoted in an active market for a total of € 1.6bn. 77,629 76,404 10.63% Half Year 2017 Financial Report 109 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 Insurance December 31, 2016 Investments as per Consolidated Statement of Financial Position Other activities Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives 28,968 1,256 20,123 1,256 2.77% 0.17% 187 125 0.35% 29,155 1,256 20,249 1,256 2.65% 0.16% Investment in real estate properties 30,224 21,379 2.94% 187 125 0.35% 30,411 21,504 2.82% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 390,821 42,340 998 5,955 390,821 42,340 998 5,736 53.73% 5.82% 0.14% 0.79% 5,413 386 29 1,136 5,413 386 29 1,136 15.27% 1.09% 0.08% 3.20% 396,234 42,727 1,027 7,091 396,234 42,727 1,027 6,872 51.94% 5.60% 0.13% 0.90% Debt instruments 440,115 439,897 60.48% 6,964 6,964 19.64% 447,079 446,861 58.58% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 16,499 8,975 60 16,499 8,975 60 2.27% 1.23% 0.01% 1,117 427 1,117 427 3.15% 1.20% 17,616 9,401 60 17,616 9,401 60 2.31% 1.23% 0.01% Equity instruments 25,534 25,534 3.51% 1,544 1,544 4.35% 27,077 27,077 3.55% Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 9,030 4,545 314 9,030 4,545 314 1.24% 0.62% 0.04% 91 252 301 91 252 301 0.26% 0.71% 0.85% 9,122 4,797 615 9,122 4,797 615 1.20% 0.63% 0.08% Non consolidated investment funds 13,890 13,890 1.91% 644 644 1.82% 14,534 14,534 1.91% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 14,067 14,067 1.93% 63 63 0.18% 14,130 14,130 1.85% Macro-hedge and other derivatives 349 349 0.05% (203) (203) 0.57% 146 146 0.02% Sub total Financial instruments (excluding Loans) 493,954 493,735 67.88% 9,013 9,013 25.42% 502,967 502,748 65.90% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) Macro-hedge and other derivatives - - - 38,164 (0) - - - 36,995 0.00% - - - 5.09% - - - 28,179 (0) - - - 26,321 (0) - - - 74.23% 0.00% - - - 66,343 (0) (0) - - - 63,317 (0) 0.00% - - - 8.30% 0.00% Loans 38,164 36,995 5.09% 28,179 26,321 74.23% 66,343 63,317 8.30% Total Financial instruments 532,117 530,730 72.96% 37,192 35,334 99.65% 569,309 566,065 74.20% Assets backing contracts where the financial risk is borne by policyholders 175,292 175,292 24.10% 175,292 175,292 22.98% INVESTMENTS 737,633 727,402 100.00% 37,379 35,459 100.00% 775,012 762,861 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 562,341 552,110 75.90% Life & Savings 483,117 474,125 65.18% Property & Casualty 79,224 77,984 10.72% (a) Includes infrastructure investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and Receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. Half Year 2017 Financial Report 110 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 5.2 Investment in real estate properties Investment in real estate properties includes buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, including the impact of all derivatives: June 30, 2017 December 31, 2016 (in Euro million) Gross value Amortization Impairment Carrying value Fair value Gross value Amortization impairment Carrying value Fair value Investment in real estate properties at amortized cost (a) Insurance (b) 24,210 (2,240) (691) 21,279 30,008 22,925 (2,202) (704) 20,019 28,864 Other activities 306 (0) 306 388 125 (0) 125 187 All activities excluding derivatives 24,516 (2,240) (691) 21,585 30,396 23,050 (2,202) (704) 20,144 29,050 Impact of Derivatives Total for all activities including derivatives (a) On January 1, 2017, Infrastructure loans were reclassified from Loans at cost to Investment in real estate properties at amortized cost for a total of €0.5bn. (b) Includes Infrastructure Investments. 21 21 21,606 30,418 104 20,249 104 29,155 Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2017 December 31, 2016 June 30, 2017 December 31, 2016 Opening value 704 611 2,202 2,196 Increase for the period 32 153 138 227 Write back following sale or repayment (8) (21) (29) (120) Write back following recovery in value (43) (37) Others (a) 5 (2) (70) (102) Closing value 691 704 2,240 2,202 (a) Includes change in scope, reclassification to held for sale and the effect of changes in exchange rates. 5.3 Unrealized gains and losses on financial investments Including the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: (in Euro million) June 30, 2017 December 31, 2016 INSURANCE Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market (c) Equity instruments available for sale Non consolidated investment funds available for sale (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (c) On January 1, 2017, Infrastructure and mid-cap loans were reclassified from Loans at cost to Debt instruments (at cost) that are not quoted in an active market for a total of € 1.6bn. 335,336 379,248 379,248 343,689 390,821 390,821 5,176 49,088 5,955 5,756 65 5,736 7,773 288 7,790 8,014 16,499 13,724 16,499 12,901 17,728 17,728 159 4,163 8,751 8,094 7,700 8,751 9,030 1,091 40 9,030 54,800 274 3,799 1,028 7,668 75 202 91 Half Year 2017 Financial Report 111 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 (in Euro million) June 30, 2017 December 31, 2016 OTHER ACTIVITIES Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale 4,397 895 854 4,393 895 1,067 4,393 895 1,067 134 248 138 35 5,399 5,413 1,136 1,136 903 1,117 5,413 1,136 1,117 211 243 197 (0) 28 Non consolidated investment funds available for sale 91 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. 74 91 17 76 91 91 16 (in Euro million) June 30, 2017 December 31, 2016 TOTAL Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale 339,733 383,641 383,641 49,222 5,313 349,087 396,234 396,234 55,011 7,864 Debt instruments (at cost) that are not quoted in an active market (c) 8,686 8,909 8,669 288 65 6,892 7,091 6,872 274 75 Equity instruments available for sale Non consolidated investment funds available for sale (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (c) On January 1, 2017, Infrastructure and mid-cap loans were reclassified from Loans at cost to Debt instruments (at cost) that are not quoted in an active market for a total of € 1.6bn. 14,578 18,795 17,616 18,795 4,411 17,616 194 13,804 9,122 8,170 1,108 8,842 8,842 7,774 40 9,122 4,042 1,043 230 91 5.4 Financial investments subject to impairment 5.4.1 BREAKDOWN OF FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). June 30, 2017 December 31, 2016 (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market (c) (e) Cost before impairment and revaluation to fair value (a) 340,127 8,686 Impairment (394) (0) Cost after impairment but before revaluation to fair value (b) 339,733 8,686 Revaluation to fair value (c) 43,908 (17) Carrying value 383,641 8,669 Cost before impairment and revaluation to fair value (a) 349,616 6,893 Impairment (529) (0) Cost after impairment but before revaluation to fair value (b) 349,087 6,892 Revaluation to fair value (c) 47,147 (20) Carrying value 396,234 6,872 Debt instruments 348,814 (395) 348,419 43,891 392,310 356,509 (529) 355,980 47,127 403,107 Equity instruments available for sale 17,087 (2,509) 14,578 4,216 18,795 16,470 (2,666) 13,804 3,812 17,616 Non consolidated investment funds available for sale 8,895 (1,120) 7,774 1,068 8,842 9,296 (1,126) 8,170 952 9,122 Loans held to maturity (0) (0) (0) Loans available for sale Loans at cost (d) (e) (f) 61,948 (230) 61,718 (350) 61,368 64,103 (236) 63,867 (550) 63,317 Loans 61,948 (230) 61,718 (350) 61,368 64,103 (236) 63,867 (550) 63,317 TOTAL 436,743 (4,253) 432,490 48,825 481,315 446,377 (4,557) 441,820 51,341 493,161 (a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans. (e) On January 1, 2017, Infrastructure and mid-cap loans were reclassified from Loans at cost to Debt instruments (at cost) that are not quoted in an active market for a total of € 1.6bn. (f) On January 1, 2017, Real estate loans were reclassified from Loans at cost to Investment in real estate properties at amortized cost for a total of €0.5bn. Half Year 2017 Financial Report 112 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 5.4.2 CHANGE IN IMPAIRMENT ON FINANCIAL INVESTMENTS (in Euro million) January 1, 2017 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) June 30, 2017 Impairment - Debt instruments 529 23 (150) (0) (7) 395 Impairment - Equity instruments 2,666 75 (221) (11) 2,509 Impairment - Non consolidated investment funds 1,126 30 (12) (24) 1,120 Impairment - Loans 236 17 (1) (20) (2) 230 TOTAL 4,557 145 (384) (20) (45) 4,253 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. (in Euro million) January 1, 2016 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) December 31, 2016 Impairment - Debt instruments 632 70 (147) (28) 2 529 Impairment - Equity instruments 2,144 543 18 (38) 2,666 Impairment - Non consolidated investment funds 1,054 132 (69) 10 1,126 Impairment - Loans 239 50 (2) (60) 8 236 TOTAL 4,069 795 (200) (88) (19) 4,557 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. 5.5 Investments/Fair value Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs):  used by the Group in the limited cases of application of mark to model valuations. assumed to be used by pricing services; or Half Year 2017 Financial Report 113 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 5.5.1 INVESTMENTS RECOGNIZED AT FAIR VALUE The breakdown by valuation method of investments recognized at fair value including derivatives but excluding assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2017 December 31, 2016 Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives (in Euro million) Debt instruments 278,068 105,685 891 384,644 383,641 279,887 118,640 748 399,275 396,234 Equity instruments 15,186 1,486 2,054 18,726 18,795 13,985 1,527 2,109 17,620 17,616 Non consolidated investment funds 834 6,490 1,498 8,821 8,842 837 7,125 1,192 9,153 9,122 Loans Financial investments and loans available for sale 294,087 113,661 4,443 412,191 411,278 294,708 127,292 4,049 426,048 422,972 Investment in real estate properties 1,279 1,279 1,279 1,256 1,256 1,256 Debt instruments 25,827 14,840 856 41,524 41,737 25,242 16,594 921 42,757 42,727 Equity instruments 5,027 994 4,919 10,940 10,940 3,405 879 5,118 9,401 9,401 Non consolidated investment funds Other assets held by consolidated investment funds designated as at fair value through profit or loss Loans 471 3,232 3,978 6,226 1,206 5,903 5,655 15,361 5,609 15,361 377 3,749 3,200 6,107 1,266 4,327 4,842 14,184 4,797 14,130 Financial investments and loans designated as at fair value through profit or loss 34,557 27,317 12,883 74,758 74,926 32,773 28,035 11,632 72,440 72,310 Debt instruments 276 509 2 787 810 342 844 1 1,187 1,027 Equity instruments 42 0 42 43 61 (0) 0 61 60 Non consolidated investment funds 236 326 0 562 562 300 315 0 615 615 Loans Financial investments and loans held for trading TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. 554 836 2 1,391 1,415 329,198 141,814 17,328 488,340 487,618 702 328,183 1,160 156,486 2 15,682 1,863 500,351 1,703 496,985 For Sovereign bonds, trends observed in 2016 were confirmed in the first semester of 2017. The market indicators will continue to be followed to assess the sustainability of those improvements. Therefore, the classification as at June 30, 2017 is maintained similar to the one as at December 31, 2016. At June 30, 2017 the net transfers between Level 1 and Level 2 was €4,216 million. This amount was comprised of €6,379 million transferred investments from Level 2 to Level 1 and €2,163 transferred from Level 1 to Level 2. The reclassifications were mainly related to changes in liquidity indicators observed in the market for corporate bonds throughout the period. Transfer in and out of the level 3 category and other movements From January 1, 2017 to June 30, 2017, the amount of level 3 assets increased to €17.3 billion, representing 3.5% of the total assets at fair value (3.1% at the end of 2016 i.e. €15.7 billion). Main movements relating to level 3 assets to be noted were the following:    €+1.2 billion of new investments; €+0.4 billion of change in unrealized gains and losses; €+0.9 billion of net asset transfers in and out of Level 3 and foreign exchange fluctuation impact; €-0.9 billion of asset sales, redemptions and settlements mainly of debt instruments, equity securities and non-conso investment funds accounted as available for sale and of equity securities, non-conso investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through P&L. Half Year 2017 Financial Report 114 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 5.5.2 INVESTMENTS RECOGNIZED AT AMORTIZED COST June 30, 2017 December 31, 2016 Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives (in Euro million) Debt instruments held to maturity Loans held to maturity Financial investments and loans held to maturity Investment in real estate properties at amortized cost (a) Debt instruments at cost (loans & receivables) (b) Loans at amortized cost (a) (b) 355 52 30,396 5,585 27,361 2,986 37,189 30,396 8,926 64,602 30,418 8,909 64,241 345 49 29,050 4,916 27,461 1,851 39,398 29,050 7,111 66,908 29,155 7,091 66,343 Non consolidated investment at cost Financial investments and loans at amortized cost 407 63,342 40,175 103,924 103,568 393 61,427 41,248 103,069 102,589 TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 407 63,342 40,175 103,924 103,568 393 61,427 41,248 103,069 102,589 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. (a) On January 1, 2017, Real estate loans were reclassified from Loans at cost to Investment in real estate properties at amortized cost for a total of €0.5bn. (b) On January 1, 2017, Infrastructure and mid-cap loans were reclassified from Loans at cost to Debt instruments (at cost) that are not quoted in an active market for a total of € 1.6bn. Half Year 2017 Financial Report 115 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The Consolidated Statement of changes in Equity is presented as a primary financial statement. 6.1 Impact of transactions with shareholders 6.1.1 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2017 a) SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2017, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value:  stock option exercice of 3.1 million shares for €48 million; cancellation of 4.2 million shares for €103 million. b) TREASURY SHARES As of June 30, 2017, the Company and its subsidiaries owned approximately 38 million AXA shares, representing 1.6% of the share capital, an increase of 32 million shares compared to December 31, 2016. As of June 30, 2017, the carrying value of treasury shares and related derivatives was €963 million and there was no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. As of June 30, 2017, 1.5 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €24 million and their market value €37 million at the end of June 2017. c) UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debt instruments issued by the Group do not qualify as liabilities under IFRS. Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2017, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves:  change in other was due to foreign exchange rate fluctuations for €-245 million; change in undistributed profits and other reserves was due to interest expenses related to the undated subordinated debt (net of tax) for €-117 million. Half Year 2017 Financial Report 116 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 As of June 30, 2017 and December 31, 2016, undated subordinated debt recognized in shareholders’ equity is as follows: June 30, 2017 December 31, 2016 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in Euro million) October 29, 2004 - 375 M€ 6.0% 375 375 375 375 December 22, 2004 - 250 M€ 6.0% 250 250 250 250 January 25, 2005 - 250 M€ 6.0% 250 250 250 250 July 6, 2006 - 350 M£ 6.7% 350 398 350 409 December 14, 2006 - 750 MUS$ 6.5% 750 654 750 709 December 14, 2006 - 750 MUS$ 6.4% 750 654 750 709 October 5, 2007 - 750 M€ 6.2% (a) 335 331 335 331 October 16, 2007 - 700 M£ 6.8% (a) 219 247 219 253 November 7, 2014 - 984 M€ 3.941% (a) 984 981 984 981 November 7, 2014 - 724 M£ 5.453% (a) 724 820 724 843 May 20, 2014 - 1,000 M€ - 3.9% 1,000 997 1,000 997 January 22, 2013 - 850 MUS$, 5.5% 850 739 850 801 Undated notes -625 M€, variables rates 625 625 625 625 Undated notes - 27,000 MJPY, 3.3% 27,000 211 27,000 219 Undated notes - 375 MUS$, variables rates 375 329 375 356 Sub-Total Undated Subordinated Debt 7,862 8,106 Equity component of convertible debt (2017) 95 95 TOTAL 7,862 8,201 (a) These undated Deeply Subordinated notes were part of the liability management exercise launched on October 29, 2014. Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step-up clauses with effect from a given date. d) DIVIDENDS PAID At the shareholders’ meeting held on April 26, 2017, shareholders approved a dividend distribution of €1.16 per share corresponding to €2,808 million with respect to the 2016 financial year. Half Year 2017 Financial Report 117 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 6.1.2 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2016 a) SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2016, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value:    stock option exercice of 1.4 million shares for €19 million; cancellation of 4.9 million shares for €117 million; shares distributed of 1.3 million under AXA Miles for €3 million (reclassified from other reserves); share-based payments for €11 million. b) TREASURY SHARES As of June 30, 2016, the Company and its subsidiaries owned approximately 8 million AXA shares, representing 0.3% of the share capital, an increase of 6 million shares compared to December 31, 2015. As of June 30, 2016, the carrying value of treasury shares and related derivatives was €352 million and there was no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. As of June 30, 2016, 2 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €42 million and their market value €40 million at the end of June 2016. c) UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES During the first half of 2016, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves:  change in other was due to foreign exchange rate fluctuations for €-255 million; change in undistributed profits and other reserves was due to interest expenses related to the undated subordinated debt (net of tax) for €-140 million. d) DIVIDENDS PAID At the shareholders’ meeting held on April 27, 2016, shareholders approved a dividend distribution of €1.10 per share corresponding to €2,656 million with respect to the 2015 financial year. Half Year 2017 Financial Report 118 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 6.2 Comprehensive income for the period The Statement of Comprehensive Income, presented as primary financial statements, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2017 a) RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled €-4,836 million, of which a €- 5,277 million decrease in unrealized capital gains on debt securities which was mainly driven by interest rates increase, partially offset by a increase in unrealized capital gains on equity securities of €571 million in line with the financial market. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: June 30, 2017 December 31, 2016 (in Euro million) Gross unrealized gains and losses (a) 49,013 53,849 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (26,963) (30,959) Shadow accounting on Deferred Acquisition Costs (b) (977) (983) Shadow accounting on Value of purchased Business In force (172) (185) Unallocated unrealized gains and losses before tax 20,902 21,722 Deferred tax (6,171) (6,405) Unrealized gains and losses (net of tax) - Assets available for sale 14,731 15,317 Unrealized gains and losses (net of tax) - Equity accounted companies (c) 43 58 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 14,774 15,376 Minority interests' share in unrealized gains and losses (d) (234) (267) Translation reserves (e) (285) (465) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (c) (a) Unrealized gains and losses on total available for sale invested assets including loans. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including unrealized gains and losses on assets held for sale operations. (d) Including foreign exchange impact attributable to minority interests. (e) Group share. 14,255 14,643 As of June 30, 2017, most of the unrealized gains on assets available for sale related to the Life & Savings segment. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2017: Half Year 2017 Financial Report 119 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 June 30, 2017 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Belgium Life & Savings Gross unrealized gains and losses (a) 17,055 7,727 3,756 5,514 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (12,852) (6,602) (2,189) (2,601) Shadow accounting on Deferred Acquisition Costs (b) (265) (73) (85) Shadow accounting on Value of purchased Business In force - (99) (9) Unallocated unrealized gains and losses before tax 3,938 1,125 1,395 2,818 Deferred tax (1,320) (344) (293) (885) Unrealized gains and losses (net of tax) - Assets available for sale 2,618 781 1,102 1,933 Unrealized gains and losses (net of tax) - Equity accounted companies 37 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 2,655 781 1,102 1,933 Minority interests' share in unrealized gains and losses (c) (7) 0 (1) Translation reserves (d) 0 (220) (0) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) 2,649 781 883 1,933 (a) Unrealized gains and losses on total available for sale invested assets including loans. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2017 and December 31, 2016 broken down as follows: June 30, 2017 December 31, 2016 (in Euro million) Unrealized gains and losses (net of tax) 100%, opening 15,376 13,352 Transfer in the income statement on the period (a) (486) (771) Investments bought in the current accounting period and changes in fair value 157 2,936 Foreign exchange impact (254) 66 Change in scope and other changes (19) (207) Unrealized gains and losses (net of tax) 100%, closing 14,774 15,376 Minority interests' share in unrealized gains and losses (b) (234) (267) Translation reserves (c) (285) (465) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (d) 14,255 14,643 (a) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period, and debt instruments discount premium impacts. (b) Including foreign exchange impact attributable to minority interests. (c) Group share. (d) Including unrealized gains and losses on assets held for sale operations. b) CURRENCY TRANSLATION RESERVE The group share translation reserves movement (€-2,313 million) was mainly driven by the United States (€-1,199 million), Asia (€-428 million), Japan (€-265 million), Switzerland (€-211 million), AXA IM (€-157 million) and the United Kingdom (€-128 million). Half Year 2017 Financial Report 120 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 c) EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year 2017 amounted to €+407 million net group share, mostly due to the net actuarial gain in the United Kingdom due to the revisited alternative approach used to derive the pension increase assumption and mortality assumption update based on the latest CMI model, and net gains coming from plan assets outperformance above the opening average discount rate used to calculate the interest income on assets in the United States and Switzerland. 6.2.2 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2016 a) RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The increase in gross unrealized gains and losses on assets available for sale totaled €23,538 million, of which a €24,152 million increase in unrealized capital gains on debt securities which was mainly driven by decrease in interest rates and corporate spreads increase, partially offset by a decrease in equity unrealized gains on equity securities of €-632 million in line with the financial market. b) CURRENCY TRANSLATION RESERVE The group share translation reserves movement (€-338 million) was mainly driven by the United Kingdom (€-613 million), the United States (€-285 million), EMEA-LATAM region (€-176 million), AXA IM (€-95 million) and the Company (€-54 million) due to change in fair value of hedges related to net investments in foreign operations and foreign exchange impact in subordinated debts (€-255 million), partly offset by Japan (€+1,180 million). c) EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial losses for the first half year 2016 amounted to €-827 million net group share, mostly due to the decrease in discount rates effect, and partly offset by net gains coming from plan assets outperformance above the opening average discount rate used to calculate the interest income on assets. Half Year 2017 Financial Report 121 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 6.3 Change in minority interests Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than shareholders’ equity item. 6.3.1 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2017 The €+457 million increase in minority interests to €+5,739 million was mainly driven by the comprehensive income and transactions with minority interests’ holders: The comprehensive income for the period notably included the following: o Net income attributable to minority interests for €+171 million; o Foreign exchange movements for €-204 million; o Reserves relating to changes in fair value through shareholders’ equity for €-30 million. Transactions with minority interests’ holders, mainly included: o Minority interests qualified as equity resulting from an increase of the value of minority interests’ holdings, in particular following consolidation of new investment funds and capital increase to existing consolidated investment funds for €+648 million; o Dividend payout to minority interests’ holders for €-179 million. 6.3.2 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2016 The €+746 million increase in minority interests to €+4,912 million was mainly driven by the comprehensive income and transactions with minority interests’ holders: The comprehensive income for the period notably included the following: o Net income attributable to minority interests for €+189 million; o Foreign exchange movements for €-27 million; o Reserves relating to changes in fair value through shareholders’ equity for €+50 million. Transactions with minority interests’ holders, mainly included: o Minority interests qualified as equity resulting from an increase of the value of minority interests’ holdings, in particular following the consolidation of a new fund for €+610 million; o Dividend payout to minority interests’ holders for €-178 million. Half Year 2017 Financial Report 122 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 7 FINANCING DEBT Carrying value (in Euro million) June 30, 2017 December 31, 2016 AXA Debt component of subordinated convertible notes, 3.75% due 2017 (€) Subordinated notes, 5.25% due 2040 (€) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) U.S. registered redeemable subordinated debt, 7.125% 2020 (£) Subordinated debt, 5.625% due 2054 (£) Derivatives relating to subordinated debts (a) Subordinated debt, 3.375%, due 2047(€) 6,875 - 1,300 1,000 1,115 370 853 (884) 1,500 7,641 1,783 1,300 1,000 1,186 380 876 (1,189) 1,500 Undated Subordinated notes, 850MUS$, 4.5% 745 806 AXA SA - Subordinated notes, 5.125%, due 2047 (USD) 876 AXA Bank Europe Subordinated debt maturity below 10 years fixed rate Undated Subordinated debt fixed rate AXA-MPS Vita and Danni Subordinated notes, EURIBOR 6 months + 81bp Other subordinated debt (under €100 million) 74 29 46 70 70 32 87 35 52 70 70 19 Subordinated debt 7,052 7,818 AXA Euro Medium Term Note, due through 2028 AXA Financial Senior notes, 7%, due 2028 AXA UK Holdings GRE: Loan Notes, 6.625%, due 2023 Other financing debt instruments issued (under €100 million) Other financing debt instruments issued (under €100 million) 500 500 306 306 172 172 94 129 500 500 331 331 177 177 100 131 Derivatives relating to other financing debt instruments issued (a) (35) (30) Financing debt instruments issued 1,072 1,109 TOTAL FINANCING DEBT (b) 8,124 8,927 (a) Hedging instruments in accordance with IAS 39 and economic hedge derivatives not eligible for hedge accounting. (b) Excluding accrued interest on derivatives. Half Year 2017 Financial Report 123 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2017 NOTE 8 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: The calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period. The calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2017 June 30, 2016 Net income Group share 3,268 3,207 Undated subordinated debt financial charge (117) (140) Net income including impact of undated subordinated debt A 3,151 3,067 Weighted average number of ordinary shares (net of treasury shares) - opening 2,419 2,424 Increase in capital (excluding stock options exercised) (b) 1 Stock options exercised (b) 1 1 Treasury shares (b) (5) (7) Share purchase program (b) (4) (4) Weighted average number of ordinary shares B 2,411 2,415 BASIC NET INCOME PER ORDINARY SHARE C = A / B 1.31 1.27 Potentially dilutive instruments : Stock options 6 6 Other 2 1 Fully diluted - weighted average number of shares (c) D 2,419 2,422 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 3,151 3,067 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 1.30 1.27 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. As of June 30, 2017, net income per ordinary share stood at €1.31 on a basic calculation, all attributable to continuing operations, and €1.30 on a fully diluted basis also all attributable to continuing operations. As of June 30, 2016, net income per ordinary share stood at €1.27 on both basic and fully diluted basis, of which €1.44 attributable to continuing operations and €-0.17 from discontinued operations on both basic and fully diluted basis. Half Year 2017 Financial Report 124 II STATUTORY AUDITORS’ REVIEW REPORT – HALF YEAR 2017 III. Statutory auditors’ review report on the 2017 Half Year Financial Information / Half Year 2017 Financial Report 125 III STATUTORY AUDITORS’ REVIEW REPORT – HALF YEAR 2017 PricewaterhouseCoopers Audit 63, rue de Villiers 92208 Neuilly-sur-Seine Cedex Mazars 61, rue Henri Regnault 92075 Paris La Défense Cedex STATUTORY AUDITORS’ REVIEW REPORT ON THE 2017 HALF-YEAR FINANCIAL INFORMATION To the Shareholders AXA S.A. 25 avenue Matignon 75008 Paris In compliance with the assignment entrusted to us by your General Meeting and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code (Code monétaire et financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the six months ended June 30, 2017 ; the verification of the information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - the standard of IFRSs as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information given in the half-year management report on the condensed half-year consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. Neuilly-sur-Seine and Courbevoie, August 3, 2017 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit Mazars Xavier Crépon Jean-Claude Pauly Maxime Simoen This is a free translation into English of the Statutory Auditors’ review report issued in French and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Half Year 2017 Financial Report 126 III STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR FINANCIAL REPORT IV. Statement of the person responsible for the Half Year Financial Report Half Year 2017 Financial Report / 127 IV STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR FINANCIAL REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and describes the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 3, 2017. Thomas Buberl Chief Executive Officer Half Year 2017 Financial Report 128 IV

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Half Year Financial Report / June 30, 2018 TABLE OF CONTENTS I. Activity Report………………………………………. II. Consolidated financial statements ……………….. III. Statutory auditors’ review report on the 2018 Half Year Financial Information …….. 121 IV. Statement of the person responsible for the Half Year Financial Report ……………………………….. 123 3 78 I. Activity Report June 30, 2018 / ACTIVITY REPORT – HALF YEAR 2018 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND THE USE OF NON- GAAP FINANCIAL MEASURES Certain statements contained herein may be forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans, expectations or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause AXA’s actual results to differ materially from those expressed or implied in such forward looking statements. Please refer to Part 4 - “Risk Factors and Risk Management” of AXA’s Registration Document for the year ended December 31, 2017 (the “2017 Registration Document”), for a description of certain important factors, risks and uncertainties that may affect AXA’s business and/or results of operations. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise, except as required by applicable laws and regulations. In addition, this report refers to certain non-GAAP financial measures, or alternative performance measures, used by Management in analyzing AXA’s operating trends, financial performance and financial position and providing investors with additional information that Management believes to be useful and relevant regarding AXA’s results. These non-GAAP financial measures generally have no standardized meaning and therefore may not be comparable to similarly labelled measures used by other companies. As a result, none of these non-GAAP financial measures should be considered in isolation from, or as a substitute for, the Group’s consolidated financial statements and related notes prepared in accordance with IFRS. A reconciliation from non-GAAP financial measures Underlying Earnings and Adjusted Earnings to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided on pages 22 to 24 of this report. Adjusted Return on Equity is reconciled to the financial statements in the table set forth on page 30 of this report. The above mentioned and other non-GAAP financial measures used in this report are defined in the Glossary on pages 70 to 77 of this report. The results of our US segment are presented herein on the basis of IFRS and are not, and should not be relied upon as representing, the US GAAP results of AXA Equitable Holdings, Inc. (including AllianceBernstein), which, as a US public company, reports in US GAAP in accordance with the rules of the US Securities and Exchange Commission (“SEC”). For further information on AEH’s financial results and other public reports please consult the SEC website at www.sec.gov. I GOVERNANCE AND REPORTING CHANGES In order to reflect the reorganization in the governance of the Group which took place in 2017 and in line with Full Year 2017 Activity Report, the financial reporting has been aligned and retroactively restated in this report under the six following segments: France (insurance and banking activities, and holdings); Europe, consisting of: o Switzerland (insurance activities), o Germany (insurance activities excluding AXA Art, banking activities and holdings), o Belgium (insurance activities and holding), o United Kingdom & Ireland (insurance activities and holdings), o Spain (insurance activities), o Italy (insurance activities and holding); Asia, consisting of: o Japan (insurance activities), o Hong Kong (insurance activities), o Asia - Direct, consisting of:  AXA Global Direct Japan,  AXA Global Direct South Korea, o Asia High Potentials, consisting of:  Thailand (insurance activities),  Indonesia (insurance activities),  China (insurance activities),  The Philippines (insurance activities), o Asia Holding; United States (insurance activities, AB and holdings); International, consisting of: o 14 countries (1) within Europe, Middle East, Africa & Latin America, mainly including Turkey, Mexico, Morocco, Czech Republic & Slovak Republic and Luxembourg (insurance activities and holdings), o Singapore (insurance activities), o Malaysia (insurance activities), (1) For the full list of countries, see the Glossary on the pages 70 & 71. Half Year 2018 Financial Report 5 o India (insurance activities), o AXA Bank Belgium; Transversal & Central Holdings, consisting of: o AXA Investment Managers, o AXA Corporate Solutions Assurance, o AXA Assistance, o AXA Art, o AXA Liabilities Managers, o AXA Global Re, o AXA Life Europe, o AXA SA and other Central Holdings. Half Year 2018 Financial Report 6 Market Environment FINANCIAL MARKET CONDITIONS IN THE FIRST HALF OF 2018 In the first semester of 2018, financial markets reacted to several important political decisions. In Europe, a transition arrangement on Brexit was approved whereby the United Kingdom would remain part of the European Union (EU) until the end of 2020. However, anxiety around Brexit stayed, and following the EU summit, leaders suggested there may be a ‘no deal’ exit in case issues such as Irish border controls were not resolved. Economic data in Europe gave rise to concerns about the potential slowing pace of the economic recovery. Progress of populist and anti-establishment parties in Europe continued with the appointment of Giuseppe Conte as Prime Minister in Italy and set up of the government coalition bringing together The League and the Five Star Movement. This led to a sharp widening of Italian sovereign spreads versus the German bund. In the United States, inflation increased from 2.1% at the end of 2017 to 2.9% at the end of June 2018, leading the Fed to raise interest rates further. Meanwhile, fears around an intensifying trade war with China and other foreign countries led to higher market volatility. In Asia, Japanese equities were soft in the first quarter, with the Nikkei 225 hitting a six-month low in March, followed by a recovery in the second quarter in local currency. Elsewhere in Asia, equities surged to all-time highs in January and fell thereafter. Chinese stocks fell-off in February on the back of trade tensions with the US. In this context, overall stock markets ended up close to their December 2017 levels with the MSCI All countries index up 0.2% in the first half of 2018 in spite of higher volatility. The Euro weakened slightly against major currencies in the first half of 2018 as compared to the end of 2017. However, on average, the Euro was materially stronger against major currencies during the first half of 2018 versus the first half of 2017. The US Federal Reserve raised its benchmark interest rates by 25 bps in both March and June, and the European Central Bank announced its quantitative easing programme would be over by the end of the year. This had mixed effects on government bond yields over the period: increases in the United States, the United Kingdom and Switzerland and decreases in Germany, France and Japan. Stock Markets The MSCI World Index increased by 0.2% in the first half of 2018. The Dow Jones Industrial Average index decreased by 1.8% while the S&P 500 index increased by 1.6% in the first half of 2018. Equity markets in Japan and Europe posted losses in the half of 2018: the Nikkei index in Tokyo decreased by 2.0% and the FTSE 100 index in London decreased by 0.7% in the first semester 2018. The EUROSTOXX 50 index in the Eurozone decreased by 3.1%. The MSCI G7 index increased by 0.6% and the MSCI Emerging index decreased by 3.9%. The S&P 500 implied volatility index (VIX) increased from 11.0% on December 31, 2017, to 16.1% on June 30, 2018. The S&P 500 realized volatility index increased from 5.6% on December 31, 2017, to 15.2% on June 30, 2018. Half Year 2018 Financial Report 7 Bond Markets Government bond yields increased since December 31, 2017, in some mature economies: the 10-year US T-bond yield increased by 46 bps to 2.86%, the UK 10-year government bond yield increased by 9 bps to 1.28%, the 10- year Belgium government bond increased by 8 bps to 0.73% and the 10-year Swiss government bond yield increased by 8 bps to -0.07%, while the 10-year German Bund yield decreased by 12 bps to 0.30%, the French 10- year government bond yield decreased by 11 bps to 0.67%, and the 10-year Japan government bond yield decreased by 2 bps to 0.03%. In the Eurozone peripheral countries, the 10-year government bond yields decreased in most countries: -24 bps to 1.33% in Spain, -16 bps to 3.96% in Greece and -14 bps to 1.79% in Portugal, while it increased by 69 bps to 2.69% in Italy and by 13 bps to 0.81% in Ireland. In Europe, the iTRAXX Main spreads increased by 29 bps to 74 bps compared to December 31, 2017, and the iTRAXX Crossover increased by 90 bps to 322 bps. In the United States, the CDX Main spread Index increased by 19 bps to 68 bps. The Euro interest rates implied volatility index (based on 10x10 Euro swaptions) increased from 43.4% as of December 31, 2017, to 43.9% as of June 30, 2018. Exchange Rates End of Period Exchange rate Average Exchange rate June 30, 2018 December 31, 2017 June 30, 2018 June 30, 2017 (for €1) (for €1) (for €1) (for €1) US Dollar 1.17 1.20 1.21 1.08 Japanese Yen 129 135 132 122 British Sterling Pound 0.88 0.89 0.88 0.86 Swiss Franc 1.16 1.17 1.17 1.08 Half Year 2018 Financial Report 8 Operating Highlights Governance RE-APPOINTMENT OF MESSRS. DENIS DUVERNE AND THOMAS BUBERL AS CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER On April 25, 2018, AXA’s Shareholders’ Meeting renewed Messrs. Denis Duverne and Thomas Buberl’s directorships as members of AXA’s Board of Directors. The Board of Directors held at the end of the Shareholders’ Meeting confirmed the renewal of Messrs. Denis Duverne and Thomas Buberl as Chairman of the Board of Directors and Chief Executive Officer respectively, for the duration of their directorship as member of the Board. Significant Acquisitions AXA ACCELERATES ITS PAYER-TO-PARTNER STRATEGY WITH THE ACQUISITION OF MAESTRO HEALTH On February 28, 2018, AXA announced that it had completed the acquisition of Maestro Health, Inc. (“Maestro Health”), a US health benefit administration digital company. Total consideration for the acquisition amounted to USD 155 million (or €127 million (1)). Maestro Health provides a digital integrated platform encompassing a full set of health benefit administration services and third-party administrator services for self-insured companies, including care coordination solutions for employees, enabling companies to be more effective in lowering healthcare costs and empowering employees to make better health-related choices. Founded in 2013, the Chicago-based company has more than 300 employees and targets mid-size and large-size employers across the United States, currently covering over 1 million lives. This acquisition reflects AXA’s continued strong focus on the health business and supports its “Payer-to- Partner“ strategy, in line with Ambition 2020, and represents an important step towards building a comprehensive and long-term population health management solution to provide better care at lower cost. AXA TO ACQUIRE XL GROUP: CREATING THE #1 GLOBAL P&C COMMERCIAL LINES INSURANCE PLATFORM On March 5, 2018, AXA announced that it had entered into an agreement to acquire 100% of XL Group Ltd (NYSE: XL), a leading global Property & Casualty commercial lines insurer and reinsurer with strong presence in North America, Europe, Lloyd’s and Asia-Pacific. The merger agreement has been unanimously approved by the boards of AXA and XL Group. Total consideration for the acquisition would amount to USD 15.3 billion (€12.4 billion (2)), to be fully paid in cash. Under the terms of the transaction, XL Group shareholders will receive USD 57.60 per share (3). This represents a premium of 33% to XL Group closing share price on March 2, 2018. (1) EUR 1 = USD 1.2233 as of January 19, 2018 (source: Bloomberg). (2) EUR 1 = USD 1.2317 as of March 2, 2018 (source: Bloomberg). (3) Completion of the transaction is subject to customary closing conditions, including the receipt of required regulatory approvals. Half Year 2018 Financial Report 9 Founded in 1986, XL Group is a leader in P&C commercial and specialty lines with an active global network. XL Group generated USD 15 billion of GWP in FY17. It is a growing franchise with a high-quality underwriting platform and a rich and diversified product offering. XL Group is a highly agile company renowned for innovative client solutions and has a comprehensive business model of originating, packaging and selling risks. XL Group has ca. 7,400 colleagues worldwide and has a strong presence across specialty and mid-market segments via insurance and reinsurance. This acquisition is aligned with AXA’s Ambition 2020 preferred segments favoring product lines with high frequency customer contacts, quality service and superior technical expertise. XL Group provides both a premier specialty platform complementing and diversifying AXA’s existing commercial lines insurance portfolio, and reinsurance capabilities that will grant AXA an access to enhanced diversification and alternative capital. The combination of AXA’s and XL Group’s existing positions will propel the Group to the #1 global position in P&C Commercial lines with combined 2016 revenues of ca. €30 billion (1) and total P&C revenues of ca. €48 billion (2). The opportunity to acquire XL Group has led AXA to announce its intention to fully exit from its existing US (3) and intended subsequent sell-downs, this operations. Together with the IPO of AXA’s US operations transaction would gear AXA further towards technical margins less sensitive to financial markets. The strong complementarities between AXA and XL Group provide opportunities for significant value creation, offsetting the US IPO earnings dilution as soon as 2018. It also allows for material capital diversification benefits under the Solvency II framework and a strong return on investment. In this context, AXA also reaffirmed its Ambition 2020 targets. Upon completion of the transaction, the combined operations of XL Group, AXA Corporate Solutions (AXA’s large commercial P&C and specialty business) and AXA Art will be led by Greg Hendrick, currently the President and Chief Operating Officer of XL Group, who will be appointed CEO of the combined entity and join AXA Group’s Management Committee, reporting to Thomas Buberl. Greg Hendrick will work closely with Doina Palici- Chehab, AXA Corporate Solutions’ Executive Chairwoman, and Rob Brown, AXA Corporate Solutions’ CEO, to build an integrated organization and leadership team for this new company. Following the closing, Mike McGavick, XL Group’s current CEO, will become Vice Chairman of the combined P&C Commercial lines operations and special adviser to Thomas Buberl, AXA Group CEO, to advise on integration-related and other strategic matters. The transaction was approved by XL Group’s shareholders on June 6, 2018, and remains subject to customary closing conditions, including the receipt of required regulatory approvals, and is expected to take place during the second half of 2018. As noted below under “AXA successfully completed the IPO of AXA Equitable Holdings, Inc. and secured the financing of the acquisition of XL Group”, the external financing of the XL Group acquisition has been completed. (1) Includes P&C Commercial lines and P&C Commercial Health for comparability purposes with peers. (2) Includes P&C Health for comparability purposes with peers. (3)NYSE listing of AXA Equitable Holdings, Inc., consisting of the AXA US Life & Savings business and the AXA Group’s interest in AllianceBernstein LP and AllianceBernstein Holding LP (“AB”). AXA America Corporate Solutions Inc. was not part of the IPO. Half Year 2018 Financial Report 10 Significant Disposals AXA TO SELL ITS OPERATIONS IN AZERBAIJAN On February 21, 2018, AXA announced it had entered into an agreement with Mr. Elkhan Garibli to sell all its insurance operations in Azerbaijan. Under the terms of the agreement, Mr. Elkhan Garibli would acquire 100% of the non-life entity (AXA MBask Insurance Company OJSC). The parties agreed not to disclose the terms and conditions of the transaction. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals. Partnerships and Innovation UBER AND AXA JOINED FORCES TO SET A NEW STANDARD FOR PROTECTION OF INDEPENDENT DRIVERS AND COURIERS Uber and AXA shared the belief that everyone, including independent workers, should have the option of benefitting from optimum protection for themselves and their families. On May 23, 2018, going beyond their successful 2017 partnership, Uber and AXA announced the expansion of benefits to all Uber’s independent partner drivers and couriers within Europe. Since June 1, 2018, Uber provides Partner Protection - a range of protections including accident, injury, illness, and paternity benefits for drivers and couriers when they are on and off the Uber app in European markets. Uber’s Partner Protection is funded by Uber at no cost to all eligible drivers and courier partners. Uber and AXA also announced the signing of a memorandum of understanding to build a joint affinity marketplace for independent workers. The aim was to empower partner drivers and couriers to be able to maintain their independent lifestyle in full security. Through a digital platform, Uber and AXA expect to propose a full set of personalized offers tailored to the different profiles and needs of each partner driver or courier, notably including injury protection, income protection, family protection, health covers, retirement, savings. This innovative platform would provide a simple seamless customer experience. ING AND AXA ANNOUNCED A DIGITAL PARTNERSHIP TO BUILD A GLOBAL INSURANCE PLATFORM On June 13, 2018, ING and AXA announced a long term and exclusive, multi-country bancassurance partnership to provide insurance products and related services through a central digital insurance platform. Under the partnership, ING will provide its leading digital banking experience and AXA its expertise in innovative modular insurance products and services, offering Property & Casualty, Health and Protection insurance solutions to ING customers in six countries - France, Germany, Italy, Czech Republic, Austria (1), and Australia (1). ING and AXA teams will together develop personalized insurance products and relevant services, accessible via the ING mobile application, that meet the forward-looking needs of ING customers towards living, mobility and wellness. (1) With the support of local insurance partners. Half Year 2018 Financial Report 11 For ING, this is a continued step towards delivering the Think Forward strategy and empowering around 13 million ING customers stay a step ahead in life. For AXA, the partnership is another step in its “Payer-to-Partner“ strategy, in growing in its preferred segments and towards its vision to empower people to live a better life. Capital / Debt operations / Other AXA RATINGS On March 7, 2018, Moody’s Investors Service affirmed the insurance financial strength rating of AXA’s principle insurance subsidiaries at ‘Aa3’, changing the outlook to negative from stable. On May 24, 2018, Fitch Ratings affirmed the financial strength rating of AXA’s core operating subsidiaries at ‘AA-’ with a stable outlook, removing the ratings from Rating Watch negative. On July 10, 2018, S&P Global Ratings affirmed the long-term financial strength rating of AXA’s core operating subsidiaries at ‘AA-’ with a stable outlook, removing the ratings from CreditWatch negative. AXA ANNOUNCED THE SUCCESSFUL PLACEMENT OF €2 BILLION DATED SUBORDINATED NOTES DUE 2049 On March 22, 2018, AXA announced the successful placement of €2 billion of Reg S subordinated notes due 2049 to institutional investors. The net proceeds of the issue of the Notes will be used for the financing of part of AXA’s acquisition of XL Group Ltd. The initial coupon has been set at 3.25% per annum. It will be fixed until the first call date in May 2029 and floating thereafter with a margin including a 100 basis points step-up. Settlement of the notes took place on March 26, 2018. The notes will be treated as capital from a regulatory and rating agencies’ perspective within applicable limits. The transaction has been structured for the notes to be eligible as Tier 2 capital under Solvency II. AXA TO TRANSFORM ITS SWISS GROUP LIFE BUSINESS, CREATING ADDITIONAL VALUE FOR ITS CUSTOMERS AND SHAREHOLDERS On April 10, 2018, AXA Switzerland (“AXA”), the largest insurer of SMEs in the Swiss market, announced that it had entered into an agreement with its main occupational benefits foundations (1) (“Foundations”) to convert their business model from a full-value insurance (2) model to a semi-autonomous model (3), by the end of 2018 (“Model Transformation”). Beginning 2019, under the semi-autonomous model, death and disability provisions and administration services will continue to be covered by AXA, while the responsibility of asset allocation and investment returns to policyholders will be with the Foundations. AXA Group, as a globally renowned asset manager, will continue to offer investment management services to the Foundations. Ongoing low interest rates in recent years and strong regulatory requirements in Switzerland have resulted in full-value insurance becoming increasingly lower value for money for corporate clients and their employees. Swiss life insurers who offer full-value insurance must maintain capital coverage for their entire pension obligations, including the minimum interest guarantees. This framework necessitates a very cautious (1) Collective group pension schemes, which are managed by an independent board. (2) Contract covering the whole offer: guaranteed savings and annuity benefits, death and disability benefits, and administration services. (3 )Contract covering death and disability benefits, and administration services. Half Year 2018 Financial Report 12 investment strategy, leading to lower investment return opportunities for its clients’ employees, as compared to the semi-autonomous model. AXA has been successfully offering new semi-autonomous solutions for some time, and which already represented around 60% of its new occupational benefits insurance business before the transformation. With the transformation, AXA will become the largest provider of semi-autonomous solutions for SMEs in Switzerland. AXA will be focused on restoring growth to occupational benefits insurance and remaining a strong partner of Swiss SMEs into the future. Financial impacts are the following: AXA will transfer most of its in-force General Account Reserves (amounting to CHF 31 billion (1) or €27 billion (2)) backing the pre-retirement savings benefits (3) in its Group Life portfolio to the Foundations. This transfer includes CHF 3.5 billion (or €3 billion (5)) of excess reserves to enable a sustainable risk carrying capacity of the Foundations (Coverage Ratio (4) of 111% as of FY17); In line with the move to a semi-autonomous model, the savings portion of the premiums will no longer appear in IFRS Gross Revenues of AXA; The Model Transformation is expected to result in a temporary reduction in AXA Group underlying earnings of ca. €20 million from 2019, and will lead to a one-time negative impact in Net income of CHF 406 million (or €347 million (5)) in the first half of 2018 linked to the transfer of the portfolio (6) to the Foundations; The reduction of guarantees on AXA’s balance sheet is expected to lead to a release of local risk capital requirement of ca. CHF 2.5 billion (or ca. €2.2 billion (1)) in 2019 and to an enhanced cash remittance to AXA Group over the next three years, subject to regulatory approvals. AXA and the responsible trustees informed the relevant Swiss supervisory authorities, i.e. the Swiss Financial Market Supervisory Authority (FINMA) and the Berufliche Vorsorge (BVG) and Foundation Supervision of the Canton of Zurich (BVS), on the Model Transformation. FINMA examined adherence of the transaction with insurance supervision requirements. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, notably by the BVS. AXA S.A. RECEIVED USD 3.2 BILLION FROM THE COMPLETION OF ITS US PRE-IPO REORGANIZATION TRANSACTIONS On April 25, 2018, AXA announced that AXA Equitable Holdings, Inc. had successfully completed its pre-IPO reorganization transactions, including the repayment of all internal loans provided by AXA Group and the purchase of AllianceBernstein units previously owned by AXA S.A. and its affiliates. Consequently, AXA S.A. received USD 3.2 billion which will contribute to the financing of the XL Group acquisition, announced on March 5, 2018. (1) Based on FY17; Market value of asset. (2) EUR 1 = CHF 1.1594 as of June 30, 2018 (source: Bloomberg). (3) In-force General Account Reserves of AXA Switzerland relating to existing annuitants will remain with AXA. (4) Coverage Ratio for Foundations = Market Value of Assets / Mandatory Reserves. (5) EUR 1 = CHF 1.1594 as of June 30, 2018 (source: Bloomberg). (6)The assets and liabilities transferred to the Foundations were classified as “held for sale“ in AXA Group’s 1H18 consolidated financial statements. Half Year 2018 Financial Report 13 AXA S.A. ANNOUNCED THE LAUNCH OF THE INITIAL PUBLIC OFFERING OF AXA EQUITABLE HOLDINGS, INC. On April 26, 2018, AXA S.A. (“AXA”) announced the launch of the initial public offering (“IPO”) of its wholly-owned subsidiary, AXA Equitable Holdings, Inc. (“AEH”) and the commencement of the roadshow for the offering. AXA, as the selling stockholder, was offering 137,250,000 shares (1) of common stock of AEH, and had granted the underwriters a 30-day option to purchase up to an additional 20,587,500 shares of common stock. The IPO price was expected to be between USD 24 and USD 27 per share. The shares were being offered by a group of underwriters led by Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, Barclays Capital Inc. and Citigroup Global Markets Inc. The shares were expected to trade on the New York Stock Exchange under the ticker symbol “EQH”. A registration statement relating to the proposed IPO had been filed by AEH with the U.S. Securities and Exchange Commission but had not yet become effective. AXA SUCCESSFULLY COMPLETED THE IPO OF AXA EQUITABLE HOLDINGS, INC. AND SECURED THE FINANCING OF THE ACQUISITION OF XL GROUP On May 14, 2018, AXA S.A. (“AXA”) announced it had successfully completed the initial public offering (“IPO”) on the New York Stock Exchange of its US subsidiary, AXA Equitable Holdings, Inc. (“AEH”). Overall proceeds amounted to USD 4.0 billion, with the sale of 24.5% of AEH’s outstanding shares at USD 20 per share and the issuance of USD 750 million of bonds mandatorily exchangeable for AEH shares, combined with the exercise of the over-allotment options granted to underwriters, resulting in the purchase by the underwriters of an additional 20.6 million AEH shares (3.7% of AEH’s outstanding shares) and USD 112.5 million mandatory exchangeable bonds (2). The financing of the acquisition of XL Group Ltd (€12.4 billion) is fully in line with the announcement on March 5, 2018: ca. €3.5 billion from cash available at hand, €2.6 billion (3) related to the pre-IPO reorganization transactions, €3.3 billion (3) overall proceeds (4) from the IPO, and the €2 billion dated subordinated debt (out of the total planned €3 billion). Given additional existing resources, AXA considers the financing of XL Group is now secured, as it is not dependent on the issuance of any additional debt. The details of the overall proceeds from the AEH share transactions are the following: Sale of AEH shares: o AXA sold 137.25 million AEH shares at USD 20 per share, o Represents 24.5% of total issued and outstanding AEH shares, o Amounts to USD 2.75 billion or €2.23 billion (3) of proceeds; Issuance of bonds mandatorily exchangeable into AEH shares: o Issuance of USD 0.75 billion, or €0.61 billion (3), mandatory exchangeable bonds, (1) Out of 561,000,000 total common shares. (2) The mandatory exchangeable bonds (including the exercise of the over-allotment option) will be exchanged at maturity into a minimum of 6.5% of AEH’s outstanding shares (subject to anti-dilution adjustments) if the AEH share price is greater than or equal to USD 23.50 per share, and a maximum of 7.7% of AEH’s outstanding shares (subject to anti-dilution adjustments) if the AEH share price does not exceed the IPO price. (3) EUR 1 = USD 1.23 as of March 2, 2018 (source: Bloomberg), as announced at the time of the acquisition of XL Group Ltd on March 5, 2018. (4)Overall proceeds include all AEH share transactions: the sale of AEH shares, the issuance of bonds mandatorily exchangeable into AEH shares, and the exercise of the over-allotment options by the underwriters. Before fees and expenses of the offerings. Half Year 2018 Financial Report 14 o The bonds will mature on May 15, 2021, unless exchanged earlier at the option of AXA (1) (2), o Mostly treated as shareholders’ equity, with negligible impact on debt and debt gearing; Exercise in full of the 30-day over-allotment options granted by AXA to the underwriters: o Underwriters exercised their options to purchase 20,587,500 shares of AEH at USD 20 per share and to purchase USD 112.5 million of mandatory exchangeable bonds, both effective as of May 11, 2018, o USD 0.52 billion or €0.43 billion (3) of additional IPO proceeds; Overall proceeds (4) of USD 4.02 billion or €3.26 billion (3). Financial guidance reiterated: FY18E debt gearing at ca. 32% (or lower if remaining debt issuance is below the level originally planned); and below 28% by FY20E; FY18E Solvency II ratio between 190% and 200%; Earnings dilution from the US IPO in FY18 expected to be neutralized by the integration of XL Group (5). The impact of the IPO on our Group consolidated shareholders’ equity was €-2.1 billion, which is the difference between the net proceeds to AXA Group and the consolidated book value of the divested AEH stake. Following the IPO, AXA Group’s ownership in AEH was reduced to 71.9% as of June 30, 2018. AEH remains fully consolidated in the AXA Group’s financial statements. The IPO resulted in a minority interest in shareholders’ equity of €+4.7 billion. Any further potential divestment of our equity participation in AEH would be subject to financial markets volatility and other market-related risks, which may also impact the consolidated value of our remaining stake in AEH and adversely impact our consolidated results of operations and AXA share price. For additional information on the accounting-related impacts of the AEH IPO, see Note 4.1 of Part II Consolidated financial statements of this report. AXA AND XL GROUP ANNOUNCED FUTURE BRANDING On July 11, 2018, following the announcement of the acquisition of XL Group Ltd by AXA SA on March 5, 2018, the two companies presented a new step in the planning process for combining XL Group operations, AXA Corporate Solutions and AXA Art into the new division of the AXA Group dedicated to large P&C commercial lines and specialty risks following closing of the acquisition. This new division will be named AXA XL and will operate under the master brand AXA. Its offerings will be identified along three main lines: (1) Or upon the occurrence of certain events. (2)The mandatory exchangeable bonds (including the exercise of the over-allotment option) will be exchanged at maturity into a minimum of 6.5% of AEH’s outstanding shares (subject to anti-dilution adjustments) if the AEH share price is greater than or equal to USD 23.50 per share, and a maximum of 7.7% of AEH’s outstanding shares (subject to anti-dilution adjustments) if the AEH share price does not exceed the IPO price. (3) EUR 1 = USD 1.23 as of March 2, 2018 (source: Bloomberg), as announced at the time of the acquisition of XL Group Ltd on March 5, 2018. (4) Overall proceeds include all AEH share transactions: the sale of AEH shares, the issuance of bonds mandatorily exchangeable into AEH shares, and the exercise of the over-allotment options by the underwriters. Before fees and expenses of the offerings. (5) Assuming an expected closing end of 3Q18. Half Year 2018 Financial Report 15 XL Insurance - which will comprise XL Group’s insurance business and AXA Corporate Solutions, and will include XL Art & Lifestyle, the combination of XL Group’s Fine Art and Specie business and AXA Art offerings; XL Reinsurance - that will incorporate XL Group’s reinsurance business; XL Risk Consulting - that will incorporate AXA Matrix and XL Group’s Property Risk Engineering GAPS. In addition, XL Group’s primary Lloyd’s syndicate will continue to be known as XL Catlin Syndicate 2003. Under the AXA brand, the new offerings will present an exciting new proposition to clients and brokers around the world. This new branding and naming follows the announcement on June 6, 2018, that XL Group’s shareholders approved the agreement under which AXA is to acquire 100% of XL Group. The closing of the acquisition is expected to take place completed during the second half of 2018, subject to customary closing conditions, including the receipt of required regulatory approvals, which remain pending. Until the acquisition closes, XL Group and AXA remain two separate companies. Risk Factors The principal risks and uncertainties faced by the Group are described in detail in Section 4.1 "Risk Factors" and Section 6.3 “General Information” of the 2017 Registration Document (respectively on pages 142 to 154 and pages 349 to 359), with the exception of the paragraph “US Department of Labor Fiduciary Duty rule” (on page 353 of the 2017 Registration Document) which is hereby explicitly excluded from the scope of incorporation to this report, as the fiduciary rule issued by the US Department of Labor on April 6, 2016, was vacated by a decision of a US federal appeals court on March 15, 2018, which subsequently became final on June 21, 2018. The 2017 Registration Document was filed with the Autorité des marchés financiers and is available on its website (www.amf-france.org) as well as on AXA's website (www.axa.com). The descriptions contained in these sections of the 2017 Registration Document, with the above mentioned exception, remain valid in all material respects at the date of the publication of this report regarding the appreciation of the major risks and uncertainties affecting the Group on June 30, 2018, or which Management expects could affect the Group during the remainder of 2018. Related-Party Transactions During the first semester 2018, there were (1) no modifications to the related-party transactions described in Note 28 "Related-party transactions" of the audited consolidated financial statements for the fiscal year ended December 31, 2017, included in the full year 2017 Registration Document (pages 323 and 324) filed with the Autorité des marchés financiers and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com), which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2018, and (2) no new transaction concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2018. Half Year 2018 Financial Report 16 Events subsequent to June 30, 2018 AXA ENTERS INTO EXCLUSIVITY FOR THE POTENTIAL DISPOSAL OF ITS EUROPEAN VARIABLE ANNUITIES CARRIER, WITH EXPECTED TOTAL CASH PROCEEDS OF €1.2 BILLION On August 1, 2018, AXA announced that it has received an irrevocable offer from Cinven for the potential sale of AXA Life Europe (“ALE”), a specialized platform which designed, manufactured and distributed AXA’s Variable Annuity products across Europe. The total cash proceeds generated for AXA Group would be €1,165 million, which includes €925 million (representing an implied 1.0x BV multiple (1)) from the potential sale of ALE shares to be fully paid in cash at closing, and a capital distribution from ALE to AXA S.A. of €240 million, prior to the transaction, in June 2018. The corresponding assets and liabilities of ca. €5 billion (mostly insurance liabilities from the German Variable Annuities book and financial assets backing these contacts) will be reclassified to held for sale in the balance sheet. Based in Dublin with over 60 employees, ALE delivers strong financial risk management capabilities and manages a portfolio of ca. 248,000 insurance contracts with ca. €5 billion reserves (2). It distributed products across Europe through the networks of AXA entities (namely Germany, France, UK, Spain, Italy, and Portugal (3)) and third-party distribution channels, and has a reinsurance arrangement with AXA Japan. ALE has been closed to new business since 2017. The German insurance contracts account for more than 70% of ALE’s portfolio (4), and the policy administration services for these contracts will continue to be provided by AXA Germany. This transaction is expected to result in a positive impact on AXA Group Solvency II ratio of ca. 2 points. The Underlying Earnings (UE) generated from the business under consideration were €19 million in FY17. The proposed transaction is subject to customary conditions, including completing the information and consultation of the relevant works councils as well as obtaining required regulatory approvals, and is expected to be finalized by the end of 2018 or early 2019. (1) Excluding Other Comprehensive Income. (2) IFRS Reserves as of FY17. (3) AXA Portugal was sold to Ageas in 2016. (4) In terms of reserves. Half Year 2018 Financial Report 17 ACTIVITY INDICATORS (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) June 30, 2018 / June 30, 2017 restated (b) & (c) December 31, 2017 Gross revenues (a) 53,600 54,283 3.1% 98,549 France 13,004 12,004 7.5% 24,475 Europe 21,747 21,784 3.0% 35,992 Asia 4,339 4,598 3.4% 8,985 United States 7,923 9,081 (2.5%) 16,911 International 3,419 3,732 2.9% 7,034 Transversal & Central Holdings 3,168 3,085 2.5% 5,152 APE (d) 3,387 3,330 8.1% 6,470 France 1,041 891 18.7% 1,849 Europe 640 560 6.0% 1,034 Asia 763 797 4.1% 1,510 United States 821 953 3.7% 1,799 International 123 129 0.2% 278 Transversal & Central Holdings 0.0% NBV Margin (e) 41.0% 42.9% (1.7 pts) 43.1% (a) Net of intercompany eliminations. (b) Restated: as per the new governance. (c) Changes are on comparable basis. (d) Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (e) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. Consolidated gross revenues amounted to €53,600 million as at June 30, 2018, down 1% on a reported basis and up 3% on a comparable basis, compared to June 30, 2017. The comparable basis mainly consisted in the adjustment of the foreign exchange rate movements (€+2.3 billion or +4.3 points) mainly due to the appreciation of average Euro exchange rate against USD, CHF and HKD. Since Full Year 2017, AXA has introduced Health as a separate line of business for activity and underlying earnings indicators. Unless otherwise specified, Life & Savings and Property & Casualty lines of business therefore exclude the Health business. Half Year 2018 Financial Report 18 Gross revenues Gross revenues were down 1% on a reported basis and up 3% on a comparable basis to €53,600 million. The growth in France, Europe, Asia and Transversal & Central Holdings, was partly offset by a slowdown in the United States. France gross revenues were up 8% (€+908 million) to €13,004 million on a comparable basis with growth in (i) Life & Savings (€+599 million or +10%) mainly driven by Individual Savings due to strong sales of both capital light products sold through the bancassurance channel and discretionary mandates through proprietary channel, (ii) Health (€+241 million or +12%) mainly driven by higher volumes in Group business in both international and domestic markets, and (iii) Other (€+56 million) driven by AXA Banque France mainly due to a favorable change in the fair value of an internal interest rate swap with AXA Bank Belgium (neutral at Group level) used to hedge loans granted by AXA Banque France, and (iv) Property & Casualty (€+13 million or 0%) driven by growth in Commercial lines partly offset by lower volumes in Personal lines. Europe gross revenues were up 3% (or €+649 million) to €21,747 million on a comparable basis: Switzerland (€-4 million or 0%) to €7,194 million mainly from (i) Life & Savings due to the decrease of single premiums, partly offset by (ii) Property & Casualty with Commercial lines due to higher volumes and tariff increases in Workers’ Compensation; Germany (€+60 million or +1%) to €5,934 million mainly from (i) Property & Casualty driven by Personal lines due to new business in Motor and tariff increases in Non-Motor, and (ii) Health due to tariff increases, partly offset by (iii) Life & Savings from the decrease in G/A Savings and Protection with Savings; Belgium (€+29 million or +2%) to €1,754 million from (i) Life & Savings mainly driven by Protection notably from Group business as a result of favorable timing effects, and (ii) Health due to new large contracts in Group business; The United Kingdom & Ireland (€+43 million or +2%) to €2,762 million from (i) Health mainly driven by volume growth and tariff increases, and (ii) Property & Casualty mainly driven by Commercial lines in Motor due to both higher new business and tariff increases and in Property due to new business, partly offset by Personal Property mainly reflecting lower volumes following tariff increases; Spain (€+22 million or +2%) to €1,284 million mainly from (i) Property & Casualty driven by both Commercial lines and Personal Motor from higher volumes and tariff increases, and (ii) Health mainly in Personal lines; Italy (€+499 million or +21%) to €2,820 million mainly from (i) Life & Savings due to the strong recovery in sales from Banca Monte dei Paschi di Siena combined with a higher commercial focus on Unit-Linked and Protection products, and (ii) Property & Casualty driven by higher new business both in Personal and Commercial lines. Asia gross revenues were up 3% (or €+154 million) to €4,339 million on a comparable basis, mainly from: Japan (€+62 million or +3%) to €2,309 million from Life & Savings driven by the success of Follow-up Life Protection product launched in 1Q18, partly offset by continued lower business growth from the G/A capital light Single Premium Whole Life product; Hong Kong (€+118 million or +8%) to €1,475 million from (i) Life & Savings from Protection driven by in- force growth and G/A Savings due to both new business sales and in-force growth, and (ii) Health mainly driven by higher volumes combined with tariff increases in both Individual and Group businesses; Asia - Direct (€-20 million or -4%) to €478 million mainly in South Korea (€-15 million or -5%) from Motor following the decision to re-price unprofitable business. Half Year 2018 Financial Report 19 The United States gross revenues were down 3% (or €-229 million) to €7,923 million on a comparable basis: The United States Life & Savings (€-371 million or -5%) to €6,602 million mainly in Unit-Linked primarily due to the non-repeat of 1H17 strong sales of non-GMxB Variable Annuities in anticipation of the implementation of the US Department of Labor rule; AB (€+142 million or +11%) to €1,321 million due to both higher average AUM and higher average management fee bps, higher performance fees, and higher distribution fees mainly due to higher average AUM in retail mutual funds. International gross revenues were up 3% (or €+103 million) to €3,419 million on a comparable basis, mainly from: Mexico (€+100 million or +12%) to €841 million mainly driven by Health due to higher revenues stemming from volume and tariff increases and Property & Casualty with higher new business in Motor; The Gulf Region (€-23 million or -4%) to €444 million mainly driven by a reduction of the size of a large Commercial Motor fleet; Colombia (€+23 million or +7%) to €337 million mainly driven by new business in Personal Accident, Workers’ Compensation and Personal Motor; Poland (€+27 million or +10%) to €311 million mainly due to new business in Motor and Commercial lines Non-Motor; Turkey (€+38 million or +11%) to €303 million mainly driven by an increase in Motor Third Party Liability from the insurance pool introduced by the government in September 2017; AXA Bank Belgium (€-62 million or -32%) to €132 million mainly due to an unfavorable change in the fair value of an internal interest rate swap (neutral at Group level) used to hedge loans granted by AXA Banque France, lower realized capital gains and lower commercial margin. Transversal & Central Holdings gross revenues were up 2% (or €+77 million) to €3,168 million on a comparable basis, mainly from: AXA Assistance (€+43 million or +7%) to €680 million mainly driven by Property & Casualty from higher volumes in Non-Motor mainly in Home and Travel, as well as in Motor; AXA Investment Managers (€+33 million or +5%) to €631 million driven by higher performance fees including realized carried interest, management fees and transaction fees. Half Year 2018 Financial Report 20 New business Annual Premium Equivalent (1) New business APE was up 2% on a reported basis and up 8% on a comparable basis to €3,387 million. All markets recorded growth. France (€1,041 million, 31% of total) up €164 million (+19%) on a comparable basis mainly driven by Group Health (€+134 million) and Individual Savings (€+47 million), partly offset by Group Savings (€-22 million). Europe (€640 million, 19% of total) up €37 million (+6%) on a comparable basis mainly from (i) Switzerland (€+32 million) due to higher sales in Group Life semi-autonomous and autonomous businesses, and (ii) Italy (€+29 million) in all lines of product driven by the strong recovery in sales from Banca Monte dei Paschi di Siena combined with a commercial focus on Unit-Linked products, partly offset by (iii) Germany (€-23 million) mainly due to lower new business in Health. Asia (€763 million, 23% of total) up €33 million (+4%) on a comparable basis mainly from (i) Japan (€+69 million) driven by Protection mainly due to the success of Follow-up Life product launched in 1Q18, (ii) Hong Kong (€+8 million) stemming from higher sales in G/A Savings mainly due to the successful launch of a new product in 1Q18 and Health, partly offset by lower sales in Protection, and (iii) The Philippines (€+7 million) driven by the strong performance in both bancassurance and agency channels, partly offset by (iv) China (€-51 million) due to lower sales of traditional G/A Savings products. The United States (€821 million, 24% of total) up €33 million (+4%) on a comparable basis mainly from Mutual Funds & Other (€+37 million) reflecting higher advisory sales from favorable market conditions and Protection following higher sales in employee benefits products, partly offset by Unit-Linked primarily due to the non- repeat of 1H17 strong sales of non-GMxB Variable Annuities in anticipation of the implementation of the US Department of Labor rule, partly mitigated by growth in Group Retirement. International (€123 million, 4% of total) remained stable on a comparable basis mainly from India (€+9 million) notably in Protection, partly offset by Singapore (€-4 million) mainly driven by lower G/A Savings sales, as well as Poland (€-2 million) and Turkey (€-2 million) both mainly due to lower Unit-Linked sales. New Business Value Margin (2) New Business Value Margin stood at 41.0%, decreasing by 1.9 points. On a comparable basis, New Business Value Margin decreased by 1.7 points mainly driven by higher sales in Group Health in France and increased volume in G/A Savings and redesigning of Protection product in Hong Kong, partly offset by a favorable business mix in China. (1) New business Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (2) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. Half Year 2018 Financial Report 21 UNDERLYING EARNINGS, ADJUSTED EARNINGS AND NET INCOME GROUP SHARE (in Euro million, except percentages) June 30, 2018 France Europe Asia United States Investment margin 2,341 825 920 19 256 Fees & revenues 4,101 966 573 991 1,394 Net technical margin 6,306 1,488 3,138 407 (123) Expenses (8,430) (2,149) (2,962) (812) (1,029) Amortization of value of purchased life business inforce (34) (21) (11) (0) Underlying earnings before tax from insurance activities 4,284 1,130 1,648 594 497 Underlying earnings before tax from other activities 36 0 40 (2) 252 Income tax expenses / benefits (938) (325) (380) (112) (136) Income from affiliates and associates 139 14 1 67 Minority interests (223) (2) (39) (4) (149) Underlying earnings Group share 3,298 816 1,271 544 465 Net capital gains or losses attributable to shareholders net of income tax 330 76 231 (8) 3 Adjusted earnings Group share 3,628 892 1,502 536 467 Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) (346) (361) (68) 48 (65) (340) (22) (6) (59) (19) Goodwill and other related intangible impacts (36) (19) (8) (0) Integration and restructuring costs (89) (9) (24) (13) (27) NET INCOME GROUP SHARE 2,796 863 1,054 487 363 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 95.0% 94.9% 96.2% 93.7% 98.7% 94.7% 93.9% 96.2% 97.6% 96.5% 77.7% 86.0% 150.1% 108.3% Half Year 2018 Financial Report International 189 171 726 (880) (1) 205 26 (43) 47 (25) 210 (1) 209 14 (20) (8) (5) 190 100.1% 99.3% 100.2% Transversal & Central Holdings 132 7 669 (598) 210 (281) 57 10 (5) (7) 29 22 (146) (25) (0) (12) (162) 96.2% 102.1% - 22 (in Euro million, except percentages) Investment margin Fees & revenues Net technical margin Expenses Amortization of value of purchased life business inforce Underlying earnings before tax from insurance activities Underlying earnings before tax from other activities Income tax expenses / benefits Income from affiliates and associates Minority interests Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio (a) Restated: as per the new governance. June 30, 2017 restated (a) France Europe 2,439 3,995 819 929 973 565 5,978 (8,322) 1,447 (2,146) 3,058 (2,959) (27) (14) 4,063 1,048 1,624 (9) (8) 14 (858) 144 (298) 9 (414) 3 (170) (2) (42) 3,171 749 1,185 307 129 167 3,478 878 1,351 (154) (10) (63) 39 (0) (4) (44) (51) (10) (22) (6) 3,268 858 1,257 95.7% 95.1% 96.8% 94.3% 98.0% 93.6% 94.4% 97.4% 97.6% Half Year 2018 Financial Report Asia 17 1,005 376 (766) (11) 621 0 (131) 90 (4) 576 4 580 (12) (0) (8) (0) 560 97.5% 78.6% 85.4% United States 297 1,307 (254) (964) (0) 385 213 65 - (99) 565 (13) 552 70 (0) (9) 613 144.2% 114.8% International 204 183 727 (904) (2) 208 43 (47) 34 (19) 218 2 220 (15) (10) (13) (10) 172 100.4% 102.3% 98.3% Transversal & Central Holdings 129 6 625 (583) 177 (271) (33) 9 (4) (121) 18 (103) (125) 53 (1) (16) (191) 98.2% 91.1% - 23 (in Euro million, except percentages) December 31, 2017 France Europe Asia United States International Transversal & Central Holdings Investment margin 4,647 1,640 1,813 35 543 375 241 Fees & revenues 8,123 2,001 1,158 1,948 2,583 420 14 Net technical margin 11,904 2,909 6,175 768 (424) 1,396 1,080 Expenses (16,873) (4,531) (5,940) (1,550) (1,864) (1,859) (1,128) Amortization of value of purchased life business inforce (42) (25) (13) (1) (3) Underlying earnings before tax from insurance activities 7,758 2,018 3,180 1,187 836 330 207 Underlying earnings before tax from other activities (2) (7) 24 (0) 556 49 (623) Income tax expenses / benefits (1,665) (598) (807) (257) (7) (91) 95 Income from affiliates and associates 297 20 7 166 86 18 Minority interests (387) (5) (78) (7) (250) (37) (10) Underlying earnings Group share 6,002 1,429 2,326 1,089 1,135 337 (313) Net capital gains or losses attributable to shareholders net of income tax 455 237 237 23 (60) (7) 26 Adjusted earnings Group share 6,457 1,666 2,563 1,111 1,075 330 (288) Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) (134) 124 31 (252) (2) (57) (59) (0) 96 268 11 (22) (211) 187 Goodwill and other related intangible impacts Integration and restructuring costs (90) (148) (25) (44) (25) (16) (9) (2) (21) (27) (16) (1) (53) NET INCOME GROUP SHARE 6,209 1,420 2,435 1,028 1,415 276 (365) Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 96.3% 94.7% 96.9% 94.6% 98.7% 95.6% 94.6% 96.1% 97.0% 97.6% 78.3% 86.7% 146.9% 112.7% 101.4% 101.6% 98.4% 101.1% 87.1% - ALTERNATIVE PERFORMANCE MEASURES Adjusted earnings, Underlying earnings and Adjusted Return on Equity are Alternative Performance Measures as defined in ESMA’s guidelines issued in 2015. A reconciliation from non-GAAP financial measures Underlying Earnings and Adjusted Earnings to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided in the above tables. Adjusted Return on Equity is reconciled to the financial statements in the table set forth on page 30 of this report. Adjusted Earnings Adjusted Earnings represent the net income (Group share) as disclosed in Part 2 - “Consolidated Financial Statements” of this Report, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: integration and restructuring costs related to material newly-acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill and other related intangibles; exceptional operations (primarily changes in scope and discontinued operations); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Half Year 2018 Financial Report 24 Underlying Earnings Underlying Earnings correspond to adjusted earnings without the following elements net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowance (on assets not designated under fair value option or trading assets); and cost at inception, intrinsic value and pay-off of derivatives involved in the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds. Adjusted Return on Equity The Adjusted Return on Equity (“Adjusted RoE”) is calculated as adjusted earnings net of financial charges related to both undated subordinated debt and mandatory exchangeable bonds (recorded through shareholders’ equity as disclosed in Part 2.4 - “Consolidated Statement of Changes in Equity” and financial debt as disclosed in Note 8 “Financing Debt” of this Report) divided by the weighted average shareholders’ equity. The weighted average shareholders’ equity: is based on opening shareholders’ equity adjusted for weighted average impact of capital flows (including dividends); without reserves relating to the change in the fair value of financial investments available for sale as disclosed in Part 2.4 - “Consolidated Statement of Changes in Equity” of this Report; without undated subordinated debt and mandatory exchangeable bonds as disclosed in Part 2 - “Note 7 Shareholders’ Equity and Minority Interests” of this Report and mandatory exchangeable bonds as disclosed in Note 8 “Financing Debt” of this Report. For further information on those indicators, see the Glossary of this report. Half Year 2018 Financial Report 25 COMMENTARIES ON GROUP EARNINGS Underlying earnings Underlying earnings amounted to €3,298 million, up €128 million (+4%) versus 1H17 on a reported basis. On a constant exchange rate basis, underlying earnings increased by €290 million (+9%) supported by all geographies. On a constant exchange rate basis, underlying earnings before tax from insurance activities increased by €400 million (+10%) to €4,284 million: Lower investment margin (€-27 million or -1%) primarily in Europe (€-37 million) from Switzerland (€- 32 million) mainly due to lower income from fixed income assets, partly offset by International (€+9 million) mainly in Turkey (€+8 million) stemming from both higher interest rates and average asset base; Higher fees & revenues (€+385 million or +10%) primarily from higher Unit-Linked management fees (€+187 million). The overall fees & revenues growth was mainly driven by (i) the United States Life & Savings (€+251 million) mainly from higher Unit-Linked management fees reflecting higher average balances from favorable equity markets combined with unlocking and reactivity impacts of model and assumption changes (fully offset by Deferred Acquisition Costs), (ii) Asia (€+82 million) mainly in Hong Kong (€+51 million) following positive equity market performance notably in 2H17 and Japan (€+29 million) mainly due to in-force growth and new business, and (iii) France (€+38 million) due to higher Unit-Linked management fees reflecting a higher asset base; Higher net technical margin (€+493 million or +8%) driven by (i) Europe (€+155 million) from Property & Casualty (€+78 million) driven by an improved all year loss ratio (-0.5 point) due to a more favorable prior year reserve development mainly in Germany, the United Kingdom & Ireland, Belgium and Spain, combined with an improved claims experience, partly offset by a higher natural event charge (+1.4 points), Health (€+32 million) in the United Kingdom & Ireland (€+33 million) mainly due to claims management measures, and Life & Savings (€+45 million) in Switzerland (€+45 million) mainly due to a favorable development of both the disability and mortality margins from lower policyholder bonus allocation, (ii) the United States Life & Savings (€+116 million) mainly due to higher GMxB margin and the non-repeat of 1H17 unfavorable mortality model updates, partly offset by a less favorable mortality experience, (iii) Asia (€+69 million) mainly in Hong Kong (€+30 million) and Japan (€+20 million) both mainly due to a higher surrender margin, (iv) International (€+56 million) mainly in Mexico (€+22 million) and the Gulf Region (€+17 million) reflecting management actions to improve the net technical margin, (v) Transversal & Central Holdings (€+50 million) mainly driven by a favorable prior year reserve development at AXA Global Re (€+57 million) partly offset by AXA Corporate Solutions Assurance (€-22 million), and (vi) France (€+46 million) primarily from Property & Casualty (€+31 million) despite a higher natural event charge (+1.5 points); Higher expenses (€-442 million or +5%) primarily in (i) the United States (€-186 million) mainly from higher Deferred Acquisition Cost amortization due to both unlocking and reactivity impacts of model and assumption changes (partly offset in Fees & Revenues), (ii) Asia (€-123 million) primarily in Hong Kong (€-72 million) mainly due to higher Deferred Acquisition Cost amortization and Japan (€-39 million) mainly due to volume growth combined with a negative timing difference of non-payroll expenses, and (iii) Europe (€-61 million) primarily in the United Kingdom & Ireland (€-30 million) from investments in transformation programs, Switzerland (€-15 million) driven by volume growth in Property & Casualty, as well as costs related to the transformation of the in-force Group Life business model to a semi-autonomous model, regulatory projects and to the launch of the Health business, and Half Year 2018 Financial Report 26 Germany (€-12 million) driven by higher Deferred Acquisition Cost amortization from unfavorable change in interest rate assumptions; Higher VBI amortization (€-9 million or +32%) primarily in Europe (€-8 million) mainly in Switzerland mainly due to the non-repeat of the positive impact from interest rate assumption updates in 1H17. On a constant exchange rate basis, underlying earnings before tax from other activities increased by €79 million to €36 million: Europe (€+26 million) mainly driven by an exceptional distribution from an investment fund in Germany Holdings; The United States (€+69 million or +32%) primarily from AB mainly due to higher revenues and lower expenses from the non-repeat of 1H17 one-off charges linked to the reduction of real estate footprint (€+36 million) and efficiency initiatives; International (€-17 million or -40%) mainly due to the decrease in gross revenues, partly offset by lower expenses at AXA Bank Belgium; Transversal & Central Holdings (€-5 million or -2%), mainly from: o AXA SA (€-25 million or -6%) mainly driven by higher financial charges in the context of the acquisition of XL Group, o AXA Investment Managers (€+13 million or +7%) as a result of higher gross revenues, partly offset by higher general expenses mainly due to regulatory costs (mainly driven by MIFID 2 regulation). On a constant exchange rate basis, income tax expenses increased by €120 million (+14%) to €-938 million driven by higher pre-tax underlying earnings across geographies combined with the non-repeat of positive tax settlements in 1H17 in the United States Life & Savings (€204 million), partly offset by the impact of the removal of the 3% tax on dividends paid to shareholders in 1H17 at AXA SA. On a constant exchange rate basis, income from affiliates & associates increased by €5 million (+3%) to €139 million mainly driven by an improved net technical margin at Reso, partly offset by unfavorable assumption updates in Thailand. On a constant exchange rate basis, minority interests increased by €74 million (+44%) to €-223 million mainly driven by the decrease in AXA Group average ownership over the period in (i) the United States Life & Savings from 100% on June 30, 2017, to 92.7% on June 30, 2018, and (ii) AB from 64.6% on June 30, 2017, to 60.0% on June 30, 2018, in the context of the IPO of AXA Equitable Holdings, Inc. completed in May 2018. On a constant exchange rate basis, the Property & Casualty combined ratio improved by 0.8 point to 95.0% as the negative impact from a higher natural event charge (+1.1 points) notably in France, Germany, Belgium and the United Kingdom & Ireland, was more than offset by a better claims experience mainly in France, Belgium and the United Kingdom & Ireland as well as a more favorable prior year reserve development (-2.1 points compared to -0.8 point in 1H17). On a constant exchange rate basis, the Health combined ratio improved by 0.3 point to 94.9% driven by an improved loss ratio mainly in the United Kingdom & Ireland due to claims management measures and tariff increases in corporate business, partly offset by a deteriorated expense ratio mainly from France. On a constant exchange rate basis, the Protection combined ratio improved by 0.6 point to 96.2% mainly driven by an improved loss ratio mainly in the United States Life & Savings and in Asia, partly offset by higher acquisition expenses primarily in Asia and in Europe, in line with business growth. Half Year 2018 Financial Report 27 Adjusted earnings to Net income Net realized capital gains and losses attributable to shareholders amounted to €330 million. On a constant exchange rate basis, net realized capital gains and losses attributable to shareholders increased by €26 million due to: €+38 million higher net realized capital gains to €+447 million mainly driven by equity securities (€+203 million to €+318 million) and fixed income assets (€+29 million to €-6 million), partly offset by alternative investments (€-153 million to €+34 million) and real estate (€-42 million to €+101 million); €-12 million higher impairments to €-76 million mainly driven by equity securities (€-22 million) and alternative investments (€-8 million), partly offset by real estate (€+11 million) and fixed income assets (€+8 million); stable unfavorable change in intrinsic value at €-41 million related to equity hedging derivatives. As a result, adjusted earnings amounted to €3,628 million, up €151 million (+4%). On a constant exchange rate basis, adjusted earnings increased by €317 million (+9%). Net income amounted to €2,796 million, down €472 million (-14%). On a constant exchange rate basis, net income decreased by €356 million (-11%) mainly from: higher adjusted earnings (€+317 million); more than offset by: higher impact from exceptional and discontinued operations (€-440 million) to €-361 million mainly due to: o the one-time negative impact linked to the transformation of the in-force Group Life business model to a semi-autonomous model in Switzerland (€-347 million), o negative impacts related to the IPO of AXA Equitable Holdings, Inc. (€-97 million), partly offset by: o the one-off benefit from the upcoming reimbursement of the tax paid on dividends received from European subsidiaries held for more than 95% following the decision from the European Court of Justice (€+71 million) at AXA SA; a more unfavorable change in the fair value of financial assets and derivatives net of foreign exchange impacts, down €194 million to €-346 million driven by: o the change in the fair value of assets accounted for under fair value option driven by mutual funds, down €237 million to €-110 million, o the change in the fair value of interest rates and credit derivatives not eligible for hedge accounting under IAS 39, down €150 million to €-245 million driven by hedging costs, partly offset by: o the favorable change in the fair value of foreign exchange derivatives not eligible for hedge accounting under IAS 39 net of foreign exchange rate movements on assets and liabilities denominated in foreign currencies, up €193 million to €+9 million; higher integration and restructuring costs (€-43 million) to €-89 million mainly in the United States in the context of the IPO of AXA Equitable Holdings, Inc. completed in May 2018 and in Spain. Half Year 2018 Financial Report 28 SHAREHOLDERS’ EQUITY GROUP SHARE As of June 30, 2018, Shareholders' Equity Group share totaled €66.0 billion. The movements in Shareholders' Equity Group share since December 31, 2017, are presented in the table below: (in Euro million) Shareholders' Equity Group share At December 31, 2017 69,611 Share Capital (4) Capital in excess of nominal value (50) Equity-share based compensation 16 Treasury shares sold or bought in open market 29 Change in equity component of compound financial instruments Deeply subordinated debt (including accumulated interests charges) (110) Fair value recorded in shareholders' equity (2,413) Impact of currency fluctuations 908 Payment of N-1 dividend (2,998) Other (2,480) Net income for the period 2,796 Actuarial gains and losses on pension benefits 641 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk 13 At June 30, 2018 65,959 Half Year 2018 Financial Report 29 SHAREHOLDER VALUE Earnings per share (“EPS”) June 30, 2018 June 30, 2017 June 30, 2018 / June 30, 2017 (in Euro except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,383 2,388 2,411 2,419 Net income (Euro per Ordinary Share) 1.13 1.12 1.31 1.30 (13.9%) (13.8%) Adjusted earnings (Euro per Ordinary Share) 1.47 1.47 1.39 1.39 5.8% 5.9% Underlying earnings (Euro per Ordinary Share) 1.34 1.33 1.27 1.26 5.5% 5.6% Return On Equity (“ROE”) (in Euro million) June 30, 2018 June 30, 2017 June 30, 2018 / June 30, 2017 ROE Net income Average shareholders' equity Adjusted ROE Adjusted earnings (a) Average shareholders' equity (b) Underlying ROE Underlying earnings (a) Average shareholders' equity (b) 8.3% 2,796 67,476 15.6% 3,513 45,142 14.1% 3,183 45,142 9.5% 3,268 68,472 14.7% 3,361 45,782 13.3% 3,054 45,782 (1.3 pt) 0.9 pt 0.8 pt (a) Including an adjustment to reflect net financial charges related to undated debt (recorded through shareholders' equity) and equity component of bonds Mandatorily Exchangeable into shares of AXA Equitable Holdings, Inc. (b) Excluding fair value of invested assets and derivatives and undated debt (both recorded through shareholders' equity). Half Year 2018 Financial Report 30 SEGMENT INFORMATION France (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 13,004 12,004 24,475 Life & Savings 6,745 6,129 13,151 Property & Casualty 4,002 3,967 7,307 Health 2,175 1,882 3,877 Other (c) 82 26 139 New business APE 1,041 891 1,849 NBV Margin 30.7% 34.2% 34.5% Underlying earnings before tax 1,130 1,040 2,011 Life & Savings 588 510 1,007 Property & Casualty 485 477 908 Health 57 61 103 Other (c) 0 (8) (7) Income tax expenses / benefits (325) (298) (598) Minority interests (2) (2) (5) Income from affiliates and associates 14 9 20 Underlying earnings Group share 816 749 1,429 Net capital gains or losses attributable to shareholders net of income tax 76 129 237 Adjusted earnings Group share 892 878 1,666 Profit or loss on financial assets (under fair value option) and derivatives (68) (10) 31 Exceptional operations (including discontinued operations) 48 (0) (252) Goodwill and other related intangible impacts Integration and restructuring costs (9) (10) (25) NET INCOME GROUP SHARE 863 858 1,420 Property & Casualty Combined Ratio 93.7% 94.3% 94.6% Health Combined Ratio 98.7% 98.0% 98.7% Protection Combined Ratio 94.7% 93.6% 95.6% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities, as well as banking activities and holdings into the Other activities. (c) Other corresponds to banking activities and holdings. Gross revenues increased by €1,000 million (+8%) to €13,004 million. On a comparable basis, gross revenues increased by €908 million (+8%): Life & Savings (€+616 million or +10%) to €6,745 million. On a comparable basis, Life & Savings gross revenues increased by €599 million (+10%) mainly driven by Individual Savings (€+466 million or +12%) due to strong sales of both capital light products sold through the bancassurance channel and discretionary mandates through proprietary channel. Unit-Linked gross revenues contributed to 41.2% of total Individual Savings, compared to 31.1% on average for the market. Protection gross revenues increased by €101 million (+5%) mainly driven by higher sales in Group business; Half Year 2018 Financial Report 31 Property & Casualty (€+35 million or +1%) to €4,002 million. On a comparable basis, Property & Casualty gross revenues slightly increased by €13 million (0%) driven by growth in Commercial lines (€+34 million), partly offset by lower volumes in Personal lines (€-22 million); Health (€+293 million or +16%) to €2,175 million. On a comparable basis, Health gross revenues increased by €241 million (+12%) mainly driven by higher volumes in Group business (€+221 million) in both international and domestic markets as well as in Individual business (€+20 million); Other (€+56 million) to €82 million. On a comparable basis, Other gross revenues increased by €56 million at AXA Banque France mainly due to a favorable change in the fair value of an internal interest rate swap with AXA Bank Belgium (neutral at Group level) used to hedge loans granted by AXA Banque France. APE increased by €151 million (+17%) to €1,041 million. On a comparable basis, APE increased by €164 million (+19%) mainly driven by Group Health (€+134 million) and Individual Savings (€+47 million), partly offset by Group Savings (€-22 million). NBV Margin decreased by 3.5 points to 30.7%. On a comparable basis, NBV Margin decreased by 4.1 points mainly driven by higher sales in Group Health. Underlying earnings before tax increased by €90 million (+9%) to €1,130 million: Life & Savings (€+79 million or +15%) to €588 million mainly driven by higher Unit-Linked management fees (€+27 million) reflecting a higher asset base, a higher investment margin (€+22 million) due to a lower policyholder participation rate, as well as lower expenses; Property & Casualty (€+8 million or +2%) to €485 million mainly driven by a higher net technical margin (€+31 million) despite a higher natural event charge (€+56 million), partly offset by a lower investment income (€-22 million); Health (€-4 million or -7%) to €57 million as the increase in net technical margin from higher volumes was more than offset by higher acquisition expenses; Other (€+8 million) to €0 million mainly from AXA France Holding (€+5 million) and AXA Banque France (€+3 million). Income tax expenses increased by €27 million (+9%) to €-325 million mainly driven by higher pre-tax underlying earnings. Underlying earnings increased by €67 million (+9%) to €816 million. Adjusted earnings increased by €14 million (+2%) to €892 million driven by higher underlying earnings, partly offset by lower net realized capital gains. Net income increased by €5 million (+1%) to €863 million driven by higher adjusted earnings as well as the gain relating to the discontinuation of the partnership with BNP Paribas (Natio), partly offset by an unfavorable change in the fair value of both mutual funds and derivatives not eligible to hedge accounting. Half Year 2018 Financial Report 32 Europe (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) Gross revenues (a) 21,747 21,784 Life & Savings 9,167 9,120 Property & Casualty 9,729 9,856 Health 2,830 2,788 Other (c) 21 19 New business APE 640 560 NBV Margin 54.2% 60.0% Underlying earnings before tax 1,688 1,637 Life & Savings 557 585 Property & Casualty 973 959 Health 118 79 Other (c) 40 14 Income tax expenses / benefits (380) (414) Minority interests (39) (42) Income from affiliates and associates 1 3 Underlying earnings Group share 1,271 1,185 Net capital gains or losses attributable to shareholders net of income tax 231 167 Adjusted earnings Group share 1,502 1,351 Profit or loss on financial assets (under fair value option) and derivatives (65) (63) Exceptional operations (including discontinued operations) (340) (4) Goodwill and other related intangible impacts (19) (22) Integration and restructuring costs (24) (6) NET INCOME GROUP SHARE 1,054 1,257 Property & Casualty Combined Ratio 93.9% 94.4% Health Combined Ratio 96.2% 97.4% Protection Combined Ratio 97.6% 97.6% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities, as well as banking activities and holdings into the Other activities. (c) Other corresponds to banking activities and holdings. Half Year 2018 Financial Report December 31, 2017 35,992 15,215 15,633 5,105 39 1,034 56.6% 3,204 1,127 1,827 226 24 (807) (78) 7 2,326 237 2,563 (2) (57) (44) (25) 2,435 94.6% 96.1% 97.0% 33 EUROPE - SWITZERLAND (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 7,194 7,821 9,797 Life & Savings 4,533 4,945 6,727 Property & Casualty 2,656 2,876 3,070 Health 5 0 New business APE 250 182 259 NBV Margin 54.6% 66.6% 66.4% Underlying earnings before tax 487 527 1,014 Life & Savings 195 210 419 Property & Casualty 299 322 606 Health (7) (5) (11) Income tax expenses / benefits (85) (111) (202) Minority interests (2) (2) (4) Income from affiliates and associates Underlying earnings Group share 399 414 809 Net capital gains or losses attributable to shareholders net of income tax 46 35 55 Adjusted earnings Group share 445 449 864 Profit or loss on financial assets (under fair value option) and derivatives 23 (53) (43) Exceptional operations (including discontinued operations) (340) Goodwill and other related intangible impacts (13) (15) (28) Integration and restructuring costs NET INCOME GROUP SHARE 116 381 792 Property & Casualty Combined Ratio 85.1% 85.1% 85.8% Health Combined Ratio n/a n/a Protection Combined Ratio 97.5% 97.7% 97.2% Average exchange rate : € 1.00 = Swiss Franc 1.17 1.08 1.11 (a) Net of intercompany eliminations. Gross revenues decreased by €627 million (-8%) to €7,194 million. On a comparable basis, gross revenues decreased by €4 million (0%): Life & Savings (€-412 million or -8%) to €4,533 million. On a comparable basis, Life & Savings gross revenues decreased by €19 million (0%) driven by G/A Savings (€-21 million) mainly due to the decrease of single premiums, while Protection remained stable; Property & Casualty (€-220 million or -8%) to €2,656 million. On a comparable basis, Property & Casualty gross revenues increased by €10 million (0%) mainly driven by Commercial lines due to higher volumes and tariff increases in Workers’ Compensation; Health (€+5 million) to €5 million. On a comparable basis, Health gross revenues increased by €5 million due to the launch of the business in 2H17. Half Year 2018 Financial Report 34 APE increased by €69 million (+38%) to €250 million. On a comparable basis, APE increased by €32 million (+13%) in Protection due to higher sales in Group Life semi-autonomous and autonomous businesses. NBV Margin decreased by 12.1 points to 54.6%. On a comparable basis, NBV Margin increased by 2.0 points mainly due to a positive business mix within Group Protection towards semi-autonomous business. Underlying earnings before tax decreased by €41 million (-8%) to €487 million. On a constant exchange rate basis, underlying earnings before tax increased by €2 million (0%): Property & Casualty (€-23 million or -7%) to €299 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €3 million (+1%) as the slightly higher current year combined ratio (+0.2 point) and the decrease in the investment income (€-2 million) were more than offset by a more favorable prior year reserve development (-0.2 point); Life & Savings (€-15 million or -7%) to €195 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax increased by €2 million (+1%) driven by a higher technical margin (€+45 million) mainly due to a favorable development of both the disability and mortality margins from lower policyholder bonus allocation, partly offset by a lower investment margin (€-30 million) mainly due to lower income from fixed income assets and a higher amortization of VBI (€-10 million) due to the non- repeat of the positive impact from interest rate assumption updates in 1H17; Health (€-2 million or -45%) to €-7 million. On a constant exchange rate basis, Health underlying earnings before tax decreased by €3 million due to further investments following the launch of the business in 2H17. Income tax expenses decreased by €26 million (-23%) to €-85 million. On a constant exchange rate basis, income tax expenses decreased by €19 million (-17%) due to a decrease in the corporate tax rate from 21% to 20%. Underlying earnings decreased by €15 million (-4%) to €399 million. On a constant exchange rate basis, underlying earnings increased by €20 million (+5%). Adjusted earnings decreased by €4 million (-1%) to €445 million. On a constant exchange rate basis, adjusted earnings increased by €34 million (+8%) driven by higher underlying earnings and higher net realized capital gains. Net income decreased by €265 million (-70%) to €116 million. On a constant exchange rate basis, net income decreased by €255 million (-67%) as higher adjusted earnings were more than offset by the one-time negative impact linked to the transformation of the in-force Group Life business model to a semi-autonomous model (€-347 million). Half Year 2018 Financial Report 35 EUROPE - GERMANY (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 5,934 5,874 10,672 Life & Savings 1,786 1,824 3,696 Property & Casualty 2,531 2,478 3,879 Health 1,596 1,553 3,059 Other (c) 21 19 39 New business APE 161 184 361 NBV Margin 59.0% 63.9% 58.2% Underlying earnings before tax 419 399 771 Life & Savings 95 95 201 Property & Casualty 230 239 419 Health 54 47 115 Other (c) 39 19 36 Income tax expenses / benefits (111) (120) (221) Minority interests (0) (1) (1) Income from affiliates and associates 1 3 7 Underlying earnings Group share 308 281 556 Net capital gains or losses attributable to shareholders net of income tax 123 77 109 Adjusted earnings Group share 431 358 665 Profit or loss on financial assets (under fair value option) and derivatives (29) 12 46 Exceptional operations (including discontinued operations) (87) Goodwill and other related intangible impacts (2) (2) (4) Integration and restructuring costs (2) (3) 2 NET INCOME GROUP SHARE 398 366 621 Property & Casualty Combined Ratio 95.2% 95.2% 96.0% Health Combined Ratio 96.6% 97.0% 96.3% Protection Combined Ratio 98.5% 97.8% 97.1% (a) Net of intercompany eliminations. (b) Restated: reallocation of banking activities and holdings into the Other activities. (c) Other corresponds to banking activities and holdings. Gross revenues increased by €60 million (+1%) to €5,934 million. On a comparable basis gross revenues increased by €60 million (+1%) driven by Personal Motor and preferred segments Health, Pure Protection and Property & Casualty Commercial lines: Property & Casualty (€+53 million or +2%) to €2,531 million. On a comparable basis, Property & Casualty gross revenues increased by €53 million (+2%) driven by Personal lines (€+37 million) mainly due to new business in Motor and tariff increases in Non-Motor as well as in Commercial lines (€+14 million) from new business in SME and Mid-Market segments; Life & Savings (€-38 million or -2%) to €1,786 million. On a comparable basis, Life & Savings gross revenues decreased by €38 million (-2%) mainly in Protection with Savings (€-28 million) and G/A Savings (€-23 million), as well as lower volumes from Variable Annuities GMxB products (€-13 million) in Half Year 2018 Financial Report 36 line with the strategy. This was partly offset by a continued growth in Pure Protection (€+13 million) and Unit-Linked Investment & Savings (€+5 million); Health (€+43 million or +3%) to €1,596 million. On a comparable basis, Health gross revenues increased by €43 million (+3%) mainly due to tariff increases in full benefit insurance and continued growth in the civil service segment. APE decreased by €23 million (-13%) to €161 million. On a comparable basis, APE decreased by €23 million (- 13%) mainly due to lower new business in Health. NBV Margin decreased by 4.9 points to 59.0% reflecting a lower share of new business in Health. Underlying earnings before tax increased by €19 million (+5%) to €419 million mainly due to a growth in Health and Other: Property & Casualty (€-9 million or -4%) to €230 million due to a lower investment income (€-11 million) mainly from lower reinvestment yields on fixed income assets. The all year combined ratio remained stable at 95.2%, as the favorable prior year reserve development (-2.7 points) was offset by an increase in the current year combined ratio (+2.7 points) driven by higher Nat Cat impact (+2.9 points), partly offset by a lower expense ratio (-0.3 point) reflecting the impact of the cost savings program; Life & Savings (€+1 million or +1%) to €95 million; Health (€+8 million or +16%) to €54 million due to a decrease in the expense ratio (-0.4 point); Other (€+20 million) to €39 million driven by Holdings (€+20 million) mainly due to an exceptional distribution from an investment fund. Income tax expenses decreased by €9 million (-7%) to €-111 million due to higher positive tax one-offs (€+13 million). Income from affiliates and associates decreased by €2 million to €1 million. Underlying earnings increased by €28 million (+10%) to €308 million. Adjusted earnings increased by €73 million (+20%) to €431 million driven by higher underlying earnings and higher net realized capital gains mainly from equities. Net income increased by €32 million (+9%) to €398 million driven by higher adjusted earnings, partly offset by an unfavorable change in the fair value of foreign exchange derivatives not eligible for hedge accounting. Half Year 2018 Financial Report 37 EUROPE - BELGIUM (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 1,754 1,725 3,310 Life & Savings 575 561 1,178 Property & Casualty 1,118 1,116 2,044 Health 61 48 87 New business APE 25 23 56 NBV Margin 76.5% 79.1% 75.4% Underlying earnings before tax 275 283 531 Life & Savings 140 153 253 Property & Casualty 137 131 286 Health (1) (0) (7) Other (c) (1) (1) (2) Income tax expenses / benefits (70) (94) (174) Minority interests (0) (0) (0) Income from affiliates and associates Underlying earnings Group share 204 189 357 Net capital gains or losses attributable to shareholders net of income tax 53 32 49 Adjusted earnings Group share 258 221 406 Profit or loss on financial assets (under fair value option) and derivatives (44) (8) 16 Exceptional operations (including discontinued operations) 34 Goodwill and other related intangible impacts (1) (1) (4) Integration and restructuring costs (3) 9 23 NET INCOME GROUP SHARE 209 220 475 Property & Casualty Combined Ratio 94.4% 95.8% 93.6% Health Combined Ratio 105.0% 102.6% 110.2% Protection Combined Ratio 100.6% 99.0% 98.2% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities and the holding into the Other activities. (c) Other corresponds to the holding. Gross revenues increased by €29 million (+2%) to €1,754 million. On a comparable basis, gross revenues increased by €29 million (+2%): Property & Casualty (€+2 million or 0%) to €1,118 million. On a comparable basis, Property & Casualty gross revenues increased by €5 million (0%) from Commercial lines (€+10 million) in SME and Mid- Market segments mainly due to tariff increases, partly offset by Personal lines (€-4 million) as tariff increases were more than offset by lower volumes mostly in Motor; Life & Savings (€+13 million or +2%) to €575 million. On a comparable basis, Life & Savings gross revenues increased by €13 million (+2%) driven by Protection (€+13 million) notably from Group business as a result of favorable timing effects, as well as G/A Savings (€+3 million) driven by higher sales in pension products for SME and self-employed, partly offset by Unit-Linked (€-3 million) due to Half Year 2018 Financial Report 38 lower single premiums, mainly on the Oxylife Invest hybrid product, in line with the strategy to stop the Individual Savings business; Health (€+14 million or +29%) to €61 million. On a comparable basis, Health gross revenues increased by €10 million (+20%) due to new large contracts in Group business. APE increased by €2 million (+11%) to €25 million. On a comparable basis, APE decreased by €3 million (-15%) mainly due to G/A Savings. NBV Margin decreased by 2.5 points to 76.5%. On a comparable basis, NBV Margin increased by 4.3 points mainly driven by a higher share of Protection in the product mix. Underlying earnings before tax decreased by €9 million (-3%) to €275 million: Life & Savings (€-13 million or -9%) to €140 million driven by lower net technical margin (€-9 million) mainly due to an exceptional unfavorable prior year result (€-11 million); Property & Casualty (€+6 million or +5%) to €137 million mainly due to a more favorable prior year reserve development (-1.0 point) combined with a lower current year combined ratio (-0.4 point) due to lower large losses as well as a lower expense ratio resulting from the cost savings program, partly offset by unfavorable weather conditions. Investment income decreased by €8 million; Health (€-1 million) to €-1 million; Other (€0 million) to €-1 million driven by the Holding. Income tax expenses decreased by €24 million (-26%) to €-70 million driven by the non-repeat of an exceptional dividend paid to the Group in 2017 (€-13 million) combined with a decrease in the corporate tax rate from 34% to 30% and lower pre-tax underlying earnings. Underlying earnings increased by €15 million (+8%) to €204 million. Adjusted earnings increased by €37 million (+17%) to €258 million driven by higher net realized capital gains as well as higher underlying earnings. Net income decreased by €11 million (-5%) to €209 million as higher adjusted earnings were more than offset by the unfavorable change in the fair value of mutual funds. Half Year 2018 Financial Report 39 EUROPE - UNITED KINGDOM & IRELAND (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 2,762 2,781 5,130 Life & Savings 28 30 57 Property & Casualty 1,737 1,722 3,372 Health 998 1,029 1,700 Underlying earnings before tax 194 151 340 Life & Savings 2 4 12 Property & Casualty 127 119 228 Health 63 32 109 Other (c) 2 (4) (10) Income tax expenses / benefits (27) (16) (58) Minority interests (0) (0) (0) Income from affiliates and associates Underlying earnings Group share 167 134 282 Net capital gains or losses attributable to shareholders net of income tax 8 23 13 Adjusted earnings Group share 175 158 295 Profit or loss on financial assets (under fair value option) and derivatives (7) (6) (32) Exceptional operations (including discontinued operations) (3) 7 Goodwill and other related intangible impacts (2) (2) (4) Integration and restructuring costs (2) (22) NET INCOME GROUP SHARE 166 144 243 Property & Casualty Combined Ratio 98.5% 98.8% 99.1% Health Combined Ratio 94.5% 97.5% 94.9% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities and the holding into the Other activities. (c) Other corresponds to the holding. Gross revenues decreased by €19 million (-1%) to €2,762 million. On a comparable basis, gross revenues increased by €43 million (+2%): Property & Casualty (€+15 million or +1%) to €1,737 million. On a comparable basis, Property & Casualty gross revenues increased by €19 million (+1%) from Commercial lines (€+45 million) in Motor due to both higher new business and tariff increases and in Property due to new business, partly offset by Personal lines (€-26 million) mainly in Property reflecting lower volumes following tariff increases and the exit of a scheme, partly offset by growth in Motor in Ireland; Health (€-31 million or -3%) to €998 million. On a comparable basis, Health gross revenues increased by €26 million (+3%) mainly driven by volume growth and tariff increases in the United Kingdom and in international business; Life & Savings - Architas (€-2 million or -8%) to €28 million. On a comparable basis, Life & Savings gross revenues decreased by €2 million (-6%). Underlying earnings before tax increased by €43 million (+28%) to €194 million. On a constant exchange rate basis, underlying earnings before tax increased by €46 million (+31%): Half Year 2018 Financial Report 40 Property & Casualty (€+8 million or +7%) to €127 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €10 million (+8%) as a higher current year combined ratio (+1.8 points) mainly driven by a higher natural event charge and higher expenses from investments in transformation programs, was more than offset by a favorable prior year reserve development (-2.1 points) combined with a higher investment income (€+5 million); Health (€+31 million or +97%) to €63 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €33 million (+102%) driven by an improvement in the combined ratio (-3.0 points) due to claims management measures and tariff increases in corporate business; Life & Savings - Architas (€-2 million or -55%) to €2 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax decreased by €2 million; Other (€+6 million) to €2 million. On a constant exchange rate basis, Other underlying earnings before tax increased by €6 million mainly due to lower expenses at AXA UK Holding. Income tax expenses increased by €11 million (+65%) to €-27 million. On a constant exchange rate basis, income tax expenses increased by €11 million (+68%) reflecting higher pre-tax underlying earnings and a negative tax one-off in 1H18 (€-7 million). Underlying earnings increased by €32 million (+24%) to €167 million. On a constant exchange rate basis, underlying earnings increased by €35 million (+26%). Adjusted earnings increased by €17 million (+11%) to €175 million. On a constant exchange rate basis, adjusted earnings increased by €20 million (+12%) driven by higher underlying earnings, partly offset by lower net realized capital gains. Net income increased by €22 million (+15%) to €166 million. On a constant exchange rate basis, net income increased by €25 million (+17%) mainly driven by higher adjusted earnings and a favorable change in fair value of foreign exchange derivatives not eligible to hedge accounting. Half Year 2018 Financial Report 41 EUROPE - SPAIN (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 1,284 1,262 2,365 Life & Savings 305 306 571 Property & Casualty 843 829 1,606 Health 136 127 188 New business APE 39 36 73 NBV Margin 82.7% 82.6% 84.3% Underlying earnings before tax 136 101 207 Life & Savings 42 32 61 Property & Casualty 86 64 131 Health 8 5 15 Income tax expenses / benefits (34) (25) (48) Minority interests (0) (0) (0) Income from affiliates and associates Underlying earnings Group share 102 77 159 Net capital gains or losses attributable to shareholders net of income tax (2) 1 4 Adjusted earnings Group share 100 78 163 Profit or loss on financial assets (under fair value option) and derivatives (2) (5) (2) Exceptional operations (including discontinued operations) (0) (2) Goodwill and other related intangible impacts (2) (2) (4) Integration and restructuring costs (15) (7) (16) NET INCOME GROUP SHARE 81 63 140 Property & Casualty Combined Ratio 95.5% 98.2% 97.5% Health Combined Ratio 92.6% 95.0% 92.8% Protection Combined Ratio 92.7% 94.3% 93.0% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities. Gross revenues increased by €22 million (+2%) to €1,284 million. On a comparable basis, gross revenues increased by €22 million (+2%): Property & Casualty (€+14 million or +2%) to €843 million. On a comparable basis, Property & Casualty gross revenues increased by €14 million (+2%) driven by Commercial lines (€+8 million) with higher volumes and tariff increases in Non-Motor, and Personal lines (€+6 million) in Motor with higher volumes and tariff increases; Life & Savings (€-1 million or 0%) to €305 million. On a comparable basis, Life & Savings gross revenues decreased by €1 million (0%) from G/A Savings (€-17 million) partly offset by Unit-Linked (€+16 million), in line with the strategy to shift towards capital light products; Health (€+9 million or +7%) to €136 million. On a comparable basis, Health gross revenues increased by €9 million (+7%) mainly driven by Personal lines with higher volumes and tariff increases. Half Year 2018 Financial Report 42 APE increased by €2 million (+7%) to €39 million. On a comparable basis, APE increased by €2 million (+7%) driven by Unit-Linked (€+2 million) and Protection (€+1 million), partly offset by G/A Savings (€-1 million), in line with the strategy to shift towards capital light products. NBV Margin remained stable at 82.7%. Underlying earnings before tax increased by €34 million (+34%) to €136 million: Property & Casualty (€+22 million or +34%) to €86 million driven by a lower current year combined ratio (-1.1 points) due to the absence of Nat Cat and lower large losses combined with a favorable prior year reserve development; Life & Savings (€+10 million or +32%) to €42 million mainly driven by a higher net technical margin in G/A Savings Group annuities; Health (€+3 million or +50%) to €8 million mainly driven by an improved claims experience. Income tax expenses increased by €9 million (+37%) to €-34 million mainly driven by higher pre-tax underlying earnings. Underlying earnings increased by €25 million (+33%) to €102 million. Adjusted earnings increased by €22 million (+28%) to €100 million mainly driven by higher underlying earnings. Net income increased by €18 million (+28%) to €81 million mainly driven by higher adjusted earnings, partly offset by higher restructuring costs. Half Year 2018 Financial Report 43 EUROPE - ITALY (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 2,820 2,321 4,719 Life & Savings 1,941 1,454 2,985 Property & Casualty 845 836 1,663 Health 35 31 70 New business APE 164 135 284 NBV Margin 38.7% 36.5% 34.9% Underlying earnings before tax 179 175 341 Life & Savings 83 91 181 Property & Casualty 95 84 156 Health 1 (0) 5 Other (c) 0 (0) 0 Income tax expenses / benefits (52) (47) (105) Minority interests (36) (39) (72) Income from affiliates and associates Underlying earnings Group share 90 89 164 Net capital gains or losses attributable to shareholders net of income tax 4 (2) 6 Adjusted earnings Group share 94 88 170 Profit or loss on financial assets (under fair value option) and derivatives (6) (3) 13 Exceptional operations (including discontinued operations) (9) Goodwill and other related intangible impacts Integration and restructuring costs (4) (2) (10) NET INCOME GROUP SHARE 85 82 164 Property & Casualty Combined Ratio 95.1% 96.3% 96.5% Health Combined Ratio 99.1% 101.0% 95.1% Protection Combined Ratio 83.8% 80.1% 82.9% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities and the holding into the Other activities. (c) Other corresponds to the holding. Gross revenues increased by €499 million (+21%) to €2,820 million. On a comparable basis, gross revenues increased by €499 million (+21%): Life & Savings (€+486 million or +33%) to €1,941 million. On a comparable basis, Life & Savings gross revenues increased by €486 million (+33%) mainly driven by G/A Savings (€+296 million), Unit-Linked (€+127 million) and Protection (€+63 million) due to strong recovery in sales from Banca Monte dei Paschi di Siena combined with a higher commercial focus on Unit-Linked and Protection products; Property & Casualty (€+9 million or +1%) to €845 million. On a comparable basis, Property & Casualty gross revenues increased by €9 million (+1%) from Commercial lines (€+6 million) mainly due to higher new business from broker channels and Personal lines (€+3 million) as a consequence of higher new business in Property; Half Year 2018 Financial Report 44 Health (€+3 million or +11%) to €35 million. On a comparable basis, Health gross revenues increased by €3 million (+11%) as a result of a strong commercial focus. APE increased by €29 million (+22%) to €164 million. On a comparable basis, APE increased by €29 million (+22%) mainly from Unit-Linked (€+15 million) and G/A Savings (€+13 million) due to the above-mentioned recovery in sales from Banca Monte dei Paschi di Siena combined with a commercial focus on Unit-Linked products. NBV Margin increased by 2.1 points to 38.7% mainly driven by a better product mix within Protection and G/A Savings. Underlying earnings before tax increased by €3 million (+2%) to €179 million: Property & Casualty (€+11 million or +13%) to €95 million driven by an improved current year combined ratio (-1.2 points) mainly resulting from the cost savings program; Life & Savings (€-9 million or -9%) to €83 million mainly due to a lower investment margin (€-8 million) as a consequence of lower reinvestment yields partly offset by a decrease in guaranteed rates; Health (€+1 million) to €1 million. Income tax expenses increased by €5 million (+11%) to €-52 million mainly driven by higher pre-tax underlying earnings. Underlying earnings remained stable at €90 million. Adjusted earnings increased by €6 million (+7%) to €94 million mainly driven by higher underlying earnings as well as higher net realized capital gains. Net income increased by €2 million (+3%) to €85 million mainly driven by higher adjusted earnings, partly offset by higher restructuring costs. Half Year 2018 Financial Report 45 Asia (in Euro million, except percentages) June 30, 2018 Gross revenues (a) 4,339 Life & Savings 2,735 Property & Casualty 630 Health 974 New business APE 763 NBV Margin 66.0% Underlying earnings before tax 592 Life & Savings 342 Property & Casualty 37 Health 215 Other (c) (2) Income tax expenses / benefits (112) Minority interests (4) Income from affiliates and associates 67 Underlying earnings Group share 544 Net capital gains or losses attributable to shareholders net of income tax (8) Adjusted earnings Group share 536 Profit or loss on financial assets (under fair value option) and derivatives (22) Exceptional operations (including discontinued operations) (6) Goodwill and other related intangible impacts (8) Integration and restructuring costs (13) NET INCOME GROUP SHARE 487 Property & Casualty Combined Ratio 96.5% Health Combined Ratio 77.7% Protection Combined Ratio 86.0% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities and the holding into the Other activities. (c) Other corresponds to the holding. Half Year 2018 Financial Report June 30, 2017 restated (b) 4,598 2,839 708 1,051 797 67.1% 621 365 31 225 0 (131) (4) 90 576 4 580 (12) (0) (8) (0) 560 97.5% 78.6% 85.4% December 31, 2017 8,985 5,702 1,313 1,970 1,510 70.6% 1,187 679 60 448 (0) (257) (7) 166 1,089 23 1,111 (59) (0) (16) (9) 1,028 97.6% 78.3% 86.7% 46 ASIA - JAPAN (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 2,309 2,433 4,647 Life & Savings 1,639 1,710 3,252 Health 670 723 1,395 New business APE 279 232 441 NBV Margin 94.1% 107.8% 112.1% Underlying earnings before tax 352 371 719 Life & Savings 156 160 298 Health 196 211 421 Income tax expenses / benefits (92) (112) (215) Minority interests (3) (3) (7) Income from affiliates and associates Underlying earnings Group share 256 256 497 Net capital gains or losses attributable to shareholders net of income tax 0 0 9 Adjusted earnings Group share 256 256 506 Profit or loss on financial assets (under fair value option) and derivatives (13) 27 (8) Exceptional operations (including discontinued operations) 0 (0) Goodwill and other related intangible impacts Integration and restructuring costs (2) NET INCOME GROUP SHARE 244 283 497 Health Combined Ratio 71.2% 70.9% 71.1% Protection Combined Ratio 87.4% 87.6% 88.1% Average exchange rate : € 1.00 = Yen 132 122 127 (a) Net of intercompany eliminations. Gross revenues decreased by €124 million (-5%) to €2,309 million. On a comparable basis, gross revenues increased by €62 million (+3%): Life & Savings (€-71 million or -4%) to €1,639 million. On a comparable basis, Life & Savings gross revenues increased by €61 million (+4%) mainly due to the success of Follow-up Life Protection product (€+79 million) launched in 1Q18, partly offset by continued lower new business from the G/A capital light Single Premium Whole Life product (€-16 million); Health (€-53 million or -7%) to €670 million. On a comparable basis, Health gross revenues increased by €1 million (0%) mainly due to Medical Whole Life products, notably due to the success of a New Medical Care product launched in 3Q17, partly offset by lower new business from the Medical Term product. APE increased by €47 million (+20%) to €279 million. On a comparable basis, APE increased by €69 million (+30%) driven by Protection mainly due to the success of Follow-up Life product launched in 1Q18. NBV Margin decreased by 13.7 points to 94.1% mainly as a consequence of higher new business in Protection. Underlying earnings before tax decreased by €19 million (-5%) to €352 million. On a constant exchange rate basis, underlying earnings before tax increased by €9 million (+3%): Half Year 2018 Financial Report 47 Health (€-15 million or -7%) to €196 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €1 million (0%); Life & Savings (€-4 million or -2%) to €156 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax increased by €9 million (+5%) primarily driven by higher fees & revenues (€+32 million) mainly due to both in-force growth and new business as well as a higher net technical margin (€+11 million) mainly due to in-force growth, partly offset by higher expenses (€-32 million) mainly due to volume growth combined with a negative timing difference of non-payroll expenses. Income tax expenses decreased by €19 million (-17%) to €-92 million. On a constant exchange rate basis, income tax expenses decreased by €12 million (-10%) due to positive tax one-offs (€+15 million), partly offset by higher pre-tax underlying earnings. Underlying earnings remained stable at €256 million. On a constant exchange rate basis, underlying earnings increased by €21 million (+8%). Adjusted earnings increased by €1 million (0%) to €256 million. On a constant exchange rate basis, adjusted earnings increased by €21 million (+8%) driven by higher underlying earnings. Net income decreased by €40 million (-14%) to €244 million. On a constant exchange rate basis, net income decreased by €20 million (-7%) as higher adjusted earnings were more than offset by an unfavorable change in the fair value of mutual funds and interest rate hedging derivatives not eligible for hedge accounting. Half Year 2018 Financial Report 48 ASIA - HONG KONG (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 1,475 1,546 3,170 Life & Savings 1,069 1,097 2,384 Property & Casualty 124 145 256 Health 283 304 530 New business APE 204 222 456 NBV Margin 50.4% 67.5% 63.8% Underlying earnings before tax 207 225 412 Life & Savings 183 200 367 Property & Casualty 9 8 19 Health 15 17 27 Income tax expenses / benefits (9) (11) (20) Minority interests Income from affiliates and associates Underlying earnings Group share 198 214 392 Net capital gains or losses attributable to shareholders net of income tax (1) 0 2 Adjusted earnings Group share 198 214 393 Profit or loss on financial assets (under fair value option) and derivatives (4) 0 1 Exceptional operations (including discontinued operations) (0) (0) Goodwill and other related intangible impacts (8) (8) (15) Integration and restructuring costs (13) (0) (5) NET INCOME GROUP SHARE 173 206 373 Property & Casualty Combined Ratio 96.3% 97.0% 96.2% Health Combined Ratio 94.5% 94.6% 95.2% Protection Combined Ratio 83.1% 81.9% 84.9% Average exchange rate : € 1.00 = Hong Kong Dollar 9.49 8.42 8.80 (a) Net of intercompany eliminations. Gross revenues decreased by €71 million (-5%) to €1,475 million. On a comparable basis, gross revenues increased by €118 million (+8%): Life & Savings (€-29 million or -3%) to €1,069 million. On a comparable basis, Life & Savings gross revenues increased by €91 million (+8%) mainly from Protection (€+60 million) driven by in-force growth partly offset by lower new business, G/A Savings (€+42 million) due to both new business sales and in- force growth, partly offset by Unit-Linked (€-11 million); Health (€-21 million or -7%) to €283 million. On a comparable basis, Health gross revenues increased by €30 million (+10%) mainly driven by higher volumes combined with tariff increases in both Individual and Group businesses; Property & Casualty (€-21 million or -14%) to €124 million. On a comparable basis, Property & Casualty gross revenues decreased by €3 million (-2%) from Personal lines (€-2 million) driven by lower new business in Motor linked to repricing measures. Half Year 2018 Financial Report 49 APE decreased by €18 million (-8%) to €204 million. On a comparable basis, APE increased by €8 million (+4%) driven by higher sales in G/A Savings (€+42 million) mainly due to the successful launch of a new product in 1Q18, and Health (€+4 million) mainly in Group business, partly offset by lower sales in Protection (€-33 million). NBV Margin decreased by 17.2 points to 50.4% mainly driven by a shift in business mix towards G/A Savings products combined with the redesign of a Protection product to focus on volumes for profitable growth. Underlying earnings before tax decreased by €18 million (-8%) to €207 million. On a constant exchange rate basis, underlying earnings before tax increased by €8 million (+4%): Life & Savings (€-17 million or -8%) to €183 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax increased by €6 million (+3%) mainly due to higher Unit-Linked management fees following positive equity market performance notably in 2H17, higher surrender margin and a less unfavorable impact from an accounting mismatch, partly offset by higher Deferred Acquisition Cost amortization; Health (€-2 million or -12%) to €15 million. On a constant exchange rate basis, Health underlying earnings before tax remained stable; Property & Casualty (€+1 million or +16%) to €9 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €3 million (+31%) mainly due to the non-repeat of 2017 unfavorable claims experience in Personal Motor. Income tax expenses decreased by €3 million (-22%) to €-9 million. On a constant exchange rate basis, income tax expenses decreased by €1 million (-12%) as higher pre-tax underlying earnings were more than offset by the non-repeat of 1H17 negative tax one-offs. Underlying earnings decreased by €15 million (-7%) to €198 million. On a constant exchange rate basis, underlying earnings increased by €10 million (+5%). Adjusted earnings decreased by €16 million (-8%) to €198 million. On a constant exchange rate basis, adjusted earnings increased by €8 million (+4%) mainly driven by higher underlying earnings. Net income decreased by €33 million (-16%) to €173 million. On a constant exchange rate basis, net income decreased by €11 million (-6%) as higher adjusted earnings were more than offset by higher restructuring costs and an unfavorable change in the fair value of derivatives not eligible for hedge accounting. Half Year 2018 Financial Report 50 ASIA - HIGH POTENTIALS (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 77 89 180 Life & Savings 28 32 66 Property & Casualty 31 37 72 Health 18 21 42 New business APE 280 343 613 NBV Margin 49.4% 39.2% 45.8% Underlying earnings before tax 1 (4) 4 Life & Savings 2 5 14 Property & Casualty (6) (6) (10) Health 4 (3) (0) Income tax expenses / benefits (1) 2 1 Minority interests 0 0 0 Income from affiliates and associates 67 90 166 Underlying earnings Group share 67 88 171 Net capital gains or losses attributable to shareholders net of income tax (6) 5 14 Adjusted earnings Group share 62 92 185 Profit or loss on financial assets (under fair value option) and derivatives (6) (39) (54) Exceptional operations (including discontinued operations) (0) (0) Goodwill and other related intangible impacts 0 0 (0) Integration and restructuring costs (2) NET INCOME GROUP SHARE 55 53 129 Property & Casualty Combined Ratio 117.6% 118.1% 115.2% Health Combined Ratio 85.2% 117.0% 102.5% Protection Combined Ratio 111.8% 99.9% 94.8% (a) Net of intercompany eliminations. Scope: (i) The Property & Casualty subsidiary in Thailand and the non-bancassurance Life & Savings subsidiary in Indonesia are fully consolidated; (ii) China, Thailand, the Philippines and the bancassurance Life & Savings subsidiary in Indonesia are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income. Gross revenues decreased by €12 million (-14%) to €77 million. On a comparable basis, gross revenues decreased by €5 million (-6%): Property & Casualty (€-6 million or -15%) to €31 million. On a comparable basis, Property & Casualty gross revenues decreased by €5 million (-14%) in Thailand (€-5 million) driven by lower revenues from Commercial Property and Personal Motor both following the decision to reduce the volume of unprofitable portfolios; Life & Savings (€-4 million or -13%) to €28 million. On a comparable basis, Life & Savings gross revenues remained stable at €28 million in Indonesia; Half Year 2018 Financial Report 51 Health (€-2 million or -11%) to €18 million. On a comparable basis, Health gross revenues remained stable as lower revenues in Thailand (€-2 million) due to the pruning of unprofitable contracts were offset by higher revenues in Indonesia (€+2 million) following in-force and new business growth. APE decreased by €63 million (-18%) to €280 million. On a comparable basis, APE decreased by €45 million (- 13%): China (€-55 million or -32%) to €118 million. On a comparable basis, APE decreased by €51 million (- 30%) due to lower sales of traditional G/A Savings products (€-61 million), partly offset by higher sales of profitable Protection products (€+9 million); Thailand (€-3 million or -3%) to €80 million. On a comparable basis, APE decreased by €1 million (-1%) due to lower sales of traditional G/A Savings products (€-7 million) following the non-repeat of sales of a product launched in 1H17, and Protection (€-3 million) due to lower sales of low margin products, partly offset by higher Unit-Linked sales (€+9 million) following successful marketing campaigns; Indonesia (€-8 million or -12%) to €55 million. On a comparable basis, APE increased by €1 million (+1%) driven by the launch of a new Protection product; The Philippines (€+2 million or +10%) to €27 million. On a comparable basis, APE increased by €7 million (+27%) mainly from Protection (€+7 million) driven by the strong performance in both bancassurance and agency channels. NBV Margin increased by 10.2 points to 49.4%. On a comparable basis, NBV Margin increased by 12.7 points mainly driven by a more favorable business mix in China and Thailand. Underlying earnings before tax increased by €5 million to €1 million. On a constant exchange rate basis, underlying earnings before tax increased by €6 million: Health (€+7 million) to €4 million. On a constant exchange rate basis, Health underlying earnings Indonesia (€+8 million) following the increased by €8 million mainly driven by Life & Savings (€-3 million) to €2 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax decreased by €3 million in Indonesia mainly due to unfavorable assumption updates; Property & Casualty (€+1 million) to €-6 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €1 million in Thailand. Income tax expenses increased by €2 million to €-1 million. On a constant exchange rate basis, income tax expenses increased by €3 million driven by Indonesia (€+2 million) due to higher pre-tax underlying earnings. Income from affiliates and associates decreased by €22 million (-25%) to €67 million. On a constant exchange rate basis, income from associates and affiliates decreased by €17 million (-19%): Thailand (€-22 million or -44%) to €27 million mainly due to unfavorable assumption updates; Indonesia (€-2 million or -8%) to €18 million mainly from lower Unit-Linked management fees reflecting negative equity market performance in 1H18; China (€+5 million or +72%) to €12 million mainly due to a favorable change in business mix; The Philippines (€+2 million or +15%) to €10 million mainly from higher fees & revenues combined with a higher investment margin, both as a result of portfolio growth. Underlying earnings decreased by €20 million (-23%) to €67 million. On a constant exchange rate basis, underlying earnings decreased by €14 million (-16%). Half Year 2018 Financial Report 52 Adjusted earnings decreased by €31 million (-33%) to €62 million. On a constant exchange rate basis, adjusted earnings decreased by €25 million (-27%) driven by lower underlying earnings as well as lower net realized capital gains. Net income increased by €3 million (+5%) to €55 million. On a constant exchange rate basis, net income increased by €8 million (+14%) as lower adjusted earnings were more than offset by a favorable change in the fair value of financial assets in Thailand and a less unfavorable change in the fair value of financial assets in China. Half Year 2018 Financial Report 53 United States (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 7,923 9,081 16,911 Life & Savings 6,577 7,720 14,154 Health 26 27 57 Other (c) 1,321 1,333 2,700 New business APE 821 953 1,799 NBV Margin 21.7% 23.3% 23.4% Underlying earnings before tax 749 599 1,392 Life & Savings 509 401 863 Health (12) (15) (27) Other (c) 252 213 556 Income tax expenses / benefits (136) 65 (7) Minority interests (149) (99) (250) Income from affiliates and associates Underlying earnings Group share 465 565 1,135 Net capital gains or losses attributable to shareholders net of income tax 3 (13) (60) Adjusted earnings Group share 467 552 1,075 Profit or loss on financial assets (under fair value option) and derivatives (59) 70 96 Exceptional operations (including discontinued operations) (19) 268 Goodwill and other related intangible impacts (0) (0) (2) Integration and restructuring costs (27) (9) (21) NET INCOME GROUP SHARE 363 613 1,415 Health Combined Ratio 150.1% 144.2% 146.9% Protection Combined Ratio 108.3% 114.8% 112.7% Average exchange rate : € 1.00 = US Dollar 1.21 1.08 1.13 (a) Net of intercompany eliminations. (b) Restated: reallocation of AXA Corporate Solutions Life Reinsurance Company operations into the Life & Savings activities, as well as asset management activities and holdings into the Other activities. (c) Other corresponds to asset management activities and holdings. The results of our US segment are presented herein on the basis of IFRS and are not, and should not be relied upon as representing, the US GAAP results of AXA Equitable Holdings, Inc. (including AllianceBernstein), which, as a US public company, reports in US GAAP in accordance with the rules of the US Securities and Exchange Commission (“SEC”). For further information on AEH’s financial results and other public reports please consult the SEC website at www.sec.gov. Half Year 2018 Financial Report 54 UNITED STATES - LIFE & SAVINGS (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 6,602 7,747 14,210 Life & Savings 6,577 7,720 14,154 Health 26 27 57 New business APE 821 953 1,799 NBV Margin 21.7% 23.3% 23.4% Underlying earnings before tax 417 314 707 Life & Savings 509 401 863 Health (12) (15) (27) Other (c) (80) (71) (129) Income tax expenses / benefits (76) 143 145 Minority interests (25) (0) Income from affiliates and associates Underlying earnings Group share 316 457 852 Net capital gains or losses attributable to shareholders net of income tax 3 (13) (60) Adjusted earnings Group share 319 444 792 Profit or loss on financial assets (under fair value option) and derivatives (59) 68 96 Exceptional operations (including discontinued operations) (20) 135 Goodwill and other related intangible impacts (0) (0) (2) Integration and restructuring costs (27) (4) (14) NET INCOME GROUP SHARE 213 508 1,006 Health Combined Ratio 150.1% 144.2% 146.9% Protection Combined Ratio 108.3% 114.8% 112.7% Average exchange rate : € 1.00 = US Dollar 1.21 1.08 1.13 (a) Net of intercompany eliminations. (b) Restated: reallocation of AXA Corporate Solutions Life Reinsurance Company operations into the Life & Savings activities, and holdings into the Other activities. (c) Other corresponds to holdings. Gross revenues decreased by €1,145 million (-15%) to €6,602 million. On a comparable basis, gross revenues decreased by €371 million (-5%): Life & Savings (€-1,144 million or -15%) to €6,577 million. On a comparable basis, Life & Savings gross revenues decreased by €373 million (-5%) mainly in Unit-Linked (€-374 million) primarily due to the non- repeat of 1H17 strong sales of non-GMxB Variable Annuities in anticipation of the implementation of the US Department of Labor rule; Health (€-1 million or -3%) to €26 million. On a comparable basis, Health gross revenues increased by €2 million (+8%). APE decreased by €133 million (-14%) to €821 million. On a comparable basis, APE increased by €33 million (+4%) mainly in Mutual Funds & Other (€+37 million) reflecting higher advisory sales from favorable equity market conditions and Protection following higher sales in employee benefit products, partly offset by Unit- Linked (€-19 million) primarily due to the non-repeat of 1H17 strong sales of non-GMxB Variable Annuities in Half Year 2018 Financial Report 55 anticipation of the implementation of the US Department of Labor rule, partly mitigated by growth in Group Retirement. NBV Margin decreased by 1.6 points to 21.7% mainly driven by a less favorable business mix due to a lower share of Unit-Linked business. Underlying earnings before tax increased by €103 million (+33%) to €417 million. On a constant exchange rate basis, underlying earnings before tax increased by €151 million (+48%): Life & Savings (€+108 million or +27%) to €509 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax increased by €0.2 billion (+42%) mainly driven by higher Unit- Linked management fees (€+0.1 billion) reflecting higher average separate account balances from favorable equity markets, a higher GMxB hedge margin (€+0.1 billion), and the non-repeat of 1H17 unfavorable mortality model updates (€+0.1 billion), partly offset by a less favorable mortality experience notably influenced by a severe influenza season in 1Q18; Other (€-9 million or -12%) to €-80 million. On a constant exchange rate basis, Other underlying earnings before tax decreased by €18 million (-25%) mainly driven by higher financial charges on external debt raised in the context of the IPO of AXA Equitable Holdings, Inc.; Health (€+3 million or +20%) to €-12 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €2 million (+11%). Income tax expenses increased by €219 million to €-76 million. On a constant exchange rate basis, income tax expenses increased by €228 million mainly driven by the non-repeat of positive tax settlements in 1H17 (€204 million) and higher pre-tax underlying earnings, partly offset by a decrease in the corporate tax rate from 35% to 21%. Minority interests increased by €25 million to €-25 million. On a constant exchange rate basis, minority interests increased by €28 million, as AXA Group average ownership over the period decreased from 100% on June 30, 2017, to 92.7% on June 30, 2018, as a consequence of the IPO of AXA Equitable Holdings, Inc. completed in May 2018. Underlying earnings decreased by €141 million (-31%) to €316 million. On a constant exchange rate basis, underlying earnings decreased by €104 million (-23%). Adjusted earnings decreased by €125 million (-28%) to €319 million. On a constant exchange rate basis, adjusted earnings decreased by €88 million (-20%) driven by lower underlying earnings, partly offset by higher net realized capital gains. Net income decreased by €295 million (-58%) to €213 million. On a constant exchange rate basis, net income decreased by €270 million (-53%) driven by an unfavorable change in the fair value of mutual funds and interest rate derivatives not eligible for hedge accounting backing structured products (€-134 million), lower adjusted earnings (€-88 million), as well as higher restructuring costs and exceptional operations (€-49 million) in the context of the IPO of AXA Equitable Holdings, Inc completed in May 2018. Half Year 2018 Financial Report 56 UNITED STATES - AB (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 1,321 1,333 2,700 Underlying earnings before tax 332 284 685 Income tax expenses / benefits (60) (78) (152) Minority interests (124) (99) (250) Income from affiliates and associates Underlying earnings Group share 148 107 283 Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share 148 107 283 Profit or loss on financial assets (under Fair Value option) and derivatives 2 Exceptional operations (including discontinued operations) 2 133 Goodwill and other related intangibles impacts Integration and restructuring costs (5) (7) NET INCOME GROUP SHARE 150 105 410 Average Assets under Management (in Euro billion) 461 475 469 Asset management fee bps 40.5 39.2 39.8 Underlying cost income ratio 71.6% 76.5% 71.8% Average exchange rate : € 1.00 = US Dollar 1.21 1.08 1.13 (a) Net of intercompany eliminations. Gross Revenues amounted to €1,376 million before intercompany eliminations as of June 30, 2018. Asset under Management (“AUM”) increased by €1 billion from December 31, 2017, to €469 billion at the end of June 30, 2018, driven by a €+13 billion favorable foreign exchange rate impact, partly offset by €-4 billion unfavorable market effect following increases both interest rates and equity markets volatility, and €-8 billion net outflows as inflows in Private clients were more than offset by outflows on lower-margin Institutional retirement products. Management fee bps increased by 1.3 bps to 40.5 bps mainly due to a more favorable business mix with higher average AUM in Retail and Private clients. Gross revenues decreased by €13 million (-1%) to €1,321 million. On a comparable basis, gross revenues increased by €142 million (+11%) driven by higher management fees (€+107 million) due to both higher average AUM and higher average management fee bps, higher performance fees, and higher distribution fees mainly due to higher average AUM in retail mutual funds. Underlying earnings before tax increased by €48 million (+17%) to €332 million. On a constant exchange rate basis, underlying earnings before tax increased by €87 million (+31%) mainly driven by higher revenues and lower expenses from both the non-repeat of 1H17 one-off charges linked to the reduction of real estate footprint (€+36 million) and efficiency initiatives. The underlying cost income ratio decreased by 4.9 points to 71.6%. Half Year 2018 Financial Report 57 Income tax expenses decreased by €18 million (-23%) to €-60 million. On a constant exchange rate basis, income tax expenses decreased by €11 million (-14%) mainly driven by a decrease in the corporate tax rate from 35% to 21%, partly offset by higher pre-tax underlying earnings. Minority interests increased by €25 million (+25%) to €-124 million. On a constant exchange rate basis, minority interests increased by €40 million (+40%) driven by higher pre-tax underlying earnings and a decrease in AXA Group average ownership over the period from 64.6% on June 30, 2017, to 60.0% on June 30, 2018, as a consequence of the IPO of AXA Equitable Holdings, Inc. completed in May 2018. Underlying earnings and adjusted earnings increased by €41 million (+38%) to €148 million. On a constant exchange rate basis, underlying earnings and adjusted earnings increased by €58 million (+54%). Net income increased by €45 million (+43%) to €150 million. On a constant exchange rate basis, net income increased by €63 million (+60%) mainly driven by higher adjusted earnings. Half Year 2018 Financial Report 58 International (in Euro million, except percentages) June 30, 2018 June 30, 2017 restated (b) December 31, 2017 Gross revenues (a) 3,419 3,732 7,034 Life & Savings 646 856 1,678 Property & Casualty 1,946 2,002 3,798 Health 695 679 1,235 Other (c) 132 195 323 New business APE 123 129 278 NBV Margin 33.5% 25.3% 28.0% Underlying earnings before tax 231 251 379 Life & Savings 43 59 92 Property & Casualty 150 153 235 Health 12 (4) 3 Other (c) 26 43 49 Income tax expenses / benefits (43) (47) (91) Minority interests (25) (19) (37) Income from affiliates and associates 47 34 86 Underlying earnings Group share 210 218 337 Net capital gains or losses attributable to shareholders net of income tax (1) 2 (7) Adjusted earnings Group share 209 220 330 Profit or loss on financial assets (under fair value option) and derivatives 14 (15) 11 Exceptional operations (including discontinued operations) (20) (10) (22) Goodwill and other related intangible impacts (8) (13) (27) Integration and restructuring costs (5) (10) (16) NET INCOME GROUP SHARE 190 172 276 Property & Casualty Combined Ratio 100.1% 100.4% 101.4% Health Combined Ratio 99.3% 102.3% 101.6% Protection Combined Ratio 100.2% 98.3% 98.4% (a) Net of intercompany eliminations. (b) Restated: reallocation of Direct Insurance business into the other Property & Casualty activities, as well as banking activities and holdings into the Other activities. (c) Other corresponds to AXA Bank Belgium and holdings. Scope: (i) Mexico, the Gulf Region, Colombia, Poland, Turkey, Singapore, Morocco, Luxembourg, Malaysia Property & Casualty, AXA Bank Belgium, the Czech Republic Life & Savings, the Slovak Republic Life & Savings, Greece and Brazil are fully consolidated; (ii) Russia (Reso), India, Nigeria and Lebanon are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income. Gross revenues decreased by €313 million (-8%) to €3,419 million. On a comparable basis, gross revenues increased by €103 million (+3%) mainly driven by insurance activities (+5%), partly offset by a decrease in banking revenues (-32%): Property & Casualty (€-56 million or -3%) to €1,946 million. On a comparable basis, Property & Casualty gross revenues increased by €98 million (+5%): o Mexico (€+42 million or +10%) to €407 million mainly driven by new business in Motor; Half Year 2018 Financial Report 59 o Turkey (€+36 million or +12%) to €273 million mainly driven by an increase in Motor Third Party Liability from the insurance pool introduced by the government in September 2017; o The Gulf Region (€-28 million or -9%) to €261 million mainly driven by a reduction of the size of a large Commercial Motor fleet; o Poland (€+27 million or +13%) to €236 million mainly due to new business in Motor and Commercial lines Non-Motor; o Colombia (€+30 million or +14%) to €218 million mainly driven by new business in Personal Accident, Workers’ Compensation and Personal Motor; o Morocco (€+7 million or +4%) to €152 million mainly driven by Commercial Property; o Singapore (€-14 million or -11%) to €99 million reflecting selective underwriting. Health (€+15 million or +2%) to €695 million. On a comparable basis, Health gross revenues increased by €82 million (+12%) driven by Mexico (€+57 million or +19% to €323 million) stemming from volume and tariff increases, the Gulf Region (€+5 million or +3% to €183 million) and Singapore (€+7 million or +12% to €67 million). Life & Savings (€-210 million or -25%) to €646 million. On a comparable basis, Life & Savings gross revenues decreased by €15 million (-2%): o Singapore (€+10 million or +8%) to €128 million mainly driven by higher sales in Unit-Linked and Protection; o Colombia (€-10 million or -9%) to €89 million mainly due to lower sales in G/A Savings; o Luxembourg (€-10 million or -10%) to €82 million mainly driven by lower sales in Unit-Linked; o Morocco (€-7 million or -10%) to €60 million mainly due to lower sales in G/A Savings. Other (€-62 million or -32%) to €132 million. On a comparable basis, Other gross revenues decreased by €62 million (-32%) at AXA Bank Belgium mainly due to an unfavorable change in the fair value of an internal interest rate swap (neutral at Group level) used to hedge loans granted by AXA Banque France, lower realized capital gains and lower commercial margin. APE decreased by €6 million (-5%) to €123 million. On a comparable basis, APE remained stable: Singapore (€-4 million or -9%) to €45 million mainly driven by lower G/A Savings sales; India (€+9 million or +66%) to €19 million mainly in Protection; Poland (€-2 million or -10%) to €16 million mainly due to lower Unit-Linked sales; Turkey (€-2 million or -19%) to €6 million mainly driven by lower Unit-Linked sales. NBV Margin increased by 8.2 points to 33.5%. On a comparable basis, NBV Margin increased by 7.7 points mainly driven by a positive business mix towards Protection products mainly in Singapore. Underlying earnings before tax decreased by €20 million (-8%) to €231 million. On a constant exchange rate basis, underlying earnings before tax decreased by €4 million (-2%): Property & Casualty (€-2 million or -2%) to €150 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €11 million (+7%) mainly driven by (i) Turkey (€+14 million) mainly driven by a higher investment income (€+8 million) due to both higher interest rates and average asset base, (ii) Poland (€+8 million) from a higher net technical margin (€+9 million) mainly driven by Personal Motor, and (iii) Colombia (€+7 million) mainly driven by a higher investment income (€+6 million), partly offset by (iv) Singapore (€-19 million) largely due to a less favorable prior year reserve development, and (v) Brazil (€-10 million) mainly due to higher expenses; Half Year 2018 Financial Report 60 Life & Savings (€-17 million or -28%) to €43 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax decreased by €16 million (-27%) mainly driven by (i) Singapore (€-9 million) largely due to the non-repeat of a positive regulatory change one-off relating to the mortality table in 1H17, (ii) Mexico (€-6 million) mainly due to lower mortality margin, and (iii) Poland (€-5 million) reflecting higher Deferred Acquisition Cost amortization following increased surrenders; Other (€-17 million) to €26 million. On a constant exchange rate basis, Other underlying earnings before tax decreased by €17 million primarily at AXA Bank Belgium (€-15 million to €43 million) mainly due to the decrease in gross revenues, partly offset by lower expenses; Health (€+16 million) to €12 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €18 million mainly from Mexico (€+10 million) and the Gulf Region (€+7 million) reflecting management actions to improve the net technical margin. Income tax expenses decreased by €5 million (-10%) to €-43 million. On a constant exchange rate basis, income tax expenses remained almost stable. Income from affiliates and associates increased by €13 million (+40%) to €47 million. On a constant exchange rate basis, income from affiliates and associates increased by €17 million (+51%) mainly driven by higher earnings at Reso (€+13 million). Underlying earnings decreased by €8 million (-4%) to €210 million. On a constant exchange rate basis, underlying earnings increased by €4 million (+2%). Adjusted earnings decreased by €10 million (-5%) to €209 million. On a constant exchange rate basis, adjusted earnings increased by €1 million mainly driven by higher underlying earnings. Net income increased by €18 million (+11%) to €190 million. On a constant exchange rate basis, net income increased by €33 million (+19%) driven by favorable foreign exchange impacts and higher adjusted earnings. Half Year 2018 Financial Report 61 Transversal & Central Holdings (in Euro million, except percentages) Gross revenues (a) Life & Savings Property & Casualty Health Other (b) Underlying earnings before tax Life & Savings Property & Casualty Health Other (b) Income tax expenses / benefits Minority interests Income from affiliates and associates Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio (a) Net of intercompany eliminations. (b) Other corresponds to asset management activities and holdings. Half Year 2018 Financial Report June 30, 2018 3,168 3 2,463 71 631 (70) 1 211 (2) (281) 57 (5) 10 (7) 29 22 (146) (25) (0) (12) (162) 96.2% 102.1% June 30, 2017 3,085 6 2,376 96 607 (94) 4 165 8 (271) (33) (4) 9 (121) 18 (103) (125) 53 (1) (16) (191) 98.2% 91.1% December 31, 2017 5,152 7 3,711 158 1,276 (417) (13) 197 23 (623) 95 (10) 18 (313) 26 (288) (211) 187 (1) (53) (365) 101.1% 87.1% 62 AXA INVESTMENT MANAGERS (“AXA IM”) (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 631 607 1,276 Underlying earnings before tax 188 178 353 Income tax expenses / benefits (55) (54) (104) Minority interests (4) (3) (9) Income from affiliates and associates 10 9 18 Underlying earnings Group share 139 129 257 Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share 139 129 257 Profit or loss on financial assets (under Fair Value option) and derivatives 11 (5) 10 Exceptional operations (including discontinued operations) (50) 58 68 Goodwill and other related intangibles impacts (0) (1) (1) Integration and restructuring costs (4) (8) (12) NET INCOME GROUP SHARE 96 172 322 Average Assets under Management (in Euro billion) 641 627 630 Asset management fee bps 17.2 18.0 17.9 Underlying cost income ratio 69.7% 69.6% 70.8% (a) Net of intercompany eliminations. Gross Revenues amounted to €786 million before intercompany eliminations as of June 30, 2018. Assets under Management ("AUM") increased by €13 billion from December 31, 2017, to €759 billion at the end of June 30, 2018, mainly driven by €+13 billion net inflows from Main Fund (€+9 billion) due to temporary cash inflows linked to the acquisition of XL Group and Third-Party clients (€+4 billion), partly offset by net outflows from Asian joint ventures (€-1 billion). Management fee bps decreased by 0.7 bps to 17.2 bps. On a constant exchange rate basis, management fee bps decreased by 0.7 bps mainly due to an unfavorable change in product mix. Gross revenues increased by €24 million (+4%) to €631 million. On a comparable basis, gross revenues increased by €33 million (+5%) mainly driven by higher performance fees including realized carried interest (€+12 million), management fees (€+12 million) and transaction fees (€+11 million). Underlying earnings before tax increased by €10 million (+6%) to €188 million. On a constant exchange rate basis, underlying earnings before tax increased by €13 million (+7%) as a result of higher gross revenues, partly offset by higher general expenses mainly due to regulatory costs (mainly driven by MIFID 2 regulation). The underlying cost income ratio increased by 0.1 point to 69.7%. On a constant exchange rate basis, the underlying cost income ratio increased by 0.6 point. Income tax expenses increased by €1 million (+1%) to €-55 million. On a constant exchange rate basis, income tax expenses increased by €2 million (+3%). Income from affiliates and associates increased by €1 million (+14%) to €10 million. On a constant exchange rate basis, income from affiliates and associates increased by €2 million (+18%) mainly due to an increase in management fee bps in the Chinese joint venture and higher AUM in both Korean and Indian joint ventures. Underlying earnings and adjusted earnings increased by €11 million (+8%) to €139 million. On a constant exchange rate basis, underlying earnings and adjusted earnings increased by €13 million (+10%). Half Year 2018 Financial Report 63 Net income decreased by €77 million (-45%) to €96 million. On a constant exchange rate basis, net income decreased by €79 million (-46%) mainly driven by the non-repeat of 1H17 positive adjustment to the deferred consideration linked to the disposal of AXA Private Equity in 2013 (€+58 million), as well as an exceptional tax charge related to the transfer of AB shares to AXA US in the context of the IPO of AXA Equitable Holdings, Inc. completed in May 2018. Half Year 2018 Financial Report 64 AXA CORPORATE SOLUTIONS ASSURANCE (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 1,655 1,634 2,322 Underlying earnings before tax 96 104 78 Income tax expenses / benefits (29) (30) (27) Minority interests (1) (1) (1) Income from affiliates and associates Underlying earnings Group share 67 73 50 Net capital gains or losses attributable to shareholders net of income tax 28 24 31 Adjusted earnings Group share 95 97 81 Profit or loss on financial assets (under fair value option) and derivatives (27) (16) (36) Exceptional operations (including discontinued operations) (4) (1) (6) Goodwill and other related intangible impacts Integration and restructuring costs (0) NET INCOME GROUP SHARE 65 80 40 Property & Casualty Combined Ratio 100.4% 99.2% 104.2% (a) Net of intercompany eliminations. Gross revenues increased by €21 million (+1%) to €1,655 million. On a comparable basis, gross revenues decreased by €12 million (-1%) notably in Construction (€-38 million or -29%) and Liability (€-19 million or -5%) driven by strong underwriting actions to protect the profitability, partly offset by Property (€+19 million or +4%) and Motor (€+17 million or +9%) mainly driven by new business and tariff increases. Underlying earnings before tax decreased by €8 million (-8%) to €96 million. On a constant exchange rate basis, underlying earnings before tax decreased by €8 million (-7%) driven by a lower prior year reserve development, partly offset by a higher investment income. Income tax expenses decreased by €1 million (-5%) to €-29 million. On a constant exchange rate basis, income tax expenses decreased by €1 million (-4%) mainly due to lower pre-tax underlying earnings. Underlying earnings decreased by €6 million (-9%) to €67 million. On a constant exchange rate basis, underlying earnings decreased by €6 million (-8%). Adjusted earnings decreased by €2 million (-2%) to €95 million. On a constant exchange rate basis, adjusted earnings decreased by €1 million (-1%) driven by lower underlying earnings, partly offset by higher net realized capital gains. Net income decreased by €15 million (-19%) to €65 million. On a constant exchange rate basis, net income decreased by €15 million (-18%) mainly driven by lower adjusted earnings and an unfavorable change in the fair value of mutual funds. Half Year 2018 Financial Report 65 AXA ASSISTANCE (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Gross revenues (a) 680 653 1,275 Property & Casualty 609 557 1,117 Health 71 96 158 Underlying earnings before tax 14 23 43 Property & Casualty 15 15 20 Health (2) 8 23 Income tax expenses / benefits (10) (11) (16) Minority interests (0) 0 (0) Income from affiliates and associates 1 1 1 Underlying earnings Group share 3 13 27 Net capital gains or losses attributable to shareholders net of income tax 1 (0) 0 Adjusted earnings Group share 5 13 28 Profit or loss on financial assets (under fair value option) and derivatives (6) (2) (7) Exceptional operations (including discontinued operations) 0 (1) Goodwill and other related intangible impacts Integration and restructuring costs (1) (3) (5) NET INCOME GROUP SHARE (2) 8 14 Property & Casualty Combined Ratio 98.1% 97.9% 98.7% Health Combined Ratio 102.1% 91.1% 87.1% (a) Net of intercompany eliminations. Gross revenues increased by €27 million (+4%) to €680 million. On a comparable basis, gross revenues increased by €43 million (+7%): Property & Casualty (€+52 million or +9%) to €609 million. On a comparable basis, Property & Casualty gross revenues increased by €42 million (+7%) from higher volumes in Non-Motor (€+28 million) mainly in Home and Travel, and in Motor (€+15 million); Health (€-25 million or -26%) to €71 million. On a comparable basis, Health gross revenues increased by €1 million (+1%). Underlying earnings before tax decreased by €10 million (-41%) to €14 million: Property & Casualty (€0 million or +2%) to €15 million mainly driven by as the improvement in loss ratio following lower attritional losses in Motor and an increase in investment income were offset by a higher level of commissions stemming from the business model evolution through large partnerships, especially in Home; Health (€-10 million) to €-2 million driven by higher commissions due to a less favorable business mix and higher claims related to an increase in service usage in Telemedicine. Income tax expenses decreased by €1 million (-5%) to €-10 million mainly driven by lower pre-tax underlying earnings. Underlying earnings decreased by €9 million (-73%) to €3 million. Half Year 2018 Financial Report 66 Adjusted earnings decreased by €8 million (-64%) to €5 million mainly driven by lower underlying earnings. Net income decreased by €9 million to €-2 million mainly driven by lower adjusted earnings. Half Year 2018 Financial Report 67 AXA SA (in Euro million, except percentages) June 30, 2018 June 30, 2017 December 31, 2017 Underlying earnings Group share (298) (388) (726) Net capital gains or losses attributable to shareholders net of income tax (2) (0) Adjusted earnings Group share (300) (388) (727) Profit or loss on financial assets (under fair value option) and derivatives (125) (104) (197) Exceptional operations (including discontinued operations) 58 (5) 136 Goodwill and other related intangible impacts Integration and restructuring costs (6) (35) NET INCOME GROUP SHARE (373) (497) (822) Underlying earnings increased by €90 million to €-298 million mainly driven by the impact of the removal of the 3% French Tax on dividend paid to shareholders in 1H17 (€+84 million) as well as lower general expenses, partly offset by higher financial charges in the context of the acquisition of XL Group. Adjusted earnings increased by €89 million to €-300 million mainly driven by higher underlying earnings. Net income increased by €124 million to €-373 million due to higher adjusted earnings and the one-off benefit from the upcoming reimbursement of the tax paid on dividends received from European subsidiaries held for more than 95% following the decision from the European Court of Justice, partly offset by an unfavorable change in the fair value of derivatives not eligible for hedge accounting. Half Year 2018 Financial Report 68 Outlook AXA remains focused on the delivery of its Ambition 2020 plan and on the transformation of its business model across all major geographies, with a key priority being the successful integration of the XL Group. Anticipating the rapidly evolving needs of its customers, AXA’s strategy is articulated around its preferred segments (Health, P&C Commercial lines and Protection) and a focus on partnerships and innovation. A significant shift in strategic profile of the Group is well underway, and is accelerating by the successful IPO of the US operations in 1H18 in combination with the strategic decision to acquire the XL Group to become the #1 global P&C commercial lines insurer, leading to reduced sensitivities to financial markets and higher proportion of technical margin earnings. The Group plans to update its capital management policy to reflect this change in profile. AXA’s Solvency II position and free cash flow generation should remain strong and resilient to external shocks thanks to robust underwriting policies, a high quality asset portfolio and disciplined capital allocation. The intended subsequent sell-downs of its US operations, a strong operating cash generation, disposals and in-force management actions, should provide AXA with additional cash flexibility over the next years. The Group’s first priority for using this cash flexibility will be to reduce leverage. With its clear Ambition 2020 strategy, a simplified organization focused on fewer countries designed to foster growth across its preferred segments, a significant shift in strategic profile and a strong balance sheet with financial flexibility, AXA is well positioned to create lasting shareholder value and offer an attractive return. Half Year 2018 Financial Report 69 Glossary This glossary includes definitions of non-GAAP financial measures, or alternative performance measures (APMs), that management believes are useful to understand the Group’s business and analyze the Group’s performance. The scope of the following definitions of APMs remains unchanged compared to prior periods. All APMs are indicated by an asterisk (*). Scope and comparable basis SPLIT BY GEOGRAPHIES The split by geographies is detailed below: France (insurance and banking activities, and holdings); Europe, consisting of: o Switzerland (insurance activities), o Germany (insurance activities excluding AXA Art, banking activities and holdings), o Belgium (insurance activities and holding), o United Kingdom and Ireland (insurance activities and holdings), o Spain (insurance activities), o Italy (insurance activities and holding); Asia, consisting of: o Japan (insurance activities), o Hong Kong (insurance activities), o Asia - Direct, consisting of:  AXA Global Direct Japan,  AXA Global Direct South Korea, o Asia High Potentials, consisting of:  Thailand (insurance activities),  Indonesia (insurance activities),  China (insurance activities),  The Philippines (insurance activities), o Asia Holding; United States (insurance activities, AB and holdings); International, consisting of: o AXA Bank Belgium (banking activities), o Brazil (insurance activities and holding), o Colombia (insurance activities), o Czech Republic and Slovak Republic (insurance activities), Half Year 2018 Financial Report 70 o Greece (insurance activities), o The Gulf Region (insurance activities and holding), o India (insurance activities), o Lebanon (insurance activities and holding), o Luxembourg (insurance activities and holding), o Malaysia (insurance activities), o AXA Mediterranean Holdings, o Mexico (insurance activities), o Morocco (insurance activities and holding), o Nigeria (insurance activities and holding), o Poland (insurance activities), o Russia (Reso) (insurance activities), o Singapore (insurance activities), o Turkey (insurance activities and holding); Transversal & Central Holdings, consisting of: o AXA Investment Managers, o AXA Corporate Solutions Assurance, o AXA Assistance, o AXA Art, o AXA Liabilities Managers, o AXA Global Re, o AXA Life Europe, o AXA SA and other Central Holdings. CURRENT ENGINES AND HIGH POTENTIALS The split between current engines and high potentials is detailed below: Current Engines: Belgium, France, Germany, Hong Kong, Italy, Japan, Spain, Switzerland, UK & Ireland, the United States and AB; High Potentials: Brazil, China, Indonesia, Mexico, the Philippines and Thailand. COMPARABLE BASIS FOR REVENUES, ANNUAL PREMIUM EQUIVALENT AND NBV MARGIN “On a comparable basis” means the following: data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis); data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Half Year 2018 Financial Report 71 Earnings and Capital ADJUSTED EARNINGS* Adjusted Earnings represent the net income (Group share) as disclosed in Part 2 - “Consolidated Financial Statements” of this Report, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: integration and restructuring costs related to material newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill and other related intangibles; exceptional operations (primarily change in scope and discontinued operations); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Derivatives related to invested assets: include all foreign exchange derivatives, except the ones related to currency options in earnings hedging strategies which are included in underlying earnings; exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy; and exclude derivatives involved in the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds, for which cost at inception, intrinsic value and pay-off flow through adjusted earnings, and only time value flows through net income when there is no intention to sell the derivatives in the short term (if not, flows through adjusted earnings). UNDERLYING EARNINGS* Underlying Earnings correspond to Adjusted Earnings without the following elements net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowances (on assets not designated under fair value option or trading assets); and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities backing General Account assets and shareholders’ funds. EARNINGS PER SHARE Earnings per share (EPS) represent AXA's consolidated earnings (after interest charges related to both undated debts recorded through shareholders’ equity - Group share and mandatory exchangeable bonds recorded through shareholders’ equity - Minority interests and financial debt), divided by the weighted average number of outstanding ordinary shares. Diluted earnings per share (diluted EPS) represent AXA's consolidated earnings (after interest charges related to both undated debts recorded through shareholders’ equity - Group share and mandatory exchangeable bonds recorded through shareholders’ equity – Minority interests and financial debt), divided by the weighted average number of outstanding ordinary shares, on a diluted basis (i.e. including the potential impact of all outstanding Half Year 2018 Financial Report 72 dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). RETURN ON EQUITY The calculation of Return on Equity (“RoE”) is based on following principles: for net income RoE: calculation is based on consolidated financial statements, i.e. shareholders’ equity including undated subordinated debt (“Super Subordinated Debts” TSS/“Undated Subordinated Debts” TSDI), mandatory exchangeable bonds (MEB) recorded through shareholders’ equity – Minority interests and financial debt, and Other Comprehensive Income “OCI”, and net income not reflecting any interest charges on TSS/TSDI; for adjusted RoE* and underlying RoE: o all undated subordinated debts (TSS/TSDI) and mandatory exchangeable bonds are treated as financing debt, thus excluded from shareholders’ equity, o interest charges on TSS/TSDI and mandatory exchangeable bonds are deducted from earnings, o reserves relating to the change in the fair value of financial investments available for sale are excluded from the average shareholders’ equity. FREE CASH FLOWS Free Cash Flows are defined as a measure of dividend capacity calculated as the sum of earnings and required capital change. AFR (AVAILABLE FINANCIAL RESOURCES) Surplus derived from a Solvency II balance sheet. It is defined as the excess of market value of assets over best estimate liabilities and Risk Margin as per Solvency II regulation. REGULATORY SOLVENCY RATIO This ratio is calculated as per Solvency II regulation, and is equal to the total of available financial resources (AFR) divided by the Group solvency capital requirement. The solvency capital requirement is set at a level ensuring that insurers and reinsurers are able to meet their obligations towards policyholders and beneficiaries over the next 12 months, with a 99.5% probability. The denominator of the ratio can be calculated either through a standard formula or through an internal model. AXA is using an internal model. DEBT GEARING Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed in percentage. Debt Gearing is used by the Management of the Group to measure the financial leverage and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt and undated subordinated debt) by total capital employed (shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus gross debt). Half Year 2018 Financial Report 73 Activities INSURANCE LIFE & SAVINGS HYBRID AND G/A CAPITAL LIGHT PRODUCTS Hybrid products: Savings products allowing clients to invest in both Unit-Linked and General Account funds; G/A Capital light products: General Account Savings products which, at inception, create more AFR than the economic capital they consume. LIFE & SAVINGS NET INFLOWS Life & Savings Net Inflows are defined as the collected premiums (including risk premiums, fees and revenues), net of surrenders, maturities, claims paid and other benefits paid. This definition is applicable to all Life and Savings products as well as Life-like Health products, with the exception of Mutual Funds products. NEW BUSINESS APE (NEW BUSINESS ANNUAL PREMIUM EQUIVALENT) It represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. NBV (NEW BUSINESS VALUE) The value of newly issued contracts during the current year. It consists of the present value of future profits after the costs of acquiring business, less (i) an allowance for the time value of financial option and guarantees, (ii) cost of capital and non-financial risks. AXA calculates this value net of tax. NBV MARGIN (NEW BUSINESS VALUE MARGIN) New Business Value Margin is the ratio of: New Business Value representing the value of newly issued contracts during the current year; to Annual Premium Equivalent. This ratio represents the profitability of the new business. MARGIN ANALYSIS The margin analysis is presented on an underlying earnings basis. Even though the presentation of the Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. Underlying investment margin includes the following items: net investment income; and interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income as well as the unwind of the discount rate used in calculating technical reserves. Underlying fees & revenues include: Half Year 2018 Financial Report 74 revenues derived from mutual fund sales (which are part of consolidated revenues); loadings charged to policyholders (or contractual charges) on premiums of all Life & Savings products; loadings on deposits received on all Life & Savings products and fees on funds under management for separate account (Unit-Linked) business; deferred income such as capitalization net of amortization of URR (Unearned Revenue Reserve) and UFR (Unearned Fee Reserve); and other fee revenues, e.g., fees received on financial planning or sales of third party products. Underlying net technical margin includes the following components: the difference between income or earned premiums for assuming risk and the actual cost of benefits or claims charges; surrender margin: the difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination; GMxB (Variable Annuity guarantees) active financial risk management: the net result from GMxB lines corresponding to explicit charges related to these types of guarantees less cost of hedging. It also includes the unhedged business result; policyholder bonuses if the policyholders participate in the risk margin; ceded reinsurance results; other changes in claims and insurance reserves: all the reserve strengthening or release coming from changes in valuation assumptions, claims experience, additional reserves for mortality risk and other technical impacts such as premium deficiencies net of derivatives if any; and claims handling costs. Underlying expenses include the following components: acquisition expenses, including commissions and general expenses allocated to new business; capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; amortization of Deferred Acquisition Costs (DAC) and net rights to future management fees for investment contracts without DPF, including the impact of interest capitalized; administrative expenses; and policyholder bonuses if the policyholder participates in the expenses of the Company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Life & Savings Margin Analysis as set out below: For insurance contracts and investment contracts with Discretionary Participation Features (DPF): o gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees & Revenues” and “Net Technical Margin”; o policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”; Half Year 2018 Financial Report 75 o the “Investment margin” represents the net investment result in the Statement of Income and is adjusted to consider the related policyholder participation (see above) as well as changes in specific reserves linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees & Revenues”; o change in URR (Unearned Revenue Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis. For investment contracts without DPF: o deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the underlying Statement of Income within Gross Consolidated Revenues on a separate line, and in Margin Analysis in the lines “Fees & Revenues” and “Net Technical Margin”; o change in UFR (Unearned Fee Reserve - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis. INSURANCE RATIOS (APPLICABLE TO PROPERTY & CASUALTY, HEALTH AND PROTECTION ACTIVITIES) Current accident year loss ratio net of reinsurance is the ratio of: current year claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on current accident year, excluding for the discounted reserves the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. Underlying expense ratio is the ratio of: underlying expenses (excluding claims handling costs, including changes in VBI amortization); to earned revenues gross of reinsurance. Underlying expenses include two components: expenses (including commissions) related to acquisition of contracts (with the related acquisition expense ratio) and all other expenses excluding claims handling costs (with the related administrative expense ratio). Underlying expenses exclude customer intangible amortization, but include the impact from the changes in VBI amortization. The underlying combined ratio is the sum of the underlying expense ratio and the all accident year loss ratio. Half Year 2018 Financial Report 76 ASSET MANAGEMENT Net inflows: Inflows of client money less outflows of client money. Net inflows are used by the Management to measure the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying cost income ratio is the ratio of: general expenses excluding distribution related expenses; to gross revenues excluding distribution fees received. Assets under management (AUM) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers and AB. AUM only includes funds and mandates which generate fees and exclude double counting. BANKING Operating net banking revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of « fair-value-P&L » assets and of hedging derivatives. Half Year 2018 Financial Report 77 ACTIVITY REPORT – HALF YEAR 2018 II Consolidated financial statements / Half Year 2018 I CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 Table Of Contents II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION .............................................................................. 80 II.2 CONSOLIDATED STATEMENT OF INCOME .................................................................................................... 82 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME .................................................................... 83 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ............................................................................... 84 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS ............................................................................................ 86 NOTE 1 Accounting Principles .......................................................................................................................... 89 NOTE 2 Scope of consolidation ....................................................................................................................... 91 NOTE 3 Consolidated statement of income by segment .......................................................................... 95 NOTE 4 Transactions in consolidated entities ................................................................................................ 98 NOTE 5 Goodwill ............................................................................................................................................... 101 NOTE 6 Investments .......................................................................................................................................... 102 NOTE 7 Shareholder’s equity and minority interests .................................................................................. 111 NOTE 8 Financing debt.................................................................................................................................... 118 NOTE 9 Net income per ordinary share ....................................................................................................... 119 NOTE 10 Subsequent events .......................................................................................................................... 120 Half Year 2018 Financial Report 79 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in Euro million) June 30, 2018 December 31, 2017 Goodwill 15,656 15,391 Value of purchased business in force (a) 1,439 1,891 Deferred acquisition costs and equivalent 24,945 22,881 Other intangible assets 3,188 3,170 Intangible assets 45,228 43,333 Investments in real estate properties 19,604 23,101 Financial investments 489,317 513,254 Assets backing contracts where the financial risk is borne by policyholders (b) 176,983 175,003 6 Investments from insurance activities 685,904 711,358 6 Investments from banking and other activities 38,145 37,335 Investments accounted for using the equity method 2,473 2,381 Reinsurers' share in insurance and investment contracts liabilities 15,063 13,081 Tangible assets 1,371 1,380 Deferred policyholders' participation assets 180 Deferred tax assets 1,240 837 Other assets 2,790 2,217 Receivables arising from direct insurance and inward reinsurance operations 18,837 16,360 Receivables arising from outward reinsurance operations 889 1,013 Receivables - current tax 1,233 1,266 Other receivables 13,939 12,868 Receivables 34,898 31,507 4 Assets held for sale (c) 30,428 5,019 Cash and cash equivalents 40,245 23,898 TOTAL ASSETS 895,176 870,128 Note: All invested assets are shown net of related derivative instruments impact. (a) Amounts are gross of tax. (b) Includes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. (c) As of June 30, 2018, amounts include the assets of AXA Wealth Management (HK) Limited (“AWM”), German pension business ProbAV Pensionskasse AG and the Switzerland Life & Savings portfolio for which the disposal process was not finalized at period end. As of December 31, 2017, amounts include the assets of AXA Wealth Management (HK) Limited (“AWM”) and of German pension business ProbAV Pensionskasse AG for which the disposal process was not finalized at year-end. Half Year 2018 Financial Report 80 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 Notes (in Euro million) June 30, 2018 December 31, 2017 Share capital and capital in excess of nominal value 24 984 25 033 Reserves and translation reserve 38 179 38 370 Net consolidated income - Group share 2 796 6 209 Shareholders’ equity – Group share 65 959 69 611 Minority interests 11 065 5 656 7 TOTAL SHAREHOLDERS' EQUITY 77 024 75 267 Subordinated debt 9 278 7 086 Financing debt instruments issued 4 383 1 013 Financing debt owed to credit institutions 0 0 8 Financing debt (a) 13 661 8 099 Liabilities arising from insurance contracts 391 917 401 129 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (b) 161 351 159 702 Total liabilities arising from insurance contracts 553 268 560 831 Liabilities arising from investment contracts with discretionary participating features 33 077 33 199 Liabilities arising from investment contracts with no discretionary participating features 3 094 2 900 Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 3 634 12 413 3 637 12 260 Total liabilities arising from investment contracts 52 218 51 995 Unearned revenue and unearned fee reserves 2 614 2 598 Liabilities arising from policyholder participation and other obligations 41 990 44 409 Derivative instruments relating to insurance and investment contracts (3 291) (2 895) Liabilities arising from insurance and investment contracts 646 800 656 938 Liabilities arising from banking activities (a) 34 360 32 898 Provisions for risks and charges 11 164 11 901 Deferred tax liabilities 5 670 5 784 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders 7 328 8 756 Other debt instruments issued, notes and bank overdrafts (a) 6 143 6 651 Payables arising from direct insurance and inward reinsurance operations 7 605 9 318 Payables arising from outward reinsurance operations 6 422 6 170 Payables – current tax 848 1 023 Collateral debts relating to investments under lending agreements or equivalent 32 333 28 401 Other payables 15 723 14 503 Payables 76 402 74 822 4 Liabilities held for sale (c) 30 095 4 419 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 895 176 870 128 (a) Amounts are shown net of related derivative instruments impact. (b) Includes liabilities arising from contracts where the financial risk is borne by policyholders with guaranteed minimum features. (c) As of June 30, 2018, amounts include the liabilities of AXA Wealth Management (HK) Limited (“AWM”), of German pension business ProbAV Pensionskasse AG and the Switzerland Life & Savings portfolio for which the disposal process was not finalized at period-end. As of December 31, 2017, amounts include the liabilities of AXA Wealth Management (HK) Limited (“AWM”) and of German pension business ProbAV Pensionskasse AG a for which the disposal process was not finalized at year-end. Half Year 2018 Financial Report 81 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 II.2 CONSOLIDATED STATEMENT OF INCOME Notes (in Euro million, except earnings per share in Euro) June 30, 2018 June 30, 2017 Gross written premiums 50 381 51 058 Fees and charges relating to investment contracts with no participating features 122 108 Revenues from insurance activities 50 503 51 166 Net revenues from banking activities 233 238 Revenues from other activities 2 863 2 879 Revenues (a) 53 600 54 283 Change in unearned premiums net of unearned revenues and fees (4 378) (4 598) Net investment income (b) 7 044 6 170 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (c) 1 195 908 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (d) (133) 9 942 of which change in fair value of assets with financial risk borne by policyholders (e) 839 8 852 Change in investments impairments (f) (324) (120) Net investment result excluding financing expenses 7 781 16 901 Technical charges relating to insurance activities (e) (41 721) (51 737) Net result from outward reinsurance (368) (295) Bank operating expenses (35) (35) Acquisition costs (5 472) (5 313) Amortization of the value of purchased business in force (34) (27) Administrative expenses (4 986) (5 041) Change in goodwill impairment and other intangible assets impairment and amortization (53) (57) Other income and expenses (134) 225 Other operating income and expenses (52 804) (62 280) Income from operating activities before tax 4 200 4 306 Income (net of impairment) from investment accounted for using the equity method 130 106 Financing debts expenses (g) (178) (183) Net income from operating activities before tax 4 151 4 229 Income tax (795) (789) Net operating income 3 356 3 440 4 Portfolio sale of Switzerland Life & Savings operations (h) (347) 4 Result from discontinued operations net of tax (1) Net consolidated income after tax 3 009 3 440 Split between : Net consolidated income - Group share 2 796 3 268 Net consolidated income - Minority interests 213 171 9 9 Earnings per share Fully diluted earnings per share 1,13 1,12 1,31 1,30 (a) Gross of reinsurance. (b) Net of investment management costs and including gains/losses from derivatives hedging variable annuities. (c) Includes impairment releases on investments sold. (d) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (f) Excludes impairment releases on investments sold. (g) Includes net balance of income and expenses related to derivatives on financing debt (however excludes change in fair value of these derivatives). (h) Mainly related to VBI impairment associated to the Switzerland Life & Savings portfolio sale classified as held for sale. Half Year 2018 Financial Report 82 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2018 June 30, 2017 Reserves relating to changes in fair value through shareholders' equity (2,545) Translation reserves 948 Items that may be reclassified subsequently to Profit or Loss (1,597) Employee benefits actuarial gains and losses 404 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk 13 Items that will not be reclassified subsequently to Profit or Loss 417 Net gains and losses recognized directly through shareholders' equity (1,181) Net consolidated income 3,009 Split between: Net consolidated income - Group share 2,796 Net consolidated income - Minority interests 213 TOTAL COMPREHENSIVE INCOME (CI) 1,829 Split between: Total comprehensive income - Group share 1,954 Total comprehensive income - Minority interests (125) Amounts are presented net of tax, policyholder participation and other shadow accounting related movements. Tax, policyholder participation and related effects are further detailed in the notes to the financial statements. Half Year 2018 Financial Report 83 (264) (2,516) (2,781) 408 408 (2,373) 3,440 3,268 171 1,067 1,128 (61) II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves (c) Shareholders' equity Group share Minority interests Shareholders' equity opening January 1, 2018 2,425,236 2.29 5,554 20,904 (1,060) 15,992 272 7,318 (4,142) 24,773 69,611 5,656 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) Income allocation Dividends paid (1,889) - - - - - - - - - 2.29 - - - - - - - - - (4) - - - - - - - - - (50) 16 - - - - - - - - - 29 - - - - - - - - - - - - - (9) - - - - - - - - 0 - - - - (40) - - - - - - - - - - - - 5 - - - - - - - (110) (2,445) (0) (5,554) (4) (50) 16 29 (40) (110) (2,450) (0) (2,998) - - - - 587 - - 4,947 0 Impact of transactions with shareholders (1,889) 2.29 (4) (33) 29 (9) 0 (40) 5 (5,607) 5,534 Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - (2,409) - 5 - 76 - 832 - 641 13 (2,404) 909 641 13 (142) 40 (237) 0 2,796 2,796 213 Total Comprehensive Income (CI) (2,409) 5 76 832 3,450 1,955 (125) Shareholders' equity closing June 30, 2018 2,423,347 2.29 5,549 20,870 (1,031) 13,574 277 7,354 (3,304) 22,669 65,959 11,065 Note: amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI) (see Note 7.1.1.c). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. (c) Includes the first time application impact of IFRS 15 Revenue from Contracts with Customers. AXA has chosen to adopt the new standard through the cumulative effect approach meaning the cumulative effect was recognised as an adjustment to the opening balance of retained earnings in 2018. Therefore there is no restatement of comparative information for the year 2017. Half Year 2018 Financial Report 84 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests Shareholders' equity opening January 1, 2017 2,425,149 2.29 5,554 20,983 (297) 14,643 197 8,137 61 21,318 70,597 5,283 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments (1,170) - - - 2.29 - - - (3) - - - (52) 12 - - - (666) - - - - - - - - - (27) (95) - - - - - - (3) (52) 12 (666) (27) (95) - - - Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) Dividends paid 0 (117) (14) (2,808) (117) (14) (2,808) 518 Impact of transactions with shareholders (1,170) 2.29 (3) (40) (666) 0 (122) (2,939) (3,769) 518 Reserves relating to changes in fair value through shareholders' equity (388) 154 (235) (30) Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - - - (245) - (2,068) - 407 3,268 (2,313) 407 3,268 (204) 1 171 Total Comprehensive Income (CI) (388) 154 (245) (2,068) 3,675 1,128 (61) Shareholders' equity closing June 30, 2017 2,423,979 2.29 5,551 20,944 (963) 14,255 351 7,771 (2,007) 22,054 67,956 5,739 Note: amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), equity components of compounded financial instruments (e.g. convertible bonds) (see Note 7.1.2.c). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2018 Financial Report 85 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2018 June 30, 2017 Operating income including discontinued operations before tax 4,151 4,228 Net amortization expense (a) 188 233 Change in goodwill impairment and other intangible assets impairment (b) Net change in deferred acquisition costs and equivalent (663) (922) Net increase / (write back) in impairment on investments, tangible and other intangible assets 328 114 Change in fair value of investments at fair value through profit or loss 13 (9,645) Net change in liabilities arising from insurance and investment contracts (c) 7,465 17,499 Net increase / (write back) in other provisions (d) (6) (820) Income (net of impairment) from investment accounted for using the equity method (129) (106) Adjustment of non cash balances included in the operating income before tax 7,197 6,353 Net realized investment gains and losses (1,089) (1,282) Financing debt expenses 178 183 Adjustment for reclassification to investing or financing activities (911) (1,099) Dividends recorded in profit or loss during the period (1,850) (1,773) Investment income & expense recorded in profit or loss during the period (e) (5,763) (4,144) Adjustment of transactions from accrued to cash basis (7,614) (5,917) Net cash impact of deposit accounting 41 387 Dividends and interim dividends collected 2,017 2,059 Investment income (e) 8,264 7,368 Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (1,938) (2,523) Net operating cash from banking activities Change in operating receivables and payables Net cash provided by other assets and liabilities (f) Tax expenses paid 584 (3,565) (618) (639) 626 (3,498) 6,021 (654) Other operating cash impact and non cash adjustment (262) (1,897) Net cash impact of transactions with cash impact not included in the operating income before tax 3,883 7,888 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 6,706 11,453 Purchase of subsidiaries and affiliated companies, net of cash acquired 0 (0) Disposal of subsidiaries and affiliated companies, net of cash ceded 92 (0) Net cash related to changes in scope of consolidation 92 (0) Sales of debt instruments (f) 32,586 29,210 Sales of equity instruments and non consolidated investment funds (f) (g) 10,949 22,724 Sales of investment properties held directly or not (f) 786 849 Sales and/or repayment of loans and other assets (f) (h) 12,431 17,129 Net cash related to sales and repayments of investments (f) (g) (h) 56,752 69,913 Purchases of debt instruments (f) (31,644) (30,159) Purchases of equity instruments and non consolidated investment funds (f) (g) (9,557) (25,584) Purchases of investment properties held direct or not (f) (1,266) (1,735) Purchases and/or issues of loans and other assets (g) (h) (11,452) (17,439) Net cash related to purchases and issuance of investments (f) (g) (h) (53,920) (74,917) Sales of tangible and intangible assets 1 14 Purchases of tangible and intangible assets (319) (208) Net cash related to sales and purchases of tangible and intangible assets (317) (194) Half Year 2018 Financial Report II 86 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 Increase in collateral payable / Decrease in collateral receivable 50,506 Decrease in collateral payable / Increase in collateral receivable (46,816) Net cash impact of assets lending / borrowing collateral receivables and payables 3,690 NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES 6,298 Issuance of equity instruments 18 Repayments of equity instruments (0) Transactions on treasury shares (1) Dividends payout (3,323) Interests on undated subordinated debts paid (131) Acquisition / sale of interests in subsidiaries without change in control 2,817 Net cash related to transactions with shareholders (620) Cash provided by financial debts issuance 5,860 Cash used for financial debts repayments (45) Interests on financing debt paid (i) (159) Net interest margin of hedging derivatives on financing debt 12 Net cash related to Group financing 5,667 Other financing cash impact and non cash adjustment NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES 5,048 NET CASH PROVIDED BY DISCONTINUED OPERATIONS CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 23,196 Net cash provided by operating activities 6,706 Net cash provided by investing activities 6,298 Net cash provided by financing activities 5,048 Net cash provided by discontinued operations Impact of change in consolidation method and of reclassifications as held for sale (k) (3,447) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents 1,669 CASH AND CASH EQUIVALENT AS OF JUNE 30 (j) 39,469 (a) Includes premiums/discounts capitalization and related amortization, amortization of investment and owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes changes in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes gains/losses from derivatives hedging variable annuities. (f) Includes related derivatives. (g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (j) Net of bank overdrafts. (k) In 2018, amounts include the assets and liabilities of AXA Wealth Management (HK) Limited (“AWM”), of German pension business ProbAV Pensionskasse AG and the Switzerland Life & Savings portfolio for which the disposal process was not finalized at period-end. In 2017, amounts include the assets and liabilities of AXA Wealth Management (HK) Limited (“AWM”) and of German pension business ProbAV Pensionskasse AG for which the disposal process was not finalized at year-end. Half Year 2018 Financial Report 56,575 (56,566) 9 (5,189) 49 (962) (1) (2,948) (135) (135) (4,132) 946 (1,781) (12) 15 (831) (4,964) 5 25,734 11,453 (5,189) (4,964) 5 (6) (929) 26,103 II 87 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 (in Euro million) June 30, 2018 June 30, 2017 Cash and cash equivalents 40,245 Bank overdrafts (a) (776) Cash and cash equivalents as of June 30 (b) 39,469 (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts). Half Year 2018 Financial Report 26,728 (626) 26,103 II 88 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 1 ACCOUNTING PRINCIPLES 1.1 General information AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, the Americas, Asia and Africa. The list of the main entities included in the scope of AXA’s consolidated financial statements is provided in Note 2 of the Notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all Notes were set by the Board of Directors on August 1, 2018. 1.2 General accounting principles AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that were endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2018. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2017. The 2018 half-year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2017 annual report. IFRS REQUIREMENTS ADOPTED ON JANUARY 1, 2018 IFRS 15 – Revenue from Contracts with Customers, published on May 28, 2014, amended on September 11, 2015 and on April 12, 2016, provides a principle-based approach for revenue recognition. The new model applies to all revenues arising from contracts with customers except those that are within the scope of other IFRS such as: insurance contracts, lease contracts and financial instruments. The Group revenues in the scope of IFRS 15 mainly correspond to asset management fees and performance fees. The cumulative effect of initially applying IFRS 15 totalled €26 million (net of tax) and was recognized as a positive adjustment to the opening balance of retained earnings on January 1, 2018. Under IFRS 15, revenue is recognised when the Group satisfies a performance obligation by transferring a service to a customer. In particular, as asset management entities of the Group deliver investment management services to their clients, revenue for providing this service may theoretically occur over-time, with a time-based measure of progress, which is relevant as the service is provided continuously over the contract period. However, according to IFRS 15, revenue is recognised only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. As a result, as management fees and performance fees received by the Group are generally calculated based on a percentage of assets under management (AUM), they are considered as variable considerations, which are subject to market volatility and are recognised only when uncertainty is resolved. The application of the amendments below as of January 1, 2018 had no material impact on the Group’s consolidated interim financial statements. Half Year 2018 Financial Report II 89 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 Amendments Publication date Topic IFRS 2 Share-based Payment June 20, 2016 Guidance on how: • to take into account the vesting and non-vesting conditions on the measurement of a cash-settled share-based payment transaction; • to classify a share-based payment transaction with net settlement features for withholding tax obligations; to account for a modification to the terms and conditions of a share-based payment transaction that changes its classification from cash-settled to equity-settled. IAS 40 Property Investment December 8, 2016 Clarification on transfer to, or from, investment properties: the transfer to, or from, investment properties must result from a change in use of the asset. IFRIC 22 Foreign Currency Transactions and Advance Consideration December 8, 2016 Clarification on the exchange rate to be used for the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. Annual Improvements to IFRS 2014 – 2016 Cycle December 8, 2016 Collection of amendments to IFRS in response to issues that are not part of a major project. PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2017. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non-current items. As for most insurance companies, expenses are classified by destination in the income statement. All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the Notes are expressed in Euro million. Half Year 2018 Financial Report II 90 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 2 SCOPE OF CONSOLIDATION 2.1 Consolidated companies 2.1.1 MAIN FULLY CONSOLIDATED COMPANIES June 30, 2018 December 31, 2017 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA SA and Other holdings France AXA Parent company Parent company CFP Management 100.00 100.00 100.00 100.00 AXA Technology Services 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 Oudinot Participation Merged with AXA 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA Asia 100.00 100.00 100.00 100.00 The Netherlands Vinci BV 100.00 100.00 100.00 100.00 France AXA France IARD 99.92 99.92 99.92 99.92 AXA France Vie 99.77 99.77 99.77 99.77 AXA Protection Juridique 98.51 98.51 98.51 98.51 Avanssur 100.00 100.00 100.00 100.00 AXA France Assurance 100.00 100.00 100.00 100.00 Genworth Financial European Group Holdings 100.00 100.00 100.00 100.00 Financial Assurance Company Limited (Genworth) 100.00 100.00 100.00 100.00 Financial Insurance Company Limited (Genworth) 100.00 100.00 100.00 100.00 AXA Banque 100.00 99.89 100.00 99.89 AXA Banque Financement 65.00 64.93 65.00 64.93 Europe Germany AXA Versicherung AG 100.00 100.00 100.00 100.00 AXA Lebensversicherung AG 100.00 100.00 100.00 100.00 ProbAV Pensionskasse 100.00 100.00 100.00 100.00 Deutsche Ärzteversicherung 100.00 100.00 100.00 100.00 AXA Krankenversicherung AG 100.00 100.00 100.00 100.00 Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 AXA Bank AG 100.00 100.00 100.00 100.00 United Kingdom & Ireland Guardian Royal Exchange Plc 100.00 99.98 100.00 99.98 AXA UK Plc 100.00 99.98 100.00 99.98 AXA Equity & Law Plc 99.96 99.96 99.96 99.96 AXA Insurance UK Plc 100.00 99.98 100.00 99.98 AXA PPP Healthcare Limited 100.00 99.98 100.00 99.98 Architas Multi-Manager Limited 100.00 99.98 100.00 99.98 AXA Insurance Limited 100.00 99.98 100.00 99.98 AXA Life Europe Limited 100.00 100.00 100.00 100.00 Spain AXA Seguros Generales, S. A. AXA Aurora Vida, S.A. de Seguros Relution 99.90 99.83 99.90 99.83 99.90 99.97 99.90 99.82 Switzerland Half Year 2018 Financial Report 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 AXA Life AXA-ARAG Legal Assistance AXA Insurance (previously Winterhur Swiss Insurance P&C) 100.00 66.67 100.00 100.00 66.67 100.00 100.00 66.67 100.00 Italy AXA Interlife AXA Assicurazioni Vita AXA Assicurazioni e Investimenti AXA MPS Vita Merged with AXA Assicurazioni vita 100.00 100.00 50.00 + 1 voting right 100.00 100.00 50.00 100.00 100.00 100.00 50.00 + 1 voting right AXA MPS Danni 50.00 + 1 voting right 50.00 50.00 + 1 voting right AXA MPS Financial AXA Italia S.p.A. 50.00 + 1 voting right 100.00 50.00 100.00 50.00 + 1 voting right 100.00 Belgium Ardenne Prévoyante AXA Belgium SA AXA Holdings Belgium Touring Assurances SA 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Asia National Mutual International Pty Ltd 100.00 100.00 100.00 Japan AXA Life Insurance AXA Non Life Insurance Co. Ltd. (Japan) 98.69 100.00 98.69 98.69 98.69 100.00 Hong Kong AXA China Region Limited AXA General Insurance Hong Kong Ltd. 100.00 100.00 100.00 100.00 100.00 100.00 Indonesia PT AXA Life Indonesia MLC Indonesia Merged with MLC Indonesia 100.00 100.00 100.00 100.00 Thailand AXA Insurance Public Company Limited 99.47 99.47 99.47 Korea Kyobo AXA General Insurance Co. Ltd. (South Korea) 99.71 99.71 99.71 United States AXA Financial, Inc. AXA Equitable Holdings, Inc. (previously AXA America Holdings, Inc.) Initial public offering Initial public offering 99.97 71.86 71.84 71.86 100.00 100.00 AXA Equitable Life Insurance Company Initial public offering 100.00 71.84 100.00 AXA Re Arizona Company Initial public offering 100.00 71.84 100.00 AB (sub group) Initial public offering 64.74 46.51 64.71 International AXA Mediterranean Holding SA AXA Bank Belgium (sub group) 100.00 100.00 100.00 100.00 100.00 100.00 Colombia AXA Colpatria Seguros AXA Colpatria Seguros de vida 51.00 51.00 51.00 51.00 51.00 51.00 Morocco AXA Assurance Maroc AXA Al Amane Assurance AXA Holding Maroc S.A. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Turkey AXA Hayat ve Emeklilik A.S. AXA Sigorta AS AXA Turkey Holding W.L.L 100.00 92.61 100.00 100.00 92.61 100.00 100.00 92.61 100.00 The Gulf Region AXA Cooperative Insurance Company AXA Insurance B.S.C.c. 50.00 50.00 34.00 50.00 50.00 50.00 Greece AXA Insurance A.E. 99.98 99.98 99.98 Half Year 2018 Financial Report 100.00 66.67 100.00 100.00 100.00 100.00 50.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 98.69 98.69 100.00 100.00 100.00 100.00 99.47 99.71 100.00 100.00 100.00 100.00 64.71 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 34.00 50.00 99.98 92 II Other CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 Mexico AXA Seguros S.A. de C.V. 100.00 100.00 Luxembourg AXA Assurances Luxembourg AXA Assurances Vie Luxembourg AXA Luxembourg SA 100.00 100.00 100.00 100.00 100.00 100.00 Czech Republic & Slovakia AXA Czech Republic Pension Funds AXA Czech Republic Insurance AXA Slovakia 99.99 100.00 100.00 99.99 100.00 100.00 Poland AXA Poland AXA Poland Pension Funds AXA Ubezpieczenia TUIR S.A 100.00 100.00 100.00 100.00 100.00 100.00 Singapore AXA Financial Services AXA Financial Services Singapore pte Ltd AXA Life Insurance Singapore AXA Insurance Singapore Merged with AXA Financial Services Singapore pte Ltd 100.00 100.00 100.00 100.00 100.00 100.00 Malaysia AXA Affin General Insurance Berhad 50.00 50.00 India AXA India Holding 100.00 100.00 AXA Investment Managers (sub group) Minority interest buyout 97.80 97.73 AXA Corporate Solutions Assurance (sub group) 98.75 98.75 AXA Global Re (previously AXA Global P&C) 100.00 100.00 AXA Assistance SA (sub group) 100.00 100.00 Colisée Ré 100.00 100.00 AXA Art 100.00 100.00 AXA US Holding 100.00 100.00 Half Year 2018 Financial Report 100.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 50.00 100.00 97.51 98.75 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 50.00 100.00 97.44 98.75 100.00 100.00 100.00 100.00 93 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 CONSOLIDATED INVESTMENT FUNDS AND REAL ESTATE COMPANIES As of June 30, 2018, investment funds represented a total of €119,503 million invested assets (€123,468 million at the end of 2017), corresponding to 299 investment funds mainly in France, Japan, Germany, Switzerland and Belgium. As of June 30, 2018, 24 consolidated real estate companies corresponded to a total of €10,369 million invested assets (€10,469 million at the end of 2017), mainly in France, Germany and Japan. In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2018, these liabilities amounted to €7,328 million (€8,756 million as of December 31, 2017). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholders’ equity amounted to €2,573 million as of June 30, 2018 (€2,545 million as of December 31, 2017). 2.1.2 MAIN INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30, 2018 December 31, 2017 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie Natio Assurances Disposal 39.98 - 39.98 - 39.98 50.00 39.98 49.96 Asia Philippines AXA Life Insurance Corporation Krungthai AXA Life Insurance Company Ltd 45.00 50.00 45.00 50.00 45.00 50.00 45.00 50.00 ICBC-AXA Life Insurance Co. Ltd 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services AXA Tian Ping 49.00 50.00 49.00 50.00 49.00 50.00 49.00 50.00 AXA SPDB Investment Managers Company limited Relution 39.00 38.11 39.00 38.00 International Reso Garantia (RGI Holdings B.V.) (Russia) Bharti AXA Life (India) Bharti AXA General Insurance Company Limited (India) AXA Middle East SAL (Lebanon) AXA Mansard Insurance plc (Nigeria) 39.34 49.00 49.00 51.00 77.79 39.34 49.00 49.00 51.00 77.79 39.34 49.00 49.00 51.00 77.79 39.34 49.00 49.00 51.00 77.79 Other AXA Investment Managers Asia Holdings Private Limited Kyobo AXA Investment Managers Company Limited Relution Relution 49.00 50.00 47.89 48.86 49.00 50.00 47.75 48.72 INVESTMENT FUNDS AND REAL ESTATE ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD As of June 30, 2018, real estate companies accounted for using the equity method amounted to €141 million invested assets (€163 million at the end of 2017) and investment funds accounted for using the equity method amounted to €4,965 million invested assets (€4,953 million at the end of 2017), mainly in the United States, France, Belgium, United Kingdom, Japan and Switzerland. Half Year 2018 Financial Report 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT AXA’s Chief Executive Officer, Chief Operating Decision Maker, is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA's business segments and holding companies reported to the Board of Directors twice a year is consistent with the presentation provided in the consolidated financial statements. AXA announced on November 13, 2017 a simplification of its operating model designed to empower subsidiaries to deliver on the transformation and operate as close as possible to their customers. The AXA Group reorganized its operations based on five main geographies (France, Europe, Asia, United States, and International). A new Management Committee was appointed to reflect this new operating model. The CEOs supervising these five main geographies (respectively CEO of AXA France, CEO of AXA in Europe, CEO of AXA in Asia, CEO of AXA US, CEO of International & New Markets) are members of the Management Committee. Key transversal entities and central holdings are managed alongside these 5 geographies. The results of operating activities and non-operating activities are presented on the basis of 6 segments: France, Europe, Asia, the United States, International and Transversal & Central Holdings. France: The French market consists of Life & Savings and Property & Casualty activities, AXA Banque France and French holdings. Europe: The European market consists of Life & Savings and Property & Casualty activities in Switzerland, Germany, Belgium, Spain, United Kingdom (UK) & Ireland and Italy. The German bank and the holding companies in these countries are also included in the segment Europe. The direct and traditional entities are reported within their respective countries. Asia: The Asian market consists of Life & Savings activities in Japan, Hong Kong and Asia High Potentials (Indonesia, Philippines, Thailand and China) as well as Property & Casualty activities in Hong Kong and Asia High Potentials (Thailand and China). The Asia-Direct entities (Japan and South Korea) and Asia / Pacific holding companies are also included. United States: This segment includes Life & Savings activities in United States, ACS Life Reinsurance, asset management services offered by AB, and US holdings. International: The International markets now consists of Life & Savings and Property & Casualty activities in 14 countries within Europe, Middle East, Africa & Latin America as well as in Singapore, in Malaysia and in India. AXA Bank Belgium and holding companies in these countries are also included in this segment. Transversal & Central Holdings: includes transversal entities namely AXA Investment Managers, AXA Art, AXA Global Re, AXA Assistance, AXA Corporate Solutions Assurance, AXA Liabilities Managers and AXA Life Europe, as well as AXA SA and other Central Holdings. The intersegment eliminations include only operations between entities from different segments. They mainly relate to reinsurance treaties, assistance guarantees recharging, Asset Management fees and interests on loans within the Group. In this document, “Insurance” covers the three insurance activities: Life & Savings, Property & Casualty and Health. Half Year 2018 Financial Report 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 3.1 Consolidated Statement of Income by segment June 30, 2018 (in Euro million) France Europe Asia United States International Transversal & Central Holdings Eliminations inter- segment TOTAL Gross written premiums 13,028 21,682 4,339 5,987 3,235 2,440 (330) 50,381 Fees and charges relating to investment contracts with no participating features 1 66 18 38 122 Revenues from insurance activities 13,028 21,748 4,357 5,987 3,272 2,440 (330) 50,503 Net revenues from banking activities 41 12 168 13 233 Revenues from other activities 2 138 1 1,992 33 962 (264) 2,863 Revenues 13,071 21,898 4,358 7,979 3,473 3,402 (581) 53,600 Change in unearned premiums net of unearned revenues and fees (528) (3,264) (1) 51 (254) (453) 72 (4,378) Net investment income (b) 2,354 2,997 670 670 266 122 (34) 7,044 Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 294 (425) (154) 626 (462) (244) 150 (190) (223) 74 1,250 1,490 (1) (24) (20) 51 (277) (10) 2 (5) 0 1,195 (133) 839 Change in investments impairment (160) (104) (29) (0) (20) (10) (324) Net investment result excluding financing expenses 2,062 3,057 601 1,994 220 (115) (38) 7,781 Technical charges relating to insurance activities (11,221) (16,428) (3,542) (7,175) (2,121) (1,387) 152 (41,721) Net result from outward reinsurance (152) (183) (17) 24 (55) (84) 98 (368) Bank operating expenses (3) (3) (29) (35) Acquisition costs (1,389) (1,983) (554) (562) (613) (385) 15 (5,472) Amortization of the value of purchased business in force (21) (11) (1) (1) (34) Administrative expenses (678) (1,225) (255) (1,341) (405) (1,304) 223 (4,986) Change in goodwill impairment and other intangible assets impairment (25) (8) (3) (18) (0) (53) Other income and expenses (2) (7) (21) (266) 19 240 (96) (134) Other operating income and expenses (13,444) (19,875) (4,409) (9,324) (3,222) (2,921) 391 (52,804) Income from operating activities before tax 1,161 1,816 548 699 217 (87) (156) 4,200 Income (net of impairment) from investment accounted for using the equity method 15 1 56 47 10 130 Financing debt expenses (0) (9) (1) (76) (6) (241) 156 (178) Net income from operating activities before tax 1,175 1,808 603 624 258 (318) 0 4,151 Income tax (309) (372) (113) (119) (42) 160 (795) Net operating income 866 1,436 491 505 217 (158) 3,356 Partial disposal of Switzerland Life & Savings operations (d) (347) (0) (347) Net consolidated income after tax 866 1,089 491 505 216 (158) 3,009 Split between : Net consolidated income - Group share 863 1,054 487 363 190 (162) 0 2,796 Net consolidated income - Minority interests 3 35 3 142 27 4 (0) 213 (a) Insurance covers the three insurance activities : Life & Savings, Property & Casualty and Health. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (d) Mainly related to VBI impairment associated to the Switzerland Life & Savings portfolio classified as Held For Sale. Half Year 2018 Financial Report of which Insurance (a) 50,381 122 50,503 909 51,413 (4,378) 6,575 1,198 81 839 (309) 7,545 (41,721) (368) (5,472) (34) (3,004) (50) (76) (50,726) 3,854 119 (5) 3,968 (609) 3,359 (347) 3,012 2,922 90 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 June 30, 2017 Restated (a) (in Euro million) France Europe Asia United States International Transversal & Central Holdings Eliminations inter- segments TOTAL Gross written premiums 12,088 21,707 4,594 7,097 3,501 2,399 (327) 51,058 Fees and charges relating to investment contracts with no participating features 1 63 22 22 108 Revenues from insurance activities 12,088 21,770 4,616 7,097 3,523 2,399 (327) 51,166 Net revenues from banking activities 45 16 166 11 238 Revenues from other activities 2 129 1 2,045 30 947 (274) 2,879 Revenues 12,134 21,914 4,617 9,141 3,719 3,346 (590) 54,283 Change in unearned premiums net of unearned revenues and fees (525) (3,476) (76) (29) (161) (401) 69 (4,598) Net investment income (c) 2,288 3,022 754 (343) 313 191 (53) 6,170 Net realized gains and losses relating to investments at cost and at fair value through shareholders'equity 323 476 106 1 4 (4) 2 908 Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (d) of which change in fair value of assets with financial risk borne by policyholders 1,078 1,213 77 303 692 628 8,129 6,535 31 123 (63) 49 (2) 0 9,942 8,852 Change in investments impairment (21) (40) (10) (22) (6) (21) (120) Net investment result excluding financing expenses 3,669 3,535 1,542 7,765 342 103 (54) 16,901 Technical charges relating to insurance activities (11,915) (16,899) (4,603) (14,566) (2,440) (1,434) 120 (51,737) Net result from outward reinsurance (159) (113) (32) 181 (166) (132) 127 (295) Bank operating expenses (6) (3) (26) (35) Acquisition costs (1,387) (1,970) (500) (462) (630) (372) 8 (5,313) Amortization of the value of purchased business in force (14) (11) (1) (2) (27) Administrative expenses (691) (1,217) (266) (1,417) (442) (1,233) 225 (5,041) Change in goodwill impairment and other intangible assets impairment (28) (9) (4) (16) (1) (57) Other income and expenses (2) 5 (12) 132 31 161 (90) 225 Other operating income and expenses (14,160) (20,239) (5,432) (16,136) (3,692) (3,011) 390 (62,280) Income from operating activities before tax 1,119 1,734 652 741 208 37 (184) 4,306 Income from investment (net of impairment) accounted for using the equity method 10 3 58 27 9 106 Financing debts expenses 1 (16) (3) (70) (5) (273) 184 (183) Net income from operating activities before tax 1,129 1,720 707 671 229 (227) (0) 4,229 Income tax (268) (420) (143) 39 (38) 41 (789) Net operating income 861 1,299 564 710 191 (186) 3,440 Result from discontinued operations net of tax (e) (1) (1) Net consolidated income after tax 861 1,299 564 710 191 (186) 3,440 Split between : Net consolidated income - Group share 858 1,257 560 613 172 (191) 0 3,268 Net consolidated income - Minority interests 3 42 4 97 20 5 (0) 171 (a) Restated: as per the new governance. (b) Insurance covers the three insurance activities : Life & Savings, Property & Casualty and Health. (c) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (d) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Relates to the discontinued UK Life & Savings operations. Half Year 2018 Financial Report of which Insurance (b) 51,058 108 51,166 936 52,102 (4,598) 5,495 930 9,994 8,852 (91) 16,329 (51,737) (295) (5,313) (27) (2,883) (54) 221 (60,087) 3,745 95 (3) 3,837 (234) 3,604 (1) 3,603 3,534 69 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 AXA Equitable Holdings, Inc. Initial Public Offering AXA US (AXA Equitable Holding) was successfully listed on the NYSE in May 2018. The total proceeds of the IPO amounted to USD 4.0 billion: IPO proceeds amounted to USD 3.1 billion (€2.6 billion) with the sale of 24.5% of AEH’s outstanding shares at USD 20 per share combined with the exercise of the over-allotment options granted to underwriters, i.e. an additional 20.6 million AEH shares (3.7% of AEH’s outstanding shares); Mandatory Exchangeable Bonds with a nominal value of USD 0.9 billion (€0.7bn). As AXA keeps the controls over AXA Equitable Holdings, Inc, this operation is a transaction between shareholders under IFRS 10 with no impact on the consolidated statement of income. As a result, the impact was recognized in consolidated shareholders’ equity for €-2.1 billion. Following the IPO, AXA Group’s ownership in AXA US was reduced to 72% as of May 14th 2018, reflecting on an average participation of 93% for HY18. AXA US remains fully consolidated in the Group’s financial statements. The IPO resulted in a minority interest in shareholders’ equity of € 4.7 billion. The impacts related to the IPO in Group Shareholder’s equity are detailed below: (in Euro million) Group Share Minority interests Proceeds 2,574 Consolidated book value divested excluding other comprehensive income and currency translation reserves (4,992) 4,992 Reserves relating to the change in fair value of financial instruments available for sale (20) 20 Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) 25 (25) Employee benefits actuarial gains and losses 243 (243) Translation Reserves 128 (28) Transactions costs (84) TOTAL Initial Public Offering impacts (2,126) 4,716 Mandatory Exchangeable Bonds 587 TOTAL including Mandatory Exchangeable Bonds (2,126) 5,303 The Mandatorily Exchangeable Bonds are a hybrid instrument with a debt component booked as financial debt corresponding to the present value of the coupons (€145 million – see Note 8) and an equity component booked in minority interests for the remaining part (€587 million – see Note 7.3.1). The Mandatorily Exchangeable Bonds will mature on May 15, 2021, unless exchanged earlier at the option of AXA. It will be exchanged into a minimum of 6.5% of AEH’s outstanding shares (subject to anti-dilution adjustments) if the AEH share price is greater than or equal to USD 23.50 per share, and a maximum of 7.7% of AEH’s outstanding shares (subject to anti-dilution adjustments) if the AEH share price does not exceed the IPO price. Half Year 2018 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 4.2 Switzerland group Life portfolio disposal On April 10, 2018 AXA announced that it had entered into an agreement with its main occupational benefits foundations to convert their business model from a full-value insurance model to a semi-autonomous model, by the end of 2018. The operations affected by these expected disposals are treated as held for sale in AXA’s consolidated financial statements as of June 30, 2018. As such the following major classes of assets and liabilities (amounts are presented net of intercompany balances with other AXA entities) are presented as held for sale: (in Euro million) June 30, 2018 Goodwill Other intangible assets Investments Other assets Cash and cash equivalents Total assets held for sale (in Euro million) June 30, 2018 Liabilities arising from insurance and investment contracts Other liabilities Total liabilities held for sale As at June 30, 2018, Other Comprehensive Income of invested assets in scope of the transaction was nil. As of June 30, 2018, the consolidated statement of income includes a net income impact of €-347 million mainly explained by the VBI impairment related to the aforementioned disposal. 4.3 AXA to sell its Swiss privilege franchise in Hong Kong (AXA Wealth Management (HK) Ltd) On December 22, 2017, AXA announced that it had entered into an agreement with Jeneration Holdings Limited to sell its Swiss Privilege franchise in Hong Kong, AXA Wealth Management (HK) Limited. This transaction would be in line with the Group’s portfolio simplification, and would allow AXA Hong Kong to focus on its core Life agency and broker channels, while simplifying its corporate structure. AXA remains committed to grow the Life, Health and Property & Casualty businesses in Hong Kong across all customer segments including high net-worth individuals. The price consideration is HKD 2,200 million (or €237 million (1)) to be fully paid at closing, representing an implied 1.4x EV multiple. The assets and liabilities of the AXA Wealth Management (HK) Limited were classified as held for sale separately from other assets and liabilities in the consolidated statements of financial positions as of December 31, 2017 and June 30, 2018. (1) EUR 1 = HKD 9.29 as of December 21, 2017 (Source: Bloomberg). Half Year 2018 Financial Report - 22,099 - 3,478 25,576 25,007 596 25,603 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 4.4 AXA to sell part of its German occupational pensions portfolio AXA Germany entered into an agreement with Frankfurter Leben-Gruppe to sell parts of its occupational pensions portfolio in Germany (ProbAV Pensionskasse AG). As of December 31, 2017, AXA recorded an exceptional negative net income impact of €87 million. The assets and liabilities of ProbAV Pensionskasse AG portfolio were classified as held for sale separately from other assets and liabilities in the consolidated statements of financial positions as of December 31, 2017 and June 30, 2018. Half Year 2018 Financial Report 100 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 5 GOODWILL The IPO of AXA Equitable Holdings, Inc. (“AEH”) that occurred in May 2018 was deemed a triggering event under IAS36 for the HY18 accounts of AXA Group. This is mainly because the transaction has provided an external and observable value for a minority interest in AEH and because AXA Group has now changed the manner in which AB and AXA US are expected to be used in the future after AXA Group’s announcement of its intention to fully exit its operations in the US. As a consequence, and in line with the change in legal structure and strategy, AXA Group combined the AXA US and AB cash generating units in order to perform a recoverability test of the goodwill accounted for in AEH as at June 30, 2018. For the recoverability test, evidence of comparable IPOs indicate that share prices remain highly volatile for a period of time following the IPO date. As such and given the short period of time since the IPO, AXA does not consider the current AEH share price as indicative for the value-in-use methodology to be applied for the purpose of evaluating goodwill recoverability at June 30, 2018. Rather, management estimated a prospective value-in-use of AEH under multiple scenarios. This estimate was based on the following assumptions: future operating earnings of AEH for both the Life and Asset Management segments; price-to-earnings ratios of comparable life Insurers and comparable asset managers. Based on these calculations including sensitivities to the above key assumptions, the goodwill of AEH is deemed recoverable as at June 30, 2018. Any further potential divestment of our equity participation in AEH would be subject to financial markets volatility and other market-related risks, which may also impact the consolidated value of our remaining stake in AEH and adversely impact our consolidated results of operations and AXA share price. Half Year 2018 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 6 INVESTMENTS 6.1 Breakdown of investments Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately. Insurance June 30, 2018 Investments as per Consolidated Statement of Financial Position Other activities Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives 26,412 1,362 18,242 1,362 2.66% 0.20% 853 623 1.63% 27,265 1,362 18,865 1,362 Investment in real estate properties 27,774 19,604 2.86% 853 623 1.63% 28,627 20,227 Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 365,265 31,866 304 8,482 365,265 31,866 304 8,325 53.25% 4.65% 0.04% 1.21% 3,789 194 43 1,017 3,789 194 43 1,017 9.93% 0.51% 0.11% 2.67% 369,055 32,061 346 9,499 369,055 32,061 346 9,342 Debt instruments 405,917 405,761 59.16% 5,044 5,044 13.22% 410,961 410,804 Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 16,054 8,374 43 16,054 8,374 43 2.34% 1.22% 0.01% 1,305 567 3 1,305 567 3 3.42% 1.49% 0.01% 17,359 8,941 46 17,359 8,941 46 Equity instruments 24,472 24,472 3.57% 1,875 1,875 4.92% 26,346 26,346 Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 6,992 3,941 308 6,992 3,941 308 1.02% 0.57% 0.04% 157 357 225 157 357 225 0.41% 0.94% 0.59% 7,149 4,298 533 7,149 4,298 533 Non consolidated investment funds 11,241 11,241 1.64% 739 739 1.94% 11,979 11,979 Other assets designated as at fair value through profit or loss, held by consolidated investment funds 14,639 14,639 2.13% 123 123 0.32% 14,761 14,761 Macro-hedge and other derivatives 521 521 0.08% (91) (91) 0.24% 430 430 Sub total Financial instruments (excluding Loans) 456,789 456,632 66.57% 7,689 7,689 20.16% 464,478 464,321 Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) Macro-hedge and other derivatives - - - 33,250 - - - 32,686 - - - 4.77% - - - 31,598 (0) - - - 29,833 (0) - - - 78.21% 0.00% - - - 64,849 (0) - - - 62,519 (0) Loans 33,250 32,686 4.77% 31,598 29,833 78.21% 64,849 62,519 Total Financial instruments 490,039 489,318 71.34% 39,287 37,522 98.37% 529,327 526,840 Assets backing contracts where the financial risk is borne by policyholders 176,983 176,983 25.80% 176,983 176,983 INVESTMENTS 694,797 685,904 100.00% 40,140 38,145 100.00% 734,938 724,049 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 517,814 508,922 74.20% (a) Includes infrastructure investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and Receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. Half Year 2018 Financial Report % (value balance sheet) 2.61% 0.19% 2.79% 50.97% 4.43% 0.05% 1.29% 56.74% 2.40% 1.23% 0.01% 3.64% 0.99% 0.59% 0.07% 1.65% 2.04% 0.06% 64.13% - - - 8.63% 0.00% 8.63% 72.76% 24.44% 100.00% 102 II (in Euro million) Fair value Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives 31,296 1,456 Investment in real estate properties 32,753 Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 380,710 34,746 586 8,350 Debt instruments 424,392 Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 18,461 8,809 41 Equity instruments 27,312 Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 9,118 3,858 262 Non consolidated investment funds 13,238 Other assets designated as at fair value through profit or loss, held by consolidated investment funds 15,231 Macro-hedge and other derivatives 792 Sub total Financial instruments (excluding Loans) 480,965 Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) - - - 33,408 Macro-hedge and other derivatives Loans 33,408 Total Financial instruments 514,373 Assets backing contracts where the financial risk is borne by policyholders 175,003 INVESTMENTS 722,128 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 547,125 (a) Includes infrastructure investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 Insurance December 31, 2017 Investments as per Consolidated Statement of Financial Position Other activities Total Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value 21,645 3.04% 778 699 1.87% 32,074 22,344 1,456 0.20% 1,456 1,456 23,101 3.25% 778 699 1.87% 33,530 23,800 380,710 53.52% 4,216 4,216 11.29% 384,927 384,927 34,746 4.88% 200 200 0.54% 34,946 34,946 586 0.08% 46 46 0.12% 632 632 8,130 1.14% 997 997 2.67% 9,347 9,127 424,172 59.63% 5,459 5,459 14.62% 429,851 429,632 18,461 2.60% 1,073 1,073 2.87% 19,534 19,534 8,809 1.24% 519 519 1.39% 9,328 9,328 41 0.01% 41 41 27,312 3.84% 1,592 1,592 4.26% 28,903 28,903 9,118 1.28% 110 110 0.30% 9,228 9,228 3,858 0.54% 385 385 1.03% 4,243 4,243 262 0.04% 249 249 0.67% 510 510 13,238 1.86% 744 744 1.99% 13,982 13,982 15,231 2.14% 108 108 0.29% 15,339 15,339 792 0.11% (1) (1) 0.00% 792 792 480,745 67.58% 7,903 7,903 21.17% 488,867 488,648 - - - 32,509 - - - 4.57% - - - 30,522 (0) - - - 28,734 (0) - - - 76.96% 0.00% - - - 63,930 (0) - - - 61,242 (0) 32,509 4.57% 30,522 28,734 76.96% 63,930 61,242 513,254 72.15% 38,424 36,636 98.13% 552,797 549,890 175,003 24.60% 175,003 175,003 711,358 100.00% 39,202 37,335 100.00% 761,330 748,693 536,355 75.40% Half Year 2018 Financial Report % (value balance sheet) 2.98% 0.19% 3.18% 51.41% 4.67% 0.08% 1.22% 57.38% 2.61% 1.25% 0.01% 3.86% 1.23% 0.57% 0.07% 1.87% 2.05% 0.11% 65.27% - - - 8.18% 0.00% 8.18% 73.45% 23.37% 100.00% 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 6.2 Investment in real estate properties Investment in real estate properties includes buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, including the impact of all derivatives: June 30, 2018 December 31, 2017 (in Euro million) Gross value Amortization Impairment Carrying value Fair value Gross value Amortization impairment Carrying value Fair value Investment in real estate properties at amortized cost Insurance (a) 20,469 (1,530) (670) 18,269 26,439 24,282 (2,114) (568) 21,599 31,251 Other activities 623 (0) 623 853 699 (0) 699 778 All activities excluding derivatives 21,092 (1,530) (670) 18,892 27,293 24,980 (2,114) (568) 22,298 32,028 Impact of Derivatives (27) (27) 46 46 Total for all activities including derivatives 18,865 27,265 22,344 32,074 (a) Includes infrastructure Investments. Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2018 December 31, 2017 June 30, 2018 December 31, 2017 Opening value 568 704 2,115 2,202 Increase for the period 121 94 95 246 Write back following sale or repayment (0) (131) (3) (89) Write back following recovery in value (20) (92) Others (a) 1 (7) (677) (245) Closing value 670 568 1,530 2,114 (a) Includes change in scope, reclassification to held for sale and the effect of changes in exchange rates. Half Year 2018 Financial Report 104 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 6.3 Unrealized gains and losses on financial investments Including the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: (in Euro million) June 30, 2018 December 31, 2017 INSURANCE Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale 328,093 8,318 12,325 365,265 8,482 16,054 365,265 8,325 16,054 43,951 229 3,937 6,779 65 209 337,654 8,158 13,931 380,710 8,350 18,461 380,710 8,130 18,461 47,362 278 4,688 Non consolidated investment funds available for sale 6,396 6,992 6,992 737 141 8,000 9,118 9,118 1,227 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (in Euro million) June 30, 2018 December 31, 2017 OTHER ACTIVITIES Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale 3,810 1,017 1,059 3,789 1,017 1,305 3,789 1,017 1,305 115 0 271 135 24 4,199 997 844 4,216 997 1,073 4,216 997 1,073 144 0 257 Non consolidated investment funds available for sale 147 157 157 16 6 95 110 110 15 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (in Euro million) June 30, 2018 December 31, 2017 TOTAL Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale 331,903 9,335 13,384 369,055 9,499 17,359 369,055 9,342 17,359 44,066 229 4,208 6,914 65 233 341,853 9,155 14,775 384,927 9,347 19,534 384,927 9,127 19,534 47,506 279 4,945 Non consolidated investment funds available for sale 6,543 7,149 7,149 753 147 8,096 9,228 9,228 1,242 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. Half Year 2018 Financial Report Unrealized losses 4,306 87 159 109 Unrealized losses 126 28 0 Unrealized losses 4,432 87 187 109 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 6.4 Financial investments subject to impairment 6.4.1 BREAKDOWN OF FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Cost before impairment and revaluation to fair value (a) 331,941 9,336 Impairment (38) (0) June 30, 2018 Cost after impairment but before revaluation to fair value (b) 331,903 9,335 Revaluation to fair value (c) 37,152 7 Carrying value 369,055 9,342 Cost before impairment and revaluation to fair value (a) 342,096 9,156 Impairment (243) (0) December 31, 2017 Cost after impairment but before revaluation to fair value (b) 341,853 9,155 Revaluation to fair value (c) 43,074 (28) Debt instruments 341,276 (38) 341,238 37,159 378,397 351,252 (243) 351,008 43,046 Equity instruments available for sale 15,629 (2,245) 13,384 3,975 17,359 17,056 (2,280) 14,775 4,759 Non consolidated investment funds available for sale 7,229 (686) 6,543 606 7,149 9,180 (1,084) 8,096 1,133 Loans held to maturity Loans available for sale Loans at cost (d) 63,131 (199) 62,932 (414) 62,519 61,864 (228) 61,635 (393) Loans 63,131 (199) 62,932 (414) 62,519 61,864 (228) 61,635 (393) TOTAL 427,265 (3,168) 424,097 41,327 465,424 439,351 (3,837) 435,515 48,544 (a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans. Half Year 2018 Financial Report Carrying value 384,927 9,127 394,054 19,534 9,228 61,242 61,242 484,059 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 6.4.2 CHANGE IN IMPAIRMENT ON FINANCIAL INVESTMENTS (in Euro million) January 1, 2018 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) June 30, 2018 Impairment - Debt instruments 243 11 (210) (5) (0) 38 Impairment - Equity instruments 2,280 171 (145) (61) 2,245 Impairment - Non consolidated investment funds 1,084 35 (4) (429) 686 Impairment - Loans 228 30 (3) (42) (14) 199 TOTAL 3,837 247 (363) (48) (505) 3,168 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. (in Euro million) January 1, 2017 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) December 31, 2017 Impairment - Debt instruments 529 29 (289) (1) (24) 243 Impairment - Equity instruments 2,666 195 (493) (87) 2,280 Impairment - Non consolidated investment funds 1,126 56 (34) (64) 1,084 Impairment - Loans 236 41 (10) (37) (1) 228 TOTAL 4,557 321 (827) (38) (176) 3,837 (a) Mainly relates to changes in the scope of consolidation and impact of changes in exchange rates. 6.5 Investments/Fair value Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. Half Year 2018 Financial Report 107 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on a mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or used by the Group in the limited cases of application of mark to model valuations. 6.5.1 INVESTMENTS RECOGNIZED AT FAIR VALUE The breakdown by valuation method of investments recognized at fair value including derivatives but excluding assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2018 December 31, 2017 Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives (in Euro million) Debt instruments 285,566 85,063 866 371,496 369,055 284,910 101,209 838 386,956 Equity instruments 13,419 1,741 2,173 17,333 17,359 15,900 1,609 2,009 19,518 Non consolidated investment funds 982 5,084 1,130 7,197 7,149 930 6,620 1,677 9,226 Loans Financial investments and loans available for sale 299,967 91,890 4,170 396,026 393,563 301,740 109,437 4,524 415,701 Investment in real estate properties 1,362 1,362 1,362 1,456 1,456 Debt instruments 22,305 8,635 938 31,878 32,061 25,195 9,299 262 34,756 Equity instruments 3,376 856 4,743 8,976 8,941 3,323 870 5,135 9,328 Non consolidated investment funds Other assets held by consolidated investment funds designated as at fair value through profit or loss 544 1,733 2,333 6,590 1,433 6,457 4,310 14,781 4,298 14,761 561 3,297 2,272 6,136 1,501 5,875 4,334 15,309 Loans Financial investments and loans designated as at fair value through profit or loss 27,959 19,775 13,571 61,306 61,423 32,377 20,033 12,773 65,183 Debt instruments 169 260 2 430 346 329 252 2 582 Equity instruments 43 3 46 46 41 0 41 Non consolidated investment funds 219 314 0 533 533 239 271 0 510 Loans Financial investments and loans held for trading 430 574 5 1,009 925 609 523 2 1,134 TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE 328,356 112,238 17,746 458,341 455,911 334,726 129,994 17,298 482,017 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. Half Year 2018 Financial Report Total including derivatives 384,927 19,534 9,228 413,689 1,456 34,946 9,328 4,243 15,339 65,313 632 41 510 1,183 480,185 108 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 As of June 30, 2018, Irish, Portuguese and Spanish sovereign bonds were reclassified from level 2 to level 1 consistently with sustained improved market liquidity for those instruments. For all other sovereign bonds, trends observed in 2017 were confirmed in the first semester of 2018, therefore, the classification as at June 30, 2018 is maintained similar to the one as at December 31, 2017. At June 30, 2018, the net transfer between Level 1 and Level 2 was €7,632 million. This amount comprised €17,371 million transferred investments from Level 2 to Level 1 mainly related to the reclassification of Irish, Portuguese and Spanish sovereign bonds and €9,739 million transferred from Level 1 to Level 2. This reclassification was mainly related to changes in liquidity indicators observed in the market for corporate bonds throughout the period. Half Year 2018 Financial Report 109 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 TRANSFER IN AND OUT OF THE LEVEL 3 CATEGORY AND OTHER MOVEMENTS From January 1, 2018 to June 30, 2018, the amount of level 3 assets increased by €0.4 billion to €17.7 billion, representing 3.8% of the total assets at fair value (3.6% at the end of 2017 or €17.3 billion). Main movements relating to level 3 assets to be noted were the following: €+1.7 billion of new investments; €+0.5 billion of change in unrealized gains and losses; €-1.1 billion of net asset transfers in and out of level 3 and foreign exchange fluctuation impact; €-0.6 billion of asset sales, redemptions and settlements mainly debt instruments, equity securities and non- consolidated investment funds accounted as available for sale and equity securities, non-consolidated investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through P&L. 6.5.2 INVESTMENTS RECOGNIZED AT AMORTIZED COST June 30, 2018 December 31, 2017 (in Euro million) Debt instruments held to maturity Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) - Fair value mainly not based on observable market data (level 3) - Total excluding derivatives Total including derivatives Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) - Fair value mainly not based on observable market data (level 3) - Total excluding derivatives Loans held to maturity Financial investments and loans held to maturity Investment in real estate properties at amortized cost Debt instruments at cost (loans & receivables) Loans at amortized cost 319 71 26,365 6,404 29,125 737 2,769 36,077 27,101 9,492 65,273 27,265 9,499 64,849 299 43 32,028 6,062 28,587 (0) 3,013 36,576 32,028 9,375 65,206 Non consolidated investment at cost Financial investments and loans at amortized cost 390 61,894 39,583 101,866 101,613 343 66,677 39,589 106,609 TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 390 61,894 39,583 101,866 101,613 343 66,677 39,589 106,609 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. Half Year 2018 Financial Report Total including derivatives 32,074 9,347 63,930 105,351 105,351 110 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 7 SHAREHOLDER’S EQUITY AND MINORITY INTERESTS The Consolidated Statement of changes in Equity is presented as a primary financial statement. 7.1 Impact of transactions with shareholders 7.1.1 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2018 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2018, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €-71 million (or 2.9 million shares) in order to eliminate the dilutive effect of share-based compensation schemes (AXA SA’s stock options and performance shares plans); capital increase of €+17 million due to exercise of stock options for 1 million shares; shared based compensation payments for €+16 million. TREASURY SHARES As at June 30, 2018, the Company and its subsidiaries owned approximately 41.1 million AXA shares, representing 1.69% of the share capital, a decrease of 0.7 million shares compared to December 31, 2017. As of June 30, 2018, the carrying value of treasury shares and related derivatives was €1,031 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. As at June 30, 2018, 1.9 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €17 million and their market value € 39 million at the end of June 2018. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debt instruments issued by the Group do not qualify as liabilities under IFRS. Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2018, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: change in other was due to foreign exchange rate fluctuations for €+76 million; change in undistributed profits and other reserves was due to interest expenses related to the undated subordinated debt (net of tax) for €-110 million. Half Year 2018 Financial Report 111 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 As of June 30, 2018 and December 31, 2017, undated subordinated debts recognized in shareholders’ equity were as follows: June 30, 2018 December 31, 2017 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in million) October 29, 2004 - 375 M€ 6.0% 375 375 375 375 December 22, 2004 - 250 M€ 6.0% 250 250 250 250 January 25, 2005 - 250 M€ 6.0% 250 250 250 250 July 6, 2006 - 350 M£ 6.7% 350 395 350 394 December 14, 2006 - 750 MUS$ 6.5% 750 641 750 623 December 14, 2006 - 750 MUS$ 6.4% 750 641 750 623 October 5, 2007 - 750 M€ 6.2% (a) October 16, 2007 - 700 M£ 6.8% (a) 219 245 219 245 November 7, 2014 - 984 M€ 3.941% (a) 984 981 984 981 November 7, 2014 - 724 M£ 5.453% (a) 724 814 724 813 May 20, 2014 - 1,000 M€ - 3.9% 1,000 997 1,000 997 January 22, 2013 - 850 MUS$, 5.5% 850 724 850 703 Undated notes -625 M€, variables rates Undated notes - 27,000 MJPY, 3.3% 625 27,000 625 209 625 27,000 625 200 Undated notes - 375 MUS$, variables rates 375 322 375 313 Sub-Total Undated Subordinated Debt 7,467 7,391 Equity component of convertible debt (2018) TOTAL 7,467 7,391 (a) These undated Deeply Subordinated notes were part of the liability management exercise launched on October 29, 2014. Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step-up clauses with effect from a given date. OTHERS The €-2,450 million decrease is others mainly comes from the US IPO (see Note 4.1). DIVIDENDS PAID At the shareholders’ meeting held on May 7, 2018, shareholders approved a dividend distribution of €1.26 per share corresponding to €2,998 million with respect to the 2017 financial year. Half Year 2018 Financial Report 112 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 7.1.2 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2017 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2017, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: stock option exercice of 3.1 million shares for €48 million; cancellation of 4.2 million shares for €103 million. TREASURY SHARES As of June 30, 2017, the Company and its subsidiaries owned approximately 38 million AXA shares, representing 1.6% of the share capital, an increase of 32 million shares compared to December 31, 2016. As of June 30, 2017, the carrying value of treasury shares and related derivatives was €963 million and there was no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. As of June 30, 2017, 1.5 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €24 million and their market value €37 million at the end of June 2017. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debt instruments issued by the Group do not qualify as liabilities under IFRS. Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2017, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: change in other was due to foreign exchange rate fluctuations for €-245 million; change in undistributed profits and other reserves was due to interest expenses related to the undated subordinated debt (net of tax) for €-117 million. DIVIDENDS PAID At the shareholders’ meeting held on April 26, 2017, shareholders approved a dividend distribution of €1.16 per share corresponding to €2,808 million with respect to the 2016 financial year. Half Year 2018 Financial Report 113 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 7.2 Comprehensive income for the period The Statement of Comprehensive Income, presented as a primary financial statement, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 7.2.1 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2018 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled €-6,787 million, of which a €-5,404 million decrease in unrealized capital gains on debt securities which was mainly driven by interest rate increases, and a decrease in both equity securities €-744 million and in non consolidated investments funds €-477 million, in line with the financial market evolution. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: June 30, 2018 December 31, 2017 (in Euro million) Gross unrealized gains and losses (a) 43,490 50,277 Less unrealized gains and losses attributable to: Shadow accounting on policyholder participation and other obligations (24,313) (27,019) Shadow accounting on Deferred Acquisition Costs (b) (390) (1,367) Shadow accounting on Value of purchased Business In force (156) (178) Unallocated unrealized gains and losses before tax 18,631 21,714 Deferred tax (4,863) (5,540) Unrealized gains and losses (net of tax) - Assets available for sale 13,768 16,174 Unrealized gains and losses (net of tax) - Equity accounted companies 15 20 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 13,783 16,194 Minority interests' share in unrealized gains and losses (d) (19) (215) Translation reserves (e) (190) 14 UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (c) 13,574 15,992 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including unrealized gains and losses on assets held for sale operations. (d) Including foreign exchange impact attributable to minority interests. (e) Group share. As of June 30, 2018, most of the unrealized gains on assets available for sale related to Life & Savings entities. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2018: Half Year 2018 Financial Report 114 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 June 30, 2018 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Belgium Life & Savings Gross unrealized gains and losses (a) 17,074 7,499 2,812 5,332 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (12,613) (6,420) (1,530) (2,272) Shadow accounting on Deferred Acquisition Costs (b) (295) (70) (80) Shadow accounting on Value of purchased Business In force (85) (6) Unallocated unrealized gains and losses before tax 4,166 1,079 1,126 2,973 Deferred tax (1,082) (335) (225) (741) Unrealized gains and losses (net of tax) - Assets available for sale 3,084 744 901 2,232 Unrealized gains and losses (net of tax) - Equity accounted companies 44 6 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 3,128 750 901 2,232 Minority interests' share in unrealized gains and losses (c) (8) 0 (1) Translation reserves (d) 0 (158) (0) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) 3,121 750 743 2,231 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2018 and December 31, 2017 broken down as follows: June 30, 2018 December 31, 2017 (in Euro million) Unrealized gains and losses (net of tax) 100%, opening 16,194 15,376 Transfer to the income statement on the period (a) (639) (725) Investments bought in the current accounting period and changes in fair value (1,927) 2,177 Foreign exchange impact 166 (629) Change in scope and other changes (9) (6) Unrealized gains and losses (net of tax) 100%, closing 13,784 16,194 Minority interests' share in unrealized gains and losses (b) (19) (215) Translation reserves (c) (190) 14 UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (d) 13,574 15,992 (a) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period, and debt instruments discount premium impacts. (b) Including foreign exchange impact attributable to minority interests. (c) Group share. (d) Including unrealized gains and losses on assets held for sale operations. CURRENCY TRANSLATION RESERVE The group share translation reserve movement (€+909 million) was mainly driven by the United States (€+414 million), Japan (€+313 million), Switzerland (€+98 million), Asia (€+89 million) and the United Kingdom (€+16 million), partly offset by the negative evolution on International Markets (€-51 million). Half Year 2018 Financial Report 115 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year 2018 amounted to (€+641 million) net shareholders’ equity group share. This was mainly driven by US with gains due to the recycling of (€+243million) in minority interests and the increase in discount rate assumptions used at HY2018 (€+64 million). In the UK & Ireland, the increase in discount rates and inflation rates were partially offset by some losses on plan assets resulting in an amount of (€+217 million) global actuarial gains. The (€+121 million) actuarial gains in Switzerland were due to the over performance of plan assets and an increase in discount rate assumptions used. 7.2.2 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2017 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled €-4,836 million, of which a €-5,277 million decrease in unrealized capital gains on debt securities which was mainly driven by interest rates increase, partially offset by a increase in unrealized capital gains on equity securities of €571 million in line with the financial market. CURRENCY TRANSLATION RESERVE The group share translation reserve movement (€-2,313 million) was mainly driven by the United States (€-1,199 million), Asia (€-428 million), Japan (€-265 million), Switzerland (€-211 million), AXA IM (€-157 million) and the United Kingdom (€- 128 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year 2017 amounted to €+407 million net group share, mostly due to the net actuarial gain in the United Kingdom due to the revisited alternative approach used to derive the pension increase assumption and mortality assumption update based on the latest CMI model, and net gains coming from plan assets outperformance above the opening average discount rate used to calculate the interest income on assets in the United States and Switzerland. 7.3 Change in minority interests Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than a shareholders’ equity item. 7.3.1 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2018 The €+5,409 million increase in minority interests to €+11,065 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period notably included the following: o Net income attributable to minority interests for €+213 million; o Foreign exchange movements for €+40million; o Employee benefits actuarial gains and losses €-237million; Half Year 2018 Financial Report 116 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 o Reserves relating to changes in fair value through shareholders’ equity for €-142 million. Transactions with minority interests’ holders, mainly included: o Increase in minority interests following the IPO €4,716 million (see Note 4.1). o Equity component of the Mandatory Exchangeable Bonds €+587 million (see Note 4.1); o Minority interests qualified as equity resulting from an increase in the value of minority interest holdings due to a capital increase in existing consolidated investment funds for €+168 million; o Dividend payout to minority interests’ holders for €-258 million; 7.3.2 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2017 The €+457 million increase in minority interests to €+5,739 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period notably included the following: o Net income attributable to minority interests for €+171 million; o Foreign exchange movements for €-204 million; o Reserves relating to changes in fair value through shareholders’ equity for €-30 million. Transactions with minority interest holders, mainly included: o Minority interests qualified as equity resulting from an increase in the value of minority interest holdings, in particular following consolidation of new investment funds and capital increase in existing consolidated investment funds for €+648 million; o Dividend payout to minority interests’ holders for €-179 million. Half Year 2018 Financial Report 117 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 8 FINANCING DEBT Carrying value (in Euro million) June 30, 2018 December 31, 2017 AXA Subordinated notes, 5.25% due 2040 (€) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) U.S. registered redeemable subordinated debt, 7.125% 2020 (£) Subordinated debt, 5.625% due 2054 (£) Derivatives relating to subordinated debts (a) Subordinated debt, 3.375%, due 2047(€) 9,151 1,300 1,000 1,027 367 846 (476) 1,500 Undated Subordinated notes, US$ 850M, 4.5% 729 AXA SA - Subordinated notes, 5.125%, due 2047 (US$) 858 AXA SA - Subordinated notes, 3.25%, due 2049 (€) 2,000 AXA Bank Belgium Subordinated debt maturity below 10 years fixed rate Undated Subordinated debt fixed rate AXA Italy Subordinated notes, EURIBOR 6 months + 81bps Other subordinated debt (under €100 million) 31 15 16 69 69 27 Subordinated debt 9,278 AXA 645 Debt component of bonds mandatorily exchangeable into shares of AXA Equitable Holdings, Inc 145 Euro Medium Term Note, due 2028 AXA Financial Senior Notes, 3.9%, due 2023 Senior Notes, 4.35%, due 2028 Senior Notes, 5%, due 2048 Senior Notes, 7%, due 2028 AXA UK Holdings GRE: Loan Notes, 6.625%, due 2023 Other financing debt instruments issued (under €100 million) Other financing debt instruments issued (under €100 million) 500 3,517 679 1,272 1,267 299 171 171 49 90 Derivatives relating to other financing debt instruments issued (a) (41) Financing debt instruments issued 4,383 TOTAL FINANCING DEBT (b) 13,661 (a) Hedging instruments in accordance with IAS 39 and economic hedge derivatives not eligible for hedge accounting. (b) Excluding accrued interest on derivatives. Half Year 2018 Financial Report 6,950 1,300 1,000 1,052 366 845 (655) 1,500 709 834 38 22 17 69 69 28 7,086 500 500 291 - - - 291 170 170 52 94 (42) 1,013 8,099 118 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 9 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: The calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period. The calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2018 June 30, 2017 Net income Group share 2,794 3,268 Undated subordinated debt financial charge (115) (117) Net income including impact of undated subordinated debt A 2,679 3,151 Weighted average number of ordinary shares (net of treasury shares) - opening 2,383 2,419 Increase in capital (excluding stock options exercised) (b) Stock options exercised (b) 1 1 Treasury shares (b) (1) (5) Share purchase program (b) (4) Weighted average number of ordinary shares B 2,383 2,411 BASIC NET INCOME PER ORDINARY SHARE C = A / B 1.12 1.31 Potentially dilutive instruments : Stock options 4 6 Other 1 2 Fully diluted - weighted average number of shares (c) D 2,388 2,419 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 2,679 3,151 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 1.12 1.30 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. As of June 30, 2018, net income per ordinary share stood at €1.13 on a basic calculation and €1.12 on a fully diluted basis. As of June 30, 2017, net income per ordinary share stood at €1.31 on a basic calculation, and €1.30 on a fully diluted basis. Half Year 2018 Financial Report 119 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2018 NOTE 10 SUBSEQUENT EVENTS AXA ENTERED INTO EXCLUSIVITY FOR THE POTENTIAL DISPOSAL OF ITS EUROPEAN VARIABLE ANNUITIES CARRIER, WITH EXPECTED TOTAL CASH PROCEEDS OF €1.2 BILLION On August 1, 2018, AXA announced that it has received an irrevocable offer from Cinven for the potential sale of AXA Life Europe (“ALE”), a specialized platform which designed, manufactured and distributed AXA’s Variable Annuity products across Europe. The total cash proceeds generated for AXA Group would be €1,165 million, which includes €925 million (representing an implied 1.0x BV multiple (1)) from the potential sale of ALE shares to be fully paid in cash at closing, and a capital distribution from ALE to AXA S.A. of €240 million, prior to the transaction, in June 2018. The corresponding assets and liabilities of ca. €5 billion (mostly insurance liabilities from the German Variable Annuities book and financial assets backing these contacts) will be reclassified to held for sale in the balance sheet. Based in Dublin with over 60 employees, ALE delivers strong financial risk management capabilities and manages a portfolio of ca. 248,000 insurance contracts with ca. €5 billion reserves (2). It distributed products across Europe through the networks of AXA entities (namely Germany, France, UK, Spain, Italy, and Portugal (3)) and third-party distribution channels, and has a reinsurance arrangement with AXA Japan. ALE has been closed to new business since 2017. The German insurance contracts account for more than 70% of ALE’s portfolio (4), and the policy administration services for these contracts will continue to be provided by AXA Germany. This transaction is expected to result in a positive impact on AXA Group Solvency II ratio of ca. 2 points. The Underlying Earnings (UE) generated from the business under consideration were €19 million in FY17. The proposed transaction is subject to customary conditions, including completing the information and consultation of the relevant works councils as well as obtaining required regulatory approvals, and is expected to be finalized by the end of 2018 or early 2019. (1) Excluding Other Comprehensive Income. (2) IFRS Reserves as of FY17. (3) AXA Portugal was sold to Ageas in 2016. (4) In terms of reserves. Half Year 2018 Financial Report 120 II Statutory auditors’ review report on the 2018 Half Year Financial Information / STATUTORY AUDITORS’ REVIEW REPORT ON THE 2018 HALF YEAR FINANCIAL INFORMATION PricewaterhouseCoopers Audit Mazars 63, rue de Villiers 61, rue Henri Regnault 92208 Neuilly-sur-Seine Cedex 92075 Paris La Défense Cedex Statutory Auditors’ Review Report on the 2018 half-year Financial Information (Period from January 1st au June 30th) To the Shareholders AXA SA 25, Avenue Matignon 75008 PARIS In compliance with the assignment entrusted to us by your General Meeting and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code (Code monétaire et financier), we hereby report to you on: - the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the period from January 1 to June 30, 2018; - the verification of the information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - the standard of IFRS as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information given in the half-year management report on the condensed half-year consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half- year consolidated financial statements. Neuilly-sur-Seine and Courbevoie, August 2, 2018 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit MAZARS Xavier Crepon Jean-Claude Pauly Maxime Simoen This is a free translation into English of the Statutory Auditors’ review report issued in French and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Half Year 2018 Financial Report III 122 Statement of the person responsible for the Half Year Financial Report / STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR FINANCIAL REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and describes the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 2, 2018. Thomas Buberl Chief Executive Officer IV

Semestriel, 2018, Insurance, AXA

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Half Year Financial Report / June 30, 2019 TABLE OF CONTENTS I. Activity Report………………………………………...3 II. Consolidated financial statements ………………..77 III. Statutory auditors’ review report on the 2019 Half Year Financial Information ……118 IV. Statement of the person responsible for the Half Year Financial Report ……………………….……..121 I. Activity Report / June 30, 2019 ACTIVITY REPORT – HALF YEAR 2019 IMPORTANT LEGAL INFORMATION AND CAUTIONARY STATEMENT REGARDING FORWARD- LOOKING STATEMENTS AND THE USE OF NON-GAAP FINANCIAL MEASURES Certain statements contained herein may be forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans, expectations or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause AXA’s actual results to differ materially from those expressed or implied in such forward looking statements. Please refer to Part 4 - “Risk Factors and Risk Management” of AXA’s 2018 Registration Document, for a description of certain important factors, risks and uncertainties that may affect AXA’s business and/or results of operations. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise, except as required by applicable laws and regulations. In addition, this report refers to certain non-GAAP financial measures, or alternative performance measures (“APMs”), used by Management in analyzing AXA’s operating trends, financial performance and financial position and providing investors with additional information that Management believes to be useful and relevant regarding AXA’s results. These non-GAAP financial measures generally have no standardized meaning and therefore may not be comparable to similarly labelled measures used by other companies. As a result, none of these non-GAAP financial measures should be considered in isolation from, or as a substitute for, the Group’s consolidated financial statements and related notes prepared in accordance with IFRS. A reconciliation from APMs Adjusted Earnings, Underlying Earnings and Underlying Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided on pages 20 to 22 of this report. APMs Adjusted Return on Equity and Underlying Earnings per share are reconciled to the financial statements in the table set forth on page 30 of this report, and Debt Gearing is reconciled to the financial statements in the table set forth on page 29 of this report The above-mentioned and other non-GAAP financial measures used in this report are defined in the Glossary set forth on pages 69 to 76 of this report. The results of our US segment are presented herein on the basis of IFRS and are not, and should not be relied upon as representing, the US GAAP results of AXA Equitable Holdings, Inc. (“EQH”) (including AllianceBernstein), which, as a US public company, reports in US GAAP in accordance with the rules of the US Securities and Exchange Commission (“SEC”). For further information on EQH’s financial results and other public reports please consult the SEC website (www.sec.gov). Half Year 2019 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2019 REPORTING CHANGES Following the completion of the acquisition of XL Group on September 12, 2018, and in line with the 2018 Registration Document, the financial reporting has been aligned and retroactively restated in this report under the seven following segments: France (insurance and banking activities, and holdings); Europe, consisting of: o Switzerland (insurance activities), o Germany (insurance and banking activities, and holdings), o Belgium (insurance activities and holdings), o United Kingdom & Ireland (insurance activities and holdings), o Spain (insurance activities), o Italy (insurance activities and holdings); Asia, consisting of: o Japan (insurance activities and holdings), o Hong Kong (insurance activities), o Asia High Potentials, consisting of:  Thailand (insurance activities),  Indonesia (insurance activities),  China (insurance activities),  The Philippines (insurance activities), o Asia - Direct, consisting of:  Direct Japan (insurance activities),  Direct South Korea (insurance activities), o Asia Holdings; AXA XL, consisting of: o XL Group (insurance activities and holdings), o AXA Corporate Solutions Assurance (insurance activities), o AXA Art (insurance activities); United States (insurance activities, AB and holdings); International, consisting of: Half Year 2019 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2019 o 14 countries (1) within Europe, Middle East, Africa & Latin America, mainly including Turkey, Mexico, Morocco, Czech Republic & Slovak Republic and Luxembourg (insurance activities and holdings), o Singapore (insurance activities and holdings), o Malaysia (insurance activities), o India (insurance activities and holdings), o AXA Bank Belgium (banking activities); Transversal & Central Holdings, consisting of: o AXA Investment Managers, o AXA Assistance, o AXA Liabilities Managers, o AXA Global Re, o AXA Life Europe, o AXA SA and other Central Holdings. (1) For the full list of countries, see the Glossary on pages 69 and 70. Half Year 2019 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2019 Market Environment FINANCIAL MARKET CONDITIONS In the first half of 2019, equity markets across the world surged supported by investors’ anticipations of an easing of monetary policies: as global activity is decelerating in a context of low inflation, central banks are expected to cut interest rates thus pushing government bond yields lower in most countries. The improvement in market conditions was also driven by recent positive developments in global trade discussions: although trade tensions between the United States and China have been weighing on the global economic outlook, further tariff increases from the United States on imports of Chinese goods were avoided during the recent G20 meeting in Japan in June, spreading some optimism. In Europe, some of the uncertainty factors of 2018, including the widening of Italian spreads and difficulties for the German automobile sector, softened in the first quarter of 2019 and the Euro zone registered a 1.6% growth. However, manufacturing activity slowed down in the second quarter of 2019 as international trade tensions mounted. Consequently, the European Central Bank (ECB) announced the postponement of actions to tighten its monetary policy to 2020 at the earliest, which led to a decrease in European government bond yields. In parallel, the USD appreciated against Euro. In France, domestic unrest softened in the first half of 2019, and GDP rose by 1.0% in the first semester. However, France was affected by the deceleration in the manufacturing sector. Announcements of the ECB also impacted the French economic indicators as the 10-year government bonds yields fell into negative territory, while the CAC40 equity index rose by 17% since the end of 2018. In the United Kingdom, the growth outlook weakened further due to Brexit uncertainties: the United Kingdom was initially expected to leave the European Union on March 31, 2019, but its exit has been deferred to October 31, 2019. The sterling depreciated against the US dollar, bond yields fell while the FTSE 100 index rose. In the United States, the GDP rose by 2.6% in the first semester of 2019, and unemployment reached its lowest level in decades. Trade tensions with China, notably with an increase in tariffs from 10% to 25% on Chinese imports in May, exacerbating concerns over the projected economic slowdown in 2019. The Federal Reserve confirmed a potential easing of its monetary policy which led to falling US government bond yields and surging US stocks reaching an all-time high. In Asia, growth suffered from both trade tensions and a weakening external demand in a context of slowing global economic growth. Japan posted stronger-than-expected GDP growth of 2.1% in the first quarter of 2019, benefiting mostly from government support. In a context of low interest rates, the Bank of Japan announced it would continue to pursue monetary easing, pushing Japan government bond yields lower. In China, growth appeared to be stabilizing following several quarters of deceleration. Recent activity was supported by both monetary and fiscal measures, but remains vulnerable to a slowdown in manufacturing activity and trade tensions. Asian stocks rose in the first half of 2019, recovering from the sharp decline of the last quarter of 2018. Half Year 2019 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2019 Stock Markets The MSCI World Index increased by 15.3% in the first half of 2019. The MSCI G7 index increased by 15.4% and the MSCI Emerging index increased by 8.7%. The Dow Jones Industrial Average index increased by 14.0% and the S&P 500 index increased by 17.3% in the first half of 2019. Equity markets in Japan and Europe posted gains in the first half of 2019: the Nikkei index in Tokyo increased by 6.3%, the FTSE 100 index in London increased by 10.4%, and the EUROSTOXX 50 index in the Eurozone increased by 15.7%. The S&P 500 implied volatility index (VIX) decreased from 25.4% on December 31, 2018, to 15.1% on June 30, 2019. Bond Markets Government bond yields decreased in the first half of 2019 in mature economies: the 10-year French government bond yield decreased by 72 bps to -0.01%, the 10-year Belgium government bond yield decreased by 70 bps to 0.07%, the 10-year US T-bond yield decreased by 64 bps to 2.05%, the 10-year German Bund yield decreased by 57 bps to -0.33%, the 10-year UK government bond yield decreased by 44 bps to 0.83%, the 10-year Swiss government bond yield decreased by 37 bps to -0.54%, and the 10-year Japan government bond yield decreased by 14 bps to -0.14%. In the Eurozone peripheral countries, the 10-year government bond yields decreased as well: -192 bps to 2.46% in Greece, -125 bps to 0.48% in Portugal, -103 bps to 0.39% in Spain, -73 bps to 0.17% in Ireland and -68 bps to 2.09% in Italy. In Europe, the iTraxx Main spreads decreased by 36 bps to 53 bps compared to December 31, 2018, and the iTraxx Crossover decreased by 100 bps to 254 bps. In the United States, the CDX Main spread Index decreased by 33 bps to 55 bps. The Euro interest rates implied volatility index (based on 10x10 Euro swaptions) increased from 46.5% as of December 31, 2018, to 106.8% as of June 30, 2019. Exchange Rates End of Period Exchange rate Average Exchange rate June 30, 2019 December 31, 2018 June 30, 2019 June 30, 2018 (for €1) (for €1) (for €1) (for €1) US Dollar 1.14 1.14 1.13 1.21 Japanese Yen 123 125 124 132 British Sterling Pound 0.89 0.90 0.87 0.88 Swiss Franc 1.11 1.13 1.13 1.17 Half Year 2019 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2019 Operating Highlights Governance RE-APPOINTMENT OF MR. JEAN-PIERRE CLAMADIEU AS DIRECTOR, AND RATIFICATION OF THE COOPTATION OF MRS. ELAINE SARSYNSKI AS DIRECTOR On April 24, 2019, AXA’s Shareholders’ Meeting approved the reappointment of Mr. Jean-Pierre Clamadieu as director for a four-year term. The Board of Directors held following the Shareholders’ Meeting confirmed his appointment as Chairman of the Compensation & Governance Committee and Senior Independent Director. AXA’s Shareholders’ Meeting also ratified the cooptation of Mrs. Elaine Sarsynski as director. GÉRALD HARLIN IS RETIRING AT THE END OF THE YEAR, ÉTIENNE BOUAS-LAURENT WILL SUCCEED HIM AS GROUP CFO ON JANUARY 1, 2020. ÉTIENNE BOUAS-LAURENT, KARIMA SILVENT AND GEORGES DESVAUX TO JOIN AXA’S MANAGEMENT COMMITTEE On June 20, 2019, AXA announced that after 29 years with the Group, Gérald Harlin, Group Deputy CEO and Chief Financial Officer, and a Member of AXA’s Management Committee has decided to retire on January 1, 2020. Étienne Bouas-Laurent, currently CEO of AXA Hong Kong, will become Deputy Chief Financial Officer and a Member of AXA’s Management Committee on September 1, 2019, and Group Chief Financial Officer on January 1, 2020, when Gérald Harlin retires. Étienne joined the Group in 1997 and has held several financial and operational roles throughout his career at AXA. Alban de Mailly Nesle, Chief Risk Officer, Head of Insurance Office, and a Member of the Management Committee, will become Chief Risk and Investment Officer, taking the additional responsibility of overseeing the Group Investment Department, in addition to Group Risk Management and Ceded Reinsurance. Georges Desvaux, previously Senior Partner at McKinsey & Company, is appointed Chief Strategy and Business Development Officer of AXA and joins AXA’s Management Committee as of September 1, 2019. Karima Silvent, Chief Human Resources Officer, is joining AXA’s Management Committee as of September 1, 2019. Significant Disposals AXA COMPLETED THE SALE OF ITS UKRAINIAN OPERATIONS On February 14, 2019, AXA announced that it had completed the sale of both its non-life entity (AXA Insurance (1)) and life entity (AXA Insurance Life) in Ukraine to Fairfax Financial Holdings Limited (2). TERMINATION OF THE SALE AGREEMENT RELATED TO AXA MBASK INSURANCE COMPANY IN AZERBAIJAN On April 4, 2019, the agreement with Mr. Elkhan Garibli to sell AXA’s non-life entity in Azerbaijan (AXA MBask Insurance Company OJSC), announced on February 21, 2018, lapsed. AXA Mbask Insurance Company ceased underwriting new insurance business and will exclusively administer the in-force portfolio with the purpose of terminating its insurance activities in Azerbaijan as soon as practicable, while preserving the interest of its existing clients in Azerbaijan. (1) AXA Insurance in Ukraine was a joint venture between AXA (50% shareholding) and Ukrsibbank. (2) Through its subsidiary FFHL Group Ltd. Half Year 2019 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2019 Partnerships and innovation AXA EXPANDS ITS PAYER-TO-PARTNER STRATEGY IN EMERGING MARKETS THROUGH INNOVATIVE HEALTHCARE DELIVERY SYSTEMS On July 17, 2019, AXA announced the expansion of its Payer-to-Partner strategy in emerging markets. AXA is creating a digital and physical health care ecosystem by launching its own medical centers, linked directly to its health insurance services. By combining, in one offer, services that are normally delivered by different providers, AXA aims to simplify the healthcare journey of its customers. AXA’s target is to open up to 50 medical clinics which would serve as many as 1.5 million clients across emerging markets by 2023, starting with Mexico in Latin America and Egypt in Africa, to be followed by other key emerging markets. These centers will provide access to advanced diagnostics, laboratory equipment and medical consultations in key specialties, thereby bringing to its customers an affordable, high-quality and seamless patient experience, in markets where access to economical and quality care still remains a challenge for many individuals and families. In Mexico, AXA announced the launch of a joint venture with Keralty, to develop a vertically integrated health system incorporating quality day-to-day healthcare delivery. Keralty is the leading health insurer and services provider in Colombia, with significant presence in the United States and Brazil. Concurrently in Egypt, AXA will open diagnostic centers and primary care centers, owned 100% by AXA, with the support of World Health Management as its technical partner, with expertise in designing and setting up healthcare facilities. These initiatives fully embody AXA’s strategy to provide healthcare solutions in emerging markets, where the existing health system often results in high non-reimbursable medical care spending for the population. Capital / Debt operations / Other AXA RATINGS On April 5, 2019, Moody’s Investors Service affirmed the “Aa3” insurance financial strength rating of AXA’s principal insurance subsidiaries, changing the outlook to stable from negative. On April 30, 2019, Fitch Ratings affirmed the financial strength rating of AXA’s core operating subsidiaries at “AA- ” with a stable outlook. On July 24, 2019, S&P Global Ratings affirmed the long-term financial strength rating of AXA’s core operating subsidiaries at “AA-” with a stable outlook. AXA GROUP UNVEILED ITS NEW GLOBAL BRAND POSITIONING: "KNOW YOU CAN" On February 1, 2019, AXA unveiled its new tagline, which will be rolled out across all its markets in the next year: "Know you can". This positioning symbolizes AXA's new promise to its customers, that of being the encouraging partner who helps them feel more confident to achieve their goals and go further. This new promise plays an integral role in the deployment of AXA's strategic ambition to transition from payer to partner to its customers. The new tagline will be deployed with a global campaign featuring one of history’s greatest tennis champions Serena Williams. Embodying success and self-belief, this campaign symbolizes AXA's values and ambition. The films with Serena Williams will be at the heart of a comprehensive communications campaign also featuring Half Year 2019 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2019 Liverpool Football Club players (1) and AXA's strategic business segments, Health, Protection and Commercial lines insurance, and local market proofs illustrating the Group's commitment to its customers. AXA ANNOUNCED THE SUCCESSFUL COMPLETION OF A SECONDARY COMMON STOCK OFFERING OF AXA EQUITABLE HOLDINGS, INC. AND RELATED SHARE BUYBACK On March 25, 2019, AXA announced that it had successfully completed a secondary public offering of 40,000,000 shares (the “Offering”), at a public offering price of USD 20.50 per share, of its U.S. subsidiary, AXA Equitable Holdings, Inc. (“EQH”) and the sale to EQH of 30,000,000 shares (the “Share Buyback”) at the per share price paid by the underwriters in the Offering. In addition, the underwriters exercised in full the over-allotment option to purchase an additional 6,000,000 EQH shares. Net proceeds (2) amounted to USD 1.5 billion or €1.3 billion (3), corresponding to the sale of 76,000,000 EQH shares in the Offering, the full exercise of the over-allotment option granted to the underwriters, and the Share Buyback. Following this sale, AXA’s ownership in EQH decreased from 60.1% (4)(5) to 48.3% (5). Following the successful completion of the Offering and the Share Buyback, the retained non-controlling minority stake in EQH has been deconsolidated and subsequently being accounted for using the equity method. The Offering and the Share Buyback resulted in a negative net income impact of €-0.6 billion in AXA’s Half Year 2019 Financial Report. This impact reflects the difference between the Offering price and the consolidated book value (6) of (i) the EQH shares sold in the transaction, and (ii) AXA’s remaining 48.3% (5) stake in EQH (i.e. the loss required to be taken upon deconsolidation). This does not reflect Management’s expectations on the future evolution of EQH’s share price or of the price at which potential future transactions might take place. The transaction contributed to the reduction of AXA’s Debt Gearing (7) by 1.0 point (8). For additional information on the accounting-related impacts of the Offering and Share Buyback, see Note 4.1 to AXA’s Half Year 2019 Consolidated Financial Statements included in this report, available on our website (www.axa.com). AXA ANNOUNCED THE SUCCESSFUL COMPLETION OF A SECONDARY OFFERING OF AXA EQUITABLE HOLDINGS, INC.’S COMMON STOCK On June 7, 2019, AXA announced that it had successfully completed a secondary public offering of a further 40,000,000 shares of EQH’s common stock. Net proceeds (2) to AXA, corresponding to the sale of 40,000,000 EQH shares, amounted to USD 834 million or €739 million (9)(10). Following this sale, AXA’s ownership in EQH decreased from 48.3% (5)(11) to 40.1% (5)(11). In addition, AXA granted the underwriters a 30-day option to purchase up to an additional 6,000,000 EQH shares. (1) AXA is the Global Insurance Partner of Liverpool Football Club. (2) Net of underwriting discounts and commissions. (3) EUR 1 = USD 1.1297 as of March 22, 2019 (Source: Bloomberg). (4) EQH’s issued and outstanding common stock as of March 7, 2019, was comprised of 521,051,204 shares. (5) Including the shares to be delivered on redemption of the bonds mandatorily exchangeable into EQH shares, issued by AXA in May 2018. (6) Including the recycling of related currency translation adjustment, and other comprehensive income. (7) Following the deconsolidation of AXA Equitable Holdings Inc. and its subsequent accounting under the equity method, the Mandatory Exchangeable Bonds (“MEB”) issued by AXA in May 2018 were excluded from the Debt Gearing. Debt Gearing is an alternative performance measure and is defined in the Glossary set forth on pages 69 to 76 of this report. (8)This reflects the effect of the deconsolidation of EQH but does not reflect the intended use of the proceeds to reduce of AXA’s Debt Gearing towards the targeted range of 25%-28% by 2020. (9) EUR 1 = USD 1.1293 as of June 6, 2019 (Source: Bloomberg). (10) Not including the proceeds from the potential exercise of the 30-day over-allotment option granted to the underwriters to purchase 6,000,000 EQH shares. (11) EQH’s issued and outstanding common stock as of May 9, 2019, comprised 491,138,042 shares. Half Year 2019 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2019 Risk Factors The principal risks and uncertainties faced by the Group are described in detail in Section 4.1 "Risk Factors" and Section 6.3 “General Information” of the 2018 Registration Document (respectively on pages 164 to 180 and pages 385 to 393). The 2018 Registration Document was filed with the Autorité des marchés financiers (the “AMF”) and is available on the AMF’s website (www.amf-france.org) as well as on AXA's website (www.axa.com). The descriptions contained in these sections of the 2018 Registration Document remain valid in all material respects at the date of the publication of this report regarding the appreciation of the major risks and uncertainties affecting the Group on June 30, 2019, or which Management expects could affect the Group during the remainder of 2019. Related-Party Transactions During the first semester of 2019, there were (1) no modifications to the related-party transactions described in Note 28 "Related-party transactions" of the audited consolidated financial statements for the fiscal year ended December 31, 2018, included in the 2018 Registration Document (pages 360 and 361) filed with AMF and available on its website (www.amf-france.org) as well as on the Company's website www.axa.com, which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2019, and (2) no new transaction concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2019. Half Year 2019 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2019 Events subsequent to June 30, 2019 AXA S.A. ANNOUNCED THE FULL EXERCISE OF THE OVER-ALLOTMENT OPTION RELATED TO THE RECENTLY COMPLETED SECONDARY OFFERING OF AXA EQUITABLE HOLDINGS, INC.’S COMMON STOCK On July 8, 2019, AXA announced that the underwriters in the secondary offering of shares of common stock (the “Offering”) of EQH, completed on June 7, 2019, have fully exercised their option to purchase an additional 6,000,000 shares of EQH’s common stock from AXA, subject to the same terms and conditions as the Offering. Net proceeds (1) to AXA from the exercise of the underwriters’ option amounts to USD 125 million or €112 million (2), corresponding to a net price (1) of USD 20.85 per share. Following the sale of these additional shares, AXA’s ownership in EQH has decreased from 40.1% (3)(4) to 38.9% (3)(4). (1) Net of underwriting discounts and commissions. (2) EUR 1 = USD 1.1219 as of July 5, 2019 (Source: Bloomberg). (3) EQH’s issued and outstanding common stock as of May 9, 2019 comprised 491,138,042 shares. (4) Including the shares to be delivered on redemption of the bonds mandatorily exchangeable into EQH shares, issued by AXA in May 2018. Half Year 2019 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2019 Activity and Earnings Indicators On March 25, 2019, AXA completed a further sell down of its shareholding in EQH, bringing AXA’s ownership in EQH from 60.1% to 48.3%. The reduction of its voting rights below 50% combined with the reduction of its board membership to a minority share led to the loss of control of AXA over EQH, while continuing to retain a significant influence over its residual shareholding of EQH. As a result, AXA: deconsolidated EQH and recorded a negative net income impact of €0.6 billion (including the recycling of related other comprehensive income and currency translation reserve) corresponding to the difference between the fair value and the consolidated carrying value of EQH at the date of the deconsolidation; accounted for its remaining ownership in EQH using the equity method; reclassified the equity component of the Mandatory Exchangeable Bonds (‘MEB’) from non-controlling interests to financial liability. As a consequence, in this report, the United States Gross revenues contribution included 3 months of operations. Nevertheless, the United States contribution for APE and NBV included 6 months of operations on Group share basis. Furthermore, the United States underlying earnings contribution in 1H19 was fully accounted for in Income from affiliates and associates, and was therefore excluded from Health and Protection Combined Ratio in 1H19. Half Year 2019 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2019 ACTIVITY INDICATORS (in Euro million, except percentages) June 30, 2019 June 30, 2018 restated (a) June 30, 2019 / June 30, 2018 restated (a) & (b) December 31, 2018 Gross revenues (c) 57,949 53,600 4.0% 102,874 France 13,383 13,004 3.1% 25,175 Europe 19,978 21,747 2.2% 36,738 Asia 4,827 4,339 5.2% 8,973 AXA XL 10,436 1,755 8.7% 6,287 United States 4,297 7,923 4.8% 16,483 International 3,662 3,419 5.7% 6,535 Transversal & Central Holdings 1,367 1,413 (2.1%) 2,684 APE (d) 3,227 3,387 1.8% 6,631 France 1,052 1,041 (4.6%) 2,232 Europe 655 640 2.1% 1,146 Asia 867 763 8.2% 1,520 United States 524 821 5.5% 1,471 International 129 123 3.4% 262 NBV Margin (e) 40.4% 38.8% (0.1 pts) 39.3% (a) Restated: as per new governance. (b) Changes are on comparable basis. (c) Net of intercompany eliminations. (d) Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (e) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. Consolidated Gross revenues amounted to €57,949 million as of June 30, 2019, up 8.1% on a reported basis and up 4.0% on a comparable basis compared to June 30, 2018. The 1H18 comparable basis mainly includes the following adjustments: (i) the inclusion of XL Group contribution in 2018 (€+7.3 billion or -13.4 points), (ii) the exclusion of the 2Q18 United States contribution following the deconsolidation of AXA Equitable Holdings Inc. and its subsequent accounting under the equity method (€-4.1 billion or +7.5 points), and (iii) the exclusion of the savings portion of the 1H18 premiums related to the transformed in-force Group Life business in Switzerland (€-2.5 billion or +4.5 points). The 1H19 comparable basis includes the foreign exchange rate movements mainly due to the depreciation of average Euro exchange rate against major currencies (€-1.3 billion or +2.4 points). Half Year 2019 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2019 Gross revenues Gross revenues were up 8% on a reported basis and up 4% on a comparable basis to €57,949 million. France gross revenues were up 3% (€+404 million) on a comparable basis to €13,383 million: Life & Savings (€+270 million or +4%) to €7,086 million mainly driven by Individual Savings (€+144 million) due to G/A strong sales of capital light products sold through the bancassurance channel and higher sales of Eurocroissance products sold through the proprietary channel, partly offset by lower Unit-Linked revenues, as well as Protection (€+53 million) and Group Savings (€+47 million) driven by higher sales in both domestic and international markets; Property & Casualty (€-9 million or 0%) to €3,922 million mainly driven by Personal lines (€-16 million) due to lower volumes in Motor, partly offset by Commercial lines (€+7 million) supported by tariff and volume increases mainly in Motor, Property and Construction, partly offset by continued selectivity in the Credit and Lifestyle Protection business; Health (€+129 million or +6%) to €2,312 million mainly driven by higher volumes in Group business (€+112 million) in both international and domestic markets as well as in Individual business (€+17 million); Other (€+14 million or +28%) to €64 million driven by AXA Banque France mainly from a higher interest margin. Europe gross revenues were up 2% (or €+411 million) on a comparable basis to €19,978 million: Switzerland (€-26 million or -1%) to €4,881 million from (i) Life & Savings in the context of the transformation of the in-force Group Life business model to a semi-autonomous model, partly offset by (ii) Property & Casualty driven by Commercial lines due to higher volumes and tariff increases in Workers’ Compensation; Germany (€+66 million or +1%) to €6,088 million from (i) Property & Casualty driven by Commercial Non- Motor due to new business in Mid-Market and SMEs as well as from a favorable impact of renewals, and (ii) Health mainly due to the continued growth in the civil servants segment and tariff increases in full benefit insurance, partly offset by (iii) Life & Savings mainly in Protection with Savings and traditional G/A Savings reflecting the decrease in the legacy business, in line with the strategy, and Unit-Linked single premium, partly offset by higher new business in G/A capital light products and Pure Protection following the launch of a new disability product; Belgium (€+40 million or +2%) to €1,794 million primarily from Property & Casualty driven by Commercial lines in Mid-Market segments, notably in the Public sector and SMEs, driven by new business and tariff increases; The United Kingdom & Ireland (€+77 million or +3%) to €2,856 million mainly from (i) Property & Casualty mainly in Motor reflecting higher new business in Personal lines as well as tariff increases and higher new business in Commercial lines, and in Property mainly due to higher new business, and (ii) Health mainly driven by a new partnership in international business; Spain (€+86 million or +7%) to €1,370 million from (i) Life & Savings driven by strong sales in Protection, G/A Savings and Unit-Linked, as well as (ii) Property & Casualty and Health both driven by higher volumes and tariff increases; Italy (€+169 million or +6%) to €2,989 million mainly from (i) Life & Savings mainly driven by the sales of Protected UL products in Unit-Linked and hybrid products in G/A Savings, and (ii) Property & Casualty driven by higher new business and renewals in Motor and Property. Half Year 2019 Financial Report 16 I ACTIVITY REPORT – HALF YEAR 2019 Asia gross revenues were up 5% (or €+223 million) on a comparable basis to €4,827 million mainly from: Japan (€-27 million or -1%) to €2,414 million from (i) Life & Savings mainly due to G/A Savings and Unit- Linked due to continued lower new business from the G/A capital light Single Premium Whole Life product, partly offset by Protection with Savings mainly from in-force growth on regular premiums, partly offset by (ii) Health mainly from Medical Whole Life products, notably due to the success of Medical Care products, partly offset by lower new business from Medical Term products; Hong Kong (€+234 million or +16%) to €1,830 million from (i) Life & Savings mainly in Protection with Savings driven by in-force growth and higher new business in brokers and agency channels, Unit-Linked driven by growth in single premium new business, and G/A Savings driven by in-force growth, (ii) Health mainly driven by higher volumes in Individual business and tariff increases in Group business, and (iii) Property & Casualty mainly due to higher volumes in both Personal and Commercial lines, and tariff increases in Commercial lines; Asia-Direct (€+23 million or +5%) to €507 million from (i) South Korea (€+14 million or +6%) in Personal Motor following the improvement of digital channel, quotation and conversion ratio, and Personal Non- Motor from higher new business, combined with (ii) Japan (€+8 million or +4%) mainly driven by higher new business in Personal Motor. AXA XL gross revenues were up 9% (or €+802 million) on a comparable basis to €10,436 million: Property & Casualty Insurance (€+616 million or +15%) to €4,961 million driven by both volume growth and rate increases across most lines of business, notably in North America Professional, including a new significant multi-year contract sold in the first quarter, and in Property; Property & Casualty Reinsurance (€+50 million or +2%) to €2,748 million driven by both volume growth and rate increases in Specialty and Other lines mainly from Lloyds Whole accounts, North America Agriculture and North America Accident & Health, partly offset by lower premiums in Property Cat reflecting a reduced Nat Cat exposure; Property & Casualty Specialty (€+137 million or +6%) to €2,632 million driven by both volume growth and rate increases across most lines of business, notably in Political Risks, as well as in Accident & Health and Fine Art & Specie. The United States gross revenues were up 5% (or €+184 million) on a comparable basis to €4,297 million in 1Q19: The United States Life & Savings (€+225 million or +7%) to €3,643 million in 1Q19 mainly in Unit-Linked from higher sales of non-GMxB Variable Annuity, partly offset by lower revenues from GMxB Variable Annuity; AB (€-42 million or -6%) to €654 million in 1Q19 mainly from both lower research service and management fees as a result of adverse market conditions in 4Q18. International gross revenues were up 6% (or €+196 million) on a comparable basis to €3,662 million mainly from: Mexico (€+105 million or +12%) to €1,008 million from (i) Health driven by volume growth and tariff increases, and (ii) Property & Casualty driven by a positive timing impact and new business in Commercial Property; The Gulf Region (€-4 million or -1%) to €471 million mainly from (i) Property & Casualty driven by a further reduction of the size of a large Commercial Motor fleet, partly offset by volume growth and tariff increases, partly offset by (ii) Health driven by volume growth and tariff increases; Half Year 2019 Financial Report 17 I ACTIVITY REPORT – HALF YEAR 2019 Colombia (€+33 million or +10%) to €354 million mainly from (i) Property & Casualty driven by new business in Protection and Workers’ Compensation, partly offset by (ii) Life & Savings mainly driven by a G/A Savings run-off portfolio; Singapore (€+10 million or +3%) to €318 million primarily from Life & Savings driven by higher sales across all lines of business; Turkey (€+67 million or +22%) to €288 million primarily from Property & Casualty mainly in Motor and Commercial Property; Poland (€-19 million or -6%) to €288 million notably from (i) Property & Casualty due to lower sales in Personal Motor in line with softening market trends, and (ii) Life & Savings driven by lower sales in Unit- Linked, partly offset by higher sales in Protection; Morocco (€+22 million or +11%) to €243 million mainly from (i) Property & Casualty driven by new business in Personal Motor and Commercial Property, and (ii) Life & Savings driven by higher sales in G/A Savings; Malaysia (€-16 million or -10%) to €143 million from Property & Casualty mainly due to lower sales in Motor reflecting strong market competition. Transversal gross revenues were down 2% (or €-30 million) on a comparable basis to €1,367 million mainly from: AXA Assistance (€+26 million or +4%) to €687 million from (i) Health mainly driven by higher new business, and (ii) Property & Casualty from Non-Motor driven by higher volumes mainly in Travel and Home, partly offset by lower volumes in Motor; AXA Investment Managers (€-48 million or -8%) to €587 million mainly driven by lower performance fees, management fees and transaction fees. New business Annual Premium Equivalent (1) New business APE was down 5% on a reported basis and up 2% on a comparable basis to €3,227 million driven by growth in Asia, the United States, Europe, and International. France (€1,052 million, 33% of total) down €51 million (-5%) on a comparable basis mainly stemming from Group Health (€-111 million) due to the non-repeat of exceptional sales in Group International business, partly offset by Savings (€+35 million) and Protection (€+23 million) mainly reflecting higher sales of mortgage insurance products. Europe (€665 million, 20% of total) up €14 million (+2%) on a comparable basis in (i) Germany (€+15 million) driven by higher new business in G/A capital light products, Pure Protection following the launch of a new disability product as well as Health both in private and civil servants segments, (ii) Belgium (€+11 million) mainly driven by Unit-Linked due to a large Group pension contract, (iii) Spain (€+10 million) driven by Protection, G/A Savings and Unit-Linked, and (iv) Italy (€+8 million) mainly from hybrid products, partly offset by (v) Switzerland (€-29 million) in the context of the transformation of the in-force Group Life business, partly offset by higher new business in Individual Life. Asia (€867 million, 27% of total) up €63 million (+8%) on a comparable basis in (i) China (€+70 million) due to strong sales of G/A Savings products during the Chinese New Year, and (ii) Hong Kong (€+46 million) driven by strong sales in Protection with Savings, partly offset by lower sales in G/A Savings and Group Health, partly offset by (iii) Japan (€-26 million) mainly due to lower new business in Protection with Savings following the (1) New business Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. Half Year 2019 Financial Report 18 I ACTIVITY REPORT – HALF YEAR 2019 announcement of a tax rule change as well as the decrease of the G/A capital light Single Premium Whole Life product, partly offset by a growth in Health, (iv) Thailand (€-20 million) driven by Protection with Savings due to lower sales of low margin products combined with lower sales of Unit-Linked products, (v) Indonesia (€-5 million) mainly driven by lower new business in Protection with Savings in both telemarketing and bancassurance channels, partly offset by successful sales of a newly launched Health product, and (vi) the Philippines (€-2 million) from Protection with Savings due to lower sales in bancassurance channel. The United States (€524 million, 16% of total) up €25 million (+5%) on a comparable basis mostly driven by higher sales of non-GMxB Variable Annuity, partly offset by lower sales of GMxB Variable Annuity and lower advisory sales in Mutual Funds. International (€129 million, 4% of total) up €4 million (+3%) on a comparable basis mainly in (i) India (€+2 million) from higher sales in Protection with Savings, (ii) Singapore (€+2 million) mainly driven by higher sales in both G/A Savings and Unit-Linked, and (iii) Mexico (€+1 million) reflecting growth in Protection with Savings. New Business Value Margin (1) New Business Value Margin stood at 40.4%, increasing by 1.5 points. On a comparable basis, restated mainly for the decrease in AXA ownership in EQH, New Business Value Margin decreased by 0.1 point mainly driven by strong volumes of low-margin G/A Savings products in China during the Chinese New Year, partly offset by a favorable business mix from Protection to Health products in Japan. (1) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. Half Year 2019 Financial Report 19 I ACTIVITY REPORT – HALF YEAR 2019 UNDERLYING EARNINGS, ADJUSTED EARNINGS AND NET INCOME GROUP SHARE June 30, 2019 (in Euro million, except percentages) June 30, 2019 (a) France Europe Asia AXA XL United States (a) International Investment margin 2,487 837 882 22 503 199 Fees & revenues 2,958 1,122 589 1,070 172 Net technical margin 9,041 1,582 3,396 442 2,428 813 Expenses Amortization of value of purchased life business in-force (9,917) (32) (2,403) - (3,104) (23) (852) (7) (2,281) - (923) (1) Underlying earnings before tax from insurance activities 4,537 1,138 1,739 674 651 260 Underlying earnings before tax from other activities (380) 1 49 (8) (48) 31 Income tax expenses / benefits Income from affiliates and associates (879) 433 (269) 5 (407) - (133) 91 (100) 1 283 (61) 41 Minority interests (91) (2) (48) (4) (2) (32) Underlying earnings Group share 3,620 873 1,333 620 502 283 240 Net capital gains or losses attributable to shareholders net of income tax 386 68 231 10 45 (3) (2) Adjusted earnings Group share 4,006 941 1,565 631 547 280 238 Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs (767) (705) (59) (142) (60) (4) - (6) (278) (36) (18) (25) 2 (8) (1) (6) (45) (20) (82) 4 (22) (0) (5) 8 (12) (2) NET INCOME GROUP SHARE 2,333 872 1,207 625 394 257 232 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 95.1% 93.9% 93.2% 90.8% 97.7% 97.8% 92.8% 95.4% 95.2% 95.4% 77.5% 86.3% 98.3% - 104.3% 98.4% 98.6% 98.7% (a) Following the deconsolidation of AXA Equitable Holdings, Inc. and its subsequent accounting under the equity method, the United States underlying earnings contribution was fully accounted for in Income from affiliates and associates, and therefore excluded from Health and Protection Combined Ratio. Half Year 2019 Financial Report I Transversal & Central Holdings 44 6 379 (355) - 75 (406) 91 11 (3) (232) 35 (196) (438) (597) (0) (22) (1,254) 95.7% 100.6% - 20 ACTIVITY REPORT – HALF YEAR 2019 June 30, 2018 (in Euro million, except percentages) June 30, 2018 France Europe Asia AXA XL United States International Investment margin 2,341 825 920 19 103 256 189 Fees & revenues 4,101 966 573 991 1,394 171 Net technical margin 6,306 1,488 3,138 407 269 (123) 726 Expenses (8,430) (2,149) (2,962) (812) (261) (1,029) (880) Amortization of value of purchased life business in-force (34) (21) (11) (0) (1) Underlying earnings before tax from insurance activities 4,284 1,130 1,648 594 111 497 205 Underlying earnings before tax from other activities 36 0 40 (2) 252 26 Income tax expenses / benefits (938) (325) (380) (112) (33) (136) (43) Income from affiliates and associates 139 14 1 67 47 Minority interests (223) (2) (39) (4) (1) (149) (25) Underlying earnings Group share 3,298 816 1,271 544 77 465 210 Net capital gains or losses attributable to shareholders net of income tax 330 76 231 (8) 28 3 (1) Adjusted earnings Group share 3,628 892 1,502 536 105 467 209 Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) (346) (361) (68) 48 (65) (340) (22) (6) (27) (4) (59) (19) 14 (20) Goodwill and other related intangible impacts Integration and restructuring costs (36) (89) (9) (19) (24) (8) (13) - (0) (27) (8) (5) NET INCOME GROUP SHARE 2,796 863 1,054 487 75 363 190 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 95.0% 94.9% 96.2% 93.7% 98.7% 94.7% 93.9% 96.2% 97.6% 96.5% 77.7% 86.0% 99.4% - - 150.1% 108.3% 100.1% 99.3% 100.2% Half Year 2019 Financial Report I Transversal & Central Holdings 30 7 400 (336) 99 (281) 90 10 (4) (84) 1 (84) (120) (20) (0) (12) (236) 89.9% 102.1% - 21 ACTIVITY REPORT – HALF YEAR 2019 December 31, 2018 (in Euro million, except percentages) December 31, 2018 France Europe Asia AXA XL United States International Investment margin 4,864 1,604 1,759 40 349 641 410 Fees & revenues 8,434 2,105 1,165 2,009 2,781 361 Net technical margin 12,990 3,034 6,374 793 944 (385) 1,421 Expenses (17,686) (4,430) (6,015) (1,653) (1,462) (1,635) (1,792) Amortization of value of purchased life business in-force (55) (23) (29) (1) (3) Underlying earnings before tax from insurance activities 8,547 2,313 3,260 1,159 (168) 1,400 397 Underlying earnings before tax from other activities (43) (0) 108 (3) (10) 496 39 Income tax expenses / benefits (2,004) (755) (755) (219) (70) (272) (92) Income from affiliates and associates 315 20 2 171 (3) 104 Minority interests (632) (5) (84) (7) 18 (500) (47) Underlying earnings Group share 6,182 1,573 2,532 1,101 (233) 1,125 400 Net capital gains or losses attributable to shareholders net of income tax 307 131 266 (34) (27) (11) (4) Adjusted earnings Group share 6,489 1,704 2,797 1,067 (260) 1,114 396 Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) (463) (451) (91) 40 (134) (376) (53) 4 (63) (29) (82) 16 39 (17) Goodwill and other related intangible impacts Integration and restructuring costs (3,102) (332) (19) (39) (107) (18) (13) (10) (67) (3,006) (27) (29) (35) NET INCOME GROUP SHARE 2,140 1,635 2,141 987 (428) (1,986) 355 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 97.0% 94.4% 95.6% 92.3% 97.9% 95.0% 94.5% 94.8% 96.7% 97.1% 78.8% 86.8% 108.6% - 89.2% 169.6% 106.2% 100.6% 99.6% 98.8% Half Year 2019 Financial Report I Transversal & Central Holdings 62 13 810 (699) 186 (673) 159 20 (8) (316) (13) (330) (79) (91) (1) (64) (564) 89.9% 110.4% - 22 ACTIVITY REPORT – HALF YEAR 2019 ALTERNATIVE PERFORMANCE MEASURES Adjusted Earnings, Underlying Earnings, Adjusted Return on Equity, Underlying Earnings per share, Underlying Combined Ratio and Debt Gearing are Alternative Performance Measures (“APMs”) as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from Adjusted Earnings, Underlying Earnings and Underlying Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided in the above tables. Adjusted Return on Equity and Underlying Earnings per share are reconciled to the financial statements in the table set forth on page 30 of this report, and Debt Gearing is reconciled to the financial statements in the table set forth on page 29 of this report. For further information on any of the above-mentioned APMs, see the Glossary set forth on pages 69 to 76 of this report. Adjusted Earnings Adjusted Earnings represent the net income (Group share) as disclosed in the above tables, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: integration and restructuring costs related to material newly-acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill and other related intangibles; exceptional operations (primarily changes in scope and discontinued operations); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Underlying Earnings Underlying Earnings correspond to Adjusted Earnings without the following elements, net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowance (on assets not designated under fair value option or trading assets); and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds. Adjusted Return on Equity The Adjusted Return on Equity (“Adjusted RoE”) is calculated as adjusted earnings net of financial charges related to undated subordinated debt, preferred shares and mandatory exchangeable bonds up to the date of deconsolidation of EQH and its subsequent accounting under equity method (recorded through shareholders’ equity as disclosed in Part 2.4 - “Consolidated statement of changes in equity” and financial debt as disclosed in Part 2.6 - Note 7 “Financing debt” of this report) divided by the weighted average shareholders’ equity. The weighted average shareholders’ equity: Half Year 2019 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2019 is based on opening shareholders’ equity adjusted for weighted average impacts of capital flows (including dividends); without reserves relating to change in fair value through shareholders’ equity as disclosed in Part 2.4 “Consolidated statement of changes in equity” of this report; without undated subordinated debt as disclosed in Part 2.4 “Consolidated statement of changes in equity” of this report. Underlying Earnings per share Underlying Earnings per share corresponds to Underlying Earnings (net of financial charges related to undated subordinated debts recorded through shareholders’ equity - Group share, and preferred shares and mandatory exchangeable bonds recorded through shareholders’ equity - Minority interests as disclosed in Part 2.4 - “Consolidated statement of changes in equity” and financial debt as disclosed in Part 2.6 - Note 7 “Financing debt” of the Financial Report), divided by the weighted average number of outstanding ordinary shares. Underlying Combined Ratio (applicable for Property & Casualty, Health and Protection) The Underlying Combined Ratio is the sum of the all accident year loss ratio and the underlying expense ratio. All accident year loss ratio net of reinsurance is the ratio of: o all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding unwind of the discount rate used in calculating technical reserves; to o earned revenues gross of reinsurance. Underlying expense ratio is the ratio of: o underlying expenses (excluding claims handling costs, including changes in VBI amortization); to o earned revenues gross of reinsurance. Debt Gearing Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt as disclosed in Part 2.6 - Note 7 “Financing debt” and undated subordinated debt as disclosed in Note 6 “Shareholders’ equity and minority interests” of this report) by total capital employed (shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus gross debt). Furthermore, following the deconsolidation of EQH and its subsequent accounting under the equity method, mandatory exchangeable bonds issued by AXA in May 2018 were excluded from the Debt Gearing. Half Year 2019 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2019 COMMENTARY ON GROUP EARNINGS Underlying earnings Underlying earnings amounted to €3,620 million, up €322 million (+10%) versus 1H18 on a reported basis. On a constant exchange rate basis, underlying earnings increased by €229 million (+7%) driven by the increase of underlying earnings from France, Europe, Asia, International and Transversal activities (€+156 million or 5% of total growth), and the contribution (€+73 million or 2% of total growth) from AXA XL, the United States and Central Holdings mainly from a temporary increase in financial charges in the context of the acquisition of XL Group and the IPO and subsequent Secondary Offering of AXA Equitable Holdings, Inc. On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, underlying earnings before tax from insurance activities increased by €154 million (+4%) to €3,886 million. On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, investment margin remained stable (€+2 million or 0%) driven by (i) International (€+16 million) mainly from Mexico (€+12 million) from a higher investment margin as a result of a higher average asset base, (ii) Transversal & Central Holdings (€+15 million) from AXA Liabilities Managers (€+15 million) due to an exceptional dividends distribution, and (iii) France (€+13 million) mainly from lower profit-sharing, partly offset by (iv) Europe (€-44 million) due to lower distribution from investment funds combined with lower reinvestment yields as well as a decrease in the asset base in Switzerland following the transformation of the in-force Group Life business model to a semi-autonomous model (€-25 million). On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, fees & revenues increased by €179 million (+7%) due to (i) France (€+155 million) mainly due to the non-repeat of the update of Unearned Revenue Reserve assumptions on G/A Savings and Unit-Linked (more than offset in Deferred Acquisition Costs), as well as higher loadings on premiums in Protection, (ii) Asia (€+16 million) mainly in Japan (€+12 million) due to in-force growth in Protection with Savings, and (iii) Switzerland (€+5 million) due to asset management fees paid by the foundations, partly offset by lower loadings on premium following the transformation of the in-force Group Life business model to a semi-autonomous model. On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, net technical margin increased by €397 million (+6%) driven by (i) Europe (€+228 million) from Property & Casualty (€+209 million) due to an improved current year loss ratio (-1.4 points) driven by lower attritional losses (-0.5 point) in Germany, Spain and Italy, and lower Nat Cat charges (-0.4 point) across geographies except in Belgium, partly offset by less favorable prior year reserve developments (+0.2 point) mainly in Switzerland, Health (€+38 million) due to an improved loss ratio in the United Kingdom & Ireland (-1.5 points) driven by an improved claims management and efficiency measures and in Germany (-0.7 point), partly offset by Life & Savings (€-19 million) mainly in Switzerland (€-17 million) due to the impact of the transformation of the in-force Group Life business model to a semi- autonomous model and the non-repeat of an exceptional release of reserves in Individual Life business, (ii) France (€+94 million) mainly from Property & Casualty (€+125 million) primarily driven by lower Nat Cat charges, lower attritional losses and higher favorable prior year reserve developments, and Health (€+12 million) mainly due to higher favorable prior year reserve developments in Group Health, partly offset by Life & Savings (€-43 million) mainly from lower prior year reserve developments, and (iii) International (€+84 million) primarily from Property & Casualty (€+66 million) driven by Colombia (€+22 million) stemming from an improved net technical margin in Workers’ Compensation, Turkey (€+20 million) due to lower unfavorable prior year reserve developments, and Brazil (€+15 million) due to a more favorable claims experience, and Health (€+10 million) driven by Mexico (€+10 million) due to volume effects. 25 I ACTIVITY REPORT – HALF YEAR 2019 On a constant exchange rate and excluding the contribution of AXA XL and the United States, expenses increased by €425 million (+6%) primarily in (i) France (€-254 million) stemming from higher acquisition expenses mainly driven by the impact of the non-repeat of an assumptions update on Deferred Acquisition Costs on G/A Savings and Unit-Linked (partly offset in Unearned Revenue Reserve) and higher commissions, (ii) Europe (€-119 million) mainly from Germany (€-71 million) due to the inclusion of Roland expenses following the consolidation starting from October 1, 2018, the United Kingdom & Ireland (€-17 million) from commissions in Ireland due to a higher share of Commercial lines as well as business growth, and Spain (€-13 million) in line with volume growth, (iii) International (€-41 million) mainly reflecting volume growth in Turkey (€-15 million), Colombia (€-13 million), and Mexico (€-11 million), and (iv) Transversal & Central Holdings (€-18 million) mainly at AXA Assistance (€-23 million) driven by higher commissions from a change in business mix towards large partnerships, notably in Home. On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, VBI amortization increased by €3 million (+8%) driven by (i) Asia (€+5 million) in Hong Kong (€+3 million) and Japan (€+2 million), partly offset by (ii) Europe (€-2 million) in Germany (€-2 million). On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, underlying earnings before tax from other activities decreased by €116 million to €-333 million mainly driven by Transversal & Central Holdings (€-125 million or -45%) mainly at AXA SA (€-88 million) due to temporary higher financial charges, notably in the context of the acquisition of XL Group, the treatment of the mandatory exchangeable bonds following the deconsolidation of AXA Equitable Holdings, Inc. (“EQH”) and hedges protecting the value of EQH, and AXA Investment Managers (€-22 million) due to lower gross revenues partly offset by lower expenses. On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, income tax expenses decreased by €2 million (0%) to €-778 million as the impact of the increase in pre-tax underlying earnings across geographies and the higher tax paid related to the timing of dividends received from subsidiaries at AXA SA (€-31 million) were more than offset by higher dividend distributions on investments funds benefiting from a lower taxation in France. On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, income from affiliates & associates increased by €8 million (+6%) to €149 million mainly driven by China (€+9 million) due to favorable tax impacts supported by a regulatory change. On a constant exchange rate basis and excluding the contribution of AXA XL and the United States, minority interests increased by €15 million (+20%) to €-89 million driven by (i) Europe (€+9 million) mainly from Italy (€+7 million) as a result of the increase of AXA MPS underlying earnings, and (ii) International (€+7 million) from the Gulf Region and Colombia. On a constant exchange rate basis, the Property & Casualty Combined Ratio increased by 0.1 point to 95.1%. On a constant exchange rate basis and excluding the contribution of AXA XL, the Property & Casualty Combined Ratio improved by 1.2 points to 93.3% driven by an improved loss ratio (-1.7 points) mainly from lower attritional losses (-0.9 point) and lower Nat Cat charges (-0.8 point), partly offset by a higher expense ratio driven by France due to higher administrative costs notably to further enhance customer service. On a constant exchange rate basis, the Health Combined Ratio improved by 0.7 point to 93.9% mainly driven by France (-1.0 point) due to volume effect from Group Health, and the United Kingdom & Ireland (-2.2 points) due to an improved claims experience and efficiency measures. On a constant exchange rate basis, the Protection Combined Ratio improved by 2.8 points to 93.2%. On a constant exchange rate basis and excluding the 1H18 contribution of the United States, the Protection Combined Ratio improved by 1.1 points mainly from Switzerland (-4.1 points) driven by the transformation of the in-force Group Life business to a semi-autonomous model. Half Year 2019 Financial Report 26 I ACTIVITY REPORT – HALF YEAR 2019 Adjusted earnings to Net income Net realized capital gains and losses attributable to shareholders amounted to €386 million. On a constant exchange rate basis, net realized capital gains and losses attributable to shareholders increased by €52 million due to: €+35 million lower impairments to €-42 million mainly driven by alternative investments (€+11 million to €-15 million), real estate (€+10 million to €4 million), equity securities (€+8 million to €-28 million), as well as fixed income assets (€+7 million to €-2 million); €+21 million favorable change in intrinsic value to €-20 million related to equity hedging derivatives; €-4 million lower net realized capital gains to €448 million mainly driven by equity securities (€-156 million to €163 million), partly offset by real estate (€+90 million to €191 million) mainly from an exceptional real estate sale in Belgium, alternative investments (€+33 million to €69 million), and fixed income assets (€+29 million to €25 million). As a result, adjusted earnings amounted to €4,006 million, up €378 million (+10%). On a constant exchange rate basis, adjusted earnings increased by €281 million (+8%). Net income amounted to €2,333 million, down €463 million (-17%). On a constant exchange rate basis, net income decreased by €543 million (-19%) due to: higher adjusted earnings (€+281 million); a positive change in the fair value of assets accounted for under fair value option, up €131 million to €22 million, driven by the decrease of interest rates and the strong recovery of the equity market in the first semester of 2019; more than offset by: a more unfavorable change in the fair value of derivatives net of foreign exchange impacts, down €547 million to €-789 million driven by: o the change in the fair value of equity, interest rates and credit derivatives not eligible for hedge accounting under IAS 39, down €462 million to €-709 million, mainly driven by equity hedging derivatives (€-279 million) in a context of strong equity market recovery in the first semester of 2019 and the impact of the decrease in interest rates on swaps hedging the financial debt (€-196 million), o the change in the fair value of foreign exchange derivatives not eligible for hedge accounting under IAS 39 net of foreign exchange rate movements on assets and liabilities denominated in foreign currencies, down €84 million to €-81 million, driven by the appreciation of main currencies against Euro; higher impact from exceptional and discontinued operations (€-339 million) to €-705 million mainly due to: o the negative impact linked to the deconsolidation of AXA Equitable Holdings, Inc. (€-598 million) corresponding to the difference between the fair value and the consolidated carrying value of EQH at the date of the deconsolidation, Half Year 2019 Financial Report 27 I ACTIVITY REPORT – HALF YEAR 2019 o the negative impact from the early redemption of financing debt at AXA XL (€-45 million) and in the United Kingdom & Ireland (€-37 million), and o the non-repeat of the one-off benefit from the reimbursement of the tax paid on dividends received from European subsidiaries held for more than 95% following the decision from the European Court of Justice (€-71 million) at AXA SA, o the non-repeat of the gain relating to the discontinuation of the partnership with BNP Paribas (Natio) in 1H18 in France (€-48 million), partly offset by: o the non-repeat of the one-time negative impact linked to the transformation of the in-force Group Life business model to a semi-autonomous model in Switzerland (€+347 million), o and the non-repeat of the negative impact related to the IPO of AXA Equitable Holdings, Inc. (€+97 million); higher integration and restructuring costs (€-48 million) to €-142 million mainly due to XL Group integration costs (€-77 million), partly offset by the non-repeat of restructuring costs in the context of the IPO of AXA Equitable Holdings, Inc. completed in May 2018 in the United States (€+23 million); higher impact of goodwill and other related intangibles (€-21 million) to €-59 million mainly from AXA XL (€-19 million) due to the amortization of customer-related intangibles in relation to the acquisition of XL Group. Half Year 2019 Financial Report 28 I ACTIVITY REPORT – HALF YEAR 2019 SHAREHOLDERS’ EQUITY GROUP SHARE As of June 30, 2019, Shareholders' equity Group share totaled €66.7 billion. The movements in Shareholders' equity Group share since December 31, 2018, are presented in the table below: (in Euro million) Shareholders' equity Group share At December 31, 2018 62,428 Share Capital (23) Capital in excess of nominal value (229) Equity-share based compensation 17 Treasury shares sold or bought in open market 353 Change in equity component of compound financial instruments Deeply subordinated debt (including accumulated interests charges) (98) Fair value recorded in shareholders' equity 6,191 Impact of currency fluctuations (528) Payment of N-1 dividend (3,189) Other (116) Net income for the period 2,333 Actuarial gains and losses on pension benefits (398) Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk (16) At June 30, 2019 66,725 SOLVENCY INFORMATION (1) As of June 30, 2019, the Group’s Eligible Own Funds (“EOF”) amounted to €57.9 billion and the Solvency II ratio to 190%, compared to €58.2 billion and 193% as of December 31, 2018. (1) Solvency-related information included in this section, including the Solvency II ratio and the Eligible Own Funds (“EOF”), is not subject to the review of the Half Year 2019 Consolidated Financial Statements, nor the verification of the information otherwise included in this report, performed by the Group’s statutory auditors. Half Year 2019 Financial Report 29 I ACTIVITY REPORT – HALF YEAR 2019 SHAREHOLDER VALUE Earnings per share (“EPS”) June 30, 2019 June 30, 2018 June 30, 2019 / June 30, 2018 (in Euro, except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,381 2,384 2,383 2,388 Net income (Euro per ordinary share) 0.92 0.92 1.13 1.12 (18.0%) (17.9%) Adjusted earnings (Euro per ordinary share) 1.63 1.62 1.47 1.47 10.2% 10.3% Underlying earnings (Euro per ordinary share) 1.46 1.46 1.34 1.33 9.5% 9.6% Return On Equity (“ROE”) (in Euro million, except percentages) June 30, 2019 June 30, 2018 June 30, 2019 / June 30, 2018 ROE Net income Average shareholders' equity Adjusted ROE Adjusted earnings (a) Average shareholders' equity (b) Underlying ROE Underlying earnings (a) Average shareholders' equity (b) 7.3% 2,333 63,883 18.3% 3,870 42,198 16.5% 3,484 42,198 8.3% 2,796 67,476 15.6% 3,513 45,142 14.1% 3,183 45,142 (1.0 pt) 2.8 pt 2.4 pt (a) Including adjustment to reflect net financial charges related to undated subordinated debt (recorded through shareholders' equity) and preferred shares. Following the deconsolidation of AXA Equitable Holdings Inc. (“EQH”) and its subsequent accounting under the equity method, it includes an adjustment to reflect financial charges for only the first three months of the year 2019 related to the equity component of mandatory exchangeable bonds into shares of EQH. (b) Excluding fair value of invested assets and derivatives and undated subordinated debt (both recorded through shareholders' equity). Half Year 2019 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2019 SEGMENT INFORMATION France (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 13 383 13 004 25 175 Life & Savings 7 086 6 745 13 542 Property & Casualty 3 922 4 002 7 061 Health 2 312 2 175 4 356 Other (b) 64 82 215 New business APE 1 052 1 041 2 232 NBV Margin 28,3% 28,6% 29,5% Underlying earnings before tax 1 139 1 130 2 313 Life & Savings 482 588 1 143 Property & Casualty 569 485 1 022 Health 88 57 149 Other (b) 1 0 (0) Income tax expenses / benefits (269) (325) (755) Minority interests (2) (2) (5) Income from affiliates and associates 5 14 20 Underlying earnings Group share 873 816 1 573 Net capital gains or losses attributable to shareholders net of income tax 68 76 131 Adjusted earnings Group share 941 892 1 704 Profit or loss on financial assets (under fair value option) and derivatives (60) (68) (91) Exceptional operations (including discontinued operations) (4) 48 40 Goodwill and other related intangible impacts Integration and restructuring costs (6) (9) (19) NET INCOME GROUP SHARE 872 863 1 635 Property & Casualty Combined Ratio 90,8% 93,7% 92,3% Health Combined Ratio 97,7% 98,7% 97,9% Protection Combined Ratio 97,8% 94,7% 95,0% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities and holding. Gross revenues increased by €379 million (+3%) to €13,383 million. On a comparable basis, gross revenues increased by €404 million (+3%): Life & Savings (€+341 million or +5%) to €7,086 million. On a comparable basis, Life & Savings gross revenues increased by €270 million (+4%) mainly driven by Individual Savings (€+144 million or +3%) due to strong sales of G/A capital light products sold through the bancassurance channel and higher sales of Eurocroissance products sold through the proprietary channel, partly offset by lower Unit-Linked revenues, which contributed to 34.3% of total Individual Savings, compared to 24.7% on average for the Half Year 2019 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2019 market. Protection and Group Savings gross revenues increased respectively by €53 million (+3%) and by €74 million (+16%) driven by higher sales in both domestic and international markets; Property & Casualty (€-80 million or -2%) to €3,922 million. On a comparable basis, Property & Casualty gross revenues decreased by €9 million (0%) mainly driven by Personal lines (€-16 million or -1%) due to lower volumes in Motor, partly offset by Commercial lines (€+7 million or 0%) supported by tariff and volume increases mainly in Motor and Property (€+38 million or +3%), partly offset by continued selectivity in the Credit and Lifestyle Protection business (€-31 million or -9%); Health (€+137 million or +6%) to €2,312 million. On a comparable basis, Health gross revenues increased by €129 million (+6%) mainly driven by higher volumes in Group business (€+112 million or +6%) in both international and domestic markets as well as in Individual business (€+17 million or +5%); Other (€-19 million or -23%) to €64 million. On a comparable basis, Other gross revenues increased by €14 million (+28%) at AXA Banque France mainly due to a higher interest margin. APE increased by €11 million (+1%) to €1,052 million. On a comparable basis, restated mainly for the change of the Group Health contribution in 1H18, APE decreased by €51 million (-5%) mainly driven by Group Health (€-111 million or -28%) due to the non-repeat of exceptional sales in Group International business, partly offset by Savings (€+38 million or +8%) and Protection (€+23 million or +11%) mainly reflecting higher sales of mortgage insurance products. NBV Margin decreased by 0.3 point to 28.3%. On a comparable basis, restated mainly for the change of the Group Health contribution in 1H18, NBV Margin increased by 0.4 point mainly driven by an improved business mix. Underlying earnings before tax increased by €8 million (+1%) to €1,139 million: Property & Casualty (€+84 million or +17%) to €569 million due to a higher net technical margin (€+125 million) driven by lower Nat Cat charges, lower attritional losses mostly in Personal Motor and higher prior year reserve developments. This was partly offset by higher expenses (€-29 million) notably to further enhance customer service and a lower net investment income (€-13 million); Life & Savings (€-107 million or -18%) to €482 million mainly due to a lower technical margin (€-43 million) linked to lower prior year reserve developments, higher general expenses as well as higher commissions mainly from business growth combined with an increase in commissioning rates to third- party distributors; Health (€+31 million or +55%) to €88 million mainly driven by higher loadings on premiums (€+18 million) in line with revenue growth and net technical margin; Other remained stable at €1 million. Income tax expenses decreased by €57 million (-17%) to €-269 million mainly driven by a decrease in the effective tax rate resulting from higher dividend distributions on investment funds benefiting from a lower taxation. Underlying earnings increased by €57 million (+7%) to €873 million. Adjusted earnings increased by €49 million (+5%) to €941 million driven by higher underlying earnings and lower net realized capital gains. Net income increased by €9 million (+1%) to €872 million driven by higher adjusted earnings and a favorable change in the fair value of credit mutual funds, partly offset by an unfavorable change in the fair value of derivatives not eligible for hedge accounting, and the non-repeat of the gain relating to the discontinuation of the partnership with BNP Paribas (Natio) in 2018. Half Year 2019 Financial Report 32 I Europe (in Euro million, except percentages) Gross revenues (a) Life & Savings Property & Casualty Health Other (b) New business APE NBV Margin Underlying earnings before tax Life & Savings Property & Casualty Health Other (b) Income tax expenses / benefits Minority interests Income from affiliates and associates Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio (a) Net of intercompany eliminations. (b) Other corresponds to banking activities and holding. Half Year 2019 Financial Report ACTIVITY REPORT – HALF YEAR 2019 June 30, 2019 June 30, 2018 December 31, 2018 19,978 21,747 36,738 6,743 9,167 15,679 10,292 9,729 15,760 2,937 2,830 5,258 6 21 41 655 640 1,146 51.1% 51.0% 49.6% 1,788 1,688 3,368 528 557 1,117 1,070 973 1,834 142 118 308 49 40 108 (407) (380) (755) (48) (39) (84) 1 2 1,333 1,271 2,532 231 231 266 1,565 1,502 2,797 (278) (65) (134) (36) (340) (376) (18) (19) (39) (25) (24) (107) 1,207 1,054 2,141 92.8% 93.9% 94.5% 95.4% 96.2% 94.8% 95.2% 97.6% 96.7% 33 I ACTIVITY REPORT – HALF YEAR 2019 EUROPE - SWITZERLAND (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 4,881 7,194 9,531 Life & Savings 2,088 4,533 6,534 Property & Casualty 2,776 2,656 2,992 Health 16 5 5 New business APE 218 250 340 NBV Margin 55.5% 55.8% 53.0% Underlying earnings before tax 478 487 943 Life & Savings 169 195 404 Property & Casualty 316 299 555 Health (8) (7) (16) Income tax expenses / benefits (80) (85) (177) Minority interests (2) (2) (4) Income from affiliates and associates Underlying earnings Group share 396 399 762 Net capital gains or losses attributable to shareholders net of income tax 36 46 81 Adjusted earnings Group share 431 445 843 Profit or loss on financial assets (under fair value option) and derivatives (40) 23 (5) Exceptional operations (including discontinued operations) 1 (340) (421) Goodwill and other related intangible impacts (12) (13) (26) Integration and restructuring costs NET INCOME GROUP SHARE 380 116 391 Property & Casualty Combined Ratio 85.0% 85.1% 87.0% Health Combined Ratio 199.1% 406.6% 412.5% Protection Combined Ratio 93.4% 97.5% 97.0% Average exchange rate: € 1.00 = Swiss Franc 1.13 1.17 1.16 (a) Net of intercompany eliminations. On January 1, 2019, AXA Switzerland transformed its main occupational benefits foundations model from full insurance to semi-autonomous. As a result, the change in gross revenues on a comparable basis excludes the savings portion of the 1H18 premiums related to the transformed in-force Group Life business. Gross revenues decreased by €2,313 million (-32%) to €4,881 million. On a comparable basis, gross revenues decreased by €26 million (-1%): Property & Casualty (€+120 million or +5%) to €2,776 million. On a comparable basis, Property & Casualty gross revenues increased by €24 million (+1%) mainly driven by Commercial lines due to higher volumes and tariff increases in Workers’ Compensation, partly offset by a decrease in Personal lines from Motor in a context of strong market competition; Half Year 2019 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2019 Life & Savings (€-2,445 million or -54%) to €2,088 million. On a comparable basis, Life & Savings gross revenues decreased by €61 million (-4%) in the context of the transformation of the in-force Group Life business model to a semi-autonomous model; Health (€+11 million) to €16 million. On a comparable basis, Health gross revenues increased by €11 million after the launch of the business in 2H17. APE decreased by €32 million (-13%) to €218 million. On a comparable basis, APE decreased by €29 million (-12%) in the context of the transformation of the in-force Group Life business, partly offset by higher new business in Individual Life. NBV Margin decreased by 0.3 point to 55.5%. On a comparable basis, restated for the impact of the transformation of the in-force Group Life business, NBV Margin decreased by 2.8 points mainly due to an adverse business mix within Group Life with a higher share of voluntary contributions on the savings component of the premiums. Underlying earnings before tax decreased by €9 million (-2%) to €478 million. On a constant exchange rate basis, underlying earnings before tax decreased by €26 million (-5%): Property & Casualty (€+17 million or +6%) to €316 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €6 million (+2%) as a result of an improvement in the current year combined ratio (-1.0 point) from lower Nat Cat charges (-0.5 point) and an improvement of the expense ratio (-0.3 point), partly offset by less favorable prior year reserve developments (+0.9 point); Life & Savings (€-26 million or -13%) to €169 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax decreased by €32 million (-16%) mainly due to the impact of the transformation of the in-force Group Life business and the non-repeat of an exceptional release of reserves in Individual Life business; Health (€-1 million or -10%) to €-8 million. On a constant exchange rate basis, Health underlying earnings before tax remained stable. Income tax expenses decreased by €5 million (-6%) to €-80 million. On a constant exchange rate basis, income tax expenses decreased by €8 million (-9%) in line with lower pre-tax underlying earnings combined with a decrease in the corporate tax rate from 20% to 19.5%. Underlying earnings decreased by €4 million (-1%) to €396 million. On a constant exchange rate basis, underlying earnings decreased by €17 million (-4%). Adjusted earnings decreased by €14 million (-3%) to €431 million. On a constant exchange rate basis, adjusted earnings decreased by €29 million (-6%) due to lower underlying earnings and lower net realized capital gains. Net income increased by €264 million to €380 million. On a constant exchange rate basis, net income increased by €251 million as lower adjusted earnings and an unfavorable change in the fair value of foreign exchange and equity derivatives were more than offset by the non-repeat of the negative impact linked to the transformation of the in-force Group Life business model to a semi-autonomous model in 1H18 (€+347 million). Half Year 2019 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2019 EUROPE - GERMANY (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 6,088 5,934 10,738 Life & Savings 1,635 1,786 3,559 Property & Casualty 2,790 2,531 4,006 Health 1,657 1,596 3,131 Other (b) 6 21 41 New business APE 181 161 340 NBV Margin 55.2% 52.8% 53.0% Underlying earnings before tax 464 419 851 Life & Savings 94 95 190 Property & Casualty 269 230 438 Health 60 54 117 Other (b) 42 39 107 Income tax expenses / benefits (140) (111) (238) Minority interests (3) (0) (4) Income from affiliates and associates 1 2 Underlying earnings Group share 321 308 612 Net capital gains or losses attributable to shareholders net of income tax 15 123 127 Adjusted earnings Group share 336 431 738 Profit or loss on financial assets (under fair value option) and derivatives (72) (29) (50) Exceptional operations (including discontinued operations) 27 Goodwill and other related intangible impacts (2) (2) (4) Integration and restructuring costs (3) (2) (4) NET INCOME GROUP SHARE 259 398 708 Property & Casualty Combined Ratio 93.6% 95.2% 95.6% Health Combined Ratio 96.4% 96.6% 96.3% Protection Combined Ratio 98.5% 98.5% 97.6% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities and holding. On October 1, 2018, AXA Germany increased its ownership in Roland Rechtsschutz from 41% to 60%. As a result, Roland Rechtsschutz has been consolidated from October 1, 2018. Property & Casualty comparable basis has been adjusted to include Roland Rechtsschutz gross revenues in 2018. On October 31, 2018, AXA Germany completed the disposal of a part of its occupational pension business. Life & Savings comparable basis in Gross revenues, APE and NBV have been adjusted accordingly to exclude the contribution of this business in 2018. Half Year 2019 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2019 Gross revenues increased by €155 million (+3%) to €6,088 million. On a comparable basis, gross revenues increased by €66 million (+1%): Property & Casualty (€+259 million or +10%) to €2,790 million. On a comparable basis Property & Casualty gross revenues increased by €40 million (+1%) driven by Commercial Non-Motor (€+38 million or +4%) due to new business in Mid-Market and SMEs as well as a higher average premium; Health (€+61 million or +4%) to €1,657 million. On a comparable basis, Health gross revenues increased by €61 million (+4%) mainly due to the continued growth in the civil servants segment and tariff increases in full benefit insurance; Life & Savings (€-151 million or -8%) to €1,635 million. On a comparable basis, Life & Savings gross revenues decreased by €23 million (-1%) mainly in Protection with Savings (€-29 million or -6%) and traditional G/A Savings (€-10 million or -5%) reflecting the decrease in the legacy business, in line with the strategy, and in Unit-Linked (€-28 million or -8%) due to lower single premium, partly offset by higher new business in G/A capital light products (€+33 million or +12%) and Pure Protection (€+17 million or +7%) following the launch of a new disability product. APE increased by €20 million (+12%) to €181 million. On a comparable basis, APE increased by €15 million (+9%) mainly due to higher new business in G/A capital light products (€+9 million or +24%), Pure Protection (€+4 million or +17%) following the launch of a new disability product as well as in Health (€+5 million or +9%) both in private and civil servants segments. NBV Margin increased by 2.4 points to 55.2% mainly reflecting a higher share of Pure Protection and G/A capital light product sales. Underlying earnings before tax increased by €45 million (+11%) to €464 million: Property & Casualty (€+39 million or +17%) to €269 million driven by an improved current year combined ratio (-2.2 points) from lower Nat Cat charges and favorable attritional losses, partly offset by less favorable prior year reserve developments (+0.5 point) and a lower net investment result (€-6 million); Life & Savings (€-2 million or -2%) to €94 million; Health (€+5 million or +10%) to €60 million due to higher volumes combined with an improved combined ratio (-0.2 point); Other (€+2 million or +6%) to €42 million from Holdings (€+2 million) mainly due to lower pension costs, partly offset by the non-repeat of an exceptional distribution from an investment fund. Income tax expenses increased by €29 million (+26%) to €-140 million due to higher pre-tax underlying earnings and less favorable tax one-offs (€-14 million). Income from affiliates and associates decreased by €1 million to €0 million. Underlying earnings increased by €13 million (+4%) to €321 million. Adjusted earnings decreased by €95 million (-22%) to €336 million as higher underlying earnings were more than offset by lower net realized capital gains mainly from equities. Net income decreased by €139 million (-35%) to €259 million driven by lower adjusted earnings and an unfavorable change in the fair value of interest rate and equity derivatives not eligible for hedge accounting. Half Year 2019 Financial Report 37 I ACTIVITY REPORT – HALF YEAR 2019 EUROPE - BELGIUM (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 1,794 1,754 3,359 Life & Savings 574 575 1,195 Property & Casualty 1,160 1,118 2,061 Health 60 61 103 New business APE 36 25 64 NBV Margin 56.1% 76.8% 66.5% Underlying earnings before tax 254 275 528 Life & Savings 141 140 281 Property & Casualty 113 137 246 Health 1 (1) 0 Other (b) (1) (1) 1 Income tax expenses / benefits (62) (70) (125) Minority interests (0) (0) (0) Income from affiliates and associates Underlying earnings Group share 192 204 403 Net capital gains or losses attributable to shareholders net of income tax 164 53 50 Adjusted earnings Group share 355 258 454 Profit or loss on financial assets (under fair value option) and derivatives (111) (44) (42) Exceptional operations (including discontinued operations) 3 Goodwill and other related intangible impacts (1) (1) (2) Integration and restructuring costs 1 (3) (40) NET INCOME GROUP SHARE 244 209 373 Property & Casualty Combined Ratio 97.0% 94.4% 95.7% Health Combined Ratio 101.2% 105.0% 102.1% Protection Combined Ratio 98.2% 100.6% 96.0% (a) Net of intercompany eliminations. (b) Other corresponds to holding. Gross revenues increased by €40 million (+2%) to €1,794 million. On a comparable basis, gross revenues increased by €40 million (+2%): Property & Casualty (€+42 million or +4%) to €1,160 million. On a comparable basis, Property & Casualty gross revenues increased by €42 million (+4%) from Commercial lines (€+35 million or +7%) in Mid-Market segments, notably in the Public sector and SMEs, due to new business and tariff increases, as well as from Personal lines (€+7 million or +1%) mainly due to tariff increases; Life & Savings (€0m or 0%) to €574 million. On a comparable basis, Life & Savings gross revenues remained stable as the increase in Unit-Linked and G/A Savings pension products was offset by the decrease in Protection with Savings and Pure G/A Savings products, in line with the strategy to exit Individual Savings market; Half Year 2019 Financial Report 38 I ACTIVITY REPORT – HALF YEAR 2019 Health (€-2 million or -3%) to €60 million. On a comparable basis, Health gross revenues decreased by €2 million (-3%) due to the non-repeat of an exceptional premium in Group business. APE increased by €11 million (+42%) to €36 million. On a comparable basis, APE increased by €11 million (+42%) mainly driven by Unit-Linked due to a large Group pension contract in Savings. NBV Margin decreased by 20.7 points to 56.1% driven by a large Group pension contract in Savings. Underlying earnings before tax decreased by €21 million (-8%) to €254 million: Life & Savings (€+1 million or +1%) to €141 million driven by a higher net technical margin (€+8 million) mainly due to the non-repeat of exceptional unfavorable prior year reserve developments, as well as lower expenses (€+9 million) resulting from the cost savings program, partly offset by a lower investment margin (€-13 million) mainly due to a lower distribution from funds; Property & Casualty (€-24 million or -17%) to €113 million mainly driven by a higher current year combined ratio (+1.7 points) primarily due to the impact of Eberhard storm (€-27 million) and higher large losses, as well as less favorable prior year reserve developments (+0.9 point), partly offset by a lower expense ratio resulting from the cost savings program; Health (€+2 million) to €1 million due to higher favorable prior year reserve developments and lower expenses; Other remained stable at €-1 million. Income tax expenses decreased by €8 million (-11%) to €-62 million driven by lower pre-tax underlying earnings. Underlying earnings decreased by €13 million (-6%) to €192 million. Adjusted earnings increased by €98 million (+38%) to €355 million as lower underlying earnings were more than offset by higher net realized capital gains (€+111 million) on real estate mainly due to an exceptional sale (€+85 million) and equities. Net income increased by €35 million (+17%) to €244 million as higher adjusted earnings were partly offset by an unfavorable change in the fair value of interest rate and equity derivatives not eligible for hedge accounting. Half Year 2019 Financial Report 39 I ACTIVITY REPORT – HALF YEAR 2019 EUROPE - UNITED KINGDOM & IRELAND (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 2,856 2,762 5,166 Life & Savings 26 28 57 Property & Casualty 1,817 1,737 3,369 Health 1,013 998 1,740 Underlying earnings before tax 245 194 437 Life & Savings 1 2 3 Property & Casualty 154 127 250 Health 81 63 184 Other (b) 9 2 0 Income tax expenses / benefits (35) (27) (56) Minority interests (0) (0) (0) Income from affiliates and associates Underlying earnings Group share 209 167 381 Net capital gains or losses attributable to shareholders net of income tax 10 8 (6) Adjusted earnings Group share 219 175 375 Profit or loss on financial assets (under fair value option) and derivatives (46) (7) (23) Exceptional operations (including discontinued operations) (37) 21 Goodwill and other related intangible impacts (2) (2) (4) Integration and restructuring costs (9) (3) NET INCOME GROUP SHARE 125 166 366 Property & Casualty Combined Ratio 96.7% 98.5% 98.4% Health Combined Ratio 92.3% 94.5% 91.2% (a) Net of intercompany eliminations. (b) Other corresponds to holding. Gross revenues increased by €94 million (+3%) to €2,856 million. On a comparable basis, gross revenues increased by €77 million (+3%): Property & Casualty (€+81 million or +5%) to €1,817 million. On a comparable basis, Property & Casualty gross revenues increased by €71 million (+4%) from Personal lines (€+36 million or +4%) mainly in Motor reflecting higher new business and Commercial lines (€+34 million or +4%) mainly in Motor due to tariff increases and higher new business, and in Property mainly due to higher new business; Health (€+15 million or +2%) to €1,013 million. On a comparable basis, Health gross revenues increased by €8 million (+1%) mainly driven by a new partnership in international business; Life & Savings - Architas (€-2 million or -7%) to €26 million. On a comparable basis, Life & Savings - Architas gross revenues decreased by €2 million (-7%). Underlying earnings before tax increased by €51 million (+26%) to €245 million. On a constant exchange rate basis, underlying earnings before tax increased by €49 million (+25%): Property & Casualty (€+27 million or +21%) to €154 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €26 million (+21%) due to (i) a lower current year Half Year 2019 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2019 combined ratio (-1.4 points) mainly driven by more favorable weather conditions and lower large losses, partly offset by an increased severity of Motor damage claims and higher expenses from commissions in Ireland due to a higher share of Commercial lines, as well as (ii) more favorable prior year reserve developments (-0.5 point), partly offset by (iii) a lower net investment income; Health (€+18 million or +28%) to €81 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €17 million (+27%) driven by a lower combined ratio (-2.2 points) mainly in the United Kingdom due to improvements in claims management, as well as volume growth and an improved profitability in international business; Other (€+7 million) to €9 million. On a constant exchange rate basis, Other underlying earnings before tax increased by €7 million mainly due to lower interest payments and a higher net investment income at AXA UK Holdings; Life & Savings - Architas (€-1 million or -30%) to €1 million. On a constant exchange rate basis, Life & Savings - Architas underlying earnings before tax decreased by €1 million. Income tax expenses increased by €8 million (+31%) to €-35 million. On a constant exchange rate basis, income tax expenses increased by €8 million (+30%) driven by higher pre-tax underlying earnings. Underlying earnings increased by €42 million (+25%) to €209 million. On a constant exchange rate basis, underlying earnings increased by €41 million (+25%). Adjusted earnings increased by €45 million (+26%) to €219 million. On a constant exchange rate basis, adjusted earnings increased by €44 million (+25%) mainly driven by higher underlying earnings. Net income decreased by €40 million (-24%) to €125 million. On a constant exchange rate basis, net income decreased by €41 million (-25%) as higher adjusted earnings were more than offset by an unfavorable change in the fair value of interest rate and equity derivatives not eligible to hedge accounting and a loss relating to the early redemption of a financing debt (€-37 million). Half Year 2019 Financial Report 41 I ACTIVITY REPORT – HALF YEAR 2019 EUROPE - SPAIN (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 1,370 1,284 2,525 Life & Savings 346 305 680 Property & Casualty 878 843 1,644 Health 146 136 202 New business APE 48 39 88 NBV Margin 87.4% 80.8% 79.5% Underlying earnings before tax 147 136 245 Life & Savings 32 42 71 Property & Casualty 108 86 152 Health 8 8 22 Income tax expenses / benefits (36) (34) (59) Minority interests (0) (0) (0) Income from affiliates and associates Underlying earnings Group share 112 102 186 Net capital gains or losses attributable to shareholders net of income tax 1 (2) 6 Adjusted earnings Group share 113 100 192 Profit or loss on financial assets (under fair value option) and derivatives (7) (2) (5) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts (1) (2) (3) Integration and restructuring costs (11) (15) (36) NET INCOME GROUP SHARE 94 81 147 Property & Casualty Combined Ratio 92.3% 95.5% 96.4% Health Combined Ratio 93.3% 92.6% 89.5% Protection Combined Ratio 95.5% 92.7% 94.0% (a) Net of intercompany eliminations. Gross revenues increased by €86 million (+7%) to €1,370 million. On a comparable basis, gross revenues increased by €86 million (+7%): Property & Casualty (€+35 million or +4%) to €878 million. On a comparable basis, Property & Casualty gross revenues increased by €35 million (+4%) driven by higher volumes and tariff increases in both Commercial lines (€+24 million or +12%) and Personal lines (€+11 million or +2%); Life & Savings (€+41 million or +13%) to €346 million. On a comparable basis, Life & Savings gross revenues increased by €41 million (+13%) driven by strong sales in Protection (€+17 million or +20%), G/A Savings (€+15 million or +20%) and Unit-Linked (€+12 million or +9%); Health (€+10 million or +7%) to €146 million. On a comparable basis, Health gross revenues increased by €10 million (+7%) driven by higher volumes and tariff increases. Half Year 2019 Financial Report 42 I ACTIVITY REPORT – HALF YEAR 2019 APE increased by €10 million (+25%) to €48 million. On a comparable basis, APE increased by €10 million (+25%) driven by Protection (€+4 million or +33%), G/A Savings (€+3 million or +55%) and Unit-Linked (€+3 million or +16%). NBV Margin increased by 6.7 points to 87.4% mainly driven by a higher share of Protection product sales. Underlying earnings before tax increased by €12 million (+9%) to €147 million: Property & Casualty (€+22 million or +25%) to €108 million driven by higher volumes combined with an improved current year combined ratio (-3.6 points) mainly driven by a more favorable current year claims experience along with lower Nat Cat charges, partly offset by a lower net investment income (€-6 million); Life & Savings (€-10 million or -24%) to €32 million mainly driven by a lower net technical margin in annuities in Group G/A Savings; Health remained stable at €8 million. Income tax expenses increased by €2 million (+6%) to €-36 million in line with higher pre-tax underlying earnings. Underlying earnings increased by €10 million (+9%) to €112 million. Adjusted earnings increased by €13 million (+13%) to €113 million mainly driven by higher underlying earnings. Net income increased by €12 million (+15%) to €94 million mainly driven by higher adjusted earnings. Half Year 2019 Financial Report 43 I ACTIVITY REPORT – HALF YEAR 2019 EUROPE - ITALY (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 2,989 2,820 5,418 Life & Savings 2,073 1,941 3,653 Property & Casualty 870 845 1,688 Health 46 35 77 New business APE 172 164 315 NBV Margin 30.2% 31.1% 30.7% Underlying earnings before tax 201 179 364 Life & Savings 90 83 169 Property & Casualty 110 95 193 Health 0 1 1 Other (b) 0 0 Income tax expenses / benefits (54) (52) (101) Minority interests (43) (36) (75) Income from affiliates and associates Underlying earnings Group share 104 90 188 Net capital gains or losses attributable to shareholders net of income tax 6 4 8 Adjusted earnings Group share 110 94 196 Profit or loss on financial assets (under fair value option) and derivatives (2) (6) (9) Exceptional operations (including discontinued operations) (5) Goodwill and other related intangible impacts Integration and restructuring costs (2) (4) (24) NET INCOME GROUP SHARE 105 85 158 Property & Casualty Combined Ratio 92.4% 95.1% 94.4% Health Combined Ratio 101.3% 99.1% 101.0% Protection Combined Ratio 80.2% 83.8% 80.8% (a) Net of intercompany eliminations. (b) Other corresponds to holding. Gross revenues increased by €169 million (+6%) to €2,989 million. On a comparable basis, gross revenues increased by €169 million (+6%): Life & Savings (€+133 million or +7%) to €2,073 million. On a comparable basis, Life & Savings gross revenues increased by €133 million (+7%) mainly in Unit-Linked (€+102 million or +23%) due to the sales of Protected Unit-Linked products and G/A Savings (€+21 million or +2%) mainly from the sales of hybrid products; Property & Casualty (€+25 million or +3%) to €870 million. On a comparable basis, Property & Casualty gross revenues increased by €25 million (+3%) driven by higher new business and renewals in Motor and Property on both Personal lines (€+16 million or +3%) and Commercial lines (€+8 million or +4%); Half Year 2019 Financial Report 44 I ACTIVITY REPORT – HALF YEAR 2019 Health (€+11 million or +31%) to €46 million. On a comparable basis, Health gross revenues increased by €11 million (+31%) as a result of a strong commercial focus. APE increased by €8 million (+5%) to €172 million. On a comparable basis, APE increased by €8 million (+5%) driven by G/A Savings (€+12 million or +15%) mainly from the sales of hybrid products. NBV Margin decreased by 0.9 point to 30.2% mainly due to a change in product mix with higher share of G/A Savings new business. Underlying earnings before tax increased by €22 million (+12%) to €201 million: Property & Casualty (€+15 million or +16%) to €110 million due to the improvement of the current year combined ratio (-1.1 points) driven by an improved loss ratio in Personal lines with lower frequency in attritional losses mainly in Motor and Property, combined with more favorable prior year reserve developments (-1.6 points), partly offset by a lower net investment income; Life & Savings (€+7 million or +9%) to €90 million mainly due to a higher investment margin (€+5 million) driven by in-force growth and lower minimum guaranteed rates, partly offset by the decrease in investment yields, and higher fees & revenues (€+3 million) mainly driven by higher Unit-Linked management fees; Health (€-1 million) to €0 million. Income tax expenses increased by €1 million (+2%) to €-54 million driven by higher pre-tax underlying earnings, partly offset by positive tax one-offs. Minority interests increased by €7 million (+18%) to €-43 million as a result of the increase of AXA MPS underlying earnings. Underlying earnings increased by €14 million (+16%) to €104 million. Adjusted earnings increased by €15 million (+16%) to €110 million mainly driven by higher underlying earnings. Net income increased by €21 million (+24%) to €105 million driven by higher adjusting earnings, a favorable change in the fair value of assets accounted for under fair value option, as well as lower restructuring costs resulting from pre-retirement plans. Half Year 2019 Financial Report 45 I Asia (in Euro million, except percentages) Gross revenues (a) Life & Savings Property & Casualty Health New business APE NBV Margin Underlying earnings before tax Life & Savings Property & Casualty Health Other (b) Income tax expenses / benefits Minority interests Income from affiliates and associates Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio (a) Net of intercompany eliminations. (b) Other corresponds to holding. Half Year 2019 Financial Report ACTIVITY REPORT – HALF YEAR 2019 June 30, 2019 June 30, 2018 December 31, 2018 4,827 4,339 8,973 3,087 2,735 5,780 677 630 1,245 1,063 974 1,947 867 763 1,520 59.2% 60.5% 62.2% 666 592 1,156 391 342 665 48 37 68 236 215 426 (8) (2) (3) (133) (112) (219) (4) (4) (7) 91 67 171 620 544 1,101 10 (8) (34) 631 536 1,067 2 (22) (53) (6) 4 (8) (8) (18) (1) (13) (13) 625 487 987 95.4% 96.5% 97.1% 77.5% 77.7% 78.8% 86.3% 86.0% 86.8% 46 I ACTIVITY REPORT – HALF YEAR 2019 ASIA - JAPAN (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 2,414 2,309 4,564 Life & Savings 1,698 1,639 3,203 Health 716 670 1,361 New business APE 268 279 546 NBV Margin 111.2% 92.3% 97.8% Underlying earnings before tax 392 352 695 Life & Savings 183 156 300 Health 217 196 395 Other (b) (8) Income tax expenses / benefits (111) (92) (189) Minority interests (4) (3) (7) Income from affiliates and associates Underlying earnings Group share 277 256 499 Net capital gains or losses attributable to shareholders net of income tax (0) 0 8 Adjusted earnings Group share 277 256 507 Profit or loss on financial assets (under fair value option) and derivatives (8) (13) (40) Exceptional operations (including discontinued operations) 0 4 Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE 270 244 471 Health Combined Ratio 70.0% 71.2% 72.0% Protection Combined Ratio 87.5% 87.4% 87.7% Average exchange rate: € 1.00 = Japanese Yen 124 132 130 (a) Net of intercompany eliminations. (b) Other corresponds to holding. Gross revenues increased by €106 million (+5%) to €2,414 million. On a comparable basis, gross revenues decreased by €27 million (-1%): Life & Savings (€+60 million or +4%) to €1,698 million. On a comparable basis, Life & Savings gross revenues decreased by €34 million (-2%) mainly due to G/A Savings (€-86 million or -23%) and Unit-Linked (€-23 million or -57%) due to continued lower new business from the G/A capital light Single Premium Whole Life product, partly offset by Protection with Savings (€+85 million or +7%) mainly from in-force growth on regular premiums; Health (€+46 million or +7%) to €716 million. On a comparable basis, Health gross revenues increased by €7 million (+1%) mainly from Medical Whole Life products, notably due to the success of Medical Care products, partly offset by lower new business from Medical Term products. APE decreased by €11 million (-4%) to €268 million. On a comparable basis, APE decreased by €26 million (-9%) mainly due to lower new business in Protection with Savings (€-24 million or -12%) following the announcement Half Year 2019 Financial Report 47 I ACTIVITY REPORT – HALF YEAR 2019 of a tax rule change as well as the decrease of the G/A capital light Single Premium Whole Life product (€-11 million or -51%), partly offset by growth in Health (€+10 million or +21%). NBV Margin increased by 18.9 points to 111.2% mainly driven by a favorable business mix from Protection to Health products. Underlying earnings before tax increased by €40 million (+11%) to €392 million. On a constant exchange rate basis, underlying earnings before tax increased by €18 million (+5%): Health (€+21 million or +11%) to €217 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €9 million (+5%) mainly due to an improved morbidity experience in Medical Whole Life products (€+6 million); Life & Savings (€+26 million or +17%) to €183 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax increased by €16 million (+11%) primarily driven by higher fees & revenues, net technical margin and expenses mainly due to in-force growth in Protection with Savings; Other (€-8 million) to €-8 million. On a constant exchange rate basis, Other underlying earnings before tax decreased by €8 million mainly due to one-off costs linked to the establishment of the holding company (€-5 million). Income tax expenses increased by €18 million (+20%) to €-111 million. On a constant exchange rate basis, income tax expenses increased by €12 million (+13%) driven by lower positive tax one-offs combined with higher pre-tax underlying earnings. Underlying earnings increased by €21 million (+8%) to €277 million. On a constant exchange rate basis, underlying earnings increased by €6 million (+2%). Adjusted earnings increased by €21 million (+8%) to €277 million. On a constant exchange rate basis, adjusted earnings increased by €6 million (+2%) driven by higher underlying earnings. Net income increased by €26 million (+11%) to €270 million. On a constant exchange rate basis, net income increased by €11 million (+5%) driven by higher adjusted earnings combined with a favorable change in the fair value of derivatives not eligible for hedge accounting, partly offset by an unfavorable change in the fair value of mutual funds. Half Year 2019 Financial Report 48 I ACTIVITY REPORT – HALF YEAR 2019 ASIA - HONG KONG (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 1,830 1,475 3,305 Life & Savings 1,362 1,069 2,521 Property & Casualty 143 124 240 Health 325 283 545 New business APE 268 204 456 NBV Margin 44.9% 49.5% 47.2% Underlying earnings before tax 237 207 404 Life & Savings 206 183 358 Property & Casualty 13 9 22 Health 17 15 25 Income tax expenses / benefits (14) (9) (13) Minority interests Income from affiliates and associates Underlying earnings Group share 223 198 391 Net capital gains or losses attributable to shareholders net of income tax 0 (1) (2) Adjusted earnings Group share 223 198 389 Profit or loss on financial assets (under fair value option) and derivatives 12 (4) (5) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts (7) (8) (15) Integration and restructuring costs (0) (13) (13) NET INCOME GROUP SHARE 228 173 357 Property & Casualty Combined Ratio 95.3% 96.3% 95.5% Health Combined Ratio 94.4% 94.5% 95.6% Protection Combined Ratio 84.2% 83.1% 85.4% Average exchange rate: € 1.00 = Hong Kong Dollar 8.86 9.49 9.26 (a) Net of intercompany eliminations. Gross revenues increased by €354 million (+24%) to €1,830 million. On a comparable basis, gross revenues increased by €234 million (+16%): Life & Savings (€+294 million or +28%) to €1,362 million. On a comparable basis, Life & Savings gross revenues increased by €204 million (+19%) mainly in Protection with Savings (€+156 million or +20%) driven by in-force growth and higher new business in brokers and agency channels, Unit-Linked (€+38 million or +66%) driven by growth in single premium new business, and G/A Savings (€+13 million or +10%) driven by in-force growth; Health (€+42 million or +15%) to €325 million. On a comparable basis, Health gross revenues increased by €21 million (+7%) mainly driven by higher volumes in Individual business and tariff increases in Group business; Half Year 2019 Financial Report 49 I ACTIVITY REPORT – HALF YEAR 2019 Property & Casualty (€+19 million or +15%) to €143 million. On a comparable basis, Property & Casualty gross revenues increased by €9 million (+7%) mainly due to higher volumes in both Personal and Commercial lines and tariff increases in Commercial lines. APE increased by €64 million (+31%) to €268 million. On a comparable basis, APE increased by €46 million (+23%) driven by strong sales in Protection with Savings (€+78 million or +67%), partly offset by lower sales in G/A Savings (€-22 million or -49%) and Group Health (€-9 million or -57%). NBV Margin decreased by 4.6 points to 44.9% mainly driven by the redesign of Protection and Critical Illness products combined with a change in distribution mix. Underlying earnings before tax increased by €29 million (+14%) to €237 million. On a constant exchange rate basis, underlying earnings before tax increased by €14 million (+7%): Life & Savings (€+23 million or +13%) to €206 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax increased by €10 million (+5%) mainly due to volume growth; Health (€+2 million or +17%) to €17 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €1 million (+9%) mainly driven by volume growth; Property & Casualty (€+4 million or +38%) to €13 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €3 million (+29%) mainly due to pricing actions in Personal Motor and Workers’ Compensation as well as volume growth in both Personal and Commercial lines. Income tax expenses increased by €5 million (+52%) to €-14 million. On a constant exchange rate basis, income tax expenses increased by €4 million (+42%) mainly driven by higher pre-tax underlying earnings. Underlying earnings increased by €25 million (+12%) to €223 million. On a constant exchange rate basis, underlying earnings increased by €10 million (+5%). Adjusted earnings increased by €26 million (+13%) to €223 million. On a constant exchange rate basis, adjusted earnings increased by €11 million (+6%) mainly driven by higher underlying earnings. Net income increased by €55 million (+32%) to €228 million. On a constant exchange rate basis, net income increased by €40 million (+23%) driven by higher adjusted earnings, a favorable change in the fair value of derivatives not eligible for hedge accounting, as well as the non-repeat of restructuring costs in 1H18. Half Year 2019 Financial Report 50 I ACTIVITY REPORT – HALF YEAR 2019 ASIA - HIGH POTENTIALS (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 75 77 153 Life & Savings 26 28 56 Property & Casualty 29 31 58 Health 20 18 39 New business APE 331 280 517 NBV Margin 28.8% 36.9% 37.9% Underlying earnings before tax 2 1 6 Life & Savings 2 2 8 Property & Casualty (1) (6) (8) Health 1 4 6 Income tax expenses / benefits 1 (1) (2) Minority interests 0 0 0 Income from affiliates and associates 91 67 171 Underlying earnings Group share 94 67 176 Net capital gains or losses attributable to shareholders net of income tax 10 (6) (40) Adjusted earnings Group share 104 62 136 Profit or loss on financial assets (under fair value option) and derivatives (7) (6) (8) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts (0) (2) Integration and restructuring costs (0) NET INCOME GROUP SHARE 97 55 126 Property & Casualty Combined Ratio 105.8% 117.6% 114.3% Health Combined Ratio 98.0% 85.2% 90.1% Protection Combined Ratio 113.7% 111.8% 103.9% (a) Net of intercompany eliminations. Scope: (i) The Property & Casualty subsidiary in Thailand and the non-bancassurance Life & Savings subsidiary in Indonesia are fully consolidated; (ii) China, the Philippines and the bancassurance Life & Savings subsidiaries in Thailand and Indonesia, are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income. Gross revenues decreased by €2 million (-2%) to €75 million. On a comparable basis, gross revenues decreased by €6 million (-8%): Property & Casualty (€-2 million or -6%) to €29 million. On a comparable basis, Property & Casualty gross revenues decreased by €4 million (-12%) in Thailand (€-4 million) driven by lower revenues following pruning actions in both Commercial Property and Personal Motor; Life & Savings (€-2 million or -7%) to €26 million. On a comparable basis, Life & Savings gross revenues decreased by €3 million (-11%) in Indonesia mainly driven by lower volumes in Protection with Savings (€-4 million or -18%); Half Year 2019 Financial Report 51 I ACTIVITY REPORT – HALF YEAR 2019 Health (€+2 million or +10%) to €20 million. On a comparable basis, Health gross revenues increased by €1 million (+5%) in Indonesia (€+1 million) driven by in-force growth and higher new business. APE increased by €52 million (+18%) to €331 million. On a comparable basis, APE increased by €42 million (+15%): China (€+71 million or +60%) to €189 million. On a comparable basis, APE increased by €70 million (+60%) due to strong sales of G/A Savings products (€+71 million or +84%) during the Chinese New Year; Thailand (€-16 million or -20%) to €64 million. On a comparable basis, APE decreased by €20 million (- 25%) driven by Protection with Savings (€-11 million or -24%) due to lower sales of low margin products combined with lower sales of Unit-Linked products (€-10 million); Indonesia (€-3 million or -6%) to €52 million. On a comparable basis, APE decreased by €5 million (-10%) mainly driven by lower new business in Protection with Savings in both telemarketing and bancassurance channels, partly offset by successful sales of a newly launched Health product; The Philippines (€-1 million or -2%) to €27 million. On a comparable basis, APE decreased by €2 million (-9%) from Protection with Savings (€-3 million or -15%) due to lower sales in bancassurance channel. NBV Margin decreased by 8.1 points to 28.8%. On a comparable basis, NBV Margin decreased by 8.2 points mainly driven by strong volumes of low-margin G/A Savings products in China during the Chinese New Year. Underlying earnings before tax increased by €1 million to €2 million. On a constant exchange rate basis, underlying earnings before tax increased by €1 million: Life & Savings (€-1 million or -23%) to €2 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax decreased by €1 million (-26%) in Indonesia mainly due to a lower net technical margin; Health (€-3 million or -69%) to €1 million. On a constant exchange rate basis, Health underlying earnings before tax decreased by €3 million (-71%) mainly in Indonesia (€-3 million) due to an unfavorable claims experience; Property & Casualty (€+5 million or +85%) to €-1 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €5 million (+86%) in Thailand due to a more favorable claims experience reflecting successful pruning actions. Income tax expenses decreased by €2 million to €1 million. On a constant exchange rate basis, income tax expenses decreased by €2 million driven by lower pre-tax underlying earnings in Indonesia (€+2 million), partly offset by higher pre-tax underlying earnings in Thailand (€-1 million). Income from affiliates and associates increased by €24 million (+35%) to €91 million. On a constant exchange rate basis, income from affiliates and associates increased by €19 million (+29%): Thailand (€+8 million or +28%) to €38 million mainly due to a more favorable claims experience and lower expenses; China (€+9 million or +75%) to €21 million mainly driven by favorable tax impacts supported by a regulatory change; Indonesia (€0 million or +2%) to €19 million; The Philippines (€+3 million or +25%) to €13 million mainly driven by an improved claims experience and a favorable change in business mix. Underlying earnings increased by €27 million (+39%) to €94 million. On a constant exchange rate basis, underlying earnings increased by €22 million (+33%). Half Year 2019 Financial Report 52 I ACTIVITY REPORT – HALF YEAR 2019 Adjusted earnings increased by €43 million (+69%) to €104 million. On a constant exchange rate basis, adjusted earnings increased by €38 million (+62%) driven by higher underlying earnings and higher net realized capital gains in China due to the positive equity market performance. Net income increased by €42 million (+76%) to €97 million. On a constant exchange rate basis, net income increased by €38 million (+68%) driven by higher adjusted earnings. Half Year 2019 Financial Report 53 I ACTIVITY REPORT – HALF YEAR 2019 AXA XL (in Euro million, except percentages) June 30, 2019 June 30, 2018 restated (a) December 31, 2018 Gross revenues (b) 10,436 1,755 6,287 Life & Savings 95 45 Property & Casualty Insurance 4,961 1,197 3,354 Property & Casualty Specialty 2,632 557 1,794 Property & Casualty Reinsurance 2,748 1,093 Underlying earnings before tax 603 111 (178) Life & Savings 7 5 Property & Casualty Insurance & Specialty 363 111 103 Property & Casualty Reinsurance 281 (277) Other (c) (48) (10) Income tax expenses / benefits (100) (33) (70) Minority interests (2) (1) 18 Income from affiliates and associates 1 (3) Underlying earnings Group share 502 77 (233) Net capital gains or losses attributable to shareholders net of income tax 45 28 (27) Adjusted earnings Group share 547 105 (260) Profit or loss on financial assets (under fair value option) and derivatives (6) (27) (63) Exceptional operations (including discontinued operations) (45) (4) (29) Goodwill and other related intangible impacts (20) (10) Integration and restructuring costs (82) (67) NET INCOME GROUP SHARE 394 75 (428) Property & Casualty Combined Ratio 98.3% 99.4% 108.6% Protection Combined Ratio 104.3% n/a 89.2% (a) Restated: as per new governance. (b) Net of intercompany eliminations. (c) Other corresponds to holding. Gross revenues increased by €8,681 million (+495%) to €10,436 million. On a comparable basis, gross revenues increased by €802 million (+9%): Property & Casualty Insurance (€+3,764 million or +314%) to €4,961 million. On a comparable basis, Property & Casualty Insurance gross revenues increased by €616 million (+15%) mainly driven by both volume growth and rate increases across most lines of business, notably in North America Professional (€+214 million or +47%), including a new significant multi-year contract written in the first quarter, and in Property (€+193 million or +17%); Property & Casualty Reinsurance at €2,748 million. On a comparable basis, Property & Casualty Reinsurance gross revenues increased by €50 million (+2%) driven by both volume growth and rate increases in Specialty and Other lines (€+115 million or +19%) mainly from Lloyds Whole Accounts, North America Agriculture and North America Accident & Health, partly offset by lower premiums in Property Cat (€-49 million or -7%) reflecting a reduced Nat Cat exposure; Property & Casualty Specialty (€+2,074 million or +372%) to €2,632 million. On a comparable basis, Property & Casualty Specialty gross revenues increased by €137 million (+6%) driven by both volume Half Year 2019 Financial Report 54 I ACTIVITY REPORT – HALF YEAR 2019 growth and rate increase across most lines of business, notably in Political Risks (€+35 million or +21%), as well as in Accident & Health (€+30 million or +21%) and Fine Art & Specie (€+25 million or +11%); Life & Savings at €95 million. On a comparable basis, Life & Savings gross revenues remained stable as the underlying business is in run-off. Underlying earnings before tax reported were €603 million: Property & Casualty reported earnings were €644 million from underwriting profits mainly driven by both volume growth and rate increases as well as favorable developments in relation to 4Q18 catastrophe losses, partly offset by elevated levels of large non-catastrophe losses in the first half of 2019, as well as a significant net investment income combined with the emergence of expense synergies related to the integration of XL Group within AXA Group; Life & Savings reported earnings were €7 million; Other reported earnings were €-48 million mainly driven by interest expenses on financing debt. Income tax expenses reported were €-100 million, reflecting positive pre-tax underlying earnings. Minority interests reported were €-2 million. Underlying earnings reported were €502 million. Adjusted earnings reported were €547 million, reflecting underlying earnings (€502 million) as well as net realized capital gains mainly on fixed-income assets and equity instruments. Net income reported was €394 million, reflecting adjusted earnings (€547 million), integration and restructuring costs (€-82 million) linked to the integration of XL Group within AXA Group, exceptional operations (€-45 million) due to the repurchase of financing debt and the amortization of intangible assets (€-20 million) related to distribution networks. Half Year 2019 Financial Report 55 I ACTIVITY REPORT – HALF YEAR 2019 United States (in Euro million, except percentages) June 30, 2019 (a) June 30, 2018 December 31, 2018 Gross revenues (b) 4,297 7,923 16,483 Life & Savings 3,629 6,577 13,723 Health 14 26 54 Other (c) 654 1,321 2,706 New business APE 524 821 1,471 NBV Margin 20.0% 22.8% 23.0% Underlying earnings before tax 749 1,897 Life & Savings 509 1,431 Health (12) (30) Other (c) 252 496 Income tax expenses / benefits (136) (272) Minority interests (149) (500) Income from affiliates and associates (a) 283 Underlying earnings Group share 283 465 1,125 Net capital gains or losses attributable to shareholders net of income tax (3) 3 (11) Adjusted earnings Group share 280 467 1,114 Profit or loss on financial assets (under fair value option) and derivatives 4 (59) (82) Exceptional operations (including discontinued operations) (22) (19) 16 Goodwill and other related intangible impacts (0) (0) (3,006) Integration and restructuring costs (5) (27) (27) NET INCOME GROUP SHARE 257 363 (1,986) Health Combined Ratio 150.1% 169.6% Protection Combined Ratio 108.3% 106.2% Average exchange rate : € 1.00 = US Dollar 1.13 1.21 1.18 (a) Following the deconsolidation of AXA Equitable Holdings, Inc. and its subsequent accounting under the equity method, the United States underlying earnings contribution was fully accounted for in Income from affiliates and associates. (b) Net of intercompany eliminations. (c) Other corresponds to asset management activities and holding. The results of our US segment are presented herein on the basis of IFRS and are not, and should not be relied upon as representing, the US GAAP results of AXA Equitable Holdings, Inc. (“EQH”) (including AllianceBernstein), which, as a US public company, reports in US GAAP in accordance with the rules of the US Securities and Exchange Commission (“SEC”). For further information on EQH’s financial results and other public reports please consult the SEC website (www.sec.gov). Half Year 2019 Financial Report 56 I ACTIVITY REPORT – HALF YEAR 2019 UNITED STATES - LIFE & SAVINGS (in Euro million, except percentages) June 30, 2019 (a) June 30, 2018 December 31, 2018 Gross revenues (b) 3,643 6,602 13,777 Life & Savings 3,629 6,577 13,723 Health 14 26 54 New business APE 524 821 1,471 NBV Margin 20.0% 22.8% 23.0% Underlying earnings before tax 417 1,206 Life & Savings 509 1,431 Health (12) (30) Other (80) (195) Income tax expenses / benefits (76) (149) Minority interests (25) (203) Income from affiliates and associates (a) 198 Underlying earnings Group share 198 316 853 Net capital gains or losses attributable to shareholders net of income tax (3) 3 (11) Adjusted earnings Group share 195 319 842 Profit or loss on financial assets (under fair value option) and derivatives 4 (59) (82) Exceptional operations (including discontinued operations) (20) (20) 19 Goodwill and other related intangible impacts (0) (0) (1,057) Integration and restructuring costs (5) (27) (26) NET INCOME GROUP SHARE 175 213 (305) Health Combined Ratio 150.1% 169.6% Protection Combined Ratio 108.3% 106.2% Average exchange rate : € 1.00 = US Dollar 1.13 1.21 1.18 (a) Following the deconsolidation of AXA Equitable Holdings, Inc. and its subsequent accounting under the equity method, the United States - Life & Savings underlying earnings contribution was fully accounted for in Income from affiliates and associates. (b) Net of intercompany eliminations. Following the deconsolidation of AXA Equitable Holdings Inc. and its subsequent accounting under the equity method, 1H19 Gross revenues include 3 months of operations, while 1H19 APE and 1H19 NBV include 6 months of operations on Group share basis. Gross revenues decreased by €2,959 million (-45%) to €3,643 million. On a comparable basis, gross revenues increased by €225 million (+7%): Life & Savings (€-2,948 million or -45%) to €3,629 million. On a comparable basis, Life & Savings gross revenues increased by €225 million (+7%) mainly in Unit-Linked (€+203 million or +10%) from higher sales of non-GMxB Variable Annuity, partly offset by lower revenues from GMxB Variable Annuity; Health (€-12 million or -46%) to €14 million. On a comparable basis, Health gross revenues remained stable. Half Year 2019 Financial Report 57 I ACTIVITY REPORT – HALF YEAR 2019 APE decreased by €297 million (-36%) to €524 million. On a comparable basis, APE increased by €25 million (+5%) mostly driven by higher sales of non-GMxB Variable Annuity, partly offset by lower sales of GMxB Variable Annuity and lower advisory sales in Mutual Funds. NBV Margin decreased by 2.8 points to 20.0% driven by lower interest rates and less favorable business mix. Underlying earnings decreased by €118 million (-37%) to €198 million. On a constant exchange rate basis, underlying earnings decreased by €132 million (-42%) mainly driven by the decrease in AXA Group average ownership of AXA Equitable Holdings, Inc. from 92.7% in 1H18 to 52.7% in 1H19, following the IPO and subsequent sell-downs. At constant ownership rate, underlying earnings increased by 7% mainly from both higher investment and GMxB hedge margins, partly offset by lower Unit-Linked management fees. Adjusted earnings decreased by €124 million (-39%) to €195 million. On a constant exchange rate basis, adjusted earnings decreased by €137 million (-43%) mainly driven by lower underlying earnings. Net income decreased by €38 million (-18%) to €175 million. On a constant exchange rate basis, net income decreased by €50 million (-23%) driven by lower adjusted earnings, partly offset by a favorable change in the fair value of mutual funds and interest rate derivatives not eligible for hedge accounting (€+63 million) backing structured products and lower separation costs (€+23 million) in the context of the IPO and subsequent sell- downs of AXA Equitable Holdings, Inc. Half Year 2019 Financial Report 58 I ACTIVITY REPORT – HALF YEAR 2019 UNITED STATES - AB (in Euro million, except percentages) June 30, 2019 (a) June 30, 2018 December 31, 2018 Gross revenues (b) 654 1,321 2,706 Underlying earnings before tax 332 691 Income tax expenses / benefits (60) (123) Minority interests (124) (297) Income from affiliates and associates (a) 85 Underlying earnings Group share 85 148 271 Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share 85 148 271 Profit or loss on financial assets (under Fair Value option) and derivatives Exceptional operations (including discontinued operations) (2) 2 (2) Goodwill and other related intangibles impacts (1,949) Integration and restructuring costs (1) NET INCOME GROUP SHARE 83 150 (1,681) Average Assets under Management (in Euro billion) 482 461 467 Asset management fee bps 40.5 40.7 Underlying cost income ratio 71.6% 70.8% Average exchange rate : € 1.00 = US Dollar 1.13 1.21 1.18 (a) Following the deconsolidation of AXA Equitable Holdings, Inc., the United States - AB underlying earnings contribution was fully accounted for in Income from affiliates and associates. (b) Net of intercompany eliminations. Gross Revenues amounted to €683 million before intercompany eliminations as of June 30, 2019. Following the deconsolidation of AXA Equitable Holdings Inc. and its subsequent accounting under the equity method, 1H19 Gross revenues include 3 months of operations. Gross revenues decreased by €667 million (-51%) to €654 million. On a comparable basis, gross revenues decreased by €42 million (-6%) mainly from both lower research service (€-30 million) and management fees (€-12 million) as a result of adverse market conditions in 4Q18. Underlying earnings decreased by €63 million (-43%) to €85 million. On a constant exchange rate basis, underlying earnings decreased by €69 million (-47%) driven by the decrease in AXA Group average ownership of AXA Equitable Holdings, Inc. from 92.7% in 1H18 to 52.7% in 1H19, following the IPO and subsequent sell-downs. At constant ownership rate, underlying earnings decreased by €15 million (-10%) reflecting lower research service and performance fees. Adjusted earnings decreased by €63 million (-43%) to €85 million. On a constant exchange rate basis, adjusted earnings decreased by €69 million (-47%). Net income decreased by €67 million (-45%) to €83 million. On a constant exchange rate basis, net income decreased by €73 million (-49%) mainly driven by lower adjusted earnings. Half Year 2019 Financial Report 59 I ACTIVITY REPORT – HALF YEAR 2019 International (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 3,662 3,419 6,535 Life & Savings 645 646 1,285 Property & Casualty 2,042 1,946 3,722 Health 816 695 1,295 Other (b) 159 132 233 New business APE 129 123 262 NBV Margin 39.8% 34.2% 36.5% Underlying earnings before tax 292 231 435 Life & Savings 55 43 67 Property & Casualty 184 150 305 Health 21 12 25 Other (c) 31 26 39 Income tax expenses / benefits (61) (43) (92) Minority interests (32) (25) (47) Income from affiliates and associates 41 47 104 Underlying earnings Group share 240 210 400 Net capital gains or losses attributable to shareholders net of income tax (2) (1) (4) Adjusted earnings Group share 238 209 396 Profit or loss on financial assets (under fair value option) and derivatives 8 14 39 Exceptional operations (including discontinued operations) (20) (17) Goodwill and other related intangible impacts (12) (8) (29) Integration and restructuring costs (2) (5) (35) NET INCOME GROUP SHARE 232 190 355 Property & Casualty Combined Ratio 98.4% 100.1% 100.6% Health Combined Ratio 98.6% 99.3% 99.6% Protection Combined Ratio 98.7% 100.2% 98.8% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities. (c) Other corresponds to banking activities and holding. Scope: (i) Mexico, the Gulf Region, Colombia, Singapore, Turkey, Poland, Morocco, AXA Bank Belgium, Malaysia Property & Casualty, Luxembourg, the Czech Republic Life & Savings, the Slovak Republic Life & Savings, Greece and Brazil are fully consolidated; (ii) Russia (Reso), India, Nigeria and Lebanon are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income. Gross revenues increased by €243 million (+7%) to €3,662 million. On a comparable basis, gross revenues increased by €196 million (+6%) mainly driven by insurance activities (+6%) partly offset by a decrease in banking revenues (-5%): Property & Casualty (€+96 million or +5%) to €2,042 million. On a comparable basis, Property & Casualty gross revenues increased by €127 million (+7%): Half Year 2019 Financial Report 60 I ACTIVITY REPORT – HALF YEAR 2019 o Mexico (€+39 million or +10%) to €476 million mainly driven by a positive timing impact and new business in Commercial Property, o The Gulf Region (€-18 million or -7%) to €260 million mainly driven by a further reduction of the size of a large Commercial Motor fleet, o Turkey (€+57 million or +21%) to €257 million mainly in Motor and Commercial Property, o Colombia (€+44 million or +20%) to €251 million mainly driven by new business in Protection and Workers’ Compensation, o Poland (€-16 million or -7%) to €217 million mainly due to lower sales in Personal Motor in line with softening market trends, o Morocco (€+12 million or +8%) to €170 million mainly due to new business in Personal Motor and Commercial Property, o Malaysia (€-10 million or -8%) to €117 million mainly due to lower sales in Motor reflecting strong market competition; Health (€+122 million or +18%) to €816 million. On a comparable basis, Health gross revenues increased by €80 million (+11%) stemming from volume growth and tariff increases in both Mexico (€+62 million or +19%) to €410 million and the Gulf Region (€+14 million or +7%) to €211 million; Life & Savings (€-1 million) to €645 million. On a comparable basis, Life & Savings gross revenues decreased by €3 million (-1%) mainly in (i) Colombia (€-14 million or -16%) to €71 million mostly due to a G/A Savings run-off portfolio, and (ii) Poland (€-3 million or -4%) to €71 million mainly driven by lower sales in Unit-Linked largely compensated by higher sales in Protection, partly offset by (iii) Singapore (€+15 million or +12%) to €140 million from higher sales across all lines of business; Other (€+ 27million or +20%) to €159 million. On a comparable basis, Other gross revenues decreased by €8 million (-5%) at AXA Bank Belgium mainly due to lower net realized capital gains. APE increased by €6 million (+5%) to €129 million. On a comparable basis, APE increased by €4 million (+3%) mainly driven by (i) India (€+2 million or +10%) to €21 million from higher sales in Protection with Savings, (ii) Singapore (€+2 million or +4%) to €49 million from higher sales in both G/A Savings and Unit-Linked, and (iii) Mexico (€+1 million or +13%) to €13 million reflecting a growth in Protection with Savings. NBV Margin increased by 5.6 points to 39.8% mainly due to a more favorable product mix, notably within Unit- Linked, in Singapore. Underlying earnings before tax increased by €61 million (+26%) to €292 million. On a constant exchange rate basis, underlying earnings before tax increased by €63 million (+27%): Property & Casualty (€+34 million or +23%) to €184 million. On a constant exchange rate basis, Property & Casualty underlying earnings before tax increased by €39 million (+26%) mainly driven by (i) Brazil (€+14 million) primarily from a more favorable claims experience, (ii) Colombia (€+11 million) mainly driven by an improved net technical margin in Workers’ Compensation, partly offset by higher acquisition expenses in line with volume growth, and (iii) Luxembourg (€+6 million) following a more favorable claims experience; Life & Savings (€+12 million or +29%) to €55 million. On a constant exchange rate basis, Life & Savings underlying earnings before tax increased by €11 million (+27%) mainly driven by (i) Mexico (€+8 million) stemming from a more favorable claims experience, and a higher investment margin as a result of a higher average asset base, partly offset by higher commissions, and (ii) Poland (€+5 million) from lower acquisition expenses; Other (€+6 million or +23%) to €31 million. On a constant exchange rate basis, Other underlying earnings before tax increased by €6 million (+23%) from Holdings (€+5 million) mainly driven by lower expenses; Half Year 2019 Financial Report 61 I ACTIVITY REPORT – HALF YEAR 2019 Health (€+9 million or +69%) to €21 million. On a constant exchange rate basis, Health underlying earnings before tax increased by €7 million (+59%) mainly from (i) the Gulf Region (€+4 million) mainly driven by higher favorable prior year reserve developments, and (ii) Mexico (€+3 million) as a result of a higher net technical margin, partly offset by higher expenses. Income tax expenses increased by €19 million (+44%) to €-61 million. On a constant exchange rate basis, income tax expenses increased by €19 million (+45%) mainly driven by higher pre-tax underlying earnings. Minority interests increased by €7 million (+28%) to €-32 million. On a constant exchange rate basis, minority interests increased by €7 million (+27%) as a result of higher underlying earnings in the Gulf Region and Colombia. Income from affiliates and associates decreased by €6 million (-12%) to €41 million. On a constant exchange rate basis, income from affiliates and associates decreased by €3 million (-6%) mainly at Reso. Underlying earnings increased by €30 million (+14%) to €240 million. On a constant exchange rate basis, underlying earnings increased by €35 million (+16%). Adjusted earnings increased by €29 million (+14%) to €238 million. On a constant exchange rate basis, adjusted earnings increased by €33 million (+16%) mainly driven by higher underlying earnings. Net income increased by €42 million (+22%) to €232 million. On a constant exchange rate basis, net income increased by €50 million (+26%) mainly driven by higher adjusted earnings. Half Year 2019 Financial Report 62 I Transversal & Central Holdings (in Euro million, except percentages) Gross revenues (b) Life & Savings Property & Casualty Health Other (c) Underlying earnings before tax Life & Savings Property & Casualty Health Other (d) Income tax expenses / benefits Minority interests Income from affiliates and associates Underlying earnings Group share Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio (a) Restated: as per new governance. (b) Net of intercompany eliminations. (c) Other corresponds to asset management activities. (d) Other corresponds to asset management activities and holding. Half Year 2019 Financial Report ACTIVITY REPORT – HALF YEAR 2019 June 30, 2019 June 30, 2018 restated (a) December 31, 2018 1,367 1,413 2,684 2 3 5 690 708 1,290 88 71 146 587 631 1,243 (331) (181) (487) 0 1 (6) 75 100 208 (1) (2) (17) (406) (281) (673) 91 90 159 (3) (4) (8) 11 10 20 (232) (84) (316) 35 1 (13) (196) (84) (330) (438) (120) (79) (597) (20) (91) (0) (0) (1) (22) (12) (64) (1,254) (236) (564) 95.7% 89.9% 89.9% 100.6% 102.1% 110.4% 63 I ACTIVITY REPORT – HALF YEAR 2019 AXA INVESTMENT MANAGERS (“AXA IM”) (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 587 631 1,243 Underlying earnings before tax 167 188 343 Income tax expenses / benefits (51) (55) (85) Minority interests (3) (4) (8) Income from affiliates and associates 10 10 19 Underlying earnings Group share 123 139 270 Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share 123 139 270 Profit or loss on financial assets (under Fair Value option) and derivatives (8) 11 (1) Exceptional operations (including discontinued operations) (0) (50) (53) Goodwill and other related intangibles impacts (0) (0) (1) Integration and restructuring costs (0) (4) (40) NET INCOME GROUP SHARE 115 96 175 Average Assets under Management (in Euro billion) 649 641 642 Asset management fee bps 16.6 17.2 17.1 Underlying cost income ratio 71.3% 69.7% 72.1% (a) Net of intercompany eliminations. Gross Revenues amounted to €728 million before intercompany eliminations as of June 30, 2019. Assets under Management ("AUM") increased by €27 billion from December 31, 2018, to €757 billion at the end of June 30, 2019, driven by positive market effects mainly linked to lower interest rates (€+28 billion), a positive foreign exchange rate impact (€+2 billion), and net inflows from Main Fund (€+4 billion) linked to the integration of XL Group (€+3 billion), partly offset by net outflows from Asian joint ventures (€-6 billion) mainly from the China subsidiary due to changes in regulatory requirements. Management fee bps decreased by 0.6 bps to 16.6 bps. On a constant exchange rate basis, management fee bps decreased by 0.6 bps mainly due to an unfavorable change in product mix. Gross revenues decreased by €44 million (-7%) to €587 million. On a comparable basis, gross revenues decreased by €48 million (-8%) mainly driven by lower performance fees (€-14 million), management fees (€-14 million) and transaction fees (€-13 million). Underlying earnings before tax decreased by €21 million (-11%) to €167 million. On a constant exchange rate basis, underlying earnings before tax decreased by €22 million (-12%) as a result of lower gross revenues, partly offset by lower expenses. The underlying cost income ratio increased by 1.6 points to 71.3%. On a constant exchange rate basis, the underlying cost income ratio increased by 1.3 points. Income tax expenses decreased by €4 million (-7%) to €-51 million. Income from affiliates and associates remained stable at €10 million. Underlying earnings and adjusted earnings decreased by €16 million (-12%) to €123 million. On a constant exchange rate basis, underlying earnings and adjusted earnings decreased by €17 million (-12%). Half Year 2019 Financial Report 64 I ACTIVITY REPORT – HALF YEAR 2019 Net income increased by €19 million (+20%) to €115 million. On a constant exchange rate basis, net income increased by €19 million (+20%) mainly driven by the non-repeat of an exceptional tax charge related to the transfer of AB shares to AXA US in the context of the IPO of AXA Equitable Holdings, Inc. completed in May 2018. Half Year 2019 Financial Report 65 I ACTIVITY REPORT – HALF YEAR 2019 AXA ASSISTANCE (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Gross revenues (a) 687 680 1,331 Property & Casualty 599 609 1,185 Health 88 71 146 Underlying earnings before tax 13 14 20 Property & Casualty 13 15 36 Health (1) (2) (17) Income tax expenses / benefits (8) (10) (16) Minority interests 0 (0) (0) Income from affiliates and associates 1 1 1 Underlying earnings Group share 5 3 4 Net capital gains or losses attributable to shareholders net of income tax 0 1 (2) Adjusted earnings Group share 5 5 2 Profit or loss on financial assets (under fair value option) and derivatives 0 (6) (7) Exceptional operations (including discontinued operations) 1 0 2 Goodwill and other related intangible impacts Integration and restructuring costs (3) (1) (8) NET INCOME GROUP SHARE 4 (2) (11) Property & Casualty Combined Ratio 98.4% 98.1% 97.8% Health Combined Ratio 100.6% 102.1% 110.4% (a) Net of intercompany eliminations. Gross revenues increased by €7 million (+1%) to € 687 million. On a comparable basis, gross revenues increased by €26 million (+4%): Property & Casualty (€-10 million or -2%) to €599 million. On a comparable basis, Property & Casualty gross revenues increased by €11 million (+2%) in Non-Motor (€+21 million or +6%) from higher volumes mainly in Travel and Home, partly offset by lower volumes in Motor (€-10 million or -4%); Health (€+17 million or +24%) to €88 million. On a comparable basis, Health gross revenues increased by €15 million (+21%) mainly due to higher new business. Underlying earnings before tax decreased by €1 million (-6%) to €13 million: Property & Casualty (€-2 million or -12%) to €13 million mainly driven by higher commissions from a change in business mix towards large partnerships, notably in Home, partly offset by lower attritional losses in Motor; Health (€+1 million or +66%) to €-1 million mainly driven by a decrease in the expense ratio. Income tax expenses decreased by €2 million (-20%) to €-8 million mainly driven by a lower corporate tax rate due to a favorable change in country mix. Underlying earnings increased by €2 million (+51%) to €5 million. Adjusted earnings remained stable at €5 million as higher underlying earnings were offset by lower net realized capital gains. Net income increased by €6 million to €4 million mainly driven by favorable foreign exchange impacts. Half Year 2019 Financial Report 66 I ACTIVITY REPORT – HALF YEAR 2019 AXA SA (in Euro million, except percentages) June 30, 2019 June 30, 2018 December 31, 2018 Underlying earnings Group share (401) (298) (703) Net capital gains or losses attributable to shareholders net of income tax 36 (2) (23) Adjusted earnings Group share (365) (300) (726) Profit or loss on financial assets (under fair value option) and derivatives (438) (125) (68) Exceptional operations (including discontinued operations) (596) 58 (16) Goodwill and other related intangible impacts Integration and restructuring costs (15) (6) (9) NET INCOME GROUP SHARE (1,414) (373) (819) Underlying earnings decreased by €103 million to €-401 million mainly driven by (i) temporary higher financial charges, notably in the context of the acquisition of XL Group, the change in the accounting methodology of the mandatory exchangeable bonds triggered by the deconsolidation of AXA Equitable Holdings, Inc. (“EQH”) and hedges protecting the value of EQH, as well as (ii) higher tax paid mostly related to the timing of dividends received from subsidiaries. Adjusted earnings decreased by €66 million to €-365 million mainly driven by lower underlying earnings, partly offset by the positive impact of derivatives set up to reduce the Group exposure to equities. Net income decreased by €1,041 million to €-1,414 million mainly due to (i) the negative impact linked to the deconsolidation of AXA Equitable Holdings, Inc. (€-0.6 billion), (ii) an unfavorable change in the fair value of derivatives not eligible for hedge accounting, and (iii) the non-repeat of the 2018 one-off benefit from the reimbursement of the tax paid on dividends received from European subsidiaries held for more than 95% following the decision from the European Court of Justice. Half Year 2019 Financial Report 67 I ACTIVITY REPORT – HALF YEAR 2019 Outlook Anticipating the rapidly evolving needs of its customers, AXA’s strategy is articulated around its preferred segments (P&C Commercial lines, Health and Protection) and a focus on partnerships and innovation, seizing opportunities arising from new technologies to offer products and services beyond insurance and becoming a trusted partner for its customers. AXA is resolutely focused on the delivery of its Ambition 2020 plan and the successful integration of XL Group, solidifying AXA’s position as the #1 global P&C Commercial lines insurer. The significant shift in the business profile of the Group is well advanced, leading to a higher proportion of technical margin earnings and a reduced sensitivity to financial markets. AXA’s Solvency II position and free cash flow generation should remain strong and resilient to external shocks due to robust underwriting and reinsurance policies, a high quality asset portfolio and disciplined capital management. With its clear strategy, a simplified organization designed to foster growth across its preferred segments, a significant shift in strategic profile and a strong balance sheet with financial flexibility, AXA is well positioned to create lasting shareholder value and offer an attractive return. Half Year 2019 Financial Report 68 I ACTIVITY REPORT – HALF YEAR 2019 Glossary This glossary includes definitions of non-GAAP financial measures, or alternative performance measures (“APMs”), indicated by an asterisk (*), that Management believes are useful to understand the Group’s business and analyze the Group’s performance. The scope of the following definitions of APMs remains unchanged compared to prior periods, except that the scope of certain definitions was updated to take into account (i) the deconsolidation of EQH and its subsequent remaining ownership accounting using the equity method and (ii) the impact of the issuance by AXA of mandatory exchangeable bonds into shares of EQH in May 2018, which were recorded in “shareholders’ equity - Minority interests” and “financial debt” and subsequent reclassification of Shareholders’ Equity components under financing debt starting 1Q19. Scope and comparable basis SPLIT BY GEOGRAPHIES The split by geographies is detailed below: France (insurance and banking activities, and holdings); Europe, consisting of: o Switzerland (insurance activities), o Germany (insurance and banking activities, and holdings), o Belgium (insurance activities and holdings), o United Kingdom and Ireland (insurance activities and holdings), o Spain (insurance activities), o Italy (insurance activities and holdings); Asia, consisting of: o Japan (insurance activities and holdings), o Hong Kong (insurance activities), o Asia High Potentials, consisting of:  Thailand (insurance activities),  Indonesia (insurance activities),  China (insurance activities),  The Philippines (insurance activities), o Asia - Direct, consisting of:  Direct Japan (insurance activities),  Direct South Korea (insurance activities), o Asia Holdings; AXA XL, consisting of: o XL Group (insurance activities and holdings) as acquired on September 12, 2018, Half Year 2019 Financial Report 69 I ACTIVITY REPORT – HALF YEAR 2019 o AXA Corporate Solutions Assurance (insurance activities), o AXA Art (insurance activities); United States (insurance activities, AB and holdings); International, consisting of: o AXA Bank Belgium (banking activities), o Brazil (insurance activities and holdings), o Colombia (insurance activities), o Czech Republic and Slovak Republic (insurance activities), o Greece (insurance activities), o The Gulf Region (insurance activities and holdings), o India (insurance activities and holdings), o Lebanon (insurance activities and holdings), o Luxembourg (insurance activities and holdings), o Malaysia (insurance activities), o AXA Mediterranean Holdings, o Mexico (insurance activities), o Morocco (insurance activities and holdings), o Nigeria (insurance activities and holdings), o Poland (insurance activities), o Russia (Reso) (insurance activities), o Singapore (insurance activities and holdings), o Turkey (insurance activities and holdings); Transversal & Central Holdings, consisting of: o AXA Investment Managers, o AXA Assistance, o AXA Liabilities Managers, o AXA Global Re, o AXA Life Europe, o AXA SA and other Central Holdings. CURRENT ENGINES AND HIGH POTENTIALS The split between current engines and high potentials is detailed below: Current Engines: Belgium, France, Germany, Hong Kong, Italy, Japan, Spain, Switzerland, UK & Ireland, AXA XL, the United States and AB; High Potentials: Brazil, China, Indonesia, Mexico, the Philippines and Thailand. Half Year 2019 Financial Report 70 I ACTIVITY REPORT – HALF YEAR 2019 COMPARABLE BASIS FOR REVENUES, ANNUAL PREMIUM EQUIVALENT AND NBV MARGIN “On a comparable basis” means the following: data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis); data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Earnings and Capital ADJUSTED EARNINGS* Adjusted Earnings represent the net income (Group share) as disclosed in the table set forth on pages 20 to 22 of this report, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: integration and restructuring costs related to material newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill and other related intangibles; exceptional operations (primarily change in scope and discontinued operations); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Derivatives related to invested assets: include all foreign exchange derivatives, except the ones related to currency options in earnings hedging strategies which are included in underlying earnings; exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy; and exclude derivatives involved in the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds, for which cost at inception, intrinsic value and pay-off flow through adjusted earnings, and only time value flows through net income when there is no intention to sell the derivatives in the short term (if not, flows through adjusted earnings). UNDERLYING EARNINGS* Underlying Earnings correspond to Adjusted Earnings without the following elements net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowances (on assets not designated under fair value option or trading assets); and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds. Half Year 2019 Financial Report 71 I ACTIVITY REPORT – HALF YEAR 2019 EARNINGS PER SHARE Earnings per share (EPS) represent AXA's consolidated earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity, preferred shares and mandatory exchangeable bonds up to the date of deconsolidation of EQH and its subsequent accounting under equity method), divided by the weighted average number of outstanding ordinary shares. Diluted earnings per share (diluted EPS) represent AXA's consolidated earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity, preferred shares and mandatory exchangeable bonds up to the date of deconsolidation of EQH and its subsequent accounting under equity method), divided by the weighted average number of outstanding ordinary shares, on a diluted basis (i.e. including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Underlying Earnings per share* corresponds to Underlying Earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity, preferred shares and mandatory exchangeable bonds up to the date of deconsolidation of EQH and its subsequent accounting under equity method), divided by the weighted average number of outstanding ordinary shares. RETURN ON EQUITY The Return on Equity (“RoE”) is calculated as earnings divided by the weighted average shareholders’ equity. The weighted average shareholders’ equity is based on opening shareholders’ equity adjusted for weighted average impacts of capital flows (including dividends). for underlying RoE and adjusted RoE*: o reserves relating to the change in the fair value through shareholders’ equity are excluded from the average shareholders’ equity, o undated subordinated debts (“Super Subordinated Debts” TSS/“Undated Subordinated Debts” TSDI) are treated as financing debt, thus excluded from the average shareholders’ equity, o and earnings include interest charges on TSS/TSDI, on preferred shares, and on shareholders’ equity component of the mandatory exchangeable bonds up to the date of deconsolidation of EQH and its subsequent accounting under equity method; for net income RoE: calculation is based on consolidated financial statements, i.e. o average shareholders’ equity including undated subordinated debt (TSS/TSDI) and reserves relating to the change in the fair value through shareholders’ equity, o and net income. FREE CASH FLOWS Free Cash Flows are defined as a measure of dividend capacity calculated as the sum of earnings and required capital change. EOF (ELIGIBLE OWN FUNDS) Surplus derived from a Solvency II balance sheet. It is defined as the excess of market value of assets over best estimate liabilities and Risk Margin as per Solvency II regulation. Half Year 2019 Financial Report 72 I ACTIVITY REPORT – HALF YEAR 2019 SOLVENCY II RATIO This ratio is calculated as per Solvency II, and is equal to the total amount of the Group’s Eligible Own Funds (“EOF”) divided by the Group’s Solvency Capital Requirement (“SCR”). The solvency capital requirement, i.e., the denominator of the Solvency II ratio, is set at a level ensuring that insurers and reinsurers are able to meet their obligations towards policyholders and beneficiaries over the next 12 months, with a 99.5% probability. The solvency capital requirement can be calculated either based on the standard formula or an internal model. The Group is using an internal model. The Solvency II ratio is estimated primarily using AXA’s internal model calibrated based on an adverse 1/200 years shock and assuming equivalence for AXA Equitable Holdings, Inc. in the US. For further information on AXA’s internal model and Solvency II disclosures, please refer to AXA Group’s SFCR for FY 2018, available on AXA’s website (www.axa.com). As in previous disclosures all AXA US entities are taken into account assuming US equivalence. The contribution to the AXA Group Solvency II ratio from the entities that were part of the XL Group (“XL entities”) as of December 31, 2018, was calculated in accordance with the equivalence regime, based on the Bermudian Standard Formula SCR, plus a 5% add-on required by the AXA’s lead supervisor (ACPR), as a transitional measure. In compliance with the ACPR’s decision, from January 1, 2019, XL entities have been fully consolidated for Solvency II purposes (as per the consolidation-based method set forth in the Solvency II Directive) and their contribution to the Group’s solvency capital requirement has been calculated using the Solvency II standard formula. Subject to the prior approval of the ACPR, the Group intends as soon as FY 2020 to extend its internal model to XL entities. DEBT GEARING* Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt and undated subordinated debt) by total capital employed (consolidated shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus gross debt). Furthermore, following the deconsolidation of EQH and its subsequent accounting under the equity method, for 1H19 mandatory exchangeable bonds issued by AXA in May 2018 were excluded from the Debt Gearing. Activities INSURANCE LIFE & SAVINGS HYBRID AND G/A CAPITAL LIGHT PRODUCTS Hybrid products: Savings products allowing clients to invest in both Unit-Linked and General Account funds. G/A capital light products: General Account Savings products which, at inception, create more EOF than the economic capital they consume. LIFE & SAVINGS NET INFLOWS Life & Savings Net Inflows are defined as the collected premiums (including risk premiums, fees and revenues), net of surrenders, maturities, claims paid and other benefits paid. This definition is applicable to all Life and Savings products as well as Life-like Health products, with the exception of Mutual Funds products. Half Year 2019 Financial Report 73 I ACTIVITY REPORT – HALF YEAR 2019 NEW BUSINESS APE (NEW BUSINESS ANNUAL PREMIUM EQUIVALENT) It represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. NBV (NEW BUSINESS VALUE) The value of newly issued contracts during the current year. It consists of the present value of future profits after the costs of acquiring business, less (i) an allowance for the time value of financial option and guarantees, (ii) cost of capital and non-financial risks. AXA calculates this value net of tax. NBV MARGIN (NEW BUSINESS VALUE MARGIN) New Business Value Margin is the ratio of: New Business Value representing the value of newly issued contracts during the current year; to Annual Premium Equivalent. This ratio represents the profitability of the new business. MARGIN ANALYSIS The Margin Analysis is presented on an underlying earnings basis. Even though the presentation of the Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. Underlying investment margin includes the following items: net investment income; and interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income as well as the unwind of the discount rate used in calculating technical reserves. Underlying fees & revenues include: revenues derived from mutual fund sales (which are part of consolidated revenues); loadings charged to policyholders (or contractual charges) on premiums of all Life & Savings products; loadings on deposits received on all Life & Savings products and fees on funds under management for separate account (Unit-Linked) business; deferred income such as capitalization net of amortization of URR (Unearned Revenue Reserve) and UFR (Unearned Fee Reserve); and other fee revenues, e.g., fees received on financial planning or sales of third party products. Underlying net technical margin includes the following components: mortality and morbidity margin: the difference between income or earned premiums for assuming risk and the cost of benefits and claims charges directly linked to the claims experience or its anticipation (death or disability); surrender margin: the difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination; Half Year 2019 Financial Report 74 I ACTIVITY REPORT – HALF YEAR 2019 GMxB (Variable Annuity guarantees) active financial risk management: the net result from GMxB lines corresponding to explicit charges related to these types of guarantees less cost of hedging. It also includes the unhedged business result; policyholder bonuses if the policyholders participate in the risk margin; ceded reinsurance results; other changes in claims and insurance reserves: all the reserve strengthening or release coming from changes in valuation assumptions, claims experience, additional reserves for mortality risk and other technical impacts such as premium deficiencies net of derivatives if any; and claims handling costs. Underlying expenses include the following components: acquisition expenses, including commissions and general expenses allocated to new business; capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; amortization of Deferred Acquisition Costs (DAC) and net rights to future management fees for investment contracts without DPF, including the impact of interest capitalized; administrative expenses; and policyholder bonuses if the policyholder participates in the expenses of the Company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Life & Savings Margin Analysis as set out below: For insurance contracts and investment contracts with Discretionary Participation Features (DPF): o gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees & Revenues” and “Net Technical Margin”, o policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”, o the “Investment margin” represents the net investment result in the Statement of Income and is adjusted to consider the related policyholder participation (see above) as well as changes in specific reserves linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees & Revenues”, o change in URR (Unearned Revenue Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis; For investment contracts without DPF: o deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the Underlying Statement of Income within Gross Consolidated Revenues on a separate line, and in Margin Analysis in the lines “Fees & Revenues” and “Net Technical Margin”, Half Year 2019 Financial Report 75 I ACTIVITY REPORT – HALF YEAR 2019 o change in UFR (Unearned Fee Reserve - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the Underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis. INSURANCE RATIOS (APPLICABLE TO PROPERTY & CASUALTY, HEALTH AND PROTECTION ACTIVITIES) Current accident year loss ratio net of reinsurance is the ratio of: current year claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on current accident year, excluding for the discounted reserves the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. Underlying expense ratio is the ratio of: underlying expenses (excluding claims handling costs, including changes in VBI amortization); to earned revenues gross of reinsurance. Underlying expenses include two components: expenses (including commissions) related to acquisition of contracts (with the related acquisition expense ratio) and all other expenses excluding claims handling costs (with the related administrative expense ratio). Underlying expenses exclude customer intangible amortization, but include the impact from the changes in VBI amortization. The Underlying Combined ratio* is the sum of the all accident year loss ratio and the underlying expense ratio. ASSET MANAGEMENT Net inflows: Inflows of client money less outflows of client money. Net inflows are used by the Management to measure the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying cost income ratio is the ratio of: general expenses excluding distribution related expenses; to gross revenues excluding distribution fees received. Assets under management (AUM) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers and AB. AUM only includes funds and mandates which generate fees and exclude double counting. BANKING Operating net banking revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of “fair-value-P&L” assets and of hedging derivatives. Half Year 2019 Financial Report 76 I II. Consolidated Financial statements / Half Year 2019 Table of Contents II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...................................................................................... 79 II.2 CONSOLIDATED STATEMENT OF INCOME ............................................................................................................ 81 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME .............................................................................. 82 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY........................................................................................ 83 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS .................................................................................................... 85 NOTE 1 ACCOUNTING PRINCIPLES ......................................................................................................................... 87 NOTE 2 SCOPE OF CONSOLIDATION ...................................................................................................................... 89 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT ........................................................................... 93 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES .......................................................................................... 96 NOTE 5 INVESTMENTS .......................................................................................................................................... 100 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS ............................................................................ 108 NOTE 7 FINANCING DEBT ...................................................................................................................................... 115 NOTE 8 NET INCOME PER ORDINARY SHARE ....................................................................................................... 116 NOTE 9 SUBSEQUENT EVENTS ............................................................................................................................. 117 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in Euro million) June 30, 2019 Goodwill 16,855 Value of purchased business in force (a) 1,663 Deferred acquisition costs and equivalent 15,672 Other intangible assets 4,738 Intangible assets 38,929 Investments in real estate properties 21,429 Financial investments 481,413 Assets backing contracts where the financial risk is borne by policyholders (b) 68,961 5 Investments from insurance activities 571,804 5 Investments from banking and other activities 43,585 Investments accounted for using the equity method 7,057 Reinsurers' share in insurance and investment contracts liabilities 22,170 Tangible assets 2,959 Deferred policyholders' participation assets Deferred tax assets 661 Other assets 3,620 Receivables arising from direct insurance and inward reinsurance operations 28,642 Receivables arising from outward reinsurance operations 2,269 Receivables - current tax 909 Other receivables 11,638 Receivables 43,459 4 Assets held for sale (c) 9,219 Cash and cash equivalents 23,666 TOTAL ASSETS 763,509 Note: All invested assets are shown net of related derivative instruments impact. (a) Amounts are gross of tax. (b) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) Amounts included the assets relating to the Group Life portfolio in Switzerland, AXA Life Europe and AXA Wealth Management (HK) Limited for which the disposal processes were not finalized at periods-end. Half Year 2019 Financial Report December 31, 2018 16,771 2,087 26,415 5,041 50,313 20,939 525,338 160,176 706,452 41,809 2,929 25,751 1,599 303 915 2,817 25,259 1,944 962 14,745 42,911 26,384 31,329 930,695 79 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 Notes (in Euro million) June 30, 2019 Share capital and capital in excess of nominal value 26,040 Reserves and translation reserve 38,352 Net consolidated income - Group share 2,333 Shareholders’ equity – Group share 66,725 Minority interests 5,538 6 TOTAL SHAREHOLDERS' EQUITY 72,263 Subordinated debt 11,368 Financing debt instruments issued 1,647 Financing debt owed to credit institutions 7 Financing debt (a) 13,015 Liabilities arising from insurance contracts 374,868 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (b) 53,902 Total liabilities arising from insurance contracts 428,769 Liabilities arising from investment contracts with discretionary participating features 34,561 Liabilities arising from investment contracts with no discretionary participating features Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 914 3,008 12,588 Total liabilities arising from investment contracts 51,071 Unearned revenue and unearned fee reserves 2,174 Liabilities arising from policyholder participation and other obligations 53,848 Derivative instruments relating to insurance and investment contracts (877) Liabilities arising from insurance and investment contracts 534,986 Liabilities arising from banking activities (a) 38,890 Provisions for risks and charges 9,578 Deferred tax liabilities 5,397 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders 7,609 Other debt instruments issued, notes and bank overdrafts (a) 4,472 Payables arising from direct insurance and inward reinsurance operations 9,251 Payables arising from outward reinsurance operations 12,201 Payables – current tax 1,461 Collateral debts relating to investments under lending agreements or equivalent 32,761 Other payables 14,579 Payables 82,334 4 Liabilities held for sale (c) 7,045 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 763,509 (a) Amounts are shown net of related derivative instruments impact. (b) Includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) Amounts included the liabilities relating to the Group Life portfolio in Switzerland, AXA Life Europe and AXA Wealth Management (HK) Limited, for which the disposal processes were not finalized at periods-end. Half Year 2019 Financial Report December 31, 2018 26,044 34,244 2,140 62,428 10,824 73,252 10,876 5,096 15,971 437,015 146,058 583,073 34,225 4,837 2,785 11,747 53,593 2,722 40,625 (1,795) 678,219 36,054 11,363 4,621 6,796 7,104 10,307 11,488 940 32,814 17,048 86,498 24,718 930,695 80 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 II.2 CONSOLIDATED STATEMENT OF INCOME Notes (in Euro million, except EPS in Euro) June 30, 2019 Gross written premiums 55,684 Fees and charges relating to investment contracts with no participating features 121 Revenues from insurance activities 55,805 Net revenues from banking activities 226 Revenues from other activities 1,918 Revenues (a) 57,949 Change in unearned premiums net of unearned revenues and fees (5,203) Net investment income (b) 5,756 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (c) 418 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (d) 15,786 of which change in fair value of assets with financial risk borne by policyholders (e) 15,154 Change in investments impairments (f) (91) Net investment result excluding financing expenses 21,869 Technical charges relating to insurance activities (e) (58,214) Net result from outward reinsurance (689) Bank operating expenses (31) Acquisition costs (6,718) Amortization of the value of purchased business in force (31) Administrative expenses (5,541) Change in goodwill impairment and other intangible assets impairment and amortization (79) Other income and expenses 68 Other operating income and expenses (71,235) Income from operating activities before tax 3,380 Income (net of impairment) from investment accounted for using the equity method 260 Financing debts expenses (g) (433) Net income from operating activities before tax 3,208 Income tax (636) 4 Net operating income 2,572 4 Net loss on held for sale Group Life portfolio in Switzerland (h) Net consolidated income after tax 2,572 Split between : Net consolidated income - Group share 2,333 Net consolidated income - Minority interests 239 8 8 Earnings per share Fully diluted earnings per share 0.92 0.92 (a) Gross of reinsurance. (b) Net of investment management costs and including gains/losses from derivatives hedging variable annuities. (c) Includes impairment releases on investments sold and the loss related to AXA Equitable Holdings, Inc. deconsolidation and the fair value revaluation of the investment retained (See Note 4.1). (d) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (f) Excludes impairment releases on investments sold. (g) Includes net balance of income and expenses related to derivatives on financing debt (nonetheless excludes change in fair value of these derivatives). (h) As of June 30, 2018, mainly related to VBI impairment associated to the Group Life portfolio in Switzerland classified as held for sale. Half Year 2019 Financial Report June 30, 2018 50,381 122 50,503 233 2,863 53,600 (4,378) 7,044 1,195 (133) 839 (324) 7,781 (41,721) (368) (35) (5,472) (34) (4,986) (53) (134) (52,804) 4,200 130 (178) 4,151 (795) 3,356 (347) 3,009 2,796 213 1.13 1.12 81 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2019 Reserves relating to changes in fair value through shareholders' equity 6,404 Translation reserves (347) Items that may be reclassified subsequently to Profit or Loss 6,057 Employee benefits actuarial gains and losses (402) Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk (16) Items that will not be reclassified subsequently to Profit or Loss (418) Net gains and losses recognized directly through shareholders' equity 5,639 Net consolidated income 2,572 Split between: Net consolidated income - Group share 2,333 Net consolidated income - Minority interests 239 TOTAL COMPREHENSIVE INCOME (CI) 8,211 Split between: Total comprehensive income - Group share 7,582 Total comprehensive income - Minority interests 629 Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Tax, policyholder participation and related effects are further detailed in the Notes to the Consolidated Financial statements. Half Year 2019 Financial Report June 30, 2018 (2,545) 948 (1,597) 404 13 417 (1,181) 3,009 2,796 213 1,829 1,954 (125) 82 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to shareholders Share Capital Other reserves Number of shares (in thousands) Nominal value (in Euro) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves (c) Shareholders' equity Group share (in Euro million, except for number of shares and nominal value) Shareholders' equity opening January 1, 2019 2,424,917 2.29 5,553 21,894 (1,038) 11,566 302 6,776 (2,395) 19,770 62,428 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt (9,954) - - - - - - - 2.29 - - - - - - - (23) - - - - - - - (229) 17 - - - - - - - 353 - - - - - - - - - - - - - - - - - - - - - (121) - 0 - - - - - - - - - - - - - - (98) 4 (23) (229) 17 353 (121) - 0 (98) Others (including impact on change in scope) (b) 0 (0) (0) 4 Dividends paid (3,189) (3,189) Impact of transactions with shareholders (9,954) 2.29 (23) (212) 353 0 (0) (121) (0) (3,283) (3,286) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income Total Comprehensive Income (CI) - - - - - - - - - - 6,141 - 6,141 50 - 50 13 - 13 (541) - (541) (398) (16) 2,333 1,919 6,191 (528) (398) (16) 2,333 7,582 Shareholders' equity closing June 30, 2019 2,414,962 2.29 5,530 21,682 (685) 17,707 353 6,668 (2,936) 18,405 66,725 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI) (see Note 6.1.1). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. (c) Includes the first time application impact of IFRS 16 Leases (€-77 million Group share ) and IFRIC 23 Uncertainty over Income Tax Treatments (€-110 million Group share). AXA has chosen to adopt the new standards retrospectively through the cumulative effect approach with an adjustment to the opening balance of retained earnings in 2019. Therefore there is no restatement of comparative information for the year 2018. Half Year 2019 Financial Report Minority interests 10,824 - - - - (614) - - (5,301) (5,915) 213 181 (4) 0 239 629 5,538 83 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 Attributable to shareholders Share Capital Other reserves Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share (in Euro million, except for number of shares and nominal value) Shareholders' equity opening January 1, 2018 2,425,236 2.29 5,554 20,904 (1,060) 15,992 272 7,318 (4,142) 24,773 69,611 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) Dividends paid Impact of transactions with shareholders (1,889) - - - - - - - - - (1,889) 2.29 - - - - - - - - - 2.29 (4) - - - - - - - - - (4) (50) 16 - - - - - - - (33) - - 29 - - - - - - 29 - - - - - - - (9) - (9) - - - - - - - 0 - 5 - - - - - - - 0 - 5 - - - (40) - - - - - (40) - - - - - - - 5 - 5 - - - - - - (110) (2,445) (2,998) (5,554) (4) (50) 16 29 (40) - - (110) (2,450) (2,998) (5,607) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - (2,409) - - 76 - 832 - 641 13 2,796 (2,404) 909 641 13 2,796 Total Comprehensive Income (CI) (2,409) 5 76 832 3,450 1,955 Shareholders' equity closing June 30, 2018 2,423,347 2.29 5,549 20,870 (1,031) 13,574 277 7,354 (3,304) 22,669 65,959 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI), equity components of compounded financial instruments (e.g. convertible bonds) (see Note 6.1.2). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2019 Financial Report Minority interests 5,656 - - - - 587 - - 4,947 - 5,534 (142) 40 (237) 0 213 (125) 11,065 84 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2019 Operating income including discontinued operations before tax 3,208 Net amortization expense (a) 777 Change in goodwill impairment and other intangible assets impairment (b) 23 Net change in deferred acquisition costs and equivalent (1,168) Net increase / (write back) in impairment on investments, tangible and other intangible assets 89 Change in fair value of investments at fair value through profit or loss (16,132) Net change in liabilities arising from insurance and investment contracts (c) 19,495 Net increase / (write back) in other provisions (d) (238) Income (net of impairment) from investment accounted for using the equity method (286) Adjustment of non cash balances included in the operating income before tax 2,561 Net realized investment gains and losses (39) Financing debt expenses 433 Adjustment for reclassification to investing or financing activities 393 Dividends recorded in profit or loss during the period (1,524) Investment income & expense recorded in profit or loss during the period (e) (4,768) Adjustment of transactions from accrued to cash basis (6,292) Net cash impact of deposit accounting (83) Dividends and interim dividends collected 1,592 Investment income (e) 7,460 Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (2,175) Net operating cash from banking activities Change in operating receivables and payables Net cash provided by other assets and liabilities (f) Tax expenses paid Other operating cash impact and non cash adjustment 179 (2,344) 197 (268) (329) Net cash impact of transactions with cash impact not included in the operating income before tax 4,231 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 4,101 Purchase of subsidiaries and affiliated companies, net of cash acquired (14) Disposal of subsidiaries and affiliated companies, net of cash ceded (2,673) Net cash related to changes in scope of consolidation (2,688) Sales of debt instruments (f) 30,374 Sales of equity instruments and non consolidated investment funds (f) (g) 8,580 Sales of investment properties held directly or not (f) 1,502 Sales and/or repayment of loans and other assets (f) (h) 11,790 Net cash related to sales and repayments of investments (f) (g) (h) 52,246 Purchases of debt instruments (f) (34,007) Purchases of equity instruments and non consolidated investment funds (f) (g) (9,941) Purchases of investment properties held direct or not (f) (2,155) Purchases and/or issues of loans and other assets (g) (h) (9,962) Net cash related to purchases and issuance of investments (f) (g) (h) (56,064) Sales of tangible and intangible assets 10 Purchases of tangible and intangible assets (192) Net cash related to sales and purchases of tangible and intangible assets (182) Half Year 2019 Financial Report June 30, 2018 4,151 188 (663) 328 13 7,465 (6) (129) 7,197 (1,089) 178 (911) (1,850) (5,763) (7,614) 41 2,017 8,264 (1,938) 584 (3,565) (618) (639) (262) 3,883 6,706 0 92 92 32,586 10,949 786 12,431 56,752 (31,644) (9,557) (1,266) (11,452) (53,920) 1 (319) (317) 85 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 Increase in collateral payable / Decrease in collateral receivable 132,131 Decrease in collateral payable / Increase in collateral receivable (132,295) Net cash impact of assets lending / borrowing collateral receivables and payables (164) NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES (6,851) Issuance of equity instruments 21 Repayments of equity instruments (819) Transactions on treasury shares 0 Dividends payout (3,447) Interests on undated subordinated debts paid (117) Acquisition / sale of interests in subsidiaries without change in control (45) Net cash related to transactions with shareholders (4,408) Cash provided by financial debts issuance 6 Cash used for financial debts repayments (541) Interests on financing debt paid (i) (292) Net interest margin of hedging derivatives on financing debt Net cash related to Group financing (826) NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (5,234) CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 30,556 Net cash provided by operating activities 4,101 Net cash provided by investing activities (6,851) Net cash provided by financing activities (5,234) Impact of change in consolidation method and of reclassifications as held for sale (k) (27) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents 139 CASH AND CASH EQUIVALENT AS OF JUNE 30 (j) 22,684 (a) Includes premiums/discounts capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes gains/losses from derivatives hedging variable annuities. (f) Includes related derivatives. (g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (j) Net of bank overdrafts. (k) Amounts included the assets and liabilities of Group Life portfolio in Switzerland, AXA Life Europe and AXA Wealth Management (HK) Limited, for which the disposals processes were not finalized at periods-end. (in Euro million) June 30, 2019 Cash and cash equivalents 23,666 Bank overdrafts (a) (982) Cash and cash equivalents as of June 30 (b) 22,684 (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (unit-linked contracts). Half Year 2019 Financial Report 50,506 (46,816) 3,690 6,298 18 (0) (1) (3,323) (131) 2,817 (620) 5,860 (45) (159) 12 5,667 5,048 23,196 6,706 6,298 5,048 (3,447) 1,669 39,469 June 30, 2018 40,245 (776) 39,469 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 1 ACCOUNTING PRINCIPLES 1.1 General information AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, the Americas, Asia and Africa. The list of the main entities included in the scope of AXA’s consolidated financial statements is provided in Note 2 of the Notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all Notes were set by the Board of Directors on July 31, 2019. 1.2 General accounting principles AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2019. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2018. The 2019 half year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2018 Annual Report. IFRS REQUIREMENTS ADOPTED ON JANUARY 1, 2019 IFRS 16 – Leases, published on January 13, 2016 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (“lessee”) and the supplier (“lessor”). Under the IFRS 16 model a lessee is required to recognize (i) assets and liabilities for all leases and (ii) depreciation of lease assets separately from interest on lease liabilities in the income statement. Lessors continue to classify and account for their leases as (i) operating leases with recognition of the underlying assets; or (ii) finance leases by derecognizing the underlying asset and recognition of a net investment, similar to the IAS 17 requirements. The cumulative effect of initially applying IFRS 16 totaled €77 million and was recognized as a negative adjustment to the opening balance of retained earnings on January 1, 2019. This mainly relates to property leases for offices. The new standard increased assets of €2.3 billion and liabilities of €2.4 billion as of January 1, 2019. The difference with the amount of lease commitments given as of December 31, 2018 (€2.6 billion) mainly results from the discount impact, as the lease liability is calculated as the present value of future lease payments. At the transition date, discount rates for leases denominated in Euro range from -0.20% to 2.009% depending on their duration. As at June 30, 2019, lease liability and lease asset (called “right-of-use”) respectively amounted to €1.6 billion and €1.5 billion. The evolution compared to January 1, 2019 is mainly explained by the deconsolidation of EQH, which is now accounted for using the equity method. As permitted by the standard, lease payments related to short-term leases (i.e leases with a term of less than 12 months) and low-value assets are directly recognized as an expense. Half Year 2019 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 IFRIC 23 - Uncertainty over tax treatment published on June 7, 2017 clarifies how to account for income tax when it is unclear whether the tax authority will accept the tax treatment applied in the tax return. The cumulative effect of initially applying IFRIC 23 totaled €111 million and was recognized as a negative adjustment to the opening balance of retained earnings on January 1, 2019. Moreover, IFRIC 23 requires Uncertain Tax Position (UTP) to be presented in current and deferred taxes. Therefore, the amount of UTP existing at January 1, 2019, (€862 million) was reclassified from provisions for risks and charges to current and deferred taxes. As at June 30, 2019 UTP amounted to €491 million; the evolution compared to January 1, 2019 is mainly explained by the deconsolidation of EQH, which is now accounted for using the equity method. The application of the amendments below as of January 1, 2019 had no material impact on the Group’s consolidated interim financial statements. Amendments Publication date Topic IAS 28 - Long-term Interests in Associates and Joint Ventures October 12, 2017 Clarification that a company applies IFRS 9 –Financial Instruments to long-term interests in an associate or joint venture to which the equity method is not applied but that in substance form part of the net investment in the associate or joint venture (long-term interests). Annual Improvements to IFRS 2015 - 2017 Cycle December 12, 2017 Collection of amendments to IFRS in response to issues that are not part of a major project. IAS 19 - Employee Benefits Plan Amendment, Curtailment or Settlement February 7, 2018 The amendments clarify the accounting when a plan amendment, curtailment or settlement occurs. Indeed, if a plan amendment, curtailment or settlement occurs, the current service cost and the net interest for the period after the remeasurement are determined using the assumptions used for the remeasurement. Amendments also clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at the year ended December 31, 2018. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non- current items. As for most insurance companies, expenses are classified by destination in the income statement. All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the Notes are expressed in Euro million. Half Year 2019 Financial Report 88 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 2 SCOPE OF CONSOLIDATION 2.1 Consolidated companies 2.1.1 MAIN FULLY CONSOLIDATED COMPANIES June 30, 2019 December 31, 2018 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA SA and Other Holdings France AXA Parent company Parent company CFP Management 100.00 100.00 100.00 100.00 AXA Services SAS 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA Asia 100.00 100.00 100.00 100.00 United States AXA US Holding 100.00 100.00 100.00 100.00 The Netherlands Vinci BV 100.00 100.00 100.00 100.00 France AXA France IARD 99.92 99.92 99.92 99.92 AXA France Vie 99.77 99.77 99.77 99.77 AXA Protection Juridique 98.52 98.44 98.52 98.44 Avanssur 100.00 100.00 100.00 100.00 AXA France Participations 100.00 100.00 100.00 100.00 Genworth Financial European Group Holdings 100.00 100.00 100.00 100.00 Financial Assurance Company Limited (Genworth) Merged with AXA France Vie 100.00 99.77 Financial Insurance Company Limited (Genworth) Merged with AXA France IARD 100.00 99.92 AXA Banque 100.00 99.89 100.00 99.89 AXA Banque Financement 65.00 64.93 65.00 64.93 Europe Germany AXA Versicherung AG 100.00 100.00 100.00 100.00 AXA Lebensversicherung AG 100.00 100.00 100.00 100.00 Deutsche Ärzteversicherung 100.00 100.00 100.00 100.00 AXA Krankenversicherung AG 100.00 100.00 100.00 100.00 Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 AXA Bank AG 100.00 100.00 100.00 100.00 Roland Rechtsschutz-Versicherungs-AG 60.00 60.00 60.00 60.00 United Kingdom & Ireland Guardian Royal Exchange Plc 100.00 99.98 100.00 99.98 AXA UK Plc 100.00 99.98 100.00 99.98 AXA Equity & Law Plc 99.96 99.96 99.96 99.96 AXA Insurance UK Plc 100.00 99.98 100.00 99.98 AXA PPP Healthcare Limited 100.00 99.98 100.00 99.98 Architas Multi-Manager Limited 100.00 100.00 100.00 100.00 AXA Insurance Limited 100.00 99.98 100.00 99.98 AXA Life Europe Limited 100.00 100.00 100.00 100.00 Spain AXA Seguros Generales, S. A. AXA Aurora Vida, S. A. de Seguros Relution Relution 99.91 99.84 99.91 99.84 99.90 99.83 99.90 99.83 Switzerland AXA Life AXA-ARAG Legal Assistance 100.00 66.67 100.00 66.67 100.00 66.67 100.00 66.67 Half Year 2019 Financial Report 89 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 AXA Insurance 100.00 100.00 100.00 Italy AXA Assicurazioni e Investimenti AXA MPS Vita 100.00 50.00 + 1 voting right 100.00 50.00 100.00 50.00 + 1 voting right AXA MPS Danni AXA MPS Financial 50.00 + 1 voting right 50.00 + 1 voting right 50.00 50.00 50.00 + 1 voting right 50.00 + 1 voting right Belgium Ardenne Prévoyante AXA Belgium S. A. AXA Holdings Belgium Touring Assurances S. A. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Asia National Mutual International Pty Ltd. 100.00 100.00 100.00 Japan AXA Japan Holding AXA Life Insurance AXA Non Life Insurance Co. Ltd. New company Relution Relution 98.70 100.00 100.00 98.70 98.70 98.70 98.69 100.00 Hong Kong AXA China Region Limited AXA General Insurance Hong Kong Ltd. 100.00 100.00 100.00 100.00 100.00 100.00 Indonesia MLC Indonesia 100.00 100.00 100.00 Thailand AXA Insurance Public Company Limited 99.47 99.47 99.47 South Korea Kyobo AXA General Insurance Co. Ltd. 99.71 99.71 99.71 AXA XL XL Group (a) 100.00 100.00 100.00 AXA Corporate Solutions Assurance (sub group) 98.75 98.75 98.75 AXA Art 100.00 100.00 100.00 International AXA Mediterranean Holding S. A. AXA Bank Belgium (sub group) 100.00 100.00 100.00 100.00 100.00 100.00 Colombia AXA Colpatria Seguros AXA Colpatria Seguros de vida 51.00 51.00 51.00 51.00 51.00 51.00 Morocco AXA Assurance Maroc AXA Al Amane Assurance AXA Holding Maroc S. A. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Turkey AXA Hayat ve Emeklilik A. S. 100.00 100.00 100.00 AXA Sigorta A. S. 92.61 92.61 92.61 AXA Turkey Holding W.L.L 100.00 100.00 100.00 The Gulf Region AXA Cooperative Insurance Company AXA Insurance B.S.C.c. 50.00 50.00 34.00 50.00 50.00 50.00 Greece AXA Insurance A.E. 99.98 99.98 99.98 Mexico AXA Seguros S.A. de C.V. 100.00 100.00 100.00 Luxembourg AXA Assurances Luxembourg AXA Assurances Vie Luxembourg AXA Luxembourg S. A. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Czech Republic & Slovak Republic AXA Czech Republic Pension Funds AXA Czech Republic Insurance AXA Slovakia 99.99 100.00 100.00 99.99 100.00 100.00 99.99 100.00 100.00 Poland AXA Poland AXA Poland Pension Funds AXA Ubezpieczenia TUIR S.A 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Singapore AXA Financial Services Singapore pte Ltd. AXA Life Insurance Singapore 100.00 100.00 100.00 100.00 100.00 100.00 Half Year 2019 Financial Report 100.00 100.00 50.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 98.69 98.69 100.00 100.00 100.00 99.47 99.71 100.00 98.75 100.00 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 34.00 50.00 99.98 100.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 90 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 AXA Insurance Singapore 100.00 100.00 100.00 100.00 Malaysia AXA Affin General Insurance Berhad 50.00 50.00 50.00 50.00 India AXA India Holding 100.00 100.00 100.00 100.00 Other AXA Investment Managers (sub group) AXA Global Re AXA Assistance SA (sub group) Colisée Ré Dilution 97.64 100.00 100.00 100.00 97.57 100.00 100.00 100.00 97.80 100.00 100.00 100.00 97.73 100.00 100.00 100.00 (a) XL Group mainly operates in the United States, the United Kingdom, Bermuda, Switzerland, France, Ireland, Singapore, Germany, Australia and Canada. CONSOLIDATED INVESTMENT FUNDS AND REAL ESTATE COMPANIES As of June 30, 2019, investment funds represented a total of €125,794 million invested assets (€117,337 million as of December 31, 2018), corresponding to 290 investment funds mainly in France, Japan, Germany, Switzerland and Belgium. In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2019, these liabilities amounted to €7,540 million (€6,799 million as of December 31, 2018). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholders’ equity amounted to €1,512 million as of June 30, 2019 (€2,275 million as of December 31, 2018). As of June 30, 2019, 26 consolidated real estate companies corresponded to a total of €14,230 million invested assets (€12,798 million as of December 31, 2018), mainly in France, Germany and Japan. 2.1.2 MAIN INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30, 2019 December 31, 2018 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie 39.98 39.98 39.98 39.98 Asia Philippines AXA Life Insurance Corporation Krungthai AXA Life Insurance Company Ltd. 45.00 50.00 45.00 50.00 45.00 50.00 45.00 50.00 ICBC-AXA Life Insurance Company Ltd. 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services AXA Tian Ping AXA SPDB Investment Managers Company limited Relution 49.00 50.00 39.00 49.00 50.00 38.05 49.00 50.00 39.00 49.00 50.00 38.11 United States AXA Equitable Holdings, Inc. (previously AXA America Holdings, Inc.) From Full Consolidation to Equity Method 40.14 40.14 59.25 59.25 AXA Equitable Life Insurance Company From Full Consolidation to Equity Method 40.14 100.00 59.25 AB (sub group) From Full Consolidation to Equity Method 26.16 65.16 38.61 International Reso Garantia (RGI Holdings B.V.) (Russia) Bharti AXA Life (India) Bharti AXA General Insurance Company Limited (India) AXA Middle East SAL (Lebanon) AXA Mansard Insurance plc (Nigeria) 39.34 49.00 49.00 51.00 77.79 39.34 49.00 49.00 51.00 77.79 39.34 49.00 49.00 51.00 77.79 39.34 49.00 49.00 51.00 77.79 Other AXA Investment Managers Asia Holdings Private Limited Kyobo AXA Investment Managers Company Limited Relution Relution 49.00 50.00 47.81 48.79 49.00 50.00 47.89 48.86 INVESTMENT FUNDS AND REAL ESTATE ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD As of June 30, 2019, real estate companies accounted for using the equity method amounted to €138 million invested assets (€157 million as of December 31, 2018) and investment funds accounted for using the equity Half Year 2019 Financial Report 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 method amounted to €5,524 million invested assets (€4,979 million as of December 31, 2018), mainly in the United States, France, Belgium, United Kingdom, Japan and Switzerland. Half Year 2019 Financial Report 92 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT AXA’s Chief Executive Officer (CEO), acting as chief operating decision maker, is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA's business segments and holding companies reported to the Board of Directors twice a year is consistent with the presentation provided in the consolidated financial statements. Following the completion of the acquisition of XL Group on September 12, 2018, the financial reporting has been aligned and retroactively restated under seven segments. The CEOs supervising the main geographies (respectively CEO of AXA France, CEO of AXA in Europe, CEO of AXA in Asia, CEO of AXA XL, CEO of AXA US (until the loss of control over AXA Equitable Holdings, Inc.), CEO of International) are members of the Management Committee. Key transversal entities and Central Holdings are managed alongside these six geographies. The results of operating activities and non-operating activities are presented on the basis of seven segments: France, Europe, Asia, AXA XL, the United States, International and Transversal & Central Holdings. France: The French market consists of in Life & Savings and Property & Casualty activities, AXA Banque France and French holdings. Europe: The European market consists of Life & Savings and Property & Casualty activities in Switzerland, Germany, Belgium, Spain, the United Kingdom & Ireland and Italy. The German bank and the holding companies in these countries are also included in the segment Europe. Asia: The Asian market consists of Life & Savings activities in Japan, Hong Kong and Asia High Potentials (Indonesia, Philippines, Thailand and China) as well as Property & Casualty activities in Hong Kong and Asia High Potentials (Thailand and China). The Asia-Direct entities (Japan and South Korea) and the holding companies of Japan and Asia / Pacific are also included in this segment. AXA XL: The AXA XL market mainly consists of Property & Casualty activities in XL Group, as well as AXA Corporate Solutions Assurance and AXA Art. XL holdings are also included. United States: This segment includes Life & Savings activities in the United States, ACS Life Reinsurance, asset management services offered by AB, and US holdings. International: The International market consist of Life & Savings and Property & Casualty activities in fourteen countries within Europe, Middle East, Africa, Latin America as well as in Singapore, in Malaysia and in India. AXA Bank Belgium and the holding companies in these countries are also included in this segment. Transversal & Central Holdings: includes transversal entities namely AXA Investment Managers, AXA Global Re, AXA Assistance, AXA Liabilities Managers and AXA Life Europe, as well as AXA SA and other Central Holdings. The intersegment eliminations include only operations between entities from different countries and operating activities. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. In this document, “Insurance” covers the three insurance activities: Life & Savings, Property & Casualty and Health. Half Year 2019 Financial Report 93 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 3.1 Consolidated Statement of Income by segment June 30, 2019 (in Euro million) France Europe Asia AXA XL United States International Transversal & Central Holdings Intersegment Eliminations Total Gross written premiums 13,469 19,955 4,825 10,522 3,321 3,451 677 (535) 55,684 Fees and charges relating to investment contracts with no participating features 1 63 18 39 121 Revenues from insurance activities 13,470 20,018 4,843 10,522 3,321 3,490 677 (535) 55,805 Net revenues from banking activities 58 (0) 161 6 226 Revenues from other activities 3 175 0 1,007 32 921 (219) 1,918 Revenues 13,531 20,192 4,843 10,522 4,328 3,684 1,598 (748) 57,949 Change in unearned premiums net of unearned revenues and fees (469) (2,686) (55) (1,767) (11) (312) (49) 146 (5,203) Net investment income (b) 2,192 2,475 672 550 (375) 273 24 (55) 5,756 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 290 3,180 3,106 560 1,087 1,146 113 692 705 56 (37) (9) 11,139 9,926 5 232 204 (597) (504) 68 0 (3) 0 418 15,786 15,154 Change in investments impairment (14) (39) (21) (7) (4) (6) (91) Net investment result excluding financing expenses Technical charges relating to insurance activities 5,649 (15,030) 4,083 (16,355) 1,455 (4,695) 563 (5,863) 10,754 (13,600) 505 (2,342) (1,082) (527) (57) 198 21,869 (58,214) Net result from outward reinsurance (164) (186) (16) (476) 93 (161) 7 215 (689) Bank operating expenses (5) (3) (22) (31) Acquisition costs (1,535) (2,048) (567) (1,404) (319) (642) (255) 52 (6,718) Amortization of the value of purchased business in force (23) (6) (0) (1) (31) Administrative expenses (805) (1,292) (288) (968) (742) (416) (1,185) 156 (5,541) Change in goodwill impairment and other intangible assets impairment (23) (8) (23) (7) (18) (0) (79) Other income and expenses (5) (8) 2 (0) (113) 22 261 (92) 68 Other operating income and expenses Income from operating activities before tax Income (net of impairment) from investment accounted for using the equity method (17,544) 1,167 5 (19,938) 1,651 (5,580) 663 98 (8,734) 584 1 (14,689) 382 110 (3,580) 297 33 (1,699) (1,232) 12 529 (131) (71,235) 3,380 260 Financing debt expenses (1) (51) (4) (97) (52) (6) (351) 131 (433) Net income from operating activities before tax 1,171 1,600 757 488 440 324 (1,571) 0 3,208 Income tax (296) (341) (128) (92) (39) (58) 320 (636) Net operating income 874 1,259 629 396 401 266 (1,252) 2,572 Result from discontinued operations net of tax Net consolidated income after tax 874 1,259 629 396 401 266 (1,252) 2,572 Split between : Net consolidated income - Group share Net consolidated income - Minority interests (a) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. 872 1,207 625 394 257 232 (1,254) 2 51 4 2 143 34 3 0 (0) 2,333 239 Half Year 2019 Financial Report of which Insurance (a) 55,684 121 55,805 675 56,480 (5,203) 5,348 1,013 16,407 15,154 (82) 22,686 (58,214) (689) (6,718) (31) (3,926) (73) (28) (69,679) 4,284 208 (12) 4,479 (589) 3,890 3,890 3,712 178 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 June 30, 2018 (in Euro million) France Europe Asia AXA XL United States International Transversal & Central Holdings Intersegment eliminations Total Gross written premiums 13,028 21,682 4,339 1,766 5,987 3,235 675 (330) 50,381 Fees and charges relating to investment contracts with no participating features 1 66 18 38 122 Revenues from insurance activities 13,028 21,748 4,357 1,766 5,987 3,272 675 (330) 50,503 Net revenues from banking activities 41 12 168 13 233 Revenues from other activities 2 138 1 0 1,992 33 961 (264) 2,863 Revenues 13,071 21,898 4,358 1,766 7,979 3,473 1,636 (581) 53,600 Change in unearned premiums net of unearned revenues and fees (528) (3,264) (1) (392) 51 (254) (61) 72 (4,378) Net investment income (b) 2,354 2,997 670 105 670 266 17 (34) 7,044 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 294 (425) (154) 626 (462) (244) 150 (190) (223) 42 (41) 74 1,250 1,490 (1) (24) (20) 9 (236) (10) 2 (5) 0 1,195 (133) 839 Change in investments impairment (160) (104) (29) (2) (0) (20) (9) (324) Net investment result excluding financing expenses Technical charges relating to insurance activities 2,062 (11,221) 3,057 (16,428) 601 (3,542) 104 (837) 1,994 (7,175) 220 (2,121) (219) (550) (38) 152 7,781 (41,721) Net result from outward reinsurance (152) (183) (17) (267) 24 (55) 183 98 (368) Bank operating expenses (3) (3) (29) (35) Acquisition costs (1,389) (1,983) (554) (157) (562) (613) (229) 15 (5,472) Amortization of the value of purchased business in force (21) (11) (1) (1) (34) Administrative expenses (678) (1,225) (255) (105) (1,341) (405) (1,199) 223 (4,986) Change in goodwill impairment and other intangible assets impairment (25) (8) (3) (18) (0) (53) Other income and expenses (2) (7) (21) 0 (266) 19 240 (96) (134) Other operating income and expenses Income from operating activities before tax Income (net of impairment) from investment accounted for using the equity method (13,444) 1,161 15 (19,875) 1,816 1 (4,409) 548 56 (1,366) 112 (9,324) 699 (3,222) 217 47 (1,555) (199) 10 391 (156) (52,804) 4,200 130 Financing debts expenses (0) (9) (1) (1) (76) (6) (240) 156 (178) Net income from operating activities before tax 1,175 1,808 603 111 624 258 (429) 0 4,151 Income tax (309) (372) (113) (36) (119) (42) 195 (795) Net operating income 866 1,436 491 75 505 217 (233) 3,356 Net loss on held for sale Group Life portfolio in Switzerland (d) (347) (0) (347) Net consolidated income after tax 866 1,089 491 75 505 216 (233) 3,009 Split between : Net consolidated income - Group share Net consolidated income - Minority interests (a) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (d) Mainly related to the VBI impairment related to the Group Life portfolio classified as held for sale. 863 1,054 487 75 363 190 (236) 3 35 3 1 142 27 3 0 (0) 2,796 213 Half Year 2019 Financial Report of which Insurance (a) 50,381 122 50,503 909 51,413 (4,378) 6,575 1,198 81 839 (309) 7,545 (41,721) (368) (5,472) (34) (3,004) (50) (76) (50,726) 3,854 119 (5) 3,968 (609) 3,359 (347) 3,012 2,922 90 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 AXA Equitable Holdings, Inc. MARCH 25TH SECONDARY COMMON STOCK OFFERING OF AXA EQUITABLE HOLDINGS, INC. AND RELATED SHARE BUYBACK On March 25, 2019, AXA completed a secondary public offering of 40,000,000 shares (the “Offering”), at a public offering price of USD 20.50 per share, of its U.S. subsidiary, AXA Equitable Holdings, Inc. (“EQH”) and the sale to EQH of 30,000,000 shares (the “Share Buyback”) at the per share price paid by the underwriters in the Offering. In addition, the underwriters exercised in full the over-allotment option to purchase an additional 6,000,000 EQH shares. Net proceeds (1) amounted to USD 1.5 billion or €1.3 billion, corresponding to the sale of 76,000,000 EQH shares in the Offering, the full exercise of the over-allotment option granted to the underwriters and the Share Buyback. Following this sale, AXA’s ownership in EQH decreased from 60.1% (2) to 48.3%. The reduction of its voting rights below 50% combined with the reduction of its Board membership to a minority share led to the loss of control of AXA over EQH, while continuing to retain a significant influence over its residual shareholding of EQH. As a result, AXA: deconsolidated EQH and accounted for its remaining ownership in EQH using the equity method; and reclassified the equity component of the Mandatory Exchangeable Bonds from non-controlling interests to financial liability. The Offering and the Share Buyback resulted in a negative net income impact of €-598 million as detailed in the table below: (in Euro million) Net Proceeds Fair value of retained stake in EQH 1,341 4,330 Total Fair Value 5,671 Consolidated Book Value 6,269 Net loss upon deconsolidation (598) o/w revaluation at fair value of retained stake o/w other comprehensive income recycling (1,165) 1,232 Employee benefits actuarial losses were reclassified from other comprehensive income to retained earnings for €-512 million. At the date of the transaction, the retained stake of EQH was adjusted to its fair value. A reconciliation of the summarized financial information to the carrying amount of the EQH under equity method is as follows: (1) Net of underwriting discounts and commissions. (2) Including the shares to be delivered on redemption of the mandatory exchangeable bonds into EQH shares, issued by AXA in May 2018. Half Year 2019 Financial Report 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 At the acquisition date (in Euro million) Intangible assets Investments Other assets TOTAL ASSETS 9,701 182,473 15,731 207,905 Liabilities arising from insurance and investment contracts Provisions for risks and charges Other liabilities TOTAL LIABILITIES 180,484 1,714 16,742 198,940 Net asset value 8,965 Net asset value - Group Share 4,330 Intangible assets mainly relate to value of business inforce and are amortized over the life of the portfolio of contracts. JUNE 7TH SECONDARY OFFERING OF AXA EQUITABLE HOLDINGS, INC.’S COMMON STOCK On June 7, 2019, AXA completed a secondary public offering of a further 40,000,000 shares of EQH’s common stock. Net proceeds (1) to AXA, corresponding to the sale of 40,000,000 EQH shares, amounted to USD 834 million or €739 million (2). Following this transaction, AXA’s ownership in EQH decreased from 48.3% (3) to 40.1%. In addition, AXA granted the underwriters a 30-day option to purchase up to an additional 6,000,000 EQH shares. The net gain of the sale amounted to €1 million. See details below: (in Euro million) Net Proceeds 738 Consolidated Book Value 737 Net Income Result 1 o/w other comprehensive income recycling 53 Employee benefits actuarial losses were reclassified from other comprehensive income to retained earnings for €-4 million. (1) Net of underwriting discounts and commissions. (2) Not including the proceeds from the potential exercise of the 30-day over-allotment option granted to the underwriters to purchase 6,000,000 EQH shares. (3) Including the shares to be delivered on redemption of the bonds mandatorily exchangeable into EQH shares, issued by AXA in May 2018. Half Year 2019 Financial Report 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 4.2 Group Life portfolio transformation in Switzerland On April 10, 2018, AXA entered into an agreement with its main occupational benefits foundations (1) to convert their business model from a full-value insurance (2) model to a semi-autonomous model (3). As at December 31, 2018, the operations affected by these disposals were treated as held for sale in AXA consolidated financial statements. On January 1, 2019, AXA Switzerland completed the transformation and most of the related assets and liabilities have been transferred to the occupational Foundations during the first half of 2019. Besides, during the first semester of 2019, AXA Switzerland entered in agreement with additional small occupational benefit foundations to convert their business model from a full insurance value to a semi- autonomous model on July 1, 2019 and January 1, 2020. Assets and liabilities were classified as held for sale in AXA’s consolidated financial statements as of June 30, 2019. There was no impact on net income for this operation as of June 30, 2019. As such, the major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: Assets (in Euro million) Investments Cash and cash equivalents Total assets held for sale Liabilities (in Euro million) Liabilities arising from insurance and investment contracts Total liabilities held for sale As of June 30, 2019, Other Comprehensive Income of invested assets in scope of the transaction was nil. As of June 30, 2019, the consolidated statement of income impact amounted to €+1 million. (1) Collective group pensions schemes, which are managed by an independent Board. (2) Contract covering the whole offer: guaranted savings and annuit benefits, death and disability benefits, and administration services. (3) Contract covering death and disability benefits, and administration services. Half Year 2019 Financial Report June 30, 2019 660 382 1,042 June 30, 2019 1,042 1,042 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 4.3 AXA to sell AXA Life Europe On August 1, 2018, AXA received an irrevocable offer from Cinven for the sale of AXA Life Europe. The sale is expected to take place in the second semester of 2019. The completion of the transaction is subjected to customary closing conditions, including the receipt of regulatory approvals. As such, the major classes of assets liabilities (net of intercompany balances with other AXA entities) presented as held for sale in AXA’s consolidated financial statements as of June 30, 2019: Assets (in Euro million) Other intangible assets Investments Other assets Cash and cash equivalents Total assets held for sale Liabilities (in Euro million) Liabilities arising from insurance and investment contracts Other liabilities Total liabilities held for sale As of June 30, 2019, the unrealized gains and losses in the scope of the transaction amounted to €+92 million. As of June 30, 2019, the consolidated statement of income included an exceptional loss of €-26 million, in addition to the €-18 million recognized as of December 31, 2018. 4.4 AXA to sell its Swiss Privilege franchise in Hong Kong (AXA Wealth Management (HK) Ltd.) On December 22, 2017, AXA entered into an agreement with Jeneration Holdings Limited to sell its Swiss Privilege franchise in Hong Kong, AXA Wealth Management (HK) Limited. However, on March 22, 2019, the transaction was cancelled by Jeneration Holdings Limited. AXA is in negotiation with other potential buyers, a new disposal agreement is expected to be finalized in the second semester. Hence the assets and liabilities remain classified as held for sale as of June 30, 2019. There was no impact on net income for this operation as of June 30, 2019. Half Year 2019 Financial Report June 30, 2019 316 5,686 (1,744) 948 5,207 June 30, 2019 5,121 73 5,194 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 5 INVESTMENTS 5.1 Breakdown of investments Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately. June 30, 2019 Insurance Investments as per Consolidated Statement of Financial Position Other activities Total (in Euro million) Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives Fair value 28,984 1,479 Carrying value 19,950 1,479 % (value balance sheet) 3.49% 0.26% Fair value 1,734 Carrying value 1,644 % (value balance sheet) 3.77% Fair value 30,718 1,479 Carrying value 21,594 1,479 % (value balance sheet) 3.51% 0.24% Investment in real estate properties 30,464 21,429 3.75% 1,734 1,644 3.77% 32,197 23,073 3.75% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 374,335 21,776 121 10,326 374,335 21,776 121 9,992 65.47% 3.81% 0.02% 1.75% 4,317 130 0 1,187 4,317 130 0 1,188 9.90% 0.30% 0.00% 2.72% 378,652 21,906 121 11,514 378,652 21,906 121 11,179 61.53% 3.56% 0.02% 1.82% Debt instruments 406,559 406,224 71.04% 5,634 5,634 12.93% 412,193 411,858 66.93% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 17,087 8,388 (0) 17,087 8,388 (0) 2.99% 1.47% 0.00% 1,655 592 3 1,655 592 3 3.80% 1.36% 0.01% 18,742 8,980 3 18,742 8,980 3 3.05% 1.46% 0.00% Equity instruments 25,475 25,475 4.46% 2,250 2,250 5.16% 27,725 27,725 4.51% Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 7,804 5,978 30 7,804 5,978 30 1.36% 1.05% 0.01% 106 20 106 20 0.24% 0.05% 7,910 5,998 30 7,910 5,998 30 1.29% 0.97% 0.00% Non consolidated investment funds 13,811 13,811 2.42% 126 126 0.29% 13,937 13,937 2.26% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 16,347 16,347 2.86% 262 262 0.60% 16,608 16,608 2.70% Macro-hedge and other derivatives (217) (217) 0.04% (405) (405) 0.93% (622) (622) 0.10% Sub total Financial instruments (excluding Loans) 461,975 461,640 80.73% 7,867 7,867 18.05% 469,842 469,507 76.29% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) Macro-hedge and other derivatives (0) - - 20,859 - (0) - - 19,774 - 0.00% - - 3.46% - 0 - - 36,012 (0) 0 - - 34,074 (0) 0.00% - - 78.18% 0.00% 0 - - 56,871 (0) 0 - - 53,847 (0) 0.00% - - 8.75% 0.00% Loans 20,859 19,774 3.46% 36,012 34,074 78.18% 56,871 53,847 8.75% Total Financial instruments 482,834 481,413 84.19% 43,879 41,941 96.23% 526,713 523,355 85.04% Assets backing contracts where the financial risk is borne by policyholders 68,961 68,961 12.06% 68,961 68,961 11.21% INVESTMENTS 582,259 571,804 100.00% 45,613 43,585 100.00% 627,872 615,389 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 513,298 502,843 87.94% (a) Includes infrastructure investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. Half Year 2019 Financial Report 100 II (in Euro million) Fair value Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives 28,461 1,435 Investment in real estate properties 29,896 Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 394,649 36,059 210 9,346 Debt instruments 440,264 Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 15,131 7,815 43 Equity instruments 22,990 Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 7,425 5,361 250 Non consolidated investment funds 13,036 Other assets designated as at fair value through profit or loss, held by consolidated investment funds 14,864 Macro-hedge and other derivatives 744 Sub total Financial instruments (excluding Loans) 491,897 Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) Macro-hedge and other derivatives 0 34,087 - Loans 34,087 Total Financial instruments 525,985 Assets backing contracts where the financial risk is borne by policyholders 160,176 INVESTMENTS 716,056 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 555,881 (a) Includes infrastructure investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and Receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 December 31, 2018 Insurance Investments as per Consolidated Statement of Financial Position Other activities Total Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) 19,504 2.76% 1,581 1,495 3.58% 30,042 20,999 2.81% 1,435 0.20% 1,435 1,435 0.19% 20,939 2.96% 1,581 1,495 3.58% 31,477 22,434 3.00% 394,649 55.86% 4,184 4,184 10.01% 398,833 398,833 53.30% 36,059 5.10% 183 183 0.44% 36,242 36,242 4.84% 210 0.03% 343 343 0.82% 553 553 0.07% 9,193 1.30% 938 938 2.24% 10,284 10,131 1.35% 440,111 62.30% 5,648 5,648 13.51% 445,912 445,759 59.57% 15,131 2.14% 1,466 1,466 3.51% 16,597 16,597 2.22% 7,815 1.11% 562 562 1.34% 8,377 8,377 1.12% 43 0.01% 19 19 0.05% 62 62 0.01% 22,990 3.25% 2,047 2,047 4.90% 25,036 25,036 3.35% 7,425 1.05% 98 98 0.23% 7,523 7,523 1.01% 5,361 0.76% 311 311 0.74% 5,672 5,672 0.76% 250 0.04% 193 193 0.46% 443 443 0.06% 13,036 1.85% 602 602 1.44% 13,639 13,639 1.82% 14,864 2.10% 169 169 0.40% 15,033 15,033 2.01% 744 0.11% 59 59 0.14% 803 803 0.11% 491,745 69.61% 8,526 8,526 20.39% 500,423 500,271 66.86% 0 0.00% - - - 0 0 0.00% 33,592 - 4.76% - 33,608 0 31,789 0 76.03% 0.00% 67,696 0 65,381 0 8.74% 0.00% 33,593 4.76% 33,609 31,789 76.03% 67,696 65,381 8.74% 525,338 74.36% 42,134 40,315 96.42% 568,119 565,652 75.60% 160,176 22.67% 160,176 160,176 21.41% 706,452 100.00% 43,715 41,809 100.00% 759,772 748,261 100.00% 546,276 77.33% Half Year 2019 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 5.2 Investment in real estate properties Investment in real estate properties includes buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, including the impact of all derivatives: June 30, 2019 December 31, 2018 Gross value Amortization Impairment Carrying value Fair value Gross value Amortization impairment Carrying value Fair value (in Euro million) Investment in real estate properties at amortized cost Insurance (a) 22,100 (1,518) (657) 19,925 28,959 21,918 (1,624) (752) 19,542 28,499 Other activities 1,644 (0) 1,644 1,734 1,495 (0) 1,495 1,581 All activities excluding derivatives 23,744 (1,518) (657) 21,569 30,693 23,413 (1,624) (752) 21,037 30,080 Impact of Derivatives 25 25 (38) (38) Total for all activities including derivatives 21,594 30,718 20,999 30,042 (a) Includes infrastructure Investments. Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2019 December 31, 2018 June 30, 2019 December 31, 2018 Opening value 752 568 1,624 2,114 Increase for the period 13 305 168 170 Write back following sale or repayment (62) (74) (169) (22) Write back following recovery in value (29) (47) Others (a) (17) (0) (106) (638) Closing value 657 752 1,518 1,624 (a) Includes change in scope, reclassification to held for sale and the effect of changes in exchange rates. Half Year 2019 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 5.3 Unrealized gains and losses on financial investments Including the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: (in Euro million) June 30, 2019 December 31, 2018 INSURANCE Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 320,487 9,975 13,350 6,972 374,335 10,326 17,087 7,804 374,335 9,992 17,087 7,804 57,969 400 3,906 889 4,121 48 168 57 360,667 9,192 13,341 6,774 394,649 9,346 15,131 7,425 394,649 9,193 15,131 7,425 41,324 224 2,275 741 7,342 71 485 90 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (in Euro million) June 30, 2019 December 31, 2018 OTHER ACTIVITIES Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 4,327 1,188 1,202 102 4,317 1,187 1,655 106 4,317 1,188 1,655 106 137 459 4 147 0 7 4,228 938 1,030 96 4,184 938 1,466 98 4,184 938 1,466 98 93 451 2 137 0 15 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. (in Euro million) June 30, 2019 December 31, 2018 TOTAL Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 324,814 11,162 14,552 7,074 378,652 11,514 18,742 7,910 378,652 11,179 18,742 7,910 58,106 400 4,365 893 4,268 48 175 57 364,895 10,131 14,371 6,870 398,833 10,284 16,597 7,523 398,833 10,131 16,597 7,523 41,417 224 2,726 744 7,479 71 500 90 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. Half Year 2019 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 5.4 Financial investments subject to impairment 5.4.1 BREAKDOWN OF FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). June 30, 2019 December 31, 2018 (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market (c) Cost before impairment and revaluation to fair value(a) 324,836 11,163 Impairment (22) (1) Cost after impairment but before revaluation to fair value (b) 324,814 11,162 Revaluation to fair value (c) 53,838 17 Carrying value 378,652 11,179 Cost before impairment and revaluation to fair value (a) 364,973 10,131 Impairment (78) (0) Cost after impairment but before revaluation to fair value (b) 364,895 10,131 Revaluation to fair value (c) 33,938 1 Carrying value 398,833 10,131 Debt instruments 335,999 (23) 335,976 53,855 389,831 375,104 (78) 375,025 33,939 408,964 Equity instruments available for sale 16,900 (2,348) 14,552 4,190 18,742 17,104 (2,733) 14,371 2,226 16,597 Non consolidated investment funds available for sale 7,926 (851) 7,074 836 7,910 7,785 (915) 6,870 654 7,523 Loans available for sale 0 0 0 0 0 0 Loans at cost (d) 54,995 (196) 54,799 (952) 53,847 65,999 (199) 65,800 (419) 65,381 Loans 54,995 (196) 54,799 (952) 53,847 65,999 (199) 65,800 (419) 65,381 TOTAL 415,819 (3,418) 412,401 57,930 470,331 465,991 (3,925) 462,066 36,400 498,466 (a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans. 5.4.2 CHANGE IN IMPAIRMENT ON FINANCIAL INVESTMENTS (in Euro million) January 1, 2019 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) June 30, 2019 Impairment - Debt instruments 78 3 (34) (24) 23 Impairment - Equity instruments 2,733 65 (453) 3 2,348 Impairment - Non consolidated investment funds 915 40 (221) 117 851 Impairment - Loans 199 17 (7) (19) 5 196 TOTAL 3,925 125 (714) (19) 101 3,418 (a) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. Half Year 2019 Financial Report 104 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 (in Euro million) January 1, 2018 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) December 31, 2018 Impairment - Debt instruments 243 53 (220) (0) 2 78 Impairment - Equity instruments 2,280 764 (295) (16) 2,733 Impairment - Non consolidated investment funds 1,084 186 (41) (314) 915 Impairment - Loans 228 49 (3) (60) (16) 199 TOTAL 3,837 1,052 (560) (60) (344) 3,925 (a) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. 5.5 Investments/Fair value Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on a mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or used by the Group in the limited cases of application of mark to model valuations. Half Year 2019 Financial Report 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 5.5.1 INVESTMENTS RECOGNIZED AT FAIR VALUE The breakdown by valuation method of investments recognized at fair value including derivatives but excluding assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2019 December 31, 2018 (in Euro million) Debt instruments Equity instruments Non consolidated investment funds Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) 293,924 14,076 818 Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) 86,939 2,182 5,581 267 2,545 1,495 Total excluding derivatives 381,130 18,802 7,894 Total including derivatives 378,652 18,742 7,910 Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) 315,367 12,168 1,272 Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) 84,894 1,843 4,781 877 2,624 1,464 Total excluding derivatives 401,138 16,635 7,517 Loans 0 0 0 (28) 0 28 0 Financial investments and loans available for sale 308,818 94,702 4,306 407,826 405,304 328,779 91,518 4,992 425,290 Investment in real estate properties Debt instruments Equity instruments Non consolidated investment funds Other assets held by consolidated investment funds designated as at fair value through profit or loss Loans 11,875 3,010 221 3,722 1,479 7,901 330 3,434 5,972 1,913 5,639 2,301 6,893 1,479 21,689 8,980 5,956 16,587 1,479 21,906 8,980 5,998 16,608 26,681 2,790 409 1,135 1,435 8,262 700 3,216 6,765 1,126 4,885 2,031 7,125 1,435 36,069 8,375 5,656 15,025 Financial investments and loans designated as at fair value through profit or loss 18,827 19,117 16,746 54,691 54,972 31,014 20,378 15,167 66,560 Debt instruments Equity instruments Non consolidated investment funds Loans 101 - 0 - 155 - 29 - 0 3 - - 257 3 30 - 121 3 30 - 512 43 197 - 181 - 245 - 0 19 0 - 694 62 443 - Financial investments and loans held for trading TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE 102 327,746 185 114,004 3 21,056 290 462,807 154 460,430 753 360,546 427 112,323 19 20,179 1,198 493,048 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. Since the 2008 financial crisis, a significant volatility related to corporate spreads has been observed leading to transfers between level 1 and 2 with both yield and bid ask spreads widening and narrowing from one closing to another. Since 2010, this volatility has also been experienced on European government bonds with yields and bid ask spreads widening significantly leading to transfers from level 1 to level 2 and then also subsequent sustained improved market liquidity for certain government issuers resulting in transfers back to level 1 from level 2. During the period ended on June 30, 2019, the net transfer between Level 1 and Level 2 was €-387 million. This amount comprised €7,912 million transferred investments from Level 2 to Level 1, and €8,299 million transferred from Level 1 to Level 2. These reclassifications were mainly related to changes in liquidity indicators observed in the market for corporate bonds throughout the period. Half Year 2019 Financial Report 106 II Total including derivatives 398,833 16,597 7,523 0 422,954 1,435 36,242 8,377 5,672 15,033 66,759 553 62 443 - 1,059 490,771 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 TRANSFER IN AND OUT OF THE LEVEL 3 CATEGORY AND OTHER MOVEMENTS From January 1, 2019 to June 30, 2019, the amount of level 3 assets increased by €0.8 billion to €21.0 billion, representing 4.5% of the total assets at fair value (4.1% as of December 31, 2018 or €20.1 billion). Main movements relating to level 3 assets to be noted were the following: €+1.7 billion of new investments; €+0.9 billion of net asset transfers in and out of level 3 and foreign exchange fluctuation impact; €+0.7 billion of net asset transfers in and out of level 3 mainly related to Group Life portfolio in Switzerland classified as held for sale; €+0.3 billion of change in unrealized gains and losses; €-1.5 billion due to change in consolidation scope for AXA Equitable Holdings, Inc.; €-1.3 billion of asset sales, redemptions and settlements mainly debt instruments, equity securities and non-consolidated investment funds accounted as available for sale and equity securities, non- consolidated investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through P&L. 5.5.2 INVESTMENTS RECOGNIZED AT AMORTIZED COST June 30, 2019 December 31, 2018 (in Euro million) Debt instruments held to maturity Assets quoted in an active market Fair value determined directly by reference to active market (level 1) - Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market Fair value determined directly by reference to active market (level 1) - Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Loans held to maturity Financial investments and loans held to maturity Investment in real estate properties at amortized cost Debt instruments at cost (loans & receivables) Loans at amortized cost Non consolidated investment at cost Financial investments and loans at amortized cost (0) 308 38 346 30,463 5,314 19,329 55,105 230 5,875 38,483 44,588 30,693 11,497 57,849 100,039 30,718 11,514 56,871 99,103 221 48 269 29,660 7,340 31,214 68,214 420 2,722 36,880 40,022 30,080 10,283 68,143 108,506 TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 346 55,105 44,588 100,039 99,103 269 68,214 40,022 108,506 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. Half Year 2019 Financial Report 107 Total including derivatives 30,042 10,284 67,696 108,021 108,021 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The consolidated statement of changes in equity is presented as a primary Financial Statement. 6.1 Impact of transactions with shareholders 6.1.1 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2019 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2019, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €274 million corresponding to 11.4 million shares in order to eliminate the dilutive effect of share-based compensation schemes (AXA SA’s stock options, performance shares plans and share plan); capital increase of €22 million due to the exercise of stock options for 1.5 million shares; shared based payments for €17 million. TREASURY SHARES As of June 30, 2019, the Company and its subsidiaries owned 29.8 million AXA shares, representing 1.2% of the share capital, a decrease of 11.8 million shares compared to December 31, 2018. As of June 30, 2019, the carrying value of treasury shares and related derivatives was €685 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. As of June 30, 2019, 1.6 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €30 million and their market value €38 million at the end of June 2019. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debt instruments issued by the Group do not qualify as liabilities under IFRS. Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2019, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €+13 change in other from to foreign exchange rate fluctuations; €-98 million from interest expenses related to the undated subordinated debt (net of tax). Half Year 2019 Financial Report 108 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 As of June 30, 2019 and December 31, 2018, undated subordinated debts recognized in shareholders’ equity were as follows: June 30, 2019 December 31, 2018 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in million) October 29, 2004 - 375 M€ - rate 6.0% 375 375 375 375 December 22, 2004 - 250 M€ - rate 6.0% 250 250 250 250 January 25, 2005 - 250 M€ - rate 6.0% 250 250 250 250 July 6, 2006 - 350 M£ - rate 6.7% 350 390 350 391 December 14, 2006 - 750 MUS$ - rate 6.4% 750 656 750 652 October 16, 2007 - 700 M£ - rate 6.8% (a) 219 242 219 243 November 7, 2014 - 984 M€ - rate 3.941% (a) 984 981 984 981 November 7, 2014 - 724 M£ - rate 5.453% (a) 724 805 724 806 May 20, 2014 - 1,000 M€ - rate 3.9% 1,000 997 1,000 997 January 22, 2013 - 850 MUS$ - rate 5.5% 850 741 850 737 Undated notes - 625 M€ at variables rates 625 625 625 625 Undated notes - 27,000 MJPY - rate 3.3% 27,000 220 27,000 215 Undated notes - 375 MUS$ at variables rates 375 330 375 328 TOTAL 6,862 6,849 (a) These undated Deeply Subordinated notes were part of the liability management exercise launched on October 29, 2014. Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty; and interest rate step-up clauses with effect from a given date. DIVIDENDS PAID At the shareholders’ meeting held on May 6, 2019, shareholders approved a dividend distribution of €1.34 per share corresponding to €3,189 million with respect to the 2018 financial year. Half Year 2019 Financial Report 109 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 6.1.2 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2018 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2018, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €-71 million (or 2.9 million shares) in order to eliminate the dilutive effect of share- based compensation schemes (AXA SA’s stock options and performance shares plans); capital increase of €+17 million due to exercise of stock options for 1 million shares; shared based compensation payments for €+16 million. TREASURY SHARES As of June 30, 2018, the Company and its subsidiaries owned approximately 41.1 million AXA shares, representing 1.7% of the share capital, a decrease of 0.7 million shares compared to December 31, 2017. As of June 30, 2018, the carrying value of treasury shares and related derivatives was €1,031 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. As of June 30, 2018, 1.9 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €17 million and their market value €39 million at the end of June 2019. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES As described in the accounting principles, undated subordinated debt instruments issued by the Group do not qualify as liabilities under IFRS. Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2018, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: change in other was due to foreign exchange rate fluctuations for €+76 million; change in undistributed profits and other reserves was due to interest expenses related to the undated subordinated debt (net of tax) for €-110 million. OTHERS The €-2,450 million decrease in others mainly comes from the US IPO. Half Year 2019 Financial Report 110 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 DIVIDENDS PAID At the shareholders’ meeting held on May 7, 2018, shareholders approved a dividend distribution of €1.26 per share corresponding to €2,998 million with respect to the 2017 financial year. 6.2 Comprehensive income for the period The Statement of Comprehensive Income, presented as a primary financial statement, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2019 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The increase in gross unrealized gains and losses on assets available for sale totaled €+21,876 million, of which a €+19,471 million increase in unrealized capital gains on debt securities driven by the decrease on interest rates. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: June 30, 2019 December 31, 2018 (in Euro million) Gross unrealized gains and losses (a) 60,451 38,575 Less unrealized gains and losses attributable to: Shadow accounting on policyholder participation and other obligations (35,677) (22,154) Shadow accounting on Deferred Acquisition Costs (b) (907) (210) Shadow accounting on Value of purchased Business In force (171) (159) Unallocated unrealized gains and losses before tax 23,696 16,052 Deferred tax (5,893) (4,189) Unrealized gains and losses net of tax - assets available for sale 17,803 11,863 Unrealized gains and losses net of tax (100%) - equity accounted companies 392 (32) UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 18,196 11,831 Minority interests' share in unrealized gains and losses (c) (243) (42) Translation reserves (d) (246) (223) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 17,707 11,566 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. As of June 30, 2019, most of the unrealized gains on assets available for sale related to Life & Savings entities. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2019: Half Year 2019 Financial Report 111 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 June 30, 2019 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Belgium Life & Savings Gross unrealized gains and losses (a) 21,501 10,514 3,741 6,443 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (16,307) (8,961) (3,028) (3,972) Shadow accounting on Deferred Acquisition Costs (b) (319) (106) (80) Shadow accounting on Value of purchased Business In force (100) (2) Unallocated unrealized gains and losses before tax 4,875 1,553 508 2,389 Deferred tax (1,247) (471) (99) (570) Unrealized gains and losses (net of tax) - assets available for sale 3,629 1,082 409 1,819 Unrealized gains and losses net of tax - equity accounted companies 35 (10) UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 3,664 1,072 409 1,819 Minority interests' share in unrealized gains and losses (c) (9) 0 (1) Translation reserves (d) 0 (186) (0) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 3,655 1,072 223 1,819 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2019 and December 31, 2018 broken down as follows: June 30, 2019 December 31, 2018 (in Euro million) Unrealized gains and losses (net of tax) 100%, opening 11,831 16,194 Transfer in the income statement on the period (a) (28) (874) Investments bought in the current accounting period and changes in fair value 6,424 (3,715) Foreign exchange impact 174 289 Change in scope and other changes (205) (62) Unrealized gains and losses (net of tax) 100%, closing 18,196 11,831 Minority interests' share in unrealized gains and losses (b) (243) (42) Translation reserves (c) (246) (223) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (d) 17,707 11,566 (a) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period, and debt instruments discount premium impacts. (b) Including foreign exchange impact attributable to minority interests. (c) Group share. (d) Including unrealized gains and losses on assets held for sale operations. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2019 amounted to (€-528 million). This was mainly driven by the deconsolidation of AXA Equitable Holdings, Inc. (€-925 million) partly offset by AXA SA (€+229 million), Japan (€+171 million) and Switzerland (€+154 million). Half Year 2019 Financial Report 112 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial losses for the first half year of 2019 amounted to (€-398 million) net shareholders’ equity Group share. This was mainly driven by losses on Germany (€-269 million), Switzerland (€-53 million), Belgium (€-39 million) and France (€-36 million) due to the discount rate decrease in the Eurozone and Switzerland partly offset by the gains registered on United Kingdom & Ireland (€+67 million) related to the increase in discount rates and inflation rates. 6.2.2 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2018 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled (€-6,787 million), of which a €-5,404 million decrease in unrealized capital gains on debt securities which was mainly driven by interest rates increases, and a decrease of both equity securities €-744 million and in non consolidated investment funds €-477 million, in Life with the financial market evolution. CURRENCY TRANSLATION RESERVE The Group share translation reserve movement (€+909 million) was mainly driven by the United States (€+414 million), Japan (€+313 million), Switzerland (€+98 million), Asia (€+89 million) and the United Kingdom (€+16 million), partly offset by the negative evolution in International (€-51 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year 2018 amounted to (€+641 million) net shareholders’ equity Group share. This was mainly driven by the United States with gains due to the recycling of (€+243 million) in minority interests and the increase in discount rate assumptions used at HY18 (€+64 million). In the UK & Ireland, the increase in discount rates and inflation rates were partially offset by some losses on plan assets resulting in an amount of (€+217 million) global actuarial gains. The (€+121 million) actuarial gains in Switzerland were due to the over performance of plan assets and an increase in discount rate assumptions used. 6.3 Change in minority interests Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than a shareholders’ equity item. 6.3.1 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2019 The €-5,286 million decrease in minority interests to €+5,538 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+239 million; o Reserves relating to changes in fair value through shareholders’ equity for €+213 million; Half Year 2019 Financial Report 113 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 o Foreign exchange movements for €+181 million; o Employee benefits actuarial gains and losses €-4 million. Transactions with minority interests’ holders, mainly included: o Decrease in minority interests as a consequence of the deconsolidation of AXA Equitable Holdings, Inc. for €-5,172 million; o Reclassification of the equity component of the Mandatory Exchangeable Bonds to financing debt for €-614 million; o Minority interests qualified as equity resulting from the increase in the value of minority interests holdings due to a capital increase in existing consolidated investment funds for €+53 million; o Dividend payout to minority interests’ holders for €-202 million. 6.3.2 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2018 The €+5,409 million increase in minority interests to €+11,065 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period notably included the following: o Net income attributable to minority interests for €+213 million; o Foreign exchange movements for €+40 million; o Employee benefits actuarial gains and losses €-237 million; o Reserves relating to changes in fair value through shareholders’ equity for €-142 million. Transactions with minority interests’ holders, mainly included: o Increase in minority interests following the IPO €4,716 million; o Equity component of the Mandatory Exchangeable Bonds €+587 million; o Minority interests qualified as equity resulting from an increase in the value of minority interest holdings due to a capital increase in existing consolidated investment funds for €+168 million; o Dividend payout to minority interests’ holders for €-258 million. Half Year 2019 Financial Report 114 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 7 FINANCING DEBT Carrying value (in Euro million) AXA Subordinated notes, 5.25% due 2040 (€) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) U.S. registered redeemable subordinated debt, 7.125% 2020 (£) Subordinated debt, 5.625% due 2054 (£) Derivatives relating to subordinated debts (a) Subordinated debt, 3.375%, due 2047(€) June 30, 2019 9,854 1,300 1,000 1,159 363 837 70 1,500 December 31, 2018 9,358 1,300 1,000 1,064 363 838 (324) 1,500 Undated Subordinated notes, US$ 850M, 4.5% 747 742 Subordinated notes, 5.125%, due 2047 (US$) 879 873 Subordinated notes, 3.25%, due 2049 (€) 2,000 2,000 AXA XL 1,388 1,385 Subordinated Notes, 4.45%, due March 2025 (US$) 438 437 Subordinated Notes, 5.5%, due March 2045 (US$) 449 448 Subordinated Notes, 3.25%, due March 2025 (€) AXA Bank Belgium Subordinated debt maturity below 10 years fixed rate Undated Subordinated debt fixed rate AXA Italy Subordinated notes, EURIBOR 6 months + 81bps Other subordinated debt (under €100 million) 500 21 7 13 67 67 39 501 26 11 16 67 67 39 Subordinated debt 11,368 10,876 AXA Mandatory exchangeable bonds into shares of AXA Equitable Holdings, Inc. (b) Euro Medium Term Note, due 2028 1,258 758 500 622 122 500 AXA XL 285 607 Senior Notes, 6.25%, due May 2027 (US$) 322 Senior Notes, 5.25%, due December 2043 (US$) AXA Financial Senior notes, 7%, due 2028 Senior notes, 3.9 %, due 2023 Senior notes, 4.35%, due 2028 Senior notes, 5%, due 2048 AXA UK Holdings GRE: Loan Notes, 6.625%, due 2023 Other financing debt instruments issued (under €100 million) Other financing debt instruments issued (under €100 million) Derivatives relating to other financing debt instruments issued (a) 285 - - - - - - - 104 104 - 285 3,594 305 694 1,300 1,295 168 168 104 104 (1) Financing debt instruments issued 1,647 5,096 TOTAL FINANCING DEBT (c) 13,015 15,971 (a) Hedging instruments in accordance with IAS 39 and economic hedge derivatives not eligible for hedge accounting. (b) Only the debt component as of December 31, 2018. (c) Excluding accrued interest on derivatives. Half Year 2019 Financial Report 115 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 8 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: the calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period; the calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2019 June 30, 2018 Net income Group share 2,333 2,796 Undated subordinated debt financial charge (d) (136) (115) Net income including impact of undated subordinated debt A 2,197 2,681 Weighted average number of ordinary shares (net of treasury shares) - opening 2,383 2,383 Stock options exercised (b) 1 1 Treasury shares (b) 8 (1) Capital increase/decrease (b) (11) Weighted average number of ordinary shares B 2,381 2,383 BASIC NET INCOME PER ORDINARY SHARE C = A / B 0.92 1.13 Potentially dilutive instruments : Stock options 2 4 Other 1 1 Fully diluted - weighted average number of shares (c) D 2,384 2,388 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 2,197 2,681 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 0.92 1.12 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. (d) As of June 30, 2019, it includes financial charges of €9 million related to Mandatory Exchangeable Bonds for only the first three months of 2019 and €29 million related to preferred shares. As of June 30, 2019, net income per ordinary share stood at €0.92 on a basic calculation and on a fully diluted basis. As of June 30, 2018, net income per ordinary share stood at €1.13 on a basic calculation, and at €1.12 on a fully diluted basis. Half Year 2019 Financial Report 116 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2019 NOTE 9 SUBSEQUENT EVENTS AXA S.A. ANNOUNCED THE FULL EXERCISE OF THE OVER-ALLOTMENT OPTION RELATED TO THE RECENTLY COMPLETED SECONDARY OFFERING OF AXA EQUITABLE HOLDINGS, INC.’S COMMON STOCK On July 8, 2019, AXA announced that the underwriters in the secondary offering of shares of common stock (the “Offering”) of AXA Equitable Holdings, Inc., completed on June 7, 2019, have fully exercised their option to purchase an additional 6,000,000 shares of EQH’s common stock from AXA, subject to the same terms and conditions as the Offering. Net proceeds (1) to AXA from the exercise of the underwriters’ option amounts to USD 125 million or €112 million (2), corresponding to a net price (1) of USD 20.85 per share. Following the sale of these additional shares, AXA’s ownership in EQH has decreased from 40.1% (3)(4) to 38.9% (3)(4). (1) Net of underwriting discounts and commissions. (2) 1 Euro = USD 1.1219 as of July 5, 2019 (Source: Bloomberg). (3) EQH’s issued and outstanding common stock as of May 9, 2019 comprised 491,138,042 shares. (4) Including the shares to be delivered on redemption of the bonds mandatorily exchangeable into EQH shares, issued by AXA in May 2018. Half Year 2019 Financial Report 117 II III. Statutory auditors’ review report on the 2019 Half Year Financial Information Half Year 2019 Financial Report / 118 STATUTORY AUDITORS’ REVIEW REPORT ON THE 2019 HALF YEAR FINANCIAL INFORMATION PricewaterhouseCoopers Audit Mazars 63, rue de Villiers 61, rue Henri Regnault 92208 Neuilly-sur-Seine Cedex 92075 Paris La Défense Cedex Statutory Auditors’ Review Report on the 2019 half-year Financial Information (Period from January 1st to June 30th) To the Shareholders AXA SA 25, Avenue Matignon 75008 PARIS In compliance with the assignment entrusted to us by your General Meeting and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code (Code monétaire et financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the period from January 1 to June 30, 2019; the verification of the information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - the standard of IFRS as adopted by the European Union applicable to interim financial information. Without qualifying our conclusion, we draw your attention to the matter set out in note 1.2 of the Appendix to the condensed half-yearly consolidated financial statements regarding the impacts of the first application of IFRS 16 "Leases" and IFRIC 23 "Uncertainty over income tax treatment”. Half Year 2019 Financial Report 119 III STATUTORY AUDITORS’ REVIEW REPORT ON THE 2019 HALF YEAR FINANCIAL INFORMATION 2. Specific verification We have also verified the information given in the half-year management report on the condensed half-year consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements, reminded that it is not our responsibility to conclude on the fair presentation and consistency with the half-year financial statements of the solvency related information. Neuilly-sur-Seine and Courbevoie, August 1st, 2019 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit MAZARS Bénédicte Vignon Grégory Saugner Jean-Claude Pauly Maxime Simoen This is a free translation into English of the Statutory Auditors’ review report issued in French and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Half Year 2019 Financial Report 120 III IV. Statement of the person responsible for the Half Year Financial Report / STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and describes the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 1, 2019 Thomas Buberl Chief Executive Officer Half Year 2019 Financial Report 122 IV

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Half Year Financial Report / June 30, 2020 TABLE OF CONTENTS I. Activity Report………………………………………...3 II. Consolidated financial statements ………………..68 III. Statutory auditors’ review report on the 2020 Half Year Financial Information ……108 IV. Statement of the person responsible for the Half Year Financial Report …………….………………..112 I. Activity Report / June 30, 2020 ACTIVITY REPORT – HALF YEAR 2020 IMPORTANT LEGAL INFORMATION AND CAUTIONARY STATEMENT REGARDING FORWARD- LOOKING STATEMENTS AND THE USE OF NON-GAAP FINANCIAL MEASURES Certain statements contained herein may be forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans, expectations or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause AXA’s actual results to differ materially from those expressed or implied in such forward looking statements. Please refer to Part 4 - “Risk Factors and Risk Management” of AXA’s Universal Registration Document for the year ended December 31, 2019 (the “2019 Universal Registration Document”) for a description of certain important factors, risks and uncertainties that may affect AXA’s business and/or results of operations, particularly in respect of the COVID-19 crisis. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise, except as required by applicable laws and regulations. In addition, this report refers to certain non-GAAP financial measures, or alternative performance measures (“APMs”), used by Management in analyzing AXA’s operating trends, financial performance and financial position and providing investors with additional information that Management believes to be useful and relevant regarding AXA’s results. These non-GAAP financial measures generally have no standardized meaning and therefore may not be comparable to similarly labelled measures used by other companies. As a result, none of these non-GAAP financial measures should be considered in isolation from, or as a substitute for, the Group’s Consolidated Financial Statements and related notes prepared in accordance with IFRS. A reconciliation from APMs Adjusted Earnings, Underlying Earnings and Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided on pages 19 to 20 of this report. APMs Adjusted Return on Equity and Underlying Earnings per share are reconciled to the financial statements in the table set forth on page 26 of this report. The calculation methodology of the Debt Gearing is set out on page 22 of this report. The above-mentioned and other non-GAAP financial measures used in this report are defined in the Glossary set forth on pages 60 to 67 of this report. Half Year 2020 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2020 Market Environment FINANCIAL MARKET CONDITIONS The first half of 2020 saw the global outbreak of the COVID-19 pandemic, which first appeared in China in late 2019 before spreading to other countries and becoming a worldwide pandemic by March. China first put in place unprecedented lockdowns to contain the spread of the pandemic, and similar measures were imposed by most large economies. The pace of the contagion did not abate in 2Q20, and by the end of June the number of daily new cases remained at a very high level. While the virus currently appears to be contained to some extent both in China and western Europe, in the United States an early easing of restrictions has contributed to a re-acceleration of new cases, and overall the outlook for a so-called “second wave” of the virus, regionally or globally, remains uncertain. The virus also continues to spread across emerging markets, particularly in Latin America, and also in some countries in the Middle East and Central Europe. The impact of the lockdowns that have been imposed to contain the spread of the virus has led to unprecedent economic shocks, although central banks and other authorities have also acted promptly to mitigate the economic effects of the pandemic, including through traditional fiscal stimulus and income support to workers, as well as loan guarantees and other measures to support companies. Financial markets were mixed in the early phases of the pandemic, with bond yields falling almost from the start of the year, while equity markets continued to perform strongly in February. In March, financial markets saw a plunge in risk assets with global equity markets collapsing to lows on March 23 while corporate spreads widened to elevated levels in early April. However, a concerted effort from central banks to support liquidity in financial markets subsequently led to a considerable rebound in equity and credit markets, although the current economic outlook remains very uncertain. France’s lockdown was strictly imposed as from mid-March, which resulted in a 5.3% drop in GDP in the first quarter. Though economic activity experienced a rebound from May as a result of both deconfinement measures combined with the effects of public support of consumers and businesses, the second quarter saw a steeper plunge in GDP level, with a quarterly decrease of 13.8%. French 10-year yields started 2020 at 0.12%, and declined to a six-month low of -0.38% in March, before rising again to 0.35%, and closing at the end of June at -0.11%. The CAC 40 equity index closed 1H20 17% lower vs. the end of 2019, after a significant rebound from a low point of - 37% in March. In Europe, following the lockdown measures, quarterly GDP growth fell by 11.9% in the second quarter, ranging from -10.1% in Germany to -12.4% in Italy and -18.5% in Spain, the latter two countries being severely impacted by stringent confinement and related measures. Differences in virus spread and economic performance exacerbated underlying differences between government bond yields. The ECB launched its quantitative easing Pandemic Emergency Purchase Programme (PEPP), which contributed to cap the widening of both peripheral government bonds and corporate spreads, while the announcement of both Euro-wide fiscal support and the joint debt issuance in the EU’s Next Generation fund contributed to easing tensions on both fixed income and equity markets. COVID-19 has impacted the United Kingdom to a more severe extent than most other European countries, with over 315k recorded cases at the end of June and a significant number of fatalities. United Kingdom GDP fell by only 2.2% in the first quarter, mostly as a result of a delayed implementation of lockdown measures, although expectations remain for second quarter GDP to fall more sharply as the country has now experienced a longer lockdown period than most other countries. United Kingdom 10-year Gilt yields have fallen 66bps to 0.17% in the first semester, with the FTSE 100 equity index down 18%, from 34% its lowest point. As COVID-19 spread later in the United States and lockdowns were not pervasive until April, United States first quarter GDP fell by only 1.3%. A relatively rapid easing of lockdown restrictions has contributed to a re-emergence of the virus, while slightly mitigating the impact on the GDP growth, at -9.5% in the second quarter. The S&P 500 index is down 4% over the first half of the year, from -30% at its lowest point in late March. The US government Half Year 2020 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2020 and the Federal Reserve have to date provided an unprecedented package of support measures, including significant cuts in the Fed Funds Rate to boost growth over the medium term and a $2.7tn front-loaded stimulus package to boost GDP. Asia’s response to COVID-19 has been mixed, but to date it has fared better from the virus than most other regions, with the notable exclusion of China, which recorded a 9.8% drop in GDP reflecting a strict enforcement of lockdown measures in the first quarter. As these measures started to be lifted, some areas of the economy recovered quickly, but domestic and external demand sectors remain subdued, though GDP grew by 11.5% in the second quarter. Japan has seen relatively few cases of the virus, and Japanese GDP fell by only 0.6% in the first quarter. However, the sharp contraction in external demand affected production activities in Japan and GDP growth has been further penalized in the second quarter. Japanese 10 year yields increased by 25 bps to 0.03% and the Nikkei index was down 7% at the end of June, owing to the government’s economic measures packages and the Bank of Japan’s yield curve control policy to reduce the risks of rising financing costs. Stock Markets The MSCI World Index decreased by 6.2%. The MSCI G7 index decreased by 5.8% and the MSCI Emerging index decreased by 6.5%. The Dow Jones Industrial Average index decreased by 9.6% and the S&P 500 index decreased by 4.0%, the FTSE 100 index in London decreased by 18.2%, the EUROSTOXX 50 index in the Eurozone decreased by 13.6%, and the Nikkei index in Tokyo decreased by 5.8%. The S&P 500 implied volatility index (VIX) increased from 13.8% on December 31, 2019, to 30.4% on June 30, 2020. Bond Markets Government bond yields decreased in the first half of 2020 in most mature economies: the 10-year US T-bond yield decreased by 126 bps to 0.66%, the 10-year UK government bond yield decreased by 66 bps to 0.17%, the 10-year German Bond yield decreased by 27 bps to -0.45%, the 10-year French government bond yield decreased by 23 bps to -0.11%, the 10-year Belgium government bond yield decreased by 22 bps to -0.12%, while the 10-year Swiss government bond yield increased by 4 bps to -0.43%, and the 10-year Japan government bond yield increased by 25 bps to 0.03%. In the Eurozone peripheral countries, the 10-year government bond yields decreased in most countries as well: -26 bps to 1.20% in Greece, -12 bps to 0.0% in Ireland and -10 bps to 1.33% in Italy, whereas it increased slightly in some: +3 bps to 0.48% in Portugal, +0.3 bps to 0.47% in Spain. In Europe, the iTraxx Main spreads increased by 22 bps to 67 bps compared to December 31, 2019, and the iTraxx Crossover increased by 176 bps to 384 bps. In the United States, the CDX Main spread Index increased by 31 bps to 76 bps. Exchange Rates End of Period Exchange rate Average Exchange rate June 30, 2020 December 31, 2019 June 30, 2020 June 30, 2019 (for €1) (for €1) (for €1) (for €1) US Dollar 1.12 1.12 1.10 1.13 Japanese Yen 121 122 119 124 British Sterling Pound 0.91 0.85 0.87 0.87 Swiss Franc 1.06 1.09 1.06 1.13 Half Year 2020 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2020 OPERATING HIGHLIGHTS COVID-19: AXA strengthens its commitments to tackle an unprecedented health, economic and social challenge On April 1, 2020, AXA announced the strengthening of its action plan to tackle the health, economic and social emergency linked to the COVID-19 crisis. RESPONDING TO THE ECONOMIC AND SOCIAL EMERGENCY AXA’s 160,000 employees and partners have been available and fully operational, notably thanks to remote working tools, from the start of the crisis to meet client needs and continue to play their role in the economy. Jobs maintained, without resorting to short-time working AXA announced that the crisis would have no impact on employment or on the remuneration of employees during the confinement period; AXA would not use temporary unemployment. The Group also undertook not to defer any social security or tax payments in France during the period. AXA is a Group that has its social responsibility at heart and wishes the financial efforts of public authorities to be primarily directed towards the most vulnerable individuals and businesses. Exceptional measures for our most affected customers These announcements came in addition to exceptional measures that had already been taken to provide flexibility to business customers, particularly SMEs. In several countries, including France, the Group continued to insure businesses even in the event of late payment due to the pandemic, for the duration of the containment period, and ensured prompt payment to all suppliers to enable them to maintain the cash and liquidity needed to overcome the crisis. €54 million for solidarity funds AXA France has also been the leading contributor, with €33 million, to the solidarity effort set up by the French government for small businesses and the self-employed and coordinated by the Fédération Française de l’Assurance (FFA), which amounted to €400 million in total. This is in addition to AXA partner association AGIPI’s creation of the “AGIPI COVID-19 Solidarity Fund”, endowed with €21 million to support clients experiencing economic difficulties. RESPONDING TO THE HEALTH EMERGENCY In response to the health emergency, as a major international healthcare company, AXA is committed to directly helping its employees and clients, while supporting medical actions in the regions in which it operates. AXA extended coverage and services to healthcare professionals in several countries and leveraged its own medical networks and teleconsulting services to contribute to the healthcare effort. Finally, the Group took full action to support and compensate its customers affected by the virus. 2 million masks distributed as part of an emergency plan to support healthcare professionals To strengthen its support for healthcare professionals on the frontline against the virus, AXA announced that it would provide 2 million masks to help healthcare workers. The first 350,000, sent out and distributed to French hospitals, were much-needed FFP2 masks. AXA France set up psychological support resources for healthcare workers. Half Year 2020 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2020 Support was also provided to the AP-HP (Assistance Publique-Hôpitaux de Paris), the public hospital system of the city of Paris and the Ile-de-France region. AXA donated 20,000 meals to the AP-HP care community for lunch or dinner at home. These solidarity measures for health professionals come in addition to donations made to hospitals and intensive care units in several countries. AXA is also supporting intensive care units through a partnership with the 101 Fund, a network of 1200 intensive care centers in over 60 countries that aims to share real-time information from each unit to accelerate the improvement of therapeutic protocols. This funding has also made it possible to set up accelerated training for caregivers in order to increase the staffing capacity of these units. €5 million to fund research on infectious diseases, including COVID-19 Finally, AXA Research Fund, which has made a steadfast commitment over the years to support research on infectious diseases and pandemics (35 projects from leading institutions worldwide for a total of €7.4 million), decided to mobilize an additional €5 million for the development of responses to infectious diseases and COVID- 19, including the implementation of post-crisis solutions. AXA also supported the creation of the Institut Pasteur's COVID-19 Task Force and the OpenCOVID-19 initiative launched by Just One Giant Lab (JOGL), an open-source research platform aimed at providing low-cost emergency solutions to respond to the pandemic, with a particular focus on low-income countries. Governance APPOINTMENT OF SCOTT GUNTER AS CEO OF AXA XL On February 20, 2020, AXA announced the appointment of Scott Gunter, previously Senior Vice President of Chubb Group and President of Chubb’s North America Commercial Insurance division, as CEO of AXA XL. He replaced Greg Hendrick. Scott joined AXA’s Management Committee, reporting to Thomas Buberl, CEO of AXA. This change was effective immediately and submitted to necessary regulatory approval. MEETING OF THE BOARD OF DIRECTORS IN RESPECT OF AXA’S 2020 SHAREHOLDERS’ MEETING On April 3, 2020, AXA announced that following the statement issued by the European Insurance and Occupational Pensions Authority (“EIOPA”) on April 2, 2020, relating to dividend distributions during the COVID-19 pandemic, the Chairman of AXA’s Board of Directors convened an extraordinary meeting of the Board of Directors on April 3, 2020 to consider EIOPA’s recommendations. At that meeting, the Board of Directors decided to postpone AXA’s Shareholders’ Meeting from the initial scheduled date of April 30, 2020, to June 30, 2020, to allow time for discussion with the European, French and other insurance regulators. APPOINTMENT OF IRENE DORNER AS CHAIRWOMAN OF AXA’S AUDIT COMMITTEE On May 13, 2020, following the sad demise of Stefan Lippe, director of the Company and Chairman of the Audit Committee, AXA’s Board of Directors, upon recommendation of its Compensation & Governance Committee, decided to designate Irene Dorner, director of the Company and member of the Audit Committee since April 2016, as Chairwoman of the Audit Committee. Irene Dorner should remain Chairwoman for approximately a year. The Board of Directors, upon recommendation of its Compensation & Governance Committee, also decided to propose to the AXA’s annual Shareholders’ Meeting of June 30, 2020, to renew Irene Dorner’s mandate as member of the Board of Directors. The renewal of Irene Dorner’s mandate was approved by AXA’s annual Shareholders’ Meeting on June 30, 2020 (12th resolution). Half Year 2020 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2020 DECISION OF THE BOARD OF DIRECTORS IN RESPECT OF AXA’S DIVIDEND PROPOSAL FOR 2019 On June 3, 2020, AXA announced that following communications from the European Insurance and Occupational Pensions Authority (“EIOPA”) and the Autorité de Contrôle Prudentiel et de Résolution (“ACPR”), relating to the adoption of a prudent approach towards dividend distributions during the COVID-19 pandemic, AXA’s Board of Directors decided to reduce its dividend proposal from €1.43 per share to €0.73 per share. This proposal was approved by shareholders at AXA’s Annual General Meeting on June 30, 2020. The dividend has been paid on July 9, 2020 with an ex-dividend date of July 7, 2020. The Board considered proposing an additional payment to shareholders in 4Q 2020, up to €0.70 per share, as an exceptional distribution of reserves, subject to favorable market and regulatory conditions at that time. In the event that the Board decides to propose an additional payment, the proposal would then be subject to approval by shareholders at an ad hoc General Meeting. During the meeting, AXA’s management also updated the Board on its best estimate of the impact on 2020 underlying earnings for the Group from claims related to COVID-19. These estimates added further precision to the indications already provided in the 1Q20 disclosure, notably P&C: an overall claims cost of ca. €-1.2 billion (1) post-tax and net of reinsurance. Consistent with indications given in the 1Q20 disclosure, management expects the most material impacts from Business Interruption and Event Cancellation, and to a lesser extent from other lines (e.g. D&O, Liability and Travel), partly offset by reduced claims in some areas, notably from Motor. Life and Health: no material deviation has been observed in current claims experience. Solidarity measures: an overall impact of ca. €-0.3 billion (1) post-tax. This includes extended health and disability coverage to vulnerable customers, most notably in France. The estimates provided above were based on management’s assessment at that time and subject to change depending on the continued evolution of the COVID-19 pandemic and its related impacts. For investment margin, unit-linked and asset management fees, no estimate was provided as the impact will depend on the evolution of financial market conditions through the remainder of the year. AXA PRESENTED THE RESULTS OF ITS SHAREHOLDERS' MEETING, ITS PURPOSE AND ITS 2019 INTEGRATED REPORT Results of AXA’s Annual Shareholders’ Meeting During the Shareholders’ Meeting held on June 30, 2020, in Paris, all resolutions recommended by the Board of Directors were approved by AXA’s shareholders, including: The appointment as directors for a four-year term of Mmes Isabel Hudson, Marie-France Tschudin, Mr. Antoine Gosset-Grainville and Mrs. Helen Browne, representing the employee shareholders of the AXA Group. The re-appointment as directors of Mmes Irene Dorner and Angelien Kemna for a four-year term. The payment of a €0.73 dividend per share for the 2019 fiscal year, which has been paid on July 9, 2020 (ex-dividend date: July 7, 2020). Presentation of the Group’s purpose The Annual Shareholders’ Meeting provided an opportunity for AXA to present its purpose: “Acting for human progress by protecting what matters”. (1) As a reminder, AXA Group’s Underlying earnings in 2019 were €6.5 billion. Half Year 2020 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2020 Publication of AXA’s Integrated Report On the same day, as it does every year at the time of its Annual Shareholders' Meeting, AXA released its 2019 Integrated Report, which discusses the Group's purpose as well as its strategy and outlook. This report is available on AXA’s website. APPOINTMENT OF MARCO MORELLI AS EXECUTIVE CHAIRMAN OF AXA INVESTMENT MANAGERS AND A MEMBER OF AXA’S MANAGEMENT COMMITTEE, GÉRALD HARLIN TO RETIRE AT THE END OF SEPTEMBER On July 16, 2020, AXA announced that Marco Morelli, previously Chief Executive Officer of Monte dei Paschi di Siena, was appointed Executive Chairman of AXA Investment Managers (“AXA IM”) and a member of AXA’s Management Committee. He will report to Thomas Buberl, Chief Executive Officer of AXA. He will take office on September 14 and will be based in Paris. After 30 years with the Group, Gérald Harlin, AXA’s Deputy Chief Executive Officer and Executive Chairman of AXA IM, has decided to retire at the end of September. He will remain a member of AXA IM’s Board of Directors. Significant Disposals AXA TO SELL ITS OPERATIONS (1) IN CENTRAL AND EASTERN EUROPE FOR €1.0 BILLION On February 7, 2020, AXA announced that it has entered into an agreement with UNIQA Insurance Group AG to sell its operations in Poland, Czech Republic and Slovakia. Under the terms of the agreement, AXA will sell 100% of its Life & Savings, Property & Casualty and Pension businesses in Central and Eastern Europe for a total cash consideration of €1,002 million, representing an implied 12.4x 2019E P/E (2) multiple. The completion of the transaction is expected to result in a positive impact on AXA Group’s Solvency II ratio of ca. 2 points. No significant Net Income impact is estimated for AXA Group from this transaction. The completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is expected to be finalized by Q4 2020. Partnerships and innovation AXA AND ACCOR LAUNCHED A STRATEGIC PARTNERSHIP TO OFFER UNIQUE MEDICAL ASSISTANCE IN HOTELS WORLDWIDE On May 15, 2020, AXA, a global leader in insurance, and Accor, a global hospitality leader, announced an innovative strategic partnership to provide medical support to guests across the 5000 Accor hotels worldwide. As soon as July 2020, this partnership will enable Accor guests to benefit from the highest level of care thanks to the expert medical solutions of AXA Partners, AXA’s international entity specialized in assistance services, travel insurance and credit protection. (1) Includes AXA Ubezpieczenia Towarzystwo Ubezpieczeń i Reasekuracji S.A. (P&C business), AXA Życie Towarzystwo Ubezpieczeń S.A. (L&S business) and AXA Powszechne Towarzystwo Emerytalne S.A. (Pension business) in Poland, and AXA pojišťovna a.s. (P&C business), AXA životni pojišťovna a.s (L&S business) and AXA penzijni společnost a.s. (Pension business) in Czech Republic, together with their subsidiaries and branches in Slovakia. AXA XL’s and AXA Partners’ operations within the three countries are not within the scope of this transaction. (2) Price / 2019 IFRS Net Income (including the 2019 IFRS Net Income of Czech Republic and Slovakia P&C operations which are not consolidated in AXA Group’s financial statements). Half Year 2020 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2020 First and foremost, Accor guests will benefit from AXA’s most recent advances in telemedicine through free access to medical teleconsultations. Guests will also get access to AXA’s extensive medical networks with tens of thousands of vetted medical professionals. This will allow hotels to make the most relevant referrals (e.g. language, specialty) to their guests in the 110 destinations where Accor is present. As Accor prepares for the post COVID-19 rebound, this unique medical service complements its overall global recovery plan and is included in the enhanced health and prevention protocols that Accor has put in place notably through its ALLSAFE Cleanliness label in anticipation of the progressive reopening of its hotels across the different regions. For AXA, this partnership is a unique occasion to strengthen its payer to partner strategy, which aims to provide innovative services to its customers, notably in health, one of its areas of growth in its Ambition 2020 plan. AXA AND WESTERN UNION TO COLLABORATE TO PROVIDE INCLUSIVE INSURANCE On June 18, 2020, AXA announced the launch of a collaboration with The Western Union Company, a leader in cross-border, cross-currency money movement and payments, to provide inclusive insurance products to Western Union’s customers using its westernunion.com service. By linking insurance to money transfer services, the two groups will help to better cover migrant workers and their families at home. An initial pilot, called ‘Transfer Protect’, launched that week in France with AXA Partners, offers Western Union’s customers sending money via westernunion.com the option to seamlessly sign up for a life and disability insurance solution (1). This helps provide peace of mind to the migrant population knowing that their designated family members or loved ones will receive a payment in case of an unfortunate life or disability event. This announcement is in line with AXA’s ambition to significantly contribute to financial inclusion through its AXA Emerging Customers division. This business aims to serve low income to mass market populations by accelerating the development of adapted and relevant insurance and protection services. For Western Union, this is a new step in their customer centric strategy to enrich the value it provides to customers by integrating adjacent financial services seamlessly through its global omni-channel platform. According to the International Fund for Agricultural Development 2017 report (2) around 200 million people, mostly from low and middle-income segments of the society in emerging countries, regularly send money back home, supporting 800 million family members. However, migrants working abroad face increasing levels of uncertainty, occupying riskier and more unstable jobs. Losing their earning capability can have highly damaging consequences for their families, for whom cross-border remittances represent on average 60% of their total income. Capital / Debt operations / Other AXA RATINGS On April 5, 2019, Moody’s Investors Service affirmed the “Aa3” insurance financial strength rating of AXA’s principal insurance subsidiaries, changing outlook to stable from negative. On March 16, 2020, S&P Global Ratings affirmed the long-term financial strength rating of AXA’s core operating subsidiaries at “AA-” with a stable outlook. (1) The scope of this initial pilot covers money transfers on westernunion.com from France to the following ten African countries: Senegal, Morocco, Ivory Coast, Madagascar, Cameroon, Mali, Benin, Togo, Republic of Congo, and Guinea. (2) “Sending Money Home: Contributing to the SDGs, one family at a time”, International Fund for Agricultural Development (IFAD), 2017. Half Year 2020 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2020 On April 30, 2020, Fitch Ratings affirmed the financial strength rating of AXA’s core operating subsidiaries at “AA-” with a stable outlook. REIMBURSMENT OF €1.3 BILLION SUBORDINATED DEBT On April 16, 2020, AXA reimbursed €1.3 billion of subordinated debt issued in April 2010. AXA PUBLISHED ITS 2020 CLIMATE REPORT On July 3, 2020, AXA announced the publication of its fourth Climate Report (1). This document describes AXA's responsible investment and insurance initiatives in the fight against climate change and measures the Group's progress in implementing the objectives of the Paris Agreement by 2050. This report follows the disclosure approach resulting from French Law No. 2015-992 of August 17, 2015, for Energy Transition for Green Growth, as well as the Taskforce on Climate-related Financial Disclosures (TCFD) that AXA has supported since its creation. The report's main indicator, the "warming potential", measures the impact of the Group's investments on global warming and its contribution to the fight against climate change. At the end of 2019, AXA's "warming potential" was 2.8°C, down compared to 2018 (3°C) and below the market average (3.6°C). This evolution notably reflects the ambitious policy implemented by AXA to align its investments with the objectives of the Paris Agreement by 2050. Risk Factors The principal risks and uncertainties faced by the Group are described in detail in Section 4.1 "Risk Factors" and Section 6.3 “General Information” of the 2019 Universal Registration Document (on pages 158 to 175 and pages 380 to 392, respectively). The 2019 Universal Registration Document was filed with the Autorité des marchés financiers (the “AMF”) on March 19, 2020, and is available on the AMF’s website (www.amf-france.org) as well as on AXA's website (www.axa.com). The descriptions contained in these sections of the 2019 Universal Registration Document remain valid in all material respects at the date of the publication of this report regarding the appreciation of the major risks and uncertainties affecting the Group on June 30, 2020, or which Management expects could affect the Group during the remainder of 2020. The information provided in the 2019 Universal Registration Document, in particular under “The occurrence of natural or man-made disasters, including those resulting from changing weather patterns, diseases and climatic and climatic conditions, profitability and cash flows - COVID-19 Outbreak”, should be read in conjunction with the following developments regarding the COVID-19 Outbreak. FOCUS ON COVID-19 OUTBREAK The COVID-19 pandemic continues to spread and evolve globally, and it has materially impacted the Group’s 1H20 earnings, in particular in Property & Casualty, mainly due to Business Interruption and Event Cancellation claims, as well as solidarity measures. For a discussion of the financial impact of COVID-19 on the Group’s 1H20 results, please refer to sections “Activity Indicators” on pages 15 to 18 of this report, “Commentary on Group Earnings” on pages 23 and 24 of this report, and “Outlook” on page 59 of this report. Material uncertainties relating to COVID-19 persist which may adversely impact the Group’s financial performance during the remainder of 2020 and future periods. We continue to closely monitor the Group’s potential exposure (1) The Climate report does not form part of the 2019 Universal Registration Document and is not intended to address or provide information in respect of any of the disclosure requirements of (i) the Annual Financial Report, (ii) the Board of Directors’ report to AXA’s Shareholders’ Meeting, or (iii) the corporate governance report. For the avoidance of doubt, any reference to Law No. 2015-992 of August 17, 2015 should be construed solely as a reference to Article 173(VI) thereof and related implementing measures. Half Year 2020 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2020 to the pandemic and its wide-ranging consequences, including on (i) the extent of claims litigation and insurance coverage impacted (in particular in Property & Casualty business lines), (ii) the impact of potential renewed localized or more generalized lockdown measures, travel limitations and business restrictions on the Group’s operations and activities, (iii) regulatory, litigation-related or legislative developments (particularly in the United States) aimed at expanding the intended scope of coverages beyond policy terms, exclusions and other conditions, (iv) financial market volatility, changes in asset prices and overall financial conditions (including interest rates and corporate spreads), and (v) macroeconomic conditions and the flow of people, goods and services. Any or all of the foregoing could materially and adversely affect our business, financial condition, results of operations and growth. Related-Party Transactions During the first semester of 2020, there were (i) no modifications to the related-party transactions described in Note 28 "Related-party transactions" to the audited consolidated financial statements for the fiscal year ended December 31, 2019, included in the 2019 Universal Registration Document (pages 356 and 357) filed with AMF and available on its website (www.amf-france.org) as well as on the Company's website www.axa.com, which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2020, and (ii) no new transaction concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2020. Half Year 2020 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2020 Events subsequent to June 30, 2020 TERMINATION OF THE SALE AGREEMENT RELATED TO AXA LIFE EUROPE On August 5, 2020, AXA and Cinven mutually agreed to terminate the sale agreement related to AXA Life Europe (“ALE”) as certain conditions to closing were not met by the agreed long stop date. As a consequence, AXA Life Europe assets and liabilities were no longer classified as held for sale as of June 30, 2020 and consolidated statement of financial position as of December 31, 2019 has been restated accordingly in the report. The major classes of assets and liabilities as of December 31, 2019 that were restated in this report are intangible assets for €307 million, cash and cash equivalent for €708 million, investments and other assets for €4,732 million, liabilities arising from insurance and investment contracts for €5,241 million and other liabilities for €468 million. AXA is reviewing its strategic options in order to maximize value creation and cash efficiency of ALE, while giving due regard to the interests of ALE’s policyholders and ensuring a seamless continuation of service to these policyholders. BOARD OF DIRECTORS’ DECISION ON EXCEPTIONAL DISTRIBUTION OF RESERVES IN 4Q20 Following a number of discussions with the French regulator (ACPR) and, in the context of the COVID-19 crisis, including the ACPR on July 28, 2020, reinforced communication from various European regulators, recommending insurers to refrain from dividend distributions until January 1, 2021, AXA’s Board of Directors, at its meeting on August 5, 2020, decided it will not propose an exceptional distribution of reserves to shareholders in 4Q 2020. Half Year 2020 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2020 Activity and Earnings Indicators ACTIVITY INDICATORS (in Euro million, except percentages) June 30, 2020 June 30, 2019 June 30, 2020 / June 30, 2019 (a) Gross revenues (b) 52,391 57,949 (1.9%) Property & Casualty 28,083 27,963 (1.1%) Life & Savings 15,597 21,287 (8.2%) Health 7,858 7,230 8.7% Asset Management 606 1,240 3.0% Banking 246 229 7.7% APE (c) 2,786 3,227 2.5% NBV Margin (d) 44.5% 40.3% (0.5 pt) (a) Changes are on comparable basis. (b) Net of intercompany eliminations. (c) Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (d) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. (in Euro million) June 30, 2020 June 30, 2019 restated (a) June 30, 2020 / June 30, 2019 restated (a) & (b) Gross revenues (c) 52,391 57,949 (1.9%) France 12,552 13,383 (6.3%) Europe 18,788 19,858 (2.1%) Asia 5,522 4,827 3.0% AXA XL 10,522 10,436 0.2% United States 4,297 0.0% International 3,563 3,662 2.1% Transversal & Central Holdings 1,444 1,487 (2.8%) (a) Restated: reclassification of German and Japanese activities of AXA Life Europe (previously reported as part of Germany and Japan respectively) into AXA Life Europe (included in Transversal & Central Holdings). (b) Changes are on comparable basis. (c) Net of intercompany eliminations. Consolidated Gross revenues amounted to €52,391 million as of June 30, 2020, down 10% on a reported basis and down 2% on a comparable basis compared to June 30, 2019. The 1H19 comparable basis mainly includes the following adjustments: (i) the exclusion of United States contribution of the first quarter of 2019 following the deconsolidation of Equitable Holdings, Inc. (€-4.3 billion or +7.3 points), (ii) the exclusion of the Savings portion of 1H19 premiums related to the additional Group Life foundations that have been transformed in Switzerland since July 1, 2019 (€-0.9 billion or +1.5 points), and (iii) the inclusion of AXA Tianping contribution in 1H19 (€+0.4 billion or -0.6 point), following its full consolidation as at December 31, 2019. Half Year 2020 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2020 Also, the 1H20 comparable basis includes the foreign exchange rate movements mainly due to the depreciation of average Euro exchange rate against most major currencies (€-0.5 billion or +0.8 point). Gross revenues Gross revenues were down 10% on a reported basis and down 2% on a comparable basis to €52,391 million. Property & Casualty gross revenues were down 1% (or €-307 million) on a comparable basis to €28,083 million, driven by Commercial lines (0%) and Personal lines (-2%): Europe (€-123 million or -1%) to €10,335 million, driven by (i) Personal lines (€-125 million or -2%) mostly from a strong market competition in both Germany (-4%) and Switzerland (-2%) combined with lower new business in the context of the COVID-19 lockdowns in Motor, slightly offset by (ii) Commercial lines (€+2 million or 0%) stemming from Germany (+3%) mainly from higher new business as well as from higher average premium in Non-Motor, and Italy (+6%) following a strong increase in Property during the first quarter, partly offset by the United Kingdom & Ireland (-4%) from lower retention and lower new business in Motor, and Belgium (-4%) from lower new business in the context of the COVID-19 crisis and pruning measures; France (€-116 million or -3%) to €3,769 million, mainly driven by solidarity measures towards both small companies and independent workers in the context of the COVID-19 crisis, partly offset by a strong growth in Commercial lines from both volume and tariff increases; Transversal (€-69 million or -10%) to €621 million, mainly driven by Commercial lines (€-52 million or -9%) at AXA Assistance from lower renewals in both Motor and Travel in the context of the COVID-19 crisis; International (€-47 million or -2%) to €1,881 million, driven by Personal lines (€-46 million or -6%) mainly from lower volumes in Motor in Singapore (-27%) and Mexico (-11%) in the context of the COVID-19 crisis; partly offset by: Asia (€+31 million or +3%) to €1,055 million, driven by Personal lines (€+30 million or +3%) primarily from (i) Direct South Korea (+15%) in Motor mainly driven by tariff increases and higher volumes, as well as in Non-Motor mostly from higher volumes, and (ii) Thailand (+81%) mainly driven by higher new business in Motor during the first quarter; AXA XL (€+17 million or 0%) to €10,421 million as the growth in Insurance mostly from tariff increases (+9%), was almost fully offset by the impact of the COVID-19 crisis (-8%) and selective underwriting across both Insurance and Reinsurance (-1%). Life & Savings gross revenues were down 8% (or €-1,385 million) on a comparable basis to €15,597 million, mainly driven by G/A Savings (-25%), partly offset by Protection (+1%) and Unit-Linked (+1%): France (€-964 million or -14%) to €6,168 million, mainly driven by lower volumes in both (i) Individual Savings (€-1,065 million or -24%) and (ii) Protection (€-78 million or -4%) in the context of the COVID-19 crisis, partly offset by an increase in (iii) Unit-Linked (€+272 million or +16%) stemming from a large Group contract; Europe (€-399 million or -7%) to €5,397 million, mainly driven by (i) G/A Savings (€-228 million or -11%) primarily in Italy (-18%) from reduced sales during the COVID-19 crisis, partly offset by higher sales of hybrid products in Germany (+11%), and (ii) Unit-Linked (€-226 million or -24%) notably in Italy (-42%) due to the impact of the COVID-19 crisis as well as a shift in business mix towards investment products for which premiums are not recognized as gross revenues under IFRS, partly offset by (iii) Protection (€+35 million or +1%) mainly from Switzerland (+4%) reflecting strong sales of semi-autonomous products in Group Life; Half Year 2020 Financial Report 16 I ACTIVITY REPORT – HALF YEAR 2020 International (€-15 million or -2%) to €610 million, mainly driven by (i) G/A Savings (€-44 million or -22%) primarily from a portfolio put in run-off in Colombia (-72%), partly offset by (ii) Protection (€+22 million or +6%) mainly from higher renewals in Protection with Savings in Mexico (+20%); Asia (€-5 million or 0%) to €3,206 million, mainly driven by (i) G/A Savings (€-94 million or -21%) and (ii) Unit-Linked (€-19 million or -15%) both primarily from Japan (-75%) mainly due to the temporary discontinuation of the capital light Single Premium Whole Life product as a consequence of the decrease of interest rates, partly offset by (iii) Protection with Savings (€+111 million or +5%) mostly from in-force growth in Japan (+5%) and Hong Kong (+4%). Health gross revenues were up 9% (or €+633 million) on a comparable basis to €7,858 million, driven by Group business (+11%) and Individual business (+7%): France (€+230 million or +10%) to €2,547 million, primarily driven by higher volumes in Group business (€+211 million or +11%) in both international and domestic markets; International (€+132 million or +16%) to €905 million, mainly in (i) Mexico (€+63 million or +15%) from tariff increases combined with higher volumes in both Group and Individual businesses, and in (ii) the Gulf Region (€+41 million or +19%) from large accounts in Group business; Asia (€+129 million or +12%) to €1,261 million, from (i) Individual business (€+100 million or +11%) mainly in China (€+78 million) driven by higher volumes following the launch of a new digital partnership, in Hong Kong (+6%) mainly from tariff increases, and in Japan (+1%), combined with (ii) Group business (€+29 million or +18%) primarily in China (€+24 million) driven by a new partnership; Europe (€+126 million or +4%) to €3,045 million, from (i) Individual business (€+105 million or +5%) notably in Germany (+5%) mainly due to the continued growth in the civil servants segment and tariff increases in full benefit insurance, Switzerland (+85%) due to the continued portfolio growth, combined with higher volumes and tariff increases in Spain (+8%), and (ii) Group business (€+20 million or +3%) mainly from new large corporate contracts in Belgium (+14%); Transversal (€+16 million or +18%) to €100 million, at AXA Assistance driven by higher renewals in Group business. Asset Management gross revenues were up 3% (or €+17 million) on a comparable basis to €606 million, mainly driven by higher transaction fees as well as higher management fees from higher average assets under management due to both (i) favorable financial markets in 2H19 and up to the beginning of the COVID-19 crisis, as well as (ii) net inflows in both Alt and Core expertises, partly offset by lower management fee bps as a result of an unfavorable change in product mix. Banking gross revenues were up 8% (or €+18 million) on a comparable basis to €246 million, driven by AXA Bank Belgium (+4%), AXA Bank Germany (+102%), and AXA Banque France (+8%) mainly driven by a higher commercial activity. Half Year 2020 Financial Report 17 I ACTIVITY REPORT – HALF YEAR 2020 New business Annual Premium Equivalent (1) New business APE was down 14% on a reported basis and up 2% on a comparable basis to €2,786 million, mainly driven by strong sales in (i) Protection with G/A Savings notably in Switzerland, and (ii) Unit-Linked mostly from a large contract underwritten during the first quarter in France, partly offset by (iii) the reduced sales of G/A Savings products in the context of the COVID-19 crisis, notably in France, China and Italy. New Business Value Margin (2) New Business Value Margin stood at 44.5%, increasing by 4.2 points. On a comparable basis, restated mainly for the deconsolidation of Equitable Holdings, Inc., New Business Value Margin decreased by 0.5 point, mainly driven by (i) a negative impact in G/A Savings primarily driven by an unfavorable change in business mix from higher sales in Group business in France, partly offset by (ii) a positive impact in Protection with Savings reflecting a favorable business mix in Asia. (1) New business Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (2) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. Half Year 2020 Financial Report 18 I ACTIVITY REPORT – HALF YEAR 2020 UNDERLYING EARNINGS, ADJUSTED EARNINGS AND NET INCOME GROUP SHARE June 30, 2020 (in Euro million) June 30, 2020 Property & Casualty Life & Savings Health Asset Management Investment margin 2,495 1,433 985 77 Fees & revenues 3,135 2,287 847 Net technical margin 7,471 6,289 412 769 Expenses (10,188) (6,692) (2,334) (1,162) Amortization of value of purchased life business in-force (39) (37) (3) Underlying earnings before tax 2,581 1,031 1,314 528 176 Income tax expenses/benefits (746) (470) (206) (145) (52) Income from affiliates and associates 140 35 85 11 9 Minority interests (89) (52) (27) (7) (3) Underlying earnings Group share 1,885 544 1,165 388 130 (a) Other corresponds to banking activities and holding. (in Euro million, except percentages) June 30, 2020 France Europe Asia AXA XL International Investment margin 2,495 889 748 40 587 197 Fees & revenues 3,135 1,278 593 1,075 162 Net technical margin Expenses 7,471 (10,188) 1,176 (2,387) 3,496 (3,144) 814 (1,156) 895 (2,261) 805 (881) Amortization of value of purchased life business in-force (39) (25) (14) (1) Underlying earnings before tax from insurance activities 2,873 956 1,667 759 (779) 282 Underlying earnings before tax from other activities (292) (1) 63 (2) (53) 29 Income tax expenses / benefits (746) (204) (417) (154) (11) (65) Income from affiliates and associates Minority interests 140 (89) 3 (2) (0) (43) 86 (4) (0) 42 (38) Underlying earnings Group share 1,885 753 1,270 685 (843) 251 Net capital gains or losses attributable to shareholders net of income tax 98 118 24 (3) (21) (17) Adjusted earnings Group share 1,984 871 1,294 682 (864) 233 Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) (169) (169) (315) (54) (179) (18) (65) (0) (84) (1) 66 (15) Goodwill and other related intangible impacts Integration and restructuring costs (93) (123) (4) (18) (14) (10) (4) (25) (85) (13) (4) NET INCOME GROUP SHARE 1,429 498 1,066 602 (1,059) 268 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 101.7% 94.0% 94.6% 94.1% 97.1% 102.3% 91.9% 95.9% 94.7% 94.8% 78.6% 88.2% 115.2% - - 96.4% 100.8% 96.7% Half Year 2020 Financial Report I Other (a) (468) 127 (0) (0) (341) Transversal & Central Holdings 34 27 285 (358) (12) (328) 103 9 (3) (230) (2) (232) 408 (82) (28) (12) 55 106.2% 96.4% - 19 ACTIVITY REPORT – HALF YEAR 2020 I June 30, 2019 (in Euro million) June 30, 2019 (a) Property & Casualty Life & Savings (a) Health (a) Asset Management (a) Other (a) & (b) Investment margin 2,487 1,430 992 65 Fees & revenues 2,958 2,144 813 Net technical margin 9,041 7,664 614 763 Expenses (9,917) (6,505) (2,260) (1,152) Amortization of value of purchased life business in-force (32) (28) (3) Underlying earnings before tax 4,156 2,589 1,462 486 167 (547) Income tax expenses/benefits (879) (609) (252) (131) (51) 165 Income from affiliates and associates 433 46 312 (3) 95 (17) Minority interests (91) (45) (36) (7) (3) (0) Underlying earnings Group share 3,620 1,981 1,486 345 208 (400) (a) As a consequence of the deconsolidation of Equitable Holdings, Inc. (“EQH”) as of March 31, 2019, and its subsequent accounting for under equity method, the United States underlying earnings contribution was fully accounted for under income from affiliates and associates in 1H19. (b) Other corresponds to banking activities and holding. (in Euro million, except percentages) June 30, 2019 (a) France Europe (b) Asia (b) AXA XL United States (a) International Transversal & Central Holdings (b) Investment margin Fees & revenues 2,487 2,958 837 1,122 876 568 22 1,070 503 - 199 172 51 27 Net technical margin Expenses 9,041 (9,917) 1,582 (2,403) 3,399 (3,090) 439 (851) 2,428 (2,281) 813 (923) 380 (370) Amortization of value of purchased life business in-force (32) (23) (7) (1) Underlying earnings before tax from insurance activities 4,537 1,138 1,728 673 651 260 87 Underlying earnings before tax from other activities (380) 1 49 (8) (48) 31 (406) Income tax expenses / benefits (879) (269) (406) (133) (100) (61) 90 Income from affiliates and associates Minority interests 433 (91) 5 (2) (48) 91 (4) 1 (2) 283 41 (32) 11 (3) Underlying earnings Group share 3,620 873 1,324 619 502 283 240 (221) Net capital gains or losses attributable to shareholders net of income tax 386 68 231 10 45 (3) (2) 35 Adjusted earnings Group share 4,006 941 1,555 629 547 280 238 (185) Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) (767) (705) (60) (4) (267) (36) 3 (6) (45) 4 (22) 8 (450) (597) Goodwill and other related intangible impacts Integration and restructuring costs (59) (142) (6) (18) (25) (8) (1) (20) (82) (0) (5) (12) (2) (0) (22) NET INCOME GROUP SHARE 2,333 872 1,208 625 394 257 232 (1,255) Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 95.1% 93.9% 93.2% 90.8% 97.7% 97.8% 92.8% 95.4% 95.2% 95.4% 77.5% 86.3% 98.3% - - 98.4% 98.6% 98.7% 95.7% 100.6% - (a) As a consequence of the deconsolidation of Equitable Holdings, Inc. (“EQH”) as of March 31, 2019, and its subsequent accounting under the equity method, the United States underlying earnings contribution was fully accounted for under income from affiliates and associates in 1H19. As a result, EQH contribution was excluded from Health and Protection Combined Ratio calculation in 1H19. (b) Reclassification of German and Japanese activities of AXA Life Europe (previously reported as part of Germany and Japan respectively) into AXA Life Europe (included in Transversal & Central Holdings). Half Year 2020 Financial Report 20 ACTIVITY REPORT – HALF YEAR 2020 ALTERNATIVE PERFORMANCE MEASURES Adjusted Earnings, Underlying Earnings, Adjusted Return on Equity, Underlying Earnings per share, Combined Ratio and Debt Gearing are Alternative Performance Measures (“APMs”) as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from Adjusted Earnings, Underlying Earnings and Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided in the above tables. Adjusted Return on Equity and Underlying Earnings per share are reconciled to the financial statements in the table set forth on page 26 of this report, and Debt Gearing calculation methodology based on the information available in the financial statements is defined on page 22 of this report. For further information on any of the above-mentioned APMs, see the Glossary on pages 60 to 67 of this report. Adjusted Earnings Adjusted Earnings represent the net income (Group share) as disclosed in the above tables, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: integration and restructuring costs related to material newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill, impairments and amortization of intangibles related to customers and distribution; exceptional operations (primarily change in scope and discontinued operations); and profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Underlying Earnings Underlying Earnings correspond to Adjusted Earnings without the following elements, net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowance (on assets not designated under fair value option or trading assets); and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities (other than the funds backing contracts where the financial risk is borne by policyholders). Adjusted Return on Equity The Adjusted Return on Equity (“Adjusted RoE”) is calculated as adjusted earnings net of financial charges related to undated subordinated debt, preferred shares and mandatory exchangeable bonds up to the date of deconsolidation of EQH (recorded through shareholders’ equity as disclosed in Part 2.4 - “Consolidated statement of changes in equity” and financial debt as disclosed in Part 2.6 - Note 7 “Financing debt” of the Half Year 2020 Financial Report) divided by the weighted average shareholders’ equity. The weighted average shareholders’ equity: is based on opening shareholders’ equity adjusted for weighted average impacts of capital flows (including dividends); Half Year 2020 Financial Report 21 I ACTIVITY REPORT – HALF YEAR 2020 without reserves relating to change in fair value of financial investments available for sale as disclosed in Part 2.4 - “Consolidated Statement of Changes in Equity” of the Half Year 2020 Financial Report; without undated subordinated debt as disclosed in Part 2.4 - “Consolidated statement of changes in equity” of the Half Year 2020 Financial Report. Underlying Earnings per share Underlying Earnings per share corresponds to Group Share Underlying Earnings net of financial charges related to undated subordinated debts recorded through shareholders’ equity – Group share, and preferred shares and mandatory exchangeable bonds up to the date of deconsolidation of EQH (recorded through shareholders’ equity as disclosed in Part 2.4 - “Consolidated Statement of Changes in Equity” and financial debt as disclosed in Part 2.6 - Note 7 “Financing debt” of the Half Year 2020 Financial Report), divided by the weighted average number of outstanding ordinary shares. Combined Ratio (applicable for Property & Casualty, Health and Protection) The Combined Ratio is the sum of the all accident year loss ratio and the underlying expense ratio. All accident year loss ratio net of reinsurance is the ratio of: o all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding unwind of the discount rate used in calculating technical reserves; to o earned revenues gross of reinsurance. Expense ratio is the ratio of: o expenses (excluding claims handling costs, including changes in VBI amortization); to o earned revenues gross of reinsurance. Debt Gearing Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt as disclosed in Part 2.6 - Note 7 “Financing debt” and undated subordinated debt as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Half Year 2020 Financial Report) by total capital employed (shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus gross debt). Furthermore, following the deconsolidation of Equitable Holdings, Inc., mandatory exchangeable bonds issued by AXA in May 2018 were excluded from Debt Gearing. Half Year 2020 Financial Report 22 I ACTIVITY REPORT – HALF YEAR 2020 COMMENTARY ON GROUP EARNINGS Underlying earnings Underlying earnings amounted to €1,885 million, down €1,734 million (-48%) versus 1H19 on a reported basis. On a constant exchange rate basis, underlying earnings decreased by €1,752 million (-48%). Excluding the €283 million contribution of Equitable Holdings, Inc. in 1H19, underlying earnings decreased by €1,469 million (-44%), driven by: the impacts of €-1.5 billion from COVID-19 crisis, mainly from Property & Casualty claims in Business Interruption and Event Cancellation, and to a lesser extent from other lines such as Casualty, Professional Liability, Directors & Officers and Travel, as well as solidarity measures, partly compensated by the decrease in claims frequency during lockdowns, mainly in Motor; partly offset by the increase in underlying earnings excluding the COVID-19 impacts (+1%). Excluding the contribution of Equitable Holdings, Inc. in 1H19, the decrease of €1,469 million in underlying earnings was broken down as follows: Property & Casualty Underlying earnings decreased by €1,427 million (-72%) to €544 million: COVID-19 impacts amounted to €-1.5 billion, mainly from Property & Casualty claims in Business Interruption and Event Cancellation, and to a lesser extent in other lines such as Casualty, Professional Liability, Directors & Officers and Travel, as well as solidarity measures in France, combined with an adverse impact on volumes net of expense reductions, partly compensated by the decrease in claims frequency during lockdowns, mainly in Motor. Underlying earnings excluding COVID-19 impacts increased by €0.1 billion (+3%) driven by business growth while all year combined ratio improved by 0.1 point due to (i) more favorable prior year reserve developments (-0.5 point), mainly in France and in Europe, and (ii) lower expense ratio (-0.2 point) as a result of cost reduction initiatives, partly offset by (iii) higher Nat Cat charges (+0.6 point) mainly at AXA XL and in Northern Europe due to the storms occurred in the beginning of the year. Investment result remained stable as lower dividends and funds distributions were offset by higher private equity fund distributions at AXA XL. Life & Savings Underlying earnings decreased by €116 million (-9%) to €1,165 million, mainly driven by (i) a lower net technical margin mainly due to the extension of disability coverage to vulnerable customers (€-110 million) and the decrease in annuities discount rate (€-38 million) in France, combined with (ii) a lower investment margin (€-9 million) as the decrease in investment income from lower yields and dividends was partly offset by the decrease in policyholder participation, partly offset by (iii) lower income tax (€+49 million) as a result of lower pre-tax underlying earnings. Health Underlying earnings increased by €25 million (+7%) to €388 million, driven by business growth combined with the improvement of the current year combined ratio (-0.4 point) in France and Hong Kong, partly offset by lower prior year reserve developments (+0.6 point), mainly in France. Other activities Underlying earnings increased by €49 million to €-211 million, mainly at AXA SA (€+33 million) driven by lower general expenses, higher dividends received mainly from the remaining stake in Equitable Holdings, Inc. related to the EQH shares to be delivered on redemption of the AXA SA bonds mandatorily exchangeable into EQH shares, maturing in May 2021, and lower tax paid on dividends received from subsidiaries. Half Year 2020 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2020 Adjusted earnings Net realized capital gains and losses attributable to shareholders amounted to €98 million. On a constant exchange rate basis, net realized capital gains and losses attributable to shareholders decreased by €288 million due to the financial markets turmoil resulting from the COVID-19 crisis: €-298 million higher impairments to €-343 million, mainly driven by equity instruments (€-114 million to €-143 million), real estate (€-84 million to €-80 million), alternative investments (€-71 million to €-90 million) and fixed income assets (€-28 million to €-30 million), as a consequence of the financial markets turmoil resulting from the COVID-19 crisis, significantly impacting the fair value of equity securities, private equity and hedge funds, as well as credit investments; €-14 million unfavorable impact of equity derivatives to €-35 million; partly offset by: €+23 million higher realized capital gains to €476 million, mainly driven by equity securities (€+97 million to €263 million) and fixed income assets (€+1 million to €27 million), partly offset by alternative investments (€-67 million to €3 million) and real estate (€-7 million to €184 million). As a result, adjusted earnings decreased by €2,022 million (-50%) to €1,984 million. On a constant exchange rate basis, adjusted earnings decreased by €2,040 million (-51%). Net income Net income amounted to €1,429 million, down €904 million (-39%). On a constant exchange rate basis, net income decreased by €904 million (-39%), driven by: lower adjusted earnings (€-2,040 million); a negative change in the fair value of assets accounted for under fair value option, down €608 million to €-594 million, due to the financial markets turmoil resulting from the COVID-19 crisis, significantly impacting the valuation of fixed income assets and credit funds (€-330 million to €-184 million), private equity funds (€-201 million to €-256 million), and hedge funds (€-125 million to €-128 million); a favorable change in the fair value of derivatives net of foreign exchange impacts, up €1,215 million to €425 million, driven by: o the change in the fair value of equity, interest rates and credit derivatives not eligible for hedge accounting under IAS 39, up €1,084 million to €379 million, from the equity market turmoil resulting from the COVID-19 crisis as well as from the significant decrease of the exposure to interest rates risk at AXA SA, o the change in the fair value of foreign exchange derivatives not eligible for hedge accounting under IAS 39 net of foreign exchange rate movements on assets and liabilities denominated in foreign currencies, up €131 million to €47 million; lower impact from exceptional operations, up €542 million to €-169 million mainly from: o the non-repeat of the 1H19 negative impact linked to the deconsolidation of Equitable Holdings, Inc., corresponding to the difference between the fair value and the consolidated carrying value of EQH at the date of the deconsolidation (€+598 million) at AXA SA, o partly offset by the exceptional contributions to French COVID-19 solidarity funds (€-54 million) to support both small companies and self-employed individuals in France. Half Year 2020 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2020 SHAREHOLDERS’ EQUITY GROUP SHARE As of June 30, 2020, Shareholders' equity Group share totaled €70.1 billion. The movements in Shareholders' equity Group share since December 31, 2019, are presented in the table below: (in Euro million) Shareholders' equity Group share At December 31, 2019 69,897 Share Capital 0 Capital in excess of nominal value (3) Equity-share based compensation 23 Treasury shares sold or bought in open market (110) Deeply subordinated debt (including accumulated interests charges) (90) Fair value recorded in shareholders' equity 1,005 Impact of currency fluctuations (758) Dividends (1,740) Other (25) Net income for the period 1,429 Actuarial gains and losses on pension benefits 417 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk 20 At June 30, 2020 70,065 SOLVENCY INFORMATION (1) As of June 30, 2020, the Group’s Eligible Own Funds (“EOF”) amounted to €53.9 billion and the Solvency II ratio to 180%, compared to €59.4 billion and 198% as of December 31, 2019. (1)Solvency-related information included in this section, including the Solvency II ratio and the Eligible Own Funds (“EOF”), is not subject to the review of the Half Year 2020 consolidated financial statements included in the Half Year 2020 Financial Report, nor the verification of the information otherwise included in such Half Year 2020 Financial Report, performed by the Group’s statutory auditors. Half Year 2020 Financial Report 25 I ACTIVITY REPORT – HALF YEAR 2020 SHAREHOLDER VALUE Earnings per share (“EPS”) June 30, 2020 June 30, 2019 June 30, 2020 / June 30, 2019 (in Euro, except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,381 2,385 2,381 2,384 Net income (Euro per ordinary share) 0.56 0.56 0.92 0.92 (39.0%) (39.1%) Adjusted earnings (Euro per ordinary share) 0.80 0.79 1.63 1.62 (51.1%) (51.1%) Underlying earnings (Euro per ordinary share) 0.75 0.75 1.46 1.46 (48.5%) (48.5%) Return On Equity (“ROE”) (in Euro million, except percentages) June 30, 2020 June 30, 2019 June 30, 2020 / June 30, 2019 ROE Net income Average shareholders' equity Adjusted ROE Adjusted earnings (a) Average shareholders' equity (b) Underlying ROE Underlying earnings (a) Average shareholders' equity (b) (a) Including adjustment to reflect net financial charges related to undated subordinated debt (recorded through shareholders' equity). In 2019, it also included adjustments to reflect financial charges related to the preferred shares and the equity component of mandatory exchangeable bonds into shares of Equitable Holdings, Inc. for the first three months of 2019 prior to its deconsolidation. (b) Excluding fair value of invested assets and derivatives and undated subordinated debt (both recorded through shareholders' equity). 4.1% 1,429 69,809 8.8% 1,894 43,180 8.3% 1,796 43,180 7.3% 2,333 63,883 18.3% 3,870 42,198 16.5% 3,484 42,198 (3.2 pts) (9.6 pts) (8.2 pts) Half Year 2020 Financial Report 26 I ACTIVITY REPORT – HALF YEAR 2020 SEGMENT INFORMATION France (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 12,552 13,383 Property & Casualty 3,769 3,922 Life & Savings 6,168 7,086 Health 2,547 2,312 Other (b) 69 64 Underlying earnings before tax 955 1,139 Property & Casualty 442 568 Life & Savings 404 482 Health 110 88 Other (c) (1) 1 Income tax expenses / benefits (204) (269) Minority interests (2) (2) Income from affiliates and associates 3 5 Underlying earnings Group share 753 873 Net capital gains or losses attributable to shareholders net of income tax 118 68 Adjusted earnings Group share 871 941 Profit or loss on financial assets (under fair value option) and derivatives (315) (60) Exceptional operations (including discontinued operations) (54) (4) Goodwill and other related intangible impacts Integration and restructuring costs (4) (6) NET INCOME GROUP SHARE 498 872 Property & Casualty Combined Ratio 94.1% 90.8% Health Combined Ratio 97.1% 97.7% Protection Combined Ratio 102.3% 97.8% New business APE 987 1,052 NBV Margin 28.0% 30.8% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities. (c) Other corresponds to banking activities and holding. Gross revenues decreased by €831 million (-6%) to €12,552 million. On a comparable basis, gross revenues decreased by €845 million (-6%): Property & Casualty (€-116 million or -3%) to €3,769 million, mainly due to the impact of the COVID-19 crisis from solidarity measures towards both small companies and independent workers, partly offset by a strong growth in Commercial lines (+8%) from both volume and tariff increases and to a lesser extent by Personal lines (+1%); Half Year 2020 Financial Report 27 I ACTIVITY REPORT – HALF YEAR 2020 Life & Savings (€-964 million or -14%) to €6,168 million, mainly driven by lower premiums collected during the COVID-19 lockdown period mostly in Individual Savings (€-1,065 million or -24%) and to a lesser extent in Protection (€-78 million or -4%), notably in international Credit and Lifestyle Protection business with €-114 million (-29%) whilst domestic activity grew by €36 million (+2%). This was partly offset by higher volumes in Unit-Linked (€+272 million or +16%), mainly from a large Group contract sold during the first quarter 2020. Unit-Linked gross revenues contributed 48% (1) of total Individual Savings, as compared to 38% (1) on average for the market; Health (€+230 million or +10%) to €2,547 million, driven by higher volumes in Group business (€+211 million or +11%) in both international and domestic markets, as well as in Individual business (€+19 million or +6%); Other (€+5 million or +8%) to €69 million at AXA Banque France mainly due to a higher interest margin. APE decreased by €65 million (or -6%) to €987 million. On a comparable basis, APE decreased by €27 million (-3%) mainly driven by G/A Savings (€-111 million or -34%) from lower sales during the COVID-19 lockdown period, partly offset by Health (€+52 million or +18%) due to higher sales in international Group business, as well as by Unit- Linked (€+32 million or +19%) mainly from a large contract in Group Savings sold during the first quarter of 2020. NBV Margin decreased by 2.8 points to 28.0%. On a comparable basis, NBV Margin decreased by 3.6 points driven by an unfavorable change in business mix from higher sales in Group Health and Group Savings products. Underlying earnings before tax decreased by €183 million (-16%) to €955 million: Property & Casualty (€-127 million or -22%) to €442 million, mainly driven by the impact of the COVID- 19 crisis primarily from higher claims in Business Interruption, as well as from lower revenues resulting from the implementation of COVID-19 related solidarity measures, partly offset by a temporary reduction of claims frequency notably in Motor during the lockdown period, as well as by business growth and more favorable prior year reserve developments; Life & Savings (€-77 million or -16%) to €404 million, mainly driven by the impact of the extension of the disability coverage to vulnerable customers and the decrease in annuities discount rate, partly offset by an exceptional reserve release; Health (€+22 million or +26%) to €110 million, mainly driven by business growth as well as lower frequency during the lockdown period, partly offset by unfavorable prior year reserve developments; Other (€-2 million) to €-1 million. Income tax expenses decreased by €65 million (-24%) to €-204 million in line with lower pre-tax underlying earnings. Underlying earnings decreased by €120 million (-14%) to €753 million. Adjusted earnings decreased by €70 million (-7%) to €871 million driven by lower underlying earnings as well as higher impairments on both real estate and equity assets as a consequence of the financial markets turmoil resulting from the COVID-19 crisis, partly offset by higher realized capital gains in real estate assets. Net income decreased by €374 million (-43%) to €498 million driven by lower adjusted earnings, an unfavorable change in the fair value of mutual funds, as well as the exceptional contributions to French COVID-19 solidarity funds (€-54 million) to support both small companies and self-employed individuals. (1) Including Eurocroissance. Half Year 2020 Financial Report 28 I ACTIVITY REPORT – HALF YEAR 2020 Europe (in Euro million, except percentages) June 30, 2020 June 30, 2019 restated (a) Gross revenues (b) 18,788 19,858 Property & Casualty 10,335 10,292 Life & Savings 5,397 6,624 Health 3,045 2,937 Other (c) 11 6 Underlying earnings before tax 1,730 1,777 Property & Casualty 1,079 1,070 Life & Savings 457 517 Health 131 142 Other (d) 63 49 Income tax expenses / benefits (417) (406) Minority interests (43) (48) Income from affiliates and associates (0) Underlying earnings Group share 1,270 1,324 Net capital gains or losses attributable to shareholders net of income tax 24 231 Adjusted earnings Group share 1,294 1,555 Profit or loss on financial assets (under fair value option) and derivatives (179) (267) Exceptional operations (including discontinued operations) (18) (36) Goodwill and other related intangible impacts (18) (18) Integration and restructuring costs (14) (25) NET INCOME GROUP SHARE 1,066 1,208 Property & Casualty Combined Ratio 91.9% 92.8% Health Combined Ratio 95.9% 95.4% Protection Combined Ratio 94.7% 95.2% New business APE 1,051 655 NBV Margin 48.7% 49.6% (a) Restated: reclassification of German activities of AXA Life Europe (previously reported as part of Germany) into AXA Life Europe (included in Transversal & Central Holdings). (b) Net of intercompany eliminations. (c) Other corresponds to banking activities. (d) Other corresponds to banking activities and holding. Half Year 2020 Financial Report 29 I ACTIVITY REPORT – HALF YEAR 2020 EUROPE - SWITZERLAND (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 4,263 4,881 Property & Casualty 2,923 2,776 Life & Savings 1,309 2,088 Health 31 16 Underlying earnings before tax 493 478 Property & Casualty 333 316 Life & Savings 166 169 Health (6) (8) Income tax expenses / benefits (74) (80) Minority interests (2) (2) Income from affiliates and associates Underlying earnings Group share 416 396 Net capital gains or losses attributable to shareholders net of income tax 17 36 Adjusted earnings Group share 434 431 Profit or loss on financial assets (under fair value option) and derivatives (59) (40) Exceptional operations (including discontinued operations) 3 1 Goodwill and other related intangible impacts (12) (12) Integration and restructuring costs NET INCOME GROUP SHARE 365 380 Property & Casualty Combined Ratio 84.3% 85.0% Health Combined Ratio n/a n/a Protection Combined Ratio 91.5% 93.4% New business APE 615 218 NBV Margin 48.8% 50.5% Average exchange rate: € 1.00 = Swiss Franc 1.06 1.13 (a) Net of intercompany eliminations. Since July 1, 2019, AXA Switzerland has transformed five more foundations from full insurance to semi- autonomous. As a result, the change in gross revenues on a comparable basis excludes the savings portion of the 2019 premiums related to the transformed in-force Group Life business. Gross revenues decreased by €618 million (-13%) to €4,263 million. On a comparable basis, gross revenues increased by €40 million (+1%): Property & Casualty (€-22 million or -1%) to €2,923 million, due to Personal lines (€-29 million or -2%) driven by Motor reflecting the ongoing market competition as well as lower new business in the context of the COVID-19 crisis, while Commercial lines increased (€+7 million or +1%) mainly due to Workers’ Compensation driven by a positive volume and price effect, partly offset by a decrease in Liability in the context of the COVID-19 crisis; Half Year 2020 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2020 Life & Savings (€+49 million or +4%) to €1,309 million, driven by Group Life (€+42 million or +5%) due to strong sales of semi-autonomous products, and Individual Life (€+6 million or +2%) from higher sales of a new hybrid product launched in 2H19; Health (€+13 million or +84%) to €31 million, due to the continuing portfolio growth. APE increased by €397 million (+182%) to €615 million. On a comparable basis, APE increased by €361 million (+165%) driven by Group Life (€+369 million) due to strong sales of semi-autonomous products including the exceptional acquisition of a significant number of new clients, partly offset by lower new business in Individual Life (€-8 million or -19%) in the context of the COVID-19 crisis. NBV Margin decreased by 1.6 points to 48.8% mainly driven by an adverse business mix within Group Life as a result of the exceptional acquisition of a significant number of new clients. Underlying earnings before tax increased by €15 million (+3%) to €493 million. On a constant exchange rate basis, underlying earnings before tax decreased by €14 million (-3%): Property & Casualty (€-2 million or -1%) to €333 million, from a lower investment income (€- 1 2 million) and a deterioration in the current year combined ratio (+4.2 points) driven by Business Interruption claims linked to the COVID-19 lockdown and higher Nat Cat charges, partly offset by lower attritional losses from lower claims frequency mainly in Motor and Workers’ Compensation combined with more favorable prior year reserve developments (-4.9 points); Life & Savings (€-13 million or -9%) to €166 million driven by Individual Life (€-14 million), mainly due to a less favorable claims experience in disability; Health remained stable at €-6 million. Income tax expenses decreased by €5 million (-7%) to €-74 million. On a constant exchange rate basis, income tax expenses decreased by €10 million (-12%) mainly driven by lower pre-tax underlying earnings and a further decrease of the corporate tax rate from 18.5% to 18.0% enacted in 2020. Underlying earnings increased by €21 million (+5%) to €416 million. On a constant exchange rate basis, underlying earnings decreased by €3 million (-1%). Adjusted earnings increased by €2 million (0%) to €434 million. On a constant exchange rate basis, adjusted earnings decreased by €23 million (-5%) driven by lower underlying earnings, as well as higher impairments, mainly from private equity investments. Net income decreased by €14 million (-4%) to €365 million. On a constant exchange rate basis, net income decreased by €35 million (-9%) driven by lower adjusted earnings combined with unfavorable changes in the fair value of alternative investments and USD foreign exchange derivatives not eligible for hedge accounting, partly offset by a positive change in the fair value of equity derivatives not eligible for hedge accounting. Half Year 2020 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2020 EUROPE - GERMANY (in Euro million, except percentages) June 30, 2020 June 30, 2019 restated (a) Gross revenues (b) 6,094 5,969 Property & Casualty 2,763 2,790 Life & Savings 1,575 1,516 Health 1,745 1,657 Other (c) 11 6 Underlying earnings before tax 422 453 Property & Casualty 253 269 Life & Savings 52 83 Health 56 60 Other (d) 59 42 Income tax expenses / benefits (149) (138) Minority interests (5) (3) Income from affiliates and associates Underlying earnings Group share 268 312 Net capital gains or losses attributable to shareholders net of income tax (4) 15 Adjusted earnings Group share 264 327 Profit or loss on financial assets (under fair value option) and derivatives (52) (61) Exceptional operations (including discontinued operations) (4) Goodwill and other related intangible impacts (2) (2) Integration and restructuring costs (4) (3) NET INCOME GROUP SHARE 203 260 Property & Casualty Combined Ratio 92.6% 93.6% Health Combined Ratio 96.8% 96.4% Protection Combined Ratio 97.8% 98.5% New business APE 191 181 NBV Margin 59.0% 59.0% (a) Restated: reclassification of German activities of AXA Life Europe (previously reported as part of Germany) into AXA Life Europe (included in Transversal & Central Holdings). (b) Net of intercompany eliminations. (c) Other corresponds to banking activities. (d) Other corresponds to banking activities and holding. Gross revenues increased by €125 million (+2%) to €6,094 million. On a comparable basis gross revenues increased by €125 million (+2%): Property & Casualty (€-27 million or -1%) to €2,763 million, driven by Motor (€-85 million or -9%) reflecting a focus on profitability in a highly competitive market and lower new business in the context of the COVID-19 crisis, partly offset by Commercial Non-Motor (€+47 million or +5%) mainly due to new business as well as higher average premium across all businesses in Mid-Market, and by Personal Non- Motor (€+12 million or +1%) mainly from tariff increases in Household; Half Year 2020 Financial Report 32 I ACTIVITY REPORT – HALF YEAR 2020 Life & Savings (€+59 million or +4%) to €1,575 million, from higher new business in hybrid products (€+64 million or +11%) and in Pure Protection (€+15 million or +6%), as well as higher Single Premiums in Unit- Linked (€+5 million or +3%), partly offset by Protection with Savings (€-28 million or -6%) in line with the strategy; Health (€+88 million or +5%) to €1,745 million, driven by the continued growth in the civil servants segment and tariff increases in full benefit insurance. APE increased by €10 million (+5%) to €191 million. On a comparable basis, APE increased by €10 million (+5%) mainly from higher new business in hybrid products (€+4 million) and from Health (€+4 million). NBV Margin remained stable at 59.0%. Underlying earnings before tax decreased by €31 million (-7%) to €422 million: Property & Casualty (€-16 million or -6%) to €253 million, driven by a lower net investment result (€-37 million) mainly from lower dividends and a higher current year combined ratio (+1.6 points) due to higher claims in Business Interruption and Event Cancellation following the COVID-19 lockdown, partly offset by more favorable prior year reserve developments; Life & Savings (€-30 million or -37%) to €52 million, mainly reflecting a lower investment margin (€-38 million) driven by an increase in policyholder participation combined with a lower investment income, partly offset by a positive impact from higher loadings on premiums (€+7 million) in hybrid products and Pure Protection, in line with volume growth; Health (€-3 million or -5%) to €56 million, driven by a higher combined ratio (+0.4 point) mainly due to higher profit sharing and higher claims frequency, partly offset by lower expenses due to cost savings; Other (€+18 million or +43%) to €59 million, from Holdings (€+16 million) mainly due to an exceptional investment result. Income tax expenses increased by €11 million (+8%) to €-149 million due to less favorable tax one-offs (€-14 million). Underlying earnings decreased by €44 million (-14%) to €268 million. Adjusted earnings decreased by €63 million (-19%) to €264 million driven by lower underlying earnings and higher impairments mainly on equity securities, as a consequence of the financial markets turmoil resulting from the COVID-19 crisis. Net income decreased by €57 million (-22%) to €203 million mainly driven by lower adjusted earnings. Half Year 2020 Financial Report 33 I ACTIVITY REPORT – HALF YEAR 2020 EUROPE - BELGIUM (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 1,765 1,794 Property & Casualty 1,138 1,160 Life & Savings 559 574 Health 67 60 Underlying earnings before tax 242 254 Property & Casualty 107 113 Life & Savings 130 141 Health 6 1 Other (b) (0) (1) Income tax expenses / benefits (52) (62) Minority interests (0) (0) Income from affiliates and associates Underlying earnings Group share 189 192 Net capital gains or losses attributable to shareholders net of income tax 36 164 Adjusted earnings Group share 225 355 Profit or loss on financial assets (under fair value option) and derivatives (27) (111) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts (1) (1) Integration and restructuring costs 0 1 NET INCOME GROUP SHARE 198 244 Property & Casualty Combined Ratio 95.5% 97.0% Health Combined Ratio 92.0% 101.2% Protection Combined Ratio 100.5% 98.2% New business APE 48 36 NBV Margin 44.5% 61.1% (a) Net of intercompany eliminations. (b) Other corresponds to holding. Gross revenues decreased by €29 million (-2%) to €1,765 million. On a comparable basis, gross revenues decreased by €29 million (-2%): Property & Casualty (€-22 million or -2%) to €1,138 million, mostly from Commercial lines (€-22 million or -4%) following the impacts of the COVID-19 crisis and pruning measures in the Mid-Market segment while Personal lines remained stable, as the negative impacts of the COVID-19 crisis on new business were compensated by tariff increases and a higher retention; Life & Savings (€-15 million or -3%) to €559 million, mainly from Unit-Linked (€-11 million or -40%) due to a change in business mix towards pure investment products for which premiums are not recognized as gross revenues under IFRS; Health (€+8 million or +13%) to €67 million, due to new large corporate contracts. Half Year 2020 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2020 APE increased by €11 million (+32%) to €48 million. On a comparable basis, APE increased by €11 million (+32%) driven by a large Unit-Linked Group pension contract, partly offset by a slowdown of the sales in the self-employed segment during the second quarter due to the COVID-19 crisis. NBV Margin decreased by 16.6 points to 44.5% mainly driven by large Unit-Linked Group pension contract. Underlying earnings before tax decreased by €12 million (-5%) to €242 million: Property & Casualty (€-6 million or -6%) to €107 million, mainly driven by a lower net investment income (€-22 million), partly offset by a lower all year combined ratio (-1.5 points) due to a decrease in attritional losses following the COVID-19 crisis as well as a lower claims severity; Life & Savings (€-11 million or -8%) to €130 million, driven by higher general expenses (€-7 million) mainly resulting from higher amortization of deferred acquisition costs (€-7 million) due to an update of economic assumptions; Health (€+5 million) to €6 million; Other remained stable at €0 million. Income tax expenses decreased by €10 million (-16%) to €-52 million driven by lower pre-tax underlying earnings and a decrease in the corporate tax rate from 30% to 25%. Underlying earnings decreased by €2 million (-1%) to €189 million. Adjusted earnings decreased by €130 million (-37%) to 225 million mainly driven by lower underlying earnings, higher impairments (€-93 million) following the financial markets turmoil resulting from the COVID-19 crisis, as well as lower realized capital gains (€-47 million) driven by the non-repeat of the exceptional sale of a building in 2019 (€-85 million). Net income decreased by €46 million (-19%) to €198 million driven by lower adjusted earnings, partly offset by a favorable change in the fair value of derivatives not eligible for hedge accounting, mainly driven by the strong equity market turmoil resulting from the COVID-19 crisis. Half Year 2020 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2020 EUROPE - UNITED KINGDOM & IRELAND (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 2,794 2,856 Property & Casualty 1,771 1,817 Life & Savings 28 26 Health 996 1,013 Underlying earnings before tax 190 245 Property & Casualty 127 154 Life & Savings 2 1 Health 57 81 Other (b) 4 9 Income tax expenses / benefits (35) (35) Minority interests (0) (0) Income from affiliates and associates (0) Underlying earnings Group share 155 209 Net capital gains or losses attributable to shareholders net of income tax (8) 10 Adjusted earnings Group share 147 219 Profit or loss on financial assets (under fair value option) and derivatives (18) (46) Exceptional operations (including discontinued operations) (17) (37) Goodwill and other related intangible impacts (2) (2) Integration and restructuring costs (4) (9) NET INCOME GROUP SHARE 106 125 Property & Casualty Combined Ratio 97.9% 96.7% Health Combined Ratio 94.6% 92.3% (a) Net of intercompany eliminations. (b) Other corresponds to holding. Gross revenues decreased by €62 million (-2%) to €2,794 million. On a comparable basis, gross revenues decreased by €40 million (-1%): Property & Casualty (€-44 million or -2%) to €1,771 million, from Commercial Motor (€-34 million or -10%) and Personal Non-Motor (€-12 million or -4%) mainly in Travel, both due to lower new business in the context of the COVID-19 crisis and lower retention, while Personal Motor slightly increased (€+3 million), as the growth in the United Kingdom and in Ireland (€+19 million) was almost fully offset by premium refunds related to the COVID-19 crisis in Ireland (€-16 million); Life & Savings – Architas (€+2 million or +7%) to €28 million; Health (€+2 million or 0%) to €996 million, mainly driven by volume growth in international business, partly offset by lower volumes in the United Kingdom in the context of the COVID-19 crisis. Underlying earnings before tax decreased by €55 million (-23%) to €190 million. On a constant exchange rate basis, underlying earnings before tax decreased by €55 million (-22%): Property & Casualty (€-27 million or -18%) to €127 million, due to a higher current year loss ratio (+3.3 points) mainly driven by higher Nat Cat charges following the Ciara and Dennis storms (+2.4 points), Half Year 2020 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2020 higher claims from Business Interruption due to COVID-19 lockdown, and higher large losses, partly offset by a lower claims frequency in Motor, and more favorable prior year reserve developments (-2.4 points); Life & Savings – Architas (€+1 million) to €2 million; Health (€-23 million or -29%) to €57 million, driven by a higher combined ratio (+2.2 points) mainly due to the non-repeat of favorable claims experience in the first half of 2019 and higher expenses due to investments to support the business continuity during the lockdown period; Other (€-5 million) to €4 million mainly due to a lower net investment income. Income tax expenses remained stable (-1%) at €-35 million. On a constant exchange rate basis, income tax expenses remained stable (-1%) driven by lower pre-tax underlying earnings, offset by negative tax one-offs (€-11 million). Underlying earnings decreased by €55 million (-26%) to €155 million. On a constant exchange rate basis, underlying earnings decreased by €55 million (-26%). Adjusted earnings decreased by €73 million (-33%) to €147 million. On a constant exchange rate basis, adjusted earnings decreased by €72 million (-33%) driven by lower underlying earnings and higher impairment charges, as a consequence of the financial markets turmoil resulting from the COVID-19 crisis. Net income decreased by €19 million (-15%) to €106 million. On a constant exchange rate basis, net income decreased by €19 million (-15%) as lower adjusted earnings and donations to solidarity funds were partly offset by (i) the non-repeat of the loss relating to the early redemption of a financing debt (€+37 million), and (ii) a favorable change in the fair value of derivatives not eligible to hedge accounting. Half Year 2020 Financial Report 37 I ACTIVITY REPORT – HALF YEAR 2020 EUROPE - SPAIN (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 1,366 1,370 Property & Casualty 877 878 Life & Savings 332 346 Health 156 146 Underlying earnings before tax 155 147 Property & Casualty 104 108 Life & Savings 36 32 Health 15 8 Income tax expenses / benefits (38) (36) Minority interests (0) (0) Income from affiliates and associates Underlying earnings Group share 117 112 Net capital gains or losses attributable to shareholders net of income tax (8) 1 Adjusted earnings Group share 109 113 Profit or loss on financial assets (under fair value option) and derivatives (9) (7) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts (1) (1) Integration and restructuring costs (4) (11) NET INCOME GROUP SHARE 94 94 Property & Casualty Combined Ratio 93.1% 92.3% Health Combined Ratio 88.6% 93.3% Protection Combined Ratio 89.2% 95.5% New business APE 47 48 NBV Margin 62.6% 62.4% (a) Net of intercompany eliminations. Gross revenues decreased by €4 million (0%) to €1,366 million. On a comparable basis, gross revenues decreased by €4 million (0%): Property & Casualty (€-1 million or 0%) to €877 million, mainly due to lower new business in the context of the COVID-19 crisis, partly offset by higher retention; Life & Savings (€-14 million or -4%) to €332 million, mainly due to lower sales in traditional G/A Savings (€-30 million or -32%) in line with the strategy, partly offset by Unit-Linked (€+11 million or +7%) and Pure Protection (€+9 million or +10%); Health (€+11 million or +7%) to €156 million, driven by higher volumes and tariff increases. APE decreased by €2 million (-3%) to €47 million, mainly driven by a decrease in G/A Savings, in line with the strategy. NBV Margin increased by 0.2 point to 62.6%. Half Year 2020 Financial Report 38 I ACTIVITY REPORT – HALF YEAR 2020 Underlying earnings before tax increased by €7 million (+5%) to €155 million: Property & Casualty (€-3 million or -3%) to €104 million, mainly due to a higher loss ratio (+1.8 points) driven by higher natural events, partly offset by lower claims frequency in Motor and a decrease in expense ratio (-0.9 point); Life & Savings (€+4 million or +11%) to €36 million, mainly driven by a better claims experience in Protection; Health (€+7 million or +93%) to €15 million, mainly due to higher volumes, a better claims experience and a decrease in expense ratio (-2.5 points). Income tax expenses increased by €2 million (+6%) to €-38 million in line with higher pre-tax underlying earnings. Underlying earnings increased by €5 million (+5%) to €117 million. Adjusted earnings decreased by €3 million (-3%) to €109 million as higher underlying earnings were more than offset by higher impairments on equity securities following the financial markets turmoil resulting from the COVID-19 crisis. Net income increased by €1 million (+1%) to €94 million as lower adjusted earnings were more than offset by lower restructuring costs. Half Year 2020 Financial Report 39 I ACTIVITY REPORT – HALF YEAR 2020 EUROPE - ITALY (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 2,507 2,989 Property & Casualty 863 870 Life & Savings 1,595 2,073 Health 49 46 Underlying earnings before tax 229 201 Property & Casualty 154 110 Life & Savings 71 90 Health 4 0 Income tax expenses / benefits (68) (54) Minority interests (36) (43) Income from affiliates and associates Underlying earnings Group share 125 104 Net capital gains or losses attributable to shareholders net of income tax (9) 6 Adjusted earnings Group share 115 110 Profit or loss on financial assets (under fair value option) and derivatives (14) (2) Exceptional operations (including discontinued operations) (0) Goodwill and other related intangible impacts Integration and restructuring costs (3) (2) NET INCOME GROUP SHARE 99 105 Property & Casualty Combined Ratio 87.3% 92.4% Health Combined Ratio 94.1% 101.3% Protection Combined Ratio 86.2% 80.2% New business APE 152 172 NBV Margin 32.4% 32.7% (a) Net of intercompany eliminations. Gross revenues decreased by €482 million (-16%) to €2,507 million. On a comparable basis, gross revenues decreased by €482 million (-16%): Property & Casualty (€-7 million or -1%) to €863 million, driven by Personal lines (€-21 million or -3%) due to a strong decrease in new business during the COVID-19 lockdown, partly offset by Commercial lines (€+14 million or +6%) due to a strong increase of new business during the first quarter in Property; Life & Savings (€-479 million or -23%) to €1,595 million, driven by G/A Savings (€-249 million or -18%) and Unit-Linked (€-228 million or -42%) both due to the impact of the COVID-19 crisis combined with a shift in Unit-Linked business mix towards pure Investment products for which premiums are not recognized as gross revenues under IFRS; Health (€+4 million or +8%) to €49 million, as a result of a strong commercial focus. Half Year 2020 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2020 APE decreased by €20 million (-12%) to €152 million. On a comparable basis, APE decreased by €20 million (-12%) mainly from G/A Savings (€-19 million) due to the impact of the COVID-19 lockdown. NBV margin decreased by 0.4 point to 32.4%, mainly due to change in product mix with lower share of Pure Protection products. Underlying earnings before tax increased by €29 million (+14%) to €229 million: Property & Casualty (€+44 million or +40%) to €154 million, due to a decrease of the current year combined ratio (-4.5 points) mainly driven by a lower claims frequency as well as lower large losses in Motor, combined with more favorable prior year reserve developments (-0.7 point); Life & Savings (€-19 million or -21%) to €71 million, mainly due to a lower investment margin driven by a decrease in investment yields; Health (€+3 million) to €4 million, driven by a better claims experience. Income tax expenses increased by €14 million (+26%) to €-68 million driven by higher pre-tax underlying earnings combined with the non-repeat of 1H19 positive tax one-offs. Minority interests decreased by €7 million (-15%) to €-36 million as a result of the decrease of AXA MPS underlying earnings. Underlying earnings increased by €21 million (+20%) to €125 million. Adjusted earnings increased by €6 million (+5%) mainly driven by higher underlying earnings, partly offset by higher impairments mainly from equity securities, as a consequence of the financial markets turmoil resulting from the COVID-19 crisis. Net income decreased by €6 million (-6%) to €99 million as higher adjusted earnings were more than offset by an unfavorable change in the fair value of assets accounted for under fair value option. Half Year 2020 Financial Report 41 I ACTIVITY REPORT – HALF YEAR 2020 Asia (in Euro million, except percentages) June 30, 2020 June 30, 2019 restated (a) Gross revenues (b) 5,522 4,827 Property & Casualty 1,055 677 Life & Savings 3,206 3,087 Health 1,261 1,063 Underlying earnings before tax 757 664 Property & Casualty 91 48 Life & Savings 390 389 Health 278 236 Other (c) (2) (8) Income tax expenses / benefits (154) (133) Minority interests (4) (4) Income from affiliates and associates 86 91 Underlying earnings Group share 685 619 Net capital gains or losses attributable to shareholders net of income tax (3) 10 Adjusted earnings Group share 682 629 Profit or loss on financial assets (under fair value option) and derivatives (65) 3 Exceptional operations (including discontinued operations) (0) Goodwill and other related intangible impacts (10) (8) Integration and restructuring costs (4) (1) NET INCOME GROUP SHARE 602 625 Property & Casualty Combined Ratio 94.8% 95.4% Health Combined Ratio 78.6% 77.5% Protection Combined Ratio 88.2% 86.3% New business APE 657 867 NBV Margin 63.7% 56.3% (a) Restated: reclassification of Japanese activities of AXA Life Europe (previously reported as part of Japan) into AXA Life Europe (included in Transversal & Central Holdings). (b) Net of intercompany eliminations. (c) Other corresponds to holding. Half Year 2020 Financial Report 42 I ACTIVITY REPORT – HALF YEAR 2020 ASIA - JAPAN (in Euro million, except percentages) June 30, 2020 June 30, 2019 restated (a) Gross revenues (b) 2,508 2,414 Life & Savings 1,741 1,698 Health 767 716 Underlying earnings before tax 431 390 Life & Savings 189 181 Health 244 217 Other (c) (2) (8) Income tax expenses / benefits (122) (110) Minority interests (4) (4) Income from affiliates and associates Underlying earnings Group share 305 276 Net capital gains or losses attributable to shareholders net of income tax (0) (0) Adjusted earnings Group share 305 276 Profit or loss on financial assets (under fair value option) and derivatives (179) (6) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE 126 270 Health Combined Ratio 69.9% 70.0% Protection Combined Ratio 88.7% 87.5% New business APE 231 268 NBV Margin 114.7% 112.0% Average exchange rate: € 1.00 = Japanese Yen 119 124 (a) Restated: reclassification of Japanese activities of AXA Life Europe (previously reported as part of Japan) into AXA Life Europe (included in Transversal & Central Holdings). (b) Net of intercompany eliminations. (c) Other corresponds to holding. Gross revenues increased by €93 million (+4%) to €2,508 million. On a comparable basis, gross revenues decreased by €29 million (-1%): Life & Savings (€-39 million or -2%) to €1,741 million, mainly due to the temporary discontinuation of the capital light Single Premium Whole Life product (€-90 million or -77%) as a consequence of the decrease in interest rates, lower sales of tax savings products impacted by a tax rule change (€-32 million or -5%), as well as lower sales activities in the context of the COVID-19 crisis, partly offset by Protection with Unit-Linked (€+128 million or +37%) from in-force growth and new business; Health (€+10 million or +1%) to €767 million, mainly from in-force growth and new business of Cancer Therapy products, partly offset by lower new business in the second quarter in the context of the COVID- 19 crisis. APE decreased by €37 million (-14%) to €231 million. On a comparable basis, APE decreased by €53 million (-19%) mainly driven by lower sales of tax savings products impacted by a tax rule change (€-59 million or -78%), and the temporary discontinuation of the capital light Single Premium Whole Life product (€-9 million or -79%), partly Half Year 2020 Financial Report 43 I ACTIVITY REPORT – HALF YEAR 2020 offset by Protection with Unit-Linked (€+31 million or +28%). Excluding the decrease in sales of tax savings products, APE increased by €6 million (+3%). NBV Margin increased by 2.7 points to 114.7%. On a comparable basis, NBV Margin increased by 3.2 points mainly driven by a favorable product mix shift towards Protection with Unit-Linked. Underlying earnings before tax increased by €41 million (+11%) to €431 million. On a constant exchange rate basis, underlying earnings before tax increased by €24 million (+6%): Life & Savings (€+1 million or +1%) to €189 million, mainly due to an improved mortality margin, partly offset by the refinement of investment allocation between Health and Life & Savings; Health (€+17 million or +8%) to €244 million, mainly driven by the refinement of investment allocation between Health and Life & Savings, as well as an improved current year technical profitability; Other (€+6 million or +74%) to €-2 million, mainly due to the non-repeat of 1H19 registration tax costs linked to the establishment of a holding company (€+5 million). Income tax expenses increased by €12 million (+11%) to €-122 million. On a constant exchange rate basis, income tax expenses increased by €7 million (+6%) in line with higher pre-tax underlying earnings. Underlying earnings and adjusted earnings increased by €29 million (+11%) to €305 million. On a constant exchange rate basis, underlying earnings and adjusted earnings increased by €17 million (+6%). Net income decreased by €144 million (-53%) to €126 million. On a constant exchange rate basis, net income decreased by €149 million (-55%) as higher adjusted earnings were more than offset by an unfavorable change in the fair value of fixed income and alternative investments as a consequence of the financial markets turmoil resulting from the COVID-19 crisis. Half Year 2020 Financial Report 44 I ACTIVITY REPORT – HALF YEAR 2020 ASIA - HONG KONG (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 1,946 1,830 Property & Casualty 143 143 Life & Savings 1,442 1,362 Health 362 325 Underlying earnings before tax 257 237 Property & Casualty 18 13 Life & Savings 201 206 Health 37 17 Income tax expenses / benefits (16) (14) Minority interests Income from affiliates and associates Underlying earnings Group share 241 223 Net capital gains or losses attributable to shareholders net of income tax 2 0 Adjusted earnings Group share 242 223 Profit or loss on financial assets (under fair value option) and derivatives 103 12 Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts (7) (7) Integration and restructuring costs (0) NET INCOME GROUP SHARE 338 228 Property & Casualty Combined Ratio 92.2% 95.3% Health Combined Ratio 89.1% 94.4% Protection Combined Ratio 86.9% 84.2% New business APE 140 268 NBV Margin 50.1% 41.2% Average exchange rate: € 1.00 = Hong Kong Dollar 8.55 8.86 (a) Net of intercompany eliminations. Gross revenues increased by €117 million (+6%) to €1,946 million. On a comparable basis, gross revenues increased by €49 million (+3%): Property & Casualty (€-5 million or -4%) to €143 million, mainly due to lower volumes notably in Travel and Workers’ Compensation in the context of the COVID-19 crisis; Life & Savings (€+37 million or +3%) to €1,442 million, mainly in Protection with Savings (€+44 million or +4%) driven by in-force growth, partly offset by lower new business in the context of the COVID-19 crisis; Health (€+17 million or +5%) to €362 million, mainly driven by tariff increases in both Individual and Group businesses. APE decreased by €128 million (-48%) to €140 million. On a comparable basis, APE decreased by €133 million (-50%) driven by lower sales in the context of the COVID-19 crisis. NBV Margin increased by 9.0 points to 50.1% mainly driven by a favorable change in product mix towards Health. Half Year 2020 Financial Report 45 I ACTIVITY REPORT – HALF YEAR 2020 Underlying earnings before tax increased by €20 million (+9%) to €257 million. On a constant exchange rate basis, underlying earnings before tax increased by €11 million (+5%): Property & Casualty (€+5 million or +35%) to €18 million, mostly from a better claims experience mainly driven by an improved frequency in both Commercial and Personal lines; Life & Savings (€-12 million or -6%) to €201 million, mainly driven by a lower surrender margin in the context of the COVID-19 crisis, partly offset by lower expenses combined with in-force growth; Health (€+19 million or +108%) to €37 million, mainly driven by a better claims experience from lower frequency combined with volume growth. Income tax expenses increased by €3 million (+20%) to €-16 million. On a constant exchange rate basis, income tax expenses increased by €2 million (+16%) driven by higher pre-tax underlying earnings. Underlying earnings increased by €17 million (+8%) to €241 million. On a constant exchange rate basis, underlying earnings increased by €9 million (+4%). Adjusted earnings increased by €19 million (+9%) to €242 million. On a constant exchange rate basis, adjusted earnings increased by €11 million (+5%) mainly driven by higher underlying earnings. Net income increased by €110 million (+48%) to €338 million. On a constant exchange rate basis, net income increased by €99 million (+43%) driven by higher adjusted earnings combined with a more favorable change in the fair value of derivatives not eligible for hedge accounting. Half Year 2020 Financial Report 46 I ACTIVITY REPORT – HALF YEAR 2020 ASIA - HIGH POTENTIALS (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 512 75 Property & Casualty 359 29 Life & Savings 23 26 Health 130 20 Underlying earnings before tax 11 2 Property & Casualty 15 (1) Life & Savings (1) 2 Health (3) 1 Income tax expenses / benefits 1 1 Minority interests (0) 0 Income from affiliates and associates 86 91 Underlying earnings Group share 99 94 Net capital gains or losses attributable to shareholders net of income tax (2) 10 Adjusted earnings Group share 96 104 Profit or loss on financial assets (under fair value option) and derivatives 13 (7) Exceptional operations (including discontinued operations) (0) Goodwill and other related intangible impacts (3) Integration and restructuring costs (1) (0) NET INCOME GROUP SHARE 105 97 Property & Casualty Combined Ratio 100.6% 105.8% Health Combined Ratio 104.3% 98.0% Protection Combined Ratio 121.8% 113.7% New business APE 286 331 NBV Margin 29.1% 23.4% (a) Net of intercompany eliminations. Scope: (i) The Property & Casualty subsidiary in Thailand, the non bancassurance Life & Savings subsidiary in Indonesia and the Property & Casualty subsidiary in China (AXA Tianping) are fully consolidated (since December 31, 2019, for AXA Tianping); (ii) China Life & Savings, the Philippines Life & Savings and the bancassurance Life & Savings subsidiaries in Thailand and Indonesia are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income. Gross revenues increased by €436 million to €512 million. On a comparable basis, gross revenues increased by €88 million (+21%): Property & Casualty (€-11 million or -3%) to €359 million, in China (€-25 million or -7%) mainly due to lower volumes in Motor following the COVID-19 crisis, partly offset by Thailand (€+15 million or +50%) mainly driven by higher new business in Personal Motor during the first quarter; Life & Savings (€-3 million or -13%) to €23 million, driven by lower volumes in Protection with Unit-Linked in Indonesia (€-4 million or -25%); Health (€+102 million) to €130 million, driven by higher volumes in China mainly from the launch of a new digital partnership. Half Year 2020 Financial Report 47 I ACTIVITY REPORT – HALF YEAR 2020 APE decreased by €46 million (-14%) to €286 million. On a comparable basis, APE decreased by €46 million (-14%): China (€-23 million or -12%) to €164 million, mainly driven by lower sales of G/A Savings products during the Chinese New Year following the COVID-19 crisis; Thailand (€-15 million or -24%) to €50 million, mainly driven by lower sales of traditional savings products in G/A Savings (€-8 million) and Protection with Savings (€-6 million); The Philippines (€-8 million or -31%) to €19 million, mainly driven by lower sales of Protection with Unit- Linked products (€-8 million) following the COVID-19 crisis; Indonesia remained stable at €52 million. NBV Margin increased by 5.6 points to 29.1%. On a comparable basis, NBV Margin increased by 5.5 points mainly driven by lower volumes of low margin G/A Savings products in China, and Protection with G/A Savings products in Thailand. Underlying earnings increased by €5 million (+5%) to €99 million. On a constant exchange rate basis, underlying earnings increased by €3 million (+3%): China (€+4 million or +20%) to €25 million, mainly driven by a better claims experience from lower frequency in Motor in the context of the COVID-19 crisis, partly offset by the non-repeat of 1H19 favorable tax impacts supported by a regulatory change in Property & Casualty; The Philippines remained stable at €14 million; Thailand (€-1 million or -2%) to €37 million; Indonesia (€-1 million or -2%) to €22 million. Adjusted earnings decreased by €8 million (-8%) to €96 million. On a constant exchange rate basis, adjusted earnings decreased by €10 million (-9%) as higher underlying earnings were more than offset by lower net realized capital gains in China. Net income increased by €7 million (+7%) to €105 million. On a constant exchange rate basis, net income increased by €6 million (+7%) as lower adjusted earnings were more than offset by a favorable change in the fair value of financial assets. Half Year 2020 Financial Report 48 I ACTIVITY REPORT – HALF YEAR 2020 AXA XL (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 10,522 10,436 Property & Casualty Insurance 7,703 7,593 Property & Casualty Reinsurance 2,718 2,748 Life & Savings 101 95 Underlying earnings before tax (832) 603 Property & Casualty Insurance (699) 363 Property & Casualty Reinsurance (87) 281 Life & Savings 7 7 Other (b) (53) (48) Income tax expenses / benefits (11) (100) Minority interests (0) (2) Income from affiliates and associates 1 Underlying earnings Group share (843) 502 Net capital gains or losses attributable to shareholders net of income tax (21) 45 Adjusted earnings Group share (864) 547 Profit or loss on financial assets (under fair value option) and derivatives (84) (6) Exceptional operations (including discontinued operations) (1) (45) Goodwill and other related intangible impacts (25) (20) Integration and restructuring costs (85) (82) NET INCOME GROUP SHARE (1,059) 394 Property & Casualty Combined Ratio 115.2% 98.3% (a) Net of intercompany eliminations. (b) Other corresponds to holding. Gross revenues increased by €86 million (+1%) to €10,522 million. On a comparable basis, gross revenues increased by €20 million mainly driven by higher revenues in Property & Casualty Insurance mostly from tariff increases, almost fully offset by the impact of the COVID-19 crisis both in Property & Casualty Insurance and Reinsurance. As the crisis resulted in worldwide lockdowns, AXA XL’s clients operating in acutely impacted sectors such as Aviation, Marine, Energy, Casualty, Travel & Leisure, Events, Art and Construction saw a significant reduction in their activity, thus driving expected exposure adjustments which resulted in lower contractual premiums written. Property & Casualty Insurance (€+246 million or +3%) to €7,703 million, mainly driven by (i) Financial lines (€+199 million or +17%) primarily stemming from tariff increases within International Financial lines (€+150 million or +45%) as well as volumes growth and tariff increases across North America Professional (€+45 million or +6%) and North America Cyber (€+25 million or +25%), and (ii) Property (€+168 million or +10%) mainly from significant tariff increases in both International Property (€+146 million or +15%) and North America Property (€+141 million or +47%) partly offset by both exposure adjustments in the context of the COVID-19 crisis as well as selective underwriting, partly offset by (iii) Specialty (€-96 million or -5%) mainly from exposure adjustments in the context of the COVID-19 crisis and selective underwriting, notably in Aviation, Marine and Energy, partly offset by Aerospace (€+79 million or +35%) mainly driven by tariff increases and Art, Specie and Bloodstock (€+65 million or +18%) driven by volume growth; 49 Property & Casualty Insurance (€+246 million or +3%) to €7,703 million, mainly driven by (i) Financial lines (€+199 million or +17%) primarily stemming from tariff increases within International Financial lines (€+150 million or +45%) as well as volumes growth and tariff increases across North America Professional (€+45 million or +6%) and North America Cyber (€+25 million or +25%), and (ii) Property (€+168 million or +10%) mainly from significant tariff increases in both International Property (€+146 million or +15%) and North America Property (€+141 million or +47%) partly offset by both exposure adjustments in the context of the COVID-19 crisis as well as selective underwriting, partly offset by (iii) Specialty (€-96 million or -5%) mainly from exposure adjustments in the context of the COVID-19 crisis and selective underwriting, notably in Aviation, Marine and Energy, partly offset by Aerospace (€+79 million or +35%) mainly driven by tariff increases and Art, Specie and Bloodstock (€+65 million or +18%) driven by volume growth; 49 I ACTIVITY REPORT – HALF YEAR 2020 Property & Casualty Reinsurance (€-229 million or -8%) to €2,718 million, driven by (i) Specialty and Other lines (€-150 million or -7%) mainly due to exposure adjustments in the context of the COVID-19 crisis, notably in Casualty partly offset by strong tariff increases, and (ii) Property Cat (€-79 million or -11%) mainly due to exposure adjustments in the context of the COVID-19 crisis as well as continued selective underwriting; Life & Savings (€+3 million) to €101 million. Underlying earnings before tax decreased by €1,435 million to €-832 million. On a constant exchange rate basis, underlying earnings before tax decreased by €1,414 million: Property & Casualty (€-1,409 million) to €-786 million, mostly in the context of the COVID-19 crisis that adversely impacted incurred losses, mainly on Event Cancellation (€-555 million), Property & Business Interruption (€-508 million) and Long-tail lines (€-178 million), partly offset by tariff increases, the continued emergence of expense synergies related to the integration within AXA and net investment income which included higher private equity fund distributions, largely offset by losses incurred as a result of civil unrest in North America (€-136 million) at the end of the first half of 2020 as well as higher natural catastrophe losses (€-100 million); Life & Savings remained stable at €7 million; Other (€-5 million) to €-53 million. Income tax expenses decreased by €90 million (89%) to €-11 million. On a constant exchange rate basis, income tax expenses decreased by €90 million driven by lower pre-tax underlying earnings, combined with a change in the geographical mix. Underlying earnings decreased by €1,345 million to €-843 million. On a constant exchange rate basis, underlying earnings decreased by €1,323 million. On constant exchange rate basis and excluding the impact of COVID-19, underlying earnings were stable. Adjusted earnings decreased by €1,411 million to €-864 million. On a constant exchange rate basis, adjusted earnings decreased by €1,389 million driven by lower underlying earnings combined with both higher impairments and lower realized capital gains as a consequence of the financial markets turmoil resulting from the COVID-19 crisis. Net income decreased by €1,453 million to €-1,059 million. On a constant exchange rate basis, net income decreased by €1,427 million driven by lower adjusted earnings and unfavorable changes in the fair value of both mutual funds and derivatives not eligible for hedge accounting, partly offset by the non-repeat of the loss related to the repurchase of financing debt in 2019 (€45 million). Half Year 2020 Financial Report 50 I ACTIVITY REPORT – HALF YEAR 2020 International (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 3,563 3,662 Property & Casualty 1,881 2,042 Life & Savings 610 645 Health 905 816 Other (b) 166 159 Underlying earnings before tax 311 292 Property & Casualty 220 184 Life & Savings 57 55 Health 5 21 Other (c) 29 31 Income tax expenses / benefits (65) (61) Minority interests (38) (32) Income from affiliates and associates 42 41 Underlying earnings Group share 251 240 Net capital gains or losses attributable to shareholders net of income tax (17) (2) Adjusted earnings Group share 233 238 Profit or loss on financial assets (under fair value option) and derivatives 66 8 Exceptional operations (including discontinued operations) (15) Goodwill and other related intangible impacts (13) (12) Integration and restructuring costs (4) (2) NET INCOME GROUP SHARE 268 232 Property & Casualty Combined Ratio 96.4% 98.4% Health Combined Ratio 100.8% 98.6% Protection Combined Ratio 96.7% 98.7% New business APE 91 129 NBV Margin 36.8% 45.3% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities. (c) Other corresponds to banking activities and holding. Scope: (i) Mexico, the Gulf Region, Colombia, Singapore, Turkey, Poland, Morocco, AXA Bank Belgium, Malaysia Property & Casualty, Luxembourg, the Czech Republic Life & Savings, the Slovak Republic Life & Savings, Greece and Brazil are fully consolidated; (ii) Russia (Reso), India, Nigeria and Lebanon are consolidated under the equity method and contribute only to the underlying earnings, adjusted earnings and net income. Gross revenues decreased by €99 million (-3%) to €3,563 million. On a comparable basis, gross revenues increased by €78 million (+2%): Property & Casualty (€-47 million or -2%) to €1,881 million: o Mexico (€-44 million or -9%) to €392 million, mainly driven by lower volumes in Motor following the COVID-19 crisis combined with the non-repeat of large multi-year accounts in Commercial Property, Half Year 2020 Financial Report 51 I ACTIVITY REPORT – HALF YEAR 2020 o Singapore (€-15 million or -15%) to €87 million, mainly in Personal Motor and Travel following the COVID-19 crisis, o Brazil (€-13 million or -18%) to €50 million, mainly due to the non-renewal of a large contract, o The Gulf Region (€-3 million or -1%) to €264 million, o Colombia (€+16 million or +7%) to €236 million, driven by tariff increases on renewals in Commercial Property and Liability, o Turkey (€+14 million or +6%) to €241 million, mainly in Commercial Property, o Poland (€+2 million or +1%) to €213 million; Life & Savings (€-15 million or €-2%) to €610 million, mainly driven by (i) Colombia (€-49 million or -69%) to €20 million due to the run-off portfolio of G/A Savings, and (ii) Singapore (€-10 million or -7%) to €130 million from lower volumes following the COVID-19 crisis, partly offset by an increase in (iii) Mexico (€+17 million or +14%) to €126 million from higher renewals in Protection with Savings, and (iv) Morocco (€+13 million or +18%) to €87 million driven by higher volumes in G/A Savings; Health (€+132 million or +17%) to €905 million, with growth across the board, notably in (i) Mexico (€+63 million or +15%) to €429 million mainly from price increases, (ii) the Gulf Region (€+41 million or +19%) to €258 million mainly from large accounts, and (iii) Turkey (€+13 million or +44%) to €38 million from higher renewals and new business, both on Individual and Group Health; Other (€+7 million or +4%) to €166 million at AXA Bank Belgium. APE decreased by €38 million (-30%) to €91 million. On a comparable basis, APE decreased by €35 million (-27%) mainly driven by (i) Singapore (€-23 million or -46%) to €26 million and (ii) India (€-6 million or -27%) to €15 million, both as a consequence of the COVID-19 crisis. NBV Margin decreased by 8.5 points to 36.8%, mainly in Singapore mostly due to an unfavorable mix effect. Underlying earnings before tax increased by €20 million (+7%) to €311 million. On a constant exchange rate basis, underlying earnings before tax increased by €32 million (+11%): Property & Casualty (€+46 million or +25%) to €220 million, mainly from (i) Turkey (€+11 million) driven by a higher net investment income, (ii) the Gulf Region (€+9 million) due to more favorable prior year reserve developments, (iii) Poland (€+9 million) driven by a lower claims frequency in Motor, and (iv) Mexico (€+7 million) due to more favorable prior year reserve developments, partly offset by higher large losses and natural events; Life & Savings (€+4 million or +8%) to €57 million, mainly from (i) Mexico (€+4 million) driven by an improved mortality margin, and (ii) the Czech Republic & Slovak Republic (€+3 million) from higher fees, partly offset by (iii) Singapore (€-4 million) driven by a lower mortality margin and lower sales in Protection with Savings; Health (€-16 million or -78%) to €5 million, mainly from Mexico (€-16 million) driven by higher claims and lower prior year reserve developments; Other (€-2 million or -7%) to € 29 million, from Holdings (€-5 million) partly offset by AXA Bank Belgium (€+3 million). Income tax expenses increased by €4 million (+6%) to €-65 million. On a constant exchange rate basis, income tax expenses increased by €7 million (+11%) mainly driven by higher pre-tax underlying earnings. Minority interests increased by €6 million (+18%) to €-38 million. On a constant exchange rate basis, minority interests increased by €6 million (+20%) driven by higher underlying earnings in the Gulf Region. Half Year 2020 Financial Report 52 I ACTIVITY REPORT – HALF YEAR 2020 Income from affiliates and associates increased by €1 million (+2%) to €42 million. On a constant exchange rate basis, income from affiliates and associates remained stable. Underlying earnings increased by €11 million (+5%) to €251 million. On a constant exchange rate basis, underlying earnings increased by €19 million (+8%). Adjusted earnings decreased by €5 million (-2%) to €233 million. On a constant exchange rate basis, adjusted earnings increased by €2 million (+1%) driven by higher underlying earnings, partly offset by lower net realized capital gains. Net income increased by €36 million (+15%) to €268 million. On a constant exchange rate basis, net income increased by €44 million (+19%) mainly driven by higher adjusted earnings combined with a favorable foreign exchange impact on financial assets. Half Year 2020 Financial Report 53 I ACTIVITY REPORT – HALF YEAR 2020 Transversal & Central Holdings (in Euro million, except percentages) June 30, 2020 June 30, 2019 restated (a) Gross revenues (b) 1,444 1,487 Property & Casualty 621 690 Life & Savings 116 122 Health 100 88 Other (c) 606 587 Underlying earnings before tax (340) (318) Property & Casualty (15) 75 Life & Savings (1) 13 Health 4 (1) Other (d) (328) (406) Income tax expenses / benefits 103 90 Minority interests (3) (3) Income from affiliates and associates 9 11 Underlying earnings Group share (230) (221) Net capital gains or losses attributable to shareholders net of income tax (2) 35 Adjusted earnings Group share (232) (185) Profit or loss on financial assets (under fair value option) and derivatives 408 (450) Exceptional operations (including discontinued operations) (82) (597) Goodwill and other related intangible impacts (28) (0) Integration and restructuring costs (12) (22) NET INCOME GROUP SHARE 55 (1,255) Property & Casualty Combined Ratio 106.2% 95.7% Health Combined Ratio 96.4% 100.6% (a) Restated: reclassification of German and Japanese activities of AXA Life Europe (previously reported as part of Germany and Japan respectively) into AXA Life Europe. (b) Net of intercompany eliminations. (c) Other corresponds to asset management activities. (d) Other corresponds to asset management activities and holding. Half Year 2020 Financial Report 54 I ACTIVITY REPORT – HALF YEAR 2020 AXA INVESTMENT MANAGERS (“AXA IM”) (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 606 587 Underlying earnings before tax 176 167 Income tax expenses / benefits (52) (51) Minority interests (3) (3) Income from affiliates and associates 9 10 Underlying earnings Group share 130 123 Net capital gains or losses attributable to shareholders net of income tax Adjusted earnings Group share 130 123 Profit or loss on financial assets (under Fair Value option) and derivatives (2) (8) Exceptional operations (including discontinued operations) (1) (0) Goodwill and other related intangibles impacts (0) (0) Integration and restructuring costs (4) (0) NET INCOME GROUP SHARE 123 115 Average Assets under Management (in Euro billion) 717 649 Asset management fee bps 15.9 16.6 Underlying cost income ratio 71.0% 71.3% (a) Net of intercompany eliminations. Gross Revenues amounted to €761 million before intercompany eliminations as of June 30, 2020. Assets under Management ("AUM") increased by €15 billion from December 31, 2019, to €815 billion at the end of June 30, 2020, mainly driven by (i) positive net inflows (€+16 billion) mainly from the Main Fund (€+9 billion) of which €+4 billion linked to the integration of XL Group, and from Third-Party clients (€+6 billion) mainly driven by the success of both Alts and Core platforms, and (ii) the integration of Quadrant (€+8 billion), partly offset by (iii) negative impacts related to unfavorable market conditions resulting from the COVID-19 crisis (€-9 billion). Management fee bps decreased by 0.8 bps to 15.9 bps. On a constant exchange rate basis, management fee bps decreased by 0.9 bps due to an unfavorable change in product mix stemming from higher asset values on fixed income products. Gross revenues increased by €20 million (+3%) to €606 million. On a comparable basis, gross revenues increased by €17 million (+3%) mainly driven by higher management fees (€+11 million) stemming from higher average assets under management, as well as higher transaction fees (€+9 million) in real estate. Underlying earnings before tax increased by €9 million (+5%) to €176 million. On a constant exchange rate basis, underlying earnings before tax increased by €8 million (+5%) as a result of higher revenues and strong cost discipline. The underlying cost income ratio decreased by 0.3 point to 71.0%. On a constant exchange rate basis, the underlying cost income ratio decreased by 0.3 point. Income tax expenses increased by €1 million (+3%) to €-52 million. On a constant exchange rate basis, income tax expenses increased by €1 million (+2%). Income from affiliates and associates decreased by €1 million (-13%) to €9 million. On a constant exchange rate basis, income from affiliates and associates decreased by €1 million (-12%). Half Year 2020 Financial Report 55 I ACTIVITY REPORT – HALF YEAR 2020 Underlying earnings and adjusted earnings increased by €7 million (+6%) to €130 million. On a constant exchange rate basis, underlying earnings and adjusted earnings increased by €6 million (+5%). Net income increased by €8 million (+7%) to €123 million. On a constant exchange rate basis, net income increased by €7 million (+6%) mainly driven by higher adjusted earnings. Half Year 2020 Financial Report 56 I ACTIVITY REPORT – HALF YEAR 2020 AXA ASSISTANCE (in Euro million, except percentages) June 30, 2020 June 30, 2019 Gross revenues (a) 645 687 Property & Casualty 545 599 Health 100 88 Underlying earnings before tax (21) 13 Property & Casualty (25) 13 Health 4 (1) Income tax expenses / benefits (1) (8) Minority interests 0 0 Income from affiliates and associates 0 1 Underlying earnings Group share (22) 5 Net capital gains or losses attributable to shareholders net of income tax (0) 0 Adjusted earnings Group share (22) 5 Profit or loss on financial assets (under fair value option) and derivatives (0) 0 Exceptional operations (including discontinued operations) 4 1 Goodwill and other related intangible impacts (28) Integration and restructuring costs (2) (3) NET INCOME GROUP SHARE (48) 4 Property & Casualty Combined Ratio 104.5% 98.4% Health Combined Ratio 96.4% 100.6% (a) Net of intercompany eliminations. Gross revenues decreased by €42 million (-6%) to €645 million. On a comparable basis, gross revenues decreased by €36 million (-5%): Property & Casualty (€-52 million or -9%) to €545 million, driven by the impact of the COVID-19 crisis in both Motor and Non-Motor notably in Travel; Health (€+16 million or +18%) to €100 million, mainly driven by in-force portfolio growth. Underlying earnings before tax decreased by €34 million to €-21 million: Property & Casualty (€-38 million) to €-25 million, mainly reflecting a higher current year combined ratio (+4.6 points) due to the COVID-19 impacts on volumes combined with investments related to both customer experience improvement and simplification; Health (€+5 million) to €4 million, in line with volumes growth. Income tax expenses decreased by €7 million to €-1 million driven by lower pre-tax underlying earnings, partly offset by an unfavorable change in country mix. Underlying earnings and adjusted earnings decreased by €27 million to €-22 million. Net income decreased by €52 million to €-48 million mainly driven by lower adjusted earnings combined with higher charges related to intangible assets. Half Year 2020 Financial Report 57 I ACTIVITY REPORT – HALF YEAR 2020 AXA SA (in Euro million) June 30, 2020 June 30, 2019 Underlying earnings Group share (368) (401) Net capital gains or losses attributable to shareholders net of income tax 3 36 Adjusted earnings Group share (366) (365) Profit or loss on financial assets (under fair value option) and derivatives 324 (438) Exceptional operations (including discontinued operations) (52) (596) Goodwill and other related intangible impacts Integration and restructuring costs (4) (15) NET INCOME GROUP SHARE (98) (1,414) Underlying earnings increased by €33 million to €-368 million, mainly driven by (i) lower general expenses, (ii) higher dividends received mainly from the remaining stake in Equitable Holdings, Inc., related to the EQH shares to be delivered on redemption of the AXA SA bonds mandatorily exchangeable into EQH shares, maturing in May 2021, and (iii) lower tax paid related on dividends received from subsidiaries. Adjusted earnings remained stable to €-366 million, as higher underlying earnings were more than offset by the non-repeat of the 2019 positive impact from derivatives set up to reduce the Group exposure to equities. Net income increased by €1,316 million to €-98 million, mainly due to (i) a favorable change in the fair value of derivatives not eligible for hedge accounting (€+761 million) mainly from equity derivatives in the context of the strong equity market turmoil resulting from the COVID-19 crisis as well as from the significant decrease of the exposure to interest rates risk, and (ii) the non-repeat of the 1H19 negative impact linked to the deconsolidation of Equitable Holdings, Inc. (€+598 million). Half Year 2020 Financial Report 58 I ACTIVITY REPORT – HALF YEAR 2020 Outlook AXA’s management re-affirms its current best estimate for the impact on the Group’s 2020 underlying earnings from COVID-19 related P&C claims and solidarity measures at €1.5 billion (post-tax and net of reinsurance), consistent with the Group’s June 3, 2020 announcement. This impact has been reflected in the underlying earnings of 1H20. In the context of a material estimated impact from COVID-19 on underlying earnings in 2020, AXA has withdrawn its Ambition 2020 UEPS and Adjusted ROE targets. In a constantly evolving context, material uncertainties persist which may adversely impact the Group’s financial performance in 2H20 and beyond, notably in respect of the evolution of regulatory, legislative and litigation- related developments for P&C Business Interruption claims, the impact of potential renewed localized or more generalized lockdown measures, and the impact of continued financial market volatility. AXA’s management sees the COVID-19 crisis as an earnings event and not a capital event, and expects that AXA’s Solvency II position should continue to remain resilient to external shocks due to robust underwriting and reinsurance policies, a high quality asset portfolio and disciplined capital management. AXA’s business profile positions the Group well for a growing Health market, a hardening pricing cycle in P&C Commercial lines and in facing a continued low interest rate environment. The Group expects to benefit from an acceleration in digital interactions with its customers and distributors, and new ways of working for its employees, resulting in significant opportunities to further enhance efficiencies. With its clear strategy, a simplified organization designed to foster growth, a significant shift in business profile and a strong balance sheet with financial flexibility, AXA’s management believes that the Group is well positioned to create lasting shareholder value and offer an attractive return. Half Year 2020 Financial Report 59 I ACTIVITY REPORT – HALF YEAR 2020 Glossary This glossary includes definitions of non-GAAP financial measures, or alternative performance measures (“APMs”), indicated by an asterisk (*), that Management believes are useful to understand the Group’s business and analyze the Group’s performance. The scope of the following definitions of APMs remains unchanged compared to prior periods, except that the scope of certain definitions was updated to take into account (i) the deconsolidation of EQH, and (ii) the impact of the issuance by AXA of mandatory exchangeable bonds into shares of EQH (the “MEBs”) in May 2018, which were recorded in “shareholders’ equity - Minority interests” and “financial debt” and subsequently reclassified from “shareholders’ equity” components to financing debt starting 1Q19. Scope and comparable basis SPLIT BY GEOGRAPHY The split by geography is detailed below: France (insurance and banking activities, and holdings); Europe, consisting of: o Switzerland (insurance activities), o Germany (insurance and banking activities, and holdings), o Belgium (insurance activities and holdings), o United Kingdom and Ireland (insurance activities and holdings), o Spain (insurance activities), o Italy (insurance activities); Asia, consisting of: o Japan (insurance activities and holdings), o Hong Kong (insurance activities), o Asia High Potentials, consisting of: ▪ Thailand (insurance activities), ▪ Indonesia (insurance activities), ▪ China (insurance activities), ▪ The Philippines (insurance activities), o Asia - Direct, consisting of: ▪ Direct Japan (insurance activities), ▪ Direct South Korea (insurance activities), o Asia Holdings; AXA XL (insurance activities and holdings); United States (insurance activities, AB and holdings); International, consisting of: Half Year 2020 Financial Report 60 I ACTIVITY REPORT – HALF YEAR 2020 o AXA Bank Belgium (banking activities), o Brazil (insurance activities and holdings), o Colombia (insurance activities), o Czech Republic and Slovak Republic (insurance activities), o Greece (insurance activities), o The Gulf Region (insurance activities and holdings), o India (insurance activities and holdings), o Lebanon (insurance activities and holdings), o Luxembourg (insurance activities and holdings), o Malaysia (insurance activities), o AXA Mediterranean Holdings, o Mexico (insurance activities), o Morocco (insurance activities and holdings), o Nigeria (insurance activities and holdings), o Poland (insurance activities), o Russia (Reso) (insurance activities), o Singapore (insurance activities and holdings), o Turkey (insurance activities and holdings); Transversal & Central Holdings, consisting of: o AXA Investment Managers, o AXA Assistance, o AXA Liabilities Managers, o AXA Global Re, o AXA Life Europe, o AXA SA and other Central Holdings. CURRENT ENGINES AND HIGH POTENTIALS The split between current engines and high potentials is detailed below: Current Engines: Belgium, France, Germany, Hong Kong, Italy, Japan, Spain, Switzerland, UK & Ireland and AXA XL; High Potentials: Brazil, China, Indonesia, Mexico, the Philippines and Thailand. COMPARABLE BASIS FOR REVENUES, ANNUAL PREMIUM EQUIVALENT AND NBV MARGIN “On a comparable basis” means the following: data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis); Half Year 2020 Financial Report 61 I ACTIVITY REPORT – HALF YEAR 2020 data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Earnings and Capital ADJUSTED EARNINGS* Adjusted Earnings represent the net income (Group share) as disclosed in the table set forth on pages 19 to 20 of this report, before the impact of the following items net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: integration and restructuring costs related to material newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; goodwill, impairments and amortization of intangibles related to customers and distribution; exceptional operations (primarily change in scope and discontinued operations); and profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Derivatives related to invested assets: include all foreign exchange derivatives, except the ones related to currency options in earnings hedging strategies which are included in underlying earnings; exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy; and exclude derivatives involved in the economic hedging of realized gains and impairments of equity securities backing General Account and shareholders’ funds, for which cost at inception, intrinsic value and pay-off flow through adjusted earnings, and only time value flows through net income when there is no intention to sell the derivatives in the short term (if not, flows through adjusted earnings). UNDERLYING EARNINGS* Underlying Earnings correspond to Adjusted Earnings without the following elements net of policyholder participation, deferred acquisition costs, VBI, taxes and minority interests: realized gains and losses and change in impairment valuation allowances (on assets not designated under fair value option or trading assets); and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities (other than the funds backing contracts where the financial risk is borne by policyholders). EARNINGS PER SHARE Earnings per share (EPS) represent AXA's consolidated earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity, preferred shares and MEBs up to the date of the deconsolidation of EQH), divided by the weighted average number of outstanding ordinary shares. Half Year 2020 Financial Report 62 I ACTIVITY REPORT – HALF YEAR 2020 Diluted earnings per share (diluted EPS) represent AXA's consolidated earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity, preferred shares and MEBs up to the date of the deconsolidation of EQH), divided by the weighted average number of outstanding ordinary shares, on a diluted basis (i.e. including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Underlying Earnings per share* correspond to Underlying Earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity, preferred shares and MEBs up to the date of the deconsolidation of EQH), divided by the weighted average number of outstanding ordinary shares. RETURN ON EQUITY The Return on Equity (“RoE”) is calculated as earnings divided by the weighted average shareholders’ equity. The weighted average shareholders’ equity is based on opening shareholders’ equity adjusted for weighted average impacts of capital flows (including dividends). for underlying RoE and adjusted RoE*: o reserves relating to the change in the fair value through shareholders’ equity are excluded from the average shareholders’ equity, o undated subordinated debts (“Super Subordinated Debts” TSS/“Undated Subordinated Debts” TSDI) are treated as financing debt, thus excluded from the average shareholders’ equity, o and earnings include interest charges on TSS/TSDI, on preferred shares, and on shareholders’ equity component of the MEBs up to the date of deconsolidation of EQH; for net income RoE: calculation is based on Consolidated Financial Statements, i.e. o average shareholders’ equity including undated subordinated debt (TSS/TSDI) and reserves relating to the change in the fair value through shareholders’ equity, o and net income. FREE CASH FLOWS Free Cash Flows are defined as a measure of dividend capacity calculated as the sum of earnings and required capital change. EOF (ELIGIBLE OWN FUNDS) Surplus derived from a Solvency II balance sheet. It is defined as the excess of market value of assets over best estimate liabilities and Risk Margin as per Solvency II regulation. SOLVENCY II RATIO This ratio is calculated as per Solvency II, and is equal to the total amount of the Group’s Eligible Own Funds (“EOF”) divided by the Group’s Solvency Capital Requirement (“SCR”). The Solvency Capital Requirement, i.e. the denominator of the Solvency II ratio, is set at a level ensuring that insurers and reinsurers are able to meet their obligations towards policyholders and beneficiaries over the next 12 months, with a 99.5% probability. The Solvency Capital Requirement can be calculated either based on the standard formula or an internal model. The Group is using an internal model. The Solvency II ratio is estimated primarily using AXA’s internal model calibrated based on an adverse 1/200 years shock. It also reflects the release of the provision for the 4Q20 exceptional distribution of reserves of €0.7 per share Half Year 2020 Financial Report 63 I ACTIVITY REPORT – HALF YEAR 2020 and includes a theoretical amount for dividends accrued for the first six months of 2020, based on the full year dividend of €1.43 per share initially proposed by the Board for FY19. Dividends are proposed by the Board, at its discretion based on a variety of factors described in AXA’s 2019 Universal Registration Document, and then submitted to AXA’s shareholders for approval. This estimate should not be considered in any way to be an indication of the actual dividend amount, if any, for the 2019 or the 2020 financial years. For further information on AXA’s internal model and Solvency II disclosures, please refer to AXA Group’s SFCR for the year ended December 31, 2019, available on AXA’s website (www.axa.com). In compliance with the ACPR’s decision, from January 1, 2019, entities that were part of the XL Group (“XL entities”) have been fully consolidated for Solvency II purposes (as per the consolidation-based method set forth in the Solvency II Directive) and their contribution to the Group’s Solvency Capital Requirement has been calculated using the Solvency II standard formula. Subject to prior approval of the ACPR, the Group intends to extend its internal model to XL entities as soon as December 31, 2020. DEBT GEARING* Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt and undated subordinated debt) by total capital employed (consolidated shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus the gross debt). Furthermore, following the deconsolidation of EQH, MEBs were excluded from Debt Gearing. Activities INSURANCE LIFE & SAVINGS HYBRID AND G/A CAPITAL LIGHT PRODUCTS Hybrid products: Savings products allowing clients to invest in both Unit-Linked and General Account funds. G/A capital light products: General Account Savings products which, at inception, create more EOF than the economic capital they consume. LIFE & SAVINGS NET INFLOWS Life & Savings Net Inflows are defined as the collected premiums (including risk premiums, fees and revenues), net of surrenders, maturities, claims paid and other benefits paid. This definition is applicable to all Life & Savings products as well as Life-like Health products, with the exception of Mutual Funds products. NEW BUSINESS APE (NEW BUSINESS ANNUAL PREMIUM EQUIVALENT) New business APE represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. NBV (NEW BUSINESS VALUE) The value of newly issued contracts during the current year. It consists of the present value of future profits after the costs of acquiring business, less (i) an allowance for the time value of financial option and guarantees, and (ii) cost of capital and non-financial risks. AXA calculates this value net of tax. Half Year 2020 Financial Report 64 I ACTIVITY REPORT – HALF YEAR 2020 NBV MARGIN (NEW BUSINESS VALUE MARGIN) New Business Value Margin is the ratio of: New Business Value representing the value of newly issued contracts during the current year; to Annual Premium Equivalent. This ratio represents the profitability of the new business. MARGIN ANALYSIS The Margin Analysis is presented on an underlying earnings basis. Even though the presentation of the Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. Underlying investment margin includes the following items: net investment income; and interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income as well as the unwind of the discount rate used in calculating technical reserves. Underlying fees & revenues include: revenues derived from mutual fund sales (which are part of consolidated revenues); loadings charged to policyholders (or contractual charges) on premiums of all Life & Savings products; loadings on deposits received on all Life & Savings products and fees on funds under management for separate account (Unit-Linked) business; deferred income such as capitalization net of amortization of URR (Unearned Revenue Reserve) and UFR (Unearned Fee Reserve); and other fee revenues, e.g. fees received on financial planning or sales of third party products. Underlying net technical margin includes the following components: mortality and morbidity margin: the difference between income or earned premiums for assuming risk and the cost of benefits and claims charges directly linked to the claims experience or its anticipation (death or disability); surrender margin: the difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination; GMxB (Variable Annuity guarantees) active financial risk management: the net result from GMxB lines corresponding to explicit charges related to these types of guarantees less cost of hedging. It also includes the unhedged business result; policyholder bonuses if the policyholders participate in the risk margin; ceded reinsurance results; other changes in claims and insurance reserves: all the reserve strengthening or release coming from changes in valuation assumptions, claims experience, additional reserves for mortality risk and other technical impacts such as premium deficiencies net of derivatives if any; and claims handling costs. Half Year 2020 Financial Report 65 I ACTIVITY REPORT – HALF YEAR 2020 Expenses include the following components: acquisition expenses, including commissions and general expenses allocated to new business; capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; amortization of Deferred Acquisition Costs (DAC) and net rights to future management fees for investment contracts without DPF, including the impact of interest capitalized; administrative expenses; and policyholder bonuses if the policyholder participates in the expenses of the Company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Life & Savings Margin Analysis as set out below: For insurance contracts and investment contracts with Discretionary Participation Features (DPF): o gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees & Revenues” and “Net Technical Margin”, o policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”, o the “Investment margin” represents the net investment result in the Statement of Income and is adjusted to consider the related policyholder participation (see above) as well as changes in specific reserves linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees & Revenues”, o change in URR (Unearned Revenue Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis; For investment contracts without DPF: o deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the Underlying Statement of Income within Gross Consolidated Revenues on a separate line, and in Margin Analysis in the lines “Fees & Revenues” and “Net Technical Margin”, o change in UFR (Unearned Fee Reserve - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the Underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis. INSURANCE RATIOS (APPLICABLE TO PROPERTY & CASUALTY, HEALTH AND PROTECTION ACTIVITIES) Current accident year loss ratio net of reinsurance is the ratio of: current year claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on current accident year, excluding for the discounted reserves the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: Half Year 2020 Financial Report 66 I ACTIVITY REPORT – HALF YEAR 2020 all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years, excluding the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. Expense ratio is the ratio of: expenses (excluding claims handling costs, including changes in VBI amortization); to earned revenues gross of reinsurance. Expenses include two components: expenses (including commissions) related to the acquisition of contracts (with the related acquisition expense ratio) and all other expenses excluding claims handling costs (with the related administrative expense ratio). Expenses exclude customer intangible amortization, but include the impact from the changes in VBI amortization. The Combined ratio* is the sum of the all accident year loss ratio and the expense ratio. ASSET MANAGEMENT Net inflows: Inflows of client money less outflows of client money. Net inflows are used by the Management to measure the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying cost income ratio is the ratio of: general expenses excluding distribution related expenses; to gross revenues excluding distribution fees received. Assets under management (AUM) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers. AUM only include funds and mandates which generate fees and exclude double counting. BANKING Operating net banking revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of “fair-value-P&L” assets and hedging derivatives. Half Year 2020 Financial Report 67 I II. Consolidated financial statements / June 30, 2020 Table of Contents 1. CONSOLIDATED STATEMENT OF FINANCIAL POSITION ........................................................................................ 70 2. CONSOLIDATED STATEMENT OF INCOME .............................................................................................................. 72 3. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ................................................................................ 73 4. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY .......................................................................................... 74 5. CONSOLIDATED STATEMENT OF CASH FLOWS ...................................................................................................... 76 NOTE 1 ACCOUNTING PRINCIPLES ......................................................................................................................... 78 NOTE 2 SCOPE OF CONSOLIDATION ...................................................................................................................... 81 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT ........................................................................... 84 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES .......................................................................................... 87 NOTE 5 INVESTMENTS ............................................................................................................................................ 90 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS ............................................................................ 100 NOTE 7 FINANCING DEBT...................................................................................................................................... 105 NOTE 8 NET INCOME PER ORDINARY SHARE ....................................................................................................... 106 NOTE 9 SUBSEQUENT EVENTS ............................................................................................................................. 107 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 1. CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in Euro million) June 30, 2020 Goodwill 17,452 Value of purchased business in force 1,393 Deferred acquisition costs and equivalent 17,074 Other intangible assets 4,677 Intangible assets 40,596 Investments in real estate properties 23,776 Financial investments 503,681 Assets backing contracts where the financial risk is borne by policyholders (b) 72,043 5 Investments from insurance activities 599,500 5 Investments from banking and other activities 22,740 Investments accounted for using the equity method 2,407 Reinsurers' share in insurance and investment contracts liabilities 26,403 Tangible assets 2,696 Deferred tax assets 467 Other assets 3,162 Receivables arising from direct insurance and inward reinsurance operations 30,095 Receivables arising from outward reinsurance operations 2,307 Receivables - current tax 984 Other receivables 9,913 Receivables 43,299 4 Assets held for sale (c) 33,833 Cash and cash equivalents 32,231 TOTAL ASSETS 804,172 Note: All invested assets are shown net of related derivative instruments impact. (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) As of June 30, 2020, amounts included the assets relating to Central and Eastern Europe operations, AXA Bank Belgium and the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. As of December 31, 2019, amounts included the assets relating to AXA Bank Belgium and the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at year-end. Half Year 2020 Financial Report December 31, 2019 restated (a) 17,776 1,520 16,988 4,875 41,159 23,301 497,257 75,774 596,332 22,389 2,437 22,970 2,873 654 3,527 27,094 2,074 954 10,378 40,501 28,908 22,656 780,878 70 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 Notes (in Euro million) June 30, 2020 Share capital and capital in excess of nominal value 26,035 Reserves and translation reserve 42,600 Net consolidated income - Group share 1,429 Shareholders’ equity – Group share 70,065 Minority interests 4,569 6 TOTAL SHAREHOLDERS' EQUITY 74,634 Subordinated debt 9,690 Financing debt instruments issued 1,806 7 Financing debt (b) 11,495 Liabilities arising from insurance contracts 388,547 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (c) 56,809 Total liabilities arising from insurance contracts 445,356 Liabilities arising from investment contracts with discretionary participating features 35,905 Liabilities arising from investment contracts with no discretionary participating features 79 Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 3,227 12,416 Total liabilities arising from investment contracts 51,629 Unearned revenue and unearned fee reserves 2,171 Liabilities arising from policyholder participation and other obligations 56,167 Derivative instruments relating to insurance and investment contracts (1,321) Liabilities arising from insurance and investment contracts 554,002 Liabilities arising from banking activities (b) 15,930 Provisions for risks and charges 9,062 Deferred tax liabilities 5,802 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders 8,933 Other debt instruments issued, notes and bank overdrafts (b) 10,681 Payables arising from direct insurance and inward reinsurance operations 10,010 Payables arising from outward reinsurance operations 13,412 Payables – current tax 1,280 Collateral debts relating to investments under lending agreements or equivalent 41,542 Other payables 15,315 Payables 101,173 4 Liabilities held for sale (d) 32,074 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 804,172 (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Amounts are shown net of related derivative instruments impact. (c) Includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (d) As of June 30, 2020, amounts included the liabilities relating to Central and Eastern Europe operations, AXA Bank Belgium and the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. As of December 31, 2019, amounts included the liabilities relating to AXA Bank Belgium and the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at year-end. Half Year 2020 Financial Report December 31, 2019 restated (a) 26,126 39,915 3,857 69,897 4,730 74,627 11,294 1,806 13,101 379,002 59,823 438,825 36,036 67 3,139 13,306 52,547 2,456 52,766 (1,724) 544,871 14,649 9,742 5,863 8,596 6,249 10,709 11,591 1,166 37,920 13,145 89,377 28,648 780,878 71 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 2. CONSOLIDATED STATEMENT OF INCOME Notes (in Euro million, except EPS in Euro) June 30, 2020 Gross written premiums 51,006 Fees and charges relating to investment contracts with no participating features 118 Revenues from insurance activities 51,124 Net revenues from banking activities 244 Revenues from other activities 1,023 Revenues (a) 52,391 Change in unearned premiums net of unearned revenues and fees (4,440) Net investment income (b) 6,651 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (c) 1,026 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (d) (3,159) of which change in fair value of assets with financial risk borne by policyholders (e) (3,475) Change in investments impairments (f) (731) Net investment result excluding financing expenses 3,787 Technical charges relating to insurance activities (e) (36,378) Net result from outward reinsurance (1,020) Bank operating expenses (35) Acquisition costs (6,238) Amortization of the value of purchased business in force (129) Administrative expenses (5,273) Change in goodwill impairment and other intangible assets impairment and amortization (104) Other income and expenses (g) 201 Other operating income and expenses (48,972) Income from operating activities before tax 2,764 Income (net of impairment) from investment accounted for using the equity method 189 Financing debts expenses (h) (634) Net income from operating activities before tax 2,320 Income tax (810) Net consolidated income after tax 1,510 Split between : Net consolidated income - Group share 1,429 Net consolidated income - Minority interests 80 8 8 Earnings per share Fully diluted earnings per share 0.56 0.56 (a) Gross of reinsurance. (b) Net of investment management costs and including gains/losses from derivatives hedging variable annuities. (c) Includes impairment releases on investments sold. (d) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (f) Excludes impairment releases on investments sold. (g) As of June 30, 2020, it includes the removal of the held for sale classification previously applied for AXA Life Europe. (h) Includes net balance of income and expenses related to derivatives on financing debt (nonetheless excludes change in fair value of these derivatives). Half Year 2020 Financial Report June 30, 2019 55,684 121 55,805 226 1,918 57,949 (5,203) 5,756 418 15,786 15,154 (91) 21,869 (58,214) (689) (31) (6,718) (31) (5,541) (79) 68 (71,235) 3,380 260 (433) 3,208 (636) 2,572 2,333 239 0.92 0.92 72 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 3. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2020 Reserves relating to changes in fair value through shareholders' equity 970 Translation reserves (781) Items that may be reclassified subsequently to Profit or Loss 189 Employee benefits actuarial gains and losses 419 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk 20 Items that will not be reclassified subsequently to Profit or Loss 439 Net gains and losses recognized directly through shareholders' equity 628 Net consolidated income 1,510 Split between: Net consolidated income - Group share 1,429 Net consolidated income - Minority interests 80 TOTAL COMPREHENSIVE INCOME (CI) 2,137 Split between: Total comprehensive income - Group share 2,113 Total comprehensive income - Minority interests 24 Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Tax, policyholder participation and related effects are further detailed in the Notes to the Consolidated Financial statements. Half Year 2020 Financial Report June 30, 2019 6,404 (347) 6,057 (402) (16) (418) 5,639 2,572 2,333 239 8,211 7,582 629 73 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 4. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euro) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' equity Group share Shareholders' equity opening January 1, 2020 2,417,695 2.29 5,537 21,706 (752) 19,328 196 6,636 (2,050) 19,297 69,897 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt 4 - - - - - - - 2.29 - - - - - - - 0 - - - - - - - (3) 23 - - - - - - - (110) - - - - - - - - - - - - - - - - - - - - - 0 - - - - - - - - - - - - - - - - (90) (25) 0 (3) 23 (110) 0 - - (90) Others (including impact on change in scope) (b) 0 0 0 (25) Dividends (1,740) (1,740) Impact of transactions with shareholders 4 2.29 0 19 (110) 0 0 0 0 (1,855) (1,946) Reserves relating to changes in fair value through shareholders' equity 325 680 1,005 Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - - - (77) - (681) - 417 20 1,429 (758) 417 20 1,429 Total Comprehensive Income (CI) 325 680 (77) (681) 1,866 2,113 Shareholders' equity closing June 30, 2020 2,417,699 2.29 5,537 21,725 (862) 19,653 877 6,559 (2,732) 19,308 70,065 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI) (see Note 6.1.1). (b) Including changes in ownership interest in consolidated subsidiaries. Half Year 2020 Financial Report Minority interests 4,730 - - - - - - - (185) (185) (35) (23) 2 0 80 24 4,569 74 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves (c) Shareholders' Equity Group share Shareholders' equity opening January 1, 2019 2,424,917 2.29 5,553 21,894 (1,038) 11,566 302 6,776 (2,395) 19,770 62,428 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) (9,954) - - - - - - - - 2.29 - - - - - - - - (23) - - - - - - - - (229) 17 - - - - - - - - 353 - - - - - - - - - - - - 0 - - - - - - - 0 - - - (121) - (0) - - - - - - - - - 0 - - - - - - (98) 4 (23) (229) 17 353 (121) - - (98) 4 Dividends paid (3,189) (3,189) Impact of transactions with shareholders (9,954) 2.29 (23) (212) 353 0 0 (121) 0 (3,283) (3,286) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - 6,141 - 50 - 13 - (541) - (398) (16) 6,191 (528) (398) (16) 2,333 2,333 Total Comprehensive Income (CI) 6,141 50 13 (541) 1,919 7,582 Shareholders' equity closing June 30, 2019 2,414,962 2.29 5,530 21,682 (685) 17,707 353 6,668 (2,936) 18,405 66,725 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (TSS, TSDI) (see Note 6.1.2). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. (c) Includes the first time application impact of IFRS 16 Leases (€-77 million Group share ) and IFRIC 23 Uncertainty over Income Tax Treatments (€-110 million Group share). AXA has chosen to adopt the new standards retrospectively through the cumulative effect approach with an adjustment to the opening balance of retained earnings. Half Year 2020 Financial Report Minority interests 10,824 - - - - (614) - - (5,301) (5,915) 213 181 (4) 0 239 629 5,538 75 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 5. CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2020 Operating income including discontinued operations before tax 2,320 Net amortization expense (b) 572 Change in goodwill impairment and other intangible assets impairment (c) 51 Net change in deferred acquisition costs and equivalent (527) Net increase / (write back) in impairment on investments, tangible and other intangible assets 730 Change in fair value of investments at fair value through profit or loss 3,078 Net change in liabilities arising from insurance and investment contracts (d) 4,953 Net increase / (write back) in other provisions (e) (164) Income (net of impairment) from investment accounted for using the equity method (189) Adjustment of non cash balances included in the operating income before tax 8,504 Net realized investment gains and losses (1,025) Financing debt expenses 634 Adjustment for reclassification to investing or financing activities (391) Dividends recorded in profit or loss during the period (1,726) Investment income & expense recorded in profit or loss during the period (f) (5,391) Adjustment of transactions from accrued to cash basis (7,117) Net cash impact of deposit accounting 1 Dividends and interim dividends collected 2,036 Investment income (f) 8,300 Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (2,844) Net operating cash from banking activities Change in operating receivables and payables Net cash provided by other assets and liabilities (g) Tax expenses paid 2,006 2,181 757 (668) Other operating cash impact and non cash adjustment 328 Net cash impact of transactions with cash impact not included in the operating income before tax 12,096 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 15,411 Purchase of subsidiaries and affiliated companies, net of cash acquired (19) Disposal of subsidiaries and affiliated companies, net of cash ceded (1) Net cash related to changes in scope of consolidation (20) Sales of debt instruments (g) 26,718 Sales of equity instruments and non consolidated investment funds (g) (h) 13,025 Sales of investment properties held directly or not (g) 715 Sales and/or repayment of loans and other assets (g) (i) 9,236 Net cash related to sales and repayments of investments (g) (h) (i) 49,694 Purchases of debt instruments (g) (29,094) Purchases of equity instruments and non consolidated investment funds (g) (h) (13,813) Purchases of investment properties held direct or not (g) (1,078) Purchases and/or issues of loans and other assets (h) (i) (10,720) Net cash related to purchases and issuance of investments (g) (h) (i) (54,704) Sales of tangible and intangible assets 1 Purchases of tangible and intangible assets (125) Net cash related to sales and purchases of tangible and intangible assets (123) Increase in collateral payable / Decrease in collateral receivable 69,542 Decrease in collateral payable / Increase in collateral receivable (66,084) Net cash impact of assets lending / borrowing collateral receivables and payables 3,458 NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES (1,695) Half Year 2020 Financial Report June 30, 2019 restated (a) 3,208 777 23 (1,168) 89 (16,132) 19,495 (238) (286) 2,561 (39) 433 393 (1,524) (4,768) (6,292) (83) 1,592 7,460 (2,175) 179 (2,344) 197 (268) (329) 4,231 4,101 (14) (2,673) (2,688) 30,374 8,580 1,502 11,790 52,246 (34,007) (9,516) (2,155) (9,994) (55,672) 10 (192) (182) 132,131 (132,295) (164) (6,459) 76 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 Issuance of equity instruments 7 Repayments of equity instruments (176) Transactions on treasury shares 2 Dividends payout (42) Interests on undated subordinated debts paid (110) Acquisition / sale of interests in subsidiaries without change in control 4 Net cash related to transactions with shareholders (315) Cash provided by financial debts issuance 31 Cash used for financial debts repayments (1,356) Interests on financing debt paid (j) (288) Net interest margin of hedging derivatives on financing debt (17) Net cash related to Group financing (1,631) Other financing cash impact and non cash adjustment NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (1,946) NET CASH PROVIDED BY DISCONTINUED OPERATIONS CASH AND CASH EQUIVALENT AS OF JANUARY 1 (k) 21,977 Net cash provided by operating activities 15,411 Net cash provided by investing activities (1,695) Net cash provided by financing activities (1,946) Net cash provided by discontinued operations Impact of change in consolidation method and of reclassifications as held for sale (l) (1,896) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents (506) CASH AND CASH EQUIVALENT AS OF JUNE 30 (k) 31,346 (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Includes premiums/discounts capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (c) Includes impairment and amortization of intangible assets booked in the context of business combinations. (d) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (e) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (f) Includes gains/losses from derivatives hedging variable annuities. (g) Includes related derivatives. (h) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (i) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (j) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (k) Net of bank overdrafts. (l) As of June 30, 2020, amounts included the assets and liabilities relating to Central and Eastern Europe operations, AXA Bank Belgium and the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. As of June 30, 2019, amounts included the assets and liabilties relating to the Group Life portfolio in Switzerland and the AXA Wealth Management (HK) Limited portfolio for which disposal processes were not finalized at period-end. (in Euro million) June 30, 2020 Cash and cash equivalents Bank overdrafts (b) 32,231 (885) Cash and cash equivalents as of June 30 (c) 31,346 (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Included in "Other debt instruments issued and bank overdrafts". (c) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (Unit-Linked contracts). Half Year 2020 Financial Report 21 (819) 0 (3,447) (117) (45) (4,408) 6 (541) (292) (826) (5,234) 31,596 4,101 (6,459) (5,234) (511) 139 23,632 June 30, 2019 restated (a) 24,614 (982) 23,632 77 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 1 ACCOUNTING PRINCIPLES 1.1 General information AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates principally in Europe, the Americas, Asia and Africa. The list of the main entities included in the scope of AXA’s consolidated financial statements is provided in Note 2 of the Notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all Notes were set by the Board of Directors on August 5, 2020. 1.2 General accounting principles AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2020. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2019. The 2020 half year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2019Universal Registration Document. Half Year 2020 Financial Report 78 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 IFRS REQUIREMENTS ADOPTED ON JANUARY 1, 2020 The application of the amendments below as of January 1, 2020 had no material impact on the Group’s consolidated interim financial statements. Amendments Publication date Topic Conceptual Framework March 29, 2018 The revised Conceptual Framework includes: a new chapter on measurement; guidance on reporting financial performance; improved definitions of an asset and a liability, and guidance supporting these definitions; and clarifications in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting. IFRS 3 Business combination Definition of Business October 22, 2018 The amendments: confirm that a business must include inputs and a process, narrow the definitions of a business; and add an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business. IAS 1 Presentation of financial statements & IAS 8 Accounting policies, changes in accounting estimates and errors Definition of “Material” October 31, 2018 The amendments clarify the definition of "Material" and how it has to be applied by adding in the definition the clarifications that were included so far in other IFRS standards. Half Year 2020 Financial Report 79 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at the year ended December 31, 2019 with, in addition, the evaluation of the ultimate cost of claims triggered by the COVID-19 pandemic which necessitated a high degree of judgment. Please refer to the Half Year 2020 Activity Report for further information on the impact of the COVID-19 pandemic and in particular to Section Operating Highlights, part Risk Factors (Page 12) for the related risks. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non- current items. As for most insurance companies, expenses are classified by destination in the income statement. All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the Notes are expressed in Euro million. Half Year 2020 Financial Report 80 II NOTE 2 SCOPE OF CONSOLIDATION 2.1 Consolidated companies 2.1.1 MAIN FULLY CONSOLIDATED COMPANIES AXA SA and Other Holdings France AXA CFP Management AXA Group Operations SAS Société Beaujon AXA China AXA Asia France AXA France IARD AXA France Vie AXA Protection Juridique Avanssur AXA France Participations Genworth Financial European Group Holdings AXA Banque AXA Banque Financement Europe Germany AXA Versicherung AG AXA Lebensversicherung AG Deutsche Ärzteversicherung AXA Krankenversicherung AG Kölnische Verwaltungs AG für Versicherungswerte AXA Konzern AG AXA Bank AG Roland Rechtsschutz-Versicherungs-AG United Kingdom & Ireland Guardian Royal Exchange Plc AXA UK Plc AXA Equity & Law Plc AXA Insurance UK Plc AXA PPP Healthcare Limited Architas Multi-Manager Limited AXA Insurance Limited AXA Life Europe Limited Spain AXA Seguros Generales, S. A. AXA Aurora Vida, S.A. de Seguros Switzerland AXA Life AXA-ARAG Legal Assistance AXA Insurance Italy AXA Assicurazioni e Investimenti AXA MPS Vita AXA MPS Danni AXA MPS Financial Belgium CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 June 30, 2020 December 31, 2019 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests Parent company Parent company 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.92 99.92 99.92 99.92 99.77 99.77 99.77 99.77 98.52 98.44 98.52 98.44 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.89 100.00 99.89 65.00 64.93 65.00 64.93 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 60.00 60.00 60.00 60.00 100.00 99.98 100.00 99.98 100.00 99.98 100.00 99.98 99.96 99.96 99.96 99.96 100.00 99.98 100.00 99.98 100.00 99.98 100.00 99.98 100.00 100.00 100.00 100.00 100.00 99.98 100.00 99.98 100.00 100.00 100.00 100.00 99.92 99.84 99.92 99.84 99.92 99.84 99.92 99.84 100.00 66.67 100.00 100.00 66.67 100.00 100.00 66.67 100.00 100.00 66.67 100.00 100.00 100.00 100.00 100.00 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 Half Year 2020 Financial Report 81 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 Ardenne Prévoyante AXA Belgium SA AXA Holdings Belgium Yuzzu SA (previously Touring Assurances SA) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Asia National Mutual International Pty Ltd. Japan AXA Holdings Japan AXA Life Insurance AXA Non Life Insurance Co. Ltd. AXA Direct Life Insurance Co. Ltd. Hong Kong AXA China Region Limited AXA General Insurance Hong Kong Ltd. China AXA Tianping Indonesia MLC Indonesia Thailand AXA Insurance Public Company Limited South Korea Kyobo AXA General Insurance Co. Ltd. First consolidation 100.00 98.70 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.47 100.00 98.70 98.70 98.70 98.70 100.00 100.00 100.00 100.00 99.47 100.00 98.70 100.00 100.00 - 100.00 100.00 100.00 100.00 99.47 99.71 99.71 99.71 AXA XL XL Group (a) 100.00 100.00 100.00 International AXA Mediterranean Holding SA AXA Bank Belgium (sub group) Colombia AXA Colpatria Seguros AXA Colpatria Seguros de vida Morocco AXA Assurance Maroc AXA Al Amane Assurance AXA Holding Maroc S.A. Turkey AXA Hayat ve Emeklilik A.S. AXA Sigorta AS AXA Turkey Holding W.L.L The Gulf Region AXA Cooperative Insurance Company AXA Insurance B.S.C.c. Greece AXA Insurance A.E. Mexico AXA Seguros S.A. de C.V. Luxembourg AXA Assurances Luxembourg AXA Assurances Vie Luxembourg AXA Luxembourg SA Czech Republic & Slovakia AXA Czech Republic Pension Funds AXA Czech Republic Insurance AXA Slovakia Poland AXA Poland AXA Poland Pension Funds AXA Ubezpieczenia TUIR S.A Singapore AXA Financial Services Singapore pte Ltd. AXA Life Insurance Singapore AXA Insurance Singapore Malaysia AXA Affin General Insurance Berhad India AXA India Holding 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 50.00 50.00 99.98 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 34.00 50.00 99.98 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 50.00 50.00 99.98 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 50.00 50.00 50.00 100.00 100.00 100.00 Other AXA Investment Managers (sub group) AXA Global Re AXA Assistance SA (sub group) Colisée Ré Relution 97.62 100.00 100.00 100.00 97.61 100.00 100.00 100.00 97.58 100.00 100.00 100.00 (a) XL Group mainly operates in the United States, the United Kingdom, Bermuda, Switzerland, France, Ireland, Singapore, Germany, Australia and Canada. Half Year 2020 Financial Report 82 100.00 100.00 100.00 100.00 100.00 98.70 98.70 98.70 - 100.00 100.00 100.00 100.00 99.47 99.71 100.00 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 34.00 50.00 99.98 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 50.00 100.00 97.57 100.00 100.00 100.00 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 MINORITIES INTERESTS ON CONSOLIDATED INVESTMENTS FUNDS AND REAL ESTATE COMPANIES In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2020, these liabilities amounted to €8,933 million (€8,567 million as of December 31, 2019). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholders’ equity amounted to €2,684 million as of June 30, 2020 (€2,848 million as of December 31, 2019). 2.1.2 MAIN INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30, 2020 December 31, 2019 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie 39.98 39.98 39.98 39.98 Asia Philippines AXA Life Insurance Corporation 45.00 45.00 45.00 45.00 Krungthai AXA Life Insurance Company Ltd. (Thailand) 50.00 50.00 50.00 50.00 ICBC-AXA Life Insurance Co., Ltd. (China) 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services (Indonesia) 49.00 49.00 49.00 49.00 International Reso Garantia (Russia) 36.68 36.68 36.68 36.68 Bharti AXA Life (India) 49.00 49.00 49.00 49.00 Bharti AXA General Insurance Company Limited (India) 49.00 49.00 49.00 49.00 AXA Middle East SAL (Lebanon) 50.99 50.99 50.99 50.99 AXA Mansard Insurance Plc (Nigeria) 76.48 76.48 76.48 76.48 Other Boi AXA Investment Managers Private Limited (India) Relution 49.00 47.83 49.00 47.81 Kyobo AXA Investment Managers Company Limited (South Korea) Relution 50.00 48.80 50.00 48.79 AXA SPDB Investment Managers Company Ltd. (China) Relution 39.00 38.07 39.00 38.05 Half Year 2020 Financial Report 83 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT AXA’s Chief Executive Officer (CEO), acting as chief operating decision maker, is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA's business segments and holding companies reported to the Board of Directors twice a year is consistent with the presentation provided in the consolidated financial statements. The results of operating activities and non-operating activities are presented on the basis of seven segments: France, Europe, Asia, AXA XL, International, Transversal & Central Holdings, and in 2019, the United States (former Equitable Holdings, Inc. activities). As of June 30, 2020, the CEOs supervising the main geographies (respectively CEO of AXA France, CEO of AXA in Europe, CEO of AXA in Asia, CEO of AXA XL and CEO of AXA Investment Managers) are members of the Management Committee. Key transversal entities and Central Holdings are managed alongside these geographies. France: The French market consists of Life & Savings and Property & Casualty activities, AXA Banque France and French holdings. Europe: The Europe market consists of Life & Savings and Property & Casualty activities in Switzerland, Germany, Belgium, United Kingdom & Ireland, Spain and Italy. The German bank and the holding companies in these countries are also included. Asia: The Asian market consists of Life & Savings activities in Japan, Hong Kong and Asia High Potentials (Indonesia, Philippines, Thailand and China) as well as Property & Casualty activities in Hong Kong and Asia High Potentials (Thailand and China). The Asia-Direct entities (Japan and South Korea) and the Asia holdings are also included. AXA XL: The AXA XL market mainly consists of Property & Casualty activities in XL Group, operating mainly in the United States, the United Kingdom, Bermuda, Switzerland, France, Ireland, Singapore, Germany, Australia and Canada. The holdings companies are also included. International: The International market consist of Life & Savings and Property & Casualty activities in 14 countries within Europe, Middle East, Africa, Latin America as well as in Singapore, in Malaysia and in India. AXA Bank Belgium and the holding companies in these countries are also included. Transversal & Central Holdings: includes transversal entities namely AXA Investment Managers, AXA Assistance, AXA Liabilities Managers, AXA Global Re, AXA Life Europe, as well as AXA SA and other Central Holdings. The intersegment eliminations include only operations between entities from different countries and operating activities. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. In this document, “Insurance” covers the three insurance activities: Life & Savings, Property & Casualty and Health. Half Year 2020 Financial Report 84 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 3.1 Consolidated Statement of Income by segment June 30, 2020 (in Euro million) France Europe Asia AXA XL International Transversal & Central Holdings Intersegment Eliminations Total of which Insurance (a) Gross written premiums 12,659 18,749 5,518 10,525 3,340 706 (490) 51,006 51,006 Fees and charges relating to investment contracts with no participating features 1 62 18 37 118 118 Revenues from insurance activities 12,659 18,811 5,535 10,525 3,378 706 (490) 51,124 51,124 Net revenues from banking activities 64 5 171 4 244 Revenues from other activities 3 165 37 31 984 (197) 1,023 414 Revenues 12,726 18,981 5,535 10,562 3,580 1,690 (683) 52,391 51,538 Change in unearned premiums net of unearned revenues and fees (333) (2,589) 78 (1,460) (243) (22) 130 (4,440) (4,440) Net investment income (b) 2,406 2,416 761 634 262 202 (29) 6,651 6,082 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 348 (2,777) (2,057) 394 (1,011) (645) 243 (627) (432) 36 (142) 1 174 (75) 4 1,209 (265) 0 14 (2) 1,026 (3,159) (3,475) 1,021 (3,941) (3,475) Change in investments impairment (238) (269) (89) (65) (9) (62) (731) (670) Net investment result excluding financing expenses (260) 1,530 288 461 428 1,354 (15) 3,787 2,492 Technical charges relating to insurance activities (8,974) (13,035) (3,894) (7,969) (2,216) (390) 100 (36,378) (36,378) Net result from outward reinsurance 73 22 (193) (213) (192) (756) 239 (1,020) (1,020) Bank operating expenses (11) (0) (23) (35) Acquisition costs (1,300) (2,041) (814) (1,275) (607) (234) 32 (6,238) (6,238) Amortization of the value of purchased business in force (25) (13) (91) (1) (129) (129) Administrative expenses (1,101) (1,357) (353) (972) (409) (1,299) 218 (5,273) (4,064) Change in goodwill impairment and other intangible assets impairment (22) (9) (24) (22) (28) (104) (104) Other income and expenses (d) (57) (28) (32) 0 1 443 (124) 201 37 Other operating income and expenses (11,370) (16,484) (5,307) (10,542) (3,470) (2,265) 465 (48,972) (47,892) Income from operating activities before tax 763 1,438 594 (979) 294 756 (103) 2,764 1,697 Income (net of impairment) from investment accounted for using the equity method 2 (0) 92 85 9 189 180 Financing debt expenses (1) (7) (2) (66) (6) (655) 103 (634) (19) Net income from operating activities before tax 765 1,431 684 (1,045) 374 111 0 2,320 1,858 Income tax (266) (329) (80) (14) (67) (54) (810) (321) Net consolidated income after tax 499 1,102 604 (1,059) 306 57 1,510 1,538 Split between: Net consolidated income - Group share 498 1,066 602 (1,059) 268 55 (0) 1,429 1,460 Net consolidated income - Minority interests 1 36 2 0 39 2 0 80 78 (a) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (d) Includes the removal of the held for sale classification previously applied for AXA Life Europe. Half Year 2020 Financial Report 85 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 June 30, 2019 restated (a) (in Euro million) France Europe Asia AXA XL United States International Transversal & Central Holdings Intersegment Eliminations Total of which Insurance (b) Gross written premiums 13,469 19,843 4,825 10,522 3,321 3,451 789 (535) 55,684 55,684 Fees and charges relating to investment contracts with no participating features 1 63 18 39 121 121 Revenues from insurance activities 13,470 19,906 4,843 10,522 3,321 3,490 789 (535) 55,805 55,805 Net revenues from banking activities 58 (0) 161 6 226 Revenues from other activities 3 161 0 1,007 32 934 (219) 1,918 675 Revenues 13,531 20,067 4,843 10,522 4,328 3,684 1,724 (748) 57,949 56,480 Change in unearned premiums net of unearned revenues and fees (469) (2,690) (55) (1,767) (11) (312) (45) 146 (5,203) (5,203) Net investment income (b) 2,192 2,549 680 550 (375) 273 (58) (55) 5,756 5,348 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 290 3,180 3,106 560 500 927 113 696 705 56 (37) (9) 11,139 9,926 5 232 204 (597) 79 286 0 (3) 0 418 15,786 15,154 1,013 16,407 15,154 Change in investments impairment (14) (39) (21) (7) (4) (6) (91) (82) Net investment result excluding financing expenses Technical charges relating to insurance activities 5,649 (15,030) 3,570 (15,727) 1,466 (4,674) 563 (5,863) 10,754 (13,600) 505 (2,342) (581) (1,177) (57) 198 21,869 (58,214) 22,686 (58,214) Net result from outward reinsurance (164) (184) (51) (476) 93 (161) 40 215 (689) (689) Bank operating expenses (5) (3) (22) (31) Acquisition costs (1,535) (2,040) (567) (1,404) (319) (642) (262) 52 (6,718) (6,718) Amortization of the value of purchased business in force (23) (6) (0) (1) (31) (31) Administrative expenses (805) (1,286) (287) (968) (742) (416) (1,193) 156 (5,541) (3,926) Change in goodwill impairment and other intangible assets impairment (23) (8) (23) (7) (18) (0) (79) (73) Other income and expenses (d) (5) (8) 3 (0) (113) 22 261 (92) 68 (28) Other operating income and expenses Income from operating activities before tax Income (net of impairment) from investment accounted for using the equity method (17,544) 1,167 5 (19,294) 1,652 (5,591) 663 98 (8,734) 584 1 (14,689) 382 110 (3,580) 297 33 (2,331) (1,233) 12 529 (131) (71,235) 3,380 260 (69,679) 4,284 208 Financing debt expenses (1) (52) (4) (97) (52) (6) (350) 131 (433) (12) Net income from operating activities before tax 1,171 1,601 757 488 440 324 (1,572) 0 3,208 4,479 Income tax (296) (341) (128) (92) (39) (58) 320 (636) (589) Net consolidated income after tax 874 1,260 628 396 401 266 (1,252) 2,572 3,890 Split between: Net consolidated income - Group share Net consolidated income - Minority interests 872 2 1,208 51 625 4 394 2 257 143 232 34 (1,255) 3 0 (0) 2,333 239 3,712 178 (a) Restated: reclassification of German and Japanese activities of AXA Life Europe (previously reported as part of Germany and Japan respectively) into AXA Life Europe (included in Transversal & Central Holdings). (b) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (c) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (d) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. Half Year 2020 Financial Report 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 Central and Eastern Europe operations disposal On February 7, 2020, AXA entered into an agreement to sell its operations in Poland, Czech Republic and Slovakia (Central and Eastern Europe operations) to UNIQA Insurance Group AG. Under the terms of the agreement, AXA would sell 100% of its Life & Savings, Property & Casualty and Pension businesses in Central and Eastern Europe for a total net cash consideration of €1,002 million. The completion of the transaction is expected to take place during the second half of 2020 and it is subject to customary closing conditions, including the receipt of regulatory approvals. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: ASSETS (in Euro million) Goodwill Other intangible assets Investments from insurance activities Reinsurers' share in insurance and investment contracts liabilities Other assets Cash and cash equivalents Total assets held for sale June 30, 2020 222 476 2,049 162 195 46 3,151 LIABILITIES (in Euro million) June 30, 2020 Financing debt 1 Liabilities arising from insurance and investment contracts Other liabilities Total liabilities held for sale 2,003 252 2,255 As of June 30, 2020, the other comprehensive income of invested assets in the scope of the transaction amounted to €+25 million. As of June 30, 2020, there is no impact recognized in the consolidated statement of income for this transaction. Half Year 2020 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 4.2 AXA Bank Belgium disposal On October 25, 2019, AXA entered into an agreement to sell its Belgian banking operations, AXA Bank Belgium, to Crelan Bank (“Crelan”). Under the terms of the agreement, AXA will sell 100% of AXA Bank Belgium to Crelan for a total consideration of €620 million, comprised of (i) a total cash consideration of €540 million (1), and (ii) the transfer to AXA Belgium of 100% of Crelan Insurance (valued at €80 million), the insurance company of Crelan, providing protection insurance linked to loans originated by Crelan. In addition, AXA Belgium will take a 9.9% minority equity stake (2) in Crelan NV (3) and AXA Bank Belgium, investing a total of €90 million, which will be fully funded by the purchase by Crelan, for €90 million, of the contingent convertible bonds previously issued by AXA Bank Belgium to AXA Group. The completion of the transaction is expected to take place during the second half of 2020 and is subject to customary closing conditions, including the receipt of regulatory approvals. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: ASSETS (in Euro million) Investments from banking and other activities Other assets Cash and cash equivalents Total assets held for sale June 30, 2020 25,540 294 2,738 28,573 LIABILITIES (in Euro million) Financing debt Liabilities arising from banking activities Other liabilities Total liabilities held for sale June 30, 2020 14 27,399 564 27,976 As of June 30, 2020, the other comprehensive income of invested assets in the scope of the transaction amounted to €+9 million. The transaction is expected to result in a loss of €-602 million, of which €-590 million were already recognized in the consolidated statement of income as of December 31, 2019. The total impairment was allocated to goodwill for €-68 million, other intangible assets for €-18 million and investments for €-516 million. All these impairments are included in the tables above. (1) Subject to price adjustment at closing. (2) Crelan has a call option to purchase the Crelan NV and AXA Bank Belgium shares held by AXA. (3) Crelan NV is Crelan’s banking subsidiary. Half Year 2020 Financial Report 88 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 4.3 Group Life portfolio transformation in Switzerland On April 10, 2018, AXA entered into an agreement with its main occupational benefits foundations (1) to convert their business model from a full-value insurance (2) model to a semi-autonomous model (3) and during 2019 with additional small occupational foundations. As of June 30, 2020, AXA Switzerland completed most of the transaction and transferred the assets and liabilities to the occupational foundations. Additionally, the remaining assets and liabilities to be transferred to the foundation on January 1, 2021, were classified as held for sale in AXA’s Consolidated Financial Statements as of June 30, 2020. As such, the major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: ASSETS (in Euro million) Investments from insurance activities June 30, 2020 1,559 Cash and cash equivalents 248 Total assets held for sale 1,806 LIABILITIES (in Euro million) Liabilities arising from insurance and investment contracts Total liabilities held for sale June 30, 2020 1,806 1,806 As of June 30, 2020, the other comprehensive income of invested assets in the scope of the transaction was nil. As of June 30, 2020, there is no impact recognized in the consolidated statement of income for this transaction. (1) Collective group pensions schemes, which are managed by an independent Board. (2) Contract covering the whole offer: guaranteed savings and annuity benefits, death and disability benefits, and administration services. (3) Contract covering death and disability benefits, and administration services. Half Year 2020 Financial Report 89 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 5 INVESTMENTS 5.1 Breakdown of investments Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately. Insurance June 30, 2020 Investments as per Consolidated Statement of Financial Position Other activities Total (in Euro million) Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives Fair value 31,717 1,604 Carrying value 22,172 1,604 % (value balance sheet) 3.70% 0.27% Fair value 3,634 Carrying value 3,438 % (value balance sheet) 15.12% Fair value 35,350 1,604 Carrying value 25,610 1,604 % (value balance sheet) 4.12% 0.26% Investment in real estate properties 33,321 23,776 3.97% 3,634 3,438 15.12% 36,954 27,214 4.37% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 393,990 20,369 4 11,324 393,990 20,369 4 10,869 65.72% 3.40% 0.00% 1.81% 2,355 81 36 2,355 81 36 10.36% 0.36% 0.16% 396,345 20,450 4 11,360 396,345 20,450 4 10,905 63.70% 3.29% 0.00% 1.75% Debt instruments 425,687 425,232 70.93% 2,472 2,472 10.87% 428,159 427,704 68.74% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 16,149 9,870 (0) 16,149 9,870 (0) 2.69% 1.65% 0.00% 2,208 568 0 2,208 568 0 9.71% 2.50% 0.00% 18,357 10,437 (0) 18,357 10,437 (0) 2.95% 1.68% 0.00% Equity instruments 26,018 26,018 4.34% 2,776 2,776 12.21% 28,794 28,794 4.63% Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 7,591 7,738 483 7,591 7,738 483 1.27% 1.29% 0.08% 48 19 48 19 0.21% 0.08% 7,639 7,757 483 7,639 7,757 483 1.23% 1.25% 0.08% Non consolidated investment funds 15,813 15,813 2.64% 67 67 0.29% 15,880 15,880 2.55% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 15,041 15,041 2.51% 198 198 0.87% 15,238 15,238 2.45% Macro-hedge and other derivatives 1,232 1,232 0.21% 173 173 0.76% 1,405 1,405 0.23% Sub total Financial instruments (excluding Loans) 483,790 483,335 80.62% 5,686 5,686 25.00% 489,476 489,021 78.59% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) Macro-hedge and other derivatives - (0) - 21,470 - (0) - (0) - 20,346 - 0.00% - 0.00% - 3.39% - - - - 13,728 0 - - - 13,616 0 - - - 59.88% 0.00% - (0) - 35,198 0 (0) - (0) - 33,962 0 0.00% - 0.00% - 5.46% 0.00% Loans 21,470 20,346 3.39% 13,728 13,616 59.88% 35,198 33,962 5.46% Total Financial instruments 505,260 503,681 84.02% 19,414 19,302 84.88% 524,674 522,983 84.05% Assets backing contracts where the financial risk is borne by policyholders 72,043 72,043 12.02% 72,043 72,043 11.58% INVESTMENTS 610,623 599,500 100.00% 23,048 22,740 100.00% 633,671 622,240 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 538,580 527,457 87.98% (a) Includes infrastructure and forests investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. Half Year 2020 Financial Report 90 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 Insurance December 31, 2019 restated (a) Investments as per Consolidated Statement of Financial Position Other activities Total (in Euro million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Investment in real estate properties at amortized cost (b) 31,395 21,679 3.64% 3,431 3,309 14.78% 34,826 24,987 4.04% Investment in real estate properties designated as at fair value through profit or loss (c) 1,622 1,622 0.27% 1,622 1,622 0.26% Macro-hedge and other derivatives Investment in real estate properties 33,017 23,301 3.91% 3,431 3,309 14.78% 36,448 26,609 4.30% Debt instruments held to maturity Debt instruments available for sale 385,347 385,347 64.62% 2,218 2,218 9.91% 387,565 387,565 62.64% Debt instruments designated as at fair value through profit or loss (d) 22,274 22,274 3.74% 93 93 0.41% 22,367 22,367 3.62% Debt instruments held for trading 117 117 0.02% 117 117 0.02% Debt instruments (at cost) that are not quoted in an active market (e) 11,271 10,901 1.83% (0) 0.00% 11,271 10,901 1.76% Debt instruments 419,009 418,640 70.20% 2,311 2,311 10.32% 421,320 420,950 68.04% Equity instruments available for sale 18,400 18,400 3.09% 2,582 2,582 11.53% 20,983 20,983 3.39% Equity instruments designated as at fair value through profit or loss (c) 9,592 9,592 1.61% 572 572 2.56% 10,165 10,165 1.64% Equity instruments held for trading 1 1 0.00% 0 0 0.00% 1 1 0.00% Equity instruments 27,994 27,994 4.69% 3,155 3,155 14.09% 31,148 31,148 5.03% Non consolidated investment funds available for sale 8,626 8,626 1.45% 76 76 0.34% 8,701 8,701 1.41% Non consolidated investment funds designated as at fair value through profit or loss (c) 6,464 6,464 1.08% 24 24 0.11% 6,487 6,487 1.05% Non consolidated investment funds held for trading 188 188 0.03% 188 188 0.03% Non consolidated investment funds 15,277 15,277 2.56% 99 99 0.44% 15,376 15,376 2.49% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 15,132 15,132 2.54% 232 232 1.03% 15,363 15,363 2.48% Macro-hedge and other derivatives 249 249 0.04% (110) (110) 0.49% 139 139 0.02% Sub total Financial instruments (excluding Loans) 477,660 477,291 80.04% 5,687 5,687 25.40% 483,347 482,977 78.06% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (c) (0) (0) 0.00% Loans held for trading Loans at cost (f) 21,012 19,966 3.35% 13,483 13,393 59.82% 34,495 33,360 5.39% Macro-hedge and other derivatives 0 0 0.00% 0 0 0.00% Loans 21,012 19,966 3.35% 13,483 13,393 59.82% 34,495 33,360 5.39% Total Financial instruments 498,672 497,257 83.39% 19,170 19,080 85.22% 517,842 516,337 83.45% Assets backing contracts where the financial risk is borne by policyholders 75,774 75,774 12.71% 75,774 75,774 12.25% INVESTMENTS 607,463 596,332 100.00% 22,601 22,389 100.00% 630,064 618,720 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 531,689 520,558 87.29% (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Includes infrastructure and forests investments. (c) Assets measured at fair value under the fair value option. (d) Includes assets measured at fair value notably under the fair value option. (e) Eligible to the IAS 39 Loans and receivables measurement category. (f) Mainly relates to mortgage loans and policy loans. Half Year 2020 Financial Report 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 5.2 Investment in real estate properties Investment in real estate properties includes buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, including the impact of all derivatives: June 30, 2020 December 31, 2019 Gross value Amortization Impairment Carrying value Fair value Gross value Amortization Impairment Carrying value Fair value (in Euro million) Investment in real estate properties at amortized cost Insurance (a) 24,774 (1,594) (1,061) 22,119 31,664 24,300 (1,536) (981) 21,783 31,499 Other activities 3,438 (0) 3,438 3,634 3,309 (0) 3,309 3,431 All activities excluding derivatives 28,212 (1,594) (1,061) 25,557 35,297 27,609 (1,536) (981) 25,092 34,930 Impact of Derivatives 53 53 (104) (104) Total for all activities including derivatives 25,610 35,350 24,987 34,826 (a) Includes infrastructure and forests investments. Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019 Opening value 981 752 1,536 1,624 Increase for the period 145 373 65 241 Write back following sale or repayment (52) (52) (18) (164) Write back following recovery in value (12) (28) Others (a) (2) (64) 11 (165) Closing value 1,061 981 1,594 1,536 (a) Includes changes in the scope of consolidation and the impact of changes in exchange rates. Half Year 2020 Financial Report 92 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 5.3 Unrealized gains and losses on financial investments Including the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: INSURANCE June 30, 2020 December 31, 2019 restated (a) (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non-consolidated investment funds available for sale Amortized cost (b) 334,293 10,855 12,517 6,992 Fair value 393,990 11,324 16,149 7,591 Carrying value (c) 393,990 10,869 16,149 7,591 Unrealized gains 63,951 529 3,888 684 Unrealized losses 4,254 60 256 86 Amortized cost (b) 332,557 10,888 13,524 7,772 Fair value 385,347 11,271 18,400 8,626 Carrying value (c) 385,347 10,901 18,400 8,626 Unrealized gains 57,289 445 4,962 920 Unrealized losses 4,499 62 86 66 (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Net of impairment - including premiums/discounts and related accumulated amortization. (c) Net of impairment. OTHER ACTIVITIES June 30, 2020 December 31, 2019 (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale Amortized cost (a) 2,271 36 1,745 48 Fair value 2,355 36 2,208 48 Carrying value (b) 2,355 36 2,208 48 Unrealized gains 98 0 580 1 Unrealized losses 14 0 118 1 Amortized cost (a) 2,133 (0) 1,766 74 Fair value 2,218 2,582 76 Carrying value (b) 2,218 (0) 2,582 76 Unrealized gains 89 0 819 2 Unrealized losses 4 3 0 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. TOTAL June 30, 2020 December 31, 2019 restated (a) (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale Amortized cost (b) 336,564 10,891 14,263 7,041 Fair value 396,345 11,360 18,357 7,639 Carrying value (c) 396,345 10,905 18,357 7,639 Unrealized gains 64,048 529 4,468 686 Unrealized losses 4,268 60 374 87 Amortized cost (b) 334,690 10,888 15,290 7,845 Fair value 387,565 11,271 20,983 8,701 Carrying value (c) 387,565 10,901 20,983 8,701 Unrealized gains 57,378 445 5,782 922 Unrealized losses 4,503 62 89 66 (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Net of impairment - including premiums/discounts and related accumulated amortization. (c) Net of impairment. Half Year 2020 Financial Report 93 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 5.4 Financial investments subject to impairment 5.4.1 BREAKDOWN OF FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market (d) Cost before impairment and revaluation to fair value (b) 336,587 10,893 Impairment (23) (2) June 30, 2020 Cost after impairment but before revaluation to fair value (c) 336,564 10,891 Revaluation to fair value (d) 59,781 14 Carrying value 396,345 10,905 Cost before impairment and revaluation to fair value (b) 334,709 10,890 December 31, 2019 restated (a) Cost after impairment but before revaluation to fair value (c) Revaluation to fair value (d) Impairment (19) 334,690 52,875 (2) 10,888 13 Carrying value 387,565 10,901 Debt instruments 347,479 (25) 347,455 59,795 407,249 345,599 (21) 345,578 52,888 398,466 Equity instruments available for sale 17,012 (2,750) 14,263 4,094 18,357 17,856 (2,566) 15,290 5,693 20,983 Non consolidated investment funds available for sale 7,939 (899) 7,041 599 7,639 8,584 (739) 7,845 856 8,701 Loans held to maturity (0) (0) (0) Loans available for sale Loans at cost (e) 34,129 (155) 33,974 (12) 33,962 33,523 (118) 33,405 (45) 33,360 Loans 34,129 (155) 33,974 (12) 33,962 33,523 (118) 33,405 (45) 33,360 TOTAL 406,559 (3,827) 402,732 64,475 467,207 405,562 (3,444) 402,118 59,392 461,510 (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. (b) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (c) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (d) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (e) Including policy loans. Half Year 2020 Financial Report 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 5.4.2 CHANGE IN IMPAIRMENT ON FINANCIAL INVESTMENTS (in Euro million) January 1, 2020 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) June 30, 2020 Impairment - Debt instruments 21 4 (0) (0) (1) 25 Impairment - Equity instruments 2,566 447 (134) (130) 2,750 Impairment - Non-consolidated investment funds 739 115 (24) 69 899 Impairment - Loans 118 54 (0) (21) 3 155 TOTAL 3,444 621 (158) (21) (58) 3,827 (a) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. (in Euro million) January 1, 2019 Increase for the period (a) Write back following sale or repayment Write back following recovery in value Other (b) December 31, 2019 Impairment - Debt instruments 78 3 (36) (0) (24) 21 Impairment - Equity instruments 2,733 412 (647) 69 2,566 Impairment - Non-consolidated investment funds 915 69 (331) 85 739 Impairment - Loans 199 46 (14) (49) (64) 118 TOTAL 3,925 529 (1,028) (49) 66 3,444 (a) Includes the impairment of the participation in non-consolidated subsidiaries for €245 million. (b) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. 5.5 Investments/Fair value Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on a mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level Half Year 2020 Financial Report 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or used by the Group in the limited cases of application of mark to model valuations. 5.5.1 INVESTMENTS RECOGNIZED AT FAIR VALUE The breakdown by valuation method of investments recognized at fair value including derivatives but excluding assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2020 December 31, 2019 restated (a) Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives (in Euro million) Debt instruments 261,898 134,439 607 396,944 396,345 297,082 92,439 661 390,182 387,565 Equity instruments Non-consolidated investment funds Loans 14,333 920 1,905 4,580 (0) 2,083 2,129 18,322 7,629 (0) 18,357 7,639 (0) 16,590 1,243 2,129 5,096 (0) 2,278 2,345 20,997 8,684 (0) 20,983 8,701 (0) Financial investments and loans available for sale Investment in real estate properties Debt instruments 277,152 9,081 140,924 1,604 10,370 4,820 920 422,895 1,604 20,371 422,340 1,604 20,450 314,915 13,355 99,664 1,622 7,528 5,284 0 1,304 419,863 1,622 22,187 417,249 1,622 22,367 Equity instruments Non-consolidated investment funds Other assets held by consolidated investment funds designated as at fair value through profit or loss Loans 3,622 397 1,399 182 4,430 7,912 6,633 2,945 5,920 10,437 7,773 15,231 10,437 7,757 15,238 3,317 330 1,634 970 3,740 6,560 5,877 2,402 7,181 10,165 6,472 15,375 10,165 6,487 15,363 (0) (0) Financial investments and loans designated as at fair value through profit or loss 14,499 24,498 16,418 55,415 55,487 18,636 20,420 16,764 55,821 56,004 Debt instruments Equity instruments Non-consolidated investment funds Loans 2 - 0 5 - 483 - 7 - 483 4 (0) 483 84 1 0 54 - 188 1 - 138 1 188 1 117 1 188 1 Financial investments and loans held for trading TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE 2 291,652 489 165,911 21,238 491 478,802 487 478,314 85 333,636 242 120,326 1 22,049 327 476,012 306 473,560 (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. In the first half of 2020, the Covid-19 crisis has affected the corporate bonds market which prices experienced an important bid-ask spread widening in March and April. These spreads have progressively tightened since then but did not return to their pre-crisis level, leading to transfers from Level 1 to Level 2. Half Year 2020 Financial Report 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 During the period ended on June 30, 2020, the net transfer between Level 1 and Level 2 was €34,085 million. This amount comprised €2,143 million transferred from Level 2 to Level 1, and €36,228 million from Level 1 to Level 2, of which €32,654 million for corporate bonds and €2,841 million for government bonds. These reclassifications were mainly due to the widening of the bid ask spreads on corporates bonds in the context of the COVID-19 crisis. TRANSFER IN AND OUT OF THE LEVEL 3 CATEGORY AND OTHER MOVEMENTS From January 1, 2020 to June 30, 2020, the amount of level 3 assets decreased by €0.8 billion to €21.2 billion, representing 4.4% of the total assets at fair value (4.7% as of December 31, 2019 or €22.1 billion). Main movements relating to level 3 assets to be noted were the following: €+1.5 billion of new investments; €-1.3 billion of net asset transfers in and out of level 3 and foreign exchange fluctuation impact; €+0.1 billion of change in unrealized gains and losses; €-1.1 billion of asset sales, redemptions and settlements mainly debt instruments, equity securities and non-consolidated investment funds accounted as available for sale and equity securities, non- consolidated investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through P&L. A majority of assets classified in level 3 corresponds to private investments, in particular private equity assets. 5.5.2 INVESTMENTS RECOGNIZED AT AMORTIZED COST June 30, 2020 December 31, 2019 restated (a) (in Euro million) Debt instruments held to maturity Loans held to maturity Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Financial investments and loans held to maturity Investment in real estate properties at amortized cost Debt instruments at cost (loans & receivables) Loans at amortized cost (0) 460 35 34,803 5,570 21,004 494 5,316 14,171 35,297 11,346 35,210 35,350 11,360 35,197 (0) 332 30 34,477 6,365 20,366 454 4,560 14,144 34,930 11,257 34,540 34,826 11,271 34,494 Financial investments and loans at amortized cost TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 495 495 61,377 61,377 19,981 19,981 81,853 81,853 81,907 81,907 362 362 61,208 61,208 19,158 19,158 80,728 80,728 80,591 80,591 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. (a) Following the termination of the sale agreement of AXA Life Europe, the held for sale classification previously applied has been restated. Half Year 2020 Financial Report 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The consolidated statement of changes in equity is presented as a primary Financial Statement. 6.1 Impact of transactions with shareholders 6.1.1 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2020 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2020, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €10 million corresponding to 0.4 million shares in order to eliminate the dilutive effect of share-based compensation schemes; capital increase of €6 million due to the exercise of stock options corresponding to 0.4 million shares; shared based payments for €23 million. TREASURY SHARES AS OF JUNE 30, 2020, THE COMPANY AND ITS SUBSIDIARIES OWNED 34.2 MILLION AXA SHARES, REPRESENTING 1.4% OF THE SHARE CAPITAL, AN INCREASE OF 2.9 MILLION SHARES COMPARED TO DECEMBER 31, 2019. The 0.9 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €6 million and their market value was €17 million at the end of June 2020. The carrying value of treasury shares and related derivatives was €862 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and at their closing value as regards exchange rates. The corresponding exchange rate differences are cancelled out through the translation reserve. During the first half of 2020, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €-77 million change in other from to foreign exchange rate fluctuations; €-90 million from interest expenses related to the undated subordinated debt (net of tax). Half Year 2020 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 As of June 30, 2020 and December 31, 2019, undated subordinated debts recognized in shareholders’ equity were as follows: June 30, 2020 December 31, 2019 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in million) October 29, 2004 - 375 M€ 6.0% 375 375 375 375 December 22, 2004 - 250 M€ 6.0% 250 250 250 250 January 25, 2005 - 250 M€ 6.0% 250 250 250 250 July 6, 2006 - 350 M£ 6.7% 350 384 350 411 December 14, 2006 - 750 MUS$ 6.4% 750 667 750 665 November 7, 2014 - 984 M€ 3.941% 984 981 984 981 November 7, 2014 - 724 M£ 5.453% 724 791 724 848 May 20, 2014 - 1,000 M€ - 3.9% 1,000 997 1,000 997 January 22, 2013 - 850 MUS$, 5.5% 850 753 850 751 Undated notes - 625 M€, variables rates 625 625 625 625 Undated notes - 27,000 MJPY, 3.3% 27,000 224 27,000 221 Undated notes - 375 MUS$, variables rates 375 335 375 334 TOTAL 6,631 6,708 Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step-up clauses with effect from a given date. DIVIDENDS PAID At the Shareholders’ meeting held on June 30, 2020, shareholders approved a dividend distribution of €0.73 per share corresponding to €1,740 million with respect to the 2019 financial year to be paid on July 9, 2020. As a consequence, the dividend to be paid was recorded as other payables in the consolidated statement of financial position as of June 30, 2020. 6.1.2 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2019 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2019, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €274 million corresponding to 11.4 million shares in order to eliminate the dilutive effect of share-based compensation schemes; capital increase of €22 million due to the exercise of stock options for 1.5 million shares; shared based payments for €17 million. Half Year 2020 Financial Report 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 TREASURY SHARES As of June 30, 2019, the Company and its subsidiaries owned 29.8 million AXA shares, representing 1.2% of the share capital, a decrease of 11.8 million shares compared to December 31, 2018. The 1.6 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €30 million and their market value was €38 million at the end of June 2019. The carrying value of treasury shares and related derivatives was €685 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES During the first half of 2019, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €+13 million change in other from to foreign exchange rate fluctuations; €-98 million from interest expenses related to the undated subordinated debt (net of tax). DIVIDENDS PAID At the shareholders’ meeting held on May 6, 2019, shareholders approved a dividend distribution of €1.34 per share corresponding to €3,189 million with respect to the 2018 financial year. Half Year 2020 Financial Report 100 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 6.2 Comprehensive income for the period The Statement of Comprehensive Income, presented as a primary financial statement, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2020 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The increase in gross unrealized gains and losses on assets available for sale totaled €+2,999 million, of which a €+4,953 million increase in unrealized capital gains on debt securities driven by the decrease on interest rates mainly in the United States (-126 bps), partly offset by €-1,649 million on equity due to the stock markets turmoil as a consequence of the Covid-19 crisis. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: (in Euro million) June 30, 2020 December 31, 2019 Gross unrealized gains and losses (a) 64,242 61,244 Less unrealized gains and losses attributable to: Shadow accounting on policyholder participation and other obligations (37,185) (34,196) Shadow accounting on Deferred Acquisition Costs (b) (842) (876) Shadow accounting on Value of purchased Business In force (171) (167) Unallocated unrealized gains and losses before tax 26,045 26,005 Deferred tax (5,967) (6,174) Unrealized gains and losses net of tax - assets available for sale 20,077 19,831 Unrealized gains and losses net of tax (100%) - equity accounted companies 78 56 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 20,155 19,887 Minority interests' share in unrealized gains and losses (c) (211) (255) Translation reserves (d) (291) (303) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 19,653 19,328 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. As of June 30, 2020, most of the unrealized gains on assets available for sale related to Life & Savings entities. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2020: Half Year 2020 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 June 30, 2020 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Belgium Life & Savings Gross unrealized gains and losses (a) 21,968 11,725 3,630 6,430 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (16,547) (10,052) (1,921) (3,677) Shadow accounting on Deferred Acquisition Costs (b) (344) (119) (75) Shadow accounting on Value of purchased Business In force (93) (1) Unallocated unrealized gains and losses before tax 5,077 1,672 1,498 2,678 Deferred tax (1,295) (535) (270) (628) Unrealized gains and losses (net of tax) - assets available for sale 3,783 1,137 1,228 2,050 Unrealized gains and losses net of tax - equity accounted companies 11 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 3,794 1,137 1,228 2,050 Minority interests' share in unrealized gains and losses (c) (9) 0 (0) Translation reserves (d) 0 (226) (0) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 3,785 1,137 1,002 2,049 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2020 and December 31, 2019, broken down as follows: (in Euro million) June 30, 2020 December 31, 2019 Unrealized gains and losses (net of tax) 100%, opening 19,887 11,831 Transfer in the income statement on the period (a) Investments bought in the current accounting period and changes in fair value Foreign exchange impact Change in scope and other changes (520) 1,108 (364) 44 (187) 8,593 217 (567) Unrealized gains and losses (net of tax) 100%, closing 20,155 19,887 Minority interests' share in unrealized gains and losses (b) (211) (255) Translation reserves (c) (291) (303) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (d) 19,653 19,328 (a) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period, and debt instruments discount premium impacts. (b) Including foreign exchange impact attributable to minority interests. (c) Group share. (d) Including unrealized gains and losses on assets held for sale operations. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2020 amounted to €-758 million. This was mainly driven by International (€-443 million), the United Kingdom (€-299 million), China (€-55 million), AXA XL (€-55 million), partly offset by Switzerland (€+235 million) and Japan (€+41 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year of 2020 amounted to €+417 million shareholders’ equity Group share. This was mainly driven by the gains on plan assets registered in the United Kingdom & Ireland (€+238 million) and the gains on liabilities in Switzerland (€+185 million). A low level of discount Half Year 2020 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 rates in the Eurozone and the drop of discount rates and inflation rates in the United States have entailed limited actuarial losses at half year. 6.2.2 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2019 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The increase in gross unrealized gains and losses on assets available for sale totaled €+21,876 million, of which a €+19,471 million increase in unrealized capital gains on debt securities driven by the decrease on interest rates. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2019 amounted to €-528 million. This was mainly driven by the deconsolidation of Equitable Holdings, Inc. (€-925 million), partly offset by AXA SA (€+229 million), Japan (€+171 million) and Switzerland (€+154 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial losses for the first half year of 2019 amounted to €-398 million net shareholders’ equity Group share. This was mainly driven by losses on Germany (€-269 million), Switzerland (€- 53 million), Belgium (€-39 million) and France (€-36 million) due to the discount rate decrease in the Eurozone and Switzerland, partly offset by the gains registered on United Kingdom & Ireland (€+67 million) related to the increase in discount rates and inflation rates. 6.3 Change in minority interests Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than a shareholders’ equity item. 6.3.1 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2020 The €-161 million decrease in minority interests to €+4,569 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+80 million; o Reserves relating to changes in fair value through shareholders’ equity for €-35 million; o Foreign exchange movements for €-23 million; o Employee benefits actuarial gains and losses for €+2 million. Transactions with minority interests’ holders, mainly included: o Minority interests in consolidated investments funds qualified as equity resulting from the decrease in the value of minority interests holdings due to a capital decrease for €-155 million; o Dividend payout to minority interests’ holders for €-34 million. Half Year 2020 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 6.3.2 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2019 The €-5,286 million decrease in minority interests to €+5,538 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+239 million; o Reserves relating to changes in fair value through shareholders’ equity for €+213 million; o Foreign exchange movements for €+181 million; o Employee benefits actuarial gains and losses for €-4 million. Transactions with minority interests’ holders, mainly included: o Decrease in minority interests as a consequence of the deconsolidation of Equitable Holdings, Inc. for €-5,172 million; o Reclassification of the equity component of the Mandatory Exchangeable Bonds to financing debt for €-614 million; o Minority interests in consolidated investments funds qualified as equity resulting from the increase in the value of minority interests holdings due to a capital increase for €+53 million; o Dividend payout to minority interests’ holders for €-202 million. Half Year 2020 Financial Report 104 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 7 FINANCING DEBT Carrying value (in Euro million) AXA Subordinated notes, 5.25% due 2040 (€) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) U.S. registered redeemable subordinated debt, 7.125% 2020 (£) Subordinated debt, 5.625% due 2054 (£) Derivatives relating to subordinated debts (a) Subordinated debt, 3.375% due 2047 (€) June 30, 2020 8,190 - 1,000 1,327 356 822 (468) 1,500 December 31, 2019 9,794 1,300 1,000 1,183 382 882 (99) 1,500 Undated Subordinated notes, US$ 850M, 4.5% 759 757 Subordinated notes, 5.125% due 2047 (US$) 893 890 Subordinated notes, 3.25% due 2049 (€) 2,000 2,000 AXA XL 1,401 1,400 Subordinated Notes, 4.45% due March 2025 (US$) 445 445 Subordinated Notes, 5.5% due March 2045 (US$) 454 455 Subordinated Notes, 3.25% due June 2047 (€) AXA Italy Subordinated notes, EURIBOR 6 months + 81bps Other subordinated debt (under €100 million) 502 67 67 33 500 67 67 33 Subordinated debt 9,690 11,294 AXA Bonds mandatorily exchangeable into shares of Equitable Holdings, Inc. Euro Medium Term Note, due 2028 1,270 770 500 1,268 768 500 AXA XL 288 289 Senior Notes, 5.25% due December 2043 (US$) AXA Switzerland Deferred payment for the acquisition of Tianping, due 2020 (in CNY) Other financing debt instruments issued (under €100 million) Other financing debt instruments issued (under €100 million) 288 143 143 103 103 289 146 146 104 104 Financing debt instruments issued 1,806 1,806 TOTAL FINANCING DEBT (b) 11,495 13,101 (a) Hedging instruments in accordance with IAS 39 and economic hedge derivatives not eligible for hedge accounting. (b) Excluding accrued interest on derivatives. Half Year 2020 Financial Report 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 8 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: The calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period. The calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2020 June 30, 2019 Net income Group share 1,429 2,333 Undated subordinated debt financial charge (b) (90) (136) Net income including impact of undated subordinated debt A 1,339 2,197 Weighted average number of ordinary shares (net of treasury shares) - opening 2,386 2,383 Stock options exercised (c) 0 1 Treasury shares (c) (5) 8 Share purchase program (c) (0) (11) Weighted average number of ordinary shares B 2,381 2,381 BASIC NET INCOME PER ORDINARY SHARE C = A / B 0.56 0.92 Potentially dilutive instruments : Stock options 1 2 Other 4 1 Fully diluted - weighted average number of shares (d) D 2,385 2,384 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 1,339 2,197 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 0.56 0.92 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) As of June 30, 2019, it includes financial charges of €9 million related to Mandatory Exchangeable Bonds for only the first three months of 2019 and €29 million related to preferred shares. (c) Weighted average. (d) Taking into account the impact of potentially dilutive instruments. As of June 30, 2020, net income per ordinary share stood at €0.56 on a basic calculation and on a fully diluted basis. As of June 30, 2019, net income per ordinary share stood at €0.92 on a basic calculation and on a fully diluted basis. Half Year 2020 Financial Report 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2020 NOTE 9 SUBSEQUENT EVENTS TERMINATION OF THE SALE AGREEMENT RELATED TO AXA LIFE EUROPE On August 5, 2020, AXA and Cinven mutually agreed to terminate the sale agreement related to AXA Life Europe (“ALE”) as certain conditions to closing were not met by the agreed long stop date. As a consequence, AXA Life Europe assets and liabilities were no longer classified as held for sale as of June 30, 2020 and consolidated statement of financial position as of December 31, 2019 has been restated accordingly in the report. The major classes of assets and liabilities as of December 31, 2019 that were restated in this report are intangible assets for €307 million, cash and cash equivalent for €708 million, investments and other assets for €4,732 million, liabilities arising from insurance and investment contracts for €5,241 million and other liabilities for €468 million. AXA is reviewing its strategic options in order to maximize value creation and cash efficiency of ALE, while giving due regard to the interests of ALE’s policyholders and ensuring a seamless continuation of service to these policyholders. BOARD OF DIRECTORS’ DECISION ON EXCEPTIONAL DISTRIBUTION OF RESERVES IN 4Q20 Following a number of discussions with the French regulator (ACPR) and, in the context of the COVID-19 crisis, reinforced communication from various European regulators, including the ACPR on July 28, 2020, recommending insurers to refrain from dividend distributions until January 1, 2021, AXA’s Board of Directors, at its meeting on August 5, 2020, decided it will not propose an exceptional distribution of reserves to shareholders in 4Q 2020. Half Year 2020 Financial Report 107 II III. Statutory auditors’ review report on / the 2020 Half Year Financial Information AXA SA Statutory Auditors' Review Report on the half-year Financial Information (Period from January 1st to June 30th 2020) STATUTORY AUDITORS’ REVIEW REPORT ON THE 2020 HALF YEAR FINANCIAL INFORMATION PricewaterhouseCoopers AuditMazars 63, rue de Villiers61, rue Henri Regnault 92208 Neuilly-sur-Seine Cedex92075 Courbevoie Cedex Statutory Auditors’ Review Report on the half-year Financial Information Period from January 1st to June 30th, 2020 To the Shareholders AXA SA 25, avenue Matignon 75008 Paris In compliance with the assignment entrusted to us by your Shareholders’ Meeting and in accordance with the requirements of article L. 451-1-2-III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: ▪ the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the period from January 1 to June 30th, 2020; ▪ the verification of the information contained in the half-year management report. These condensed half-year consolidated financial statements were prepared under the responsibility of the Board of Directors on August 5th, 2020, based on information available at that date in the evolving context of the COVID-19 crisis and difficulties in understanding its impacts and future prospects. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 – the standard of IFRSs as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information given in the half-year management report on the condensed half-yearly consolidated financial statements prepared on August 5th, 2020 subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. It is not our responsibility to conclude on the fair presentation and consistency with the half-year financial statements of the solvency related information. Half Year 2020 Financial Report 110 III STATUTORY AUDITORS’ REVIEW REPORT ON THE 2020 HALF YEAR FINANCIAL INFORMATION Neuilly-sur-Seine and Courbevoie, August 5th, 2020 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit Mazars Bénédicte Vignon Grégory SaugnerJean-Claude Pauly Maxime Simoen This is a free translation into English of the statutory auditors’ review report on the half-year financial information issued in French and is provided solely for the convenience of English-speaking users. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Half Year 2020 Financial Report 111 III IV. Statement of the person responsible / for the Half Year Financial Report STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR FINACIAL REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and describes the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 6, 2020. Thomas Buberl Chief Executive Officer Half Year 2020 Financial Report 113 IV

Semestriel, 2020, Insurance, AXA

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Semestriel

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AXA

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Half Year Financial Report / June 30, 2021 TABLE OF CONTENTS I. Activity Report………………………………………...3 II. Consolidated financial statements ………………..68 III. Statutory auditors’ review report on the 2021 Half Year Financial Information ……108 IV. Statement of the person responsible for the Half Year Financial Report …………….………………..112 I. Activity Report / June 30, 2021 ACTIVITY REPORT – HALF YEAR 2021 IMPORTANT LEGAL INFORMATION AND CAUTIONARY STATEMENT REGARDING FORWARD- LOOKING STATEMENTS AND THE USE OF NON-GAAP FINANCIAL MEASURES Certain statements contained herein may be forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans, expectations or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause AXA’s actual results to differ materially from those expressed or implied in such forward looking statements. Please refer to Part 5 - “Risk Factors and Risk Management” of AXA’s Universal Registration Document for the year ended December 31, 2020 (the “2020 Universal Registration Document”), for a description of certain important factors, risks and uncertainties that may affect AXA’s business and/or results of operations, particularly in respect of the COVID-19 crisis. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise, except as required by applicable laws and regulations. In addition, this report refers to certain non-GAAP financial measures, or alternative performance measures (“APMs”), used by Management in analyzing AXA’s operating trends, financial performance and financial position and providing investors with additional information that Management believes to be useful and relevant regarding AXA’s results. These non-GAAP financial measures generally have no standardized meaning and therefore may not be comparable to similarly labelled measures used by other companies. As a result, none of these non-GAAP financial measures should be considered in isolation from, or as a substitute for, the Group’s Consolidated Financial Statements and related notes prepared in accordance with IFRS. A reconciliation from APMs Underlying earnings and Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided on pages 19 to 20 of this report. APMs Underlying Return on Equity and Underlying earnings per share are reconciled to the financial statements in the tables set forth on page 26 of this report. The calculation methodology of the Debt Gearing is set out on page 21 of this report. The above-mentioned and other non-GAAP financial measures used in this report are defined in the Glossary set forth on pages 60 to 67 of this report. Half Year 2021 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2021 Operating Highlights Governance DENIS DUVERNE TO BE SUCCEEDED BY ANTOINE GOSSET-GRAINVILLE AS CHAIRMAN OF AXA IN APRIL 2022 On March 12, 2021, AXA announced that Denis Duverne, Chairman of AXA’s Board of Directors, would retire at the end of his current mandate in April 2022, as planned. Following a comprehensive succession process led by the Compensation & Governance Committee of AXA’s Board over the past two years, the Board has unanimously decided to appoint Antoine Gosset-Grainville as Chairman, effective on Denis Duverne’s retirement in April 2022. AXA ANNOUNCED SENIOR LEADERSHIP CHANGES TO IMPLEMENT THE NEW PHASE OF ITS STRATEGIC JOURNEY On March 25, 2021, AXA announced changes in its senior leadership team to implement its new strategic plan, Driving Progress 2023, presented in December 2020. Simplification of AXA’s Corporate Center AXA’s Corporate Center moved to a simpler and more focused organization, in line with the operating model launched in 2017, and led by two Deputy CEOs: Frédéric de Courtois joined AXA on August 1, 2021, as Deputy CEO, in charge of Finance and Investments, Risk Management, Strategy, and Ceded Reinsurance; George Stansfield, Deputy CEO and Group General Secretary, in charge of Legal, Human Resources, Audit, Compliance and Public Affairs, is also overseeing Communication, Brand and Sustainability. The two Deputy CEOs are therefore managing all of the Group’s central functions to ensure consistency and effectiveness in the implementation of the new strategic plan. In addition: Étienne Bouas-Laurent, previously Group Chief Financial Officer, became CEO of AXA Belgium, effective July 1, 2021, replacing Jef Van In. Étienne Bouas-Laurent is also overseeing activities in Luxembourg; Alban de Mailly Nesle, previously Group Chief Risk and Investment Officer, became Group Chief Financial Officer while continuing to lead Group Investments, effective July 1, 2021. Changes in key geographies Important leadership changes were also implemented in key geographies: Jacques de Peretti, previously Chairman and CEO of AXA France, took up a new challenge serving as a Senior Advisor to the Group CEO to help drive key strategic initiatives across the Group and as a Board member of different AXA entities. Jacques de Peretti remains a member of AXA’s Management Committee; Patrick Cohen, previously CEO of AXA Italy, was appointed CEO of AXA France, reporting to Thomas Buberl, effective May 3, 2021; Benoît Claveranne, previously CEO of AXA International & New Markets (INM), decided to pursue new opportunities outside of the Group. The African and Asian operations of INM now report to Gordon Half Year 2021 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2021 Watson, CEO of AXA Asia and Africa, and the other INM operations (1) as well as AXA Partners and AXA Next report to Antimo Perretta, CEO of AXA Europe and Latin America. Renewed Management Committee The Group’s Management Committee was renewed with the further addition of Helen Browne, Group General Counsel, and Ulrike Decoene, Group Chief Communication, Brand and Sustainability Officer. AXA’s Management Committee is now composed of 15 members: Led by Thomas Buberl, CEO and Director of AXA Group, George Stansfield, Deputy CEO and Group General Secretary, in charge of Legal, Human Resources, Audit, Compliance, Public Affairs, Communication, Brand and Sustainability, Frédéric de Courtois, Deputy CEO, in charge of Finance and Investments, Risk Management, Strategy, and Ceded Reinsurance, Helen Browne, Group General Counsel, Patrick Cohen, CEO of AXA France, Ulrike Decoene, Group Chief Communication, Brand and Sustainability Officer, Georges Desvaux, Group Chief Strategy and Business Development Officer, Scott Gunter, CEO of AXA XL, Alban de Mailly Nesle, Group Chief Financial Officer, Marco Morelli, Executive Chairman of AXA Investment Managers, Jacques de Peretti, Senior Advisor, Antimo Perretta, CEO of AXA Europe and Latin America, Karima Silvent, Group Chief Human Resources Officer, Astrid Stange, CEO of AXA Group Operations, Gordon Watson, CEO of AXA Asia and Africa. The implementation of these changes was subject to consultation with social partners and regulatory authorities where applicable. APPPOINTMENT OF JEF VAN IN AS CEO OF AXA NEXT AND AXA PARTNERS, AND GROUP CHIEF INNOVATION OFFICER On April 9, 2021, AXA announced the appointment of Jef Van In, previously CEO of AXA Belgium, as CEO of AXA Next and Group Chief Innovation Officer, effective July 1, 2021. He reports to Antimo Perretta, CEO of AXA Europe and Latin America and a Member of AXA’s Management Committee. Jef Van In replaced Delphine Maisonneuve who decided to take on a new role outside of AXA. In addition to his new role as CEO of AXA Next and AXA Group’s Chief Innovation Officer, Jef Van In has been appointed as CEO of AXA Partners, effective as of August 1, 2021. (1) AXA Bank Belgium, Brazil, Colombia, the Gulf Region, Luxembourg, Mexico, Turkey and Russia. Half Year 2021 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2021 AXA PRESENTED THE RESULTS OF ITS SHAREHOLDERS' MEETING, THE “AXA FOR PROGRESS INDEX” AND ITS 2020 INTEGRATED REPORT Results of AXA’s Annual Shareholders’ Meeting During the Shareholders’ Meeting held on April 29, 2021, all resolutions recommended by the Board of Directors were approved by AXA’s shareholders, including: The appointment as directors for a four-year term of Mr. Guillaume Faury and Mr. Ramon Fernandez; The re-appointment as director of Mr. Ramon de Oliveira for a four-year term; The payment of a €1.43 dividend per share for the 2020 fiscal year, which has been paid on May 11, 2021 (ex-dividend date: May 7, 2021). Launch of the “AXA For Progress Index” Last year at the Shareholders’ Meeting, AXA presented its purpose, “Acting for human progress in protecting what matters” to express the Group’s identity, to define its mission and to set a long-term strategic horizon. To make its purpose tangible and operational for all teams, the Group launched, on April 29, 2021, the “AXA For Progress Index”. It aims to measure and amplify the impact of AXA’s purpose on the Group’s activities through precise objectives: Investments o Reduction of the carbon footprint of the General Account assets by 20% by 2025, o Development of the green investment portfolio to reach €25 billion by 2023, Insurance o Strengthening the share of insurance products with a positive impact on the environment, through the guarantees or services offered, o Promotion of inclusive insurance for vulnerable populations, Corporate responsibility o Training all employees on climate issues by 2023, o Carbon neutrality of our activities by 2025 by reducing emissions from our operations by 20% and offsetting residual emissions. The “AXA For Progress Index” will also incorporate AXA's position in the S&P Global Corporate Sustainability Assessment, which recognizes the most responsible companies in the financial sector. Publication of AXA’s Integrated Report On the same day, as it does every year at the time of its Annual Shareholders' Meeting, AXA released the new edition of its Integrated Report, which looks back on 2020 through the analysis of external experts, discusses the Group's results and strategic outlook and reports its financial, environmental and social impact. This report is available on AXA’s website at: https://www.axa.com/en/about-us/2020-integrated-report. APPOINTMENT OF CLOTILDE DELBOS AS MEMBER OF AXA’S BOARD OF DIRECTORS TO REPLACE IRENE DORNER During its meeting held on May 10, 2021, AXA’s Board of Directors acknowledged Mrs. Irene Dorner’s resignation from the Board as she wished to devote more time to her role as Chairwoman of Taylor Wimpey Plc (United Kingdom), which she assumed in February 2020. Half Year 2021 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2021 The Board of Directors, following the recommendation of its Compensation & Governance Committee, decided to coopt Mrs. Clotilde Delbos to the Board with immediate effect for the remainder of Mrs. Irene Dorner’s mandate, i.e. until the Shareholders’ Meeting called to approve the financial statements of the 2023 fiscal year. Mrs. Clotilde Delbos’ candidacy was selected by the Board of Directors mainly due to her executive officer profile and her strong financial expertise. She is currently Deputy Chief Executive Officer and Chief Financial Officer of the Renault Group, which she joined in 2012 and where she served as interim Chief Executive Officer from October 2019 to July 2020. Mrs. Clotilde Delbos was also appointed as a member of the Audit Committee, the Chairmanship of which has been entrusted by the Board of Directors, following the recommendation of its Compensation & Governance Committee, to Mrs. Isabel Hudson. Significant transactions AXA COMPLETED THE SALE OF ITS INSURANCE OPERATIONS IN GREECE On May 31, 2021, AXA announced that it had completed the sale of its Life & Savings and Property & Casualty businesses in Greece to Generali, for a total cash consideration of €167 million. AXA TO SELL ITS INSURANCE OPERATIONS IN MALAYSIA On June 22, 2021, AXA announced that it had entered into an agreement with Generali to sell its insurance operations in Malaysia, which include its 49.99% shareholding in AXA Affin General Insurance (“AAGI”) and 49% shareholding in AXA Affin Life Insurance (“AALI”). Under the terms of the agreement, AXA will sell its ownership in AAGI and AALI for total cash proceeds of RM 688 million (1) (or €140 million (2)). The transaction is subject to closing conditions, including the receipt of regulatory approvals, and is expected to close by 2Q22. Partnerships and innovation AXA COLLABORATES WITH MICROSOFT TO CREATE THE NEXT GENERATION STANDARD OF HEALTH AND WELL-BEING SERVICES On April 14, 2021, AXA announced it was collaborating with Microsoft to build a digital healthcare platform, enabling a virtual healthcare system that is open to all. The partnership will be built on AXA’s global reach, extensive experience in healthcare and insurance, business and technology architecture skills, and Microsoft's deep expertise in cloud-based computing, artificial intelligence, and array of partnerships with clinical partners and third-party vendors. The new platform will rely on the extensive portfolio of technology in the Microsoft Cloud for Healthcare, including Azure API for FHIR (Fast Healthcare Interoperability Resources), that enables patient insights without compromising patient privacy. The digital healthcare platform will link digital health services offered by AXA to support its customers at every stage of their e-health experience. The range of services offered will include a self-assessment and prevention tool, a medical concierge, a teleconsultation interface, a digital document vault, home care services (e.g. (1) Including the repayment of RM 39 million (or €8 million) subordinated debt issued by AAGI to AXA, prior to or at the closing of the transaction. (2) 1 Euro = RM 4.9328 as of June 18, 2021 (Source: Bloomberg). Half Year 2021 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2021 medicine delivery) or a directory of healthcare professionals. Furthermore, the platform will break down health service silos to improve research, treatments and prevent diseases. A pilot program, which included a self-assessment tool, teleconsultation and a medical concierge to facilitate appointment-setting, was successfully launched in late 2020. The platform is open to all AXA customers in Germany and Italy, with tailored services. The service will be deployed by 2022 in the United Kingdom, Belgium, Spain and Switzerland to be followed by other countries around the globe. In the long-term, the platform aims to allow integration of third-party services, with the ambition of creating an open, global service for healthcare providers and patients, regardless of whether they are AXA customers. Capital / Debt operations AXA RATINGS On June 15, 2021, Moody’s Investors Service reaffirmed the ‘Aa3’ insurance financial strength rating of AXA’s principal insurance subsidiaries, with a stable outlook. On May 27, 2021, Fitch Ratings reaffirmed the financial strength rating of AXA’s core operating subsidiaries at ‘AA-’, changing the outlook to positive from stable. On March 12, 2021, S&P Global Ratings reaffirmed the long-term financial strength rating of AXA’s core operating subsidiaries at ‘AA-’, with a stable outlook. AXA ANNOUNCED THE SUCCESSFUL PLACEMENT OF €1 BILLION OF SUBORDINATED GREEN BONDS DUE 2041 On April 1, 2021, AXA announced the successful placement of its first subordinated green bonds, which have been issued under AXA Group’s newly established Sustainability Bond Framework. In 2019, AXA launched a new phase of its climate strategy and doubled its green investment target to €24 billion by 2023. With this issuance, the Group further increased this target by €1 billion to €25 billion. An amount equivalent to the proceeds of the green bond issuance will be exclusively used to finance or re-finance eligible Green Projects in the following eligible Green Categories: Green Buildings, Renewable Energy, Clean Transportation, Energy Efficiency and Natural Resources / Sustainable Forestry, as set out and defined in AXA Group’s Sustainability Bond Framework. Sustainalytics provided a third-party opinion on AXA Group’s Sustainability Bond Framework, available on www.axa.com. In line with the green bond market standards (ICMA’s Green Bond Principles), AXA will publish an allocation and impact report annually to track the financing of Green Projects and their associated positive environmental impacts. Financial conditions This issuance is consistent with the Group’s expectations for debt gearing over its 2020 – 2023 strategic plan, as communicated at AXA’s 2020 Investor Day. This first green subordinated bond issuance placed with institutional investors in April matures in 2041. The initial fixed coupon has been set at 1.375% per annum until the end of the 6-month call window period (October 2031), when it will become a floating coupon based on 3-month EURIBOR plus a margin including a 100 basis points step up. Investor demand was strong with more than 100 institutional investors participating, mainly asset managers, insurers and pension funds essentially across Europe. Half Year 2021 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2021 The bonds will be treated as capital from a regulatory and rating agencies’ perspective within applicable limits. The transaction was structured for the bonds to be eligible as Tier 2 capital under Solvency II. The bonds are rated BBB+/Stable by Standard & Poor’s, A3(hyb)/Stable by Moody’s and BBB/Stable by Fitch. Settlement of the bonds took place on April 7, 2021. AXA ALLOCATED €2 BILLION TO FRENCH RECOVERY PARTICIPATORY LOAN SCHEME On April 26, 2021, AXA announced a €2 billion allocation to the Prêts Participatifs Relance to strengthen SME capital in France. This scheme, deployed in coordination with the French Insurance Federation (FFA) and a network of partner banks, aims to provide up to €14 billion in participative loans by June 2022 to French companies affected by the crisis linked to COVID-19. Guaranteed 30% by the State, these participative loans meet insurer investment criteria and constitute a suitable investment to finance the economic recovery. The loans will help strengthen the balance sheet and finance the growth of nearly 12,000 SMEs in all sectors of the French economy. They will be granted to beneficiaries under simple terms and at attractive rates. This initiative complements AXA's previous commitments to financing the economy, such as the €500 million mandate given to the CAPZA Expansion fund to support French SMEs. Deployed since July 2020, this mechanism helps strengthen the capital of companies affected by the health crisis and offers them targeted support to continue their development. Other AXA DEPLOYS ITS SMART WORKING STRATEGY WORLDWIDE On January 19, 2021, AXA announced the extension of its smart working strategy to all entities worldwide. This strategy aims to implement a hybrid way of working, combining remote work and office presence by enabling employees on a voluntary basis to work remotely with two days as a general guide. These principles will be deployed by 2023. They will be applied by the end of 2021 in the major entities employing over 70% of AXA employees. The program will include change management and training measures, adaptation of workspaces and provision of IT equipment. Particular attention will be paid to the autonomy and responsibility of teams, and to the cohesion and well-being of employees. Smart working will not preclude eligible employees to work full time in the office if they want to or need to, depending on the specificity of their job. This decision is based on the successful implementation of remote working – with 38% of employees regularly working from home prior to the crisis, and 90% of them wishing to increase the practice of remote working in the future – as well as on the experience gained during the COVID-19 health crisis during which full remote working guaranteed operational continuity. AXA FRANCE’S SETTLEMENT OFFER TO RESTAURANTS – GROUP IMPACT On June 10, 2021, in the context of continuing judicial uncertainty, AXA France announced the launch of a settlement offer to 15,000 restaurant owners who hold non-damage business interruption policies. AXA estimated the cost of these settlements to be ca. €0.3 billion, gross of tax and before reinsurance. The cost of the settlements, net of tax and after reinsurance, was offset by favorable developments in 2021 related to COVID-19, in France and Europe. Half Year 2021 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2021 AXA PUBLISHED ITS 2021 CLIMATE REPORT On June 29, 2021, AXA announced the publication of its 6th Climate Report. This report fulfils the legal requirements for non-financial reporting as well as the voluntary approach of the Task Force on Climate-related Financial Disclosures (TCFD), which AXA has supported since its creation. It describes AXA's responsible investment and insurance initiatives in the fight against climate change and measures the Group's progress in its ambition to reach the objectives of the Paris Agreement. Among the various indicators measuring AXA's activities with regard to climate change, this report highlights the "warming potential" methodology, which measures the impact of the Group's investments on global warming by 2050. At the end of 2020, it stood at 2.7°C, significantly below the market, whose potential was 3.2°C. This indicator is key for AXA, which committed to limiting the warming potential of its investments to 1.5°C by 2050. The report also shows that the "green" share of AXA's portfolios is increasing - driven in particular by the €25 billion green investments planned by 2023 - and that the carbon footprint of investments continues to decline, in line with the -20% target by 2025 set by AXA's strategic plan Driving Progress. These indicators are part of a fundamental methodological effort by the financial industry to measure its climate impact, anticipate and manage climate-related risks for its business and stakeholders, and determine effective action plans. Risk factors The principal risks and uncertainties faced by the Group are described in detail in Section 5.1 "Risk Factors" and Section 7.3 “General Information” of the 2020 Universal Registration Document (on pages 212 to 232 and pages 433 to 447, respectively). The 2020 Universal Registration Document was filed with the Autorité des marchés financiers (the “AMF”) on March 22, 2021, and is available on the AMF’s website (www.amf-france.org) as well as on AXA's website (www.axa.com). The descriptions contained in these sections of the 2020 Universal Registration Document remain valid in all material respects at the date of the publication of this report regarding the appreciation of the major risks and uncertainties affecting the Group on June 30, 2021, or which Management expects could affect the Group during the remainder of 2021. Related-party transactions During the first semester of 2021, there were (i) no modifications to the related-party transactions described in Note 28 "Related-party transactions" to the audited consolidated financial statements for the fiscal year ended December 31, 2020, included in the 2020 Universal Registration Document (pages 410 and 411) filed with AMF and available on its website (www.amf-france.org) as well as on the Company's website www.axa.com, which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2021, and (ii) no new transaction concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2021. Half Year 2021 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2021 Events subsequent to June 30, 2021 HONG KONG REINSURANCE TRANSACTION On July 12, 2021, AXA China Region Insurance Company (Bermuda) Limited, AXA China Region Insurance Company Limited (collectively, “AXA Hong Kong”) and Global Atlantic Assurance Limited have entered into a reinsurance transaction to reinsure a closed book of whole-life insurance policies. This reinsurance transaction covers technical and financial risks (€3.7 billion IFRS reserves ceded). AXA Hong Kong will continue to service and administer the policies as insurer of the reinsured block of business. The Group IFRS P&L impact of this transaction to be booked in the second half of 2021 is expected to be ca. €-0.1 billion. Furthermore, the corresponding reduction of risk is expected to result in a ca. 2 points increase of the Group Solvency II ratio from 3Q21 on. Half Year 2021 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2021 Financial Market Conditions Despite lingering uncertainty surrounding COVID-19 variants since the beginning of the year, optimism on the vaccination roll-out and the rebound in economic activity continued to support the overall recovery of financial markets. The year had started with active third waves in most countries which led to the further imposition of a range of restrictions and lockdowns. As the third wave was starting to fade and mass vaccination was ramping up in developed countries, several economies began reopening, which fuelled investor sentiment that a normalization was in sight, despite outbreaks spiking in developing countries. Several economies posted better than expected economic outputs that spurred economic growth expectations. However, the sudden uptick in economic activity created significant bottlenecks across the value chain, ranging from higher commodity prices to a shortage of available labor. At the same time, governments were supporting their respective economies with a mixture of quantitative easing (QE) measures with central banks partly combined with substantial fiscal packages. Particularly in the United States, the new administration provided several large fiscal stimuli to underpin the economic recovery. As a result, inflation expectations spiked in the first semester, calling into question how central banks would continue short-term and long-term monetary support going forward. The French economy closed 2020 with some restrictions which were tightened in the first quarter and into April as the spread of the alpha variant drove an increase in cases. Yet the French economy, in common with many others, adapted to these increasing restrictions and GDP marginally contracted by 0.1% in the first quarter. An easing of restrictions from May led to a solid rebound in activity along with expectations of a 1.1% rebound in the second quarter and an acceleration in the second half. More broadly across Europe, the economic performance was akin to France, with the virus and restrictions following a similar pattern across most economies. The Eurozone contracted by 0.3% in the first quarter, with a 1.3% rebound expected in the second quarter. Expected GDP growth in 2021 for the Eurozone as a whole was 4.3% following a 6.5% contraction in 2020. In response to a rise in bond yields, the European Central Bank (ECB) increased its QE Pandemic Emergency Purchase Program to prevent a spill-over of tighter financial conditions. The Alpha variant triggered a more severe lockdown in the United Kingdom in the first quarter, and although the economy contracted by only 1.5%, consumption fell by a sharper 4.6%. However, a swift rollout of the vaccination program has contributed to an easing of those restrictions from March and underpinned a surge in economic activity. Expected GDP growth in the second quarter was around 5%, before slowing back to a still robust, but lower expected growth in the second half of the year. In Japan, coronavirus infections continued to spread in the run-up to host the Olympic Games in July. Japanese GDP contracted by 1.0% in the first quarter after posting recovery in the second half of last year. China has continued to perform well, although the re-emergence of the virus led to the effective cancellation of the Lunar New Year Holiday celebrations and contributed to a softening in quarterly growth to just 0.6% in the first quarter, after an impressive rebound in the second half of 2020. The United States began easing restrictions sooner than most and managed to post growth of 1.6% in the first quarter. This growth was bolstered by a fiscal stimulus package of $0.9trn passed in December 2020, that was supplemented by a larger $1.9trn bill in March 2021. The rapid spread of the Delta variant across countries in the latter part of the second quarter started to shake the optimism on the pace of global recovery. However, evidence showed that the economic impact of each new wave decreased in intensity as rapid progress was made on treatments and prevention, combined with a global vaccination roll-out. Half Year 2021 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2021 Stock Markets (in local currency) June 30, 2021 June 30, 2021 / December 31, 2020 June 30, 2020 June 30, 2020 / December 31, 2019 CAC 40 6,508 17% 4,936 17% Eurostoxx 50 4,064 14% 3,234 14% FTSE 100 7,037 9% 6,170 18% Nikkei 28,792 5% 22,288 6% S&P 500 4,298 14% 3,100 4% MSCI World 3,017 12% 2,202 7% MSCI Emerging 1,375 6% 995 11% Source: Bloomberg In broad terms, risk assets performed well over the first half of 2021. Equity markets continued to rise, although concerns over longer-term interest rates led to differences in performance between value and growth stocks. Reflecting both the continued improvement and the fading uncertainty in the economic outlook, the S&P 500 implied volatility index (VIX) decreased from 23 points on December 31, 2020 to 16 on June 30, 2021. French equities have been amongst the stronger performers, with the CAC 40 rising by 17.2% from the end of 2020 to the end of June 2021. The Eurostoxx 50 equity index also posted strong gains in the first half of the year, rising by 14.4%. The FTSE 100 rose by 8.9% in the first half of the year. The S&P 500 continued to set fresh highs over the period, closing at a record high close to 4,300 points, up 14.4% from the end of 2020. Bond Markets (in % or basis points (bps)) June 30, 2021 June 30, 2021 / December 31, 2020 June 30, 2020 June 30, 2020 / December 31, 2019 10Y French bond 0.13% +46 bps 0.11% 23 bps 10Y German bond 0.21% +36 bps 0.45% 27 bps 10Y Swiss bond 0.22% +33 bps 0.44% +3 bps 10Y Italian bond 0.82% +28 bps 1.26% 15 bps 10Y UK bond 0.72% +52 bps 0.17% 65 bps 10Y Japanese bond 0.06% +4 bps 0.03% +4 bps 10Y US bond 1.47% +55 bps 0.66% 126 bps Source: Bloomberg Corporate spreads remained tight, buoyed by central bank support and the recovering economic outlook. Government bond yields rose significantly in the first quarter of 2021, followed by a partial reversal in the second quarter as a result of asset purchases by central banks. French 10-year government bond yields rose by 46 bps to 0.13% by end-June, only 10 bps more than the increase in the German benchmark. Benchmark German Bund yields rose by 36 bps to -0.21% by end-June despite more elevated ECB purchases. 10-year gilt yields rose by 52 bps to 0.72% as the Bank of England (BoE) slowed its pace of asset purchases with a view to ending QE this year. Markets started to consider the pace of BoE tightening, at some points expecting the first interest rate hike in 2022. The Bank of Japan continued to target 10-year yields around 0%, so yields rose just 4 bps to 0.06% in the first half of the year. Initial expectations for US bonds emerged for a quicker reversal of monetary support by the Fed, which Half Year 2021 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2021 led to 10-year yields peaking at 1.74% at the end of the first quarter. However, yields fell in the second quarter as uncertainty over additional fiscal stimulus and central policies resulted in significant liquidity and the Fed reassured that the rising trend was directly linked to the reopening of the economy and therefore temporary. In total, US 10-year yields rose by 55 bps from the beginning of the year to 1.47%. Exchange rates End of Period Exchange rate Average Exchange rate (for €1) June 30, 2021 December 31, 2020 June 30, 2021 June 30, 2020 US Dollar 1.19 1.22 1.21 1.10 British Pound Sterling 0.86 0.90 0.87 0.87 Swiss Franc 1.10 1.08 1.09 1.06 Japanese Yen 132 126 130 119 Source: Bloomberg Uncertainty surrounding the pandemic set a volatile backdrop in currency markets, yet the recent rise in interest rates, especially outside the Eurozone, supported an overall strengthening of major currencies against the Euro. Despite the volatility observed in the first half of 2020, the US Dollar remained on average at the levels seen in 2019. During the second half of 2020, restrictions and reduced economic activity continued to impact global markets, while the US economy generally opened earlier than most other economies. This imbalance resulted in a weaker US Dollar by the end of 2020 from the trade deficit as almost half of global exports are denominated in US Dollar. As the world economy has started to rebound from the end of 2020, the US Dollar has since strengthened by 3.1%. The British Pound Sterling also rose 4.1% from a context of significant uncertainty around Brexit at the end of 2020. Finally, the Japanese Yen was one of the worst major performers as it dropped 4.2% from a continued weak yield. Half Year 2021 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2021 Activity and Earnings Indicators ACTIVITY INDICATORS (in Euro million, except percentages) June 30, 2021 June 30, 2020 June 30, 2021 / June 30, 2020 (a) Gross revenues (b) 53,865 52,391 6.9% Property & Casualty 28,122 28,083 4.4% Life & Savings 16,879 15,597 12.4% Health 7,884 7,858 3.4% Asset Management 704 606 16.9% Banking 277 246 17.7% APE (c) 3,005 2,786 9.2% NBV Margin (d) 46.8% 45.8% 2.5 pts (a) Changes are on comparable basis. (b) Net of intercompany eliminations. (c) Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (d) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. (in Euro million, except percentages) June 30, 2021 June 30, 2020 June 30, 2021 / June 30, 2020 (a) Gross revenues (b) 53,865 52,391 6.9% France 14,217 12,552 12.9% Europe (c) 18,801 18,761 1.6% Asia 5,568 5,522 9.0% AXA XL 10,505 10,522 6.8% International 3,199 3,563 7.8% Transversal & Central Holdings (c) 1,576 1,471 11.9% (a) Changes are on comparable basis. (b) Net on intercompany eliminations. (c) Reclassification of Architas activities (previously reported as part of Europe) to Transversal & Central Holdings. Consolidated Gross revenues amounted to €53,865 million as of June 30, 2021, up 3% on a reported basis and up 7% on a comparable basis compared to June 30, 2020. The 2020 comparable basis mainly includes the following adjustments: (i) the exclusion of the contribution of disposed entities (€-0.6 billion or +1.2 points) notably the contribution to the first semester of 2020 of Central & Eastern Europe following its disposal in October 2020 (€-0.4 billion or +0.8 point) and (ii) the exclusion of the Savings portion of 2020 premiums related to the additional small foundations in Group Life that have been transformed into semi-autonomous foundations in Switzerland since January 1, 2021 (€-0.1 billion or +0.3 point). The 2021 comparable basis also includes the foreign exchange rate movements notably due to the appreciation of average Euro exchange rate against most currencies (€-1.7 billion or +3.3 points). Half Year 2021 Financial Report 16 I ACTIVITY REPORT – HALF YEAR 2021 Gross revenues Property & Casualty gross revenues were up 4% (or €+1,236 million) on a comparable basis to €28,122 million: Commercial lines grew by 6% (or €+1,149 million) primarily driven by (i) AXA XL (+7%) mainly from positive price effects (+11%) across both Insurance (+11%) and Reinsurance (+10%) combined with the non-repeat of COVID-19 premium adjustments in the context of a partial recovery of customers activity, partly offset by selective underwriting , (ii) Europe (+3%) driven by tariff increases and higher volumes in Property and Liability, mainly in Germany, United Kingdom & Ireland and Belgium, as well as in Workers’ Compensation in Switzerland, (iii) France (+6%) reflecting favorable price effects on large accounts, (iv) Singapore (+138%) from a large multi-year Motor contract, as well as (v) AXA Assistance (+9%) from business growth in Motor and Home; Personal lines grew by 1% (or €+88 million) driven by (i) Non-Motor (+4%) in France (+4%) due to the impact of solidarity measures towards both small companies and independent workers in 1H20, in Switzerland (+7%) with higher volumes in Household, as well as in Germany (+3%) with tariff increases mainly in Property, as well as in South Korea (+28%) from higher volumes and a favorable mix effect, partly offset by (ii) Motor (-1%) from lower revenues in Europe (-2%) due to an increased market competition following the restrictions related to the COVID-19 crisis, as well as in China (-19%) following the change in price regulation implemented in September 2020, partly offset by France (+5%) from higher new business combined with favorable price effect. Life & Savings gross revenues were up 12% (or €+1,906 million) on a comparable basis to €16,879 million: Unit-Linked grew by 35% (or €+1,007 million) notably in (i) France (+40%) primarily driven by a strong commercial performance in Individual Savings, (ii) Hong Kong (+86%) from higher new business, and (iii) Spain (+46%) and Italy (+15%) both from strong commercial focus on non-guaranteed business; General Account Savings grew by 12% (or €+570 million) mainly driven by (i) France (+16%) from higher sales in Eurocroissance product, and (ii) Japan (+123%) from the sales of a capital light Single Premium Whole Life product as a consequence of favorable market conditions; Protection grew by 4% (or €+324 million) mainly in (i) France (+6%) reflecting the good momentum in international market, (ii) Japan (+8%) from the strong sales of Protection with Unit-Linked products, as well as in (iii) Hong Kong (+7%) from higher new business in both Protection with Savings and Pure Protection. Health gross revenues were up 3% (or €+267 million) on a comparable basis to €7,884 million: Group business grew by 5% (or €+178 million) primarily in (i) France (+6%) from higher volumes in both international and domestic markets, (ii) Mexico (+19%) due to a positive price effect and higher volumes, as well as in (iii) AXA Assistance (+20%) driven by higher volumes mainly in international markets, while (iv) Europe remained stable; Individual business grew by 2% (or €+90 million) mostly in (i) Europe (+4%) from both positive price and volume effects in Germany, Switzerland and in the United Kingdom, as well as in (ii) Mexico (+13%) from positive price effect and higher volumes, partly offset by (iii) China (-51%) from the non-repeat of a large digital partnership, partly offset by growth in other new digital partnerships. Asset Management gross revenues were up 17% (or €+103 million) on a comparable basis to €704 million mainly driven by (i) higher management fees (€+68 million) from higher average assets under management due to strong net inflows and favorable market effects, as well as higher management fee bps as a result of a favorable change in product mix, combined with (ii) higher distribution fees (€+24 million), as well as (iii) higher performance fees (€+16 million). Half Year 2021 Financial Report 17 I ACTIVITY REPORT – HALF YEAR 2021 Banking gross revenues were up 18% (or €+42 million) on a comparable basis to €277 million driven by AXA Banque France (+60%) mainly due to a favorable change in the fair value of an interest rate swap hedging loans at cost. New business performance NEW BUSINESS ANNUAL PREMIUM EQUIVALENT (1) New business APE grew by 8% on a reported basis and 9% on a comparable basis to €3,005 million, mainly driven by (i) Health in France from the expansion of partnerships in international market, (ii) Unit-Linked in France from strong sales performance in Individual Savings, and in Italy, as well as (iii) General Account Savings notably in France recovering from a low level in 1H20 in the context of the COVID-19 lockdowns, partly offset by (iv) Protection in Switzerland from the non-repeat of exceptional sales in Group Life in the first semester of 2020, partly offset by Hong Kong and Japan from successful commercial campaigns. NEW BUSINESS VALUE MARGIN (2) New Business Value Margin stood at 46.8%, up 2.5 points on a comparable basis, mainly driven by France due to a positive business mix from higher sales in Unit-Linked as well as Individual Health products. (1) New business Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (2) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. Half Year 2021 Financial Report 18 I UNDERLYING EARNINGS AND NET INCOME GROUP SHARE June 30, 2021 (in Euro million) June 30, 2021 Property & Casualty Investment margin Fees & revenues Net technical margin Expenses Amortization of value of purchased life business in-force Underlying earnings before tax Income tax expenses/benefits Income from affiliates and associates Minority interests UNDERLYING EARNINGS GROUP SHARE 2,325 2,970 9,398 (9,851) (22) 4,569 (955) 125 (96) 3,643 1,278 8,097 (6,480) 2,895 (649) 15 (53) 2,209 (a) Other corresponds to banking activities and holding. (in Euro million, except percentages) June 30, 2021 France Investment margin Fees & revenues 2,325 2,970 874 1,234 Net technical margin Expenses 9,398 (9,851) 1,446 (2,355) Amortization of value of purchased life business in-force (22) Underlying earnings before tax from insurance activities 4,820 1,199 Underlying earnings before tax from other activities (252) 7 Income tax expenses / benefits (955) (286) Income from affiliates and associates Minority interests 125 (96) 3 (2) UNDERLYING EARNINGS GROUP SHARE 3,643 921 Net capital gains or losses Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) 257 290 (59) 168 (63) (1) Goodwill and other related intangible impacts Integration and restructuring costs (69) (67) (20) NET INCOME GROUP SHARE 3,996 1,006 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 93.3% 94.4% 94.3% 89.7% 98.7% 100.6% Half Year 2021 Financial Report Life & Savings 974 2,084 608 (2,214) (20) 1,432 (251) 89 (31) 1,240 Europe 812 587 3,640 (3,163) (6) 1,870 10 (409) (0) (48) 1,424 38 166 4 (17) (19) 1,596 90.8% 96.6% 92.8% ACTIVITY REPORT – HALF YEAR 2021 Health Asset Management Other (a) 72 886 692 (1,157) (2) 493 (111) 9 (6) 386 224 (60) 11 (6) 170 (476) 115 - (0) (361) Asia AXA XL International Transversal & Central Holdings 37 1,038 400 - 176 76 24 36 710 (1,058) 2,575 (2,207) 701 (699) 327 (368) (16) (1) 712 767 253 19 (3) (42) 38 (261) (142) (107) (70) 60 97 (4) 1 14 (37) 11 (6) 658 619 198 (178) 0 46 0 4 64 131 20 (28) (27) (0) (60) 26 (15) (0) (31) (20) (6) (2) (1) (5) 680 745 150 (182) 97.7% 73.9% 88.9% 95.8% - - 94.0% 99.5% 105.3% 101.4% 100.6% - 19 I June 30, 2020 (in Euro million) June 30, 2020 Property & Casualty Investment margin Fees & revenues Net technical margin Expenses Amortization of value of purchased life business in-force Underlying earnings before tax Income tax expenses/benefits Income from affiliates and associates Minority interests UNDERLYING EARNINGS GROUP SHARE 2,495 3,135 7,471 (10,188) (39) 2,581 (746) 140 (89) 1,885 1,433 6,289 (6,692) 1,031 (470) 35 (52) 544 (a) Other corresponds to banking activities and holding. (in Euro million, except percentages) June 30, 2020 France Investment margin 2,495 889 Fees & revenues Net technical margin 3,135 7,471 1,278 1,176 Expenses Amortization of value of purchased life business in-force (10,188) (39) (2,387) - Underlying earnings before tax from insurance activities 2,873 956 Underlying earnings before tax from other activities (292) (1) Income tax expenses / benefits Income from affiliates and associates (746) 140 (204) 3 Minority interests (89) (2) UNDERLYING EARNINGS GROUP SHARE 1,885 753 Net capital gains or losses Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts 98 (169) (169) (93) 118 (315) (54) - Integration and restructuring costs (123) (4) NET INCOME GROUP SHARE 1,429 498 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 101.7% 94.0% 94.6% 94.1% 97.1% 102.3% (a) Reclassification of Architas activities (previously reported as part of Europe) to Transversal & Central Holdings. Half Year 2021 Financial Report ACTIVITY REPORT – HALF YEAR 2021 Life & Savings Health Asset Management Other (a) 985 2,287 412 (2,334) (37) 1,314 (206) 85 (27) 1,165 77 847 769 (1,162) (3) 528 (145) 11 (7) 388 176 (52) 9 (3) 130 (468) 127 (0) (0) (341) Europe (a) Asia AXA XL International Transversal & Central Holdings (a) 748 40 587 197 34 564 3,496 1,075 814 895 162 805 56 285 (3,118) (25) (1,156) (14) (2,261) - (881) (1) (385) - 1,665 759 (779) 282 (11) 63 (2) (53) 29 (328) (416) (0) (154) 86 (11) - (65) 42 103 9 (43) (4) (0) (38) (3) 1,268 685 (843) 251 (229) 24 (3) (21) (17) (2) (179) (65) (84) 66 408 (9) (18) (0) (10) (1) (25) (15) (13) (90) (28) (13) (4) (85) (4) (13) 1,074 602 (1,059) 268 47 91.9% 95.9% 94.7% 94.8% 78.6% 88.2% 115.2% - - 96.4% 100.8% 96.7% 106.2% 96.4% - 20 I ACTIVITY REPORT – HALF YEAR 2021 ALTERNATIVE PERFORMANCE MEASURES Underlying earnings, Underlying Return on Equity, Underlying earnings per share, Combined Ratio and Debt Gearing are Alternative Performance Measures (“APMs”) as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from Underlying earnings and Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided in the above tables. Underlying Return on Equity and Underlying earnings per share are reconciled to the financial statements in the table set forth on page 26 of this report, and the calculation methodology of the Debt Gearing is set out on page 22 of this report. For further information on any of the above-mentioned APMs, see the Glossary on pages 60 to 67 of this report. Underlying earnings Underlying earnings represent the net income (Group share), before the impact of the following items net of policyholder participation, deferred acquisition costs, Value of Business in-force, taxes and minority interests: realized gains and losses, change in impairment valuation allowances (on assets not designated under fair value option or trading assets) and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities (other than the funds backing contracts where the financial risk is borne by policyholders); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities; impairments of goodwill, impairments and amortization of intangibles related to customers and distribution agreements; integration and restructuring costs related to newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; and exceptional operations (primarily changes in scope and discontinued operations). Underlying Return on Equity The Underlying Return on Equity (“Underlying RoE”) is calculated as underlying earnings net of financial charges related to undated subordinated debt (recorded through shareholders’ equity as disclosed in Part 2.6 - Note 6 “Shareholders’ Equity and Minority Interests” of this report) divided by the average of opening and closing shareholders’ equity excluding: reserves relating to the change in the fair value through shareholders’ equity as disclosed in Part 2.4 “Consolidated Statement of Changes in Equity” of the this report; undated subordinated debt as disclosed in Part 2.6 - Note 6 “Shareholders’ equity and minority interests” of this report. Half Year 2021 Financial Report 21 I ACTIVITY REPORT – HALF YEAR 2021 Underlying earnings per share Underlying earnings per share corresponds to Group share Underlying earnings net of financial charges related to undated subordinated debt (recorded through shareholders’ equity as disclosed in Part 2.6 - Note 6 “Shareholders’ equity and minority interests” of this report), divided by the weighted average number of outstanding ordinary shares over the period. Combined Ratio (applicable for Property & Casualty, Health and Protection) The Combined Ratio is the sum of the all accident year loss ratio and the underlying expense ratio. All accident year loss ratio net of reinsurance is the ratio of: o all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding the unwind of the discount rate used in calculating technical reserves, to o earned revenues gross of reinsurance. Expense ratio is the ratio of: o expenses (excluding claims handling costs, including changes in Value of Business In-force amortization), to o earned revenues gross of reinsurance. Debt Gearing Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt as disclosed in Part 2.6 - Note 7 “Financing debt” and undated subordinated debt as disclosed in Part 2.6 - Note 6 “Shareholders’ equity and minority interests” of this report) by total capital employed (shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus gross debt). Furthermore, mandatory exchangeable bonds into EQH shares issued by AXA in May 2018, and redeemed in May 2021, were excluded from Debt Gearing since EQH had been deconsolidated. Half Year 2021 Financial Report 22 I ACTIVITY REPORT – HALF YEAR 2021 COMMENTARY ON GROUP EARNINGS Underlying earnings Underlying earnings amounted to €3,643 million, up €1,757 million (+93%) versus 1H20 on a reported basis. On a constant exchange rate basis, underlying earnings increased by €1,904 million (+101%). Excluding COVID-19 losses (€-1.5 billion) which impacted mainly the Property & Casualty business during 1H20, underlying earnings increased by €393 million (+12%). Property & Casualty underlying earnings increased by €1,754 million to €2,209 million. Underlying earnings were impacted in 1H20 by the COVID-19 crisis (€-1.5 billion) mainly from claims in Business Interruption and Event Cancellation, and to a lesser extent in other lines such as Casualty, Professional Liability, Directors & Officers and Travel. Excluding COVID-19 losses incurred in 1H20 (€-1.5 billion), underlying earnings increased by €261 million (+13%) driven by an improved all year combined ratio (-1.8 points to 93.3%) driven by (i) favorable technical results excluding Nat Cat charges (-2.1 points) primarily at AXA XL from tariff increases and disciplined underwriting combined with the non-repeat impact of civil unrest in North America, as well as from Motor frequency benefits partly offset by higher large losses across Europe and in France, (ii) a lower expense ratio (-0.5 point) from a favorable business mix combined with cost reduction initiatives across geographies. This was partly offset by (iii) less favorable prior year reserve developments (+0.1 point) mainly due to the exceptional Business Interruption settlement costs at AXA France, (iv) higher Nat Cat charges (+0.7 point to 4.1%) mainly at AXA XL (+1.1 points to 6.0%) stemming from the Texas winter storm in February 2021 as well as in Switzerland and in Germany from hail storms at the end of June 2021, and (v) lower investment result (€-95 million) due to the non-repeat of a significant private equity fund distribution at AXA XL. Life & Savings underlying earnings increased by €112 million (+10%) to €1,241 million. Excluding the disposals of Central & Eastern Europe and Greece (€-26 million), underlying earnings increased by €137 million (+12%) mainly driven by the improvement of (i) the net technical margin (€+236 million) mainly due to the non- repeat, in France, of both the extension of disability coverage to vulnerable customers in the context of the COVID-19 crisis as well as the decrease in annuities discount rate, combined with an increase in volumes and an improved claims experience mainly in France and Switzerland. This was partly offset by (ii) higher general expenses (€-30 million), and (iii) higher income taxes (€-54 million). Investment margin remained flat as the yield dilution was compensated by lower credited rates to policyholders. The increase in Unit-Linked management fees driven by the strong inflows over the past years as well as a favorable market performance was offset by commissions as a result of business growth. Health underlying earnings increased by €20 million (+5%) to €386 million driven by (i) favorable prior year reserve developments in France (€+28 million) and in Hong Kong (€+27 million), (ii) a favorable morbidity experience as well as a higher surrender margin in Japan (€+17 million), and (iii) lower income taxes mainly reflecting a favorable geographical mix, partly offset by (iv) the non-repeat of the lower claims frequency in 1H20 in the context of the COVID-19 crisis in France (€-62 million). Asset Management underlying earnings increased by €41 million (+32%) to €170 million mainly due to (i) higher revenues (€+83 million) mainly from higher management fees from both higher average assets under management and higher management fee bps, partly offset by (ii) higher staff expenses (€-38 million) linked to higher profitability. Other activities underlying earnings decreased by €23 million (-7%) to €-361 million mainly in Germany Holding (€-28 million) driven by the non-repeat of an exceptional investment result in 1H20. Half Year 2021 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2021 Net income Net income amounted to €3,996 million, up €2,566 million (+180%). On a constant exchange rate basis, net income increased by €2,729 million (+191%) driven by: higher underlying earnings, up €1,904 million (+101%) to €3,643 million; net realized capital gains, up €163 million to €257 million mainly from lower impairments (€-343 million to €-55 million) due to the non-repeat of 1H20 market turmoil mainly on equity, alternative assets and real estate, partly offset by losses on equity forwards as a result of strong market performance in 1H21; a positive change in the fair value of mutual funds and derivatives not eligible for hedge accounting under IAS39 (€+489 million) to €290 million from: o the non-repeat of 1H20 financial market turmoil which led to a significant decrease in the fair value of mutual funds (€+594 million) mainly private equity and hedge funds, partly offset by the positive change in the fair value of derivatives (€-379 million) mainly hedging equity securities, o the strong market rebound since 2H20 leading to an opposite effect on the fair value of mutual funds (€+378 million) and derivatives (€-108 million); a less unfavorable impact from exceptional operations, up €99 million to €-59 million mainly from: o the non-repeat of (i) impairments of the participation in non-consolidated subsidiaries mainly at AXA SA (€+46 million), and (ii) the exceptional contributions to COVID-19 solidarity funds (€+62 million) mainly in France to support both small companies and self-employed individuals, partly offset by: o the negative impact in 1H21 from the loss on (i) the disposal of a non-consolidated subsidiary (€-40 million), and (ii) the upcoming disposals of the activities in Malaysia (€-35 million) and the Gulf Region (€-24 million), partly offset by the realized gains following (iii) the sale of the remaining stake in EQH (€+30 million), and (iv) on the disposal of the activities in Greece (€+21 million). Half Year 2021 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2021 SHAREHOLDERS’ EQUITY GROUP SHARE As of June 30, 2021, Shareholders' equity Group share totaled €68.4 billion. The movements in Shareholders' equity Group share since December 31, 2020, are presented in the table below: (in Euro million) Shareholders' equity Group share At December 31, 2020 71,610 Share Capital 2 Capital in excess of nominal value 9 Equity-share based compensation 23 Treasury shares sold or bought in open market (97) Deeply subordinated debt (including accumulated interests charges) (96) Fair value recorded in shareholders' equity (4,728) Impact of currency fluctuations 518 Dividends (3,403) Other 109 Net income for the period 3,996 Actuarial gains and losses on pension benefits 507 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk (3) At June 30, 2021 68,447 SOLVENCY INFORMATION (1) As of June 30, 2021, the Group’s Eligible Own Funds (“EOF”) amounted to €60.2 billion and the Solvency II ratio to 212%, compared to €55.0 billion and 200% as of December 31, 2020. (1)Solvency-related information included in this section, including the Solvency II ratio and the Eligible Own Funds (“EOF”), is not subject to the review of the Half Year 2021 consolidated financial statements included in this report, nor the verification of the information otherwise included in such report, performed by the Group’s statutory auditors. Half Year 2021 Financial Report 25 I ACTIVITY REPORT – HALF YEAR 2021 SHAREHOLDER VALUE Earnings per share (“EPS”) June 30, 2021 June 30, 2020 June 30, 2021 / June 30, 2020 (in Euro, except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,384 2,390 2,381 2,385 Net income (Euro per ordinary share) 1.64 1.63 0.56 0.56 190.8% 190.7% Underlying earnings (Euro per ordinary share) 1.49 1.48 0.75 0.75 97.3% 97.2% Return On Equity (“ROE”) (in Euro million, except percentages) June 30, 2021 June 30, 2020 (a) June 30, 2021 / June 30, 2020 (a) ROE 16.8% 5.8% 11.0 pts Net income (b) 3,900 1,339 Average shareholders' equity 46,525 46,355 Underlying ROE 16.6% 8.3% 8.3 pts Underlying earnings (b) 3,547 1,796 Average shareholders' equity 42,800 43,284 (a) Restated as per the new methodology effective starting 2021 as defined in the Glossary on page 63 of this report. As per the former methodology (as defined in the Glossary on page 63), the ROE and Underlying ROE stood at 4.1% and 8.3% respectively as of June 30, 2020. (b) Including adjustment to reflect net financial charges related to undated subordinated debt (recorded through shareholders’ equity). Half Year 2021 Financial Report 26 I ACTIVITY REPORT – HALF YEAR 2021 SEGMENT INFORMATION France (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 14,217 12,552 Property & Casualty 3,936 3,769 Life & Savings 7,580 6,168 Health 2,591 2,547 Banking 111 69 Underlying earnings before tax 1,206 955 Property & Casualty 603 442 Life & Savings 533 404 Health 64 110 Other (b) 7 (1) Income tax expenses / benefits (286) (204) Minority interests (2) (2) Income from affiliates and associates 3 3 UNDERLYING EARNINGS GROUP SHARE 921 753 Net capital gains or losses 168 118 Profit or loss on financial assets (under fair value option) and derivatives (63) (315) Exceptional operations (including discontinued operations) (1) (54) Goodwill and other related intangible impacts Integration and restructuring costs (20) (4) NET INCOME GROUP SHARE 1,006 498 Property & Casualty Combined Ratio 89.7% 94.1% Health Combined Ratio 98.7% 97.1% Protection Combined Ratio 100.6% 102.3% New business APE 1,224 987 NBV Margin 32.9% 28.7% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities and holding. Gross revenues increased by €1,665 million (+13%) to €14,217 million. On a comparable basis, gross revenues increased by €1,623 million (+13%): Property & Casualty (€+194 million or +5%) to €3,936 million driven by a strong growth in Commercial lines (€+102 million or +6%) as well as in Personal lines (€+93 million or +5%) mainly due to tariff increases in Commercial lines, as well as the impact of solidarity measures in both lines in 1H20 ; Half Year 2021 Financial Report 27 I ACTIVITY REPORT – HALF YEAR 2021 Life & Savings (€+1,264 million or +20%) to €7,580 million driven by (i) Individual Savings (€+987 million or +29%) from a strong sales performance in both Unit-Linked and Eurocroissance products which contributed 55% of total Individual Savings revenues, compared to 41% on average for the market, (ii) Group Savings (€+137 million or +19%) from higher volumes in Unit-Linked (€+139 million or +34%) thanks to the continued success of retirement products, and (iii) Protection (€+140 million or +6%) from higher sales in both domestic and international markets; Health (€+123 million or +5%) to €2,591 million driven by higher volumes in Group business (€+119 million or +6%) in both international and domestic markets; Other (€+42 million or +60%) to €111 million at AXA Banque France mainly due to a favorable change in the fair value of an interest rate swap hedging loans at cost. APE increased by €237 million (or +24%) to €1,224 million. On a comparable basis, APE increased by €199 million (+19%) mainly driven by Health (€+123 million or +40%) due to higher Group business in both international and domestic markets, Unit-Linked (€+87 million or +43%) and General Account Savings (€+52 million or +24%) recovering from a low level in 1H20 in the context of the COVID-19 lockdown, partly offset by Protection (€-64 million or -21%) mainly from the non-repeat of large contracts in Group business within international markets. NBV Margin increased by 4.2 points to 32.9%. On a comparable basis, NBV Margin increased by 4.6 points driven by a favorable change in business mix from higher sales in Unit-Linked as well as Individual Protection and Health products. Underlying earnings before tax increased by €250 million (+26%) to €1,206 million: Property & Casualty (€+161 million or +36%) to €603 million mainly driven by (i) a favorable current year claims experience due to the non-repeat of the impact of the COVID-19 crisis in 2020, combined with frequency benefits in Motor in the first semester of 2021, despite higher large losses, partly offset by (ii) a less favorable prior year reserve developments, notably including the impact of the settlement offer to restaurants holding non-damage business interruption policies; Life & Savings (€+128 million or +32%) to €533 million mainly driven by the impact from the extension of disability coverage to vulnerable customers in the context of the COVID-19 crisis in the first semester of 2020 and the non-repeat of the change in annuities discount rate, combined with higher Unit-Linked management fees from both favorable financial markets conditions and net inflows from strong commercial performance, partly offset by unfavorable prior year reserve developments; Health (€-47 million or -42%) to €64 million mainly driven by lower claims frequency during the lockdown period in the first semester of 2020, partly offset by favorable prior year reserve developments; Other (€+8 million) to €7 million mainly due to a higher interest margin at AXA Banque France. Income tax expenses increased by €83 million (+41%) to €-286 million mainly driven by higher pre-tax underlying earnings as well as a higher effective tax rate from a lower share of dividend distributions on investment funds benefiting from a lower taxation partly offset by the decrease in the corporate tax rate from 32% to 28%. Underlying earnings increased by €168 million (+22%) to €921 million. Net income increased by €508 million (+102%) to €1,006 million driven by higher underlying earnings, lower impairments on both real estate and equity security and a favorable change in the fair value of mutual funds from the non-repeat of 1H20 financial market turmoil, as well as the non-repeat of the exceptional contribution to French COVID-19 solidarity funds in 2020. Half Year 2021 Financial Report 28 I Europe (in Euro million, except percentages) Gross revenues (b) Property & Casualty Life & Savings Health Banking Underlying earnings before tax Property & Casualty Life & Savings Health Other (c) Income tax expenses / benefits Minority interests Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE Net capital gains or losses Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio New business APE NBV Margin (a) Reclassification of Architas activities (previously reported as part of United Kingdom & Ireland) to Transversal & Central Holdings. (b) Net of intercompany eliminations. (c) Other corresponds to banking activities and holding. Half Year 2021 Financial Report ACTIVITY REPORT – HALF YEAR 2021 June 30, 2021 June 30, 2020 restated (a) 18,801 18,761 10,434 10,335 5,223 5,369 3,144 3,045 11 1,881 1,728 1,238 1,079 512 455 121 131 10 63 (409) (416) (48) (43) (0) (0) 1,424 1,268 38 24 166 (179) 4 (9) (17) (18) (19) (13) 1,596 1,074 90.8% 91.9% 96.6% 95.9% 92.8% 94.7% 840 1,051 51.9% 49.6% 29 I ACTIVITY REPORT – HALF YEAR 2021 EUROPE - SWITZERLAND (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 4,054 4,263 Property & Casualty 2,934 2,923 Life & Savings 1,074 1,309 Health 46 31 Underlying earnings before tax 576 493 Property & Casualty 370 333 Life & Savings 211 166 Health (5) (6) Income tax expenses / benefits (108) (74) Minority interests (2) (2) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 466 416 Net capital gains or losses (2) 17 Profit or loss on financial assets (under fair value option) and derivatives 102 (59) Exceptional operations (including discontinued operations) 3 3 Goodwill and other related intangible impacts (11) (12) Integration and restructuring costs NET INCOME GROUP SHARE 558 365 Property & Casualty Combined Ratio 84.0% 84.3% Health Combined Ratio 122.4% 140.5% Protection Combined Ratio 86.4% 91.5% New business APE 375 615 NBV Margin 54.8% 50.3% Average exchange rate: € 1.00 = Swiss Franc 1.09 1.06 (a) Net of intercompany eliminations. On January 1, 2021, AXA Switzerland changed three additional small foundations from full insurance to semi- autonomous. As a result, the change in gross revenues on a comparable basis excludes the savings portion of the 2020 premiums related to the transformed in-force Group Life business. Gross revenues decreased by €208 million (-5%) to €4,054 million. On a comparable basis, gross revenues increased by €54 million (+1%): Property & Casualty (€+21 million or +1%) to €2,934 million driven by (i) Commercial lines (€+14 million or +1%) mainly due to positive volume and price effects on Workers’ Compensation, partly offset by a decrease in Motor from the discontinuation of a large non-profitable contract combined with strong market competition, as well as (ii) Personal lines (€+7 million or 0%) due to volume growth in Household and Digital Device Insurance, more than offsetting the decrease in Motor from strong market competition; Life & Savings (€+16 million or +1%) to €1,074 million driven by Individual Life (€+18 million or +4%) from higher sales of a hybrid product; Half Year 2021 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2021 Health (€+16 million or +52%) to €46 million from continued portfolio growth. APE decreased by €240 million (-39%) to €375 million. On a comparable basis, APE decreased by €229 million (-37%) driven by Group Life (€-241 million or -42%) due to the non-repeat of the exceptional number of new clients in 2020, partly offset by Individual Life (€+12 million or +34%) driven by higher sales of the hybrid product launched in 2H19. NBV Margin increased by 4.5 points to 54.8% mainly driven by a favorable business mix within Group and Individual Life as a result of the shift in sales from pure General Account products towards hybrid products. Underlying earnings before tax increased by €83 million (+17%) to €576 million. On a constant exchange rate basis, underlying earnings before tax increased by €101 million (+20%): Property & Casualty (€+47 million or +14%) to €370 million as a result of (i) the improvement in the combined ratio (-0.4 point) from the non-repeat of Business Interruption claims linked to the COVID-19 lockdown combined with more favorable prior year reserve developments, partly offset by higher Nat Cat charges following severe hailstorms in June, and lower claims frequency benefits mainly in Motor and Workers’ Compensation in the context of the COVID-19 crisis, combined with (ii) a higher investment income (€+37 million) from higher private equity funds distribution and lower hedging costs; Life & Savings (€+51 million or +31%) to €211 million driven by (i) an improved technical result in both Individual and Group Life, (ii) a higher investment margin (€+11 million) mainly in Individual Life, (iii) higher asset management fees in Group Life (€+7 million) from the growth of the semi-autonomous business, as well as (iv) a lower VBI amortization (€+12 million) driven by more favorable financial assumptions; Health (€+1 million or +14%) to €-5 million. Income tax expenses increased by €33 million (+45%) to €-108 million. On a constant exchange rate basis, income tax expenses increased by €36 million (+49%) driven by higher pre-tax underlying earnings and the non-repeat of the positive effect from the decrease in the corporate tax rate. Underlying earnings increased by €49 million (+12%) to €466 million. On a constant exchange rate basis, underlying earnings increased by €63 million (+15%). Net income increased by €193 million (+53%) to €558 million. On a constant exchange rate basis, net income increased by €209 million (+57%) driven by higher underlying earnings and a positive change in the fair value of mutual funds and derivatives not eligible for hedge accounting under IAS39 (€+159 million) from (i) the non- repeat of 1H20 financial market turmoil which led to a significant decrease in the fair value of mutual funds (€+55 million), mainly private equity and hedge funds, and (ii) the strong market rebound since 2H20 leading to an opposite effect on the fair value of mutual funds (€+101 million). Half Year 2021 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2021 EUROPE - GERMANY (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 6,227 6,094 Property & Casualty 2,793 2,763 Life & Savings 1,633 1,575 Health 1,800 1,745 Banking 11 Underlying earnings before tax 439 422 Property & Casualty 304 253 Life & Savings 61 52 Health 59 56 Other (b) 15 59 Income tax expenses / benefits (103) (149) Minority interests (5) (5) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 332 268 Net capital gains or losses 17 (4) Profit or loss on financial assets (under fair value option) and derivatives 7 (52) Exceptional operations (including discontinued operations) 1 (4) Goodwill and other related intangible impacts (2) (2) Integration and restructuring costs (6) (4) NET INCOME GROUP SHARE 349 203 Property & Casualty Combined Ratio 91.6% 92.6% Health Combined Ratio 96.8% 96.8% Protection Combined Ratio 97.0% 97.8% New business APE 191 191 NBV Margin 63.2% 62.9% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities and holding. Gross revenues increased by €132 million (+2%) to €6,227 million. On a comparable basis, gross revenues increased by €154 million (+3%): Property & Casualty (€+41 million or +1%) to €2,793 million driven by (i) Commercial Non-Motor (€+44 million or +4%) mainly due to new business and higher average premium, especially in Mid-Market as well as in Legal Assistance, and (ii) Personal Non-Motor (€+23 million or +3%) mainly from tariff increases and new business in Household as well as in Legal Assistance, partly offset by (iii) Motor (€-27 million or -3%) reflecting a highly competitive market; Life & Savings (€+59 million or +4%) to €1,633 million mainly stemming from higher new business in hybrid products (€+65 million or +26%) and in Pure Protection (€+15 million or +5%), partly offset by traditional General Account Savings products (€-24 million or -7%) in line with the strategy; Half Year 2021 Financial Report 32 I ACTIVITY REPORT – HALF YEAR 2021 Health (€+55 million or +3%) to €1,800 million, driven by tariff increases in full benefit insurance and by the continued growth in the civil servants’ segment. APE remained stable at €191 million (0%). NBV Margin increased by 0.4 point to 63.2%. Underlying earnings before tax increased by €17 million (+4%) to €439 million: Property & Casualty (€+51 million or +20%) to €304 million reflecting (i) the improvement in the combined ratio (-1.0 point) driven by the non-repeat of Business Interruption and Event Cancellation claims due to the lockdown in 1H20, partly offset by higher Nat Cat charges following severe hailstorms in June 2021 and lower prior year reserve developments, combined with (ii) a higher investment result (€+27 million) driven by exceptional funds distribution; Life & Savings (€+9 million or +17%) to €61 million mainly reflecting lower Deferred Acquisition Costs and VBI amortization due to favorable financial assumptions; Health (€+2 million or +4%) to €59 million due to higher volumes while the combined ratio remained stable; Other (€-45 million or -75%) to €15 million from Holdings mainly due to the non-repeat of an exceptional investment result in 1H20. Income tax expenses decreased by €47 million (-31%) to €-103 million as the increase in pre-tax underlying earnings was more than offset by more favorable tax one-offs (€+39 million). Underlying earnings increased by €64 million (+24%) to €332 million. Net income increased by €146 million (+72%) to €349 million driven by higher underlying earnings and higher net realized gains on equities, combined with a positive change in the fair value of mutual funds and derivatives not eligible for hedge accounting under IAS39 (€+59 million) from (i) the non-repeat of 1H20 financial market turmoil which led to a significant decrease in the fair value of mutual funds (€+37 million), mainly private equity funds, and (ii) the strong market rebound since 2H20 leading to an opposite effect on the fair value of private equity funds (€+24 million). Half Year 2021 Financial Report 33 I ACTIVITY REPORT – HALF YEAR 2021 EUROPE - BELGIUM (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 1,817 1,765 Property & Casualty 1,183 1,138 Life & Savings 557 559 Health 76 67 Underlying earnings before tax 252 242 Property & Casualty 106 107 Life & Savings 139 130 Health 7 6 Holding (0) (0) Income tax expenses / benefits (58) (52) Minority interests (0) (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 193 189 Net capital gains or losses 17 36 Profit or loss on financial assets (under fair value option) and derivatives 70 (27) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts (1) (1) Integration and restructuring costs (2) 0 NET INCOME GROUP SHARE 278 198 Property & Casualty Combined Ratio 95.8% 95.5% Health Combined Ratio 91.7% 92.0% Protection Combined Ratio 98.1% 100.5% New business APE 26 48 NBV Margin 77.4% 46.5% (a) Net of intercompany eliminations. Gross revenues increased by €52 million (+3%) to 1,817 million: Property & Casualty (€+45 million or +4%) to €1,183 million stemming from (i) Commercial lines (€+33 million or +6%) mainly in Property and Liability recovering from low level in 1H20 and strong sales in the SME segment, offsetting pruning measures in the Mid-Market segment, and (ii) Personal lines (€+12 million or +2%) following tariff increases in Household resulting from the regulatory indexation, combined with higher sales; Life & Savings (€-2 million or 0%) to €557 million from Protection with General Account Savings (€-8 million or -2%) due to a change in business mix towards pure Unit-Linked investment products for which premiums are not recognized as gross revenues under IFRS, in line with the strategy, partly offset by the growth in both Self-Employed pension (€+7 million or +7%) and Pure Protection products (€+3 million or +8%); Health (€+9 million or +13%) to €76 million driven by new Group contracts. Half Year 2021 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2021 APE decreased by €21 million (-45%) to €26 million driven by the non-repeat of a large Unit-Linked Group pension contract. NBV Margin increased by 30.9 points to 77.4% mainly due to the non-repeat of a large Unit-Linked Group pension contract. Underlying earnings before tax increased by €10 million (+4%) to €252 million: Property & Casualty stable at €106 million mainly driven by higher volumes offset by a higher combined ratio (+0.4 point) as a result of lower claims frequency benefits in the context of the COVID-19 crisis as well as higher large losses, offset by lower natural events and favorable prior year reserve developments; Life & Savings (€+9 million or +7%) to €139 million driven by lower amortization of Deferred Acquisition Costs (€+11 million) due to favorable financial assumptions; Health (€+1 million) to €7 million. Income tax expenses increased by €6 million (+11%) to €-58 million mainly driven by higher pre-tax underlying earnings. Underlying earnings increased by €4 million (+2%) to €193 million. Net income increased by €80 million (+40%) to €278 million mainly driven by higher underlying earnings, and a positive change in the fair value of mutual funds and derivatives not eligible for hedge accounting under IAS39 (€+97 million) from (i) the non-repeat of 1H20 financial market turmoil which led to a significant decrease in the fair value of mutual funds (€+36 million), mainly private equity and hedge funds, and (ii) the strong market rebound since 2H20 leading to an opposite effect on the fair value of mutual funds (€+70 million). Half Year 2021 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2021 EUROPE - UNITED KINGDOM & IRELAND (in Euro million, except percentages) June 30, 2021 June 30, 2020 restated (a) Gross revenues (b) 2,774 2,767 Property & Casualty 1,780 1,771 Health 994 996 Underlying earnings before tax 233 188 Property & Casualty 181 127 Health 56 57 Holding (4) 4 Income tax expenses / benefits (46) (35) Minority interests (0) (0) Income from affiliates and associates (0) (0) UNDERLYING EARNINGS GROUP SHARE 186 153 Net capital gains or losses 1 (8) Profit or loss on financial assets (under fair value option) and derivatives 6 (18) Exceptional operations (including discontinued operations) (1) (8) Goodwill and other related intangible impacts (2) (2) Integration and restructuring costs (3) (3) NET INCOME GROUP SHARE 187 114 Property & Casualty Combined Ratio 94.6% 97.9% Health Combined Ratio 94.9% 94.6% (a) Reclassification of Architas activities to Transversal & Central Holdings. (b) Net of intercompany eliminations. Gross revenues increased by €7 million (0%) to €2,774 million. On a comparable basis, gross revenues decreased by €11 million (0%): Property & Casualty (€-2 million or 0%) to €1,780 million as the decrease in (i) Commercial Motor (€-21 million or -7%) and Personal Motor (€-8 million or -1%) from market softening combined with (ii) lower volumes in Travel in the context of the COVID-19 crisis (€-12 million) were partly offset by (iii) Commercial Non-Motor (€+33 million or +7%) mainly from Property (€+21 million) and Liability (€+13 million) both driven by tariff increases; Health (€-9 million or -1%) to €994 million mainly driven by lower volumes in international Group business in the context of the COVID-19 crisis, partly offset by a strong retention in the United Kingdom Group business and volume growth in the Individual business. Underlying earnings before tax increased by €45 million (+24%) to €233 million. On a constant exchange rate basis, underlying earnings before tax increased by €44 million (+23%): Property & Casualty (€+53 million or +42%) to €181 million mainly driven by the improvement of the combined ratio (-3.3 points) due to the non-repeat of claims related to COVID-19 lockdowns in Business Interruption and lower Nat Cat charges, partly offset by a lower impact from lower claims frequency in Motor in the context of COVID-19 and unfavorable prior year reserve developments; Half Year 2021 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2021 Health (€-2 million or -4%) to €56 million driven by lower volumes combined with the impact of the Customer Promise commitment to payback Individual and SME policyholders’ excess profitability in 2020 and 2021 over the profit of 2019; Holding (€-8 million) to €-4 million mainly due to higher IT investments. Income tax expenses increased by €12 million (+34%) to €-46 million. On a constant exchange rate basis, income tax expenses increased by €12 million (+33%) driven by higher pre-tax underlying earnings and adverse tax one- offs. Underlying earnings increased by €33 million (+22%) to €186 million. On a constant exchange rate basis, underlying earnings increased by €32 million (+21%). Net income increased by €73 million (+64%) to €187 million. On a constant exchange rate basis, net income increased by €72 million (+63%) driven by higher underlying earnings, a favorable change in the fair value of mutual funds, lower impairments and the non-repeat of donations to solidarity funds. Half Year 2021 Financial Report 37 I ACTIVITY REPORT – HALF YEAR 2021 EUROPE - SPAIN (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 1,431 1,366 Property & Casualty 847 877 Life & Savings 417 332 Health 167 156 Underlying earnings before tax 160 155 Property & Casualty 132 104 Life & Savings 23 36 Health 5 15 Income tax expenses / benefits (38) (38) Minority interests (0) (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 122 117 Net capital gains or losses (3) (8) Profit or loss on financial assets (under fair value option) and derivatives (15) (9) Exceptional operations (including discontinued operations) 1 Goodwill and other related intangible impacts (1) (1) Integration and restructuring costs (5) (4) NET INCOME GROUP SHARE 99 94 Property & Casualty Combined Ratio 88.5% 93.1% Health Combined Ratio 101.1% 88.6% Protection Combined Ratio 103.3% 89.2% New business APE 62 47 NBV Margin 37.4% 38.6% (a) Net of intercompany eliminations. Gross revenues increased by €65 million (+5%) to €1,431 million: Property & Casualty (€-30 million or -3%) to €847 million mainly due to lower sales in Motor (€-27 million or -5%) driven by a strong market competition in the context of the COVID-19 crisis; Life & Savings (€+85 million or +26%) to €417 million mainly due to higher sales of Unit-Linked products (€+72 million or +46%), in line with the strategy; Health (€+10 million or +7%) to €167 million driven by higher volumes and tariff increases. APE increased by €15 million (+32%) to €62 million mainly driven by higher sales of Unit-Linked products. NBV Margin decreased by 1.2 points to 37.4% mainly due to an unfavorable change in business mix. Underlying earnings before tax increased by €5 million (+3%) to €160 million: Half Year 2021 Financial Report 38 I ACTIVITY REPORT – HALF YEAR 2021 Property & Casualty (€+28 million or +27%) to €132 million mainly due to the improvement of the combined ratio (-4.7 points) mainly driven by favorable prior year reserve developments, partly offset by a lower investment income; Life & Savings (€-13 million or -36%) to €23 million mainly due to an adverse claims experience in Protection and a lower investment income; Health (€-10 million or -66%) to €5 million mainly due to a less favorable claims experience. Income tax expenses remained stable to €-38 million. Underlying earnings increased by €5 million (+4%) to €122 million. Net income increased by €5 million (+5%) to €99 million driven by higher underlying earnings and lower impairments on equity securities, combined with the non-repeat of the unfavorable change in fair value of mutual funds in the context of the 1H20 market turmoil, partly offset by an unfavorable change in the fair value of derivatives. Half Year 2021 Financial Report 39 I ACTIVITY REPORT – HALF YEAR 2021 EUROPE - ITALY (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 2,498 2,507 Property & Casualty 896 863 Life & Savings 1,541 1,595 Health 61 49 Underlying earnings before tax 222 229 Property & Casualty 145 154 Life & Savings 77 71 Health (0) 4 Income tax expenses / benefits (56) (68) Minority interests (41) (36) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 125 125 Net capital gains or losses 9 (9) Profit or loss on financial assets (under fair value option) and derivatives (5) (14) Exceptional operations (including discontinued operations) (0) (0) Goodwill and other related intangible impacts Integration and restructuring costs (4) (3) NET INCOME GROUP SHARE 125 99 Property & Casualty Combined Ratio 89.9% 87.3% Health Combined Ratio 103.3% 94.1% Protection Combined Ratio 84.5% 86.2% New business APE 186 152 NBV Margin 35.8% 34.9% (a) Net of intercompany eliminations. Gross revenues decreased by €9 million (0%) to €2,498 million: Life & Savings (€-54 million or -3%) to €1,541 million mainly on General Account Savings (€-71 million or -6%) from a reduction in traditional General Account business and in Protection with Savings (€-39 million or -44%), in line with the strategy, partly offset by the strong performance of Unit-Linked (€+47 million or +15%) driven by Protected Unit-Linked and hybrid products with an average UL share of 50%; Property & Casualty (€+33 million or +4%) to €896 million driven by Commercial lines (€+22 million or +9%) mainly from new business and tariff increases in Property, and Personal lines (€+11 million or +2%) driven by a successful cross-selling campaign in Household; Health (€+12 million or +24%) to €61 million as a result of an earlier renewal of a Group business contract (€+9 million or +58%) and a commercial focus on Individual business (€+3 million or +8%). APE increased by €34 million (+23%) to €186 million mainly from Unit-Linked (€+37 million or +55%) due to the sales acceleration of investment and hybrid products, partly offset by a reduction in General Account Savings (€-2 million or -3%), in line with the strategy. Half Year 2021 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2021 NBV Margin increased by 0.9 point to 35.8% mainly from a more favorable product mix towards Unit-Linked products. Underlying earnings before tax decreased by €7 million (-3%) to €222 million: Property & Casualty (€-9 million or -6%) to €145 million due to (i) a higher current year combined ratio (+2.3 points) mainly driven by lower claims frequency benefits in the context of the COVID-19 crisis, partly offset by lower Nat Cat charges, and (ii) a higher investment income (€+11 million) from funds distribution; Life & Savings (€+6 million or +8%) to €77 million mainly due to a higher investment margin driven by higher volumes combined with the decrease of the minimum guaranteed rates, as well as higher Unit- Linked management fees, driven by more favorable market conditions and strong sales; Health (€-4 million) to €0 million due to a higher current year combined ratio (+5.8 points) driven by higher investments to accelerate the digital health transformation. Income tax expenses decreased by €12 million (-17%) to €-56 million due to lower pre-tax underlying earnings combined with a positive tax one-off. Minority interests underlying earnings increased by €4 million (-11%) to €-41 million as a result of the increase of AXA MPS underlying earnings. Underlying earnings remained stable at €125 million. Net income increased by €26 million (+27%) to €125 million mainly driven by higher realized capital gains (€+11 million) mainly from equities combined with lower impairments (€+10 million). Half Year 2021 Financial Report 41 I Asia (in Euro million, except percentages) Gross revenues (a) Property & Casualty Life & Savings Health Underlying earnings before tax Property & Casualty Life & Savings Health Holding Income tax expenses / benefits Minority interests Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE Net capital gains or losses Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio New business APE NBV Margin (a) Net of intercompany eliminations. Half Year 2021 Financial Report ACTIVITY REPORT – HALF YEAR 2021 June 30, 2021 June 30, 2020 5,568 5,522 1,015 1,055 3,444 3,206 1,108 1,261 708 757 55 91 361 390 295 278 (3) (2) (142) (154) (4) (4) 97 86 658 685 0 (3) 64 (65) (27) (0) (15) (10) (0) (4) 680 602 97.7% 94.8% 73.9% 78.6% 88.9% 88.2% 866 657 62.9% 66.5% 42 I ACTIVITY REPORT – HALF YEAR 2021 ASIA - JAPAN (in Euro million, except percentages) June 30, 2021 June 30, 2020 restated (a) Gross revenues (b) 2,911 2,753 Property & Casualty 222 243 Life & Savings 1,977 1,741 Health 711 769 Underlying earnings before tax 454 467 Property & Casualty 25 36 Life & Savings 185 189 Health 246 244 Holding (2) (2) Income tax expenses / benefits (129) (132) Minority interests (4) (4) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 321 330 Net capital gains or losses 1 (3) Profit or loss on financial assets (under fair value option) and derivatives 96 (179) Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs 0 NET INCOME GROUP SHARE 418 148 Property & Casualty Combined Ratio 90.0% 85.5% Health Combined Ratio 66.6% 70.0% Protection Combined Ratio 88.3% 88.7% New business APE 335 231 NBV Margin 111.7% 130.3% Average exchange rate: € 1.00 = Japanese Yen 130 119 (a) Reclassification of AXA Direct Japan activities (previously reported as part of Asia - Direct). (b) Net of intercompany eliminations. Gross revenues increased by €158 million (+6%) to €2,911 million. On a comparable basis, gross revenues increased by €417 million (+15%): Property & Casualty stable at €222 million as tariff increases in Motor were offset by pruning actions in Non-Motor; Life & Savings (€+412 million or +24%) to €1,977 million mainly driven by the sales of a capital light Single Premium Whole Life product (€+280 million) as a consequence of favorable market conditions, combined with the strong sales of Protection with Unit-Linked products (€+170 million or +34%); Health (€+5 million or +1%) to €711 million mainly from in-force growth and new business. APE increased by €104 million (+45%) to €335 million. On a comparable basis, APE increased by €133 million (+58%) following strong sales of Protection with Unit-Linked products (€+96 million or +66%) and a capital light Single Premium Whole Life product (€+29 million) supported by an increased focus on hybrid distribution and SME advisory model despite continued sales restrictions in the context of the COVID-19 crisis in 1H21. Half Year 2021 Financial Report 43 I ACTIVITY REPORT – HALF YEAR 2021 NBV Margin decreased by 18.6 points to 111.7% reflecting the repricing applied to Protection with Unit-Linked products at the end of 2020. Underlying earnings before tax decreased by €13 million (-3%) to €454 million. On a constant exchange rate basis, underlying earnings before tax increased by €27 million (+6%): Property & Casualty (€-9 million or -25%) to €25 million as a result of the non-repeat of 1H20 claims frequency benefits in the context of the COVID-19 crisis combined with lower prior year reserve developments, partly offset by lower expenses from cost savings; Life & Savings (€+12 million or +6%) to €185 million mainly driven by a favorable mortality experience and a higher surrender margin, combined with cost savings; Health (€+24 million or +10%) to €246 million mainly from a favorable morbidity experience and a higher surrender margin; Holding stable at €-2 million. Income tax expenses decreased by €4 million (-3%) to €-129 million. On a constant exchange rate basis, income tax expenses increased by €8 million (+6%) driven by higher pre-tax underlying earnings. Underlying earnings decreased by €10 million (-3%) to €321 million. On a constant exchange rate basis, underlying earnings increased by €19 million (+6%). Net income increased by €270 million to €418 million. On a constant exchange rate basis, net income increased by €307 million mainly driven by higher underlying earnings and the non-repeat of the effect of 1H20 financial market turmoil combined with the strong market rebound since 2H20, notably on the fair value of private equity funds. Half Year 2021 Financial Report 44 I ACTIVITY REPORT – HALF YEAR 2021 ASIA - HONG KONG (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 1,896 1,946 Property & Casualty 129 143 Life & Savings 1,448 1,442 Health 320 362 Underlying earnings before tax 246 257 Property & Casualty 14 18 Life & Savings 173 201 Health 58 37 Income tax expenses / benefits (11) (16) Minority interests (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 235 241 Net capital gains or losses (0) 2 Profit or loss on financial assets (under fair value option) and derivatives 1 103 Exceptional operations (including discontinued operations) 1 Goodwill and other related intangible impacts (6) (7) Integration and restructuring costs (1) NET INCOME GROUP SHARE 230 338 Property & Casualty Combined Ratio 93.8% 92.2% Health Combined Ratio 80.3% 89.1% Protection Combined Ratio 89.3% 86.9% New business APE 227 140 NBV Margin 34.0% 38.5% Average exchange rate: € 1.00 = Hong Kong Dollar 9.35 8.55 (a) Net of intercompany eliminations. Gross revenues decreased by €50 million (-3%) to €1,896 million. On a comparable basis, gross revenues increased by €128 million (+7%): Property & Casualty (€-1 million or -1%) to €129 million mainly due to lower volumes in Travel in the context of the COVID-19 crisis, partly offset by higher new business in Motor and Workers’ Compensation; Life & Savings (€+142 million or +10%) to €1,448 million mainly driven by higher new business in Unit- Linked (€+87 million or +86%), Protection with Savings (€+54 million or +5%) and Pure Protection (€+28 million or +27%), partly offset by lower volumes in General Account Savings (€-27 million or -19%); Health (€-12 million or -3%) to €320 million mainly driven by lower renewals in both Individual and Group businesses, partly offset by higher new business. APE increased by €86 million (+62%) to €227 million. On a comparable basis, APE increased by €108 million (+77%) driven by strong sales momentum in Protection with Savings and Pure Protection. NBV Margin decreased by 4.5 points to 34.0% mainly driven by an unfavorable change in product mix. Half Year 2021 Financial Report 45 I ACTIVITY REPORT – HALF YEAR 2021 Underlying earnings before tax decreased by €11 million (-4%) to €246 million. On a constant exchange rate basis, underlying earnings before tax increased by €12 million (+5%): Property & Casualty (€-3 million or -15%) to €14 million mainly driven by lower claims frequency benefits in the context of the COVID-19 crisis; Life & Savings (€-12 million or -6%) to €173 million mainly due to the non-repeat of a model change in 1H20, partly offset by higher surrender margin; Health (€+27 million or +71%) to €58 million mainly driven by favorable prior year reserve developments. Income tax expenses decreased by €5 million (-33%) to €-11 million. On a constant exchange rate basis, income tax expenses decreased by €4 million (-26%). Underlying earnings decreased by €6 million (-2%) to €235 million. On a constant exchange rate basis, underlying earnings increased by €16 million (+7%). Net income decreased by €109 million (-32%) to €230 million. On a constant exchange rate basis, net income decreased by €87 million (-26%) as the increase in underlying earnings was more than offset by the non-repeat of a favorable change in the fair value of derivatives not eligible for hedge accounting in the context of lower interest rates in 1H20. Half Year 2021 Financial Report 46 I ACTIVITY REPORT – HALF YEAR 2021 ASIA - HIGH POTENTIALS (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 430 512 Property & Casualty 334 359 Life & Savings 19 23 Health 78 130 Underlying earnings before tax (10) 11 Property & Casualty (4) 15 Life & Savings 3 (1) Health (9) (3) Income tax expenses / benefits 3 1 Minority interests (0) (0) Income from affiliates and associates 97 86 UNDERLYING EARNINGS GROUP SHARE 90 99 Net capital gains or losses (0) (2) Profit or loss on financial assets (under fair value option) and derivatives (34) 13 Exceptional operations (including discontinued operations) (0) Goodwill and other related intangible impacts (9) (3) Integration and restructuring costs 0 (1) NET INCOME GROUP SHARE 48 105 Property & Casualty Combined Ratio 104.9% 100.6% Health Combined Ratio 113.9% 104.3% Protection Combined Ratio 108.4% 121.8% New business APE 305 286 NBV Margin 30.8% 28.6% (a) Net of intercompany eliminations. Scope: (i) The Property & Casualty subsidiary in Thailand, the non-bancassurance Life & Savings subsidiary in Indonesia and the Property & Casualty subsidiary in China (AXA Tianping) are fully consolidated; (ii) the bancassurance Life & Savings subsidiaries in China, Thailand, Indonesia and the Philippines are consolidated under the equity method and do not contribute to the gross revenues. Gross revenues decreased by €81 million to €430 million. On a comparable basis, gross revenues decreased by €73 million (-14%): Property & Casualty (€-20 million or -5%) to €334 million, in China (€-26 million or -8%) mainly due to lower volumes in Motor (€-41 million or -15%) following the change in price regulation implemented in September 2020, partly offset by growth in Non-Motor in both Commercial (€+8 million or +54%) and Personal lines (€+7 million or +44%). This decrease was partly offset by Thailand (€+7 million or +15%) from higher volumes in Motor and Non-Motor; Life & Savings (€+1 million or +7%) to €19 million from higher volumes in Protection in Indonesia (€+1 million or +7%); Health (€-55 million or -41%) to €78 million driven by from the non-repeat of a large digital partnership, partly offset by growth in other new digital partnerships in China. Half Year 2021 Financial Report 47 I ACTIVITY REPORT – HALF YEAR 2021 APE increased by €19 million (+7%) to €305 million. On a comparable basis, APE increased by €5 million (+2%) driven by Thailand (€+8 million or +15%) and the Philippines (€+6 million or +34%) both from higher sales of Protection with Unit-Linked products, partly offset by China (€-6 million or -3%) from lower sales of single premium General Account Savings products. NBV Margin increased by 2.2 points to 30.8%. On a comparable basis, NBV Margin increased by 4.3 points mainly driven by China (+5.4 points) from an improved business mix towards high-margin Protection products and lower sales of General Account Savings products, combined with Indonesia (+4.5 points) from a favorable shift in business mix within Protection with Savings. Underlying earnings decreased by €8 million (-8%) to €90 million. On a constant exchange rate basis, underlying earnings decreased by €4 million (-4%): China (€-4 million or -18%) to €20 million driven by (i) Property & Casualty (€-16 million) from the non- repeat of 2020 claims frequency benefits in the context of the COVID-19 crisis combined with negative impacts from the change in price regulation in Motor, partly offset by lower expenses, and (ii) Health (€- 4 million) from investments in digital partnerships. This was partly offset by Life & Savings (€+16 million) mainly from a higher net technical margin; Thailand (€-2 million or -6%) to €33 million mainly driven by a lower net technical margin partly compensated by lower expenses in Life & Savings (€-3 million); Indonesia (€+3 million or +12%) to €23 million mainly driven by an improved mortality experience in Life & Savings; The Philippines stable at €14 million. Net income decreased by €57 million (-55%) to €48 million. On a constant exchange rate basis, net income decreased by €54 million (-52%) mainly driven by lower underlying earnings and an unfavorable change in the fair value of financial assets and liabilities (€-48 million). Half Year 2021 Financial Report 48 I ACTIVITY REPORT – HALF YEAR 2021 AXA XL (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 10,505 10,522 Property & Casualty Insurance 7,415 7,703 Property & Casualty Reinsurance 3,003 2,718 Life & Savings 87 101 Underlying earnings before tax 725 (832) Property & Casualty Insurance 626 (699) Property & Casualty Reinsurance 134 (87) Life & Savings 7 7 Holding (42) (53) Income tax expenses / benefits (107) (11) Minority interests 1 (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 619 (843) Net capital gains or losses 46 (21) Profit or loss on financial assets (under fair value option) and derivatives 131 (84) Exceptional operations (including discontinued operations) (0) (1) Goodwill and other related intangible impacts (31) (25) Integration and restructuring costs (20) (85) NET INCOME GROUP SHARE 745 (1,059) Property & Casualty Combined Ratio 95.8% 115.2% (a) Net of intercompany eliminations. Gross revenues decreased by €17 million to €10,505 million. On a comparable basis, gross revenues increased by €715 million (+7%) mainly driven by positive pricing effects in both Property & Casualty Insurance and Reinsurance combined with the non-repeat of COVID-19 premium adjustments in the context of partial recovery of clients’ turnover, partly offset by selective underwriting: Property & Casualty Reinsurance (€+526 million or +19%) to €3,003 million driven by (i) Specialty and Other lines (€+348 million or +24%) and (ii) Property Treaty (€+125 million or +21%) both mainly due to tariff increases (+10%) and the non-repeat of COVID-19 premium adjustments; Property & Casualty Insurance (€+194 million or +3%) to €7,415 million mainly driven by positive price effects (+11%) across the portfolio, partly offset by continued disciplined exposure reduction as follows: (i) Financial lines (€+325 million or +24%) across North America Professional lines (€+395 million or +53%) mostly driven by volumes growth and tariff increases (+10%), partly offset by International Financial lines (€-95 million or -19%) due to the exit of unprofitable Management Liability and Financial Institutions lines from both the United Kingdom and Lloyd’s, and (ii) Casualty (€+109 million or +4%) from selective underwriting more than offset by tariff increases (+11%) along with the non-repeat of COVID-19 premium adjustments, partly offset by (iii) Specialty (€-162 million or -9%) and (iv) Property (€-78 million or -4%) from selective underwriting, mostly offset by tariff increases (+6% and +12% respectively); Life & Savings (€-6 million) to €87 million. Half Year 2021 Financial Report 49 I ACTIVITY REPORT – HALF YEAR 2021 Underlying earnings before tax increased by €1,557 million to €725 million. On a constant exchange rate basis, underlying earnings before tax increased by €1,625 million: Property & Casualty (€+1,617 million) to €760 million. Excluding COVID-19 losses (€1,396 million) incurred in 1H20 mainly from claims in Business Interruption and Event Cancellation, underlying earnings increased by €222 million (+36%) driven by (i) improved technical results (-3.9 points of combined ratio) across the entire portfolio coming from tariff increases, underwriting actions and the non-repeat of the civil unrest in North America, despite higher Nat Cat charges (+1.1 points) driven by the Texas winter storm in the first quarter, partly offset by (ii) lower net investment income (€-150 million) from the non-repeat of a significant private equity fund distribution; Life & Savings remained stable at €7 million; Holding (€+7 million) to €-42 million. Income tax expenses increased by €96 million to €-107 million. On a constant exchange rate basis, income tax expenses increased by €106 million mainly driven by higher pre-tax underlying earnings. Underlying earnings increased by €1,462 million to €619 million. On a constant exchange rate basis, underlying earnings increased by €1,520 million. Net income increased by €1,804 million to €745 million. On a constant exchange rate basis, net income increased by €1,873 million driven by (i) higher underlying earnings, (ii) a favorable change in the fair value of derivatives, alternative investment funds as well as foreign exchange impacts (€+227 million), (iii) lower integration and restructuring costs (€+64 million), and (iv) lower equity impairments (€+57 million). Half Year 2021 Financial Report 50 I ACTIVITY REPORT – HALF YEAR 2021 International (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 3,199 3,563 Property & Casualty 1,679 1,881 Life & Savings 417 610 Health 937 905 Banking 166 166 Underlying earnings before tax 291 311 Property & Casualty 226 220 Life & Savings 13 57 Health 15 5 Other (b) 38 29 Income tax expenses / benefits (70) (65) Minority interests (37) (38) Income from affiliates and associates 14 42 UNDERLYING EARNINGS GROUP SHARE 198 251 Net capital gains or losses 0 (17) Profit or loss on financial assets (under fair value option) and derivatives 20 66 Exceptional operations (including discontinued operations) (60) (15) Goodwill and other related intangible impacts (6) (13) Integration and restructuring costs (2) (4) NET INCOME GROUP SHARE 150 268 Property & Casualty Combined Ratio 94.0% 96.4% Health Combined Ratio 99.5% 100.8% Protection Combined Ratio 105.3% 96.7% New business APE 76 91 NBV Margin 29.7% 37.1% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities and holding. Scope: (i) Mexico, Colombia, Singapore, Turkey, Morocco, Luxembourg and Brazil are fully consolidated; (ii) Russia (Reso), India and Nigeria are consolidated under the equity method and do not contribute to the gross revenues. AXA Bank Belgium, India Property & Casualty, the Gulf Region, and Malaysia are held for sale. The Central & Eastern Europe entities (Poland, the Czech Republic and the Slovak Republic) were disposed in October 2020 and therefore contributed until September 2020. Greece was disposed in May 2021 and contributed until March 2021. Thus, those changes in scope have been taken into account in the comparable basis. Gross revenues decreased by €364 million (-10%) to €3,199 million. On a comparable basis, gross revenues increased by €245 million (+8%) mainly from Property & Casualty (€+165 million or +10%) and Health (€+95 million or +11%), partly offset by Life & Savings (€-14 million or -3%): Half Year 2021 Financial Report 51 I ACTIVITY REPORT – HALF YEAR 2021 EME-LATAM (€+174 million or +7%) to €2,447 million mainly driven by Health (€+99 million or +13%) and Property & Casualty (€+91 million or +7%), both across the board, partly offset by Life & Savings (€ -16 million or -7%): o Mexico (€+93 million or +10%) driven by (i) Health (€+66 million or +15%) due to a positive price effect and higher volumes, and (ii) Property & Casualty (€+38 million or +10%) from the renewal of large multi-year accounts in Commercial Property, partly offset by (iii) Life & Savings (€-11 million or -9%), o Turkey (€+28 million or +10%) mainly in (i) Commercial lines (€+21 million or €+14%) driven by higher volumes in Non-Motor and positive price effect in Motor, and (ii) Health (€+12 million or +33%) from positive price and volume effects, o The Gulf Region (€+27 million or +5%) mainly driven by (i) higher sales in Commercial Non-Motor (€+20 million or +19%) mainly from the bancassurance channel and (ii) new large accounts in Health (€+17 million or +7%), and o Colombia (€+12 million or +4%) from (i) Property & Casualty (€+22 million or +9%) mainly from Personal Non-Motor and Workers’ Compensation, partly offset by (ii) a portfolio put in run-off in Life & Savings (€-12 million or -64%); Africa & Asia (€+71 million or +10%) to €751 million mainly driven by Property & Casualty (€+74 million or +20%): o Singapore (€+51 million or +17%) from a new large multi-year contract in Commercial Motor, and o Morocco (€+18 million or +7%) from higher volumes in both Personal Motor and Commercial Non-Motor. APE decreased by €15 million (-16%) to €76 million. On a comparable basis, APE increased by €15 million (+23%) mainly due to the non-repeat of COVID-19 negative impact on new business sales, notably in (i) Mexico (€+6 million or +58%) in Protection, (ii) Singapore (€+6 million or +24%) mainly in Unit-Linked, and (iii) India (€+5 million or +33%) in Protection with General Account Savings. NBV Margin decreased by 7.4 points to 29.7%. On a comparable basis, NBV Margin increased by 8.0 points mainly driven by Singapore (+22.3 points) due to a more favorable mix effect. Underlying earnings before tax decreased by €20 million (-6%) to €291 million. On a constant exchange rate basis, underlying earnings before tax increased by €2 million (+1%) as Property & Casua lty (€+27 million or +12%), Health (€+11 million or +219%) and Banking (€+10 million or +21%) were partly offset by Life & Savings (€-44 million or -77%): EME-LATAM (€-3 million or -1%) to €251 million driven by: o the disposals of Poland (€-30 million), the Czech Republic & Slovak Republic (€-22 million) and Greece (€-6 million), o Turkey (€+23 million or +68%) mainly driven by a higher net investment income in Property & Casualty, o Mexico (€+13 million or +28%) due to more favorable prior year reserve developments in Property & Casualty and Health, combined with lower large losses in Commercial Property, partly offset by higher COVID-19 claims in Life & Savings, o AXA Bank Belgium (€+10 million or +21%) mainly driven by favorable developments on loans provisions reflecting good quality of the portfolio, and higher fee income driven by strong commercial performance, and Half Year 2021 Financial Report 52 I ACTIVITY REPORT – HALF YEAR 2021 o the Gulf Region (€+6 million or +15%) mainly due to more favorable prior year reserve developments in Property & Casualty; Africa & Asia (€+6 million or +11%) to €61 million from Morocco (€+6 million or +17%) mainly from Property & Casualty driven by more favorable prior year reserve developments, partly offset by the non- repeat of 1H20 claims frequency benefits in Motor in the context of the COVID-19 crisis; AXA Mediterranean Holdings (€-1 million or -6%) to €-21 million. Income tax expenses increased by €5 million (+8%) to €-70 million. On a constant exchange rate basis, income tax expenses increased by €9 million (+14%) driven by higher pre-tax underlying earnings. Minority interests remained stable at €-37 million. On a constant exchange rate basis, minority interests increased by €4 million (+10%) driven by higher underlying earnings in the Gulf Region. Income from affiliates and associates decreased by €28 million (-67%) to €14 million. On a constant exchange rate basis, income from affiliates and associates decreased by €24 million (-57%) mainly in Russia (€-10 million) and India (€-10 million). Underlying earnings decreased by €53 million (-21%) to €198 million. On a constant exchange rate basis, underlying earnings decreased by €35 million (-14%). Excluding the contribution of Central & Eastern Europe entities in 1H20 and Greece in 2Q20, underlying earnings increased by €12 million (+6%). Net income decreased by €117 million (-44%) to €150 million. On a constant exchange rate basis, net income decreased by €106 million (-39%) mainly due to (i) lower underlying earnings, (ii) a negative foreign exchange impact on financial assets primarily from the appreciation of the RUB versus major currencies, (iii) the loss on disposal of a non-consolidated subsidiary as well as the upcoming disposals of the activities in the Gulf Region and Malaysia, partly offset by (iv) the realized gain on the disposal of the activities in Greece. This was partly offset by (v) a favorable change in the fair value of private equity funds reflecting the strong financial market rebound since 2H20. Half Year 2021 Financial Report 53 I Transversal & Central Holdings (in Euro million, except percentages) Gross revenues (b) Property & Casualty Life & Savings Health Asset Management Underlying earnings before tax Property & Casualty Life & Savings Health Other (c) Income tax expenses / benefits Minority interests Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE Net capital gains or losses Profit or loss on financial assets (under fair value option) and derivatives Exceptional operations (including discontinued operations) Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio (a) Reclassification of Architas activities (previously reported as part of United Kingdom & Ireland). (b) Net of intercompany eliminations. (c) Other corresponds to asset management activities and holding. Half Year 2021 Financial Report ACTIVITY REPORT – HALF YEAR 2021 June 30, 2021 June 30, 2020 restated (a) 1,576 1,471 640 621 128 144 103 100 704 606 (242) (339) 13 (15) 7 0 (1) 4 (261) (328) 60 103 (6) (3) 11 9 (178) (229) 4 (2) (28) 408 26 (90) (1) (28) (5) (13) (182) 47 101.4% 106.2% 100.6% 96.4% 54 I ACTIVITY REPORT – HALF YEAR 2021 AXA INVESTMENT MANAGERS (“AXA IM”) (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 704 606 Underlying earnings before tax 224 176 Income tax expenses / benefits (60) (52) Minority interests (6) (3) Income from affiliates and associates 11 9 UNDERLYING EARNINGS GROUP SHARE 170 130 Net capital gains or losses Profit or loss on financial assets (under Fair Value option) and derivatives (15) (2) Exceptional operations (including discontinued operations) (1) Goodwill and other related intangibles impacts (1) (0) Integration and restructuring costs (1) (4) NET INCOME GROUP SHARE 153 123 Average Assets under Management (in Euro billion) 760 717 Asset management fee bps 16.4 15.9 Underlying cost income ratio 67.3% 71.0% (a) Net of intercompany eliminations. Gross revenues amounted to €864 million before intercompany eliminations as of June 30, 2021. Assets under Management ("AUM") increased by €8 billion from December 31, 2020, to €866 billion at the end of June 30, 2021, mainly driven by (i) positive net inflows (€+18 billion) from Third-Party clients (€+9 billion) driven by the success of both Alts and Core platforms, and from Asian joint ventures (€+9 billion) mainly in China, partly offset by (ii) negative market effects (€-8 billion) from the increase in interest rates. Management fee bps increased by 0.6 bps to 16.4 bps. On a constant exchange rate basis, management fee bps increased by 0.5 bps due to a favorable change in product mix stemming from higher share of Alternative, Equity and High Yield products. Gross revenues increased by €97 million (+16%) to €704 million. On a comparable basis, gross revenues increased by €103 million (+17%) mainly driven by higher management fees (€+68 million) from both higher average assets under management and higher management fee bps, as well as higher distribution fees (€+24 million) and performance fees (€+16 million). Underlying earnings before tax increased by €48 million (+28%) to €224 million. On a constant exchange rate basis, underlying earnings before tax increased by €50 million (+29%) as a result of higher revenues as well as cost discipline, combined with favorable seasonality effects. The underlying cost income ratio decreased by 3.7 points to 67.3%. On a constant exchange rate basis, the underlying cost income ratio decreased by 3.6 points. Income tax expenses increased by €8 million (+15%) to €-60 million. On a constant exchange rate basis, income tax expenses increased by €8 million (+16%) driven by higher pre-tax underlying earnings, partly offset by positive tax one-offs and a decrease in the corporate tax rate in France from 32% to 28%. Income from affiliates and associates increased by €2 million (+27%) to €11 million. On a constant exchange rate basis, income from affiliates and associates increased by €3 million (+28%). Half Year 2021 Financial Report 55 I ACTIVITY REPORT – HALF YEAR 2021 Underlying earnings increased by €40 million (+31%) to €170 million. On a constant exchange rate basis, underlying earnings increased by €41 million (+32%). Net income increased by €30 million (+25%) to €153 million. On a constant exchange rate basis, net income increased by €32 million (+26%) mainly driven by higher underlying earnings, partly offset by a negative change in the fair value of a real estate fund. Half Year 2021 Financial Report 56 I ACTIVITY REPORT – HALF YEAR 2021 AXA ASSISTANCE (in Euro million, except percentages) June 30, 2021 June 30, 2020 Gross revenues (a) 670 645 Property & Casualty 566 545 Health 103 100 Underlying earnings before tax (20) (21) Property & Casualty (19) (25) Health (1) 4 Income tax expenses / benefits 0 (1) Minority interests (0) 0 Income from affiliates and associates 0 UNDERLYING EARNINGS GROUP SHARE (19) (22) Net capital gains or losses (0) (0) Profit or loss on financial assets (under fair value option) and derivatives (2) (0) Exceptional operations (including discontinued operations) (8) 4 Goodwill and other related intangible impacts (28) Integration and restructuring costs (1) (2) NET INCOME GROUP SHARE (29) (48) Property & Casualty Combined Ratio 103.3% 104.5% Health Combined Ratio 100.6% 96.4% (a) Net of intercompany eliminations. Gross revenues increased by €25 million (+4%) to €670 million. On a comparable basis, gross revenues increased by €65 million (+11%): Property & Casualty (€+47 million or +9%) to €566 million driven by new business and existing partnerships growth in both Motor and Home; Health (€+18 million or +20%) to €103 million driven by higher volumes mainly in international markets. Underlying earnings before tax increased by €1 million to €-20 million: Property & Casualty (€+6 million) to €-19 million reflecting a lower current year combined ratio (-0.3 point) mainly driven by cost discipline combined with favorable prior year reserve developments; Health (€-5 million) to €-1 million mainly reflecting a higher current year combined ratio due to an unfavorable business mix. Income tax expenses decreased by €2 million to €0 million. Underlying earnings increased by €2 million to €-19 million. Net income increased by €18 million to €-29 million mainly driven by higher underlying earnings combined with the non-repeat of charges related to intangible assets. AXA SA Half Year 2021 Financial Report 57 I ACTIVITY REPORT – HALF YEAR 2021 (in Euro million) June 30, 2021 June 30, 2020 UNDERLYING EARNINGS GROUP SHARE (380) (368) Net capital gains or losses 3 Profit or loss on financial assets (under fair value option) and derivatives (17) 324 Exceptional operations (including discontinued operations) 33 (52) Goodwill and other related intangible impacts Integration and restructuring costs (4) NET INCOME GROUP SHARE (364) (98) Underlying earnings decreased by €12 million to €-380 million mainly driven by (i) higher investments to accelerate the IT transformation strategy, (ii) lower dividends received following the disposal of the remaining stake in Equitable Holdings, Inc., partly offset by (iii) lower financial charges following the reimbursement of debt in 2020. Net income decreased by €266 million to €-364 million mainly due to (i) the non-repeat of gain on equity derivatives positions in the context of the strong equity market turmoil resulting from the COVID-19 crisis, partly offset by (ii) a favorable change in the fair value of interest rates derivatives not eligible for hedge accounting given the significant decrease in exposure to interest rates risk implemented last year. Half Year 2021 Financial Report 58 I ACTIVITY REPORT – HALF YEAR 2021 Outlook AXA has delivered excellent operational performance in the first half of 2021, while fulfilling its role in supporting society by investing into future economic recovery, and serving its clients, with empowered distributors and employees. While lingering uncertainties around COVID-19 persists, the progressive roll-out of vaccination program across geographies has contributed to a recovery in economic activity. AXA plans to capture post COVID-19 growth in a hardening pricing cycle for Property & Casualty Commercial lines and a growing Health market, while remaining resilient to the continued low interest rate environment. In its new 3-year plan “Driving Progress 2023”, AXA is focused on the delivery of five strategic actions: (i) expand Heath and Protection, including through services and across all geographies; (ii) simplify customer experience and accelerate efficiency, particularly in Europe and France; (iii) strengthen underwriting performance, notably at AXA XL; (iv) sustain our climate leadership position in shaping the climate transition; and (v) grow cash-flows across the Group through continued life in-force management and Group simplification, and disciplined capital management. AXA’s strategy is designed to deliver sustained earnings and dividend growth, supported by enhanced cash generation, a strong balance sheet and disciplined capital management. AXA’s Management believes that the Group is well positioned to create lasting shareholder value and offer an attractive return. Half Year 2021 Financial Report 59 I ACTIVITY REPORT – HALF YEAR 2021 Glossary This glossary includes definitions of non-GAAP financial measures, or alternative performance measures (“APMs”), indicated by an asterisk (*), that Management believes are useful to understand the Group’s business and analyze the Group’s performance. The scope of the following definitions of APMs remains unchanged compared to prior periods, except (i) the formula used to calculate Return on Equity, (ii) the discontinuation of the « Adjusted Earnings » indicator as a matter of simplification of disclosures and (iii) the introduction of a new APM called “Underlying Return on Equity” in replacement of the APM “Adjusted Return on Equity” used previously, in each case as described in Appendix V (“Glossary”) to the 2020 Universal Registration Document. Scope and comparable basis SPLIT BY GEOGRAPHY The split by geography is detailed below: France (insurance and banking activities, and holding); Europe, consisting of: o Switzerland (insurance activities), o Germany (insurance activities, holding, and banking activities until its disposal on December 31, 2020), o Belgium (insurance activities and holding), o United Kingdom and Ireland (insurance activities and holding), o Spain (insurance activities), o Italy (insurance activities); Asia, consisting of: o Japan (insurance activities, and holding), o Hong Kong (insurance activities), o Asia High Potentials, consisting of: ▪ Thailand (insurance activities), ▪ Indonesia (insurance activities), ▪ China (insurance activities), ▪ The Philippines (insurance activities), o South Korea (insurance activities), o Asia Holdings; AXA XL (insurance activities and holding); International, consisting of: o EME-LATAM: ▪ AXA Bank Belgium (banking activities, held for sale), Half Year 2021 Financial Report 60 I ACTIVITY REPORT – HALF YEAR 2021 ▪ Brazil (insurance activities and holding), ▪ Colombia (insurance activities), ▪ Czech Republic and Slovak Republic (insurance activities) until September 2020 (disposed on October 15, 2020), ▪ Greece (insurance activities) until March 2021 (disposed on May 31, 2021), ▪ The Gulf Region (insurance activities held for sale, and holding), ▪ Luxembourg (insurance activities and holding), ▪ Mexico (insurance activities), ▪ Poland (insurance activities) until September 2020 (disposed on October 15, 2020), ▪ Russia (Reso) (insurance activities), ▪ Turkey (insurance activities and holding), o Africa & Asia: ▪ India (Property & Casualty activities held for sale, Life & Savings activities and holding), ▪ Malaysia (insurance activities held for sale), ▪ Morocco (insurance activities and holding), ▪ Nigeria (insurance activities and holding), ▪ Singapore (insurance activities and holding), o AXA Mediterranean Holdings; Transversal & Central Holdings, consisting of: o AXA Investment Managers, o AXA Assistance, o AXA Liabilities Managers, o AXA Global Re, o AXA Life Europe, o Architas, o AXA SA and other Central Holdings. CURRENT ENGINES AND HIGH POTENTIALS The split between current engines and high potentials is detailed below: Current Engines: Belgium, France, Germany, Hong Kong, Italy, Japan, Spain, Switzerland, UK & Ireland and AXA XL; High Potentials: Brazil, China, Indonesia, Mexico, the Philippines and Thailand. Half Year 2021 Financial Report 61 I ACTIVITY REPORT – HALF YEAR 2021 COMPARABLE BASIS FOR REVENUES, ANNUAL PREMIUM EQUIVALENT AND NBV MARGIN “On a comparable basis” means: data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis); data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Earnings and Capital UNDERLYING EARNINGS* Underlying earnings represent the net income (Group share) as disclosed in the table set forth on pages 19 to 20 of this report, before the impact of the following items net of policyholder participation, deferred acquisition costs, Value of Business in-force, taxes and minority interests: realized gains and losses, change in impairment valuation allowances (on assets not designated under fair value option or trading assets) and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities (other than the funds backing contracts where the financial risk is borne by policyholders); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Derivatives related to invested assets and liabilities: o include all foreign exchange derivatives, except the pay-off related to currency options in earnings hedging strategies which are included in underlying earnings; o include all interest rate derivatives, except the pay-off related to rate instrument in earnings hedging strategies which are included in underlying earnings; o exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy. impairments of goodwill, impairments and amortization of intangibles related to customers and distribution; integration and restructuring costs related to new acquired companies as well as restructuring and associated costs related to productivity improvement plans; and exceptional operations (primarily changes in scope and discontinued operations). EARNINGS PER SHARE Earnings per share (EPS) represent AXA's consolidated earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity) divided by the weighted average number of outstanding ordinary shares over the period. Diluted earnings per share (diluted EPS) represent AXA's consolidated earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity) divided by the weighted average number of outstanding ordinary shares over the period, on a diluted basis (i.e. including the potential impact of all Half Year 2021 Financial Report 62 I ACTIVITY REPORT – HALF YEAR 2021 outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Underlying Earnings per share* correspond to underlying Earnings (net of financial charges related to undated subordinated debt recorded through shareholders’ equity) divided by the weighted average number of outstanding ordinary shares over the period. RETURN ON EQUITY The Return on Equity (“RoE”) presented herein and in this report is calculated as earnings net of interest charges related to undated subordinated debts divided by the average of opening and closing shareholders’ equity both excluding: for underlying RoE*: o reserves relating to the change in the fair value through shareholders’ equity, o undated subordinated debts since they are treated as financing debt; for net income RoE: o reserves relating to the change in the fair value of available for sale fixed income securities through shareholders’ equity, o undated subordinated debts since they are treated as financing debt. The Return on Equity (“RoE”) as per former definition was calculated as earnings divided by the weighted average shareholders’ equity. The weighted average shareholders’ equity is based on opening shareholders’ equity adjusted for weighted average impacts of capital flows (including dividends). for underlying RoE*: o reserves relating to the change in the fair value through shareholders’ equity are excluded from the average shareholders’ equity, o undated subordinated debts are treated as financing debt, thus excluded from the average shareholders’ equity, and o earnings include interest charges on undated subordinated debts, on preferred shares, and on shareholders’ equity component of the mandatory exchangeable bonds up to the date of deconsolidation of Equitable Holdings, Inc.; for net income RoE: o calculation is based on Consolidated Financial Statements, i.e.: average shareholders’ equity including undated subordinated debts and reserves relating to the change in the fair value through shareholders’ equity, and o net income. FREE CASH FLOWS Free Cash Flows are defined as a measure of dividend capacity calculated as the sum of earnings and required capital change. EOF (ELIGIBLE OWN FUNDS) Surplus derived from a Solvency II balance sheet. It is defined as the excess of market value of assets over best estimate liabilities and Risk Margin as per Solvency II regulation. Half Year 2021 Financial Report 63 I ACTIVITY REPORT – HALF YEAR 2021 SOLVENCY II RATIO This ratio is calculated as per Solvency II and is equal to the total amount of the Group’s Eligible Own Funds (“EOF”) divided by the Group’s Solvency Capital Requirement (“SCR”). The Solvency Capital Requirement, i.e. the denominator of the Solvency II ratio, is set at a level ensuring that insurers and reinsurers are able to meet their obligations towards policyholders and beneficiaries over the next 12 months, with a 99.5% probability. The Solvency Capital Requirement can be calculated either based on the standard formula or an internal model. The Group is using an internal model. The Solvency II ratio is estimated primarily using AXA’s internal model calibrated based on an adverse 1/200 years shock. For further information on AXA’s internal model and Solvency II disclosures, please refer to AXA Group’s Solvency and Financial Condition Report (SFCR) as of December 31, 2020, available on AXA’s website (www.axa.com). Pursuant to the authorization from AXA’s lead supervisor (the “ACPR”), the contribution of entities that were part of the XL Group (“XL entities), and are now part of the AXA XL division, to the Group Solvency II ratio is, as from December 31, 2020 on, calculated with the AXA Group internal model. DEBT GEARING* Debt Gearing refers to the level of a company's debt related to its equity capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt and undated subordinated debt) by total capital employed (consolidated shareholders’ equity excluding undated subordinated debt and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives plus the gross debt). Furthermore, mandatory exchangeable bonds into EQH shares issued by AXA in May 2018, and redeemed in May 2021 in exchange of EQH shares, were excluded from Debt Gearing since EQH had been deconsolidated. Activities INSURANCE LIFE & SAVINGS HYBRID AND GENERAL ACCOUNT CAPITAL LIGHT PRODUCTS Hybrid products: Savings products allowing clients to invest in both Unit-Linked and General Account funds. General Account capital light products: General Account Savings products which, at inception, create more EOF than the economic capital they consume. LIFE & SAVINGS NET INFLOWS Life & Savings Net Inflows are defined as the collected premiums (including risk premiums, fees and revenues), net of surrenders, maturities, claims paid, and other benefits paid. This definition is applicable to all Life & Savings products as well as Life-like Health products, except for Mutual Funds products. NEW BUSINESS APE (NEW BUSINESS ANNUAL PREMIUM EQUIVALENT) New business APE represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. Half Year 2021 Financial Report 64 I ACTIVITY REPORT – HALF YEAR 2021 NBV (NEW BUSINESS VALUE) The value of newly issued contracts during the current year. It consists of the present value of future profits after the costs of acquiring business, less (i) an allowance for the time value of financial option and guarantees, and (ii) cost of capital and non-financial risks. AXA calculates this value net of tax. NBV MARGIN (NEW BUSINESS VALUE MARGIN) New Business Value Margin is the ratio of: New Business Value representing the value of newly issued contracts during the current year; to Annual Premium Equivalent. This ratio represents the profitability of the new business. MARGIN ANALYSIS The Margin Analysis is presented on an underlying earnings basis. Even though the presentation of the Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. Underlying investment margin includes the following items: net investment income; and interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income as well as the unwind of the discount rate used in calculating technical reserves. Underlying fees & revenues include: loadings charged to policyholders (or contractual charges) on premiums of all Life & Savings products; loadings on deposits received on all Life & Savings products and fees on funds under management for separate account (Unit-Linked) business; capitalization of deferred income linked to new business: Unearned Revenue Reserve (URR) and Unearned Fee Reserve (UFR); amortization of Unearned Revenue Reserve (URR) and Unearned Fee Reserve (UFR), including the impact of interest capitalized; revenues derived from mutual fund sales (which are part of consolidated revenues); and other fee revenues, e.g. fees received on financial planning or sales of third-party products. Underlying net technical margin includes the following components: mortality and morbidity margin: the difference between income or earned premiums for assuming risk and the cost of benefits and claims charges directly linked to the claims experience or its anticipation (death or disability) as well as other changes in claims and insurance reserves: all the reserve strengthening or release coming from changes in valuation assumptions and other technical impacts such as premium deficiencies net of derivatives if any; surrender margin: the difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination; Half Year 2021 Financial Report 65 I ACTIVITY REPORT – HALF YEAR 2021 GMxB (Variable Annuity guarantees) active financial risk management: the net result from GMxB lines corresponding to explicit charges related to these types of guarantees less cost of hedging. It also includes the unhedged business result; policyholder bonuses if the policyholders participate in the risk margin; ceded reinsurance results; and claims handling costs. Expenses include the following components: acquisition expenses, including commissions and general expenses allocated to new business; capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (DAC) and net rights to future management fees only for investment contracts without DPF; amortization of Deferred Acquisition Costs (DAC) and net rights to future management fees for investment contracts without DPF, including the impact of interest capitalized; administrative expenses; and policyholder bonuses if the policyholder participates in the expenses of the Company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Life & Savings Margin Analysis as set out below: For insurance contracts and investment contracts with Discretionary Participation Features (DPF): o gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees & Revenues” and “Net Technical Margin”, o policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”, o the “Investment margin” represents the net investment result in the Statement of Income and is adjusted to consider the related policyholder participation (see above) as well as changes in specific reserves linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees & Revenues”, o change in URR (Unearned Revenue Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis; For investment contracts without DPF: o deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the Underlying Statement of Income within Gross Consolidated Revenues on a separate line, and in Margin Analysis in the lines “Fees & Revenues” and “Net Technical Margin”, o change in UFR (Unearned Fee Reserve - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the Underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis. Half Year 2021 Financial Report 66 I ACTIVITY REPORT – HALF YEAR 2021 INSURANCE RATIOS (APPLICABLE TO PROPERTY & CASUALTY, HEALTH AND PROTECTION ACTIVITIES) Current accident year loss ratio net of reinsurance is the ratio of: current year claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on current accident year, excluding for the discounted reserves the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years, excluding the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. Expense ratio is the ratio of: expenses (excluding claims handling costs, including changes in VBI amortization); to earned revenues gross of reinsurance. Expenses include two components: expenses (including commissions) related to the acquisition of contracts (with the related acquisition expense ratio) and all other expenses excluding claims handling costs (with the related administrative expense ratio). Expenses exclude customer intangible amortization but include the impact from the changes in VBI amortization. The Combined ratio* is the sum of the all accident year loss ratio and the expense ratio. ASSET MANAGEMENT Net inflows: Inflows of client money less outflows of client money. Net inflows are used by the Management to measure the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying cost income ratio is the ratio of: general expenses excluding distribution related expenses; to gross revenues excluding distribution fees received. Assets under management (AUM) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers. AUM only include funds and mandates which generate fees and exclude double counting. BANKING Operating net banking revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of “fair-value-P&L” assets and hedging derivatives. Half Year 2021 Financial Report 67 I II. Consolidated financial statements / Half Year 2021 Table of Contents II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...................................................................................... 70 II.2 CONSOLIDATED STATEMENT OF INCOME ............................................................................................................ 72 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME .............................................................................. 73 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY........................................................................................ 74 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS .................................................................................................... 76 NOTE 1 ACCOUNTING PRINCIPLES ......................................................................................................................... 78 NOTE 2 SCOPE OF CONSOLIDATION ...................................................................................................................... 80 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT ........................................................................... 83 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES .......................................................................................... 86 NOTE 5 INVESTMENTS ............................................................................................................................................ 91 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS .............................................................................. 99 NOTE 7 FINANCING DEBT...................................................................................................................................... 105 NOTE 8 NET INCOME PER ORDINARY SHARE ....................................................................................................... 106 NOTE 9 SUBSEQUENT EVENTS ............................................................................................................................. 107 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in Euro million) June 30, 2021 Goodwill 16,788 Value of purchased business in force 1,245 Deferred acquisition costs and equivalent 18,142 Other intangible assets 4,442 Intangible assets 40,617 Investments in real estate properties 26,575 Financial investments 485,931 Assets backing contracts where the financial risk is borne by policyholders (a) 84,410 5 Investments from insurance activities 596,916 5 Investments from banking and other activities 18,924 Investments accounted for using the equity method 2,550 Reinsurers' share in insurance and investment contracts liabilities 30,403 Tangible assets 2,539 Deferred policyholders' participation assets Deferred tax assets 428 Other assets 2,967 Receivables arising from direct insurance and inward reinsurance operations 28,364 Receivables arising from outward reinsurance operations 1,916 Receivables - current tax 1,064 Other receivables 9,449 Receivables 40,793 4 Assets held for sale (b) 33,547 Cash and cash equivalents 26,788 TOTAL ASSETS 793,506 Note: All invested assets are shown net of related derivative instruments impact. (a) Includes assets backing contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (b) As of June 30, 2021, amounts included the assets relating to AXA Bank Belgium, India P&C, the Gulf Region and Malaysia operations, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. As of December 31, 2020, amounts included the assets relating to AXA Bank Belgium, India P&C, the Gulf Region and Greece operations, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at year-end. Half Year 2021 Financial Report December 31, 2020 16,583 1,245 16,534 4,432 38,793 25,876 506,959 77,802 610,637 22,562 2,471 26,972 2,649 333 2,981 25,487 2,466 845 9,707 38,505 33,432 28,237 804,589 70 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 Notes (in Euro million) June 30, 2021 Share capital and capital in excess of nominal value 26,102 Reserves and translation reserve 38,349 Net consolidated income - Group share 3,996 Shareholders’ equity – Group share 68,447 Minority interests 4,421 6 TOTAL SHAREHOLDERS' EQUITY 72,868 Subordinated debt 10,330 Financing debt instruments issued 793 7 Financing debt (a) 11,122 Liabilities arising from insurance contracts 388,018 Liabilities arising from insurance contracts where the financial risk is borne by policyholders (b) 65,684 Total liabilities arising from insurance contracts 453,702 Liabilities arising from investment contracts with discretionary participating features 35,194 Liabilities arising from investment contracts with no discretionary participating features Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 68 4,865 14,420 Total liabilities arising from investment contracts 54,547 Unearned revenue and unearned fee reserves 2,278 Liabilities arising from policyholder participation and other obligations 50,722 Derivative instruments relating to insurance and investment contracts (833) Liabilities arising from insurance and investment contracts 560,416 Liabilities arising from banking activities (a) 14,089 Provisions for risks and charges 8,579 Deferred tax liabilities 5,592 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders Other debt instruments issued, notes and bank overdrafts (a) 7,273 11,175 Payables arising from direct insurance and inward reinsurance operations 9,694 Payables arising from outward reinsurance operations 14,473 Payables – current tax 1,086 Collateral debts relating to investments under lending agreements or equivalent 33,619 Other payables 11,707 Payables 89,027 4 Liabilities held for sale (c) 31,813 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 793,506 (a) Amounts are shown net of related derivative instruments impact. (b) Includes liabilities arising from contracts where the financial risk is borne by policyholders with Guaranteed Minimum features. (c) As of June 30, 2021, amounts included the liabilities relating to AXA Bank Belgium, the Gulf Region and Malaysia operations, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. As of December 31, 2020, amounts included the liabilities relating to AXA Bank Belgium, the Gulf Region and Greece operations, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at year-end. Half Year 2021 Financial Report December 31, 2020 26,165 42,281 3,164 71,610 4,565 76,176 9,279 1,569 10,848 381,166 61,157 442,323 36,480 66 3,695 13,224 53,466 2,021 59,993 (1,245) 556,557 15,284 9,554 6,470 9,221 12,868 10,893 13,156 1,088 37,878 12,692 97,796 31,904 804,589 71 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 II.2 CONSOLIDATED STATEMENT OF INCOME Notes (in Euro million, except EPS in Euro) June 30, 2021 Gross written premiums 52,373 Fees and charges relating to investment contracts with no participating features 95 Revenues from insurance activities 52,468 Net revenues from banking activities 274 Revenues from other activities 1,123 Revenues (a) 53,865 Change in unearned premiums net of unearned revenues and fees (4,937) Net investment income (b) 6,105 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (c) 1,579 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (d) 4,559 of which change in fair value of assets with financial risk borne by policyholders (e) 5,205 Change in investments impairments (f) (141) Net investment result excluding financing expenses 12,102 Technical charges relating to insurance activities (e) (43,660) Net result from outward reinsurance (999) Bank operating expenses (32) Acquisition costs (6,020) Amortization of the value of purchased business in force (21) Administrative expenses (5,017) Change in goodwill impairment and other intangible assets impairment and amortization (66) Other income and expenses (g) 96 Other operating income and expenses (55,719) Income from operating activities before tax 5,310 Income (net of impairment) from investment accounted for using the equity method 44 Financing debts expenses (h) (244) Net income from operating activities before tax 5,110 Income tax (993) Net consolidated income after tax 4,117 Split between : Net consolidated income - Group share 3,996 Net consolidated income - Minority interests 121 8 8 Earnings per share Fully diluted earnings per share 1.64 1.63 (a) Gross of reinsurance. (b) Net of investment management costs. (c) Includes impairment releases on investments sold. (d) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (f) Excludes impairment releases on investments sold. (g) As of June 30, 2021, it included losses related to the disposal processes of the Gulf Region and Malaysia operations (see Note 4). As of June 30, 2020, it included the removal of the held for sale classification previously applied for AXA Life Europe. (h) Includes net balance of income and expenses related to derivatives on financing debt (nonetheless excludes change in fair value of these derivatives). Half Year 2021 Financial Report June 30, 2020 51,006 118 51,124 244 1,023 52,391 (4,440) 6,651 1,026 (3,159) (3,475) (731) 3,787 (36,378) (1,020) (35) (6,238) (129) (5,273) (104) 201 (48,972) 2,764 189 (634) 2,320 (810) 1,510 1,429 80 0.56 0.56 72 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2021 Reserves relating to changes in fair value through shareholders' equity (4,853) Translation reserves 516 Items that may be reclassified subsequently to Profit or Loss (4,338) Employee benefits actuarial gains and losses 510 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk (3) Items that will not be reclassified subsequently to Profit or Loss 507 Net gains and losses recognized directly through shareholders' equity (3,831) Net consolidated income 4,117 Split between: Net consolidated income - Group share 3,996 Net consolidated income - Minority interests 121 TOTAL COMPREHENSIVE INCOME (CI) 286 Split between: Total comprehensive income - Group share 289 Total comprehensive income - Minority interests (3) Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Tax, policyholder participation and related effects are further detailed in the Notes to the Consolidated Financial statements. Half Year 2021 Financial Report June 30, 2020 970 (781) 189 419 20 439 628 1,510 1,429 80 2,137 2,113 24 73 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euro) Share Capital Capital in excess of nominal value Treasur y shares Reserves relating to the change in fair value of financial instrument s available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translati on reserves Undistribute d profits and other reserves Shareholders ' equity Group share Minority interests Shareholders' equity opening January 1, 2021 2,418,389 2.29 5,538 21,735 (744) 22,575 483 6,411 (4,663) 20,275 71,610 4,565 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) Dividends Impact of transactions with shareholders 767 - - - - - - - - - 767 2.29 - - - - - - - - - 2.29 2 - - - - - - - - - 2 9 23 - - - - - - - 33 - - (97) - - - - - - (97) - - - - - - - (0) - (0) - - - - - - - (0) - (0) - - - - - 0 - - - - - - - - - - (0) - (0) - - - - - - (96) 110 (3,403) (3,389) 2 9 23 (97) - - 0 (96) 109 (3,403) (3,452) - - - - - - - (141) - (125) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - (3,937) - (792) - 101 - 416 - 507 (3) (4,728) 518 507 (3) (2) 3 0 3,996 3,996 121 Total Comprehensive Income (CI) (3,937) (792) 101 416 4,499 289 (3) Shareholders' equity closing June 30, 2021 2,419,157 2.29 5,540 21,768 (841) 18,638 (309) 6,513 (4,247) 21,385 68,447 4,421 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (see Note 6.1.1). (b) Including changes in ownership interest in consolidated subsidiaries. Half Year 2021 Financial Report 74 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests Shareholders' equity opening January 1, 2020 2,417,695 2.29 5,537 21,706 (752) 19,328 196 6,636 (2,050) 19,297 69,897 4,730 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) Dividends paid Impact of transactions with shareholders 4 - - - - - - - - - 4 2.29 - - - - - - - - - 2.29 0 - - - - - - - - - 0 (3) 23 - - - - - - - 19 - - (110) - - - - - - (110) - - - - - - - 0 - 0 - - - - - - - 0 - 0 - - - (0) - 0 - - - 0 - - - - - - - 0 - 0 - - - - - - (90) (25) (1,740) (1,855) 0 (3) 23 (110) 0 - - (90) (25) (1,740) (1,946) - - - - - - - (185) - (35) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - 325 - 680 - (77) - (681) - 417 20 1,005 (758) 417 20 (23) 2 0 1,429 1,429 80 Total Comprehensive Income (CI) 325 680 (77) (681) 1,866 2,113 24 Shareholders' equity closing June 30, 2020 2,417,699 2.29 5,537 21,725 (862) 19,653 877 6,559 (2,732) 19,308 70,065 4,569 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (see Note 6.1.2). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2021 Financial Report 75 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2021 Operating income including discontinued operations before tax 5,110 Net amortization expense (a) Change in goodwill impairment and other intangible assets impairment (b) Net change in deferred acquisition costs and equivalent 242 31 (1,047) Net increase / (write back) in impairment on investments, tangible and other intangible assets 136 Change in fair value of investments at fair value through profit or loss Net change in liabilities arising from insurance and investment contracts (c) Net increase / (write back) in other provisions (d) Income (net of impairment) from investment accounted for using the equity method (5,747) 9,100 (41) (44) Adjustment of non cash balances included in the operating income before tax 2,631 Net realized investment gains and losses Financing debt expenses (409) 244 Adjustment for reclassification to investing or financing activities (165) Dividends recorded in profit or loss during the period Investment income & expense recorded in profit or loss during the period (e) (1,775) (4,631) Adjustment of transactions from accrued to cash basis (6,407) Net cash impact of deposit accounting 343 Dividends and interim dividends collected 2,273 Investment income (e) 6,479 Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) (1,177) Net operating cash from banking activities (935) Change in operating receivables and payables Net cash provided by other assets and liabilities (f) Tax expenses paid 174 (1,248) (813) Other operating cash impact and non cash adjustment 828 Net cash impact of transactions with cash impact not included in the operating income before tax 5,924 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 7,094 Purchase of subsidiaries and affiliated companies, net of cash acquired 7 Disposal of subsidiaries and affiliated companies, net of cash ceded 57 Net cash related to changes in scope of consolidation 64 Sales of debt instruments (f) Sales of equity instruments and non consolidated investment funds (f) (g) Sales of investment properties held directly or not (f) Sales and/or repayment of loans and other assets (f) (h) 27,761 9,882 961 10,354 Net cash related to sales and repayments of investments (f) (g) (h) 48,957 Purchases of debt instruments (f) Purchases of equity instruments and non consolidated investment funds (f) (g) Purchases of investment properties held direct or not (f) Purchases and/or issues of loans and other assets (g) (h) (23,963) (11,277) (1,667) (13,080) Net cash related to purchases and issuance of investments (f) (g) (h) (49,987) Sales of tangible and intangible assets Purchases of tangible and intangible assets 3 (161) Net cash related to sales and purchases of tangible and intangible assets (158) Increase in collateral payable / Decrease in collateral receivable 72,700 Half Year 2021 Financial Report June 30, 2020 2,320 572 51 (527) 730 3,078 4,953 (164) (189) 8,504 (1,025) 634 (391) (1,726) (5,391) (7,117) 1 2,036 8,300 (2,844) 2,006 2,181 757 (668) 328 12,096 15,411 (19) (1) (20) 26,718 13,025 715 9,236 49,694 (29,094) (13,813) (1,078) (10,720) (54,704) 1 (125) (123) 69,542 76 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 Decrease in collateral payable / Increase in collateral receivable (75,709) Net cash impact of assets lending / borrowing collateral receivables and payables (3,009) NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES (4,133) Issuance of equity instruments 22 Repayments of equity instruments (149) Transactions on treasury shares (1) Dividends payout (3,503) Interests on undated subordinated debts paid (102) Acquisition / sale of interests in subsidiaries without change in control (4) Net cash related to transactions with shareholders (3,737) Cash provided by financial debts issuance 1,003 Cash used for financial debts repayments Interests on financing debt paid (i) Net interest margin of hedging derivatives on financing debt (109) (249) Net cash related to Group financing 646 Other financing cash impact and non cash adjustment NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (3,091) NET CASH PROVIDED BY DISCONTINUED OPERATIONS CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 27,516 Net cash provided by operating activities 7,094 Net cash provided by investing activities (4,133) Net cash provided by financing activities (3,091) Net cash provided by discontinued operations Impact of change in consolidation method and of reclassifications as held for sale (k) (1,329) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents 213 CASH AND CASH EQUIVALENT AS OF JUNE 30 (j) 26,270 (a) Includes premiums/discounts capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes gains/losses from derivatives hedging variable annuities. (f) Includes related derivatives. (g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (j) Net of bank overdrafts. (k) As of June 30, 2021, amounts included the assets relating to AXA Bank Belgium, the Gulf Region and Malaysia operations, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. As of June 30, 2020, amounts included the assets and liabilities relating to Central and Eastern Europe operations, AXA Bank Belgium and the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. (in Euro million) June 30, 2021 Cash and cash equivalents Bank overdrafts (a) 26,788 (518) Cash and cash equivalents as of June 30 (b) 26,270 (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (Unit-Linked contracts). Half Year 2021 Financial Report (66,084) 3,458 (1,695) 7 (176) 2 (42) (110) 4 (315) 31 (1,356) (288) (17) (1,631) (1,946) 21,977 15,411 (1,695) (1,946) (1,896) (506) 31,346 June 30, 2020 32,231 (885) 31,346 77 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 1 ACCOUNTING PRINCIPLES 1.1 General information AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates both in Europe and worldwide. The list of the main entities included in the scope of AXA’s consolidated financial statements is provided in Note 2 of the Notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all Notes were set by the Board of Directors on July 29, 2021. 1.2 General accounting principles AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2021. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2020. The 2021 half year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2020 Universal Registration Document. IFRS REQUIREMENTS ADOPTED ON JANUARY 1, 2021 Amendments to IAS 39, IFRS 9, IFRS 7, IFRS 4 and IFRS 16 related to Phase 2 of the IBOR reform Amendments to IAS 39, IFRS 9, IFRS 7, IFRS 4 and IFRS 16 – Interest Rate Benchmark Reform – Phase 2 were issued in August 2020 and endorsed by the European Union in January 2021. The amendments provide a practical expedient for the situations where changes are made to contractual cash flows of financial assets and liabilities or leases, as a result of the transition from an IBOR benchmark rate to alternative benchmark rates, in the context of the ongoing risk-free rate reform. This practical expedient enables entities not to derecognise or adjust the carrying amounts of those assets and liabilities that are subject to a change with recognition of a corresponding modification gain or loss in profit or loss. In addition, the amendments provide several exceptions to the hedge accounting requirements so that entities will be able to update the designation of the hedging relationship in response to the replacement of the original benchmark rate and to continue with the hedging relationships after transition to the alternative benchmark rate. AXA initiated in 2019 a group-wide project to actively manage the transition to new benchmark rates. The definition phase took place in 2020 when the project governance and the Group IBOR Roadmap were built. The implementation phase was launched in the first half of 2021. Half Year 2021 Financial Report 78 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 Only about 6% of the debt instruments held by AXA are concerned by the IBOR reform, of which 3% are floating- rate debt instruments referencing Euribor rates expected to continue beyond 2021. The remaining 3% are indexed mainly on USD, JPY, and GBP Libor rates and are expected to transit to new benchmark rates during 2021. The application of the amendments has no material impact on the Group’s Half Year consolidated financial statements and is not expected to have any material impact in the future. Amendment to IFRS 4 – deferral of IFRS 9 On June 25, 2020, the IASB issued an amendment to IFRS 4 Insurance contracts extending the expiry date of the temporary exemption in IFRS 4 from applying IFRS 9 by two years, i.e. to January 1, 2023. It enables insurers eligible for this temporary exception to align the effective dates of IFRS 9 – Financial instruments and IFRS 17 – Insurance contracts. Applying this amendment, AXA defers the implementation of IFRS 9 until the effective date of the new insurance contracts standard. PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at the year ended December 31, 2020. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non- current items. As for most insurance companies, expenses are classified by destination in the income statement. All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the Notes are expressed in Euro million. Half Year 2021 Financial Report 79 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 2 SCOPE OF CONSOLIDATION 2.1 Consolidated companies 2.1.1 MAIN FULLY CONSOLIDATED COMPANIES June 30, 2021 December 31, 2020 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA SA and Other Holdings AXA SA Parent company Parent company CFP Management 100.00 100.00 100.00 100.00 AXA Group Operations SAS 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA Asia 100.00 100.00 100.00 100.00 France AXA France IARD 99.92 99.92 99.92 99.92 AXA France Vie 99.77 99.77 99.77 99.77 AXA Protection Juridique 98.52 98.44 98.52 98.44 Avanssur 100.00 99.81 100.00 99.81 AXA France Participations 100.00 100.00 100.00 100.00 Genworth Financial European Group Holdings 100.00 100.00 100.00 100.00 AXA Banque 100.00 99.89 100.00 99.89 AXA Banque Financement 65.00 64.93 65.00 64.93 Europe Germany AXA Versicherung AG 100.00 100.00 100.00 100.00 AXA Lebensversicherung AG 100.00 100.00 100.00 100.00 Deutsche Ärzteversicherung 100.00 100.00 100.00 100.00 AXA Krankenversicherung AG 100.00 100.00 100.00 100.00 Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 Roland Rechtsschutz-Versicherungs-AG United Kingdom & Ireland Guardian Royal Exchange Plc 60.00 100.00 60.00 99.98 60.00 100.00 60.00 99.98 AXA UK Plc 100.00 99.98 100.00 99.98 AXA Equity & Law Plc 99.96 99.96 99.96 99.96 AXA Insurance UK Plc 100.00 99.98 100.00 99.98 AXA PPP Healthcare Limited 100.00 99.98 100.00 99.98 AXA Insurance Limited 100.00 99.98 100.00 99.98 AXA Life Europe dac Spain AXA Seguros Generales, S.A. 100.00 99.92 100.00 99.92 100.00 99.92 100.00 99.92 AXA Aurora Vida, S.A. de Seguros Switzerland AXA Leben AG 99.84 100.00 99.84 100.00 99.84 100.00 99.84 100.00 AXA-ARAG Rechtsschutz AG 66.67 66.67 66.67 66.67 AXA Versicherungen AG Italy AXA Assicurazioni e Investimenti 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 AXA MPS Vita AXA MPS Danni 50.00 + 1 voting right 50.00 + 1 voting right 50.00 50.00 50.00 + 1 voting right 50.00 + 1 voting right 50.00 50.00 AXA MPS Financial 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 Belgium Ardenne Prévoyante Merged with AXA Belgium SA 100.00 100.00 AXA Belgium SA 100.00 100.00 100.00 100.00 AXA Holdings Belgium 100.00 100.00 100.00 100.00 Yuzzu SA 100.00 100.00 100.00 100.00 Asia National Mutual International Pty Ltd. Japan AXA Holdings Japan 100.00 98.70 100.00 98.70 100.00 98.70 100.00 98.70 Half Year 2021 Financial Report 80 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 AXA Life Insurance 100.00 98.70 100.00 AXA General Insurance Co. Ltd. 100.00 98.70 100.00 AXA Direct Life Insurance Co. Ltd. Hong Kong AXA China Region Limited 100.00 100.00 98.70 100.00 100.00 100.00 AXA General Insurance Hong Kong Ltd. China AXA Tianping Indonesia MLC Indonesia Thailand AXA Insurance Public Company Limited South Korea AXA General Insurance Co. Ltd. 100.00 100.00 100.00 99.47 100.00 100.00 100.00 99.47 100.00 100.00 100.00 99.47 99.71 99.71 99.71 AXA XL XL Group (a) 100.00 100.00 100.00 International AXA Mediterranean Holding SA AXA Bank Belgium (sub group) Colombia AXA Colpatria Seguros AXA Colpatria Seguros de vida Morocco AXA Assurance Maroc 100.00 100.00 51.00 51.00 100.00 100.00 100.00 51.00 51.00 100.00 100.00 100.00 51.00 51.00 100.00 AXA Al Amane Assurance 100.00 100.00 100.00 AXA Holding Maroc S.A. Turkey AXA Hayat ve Emeklilik A.S. 100.00 100.00 100.00 100.00 100.00 100.00 AXA Sigorta AS 92.61 92.61 92.61 AXA Turkey Holding W.L.L The Gulf Region AXA Cooperative Insurance Company 100.00 50.00 100.00 34.00 100.00 50.00 AXA Insurance B.S.C.c. Greece AXA Insurance A.E. Mexico AXA Seguros S.A. de C.V. Disposal 50.00 100.00 50.00 100.00 50.00 99.98 100.00 AXA Salud S.A. de C.V. Luxembourg AXA Assurances Luxembourg 80.00 100.00 80.00 100.00 80.00 100.00 AXA Assurances Vie Luxembourg AXA Luxembourg SA Singapore AXA Financial Services Singapore pte Ltd. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 AXA Life Insurance Singapore 100.00 100.00 100.00 AXA Insurance Singapore Malaysia AXA Affin General Insurance Berhad India AXA India Holding 100.00 49.99 100.00 100.00 49.99 100.00 100.00 49.99 100.00 Other AXA Investment Managers (sub group) Dilution 97.55 97.54 97.63 AXA Global Re 100.00 100.00 100.00 AXA Assistance SA (sub group) 100.00 100.00 100.00 Colisée Ré 100.00 100.00 100.00 (a) XL Group mainly operates in the United States, the United Kingdom, France, Germany, Australia, Switzerland, Netherlands, Italy, Spain, Bermuda and Canada. Half Year 2021 Financial Report 81 98.70 98.70 98.70 100.00 100.00 100.00 100.00 99.47 99.71 100.00 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 34.00 50.00 99.98 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 49.99 100.00 97.61 100.00 100.00 100.00 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 MINORITIES INTERESTS ON CONSOLIDATED INVESTMENTS FUNDS AND REAL ESTATE COMPANIES In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2021, minority interests in consolidated investments funds amounted to €7,273 million (€9,221 million as of December 31, 2020). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholders’ equity amounted to €2,463 million as of June 30, 2021 (€2,502 million as of December 31, 2020). 2.1.2 MAIN INVESTMENTS IN COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30, 2021 December 31, 2020 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie 39.98 39.98 39.98 39.98 Asia Philippines AXA Life Insurance Corporation 45.00 45.00 45.00 45.00 Krungthai AXA Life Insurance Company Ltd. (Thailand) 50.00 50.00 50.00 50.00 ICBC-AXA Life Insurance Co., Ltd. (China) 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services (Indonesia) 49.00 49.00 49.00 49.00 International Reso Garantia (Russia) 38.39 38.39 38.39 38.39 Bharti AXA Life (India) 49.00 49.00 49.00 49.00 Bharti AXA General Insurance Company Limited (India) 49.00 49.00 49.00 49.00 AXA Mansard Insurance Plc (Nigeria) 76.48 76.48 76.48 76.48 Other Boi AXA Investment Managers Private Limited (India) Dilution 47.71 46.54 49.00 47.83 Kyobo AXA Investment Managers Company Limited (South Korea) Dilution 50.00 48.77 50.00 48.80 AXA SPDB Investment Managers Company Ltd. (China) Dilution 39.00 38.04 39.00 38.07 Half Year 2021 Financial Report 82 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT AXA’s Chief Executive Officer (CEO), acting as chief operating decision maker, is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA's business segments and holding companies reported to the Board of Directors twice a year is consistent with the presentation provided in the Consolidated Financial Statements. The results of operating activities and non-operating activities are presented on the basis of six segments: France, Europe, Asia, AXA XL, International, Transversal & Central Holdings. As of June 30, 2021, the CEOs supervising the main hubs (respectively CEO of AXA France, CEO of AXA in Europe and Latin America, CEO of AXA in Asia and Africa, CEO of AXA XL and CEO of AXA Investment Managers) are members of the Management Committee. Key transversal entities and Central Holdings are managed alongside these hubs. France: The French market consists of Life & Savings and Property & Casualty activities, AXA Banque France and French holdings. Europe: The European market consists of Life & Savings and Property & Casualty activities in Switzerland, Germany, Belgium, United Kingdom & Ireland, Spain and Italy. The holding companies in these countries are also included as well as AXA Bank Germany until its disposal on December 31, 2020. Asia: The Asian market consists of Life & Savings activities in Japan, Hong Kong and Asia High Potentials (Indonesia, Philippines, Thailand and China) as well as Property & Casualty activities in Japan, Hong Kong, South Korea and Asia High Potentials (Thailand and China). The Asia holdings are also included. AXA XL: The AXA XL market mainly consists of Property & Casualty activities in XL Group, operating mainly in the United States, the United Kingdom, France, Germany, Australia, Switzerland, Netherlands, Italy, Spain, Bermuda and Canada. The holding companies of XL Group in these countries are also included. International: The International market consists of Life & Savings and Property & Casualty activities for 11 countries in EME-LATAM, including AXA Bank Belgium, Czech Republic & Slovakia and Poland (disposed in October 2020) and Greece (disposed in May 2021), and in 5 countries in Africa and Asia. The holdings companies are also included. Transversal & Central Holdings: includes transversal entities namely AXA Investment Managers, AXA Assistance, AXA Liabilities Managers, AXA Global Re, AXA Life Europe, Architas, as well as AXA SA and other Central Holdings. The intersegment eliminations include only operations between entities from different countries and operating activities. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. In this document, “Insurance” covers the three insurance activities: Life & Savings, Property & Casualty and Health. Half Year 2021 Financial Report 83 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 3.1 Consolidated Statement of Income by segment June 30, 2021 (in Euro million) France Europe Asia AXA XL International Transversal & Central Holdings Intersegment Eliminations Total of which Insurance (a) Gross written premiums 14,274 18,770 5,561 10,502 3,036 721 (491) 52,373 52,373 Fees and charges relating to investment contracts with no participating features 0 67 19 8 95 95 Revenues from insurance activities 14,274 18,837 5,581 10,502 3,044 721 (491) 52,468 52,468 Net revenues from banking activities 105 177 (8) 274 Revenues from other activities 3 152 41 1 1,120 (194) 1,123 416 Revenues 14,382 18,989 5,581 10,544 3,222 1,841 (693) 53,865 52,884 Change in unearned premiums net of unearned revenues and fees (502) (2,608) 59 (1,588) (367) (53) 122 (4,937) (4,937) Net investment income (b) 2,113 2,354 1,060 462 231 (72) (43) 6,105 5,646 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 527 2,901 3,160 472 766 708 342 923 932 171 32 26 115 158 42 (173) 248 (5) (1) 1,579 4,559 5,205 1,526 4,578 5,205 Change in investments impairment (24) (66) (42) (4) (2) (4) (141) (136) Net investment result excluding financing expenses 5,517 3,526 2,283 662 369 (207) (48) 12,102 11,614 Technical charges relating to insurance activities (16,047) (14,282) (5,898) (5,722) (1,896) (219) 404 (43,660) (43,660) Net result from outward reinsurance 185 (155) (91) (657) (150) (76) (55) (999) (999) Bank operating expenses (9) (22) (32) Acquisition costs (1,156) (2,059) (742) (1,391) (489) (235) 52 (6,020) (6,020) Amortization of the value of purchased business in force (6) (15) (1) (21) (21) Administrative expenses (1,128) (1,314) (324) (837) (329) (1,434) 348 (5,017) (3,724) Change in goodwill impairment and other intangible assets impairment (20) (16) (22) (8) (1) (66) (66) Other income and expenses (d) (1) (6) (31) (3) (21) 400 (242) 96 (47) Other operating income and expenses (18,156) (17,842) (7,117) (8,630) (2,917) (1,564) 506 (55,719) (54,538) Income from operating activities before tax 1,240 2,065 806 987 307 17 (112) 5,310 5,024 Income (net of impairment) from investment accounted for using the equity method 3 (0) 61 (32) 11 44 32 Financing debt expenses (1) (7) (3) (77) (5) (264) 112 (244) (38) Net income from operating activities before tax 1,243 2,058 864 910 270 (235) (0) 5,110 5,018 Income tax (235) (419) (178) (138) (81) 59 (993) (719) Net consolidated income after tax 1,008 1,639 686 772 189 (176) 4,117 4,299 Split between: Net consolidated income - Group share 1,006 1,596 680 745 150 (182) (0) 3,996 4,184 Net consolidated income - Minority interests 2 42 6 27 39 6 0 121 115 (a) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (d) Includes losses related to the disposal processes of the Gulf Region and Malaysia operations (see Note 4). Half Year 2021 Financial Report 84 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 June 30, 2020 (in Euro million) Gross written premiums France 12,659 Europe (a) 18,749 Asia 5,518 AXA XL 10,525 International 3,340 Transversal & Central Holdings (a) 706 Intersegment Eliminations (490) Total 51,00 6 of which Insurance (b) 51,006 Fees and charges relating to investment contracts with no participating features 1 62 18 37 118 118 Revenues from insurance activities 12,659 18,811 5,53 5 10,525 3,378 706 (490) 51,12 4 51,124 Net revenues from banking activities 64 5 171 4 244 Revenues from other activities 3 133 37 31 1,016 (197) 1,023 414 Revenues 12,726 18,949 5,53 5 10,562 3,580 1,722 (683) 52,39 1 51,538 Change in unearned premiums net of unearned revenues and fees (333) (2,589) 78 (1,460) (243) (22) 130 (4,44 0) (4,440) Net investment income (c) 2,406 2,419 761 634 262 199 (29) 6,651 6,082 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (d) of which change in fair value of assets with financial risk borne by policyholders 348 (2,777) (2,057) 394 (1,011) (645) 243 (627) (432) 36 (142) 1 174 (75) 4 1,209 (265) 0 14 (2) 1,026 (3,159 ) (3,475 ) 1,021 (3,941) (3,475) Change in investments impairment (238) (269) (89) (65) (9) (62) (731) (670) Net investment result excluding financing expenses (260) 1,533 288 461 428 1,351 (15) 3,787 2,492 Technical charges relating to insurance activities Net result from outward reinsurance (8,974) 73 (13,035) 22 (3,89 4) (193) (7,969) (213) (2,216) (192) (390) (756) 100 239 (36,37 8) (1,020 ) (36,378) (1,020) Bank operating expenses (11) (0) (23) (35) Acquisition costs (1,300) (2,041) (814) (1,275) (607) (234) 32 (6,238 ) (6,238) Amortization of the value of purchased business in force (25) (13) (91) (1) (129) (129) Administrative expenses (1,101) (1,328) (353) (972) (409) (1,329) 218 (5,273 ) (4,064) Change in goodwill impairment and other intangible assets impairment (22) (9) (24) (22) (28) (104) (104) Other income and expenses (e) (57) (19) (32) 0 1 433 (124) 201 37 Other operating income and expenses (11,370 ) (16,445 ) (5,30 7) (10,542 ) (3,470) (2,303) 465 (48,9 72) (47,892) Income from operating activities before tax 763 1,448 594 (979) 294 747 (103) 2,764 1,697 Income (net of impairment) from investment accounted for using the equity method 2 (0) 92 85 9 189 180 Financing debt expenses (1) (7) (2) (66) (6) (655) 103 (634) (19) Net income from operating activities before tax 765 1,441 684 (1,045) 374 101 (0) 2,320 1,858 Income tax (266) (331) (80) (14) (67) (52) (810) (321) Net consolidated income after tax 499 1,110 604 (1,059) 306 49 0 1,510 1,538 Split between: Net consolidated income - Group share 498 1,074 602 (1,059) 268 47 0 1,429 1,460 Net consolidated income - Minority interests 1 36 2 0 39 2 0 80 78 (a) Reclassification of Architas activities (previously reported as part of Europe) to Transversal & Central Holdings. (b) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (c) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (d) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Includes the removal of the held for sale classification previously applied for AXA Life Europe. Half Year 2021 Financial Report 85 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 Greece operations disposal On May 31, 2021, AXA completed the sale of its Life & Savings and Property & Casualty businesses in Greece to Generali, for a total cash consideration of €167 million. The disposal resulted in a positive net income impact of €+21 million as detailed in the table below: (in Euro million) Net Proceeds Consolidated Book Value 167 146 NET GAIN UPON DISPOSAL 21 of which other comprehensive income recycling 14 4.2 AXA Bank Belgium disposal On October 25, 2019, AXA entered into an agreement to sell its Belgian banking operations, AXA Bank Belgium, to Crelan Bank (“Crelan”). Under the terms of the agreement, AXA will sell 100% of AXA Bank Belgium to Crelan for a total consideration of €590 million, comprised of (i) a total cash consideration of €510 million (1), and (ii) the transfer to AXA Belgium of 100% of Crelan Insurance (valued at €80 million), the insurance company of Crelan which provides protection insurance linked to the loans underwritten by Crelan. The completion of the transaction is expected to take place during the second half of 2021 and is subject to customary closing conditions, including the receipt of regulatory approvals. Given these circumstances, the held for sale classification was therefore extended beyond one year. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: ASSETS June 30, 2021 (in Euro million) Investments from banking and other activities 26,229 Other assets 174 Cash and cash equivalents 4,039 TOTAL ASSETS HELD FOR SALE 30,442 (1) Subject to price adjustment at closing. Half Year 2021 Financial Report 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 LIABILITIES June 30, 2021 (in Euro million) Financing debt 3 Liabilities arising from banking activities 29,364 Other liabilities 450 TOTAL LIABILITIES HELD FOR SALE 29,816 As of June 30, 2021, the other comprehensive income of invested assets in the scope of the transaction amounted to €+5 million. The transaction is expected to result in a loss of €-639 million already recognized as of December 31, 2020. The cumulated impairment was allocated to the goodwill for €-68 million, other intangible assets for €-18 million and investments for €-553 million. These impairments are included in the tables above. 4.3 Gulf region operations disposal On November 30, 2020, AXA entered into an agreement with Gulf Insurance Group to sell its insurance operations in the Gulf Region, which include its shareholding (1) in AXA Gulf, AXA Cooperative Insurance Company and AXA Green Crescent Insurance Company. As part of the transaction, Yusuf Bin Ahmed Kanoo (« YBA Kanoo »), one of the largest conglomerates in the Gulf Region, will also sell its shareholding (2) in AXA Gulf and in AXA Cooperative Insurance Company. Under the terms of the agreement, AXA will sell its ownership in its operations in the Gulf Region for a total cash consideration of €225 million. The completion of the transaction is expected to take place during the second half of 2021 and is subject to customary closing conditions, including the receipt of regulatory approvals. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: (1) AXA’s direct and indirect ownership of AXA Gulf is 50%, of AXA Cooperative Insurance Company is 34%, and of AXA Green Crescent Insurance Company is 28%. (2) YBA Kanoo’s direct and indirect ownership of AXA Gulf is 50%, and of AXA Cooperative Insurance Company is 16%. Half Year 2021 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 ASSETS June 30, 2021 (in Euro million) Goodwill 14 Other intangible assets 63 Investments from insurance activities 731 Reinsurers' share in insurance and investment contracts liabilities 157 Other assets 289 Cash and cash equivalents 373 TOTAL ASSETS HELD FOR SALE 1,627 LIABILITIES June 30, 2021 (in Euro million) Liabilities arising from insurance and investment contracts 952 Other liabilities 192 TOTAL LIABILITIES HELD FOR SALE 1,144 As of June 30, 2021, the other comprehensive income of invested assets in the scope of the transaction amounted to €+20 million (Group share €+8 million). The transaction is expected to result in a Group share loss of €-48 million before recycling of the other comprehensive income, of which €-24 million were already recognized in the consolidated statement of income as of December 31, 2020. An additional impairment of €-24 million was booked in 2021 in order to neutralize the impact of the net income of the year on the carrying value of the company. The cumulated impairment was fully allocated to the goodwill and is included in the tables above. 4.4 Malaysia operations disposal On June 22, 2021, AXA entered into an agreement with Generali to sell its insurance operations in Malaysia. Under the terms of the agreement, AXA will sell its Life & Savings and Property & Casualty businesses in Malaysia for a total net cash consideration of €140 million (1). The completion of the transaction is expected to take place during the first half of 2022 and is subject to customary closing conditions, including the receipt of regulatory approvals. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: ASSETS (1) Including the repayment of a €8 million subordinated debt issued by Malaysia P&C to AXA, prior to or at the closing of the transaction. Half Year 2021 Financial Report 88 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 June 30, 2021 (in Euro million) Goodwill 12 Other intangible assets 18 Investments from insurance activities 467 Reinsurers' share in insurance and investment contracts liabilities 61 Other assets 55 Cash and cash equivalents 164 TOTAL ASSETS HELD FOR SALE 777 LIABILITIES June 30, 2021 (in Euro million) Financing debt 6 Liabilities arising from insurance and investment contracts 426 Other liabilities 85 TOTAL LIABILITIES HELD FOR SALE 517 As of June 30, 2021, the other comprehensive income of invested assets in the scope of the transaction amounted to €+5 million (Group share €+3 million). The transaction is expected to result in a loss of €-35 million before recycling of the other comprehensive income, leading to an impairment of financial investments for €-28 million and goodwill for €-8 million. These impairments are included in the tables above. Half Year 2021 Financial Report 89 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 4.5 India P&C operations disposal On August 21, 2020, AXA and Bharti entered into an agreement to combine their non-life insurance operations in India, Bharti AXA General Insurance Company Limited (“Bharti AXA P&C”), into ICICI Lombard General Insurance Company Limited (“ICICI Lombard”). Under the terms of the agreement, AXA and Bharti P&C will receive a total of 35.8 million shares of ICICI Lombard on closing, which based on available market price as of June 30, 2021, indicatively amounts to €636 million (1)(2). The completion of the transaction is expected to take place during the second half of 2021 and is subject to customary closing conditions, including the receipt of regulatory approvals. Bharti AXA P&C, which is consolidated using the equity method, was classified as held for sale. As of June 30, 2021, this expected transaction did not lead to the recognition of any impact in the consolidated statement of income. (1) Based on ICICI-Lombard closing shares price in the National Stock Exchange (NSE) as at June 30, 2021. (2)AXA’s direct and indirect ownership of Bharti AXA P&C is 49%. Half Year 2021 Financial Report 90 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 5 INVESTMENTS 5.1 Breakdown of investments Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately. Insurance June 30, 2021 Investments as per Consolidated Statement of Financial Position Other activities Total (in Euro million) Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives Fair value 34,249 1,792 Carrying value 24,784 1,792 % (value balance sheet) 4.15% 0.30% Fair value 1,982 Carrying value 1,957 % (value balance sheet) 10.34% Fair value 36,231 1,792 Carrying value 26,741 1,792 % (value balance sheet) 4.34% 0.29% Investment in real estate properties 36,040 26,575 4.45% 1,982 1,957 10.34% 38,023 28,532 4.63% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 372,198 16,472 5 13,631 372,198 16,472 5 13,187 62.35% 2.76% 0.00% 2.21% 2,694 54 22 2,694 54 22 14.23% 0.29% 0.12% 374,892 16,526 5 13,654 374,892 16,526 5 13,209 60.87% 2.68% 0.00% 2.14% Debt instruments 402,307 401,862 67.32% 2,770 2,770 14.64% 405,077 404,632 65.70% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 20,306 11,091 20,306 11,091 3.40% 1.86% 891 505 891 505 4.71% 2.67% 21,198 11,596 21,198 11,596 3.44% 1.88% Equity instruments 31,397 31,397 5.26% 1,397 1,397 7.38% 32,794 32,794 5.33% Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 8,708 7,564 0 8,708 7,564 0 1.46% 1.27% 0.00% 78 73 78 73 0.41% 0.39% 8,786 7,637 0 8,786 7,637 0 1.43% 1.24% 0.00% Non consolidated investment funds 16,272 16,272 2.73% 151 151 0.80% 16,423 16,423 2.67% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 16,357 16,357 2.74% 127 127 0.67% 16,484 16,484 2.68% Macro-hedge and other derivatives 522 522 0.09% (27) (27) 0.14% 495 495 0.08% Sub total Financial instruments (excluding Loans) 466,855 466,410 78.14% 4,418 4,417 23.34% 471,272 470,828 76.45% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) Macro-hedge and other derivatives (0) - - 20,340 - (0) - - 19,521 - 0.00% - - 3.27% - - - - 12,549 - - - - 12,550 - - - - 66.32% - (0) - - 32,890 - (0) - - 32,071 - 0.00% - - 5.21% - Loans 20,340 19,521 3.27% 12,549 12,550 66.32% 32,890 32,071 5.21% Total Financial instruments 487,195 485,931 81.41% 16,967 16,967 89.66% 504,162 502,898 81.66% Assets backing contracts where the financial risk is borne by policyholders 84,410 84,410 14.14% 84,410 84,410 13.71% INVESTMENTS 607,645 596,916 100.00% 18,949 18,924 100.00% 626,595 615,840 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 523,235 512,506 85.86% (a) Includes infrastructure and forests investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. Half Year 2021 Financial Report 91 II (in Euro million) Fair value Investment in real estate properties at amortized cost (a) 33,392 Investment in real estate properties designated as at fair value through profit or loss (b) 1,832 Macro-hedge and other derivatives Investment in real estate properties 35,224 Debt instruments held to maturity Debt instruments available for sale 396,021 Debt instruments designated as at fair value through profit or loss (c) 18,823 Debt instruments held for trading 37 Debt instruments (at cost) that are not quoted in an active market (d) 12,058 Debt instruments 426,939 Equity instruments available for sale 18,347 Equity instruments designated as at fair value through profit or loss (b) 10,043 Equity instruments held for trading (0) Equity instruments 28,390 Non consolidated investment funds available for sale 8,114 Non consolidated investment funds designated as at fair value through profit or loss (b) 7,671 Non consolidated investment funds held for trading 282 Non consolidated investment funds 16,067 Other assets designated as at fair value through profit or loss, held by consolidated investment funds 14,848 Macro-hedge and other derivatives 879 Sub total Financial instruments (excluding Loans) 487,124 Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) 21,559 Macro-hedge and other derivatives Loans 21,559 Total Financial instruments 508,683 Assets backing contracts where the financial risk is borne by policyholders 77,802 INVESTMENTS 621,709 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 543,907 (a) Includes infrastructure and forests investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 Insurance December 31, 2020 Investments as per Consolidated Statement of Financial Position Other activities Total Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) 24,044 3.94% 4,497 4,410 19.55% 37,890 28,454 4.49% 1,832 0.30% 1,832 1,832 0.29% 25,876 4.24% 4,497 4,410 19.55% 39,721 30,286 4.78% 396,021 64.85% 2,673 2,673 11.85% 398,695 398,695 62.97% 18,823 3.08% 69 69 0.30% 18,892 18,892 2.98% 37 0.01% 37 37 0.01% 11,496 1.88% 29 29 0.13% 12,087 11,525 1.82% 426,377 69.82% 2,771 2,771 12.28% 429,711 429,148 67.77% 18,347 3.00% 1,897 1,897 8.41% 20,245 20,245 3.20% 10,043 1.64% 579 579 2.57% 10,622 10,622 1.68% (0) 0.00% (0) (0) 0.00% 28,390 4.65% 2,477 2,477 10.98% 30,866 30,866 4.87% 8,114 1.33% 48 48 0.21% 8,162 8,162 1.29% 7,671 1.26% 41 41 0.18% 7,712 7,712 1.22% 282 0.05% 282 282 0.04% 16,067 2.63% 88 88 0.39% 16,155 16,155 2.55% 14,848 2.43% 483 483 2.14% 15,332 15,332 2.42% 879 0.14% 19 19 0.08% 898 898 0.14% 486,562 79.68% 5,838 5,838 25.88% 492,962 492,400 77.76% 0 0 0.00% 0 0 0.00% 20,397 3.34% 12,314 12,314 54.58% 33,873 32,711 5.17% 20,397 3.34% 12,314 12,314 54.58% 33,873 32,711 5.17% 506,959 83.02% 18,152 18,152 80.45% 526,835 525,110 82.93% 77,802 12.74% 77,802 77,802 12.29% 610,637 100.00% 22,649 22,562 100.00% 644,358 633,198 100.00% 532,835 87.26% Half Year 2021 Financial Report 92 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 5.2 Investment in real estate properties Investment in real estate properties includes buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, including the impact of all derivatives: June 30, 2021 December 31, 2020 Gross value Amortization Impairment Carrying value Fair value Gross value Amortization Impairment Carrying value Fair value (in Euro million) Investment in real estate properties at amortized cost Insurance (a) 27,524 (1,553) (1,131) 24,839 34,304 26,680 (1,581) (1,158) 23,942 33,290 Other activities 1,957 (0) 1,957 1,982 4,410 (0) 4,410 4,497 All activities excluding derivatives 29,481 (1,553) (1,131) 26,796 36,287 31,090 (1,581) (1,158) 28,352 37,787 Impact of derivatives (56) (56) 103 103 TOTAL 26,741 36,231 28,454 37,890 (a) Includes infrastructure and forests investments. Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 Opening value 1,158 981 1,581 1,536 Increase for the period 65 311 61 142 Write back following sale or repayment (26) (93) (33) (55) Write back following recovery in value (29) (25) Others (a) (36) (15) (55) (43) Closing value 1,131 1,158 1,553 1,581 (a) Includes changes in the scope of consolidation and the impact of changes in exchange rates. Half Year 2021 Financial Report 93 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 5.3 Unrealized gains and losses on financial investments Including the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: INSURANCE June 30, 2021 December 31, 2020 Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non-consolidated investment funds available for sale 325,125 13,222 14,177 7,414 372,198 13,631 20,306 8,708 372,198 13,187 20,306 8,708 52,356 496 6,300 1,345 5,283 86 171 51 330,875 11,518 13,023 7,035 396,021 12,058 18,347 8,114 396,021 11,496 18,347 8,114 68,796 596 5,503 1,119 3,650 56 179 40 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. OTHER ACTIVITIES June 30, 2021 December 31, 2020 Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non-consolidated investment funds available for sale 2,659 22 648 74 2,694 22 891 78 2,694 22 891 78 77 0 292 4 43 0 49 0 2,555 29 1,608 46 2,673 29 1,897 48 2,673 29 1,897 48 121 0 826 2 2 0 537 0 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. TOTAL June 30, 2021 December 31, 2020 Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 327,785 13,244 14,825 7,487 374,892 13,654 21,198 8,786 374,892 13,209 21,198 8,786 52,433 496 6,592 1,349 5,326 86 219 51 333,431 11,547 14,630 7,080 398,695 12,087 20,245 8,162 398,695 11,525 20,245 8,162 68,916 596 6,330 1,122 3,652 56 716 40 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. Half Year 2021 Financial Report 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 5.4 Financial investments subject to impairment 5.4.1 BREAKDOWN OF FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). June 30, 2021 December 31, 2020 Cost before impairment and revaluation to fair value (a) Impairment Cost after impairment but before revaluation to fair value (b) Revaluation to fair value (c) Carrying value Cost before impairment and revaluation to fair value (a) Impairment Cost after impairment but before revaluation to fair value (b) Revaluation to fair value (c) (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market (c) 327,808 13,248 (23) (4) 327,785 13,244 47,108 (35) 374,892 13,209 333,453 11,551 (23) (4) 333,431 11,547 65,264 (22) Debt instruments 341,055 (27) 341,029 47,073 388,101 345,004 (27) 344,978 65,242 Equity instruments available for sale 16,978 (2,153) 14,825 6,373 21,198 17,200 (2,570) 14,630 5,614 Non-consolidated investment funds available for sale 8,377 (890) 7,487 1,298 8,786 7,964 (884) 7,080 1,082 Loans held to maturity Loans available for sale (0) (0) (0) (0) (0) 0 Loans at cost (d) 32,450 (172) 32,278 (208) 32,071 33,255 (151) 33,104 (394) Loans 32,450 (172) 32,278 (208) 32,071 33,255 (151) 33,104 (394) TOTAL 398,860 (3,241) 395,619 54,536 450,155 403,424 (3,631) 399,793 71,544 (a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans. Half Year 2021 Financial Report 95 II Carrying value 398,695 11,525 410,219 20,245 8,162 0 32,711 32,711 471,337 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 5.4.2 CHANGE IN IMPAIRMENT ON FINANCIAL INVESTMENTS (in Euro million) January 1, 2021 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) June 30, 2021 Impairment - Debt instruments 27 0 (0) 0 27 Impairment - Equity instruments 2,570 57 (502) 28 2,153 Impairment - Non-consolidated investment funds 884 33 (25) (3) 890 Impairment - Loans 151 41 (1) (27) 8 172 TOTAL 3,631 132 (528) (27) 33 3,241 (a) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. (in Euro million) January 1, 2020 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) December 31, 2020 Impairment - Debt instruments 21 8 (1) (1) 27 Impairment - Equity instruments 2,566 512 (364) (145) 2,570 Impairment - Non-consolidated investment funds 739 157 (67) 56 884 Impairment - Loans 118 81 (10) (31) (5) 151 TOTAL 3,444 757 (442) (31) (95) 3,631 (a) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. 5.5 Investments/Fair value Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on a mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an Half Year 2021 Financial Report 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or used by the Group in the limited cases of application of mark to model valuations. 5.5.1 INVESTMENTS RECOGNIZED AT FAIR VALUE The breakdown by valuation method of investments recognized at fair value including derivatives but excluding assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2021 December 31, 2020 Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives (in Euro million) Debt instruments 281,002 95,292 605 376,899 374,892 284,634 113,158 550 398,342 398,695 Equity instruments Non-consolidated investment funds Loans 17,275 830 1,717 5,258 (0) 2,231 2,713 21,223 8,801 (0) 21,198 8,786 (0) 16,414 1,205 1,731 4,883 0 1,963 2,062 (0) 20,108 8,150 0 20,245 8,162 0 Financial investments and loans available for sale Investment in real estate properties Debt instruments 299,108 9,218 102,267 1,792 6,517 5,548 674 406,923 1,792 16,408 404,876 1,792 16,526 302,253 9,602 119,772 1,832 8,413 4,574 727 426,599 1,832 18,742 427,101 1,832 18,892 Equity instruments Non-consolidated investment funds Other assets held by consolidated investment funds designated as at fair value through profit or loss Loans 3,717 289 2,002 992 4,202 8,220 6,888 3,207 6,242 11,596 7,697 16,465 11,596 7,637 16,484 3,702 352 1,694 914 4,811 8,367 6,006 2,519 5,233 10,622 7,681 15,293 10,622 7,712 15,332 (0) Financial investments and loans designated as at fair value through profit or loss 15,225 21,722 17,010 53,958 54,035 15,350 24,336 14,484 54,170 54,389 Debt instruments Equity instruments Non-consolidated investment funds Loans 7 - - 0 - 7 - 0 5 - 0 3 - 4 - 282 - 7 - 282 37 (0) 282 Financial investments and loans held for trading TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE 7 314,340 0 123,990 22,559 7 460,888 5 458,915 3 317,606 285 144,393 19,058 288 481,057 319 481,808 In 2020, the COVID-19 crisis affected the corporate bonds market which prices experienced an important bid-ask spread widening in first half and progressively tightened on the second half of 2020 without coming back to its pre-crisis level. Spreads have continued to tighten in 2021, leading to transfers of assets from level 2 to level 1. Half Year 2021 Financial Report 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 During the period ended on June 30, 2021, the net transfer between Level 1 and Level 2 was €-13,868 million. This amount comprised €17,015 million transferred from Level 2 to Level 1, of which €14,413 million for Corporate bonds and €1,526 million for Government bonds, and €3,147 million from Level 1 to Level 2. These reclassifications were mainly due to the tightening of the bid ask spreads on corporates bonds in the context of the Covid-19 crisis progressively normalizing to pre-covid levels. TRANSFER IN AND OUT OF THE LEVEL 3 CATEGORY AND OTHER MOVEMENTS From January 1, 2021 to June 30, 2021, the amount of level 3 assets increased by €3.5 billion to €22.6 billion, representing 4.9% of the total assets at fair value (4.0% as of December 31, 2020 or €19.1 billion). Main movements relating to level 3 assets to be noted were the following: €+2.4 billion of new investments; €+1.5 billion of change in unrealized gains and losses; €+0.4 billion of net asset transfers in and out of level 3 and foreign exchange fluctuation impact; €-0.8 billion of asset sales, redemptions and settlements mainly debt instruments, equity securities and non-consolidated investment funds accounted as available for sale and equity securities, non- consolidated investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through profit and loss. A majority of assets classified in level 3 corresponds to private investments, in particular private equity assets. 5.5.2 INVESTMENTS RECOGNIZED AT AMORTIZED COST June 30, 2021 December 31, 2020 (in Euro million) Debt instruments held to maturity Loans held to maturity Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Financial investments and loans held to maturity Investment in real estate properties at amortized cost Debt instruments at cost (loans & receivables) Loans at amortized cost 0 259 25 35,616 8,263 18,819 671 5,166 14,254 36,287 13,689 33,098 36,231 13,654 32,890 283 25 37,533 6,480 20,595 254 5,347 13,642 37,787 12,110 34,263 37,890 12,087 33,873 Financial investments and loans at amortized cost TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 284 284 62,698 62,698 20,092 20,092 83,074 83,074 82,774 82,774 308 308 64,608 64,608 19,243 19,243 84,159 84,159 83,850 83,850 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. Half Year 2021 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The consolidated statement of changes in equity is presented as a primary Financial Statement. 6.1 Impact of transactions with shareholders 6.1.1 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2021 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2021, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital increase of €13 million due to the exercise of stock options for 0.8 million shares; capital decrease of €2 million corresponding to 0.1 million shares in order to eliminate the dilutive effect of share-based compensation schemes; shared based payments for €23 million. TREASURY SHARES As of June 30, 2021, the Company and its subsidiaries owned 31.7 million AXA shares, representing 1.3% of the share capital, a decrease of 0.9 million shares compared to December 31, 2020. The 1.2 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €7 million and their market value was €25 million at the end of June 2021. The carrying value of treasury shares and related derivatives was €841 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2021, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €+101 million from foreign exchange rate fluctuations; €-96 million from interest expenses related to the undated subordinated debt (net of tax). Half Year 2021 Financial Report 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 As of June 30, 2021 and December 31, 2020, undated subordinated debts recognized in shareholders’ equity were as follows: June 30, 2021 December 31, 2020 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in million) October 29, 2004 - 375 M€ 6.0% December 22, 2004 - 250 M€ 6.0% January 25, 2005 - 250 M€ 6.0% July 6, 2006 - 350 M£ 6.7% December 14, 2006 - 750 MUS$ 6.4% November 7, 2014 - 984 M€ 3.941% November 7, 2014 - 724 M£ 5.453% May 20, 2014 - 1,000 M€ - 3.9% January 22, 2013 - 850 MUS$, 5.5% Undated notes - 625 M€, variables rates Undated notes - 27,000 MJPY, 3.3% Undated notes - 375 MUS$, variables rates 375 250 250 350 750 984 724 1,000 850 625 27,000 375 375 250 250 408 628 981 841 997 710 625 205 316 375 250 250 350 750 984 724 1,000 850 625 27,000 375 375 250 250 389 608 981 802 997 687 625 213 306 TOTAL 6,586 6,484 Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step-up clauses with effect from a given date. DIVIDENDS PAID At the Shareholders’ meeting held on April 29, 2021, shareholders approved a dividend distribution of €1.43 per share corresponding to €3,403 million with respect to the 2020 financial year. 6.1.2 CHANGE IN SHAREHOLDERS’ EQUITY GROUP SHARE FOR THE FIRST HALF OF 2020 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2020, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €10 million corresponding to 0.4 million shares in order to eliminate the dilutive effect of share-based compensation schemes; capital increase of €6 million due to the exercise of stock options for 0.4 million shares; shared based payments for €23 million. TREASURY SHARES As of June 30, 2020, the Company and its subsidiaries owned 34.2 million AXA shares, representing 1.4% of the share capital, an increase of 2.9 million shares compared to December 31, 2019. The 0.9 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €6 million and their market value was €17 million at the end of June 2020. Half Year 2021 Financial Report 100 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 The carrying value of treasury shares and related derivatives was €862 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES During the first half of 2020, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €-77 million from foreign exchange rate fluctuations; €-90 million from interest expenses related to the undated subordinated debt (net of tax). DIVIDENDS PAID At the Shareholders’ meeting held on June 30, 2020, shareholders approved a dividend distribution of €0.73 per share corresponding to €1,740 million with respect to the 2019 financial year. 6.2 Comprehensive income for the period The Statement of Comprehensive Income, presented as a primary financial statement, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2021 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled €-14,513 million, of which a €-15,665 million decrease in unrealized capital gains on debt securities driven by the increase on interest rates mainly in the United States and the Eurozone, partly offset by €+907 million on equities. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: Half Year 2021 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 (in Euro million) June 30, 2021 December 31, 2020 Gross unrealized gains and losses (a) 56,085 70,598 Less unrealized gains and losses attributable to: Shadow accounting on policyholder participation and other obligations (31,188) (40,053) Shadow accounting on Deferred Acquisition Costs (b) (633) (974) Shadow accounting on Value of purchased Business In force (142) (154) Unallocated unrealized gains and losses before tax 24,122 29,417 Deferred tax (5,494) (6,699) Unrealized gains and losses net of tax - assets available for sale 18,628 22,717 Unrealized gains and losses net of tax (100%) - equity accounted companies 151 125 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL 18,779 22,842 Minority interests' share in unrealized gains and losses (c) (234) (360) Translation reserves (d) 93 92 UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 18,638 22,575 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. As of June 30, 2021, most of the unrealized gains on assets available for sale related to Life & Savings entities. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2021: June 30, 2021 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Belgium Life & Savings Gross unrealized gains and losses (a) 19,606 10,032 3,206 5,800 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (14,244) (8,605) (1,430) (2,517) Shadow accounting on Deferred Acquisition Costs (b) (195) (143) (66) Shadow accounting on Value of purchased Business In force (80) Unallocated unrealized gains and losses before tax 5,168 1,427 1,553 3,217 Deferred tax (1,305) (457) (280) (714) Unrealized gains and losses (net of tax) - assets available for sale 3,863 971 1,274 2,502 Unrealized gains and losses net of tax - equity accounted companies 17 UNREALIZED GAINS AND LOSSES (NET OF TAX) - 100% - TOTAL 3,880 971 1,274 2,502 Minority interests' share in unrealized gains and losses (c) (10) 0 (1) Translation reserves (d) 0 (188) (0) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 3,871 971 1,086 2,502 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. Half Year 2021 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2021 and December 31, 2020, broke down as follows: (in Euro million) June 30, 2021 December 31, 2020 Unrealized gains and losses (net of tax) 100% - opening 22,842 19,887 Transfer in the income statement on the period (a) Investments bought in the current accounting period and changes in fair value Foreign exchange impact Change in scope and other changes (791) (3,213) (41) (18) (934) 4,591 (457) (245) Unrealized gains and losses (net of tax) 100% - closing 18,779 22,842 Minority interests' share in unrealized gains and losses (b) Translation reserves (c) (234) 93 (360) 92 UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (d) 18,638 22,575 (a) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period. (b) Including foreign exchange impact attributable to minority interests. (c) Group share. (d) Including unrealized gains and losses on assets held for sale operations. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2021 amounted to €+516 million. This was mainly driven by AXA XL (€+493 million), United Kingdom (€+178 million), Hong Kong (€+153 million) and China (€+97 million) partly offset by Japan (€-291 million) and Switzerland (€-146 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains amounted to €+510 million for the first half year of 2021. This was mainly driven by the overall increase in discount rate assumptions used, reflecting the economic and financial conditions as at the end of June, 2021. 6.2.2 COMPREHENSIVE INCOME FOR THE FIRST HALF OF 2020 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The increase in gross unrealized gains and losses on assets available for sale totaled €+2,999 million, of which a €+4,953 million increase in unrealized capital gains on debt securities driven by the decrease on interest rates mainly in the United States (-126 bps), partly offset by €-1,649 million on equity due to the stock markets turmoil as a consequence of the Covid-19 crisis. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2020 amounted to €-758 million. This was mainly driven by International (€-443 million), United Kingdom (€-299 million), China (€-55 million), AXA XL (€-55 million) and partly offset by Switzerland (€+235 million) and Japan (€+41 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year of 2020 amounted to €+417 million shareholders’ equity Group share. This was mainly driven by the gains on plan assets registered in the United Kingdom & Ireland (€+238 million) and the gains on liabilities in Switzerland (€+185 million). A low level of discount rates in the Eurozone and the drop of discount rates and inflation rates in the United States have entailed limited actuarial losses at half year. Half Year 2021 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 6.3 Change in minority interests Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than a shareholders’ equity item. 6.3.1 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2021 The €-144 million decrease in minority interests to €+4,421 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+121 million; o Reserves relating to changes in fair value through shareholders’ equity for €-125 million; o Foreign exchange movements for €-2 million; o Employee benefits actuarial gains and losses for €+3 million. Transactions with minority interests’ holders, mainly included: o Minority interests in consolidated investments funds qualified as equity resulting from the decrease in the value of minority interests holdings due to a capital decrease for €-38 million; o Dividend payout to minority interests’ holders for €-82 million. 6.3.2 CHANGE IN MINORITY INTERESTS FOR THE FIRST HALF OF 2020 The €-161 million decrease in minority interests to €+4,569 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+80 million; o Reserves relating to changes in fair value through shareholders’ equity for €-35 million; o Foreign exchange movements for €-23 million; o Employee benefits actuarial gains and losses for €+2 million. Transactions with minority interests’ holders, mainly included: o Minority interests in consolidated investments funds qualified as equity resulting from the decrease in the value of minority interests holdings due to a capital decrease for €-155 million; o Dividend payout to minority interests’ holders for €-34 million. Half Year 2021 Financial Report 104 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 7 FINANCING DEBT June 30, 2021 December 31, 2020 Carrying value Carrying value (in Euro million) AXA Subordinated green notes, 1.375%, due 2041 (in €) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) Subordinated debt, 5.625% due 2054 (£) Subordinated debt, 3.375% due 2047 (€) 8,895 1,000 1,000 1,242 874 1,500 7,854 - 1,000 1,219 834 1,500 Undated Subordinated notes, US$ 850M, 4.5% 715 693 Subordinated notes, 5.125% due 2047 (US$) 841 815 Subordinated notes, 3.25% due 2049 (€) 2,000 2,000 Derivatives relating to subordinated debts (a) AXA XL (278) 1,353 (207) 1,327 Subordinated Notes, 4.45% due March 2025 (US$) 421 408 Subordinated Notes, 5.5% due March 2045 (US$) 429 417 Subordinated Notes, 3.25% due June 2047 (€) AXA Italy Subordinated notes, EURIBOR 6 months + 81bps Other subordinated debt (under €100 million) 502 67 67 15 502 67 67 31 Subordinated debt 10,330 9,279 AXA Bonds mandatorily exchangeable into shares of Equitable Holdings, Inc. Euro Medium Term Note, due 2028 500 - 500 1,203 703 500 AXA XL 272 264 Senior Notes, 5.25% due December 2043 (US$) Other financing debt instruments issued (under €100 million) 272 20 264 102 Financing debt instruments issued 793 1,569 TOTAL FINANCING DEBT (b) 11,122 10,848 (a) Hedging instruments in accordance with IAS 39 and economic hedge derivatives not eligible for hedge accounting. (b) Excluding accrued interest on derivatives. Half Year 2021 Financial Report 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 8 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: the calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period; the calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2021 June 30, 2020 NET INCOME GROUP SHARE 3,996 1,429 Undated subordinated debt financial charge (96) (90) Net income including impact of undated subordinated debt A 3,900 1,339 Weighted average number of ordinary shares (net of treasury shares) - opening Stock options exercised (b) 2,386 0 2,386 0 Treasury shares (b) (2) (5) Share purchase program (b) (0) (0) Weighted average number of ordinary shares B 2,384 2,381 BASIC NET INCOME PER ORDINARY SHARE C = A / B 1.64 0.56 Potentially dilutive instruments : Stock options 1 1 Other 5 4 Fully diluted - weighted average number of shares (c) D 2,390 2,385 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 3,900 1,339 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 1.63 0.56 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. As of June 30, 2021, net income per ordinary share stood at €1.64 on a basic calculation and at €1.63 on a fully diluted basis. As of June 30, 2020, net income per ordinary share stood at €0.56 on a basic calculation and on a fully diluted basis. Half Year 2021 Financial Report 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2021 NOTE 9 SUBSEQUENT EVENTS HONG KONG REINSURANCE TRANSACTION On July 12, 2021, AXA China Region Insurance Company (Bermuda) Limited, AXA China Region Insurance Company Limited (collectively, “AXA Hong Kong”) and Global Atlantic Assurance Limited have entered into a reinsurance transaction to reinsure a closed book of whole-life insurance policies. This reinsurance transaction covers technical and financial risks (€3.7 billion IFRS reserves ceded). AXA Hong Kong will continue to service and administer the policies as insurer of the reinsured block of business. The Group IFRS P&L impact of this transaction to be booked in the second half of 2021 is expected to be ca. €-0.1 billion. Furthermore, the corresponding reduction of risk is expected to result in a ca. 2 points increase of the Group Solvency II ratio from 3Q21 on. Half Year 2021 Financial Report 107 II III. Statutory auditors’ review report / on the 2021 Half Year Financial Information AXA SA Statutory Auditors' Review Report on the half-yearly Financial Information (For the period from January 1st to June 30th 2021) STATUTORY AUDITORS’ REVIEW REPORT ON THE 2021 HALF YEAR FINANCIAL INFORMATION PricewaterhouseCoopers AuditMazars 63, rue de Villiers 61, rue Henri Regnault 92208 Neuilly-sur-Seine Cedex 92075 Courbevoie Cedex Statutory Auditors’ Review Report on the half-yearly Financial Information Period from January 1st to June 30th, 2021 To the Shareholders, AXA SA 25, avenue Matignon 75008 Paris In compliance with the assignment entrusted to us by your Shareholders’ Meeting and in accordance with the requirements of article L. 451-1-2-III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: ▪ the review of the accompanying condensed half-yearly consolidated financial statements of AXA SA, for the period from January 1 to June 30th, 2021, ▪ the verification of the information presented in the half-yearly management report. Due to the global crisis related to the Covid-19 pandemic, the condensed half-yearly consolidated financial statements of this period have been prepared and reviewed under specific conditions. Indeed, this crisis and the exceptional measures taken in the context of the state of sanitary emergency have had numerous consequences for companies, particularly on their operations and their financing, and have led to greater uncertainties on their future prospects. Those measures, such as travel restrictions and remote working, have also had an impact on the companies' internal organization and the performance of our procedures. These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34, standard of the IFRSs as adopted by the European Union applicable to interim financial information. Half Year 2021 Financial Report 110 III STATUTORY AUDITORS’ REVIEW REPORT ON THE 2021 HALF YEAR FINANCIAL INFORMATION 2. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half- yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. It is not our responsibility to conclude on the fair presentation and consistency with the half-year financial statements of the solvency related information. Neuilly-sur-Seine and Courbevoie, August 2nd, 2021 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit Mazars Bénédicte Vignon Grégory Saugner Gilles Magnan Maxime Simoen This is a free translation into English of the statutory auditors’ review report on the half-year financial information issued in French and is provided solely for the convenience of English-speaking users. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Half Year 2021 Financial Report 111 III IV. Statement of the person responsible / for the Half Year Financial Report STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and describes the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 2, 2021. Thomas Buberl Chief Executive Officer Half Year 2021 Financial Report 113 IV

Semestriel, 2021, Insurance, AXA

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Semestriel

Insurance

AXA

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Half Year Financial Report / June 30, 2022 GIE_AXA_Internal TABLE OF CONTENTS I. Activity Report………………………………………...3 II. Consolidated financial statements ………………..65 III. Statutory auditors’ review report on the 2022 Half Year Financial Information ……110 IV. Statement of the person responsible for the Half Year Financial Report …………….………………..114 GIE_AXA_Internal I. Activity Report / June 30, 2022 GIE_AXA_Internal ACTIVITY REPORT – HALF YEAR 2022 IMPORTANT LEGAL INFORMATION AND CAUTIONARY STATEMENT REGARDING FORWARD- LOOKING STATEMENTS AND THE USE OF NON-GAAP AND ALTERNATIVE PERFORMANCE MEASURES Certain statements contained herein may be forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans, expectations or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause AXA’s actual results to differ materially from those expressed or implied in such forward looking statements. Please refer to Part 5 - “Risk Factors and Risk Management” of AXA’s Universal Registration Document for the year ended December 31, 2021 (the “2021 Universal Registration Document”) for a description of certain important factors, risks and uncertainties that may affect AXA’s business and/or results of operations. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events or circumstances or otherwise, except as required by applicable laws and regulations. In addition, this report refers to certain non-GAAP financial measures, or alternative performance measures (“APMs”), used by Management in analyzing AXA’s operating trends, financial performance and financial position and providing investors with additional information that Management believes to be useful and relevant regarding AXA’s results. These non-GAAP financial measures generally have no standardized meaning and therefore may not be comparable to similarly labelled measures used by other companies. As a result, none of these non-GAAP financial measures should be considered in isolation from, or as a substitute for, the Group’s Consolidated Financial Statements and related notes prepared in accordance with IFRS. Underlying earnings, Underlying Return on Equity, Underlying earnings per share, Combined Ratio and Debt Gearing are APMs as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from APMs Underlying earnings and Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided on pages 16 and 17 of this report. APMs Underlying Return on Equity and Underlying earnings per share are reconciled to the financial statements in the tables set forth on page 23 of this report. The calculation methodology of the Debt Gearing is set out on page 19 of this report. For further information on the above-mentioned and other non-GAAP financial measures used in this report, see the Glossary set forth on pages 57 to 64 of this report. Half Year 2022 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2022 Operating Highlights GOVERNANCE Antoine Gosset-Grainville was appointed Chairman of AXA and Thomas Buberl was renewed as CEO On April 28, 2022, at the Annual Shareholders’ Meeting, AXA’s shareholders approved all of the resolutions submitted to them by the Board of Directors. Thomas Buberl was reappointed by the shareholders as a member of the Board of Directors for a four-year term. The Board of Directors, which met after the Annual Shareholders’ Meeting, confirmed the renewal of Thomas Buberl as Chief Executive Officer and the appointment of Antoine Gosset-Grainville as Chairman of the Board of Directors, replacing Denis Duverne, for the duration of their term of office as directors. Alexander Vollert was appointed member of AXA’s Management Committee On July 19, 2022, AXA announced the appointment of Alexander Vollert, AXA’s Chief Operating Officer and CEO of AXA Group Operations (AXA GO), as member of the Group’s Management Committee, effective September 1. SIGNIFICANT TRANSACTIONS AXA Germany to sell a closed life and pensions portfolio On July 14, 2022, AXA announced that AXA Germany entered into an agreement with Athora Deutschland GmbH (“Athora Germany”), a licensed insurer in Germany, to sell a portfolio of €16 billion of life and pensions insurance reserves(1) in Germany. The portfolio has been closed to new business since 2013 and is mainly composed of traditional Savings policies, with an average guaranteed rate(2) of 3.2%. The reduction of guarantees on AXA’s balance sheet resulting from the sale will further diminish the Group’s exposure to financial market risk. Under the terms of the agreement, AXA Germany will sell the portfolio to Athora Germany for a consideration of €660 million( 3 ), representing an implied multiple of 18x 2022E earnings( 4 ). The sale is expected to result in estimated net cash proceeds of €0.4 billion to AXA SA. AXA intends to offset the earnings dilution from the disposal with a share buy-back to be launched following the closing of the transaction. As part of the transaction, AXA IM will enter into an agreement to provide asset management services to Athora until 2028. AXA and Athora are committed to ensuring a smooth transfer of the portfolio and, as such, AXA Germany will provide administrative services to support Athora Germany until 2028. Thereafter, Athora Germany will take over the management of the contracts with all guarantees, terms and conditions remaining unchanged. (1) General account reserves, under IFRS, estimated as of half-year 2022 (2) Weighted-average guaranteed interest rate as of full-year 2021, based on local statutory reserves. (3) Consideration subject to potential contractual adjustments. (4) 2022 estimated underlying earnings of the portfolio under IFRS standards. Half Year 2022 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2022 The transaction is subject to customary closing conditions, including the receipt of regulatory approvals, and is currently expected to close in the fourth quarter of 2023. PARTNERSHIPS AND INNOVATION AXA announced the launch of a strategic program to develop a Digital Commercial Platform On June 15, 2022, AXA announced the launch of a strategic program to build a Digital Commercial Platform. This platform will aggregate different services to transform AXA’s value proposition to better serve its commercial customers, in line with AXA’s “Driving Progress 2023” strategic plan. The ambition of the Digital Commercial Platform is to fully leverage the combination of real time data and analytics collected through satellites, drones and sensors, with AXA’s expertise in risk prevention services and the Group’s underwriting and claims capabilities. With this platform, AXA aims to build an ecosystem of new services to tackle the evolving protection needs of corporate clients. CAPITAL / DEBT OPERATIONS AXA announced the successful placement of €1.25 billion dated subordinated notes due 2042 On January 6, 2022, AXA announced the successful placement of €1.25 billion of Reg S subordinated notes due 2042 to institutional investors, to be used for general corporate purposes including the refinancing of part of its outstanding debt(1). The initial fixed coupon was set at 1.875% per annum until the end of the six-month call window period (July 2032), when it will become a floating coupon based on 3-month EURIBOR plus a margin including a 100 basis points step up. Investor demand was strong with a book subscribed more than two times. The notes are treated as capital from a regulatory and rating agencies’ perspective within applicable limits. The transaction has been structured for the notes to be eligible as Tier 2 capital under Solvency II. The notes are rated BBB+/Stable by Standard & Poor’s, A3(hyb)/Stable by Moody’s and BBB/Positive by Fitch. Settlement of the notes took place on January 10, 2022. Execution of a share repurchase agreement in relation to AXA’s share buy-back program of up to €0.5 billion as announced on February 24, 2022 On February 25, 2022, AXA executed a share repurchase agreement with an investment services provider, whereby AXA bought back its own shares for a maximum amount of €0.5 billion to neutralize earnings dilution from the disposals(2) announced after December 1, 2020(3), as initially communicated on November 4, 2021 and confirmed on February 24, 2022. The share repurchase agreement was executed in accordance with the terms of the share repurchase program authorized by the Annual Shareholders’ Meeting of April 29, 2021. (1) Includes the US$ 850 million 5.5% undated subordinated notes redeemed on January 22, 2022, following the notice of early redemption published on January 4, 2022.. (2) Disposals announced after December 1, 2020 and either closed (Greece on May 31, 2021 and Singapore on February 11, 2022) or expected to be closed in 3Q22 (Malaysia, subject to closing conditions) (3) As communicated during AXA’s Investor Day on December 1, 2020. Half Year 2022 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2022 Under the share repurchase agreement, shares were bought back commencing on February 28, 2022 and ending at the latest on April 27, 2022. On each day during the purchase period, the price per share to be paid by AXA(1) was determined on the basis of the volume-weighted average share price. AXA cancelled all repurchased shares related to the up to €0.5 billion share buy-back program. AXA announced the successful placement of €1.25 billion dated subordinated notes due 2043 On May 25, 2022, AXA announced the successful placement of €1.25 billion of Reg S subordinated notes due 2043 with institutional investors. The notes will be used for general corporate purposes, including the refinancing of part of the Group’s outstanding debt, comprising AXA XL US$ 500 million 4.45% subordinated notes due 2025 and AXA XL €500 million 3.25% subordinated notes due 2047 (callable in 2027)(2). The initial fixed rate was set at 4.25% per annum until the end of the six-month call window period (March 2033), when the interest rate will become a floating rate based on three-month EURIBOR plus a margin including a 100 basis points step up. Investor demand was strong with a book subscribed close to two times. The notes are treated as capital from a regulatory and rating agencies’ perspective within applicable limits. The transaction has been structured for the notes to be eligible as Tier 2 capital under Solvency II. The notes are rated A-/Stable by Standard & Poor’s, A3 (hyb)/on Review for Upgrade by Moody’s and A-/Positive by Fitch, which reflect notably the recent upgrade of AXA SA’s long term issuer credit rating by S&P(3) and Fitch(4), as a result of the transformation of AXA SA into the Group’s internal reinsurer. The settlement of the notes took place on May 31, 2022. Completion of AXA’s SA’s transformation into the Group’s internal reinsurer following its merger with AXA Global Re On July 1, 2022, AXA announced that AXA SA, the holding company of AXA Group, completed its transformation into AXA Group’s internal reinsurer(5). The transformation is the result of AXA SA being granted a reinsurance license from the Autorité de contrôle prudentiel et de résolution (“ACPR” – the French Prudential Supervision and Resolution Authority)(6) as announced on May 10, 2022 and its merger on June 30, 2022 with its captive reinsurer, AXA Global Re. AXA S.A. will reinsure for 2022 certain of its European P&C carriers, through annually renewable 25% quota-share reinsurance treaties, with retroactive effect to January 1, 2022. The transformation of AXA SA into the Group’s internal reinsurer aims to enhance capital fungibility across AXA Group, in line with AXA’s capital management policy. (1) The purchase price did not exceed the maximum purchase price approved by the Annual Shareholders’ Meeting of April 29, 2021. (2) Following the exercise of the respective make-whole option by AXA XL related to each such series of notes, redeemed on June 29, 2022. (3) On May 11, 2022, S&P upgraded its long-term Issuer Credit Rating of AXA S.A. by one notch to A+ from A and removed it from CreditWatch with positive implications. The outlook is stable. (4) On May 16, 2022, Fitch upgraded its long-term Issuer Default Rating on AXA S.A. by one notch to A+ from A and removed it from Rating Watch Positive. The outlook is positive. (5) The completion of the merger with AXA Global Re followed the receipt of customary regulatory clearances. (6) The grant of AXA SA’s reinsurance license followed approval by the shareholders of necessary changes to AXA S.A.’s bylaws at the Annual Shareholders’ Meeting held on April 28, 2022. Half Year 2022 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2022 OTHER AXA published its Climate and Biodiversity Report 2022 On June 30, 2022, AXA announced the publication of the 7th edition of its climate report, renamed Climate and Biodiversity Report(1). This report responds to legal obligations in terms of extra-financial reporting, notably the first year of implementation of the new article 29 of the French Climate Law, as well as to the voluntary approach of two initiatives in which AXA plays a leading role, the Task Force on Climate-related Financial Disclosures (TCFD) and the Task Force on Nature-related Financial Disclosures (TNFD) launched in june 2021. In this report, AXA highlights the different dimensions of its action to fight climate change and protect biodiversity: governance, strategy, risk management and quantitative indicators of the impact of its actions. The report's key metric, the “warming potential”, which measures the impact of the Group's investments on global warming by 2050, continues to improve. As of December 31, 2021, it stood at 2.6°C, down 0.1°C compared to December 31, 2020 and below the market (2.9°C). Its calculation model has been strengthened since our 2020 Climate Report by integrating, for example, scope 3(2) emissions when available. The report also indicates a clear improvement in the carbon footprint of AXA's investment portfolio, with a 29% decrease in 2021 compared to 2019. Finally, the amount of green investments totalled €22.6 billion, close to the target of €26 billion by 2023. The report thus highlights the transition trajectory thus begun, but also underlines the efforts that remain to be made to accelerate it. New this year, the report details AXA's action to preserve biodiversity and its support for the creation of the TNFD. Today, more than 50% of the world's economic output depends on nature. The objective of the TNFD is therefore to direct financial flows towards investments in the sector that are beneficial to ecosystems and to ensure that each player integrates this risk into its activities. AXA is leading the way and reports on its first initiatives in this area, both in terms of commitment (policy to combat deforestation through its investments and insurance activities) and the experimentation of new metrics (corporate biodiversity footprint). RISK FACTORS The principal risks and uncertainties faced by the Group are described in detail in Section 5.1 “Risk Factors” and Section 7.3 “General Information” of the 2021 Universal Registration Document (on pages 232 to 254 and pages 454 to 470, respectively). The 2021 Universal Registration Document was filed with the Autorité des marchés financiers (the “AMF”) on March 22, 2022, and is available on the AMF’s website (www.amf-france.org) as well as on AXA's website (www.axa.com). The descriptions contained in these sections of the 2021 Universal Registration Document remain valid in all material respects at the date of the publication of this report regarding the evaluation of the major risks and uncertainties affecting the Group as of June 30, 2022, or which Management expects could affect the Group during the remainder of 2022. (1) The Climate and Biodiversity Report 2022 is available on the AXA website at the following address: https:// www.axa.com/ en/press/publications/2022-climate-report (2) The terms scope 1, scope 2 or scope 3 are used in the context of a product or organisation's greenhouse gas (GHG) emissions report. Scope 3 includes the indirect impacts of an entity, which do not result from its operations but from sources it does not own or control, upstream of its activities (purchase of IT equipment, office equipment, car fleet, catering, employee travel, etc.). Half Year 2022 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2022 RELATED-PARTY TRANSACTIONS During the first half of 2022, there were (i) no modifications to the related-party transactions described in Note 28 “Related-party transactions” to the audited Consolidated Financial Statements for the fiscal year ended December 31, 2021, included in the 2021 Universal Registration Document (pages 432 and 433) filed with the AMF and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com), which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2022, and (ii) no new transactions concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2022. Events subsequent to June 30, 2022 There was no material event after the reporting period to be reported. Half Year 2022 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2022 Market Environment FINANCIAL MARKET CONDITIONS During the first half of 2022, the world’s largest economies struggled with the continued rise in inflation which was exacerbated by the war in Ukraine. Central banks across the world have responded by accelerating the tightening of monetary policy that, in turn, has triggered a material sell-off in equity and bond markets, as well as drawdowns in most asset classes. One of the primary drivers of inflation has been the inability of supply to keep up with pent-up demand from excess savings built up during the pandemic. This has been made worse by the war in Ukraine that has pushed up the prices of many commodities, notably energy. The sharp rise in inflation and the resulting increase in interest rates have reduced household and corporate spending power, weighing on economic activity and on the macroeconomic outlook. In Europe, the French economy experienced a contraction of -0.2% in the first quarter, but GDP rose by +0,5% in the second quarter mainly thanks to direct government intervention to mitigate the rising inflation rate and an increase in exports. Other large Eurozone economies have been impacted to a greater extent due to other factors, such as Spain with higher levels of inflation and Germany and Italy with supply side disruptions to their manufacturing sector. Nonetheless, growth in Europe remained positive at +0.6% in the first quarter thanks in part to the noticeable contribution of the Irish economy that grew +11%. Growth across the Eurozone remained also positive in the second quarter, but the outlook for the second half of the year is much more uncertain, especially with the recent gas supply restrictions from Russia. The United Kingdom posted solid growth in the first quarter (+0.8%). However, with inflation rising to 9% in May and fiscal support coming late, its economy contracted in the second quarter. The rise in inflation led the Bank of England to start tightening its monetary policy in December 2021 and to forecast to continue until November 2022 to deliver financial stability. The United States’ GDP contracted by -0.4% in the first quarter, due to a sharp fall in net trade linked to a rebound of imports. In addition, inflation in the United States rose to +9% in May resulting in increased economic pressures on US households. The Federal Reserve responded by increasing interest rates in March and by June had posted a +0.75 bps increase. While second quarter GDP growth is slightly negative, the sharp tightening in US financial conditions raises the prospect of a recession in the second half of the year. In Asia, Japan saw waves of COVID-19 outbreaks passed through the economy at different times compared to other developed economies. This helped explain swings in growth in recent quarters, including the -0.1% GDP contraction in the first quarter. The Bank of Japan is still pursuing an accommodative monetary policy, that has weighed on the Yen compared to other major currencies. Inflation has also risen in Japan, with a core rate of +0.8%. In China, GDP growth levelled at +1.3% in the first quarter. Severe lockdowns in several large cities led to a slowdown of GDP growth (close to 0%) in the second quarter. Half Year 2022 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2022 STOCK MARKETS (main indexes, in pts) June 30, 2022 June 30, 2022 / December 31, 2021 June 30, 2021 June 30, 2021 / December 31, 2020 CAC 40 5,923 17% 6,508 17% Eurostoxx 50 3,455 20% 4,064 14% FTSE 100 7,169 3% 7,037 9% Nikkei 26,393 8% 28,792 5% S&P 500 3,785 21% 4,298 14% MSCI World 2,546 21% 3,017 12% MSCI Emerging 1,001 19% 1,375 6% Source: Bloomberg. Global concerns over rising interest rates amidst inflation coupled with fears over the decrease in economic activity led to significant downward revisions to economic outlooks. This has also triggered significant turmoil in financial markets, with riskier assets suffering heavy losses. Oil and other commodities performed well in the first half of 2022, but most financial assets sold off heavily. The S&P 500 index fell by -21% over the first half of the year. The Eurostoxx 50 index was similarly down by -20% and France’s CAC 40 also fell by -17% over the same period. The United Kingdom’s FTSE 100 index performed better, down just -3%, in the first half of the year, reflecting the relatively large weight of of commodity producers in the index. The United Kingdom’s FTSE 250, which is more representative of the United Kingdom economy, dropped by -21%, in line with other developed economies markets. The Japanese Nikkei index dropped by -8%, underscored by a sharply weakening currency. China’s Shanghai Composite index also dropped by -7%, supported by an accommodative monetary policy. The US S&P 500 implied volatility index (VIX) surged from 17 points at the end of 2021 to 36 points in March 2022 and closed at 29 points on June 30, 2022, reflecting a high level of market uncertainty. BOND MARKETS (in % or basis points (bps)) June 30, 2022 June 30, 2022 / December 31, 2021 June 30, 2021 June 30, 2021 / December 31, 2020 10Y French bond 1.92% +172 bps 0.13% +46 bps 10Y German bond 1.34% +151 bps 0.21% +36 bps 10Y Swiss bond 1.07% +120 bps 0.22% +33 bps 10Y Italian bond 3.26% +209 bps 0.82% +28 bps 10Y UK bond 2.23% +126 bps 0.72% +52 bps 10Y Japanese bond 0.23% +16 bps 0.06% +4 bps 10Y US bond 3.01% +150 bps 1.47% +55 bps Source: Bloomberg. Half Year 2022 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2022 Bond markets have seen significant moves over the past six months. In broad terms, sovereign bonds have sold off in anticipation of tightening of monetary policy by Central banks, both in term of expected policy rate increases and balance sheet adjustments. 10-year US Treasury yields ended at 1.51% in December 2021 but rose sharply to peak around 3.50% in mid-June 2022 and closed at 3.01% by June 30, 2022. A similar pattern was observed in most developed bond markets. The UK 10-year gilt yield also rose to 2.23% in June 2022 from 0.97% in December 2021. In the Eurozone, the benchmark German Bund 10-year yield rose from -0.18% in December 2021 to 1.34% on June 30th, 2022, and the French OAT 10-year closed at 1.92% on June 30, 2022, an increase of +172 bps over the same period. However, tensions in peripheral Eurozone bond yields emerged, as the 10-year Italian yield rose sharply to 3.26% as of June 30, 2022 (+193 bps over the German Bund). On the other hand, the Japanese 10-year yield was a major exception with an increase of just +16 bps to 0.23% as of June 30, 2022, which can be explained by the accommodative monetary policy of the Bank of Japan. Credit markets have experienced a material repricing in the first half of the yeart. In the United States, the CDX IG spread doubled from 50 bps to 100 bps and, in Europe, the iTraxx Main index has widened from 50 bps to 120 bps. These trends were similar across most CDS indices, from Investment Grade to High Yield credit spreads, with marked underperformance in Europe due to its closer proximity to the war in Ukraine. Also, the China High Yield index spread widened from 1780 bps at December 2021 to 2360 bps in June 2022, due to continuous pressure from the shakeout in the property sector. Overall, the combination of rising yields and widening spreads has raised the spectre of adverse refinancing conditions for corporates over the next few quarters. EXCHANGE RATES End of Period Exchange rate Average Exchange rate (for €1) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 US Dollar 1.05 1.19 1.09 1.21 British Pound Sterling 0.86 0.86 0.84 0.87 Swiss Franc 1.00 1.10 1.03 1.09 Japanese Yen 142 132 134 130 Source: Bloomberg. Currencies have witnessed a marked volatility, but the past six months have broadly been a period of sharp dollar appreciation. The Bloomberg DXY dollar index rose 10% on the first half of the year. This level reflects the combination of rising interest rate expectations in the United States and the risk sentiment as war risks in Europe and COVID-19 in China prompted a flight to safety in the US dollar. The US dollar increased by 13% over the first six months and the Swiss Franc increased by 9%, while the Japanese yen was down 8% mainly as a result of the accommodating monetary policy of the Bank of Japan. Half Year 2022 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2022 Activity and Earnings Indicators ACTIVITY INDICATORS (in Euro million, except percentages) June 30, 2022 June 30, 2021 June 30, 2022 / June 30, 2021 (a) Gross revenues (b) 55,141 53,865 1.2% Property & Casualty 29,326 28,122 1.3% Life & Savings (c) 15,990 16,879 (5.3%) Health 8,799 7,884 12.9% Asset Management (c) 788 704 3.8% Banking 239 277 115.5% APE (d) 3,273 3,005 5.8% NBV Margin (e) 40.3% 44.7% (2.4 pt) (a) Changes are on comparable basis. (b) Net of intercompany eliminations. (c) From January 1, 2022, the scope of the Asset Management segment also includes Architas. (d) Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (e) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. (in Euro million, except percentages) June 30, 2022 June 30, 2021 June 30, 2022 / June 30, 2021 (a) Gross revenues (b) 55,141 53,865 1.2% France (c) 14,952 14,217 3.1% Europe 19,288 18,801 0.9% Asia 5,689 5,568 0.1% AXA XL 10,719 10,505 (6.2%) International 2,673 3,199 20.4% Transversal & Central Holdings (c) 1,821 1,576 11.4% (a) Changes are on comparable basis. (b) Net on intercompany eliminations. (c) From January 1, 2022, the scope of the Transversal & Central Holdings also includes Architas. Consolidated Gross revenues amounted to €55,141 million as of June 30, 2022, up 2% on a reported basis and up 1% on a comparable basis compared to June 30, 2021. The comparable basis mainly excludes the contribution of disposed entities (€-1.0 billion or +1.9 points) to the first semester of 2021 of Gulf Region, Axa Bank Belgium and Singapore before their disposals. The 2022 comparable basis neutralizes the foreign exchange rate movements notably due to the depreciation of average Euro exchange rate against most currencies (€+1.4 billion or -2.6 points). Half Year 2022 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2022 GROSS REVENUES Property & Casualty gross revenues were up 1% (or €+365 million) on a comparable basis to €29,326 million: Personal lines grew by 3% (or €+242 million) driven by (i) Non-Motor (+4%) in France (+3%) mainly from Legal Protection and Property, and in Germany (+4%) and Belgium (+6%) both from tariff increases, and in Colombia (+59%) from higher volumes in Compulsory accident insurance, partly offset by the United Kingdom (-10%) mainly due to the run-off of the Travel portfolio, and (ii) Motor (+2%) in Turkey (+161%) driven by tariff increases in a hyperinflation context and higher new business, partly offset by lower revenues in Europe (-1%) mainly reflecting a strong market competition across the countries; Commercial lines grew by 1% (or €+149 million) primarily driven by (i) Europe (+6%) with higher volumes and tariff increases notably in Property and Liability, as well as in Workers’ Compensation in Switzerland, (ii) AXA Assistance (+33%) mainly from the rebound of the Travel business in all geographies, (iii) France (+6%) reflecting higher new business and favorable price effects, (iv) Turkey (+92%) from higher average premiums in Motor and Property & Liability, partly offset by (v) AXA XL (-6%) mainly due to lower Property Cat exposure in Reinsurance in line with the strategy, lower volumes in North America Professional lines, and selective underwriting, partly offset by positive price effect across the books. Life & Savings gross revenues were down -5% (or €-893 million) on a comparable basis to €15,990 million: General Account Savings decreased by -12% (or €-612 million) mainly driven by (i) Italy (-28%) due to lower sales through the banking channel in a challenging market context, (ii) Japan (-38%) mainly from the non-repeat of elevated sales of the capital-light Single Premium Whole Life product in 1H21 following adverse market conditions, and (iii) France (-6%) due to lower sales of traditional products, partly offset by the continued growth of Eurocroissance; Unit-Linked went down by -11% (or €-436 million) notably in (i) France (-12%) primarily driven by the non-repeat of a large contract, (ii) Hong Kong (-45%) as a result of the continued closure of Mainland China border in the context of the COVID-19 crisis, partly offset by (iii) Germany (+10%); Protection grew by 2% (or €+177 million) mainly in (i) Japan (+10%) and in (ii) Switzerland (+5%) both from the strong sales of Protection with Unit-Linked products. Health gross revenues were up 13% (or €+999 million) on a comparable basis to €8,799 million: Group business grew by 21% (or €+770 million) primarily in (i) France (+28%) mainly in international from two large contracts and in the domestic market, and (ii) the United Kingdom (+10%) from higher volumes, strong retention combined with underwriting measures; Individual business grew by 6% (or €+229 million) driven by Germany (+5%), Mexico (+12%) and Turkey (+92%) mostly from tariff increases. Asset Management gross revenues were up 4% (or €+28 million) on a comparable basis to €788 million mainly driven by (i) higher distribution fees (€+13 million) coming from strong commercial momentum, as well as (ii) higher management fees (€+12 million) stemming from favorable product mix. Average Assets under Management decreased by €19 billion (-2%) on a comparable basis to €771 billion mainly driven by unfavorable market effects in 1H22 from the increase in interest rates and equity market drop. Banking gross revenues were up 116% (or €+128 million) on a comparable basis to €239 million from AXA Banque France mainly driven by the favorable change in the fair value of an interest rate swap hedging loans at cost, partly offset by lower mortgage loans activity. Half Year 2022 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2022 NEW BUSINESS PERFORMANCE New business Annual Premium Equivalent (1) New business APE grew by 9% on a reported basis and by 6% on a comparable basis to €3,273 million, mainly driven by (i) Health in France from the expansion of partnerships in international markets, (ii) Protection in Switzerland due to strong sales of semi-autonomous products, partly offset by France from lower new business in a mature domestic market combined with the loss of partnerships in Credit and Lifestyle Protection, and in Hong Kong in the context of the COVID-19 crisis, partly offset by (iii) Unit-Linked Savings in Italy from lower sales notably in Investments products. New Business Value Margin (2) New Business Value Margin decreased by 4.4 points on a reported basis and 2.4 points on a comparable basis to 40.3%, driven by (i) Health from an unfavorable shift in business mix in both Hong Kong and France as well as (ii) Protection from an unfavorable business mix towards lower margin semi-autonomous Group life products in Switzerland. (1) New business Annual Premium Equivalent (APE) represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. (2) New Business Value (NBV) Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) APE. Half Year 2022 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2022 UNDERLYING EARNINGS AND NET INCOME GROUP SHARE JUNE 30, 2022 (in Euro million) June 30, 2022 Property & Casualty Life & Savings (a) Health Asset Management (a) Investment margin Fees & revenues Net technical margin Expenses Amortization of value of purchased life business in-force Underlying earnings before tax Income tax Income from affiliates and associates Minority interests UNDERLYING EARNINGS GROUP SHARE 2,537 3,199 9,363 (10,011) (31) 4,793 (933) 144 (86) 3,918 1,461 8,099 (6,524) 3,036 (633) 20 (48) 2,374 992 2,196 596 (2,256) (23) 1,505 (257) 105 (28) 1,325 84 1,003 668 (1,231) (8) 517 (117) 6 (4) 402 267 (71) 13 (5) 203 (a) Reclassification of Architas activities (previously reported as part of Life & Savings) to Asset Management. (b) Other corresponds to banking activities and holding. (in Euro million, except percentages) June 30, 2022 France (a) Europe Asia AXA XL International Investment margin 2,537 820 940 39 480 233 Fees & revenues Net technical margin 3,199 9,363 1,333 1,466 617 3,633 1,170 729 2,623 51 523 Expenses Amortization of value of purchased life business in-force (10,011) (31) (2,421) - (3,202) (12) (1,147) (18) (2,208) - (597) (1) Underlying earnings before tax from insurance activities 5,058 1,198 1,975 774 895 208 Underlying earnings before tax from other activities (264) (9) 32 (1) (42) (25) Income tax Income from affiliates and associates (933) 144 (239) 3 (417) 0 (151) 111 (164) - (47) 17 Minority interests (86) (2) (48) (5) (1) (25) UNDERLYING EARNINGS GROUP SHARE 3,918 952 1,541 728 688 129 Net capital gains or losses 279 146 179 (11) (35) (1) Profit or loss on financial assets and derivatives 211 9 171 (49) (9) (12) Exceptional operations Goodwill and other related intangible impacts Integration and restructuring costs 41 (202) (140) 3 - (21) 70 (15) (19) (17) (0) (22) (32) (3) (147) (3) NET INCOME GROUP SHARE 4,108 1,090 1,927 651 590 (36) Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 93.7% 94.9% 93.5% 89.3% 99.0% 97.7% 91.9% 96.4% 92.5% 94.1% 73.5% 90.1% 95.6% - - 100.2% 101.8% 108.0% (a) Reclassification of Architas activities (previously reported as part of France) to Transversal & Central Holdings. Half Year 2022 Financial Report I Other (b) (531) 145 - (0) (386) Transversal & Central Holdings (a) 26 28 389 (436) - 8 (219) 84 13 (6) (120) 1 102 (30) (1) (65) (113) 102.4% 98.0% - 16 ACTIVITY REPORT – HALF YEAR 2022 JUNE 30, 2021 (in Euro million) June 30, 2021 Property & Casualty Life & Savings (a) Health Asset Management (a) Investment margin Fees & revenues Net technical margin Expenses Amortization of value of purchased life business in-force Underlying earnings before tax Income tax Income from affiliates and associates Minority interests UNDERLYING EARNINGS GROUP SHARE 2,300 2,949 9,398 (9,837) (22) 4,569 (955) 125 (96) 3,643 1,278 8,097 (6,480) 2,895 (649) 15 (53) 2,209 950 2,063 608 (2,201) (20) 1,400 (242) 89 (31) 1,216 72 886 692 (1,157) (2) 493 (111) 9 (6) 386 257 (69) 11 (6) 194 (a) Reclassification of Architas activities (previously reported as part of Life & Savings) (€-24 million) to Asset Management (€+24 million). (b) Other corresponds to banking activities and holding. (in Euro million, except percentages) June 30, 2021 France (a) Europe Asia AXA XL International Investment margin 2,300 850 812 37 400 176 Fees & revenues Net technical margin 2,949 9,398 1,221 1,446 587 3,640 1,038 710 2,575 76 701 Expenses (9,837) (2,355) (3,163) (1,058) (2,207) (699) Amortization of value of purchased life business in-force (22) (6) (16) (1) Underlying earnings before tax from insurance activities 4,788 1,162 1,870 712 767 253 Underlying earnings before tax from other activities (219) 7 10 (3) (42) 38 Income tax Income from affiliates and associates (955) 125 (277) 3 (409) (0) (142) 97 (107) - (70) 14 Minority interests (96) (2) (48) (4) 1 (37) UNDERLYING EARNINGS GROUP SHARE 3,643 893 1,424 658 619 198 Net capital gains or losses 257 168 38 0 46 0 Profit or loss on financial assets and derivatives Exceptional operations 290 (59) (63) (1) 166 4 64 (27) 131 (0) 20 (60) Goodwill and other related intangible impacts Integration and restructuring costs (69) (67) (20) (17) (19) (15) (0) (31) (20) (6) (2) NET INCOME GROUP SHARE 3,996 978 1,596 680 745 150 Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio 93.3% 94.4% 94.3% 89.7% 98.7% 100.6% 90.8% 96.6% 92.8% 97.7% 73.9% 88.9% 95.8% - - 94.0% 99.5% 105.3% (a) Reclassification of Architas activities (previously reported as part of France) (€-24 million) to Transversal & Central Holdings (€+24 million). Half Year 2022 Financial Report I Other (b) (476) 115 - (0) (361) Transversal & Central Holdings (a) 24 27 327 (355) 23 (229) 50 11 (6) (150) 4 (28) 26 (1) (5) (154) 101.4% 100.6% - 17 ACTIVITY REPORT – HALF YEAR 2022 Alternative Performance Measures Underlying earnings, Underlying Return on Equity, Underlying earnings per share, Combined Ratio and Debt Gearing are Alternative Performance Measures (“APMs”) as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from Underlying earnings and Combined Ratio to the most directly reconcilable line item, subtotal or total in the financial statements of the corresponding period is provided in the above tables. Underlying Return on Equity and Underlying earnings per share are reconciled to the financial statements in the table set forth on page 23 of this report, and the calculation methodology of the Debt Gearing is set out on page 19 of this report. For further information on any of the above-mentioned APMs, see the Glossary on pages 57 to 64 of this report. UNDERLYING EARNINGS Underlying earnings represent the net income (Group share), before the impact of the following items net of policyholder participation, deferred acquisition costs, Value of Business in-force, taxes and minority interests: realized gains and losses, change in impairment valuation allowances (on assets not designated under fair value option or trading assets) and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities (other than the funds backing contracts where the financial risk is borne by policyholders); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities; impairments of goodwill, impairments and amortization of intangibles related to customers and distribution agreements; integration and restructuring costs related to newly acquired companies as well as restructuring and associated costs related to productivity improvement plans; and exceptional operations (primarily changes in scope and discontinued operations). UNDERLYING RETURN ON EQUITY The Underlying Return on Equity (“Underlying RoE”) is calculated as underlying earnings net of financial charges related to undated and deeply subordinated debts (recorded through shareholders’ equity as disclosed in Part 2.6 - Note 6 “Shareholders’ Equity and Minority Interests” of this report) divided by the average of opening and closing shareholders’ equity excluding: reserves relating to the change in the fair value through shareholders’ equity as disclosed in Part 2.4 - “Consolidated Statement of Changes in Equity” of this report; undated and deeply subordinated debts as disclosed in Part 2.6 - Note 6 “Shareholders’ equity and minority interests” of this report. Half Year 2022 Financial Report 18 I ACTIVITY REPORT – HALF YEAR 2022 UNDERLYING EARNINGS PER SHARE Underlying earnings per share corresponds to Group share Underlying earnings net of financial charges related to undated and deeply subordinated debts (recorded through shareholders’ equity as disclosed in Part 2.6 - Note 6 “Shareholders’ equity and minority interests” of this report) divided by the weighted average number of outstanding ordinary shares over the period. Shares held by AXA and its subisidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. COMBINED RATIO (APPLICABLE FOR PROPERTY & CASUALTY, HEALTH AND PROTECTION) The Combined Ratio is the sum of the all accident year loss ratio net of reinsurance and the underlying expense ratio. All accident year loss ratio net of reinsurance is the ratio of: o all accident years claims charge gross of reinsurance + claims handling costs + result of reinsurance ceded on all accident years excluding the unwind of the discount rate used in calculating technical reserves, to o earned revenues gross of reinsurance. Expense ratio is the ratio of: o expenses (excluding claims handling costs, including changes in Value of Business In-force amortization), to o earned revenues gross of reinsurance. DEBT GEARING Debt Gearing refers to the level of a company's debt related to its long term capital, usually expressed as a percentage. Debt Gearing is used by the Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing the gross debt (financing debt as disclosed in Part 2.6 - Note 7 “Financing debt” and undated and deeply subordinated debts as disclosed in Part 2.6 - Note 6 “Shareholders’ equity and minority interests” of this report) by total capital employed (shareholders’ equity excluding undated and deeply subordinated debts and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives) plus gross debt. Half Year 2022 Financial Report 19 I ACTIVITY REPORT – HALF YEAR 2022 COMMENTARY ON GROUP EARNINGS UNDERLYING EARNINGS Underlying earnings amounted to €3,918 million, up €276 million (+8%) versus 2021 on a reported basis. On a constant exchange rate basis underlying earnings increased by €159 million (+4%). Excluding the disposals of AXA Bank Belgium, The Gulf Region, Singapore and Greece, underlying earnings increased by €234 million (+7%). Property & Casualty underlying earnings increased by €82 million (+4%) to €2,374 million mainly from (i) an increase in the investment result by €198 million driven by inflation-linked bonds in Turkey (€114m) and higher funds distribution across geographies, mostly in Europe and in France, (ii) an improved expense ratio (-0.9 point) from cost reduction initiatives across geographies combined with favorable business mix, (iii) lower income taxes by €34 million as the impact of higher pre-tax underlying earnings was more than offset by a favorable geographical mix, partly offset by (iv) an unfavorable current year loss ratio excluding Nat Cat charges (+1.3 points) primarily from the impact of the war in Ukraine (+1.1 points) at AXA XL notably in Aviation as well as lower motor frequency benefits in France and Europe, (v) higher Nat Cat charges (+0.1 points to 4.2%) in France (+2.3 points to 4.9%) and Europe (+0.5 points to 4.7%) notably in Germany, Belgium and United Kingdom & Ireland due to higher frequency of storms, partly offset by AXA XL (-1.2 points to 4.8%) driven by exposure reductions in line with the strategy. The all year combined ratio increased by +0.7 point to 93.7% with stable prior year reserves development. Life & Savings underlying earnings increased by €83 million (+7%) to €1,325 million, mainly driven by (i) higher fees & revenues net of expenses (€+47 million) reflecting the strong sales in Protection in Japan combined with resilient Unit-Linked management fees, notably in France, from strong inflows over the past years, partly offset by the impact of unfavorable financial market conditions, (ii) higher investment margin (€+33 million) as the impact of lower reinvestment yields was more than compensated by higher funds distribution and management actions on credited interests. Technical margin decreased by €16 million - or remained broadly stable (€-5 million) excluding the disposal of Singapore - mainly from the unfavorable recurring impact of a reinsurance transaction in a closed book of whole-life insurance policies implemented in Hong Kong in 1H21 partly offset by less unfavorable prior year reserves development in France. Health underlying earnings increased by €10 million (+2%) to €402 million sustained by (i) a higher investment margin notably in the United Kingdom & Ireland and in Spain, and (ii) a higher net technical margin from strong revenues growth across most geographies, partly offset by higher COVID-19 claims in Japan and less favorable prior year reserves development in France. This was partly offset by (iii) higher income taxes reflecting higher pre- tax underlying earnings and (iv) the negative impact from disposals. Asset Management underlying earnings increased by €6 million (+3%) to €203 million driven by (i) higher revenues (€+9 million) mainly from higher management fees from improved product mix despite lower average assets under management in the context of rising interest rates and downward equity markets, partly offset by (ii) higher taxes (€-4 million) in line with higher pre-tax underlying earnings combined with the non-repeat of positive tax one-offs. Other activities underlying earnings decreased by €21 million (-6%) to €-386 million mainly driven by the sale of AXA Bank Belgium (€-42m) in December 31, 2021 and to lower mortgage loans activity at AXA Banque France (€-12 million) partly offset by Germany Holding (€+18 million) driven by a tax one-off as well as lower pension costs and at AXA SA Holding (€+16 million) driven by the positive impact related to the settlement of a tax litigation. Half Year 2022 Financial Report 20 I ACTIVITY REPORT – HALF YEAR 2022 NET INCOME Net income amounted to €4,108 million, up €113 million (+3%). On a constant exchange rate basis, net income increased by €14 million (+0%) driven by: higher underlying earnings, up €159 million (+4%) to €3,918 million; net realized capital gains, up €20 million (+8%) to €279 million mainly from lower impairments net of equity hedges (€+82 million); a negative change in the fair value of mutual funds and derivatives not eligible for hedge accounting under IAS 39, down €65 million (-22%) to €211 million from: o the non-repeat of (i) the 1H21 strong market performance which led to an increase in the fair value of mutual funds (€+378 million) mainly private equity and hedge funds and (ii) negative change in the fair value of derivatives (€-108 million), o in 1H22 (iii) the significant rise in interest rates leading to an opposite effect in the fair value of mutual funds (€-120 million) and (iv) a favorable change in the fair value of derivatives (€+157 million) hedging equity and inflation, o (v) a favorable Forex impact mainly related to EUR weakening against most currencies, a higher impact of goodwill and other related intangibles up €131m (-190%) to €-202m due to the impairment of the full goodwill of Reso Garantia (€-144m); a favorable impact from exceptional operations, up €101 million to €+41 million, mainly from (i) the downward revision of the loss on the upcoming disposal of a General Account Savings portfolio in Belgium (€+70m) in 1H22, partly offset by the non-repeat of the negative impact in 1H21 from the loss on (ii) the disposal of a non-consolidated subsidiary (€-40 million), and (iii) the disposals of entities in Malaysia (€-35 million) and in the Gulf Region (€-24 million), partly offset by the realized gains following (iv) the sale of the remaining stake in EQH (€+30 million), and (v) the disposal of the activities in Greece (€+21 million). Half Year 2022 Financial Report 21 I ACTIVITY REPORT – HALF YEAR 2022 SHAREHOLDERS’ EQUITY GROUP SHARE As of June 30, 2022, Shareholders' equity Group share totaled €52.6 billion. The movements in Shareholders' equity Group share since December 31, 2021, are presented in the table below: (in Euro million) Shareholders' equity Group share At December 31, 2021 71,135 Share Capital (195) Capital in excess of nominal value (1,999) Equity-share based compensation 24 Treasury shares sold or bought in open market 670 Deeply subordinated debt (including accumulated interests charges) (838) Fair value recorded in shareholders' equity (19,944) Impact of currency fluctuations 1,421 Dividends (3,539) Other 124 Net income for the period 4,108 Actuarial gains and losses on pension benefits 1,666 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk 11 At June 30, 2022 52,645 SOLVENCY INFORMATION (1) As of June 30, 2022, the Group’s Eligible Own Funds (“EOF”) amounted to €63.0 billion and the Solvency II ratio to 227%, compared to €62.0 billion and 217% as of December 31, 2021. (1) Solvency-related information included in this section, including the Solvency II ratio and the Eligible Own Funds (“EOF”), is not subject to the review of the Half Year 2022 Consolidated Financial Statements included in this report, nor the verification of the information otherwise included in such report, performed by the Group’s statutory auditors. The Solvency II ratio as of June 30, 2022 is adjusted to give effect to the full Euro 1.0 billion share buy-back announced by AXA on August 3, 2022 with its half-year results. Half Year 2022 Financial Report 22 I ACTIVITY REPORT – HALF YEAR 2022 SHAREHOLDER VALUE EARNINGS PER SHARE (“EPS”) June 30, 2022 June 30, 2021 June 30, 2022 / June 30, 2021 (in Euro, except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,311 2,317 2,384 2,390 Net income (Euro per ordinary share) 1.74 1.73 1.64 1.63 6.3% 6.2% Underlying earnings (Euro per ordinary share) 1.66 1.65 1.49 1.48 11.3% 11.3% RETURN ON EQUITY (“ROE”) (in Euro million, except percentages) June 30, 2022 June 30, 2021 June 30, 2022 / June 30, 2021 ROE 15.8% 16.8% 1.0 pts Net income (a) Average shareholders' equity 4,017 50,812 3,900 46,525 Underlying ROE 15.8% 16.6% 0.8 pts Underlying earnings (a) 3,827 3,547 Average shareholders' equity 48,581 42,800 (a) Including adjustment to reflect net financial charges related to undated and deeply subordinated debts (recorded through shareholders’ equity). Half Year 2022 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2022 SEGMENT INFORMATION FRANCE (in Euro million, except percentages) June 30, 2022 June 30, 2021 restated (a) Gross revenues (b) 14,952 14,217 Property & Casualty 4,284 3,936 Life & Savings 7,023 7,580 Health 3,406 2,591 Banking 239 111 Underlying earnings before tax 1,189 1,169 Property & Casualty 635 603 Life & Savings 500 496 Health 63 64 Other (c) (9) 7 Income tax (239) (277) Minority interests (2) (2) Income from affiliates and associates 3 3 UNDERLYING EARNINGS GROUP SHARE 952 893 Net capital gains or losses 146 168 Profit or loss on financial assets and derivatives 9 (63) Exceptional operations 3 (1) Goodwill and other related intangible impacts Integration and restructuring costs (21) (20) NET INCOME GROUP SHARE 1,090 978 Property & Casualty Combined Ratio 89.3% 89.7% Health Combined Ratio 99.0% 98.7% Protection Combined Ratio 97.7% 100.6% New business APE 1,324 1,224 NBV Margin 24.7% 29.9% (a) Reclassification of Architas activities (previously reported as part of France) to Transversal & Central Holdings. (b) Net of intercompany eliminations. (c) Other corresponds to banking activities and holding. Gross revenues increased by €735 million (+5%) to €14,952 million. On a comparable basis, gross revenues increased by €455 million (+3%): Property & Casualty (€+166 million or +4%) to €4,284 million, driven by tariff increases and higher new business in both Commercial lines (€+126 million or +6%) and Personal lines (€+40 million or +2%); Life & Savings (€-527 million or -7%) to €7,023 million, driven by (i) Group Savings (€-380 million or -44%) mainly due to the non-repeat of a large Unit-Linked Pension contract, (ii) Individual Savings (€-101 million or -2%) due to lower sales in traditional G/A Savings, partly offset by strong sales in Eurocroissance and Unit-Linked products which contributed 64% of total Individual Savings revenues, Half Year 2022 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2022 compared to 43% on average for the market, and (iii) Protection (€-45 million or -2%) from loss in partnerships in Credit and Lifestyle Protection, partly offset by higher volumes in individual domestic market; Health (€+688 million or +25%) to €3,406 million, driven by higher volumes in Group business (€+651 million or +28%) in international mainly from two large contracts and in domestic market; Banking (€+128 million or +116%) to €239 million mainly due to a favorable change in fair value of a derivative instrument hedging loans at cost, partly offset by lower mortgage loans activity in the context of high interest rates. APE increased by €100 million (or +8%) to €1,324 million. On a comparable basis, APE increased by €44 million (+3%) mainly driven by (i) Health (€+162 million or +33%) due to higher Group business in both international and domestic markets partly offset by (ii) Protection (€-59 million or -25%) from lower new business in a mature domestic market combined with the loss of partnerships in Credit and Lifestyle Protection, (iii) G/A Savings (€-43 million or -16%) in traditional business partly offset by the growth in Eurocroissance and (iv) Unit-Linked (€-16 million or -6%) mainly due to the non-repeat of a large Group Pension contract. NBV Margin decreased by 5.2 points to 24.7%. On a comparable basis, NBV margin decreased by 3.0 points mainly due to an unfavorable business mix towards Group Health. Underlying earnings before tax increased by €20 million (+2%) to €1,189 million: Property & Casualty (€+33 million or +5%) to €635 million, mainly driven by higher volumes combined with a more favorable current year claims experience notably in Commercial lines, partly offset by higher natural events, as well as more favorable prior year reserves development; Life & Savings (€+4 million or +1%) to €500 million, mainly driven by less unfavorable prior year reserves development, offset by a lower investment margin; Health (€-0 million or -1%) to €63 million, mainly driven by less favorable prior year reserves development partly offset by the ongoing development of the international business; Banking (€-16 million) to €-9 million mainly due to lower mortgage loans activity. Income tax expenses decreased by €39 million (-14%) to €-239 million mainly driven by the decrease in the corporate tax rate from 28% to 26%, higher share of dividend distributions on investment funds benefiting from a lower tax regime, partly offset by higher pre-tax underlying earnings. Underlying earnings increased by €59 million (+7%) to €952 million. Net income increased by €111 million (+11%) to €1,090 million driven by (i) higher underlying earnings, (ii) a favorable change in the fair value of equity derivatives, partly offset by (iii) an unfavorable change in the fair value of mutual funds. Half Year 2022 Financial Report 25 I EUROPE (in Euro million, except percentages) Gross revenues (a) Property & Casualty Life & Savings Health Underlying earnings before tax Property & Casualty Life & Savings Health Holding Income tax Minority interests Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE Net capital gains or losses Profit or loss on financial assets and derivatives Exceptional operations Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio New business APE NBV Margin (a) Net of intercompany eliminations. ACTIVITY REPORT – HALF YEAR 2022 June 30, 2022 June 30, 2021 19,288 18,801 10,930 10,434 4,977 5,223 3,381 3,144 2,006 1,881 1,232 1,238 598 512 145 121 32 10 (417) (409) (48) (48) 0 (0) 1,541 1,424 179 38 171 166 70 4 (15) (17) (19) (19) 1,927 1,596 91.9% 90.8% 96.4% 96.6% 92.5% 92.8% 1,000 840 45.7% 46.9% Half Year 2022 Financial Report 26 I ACTIVITY REPORT – HALF YEAR 2022 Europe - Switzerland (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 4,385 4,054 Property & Casualty 3,141 2,934 Life & Savings 1,181 1,074 Health 62 46 Underlying earnings before tax 697 576 Property & Casualty 487 370 Life & Savings 213 211 Health (2) (5) Income tax (104) (108) Minority interests (3) (2) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 590 466 Net capital gains or losses 109 (2) Profit or loss on financial assets and derivatives 111 102 Exceptional operations 3 Goodwill and other related intangible impacts (11) (11) Integration and restructuring costs NET INCOME GROUP SHARE 799 558 Property & Casualty Combined Ratio 78.8% 84.0% Health Combined Ratio 106.2% 122.4% Protection Combined Ratio 88.3% 86.4% New business APE 583 375 NBV Margin 43.7% 45.3% Average exchange rate: € 1.00 = Swiss Franc 1.03 1.09 (a) Net of intercompany eliminations. Gross revenues increased by €330 million (+8%) to €4,385 million. On a comparable basis, gross revenues increased by €109 million (+3%): Property & Casualty (€+45 million or +2%) to €3,141 million driven by Commercial lines (€+48 million or +3%) mainly due to higher volumes and positive price effects on Workers’ Compensation as well as higher volumes in Liability, partly offset by Personal lines (€-3 million) as a result of the decrease in Motor from strong market competition offset by the growth in Digital Device Insurance; Life & Savings (€+52 million or +5%) to €1,181 million due to Group Life (€+35 million or +5%) due to higher sales of semi-autonomous products, and Individual Life (€+17 million or +4%) notably in higher regular premiums from a hybrid product; Health (€+12 million or +26%) to €62 million from continued portfolio growth. APE increased by €208 million (+55%) to €583 million. On a comparable basis, APE increased by €175 million (+47%) driven by Group Life (€+177 million or +54%) due to strong sales of semi-autonomous products. Half Year 2022 Financial Report 27 I ACTIVITY REPORT – HALF YEAR 2022 NBV Margin decreased by 1.6 points to 43.7% mainly driven by a less favorable business mix within Group Protection. Underlying earnings before tax increased by €122 million (+21%) to €697 million. On a constant exchange rate basis, underlying earnings before tax increased by €82 million (+14%): Property & Casualty (€+89 million or +24%) to €487 million driven by a higher technical result (€+90 million) due to lower Nat Cat charges from the non-repeat of severe hailstorms in June 2021 combined with more favorable prior year reserves development, partly offset by higher attritional losses mainly in Motor and Workers’ Compensation from higher claims frequency; Life & Savings (€-10 million or -5%) to €213 million driven by a lower technical result (€-28 million) in both Individual and Group Life, partly offset by a higher investment margin (€+8 million) notably in Individual Life and higher loadings on premiums (€+10 million) in both Group Life and Individual Life; Health (€+4 million or +65%) to €-2 million. Income tax expenses decreased by €3 million (-3%) to €-104 million. On a constant exchange rate basis, income tax expenses decreased by €9 million (-9%) driven by favorable tax one-offs, partly offset by higher pre-tax underlying earnings. Underlying earnings increased by €124 million (+27%) to €590 million. On a constant exchange rate basis, underlying earnings increased by €90 million (+19%). Net income increased by €240 million (+43%) to €799 million. On a constant exchange rate basis, net income increased by €195 million (+35%) driven by higher underlying earnings and higher net capital gains (€+104 million) mainly on equities. Half Year 2022 Financial Report 28 I ACTIVITY REPORT – HALF YEAR 2022 Europe - Germany (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 6,387 6,227 Property & Casualty 2,885 2,793 Life & Savings 1,613 1,633 Health 1,890 1,800 Underlying earnings before tax 540 439 Property & Casualty 341 304 Life & Savings 105 61 Health 57 59 Holding 36 15 Income tax (169) (103) Minority interests (6) (5) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 365 332 Net capital gains or losses 21 17 Profit or loss on financial assets and derivatives 11 7 Exceptional operations 0 1 Goodwill and other related intangible impacts (1) (2) Integration and restructuring costs (5) (6) NET INCOME GROUP SHARE 392 349 Property & Casualty Combined Ratio 90.0% 91.6% Health Combined Ratio 97.0% 96.8% Protection Combined Ratio 96.5% 97.0% New business APE 191 191 NBV Margin 59.5% 60.9% (a) Net of intercompany eliminations. Gross revenues increased by €161 million (+3%) to €6,387 million. On a comparable basis gross revenues increased by €161 million (+3%): Property & Casualty (€+91 million or 3%) to €2,885 million, driven by (i) Commercial Non-Motor (€+81 million or +7%) mainly due to new business and tariff increases in a hardening market environment, especially in Property Mid-Market, as well as new business in Liability and in Legal Assistance, (ii) Personal Non-Motor (€+32 million or +4%) mainly from tariff increases, including automatic indexation and new business in Household as well as in Legal Assistance, partly offset by (iii) Personal Motor (€-23 million or -3%) from the decrease in new car registrations; Life & Savings (€-21 million or -1%) to €1,613 million, stemming from traditional G/A Savings products (€-63 million or -8%), partly offset by higher new business in hybrid (€+23 million or +7%) and in Unit- Linked products (€+22 million or +10%) as well as in Pure Protection (€+9 million or +3%) both in line with the strategy; Half Year 2022 Financial Report 29 I ACTIVITY REPORT – HALF YEAR 2022 Health (€+90 million or +5%) to €1,890 million, driven by tariff increases in full benefit insurance and by the continued growth in the civil servants segment. APE remained stable at €191 million. NBV Margin decreased by 1.4 pts. to 59.5% mainly due to actuarial assumptions update. Underlying earnings before tax increased by €101 million (+23%) to €540 million: Property & Casualty (€+37 million or +12%) to €341 million, reflecting a lower combined ratio (-1.6 points) driven by lower attritional losses in Household, lower large losses in Commercial Non-Motor and favorable prior year reserves development, partly offset by higher Nat Cat charges notably from winter storms; Life & Savings (€+44 million or +71%) to €105 million, mainly from a higher investment margin as well as from an improved technical margin and higher fees and revenues as a result of the change in business mix; Health (€-2 million or -3%) to €57 million as the growth in volumes was more than offset by less favorable prior year reserves development while the current year combined ratio remained stable; Holding (€+21 million or +146%) to €36 million, driven by a favorable tax one-off as well as lower pension costs. Income tax expenses increased by €66 million (+65%) to €-169 million, driven by higher pre-tax underlying earnings combined with the non-repeat of positive tax one-offs. Underlying earnings increased by €34 million (+10%) to €365 million. Net income increased by €43 million (+12%) to €392 million driven by higher underlying earnings and higher net realized gains notably on equities, combined with a favorable change in the fair value of derivatives not eligible for hedge accounting. Half Year 2022 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2022 Europe - Belgium (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 1,904 1,817 Property & Casualty 1,240 1,183 Life & Savings 582 557 Health 82 76 Underlying earnings before tax 240 252 Property & Casualty 70 106 Life & Savings 166 139 Health 5 7 Holding (1) (0) Income tax (47) (58) Minority interests (0) (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 193 193 Net capital gains or losses 42 17 Profit or loss on financial assets and derivatives 28 70 Exceptional operations 70 Goodwill and other related intangible impacts (1) (1) Integration and restructuring costs (1) (2) NET INCOME GROUP SHARE 332 278 Property & Casualty Combined Ratio 101.8% 95.8% Health Combined Ratio 95.7% 91.7% Protection Combined Ratio 96.2% 98.1% New business APE 30 26 NBV Margin 65.9% 74.2% (a) Net of intercompany eliminations. As part of the disposal of AXA Bank Belgium on December 31, 2021, 100% of Crelan Insurance has been transferred to AXA Belgium. Crelan Insurance provides protection insurance linked to loans originated by Crelan Bank NV/SA. Gross revenues increased by €87 million (+5%) to €1,904 million. On a comparable basis, gross revenues increased by €70 millon (+4%): Property & Casualty (€+56 million or +5%) to €1,240 million driven by (i) Commercial lines (€+44 million or +7%) mainly in Property and Liability due to tariff increases including automatic indexation as well as strong sales in the SME segment, partly offset by pruning measures in the Mid-Market segment, and (ii) Personal lines (€+12 million or +2%) following tariff increases including automatic indexation, partly offset by lower volumes in Motor resulting from the decrease in new car registrations; Life & Savings (€+8 million or 1%) to €582 million mainly from the growth in Protection with General Account Savings products (€+9 million or +3%); Half Year 2022 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2022 Health (€+6 million or +8%) to €82 million driven by new Group contracts. APE increased by €4 million (+15%) to €30 million. On a comparable basis, APE increased by €1 million (+3%) mainly driven by higher sales in Self-Employed Unit-Linked pension products. NBV Margin decreased by 8.3 points to 65.9%. On a comparable basis, NBV margin decreased by 0.5 point mainly due to a less favorable business mix from the non-repeat of strong sales in Pure Protection. Underlying earnings before tax decreased by €12 million (-5%) to €240 million: Property & Casualty (€-37 million or -34%) to €70 million mainly driven by unfavorable prior year reserves development as well as higher natural event charges related to winter storms, partly offset by improved current year performance in Commercial lines combined with a higher investment result notably from funds distribution; Life & Savings (€+26 million or +19%) to €166 million mainly from higher investment margin driven by exceptional funds distribution combined with lower interests credited as well as higher technical margin notably following Crelan Insurance integration; Health (€-1 million or -22%) to €5 million. Income tax expenses decreased by €11 million (-19%) to €-47 million mainly driven by lower pre-tax underlying earnings and a higher share of dividend distributions on investment funds benefiting from a lower regime, combined with favorable tax one-offs. Underlying earnings remained stable at €193 million. Net income increased by €54 million (+20%) to €332 million driven by the downward revision on the loss of the expected disposal of a General Account Savings portfolio (€+70 million before the recycling of net unrealized gains upon closing of the transaction) combined with higher net realized capital gains (€+26 million) as well as a positive change in fair value of freestanding derivatives (€+15 million), partly offset by a negative change in the fair value of mutual funds and derivatives not eligible for hedge accounting under IAS39 (€-64 million). Half Year 2022 Financial Report 32 I ACTIVITY REPORT – HALF YEAR 2022 Europe - United Kingdom & Ireland (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 2,973 2,774 Property & Casualty 1,866 1,780 Health 1,107 994 Underlying earnings before tax 154 233 Property & Casualty 83 181 Health 74 56 Holding (4) (4) Income tax 8 (46) Minority interests (0) Income from affiliates and associates 0 (0) UNDERLYING EARNINGS GROUP SHARE 162 186 Net capital gains or losses (1) 1 Profit or loss on financial assets and derivatives 34 6 Exceptional operations (1) Goodwill and other related intangible impacts (2) (2) Integration and restructuring costs (11) (3) NET INCOME GROUP SHARE 183 187 Property & Casualty Combined Ratio 100.8% 94.6% Health Combined Ratio 94.0% 94.9% (a) Net of intercompany eliminations. Gross revenues increased by €199 million (+7%) to €2,973 million. On a comparable basis, gross revenues increased by €122 million (+4%): Property & Casualty (€+46 million or +3%) to €1,866 million driven by (i) Commercial Non-Motor (€+58 million or +11%) in both Property (€+44 million or +13%) and Liability (€+10 million or +8%) mainly from tariff increases in the United Kingdom and higher volumes in Ireland and in the United Kingdom, combined with (ii) Personal Motor (€+16 million or +2%) notably from strong retention in Ireland, partly offset by the continued market softening in the United Kingdom, partly offset by (iii) lower volumes in Personal Non-Motor (€-29 million or -10%) due to the transfer of the Travel book (€-25 million or -45%); Health (€+76 million or +8%) to €1,107 million driven by higher volumes mainly from strong retention in the United Kingdom Group business combined with underwriting measures in both Group and Individual businesses. Underlying earnings before tax decreased by €79 million (-34%) to €154 million. On a constant exchange rate basis, underlying earnings before tax decreased by €81 million (-35%): Property & Casualty (€-97 million or -54%) to €83 million mainly driven by (i) the deterioration of the combined ratio (+6.2 points) due to higher Motor claims frequency, heightened inflation combined with the continued soft market conditions in Personal Lines and higher natural events from winter storms, partly offset by (ii) a higher investment result; Half Year 2022 Financial Report 33 I ACTIVITY REPORT – HALF YEAR 2022 Health (€+16 million or +29%) to €74 million mainly reflecting higher volumes and a higher investment result; Holding (€-0 million or -2%) to €-4 million. Income tax expenses decreased by €55 million (-118%) to €8 million. On a constant exchange rate basis, income tax expenses decreased by €54 million (-117%) driven by lower pre-tax underlying earnings combined with favorable tax one-offs. Underlying earnings decreased by €24 million (-13%) to €162 million. On a constant exchange rate basis, underlying earnings decreased by €27 million (-14%). Net income decreased by €4 million (-2%) to €183 million. On a constant exchange rate basis, net income decreased by €6 million (-3%) as the decrease in underlying earnings was partly offset by a favorable change in the fair value of mutual funds and favorable foreign exchange impacts. Half Year 2022 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2022 Europe - Spain (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 1,433 1,431 Property & Casualty 866 847 Life & Savings 392 417 Health 176 167 Underlying earnings before tax 147 160 Property & Casualty 107 132 Life & Savings 33 23 Health 8 5 Income tax (34) (38) Minority interests (0) (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 113 122 Net capital gains or losses (6) (3) Profit or loss on financial assets and derivatives (16) (15) Exceptional operations 1 Goodwill and other related intangible impacts (1) (1) Integration and restructuring costs (0) (5) NET INCOME GROUP SHARE 90 99 Property & Casualty Combined Ratio 93.3% 88.5% Health Combined Ratio 101.8% 101.1% Protection Combined Ratio 98.3% 103.3% New business APE 57 62 NBV Margin 43.9% 50.1% (a) Net of intercompany eliminations. Gross revenues remained stable at €1,433 million: Property & Casualty (€+19 million or +2%) to €866 million driven by both higher volumes and tariff increases in Commercial lines (€+28 million or +11%), especially in Liability (€+12 million or +17%), partly offset by Personal Motor (€-14 million or -3%) due to lower volumes in a highly competitive market; Life & Savings (€-26 million or -6%) to €392 million mainly due to lower sales in Unit-Linked (€-27 million or -12%); Health (€+9 million or +5%) to €176 million driven by both tariff increases and higher volumes. APE decreased by €5 million (-8%) to €57 million mainly driven by lower sales in Unit-Linked products (€-6 million or -21%). NBV Margin decreased by 6.2 points to 43.9% mainly due to a less favorable business mix within Pure Protection business. Half Year 2022 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2022 Underlying earnings before tax decreased by €13 million (-8%) to €147 million: Property & Casualty (€-25 million or -19%) to €107 million mainly driven by a higher combined ratio notably due to higher motor claims frequency, partly offset by higher investment income as a result of funds distribution; Life & Savings (€+9 million or +41%) to €33 million mainly driven by an improved technical margin reflecting a more favorable claims experience in Pure Protection; Health (€+3 million or +60%) to €8 million mainly due to a higher investment income. Income tax expenses decreased by €3 million (-9%) to €-34 million driven by lower pre-tax underlying earnings. Underlying earnings decreased by €9 million (-8%) to €113 million. Net income decreased by €9 million (-9%) to €90 million driven by lower underlying earnings. Half Year 2022 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2022 Europe - Italy (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 2,206 2,498 Property & Casualty 932 896 Life & Savings 1,209 1,541 Health 65 61 Underlying earnings before tax 228 222 Property & Casualty 144 145 Life & Savings 82 77 Health 2 (0) Income tax expenses / benefits (70) (56) Minority interests (39) (41) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 119 125 Net capital gains or losses 13 9 Profit or loss on financial assets and derivatives 2 (5) Exceptional operations (0) Goodwill and other related intangible impacts Integration and restructuring costs (3) (4) NET INCOME GROUP SHARE 131 125 Property & Casualty Combined Ratio 90.5% 89.9% Health Combined Ratio 99.4% 103.3% Protection Combined Ratio 81.0% 84.5% New business APE 140 186 NBV Margin 31.9% 30.7% (a) Net of intercompany eliminations. Gross Revenues decreased by €292 million (-12%) to €2,206 million: Property & Casualty (€+36 million or +4%) to €932 million driven by (i) Commercial Lines (€+21 million or +8%) from tariff increases and higher volumes, notably in Property and Liability and by (ii) Personal Lines (€+15 million or +2%) notably in Motor, mainly from new business through brokers channel and the higher renewals through agents channel; Life & Savings (€-332 million or -22%) to €1,209 million mainly in General Account Savings (€-289 million or -28%) and in Unit-Linked (€-27 million or -7%) reflecting lower sales through the banking channel in a challenging market environment; Health (€+4 million or +7%) to €65 million, stemming from Individual business (€+2 million or +6%) driven by higher renewals and Group business (€+2 million or +8%) thanks to higher new business. Half Year 2022 Financial Report 37 I ACTIVITY REPORT – HALF YEAR 2022 APE decreased by €46 million (-25%) to €140 million mainly from Unit-Linked (€-29 million or -28%) driven by lower sales of Investments products, combined with a reduction in General Account Savings (€-15 million or -22%) as a consequence of lower sales through the banking channel. NBV Margin improved by 1.2 points to 31.9% driven by a favorable change in business mix towards Pure Protection business, notably through agents channel. Underlying earnings before tax increased by € 6 million (+3%) to €228 million: Property & Casualty (€-1 million or 0%) to €144 million due to a higher current year combined ratio (+1.8 points) mainly driven by higher Motor claims frequency, as well as higher Nat Cat charges, partly offset by volumes growth, and favorable prior year reserves development; Life & Savings (€+5 million or 6%) to €82 million, mainly reflecting an improved technical experience in Protection business more than offsetting a decrease in the investment margin; Health (€+2 million) to €2 million driven by lower general expenses. Income tax expenses increased by €14 million driven by the non repeat of a positive tax one-off in 2021 as well as higher pre-tax underlying earnings. Minority interests decreased by €2 million (-5%) to €39 million as a result of the decrease of AXA MPS underlying earnings. Underlying earnings decreased by €6 million (-5%) to €119 million. Net income increased by €6 million (+5%) to €131 million as the decrease in underlying earnings was more than offset by higher realized capital gains and a positive change in the fair value of derivatives not eligible for hedge accounting under IAS39. Half Year 2022 Financial Report 38 I ASIA (in Euro million, except percentages) Gross revenues (a) Property & Casualty Life & Savings Health Underlying earnings before tax Property & Casualty Life & Savings Health Holding Income tax Minority interests Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE Net capital gains or losses Profit or loss on financial assets and derivatives Exceptional operations Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE Property & Casualty Combined Ratio Health Combined Ratio Protection Combined Ratio New business APE NBV Margin (a) Net of intercompany eliminations. ACTIVITY REPORT – HALF YEAR 2022 June 30, 2022 June 30, 2021 5,689 5,568 1,121 1,015 3,416 3,444 1,152 1,108 773 708 97 55 369 361 308 295 (1) (3) (151) (142) (5) (4) 111 97 728 658 (11) 0 (49) 64 (27) (17) (15) (0) (0) 651 680 94.1% 97.7% 73.5% 73.9% 90.1% 88.9% 898 866 58.6% 64.3% Half Year 2022 Financial Report 39 I ACTIVITY REPORT – HALF YEAR 2022 Asia - Japan (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 2,802 2,911 Property & Casualty 221 222 Life & Savings 1,884 1,977 Health 698 711 Underlying earnings before tax 455 454 Property & Casualty 30 25 Life & Savings 209 185 Health 217 246 Holding (1) (2) Income tax (129) (129) Minority interests (4) (4) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 322 321 Net capital gains or losses 0 1 Profit or loss on financial assets and derivatives 38 96 Exceptional operations Goodwill and other related intangible impacts Integration and restructuring costs 0 NET INCOME GROUP SHARE 360 418 Property & Casualty Combined Ratio 87.4% 90.0% Health Combined Ratio 70.4% 66.6% Protection Combined Ratio 88.3% 88.3% New business APE 329 335 NBV Margin 125.5% 118.8% Average exchange rate: € 1.00 = Japanese Yen 134 130 (a) Net of intercompany eliminations. Gross revenues decreased by €108 million (-4%) to €2,802 million. On a comparable basis, gross revenues decreased by €12 million (0%): Property & Casualty (€+7 million or +3%) to €221 million, mainly driven by higher volumes in Motor; Life & Savings (€-29 million or -1%) to €1,884 million, as the strong sales in Protection (€+156 million or +10%), mainly from Protection with Unit-Linked products, were more than offset by lower volumes in General Account Savings (€-172 million or -38%) mainly from the non-repeat of elevated sales of a capital-light Single Premium Whole Life product in 1H21 in line with less favorable market conditions; Health (€+11 million or +1%) to €698 million from higher volumes in Medical rider products. APE decreased by €6 million (-2%) to €329 million. On a comparable basis, APE increased by €5 million (+2%) due to strong sales of both Protection with Unit-Linked products (€+29 million) and Medical rider products in Health (€+4 million), partly offset by the non-repeat of elevated sales in 1H21 of the capital-light Single Premium Whole Life product (€-19 million) following less favorable market conditions. Half Year 2022 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2022 NBV Margin increased by 6.7 points to 125.5% mainly driven by a favorable change in business mix towards Protection with Unit-Linked and Health Medical rider products. Underlying earnings before tax increased by €1 million (0%) to €455 million. On a constant exchange rate basis, underlying earnings before tax increased by €17 million (+4%): Property & Casualty (€+6 million or +26%) to €30 million, mainly from more favorable prior year reserves development; Life & Savings (€+31 million or +17%) to €209 million, mainly driven by a higher net technical margin stemming from growth in Protection with Unit-Linked combined with efficiency measures, partly offset by higher acquisition costs in line with business growth; Health (€-21 million or -9%) to €217 million, mainly from higher COVID-19 claims in 1H22; Holding remained stable at €-1 million. Income tax expenses remained stable at €-129 million. On a constant exchange rate basis, income tax expenses increased by 5 million (+4%) driven by higher pre-tax underlying earnings. Underlying earnings increased by €1 million to €322 million. On a constant exchange rate basis, underlying earnings increased by €12 million (+4%). Net income decreased by €58 million to €360 million. On a constant exchange rate basis, net income decreased by €46 million as higher underlying earnings were more than offset by a less favorable change in the fair value of financial assets, notably in private equity and hedge funds. Half Year 2022 Financial Report 41 I ACTIVITY REPORT – HALF YEAR 2022 Asia - Hong Kong (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 2,049 1,896 Property & Casualty 154 129 Life & Savings 1,512 1,448 Health 383 320 Underlying earnings before tax 289 246 Property & Casualty 37 14 Life & Savings 160 173 Health 92 58 Income tax (15) (11) Minority interests (0) (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 273 235 Net capital gains or losses (7) (0) Profit or loss on financial assets and derivatives 6 1 Exceptional operations 1 Goodwill and other related intangible impacts (7) (6) Integration and restructuring costs (1) NET INCOME GROUP SHARE 265 230 Property & Casualty Combined Ratio 78.9% 93.8% Health Combined Ratio 73.7% 80.3% Protection Combined Ratio 91.7% 89.3% New business APE 184 227 NBV Margin 32.0% 35.4% Average exchange rate: € 1.00 = Hong Kong Dollar 8.56 9.35 (a) Net of intercompany eliminations. Gross revenues increased by €153 million (+8%) to €2,049 million. On a comparable basis, gross revenues decreased by €22 million (-1%): Property & Casualty (€+12 million or +9%) to €154 million mainly from higher new business in both Commercial and Personal lines; Life & Savings (€-65 million or -4%) to €1,512 million mainly driven by lower new business as a result of the continued Mainland China border closure as well as reinforced restrictions in the context of the COVID-19 crisis, namely in Unit-Linked products and Protection, partly offset by in-force growth in Protection with Savings; Health (€+30 million or +10%) to €383 million mainly driven by higher volumes in both Individual and Group businesses. Half Year 2022 Financial Report 42 I ACTIVITY REPORT – HALF YEAR 2022 APE decreased by €42 million (-19%) to €184 million. On a comparable basis, APE decreased by €58 million (-26%) driven by lower sales of Protection products following the continued Mainland China border closure as well as reinforced restrictions in the context of the COVID-19 crisis. NBV Margin decreased by -3.3 points to 32.0%, mainly due to lower new business volume leading to higher expense overrun. Underlying earnings before tax increased by €43 million (+17%) to €289 million. On a constant exchange rate basis, underlying earnings before tax increased by €18 million (+7%): Property & Casualty (€+20 million) to €37 million mainly driven by favorable prior year reserves development; Life & Savings (€-27 million or -16%) to €160 million mainly from the recurring impact of a reinsurance transaction on a closed book of whole-life insurance policies implemented in 2H21 (€-18 million) and a lower surrender margin (€-14 million), partly offset by lower general expenses (€+10 million); Health (€+26 million or +44%) to €92 million driven by favorable prior year reserves development. Income tax expenses increased by €4 million (+40%) to €-15 million. On a constant exchange rate basis, income tax expenses increased by €3 million (+28%) driven by higher pre-tax underlying earnings. Underlying earnings increased by €38 million (+16%) to €273 million. On a constant exchange rate basis, underlying earnings increased by €15 million (+6%). Net income increased by €35 million (+15%) to €265 million. On a constant exchange rate basis, net income increased by €13 million (+6%) mainly driven by higher underlying earnings. Half Year 2022 Financial Report 43 I ACTIVITY REPORT – HALF YEAR 2022 Asia - High Potentials (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 506 430 Property & Casualty 414 334 Life & Savings 20 19 Health 72 78 Underlying earnings before tax 5 (10) Property & Casualty 5 (4) Life & Savings 1 3 Health (1) (9) Income tax 0 3 Minority interests (1) (0) Income from affiliates and associates 111 97 UNDERLYING EARNINGS GROUP SHARE 115 90 Net capital gains or losses (4) (0) Profit or loss on financial assets and derivatives (93) (34) Exceptional operations Goodwill and other related intangible impacts (10) (9) Integration and restructuring costs (0) 0 NET INCOME GROUP SHARE 8 48 Property & Casualty Combined Ratio 102.6% 104.9% Health Combined Ratio 106.1% 113.9% Protection Combined Ratio 122.3% 108.4% New business APE 385 305 NBV Margin 14.1% 26.1% (a) Net of intercompany eliminations. Scope: (i) The Property & Casualty subsidiary in Thailand, the non bancassurance Life & Savings subsidiary in Indonesia and the Property & Casualty subsidiary in China (AXA Tianping) are fully consolidated; (ii) the bancassurance Life & Savings subsidiaries in China, Thailand, Indonesia and the Philippines are consolidated under the equity method and do not contribute to the gross revenues. Gross revenues increased by €76 million (+18%) to €506 million. On a comparable basis, gross revenues increased by €36 million (+8%): Property & Casualty (€+48 million or +14%) to €414 million from (i) China (€+32 million or +11%) driven by higher volumes in Commercial lines (€+16 million or +22%) from Non-Motor and in Personal lines (€+15 million or +7%) from both Motor and Non-Motor, and (ii) Thailand (€+16 million or +33%) driven by higher sales in Non-Motor; Life & Savings remained stable at €20 million; Health (€-12 million or -15%) to €72 million from China (-13 million or -24%) following the discontinuation of a digital partnership, partly offset by higher sales from agency and broker channels. Half Year 2022 Financial Report 44 I ACTIVITY REPORT – HALF YEAR 2022 APE increased by €80 million (+26%) to €385 million. On a comparable basis, APE increased by €50 million (+16%) driven by China (€+69 million or +38%) mainly driven by higher sales of regular premium General Account Savings products in 1Q22. This was partly offset by Thailand (€-10 million or -19%) from lower volumes in Health (€-6 million or -47%) and Protection with Savings (€-4 million or -11%). NBV Margin decreased by 11.9 points to 14.1%. On a comparable basis, NBV Margin decreased by 11.5 points mainly driven by China (-13.1 points) notably from an unfavorable change in product mix towards General Account Savings products. Underlying earnings increased by €25 million (+28%) to €115 million. On a constant exchange rate basis, underlying earnings increased by €19 million (+21%): China (€+17 million or +87%) to €41 million driven by (i) Health (€+7 million) mainly from the non-repeat of an unfavorable prior year reserves development following the discontinuation of a digital partnership, combined with an improved profitability on core branch business, (ii) Life & Savings (€+6 million) driven by a higher net technical margin, and (iii) Property & Casualty (€+5 million) mainly stemming from a lower claims frequency in Motor in the context of COVID-19 lockdowns, partly offset by negative impacts from the change in price regulation; Thailand (€+3 million or +9%) to €36 million driven by higher net technical margin in Life & Savings (€+3 million); Indonesia (€-2 million or -8%) to €23 million mainly driven by Life & Savings (€-1 million); and The Philippines remained stable at €15 million. Net income decreased by €39 million (-82%) to €8 million. On a constant exchange rate basis, net income decreased by €38 million (-79%) as higher underlying earnings were more than offset by the unfavorable change in the fair value of financial assets and liabilities, primarily in China. Half Year 2022 Financial Report 45 I ACTIVITY REPORT – HALF YEAR 2022 AXA XL (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 10,719 10,505 Property & Casualty Insurance 8,384 7,415 Property & Casualty Reinsurance 2,247 3,003 Life & Savings 87 87 Underlying earnings before tax 853 725 Property & Casualty Insurance 740 626 Property & Casualty Reinsurance 143 134 Life & Savings 11 7 Holding (42) (42) Income tax (164) (107) Minority interests (1) 1 Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE 688 619 Net capital gains or losses (35) 46 Profit or loss on financial assets and derivatives (9) 131 Exceptional operations (0) Goodwill and other related intangible impacts (22) (31) Integration and restructuring costs (32) (20) NET INCOME GROUP SHARE 590 745 Property & Casualty Combined Ratio 95.6% 95.8% o/w Insurance Combined Ratio 94.3% 94.4% o/w Reinsurance Combined Ratio 100.6% 99.9% (a) Net of intercompany eliminations. Gross revenues increased by €214 million (+2%) to €10,719 million. On a comparable basis, gross revenues decreased by €652 million (-6%) as tariff increases across all lines of business were more than offset by lower Property Cat exposure in Reinsurance, in line with the strategy, lower volumes in North America Professional lines, and selective underwriting: Property & Casualty Reinsurance (€-564 million or -21%) to €2,247 million driven by (i) Nat Cat exposure reductions in Property Treaty (€-261 million or -38%) and Property Cat (€-236 million or -37%), partly offset by tariff increases (+5% and +7%, respectively), and (ii) Specialty and Other lines (€-62 million or -5%) as tariff increases (+4%) were more than offset by selective underwriting; Property & Casualty Insurance (€-80 million or -1%) to €8,384 million driven by (i) Casualty (€- 106 million or -4%) and Specialty (€-86 million or -6%) mainly in the context of selective underwriting despite tariff increases (+6% and +4% respectively), partly offset by (ii) Property (€+104 million or +5%) mainly from International (€+80 million or +8%) driven by higher new business combined with tariff increases (+12%), partly offset by selective underwriting, as well as from North America (€+20 million or +6%) driven by higher renewals and tariff increases (+13%), and (iii) Financial lines (€+8 million or +1%) as lower volumes of transactional business in North America Professional lines (€-102 million or -10%) were more than offset by North America CyberTech (€+77 million or +64%) and International Financial lines (€+32 million or +8%) driven entirely by tariff increases; 46 Property & Casualty Insurance (€-80 million or -1%) to €8,384 million driven by (i) Casualty (€- 106 million or -4%) and Specialty (€-86 million or -6%) mainly in the context of selective underwriting despite tariff increases (+6% and +4% respectively), partly offset by (ii) Property (€+104 million or +5%) mainly from International (€+80 million or +8%) driven by higher new business combined with tariff increases (+12%), partly offset by selective underwriting, as well as from North America (€+20 million or +6%) driven by higher renewals and tariff increases (+13%), and (iii) Financial lines (€+8 million or +1%) as lower volumes of transactional business in North America Professional lines (€-102 million or -10%) were more than offset by North America CyberTech (€+77 million or +64%) and International Financial lines (€+32 million or +8%) driven entirely by tariff increases; 46 I ACTIVITY REPORT – HALF YEAR 2022 Life & Savings (€-8 million or -9%) to €87 million. Underlying earnings before tax increased by €128 million (+18%) to €853 million. On a constant exchange rate basis, underlying earnings before tax increased by €49 million (+7%): Property & Casualty (€+42 million or +5%) to €884 million driven by (i) an improved all year combined ratio (-0.3 point) from lower Nat Cat charges (-1.2 points to 4.8%) driven by exposure reductions and less severe events, positive impacts from tariff increases and change in business mix, as well as favorable developments on prior year losses (-1.4 points), partly offset by the losses related to the war in Ukraine (+3.1 points or €-0.3 billion) notably in Aviation. (ii) The increase in net investment income (€+34 million) was mainly driven by higher private equity fund distributions; Life & Savings (€+3 million or +44%) to €11 million; Holding (€+4 million or +9%) to €-42 million. Income tax expenses increased by €57 million (+54%) to €-164 million. On a constant exchange rate basis, income tax expenses increased by €42 million (+39%) driven by higher pre-tax underlying earnings and a change in geographical mix. Underlying earnings increased by €68 million (+11%) to €688 million. On a constant exchange rate basis, underlying earnings increased by €5 million (+1%). Net income decreased by €155 million (-21%) to €590 million. On a constant exchange rate basis, net income decreased by €209 million (-28%) as the increase in underlying earnings was more than offset by (i) the non-repeat of the 2021 strong market rebound, notably on the fair value of alternative assets and equity derivatives net of foreign exchange impacts, and (ii) lower net realized capital gains. Half Year 2022 Financial Report 47 I ACTIVITY REPORT – HALF YEAR 2022 INTERNATIONAL (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 2,673 3,199 Property & Casualty 1,553 1,679 Life & Savings 364 417 Health 756 937 Banking 166 Underlying earnings before tax 184 291 Property & Casualty 187 226 Life & Savings 23 13 Health (1) 15 Other (b) (25) 38 Income tax (47) (70) Minority interests (25) (37) Income from affiliates and associates 17 14 UNDERLYING EARNINGS GROUP SHARE 129 198 Net capital gains or losses (1) 0 Profit or loss on financial assets and derivatives (12) 20 Exceptional operations (3) (60) Goodwill and other related intangible impacts (147) (6) Integration and restructuring costs (3) (2) NET INCOME GROUP SHARE (36) 150 Property & Casualty Combined Ratio 100.2% 94.0% Health Combined Ratio 101.8% 99.5% Protection Combined Ratio 108.0% 105.3% New business APE 51 76 NBV Margin 18.2% 36.0% (a) Net of intercompany eliminations. (b) Other corresponds to banking activities and holding. Scope: (i) Mexico, Colombia, Turkey, Morocco, Nigeria, Luxembourg and Brazil are fully consolidated; (ii) Russia (Reso) and India Life & Savings are consolidated under the equity method and do not contribute to the gross revenues. Malaysia is classified as held for sale. Greece was sold in May 2021 and contributed until March 2021. The Gulf Region and India Property & Casualty were sold in September 2021 and contributed until June 2021. AXA Bank Belgium was disposed on December 31, 2021, and therefore contributed until December 2021. Singapore was sold in February 2022 and contributed until December 2021. Gross revenues decreased by €526 million (-16%) to €2,673 million. On a comparable basis, gross revenues increased by €464 million (+20%) from Property & Casualty (€+325 million or +24%), Health (€+85 million or +13%) and Life & Savings (€+53 million or +18%): Half Year 2022 Financial Report 48 I ACTIVITY REPORT – HALF YEAR 2022 EME-LATAM (€+398 million or +22%) to €2,094 million mainly driven by Property & Casualty (€+301 million or +30%) from Turkey and Colombia, and Health (€+85 million or +15%) from Mexico and Turkey: o Turkey (€+233 million) mainly from tariff increases resulting from higher inflation in (i) Commercial lines (€+119 million or +92%) from both Motor and Property, (ii) Personal lines (€+88 million) from Motor and (iii) Health (€+24 million or +65%), o Colombia (€+70 million or +24%) driven by Property & Casualty (€+72 million or +30%) mainly from higher volumes in both Personal Non-Motor and Commercial Workers’ Compensation, o Mexico (€+62 million or +6%) driven by (i) a positive price effect in Health (€+59 million or +12%) and (ii) Property & Casualty (€+1 million or 0%) from higher volumes in both Personal and Commercial lines compensating the non-repeat of large accounts in Commercial Property, o Brazil (€+17 million or +22%) mainly from higher volumes in Commercial Non-Motor, and o Luxembourg (€+16 million or +10%) mainly from a large contract in Life & Savings; Africa & Asia (€+66 million or +13%) to €579 million mainly driven by Life & Savings (€+42 million or +42%) and Property and Casualty (€+24 million or +7%): o Morocco (€+48 million or +17%) from higher volumes in (i) General Account Savings (€+34 million or +42%) and (ii) Commercial Non-Motor (€+8 million or +9%), and o Nigeria (€+16 million or +21%) driven by (i) Life & Savings (€+8 million or +65%) from higher volumes in Protection with General Account Savings and Pure Protection and (ii) Health (€+6 million or +21%) from higher volumes in Group business; APE decreased by €24 million (-32%) to €51 million. On a comparable basis, APE increased by €9 million (+20%) from (i) Protection with General Accounts Savings (€+9 million or +38%) from India and Nigeria, (ii) Unit-Linked (€+4 million or +61%) from Turkey and Luxembourg, partly offset by (iii) Pure Protection (€-6 million or -51%) in Mexico. NBV Margin decreased by 17.8 points to 18.2%. On a comparable basis, NBV Margin increased by 1.1 points notably in India. Underlying earnings before tax decreased by €108 million (-37%) to €184 million. On a constant exchange rate basis, underlying earnings before tax decreased by €102 million (-35%) mainly from (i) Banking activities (€-57 million or -100%), (ii) Property & Casualty (€-30 million or -13%) and (iii) Health (€-19 million), partly offset by (iv) Life & Savings (€+9 million or +71%): EME-LATAM (€-92 million or -37%) to €152 million driven by: o the disposals of the activities in AXA Bank Belgium (€-57 million), the Gulf Region (€-46 million) and Greece (€-6 million), o Turkey (€-12 million or -28%) as a consequence of the extraordinary high level of inflation leading to (i) unfavorable prior year reserves development in Motor from increase in minimum wage affecting bodily injury claims and (ii) a deterioration of both Property & Casualty and Health current year combined ratio, partly offset by (iii) a higher net investment income from inflation-linked bonds, and o Luxembourg (€-4 million or -19%) mainly from Property and Casualty; partly offset by: o Colombia (€+24 million) mainly driven by a higher investment result from inflation-linked bonds in Property & Casualty, Half Year 2022 Financial Report 49 I ACTIVITY REPORT – HALF YEAR 2022 o Mexico (€+4 million or +7%) driven by Life & Savings (€+9 million) due to lower COVID-19 claims, partly offset by Health (€-5 million) from unfavorable prior year reserves development; Africa & Asia (€-5 million or -8%) to €57 million driven by: o the disposals of the activities in Singapore (€-12 million), partly offset by: o Nigeria (€+4 million) following its full consolidation in 2022, and o Morocco (€+2 million or +5%) driven by (i) Life & Savings (€+5 million) from higher fees and revenues, partly offset by (ii) Property & Casualty (€-3 million or -9%) from a lower technical margin; AXA Mediterranean Holdings (€-5 million or -24%) to €-26 million. Excluding the above-mentioned changes in scope and on a constant exchange basis, underlying earnings before taxes increased by €18 million (+10%). Income tax expenses decreased by €23 million (-33%) to €-47 million. On a constant exchange rate basis, income tax expenses decreased by €23 million (-33%) driven by lower pre-tax underlying earnings. Minority interests decreased by €12 million (-33%) to €-25 million. On a constant exchange rate basis, minority interests decreased by €12 million (-32%) due to the disposal of the activities in the Gulf Region, partly offset by Colombia (€-11 million) from higher underlying earnings. Income from affiliates and associates increased by €3 million (+20%) to €17 million. On a constant exchange rate basis, income from affiliates and associates increased by €3 million (+23%) mainly from Russia (€+5 million) and India (€+3 million), partly offset by Nigeria (€-5 million) following its full consolidation in 2022. Underlying earnings decreased by €69 million (-35%) to €129 million. On a constant exchange rate basis, underlying earnings decreased by €64 million (-32%). Excluding the above-mentioned changes in scope, underlying earnings increased by €11 million (+9%). Net income decreased by €186 million to €-36 million. On a constant exchange rate basis, net income decreased by €171 million mainly due to (i) lower underlying earnings combined with (ii) the impairment of the full goodwill of Reso Garantia (€-144 million) and (iii) an unfavorable change in the fair value of financial assets (€-82 million). This was partly offset by (iv) the non-repeat of the loss on disposals in 1H21 (€+58 million) and (v) a more favorable foreign exchange impact on financial assets (€+40 million). Half Year 2022 Financial Report 50 I ACTIVITY REPORT – HALF YEAR 2022 TRANSVERSAL & CENTRAL HOLDINGS (in Euro million, except percentages) June 30, 2022 June 30, 2021 restated (a) Gross revenues (b) 1,821 1,576 Property & Casualty 807 640 Life & Savings 123 128 Health 104 103 Asset Management 788 704 Underlying earnings before tax (211) (206) Property & Casualty 1 13 Life & Savings 4 11 Health 3 (1) Other (c) (219) (229) Income tax 84 50 Minority interests (6) (6) Income from affiliates and associates 13 11 UNDERLYING EARNINGS GROUP SHARE (120) (150) Net capital gains or losses 1 4 Profit or loss on financial assets and derivatives 102 (28) Exceptional operations (30) 26 Goodwill and other related intangible impacts (1) (1) Integration and restructuring costs (65) (5) NET INCOME GROUP SHARE (113) (154) Property & Casualty Combined Ratio 102.4% 101.4% Health Combined Ratio 98.0% 100.6% (a) Reclassification of Architas activities (previously reported as part of France) to Transversal & Cental Holdings as well as within Asset Management (previously reported in Life & Savings) segment. (b) Net of intercompany eliminations. (c) Other corresponds to asset management activities and holding. Half Year 2022 Financial Report 51 I ACTIVITY REPORT – HALF YEAR 2022 AXA Investment Managers (“AXA IM”) (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 729 704 Underlying earnings before tax 234 224 Income tax (64) (60) Minority interests (5) (6) Income from affiliates and associates 13 11 UNDERLYING EARNINGS GROUP SHARE 178 170 Net capital gains or losses Profit or loss on financial assets and derivatives 3 (15) Exceptional operations 0 Goodwill and other related intangibles impacts (1) (1) Integration and restructuring costs 1 (1) NET INCOME GROUP SHARE 181 153 Average Assets under Management (in Euro billion) 749 760 Asset management fee bps 17.1 16.4 Underlying cost income ratio 66.6% 67.3% (a) Net of intercompany eliminations. Gross revenues amounted to €877 million before intercompany eliminations as of June 30, 2022. Assets under Management (“AUM”) decreased by €64 billion from December 31, 2021, to €823 billion at the end of June 30, 2022, mainly driven by (i) negative and significant market impacts (€-82 billion) from the increase in interest rates and downward equity markets, partly offset by (ii) positive net inflows (€+13 billion) from Asian joint ventures (€+8 billion) mainly in China, Third-Party clients (€+5 billion) driven by the success of both Alts and Core platforms, while the Main Fund remained stable and in line with the strategy of rebalancing between Core and Alts platforms, and (iii) favorable foreign exchange rate impacts (€+6 billion). Management fees increased by 0.7 bps to 17.1 bps. On a constant exchange rate basis, management fees increased by 0.6 bps due to a favorable change in product mix from higher share of Alternative products. Gross revenues increased by €25 million (+4%). On a comparable basis, gross revenues increased by €18 million (+3%) to €729 million mainly driven by (i) higher management fees (€+9 million) stemming from favorable product mix, (ii) higher transaction fees (€+7 million) from real estate, and (iii) higher distribution fees (€+6 million) coming from strong commercial momentum, partly offset by (iv) the non-repeat of exceptional performance fees (€-11 million). Underlying earnings before tax increased by €10 million (+5%) to €234 million. On a constant exchange rate basis, underlying earnings before tax increased by €7 million (+3%) as a result of higher revenues. The underlying cost income ratio decreased by 0.7 point to 66.6%. On a constant exchange rate basis, the underlying cost income ratio decreased by 1.2 points. Income tax expenses increased by €4 million (+6%) to €64 million. On a constant exchange rate basis, income tax expenses increased by €3 million (+5%) mainly driven by higher underlying earnings as well as the non-repeat of positive tax one-offs. Income from affiliates and associates increased by €1 million (+11%). On a constant exchange rate basis, income from affiliates and associates remained stable. Half Year 2022 Financial Report 52 I ACTIVITY REPORT – HALF YEAR 2022 Underlying earnings increased by €8 million (+5%) to €178 million. On a constant exchange rate basis, underlying earnings increased by €5 million (+3%). Net income increased by €28 million (+19%) to €181 million. On a constant exchange rate basis, net income increased by €25 million (+16%) mainly driven by higher underlying earnings and the non-repeat of a negative change in the fair value of a real estate fund. Half Year 2022 Financial Report 53 I ACTIVITY REPORT – HALF YEAR 2022 AXA Assistance (in Euro million, except percentages) June 30, 2022 June 30, 2021 Gross revenues (a) 844 670 Property & Casualty 740 566 Health 104 103 Underlying earnings before tax (20) (20) Property & Casualty (22) (19) Health 3 (1) Income tax 13 0 Minority interests (0) (0) Income from affiliates and associates UNDERLYING EARNINGS GROUP SHARE (7) (19) Net capital gains or losses (1) (0) Profit or loss on financial assets and derivatives (2) (2) Exceptional operations 1 (8) Goodwill and other related intangible impacts Integration and restructuring costs (15) (1) NET INCOME GROUP SHARE (24) (29) Property & Casualty Combined Ratio 103.2% 103.3% Health Combined Ratio 98.0% 100.6% (a) Net of intercompany eliminations. Gross revenues increased by €174 million (+26%) to €844 million. On a comparable basis, gross revenues increased by €182 million (+28%): Property & Casualty (€+174 million or +31%) to €740 million, mainly driven by the rebound of the Travel business in all geographies, and to a lesser extent from new business and higher volumes from existing partnerships in Motor; Health remained stable at €104 million; Underlying earnings before tax remain at €-20 million: Property & Casualty (€-3 million) to €-22 million, mainly due to a higher combined ratio in Motor from an increase in claims frequency and higher average costs in Europe as well as adverse prior year reserves development partly offset by the increase of volumes in Travel; Health (€+3 million) to €+3 million, reflecting a lower combined ratio mainly due to favorable business mix; Income tax expenses decreased by €12 million to €+13 million driven by positive tax one-offs. Underlying earnings increased by €12 million to €-7 million. Net income increased by €5 million to €-24 million mainly driven by higher underlying earnings partly offset by higher restructuring costs. Half Year 2022 Financial Report 54 I ACTIVITY REPORT – HALF YEAR 2022 AXA SA - HOLDING (in Euro million) June 30, 2022 June 30, 2021 UNDERLYING EARNINGS GROUP SHARE (364) (380) Net capital gains or losses Profit or loss on financial assets and derivatives 87 (17) Exceptional operations (20) 33 Goodwill and other related intangible impacts Integration and restructuring costs NET INCOME GROUP SHARE (296) (364) Underlying earnings increased by €16 million to €-364 million, mainly driven by (i) the positive impact related to the settlement of a tax litigation, partly offset by (ii) higher investments on the Digital Commercial Platform and the Digital Healthcare Platform. Net income increased by €67 million to €-296 million, mainly due to (i) higher underlying earnings and (ii) a favorable change in the fair value of foreign currency and interest rates derivatives not eligible for hedge accounting. Half Year 2022 Financial Report 55 I ACTIVITY REPORT – HALF YEAR 2022 Outlook AXA has delivered very strong operational performance in the first half of 2022. The Group remains focused on executing its strategy, growing cash generative, technical and fee-based business lines with reduced sensitivity to financial markets and lowered exposure to natural catastrophe reinsurance. The macroeconomic environment and geopolitical context have become more uncertain in the first half of the year. The Group remains vigilant to the evolving context and potential short-term challenges, including inflationary pressure, market volatility and risk of economic slowdown. Management believes AXA is well positioned despite this challenging environment, primarily because of a business profile resilient to economic cycles, a very strong balance sheet and the Group’s actions to counterbalance the impact of higher inflation. In the current context, Management remains confident in the Group’s ability to deliver on the four main financial targets of AXA’s “Driving Progress 2023” plan: (i) underlying earnings per share growth at the high end of the 3-7% CAGR target range between 2020 (rebased for COVID-19 and excess Nat Cat losses) and 2023, (ii) Underlying return on equity between 13% and 15% between 2021 and 2023, (iii) a Solvency II ratio at approximately 190%, and (iv) cumulative cash upstream in excess of €14 billion for 2021-2023. AXA’s strategy is designed to deliver sustained earnings and dividend growth, supported by enhanced cash generation, a strong balance sheet and disciplined capital management. AXA’s Management believes that the Group is well positioned to create lasting shareholder value and offer an attractive return. Half Year 2022 Financial Report 56 I ACTIVITY REPORT – HALF YEAR 2022 Glossary This glossary includes definitions of non-GAAP financial measures, or alternative performance measures (“APMs”), indicated by an asterisk (*), that Management believes are useful to understand the Group’s business and analyze the Group’s performance. SCOPE AND COMPARABLE BASIS Split by geography The split by geography is detailed below: France (insurance and banking activities, and holding); Europe, consisting of: o Switzerland (insurance activities), o Germany (insurance activities and holding), o Belgium (insurance activities and holding), o United Kingdom and Ireland (insurance activities and holding), o Spain (insurance activities), o Italy (insurance activities); Asia, consisting of: o Japan (insurance activities and holding), o Hong Kong (insurance activities), o Asia High Potentials, consisting of: ▪ Thailand (insurance activities), ▪ Indonesia (insurance activities), ▪ China (insurance activities), ▪ The Philippines (insurance activities), o South Korea (insurance activities), o Asia Holdings; AXA XL (insurance and reinsurance activities and holding); International, consisting of: o EME-LATAM: ▪ AXA Bank Belgium (disposed on December 31, 2021), ▪ Brazil (insurance activities and holding), ▪ Colombia (insurance activities), ▪ Greece (insurance activities) until March 2021 (disposed on May 31, 2021), Half Year 2022 Financial Report 57 I ACTIVITY REPORT – HALF YEAR 2022 ▪ The Gulf Region (insurance activities until June 2021 (disposed on September 7, 2021), and holding), ▪ Luxembourg (insurance activities and holding), ▪ Mexico (insurance activities), ▪ Russia (Reso) (insurance activities), ▪ Turkey (insurance activities and holding), o Africa & Asia: ▪ India (Property & Casualty activities until June 2021 (disposed on September 8, 2021), Life & Savings activities and holding), ▪ Malaysia (insurance activities held for sale), ▪ Morocco (insurance activities and holding), ▪ Nigeria (insurance activities and holding), ▪ Singapore (insurance activities held for sale until December 31, 2021 and disposed on February 11, 2022, and holding), o AXA Mediterranean Holdings; Transversal & Central Holdings, consisting of: o AXA Investment Managers, o AXA Assistance, o AXA Liabilities Managers, o AXA Global Re until June 30, 2022 (when it merged with and into AXA S.A.), o AXA Life Europe, o Architas, o AXA SA (including Group’s internal reinsurance activity consequently to the merger with AXA Global Re on June 30, 2022) and other Central Holdings. Current engines and High Potentials The split between current engines and high potentials is detailed below: Current Engines: Belgium, France, Germany, Hong Kong, Italy, Japan, Spain, Switzerland, United Kingdom & Ireland and AXA XL; High Potentials: Brazil, China, Indonesia, Mexico, the Philippines and Thailand. Comparable basis for revenues, Annual Premium Equivalent and NBV Margin “On a comparable basis” means: data for the current period were restated using the prevailing foreign currency exchange rates for the same period of prior year (constant exchange rate basis); data in one of the two periods being compared were restated for the results of acquisitions, disposals and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Half Year 2022 Financial Report 58 I ACTIVITY REPORT – HALF YEAR 2022 EARNINGS AND CAPITAL Underlying earnings* Underlying earnings represent the net income (Group share) as disclosed in the table set forth on pages 16 and 17 of this report, before the impact of the following items net of policyholder participation, deferred acquisition costs, Value of Business in-force, taxes and minority interests: realized gains and losses, change in impairment valuation allowances (on assets not designated under fair value option or trading assets) and cost at inception, intrinsic value and pay-off of derivatives used for the economic hedging of realized gains and impairments of equity securities (other than the funds backing contracts where the financial risk is borne by policyholders); profit or loss on financial assets accounted for under fair value option (excluding assets backing liabilities for which the financial risk is borne by the policyholder), foreign exchange impacts on assets and liabilities, and derivatives related to invested assets and liabilities. Derivatives related to invested assets and liabilities: o include all foreign exchange derivatives, except the pay-off related to currency options in earnings hedging strategies which are included in underlying earnings; o include all interest rate derivatives, except the pay-off related to rate instrument in earnings hedging strategies which are included in underlying earnings; o exclude derivatives related to insurance contracts evaluated according to the “selective unlocking” accounting policy. impairments of goodwill, impairments and amortization of intangibles related to customers and distribution; integration and restructuring costs related to new acquired companies as well as restructuring and associated costs related to productivity improvement plans; and exceptional operations (primarily changes in scope and discontinued operations). Earnings per share Earnings per share (“EPS”) represent AXA's consolidated earnings (net of financial charges related to undated and deeply subordinated debts recorded through shareholders’ equity) divided by the weighted average number of outstanding ordinary shares over the period. Shares held by AXA and its subisidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. Diluted earnings per share (“diluted EPS”) represent AXA's consolidated earnings (net of financial charges related to undated and deeply subordinated debts recorded through shareholders’ equity) divided by the weighted average number of outstanding ordinary shares over the period, on a diluted basis (i.e. including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Shares held by AXA and its subisidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. Underlying Earnings per share* correspond to underlying Earnings (net of financial charges related to undated subordinated debts recorded through shareholders’ equity) divided by the weighted average number of outstanding ordinary shares over the period. Shares held by AXA and its subisidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. Half Year 2022 Financial Report 59 I ACTIVITY REPORT – HALF YEAR 2022 Return on Equity Return on Equity (“RoE”) presented herein and in this report is calculated as earnings net of interest charges related to undated and deeply subordinated debts divided by the average of opening and closing shareholders’ equity both excluding: for underlying RoE*: o reserves relating to the change in the fair value through shareholders’ equity, o undated and deeply subordinated debts since they are treated as financing debt; for net income RoE: o reserves relating to the change in the fair value of available for sale fixed income securities assets through shareholders’ equity, o undated and deeply subordinated debts since they are treated as financing debt. Free Cash Flows Free Cash Flows are defined as a measure of dividend capacity calculated as the sum of earnings and required capital change. EOF (Eligible Own Funds) Surplus derived from a Solvency II balance sheet. It is defined as the excess of market value of assets over best estimate liabilities and Risk Margin as per Solvency II regulation. Solvency II ratio This ratio is calculated as per Solvency II and is equal to the total amount of the Group’s Eligible Own Funds (“EOF”) divided by the Group’s Solvency Capital Requirement (“SCR”). The Solvency Capital Requirement, i.e. the denominator of the Solvency II ratio, is set at a level ensuring that insurers and reinsurers are able to meet their obligations towards policyholders and beneficiaries over the next 12 months, with a 99.5% probability. The Solvency Capital Requirement can be calculated either based on the standard formula or an internal model. The Group is using an internal model. The Solvency II ratio is estimated primarily using AXA’s internal model calibrated based on an adverse 1/200 years shock. For further information on AXA’s internal model and Solvency II disclosures, please refer to AXA Group’s Solvency and Financial Condition Report (SFCR) as of December 31, 2021, available on AXA’s website (www.axa.com). Debt Gearing* Debt Gearing refers to the level of a company's debt related to its long term capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing gross debt (financing debt and undated and deeply subordinated debts) by total capital employed (shareholders’ equity excluding undated and deeply subordinated debts and reserves relating to the change in the fair value of financial instruments and of hedge accounting derivatives) plus gross debt. Half Year 2022 Financial Report 60 I ACTIVITY REPORT – HALF YEAR 2022 ACTIVITIES Insurance LIFE & SAVINGS HYBRID AND GENERAL ACCOUNT CAPITAL-LIGHT PRODUCTS Hybrid products: Savings products allowing clients to invest in both Unit-Linked and General Account funds. General Account capital-light products: General Account Savings products which, at inception, create more EOF than the economic capital they consume. LIFE & SAVINGS NET INFLOWS Life & Savings Net Inflows are defined as the collected premiums (including risk premiums, fees and revenues), net of surrenders, maturities, claims paid, and other benefits paid. This definition is applicable to all Life & Savings products as well as Life-like Health products, except for Mutual Funds products. NEW BUSINESS APE (NEW BUSINESS ANNUAL PREMIUM EQUIVALENT) New business APE represents 100% of new regular premiums plus 10% of single premiums, in line with EEV methodology. APE is Group share. NBV (NEW BUSINESS VALUE) The value of newly issued contracts during the current year. It consists of the present value of future profits after the costs of acquiring business, less (i) an allowance for the time value of financial option and guarantees, and (ii) cost of capital and non-financial risks. AXA calculates this value net of tax. NBV MARGIN (NEW BUSINESS VALUE MARGIN) New Business Value Margin is the ratio of: New Business Value representing the value of newly issued contracts during the current year; to Annual Premium Equivalent. This ratio represents the profitability of the new business. MARGIN ANALYSIS The Margin Analysis is presented on an underlying earnings basis. Even though the presentation of the Margin Analysis is not the same as the Statement of Income (underlying basis), it is based on the same GAAP measures as used to prepare the Statement of Income in accordance with IFRS. Underlying investment margin includes the following items: net investment income; and interests and bonuses credited to policyholders and unallocated policyholder bonuses (and the change in specific reserves purely linked to invested assets returns) related to the net investment income as well as the unwind of the discount rate used in calculating technical reserves. Underlying fees & revenues include: loadings charged to policyholders (or contractual charges) on premiums of all Life & Savings products; loadings on deposits received on all Life & Savings products and fees on funds under management for separate account (Unit-Linked) business; capitalization of deferred income linked to new business: Unearned Revenue Reserve (“URR”) and Unearned Fee Reserve (“UFR”); Half Year 2022 Financial Report 61 I ACTIVITY REPORT – HALF YEAR 2022 amortization of URR and UFR, including the impact of interest capitalized; revenues derived from mutual fund sales (which are part of consolidated revenues); and other fee revenues, e.g. fees received on financial planning or sales of third-party products. Underlying net technical margin includes the following components: mortality and morbidity margin: the difference between income or earned premiums for assuming risk and the cost of benefits and claims charges directly linked to the claims experience or its anticipation (death or disability) as well as other changes in claims and insurance reserves: all the reserve strengthening or release coming from changes in valuation assumptions and other technical impacts such as premium deficiencies net of derivatives if any; surrender margin: the difference between the benefit reserve and the surrender value paid to the policyholder in the event of early contract termination; policyholder bonuses if the policyholders participate in the risk margin; ceded reinsurance results; and claims handling costs. Expenses include the following components: acquisition expenses, including commissions and general expenses allocated to new business; capitalization of acquisition expenses linked to new business: Deferred Acquisition Costs (“DAC”) and net rights to future management fees only for investment contracts without Discretionary Participation Features (“DPF”); amortization of Deferred Acquisition Costs (DAC) and net rights to future management fees for investment contracts without DPF, including the impact of interest capitalized; administrative expenses; and policyholder bonuses if the policyholder participates in the expenses of the Company. Underlying VBI amortization includes VBI (Value of Purchased Life Business In-force) amortization related to underlying margins. There are certain material differences between the detailed line-by-line presentation in the Statement of Income and the components of Life & Savings Margin Analysis as set out below: For insurance contracts and investment contracts with DPF: o gross premiums (net of deposits), fees and other revenues are allocated in the Margin Analysis based on the nature of the revenue between “Fees & Revenues” and “Net Technical Margin”, o policyholders’ interest in participating contracts is reflected as a change in insurance benefits in the Statement of Income. In the Margin Analysis, it is allocated to the related margin, i.e. primarily “Investment Margin” and “Net Technical Margin”, o the “Investment margin” represents the net investment result in the Statement of Income and is adjusted to consider the related policyholder participation (see above) as well as changes in specific reserves linked to invested assets’ returns and to exclude the fees on (or contractual charges included in) contracts with the financial risk borne by policyholders, which are included in “Fees & Revenues”, o change in URR (Unearned Revenue Reserve – capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues and fees” in the underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis; Half Year 2022 Financial Report 62 I ACTIVITY REPORT – HALF YEAR 2022 For investment contracts without DPF: o deposit accounting is applied. As a consequence, fees and charges related to these contracts are presented in the Underlying Statement of Income within Gross Consolidated Revenues on a separate line, and in Margin Analysis in the lines “Fees & Revenues” and “Net Technical Margin”, o change in UFR (Unearned Fee Reserve - capitalization net of amortization) is presented in the line “Change in unearned premiums net of unearned revenues & fees” in the Underlying Statement of Income, whereas it is located in the line “Fees & Revenues” in the Margin Analysis. INSURANCE RATIOS (APPLICABLE TO PROPERTY & CASUALTY, HEALTH AND PROTECTION ACTIVITIES) Current accident year loss ratio net of reinsurance is the ratio of: current year claims charge gross of reinsurance plus claims handling costs plus result of reinsurance ceded on current accident year, excluding for the discounted reserves the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. All accident year loss ratio net of reinsurance is the ratio of: all accident years claims charge gross of reinsurance plus claims handling costs plus result of reinsurance ceded on all accident years, excluding the unwind of the discount rate used in calculating technical reserves; to earned revenues gross of reinsurance. Expense ratio is the ratio of: expenses (excluding claims handling costs, including changes in VBI amortization); to earned revenues gross of reinsurance. Expenses include two components: expenses (including commissions) related to the acquisition of contracts (with the related acquisition expense ratio) and all other expenses excluding claims handling costs (with the related administrative expense ratio). Expenses exclude customer intangible amortization but include the impact from the changes in VBI amortization. The Combined ratio* is the sum of the all accident year loss ratio net of reinsurance and the expense ratio. Asset Management Net inflows: Inflows of client money less outflows of client money. Net inflows are used by the Management to measure the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Underlying cost income ratio is the ratio of: general expenses excluding distribution related expenses; to gross revenues excluding distribution fees received. Assets under management (“AUM”) are defined as the assets whose management has been delegated by their owner to an asset management company such as AXA Investment Managers. AUM only include funds and mandates which generate fees and exclude double counting. Half Year 2022 Financial Report 63 I ACTIVITY REPORT – HALF YEAR 2022 Banking Operating net banking revenues are disclosed before intercompany eliminations and before realized capital gains/losses or changes in fair value of “fair-value-P&L” assets and hedging derivatives. Half Year 2022 Financial Report 64 I II. Consolidated financial statements / Half Year 2022 Contents II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ................................................................................... 67 II.2 CONSOLIDATED STATEMENT OF INCOME ........................................................................................................ 69 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME........................................................................... 70 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY .................................................................................... 71 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS ................................................................................................ 73 II.6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS .............................................................................. 75 NOTE 1 ACCOUNTING PRINCIPLES ..................................................................................................................... 75 NOTE 2 SCOPE OF CONSOLIDATION ................................................................................................................... 84 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT ....................................................................... 87 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES ....................................................................................... 90 NOTE 5 INVESTMENTS ......................................................................................................................................... 93 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS ........................................................................ 101 NOTE 7 FINANCING DEBT .................................................................................................................................. 107 NOTE 8 NET INCOME PER ORDINARY SHARE .................................................................................................... 108 NOTE 9 SUBSEQUENT EVENTS ......................................................................................................................... 109 GIE_AXA_Internal CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in Euro million) June 30, 2022 Goodwill 18,016 Value of purchased business in force 1,064 Deferred acquisition costs and equivalent 19,645 Other intangible assets 4,321 Intangible assets 43,046 Investments in real estate properties 28,574 Financial investments 408,337 Assets backing contracts where the financial risk is borne by policyholders 75,952 5 Investments from insurance activities (a) 512,863 5 Investments from banking and other activities (a) 19,485 Investments accounted for using the equity method 2,333 Reinsurers' share in insurance and investment contracts liabilities 40,206 Tangible assets 2,425 Deferred policyholders' participation assets 1,624 Deferred tax assets 2,787 Other assets 6,836 Receivables arising from direct insurance and inward reinsurance operations 30,341 Receivables arising from outward reinsurance operations 3,613 Receivables - current tax 1,259 Other receivables 11,904 Receivables 47,117 4 Assets held for sale (b) 19,789 Cash and cash equivalents 24,749 TOTAL ASSETS 716,425 Note: All invested assets are shown net of related derivative instruments impact. (a) Reclassification of Architas activites from Insurance to Other activities. (b) As of June 30, 2022, amounts included the assets relating to Malaysia operations and General Account Savings portfolio in Belgium and Germany for which disposal processes were not finalized at period-end. As of December 31, 2021, amounts included the assets relating to Malaysia and Singapore operations, a General Account Savings portfolio in Belgium, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at year-end. Half Year 2022 Financial Report December 31, 2021 restated (a) 17,167 919 17,825 4,297 40,208 28,355 486,564 86,315 601,234 19,729 2,601 36,970 2,443 421 2,864 25,812 2,612 908 8,991 38,323 8,512 25,051 775,491 67 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 Notes (in Euro million) June 30, 2022 Share capital and capital in excess of nominal value 23,854 Reserves and translation reserve 24,682 Net consolidated income - Group share 4,108 Shareholders’ equity – Group share 52,645 Minority interests 3,652 6 TOTAL SHAREHOLDERS' EQUITY 56,296 Subordinated debt 12,182 Financing debt instruments issued 830 7 Financing debt (a) 13,012 Liabilities arising from insurance contracts 384,839 Liabilities arising from insurance contracts where the financial risk is borne by policyholders 59,178 Total liabilities arising from insurance contracts 444,017 Liabilities arising from investment contracts with discretionary participating features 34,890 Liabilities arising from investment contracts with no discretionary participating features Liabilities arising from investment contracts with discretionary participating features and where the financial risk is borne by policyholders Liabilities arising from investment contracts with no discretionary participating features and where the financial risk is borne by policyholders 114 4,217 12,793 Total liabilities arising from investment contracts 52,014 Unearned revenue and unearned fee reserves 2,299 Liabilities arising from policyholder participation and other obligations 16,000 Derivative instruments relating to insurance and investment contracts 439 Liabilities arising from insurance and investment contracts 514,770 Liabilities arising from banking activities (a) 11,522 Provisions for risks and charges 6,131 Deferred tax liabilities 2,274 Minority interests of consolidated investment funds and puttable instruments held by minority interest holders Other debt instruments issued, notes and bank overdrafts (a) 5,783 11,734 Payables arising from direct insurance and inward reinsurance operations 10,095 Payables arising from outward reinsurance operations 16,911 Payables – current tax 1,251 Collateral debts relating to investments under lending agreements or equivalent 34,301 Other payables 13,369 Payables 93,444 4 Liabilities held for sale (b) 18,976 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 716,425 (a) Amounts are shown net of related derivative instruments impact. (b) As of June 30, 2022, amounts included the liabilities relating to Malaysia operations and General Account Savings portfolios in Belgium and Germany, for which disposal processes were not finalized at period-end. As of December 31, 2021, amounts included the liabilities relating to Malaysia and Singapore operations, a General Account Savings portfolio in Belgium, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at year-end. Half Year 2022 Financial Report December 31, 2021 25,354 38,487 7,294 71,135 4,094 75,229 10,449 800 11,249 387,827 66,983 454,810 35,297 76 4,790 14,587 54,750 2,117 48,936 (863) 559,750 14,643 8,942 5,334 7,750 10,518 10,957 15,362 924 35,030 12,177 92,719 7,626 775,491 68 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 II.2 CONSOLIDATED STATEMENT OF INCOME Notes (in Euro million, except EPS in Euro) June 30, 2022 Gross written premiums 53,583 Fees and charges relating to investment contracts with no participating features 104 Revenues from insurance activities 53,687 Net revenues from banking activities 236 Revenues from other activities 1,218 Revenues (a) 55,141 Change in unearned premiums net of unearned revenues and fees (4,908) Net investment income (b) 6,227 Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity (c) 1,098 Net realized gains and losses and change in fair value of investments at fair value through profit and loss (d) (10,212) of which change in fair value of assets with financial risk borne by policyholders (e) (9,311) Change in investments impairments (f) (759) Net investment result excluding financing expenses (3,645) Technical charges relating to insurance activities (e) (29,372) Net result from outward reinsurance (424) Bank operating expenses (10) Acquisition costs (6,290) Amortization of the value of purchased business in force (30) Administrative expenses (5,006) Change in tangible assets impairment (0) Change in goodwill impairment and other intangible assets impairment and amortization (66) Other income and expenses (g) (h) 150 Other operating income and expenses (41,049) Income from operating activities before tax 5,540 Income (net of impairment) from investment accounted for using the equity method (112) Financing debts expenses (i) (147) Net income from operating activities before tax 5,281 Income tax (1,073) Net consolidated income after tax 4,207 Split between : Net consolidated income - Group share 4,108 Net consolidated income - Minority interests 99 8 8 Earnings per share Fully diluted earnings per share 1.74 1.73 (a) Gross of reinsurance. (b) Net of investment management costs. (c) Includes impairment releases on investments sold. (d) Includes realized and unrealized forex gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Change in fair value of assets with financial risk borne by policyholders is offset by a balancing entry in technical charges relating to insurance activities. (f) Excludes impairment releases on investments sold. (g) As of June 30, 2022, it includes the impact related to the disposal process of General Account Savings portfolio in Belgium (see Note 4). As of June 30, 2021, it included losses related to the disposal processes of the Gulf Region and Malaysia. (h) As of June 30, 2022, it includes the effect of applying IAS 29 standard related to hyperinflation in Turkey for €-20 million of which €-19 million group share (see Note 1). (i) Includes net balance of income and expenses related to derivatives on financing debt (nonetheless excludes change in fair value of these derivatives). Half Year 2022 Financial Report June 30, 2021 52,373 95 52,468 274 1,123 53,865 (4,937) 6,105 1,579 4,559 5,205 (141) 12,102 (43,660) (999) (32) (6,020) (21) (5,017) (0) (66) 96 (55,719) 5,310 44 (244) 5,110 (993) 4,117 3,996 121 1.64 1.63 69 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in Euro million) June 30, 2022 Reserves relating to changes in fair value through shareholders' equity (20,318) Translation reserves 1,434 Items that may be reclassified subsequently to Profit or Loss (18,884) Employee benefits actuarial gains and losses 1,673 Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk 11 Items that will not be reclassified subsequently to Profit or Loss 1,684 Net gains and losses recognized directly through shareholders' equity (17,200) Net consolidated income 4,207 Split between: Net consolidated income - Group share 4,108 Net consolidated income - Minority interests 99 TOTAL COMPREHENSIVE INCOME (CI) (12,992) Split between: Total comprehensive income - Group share (12,737) Total comprehensive income - Minority interests (255) Amounts are presented net of tax, policyholders’ participation and other shadow accounting related movements. Tax, policyholder participation and related effects are further detailed in the Notes to the Consolidated Financial statements. Half Year 2022 Financial Report June 30, 2021 (4,853) 516 (4,338) 510 (3) 507 (3,831) 4,117 3,996 121 286 289 (3) 70 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euro) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves (b) Undistributed profits and other reserves (c) Shareholders' equity Group share Minority interests (b) (c) Shareholders' equity opening January 1, 2022 2,421,569 2.29 5,545 21,803 (1,630) 17,491 (556) 6,623 (2,843) 24,701 71,135 4,094 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (d) Dividends Impact of transactions with shareholders (85,271) - - - - - - - - - (85,271) 2.29 - - - - - - - - - 2.29 (195) - - - - - - - - - (195) (1,999) 24 - - - - - - - (1,976) - - 670 - - - - - - 670 - - - - - - - 0 - 0 - - - - - - - - - - - - - - (746) - - - (746) - - - - - - - 0 - 0 - - - - - - (91) 124 (3,539) (3,506) (195) (1,999) 24 670 - - (746) (91) 124 (3,539) (5,753) - - - - - - - (187) - (374) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - (19,166) - (778) - 48 - 1,373 - 1,666 11 (19,944) 1,421 1,666 11 13 7 0 4,108 4,108 99 Total Comprehensive Income (CI) (19,166) (778) 48 1,373 5,785 (12,737) (255) Shareholders' equity closing June 30, 2022 2,336,298 2.29 5,350 19,828 (960) (1,675) (1,334) 5,925 (1,470) 26,981 52,645 3,652 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (see Note 6.1.1). (b) As of June 30, 2022, it includes the effect over the reporting period of applying IAS 29 standard related to hyperinflation in Turkey for €89 million of which €86 million group share (see Note 1). (c) As of June 30, 2022, it includes the cumulative effect for previous periods of applying IAS 29 standard related to hyperinflation in Turkey for €132 million of which €130 million group share (see Note 1). (d) Including changes in ownership interest in consolidated subsidiaries. Half Year 2022 Financial Report 71 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 Attributable to shareholders Share Capital Other reserves (in Euro million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euros) Share Capital Capital in excess of nominal value Treasury shares Reserves relating to the change in fair value of financial instruments available for sale Reserves relating to the change in fair value of hedge accounting derivatives (cash flow hedge) Other (a) Translation reserves Undistributed profits and other reserves Shareholders' Equity Group share Minority interests Shareholders' equity opening January 1, 2021 2,418,389 2.29 5,538 21,735 (744) 22,575 483 6,411 (4,663) 20,275 71,610 4,565 Capital Capital in excess of nominal value Equity - share based compensation Treasury shares Others reserves - transaction on treasury shares Equity component of compound financial instruments Undated subordinated debt Financial expenses - Undated subordinated debt Others (including impact on change in scope) (b) Dividends paid Impact of transactions with shareholders 767 - - - - - - - - - 767 2.29 - - - - - - - - - 2.29 2 - - - - - - - - - 2 9 23 - - - - - - - 33 - - (97) - - - - - - (97) - - - - - - - (0) - (0) - - - - - - - (0) - (0) - - - - - 0 - - - - - - - - - - (0) - (0) - - - - - - (96) 110 (3,403) (3,389) 2 9 23 (97) - - 0 (96) 109 (3,403) (3,452) - - - - - - - (141) - (125) Reserves relating to changes in fair value through shareholders' equity Translation reserves Employee benefits actuarial gains and losses Reserves relating to changes in fair value of financial liabilities measured at fair value through profit and loss that are attributable to changes in own credit risk Net consolidated income - - - - - (3,937) - (792) - 101 - 416 - 507 (3) (4,728) 518 507 (3) (2) 3 0 3,996 3,996 121 Total Comprehensive Income (CI) (3,937) (792) 101 416 4,499 289 (3) Shareholders' equity closing June 30, 2021 2,419,157 2.29 5,540 21,768 (841) 18,638 (309) 6,513 (4,247) 21,385 68,447 4,421 Note: Amounts are presented net of impacts of shadow accounting and its effects on policyholder participation, deferred acquisition costs, and value of business in force. (a) Mainly undated subordinated debts (see Note 6.1.2). (b) Including changes in ownership interest in consolidated subsidiaries without losing control. Half Year 2022 Financial Report 72 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in Euro million) June 30, 2022 Operating income including discontinued operations before tax 5,281 Net amortization expense (a) Change in goodwill impairment and other intangible assets impairment (b) Net change in deferred acquisition costs and equivalent (71) (837) Net increase / (write back) in impairment on investments, tangible and other intangible assets 742 Change in fair value of investments at fair value through profit or loss Net change in liabilities arising from insurance and investment contracts (c) Net increase / (write back) in other provisions (d) Income (net of impairment) from investment accounted for using the equity method 11,238 (4,206) (108) 120 Adjustment of non cash balances included in the operating income before tax 6,878 Net realized investment gains and losses Financing debt expenses (2,305) 147 Adjustment for reclassification to investing or financing activities (2,158) Dividends recorded in profit or loss during the period Investment income & expense recorded in profit or loss during the period (e) (1,821) (4,360) Adjustment of transactions from accrued to cash basis (6,181) Net cash impact of deposit accounting 253 Dividends and interim dividends collected Investment income (e) Investment expense (excluding interests on financing and undated subordinated debts, margin calls and others) 2,093 6,021 (1,006) Net operating cash from banking activities (1,381) Change in operating receivables and payables Net cash provided by other assets and liabilities (f) Tax expenses paid (2,903) (2,738) (672) Other operating cash impact and non cash adjustment 132 Net cash impact of transactions with cash impact not included in the operating income before tax (201) NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 3,619 Purchase of subsidiaries and affiliated companies, net of cash acquired 19 Disposal of subsidiaries and affiliated companies, net of cash ceded 380 Net cash related to changes in scope of consolidation 399 Sales of debt instruments (f) Sales of equity instruments and non consolidated investment funds (f) (g) Sales of investment properties held directly or not (f) Sales and/or repayment of loans and other assets (f) (h) 26,254 9,904 758 13,342 Net cash related to sales and repayments of investments (f) (g) (h) 50,258 Purchases of debt instruments (f) Purchases of equity instruments and non consolidated investment funds (f) (g) Purchases of investment properties held direct or not (f) Purchases and/or issues of loans and other assets (g) (h) (21,372) (10,411) (1,144) (16,220) Net cash related to purchases and issuance of investments (f) (g) (h) (49,147) Sales of tangible and intangible assets Purchases of tangible and intangible assets 2 (121) Net cash related to sales and purchases of tangible and intangible assets (119) Increase in collateral payable / Decrease in collateral receivable 101,012 Half Year 2022 Financial Report June 30, 2021 5,110 242 31 (1,047) 136 (5,747) 9,100 (41) (44) 2,631 (409) 244 (165) (1,775) (4,631) (6,407) 343 2,273 6,479 (1,177) (935) 174 (1,248) (813) 828 5,924 7,094 7 57 64 27,761 9,882 961 10,354 48,957 (23,963) (11,277) (1,667) (13,080) (49,987) 3 (161) (158) 72,700 73 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 Decrease in collateral payable / Increase in collateral receivable (100,895) Net cash impact of assets lending / borrowing collateral receivables and payables 117 NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES 1,509 Issuance of equity instruments 1 Repayments of equity instruments (2,361) Transactions on treasury shares 13 Dividends payout (3,856) Interests on undated subordinated debts paid (112) Acquisition / sale of interests in subsidiaries without change in control (0) Net cash related to transactions with shareholders (6,316) Cash provided by financial debts issuance 2,504 Cash used for financial debts repayments Interests on financing debt paid (i) Net interest margin of hedging derivatives on financing debt (1,039) (165) Net cash related to Group financing 1,300 Other financing cash impact and non cash adjustment NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (5,015) NET CASH PROVIDED BY DISCONTINUED OPERATIONS 0 CASH AND CASH EQUIVALENT AS OF JANUARY 1 (j) 24,371 Net cash provided by operating activities 3,619 Net cash provided by investing activities 1,509 Net cash provided by financing activities (5,015) Net cash provided by discontinued operations 0 Impact of change in consolidation method and of reclassifications as held for sale (k) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents (209) (216) CASH AND CASH EQUIVALENT AS OF DECEMBER 31 (j) 24,059 (a) Includes premiums/discounts capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes gains/losses from derivatives hedging variable annuities. (f) Includes related derivatives. (g) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (h) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (i) Includes net cash impact of interest margin relating to hedging derivatives on financing debt. (j) Net of bank overdrafts. (k) As of June 30, 2022, amounts included the assets relating to Malaysia operations and General Account Savings portfolios in Belgium and Germany, for which disposal processes were not finalized at period-end. As of June 30, 2021, amounts included the assets relating to AXA Bank Belgium, the Gulf Region and Malaysia operations, as well as the remaining Group Life portfolio in Switzerland, for which disposal processes were not finalized at period-end. (in Euro million) June 30, 2022 Cash and cash equivalents Bank overdrafts (a) 24,749 (690) Cash and cash equivalents (b) 24,059 (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders (Unit-Linked contracts). Half Year 2022 Financial Report (75,709) (3,009) (4,133) 22 (149) (1) (3,503) (102) (4) (3,737) 1,003 (109) (249) 646 (3,091) 27,516 7,094 (4,133) (3,091) (1,329) 213 26,270 June 30, 2021 26,788 (518) 26,270 74 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 II.6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ACCOUNTING PRINCIPLES 1.1 GENERAL INFORMATION AXA SA, a French “Société Anonyme” (the “Company” and together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company for an international financial services group focused on financial protection. AXA operates both in Europe and worldwide. The list of the main entities included in the scope of AXA’s consolidated financial statements is provided in Note 2 of the Notes to the consolidated interim financial statements. AXA is listed on Euronext Paris Compartment A. These consolidated interim financial statements including all Notes were set by the Board of Directors on August 2, 2022. 1.2 GENERAL ACCOUNTING PRINCIPLES AXA’s consolidated interim financial statements are prepared as of June 30. The consolidated interim financial statements are prepared in compliance with IFRS standards according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the balance sheet date with a compulsory date published by the IASB of January 1, 2022. For existing and unchanged IFRS standards and interpretations, the accounting policies applied in the preparation of the consolidated interim financial statements are consistent with those applied in the preparation of the consolidated financial statements for the year ended December 31, 2021. The 2022 half year consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 2021 Universal Registration Document. IFRS REQUIREMENTS ADOPTED ON JANUARY 1, 2022 The application of the amendments below as of January 1, 2022 had no material impact on the Group’s consolidated interim financial statements. Half Year 2022 Financial Report 75 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 Amendments and interpretations Publication date Topic IAS 37 Provisions, Contingent Liabilities and Contingent Assets: May 14, 2020 The amendments specify which costs an entity includes in determining the cost of fulfilling a contract for the purpose of assessing whether the contract is onerous. Onerous contract – cost of fulfilling a contract IFRS 3 Business Combinations: Updating a reference to the conceptual Framework May 14, 2020 The amendments update IFRS 3 by replacing a reference to an old version of the Board’s Conceptual Framework for Financial Reporting with a reference to the latest version, which was issued in March 2018. They also introduce an exception from the requirement in IFRS 3 to refer to the Conceptual Framework to determine what constitutes an asset or a liability. The exception specifies that, for some types of liabilities and contingent liabilities, an entity applying IFRS 3 should instead refer to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 16 Property, Plant and Equipment: Proceeds before intended use May 14, 2020 The amendments prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss. Annual Improvements 2018-2020 Cycle May 14, 2020 Collection of amendments to IFRS in response to issues that are not part of a major project. STANDARDS AND AMENDMENTS PUBLISHED BUT NOT YET EFFECTIVE IFRS 17 – Insurance contracts IFRS 17 Insurance contracts, published on May 18, 2017, and amended on June 25, 2020 and on December 9, 2021, establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS 4 Insurance contracts. It was adopted by the European Union on November 19, 2021, with an exemption regarding the annual cohort requirement (see below) and will be applied by AXA for periods starting from January 1, 2023. IFRS 17 will represent a significant conceptual change from IFRS 4. It aims at being more economic and better reflecting the underlying profitability of the business, while increasing comparability across the industry. IFRS 17 applies to insurance contracts issued, reinsurance contracts and investment contracts with discretionary participating features provided the insurance company also issues insurance contracts. It requires to separate the following components from insurance contracts: (i) embedded derivatives, if they meet certain specified criteria, (ii) distinct investment components, and (iii) distinct performance obligations to provide non-insurance Half Year 2022 Financial Report 76 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 goods and services. These components should be accounted for separately in accordance with the related standards. The standard defines the level of aggregation to be used for measuring the insurance contract liabilities and the related profitability. Indeed, IFRS 17 requires to identify portfolios of insurance contracts, which comprise contracts that are subject to similar risks and are managed together. Afterwards, each portfolio of insurance contracts issued shall be divided into three groups: contracts that are onerous at initial recognition; contracts that at initial recognition have no significant possibility of becoming onerous subsequently; and the remaining contracts in the portfolio. Moreover, IFRS 17 as issued by the IASB introduces the “annual cohort requirement” that prevents contracts issued more than one year apart from being included in the same group. However, the Standard as adopted by the European Union Commission Regulation (EU) 2021/2036 of November 19, 2021) provides an optional exemption from applying this annual cohort requirement for the following contracts: groups of insurance contracts with direct participation features and groups of investment contracts with discretionary participation features, and with cash flows that affect or are affected by cash flows to policyholders of other contracts; groups of insurance contracts that are managed across generations of contracts and that meet certains conditions and have been approved by supervisory authorities for the application of the matching adjustment. This exemption will be reviewed by the end of 2027, taking into account the outcome of the IASB’s post- implementation review of IFRS 17. AXA intends to apply this exemption to the groups of insurance contracts eligible to this European exemption. IFRS 17 requires to apply by default the general model (Building Blocks Approach, or BBA) which is based on the following “building blocks” : the fulfilment cash flows (FCF), which comprise: o probability-weighted estimates of future cash flows; o an adjustment to reflect the time value of money (i.e. discounting) and the financial risks associated with those future cash flows; o and a risk adjustment for non-financial risk; the Contractual Service Margin (CSM). Regarding the risk adjustment, its measurement should reflect the compensation required by AXA for bearing the uncertainty around the amount and timing of the future cash flows that arises from non-financial risk as AXA fulfils insurance contracts. The determination of the risk adjustment follows a value-at-risk type approach, reflecting a retained confidence level with reference to the risk drivers of reserves. The value-at-risk is the maximum loss within a certain confidence level. The implementation is slightly different between Life & Savings and Property & Casualty businesses. For Life & Savings business, groups of contracts are first shocked, risk factor by risk factor, up to the retained confidence level to assess the change in the present value of future cash flows. Then, diversification benefits between risks implicit to the entity’s portfolio is considered by applying correlation factors between risks. For Property & Casualty liabilities for incurred claims, a direct value-at-risk calculation, reflecting the retained confidence level, is applied to the full probability distribution of the reserves. Finally, a diversification effect between entities is considered to reflect the fact that a same risk cannot impact all the entities at the same Half Year 2022 Financial Report 77 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 time.Regarding the discount rate, AXA expects to adopt a bottom-up approach. IFRS 17 requires using a market consistent yield curve factoring the illiquidity embedded in insurance liabilities. The methodology consists in using a Basic Risk-Free Rate (RFR), based on swaps for most currencies and government bonds for others, and adding on a liquidity premium (LP) allowance to reflect the remuneration of illiquidity observed on traded assets until the Last Liquid Point (LLP), meaning the longest maturity for which there are enough traded bonds. An Ultimate Forward Rate (UFR) macro-economically defined as the sum of the average of past real interest rates and central bank’s target inflation is also considered. Discount rates between the LLP and the UFR maturities are obtained by extrapolation. Compared to IFRS 4, the introduction of the CSM is a major change. The CSM represents the unearned profit for a group of insurance contracts, in other words the present value of future profits attributable to the shareholders. It will be presented as a liability separately from the FCF in the consolidated statement of financial position and will be recognized in the consolidated statement of income over the coverage period of the contracts, as the entity provides services to the policyholders. The CSM cannot be negative at inception; any net negative amount of the fulfilment cash flows at inception will be recorded in profit or loss immediately. At the end of each subsequent reporting period the carrying amount of a group of insurance contracts is remeasured to be the sum of: the liability for remaining coverage, which comprises the FCF related to future services and the CSM of the group at that date; and the liability for incurred claims, which is measured as the FCF related to past services allocated to the group at that date. Under the general model, that is expected to apply for AXA long term Protection business as well as for few General Account Savings contracts with no direct participation features and for assumed long term reinsurance, the CSM is adjusted at each subsequent reporting period for changes in expected future cash flows driven by changes in technical assumptions (death, morbidity, longevity, surrenders, expenses, future premiums…). However, as the CSM cannot be negative, negative changes in future cash flows that are greater than the remaining CSM are immediately recognized in profit or loss. Interest is also accreted on the CSM at rates locked in at initial recognition of a contract (i.e. discount rate used at inception to determine the present value of the estimated cash flows). Moreover, the CSM will be released into profit or loss based on coverage units, reflecting the quantity of the benefits provided and the expected coverage duration of the remaining contracts in the group. Given the variety of insurance contracts, the definition of coverage units involves the use of judgment by considering both the level of coverage defined within the contract (e.g. a death benefit over a fixed term, the policyholders’ account value, or a combination of guarantees) and the expected coverage duration of the contract. Besides the general model, the Variable Fee Approach (VFA) is the mandatory model for measuring contracts with direct participation features (also referred to as “direct participating contracts”). A contract has a direct participation feature if it meets all three requirements below: the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; the entity expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; the entity expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items. This assessment of whether the contract meets these criteria is made at inception of the contract and not revised subsequently, except in case of substantial modification of the contract. Half Year 2022 Financial Report 78 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 The VFA is expected to apply for a large part of the AXA Life & Savings businesses (both General Account and Unit- Linked contracts), as well as for long term Protection with Savings businesses which include participating features. For these contracts, the CSM is adjusted (i) for changes in the variable fee (company’s share in the change of value of underlying items that corresponds to the revenue of the insurer), (ii) for the time value of money, and (iii) for effect of changes in financial risks not arising from underlying items (such as options and guarantees). In order to allow an appropriate release pattern of the CSM, consistent with the definition of the investment-related service, real-world expected development of the CSM and coverage units need to be considered when determining the CSM release factor. Therefore, shadow accounting (i.e. recognition of policyholders participation in unrealized capital gains and losses as allowed by IFRS 4 for insurance and investment contracts with discretionary participating features) will no longer apply under IFRS 17. As a result of applying IFRS 17, the shareholders’ share in the unrealized capital gains on underlying items related to VFA contracts will be recognized in CSM instead of equity under the current accounting framework. In addition to these two models, a simplified Premium Allocation Approach (PAA) is permitted for the measurement of the liability for remaining coverage if it provides a measurement that is not materially different from the general model or if the coverage period is one year or less. With the PAA, the liability for remaining coverage corresponds to premiums received at initial recognition less acquisition costs and amounts already recognized as insurance revenue at the closing date. However, the general model remains applicable for the measurement of incurred claims. For the PAA, changes relative to IFRS 4 are expected to be limited and mainly linked to the discount of all reserves, a more granular onerous contract testing and the inclusion of a risk adjustment for non-financial risk. The PAA is expected to be used for most of the AXA Property and Casualty business and, to a lesser extent, for some short-term Protection businesses. Under IFRS 17, in terms of presentation, the amounts recognized in the consolidated statement of income have to be disaggregated into: an insurance service result, comprising insurance revenue (corresponding to the insurance service provided over the period, which will be more comparable with the revenue of other industries) and insurance service expenses (i.e. incurred claims and other incurred insurance service expense); and insurance finance income or expenses, with the expectation that AXA will generally apply the option to disaggregate insurance financial income or expense between income statement and OCI in order to limit the volatility in net income. Under IFRS 17, compared to IFRS 4, insurance revenues will not anymore reflect the premiums underwritten during the year since they will: exclude any investment component that is the main bulk of the premiums in Life & Savings and Protection with Savings businesses; and reflect the portion of the premiums earned during the period, i.e. the release of the FCF (the expected cash flows of the period plus the related release of risk adjustment) as well as the CSM release (corresponding to the portion of the profits acquired during the period). In terms of presentation of the consolidated statement of financial position, the other changes compared to IFRS 4 relate notably to: intangible assets which will decrease as a result of the removal of deferred acquisition costs (DAC) and the value of purchased business in-force (VBI); these assets represent a part of future profits under IFRS 4 that are implicitly embedded within the CSM under IFRS 17; Half Year 2022 Financial Report 79 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 insurance-related receivables (and payables) which will no longer be presented separately from insurance liabilities, leading to a reduction of total assets and liabilities. For the transition from IFRS 4 to IFRS 17, the standard has to be applied retrospectively (i.e. using the Full Retrospective Approach) unless impracticable, in which case two options are possible: either the modified retrospective approach: based on reasonable and supportable information available without undue cost and effort to the entity, certain modifications of requirements are applied to the extent their full retrospective application is not possible, but still with the objective to achieve the closest outcome to retrospective application possible; or the fair value approach: the CSM is determined as the positive difference between the fair value determined in accordance with IFRS 13 and the fulfilment cash flows (any negative difference would be recognized in retained earnings at the transition date). In practice, for many groups of contracts, different factors (such as the impossibility of running models since the inception of the contracts, the lack of historical data,…) are expected to make the application of the Full Retrospective Approach unpracticable. For these groups of contracts, AXA therefore expects to apply the modified retrospective approach or the fair value approach. IFRS 9 – Financial instruments IFRS 9 - Financial instruments, published on July 24, 2014, replaces IAS 39. As explained below, it will be applied by AXA at the same date as IFRS 17, i.e. for periods starting from January 1, 2023. IFRS 9 addresses the following items related to financial instruments: classification and measurement of financial assets - IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss: o a financial asset is measured at amortized cost if both (i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (“SPPI”); o if both (i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows and for sale, and (ii) the contractual terms of cash flows are SPPI, the financial asset is measured at fair value through other comprehensive income and realized gains or losses would be recycled through profit or loss upon sale. Most of the debt instruments held by AXA are expected to continue to be accounted for at fair value with changes in fair value recognised in the OCI; o assets not fitting either of these categories are measured at fair value through profit or loss. Additionally, at initial recognition, there is an option to designate a financial asset at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch. Compared to IAS 39, parts of investments funds are expected to be more generally measured at fair value through profit or loss (instead of at fair value through OCI) to the extent that the related cash- flows are non-SPPI; o for equity instruments that are not held for trading, it is also allowed to make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of the instruments (including realized gains and losses), dividends being recognized in profit or loss. AXA expects to elect Half Year 2022 Financial Report 80 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 for this option for most equity securities held in order to avoid a significant new volatility in net income resulting from this asset class, compared to the current IAS 39 accounting; classification and measurement of financial liabilities - For financial liabilities that are measured as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss; impairment - The impairment model under IFRS 9 reflects expected credit losses, as opposed to incurred credit losses under IAS 39. Under the IFRS 9 approach, it is no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition; hedge accounting - AXA intends to apply IFRS 9 requirements for hedge accounting that align hedge accounting more closely with the risk management. The new requirements establish a more principles-based approach for the general hedge accounting model and apply to all hedge accounting with the exception of portfolio fair value hedges of interest rate risk (commonly referred to as “fair value macro hedges”). For the latter, AXA will continue applying the hedge accounting requirements currently in IAS 39as allowed by the IASB that is currently addressing macro hedge accounting as a separate project. The published effective date of IFRS 9 was January 1, 2018. However, amendments to IFRS 4 Insurance contracts “Applying IFRS 9 - Financial instruments with IFRS 4 - Insurance contracts”, published on September 12, 2016, and “Extension of the temporary exemption from applying IFRS 9”, published on June 25, 2020, both endorsed by the European Union, have changed the existing IFRS 4 to allow entities issuing insurance contracts within the scope of IFRS 4 to mitigate certain effects of applying IFRS 9 before the IASB’s new insurance contract standard, IFRS 17, becomes effective. The amendments provide two alternative options: (i) apply a temporary exemption from implementing IFRS 9 until the earlier of (i) the effective date of IFRS 17, or (ii) annual reporting periods beginning on or after January 1, 2023, following the deferral of the effective application of IFRS 17 until the same date. Additional disclosures related to financial assets are required during the deferral period. This option is only available to entities whose activities are predominately connected with insurance and that have not applied IFRS 9 previously; or (ii) adopt IFRS 9 but, for designated financial assets, remove from profit or loss the effects of some of the accounting mismatches that may occur before IFRS 17 is implemented. During the interim period, additional disclosures are required. The Group, eligible for the temporary exemption option (i), decided to defer the implementation of IFRS 9 until the effective date of IFRS 17, as mentioned above. Disclosures related to financial assets required during the deferral period are included in the Group’s annual Consolidated Financial Statements. In addition, some amendments to IFRS 9 have been issued since its publication. These amendments, endorsed by the European Union, relate to: prepayment features with negative compensation: these amendments, published on October 12, 2017, change the initial IFRS 9 in regards of the classification of financial assets with prepayment features that may result in negative compensation; fees included in the '10 per cent' test for derecognition of financial liabilities: this amendment, issued on May 14, 2020, as a part of the 2018-2020 Annual Improvements Cycle, clarifies the fees an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. Half Year 2022 Financial Report 81 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 Finally, on December 9, 2021, the IASB issued an amendment to IFRS 17 “Initial Application of IFRS 17 and IFRS 9—Comparative Information”. The amendment, which has not yet been endorsed by the European Union, improves requirements for the comparative information to be disclosed on initial application of the both Standards. It permits entities that first apply IFRS 17 and IFRS 9 at the same time to present comparative information about a financial asset as if the classification and measurement requirements of IFRS 9 had been applied to that financial asset before. AXA intends to restate the comparative period at the first application of IFRS 9 and apply this “classification overlay”, including the impairment requirements of IFRS 9, to all eligible financial assets. Status of the IFRS 17 and IFRS 9 implementation projects The effective date of IFRS 17 and IFRS 9 being now definitively established as of January 1, 2023, the implementation process is currently focused on assessing the impacts as of the transition date (January 1, 2022) and then building the comparative 2022 information applying transitional requirements in both Standards. In order to adopt the Standards in its consolidated financial statements, AXA launched a global implementation program including IFRS 9 and IFRS 17 parts, in 2016 and 2018 respectively. This program involves both the central functions and all the entities included in the Group’s consolidation scope and covers various aspects such as methodology, modelling, information systems, accounting and reporting, risk management, internal control,… This implied updating existing tools or creating new dedicated ones which are already operational as at the date of the publication of these interim consolidated financial statements and will be shortly used within the framework of the upcoming global implementation testing exercise. The assessment of the impacts on the Group’s Consolidated Financial Statements is still in progress. Although the work is well advanced as of the date of the publication of these interim consolidated financial statements, it is not yet practicable to reliably quantify them. PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. The half year income tax charge is based on the best estimate of the expected full year tax rate. In preparing the consolidated interim financial statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at the year ended December 31, 2021. As recommended by IAS 1, assets and liabilities are generally classified globally on the balance sheet in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non- current items. As for most insurance companies, expenses are classified by destination in the income statement. All amounts in the consolidated statement of financial position, consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the Notes are expressed in Euro million. HYPERINFLATION ACCOUNTING As of June 30, 2022, the Turkish Consumer Price Index (CPI) was up to 42.4% compared to December 31, 2021; it increased by 36.0% over 2021. In total, the cumulative three-year inflation rate in Turkey exceeded 100% as at the end of June 2022 to reach 136.4% and the Turkish economy is considered to be hyperinflationary in accordance with the criteria in IAS 29 “Financial Reporting in Hyperinflationary Economy” for reporting periods ending on or after 30 June 2022. Half Year 2022 Financial Report 82 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 IAS 29 requires the financial statements of entities operating in hyperinflationary economies to be adjusted to reflect the changes in the general purchasing power of their functional currency. Thus, non-monetary assets and liabilities of Turkish subsidiaries which are not already expressed in terms of the measuring unit current at the period end date are restated to reflect the change in the CPI. In the Group’s consolidated statement of financial position as at the reporting date, the restatement effects on equity items are included in other components of comprehensive income, altogether with the translation differences, since the change in the Turkish CPI is correlated with movements in the Turkish lira / Euro exchange rate. The effect of inflation on monetary assets and liabilities over the reporting period is included in the reporting period’s consolidated incomeas a loss on net monetary position. The cumulated gains and losses on net monetary position for previous periods are included within the retained earnings. The presentation of the consolidated income statement of the reporting period is not restated as the effect of the restatement is not material. As stated in IAS 21 “The Effects of Changes in Foreign Exchange Rates”, financial statements of Turkish subsidiaries, including their income statements, are translated in Euros at the closing exchange rate to be incorporated in the Group’s consolidated financial statements of the reporting period, and the comparative information is not restated. Half Year 2022 Financial Report 83 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 2 SCOPE OF CONSOLIDATION 2.1 CONSOLIDATED COMPANIES 2.1.1 Main fully consolidated companies June 30, 2022 December 31, 2021 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA SA and Other Holdings AXA SA Parent company Parent company CFP Management 100.00 100.00 100.00 100.00 AXA Group Operations SAS 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA Asia 100.00 100.00 100.00 100.00 France AXA France IARD 99.92 99.92 99.92 99.92 AXA France Vie 99.77 99.77 99.77 99.77 AXA Protection Juridique 98.52 98.44 98.52 98.44 Avanssur 100.00 99.81 100.00 99.81 AXA France Participations 100.00 100.00 100.00 100.00 AXA Banque 100.00 99.89 100.00 99.89 AXA Banque Financement 65.00 64.93 65.00 64.93 Europe Germany AXA Versicherung AG 100.00 100.00 100.00 100.00 AXA Lebensversicherung AG 100.00 100.00 100.00 100.00 Deutsche Ärzteversicherung 100.00 100.00 100.00 100.00 AXA Krankenversicherung AG 100.00 100.00 100.00 100.00 Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 Roland Rechtsschutz-Versicherungs-AG United Kingdom & Ireland Guardian Royal Exchange Plc 60.00 100.00 60.00 100.00 60.00 100.00 60.00 100.00 AXA UK Plc 100.00 100.00 100.00 100.00 AXA Insurance UK Plc 100.00 100.00 100.00 100.00 AXA PPP Healthcare Limited 100.00 100.00 100.00 100.00 AXA Insurance Limited 100.00 100.00 100.00 100.00 AXA Life Europe dac Spain AXA Seguros Generales, S.A. 100.00 99.93 100.00 99.93 100.00 99.92 100.00 99.92 AXA Aurora Vida, S.A. de Seguros Switzerland AXA Leben AG 99.86 100.00 99.86 100.00 99.84 100.00 99.84 100.00 AXA-ARAG Rechtsschutz AG 66.67 66.67 66.67 66.67 AXA Versicherungen AG Italy AXA Assicurazioni e Investimenti 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 AXA MPS Vita 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 AXA MPS Danni 50.00 + 1 voting right 50.00 50.00 + 1 voting right 50.00 AXA MPS Financial 100.00 50.00 100.00 50.00 Belgium AXA Belgium SA 100.00 100.00 100.00 100.00 AXA Holdings Belgium 100.00 100.00 100.00 100.00 Yuzzu SA 100.00 100.00 100.00 100.00 Asia National Mutual International Pty Ltd. Japan AXA Holdings Japan AXA Life Insurance 100.00 98.70 100.00 100.00 98.70 98.70 100.00 98.70 100.00 100.00 98.70 98.70 AXA General Insurance Co. Ltd. 100.00 98.70 100.00 98.70 Half Year 2022 Financial Report 84 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 AXA Direct Life Insurance Co. Ltd. Hong Kong AXA China Region Limited 100.00 100.00 98.70 100.00 100.00 100.00 AXA General Insurance Hong Kong Ltd. China AXA Tianping Indonesia MLC Indonesia Thailand AXA Insurance Public Company Limited South Korea AXA General Insurance Co. Ltd. 100.00 100.00 100.00 99.47 100.00 100.00 100.00 86.35 100.00 100.00 100.00 99.47 99.71 99.71 99.71 AXA XL AXA XL (sub group) (a) 100.00 100.00 100.00 International AXA Mediterranean Holding SA Colombia AXA Colpatria Seguros AXA Colpatria Seguros de vida Morocco AXA Assurance Maroc 100.00 51.00 51.00 100.00 100.00 51.00 51.00 100.00 100.00 51.00 51.00 100.00 AXA Al Amane Assurance 100.00 100.00 100.00 AXA Holding Maroc S.A. Turkey AXA Hayat ve Emeklilik A.S. 100.00 100.00 100.00 100.00 100.00 100.00 AXA Sigorta AS 92.61 92.61 92.61 AXA Turkey Holding W.L.L Mexico AXA Seguros S.A. de C.V. 100.00 100.00 100.00 100.00 100.00 100.00 AXA Salud S.A. de C.V. Luxembourg AXA Assurances Luxembourg 80.00 100.00 80.00 100.00 80.00 100.00 AXA Assurances Vie Luxembourg AXA Luxembourg SA Singapore AXA Financial Services Singapore pte Ltd. 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 AXA Life Insurance Singapore Disposal 100.00 AXA Insurance Singapore Malaysia AXA Affin General Insurance Berhad India AXA India Holding Disposal 49.99 100.00 49.99 100.00 100.00 49.99 100.00 Nigeria AXA Mansard Insurance Plc (Nigeria) From Equity Method to Full Consolidation 76.48 76.48 76.48 Other AXA Investment Managers (sub group) 97.52 97.51 97.55 AXA Global Re Merged with AXA SA 100.00 AXA Assistance SA (sub group) 100.00 100.00 100.00 Colisée Ré 100.00 100.00 100.00 Architas, Ltd. 100.00 100.00 100.00 (a) AXA XL mainly operates in the United States, the United Kingdom, France, Germany, Australia, Switzerland, Netherlands, Italy, Spain, Bermuda and Canada. Half Year 2022 Financial Report 85 98.70 100.00 100.00 100.00 100.00 99.47 99.71 100.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 92.61 100.00 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 49.99 100.00 76.48 97.54 100.00 100.00 100.00 100.00 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 MINORITIES INTERESTS ON CONSOLIDATED INVESTMENTS FUNDS AND REAL ESTATE COMPANIES In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of consolidated investment funds”. As of June 30, 2022, minority interests in consolidated investments funds amounted to €5,783 million (€7,750 million as of December 31, 2021). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholders’ equity amounted to €2,248 million as of June 30, 2022 (€2,323 million as of December 31, 2021). 2.1.2 main investments in companies accounted for using the equity method Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30, 2022 December 31, 2021 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie 39.98 39.98 39.98 39.98 Asia Philippines AXA Life Insurance Corporation 45.00 45.00 45.00 45.00 Krungthai AXA Life Insurance Company Ltd. (Thailand) 50.00 50.00 50.00 50.00 ICBC-AXA Life Insurance Co., Ltd. (China) 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services (Indonesia) 49.00 49.00 49.00 49.00 International Reso Garantia (Russia) 38.61 38.61 38.61 38.61 Bharti AXA Life (India) 49.00 49.00 49.00 49.00 Other Kyobo AXA Investment Managers Company Limited (South Korea) 50.00 48.75 50.00 48.77 AXA SPDB Investment Managers Company Ltd. (China) 39.00 38.03 39.00 38.04 Half Year 2022 Financial Report 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 3 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT AXA’s Chief Executive Officer (CEO), acting as chief operating decision maker, is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA's business segments and holding companies reported to the Board of Directors twice a year is consistent with the presentation provided in the Consolidated Financial Statements. The results of operating activities and non-operating activities are presented on the basis of six segments: France, Europe, Asia, AXA XL, International, Transversal & Central Holdings. As of June 30, 2022, the CEOs supervising the main hubs (respectively CEO of AXA France, CEO of AXA in Europe and Latin America, CEO of AXA in Asia and Africa, CEO of AXA XL and CEO of AXA Investment Managers) are members of the Management Committee. Key transversal entities and Central Holdings are managed alongside these hubs. France: The French market consists of Life & Savings and Property & Casualty activities, AXA Banque France and French holdings. Europe: The European market consists of Life & Savings and Property & Casualty activities in Switzerland, Germany, Belgium, Spain and Italy as well as Property & Casualty activities in United Kingdom & Ireland. The holding companies in these countries are also included. Asia: The Asian market consists of Life & Savings and Property & Casualty activities in Japan, Hong Kong and Asia High Potentials (Indonesia, Philippines, Thailand and China) as well as Property & Casualty activities in South Korea. The holding company in Japan and the other Asia holdings are also included. AXA XL: The AXA XL market mainly consists of Property & Casualty activities in XL Group, operating mainly in the United States, the United Kingdom, France, Germany, Australia, Switzerland, Netherlands, Italy, Spain, Bermuda and Canada. The holding companies are also included. International: The International market consists of Life & Savings and Property & Casualty activities for 9 countries within Europe, Middle East, Africa, Latin America, and in Singapore (until its disposal on February 11, 2022), Malaysia and India Life & Savings. The holdings companies in these countries are also included as well as AXA Bank Belgium until its disposal on December 31, 2021. Transversal & Central Holdings: It includes transversal entities namely AXA Investment Managers, AXA Assistance, AXA Liabilities Managers, AXA Global Re (until June 30, 2022, where it was merged with AXA SA), AXA Life Europe, Architas, as well as AXA SA and other Central Holdings. The intersegment eliminations include only operations between entities from different countries and operating activities. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. In this document, “Insurance” covers the three insurance activities: Life & Savings, Property & Casualty and Health. Half Year 2022 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 3.1 CONSOLIDATED STATEMENT OF INCOME BY SEGMENT June 30, 2022 (in Euro million) France Europe Asia AXA XL International Transversal & Central Holdings Intersegment Eliminations Gross written premiums 14,903 19,201 5,667 10,719 2,670 894 (471) Fees and charges relating to investment contracts with no participating features 0 76 28 Revenues from insurance activities 14,904 19,277 5,695 10,719 2,670 894 (471) Net revenues from banking activities 233 3 Revenues from other activities 3 163 38 14 1,189 (189) Revenues 15,140 19,440 5,695 10,757 2,684 2,083 (657) Change in unearned premiums net of unearned revenues and fees (538) (2,830) 81 (1,313) (347) (67) 105 Net investment income (b) 2,031 2,465 762 516 277 193 (17) Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (c) of which change in fair value of assets with financial risk borne by policyholders 548 (7,017) (6,134) 554 (1,498) (1,634) 22 (388) (1,105) (25) 5 (6) 17 (24) 5 (1,331) (412) 1 (1) Change in investments impairment (182) (416) (134) (19) (3) (5) Net investment result excluding financing expenses (4,619) 1,105 262 477 285 (1,138) (17) Technical charges relating to insurance activities (5,931) (11,710) (4,089) (6,721) (1,691) 576 196 Net result from outward reinsurance (255) (97) 31 (143) (105) 3 144 Bank operating expenses (10) Acquisition costs (1,251) (2,186) (820) (1,352) (413) (311) 44 Amortization of the value of purchased business in force (12) (17) (1) Administrative expenses (1,140) (1,287) (329) (891) (199) (1,459) 298 Change in tangible assets impairment (1) 0 0 Change in goodwill impairment and other intangible assets impairment (19) (18) (25) (4) (1) Other income and expenses (d) (e) (23) 94 2 (2) (10) 289 (200) Other operating income and expenses (8,612) (15,217) (5,240) (9,134) (2,423) (904) 482 Income from operating activities before tax 1,371 2,497 797 787 199 (25) (87) Income (net of impairment) from investment accounted for using the equity method 3 0 22 (151) 13 Financing debt expenses (2) (3) (4) (53) (6) (166) 87 Net income from operating activities before tax 1,373 2,494 816 734 42 (178) (0) Income tax (281) (513) (159) (137) (53) 71 Net consolidated income after tax 1,091 1,981 657 597 (11) (107) (0) Split between: Net consolidated income - Group share 1,090 1,927 651 590 (36) (113) (0) Net consolidated income - Minority interests 2 54 5 7 25 6 (0) (a) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (b) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (c) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (d) Includes the impact related to the disposal process of General Account Savings portfolio in Belgium (see Note 4). (e) Includes the effect of applying IAS 29 standard related to hyperinflation in Turkey for €-20 million of which €-19 million group share (see Note 1). Half Year 2022 Financial Report Total 53,583 104 53,687 236 1,218 55,141 (4,908) 6,227 1,098 (10,212) (9,311) (759) (3,645) (29,372) (424) (10) (6,290) (30) (5,006) (0) (66) 150 (41,049) 5,540 (112) (147) 5,281 (1,073) 4,207 4,108 99 II of which Insurance (a) 53,583 104 53,687 428 54,115 (4,908) 5,673 1,106 (10,198) (9,311) (736) (4,156) (29,372) (424) (6,290) (30) (3,754) (0) (65) 67 (39,869) 5,182 (125) (18) 5,040 (703) 4,336 4,243 93 88 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 June 30, 2021 restated (in Euro million) France (a) Europe Asia AXA XL International Transversal & Central Holdings (a) Intersegment Eliminations Gross written premiums 14,274 18,770 5,561 10,502 3,036 721 (491) Fees and charges relating to investment contracts with no participating features 0 67 19 8 Revenues from insurance activities 14,274 18,837 5,581 10,502 3,044 721 (491) Net revenues from banking activities 105 177 (8) Revenues from other activities 3 152 41 1 1,120 (194) Revenues 14,382 18,989 5,581 10,544 3,222 1,841 (693) Change in unearned premiums net of unearned revenues and fees (502) (2,608) 59 (1,588) (367) (53) 122 Net investment income (c) 2,076 2,354 1,060 462 231 (35) (43) Net realized gains and losses relating to investments at cost and at fair value through shareholders' equity Net realized gains and losses and change in fair value of other investments at fair value through profit or loss (d) of which change in fair value of assets with financial risk borne by policyholders 527 2,901 3,160 472 766 708 342 923 932 171 32 26 115 158 42 (173) 248 (5) (1) Change in investments impairment (24) (66) (42) (4) (2) (4) Net investment result excluding financing expenses 5,480 3,526 2,283 662 369 (170) (48) Technical charges relating to insurance activities (16,047) (14,282) (5,898) (5,722) (1,896) (219) 404 Net result from outward reinsurance 185 (155) (91) (657) (150) (76) (55) Bank operating expenses (9) (22) Acquisition costs (1,156) (2,059) (742) (1,391) (489) (235) 52 Amortization of the value of purchased business in force (6) (15) (1) Administrative expenses (1,128) (1,314) (324) (837) (329) (1,434) 348 Change in tangible assets impairment 0 (0) Change in goodwill impairment and other intangible assets impairment (20) (16) (22) (8) (1) Other income and expenses (e) (1) (6) (31) (3) (21) 400 (242) Other operating income and expenses (18,156) (17,842) (7,117) (8,630) (2,917) (1,564) 506 Income from operating activities before tax 1,203 2,065 806 987 307 54 (112) Income (net of impairment) from investment accounted for using the equity method 3 (0) 61 (32) 11 Financing debt expenses (1) (7) (3) (77) (5) (264) 112 Net income from operating activities before tax 1,206 2,058 864 910 270 (198) (0) Income tax (226) (419) (178) (138) (81) 63 (0) Net consolidated income after tax 980 1,639 686 772 189 (148) Split between: Net consolidated income - Group share 978 1,596 680 745 150 (154) (0) Net consolidated income - Minority interests 2 42 6 27 39 6 0 (a) Reclassification of Architas activities (previously reported as part of France) to Transversal & Central Holdings. (b) Insurance covers the three insurance activities: Life & Savings, Property & Casualty and Health. (c) Includes gains/losses from derivatives hedging variable annuities within the Life & Savings activity. (d) Includes net realized and unrealized foreign exchange gains and losses relating to investments at cost and at fair value through shareholders' equity. (e) Includes losses related to the disposal processes of the Gulf Region and Malaysia. Half Year 2022 Financial Report Total 52,373 95 52,468 274 1,123 53,865 (4,937) 6,105 1,579 4,559 5,205 (141) 12,102 (43,660) (999) (32) (6,020) (21) (5,017) (0) (66) 96 (55,719) 5,310 44 (244) 5,110 (993) 4,117 3,996 121 II of which Insurance (a)(b) 52,373 95 52,468 411 52,879 (4,937) 5,613 1,526 4,578 5,205 (136) 11,581 (43,660) (999) (6,020) (21) (3,710) (0) (66) (47) (54,524) 4,998 32 (38) 4,992 (718) 4,275 4,160 115 89 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 SINGAPORE OPERATIONS DISPOSAL On February 11, 2022, AXA completed the sale of its insurance operations in Singapore to HSBC, for a total cash consideration of €463 million. The disposal resulted in a negative net income impact of €-5 million as detailed in the table below: (in Euro million) Net Proceeds Consolidated Book Value 463 468 NET LOSS RECOGNIZED IN 2022 (5) of which other comprehensive income recycling 65 4.2 MALAYSIA OPERATIONS DISPOSAL On June 22, 2021, AXA entered into an agreement with Generali to sell its insurance operations in Malaysia. Under the terms of the agreement, AXA will sell its Life & Savings and Property & Casualty businesses in Malaysia for a total net cash consideration of €140 million (1). The completion of the transaction is expected to take place during the second half of 2022 and is subject to customary closing conditions, including the receipt of regulatory approvals. Given these circumstances, the held for sale classification was therefore extended beyond one year. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) presented as held for sale related to: ASSETS June 30, 2022 (in Euro million) Goodwill 13 Other intangible assets 20 Investments from insurance activities 494 Reinsurers' share in insurance and investment contracts liabilities 90 Other assets 82 Cash and cash equivalents 198 TOTAL ASSETS HELD FOR SALE 897 (1) Including the repayment of a €8 million subordinated debt issued by Malaysia P&C to AXA, prior to or at the closing of the transaction. Half Year 2022 Financial Report 90 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 LIABILITIES June 30, 2022 (in Euro million) Financing debt 7 Liabilities arising from insurance and investment contracts 492 Other liabilities 115 TOTAL LIABILITIES HELD FOR SALE 614 As of June 30, 2022, the other comprehensive income of invested assets in the scope of the transaction amounted to €-8 million (Group share €-4 million). The transaction is expected to result in a loss of €-66 million already recognized in the consolidated statement of income as of December 31, 2021. 4.3 DISPOSAL OF A GENERAL ACCOUNT SAVINGS PORTFOLIO IN BELGIUM On December 12, 2021, AXA entered into an agreement with Monument Assurance Belgium to sell a run-off General Accounts Savings portfolio. The completion of the transaction is expected to take place during the second half of 2022 and is subject to customary closing conditions, including the receipt of regulatory approvals. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) which have been restated in held for sale are presented in the table below: ASSETS June 30, 2022 (in Euro million) Investments from insurance activities 2,245 Cash and cash equivalents 362 TOTAL ASSETS HELD FOR SALE 2,608 LIABILITIES June 30, 2022 (in Euro million) Liabilities arising from insurance and investment contracts 2,607 Other liabilities 12 TOTAL LIABILITIES HELD FOR SALE 2,619 As of June 30, 2022, the other comprehensive income of invested assets in the scope of the transaction amounted to €+33 million. Half Year 2022 Financial Report 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 The transaction is expected to result in an overall loss of €-28 million. Given that as of December 31, 2021, €-98 million were already recognized in the consolidated statement of income and allocated to Investments from insurance activities, a release of the provision of €70 million was booked at June 30, 2022. 4.4 DISPOSAL OF A GENERAL ACCOUNT SAVINGS PORTFOLIO IN GERMANY On July 14, 2022, AXA entered into an agreement with Athora Deutschland GmbH (“Athora Germany”), a licensed insurer in Germany, to sell a life and pensions insurance reserves portfolio. Under the terms of the agreement, AXA Germany will sell the portfolio to Athora Germany for a consideration of Euro 660 million. The completion of the transaction is expected to take place during the second half of 2023 and is subject to customary closing conditions, including the receipt of regulatory approvals. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) which have been restated in held of sale are presented in the table below: ASSETS June 30, 2022 (in Euro million) Intangible assets 209 Investments from insurance activities 15,059 Reinsurers' share in insurance and investment contracts liabilities 6 Other assets 503 Cash and cash equivalents 344 TOTAL ASSETS HELD FOR SALE 16,120 LIABILITIES June 30, 2022 (in Euro million) Liabilities arising from insurance and investment contracts 14,678 Other liabilities 1,059 TOTAL LIABILITIES HELD FOR SALE 15,738 As of June 30, 2022, the other comprehensive income of invested assets in the scope of the transaction amounted to €-9 million. As of June 30, 2022, there is no impact recognized in the consolidated statement of income for this transaction. Half Year 2022 Financial Report 92 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 5 INVESTMENTS 5.1 BREAKDOWN OF INVESTMENTS Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges) except derivatives related to macro-hedges shown separately. Insurance June 30, 2022 Investments as per Consolidated Statement of Financial Position Other activities Total (in Euro million) Investment in real estate properties at amortized cost (a) Investment in real estate properties designated as at fair value through profit or loss (b) Macro-hedge and other derivatives Fair value 38,185 1,647 Carrying value 26,927 1,647 % (value balance sheet) 5.25% 0.32% Fair value 2,853 Carrying value 2,812 % (value balance sheet) 14.43% Fair value 41,038 1,647 Carrying value 29,739 1,647 % (value balance sheet) 5.59% 0.31% Investment in real estate properties 39,832 28,574 5.57% 2,853 2,812 14.43% 42,685 31,386 5.90% Debt instruments held to maturity Debt instruments available for sale Debt instruments designated as at fair value through profit or loss (c) Debt instruments held for trading Debt instruments (at cost) that are not quoted in an active market (d) 294,075 12,376 5 14,129 294,075 12,376 5 14,896 57.34% 2.41% 0.00% 2.90% 2,657 51 17 2,657 51 17 13.64% 0.26% 0.09% 296,733 12,428 5 14,145 296,733 12,428 5 14,913 55.74% 2.33% 0.00% 2.80% Debt instruments 320,586 321,353 62.66% 2,725 2,726 13.99% 323,311 324,079 60.88% Equity instruments available for sale Equity instruments designated as at fair value through profit or loss (b) Equity instruments held for trading 15,178 11,935 15,178 11,935 2.96% 2.33% 1,115 527 1,115 527 5.72% 2.70% 16,294 12,462 16,294 12,462 3.06% 2.34% Equity instruments 27,113 27,113 5.29% 1,642 1,642 8.43% 28,755 28,755 5.40% Non consolidated investment funds available for sale Non consolidated investment funds designated as at fair value through profit or loss (b) Non consolidated investment funds held for trading 8,881 8,088 0 8,881 8,088 0 1.73% 1.58% 0.00% 62 7 62 7 0.32% 0.03% 8,943 8,094 0 8,943 8,094 0 1.68% 1.52% 0.00% Non consolidated investment funds 16,969 16,969 3.31% 69 69 0.35% 17,037 17,037 3.20% Other assets designated as at fair value through profit or loss, held by consolidated investment funds 21,462 21,462 4.18% 761 761 3.91% 22,223 22,223 4.17% Macro-hedge and other derivatives 1,060 1,060 0.21% 557 557 2.86% 1,617 1,617 0.30% Sub total Financial instruments (excluding Loans) 387,189 387,957 75.65% 5,754 5,755 29.53% 392,944 393,712 73.96% Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (b) Loans held for trading Loans at cost (e) Macro-hedge and other derivatives - - - 19,835 - - - - 20,380 - - - - 3.97% - - - - 10,919 - - - - 10,919 - - - - 56.04% - - - - 30,754 - - - - 31,299 - - - - 5.88% - Loans 19,835 20,380 3.97% 10,919 10,919 56.04% 30,754 31,299 5.88% Total Financial instruments 407,024 408,337 79.62% 16,673 16,674 85.57% 423,697 425,011 79.84% Assets backing contracts where the financial risk is borne by policyholders 75,952 75,952 14.81% 75,952 75,952 14.27% INVESTMENTS 522,808 512,863 100.00% 19,526 19,485 100.00% 542,334 532,348 100.00% Investments (excluding those backing contracts where the financial risk is borne by policyholders) 446,856 436,911 85.19% (a) Includes infrastructure and forests investments. (b) Assets measured at fair value under the fair value option. (c) Includes assets measured at fair value notably under the fair value option. (d) Eligible to the IAS 39 Loans and receivables measurement category. (e) Mainly relates to mortgage loans and policy loans. Half Year 2022 Financial Report 93 II (in Euro million) Fair value Investment in real estate properties at amortized cost (b) 37,611 Investment in real estate properties designated as at fair value through profit or loss (c) 1,523 Macro-hedge and other derivatives Investment in real estate properties 39,135 Debt instruments held to maturity Debt instruments available for sale 365,239 Debt instruments designated as at fair value through profit or loss (d) 14,624 Debt instruments held for trading 1 Debt instruments (at cost) that are not quoted in an active market (e) 15,126 Debt instruments 394,991 Equity instruments available for sale 20,900 Equity instruments designated as at fair value through profit or loss (c) 13,623 Equity instruments held for trading Equity instruments 34,523 Non consolidated investment funds available for sale 9,746 Non consolidated investment funds designated as at fair value through profit or loss (c) 7,633 Non consolidated investment funds held for trading 0 Non consolidated investment funds 17,379 Other assets designated as at fair value through profit or loss, held by consolidated investment funds 18,829 Macro-hedge and other derivatives 583 Sub total Financial instruments (excluding Loans) 466,305 Loans held to maturity Loans available for sale Loans designated as at fair value through profit or loss (c) Loans held for trading Loans at cost (f) 21,562 Macro-hedge and other derivatives Loans 21,562 Total Financial instruments 487,867 Assets backing contracts where the financial risk is borne by policyholders 86,315 INVESTMENTS 613,317 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 527,002 (a) Reclassification of Architas activities from Insurance to Other activities. (b) Includes infrastructure and forests investments. (c) Assets measured at fair value under the fair value option. (d) Includes assets measured at fair value notably under the fair value option. (e) Eligible to the IAS 39 Loans and receivables measurement category. (f) Mainly relates to mortgage loans and policy loans. CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 Insurance December 31, 2021 restated (a) Investments as per Consolidated Statement of Financial Position Other activities Total Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) 26,831 4.46% 2,693 2,664 13.50% 40,305 29,495 4.75% 1,523 0.25% 1,523 1,523 0.25% 28,355 4.72% 2,693 2,664 13.50% 41,828 31,019 5.00% 365,239 60.75% 2,845 2,845 14.42% 368,084 368,084 59.28% 14,624 2.43% 63 63 0.32% 14,688 14,688 2.37% 1 0.00% 1 1 0.00% 14,591 2.43% 17 17 0.09% 15,144 14,608 2.35% 394,455 65.61% 2,926 2,926 14.83% 397,917 397,381 63.99% 20,900 3.48% 1,053 1,053 5.34% 21,953 21,953 3.54% 13,623 2.27% 648 648 3.29% 14,271 14,271 2.30% 34,523 5.74% 1,701 1,701 8.62% 36,225 36,225 5.83% 9,746 1.62% 78 78 0.40% 9,824 9,824 1.58% 7,633 1.27% 11 11 0.06% 7,644 7,644 1.23% 0 0.00% 0 0 0.00% 17,379 2.89% 90 90 0.45% 17,468 17,468 2.81% 18,829 3.13% 465 465 2.36% 19,294 19,294 3.11% 583 0.10% (116) (116) 0.59% 468 468 0.08% 465,770 77.47% 5,067 5,067 25.68% 471,372 470,836 75.82% 20,794 3.46% 11,998 11,998 60.82% 33,561 32,793 5.28% 20,794 3.46% 11,998 11,998 60.82% 33,561 32,793 5.28% 486,564 80.93% 17,065 17,065 86.50% 504,933 503,629 81.10% 86,315 14.36% 86,315 86,315 13.90% 601,234 100.00% 19,758 19,729 100.00% 633,076 620,963 100.00% 514,919 85.64% Half Year 2022 Financial Report 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 5.2 INVESTMENT IN REAL ESTATE PROPERTIES Investment in real estate properties includes buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost, including the impact of all derivatives: June 30, 2022 December 31, 2021 Gross value Amortization Impairment Carrying value Fair value Gross value Amortization impairment Carrying value Fair value (in Euro million) Investment in real estate properties at amortized cost Insurance (a) 29,826 (1,569) (1,234) 27,023 38,281 29,818 (1,622) (1,214) 26,982 37,762 Other activities 2,815 (3) 2,812 2,853 2,664 2,664 2,693 All activities excluding derivatives 32,641 (1,569) (1,237) 29,834 41,133 32,482 (1,622) (1,214) 29,646 40,456 Impact of derivatives (96) (96) (151) (151) TOTAL 29,739 41,038 29,495 40,305 (a) Includes infrastructure and forests investments. Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in Euro million) June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 Opening value 1,214 1,158 1,622 1,581 Increase for the period 54 193 58 121 Write back following sale or repayment (5) (37) (54) (52) Write back following recovery in value (22) (59) Others (a) (4) (42) (57) (28) Closing value 1,237 1,214 1,569 1,622 (a) Includes changes in the scope of consolidation and the impact of changes in exchange rates. Half Year 2022 Financial Report 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 5.3 UNREALIZED GAINS AND LOSSES ON FINANCIAL INVESTMENTS Including the effect of derivatives, unrealized capital gains and losses on financial investments, when not already reflected in the income statement, were allocated as follows: INSURANCE June 30, 2022 December 31, 2021 restated (a) Amortized cost (b) Fair value Carrying value (c) Unrealized gains Unrealized losses Amortized cost (b) Fair value Carrying value (c) Unrealized gains Unrealized losses (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non-consolidated investment funds available for sale 308,731 14,958 12,274 7,557 294,075 14,129 15,178 8,881 294,075 14,896 15,178 8,881 19,172 117 3,289 1,436 33,828 946 384 111 323,758 14,622 14,175 8,200 365,239 15,126 20,900 9,746 365,239 14,591 20,900 9,746 47,766 908 6,990 1,587 6,285 404 265 41 (a) Reclassification of Architas activities from Insurance to Other activities. (b) Net of impairment - including premiums/discounts and related accumulated amortization. (c) Net of impairment. OTHER ACTIVITIES June 30, 2022 December 31, 2021 restated (a) Amortized cost (b) Fair value Carrying value (c) Unrealized gains Unrealized losses Amortized cost (b) Fair value Carrying value (c) Unrealized gains Unrealized losses (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non-consolidated investment funds available for sale 3,021 17 908 59 2,657 17 1,115 62 2,657 17 1,115 62 23 0 245 3 387 0 38 0 2,847 17 823 74 2,845 17 1,053 78 2,845 17 1,053 78 64 0 248 5 66 0 8 0 (a) Reclassification of Architas activities from Insurance to Other activities. (b) Net of impairment - including premiums/discounts and related accumulated amortization. (c) Net of impairment. TOTAL June 30, 2022 December 31, 2021 Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses Amortized cost (a) Fair value Carrying value (b) Unrealized gains Unrealized losses (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market Equity instruments available for sale Non consolidated investment funds available for sale 311,752 14,975 13,182 7,616 296,733 14,145 16,294 8,943 296,733 14,913 16,294 8,943 19,195 117 3,524 1,439 34,214 947 422 111 326,606 14,640 14,998 8,274 368,084 15,144 21,953 9,824 368,084 14,608 21,953 9,824 47,831 908 7,238 1,591 6,352 404 273 41 (a) Net of impairment - including premiums/discounts and related accumulated amortization. (b) Net of impairment. Half Year 2022 Financial Report 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 5.4 FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT 5.4.1 Breakdown of financial investments subject to impairment Each investment item is presented net of the effect of related hedging derivatives (IAS 39 qualifying hedges or economic hedges). (in Euro million) Debt instruments available for sale Debt instruments (at cost) that are not quoted in an active market (c) Cost before impairment and revaluation to fair value (a) 311,795 14,976 Impairment (44) (0) June 30, 2022 Cost after impairment but before revaluation to fair value (b) 311,752 14,975 Revaluation to fair value (c) (15,019) (62) Carrying value 296,733 14,913 Cost before impairment and revaluation to fair value (a) 326,637 14,640 December 31, 2021 Impairment Cost after impairment but before revaluation to fair value (b) (32) 326,606 (0) 14,640 Revaluation to fair value (c) 41,479 (31) Carrying value 368,084 14,608 Debt instruments 326,771 (44) 326,727 (15,081) 311,646 341,278 (32) 341,245 41,447 382,693 Equity instruments available for sale Non-consolidated investment funds available for sale Loans available for sale Loans at cost (d) 16,088 8,593 (0) (2,906) (977) 13,182 7,616 (0) 3,112 1,328 16,294 8,943 (0) 17,401 9,202 (0) (2,403) (928) 14,998 8,274 (0) 6,955 1,551 21,953 9,824 (0) 32,057 (167) 31,889 (590) 31,299 33,142 (178) 32,964 (171) 32,793 Loans 32,057 (167) 31,889 (590) 31,299 33,142 (178) 32,964 (171) 32,793 TOTAL 383,509 (4,095) 379,414 (11,232) 368,182 401,022 (3,541) 397,481 49,782 447,263 (a) Asset value including impact of discounts/premiums and accrued interests, but before impairment and revaluation to fair value of assets available for sale. (b) Asset value including impairment, discounts/premiums and accrued interests, but before revaluation to fair value of assets available for sale. (c) Revaluation to fair value for instruments at cost related to the application of hedge accounting. (d) Including policy loans. Half Year 2022 Financial Report 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 5.4.2 Change in impairment on financial investments (in Euro million) January 1, 2022 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) June 30, 2022 Impairment - Debt instruments 32 0 (2) (0) 14 44 Impairment - Equity instruments 2,403 650 (198) 51 2,906 Impairment - Non-consolidated investment funds 928 59 (22) 13 977 Impairment - Loans 178 60 (15) (58) 2 167 TOTAL 3,541 769 (237) (58) 80 4,095 (a) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. (in Euro million) January 1, 2021 Increase for the period Write back following sale or repayment Write back following recovery in value Other (a) December 31, 2021 Impairment - Debt instruments 27 0 (4) 9 32 Impairment - Equity instruments 2,570 351 (658) 141 2,403 Impairment - Non-consolidated investment funds 884 54 (47) 38 928 Impairment - Loans 151 69 (1) (54) 13 178 TOTAL 3,631 474 (710) (54) 200 3,541 (a) Mainly relates to changes in the scope of consolidation and the impact of changes in exchange rates. 5.5 INVESTMENTS/FAIR VALUE Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on a mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an Half Year 2022 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or used by the Group in the limited cases of application of mark to model valuations. 5.5.1 Investments recognized at fair value The breakdown by valuation method of investments recognized at fair value including derivatives but excluding assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2022 December 31, 2021 Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market excluding derivatives Fair value determined directly by reference to active market excluding derivatives (level 1) Assets not quoted in an active market or no active market excluding derivatives Fair value mainly based on observable market data excluding derivatives (level 2) Fair value mainly not based on observable market data excluding derivatives (level 3) Total excluding derivatives Total including derivatives (in Euro million) Debt instruments 227,580 75,291 492 303,363 296,733 279,484 90,968 322 370,774 368,084 Equity instruments Non-consolidated investment funds Loans 12,787 1,579 1,422 3,920 2,116 3,451 16,324 8,950 16,294 8,943 (0) 18,401 1,715 1,558 4,947 2,075 3,150 22,035 9,812 21,953 9,824 (0) Financial investments and loans available for sale Investment in real estate properties Debt instruments 241,945 6,907 80,634 1,647 5,011 6,058 501 328,637 1,647 12,419 321,970 1,647 12,428 299,601 8,459 97,473 1,523 5,632 5,548 513 402,622 1,523 14,604 399,862 1,523 14,688 Equity instruments Non-consolidated investment funds Other assets held by consolidated investment funds designated as at fair value through profit or loss Loans 1,997 251 2,449 2,050 4,333 10,408 8,413 3,698 9,373 12,460 8,282 22,230 12,462 8,094 22,223 3,557 311 2,032 1,106 4,369 9,897 9,607 3,038 7,425 14,271 7,718 19,355 14,271 7,644 19,294 Financial investments and loans designated as at fair value through profit or loss 11,604 23,450 21,985 57,038 56,854 14,360 22,529 20,583 57,471 57,421 Debt instruments 5 5 5 5 1 6 1 Equity instruments Non-consolidated investment funds Loans 0 0 0 0 0 0 Financial investments and loans held for trading TOTAL FINANCIAL INVESTMENTS AND LOANS ACCOUNTED FOR AT FAIR VALUE 5 253,554 0 104,083 28,043 5 385,680 5 378,829 5 313,965 1 120,003 26,130 6 460,099 1 457,284 During the first half of 2022, the increase in interest rates and the bid-to-ask spread widening across the board lead to transfers from level 1 to level 2. During the period ended on June 30, 2022, the net transfer from Level 1 to Level 2 was €2,908 million. This amount comprised €8,287 million transferred from Level 1 to Level 2, of which €6,817 million for Corporate bonds and Half Year 2022 Financial Report 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 €815 million for Government bonds, and €5,379 million from Level 2 to Level 1, of which €4,234 million for Corporate bonds and €678 million for Government bonds. TRANSFER IN AND OUT OF THE LEVEL 3 CATEGORY AND OTHER MOVEMENTS From January 1, 2022 to June 30, 2022, the amount of level 3 assets increased by €1.9 billion to €28.0 billion, representing 7.4% of the total assets at fair value (5.7% as of December 31, 2021 or €26.1 billion). Main movements relating to level 3 assets to be noted were the following: €2.6 billion of new investments; €+1.0 billion of change in unrealized gains and losses; €+0.1 billion of net asset transfers in and out of level 3 and foreign exchange fluctuation impact; €-1.8 billion of asset sales, redemptions and settlements mainly debt instruments, equity securities and non-consolidated investment funds accounted as available for sale and equity securities, non- consolidated investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through profit and loss. A majority of assets classified in level 3 corresponds to private investments, in particular private equity assets. 5.5.2 Investments recognized at amortized cost June 30, 2022 December 31, 2021 (in Euro million) Debt instruments held to maturity Loans held to maturity Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Assets quoted in an active market Fair value determined directly by reference to active market (level 1) Assets not quoted in an active market or no active market Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total excluding derivatives Total including derivatives Financial investments and loans held to maturity Investment in real estate properties at amortized cost Debt instruments at cost (loans & receivables) Loans at amortized cost (0) 773 22 40,309 8,425 17,798 824 5,009 13,525 41,133 14,207 31,344 41,038 14,145 30,754 (0) 624 22 39,629 8,844 18,200 827 5,708 15,510 40,456 15,175 33,732 40,305 15,144 33,561 Financial investments and loans at amortized cost TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 795 795 66,531 66,531 19,359 19,359 86,685 86,685 85,936 85,936 646 646 66,673 66,673 22,044 22,044 89,363 89,363 89,009 89,009 Note: This table excludes assets backing contracts where the financial risk is borne by policyholders with guaranteed minimum features. Half Year 2022 Financial Report 100 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The consolidated statement of changes in equity is presented as a primary Financial Statement. 6.1 IMPACT OF TRANSACTIONS WITH SHAREHOLDERS 6.1.1 Change in shareholders’ equity group share for the first half of 2022 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2022, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €-2,207 million corresponding to 85.9 million shares mainly to cancel the shares bought in the context of the share buy back programs; capital increase of €13 million due to the exercise of stock options for 0.6 million shares; shared based payments for €24 million. TREASURY SHARES As of June 30, 2022, the Company and its subsidiaries owned 32.4 million AXA shares, representing 1.4% of the share capital, a decrease of 33.7 million shares compared to December 31, 2021. The 0.9 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €20 million and their market value was €20 million at the end of June 2022. The carrying value of treasury shares and related derivatives was €960 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2022, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €-746 million from repayment of undated subordinated debt; €+48 million from foreign exchange rate fluctuations; €-91 million from interest expenses related to the undated subordinated debt (net of tax). Half Year 2022 Financial Report 101 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 As of June 30, 2022 and December 31, 2021, undated subordinated debts recognized in shareholders’ equity were as follows: June 30, 2022 December 31, 2021 Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million Value of the undated subordinated debt in currency of issuance Value of the undated subordinated debt in Euro million (in million) October 29, 2004 - 375 M€ 6.0% December 22, 2004 - 250 M€ 6.0% January 25, 2005 - 250 M€ 6.0% July 6, 2006 - 350 M£ 6.7% December 14, 2006 - 750 MUS$ 6.4% November 7, 2014 - 984 M€ 3.941% November 7, 2014 - 724 M£ 5.453% May 20, 2014 - 1,000 M€ - 3.9% January 22, 2013 - 850 MUS$, 5.5% Undated notes - 625 M€, variables rates Undated notes - 27,000 MJPY, 3.3% Undated notes - 375 MUS$, variables rates 375 250 250 350 750 984 724 1,000 - 625 27,000 375 375 250 250 408 719 981 841 997 - 625 191 361 375 250 250 350 750 984 724 1,000 850 625 27,000 375 375 250 250 417 659 981 859 997 745 625 207 331 TOTAL 5,997 6,696 Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step-up clauses with effect from a given date. DIVIDENDS PAID At the Shareholders’ meeting held on April 28, 2022, shareholders approved a dividend distribution of €1.54 per share corresponding to €3,539 million with respect to the 2021 financial year. 6.1.2 Change in shareholders’ equity Group share for the first half of 2021 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2021, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital increase of €13 million due to the exercise of stock options for 0.8 million shares; capital decrease of €2 million corresponding to 0.1 million shares in order to eliminate the dilutive effect of share-based compensation schemes; shared based payments for €23 million. TREASURY SHARES As of June 30, 2021, the Company and its subsidiaries owned 31.7 million AXA shares, representing 1.3% of the share capital, a decrease of 0.9 million shares compared to December 31, 2020. The 1.2 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €14 million and their market value was €25 million. Half Year 2022 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 The carrying value of treasury shares and related derivatives was €841 million and there were no AXA shares held by consolidated mutual funds not backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES During the first half of 2021, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €+101 million from foreign exchange rate fluctuations; €-96 million from interest expenses related to the undated subordinated debt (net of tax). DIVIDENDS PAID At the Shareholders’ meeting held on April 29, 2021, shareholders approved a dividend distribution of €1.43 per share corresponding to €3,403 million with respect to the 2020 financial year. 6.2 COMPREHENSIVE INCOME FOR THE PERIOD The Statement of Comprehensive Income, presented as a primary financial statement, includes net income for the period, the reserve relating to the change in fair value of available for sale financial instruments, the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 Comprehensive income for the first half of 2022 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled €-56,805 million, of which a €-51,530 million decrease in unrealized capital gains on debt securities driven by the increase in interest rates as well as €-3,783 million on equities driven by the stock markets underperformance across the board. The following table shows the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding reserve recognized in shareholders’ equity: Half Year 2022 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 (in Euro million) June 30, 2022 December 31, 2021 Gross unrealized gains and losses (a) (4,804) 52,001 Less unrealized gains and losses attributable to: Shadow accounting on policyholder participation and other obligations 2,573 (28,229) Shadow accounting on Deferred Acquisition Costs (b) (43) (711) Shadow accounting on Value of purchased Business In force (11) (126) Unallocated unrealized gains and losses before tax (2,285) 22,936 Deferred tax 377 (5,226) Unrealized gains and losses net of tax - assets available for sale (1,908) 17,710 Unrealized gains and losses net of tax (100%) - equity accounted companies 128 154 UNREALIZED GAINS AND LOSSES (NET OF TAX) – 100% - TOTAL (1,780) 17,864 Minority interests' share in unrealized gains and losses (c) 153 (223) Translation reserves (d) (48) (150) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) (1,675) 17,491 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves and held for sale activities. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. As of June 30, 2022, most of the unrealized gains and losses on assets available for sale related to Life & Savings entities. In jurisdictions where participating business represents an important portion of contracts in force and where required minimum local policyholders’ share in the entities’ results (limited to investment or not) are significant, the reconciliation between gross unrealized gains and losses on available for sale financial assets and the corresponding net reserve recognized in shareholders’ equity were as follows as of June 30, 2022: June 30, 2022 (in Euro million) France Life & Savings Germany Life & Savings Switzerland Life & Savings Belgium Life & Savings Gross unrealized gains and losses (a) 479 (1,390) (661) 1,189 Less unrealized gains and losses attributable to: Shadow accounting on policyholders' participation and other obligations (300) 1,126 646 (629) Shadow accounting on Deferred Acquisition Costs (b) 9 (5) (13) Shadow accounting on Value of purchased Business In force 14 Unallocated unrealized gains and losses before tax 188 (264) (6) 547 Deferred tax (14) 91 1 (112) Unrealized gains and losses (net of tax) - assets available for sale 174 (173) (5) 435 Unrealized gains and losses net of tax - equity accounted companies 4 UNREALIZED GAINS AND LOSSES (NET OF TAX) - 100% - TOTAL 178 (173) (5) 435 Minority interests' share in unrealized gains and losses (c) (1) 0 (0) Translation reserves (d) 0 (269) (0) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (e) 178 (172) (274) 435 (a) Unrealized gains and losses on total available for sale invested assets including loans and assets held for sale. (b) Net of shadow accounting on unearned revenues and fees reserves. (c) Including foreign exchange impact attributable to minority interests. (d) Group share. (e) Including unrealized gains and losses on assets held for sale. Half Year 2022 Financial Report 104 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 The change in reserves related to changes in fair value of available for sale financial instruments included in shareholders’ equity relating to changes in fair value of assets in June 30, 2022 and December 31, 2021, broke down as follows: (in Euro million) June 30, 2022 December 31, 2021 Unrealized gains and losses (net of tax) 100% - opening 17,864 22,842 Transfer in the income statement on the period (a) Investments bought in the current accounting period and changes in fair value Foreign exchange impact Change in scope and other changes (987) (18,472) (101) (84) (2,311) (2,865) 281 (83) Unrealized gains and losses (net of tax) 100% - closing (1,780) 17,864 Minority interests' share in unrealized gains and losses (b) Translation reserves (c) 153 (48) (223) (150) UNREALIZED GAINS AND LOSSES (NET GROUP SHARE) (d) (1,675) 17,491 (a) Transfer induced by disposal of financial assets, impairment write-back following reevaluation, or transfer of expenses following impairment charge during the period. (b) Including foreign exchange impact attributable to minority interests. (c) Group share. (d) Including unrealized gains and losses on assets held for sale operations. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2022 amounted to €+1,434 million of which €+1,421 million from Group share and €+13 million from minority interests. This was mainly driven by AXA XL (€+1,398 million), Hong Kong (€+434 million) and Switzerland (€+372 million), partly offset by Japan (€-570 million) and United Kingdom (€-106 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year of 2022 amounted to €+1,673 million (of which €+1,666 million from Group share and €+7 million from minority interests). This was mainly driven by the overall increase in discount rate assumptions used, reflecting the economic and financial conditions as at the end of June, 2022. 6.2.2 Comprehensive income for the first half of 2021 RESERVE RELATED TO CHANGES IN FAIR VALUE OF AVAILABLE FOR SALE FINANCIAL INSTRUMENTS INCLUDED IN SHAREHOLDERS’ EQUITY The decrease in gross unrealized gains and losses on assets available for sale totaled €-14,513 million, of which a €-15,665 million decrease in unrealized capital gains on debt securities driven by the increase on interest rates mainly in the United States and the Eurozone, partly offset by €+907 million on equities. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2021 amounted to €+516 million. This was mainly driven by AXA XL (€+493 million), United Kingdom (€+178 million), Hong Kong (€+153 million) and China (€+97 million) partly offset by Japan (€-291 million) and Switzerland (€-146 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains amounted to €+510 million for the first half year of 2021. This was mainly driven by the overall increase in discount rate assumptions used, reflecting the economic and financial conditions as at the end of June, 2021. Half Year 2022 Financial Report 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 6.3 CHANGE IN MINORITY INTERESTS Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than a shareholders’ equity item. 6.3.1 Change in minority interests for the first half of 2022 The €-442 million decrease in minority interests to €+3,652 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+99 million; o Reserves relating to changes in fair value through shareholders’ equity for €-374 million; o Foreign exchange movements for €+13 million; o Employee benefits actuarial gains and losses for €+7 million. Transactions with minority interests’ holders, mainly included: o Minority interests in consolidated investments funds qualified as equity resulting from the decrease in the value of minority interests holdings due to divestment in the funds for €-82 million; o Dividend payout to minority interests’ holders for €-142 million. o 6.3.2 Change in minority interests for the first half of 2021 The €-144 million decrease in minority interests to €+4,421 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+121 million; o Reserves relating to changes in fair value through shareholders’ equity for €-125 million; o Foreign exchange movements for €-2 million; o Employee benefits actuarial gains and losses for €+3 million. Transactions with minority interests’ holders, mainly included: o Minority interests in consolidated investments funds qualified as equity resulting from the decrease in the value of minority interests holdings due to a capital decrease for €-38 million; o Dividend payout to minority interests’ holders for €-82 million. Half Year 2022 Financial Report 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 7 FINANCING DEBT June 30, 2022 December 31, 2021 Carrying value Carrying value (in Euro million) AXA Subordinated green notes, 1.375%, due 2041 (€) Subordinated notes, 5.125% due 2043 (€) U.S. registered redeemable subordinated debt, 8.60% 2030 (US$) Subordinated debt, 5.625% due 2054 (£) Subordinated debt, 3.375% due 2047 (€) Undated Subordinated notes, US$ 850M, 4.5% Subordinated notes, 5.125% due 2047 (US$) Subordinated notes, 3.25% due 2049 (€) Subordinated Notes, 1,875% due 2042 (€) Subordinated Notes, 4,25% due 2043 (€) Derivatives relating to subordinated debts (a) AXA XL Subordinated Notes, 4.45% due March 2025 (US$) 11,616 1,000 1,000 1,374 874 1,500 818 963 2,000 1,250 1,250 (413) 486 - 8,979 1,000 1,000 1,284 893 1,500 750 883 2,000 - - (331) 1,389 439 Subordinated Notes, 5.5% due March 2045 (US$) 486 447 Subordinated Notes, 3.25% due June 2047 (€) AXA Italy Subordinated notes, EURIBOR 6 months + 81bps Other subordinated debt (under €100 million) 66 66 13 503 66 66 14 Subordinated debt 12,182 10,449 AXA Euro Medium Term Note, due 2028 500 500 500 500 AXA XL 308 284 Senior Notes, 5.25% due December 2043 (US$) Other financing debt instruments issued (under €100 million) 308 22 284 16 Financing debt instruments issued 830 800 TOTAL FINANCING DEBT (b) 13,012 11,249 (a) Hedging instruments in accordance with IAS 39 and economic hedge derivatives not eligible for hedge accounting. (b) Excluding accrued interest on derivatives. Half Year 2022 Financial Report 107 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 8 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: the calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period; the calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in Euro million) (a) June 30, 2022 June 30, 2021 NET INCOME GROUP SHARE 4,108 3,996 Undated subordinated debt financial charge (91) (96) Net income including impact of undated subordinated debt A 4,017 3,900 Weighted average number of ordinary shares (net of treasury shares) - opening Stock options exercised (b) 2,356 0 2,386 0 Treasury shares (b) 32 (2) Capital increase/decrease (b) (77) (0) Weighted average number of ordinary shares B 2,311 2,384 BASIC NET INCOME PER ORDINARY SHARE C = A / B 1.74 1.64 Potentially dilutive instruments : Stock options 1 1 Other 5 5 Fully diluted - weighted average number of shares (c) D 2,317 2,390 NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT 4,017 3,900 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 1.73 1.63 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive instruments. As of June 30, 2022, net income per ordinary share stood at €1.74 on a basic calculation and at €1.73 on a fully diluted basis. As of June 30, 2021, net income per ordinary share stood at €1.64 on a basic calculation and at €1.63 on a fully diluted basis. Half Year 2021 Financial Report 108 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2022 NOTE 9 SUBSEQUENT EVENTS There was no material event after the reporting period to be reported. Half Year 2022 Financial Report 109 II III. Statutory auditors’ review report / on the 2022 Half Year Financial Information AXA SA Statutory Auditors' Review Report on the half-year Financial Information (For the period from January 1st to June 30th 2022) Half Year 2022 Financial Report 111 STATUTORY AUDITORS’ REVIEW REPORT ON THE 2021 HALF YEAR FINANCIAL INFORMATION PricewaterhouseCoopers Audit ERNST & YOUNG Audit 63, rue de Villiers 92208 Neuilly-sur-Seine Cedex Tour First TSA 14444 92037 Paris-La Défense cedex S.A.S. au capital de € 2 510 460 672 006 483 R.C.S. Nanterre S.A.S. à capital variable 344 366 315 R.C.S. Nanterre Statutory Auditors’ Review Report on the half-year Financial Information (Period from January 1st to June 30th, 2022) To the Shareholders, AXA SA 25, avenue Matignon 75008 Paris In compliance with the assignment entrusted to us by your Shareholders’ Meeting and in accordance with the requirements of article L. 451-1-2-III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: ▪ the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the period from January 1 to June 30th, 2022, ▪ the verification of the information presented in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34, standard of the IFRSs as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information presented in the half-year management report on the condensed half-year consolidated financial statements subject to our review. Half Year 2022 Financial Report 112 III STATUTORY AUDITORS’ REVIEW REPORT ON THE 2021 HALF YEAR FINANCIAL INFORMATION We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. It is not our responsibility to conclude on the fair presentation and consistency with the half- year financial statements of the solvency related information. Neuilly-sur-Seine and Courbevoie, August 2nd, 2022 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit Ernst & Young Audit Bénédicte Vignon Grégory Saugner Patrick Menard Olivier Durand This is a free translation into English of the statutory auditors’ review report on the half-year financial information issued in French and is provided solely for the convenience of English-speaking users. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Half Year 2022 Financial Report 113 III IV. Statement of the person responsible / for the Half Year Financial Report STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and describes the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 2, 2022. Thomas Buberl Chief Executive Officer Half Year 2022 Financial Report 115 IV

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Half Year Financial Report / June 30, 2023 TABLE OF CONTENTS I. Activity Report………………………………………...3 II. Consolidated financial statements ………………..42 III. Statutory auditors’ review report on the 2023 Half Year Financial Information ….. 154 IV. Statement of the person responsible for the Half Year Financial Report …………….……………… 158 I. Activity Report / June 30, 2023 ACTIVITY REPORT – HALF YEAR 2023 IMPORTANT LEGAL INFORMATION AND CAUTIONARY STATEMENT REGARDING FORWARD- LOOKING STATEMENTS AND THE USE OF NON-GAAP AND ALTERNATIVE PERFORMANCE MEASURES Certain statements contained herein may be forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans, expectations, or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause AXA’s actual results to differ materially from those expressed or implied in such forward looking statements. Please refer to Part 5 - “Risk Factors and Risk Management” of AXA’s Universal Registration Document for the year ended December 31, 2022 (the “2022 Universal Registration Document”) for a description of certain important factors, risks and uncertainties that may affect AXA’s business and/or results of operations. AXA undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information, future events, or circumstances or otherwise, except as required by applicable laws and regulations. In addition, this report refers to certain non-GAAP financial measures, or alternative performance measures (“APMs”), used by Management in analysing AXA’s operating trends, financial performance and financial position and providing investors with additional information that Management believes to be useful and relevant regarding AXA’s results. These non-GAAP financial measures generally have no standardized meaning and therefore may not be comparable to similarly labelled measures used by other companies. As a result, none of these non-GAAP financial measures should be considered in isolation from, or as a substitute for, the Group’s Consolidated Financial Statements and related notes prepared in accordance with IFRS. Underlying Earnings, Underlying Earnings per Share, Underlying Return on Equity, Combined Ratio and Debt Gearing are APMs as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from APMs Underlying Earnings and Combined Ratio to the most directly reconcilable line item, subtotal, or total in the Consolidated Financial Statements of the corresponding period is provided on pages 18 and 19 of this report. APMs Underlying Return on Equity and Underlying Earnings per Share are reconciled to the Consolidated Financial Statements in the tables set forth on page 34 of this report. The calculation methodology of the Debt Gearing is set out on page 21 of this report. For further information on the above-mentioned and other non-GAAP financial measures used in this report, see the Glossary set forth on pages 36 to 41 of this report. Half Year 2023 Financial Report 4 I ACTIVITY REPORT – HALF YEAR 2023 Operating Highlights GOVERNANCE AXA announced evolutions within its leadership team to prepare the launch of its next strategic plan On June 6, 2023, the AXA Group announced evolutions within its Management Committee for the launch of its next strategic plan, which will be presented during the first quarter of 2024. Changes in key geographies of the Group Patrick Cohen, member of AXA’s Management Committee and CEO of AXA France was appointed CEO European Markets and Health. In addition to supervising AXA’s European entities, he was tasked with the creation and development of a new business unit which will gather and accelerate the Group’s key international Health operations. He keeps reporting to Thomas Buberl. Guillaume Borie, Deputy CEO of AXA France was appointed CEO of AXA France and joined the Management Committee reporting to Thomas Buberl. Hassan El-Shabrawishi, CEO of AXA Africa was appointed CEO International Markets, and now oversees AXA’s operations in Latin America, Africa, the Middle East, Turkey, India, and South-East Asia. Hassan El- Shabrawishi joined AXA’s Management Committee reporting to Thomas Buberl. AXA Japan and AXA Greater China (Hong Kong and China) report directly to George Stansfield, Group Deputy CEO and General Secretary. Gordon Watson was appointed non-executive Chairman for Asia. New members of the Management Committee in central functions Nancy Bewlay, CEO of AXA XL Reinsurance, was appointed Chief Underwriting Officer for the Group and joined the Management Committee. She reports to Frédéric de Courtois, Group Deputy CEO in charge of Finance, Operations, Strategy, Risk, Underwriting. Françoise Gilles, Chief Strategic Development Officer for AXA Asia, was appointed Chief Risk Officer for the Group and joined the Management Committee, reporting to Frédéric de Courtois. Anu Venkataraman was appointed Chief Strategy Officer for the Group in addition to her current role as Group Head of Investor Relations. She joined the Management Committee reporting to Frédéric de Courtois and Alban de Mailly Nesle, Group Chief Financial Officer and member of the Management Committee. The new Management Committee around Thomas Buberl started working together as of July 1 and is now composed of : Frédéric de Courtois, Group Deputy CEO, Finance, Operations, Strategy, Risk, Underwriting George Stansfield, Group Deputy CEO, General Secretary, oversight of AXA Japan, AXA Greater China (China and Hong Kong) Nancy Bewlay, Group Chief Underwriting Officer Guillaume Borie, CEO AXA France Helen Browne, Group General Counsel Patrick Cohen, CEO European Markets & Health Half Year 2023 Financial Report 5 I ACTIVITY REPORT – HALF YEAR 2023 Ulrike Decoene, Group Chief Communication, Brand & Sustainability Officer Hassan El-Shabrawishi, CEO International Markets(1) Françoise Gilles, Group Chief Risk Officer Scott Gunter, CEO AXA XL Alban de Mailly Nesle, Group Chief Financial Officer Marco Morelli, Executive Chairman AXA Investment Managers Karima Silvent, Group Chief Human Resources Officer Anu Venkataraman, Group Chief Strategy Officer, Head of Investor Relations Alexander Vollert, Group Chief Operating Officer, CEO AXA Group Operations Renaud Guidée was appointed CEO AXA XL Reinsurance Renaud Guidée, who has held the role of Group Chief Risk Officer since 2019 was appointed CEO of AXA XL Reinsurance, succeeding to Nancy Bewlay. He reports to Scott Gunter, CEO of AXA XL, and member of AXA’s Management Committee. SIGNIFICANT TRANSACTIONS AXA SA successfully completed the sale of shares in Banca Monte dei Paschi di Siena S.p.A. On February 28, 2023, AXA SA (“AXA”) announced the successful sale of 100,000,000 shares in Banca Monte dei Paschi di Siena S.p.A. (the “Bank”), representing ca.7.94% of the Bank’s share capital, at a price of €2.33 per share (i.e., a total amount of €233 million) in an accelerated book built offering (the “Offering”) reserved to institutional investors. Following the settlement and delivery of the Offering, which occurred on March 2, 2023, AXA retained (directly or indirectly) 0.0007% of the Bank’s share capital. The Bank’s shares are listed on the regulated market of Euronext Milan (ISIN IT0005508921). CAPITAL / DEBT OPERATIONS AXA announced the successful placement of €750 million senior notes due 2033 On January 4, 2023, AXA announced the successful placement of €750 million of Reg S senior unsecured notes due 2033 with institutional investors. The notes will be used for general corporate purposes, including the refinancing of part of the Group’s outstanding debt. The notes have a fixed annual coupon of 3.625%. Investor demand was strong with a book subscribed close to 3 times. The notes are rated A+/Stable by Standard & Poor’s and A1/Stable by Moody’s. The settlement of the notes took place on January 10, 2023. (1) Including Africa, Turkey, Middle East, Latin America, Thailand, Indonesia, Philippines, India Life. Half Year 2023 Financial Report 6 I ACTIVITY REPORT – HALF YEAR 2023 Execution of a share repurchase agreement in relation to AXA’s share buy-back program of up to €1.1 billion as announced on February 23, 2023 On February 24, 2023, AXA executed a share repurchase agreement with an investment services provider, whereby AXA bought back its own shares for an amount of €1.1 billion(1), as communicated on February 23, 2023. The share repurchase agreement was executed in accordance with the terms of the applicable Shareholders’ Annual General Meeting authorization(2). Under the share repurchase agreement(3) announced on February 23,2023, shares were bought back commencing on February 27, 2023, and ending on April 4, 2023. On each day during the purchase period, the price per share paid by AXA(4) was determined on the basis of the volume-weighted average share price. AXA intends to cancel all shares repurchased pursuant to this share buy-back program. Information regarding share buyback programs is disclosed on the AXA Group(5) website. AXA announced the successful placement of €1 billion dated subordinated notes due 2043 On April 5, 2023, AXA announced the successful placement of €1 billion of Reg S subordinated notes due 2043 with institutional investors. The initial fixed rate was set at 5.50% per annum until the end of the six-month call window period (July 11, 2033), when the interest rate will become a floating rate based on three-month EURIBOR plus a margin including a 100 basis points step up. Investor demand was strong with a book subscribed close to 5 times. The notes are rated A-/Stable by Standard & Poor’s and A2 (hyb)/Stable by Moody’s. The notes are treated as capital from a regulatory and rating agencies’ perspective within applicable limits. The transaction has been structured for the notes to be eligible as Tier 2 capital under Solvency II. The settlement of the notes took place on April 11, 2023. This issuance is part of AXA Group’s funding plan for 2023 and the proceeds are used for general corporate purposes, including the refinancing of part of the AXA Group’s outstanding debt. In particular, it followed the completion of a cash tender offer(6) on AXA XL subordinated notes(7), resulting in the buy-back of US $248 million debt. (1) AXA bought back its own shares for an exact amount of €1,099,999,998. (2) The Shareholders’ Annual General Meeting authorization granted on April 28, 2022, or the authorization granted by the Shareholders’ Annual General Meeting on April 27, 2023, as applicable. (3) The up to €1.1 billion share buy-back program was executed in addition to any other potential share buy-back transactions that may be launched by AXA, including the previously announced share buy-back to be executed following the closing of the sale of the closed Life & Pensions portfolio by AXA Germany. (4) The purchase price did not exceed the maximum purchase price approved at the applicable Shareholders’ Annual General Meeting. (5) https://www.axa.com/en/investor/share-buyback-programs#tab=share-buy-back-program-total (6) Completed on March 14, 2023. Details of the terms of the cash tender offer available at XL Group Ltd - Tender Offer Results Announcement | AXA XL. (7) AXA XL US $500 million 5.500% subordinated notes due 2045. As of December 31, 2022, these notes no longer contribute to the Group Eligible Own Funds under Solvency II. Half Year 2023 Financial Report 7 I ACTIVITY REPORT – HALF YEAR 2023 AXA announced a cash tender offer for one series of subordinated notes On April 19, 2023, AXA announced an any-and-all cash tender offer for its GB £750,000,000 5.625% Subordinated Tier 2 Notes due January 16, 2054. The tender offer expired at 5:00 p.m., Central European time, on April 26, 2023. The transaction is part of AXA Group’s active management of its debt structure and allows AXA to further optimize its capital base. PARTNERSHIPS AND INNOVATION AXA renewed the mandate of the AXA Research Fund for five years On January 12, 2023, AXA announced that it renewed for five years the mandate of the AXA Research Fund, one of the largest scientific philanthropy initiatives in the private sector. The objectives of the AXA Research Fund are to reinforce the transdisciplinary exploration of emerging risks, to consolidate the links between academic experts, industry and the public sector. With a total budget of €250 million since its launch in 2007, the AXA Research Fund has forged partnerships with more than 334 academic institutions in 38 countries and has supported 708 projects led by researchers of 60 nationalities, 42% of whom are women. 279 projects funded by the AXA Research Fund focus on health issues, such as data driven diabetes treatment (University of Edinburgh), 242 centers on climate and environmental subjects like the protection of biodiversity for coastal resilience (University of California, Santa Cruz) while 187 programs explore socio-economic questions such as the effects of the energy transition (Paris School of Economics). OTHER AXA published the third edition of its Mind Health Report On February 28, 2023, AXA released the third edition of its Mind Health Report, a study aimed at identifying mental health and wellness issues in society in order to build solutions to mitigate them. The study was conducted in collaboration with IPSOS involving surveys of 30,000 people aged 18 to 74 from sixteen European, Asian, and American countries and territories. Over the past year, the rate of participants with poor mental health has decreased by 3 points (13% compared to 16%), despite the difficult geopolitical and economic context. One in two respondents felt happy and confident about the future. The happiest people are in Mexico (64%), the Philippines (62%) and Thailand (61%). On the contrary, this feeling is lowest in Italy (36%), Hong Kong (38%) and Turkey (42%). In France, the feeling of happiness has increased by 5% compared to last year (44% against 39%). This year's survey showed three main trends: 24% fewer women than men feel fulfilled. 40% feel that their skills have been questioned simply because of their gender. More than one in three 18-24 year olds believe that addiction to technology and social networking has a negative impact on well-being. Employees are three times more likely to thrive if they work in a company that offers mental health support. Half Year 2023 Financial Report 8 I ACTIVITY REPORT – HALF YEAR 2023 AXA published 1H22 and FY22 financial information under IFRS 17 and IFRS 9 accounting standards and provided 2023 Group Underlying Earnings Target(1)(2) On May 15, 2023, AXA published its financial supplement for both half-year 2022 and full-year 2022, restated under the IFRS 17 and IFRS 9 accounting standards that became effective on January 1, 2023. To enable analysts and investors to better assess the Group’s Underlying Earnings trajectory in 2023 following the implementation of IFRS 17 and IFRS 9, AXA exceptionally provided a 2023 Group Underlying Earnings Target, including a breakdown by main lines of business. AXA reaffirmed that Group Underlying Earnings’ power is unaffected by the new accounting standards. Group Underlying Earnings target was set above €7.5 billion in 2023, including ca. €-0.1 billion impact from unfavorable foreign exchange movements. Cash and regulatory capital were unaffected by accounting changes, with €5.5 billion of net cash remittance and Solvency II ratio(3) of 215% at year-end 2022 (217% as of 1Q23). The key financial targets of ‘Driving Progress 2023’ were reaffirmed, with the Underlying Earnings per Share (UEPS) CAGR(4) expected to exceed +7% over the three-year period 2020(5)-2023 and cumulative cash remittance to exceed €14 billion over the period 2021-2023. (1) IFRS 17 and IFRS 9 financial figures and information published on May 15, 2023, were not audited. (2) All information in the May 15,2023 publication was expressly qualified by the disclaimer on forward-looking statements set out therein, and such information, as it may be updated by this report, remains subject to the disclaimer on forward-looking statements herein. The 2023 Group Underlying Earnings Target (the “2023 Target”) set out management’s then-current expectations of certain performance metrics following the implementation of IFRS 17 and IFRS 9 accounting standards, which became effective on January 1, 2023. The 2023 Target’s assumptions are expressly updated as set out in the section titled “Outlook” on page 35 of this report. The 2023 Target’s assumptions may prove to be incorrect or need to be updated, and actual results, performance, or events may differ from those expressed in the 2023 Target due to known and unknown risks and uncertainties. Because the 2023 Target was provided exceptionally to enable analysts and investors to better assess the Group’s Underlying Earnings trajectory in 2023 in connection with the implementation of IFRS 17 and IFRS 9, it is not expected or intended that similar guidance will be issued in future periods beyond 2023, nor that such guidance will be updated, except as set forth in this report and as otherwise required by law. (3) The Solvency II ratio included in the May 15, 2023 publication was estimated primarily using AXA’s internal model calibrated based on an adverse 1/200 years shock. It included a theoretical amount for dividends accrued for the first three months of 2023, based on the full-year dividend of €1.70 per share paid in 2023 for FY22. Dividends were proposed by the Board, at its discretion, based on a variety of factors described in AXA’s 2022 Universal Registration Document, and were then submitted to AXA’s shareholders for approval. This estimate should not be considered in any way to be an indication of the actual dividend amount, if any, for the 2023 financial year. For further information on AXA’s internal model and Solvency II disclosures, please refer to AXA Group’s Solvency and Financial Condition Report (SFCR) as of December 31, 2022, available on AXA’s website (www.axa.com). For updated Solvency II information as of June 30, 2023, please see the press release “Half Year Earnings 2023” published on August 3, 2023, and available on AXA’s website. (4) Compounded annual growth rate. (5) Rebased. FY20 Underlying Earnings rebased included actual Underlying Earnings restating for “Covid-19 claims” and natural catastrophes in excess of normalized. AXA Group normalized level of Natural Catastrophe charges expected for 2020 at ca. 3% of Gross Earned Premiums. Natural Catastrophe charges include natural catastrophe losses regardless of event size. “Covid-19 claims” included P&C, L&S and Health net claims related to Covid-19, as well as the impacts from solidarity measures and from lower volumes net of expenses, linked to Covid-19. “Covid-19 claims” did not include any financial market impacts (including impacts on investment margin, unit-linked and asset management fees, etc.) related to the Covid-19 crisis. Half Year 2023 Financial Report 9 I ACTIVITY REPORT – HALF YEAR 2023 AXA announced new decarbonization targets and published its 2023 Climate & Biodiversity report On June 29, 2023, AXA published its 2023 Climate & Biodiversity report and announced new decarbonization targets for both its insurance and investment portfolios(1). Insurance Portfolio For the first time, AXA published targets to drive the decarbonization of various of its Property & Casualty insurance portfolios and to develop its insurance activities dedicated to the transition. Specifically, AXA has set targets to: Increase its business in the field of renewable energies, and more broadly across sectors transitioning to low carbon business models, as well as developing environmentally sustainable claims management for its motor business by 2026. Reduce the carbon intensity of the most material personal motor portfolios in the Group by 20% by 2030 compared with the 2019 baseline. Reduce the absolute carbon emissions of the Group’s largest commercial insurance clients by 30% and the carbon intensity of other corporate clients by 20% by 2030 compared with a 2021 baseline. Strengthen dialogue with its customers, particularly its corporate customers, but also with its external stakeholders and partners to better support them in the transition. These targets were based on new calculation methodologies developed and promoted by the sector. AXA expects these methodologies to evolve as data availability improves, but they are a first step to better steer the carbon impact of AXA’s insurance portfolios. Investment Portfolio AXA also announced that it is continuing its efforts to reduce the carbon footprint of its investment activities. After setting a target of reducing the carbon footprint of AXA's general account assets by 20% between 2019 and 2025, AXA set a new target of a 50% reduction between 2019 and 2030. AXA also intends to strengthen its engagement activities and its efforts to finance the transition. Climate & Biodiversity Report 2023 AXA published the 8th edition of its Climate & Biodiversity Report. This report responds to legal obligations for extra-financial reporting, as well as to the voluntary recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the Task Force on Nature-related Financial Disclosures (TNFD), to which AXA has been a long-standing contributor. In this report, AXA highlighted the different dimensions of its action on climate and biodiversity: governance, strategy, risk management and quantified indicators of the impact of its actions. One of the main indicators of the report, “the Group portfolio’s implied temperature rise”, measures the impact of the corporate bonds and equities held in the Group’s general account portfolios on global warming by 2050. It stood at 2.5°C in 2022, down 0.1°C on last year using the same methodology and remains below the market (2.7°C). (1) For further information on these targets, the methodologies used to set and report on them, as well as key assumptions, risks and variables that may impact AXA’s ability to meet the targets, please refer to AXA Net Zero strategy for investment & underwriting Half Year 2023 Financial Report 10 I ACTIVITY REPORT – HALF YEAR 2023 RISK FACTORS The principal risks and uncertainties faced by the Group are described in detail in Section 5.1 “Risk Factors” and Section 7.3 “General Information” of the 2022 Universal Registration Document (on pages 230 to 254 and pages 457 to 473, respectively). The 2022 Universal Registration Document was filed with the Autorité des marchés financiers (the “AMF”) on March 21, 2023, and is available on the AMF’s website (www.amf-france.org) as well as on AXA's website (www.axa.com). The descriptions contained in these sections of the 2022 Universal Registration Document remain valid in all material respects at the date of the publication of this report regarding the evaluation of the major risks and uncertainties affecting the Group as of June 30, 2023, or which Management expects could affect the Group during the remainder of 2023. RELATED-PARTY TRANSACTIONS During the first half of 2023, there were (i) no modifications to the related-party transactions described in Note 28 “Related-party transactions” to the audited Consolidated Financial Statements for the fiscal year ended December 31, 2022, included in the 2022 Universal Registration Document (pages 433 and 434) filed with the AMF and available on its website (www.amf-france.org) as well as on the Company's website (www.axa.com), which significantly influenced the financial position or the results of the Company during the first six months of the fiscal year 2023, and (ii) no new transactions concluded between AXA SA and related parties that significantly influenced the financial position or the results of the Company during the first six months of 2023. Half Year 2023 Financial Report 11 I ACTIVITY REPORT – HALF YEAR 2023 EVENTS SUBSEQUENT TO JUNE 30, 2023 AXA completed the acquisition of Groupe Assurances du Crédit Mutuel España On July 12, 2023, AXA announced that it has completed the acquisition of Groupe Assurances du Crédit Mutuel España (“GACM España”). Under the terms of the transaction, AXA has acquired GACM España for a total cash consideration of €310 million, in line with the announcement made upon signing of the agreement. AXA accelerated the development of its Health strategy in Europe with the acquisition of Laya On August 3rd, AXA announced that it has entered into an agreement to acquire Laya Healthcare Limited (“Laya”) from Corebridge Financial Inc., a subsidiary of AIG. Laya has a leading position in the Irish health market with ca. 28% market share, serving close to 700,000 policyholders and generating ca. €800 million premiums(1) per annum. It operates as a Managing General Agent with a highly digitalized platform and a strong direct distribution network, which makes Laya the sole point of contact for its customers through their healthcare journey. With this transaction, AXA affirms its ambition to grow its European franchise, by expanding its operations in a buoyant, fast-growing Health insurance market. AXA is already present in Ireland where it benefits from a number 1 position in the P&C market. Under the terms of the agreement, AXA acquired Laya for a consideration of €650 million, representing an expected price-to-earnings multiple of ca. 11x, taking into account the planned re-capturing of underwriting margin currently earned by third parties. The completion of the transaction is expected to result in an impact of - 3 points on AXA Group’s Solvency II ratio(2). (1) As of FY22. Premiums currently underwritten by a third-party insurer. (2) Impact effective on AXA Group’s Solvency II ratio at the time of closing of the transaction. Half Year 2023 Financial Report 12 I ACTIVITY REPORT – HALF YEAR 2023 Market Environment Financial Market Conditions STOCK MARKETS (main indexes, in pts) June 30, 2023 June 30, 2023 / December 31, 2022 June 30, 2022 June 30, 2022 / December 31, 2021 CAC 40 7,400 14% 5,923 17% Eurostoxx 50 4,399 16% 3,455 20% FTSE 100 7,532 1% 7,169 3% Nikkei 33,189 27% 26,393 8% S&P 500 4,450 16% 3,785 21% MSCI World 2,967 14% 2,546 21% MSCI Emerging 989 3% 1,001 19% Source: Bloomberg. Following a very challenging year in 2022, equity markets broadly recovered during the first half of 2023. The S&P 500 recorded a positive performance of +16%, despite the ongoing concerns of economic slowdown. These gains were echoed across the Eurozone economies in Italy (+19% on IT 40), Spain (+17% on IBEX 35), Germany (+16% on DAX) and France (+14% on CAC 40). In the United Kingdom, equity indices underperformed in the first half of 2023, with the FTSE 100 rising by just 1% while the FTSE 250 was 2.3% lower. This reflects the fact that the FTSE 100 was one of the few indices to avoid sharp losses in 2022. BOND MARKETS (Government bonds in % or basis points (bps)) June 30, 2023 June 30, 2023 / December 31, 2022 June 30, 2022 June 30, 2022 / December 31, 2021 10Y French bond 2.93% 19 bps 1.92% +172 bps 10Y German bond 2.39% 18 bps 1.34% +151 bps 10Y Swiss bond 0.96% 66 bps 1.07% +120 bps 10Y Italian bond 4.07% 64 bps 3.26% +209 bps 10Y UK bond 4.39% +72 bps 2.23% +126 bps 10Y Japanese bond 0.40% 2 bps 0.23% +16 bps 10Y US bond 3.84% 4bps 3.01% +150 bps Source: Bloomberg. Bond markets suffered during 2022 from a continuous tightening of Central Banks’ monetary policies. In 2023, most sovereign fixed income bonds saw yields stabilize while some markets witnessed even tighter monetary policies. US Treasury yields remain far below October’s highs, but yields were barely changed from 2022 year-end, with 10-year yields 4bps lower to 3.84% at the end of June 2023. Across the Eurozone, despite the ECB raising both Half Year 2023 Financial Report 13 I ACTIVITY REPORT – HALF YEAR 2023 policy rates and the outlook, government rates decreased at end of June 2023, by 19 bps and 18 bps respectively for the French 10-year OAT and the 10-year German bonds and 10-year yields in Italy closed at 4.07%, 64bps lower than their end-December level, helped in part by the ECB’s ongoing flexibility in its Pandemic Emergency Purchase Programme. In Japan, the 10-year JGB yields were broadly unchanged at end of June 2023 at 0.40% from the end of December level, although the markets had considered the prospect of some shift in Bank of Japan policy. United Kingdom’s gilts underperformed with yields rising by 72bps from December 2022 to 4.39% in June 2023, which reflects the continued concerns about persistent UK inflation and subsequent tightening by the Bank of England. Credit markets had a solid first half of 2023, despite the difficulties faced by the banking sector in March. Spreads are broadly tighter, more so in high yield (HY) than investment grade (IG). Spreads in large cap bank benchmarks are flat to wider year to date, flat in USD (at 139bps) and wider in EUR (+8bps to 174bps). Global IG is tighter by 8bps to 140bps (with USD IG tighter by 8bps to 130bps and EUR IG tighter by 6bps to 161bps) while Global HY is tighter by 65bps to 450bps (with USD HY tighter by 76bps to 405bps and EUR HY tighter by 52bps to 446bps). EXCHANGE RATES End of Period Exchange rate Average Exchange rate (for €1) June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 US Dollar 1.09 1.05 1.08 1.09 British Pound Sterling 0.86 0.86 0.88 0.84 Swiss Franc 0.98 1.00 0.99 1.03 Japanese Yen 158 142 146 134 Source : WM/Refinitiv The first half of 2023 has seen a relative exchange rate stability, except for the Japanese Yen. Against a basket of currencies, the US Dollar remained broadly stable in the first half of 2023 (-2% vs. Euro and -2.2% vs. Swiss Franc). The higher Bank of England rate expectations and the diminishing fiscal concerns have led the Sterling to make gains in the first half of 2023 (+3% vs. Euro and +5% vs. US dollar). Dwindling expectations of rate adjustments from the Bank of Japan, led to the Yen's depreciation of -12% against the Euro and -10 % against the US dollar. Half Year 2023 Financial Report 14 I ACTIVITY REPORT – HALF YEAR 2023 Activity and Earnings Indicators ACTIVITY INDICATORS (in Euro million, except percentages) June 30, 2023 June 30, 2022 June 30, 2023 / June 30, 2022KLM Gross Written Premiums & Other Revenues UVW 55,740 54,867 2.4% Property & Casualty 30,400 28,713 7.2% Life & Health 24,528 25,287 2.8% o/w Life 16,297 16,553 1.0% o/w Health 8,231 8,734 6.2% Asset Management 749 788 4.5% Banking 62 80 21.8% New Business Value (NBV) (1) 1,179 1,300 7.3% Present Value of Expected Premiums (PVEP) (2) 23,260 25,936 9.2% NBV Margin (1)/(2) 5.1% 5.0% 0.1 pt Average Assets under Management KPM 736 771 4.4% (a) Changes are on comparable basis. (b) Net of Intercompany eliminations. (c) in Euro billion. (in Euro million, except percentages) June 30, 2023 June 30, 2022 June 30, 2023 / June 30, 2022KLM Gross Written Premiums & Other Revenues UVW 55,740 54,867 2.4% France 13,859 14,507 6.1% Europe 20,996 20,251 2.8% AXA XL 10,534 10,252 5.7% Asia, Africa & EME-LATAM 8,610 8,152 13.2% AXA IM 749 788 4.5% Transversal & Other 993 917 4.4% (a) Changes are on comparable basis. (b) Net of Intercompany eliminations. Consolidated Gross Written Premiums and Other Revenues amounted to €55,740 million as of June 30, 2023, up 1.6% on a reported basis and up 2.4% on a comparable basis compared to June 30, 2022. The comparable basis (€-0.4 billion or +0.8 point) mainly neutralizes the foreign exchange rate movements due to the appreciation of average Euro exchange rate mainly against Turkish Lyra, Japanese Yen and British Pound Sterling. Half Year 2023 Financial Report 15 I ACTIVITY REPORT – HALF YEAR 2023 GROSS WRITTEN PREMIUMS & OTHER REVENUES Property & Casualty gross written premiums were up 7% (or €+2,077 million) on a comparable basis to €30,400 million: Commercial lines Insurance grew by 9% (or €+1,661 million) primarily driven by (i) AXA XL Insurance (+8%) mainly from strong price increases across all lines except North America Professional, along with volume growth mostly driven by Property lines, (ii) Asia, Africa & EME-LATAM (+36%) mainly driven by Turkey mostly from higher average premiums in Property and Motor in a hyperinflationary context, along with favorable volume and price effects most notably in Colombia, (iii) Europe (+8%) from price increases in all lines of business, notably Property, combined with a positive volume effect, (iv) France (+7%) reflecting price increases, notably in Commercial Property and (v) AXA Assistance (+5%) mainly from the continued rebound of the Travel business; Personal lines grew by 5% (or €+471 million) driven by (i) Motor (+7%) in Europe (+5%) in the United Kingdom mainly stemming from strong price increases and Italy mainly from new business growth through a continued partnership with a car manufacturer, in Asia, Africa & EME-LATAM (+17%) notably in Turkey driven by higher average premiums in a hyperinflationary context and in France (+6%) from strong price increases combined with new business growth through brokers. Gross written premiums also grew in (ii) Non-Motor (+2%) primarily in Europe (+4%) mostly in Germany and Belgium & Luxembourg from price increases partly offset by the United Kingdom mainly due to the run-off of the Travel portfolio and in France (+2%) stemming from price increases. This was partly offset by Asia, Africa & EME-LATAM (-9%) mostly driven by Colombia from lower volumes driven by selective underwriting, partly compensated by Turkey from higher average premiums in Household in a hyperinflationary context; AXA XL Reinsurance decreased by 3% (or €-55 million) primarily due to the reduction of the Property Cat exposure in line with the Group’s strategy, partly offset by price increases across all lines of business. Life & Health gross written premiums were down 3% (or €-718 million) on a comparable basis to €24,528 million. Life gross written premiums were down 1% (or €-169 million) on a comparable basis to €16,297 million: Unit-Linked decreased by 16% (or €-673 million) driven by challenging market conditions in (i) Europe (-22%) mainly in Italy and Spain, in (ii) France (-10%) as well as in (iii) Asia, Africa & EME-LATAM (-27%) mainly in Hong Kong; General Account Savings increased by 5% (or €+212 million) mainly driven by (i) France (+10%) reflecting the continued growth in Eurocroissance partly offset by lower sales in traditional G/A, and (ii) Asia, Africa & EME-LATAM (+12%) from the success of a new product launched in 2023 in Hong Kong, partly offset by the decrease of sales of the capital-light Single Premium Whole Life product from unfavorable foreign exchange conditions in Japan, partly offset by (iii) Europe (-4%) mainly in Italy, Germany and Belgium & Luxembourg from challenging market conditions in a higher interest rate environment. Protection grew by 4% (or €+293 million) mainly from (i) Protection with Unit-Linked (+19%) in Asia, Africa & EME-LATAM (+24%) driven by the continued growth in Japan, (ii) Protection with General Account Savings (+4%) in Asia, Africa & EME-LATAM (+5%) driven by Hong Kong due to the re-opening of the border with mainland China partly offset by Japan, combined with Europe (+3%) driven by Switzerland from new business growth in both Individual and Group Life. This was partly offset by (iii) Pure Protection (-2%) due to the run-off of a portfolio in France. Half Year 2023 Financial Report 16 I ACTIVITY REPORT – HALF YEAR 2023 Health gross written premiums were down 6% (or €-550 million) on a comparable basis to €8,231 million. Excluding the impact of the non-renewal of two large legacy International Group contracts, Health gross written premiums increased by 7% (or €+546 million): Group business increased by 8% (or €+289 million) notably in Europe (+23%) from higher volumes in Large Corporate in the United Kingdom & Ireland and in Asia, Africa & EME-LATAM (+17%) mostly driven by price increases in Mexico and Turkey; Individual business grew by 6% (or €+258 million) driven by Europe (+4%) notably due to higher volumes in the United Kingdom & Ireland and Switzerland, and price increases in Germany, and by Asia, Africa & EME-LATAM (+9%) primarily from price increases in Mexico and Turkey. Asset Management revenues were down 5% (or €-36 million) on a comparable basis to €749 million mainly driven by both lower management fees (€-30 million) from a lower Average Assets under Management. Average Assets under Management decreased by 4% (or €-34 billion) on a comparable basis to €736 billion mainly driven by unfavorable market effect following the rise in interest rates and downward equity markets during the second half of 2022, partly offset by business growth in AXA IM Alts mostly from third-party business. Banking revenues decreased by 22% (or €-17 million) on a comparable basis to €62 million from AXA Banque France mainly due to pressure on margins in the context of higher interest rates. NEW BUSINESS PERFORMANCE Present Value of Expected Premiums (“PVEP”) PVEP decreased by 10% on a reported basis and 9% on a comparable basis to €23,260 million driven by the impact of increases in interest rates experienced in 2022 on the discount, partly offset by favorable actuarial assumptions in France and higher volumes, notably in Hong Kong. New Business Value Margin (“NBV margin”) NBV margin grew by 0.1 point on both reported and comparable basis to 5.1% driven by higher margins in General Account Savings (+0.9 point) reflecting a favorable new business mix in France towards Eurocroissance, as well as in Health from the non-renewal of two large legacy International group contracts partly offset by Protection (-0.5 point) from higher interest rates impacting the present value of future margins. Half Year 2023 Financial Report 17 I ACTIVITY REPORT – HALF YEAR 2023 UNDERLYING EARNINGS AND NET INCOME GROUP SHARE JUNE 30, 2023 (in Euro million) June 30, 2023 Property & Casualty Life & Health Asset Management Holdings KLM Short-term Business Revenues Combined Ratio Technical Margin 32,396 2,368 25,254 90.9% 2,288 7,142 98.9% 80 Long-term Business CSM Release Technical Experience 1,474 -41 1,474 -41 Financial Results & Other Financial Results Other Revenues Other Expenses Debt Financing Charges 1,804 1,397 -1,449 -461 1,193 431 15 909 -682 166 489 -766 -461 Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other 5,092 -1,072 92 3,480 -761 -2 1,944 -381 81 241 -66 13 574 136 0 UNDERLYING EARNINGS GROUP SHARE 4,111 2,717 1,643 188 437 Contractual Service Margin 34,132 212 33,920 (a) Holdings segment includes banking and holding activities. (in Euro million, except percentages) June 30, 2023 France Europe AXA XL Asia, Africa & EME- LATAM AXA IM Transversal & Central Holdings Short-term Business Revenues Combined Ratio Technical Margin Long-term Business 32,396 2,368 8,432 516 10,685 823 8,670 953 3,602 77 1,008 2 CSM Release Technical Experience Financial Results & Other 1,474 -41 433 -39 487 5 1 0 553 -6 0 0 Financial Results Other Revenues Other Expenses Debt Financing Charges Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE Net Realized Capital Gains & Losses Fair Value of Funds & Derivatives Amortization of Intangibles Restructuring Costs Exceptional Items NET INCOME GROUP SHARE 1,804 1,397 -1,449 -461 5,092 -1,072 92 4,111 -30 -74 -93 -82 1 3,833 357 58 -83 0 1,241 -222 6 1,025 738 1 19 -1 2,071 -470 -56 1,545 239 0 0 -18 1,175 -237 0 938 266 0 -9 -8 873 -190 129 813 15 909 -682 0 241 -66 13 188 190 429 -693 -434 -511 113 0 -398 Property & Casualty Combined Ratio Life & Health Short-Term Combined Ratio 90.9% 98.9% 90.7% 96.8% 90.1% 106.1% 89.0% 97.9% 97.8% 100.4% 98.9% Half Year 2023 Financial Report 18 I JUNE 30,2022 (in Euro million) Short-term Business Revenues Combined Ratio Technical Margin Long-term Business CSM Release Technical Experience Financial Results & Other Financial Results Other Revenues Other Expenses Debt Financing Charges Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE Contractual Service Margin (a) Holdings segment includes banking and holding activities. (in Euro million, except percentages) Short-term Business Revenues Combined Ratio Technical Margin Long-term Business CSM Release Technical Experience Financial Results & Other Financial Results Other Revenues Other Expenses Debt Financing Charges Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE Net Realized Capital Gains & Losses Fair Value of Funds & Derivatives Amortization of Intangibles Restructuring Costs Exceptional Items Net Income Group share Property & Casualty Combined Ratio Life & Health Short-Term Combined Ratio ACTIVITY REPORT – HALF YEAR 2023 June 30, 2022 Property & Casualty Life & Health Asset Management Holdings KLM 32,261 1,184 24,614 96.2% 944 7,647 96.9% 241 1,454 -66 1,454 -66 1,992 1,447 -1,424 -363 1,288 626 2 947 -682 77 500 -741 -363 4,225 -818 61 2,231 -455 -26 2,255 -437 80 267 -71 7 528 146 0 3,467 1,750 1,897 203 383 33,112 223 32,889 June 30, 2022 France Europe AXA XL Asia, Africa & EME- LATAM AXA IM Transversal & Central Holdings 32,261 8,980 10,053 8,930 3,359 940 1,184 234 330 648 29 57 1,454 -66 423 -50 475 21 3 -2 554 -34 0 0 1,992 1,447 -1,424 -363 458 80 -85 0 866 0 6 0 265 0 0 -42 311 0 -9 -6 2 947 -682 0 90 420 -653 -315 4,225 1,060 1,697 871 845 267 515 818 61 3,467 206 1 855 352 -47 1,298 174 -1 696 175 100 770 71 7 203 161 0 355 80 797 -201 -143 11 3,852 96.2% 96.9% 98.5% 96.6% 96.9% 95.3% 92.7% 98.6% 100.4% 107.4% 97.8% Half Year 2023 Financial Report 19 I ACTIVITY REPORT – HALF YEAR 2023 Alternative Performance Measures Underlying Earnings, Underlying Earnings per Share, Combined Ratio, Underlying Return on Equity and Debt Gearing are Alternative Performance Measures (“APMs”) as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from Underlying Earnings and Combined Ratio to the most directly reconcilable line item, subtotal, or total in the Consolidated Financial Statements of the corresponding period is provided in the above tables. Underlying Return on Equity and Underlying Earnings per Share are reconciled to the Consolidated Financial Statements in the table set forth on page 34 of this report, and the calculation methodology of the Debt Gearing is set out on page 21 of this report. For further information on any of the above-mentioned APMs, please see the definitions and the Glossary on pages 36 to 41 of this report. IFRS 17 and IFRS 9 became effective on, and have been implemented by the Group since, January 1, 2023. The new accounting standards have impacted certain components of the APMs published by AXA. For definitions of relevant accounting components under IFRS 17 and IFRS 9, please refer to Note 1 to AXA’s 2023 Half-Year Consolidated Financial Statements (the “Consolidated Financial Statements”). Underlying Earnings Underlying Earnings represent the Net Income Group share as disclosed in the table set forth on pages 18 and 19 of this report, before the impact of the following items net of absorption from technical liabilities, taxes, and minority interests: realized gains and losses as well as the change in impairment valuation on assets held directly and accounted through other comprehensive income with recycling or at the amortized cost; profit or loss on financial assets accounted at fair value through profit & loss, foreign exchange impacts on assets and liabilities as well as derivatives hedging assets and liabilities; impairments of goodwill, impairments, and amortization of other intangibles; integration costs related to newly acquired companies as well as restructuring costs related to productivity improvement plans; and exceptional operations (primarily changes in scope and discontinued operations). Underlying Earnings per Share Underlying Earnings per Share (“ Basic UEPS”) represent AXA's consolidated Underlying Earnings (net of financial charges related to undated and deeply subordinated debts recorded through shareholders’ equity as disclosed in Note 6 “Shareholders’ equity and minority interests” of Consolidated Financial Statements) divided by the weighted average number of outstanding ordinary shares over the period. Shares held by AXA and its subsidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. Fully Diluted Underlying Earnings per Share (“Fully Diluted UEPS”) represent AXA's consolidated Underlying Earnings (net of financial charges related to undated and deeply subordinated debts recorded through shareholders’ equity as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements) divided by the weighted average number of outstanding ordinary shares over the period, on a diluted basis (i.e. including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Shares held by AXA and its subsidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. Combined Ratio (Applicable to Short-Term Business) The Combined Ratio is the sum of the current accident year loss ratio net of reinsurance plus the prior accident year loss ratio net of reinsurance plus the expense ratio. Current accident year loss ratio net of reinsurance is the ratio of: Half Year 2023 Financial Report 20 I ACTIVITY REPORT – HALF YEAR 2023 discounted current year claims charge gross of reinsurance + discounted current accident year claims handling costs + discounted current accident year result of reinsurance ceded + change in loss component; to current year revenues gross of reinsurance. Prior accident year loss ratio net of reinsurance is the ratio of: discounted prior accident year claims charge gross of reinsurance + discounted prior accident year claims handling costs + discounted prior accident year result of reinsurance ceded + variation of risk adjustment; to all year revenues gross of reinsurance. Expense ratio is the ratio of: expenses commissions from assumed reinsurance business; to all year revenues gross of reinsurance. (including attributable, non-attributable and non-insurance expenses), excluding Underlying Return on Equity Underlying Return on Equity (“Underlying ROE”) is calculated as the ratio of : Underlying Earnings net of interest charges related to undated and deeply subordinated debts (recorded through shareholders’ equity as disclosed in Note 6 “Shareholders’ Equity and Minority Interests” of the Consolidated Financial Statements); to the average of opening and closing shareholders’ equity excluding other comprehensive income related to invested assets (as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements) insurance and reinsurance contracts, as well as excluding undated and deeply subordinated debt (recorded through shareholders' equity, as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements). Debt Gearing Debt Gearing refers to the level of a company's debt related to its long-term capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing gross debt (financing debt, as disclosed in Note 8 “Financing debt” of the Consolidated Financial Statements, and undated and deeply subordinated debts, as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements) by total capital employed (shareholders’ equity excluding undated and deeply subordinated debts), gross debt and Contractual Service Margin (net of tax), as it represents the unearned profit to be recognized as services are provided to policyholders. Half Year 2023 Financial Report 21 I ACTIVITY REPORT – HALF YEAR 2023 COMMENTARY ON GROUP EARNINGS Since January 1, 2023, the Group has implemented the IFRS 17 – Insurance Contracts and IFRS 9 – Financial Instruments accounting standards. Please refer to Note 1 to the Consolidated Financial Statements for further details on the application of IFRS 17 and IFRS 9 accounting standards in such Consolidated Financial Statements. Restated 2022 comparative information has been prepared under the new standards. All tables in this report present the prior-year comparative financial figures as restated in accordance with IFRS 17 and IFRS 9. As of June 30, 2022, Underlying Earnings under IFRS 17 and IFRS 9 amounted to €3,467 million, down €451 million (-12%) versus the published half-year 2022 Underlying Earnings under IFRS 4 and IAS 39, mainly driven by Property & Casualty down €-625 million, primarily from lower prior year’s reserve developments partly offset by higher discounting impact of claims reserves, while Life & Health Underlying Earnings were higher by €170 million mainly reflecting an acceleration in the pattern of earnings recognition induced by the CSM release mechanism under IFRS 17. Underlying Earnings for Asset Management, Banking and Holdings remained at the same level as previously reported under IFRS 4 and IAS 39 for half-year 2022. The sum of items reconciling Underlying Earnings to Net Income under IFRS 17 and IFRS 9 amounted to €385 million, up €194 million versus the Net Income for half-year 2022 published under IFRS 4 and IAS 39, mainly from a more favorable change in the fair value of assets and derivatives, partly offset by lower realized capital gains from equity securities that are accounted for as other comprehensive income without recycling under IFRS 9. As a result, Net Income under IFRS 17 and IFRS 9 amounted to €3,852 million, down €257 million (-6%) versus half- year 2022 under IFRS 4 and IAS 39. UNDERLYING EARNINGS On a reported basis, Underlying Earnings amounted to €4,111 million under IFRS 17 and IFRS 9, up €193 million (+5%) versus half-year 2022 Underlying Earnings under IFRS 4 and IAS 39, and up €644 million (+19%) versus half-year 2022 Underlying Earnings as restated under IFRS 17 and IFRS 9. On a constant exchange rate basis, Underlying Earnings under IFRS 17 and IFRS 9 increased by €181 million (+5%) versus Underlying Earnings under IFRS 4 and IAS 39. On a constant exchange rate basis, Underlying Earnings increased by €632 million (+18%) under IFRS 17 and IFRS 9. Half Year 2023 Financial Report 22 I PROPERTY & CASUALTY (in Euro million, except percentages) Short-term Business Revenues Combined Ratio Technical Margin Financial Result & Other Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE Contractual Service Margin (in Euro million, except percentages) Short-term Business Revenues Combined Ratio Technical Margin Financial Result & Other Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE Contractual Service Margin ACTIVITY REPORT – HALF YEAR 2023 June 30, 2023 Commercial lines Personal lines AXA XL Reinsurance Intercompany eliminations 25,254 17,117 8,470 1,121 1,455 90.9% 90.9% 93.6% 80.8% 2,288 1,556 544 215 28 1,193 891 228 81 7 3,480 2,447 772 297 35 761 2 2,717 212 June 30, 2022 Commercial lines Personal lines AXA XL Reinsurance Intercompany eliminations 24,614 96.2% 16,188 95.8% 8,255 97.2% 1,447 94.8% 1,276 944 682 234 75 47 1,288 925 309 75 22 2,231 1,607 543 151 69 455 -26 1,750 223 Half Year 2023 Financial Report 23 I ACTIVITY REPORT – HALF YEAR 2023 (in Euro million, except percentages) June 30, 2023 France Europe AXA XL o/w AXA XL Insurance Asia, Africa & EME- LATAM Transversal & Central Holdings Short-term Business Revenues 25,254 4,046 9,244 8,670 7,549 2,417 878 Combined Ratio 90.9% 90.7% 90.1% 89.0% 90.2% 97.9% 100.4% Technical Margin 2,288 377 911 953 737 52 4 Financial Result & Other 1,193 258 484 232 151 172 46 Underlying Earnings Before Tax 3,480 635 1,395 1,185 888 224 42 Income tax 761 126 329 236 180 61 10 Minority interests, Income from Affiliates & Other 2 1 24 0 0 23 0 UNDERLYING EARNINGS GROUP SHARE 2,717 508 1,042 949 708 186 32 (in Euro million, except percentages) June 30, 2022 France Europe AXA XL o/w AXA XL Insurance Asia, Africa & EME- LATAM Transversal & Central Holdings Short-term Business Revenues 24,614 3,784 8,718 8,930 7,482 2,371 811 Combined Ratio 96.2% 98.5% 96.9% 92.7% 92.3% 98.6% 107.4% Technical Margin 944 55 267 648 573 33 60 Financial Result & Other 1,288 251 554 254 178 202 28 Underlying Earnings Before Tax 2,231 306 820 902 751 235 32 Income tax 455 71 170 172 146 53 12 Minority interests, Income from Affiliates & Other 26 0 24 1 1 1 0 UNDERLYING EARNINGS GROUP SHARE 1,750 234 627 729 604 180 21 On a reported basis, Property & Casualty Underlying Earnings amounted to €2,717 million, up €343 million (+14%) versus half-year 2022 Underlying Earnings under IFRS 4 and IAS 39, and up €968 million (+55%) versus half- year 2022 Underlying Earnings under IFRS 17 and IFRS 9. On a constant exchange rate basis, Underlying Earnings under IFRS 17 and IFRS 9 increased by €316 million (+13%) versus Underlying Earnings under IFRS 4 and IAS 39. Half Year 2023 Financial Report 24 I ACTIVITY REPORT – HALF YEAR 2023 On a constant exchange rate basis, Property & Casualty Underlying Earnings increased by €940 million (+54%) under IFRS 17 and IFRS 9, fueled by a strong growth in gross written premiums across the lines, and mainly driven by (i) favorable prior years’ reserve developments (-1.6 points to -0.6% of combined ratio) as HY22 results were impacted by non-recognition of release of reserves in excess of best estimates, (ii) the increase in current year discount (+2.5 points to 4.2%) driven by the rise in interest rates across geographies, (iii) lower Natural Catastrophe charges (-1.0 point to 3.0%) in Europe (-2.0 points to 2.1%), France (-2.5 points to 2.4%) and AXA XL Reinsurance (-3.9 points to 10.6%) from the lower frequency of storms, (iv) slightly more favorable current year loss ratio excluding Natural Catastrophe charges (-0.4 point) mainly from the non-repeat of the impact of the war in Ukraine at AXA XL, as well as strong pricing actions to mitigate inflation, offset by the impact of elevated level of large loss activity experienced in France and Europe, including French riots, and higher attritional claims due to higher frequency in Motor notably in United Kingdom & Ireland and Germany, partly offset by (v) higher expenses (+0.4 point) due to the increase in commission expenses (+0.5 point) driven by a business mix effect in Europe, at AXA XL and in China, offset by the improvements of non-commission ratio (-0.1 point) resulting from disciplined expense management in the context of high inflation, (vi) lower financial results (€-71 million) as a consequence of the increase in the unwind of the discount of claims reserves (€-99 million) resulting from the increase in interest rates experienced in 2022, partly offset by a higher investment income (€+27 million) driven by higher reinvestment yields in the context of rising interest rates and (vii) higher income taxes by €304 million due to higher pre–tax Underlying Earnings. Half Year 2023 Financial Report 25 I LIFE & HEALTH (in Euro million, except percentages) Short-term Business Revenues Combined Ratio Technical Margin Long-term Business CSM Release Technical Experience Financial Result & Other Financial Result Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE Contractual Service Margin (in Euro million, except percentages) Short-term Business Revenues Combined Ratio Technical Margin Long-term Business CSM Release Technical Experience Financial Result & Other Financial Result Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE Contractual Service Margin Half Year 2023 Financial Report ACTIVITY REPORT – HALF YEAR 2023 June 30, 2023 Life Health 7,142 1,970 98.9% 93.8% 80 122 1,474 1,202 41 52 431 350 1,944 1,622 381 305 81 81 1,643 1,398 33,920 26,443 June 30, 2022 Life Health 7,647 1,979 96.9% 93.3% 241 132 1,454 1,177 66 50 626 511 2,255 1,771 437 326 80 76 1,897 1,521 32,889 25,366 5,172 100.8% 43 272 11 81 322 76 0 245 7,476 5,668 98.1% 109 277 16 115 484 112 4 376 7,523 26 I (in Euro million, except percentages) Short-term Business Revenues Combined Ratio Technical Margin Long-term Business CSM Release Technical Experience Financial Result & Other Financial Result Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE (in Euro million, except percentages) Short-term Business Revenues Combined Ratio Technical Margin Long-term Business CSM Release Technical Experience Financial Result & Other Financial Result Underlying Earnings Before Tax Income tax Minority interests, Income from Affiliates & Other UNDERLYING EARNINGS GROUP SHARE June 30, 2023 France 7,142 4,386 98.9% 80 96.8% 140 1,474 -41 433 -39 431 98 1,944 631 381 81 100 7 1,643 538 June 30, 2022 France 7,647 96.9% 5,195 96.6% 241 179 1,454 -66 423 -50 626 208 2,255 759 437 80 135 1 1,897 626 Half Year 2023 Financial Report ACTIVITY REPORT – HALF YEAR 2023 Europe AXA XL Asia, Africa & EME-LATAM Transversal & Central Holdings 1,441 0 1,185 130 106.1% -87 0.0% 0 97.8% 26 98.9% 1 487 5 1 0 553 -6 0 0 226 7 101 0 630 8 673 1 148 -32 2 0 131 106 0 0 449 6 648 1 Europe AXA XL Asia, Africa & EME-LATAM Transversal & Central Holdings 1,335 95.3% 0 0.0% 988 100.4% 129 97.8% 63 0 4 3 475 21 3 -2 554 -34 0 0 285 11 122 0 844 11 637 3 174 -23 2 0 125 101 1 0 647 9 613 2 27 I ACTIVITY REPORT – HALF YEAR 2023 LIFE (in Euro million, except percentages) June 30, 2023 France Europe AXA XL Asia, Africa & EME-LATAM Transversal & Central Holdings Short-term Business Revenues Combined Ratio 1,970 93.8% 1,787 94.3% 50 93.9% 0 0.0% 132 86.9% 0 0.0% Technical Margin 122 102 3 0 17 0 Long-term Business CSM Release Technical Experience 1,202 -52 433 -39 413 12 1 0 354 -25 0 0 Financial Result & Other Financial Result 350 82 201 7 61 0 Underlying Earnings Before Tax 1,622 577 629 8 408 0 Income tax Minority interests, Income from Affiliates & Other 305 81 92 7 141 -32 2 0 70 106 0 0 UNDERLYING EARNINGS GROUP SHARE 1,398 492 456 6 444 0 (in Euro million, except percentages) June 30, 2022 France Europe AXA XL Asia, Africa & EME-LATAM Transversal & Central Holdings Short-term Business Revenues Combined Ratio 1,979 93.3% 1,839 92.7% 47 92.0% 0 0.0% 92 106.1% 0 0.0% Technical Margin 132 134 4 0 6 0 Long-term Business CSM Release Technical Experience 1,177 -50 423 -50 415 20 3 -2 336 -18 0 0 Financial Result & Other Financial Result 511 169 250 11 81 0 Underlying Earnings Before Tax 1,771 676 690 11 394 0 Income tax Minority interests, Income from Affiliates & Other 326 76 120 1 135 -23 2 0 68 98 0 0 UNDERLYING EARNINGS GROUP SHARE 1,521 557 531 9 423 0 On a reported basis, Life Underlying Earnings amounted to €1,398 million, up €73 million (+6%) versus half- year 2022 Underlying Earnings under IFRS 4 and IAS 39, and down €122 million (-8%) versus half-year 2022 Underlying Earnings under IFRS 17 and IFRS 9. On a constant exchange rate basis, Underlying Earnings under IFRS 17 and IFRS 9 increased by €77 million (+6%) versus Underlying Earnings under IFRS 4 and IAS 39. Half Year 2023 Financial Report 28 I ACTIVITY REPORT – HALF YEAR 2023 On a constant exchange rate basis, Life Underlying Earnings decreased by €119 million (-8%) under IFRS 17 and IFRS 9 from (i) lower financial result (€-167 million) mainly from lower operating investment income (€-132 million) driven by Europe, mainly in Belgium & Luxembourg from lower alternative investment funds distribution, France notably from lower return from inflation bonds combined with the increase in the unwind of discount on reserves (€-35 million) from higher interest rates, as well as (ii) lower short-term business technical margin (€-10 million) reflecting a 0.5 point increase in combined ratio mainly driven by France from an update in actuarial assumptions in Group Protection annuities business as well as the run-off of a Protection portfolio, partly offset by Asia, Africa & EME-LATAM an improved claims experience in Group Life in Mexico, partly offset by (iii) a higher CSM release (€+32 million) reflecting the underlying CSM growth (4% annualized) as well as (iv) a lower income tax (€+19 million) driven by lower pre-tax Underlying Earnings. Half Year 2023 Financial Report 29 I ACTIVITY REPORT – HALF YEAR 2023 HEALTH (in Euro million, except percentages) June 30, 2023 France Europe AXA XL Asia, Africa & EME-LATAM Transversal & Central Holdings Short-term Business Revenues Combined Ratio 5,172 100.8% 2,599 98.5% 1,391 106.5% 0 0.0% 1,053 99.2% 130 98.9% Technical Margin 43 38 90 0 9 1 Long-term Business CSM Release Technical Experience 272 11 0 0 73 -7 0 0 199 19 0 0 Financial Result & Other Financial Result 81 16 25 0 40 0 Underlying Earnings Before Tax 322 54 0 0 266 1 Income tax Minority interests, Income from Affiliates & Other 76 0 8 0 7 0 0 0 61 0 0 0 UNDERLYING EARNINGS GROUP SHARE 245 46 7 0 205 1 (in Euro million, except percentages) June 30, 2022 France Europe AXA XL Asia, Africa & EME-LATAM Transversal & Central Holdings Short-term Business Revenues Combined Ratio 5,668 98.1% 3,356 98.7% 1,288 95.4% 0 0.0% 896 99.8% 129 97.8% Technical Margin 109 45 60 0 1 3 Long-term Business CSM Release Technical Experience 277 -16 0 0 59 0 0 0 217 -16 0 0 Financial Result & Other Financial Result 115 39 36 0 40 0 Underlying Earnings Before Tax 484 84 155 0 243 3 Income tax Minority interests, Income from Affiliates & Other 112 4 15 0 39 0 0 0 57 4 1 0 UNDERLYING EARNINGS GROUP SHARE 376 69 116 0 190 2 On a reported basis, Health Underlying Earnings amounted to €245 million, down €157 million (-39%) versus half-year 2022 Underlying Earnings under IFRS 4 and IAS 39, and down €131 million (-35%) versus half-year 2022 Underlying Earnings under IFRS 17 and IFRS 9. On a constant exchange rate basis, Underlying Earnings under IFRS 17 and IFRS 9 decreased by € 148 million (- 37%) versus Underlying Earnings under IFRS 4 and IAS 39. Half Year 2023 Financial Report 30 I ACTIVITY REPORT – HALF YEAR 2023 On a constant exchange rate basis, Health Underlying Earnings decreased by €122 million (-33%) under IFRS 17 and IFRS 9 mainly driven by (i) a lower short-term business technical margin (€-156 million) reflecting a 2.8 points increase in the combined ratio, in Europe (€-154 million) due to higher claims frequency in the United Kingdom, and (ii) a lower financial result (€-33 million) driven by France (€-22 million) from the increase in the unwind of discount on reserves reflecting the rise in interest rates, and Europe (€-10 million) from non-repeat of elevated dividends distribution in Spain, partly offset by (iii) a higher Technical Experience (€+30 million) driven by Asia, Africa & EME-LATAM (€+37 million) mainly from the non-repeat of elevated level of COVID-19 claims in Japan, and (iv) a higher CSM Release (€+9 million) notably in Europe (€+14 million) from Germany and Switzerland, as well as (v) a lower income taxes (€+32 million) driven by lower pre-tax Underlying Earnings. Half Year 2023 Financial Report 31 I ACTIVITY REPORT – HALF YEAR 2023 ASSET MANAGEMENT Asset Management Underlying Earnings decreased by €14 million (-7%) to €188 million driven by (i) lower revenues (€-33 million), (ii) higher expenses (€-5 million) from higher staff expenses to support business compensated by cost containment measures, partly offset by (iii) higher investment income (€+13 million) from higher interest rates, (iv) higher income from affiliates and associates (€+6 million) following the consolidation of Capza, and (v) lower taxes (€+5 million) from lower pre-tax Underlying Earnings. HOLDINGS Holdings Underlying Earnings decreased by €53 million (-14%) to €-437 million mainly driven by (i) AXA SA Holding (€-92 million) from higher financial charges driven by debt issuance, the non-repeat of the positive impact of a tax litigation settlement last year, partly offset by higher investment income, partly offset by (ii) UK Holdings (€+25 million) mainly from favorable tax one-offs, as well as (iii) AXA XL Holding (€+24 million) from lower financing debt expenses due to early debt redemption in July 2022. NET INCOME On a reported basis, Net Income amounted to €3,833 million, down €275 million (-7%) versus half-year 2022 Net Income under IFRS 4 and IAS 39, and down €18 million (-0%) versus half-year 2022 Net Income under IFRS 17 and IFRS 9. On a constant exchange rate basis, Net Income decreased by € 269 million (-7%) versus Net Income under IFRS 4 and IAS 39. On a constant exchange rate basis, Net Income decreased by €12 million (-0%) under IFRS 17 and IFRS 9 driven by: higher Underlying Earnings, up €632 million (+18%) to €4,111 million; a negative change in the fair value of assets and derivatives, down €866 million to €-74 million which can be analyzed as follows: o €-67 million primarily from (i) an unfavorable change in the fair value of equity hedging derivatives (€-169 million) in France and AXA XL reflecting the strong market performance over the first half of the year, partly offset by (ii) the favorable impact from interest rates hedging derivatives (€+57 million) in both Hong Kong and France, o €-6 million from an unfavorable change in the fair value of foreign exchange derivatives notably from US Dollar denominated options in France as a result of US Dollar depreciation against Euro; less unfavorable net realized capital losses, up €56 million to €-30 million; a lower negative impact of goodwill and other related intangibles, down €117 million (-58%) to €-93 million, mainly from the non-repeat of the full impairment of the goodwill of Reso Garantia; lower restructuring costs, down €61 million (-42%) to €-82 million; and exceptional items at €1 million. Half Year 2023 Financial Report 32 I ACTIVITY REPORT – HALF YEAR 2023 Shareholders’ equity Group share As of June 30, 2023, Shareholders' equity Group share totaled €45.9 billion. The movements in Shareholders' equity Group share since December 31, 2022, are presented in the table below: (in Euro million) Shareholders’ equity Group share At December 31, 2022 Paid-in Capital Treasury Shares Other Comprehensive Income Arising from Defined Benefit Plans Fair Value Recorded in Shareholders' Equity Other Comprehensive Income Related to Invested Assets Other Comprehensive Income Related to (re) Insurance Contracts Impact of Currency Fluctuations Undated Subordinated Debt (including interest charges) Realized Gains on Equity through Retained Earnings Dividends Net Income for the Period Other At June 30, 2023 Solvency information(1) As of June 30, 2023, the Group’s Eligible Own Funds (“EOF”) amounted to €62.3 billion and the Solvency II ratio to 235%, compared to €58.5 billion and 215% as of December 31, 2022. (1) Solvency-related information included in this section, including the Solvency II ratio and the Eligible Own Funds (“EOF”), is not subject to the review of the Half Year 2023 Consolidated Financial Statements included in the Half Year 2023 Financial Report, nor the verification of the information otherwise included in such Half Year 2023 Financial Report, performed by the Group’s statutory auditors. Half Year 2023 Financial Report 46,071 1,362 150 565 1,273 5,506 4,233 772 87 23 3,787 3,833 5 45,912 33 I ACTIVITY REPORT – HALF YEAR 2023 Shareholder value EARNINGS PER SHARE (“EPS”) Underlying Earnings Per Share on a fully diluted basis amounted to €1.79, up 8% versus half-year 2022 under IFRS 4 and IAS 39, and up 23% versus half-year 2022 under IFRS 17 and IFRS 9. June 30, 2023 June 30, 2022 June 30, 2023 / June 30, 2022 (in Euro, except ordinary shares in million) Basic Fully diluted Basic Fully diluted Basic Fully diluted Weighted average number of shares 2,241 2,247 2,311 2,317 3% 3% Net income (Euro per ordinary share) 1.67 1.67 1.63 1.62 3% 3% Underlying earnings (Euro per ordinary share) 1.79 1.79 1.46 1.46 23% 23% RETURN ON EQUITY (“ROE”) (in Euro billion) June 30, 2023 June 30, 2022 June 30, 2023/ June 30, 2022 Net Income ROE 15.5% 15.2% 0.2 pt Net Income UZW 3.7 3.8 Average Adjusted Shareholders' Equity UVW 48.4 49.3 Underlying ROE 16.6% 13.7% 2.9 pts Underlying Earnings UZW 4.0 3.4 Average Adjusted Shareholders' Equity UVW 48.4 49.3 (a) Including adjustments to reflect net financial charges related to undated and deeply subordinated debt (recorded through shareholders' equity). (b) Excluding reserves related to the change in fair value of invested assets and derivatives, reserves related to insurance contracts as well as undated and deeply subordinated debt (recorded through shareholders' equity). Half Year 2023 Financial Report 34 I ACTIVITY REPORT – HALF YEAR 2023 Outlook AXA delivered strong operational performance in the first half of 2023. The Group remains focused on growing its cash generative, technical and fee-based business lines, reducing sensitivity to financial markets, and delivering sustainable and attractive margins. In Property & Casualty, the pricing environment remains favorable. In this context, Management is confident in the Group’s ability to sustain its strong underwriting margins across Commercial and Personal lines, supported by pricing actions and cost discipline. The below-average Nat Cat charges in 1H23 and the continued high interest rate environment have provided some tailwinds on current year margins. The Group is maintaining its prudent stance on reserving and is committed to delivering sustainable and attractive P&C results over the cycle. Life results are expected to be driven by a predictable CSM release, underpinned by steady underlying growth(1) in the stock of CSM from attractive new business. In Health, the Group expects claims frequency in the United Kingdom to remain elevated in the second half, at levels similar to 1H23. The impact is expected to be gradually compensated by price increases with the benefits to be reflected starting next year. In this context, Management affirms that the Group is on track to meet its 2023 underlying earnings target of above Euro 7.5 billion for the year(2) . The Group remains focused on executing its strategy and is confident in its ability to deliver on the four main financial targets of AXA’s “Driving Progress 2023” plan. AXA’s strategy is designed to generate sustained earnings and dividend growth, supported by enhanced cash generation, a strong balance sheet and disciplined capital management. AXA’s Management believes that the Group is well placed to create lasting shareholder value and offer an attractive return. (1) Underlying growth refers to the sum of new business CSM and underlying return on in-force portfolio, net of CSM release. (2) Based on normalized natural catastrophe charges and assuming current operating and market conditions persist. Half Year 2023 Financial Report 35 I ACTIVITY REPORT – HALF YEAR 2023 Glossary This glossary includes definitions of non-GAAP financial measures, or alternative performance measures (“APMs”), indicated by an asterisk (*), that Management believes are useful to understand the Group’s business and analyze the Group’s performance. SCOPE • Europe, consisting of: France (insurance and banking activities, and holding); o Switzerland (insurance activities), o Germany (insurance activities and holding), o Belgium & Luxemburg (insurance activities and holding), o United Kingdom & Ireland (insurance activities and holding), o Spain (insurance activities), o Italy (insurance activities), and o AXA Life Europe (insurance activities); AXA XL (insurance and reinsurance activities and holding); • Asia, Africa & EME-LATAM consisting of o Asia, consisting of:   Hong Kong (insurance activities),  Thailand (insurance activities),  Indonesia (insurance activities),  China (insurance activities),  The Philippines (insurance activities),  South Korea (insurance activities),  Malaysia (insurance activities held for sale until June 2021, and disposed on August 30, Japan (insurance activities and holding), 2022),   Asia Holdings; India (Life activities and holding), and o EME-LATAM, consisting of:  Brazil (insurance activities and holding),  Colombia (insurance activities),  Mexico (insurance activities),  Russia (Reso) (insurance activities), and  Turkey (insurance activities and holding), Half Year 2023 Financial Report 36 I ACTIVITY REPORT – HALF YEAR 2023 o Africa:  Morocco (insurance activities and holding),  Nigeria (insurance activities and holding), o AXA Mediterranean Holdings; • AXA Investment Managers (including Architas); • Transversal & Central Holdings, consisting of: o AXA Assistance, o AXA Liabilities Managers, o AXA SA (including Group’s internal reinsurance activity consequently to the merger with AXA Global Re on June 30, 2022), and o Other Central Holdings. ALTERNATIVE PERFORMANCE MEASURES Underlying Earnings, Underlying Earnings per Share, Combined Ratio, Underlying Return on Equity and Debt Gearing are Alternative Performance Measures (“APMs”) as defined in ESMA’s guidelines and the AMF’s related position statement issued in 2015. A reconciliation from Underlying Earnings and Combined Ratio to the most directly reconcilable line item, subtotal, or total in the Consolidated Financial Statements of the corresponding period is provided in the above tables. Underlying Return on Equity and Underlying Earnings per Share are reconciled to the Consolidated Financial Statements in the table set forth on page 34 of this report, and the calculation methodology of the Debt Gearing is set out on page 21 of this report. For further information on any of the above-mentioned APMs, please see the definitions and the Glossary on pages 36 to 41 of this report. IFRS 17 and IFRS 9 became effective on, and have been implemented by the Group since, January 1, 2023. The new accounting standards have impacted certain components of the APMs published by AXA. For definitions of relevant accounting components under IFRS 17 and IFRS 9, please refer to Note 1 to AXA’s 2023 Half-Year Consolidated Financial Statements (the “Consolidated Financial Statements”). Underlying Earnings Underlying Earnings represent the Net Income Group share as disclosed in the table set forth on pages 18 and 19 of this report, before the impact of the following items net of absorption from technical liabilities, taxes, and minority interests: realized gains and losses as well as the change in impairment valuation on assets held directly and accounted through other comprehensive income with recycling or at the amortized cost; profit or loss on financial assets accounted at fair value through profit & loss, foreign exchange impacts on assets and liabilities as well as derivatives hedging assets and liabilities; impairments of goodwill, impairments, and amortization of other intangibles; integration costs related to newly acquired companies as well as restructuring costs related to productivity improvement plans; and exceptional operations (primarily changes in scope and discontinued operations). Underlying Earnings per Share Underlying Earnings per Share (“ Basic UEPS”) represent AXA's consolidated Underlying Earnings (net of financial charges related to undated and deeply subordinated debts recorded through shareholders’ equity as disclosed in Note 6 “Shareholders’ equity and minority interests” of Consolidated Financial Statements) divided by the weighted average number of outstanding ordinary shares over the period. Shares held by AXA and its subsidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. Half Year 2023 Financial Report 37 I ACTIVITY REPORT – HALF YEAR 2023 Fully Diluted Underlying Earnings per Share (“Fully Diluted UEPS”) represent AXA's consolidated Underlying Earnings (net of financial charges related to undated and deeply subordinated debts recorded through shareholders’ equity as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements) divided by the weighted average number of outstanding ordinary shares over the period, on a diluted basis (i.e. including the potential impact of all outstanding dilutive stock options being exercised, performance shares, and conversion of existing convertible debt into shares, provided that their impact is not anti-dilutive). Shares held by AXA and its subsidiaries (i.e. treasury shares) are deducted for the calculation of outstanding shares. Combined Ratio (Applicable to Short-Term Business) The Combined Ratio is the sum of the current accident year loss ratio net of reinsurance plus the prior accident year loss ratio net of reinsurance plus the expense ratio. Current accident year loss ratio net of reinsurance is the ratio of: discounted current year claims charge gross of reinsurance + discounted current accident year claims handling costs + discounted current accident year result of reinsurance ceded + change in loss component; to current year revenues gross of reinsurance. Prior accident year loss ratio net of reinsurance is the ratio of: discounted prior accident year claims charge gross of reinsurance + discounted prior accident year claims handling costs + discounted prior accident year result of reinsurance ceded + variation of risk adjustment; to all year revenues gross of reinsurance. Expense ratio is the ratio of: expenses commissions from assumed reinsurance business; to all year revenues gross of reinsurance. (including attributable, non-attributable and non-insurance expenses), excluding Underlying Return on Equity Underlying Return on Equity (“Underlying ROE”) is calculated as the ratio of : Underlying Earnings net of interest charges related to undated and deeply subordinated debts (recorded through shareholders’ equity as disclosed in Note 6 “Shareholders’ Equity and Minority Interests” of the Consolidated Financial Statements); to the average of opening and closing shareholders’ equity excluding other comprehensive income related to invested assets (as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements) insurance and reinsurance contracts, as well as excluding undated and deeply subordinated debt (recorded through shareholders' equity, as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements). Debt Gearing Debt Gearing refers to the level of a company's debt related to its long-term capital, usually expressed as a percentage. Debt Gearing is used by Management to measure the financial leverage of the Group and the extent to which its operations are funded by creditors as opposed to shareholders. AXA’s Debt Gearing is calculated by dividing gross debt (financing debt, as disclosed in Note 8 “Financing debt” of the Consolidated Financial Statements, and undated and deeply subordinated debts, as disclosed in Note 6 “Shareholders’ equity and minority interests” of the Consolidated Financial Statements) by total capital employed (shareholders’ equity excluding undated and deeply subordinated debts), gross debt and Contractual Service Margin (net of tax), as it represents the unearned profit to be recognized as services are provided to policyholders. Half Year 2023 Financial Report 38 I ACTIVITY REPORT – HALF YEAR 2023 OTHER DEFINITIONS Asset Management - Net inflows Net inflows represent inflows of client money less outflows of client money. Net inflows are used by the Management to measure the impact of sales efforts, product attractiveness (mainly dependent on performance and innovation), and the general market trend in investment allocation. Asset Management - Cost Income ratio Underlying cost income ratio is the ratio of general expenses excluding distribution-related expenses to gross revenues excluding distribution fees received. Assets under Management (“AuM”) Assets under Management are defined as the assets the management of which has been delegated by their owner to an asset management company such as AXA Investment Managers. AuM only include funds and mandates which generate fees and exclude double counting. Average Assets Under Management ("Average AuM") Average Assets under Management represent an annual measure of the assets during the period, taking into account net flows, market effect and foreign exchange to compute the year-to-date average. They also exclude assets held in joint venture companies which are consolidated under the equity method. Comparable basis for Gross Written Premiums and Other Revenues, Present Value of Expected Premiums (PVEP) and NBV Margin “On a comparable basis” means: data for the current period were restated using the prevailing foreign currency exchange rates for the same period of the prior year (constant exchange rate basis); data in one of the two periods being compared were restated for the results of acquisitions, disposals, and business transfers (constant structural basis) and for changes in accounting principles (constant methodological basis). Contractual Service Margin (“CSM”) CSM represents a component of the carrying amount of the asset or liability for a group of insurance contracts representing the unearned profit to be recognized as services are provided to policyholders. CSM Release CSM Release is the portion of CSM stock net of reinsurance at the end of the defined period flowing through profit and loss representing the estimated profit earned by the insurer for providing insurance services during the reporting period. Economic Variance Economic Variance corresponds to the variance of the year end CSM arising from changes in market conditions net of the underlying return on in-force. Eligible Own Funds (“EOF”) Eligible Own Funds represents the surplus derived from a Solvency II balance sheet. EOF is defined as the excess of market value of assets over best estimate liabilities and risk margin as per Solvency II regulation. Half Year 2023 Financial Report 39 I ACTIVITY REPORT – HALF YEAR 2023 Financial Result Financial Result consists of investment income on assets backing Building Block Approach (“BBA”) and Premium Allocation Approach (“PAA”) contracts as well as assets backing shareholder’s equity, net of the insurance finance expenses (“IFE”) defined as the unwind of the present value of future cash flow and risk adjustment. Gross Written Premiums and Other Revenues Gross Written Premiums represent the insurance premiums collected during the period (including risk premiums, premiums from pure investment contracts with no discretionary participating features, fees and revenues, net of commissions paid on assumed reinsurance business). Other Revenues represent premiums and fees collected on activities other than insurance (i.e., banking, services and asset management activities). Long-Term Business Long-Term Business refers to insurance activities measured using the Variable Fee Approach (“VFA”) or the Building Block Approach (“BBA”), as well as Protection with Savings, even if the latter is measured using Premium Allocation Approach (“PAA”). Long-Term Business margin analysis includes CSM Release and Technical Experience. New Business Value (“NBV”) NBV represents the value of newly issued contracts during the current year. It consists of the sum of (i) the New Business Contractual Service Margin, (ii) the present value of the future profits of Short-Term Business newly issued contracts during the period, carried by Life entities, considering expected renewals, and (iii) the present value of the future profits of pure investment contracts accounted for under IFRS 9, net of (iv) the cost of reinsurance, (v) taxes and (vi) minority interests. NBV Margin NBV Margin is the ratio of (i) New Business Value representing the value of newly issued contracts during the current year to (ii) Present Value of Expected Premiums (PVEP). New Business Contractual Service Margin (“NB CSM”) NB CSM represents a component of the carrying amount of the asset or liability for newly issued insurance contracts during the period, representing the unearned profit to be recognized as insurance contract services are provided. Present Value of Expected Premium (“PVEP”) PVEP represents the new business volume, equal to the present value at the time of issue of the total premiums expected to be received over the policy term. PVEP is discounted at the reference interest rate and PVEP is Group share. Revenues For Short-Term Business, revenues represent the portion of premiums earned during the defined reporting period as well as revenues from non-insurance activities. Short-Term Business Short-Term Business refers to insurance activities measured using the Premium Allocation Approach (“PAA”) and services activities notably at AXA Assistance. Short-Term Business margin is analyzed using the Combined Ratio. Short-Term Business covers Property & Casualty, Health and Life Pure Protection when measured using the PAA. Bank and Asset Management activities are presented in the aggregate “Financial Results and Other” in the Group Earnings table. Half Year 2023 Financial Report 40 I ACTIVITY REPORT – HALF YEAR 2023 Solvency II ratio This ratio is calculated as per Solvency II and is equal to the total amount of the Group’s Eligible Own Funds (“EOF”) divided by the Group’s Solvency Capital Requirement (“SCR”). The Solvency Capital Requirement, i.e., the denominator of the Solvency II ratio, is set at a level to ensure that insurers and reinsurers are able to meet their obligations towards policyholders and beneficiaries over the next 12 months, with a 99.5% probability. The Solvency Capital Requirement can be calculated either based on the standard formula or an internal model. The Group is using an internal model. The Solvency II ratio is estimated primarily using AXA’s internal model calibrated based on an adverse 1/200-year shock. For further information on AXA’s internal model and Solvency II disclosures, please refer to AXA Group’s Solvency and Financial Condition Report (SFCR) as of December 31, 2022, available on AXA’s website (www.axa.com). Technical Experience Technical Experience consists of the impacts on the underlying earnings of (i) the difference between the expected and incurred cash-flows of the defined period, (ii) the risk adjustment release, (iii) the changes in onerous contracts and (iv) the other long-term elements which are mainly composed of non-attributable expenses. Underlying Return on in-force Underlying Return on in-force represents the release of the time value of options and guarantees plus the unwind of CSM at the reference rate plus the underlying financial over-performance. Half Year 2023 Financial Report 41 I II. Consolidated financial statements / Half Year 2023 Contents II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION .................................................................................. 44 II.2 CONSOLIDATED STATEMENT OF PROFIT OR LOSS .......................................................................................... 46 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME .......................................................................... 47 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY.................................................................................... 48 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS ................................................................................................ 50 II.6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ............................................................................. 52 Note 1 Accounting principles ............................................................................................................................. 52 Note 2 Scope Of Consolidation .......................................................................................................................... 99 Note 3 Consolidated Statement of Profit or Loss by Segment ........................................................................ 103 Note 4 Transactions in Consolidated Entities .................................................................................................. 106 Note 5 Investments ........................................................................................................................................... 107 Note 6 Shareholders’ equity and Minority Interests ........................................................................................ 120 Note 7 Insurance and Reinsurance Contracts ................................................................................................. 126 Note 8 Financing Debt ...................................................................................................................................... 142 Note 9 Financial Result, excluding Financing Debt Expenses ......................................................................... 143 Note 10 Net Income per Ordinary Share .......................................................................................................... 145 Note 11 Subsequent Events .............................................................................................................................. 146 Half Year 2023 Financial Report 43 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 In this document, “restated” refers to comparative periods that were restated for the impact of the application of both IFRS 17 - Insurance contracts (replacing IFRS 4) and IFRS 9 - Financial instruments (replacing IAS 39). 6.1 to 6.5 CONSOLIDATED FINANCIAL STATEMENTS II.1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes (in EURO million) Goodwill June 30, 2023 17,356 December 31, 2022, restated 17,754 Other intangible assets 4,563 4,720 Intangible assets 21,919 22,474 Investments in real estate properties 29,699 28,684 Financial investments 385,582 389,586 Assets backing contracts where the financial risk is borne by policyholders 80,771 76,491 5 Investments from insurance activities 496,052 494,760 5 Investments from banking and other activities 21,002 20,815 Investments accounted for using the equity method 2,268 2,234 Assets arising from insurance contracts and investment contracts with discretionary participation features 7 4 Assets arising from reinsurance contracts held 24,723 24,373 7 Assets arising from insurance contracts, investment contracts, and reinsurance contracts held 24,730 24,377 of which Present Value of Future Cash Flows 23,585 23,220 of which Risk Adjustment for non-financial risk 502 504 of which Contractual Service Margin 644 653 Derivative assets 11,682 15,704 Tangible assets 2,149 2,231 Deferred tax assets 3,696 3,263 Other assets 17,527 21,198 Current tax receivables 945 930 Other receivables 11,229 9,771 Receivables 12,174 10,700 4 Assets held for sale 13,124 14,161 Cash and cash equivalents 26,779 26,167 TOTAL ASSETS 635,575 636,885 Half Year 2023 Financial Report 44 January 1, 2022, restated 17,167 4,764 21,931 28,011 486,073 86,183 600,268 20,632 2,451 25,795 25,795 24,557 525 713 9,107 2,443 2,417 13,967 945 10,997 11,942 8,107 25,053 730,146 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Notes (in EURO million) June 30, 2023 December 31, 2022, restated Shareholders’ equity – Group share 45,912 46,071 of which Net income - Group share 3,833 5,061 Minority interests 2,906 3,018 6 TOTAL SHAREHOLDERS' EQUITY 48,819 49,089 Subordinated debt Financing debt instruments issued 11,968 2,416 11,956 1,672 8 Financing debt 14,383 13,629 Liabilities arising from insurance contracts and investment contracts with discretionary participation features 446,544 444,812 Liabilities arising from other investment contracts 12,059 12,366 Liabilities arising from reinsurance contracts held 7 5 7 Liabilities arising from insurance contracts, investment contracts, and reinsurance contracts held 458,610 457,183 of which Present Value of Future Cash Flows of which Risk Adjustment for non-financial risk 420,727 3,106 419,892 3,104 of which Contractual Service Margin 34,776 34,188 Liabilities arising from banking activities 10,933 12,161 Provisions for risks and charges 6,375 6,516 Derivative liabilities Deferred tax liabilities 16,781 1,685 18,604 911 Other liabilities 18,466 19,515 Minority interests of controlled investment funds and puttable instruments held by minority interests 6,891 6,400 Other debt instruments issued, notes and bank overdrafts 11,019 10,558 Current tax payables 1,534 1,308 Collateral debts relating to investments under a lending agreement or equivalent 33,100 34,245 Other payables 12,555 13,231 Payables 65,099 65,742 4 Liabilities held for sale 12,890 13,049 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 635,575 636,885 Half Year 2023 Financial Report 45 II January 1, 2022, restated 51,885 3,702 55,587 10,599 800 11,399 539,351 14,485 11 553,848 515,781 3,765 34,301 14,653 9,424 10,854 785 11,639 7,750 10,518 963 35,030 12,142 66,403 7,194 730,146 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II.2 CONSOLIDATED STATEMENT OF PROFIT OR LOSS Notes (in EURO million, except EPS in EURO) June 30, 2023 Insurance revenue 39,194 Fees and charges relating to investment contracts with no discretionary participation features 118 Revenues from other activities 1,403 Revenues from all activities 40,715 Insurance service expenses (33,627) Net expenses from reinsurance contracts held (1,209) Expenses from other activities (1,505) Expenses from all activities Result from all activities Investment return Net finance income or expenses from insurance contracts issued (36,341) 4,374 8,620 (7,603) Net finance income or expenses from reinsurance contracts held 155 Net finance income or expenses from insurance and reinsurance contracts Financial result excluding financing debt expenses Other income and expenses (a) (b) (7,448) 1,172 (509) Change in impairment on goodwill and other intangible assets (1) Other operating income and expenses (510) Operating profit before tax 5,037 Income (net of impairment) from investment accounted for using the equity method 200 Financing debts expenses (306) Profit before tax 4,931 Income tax (994) Net income 3,937 Split between : Net income - Group share 3,833 Net income - Minority interests 104 10 Earnings per share 1.67 10 Fully diluted earnings per share 1.67 (a) As of June 30, 2022, it included the impact related to the disposal process of General Account portfolio in Belgium. (b) As of June 30,2023, it included the impact of IAS29 standard application related to hyperinflation in Turkey for €-12 million of which €-11 million group share (as of June 30, 2022, €-20 million of which €-19 million group share). Half Year 2023 Financial Report June 30, 2022, restated 39,133 166 1,597 40,896 (35,597) (658) (1,567) (37,822) 3,074 (4,945) 7,199 297 7,497 2,551 (450) (450) 5,176 (91) (260) 4,824 (899) 3,925 3,852 74 1.63 1.62 46 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II.3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in EURO million) June 30, 2023 Net income 3,937 Changes in fair value of financial instruments UZW 4,747 Net finance income and expenses from insurance contracts issued (4,165) Net finance income from reinsurance contracts held 395 Foreign currency translation differences (781) Items that may be reclassified subsequently to Profit or Loss 195 Realized capital gains or losses on equity instruments, without recycling in Profit or Loss 31 Change in fair value of equity instruments, without recycling in Profit or Loss UVW 934 Net finance income or expenses from insurance contracts, without recycling in Profit or Loss (585) Employee benefits actuarial gains and losses 568 Change in fair value of financial liabilities attributable to changes in credit risk (1) Items that may not be reclassified subsequently to Profit or Loss 947 Other comprehensive income, net of tax 1,142 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 5,079 Split between: Comprehensive Income - Group share 4,927 Comprehensive Income - Minority Interests 152 (a) Including changes in the fair value of cash flows hedge reserve and cost of hedging reserve. (b) Including changes in the fair value hedge reserve of equity instruments. Half Year 2023 Financial Report 47 June 30, 2022, restated 3,925 (41,939) 42,056 (3,244) 1,641 (1,487) 365 (3,685) 2,077 1,287 11 56 (1,431) 2,494 2,490 4 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II.4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in EURO million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euro) Paid-in capital Other reserves recognized through OCI Undated subordinated debts Translation reserves Shareholders' equity opening January 1, 2023 2,351,771 2.29 23,317 (8,758) 5,704 (1,643) Paid-in capital Share based compensation Treasury shares Undated subordinated debt Others (including impact on change in scope) UZW Dividends paid (57,732) (1,384) 22 150 (0) (0) (0) Impact of transactions with shareholders Net income Other comprehensive income (OCI) (57,732) (1,212) (0) 1,273 (0) 5 (0) (772) Total comprehensive income for the period Shareholders' equity closing June 30, 2023 2,294,039 2.29 22,106 1,273 (7,485) 5 5,709 (772) (2,415) (a) Included the application impact of IAS 12 amendment relating to deferred taxes on Leases (€24 million in Group share). Half Year 2023 Financial Report Employee benefits (2,652) 565 565 (2,087) Retained earnings 30,102 (92) 5 (3,787) (3,874) 3,833 23 3,856 30,084 Shareholders' equity group share 46,071 (1,384) 22 150 (92) 5 (3,787) (5,086) 3,833 1,094 4,927 45,912 Minority interests 3,018 (264) (264) 104 48 152 2,906 Total shareholders' equity 49,089 (1,384) 22 150 (92) (259) (3,787) (5,350) 3,937 1,142 5,079 48,819 48 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in EURO million, except for number of shares and nominal value) Number of shares (in thousands) Nominal value (in Euro) Paid-in capital Other reserves recognize d through OCI Undated subordinated debts Translation reserves KLM Shareholders' equity opening January 1, 2022, as previously reported 2,421,569 2.29 25,718 16,935 6,696 (2,843) Adjustment on initial application of IFRS17 and IFRS9, net of tax (0) (73) (20,074) (27) Shareholders' equity opening January 1, 2022, restated 2,421,569 2.29 25,645 (3,139) 6,696 (2,870) Paid-in capital Share based compensation (85,271) (2,194) 24 Treasury shares 670 Undated subordinated debt (746) Others (including impact on change in scope) UVW (0) Dividends paid Impact of transactions with shareholders (85,271) (1,501) (0) (746) Net income Other comprehensive income (OCI) (4,658) 48 1,579 Total comprehensive income for the period (4,658) 48 1,579 Shareholders' equity closing June 30, 2022, restated 2,336,298 2.29 24,144 (7,797) 5,997 (1,291) (a) As of June 30, 2022, it included the effect over the reporting period of applying IAS 29 standard related to hyperinflation in Turkey for €89 million of which €86 million group share. (b) As of June 30, 2022, it included the cumulative effect for previous periods of applying IAS 29 standard related to hyperinflation in Turkey for €132 million of which €130 million group share. Half Year 2023 Financial Report Employee benefits (3,185) 68 (3,117) 0 0 1,280 1,280 (1,836) Retained earnings KVM 27,815 855 28,670 (91) 36 (3,539) (3,594) 3,852 389 4,241 29,316 Shareholders' equity group share 71,135 (19,250) 51,885 (2,194) 24 670 (837) 36 (3,539) (5,841) 3,852 (1,362) 2,490 48,534 Minority interests 4,094 (392) 3,702 (177) (177) 74 (69) 4 3,529 49 II Total shareholders' equity 75,229 (19,642) 55,587 (2,194) 24 670 (837) (141) (3,539) (6,018) 3,925 (1,431) 2,494 52,062 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II.5 CONSOLIDATED STATEMENT OF CASH FLOWS (in EURO million) June 30, 2023 Operating profit before tax 4,931 Net amortization expense (a) (299) Change in goodwill impairment and other intangible assets impairment (b) 1 Net increase / (write back) in impairment on investments and tangible assets 186 Change in fair value of assets and liabilities at fair value trough profit or loss (4,877) Net change in liabilities arising from insurance and investment contracts (c) 2,476 Net increase / (write back) in other provisions (d) (74) Income arising from investments in associates - Equity method (200) Adjustment of non cash balances included in the operating income before tax (2,787) Net realized gains and losses 1,595 Financing debt expenses 306 Adjustment of balances included in operating income before tax for reclassification to investing or financing activities 1,900 Dividends recorded during the period (1,515) Investment income & expense recorded in profit or loss during the period (3,995) Adjustment of transactions from accrued to cash basis (5,510) Net cash impact of deposit accounting (470) Dividends and interim dividends collected 1,618 Interests collected 7,100 Interests paid (excluding interests on financing and undated subordinated debts, margin calls and other) (1,917) Net operating cash from banking activities (473) Net change in operating receivables and payables (239) Net cash provided by other assets and liabilities 1,078 Tax expenses paid (496) Other operating cash impact and non cash adjustment 149 Net cash impact of transactions with cash impact not included in the operating income before tax 6,350 NET CASH PROVIDED / (USED) BY OPERATING ACTIVITIES 4,884 Purchase of subsidiaries and affiliated companies, net of cash acquired (0) Disposal of subsidiaries and affiliated companies, net of cash ceded 15 Net cash related to changes in scope of consolidation 14 Sales and / or repayment of debt instruments (e) 22,332 Sales of equities instruments (e) (f) 8,663 Sales of investment properties held directly or not (69) Sales and/or repayment of loans and other assets (e) (g) 7,530 Net cash related to sales and repayments of investments (e) (f) (g) 38,456 Purchases of debt instruments (e ) (18,711) Purchases of equity instruments (e )(f) (8,802) Purchases of investment properties held direct or not (1,481) Half Year 2023 Financial Report June 30, 2022, restated 4,824 (340) 73 12,391 (5,974) (29) 99 6,220 (1,149) 260 (888) (1,821) (4,360) (6,181) 253 2,093 6,125 (1,006) (1,381) (2,903) (3,365) (672) 270 (637) 3,337 19 380 399 26,254 9,904 758 13,342 50,258 (21,372) (10,411) (1,144) 50 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Purchases and/or issues of loans and other assets (e) (g) (8,896) Net cash related to purchases and issuance of investments (e) (f) (g) (37,890) Sales of tangible and intangible assets 167 Purchases of tangible and intangible assets (142) Net cash related to sales and purchases of tangible and intangible assets 25 Increase in collateral payable / Decrease in collateral receivable 61,613 Decrease in collateral payable / Increase in collateral receivable (62,085) Net cash impact of assets lending / borrowing collateral receivables and payables (473) NET CASH PROVIDED / (USED) BY INVESTING ACTIVITIES 133 Issuance of equity instruments 159 Repayments of equity instruments (1,176) Transactions on treasury shares (11) Dividends payout (3,938) Interests on perpetual debts paid (92) Acquisition / sale of interests in subsidiaries without change in control Net cash related to transactions with shareholders (5,058) Cash provided by financial debts issuance 1,765 Cash used for financial debts repayments (1,008) Interests on financing debt paid (382) Net cash related to Group financing 376 NET CASH PROVIDED / (USED) BY FINANCING ACTIVITIES (4,683) Net cash provided by discontinued operations CASH AND CASH EQUIVALENT AS OF JANUARY 1 (h) 25,679 Net cash provided by operating activities 4,884 Net cash provided by investing activities 133 Net cash provided by financing activities (4,683) Net cash provided by discontinued operations Impact of change in consolidation method (33) Net impact of foreign exchange fluctuations and reclassification on cash and cash equivalents 91 CASH AND CASH EQUIVALENT AS OF JUNE 30 (h) 26,072 (a) Includes premiums/discounts capitalization and relating amortization, amortization of investment and owner occupied properties (held directly). (b) Includes impairment and amortization of intangible assets booked in the context of business combinations. (c) Includes impact of reinsurance and change in liabilities arising from contracts where the financial risk is borne by policyholders. (d) Mainly includes change in provisions for risks & charges, for bad debts/doubtful receivables and change in impairment of assets held for sale. (e) Includes related derivatives. (f) Includes equity instruments held directly or by consolidated investment funds as well as non consolidated investment funds. (g) Includes sales/purchases of assets backing insurance & investment contracts where the financial risk is borne by policyholders. (h) Net of bank overdrafts. (in EURO million) June 30, 2023 Cash and cash equivalents 26,779 Bank overdrafts UZW (707) Cash and cash equivalents KVM 26,072 (a) Included in "Other debt instruments issued and bank overdrafts". (b) The "Cash and cash equivalents" item excludes cash backing contracts where the financial risk is borne by policyholders. Half Year 2023 Financial Report (16,220) (49,147) 2 (121) (119) 101,012 (100,895) 117 1,509 1 (2,361) 13 (3,856) (112) 0 (6,314) 2,504 (1,039) (267) 1,198 (5,116) 0 24,371 3,337 1,509 (5,116) 0 187 (229) 24,059 June 30, 2022, restated 24,749 (690) 24,059 51 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II.6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ACCOUNTING PRINCIPLES 1.1 GENERAL INFORMATION AXA SA, a French Société Anonyme (the “Company” and, together with its consolidated subsidiaries, “AXA” or the “Group”), is the holding (parent) company and, since 2022, the internal reinsurer of an international financial services group focused on financial protection. AXA operates both in Europe and worldwide. The list of the main entities included in the scope of consolidation is provided in Note 2 of the Notes to the Consolidated Interim Financial Statements. AXA is listed on Euronext Paris Compartiment A. These Consolidated Interim Financial Statements including all Notes were set by the Board of Directors on August 2, 2023. 1.2 GENERAL ACCOUNTING PRINCIPLES AXA’s Consolidated Interim Financial Statements are prepared as of June 30. The Consolidated Interim Financial Statements are prepared in compliance with IFRS according to IAS 34 – Interim Financial Reporting and interpretations of the IFRS Interpretations Committee that are endorsed by the European Union before the end of the reporting period with a compulsory date of January 1, 2023. Accordingly, the Group uses the option provided by the European Union which allows not to apply the annual cohort requirement under IFRS 17 for determining the groups of insurance contracts meeting some criteria (refer to paragraph 1.14.3). The 2023 half year Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the 2022 Universal Registration Document. Half Year 2023 Financial Report 52 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.2.1 IFRS requirements adopted on January 1, 2023 1.2.1.1 IFRS 17 - Insurance Contracts and IFRS 9 - Financial Instruments AXA has started applying IFRS 17 - Insurance Contracts and IFRS 9 - Financial Instruments from January 1, 2023. IFRS 17 - Insurance Contracts, published on May 18, 2017 and amended on June 25, 2020 and on December 9, 2021, was adopted by the European Union with an exemption regarding the annual cohort requirement (refer to paragraph 1.14.3). IFRS 9 - Financial Instruments was issued on July 24, 2014 and adopted by the European Union on November 22, 2016, with the published effective date on January 1, 2018. However, amendments to IFRS 4 - Insurance Contracts allowed entities issuing insurance contracts within the scope of IFRS 4 to notably apply a temporary exemption from implementing IFRS 9 until the effective date of IFRS 17. In this context, the Group, eligible for this temporary exemption option, decided to defer the implementation of IFRS 9 until January 1, 2023. Finally, an amendment to IFRS 17 “Initial Application of IFRS 17 and IFRS 9 - Comparative Information”, issued on December 9, 2021 and endorsed by the European Union on September 8, 2022, improved requirements for the comparative information to be disclosed on initial application of IFRS 17 and IFRS 9. It permits entities that first apply both standards at the same time to present comparative information about a financial asset as if the classification and measurement requirements of IFRS 9 had been applied to that financial asset before. AXA decided to restate the comparative period at the first application of IFRS 9 and to apply this “classification overlay”, including the impairment requirements of IFRS 9, to all eligible financial assets. The adoption of IFRS 17 and IFRS 9 results in significant accounting changes, with an impact on AXA’s consolidated statement of financial position, consolidated statement of profit or loss, and other comprehensive income. The nature and effects of these changes are summarized below. Impacts of adoption of IFRS 17 and IFRS 9 at the transition date (January 1, 2022) The restated consolidated statement of financial position as at January 1, 2022, compared to the consolidated statement of financial position as at December 31, 2021 as published, highlights the following impacts of IFRS 17 and IFRS 9 at the transition date: Half Year 2023 Financial Report 53 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 (In EURO million) December 31, 2021 (Published) January 1, 2022 (Restated) Impact of the Restatement Goodwill 17,167 17,167 Value of purchased business in force 919 (919) Deferred acquisition costs and equivalent 17,825 (17,825) Other intangible assets 4,297 4,764 467 Intangible assets 40,208 21,931 (18,277) Investments in real estate properties 28,355 28,011 (343) Financial investments 486,564 486,073 (491) Assets backing contracts where the financial risk is borne by policyholders 86,315 86,183 (132) Investments from insurance activities 601,234 600,268 (965) Investments from banking and other activities 19,729 20,632 903 Investments accounted for using the equity method 2,601 2,451 (150) Assets arising from insurance contracts and investment contracts with discretionary participation features Assets arising from reinsurance contracts held 36,970 25,795 (11,175) Assets arising from insurance contracts, investment contracts, and reinsurance contracts held 36,970 25,795 (11,175) of which Present value of future cash flows (“PVFCF”) 24,557 24,557 of which Risk Adjustment 525 525 of which Contractual Service Margin (“CSM”) 713 713 Derivative assets (a) 9,107 9,107 Tangible assets 2,443 2,443 Deferred tax assets 421 2,417 1,996 Other assets 2,864 13,967 11,103 Receivables arising from direct insurance and inward reinsurance operations (b) 25,812 (25,812) Receivables arising from outward reinsurance operations 2,612 (2,612) Current tax receivables 908 945 37 Other receivables 8,991 10,997 2,006 Receivables 38,323 11,942 (26,381) Assets held for sale 8,512 8,107 (405) Cash and cash equivalents 25,051 25,053 2 TOTAL ASSETS 775,491 730,146 (45,345) (In EURO million) December 31, 2021 (Published) January 1, 2022 (Restated) Impact of the Restatement Shareholders' equity excluding Other Comprehensive Income (“OCI”) on investments and technical liabilities - Group share 54,201 55,024 823 Half Year 2023 Financial Report 54 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 OCI on investments and technical liabilities - Group share 16,934 (3,139) (20,073) Minority interests 4,094 3,702 (392) TOTAL SHAREHOLDERS' EQUITY 75,229 55,587 (19,642) TOTAL SHAREHOLDERS' EQUITY EXCLUDING OCI 58,068 58,745 677 Subordinated debt 10,449 10,599 150 Financing debt instruments issued 800 800 Financing debt 11,249 11,399 150 Liabilities arising from insurance contracts and investment contracts with discretionary participation features 545,087 539,351 (5,736) Liabilities arising from other investment contracts 14,663 14,485 (178) Liabilities arising from reinsurance contracts held 11 11 Liabilities arising from insurance contracts, investment contracts, and reinsurance contracts held 559,750 553,848 (5,902) of which Present value of future cash flows (“PVFCF”) 515,781 515,781 of which Risk Adjustment 3,765 3,765 of which Contractual Service Margin (“CSM”) 34,301 34,301 Liabilities arising from banking activities 14,643 14,653 10 Provisions for risks and charges 8,942 9,424 482 Derivative liabilities (a) 10,854 10,854 Deferred tax liabilities 5,334 785 (4,549) Other liabilities 5,334 11,639 6,305 Minority interests of controlled investment funds and other puttable instruments held by minority interests 7,750 7,750 Other debt instruments issued, notes and bank overdrafts 10,518 10,518 Payables arising from direct insurance and inward reinsurance operations (b) 10,957 (10,957) Payables arising from outward reinsurance operations 15,362 (15,362) Current tax payables 924 963 39 Collateral debts relating to investments under a lending agreement or equivalent 35,030 35,030 Other payables 12,177 12,142 (35) Payables (b) 92,719 66,403 (26,316) Liabilities held for sale 7,626 7,194 (432) TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 775,491 730,146 (45,345) (a) Derivatives, presented alongside their underlying items until December 31, 2021, are reclassified in separate assets and liabilities lines in the restated statement of financial position as of January 1, 2022. (b) Insurance and reinsurance related receivables and payables as of December 31, 2021 are reclassified in the restated statement of financial position as of January 1, 2022 due the cash basis presentation required by IFRS 17, leading to a decrease of technical liabilities and reinsurance assets of €-16,331 million and €-10,312 million, respectively. The total restated shareholders’ equity under IFRS 17 and IFRS 9, excluding other comprehensive income (“OCI”) remains broadly stable at transition (€58,745 million including minority interests) as compared to total shareholders’ equity (excluding OCI) under IFRS 4 and IAS 39. Half Year 2023 Financial Report 55 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 (In EURO million) December 31, 2021 (Published) Net impact of IFRS 9 KLM Net impact of IFRS 17 January 1, 2022 (Restated) Shareholders' equity excluding Other Comprehensive Income (“OCI”) on investments and technical liabilities - Group share 54,201 2,388 (1,565) 55,024 OCI on investments and technical liabilities - Group share 16,934 (2,544) (17,529) (3,139) Minority interests 4,094 (2) (390) 3,702 TOTAL SHAREHOLDERS' EQUITY 75,229 (158) (19,484) 55,587 TOTAL SHAREHOLDERS' EQUITY EXCLUDING OCI 58,068 2,097 (1,420) 58,745 (a) Including the effect of the remeasurement at cost of some real estate properties in the scope of IAS 40 – Investment properties, that were previously accounted for at fair value with changes in fair value through profit or loss. The scope of application of the OCI option is different under IFRS 17 compared to IFRS 4: for non-direct participating contracts, the impact of changes in discount rates on technical liabilities flows through OCI, which therefore partly matches the OCI on investments; both OCI components evolve in a consistent manner, mainly depending on interest rates movements, with some differences arising from duration gaps and the shape of the interest rate curves; for direct participating contracts, the OCI on the technical liabilities fully offsets the OCI on the investments. In addition, a negative accounting mismatch in OCI structurally occurs as some underlying items, notably investments in real estate properties, are accounted for at amortized cost by AXA, with therefore no recognition of unrealized gains and losses in shareholders’ equity while these unrealized gains and losses are included in the value of the contracts (with a corresponding opposite effect in OCI). Further details on these impacts are provided below for both IFRS 17 and IFRS 9. For the description of the main IFRS 17 and IFRS 9 accounting principles applied by AXA, refer to paragraphs 1.9 to 1.10 and 1.14. IFRS 17 – Insurance Contracts Main changes resulting from the adoption of IFRS 17 IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS 4 - Insurance Contracts. It aims at being more economic and better reflecting the underlying profitability of the business, while increasing comparability across the industry. The main changes in the measurement of insurance contracts compared to IFRS 4 are as follows: technical liabilities under IFRS 17 include the best estimate present value of future cash flows (forward looking and market consistent) that are therefore now all discounted; the recognition of a risk adjustment for non-financial risk (“RA”) under IFRS 17, €3,240 million as of January 1, 2022 net of reinsurance, which reflects the compensation required by AXA for bearing the uncertainty around the amount and timing of the future cash flows that arises from non-financial risk as insurance contracts are fulfilled. In this respect, the Group considers the 62.5th-67.5th percentile range as the adequate level of prudence on underlying insurance liabilities; the introduction of the Contractual Service margin (“CSM”), €33,588 million as of January 1, 2022 net of reinsurance, is a major change; the CSM represents the present value of estimated future profits attributable to the shareholders for non-onerous contracts, and is released through the statement of profit or loss over the coverage period of the contracts, as AXA provides services to policyholders; Half Year 2023 Financial Report 56 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 compared to the level at which the liability adequacy test was performed under IFRS 4, the level of aggregation of the contracts under IFRS 17 is more granular and can therefore result in more contracts being identified as onerous and losses on onerous contracts being recognized in profit or loss sooner. IFRS 17 does not change the underlying profitability of any given insurance contract. It can only change the pattern of earnings recognition over the life of the contracts: for Life and Savings and long-tail Health businesses, the CSM amortization profile can differ from the previous timing of profit recognition under IFRS 4 and the CSM mechanism is expected to absorb small to medium technical variances and also financial variances for direct participating contracts. However, in case of significant technical or financial chocks, some group of contracts may become onerous and trigger the recognition of a loss in profit or loss; for Property and Casualty business, the changes relative to IFRS 4 are limited and mainly linked to the discounting of all claims reserves, a more granular onerous contract testing based on facts and circumstances, and the inclusion of a risk adjustment for non-financial risk. Earnings of this line of business are more sensitive to interest rates level (e.g. positive impact from discounting claims reserves, net of the unwind of the discount, in a rising interest environment). As a result of applying IFRS 17, the shareholders’ share in the unrealized capital gains and losses on underlying items related to direct participating contracts is recognized in CSM instead of equity under the previous accounting framework. Therefore, shadow accounting (i.e. recognition of policyholders participation in unrealized capital gains and losses as it was allowed by IFRS 4 for insurance and investment contracts with discretionary participating features) no longer applies under IFRS 17. In respect of the presentation of the consolidated statement of financial position, the other changes compared to IFRS 4 relate notably to the following: intangible assets decreased as a result of the removal of deferred acquisition costs (“DAC”) and the value of purchased business in-force (“VBI”) respectively for €17,825 million and €919 million as of January 1, 2022; these assets are implicitly embedded within the CSM under IFRS 17. Goodwill was not affected by the adoption of IFRS 17; insurance and reinsurance related receivables and payables are no longer presented separately from technical liabilities and reinsurance assets, leading to a reduction of total assets and liabilities; policy loans, presented within the investments under IAS 39, are reclassified within insurance liabilities (refer to paragraph IFRS 9 – Financial Instruments below); portfolios of contracts that have asset balances and those that have liability balances are presented separately on each side of the consolidated statement of financial position. Furthermore, in the consolidated statement of profit or loss, insurance revenue will not reflect the premiums underwritten during the year but the premiums earned during the period, net of any investment component, corresponding to the release of the fulfilment cash flows (i.e. the expected cash flows of the period plus the related release of risk adjustment for non-financial risk) and the CSM. Transition methods The transition to IFRS 17 involved determining the methodology to be used for measuring the insurance contracts in force at the transition date, which is the beginning of the annual reporting period immediately preceding the date of initial application, namely January 1, 2022. Theoretically, the transition from IFRS 4 to IFRS 17 requires applying the new standard fully retrospectively, as if it was applied from the inception of insurance contracts in force. However, if the application of this full retrospective approach (“FRA”) is impracticable, the two following options are possible: Half Year 2023 Financial Report 57 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 either the modified retrospective approach (“MRA”), which consists in applying certain modifications of general requirements, to the extent that the full retrospective application is impracticable, but still with the objective to achieve the outcome as close as possible to the retrospective application, based on reasonable and supportable information available without undue cost and effort; or the fair value approach (“FVA”), which consists in repricing the contracts in the light of actuarial and financial parameters seen at the transition date by calculating the CSM as the positive difference between (i) the fair value of liabilities determined in accordance with IFRS 13 – Fair Value Measurement 1 , corresponding to the price that would be required by an external party to acquire the liabilities, and (ii) the fulfilment cash flows of insurance contracts. In practice, the Group has applied the FRA only to the liabilities for remaining coverage (“LRC”) of insurance contracts measured using the Premium Allocation Approach (“PAA”) and to the liabilities for incurred claims (“LIC”) occurred since 2016. For other groups of insurance contracts, different factors (such as the impossibility of running models since the inception of the contracts, the availability of yield curves, the lack of historical data) have made the application of the FRA impracticable. For these groups of contracts, AXA has applied the MRA or the FVA, namely: for long-term Life and Savings contracts, the MRA was the most broadly used approach, which mainly consisted in calculating an approximate CSM by reusing past information coming from European Embedded Value (“EEV”) or Solvency II, and the analyses of movements leading to get results close to those that would have been obtained using a FRA, whereas the FVA being applied only on a more limited basis; for LIC occurred before 2016 related to non-direct participating contracts, in the absence of reasonable and supportable information (under IFRS 4, claims reserves were generally not discounted and determining the correct locked-in discount yield curves was not possible without hindsight for periods before the adoption of Solvency 2), the FVA was applied with the option taken to set the OCI to zero on transition (i.e. discounting the liabilities with the transition yield curve instead of an historical accident year yield curve). In the context of the application of this option, an estimate of OCI for financial assets related to these LIC is disclosed in Note 6.2.3. Other information related to transition Yield curves The yield curves used to calculate the fulfilment cash-flows at transition date, i.e. as at January 1, 2022, by main currencies were as follows: 1 Excluding paragraph 47 of IFRS 13 relating to demand features as required by IFRS17.C20. Half Year 2023 Financial Report 58 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Yield curve at transition corresponding to spot rate Maturity EUR USD GBP JPY CHF HKD 1 0.4% 0.9% 1.0% 0.1% 0.6% 2 0.2% 1.2% 1.2% 0.1% 0.4% 3 0.1% 1.5% 1.3% 0.1% 0.3% 5 0.1% 1.7% 1.3% 0.1% 0.1% 7 0.2% 1.8% 1.2% 0.1% 0.1% 10 0.4% 1.9% 1.2% 0.1% 0.2% 15 0.6% 2.0% 1.1% 0.3% 0.3% 20 0.6% 2.1% 1.1% 0.5% 0.6% 25 0.8% 2.1% 1.1% 0.6% 0.8% 30 1.0% 2.1% 1.1% 0.7% 1.0% Besides, when retrospective approaches were used to measure the CSM and the OCI on technical liabilities at transition, yield curves have been rebuilt for all years prior to 2022, including average yield curves (accident year) for LIC occurred after 2015. For LIC occurred before 2016 for which the Group applied the FVA, average yield curves were not applicable. CSM at transition date of groups of insurance contracts not applying the annual cohort requirement Contracts in force at transition eligible to the exemption provided by the European Union not to apply the IFRS 17 annual cohort requirement (refer to paragraph 1.14.3) were all measured at transition applying the MRA or FVA. After transition, the adoption of this exemption by AXA (which mostly concerns contracts applying the Variable Fee Approach), leads to mix contracts which are in force at transition and those generated by the new business underwritten from 2022, in a unique group of contracts. For these contracts which were in force at transition date, the following table provides a detail by transition method, of the expected timing of recognition in profit or loss of the CSM such as reported in the consolidated statement of financial position as of January 1, 2022. This pattern of recognition only reflects expected coverage units which do not consider the future expected accretion of the CSM arising from the expected return on assets for contracts measured applying the Variable Fee Approach. For this reason, the table below does not reflect the expected release of the CSM that will be reported in the statement of profit or loss in the coming years for these contracts. Half Year 2023 Financial Report 0.6% 1.0% 1.2% 1.4% 1.5% 1.6% 1.8% 1.9% 2.1% 2.3% 59 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 (in EURO million) 1 year or less 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years 5 - 10 years More than 10 years Full retrospective approach 0 0 0 0 0 0 0 Modified retrospective approach 1,243 1,100 1,001 922 856 3,479 7,517 Fair value approach 427 382 356 334 313 1,277 3,279 Total 1,671 1,481 1,357 1,256 1,169 4,756 10,795 IFRS 9 – Financial Instruments IFRS 9 – Financial Instruments provides accounting requirements related to the classification and measurement of financial instruments and replaces IAS 39 – Financial Instruments: Recognition and Measurement. Changes in accounting policies resulting from the adoption of IFRS 9 are applied retrospectively, excluding the changes in hedge accounting that are applied prospectively from January 1, 2023, with the exception of the “cost of hedging approach” (see below) applied retrospectively. The comparative period has been restated. The main changes in the Group’s accounting policies resulting from the adoption of IFRS 9, as well as their effects on the Group’s consolidated financial statements, are disclosed below. Classification and measurement of financial assets On adoption of IFRS 9, the previous IAS 39 categories of financial assets are replaced by the IFRS 9 classification categories based on how financial assets are subsequently measured (at cost, at fair value through other comprehensive value (“FV OCI”) or at fair value through profit or loss (“FV P&L”)) and determined depending on both the business model in which those financial assets are managed and their contractual cash flow characteristics. The new IFRS 9 classification requirements notably led to reclassifying some debt instruments and non-consolidated investment funds from FV OCI to FV P&L (see the tables below). Regarding the classification options for financial assets, IFRS 9: narrows the scope of the optional designation of financial assets at fair value through profit or loss by limiting it to the only situations when doing so eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring those financial assets at amortized cost or at FV OCI; introduces the optional FV OCI designation for qualifying investments in equity instruments, referred to as “FV OCI without recycling”; and provides an option to designate a credit exposure as measured at FV P&L when an entity uses a credit derivative measured at FV P&L to manage the credit risk of this credit exposure. Another change compared to IAS 39 lies in derivatives embedded in hybrid contracts that are not separated when the host is a financial asset in the scope of IFRS 9. Instead, the hybrid financial instrument as a whole is assessed for classification applying the general IFRS 9 approach for financial assets. The approach applied by the Group to classify and measure its financial investments under IFRS 9 is detailed in paragraph 1.9.2.1. Most of the Group’s financial assets are measured at fair value both before and after transition to IFRS 9, and most of the debt instruments accounted for at FV OCI under IAS 39 (debt instruments available for sale) continue to be accounted for at FV OCI under IFRS 9. The new classification and measurement requirements however resulted in the changes detailed hereafter. Half Year 2023 Financial Report Total 0 16,118 6,367 22,486 60 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 The following table sets out the reclassifications from the original categories under IAS 39 to the new categories under IFRS 9 for each class of financial assets included in investments from insurance activities and investments from banking and other activities in the Group’s consolidated statement of financial position as at January 1, 2022. Reclassification of financial assets (IAS 39 versus IFRS 9) as of January 1, 2022 Original carrying amount under IAS 39 December 31, 2021 KLM IFRS 9 remeasurement New carrying amount under IFRS 9 January 1, 2022 (in EURO million) Debt instruments 398,929 (13) 398,917 FV OCI IAS 39 (Available for Sale) / FV OCI IFRS 9 FV OCI IAS 39 (Available for Sale) / FV P&L - FV Option IFRS 9 365,482 3,010 - 365,482 3,010 FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 1,720 1,720 FV P&L IAS 39 / FV OCI IFRS 9 1,312 1,312 FV P&L IAS 39 / FV P&L - FV Option IFRS 9 49 49 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 12,717 12,717 Amortized Cost (Loans & Receivables) IAS39 / Amortized Cost IFRS9 14,639 (13) 14,627 Equity instruments 36,575 36,575 FV OCI IAS 39 (Available for Sale) / FV OCI without recycling IFRS 9 FV P&L IAS 39 / FV OCI IFRS 9 22,313 117 - 22,313 117 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 14,145 14,145 Non controlled investment funds 17,845 17,845 FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 10,258 7,587 - 10,258 7,587 Other assets held by controlled investment funds 19,355 19,355 FV P&L IAS 39 / FV P&L - FV Option IFRS 9 19,355 19,355 Loans 30,984 366 31,350 Amortized Cost (Loans & Receivables) IAS 39 / Amortized Cost IFRS 9 Amortized Cost (Loans & Receivables) IAS 39 / FV P&L - FV Option IFRS 9 26,393 4,569 (21) 387 26,372 4,956 Amortized Cost (Loans & Receivables) IAS 39 / FV P&L - Mandatory IFRS 9 21 1 22 Assets backing contracts where the financial risk is borne by policyholders 81,587 81,587 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 81,587 81,587 Total 585,274 354 585,628 (a) Adjusted for items transferred out of Financial Investments, mainly: derivatives, presented alongside their underlying financial instruments as of December 31, 2021, reclassified in separate assets and liabilities lines in the statement of financial position as of January 1, 2022; - loans granted to policyholders, accounted for as investments at amortized cost under IAS 39 as of December 31, 2021, reclassified as a part of fulfilment cash flows of insurance contracts within the scope of IFRS 17 as of January 1, 2022. On the basis of the opening consolidated statement of financial position as of January 1, 2022: some debt instruments and non-consolidated funds, for a total of €14,988 million, were reclassified from FV OCI to FV P&L with unrealized gains of €2,093 million transferred from OCI to retained earnings, either because those instruments do not meet the SPPI criteria or because the optional designation at FV P&L is applied; for equity securities, as the IAS 39 category FV OCI with recycling of realized gains and losses in profit or loss (equity instruments available for sale) is no longer permitted under IFRS 9, AXA applies the optional designation at FV OCI without recycling for most of equity securities held, in order to avoid a significant new volatility in resulting from this asset class, compared to the previous IAS 39 accounting. The total carrying value of equity instruments designated at FV OCI without recycling represented €22,313 million (of which €4,207 million of net unrealized gains accumulated in OCI); some loans, accounted for at amortized cost under IAS 39, for a total of €4,569 million, were designated at FV P&L under IFRS 9 applying the fair value option in order to eliminate or significantly reduce Half Year 2023 Financial Report 61 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 accounting mismatches in profit or loss, leading to recognize unrealized capital gains for €387 million in retained earnings; some debt instruments, for a total of €1,312 million, were reclassified from FV P&L to FV OCI; cumulated changes in fair value of those debt instruments are no longer recognized in profit or loss but in OCI. A fair value gain of € 111 million would have been recognized in profit or loss in 2022 if those debt instruments had not been reclassified; the interest revenue on these instruments recognized in profit or loss under IFRS 9 in the 2022 restated Consolidated Financial Statements, amounted to €13 million. The following table sets out the reclassifications from the original categories under IAS 39 to the new categories under IFRS 9 for each class of the Group’s financial assets as at January 1, 2023. Reclassification of financial assets (IAS 39 versus IFRS 9) as of January 1, 2023 Original carrying amount under IAS 39 December 31, 2022 KLM IFRS 9 remeasurement New carrying amount under IFRS 9 January 1, 2023 (in EURO million) Debt instruments 306,718 (16) 306,702 FV OCI IAS 39 (Available for Sale) / FV OCI IFRS 9 FV OCI IAS 39 (Available for Sale) / FV P&L - FV Option IFRS 9 275,724 1,790 - 275,724 1,790 FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 545 545 FV P&L IAS 39 / FV OCI IFRS 9 1,219 1,219 FV P&L IAS 39 / FV P&L - FV Option IFRS 9 24 24 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 11,386 11,386 Amortized Cost (Loans & Receivables) IAS39 / Amortized Cost IFRS9 16,030 (16) 16,014 Equity instruments 29,674 29,674 FV OCI IAS 39 (Available for Sale) / FV OCI without recycling IFRS 9 FV P&L IAS 39 / FV OCI IFRS 9 14,336 145 - 14,336 145 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 15,193 15,193 Non controlled investment funds 19,348 19,348 FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 9,890 9,458 - 9,890 9,458 Other assets held by controlled investment funds 20,294 20,294 FV P&L IAS 39 / FV P&L - FV Option IFRS 9 20,294 20,294 Loans 31,930 (445) 31,486 Amortized Cost (Loans & Receivables) IAS 39 / Amortized Cost IFRS 9 Amortized Cost (Loans & Receivables) IAS 39 / FV P&L - FV Option IFRS 9 27,591 4,322 (21) (423) 27,570 3,899 Amortized Cost (Loans & Receivables) IAS 39 / FV P&L - Mandatory IFRS 9 18 (1) 17 Assets backing contracts where the financial risk is borne by policyholders 71,652 71,652 FV P&L IAS 39 / FV P&L - Mandatory IFRS 9 71,652 71,652 Total 479,616 (461) 479,155 (a) Adjusted for items transferred out of Financial Investments, mainly: derivatives, presented alongside their underlying financial instruments as of December 31, 2022, reclassified in separate assets and liabilities lines in the statement of financial position as of January 1, 2023; - loans granted to policyholders, accounted for as investments at amortized cost under IAS 39 as of December 31, 2022, reclassified as a part of fulfilment cash flows of insurance contracts within the scope of IFRS 17 as of January 1, 2023. Impairment of financial assets The impairment model under IFRS 9 reflects expected credit losses (“ECL”), as opposed to incurred credit losses under IAS 39. Under the IFRS 9 impairment approach, it is no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The Group’s IFRS 9 impairment approach is detailed in paragraph 1.9.2.2. Half Year 2023 Financial Report 62 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 The following table presents the reconciliation between the balances of cumulated impairment allowances under IAS 39 and cumulated ECL allowances under IFRS 9 as of January 1, 2022. Reconciliation of impairment allowances on financial assets (IAS 39 versus IFRS 9) as of January 1, 2022 (in EURO million) Impairment allowance under IAS 39 IFRS 9 remeasurement ECL allowance under IFRS 9 Debt instruments FV OCI IAS 39 (Available for Sale) / FV OCI IFRS 9 FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 Amortized Cost (Loans & Receivables) IAS 39 / Amortized Cost IFRS 9 (32) (31) (1) (0) (64) (52) 1 (13) (96) (83) (0) (13) Equity instruments FV OCI IAS 39 (Available for Sale) / FV OCI without recycling IFRS 9 Non controlled investment funds FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 Loans Amortized Cost (Loans & Receivables) IAS39 / Amortized Cost IFRS 9 Amortized Cost (Loans & Receivables) IAS39 / FV P&L - Mandatory IFRS 9 (2,403) (2,403) (928) (928) (177) (176) (1) 2,403 2,403 928 928 (20) (21) 1 - - - (197) (197) - (293) Total (3,541) 3,247 The application of the new IFRS 9 impairment requirements generates the following impacts on the Group’s opening consolidated statement of financial position as of January 1, 2022: for FV OCI equity instruments, unlike IAS 39, no impairment is required under IFRS 9. As mentioned above, AXA applies the optional designation at FV OCI without recycling for most of equity securities held. As a consequence of this designation, the cumulated amount of IAS 39 impairment allowances, €2,403 million, was transferred from retained earnings to OCI without recycling, with no impact on the Group’s total consolidated shareholders’ equity; for non-consolidated investment funds reclassified from FV OCI to FV P&L, the cumulated amount of IAS 39 impairment allowances, €928 million, was removed without any impact on the Group’s retained earnings; for debt instruments and loans measured at FV OCI or at cost under both IAS 39 and IFRS 9, the application of new impairment requirements results in limited additional impairment allowances (€86 million). The following table presents the reconciliation between the balances of cumulated impairment allowances under IAS 39 and cumulated ECL allowances under IFRS 9 as of January 1, 2023. Half Year 2023 Financial Report 63 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Reconciliation of impairment allowances on financial assets (IAS 39 versus IFRS 9) as of January 1, 2023 (in EURO million) Impairment allowance under IAS 39 IFRS 9 remeasurement ECL allowance under IFRS 9 Debt instruments FV OCI IAS 39 (Available for Sale) / FV OCI IFRS 9 FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 Amortized Cost (Loans & Receivables) IAS 39 / Amortized Cost IFRS 9 (100) (49) (2) (49) (51) (37) 2 (16) (151) (86) - (65) Equity instruments FV OCI IAS 39 (Available for Sale) / FV OCI without recycling IFRS 9 Non controlled investment funds FV OCI IAS 39 (Available for Sale) / FV P&L - Mandatory IFRS 9 Loans Amortized Cost (Loans & Receivables) IAS39 / Amortized Cost IFRS 9 Amortized Cost (Loans & Receivables) IAS39 / FV P&L - Mandatory IFRS 9 (2,670) (2,670) (939) (939) (184) (184) (0) 2,670 2,670 939 939 (20) (21) 0 - - - (205) (205) (0) (356) Total (3,894) 3,538 Classification and measurement of financial liabilities IFRS 9 requirements for financial liabilities remain largely unchanged compared to IAS 39, except for the changes in fair value of financial liabilities that are optionally designated at fair value through profit or loss. Under IAS 39, the entire amount of those changes was recorded in profit or loss, whereas IFRS 9 requires an entity to recognize the portion thereof attributable to changes in the credit risk of that liability in other comprehensive income, unless this treatment would create or enlarge an accounting mismatch in profit or loss. AXA applies this requirement since 2017, when the Group decided to early adopt the corresponding amendment to IFRS 9, mainly for certain financial liabilities arising from banking activities. This requirement is not applicable for the financial liabilities arising from investment contracts with no discretionary participation features (refer to paragraph 1.15). Hedge accounting When first applying IFRS 9, an entity may make an accounting policy choice to continue applying the hedge accounting requirements in IAS 39, instead of those in IFRS 9. AXA decided to apply IFRS 9 requirements for all hedges with the exception of portfolio fair value hedges of interest rate risk (commonly referred to as “fair value macro hedges”). For the latter, AXA continues applying the hedge accounting requirements currently in IAS 39 as allowed by the IASB that is addressing macro hedge accounting as a separate project. IFRS 9 establishes a more principle-based approach for the general hedge accounting model and aligns hedge accounting more closely with the risk management. In particular, IFRS 9 introduces the possibility to apply prospectively from January 1, 2023 the hedge accounting for fair value hedges of equity instruments designated at fair value through OCI, that implies to record in OCI, without recycling into profit or loss, the changes in fair value of both the hedged equity instrument and the derivative. In addition, IFRS 9 provides a new accounting mechanism, applicable retrospectively from January 1, 2023, designed to reduce the volatility in profit or loss and referred to as “cost of hedging approach”, for the situations where only a part of a derivative is designated as the hedging instrument (for example, changes in intrinsic value of a purchased option or changes in the spot element of a forward contract). IFRS 9 accounting for derivative instruments and hedge relationships applied by AXA is detailed in paragraph 1.10. Half Year 2023 Financial Report 64 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Most Group’s hedge accounting relationships documented under IAS 39 are considered as continuing hedge relationships under IFRS 9 with the exception of those implying derivative instruments belonging to underlying items of direct participating contracts within the scope of IFRS 17, as no accounting mismatch exists any longer in this case. Change in the presentation of derivative instruments In previous reporting periods, AXA disclosed derivative instruments, in its consolidated statement of financial position, alongside their underlying assets or liabilities. Thus, for each line of assets or liabilities concerned, a net economic position was presented. Together with the first application of IFRS 9, AXA has decided to modify the presentation of its derivative instruments to present them in separate lines of its consolidated statement of financial position, as either an asset or a liability depending upon the fair value position at the reporting date, with no offsetting. In the restated Group’s consolidated statement of financial position as of January 1, 2022, the derivative assets and liabilities lines represented respectively €9,107 million and €11,112 million, the net balance of €2,005 million mostly resulting from derivatives previously classified within the investments. 1.2.1.2 Other IFRS amendments adopted on January 1, 2023 Amendments to IAS 12 – Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction Amendments to IAS 12 – Income Taxes published on May 7, 2021 narrow the scope of the exemption from the recognition of deferred tax liabilities and assets. This exemption no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. These amendments mainly concern lease transactions of the Group. As a result, on initial recognition of a lease, AXA needs to assess the tax bases of the right-of-use and the lease liability by identifying the amounts attributable to them for tax purposes. Then, if the taxable and the deductible temporary differences are equal, a deferred tax liability related to the right-of-use and a deferred tax asset related to the lease liability are recognized. The cumulative effect of initially applying these amendments totaled €24 million and was recognized as a positive adjustment to the opening balance of retained earnings on January 1, 2023. Other IFRS amendments The application of the amendments below as of January 1, 2023 had no material impact on the Group’s Consolidated Interim Financial Statements: Half Year 2023 Financial Report 65 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Amendments Publication date Topic IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting policies February 12, 2021 The amendments to IAS 1 require entities to disclose their “material accounting policy information” rather than their “significant accounting policies”. IFRS Practice Statement 2 Making Materiality Judgements is modified accordingly to support these amendments. IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates February 12, 2021 The amendments introduce a definition of “accounting estimates” and other changes to help entities distinguish changes in accounting policies from changes in accounting estimates. 1.2.2 Standards and amendments published but not yet effective Amendments to IAS 12 – International tax reform Pillar Two model rules Amendments to IAS 12 – Income Taxes published on May 23, 2023 introduce a mandatory temporary exception in IAS 12 from recognizing and disclosing deferred tax assets and deferred tax liabilities arising from the implementation of the OECD Pillar Two model rules. They also introduce some disclosure requirements for affected entities. The amendments have not yet been endorsed by the European Union. When the tax legislation is effective, the current tax expense (income) related to Pillar Two income taxes will have to be disclosed separately. In the meantime, in periods in which Pillar Two legislation is enacted or substantively enacted, but not yet in effect, the IAS 12 amendments require disclosing known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes arising from that legislation. These disclosures are required for annual reporting periods beginning on or after January 1, 2023. Other IFRS requirements not yet effective The following amendments are not expected to have a material impact on the Group’s Consolidated Financial Statements: Half Year 2023 Financial Report 66 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Amendments Publication date Effective for annual periods beginning on or after Topic IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current; Classification of Liabilities as Current or Non-current – Deferral of Effective Date; January 23, 2020, July 15, 2020, October 31, 2022 January 1, 2024(b) The clarify requirements in IAS 1 for the presentation of liabilities in the statement of financial position and improve the information an entity provides when its right to defer settlement of a liability for at least twelve months is subject to compliance with covenants. amendments Non-current Liabilities with Covenants IFRS 16 – Leases: Lease Liability in a Sale and Leaseback September 22, 2022 January 1, 2024(a) (b) The introduce subsequent specific measurement requirements for sale and leaseback transactions. amendments IAS 7 – Statement of Cash Flows and IFRS 7 – Financial Instruments: Disclosures: Supplier Arrangements Finance May 25, 2023 January 1, 2024(b) introduce The specific disclosure requirements relating to the effects of supplier finance arrangements on the entity’s liabilities, cash flows and its exposure to liquidity risk. amendments (a) With earlier application being permitted (subject to conditions in some cases) but not elected by the Group (b) Not yet endorsed by the European Union. Half Year 2023 Financial Report 67 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.2.3 Preparation of financial statements The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions. In preparing the Consolidated Interim Financial Statements, significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those applied to the Consolidated Financial Statements as at the year ended December 31, 2022. However, this information was updated in this report, when required, following the adoption of IFRS 17 and IFRS 9. As recommended by IAS 1, assets and liabilities are generally classified globally in the statement of financial position in increasing order of liquidity, which is more relevant for financial institutions than a classification between current and non-current items. As for most insurance companies, expenses are classified by destination in the statement of profit or loss. All amounts in the consolidated statement of financial position, consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and in the Notes are expressed in Euro million. 1.3 CONSOLIDATION 1.3.1 Scope and basis of consolidation Companies in which AXA exercises control are subsidiaries. They are fully consolidated from the date on which control is transferred to AXA. Under IFRS 10 – Consolidated Financial Statements, AXA controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Only substantive rights (i.e. the holder must have the practicability to exercise them) and rights that are not protective shall be considered. AXA can have power with less than a majority of the voting rights of an investee, in particular through: the proportion of ownership with regards to the other investors; potential voting rights ; a contractual arrangement between the investor and other vote holders; rights arising from other contractual arrangements; or a combination of these indicators. Under IFRS 11 – Joint Arrangements, companies over which AXA exercises a joint controlling influence alongside one or more third parties are joint ventures and are accounted for using the equity method. Companies in which AXA exercises significant influence are accounted for using the equity method. Under IAS 28 – Investments in Associates and Joint Ventures, significant influence is presumed when AXA directly or indirectly holds 20% or more of the voting rights. Significant influence can also be exercised through an agreement with other shareholders. Under the equity method, AXA’s share of equity investments’ post-acquisition profit or loss is recognized in the statement of profit or loss, and its share of post-acquisition movements in reserves is stated under “Other reserves”. Investment funds and real estate companies are either fully consolidated or accounted for using the equity method, depending on which conditions of IFRS 10/IFRS 11/IAS 28 listed above they satisfy. Fees received by asset managers are also taken into account in the assessment of the exposure to variability of returns. For fully consolidated investment funds, minority interests are recognized at fair value and shown as liabilities in the statement of financial position, if the companies’ instruments can be redeemed at any time by the holder at fair Half Year 2023 Financial Report 68 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 value. Investment funds accounted for using the equity method are shown under the caption “Financial investments”. Some companies in which AXA exercises control, a joint controlling influence or a significant influence are excluded from the scope of consolidation as they are not material with respect to the Group’s Consolidated Financial Statements. These are mainly investment funds. 1.3.2 Business combinations and subsequent changes in the Group ownership interest In accordance with the option made available by IFRS 1 – First-time adoption of IFRS, business combinations prior to 2004 were not restated with respect to French accounting principles in force at the time. 1.3.2.1 Consideration transferred in a business combination The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, the liabilities incurred by the Group to former owners of the acquiree and the equity interests issued by the Group. Purchase consideration includes any contingent element (adjustment in the acquisition price conditional upon one or more events). In the estimate of the contingent element, attention is paid to use assumptions that are consistent with the assumptions used for the valuation of intangible assets. For business combinations that occurred before January 1, 2009, any contingent element was included in the cost of the combination to the extent the adjustment was probable and could be measured reliably. If the future events do not occur or the estimate needs to be revised, the cost of the business combination continues to be adjusted accordingly, taking account the impact in terms of additional goodwill and/or adjustments of the valuation of acquired assets and liabilities. For business combinations on or after January 1, 2009, any change to the estimate of the contingent element between the acquisition date and the amount actually subsequently paid is recognized in the statement of profit or loss. Direct transaction costs related to a business combination are charged in the statement of profit or loss when incurred. 1.3.2.2 Valuation of assets acquired, and liabilities assumed in a business combination Upon first consolidation, all assets, liabilities and contingent liabilities (unless they are not present obligations) of the acquired company are estimated at their fair value. Insurance and investment contracts Insurance and investment contracts within the scope of IFRS 17 are measured as follows (refer to paragraph 1.14 for the explanation of IFRS 17 concepts relating to the classification and measurement of insurance contracts): the groups of contracts acquired in a business combination are identified as if AXA had entered into the contracts at the date of the acquisition, following the general guidance for the level of aggregation described in paragraph 1.14.3; these groups of contracts are measured using the consideration received or paid for the contracts as a proxy for the premiums received or paid; if those groups of contracts are profitable, and unless the Premium Allocation Approach (“PAA”) for the liability for remaining coverage (“LRC”) applies, the Contractual Service Margin (“CSM”) is initially recognized applying the general valuation principles described in paragraph 1.14.5. The excess of the consideration paid or received over the fulfilment cash flows adjusts goodwill for the contracts measured using the PAA and the CSM for other contracts; Half Year 2023 Financial Report 69 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 in case of onerous groups of contracts, the loss component of the liability for remaining coverage is determined on initial recognition applying the approach described in paragraph 1.14.5, and the excess of the fulfilment cash flows over the consideration paid or received is recognized as a part of the goodwill; an asset for insurance acquisition cash flows is recognized as at the acquisition date following the guidance in paragraph 1.14.5. Groups of insurance contracts acquired in their settlement period are, if material, valuated as if they were new insurance contracts issued by the acquirer as at the acquisition date: the LRC are recognized for such insurance contracts using the general measurement model described in paragraph 1.14.5, with the consideration received used as a proxy for the premiums received. Subsequently, the whole amount of the LRC recognized for the acquired claim settlement liabilities is recycled in the insurance revenue over the coverage period applying the mechanism described in paragraph 1.19.1. Contrary to direct participating insurance contracts and investment contracts with discretionary participation features, investment contracts with no discretionary participation features are financial liabilities within the scope of IFRS 9. These liabilities are measured at their fair value which cannot be lower than surrender value when those contracts contain a surrender option. Identifiable intangible assets Identifiable intangible assets are recognized separately from goodwill and may include: marketing-related intangible assets (trademarks, tradenames, internet domain names, non-competition agreements); the value of customer relationships relating to future insurance contracts, including (i) expected renewals of existing contracts (excluding any related asset for insurance acquisition cash flows to be separately recognized), considering cancellations by policyholders and a definite life due to the regular decline in renewals over the passage of time, (ii) expected cross-selling with current policyholders, and (iii) expected other new contracts on customer lists (identified possible customers who have not yet a contract with the entity). These projections include assumptions regarding claims, expenses and financial revenues, or they can be estimated on the basis of the New Business Value. The nature of the intangible assets recognized in a business combination is consistent with the valuation methods used when purchasing the acquired entity. To the extent that the intangible assets above can be estimated separately, they can also be measured by looking at the purchased marketing resources that will allow to generate these future cash flows. Restructuring costs In the context of a business combination, only restructuring costs that can be measured reliably and which correspond to an existing liability of the acquired company prior to the acquisition date are included in restructuring provisions recognized in the statement of financial position of the acquired company at acquisition date. 1.3.2.3 Non-controlling interests in the acquiree According to a decision taken for each acquisition, minority interests may be measured at fair value or at its proportionate interest in the acquiree’s identifiable net assets. In step acquisitions, previous minority interests held by the Group are measured at fair value and the resulting adjustment is recognized through profit or loss. Similarly, when an additional purchase changes the control from significant influence or joint control to control, any investment pre-existing in a former associate/joint venture is re-measured to its fair value with the gain or loss through profit or loss (consequently also resulting in a new goodwill). Half Year 2023 Financial Report 70 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.3.2.4 Goodwill Goodwill is measured as the excess of (i) the aggregate of the consideration transferred, the amount of any minority interest in the acquiree and in a business combination achieved in stages, the acquisition-date fair value of the Group’s previously held equity interest in the acquiree over (ii) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Goodwill arising from the acquisition of a foreign entity is recorded in the local currency of the acquired entity and is translated into Euro at the closing date. If the cost of acquisition is lower than the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, the difference is directly recorded in the consolidated statement of income. Adjustments can be made to goodwill within twelve months of the acquisition date if new information becomes available to complete the initial accounting. In this case, comparative information is presented as if the initial accounting had been completed from the acquisition date. If, after the period of twelve months, a deferred tax asset, initially considered as not recoverable, finally meets the recognition criteria, the corresponding tax benefit is recorded in the consolidated statement of income without a corresponding adjustment in goodwill. Goodwill is allocated to cash generating units corresponding to (i) the companies acquired or portfolios of business acquired according to their expected profitability, and (ii) the entities already within the AXA Group that will benefit from the synergies of the combination with the activities acquired. This allocation of goodwill is used both for segment reporting and for impairment testing (refer to paragraph 1.8.1). 1.3.2.5 Purchase and sale of interests in a controlled subsidiary Purchase and sale transactions of minority interests in a controlled subsidiary that do not change the conclusion of control are recorded through shareholders’ equity (including direct acquisition costs). If control in a subsidiary is lost, any gain or loss is recognized in profit or loss. Furthermore, if an investment in the entity is retained by the Group, it is re-measured to its fair value and any gain or loss is also recognized in profit or loss. 1.3.2.6 Put over minority interests When control over a subsidiary is acquired, a put option may be granted to minority shareholders. However, the recognition of the puttable instruments as a liability depends on the contractual obligations. When the contract involves an unconditional commitment exercisable by the option holder, it is recognized as a liability. Since the balancing entry to this liability is not specified by current IFRS, the Group’s method is to (i) reclassify minority interests from equity to liability, (ii) re-measure this liability at the present value of the option price, and (iii) recognize the difference either as an increase in goodwill for puts existing before January 1, 2009, or as a decrease in equity (Group share) for a put granted after January 1, 2009, to the extent there is no immediate transfer of risks and rewards. Similarly, subsequent changes in the liability are recorded against goodwill for puts existing before January 1, 2009, and against equity (Group share) for puts granted after that date. 1.3.2.7 Intra-group transactions Intra-group transactions, including internal dividends, payables/receivables and gains/losses on intra-group transactions are eliminated: in full for controlled subsidiaries; and to the extent of AXA’s interest for entities accounted for using the equity method. Half Year 2023 Financial Report 71 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 The effect on profit or loss of transactions between consolidated entities is always eliminated. However, in case of a loss, an impairment test is performed, in order to assess whether an impairment of the underlying item has to be booked. In the event of an internal sale of an asset that is not intended to be held on the long term by the Group, deferred tax is recognized as the current tax calculated on the realized gain or loss is eliminated. In addition, the transfer of consolidated shares, between two consolidated subsidiaries but held with different ownership percentages, should not impact the profit or loss. The only exception would be any related tax recorded in connection to the transaction, which is maintained in the Consolidated Financial Statements. These transfers also have an impact on Group shareholders’ equity (with a balancing entry recorded in minority interests). This impact is identified in the “other” changes of the consolidated statement of shareholders’ equity. 1.4 FOREIGN CURRENCY TRANSLATION OF FINANCIAL STATEMENTS AND TRANSACTIONS The Consolidated Financial Statements are presented in Euro million, the Euro being the Group’s presentational currency. The results and financial position of all Group entities that have a functional currency (i.e. the currency of the primary economic environment in which the entity operates) different from the Group presentational currency are translated as follows: assets and liabilities of entities in a functional currency different from Euro are translated at the closing exchange rate; revenues and expenses are translated at the average exchange rate over the period, except for revenues and expenses of the entities operating in hyperinflationary economies which are translated at the closing exchange rate as explained in paragraph 1.5; all resulting foreign exchange differences are recognized as a separate component of equity (translation differences). At the local entity level, foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of profit or loss, except where hedge accounting is applied as explained in paragraph 1.10. Foreign exchange differences arising from monetary financial assets at fair value through other comprehensive income (“OCI”) are recognized as income or expense for the period in respect of the portion corresponding to amortized cost. The residual translation differences relating to fair value changes are recorded in OCI, like for non- monetary items such as equity securities. The groups of insurance contracts that generate cash flows in one or several foreign currencies are treated as monetary items, which requires translating their carrying amounts at the end of the reporting period into the functional currency using the closing rate. When measuring a multi-currency group of contracts (including the Contractual Service Margin – refer to paragraph 1.14.5), the entities determine on initial recognition whether the group is denominated in a single currency or in the multiple currencies of the cash flows within the group, the methodology having to be applied consistently for similar transactions: under a single-currency denomination policy, the changes in exchange rates between the currencies of the cash flows and the currency of the group of contracts correspond to a financial risk accounted for Half Year 2023 Financial Report 72 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 applying IFRS 17 whereas the changes in exchange rates between the currency of the group of contracts and the functional currency are accounted for applying IAS 21; under a multi-currency denomination policy, all changes in exchange rates are exchange differences that are accounted for applying IAS 21. As mentioned in paragraph 1.3.2.4, goodwill arising on the acquisition of a foreign entity is recorded in the local currency of the acquired entity and is translated into Euro at the closing date. Foreign exchange differences arising from the translation of a net investment in a foreign subsidiary, borrowings and other currency instruments qualifying for hedge accounting of such investment are recorded in shareholders’ equity under translation differences and are recycled in the statement of profit or loss as part of the realized gain or loss on disposal of the hedged net investment. Regarding the cumulative amount of the exchange differences related to disposed business, the Group applies the step-by-step consolidation method (IFRIC 16). 1.5 HYPERINFLATION ACCOUNTING In accordance with IAS 29 – Financial Reporting in Hyperinflationary Economy, financial statements of the entities operating in hyperinflationary economies are adjusted to reflect the changes in the general purchasing power of their functional currency. Thus, non-monetary assets and liabilities of these entities which are not already expressed in terms of the measuring unit current at the end of the reporting period are restated to reflect the change in the Consumer Price Index (“CPI”). The effect of inflation on monetary assets and liabilities over the reporting period is included in the statement of profit or loss of the reporting period as a gain or loss on net monetary position. The cumulated gains and losses on net monetary position for previous periods are included within the retained earnings. All items in the statement of comprehensive income need to be restated by applying the change in the CPI between the dates when those items were initially recorded in the financial statements and the end of the reporting period. To be included in the Group’s consolidated financial statements, financial statements of hyperinflationary entities, restated for hyperinflation as described above, are translated in Euros at the closing exchange rate. In the Group’s consolidated statement of financial position as at the reporting date, the restatement effects on equity items are included in other components of comprehensive income, altogether with the translation differences, to the extent that the change in the CPI is correlated with movements in the exchange rate between the functional currency of the entity and Euros. The Turkish economy is considered to be hyperinflationary in accordance with the criteria in IAS 29. By consequence, the financial statements of the Turkish consolidated entities are incorporated in the Group’s Consolidated Financial Statements applying the hyperinflation accounting. The presentation of the consolidated statement of profit or loss of the reporting period is not restated as the effect of the restatement is not material. 1.6 FAIR VALUE MEASUREMENT The Group applies the fair value hierarchy of IFRS 13 – Fair Value Measurement as described below for all assets and liabilities where another IFRS requires or permits fair value measurement or disclosures about fair value measurement in the Notes. Principles below address mostly assets given the nature of the activities of the Group. Half Year 2023 Financial Report 73 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.6.1 Active market: quoted price Fair values of assets and liabilities traded on active markets are determined using quoted market prices when available. An instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from a stock exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis between a willing seller and a willing buyer. For financial instruments traded in active markets, quotes received from external pricing services represent consensus prices, i.e. using similar models and inputs resulting in a very limited dispersion. The fair value amounts of assets and liabilities for which fair value is determined in whole directly by reference to an active market are disclosed as level 1 in the Notes to the Consolidated Financial Statements. 1.6.2 Active versus inactive markets – financial instruments Financial instruments are considered as being quoted in an active market when: quotes that represent consensus are regularly provided by external pricing services with limited dispersion; and prices are readily available. Liquidity may be defined as the possibility to sell or dispose of the asset in the ordinary course of business within a certain limited time period at approximately the price at which the investment is valued. Liquidity for debt instruments is assessed using a multi-criteria approach including the number of quotes available, the place of issuance and the evolution of the widening of bid ask spreads. A financial instrument is regarded as not quoted in an active market: if there is little observation of transaction prices as an inherent characteristic of the instrument; when there is a significant decline in the volume and level of trading activity; in case of significant illiquidity; if observable prices cannot be considered as representing fair value because of dislocated market conditions. Characteristics of inactive markets can therefore be very different in nature, inherent to the instrument or indicative of a change in the conditions prevailing in certain markets. 1.6.3 Assets and liabilities not quoted in an active market Fair values of assets and liabilities that are not traded in an active market are estimated using: external and independent pricing services; or valuation techniques. Fair values of assets and liabilities that are not traded in active market mainly based on observable market data are disclosed as level 2 in the Notes to the Consolidated Financial Statements. Fair values mainly not based on observable market data are disclosed as level 3 in the Notes to the Consolidated Financial Statements. 1.6.3.1 No active market: use of external pricing services External pricing services may be fund asset managers in the case of non-consolidated investments in funds or brokers. To the extent possible, the Group collects quotes from external pricing providers as inputs to measure fair value. Prices received may form tight clusters or dispersed quotes which may then lead to the use of valuation techniques. The dispersion of quotes received may be an indication of the large range of assumptions used by Half Year 2023 Financial Report 74 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 external pricing providers given the limited number of transactions to be observed or reflect the existence of distress transactions. In addition, given current market conditions since the financial crisis and the persistency of complete inactivity of some markets since then, many financial institutions closed their desks dedicated to structured assets deals and are no longer in a position to deliver meaningful quotes. 1.6.3.2 No active market: use of valuation techniques The objective of valuation techniques is to arrive at the price at which an orderly transaction would take place between market participants (a willing buyer and a willing seller) at the measurement date. Valuation techniques include: market approach: the consideration of recent prices and other relevant information generated by market transactions involving substantially similar assets or liabilities; income approach: use of discounted cash flow analysis, option pricing models, and other present value techniques to convert future amounts to a single current (i.e. discounted) amount; cost approach: the consideration of amounts that would currently be required to construct or replace the service capacity of an asset. Valuation techniques are subjective in nature and significant judgment is involved in establishing fair values. They include recent arm’s length transactions between knowledgeable willing parties on similar assets if available and representative of fair value and involve various assumptions regarding the underlying price, yield curve, correlations, volatility, default rates and other factors. Unlisted equity instruments valuation is based on cross checks using different methodologies such as discounted cash flows techniques, price earning ratios multiples, adjusted net asset values, taking into account recent transactions on instruments which are substantially the same if concluded at arm’s length between knowledgeable willing parties, if any. The use of valuation techniques and assumptions could produce different estimates of fair value. However, valuations are determined using generally accepted models (discounted cash flows, Black & Scholes models, etc.) based on quoted market prices for similar instruments or underlyings (index, credit spread, etc.) whenever such directly observable data are available and valuations are adjusted for liquidity and credit risk. Valuation techniques may be used when there is little observation of transaction prices as an inherent characteristic of the market, when quotes made available by external pricing providers are too dispersed or when market conditions are so dislocated that observed data cannot be used or need significant adjustments. Internal mark to model valuations are, therefore, either normal market practices for certain assets and liabilities inherently scarcely traded or exceptional processes implemented due to specific market conditions. 1.6.3.3 Use of valuation techniques in dislocated markets The dislocation of certain markets may be evidenced by various factors. For example, a very large widening of bid ask spreads may be a helpful indicator in understanding whether market participants are willing to transact. The dislocation of markets may also be suspected in cases of wide dispersion in the prices (over time or among market participants), small number of transactions, closing down of primary and/or secondary markets, forced transactions motivated by needs of liquidity or other difficult financial conditions with insufficient time to market the assets to be sold, and large bulk sales to exit such markets at all costs that may involve side arrangements (such as sellers providing finance for a sale to a buyer). In such cases, the Group uses valuation techniques including observable data whenever possible and relevant, adjusted if needed to develop the best estimate of fair value, including adequate risk premiums, or develops a valuation model based on unobservable data representing estimates of assumptions that willing market participants would use when prices are not current, relevant or available without undue costs and efforts: in inactive markets, transactions may be inputs when measuring fair value, but would likely not be determinative and unobservable data may be more appropriate than observable inputs. Half Year 2023 Financial Report 75 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.7 SEGMENT REPORTING The segmental analysis provided in AXA’s Consolidated Financial Statements reflects six operating business segments. These segments are determined on the basis of geographies or transversally for entities operating in various jurisdictions, and include “France”, “Europe”, “AXA XL”, “Asia, Africa & EME-LATAM1”, “AXA Investment Managers” and “Transversal & Other” segments. 1.8 INTANGIBLE ASSETS 1.8.1 Goodwill and impairment of goodwill Goodwill is considered to have an indefinite useful life and is therefore not amortized but subject to a regular test for impairment. Impairment tests are performed at least annually. Impairment of goodwill is not reversible. AXA performs an impairment test of goodwill by cash generating unit, using valuation approaches that rely on parameters such as market indicators, market value of assets, market value of liabilities and future operating profits, derived on the basis of operational and economic assumptions in order to determine any significant adverse changes that might lead to the non-recoverability of goodwill. Compliant with IAS 36 – Impairment of Assets, within each cash generating unit, a comparison is made between net book value and the recoverable value (equal to the higher of fair value less costs to sell and value in use). An impairment loss is recognized for a cash generating unit if, and only if, the recoverable amount of the unit or group of units is lower than the carrying amount of the unit or group of units. Value in use consists of the net assets and the value placed on expected future earnings from existing and new business. Fair value less costs to sell is determined in compliance with IFRS 13 as described in paragraph 1.6. The fair value approach is based on risk neutral valuation techniques applied to risk adjusted future cashflows. The fair value is made of: the current shareholders’ net asset value; the profitability of the business in force, determined by projecting the expected margins from the in force portfolio of insurance contracts until the end of their coverage period; and the profitability of future new business, computed on the basis of multiples of a standardized year of new business contribution (present value of projected future distributable profits generated from the business written in the current year). The determination of the future earnings arising from the new business relies upon the use of operational, technical and economic assumptions, all of which are compliant with the requirements of the different regulatory frameworks and regularly reviewed by independent parties. The recoverable value of the Life and Savings segment is first assessed on a risk free basis (consistent with fair value) and then on the basis of market assumptions aligned with a Real World valuation (value in use) if the recoverable value determined on a risk free basis is lower than the carrying amount. The recoverable value of the Property & Casualty segment is built upon cash flow projections based on the business plans (using IFRS principles) which are approved by AXA management, and discounted using a risk adjusted rate (value in use). Cash flows beyond that period are extrapolated using a steady growth rate and a terminal value. 1 Europe – Middle East – Latin America Half Year 2023 Financial Report 76 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.8.2 Other intangible assets Other intangible assets include the following categories: software developed for internal use for which direct costs are capitalized and amortized on a straight-line basis over the assets’ estimated useful lives; customer relationships intangibles relating to future insurance contracts as well as distribution agreements recognized as a result of business combinations in accordance with the guidance described in paragraph 1.3.2.2. If these assets have a finite useful life, they are amortized on a straight-line basis over their estimated life. In all cases, they are subject to impairment tests, at each closing date for assets with a finite useful life and at least annually for other assets. In the event of a significant decline in value, an impairment is booked corresponding to the difference between the carrying value and the higher of value in use and fair value less costs to sell; Deferred Origination Costs (“DOC”) correspond to the deferred contract costs (such as incremental costs of obtaining a contract or costs directly related to fulfilling a contract) of investment contracts with no discretionary participation features (refer to paragraph 1.15) but with an investment management service. They are amortized by taking into account projections of fees collected over the life of the contracts. The amortization of DOC is reviewed at each closing date to reflect changes in assumptions and experience. These assets are also tested for recoverability. As DOC are reported gross of unearned fees reserves, these unearned fees reserves are separately recognized as liabilities and are amortized over the contract term using the same amortization approach as the one used for DOC. 1.9 INVESTMENTS FROM INSURANCE, BANKING AND OTHER ACTIVITIES Investments from insurance activities (including assets backing contracts where the financial risk is borne by policyholders) and investments from banking and other activities cover investments in real estate properties and financial investments. Investments backing contracts where the financial risk is borne by policyholders are presented in a separate aggregate of the statement of financial position as a part of investments from insurance activities. This presentation is considered more relevant for the users and consistent with the liquidity order recommended by IAS 1 for financial institutions, since the risks are borne by policyholders, whatever the type of assets backing liabilities (investment in real estate properties, debt instruments or equity instruments, etc.). 1.9.1 Investment in real estate properties Investments in real estate properties include buildings and assimilated assets (such as infrastructures) owned directly or through consolidated real estate entities. All investments in real estate properties (including those totally or partially backing liabilities arising from insurance or investment contracts measured using the Variable Fee Approach described in paragraph 1.14.7) are recognized at cost. The properties components are depreciated over their estimated useful lives, also considering their residual value if it may be reliably estimated. In case of unrealized loss over 15%, an impairment is recognized for the difference between the net book value of the investment property and the fair value of the asset based on an independent valuation. Furthermore, at the level of each reporting entity, if the cumulated amount of unrealized losses under 15% (without offsetting with unrealized gains) represents more than 10% of the cumulated net cost of real estate assets, additional impairment is booked on a line-by-line approach until the 10% threshold is reached. Half Year 2023 Financial Report 77 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 If, in subsequent periods, the appraisal value rises to at least 15% more than the net carrying value, previously recorded impairment is reversed to the extent of the difference between (i) the net carrying value and (ii) the lower of the appraisal value and the depreciated cost (before impairment). 1.9.2 Financial investments 1.9.2.1 Classification of financial assets Financial assets held by AXA include notably debt instruments, equity instruments, loans, receivables and investments in non-consolidated investments funds. These instruments are held directly or through controlled investment funds. The classification of financial assets reflects the basis on which those assets are subsequently measured in the statement of financial position and how gains and losses generated by those assets are reported. The classification of financial assets (including the application of classification options) is assessed at initial recognition applying the guidance below and cannot be modified afterwards, unless if, in extremely rare cases, the business model in which those financial assets are held changes. Financial assets held directly Financial assets are classified in the three following measurement categories, based on the business model in which those financial assets are held and on the characteristics of their contractual cash flows: a financial asset is measured at amortized cost if both (i) the asset is held within a business model whose objective is achieved by collecting contractual cash flows from the assets held, and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (“SPPI”); if both (i) the asset is held within a business model whose objective is achieved by collecting contractual cash flows and selling financial assets (which is the major business model for AXA’s investments in debt instruments), and (ii) the contractual terms of cash flows are SPPI, the financial asset is measured at fair value through other comprehensive income (“FV OCI”) and realized gains or losses are recycled through profit or loss upon sale; assets not fitting either of these categories are measured at fair value through profit or loss (“FV P&L”). In addition to the general classification guidance above, the Group uses the following classification options: optional FV OCI designation for investments in equity instruments (other than those held for trading), also referred to as “FV OCI without recycling”. When applying this option, all subsequent changes in fair value on concerned equity instruments are presented in OCI and never recycled to profit or loss ; however, the corresponding cumulative gains or losses are transferred to retained earnings on derecognition. Dividends received on those instruments are recognized in profit or loss. AXA applies this optional designation for most of equity securities held except those backing contracts where the financial risk is borne by policyholders, measured at a FV P&L basis; optional FV P&L designation (Fair Value Option for financial assets). AXA applies this option for some financial assets that otherwise meet the requirements to be measured at amortized cost or at FV OCI, if doing so eliminates or significantly reduces an accounting mismatch in profit or loss, for example, for some loans backing insurance contracts measured using the Variable Fee Approach described in paragraph 1.14.7. Financial assets held through consolidated investment funds Half Year 2023 Financial Report 78 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 Assets held through consolidated investment funds are classified: either as assets of the “Core Investment Portfolios” which include assets backing liabilities arising from insurance and investment contracts, managed according to AXA’s Assets and Liabilities strategy; or as assets of the “Satellite Investment Portfolios”, reflecting the strategic asset allocation based on a dynamic asset management aiming at maximizing returns. Those portfolios are managed, and their performance is evaluated on a fair value basis. Underlying financial instruments held in the “Core Investment Portfolios” are classified on a line-by-line basis as if they were held directly. Debt instruments held in those funds are managed within a business model whose objective is achieved by collecting contractual cash flows and selling financial assets and, by consequence, are measured at FV OCI to the extent that their contractual cash flows are SPPI on the principal amount outstanding. Underlying financial instruments held in the “Satellite Investment Portfolios” are held within a business model whose objective is achieved neither by collecting contractual cash flows nor collecting contractual cash flows and selling financial assets and are, therefore, accounted for at FV P&L. 1.9.2.2 Impairment of financial investments The impairment applies to debt instruments, loans and receivables measured at amortized cost or at FV OCI and reflects Expected Credit Losses (“ECL”) on those financial assets. The Group measures ECL allowances at an amount equal to: 12-month ECL resulting from default events that are possible within the 12 months after the reporting date and recognized for financial instruments for which the credit risk has not increased significantly since initial recognition (it is also assumed that the credit risk has not increased significantly since initial recognition if the financial instrument has low credit risk at the reporting date); or lifetime ECL resulting from all possible default events over the expected life of the financial instrument and calculated for financial instruments for which there have been significant increases in credit risk since initial recognition, as well as for financial instruments for which a credit event has occurred since their initial recognition. ECL for receivables that are within the scope of IFRS 9, typically outstanding for a relatively short period of time, are always measured at an amount equal to lifetime ECL. Financial instruments for which 12-month ECL are recognized referred to as “Stage 1” financial instruments. Financial instruments for which lifetime ECL are recognized but for which no credit event has occurred are referred to as “Stage 2” financial instruments. Finally, financial instruments for which a credit event has occurred since their initial recognition are referred to as credit-impaired, or “Stage 3” financial instruments. To perform the impairment stage allocation, at each reporting date, the Group assesses, for each financial instrument within the scope of the ECL calculation: whether the financial instrument has low credit risk; whether the credit risk on the financial instrument has increased significantly since initial recognition; whether the credit risk on the financial instrument previously classified in Stage 2 has improved since the previous reporting date; and whether a credit event (default) has occurred. The approach used by AXA to perform the impairment stage allocation includes the following components: the quantitative assessment designed to detect, for all financial assets within the scope of the ECL calculation, significant increases and decreases in credit risk. This quantitative assessment is based on Half Year 2023 Financial Report 79 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 the AXA’s IFRS 9 rating which captures all relevant information, including forward-looking information, required to identify significant changes in credit risk since initial recognition based on fact and circumstances specific to the financial asset; and the qualitative assessment, based on expert judgment, performed to confirm transfers between Stage 1 and Stages 2 or 3 for material exposures within the scope derived from the quantitative assessment. ECL is defined at each financial reporting date based on the key inputs which are the probability of the default, the magnitude of the potential credit loss after any potential recovery and the exposure to the risk of default determined as the financial instrument’s gross carrying amount plus the accrued interests at the closing date. The amount of ECL is updated at each reporting date to reflect changes in credit risk on the concerned financial instruments. Any increase in credit risk gives rise to an additional ECL allowance. Previously recognized ECL allowances are reversed when the corresponding credit risk improves. ECL allowances and reversals are recognized in profit or loss and, as a counterpart, affect: for the financial instruments measured at amortized cost, their carrying value in the statement of financial position; for the financial instruments measured at FV OCI, the amount of unrealized gains or losses on those instruments accumulated in the OCI. 1.9.3 Repurchase agreements and securities lending The Group is party to repurchase agreements and securities lending transactions under which financial assets are sold to a counterparty, subject to a simultaneous agreement to repurchase these financial assets at a certain later date, at an agreed price. Since substantially all of the risks and rewards of the financial assets remain with the Group over the entire lifetime of the transaction, the Group does not derecognize the financial assets. The liability in balance of the cash received is reported separately in the statement of financial position. Interest expense from repurchase and security lending transactions is accrued over the duration of the agreements. Additionally, the Group is party to total return swaps under which financial assets are sold to a counterparty with a corresponding agreement. Cash flows equal to those of the underlying assets will be remitted to the Group in exchange for specified payments taking into account any increase or decline in the fair value of the assets. This results in substantially all of the risks and rewards of the financial assets remaining with the Group. As such, the Group does not derecognize the financial assets. The Group is also party to reverse repurchase agreements under which financial assets are purchased from a counterparty, subject to a simultaneous agreement to return these financial assets at a certain later date, at an agreed price. If substantially all of the risks and rewards of the securities remain with the counterparty over the entire lifetime of the agreement of the transaction, the securities concerned are not recognized as financial assets of the Group. The asset in face of the cash disbursed is recorded under financial investments, except for transactions arising from banking activities, for which it is recorded as a separate asset. Interest income on reverse repurchase agreements is accrued over the duration of the agreements. 1.10 DERIVATIVE INSTRUMENTS Derivatives are initially recognized at fair value at purchase date and are subsequently re-measured at their fair value at the reporting date. Unrealized gains and losses are recognized in the statement of profit or loss unless they relate to a qualifying hedge relationship as described below. Half Year 2023 Financial Report 80 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 In the statement of financial position, derivatives are presented in separate line items, as either an asset or a liability depending upon the fair value position at the reporting date, with no offsetting, regardless of whether these derivatives meet the criteria for hedge accounting. The Group designates certain derivatives as either: (i) hedging of highly probable expected future transactions (cash flow hedge), or (ii) hedging of the fair value of recognized assets or liabilities or of a firm commitment (fair value hedge), or (iii) hedging of net investments in foreign operations. The Group formally documents, at inception of a designated hedging relationship, its risk management objectives and strategy for undertaking the hedge. This documentation includes the identification of the hedged item and of the hedging instrument, the nature of the risk being hedged, the economic relationship between the hedged item and the hedging instrument, including whether the changes in the values of the hedged item and the hedging instrument are expected to offset each other, and how the assessment of whether the hedging relationship meets the hedge effectiveness requirements will be performed, including its analysis of the sources of hedge ineffectiveness. The hedging relationship documentation is updated on an ongoing basis. 1.10.1 Cash flow hedge A separate component of equity, referred to as cash flow hedge reserve, is adjusted through other comprehensive income (“OCI”) for the lower of the following amounts: gain or loss on the hedging instrument cumulated since inception of the hedge, and change in fair value of the hedged item cumulated since inception of the hedge (i.e. the present value of the cumulative change in the hedged expected future cash flows). If the cumulative gain or loss on the hedging instrument exceeds the change in fair value of the hedged item (sometimes referred to as an ‘over-hedge’), the related ineffectiveness is recognized in profit or loss. If the cumulative gain or loss on the hedging instrument is lower than the change in fair value the hedged item (sometimes referred to as an ‘under-hedge’), no ineffectiveness appears. Cumulative gain or loss in shareholders’ equity is recycled in the statement of profit or loss when the hedged underlying item impacts the profit or loss for the period (for example when the hedged future transaction is recognized. When a hedging instrument reaches its maturity date or is sold, or when a hedge no longer qualifies for hedge accounting, the cumulative gains or losses in shareholders’ equity are released in profit or loss when the initially hedged future transaction ultimately impacts the statement of profit or loss. If the hedged future cash flows are no longer expected to occur, the cumulative gains or losses are immediately reclassified from shareholders’ equity to profit or loss. 1.10.2 Fair value hedge Changes in the fair value of derivatives designated and qualifying as fair value hedges of equity instruments designated at FV OCI are recorded in OCI, without recycling into profit or loss, together with changes in fair value of the hedged equity instrument. Changes in the fair value of derivatives designated and qualifying as fair value hedges of other financial instruments are recorded in the statement of profit or loss, together with any changes in the fair value of the hedged asset or liability. Therefore, the gain or loss relating to any ineffective portion is directly recognized in the statement of profit or loss. 1.10.3 Net investment hedge The accounting of net investments in foreign operations hedge is similar to the accounting of cash flow hedge. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in shareholders’ Half Year 2023 Financial Report 81 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 equity; the gain or loss relating to the ineffective portion is recognized in the statement of profit or loss. Cumulative gains and losses in shareholders’ equity impact the statement of profit or loss only on disposal of the foreign operations. 1.10.4 Cost of hedging approach When only a part of a derivative is designated as the hedging instrument (for example, the change in intrinsic value of a purchased option or changes in the spot element of a forward contract), the Group applies a specific accounting mechanism in IFRS 9 referred to as “cost of hedging approach” and resulting in less volatility in profit or loss. Conversely, the cost of hedging approach is not applied when hedging equity instruments are measured at FV OCI without recycling. Consistent with the cost of hedging approach, if only changes in intrinsic value of an option are designated as the hedging instrument, the changes in fair value of the time value of the option are deferred in OCI. This cumulated amount is removed from OCI and recognized in profit or loss following the timing that depends on the nature of the hedged item: if the hedged item is transaction related (e.g. a forecast purchase denominated in a foreign currency) – when the hedged transaction affects profit or loss, if the hedged item is time-period related (e.g. the fair value of an item for a period of time) – over the period of the hedge. The identical approach applies to: the changes in forward points of a forward contract when only the change in the spot element of such a contract is designated as the hedging instrument, and the changes in the foreign currency basis spread when separated from a financial instrument and excluded from the designation of that financial instrument as the hedging instrument. 1.10.5 Derivatives not qualifying for hedge accounting Most of the derivatives used by the Group are purchased with a view to hedge, or for example to use such instruments as an alternative to gain exposure to certain asset classes through “synthetic positions”. However, given IFRS 9 constraints, only qualifying hedges are eligible to hedge accounting provisions described above. Changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognized in the statement of profit or loss. The Group holds financial investments that also include embedded derivatives. A derivative embedded in a contract where the host is a financial asset in the scope of IFRS 9 is not separated. Instead, the hybrid financial instrument as a whole is assessed for classification applying the guidance described in paragraph 1.9.2.1. Conversely, if the host contract is a financial liability within the scope of IFRS 9 and is not measured at FV P&L, the embedded derivative is separated from the host contract to the extent that the impact is deemed material, unless the economic characteristics and risks of both the embedded derivative and the host contract are closely related. In this case, the host contract is accounted for as a financial liability within the scope of IFRS 9, and the separated derivative is accounted for at FV P&L and might be eligible as a hedging instrument. 1.11 ASSETS/LIABILITIES HELD FOR SALE AND ASSETS/LIABILITIES INCLUDING DISCONTINUED OPERATIONS These comprise assets, particularly buildings or operations, intended to be sold or discontinued within twelve months. Subsidiaries held for sale remain within the scope of consolidation until the date on which the Group loses effective control. The assets and activities (assets and liabilities) concerned are measured at the lower of net Half Year 2023 Financial Report 82 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 carrying value and fair value net of selling costs. They are presented in separate asset and liability items on the statement of financial position. The liabilities of subsidiaries (excluding shareholders’ equity) held for sale are entered separately on the liability side of the statement of financial position, with no netting against assets. In the event of a discontinuation of operations representing either a business line, a main and distinct geographical region or a subsidiary acquired solely with a view to reselling, their after-tax contribution is stated on a separate line of the statement of profit or loss. For comparison purposes, the same applies to the presentation of income statements relating to previous periods that are included in the financial statements. This separate line also includes the post-tax gain/loss recognized on the disposal of the discontinued operation at the date of loss of control. 1.12 CASH AND CASH EQUIVALENTS Cash comprises cash on hand and demand deposits while cash equivalents are short-term, liquid investments that are readily convertible to cash and which are subject to low volatility. 1.13 SHARE CAPITAL AND SHAREHOLDERS’ EQUITY 1.13.1 Share capital Ordinary shares are classified in shareholders’ equity when there is no obligation to transfer cash or other assets to the holders. Additional costs (net of tax) directly attributable to the issue of equity instruments are shown in shareholders’ equity as a deduction to the proceeds. 1.13.2 Undated subordinated debt Undated subordinated debt and any related interest charges are classified either in shareholders’ equity (in the “other reserves” aggregate) or as liabilities depending on contract clauses without taking into consideration the prospect of redemption under economic constraints (e.g. step up clauses or shareholders’ expectations). 1.13.3 Compound financial instruments Any financial instrument issued by the Group with an equity component (for example certain options granted to convert the debt instrument into an equity instrument of the Company) and a liability component (a contractual obligation to deliver cash) is classified separately on the liability side of the statement of financial position with the equity component reported in Group shareholders’ equity (in the “other reserves” aggregate) and the liability component reported in financing debt. Gains and losses relating to redemptions or refinancing of the equity component are recognized as changes to shareholders’ equity. 1.13.4 Treasury shares Treasury shares and any directly related costs are generally recorded as a deduction to consolidated shareholders’ equity. Where those treasury shares are subsequently sold or reissued, any consideration received is included in consolidated shareholders’ equity, net of any directly related costs and tax effects. As an exception to the foregoing, when treasury shares are reacquired to be used as a part of an investment fund that provides investors with benefits determined by units in the fund, or as an underlying item for insurance contracts with direct participation features (or investment contracts with discretionary participation features), those treasury shares are recognized as financial assets measured at fair value through profit or loss in accordance with the option provided by IFRS 9 and therefore are not deducted from shareholders’ equity. Half Year 2023 Financial Report 83 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.13.5 Preferred shares Preferred shares issued by the Group are recorded as equity when there is no contractual obligation to redeem and there is no contractual obligation to deliver cash or other financial asset. 1.14 INSURANCE CONTRACTS, PARTICIPATION FEATURES AND REINSURANCE CONTRACTS HELD INVESTMENT CONTRACTS WITH DISCRETIONARY In the statement of financial position, (i) insurance contracts and investment contracts with discretionary participation features issued and (ii) reinsurance contracts held are aggregated by portfolios and presented separately, depending on their balances at the end of the reporting period, leading to the four following categories: the carrying amount of portfolios of insurance contracts and investment contracts with discretionary participation features that are assets; the carrying amount of portfolios of insurance contracts and investment contracts with discretionary participation features that are liabilities; the carrying amount of portfolios of reinsurance contracts held that are assets; and the carrying amount of portfolios of reinsurance contracts held that are liabilities. IFRS 17 – Insurance Contracts applies to these contracts, such as detailed in paragraphs 1.14.1 to 1.14.9 of this note. Significant judgements and estimates are made by the Group in applying IFRS 17. The judgements that have the most significant effects on the amounts recognized in the consolidated financial statements relate to the classification of contracts, their level of aggregation and their measurement. In particular, the Group makes significant judgments regarding inputs, assumptions concerning the future and other sources of uncertainty at the reporting date and uses estimation techniques to measure the insurance contracts. These assumptions and estimates are reviewed on an ongoing basis, based on changes in facts and circumstances (including market changes), which leads to adjustments in the measurement of contracts. The Group uses notably assumptions to project future cash flows and ensures to design them to adequately reflect any uncertainty underlying the cash flows. Non-market assumptions, based on latest best estimate assumptions (historical data and expert judgment), include the following information: loss ratios, best estimate schedule of lapses, policyholder behavior (e.g. dynamic lapses, election to guaranteed annuity), and management actions (e.g. discretionary benefits distribution policy). In respect of estimation techniques used to measure the non-Life technical contracts, different actuarial projection models are applied, based on (i) the portfolios’ main features (in terms of risk drivers, underwriting and claims policies), (ii) quality, relevance and consistency over time of available statistical data, (iii) selection of relevant actuarial assumptions and models, and (iv) ability to economically interpret and justify the projected range of results, both quantitatively and qualitatively. In respect of estimation techniques used to measure the Life and Savings contracts, they are based on projections of the key components of statutory financial statements, namely income or expenses that relate to policyholders, beneficiary obligations and assets backing those liabilities. The main assumptions that may generate material changes in the estimate of the future cash flows relate to (i) mortality, morbidity, and longevity rates, (ii) policyholder behavior (due to lapse and surrender), (iii) participation percentages and crediting rates, and (i) overhead expenses. Half Year 2023 Financial Report 84 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 More specifically, assumptions made about the discount rates, the confidence level for risk adjustment for non- financial risk, the pattern of the CSM release for direct participating contracts are explained in paragraph 1.14.5 and quantitative information about these assumptions is disclosed in Note 7. 1.14.1 Definition and classification An insurance contract is a contract under which an issuer accepts significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future event (an “insured event”) adversely affects this policyholder. The assessment whether a contract transfers a significant insurance risk considers all substantive rights and obligations (including those arising from law or regulation) and is based on the use of judgement. In substance, insurance contract services provided to a policyholder include the insurance coverage and may also include an investment-return service, corresponding to the generation of an investment return for the policyholder having underwritten an insurance contract without direct participation features, and an investment-related service corresponding to the management of underlying items on behalf of the policyholder having underwritten an insurance contracts with direct participation features. Insurance contracts with direct participation features The Group classifies as insurance contract with direct participation features (i.e. direct participating contract) a contract for which (i) the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items, (ii) the Group expects to pay to the policyholder an amount equal to a substantial share of the fair value returns on the underlying items; and (iii) the Group expects a substantial proportion of any change in the amounts to be paid to the policyholder to vary with the change in fair value of the underlying items. In addition to the transfer of significant insurance risk to the issuer, a direct participating contract is therefore based on a substantially investment-related service under which an entity promises an investment return on underlying items (the link must be enforceable), as well as on a contractually specified participation. The underlying items determine some of the amounts payable to a policyholder and can comprise any items (e.g. a reference portfolio of assets, technical items, the net assets of the entity, or a specified subset of the net assets of the entity). The nature of underlying items mainly depends on local regulation and products' features. The Group assesses whether the conditions above are met using its expectations at inception of the contract and needs not reassess the conditions afterwards unless the contract is modified. Insurance contracts without direct participation features The Group classifies as insurance contract without direct participation features an insurance contract that is not an insurance contract with direct participation features, namely: an insurance contract with indirect participation features (i.e. indirect participating contract) because the payment to policyholders depends upon the return on underlying items, without meeting the criteria defined for insurance contracts with direct participation features; or an insurance contract without any participation features (i.e. non-participating contract) as the payment to policyholders does not depend upon the return on underlying items. Investment contracts with discretionary participation features The Group classifies as investment contract with discretionary participation features a financial instrument that provides a particular investor with the contractual right to receive both an amount not subject to the discretion of the issuer (usually the account value or the value of the unit-linked) and an additional amount subject to the discretion of the issuer, which is expected to be a significant portion of the total contractual benefits. Even though these contracts do not meet the definition of an insurance contract (as they do not include a transfer of significant insurance risk), IFRS 17 applies to those contracts as the Group also issues insurance contracts. Following IFRS 17 Half Year 2023 Financial Report 85 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 guidance, the investment contracts with discretionary participation features issued by AXA have been assessed as meeting the criteria of insurance contracts with direct participation features. Furthermore, as described in paragraph 1.15 of this note, the Group holds investments contracts with no discretionary participation features for which IFRS 9 – Financial Instruments applies. 1.14.2 Separating components from insurance contracts The following components are separated from contracts: (i) distinct embedded derivatives, if they meet certain specified criteria, (ii) distinct investment components, and (iii) distinct performance obligations to provide non- insurance goods and services. These components are accounted for separately by the Group in accordance with the related standards. After having performed this separation, the Group applies IFRS 17 to all remaining components of the host insurance contract. All these remaining components, including embedded derivatives and investment components that have not been separated from the host contract, are considered as a single insurance contract in substance. 1.14.3 Level of aggregation of insurance contracts The level of aggregation of contracts is the basis for measuring the contracts and their corresponding profitability. To define the level of aggregation to be used, each entity within the Group applies the process hereafter: first, portfolios of contracts are identified, each of them only comprising contracts that are subject to similar risks and managed together; then, these portfolios are broken down by annual cohort (IFRS 17 as issued by the IASB preventing contracts issued more than one year apart from being included in the same group). However, as an exception, AXA has chosen the option allowed by the European Union not to apply this requirement to: o groups of insurance contracts with direct participation features and groups of investment contracts with discretionary participation features, having cash flows that affect or are affected by cash flows to policyholders of other contracts; and o groups of insurance contracts that are managed across generations of contracts and that meet certain conditions and have been approved by supervisory authorities for the application of the matching adjustment; finally, a further split is performed depending on the level of profitability, with notably a separate group for contracts that are onerous at initial recognition. 1.14.4 Initial recognition The groups of insurance contracts issued are recognized from the earliest of (i) the beginning of the coverage period of the group of contracts, which is the general case, (ii) the date when the first payment from a policyholder in the group becomes due, and (iii) for a group of onerous contracts, the date when this group becomes onerous. For investment contracts with discretionary participation features, the date of initial recognition is the date when AXA becomes party to the contract. 1.14.5 The General Measurement Model or “BBA” IFRS 17 requires applying by default the General Measurement Model of insurance contracts, called the “Building Block Approach” (“BBA”) as it is based on the following building blocks: the Fulfilment Cash Flows (“FCF”), which comprise: Half Year 2023 Financial Report 86 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 o probability-weighted estimates of future cash flows; o an adjustment to reflect the time value of money (i.e. discounting) and the financial risks associated with those future cash flows; and o a risk adjustment for non-financial risk; the Contractual Service Margin (“CSM”), which is calculated at inception as the difference between the premium paid by the policyholder and the expected FCF, and corresponds to the present value of future expected profits. The Group has adopted a “year-to-date” approach, which consists, for the annual reporting period, in changing the treatment of accounting estimates made in its previous interim financial statements (i.e. as at end June). The BBA mainly applies to AXA long term Protection and Health business (notably in Japan), as well as to few General Account savings contracts with no direct participation features (almost exclusively in Belgium and, to a lesser extent, in Spain) and assumed long term reinsurance treaties (including reinsurance of savings contracts with direct participation features such as Prefon in France). Insurance acquisition cash flows (“IACF”) The insurance acquisition cash flows arise from the costs of selling, underwriting and starting a group of insurance contracts. When these IACF are incurred prior to the date of initial recognition of the group of insurance contracts, such IACF are recognized as an asset, which is deducted from the carrying amounts of insurance contracts. The recoverability of assets for IACF is assessed at the end of each reporting period, if facts and circumstances indicate that the asset may be impaired. If an impairment loss is identified, the carrying amount of the asset for IACF is adjusted and the impairment loss is recognized in the statement of profit or loss. When the group of insurance contract is recognized, the corresponding asset for IACF is derecognized and included in the measurement of that group. Estimates of future cash flows The FCF notably include all the probability-weighted estimates of future cash flows within the boundary of each contract already recognized. Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period in which AXA can compel the policyholder to pay the premiums or in which the entity has a substantive obligation to provide the policyholder with services. A substantive obligation to provide services ends notably when AXA has the practical ability to reassess the risks of the policyholder and, as a result, can set a price or level of benefits that fully reflects those risks. The unbiased estimate of the expected future cash flows within the boundary of insurance contracts, including the cost of options and guarantees, are based on a probability-weighted mean of the full range of possible outcomes to factor the uncertainty about the timing and amounts of the cash flows, determined from the perspective of the Group, provided that the estimates are consistent with observable market prices for market variables reflecting conditions existing at the measurement date. The cash flows attributable to the group of insurance contracts include premiums from the policyholders, claim payments (including reported, incurred and all the future claims for which AXA has a substantive obligation net of recoveries from claims), profit sharing to policyholders, as well as payments arising from the policyholders exercising options, expenses and commissions, costs related to investment activities performed for the benefit of policyholders (i.e. including investment-return services and investment-related services). The following cash flows are not included in the contracts boundary: investment returns as they are recognized, measured and presented separately under other applicable IFRSs, costs of investment activities performed for the benefit of shareholders, payments or receipts that arise under reinsurance contracts held (as they are accounted for separately), those that may arise from future insurance contracts, overheads that do not provide any economic benefits to fulfilling insurance contracts, income tax payments and receipts AXA does not pay or receive in a Half Year 2023 Financial Report 87 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 fiduciary capacity, flows arising from components separated from the insurance contracts and accounted for using other applicable IFRSs. If insurance premiums are first collected by an intermediary and then transferred to AXA at a later date, the premium receivables from the intermediary are generally accounted for as future cash flows within the boundary of insurance contracts included in the measurement of the corresponding group of insurance contracts applying IFRS 17. Discount rate AXA has defined a Group methodology for the calibration and the generation of “IFRS 17 yield curves” used to discount the estimate of future cash flows within the boundary of contracts, consistent with the IFRS 17 requirements and applied homogeneously across all AXA entities. If the standard does not impose a particular estimation technique to determine the yield curves, AXA has chosen to adopt a bottom-up approach as it has been widely used for many years in the EEV and Solvency II frameworks. This approach consists in using a Basic Risk-Free Rate (“RFR”), based on swaps for most currencies and government bonds for others, adjusted by adding on a liquidity premium (“LP”) allowance to reflect the remuneration of illiquidity observed on traded assets until the Last Liquid Point (“LLP”), meaning the longest maturity for which there are enough traded bonds. An Ultimate Forward Rate (“UFR”) macro-economically defined as the sum of the average of past real interest rates and central bank’s target inflation is also considered. Discount rates between the LLP and the UFR maturities are obtained by extrapolation. The yield curves used by AXA for main currencies are summarized in Note 7.5. The Group has chosen to apply the “OCI option” (refer to paragraph 1.21.2) to all portfolio of insurance contracts, allowing to recognize the impact of changes in discount rates through Other Comprehensive Income. Risk adjustment for non-financial risk (“RA”) The measurement of the risk adjustment reflects the compensation required by AXA for bearing the uncertainty around the amount and timing of the future cash flows that arises from non-financial risk as AXA fulfils insurance contracts. In this respect, the Group considers the 62.5th-67.5th percentile range as the adequate level of prudence on underlying insurance liabilities. The determination of the risk adjustment follows a value-at-risk type approach, reflecting a retained confidence level with reference to the risk drivers of reserves. The value-at-risk is the maximum loss within a certain confidence level. The implementation is slightly different between Life and Savings and Property and Casualty businesses. For Life and Savings, groups of contracts are first shocked, risk factor by risk factor, up to the retained confidence level to assess the change in the present value of future cash flows. Then, diversification benefits between risks implicit to the entity’s portfolio are considered by applying correlation factors between risks. For Property and Casualty liabilities for incurred claims, a direct value-at-risk calculation, reflecting the retained confidence level, is applied to the full probability distribution of the reserves. Finally, a diversification effect between AXA entities is considered to reflect the fact that a same risk is unlikely to impact all the Group’s entities at the same time. The changes in the risk adjustment for non-financial risk are presented in the insurance service result (i.e. they are not disaggregated into an insurance service component and an insurance finance component). Contractual Service Margin (“CSM”) For a group of insurance contracts, the CSM represents the unearned profit attributable to the shareholders. At inception, the CSM is the amount that offsets the FCF, less the derecognition of any IACF (see above), or the value of the AXA’s rights in excess of the value of its obligations under the insurance contracts. On the other hand, the Half Year 2023 Financial Report 88 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 CSM cannot be negative. Consequently, if the expected cash outflows exceed the expected cash inflows , the group of contracts is onerous and the loss, which corresponds to the expected net cash outflow, is expensed immediately in the statement of profit or loss. At the end of each subsequent reporting period, AXA remeasures the liability for remaining coverage (”LRC”), which comprises the FCF related to future services and the CSM of the group of contracts at that date. Hence, the CSM is adjusted at each subsequent reporting period for changes in expected future cash flows driven by changes in technical assumptions (death, morbidity, longevity, surrenders, expenses, future premiums…). Interest is also accreted on the CSM at rates locked in at initial recognition of a contract (i.e. discount rate used at inception to determine the present value of the estimated cash flows). Moreover, the CSM is progressively recognized and included in insurance revenue in the consolidated statement of profit or loss over the coverage period of insurance contracts (refer to paragraph 1.19.1). The portion of the CSM to be released as part of insurance revenue for a reporting period, which reflects the performance of insurance contract services, is based on coverage units. In practice, AXA: identifies the total number of coverage units for each group of contracts, which is the quantity of services provided for the insurance contracts belonging to the group over the expected coverage period; allocates the CSM at the end of the reporting period (before having recognized any amounts in the statement of profit or loss to reflect the services provided in the period) equally to each coverage unit provided in the current reporting period and expected to be provided in the future; and recognizes the amount of CSM allocated to the coverage units provided in the current reporting period in the statement of profit or loss. Given the variety of insurance contracts, AXA exercises its judgment to define coverage units, considering both the level of coverage defined within the contract (e.g. a death benefit over a fixed term, the policyholders’ account value, or a combination of guarantees) and the expected coverage duration of the contract. However, this release of the CSM is not applicable if there are adverse changes in future cash flows greater than the remaining CSM. In this case, the group of contracts becomes onerous, and the loss is immediately recognized in the statement of profit or loss. When a group of insurance contracts is onerous, on initial recognition or subsequently, the LRC includes a loss component reflecting the loss recognized in the statement of profit or loss. As long as the group of contracts remains onerous, subsequent changes in the amount of loss component are immediately allocated to the statement of profit or loss. Liability for Incurred Claims (“LIC”) After initial recognition of a group of insurance contracts, the carrying amount of the group at each reporting date is the sum of two different components: the LRC, that relates to the remaining coverage (see above) and the LIC, which corresponds to the FCF related to past services allocated to the group. The LIC reflects the AXA’s obligation to investigate and pay valid claims for insured events that have already occurred, including events that have occurred but for which claims have not been reported, and other incurred insurance expenses, as well as to pay amounts relating to other insurance contract services already provided or any investment components or other amounts that are not related to the provision of insurance contract services and that are not in the LRC. 1.14.6 Measurement with the Premium Allocation Approach (“PAA”) The Premium Allocation Approach is used for most of the AXA Property and Casualty business and, to a lesser extent, for some short-term Protection and Health businesses. Half Year 2023 Financial Report 89 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 This is a simplified model permitted for the measurement of the liability for remaining coverage (“LRC”) provided that the measurement of the LRC does not differ materially from the general measurement model (“BBA”) or the coverage period is one year or less. With the PAA, the LRC corresponds to premiums received at initial recognition less acquisition costs and amounts already recognized on a prorata temporis basis as insurance revenue at the closing date. However, the BBA remains applicable for the measurement of incurred claims. Insurance acquisition cash flows (“IACF”) incurred before the recognition of a group of contracts measured with the PAA are recognized as an asset allocated to that group and future groups of insurance contracts that will include contracts arising from expected renewals. In practice, the recognition of a portion relating to the expected renewals is limited to the groups of insurance contracts with up front or extra-commissions paid for acquiring new business. 1.14.7 Measurement with the Variable Fee Approach (“VFA”) The VFA applies to a large part of the AXA Life and Savings businesses (both General Account and Unit-Linked contracts), as well as for long term Protection and Health businesses which include participating features. This measurement model is mandatory for AXA insurance contracts with direct participation features and investment contracts with discretionary participation features and aims at adjusting the Contractual Service Margin (“CSM”) to reflect the variable nature of the fee. The adjustment equals to the entity’s share of the change in fair value of the underlying items as explained below. The VFA is derived from the General Measurement Model (BBA) to the extent that it is also based on a building block approach. As such, the principles described here above in paragraph 1.14.5 are the same, meaning that the liabilities are also made of FCF and a CSM. At initial recognition, there are no differences between the BBA and the VFA (with the exception related to the groups of insurance contracts not applying the annual cohort requirement). However, the methodology is different for subsequent measurement since the CSM under the VFA absorbs: the experience variance of the period generated by underlying items, including the variance on commissions based on these underlying items; the consequences of changes in both technical and financial assumptions; the effect of changes in financial risks not arising from underlying items (such as options and guarantees). In order to allow an appropriate pattern of the CSM release in the statement of profit or loss over the coverage period, consistently with the IFRS 17 definition of the investment-related service, the number of coverage units is determined on the basis of policyholders’ mathematical reserves, which are adjusted by considering the expected return of underlying items resulting from Real World (“RW”) deterministic assumptions. The main Real World assumptions used by AXA are summarized in note 7.6. RW assumptions are based on AXA Group’s Chief Economist studies that rely on AXA IM’s Research and Investment Strategy team for the short term and on academic literature, international organizations (e.g. IMF, World Bank) studies and dedicated structural models for the long term. Then, RW assumptions are reviewed and validated by the Group Economic Assumptions Committee, in charge of determining economic assumptions to be used for a variety of local and Group processes. This Committee is co-chaired by the Group Chief Financial Officer and the Group Chief Risk Officer. The “risk mitigation” accounting option is applied to some group of contracts and allows to reduce or remove any accounting mismatch arising from the mitigation of financial risks impacting the CSM by using (i) derivatives, (ii) financial assets measured at fair value through profit and loss, held within shareholders’ fund or (iii) reinsurance contracts. Under this option, it is allowed (on a prospective basis from the transition date to IFRS 17 as of January 1, 2022) not to adjust the CSM but instead affect the statement of profit or loss for the changes in the FCF and the entity’s share in the fair value return on the underlying items that the hedged items are intended to mitigate. This option is allowed only when AXA has previously documented a risk-management objective and strategy for mitigating financial risk. In particular, an economic offset should exist between the insurance contracts and the Half Year 2023 Financial Report 90 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 hedging instruments, and credit risk should not dominate the economic offset. If, and only if, these conditions cease to be subsequently met, the risk mitigation option is stopped (with no restatement of previous adjustments). 1.14.8 Derecognition of insurance contracts An insurance contract is derecognized from the group of contracts to which it belongs in case of extinguishment, transfer, or a modification of its terms in a such a way that a new contract is recognized in a new group. The derecognition of insurance contracts leads to eliminate their Fulfilment Cash Flows (“FCF”) and adjust the Contractual Service Margin (“CSM”) of the group of contracts instead of generating a direct and immediate effect in the statement of profit or loss, unless the group of contracts becomes onerous or empty. Depending on the cause of derecognition, the CSM of the group of contracts is adjusted: in case of extinguishment of an insurance contract, by the same amount eliminated from the FCF; in case of a portfolio transfer to a third party, by the difference between the amount eliminated from the FCF and the premium charged by the third party; in case of a modification of insurance contracts (requiring a derecognition followed by a recognition in a new group of contracts), by the difference between the amount eliminated from the FCF and any additional premium charged to the policyholder as a result of the modification. In practice, this means that the global adjustments of CSM generated by the modification is split between the initial group of contracts and the new one, depending on the hypothetical premium that the entity would have charged had it entered into a contract with equivalent terms as the new contract at the date of the contract modification. Finally, if an insurance contract is derecognized because of its transfer to a third party or a modification, the remaining amount previously recognized in Other Comprehensive Income (“OCI”) is reclassified in the statement of profit or loss when the Building Block Approach applies but maintained in OCI when the Variable Fee Approach applies. 1.14.9 Reinsurance contracts The Group assumes and cedes reinsurance in the normal course of business. Assumed reinsurance refers to the Group’s acceptance of certain insurance risks that other companies have underwritten leading to the recognition of groups of reinsurance contracts issued. Ceded reinsurance refers to the transfer of insurance risks, along with the related premiums, to other reinsurers who will assume the risks as the Group seeks to reduce the potential amount of loss arising from claims events by reinsuring certain levels of risk underwritten, leading to the recognition of groups of reinsurance contracts held. Both groups of reinsurance contracts issued and groups of reinsurance contracts held are subject to the Building Block Approach (“BBA”) or the Premium Allocation Approach (“PAA”) described in the previous paragraphs provided that there is a transfer of significant insurance risk; in any case, they are not eligible to the Variable Fee Approach as they are not insurance contracts with direct participation features. As the specificities of the treaties can affect their classification, each reinsurance contract is subject to a detailed analysis by AXA in order to determine the appropriate accounting treatment. Whereas the recognition and measurement of reinsurance contracts issued is similar to insurance contracts issued, the reinsurance contracts held have some specificities which are described hereafter. Date of initial recognition The recognition of groups of reinsurance contracts held depends on the type of coverage. When the reinsurance contract held provides proportionate coverage, the date of recognition of the group corresponds to the date when any underlying insurance contract is recognized by AXA. When the reinsurance contract held does not provide Half Year 2023 Financial Report 91 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 proportionate coverage, the group of reinsurance contracts is recognized at the earliest of the beginning of the coverage period of the group of underlying insurance contracts and the date when the entity recognizes an onerous group of underlying insurance contracts. Boundary of contract For reinsurance contracts held, the cash flows are within the boundary of the reinsurance contract if AXA has a substantive right to receive services from the reinsurer or a substantive obligation to pay premiums to the reinsurer. Depending on the relationship between the contract boundary of the direct insurance contracts and that of the reinsurance contracts held, in some cases, the reinsurance treaty might offer protection for underlying insurance contracts that AXA has not issued yet. However, the carrying amount of a reinsurance contract held is nil before any cash flows occur or any service is received. Measurement Similarly to underlying insurance contracts, PAA is used for short term reinsurance coverages, while long term coverages are measured with the BBA. The measurement of reinsurance contracts held follows a mirroring principle of the underlying insurance contracts leading to estimate the present value of the future cash flows of the reinsurance contract held using assumptions consistent with those used for the underlying insurance contracts. Thus, the reinsurance asset is derived using the same assumptions as those used by AXA for the underlying insurance contracts as these are the ones used to determine the expected reinsurance recoveries. In practice, some reinsurance contracts held by AXA provide cover for underlying contracts that are included in different groups. However, using consistent assumptions does not imply the use of the same assumptions as those used for measuring the underlying contracts if those assumptions are not valid for the reinsurance contract held. In practice, the use of the same discount rate might not be appropriate, especially if the reinsurance contract is entered into during the coverage period of the underlying contracts. In addition, the cash flows from the reinsurance contract held include an adjustment for the effect of any risk of non-performance by the issuer of the reinsurance contract, including the effects of collateral and losses from disputes. At inception, the reinsurance coverage, in exchange of a reinsurance premium, is measured as: the reinsurer’s share of the expected present value of the cash flows generated under the underlying insurance contracts, including an adjustment to reflect the fact that the reinsurer might dispute coverage or fail to satisfy its obligations under the contract (risk of non-performance / counterparty risk) ; and typically a “net cost” ( a “net gain” can however occur in some cases ), which is in substance a negative Contractual Service Margin (“CSM”) corresponding to the cost paid to the reinsurer, depending on the pricing of the reinsurance contract held and assessed independently to the CSM arising from the underlying insurance contracts. The mechanics of the measurement models are the same for the underlying insurance contracts with the difference that the concept of CSM is replaced by the concept of net cost / net gain. This net loss or net gain is deferred and released in profit or loss throughout the coverage period, in line with the provision of reinsurance services. However, if the net cost of purchasing reinsurance relates to past events, i.e. retrospective reinsurance contracts covering such as adverse development covers for incurred claims, any net cost occurring at inception is immediately recognized in the statement of profit or loss. Subsequently, at the end of each reporting period, the carrying amount of the net deferred cost or gain for reinsurance contracts held is adjusted to reflect changes in estimates. However, if AXA recognizes losses in the statement of profit or loss on underlying contracts because of adverse changes in estimates of fulfilment cash flows, the corresponding changes in cash inflows for reinsurance contracts held are also recognized in profit or loss and therefore do not adjust the net deferred loss or gain of the group of reinsurance contracts held. As a result, Half Year 2023 Financial Report 92 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 there is no net effect in the profit or loss for the period to the extent that the change in the fulfilment cash flows of the underlying contracts is matched with a change in the fulfilment cash flows on the reinsurance contracts held. 1.15 INVESTMENT CONTRACTS WITH NO DISCRETIONARY PARTICIPATION FEATURES Liabilities arising from these contracts are financial liabilities within the scope of IFRS 9. They mainly include unit- linked contracts that do not meet the definition of insurance contracts or investment contracts with discretionary participation features. For these unit-linked contracts, the liabilities are measured at current unit value, i.e. on the basis of the fair value of the financial investments backing those contracts at the end of the reporting period together with rights to future management fees, also known as Deferred Origination Costs (“DOC”) (refer to paragraph 1.8.2). In accordance with paragraph 1.19.2). IFRS 9, these contracts are accounted for using “deposit accounting” (refer to Fees received at inception to cover future services are recognized as liabilities and accounted for in the statement of profit or loss based on the same amortization pattern as the one used for DOC. 1.16 FINANCING DEBT Financing debt issued to finance the solvency requirements of operational entities or to acquire a portfolio of contracts is isolated in a specific aggregate of the statement of financial position and is accounted for at amortized cost. 1.17 OTHER LIABILITIES 1.17.1 Income taxes The current income tax expense (benefit) is recorded in the statement of profit or loss on the basis of local tax regulations. The half year income tax charge is based on the best estimate of the expected full year tax rate. Deferred tax assets and liabilities emerge from temporary differences between the accounting and fiscal values of assets and liabilities, and when applicable from tax loss carry forwards. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available to offset the temporary differences taking into account the existence of tax groups and any legal or regulatory requirements on the limits (in terms of amounts or timing) relating to the carry forwards of unused tax credits. The recoverability of deferred tax assets recognized in previous periods is re-assessed at each closing. In particular, a deferred tax liability is recognized for any taxable temporary difference relating to the value of shares in a consolidated company held, unless the Group controls at what date the temporary difference will reverse and it is probable that the temporary difference will not reverse in the foreseeable future. If a Group company decides to sell its stake in another consolidated entity, the difference between the carrying value and the tax value of these shares for the company that holds them leads to the recognition of deferred tax (including as part of a business combination when the Group as the buyer intends to sell or carry out internal restructuring of the shares following the acquisition). The same approach applies to dividend payments that have been voted or deemed likely, to the extent that a tax on dividends will be due. Deferred taxes for taxable temporary differences relating to tax deductible goodwill are recognized to the extent they do not arise from the initial recognition of goodwill. These deferred taxes are only released if the goodwill is impaired or if the corresponding consolidated shares are sold. Half Year 2023 Financial Report 93 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 The measurement of deferred tax liabilities and deferred tax assets reflects the expected tax impact at the end of the reporting period. That would follow the way the Group expects to recover or settle the carrying amount of its assets and liabilities. When income taxes are calculated at a different rate if dividends are paid, deferred taxes are measured at the tax rate applicable to undistributed profits. The income tax consequences of dividends are only accounted when a liability to pay the dividend is recognized. 1.17.2 Pensions and other post-retirement benefits Pensions and other post-retirement benefits: they include the benefits payable to AXA Group employees after they retire (retirement compensation, additional pension benefit, health insurance). In order to meet those obligations, some regulatory frameworks have allowed or enforced the set up of dedicated funds (plan assets). Defined contribution plans: payments are made by the employer to a third party (e.g. pension trusts). These payments free the employer of any further commitment, and the obligation to pay acquired benefits to the employees is transferred. The contributions paid by the employer are recorded as an expense in the statement of profit or loss and no liability needs to be recorded once contributions are made. Defined benefit plans: an actuarial assessment of the commitments based on each plan’s internal rules is performed. The present value of the future benefits paid by the employer, known as the Defined Benefit Obligation (“DBO”), is calculated annually on the basis of long-term projections of rate of salary increase, inflation rate, mortality, staff turnover, pension indexation and remaining service lifetime. The amount recorded in the statement of financial position for defined benefit plans is the difference between the present value of the DBO and the market value at the end of the reporting period of the corresponding invested plan assets after adjustment for any minimum funding requirement or any asset ceiling effect. If the net result is positive, a provision is recorded under the provision for risks and charges heading. If the net result is negative, a prepaid pension asset is recorded in the statement of financial position but not more than its recoverable amount (asset ceiling). Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in shareholders’ equity (in Other Comprehensive Income) in full in the period in which they occur. Similarly, the actual return on assets and any change in asset ceiling, excluding the net interest income on assets, is recognized in shareholders’ equity. The regular impact in the statement of profit or loss mainly relates to the current service cost (annually accruing employee benefit) and the net interest on the amount recorded in the opening statement of financial position (unwinding of discount applied to the net liability/asset at start of the annual period, taking into account contributions and benefits payments during the period). Past service cost represents the change in the present value of the DBO resulting from a plan amendment or curtailment to a defined benefit plan. It is recognized totally and immediately in the statement of profit or loss when incurred. Gains and losses on the settlement of a defined benefit plan also have an impact in the statement of profit or loss when the settlement occurs. It should be noted that, all cumulative past actuarial gains and losses on all employee benefit plans were recognized in retained earnings as of January 1, 2004, AXA Group’s transition date. 1.17.3 Share-based compensation plans The Group’s share-based compensation plans are predominantly settled in equities. All equity-settled share-based compensation plans are accounted for at fair value at the date they were granted and the fair value is expensed over the vesting period. Cash-settled share-based compensation plans are recognized at fair value, which is remeasured at the end of each reporting period with any change in fair value recognized in the statement of profit or loss. The AXA Shareplan issued under a specific French regulatory framework includes a traditional and a leveraged formula (with an application subject to specific local regulations within the Group). Half Year 2023 Financial Report 94 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.18 PROVISIONS FOR RISKS, CHARGES AND CONTINGENT LIABILITIES 1.18.1 Restructuring costs Restructuring provisions other than those that may be recognized in the statement of financial position of an acquired company on the acquisition date are recorded when the Group has a present obligation evidenced by a binding sale agreement or a detailed formal plan whose main features are announced to those affected or to their representatives. 1.18.2 Other provisions and contingencies Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of past events, when it is probable that an outflow of resources will be required to settle the obligation, and when the provision can be reliably estimated. Provisions are not recognized for future operating losses. The same applies to contingent liabilities, except if identified at the time of a business combination (refer to paragraph 1.3.2). Provisions are measured at management’s best estimate, at the end of the reporting period, of the expenditure required to settle the obligation, discounted at the market risk-free rate of return for long term provisions. 1.19 REVENUES FROM ALL ACTIVITIES 1.19.1 Insurance revenue The insurance revenue reflects the insurance contract services provided by AXA over the period, which is derived from the reduction in the liability for remaining coverage (“LRC”) during the reporting period, subject to corrections (adjustment of premiums, loss components) and excluding investment components (i.e. amounts to be paid to a policyholder even if an insured event does not occur). However, the way these changes are reflected in the insurance revenue differs by measurement model. For the contracts measured under the Premium Allocation Approach (“PAA”), the insurance revenue corresponds to the amount of expected insurance coverage during the period (or passage of time if not significantly different), excluding any investment components. For the contracts measured under the Building Block Approach (“BBA”) and the Variable Fee Approach (“VFA”), the insurance revenue corresponds to the release of the LRC, depending on the quantity of provided services, and an allocation of insurance acquisition cash flows (refer to paragraph 1.14.5). In substance, the amounts related to the provision of insurance contract services include: the expected claims, including expenses other than insurance acquisition cash flows, but excluding those not contributing to the fulfilment of insurance contracts (i.e. non-attributable expenses); the release of the risk adjustment for non-financial risk; the allocation of the Contractual Service Margin (“CSM”) to the period. The allocation of insurance acquisition cash flows represents the portion of premiums that corresponds to the recovering of those cash flows to each reporting period in a systematic way based on the passage of time, the same amount being recognized as insurance service expenses. This mechanism enables to add back the part of the premium corresponding to the coverage of insurance acquisition cash flows. This means that insurance acquisition cash flows are not recognized in the statement of profit or loss when the acquisition cash flows occur but when the CSM is released. Half Year 2023 Financial Report 95 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.19.2 Fees and loadings from investment contracts with no discretionary participation features Deposit accounting applies to investment contracts with no discretionary participation features (refer to paragraph 1.15). As a result, amounts collected as premiums are reported as deposits net of any loadings and policy fees. Revenues from these contracts consist of loadings and policy fees relating to underwriting, investment management, administration and surrender of the contracts during the period. Front-end fees collected corresponding to fees for future services are recognized over the estimated life of the contract. 1.19.3 Revenues from other activities Revenues from other activities mainly include: commissions and fees received for services relating to Asset Management activities. As asset management entities of the Group deliver investment management services to their clients, revenue for providing these services may theoretically occur over-time, with a time-based measure of progress, the service being provided continuously over the contract period. However, IFRS 15 – Revenue from Contracts with Customers states that revenue is recognized only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur. As a result, as management fees and performance fees received by the Group are generally calculated based on a percentage of assets under management, they are considered as variable considerations, which are subject to market volatility, and are therefore recognized only when uncertainty is resolved; assistance services revenues from AXA Assistance; net revenues from banking activities. They comprise all revenues and expenses from banking operations, including interest expenses not related to financing, banking fees, capital gains and losses on sales of financial assets, changes in the fair value of assets under the fair value option and related derivatives. They exclude bank operating expenses and change in bad debt provisions, doubtful receivables or loans, which are recorded in “Bank operating expenses”; and insurance companies revenues from non-insurance activities, notably commissions received on the sales or distribution of financial products. 1.20 EXPENSES FROM ALL ACTIVITIES 1.20.1 Insurance service expenses Insurance service expenses arising from groups of contracts issued by AXA are recognized in the statement of profit or loss as they are incurred, excluding amounts allocated to refunds of premiums and payment of policy loans. Symmetrically to insurance revenue, the payments relating to investment components are excluded from insurance service expenses. All insurance service expenses correspond to actual cash outflows within the boundary of contracts identified when projecting and calculating the present value of future cash flows (refer to paragraph 1.14.5). These cash flows are: those that relate directly to the fulfilment of insurance contract; and those over which AXA has discretion over the amount or timing. In this respect, the change in discretionary cash flows is determined at inception of the contract (e.g. by identifying the minimum guarantees and defining its profit-sharing policy). Half Year 2023 Financial Report 96 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 1.20.2 Net expenses from reinsurance contracts held In the statement of profit or loss, net expenses from reinsurance contracts held (net income in some cases) are presented separately from the insurance service expenses and included in a single aggregate, corresponding to the net between reinsurance service expenses and amounts recovered from the reinsurers. 1.20.3 Expenses from other activities The expenses from other AXA activities include the acquisition costs of investment contracts with no discretionary participation features, as well as the expenses that are the twin of revenues from other activities, namely acquisition costs and administrative expenses relating to AXA other non-insurance activities (i.e. those incurred by insurance entities, assistance services, asset management entities and holding entities), and bank operating expenses. 1.21 FINANCIAL RESULT (EXCLUDING FINANCING EXPENSES) 1.21.1 Investment return The investment return recognized through profit or loss consists of: net investment income from investments other than from banking activities, including the cost of investment activities not included in the fulfilment cash flows (i.e. those not performed for the benefit of policyholders), net of depreciation expense on real estate investments; this item includes interest received calculated using the effective interest method for debt instruments and dividends received on equity instruments; realized gains and losses relating to investments at amortized cost and at fair value through other comprehensive income (with recycling), net of releases of impairment following sales; net realized gains and losses and change in fair value of investments at fair value through profit or loss; and change in impairment on investments. In respect of banking activities, interest income and expenses are included in the “Revenues from other activities”. 1.21.2 Net finance income or expenses from insurance and reinsurance contracts held The net finance income or expenses from insurance and reinsurance contracts is presented in the AXA consolidated statement of profit or loss with a split between insurance contracts issued and reinsurance contracts held. This aggregate comprises the changes in the carrying amount of the groups of contracts that relate to financial risk arising from both (i) the effect of the time value of money and changes in the time value of money, (ii) the effect of financial risk and changes in financial risk (i.e. effect of changes in discount rates, exchange rate, the time value of options and guarantees). However, the option to disaggregate insurance (and reinsurance) financial income or expense between the statement of profit or loss and the Other Comprehensive Income (“OCI”) is applied by AXA in order to limit the volatility in profit or loss (considering that many of the supporting financial assets are measured at fair value through OCI under IFRS 9). Under this option, for contracts without direct participation features, the difference between the valuation of the liabilities at locked-in rates (used for the unwind in the finance income or expenses) and their valuation at current rates is recognized by AXA in OCI. In the same way, when changes in liabilities arise from a contractual link Half Year 2023 Financial Report 97 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 (indexation) between inflation and the payments to policyholders, the changes due to inflation that relate to future services shall also be considered as resulting from a financial risk and therefore are recognized by AXA through OCI with a release over the duration of the payments to the policyholders. The amount included in the statement of profit or loss is determined by a systematic allocation of the expected total insurance (and reinsurance) finance income or expenses over the duration of the group of contracts. This systematic allocation is based on the characteristics of the contracts, depending on whether the changes in assumptions relating to financial risk have a substantial effect on the amount paid to the policyholder or not: when the changes in financial risk assumptions do not have a substantial effect on amounts paid to the policyholders, the systematic allocation is determined using the discount rates at the date of initial recognition of the groups of contracts measured with the Building Block Approach and at the date of the incurred claims for groups of contracts applying the Premium Allocation Approach; when the changes in financial risk assumptions do have a substantial effect on amounts paid to the policyholder, the systematic allocation is determined by using a rate that allocates the remaining revised expected finance income or expenses over the remaining duration of the group of contracts at a constant rate (i.e. the effective yield approach) or a crediting rate based on the amounts credited to the policyholders in the period and expected to be credited in future periods (i.e. the projected crediting approach). AXA also applies the OCI option for direct participating contracts. It consists in recognizing in finance income or expenses (with OCI as a balance) an amount that exactly matches the income or expenses included in profit or loss on the underlying items held, resulting in the net of the separately presented items being nil. However, a negative accounting mismatch in OCI structurally occurs as some underlying items, notably investments in real estate properties, are accounted for at amortized cost by AXA, with therefore no recognition of unrealized gains and losses in shareholders’ equity while these unrealized gains and losses are included in the value of the contracts with a corresponding opposite effect in OCI). 1.22 OTHER INCOME AND EXPENSES Other income and expenses notably include other insurance expenses, which correspond to overheads assessed as being not attributable to the fulfilment of insurance contracts (refer to paragraph 1.14.5) and are not expenses from other activities (refer to paragraph 1.20.3). 1.23 SUBSEQUENT EVENTS Subsequent events relate to events that occur between the end of the reporting period date and the date when the financial statements are authorized for issue: such events lead to an adjustment of the Consolidated Financial Statements if they provide evidence of conditions that existed at the end of the reporting period; such events result in additional disclosures if indicative of conditions that arose after the end of the reporting period, and if relevant and material. Half Year 2023 Financial Report 98 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 2 SCOPE OF CONSOLIDATION 2.1 CONSOLIDATED COMPANIES June 30,2023 December 31, 2022 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests AXA SA and Other Holdings AXA SA Parent company Parent company CFP Management 100.00 100.00 100.00 100.00 AXA Group Operations SAS 100.00 100.00 100.00 100.00 Société Beaujon 100.00 100.00 100.00 100.00 AXA China 100.00 100.00 100.00 100.00 AXA Asia 100.00 100.00 100.00 100.00 France AXA France IARD 99.92 99.92 99.92 99.92 AXA France Vie 99.77 99.77 99.77 99.77 AXA Protection Juridique 98.52 98.44 98.52 98.44 Avanssur 100.00 99.81 100.00 99.81 AXA France Participations 100.00 100.00 100.00 100.00 AXA Banque 100.00 99.89 100.00 99.89 AXA Banque Financement 65.00 64.93 65.00 64.93 Europe Germany AXA Versicherung AG 100.00 100.00 100.00 100.00 AXA Lebensversicherung AG 100.00 100.00 100.00 100.00 Deutsche Ärzteversicherung 100.00 100.00 100.00 100.00 AXA Krankenversicherung AG 100.00 100.00 100.00 100.00 Kölnische Verwaltungs AG für Versicherungswerte 100.00 100.00 100.00 100.00 AXA Konzern AG 100.00 100.00 100.00 100.00 Roland Rechtsschutz-Versicherungs-AG 60.00 60.00 60.00 60.00 United Kingdom & Ireland Guardian Royal Exchange Plc 100.00 100.00 100.00 100.00 AXA UK Plc 100.00 100.00 100.00 100.00 AXA Insurance UK Plc 100.00 100.00 100.00 100.00 AXA PPP Healthcare Limited 100.00 100.00 100.00 100.00 AXA Insurance Limited 100.00 100.00 100.00 100.00 AXA Life Europe DAC 100.00 100.00 100.00 100.00 Half Year 2023 Financial Report 99 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II June 30,2023 December 31, 2022 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests Spain AXA Seguros Generales, S.A. 99.93 99.93 99.93 99.93 AXA Aurora Vida, S.A. de Seguros 99.86 99.86 99.86 99.86 Switzerland AXA Leben AG 100.00 100.00 100.00 100.00 AXA-ARAG Rechtsschutz AG 66.67 66.67 66.67 66.67 AXA Versicherungen AG 100.00 100.00 100.00 100.00 Italy AXA Assicurazioni e Investimenti 100.00 100.00 100.00 100.00 AXA MPS Vita 50.00 50.00 50.00 50.00 + 1 voting right + 1 voting right AXA MPS Danni 50.00 50.00 50.00 50.00 + 1 voting right + 1 voting right AXA MPS Financial 100.00 50.00 100.00 50.00 Belgium and Luxembourg AXA Belgium SA 100.00 100.00 100.00 100.00 AXA Holdings Belgium 100.00 100.00 100.00 100.00 Yuzzu SA 100.00 100.00 100.00 100.00 AXA Assurances Luxembourg 100.00 100.00 100.00 100.00 AXA Assurances Vie Luxembourg 100.00 100.00 100.00 100.00 AXA Luxembourg SA 100.00 100.00 100.00 100.00 AXA XL AXA XL (sub group) (a) 100.00 100.00 100.00 100.00 Asia, Africa & EME-LATAM National Mutual International Pty Ltd. 100.00 100.00 100.00 100.00 AXA Mediterranean Holding SA 100.00 100.00 100.00 100.00 Japan AXA Holdings Japan 98.70 98.70 98.70 98.70 AXA Life Insurance 100.00 98.70 100.00 98.70 AXA General Insurance Co. Ltd. 100.00 98.70 100.00 98.70 AXA Direct Life Insurance Co. Ltd. 100.00 98.70 100.00 98.70 Hong Kong AXA China Region Limited 100.00 100.00 100.00 100.00 AXA General Insurance Hong Kong Ltd. 100.00 100.00 100.00 100.00 China AXA Tianping 100.00 100.00 100.00 100.00 Indonesia MLC Indonesia 100.00 100.00 100.00 100.00 Thailand AXA Insurance Public Company Limited 99.47 86.35 99.47 86.35 (a) AXA XL mainly operates in the United States, the United Kingdom, France, Germany, Australia, Switzerland, Netherlands, Italy, Spain, Bermuda and Canada. Half Year 2023 Financial Report 100 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II June 30,2023 December 31, 2022 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests South Korea AXA General Insurance Co. Ltd. 99.71 99.71 99.71 99.71 Colombia AXA Colpatria Seguros 51.00 51.00 51.00 51.00 AXA Colpatria Seguros de vida 51.00 51.00 51.00 51.00 Morocco AXA Assurance Maroc 100.00 100.00 100.00 100.00 AXA Al Amane Assurance 100.00 100.00 100.00 100.00 AXA Holding Maroc S.A. 100.00 100.00 100.00 100.00 Turkey AXA Hayat ve Emeklilik A.S. 100.00 100.00 100.00 100.00 AXA Sigorta AS 92.61 92.61 92.61 92.61 AXA Turkey Holding W.L.L 100.00 100.00 100.00 100.00 Mexico AXA Seguros S.A. de C.V. 100.00 100.00 100.00 100.00 AXA Salud S.A. de C.V. 80.00 80.00 80.00 80.00 Singapore AXA Financial Services Singapore pte Ltd. 100.00 100.00 100.00 100.00 India AXA India Holding 100.00 100.00 100.00 100.00 Nigeria AXA Mansard Insurance Plc (Nigeria) 76.48 76.48 76.48 76.48 Brazil AXA Seguros S.A. 100.00 100.00 100.00 100.00 Other AXA Investment Managers (sub group) 97.50 97.48 97.52 97.51 AXA Assistance SA (sub group) 100.00 100.00 100.00 100.00 Colisée Ré 100.00 100.00 100.00 100.00 Architas, Ltd. 100.00 100.00 100.00 100.00 2.1.1 Main fully consolidated companies MINORITIES INTERESTS ON CONTROLLED INVESTMENTS FUNDS AND REAL ESTATE COMPANIES In most investment funds (particularly open-ended investment funds), minority interests are presented as liabilities under “Minority interests of controlled investment funds”. As of June 30, 2023, minority interests in controlled investments funds amounted to €6,891 million (€6,400 million as of December 31, 2022, restated). Minority interests related to consolidated investment funds and real estate companies that are classified in shareholders’ equity amounted to €1,736 million as of June 30, 2023 (€1,842 million as of December 31, 2022, restated). Half Year 2023 Financial Report 101 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 2.1.2 Main investments in companies accounted for using the equity method Companies accounted for using the equity method listed below exclude investment funds and real estate entities: June 30,2023 December 31, 2022 Change in scope Voting rights percentage Group share of interests Voting rights percentage Group share of interests France Neuflize Vie 39.98 39.98 39.98 39.98 Asia, Africa & EME-LATAM Philippines AXA Life Insurance Corporation 45.00 45.00 45.00 45.00 Krungthai AXA Life Insurance Company Ltd. (Thailand) 50.00 50.00 50.00 50.00 ICBC-AXA Life Insurance Co., Ltd. (China) 27.50 27.50 27.50 27.50 PT AXA Mandiri Financial Services (Indonesia) 49.00 49.00 49.00 49.00 Reso Garantia (Russia) 38.61 38.61 38.61 38.61 Bharti AXA Life (India) 49.00 49.00 49.00 49.00 Other Capza (Asset Management - France) 66.09 65.44 66.09 65.45 Kyobo AXA Investment Managers Company Limited (South Korea) 50.00 48.74 50.00 48.75 AXA SPDB Investment Managers Company Ltd. (China) 39.00 38.02 39.00 38.03 Half Year 2023 Financial Report 102 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 3 CONSOLIDATED STATEMENT OF PROFIT OR LOSS BY SEGMENT AXA’s Chief Executive Officer (CEO), acting as chief operating decision maker, is a member of the Board of Directors. He is assisted by a Management Committee in the operational management of the Group and by a group of senior executives, the so-called Partners’ Group, in developing and implementing any strategic initiatives. The financial information related to AXA's business segments and holding companies reported to the Board of Directors twice a year is consistent with the presentation provided in the Consolidated Financial Statements. The results of operating activities and non-operating activities are presented on the basis of six segments: France, Europe, AXA XL, Asia, Africa & EME LATAM, AXA Investment Managers and Transversal & Other. As of June 30, 2023, the CEOs supervising the main hubs (respectively CEO of AXA France, CEO of AXA in Europe, CEO of AXA XL, CEO of AXA International Markets, and CEO of AXA Investment Managers) are members of the Management Committee. Key transversal entities and Central Holdings are managed alongside these hubs. France: The French market consists of Life & Savings and Property & Casualty activities, AXA Banque France and French holdings. Europe: The European market consists of Life & Savings and Property & Casualty activities in Switzerland, Germany, Belgium & Luxembourg, Spain, Italy and AXA Life Europe as well as Property & Casualty activities in United Kingdom & Ireland. The holding companies in these countries are also included. AXA XL: The AXA XL market mainly consists of Property & Casualty activities in XL Group, operating mainly in the United States, the United Kingdom, France, Germany, Australia, Switzerland, Netherlands, Italy, Spain, Bermuda and Canada. The holding companies are also included. Asia, Africa & EME-LATAM: The Asian market consists of Life & Savings and Property & Casualty activities in Japan, Hong Kong and Asia High Potentials (Indonesia, Philippines, Thailand and China) as well as Property & Casualty activities in South Korea and Life & savings activities in India. The holding company in Japan and the other Asia holdings are also included. The African market consists of Life & Savings and Property & Casualty activities in Morocco and Nigeria. The holding companies in these countries are also included. The EME – LATAM market consists of Life & Savings and Property & Casualty activities in Brazil, Colombia, Mexico, Russia and Turkey. The holding company in Brazil, Turkey and other holding companies are also included. AXA Investment Managers: including Architas. Transversal & Other: It includes transversal entities namely AXA Assistance, AXA Liabilities Managers, AXA SA (including AXA Global Re, Group’s internal reinsurance activities, which was merged with AXA SA at June 30, 2022), and other Central Holdings. The intersegment eliminations include only operations between entities from different countries and operating activities. They mainly relate to reinsurance treaties, assistance guarantees recharging, asset management fees and interests on loans within the Group. Half Year 2023 Financial Report 103 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 In this document, “Insurance” covers the three insurance activities: Life & Savings, Property & Casualty and Health. 3.1 CONSOLIDATED STATEMENT OF PROFIT OR LOSS BY SEGMENT June 30, 2023 (in EURO million) France Europe AXA XL Asia, Africa & EME- LATAM AXA IM Transversal & Other Intersegment Eliminations Insurance revenue 10,170 14,766 8,801 5,290 723 (556) Fees and charges relating to investment contracts with no discretionary participation features 0 88 30 Revenues from other activities 68 73 44 16 906 680 (386) Revenues from all activities 10,238 14,927 8,845 5,336 906 1,404 (942) Insurance service expenses (8,935) (12,966) (6,838) (4,659) (718) 490 Net expenses from reinsurance contracts held (63) (256) (977) (42) 25 104 Expenses from other activities (96) (94) (24) (22) (651) (1,059) 440 Expenses from all activities (9,095) (13,317) (7,839) (4,723) (651) (1,752) 1,034 Result from all activities 1,144 1,611 1,006 613 256 (349) 93 Investment return 2,481 3,026 427 2,779 14 151 (258) Net finance income or expenses from insurance contracts issued (2,607) (2,567) (203) (2,217) (4) (4) Net finance income or expenses from reinsurance contracts held 85 (7) 79 (4) 2 1 Net finance income or expenses from insurance and reinsurance contracts Financial result (2,523) (41) (2,574) 452 (124) 303 (2,221) 558 14 (2) 149 (4) (261) Other income and expenses (a) (147) (114) (223) (44) (36) 72 (16) Change in impairment on goodwill and other intangible assets (1) Other operating income and expenses (147) (114) (224) (44) (36) 72 (16) Operating profit before tax 955 1,949 1,085 1,127 233 (128) (184) Income (net of impairment) from investment accounted for using the equity method 8 (0) 179 13 Financing debts expenses (5) (8) (26) (13) (0) (438) 185 Profit before tax 958 1,941 1,059 1,293 246 (567) 1 Income tax (177) (426) (221) (214) (65) 111 (1) Net income 781 1,515 839 1,079 181 (456) Split between : Net income - Group share 780 1,460 838 1,034 176 (456) Net income - Minority interests 1 54 0 44 4 0 (a) It included the effect of applying IAS29 standard related to hyperinflation in Turkey for €-12 million (€-11 million group share) Half Year 2023 Financial Report Total 39,194 118 1,403 40,715 (33,627) (1,209) (1,505) (36,341) 4,374 8,620 (7,603) 155 (7,448) 1,172 (509) (1) (510) 5,037 200 (306) 4,931 (994) 3,937 3,833 104 II of which Insurance 39,750 118 431 40,299 (34,117) (1,313) (469) (35,900) 4,399 8,727 (7,598) 154 (7,444) 1,283 (552) (1) (553) 5,129 187 (27) 5,288 (1,059) 4,230 4,130 100 104 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 June 30, 2022, restated (in EURO million) France Europe AXA XL Asia, Africa & EME- LATAM AXA IM Transversal & Other Intersegment Eliminations Total Insurance revenue Fees and charges relating to investment contracts with no discretionary participation features Revenues from other activities 10,730 0 236 13,885 101 92 9,114 37 5,070 65 15 945 662 641 (329) (369) 39,133 166 1,597 Revenues from all activities Insurance service expenses Net expenses from reinsurance contracts held Expenses from other activities 10,966 (9,491) (276) (97) 14,079 (13,136) (102) (145) 9,152 (8,059) (361) (21) 5,150 (4,397) (154) (59) 945 - - (643) 1,303 (796) 112 (1,015) (698) 283 122 415 40,896 (35,597) (658) (1,567) Expenses from all activities Result from all activities Investment return Net finance income or expenses from insurance contracts issued Net finance contracts held income or expenses from reinsurance (9,864) 1,103 (4,441) 4,719 10 (13,383) 695 (1,036) 2,302 (2) (8,442) 710 469 (415) 208 (4,610) 540 136 604 64 (643) 301 (25) (1,698) (395) 125 (11) 18 819 121 (174) 0 (0) (37,822) 3,074 (4,945) 7,199 297 Net finance income or expenses from insurance and Financial result Other income and expenses (a) Change in impairment on goodwill and other intangible assets 4,729 288 (68) 2,300 1,264 (73) (207) 262 (178) 668 804 (41) (25) (34) 7 133 (19) (0) (174) (35) 7,497 2,551 (450) Other operating income and expenses (68) (73) (178) (41) (34) (19) (35) (450) Operating profit before tax 1,322 1,886 794 1,302 242 (282) (88) 5,176 Income (net of impairment) from investment accounted for using the equity method Financing debts expenses 3 (2) 0 (3) (51) (107) (9) 13 27 (313) 91 (91) (260) Profit before tax 1,324 1,883 743 1,185 282 (595) 3 4,824 Income tax (270) (381) (143) (198) (72) 169 (3) (899) Net income 1,054 1,502 600 987 209 (426) 3,925 Split between : Net income - Group share Net income - Minority interests 1,051 2 1,462 41 599 1 962 24 204 5 (427) 0 - 3,852 74 (a) It included the impact related to the disposal process of General Account portfolio in Belgium. (b) It included the effect of applying IAS29 standard related to hyperinflation in Turkey for €-20 million (€-19 million group share) Half Year 2023 Financial Report of which Insurance 39,462 166 424 40,052 (35,879) (780) (547) (37,207) 2,845 (4,799) 7,199 298 7,497 2,698 (378) (378) 5,165 (104) (15) 5,046 (956) 4,090 4,022 68 105 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 4 TRANSACTIONS IN CONSOLIDATED ENTITIES 4.1 DISPOSAL OF A CLOSED LIFE AND PENSION PORTFOLIO IN GERMANY On July 14, 2022, AXA entered into an agreement with Athora Deutschland GmbH (“Athora Germany”), a licensed insurer in Germany, to sell a life and pensions insurance reserves portfolio. Under the terms of the agreement, AXA Germany will sell the portfolio to Athora Germany for a consideration of Euro 660 million. The completion of the transaction is expected to take place during the first quarter of 2024 and is subject to customary closing conditions, including the receipt of regulatory approvals. Given these circumstances, the held for sale classification was therefore extended beyond one year. The major classes of assets and liabilities (net of intercompany balances with other AXA entities) which have been restated in held of sale are presented in the table below: ASSETS (in EURO million) Investments from insurance activities Assets arising from insurance contracts, investment contracts, and reinsurance contracts held Other assets Cash and cash equivalents TOTAL ASSETS HELD FOR SALE LIABILITIES (in EURO million) Liabilities arising from insurance contracts, investment contracts, and reinsurance contracts held Other liabilities TOTAL LIABILITIES HELD FOR SALE As of June 30, 2023, the net other comprehensive income from invested assets and insurance contracts in the scope of the transaction amounted to €-227 million. As of June 30, 2023, there is no impact recognized in the consolidated statement of income for this transaction. As of December 31, 2022, the assets and liabilities classified as held for sale disclosed in the consolidated statement of financial position mainly relates to the transaction described above. Half Year 2023 Financial Report June 30, 2023 12,366 7 395 279 13,046 June 30, 2023 11,976 914 12,890 106 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 5 INVESTMENTS 5.1 BREAKDOWN OF INVESTMENTS June 30, 2023 Investments as per Consolidated Statement of Financial Position Insurance Other activities TOTAL (in EURO million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value Investment in real estate properties 40,896 29,699 5.99% 3,025 2,983 14.20% 43,921 32,682 Debt instruments at amortized cost 14,308 15,965 3.22% 11 11 0.05% 14,319 15,975 Debt instruments at FV OCI 269,486 269,486 54.33% 4,919 4,919 23.42% 274,404 274,404 Debt instruments at FV P&L - FV Option 1,677 1,677 0.34% 0.00% 1,677 1,677 Debt instruments at FV P&L - Mandatory FV P&L 11,996 11,996 2.42% 51 51 0.24% 12,047 12,047 Debt Instruments 297,467 299,123 60.30% 4,980 4,980 23.71% 302,447 304,104 Equity instruments at FV OCI without recycling 12,367 12,367 2.49% 1,623 1,623 7.73% 13,990 13,990 Equity instruments at FV P&L 14,093 14,093 2.84% 542 542 2.58% 14,635 14,635 Equity Instruments 26,459 26,459 5.33% 2,166 2,166 10.31% 28,625 28,625 Non consolidated investment funds at FV P&L 18,069 18,069 3.64% 116 116 0.55% 18,185 18,185 Other assets at FV P&L, held by consolidated investment funds 21,871 21,871 4.41% 891 891 4.24% 22,762 22,762 Sub total Financial instruments (excluding Loans) 363,866 365,522 73.69% 8,153 8,153 38.82% 372,019 373,675 Loans held at amortized cost 15,700 16,317 3.29% 9,866 9,866 46.98% 25,566 26,183 Loans at FV P&L - FV Option 3,726 3,726 0.75% 0.00% 3,726 3,726 Loans at FV P&L - Mandatory FV P&L 16 16 0.00% 0.00% 16 16 Loans 19,443 20,059 4.04% 9,866 9,866 46.98% 29,309 29,925 Total Financial instruments 383,309 385,582 77.73% 18,019 18,019 85.80% 401,328 403,601 Assets backing contracts where the financial risk is borne by policyholders 80,771 80,771 16.28% 0.00% 80,771 80,771 INVESTMENTS 504,976 496,052 100.00% 21,043 21,002 100.00% 526,019 517,054 Investments (excluding those backing contracts where t he financial risk is borne by policyholders) 424,205 415,281 83.72% Half Year 2023 Financial Report % (value balance sheet) 6.32% 3.09% 53.07% 0.32% 2.33% 58.81% 2.71% 2.83% 5.54% 3.52% 4.40% 72.27% 5.06% 0.72% 0.00% 5.79% 78.06% 15.62% 100.00% 107 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022, restated Investments as per Consolidated Statement of Financial Position Other activities Insurance TOTAL (in EURO million) Fair value Carrying value % (value balance sheet) Fair value Carrying value % (value balance sheet) Fair value Carrying value Investment in real estate properties 40,740 28,684 5.80% 2,946 2,896 13.91% 43,686 31,580 Debt instruments at amortized cost 14,248 15,997 3.23% 12 12 0.06% 14,259 16,009 Debt instruments at FV OCI 273,045 273,045 55.19% 3,907 3,907 18.77% 276,953 276,953 Debt instruments at FV P&L - FV Option 1,814 1,814 0.37% 0 0 0.00% 1,814 1,814 Debt instruments at FV P&L - Mandatory FV P&L 11,872 11,872 2.40% 66 66 0.32% 11,938 11,938 Debt Instruments 300,978 302,728 61.19% 3,985 3,985 19.15% 304,964 306,714 Equity instruments at FV OCI without recycling 12,704 12,704 2.57% 1,768 1,768 8.49% 14,472 14,472 Equity instruments at FV P&L 15,174 15,174 3.07% 680 680 3.27% 15,853 15,853 Equity Instruments 27,878 27,878 5.63% 2,447 2,447 11.76% 30,326 30,326 Non consolidated investment funds at FV P&L 18,604 18,604 3.76% 100 100 0.48% 18,705 18,705 Other assets at FV P&L, held by consolidated investment funds 19,558 19,558 3.95% 736 736 3.53% 20,293 20,293 Sub total Financial instruments (excluding Loans) 367,019 368,769 74.53% 7,269 7,269 34.92% 374,287 376,037 Loans held at amortized cost 16,215 16,901 3.42% 10,650 10,650 51.16% 26,864 27,551 Loans at FV P&L - FV Option 3,899 3,899 0.79% 0 0 0.00% 3,899 3,899 Loans at FV P&L - Mandatory FV P&L 17 17 0.00% 0 0 0.00% 17 17 Loans 20,131 20,817 4.21% 10,650 10,650 51.16% 30,781 31,467 Total Financial instruments 387,149 389,586 78.74% 17,918 17,919 86.09% 405,068 407,504 Assets backing contracts where the financial risk is borne by policyholders 76,491 76,491 15.46% 0 0 0.00% 76,491 76,491 INVESTMENTS 504,380 494,760 100.00% 20,864 20,815 100.00% 525,245 515,575 Investments (excluding those backing contracts where the financial risk is borne by policyholders) 427,890 418,269 84.54% Half Year 2023 Financial Report % (value balance sheet) 6.13% 3.11% 53.72% 0.35% 2.32% 59.49% 2.81% 3.07% 5.88% 3.63% 3.94% 72.94% 5.34% 0.76% 0.00% 6.10% 79.04% 14.84% 100.00% 108 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II 5.2 INVESTMENT IN REAL ESTATE PROPERTIES Investment in real estate properties includes buildings owned directly and through real estate entities. Breakdown of the carrying value and fair value of investments in real estate properties at amortized cost: June 30, 2023 December 31, 2022, restated (in EURO million) Gross value Amortization Impairment Carrying value Fair value Gross value Amortization Impairment Carrying value Fair value Investment in properties at amortized cost real estate Insurance 32,692 (1,521) (1,471) 29,699 40,896 31,453 (1,449) (1,320) 28,684 40,740 Other activities 2,983 2,983 3,025 2,896 2,896 2,946 TOTAL 35,675 (1,521) (1,471) 32,682 43,921 34,349 (1,449) (1,320) 31,580 43,686 Change in impairment and amortization of investment in real estate properties at amortized cost (all activities): Impairment - Investment in real estate properties Amortization - Investment in real estate properties (in EURO million) June 30, 2023 December 31, 2022, restated June 30, 2023 December 31, 2022, restated Opening value 1,320 1,216 1,449 1,621 Increase for the period 160 206 74 115 Write back following sale or reimbursement (8) (25) (3) (237) Write back following recovery in value (23) (78) Others (a) 22 2 1 (50) Closing value 1,471 1,320 1,521 1,449 (a) Includes changes in the scope of consolidation and the impact of changes in exchange rates. Half Year 2023 Financial Report 109 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II 5.3 UNREALIZED GAINS AND LOSSES ON FINANCIAL INVESTMENTS Unrealized capital gains and losses on financial investments, when not already reflected in the statement of profit or loss, were allocated as follows: Insurance June 30, 2023 December 31, 2022, restated (in EURO million) Amortized cost KLM Fair Value Carrying value KVM Unrealized gains Unrealized losses Amortized cost KLM Fair Value Carrying value (b) Unrealized gains Unrealized losses Debt instruments at FV OCI 284,886 269,486 269,486 11,313 26,713 294,285 273,045 273,045 10,874 32,115 Debt instruments at amortized cost 15,965 14,308 15,965 19 1,675 15,997 14,248 15,997 26 1,776 Equity instruments at FV OCI without recycling 11,430 12,367 12,367 2,479 1,543 12,760 12,704 12,704 1,781 1,837 Loans at amortized Cost 16,317 15,700 16,317 33 650 16,901 16,215 16,901 38 724 (a) Net of impairment and includes premiums/discount and related accumulated amortization as well as accrued interest when applicable.(b) Net of impairment. Other Activities June 30, 2023 December 31, 2022, restated (in EURO million) Amortized cost KLM Fair Value Carrying value KVM Unrealized gains Unrealized losses Amortized cost KLM Fair Value Carrying value (b) Unrealized gains Unrealized losses Debt instruments at FV OCI 5,417 4,919 4,919 9 507 4,438 3,907 3,907 6 537 Debt instruments at amortized cost 11 11 11 0 0 12 12 12 0 0 Equity instruments at FV OCI without recycling Loans at amortized Cost 1,534 9,866 1,623 9,866 1,623 9,866 181 0 92 0 1,739 10,650 1,768 10,650 1,768 10,650 255 0 226 0 (a) Net of impairment and includes premiums/discount and related accumulated amortization as well as accrued interest when applicable.(b) Net of impairment. Total June 30, 2023 December 31, 2022, restated (in EURO million) Amortized cost KLM Fair Value Carrying value KVM Unrealized gains Unrealized losses Amortized cost KLM Fair Value Carrying value (b) Unrealized gains Unrealized losses Debt instruments at FV OCI 290,303 274,404 274,404 11,322 27,220 298,723 276,953 276,953 10,880 32,651 Debt instruments at amortized cost 15,975 14,319 15,975 19 1,675 16,009 14,259 16,009 26 1,776 Equity instruments at FV OCI without recycling Loans at amortized Cost 12,965 26,183 13,990 25,566 13,990 26,183 2,660 33 1,635 650 14,499 27,551 14,472 26,864 14,472 27,551 2,036 38 2,063 724 (a) Net of impairment and includes premiums/discount and related accumulated amortization as well as accrued interest when applicable.(b) Net of impairment. Half Year 2023 Financial Report 110 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II 5.4 FINANCIAL INVESTMENTS SUBJECT TO IMPAIRMENT 5.4.1 Breakdown of financial investments subject to impairment June 30, 2023 Cost before impairment and revaluation to fair value Impairment Cost after impairment but before revaluation to fair value Revaluation to fair value Carrying value (in EURO million) Financial Assets for which the loss allowance is measured at an amount equal to 12 months expected credit losses (Stage 1) Debt instruments at amortized cost 15,904 (16) 15,887 15,887 Debt instruments at FV OCI 290,242 (50) 290,192 (15,877) 274,315 Debt instruments 306,145 (66) 306,079 (15,877) 290,202 Loans at amortized cost 25,146 (51) 25,096 25,096 Loans 25,146 (51) 25,096 25,096 TOTAL 331,292 (117) 331,175 (15,877) 315,298 Financial Assets for which the loss allowance is measured at an amount equal to lifetime expected credit losses for which credit risk has increased significantly but are not credit impaired (Stage 2) Debt instruments at amortized cost 136 (48) 88 88 Debt instruments at FV OCI 41 (6) 35 (14) 21 Debt instruments 177 (54) 123 (14) 109 Loans at amortized cost 602 (8) 594 594 Loans 602 (8) 594 594 TOTAL 780 (62) 718 (14) 704 Financial assets for which the loss allowance is measured at an amount equal to lifetime expected credit losses and not purchased or originated credit impaired (Stage 3) Debt instruments at amortized cost Debt instruments at FV OCI 105 (29) 76 (9) 67 Debt instruments 105 (29) 76 (9) 67 Loans at amortized cost 671 (192) 480 480 Loans 671 (192) 480 480 TOTAL 776 (220) 555 (9) 546 Other Debt instruments at amortized cost 0 (0) Debt instruments at FV OCI 0 0 1 1 Debt instruments 0 (0) 0 1 1 Loans at amortized cost 10 4 14 14 Loans 10 4 14 14 TOTAL 10 4 14 1 15 Total Financial investments Debt instruments at amortized cost 16,040 (65) 15,975 15,975 Debt instruments at FV OCI 290,388 (85) 290,303 (15,898) 274,404 Debt instruments 306,428 (150) 306,278 (15,898) 290,380 Loans at amortized cost 26,429 (246) 26,183 26,183 Loans 26,429 (246) 26,183 26,183 TOTAL 332,857 (396) 332,461 (15,898) 316,563 Half Year 2023 Financial Report 111 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 II December 31, 2022, restated Cost before impairment and revaluation to fair value Impairment Cost after impairment but before revaluation to fair value Revaluation to fair value Carrying value (in EURO million) Financial Assets for which the loss allowance is measured at an amount equal to 12 months expected credit losses (Stage 1) Debt instruments at amortized cost 15,738 (16) 15,721 15,721 Debt instruments at FV OCI 298,651 (52) 298,599 (21,754) 276,845 Debt instruments 314,389 (69) 314,320 (21,754) 292,566 Loans at amortized cost 26,326 (45) 26,281 26,281 Loans 26,326 (45) 26,281 26,281 TOTAL 340,715 (113) 340,602 (21,754) 318,848 Financial Assets for which the loss allowance is measured at an amount equal to lifetime expected credit losses for which credit risk has increased significantly but are not credit impaired (Stage 2) Debt instruments at amortized cost 97 (48) 48 48 Debt instruments at FV OCI 48 (7) 42 (11) 30 Debt instruments 145 (55) 90 (11) 79 Loans at amortized cost 747 (7) 740 740 Loans 747 (7) 740 740 TOTAL 892 (62) 830 (11) 819 Financial assets for which the loss allowance is measured at an amount equal to lifetime expected credit losses and not purchased or originated credit impaired (Stage 3) Debt instruments at amortized cost Debt instruments at FV OCI 122 (39) 83 (6) 77 Debt instruments 122 (39) 83 (6) 77 Loans at amortized cost 674 (157) 517 517 Loans 674 (157) 517 517 TOTAL 797 (197) 600 (6) 594 Other Debt instruments at amortized cost 240 (0) 240 240 Debt instruments at FV OCI 0 0 Debt instruments 240 (0) 240 0 240 Loans at amortized cost 8 4 13 13 Loans 8 4 13 13 TOTAL 249 4 252 0 252 Total Financial investments Debt instruments at amortized cost 16,075 (65) 16,009 16,009 Debt instruments at FV OCI 298,822 (98) 298,723 (21,771) 276,953 Debt instruments 314,896 (163) 314,733 (21,771) 292,962 Loans at amortized cost 27,756 (205) 27,551 27,551 Loans 27,756 (205) 27,551 27,551 TOTAL 342,652 (368) 342,284 (21,771) 320,513 Half Year 2023 Financial Report 112 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 5.4.2 Change in impairment on financial investments June 30, 2023 Stage 1: 12 month Expected Credit Losses Stage 2: Lifetime Expected Credit Losses Stage 3: Lifetime Expected Credit Losses Purchased/Originated Credit Impaired Total (in EURO million) Gross Carrying Amount Allowance for Expected Credit Losses Gross Carrying Amount Allowance for Expected Credit Losses Gross Carrying Amount Allowance for Expected Credit Losses Gross Carrying Amount Allowance for Expected Credit Losses Gross Carrying Amount Allowance for Expected Credit Losses January 1, 2023 Debt securities at FV OCI 298,651 (52) 48 (7) 122 (39) 298,822 (98) Total Opening period 298,651 (52) 48 (7) 122 (39) 298,822 (98) Transfers to 12 month ECL (Stage 1) Debt securities at FV OCI 32 (0) (9) 0 23 0 Transfers to lifetime ECL (Stage 2) Debt securities at FV OCI (20) 2 20 (2) Transfer to credit impaired (Stage 3) Debt securities at FV OCI (2) (0) (7) 1 9 (1) (0) 0 New financial assets purchased or originated Debt securities at FV OCI 18,188 (3) 18,188 (3) Financial assets that have been derecognized Debt securities at FV OCI (30,720) 2 (12) 0 (26) 12 (30,758) 15 Other (b) Debt securities at FV OCI 4,114 1 (0) 1 (0) (0) 0 4,113 1 June 30, 2023 Debt securities at FV OCI 290,242 (50) 41 (6) 105 (29) 0 290,388 (85) Total Closing period 290,242 (50) 41 (6) 105 (29) 0 290,388 (85) (a) Includes amortization premiums/discount and accrued interests. (b) Includes changes due to modification that did not result in derecognition, change to risk parameters / model inputs, foreign exchange impacts and changes in scope. Half Year 2023 Financial Report 113 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022, restated Stage 1: 12 month Expected Credit Losses Stage 2: Lifetime Expected Credit Losses Stage 3: Lifetime Expected Credit Losses Purchased/Originated Credit Impaired (in EURO million) Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) January 1, 2022 Debt securities at FV OCI 323,668 (59) 77 (1) 42 (25) 323,787 Total Opening period 323,668 (59) 77 (1) 42 (25) 323,787 Transfers to 12 month ECL (Stage 1) Debt securities at FV OCI 210 (0) (2) 0 208 Transfers to lifetime ECL (Stage 2) Debt securities at FV OCI (37) 2 37 (4) Transfer to credit impaired (Stage 3) Debt securities at FV OCI (3) (0) (15) 1 18 (1) (0) New financial assets purchased or originated Debt securities at FV OCI 34,481 (5) 34,481 Financial assets that have been derecognized Debt securities at FV OCI (45,401) 9 (48) 1 (5) 2 (45,454) Other (b) Debt securities at FV OCI (14,265) 0 (1) (3) 67 (15) (14,200) December 31, 2022 Debt securities at FV OCI 298,651 (52) 48 (7) 122 (39) 298,822 Total Closing Period 298,651 (52) 48 (7) 122 (39) 298,822 (a) Includes amortization premiums/discount and accrued interests. (b) Includes changes due to modification that did not result in derecognition, change to risk parameters / model inputs, foreign exchange impacts and changes in scope. Half Year 2023 Financial Report Total Allowance for Expected Credit Losses (85) (85) (0) (1) (0) (5) 12 (18) (98) (98) 114 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 June 30, 2023 Stage 1: 12 month Expected Credit Losses Stage 2: Lifetime Expected Credit Losses Stage 3: Lifetime Expected Credit Losses Purchased/Originated Credit Impaired Total Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses (in EURO million) Balance at 1 January 2023 Debt securities at amortized cost 15,738 (16) 97 (48) 240 (0) 16,075 (65) Loans at amortized cost 26,326 (45) 747 (7) 674 (157) 8 4 27,756 (205) Total Opening period 42,064 (61) 843 (55) 674 (157) 249 4 43,830 (270) Transfers to 12 month ECL (Stage 1) Debt securities at amortized cost Loans at amortized cost (97) (0) 98 0 (2) 0 (0) 0 Subtotal (97) (0) 98 0 (2) 0 (0) 0 Transfers to lifetime ECL (Stage 2) Debt securities at amortized cost (5) 3 5 (3) Loans at amortized cost (31) 0 31 (0) (0) Subtotal (36) 3 36 (3) (0) Transfer to credit impaired (Stage 3) Debt securities at amortized cost Loans at amortized cost (8) 0 8 (1) (1) Subtotal (8) 0 8 (1) (1) New financial assets purchased or originated Debt securities at amortized cost 663 (1) 663 (1) Loans at amortized cost 4,532 (2) 2 (0) 4,534 (2) Subtotal 5,195 (3) 2 (0) 5,197 (3) Financial assets that have been derecognized Debt securities at amortized cost (1,325) 0 (5) 3 (1,330) 3 Loans at amortized cost (5,001) 0 (4) 0 (1) 0 (0) (5,006) 0 Subtotal (6,326) 0 (9) 3 (1) 0 (0) (6,336) 3 Other (b) Debt securities at amortized cost 833 (1) 40 0 (240) 0 633 (1) Loans at amortized cost (576) (5) (270) (1) (9) (33) (0) (0) (855) (39) Subtotal 257 (6) (230) (1) (9) (33) (240) (0) (222) (40) Closing Period Debt securities at amortized cost 15,904 (16) 136 (48) 0 (0) 16,040 (65) Loans at amortized cost 25,146 (51) 602 (8) 671 (192) 10 4 26,429 (246) Total Closing Period 41,050 (67) 739 (56) 671 (192) 10 4 42,470 (311) (a) Includes amortization premiums/discount and accrued interests. (b) Includes changes due to modification that did not result in derecognition, change to risk parameters / model inputs, foreign exchange impacts and changes in scope. Half Year 2023 Financial Report 115 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022, restated Stage 1: 12 month Expected Credit Losses Stage 2: Lifetime Expected Credit Losses Stage 3: Lifetime Expected Credit Losses Purchased/Originated Credit Impaired Gross Carrying Amount (a) (in EURO million) Balance at 1 January 2022 Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Allowance for Expected Credit Losses Gross Carrying Amount (a) Debt securities at amortized cost 14,389 (12) 20 (0) 230 (0) 14,640 Loans at amortized cost 25,383 (46) 589 (14) 599 (139) 1 1 26,572 Total period Opening 39,772 (58) 609 (15) 599 (139) 231 0 41,211 Transfers to 12 month ECL (Stage 1) Debt securities at amortized cost (0) Loans at amortized cost 129 (2) (129) 2 Subtotal 129 (2) (129) 2 Transfers to lifetime ECL (Stage 2) Debt securities at amortized cost (91) 10 91 (18) Loans at amortized cost (32) 0 32 (0) Subtotal (122) 10 122 (18) Transfer to credit impaired (Stage 3) Debt securities at amortized cost Loans at amortized cost (9) 0 (1) 0 10 (17) 0 Subtotal (9) 0 (1) 0 10 (17) 0 New financial assets purchased or originated Debt securities at amortized cost 3,832 (3) 8 3,841 Loans at amortized cost 10,682 (10) 2 (1) 10,683 Subtotal 14,514 (13) 10 (1) 14,524 Financial assets that have been derecognized Debt securities at amortized cost (2,058) 1 (15) 0 (7) (2,080) Loans at amortized cost (7,268) 8 (164) 1 (19) 10 (7,452) Subtotal (9,326) 9 (179) 1 (19) 10 (7) (9,532) Other (b) Debt securities at amortized cost (336) (12) 1 (30) 9 0 (326) Loans at amortized cost (2,559) 4 420 4 85 (11) 6 5 (2,047) Subtotal (2,895) (7) 421 (26) 85 (11) 15 5 (2,373) Closing Period Debt securities at amortized cost 15,738 (16) 97 (48) 240 (0) 16,075 Loans at amortized cost 26,326 (45) 747 (7) 674 (157) 8 4 27,756 Total Period Closing 42,064 (61) 843 (55) 674 (157) 249 4 43,830 (a) Includes amortization premiums/discount and accrued interests. (b) Includes changes due to modification that did not result in derecognition, change to risk parameters / model inputs, foreign exchange impacts and changes in scope. Half Year 2023 Financial Report Total Allowance for Expected Credit Losses (13) (198) (211) (0) 0 0 (8) (8) (17) (17) (3) (11) (14) 1 18 20 (42) 2 (40) (65) (205) (270) 116 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 5.5 INVESTMENTS/FAIR VALUE Fair values determined in whole directly by reference to an active market relate to prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market is still active. Such assets are categorized in the level 1 of the IFRS 13 fair value hierarchy. Level 2 and 3 assets are investments which are not quoted in an active market or for which there is no active market. Fair values for level 2 and 3 assets include: values provided by external parties which o are readily available including last transaction prices but relate to assets for which the market is not always active, o values provided at the request of the Group by pricing services and which are not readily publicly available; assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market transactions and observable data. The common characteristic of level 2 and 3 assets is that their related market is considered as inactive. Their value is generally based on a mark to market basis, except when there is no market or when the market is distressed, in which case a mark to model approach is used. Assets not quoted in an active market which are marked to market using mainly observable inputs are classified in level 2. Assets not quoted in an active market for which fair value determination is not mainly based on observable inputs are classified as level 3. For all assets not quoted in an active market/ no active market and for which a mark to model approach is used, the classification between level 2 and level 3 depends on the proportion of assumptions used supported by market transactions and observable data (market observable inputs): assumed to be used by pricing services; or used by the Group in the limited cases of application of mark to model valuations. Half Year 2023 Financial Report 117 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 5.5.1 Investments recognized at fair value The breakdown by valuation method of investments recognized at fair value excluding assets backing contracts where the financial risk is borne by policyholders is as follows: June 30, 2023 December 31, 2022, restated Assets quoted in an active market Assets not quoted in an active market or no active market Assets quoted in an active market Assets not quoted in an active market or no active market (in EURO million) Fair Value determined directly by reference to active market (level 1) Fair Value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total Fair Value determined directly by reference to active market (level 1) Fair Value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Debt instruments 203,706 70,157 541 274,404 201,906 74,811 235 Equity instruments 9,286 1,326 3,378 13,990 10,224 1,601 2,647 Financial assets at FV OCI 212,992 71,483 3,919 288,394 212,131 76,413 2,882 Debt instruments 6,656 4,583 808 12,047 5,638 5,193 1,107 Equity instruments 3,748 1,435 9,452 14,635 3,664 1,670 10,520 Non consolidated investment funds 2,055 8,466 7,665 18,185 1,903 8,940 7,861 Other assets, held by consolidated investment funds 1,925 9,956 10,881 22,762 1,787 7,398 11,108 Loans 16 16 17 Financial assets at FV P&L 14,383 24,456 28,806 67,645 12,992 23,218 30,596 Debt instruments 1,677 1,677 1,814 Loans 3,726 3,726 3,899 Financial assets at FV Option 1,677 3,726 5,403 1,814 3,899 TOTAL FINANCIAL ASSETS AT FV 229,053 99,666 32,724 361,443 226,937 103,530 33,478 During the first half of 2023, the bid-to-ask spread tightening across the board lead to transfers from level 2 to level 1. During the period ended on June 30, 2023, the net transfer from Level 2 to Level 1 was €+4,989 million. This amount comprised €4,908 million transferred from Level 1 to Level 2, of which €4,538 million for Corporate bonds and €335 million for Government bonds, and €9,897 million from Level 2 to Level 1, of which €6,739 million for Corporate bonds and €3,123 million for Government bonds. TRANSFER IN AND OUT OF THE LEVEL 3 CATEGORY AND OTHER MOVEMENTS From January 1, 2023 to June 30, 2023, the amount of level 3 assets decreased by €-0.8 billion to €32.7 billion, representing 9.1% of the total assets at fair value (9.2% as of December 31, 2022 or €33.5 billion). Main movements relating to level 3 assets to be noted were the following: €+2.5 billion of new investments; €+0.8 billion of change in unrealized gains and losses; Half Year 2023 Financial Report Total 276,953 14,472 291,425 11,938 15,853 18,705 20,293 17 66,807 1,814 3,899 5,712 363,944 118 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 €-2.2 billion of net asset transfers in and out of level 3 and foreign exchange fluctuation impact; €-1.9 billion of asset sales, redemptions and settlements mainly debt instruments, equity securities and non-consolidated investment funds accounted as available for sale and equity securities, non- consolidated investment funds, other assets held by controlled investment funds and debt instruments accounted as fair value through profit and loss. A majority of assets classified in level 3 corresponds to private investments, in particular private equity assets. 5.5.2 Investments recognized at amortized cost June 30, 2023 December 31, 2022, restated Assets quoted in an active market Assets not quoted in an active market or no active market Assets quoted in an active market Assets not quoted in an active market or no active market (in EURO million) Fair value determined directly by reference to active market (level 1) Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Total Fair value determined directly by reference to active market (level 1) Fair value mainly based on observable market data (level 2) Fair value mainly not based on observable market data (level 3) Investment in real estate properties at amortized cost 0 42,948 973 43,921 69 42,775 843 Debt instruments at amortized cost 351 9,084 4,884 14,319 167 9,095 4,998 Loans at amortized cost 15 11,070 14,482 25,566 18 12,079 14,767 TOTAL FAIR VALUE OF INVESTED ASSETS AT AMORTIZED COST 365 63,101 20,339 83,806 254 63,949 20,608 Half Year 2023 Financial Report Total 43,686 14,259 26,864 84,810 119 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 6 SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS The consolidated statement of changes in equity is presented as a primary Financial Statement. 6.1 IMPACT OF TRANSACTIONS WITH SHAREHOLDERS 6.1.1 Change in shareholders’ equity group share for the first half of 2023 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2023, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €-1,402 million corresponding to 58.6 million shares mainly to cancel the shares bought in the context of the share buy back programs; capital increase of €18 million due to the exercise of stock options for 0.8 million shares; shared based payments for €22 million. TREASURY SHARES As of June 30, 2023, the Company and its subsidiaries owned 70.1 million AXA shares, representing 3.1% of the share capital, a decrease of 17.2 million shares compared to December 31, 2022. The 0.6 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €15 million, and their market value was €18 million at the end of June 2023. The carrying value of treasury shares and related derivatives was €2,093 million. No AXA shares were held directly by AXA subsidiaries or by consolidated mutual funds other than those backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES Undated subordinated debt instruments are classified in shareholders’ equity at their historical value and their closing value as regards exchange rates. The corresponding exchange differences are cancelled out through the translation reserve. During the first half of 2023, the following transactions pertaining to undated subordinated debt had an impact on AXA’s other reserves: €+5 million from foreign exchange rate fluctuations; €-92 million from interest expenses related to undated subordinated debts (net of tax). Half Year 2023 Financial Report 120 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 As of June 30, 2023 and December 31, 2022, undated subordinated debts recognized in shareholders’ equity were as follows: June 30 2023 December 31 2022 Value of the undated debt in currency of issuance Value of the undated debt in Euro million Value of the undated debt in currency of issuance Value of the undated debt in Euro million (in EURO million) October 29, 2004 - 375 M€ 6% 375 375 375 375 December 22, 2004 - 250 M€ 6% 250 250 250 250 January 25, 2005 - 250 M€ 6% 250 250 250 250 July 6, 2006 - 350 M£ 6.6862% 350 408 350 395 December 14, 2006 - 750 M US$ 6,3790% 509 466 509 475 November 7, 2014 – 984 M€ 3.941% 984 981 984 981 November 7, 2014 – 724 M£ 5.453% 724 841 724 813 May 20, 2014 - 1.000 M€ - 3.875% until October 2025 Perpetual notes - variables rates in € Perpetual notes - 3.29% in JPY Perpetual notes - (of which 500 M US$ at 7,1%) in US$ 1,000 625 27,000 375 997 625 172 345 1,000 625 27,000 375 997 625 192 352 TOTAL 5,709 5,704 Undated subordinated debt often contains the following features: early redemption clauses (calls) at the Group’s option, giving AXA the ability to redeem on certain dates the principal amount before settlement and without penalty, and; interest rate step-up clauses with effect from a given date. DIVIDENDS PAID At the Shareholders’ meeting held on April 27, 2023, shareholders approved a dividend distribution of €1.70 per share corresponding to €3,787 million with respect to the 2022 financial year. 6.1.2 Change in shareholders’ equity Group share for the first half of 2022 SHARE CAPITAL AND CAPITAL IN EXCESS OF NOMINAL VALUE During the first half of 2022, the following transactions had an impact on AXA’s share capital and capital in excess of nominal value: capital decrease of €-2,207 million corresponding to 85.9 million shares mainly to cancel the shares bought in the context of the share buy back programs; capital increase of €13 million due to the exercise of stock options for 0.6 million shares ; shared based payments for €24 million. Half Year 2023 Financial Report 121 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 TREASURY SHARES As of June 30, 2022, the Company and its subsidiaries owned 32.4 million AXA shares, representing 1.4% of the share capital, a decrease of 33.7 million shares compared to December 31, 2021. The 0.9 million treasury shares backing contracts where the financial risk is borne by policyholders held in controlled investment funds were not deducted from shareholders’ equity. Their total estimated historical cost was €20 million and their market value was €20 million. The carrying value of treasury shares and related derivatives was €960 million. No AXA shares were held directly by AXA subsidiaries or by consolidated mutual funds other than those backing contracts where financial risk is borne by policyholders. UNDATED SUBORDINATED DEBT AND RELATED FINANCIAL EXPENSES During the first half of 2022, the following transactions pertaining to undated subordinated debts had an impact on AXA’s other reserves: €-746 million from repayment of undated subordinated debt; €+48 million from foreign exchange rate fluctuations; €-91 million from interest expenses related to the undated subordinated debt (net of tax). DIVIDENDS PAID At the Shareholders’ meeting held on April 28, 2022, shareholders approved a dividend distribution of €1.54 per share corresponding to €3,539 million with respect to the 2021 financial year. 6.2 COMPREHENSIVE INCOME FOR THE PERIOD The Statement of Comprehensive Income, presented as a primary financial statement, includes the net income for the period, reserves recognized through other comprehensive income (“OCI”), the translation reserve, and actuarial gains and losses on employee benefit obligations. 6.2.1 Comprehensive income for the first half of 2023 OTHER RESERVES RECOGNIZED THROUGH OCI IN ACCORDANCE WITH IFRS9 AND IFRS17 (in EURO million) Fair value reserves relating to financial instruments KLM Fair value reserves relating to cash flow hedge derivatives Reserves relating to the cost of hedging Reserves relating to finance income or expenses from insurance and reinsurance contracts Balance at January 1, 2023 (17,680) (5,207) 48 14,081 Change in fair value of financial instruments, as well as finance income or expenses from insurance and reinsurance contracts, recognized in other comprehensive income with recycling in Profit or Loss 4,486 147 (46) (3,653) Change in fair value and realised capital gains or losses on equity instruments, as well as finance income or expenses from insurance contracts, recognized in other comprehensive income without recycling in Profit or Loss 920 (581) Change in scope and other (1) 0 0 1 Other comprehensive income Balance at June 30, 2023 5,405 (12,275) 147 (5,060) (46) 1 (4,233) 9,849 (a) Including the fair value hedge of equity instruments. Half Year 2023 Financial Report Total (8,758) 933 339 0 1,273 (7,485) 122 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 (in EURO million) Fair value reserves relating to financial instruments KLM Fair value reserves relating to cash flow hedge derivatives Reserves relating to the cost of hedging Reserves relating to finance income or expenses from insurance and reinsurance contracts Balance at January 1, 2022, restated 36,207 128 (8) (39,466) Change in fair value of financial instruments, as well as finance income or expenses from insurance and reinsurance contracts, recognized in other comprehensive income with recycling in Profit or Loss (36,025) (5,249) 111 38,105 Change in fair value and realised capital gains or losses on equity instruments, as well as finance income or expenses from insurance contracts, recognized in other comprehensive income without recycling in Profit or Loss (3,658) 2,059 Change in scope and other (1) (0) 0 Other comprehensive income Balance at June 30, 2022 (39,684) (3,477) (5,249) (5,121) 111 103 40,164 698 (a) Including the fair value hedge of equity instruments. REALIZED CAPITAL GAINS OR LOSSES ON EQUITY INSTRUMENTS Under IFRS 9, realized capital gains or losses on Equity instruments accounted for at fair value through other comprehensive income are accounted directly in retained earnings, without affecting the net income of the period. For the first half of 2023, the Group share realized gain net of tax amounted to €+23 million. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2023 amounted to €-786 million of which €-772 million from Group share and €-14 million from minority interests. This was mainly driven by AXA XL (€-401 million), Japan (€-357 million) and China (€-131 million), partly offset by AXA SA (€+191 million) and Switzerland (€+122 million). EMPLOYEE BENEFITS ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains for the first half year of 2023 amounted to €+568 million (of which €+565 million from Group share and €+3 million from minority interests). This was mainly driven by an increase in the net defined benefit asset of the Swiss pension plan. Measured at half year on the AXA’s share in the cost of the future employee benefits, the asset ceiling had no more effect of limiting the net defined benefit asset to be recognized. Half Year 2023 Financial Report Total (3,139) (3,058) (1,600) (1) (4,658) (7,797) 123 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 6.2.2 Comprehensive income for the first half of 2022 REALIZED CAPITAL GAINS OR LOSSES ON EQUITY INSTRUMENTS For the first half of 2022, the Group share realized gain net of tax amounted to €+378 million. CURRENCY TRANSLATION RESERVE The total impact of currency translation reserve for the first half year of 2022 amounted to €+1,630 million of which €+1,615 million from Group share and €+15 million from minority interests. This was mainly driven by AXA XL (€+1,473 million), Switzerland (€+360 million), Hong Kong (€+333 million) and China (€+28 million) partly offset by Japan (€-308 million) and (United Kingdom (€-109 million). EMPLOYEE BENEFIT ACTUARIAL GAINS AND LOSSES The total impact of employee benefit actuarial gains amounted to €+1,287 million (€+1,280 million Group share) for the first half year of 2022. This was mainly driven by the overall increase in discount rate assumptions used, reflecting the economic and financial conditions as at the end of June, 2022. 6.2.3 Estimate of fair value reserve related to financial instruments corresponding to LIC occurred before 2016 As explained in paragraph 1.2.1.1 of Note 1 on Transition methods), the other comprehensive income (“OCI”) was set to zero at transition for liabilities for incurred claims (“LIC”) occurred before 2016 related to non-direct participating contracts. Opposite to these liabilities, the Group holds financial assets at fair value through OCI. The estimate of the OCI net of tax on these financial assets was respectively: €+937 million as of January 1, 2022, at transition date (€+1,251 million before tax); €-400 million as of December 31, 2022 (€-535 million before tax); €-217 million as of June 30, 2023 (€-293 million before tax). The decrease in OCI since transition has mainly resulted from the increase in interest rates. The allocation of assets (and therefore the related OCI) to LIC occurred before 2016 has also naturally decreased as these LIC are progressively settled over the time. 6.3 CHANGE IN MINORITY INTERESTS Under IFRS, minority interests in most investment funds in which the Group invests consist of instruments that holders can redeem at will at fair value, and qualify as a liability rather than a shareholders’ equity item. 6.3.1 Change in minority interests for the first half of 2023 The €-112 million decrease in minority interests to €+2,906 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+104 million; o Reserves relating to changes in fair value through shareholders’ equity for €+51 million; o Realized gains or losses on equity instruments, without recycling in profit or loss for €+8 million; o Foreign exchange movements for €-14 million; Half Year 2023 Financial Report 124 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 o Employee benefits actuarial gains and losses for €+3 million. Transactions with minority interests’ holders, mainly included: o Minority interests in consolidated investments funds qualified as equity resulting from the decrease in the value of minority interests holdings due to divestment in the funds for €-111 million; o Dividend payout to minority interests’ holders for €-150 million. 6.3.2 Change in minority interests for the first half of 2022 The €-173 million decrease in minority interests to €+3,529 million was mainly driven by the comprehensive income and transactions with minority interest holders: The comprehensive income for the period included the following: o Net income attributable to minority interests for €+74 million; o Reserves relating to changes in fair value through shareholders’ equity for €-79 million; o Realized gains or losses on equity instruments, without recycling in profit or loss for €-13 million; o Foreign exchange movements for €+15 million; o Employee benefits actuarial gains and losses for €+7 million. Transactions with minority interests’ holders, mainly included: o Minority interests in consolidated investments funds qualified as equity resulting from the decrease in the value of minority interests holdings due to divestment in the funds for €-82 million; o Dividend payout to minority interests’ holders for €-142 million Half Year 2023 Financial Report 125 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 7 INSURANCE AND REINSURANCE CONTRACTS The purpose of this note is to highlight the effects of insurance and reinsurance contracts issued, investment contracts with discretionary participation features (“DPF”), as well as reinsurance contracts held on the consolidated statement of financial position and the consolidated statement of profit or loss. As such, information disclosed relates to assets and liabilities arising from insurance and reinsurance contracts, as well as liabilities arising from investment contracts with DPF. 7.1 RECONCILIATIONS WITH THE CONSOLIDATED FINANCIAL STATEMENTS The tables included in this section enable to reconcile the consolidated statement of financial position and the consolidated statement of profit or loss with required information disclosed in the next paragraphs. These reconciliations consist in neutralizing the amounts of both insurance and reinsurance receivables and payables, as well as the assets for insurance acquisition cash flows, in the balance sheet on one hand, and the related amounts affecting the profit or loss on the other hand. 7.1.1 Reconciliation with the consolidated statement of financial position The reconciliation of amounts presented in the consolidated statement of financial position with the carrying amount of insurance contracts and investment contracts with DPF, as disclosed below in section 7.2, is formalised as follows: (in EURO million) June 30, 2023 Reconciliation from the statement of financial position to the notes to the consolidated financial statements Liabilities arising from insurance contracts and investment contracts with discretionary participation features 446,544 Assets arising from insurance contracts and investment contracts with discretionary participation features 7 Net position 446,537 Receivables arising from direct insurance and inward reinsurance operations 30,821 Payables arising from direct insurance and inward reinsurance operations (9,886) Assets relating to insurance acquisition cash flows 204 Carrying amount of insurance contracts and investment contracts with discretionary participation features, as disclosed in notes to the consolidated financial statements 467,675 The reconciliation of amounts presented in the consolidated statement of financial position with the carrying amount of reinsurance contracts held as disclosed below in section 7.3, is formalised as follows: Half Year 2023 Financial Report December 31, 2022, restated 444,812 4 444,808 28,317 (10,960) 226 462,391 126 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 (in EURO million) June 30, 2023 Reconciliation from the statement of financial position to the notes to the consolidated financial statements Assets arising from reinsurance contracts held 24,723 Liabilities arising from reinsurance contracts held 7 Net position 24,717 Payables arising from outward reinsurance operations 14,461 Receivables arising from outward reinsurance operations (3,608) Carrying amount of reinsurance contracts held, as disclosed in notes to the consolidated financial statements 35,570 7.1.2 Reconciliation with the consolidated statement of profit or loss The reconciliation of amounts presented in the consolidated statement of profit or loss to both the “Insurance service expenses” and the “Net finance income or expenses from insurance contracts recognised in profit or loss”, as disclosed below in section 7.2, is formalised as follows: (in EURO million) June 30, 2023 Reconciliation from the statement of profit or loss to the notes to the consolidated financial statements Insurance service expenses, as disclosed in the statement of profit or loss (33,627) Increase in impairment relating to receivables arising from direct insurance and inward reinsurance operations (22) Write back of impairment relating to receivables arising from direct insurance and inward reinsurance operations 10 Increase in impairment of assets relating to insurance acquisition cash flows Write back of impairment of assets relating to insurance acquisition cash flows Insurance service expenses, as disclosed in notes to the consolidated financial statements (33,615) Net finance income or expenses from insurance contracts, as disclosed in the statement of profit or loss (7,603) Interest income on receivables arising from direct insurance and inward reinsurance operations 4 Interest expenses on payables arising from direct insurance and inward reinsurance operations (21) Foreign exchange unrealized gains or losses relating to receivables and payables arising from direct insurance and inward reinsurance operations 88 Foreign exchange realized gains or losses relating to receivables and payables arising from direct insurance and inward reinsurance operations (1) Net finance income or expenses from insurance contracts recognized in profit or loss, as disclosed in notes to the consolidated financial statements (7,533) Half Year 2023 Financial Report December 31, 2022, restated 24,373 5 24,368 13,013 (4,119) 33,263 June 30, 2022, restated (35,597) (22) 14 (35,588) 7,199 (18) 6 (30) 8 7,166 127 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 The reconciliation of amounts presented in the consolidated statement of profit or loss to both the “Net expenses from reinsurance contracts held” and the “Net finance income or expenses from reinsurance contracts recognised in profit or loss”, as disclosed below in section 7.3, is formalised as follows: (in EURO million) June 30, 2023 Reconciliation from the statement of profit or loss to the notes to the consolidated financial statements Net expenses from reinsurance contracts held, as disclosed in the statement of profit or loss (1,209) Increase in impairment relating to receivables arising from outward reinsurance operations (0) Write back of impairment relating to receivables arising from outward reinsurance operations 0 Net expenses from reinsurance contracts held, as disclosed in notes to the consolidated financial statements (1,209) Net finance income or expenses from reinsurance contracts held, as disclosed in the statement of profit or loss 155 Interest income on receivables arising from outward reinsurance operations (0) Interest expense on payables arising from outward reinsurance operations 4 Foreign exchange unrealized gains or losses relating to receivables and payables arising from outward reinsurance operations (0) Foreign exchange realized gains or losses relating to receivables and payables arising from outward reinsurance operations Effect of changes in non-performance risk of reinsurers (6) Net finance income or expenses from reinsurance contracts recognized in profit or loss, as disclosed in notes to the consolidated financial statements 153 Half Year 2023 Financial Report June 30, 2022, restated (658) (0) 0 (658) 297 (0) 4 (39) 29 291 128 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 7.2 MOVEMENTS IN BALANCES OF INSURANCE CONTRACTS AND INVESTMENT CONTRACTS WITH DISCRETIONARY PARTICIPATION FEATURES (“DPF”) 7.2.1 Changes in the carrying amount of insurance contracts and investment contracts with DPF, split between remaining coverage and incurred claims components The following tables provide an analysis of movements in the carrying amount of insurance contracts and investment contracts with DPF, split between the Liability for Remaining Coverage (“LRC”) and the Liability for Incurred Claims (“LIC”). June 30, 2023 Remaining coverage component Incurred claims component Excluding loss component Loss component Total remaining coverage component Contracts not measured under Premium Allocation Approach Contracts measured under Premium Allocation Approach Estimates of present value of future cash flows Risk adjustment Total incurred claims component (in EURO million) Opening assets (4) 0 (4) 0 0 0 0 Opening liabilities 346,776 2,440 349,216 (246) 111,648 1,776 113,179 Net opening balance 346,772 2,440 349,212 (246) 111,648 1,776 113,179 Contracts under the modified retrospective approach (MRA) (3,049) 0 (3,049) 0 0 0 0 Contracts under the fair value approach (FVA) (808) 0 (808) 0 0 0 0 Other contracts (35,337) 0 (35,337) 0 0 0 0 Insurance revenue (39,194) 0 (39,194) 0 0 0 0 Incurred claims and other insurance service expenses 0 (102) (102) 5,670 22,374 178 28,223 Amortization of insurance acquisition cash flows 5,610 0 5,610 0 0 0 0 Losses and reversal of losses on onerous contracts 0 16 16 0 0 0 0 Adjustments to liabilities for incurred claims 0 0 0 (410) 521 (242) (132) Insurance service expenses 5,610 (86) 5,524 5,260 22,895 (64) 28,091 Investment components (14,753) 0 (14,753) 14,275 478 0 14,753 Insurance service result (48,337) (86) (48,422) 19,535 23,373 (64) 42,844 Net finance income or expenses from insurance contracts recognized in profit or loss 7,063 29 7,092 (0) 434 3 437 Net finance income or expenses from insurance contracts recognized in shareholders' equity 5,331 0 5,331 5 871 0 876 Net finance income or expenses from insurance contracts 12,394 29 12,423 4 1,305 3 1,313 Total changes in the statement of profit or loss and shareholders' equity (35,943) (57) (36,000) 19,539 24,679 (61) 44,157 Premiums received 53,846 0 53,846 0 0 0 0 Claims and other insurance service expenses paid, including investment components 0 0 0 (19,611) (24,738) 0 (44,349) Insurance acquisition cash flows paid (7,256) 0 (7,256) 0 0 0 0 Total cash flows 46,590 0 46,590 (19,611) (24,738) 0 (44,349) Effect of movements in exchange rates (4,455) (191) (4,646) (67) (70) (3) (140) Change in scope of consolidation, portfolio transfers, and other changes 7 (276) (270) 4 (63) (0) (59) Net closing balance 352,971 1,916 354,887 (379) 111,455 1,712 112,788 Closing assets (8) 0 (8) 0 0 0 0 Closing liabilities 352,979 1,916 354,895 (379) 111,455 1,712 112,788 129 II Total (4) 462,395 462,391 (3,049) (808) (35,337) (39,194) 28,121 5,610 16 (132) 33,615 0 (5,578) 7,529 6,207 13,736 8,157 53,846 (44,349) (7,256) 2,241 (4,786) (329) 467,675 (8) 467,683 (in EURO million) Opening assets Opening liabilities Net opening balance Contracts under the modified retrospective approach (MRA) Contracts under the fair value approach (FVA) Other contracts Insurance revenue Incurred claims and other insurance service expenses Amortization of insurance acquisition cash flows Losses and reversal of losses on onerous contracts Adjustments to liabilities for incurred claims Insurance service expenses Investment components Insurance service result Net finance income or expenses from insurance contracts recognized in profit or loss Net finance income or expenses from insurance contracts recognized in shareholders' equity Net finance income or expenses from insurance contracts Total changes in the statement of profit or loss and shareholders' equity Premiums received Claims and other insurance service expenses paid, including investment components Insurance acquisition cash flows paid Total cash flows Effect of movements in exchange rates Change in scope of consolidation, portfolio transfers, and other changes Net closing balance Closing assets Closing liabilities CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022, restated Remaining coverage component Incurred claims component Excluding loss component Loss component Total remaining coverage component Contracts not measured under Premium Allocation Approach Contracts measured under Premium Allocation Approach Estimates of present value of future cash flows Risk adjustment Total incurred claims component 0 0 0 0 0 0 0 433,948 2,712 436,660 2,439 114,950 1,841 119,230 433,948 2,712 436,660 2,439 114,950 1,841 119,230 (5,134) 0 (5,134) 0 0 0 0 (2,293) 0 (2,293) 0 0 0 0 (73,021) 0 (73,021) 0 0 0 0 (80,449) 0 (80,449) 0 0 0 0 0 (220) (220) 10,961 50,119 396 61,476 11,053 0 11,053 0 0 0 0 0 14 14 0 0 0 0 0 0 0 54 2,636 (483) 2,206 11,053 (206) 10,847 11,014 52,755 (87) 63,682 (23,841) 0 (23,841) 22,913 928 0 23,841 (93,236) (206) (93,442) 33,928 53,682 (87) 87,523 (4,809) 66 (4,743) (7) 929 14 936 (62,748) 0 (62,748) (57) (13,713) (6) (13,776) (67,557) 66 (67,492) (64) (12,785) 8 (12,840) (160,794) (140) (160,934) 33,864 40,898 (79) 74,683 98,207 0 98,207 0 0 0 0 0 0 0 (36,511) (46,325) 0 (82,835) (12,578) 0 (12,578) 0 0 0 0 85,628 0 85,628 (36,511) (46,325) 0 (82,835) 128 (127) 1 (13) 2,108 11 2,106 (12,140) (4) (12,144) (24) 16 4 (4) 346,772 2,440 349,212 (247) 111,648 1,776 113,179 (4) 0 (4) 0 0 0 0 346,776 2,440 349,216 (246) 111,648 1,776 113,179 Total 0 555,889 555,889 (5,134) (2,293) (73,021) (80,449) 61,256 11,053 14 2,206 74,529 0 (5,919) (3,807) (76,524) (80,332) (86,251) 98,207 (82,835) (12,578) 2,793 2,107 (12,148) 462,391 (4) 462,395 130 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 7.2.2 Changes in the carrying amount of insurance contracts and investment contracts with DPF, broken down by measurement component The following tables provide an analysis of movements in the carrying amount of insurance contracts and investment contracts with DPF broken down by measurement component, namely (i) the estimate of the Present Value of Future Cash Flows (“PVFCF”), (ii) the risk adjustment for non-financial risk (“RA”), and (iii) the Contractual Service Margin (“CSM”). It should be noted that the carrying amount of insurance contracts measured under the Premium Allocation Approach (“PAA”) is also reported to match with the opening and closing balances of financial statements. June 30, 2023 Contractual Service Margin (CSM) (in EURO million) Opening assets Opening liabilities Net opening balance Contractual service margin recognized in profit or loss for services provided Release of risk adjustment Experience adjustments Changes that relate to current services Contracts initially recognized in the period Changes in estimates that adjust the contractual service margin Changes in estimates that result in losses and reversal of losses on onerous contracts Changes that relate to future services Adjustments to liabilities for incurred claims Changes that relate to past services Insurance service result Net finance income or expenses from insurance contracts recognized in profit or loss Net finance income or expenses from insurance contracts recognized in shareholders' equity Net finance income or expenses from insurance contracts Total changes in the statement of profit or loss and shareholders' equity Premiums received Claims and other insurance service expenses paid, including investment components Insurance acquisition cash flows Total cash flows Effect of movements in exchange rates Change in scope of consolidation, portfolio transfers, and other changes Net closing balance Closing assets Closing liabilities Estimates present value of future cash flows (19) 294,890 294,871 0 0 (41) (41) (1,284) (1,916) 6 (3,194) (409) (409) (3,496) 7,166 5,411 12,577 8,933 16,109 (19,611) (1,866) (5,367) (3,349) 85 295,173 (45) 295,218 Risk adjustment 0 1,327 1,327 0 (33) 3 (31) 52 84 3 139 (1) (1) 108 (0) 1 1 108 0 0 0 0 (41) (0) 1,395 1 1,394 Contracts under modified retrospective approach 0 7,613 7,613 (290) 0 0 (290) 31 (21) 0 10 0 0 (280) 50 0 50 (230) 0 0 0 0 (500) 0 6,883 178 6,705 Contracts under fair value approach 0 2,610 2,610 (108) 0 0 (108) 6 72 0 79 0 0 (29) 12 0 12 (17) 0 0 0 0 (91) 0 2,502 0 2,502 All other contracts ⁽ᵃ⁾ 15 23,967 23,982 (1,126) 0 0 (1,126) 1,208 1,781 0 2,989 0 0 1,864 43 0 43 1,906 0 0 0 0 (398) (58) 25,433 (143) 25,576 Total CSM 15 34,190 34,205 (1,523) 0 0 (1,523) 1,246 1,832 0 3,078 0 0 1,555 105 0 105 1,659 0 0 0 0 (989) (58) 34,818 35 34,783 Total carrying amount (excluding contracts measured under PAA) (4) 330,408 330,404 (1,523) (33) (38) (1,594) 14 0 10 23 (410) (410) (1,833) 7,271 5,411 12,682 10,701 16,109 (19,611) (1,866) (5,367) (4,378) 26 331,386 (8) 331,394 Carrying amount of contracts measured under PAA 0 131,987 131,987 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (2,545) 37,737 (24,738) (5,391) 7,608 (406) (355) 136,289 0 136,289 II TOTAL (4) 462,395 462,391 (1,523) (33) (38) (1,594) 14 0 10 23 (410) (410) (1,833) 7,271 5,411 12,682 8,156 53,846 (44,349) (7,256) 2,241 (4,784) (329) 467,675 (8) 467,683 131 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022, restated (in EURO million) Estimates present value of future cash flows Risk adjustment Contractual Service Margin (CSM) Contracts under modified retrospective approach Contracts under fair value approach All other contracts ⁽ᵃ⁾ Total CSM Total carrying amount (excluding contracts measured under PAA) Carrying amount of contracts measured under PAA Opening assets 0 0 0 0 0 0 0 0 Opening liabilities 381,740 1,925 9,023 2,662 22,639 34,324 417,989 137,900 Net opening balance 381,740 1,925 9,023 2,662 22,639 34,324 417,989 137,900 Contractual service margin recognized in profit or loss for services provided 0 0 (749) (230) (2,137) (3,115) (3,115) 0 Release of risk adjustment 0 (114) 0 0 0 0 (114) 0 Experience adjustments 2,728 4 0 0 0 0 2,732 0 Changes that relate to current services 2,728 (110) (749) (230) (2,137) (3,115) (497) 0 Contracts initially recognized in the period (2,481) 82 94 25 2,288 2,408 9 0 Changes in estimates that adjust the contractual service margin 22 (485) (576) (18) 1,057 463 (0) 0 Changes in estimates that result in losses and reversal of losses on onerous contracts 49 (68) 0 0 0 0 (19) 0 Changes that relate to future services (2,410) (471) (482) 8 3,345 2,871 (11) 0 Adjustments to liabilities for incurred claims 54 (1) 0 0 0 0 54 0 Changes that relate to past services 54 (1) 0 0 0 0 54 0 Insurance service result 556 (582) (1,231) (222) 1,208 (245) (270) 0 Net finance income or expenses from insurance contracts recognized in profit or loss (4,770) 0 151 12 18 181 (4,589) 0 Net finance income or expenses from insurance contracts recognized in shareholders' equity (62,829) (1) 0 0 0 0 (62,831) 0 Net finance income or expenses from insurance contracts (67,600) (1) 151 12 18 181 (67,419) 0 Total changes in the statement of profit or loss and shareholders' equity (67,227) (583) (1,080) (210) 1,226 (63) (67,873) (18,381) Premiums received 31,899 0 0 0 0 0 31,899 66,308 Claims and other insurance service expenses paid, including investment components (36,511) 0 0 0 0 0 (36,511) (46,325) Insurance acquisition cash flows (3,330) 0 0 0 0 0 (3,330) (9,248) Total cash flows (7,942) 0 0 0 0 0 (7,942) 10,735 Effect of movements in exchange rates 171 6 (313) 24 237 (52) 125 1,987 Change in scope of consolidation, portfolio transfers, and other changes (11,870) (21) (16) 134 (120) (3) (11,894) (254) Net closing balance 294,871 1,327 7,613 2,610 23,982 34,205 330,404 131,987 Closing assets (19) 0 0 0 15 15 (4) 0 Closing liabilities 294,890 1,327 7,613 2,610 23,967 34,190 330,408 131,987 (a) As of January 1, 2022, it included the CSM at transition date of groups of insurance contracts not applying the annual cohort requirement for €22,486 million euros (refer to paragraph 1.14.3). CSM of these contracts measured at transition applying the Modified Retrospective Approach and the Fair Value Approach stood at €16,118 million and €6,367 million respectively. TOTAL 0 555,889 555,889 (3,115) (114) 2,732 (497) 9 (0) (19) (11) 54 54 (270) (4,589) (62,831) (67,419) (86,255) 98,207 (82,835) (12,578) 2,793 2,111 (12,148) 462,391 (4) 462,395 132 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 The risk adjustment gross of reinsurance held (including the Premium Allocation Approach) was €2,603 million as of June 30, 2023 and €2,600 million as of December 31, 2022. The percentile was stable at 65th comprised within the 62.5th-67.5th percentile range considered by the Group as the adequate level of prudence on underlying insurance liabilities. 7.3 MOVEMENTS IN BALANCES OF REINSURANCE CONTRACTS HELD 7.3.1 Changes in the carrying amount of reinsurance contracts held, split between remaining coverage and incurred claims components The following tables provide an analysis of movements in the carrying amount of reinsurance contracts held split between the component for remaining coverage and the component for incurred claims. June 30, 2023 Remaining coverage component Incurred claims component Contracts measured under Premium Allocation Approach (in EURO million) Excluding loss recovery component Loss recovery component Total remaining coverage component Contracts not under Premium Allocation Approach Estimates of present value of future cash flows Risk adjustment Total incurred claims component Opening assets 10,953 240 11,193 79 21,619 378 22,075 Opening liabilities (5) 0 (5) 0 0 0 0 Net opening balance 10,947 240 11,187 79 21,619 378 22,075 Expenses from reinsurance contracts Changes in estimates that relate to losses and reversal of losses on underlying onerous contracts (5,239) 0 0 11 (5,239) 11 0 0 0 0 0 0 0 0 Amount recovered from the reinsurers 0 (2) (2) 312 3,713 2 4,027 Net expenses from reinsurance contracts (5,239) 9 (5,230) 312 3,713 2 4,027 Investment component (218) 0 (218) 218 0 0 218 Net finance income or expenses from reinsurance contracts recognized in profit or loss 49 0 49 (0) 106 3 109 Net finance income or expenses from reinsurance contracts recognized in shareholders' equity 153 0 153 0 268 0 268 Net finance income or expenses from reinsurance contracts 202 0 202 0 374 3 377 Effect of changes in non-performance risk of reinsurers (5) 0 (5) 0 (0) 0 (0) Total changes in the statement of profit or loss and shareholders' equity (5,261) 10 (5,251) 530 4,087 5 4,622 Premiums paid (net of commissions related to premiums) 7,925 0 7,925 0 0 0 0 Amount received (net of commissions related to claims) 0 0 0 (539) (4,001) 0 (4,540) Total cash flows 7,925 0 7,925 (539) (4,001) 0 (4,540) Effect of movements in exchange rates (159) 1 (158) (16) 32 (4) 13 Changes in scope of consolidation and other changes (56) (277) (333) 62 (32) (0) 30 Net closing balance 13,396 (26) 13,370 117 21,705 378 22,199 Closing assets Closing liabilities 13,403 (7) (26) 0 13,377 (7) 117 0 21,705 0 378 0 22,199 0 II Total 33,268 (5) 33,263 (5,239) 11 4,025 (1,203) 0 158 421 579 (6) (629) 7,925 (4,540) 3,385 (145) (303) 35,570 35,577 (7) 133 (in EURO million) Opening assets Opening liabilities Net opening balance Expenses from reinsurance contracts Changes in estimates that relate to losses and reversal of losses on underlying onerous contracts Amount recovered from the reinsurers Net expenses from reinsurance contracts Investment component Net finance income or expenses from reinsurance contracts recognized in profit or loss Net finance income or expenses from reinsurance contracts recognized in shareholders' equity Net finance income or expenses from reinsurance contracts Effect of changes in non-performance risk of reinsurers Total changes in the statement of profit or loss and shareholders' equity Premiums paid (net of commissions related to premiums) Amount received (net of commissions related to claims) Total cash flows Effect of movements in exchange rates Changes in scope of consolidation and other changes Net closing balance Closing assets Closing liabilities CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022, restated Remaining coverage component Incurred claims component Contracts measured under Premium Allocation Approach Excluding loss recovery component Loss recovery component Total remaining coverage component Contracts not under Premium Allocation Approach Estimates of present value of future cash flows Risk adjustment Total incurred claims component 13,375 275 13,650 93 22,009 356 22,457 (11) 0 (11) 0 0 0 0 13,363 275 13,638 93 22,009 356 22,457 (10,826) 0 (10,826) 0 0 0 0 0 (33) (33) 0 0 0 0 0 (2) (2) 684 9,086 17 9,787 (10,826) (34) (10,860) 684 9,086 17 9,787 (228) 0 (228) 228 0 0 228 83 1 84 (3) 251 3 251 (2,726) 0 (2,726) (0) (2,333) (0) (2,333) (2,643) 1 (2,642) (3) (2,082) 2 (2,083) 17 0 17 0 22 0 22 (13,679) (34) (13,713) 909 7,026 19 7,955 10,831 0 10,831 0 0 0 0 0 0 0 932 7,826 0 (8,758) 10,831 0 10,831 (932) (7,826) 0 (8,758) 456 (0) 455 7 594 (9) 592 (23) (1) (24) 2 (184) 11 (171) 10,948 240 11,188 79 21,619 378 22,075 10,953 240 11,193 79 21,619 378 22,075 (5) 0 (5) 0 0 0 0 II Total 36,107 (11) 36,096 (10,826) (33) 9,785 (1,073) 0 334 (5,060) (4,725) 40 (5,759) 10,831 (8,758) 2,073 1,047 (195) 33,263 33,268 (5) 134 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 7.3.2 Changes in the carrying amount of reinsurance contracts held, broken down by measurement component The following tables provide an analysis of movements in the carrying amount of reinsurance contracts broken down by measurement component, namely (i) the estimate of the Present Value of Future Cash Flows (“PVFCF”), (ii) the risk adjustment for non-financial risk (“RA”), and (iii) the Contractual Service Margin (“CSM”). It should be noted that the carrying amount of reinsurance contracts measured under the Premium Allocation Approach (“PAA”) is also reported to match with the opening and closing balances of financial statements. June 30, 2023 Contractual Service Margin (CSM) Total carrying amount (excluding contracts measured under PAA) Carrying amount of contracts measured under PAA (in EURO million) Estimates present value of future cash flows Risk adjustment Contracts under modified retrospective approach Contracts under fair value approach All other contracts Total CSM Opening assets 6,894 127 161 392 114 668 7,689 25,579 Opening liabilities (8) 0 0 3 0 3 (5) 0 Net opening balance 6,886 127 161 395 114 670 7,683 25,579 Contractual service margin recognized for services received 0 0 (3) (20) (10) (33) (33) 0 Release of risk adjustment 0 (3) 0 0 0 0 (3) 0 Experience adjustments (47) 1 0 0 0 0 (47) 0 Changes that relate to current services (47) (3) (3) (20) (10) (33) (83) 0 Contracts initially recognized in the period 4 1 0 0 (4) (4) 0 0 Changes in estimates that adjust the contractual service margin Changes in estimates that relate to losses and reversal from losses on underlying onerous contracts (80) 11 2 1 43 0 13 0 22 0 79 0 0 12 0 0 Other changes in estimates that relate to future services (28) 0 0 0 0 0 (28) 0 Changes that relate to future services (93) 3 43 13 18 74 (15) 0 Adjustments to incurred claims (3) (0) 0 0 0 0 (4) 0 Changes that relate to past services (3) (0) 0 0 0 0 (4) 0 Net expenses from reinsurance contracts (115) 0 40 (7) 8 41 (73) 0 Net finance income or expenses from reinsurance contracts 222 (0) 1 3 0 4 226 0 Effect of changes in non-performance risk of reinsurers (5) 0 0 0 0 0 (5) 0 Total changes in the statement of profit or loss and shareholders' equity 74 0 41 (4) 8 45 119 (748) Premiums paid (net of commissions related to premiums) Amount received (net of commissions related to claims) 2,165 (539) 0 0 0 0 0 0 0 0 0 0 2,165 (539) 5,759 (4,001) Total cash flows 1,627 0 0 0 0 0 1,627 1,758 Effect of movements in exchange rates (107) (2) (8) (12) (10) (30) (139) (6) Change in scope of consolidation, portfolio transfers, and other changes Net closing balance Closing Assets (0) 8,479 8,493 0 125 125 0 194 191 0 378 375 0 113 113 0 686 679 (0) 9,290 9,297 (303) 26,280 26,280 Closing Liabilities (14) 0 3 3 0 7 (7) 0 TOTAL 33,268 (5) 33,263 (33) (3) (47) (83) 0 0 12 (28) (15) (4) (4) (73) 226 (5) (629) 7,925 (4,540) 3,385 (145) (303) 35,570 35,577 (7) 135 II (in EURO million) Opening assets Opening liabilities Net opening balance Contractual service margin recognized for services received Release of risk adjustment Experience adjustments Changes that relate to current services Contracts initially recognized in the period Changes in estimates that adjust the contractual service margin Changes in estimates that relate to losses and reversal from losses on underlying onerous contracts Other changes in estimates that relate to future services Changes that relate to future services Adjustments to incurred claims Changes that relate to past services Net expenses from reinsurance contracts Net finance income or expenses from reinsurance contracts Effect of changes in non-performance risk of reinsurers Total changes in the statement of profit or loss and shareholders' equity Premiums paid (net of commissions related to premiums) Amount received (net of commissions related to claims) Total cash flows Effect of movements in exchange rates Change in scope of consolidation, portfolio transfers, and other changes Net closing balance Closing Assets Closing Liabilities CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022, restated Contractual Service Margin (CSM) Estimates present value of future cash flows Risk adjustment Contracts under modified retrospective approach Contracts under fair value approach All other contracts Total CSM Total carrying amount (excluding contracts measured under PAA) Carrying amount of contracts measured under PAA 9,367 169 169 535 9 713 10,249 25,858 (35) 0 21 2 (0) 23 (11) 0 9,332 170 190 537 9 736 10,238 25,858 0 0 (7) (51) (8) (66) (66) 0 0 (14) 0 0 0 0 (14) 0 (159) 1 0 0 0 0 (159) 0 (159) (14) (7) (51) (8) (66) (239) 0 (111) 9 0 (0) 102 102 (0) 0 151 (32) (23) (108) 12 (119) (0) 0 (5) (3) 0 0 0 0 (8) 0 (33) 0 0 0 0 0 (33) 0 3 (27) (23) (108) 114 (17) (41) 0 9 (0) 0 0 0 0 8 0 9 (0) 0 0 0 0 8 0 (69) (41) (30) (159) 107 (83) (193) 0 (2,566) (0) 2 4 0 6 (2,560) 0 17 0 0 0 0 0 17 0 (2,696) (42) (28) (156) 107 (77) (2,815) (2,944) 888 0 0 0 0 0 888 9,942 (932) 0 0 0 0 0 (932) (7,826) (44) 0 0 0 0 0 (44) 2,117 292 (1) (0) 13 (2) 11 302 745 2 0 0 0 0 0 2 (197) 6,886 127 161 395 114 671 7,684 25,579 6,894 (8) 127 0 161 0 392 3 114 0 668 3 7,689 (5) 25,579 0 (5) II TOTAL 36,107 (11) 36,096 (66) (14) (159) (239) (0) (0) (8) (33) (41) 8 8 (193) (2,560) 17 (5,759) 10,831 (8,758) 2,073 1,047 (195) 33,263 33,268 136 CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 7.4 INSURANCE REVENUE AND CONTRACTUAL SERVICE MARGIN (“CSM”) 7.4.1 Insurance revenue The comparative analysis of insurance revenue recognised in the period is as follows: (in EURO million) June 30, 2023 June 30, 2022, restated Amounts relating to changes in liabilities for remaining coverage Contractual service margin recognized in profit or loss for services provided 1,523 1,508 Change in release of risk adjustment for non-financial risk for risk expired 33 65 Release of expected incurred claims and other insurance service expenses 5,751 5,608 Experience adjustments (16) (0) Recovery of insurance acquisition cash flows 759 637 Total Insurance revenue arising from contracts not measured under the PAA 7,921 7,664 Total Insurance revenue arising from contracts measured under the PAA 31,273 31,469 Total insurance revenue 39,194 39,133 7.4.2 Contractual Service Margin (“CSM”) As of June 30, 2023, the total amount of CSM net of reinsurance contracts reported in the consolidated statement of financial position was €.34,132 million (€33,535 million as of December 31, 2022). (in EURO million) June 30, 2023 December 31, 2022, restated Liabilities arising from insurance contracts and investment contracts with discretionary participation features 34,783 34,190 Liabilities arising from reinsurance contracts held (7) (3) Amount of CSM included in liabilities 34,776 34,188 Assets arising from insurance contracts and investment contracts with discretionary participation features (35) (15) Assets arising from reinsurance contracts held 679 668 Amount of CSM included in assets 644 653 Total CSM 34,132 33,535 Of which CSM of insurance contracts issued 34,818 34,205 Of which CSM of reinsurance contracts held 686 670 The following table provides a detail of the expected timing of recognition in profit or loss of the CSM, such as reported in the consolidated statement of financial position as of December 31, 2022. This pattern of recognition therefore only reflects the expected coverage units which do not consider the future expected accretion of the CSM arising from risk neutral unwind for contracts measured using the Building Block Approach and expected return of assets for contracts measured using the Variable Fee Approach. Furthermore, it should be noted that the future CSM releases will also include amounts related to new contracts that are not yet recognized as of December Half Year 2023 Financial Report 137 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 31, 2022. For these reasons, the table below does not reflect the expected release of CSM that will be reported in the statement of profit or loss in the coming years for these contracts. (in EURO million) 1 year or less 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years 5 - 10 years More than 10 years Total Insurance contracts and investment contracts with discretionnary participation features 1,988 2,300 2,065 1,880 1,720 6,729 17,525 34,205 Reinsurance contracts held 79 72 67 61 55 123 214 670 7.5 DISCOUNT RATES As explained in the Note 1.14.5, the estimates of future cash flows are discounted based on yield curves determined in a “risk-neutral” environment. The yield curves used as of June 30, 2023, December 31, 2022, and June 30, 2022, for the main currencies are disclosed in the tables below. June 30, 2023 Maturity EUR USD GBP JPY CHF HKD 1 4.4% 6.1% 6.5% 0.2% 2.0% 5.0% 2 4.1% 5.5% 6.4% 0.2% 2.0% 4.7% 3 3.9% 5.1% 6.1% 0.1% 1.9% 4.5% 5 3.5% 4.6% 5.5% 0.0% 1.8% 4.2% 7 3.3% 4.4% 5.1% 0.1% 1.8% 4.1% 10 3.2% 4.2% 4.7% 0.4% 1.8% 4.0% 15 3.2% 4.2% 4.5% 0.7% 1.8% 4.0% 20 3.0% 4.1% 4.4% 1.0% 1.8% 3.9% 25 2.9% 3.9% 4.2% 1.2% 1.9% 3.9% 30 2.9% 3.8% 4.1% 1.3% 2.0% 3.8% Half Year 2023 Financial Report 138 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 December 31, 2022 Maturity EUR USD GBP JPY CHF HKD 1 3.5% 5.8% 4.9% 0.1% 1.5% 2 3.6% 5.3% 5.0% 0.0% 1.6% 3 3.5% 4.9% 4.8% 0.0% 1.7% 5 3.5% 4.6% 4.5% 0.2% 1.9% 7 3.4% 4.5% 4.3% 0.4% 2.0% 10 3.4% 4.4% 4.2% 0.5% 2.1% 15 3.4% 4.4% 4.1% 1.0% 2.2% 20 3.1% 4.3% 4.0% 1.3% 2.2% 25 2.9% 4.1% 3.9% 1.5% 2.3% 30 2.9% 3.9% 3.8% 1.6% 2.3% June 30, 2022 Maturity EUR USD GBP JPY CHF HKD 1 1.1% 4.0% 3.0% 0.1% 0.6% 2 1.6% 4.0% 3.2% 0.1% 0.9% 3 1.8% 3.8% 3.1% 0.1% 1.1% 5 2.1% 3.7% 3.0% 0.0% 1.3% 7 2.2% 3.7% 2.9% 0.1% 1.6% 10 2.5% 3.8% 2.9% 0.3% 1.8% 15 2.7% 3.9% 2.8% 0.6% 2.1% 20 2.5% 3.9% 2.8% 0.9% 2.2% 25 2.5% 3.7% 2.7% 1.1% 2.2% 30 2.5% 3.5% 2.7% 1.2% 2.3% 7.6 REAL WORLD ASSUMPTIONS As described in Note 1.14.7, Real-World (“RW”) assumptions are used for contracts measured using the Variable Fee Approach (“VFA”) to allow an appropriate pattern of the Contractual Service Margin (“CSM”) release in the statement of profit or loss over the coverage period, consistently with the IFRS 17 definition of the investment- related service. The number of coverage units is determined on the basis of policyholders’ mathematical reserves, which are adjusted by considering the expected return of underlying items resulting from RW assumptions. Half Year 2023 Financial Report 5.0% 4.7% 4.4% 4.2% 4.1% 4.0% 4.0% 4.0% 3.9% 3.8% 3.2% 3.4% 3.4% 3.5% 3.5% 3.6% 3.6% 3.6% 3.6% 3.6% 139 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 The main RW assumptions used as at end June 2023 (with a comparative to end June 2022 and end December 2022) by main currencies are disclosed below. June 30, 2023 Real World Rates EUR USD JPY CHF HKD Interest rates N+1 2.4% 3.3% 0.5% 1.2% 2.9% 5y Government (par) rate N+10 2.3% 3.2% 1.3% 1.4% 3.2% N+1 2.5% 3.3% 0.8% 1.3% 3.0% 10y Government (par) rate N+10 2.5% 3.5% 1.4% 1.7% 3.5% Credit Spreads N+1 1.4% 1.2% 0.6% 1.2% 1.3% 5y single-A credit spreads over Govies N+10 0.9% 0.9% 0.8% 0.9% 0.7% Equity return (incl dividends) N+1 9.3% 9.0% 7.9% 7.7% 5.9% N+10 6.3% 6.5% 4.7% 4.9% 6.4% Real Estate N+1 6.9% 7.3% 3.7% 1.4% #N/A N+10 6.0% 6.7% 4.7% 5.2% #N/A December 31, 2022 Real World Rates EUR USD JPY CHF HKD Interest rates N+1 2.4% 4.3% 0.2% 1.1% 4.2% 5y Government (par) rate N+10 2.3% 3.2% 1.1% 1.4% 3.3% N+1 2.5% 4.0% 0.4% 1.2% 4.0% 10y Government (par) rate N+10 2.5% 3.5% 1.2% 1.7% 3.5% Credit Spreads N+1 1.9% 1.5% 0.7% 1.2% 1.4% 5y single-A credit spreads over Govies N+10 0.5% 0.7% 0.8% 0.9% 0.4% Equity return (incl dividends) N+1 3.0% 7.2% 5.7% 5.3% 8.9% N+10 6.3% 6.4% 5.0% 5.0% 7.7% Real Estate N+1 1.7% 3.4% 5.7% 0.6% #N/A N+10 6.0% 6.7% 4.7% 5.2% #N/A Half Year 2023 Financial Report 140 II Interest rates 5y Government (par) rate 10y Government (par) rate Credit Spreads 5y single-A credit spreads over Govies Equity return (incl dividends) Real Estate CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 June 30, 2022 Real World Rates EUR USD JPY CHF HKD N+1 1.7% 3.1% 0.2% 1.3% 3.0% N+10 2.0% 3.0% 1.1% 1.4% 3.0% N+1 1.8% 3.3% 0.3% 1.5% 3.3% N+10 2.3% 3.2% 1.2% 1.7% 3.2% N+1 1.8% 1.2% 0.8% 1.2% 1.2% N+10 1.1% 1.2% 0.8% 0.9% 1.0% N+1 3.9% 2.7% 0.7% 1.1% 3.6% N+10 6.0% 6.1% 5.1% 5.1% 7.4% N+1 3.2% 4.3% 5.7% 2.8% #N/A N+10 5.8% 6.7% 4.7% 5.2% #N/A Half Year 2023 Financial Report 141 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 8 FINANCING DEBT June 30, 2023 December 31, 2022, restated (in EURO million) Carrying value Carrying value AXA 11,671 11,401 Subordinated green notes, 1.375%, due 2041 (in €) 1,000 1,000 Subordinated notes, 5.125% due 2043 (€) 1,000 1,000 U.S. registered redeemable subordinated debt, 8.60% 2030 (euro) 806 821 Subordinated debt, 5.625%, due 2054 (£) 163 846 Subordinated debt, 3.375%, due 2047 (€) 1,500 1,500 Undated Subordinated notes, 850MUS$, 4.5% 782 797 Subordinated notes, 5.125%, due 2047 (USD) 920 938 AXA SA- Subordinated debt, 3.25%, due 2049 (€) 2,000 2,000 Subordinated Notes, 1,875% due 2042 (€) 1,250 1,250 Subordinated Notes, 4,25% due 2043 (€) 1,250 1,250 Subordinated Notes, 5,5% due 2043 (€) 1,000 AXA XL 226 476 Subordinated Notes, 5.5%, due March 2045 (USD) 226 476 AXA Italy 66 66 Subordinated Notes, euribor 6 months + 81bp 66 66 Other subordinated debts (under €100 million) 4 13 Subordinated debt 11,968 11,956 AXA 2,100 1,350 Euro Medium Term Note, due through 2028 500 500 Euro Medium Term Note, due 2030 850 850 Euro Medium Term Note, due 2033 750 AXA XL 294 301 Senior Notes, 5.25%, due December 2043 (USD) 294 301 Other financing debts instruments issued (under €100 million) 21 21 Financing debt instruments issued 2,416 1,672 TOTAL FINANCING DEBT 14,383 13,629 Half Year 2023 Financial Report 142 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 9 FINANCIAL RESULT, EXCLUDING FINANCING DEBT EXPENSES The financial result, excluding financing debt expenses, reflects the difference between the investment return on invested assets and the net finance income or expenses stemming from insurance and reinsurance contracts. The table below highlights the impact of the financial result on both the profit or loss and the other comprehensive income (OCI). As a reminder, the reconciliation of amounts presented in the consolidated statement of profit or loss to the net finance income or expenses from insurance and reinsurance contracts as disclosed below is presented in paragraph 7.1.2. June 30, 2023 (in EURO million) Insurance Other Activities Total Net investment income 5,191 358 5,549 Net realized gains and losses relating to investments at cost and at fair value through other comprehensive income (1,286) (14) (1,300) Net realized gains and losses and change in fair value of other investments at fair value through profit or loss 4,563 (31) 4,532 Change in impairment on investments (155) (6) (161) Investment return through profit or loss 8,314 307 8,620 Time value of money including interest accreted on contractual service margin (1,342) (1,342) Effect of changes in discount rates and other financial assumptions 293 293 Change in fair value of underlying items of insurance contracts with direct participation features (6,407) (6,407) Foreign exchange gains or losses 171 171 Other impacts (248) (248) Net finance income or expenses from insurance contracts issued, through profit or loss (7,533) (7,533) Time value of money including interest accreted on contractual service margin 241 241 Effect of changes in discount rates and other financial assumptions (33) (33) Effect of changes in the risk of non-performance of reinsurers (6) (6) Foreign exchange gains or losses (49) (49) Other impacts (1) (1) Net finance income or expenses from reinsurance contracts held through profit or loss 153 153 Total net finance income or expenses from insurance contracts issued and reinsurance contracts held through profit or loss (7,380) (7,380) Financial result recognized in profit or loss 933 307 1,240 Realised capital gains or losses on equity instruments measured at fair value through other comprehensive income, without recycling in profit or loss 183 (64) 120 Changes in fair value of financial investments through other comprehensive income 7,163 30 7,193 Investment return through other comprehensive income 7,346 (34) 7,312 Net finance income or expenses from insurance contracts issued through other comprehensive income (6,213) (6,213) of which changes in fair value of underlying items of insurance contracts with direct participation features (353) (353) of which realised capital gains or losses on equity instruments measured at fair value through other comprehensive income, without recycling in profit or loss (83) (83) Net finance income or expenses from reinsurance contracts held through other comprehensive income 420 420 Total net finance income or expenses from insurance contracts issued and reinsurance contracts held through other comprehensive income (5,792) (5,792) Financial result recognized in other comprehensive income 1,554 (34) 1,520 Impact of financial result on the statement of comprehensive income (before tax) 2,487 273 2,760 Half Year 2023 Financial Report GIE_AXA_Internal 143 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 June 30, 2022, restated (in EURO million) Insurance Other Activities Total Net investment income 5,903 416 6,319 Net realized gains and losses relating to investments at cost and at fair value through other comprehensive income 61 12 49 Net realized gains and losses and change in fair value of other investments at fair value through profit or loss 11,145 77 11,222 Change in impairment on investments 77 14 92 Investment return through profit or loss (5,258) 313 (4,945) Time value of money including interest accreted on contractual service margin (1,159) (1,159) Effect of changes in discount rates and other financial assumptions 1,155 1,155 Change in fair value of underlying items of insurance contracts with direct participation features 7,642 7,642 Foreign exchange gains or losses (363) (363) Other impacts (108) (108) Net finance income or expenses from insurance contracts issued, through profit or loss 7,166 7,166 Time value of money including interest accreted on contractual service margin 172 172 Effect of changes in discount rates and other financial assumptions 11 11 Effect of changes in the risk of non-performance of reinsurers 29 29 Foreign exchange gains or losses 78 78 Other impacts Net finance income or expenses from reinsurance contracts held through profit or loss 291 291 Total net finance income or expenses from insurance contracts issued and reinsurance contracts held through profit or loss 7,457 7,457 Financial result recognized in profit or loss 2,199 313 2,512 Realised capital gains or losses on equity instruments measured at fair value through other comprehensive income, without recycling in profit or loss 862 22 884 Changes in fair value of financial investments through other comprehensive income (58,681) (1,476) (60,157) Investment return through other comprehensive income (57,819) (1,454) (59,273) Net finance income or expenses from insurance contracts issued through other comprehensive income 57,462 57,462 of which changes in fair value of underlying items of insurance contracts with direct participation features 12,163 12,163 of which realised capital gains or losses on equity instruments measured at fair value through other comprehensive income, without recycling in profit or loss (501) (501) Net finance income or expenses from reinsurance contracts held through other comprehensive incom e (3,764) (3,764) Total net finance income or expenses from insurance contracts issued and reinsurance contracts held through other comprehensive income 53,697 53,697 Financial result recognized in other comprehensive income (4,121) (1,454) (5,576) Impact of financial result on the statement of comprehensive income (before tax) (1,922) (1,142) (3,064) Half Year 2023 Financial Report 144 GIE_AXA_Internal II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 10 NET INCOME PER ORDINARY SHARE The Group calculates a basic net income per ordinary share and a diluted net income per ordinary share: the calculation of the basic net income per ordinary share assumes no dilution and is based on the weighted average number of outstanding ordinary shares during the period; the calculation of diluted net income per ordinary share takes into account shares that may be issued as a result of stock option plans. The effect of stock option plans on the number of fully diluted shares is taken into account only if options are considered to be exercisable on the basis of the average stock price of the AXA share over the period. (in EURO million) TUV June 30, 2023 June 30, 2022, restated NET INCOME GROUP SHARE 3,833 3,852 Undated subordinated debt financial charge (92) (91) NET INCOME INCLUDING IMPACT OF UNDATED SUBORDINATED DEBT A 3,741 3,760 Weighted average number of ordinary shares (net of treasury shares) - opening 2,265 2,356 Increase in capital (excluding stock options exercised) Stock options exercised UVW 1 1 Treasury shares UVW 34 32 Capital increase/Decrease UVW (59) (77) WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES B 2,241 2,311 BASIC NET INCOME PER ORDINARY SHARE C = A / B 1.67 1.63 Potentially dilutive instruments: Stock options 1 1 Other 4 5 FULLY DILUTED - WEIGHTED AVERAGE NUMBER OF SHARES KPM D 2,247 2,317 FULLY DILUTED NET INCOME PER ORDINARY SHARE E = A / D 1.67 1.62 (a) Except for number of shares (million of units) and earnings per share (Euro). (b) Weighted average. (c) Taking into account the impact of potentially dilutive impacts Half Year 2023 Financial Report GIE_AXA_Internal 145 II CONSOLIDATED FINANCIAL STATEMENTS – HALF YEAR 2023 NOTE 11 SUBSEQUENT EVENTS AXA completed the acquisition of Groupe Assurances du Crédit Mutuel España On July 12, 2023, AXA announced that it has completed the acquisition of Groupe Assurances du Crédit Mutuel España (“GACM España”). Under the terms of the transaction, AXA has acquired GACM España for a total cash consideration of €310 million, in line with the announcement made upon signing of the agreement. AXA accelerated the development of its Health strategy in Europe with the acquisition of Laya On August 3rd, AXA announced that it has entered into an agreement to acquire Laya Healthcare Limited (“Laya”) from Corebridge Financial Inc., a subsidiary of AIG. Laya has a leading position in the Irish health market with ca. 28% market share, serving close to 700,000 policyholders and generating ca. €800 million premiums(22) per annum. It operates as a Managing General Agent with a highly digitalized platform and a strong direct distribution network, which makes Laya the sole point of contact for its customers through their healthcare journey. With this transaction, AXA affirms its ambition to grow its European franchise, by expanding its operations in a buoyant, fast-growing Health insurance market. AXA is already present in Ireland where it benefits from a number 1 position in the P&C market. Under the terms of the agreement, AXA acquired Laya for a consideration of €650 million, representing an expected price-to-earnings multiple of ca. 11x, taking into account the planned re-capturing of underwriting margin currently earned by third parties. The completion of the transaction is expected to result in an impact of - 3 points on AXA Group’s Solvency II ratio(23). (22) As of FY22. Premiums currently underwritten by a third-party insurer. (23) Impact effective on AXA Group’s Solvency II ratio at the time of closing of the transaction. Half Year 2023 Financial Report GIE_AXA_Internal 146 II III. Statutory auditors’ review report / on the 2023 Half Year Financial Information GIE_AXA_Internal AXA SA Statutory Auditors' Review Report on the half-year Financial Information (For the period from January 1st to June 30th 2023) Half Year 2023 Financial Report GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal 148 PricewaterhouseCoopers Audit ERNST & YOUNG Audit 63, rue de Villiers 92208 Neuilly-sur-Seine Cedex Tour First TSA 14444 92037 Paris-La Défense cedex Statutory Auditors’ Review Report on the half-year Financial Information (Period from January 1st to June 30th, 2023) To the Shareholders, AXA SA 25, avenue Matignon 75008 Paris In compliance with the assignment entrusted to us by your Shareholders’ Meetings and in accordance with the requirements of Article L. 451-1-2-III of the French Monetary and Financial Code (“Code monétaire et financier”), we hereby report to you on:  the review of the accompanying condensed half-year consolidated financial statements of AXA SA, for the period from January 1st to June 30th, 2023;  the verification of the information presented in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34, standard of the IFRSs as adopted by the European Union applicable to interim financial information. Without qualifying the above conclusion, we draw your attention to the change in accounting method relating to the application as of January 1, 2023 of IFRS 17 “Insurance contracts” and IFRS 9 "Financial Instruments" described in Note 1 “Accounting principles”, as well as in the other notes to the condensed half-yearly consolidated financial statements presenting figures relating to the impact of these changes. 2. Specific verification Half Year 2023 Financial Report GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal 149 We have also verified the information presented in the half-year management report on the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. It is not our responsibility to conclude on the fair presentation and consistency with the half-year financial statements of the solvency related information. Neuilly-sur-Seine and Paris-La Défense, August 3, 2023 The Statutory Auditors French original signed by* PricewaterhouseCoopers Audit ERNST & YOUNG Audit Bénédicte Vignon Grégory Saugner Patrick Menard Olivier Durand This is a translation into English of the statutory auditors’ review report on the half-year financial information issued in French and is provided solely for the convenience of English-speaking users. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Half Year 2023 Financial Report GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal 150 IV. Statement of the person responsible / for the Half Year Financial Report GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal STATEMENT OF THE PERSON RESPONSIBLE FOR THE HALF YEAR REPORT Statement of the person responsible for the Half-Year Financial Report I certify, to the best of my knowledge, that the condensed financial statements for the past half-year have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities and financial position and profit or loss of the Company and all the undertakings included in the consolidation, and that the interim management report, to be found in the first part of this Report, presents a fair review of the important events that have occurred during the first six months of the financial year, their impact on the financial statements, major related-party transactions, and describes the principal risks and uncertainties for the remaining six months of the financial year. Paris, August 3, 2023. Thomas Buberl Chief Executive Officer Half Year 2023 Financial Report GIE_AXA_Internal GIE_AXA_Internal GIE_AXA_Internal 152 IV

Semestriel, 2023, Insurance, AXA

write me a financial report

Semestriel

Auto

Volswagen

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Auto ### Company: Volswagen ### Response:

Half-Yearly Financial Report January - June 2014 1 U PDATED I N F OR M ATI ON 6 I NTER IM M A N AG EM ENT 2 0 B R A N D S AN D 25 I NTER I M CONSOLI DATED FI NA NC IA L R EPORT BUSI N ESS F I ELD S STATEMENTS (CON D ENSED) 1 Key Facts 2 Key Events 6 Volkswagen Shares 7 Business Development 15 Results of Operations, Finan- cial Position and Net Assets 19 Outlook 25 Income Statement 26 Statement of Comprehensive Income 29 Balance Sheet 30 Statement of Changes in Equity 32 Cash Flow Statement 33 Notes to the Interim Consolidated Financial Statements 50 Responsibility Statement 51 Review Report Key Figures V O L K S WA G E N G R O U P Q 2 H 1 Volume Data1 2014 2013 % 2014 2013 % Deliveries to customers ('000 units) 2,623 2,484 + 5.6 5,066 4,797 + 5.6 of which: in Germany 337 329 + 2.7 626 596 + 5.0 abroad 2,286 2,155 + 6.1 4,440 4,201 + 5.7 Vehicle sales ('000 units) 2,645 2,498 + 5.9 5,207 4,873 + 6.8 of which: in Germany 339 323 + 4.8 644 617 + 4.3 abroad 2,306 2,175 + 6.0 4,563 4,256 + 7.2 Production ('000 units) 2,669 2,498 + 6.8 5,234 4,886 + 7.1 of which: in Germany 653 646 + 1.1 1,314 1,253 + 4.8 abroad 2,016 1,852 + 8.8 3,920 3,632 + 7.9 Employees ('000 on June 30, 2014/Dec. 31, 2013) 575.8 572.8 + 0.5 of which: in Germany 262.2 260.4 + 0.7 abroad 313.6 312.4 + 0.4 Q 2 H 1 Financial Data (IFRSs), € million 2014 2013 % 2014 2013 % Sales revenue 50,977 52,122 – 2.2 98,808 98,687 + 0.1 Operating profit 3,330 3,437 – 3.1 6,186 5,780 + 7.0 as a percentage of sales revenue 6.5 6.6 6.3 5.9 Profit before tax 4,420 3,932 + 12.4 7,777 6,620 + 17.5 as a percentage of sales revenue 8.7 7.5 7.9 6.7 Profit after tax 3,249 2,847 + 14.1 5,716 4,793 + 19.3 Profit attributable to Volkswagen AG shareholders 3,186 2,832 + 12.5 5,581 4,858 + 14.9 Cash flows from operating activities 1,848 2,434 – 24.1 3,347 4,984 – 32.9 Cash flows from investing activities attributable to operating activities 3,312 3,340 – 0.8 6,236 5,769 + 8.1 Automotive Division2 EBITDA3 5,710 5,589 + 2.2 10,953 10,114 + 8.3 Cash flows from operating activities 6,137 4,904 + 25.2 8,388 8,431 – 0.5 Cash flows from investing activities attributable to operating activities4 3,167 3,259 – 2.8 5,469 7,201 – 24.0 of which: investments in property, plant and equipment 1,953 2,252 – 13.3 3,578 3,924 – 8.8 as a percentage of sales revenue 4.3 4.9 4.1 4.5 capitalized development costs5 1,205 957 + 25.9 2,396 1,635 + 46.5 as a percentage of sales revenue 2.7 2.1 2.8 1.9 Net cash flow 2,970 1,645 + 80.6 2,919 1,231 x Net liquidity at June 30 13,979 11,313 + 23.6 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2013 deliveries updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Operating profit plus net depreciation/amortization and impairment losses/reversals of impairment losses on property, plant and equipment, capitalized development costs, lease assets, goodwill and financial assets as reported in the cash flow statement. 4 Excluding acquisition and disposal of equity investments: Q2 €3,147 million (€3,157 million), H1 €5,849 million (€5,365 million). 5 See table on page 36. U P D AT E D I N F O R M AT I O N Key Facts Key Facts > Volkswagen Group increases deliveries to customers by 5.6% year-on-year to 5.1 million vehicles; continued growth in China and Europe > At €98.8 billion (€98.7 billion), Group sales revenue is up only slightly on the prior-year figure because of significant negative exchange rate effects > Operating profit of €6.2 billion in an ongoing difficult market environment is €0.4 billion higher than in the previous year > Earnings before tax rise by €1.2 billion to €7.8 billion > Cash flows from operating activities in the Automotive Division total €8.4 billion (€8.4 billion); ratio of investments in property, plant and equipment (capex) to sales revenue is 4.1% (4.5%) > Net liquidity in the Automotive Division at €14.0 billion; acquisition of Scania shares and capital increase at Financial Services Division reduce liquidity, while capital increase from issuing new preferred shares and successful placement of hybrid notes strengthen Automotive Division’s capital base > Fascinating new models: Volkswagen Passenger Cars unveils the Jetta and Touareg model updates; Golf Edition launched to mark the bestseller’s 40th anniversary Audi celebrates the world premiere of the new “S” version of the A7 and offers a glimpse of a possible addition to the TT series in the shape of the TT offroad concept - ŠKODA launches the successor to the Octavia in China and expands local production to include the Rapid Sportback SEAT presents the sporty Leon CUPRA in Germany - GTS versions of the Boxster and the Cayman debut at Porsche - Bentley showcases the Bentley Hybrid Concept – its first vehicle featuring plug-in hybrid technology 1 U P D AT E D I N F O R M AT I O N Key Events Key Events M OTO R S H O W S A N D E V E N T S The Volkswagen Group presented a wide range of new models at motor shows and events in the second quarter of 2014. an average of just 1.9 l of fuel per 100 km. It features Audi Wireless Charging technology for contactless induction charging. The Audi TT offroad concept provides a glimpse of how the brand might imagine a new model in the TT family of the future. New York Auto Show The Volkswagen Group of America celebrated the world premiere of the new Jetta at the 2014 New York Auto Show. The facelifted com- pact saloon features new front and rear styling. Additional assis- tance systems such as blind spot detection ensure greater comfort and safety. Its improved aerodynamics and updated range of engines, including the addition of a 2.0 TDI clean diesel engine with 110 kW (150 PS), make the new Jetta even more economical than its predecessor. Bentley saw the North American debut of the new Continental GT Speed and the Flying Spur V8 in New York. Powered by 467 kW (635 PS) 6.0 l W12 engine technology with twin turbocharging and a top speed of 331 km/h, the Continental GT Speed is the luxury brand’s fastest ever series-produced vehicle. Auto China 2014 Volkswagen presented a wide range of new models at the Auto China 2014 in Beijing. The Group also announced an e-mobility campaign for the Chinese market. The Volkswagen Passenger Cars brand unveiled the revamped Touareg in Beijing. The successful premium SUV was perfected both optically and technically – an updated front and rear as well as fresh colors and sporty rims give the vehicle even more spirit. The new Touareg includes a coasting function, which decouples the engine from the automatic gearbox to save fuel, bi-xenon headlights and mobile online services. Visitors were also drawn to the stand by three studies: Volkswagen marked the 40th anniversary of its best- selling vehicle with the exclusive Golf Edition featuring a metallic white exterior with a golden shimmer and a two-tone leather interior. The sporty Golf R 400 is equipped with a 4Motion all-wheel drive system and a 294 kW (400 PS) TSI engine that takes it from 0 to 100 km/h in only 3.9 seconds. The New Midsize Coupé concept marries a saloon and sports car in a dynamic four door. Its features include a low profile, an avant-garde front with LED headlights, a dynamic roofline and 20-inch alloy rims. At the Audi brand’s stand, the focus was on the Audi TT offroad concept show car. The four door completely reinterprets the design language of the Audi TT, combining the sporty character of a coupé with the features of a compact SUV. The plug-in hybrid drive com- prises two electric motors and one 2.0 TFSI engine to deliver a combined maximum output of 300 kW (408 PS). The vehicle uses ŠKODA celebrated the Chinese debut of three models. The third generation of the ŠKODA Octavia, which has also been produced in China since spring 2014, sets new standards in space, functionality, technology and design in the compact segment. The ŠKODA Rapid Spaceback also started to roll off the production line in China this year. It closes the gap between the Fabia and the Octavia and increasingly appeals to younger customer groups with its dynamic and fresh design. The city version of the ŠKODA Yeti is ideal for the urban jungle. The locally produced compact SUV meets Chinese customers’ wishes for even more space with a six centimeter longer wheelbase. Porsche celebrated the world premiere of the GTS versions of the Boxster and the Cayman. The two most powerful and fastest vehicles in Porsche’s mid-engine series set new sporty benchmarks in their segment. The six-cylinder Boxer engines are based on the 3.4 l Boxster S and Cayman S engines and were optimized to deliver outputs of 243 kW (330 PS) and 250 kW (340 PS) respectively. Both vehicles are also equipped with the Sport Chrono Package as stan- dard for a sporty tuned chassis. Alongside the GTS sports cars, Porsche presented four exclusive new models for the Chinese market, Porsche’s second largest single market after the USA, including the Porsche Macan with a four-cylinder engine. The Bentley brand incorporated plug-in hybrid technology into one of its vehicles for the first time. The Bentley Hybrid Concept is based on the Mulsanne flagship and is up to 25% more powerful with 70% less CO2 emissions. Bentley aims to launch its SUV as the first series-produced hybrid model from 2017 before gradually rolling out this technology to the entire model portfolio. Over 90% of vehicles should be available as a plug-in hybrid by the end of the decade. The Bentley Flying Spur V8, the Continental GT Speed and the Continental GT V8 S models celebrated their Chinese pre- mieres in Beijing. Lamborghini unveiled the Aventador LP 700-4 “Nazionale” configuration from its Ad Personam personalization program at the Auto China. The model features special exterior body paint and a stripe in the colors of the Italian flag, which extends from the bonnet over the roof to the rear wing. The model features an exclu- sive two-tone interior with striking topstitching on the seats and an Italian flag embroidered on the backrest. The Huracán also made its Asian debut in Beijing. 2 U P D AT E D I N F O R M AT I O N Key Events The Bugatti Veyron 16.4 Grand Sport Vitesse “Black Bess” is the fifth model from the “Les Legendes de Bugatti” series and is remi- niscent of the most spectacular vehicle in the company’s history – the Type 18 “Black Bess”. It was among the first super sports cars in the 1910s, its top speed of around 160 km/h making it one of the fastest street-legal cars. Ducati presented its new entry-level superbike, the 109 kW (148 PS) 899 Panigale, which will expand the brand’s Chinese offering from summer 2014. Ducati is currently developing a long- term strategy for the Chinese market based on the Audi brand’s experiences. vocational trainees from the main production facility in Wolfsburg also unveiled the Golf GTI Wolfsburg Edition in Austria. Inspired by the 40th anniversary of the Golf, the young employees created their dream GTI with the study: absolute red paint, decorative black stripes with a red Wolfsburg skyline and sporty attachments in high- the color concept, interior picks up on gloss black. The incorporating the plaid pattern that characterizes the GTI. The concept vehicle is completed by a 279 kW (380 PS) 2.0 l TSI engine and a high-end sound system. Vocational trainees from the Zwickau plant and from ŠKODA’s Mladá Boleslav location also presented vehicles. Auto Mobil International (AMI) Leipzig The Volkswagen Passenger Cars brand celebrated the world pre- miere of the European version of the Golf Edition at the AMI in Leipzig. The premium special model had been presented as a study in Beijing and commemorates the 40th anniversary of the best- selling vehicle, combining signature Golf features with exclusive premium-class elements. The exterior features xenon headlights with daytime running lights, machine-polished 17-inch wheels and tinted windows. Inside, the model captivates with its Alcantara leather seats and illuminated door sill plates. The Golf Edition is completed by infotainment functions and assistance systems such as blind spot detection. Volkswagen Passenger Cars also presented the special-edition Beetle Cabriolet Karmann for the first time. The vehicle is a nod to the Osnabrück body shell manufacturer that pro- duced the Beetle Cabriolet between 1949 and 1980. The Touareg made its European debut in Leipzig, while the Golf GTE with a plug- in hybrid drive, the new Scirocco and Beetle Dune study with striking offroad styling made their first appearances in Germany. Audi unveiled the new “S” version of the A7 to the world in Leipzig – a car that embodies the brand’s sporty spirit. Its powerful 4.0 l V8 engine with 331 kW (450 PS) and cylinder deactivation technology take the model into sports car territory. The TT and the TTS also celebrated their German debut. Audi wowed Wörthersee visitors with two show cars: the Audi A3 clubsport quattro concept is an impressive example of how much sporty potential the A3 family has. The vehicle is based on the S3 saloon and can accelerate from 0 to 100 km/h in 3.6 seconds. Its 2.5 TFSI engine has an output of 386 kW (525 PS) thanks to extensive modifications. The dynamic Audi TT quattro sport concept, which made its debut at the Geneva Motor Show, wears its racing pedigree on its sleeve with lightweight body construction, a fixed rear wing and low racing seats with four-point seat belts, showing the TT series from its sportiest side. Vienna Motor Symposium The Volkswagen Group’s showing at the 35th Vienna Motor Sympo- sium was underlined by the motto “performance and efficiency”: as well as progressively reducing CO2 emissions, drivetrain develop- ment also focuses on driving pleasure. Visitors gained first impressions of the new twin turbocharged 2.0 l TDI engine for the new Passat and the 2.0 l TSI engine for the sporty members of the Golf family. As announced last year, Volkswagen also unveiled a fuel-saving ten-speed direct shift gearbox. Another highlight was the new three-cylinder engine for A0 and A class vehicles. The Group also provided information on the progress made in natural gas drives and in the electrification of its portfolio. The SEAT brand showcased the fastest and most powerful model in the company’s history in Leipzig – the Leon CUPRA. The CUPRA’s 206 kW (280 PS) TSI engine propels the car from 0 to 100 km/h in 5.7 seconds. ŠKODA presented its VisionC study for the first time in Germany and Porsche revealed its Cayman GTS to the European public for the first time. Volkswagen Commercial Vehicles showcased a wide range of vehicles and also gave AMI visitors the chance to test drive the latest models on the exhibition grounds. The Amarok demonstrated its off-road credentials on a specially built obstacle course. AWA R D S The Volkswagen Group and its brands received a large number of prizes and awards in the second quarter of 2014. The Leon ST and the Alhambra from SEAT, the Panamera and the new Macan from Porsche, the Yeti from ŠKODA and the e-up! from the Volkswagen Passenger Cars brand claimed a total of six first places in the road tests conducted by specialist journal “Fir- menauto” in April 2014. The prizes were awarded in 11 categories, each with an overall and imports ranking. 280 fleet managers took part in the selection process, testing 71 different models and clocking up over 50,000 kilometers in around 2,000 test drives. Lake Wörthersee GTI festival Volkswagen saw the real world collide with the virtual one at the annual GTI fan festival at Lake Wörthersee in Austria: the GTI Road- ster study, which was originally developed for the video game Gran Turismo 6, celebrated its real-world premiere at Lake Wörthersee. The open-top two seater features a twin turbocharged 370 kW (503 PS) V6 engine, which takes arguably the most spectacular GTI of all time from 0 to 100 km/h in only 3.6 seconds. A group of Also in April 2014, the Audi A3 was named “World Car of the Year 2014”. It was selected as the winner out of 24 vehicles by a jury of 69 motor industry journalists from 22 countries. The ŠKODA Octavia estate 4x4 and the ŠKODA Yeti 4x4 were named the “All-wheel drive car of the year 2014” in their respective categories in the reader poll conducted by specialist journal “Auto Bild Allrad” in April 2014. The ŠKODA models came up trumps in ten categories against around 170 vehicles. 3 U P D AT E D I N F O R M AT I O N Key Events Bentley’s Mulsanne was awarded the title of “Best Luxury Car” in the Telegraph Motoring Awards in May. Vehicles were ranked by members of the public in an online poll. The Volkswagen Passenger Cars brand celebrated a double vic- tory in the J.D. Power customer satisfaction study in May. The Touareg and the up! received the highest satisfaction levels in their respective vehicle categories and were rewarded with first place. The results are based on an online survey of around 18,000 vehicle owners on their experiences with the vehicles over the past two years. The survey measures customer satisfaction in terms of qual- ity, appeal, service and maintenance costs. Audi, Lamborghini, Porsche and Volkswagen achieved top rankings in various employer studies. A large part of the 26,000 economics and engineering students surveyed by research institute trendence in April 2014 cited the Audi, Porsche and Volkswagen brands as their preferred employer. A ranking published by consulting firm UNIVERSUM confirmed that Audi is the most desirable employer among engineering and business/economics graduates. The study was based on a survey of over 30,000 graduates from 140 univer- sities. In May, Lamborghini was voted the “Best Employer of Choice” by Italian university graduates. They cited career develop- ment opportunities, the working environment and the brand’s appeal as the reasons for their choice. In May 2014, the XL1 was honored with the title of “Design of the Year” in the “Transport” category by the Design Museum London. The XL1 won over the jury with its unique lightweight construction, efficiency and design. The Volkswagen Group was named the world’s most innovative automotive company in the AutomotiveINNOVATIONS Award 2014 presented by the Center of Automotive Management in May 2014. New vehicle technologies that benefit customers and that are already available or at least have been presented in prototypes were analyzed across 53 brands from 18 automotive groups. Volkswagen achieved the highest score of any one group since the first analysis in 2005: 229 innovations and an innovation ranking of 186 index points. In April 2014, Audi received a DEKRA report on the calculation of its carbon footprint, which was certified in accordance with ISO 14064. The report confirmed the emissions calculated for the entire life cycle of its models. Audi can use the carbon footprint to make its company-wide greenhouse gas emissions more trans- parent in order to analyze them more accurately and reduce them. The Volkswagen Group received the “Gold Medal Award 2013 for Sustainable Development” in May 2014. The non-profit World Environmental Center recognized Volkswagen’s achievements in sustainable development and environmentally-conscious business practices with the prize. The jury highlighted the Volkswagen Group’s understanding of sustainability as a strategic goal and its exemplary implementation. Two Volkswagen Group brands were awarded the “Deutscher Ideen Preis 2014” (“German Ideas Prize 2014”) in May 2014. The German Institute for Business Management cited the clear meth- odology and holistic approach of the Volkswagen Passenger Car brand’s “mach18.FACTORY” production strategy, as well as the knowledge transfer across locations, as the reasons for its choice. Audi received the prize for the best ideas management in the automotive industry. The jury’s assessment focused on the improve- ments suggested by employees and their implementation and participation rates. Two Volkswagen Group brands also received the “International Engine of the Year Award 2014” in June 2014. Volkswagen’s 1.4 l TSI twincharger won the 1.0 to 1.4 l category for the ninth time in succession, making it the most successful powertrain in the history of the international engine technology competition. Audi’s 2.5 l TFSI engine secured the brand’s fifth consecutive win in the 2.0 to 2.5 l category. Over 80 international motor industry journalists assessed personal driving experience, fuel economy, noise levels and power, among other things. Also in June 2014, Volkswagen Commercial Vehicles received the “OFF ROAD Award” from the magazine of the same name. The Amarok was named the overall winner of its category. The Volkswagen Group was named the “Company of the Year 2013” by the Schutzgemeinschaft der Kapitalanleger e.V. (German Association for the Protection of Investors) in May 2014. Key to the Group’s success was the continuous growth in the value of Volks- wagen’s operating business combined with a shareholder-friendly dividend policy. A N N I V E R S A R I E S Volkswagen’s Emden plant celebrated its 50th anniversary at the beginning of April 2014. The start of production of the new Passat on the basis of the Modular Transverse Toolkit marks the beginning of a new era for the lead plant for the Passat. Volkswagen will invest €1 billion in the Emden plant by 2018 to make it future-ready. Also in April, SEAT celebrated the 30th anniversary of its best- selling car – the SEAT Ibiza. Approximately five million vehicles have been sold around the world since the model was launched at the Paris Motor Show in 1984. This makes the SEAT Ibiza the Spanish brand’s best-selling model, and at the same time the market leader in its segment in Spain for almost 15 years. As the first vehicle to be developed completely independently by the brand, it is also a mile- stone in the company’s history. SEAT commemorated the anniver- sary with the special-edition Ibiza SC 30 Years. The e-Golf took top honors in both the main category for pro- duction models and the “Range Award” category of the “WAVE TROPHY 2014”, the world’s largest electric vehicle rally, which was held in June. It demonstrated its capabilities in alpine terrain, achieving the best efficiency and range over the different stages of the rally, some of them more than 200 km long. MAN celebrated the 50th anniversary of the Salzgitter plant, which produces trucks and buses, on June 27, 2014. The event was marked with a family day. A highlight of the day was the behind-the- scenes look at the new logistics center. 4 U P D AT E D I N F O R M AT I O N Key Events D O U B L E V I C T O RY AT L E M A N S F O R A U D I Audi claimed a double victory at the legendary 24 Hour Le Mans race, finishing in first place for the 13th time out of 16 appearances. The winning trio – Marcel Fässler, André Lotterer and Benoit Treluyer – took the checkered flag in their R18 e-tron quattro despite strong competition and adverse weather conditions, followed by defending champion Tom Kristensen and his team. Audi took first place for the fifth year in succession and also clocked the fastest lap. Porsche returned to top flight motorsport after 16 years – the FIA World Endurance Championship including Le Mans in the top- tier LMP1 category – taking part in the 82nd running of arguably the toughest car race in the world with two innovative 919 hybrids. The supercars, which took two years to develop, impressed with their spectacular looks and pioneering technology. The two Porsches missed out on a podium finish despite a strong debut showing and leading over 30 laps. Porsche was the only manufacturer to take to the Le Mans starting line with two works teams in two categories; Porsche placed third in the GTE Pro class. V O L U N TA RY T E N D E R O F F E R F O R S C A N I A S U C C E S S F U L On May 13, 2014, Volkswagen announced that the voluntary tender offer starting on March 17, 2014 for all Scania shares would be completed since all of the conditions – including becoming the owner of more than 90% of all Scania shares – had been fulfilled. As of June 30, 2014, Volkswagen held a 99.57% interest in Scania’s capital and 99.66% of the voting rights. The squeeze-out for the Scania shares not tendered in the offer has been initiated and Scania’s shares were delisted from the NASDAQ OMX in Stockholm at the end of June 5, 2014. Volkswagen aims to create a leading commercial vehicles group through close operational cooperation between Scania, MAN and Volkswagen Commercial Vehicles. capital against cash contributions, while disapplying shareholders’ preemptive rights. The implementation of the capital increase increased the share capital in accordance with the Articles of Association by a notional amount of approximately €26.8 million to approximately €1.2 billion. The placement price of the 10,471,204 new preferred shares was set at €191.00 per share, generating gross proceeds of €2.0 billion. A syndicate of banks undertook to subscribe for all of the new shares and place them with institutional investors in Germany and other countries, including a private placement for qualified insti- tutional investors in the USA. The new shares carry full dividend rights retrospectively from January 1, 2014. The issue proceeds will serve to partially refinance the voluntary tender offer made to the shareholders of Scania AB. A N N U A L G E N E R A L M E E T I N G The 54th Annual General Meeting and the 12th Special Meeting of Preferred Shareholders of Volkswagen AG were held at the Hanover Exhibition Grounds on May 13, 2014. With 92.45% of the voting capital present, the ordinary shareholders of Volkswagen AG for- mally approved the actions of the Board of Management and the Supervisory Board and the conclusion of intercompany agree- ments. They also elected PricewaterhouseCoopers AG Wirtschafts- prüfungsgesellschaft, Hanover, as the auditors for fiscal year 2014 and as the auditors to review the condensed financial statements and interim management report for the first six months of 2014. The scheduled terms of office of Dr. Hans Michel Piëch and Dr. Ferdinand Oliver Porsche expired at the end of the Annual General Meeting. The Annual General Meeting elected them both to the Supervisory Board for a further full term of office. In addition, Mr. Ahmad Al-Sayed, who was previously appointed to the Supervisory Board by the court, was elected to the Supervisory Board for a full term of office. The Annual General Meeting also resolved to distribute a dividend of €4.00 per ordinary share and €4.06 per preferred share for fiscal year 2013. S U C C E S S F U L C A P I TA L I N C R E A S E P L A C E D On June 3, 2014, the Board of Management of Volkswagen AG resolved, with the consent of the Supervisory Board, to increase the Company’s capital by issuing new preferred shares from authorized 5 I N T E R I M M A N A G E M E N T R E P O R T Volkswagen Shares Volkswagen Shares The price volatility experienced in the international equity markets in the first three months of 2014 continued into the beginning of the second quarter. Better-than-expected economic data from China and hopes that the Federal Reserve would continue its expansionary monetary policy had a stabilizing effect on prices. However, the recovery was curbed by sustained anxiety over the crisis in Ukraine, weak quarterly figures from the USA and concerns about continued volatile exchange rates in developing economies. Largely healthy corporate results in the eurozone, the European Central Bank’s decision to continue its loose monetary policy and positive economic data from the USA led to price increases in mid-April. Buoyed by this news, the DAX closed at a new high of 10,029 points on June 10, 2014. Prices eased off slightly towards the end of the reporting period. Among other things, capital market participants were unnerved by the increasingly strained political situation in Iraq and continuing tensions resulting from the Ukraine crisis. The DAX closed at 9,833 points at the end of June 2014, up 2.9% on the level at the end of 2013. The EURO STOXX Automo- biles & Parts stood at 490 points, up 6.7% compared with the 2013 closing price. remained below the positive trend of the market as a whole. Among other reasons, this was due to the completion of the voluntary tender offer for all Scania shares. As May progressed, Volkswagen’s shares benefited from the upward movement of the DAX, and their price also increased. Compared with the preferred shares, the price of ordinary share grew at a slightly faster pace. Volkswagen AG implemented a capital increase at the beginning of June, issuing new preferred shares from authorized capital against cash contri- butions. Both classes of shares moved sideways as June progressed, before again declining in lockstep with the market towards the end of the reporting period. Volkswagen’s preferred shares reached their highest daily closing price in the first six months of 2014 (€203.35) on January 17, 2014, hitting their lowest closing price of €177.75 on March 14, 2014. At the end of June, the preferred shares closed at €191.80, down 6.0% on the end of 2013. Volkswagen AG’s ordinary shares also reached their highest closing price in the reporting period – €197.35 – on January 17, 2014. The shares hit their lowest daily closing price on March 24, 2014 at €172.10. The ordinary shares ended the first six months of the year at €188.80; this was a decrease of 4.1% as against the end of 2013. Volkswagen AG’s preferred and ordinary share prices were unable to escape the equity market volatility in the reporting period. Due in particular to the positive response to the Group’s sales figures for Q1 2013, increases were seen at the beginning of April. Volkswagen share prices retreated again until mid-May, and Information and explanations on earnings per share can be found in the notes to the consolidated interim financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website at www.volkswagenag.com/ir. S H A R E P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 2 T O J U N E 2 0 1 4 Index based on month-end prices: December 31, 2012 = 100 Volkswagen ordinary shares Volkswagen ordinary shares Volkswagen preferred shares Volkswagen preferred shares DAX DAX EURO STOXX Automobiles & Parts EURO STOXX Automobiles & Parts 160 160 140 140 120 120 100 100 80 80 D J F M A M J J A S O N D J F M A M J 6 I N T E R I M M A N A G E M E N T R E P O R T Business Development Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The global economy continued its slight recovery in the first half of 2014, although its strength has been mixed in the different regions. The economic situation in the industrialized nations improved despite the continued presence of structural obstacles. Economic growth in a number of emerging economies slowed due to currency fluctuations and structural deficits. 2014. GDP growth decreased on the already low prior-year period level. Despite the difficult weather-induced conditions at the begin- ning of the year, the US economy continued its recovery at a slightly stronger pace in the following months. The easing unemployment rate and positive consumer sentiment boosted the economy. Eco- nomic development in Mexico was positive, but remained muted compared with previous years. Western Europe’s economic recovery continued in the first six months of 2014. The northern European countries returned to a moderate growth path, while there were signs that the recession is coming to an end in most of the crisis-hit southern European countries. The German economy reinforced its upward trend in the first six months of 2014, benefiting in particular from the continued posi- tive consumer sentiment and the stable situation on the labor market. Economic growth was also positive in Central Europe in the reporting period. However, sentiment deteriorated in Eastern Europe due to the political tensions between Russia and Ukraine. Growth in Brazil was below prior-year levels in the first six months of 2014. Recessionary trends and sustained very high infla- tion impacted the situation in Argentina. The Chinese economy continued to record robust growth in the reporting period, with slightly declining momentum. India’s economic growth was curbed by sustained cautious investment spending due to regulatory and financial uncertainties, and a large number of structural deficits. Japan’s economy continued to sta- bilize on the back of fiscal and monetary policy measures taken to revive economic activity. South Africa’s economic situation continued to be impacted by structural deficits and social conflict between January and June E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 2 T O J U N E 2 0 1 4 Index based on month-end prices: December 31, 2012=100 EUR to USD EUR to USD EUR to JPY EUR to JPY EUR to GBP EUR to GBP 130 130 120 120 110 110 100 100 90 90 D J F M A M J J A S O N D J F M A M J 7 I N T E R I M M A N A G E M E N T R E P O R T Business Development T R E N D S I N T H E PA S S E N G E R C A R M A R K E T S Global demand for passenger cars continued to grow between January and June 2014, despite a slight slowdown and mixed trends at a regional level. While the number of new registrations in the Asia-Pacific region, Western Europe, North America and Cen- tral Europe increased year-on-year, overall market demand in South America in particular as well as Eastern Europe was lower than in the first half of 2013. The weak currencies of key emerging economies pushed prices up and thus put pressure on demand. Signs of stabilization in the passenger car markets continued in Western Europe. Despite increased sales in the first six months of 2014, overall the markets remain at a low level. While the positive economic environment in the United Kingdom and Spain’s con- tinuation of its government purchase incentives led to double-digit growth rates for new passenger car registrations, France and Italy recorded growth in the reporting period at a level only slightly exceeding last year’s weak figures. Demand for passenger cars in the Asia-Pacific region recorded the world’s highest absolute increase from January to June 2014. By far the highest increase in market volumes was recorded in China, the world’s largest single market. In particular, models in the SUV segment recorded higher-than-average growth rates. Passenger car sales in India were down slightly year-on-year in the reporting period. The market was able to recover to some extent in the second quarter due to the temporary cut in excise tax – for vehicles, among other things – initially until June 30, 2014. In Japan, new passenger car registrations remained high. However, growth slowed at the end of the reporting period due to the VAT increase effective April 1, 2014. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S Global demand for light commercial vehicles rose moderately year- on-year in the period from January to June 2014. Growth in new registrations in Germany slowed as the year progressed. Demand was underpinned by commercial purchases and the stable macroeconomic environment. In the period January to June 2014, the markets for passenger cars in Central and Eastern Europe were mixed. While the number of new registrations in Central Europe grew significantly, overall passenger car sales in Eastern Europe saw a sharp decline. Sales in Russia and Ukraine in particular recorded a significant decrease due to the political tensions in recent months. South Africa saw a continuation of the downward sales trend observed since the fourth quarter of 2013. Coupled with weak con- sumer sentiment, higher interest rates and mobility costs led to a decline in the market. Light commercial vehicle sales in the Western European market exceeded the prior-year figures in the period under review on the back of economic stabilization in Western Europe. Countries such as Italy or Spain, which continue to be impacted by the debt crisis, saw in part considerable market growth. In Central and Eastern Europe, demand for light commercial vehicles was mixed in the first half of 2014. While many markets – including the Czech Republic, Croatia and Hungary – recorded double-digit growth rates as against the previous year, demand declined in Russia and Ukraine due mainly to political tensions and their economic impact. In North America, the number of new registrations for light commercial vehicles in the first six months of 2014 was higher than in the previous year. In North America, the automotive market showed further improvement on the prior-year period. After weak sales caused by the extreme weather conditions at the start of the year, sales in the USA were boosted by backlog effects, attractive financing conditions and continuing high replacement demand. Demand was partic- ularly strong for models in the SUV and pickup segments. Market volumes also increased in Canada, whereas sales stagnated in Mexico on a level with the strong prior-period figures. Ongoing difficult economic conditions in South America led to a decrease in light commercial vehicle sales in the region’s core markets in the period under review. However, Brazil exceeded the 2013 figure thanks to higher demand for new SUVs, which are included in light commercial vehicles in this market. The rise in the number of new SUVs registered in Argentina was unable to com- pensate for the decline in demand for light commercial vehicles triggered by the tax hike on higher-value vehicles at the beginning of the year. The number of new passenger car registrations in South Amer- ica in the first six months of 2014 was significantly below the prior- year figure, and the decline in demand accelerated further in recent months. In Brazil, the generally weaker economic environ- ment, higher vehicle prices and less favorable financing conditions had a negative impact on market trends. The market collapse in Argentina compared with the record level in the prior-year period was mainly attributable to the tax increase on higher-value pas- senger car purchases at the beginning of the year, together with buyer reluctance due to decreasing real incomes and sharp increases in interest rates. Demand in China, the dominant market for light commercial vehicles in the Asia-Pacific region, rose year-on-year in the first half of 2014. The Indian market was negatively impacted by weak economic growth and persistently high inflation; demand fell con- siderably as against the prior-year period. In Japan, demand for light commercial vehicles increased in the reporting period compared with January to June 2013 as a result of pull-forward effects from a VAT increase as of April 1, 2014. Demand for light commercial vehicles in the ASEAN region was mixed. While a number of small markets saw strong growth, demand in Thailand declined after government incentive programs expired. 8 I N T E R I M M A N A G E M E N T R E P O R T Business Development Global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes fell short of the 2013 figure in the first six months of 2014. New vehicle registrations in the Western European market were on a level with the previous year. Sales were up significantly year-on-year in Germany, the largest market in Western Europe. New vehicle registrations in Central and Eastern Europe declined appreciably as against the previous year. The figure for Russia was down significantly year-on-year due to the weak ruble and difficult financing conditions caused by the tense political situation. In North America, demand in the period from January to June 2014 clearly exceeded the prior-year figure. The truck market expe- rienced a growth trend due to increased construction activities and higher demand for replacement vehicles in the heavy truck segment. The number of new vehicle registrations in South America was well below the 2013 figure in the first half of 2014. Vehicle sales in the Brazilian truck market were down significantly year-on-year as a result of the deterioration in the macroeconomic environment and more restrictive financing conditions. marine engines saw a slightly positive trend compared with the same period of the previous year. In particular in developing countries and emerging markets, the need for energy generation facilities remained high, with a strong trend towards greater flexibility and decentralized avail- ability. The global trend towards using gas as a fuel continued. Order placements were delayed for larger projects in particular, due to exchange rate fluctuations and difficult financing conditions for customers. Compared with the first half of 2013, the market for power generation as a whole was stable. The turbomachinery market is mainly dominated by contracts awarded in connection with global investment projects in oil and chemical facilities. Project volumes remained high in the oil and gas industry; however, competitive pressure rose as a result of the unfavorable trend affecting the US dollar and the yen in particular. Demand for turbomachinery in the processing industry remained at a low level between January and June 2014, increasing the existing strong competitive pressure still further due to currency- related factors. The overall market for turbomachinery declined slightly compared with the same period of the previous year. The Asia-Pacific region – excluding the Chinese market – saw sales decline in the reporting period. Weak economic growth and high interest rates led to a considerable contraction of the Indian market. By contrast, demand in the world’s largest truck market, China, was up slightly year-on-year in the first six months of 2014. This trend was buoyed by the delay in implementing the most recent emission standards. D E M A N D F O R F I N A N C I A L S E R V I C E S Global demand for automotive-related financial services was strong in the first half of 2014. Business with financial services products was buoyed by the positive overall performance in Germany and the signs of recovery in Western and Central Europe. In North America, demand for financial services was down slightly on the previous year. New bus registrations worldwide were down on the previous year in the first half of 2014. Sales volumes for financial services did not quite meet the prior-year level in South America against declining demand in the automotive markets. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are generally independent of each other. The market situation for large merchant ships – such as con- tainer and freight ships – continued to be tense due to overcapacity. Demand for four-stroke engines for merchant and special ships remained stable in the first half of 2014. Overall, the market for Demand for financial services in the Asia-Pacific region, and in China in particular, was higher than in the previous year – in some areas significantly so. In the truck and bus business, demand for financial services products in South America and Asia-Pacific (excluding China) remained under pressure. By contrast, North America and China saw volumes increase year-on-year. 9 I N T E R I M M A N A G E M E N T R E P O R T Business Development V O L K SWA G E N G R O U P D E L I V E R I E S The Volkswagen Group delivered 5,065,658 vehicles to customers in the first half of the year; this corresponds to 268,311 vehicles or 5,6% more than in the same period of 2013. Deliveries exceeded the corresponding prior-year figures in all six months of 2014. Separate details of deliveries of passenger cars and commercial vehicles are provided in the following. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A RY 1 TO J U N E 3 0 * eral Motor Transport Authority) registration statistics in their respective segments: the up!, Polo, Golf, Passat, Touran and Tiguan. The Golf was also the most popular passenger car in Germany in the first half of 2014 in terms of registrations. The Volkswagen Group delivered a total of 6.3% more vehicles year-on-year in Central and Eastern European markets in the first six months of 2014. While we recorded significant growth in Poland and the Czech Republic, sales in Russia and Ukraine declined, particularly as a result of the political tensions. Demand was high for the Polo, Golf, Audi A3 and Audi Q3 models, as well as for the ŠKODA Rapid, Yeti and Octavia models. At 17.4% (15.9%), the Group’s market share was higher than in the previous year. 2014 2013 % Passenger cars Commercial vehicles 4,751,867 313,791 4,467,882 329,465 + 6.4 – 4.8 In the declining South African market, Group deliveries to cus- tomers decreased by 8.8% year-on-year in the reporting period. The Golf and Audi A3 models saw an increase in demand. Total 5,065,658 4,797,347 + 5.6 Deliveries for 2013 have been updated to reflect subsequent statistical trends. Includes the Chinese joint ventures. The Saveiro model is reported as a passenger car retrospec- tively as of January 1, 2013. PA S S E N G E R C A R D E L I V E R I E S W O R L D W I D E We sold 4,751,867 passenger cars worldwide in the reporting period, an increase of 6.4% compared with the record level in the first half of 2013. The Volkswagen Passenger Cars (+3.8%), Audi (+11.4%), ŠKODA (+12.5%) and Porsche (+7.6%) brands recorded new highs. Since the market as a whole only grew by 4.7% in the first six months, we were able to extend our market position and gain additional market share. Demand for our vehicles grew in the Asia-Pacific region and in Europe. The table on the next page provides an overview of passenger car deliveries to customers by market in the reporting period. Sales trends in the individual markets are as follows. Deliveries in North America The Volkswagen Group sold 3.2% fewer vehicles year-on-year in North America in the reporting period; the market share amounted to 4.4% (4.8%). The Jetta remains the Group’s bestselling model in North America. In the USA, the market as a whole grew by 4.4% in the first half of 2014, with this increase being driven mainly by the pickup and the SUV segment, while most other segments were flat. The Volks- wagen Group delivered 5.3% fewer vehicles than in the previous year. Demand for the Audi A3, Audi A6, Audi Q5, Audi Q7 and the Porsche 911 coupé and Panamera models was higher than in 2013. After deliveries to customers in the Canadian market declined in the first quarter of 2014, they rose significantly in the second quarter and were up by a total of 1.6% on the prior-year figure in the reporting period. Demand was particularly high for the Jetta, Tiguan, Passat, Audi A4 and Audi Q5 models. Deliveries in Europe/Other markets Our deliveries to customers in the growing passenger car market in Western Europe increased by 7.1% year-on-year to 1,519,724 units in the period from January to June 2014. All major markets in the region saw higher delivery figures year-on-year for Volkswagen Group vehicles; the Polo, Golf, Tiguan, Audi A3, ŠKODA Octavia, SEAT Ibiza and SEAT Leon models were in particularly high demand. The Porsche Macan was successfully launched in the mar- ket. Our share of the passenger car market in Western Europe was 24.7% (24.7%). Group sales in Mexico exceeded the 2013 figure by 1.6% in the first six months of the year. The Polo, Audi A3, SEAT Toledo and SEAT Leon models recorded high growth rates. Deliveries in South America The highly competitive South American markets were dominated by increasingly difficult conditions in the first half of 2014. The Volkswagen Group delivered 20.2% fewer vehicles year-on-year to customers in that period. The Volkswagen Group’s share of the passenger car market decreased to 17.4% (19.3%) overall. In Germany, the Volkswagen Group sold 5.2% more vehicles in the reporting period than in the previous year; the market as a whole grew by 2.4% in the first six months. The Golf, Touran, Tiguan, Audi A3, ŠKODA Rapid, ŠKODA Octavia and Porsche 911 coupé models recorded high growth rates. A total of six Volkswagen Group vehicles led the Kraftfahrtbundesamt (KBA – German Fed- In Brazil, we handed over 15.4% fewer vehicles to customers than in the previous year. Demand increased for the Golf, Audi A3 and Audi Q3 models. The up! was successfully launched in the market. The Gol remains the bestselling model in Brazil. In the Argentinian passenger car market, the Group delivered 40,8% fewer vehicles in the reporting period than in the previous year. The Gol experienced the highest demand. 10 I N T E R I M M A N A G E M E N T R E P O R T Business Development Deliveries in the Asia-Pacific region We sold 15.9% more passenger cars year-on-year in the Asia-Pacific region between January and June 2014. The market as a whole only grew by 9.2% in the same period, meaning that the Group’s market share in this region increased to 13.3% (12.6%). We delivered 9.6% more vehicles to the Japanese passenger car market in the first six months of the year than in the same period in 2013, while the market as a whole grew by 11.0%. The Polo, Golf and Audi A3 models were particularly popular with Japanese customers. Growth in the Asia-Pacific region was again driven by the passenger car market in China. The Volkswagen Group delivered 17.5% more vehicles to customers there than in the previous year. The Jetta, Lavida, Magotan, Santana, Tiguan, Audi Q3, ŠKODA Rapid and Porsche Panamera models recorded high growth rates. Our sales in the declining Indian passenger car market were down 33.6% year-on-year. The Polo was the most sought-after Group model. The Audi Q3 and the ŠKODA Octavia recorded encouraging growth. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A RY 1 TO J U N E 3 0 * D E L I V E R I E S ( U N I T S ) C H A N G E 2014 2013 (%) Europe/Other markets 2,011,940 1,902,794 + 5.7 Western Europe 1,519,724 1,418,546 + 7.1 of which: Germany 557,218 529,891 + 5.2 United Kingdom 265,998 233,993 + 13.7 France 132,292 129,583 + 2.1 Spain 115,427 97,381 + 18.5 Italy 104,002 96,744 + 7.5 Central and Eastern Europe 312,504 294,036 + 6.3 of which: Russia 130,633 142,213 – 8.1 Poland 52,853 38,053 + 38.9 Czech Republic 50,253 39,763 + 26.4 Other markets 179,712 190,212 – 5.5 of which: Turkey 52,757 55,528 – 5.0 South Africa 49,603 54,418 – 8.8 North America 421,981 435,882 – 3.2 of which: USA 287,952 303,925 – 5.3 Mexico 89,726 88,344 + 1.6 Canada 44,303 43,613 + 1.6 South America 330,701 414,530 – 20.2 of which: Brazil 262,286 310,156 – 15.4 Argentina 49,451 83,560 – 40.8 Asia-Pacific 1,987,245 1,714,676 + 15.9 of which: China 1,811,195 1,541,778 + 17.5 Japan 53,981 49,254 + 9.6 India 32,651 49,175 – 33.6 Worldwide 4,751,867 4,467,882 + 6.4 Volkswagen Passenger Cars 3,065,828 2,953,613 + 3.8 Audi 869,355 780,467 + 11.4 ŠKODA 522,499 464,595 + 12.5 SEAT 200,153 182,181 + 9.9 Bentley 5,254 4,279 + 22.8 Lamborghini 956 1,166 – 18.0 Porsche 87,803 81,565 + 7.6 Bugatti 19 16 + 18.8 Deliveries for 2013 have been updated to reflect subsequent statistical trends. Includes the Chinese joint ventures. The Saveiro model, which is sold mainly in South America, is reported in the Volkswagen Passenger Cars brand retrospectively as of January 1, 2013. 11 I N T E R I M M A N A G E M E N T R E P O R T Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 2014 2014 2013 2013 1,000 1,000 900 900 800 800 700 700 600 600 500 500 J F M A M J J A S O N D C O M M E R C I A L V E H I C L E D E L I V E R I E S The Volkswagen Group delivered a total of 313,791 commercial vehicles to customers worldwide in the first half of 2014, 4.8% fewer than in the prior-year period. Of these, 86,066 units were trucks (–5.5%) and 9,960 were buses (–15.1%). Volkswagen Com- mercial Vehicles delivered 217,765 light commercial vehicles, falling 3.9% short of the prior-year figure. Scania increased its deliveries by 1.1% to 38,391 units. MAN delivered 57,635 vehicles to customers in the first six months of 2014, 11.1% fewer than in the same period of 2013. In Western Europe, the Volkswagen Group benefited from the improved economic environment and from further new vehicle registrations of Euro 5 vehicles in the reporting period. We deliv- ered a total of 175,201 commercial vehicles (+4.8%), of which 143,843 units were light commercial vehicles and 29,657 were trucks. The Caddy and the Transporter were the most sought-after Group models. In Central and Eastern Europe, deliveries to the Group’s commercial customers were on a level with the previous year at 31,389 units (–0.4%). Light commercial vehicles accounted for 18,818 units, and trucks for 12,247. The Transporter was in particularly high demand. Sales in Russia fell by 11.5% overall to 11,917 units due to the weak ruble and the more difficult financing conditions caused by the tense political situation. In the Other markets, Group sales amounted to 33,320 units (–0.4%): 20,891 light commercial vehicles, 11,240 trucks and 1,189 buses. In North America, demand for Volkswagen Group commercial vehicles increased by 962 units to 3,881 units, of which 2,907 were light commercial vehicles, 196 were trucks and 778 were buses. In the first half of 2014, we handed over a total of 52,988 com- mercial vehicles (–32.6%) to customers in the South American markets, consisting of 20,064 light commercial vehicles, 27,938 trucks and 4,986 buses. The Caddy was the most sought-after light commercial vehicle. In Brazil, sales were negatively impacted by the deteriorating macroeconomic environment and the more difficult financing conditions. Commercial vehicle deliveries in Brazil amounted to a total of 38,761 units (–35.4%). Of these, 9,444 were light commercial vehicles, 25,198 were trucks and 4,119 were buses. In the Asia-Pacific region, the Group sold 17,012 commercial vehicles (+7.8%), of which 11,242 were light commercial vehicles and 4,788 were trucks. The Amarok and the Transporter recorded the strongest growth in demand. 12 I N T E R I M M A N A G E M E N T R E P O R T Business Development C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A RY 1 TO J U N E 3 0 * D E L I V E R I E S ( U N I T S ) C H A N G E 2014 2013 (%) Europe/Other markets 239,910 232,170 + 3.3 Western Europe 175,201 167,191 + 4.8 Central and Eastern Europe 31,389 31,512 – 0.4 Other markets 33,320 33,467 – 0.4 North America 3,881 2,919 + 33.0 South America 52,988 78,597 – 32.6 of which: Brazil 38,761 59,972 – 35.4 Asia-Pacific 17,012 15,779 + 7.8 of which: China 2,871 2,585 + 11.1 Worldwide 313,791 329,465 – 4.8 Volkswagen Commercial Vehicles 217,765 226,632 – 3.9 Scania 38,391 37,980 + 1.1 MAN 57,635 64,853 – 11.1 Deliveries for 2013 have been updated to reflect subsequent statistical trends. The Saveiro model, which is sold mainly in South America, is reported in the Volkswagen Passenger Cars brand retrospectively as of January 1, 2013. D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times typically range from just under one year to several years, and partial deliveries as construction prog- resses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction busi- ness. In the first six months of 2014, sales revenue in the Power Engi- neering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated nearly three- quarters of the overall revenue volume. G R O U P F I N A N C I A L S E R V I C E S The products and services of Volkswagen Financial Services were in high demand in the first half of the year. The financial services business of MAN Finance International GmbH has been included in this division since January 1, 2014; the prior-year figures were adjusted accordingly. The number of new financing, leasing, service and insurance contracts signed worldwide was 2.3 million, an increase of 16.1% compared with the same period of the previous year. The total number of contracts increased to 11.5 million as of June 30, 2014, 13.0% more than at the reporting date in the previous year. the total number of contracts was 10.5% higher than in the pre- vious year. The number of contracts in the Customer Financing/ Leasing area was 4.5 million, an increase of 6.5%. In North America, the number of contracts at the end of the first half of 2014 was 1.9 million, surpassing the figure at the prior-year reporting date by 14.2%. The Customer Financing/Leasing area accounted for 1.5 million contracts (+10.3%). The number of new contracts signed in the reporting period was 375 thousand, exceed- ing the prior-year figure by 4.4%. In South America, 75 thousand new contracts (–52.5%) were signed in the first half of the year. The year-on-year decline is attrib- utable to the lower sales figures as well as to the higher interest rates in Brazil, which had a negative impact on customer financing. The total number of contracts as of June 30, 2014 was 0.8 million, up 11.1% on the prior-year reporting date. Almost all contracts were attributable to the Customer Financing/Leasing area. In the Asia-Pacific region, the number of new contracts in the reporting period was 235 thousand (107 thousand), more than double the prior-year figure. The total number of contracts at the end of the first half of 2014 was 765 thousand (+48.2%). Of this total, 647 thousand (+56.4%) were attributable to the Customer Financing/Leasing area. The number of new contracts in Europe rose by 19.1% to 1.6 million year-on-year from January to June 2014. At 8.0 million, 13 I N T E R I M M A N A G E M E N T R E P O R T Business Development S A L E S TO T H E D E A L E R O R G A N I Z AT I O N Including the Chinese joint ventures, the Volkswagen Group sold 5,206,840 vehicles to the dealer organization from January to June 2014, 6.8% more than in the comparable prior-year period. The 7.2% increase in sales outside Germany is attributable to the buoy- ant growth in demand for Group models in the Chinese passenger car market and in other European countries. In Germany we bene- fited from the sustained market recovery, increasing sales by 4.3%. Vehicles sold in Germany accounted for 12.4% (12.7%) of overall sales. P R O D U C T I O N The Volkswagen Group produced 5,234,123 vehicles worldwide in the first half of 2014, 7.1% more than in the prior-year period. Of this total, 1,313,629 vehicles were produced in Germany, thereby exceeding the prior-year figure by 4.8%. The proportion of vehicles produced in Germany declined from 25.6% to 25.1%. I N V E N TO R I E S The Group companies and dealer organizations recorded global inventories that were higher on June 30, 2014 than at year-end 2013 and at June 30, 2013. N U M B E R O F E M P L OY E E S The Volkswagen Group had 552,077 active employees on June 30 of this year. A further 8,276 employees were in the passive phase of their partial retirement, and 15,451 young people were in voca- tional traineeships. The Volkswagen Group had 575,804 employees worldwide at the end of the reporting period, up 0.5% on the number as of December 31, 2013. The expansion of the workforce is attributable to the increase in production volume and the recruitment of specialists and experts. At 262,187, the number of employees in Germany was 0.7% higher than the 2013 year-end figure; the proportion of employees in Germany remained on a level with the previous year, at 45.5%. 14 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets On March 14, 2014, Volkswagen AG made a voluntary tender offer to Scania for all shares not previously held by Volkswagen either directly or indirectly. 36.93% of all Scania shares were acquired by the end of June 2014 on the successful completion of the offer. Volkswagen held 99.57% of Scania’s share capital at the end of the reporting period; this corresponded to 99.66% of the voting rights. Volkswagen has initiated a squeeze-out for the remaining Scania shares. The transaction reduced equity by €6.7 billion. €6.5 billion was paid for the shares acquired in 2014; a liability was recognized in the balance sheet without affecting profit or loss for the shares to be acquired in the squeeze-out. R E S U LT S O F O P E R AT I O N S I N T H E A U TO M OT I V E D I V I S I O N The Automotive Division generated sales revenue of €87.0 billion (€87.5 billion) in the first six months. Positive volume and mix effects were unable to offset clearly negative exchange rate effects. Sales revenue in the Passenger Cars Business Area was up year-on- year but declined in the Commercial Vehicles/Power Engineering Business Area, mainly due to the difficult conditions in South America. As our Chinese joint ventures are accounted for using the equity method, the Group’s positive business growth in the Chinese passenger car market is mainly reflected in the Group’s sales revenue only by deliveries of vehicles and vehicle parts. To partially fund the transaction, the Company resolved and implemented a capital increase in June 2014, under which new preferred shares were issued from authorized capital against cash contributions, while disapplying shareholders’ preemptive rights. This increased the share capital by a notional €26.8 million and generated gross proceeds totaling €2.0 billion. Gross profit in the Automotive Division rose by €0.1 billion to €16.0 billion. This was negatively affected by unfavorable exchange rate trends, increased depreciation charges as a result of high capital expenditures, greater fixed costs due to growth factors and higher research and development costs, in particular for new drive concepts, while improved product costs had a positive effect. The prior year had been impacted by contingency reserves in the areas of passenger cars and power engineering. R E S U LT S O F O P E R AT I O N S O F T H E G R O U P The Volkswagen Group’s sales revenue amounted to €98.8 billion in the first half of 2014, up slightly on the prior-year period (€98.7 billion). Clearly negative exchange rate effects were offset by higher volumes and improvements in the mix. The Volkswagen Group generated 79.6% (80.3%) of its sales revenue outside of Germany. Distribution expenses increased by 4.8% in the reporting period. The ratio of distribution expenses to sales revenue also rose. Administrative expenses and the ratio of administrative expenses to sales revenue were up slightly year-on-year. Other operating income improved to €1.5 billion (€0.8 billion), mainly due to cur- rency-related factors. Gross profit in the period from January to June 2014 was €18.7 billion, €0.3 billion higher than in the previous year. The gross margin rose to 19.0% (18.6%). Exchange rate deterioration, higher depreciation charges resulting from significant capital expenditures and higher upfront investments in new products were offset by optimized product costs. Prior-year profit was impacted by contingency reserves. At €5.3 billion, the Automotive Division’s operating profit exceeded the prior-year figure by €0.3 billion in the first half of 2014. The operating return on sales was 6.0% (5.7%). Since the profit recorded by the joint venture companies is accounted for in the financial result using the equity method, the positive business growth of our Chinese joint ventures is mainly reflected in the Group’s operating profit only by deliveries of vehicles and vehicle parts. The Volkswagen Group generated an operating profit of €6.2 billion (€5.8 billion) in the first half of 2014. The operating return on sales was 6.3% (5.9%). Profit before tax rose by 17.5% year-on-year to €7.8 billion. Profit after tax improved by €0.9 billion to €5.7 billion. The financial result rose by €0.7 billion year-on-year to €1.5 billion. This was positively impacted by income from the measure- ment of derivative financial instruments at the reporting date, as well as income from the equity-accounted Chinese joint ventures, which was up on the high prior-year figures. 15 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets O P E R A T I N G P R O F I T B Y Q U A R T E R S Volkswagen Group in € million 2014 2014 2013 2013 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 Q1 Q2 Q3 Q4 R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A A N D C O M M E R C I A L V E H I C L E S / P O W E R E N G I N E E R I N G B U S I N E S S A R E A F R O M J A N U A RY 1 TO J U N E 3 0 € million 2014 2013 F I N A N C I A L P O S I T I O N O F T H E G R O U P The Volkswagen Group’s gross cash flow improved by €0.3 billion year-on-year to €13.5 billion in the first six months of 2014. At €10.1 billion, funds tied up in working capital were 23.2% higher than a year earlier due to volume-related factors and a stronger per- formance by the financial services business. As a result, cash flows from operating activities declined to €3.3 billion (€5.0 billion). Passenger Cars Sales revenue Gross profit Operating profit Operating return on sales (in %) Commercial Vehicles/Power Engineering Sales revenue Gross profit Operating profit 70,711 13,466 4,748 6.7 16,333 2,561 514 70,345 13,829 4,877 6.9 17,170 2,052 78 Investing activities attributable to the Volkswagen Group’s operating activities were up €0.5 billion on the prior-year figure at €6.2 billion in the reporting period. Investments in property, plant and equipment declined, while capitalized development costs rose. Cash inflows from financing activities amounted to €0.3 billion (€4.1 billion). Net liquidity was increased by the hybrid notes successfully placed in March 2014 (€3.0 billion) and the capital increase implemented in June 2014 by issuing new preferred shares in the amount of €2.0 billion; net liquidity was reduced by the cash outflows from the dividend payment and the increase in the interest in Scania. Operating return on sales (in %) 3.1 0.5 R E S U LT S O F O P E R AT I O N S I N T H E F I N A N C I A L S E R V I C E S D I V I S I O N The Financial Services Division generated sales revenue of €11.8 billion in the period from January to June 2014, 5.3% more than in the first half of 2013. The increase was mainly due to higher busi- ness volumes. At €2.7 billion, gross profit was up €0.2 billion on the prior-year figure. Distribution and administrative expenses rose in the reporting period due to volume-related factors and compliance with regu- latory requirements. The ratio of both distribution and admin- istrative expenses to sales revenue also increased. Cash and cash equivalents in the Volkswagen Group as reported in the cash flow statement amounted to €18.2 billion as of June 30, 2014, down 13.0% year-on-year. The Group’s net liquidity amounted to €–90.0 billion as of June 30, 2014; at year-end 2013, it was €–82.3 billion. F I N A N C I A L P O S I T I O N I N T H E A U T O M OT I V E D I V I S I O N The Automotive Division recorded a gross cash flow of €10.7 billion in the first half of the year, €0.1 billion higher than in the previous year. Funds tied up in working capital rose to €2.3 billion (€2.1 billion). Cash flows from operating activities were on a level with the prior-year figure, at €8.4 billion (€8.4 billion). Operating profit improved by 11.9% to €0.9 billion, while the operating return on sales rose to 7.9% (7.4%). 16 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets F I N A N C I A L P O S I T I O N I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A A N D T H E C O M M E R C I A L V E H I C L E S / P O W E R E N G I N E E R I N G B U S I N E S S A R E A F R O M J A N U A RY 1 TO J U N E 3 0 € million 2014 Passenger Cars 2013 consist of a €1.25 billion note that carries a coupon of 3.75% and has a first call date after seven years, and a €1.75 billion note that carries a coupon of 4.625% and has a first call date after twelve years. Both tranches are perpetual and increase equity by the full amount, net of transaction costs. €3.0 billion of the hybrid notes was classified as a capital contribution, which increased net liquidity. The capital increase implemented in June by issuing new preferred shares in the amount of €2.0 billion also had a positive impact. Gross cash flow 9,507 9,590 Change in working capital Cash flows from operating activities – 807 8,699 – 1,721 7,869 Net liquidity in the Automotive Division amounted to €14.0 billion as of June 30, 2014, compared with €16.9 billion at year-end 2013. Cash flows from investing activities – 5,326 – 6,651 Net cash flow 3,374 1,218 Commercial Vehicles/Power Engineering Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities Net cash flow 1,150 – 1,462 – 312 – 143 – 455 945 – 382 562 – 549 13 F I N A N C I A L P O S I T I O N I N T H E F I N A N C I A L S E R V I C E S D I V I S I O N Gross cash flow in the Financial Services Division improved by €0.2 billion to €2.8 billion in the first half of 2014. At €7.9 billion (€6.1 billion), funds tied up in working capital were up on the previous year due to growth in business volumes. Largely due to the intragroup acquisition of MAN Finance International GmbH from MAN SE, a cash outflow of €0.8 billion was recorded in investing activities attributable to operating activities in the reporting period. The previous year was characterized by a cash inflow from the sale of the interest in LeasePlan to Volkswagen AG. Investing activities attributable to operating activities were down year-on-year at €5.5 billion (€7.2 billion) in the first six months of 2014. Investments in property, plant and equipment amounted to €3.6 billion (€3.9 billion); the ratio of investments in property, plant and equipment (capex) declined to 4.1% (4.5%). We invested primarily in our production facilities and in models to be launched in 2014 and 2015, as well as in the ecological focus of our model range. Capitalized development costs rose to €2.4 billion (€1.6 billion). Investment activities in the first half of 2014 included the sale of MAN Finance International GmbH to Volkswagen Financial Services AG by MAN SE; the previous year was impacted by the intra- group acquisition of the interest in LeasePlan Corporation N.V. The Automotive Division’s net cash flow rose by €1.7 billion to The Financial Services Division’s negative net liquidity, which is common in the industry, amounted to €–104.0 billion at the end of June 2014, after €–99.2 billion at December 31, 2013. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E At €336.1 billion, the Volkswagen Group’s total assets at the end of the first half of 2014 exceeded the prior-year figure by 3.6%. The Group’s equity was down slightly on the 2013 year-end figure, at €89.7 billion (€90.0 billion). The equity ratio was 26.7% (27.8%). Noncontrolling interests declined to €0.2 billion (€2.3 billion) following the increase in the interest in Scania; these are now largely attributable to shareholders of RENK AG and AUDI AG. €2.9 billion in the reporting period. Funds of €5.6 billion were invested in financing activities in the first six months of 2014. This figure included the total dividend paid out to the shareholders of Volkswagen AG, which rose by €0.2 billion to €1.9 billion, a capital increase of €2.3 billion carried out by Volkswagen AG at Volkswagen Financial Services AG at the beginning of the year in order to finance the growth in business volumes and meet regulatory capital requirements, as well as the purchase price of €6.5 billion for the shares acquired in Scania, which is reported as a capital transaction with noncontrolling interests. The successful placement of dual-tranche hybrid notes with an aggregate principal amount of €3.0 billion via Volkswagen International Finance N.V. in March led to cash inflows. They A U TO M OT I V E D I V I S I O N B A L A N C E S H E E T ST R U C T U R E At the reporting date, intangible assets and property, plant and equipment in the Automotive Division were on a level with Decem- ber 31, 2013. The equity-accounted investments contained in the other noncurrent assets item decreased, as dividends that have already been declared and paid had to be recognized in this item. Overall, noncurrent assets were on a level with the previous year. Current assets rose by 5.4% as against year-end 2013; within this item, the growth in business resulted in a rise in inventories and trade receivables in particular. Cash and cash equivalents in the Automotive Division amounted to €17.6 billion (€20.5 billion) at the reporting date. 17 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets B A L A N C E S H E E T ST R U C T U R E I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A A N D T H E C O M M E R C I A L V E H I C L E S / P O W E R E N G I N E E R I N G B U S I N E S S A R E A € million June 30, 2014 Dec. 31, 2013 Passenger Cars Noncurrent assets 95,418 94,873 Current assets 55,032 50,146 Total assets 150,450 145,019 Equity 57,606 60,494 increased due to the change in the discount rate. Overall, current liabilities rose by 12.4% compared with year-end 2013. Reclassi- fications from noncurrent to current liabilities, in particular due to shorter remaining maturities, led to an increase in current finan- cial liabilities. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed for the reporting period. The item “Put options and com- pensation rights granted to noncontrolling interest shareholders”, which included the total amount of the offer to the Scania share- holders as of the end of Q1 2014, declined with the acquisition of the Scania shares. Noncurrent liabilities 53,687 52,900 Current liabilities Commercial Vehicles/Power Engineering 39,157 31,625 The Automotive Division’s total assets amounted to €194.2 billion at the end of June 2014, up slightly on the level at Decem- ber 31, 2013 (€190.8 billion). Noncurrent assets 26,712 27,565 Current assets 16,992 18,174 Total assets 43,703 Equity 15,291 Noncurrent liabilities 11,965 Current liabilities 16,447 All of the outstanding Scania shares – with the exception of 0.43% of the share capital – were acquired following the fulfillment of all of the conditions for Volkswagen AG’s voluntary tender offer to acquire all Scania shares in May. The transaction reduced equity by €6.7 billion. €6.5 billion was paid for the Scania A and B shares already acquired; a liability was recognized for the shares to be acquired in the squeeze-out. This did not affect liquidity. The non- controlling interests are mainly attributable to RENK AG and AUDI AG. These were lower overall than the noncontrolling interests attributable to the Financial Services Division, so the figure for the Automotive Division, where the deduction was recog- nized, was negative. The Automotive Division’s equity amounted to €72.9 billion at the end of the reporting period, down 4.1% on the 2013 year-end figure. This was positively impacted by healthy earnings growth, the hybrid notes issued in March and the capital increase implemented in June by issuing new preferred shares from authorized capital. The reduction in equity as a result of the acquisition of all out- standing Scania shares, higher actuarial losses from the measure- ment of pension provisions and the dividend paid out to the shareholders of Volkswagen AG had an offsetting effect. The equity increase implemented in the Financial Services Division also decreased equity in the Automotive Division, where the deduction was recognized. liabilities, which remained virtually unchanged as against December 31, 2013, pension provisions Within noncurrent 45,739 15,490 12,390 17,859 F I N A N C I A L S E R V I C E S D I V I S I O N B A L A N C E S H E E T ST R U C T U R E The Financial Services Division’s total assets amounted to €142.0 billion on June 30, 2014, 6.3% higher than at December 31, 2013. Noncurrent assets rose by a total of 7.2% compared with the prior-year figure. This is mainly attributable to an increase in lease assets and noncurrent financial services receivables resulting from business growth. Current assets rose by 5.0%, also due to volume- related factors. The Financial Services Division accounted for approximately 42.2% of the Volkswagen Group’s assets at the end of the first half of 2014. The Financial Services Division’s equity at the end of the reporting period was €16.8 billion, 19.7% higher than at year-end 2013. This is largely the result of a capital increase carried out by Volkswagen AG at the beginning of the year in order to finance the growth in business and meet regulatory capital requirements. The equity ratio rose from 10.5% to 11.8%. Noncurrent liabilities increased by 16.0% due to higher noncurrent financial liabilities entered into to fund the growth in volumes. Overall, current lia- bilities declined compared with the prior-year reporting date; this was attributable to the decrease in current financial liabilities contained in this item. Deposits from direct banking business amounted to €24.6 billion (€23.3 billion); of this figure, €21.9 billion was attributable to Volkswagen Bank direct. R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S In the reporting period, there were no significant changes com- pared with the disclosures on the Volkswagen Group’s expected development in fiscal 2014 in the “Report on Expected Develop- ments” and “Report on Risks and Opportunities” chapters of the 2013 Annual Report. 18 I N T E R I M M A N A G E M E N T R E P O R T Outlook Outlook The global economy continued its slight recovery in the first six months of 2014, although its strength has been mixed in the different regions. The Volkswagen Group’s Board of Management expects the global economy to record slightly stronger growth in 2014 than in the previous year, despite some uncertainties. The financial markets still entail risks resulting above all from the strained debt situation of many countries. While the industrialized nations will probably record moderate rates of expansion, we continue to anticipate that growth will be strongest in the emerging economies of Asia. Global demand for passenger cars continued to rise from January to June 2014, albeit at a slightly slower pace; however, the markets varied from region to region. We expect trends in the passenger car markets in the individual regions to again be mixed in fiscal year 2014. Overall, growth in global demand for new vehicles will probably be somewhat slower than in 2013. We anticipate a slight recovery in demand for automobiles in Western Europe, and volumes in the German market are also likely to increase again somewhat in 2014. The passenger car markets in Central and Eastern Europe will be clearly below the prior-year level. The upward trend in North America will probably weaken, while the South American passenger car markets will be down significantly on the previous year. We anticipate further growth in 2014 for the markets in the Asia-Pacific region that are strategically important for the Volkswagen Group, although momentum there is expected to be lower than in the previous year. The Volkswagen Group is well positioned to deal with the mixed developments in the automotive markets. Our strengths include our unique brand portfolio covering almost all segments, from motor- cycles through subcompact cars to heavy trucks and buses, our steadily growing presence in all major world markets and our wide range of financial services. We offer an extensive range of environmentally friendly, cutting-edge, high-quality vehicles for all markets and customer groups that is unparalleled in the industry. The Volkswagen Group will press ahead with its product initiative across all brands in 2014, and we will modernize and expand our offering by introducing attractive new vehicles. We are pursuing the goal of offering all customers the mobility and innovation they need, sustainably strengthening our competitive position in the process. We expect that the Volkswagen Group will moderately increase deliveries to customers year-on-year in 2014 in a still challenging market environment. Challenges for the Volkswagen Group will come from the difficult market environment and fierce competition, as well as interest rate and exchange rate volatility and fluctuations in raw materials prices. The modular toolkit system, which we are con- tinuously expanding, will have an increasingly positive effect on the Group’s cost structure. Depending on the economic conditions, we expect 2014 sales revenue for the Volkswagen Group and its business areas to move within a range of 3% around the prior-year figure. The global markets for light commercial vehicles will probably experience slight growth overall in 2014, with the individual regions recording mixed trends. We anticipate that the overall volume in the markets for trucks and buses that are relevant for the Volkswagen Group will see a decrease in 2014 as against the previous year due to the increase- ingly difficult conditions in South America and Eastern Europe. We expect demand for automotive financial services to grow In terms of the Group’s operating profit, we are expecting an operating return on sales of between 5.5% and 6.5% in 2014 in light of the challenging economic environment, and the same range also applies to the Passenger Cars Business Area. The Commercial Vehicles/Power Engineering Business Area is likely to moderately exceed the 2013 figure. The operating return on sales in the Financial Services Division is expected to be between 8.0% and 9.0%. Disciplined cost and investment management and the continuous optimization of our processes remain integral elements of the Volkswagen Group’s Strategy 2018. worldwide again in 2014. This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and the actual developments may differ from those forecast. Consequently, any unexpected fall in demand or economic stagnation in our key sales markets, such as Western Europe (and especially Germany), the USA, Brazil, China, or Russia will have a corresponding impact on the development of our business. The same applies in the event of a significant shift in exchange rates, mostly against the euro and primarily in sterling, US dollars, Chinese renminbi, Swiss francs, Japanese yen, Hungarian forints, Swedish kronor, Korean won, Australian dollars and Canadian dollars. In addition, expected business development may vary if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities presented in the 2013 Annual Report develop in a way other than we are currently expecting, or additional risks and opportunities or other factors emerge that affect the development of our business. 19 B R A N D S A N D B U S I N E S S F I E L D S Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D The Volkswagen Group generated sales revenue of €98.8 billion (€98.7 billion) in the first six months of 2014, up only slightly on the prior-year figure (+0.1%). At €6.2 billion, operating profit was up 7.0% compared with the first half of 2013. The Volkswagen Passenger Cars brand sold 2.3 million vehicles in the reporting period, down 3.1% year-on-year. This decrease was primarily due to the declining South American markets. The Sharan, Tiguan, Golf estate and up! models recorded increased sales figures. Lower volumes and exchange rate deterioration had a negative impact on sales revenue, which declined by 2.2% to €49.3 billion. Operating profit decreased by €482 million to €1.0 billion, weighed down by the decline in volumes, negative exchange rate effects and higher upfront expenditures for new technologies. By contrast, lower material costs and improvements in the mix had a positive effect. Unit sales by the Audi brand were up 8.4% worldwide year-on- year in the first six months of 2014 to 750 thousand vehicles. In addition, a further 248 thousand (197 thousand) Audi vehicles were sold by the FAW-Volkswagen Chinese joint venture. Together with the compact A3 and luxury A8 models, Audi’s Q3 and Q5 SUV models were particularly popular with customers. Strong growth in the Asian, North American and European markets also produced positive effects. As a result, sales revenue grew by 5.8% to €26.7 billion despite negative currency effects. At €2.7 billion, operating profit was on a level with the previous year (+1.0%). Earnings growth was impacted by high upfront investments in new products and technologies, as well as in the expansion of the international production network. The Lamborghini and Ducati brands are included in the financial key performance indicators for the Audi brand. 29,839 Ducati motorcycles were sold in the reporting period (–1.8%). The ŠKODA brand lifted unit sales by 17.5% to 426 thousand vehicles between January and June 2014. Demand increased for the Octavia family, the Rapid and the Yeti models. At €6.0 billion, sales revenue was up 20.3% year-on-year. Positive volume and mix effects lifted operating profit, which exceeded the prior-year figure by 74.9% to reach €425 million. The SEAT brand sold 258 thousand vehicles in the reporting period, up 5.8% year-on-year. The sales figures include the Q3 manufactured for Audi. Customer demand increased for the Leon family and Alhambra models. Sales revenue amounted to €3.9 billion, up 8.8% on the prior-year figure. Positive effects from volumes, mix and product costs helped the operating loss to narrow by 6.5% to €37 million. By contrast, development costs for new models increased. The Bentley brand recorded sales of 5,632 vehicles in the first half of the year, up 33.4% on the previous year. Sales revenue rose by 28.5% to €887 million. Operating profit rose by 65.4% to €95 million. The growth in volumes more than offset negative exchange rate effects and higher upfront investments in new products. V O L K S WA G E N G R O U P Division Automotive Financial Services Brand/ Business Field Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Volkswagen Commercial Vehicles Scania MAN Other Dealer and customer financing Leasing Direct bank Insurance Fleet business Mobility offerings 20 B R A N D S A N D B U S I N E S S F I E L D S The Porsche brand sold 89 thousand vehicles worldwide between January and June 2014, an increase of 13.4% compared with the prior-year period. Sales revenue amounted to €8.2 billion, up 16.2% year-on-year. At €1.4 billion, Porsche’s operating profit grew by 8.0%. The increased volumes and an improved mix had a positive effect, although by contrast, increased development costs and higher fixed costs from the development of structures for the Macan had a significant impact. There was strong customer demand for the new Macan and the Panamera in particular. At 221 thousand vehicles (220 thousand), unit sales at Volks- wagen Commercial Vehicles in the first half of 2014 remained level with the prior-year period. Demand for the Multivan/Transporter and the Caddy increased. Sales revenue declined by 1.1% to €4.7 billion due to exchange rate effects. Operating profit grew by 13.5% to €280 million due to lower material costs and positive mix effects. Scania lifted sales by 1.1% to 38 thousand vehicles in the reporting period. The brand was very successful in the European markets in particular. Demand for services also increased. Sales revenue declined by 0.6% to €5.1 billion due to exchange rate factors. Operating profit rose by 2.5% year-on-year to €476 million, a development attributable to Scania Financial Services. The MAN brand sold 58 thousand vehicles in the first six months of the year, down 11.1% year-on-year. Sales revenue decreased by 12.2% to €6.7 billion. MAN generated an operating profit of €222 million compared with an operating loss of €124 million in the previous year. The improvement is mainly attrib- utable to the Power Engineering segment, which had recognized project-specific contingency reserves in the previous year. Operating profit at Volkswagen Financial Services was up 11.5% in the first six months of 2014 to €776 million. The growth in volumes, together with improved net income from service contracts and net fee and commission income, more than compensated for the increase in fixed costs, which was mainly attributable to volumes and compliance with regulatory requirements. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A RY 1 TO J U N E 3 0 1 S A L E S T O T H I R D V E H I C L E S A L E S S A L E S R E V E N U E P A R T I E S O P E R A T I N G R E S U L T thousand units/€ million 2014 2013 2014 2013 2014 2013 2014 2013 Volkswagen Passenger Cars 2,302 2,376 49,259 50,367 34,263 36,881 1,012 1,494 Audi 750 692 26,690 25,234 17,668 17,392 2,671 2,644 ŠKODA 426 362 5,974 4,966 2,950 2,381 425 243 SEAT 258 244 3,948 3,629 1,700 1,569 – 37 – 40 Bentley 6 4 887 690 561 459 95 58 Porsche2 89 78 8,162 7,025 7,541 6,536 1,398 1,294 Volkswagen Commercial Vehicles 221 220 4,724 4,777 2,340 2,430 280 246 Scania2 38 38 5,067 5,097 5,067 5,097 476 464 MAN3 58 65 6,699 7,629 6,626 7,583 222 – 124 VW China4 1,847 1,517 – – – – – – Other – 788 – 724 – 23,026 – 20,413 10,585 9,483 – 1,1325 – 1,1955 Volkswagen Financial Services3 – – 10,423 9,688 9,508 8,875 776 696 Volkswagen Group 5,207 4,873 98,808 98,687 98,808 98,687 6,186 5,780 Automotive Division 5,207 4,873 87,044 87,515 88,086 88,433 5,262 4,955 of which: Passenger Cars Business Area 4,890 4,551 70,711 70,345 74,333 73,791 4,748 4,877 Commercial Vehicles/Power Engineering Business Area 317 323 16,333 17,170 13,754 14,642 514 78 Financial Services Division – – 11,764 11,173 10,722 10,255 924 826 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 Including financial services. 3 MAN Finance International GmbH has been reported within Volkswagen Financial Services since its acquisition by Financial Services AG as of January 1, 2014. The prior-year figures have not been adjusted. 4 The sales revenue and operating profit of the joint venture companies in China are not included in the figures for the Group. The Chinese companies are accounted for using the equity method and recorded an operating profit (proportionate) of €2,622 million (€2,370 million). 5 Mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation for Scania, Porsche Holding Salzburg, MAN and Porsche. 21 B R A N D S A N D B U S I N E S S F I E L D S U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T The Volkswagen Group sold 2.3 million vehicles in the Europe/ Other markets region during the reporting period, exceeding the prior-year figure by 7.0%. Sales grew by 4.9% to €61.9 billion due to increased volumes; deteriorations in exchange rates had an off- setting effect. Sales by the Volkswagen Group in the North American market decreased by 6.2% to 422 thousand vehicles. The lower sales figures and a negative exchange rate trend saw sales revenue decline by 6.9% to €12.9 billion. 24.0% year-on-year to 368 thousand vehicles. The decline in volumes is reflected in sales revenue, which dropped 27.8% to €6.5 billion; exchange rate effects also had a negative impact. From January to June 2014, the Volkswagen Group again recorded demand in the Asia-Pacific region at levels exceeding market growth. Including the Chinese joint ventures, 2.1 million vehicles were sold, 18.1% more than in the prior-year period. As a result, sales revenue rose by 4.0% year-on-year to €17.5 billion. This figure does not include our Chinese joint ventures as they are accounted for using the equity method. The highly competitive South American markets contracted sharply in the first half of 2014. Unit sales there decreased by K E Y F I G U R E S B Y M A R K E T F R O M J A N U A RY 1 T O J U N E 3 0 1 V E H I C L E S A L E S S A L E S R E V E N U E thousand units/€ million 2014 2013 2014 Europe/Other markets 2,279 2,129 61,868 North America 422 450 12,905 South America 368 485 6,510 Asia-Pacific2 2,138 1,810 17,525 Volkswagen Group2 5,207 4,873 98,808 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 22 2013 58,950 13,858 9,022 16,856 98,687 B R A N D S A N D B U S I N E S S F I E L D S V O L K SWA G E N F I N A N C I A L S E R V I C E S Volkswagen Financial Services also performed well in the first six months of 2014, its innovative products and services supporting the Volkswagen Group’s strong sales performance along the automotive value chain. In June 2014, Porsche Bank AG and Volkswagen Financial Services AG established Porsche Volkswagen Servicios Financieros Chile SpA, a joint venture offering sales financing solutions, in Santiago de Chile. Financial Services AG and the German Nature and Biodiversity Conservation Union (NABU) are campaigning together to preserve wetlands as a habitat for valuable species and as CO2 reservoirs for climate protection. A German Moor Conservation Fund has been established for this purpose, which in the future will also expand its activities at an international level. At the end of May, Volkswagen Financial Services Mexico was recognized for the first time in the employer competition “Great Place to Work”. The key elements of the diversified funding strategy employed by Volkswagen Financial Services are unsecured bonds placed on the capital markets, deposits from direct banking business and auto asset-backed securities (ABS) transactions. Volkswagen Bank GmbH successfully placed the Driver 12 ABS transaction, with a volume of approximately €1.3 billion, in April 2014. This was the largest Euro- pean ABS transaction since the beginning of the financial crisis in 2008. This issue met with interest from 32 investors in nine countries, illustrating Volkswagen Financial Services’ leading posi- tion in the European auto ABS market. The funding strategy is aimed at achieving funding solutions that are local wherever possible and that are tailored with regard to the instruments and currencies used. Volkswagen Bank RUS placed its first Russian ruble-denominated bond on the Russian capital markets in June 2014. This transaction, with a volume of RUB 5 billion, was part of Volkswagen Bank RUS’ local debt issuance pro- gram and received a very good rating and enjoyed strong investor demand. The number of new financing, leasing, service and insurance contracts signed between January and June 2014 was 2.3 million, 16.7% more than in the prior-year period (excluding MAN Finance International GmbH, which was acquired on January 1, 2014). The total number of contracts as of June 30, 2014 exceeded the number as of December 31, 2013 by 7.4%. At 7.3 million, the Customer Financing/Leasing area recorded a 5.9% rise in the number of contracts against the year-end figure. In the Service/Insurance area, the number of contracts rose by 9.9% to 4.2 million. Based on unchanged credit eligibility criteria, the share of leased or financed vehicles rose from 27.7% of total Group deliveries worldwide in the previous year, to 29.7%. Compared with December 31, 2013, receivables relating to dealer financing were up 5.3% as of June 30, 2014. Volkswagen Bank direct had approximately 1.4 million accounts as of June 30, 2% fewer than as of the end of 2013. Volkswagen Financial Services had 11,859 employees at the end of the reporting period. The 8.4% increase as against December 31, 2013 is primarily attributable to the acquisition of MAN Finance Inter- national GmbH. 23 24 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Income Statement Interim Consolidated Financial Statements (Condensed) I NCOME STATEMENT FOR TH E PERIOD JAN UARY 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E 1 € million 2014 2013 2014 2013 Sales revenue 98,808 98,687 87,044 87,515 Cost of sales – 80,075 – 80,293 – 71,018 – 71,635 Gross profit 18,733 18,394 16,027 15,880 Distribution expenses – 10,138 – 9,616 – 9,563 – 9,121 Administrative expenses – 3,427 – 3,267 – 2,723 – 2,646 Other operating income/expense 1,019 270 1,521 841 Operating profit 6,186 5,780 5,262 4,955 Share of profits and losses of equity-accounted investments 2,143 1,841 2,127 1,790 Other financial result – 552 – 1,002 – 608 – 1,014 Financial result 1,591 839 1,520 776 Profit before tax 7,777 6,620 6,782 5,731 Income tax expense – 2,061 – 1,827 – 1,808 – 1,536 Profit after tax 5,716 4,793 4,974 4,195 of which attributable to Noncontrolling interests 75 – 65 51 – 76 Volkswagen AG hybrid capital investors 60 – 60 – Volkswagen AG shareholders 5,581 4,858 4,863 4,271 Basic earnings per ordinary share (€)2 11.33 10.04 Diluted earnings per ordinary share (€)2 11.33 10.04 Basic earnings per preferred share (€)2 11.39 10.10 Diluted earnings per preferred share (€)2 11.39 10.10 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in note 4. Prior-year figures adjusted to reflect application of IAS 33.26 25 F I N A N C I A L S E R V I C E S 2014 11,764 – 9,058 2,706 – 575 – 705 – 502 924 16 56 71 995 – 253 742 24 – 718 2013 11,173 – 8,659 2,514 – 495 – 621 – 572 826 52 12 63 889 – 291 598 10 – 587 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Comprehensive Income STATE MENT OF COMPREH ENSIVE I NCOME FOR TH E PERIOD JAN UARY 1 TO J U N E 30 € million Profit after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 26 2014 5,716 – 2,657 779 – 1,878 – 3 – 1,881 150 0 150 0 150 – 1,218 – 133 – 1,351 403 – 947 431 22 453 – 29 424 – 103 – 476 – 3,511 1,154 – 2,357 3,359 13 60 3,286 2013 4,793 1,696 – 492 1,204 – 4 1,200 – 993 – – 993 0 – 992 949 – 11 938 – 282 656 – 254 0 – 254 0 – 253 19 – 571 1,402 – 773 629 5,421 – 147 – 5,568 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Income Statement I NCOME STATEMENT FOR TH E PERIOD APRI L 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E 1 € million 2014 2013 2014 2013 Sales revenue 50,977 52,122 44,990 46,386 Cost of sales – 41,207 – 42,007 – 36,586 – 37,534 Gross profit 9,771 10,116 8,405 8,852 Distribution expenses – 5,374 – 4,998 – 5,078 – 4,756 Administrative expenses – 1,774 – 1,648 – 1,429 – 1,367 Other operating income/expense 708 – 33 939 299 Operating profit 3,330 3,437 2,837 3,027 Share of profits and losses of equity-accounted investments 1,150 949 1,143 942 Other financial result – 60 – 454 – 89 – 494 Financial result 1,089 495 1,055 448 Profit before tax 4,420 3,932 3,892 3,476 Income tax expense – 1,171 – 1,085 – 1,043 – 966 Profit after tax 3,249 2,847 2,849 2,510 of which attributable to Noncontrolling interests 24 14 15 10 Volkswagen AG hybrid capital investors 38 – 38 – Volkswagen AG shareholders 3,186 2,832 2,796 2,500 Basic earnings per ordinary share (€)2 6.47 5.86 Diluted earnings per ordinary share (€)2 6.47 5.86 Basic earnings per preferred share (€)2 6.47 5.86 Diluted earnings per preferred share (€)2 6.47 5.86 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in note 4. Prior-year figures adjusted to reflect application of IAS 33.26 27 F I N A N C I A L S E R V I C E S 2014 5,987 – 4,621 1,366 – 296 – 346 – 231 493 6 29 35 528 – 128 400 9 – 391 2013 5,737 – 4,473 1,264 – 241 – 281 – 332 409 7 40 47 456 – 119 337 4 – 332 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Comprehensive Income STATE MENT OF COMPREH ENSIVE I NCOME FOR TH E PERIOD APRI L 1 TO J U N E 30 € million Profit after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 28 2014 3,249 – 1,322 384 – 938 0 – 938 276 0 276 0 276 – 1,108 – 53 – 1,161 348 – 814 521 – 36 484 – 9 475 12 – 50 – 1,711 723 – 988 2,261 – 6 38 2,228 2013 2,847 862 – 249 613 – 4 608 – 1,430 – – 1,430 0 – 1,430 1,663 – 14 1,649 – 479 1,169 – 69 33 – 37 – 2 – 38 – 57 – 356 983 – 730 253 3,099 – 135 – 3,234 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Balance Sheet BALANCE SH EET AS OF J U N E 30, 2014 AN D DECEMBER 31, 2013 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E * € million 2014 2013 2014 2013 Assets Noncurrent assets 207,558 202,141 122,129 122,438 Intangible assets 59,762 59,243 59,529 59,007 Property, plant and equipment 42,459 42,389 40,633 40,632 Lease assets 24,181 22,259 2,834 2,642 Financial services receivables 54,168 51,198 – 1,011 – 602 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 26,987 27,053 20,144 20,759 Current assets 128,566 122,192 72,024 68,320 Inventories 31,630 28,653 28,768 25,580 Financial services receivables 40,753 38,386 – 1,026 – 844 Other receivables and financial assets 27,624 23,483 19,706 16,458 Marketable securities 8,557 8,492 6,997 6,675 Cash, cash equivalents and time deposits 20,002 23,178 17,578 20,450 Total assets 336,124 324,333 194,153 190,758 Equity and Liabilities Equity 89,714 90,037 72,898 75,984 Equity attributable to Volkswagen AG shareholders 84,495 85,730 67,894 72,100 Equity attributable to Volkswagen AG hybrid capital investors 5,028 2,004 5,028 2,004 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 89,524 87,733 72,922 74,103 Noncontrolling interests 190 2,304 – 25 1,881 Noncurrent liabilities 124,086 115,672 65,651 65,290 Financial liabilities 66,859 61,517 13,422 15,913 Provisions for pensions 24,543 21,774 24,204 21,481 Other liabilities 32,684 32,380 28,026 27,896 Current liabilities 122,324 118,625 55,604 49,484 Put options and compensation rights granted to noncontrolling interest shareholders 3,548 3,638 3,548 3,638 Financial liabilities 59,472 59,987 – 1,421 – 3,981 Trade payables 19,179 18,024 17,231 16,582 Other liabilities 40,126 36,976 36,247 33,245 Total equity and liabilities 336,124 324,333 194,153 190,758 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. 29 F I N A N C I A L S E R V I C E S 2014 2013 85,429 79,704 234 236 1,827 1,757 21,347 19,617 55,180 51,800 6,842 6,294 56,542 53,872 2,862 3,073 41,779 39,229 7,918 7,025 1,560 1,817 2,424 2,728 141,971 133,576 16,816 14,053 16,601 13,630 – – 16,601 13,630 215 423 58,435 50,382 53,438 45,604 339 293 4,659 4,484 66,720 69,141 – – 60,893 63,968 1,948 1,441 3,879 3,731 141,971 133,576 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Changes in Equity STATE MENT OF C HANGE S I N EQU ITY O T H E R R E S E R V E S € million Subscribed capital Capital reserves Retained earnings Currency translation reserve Balance at Jan. 1, 2013 1,191 11,509 64,596 – 539 Profit after tax – – 4,858 – Other comprehensive income, net of tax – – 1,182 – 890 Total comprehensive income – – 6,040 – 890 Capital increase 0 1,149 – – Dividend payment – – – 1,639 – Capital transactions involving a change in ownership interest1 – – – 1,397 39 Other changes – – – 8 – Balance at June 30, 2013 1,191 12,658 67,592 – 1,390 Balance at Jan. 1, 2014 1,191 12,658 72,341 – 2,799 Profit after tax – – 5,581 – Other comprehensive income, net of tax – – – 1,870 204 Total comprehensive income – – 3,711 204 Capital increase2 27 1,959 – – Dividend payment – – – 1,871 – Capital transactions involving a change in ownership interest1 – – – 4,484 – 45 Other changes3 – – – 109 0 Balance at June 30, 2014 1,218 14,616 69,587 – 2,641 1 The capital transactions involving a change in ownership interest are attributable in the previous year to the derecognition of the noncontrolling interests in the equity of MAN SE and the interest in Scania AB attributable to those noncontrolling interest shareholders and, in the reporting period, to the derecognition of the noncontrolling interests in the equity of Scania AB. 2 Volkswagen AG recorded an inflow of cash funds amounting to €3,000 million, less a discount of €29 million and transaction costs (€19 million), from the hybrid capital issued in March 2014. Additionally, there are noncash effects from the deferral of taxes amounting to €13 million. The hybrid capital is required to be classified as equity instruments granted. Volkswagen AG recorded an inflow of cash funds amounting to €2,000 million, less transaction costs (€20 million), from the capital increase implemented in June 2014 by issuing new preferred shares. Additionally, there are noncash effects from the deferral of taxes amounting to €6 million. 3 The other changes in retained earnings are primarily a result of exchange rate movements between the dates of publication and completion of the offer to acquire all shares of Scania in conjunction with the measurement of the liability originally recognized in other comprehensive income in March 2014. 30 Cash flow hedges 360 – 657 657 – – – 8 – 1,009 1,845 – – 947 – 947 – – 2 0 900 Available-for-sale financial assets 624 – – 253 – 253 – – 0 – 370 724 – 424 424 – – – – 1,147 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Changes in Equity Equity-accounted investments Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors – 59 – 77,682 – – 4,858 14 – 710 14 – 5,568 – – 1,149 – – – 1,639 1 – – 1,366 – – – 8 – 43 – 81,386 – 229 2,004 87,733 – 60 5,641 – 106 – – 2,295 – 106 60 3,346 – 2,965 4,951 – – – 1,871 0 – – 4,527 – – – 109 – 334 5,028 89,524 31 Noncontrolling interests 4,313 – 65 – 81 – 147 – – 209 – 1,759 8 2,206 2,304 75 – 62 13 – – 4 – 2,123 0 190 Total equity 81,995 4,793 629 5,421 1,149 – 1,848 – 3,125 0 83,593 90,037 5,716 – 2,357 3,359 4,951 – 1,875 – 6,650 – 109 89,714 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Cash Flow Statement CASH FLOW STATE MENT F OR TH E PERIOD JAN UARY 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E 1 F I N A N C I A L S E R V I C E S € million 2014 2013 2014 2013 2014 2013 Cash and cash equivalents at beginning of period 22,009 17,794 19,285 14,788 2,724 3,005 Profit before tax 7,777 6,620 6,782 5,731 995 889 Income taxes paid – 2,531 – 2,036 – 2,227 – 1,814 – 304 – 222 Depreciation and amortization expense 7,822 7,056 5,690 5,159 2,132 1,897 Change in pension provisions 116 109 110 103 5 6 Other noncash income/expense and reclassifications2 309 1,469 301 1,356 8 112 Gross cash flow 13,493 13,217 10,657 10,535 2,837 2,682 Change in working capital – 10,147 – 8,234 – 2,269 – 2,104 – 7,878 – 6,130 Change in inventories – 2,689 – 1,869 – 2,706 – 2,112 17 242 Change in receivables – 3,829 – 3,226 – 3,181 – 2,665 – 648 – 561 Change in liabilities 4,275 2,973 3,568 2,467 707 506 Change in other provisions 677 379 591 290 86 88 Change in lease assets (excluding depreciation) – 4,143 – 3,286 – 467 – 3 – 3,676 – 3,283 Change in financial services receivables – 4,439 – 3,203 – 74 – 81 – 4,365 – 3,122 Cash flows from operating activities 3,347 4,984 8,388 8,431 – 5,041 – 3,448 Cash flows from investing activities attributable to operating activities – 6,236 – 5,769 – 5,469 – 7,201 – 767 1,432 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property – 3,779 – 4,042 – 3,578 – 3,924 – 201 – 118 capitalized development costs – 2,396 – 1,635 – 2,396 – 1,635 – – acquisition and disposal of equity investments – 195 – 323 380 – 1,835 – 576 1,512 Net cash flow3 – 2,889 – 785 2,919 1,231 – 5,808 – 2,016 Change in investments in securities and loans – 1,235 – 63 – 815 444 – 420 – 507 Cash flows from investing activities – 7,471 – 5,832 – 6,284 – 6,757 – 1,187 925 Cash flows from financing activities 306 4,100 – 5,567 1,975 5,873 2,124 of which: capital transactions with noncontrolling interests – 6,535 0 – 6,535 0 – – capital contributions/capital redemptions 4,932 1,099 2,670 1,093 2,262 7 Effect of exchange rate changes on cash and cash equivalents 21 – 116 – 30 – 72 51 – 44 Net change in cash and cash equivalents – 3,797 3,135 – 3,493 3,578 – 304 – 443 Cash and cash equivalents at June 30 18,213 20,928 15,792 18,366 2,421 2,562 Securities, loans and time deposits 18,105 14,297 10,187 7,597 7,918 6,700 Gross liquidity 36,318 35,225 25,980 25,963 10,338 9,262 Total third-party borrowings – 126,332 – 121,318 – 12,001 – 14,650 – 114,331 – 106,668 Net liquidity at June 30 – 90,014 – 86,093 13,979 11,313 – 103,993 – 97,406 For information purposes: at January 1 – 82,318 – 85,517 16,869 10,573 – 99,186 – 96,090 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 These relate mainly to the fair value measurement of financial instruments, application of the equity method and reclassification of gains/losses on disposal of noncurrent assets to investing activities. 3 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities. 32 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements Notes to the Interim Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2013 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2014 were therefore also prepared in accordance with IAS 34 and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 37w(5) of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2014. The pronouncements contained in the “consolidation package” must be applied effective January 1, 2014. These relate to the new standards IFRS 10, IFRS 11 and IFRS 12, as well as amendments to IAS 28. IFRS 10 (Consolidated Finan- cial Statements) defines the basis of consolidation and the principles for including subsidiaries in the consolidated financial statements. All entities that Volkswagen AG can control directly or indirectly must be included in the basis of consolidation. The switch from IAS 27 to IFRS 10 did not require the Volkswagen Group to make any adjustments because the parent/subsidiary relationships and other control relationships are attributable almost entirely to voting rights majorities. There was therefore no requirement to consolidate additional entities or deconsolidate existing ones. Equally, because all significant special purpose entities/structured entities are consolidated in the Volkswagen Group, no adjust- ments were required for these entities. IFRS 11 governs the definition of and accounting for “joint arrangements” in the consolidated financial statements. Joint arrangements are classified into “joint ventures” and “joint operations”. Because all entities that are jointly controlled by Volkswagen AG or one of its subsidiaries are required to be classified as joint ventures, there were no effects from applying IFRS 11. IFRS 12 governs all disclosures on interests in other entities and thus combines all of the information required to be disclosed in the notes on subsidiaries, joint arrangements, associates, and consolidated and unconsolidated structured entities. The scope of the information to be disclosed was expanded in some cases. IFRS 12 does not result in any additional disclosure requirements in the interim financial reports. Only the equity method in accordance with IAS 28 may be applied to joint ventures and associates effective January 1, 2014. The option to include these entities in the consolidated financial statements using proportionate consolidation was eliminated. Because proportionate consolidation was not used in the past in the Volkswagen Group, the elimination of this option did not result in any adjustments. The other accounting pronouncements required to be applied for the first time in fiscal year 2014 are insignificant for the presentation of the Volkswagen Group’s net assets, financial position and results of operations in its interim con- solidated financial statements. A detailed breakdown of these accounting pronouncements is provided in the notes to the consolidated financial statements in the 2013 Annual Report. 33 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements A discount rate of 3.1% (December 31, 2013: 3.7%) was applied to German pension provisions in the accompanying interim consolidated financial statements. The reduction in the discount rate increased the actuarial losses for pension provisions that are recognized in retained earnings. The income tax expense for the interim reporting period was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34, Interim Financial Reporting. In other respects, the same accounting policies and consolidation methods that were used for the 2013 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the notes to the consolidated financial statements in the 2013 Annual Report. This can also be accessed on the Internet at www.volkswagenag.com/ir. Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under no. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. C O N S O L I D AT E D S U B S I D I A R I E S On March 14, 2014, Volkswagen AG published an offer to the shareholders of Scania Aktiebolag, Södertälje, (“Scania”) to acquire all Scania A and Scania B shares. Each Scania A share conveys one vote at the general meeting, while each Scania B share conveys one-tenth of a vote. There are no other legal differences between Scania A and B shares. Volkswagen AG offered SEK 200 for each Scania share, regardless of share class. One of the conditions of the offer was that it resulted in the Volkswagen Group holding more than 90 percent of the total number of Scania shares. When the offer to the Scania shareholders was published, the present value of the put options granted amounting to approximately €6.7 billion was recognized as a current liability without affecting profit or loss. The Group’s retained earnings declined by the same amount. Starting on May 7, 2014, Volkswagen acquired a total of 2.4 million Scania shares outside the offer (10,941 A shares and 2,400,679 B shares). This corresponds to 0.30% of Scania shares and 0.06% of the voting rights. The condition for the Volkswagen Group to hold more than 90% of the total number of Scania shares was satisfied on May 13, 2014, and Volkswagen initiated a squeeze-out for the Scania shares that were not tendered in the course of the offer. 34 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements At the end of the second extended acceptance period on June 5, 2014, the number of shares tendered under the terms of the offer, together with the shares already held by Volkswagen either directly or indirectly, amounted to a total of 796.6 million Scania shares, comprising 398.7 million A shares and 397.8 million B shares. This corresponds to 99.57% of Scania shares and 99.66% of the voting rights. On completion of the offer, the equity interest in Scania previously attributable to noncontrolling interest share- holders amounting to €2,123 million was required to be reclassified from noncontrolling interests to the reserves attrib- utable to the shareholders of Volkswagen AG. The difference of €4,527 million therefore reduces the retained earnings attributable to the shareholders of Volkswagen AG. The changes in the carrying amount of the liability of €96 million that was recognized when the offer was published, which were due primarily to exchange rate movements, were recognized in the financial result in profit or loss. Net of exchange rate effects, the shares already tendered resulted in a cash outflow of €6,535 million as of the reporting date. This amount is reported within financing activities in the cash flow statement as an outflow from capital transactions with noncontrolling interests. A liability of €78 million from put options and compensation rights granted to noncontrolling interest shareholders was recognized for the remaining shares that are subject to the squeeze-out. I N T E R E ST S I N J O I N T V E N T U R E S The Volkswagen Group holds a 50% indirect interest in the joint venture LeasePlan Corporation N.V., Amsterdam, the Netherlands, via its 50% stake in the joint venture Global Mobility Holding B.V., Amsterdam, the Netherlands. Volkswagen agreed with Fleet Investments B.V., Amsterdam, the Netherlands, an investment company belonging to the von Metzler family, that Fleet Investments would become the new co-investor in Global Mobility Holding in 2010. The previous co- investors were instructed by Volkswagen AG to transfer their shares to Fleet Investments B.V. on February 1, 2010 for the purchase price of €1.4 billion. In fiscal year 2013, the agreement was prolonged by two years until January 2016. Volkswagen AG granted the new co-investor a put option on its shares. If this option is exercised, Volkswagen must pay the original purchase price plus accumulated pro rata preferred dividends or the higher fair value. The put option is accounted for at fair value. In addition, Volkswagen has pledged claims under certificates of deposit with Bankhaus Metzler in the amount of €1.4 billion to secure a loan granted to Fleet Investments B.V. by Bankhaus Metzler. This pledge does not increase the Volkswagen Group’s risk arising from the above-mentioned short position. I N V E STM E N T S I N A S S O C I AT E S There were no significant changes compared with the disclosures in the 2013 Annual Report. 35 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements DISC LOSU RE S ON TH E CONSOLI DATED FI NANC IA L STATEMENTS 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 € million 2014 Vehicles 66,543 Genuine parts 6,650 Used vehicles and third-party products 4,963 Engines, powertrains and parts deliveries 4,697 Power Engineering 1,633 Motorcycles 308 Leasing business 7,575 Interest and similar income 3,097 Other sales revenue 3,343 98,808 2. Cost of sales Cost of sales includes interest expenses of €936 million (previous year: €1,086 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on intangible assets, items of property, plant and equipment, and lease assets. The impairment losses identified on the basis of updated impairment tests amount to a total of €101 million (previous year: €93 million). 3. Research and development costs in the Automotive Division H 1 € million 2014 2013 Total research and development costs 6,478 5,571 of which: capitalized development costs 2,396 1,635 Capitalization ratio in % 37.0 29.4 Amortization of capitalized development costs 1,391 1,118 Research and development costs recognized in the income statement 5,474 5,054 36 2013 68,105 6,731 4,009 4,089 1,827 315 7,086 3,121 3,406 98,687 % 16.3 46.5 24.4 8.3 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 4. Earnings per share Basic earnings per share are calculated by dividing profit attributable to shareholders of Volkswagen AG by the weighted average number of ordinary and preferred shares outstanding during the reporting period. During the reporting period, Volkswagen AG implemented a capital increase from authorized capital against cash con- tributions, with shareholders’ preemptive rights disapplied, by issuing preferred shares. Since their admission to the regulated market on June 12, 2014, these new preferred shares have been included in the calculation of earnings per share. In 2012 and 2013, Volkswagen AG placed two mandatory convertible notes with identical features and an aggregate principal amount of €3.7 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam/the Netherlands (issuer). Both mandatory convertible notes mature on November 9, 2015. The current minimum conversion price is €147.61, and the corresponding maximum conversion price is €177.13. The conversion price will be adjusted if certain events occur. The convertible notes will be settled by issuing new preferred shares no later than at maturity. The issuer is entitled to convert the mandatory convertible notes at any time at the minimum conversion price. The note terms and conditions also provide for early conversion options. This discretionary conversion right was exercised in the reporting period, with a total of €4 million of the notes being converted into 22,103 newly created preferred shares at the effective maximum conversion price at the conversion date. IAS 33.23 sets out that all potential shares that will be issued upon the conversion of a mandatory convertible note must be accounted for as issued shares and included in the calculation of basic and diluted earnings per share. The number of outstanding preferred shares is therefore increased by the potential preferred shares that would be issued if the manda- tory convertible notes issued were actually to be converted. The average number of preferred shares not yet converted that have to be included is calculated based on the maximum conversion ratio resulting from the current minimum conversion price of €147.61. The terms and conditions require the minimum conversion price to be adjusted following the distribution of dividends. The number of potential preferred shares was calculated retrospectively at the new minimum conversion price in accordance with IAS 33.26, including for the previous year. The finance costs associated with the mandatory convertible notes are not included in the calculation of consolidated profit because the interest component was recognized in other comprehensive income when the note was issued, and interest expense arises only from the amount of compound interest. Since the number of basic and diluted shares is identical, basic earnings per share also correspond to diluted earnings per share. In total, the existing mandatory convertible notes still entitle the holders to subscribe for a maximum of 25,032,179 no-par value preferred shares of Volkswagen AG, based on the current maximum conversion ratio. Q 2 H 1 2014 2013* 2014 Weighted average number of shares outstanding Ordinary shares: basic million 295.1 295.1 295.1 diluted million 295.1 295.1 295.1 Preferred shares: basic million 197.4 188.3 196.3 diluted million 197.4 188.3 196.3 Profit after tax € million 3,249 2,847 5,716 Noncontrolling interests € million 24 14 75 Profit attributable to Volkswagen AG hybrid capital investors € million 38 – 60 Profit attributable to Volkswagen AG shareholders € million 3,186 2,832 5,581 Earnings per share Ordinary shares: basic € 6.47 5.86 11.33 diluted € 6.47 5.86 11.33 Preferred shares: basic € 6.47 5.86 11.39 diluted € 6.47 5.86 11.39 Prior-year figures adjusted to reflect application of IAS 33.26. 37 2013* 295.1 295.1 187.7 187.7 4,793 – 65 – 4,858 10.04 10.04 10.10 10.10 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A RY 1 A N D J U N E 3 0 , 2 0 1 4 € million Carrying amount at Jan. 1, 2014 Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2014 Intangible assets 59,243 2,527 51 1,957 59,762 Property, plant and equipment 42,389 3,707 84 3,552 42,459 Lease assets 22,259 6,655 2,403 2,330 24,181 6. Inventories € million June 30, 2014 Dec. 31, 2013 Raw materials, consumables and supplies 3,843 3,716 Work in progress 3,455 3,096 Finished goods and purchased merchandise 20,170 18,284 Current lease assets 4,004 3,418 Payments on account 157 140 31,630 28,653 There was no requirement to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2014 Dec. 31, 2013 Trade receivables 13,489 11,133 Miscellaneous other receivables and financial assets 14,135 12,350 27,624 23,483 In the period January 1 to June 30, 2014, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €250 million (previous year: €359 million). 38 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 8. Equity Following the approval by the Annual General Meeting of MAN SE of the conclusion of the control and profit and loss transfer agreement between MAN SE and Truck & Bus GmbH on June 6, 2013, Volkswagen is obliged to pay a cash settlement to the remaining noncontrolling interest shareholders of MAN SE. For this reason, the noncontrolling interests in the equity of MAN SE and the interest in Scania AB attributable to those noncontrolling interest shareholders were derecognized from Group equity as of this date. At the same time, a liability was recognized in accordance with the cash settlement offer for the obligation to acquire the shares. MAN SE’s profit or loss is attributed in full to the shareholders of Volkswagen AG. As of June 30, 2014, a total of 335,055 ordinary shares and 111,274 preferred shares had been tendered. On March 14, 2014, Volkswagen AG published an offer to the shareholders of Scania Aktiebolag, Södertälje, (“Scania”) to acquire all Scania shares. The offer was completed on May 13, 2014 and Volkswagen initiated a squeeze-out for the Scania shares that were not tendered in the course of the offer. Scania shares were delisted from the NASDAQ OMX Stockholm at the end of June 5, 2014. The Group’s retained earnings were reduced by the total value of the offer amounting to €6,650 million as a capital transaction with noncontrolling interest shareholders recognized directly in equity. At the same time, the equity interest in Scania previously attributable to the noncontrolling interest shareholders in Scania amounting to €2,123 million was reclassified from noncontrolling interests to the reserves attributable to the shareholders of Volkswagen AG. The remaining noncontrolling interests are largely attributable to shareholders of RENK AG and AUDI AG. For information on the acquisition of the noncontrolling interests in Scania, see also the disclosures on the basis of consolidation. In March 2014, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €3 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam/the Netherlands (issuer). The perpetual hybrid notes were issued in two tranches and can be called by the issuer. The first call date for the first tranche (€1.25 billion and a coupon of 3.750%) is after seven years, and the first call date for the second tranche (€1.75 billion and a coupon of 4.625%) is after twelve years. Under IAS 32, the hybrid notes must be classified in their entirety as equity. The capital raised was recognized in equity, less a discount and transaction costs and net of deferred taxes. The interest payments payable to the noteholders will be recognized directly in equity, net of income taxes. The Annual General Meeting on April 19, 2012 resolved to create authorized capital of up to €110 million, expiring on April 18, 2017, for the issue of new ordinary bearer shares or preferred shares based. In June 2014, Volkswagen AG issued 10,471,204 new preferred shares (with a notional value of €27 million), with the result that the remaining authorized capital amounts to €83 million. Volkswagen AG recorded a cash inflow of €2,000 million from the capital increase, less transaction costs of €20 million. In the first six months of 2014, Volkswagen AG issued 22,103 newly created preferred shares (notional value: €56,583.68) resulting from the exercise of mandatory convertible bonds. The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 180,641,478 preferred shares, and amounts to €1,218 million (Decem- ber 31, 2013: €1,191 million). Volkswagen AG paid a dividend of €1,871 million in the reporting period (previous year: €1,639 million). €1,180 million of this amount (previous year: €1,033 million) was attributable to ordinary shares and €691 million (previous year: €606 million) to preferred shares. 39 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 9. Noncurrent financial liabilities € million June 30, 2014 Bonds, commercial paper and notes 56,762 Liabilities to banks 7,971 Deposit business 1,005 Other financial liabilities 1,122 66,859 10. Current financial liabilities € million June 30, 2014 Bonds, commercial paper and notes 25,281 Liabilities to banks 10,034 Deposit business 23,561 Other financial liabilities 596 59,472 11. Fair value disclosures The principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the 2013 Annual Report. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is deter- mined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Assets and liabilities measured at fair value through profit or loss consist of derivatives or components of derivatives that are not included in hedge accounting. These relate primarily to the interest component of currency forwards used to hedge sales revenue, commodity futures and currency forwards relating to commodity futures. Available-for-sale financial assets (marketable securities) are carried at fair value. Changes in fair value are recognized directly in equity, net of deferred taxes. Shares in unconsolidated subsidiaries and other equity investments that are not accounted for using the equity method are also classified as available-for-sale financial assets. They are recognized at cost in the consolidated financial statements if there is no active market for those companies and fair values cannot be reliably ascertained without undue cost or effort. Fair values are recognized if there are indications that fair value is lower than cost. There is currently no intention to sell these financial assets. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The fair value of the put options and compensation rights granted to noncontrolling interest shareholders is calculated using a present value model that is based on the expected cash settlement entitlement of the free float MAN and Scania shareholders. Risk-adjusted discount rates for matching maturities were applied. The calculation was also based on any cash compensation that might be payable and a minimum statutory interest rate. 40 Dec. 31, 2013 51,630 7,659 1,015 1,213 61,517 Dec. 31, 2013 25,926 11,305 22,310 446 59,987 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements The following table contains an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT FA I R VA L U E B Y L E V E L € million Dec. 31, 2013 Level 1 Level 2 Noncurrent assets Other equity investments 2,666 2,666 – Other financial assets 2,414 – 2,400 Current assets Other financial assets 1,680 – 1,662 Marketable securities 8,492 8,410 83 Noncurrent liabilities Other noncurrent financial liabilities 1,169 – 1,033 Current liabilities Other current financial liabilities 1,070 – 988 € million June 30, 2014 Level 1 Level 2 Noncurrent assets Other equity investments 3,023 3,023 – Other financial assets 2,125 – 2,090 Current assets Other financial assets 1,256 – 1,240 Marketable securities 8,557 8,557 – Noncurrent liabilities Other noncurrent financial liabilities 1,171 – 1,027 Current liabilities Other current financial liabilities 1,321 – 1,261 The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices in an active market. Level 1 is used to report the fair value of financial instruments for which a quoted price is available. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs such as exchange rates or yield curves using market-based valuation techniques. Level 3 fair values are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, Level 3 fair values comprise long-term commodity futures because the prices available on the market must be extrapolated for measurement purposes. Options on equity instruments and residual value protection models are also reported in Level 3. 41 Level 3 – 14 18 – 136 82 Level 3 – 35 16 – 145 60 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT FA I R VA L U E B A S E D O N L E V E L 3 € million Financial assets measured at fair value Balance at Jan. 1, 2013 119 Foreign exchange differences 0 Total comprehensive income – 68 recognized in profit or loss – 60 recognized in other comprehensive income – 8 Additions (purchases) – Sales and settlements – 3 Transfers into Level 2 – 8 Balance at June 30, 2013 40 Total gains or losses recognized in profit or loss – 60 Net other operating expense/income – 58 of which attributable to assets/liabilities held at the reporting date 58 Financial result – 2 of which attributable to assets/liabilities held at the reporting date 4 € million Financial assets measured at fair value Balance at Jan. 1, 2014 32 Foreign exchange differences 0 Total comprehensive income 30 recognized in profit or loss 25 recognized in other comprehensive income 4 Additions (purchases) – Sales and settlements – 5 Transfers into Level 2 – 6 Balance at June 30, 2014 51 Total gains or losses recognized in profit or loss 25 Net other operating expense/income – of which attributable to assets/liabilities held at the reporting date – Financial result 25 of which attributable to assets/liabilities held at the reporting date 21 42 Financial liabilities measured at fair value 60 0 – 117 – 100 – 17 – 18 – 15 144 – 100 – 131 131 31 – 33 Financial liabilities measured at fair value 218 0 14 14 1 – – 19 – 9 205 – 14 – – – 14 – 9 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on profit after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2014, profit would have been €29 million higher (lower) and equity would have been €12 million higher (lower). The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on profit. If the assumed enterprise values had been 10% higher, profit would have been €1 million higher. If the assumed enterprise values had been 10% lower, profit would have been €1 million lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market- related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volks- wagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensi- tivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices for the used cars covered by the residual value protection model had been 10% higher as of June 30, 2014, profit after tax would have been €183 million higher. If the prices for the used cars covered by the residual value protection model had been 10% lower as of June 30, 2014, profit after tax would have been €183 million lower. Reconciliation of balance sheet items to classes of financial instruments The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. 43 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 3 M E A S U R E D N O T W I T H I N A T F A I R S C O P E O F V A L U E M E A S U R E D A T A M O R T I Z E D C O S T I F R S 7 € million Carrying amount Carrying amount Fair value Carrying amount Noncurrent assets Equity-accounted investments – – – 7,934 Other equity investments 2,666 1,274 1,274 – Financial services receivables – 51,198 53,200 – Other financial assets 2,414 4,626 4,593 – Current assets Trade receivables – 11,133 11,133 – Financial services receivables – 38,386 38,386 – Other financial assets 1,680 4,911 4,911 – Marketable securities 8,492 – – – Cash, cash equivalents and time deposits – 23,178 23,178 – Noncurrent liabilities Noncurrent financial liabilities – 61,517 62,810 – Other noncurrent financial liabilities 1,169 1,136 1,153 – Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,638 3,563 – Current financial liabilities – 59,987 59,987 – Trade payables – 18,024 18,024 – Other current financial liabilities 1,070 3,456 3,456 – 44 B A L A N C E S H E E T I T E M A T D E C . 3 1 , 2 0 1 3 7,934 3,941 51,198 7,040 11,133 38,386 6,591 8,492 23,178 61,517 2,305 3,638 59,987 18,024 4,526 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 1 4 M E A S U R E D N O T W I T H I N A T F A I R S C O P E O F V A L U E M E A S U R E D A T A M O R T I Z E D C O S T I F R S 7 € million Carrying amount Carrying amount Fair value Carrying amount Noncurrent assets Equity-accounted investments – – – 7,030 Other equity investments 3,023 1,335 1,335 – Financial services receivables – 54,168 55,919 – Other financial assets 2,125 4,665 4,678 – Current assets Trade receivables – 13,489 13,489 – Financial services receivables – 40,753 40,753 – Other financial assets 1,256 6,472 6,472 – Marketable securities 8,557 – – – Cash, cash equivalents and time deposits – 20,002 20,002 – Noncurrent liabilities Noncurrent financial liabilities – 66,859 68,761 – Other noncurrent financial liabilities 1,171 1,201 1,231 – Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,548 3,690 – Current financial liabilities – 59,472 59,472 – Trade payables – 19,179 19,179 – Other current financial liabilities 1,321 3,395 3,395 – 45 B A L A N C E S H E E T I T E M A T J U N E 3 0 , 2 0 1 4 7,030 4,358 54,168 6,790 13,489 40,753 7,728 8,557 20,002 66,859 2,372 3,548 59,472 19,179 4,716 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, bills, cash-in-hand and call deposits. € million June 30, 2014 Cash, cash equivalents and time deposits as reported in the balance sheet 20,002 of which: time deposits and restricted cash – 1,789 Cash and cash equivalents as reported in the cash flow statement 18,213 Cash inflows from financing activities in the current year are attributable primarily to the issuance of bonds in the amount of €14,874 million (previous year: €12,637 million), inflows from the issuance of hybrid notes in the amount of €2,952 million (see note 8), the issuance of new preferred shares amounting to €1,980 million and the change in other financial liabilities amounting to €917 million (previous year: €672 million). They are offset mainly by cash outflows from the repayment of bonds amounting to €11,961 million (previous year: €8,462 million), the acquisition of shares of Scania AB amounting to €6,535 million and dividend payments amounting to €1,875 million (previous year: €1,848 million). 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG or the Group Board of Management must be complied with to the extent permitted by law. Segment reporting comprises four reportable segments: Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars segment cover the development of vehicles and engines, the production and sale of passenger cars, and the corresponding genuine parts business. As a rule, the Volkswagen Group’s individual passenger car brands are combined on a consolidated basis into a single reportable segment. The Commercial Vehicles segment primarily comprises the development, production and sale of light commercial vehicles, trucks and buses, the corresponding genuine parts business and related services. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, as well as fleet management. In the segment structure, purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of operating profit or loss. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. 46 June 30, 2013 21,639 – 710 20,928 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements R E P O RT I N G S E G M E N T S : H 1 2 0 1 3 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Sales revenue from external customers 73,699 12,815 1,827 10,255 98,596 Intersegment sales revenue 4,836 2,525 3 918 8,282 Total sales revenue 78,535 15,340 1,830 11,173 106,878 Segment profit or loss (operating profit or loss) 5,522 426 – 348 826 6,425 R E P O RT I N G S E G M E N T S : H 1 2 0 1 4 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Sales revenue from external customers 74,112 12,121 1,632 10,722 98,587 Intersegment sales revenue 6,324 2,578 2 1,042 9,947 Total sales revenue 80,437 14,699 1,634 11,764 108,533 Segment profit or loss (operating profit or loss) 5,528 509 4 924 6,965 R E C O N C I L I AT I O N € million Segment profit or loss (operating profit or loss) Unallocated activities Group financing Consolidation Operating profit Financial result Consolidated profit before tax 47 Reconciliation 92 – 8,282 – 8,190 – 645 Reconciliation 221 – 9,947 – 9,725 – 780 H 1 2014 6,965 74 15 – 869 6,186 1,591 7,777 Volkswagen Group 98,687 – 98,687 5,780 Volkswagen Group 98,808 – 98,808 6,186 2013 6,425 83 – 22 – 706 5,780 839 6,620 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 14. Related party disclosures At 50.73%, Porsche SE holds the majority of the voting rights in Volkswagen AG. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. As a result, Porsche SE can no longer appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE continues to have the power to participate in the operating policy decisions of the Volkswagen Group. S U P P L I E S A N D S E R V I C E S S U P P L I E S A N D S E R V I C E S R E N D E R E D R E C E I V E D H1 H1 € million 2014 2013 2014 2013 Porsche SE 10 4 3 8 Supervisory Board members 2 1 2 2 Unconsolidated subsidiaries 425 438 295 272 Joint ventures and their majority interests 7,174 6,725 577 571 Associates and their majority interests 73 135 145 155 State of Lower Saxony, its majority interests and joint ventures 2 3 2 1 R E C E I V A B L E S ( I N C L . C O L L A T E R A L L I A B I L I T I E S R E C E I V E D ) F R O M ( I N C L . O B L I G A T I O N S ) T O € million June 30, 2014 Dec. 31, 2013 June 30, 2014 Dec. 31, 2013 Porsche SE 355 361 1,107 419 Supervisory Board members 1 0 178 165 Unconsolidated subsidiaries 1,049 1,172 573 587 Joint ventures and their majority interests 6,821 5,758 2,286 2,064 Associates and their majority interests 50 26 90 73 State of Lower Saxony, its majority interests and joint ventures 1 2 0 0 The supplies and services received from joint ventures and associates in the first six months do not include resolved dividend distributions amounting to €2,925 million (previous year: €2,744 million). 48 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements The supplies and services received from Porsche SE relate, among other things, to standard market liability compensation for guarantees assumed. The supplies and services rendered to Porsche SE relate mainly to interest income on loans granted. The receivables from Porsche SE comprise a receivable under a loan agreement and receivables from land transfer taxes. The obligations to Porsche SE consist mainly of term deposits and interest payable. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members amounting to €174 million that were invested at standard market terms and conditions at Volkswagen Group companies. Obligations to joint ventures contain miscellaneous other financial obligations under an irrevocable credit commit- ment in the amount of €1.3 billion to LeasePlan Corporation N.V., Amsterdam, the Netherlands, a Volkswagen Group joint venture, with a term until December 2015. 15. Litigation Volkswagen AG’s Annual Report for fiscal year 2013 contains detailed information on litigation and other legal proceedings. The antitrust proceedings opened in 2011 by the Korean Fair Trade Commission against several truck manufacturers, including local subsidiaries of MAN and Scania, were brought to a close at the end of fiscal year 2013 with decisions to impose administrative fines on all manufacturers involved. MAN and Scania have lodged appeals at the competent court against the administrative fines imposed on them. There have been no other significant changes since the publication of the 2013 Annual Report. 16. Contingent assets and liabilities There were no significant changes as of June 30, 2014 in the contingent assets and liabilities described in the 2013 Annual Report. 17. Other financial obligations The other financial obligations increased by €2,558 million compared with the 2013 consolidated financial statements to €26,928 million, due in particular to an increase in purchase commitments for items of property, plant and equipment, and intangible assets, because of initiated or planned investment projects. German Corporate Governance Code The current declarations in accordance with section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) on the German Corporate Governance Code by the Board of Management and Supervisory Board of Volkswagen AG, AUDI AG, MAN SE and RENK AG are permanently available on the Internet at www.volkswagenag.com/ir, www.audi.com/cgk- declaration, www.corporate.man.eu/en and www.renk.biz/corporated-governance.html respectively. Significant events after the balance sheet date There were no significant events after the end of the first six months of 2014. 49 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group in accordance with German accepted accounting principles, and the interim management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 31, 2014 Volkswagen Aktiengesellschaft The Board of Management Martin Winterkorn Francisco Javier Garcia Sanz Jochem Heizmann Christian Klingler Michael Macht Horst Neumann Leif Östling Hans Dieter Pötsch Rupert Stadler 50 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Review Report Review Report This report was originally prepared in German. In case of ambiguities the German version shall prevail: Review Report To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg We have reviewed the condensed consolidated interim financial statements – comprising the condensed income state- ment and condensed statement of comprehensive income, condensed balance sheet, condensed statement of changes in equity, condensed statement of cash flows and selected explanatory notes – and the interim group management report of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, for the period from January 1 to June 30, 2014, which are part of the half-yearly financial report pursuant to § (Article) 37w WpHG ("Wertpapierhandelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRSs applicable to interim financial reporting, as adopted by the EU, and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Management. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRSs applicable to interim financial reporting, as adopted by the EU, and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRSs applicable to interim financial reporting, as adopted by the EU, nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. Hanover, July 31, 2014 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Norbert Winkeljohann German Public Auditor Martin Schröder German Public Auditor 51 Contact Information P U B L I S H E D B Y Volkswagen AG Financial Publications F I N A N C I A L C A L E N D A R October 30, 2014 Interim Report January – September 2014 Letterbox 1848-2 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-86622 IR hotline Fax + 49 (0) 5361 9-44091 E-mail investor.relations@volkswagen.de Internet www.volkswagenag.com/ir Volkswagen AG Investor Relations 103 Wigmore Street London W1U 1QS United Kingdom Phone + 44 20 3693 6060 Volkswagen Group China No. 3A, Xi Liu Jie, Sanlitun Road Chaoyang District Beijing 100027, P.R. China Phone + 86 10 6531 3000 Volkswagen Group of America, Inc. Investor Relations Liaison Office This Interim Report is also available on the (Questions relating to American Internet, in German and English, at: Depositary Receipts) www.volkswagenag.com/ir 2200 Ferdinand Porsche Drive Herndon, Virginia 20171 USA Printed in Germany Phone + 1 703 364 7000 458.809.553.20 52

Semestriel, 2014, Auto, Volswagen

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Semestriel

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Volswagen

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Half-Yearly Financial Report January - June 2015 1 U PDATED I N F OR M ATI ON 6 I NTER IM M A N AG EM ENT 2 0 B R A N D S AN D 25 I NTER I M CONSOLI DATED FI NA NC IA L R EPORT BUSI N ESS F I ELD S STATEMENTS (CON D ENSED) 1 Key Facts 2 Key Events 6 Volkswagen Shares 7 Business Development 15 Results of Operations, Finan- cial Position and Net Assets 19 Outlook 25 26 Statement of Comprehensive Income 29 Balance Sheet 30 Statement of Changes in Equity 32 Cash Flow Statement 33 Notes to the Interim Consolidated Income Statement Financial Statements 50 Responsibility Statement 51 Review Report Key Figures V O L K S WA G E N G R O U P Q 2 H 1 Volume Data1 2015 2014 % 2015 2014 % Deliveries to customers ('000 units) 2,552 2,623 – 2.7 5,039 5,066 – 0.5 of which: in Germany 353 337 + 4.7 668 626 + 6.7 abroad 2,198 2,286 – 3.8 4,371 4,440 – 1.5 Vehicle sales ('000 units) 2,483 2,645 – 6.1 5,090 5,207 – 2.2 of which: in Germany 343 339 + 1.3 668 644 + 3.8 abroad 2,140 2,306 – 7.2 4,422 4,563 – 3.1 Production ('000 units) 2,593 2,669 – 2.8 5,314 5,234 + 1.5 of which: in Germany 693 653 + 6.1 1,395 1,314 + 6.2 abroad 1,900 2,016 – 5.8 3,919 3,920 – 0.0 Employees ('000 on June 30, 2015/Dec. 31, 2014) 597.8 592.6 + 0.9 of which: in Germany 273.9 271.0 + 1.0 abroad 324.0 321.5 + 0.8 Q 2 H 1 Financial Data (IFRSs), € million 2015 2014 % 2015 2014 % Sales revenue 56,041 50,977 + 9.9 108,776 98,808 + 10.1 Operating profit before special items 3,662 3,330 + 10.0 6,990 6,186 + 13.0 Special items – 170 – x – 170 – x Operating profit 3,492 3,330 + 4.9 6,820 6,186 + 10.3 as a percentage of sales revenue 6.2 6.5 6.3 6.3 Profit before tax 3,696 4,420 – 16.4 7,664 7,777 – 1.5 as a percentage of sales revenue 6.6 8.7 7.0 7.9 Profit after tax 2,731 3,249 – 15.9 5,663 5,716 – 0.9 Profit attributable to Volkswagen AG shareholders 2,671 3,186 – 16.2 5,558 5,581 – 0.4 Cash flows from operating activities 4,147 1,848 x 7,766 3,347 x Cash flows from investing activities attributable to operating activities 3,668 3,312 + 10.8 6,993 6,236 + 12.1 Automotive Division2 EBITDA3 6,019 5,710 + 5.4 11,859 10,953 + 8.3 Cash flows from operating activities 6,861 6,137 + 11.8 11,553 8,388 + 37.7 Cash flows from investing activities attributable to operating activities4 3,572 3,167 + 12.8 6,761 5,469 + 23.6 of which: capex 2,581 1,953 + 32.1 4,652 3,578 + 30.0 as a percentage of sales revenue 5.3 4.3 4.9 4.1 capitalized development costs5 1,033 1,205 – 14.3 2,170 2,396 – 9.4 as a percentage of sales revenue 2.1 2.7 2.3 2.8 Net cash flow 3,288 2,970 + 10.7 4,791 2,919 + 64.2 Net liquidity at June 30 21,489 13,979 + 53.7 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2014 deliveries updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Operating profit plus net depreciation/amortization and impairment losses/reversals of impairment losses on property, plant and equipment, capitalized development costs, lease assets, goodwill and financial assets as reported in the cash flow statement. 4 Excluding acquisition and disposal of equity investments: Q2 €3,518 million (€3,147 million), H1 €6,672 million (€5,849 million). 5 See table on page 35. U P D AT E D I N F O R M AT I O N Key Facts Key Facts > Volkswagen Group deliveries to customers on a level with the previous year at 5.0 million (5.1 million) vehicles; declines in Eastern Europe, South America and Asia Pacific – higher demand especially in Western Europe > Group sales revenue up 10.1% on the prior-year figure at €108.8 billion; positive exchange rate effects > Operating profit up €0.6 billion to €6.8 billion in a regionally very mixed market environment > Special items relating to restructuring measures in the trucks business; operating profit before special items at €7.0 billion (€6.2 billion) > Earnings before tax at €7.7 billion (€7.8 billion); share of profits of the equity-accounted Chinese joint ventures on a level with the previous year; fair value measurement effects reduce financial result > Cash flows from operating activities in the Automotive Division up €3.2 billion year-on-year at €11.6 billion; ratio of capex to sales revenue is 4.9% (4.1%) > Net liquidity in the Automotive Division at €21.5 billion; capital increase at Financial Services Division reduces liquidity, successful placement of hybrid notes strengthens Automotive Division’s capital base > Enthusiastic reception by customers for Group models: Volkswagen Passenger Cars presents the new edition of the legendary Scirocco GTS and the progressive C Coupé GTE concept for the first time World premiere of the Audi Q7 e-tron – the first plug-in hybrid featuring a petrol engine and the quattro drive system ŠKODA celebrates Chinese debut of its new Superb and Fabia models - Debut appearance for Porsche’s new Boxster Spyder in New York - Lamborghini celebrates its tenth anniversary in the Chinese market with the Aventador LP 750-4 Superveloce and the Aventador LP 700-4 Pirelli Edition Volkswagen Commercial Vehicles unveils the sixth generation of the popular T model series MAN’s powerful special-edition TGX D38 “100 Years” meets an enthusiastic reception 1 U P D AT E D I N F O R M AT I O N Key Events Key Events M OTO R S H O W S A N D E V E N T S The Volkswagen Group brands presented their new products at a wide range of motor shows and events in the first half of 2015. New York International Auto Show The Volkswagen Passenger Cars brand unveiled four new variants of its cult classic, the Beetle, at the New York International Auto Show – two coupés and two cabriolets. The new Golf Alltrack also marked its US debut. Porsche kicked off the 2015 convertible season with the global launch of the new Boxster Spyder. This purist sports car is the new top-of-the-range model in the open-top two-seat Boxster range, and it retains the unique character of the previous Spyder, which has already attained cult status: its classic roadster top is opened and closed by hand and the model is only available with manual transmission. Auto Shanghai 2015 Volkswagen Passenger Cars unveiled the new version of the legend- ary Scirocco GTS at Auto Shanghai 2015, marking its world pre- miere. The model was first launched in 1982 and was based on the Golf GTI. The new model is powered by a 162 kW (220 PS) TSI engine and, like its predecessor in 1982, is available with optional red stripes extending from the bonnet, over the roof to the tailgate. Another highlight of the stand was the C Coupé GTE concept, which was on show for the first time. Measuring in at over five meters long, this saloon is designed for the Chinese market and combines exclusivity with perfection and emotion, giving an insight into the future design of sporty saloons. The C Coupé GTE features an innovative plug-in hybrid drive that generates system power output of 180 kW (245 PS) and offers an impressive 500 Nm of torque. The Volkswagen Passenger Cars brand’s appearance at the show was rounded off by the world debut of the Gran Santana, a model specially developed for the Chinese market, and a presentation of the Golf GTI manufactured in Foshan, southern China. The Audi brand celebrated the global debut of three new models powered by innovative plug-in hybrid drives in Shanghai. The Audi Q7 e-tron 2.0 TFSI quattro is the first plug-in hybrid featuring a petrol engine and the quattro all-wheel drive system, and was specially developed for the markets in China, Singapore and Japan. The SUV’s 270 kW (367 PS) output averages fuel con- sumption of just 2.5 l/100 km, with an overall range of 1,020 km. The Q7 e-tron can cover up to 53 km in all-electric driving. Audi also unveiled the A6 L e-tron, a spacious, environmentally friendly and at the same time sporty model developed exclusively for the Chinese market. Based on the long-wheelbase version of the A6, this saloon features a plug-in hybrid drive generating system power output of 180 kW (245 PS), with average fuel consumption of just 2.2 l/100 km. The A6 L e-tron will be manufactured at the FAW- Volkswagen joint venture’s plant in Changchun. In addition to the production models, Audi turned heads with the debut of the prologue allroad concept. This five-door model recasts the standard offroad elements in a new, sporty light and hints at the brand’s design future. Its quattro plug-in hybrid drive develops an impres- sive 540 kW (734 PS) of system power output. The ŠKODA brand celebrated the Chinese debut of its Superb and Fabia models at Auto Shanghai. The Superb is the Czech brand’s flagship model and has been at the forefront of its model range since 2001. For the Chinese market, this popular mid-range saloon will be available in three engine variants ranging from 110 kW (150 PS) to 162 kW (220 PS). All models come with direct shift gearboxes (DSG) as standard. The new Fabia marks the first time that ŠKODA has applied the brand’s new, modern design language in a production model. Chinese customers have two engine variants to choose from – 66 kW (90 PS) and 81 kW (110 PS). The SEAT brand’s 20V20 concept was aimed primarily at younger show visitors. In particular, this powerful and dynamic SUV combines sportiness with versatility, and illustrates the systematic development of the Spanish brand’s widely acclaimed design language. SEAT Connect Technology ensures that the vehicle is at home in an interconnected world, with a specific focus on voice command. The Bentley brand’s EXP 10 Speed 6 concept marked its Asian premiere in Shanghai following the model’s successful debut in Geneva. The two-seat luxury sports car combines British design and detailed handcrafting with advanced technology and superlative performance. The show car shared the stage with the revamped Continental GT and Flying Spur models, as well as the Conti- nental GT3 motorsport version. The highlight of the Porsche stand was the global debut of the 911 Carrera and Boxster Style Edition variants, which impressed visitors with an attractive specification package and a wide range of optical extras. The brand’s appearance was rounded off by the Asian premiere of the Porsche 911 GT3 RS and the Porsche Targa 4 GTS. Italian sports car manufacturer Lamborghini is celebrating its tenth anniversary in the Chinese market in 2015. It marked the occasion in Shanghai by unveiling the Aventador LP 750-4 Super- veloce – the brand’s fastest and most emotional model – and the Aventador LP 700-4 Pirelli Edition, which is fitted with exclusive equipment and reflects the long-standing collaboration between the automaker and the Italian tire producer. Commercial vehicle brands Scania and MAN were also repre- sented at Auto Shanghai; they presented powerful tractor units for the particularly high mileages covered in the vast expanses of China. Scania’s 353 kW (480 PS) G 480 6x2 was on show, while MAN displayed the TGX 28.480, also rated at 353 kW (480 PS). 2 U P D AT E D I N F O R M AT I O N Key Events Lake Wörthersee GTI festival One of the main attractions for visitors to the annual meeting of GTI enthusiasts at Lake Wörthersee in Austria was the production- bound Golf GTI Clubsport concept. The model was created espe- cially to celebrate the GTI’s 40th anniversary next year, and it marked its world premiere in Austria. Packing 195 kW (265 PS) and with a boost function that can temporarily push its output by a further 10%, the GTI Clubsport 2016 is planned as the most power- ful GTI ever to go into series production. The model’s customized interior and specific bodywork features – such as completely new bumpers and an innovative roof spoiler – round off its exclusive appearance. A second world premiere was the unveiling of the Golf GTE Sport, a concept car that brings Volkswagen’s GT tradition into the world of tomorrow. The innovative concept has a carbon fiber body and is fitted with a plug-in hybrid drive that generates 295 kW (400 PS) and propels the car to a top speed of 280 km/h. Appren- tices from Volkswagen and Wolfsburg-based Sitech Sitztechnik collaborated to produce the Golf GTI Dark Shine, an impressive demonstration of the high-quality and practical education within the Group. The hand-painted car features a striking two-tone exterior. The color scheme continues inside the cabin, including the two bucket sports seats. The 2.0 TSI engine was custom modified for this model and generates 290 kW (395 PS). The Golf Estate Biturbo Edition and the ŠKODA FUNstar show cars, which were developed and presented by apprentices from Zwickau and Mladá Boleslav respectively, were also presented at the GTI festival. Other Group brands were also represented at Lake Wörthersee: Audi presented its TT clubsport turbo concept which, with its pro- nounced wheel wells and powerful rear wing, offers a foretaste of the new Audi TT RS. An electric turbocharger and 441 kW (600 PS) of power catapult the muscular concept car from 0 to 100 km/h in just 3.6 seconds. The ŠKODA brand presented the sporty ŠKODA Octavia Combi RD 230 and the ŠKODA Fabia R5 rally car, among others. The SEAT brand caused a sensation with the Leon ST CUPRA, the fastest estate to complete the Nürnburgring’s north loop. The MAN brand catered for a specific kind of premiere. The commercial vehicles manufacturer from Munich was represented at the event for the first time and presented the special-edition TGX D38 “100 Years”, a 412 kW (560 PS) tractor unit with a charac- teristic flaming lion painted on the cabin. MAN celebrated 100 years of commercial vehicle production this year. World premiere of the new T model series The Volkswagen Commercial Vehicles brand unveiled a new version of its successful model in April: the sixth generation of the Transporter series was launched with a wide range of technical innovations that ensure greater safety, comfort and an improved driving experience together with lower fuel consumption and emissions. The available driver assistance systems include the Front Assist area monitoring system and Adaptive Cruise Control (ACC), as well as City Emergency Braking, a combination of these two systems. The adaptive Dynamic Cruise Control and an elec- trically operated tailgate add an extra level of comfort. The new engines are fitted with a start-stop system as standard and fuel consumption is reduced by an average of 15%. The new radio navigation system is fitted with a proximity sensor and can be connected to mobile online services. Vienna Motor Symposium At the 36th Vienna Motor Symposium, Volkswagen emphasized that CO2 reduction, e-mobility and digitization are the key challenges in the automotive industry. Volkswagen’s broad range of drive variants, spanning petrol and diesel engines through natural gas and plug-in hybrid drives down to pure-play electric traction – and potentially even fuel cells – demonstrates the Group’s enormous potential for innovation. The optimization of the internal combustion engine remains a key development area; high rpm diesel engines and a new high-performance three-cylinder TSI engine are examples of this. The “laser roughening” coating technique that Volkswagen will use in future large-scale production contributes to reducing friction in the engine and to boosting performance. The new generation of the T series also saw the launch of a new 2.0 TDI engine for light commercial vehicles, developed on the basis of the Modular Diesel Toolkit (MDB). In addition, Volkswagen presented the new 447 kW (608 PS) 6.0 liter W12 TSI engine in Vienna, one of the world’s most sophisticated premium drive systems. AWA R D S The Volkswagen Passenger Cars brand was named best volume manufacturer for the fourth consecutive time in this year’s “Schwacke MarkenMonitor”. The brand performed particularly well in the vehicle quality, image and model range attractiveness categories. The ŠKODA brand won first prize in the major importer category. “Schwacke MarkenMonitor” is a dealer satisfaction survey in which approximately 1,000 telephone interviews with German car dealers are conducted and analyzed. The academic survey focuses on the quality of cooperation between manufacturers and dealers. The Tiguan was named “All-wheel drive car of the year” in the SUV under €30,000 category in the reader poll conducted by “Auto Bild Allrad” magazine. The survey covered the complete range of all-wheel drive models available in the German market. The Audi brand received the “2015 L.E.A.D.E.R. Award” in the original equipment manufacturer (OEM) category. Leading Euro- pean automotive industry magazine “Automotive News Europe” and the Bilbao-based “Automotive Intelligence Center” award this prize to European companies and organizations that make out- standing contributions to development, excellence and research in the automotive industry. The jury highlighted Audi’s ground- breaking work in the development of lightweight construction and piloted driving. Automobile club Kraftfahrer-Schutz e.V. awarded the Energy and Environment Prize to the Volkswagen Group in June. The prize has been in existence for 35 years. The expert judges presented the award to the Golf GTE’s plug-in hybrid drive system and the Audi A3 e-tron for their low fuel consumption, compelling performance and long range. 3 U P D AT E D I N F O R M AT I O N Key Events The Audi brand’s 2.5 liter TFSI engine was named “International Engine of the Year” in the 2.0 to 2.5 liter category. This is the sixth consecutive year that an Audi engine has won the award. The international jury of 65 automotive journalists based their decision on the engine’s reliability and excellent tuning. more than 20%. In addition, the use of rainwater and recycled production water means that 20% less fresh water is used in pro- duction compared with conventional processes. The plant uses solar panels and local hydroelectricity for power, making pro- duction carbon neutral. The Volkswagen Commercial Vehicles brand’s Amarok was named best pickup of the year for the fifth consecutive time in a reader poll conducted by “OFF ROAD” magazine. Over 38,000 readers took part in the survey. The ŠKODA Superb received the top five-star rating in the Euro NCAP crash test. This result underscores the ŠKODA model range’s high safety standards: all series currently in production were given a five-star rating as part of their market launch. The Euro NCAP assessment covers the categories adult and child occupant pro- tection as well as pedestrian and safety assist technologies. The Volkswagen Passenger Cars brand’s “Das Auto.Magazin” won numerous prizes as part of the “Best of Corporate Publishing” awards. The expert jury awarded a gold medal for the powerful short documentary “Wege zur Freiheit” (“Roads to Freedom”) about automotive designer Giorgetto Guigiaro, as well as for the magazine’s mobile app, which in particular impressed the judges with its cross-media content. The print version of the magazine and the iPad app each received a silver medal in the “Automobile” and “Digital Media – Mobile” categories. Volkswagen is investing approximately half a billion euros in a further body shell production facility at the Bratislava plant. The new hall will be equipped with state-of-the-art joining technology and the plan is to produce body shells for the Porsche Cayenne to begin in 2017. The Audi brand intends to cooperate with Baidu and Huawei to give Chinese customers seamless and fast use of smartphones in cars and to drive forward the networking of vehicles with their surroundings and the Internet. The partnership with Baidu, China’s leading search engine provider, covers the integration of smartphones for use in cars and the joint development of data, calculation processes and functions for vehicle navigation. Audi and Huawei, the world’s largest network provider, are jointly devel- oping a China-specific LTE module for rapid data transfer. In June, Volkswagen signed a cooperation agreement in the area of e-mobility research with Chinese joint venture partner SAIC. This covers expanding Chinese joint venture SVW’s main pro- duction facility in Anting to locally develop and produce plug-in hybrid and fully electric models. A N N I V E R S A R I E S The ŠKODA plant in Kvasiny celebrated the production of its 750,000th ŠKODA Superb in April 2015. The ŠKODA Superb has been thrilling customers in Europe, China and other non- European markets since 2001. The model’s third generation was launched in June this year and is revolutionizing the ŠKODA design language, as well as adding new dimensions in comfort, spa- ciousness and technology. The new Superb features the Volkswagen Group’s MQB technology, innovative assistance systems for safety, environmental care and comfort, a high-performance Euro 6 engine and ŠKODA’s trademark “Simply Clever” features. In June 2015, the Audi brand celebrated 50 years of Audi model production at the plant in Ingolstadt. Auto Union manufactured its first the foundations for the rebirth of the Audi brand. To mark the event, Audi entered ten classic cars in the “Danube Classic” vintage rally around Ingolstadt. four-cylinder, four-stroke model in 1965, laying C A PA C I T I E S A N D C A PA B I L I T I E S Volkswagen opened a new vehicle plant in Changsha, southern China, in May 2015. The plant has the capacity to produce a total of 300,000 Volkswagen Passenger Cars and ŠKODA brand models per year. The goal is for more than 4,000 jobs to be created at the plant, with a further 4,000 at the adjacent supplier park. The plant is the Shanghai-Volkswagen joint venture’s first production facility to receive the “Triple-Star Green Building Design Award”, China’s highest state award for environmentally friendly factory planning. A dry painting system reduces water and energy consumption by C H A R T E R O N V O C AT I O N A L E D U C AT I O N A N D T R A I N I N G A D O P T E D The Group Board of Management, the European Group Works Council and the Global Works Council of Volkswagen AG adopted the Volkswagen Group Charter on Vocational Education and Train- ing in June 2015. Its objective is to ensure that apprentices through- out the Group have the opportunity to gain knowledge and expertise at the same high standard. The Charter covers basic issues such as the selection process for apprentices, the duration and quality of vocational education and training, and the teaching of educational content. It also sets out policies concerning financial and nonfinancial support for apprentices, their working time, breaks and annual leave, their transition to post-apprenticeship employment and their repre- sentation. As a consequence, the different legal, social, economic and cultural aspects in the various countries will also be addressed. The Volkswagen Group is taking responsibility for social issues and the future at its production locations worldwide through its commitment to young peoples’ education and training. In addition, excellent vocational education is the prerequisite for a highly productive team, outstanding quality and top products. V O L K S WA G E N C R E AT E S A N I N T E G R AT E D C O M M E R C I A L V E H I C L E S G R O U P Going forward, the Volkswagen Group will bundle the mid-sized truck, heavy truck and bus businesses under Truck & Bus GmbH as the holding company for commercial vehicle brands MAN and Scania. The brands will continue to retain their independence. Truck & Bus GmbH will manage the cooperation between the three 4 U P D AT E D I N F O R M AT I O N Key Events commercial vehicles businesses – MAN Truck & Bus AG, MAN Latin America Ltda. And Scania AB. The company’s management will be headed by Mr. Andreas Renschler, the member of the Group Board of Management responsible for Commercial Vehicles. The CEOs of the three commercial vehicles businesses, among others, will be represented in the company’s management. The objective is for strategy, development, HR and purchasing to be agreed jointly across the brands, allowing the full potential for synergies between the brands to be leveraged. As a producer of light commercial vehicles, Volkswagen Commercial Vehicles will also form part of the integrated commercial vehicles group and will retain a close link with the Volkswagen Passenger Cars brand. V I C TO RY AT L E M A N S F O R P O R S C H E A N D A U D I Teams fielded by Group companies Porsche and Audi wowed the more than 260,000 spectators at the legendary 24 Hours of Le Mans race with a close duel, and went on to dominate the podium. The Porsche teams took first and second place with the innovative Porsche 919 Hybrid – a double win for the brand. This was Porsche’s 17th overall victory in the classic race. The Volkswagen Group’s triple success was rounded off by last year’s winner, Audi, which took third place with the Audi R18. V F L W O L F S B U R G W I N S T H E 2 0 1 5 D F B C U P VfL Wolfsburg won the DFB Cup for the first time in the club’s history on May 30, 2015 in front of a crowd of roughly 75,000 at Berlin’s Olympic Stadium. The match was broadcast live in 149 countries around the world, with almost 12 million viewers in Germany tuning in. The VfL Wolfsburg women’s team had already won the DFB Cup on May 1, 2015 for the second time following their victory in 2013. This marked the first time in the competition’s history that the men’s and women’s teams from the same club won the cup in the same season. Volkswagen congratulates the cup winners and appreciates the intense national and international media interest. VfL Wolfsburg-Fußball GmbH is a wholly owned Volkswagen Group company. Volkswagen’s decades-long and ongoing commitment is a hallmark of the partnership. For the Group, VfL Wolfsburg is a global communications platform with high strategic value. It also plays a key role in raising the profile of Volkswagen AG’s locations and the Wolfsburg region. S U P E R V I S O RY B O A R D M AT T E R S On April 30, 2015 Dr. Louise Kiesling and Ms. Julia Kuhn-Piëch were appointed to the Supervisory Board of Volkswagen AG as replacement shareholder representatives, effective the same day, by the court on the application of the Board of Management of Volkswagen AG in accordance with section 104 of the Aktiengesetz (AktG – German Stock Corporation Act). This was due to the resignations of Prof. Dr. Ferdinand K. Piëch and Ms. Ursula Piëch from the Supervisory Board on April 25, 2015. The court appointed Mr. Uwe Hück, Chairman of the General and Group Works Councils of Dr. Ing. h.c. F. Porsche AG, to the Supervisory Board of Volkswagen AG as an employee representative, effective July 1, 2015. He replaces Mr. Jürgen Dorn, who stepped down as of June 30, 2015. A N N U A L G E N E R A L M E E T I N G The 55th Annual General Meeting of Volkswagen AG was held at the Hanover Exhibition Grounds on May 5, 2015. With 91.93% of the voting capital present, the ordinary shareholders of Volkswagen AG approved the proposal by the Board of Management and the Supervisory Board to distribute a dividend of €4.80 per ordinary share and €4.86 per preferred share for fiscal year 2014. In addition, they formally approved the actions of the Board of Management and the Supervisory Board and the conclusion of an intercompany agreement. Mr. Hussain Ali Al-Abdulla’s scheduled term of office on the Supervisory Board of Volkswagen AG expired at the end of the Annual General Meeting. The Annual General Meeting elected Mr. Al-Abdulla to the Supervisory Board for a further full term of office as a shareholder representative. Mr. Ahmad Al-Sayed stepped down as a shareholder representative on the Supervisory Board of Volkswagen AG as of the end of the Annual General Meeting. The Annual General Meeting elected Mr. Akbar Al Baker, Minister of State and Group Chief Executive of Qatar Airways, to replace him for the remainder of his term of office. In addition, the ordinary shareholders authorized the Board of Management to issue a total of up to 70 million new non-voting preferred bearer shares within the next five years. They also elected PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft, as the auditors for the single-entity and consolidated financial state- ments for fiscal year 2015 and as the auditors to review the condensed consolidated financial statements and interim manage- ment report for the first six months of 2015. 5 I N T E R I M M A N A G E M E N T R E P O R T Volkswagen Shares Volkswagen Shares In the second quarter of 2015, prices in the international equity markets were unable to match the increase seen in the first three months of the year. The DAX also suffered from uncertainty, in particular as a result of the escalating debt situation in Greece. After a slight increase at the beginning of the second quarter, the deteriorating situation in Greece and concerns about its effect on the European economy were the main triggers for falling prices. Healthy corporate results and expectations that the European Central Bank would continue its bond-buying program and the US Federal Reserve its loose monetary policy brought about a tempo- rary recovery before the downward trend resumed in April. The DAX moved sideways amid significant price swings in May. Investors’ hopes of a more expansionary monetary policy by the Chinese central bank and healthy labor market data from the USA supported prices in an environment that continued to be dominated by concerns over the situation in Greece. Prices declined in June amid volatility brought about by increasing fears of bankruptcy in Greece and growing uncertainty about whether it would remain in the eurozone. second quarter of 2015. In addition, discussions about the com- position of the Board of Management and the Supervisory Board, as well as increasing concerns about slower growth in demand for passenger cars due to the economic downturn in China influenced market participants. As a result, both classes of shares were more volatile than the market as a whole, trailing market growth. Compared with the preferred shares, the price of ordinary shares grew at a slightly faster pace in the second quarter. Volkswagen AG’s preferred shares recorded their highest daily closing price in the period from January to June 2015 (€255.20) on March 16, 2015, and with it an all-time high. They reached their lowest closing price of €176.30 on January 5, 2015. The preferred shares ended the reporting period at €208.00; this was an increase of 12.6% compared with the last closing price in 2014. Volks- wagen’s ordinary shares also recorded their highest daily closing price in the first six months of the year (€247.55) on March 16, 2015. They hit their lowest closing price on January 5, 2015 (€172.55). The ordinary shares recorded a daily closing price of €207.55 on June 30, 2015, up 15.2% on the closing price at the end of 2014. The DAX reached a new all-time high of 12,375 points on April 10, 2015 and closed the first half of 2015 at 10,945 points, up 11.6% on the 2014 year-end level. The EURO STOXX Automobiles & Parts stood at 585 points on June 30, 2015, up 22.2% compared with the 2014 closing price. Volkswagen AG’s preferred and ordinary share prices were unable to escape the declining trend in the equity markets in the Information and explanations on earnings per share can be found in the notes to the interim consolidated financial state- ments. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website at www.volkswagenag.com/ir. S H A R E P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 3 T O J U N E 2 0 1 5 Index based on month-end prices: December 31, 2013 = 100 Volkswagen ordinary shares Volkswagen ordinary shares Volkswagen preferred shares Volkswagen preferred shares DAX DAX EURO STOXX Automobiles & Parts EURO STOXX Automobiles & Parts 150 150 125 125 100 100 75 75 D J F M A M J J A S O N D J F M A M J 6 I N T E R I M M A N A G E M E N T R E P O R T Business Development Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The robust growth in the global economy lost momentum slightly in the first half of 2015. While the economic upturn continued in many industrialized nations, growth in some emerging economies remained below average. Although the comparatively low energy and raw materials prices had a negative impact on individual countries’ economies, their effect on the global economy as a whole was supportive. Structural deficits and social conflict dominated the situation in South Africa in the first half of 2015; nevertheless, economic growth was slightly stronger than in previous quarters. The US economy recorded solid growth on average in the period from January to June 2015. The further decline in unem- ployment, positive consumer sentiment and the continuing very loose monetary policy supported the economy. Mexico saw positive economic growth at an almost constant growth rate. In Western Europe, the economic recovery continued in the reporting period. The northern European countries saw solid growth and there were increasing signs that the recession is coming to an end in most of the southern European countries. The German economy continued to benefit from positive con- sumer sentiment and the strong labor market; the pace of growth rose slightly over the course of the year. Economic growth was also positive in Central Europe in the first six months of 2015. The conflict between Russia and Ukraine contributed substantially to the recessionary trend in both of these economies and had a negative impact on the situation in Eastern Europe overall. In addition, falling energy prices hit the oil producing countries in this region in particular. The situation in Brazil remained tense in the first half of 2015. The negative trend continued, in particular as a result of the coun- try’s weak domestic demand and the low global commodity prices. Economic output in Argentina also retreated in the reporting period as the very high rate of inflation persisted. The high growth rate recorded in the Chinese economy weakened slightly in the first six months of 2015 due to economic uncertainties. In Japan, economic output remained almost unchanged compared with the prior-year quarter. The economies in India and the ASEAN region registered stable growth. E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 3 T O J U N E 2 0 1 5 Index based on month-end prices: December 31, 2013 = 100 EUR to USD EUR to USD EUR to JPY EUR to JPY EUR to GBP EUR to GBP 110 110 100 100 90 90 80 80 70 70 D J F M A M J J A S O N D J F M A M J 7 I N T E R I M M A N A G E M E N T R E P O R T Business Development T R E N D S I N T H E PA S S E N G E R C A R M A R K E T S In the period from January to June 2015, global new passenger car registrations were up 2.6% year-on-year, although demand varied from region to region. The growth drivers were the Asia-Pacific region, North America and Western Europe. In contrast, new pas- senger car registrations in Eastern Europe and South America declined drastically in some areas compared with the prior-year period. The passenger car market in Western Europe benefited from the improved macroeconomic environment, positive consumer sentiment and lower fuel prices, and continued to recover in the first half of 2015. In June, the number of new registrations increased year-on-year for the 22nd time in a row. Demand for passenger cars in Italy and Spain saw double-digit percentage growth; however, market volumes were still down substantially on pre-crisis levels in both countries. The Spanish market continued to benefit from government stimulus measures. In the United Kingdom and France, growth rates were more moderate in the year to date. first quarter of 2014 continued in the reporting period, although the pace slowed. The lowest level of new registrations for a first half- year period since 2006 was recorded, in particular due to the poor state of the economy and a decline in real incomes. Overall market volumes in the Asia-Pacific region recorded the highest absolute increase in the first six months of 2015. This was primarily attributable to the growth in demand for passenger cars in China; however, this declined significantly over the reporting period as a result of the economic slowdown, and even slid into negative territory in June. The strong demand for attractively priced entry-level models in the SUV segment continued and contributed substantially to growth. In Japan, the declining trend in new pas- senger car registrations also continued in the second quarter of 2015. In addition to pull-forward effects from the consumption tax increase on April 1, 2014, which had a positive impact in the pre- vious year, the tax increase on mini vehicles (up to 660 cc) effective April 1 had a negative effect on demand over the course of 2015. The Indian passenger car market saw further growth. An improve- ment in consumer sentiment and lower interest rates and fuel prices boosted the ongoing recovery process. In Germany, the number of new passenger car registrations in the first six months of 2015 was higher than in the prior-year period. Whereas private demand continued to decline, new business vehicle registrations saw a significant increase. The passenger car market as a whole in Central and Eastern Europe declined sharply overall in the reporting period. Trends in the individual markets were very mixed: while the EU markets in Central Europe mainly recorded positive rates of change, there was a slump in passenger car sales in the Eastern European markets. This was primarily due to the drastic deterioration in market conditions in Russia and Ukraine resulting from the difficult economic and political situation in both countries. The slight downward trend in the South African passenger car market continued in the first half of 2015. This was largely attrib- utable to the unfavorable economic conditions and weak consumer confidence. In North America, market growth in the period from January to June 2015 continued with slightly declining momentum. Sales figures for passenger cars and light commercial vehicles (up to 6.35 tonnes) in the USA reached their highest level for a first half-year period in the past ten years. Growth was driven in particular by models in the SUV and pickup segments. The increase was mainly due to high consumer confidence, in addition to favorable credit conditions and fuel prices and the low unemployment rate. Both the Canadian and the Mexican automotive markets recorded new highs in the reporting period. In South America, the number of new passenger car regis- trations in the first half of 2015 was significantly below the prior- year period. Brazil recorded the lowest passenger car demand volumes seen since 2007. In addition to the tax increase on indus- trial products at the beginning of 2015, this was mainly due to overall economic decline and higher interest rates. The downward trend in the Argentinian passenger car market which began in the The number of passenger cars sold in the ASEAN region in the period from January to June 2015 was below the prior-year figure. This was mainly attributable to the passenger car market in Indonesia, which saw a decline on the back of high inflation and higher borrowing costs, among other factors. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S Global demand for light commercial vehicles was slightly below the prior-year level in the first half of 2015. The economic stabilization in Western Europe made itself felt: new vehicle registrations significantly exceeded the prior-year figure. In the Central and Eastern European markets, registrations were down considerably year-on-year in the first six months of 2015. Russia saw a significant drop in demand due to the political tensions and their impact. In North America, light commercial vehicles up to 6.35 tonnes and passenger cars are reported as the “light vehicle market”. In the period from January to June 2015, vehicle sales in South America were down on the previous year due to the continuing difficult economic conditions. In Brazil and Argentina, the region’s largest markets, sales of light commercial vehicles fell short of the prior-year figure. Vehicle sales in the Asia-Pacific region were down slightly year- on-year. In China, the dominant market for light commercial vehi- cles in the region, new registrations did not reach the prior-year level. In the Indian market, demand grew moderately compared with the previous year. Sales volumes in Japan were down signif- icantly year-on-year in the period from January to June 2015 due to the pull-forward effects of the consumption tax increase on April 1, 2014 in the first quarter of the previous year. In the first half of 2015, sales in the ASEAN region were on a level with the previous year. 8 I N T E R I M M A N A G E M E N T R E P O R T Business Development In the period from January to June 2015, global demand for mid- sized and heavy trucks with a gross weight of more than six tonnes was significantly down on the previous year. In Western Europe, higher demand in the United Kingdom, the Netherlands, Spain and Italy – due for the most part to the low prior- year level – resulted in an increase in registrations. Demand in Germany, the largest market in Western Europe, was down slightly on the prior-year period in the first six months of the year. decentralized availability. The shift away from oil-fired power plants toward dual-fuel and gas-fired power plants continued. Order place- ments were delayed, in some cases significantly, due to continuing muted economic growth in the key emerging markets and devel- oping countries, as well as the increasingly difficult financing conditions for customers. This affected major projects in particular. The energy generation market proved stable overall compared with the previous year. In the Central and Eastern European markets, registrations were down sharply year-on-year. This was primarily due to the tense and uncertain political situation, as well as currency weaknesses and the difficult financing conditions in Russia. Momentum in the construction and energy sector and favor- able financing conditions led to higher registration volumes in North America compared with the previous year. In South America, the number of new vehicle registrations in the first half of 2015 was significantly below the prior-year figure. Vehicle sales in Brazil were down substantially on the previous year as a result of declining economic output and the restrictive finan- cing conditions. The ongoing high inflation and recession in Argen- tina also contributed to the decline in demand. The market for the construction of turbomachinery is mainly dominated by contracts awarded in connection with global investment projects in oil and chemical facilities. Project volumes declined in the oil and gas industry due to the low oil prices, which further increased competitive pressure. Demand for turbomachin- ery in the processing industry was at a low level overall between January and June 2015, and here, too, competition increased. Overall, the market for turbomachinery was at a low level, declining again slightly compared with the previous year. D E M A N D F O R F I N A N C I A L S E R V I C E S Global demand for automotive-related financial services remained high in the first half of 2015. The number of trucks sold in the Asia-Pacific region (excluding the Chinese market) increased significantly year-on-year. Demand in the Indian market recorded a clear increase due to replacement vehicles in the heavy truck segment, increased spending on infra- structure and a more favorable investment climate following the change of government in May 2014. Registration volumes in the world’s largest truck market, China, were significantly lower than in the previous year. This was due to the pull-forward effects in 2014 from the introduction of the C4 emission standard and declining investment growth in China. Demand for buses, both globally and in the markets that are relevant for the Volkswagen Group, was lower than in the previous year in the period from January to June 2015. Business with financial services products was buoyed by the good overall market performance in Germany and the signs of recovery in Western and Central Europe. These offset the negative effects from lower unit sales volumes in Eastern Europe and South America. Demand for automotive-related financial services in the North American region was up year-on-year, with leasing in particular further increasing its share. The South American automotive markets continued to decline, with the downward trend also reflected in sales volumes for finan- cial services products. Demand for automotive-related financial services recorded positive growth in the Asia-Pacific region, with year-on-year increases in China despite the gloomier market conditions. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are generally independent of each other. In the first half of 2015, the marine market saw a continuation of the muted order activity that was already noticeable during the course of 2014. In some cases, the market segments developed at different rates. While demand for liquid gas tankers and cruise ships increased slightly, the situation for freight and container ships remained tense. Demand for ships for offshore applications also dropped as a result of the low oil prices. The overall marine market declined significantly compared with the prior-year period. In energy generation, demand for energy solutions remained flexibility and In the truck and bus business, demand for financial services products rose year-on-year despite lower overall demand for vehi- cles in the relevant markets. The significant decline in truck and bus unit sales in South America had a negative impact, particularly in the core Brazilian market. However, this was more than offset by positive business growth in Europe. high, with a strong trend towards greater 9 I N T E R I M M A N A G E M E N T R E P O R T Business Development V O L K SWA G E N G R O U P D E L I V E R I E S In the first half of 2015, the Volkswagen Group delivered 5,039,210 vehicles to customers, on a level with the previous year. The chart on page 12 shows the changes in deliveries by month. Separate details of deliveries of passenger cars and commercial vehicles are provided in the following. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A RY 1 TO J U N E 3 0 * 2015 2014 % Touran, Tiguan, Passat, Audi TT and Audi A6. The Golf was again the most popular passenger car in Germany in terms of registrations in the first half of 2015. In the overall sharply declining passenger car markets in Central and Eastern Europe, we sold 11.2% fewer vehicles between January and June of this year than in the prior-year period. While we recorded strong increases in demand in the Czech Republic, Hungary and Romania, our sales figures in Russia and Ukraine declined significantly as a result of the difficult economic and political situation in the two countries. There was a positive trend in demand for the Golf Sportsvan, ŠKODA Rapid, ŠKODA Octavia Combi and SEAT Leon ST models. The Volkswagen Group’s share of the market in this region rose to 20.2% (17.3%). Passenger cars Commercial vehicles Total 4,729,383 309,827 5,039,210 4,751,927 313,758 5,065,685 – 0.5 – 1.3 – 0.5 In an overall declining market in South Africa, we handed over fewer passenger cars to customers in the first six months of 2015 than in the previous year (–12.3%). Deliveries for 2014 have been updated to reflect subsequent statistical trends. Includes the Chinese joint ventures. PA S S E N G E R C A R D E L I V E R I E S W O R L D W I D E In the period from January to June 2015, the Volkswagen Group delivered 4,729,383 passenger cars to customers worldwide, matching the prior-year level. The market as a whole grew by 2.6% in the same period. The Audi (+3.8%), ŠKODA (+4.2%), Porsche (+29.8%) and Lamborghini (+96.9%) brands reached new highs in the first half of the year. While demand for Volkswagen Group passenger cars rose in Western Europe, Central Europe and North America, and was slightly below the prior-year level in the Asia- Pacific region, deliveries to customers in South America and East- ern Europe were in some cases significantly lower year-on-year. The table on the next page provides an overview of passenger car deliveries to customers in the reporting period by market. Deliveries in North America In North America, demand for Volkswagen Group vehicles increased by 6.0% year-on-year in the reporting period. The Group’s share of the passenger car market amounted to 4.5% (4.4%). The Jetta remained the Group’s bestselling model in North America. In the US market, we delivered more vehicles to customers in the first half of 2015 than in the previous year (+2.4%). The market as a whole grew by 4.4% in the same period. Models in the SUV and pickup segments remained in particularly high demand. The Group’s Golf, Jetta, Passat, Audi A3 saloon, Audi Q5 and Porsche Cayenne models were especially popular. The Mexican market as a whole continued to show dynamic growth and Group sales in the reporting period were also sharply up on the prior-year figure (+9.9%). The Vento, Jetta and SEAT Ibiza models were particularly popular. Below we explain the trends in our sales figures in the individual markets. Deliveries in Europe/Other markets In the growing passenger car market in Western Europe, we delivered 6.5% more vehicles to customers in the first half of 2015 than in the previous year, recording rising sales figures in all major markets in this region. The Polo, Golf Sportsvan and Passat models saw the highest growth in demand. The Golf, Tiguan, Audi A3, ŠKODA Octavia and Porsche Macan models were also very popular. The Audi Q7 and the ŠKODA Superb saloon were successfully launched on the market. In Western Europe, the Volkswagen Group achieved a 24.4% share of the passenger car market (24.7%). In the German passenger car market, demand for Volkswagen Group models increased by 6.7% year-on-year in the reporting period. The market as a whole grew by 5.2% in the same period. The Golf Sportsvan, Passat and Audi TT Coupé models recorded the highest growth rates. Eight Group models led the Kraftfahrt- bundesamt (KBA – German Federal Motor Transport Authority) reg- istration statistics in their respective segments: the up!, Polo, Golf, Demand for Group models in the growing Canadian market rose by 21.1% year-on-year between January and June 2015. The Golf, Audi A3 saloon and Audi Q3 were among the models to see the highest increases. Deliveries in South America Conditions in the highly competitive South American markets continued to deteriorate in the first six months of 2015. The number of deliveries made to Volkswagen Group customers in this period was down 20.3% on the low prior-year figure. The Group’s share of the passenger car market in this region was 16.6% (17.2%). In the sharply declining passenger car market in Brazil, demand for Volkswagen Group vehicles fell by 26.1% year-on-year between January and June 2015. The bestselling models were the up!, Fox, Gol, Golf, Saveiro and Audi A3. In Argentina, the Group’s sales recovered slightly in the reporting period, exceeding the low prior-year figure by 4.9%. The sharp downward trend in the market as a whole continued but weakened slightly. The Gol was the most sought-after Group model in Argentina. 10 I N T E R I M M A N A G E M E N T R E P O R T Business Development Deliveries in the Asia-Pacific region In the first half of 2015, Volkswagen Group passenger car sales in the Asia-Pacific region were down slightly on the previous year’s level (–3.1%). The market as a whole grew by 3.8% in this period; the Group’s market share was 12.5% (13.4%). Growth in the Chinese passenger car market slowed signifi- cantly in the course of the reporting period and even slid into negative territory for one month in June. Demand remained par- ticularly strong for attractively priced entry-level models in the SUV segment. In the reporting period, we delivered 3.9% fewer vehicles to customers in China than in the previous year. The Lavida, Jetta, Santana, Tiguan, Audi Q5, Audi A6 and Porsche Macan models recorded strong demand. The Lamando was successfully launched on the market. In Japan, Group passenger car sales declined by 9.7% year-on-year between January and June 2015. The market as a whole also contracted in the same period. Demand for the Polo, Audi A3 and Audi Q3 models recorded positive growth. The Indian passenger car market continued to see moderate growth in the first six months of this year. The Volkswagen Group delivered 12.0% more vehicles to customers there than in the prior-year period. The most sought-after Group model was the Polo; the Vento, ŠKODA Rapid and ŠKODA Octavia models were also very popular. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A RY 1 TO J U N E 3 0 * D E L I V E R I E S ( U N I T S ) C H A N G E 2015 2014 (%) Europe/Other markets 2,092,239 2,012,001 + 4.0 Western Europe 1,619,156 1,519,781 + 6.5 of which: Germany 594,274 557,218 + 6.7 United Kingdom 278,735 266,068 + 4.8 France 136,114 132,292 + 2.9 Spain 135,966 115,414 + 17.8 Italy 114,558 104,002 + 10.1 Central and Eastern Europe 277,418 312,508 – 11.2 of which: Russia 79,534 130,633 – 39.1 Czech Republic 63,595 50,253 + 26.5 Poland 54,196 52,853 + 2.5 Other markets 195,665 179,712 + 8.9 of which: Turkey 80,231 52,757 + 52.1 South Africa 43,507 49,603 – 12.3 North America 447,255 421,982 + 6.0 of which: USA 294,992 287,953 + 2.4 Mexico 98,609 89,726 + 9.9 Canada 53,654 44,303 + 21.1 South America 263,467 330,701 – 20.3 of which: Brazil 193,934 262,286 – 26.1 Argentina 51,861 49,451 + 4.9 Asia-Pacific 1,926,422 1,987,243 – 3.1 of which: China 1,739,904 1,811,195 – 3.9 Japan 48,740 53,981 – 9.7 India 36,585 32,651 + 12.0 Worldwide 4,729,383 4,751,927 – 0.5 Volkswagen Passenger Cars 2,945,709 3,065,899 – 3.9 Audi 902,389 869,357 + 3.8 ŠKODA 544,300 522,499 + 4.2 SEAT 216,463 200,140 + 8.2 Bentley 4,639 5,254 – 11.7 Lamborghini 1,882 956 + 96.9 Porsche 113,984 87,803 + 29.8 Bugatti 17 19 – 10.5 Deliveries for 2014 have been updated to reflect subsequent statistical trends. Includes the Chinese joint ventures. 11 I N T E R I M M A N A G E M E N T R E P O R T Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 2015 2015 2014 2014 1,000 1,000 900 900 800 800 700 700 600 600 500 500 J F M A M J J A S O N D C O M M E R C I A L V E H I C L E D E L I V E R I E S The Volkswagen Group delivered a total of 309,827 commercial vehicles worldwide in the first half of 2015, 1.3% fewer than in the prior-year period. Of these, 78,800 were trucks (–8.4%) and 8,065 were buses (–19.0%). Volkswagen Commercial Vehicles increased its deliveries by 2.4% year-on-year to 222,962 units. In the period from January to June 2015, the number of vehicles delivered by the Scania brand was down 3.7% year-on-year to 36,989. MAN deliv- ered 49,876 units to customers in the reporting period, 13.5% fewer than in the previous year. In the Western European markets, demand for the Volkswagen Group’s commercial vehicles in the first six months of 2015 was up 9.4% on the prior-year figure to 191,696 units on the back of the economic recovery. Of the vehicles delivered, 151,066 were light commercial vehicles, 38,445 were trucks and 2,185 were buses. The Caddy and the Transporter were particularly popular. the persistently weak ruble due to the tense political situation linked to the Ukraine crisis and the low oil price. In the Other markets, the Group sold a total of 36,677 com- mercial vehicles in the period from January to June 2015: 24,153 light commercial vehicles, 11,134 trucks and 1,390 buses. At 3,986, the Volkswagen Group delivered 2.7% more units to customers in North America than in the prior-year period. 2,891 light commercial vehicles, 165 trucks and 930 buses were sold. Deliveries in the South American markets fell by 36.1% to 33,862 commercial vehicles. Of the units sold, 17,876 were light commercial vehicles, 13,829 were trucks and 2,157 were buses. The Amarok was the most sought-after Group model. Demand for commercial vehicles in Brazil suffered due to further deterioration in the macroeconomic environment and the more difficult finan- cing conditions. Sales figures were down 53.9% in the first half of 2015, to 17,855 vehicles. In Central and Eastern Europe, the Volkswagen Group’s com- mercial vehicle brands sold a total of 26,540 units (–15.4%). Of these, 15,241 were light commercial vehicles, 10,832 were trucks and 467 were buses. The Caddy and the Transporter were the most sought-after Group models. At 4,717 units, deliveries to customers in Russia were down 60.4% on the prior-year figure as a result of In the Asia-Pacific region, demand for Volkswagen Group commercial vehicles was on a level with the previous year, at 17,066 units. 11,735 light commercial vehicles, 4,395 trucks and 936 buses were delivered. The Amarok and the Transporter were in particu- larly high demand there. 12 I N T E R I M M A N A G E M E N T R E P O R T Business Development C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A RY 1 TO J U N E 3 0 * D E L I V E R I E S ( U N I T S ) C H A N G E 2015 2014 (%) Europe/Other markets 254,913 239,882 + 6.3 Western Europe 191,696 175,202 + 9.4 Central and Eastern Europe 26,540 31,374 – 15.4 Other markets 36,677 33,306 + 10.1 North America 3,986 3,881 + 2.7 South America 33,862 52,985 – 36.1 of which: Brazil 17,855 38,761 – 53.9 Asia-Pacific 17,066 17,010 + 0.3 of which: China 3,088 2,871 + 7.6 Worldwide 309,827 313,758 – 1.3 Volkswagen Commercial Vehicles 222,962 217,732 + 2.4 Scania 36,989 38,391 – 3.7 MAN 49,876 57,635 – 13.5 Deliveries for 2014 have been updated to reflect subsequent statistical trends. D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times typically range from just under one year to several years, and partial deliveries as construction prog- resses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. In the first six months of 2015, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated nearly three-quarters of overall sales revenue. A total of 2.0 million new contracts were signed in the Europe/ Other markets region between January and June 2015 (+10.0%). The total number of contracts amounted to 9.6 million as of June 30, 2015, up 2.7% on the figure recorded at the end of 2014. The for 5.2 million Customer Financing/Leasing area accounted contracts (+2.1%). The number of contracts in North America was 2.0 million at the end of the reporting period, falling 5.6% short of the figure for year-end 2014. The Customer Financing/Leasing area accounted for 1.6 million contracts, up 2.5% compared with December 31, 2014. The number of new contracts signed as of June 30, 2015 amounted to 375 thousand (385 thousand). G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division combines the Volkswagen Group’s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania, Porsche and Porsche Holding Salzburg. In South America, the number of new contracts signed in the first half of 2015 was 133 thousand, a decline of 9.6% on the prior- year period. The total number of contracts decreased to 780 thou- sand at the end of the reporting period, down 5.7% on the figure for the end of 2014. The contracts mainly related to the Customer Financing/Leasing area. Demand for the Financial Services Division’s products and services remained strong in the first half of 2015. The number of new financing, leasing, service and insurance contracts signed worldwide rose by 6.8% year-on-year to 2.7 million. At 13.5 million, the total number of contracts as of June 30, 2015 was up 1.1% on the figure for year-end 2014. In the first six months of the year, the ratio of leased or financed vehicles to Group deliveries (penetration rate) in the Financial Services Division’s markets was level year-on- year at 29.7% (29.8%). In the Asia-Pacific region, the number of new contracts signed in the first six months of the year amounted to 257 thousand (+8.2%). At 1.1 million, the total number of contracts as of June 30, 2015 was up 4.7% on the year-end figure. The Customer Finan- cing/Leasing area accounted for 931 thousand contracts (+8.0%). 13 I N T E R I M M A N A G E M E N T R E P O R T Business Development S A L E S TO T H E D E A L E R O R G A N I Z AT I O N The Volkswagen Group’s unit sales to the dealer organization – including the Chinese joint ventures – amounted to 5,090,239 vehicles in the first half of 2015, 2.2% fewer than at the prior-year reporting date. The increase in demand for Group models in Western Europe, Central Europe and North America was not enough to offset the declines in the Chinese, Brazilian and Russian markets. Unit sales outside Germany decreased by 3.1%, while unit sales in Germany recorded a 3.8% rise. As a consequence, vehicles sold in Germany as a proportion of overall sales increased to 13.1% (12.4%). P R O D U C T I O N The Volkswagen Group produced 5,313,568 vehicles in the first six months of 2015, an increase of 1.5% year-on-year. Production in Germany increased by 6.2% to 1,394,816 units. The proportion of vehicles produced in Germany rose to 26.3% (25.1%). I N V E N TO R I E S Global inventories at Group companies and in the dealer organi- zation were higher at the end of the reporting period than at year- end 2014 and at June 30, 2014. E M P L OY E E S The Volkswagen Group had 575,621 active employees at the end of the first half of 2015. A further 6,620 employees were in the passive phase of their partial retirement, and 15,608 young people were in vocational traineeships. The Volkswagen Group had a total of 597,849 employees worldwide at the end of the first half of 2015, up 0.9% on the number as of December 31, 2014. The expansion of the workforce was primarily attributable to the recruitment of specialists and experts, the transfer of temporary workers to permanent contracts and the expansion of the production facilities in Mexico and Poland. At 273,852, the number of employees in Germany was up 1.0% on year-end 2014. The proportion of employees in Germany was 45.8% (45.7%). 14 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets R E S U LT S O F O P E R AT I O N S O F T H E G R O U P The Volkswagen Group generated sales revenue of €108.8 billion in the first half of 2015, 10.1% more than a year earlier. The rise was primarily due to a favorable trend in exchange rates and positive mix effects. The proportion of the Group’s sales revenue generated outside Germany was 79.2% (79.6%). At €21.7 billion in the reporting period, gross profit was €3.0 billion higher than in the previous year. The gross margin was 19.9% (19.0%). Despite lower vehicle volumes and higher fixed costs, the Volkswagen Group’s operating profit improved to €7.0 billion (€6.2 billion) before special items in the first six months of 2015 due to optimized product costs as well as exchange rate and mix effects. Restructuring measures in the trucks business resulted in special items of €–170 million in the reporting period. Operating profit was €6.8 billion (€6.2 billion) and the operating return on sales stood at 6.3% (6.3%). ratio of both distribution and administrative expenses to sales revenue declined. In addition to negative exchange rate effects, other operating income was depressed by the special items resulting from restructuring measures in the trucks business, declining by €1.9 billion year-on-year to €–0.3 billion. At €5.7 billion, the Automotive Division’s operating profit for the reporting period exceeded the prior-year figure by €0.4 billion or 8.3%, as higher fixed costs and special items were more than offset by optimized product costs, overall positive effects from exchange rates and an improved mix. The operating return on sales rose to 6.1% (6.0%). Excluding the special items in the Commer- cial Vehicles/Power Engineering Business Area, operating profit amounted to €5.9 billion (€5.3 billion). Since the profit recorded by the joint venture companies is accounted for in the financial result using the equity method, the business performance of our Chinese joint ventures is mainly reflected in the Group’s operating profit only by deliveries of vehicles and vehicle parts as well as license revenue. Profit before tax was down slightly on the prior-year figure to €7.7 billion (€7.8 billion). Profit after tax was on a level with the previous year at €5.7 billion (€5.7 billion). Results of operations in the Automotive Division Sales revenue in the Automotive Division was €7.0 billion higher than in the previous year, at €94.1 billion in the period from Janu- ary to June 2015. In particular, the favorable trend in exchange rates and mix effects had a positive impact. Sales revenue in both the Passenger Cars Business Area and the Commercial Vehicles/ Power Engineering Business Area exceeded the prior-year figure. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is mainly reflected in its sales revenue only by deliveries of vehicles and vehicle parts. The financial result decreased by €0.7 billion to €0.8 billion; the decline was primarily due to expenses from the measurement of derivative financial instruments at the reporting date. Income from the Chinese joint ventures was on a level with the previous year. R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A A N D C O M M E R C I A L V E H I C L E S / P O W E R E N G I N E E R I N G B U S I N E S S A R E A F R O M J A N U A RY 1 TO J U N E 3 0 € million 2015 Passenger Cars Cost of sales was negatively impacted by increased depreciation charges as a result of high capital expenditures, greater fixed costs due to growth factors, higher research and development costs, in particular for new drive concepts, and exchange rate effects, while improved product costs had a positive effect. The ratio of cost of sales to sales revenue declined; gross profit in the Automotive Division climbed to €18.7 billion (€16.0 billion). Sales revenue Gross profit Operating profit Operating return on sales (%) Commercial Vehicles/Power Engineering 77,129 15,834 5,346 6.9 Sales revenue 16,964 Distribution expenses in the first half of 2015 were 2.7% higher and administrative expenses 3.5% higher than a year earlier due to factors including exchange rate effects, although the Gross profit Operating profit Operating return on sales (%) 2,832 354 2.1 15 2014 70,711 13,466 4,748 6.7 16,333 2,561 514 3.1 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets O P E R A T I N G P R O F I T B Y Q U A R T E R Volkswagen Group in € million 2015 2015 2014 2014 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 Q1 Q2 Q3 Q4 Results of operations in the Financial Services Division The Financial Services Division generated sales revenue of €14.7 billion in the period from January to June 2015. The year-on-year increase of 24.8% is mainly the result of higher business volumes and positive exchange rate effects. Cash inflows from financing activities amounted to €1.0 billion (€0.3 billion). The Group’s net liquidity was €–99.3 billion at the end of the reporting period; at December 31, 2014, it had stood at €–96.5 billion. Gross profit rose by €0.3 billion year-on-year to €3.0 billion. Due to the rise in volumes and, above all, compliance with regulatory requirements, both distribution and administrative expenses were higher than in the first half of 2014. The ratio of both administrative and distribution expenses to sales revenue declined. Operating profit rose by 21.3% year-on-year to €1.1 billion and F I N A N C I A L P O S I T I O N I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A A N D T H E C O M M E R C I A L V E H I C L E S / P O W E R E N G I N E E R I N G B U S I N E S S A R E A F R O M J A N U A RY 1 TO J U N E 3 0 the operating return on sales stood at 7.6% (7.9%). € million 2015 2014 F I N A N C I A L P O S I T I O N O F T H E G R O U P The Volkswagen Group’s gross cash flow increased by €4.7 billion year-on-year to €18.2 billion in the first six months of 2015. Funds tied up in working capital were 3.1% higher than in the previous year at €10.5 billion. As a result, cash flows from operating activities more than doubled to €7.8 billion (€3.3 billion). At €7.0 billion in the reporting period, investing activities attributable to the Volkswagen Group’s operating activities were €0.8 billion higher than in the first half of 2014. Within investing activities, investments in property, plant and equipment, invest- ment property and intangible assets, excluding capitalized develop- ment costs (capex) increased, while capitalized development costs declined. Passenger Cars Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities attributable to operating activities Net cash flow Commercial Vehicles/Power Engineering Gross cash flow Change in working capital Cash flows from operating activities 12,506 – 2,495 10,011 – 5,757 4,254 1,499 43 1,542 9,507 – 807 8,699 – 5,326 3,374 1,150 – 1,462 – 312 Cash flows from investing activities attributable to operating activities – 1,005 – 143 Net cash flow 537 – 455 16 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets Financial position in the Automotive Division The gross cash flow generated by the Automotive Division in the first half of 2015 was €3.3 billion higher than in the previous year at €14.0 billion. Funds tied up in working capital amounted to €2.5 billion (€2.3 billion). In the previous year, the higher dividends receivable from the Chinese joint ventures had a positive effect on gross cash flow but also increased funds tied up in working capital because of the undistributed amounts. As a result, cash flows from operating activities rose to €11.6 billion (€8.4 billion). Investing activities attributable to operating activities increased year-on-year to €6.8 billion (€5.5 billion) in the period from Janu- ary to June 2015. Capex rose to €4.7 billion (€3.6 billion), pro- ducing a capex ratio of 4.9% (4.1%). We invested primarily in our production facilities and in models to be launched in 2015 and 2016, as well as in the ecological focus of the model range. At €2.2 billion (€2.4 billion), capitalized development costs were lower than in the prior-year period. The year-on-year comparison of investing activities is impacted by MAN SE’s sale of MAN Finance Inter- national GmbH to Volkswagen Financial Services AG in 2014. The Automotive Division recorded net liquidity of €21.5 billion as of June 30, 2015; at year-end 2014, it was €17.6 billion. Financial position in the Financial Services Division The Financial Services Division’s gross cash flow rose by €1.4 billion to €4.2 billion in the first six months of 2015 as a result of improved earnings quality. Due in particular to growth in business volumes, funds tied up in working capital increased slightly compared with the first half of 2014 to €8.0 billion (€7.9 billion). At €0.2 billion (€0.8 billion), investing activities attributable to operating activities were significantly lower than in the previous year, when the figure reflected the intragroup acquisition of MAN Finance International GmbH from MAN SE. The Financial Services Division’s negative net liquidity, which is common in the industry, stood at €–120.8 billion at the end of June 2015; at December 31, 2014, it had amounted to €–114.1 billion. The Automotive Division’s net cash flow rose €1.9 billion above the prior-year figure to €4.8 billion in the reporting period. A capital increase carried out by Volkswagen AG at Volkswagen Financial Services AG at the beginning of the year in order to finance the growth in business volumes and meet regulatory capital requirements resulted in outflows from financing activities of €1.1 billion. In May, a dividend of €2.3 billion in total, €0.4 billion higher than in the previous year, was distributed to Volkswagen AG shareholders. Conversely, the successful placement of dual-tranche hybrid notes with an aggregate principal amount of €2.5 billion via Volkswagen International Finance N.V. in March resulted in a cash inflow. They consist of a €1.1 billion note that carries a coupon of 2.5% and has a first call date after seven years, and a €1.4 billion note that carries a coupon of 3.5% and has a first call date after 15 years. Both tranches are perpetual and increase equity by the full amount, net of transaction costs. €2.5 billion of the hybrid notes was classified as a capital contribution, which increased net liq- uidity. Overall, cash outflows from financing activities amounted to €3.3 billion (€5.6 billion). In the previous year, the figure included the acquisition of Scania shares, a capital increase and the issuance of hybrid notes. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E Due partly to currency factors, in particular relating to the US dollar, sterling and the Chinese renminbi, the Volkswagen Group’s total assets amounted to €374.0 billion at the end of the reporting period, exceeding the figure at December 31, 2014 by 6.5%. The Group’s equity rose to €96.2 billion (€90.2 billion) and the equity ratio was 25.7% (25.7%). Automotive Division balance sheet structure In the Automotive Division, property, plant and equipment increased slightly compared with December 31, 2014 and intangible assets remained almost unchanged. While equity-accounted investments declined as a result of the dividend distributions resolved by the Chinese joint ventures, deferred taxes increased. This was due in particular to the measurement of derivative financial instruments. At the end of June 2015, noncurrent assets were 2.5% higher overall than at year-end 2014. Current assets rose by 13.9%; the inventories contained within this item increased due to production- related and exchange rate factors, while other receivables and financial assets include the unpaid dividends of the Chinese joint ventures. Cash and cash equivalents in the Automotive Division amounted to €15.5 billion (€16.5 billion) at the reporting date. 17 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets B A L A N C E S H E E T ST R U C T U R E I N T H E PA S S E N G E R C A R S B U S I N E S S A R E A A N D T H E C O M M E R C I A L V E H I C L E S / P O W E R E N G I N E E R I N G B U S I N E S S A R E A € million June 30, 2015 Dec. 31, 2014 elimination of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed for the reporting period. The item “Put options and compensation rights granted to noncontrolling interest shareholders” primarily comprises the liability for the obligation to acquire the shares held by the remaining free float shareholders of MAN. Passenger Cars Noncurrent assets 104,102 101,459 At €210.2 billion as of June 30, 2015, the Automotive Division’s total assets were higher than at December 31, 2014 (€197.4 billion). Current assets 61,060 52,869 Total assets Equity Noncurrent liabilities Current liabilities 165,162 61,954 57,717 45,490 154,328 58,708 54,366 41,254 Financial Services Division balance sheet structure The Financial Services Division recorded total assets of €163.8 billion at the end of the reporting period, 6.5% higher than at December 31, 2014. Commercial Vehicles/Power Engineering Noncurrent assets Current assets Total assets Equity Noncurrent liabilities 27,327 17,748 45,075 14,707 11,922 26,772 16,311 43,083 14,107 12,072 Lease assets and noncurrent financial services receivables increased due to the positive business performance and exchange rate factors. Overall, noncurrent assets rose by 7.8% compared with year-end 2014. The 4.6% rise in current assets was also attributable to higher volumes and exchange rate effects. The Financial Services Division accounted for approximately 43.8% of the Volkswagen Group’s assets at June 30, 2015. Current liabilities 18,447 The Automotive Division’s equity was €76.7 billion at the end of the first half of 2015, 5.3% higher than at December 31, 2014. It was positively impacted by healthy earnings growth, the hybrid notes issued in March, currency translation and lower actuarial losses from the measurement of pension provisions. The amounts recognized in other comprehensive income from measurement of to Volkswagen AG derivatives and shareholders reduced the Automotive Division’s equity. The noncontrolling interests are mainly attributable to RENK AG and AUDI AG. These were lower overall than the noncontrolling interests attributable to the Financial Services Division, so the figure for the Automotive Division, where the deduction was recognized, was negative. the dividend payment 16,904 At €19.5 billion, the Financial Services Division’s equity at the end of the reporting period exceeded the figure at December 31, 2014 by 12.2%. In addition to earnings growth and currency translation, equity was pushed up by the capital increase carried out by Volkswagen AG at the beginning of the year in order to finance the growth in business and meet regulatory capital requirements. The equity ratio was 11.9% (11.3%). Noncurrent liabilities increased by 6.8% and current liabilities by 4.9% compared with December 31, 2014. These increases are attributable respectively to the funding of the growth in volumes and exchange rate effects. At €24.8 billion, deposits from direct banking business were down slightly on December 31, 2014 (€25.3 billion). R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S Noncurrent liabilities increased by 4.8% compared with December 31, 2014; the other financial liabilities contained within this item rose due to exchange rate factors and negative effects from the measurement of derivatives. Pension provisions decreased due to the change in the discount rate. Current liabilities rose by 9.9%. Other liabilities were higher than at year-end 2014 as a result of exchange rates, the measurement of derivatives and growth in business. The figures for the Automotive Division also contain the We have adjusted our expected deliveries to customers due to the weaker global economic growth and the tense situation in the Chinese, Brazilian and Russian vehicle markets. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2015 in the “Report on Expected Developments” and “Report on Risks and Opportunities” chapters of the 2014 Annual Report. 18 I N T E R I M M A N A G E M E N T R E P O R T Outlook Outlook The robust growth in the global economy lost momentum slightly in the first half of 2015. While the economic upturn held steady in many industrialized nations, some emerging economies continued to record below-average growth. The Volkswagen Group’s Board of Management expects the global economy to record the same level of growth in 2015 as in the previous year, despite some uncertainties. The financial markets still entail risks resulting above all from the strained debt situation of many countries. In addition, growth pros- pects are being hurt by geopolitical tensions and conflicts. The emerging economies in Asia will probably record the highest growth rates. While we expect to see an economic upturn in the major industrialized nations, the rates of expansion will remain moderate. The Volkswagen Group is optimally positioned to deal with the mixed developments in the global automotive markets. The Com- pany’s strengths include in particular its unique brand portfolio, its diverse range of models, its steadily growing presence in all major world markets and its wide selection of financial services. We offer an extensive array of attractive, environmentally friendly, cutting- edge, high-quality vehicles for all markets and customer groups. This ranges from motorcycles through compact, sports and luxury cars to heavy trucks and buses, and covers almost all segments. The Volkswagen Group’s brands will press ahead with their product initiative in 2015, modernizing and expanding their offering by introducing new models. Our goal is to offer all customers the products and innovations they need, sustainably strengthening our competitive position in the process. In the period from January to June 2015, global new passenger car registrations were up year-on-year, although demand varied from region to region. We also expect trends in the passenger car markets in the individual regions to be mixed for the full year. Overall, growth in global demand for new vehicles will probably be slower than in the previous year. We anticipate a slight increase in demand for automobiles in Western Europe and expect to see slight growth in the German market as well. The Central and Eastern European markets are likely to be down sharply year-on-year due primarily to the substantial fall in demand in Russia. In North America, we expect last year’s positive trend to continue at a notice- ably weaker pace. We assume that the South American passenger car markets will fall appreciably short of the prior-year level. The markets in the Asia-Pacific region that are strategically important for the Volkswagen Group will probably continue to grow at a slower pace. We expect the Volkswagen Group’s deliveries to customers in 2015 to remain on a level with the previous year in a persistently challenging market environment. The difficult market environment, fierce competition, interest rate and exchange rate volatility, and fluctuations in raw materials prices all pose challenges. We anticipate a positive effect from the efficiency programs implemented by all brands and, increasingly, from the modular toolkits. Depending on the economic conditions, we expect 2015 sales revenue for the Volkswagen Group and its business areas to increase by up to 4% above the prior-year figure. However, economic trends in Latin America and Eastern Europe will need to be continuously monitored in the Commercial Vehicles/Power Engineering Busi- ness Area. Global demand for light commercial vehicles will probably see a moderate increase in 2015. We expect trends to vary from region to region. In the markets for trucks and buses that are relevant for the Volkswagen Group, new registrations in 2015 will probably be noticeably lower than in the previous year. We expect automotive financial services to continue to grow in importance worldwide in 2015. In terms of the Group’s operating profit, we anticipate an operating return on sales of between 5.5% and 6.5% in 2015 in light of the challenging economic environment. The operating return on sales is expected to be in the 6.0% to 7.0% range in the Passenger Cars Business Area and between 2.0% and 4.0% in the Commercial Vehicles/Power Engineering Business Area. For the Financial Services Division, we are forecasting an operating profit at the prior-year level. Disciplined cost and investment manage- ment and the continuous optimization of our processes remain integral elements of the Volkswagen Group’s Strategy 2018. This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the develop- ment of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales markets, or any significant shifts in exchange rates relevant to the Volkswagen Group, will have a corresponding effect on the development of our business. In addition, expected business development may vary if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities presented in the 2014 Annual Report develop in a way other than we are currently expecting, or additional risks and opportunities or other factors emerge that affect the development of our business. 19 B R A N D S A N D B U S I N E S S F I E L D S Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D The Volkswagen Group generated sales revenue of €108.8 billion in the first half of 2015, up 10.1% on the prior-year figure of €98.8 bil- lion. Operating profit rose by 10.3% to €6.8 billion. Excluding the special items of €–170 million for restructuring measures, operating profit amounted to €7.0 billion (€6.2 billion). Sales by the Volkswagen Passenger Cars brand amounted to 2.3 million vehicles (2.3 million) in the reporting period. The Sportsvan, Golf and new Passat models proved particularly popular. Sales revenue rose by 8.8% year-on-year to €53.6 billion. Operating profit rose to €1.4 billion (€1.0 billion) due to sales revenue and cost optimization in addition to positive exchange rate effects. Although the markets in South America and Russia were negative factors, there were positive effects from the efficiency program. The Audi brand sold 784 thousand vehicles worldwide between January and June 2015, 4.5% more than in the previous year. A further 240 thousand (248 thousand) Audi vehicles were sold by the FAW-Volkswagen Chinese joint venture. The compact models in the A3 family, the SUV models and the new TT were particularly popular with customers. Sales revenue increased by €3.1 billion year-on- year to €29.8 billion. Operating profit improved by 9.1% to €2.9 billion due to the growth in unit sales and positive exchange rate effects. By contrast, high upfront investments in new products and technologies, as well as the expansion of the international production network, weighed on earnings. The financial key performance indicators for the Audi brand also include the Lamborghini and Ducati brands. A total of 35,248 Ducati motor- cycles were sold in the first six months of 2015 (+18.1%). The ŠKODA brand’s unit sales remained level with the prior- year figure in the first half of 2015, at 421 thousand (426 thousand) vehicles. There was increasing demand for the Octavia and the new Fabia. Sales revenue rose by 7.5% to €6.4 billion. Operating profit increased by 22.8% to €522 million, primarily due to improve- ments in mix and exchange rates, as well as lower material costs. The SEAT brand’s positive growth trend continued in the first half of 2015, with sales of 286 thousand vehicles, up 10.5% year- on-year. This figure includes the Q3 manufactured for Audi. There was strong customer demand for the models in the Leon family and for the Ibiza. Sales revenue rose by 13.2% to €4.5 billion. SEAT generated an operating profit of €52 million, an improvement of €89 million on the prior-year figure. This was primarily due to increased volumes, positive exchange rate effects and cost optimization. The Bentley brand’s unit sales declined by 10.9% to 5,016 vehicles in the reporting period; by contrast, sales revenue rose by 5.9% year-on-year to €939 million due to exchange rate factors. Positive exchange rate effects and lower costs were insufficient to offset the reduced volumes and higher upfront investments in new products; as a result, operating profit decreased to €54 million (€95 million). V O L K S WA G E N G R O U P Division Automotive Financial Services Brand/ Business Field Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Volkswagen Commercial Vehicles Scania MAN Other Dealer and customer financing Leasing Direct bank Insurance Fleet business Mobility offerings 20 B R A N D S A N D B U S I N E S S F I E L D S The Porsche brand sold 109 thousand vehicles worldwide between January and June 2015, an increase of 23.1% year-on-year. Sales revenue amounted to €10.8 billion, up 32.9% on the figure for the first half of 2014. Operating profit improved to €1.7 billion (€1.4 billion), with positive volume and exchange rate effects more than offsetting the negative impact of changes to the mix, increased structural costs and higher development costs for future projects and technologies. The Macan and the new 911 derivatives were particularly popular with customers. Volkswagen Commercial Vehicles sold 231 thousand (221 thou- sand) vehicles in the reporting period. There was strong customer demand for the Multivan/Transporter and the Caddy. At €5.2 billion (€4.7 billion), sales revenue was up 10.6% year-on-year. However, higher volumes and more advantageous exchange rates were unable to offset the year-on-year increase in costs incurred for the renewal of the product range; as a result, operating profit declined by 4.1% to €268 million. The Scania brand sold 38 thousand (38 thousand) vehicles in the first half of 2015. While volumes in Western Europe saw positive growth, the difficult conditions in Brazil and Russia had a negative impact. At €5.2 billion (€5.1 billion), sales revenue was up slightly year-on-year. Operating profit improved to €503 million (€476 mil- lion). In particular, exchange rate trends were positive and there was healthy growth in the service business. Unit sales by the MAN brand were down 13.5% in the first six months of 2015 to 50 thousand vehicles. At €6.7 billion (€6.7 bil- lion), sales revenue remained at the prior-year level. Operating profit before special items was weighed down by the negative trend in the commercial vehicles business in South America, and amounted to €185 million (€222 million). Restructuring measures resulted in special items of €–170 million. Volkswagen Financial Services generated an operating profit of €970 million in the first half of 2015, up 25.1% year-on-year on the back of positive volume and exchange rate effects. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A RY 1 TO J U N E 3 0 1 S A L E S T O T H I R D V E H I C L E S A L E S S A L E S R E V E N U E P A R T I E S O P E R A T I N G R E S U L T thousand units/€ million 2015 2014 2015 2014 2015 2014 2015 2014 Volkswagen Passenger Cars 2,251 2,302 53,578 49,259 36,426 34,263 1,428 1,012 Audi 784 750 29,784 26,690 19,775 17,668 2,914 2,671 ŠKODA 421 426 6,421 5,974 3,227 2,950 522 425 SEAT 286 258 4,469 3,948 1,873 1,700 52 – 37 Bentley 5 6 939 887 621 561 54 95 Porsche2 109 89 10,850 8,162 9,912 7,541 1,698 1,398 Volkswagen Commercial Vehicles 231 221 5,223 4,724 2,487 2,340 268 280 Scania2 38 38 5,182 5,067 5,182 5,067 503 476 MAN 50 58 6,719 6,699 6,593 6,626 185 222 VW China3 1,743 1,847 – – – – – – Other – 827 – 788 – 27,407 – 23,026 10,816 10,585 – 1,6054 – 1,1324 Volkswagen Financial Services – – 13,018 10,423 11,862 9,508 970 776 Volkswagen Group before special items – – – – – – 6,990 6,186 Special items – – – – – – – 170 – Volkswagen Group 5,090 5,207 108,776 98,808 108,776 98,808 6,820 6,186 Automotive Division5 5,090 5,207 94,093 87,044 95,412 88,086 5,700 5,262 of which: Passenger Cars Business Area 4,772 4,890 77,129 70,711 81,449 74,333 5,346 4,748 Commercial Vehicles/Power Engineering Business Area 318 317 16,964 16,333 13,963 13,754 354 514 Financial Services Division – – 14,683 11,764 13,364 10,722 1,120 924 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 Including financial services. 3 The sales revenue and operating profit of the joint venture companies in China are not included in the figures for the Group. The Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €2,744 million (€2,622 million). 4 Mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation for Scania, Porsche Holding Salzburg, MAN and Porsche. 5 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 21 B R A N D S A N D B U S I N E S S F I E L D S U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T The Volkswagen Group sold 2.3 million vehicles in the Europe/ Other markets region in the first half of the year, up 1.9% on the prior-year period. Sales revenue rose by 9.2% to €67.6 billion on the back of volume, mix and exchange rate effects. A total of 457 thousand vehicles were sold in the North Ameri- can market in the reporting period, an increase of 8.2% year-on- year. Sales revenue rose by 34.9% to €17.4 billion, primarily due to the increase in volumes, the strong US dollar and positive mix effects. vehicles in these markets, 23.3% fewer than in the prior-year period. The decline in volumes and the negative exchange rate trend caused sales revenue to decrease by 17.6% to €5.4 billion. The Volkswagen Group’s unit sales in the Asia-Pacific region were down year-on-year between January and June 2015 in light of the sharp decline in momentum in the Chinese passenger cars market. Including the Chinese joint ventures, 2.0 million vehicles were sold, 5.0% fewer than in the prior-year period. At €18.4 billion, sales revenue exceeded the prior-year figure by 5.2% due to exchange rate effects. This figure does not include our Chinese joint ventures, which are accounted for using the equity method. Conditions in South America increasingly deteriorated in the first six months of 2015; the Volkswagen Group sold 283 thousand K E Y F I G U R E S B Y M A R K E T F R O M J A N U A RY 1 T O J U N E 3 0 1 V E H I C L E S A L E S S A L E S R E V E N U E thousand units/€ million 2015 2014 2015 Europe/Other markets 2,321 2,279 67,568 North America 457 422 17,414 South America 283 368 5,365 Asia-Pacific2 2,030 2,138 18,429 Volkswagen Group2 5,090 5,207 108,776 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 22 2014 61,868 12,905 6,510 17,525 98,808 B R A N D S A N D B U S I N E S S F I E L D S V O L K SWA G E N F I N A N C I A L S E R V I C E S Volkswagen Financial Services supported the Volkswagen Group brands’ unit sales in the first half of 2015 with its innovative products and services along the entire automotive value chain. In Puerto Rico, Volkswagen Credit, Inc. entered into a partner- ship with Reliable Financial Services, the largest local automotive financing company. This enables Volkswagen Passenger Cars and Audi dealers to offer attractive financing opportunities to customers in Puerto Rico buying new vehicles. In Germany, Volkswagen Bank GmbH was named best auto- motive bank for the fourth consecutive time by the readers of “Auto Bild” magazine. Over 32,000 people took part in the reader poll, assessing areas including the quality of financial services products. In April 2015, Volkswagen Financial Services AG’s environ- mental management system at its Braunschweig site was certified in accordance with ISO 14001 by certification organization TÜV Nord. The system enables the company to track and system- atically optimize its environmental footprint at all central and decentralized units. In Germany, Volkswagen Financial Services trainees supported the project run by Naturschutzbund Deutschland e.V. (NABU) for the ecological restoration of the Lower Havel river. Old and defective mobile phones were collected and professionally recycled, and the proceeds were donated to the project. The main refinancing sources for Volkswagen Financial Ser- vices are unsecured bonds placed on the capital markets, auto asset-backed securities (ABS) transactions and deposits from the direct banking business. Securitized financing agreements with a volume of approximately €481 million were placed on the French market for the second time as part of the Driver France Two transaction, marking the successful continuation of the ABS program in the reporting period. In April 2015, Volkswagen Leasing GmbH securitized leasing contracts with a volume of approximately €1.03 billion as part of its 21st ABS transaction – VCL 21, which was awarded the “Certified by TSI - deutscher Verbriefungsstandard” seal of quality by True Sale International (TSI) GmbH. TSI certification is awarded to transactions that are clearly defined and meet strict transparency, disclosure, lending and loan processing standards. Volkswagen Financial Services AG implemented further inter- national capital market transactions for funding purposes. A dual- tranche euro-denominated benchmark note with a total volume of €1.25 billion was placed in April, and local activities in Brazil and South Korea were supported by bonds of approximately €130 mil- lion and €140 million that saw a high level of oversubscription. The number of new financing, leasing, service and insurance contracts signed between January and June 2015 rose by 6.4% year-on-year to 2.5 million. At 12.6 million, the total number of contracts at the end of the first half of 2015 was up 1.7% on the figure as of December 31, 2014. The number of contracts in the Customer Financing/Leasing area amounted to 8.0 million contracts, up 2.1% on the year-end figure 2014. In the Service/ Insurance area, the number of contracts rose slightly to 4.6 million (+1.0%) in the reporting period. The ratio of leased or financed vehicles to Group deliveries (penetration rate) declined to 29.5% (29.7%) in Volkswagen Financial Services’ markets in the first half of 2015, with credit quality requirements remaining unchanged. Volkswagen Bank’s direct banking business had approximately 1.4 million (1.4 million) accounts as of June 30, 2015. Volkswagen Financial Services employed a total of 13,174 people at the end of the first half of 2015, up 2.8% compared with the figure for the end of 2014. 23 24 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Income Statement Interim Consolidated Financial Statements (Condensed) I NCOME STATEMENT FOR TH E PERIOD JAN UARY 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2015 2014 2015 2014 Sales revenue 108,776 98,808 94,093 87,044 Cost of sales – 87,078 – 80,075 – 75,427 – 71,018 Gross profit 21,698 18,733 18,666 16,027 Distribution expenses – 10, 431 – 10,138 – 9,819 – 9,563 Administrative expenses – 3,626 – 3,427 – 2,818 – 2,723 Other operating income/expense – 821 1,019 – 330 1,521 Operating profit 6,820 6,186 5,700 5,262 Share of profits and losses of equity-accounted investments 2,241 2,143 2,222 2,127 Other financial result – 1,397 – 552 – 1,437 – 608 Financial result 843 1,591 785 1,520 Profit before tax 7,664 7,777 6,485 6,782 Income tax expense – 2,000 – 2,061 – 1,603 – 1,808 Profit after tax 5,663 5,716 4,882 4,974 of which attributable to Noncontrolling interests 7 75 – 5 51 Volkswagen AG hybrid capital investors 99 60 99 60 Volkswagen AG shareholders 5,558 5,581 4,789 4,863 Basic earnings per ordinary share (€)² 11.06 11.32 Diluted earnings per ordinary share (€)² 11.06 11.32 Basic earnings per preferred share (€)² 11.12 11.38 Diluted earnings per preferred share (€)² 11.12 11.38 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in note 4. Prior-year figures adjusted to reflect application of IAS 33.26. 25 F I N A N C I A L S E R V I C E S 2015 14,683 – 11,651 3,032 – 613 – 808 – 491 1,120 19 39 58 1,179 – 397 781 12 – 770 2014 11,764 – 9,058 2,706 – 575 – 705 – 502 924 16 56 71 995 – 253 742 24 – 718 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Comprehensive Income STATE MENT OF COMPREH ENSIVE I NCOME FOR TH E PERIOD JAN UARY 1 TO J U N E 30 € million Profit after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 26 2015 5,663 1,773 – 523 1,250 – 3 1,248 1,829 0 1,829 0 1,829 – 7,589 2,243 – 5,346 1,576 – 3,770 588 – 182 406 50 456 473 – 1,011 – 867 1,104 237 5,900 8 99 5,794 2014 5,716 – 2,657 779 – 1,878 – 3 – 1,881 150 0 150 0 150 – 1,218 – 133 – 1,351 403 – 947 431 22 453 – 29 424 – 103 – 476 – 3,511 1,154 – 2,357 3,359 13 60 3,286 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Income Statement I NCOME STATEMENT FOR TH E PERIOD APRI L 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2015 2014 2015 2014 Sales revenue 56,041 50,977 48,287 44,990 Cost of sales – 44,652 – 41,207 – 38,454 – 36,586 Gross profit 11,389 9,771 9,832 8,405 Distribution expenses – 5,455 – 5,374 – 5,144 – 5,078 Administrative expenses – 1,811 – 1,774 – 1,399 – 1,429 Other operating income/expense – 631 708 – 446 939 Operating profit 3,492 3,330 2,844 2,837 Share of profits and losses of equity-accounted investments 1,095 1,150 1,086 1,143 Other financial result – 891 – 60 – 917 – 89 Financial result 204 1,089 170 1,055 Profit before tax 3,696 4,420 3,014 3,892 Income tax expense – 965 – 1,171 – 687 – 1,043 Profit after tax 2,731 3,249 2,328 2,849 of which attributable to Noncontrolling interests 5 24 – 1 15 Volkswagen AG hybrid capital investors 56 38 56 38 Volkswagen AG shareholders 2,671 3,186 2,273 2,796 Basic earnings per ordinary share (€)² 5.33 6.46 Diluted earnings per ordinary share (€)² 5.33 6.46 Basic earnings per preferred share (€)² 5.33 6.46 Diluted earnings per preferred share (€)² 5.33 6.46 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in note 4. Prior-year figures adjusted to reflect application of IAS 33.26. 27 F I N A N C I A L S E R V I C E S 2015 7,754 – 6,198 1,557 – 311 – 412 – 186 648 8 26 34 682 – 278 404 6 – 398 2014 5,987 – 4,621 1,366 – 296 – 346 – 231 493 6 29 35 528 – 128 400 9 – 391 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Comprehensive Income STATE MENT OF COMPREH ENSIVE I NCOME FOR TH E PERIOD APRI L 1 TO J U N E 30 € million Profit after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 28 2015 2,731 7,281 – 2,159 5,123 0 5,123 – 697 0 – 697 0 – 697 1,854 1,100 2,955 – 845 2,110 168 – 142 26 61 87 – 158 1,342 9,406 – 2,942 6,464 9,196 6 56 9,134 2014 3,249 – 1,322 384 – 938 0 – 938 276 0 276 0 276 – 1,108 – 53 – 1,161 348 – 814 521 – 36 484 – 9 475 12 – 50 – 1,711 723 – 988 2,261 – 6 38 2,228 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Balance Sheet BALANCE SH EET AS OF J U N E 30, 2015 AN D DECEMBER 31, 2014 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E * € million 2015 2014 2015 2014 Assets Noncurrent assets 230,444 220,106 131,429 128,231 Intangible assets 60,363 59,935 60,126 59,697 Property, plant and equipment 47,462 46,169 45,239 44,080 Lease assets 30,743 27,585 2,958 2,815 Financial services receivables 61,822 57,877 – – Investments, equity-accounted investments and other equity investments, other receivables and financial assets 30,054 28,541 23,106 21,639 Current assets 143,575 131,102 78,808 69,180 Inventories 35,262 31,466 32,210 28,269 Financial services receivables 46,861 44,398 – 538 – 464 Other receivables and financial assets 28,760 25,254 19,466 15,677 Marketable securities 15,095 10,861 12,191 9,197 Cash, cash equivalents and time deposits 17,598 19,123 15,479 16,499 Total assets 374,019 351,209 210,237 197,411 Equity and Liabilities Equity 96,162 90,189 76,661 72,815 Equity attributable to Volkswagen AG shareholders 88,442 84,950 69,192 67,828 Equity attributable to Volkswagen AG hybrid capital investors 7,513 5,041 7,513 5,041 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 95,955 89,991 76,705 72,870 Noncontrolling interests 207 198 – 44 – 55 Noncurrent liabilities 137,833 130,314 69,639 66,438 Financial liabilities 71,889 68,416 10,343 10,643 Provisions for pensions 28,221 29,806 27,798 29,361 Other liabilities 37,723 32,092 31,497 26,434 Current liabilities 140,024 130,706 63,937 58,158 Put options and compensation rights granted to noncontrolling interest shareholders 3,632 3,703 3,632 3,703 Financial liabilities 67,489 65,564 – 2,269 – 847 Trade payables 20,511 19,530 18,338 17,838 Other liabilities 48,392 41,909 44,237 37,465 Total equity and liabilities 374,019 351,209 210,237 197,411 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. 29 F I N A N C I A L S E R V I C E S 2015 2014 99,015 91,875 236 237 2,223 2,089 27,785 24,770 61,822 57,877 6,948 6,902 64,767 61,923 3,052 3,197 47,399 44,862 9,294 9,577 2,904 1,664 2,119 2,624 163,782 153,798 19,501 17,374 19,250 17,122 – – 19,250 17,122 251 253 68,195 63,876 61,546 57,773 423 445 6,226 5,658 76,086 72,547 – – 69,758 66,411 2,173 1,692 4,155 4,444 163,782 153,798 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Changes in Equity STATE MENT OF C HANGE S I N EQU ITY € million Subscribed capital Capital reserves Retained earnings Balance at Jan. 1, 2014 1,191 12,658 72,341 Profit after tax – – 5,581 Other comprehensive income, net of tax – – – 1,870 Total comprehensive income – – 3,711 Capital increase¹ 27 1,959 – Dividend payment – – – 1,871 Capital transactions involving a change in ownership interest² – – – 4,484 Other changes – – – 109 Balance at June 30, 2014 1,218 14,616 69,587 Balance at Jan. 1, 2015 1,218 14,616 71,197 Profit after tax – – 5,558 Other comprehensive income, net of tax – – 1,250 Total comprehensive income – – 6,809 Capital increase¹ 0 0 – Dividend payment – – – 2,294 Capital transactions involving a change in ownership interest – – 0 Other changes – – – 7 Balance at June 30, 2015 1,218 14,616 75,704 1 Volkswagen AG recorded an inflow of cash funds amounting to €3,000 million, less a discount of €29 million and transaction costs of €19 million, from the hybrid capital issued in March 2014. Additionally, there were noncash effects from the deferral of taxes amounting to €13 million. The hybrid capital is required to be classified as equity instruments granted. Volkswagen AG recorded an inflow of cash funds amounting to €2,000 million, less transaction costs (€20 million), from the capital increase implemented in June 2014 by issuing new preferred shares. Additionally, there are noncash effects from the deferral of taxes amounting to €6 million. Volkswagen AG recorded an inflow of cash funds amounting to €2,500 million, less a discount of €29 million and transaction costs of €14 million, from the hybrid capital issued in March 2015. Additionally, there were noncash effects from the deferral of taxes amounting to €11 million. The hybrid capital is required to be classified as equity instruments granted. 2 The capital transactions involving a change in ownership interest in 2014 are attributable to the derecognition of the noncontrolling interests in the equity of Scania AB. 30 O T H E R R E S E R V E S Currency translation reserve – 2,799 – 204 204 – – – 45 0 – 2,641 – 1,777 – 1,828 1,828 – – – – 51 Cash flow hedges 1,845 – – 947 – 947 – – 2 0 900 – 1,715 – – 3,769 – 3,769 – – – – – 5,485 Available-for-sale financial assets 724 – 424 424 – – – – 1,147 1,263 – 456 456 – – – – 1,719 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Changes in Equity Equity-accounted investments Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors – 229 2,004 87,733 – 60 5,641 – 106 – – 2,295 – 106 60 3,346 – 2,965 4,951 – – – 1,871 0 – – 4,527 – – – 109 – 334 5,028 89,524 148 5,041 89,991 – 99 5,657 470 – 235 470 99 5,892 – 2,469 2,469 – – 128 – 2,422 – – 0 – 32 25 618 7,513 95,955 31 Noncontrolling interests 2,304 75 – 62 13 – – 4 – 2,123 0 190 198 7 1 8 – – 6 0 7 207 Total equity 90,037 5,716 – 2,357 3,359 4,951 – 1,875 – 6,650 – 109 89,714 90,189 5,663 237 5,900 2,469 – 2,429 0 32 96,162 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Cash Flow Statement CASH FLOW STATE MENT F OR TH E PERIOD JAN UARY 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2015 2014 2015 2014 Cash and cash equivalents at beginning of period 18,634 22,009 16,010 19,285 Profit before tax 7,664 7,777 6,485 6,782 Income taxes paid – 1,924 – 2,531 – 1,841 – 2,227 Depreciation and amortization expense² 8,947 7,822 6,159 5,690 Change in pension provisions 209 116 200 110 Other noncash income/expense and reclassifications³ 3,334 309 3,002 301 Gross cash flow 18,230 13,493 14,005 10,657 Change in working capital – 10,464 – 10,147 – 2,452 – 2,269 Change in inventories – 2,797 – 2,689 – 2,967 – 2,706 Change in receivables – 3,505 – 3,829 – 3,545 – 3,181 Change in liabilities 3,376 4,275 2,964 3,568 Change in other provisions 1,425 677 1,412 591 Change in lease assets (excluding depreciation) – 4,845 – 4,143 – 391 – 467 Change in financial services receivables – 4,118 – 4,439 74 – 74 Cash flows from operating activities 7,766 3,347 11,553 8,388 Cash flows from investing activities attributable to operating activities – 6,993 – 6,236 – 6,761 – 5,469 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property – 4,823 – 3,779 – 4,652 – 3,578 capitalized development costs – 2,170 – 2,396 – 2,170 – 2,396 acquisition and disposal of equity investments – 166 – 195 – 89 380 Net cash flow⁴ 773 – 2,889 4,791 2,919 Change in investments in securities and loans – 3,944 – 1,235 – 3,121 – 815 Cash flows from investing activities – 10,937 – 7,471 – 9,882 – 6,284 Cash flows from financing activities 999 306 – 3,283 – 5,567 Effect of exchange rate changes on cash and cash equivalents 444 21 401 – 30 Net change in cash and cash equivalents – 1,728 – 3,797 – 1,212 – 3,493 Cash and cash equivalents at June 30 16,906 18,213 14,798 15,792 Securities, loans and time deposits 23,166 18,105 14,765 10,187 Gross liquidity 40,072 36,318 29,563 25,980 Total third-party borrowings – 139,378 – 126,332 – 8,074 – 12,001 Net liquidity at June 30 – 99,306 – 90,014 21,489 13,979 For information purposes: at Jan. 1 – 96,453 – 82,318 17,639 16,869 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments, application of the equity method and reclassification of gains/losses on disposal of noncurrent assets to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities. Explanatory notes on the cash flow statement are presented in note 12. 32 F I N A N C I A L S E R V I C E S 2015 2014 2,624 2,724 1,179 995 – 83 – 304 2,788 2,132 9 5 332 8 4,225 2,837 – 8,012 – 7,878 170 17 40 – 648 412 707 12 86 – 4,454 – 3,676 – 4,192 – 4,365 – 3,787 – 5,041 – 231 – 767 – 171 – 201 – – – 77 – 576 – 4,018 – 5,808 – 823 – 420 – 1,055 – 1,187 4,282 5,873 43 51 – 516 – 304 2,108 2,421 8,401 7,918 10,509 10,338 – 131,304 – 114,331 – 120,796 – 103,993 – 114,092 – 99,186 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements Notes to the Interim Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2014 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2015 were therefore also prepared in accordance with IAS 34 and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 37w(5) of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2015. A number of amendments to International Financial Reporting Standards resulting from the Annual Improvements Project 2013 became effective on January 1, 2015. These relate to changes to IFRS 1, IFRS 3, IFRS 13 and IAS 40, and do not materially affect the Volkswagen Group’s net assets, financial position and results of operations. IFRIC 21 has also been required to be applied since January 1, 2015. IFRIC 21 governs the accounting for levies that do not fall within the scope of IAS 12 “Income Taxes”. In particular, it provides guidance on when a liability has to be recognized for payment of a levy. This Interpretation also does not materially affect the Volkswagen Group’s net assets, financial position and results of operations. A discount rate of 2.6% (December 31, 2014: 2.3%) was applied to German pension provisions in the accompanying interim consolidated financial statements. The increase in the discount rate decreased pension provisions and deferred taxes attributable to pension provisions and also decreased the actuarial losses for pension provisions that are recognized in retained earnings. The income tax expense for the interim reporting period was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34, Interim Financial Reporting. In other respects, the same accounting policies and consolidation methods that were used for the 2014 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the notes to the consolidated financial statements in the 2014 Annual Report. This can also be accessed on the Internet at www.volkswagenag.com/ir. 33 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. I N T E R E ST S I N J O I N T V E N T U R E S Through its 50% interest in the joint venture Global Mobility Holding B.V., Amsterdam, the Netherlands, the Volkswagen Group holds a 50% indirect stake in the joint venture’s subsidiary, LeasePlan Corporation N.V., Amsterdam, the Netherlands. Volkswagen agreed with Fleet Investments B.V., Amsterdam, the Netherlands, an investment company belonging to the von Metzler family, that Fleet Investments would become the new co-investor in Global Mobility Holding in 2010. The previous co-investors were instructed by Volkswagen AG to transfer their shares to Fleet Investments B.V. on February 1, 2010 for the purchase price of €1.4 billion. Volkswagen AG has granted the new co-investor a put option on its shares. If this option is exercised, Volkswagen must pay the original purchase price, less purchase price reductions, plus accumulated pro rata preferred dividends. Additionally, Volkswagen AG has a preemptive right of purchase at any applicable higher fair value. The put option is accounted for at fair value. In addition, Volkswagen has pledged claims under certificates of deposit with Bankhaus Metzler in the amount of €1.3 billion to secure a loan granted to Fleet Investments B.V. by Bankhaus Metzler. This pledge does not increase the Volkswagen Group’s risk arising from the above-mentioned short position. In fiscal year 2013, the put option and the certificates of deposit were prolonged by two years until January 2016. 34 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements DISC LOSU RE S ON TH E CONSOLI DATED FI NANC IA L STATEMENTS 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 € million 2015 Vehicles 71,823 Genuine parts 7,237 Used vehicles and third-party products 5,509 Engines, powertrains and parts deliveries 4,672 Power Engineering 1,812 Motorcycles 361 Leasing business 10,170 Interest and similar income 3,409 Other sales revenue 3,783 108,776 2. Cost of sales Cost of sales includes interest expenses of €972 million (previous year: €936 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on intangible assets, items of property, plant and equipment, and lease assets. The impairment losses identified on the basis of updated impairment tests amount to a total of €260 million (previous year: €101 million). 3. Research and development costs in the Automotive Division H 1 € million 2015 2014 Total research and development costs 6,648 6,478 of which: capitalized development costs 2,170 2,396 Capitalization ratio in % 32.6 37.0 Amortization of capitalized development costs 1,521 1,391 Research and development costs recognized in the income statement 5,999 5,474 35 2014 66,543 6,650 4,963 4,697 1,633 308 7,575 3,097 3,343 98,808 % 2.6 – 9.4 9.3 9.6 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 4. Earnings per share Basic earnings per share are calculated by dividing profit attributable to shareholders of Volkswagen AG by the weighted average number of ordinary and preferred shares outstanding during the reporting period. In 2012 and 2013, Volkswagen AG placed two mandatory convertible notes with identical features and an aggregate principal amount of €3.7 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam (issuer). Both mandatory convertible notes mature on November 9, 2015. The current minimum conversion price is €144.50, and the corresponding maximum conversion price is €173.40. The conversion price will be adjusted if certain events occur. The convertible notes will be settled by issuing new preferred shares no later than at maturity. The issuer is entitled to convert the mandatory convertible notes at any time at the minimum conversion price. The note terms and conditions also provide for early conversion options. This voluntary conversion right was exercised in the reporting period, with a total of €100 thousand of the notes being converted into 564 newly created preferred shares at the effective maximum conversion price at the conversion date. IAS 33.23 sets out that all potential shares that will be issued upon the conversion of a mandatory convertible note must be accounted for as issued shares and included in the calculation of basic and diluted earnings per share. The number of outstanding preferred shares is therefore increased by the potential preferred shares that would be issued if the mandatory convertible notes issued were actually to be converted. The average number of preferred shares not yet converted that have to be included is calculated based on the maximum conversion ratio resulting from the current minimum conversion price of €144.50. The terms and conditions require the minimum conversion price to be adjusted following the distribution of dividends. The number of potential preferred shares was calculated retrospectively at the new minimum conversion price in accordance with IAS 33.26, including for the previous year. The finance costs associated with the mandatory convertible notes are not included in the calculation of consolidated profit because the interest component was recognized in other comprehensive income when the note was issued, and interest expense arises only from the amount of compound interest. Since the number of basic and diluted shares is identical, basic earnings per share also correspond to diluted earnings per share. In total, the existing mandatory convertible notes still entitle the holders to subscribe for a maximum of 25,570,242 no-par value preferred shares of Volkswagen AG, based on the current maximum conversion ratio. Q 2 H 1 2015 2014* 2015 Weighted average number of shares outstanding Ordinary shares: basic million 295.1 295.1 295.1 diluted million 295.1 295.1 295.1 Preferred shares: basic million 206.2 198.0 206.2 diluted million 206.2 198.0 206.2 Profit after tax € million 2,731 3,249 5,663 Noncontrolling interests € million 5 24 7 Profit attributable to Volkswagen AG hybrid capital investors € million 56 38 99 Profit attributable to Volkswagen AG shareholders € million 2,671 3,186 5,558 Earnings per share Ordinary shares: basic € 5.33 6.46 11.06 diluted € 5.33 6.46 11.06 Preferred shares: basic € 5.33 6.46 11.12 diluted € 5.33 6.46 11.12 Prior-year figures adjusted to reflect application of IAS 33.26. 36 2014* 295.1 295.1 196.8 196.8 5,716 75 60 5,581 11.32 11.32 11.38 11.38 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A RY 1 A N D J U N E 3 0 , 2 0 1 5 € million Carrying amount at Jan. 1, 2015 Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2015 Intangible assets 59,935 2,324 – 137 2,032 60,363 Property, plant and equipment 46,169 4,677 – 522 3,906 47,462 Lease assets 27,585 8,389 2,221 3,009 30,743 6. Inventories € million June 30, 2015 Dec. 31, 2014 Raw materials, consumables and supplies 4,209 3,941 Work in progress 3,686 3,552 Finished goods and purchased merchandise 22,991 20,156 Current lease assets 4,233 3,679 Prepayments 143 139 35,262 31,466 There was no requirement to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2015 Dec. 31, 2014 Trade receivables 12,628 11,472 Miscellaneous other receivables and financial assets 16,132 13,782 28,760 25,254 In the period January 1 to June 30, 2015, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €386 million (previous year: €250 million). 37 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 8. Equity Following the approval by the Annual General Meeting of MAN SE of the conclusion of the control and profit and loss transfer agreement between MAN SE and Truck & Bus GmbH on June 6, 2013, Volkswagen is obliged to pay a cash settlement to the remaining noncontrolling interest shareholders of MAN SE. For this reason, the noncontrolling interests in the equity of MAN SE and the interest in Scania AB attributable to those noncontrolling interest shareholders were derecognized from Group equity as of this date. At the same time, a liability was recognized in accordance with the cash settlement offer for the obligation to acquire the shares. MAN SE’s profit or loss is attributed in full to the shareholders of Volkswagen AG. As of June 30, 2015, a total of 360,020 ordinary shares and 117,656 preferred shares had been tendered. On March 14, 2014, Volkswagen AG published an offer to the shareholders of Scania Aktiebolag, Södertälje, (“Scania”) to acquire all Scania shares. The offer was completed on May 13, 2014 and Volkswagen initiated a squeeze-out for the Scania shares that were not tendered in the course of the offer. Scania shares were delisted from the NASDAQ OMX Stockholm at the end of June 5, 2014. The Group’s retained earnings were reduced by the total value of the offer amounting to €6,650 million as a capital transaction with noncontrolling interest shareholders recognized directly in equity. At the same time, the equity interest in Scania previously attributable to the noncontrolling interest shareholders in Scania amounting to €2,123 million was reclassified from noncontrolling interests to the reserves attributable to the shareholders of Volkswagen AG. The remaining noncontrolling interests are largely attributable to shareholders of RENK AG and AUDI AG. In March 2015, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €2.5 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam (issuer). The perpetual hybrid notes were issued in two tranches and can be called by the issuer. The first call date for the first tranche (€1.1 billion and a coupon of 2.50%) is after seven years, and the first call date for the second tranche (€1.4 billion and a coupon of 3.50%) is after 15 years. Under IAS 32, the hybrid notes must be classified in their entirety as equity. The capital raised was recognized in equity, less a discount and transaction costs and net of deferred taxes. The interest payments payable to the noteholders will be recognized directly in equity, net of income taxes. In the first six months of the fiscal year, Volkswagen AG issued 564 newly created preferred shares (notional value: €1,443.84) resulting from the exercise of mandatory convertible notes. The subscribed capital is composed of 295,089,818 no–par value ordinary shares and 180,642,042 preferred shares, and amounts to €1,218 million (December 31, 2014: €1,218 million). Volkswagen AG paid a dividend of €2,294 million in the reporting period (previous year: €1,871 million). €1,416 mil- lion of this amount (previous year: €1,180 million) was attributable to ordinary shares and €878 million (previous year: €691 million) to preferred shares. 9. Noncurrent financial liabilities € million June 30, 2015 Bonds, commercial paper and notes 58,662 Liabilities to banks 10,923 Deposit business 892 Other financial liabilities 1,412 71,889 38 Dec. 31, 2014 56,639 9,692 980 1,105 68,416 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 10. Current financial liabilities € million June 30, 2015 Bonds, commercial paper and notes 32,935 Liabilities to banks 10,242 Deposit business 23,861 Other financial liabilities 451 67,489 11. Fair value disclosures The principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the 2014 Annual Report. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Assets and liabilities measured at fair value through profit or loss consist of derivatives or components of derivatives that are not included in hedge accounting. These relate primarily to the interest component of currency forwards used to hedge sales revenue, commodity futures and currency forwards relating to commodity futures. Available-for-sale financial assets (marketable securities) are carried at fair value. Changes in fair value are recognized directly in equity, net of deferred taxes. Shares in unconsolidated subsidiaries and other equity investments that are not accounted for using the equity method are also classified as available-for-sale financial assets. They are recognized at cost in the consolidated financial statements if there is no active market for those companies and fair values cannot be reliably ascertained without undue cost or effort. Fair values are recognized if there are indications that fair value is lower than cost. There is currently no intention to sell these financial assets. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The fair value of put options and compensation rights granted to noncontrolling interest shareholders is calculated using a present value model based on the contractually agreed cash settlement, including cash compensation, as well as the minimum statutory interest rate and a risk-adjusted discount rate for a matching maturity. 39 Dec. 31, 2014 29,639 11,109 24,353 463 65,564 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements The following table contains an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT FA I R VA L U E B Y L E V E L € million Dec. 31, 2014 Level 1 Level 2 Noncurrent assets Other equity investments 2,922 2,922 – Other financial assets 2,047 – 2,023 Current assets Other financial assets 1,551 – 1,543 Marketable securities 10,861 10,861 – Noncurrent liabilities Other noncurrent financial liabilities 2,390 – 2,216 Current liabilities Other current financial liabilities 2,991 – 2,916 € million June 30, 2015 Level 1 Level 2 Noncurrent assets Other equity investments 3,500 3,500 – Other financial assets 2,240 – 2,217 Current assets Other financial assets 1,758 – 1,752 Marketable securities 15,095 15,095 – Noncurrent liabilities Other noncurrent financial liabilities 5,822 – 5,643 Current liabilities Other current financial liabilities 5,656 – 5,576 The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Level 3 fair values are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments and residual value protection models are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. 40 Level 3 – 24 9 – 174 75 Level 3 – 23 7 – 179 80 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT FA I R VA L U E B A S E D O N L E V E L 3 Financial assets € million measured at fair value Balance at Jan. 1, 2014 32 Foreign exchange differences 0 Total comprehensive income 30 recognized in profit or loss 25 recognized in other comprehensive income 4 Additions (purchases) – Sales and settlements – 5 Transfers into Level 2 – 6 Balance at June 30, 2014 51 Total gains or losses recognized in profit or loss 25 Net other operating expense/income – of which attributable to assets/liabilities held at the reporting date – Financial result 25 of which attributable to assets/liabilities held at the reporting date 21 Financial assets € million measured at fair value Balance at Jan. 1, 2015 32 Foreign exchange differences – Total comprehensive income 1 recognized in profit or loss 0 recognized in other comprehensive income 1 Additions (purchases) – Sales and settlements – 4 Transfers into Level 2 0 Balance at June 30, 2015 30 Total gains or losses recognized in profit or loss 0 Net other operating expense/income – of which attributable to assets/liabilities held at the reporting date – Financial result 0 of which attributable to assets/liabilities held at the reporting date 0 41 Financial liabilities measured at fair value 218 0 14 14 1 – – 19 – 9 205 – 14 – – – 14 – 9 Financial liabilities measured at fair value 249 0 66 62 4 – – 36 – 20 259 – 62 – – – 62 – 47 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on profit after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2015, profit after tax would have been €13 million higher (lower) and equity would have been €2 million higher (lower). The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on profit after tax. If the assumed enterprise values had been 10% higher, profit after tax would have been €1 million higher. If the assumed enterprise values had been 10% lower, profit after tax would have been €1 million lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market- related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volks- wagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on profit after tax. If the prices for the used cars covered by the residual value protection model had been 10% higher as of June 30, 2015, profit after tax would have been €208 million higher. If the prices for the used cars covered by the residual value protection model had been 10% lower as of June 30, 2015, profit after tax would have been €208 million lower. Reconciliation of balance sheet items to classes of financial instruments The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. In the reconciliation presented in the following tables, equity instruments recognized at their carrying amount are allocated to Level 3 of the fair value hierarchy. 42 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 4 M E A S U R E D N O T W I T H I N A T F A I R V A L U E M E A S U R E D A T A M O R T I Z E D C O S T S C O P E O F I F R S 7 € million Carrying amount Carrying amount Fair value Carrying amount Noncurrent assets Equity-accounted investments – – – 9,874 Other equity investments 2,922 761 761 – Financial services receivables – 57,877 60,052 – Other financial assets 2,047 4,451 4,496 – Current assets Trade receivables – 11,472 11,472 – Financial services receivables – 44,398 44,398 – Other financial assets 1,551 6,141 6,141 – Marketable securities 10,861 – – – Cash, cash equivalents and time deposits – 19,123 19,123 – Noncurrent liabilities Noncurrent financial liabilities – 68,416 70,238 – Other noncurrent financial liabilities 2,390 1,564 1,568 – Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,703 3,822 – Current financial liabilities – 65,564 65,564 – Trade payables – 19,530 19,530 – Other current financial liabilities 2,991 4,652 4,652 – 43 B A L A N C E S H E E T I T E M A T D E C . 3 1 , 2 0 1 4 9,874 3,683 57,877 6,498 11,472 44,398 7,693 10,861 19,123 68,416 3,954 3,703 65,564 19,530 7,643 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 1 5 M E A S U R E D N O T W I T H I N A T F A I R V A L U E M E A S U R E D A T A M O R T I Z E D C O S T S C O P E O F I F R S 7 € million Carrying amount Carrying amount Fair value Carrying amount Noncurrent assets Equity-accounted investments – – – 8,288 Other equity investments 3,500 865 865 – Financial services receivables – 61,822 64,267 – Other financial assets 2,240 4,595 4,636 – Current assets Trade receivables – 12,628 12,628 – Financial services receivables – 46,861 46,861 – Other financial assets 1,758 7,384 7,384 – Marketable securities 15,095 – – – Cash, cash equivalents and time deposits – 17,598 17,598 – Noncurrent liabilities Noncurrent financial liabilities – 71,889 73,223 – Other noncurrent financial liabilities 5,822 1,760 1,766 – Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,632 3,533 – Current financial liabilities – 67,489 67,489 – Trade payables – 20,511 20,511 – Other current financial liabilities 5,656 5,609 5,609 – 44 B A L A N C E S H E E T I T E M A T J U N E 3 0 , 2 0 1 5 8,288 4,365 61,822 6,835 12,628 46,861 9,142 15,095 17,598 71,889 7,582 3,632 67,489 20,511 11,264 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 12. Cash Flow Statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, bills, cash-in-hand and call deposits. € million June 30, 2015 Cash, cash equivalents and time deposits as reported in the balance sheet 17,598 Time deposits – 691 Cash and cash equivalents as reported in the cash flow statement 16,906 Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2015 Capital contributions 2,457 Dividends paid – 2,429 Capital transactions with noncontrolling interest shareholders 0 Other changes – 2 Proceeds from issuance of bonds 12,963 Repayment of bonds – 10,204 Change in other financial liabilities – 1,771 Lease payments – 16 999 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG or the Group Board of Management must be complied with. Segment reporting comprises four reportable segments: Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services. The operating segments are combined into reportable segments based on similar economic characteristics (in particular the nature of the products or services, integration in the development, production and sales processes, and similar customer groups). The activities of the Passenger Cars segment cover the development of vehicles and engines, the production and sale of passenger cars, and the corresponding genuine parts business. As a rule, the Volkswagen Group’s individual passenger car brands are combined on a consolidated basis into a single reportable segment. The Commercial Vehicles segment primarily comprises the development, production and sale of light commercial vehicles, trucks and buses, the corresponding genuine parts business and related services. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In the segment structure, purchase price allocation for companies acquired is allocated directly to the corresponding segments. 45 June 30, 2014 20,002 – 1,789 18,213 2014 4,932 – 1,875 – 6,535 – 45 14,874 – 11,961 917 – 1 306 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements At Volkswagen, segment profit or loss is measured on the basis of operating profit or loss. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. R E P O RT I N G S E G M E N T S : H 1 2 0 1 4 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Sales revenue from external customers 74,112 12,121 1,632 10,722 98,587 221 Intersegment sales revenue 6,324 2,578 2 1,042 9,947 – 9,947 Total sales revenue 80,437 14,699 1,634 11,764 108,533 – 9,725 Segment profit or loss (operating profit or loss) 5,528 509 4 924 6,965 – 780 R E P O RT I N G S E G M E N T S : H 1 2 0 1 5 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Sales revenue from external customers 81,358 12,150 1,812 13,364 108,684 92 Intersegment sales revenue 7,760 3,001 1 1,319 12,081 – 12,081 Total sales revenue 89,118 15,151 1,813 14,683 120,765 – 11,989 Segment profit or loss (operating profit or loss) 6,215 349 5 1,120 7,689 – 868 R E C O N C I L I AT I O N H 1 € million 2015 Segment profit or loss (operating profit or loss) 7,689 Unallocated activities 113 Group financing 10 Consolidation – 991 Operating profit 6,820 Financial result 843 Consolidated profit before tax 7,664 46 Volkswagen Group 98,808 – 98,808 6,186 Volkswagen Group 108,776 – 108,776 6,820 2014 6,965 74 15 – 869 6,186 1,591 7,777 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 14. Related party disclosures At 50.73%, Porsche SE holds the majority of the voting rights in Volkswagen AG. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. As a result, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE continues to have the power to participate in the operating policy decisions of the Volkswagen Group. S U P P L I E S A N D S E R V I C E S S U P P L I E S A N D S E R V I C E S R E N D E R E D R E C E I V E D H1 H1 € million 2015 2014 2015 2014 Porsche SE 5 10 2 3 Supervisory Board members 3 2 2 2 Unconsolidated subsidiaries 571 425 353 295 Joint ventures and their majority interests 6,367 7,174 566 577 Associates and their majority interests 59 73 311 145 State of Lower Saxony, its majority interests and joint ventures 2 2 1 2 R E C E I V A B L E S L I A B I L I T I E S ( I N C L U D I N G C O L L A T E R A L ) F R O M ( I N C L U D I N G O B L I G A T I O N S ) T O € million June 30, 2015 Dec. 31, 2014 June 30, 2015 Dec. 31, 2014 Porsche SE 348 356 12 14 Supervisory Board members 0 0 154 218 Unconsolidated subsidiaries 837 673 874 815 Joint ventures and their majority interests 7,808 6,295 2,178 2,127 Associates and their majority interests 64 69 291 168 State of Lower Saxony, its majority interests and joint ventures 0 0 1 1 47 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements The supplies and services received from joint ventures and associates in the first six months do not include resolved dividend distributions amounting to €4,589 million (previous year: €2,925 million). The receivables from Porsche SE comprise a receivable under a loan agreement and receivables from land transfer taxes. The obligations to Porsche SE consist mainly of liability compensation for guarantees. Obligations to members of the Supervisory Board amounting to €154 million relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. Obligations to joint ventures and their majority interests contain miscellaneous financial obligations under an irrevocable credit commitment in the amount of €1.3 billion to LeasePlan Corporation N.V., Amsterdam, the Netherlands, with a term until December 2018. 15. Litigation Volkswagen AG’s Annual Report for fiscal year 2014 contains detailed information on litigation and other legal proceedings. There were no significant changes compared with the situation described there. 16. Contingent assets and liabilities There were no significant changes as of June 30, 2015 in the contingent assets and liabilities described in the 2014 Annual Report. 17. Other financial obligations The other financial obligations increased by €875 million compared with the 2014 consolidated financial statements to €28,161 million, due in particular to an increase in purchase commitments for items of property, plant and equipment, and intangible assets, because of initiated or planned investment projects. 48 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements German Corporate Governance Code The current declarations in accordance with section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) on the German Corporate Governance Code by the Board of Management and Supervisory Board of Volkswagen AG, AUDI AG, MAN SE and RENK AG are permanently available on the Internet at www.volkswagenag.com/ir, www.audi.com/cgk- declaration, www.corporate.man.eu/en and www.renk.biz/corporated-governance.html respectively. Significant events after the balance sheet date On July 23, 2015, Global Mobility Holding B.V., Amsterdam, Netherlands, sold its 100% interest in LeasePlan Corporation N.V., Amsterdam, the Netherlands, (LeasePlan) to a consortium of international investors. The legal transfer of the shares is subject to the condition precedent that the necessary official approvals are issued during the further course of the sale. The Volkswagen Group assumes that the approvals will be issued in the second half of 2015 and that the transaction can be completed. The total value of the transaction is approximately €3.7 billion. It is expected that a gain in the low triple-digit millions of euros will be reported in the Volkswagen Group’s financial result. Volkswagen AG did not grant additional credit lines either to the consortium of investors or to LeasePlan in connection with the intended sale of the indirect interest in LeasePlan. On completion of the transaction, the existing credit line of €1.3 billion provided by the Volkswagen Group will be terminated and replaced by a facility commitment by a banking syndicate. For a description of the previous arrangements under company law, please refer to our explanations on “Interests in joint ventures” in the “Basis of consolidation” section. 49 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group in accordance with German accepted accounting principles, and the interim management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 29, 2015 Volkswagen Aktiengesellschaft The Board of Management Martin Winterkorn Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Christian Klingler Matthias Müller Horst Neumann Hans Dieter Pötsch Andreas Renschler Rupert Stadler 50 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Review Report Review Report This report was originally prepared in German. In case of ambiguities the German version shall prevail: Review Report To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg We have reviewed the condensed consolidated interim financial statements - comprising the condensed income statement and condensed statement of comprehensive income, condensed balance sheet, condensed statement of changes in equity, condensed statement of cash flows and selected explanatory notes - and the interim group management report of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, for the period from January 1 to June 30, 2015, which are part of the half-yearly financial report pursuant to § (Article) 37w WpHG ("Wertpapierhandelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRSs applicable to interim financial reporting, as adopted by the EU, and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Management. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group manage- ment report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRSs applicable to interim financial reporting, as adopted by the EU, and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRSs applicable to interim financial reporting, as adopted by the EU, nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. Hanover, July 29, 2015 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Norbert Winkeljohann Wirtschaftsprüfer (German Public Auditor) Frank Hübner Wirtschaftsprüfer (German Public Auditor) 51 Contact Information P U B L I S H E D B Y Volkswagen AG Financial Publications F I N A N C I A L C A L E N D A R October 28, 2015 Interim Report January – September 2015 Letterbox 1848-2 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-86622 IR hotline Fax + 49 (0) 5361 9-30411 E-mail investor.relations@volkswagen.de Internet www.volkswagenag.com/ir This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/ir Printed in Germany 558.809.560.20

Semestriel, 2015, Auto, Volswagen

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Volswagen

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Half-Yearly Financial Report January – June 2016 1 U PDATED I N F OR M ATI ON 7 I NTER IM M A N AG EM ENT 2 3 B R A N D S AN D 27 I NTER I M CONSOLI DATED FI NA NC IA L R EPORT BUSI N ESS F I ELD S STATEMENTS (CON D ENSED) 1 Key Facts 2 Key Events 7 Volkswagen Shares 8 Business Development 16 Results of Operations, Finan- cial Position and Net Assets 22 Outlook 27 28 Statement of Comprehensive Income 31 Balance Sheet 32 Statement of Changes in Equity 34 Cash Flow Statement 35 Notes to the Interim Consolidated Income Statement Financial Statements 53 Responsibility Statement 54 Review Report Key Figures V O L K S WA G E N G R O U P Q 2 H 1 Volume Data1 2016 2015 % 2016 2015 % Deliveries to customers (thousand units) 2,609 2,552 + 2.2 5,117 5,039 + 1.5 of which: in Germany 366 353 + 3.5 685 668 + 2.5 abroad 2,243 2,198 + 2.0 4,432 4,371 + 1.4 Vehicle sales (thousand units) 2,622 2,483 + 5.6 5,199 5,090 + 2.1 of which: in Germany 357 343 + 4.1 679 668 + 1.6 abroad 2,265 2,140 + 5.8 4,520 4,422 + 2.2 Production (thousand units) 2,713 2,593 + 4.6 5,268 5,314 – 0.9 of which: in Germany 722 693 + 4.1 1,405 1,395 + 0.8 abroad 1,991 1,900 + 4.8 3,863 3,919 – 1.4 Employees (thousand on June 30, 2016/Dec. 31, 2015) 613.6 610.1 + 0.6 of which: in Germany 278.1 278.7 – 0.2 abroad 335.5 331.4 + 1.3 Q 2 H 1 Financial Data (IFRSs), € million 2016 2015 % 2016 2015 % Sales revenue 56,971 56,041 + 1.7 107,935 108,776 – 0.8 Operating profit before special items 4,386 3,662 + 19.8 7,517 6,990 + 7.5 as a percentage of sales revenue 7.7 6.5 7.0 6.4 Special items – 2,487 – 170 x – 2,178 – 170 x Operating profit 1,899 3,492 – 45.6 5,339 6,820 – 21.7 as a percentage of sales revenue 3.3 6.2 4.9 6.3 Profit before tax 1,607 3,696 – 56.5 4,810 7,664 – 37.2 as a percentage of sales revenue 2.8 6.6 4.5 7.0 Profit after tax 1,214 2,731 – 55.6 3,579 5,663 – 36.8 Profit attributable to Volkswagen AG shareholders 1,155 2,671 – 56.7 3,461 5,558 – 37.7 Cash flows from operating activities2 Cash flows from investing activities attributable to operating activities 3,757 3,987 4,086 3,668 – 8.0 + 8.7 5,111 5,149 7,447 6,993 – 31.4 – 26.4 Automotive Division3 EBITDA4 Cash flows from operating activities2 Cash flows from investing activities attributable to operating activities5 of which: capex 4,904 7,334 3,484 2,395 6,019 6,800 3,572 2,581 – 18.5 + 7.5 – 2.5 – 7.2 10,974 9,736 4,601 4,515 11,859 11,234 6,761 4,652 – 7.5 – 13.3 – 31.9 – 2.9 as a percentage of sales revenue 4.9 5.3 4.9 4.9 capitalized development costs6 1,342 1,033 + 29.9 2,582 2,170 + 19.0 as a percentage of sales revenue 2.7 2.1 2.8 2.3 Net cash flow2 Net liquidity at June 30 3,850 3,228 + 19.3 5,135 28,778 4,473 21,489 + 14.8 + 33.9 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. 2015 deliveries updated to reflect subsequent statistical trends. 2 Prior-year figures adjusted. 3 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 4 Operating profit plus net depreciation/amortization and impairment losses/reversals of impairment losses on property, plant and equipment, capitalized development costs, lease assets, goodwill and financial assets as reported in the cash flow statement. 5 Excluding acquisition and disposal of equity investments: Q2 €3,646 (3,518) million, H1 €6,939 (6,672) million. 6 See table on page 38. All figures shown in the Report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. U P D AT E D I N F O R M AT I O N Key Facts Key Facts > Volkswagen Group deliveries to customers up slightly on the previous year at 5.1 (5.0) million vehicles; increases particularly in Western and Central Europe and Asia-Pacific; further declines in South America and Eastern Europe > Group sales revenue on a level with the previous year at €107.9 (108.8) billion; negative effect from exchange rates > Operating profit amounts to €5.3 (6.8) billion; negative special items, particularly from legal risks, total €2.2 billion > Operating profit before special items improves by €0.5 billion to €7.5 billion > Earnings before tax decline to €4.8 (7.7) billion; negative impact from remeasurement in the financial result and lower equity-accounted profit from the Chinese joint ventures > Automotive Division’s net cash flow increases to €5.1 (4.5) billion; ratio of capex to sales revenue remains on a level with the previous year at 4.9 (4.9)% > Net liquidity in the Automotive Division rises to €28.8 billion; sale of shares in LeasePlan strengthens capital base > Inspiring vehicles from the Group: Volkswagen Passenger Cars introduces the new Magotan at Auto China 2016; SUV study T-Prime Concept GTE offers a glimpse of the brand’s future flagship Audi celebrates the world premiere of the new A5 Coupé - ŠKODA’s VisionS show car makes its debut appearance in China - Successful market introduction for the SEAT Ateca - Bentley launches the exclusive Mulsanne First Edition - Following the 718 Boxster, Porsche presents the new 718 Cayman - Lamborghini extends the Huracán family with three fascinating models - Scania receives “Green Truck Future Innovation 2016” environmental accolade - MAN showcases complete solutions for the construction industry at the bauma 2016 trade fair 1 U P D AT E D I N F O R M AT I O N Key Events Key Events M OTO R S H O W S A N D E V E N T S The Volkswagen Group presented a wealth of new models and tech- nologies at motor shows and events in the second quarter of 2016. Auto China 2016 At Auto China 2016 in Beijing, the centerpiece of the Volkswagen Passenger Cars brand’s showing was the unveiling of the T-Prime Concept GTE concept car. The premium-segment SUV is equipped with plug-in hybrid and all-wheel drive, generating a power output of 280 kW (381 PS). The vehicle is an automotive statement of modernity, equipped with fully digitalized display and control interfaces. All conventional interior switches have been replaced by gesture and voice control, touchscreens and touch-sensitive sur- faces. The T-Prime Concept GTE features a Curved Interaction Area. This curved infotainment console is a world debut, integrating various display and control functions to create the cockpit of the future. In place of the familiar shift lever, a glass scroll wheel controls the concept car’s eight-speed automatic gearbox. The brand also pres- ented the new Magotan, which has been completely redesigned. Based for the first time on the Modular Transverse Toolkit (MQB), the saloon is impressive with its appealing proportions, unrivaled space in the rear and a wide range of new assistance, convenience and infotainment systems. The Magotan also offers a high-tech drivetrain: three TSI engines are available with power outputs of between 110 kW (150 PS) and 162 kW (220 PS), offering the utmost in efficiency and performance. The Phideon celebrated its Chinese premiere in Beijing. The new premium saloon will launch on the market in China in the third quarter of 2016. The Phideon 3.0 TSI 4MOTION all-wheel drive is equipped with a 220 kW (300 PS) V6 engine. A 2.0 TSI saloon with front-wheel drive will also be available, and a plug-in hybrid model is planned. Volkswagen Passenger Cars rounded off its presentation at the motor show with the BUDD-e, a show car whose appearance is inspired by the legendary VW Bus. The vehicle was created based on a new technology matrix for electric vehicles – the Modular Electrification Toolkit (MEB). The BUDD-e has a range of more than 500 km. Just 30 minutes of charging replenishes 80% of the battery power. Inside, touch and gesture control combine seamlessly to replace traditional switches and buttons. Individual displays merge into large infotainment panels and mirrors are replaced by digital screens. in 3.9 seconds – a super sports car-level performance. The TT RS is the first Audi production model to offer tail lights featuring matrix OLED technology as an option. These emit a highly uniform, high- contrast light. Another highlight was the presentation of the new Audi A4 L with extended wheelbase. Passengers in the 4.81-meter- long mid-class saloon travel in premium-level comfort in a spacious interior. Audi has considerably reduced the vehicle’s kerb weight by up to 110 kg compared with its predecessor. The A4 L offers intelligent technologies such as the Audi virtual cockpit, numerous driver assistance systems and Matrix LED lights with dynamic indicators. Alongside the production models, Audi also used Beijing to showcase its innovative Audi connected mobility concept. The vehicle is based on the new Q3, which will launch on the Chinese market this year. It is specially tailored to markets with growing levels of urbanization such as China, and offers sporty, multi- functional mobility for megacities. The rear bumper contains an electric-powered, 1.05-meter longboard scooter. The infotainment system connects to the user’s smartphone and calculates the fastest mobility mix for the destination and planned arrival time using real- time traffic information. The system recommends that the driver continues the journey by the electric longboard if this is the quickest way to reach the destination. ŠKODA’S VisionS SUV study celebrated its Chinese premiere in Beijing. The vehicle’s expressive, modern and dynamic design offers ŠKODA’s typical balance of rationality and aesthetics. In addition to revealing the brand’s future SUV design language, the VisionS features the key technologies on which ŠKODA will be focusing in the coming years: electromobility, connectivity and safety. The show car was accompanied by six production models from the Czech brand. ŠKODA will press ahead with its model rollout in China in the coming years. Bentley attracted plenty of attention at the motor show, espe- cially with the world premiere of the Mulsanne First Edition. The Mulsanne family comprises three models. Bentley will produce just 50 First Edition cars, distinguished by highly exclusive features including a Mulliner-styled picnic table and crafted English walnut veneer. Audi used Auto China 2016 to underscore its role as a leading premium supplier, celebrating the world premiere of the new Audi TT RS Coupé and the Audi TT RS Roadster in Beijing. The new five-cylinder engine in the TT RS generates an impressive 294 kW (400 PS). Together with the quattro drive system, it ensures a fun, sporty driving experience with maximum traction. The TT RS Coupé can accelerate from 0 to 100 km/h in 3.7 seconds, and the Roadster Just a few weeks after the premiere of the 718 Boxster, the 718 Cayman made its debut in Beijing. The fourth, newly developed generation of Porsche’s mid-engined sports coupé is even more eye- catching, sporty and efficient. The taut proportions, prominent air intakes at the front and sides and low side profile highlight the boost in performance and give the vehicle a muscular appearance. The 718 Cayman uses the same new flat four-cylinder, turbocharged engines as the 718 Boxster. The entry model offers 221 kW (300 PS) from a 2.0 l engine; the 2.5 l S model supplies 257 kW (350 PS). 2 U P D AT E D I N F O R M AT I O N Key Events Lamborghini presented its expanded Huracán family. The Huracán LP 580-2 has been engineered and tuned for an essential driving experience. Its naturally aspirated 5.2 l V10 engine sends 427 kW (580 PS) to the rear axle. The vehicle weighs just 1,389 kg. Alongside the rear-wheel drive version, Lamborghini exhibited the Huracán LP 610-4 Avio, which is limited to a run of only 250 units. Its lightweight chassis is made of aluminum and carbon fiber. The naturally aspirated 5.2 l V10 engine delivers 449 kW (610 PS) and accelerates the LP 610-4 Avio from 0 to 100 km/h in just 3.2 seconds. The maximum speed is 325 km/h. The open top version of the Huracán LP 610-4 combines the power and performance of the coupé with the thrill of open-air driving. The Huracán Spyder stands for inspiration, outstanding quality and breathtaking per- formance. It is an icon of the super sports car manufacturer in its own right. common rail injection system with up to 350 bar pressure, innovative thermal management, cylinder deactivation and specially coated cylinders so that the piston rings glide smoothly with low friction and little wear. bauma 2016 Scania presented numerous products from its Scania Trucks, Scania Mining and Scania Engines business divisions at bauma 2016 in Munich – the leading trade fair for construction machinery. One focus was on efficient construction site vehicles, and a 6x6 all- wheel-drive dump truck for use in underground and surface mining was also on show. The Swedish commercial vehicle brand always seeks to offer its customers intelligent vehicle solutions and the best possible value for money. It does so by combining robust products with networked services. World premiere of the new Audi A5 Coupé In June 2016, Audi celebrated the world premiere of the new Audi A5 Coupé, which offers a chassis that has been newly developed from scratch as well as innovative infotainment functions and driver assistance systems. Powerful six-cylinder engines with outputs ranging between 140 kW (190 PS) and 210 kW (286 PS) ensure greater driving pleasure and efficiency. Inside the vehicle, the Audi virtual cockpit and the Audi connect module offering a fast LTE Internet connection impress customers. The MAN brand showcased its expertise in construction sector vehicles with a wide range of exhibits. One of the highlights was the two-axle MAN TGS tractor for semitrailer with HydroDrive, an engage- able, hydrostatic front-axle drive. MAN introduced this new type of drive technology to the market in 2005 in order to increase traction when needed and improve braking performance on unsurfaced slopes. It has constantly enhanced HydroDrive ever since. Other include a weight saving of advantages of MAN HydroDrive 500-750 kg over conventional all-wheel drive as well as lower fuel consumption. Wörthersee GTI Meet The GTI fan community got together for the 35th GTI meet at Wörthersee in Austria in May 2016, where they also celebrated the 40th birthday of Volkswagen’s cult sports car. The Golf GTI entered the market in 1976 and democratized sporty driving. If all gener- ations of the Golf GTI are counted together, the total number sold has long passed the two million mark. The star of the event in Austria was the Golf GTI Clubsport S, of which just 400 cars will be built. Delivering 228 kW (310 PS), this is the most powerful Golf that Volkswagen has ever brought to market. The vehicle, equipped with a heavily modified suspense, has already proven its potential on the Nürburgring’s Nordschleife (North Loop), where it set a new record for a front-wheel-drive production car. Vocational trainees from Volkswagen’s plants in Wolfsburg and Zwickau traditionally present unique vehicles on stage at the GTI meet. This year, the Wolfsburg team brought the 295 kW (400 PS) GTI Heartbeat. The vehicle makes a strong impact thanks to its fantastic engine sound, con- trasting color scheme with honeycomb design and heartbeat symbols, and a 1,360-watt sound system with seven speakers. The trainees from Zwickau celebrated the 35th Wörthersee meet with the 247 kW (350 PS) Golf R Estate Performance. AWA R D S No fewer than four models from the Volkswagen Passenger Cars brand took first place in the 2016 Plus X Award for innovation. The new Tiguan and new Touran won the categories for high quality, design, ease of use and functionality. The vehicles were chosen as Compact SUV and Compact MPV of the Year 2016/2017 respectively. The Phideon was crowned Premium Saloon of the Year 2016/2017 and the T-Cross Breeze awarded Automotive Concept Vehicle of the Year 2016/2017. The innovation awards go to technology, sport and lifestyle products and the winners are chosen by an international jury drawn from 25 industries. The Volkswagen Passenger Cars brand’s BUDD-e show car was recognized at the Automotive Interiors Expo 2016 for its intuitive controls and novel, lounge-style interior. The competition jury is made up of 17 leading international automotive and design jour- nalists. For the seventh time in a row, the Audi brand took first prize in the International Engine of the Year Award in the 2 to 2.5 l engine category. Among the qualities that impressed the jury were the 2.5 l TFSI engine’s top performance and its sound, which is remi- niscent of the Group B rally car engines of the 1980s. Vienna Motor Symposium The 37th Vienna Motor Symposium saw Volkswagen present the EA 211 TSI evo – the latest generation of petrol engines. The first in this series, released on the market in late 2016, will be the powerful yet efficient 1.5 l TSI engine, available initially with power outputs of 96 kW (131 PS) and 110 kW (150 PS). A key innovation is the exhaust gas turbocharger with variable turbine geometry; a first for a mass-production petrol engine. The efficient powertrain also uses the Miller combustion cycle featuring a high compression ratio, the Several Volkswagen Group brands scored highly in the readers’ choice awards by the Auto Bild Allrad all-wheel-drive motoring magazine. Readers voted in a total of ten categories for the all- wheel-drive car of the year. The Tiguan from the Volkswagen Pas- senger Cars brand won the all-terrain and SUV category for vehicles up to €30,000. Audi took the top spot in the all-wheel-drive cross- over category with the Audi A4 allroad quattro. The brand’s A6 won the category for all-wheel-drive cars priced at over €40,000. For the second time in a row, the ŠKODA Superb 4x4 won in the import category for all-wheel-drive cars priced at up to €40,000. The 3 U P D AT E D I N F O R M AT I O N Key Events magazine’s readers chose the T6 Multivan from Volkswagen Com- mercial Vehicles as the top MPV, while the SEAT Alhambra took the award in the import category. In the all-wheel-drive sports cars, coupés and convertibles category, the Porsche 911 was the overall winner, while Lamborghini’s Huracán was crowned top import. Audi’s “Actively tackling cancer” screening plan won this year’s Felix Burda Award in the workplace health checks category. Health protection at Audi impressed the jury with its intelligent combi- nation of campaigns, individual screening and the latest diagnosis techniques. Firmenauto magazine’s company car awards saw impressive results for as many as four Volkswagen Group brands. Some 250 fleet managers tested 82 different models in 12 categories and completed 2,043 test drives covering a total of more than 50,000 km. Audi’s A3 was the winner in the compact class, the A4 in the mid-size class and the A6 in the upper mid-size class. The Volks- wagen Passat came a strong third in the mid-size class. In the import rankings for minicars and minivans, the SEAT brand took the first two places with the Mii and Alhambra. The Sharan from Volkswagen Passenger Cars won the overall ranking for large MPVs. Audi was the top-ranked brand in the category of good service for fleet customers. Volkswagen Financial Services AG was awarded first prize for leasing and fleet management. A N N I V E R S A R I E S The Czech brand ŠKODA celebrated two important anniversaries in the reporting period. Steeped in tradition, the automobile manu- facturer has now been part of the Volkswagen Group for 25 years and has transformed itself over this period from a regional market leader into an internationally successful business. When the collaboration between Volkswagen and ŠKODA began, the brand sold just one model and approximately 170,000 vehicles a year. Today, that has grown to six model series with more than 40 variants. These are produced at 14 locations and sold in over 100 markets. They include the brand’s top-selling model, the ŠKODA Octavia, which celebrated its 20th birthday in April 2016 and has now sold more than 5 million vehicles. Two Volkswagen Group brands won accolades at the Auto- motiveINNOVATIONS Award 2016. Volkswagen Passenger Cars was recognized as the most innovative high-volume brand in 2016. The jury pointed, among other things, to the 89 innovations and 15 world debuts presented by Volkswagen during the award period. They singled out the new Tiguan and Touran models and the Sharan. Volkswagen also took the top spots in the conventional drive systems and connected car categories. The Audi brand won the main prize for the most innovative premium brand as well as further awards for innovations in the connected car and vehicle concepts/body categories. The Center of Automotive Management presents the accolades each year in cooperation with audit and consulting firm, PricewaterhouseCoopers. It examined more than 1,400 innovations from 20 carmakers and 50 brands. Volkswagen Slovakia’s Bratislava site has been part of the Volkswagen Group’s production system for 25 years. The product portfolio at the plant, which produces multiple brands, currently includes SUV models from Volkswagen Passenger Cars, Audi and Porsche, as well as Volkswagen Passenger Cars, SEAT and ŠKODA vehicles based on the New Small Family platform. Since the facility opened in 1991 it has produced more than 4.5 million vehicles and some 7 million gearboxes. The Volkswagen plant in Kassel produced its 125 millionth transmission in May 2016, a DQ500 dual clutch gearbox used in the Tiguan, Passat, Audi Q3, Audi TT and other models. The trans- mission plant in Kassel currently employs 6,500 staff. Customers include 34 vehicle production plants in 14 countries. Bentley’s Bentayga was the SUV of the year in this year’s Robb Report. In their Best of the Best Awards, Robb Report’s editorial team produce a ranking of luxury-segment products. Scania received the “Green Truck Future Innovation 2016” environmental award in the category of promising innovations for its hybrid module for distribution trucks. The accolade is awarded by Verkehrsrundschau and Trucker magazines. The 320 PS hybrid truck achieves fuel savings of up to 18% compared with normal diesel-powered vehicles. It can operate in electric mode alone, or the electric power can be combined with pure biodiesel. This year’s dealer satisfaction survey conducted by the market research institute Schwacke saw renewed success for ŠKODA. For the second time in a row, the brand came first in the major importer category in Germany. The SchwackeMarkenMonitor survey is based on almost 1,000 interviews conducted by puls Marktfor- schung GmbH with owners and managers of authorised vehicle dealerships. It includes 37 criteria such as used car guarantees, the supply system for parts and accessories and the competence of sales representatives. In June 2016, Volkswagen Commercial Vehicles celebrated 60 years of its headquarters in Hanover, where the Company has manu- factured some 9.5 million vehicles since 1956. The Multivan/Trans- porter and Amarok are currently rolling off the production line, and the site also produces components. With more than 14,000 staff members, it is one of the Hanover region’s largest employers. V O L K SWA G E N G R O U P L A U N C H E S N E W V I S I O N : TO G E T H E R – ST R AT E G Y 2 0 2 5 Volkswagen announced the first details of its new Group strategy “TOGETHER – Strategy 2025” on June 16, 2016, ushering in the greatest process of change the Company has ever seen. The major realignment is concentrated on transforming the core automotive business and tapping potential new revenue sources. This will involve developing further core competencies such as battery technology, digitalization and autonomous driving, as well as intensifying the focus on profitable growth. At the same time, the Company will rely to a greater extent than before on partnerships and venture capital investments. 4 U P D AT E D I N F O R M AT I O N Key Events Transforming the core business for the new age of mobility is the first pillar of TOGETHER – Strategy 2025. For this, Volkswagen will sharpen the positioning of the Group brands and optimize the vehicle and drivetrain portfolio to reflect regional market and customer requirements, concentrating on the most attractive and fastest-growing market segments. One focus is on e-mobility, where a broad-based initiative is planned. The regional growth strategy will continue in particularly attractive automotive markets. Expan- sion and investment plans for North America and the expansion program in China will remain in place. Collaboration with regional partners is being sought in the economy segment, particularly in Asia. The modular toolkits are being revised and streamlined to reduce their complexity in development and production and increase efficiency. Implementing a model line organization in the brands will lead to a stronger focus on results. The components business will be realigned. This will improve competitiveness and efficiency, making important contributions to future trends. Another important lever of the strategy is to establish new core competencies in forward-looking areas such as battery technology, autonomous driving and artificial intelligence. The aim is to gain a license for a self-driving system developed in-house for fully auton- omous vehicles. At three Volkswagen Group Future Centers in Germany, the USA and China, designers and digital experts will work together on the car of the future so that the Group can offer the best possible customer experience and make optimum use of the latest technologies. The Commercial Vehicles Business Area will also resolutely pursue future topics, developing into an intelligent transport solution provider. Offering vehicles under several dif- ferent brands, Volkswagen Truck & Bus is to become a global industry champion with a significant presence in all key regions of the world and an improved overall performance. Under the stra- tegic realignment of the Volkswagen Group, the Financial Services Division will continue to support the brands’ business models and remain an important source of revenue. The second key pillar of the new Group strategy is the estab- lishment of a new cross-brand mobility solutions business. The cornerstone and starting point of the new business unit will be the provision of on-demand mobility. The unit will subsequently develop and acquire further services tailored to customer require- ments, such as robotaxis, carsharing, or on-demand transport for the logistics industry. By driving forward the digital transformation already underway, the Group will further boost its power to innovate. This will involve operational aspects such as Industry 4.0 in production and logistics or digitalization in sales. The Organization 4.0 initiative will also create a modernized, more attractive work organization. expenses to less than 12% of sales revenue. Additional funds for future investments may also be generated by optimizing the existing portfolio of brands and equity investments. A sustained increase to between 7% and 8% in the Group’s operating return on sales is envisaged by 2025. A return on investment (ROI) of over 15% is planned for the Automotive Division. The distribution ratio to shareholders is to be sustained at around 30% of net profit. CO O P E R AT I O N A N D I N V E STM E N T S In April 2016, Volkswagen signed a cooperation agreement with Singularity University in California’s Silicon Valley. The aim of the collaboration is to make even better use of the opportunities of the digital transformation by improving the connections between high- tech start-ups, managers, researchers and inventors. In May 2016, Volkswagen agreed a strategic partnership with the international ride-hailing service GETT, making a USD 300 million investment in that company. GETT is a leading provider of on-demand mobility services in the European market and is active in more than 60 cities worldwide including London, Moscow and New York. In addition to passenger transportation, the company also offers innovative delivery and logistics services. The two partner companies plan a further roll-out of these mobility services across Europe as part of an expansion strategy. The technology deployed uses big data, innovative forecasting algorithms and artificial intelligence, and can also serve as a basis for developing further mobility-related business models. The Volkswagen Group also acquired a stake in the German Research Center for Artificial Intelligence (DFKI) in May 2016, thereby intensifying its investment in research on digital tech- nologies of the future. Artificial intelligence is a key technology for autonomous driving and the digital factory. Together with the DFKI, Volkswagen plans to redouble its efforts in this field in future and advance artificial intelligence outside the automotive industry, too. The DFKI also specializes in robotics, Industry 4.0 and driver assistance systems. Volkswagen will have a seat on the DFKI Super- visory Board and actively help to shape the center’s technology and research strategy. MAN Truck & Bus AG invested in the logistics company FR8 Revolution Inc. in May 2016 in order to play an active part in the digital transformation and integration of the logistics industry. The US-based company has developed software that offers a standard- ized and transparent platform for shippers, transport companies and truck drivers to plan loads based on real-time data. The system provides all parties with continuous information on the position of trucks, available capacity, drivers’ time behind the wheel and rest periods, and up-to-date freight rates. Funding for investments as part of the new Group strategy will be achieved primarily through efficiency gains across all brands, business areas and functions. In the automotive business, Volks- wagen is aiming for a ratio of capex to sales revenue of 6% by 2025, and a similar ratio for research and development expenditure to sales. The Group aims to reduce distribution and administrative D I E S E L I S S U E Volkswagen reaches certain settlement agreements In June 2016, Volkswagen publicly announced that Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates had reached settlement agreements in the USA with the U.S. Department of 5 U P D AT E D I N F O R M AT I O N Key Events Justice, the U.S. Environmental Protection Agency (EPA), the U.S. Federal Trade Commission, the California Air Resources Board (CARB) and private plaintiffs represented by a Plaintiffs’ Steering Committee (PSC) in the Multi-District Litigation pending in Cali- fornia. The settlement agreements, if finally approved, will resolve certain civil claims made in relation to affected diesel vehicles with 2.0 l TDI engines from the Volkswagen Passenger Cars and Audi brands in the USA. The settlement agreements are subject to final court approval. solutions for more than 3.7 million Volkswagen Group vehicles fitted with EA 189 2.0 l TDI engines. For the Volkswagen Passenger Cars brand, modification of models in the Tiguan, Passat, Golf and Touran series, among others, has now been approved. The recall process has also begun at Audi. The KBA has issued approvals for a series of model A4, A3, Q3 and Q5 vehicles. The SEAT, ŠKODA and Volkswagen Commercial Vehicles brands have also begun modi- fying vehicles. The proposed settlements provide affected customers with the option of a buyback or, for leased vehicles, early lease termination or a free technical modification of the vehicles, provided that EPA and CARB approve the appropriate modification measures. Volkswagen will also make cash payments to affected owners and lessees. The KBA has issued unqualified confirmation, for the vehicles approved so far, that fuel consumption, performance figures and noise emissions are unaffected by the modifications. Following implementation of the technical solutions, these vehicles will therefore fulfill all legal requirements. Volkswagen also agreed to support environmental programs. The company will pay USD 2.7 billion over three years into an environmental trust, managed by a trustee appointed by the court, to offset excess nitrogen oxide (NOx) emissions. Volkswagen will also invest in total USD 2.0 billion over 10 years in zero emissions vehicle infrastructure as well as corresponding access and awareness initiatives. Volkswagen also reached separate settlement agreements with the attorneys general of 44 US states, the District of Columbia and Puerto Rico, to resolve their existing or potential consumer pro- tection and unfair trade practices claims – in connection with both 2.0 l TDI and 3.0 l TDI vehicles in the USA – for a settlement amount of USD 603 million. These settlements do not resolve the civil claims by the DOJ, FTC and private plaintiffs represented by the PSC related to 3.0 l TDI vehicles, civil penalties sought by the DOJ on behalf of the EPA, potential state environmental claims related to the 2.0 l and 3.0 l TDI vehicles, any criminal investigations by the DOJ, as well as certain other claims. US lawsuits alleging claims for civil environmental penalties On July 19, 2016, the US states Maryland, Massachusetts and New York filed complaints in their respective state courts against Volks- wagen AG, Volkswagen Group of America, Inc. and certain affiliates seeking civil penalties and injunctive relief for alleged violations of environmental laws. Maryland, Massachusetts and New York par- ticipated in the state settlements described above with respect to consumer protection and unfair trade practices claims, but those settlements did not include claims for environmental penalties. German Federal Motor Transport Authority approves technical solutions In the first half of 2016, the Kraftfahrzeug-Bundesamt (KBA –Ger- man Federal Motor Transport Authority) approved the technical A N N U A L G E N E R A L M E E T I N G The 56th Annual General Meeting of Volkswagen AG was held at the Hanover Exhibition Center on June 22, 2016. The ordinary share- holders of Volkswagen AG accepted the proposal of the Board of Management and the Supervisory Board to pay a dividend of €0.11 per ordinary share and €0.17 per preferred share with a majority of 99.98%. With over 90% of the voting capital present, they formally approved the actions of the Board of Management and Supervisory Board. The ordinary shareholders of Volkswagen AG also elected Price- waterhouseCoopers AG Wirtschaftsprüfungsgesellschaft (PwC) as the auditors for the single-entity and consolidated financial state- ments for fiscal year 2016 and as the auditors to review the condensed consolidated financial statements and interim manage- ment report for the first six months of 2016, for the period up to September 30, 2016 and for the first quarter of fiscal year 2017. The Annual General Meeting also rejected the motions added to the agenda concerning the appointment of a special auditor in accordance with section 142(1) of the Aktiengesetz (AktG – German Stock Corporation Act) as well as the further motions raised in the course of the meeting. Ms. Annika Falkengren’s scheduled term of office and the terms of office of the court-appointed members of the Supervisory Board – Dr. Louise Kiesling and Mr. Hans Dieter Pötsch – expired at the end of the Annual General Meeting. The Annual General Meeting elected all three members to a full term of office in the Supervisory Board. Mr. Akbar Al Baker, likewise a shareholder representative on the Supervisory Board of Volkswagen AG, stepped down from his office with effect from the end of the Annual General Meeting. The Annual General Meeting elected Dr. Hessa Al-Jaber, representing the Qatar Investment Authority (QIA), to replace him for the remainder of his term of office. With Ms. Al-Jaber, Ms. Falkengren and Ms. Kiesling, three of the ten shareholder representative seats on the supervisory body are filled by women. 6 I N T E R I M M A N A G E M E N T R E P O R T Volkswagen Shares Volkswagen Shares Prices on the international stock markets continued their volatile sideways movement in the second quarter of 2016. The DAX recorded a decrease. Concerns about an appreciation of the euro and deteriorating corporate data from Germany caused prices to decline at the beginning of the second quarter. The German benchmark index staged a temporary recovery in mid-April on the back of the rising oil price, which is usually regarded as a positive indicator for global economic growth, and favorable economic data from China. May saw prices move sideways before rising late in the month, buoyed by further oil price increases. Despite uncertainty over the United Kingdom’s continued membership of the European Union (EU), the DAX was propped up for a time in June by hopes that the US Federal Reserve would continue its loose monetary policy. The referendum at the end of June, which resulted in the British public voting to leave the EU, led to sharp falls in stock prices. The DAX closed the first half of 2016 at 9,680 points, down 9.9% on year-end 2015. The EURO STOXX Automobiles & Parts stood at 406 points at the end of the reporting period, down 25.1% on the 2015 closing price. In the period from April to June 2016, Volkswagen AG’s pre- ferred and ordinary shares followed the market trend, which saw a decline overall. This was due to speculation about the impact of the emissions issue in addition to general economic data. In April, prices stabilized following the news that an agreement in principle in connection with the diesel issue had been reached in the USA, as well as the publication of the Volkswagen Group’s annual report. In a market environment dominated by uncertainty, prices were shored up in June by the presentation of the new “TOGETHER Strategy 2025” at a press conference and the announcement that Volkswagen had reached settlement agreements in the USA. On May 30, 2016, Volkswagen AG’s preferred shares hit their highest daily closing price for the first six months of the year at €137.95. They recorded their lowest closing price for the January to June 2016 period of €94.00 on February 11, 2016. The preferred shares ended the last day of trading in the first half of the year at €108.30, down 19.0% on the 2015 closing price. Volkswagen’s ordinary shares registered their highest daily closing price for the reporting period on April 28, 2016 at €141.85. Their lowest closing price was €108.95 on February 11, 2016. On June 30, 2016, the ordinary shares closed the period at €120.40, down 15.4% on the 2015 year-end price. Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website at www.volkswagenag.com/ir. S H A R E P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 4 T O J U N E 2 0 1 6 Index based on month-end prices: December 31, 2014 = 100 Volkswagen ordinary shares Volkswagen ordinary shares Volkswagen preferred shares Volkswagen preferred shares DAX DAX EURO STOXX Automobiles & Parts EURO STOXX Automobiles & Parts 140 140 110 110 80 80 50 50 D J F M A M J J A S O N D J F M A M J 7 I N T E R I M M A N A G E M E N T R E P O R T Business Development Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The global economy recorded moderate growth in the first six months of 2016, although momentum slowed slightly in both the industrialized nations and emerging economies compared with 2015 as a whole. The relatively low energy and commodity prices weighed on the economies of individual exporting countries that depend on them. In Western Europe, the economic recovery continued in the reporting period. Whereas the Northern European countries recorded solid economic growth overall, growth rates in Southern Europe presented a more mixed picture. A drastic effect resulted from the UK’s Brexit referendum in June 2016, when a small majority voted to leave the EU. The direct consequences of this were uncer- tainty in the financial markets and dimmer economic prospects for the United Kingdom and Europe as a whole. In the first six months of 2016, South Africa suffered from a severe drought, structural deficits and political upheaval; this had a dampening effect on gross domestic product (GDP). The US economy continued to expand between January and June 2016, albeit more slowly. Significant stimulus was provided by private consumer spending, whereas exports and private capital investments recorded weak growth. In Canada, the rate of expan- sion reached the comparatively low level of the previous year; by contrast, the Mexican economy grew at a faster pace than in the preceding quarters. Brazil’s economy remained in deep recession in the first six months of 2016. Weak domestic demand, relatively low global commodity prices and political uncertainty weighed on economic performance. Economic output in Argentina retreated in the face of persistently high inflation. The German economy continued to benefit from positive con- sumer sentiment and the strong labor market, continuing its growth trajectory in the first six months of 2016. The positive economic trend in Central Europe continued in the reporting period. The ongoing conflict between Russia and Ukraine and low energy prices had a generally negative effect on the situation in Eastern Europe. Russian economic output continued to decline year-on-year. The Chinese economy slowed slightly in the first six months of 2016, primarily as a result of ongoing structural changes, but continued to see a high rate of expansion by global standards. The Indian economy sustained its positive trend, growing at a somewhat stronger pace than in the previous year. Japanese GDP rose slightly, and growth was largely stable in the ASEAN region. E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 4 T O J U N E 2 0 1 6 Index based on month-end prices: as of December 31, 2014 = 100 EUR to GBP EUR to GBP EUR to USD EUR to USD EUR to CNY EUR to CNY EUR to JPY EUR to JPY 110 110 100 100 90 90 80 80 70 70 D J F M A M J J A S O N D J F M A M J 8 I N T E R I M M A N A G E M E N T R E P O R T Business Development T R E N D S I N T H E PA S S E N G E R C A R M A R K E T S Global new passenger car registrations were up 3.1% compared with the prior-year period in the first six months of 2016, although market trends varied from region to region. Demand rose year-on- year in the Asia-Pacific region, Western Europe, North America and Central Europe, while new registrations in South America and Eastern Europe, as well as the Middle East and Africa, were lower than in the first six months of 2015. The Western European passenger car market continued to recover between January and June 2016 and recorded significant growth. The region continued to profit in particular from the posi- tive macroeconomic environment, low interest rates, low fuel prices, pent-up demand for replacement vehicles and manufacturers’ incentive programs. The Italian and Spanish markets saw double- digit growth rates. By contrast, the increase was less pronounced in France and the United Kingdom. The new passenger car business also recorded positive growth in Germany in the first six months of 2016. Lifted by higher real incomes and the strong labor market, new registrations for busi- ness customers continued to increase, while purchases by private buyers rose for the first time in four years. comparatively low prior-year level. This uptick in demand was supported by rebates and attractive financing conditions offered by the manufacturers. Overall passenger car market volumes in the Asia-Pacific region recorded the strongest absolute growth in the first six months of 2016. By far the highest increase in sales was recorded in China. The tax break introduced on October 1, 2015 on purchases of vehi- cles with engine sizes of up to 1.6 l again had a positive effect, as did the sustained high demand for attractively priced entry-level models in the SUV segment. Passenger car sales in India rose year- on-year in the reporting period. The positive trend was attributable in particular to ongoing economic growth, low oil prices and a large number of new models. In Japan, the number of new passenger car registrations declined further in the first six months of 2016. However, the downward trend diminished significantly in the second quarter since the prior-year level was already weaker because of the tax increase on mini vehicles (up to 660 cm³) that took effect on April 1, 2015. Malaysia, one of the largest markets in the ASEAN region, recorded a year-on-year decline in the reporting period. Demand for passenger cars in Central and Eastern Europe declined in the reporting period, although trends in the individual markets were very mixed. Whereas passenger car sales in the Central European EU countries mainly recorded high growth rates, demand continued to decline in Eastern Europe. As a result of the continuing weak economic and politically tense situation, the Russian passenger car market in particular recorded further strong losses. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S Global demand for light commercial vehicles was up slightly on the previous year’s level in the first six months of 2016. New registrations increased markedly year-on-year in Western Europe on the back of the positive economic performance. Demand in Germany saw moderate growth in the reporting period com- pared with the 2015 comparative period. The downward trend in new passenger car registrations continued in South Africa. In addition to the weak macroeconomic environment, this was due above all to low consumer confidence and high interest rates. Registrations of light commercial vehicles in Central and East- ern Europe recorded a noticeable increase compared with the previous year. Sustained political and economic tensions in Russia caused a moderate drop in registrations there in the period from January to June 2016. The North American automotive market recorded further year- on-year growth between January and June 2016. Sales figures for passenger cars and light commercial vehicles (up to 6.35 tonnes) in the USA reached their highest level for a first half-year period since 2001. The primary drivers of the still stable unit sales were in particular strong consumer confidence, the sound employment situation, financing conditions that continue to be attractive and low fuel prices. Vehicles in the SUV, pickup and van segments were the main beneficiaries of the favorable conditions. By contrast, demand for notchback and hatchback saloons was again lower than the year before. The automotive markets in Canada and Mexico also expanded, in each case reaching new highs for a first half-year period. The markets for passenger cars and light commercial vehicles in the South American region continued to contract sharply overall in the first six months of 2016. The main cause of this trend was the collapse in demand in Brazil to its lowest level since 2006. The ongoing recession, coupled with high unemployment, falling real incomes and restrictive lending policies were the main reasons behind the continued crisis affecting unit sales. By contrast, new vehicle registrations in Argentina increased compared with the In North and South America, the light vehicle market is reported as part of the passenger car market, which includes both passenger cars and light commercial vehicles. In the Asia-Pacific region, demand for light commercial vehi- cles was distinctly higher than in the previous year. Registration volumes in China, the region’s dominant market, were up year-on- year. The number of new vehicle registrations in India recorded a sharp increase compared with the year before. Japan saw a decline in new registrations. Vehicle registrations in the ASEAN region were on a level with the previous year. Global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes increased year-on-year in the period from January to June 2016. The positive economic trend in Western Europe resulted in a significant increase in demand; high growth rates in new regis- trations were recorded in Italy, France and the Netherlands. New registrations in Germany, the largest market in Western Europe, were up noticeably on the prior-year level in the first six months of 2016. Higher investments and a slight increase in exports had a positive effect on the sector. 9 I N T E R I M M A N A G E M E N T R E P O R T Business Development In the Central and Eastern European markets, the number of new vehicle registrations was up significantly year-on-year. While the region’s economic performance was positive on the whole, the tense economic and political situation, the currency weakness and difficult financing conditions in Russia resulted in a year-on-year decline in demand. The slowdown in US economic growth impacted the truck market in North America: following high growth rates in 2015, vehicle registrations were down slightly on the previous year. Regis- tration volumes in the US market were also down slightly on the previous year’s level in the first six months of 2016. New registrations declined substantially year-on-year in South America. In Brazil, the region’s largest market, demand for trucks was down considerably on the prior-year level as a result of the persistently weak economic performance and the high inflation rates. The number of new vehicle registrations in Argentina fell sharply between January and June 2016 because of pull-forward effects in 2015 attributable to the introduction of the Euro 5 emis- sion standard. larly on larger projects, order placement is being delayed, in some cases significantly, due to sustained muted economic growth in key emerging and developing countries and persistently difficult financing conditions for customers. Activity in the construction of turbomachinery is mainly domi- nated by global investment projects in the oil, gas and processing industry and in power generation. Compared with the prior-year period, the turbomachinery market as a whole once again experi- enced marginal decline at a low level. Project volumes in the oil and gas industry remained at a low level owing to the sharp falls in the oil price. The moderate increase in the oil price over recent months has not yet led to a recovery in the turbomachinery business either. Demand in the processing industry and in power generation was also weak overall in the first half of 2016. As a result, pressure through competition and pricing increased again. The after-sales market performed positively overall. In partic- ular, the marine and power plant after-sales business with diesel engines benefited from an increased interest in long-term main- tenance contracts. Demand for mid-sized and heavy trucks in the Asia-Pacific region (excluding the Chinese market) increased significantly year- on-year. India saw a continuation of the positive economic trend in the first six months of 2016. Demand for replacement vehicles and an improvement in the investment climate led to a significant increase in registration volumes there. Registrations in the world’s largest truck market, China, rose appreciably compared with the weak prior-year level. Demand for buses in the markets that are relevant for the Volkswagen Group was down significantly on the previous year in the first six months of 2016. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are generally independent of each other. In the first six months of 2016, the marine market saw an intensification of the muted order activity that had already been noticeable during the course of 2015. Due to the excess capacity in the market, which pushed down freight rates in the transport sector, there was no sign of a recovery in the market segments affected: container ships, tankers and bulk carriers. Demand for cruise ships, passenger ferries and government vessels nevertheless continued on a growth path. The slight increase in the oil price recently has not yet had a positive effect on the offshore ship market. The market for power generation was stable at a low level compared with the prior-year period. Demand for energy solutions remained high, with a strong trend towards greater flexibility and decentralized availability. The shift away from oil-fired power plants towards dual-fuel and gas-fired power plants continued. Particu- D E M A N D F O R F I N A N C I A L S E R V I C E S Demand for automotive financial services remained high in the first six months of 2016, with the year-on-year expansion of the overall market for passenger cars providing slight impetus for growth. In Europe, the market for automotive financial services bene- fited from the higher vehicle sales particularly in Western Europe. This offset the negative effects from the continued decline in unit sales volumes in Russia. The share of financed or leased new vehicles remained at a high level; the positive trend in demand for insurance and after-sales products such as inspection contracts, maintenance and spare parts agreements also continued in the second quarter. In Germany, demand for automotive financial services once again exceeded the level in the prior-year period. The business customer segment was the main driver; in particular, demand in the after-sales area rose significantly for products such as inspection contracts as well as maintenance and spare parts agree- ments. In South Africa, demand for insurance and after-sales products was stable. Demand for automotive financial services products, particu- larly leasing, remained high in the US market. In Mexico, demand for financial services products rose compared with the previous year. The macroeconomic and political situation in Brazil remained tense. The further deterioration in conditions there had a correspondingly negative impact on the consumer credit business for new vehicles and on sales of the country-specific financial services product Consorcio, a lottery-style savings plan. 10 I N T E R I M M A N A G E M E N T R E P O R T Business Development Demand for automotive financial services across the Asia-Pacific region was mixed. In China, the proportion of loan-financed vehicle purchases continued to rise. Despite increasing restrictions on registrations in metropolitan areas, there is still considerable potential to acquire new customers for automotive-related financial services, particularly in the interior of the country. Demand for financial services products stagnated in the markets in Japan and South Korea, but rose slightly once more in Australia. The financial services market in the commercial vehicles business area continued to perform positively in Europe. In Brazil, on other hand, the difficult economic conditions led to a further decline in the numbers of trucks and buses sold, which also adversely affected the financial services market. Sales trends in the individual markets are as follows. Deliveries in Europe/Other markets Demand for Volkswagen Group vehicles in the growing passenger car market in Western Europe rose by 2.5% to 1,660,194 units in the first half of 2016. The number of Group models sold was up year-on-year in nearly all markets in this region. The Audi Q7, Audi R8 Coupé and ŠKODA Superb models achieved the highest growth rates. The new Touran also recorded strong increases. In addition, the new Tiguan was very well received by the market, and the Bentley Bentayga was the Group’s first luxury SUV to celebrate its market debut. The Volkswagen Group’s share of the passenger car market in Western Europe amounted to 23.2 (24.4)%. V O L K SWA G E N G R O U P D E L I V E R I E S The Volkswagen Group handed over 5,116,819 vehicles to custom- ers in the first six months of 2016, an increase of 77,531 units or 1.5% on the prior-year period. The chart on page 13 shows the changes in deliveries worldwide by month compared with the previous year. Separate details of deliveries of passenger cars and commercial vehicles are provided in the following. We delivered 2.2% more passenger cars to customers in Ger- many from January to June of this year than in the prior-year period; the market as a whole grew by 7.1% in the same period. The Polo, Golf, Tiguan, Touran, Passat Estate, Audi A3 Sportback and ŠKODA Octavia models were particularly popular. Eight Group models led the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) registration statistics in their respective segments: the up!, Polo, Golf, Tiguan, Touran, Passat, Audi A6 and Porsche 911. Again, the Golf was the most popular passenger car in Germany from January to June 2016 in terms of registrations. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A RY 1 TO J U N E 3 0 * 2016 Passenger cars 4,788,354 Commercial vehicles 328,465 2015 4,729,262 310,026 % + 1.2 + 5.9 Demand for Volkswagen Group vehicles in the overall declining passenger car markets in Central and Eastern Europe was up 6.0% year-on-year in the reporting period. While we recorded strong growth in the Czech Republic and Poland, our sales figures in Russia declined as a result of the continuing weak economic and politically tense situation. Demand for the Polo, ŠKODA Rapid and ŠKODA Octavia increased. The Volkswagen Group’s share of the market in this region rose to 22.3 (20.3)%. Total 5,116,819 5,039,288 + 1.5 Deliveries for 2015 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. Deliveries to Volkswagen Group customers in South Africa decreased by 7.0% in the first six months of this year; the con- traction of the market as a whole was more pronounced at 10.4%. PA S S E N G E R C A R D E L I V E R I E S W O R L D W I D E In the period from January to June 2016, the Volkswagen Group delivered 4,788,354 passenger cars to customers worldwide, exceeding the high seen in the previous year by 1.2%. The market as a whole grew by 3.1% in the same period. The Audi (+5.6%), ŠKODA (+4.6%) and Porsche (+3.5%) brands recorded encour- aging growth rates. Due to market-related declines especially in Brazil and Russia and as a result of the emissions issue, the Volks- wagen Passenger Cars brand delivered 0.7% fewer vehicles than in the prior-year period. Demand for Volkswagen Group passenger cars was higher than in the previous year in the Western Europe, Central and Eastern Europe, and Asia-Pacific regions. The table on the next page provides an overview of passenger car deliveries to customers by market in the reporting period. Deliveries in North America In the reporting period, the Volkswagen Group’s deliveries to cus- tomers in North America decreased by 1.7% year-on-year amid a growing overall market for passenger cars and light commercial vehicles. The Group’s share of the market amounted to 4.3 (4.5)%. The Jetta remained the Group’s best-selling model in North America. The Volkswagen Group delivered 7.2% fewer vehicles to cus- tomers in the USA in the first half of 2016 mainly as a consequence of the diesel issue. The market as a whole grew by 1.5% in the same period. Demand was particularly strong for models in the SUV, pickup and van segments. The Tiguan, Audi A3 Sportback, Audi Q3, Audi Q7 and Porsche Macan models all registered increases in demand. 11 I N T E R I M M A N A G E M E N T R E P O R T Business Development In a continuously growing overall Canadian market, the Volkswagen Group sold 5.3% fewer vehicles in the reporting period than in the previous year, mainly as a consequence of the diesel issue. Demand for the Golf, Audi TT Coupé, Audi Q3 and Audi Q7 models developed encouragingly. The strong momentum in the Mexican market as a whole continued in the first six months of 2016, with the Volkswagen Group increasing its deliveries to local customers by 16.4% in this period. The Gol, Vento, Jetta and SEAT Ibiza models were particularly popular. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A RY 1 TO J U N E 3 0 * D E L I V E R I E S ( U N I T S ) C H A N G E 2016 2015 (%) Europe/Other markets 2,131,729 2,092,183 + 1.9 Western Europe 1,660,194 1,619,166 + 2.5 of which: Germany 607,437 594,274 + 2.2 United Kingdom 273,209 278,735 – 2.0 Spain 138,184 135,979 + 1.6 France 136,754 136,114 + 0.5 Italy 130,540 114,558 + 14.0 Central and Eastern Europe 293,875 277,349 + 6.0 of which: Russia 74,200 79,534 – 6.7 Czech Republic 68,742 63,595 + 8.1 Poland 62,595 54,197 + 15.5 Other markets 177,660 195,668 – 9.2 of which: Turkey 79,514 80,231 – 0.9 South Africa 40,448 43,509 – 7.0 North America 439,440 447,255 – 1.7 of which: USA 273,843 294,992 – 7.2 Mexico 114,800 98,609 + 16.4 Canada 50,797 53,654 – 5.3 South America 192,779 263,405 – 26.8 of which: Brazil 127,675 193,934 – 34.2 Argentina 47,911 51,861 – 7.6 Asia-Pacific 2,024,406 1,926,419 + 5.1 of which: China 1,859,353 1,739,903 + 6.9 Japan 42,894 48,740 – 12.0 India 30,422 36,585 – 16.8 Worldwide 4,788,354 4,729,262 + 1.2 Volkswagen Passenger Cars 2,924,953 2,945,708 – 0.7 Audi 953,218 902,272 + 5.6 ŠKODA 569,353 544,300 + 4.6 SEAT 216,843 216,460 + 0.2 Bentley 4,011 4,639 – 13.5 Lamborghini 2,013 1,882 + 7.0 Porsche 117,963 113,984 + 3.5 Bugatti – 17 x Deliveries for 2015 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 12 I N T E R I M M A N A G E M E N T R E P O R T Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 2016 2016 2015 2015 1,000 1,000 900 900 800 800 700 700 600 600 J F M A M J J A S O N D Deliveries in South America Conditions in the markets for passenger cars and light commercial vehicles in South America remained very challenging and highly competitive in the first half of 2016. Demand for Volkswagen Group vehicles in the region’s generally sharply declining overall markets in this period was down 26.8% on the already weak prior-year figure. The Group’s share of the passenger car market in South America was 11.9 (13.2)%. In the rapidly deteriorating Brazilian market, we handed over 34.2% fewer vehicles to customers in the reporting period than a year earlier. The up!, Fox, Gol and Saveiro models witnessed the strongest demand. The Argentinian market recovered in the second quarter of 2016 and by the end of the first six months had surpassed the low prior-year level. Volkswagen Group sales between January and June 2016 were down 7.6% year-on-year. The Gol and Suran saw the highest demand of all Group models in Argentina. Deliveries in the Asia-Pacific region The Volkswagen Group delivered 5.1% more vehicles to customers in the Asia-Pacific region in the first six months of this year than in the prior-year period. The market as a whole grew at a slightly stronger pace in the same period, giving the Group a market share of 12.4 (12.5)% in this region. The Chinese passenger car market performed better in the reporting period than in the previous year, remaining the growth driver in the Asia-Pacific region. Demand for Group models in China rose by 6.9% compared with the previous year’s period. The Jetta, Lavida, Sagitar and Santana models were particularly popular. The new versions of the Bora, Touran, Passat and Audi A6 L models and the locally produced Golf Sportsvan were launched in the market. Between January and June 2016, we delivered 16.8% fewer vehicles to customers in the expanding Indian passenger car market than in the previous year. The most sought-after Group model was the Polo; the ŠKODA Rapid was also in high demand. In the first half of 2016, we delivered 12.0% fewer vehicles to customers in Japan year-on-year in tandem with a contracting over- all market. Demand for the Touran, Passat and Audi TT Coupé models recorded positive growth. 13 I N T E R I M M A N A G E M E N T R E P O R T Business Development C O M M E R C I A L V E H I C L E D E L I V E R I E S The Volkswagen Group delivered a total of 328,465 commercial vehicles worldwide in the first half of 2016, an increase of 5.9% on the same period of the previous year. Sales of trucks rose to 82,074 units, 4.2% more than a year before. Bus delivery volumes declined by 6.2% to 7,567 units. With 238,824 units sold, Volkswagen Commercial Vehicles exceeded the prior-year figure by 7.0%. Scania handed over 40,310 vehicles to customers in the reporting period (+9.0%). MAN sold 49,331 units, 1.1% fewer than in the previous year. In the first six months of 2016, the Volkswagen Group sold 33,869 vehicles in the Other markets, a decrease of 7.9% compared with the figure for the prior-year period. Of the units handed over to customers, 24,549 were light commercial vehicles, 8,137 were trucks and 1,183 were buses. Sales in North America climbed to 4,687 units, up 17.6% on the previous year’s level. Of the units sold, 3,541 were light com- mercial vehicles, 368 were trucks and 778 were buses, with a large share of these vehicles delivered in Mexico. In the period from January to June 2016, the Volkswagen Group delivered 211,168 commercial vehicles in the Western European markets, 10.1% more than in the previous year. Of the vehicles delivered, 164,884 were light commercial vehicles, 44,102 were trucks and 2,182 were buses. This improvement is attri- butable to the ongoing economic recovery. The Transporter and the Caddy were the most sought-after Group models. Demand for the Volkswagen Group’s commercial vehicles in the South American markets fell by 8.5% to 30,979 units: 18,040 light commercial vehicles, 11,053 trucks and 1,886 buses. The Amarok was particularly popular. Due to the continuing tough macroeconomic environment and the more difficult financing conditions, deliveries in Brazil declined, falling 21.1% short of the prior-year level to 14,093 units. This figure included 4,723 light commercial vehicles, 8,414 trucks and 956 buses. Demand for commercial vehicles in the Central and Eastern European markets rose by 14.8% to 30,457 units, including 16,720 light commercial vehicles, 13,277 trucks and 460 buses. The Transporter and the Caddy witnessed the strongest demand. The economic and political difficulties persisting in Russia led to a decline in deliveries. A total of 4,358 units were sold there (–7.6%). The Volkswagen Group delivered a total of 17,305 commercial vehicles (+1.4%) in the Asia-Pacific region; 11,090 were light commercial vehicles, 5,137 were trucks and 1,078 were buses. The Amarok and the Transporter witnessed the strongest demand. C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A RY 1 TO J U N E 3 0 * D E L I V E R I E S ( U N I T S ) C H A N G E 2016 2015 (%) Europe/Other markets 275,494 255,112 + 8.0 Western Europe 211,168 191,783 + 10.1 Central and Eastern Europe 30,457 26,540 + 14.8 Other markets 33,869 36,789 – 7.9 North America 4,687 3,986 + 17.6 South America 30,979 33,862 – 8.5 of which: Brazil 14,093 17,856 – 21.1 Asia-Pacific 17,305 17,066 + 1.4 of which: China 2,374 2,722 – 12.8 Worldwide 328,465 310,026 + 5.9 Volkswagen Commercial Vehicles 238,824 223,161 + 7.0 Scania 40,310 36,989 + 9.0 MAN 49,331 49,876 – 1.1 Deliveries for 2015 have been updated to reflect subsequent statistical trends. 14 I N T E R I M M A N A G E M E N T R E P O R T Business Development D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times typically range from just under one year to several years, and partial deliveries as construction prog- resses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. The number of new contracts signed in the Asia-Pacific region rose by 21.8% to 328 thousand. The total number of contracts amounted to 1.4 million at the end of the first half of 2016, up 7.0% on the figure for December 31, 2015. The Customer Financing/Leasing area accounted for 1.1 million contracts, an increase of 9.1% as against year-end 2015. In the period from January to June 2016, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated nearly three-quarters of overall sales revenue. G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division combines the Volkswagen Group’s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania, Porsche and Porsche Holding Salzburg. S A L E S TO T H E D E A L E R O R G A N I Z AT I O N In the first half of 2016, the Volkswagen Group’s unit sales to the dealer organization (including the Chinese joint ventures) amounted to 5,199,195 vehicles. This represents an increase of 2.1% on the prior-year period, due primarily to higher demand in Western and Central Europe as well as in China, which more than compensated for the volume decreases particularly in Brazil. Unit sales outside Germany rose by 2.2% in the reporting period, while in the German market they were up 1.6% year-on-year. Vehicles sold in Germany as a proportion of overall sales were on a level with the prior-year figure at 13.1 (13.1)%. Demand for the Financial Services Division’s products and services remained strong in the first half of 2016. The number of new financing, leasing, service and insurance contracts signed rose worldwide by 15.4% year-on-year to 3.5 million. The total number of contracts as of June 30, 2016 was higher than the 2015 year-end figure, at 16.7 million (+5.2%). The underlying contract types were modified according to their significance. The ratio of leased or financed vehicles to Group deliveries (penetration rate) in the Financial Services Division’s markets stood at 32.7 (29.7)% in the reporting period. In the Europe/Other markets region, 2.6 million new contracts were signed in the period from January to June 2016, an increase of 18.4% on the prior-year figure. As of June 30, 2016, the total number of contracts was 11.9 million, up 5.7% on the 2015 year- end figure. The Customer Financing/Leasing area accounted for 5.7 million contracts (+3.8%). The number of contracts in North America amounted to 2.6 mil- lion at the end of June 2016, up 5.4% on the figure as of Decem- ber 31, 2015. This included 1.8 million contracts in the Customer Financing/Leasing area, an increase of 3.8% on the 2015 year-end level. The number of new contracts signed amounted to 466 thou- sand, 9.0% more than in the prior-year period. In South America, 102 thousand new contracts were signed in the first six months of 2016, a decrease of 25.0% year-on-year. The total number of contracts amounted to 719 thousand as of June 30, 2016, 7.1% fewer than on December 31, 2015. The contracts mainly related to the Customer Financing/Leasing area. P R O D U C T I O N The Volkswagen Group produced a total of 5,268,086 vehicles in the period from January to June 2016, a decline of 0.9% year-on-year. Production in Germany rose by 0.8% to 1,405,429 units. The pro- portion of vehicles produced in Germany increased to 26.7 (26.3)%. I N V E N TO R I E S Global inventories at Group companies and in the dealer orga- nization were higher on June 30, 2016 than at year-end 2015 and also up on the June 30, 2015 level. E M P L OY E E S The Volkswagen Group had 591,867 active employees at the end of the first half of 2016. A further 5,936 employees were in the passive phase of their partial retirement. An additional 15,822 young people were in vocational traineeships. At the end of the second quarter of 2016, the Volkswagen Group had a total of 613,625 employees worldwide, up 0.6% on the number at December 31, 2015. Significant factors for the increase were the expansion of the workforce in the new plants in Mexico and Poland, and the recruitment of specialists. At 278,076, the number of employees in Germany was down 0.2% on year-end 2015. The proportion of employees in Germany declined to 45.3 (45.7)%. 15 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets C H A N G E I N R E P O RT I N G ST R U C T U R E The reorganization of the Volkswagen Group has resulted in slight changes to our financial reporting. In the Automotive Division, effective January 1, 2016 the former combined Commercial Vehi- cles/Power Engineering Business Area is presented as two separate business areas in accordance with the segment reporting: the Commercial Vehicles Business Area and the Power Engineering Business Area. The Automotive Division thus has three business areas: Passenger Cars, Commercial Vehicles and Power Engineer- ing. The Financial Services Division, which corresponds to the Financial Services segment, remains unchanged. R E S U LT S O F O P E R AT I O N S O F T H E G R O U P At €107.9 (108.8) billion, the Volkswagen Group’s sales revenue in the first six months of 2016 was on a level with the previous year. Positive mix effects and the good business development in the Financial Services Division were offset by negative exchange rate trends and lower vehicle unit sales, excluding the Chinese joint ventures. The Volkswagen Group generated 79.0 (79.2)% of its sales revenue outside Germany. At €21.1 (21.7) billion, gross profit from January to June 2016 was down year-on-year. The gross margin amounted to 19.6 (19.9)%; excluding special items it was 20.3%. S A L E O F L E A S E P L A N The final approvals for the sale of LeasePlan to an international consortium of investors were issued by the competent authorities in January 2016. Legal transfer of the LeasePlan shares to the con- sortium was completed on March 21, 2016. In the reporting period, the transaction had a positive effect of €2.2 billion on investing activities attributable to operating activities and net liquidity and, taking into account the disposal of the equity-accounted investment, resulted in income of €0.2 billion for the Volkswagen Group, which is reported in the financial result. R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A RY 1 TO J U N E 3 0 € million 2016 Passenger Cars Sales revenue 75,285 Gross profit 15,324 S P E C I A L I T E M S Special items relating to the diesel issue amounted to €–1.6 billion in the reporting period, mainly due to higher expenses attributable to the recognition of provisions for legal risks. Operating result Operating return on sales (%) Commercial Vehicles 3,895 5.2 Additional provisions had to be recognized because of the expanded scope of the replacement of potentially faulty airbags manufactured and supplied by Takata that had been imposed by the competent authorities in the USA and Canada on all affected auto- mobile manufacturers. The resulting special items recognized in operating profit in the period from January to June 2016 amounted to €–0.2 billion. Sales revenue Gross profit Operating result Operating return on sales (%) Power Engineering 15,589 2,613 285 1.8 Sales revenue 1,673 Restructuring measures in the trucks business in South America, which serve to sustainably enhance competitiveness (€–0.1 billion), and provisions for legal risks relating to the commercial vehicles antitrust proceedings launched by the European Commission (€–0.4 billion) resulted in total special items of €–0.5 billion in the Commercial Vehicles Business Area in the reporting period. Gross profit Operating result Operating return on sales (%) 321 – 18 – 1.1 Overall, negative special items recognized in operating profit therefore amounted to €2.2 billion in the first six months of 2016. 16 2015 77,129 15,834 5,346 6.9 15,151 2,484 349 2.3 1,813 348 5 0.3 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets O P E R A T I N G P R O F I T B E F O R E S P E C I A L I T E M S B Y Q U A R T E R Volkswagen Group in € million 2016 2016 2015 2015 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 Q1 Q2 Q3 Q4 At €7.5 (7.0) billion, operating profit before special items was higher than in the previous year, and the operating return on sales before special items was 7.0 (6.4)%. In addition to optimized prod- uct costs, mix improvements had a positive effect, while exchange rate and volume effects had a negative impact. Special items of €–2.2 (–0.2) billion – particularly for legal risks – weighed on operating profit; of this total, €–1.7 billion is attributable to the Passenger Cars Business Area and €–0.5 (–0.2) billion to the Commercial Vehicles Business Area. As a result, at €5.3 billion, the Volkswagen Group’s operating profit in the first six months of 2016 was €1.5 billion lower than the year before. The operating return on sales declined to 4.9 (6.3)%. year-on-year in the Commercial Vehicles Business Area. As our Chinese joint ventures are accounted for using the equity method, the Group’s business growth in the Chinese passenger car market is primarily reflected in consolidated sales revenue only by deliveries of vehicles and vehicle parts. Cost of sales declined year-on-year. Improved product costs and currency translation effects were positive factors, while higher depreciation and amortization charges resulting from high capital expenditures and special items relating to the diesel issue and the replacement of procured airbags were negative factors. Research and development costs were down slightly on the previous year. Gross profit amounted to €18.3 (18.7) billion. The financial result decreased by €1.4 billion to €–0.5 billion; the decrease was a result in particular of higher finance costs due to remeasurement effects, a year-on-year decline in income from the equity-accounted Chinese joint ventures and higher expenses from the measurement of derivative financial instruments at the reporting date. The income from the sale of the LeasePlan shares had a positive effect. At €4.8 billion, the Group’s profit before tax was 37.2% lower than in the previous year as a result of the special items. Profit after tax declined by €2.1 billion to €3.6 billion. Results of operations in the Automotive Division The Automotive Division generated sales revenue of €92.5 (94.1) bil- lion in the period from January to June 2016. The decrease was attributable primarily to negative exchange rate and volume effects, which were partly offset by positive mix developments. Sales revenue declined in the Passenger Cars and Power Engineering Business Areas in the first six months of 2016, but grew slightly Distribution expenses rose in the reporting period, primarily because of higher marketing expenses as a result of the emissions issue; the ratio of distribution expenses to sales revenue also increased slightly. Administrative expenses grew marginally, and the ratio of administrative expenses to sales revenue was close to the previous year’s level. The other operating result fell to €– 1.1 (– 0.3) billion; it was negatively impacted by special items in connection with the diesel issue and the Commercial Vehicles Business Area. At €4.2 billion, the Automotive Division’s operating profit in the first six months of 2016 was €1.5 billion lower than in the previous year. The operating return on sales declined to 4.5 (6.1)%. Special items contained in this figure amounted to €–2.2 (–0.2) billion. The Automotive Division’s operating profit before special items was €6.3 (5.9) billion, and its operating return on sales before special items increased to 6.9 (6.2)%. Optimized product costs and favor- able mix developments were able to more than offset negative exchange rate effects and declining vehicle unit sales, as well as 17 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets higher marketing costs. Since the profit recorded by the joint ventures is accounted for in the financial result using the equity method, the business growth of our Chinese joint ventures is primarily reflected in the Group’s operating result only by deliveries of vehicles and vehicle parts, and license revenue. F I N A N C I A L P O S I T I O N I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A RY 1 TO J U N E 3 0 At €–0.5 billion, the financial result was €1.3 billion lower year- on-year; this figure contained higher finance costs due to remea- surement effects, lower investment income from the Chinese joint ventures and increased expenses from the measurement of derivative financial instruments at the reporting date, which were partly offset by income from the sale of the LeasePlan shares. € million Passenger Cars Gross cash flow Change in working capital* 2016 9,101 – 716 2015 12,506 – 2,814 Cash flows from operating activities* 8,385 9,692 Results of operations in the Financial Services Division In the period from January to June 2016, the Financial Services Division generated sales revenue of €15.4 billion, thus exceeding the 2015 comparative figure by 4.8%, largely because of growth in business volumes. Cash flows from investing activities attributable to operating activities Net cash flow* Commercial Vehicles – 3,659 4,727 – 5,757 3,935 At €2.9 (3.0) billion, gross profit was down slightly year-on-year because of the sustained pressure on margins and higher depre- ciation and amortization charges. Gross cash flow Change in working capital Cash flows from operating activities 1,254 18 1,272 1,310 56 1,366 Distribution expenses in the reporting period were on a level with 2015, and the ratio of distribution expenses to sales revenue was almost unchanged. Despite higher expenses for meeting regu- latory requirements, administrative expenses declined by 3.2%, and the ratio of administrative expenses to sales revenue decreased slightly. Cash flows from investing activities attributable to operating activities Net cash flow Power Engineering – 856 416 – 908 458 Gross cash flow 132 189 Operating profit increased by 5.1% to €1.2 billion, and the Change in working capital – 53 – 13 operating return on sales was 7.6 (7.6)%, as in the previous year. Cash flows from operating activities 79 175 F I N A N C I A L P O S I T I O N O F T H E G R O U P In the first six months of 2016, the Volkswagen Group’s gross cash flow amounted to €15.2 billion, representing a decline of 16.4% year-on-year. Funds tied up in working capital amounted to €10.1 billion, down €0.7 billion on the previous year. As a result, cash flows from operating activities decreased to €5.1 (7.4) billion. Investing activities attributable to the Volkswagen Group’s operating activities decreased by €1.8 billion to €5.1 billion in the reporting period. Within investing activities, investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs (capex) were lower than the previous year, while capitalized development costs increased year-on-year. The “Acquisition and disposal of equity investments” item was affected by the cash inflow from the sale of the LeasePlan shares and the cash outflow for the investment in ride-hailing service GETT. Cash flows from investing activities attributable to operating activities – 86 Net cash flow – 7 Prior-year figures adjusted. Financial position in the Automotive Division In the first six months of 2016, the Automotive Division generated gross cash flow of €10.5 billion; the €3.5 billion decline resulted primarily from the special items in the Passenger Cars and Com- mercial Vehicles Business Areas, as well as from lower dividends from the Chinese joint ventures. At €0.8 (2.8) billion, funds tied up in working capital were down considerably on the previous year. The new special items recognized in the first six months of 2016 had a negative impact overall on gross cash flow and a positive effect on the change in working capital. Cash flows from operating activities decreased by €1.5 billion to €9.7 billion. – 97 79 The Group recorded cash inflows from financing activities of €8.2 (1.3) billion in the first six months of 2016. At €29.3 billion, the Volkswagen Group’s cash and cash equivalents reported in the cash flow statement increased significantly year-on-year. The Volkswagen Group’s net liquidity at June 30, 2016 was €– 99.5 (– 100.5) billion and thus on a level with year-end 2015. At €4.6 (6.8) billion, investing activities attributable to operating activities were considerably lower year-on-year in the reporting period. Capex decreased slightly compared with the previous year; the ratio of capex to sales revenue was unchanged at 4.9 (4.9)%. Capitalized development costs increased by €0.4 billion to €2.6 bil- lion. We invested primarily in our production facilities and in models to be launched in 2016 and 2017, as well as in the ecological focus of the model range, drivetrain electrification and modular toolkits. The sale of the LeasePlan shares resulted in a cash inflow of €2.2 billion. 18 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets The Automotive Division’s net cash flow rose by €0.7 billion to €5.1 billion in the period from January to June 2016. In financing activities, a capital increase carried out by Volks- wagen AG at Volkswagen Financial Services AG in April 2016 to finance the growth in business volumes and comply with the increase in regulatory capital requirements resulted in outflows of €0.5 billion. At the end of June, a total dividend of €0.1 (2.3) billion, which was considerably lower than in the previous year, was distributed to the shareholders of Volkswagen AG. The Automotive Division’s financing activities include the issuance and redemption of bonds and other to €2.5 (– 3.0) billion. financial liabilities and amounted At €28.8 billion, the Automotive Division’s net liquidity at the end of June 2016 exceeded the 2015 year-end figure by €4.3 billion. Financial position in the Financial Services Division The Financial Services Division’s gross cash flow improved by 12.5% year-on-year to €4.8 billion in the first six months of 2016. At €9.4 (8.0) billion, funds tied up in working capital were higher than in the first six months of 2015, due in particular to the growth in the volume of business. Investing activities attributable to operating activities amounted to €0.5 (0.2) billion; this also includes the acquisition of the interest in ride-hailing service GETT amounting to €0.3 billion. Cash inflows from financing activities amounted to €5.7 (4.3) billion. At the end of the first half of 2016, the Financial Services Division’s negative net liquidity, which is common in the industry, amounted to €– 128.3 billion, after €–125.1 billion at December 31, 2015. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E At €401.4 billion, the Volkswagen Group’s total assets as of June 30, 2016 exceeded the year-end 2015 figure by 5.1%. The Group’s equity was slightly higher than at December 31, 2015 at €88.9 (88.3) bil- lion. The equity ratio was 22.1 (23.1)%. than at year-end 2015. Current assets rose by 22.4%; inventories contained in this item mainly rose due to production-related and exchange rate factors. Receivables increased significantly; they include the still unpaid dividends of the Chinese joint ventures. At €24.2 (15.7) billion, cash and cash equivalents in the Automotive Division were significantly higher at the end of the reporting period than at December 31, 2015. As of June 30, 2016, the Automotive Division’s equity was on a level with the previous year at €66.9 (67.4) billion. It was lifted by the good earnings growth before special items and positive effects from the measurement of derivatives recog- nized outside profit or loss. Expenses from special items, higher actuarial losses from the measurement of pension provisions and negative currency translation effects reduced the Automotive Division’s equity. The dividend distribution to the shareholders of Volkswagen AG at the end of June was considerably lower than in the previous year. The noncontrolling interests are mainly attri- butable to RENK AG and AUDI AG. As these were lower overall than the noncontrolling interests attributable to the Financial Services Division, the figure for the Automotive Division, where the deduction was recognized, was negative. Noncurrent liabilities rose by 7.7% compared with Decem- ber 31, 2015. While the financial liabilities contained in this item declined by €3.1 billion, pension provisions increased substantially because of the change in the discount rate; other noncurrent pro- visions rose because of the special items. At €74.7 billion, current liabilities were 13.3% higher than at the end of December 2015; the current other provisions contained in this item increased because of the special items. Current financial liabilities went up to €2.3 (– 4.0) billion. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Auto- motive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed for the prior-year period. The item “Put options and compensation rights granted to noncontrolling interest share- holders” primarily comprises the liability for the obligation to acquire the shares held by the remaining free float shareholders of MAN. Automotive Division balance sheet structure Both intangible assets and property, plant and equipment were on a level with December 31, 2015 in the Automotive Division. Equity- accounted investments decreased, mainly as a result of the sale of the LeasePlan shares and the dividend resolutions by the Chinese joint ventures. Overall, noncurrent assets were somewhat lower At €220.8 (206.8) billion, the Automotive Division’s total assets as of June 30, 2016 were 6.8% higher than as of December 31, 2015. 19 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets B A L A N C E S H E E T ST R U C T U R E I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S by Volkswagen AG in April to finance the growth in business and meet regulatory capital requirements. The equity ratio was 12.2 (11.9)%. Noncurrent liabilities were up slightly on year-end 2015 at 72.5 billion. Current liabilities rose by 4.3%. The increase mainly resulted from the funding of volume growth. € million June 30, 2016 Dec. 31, 2015 At €32.0 (26.5) billion, deposits from direct banking business were higher than at the end of 2015. Passenger Cars Noncurrent assets Current assets Total assets 102,490 70,914 173,404 105,028 57,289 162,317 R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S We have aligned our expected deliveries to customers to reflect the stronger recovery of the European automotive markets. Equity Noncurrent liabilities Current liabilities 52,152 66,019 55,233 54,598 61,195 46,524 Special items, in particular relating to legal risks, serve to reduce the earnings forecast including special items for the Group and for the Passenger Cars and Commercial Vehicles business areas. Commercial Vehicles Noncurrent assets Current assets Total assets Equity Noncurrent liabilities Current liabilities 24,795 16,557 41,352 11,692 12,313 17,347 24,749 13,421 38,170 9,512 11,532 17,126 Beyond this, the following changes were made in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2016 in the “Report on Expected Developments” and “Report on Risks and Opportunities” chapters – including the “Risks from the emissions issue” and “Litigation/Diesel issue” sections and the underlying description of the issues in the chapter entitled “The Emissions Issue” – of the combined management report in the 2015 Annual Report: Power Engineering Noncurrent assets 2,925 Current assets 3,151 Total assets 6,077 Equity 3,103 Noncurrent liabilities 870 Current liabilities 2,104 Financial Services Division balance sheet structure The Financial Services Division’s total assets amounted to €180.6 bil- lion as of June 30, 2016, 3.1% higher than at the end of December 2015. 3,035 3,310 6,345 3,255 842 2,248 In June 2016, Volkswagen publicly announced that Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates had reached settlement agreements in the USA with the U.S. Depart- ment of Justice, the U.S. Environmental Protection Agency (EPA), the U.S. Federal Trade Commission, the California Air Resources Board (CARB) and private plaintiffs represented by a Plaintiffs’ Steering Committee (PSC) in the Multi-District Litigation pending in California. The settlement agreements, if finally approved, will resolve certain civil claims made in relation to affected diesel vehicles with 2.0 l TDI engines from the Volkswagen Passenger Cars and Audi brands in the USA. The settlement agreements are subject to final court approval. Noncurrent assets rose by 4.2% overall. The lease assets and noncurrent financial services receivables contained in this item recorded a rise due to the growth in business. Equity-accounted investments increased following the purchase of the interest in GETT. Current assets were up slightly year-on-year because of higher financial services receivables. Approximately 45.0 (45.8)% of the Volkswagen Group’s assets were attributable to the Financial Services Division at the end of the first six months of 2016. At €21.9 billion, the Financial Services Division’s equity at the end of the reporting period was 5.0% higher than at the end of the previous fiscal year. In addition to earnings growth, the increase was attributable in particular to the capital increase implemented The proposed settlements provide affected customers with the option of a buyback or, for leased vehicles, early lease termination or a free technical modification of the vehicles, provided that EPA and CARB approve the appropriate modification measures. Volkswagen will also make cash payments to affected owners and lessees. Volkswagen also agreed to support environmental programs. The company will pay USD 2.7 billion over three years into an envi- ronmental trust, managed by a trustee appointed by the court, to offset excess nitrogen oxide (NOx) emissions. Volkswagen will also invest in total USD 2.0 billion over 10 years in zero emissions vehicle infrastructure as well as corresponding access and awareness initiatives. 20 I N T E R I M M A N A G E M E N T R E P O R T Results of Operations, Financial Position and Net Assets Volkswagen also reached separate settlement agreements with the attorneys general of 44 US states, the District of Columbia and Puerto Rico, to resolve their existing or potential consumer pro- tection and unfair trade practices claims – in connection with both 2.0 l TDI and 3.0 l TDI vehicles in the USA – for a settlement amount of USD 603 million. These settlements do not resolve the civil claims by the DOJ, FTC and private plaintiffs represented by the PSC related to 3.0 l TDI vehicles, civil penalties sought by the DOJ on behalf of the EPA, potential state environmental claims related to the 2.0 l and 3.0 l TDI vehicles, any criminal investigations by the DOJ, as well as certain other claims. In 2011, the European Commission opened antitrust proceedings against European truck manufacturers concerning inappropriate exchange of information during the period 1997-2011 and sent a statement of objections to MAN, Scania and the other truck manufacturers concerned in November 2014. With its decision as of July 19, 2016 the European Commission has fined five European truck manufacturers excluding MAN and Scania. MAN was not fined as the company had informed the EU Commission about the cartel as a key witness. With regard to Scania, the antitrust proceedings will be con- tinued. Scania has decided to fully exercise its rights of defense in the ongoing investigation. A provision of €0.4 billion was recog- nized in order to cover possible fines. On July 19, 2016, the US states of Maryland, Massachusetts and New York filed complaints in their respective state courts against Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates seeking civil penalties and injunctive relief for alleged violations of environmental laws. Maryland, Massachusetts and New York participated in the state settlements described above with respect to consumer protection and unfair trade practices claims, but those settlements did not include claims for environmental penalties. It is not possible at the present time to rule out a potential further increase in the recalls of a range of models produced by various manufacturers in which certain airbags manufactured by Takata were installed. This could also affect Volkswagen Group models. In addition, there are risks in connection with the decision by the UK to leave the EU following the outcome of the Brexit referendum in June 2016. In light of this, we are monitoring potential consequences for macroeconomic growth, effects on exchange rates and reduced demand for Group products. This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales markets, or any significant shifts in exchange rates relevant to the Volkswagen Group, will have a corresponding effect on the development of our business. In addition, expected business development may vary if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities presented in the 2015 Annual Report develop in a way other than we are currently expecting, or additional risks and opportunities or other factors emerge that affect the development of our business. 21 I N T E R I M M A N A G E M E N T R E P O R T Outlook Outlook The global economy saw moderate growth in the first six months of 2016. Both in industrialized nations and in emerging economies, momentum slowed slightly compared with 2015 as a whole. The Volkswagen Group’s Board of Management expects the global eco- nomy to record the same level of growth in 2016 as in the previous year. Risks will arise from potential turbulence in the financial markets – including as a result of a future Brexit from the EU – and structural deficits in individual countries. In addition, growth prospects continue to be hurt by geopolitical tensions and conflicts. We expect the positive economic trend in industrialized nations to continue, with moderate rates of expansion overall. In all prob- ability, growth in emerging economies will be at a similar level to the previous year. We expect the strongest rates of expansion in Asia’s emerging economies. its steadily growing presence in all major world markets and its wide selection of financial services. Our range of models spans from motorcycles through compact, sports and luxury cars to heavy trucks and buses, and covers almost all segments. The Volkswagen Group’s brands will press ahead with their product initiative in 2016, modernizing and expanding their offering by introducing new models. Our goal is to offer all customers the mobility and innovations they need, sustainably strengthening our competitive position in the process. We expect that, on the whole, deliveries to customers of the Volkswagen Group in 2016 will be slightly higher than the previous year amid persistently challenging market conditions, with a growing volume in China. Global demand for passenger cars continued to rise in the first six months of 2016, although there was regional variation in the markets. We expect trends in the passenger car markets in the individual regions to be mixed over the year as a whole, too. Overall, global demand for new vehicles will probably rise at a similar pace to 2015. We anticipate that demand volume in Western Europe and the German passenger car market will be slightly higher than in the previous year. In the Central and Eastern European markets, demand for passenger cars is estimated to be slightly lower than the weak prior-year figure. In North America, we expect last year’s positive trend to continue at a slightly weaker pace. Volumes in the South American markets will probably fall noticeably short of the prior-year figures. The passenger car markets in the Asia-Pacific region look set to continue their growth path at a similar pace. Global demand for light commercial vehicles will probably see a slight increase in 2016. We expect trends to vary from region to region. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group, new registrations in 2016 will probably be at the previous year’s level overall with performance varying from region to region, while demand in the relevant bus markets will decline noticeably. In addition to the emissions issue, the highly competitive environment as well as interest rate and exchange rate volatility and fluctuations in raw materials prices all pose challenges. We antic- ipate positive effects from the efficiency programs implemented by all brands and from the modular toolkits. Depending on the economic conditions – particularly in South America and Russia – and exchange rate developments and in light of the emissions issue, we expect 2016 sales revenue for the Volkswagen Group to be down by as much as 5% on the prior-year figure. In terms of the Group’s operating profit before special items, we anticipate that the operating return on sales will be between 5.0% and 6.0% in 2016. In the Passenger Cars Business Area, we expect a noticeable decrease in sales revenue, with an operating return on sales before special items in the anticipated range of 5.5 – 6.5%. With sales revenue in the Commercial Vehicles Business Area remaining essentially unchanged, we assume that the operating return on sales before special items will be between 2.0% and 4.0%. We expect sales revenue in the Power Engineering Business Area to be perceptibly lower than the prior-year figure, with a significantly reduced operating profit. For the Financial Services Division, we are forecasting sales revenue and operating profit at the prior-year level. We expect automotive financial services to continue to grow in importance worldwide in 2016. The Volkswagen Group is well positioned to deal with the mixed developments in the global automotive markets. Our broad, selectively expanded product range featuring the latest generation of engines as well as a variety of alternative drives puts us in a good position globally compared with our competitors. The Group’s further strengths include in particular its unique brand portfolio, After special items we are expecting a clearly positive operating return on sales for the Group and the Passenger Cars Business Area, and a slightly positive operating return on sales for the Commercial Vehicles Business Area; however the respective target range will not be reached. Disciplined cost and investment management and the contin- uous optimization of our processes remain integral elements of the Volkswagen Group’s strategy. 22 B R A N D S A N D B U S I N E S S F I E L D S Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D The sales revenue of the Volkswagen Group amounted to €107.9 (108.8) billion in the first half of 2016. Operating profit declined by €1.5 billion to €5.3 billion, weighted down by special items totaling €–2.2 billion. Operating profit before special items rose to €7.5 (7.0) billion. The Volkswagen Passenger Cars brand’s unit sales of 2.2 (2.3) million vehicles in the first six months of 2016 matched the prior- year level. This figure includes 1.6 (1.7) million Volkswagen models. The Polo, Golf, Tiguan and Passat were especially popular among customers. At €53.0 (53.6) billion, sales revenue almost reached the items previous year’s decreased to €0.9 (1.4) billion. Negative impacts resulting from unfavorable exchange rates and mix effects, lower volumes and higher marketing costs as a consequence of the emissions issue were offset by cost savings. The diesel issue in particular gave rise to special items of €–1.5 billion. level. Operating profit before special key performance indicators for the Audi brand also include the Lamborghini and Ducati brands. Ducati sold 39 thousand motor- cycles in the reporting period (+9.8%). The ŠKODA brand’s unit sales rose by 2.4% in the first half of 2016 to 431 thousand vehicles. The Fabia, Octavia and Superb models in particular saw strong customer demand. At €7.1 billion, sales revenue was up 10.8% year-on-year. Operating profit improved by 31.2% to €685 million mainly on the back of positive volume and mix effects as well as optimized product costs. The SEAT brand’s unit sales fell to 276 (286) thousand vehicles in the first six months of 2016 largely due to the phasing out of the Altea. This figure includes the Q3 manufactured for Audi. Demand remained high for the Ibiza and the Leon, while the Ateca was very well received by the market. Sales revenue maintained the 2015 level at €4.5 (4.5) billion. Operating profit climbed €40 million to €93 million, with cost reductions and mix improvements compen- sating for negative volume and exchange rate effects. The Audi brand sold 799 (784) thousand vehicles worldwide in the period from January to June 2016, 2.0% more than a year earlier. Our Chinese joint venture FAW-Volkswagen sold a further 276 (240) thousand Audi vehicles. There was strong demand for the Q3 SUV model and the new generations of the A4, TT and Q7. Sales revenue increased to €30.1 (29.8) billion. Operating profit before special items came to €2.7 (2.9) billion. Exchange rate effects and continuing high upfront expenditures for new products and technologies and for the expansion of the international production network had a negative impact on earnings. The diesel issue and the increased scope of the replacement of faulty airbags delivered by Takata resulted in special items of €–0.3 billion. The financial Unit sales by the Bentley brand in the period from January to June 2016 fell by 3.1% year-on-year to 4,863 vehicles. The new Bentayga enjoyed buoyant demand. Sales revenue was down 6.0% on the previous year at €883 million. Operating profit decreased by €75 million to €–22 million mainly due to changed market con- ditions and unfavorable exchange rates. The Porsche brand lifted its vehicle sales by 7.2% in the reporting period to 117 thousand units worldwide. Demand increased for the Boxster, Cayman, 911 and Macan models. Sales revenue amounted to €10.9 (10.8) billion. Operating profit rose by 7.7% to €1.8 billion; alongside the increase in volumes, mainly exchange rate effects had a positive impact. V O L K S WA G E N G R O U P Division Automotive Financial Services Brand/ Business Field Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Volkswagen Commercial Vehicles Scania MAN Others Dealer and customer financing Leasing Direct bank Insurance Fleet management Mobility offerings 23 B R A N D S A N D B U S I N E S S F I E L D S Volkswagen Commercial Vehicles sold 231 (231) thousand vehicles worldwide in the first half of 2016. The Multivan/Transporter and Caddy models were particularly popular. Sales revenue improved by 3.5% year-on-year to €5.4 billion. Operating profit rose to €299 (268) million as a result of mix effects. Unit sales by the Scania brand increased to 41 (38) thousand trucks and buses in the reporting period, with rising sales figures in Europe making up for the decline in demand in South America, Turkey and Russia. Sales revenue increased by 7.6% to €5.6 billion. Operating profit before special items improved to €550 (503) mil- lion, as negative exchange rate effects were more than offset by higher vehicle sales and an expansion of the service business. Legal risks in connection with the commercial vehicle antitrust pro- ceedings launched by the European Commission gave rise to special items of €–0.4 billion. MAN Commercial Vehicles sold 49 (50) thousand units in the period from January to June of this year. At €4.8 (4.9) billion, sales revenue fell slightly short of the prior-year figure. In spite of the persistently difficult economic climate in South America, the operating profit before special items rose to €186 (54) million. Alongside the higher volumes and improved margins in Europe, the structural changes introduced also had a positive effect here. Restructuring measures in South America led to special items of €–0.1 billion; in the pre- vious year, special items of €–0.2 billion had been incurred for restructuring measures in Europe. MAN Power Engineering generated sales revenue of €1.7 bil- lion in the first six months of 2016, a decrease of 7.7% year-on-year. This reduced the operating profit by €32 million to €103 million. At €995 million, the operating profit at Volkswagen Financial Services in the reporting period was 2.6% higher than in the pre- vious year. Volume-related factors in particular had a positive effect. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A RY 1 TO J U N E 3 0 1 S A L E S T O T H I R D V E H I C L E S A L E S S A L E S R E V E N U E P A R T I E S O P E R A T I N G R E S U L T thousand units/€ million 2016 2015 2016 2015 2016 2015 2016 2015 Volkswagen Passenger Cars 2,232 2,251 53,006 53,578 34,644 36,426 881 1,428 Audi 799 784 30,134 29,784 19,452 19,775 2,666 2,914 ŠKODA 431 421 7,114 6,421 3,465 3,227 685 522 SEAT 276 286 4,485 4,469 1,912 1,873 93 52 Bentley 5 5 883 939 643 621 – 22 54 Porsche2 117 109 10,929 10,850 10,028 9,912 1,830 1,698 Volkswagen Commercial Vehicles 231 231 5,406 5,223 2,700 2,487 299 268 Scania2 41 38 5,575 5,182 5,575 5,182 550 503 MAN Commercial Vehicles 49 50 4,798 4,919 4,450 4,781 186 54 MAN Power Engineering – – 1,673 1,813 1,672 1,812 103 135 VW China3 1,867 1,743 – – – – – – Other – 849 – 827 – 29,679 – 27,420 11,119 10,816 – 7494 – 1,6084 Volkswagen Financial Services – – 13,611 13,018 12,276 11,862 995 970 Volkswagen Group before special items – – – – – – 7,517 6,990 Special items – – – – – – – 2,178 – 170 Volkswagen Group 5,199 5,090 107,935 108,776 107,935 108,776 5,339 6,820 Automotive Division5 5,199 5,090 92,547 94,093 94,085 95,412 4,162 5,700 of which: Passenger Cars Business Area 4,879 4,772 75,285 77,129 80,004 81,449 3,895 5,346 Commercial Vehicles Business Area 320 318 15,589 15,151 12,410 12,150 285 349 Power Engineering Business Area – – 1,673 1,813 1,672 1,812 – 18 5 Financial Services Division – – 15,388 14,683 13,850 13,364 1,177 1,120 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 Including financial services. 3 The sales revenue and operating profit of the joint venture companies in China are not included in the figures for the Group. The Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €2,366 (2,744) million. 4 Mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation for Scania, Porsche Holding Salzburg, MAN and Porsche. 5 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 24 B R A N D S A N D B U S I N E S S F I E L D S U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T At 2.4 million vehicles, the Volkswagen Group sold 3.1% more units in the first half of 2016 in the Europe/Other markets region than in the previous year. Sales revenue rose to €69.9 (67.6) billion. Volkswagen Group’s unit sales in this region by 22.5% to 219 thou- sand vehicles. Sales revenue was down 29.6% to €3.8 billion, attributable to lower volumes and the unfavorable exchange rate trend. Buoyed by higher demand in Mexico, the Volkswagen Group lifted unit sales in the North American market by 2.8% year-on-year in the reporting period to 469 thousand vehicles. Sales revenue was marginally below the prior-year level at €17.0 (17.4) billion. In the South American markets the economic conditions remained difficult in the first six months of 2016, reducing the In the Asia-Pacific region we sold a total of 2.1 million vehicles between January and June of this year – including the Chinese joint ventures; this represents an increase of 4.4% as against the previous year. Sales revenue, which does not include our equity- accounted Chinese joint ventures, was down 6.4% on 2015 at €17.3 billion as a result of volume and exchange rate effects. K E Y F I G U R E S B Y M A R K E T F R O M J A N U A RY 1 T O J U N E 3 0 1 V E H I C L E S A L E S S A L E S R E V E N U E thousand units/€ million 2016 2015 2016 2015 Europe/Other markets 2,392 2,321 69,861 67,568 North America 469 457 17,044 17,414 South America 219 283 3,777 5,365 Asia-Pacific2 2,119 2,030 17,254 18,429 Volkswagen Group2 5,199 5,090 107,935 108,776 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 25 B R A N D S A N D B U S I N E S S F I E L D S V O L K SWA G E N F I N A N C I A L S E R V I C E S Volkswagen Financial Services supported the Volkswagen Group’s sales growth in the first half of 2016 with its innovative products along the automotive value chain. Volkswagen Bank GmbH was voted Best Brand in the Automotiv Bank category by readers of auto motor sport magazine. This was the tenth consecutive time that Volkswagen Bank GmbH received this accolade, beating 25 competitors in the 2016 survey. securities (ABS) transactions and customer deposits from the direct banking business. The ABS program was successfully continued in the first half of 2016 with the placement of the 23rd transaction involving collateralized financing contracts, VCL 23, with a volume of around €750 million. Volkswagen Financial Services AG issued its first bond denominated in Chinese renminbi in the reporting period. The successfully placed three-year bond has a volume of 2 billion renminbi. Readers of Auto Bild magazine chose Volkswagen Bank GmbH as Best Automotive Bank for the fifth time in succession, with over 60,000 readers participating in the poll. The finals of the “Just Leasing – Play. Learn. Win” university competition initiated by Volkswagen Financial Services AG took place in April 2016. A total of 120 teams from 55 German third-level institutions took part in the leasing business game. The participants took over management of their virtual leasing companies and in different rounds of the game had to make practical decisions, for example in the areas of Sales, Human Resources, or Finance. In light of the growing digitalization, Volkswagen Financial Services has established a new communications channel, “VWFS – News2Go”, on which Group-wide information can also be called up in a flexible manner with the use of audio clips. The first pilot broadcasts have been compiled for staff and executives from the sales force. The number of new financing, leasing, service and insurance contracts signed in the first half of 2016 rose by 15.2% year-on-year to 3.3 million. The total number of contracts amounted to 15.4 mil- lion as of June 30, 2016, an increase of 5.1% on the figure for December 31, 2015. In the Customer Financing/Leasing area, the number of contracts rose slightly by 3.4% compared with the 2015 year-end figure to 8.6 million. The number of contracts in the Service/Insurance area was up 7.4% year-on-year to 6.8 million. The underlying contract types were modified according to their significance. Based on unchanged credit eligibility criteria, the penetration rate, expressed as the ratio of leased or financed vehi- cles to relevant Group delivery volumes, increased to 32.5 (29.5)%. Volkswagen Bank’s direct banking business had approximately 1.5 (1.4) million accounts at the end of the first half of 2016. Volkswagen Financial Services had a total of 13,151 employees as of June 30, 2016, unchanged on the December 31, 2015 level. The main refinancing sources for Volkswagen Financial Ser- vices are money and capital market instruments, asset-backed 26 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Income Statement Interim Consolidated Financial Statements (Condensed) I NCOME STATEMENT FOR TH E PERIOD JAN UARY 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2016 2015 2016 2015 Sales revenue 107,935 108,776 92,547 94,093 Cost of sales – 86,790 – 87,078 – 74,290 – 75,427 Gross profit 21,145 21,698 18,257 18,666 Distribution expenses – 10,751 – 10,431 – 10,139 – 9,819 Administrative expenses – 3,670 – 3,626 – 2,889 – 2,818 Other operating income/expense – 1,385 – 821 – 1,068 – 330 Operating profit 5,339 6,820 4,162 5,700 Share of profits and losses of equity-accounted investments 1,715 2,241 1,679 2,222 Other financial result – 2,243 – 1,397 – 2,174 – 1,437 Financial result – 528 843 – 495 785 Profit before tax 4,810 7,664 3,667 6,485 Income tax expense – 1,231 – 2,000 – 775 – 1,603 Profit after tax 3,579 5,663 2,892 4,882 of which attributable to Noncontrolling interests 6 7 – 44 – 5 Volkswagen AG hybrid capital investors 112 99 112 99 Volkswagen AG shareholders 3,461 5,558 2,824 4,789 Basic earnings per ordinary share (€)² 6.88 11.06 Diluted earnings per ordinary share (€)² 6.88 11.06 Basic earnings per preferred share (€)² 6.94 11.12 Diluted earnings per preferred share (€)² 6.94 11.12 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in note 4. Prior-year figures restated to reflect application of IAS 33.26. 27 F I N A N C I A L S E R V I C E S 2016 2015 15,388 14,683 – 12,501 – 11,651 2,888 3,032 – 612 – 613 – 782 – 808 – 317 – 491 1,177 1,120 36 19 – 69 39 – 34 58 1,144 1,179 – 457 – 397 687 781 49 12 – – 638 770 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Comprehensive Income STATE MENT OF COMPREH ENSIVE I NCOME FOR TH E PERIOD JAN UARY 1 TO J U N E 30 € million Profit after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 28 2016 3,579 – 7,512 2,219 – 5,293 – 1 – 5,294 – 729 0 – 729 0 – 729 3,912 894 4,806 – 1,401 3,405 60 16 76 – 20 56 – 172 2,560 – 3,531 798 – 2,733 846 4 112 730 2015 5,663 1,773 – 523 1,250 – 3 1,248 1,829 0 1,829 0 1,829 – 7,589 2,243 – 5,346 1,576 – 3,770 588 – 182 406 50 456 473 – 1,011 – 867 1,104 237 5,900 8 99 5,794 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Income Statement I NCOME STATEMENT FOR TH E PERIOD APRI L 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2016 2015 2016 2015 Sales revenue 56,971 56,041 49,017 48,287 Cost of sales – 46,124 – 44,652 – 39,565 – 38,454 Gross profit 10,847 11,389 9,452 9,832 Distribution expenses – 5,647 – 5,455 – 5,351 – 5,144 Administrative expenses – 1,890 – 1,811 – 1,513 – 1,399 Other operating income/expense – 1,412 – 631 – 1,275 – 446 Operating profit 1,899 3,492 1,312 2,844 Share of profits and losses of equity-accounted investments 601 1,095 585 1,086 Other financial result – 892 – 891 – 896 – 917 Financial result – 291 204 – 312 170 Profit before tax 1,607 3,696 1,000 3,014 Income tax expense – 393 – 965 – 197 – 687 Profit after tax 1,214 2,731 804 2,328 of which attributable to Noncontrolling interests 3 5 0 – 1 Volkswagen AG hybrid capital investors 56 56 56 56 Volkswagen AG shareholders 1,155 2,671 748 2,273 Basic earnings per ordinary share (€)² 2.30 5.33 Diluted earnings per ordinary share (€)² 2.30 5.33 Basic earnings per preferred share (€)² 2.30 5.33 Diluted earnings per preferred share (€)² 2.30 5.33 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in note 4. Prior-year figures restated to reflect application of IAS 33.26. 29 F I N A N C I A L S E R V I C E S 2016 7,954 – 6,559 1,395 – 295 – 377 – 137 587 16 4 20 607 – 197 410 3 – 408 2015 7,754 – 6,198 1,557 – 311 – 412 – 186 648 8 26 34 682 – 278 404 6 – 398 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Comprehensive Income STATE MENT OF COMPREH ENSIVE I NCOME FOR TH E PERIOD APRI L 1 TO J U N E 30 € million Profit after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income Transferred to profit or loss Cash flow hedges, before tax Deferred taxes relating to cash flow hedges Cash flow hedges, net of tax Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 30 2016 1,214 – 3,201 946 – 2,255 0 – 2,255 153 – 153 0 153 – 80 467 387 – 115 272 38 – 16 22 – 7 14 – 2 438 – 2,641 824 – 1,817 – 603 2 56 – 661 2015 2,731 7,281 – 2,159 5,123 0 5,123 – 697 0 – 697 0 – 697 1,854 1,100 2,955 – 845 2,110 168 – 142 26 61 87 – 158 1,342 9,406 – 2,942 6,464 9,196 6 56 9,134 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Balance Sheet BALANCE SH EET AS OF J U N E 30, 2016 AN D DECEMBER 31, 2015 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E * € million 2016 2015 2016 2015 Assets Noncurrent assets 238,320 236,548 130,210 132,812 Intangible assets 61,483 61,147 61,262 60,918 Property, plant and equipment 50,364 50,171 47,916 47,768 Lease assets 35,210 33,173 3,099 2,931 Financial services receivables 65,132 63,185 9 – Investments, equity-accounted investments and other equity investments, other receivables and financial assets 26,132 28,873 17,924 21,195 Current assets 163,109 145,387 90,622 74,019 Inventories 37,716 35,048 33,739 31,369 Financial services receivables 47,805 46,888 – 678 – 614 Other receivables and financial assets 32,646 27,572 20,842 15,315 Marketable securities 15,252 15,007 12,486 12,261 Cash, cash equivalents and time deposits 29,691 20,871 24,233 15,688 Total assets 401,429 381,935 220,832 206,831 Equity and Liabilities Equity 88,890 88,270 66,947 67,366 Equity attributable to Volkswagen AG shareholders 81,156 80,500 59,546 59,898 Equity attributable to Volkswagen AG hybrid capital investors 7,519 7,560 7,519 7,560 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 88,675 88,060 67,065 67,458 Noncontrolling interests 215 210 – 118 – 92 Noncurrent liabilities 151,713 145,175 79,201 73,568 Financial liabilities 70,499 73,292 6,468 9,557 Provisions for pensions 35,247 27,535 34,692 27,119 Other liabilities 45,967 44,349 38,041 36,892 Current liabilities 160,826 148,489 74,684 65,898 Put options and compensation rights granted to noncontrolling interest shareholders 3,689 3,933 3,689 3,933 Financial liabilities 81,706 72,313 2,316 – 3,974 Trade payables 21,811 20,460 19,559 18,709 Other liabilities 53,621 51,783 49,121 47,229 Total equity and liabilities 401,429 381,935 220,832 206,831 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. 31 F I N A N C I A L S E R V I C E S 2016 2015 108,110 103,736 220 228 2,448 2,403 32,111 30,242 65,123 63,185 8,207 7,678 72,487 71,367 3,977 3,679 48,482 47,502 11,804 12,257 2,766 2,747 5,457 5,183 180,597 175,103 21,943 20,905 21,610 20,603 – – 21,610 20,603 333 302 72,512 71,607 64,031 63,735 555 415 7,926 7,457 86,142 82,591 – – 79,390 76,286 2,252 1,751 4,499 4,554 180,597 175,103 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Changes in Equity STATE MENT OF C HANGE S I N EQU ITY O T H E R R E S E R V E S € million Subscribed capital Capital reserves Retained earnings Currency translation reserve Balance at Jan. 1, 2015 1,218 14,616 71,197 – 1,777 Profit after tax – – 5,558 – Other comprehensive income, net of tax – – 1,250 1,828 Total comprehensive income – – 6,809 1,828 Capital increase* 0 0 – – Dividend payment – – – 2,294 – Capital transactions involving a change in ownership interest – – 0 – Other changes – – – 7 – Balance at June 30, 2015 1,218 14,616 75,704 51 Balance at Jan. 1, 2016 1,283 14,551 69,039 – 987 Profit after tax – – 3,461 – Other comprehensive income, net of tax – – – 5,291 – 729 Total comprehensive income – – – 1,829 – 729 Capital increase – – – – Dividend payment – – – 68 – Capital transactions involving a change in ownership interest – – – – Other changes – – – 13 – Balance at June 30, 2016 1,283 14,551 67,130 – 1,716 Volkswagen AG recorded an inflow of cash funds amounting to €2,500 million, less a discount of €29 million and transaction costs of €14 million, from the hybrid capital issued in March 2015. Additionally, there were noncash effects from the deferral of taxes amounting to €11 million. The hybrid capital is required to be classified as equity instruments granted. 32 Cash flow hedges – 1,715 – – 3,769 – 3,769 – – – – – 5,485 – 3,912 – 3,405 3,405 – – – – – 507 Available-for-sale financial assets 1,263 – 456 456 – – – – 1,719 – 16 – 56 56 – – – – 40 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Statement of Changes in Equity Equity-accounted investments Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors 148 5,041 89,991 – 99 5,657 470 – 235 470 99 5,892 – 2,469 2,469 – – 128 – 2,422 – – 0 – 32 25 618 7,513 95,955 542 7,560 88,060 – 112 3,573 – 173 – – 2,731 – 173 112 842 – – – – – 204 – 272 – – – 6 51 44 376 7,519 88,675 33 Noncontrolling interests 198 7 1 8 – – 6 0 7 207 210 6 – 2 4 – – 5 – 7 215 Total equity 90,189 5,663 237 5,900 2,469 – 2,429 0 32 96,162 88,270 3,579 – 2,733 846 – – 277 – 51 88,890 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Cash flow statement CASH FLOW STATE MENT F OR TH E PERIOD JAN UARY 1 TO J U N E 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2016 2015² 2016 2015² Cash and cash equivalents at beginning of period 20,462 18,634 15,294 16,010 Profit before tax 4,810 7,664 3,667 6,485 Income taxes paid Depreciation and amortization expense3 – 1,724 10,007 – 1,924 8,947 – 2,138 6,813 – 1,841 6,159 Change in pension provisions 169 209 165 200 Other noncash income/expense and reclassifications4 1,977 3, 334 1,981 3,002 Gross cash flow 15,239 18,230 10,487 14,005 Change in working capital – 10,128 – 10,783 – 751 – 2,771 Change in inventories – 2,835 – 2,797 – 2,516 – 2,967 Change in receivables – 4,545 – 3,824 – 4,486 – 3,864 Change in liabilities 4,488 3,376 3,650 2,964 Change in other provisions 3,159 1,425 3,092 1,412 Change in lease assets (excluding depreciation) – 6,078 – 4,845 – 567 – 391 Change in financial services receivables – 4,318 – 4,118 76 74 Cash flows from operating activities 5,111 7,447 9,736 11,234 Cash flows from investing activities attributable to operating activities – 5,149 – 6,993 – 4,601 – 6,761 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property – 4,661 – 4,823 – 4,515 – 4,652 capitalized development costs – 2,582 – 2,170 – 2,582 – 2,170 acquisition and disposal of equity investments 1,917 – 166 2,338 – 89 Net cash flow5 – 38 454 5,135 4,473 Change in investments in securities and loans 926 – 3,944 1,112 – 3,121 Cash flows from investing activities – 4,224 – 10,937 – 3,489 – 9,882 Cash flows from financing activities 8,169 1,318 2,502 – 2,964 Effect of exchange rate changes on cash and cash equivalents – 179 444 – 143 401 Net change in cash and cash equivalents 8,877 – 1,728 8,605 – 1,212 Cash and cash equivalents at June 30 29,338 16,906 23,899 14,798 Securities, loans and time deposits 23,328 23,166 13,663 14,765 Gross liquidity 52,666 40,072 37,561 29,563 Total third-party borrowings – 152,205 – 139,378 – 8,784 – 8,074 Net liquidity at June 30 – 99,539 – 99,306 28,778 21,489 For information purposes: at Jan. 1 – 100,530 – 96,453 24,522 17,639 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Prior-year figures adjusted. 3 Net of impairment reversals. 4 These relate mainly to the fair value measurement of financial instruments, application of the equity method and reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 5 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities. Explanatory notes on the cash flow statement are presented in note 12. 34 F I N A N C I A L S E R V I C E S 2016 2015 5,168 2,624 1,144 1,179 414 – 83 3,195 2,788 3 9 – 4 332 4,752 4,225 – 9,377 – 8,012 – 319 170 – 59 40 838 412 67 12 – 5,511 – 4,454 – 4,393 – 4,192 – 4,625 – 3,787 – 548 – 231 – 146 – 171 – – – 420 – 77 – 5,173 – 4,018 – 186 – 823 – 735 – 1,055 5,667 4,282 – 36 43 271 – 516 5,439 2,108 9,665 8,401 15,104 10,509 – 143,421 – 131,304 – 128,317 – 120,796 – 125,052 – 114,092 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements Notes to the Interim Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2015 in compliance with the International Financial Reporting Standards (IFRS), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2016 were therefore also prepared in accordance with IAS 34 and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 37w of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2016. A number of amendments to International Financial Reporting Standards resulting from the Annual Improvements Project 2012 and the Annual Improvements Project 2014 became effective on January 1, 2016. Among others, these amendments included changes to IFRS 3, IFRS 7, IFRS 8, IFRS 13 and IAS 24. The changes to IFRS 8 Operating Segments added a requirement to describe the criteria used to aggregate the operating segments. The segment disclosure require- ments have therefore been clarified. Additional disclosure requirements have been included in IFRS 7 in relation to the derecognition of financial instruments. These changes mainly relate to the presentation of ABS transactions. Changes to IAS 19 also had to be applied from January 1, 2016 onward. These changes relate to the accounting treat- ment of employee pension contributions. In the Volkswagen Group, employee contributions in which the amount is independent of the number of years of service (fixed percentage of salary) will in the future be deducted from the service cost in the year the contributions are made. The amendments to IAS 16 and IAS 38 clarified that, with effect from January 1, 2016, revenue-based methods for measuring depreciation and amortization are not generally permitted. The IFRS amendments described here do not materially affect the Volkswagen Group’s net assets, financial position and results of operations. Amendments to IAS 1 introduced with effect from January 1, 2016 have clarified a large number of the concepts used in IFRS reporting. The existing presentation in the Volkswagen interim group financial report is not affected by these conceptual modifications and can be retained. The amendments also specified that disclosures are only required in an interim report if the content is material. The other financial reporting standards that have to be applied for the first time in fiscal year 2016 do not have any significant impact on the presentation of net assets, financial position and results of operations in the Volkswagen interim group financial report. A detailed breakdown of these accounting pronouncements is provided in the “New and amended IFRSs not applied” section of the notes to the consolidated financial statements in the 2015 Annual Report. In addition, in the consolidated financial statements for the period ended December 31, 2015, the presentation of hedges in the cash flow statement was adjusted so that cash flows from hedging transactions were allocated to those of the underlying hedged items. As a result of the adjustment, during the prior-year period covered by the Volkswagen interim 35 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements group financial report, cash flows from operating activities decreased by €319 million and cash flows from financing activities increased by a corresponding amount. Furthermore, changes within the scope of IFRS 7 were made to the financial statements for fiscal year 2015. The changes were described in the section on “Accounting policies” in the 2015 consolidated financial statements. The prior- year figures have been adjusted accordingly in the interim report of the Volkswagen Group. A discount rate of 1.5% (December 31, 2015: 2.7%) was applied to German pension provisions in the accompanying interim consolidated financial statements. The reduction in the discount rate increased pension provisions and deferred taxes attributable to pension provisions and also increased the actuarial losses for pension provisions that are recognized in retained earnings. The income tax expense for the interim reporting period was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34, Interim Financial Reporting. In other respects, the same accounting policies and consolidation methods that were used for the 2015 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2015 consolidated financial statements. This can also be accessed on the Internet at www.volkswagenag.com/ir. Key events On September 18, 2015, the U.S. Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain vehicles with Volkswagen Group diesel engines. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2015 consolidated financial statements. In this respect, additional provisions amounting to €1.6 billion were recognized in the first six months of 2016. These additions resulted from an increase in the provisions for legal risks amounting to €1.7 billion, higher warranty costs amounting to €0.1 billion, impairment losses on inventories amounting to €0.2 billion and impairment losses on intangible assets, lease assets and property, plant and equipment amounting to €0.3 billion. The impairment losses recognized on noncurrent assets resulted primarily from the lower value in use of various products in the Passenger Cars segment due to expected declines in volumes. Exchange rate-related reversals of provisions amounting to €0.3 billion and unutilized provisions for legal risks and sales-related measures amounting to a total of €0.5 billion had an offsetting effect. The Volkswagen Group has started entering into exchange rate hedges relating to the outstanding obligations denominated in foreign currencies. In addition, provisions were recognized for restructuring measures in the trucks business in South America (€0.1 billion) and for the antitrust proceedings launched in 2011 by the European Commission against the European truck manufacturers, including MAN and Scania (€0.4 billion). Additional provisions amounting to €0.2 billion were recognized in the reporting period in connection with the replacement of potentially faulty airbags, manufactured and supplied by Takata, imposed by the competent authorities. Further information on the antitrust proceedings and the replacement of airbags manufactured and supplied by Takata can be found in the “Litigation” and “Contingent assets and liabilities” sections. Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. 36 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements I N V E STM E N T S I N A S S O C I AT E S On June 22, 2016, the Volkswagen Group acquired a 28.1% interest in on-demand mobility company GT Gettaxi Limited, Limassol, Cyprus (GETT), via Volkswagen New Mobility Luxembourg S.A., Luxembourg, Luxembourg. With its subsidiaries, GETT is active in more than 60 cities worldwide and is one of the strongest growing providers of ride hailing services. These services are to be further expanded as part of a joint growth strategy. This strategic investment amounts to €264 million. The investment in GETT is reported as an equity-accounted investment in the consolidated financial statements. Audi, the BMW Group and Daimler AG each acquired a 33.3% interest in There Holding B.V., Rijswijk, the Netherlands, which was formed in 2015. Effective December 4, 2015, There Holding B.V. acquired all shares in the HERE Group through a wholly owned subsidiary, There Acquisition B.V., Rijswijk, the Netherlands. Audi’s share of the investment amounts to €0.7 billion. On January 29, 2016, There Acquisition B.V. was renamed HERE International B.V. The equity investment in There Holding B.V. is recognized as an equity-accounted investment in the consolidated financial statements. Purchase price allocation was completed in the first six months of the year. I N T E R E ST S I N J O I N T V E N T U R E S Through its 50% interest in the joint venture Global Mobility Holding B.V., Amsterdam, the Netherlands (GMH), the Volkswagen Group held a 50% indirect stake in the joint venture’s subsidiary, LeasePlan Corporation N.V., Amsterdam, the Netherlands (LeasePlan). GMH’s business activity consisted of holding the interest in LeasePlan. LeasePlan is a Dutch financial services group whose core business is leasing and fleet management. GMH’s principal place of business is in Amsterdam, the Netherlands. On July 23, 2015, GMH sold its 100% interest in LeasePlan to a consortium of international investors. The final approvals for the sale of LeasePlan to an international consortium of investors were issued by the competent authorities in January 2016. Legal transfer of the LeasePlan shares to the consortium was completed on March 21, 2016. The total value of the transaction was approximately €3.7 billion plus interest in the amount of €31.5 million. In 2016, this had a positive effect of €2.2 billion on investing activities attributable to operating activities and net liquidity and, taking into account the disposal of equity-accounted investment in GMH, resulted in an income amount of €0.2 billion for the Volkswagen Group, which is reported in the financial result. On completion of the transaction, the existing credit line of €1.3 billion provided by the Volkswagen Group was canceled. OT H E R E Q U I T Y I N V E ST M E N T S On August 29, 2015, an arbitration ruling was delivered to the parties in the proceedings between Suzuki Motor Corporation and Volkswagen AG. It found that Volkswagen had acted in accordance with the agreement. The arbitration court also confirmed that Suzuki was in breach of contract and, on the merits of this case, acknowledged that Volkswagen had a claim to damages. In addition, the arbitration court established that the parties had the right to give regular notice to terminate the cooperation agreement. It said that Suzuki had exercised this right, ending the partnership. According to the court, the agreements had to be interpreted in such a way that Volkswagen had to sell its equity investment in Suzuki on termination of the partnership. Volkswagen consequently sold its 19.9% equity investment to Suzuki on September 17, 2015 at the quoted market price of €3.1 billion. The sale of the shares generated income in the amount of €1.5 billion in the third quarter of the previous year. In February 2016, Volkswagen and Suzuki agreed a settlement regarding the claims for damages brought by Volkswagen. 37 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements DISC LOSU RE S ON TH E CONSOLI DATED FI NANC IA L STATEMENTS 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 € million 2016 Vehicles 68,890 Genuine parts 7,582 Used vehicles and third-party products 6,479 Engines, powertrains and parts deliveries 4,782 Power Engineering 1,672 Motorcycles 409 Leasing business 10,775 Interest and similar income 3,309 Other sales revenue 4,038 107,935 2. Cost of sales Cost of sales includes interest expenses of €948 million (previous year: €972 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on intangible assets, items of property, plant and equipment, and lease assets. The impairment losses identified on the basis of updated impairment tests amount to a total of €572 million (previous year: €260 million). The value in use of Volkswagen Group products is used as the basis for calculating impairment losses. The increase in impairment losses is primarily a result of the lower value in use of various products in the Passenger Cars segment due to expected declines in volumes (see also the “Key events” section). 3. Research and development costs in the Automotive Division H 1 € million 2016 2015 Total research and development costs 6,619 6,648 of which: capitalized development costs 2,582 2,170 Capitalization ratio in % 39.0 32.6 Amortization of capitalized development costs 1,803 1,521 Research and development costs recognized in the income statement 5,840 5,999 38 2015 71,823 7,237 5,509 4,672 1,812 361 10,170 3,409 3,783 108,776 % – 0.4 19.0 18.6 – 2.6 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since the basic and diluted number of shares is identical, basic earnings per share also correspond to diluted earnings per share. Article 27(2) No. 1 of the Articles of Association of Volkswagen AG sets out that, even in the event of a deficit, a preferred dividend of €0.11 per preferred share must be paid out in the subsequent fiscal years based on the cumulative arrangement if no dividend is paid for the year under review; consequently, this must be factored into the calculation of earnings per share for the current fiscal year. The dividend proposal that is based on Volkswagen AG’s net income for the year under the German Commercial Code is not relevant for the calculation of earnings per share in accordance with IAS 33. The distribution of further dividends in accordance with Article 27(2) Nos. 2 and 3 of the Articles of Association of Volkswagen AG, whereby, in the case of a full distribution, the dividend paid for each preferred share is €0.06 higher than that paid for each ordinary share, is only included in the calculation of earnings per share if there is a profit after tax attributable to the shareholders of Volkswagen AG. In 2012 and 2013, Volkswagen AG placed two mandatory convertible notes with identical features and an aggregate principal amount of €3.7 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam (issuer). These notes matured on November 9, 2015. The terms and conditions of the notes provided for early conversion options and the exercise of such options in 2015 resulted in the creation of 27,091 new preferred shares. Under the note terms and conditions, the mandatory convertible notes were required to be settled by issuing new preferred shares no later than at maturity. On the maturity date (November 9, 2015), the outstanding volume of the two notes was converted by the issuer as required under the terms and conditions, resulting in the creation of 25,536,876 new preferred shares. The year-on-year comparison has to take into account that, in accordance with IAS 33.26, the number of potential preferred shares included in the previous year was replaced retrospectively with the shares actually issued in the reporting period when notes were voluntarily and mandatorily converted. Q 2 H 1 2016 2015* 2016 Weighted average number of shares outstanding Ordinary shares: basic million 295.1 295.1 295.1 diluted million 295.1 295.1 295.1 Preferred shares: basic million 206.2 206.2 206.2 diluted million 206.2 206.2 206.2 Profit after tax € million 1,214 2,731 3,579 Noncontrolling interests € million 3 5 6 Profit attributable to Volkswagen AG hybrid capital investors € million 56 56 112 Profit attributable to Volkswagen AG shareholders € million 1,155 2,671 3,461 Earnings per share Ordinary shares: basic € 2.30 5.33 6.88 diluted € 2.30 5.33 6.88 Preferred shares: basic € 2.30 5.33 6.94 diluted € 2.30 5.33 6.94 Prior-year figures restated to reflect application of IAS 33.26. 39 2015* 295.1 295.1 206.2 206.2 5,663 7 99 5,558 11.06 11.06 11.12 11.12 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A RY 1 A N D J U N E 3 0 , 2 0 1 6 € million Carrying amount at Jan. 1, 2016 Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2016 Intangible assets 61,147 2,701 80 2,284 61,483 Property, plant and equipment 50,171 4,606 193 4,220 50,364 Lease assets 33,173 10,064 4,542 3,485 35,210 6. Inventories € million June 30, 2016 Dec. 31, 2015 Raw materials, consumables and supplies 4,155 4,021 Work in progress 3,891 3,927 Finished goods and purchased merchandise 24,778 23,083 Current lease assets 4,688 3,861 Prepayments 204 156 37,716 35,048 Impairment losses of €0.2 billion were recognized on inventories in connection with the diesel issue in the reporting period. There was no requirement to recognize or reverse additional significant impairment losses on inventories. 7. Current other receivables and financial assets € million June 30, 2016 Dec. 31, 2015 Trade receivables 12,987 11,132 Miscellaneous other receivables and financial assets 19,660 16,440 32,646 27,572 In the period January 1 to June 30, 2016, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €271 million (previous year: €386 million). 40 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 8. Equity In March 2015, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €2.5 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam (issuer). Under IAS 32, the hybrid notes must be classified in their entirety as equity. The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par-value pre- ferred shares, and amounts to €1,283 million (December 2015: €1,283 million). Volkswagen AG distributed a dividend of €68 million (previous year: €2,294 million) in the reporting period. €32 million (previous year: €1,416 million) of this amount was attributable to ordinary shares and €35 million (previous year: €878 million) to preferred shares. The noncontrolling interests are largely attributable to shareholders of RENK AG and AUDI AG. 9. Noncurrent financial liabilities € million June 30, 2016 Bonds, commercial paper and notes 56,175 Liabilities to banks 9,686 Deposit business 2,544 Other financial liabilities 2,093 70,499 10. Current financial liabilities € million June 30, 2016 Bonds, commercial paper and notes 33,799 Liabilities to banks 17,682 Deposit business 29,452 Other financial liabilities 772 81,706 41 Dec. 31, 2015 58,824 11,101 1,141 2,226 73,292 Dec. 31, 2015 30,319 16,018 25,357 618 72,313 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 11. Fair value disclosures The principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2015 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is deter- mined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Assets and liabilities measured at fair value through profit or loss consist of derivatives or components of derivatives that are not included in hedge accounting. These relate primarily to the interest component of currency forwards used to hedge sales revenue, commodity futures and currency forwards relating to commodity futures. Available-for-sale financial assets (debt instruments) are carried at fair value. Changes in fair value are recognized directly in equity, net of deferred taxes. Other equity investments (shares representing an ownership interest of less than 20% as a rule) are also classified as available-for-sale financial assets. They are recognized at cost in the consolidated financial statements if there is no active market for those shares and fair values cannot be reliably ascertained without undue cost or effort. The lower present value of the estimated future cash flows is recognized if there are indications of impairment. There is currently no intention to sell these financial assets. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The fair value of put options and compensation rights granted to noncontrolling interest shareholders is calculated using a present value model based on the contractually agreed cash settlement, including cash compensation, as well as the minimum statutory interest rate and a risk-adjusted discount rate for a matching maturity. Reconciliation of balance sheet items to classes of financial instruments The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. In the reconciliation presented in the following tables, equity instruments recognized at their carrying amount are allocated to Level 3 of the fair value hierarchy. 42 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 5 D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S W I T H I N N O T W I T H I N M E A S U R E D M E A S U R E D A T H E D G E S C O P E O F A T F A I R V A L U E A M O R T I Z E D C O S T A C C O U N T I N G I F R S 7 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 10,904 Other equity investments 211 – – – 763 Financial services receivables – 63,185 64,630 – – Other financial assets 996 4,484 4,492 1,249 – Current assets Trade receivables – 11,132 11,132 – – Financial services receivables – 46,888 46,888 – – Other financial assets 885 7,963 7,963 1,196 – Marketable securities 15,007 – – – – Cash, cash equivalents and time deposits – 20,871 20,871 – – Noncurrent liabilities Noncurrent financial liabilities – 73,292 73,844 – – Other noncurrent financial liabilities 1,325 1,996 1,998 2,580 – Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,933 3,783 – – Current financial liabilities – 72,313 72,313 – – Trade payables – 20,460 20,460 – – Other current financial liabilities 1,074 5,551 5,551 3,725 – 43 B A L A N C E S H E E T I T E M A T D E C . 3 1 , 2 0 1 5 10,904 974 63,185 6,730 11,132 46,888 10,043 15,007 20,871 73,292 5,901 3,933 72,313 20,460 10,350 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 1 6 D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S W I T H I N N O T W I T H I N M E A S U R E D M E A S U R E D A T H E D G E S C O P E O F A T F A I R V A L U E A M O R T I Z E D C O S T A C C O U N T I N G I F R S 7 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 6,897 Other equity investments 181 – – – 746 Financial services receivables – 65,132 67,321 – – Other financial assets 16 2,930 2,978 2,946 – Current assets Trade receivables – 12,987 12,987 – – Financial services receivables – 47,805 47,805 – – Other financial assets 748 9,904 9,904 1,553 – Marketable securities 15,252 – – – – Cash, cash equivalents and time deposits – 29,691 29,691 – – Noncurrent liabilities Noncurrent financial liabilities – 70,499 70,890 – – Other noncurrent financial liabilities 1,049 2,039 2,043 1,454 – Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,689 3,826 – – Current financial liabilities – 81,706 81,706 – – Trade payables – 21,811 21,811 – – Other current financial liabilities 1,310 5,989 5,989 1,801 – The following tables contain an overview of the financial assets and liabilities measured at fair value: 44 B A L A N C E S H E E T I T E M A T J U N E 3 0 , 2 0 1 6 6,897 927 65,132 5,892 12,987 47,805 12,205 15,252 29,691 70,499 4,542 3,689 81,706 21,811 9,099 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT FA I R VA L U E B Y L E V E L € million Dec. 31, 2015 Level 1 Noncurrent assets Other equity investments 211 117 Other financial assets 996 – Current assets Other financial assets 885 – Marketable securities 15,007 15,007 Noncurrent liabilities Other noncurrent financial liabilities 1,325 – Current liabilities Other current financial liabilities 1,074 – € million June 30, 2016 Level 1 Noncurrent assets Other equity investments 181 89 Other financial assets 16 – Current assets Other financial assets 748 – Marketable securities 15,252 15,252 Noncurrent liabilities Other noncurrent financial liabilities 1,049 – Current liabilities Other current financial liabilities 1,310 – D E R I VAT I V E F I N A N C I A L I N ST R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million Dec. 31, 2015 Level 1 Noncurrent assets Other financial assets 1,249 – Current assets Other financial assets 1,196 – Noncurrent liabilities Other noncurrent financial liabilities 2,580 – Current liabilities Other current financial liabilities 3,725 – 45 Level 2 – 976 879 – 1,142 778 Level 2 – – 10 741 – 906 1,244 Level 2 1,249 1,196 2,573 3,725 Level 3 94 20 6 – 183 296 Level 3 92 26 7 – 143 65 Level 3 – – 7 – I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements € million June 30, 2016 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 2,946 – 2,942 3 Current assets Other financial assets 1,553 – 1,553 – Noncurrent liabilities Other noncurrent financial liabilities 1,454 – 1,453 1 Current liabilities Other current financial liabilities 1,801 – 1,801 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Level 3 fair values are calculated using valuation techniques that incor- porate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments and residual value protection models are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT FA I R VA L U E B A S E D O N L E V E L 3 € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2015* 178 249 Foreign exchange differences 6 0 Total comprehensive income 1 66 recognized in profit or loss 0 62 recognized in other comprehensive income 1 4 Additions (purchases) 0 – Sales and settlements – 5 – 36 Transfers into Level 2 0 – 20 Balance at June 30, 2015* 181 259 Total gains or losses recognized in profit or loss 0 – 62 Net other operating expense/income – – of which attributable to assets/liabilities held at the reporting date – – Financial result 0 – 62 of which attributable to assets/liabilities held at the reporting date 1 – 10 Prior-year figures adjusted. 46 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2016 119 251 Foreign exchange differences – 3 0 Total comprehensive income 9 16 recognized in profit or loss 5 19 recognized in other comprehensive income 3 – 3 Additions (purchases) 1 – Sales and settlements – 1 – 36 Transfers into Level 2 0 – 23 Balance at June 30, 2016 125 208 Total gains or losses recognized in profit or loss 5 – 19 Net other operating expense/income – – of which attributable to assets/liabilities held at the reporting date – – Financial result 5 – 19 of which attributable to assets/liabilities held at the reporting date 5 1 The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2016, profit after tax would have been €5 million higher (lower) and equity would have been €2 million higher (lower). The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on profit after tax. If the assumed enterprise values had been 10% higher, profit after tax would have been €1 million higher. If the assumed enterprise values had been 10% lower, profit after tax would have been €1 million lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market- related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volks- wagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices for the used cars covered by the residual value protection model had been 10% higher as of June 30, 2016, earnings after tax would have been €244 million higher. If the prices for the used cars covered by the residual value protection model had been 10% lower as of June 30, 2016, earnings after tax would have been €244 million lower. 47 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, bills, cash-in-hand and call deposits. € million June 30, 2016 Cash, cash equivalents and time deposits as reported in the balance sheet 29,691 Time deposits – 352 Cash and cash equivalents as reported in the cash flow statement 29,338 Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2016 Capital contributions – Dividends paid – 277 Capital transactions with noncontrolling interest shareholders – 3 Other changes – 19 Proceeds from issuance of bonds 4,560 Repayment of bonds – 12,464 Change in other financial liabilities 16,394 Lease payments – 22 8,169 Prior-year figures adjusted. 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services. The operating segments are combined into reportable segments based on similar economic character- istics (in particular the nature of the products or services, integration in the development, production and sales processes, and similar customer groups). The activities of the Passenger Cars segment cover the development of vehicles and engines, the production and sale of passenger cars, and the corresponding genuine parts business. As a rule, the Volkswagen Group’s individual passenger car brands are combined on a consolidated basis into a single reportable segment. The Commercial Vehicles segment primarily comprises the development, production and sale of light commercial vehicles, trucks and buses, the corresponding genuine parts business and related services. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, pro- pulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. 48 June 30, 2015 17,598 – 691 16,906 2015* 2,457 – 2,429 0 – 2 12,963 – 10,204 – 1,452 – 16 1,318 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. R E P O RT I N G S E G M E N T S : H 1 2 0 1 5 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Sales revenue from external customers 81,358 12,150 1,812 13,364 108,684 92 Intersegment sales revenue 7,760 3,001 1 1,319 12,081 – 12,081 Total sales revenue 89,118 15,151 1,813 14,683 120,765 – 11,989 Segment profit or loss (operating profit or loss) 6,215 349 5 1,120 7,689 – 868 R E P O RT I N G S E G M E N T S : H 1 2 0 1 6 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Sales revenue from external customers 80,074 12,410 1,672 13,850 108,005 – 70 Intersegment sales revenue 8,833 3,179 1 1,539 13,553 – 13,553 Total sales revenue 88,907 15,589 1,673 15,388 121,558 – 13,623 Segment profit or loss (operating profit or loss) 4,145 285 – 18 1,177 5,589 – 250 R E C O N C I L I AT I O N H 1 € million 2016 Segment profit or loss (operating profit or loss) 5,589 Unallocated activities 40 Group financing 12 Consolidation – 302 Operating profit 5,339 Financial result – 528 Consolidated profit before tax 4,810 49 Volkswagen Group 108,776 – 108,776 6,820 Volkswagen Group 107,935 – 107,935 5,339 2015 7,689 113 10 – 991 6,820 843 7,664 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 14. Related party disclosures Porsche SE reached an agreement with Suzuki Motor Corporation at the end of September 2015 to acquire 1.5% of Volkswagen AG’s ordinary shares via an off-market transaction. At 52.2%, Porsche SE held the majority of the voting rights in Volkswagen AG as of June 30, 2016. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. As a result, Porsche SE cannot appoint the majority of the members of Volks- wagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE has the power to participate in the operating policy decisions of the Volkswagen Group and is therefore classified as a related party as defined by IAS 24. S U P P L I E S A N D S E R V I C E S S U P P L I E S A N D S E R V I C E S R E N D E R E D R E C E I V E D H1 H1 € million 2016 2015 2016 2015 Porsche SE 6 5 1 2 Supervisory Board members 1 3 2 2 Unconsolidated subsidiaries 419 571 340 353 Joint ventures and their majority interests 6,477 6,367 559 566 Associates and their majority interests 96 59 374 311 State of Lower Saxony, its majority interests and joint ventures 2 2 2 1 R E C E I V A B L E S L I A B I L I T I E S ( I N C L U D I N G C O L L A T E R A L ) F R O M ( I N C L U D I N G O B L I G A T I O N S ) T O € million June 30, 2016 Dec. 31, 2015 June 30, 2016 Dec. 31, 2015 Porsche SE 329 334 101 110 Supervisory Board members 0 0 278 165 Unconsolidated subsidiaries 1,146 1,015 1,022 1,418 Joint ventures and their majority interests 8,500 7,495 1,649 2,343 Associates and their majority interests 63 40 452 518 State of Lower Saxony, its majority interests and joint ventures 1 0 0 0 The supplies and services received from joint ventures and associates in the first six months do not include resolved dividend distributions amounting to €3,488 million (previous year: €4,589 million). The receivables from Porsche SE comprise a receivable under a loan agreement and receivables from land transfer taxes. The obligations to Porsche SE consist mainly of term deposits. Obligations to members of the Supervisory Board amounting to €278 million relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. In addition, the Volkswagen Group has furnished guarentees to external banks on behalf of related parties in the amount of €115 million. 50 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements 15. Virtual Shares At its meeting on April 22, 2016, Volkswagen AG’s Supervisory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remuneration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance by means of virtual shares. For further details, please refer to our disclosures in the remuneration report in the 2015 Annual Report. In accordance with IFRS 2, the obligations relating to these virtual shares are accounted for as a cash-settled plan and measured at fair value using a recognized valuation technique. The link between the original bonus (€5.7 million) and future share price performance resulted in a gain of €1.5 million as of April 22, 2016. Expenses of €0.6 million were recognized in the second quarter because of the share price performance in the period up to June 30, 2016. The fair value of the obligation to members of the Board of Management as of June 30, 2016 amounts to €4.9 million. If all members of the Board of Management had left as of June 30, 2016, the obligation (intrinsic value) would have amounted to a total of €4.9 million. 16. Litigation Detailed information on litigation and other legal proceedings can be found in the “Litigation” section of Volkswagen AG’s 2015 consolidated financial statements. Substantially, there have been the following changes compared with the situation described there: V O L K SWA G E N R E A C H E S C E RTA I N S E T T L E M E N T A G R E E M E N T S In June 2016, Volkswagen publicly announced that Volkswagen AG, Volkswagen Group of America, Inc. and certain affil- iates had reached settlement agreements in the USA with the U.S. Department of Justice, the U.S. Environmental Pro- tection Agency (EPA), the U.S. Federal Trade Commission, the California Air Resources Board (CARB) and private plaintiffs represented by a Plaintiffs’ Steering Committee (PSC) in the Multi-District Litigation pending in California. The settlement agreements, if finally approved, will resolve certain civil claims made in relation to affected diesel vehicles with 2.0 l TDI engines from the Volkswagen Passenger Cars and Audi brands in the USA. The settlement agreements are subject to final court approval. The proposed settlements provide affected customers with the option of a buyback or, for leased vehicles, early lease termination or a free technical modification of the vehicles, provided that EPA and CARB approve the appropriate modification measures. Volkswagen will also make cash payments to affected owners and lessees. Volkswagen also agreed to support environmental programs. The company will pay USD 2.7 billion over three years into an environmental trust, managed by a trustee appointed by the court, to offset excess nitrogen oxide (NOx) emissions. Volkswagen will also invest in total USD 2.0 billion over 10 years in zero emissions vehicle infrastructure as well as corresponding access and awareness initiatives. Volkswagen also reached separate settlement agreements with the attorneys general of 44 US states, the District of Columbia and Puerto Rico, to resolve their existing or potential consumer protection and unfair trade practices claims – in connection with both 2.0 l TDI and 3.0 l TDI vehicles in the USA – for a settlement amount of USD 603 million. These settlements do not resolve the civil claims by the DOJ, FTC and private plaintiffs represented by the PSC related to 3.0 l TDI vehicles, civil penalties sought by the DOJ on behalf of the EPA, potential state environmental claims related to the 2.0 l and 3.0 l TDI vehicles, any criminal investigations by the DOJ, as well as certain other claims. U S L AW S U I T S A L L E G I N G C L A I M S F O R C I V I L E N V I R O N M E N TA L P E N A LT I E S On July 19, 2016, the US states Maryland, Massachusetts and New York filed complaints in their respective state courts against Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates seeking civil penalties and injunctive relief for alleged violations of environmental laws. Maryland, Massachusetts and New York participated in the state settle- 51 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Notes to the Interim Consolidated Financial Statements ments described above with respect to consumer protection and unfair trade practices claims, but those settlements did not include claims for environmental penalties. To protect against the currently known legal risks, including suitable expenses for defense and legal advice related to the diesel issue, the current information and assessments in the reporting period indicated a requirement to recognize additional provisions of €1.7 billion. Unused provisions for legal risks amounting to €0.4 billion were reversed. There were no material adjustments to the existing contingent liabilities in connection with the diesel issue. The provisions for legal risks recognized in connection with the diesel issue and the contingent liabilities disclosed continue to be subject in part to substantial estimation risks in light of the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the comprehensive, exhaustive investigations have not yet been completed. A N T I R U ST P R O C E E D I N G S In 2011, the European Commission opened antitrust proceedings against European truck manufacturers concerning inappropriate exchange of information during the period 1997-2011 and sent a statement of objections to MAN, Scania and the other truck manufacturers concerned in November 2014. With its decision as of July 19, 2016 the European Commission has fined five European truck manufacturers excluding MAN and Scania. MAN was not fined as the company had informed the EU Commission about the cartel as a key witness. With regard to Scania, the antitrust proceedings will be continued. Scania has decided to fully exercise its rights of defense in the ongoing investigation. A provision of €0.4 billion was recognized in order to cover possible fines. 17. Contingent assets and liabilities On May 5, 2016, the U.S. National Highway Traffic Safety Administration (NHTSA) announced, jointly with the Takata company, a further extension of the recall for various models from different manufacturers containing certain airbags produced by the Takata company. Recalls were also ordered by the local authorities in Canada, Japan and South Korea. The recalls also included models manufactured by the Volkswagen Group. Appropriate provisions have been recognized. Currently, the possibility of further extensions to the recalls that could also affect Volkswagen Group models cannot be ruled out. It is not possible at the moment to provide further disclosures in accordance with IAS 37.86 in relation to this matter because the technical investigations and consultations with the authorities are still being carried out. Contingent liabilities increased by €501 million to €4,001 million compared with the 2015 consolidated financial statements, particularly because of exchange rate effects. 18. Other financial obligations Other financial obligations remained essentially unchanged as against the 2015 consolidated financial statements. An increase in the purchase order commitment for property, plant and equipment and services was partly offset by the elimination of the obligations of €1.3 billion under an irrevocable credit commitment to LeasePlan. German Corporate Governance Code The current declarations in accordance with section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) on the German Corporate Governance Code by the Board of Management and Supervisory Board of Volkswagen AG, AUDI AG, MAN SE and RENK AG are permanently available on the Internet at www.volkswagenag.com/ir, www.audi.com/cgk- declaration, www.corporate.man.eu/en and www.renk.biz/corporated-governance.html respectively. Significant events after the balance sheet date There were no significant events after the end of the first six months of 2016. 52 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed consolidated interim financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group in accordance with German accepted accounting principles, and the interim management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 28, 2016 Volkswagen Aktiengesellschaft The Board of Management Matthias Müller Karlheinz Blessing Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Christine Hohmann-Dennhardt Andreas Renschler Rupert Stadler Frank Witter 53 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Review Report Review Report On completion of our review, we issued the following unqualified auditors’ report dated July 28, 2016. This report was originally prepared in German. In case of ambiguities the German version takes precedence: To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg We have reviewed the condensed consolidated interim financial statements - comprising the condensed income statement and condensed statement of comprehensive income, condensed balance sheet, condensed statement of changes in equity, condensed statement of cash flows and selected explanatory notes - and the interim group management report of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, for the period from January 1 to June 30, 2016, which are part of the half-yearly financial report pursuant to § (Article) 37w WpHG ("Wertpapierhandelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Managing Directors. Our responsibility is to issue a review report on the condensed con- solidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group manage- ment report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. 54 I N T E R I M C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N D E N S E D ) Review Report Without qualifying our opinion, we draw attention to the updated information provided in section “Key events” of the notes to the condensed consolidated interim financial statements and in chapter “Report on Expected Developments, Risks and Opportunities” of the interim Group management report with regard to the emission issue, which essentially refer to the information provided and statements made in the 2015 consolidated financial statements and in the combined manage- ment report as of December 31, 2015. Based on the presented first results of the various measures taken to investigate the issue, which underlie these financial statements, there is no validation that members of the board of management were aware of the deliberate manip- ulation of engine management software before summer 2015. Nevertheless, should as a result of the ongoing investigation new knowledge be obtained showing that members of the board of management were informed earlier, this could eventually have an impact on the condensed consolidated interim financial statements as well as on the annual and consolidated financial statements and on the combined management report for the fiscal year 2015 and the comparative figures for 2014. The provisions for warranties and legal risks recorded up to now are based on the presented state of knowledge. Due to the large number of the technical solutions necessary and the inevitable uncertainties associated with the current and expected litigation it cannot be excluded that a future assessment of the risks may be different. Hanover, July 28, 2016 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Norbert Winkeljohann Wirtschaftsprüfer (German Public Auditor) Frank Hübner Wirtschaftsprüfer (German Public Auditor) 55 Contact Information P U B L I S H E D B Y Volkswagen AG Financial Publications F I N A N C I A L C A L E N D A R October 27, 2016 Interim Report January – September 2016 Letterbox 1848-2 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-30411 E-mail investor.relations@volkswagen.de Internet www.volkswagenag.com/ir This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/ir This version of the Interim Report is a translation of the German original. The German takes precedence. Printed in Germany 658.809.568.20 56 Halbjahresfinanzbericht Januar – Juni 2016

Semestriel, 2016, Auto, Volswagen

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Volswagen

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Half-Yearly Financial Report 2017 January – June 1 U PDATE D I N F O R M AT I O N 6 I N T E R IM M AN AGEM E N T R E PORT 23 B RAN D S AN D BUSI N ESS FI ELDS 2 7 I N T E R IM CON SOLI DATED F I NA N C IA L STATE M EN T S (CON D E N SE D) 1 Key Facts 2 Key Events 6 Volkswagen Shares 7 Business Development 15 Result of Operations, Finan- cial Position and Net Assets 22 Outlook 27 Income Statement 28 Statement of Comprehensive Income 31 Balance Sheet 32 Statement of Changes in Equity 34 Cash Flow Statement 35 Notes to the Interim Consolidated Financial Statements 55 Responsibility Statement 56 Review Report Key Figures V O L K SWA G E N G R O U P Q 2 H 1 Volume Data1 2017 2016 % 2017 2016 % Deliveries to customers (thousand units) of which: in Germany abroad Vehicle sales (thousand units) of which: in Germany abroad Production (thousand units) of which: in Germany abroad Employees (thousand on June 30, 2017/Dec. 31, 2016) of which: in Germany 2,661 358 2,302 2,660 350 2,310 2,696 687 2,009 2,608 366 2,242 2,622 357 2,265 2,713 722 1,991 +2.0 –2.0 +2.7 +1.4 –2.0 +2.0 –0.6 –4.9 +0.9 5,156 679 4,477 5,270 673 4,597 5,433 1,352 4,081 625.8 282.7 343.1 5,116 685 4,431 5,199 679 4,520 5,268 1,405 3,863 626.7 281.5 345.2 +0.8 –1.0 +1.0 +1.4 –0.9 +1.7 +3.1 –3.8 +5.7 –0.1 +0.4 –0.6 abroad Q 2 H 1 Financial Data (IFRSs), € million 2017 2016 % 2017 2016 % Sales revenue Operating profit before special items as a percentage of sales revenue Special items Operating profit as a percentage of sales revenue Profit before tax as a percentage of sales revenue Profit after tax Profit attributable to Volkswagen AG shareholders 59,665 4,549 7.6 – 4,549 7.6 4,337 7.3 3,192 3,129 56,971 4,386 7.7 –2,487 1,899 3.3 1,607 2.8 1,214 1,155 +4.7 +3.7 x x x x x 115,862 8,916 7.7 – 8,916 7.7 8,960 7.7 6,595 6,474 107,935 7,517 7.0 –2,178 5,339 4.9 4,810 4.5 3,579 3,461 +7.3 +18.6 x +67.0 +86.3 +84.3 +87.0 Cash flows from operating activities Cash flows from investing activities attributable to operating activities –3,177 3,527 3,757 3,987 x –11.5 –2,878 7,040 5,111 5,149 x +36.7 Automotive Division2 Total research and development costs as a percentage of sales revenue (R&D ratio) EBITDA3 Cash flows from operating activities Cash flows from investing activities attributable to operating activities4 of which: capex as a percentage of sales revenue capitalized development costs as a percentage of sales revenue Net cash flow Net liquidity at June 30 3,389 6.6 7,440 1,198 3,411 2,319 4.5 1,473 2.9 –2,213 3,305 6.7 4,904 7,334 3,484 2,395 4.9 1,342 2.7 3,850 +2.6 +51.7 –83.7 –2.1 –3.2 +9.7 x 6,759 6.8 14,720 2,033 6,829 4,159 4.2 2,919 3.0 –4,795 23,745 6,619 7.2 10,974 9,736 4,601 4,515 4.9 2,582 2.8 5,135 28,778 +2.1 +34.1 –79.1 +48.4 –7.9 +13.0 x –17.5 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. 2016 deliveries updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Operating profit plus net depreciation/amortization and impairment losses/reversals of impairment losses on property, plant and equipment, capitalized development costs, lease assets, goodwill and financial assets as reported in the cash flow statement. 4 Excluding acquisition and disposal of equity investments: Q2 €3,692 (3,646) million, H1 €6,853 (6,939) million. All figures shown in the Report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. Updated Information Key Facts > Volkswagen Group records successful first half of 2017 > Volkswagen Group deliveries to customers rise to 5.2 (5.1) million vehicles; growth particularly in Europe as well as in North and South America > Group sales revenue of €115.9 (107.9) billion much higher than prior-year figure due to volume-related factors > Operating profit up €3.6 billion to €8.9 billion; increase of €1.4 billion compared with prior-year result before special items > Profit before tax of €9.0 billion, up €4.1 billion year-on-year > Automotive Division’s net cash flow stands at €–4.8 (5.1) billion after anticipated high cash outflows attributable to the diesel issue; capex ratio of 4.2 (4.9)% > Net liquidity in the Automotive Division of €23.7 billion; successful placement of hybrid notes strengthens the capital base > Inspiring product innovations: Volkswagen Passenger Cars celebrates the world premiere of the new Polo; the I.D. CROZZ concept car is the third member of Volkswagen’s I.D. family, the new generation of electric vehicles Audi debuts the electric-powered e-tron Sportback concept - ŠKODA unveils the Karoq, its new compact SUV; the VISION E concept car offers an insight into the brand’s electrification SEAT adds the compact Arona to its range of SUVs - A special anniversary for Porsche: the one-millionth 911 rolls off the production line - MAN becomes a comprehensive provider for all transport needs between 3 and 250 tonnes with its launch of the TGE The Scania R 450 Highline wins the Green Truck 2017 award Key Facts 1 2 Key Events Key Events M OTO R S H O W S A N D E V E N T S The Volkswagen Group once again presented a wealth of new models and technologies at motor shows and events in the second quarter of 2017. World premiere of the new Polo The Volkswagen Passenger Cars brand debuted the new Polo in June 2017. The clear lines of the new exterior design give the sixth generation a sportier, more mature appearance. All variants of the bestseller are now four-door vehicles. The new Polo is larger in every dimension than its predecessor, and the boot capacity has even grown from 280 to 351 liters. It offers a multitude of assistance and convenience systems previously reserved for the Golf and Passat class. These include Front Assist with City Emergency Braking System and Pedestrian Monitoring as well as the Blind Spot Monitor lane- change system with Rear Traffic Alert. The new generation is going on sale with engine power outputs ranging from 48 kW (65 PS) to 110 kW (150 PS). A natural gas-powered version of the Polo is available for the first time: the newly developed 1.0 TGI engine generates 66 kW (90 PS) of power. The Polo is available in the three traditional equipment versions Trendline, Comfortline and Highline, as well as the special Polo Beats model with a 300-watt sound system, and the sporty top-of-the-range Polo GTI model with a power output of 147 kW (200 PS). ŠKODA unveils the Karoq In May, the ŠKODA brand celebrated the world premiere of the new Karoq. The compact SUV has been completely redeveloped with the exciting and dynamic features of ŠKODA’s new SUV design language. The Karoq offers excep- tional spaciousness, new driver assistance systems, full-LED headlights and – for the first time in a ŠKODA – a freely programmable digital instrument panel. The choice of engine power outputs on offer ranges from 85 kW (115 PS) to 140 kW (190 PS). The Karoq impresses with ŠKODA’s typical clever equipment features, such as hands-free tailgate opening and the VarioFlex rear seating system. The latter consists of three rear seats that can be individually adjusted. Mobile online services and an infotainment system with a touch display in glass design round off the vehicle features. World premiere of the SEAT Arona SEAT presented the new Arona in Barcelona at the end of June. This new addition to the Spanish brand’s SUV family marries the benefits of compact dimensions with the features of a crossover model. Its attractive design underscores the brand’s sporty and dynamic claim. The new Arona comes Updated Information with a variety of driver assistance systems. These include Front Assist with City Emergency Braking System and Pedestrian Monitoring as well as Adaptive Cruise Control (ACC) and Multi-Collision Braking. The Arona also excels in terms of connectivity. All engines that are available for the Arona feature direct injection, turbocharging and a start-stop system; the engine power outputs on offer range from 70 kW (95 PS) to 110 kW (150 PS). Auto Shanghai 2017 In addition to presenting a wealth of new models, the Volkswagen Passenger Cars brand unveiled the I.D. CROZZ at Auto Shanghai 2017 for the first time. The I.D. CROZZ is the third member of the innovative I.D. family – the new gener- ation of Volkswagen electric vehicles. The crossover utility vehicle (CUV) concept car combines the dynamism of a coupé with the greater stature of an SUV. Its electric all-wheel drive is impressive in the city and on sporty roads alike. With a top speed of 180 km/h and a power output of 225 kW (306 PS), the I.D. CROZZ can cover up to 500 km (NEDC) on a single battery charge. Pressing the Volkswagen emblem on the steering wheel for three seconds switches on the concept car’s fully autonomous “I.D. Pilot” mode. A concept car world premiere was also the centerpiece of Audi’s stand at the motor show. The four-door Gran Turismo Audi e-tron Sportback concept car is a real power pack in the guise of a coupé, embodying the synthesis of electric drive and everyday practicality. Its 320 kW (435 PS) of electric power propels it from 0 to 100 km/h in 4.5 seconds. The vehicle has a range of up to 500 km. Its extremely sporty silhouette and a sharp rear end reminiscent of a coupé are impressive fea- tures. The lighting technology points the way to an intelligent future. Using digital animations, among other things, the light units will enable drivers to give highly visible signals to other road users. In Shanghai, Audi also presented the refreshed A3 to its customers in the Chinese market with an even more attractive design, new TFSI engines and improved connectivity. The ŠKODA brand used Shanghai to debut the VISION E. As ŠKODA’s first electric concept car, the vehicle gives an insight into the e-mobility strategy of the Czech brand. Thanks to a system power output of 225 kW (306 PS), the excitingly designed five-door SUV coupé accelerates dynam- ically and without hesitation. The vehicle has a top speed of 180 km/h. The high-power lithium-ion batteries, combined with optimal recuperation, enable a range of up to 500 km. With the VISION E, ŠKODA is also outlining realizable forms of autonomous driving. Updated Information Porsche presented five new vehicles for the Asian market at Auto Shanghai 2017. The centerpiece was the Asian debut of the Panamera Sport Turismo. The new version of the four- door Panamera has a power output of up to 404 kW (550 PS) and adds even more variety to the luxury segment with its unmistakable design and excellent everyday practicality. The second new vehicle presented by Porsche was the Panamera Turbo S E-Hybrid. The world’s most powerful hybrid saloon with a system power output of 500 kW (680 PS) is entering the Chinese market exclusively as an especially luxurious Executive version with long wheelbase. The third new vehicle – and intended only for the Chinese market – was the rear- wheel-drive Panamera Executive (243 kW/330 PS) as the new basic long-wheelbase model. The new 911 GTS models and the 911 GT3 Cup race car were also on show in Asia for the first time. Bentley presented various models in Shanghai alongside the Chinese premiere of the luxurious electric concept car EXP 12 Speed 6e. The customization company Mulliner showed off a top-of-the-range Bentayga model featuring a specially designed interior. Mulliner’s exclusive Mulsanne Hallmark Series – a strictly limited edition – is inspired by the finest precious metals and luxury materials found in the workshops of the world’s best jewelers. The W12 S, flagship of the Flying Spur range, also made its debut at the Asian automotive show. Lamborghini presented the Huracán Performante and Aventador S for the first time in Asia at the Shanghai event. The Huracán Performante combines innovative lightweight technologies, active aerodynamics and a reconfigured chassis and all-wheel-drive set-up with a further improved V10 power train. The Aventador S, the latest member of the Aventador family, impresses with its unparalleled design and out- standing aerodynamics. The new generation of the naturally aspirated V12 engine has a power output of 544 kW (740 PS) and accelerates the car from 0 to 100 km/h in just 2.9 sec- onds. The Volkswagen Group’s vision of autonomous driving was also on show in Shanghai in the form of the Sedric concept car, which was first presented in Geneva. It under- lines the great importance of fully automated driving to the Group’s strategy. Sedric offers a glimpse of the mobility of the future and is also being developed further in China. Wörthersee GTI Meet The world premiere of the advanced up! GTI prototype drew visitors’ interest at the annual GTI Meet at the Wörthersee in Austria. With a power output of 85 kW (115 PS), the up! GTI is an homage to the original 110 PS GTI of 1976. The typical GTI insignia include the red lateral stripes on the radiator grill with a honeycomb pattern, black double stripes across the broad side sills, a GTI gear stick knob and the legendary “Clark” tartan seats. The Golf GTE Performance concept car also celebrated its debut at the Wörthersee. The concept presented Volkswagen’s ideas for further enhancing the pure Key Events electric Golf GTE, which has a range of up to 50 km. Compared to the existing car’s 150 kW (204 PS), the concept car’s plug-in hybrid drive achieves a system power output of 200 kW (272 PS). The system torque has been increased from 350 to 450 Nm. A team of vocational trainees from Wolfsburg wowed the Wörthersee visitors for the tenth time with a special Golf GTI show car, the GTI First Decade, which features an interior and exterior colored in various shades of blue. Trainees from Volkswagen in Saxony showed off an impressive concept car: their Golf GTE Estate impulsE. Vienna Motor Symposium At the 38th Vienna Motor Symposium, the Volkswagen Group used the example of the new Golf to present its far-reaching electrification of drive systems. This ranges from the new “eco-coasting” low-cost micro-hybrid system, to the Golf GTE with plug-in hybrid drive, to the new e-Golf, which now has a range of up to 300 km. In the new Golf TSI BlueMotion, which is on sale from summer 2017, the eco-coasting system works in conjunction with a DSG transmission. It offers the driver hybrid-like performance at speeds of up to 130 km/h: when the driver releases the accelerator pedal, the Golf can coast with the engine completely deactivated. The system reduces fuel consumption by up to 0.4 l per 100 km, compared to up to 0.2 l per 100 km for the current engine-on coasting func- tion. Another technology with which Volkswagen is shaping the transition to the sustainable mobility of the future is the use of compressed natural gas (CNG) to power vehicles. The powerful new compact 1.0 TGI engine for the Volkswagen Group’s compact car class generates 66 kW (90 PS). It is a bivalent engine, meaning that it can run on both petrol and CNG. Its emissions are particularly low when using CNG fuel – this applies both to CO2 and NOx and particulate emissions. transport logistic 2017 At the global logistics industry’s leading trade fair, transport logistic 2017 in Munich, Volkswagen Commercial Vehicles along with premium partners from the expansion sector presented solutions for making the new Crafter the best partner in the transport sector. MAN used the Munich trade fair to demonstrate its exper- tise as a provider of efficient transport solutions. The vehicle fleet was represented by the TGX EfficientLine 3 and the new TGE van. Also at the event, MAN Financial Services showed off its comprehensive financing, leasing and insurance service portfolio as well as its rental offering and the MAN Card. Scania used transport logistic 2017 to present its new digital platform for connected services – Scania One – for the first time in Germany. The platform enables fleet owners and drivers to access connected services that help them optimize their transport orders. The additional Scania Trailer Control service allows companies to display their trailer data in the Scania Fleet Management Portal. In addition to the functions already available, such as positioning and route tracking, the service will also display the coupling of tractor units and 3 4 Key Events trailers. Scania also presented options for enhancing tele- matics services along with a modern maintenance plan without fixed servicing intervals. RIO, the new digital brand of Volkswagen Truck & Bus, also gave a preview of its innovative digital services for the logistics of the future. AWA R D S No fewer than four Group models received the renowned “Red Dot Award” for outstanding product design in early April 2017. The Audi Q2 received the coveted prize for its superior design quality and trendsetting design. The ŠKODA brand, whose current design language emphasizes precision and clarity, saw the new Kodiaq and the extensively upgraded Octavia Combi win awards in the Product Design category as well. The new SEAT Ibiza, whose body shape artfully combines sharp lines and smooth surfaces, also won over the jury. The Volkswagen Group was again crowned the world’s most innovative automotive company in early May 2017 when it received the “AutomotiveINNOVATIONS Award”. The independent Center of Automotive Management presented the accolades in cooperation with audit and consulting firm PricewaterhouseCoopers. Volkswagen Passenger Cars earned the title of Most Innovative Volume Brand and also took first place in the individual categories Interface and Connectivity as well as Autonomous Driving and Safety. Audi was recog- nized as the Most Innovative Premium Brand and came first in the individual categories Vehicle Concepts and Body as well as Interface and Connectivity. At the “Automobilwoche Award Autohandel” in May 2017, Volkswagen Passenger Cars emerged as the winner among the volume brands and Audi among the premium brands. The renowned industry award recognized the excellent purchasing experience for buyers of new vehicles from both brands. The study was based on undercover test purchases at around 700 German car dealerships for 16 brands between February and April 2017. Audi also won a special prize for its financing. At the end of May 2017, the Audi A3 Sportback g-tron achieved the best result ever recorded in the 100,000-kilo- meter endurance test organized by Auto Bild magazine, putting it at the very top of the endurance test rankings. The top score was based on everyday experiences of and mea- surements taken by the editorial team, the vehicle’s reliability and, importantly, the concluding inspection involving the dismantling of the test vehicle and detailed examination of all components by technical experts. In June 2017, Volkswagen Group brands took a total of six top places in Firmenauto magazine’s “Company Car of the Year” poll. The Passat GTE version won in the mid-size class, while the ŠKODA Superb Combi took the top spot in the relevant import rankings. The Czech brand also came first in the compact-class rankings for imported vehicles with the Octavia Estate. The SEAT brand celebrated a double success, Updated Information with the Mii helping the brand win the title of best importer for mini cars, while the Ateca topped the overall rankings for compact SUVs. Audi rounded off the success with top place in the Service for Fleet Customers category. At the “International Engine of the Year Awards” at the end of June 2017, the Audi brand received the coveted award in the 2.0 to 2.5 l category for its 2.5 l TFSI engine. This was Audi’s 13th success since the awards began in 1999. Alongside the outstanding performance, the jury gave special praise to the unique sound of the five-cylinder engine. The engine is 26 kg lighter than its predecessor, thanks in part to the switch to a lightweight metal crankcase. Also at the end of June 2017, Volkswagen won the “Ger- man Mobility Award 2017” with its driver assistance system Emergency Assist. The prize was awarded to Volkswagen Passenger Cars by the “Germany – Land of Ideas” initiative and the German Federal Ministry of Transport and Digital Infrastructure for its safe, intelligent mobility. Emergency Assist monitors the driver’s activity (accelerator pedal, brakes and steering) and helps to avoid accidents or at least reduce the damage caused. The magazines VerkehrsRundschau and Trucker gave awards to the most environmentally friendly commercial vehicles in April 2017. The “Green Van of the Year” title went to the Transporter from Volkswagen Commercial Vehicles, while the Scania R 450 was named “Green Truck of the Year”. In the case of the Transporter, the decisive factors were the excellent ratio of payload to loading space combined with low fuel consumption and Euro 6 emissions compliance as standard. The Scania R 450 was especially impressive with its fuel consumption and emissions figures. At the end of June 2017, readers of the specialist maga- zines trans aktuell, FERNFAHRER and lastauto omnibus chose no fewer than three models from Volkswagen Commercial Vehicles as the best commercial vehicles for the fourth time in a row. The Caddy beat the competition to become the best delivery vehicle, while the Volkswagen Transporter won the category for vans up to 2.8 tonnes. The Amarok was crowned best pickup. A N N I V E R S A R I E S In mid-May 2017, Porsche’s main factory in Zuffenhausen produced the millionth Porsche 911 – a Carrera S with custom paintwork and numerous exclusive special features in the style of the first 911 model from 1963. All 911s come from the company’s headquarters. At the end of April 2017, ŠKODA built the millionth Superb at the Kvasiny plant in the Czech Republic. The anni- versary vehicle was a saloon with top-of-the-range Laurin & Klement specifications. The current third generation of the Superb has made a major contribution to this success story. A total of 250,000 units have already been manufactured since production began in 2015. Updated Information The end of June 2017 saw completion of the fifteen millionth engine to be manufactured at Volkswagen’s Chemnitz site since production began in Saxony 29 years ago. The anniver- sary engine was a 1.0 l CNG unit for the eco up! with a power output of 50 kW. PA R T N E R S H I P S In June 2017, Volkswagen agreed on a new joint venture for e-mobility in China with the Chinese car manufacturer Anhui Jianghuai Automobile (JAC). The two partners each have a 50% stake in the new company, which plans to develop, produce and sell electric vehicles and mobility services. The agreement includes the construction of a further factory and a research and development center for this purpose. The partnership also comprises the development and production of components for New Energy Vehicles (NEV) as well as the enhancement of vehicle connectivity and automotive ser- vices. In addition, the establishment of new used-car plat- forms and all associated business activities is planned. AUDI AG, the FAW Group and FAW-Volkswagen have signed an agreement on the future development of the Audi business in China with the Chinese Audi dealer council. The agreement with the dealers incorporates the interests of the existing sales network into the premium brand’s new two- pillar strategy in China. All parties agreed that Audi models from the planned partnership between Audi and SAIC Motor will be sold through the brand’s existing dealer network in China. A new sales management structure was defined on the basis of the legal requirements. This will ensure a unified market presence for the brand’s own products originating from the cooperation between the two partners. Audi and long-standing Volkswagen partner SAIC are in the process of evaluating a partnership for the production and sale of Audi models and for data and mobility services. This strategic course is intended to further develop the China business profitably for all parties involved. At the end of June 2017, Volkswagen agreed on a strategic partnership with US technology firm NVIDIA. The aim is to expand expertise in deep learning – a field of machine learning. Advanced systems based on artificial intelligence (AI) will be developed using deep learning at the Volkswagen Data:Lab. The projects include, among other things, AI in corporate processes and mobility services. D I V E R S I T Y C H A R T E R At the end of May 2017, the Volkswagen Group joined the Diversity Charter – Charta der Vielfalt e.V. In doing so, the Company underscored its commitment to tolerance and tackling discrimination in the work environment. The aim is to promote a corporate culture of recognition, appreciation and diversity in Germany. Key Events D I E S E L I S S U E UK Vehicle Certification Agency approves technical solutions During the second quarter of 2017, the Vehicle Certification Agency in the United Kingdom issued the outstanding official approvals needed for technical solutions to modify the ŠKODA and SEAT models falling within its remit. The technical solutions for all vehicles in the European Union were thereby approved without exception. A N N U A L G E N E R A L M E E T I N G The 57th Annual General Meeting of Volkswagen AG was held at the Hanover Exhibition Center on May 10, 2017. With 92.53% of the voting capital present, the ordinary share- holders of Volkswagen AG agreed to the proposal of the Board of Management and Supervisory Board to pay a dividend of €2.00 per ordinary share and €2.06 per preferred share for fiscal year 2016. They also formally approved the actions of the members of the Board of Management and Supervisory Board and gave their consent to the signing of an inter- company agreement. The ordinary shareholders of Volks- wagen AG additionally approved the new system of Board of Management remuneration and agreed the redesign of the Supervisory Board remuneration system along with a corresponding amendment to the Articles of Association. During the Annual General Meeting, they elected Pricewater- houseCoopers AG Wirtschaftsprüfungsgesellschaft (PwC) as the auditors for the single-entity and consolidated financial statements for fiscal year 2017 and as the auditors to review the condensed consolidated financial statements and interim management report for the first six months of 2017, for the period up to September 30, 2017 and for the first quarter of fiscal year 2018. S U P E R V I S O R Y B O A R D M AT T E R S In the election of employee representatives to the Super- visory Board of Volkswagen AG on April 6, 2017 in Wolfsburg, Ms. Ulrike Jakob, Deputy Chairwoman of the Works Council of Volkswagen AG, Kassel plant; Ms. Bertina Murkovic, Deputy Chairwoman of the Works Council of Volkswagen Commer- cial Vehicles; and Mr. Athanasios Stimoniaris, Chairman of the Group Works Council of MAN SE and of the MAN SE Works Council, were elected as members of the Volkswagen AG Supervisory Board for the first time. They succeed Mr. Uwe Fritsch, Mr. Stephan Wolf and Mr. Thomas Zwiebler. The remaining employee representatives on the Supervisory Board were reappointed. The term of office began at the end the Volkswagen AG Annual General Meeting on of May 10, 2017. The election means that the legally prescribed ratio of at least 30% women and at least 30% men has now also been reached on the employee side of the board. 5 6 Volkswagen Shares Interim Management Report Volkswagen Shares In the period from January to June 2017, prices on the inter- national equity markets rose amid volatile trading. The DAX also recorded an increase compared with the end of 2016. The promising economic performance of important industrialized nations, the improved situation in the US labor market, the outcome of the elections in the Netherlands and France and strong corporate results had a positive impact. At times, however, uncertainty as regards the economic policy of the new US government, the election results in Europe and international crises weighed on share prices. Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website at www.volkswagenag.com/ir. V O L K SWA G E N K E Y S H A R E F I G U R E S A N D M A R K E T I N D I C E S F R O M J A N U A R Y 1 TO J U N E 3 0 , 2 0 1 7 In the first half of 2017, Volkswagen AG’s preferred and ordinary shares trailed behind the rising market trend amid high volatility. Positive stimulus was generated by settlement agreements in the United States in connection with the diesel issue, strong corporate earnings and the successful perfor- mance of the Volkswagen Passenger Cars brand. Uncertainty about further legal risks arising from the diesel issue and the future regulatory framework for diesel and electric vehicles impacted on share prices. Ordinary share Preferred share DAX Price (€) Date Price (€) Date Price Date High 156.40 Jan. 25 153.90 Jan. 25 12,889 June 19 Low 135.65 June 16 131.15 Apr. 13 11,510 Feb. 6 Closing 135.75 June 30 133.35 June 30 12,325 June 30 ESTX Auto & Parts Price 562.18 516.21 516.21 Date May 10 June 30 June 30 P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 6 T O J U N E 2 0 1 7 Index based on month-end prices: December 31, 2016 = 100 Volkswagen ordinary shares –0.7% Volkswagen preferred shares 0.0% DAX +7.4% EURO STOXX Automobiles & Parts –1.0% 120 120 110 110 100 100 90 90 D J F M A M A S O N D Interim Management Report Business Development Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The global economy saw moderate growth in the first half of 2017. The average expansion rate of gross domestic product (GDP) was up year-on-year in both the industrialized coun- tries and the emerging market economies. Energy and commodity prices, which increased again at the beginning of the year, giving a boost to the economies of individual exporting countries that depend on them, weakened slightly in the course of the second quarter. The economy of Western Europe recorded stable growth on the whole between January and June 2017, though the rates of change were mixed in both Northern European and Southern European countries. ongoing conflict between Russia and Ukraine continued to weigh on the economy. In South Africa, structural deficits and political upheaval on the whole subdued the GDP growth rate during the first six months of 2017. The US economy continued its growth trajectory between January and June 2017, with considerable stimulus being provided by private domestic demand. Based on the stable situation in the labor market and the expected inflation trend, the US Federal Reserve decided once again to raise its key interest rate slightly. GDP growth rates in the neighboring countries of Canada and Mexico were also higher year-on- year. In Germany, the continuing optimism among consumers and the strong labor market situation allowed the economy to maintain its solid growth course in the reporting period. The economy in Central Europe continued to perform positively in the first half of 2017. Eastern Europe’s economic situation improved on the back of the comparatively higher level of energy prices. Following a prolonged recessionary period in Russia’s economy, the turnaround that began at the end of 2016 was maintained in the reporting period. The Brazil’s economy remained in recession, though economic output decreased at a slightly slower pace than in the prior- year period. Weak domestic demand and political uncertainty weighed on performance. Amid sustained high inflation, Ar- gentina’s economic situation showed a slight improvement. The Chinese economy maintained its high growth momen- tum in the reporting period. In India, the growth trend strengthened slightly at a high level as the year progressed. Japan registered relatively solid GDP growth. E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 6 T O J U N E 2 0 1 7 Index based on month-end prices: as of December 31, 2016 = 100 EUR to GBP EUR to GBP EUR to USD EUR to USD EUR to CNY EUR to CNY EUR to JPY EUR to JPY 110 110 105 105 100 100 95 95 90 90 D F M A M A S O N D 7 8 Business Development T R E N D S I N T H E PA S S E N G E R C A R M A R K E T S Worldwide demand for passenger cars was up 2.7% in the period from January to June 2017 compared with the prior- year period. Growth was driven by the Asia-Pacific region, Western Europe, South America and Central and Eastern Europe. The number of new cars sold in North America, the Middle East and Africa declined. In the first half of 2017, the Western European passenger car market continued its growth trajectory in spite of ongoing political uncertainty. This positive performance was underpinned by the stable macroeconomic environment. While new registrations in Italy and Spain continued to benefit from high demand for replacement vehicles and considerable growth in demand from commercial customers, the French market recorded an increase that was below average in comparison. In the United Kingdom, the weaker second quarter – due in particular to the change in vehicle taxation as of April 1, 2017 – resulted in passenger car sales falling short of the record level of the prior-year period. New passenger car registrations in Germany in the first six months of 2017 were up year-on-year for the fourth year in a row. Demand from private and also commercial custom- ers was helped in particular by the ongoing robust develop- ment of the economy. The passenger car market in Central and Eastern Europe saw a marked increase year-on-year in the first half of 2017. As in the three preceding years, the majority of EU markets in Central Europe recorded high growth rates. Passenger car sales in Eastern Europe also rose, starting from a very low level. This was primarily attributable to the growth of the Russian market in the year to date. After seeing an increase in the first quarter of 2017, new passenger car registrations in South Africa in the reporting period were down slightly overall on the previous year, mainly as a result of the weak economic environment. In North America, sales of passenger cars and light commercial vehicles (up to 6.35 tonnes) in the period from January to June 2017 fell slightly short of the high prior-year level. At the same time, demand continued to decline in the USA during the second quarter. High consumer confidence, a favorable labor market and manufacturer incentive programs that continue to be attractive were unable to prevent the downward trend. The trend in demand towards SUV and pickup models, accompanied by a simultaneous decrease in traditional passenger car segments, continued in the reporting period. The automotive markets in Canada and Mexico recorded a further increase, exceeding their respective records from the prior-year period. In South America, the market volume for passenger cars and light commercial vehicles witnessed a marked improve- ment in the first half of 2017 from the previously low level. After three years of declining new vehicle registrations, moderate growth was registered in Brazil in the reporting Interim Management Report period. Brazilian car manufacturing benefited in particular from a rise in exports to Argentina, where new registrations of passenger cars and light commercial vehicles recorded a very high increase from a comparatively low prior-year figure, mainly due to price reductions by the manufacturers. The Asia-Pacific region recorded by far the highest abso- lute growth in demand between January and June 2017. A comparatively modest growth rate was registered in the Chinese passenger car market. The main reason for this was the bringing forward of purchases at the end of 2016 in anticipation that the tax rate on vehicles of up to 1.6 l would be raised at the beginning of 2017. In India, passenger car sales rose considerably, largely on the strength of attractive financing terms, a high level of consumer confidence and a large number of new models. The Japanese passenger car market also showed an improvement in the reporting period. The marked upturn compared with the very low prior-year level was generated by ongoing state incentives for fuel- efficient and low-emission vehicles as well as the intro- duction of new models. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S Global demand for light commercial vehicles was down on the previous year’s level in the first half of 2017. In Western Europe, new registrations stabilized and slightly exceeded the prior-year level on the back of the sus- tained positive economic performance. In the reporting period, demand in Germany was also up slightly year-on-year. Registrations of light commercial vehicles in Central and Eastern Europe recorded a moderate increase compared with the previous year. The market trend in Russia benefited from the recovery of the ruble and falling inflation, which led to a marked increase in registrations year-on-year in the months from January to June 2017. In North and South America, the light vehicle market is reported as part of the passenger car market, which includes both passenger cars and light commercial vehicles. In the Asia-Pacific region, demand for light commercial vehicles declined compared with the previous year. Registra- tion volumes in China, the region’s dominant market, were down considerably year-on-year. The number of new vehicle registrations in Australia, India, Japan, South Korea and Thailand saw a moderate increase compared with the previ- ous year. In the markets that are relevant for the Volkswagen Group, global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was above the prior-year figure between January and June 2017. Demand in Western Europe saw a moderate increase over the 2016 level. New registrations in Germany, Western Europe’s largest market, were slightly higher year-on-year in the first half of 2017. Demand in Italy also developed posi- Interim Management Report tively, with programs to promote investment and demand for replacement vehicles pushing up demand significantly. In the Central and Eastern Europe region, the positive eco- nomic performance led to much higher registration volumes than in the previous year. Demand in Russia showed a sub- stantial improvement, buoyed by the incipient recovery of the economy along with declining inflation rates. Registration volumes in South America were perceptibly lower than in 2016. In Brazil, the region’s largest market, demand for trucks decreased sharply on the prior-year period as a result of the continuing weak economic climate and political tensions. Political reforms and stimulus from the agricultural sector resulted in a very sharp increase in regis- tration volumes in Argentina in the first half of 2017. In the first six months of 2017, registration volumes for mid- sized and heavy trucks in the US market were noticeably lower than the previous year’s level. Demand for buses in the markets that are relevant for the Volkswagen Group was distinctly up on the previous year in the period from January to June 2017. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are generally independent of each other. In the first half of 2017, the marine market saw a contin- uation of the noticeably muted order activity but remained stable at a low level compared with the prior-year period. Despite rising freight rates in the transport sector, there was no sign of recovery in the affected container ships, tankers and bulk carrier market segments due to the growing excess capacity. Demand for cruise ships, passenger ferries, dredgers and government vessels remained steady. In the offshore sector, the still low oil price in conjunction with the existing excess capacity curbed investment in offshore oil production. On account of low market volumes, all market segments are continuing to notice considerably higher competitive pressure and a sharp drop in prices as a result. The market for power generation showed a slight recovery compared with the same period in 2016. Demand rose some- what in all areas of application. Demand for energy solutions remained high, with a strong trend towards greater flexibility and decentralized availability. The shift away from oil-fired power plants towards dual-fuel and gas-fired power plants continued. Particularly on larger projects, order placement is being delayed due to sustained muted economic growth in key developing countries and emerging markets and to persistently difficult financing conditions for customers. In Business Development addition, continued strong pressure from competition and pricing is discernible in all projects, and is having a negative impact on the earnings quality of orders. The market for turbomachinery was stable at a low level compared with the prior-year period. Activity in the con- struction of turbomachinery is mainly dominated by global investment projects in the oil, gas and processing industry and in power generation. Project volumes in the oil and gas industry remained at a low level despite the slight recovery in the oil price. Demand for products in the processing industry and in power generation has also been weak on the whole in 2017 to date. Pressure from competition and pricing increased again. The marine and power plant after-sales business for diesel engines performed positively overall and benefited from a continued increase in interest in long-term maintenance contracts. The after-sales market for turbomachinery was mostly stable. D E M A N D F O R F I N A N C I A L S E R V I C E S Demand for automotive financial services remained high in the first half of 2017, due in particular to the expansion of the overall market for passenger cars and low key interest rates in the main currency areas. Higher vehicle sales particularly in Western and Central Europe gave a further boost to the European market. Financ- ing and leasing were the options preferred by customers, especially for purchases of new vehicles. Demand for after- sales products such as inspection contracts, maintenance and spare parts agreements and automotive-related insurance was also higher in the period from January to June 2017 than in the same period of the previous year. In Germany, the share of loan-financed or leased new vehi- cles remained stable at a high level in the reporting period. There was greater demand for after-sales products, and demand for integrated mobility solutions in the business customer segment also continued to rise. Demand for financing and insurance products in South Africa was steady in the first six months of 2017. In the US market and in Mexico, demand for automotive financial services remained high in the first half of 2017. The still tense macroeconomic and political situation in Brazil had a negative impact on the financial services business in the reporting period, with the consumer credit business and sales of the country-specific financial services product Consorcio, a lottery-style savings plan, falling below prior-year levels. Demand for automotive financial services across the Asia- Pacific region was again mixed. In China, the proportion of loan-financed vehicle purchases rose further compared with 9 10 Business Development the prior-year period. Despite increasing restrictions on regis- trations in metropolitan areas, there is considerable potential to acquire additional new customers for automotive-related financial services, particularly in the interior of the country. In Japan and South Korea, as well as in Australia, demand for automotive-related financial services was stable. Demand for financial services in the commercial vehicles business area also varied from region to region. The growth trend from 2016 continued in the first half of 2017 in China and particularly in Western Europe. In contrast, the truck and bus business in Brazil and the related financial services market continued to come under pressure from the tense economic situation. V O L K SWA G E N G R O U P D E L I V E R I E S Between January and June 2017, the Volkswagen Group delivered 5,155,591 vehicles to customers worldwide, an increase of 0.8% or 39,676 units on the prior-year period. The chart on page 12 shows the trend in deliveries worldwide by month compared with the previous year. Separate details of deliveries of passenger cars and commercial vehicles are provided in the following. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A R Y 1 TO J U N E 3 0 1 2017 2016 Passenger Cars 4,809,453 4,788,395 Commercial Vehicles 346,138 327,520 Total 5,155,591 5,115,915 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. PA S S E N G E R C A R D E L I V E R I E S W O R L D W I D E In the first half of 2017, global demand for passenger cars from the Volkswagen Group rose to 4,809,453 vehicles, an increase of 0.4% or 21,058 units compared with the previous year. The market as a whole grew at a slightly stronger pace in the same period at + 2.7%. The ŠKODA (+2.8%), SEAT (+13.7%), Bentley (+30.6%), Lamborghini (+3.9%) and Porsche (+7.2%) brands reported encouraging growth rates. While the Volks- wagen Passenger Cars brand now registered a slight improve- ment overall on the prior-year figure (+0.3%) following a weaker first quarter, deliveries to Audi customers (–4.7%) fell short of the prior-year volume. Demand for Volkswagen Group passenger cars was higher than in the previous year in the Western Europe, Central and Eastern Europe, and North and South America regions, but deliveries in the Asia-Pacific region fell below the previous year’s level. The table on the next page provides an overview of passenger car deliveries to customers by market in the reporting period. Sales trends in the individual markets are as follows. % +0.4 +5.7 +0.8 Interim Management Report Deliveries in Europe/Other markets In Western Europe, demand for Volkswagen Group vehicles between January and June 2017 grew by 1.5% to 1,685,446 units and thus less rapidly than the market as a whole (+3.6%). This trend was partly the result of the Golf model change, but was also due to the fact that customer confidence has not yet been fully restored following the diesel issue. The Tiguan, Audi Q2 and Audi A5 models saw the highest growth rates. In addition, the SEAT Ateca and Porsche Macan were very popular. The new Arteon from Volkswagen Passenger Cars and the new ŠKODA Kodiaq were successfully launched in the market. In Western Europe, the Volkswagen Group’s share of the passenger car market was 21.6 (22.1)%. Sales of Volkswagen Group passenger cars in Germany in the first half of 2017 were down 1.4% on the prior-year figure. The market as a whole grew by 3.1% in the same period. The Tiguan, Audi Q2, Audi A4 Avant and Audi A5 models saw the strongest growth in demand. Moreover, the new ŠKODA Kodiaq, the new SEAT Ateca and the Porsche Macan were very popular. Seven Group models led the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) registra- tion statistics in their respective segments: the up!, Polo, Golf, Tiguan, Touran, Passat and Porsche 911. In the first six months of 2017, the Golf was again the number one passen- ger car in Germany in terms of registrations. The Volkswagen Group handed over 12.8% more vehicles to customers in the still-expanding passenger car markets in the Central and Eastern Europe region in the reporting period than a year before. The Czech Republic and Poland continued to see strong growth in demand for Group models, and in Russia our sales figures also continued to rise. Demand for the Golf, Tiguan, ŠKODA Fabia, ŠKODA Rapid and ŠKODA Octavia models was very encouraging. In addition, the new Audi Q2, ŠKODA Kodiaq and SEAT Ateca models were in great demand. The Volkswagen Group’s share of the market in this region rose to 22.9 (22.5)%. In the declining passenger car market in South Africa, we handed over 0.1% more vehicles to customers in the first six months of this year than in 2016. The Polo remained the best-selling Group model in South Africa. Deliveries in North America Volkswagen Group deliveries to customers in North America in the first half of 2017 were 3.4% higher than the prior-year figure despite a weaker overall passenger car and light com- mercial vehicle market. The Volkswagen Group’s share of the market in this region rose to 4.5 (4.3)%. The Jetta remained the most sought-after Group model in North America. In the US market, demand for Volkswagen Group vehicles between January and June 2017 exceeded the prior-year figure by 7.2%. The market as a whole declined slightly in the same period. Models in the SUV and pickup segments remained in particularly high demand. The Golf, Passat, Audi A4, Audi Q5, Audi Q7 and Porsche Macan models enjoyed an Interim Management Report Business Development encouraging rise in demand. The new Atlas SUV was well received by the market. in the previous year. The Polo, Vento and SEAT Ibiza models were particularly popular. In Canada, where the overall market is growing, we delivered almost as many vehicles to customers in the reporting period as in the previous year, mainly on account of the diesel issue. Demand for the Golf Estate, Audi A4, Audi Q5 and Porsche Macan models developed positively. The Mexican market as a whole lost some of its momen- tum during the first six months of 2017. The Volkswagen Group delivered 3.8% fewer vehicles to customers there than Deliveries in South America The South American markets for passenger cars and light commercial vehicles continued their upward trend in the reporting period. During this period, the Volkswagen Group delivered 10.7% more vehicles to customers there than in the prior year. The Volkswagen Group’s share of the passenger car market in South America was 11.8 (11.7)%. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2017 2016 (%) Europe/Other markets 2,176,449 2,131,710 +2.1 Western Europe 1,685,446 1,660,192 +1.5 of which: Germany 598,980 607,437 –1.4 United Kingdom 276,749 273,210 +1.3 Spain 151,810 138,184 +9.9 Italy 143,169 130,540 +9.7 France 135,519 136,754 –0.9 Central and Eastern Europe 331,583 293,890 +12.8 of which: Russia 78,822 74,200 +6.2 Czech Republic 76,946 68,743 +11.9 Poland 74,137 62,595 +18.4 Other markets 159,420 177,628 –10.3 of which: Turkey 67,165 79,514 –15.5 South Africa 40,496 40,448 +0.1 North America 454,457 439,440 +3.4 of which: USA 293,432 273,843 +7.2 Mexico 110,423 114,800 –3.8 Canada 50,602 50,797 –0.4 South America 213,373 192,736 +10.7 of which: Brazil 126,655 127,638 –0.8 Argentina 63,874 47,911 +33.3 Asia-Pacific 1,965,174 2,024,509 –2.9 of which: China 1,821,082 1,859,353 –2.1 Japan 42,930 42,894 +0.1 India 35,567 30,422 +16.9 Worldwide 4,809,453 4,788,395 +0.4 Volkswagen Passenger Cars 2,935,146 2,924,919 +0.3 Audi 908,955 953,293 –4.7 ŠKODA 585,013 569,353 +2.8 SEAT 246,493 216,843 +13.7 Bentley 5,238 4,011 +30.6 Lamborghini 2,091 2,013 +3.9 Porsche 126,497 117,963 +7.2 Bugatti 20 0 x 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 11 12 Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 1,000 1,000 900 900 800 800 700 700 600 600 500 500 J F M A M The Brazilian market witnessed a slight recovery during the first six months of 2017. Volkswagen Group deliveries to customers were on a level with the previous year. The Gol, Saveiro and Amarok models were particularly sought after. In Argentina, Group sales between January and June 2017 were up 33.3% year-on-year. The market as a whole grew similarly strongly in the same period. The Gol was the best- selling model in Argentina. The Suran and Amarok models were also high in demand. Deliveries in the Asia-Pacific region In the Asia-Pacific region, the number of Volkswagen Group passenger cars sold in the first half of 2017 fell below the high prior-year figure (–2.9%) although the market as a whole grew. This was mainly due to the now successfully concluded negotiations by the Audi brand for the strategic reorientation of the brand’s business in China. As a result, the Group’s share of the market in this region declined to 11.5 (12.3)%. Interim Management Report 2017 2017 2016 2016 J A S O N D The momentum in the Chinese passenger car market slowed in the reporting period compared with the previous year. The number of Group models delivered to customers in China decreased by 2.1%. Demand for the Bora, Tiguan, Magotan and Passat models developed positively. The new Teramont SUV was successfully rolled out. Between January and June 2017, the rate of growth in the Indian passenger car market picked up year-on-year. During this period, sales of Group models were 16.9% higher than the figure for the prior-year period. In addition to the new Ameo, the ŠKODA Rapid was very popular with customers. Passenger car deliveries to the Group’s customers in Japan in the first six months of 2017 matched the previous year’s level (+0.1%) even though the market as a whole grew. The Polo, Golf and Audi A3 models saw the highest demand. Interim Management Report Business Development C O M M E R C I A L V E H I C L E D E L I V E R I E S The Volkswagen Group handed over a total of 346,138 com- mercial vehicles to customers worldwide in the period from January to June 2017, an increase of 5.7% on the previous year. Sales of trucks rose to 87,529 vehicles (+6.6%). Bus delivery volumes amounted to 8,480 units (+12.1%). With 250,129 light commercial vehicles sold, the prior-year figure was exceeded by 5.1%. The Volkswagen Group delivered 28,435 vehicles in the Other markets, a decrease of 16.1% compared with the previous year; 19,903 were light commercial vehicles, 7,161 were trucks and 1,371 were buses. Sales in North America climbed to 6,957 units, exceeding the previous year’s level by 48.1%. In Mexico alone, 5,501 light commercial vehicles, 475 trucks and 978 buses were handed over to customers. As a result of the sustained economic recovery, the Volks- wagen Group sold 220,403 units to customers in the Western European markets in the period from January to June 2017, 4.4% more than in the previous year. Of the vehicles deliv- ered, 173,578 were light commercial vehicles, 44,406 were trucks and 2,419 were buses. The Transporter and the Caddy were the most sought-after Group models. In the first six months of 2017, we delivered 34,976 commercial vehicles in the South American markets, an increase of 15.7%. Of the units sold, 19,429 were light commercial vehicles, 13,226 were trucks and 2,321 were buses. The Group model that witnessed the strongest demand was the Amarok. Delivery volumes in Brazil rose by 10.8% to 15,616 units; this included 5,332 light commercial vehicles, 8,764 trucks and 1,520 buses. In the Central and Eastern European markets, demand for our commercial vehicle brands rose by 13.9% to 34,373 units; this included 19,143 light commercial vehicles, 14,715 trucks and 515 buses. The Transporter and the Caddy were particularly popular. In Russia, sales were up substantially on the prior-year level at 6,940 units, buoyed by the incipient economic recovery and receding inflation rates. The Volkswagen Group handed over a total of 20,994 com- mercial vehicles to customers in the Asia-Pacific region, an increase of 21.0%. Of the vehicles delivered, 12,575 were light commercial vehicles, 7,543 were trucks and 876 were buses. China saw the highest growth in sales. The Transporter and the Amarok were the most popular Group models. C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2017 2016 (%) Europe/Other markets 283,211 275,247 +2.9 Western Europe 220,403 211,195 +4.4 Central and Eastern Europe 34,373 30,180 +13.9 Other markets 28,435 33,872 –16.1 North America 6,957 4,696 +48.1 South America 34,976 30,223 +15.7 of which: Brazil 15,616 14,093 +10.8 Asia-Pacific 20,994 17,354 +21.0 of which: China 4,882 2,760 +76.9 Worldwide 346,138 327,520 +5.7 Volkswagen Commercial Vehicles 249,807 237,879 +5.0 Scania 43,608 40,310 +8.2 MAN 52,723 49,331 +6.9 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. 13 14 Business Development D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times typically range from just under one year to several years, and partial deliveries as construction progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. In the period from January to June 2017, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated more than two-thirds of overall sales revenue. G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division combines the Volkswagen Group’s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania, Porsche and Porsche Holding Salzburg. Demand for the Financial Services Division’s products and services remained strong in the first half of 2017. At 3.6 (3.5) million, the number of new financing, leasing, service and insurance contracts signed worldwide exceeded the previous year’s level. The ratio of leased or financed vehicles to Group deliveries (penetration rate) in the Financial Services Division’s markets rose to 33.5 (32.7)% in the reporting period. At 17.9 million, the total number of contracts as of June 30, 2017 was 2.8% higher than the 2016 year-end figure. In Europe/Other markets, 2.7 million new contracts were signed in the period from January to June 2017, 2.5% more than in the previous year. As of June 30, 2017, the total num- ber of contracts was 13.0 million, up 4.6% on the end of December 2016. The Customer Financing/Leasing area accounted for 6.2 million contracts (+5.3%). The number of contracts in North America declined to 2.7 million at the end of the reporting period, a drop of 4.3% versus December 31, 2016. The Customer Financing/Leasing area recorded 1.7 million contracts (–5.3%). The number of new contracts signed amounted to 413 thousand, a decrease of 11.3% compared with the prior-year period. In South America, 98 thousand new contracts were signed in the first six months of this year, a decrease of 4.7% year-on-year. The total number of contracts amounted to 640 thousand at the end of the reporting period, 1.1% fewer than at the end of last year. The contracts mainly related to the Customer Financing/Leasing area. Interim Management Report The number of new contracts signed in the Asia-Pacific region rose by 9.9% to 361 thousand. The total number of contracts amounted to 1.6 million on June 30, 2017, up 3.8% compared with December 31, 2016; the Customer Financing/ Leasing area accounted for 1.3 million contracts (+6.5%). S A L E S T O T H E D E A L E R O R G A N I Z AT I O N In the first half of 2017, the Volkswagen Group’s unit sales to the dealer organization (including the Chinese joint ventures) rose by 1.4% to 5,270,402 vehicles, in particular on the back of higher demand in Europe and South America. Unit sales outside Germany rose by 1.7% in the reporting period, while in the German market they fell 0.9% short of the prior-year level. Vehicles sold in Germany as a proportion of overall sales declined to 12.8 (13.1)%. P R O D U C T I O N The Volkswagen Group produced a total of 5,433,123 vehicles in the period from January to June 2017, an increase of 3.1% year-on-year. Production in Germany declined by 3.8% to 1,351,856 units. The proportion of vehicles produced in Ger- many decreased to 24.9 (26.7)%. I N V E N T O R I E S Global inventories at Group companies and in the dealer organization were higher on June 30, 2017 than at year-end 2016 and also up on the June 30, 2016 level. E M P L OY E E S The Volkswagen Group had 603,131 active employees on June 30, 2017. A further 6,919 employees were in the passive phase of their partial retirement. An additional 15,746 young people were in vocational traineeships. At the end of the first half of 2017, the Volkswagen Group had a total of 625,796 employees worldwide, on a level with the December 31, 2016 figure. The production-related expansion, the recruitment of specialists within and outside Germany and the expansion of the workforce in the new plants in Mexico, China and Poland were offset by the reduction of around 9,800 employees as a result of the disposal of part of the PGA Group SAS. At 282,679, the number of employees in Germany was up 0.4% on year-end 2016. The proportion of employees in Germany was slightly higher than on December 31, 2016 at 45.2 (44.9)%. Interim Management Report Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets S A L E O F T H I R D - PA R T Y - B R A N D D E A L E R S H I P S O F P O R S C H E H O L D I N G S A L Z B U R G The sale of part of the PGA Group SAS to the Emil Frey Group was executed on June 1, 2017. The sale took place in connection with the strategic development of Porsche Holding Salzburg’s dealer network and the corresponding focus on dealerships belonging to the Volkswagen Group brands. This had a positive effect of €0.8 billion on the Group’s net liquidity and, taking into account the disposal of the assets and liabilities, resulted in immaterial income for the Group, which was reported in other operating income. financial instruments on the reporting date. The share of profits and losses of equity-accounted investments was slightly down on the prior-year figure. It includes the pro- portionate result of our Chinese joint ventures, which was on a par with the prior-year period, as well as gains from the remeasurement of the shares in HERE following investment by additional investors. In the prior-year period, the income from the sale of the LeasePlan shares had had a positive effect. The Volkswagen Group’s profit before tax rose by €4.1 bil- lion year-on-year to €9.0 billion. Profit after tax increased by €3.0 billion to €6.6 billion. R E S U LT S O F O P E R AT I O N S O F T H E G R O U P The Volkswagen Group generated sales revenue of €115.9 bil- lion in the first half of 2017, thus exceeding the prior-year figure by €7.9 billion. In particular, volume effects and the good performance of the Financial Services Division made a positive contribution. Sales revenue generated abroad accounted for a share of 80.1 (79.0)%. R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 TO J U N E 3 0 € million 2017 2016 At €23.2 billion, gross profit was €2.1 billion higher than the prior-year figure, which had been negatively affected by special items. The gross margin amounted to 20.1% (19.6%; before special items 20.3%). Passenger Cars Sales revenue Gross profit 80,070 16,908 75,285 15,324 In the period from January to June 2017, the Volkswagen Group’s operating profit improved by €3.6 billion to €8.9 bil- lion, driven primarily by improvements in volumes, the mix and margins, as well as positive exchange rate trends and product cost optimization. In the prior-year period, this item had also included negative special items totaling €–2.2 billion. The Volkswagen Group’s operating return on sales rose to 7.7 (4.9)% in the reporting period. In the previous year, the operating profit before special items amounted to €7.5 billion and the operating return on sales before special items was 7.0%. Operating result Operating return on sales (%) Commercial Vehicles Sales revenue Gross profit Operating result Operating return on sales (%) Power Engineering 6,654 8.3 17,252 2,871 1,043 6.0 3,895 5.2 15,589 2,613 285 1.8 Sales revenue 1,579 1,673 At €44 million, the financial result was slightly positive, up €0.6 billion on the prior-year period. The rise was mainly attributable to lower finance costs due to remeasurement and lower expenses from the measurement of derivative Gross profit Operating result Operating return on sales (%) 284 –46 –2.9 321 –18 –1.1 15 16 Results of Operations, Financial Position and Net Assets O P E R A T I N G P R O F I T B Y Q U A R T E R Volkswagen Group in € million 5,000 5,000 3,750 3,750 2,500 2,500 1,250 1,250 0 0 Q1 Q2 1 Before special items. Results of operations in the Automotive Division The Automotive Division’s sales revenue amounted to €98.9 billion in the period from January to June 2017, an increase of 6.9% compared with the previous year. The rise was primarily attributable to increased vehicle sales. Sales revenue in the Passenger Cars Business Area and the Com- mercial Vehicles Business Area was up significantly on the respective prior-year figures. The Power Engineering Business Area’s sales revenue fell short of the level achieved in the previous year. As our Chinese joint ventures are accounted for using the equity method, the Group’s performance in the Chinese passenger car market in consolidated sales revenue only through deliveries of vehicles and vehicle parts. is mainly reflected The increase in cost of sales was driven mainly by larger volumes. Improved product costs and lower research and development costs recognized in profit or loss had a positive impact. Total research and development costs as a percentage of the Automotive Division’s sales revenue (research and development ratio or R&D ratio) amounted to 6.8 (7.2)% in the reporting period. In the prior-year period, cost of sales included negative special items. The gross profit of the Automotive Division amounted to €20.1 (18.3) billion. Distribution expenses increased by 2.3% in the reporting period, driven among other factors by exchange rate effects, although the ratio of distribution expenses to sales revenue declined. Administrative expenses and the ratio thereof to sales revenue increased year-on-year. Net other operating income amounted to €1.1 billion; due among other factors to exchange rate effects, this was €2.2 billion higher than in the previous year, which had been affected by negative special items. The operating profit of the Automotive Division rose by €3.5 billion to €7.7 billion, above all due to improvements in Interim Management Report 20171 20171 20161 20161 Q3 Q4 volumes, the mix and margins, as well as positive exchange rate effects and product cost optimization. The operating return on sales rose to 7.7 (4.5)%. In the prior-year period, this item included negative special items in the Passenger Cars Business Area (€–1.7 billion) and in the Commercial Vehicles Business Area (€–0.5 billion). In the first half of 2016, the operating profit before special items amounted to €6.3 bil- lion, giving an operating return on sales of 6.9%. Since the profit recorded by joint ventures is accounted for in the financial result using the equity method, the business growth of our Chinese joint ventures is primarily reflected in the operating profit only through deliveries of vehicles and vehicle parts, and through license income. Results of operations in the Financial Services Division In first six months of 2017, the Financial Services Division generated sales revenue of €17.0 billion; the 10.2% increase was mainly attributable to a rise in business volumes. At €3.2 billion, gross profit was up 10.1% year-on-year. Both distribution and administrative expenses increased in the reporting period; the ratio of each figure to sales revenue remained unchanged. In addition to higher volumes, the year-on-year rise in particular to digitalization. in expenses was attributable The Financial Services Division generated an operating profit of €1.3 billion, a year-on-year increase of 7.4%. The operating return on sales stood at 7.5 (7.6)%. F I N A N C I A L P O S I T I O N O F T H E G R O U P At €19.5 billion, the Volkswagen Group’s gross cash flow during the period from January to June 2017 exceeded the prior-year figure by €4.2 billion. The change in working capital was €12.2 billion higher than in the first six months of 2016, and amounted to €–22.4 billion. Cash flows from Interim Management Report operating activities consequently declined to €–2.9 (5.1) bil- lion. At €7.0 billion, the Volkswagen Group’s investing activ- ities attributable to operating activities in the reporting period were €1.9 billion higher than in the previous year. The “Acquisition and disposal of equity investments” item includes in particular the acquisition of shares in Navistar and the sale of part of the PGA Group in the period under review, while the previous year had primarily been influenced by a cash inflow from the sale of the shares in LeasePlan. Cash inflows from financing activities amounted to €12.6 (8.2) billion. notes (€3.5 billion) successfully issued in June 2017 increased net liquidity; this was offset by the dividend paid to the shareholders of Volkswagen AG (€1.0 billion). The dual-tranche hybrid On June 30, 2017, the Volkswagen Group’s cash and cash equivalents as reported in the statement of cash flows amounted to €21.9 billion, down €7.5 billion on the prior- year reporting date. At the end of the first half of 2017, the Group’s net liquidity was €–112.0 billion, compared with €–107.9 billion at the end of 2016. Financial position in the Automotive Division The gross cash flow generated by the Volkswagen Group in the first six months of 2017 amounted to €14.8 billion, €4.4 bil- lion up on the prior-year figure, mainly due to the increase in earnings. At €–12.8 (–0.8) billion, the change in working capital was significantly negative. The cash outflows were primarily a result of vehicle recalls and legal risks relating to the diesel issue. As a result, cash flows from operating activ- ities declined to €2.0 (9.7) billion. Investing activities attributable to operating activities rose compared with the prior-year period to €6.8 (4.6) billion in the period from January to June 2017. Investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs (capex) declined year-on-year. In addition, the ratio of capex to sales revenue declined to 4.2 (4.9)% due to the rise in sales revenue. We invested primarily in our production facilities and in models to be launched in 2017 and 2018, as well as in the ecological focus of the model range, drivetrain electri- fication and modular toolkits. Capitalized development costs were higher than in the first half of 2016. In the reporting period, the “Acquisition and disposal of equity investments” item mainly includes the acquisition of the shares in Navistar and the sale of part of the PGA Group. In the prior-year period, the sale of the shares in LeasePlan had a significant positive effect on this item. In the first six months of 2017, the Automotive Division’s net cash flow amounted to €–4.8 billion, a decrease of €9.9 billion compared with the corresponding prior-year figure. Results of Operations, Financial Position and Net Assets F I N A N C I A L P O S I T I O N I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 TO J U N E 3 0 € million 2017 2016 Passenger Cars Gross cash flow 12,866 9,101 Change in working capital –11,902 –716 Cash flows from operating activities 964 8,385 Cash flows from investing activities attributable to operating activities –5,710 –3,659 Net cash flow –4,746 4,727 Commercial Vehicles Gross cash flow 1,871 1,254 Change in working capital –830 18 Cash flows from operating activities 1,041 1,272 Cash flows from investing activities attributable to operating activities –1,034 –856 Net cash flow 6 416 Power Engineering Gross cash flow 107 132 Change in working capital –79 –53 Cash flows from operating activities 28 79 Cash flows from investing activities attributable to operating activities –84 –86 Net cash flow –56 –7 In the Automotive Division’s financing activities, a capital increase carried out by Volkswagen AG at Volkswagen Financial Services AG at the beginning of 2017 in order to finance the growth in business volumes and comply with regulatory capital requirements resulted in outflows of €1.0 billion. In May 2017, a dividend totaling €1.0 billion was shareholders of Volkswagen AG, distributed €0.9 billion more than in the previous year. The successful placement of dual-tranche hybrid notes with an aggregate principal amount of €3.5 billion via Volkswagen International Finance N.V. in June 2017 resulted in a cash inflow. They consist of a €1.5 billion note that carries a coupon of 2.7% and has a first call date after five and a half years, and a €2.0 billion note that carries a coupon of 3.875% and has a first call date after ten years. Both tranches are perpetual and increase equity, net of transaction costs among other factors. €3.5 billion of the hybrid notes was classified as a capital contribution, which increased net liquidity. In addition, financing activities include the issuance and redemption of to the 17 18 Results of Operations, Financial Position and Net Assets bonds and other financial liabilities. They amounted to €6.9 billion in the reporting period, €4.4 billion more than in the prior-year period. On June 30, 2017, the Automotive Division’s net liquidity stood at €23.7 billion, €3.4 billion below the figure as of the end of 2016. Financial position in the Financial Services Division At €4.6 (4.8) billion, the Financial Services Division’s gross cash flow in the reporting period was down on the previous year. At €9.6 (9.4) billion, the funds tied up in working capital were higher than in the first half of 2016. This was due to higher business volume. Cash flows from operating activities amounted to €–4.9 (–4.6) billion. At €0.2 (0.5) billion, investing activities attributable to operating activities were down on the prior-year figure, which had included the acquisition of an interest in the ride- hailing service Gett. The Financial Services Division’s financing activities resulted in cash inflows amounting to €5.7 (5.7) billion in the first six months of 2017. This included a capital increase of €1.0 billion implemented by Volkswagen AG to finance expected business growth and to comply with stricter regu- latory requirements. At the end of June 2017, the Financial Services Division’s negative net liquidity, which is common in the industry, stood at €–135.7 billion, compared with €–135.1 billion at the end of December 2016. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E At the end of the first half of 2017, the Volkswagen Group’s total assets had increased to €416.2 billion, a rise of 1.6% compared with the end of 2016, although exchange rate movements had a decreasing effect. At €104.5 (92.9) billion, the Group’s equity was 12.4% higher than as of Decem- ber 31, 2016. The equity ratio increased to 25.1 (22.7)%. The sale of part of the PGA Group led to the disposal of assets in the amount of €2.5 billion and liabilities in the amount of €2.1 billion. Balance sheet structure in the Automotive Division On June 30, 2017, property, plant and equipment in the Automotive Division was slightly down on the figure recorded at the end of 2016, while intangible assets were virtually unchanged. Lease assets were down compared with the end of December 2016 as a result of the sale of part of the PGA Group. The share of equity-accounted investments declined because of dividend payments resolved by the Chinese joint ventures. The positive business results of the Chinese joint ventures, the purchase of the shares in Navistar Interim Management Report and the remeasurement of the shares in HERE were unable to offset this. In total, noncurrent assets decreased by 3.1%. Current assets were 9.9% higher than at the end of December 2016; the inventories included in this figure increased for production-related reasons and as a conse- quence of vehicle recalls in connection with the diesel issue. Receivables, which include the as yet unpaid amounts of dividends due from the Chinese joint ventures, increased significantly. Cash and cash equivalents amounted to €17.9 billion, €3.3 billion more than on December 31, 2016. At the end of the first six months of 2017, the Automotive Division’s equity amounted to €79.2 billion, an increase of €14.6% compared with the end of 2016. It was positively impacted by healthy earnings growth, the hybrid notes issued in June 2017, effects from the measurement of derivatives recognized outside profit or loss and lower actuarial losses from the measurement of pension provisions. Currency translation effects and the dividend paid to the shareholders of Volkswagen AG reduced the Automotive Division’s equity. B A L A N C E S H E E T ST R U C T U R E I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S € million Jun. 30, 2017 Dec. 31, 2016 Passenger Cars Noncurrent assets 106,009 109,918 Current assets 68,670 61,600 Total assets 174,679 171,518 Equity 64,337 54,789 Noncurrent liabilities 51,823 56,703 Current liabilities 58,519 60,026 Commercial Vehicles Noncurrent assets 25,932 26,206 Current assets 17,384 16,197 Total assets 43,316 42,403 Equity 11,836 11,185 Noncurrent liabilities 13,523 12,531 Current liabilities 17,957 18,687 Power Engineering Noncurrent assets 2,771 2,879 Current assets 3,070 3,285 Total assets 5,840 6,165 Equity 3,066 3,157 Noncurrent liabilities 691 748 Current liabilities 2,083 2,260 Interim Management Report The noncontrolling interests are mainly attributable to RENK AG and AUDI AG. As these were lower overall than the noncontrolling interests attributable to the Financial Services Division, the figure for the Automotive Division, where the deduction was recognized, was negative. At €66.0 (70.0) billion, noncurrent liabilities were down on December 31, 2016. The noncurrent financial liabilities included in this item increased. Noncurrent other liabilities declined as a result of the positive effects from the measure- ment of derivatives, and there was a decrease in pension pro- visions due to an increase in the interest rate. Current liabilities declined by 3.0%; the other provisions contained in this figure decreased significantly due to usage in connection with the diesel issue. Reclassifications from noncurrent to current liabilities due to shorter remaining maturities led to an increase in current financial liabilities to €3.1 (–1.0) billion. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division in the previous year, a negative amount was disclosed for the prior-year period. The item “Put options and compensation rights granted to noncontrolling interest shareholders” primarily comprises the liability for the obli- gation to acquire the shares held by the remaining free float shareholders of MAN. At the end of June 2017, the Automotive Division’s total assets stood at €223.8 billion, a 1.7% increase compared with the end of the previous fiscal year. Financial Services Division balance sheet structure The Financial Services Division’s total assets amounted to €192.4 billion at the end of the first half of 2017, thus exceed- ing the figure for the end of 2016 by 1.5%. Total noncurrent assets were up slightly on the previous year. The noncurrent financial services receivables included in this item rose because of the growth in business. The 2.2% increase in current assets was mainly attri- butable to a volume-induced rise in receivables. the Financial Services Division accounted for 46.2 (46.3)% of the Volkswagen Group’s assets. Equity in the Financial Services Division amounted to €25.2 billion at the end of the reporting period, 6.1% more than as of December 31, 2016. Equity was pushed up by earnings growth and by the capital increase implemented by Volkswagen AG at the beginning of the year to finance the growth in business and to meet regulatory capital require- ments. The equity ratio was 13.1 (12.5)%. On June 30, 2017, Results of Operations, Financial Position and Net Assets Higher noncurrent financial liabilities to fund business growth led to an increase of 11.3% in noncurrent liabilities compared with December 31, 2016. Current liabilities declined by 6.7%; the current financial liabilities contained in this item fell significantly. At €31.5 (33.3) billion, deposits from direct banking busi- ness as of June 30, 2017 were lower than as of December 31, 2016. R E P O R T O N E X P E C T E D D E V E L O P M E N T, R I S K S A N D O P P O R T U N I T I E S On March 10, 2017, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates entered into a settlement agreement resolving the environmental claims of ten states – Connecticut, Delaware, Maine, Massachusetts, New York, Oregon, Pennsylvania, Rhode Island, Vermont and Washing- ton – for an amount of USD 157 million. On March 24, 2017, the United States filed a motion for entry of the second partial consent decree, which had been agreed to between Volkswagen and the Department of Justice (DOJ), the US Environmental Protection Agency (EPA), the US environmental authority of California – the California Air Resources Board (CARB) – and the California Attorney General on December 20, 2016 that resolved claims for injunctive relief under the US Clean Air Act and California environ- mental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. The federal court in the multi- district litigation in California approved the second partial consent decree on May 17, 2017. Also on May 17, 2017, the court granted final approval of the 3.0 l California Second Partial Consent Decree and the class action settlement reached with private plaintiffs related to 3.0 l TDI vehicles. On April 13, 2017, the federal court in the multidistrict litigation in California approved the third partial consent decree, which Volkswagen had agreed to with the DOJ and EPA on January 11, 2017 that resolved claims for civil penalties and injunctive relief under the Clean Air Act related to the 2.0 l and 3.0 l TDI vehicles. Various cases filed against Volkswagen AG and its affiliates remain pending before the federal court in the multidistrict litigation in California, including class actions brought by competitor dealerships (i.e. non-Volkswagen car dealerships) and Volkswagen salespersons working at franchise dealerships, as well as purchasers of certain Volkswagen bonds and American Depositary Receipts (ADRs). Moreover, certain members of the consumer and dealer classes have opted out of the settlements in the California multidistrict litigation and instead filed their own lawsuits, which are pending in the 19 20 Results of Operations, Financial Position and Net Assets California multidistrict litigation and various state courts in the United States. On April 21, 2017, the federal court in Michigan accepted Volkswagen AG’s agreement to plead guilty on January 11, 2017 and to pay a USD 2.8 billion criminal penalty, and imposed a sentence of three years’ probation. Also on April 21, 2017, Canadian courts approved the settlement agreement entered into between consumers and Volkswagen AG and other Canadian and US Volkswagen Group companies relating to 2.0 l diesel vehicles. The public prosecutor’s office in Munich initiated a crimi- nal investigation against persons unknown on suspicion of fraud and false advertising in connection with 3.0 l TDI vehicles distributed in the United States. The criminal investi- gation is still at an early stage and further progress remains to be seen. In June 2017, Larry Thompson was named as an Inde- pendent Compliance Monitor and an Independent Compli- ance Auditor. Together with his team, he will be active for the period of three years pursuant to the criminal plea agree- ment and the “third partial consent decree”, respectively. Mr. Thompson (the “Monitor”) has significant experience in both public and private sectors, having served inter alia as a Deputy Attorney General; a United States Attorney for the Northern District of Georgia; and as Executive Vice President and General Counsel for Pepsi-Co. Volkswagen AG and rele- vant related entities are working closely with the Monitor and his team to support them as they execute their mandates. On April 19, 2017, a putative class action was filed against AUDI AG and certain affiliates alleging that defendants con- cealed the existence of “defeat devices” in Audi brand vehicles with automatic gearboxes. There are now 14 such putative class actions pending in the California multidistrict litigation. The court has set a deadline of August 28, 2017 for plaintiffs to file a consolidated class action complaint. In addition, five “mass actions” have been filed in the California multidistrict litigation on behalf of approximately 500 individual plaintiffs alleging similar claims with respect to the existence of “defeat devices” in Audi brand vehicles with automatic gearboxes. The most recent of the mass action complaints was filed on May 26, 2017. In June 2017, the plaintiffs dismissed these actions without prejudice. On May 23, 2017, the federal court in the multidistrict litigation in California remanded the consumer and environ- mental claims of 12 State Attorneys General (Alabama, Illinois, Maryland, Minnesota, Missouri, Montana, New Hamp- shire, New Mexico, Ohio, Oklahoma, Tennessee and Vermont) to their respective state courts, where future litigation of these claims will proceed. Interim Management Report In June 2017, Volkswagen Group Canada reached an agree- ment with its Volkswagen-branded franchise dealers to resolve issues related to the diesel issue. The agreement was reached without court process. On June 28, 2017, the court in the multidistrict litigation in California granted in part and denied in part Volkswagen AG’s motion to dismiss plaintiffs’ First Amended Consolidated Securities Class Action Complaint, which was filed by certain purchasers of Volkswagen ADRs. On July 19, 2017, this court granted in part and denied in part Volkswagen AG’s motion to dismiss the class action complaint filed by purchasers of certain Volkswagen bonds, and permitted the plaintiffs to file an amended complaint by August 18, 2017. On July 21, 2017, the federal court in the multidistrict litigation in California approved a further California Partial Consent Decree, in which Volkswagen AG and certain affili- ates had agreed with the California Attorney General and CARB to pay USD 153,8 million in civil penalties and cost reim- bursements. These penalties covered California environ- mental penalties for both the 2.0 l and 3.0 l TDI vehicles. An agreement in principle had been reached on January 11, 2017. Also on July 21, 2017, the California federal court granted the motion of the Plaintiffs’ Steering Committee seeking USD 125 million in attorneys’ fees and costs in connection with the 3.0 l TDI settlement. On July 21, 2017, AUDI AG offered a software-based retro- fit program for up to 850,000 vehicles with V6 and V8 TDI engines meeting the Euro 5 and Euro 6 emission standards in Europe and other markets except the USA and Canada. The measure will mainly serve to further improve the vehicles’ emissions in real driving conditions beyond the current legal requirements. Customers will not be charged for the new software. The full package is also offered for certain Porsche and Volkswagen models and comprises voluntary and compulsory measures that have already been reported to the authorities and partially considered within their decisions. Audi has been systematically checking the emissions of engine-gearbox combinations for months, working closely with the authorities, in particular the German Federal Ministry of Transport and the German Federal Motor Transport Authority (KBA). Audi currently assumes that the overall cost of the software-based retrofit program including the scope related to recalls will be manageable and has already recognized first provisions in this respect. If the investigations by Audi and the discussions with the KBA should reveal that further measures are necessary, Audi will swiftly implement the required solutions in the interest of its customers as part of the retrofit program. The voluntary tests have already reached an advanced stage, but have not yet Interim Management Report been completed. In addition, Audi is responding to requests from the US authorities for information regarding automatic gearboxes in certain vehicles. Further field measures with financial consequences can therefore not be ruled out completely at this time. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volks- wagen Group’s expected development in fiscal year 2017 in the “Report on Expected Developments” and “Report on This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters Results of Operations, Financial Position and Net Assets Risks and Opportunities” chapters – including the “Risks from the diesel issue” and “Litigation/Diesel issue” sections and the underlying description of the issues in the chapter entitled “Diesel Issue” – of the combined management report in the 2016 Annual Report or in publications released by the reporting date concerning the diesel issue and other possible proceedings, as well as the investigations and interviews in connection with the diesel issue. relating to our key sales markets, or any significant shifts in exchange rates relevant to the Volkswagen Group, will have a corresponding effect on the development of our business. In addition, expected business development may vary if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities presented in the 2016 Annual Report develop in a way other than we are currently expecting, or additional risks and opportunities or other factors emerge that affect the development of our business. 21 22 Outlook Outlook The Volkswagen Group’s Board of Management expects the global economy to record slightly higher growth in 2017 than in the previous year. We believe risks will arise from protec- tionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We expect the economic upturn to continue in the large majority of industrialized nations, with stable rates of expansion overall. Most emerging markets will probably see faster growth than in the previous year. We expect the strongest rates of expansion in Asia’s emerging economies. We expect trends in the passenger car markets in the individual regions to be mixed in 2017. Overall, growth in global demand for new vehicles will probably be slower than in 2016. We anticipate that sales volume in Western Europe and the German passenger car market will be slightly higher than in the previous year. In the Central and Eastern Euro- pean markets, demand for passenger cars should exceed the weak prior-year figure. We expect that the market volume for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America in 2017 will be a little lower than the prior-year figure. On the South American market for passenger cars and light commercial vehicles, overall demand is expected to rise moderately compared with the previous year. The passenger car markets in the Asia-Pacific region look set to continue their growth trajectory at a slightly weaker pace. We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in 2017. Overall, we envisage a slight increase in demand. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group and in the relevant markets for buses, new registrations in 2017 are set to rise moderately above the prior-year level. We believe that automotive financial services will con- tinue to be very important for vehicle sales worldwide in 2017. Interim Management Report The Volkswagen Group is well positioned to deal with the mixed developments in automotive markets around the world. Our broad, selectively expanded product range fea- turing the latest generation of engines as well as a variety of alternative drives puts us in a good position globally com- pared with our competitors. The Group’s further strengths include in particular its unique brand portfolio, its steadily growing presence in all major world markets and its wide selection of financial services. Our range of models covers almost all key segments, with offerings from small cars to super sports cars in the passenger car segment, and from pickups to heavy trucks and buses in the commercial vehicles segment, as well as motorcycles. The Volkswagen Group brands will further optimize their vehicle and drivetrain portfolio in 2017 to concentrate on the most attractive and fastest-growing market segments. Our goal is to offer all customers the mobility and inno- vations they need, sustainably strengthening our competitive position in the process. We expect that deliveries to customers of the Volkswagen Group in 2017 will moderately exceed the prior-year volume amid persistently challenging market conditions. Challenges will arise particularly from the economic situation, intense competition in the market, exchange rate volatility and the diesel issue. We expect the sales revenues of the Volkswagen Group and of the Passenger Cars Business Area and Commercial Vehicles Business Area to grow by more than 4% year-on-year in 2017. In terms of the Group’s operating profit, we anticipate an operating return on sales of between 6.0% and 7.0% in 2017. In the Passenger Cars Business Area, we expect an operating return on sales in the range of 6.5% – 7.5%. For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between 3.0% and 5.0%. In the Power Engineering Business Area, we expect a substantial year-on-year decline in sales revenue but also a lower operating loss. For the Financial Services Division, we are forecasting sales revenue and operating profit at least at the prior-year level. Brands and Business Fields Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D revenue of The Volkswagen Group generated €115.9 (107.9) billion in the first six months of 2017. Operating profit before special items improved by €1.4 billion to €8.9 billion. In the previous year, special items totaling €–2.2 billion had to be accounted for. sales When realigning our Group structures, we have reclassified companies from the Volkswagen Passenger Cars brand to the Group starting in 2017. This will allow us to increase transparency and comparability. Along with cross- brand logistics and other services, importers that also distribute vehicles from other Group brands will be separated out from the Volkswagen Passenger Cars brand. These will be disclosed in the line “Other” and will continue to be presented in the Passenger Cars Business Area. For the Volks- wagen Passenger Cars brand, the reclassifications lead to reductions in unit sales, sales revenue and operating profit. The Volkswagen Passenger Cars brand sold 1.8 (2.2) million includes in the reporting period. This figure vehicles 1.6 (1.6) million Volkswagen models. The Polo, Golf, Passat and Tiguan models were in high demand. As a result of the reclassification of companies, sales revenues were down 24.8% on the prior-year period at €39.9 billion. Operating profit increased to €1.8 (0.9) billion (previous year’s figure excludes special items). In addition to volume-, mix- and margin-related factors, exchange rate effects and optimi- zation of costs had a positive impact. popular with customers. At €30.1 (30.1) billion, sales revenue remained at level. At €2.7 (2.7) billion, operating profit matched the 2016 figure (previous year’s figure excludes special items). Product cost optimization, positive exchange rate effects and improved margins com- pensated for the decline in volume and the expansion of the international model and technology portfolio. The financial key performance indicators for the Audi brand also include the sold 36,713 (38,693) motorcycles in the first half of 2017. the prior-year Lamborghini and Ducati brands. Ducati Unit sales by the ŠKODA brand increased to 501 (431) thou- sand vehicles in the period from January to June 2017. Demand grew for the Fabia, Rapid and Superb models. The new Kodiaq met with a very positive reception in the market and had a major part in boosting unit sales. At €8.7 billion, sales revenue was up 22.6% year-on-year. The rise in volume along with margin, mix and exchange rate effects more than compensated for increased costs. Operating profit improved by 25.5% to €860 million. The SEAT brand recorded unit sales of 304 thousand vehicles in the first six months of 2017 (+ 9.8%). This figure includes the Q3 manufactured for Audi. The Ibiza and Leon models continued to enjoy great popularity. The new Ateca contributed particularly to the rise in unit sales. Sales revenue increased by 12.7% year-on-year to €5.1 billion. At €130 (93) million, the operating profit was up 40.9% on the prior-year period. Negative exchange rate effects and cost increases were more than compensated for by the higher volume, improved margins and positive mix effects. In the period from January to June 2017, the Audi brand sold 783 (799) thousand vehicles worldwide. Our Chinese joint venture FAW-Volkswagen sold a further 252 (276) thou- sand Audi vehicles. The Q2 and A5 models proved particularly Bentley sold 4,907 (4,863) vehicles in the first half of 2017 and generated sales revenue of €867 (883) million. Operating profit improved to €13 (–22) million; exchange rate effects V O L K SWA G E N G R O U P Division Automotive Financial Services Brand/ Business Field Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Volkswagen Commercial Vehicles Scania MAN Others Dealer and customer financing Leasing Direct bank Insurance Fleet management Mobility offerings 23 24 Brands and Business Fields and lower expenses from the development of the model portfolio had a positive impact. Starting on January 1, 2017, Porsche’s financial services business is reported as part of Volkswagen Financial Services. Porsche Automotive recorded unit sales of 124 (117) thou- sand vehicles worldwide in the reporting period. Above all, the Macan and Panamera saw considerable sales growth. Sales revenue increased to €10.8 (10.2) billion. The operating profit of Porsche Automotive climbed to €2.1 (1.8) billion; the increase resulted particularly from improvements in volumes and in the mix. Volkswagen Commercial Vehicles sold 244 (231) thousand vehicles worldwide from January to June 2017. The Multivan/ Transporter and Caddy were particularly popular with customers. Sales revenue improved by 9.6% to €5.9 billion. Despite higher costs resulting from expansion of the pro- duction network, operating profit improved by 49.8% to €448 million due to margin, volume and exchange rate effects. The Scania brand increased its unit sales in the first six months of 2017 to 44 (41) thousand trucks and buses. Sales revenue grew to €6.3 (5.6) billion. Operating profit rose by €123 million to €673 million (previous year’s figure excludes special items). This was attributable to higher vehicle sales and the enhanced service business as well as positive exchange rate effects. At 53 thousand units, sales of MAN Commercial Vehicles in the reporting period were up 6.9% year-on-year. Sales revenue increased to €5.3 (4.8) billion. Operating profit (pre- vious year’s figure excludes special items) climbed to €193 (186) million due to volume and margin effects. Sales revenue at MAN Power Engineering in the first six months of 2017 amounted to €1.6 (1.7) billion. As a result, operating profit declined to €73 (103) million. Operating profit at Volkswagen Financial Services (including Porsche Financial Services since January 1, 2017) rose by 17.0% to €1.2 billion. In addition to Porsche Financial Services, the increase mainly resulted from business growth. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A R Y 1 TO J U N E 3 0 1 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2017 2016 2017 2016 2017 2016 Volkswagen Passenger Cars2 1,812 2,232 39,855 53,006 1,776 881 Audi 783 799 30,143 30,134 2,680 2,666 ŠKODA 501 431 8,720 7,114 860 685 SEAT 304 276 5,054 4,485 130 93 Bentley Porsche Automotive3 5 124 5 117 867 10,841 883 10,151 13 2,056 –22 1,768 Volkswagen Commercial Vehicles Scania4 244 44 231 41 5,927 6,307 5,406 5,575 448 673 299 550 MAN Commercial Vehicles 53 49 5,297 4,798 193 186 MAN Power Engineering VW China5 Other6 Volkswagen Financial Services7 – 1,870 –469 – – 1,867 –849 – 1,579 – –14,728 15,999 1,673 – –28,901 13,611 73 – –1,152 1,165 103 – –687 995 Volkswagen Group before special items – – – – 8,916 7,517 Special items – – – – – –2,178 Volkswagen Group Automotive Division8 5,270 5,270 5,199 5,199 115,862 98,901 107,935 92,547 8,916 7,651 5,339 4,162 of which: Passenger Cars Business Area 4,930 4,879 80,070 75,285 6,654 3,895 Commercial Vehicles Business Area 340 320 17,252 15,589 1,043 285 Power Engineering Business Area – – 1,579 1,673 –46 –18 Financial Services Division – – 16,961 15,388 1,265 1,177 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 2017 figures take account of the reclassification of companies; prior-year figures were not adjusted. 3 Porsche (Automotive and Financial Services): sales revenue €11,778 (10,929) million, operating profit €2,131 (1,830) million. 4 Including financial services. 5 The sales revenue and operating profits of the joint venture companies in China are not included in the figures for the Group. These Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €2,135 (2,366) million. 6 Prior year adjusted. In operating profit, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation for Scania, Porsche Holding Salzburg, MAN and Porsche. 7 Starting January 1, 2017, Porsche’s financial services business is reported as part of Volkswagen Financial Services. Prior-year figures were not adjusted. 8 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. Brands and Business Fields U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T At €2.4 (2.4) million vehicles, the Volkswagen Group’s unit sales in the Europe/Other markets region in the first six months of 2017 exceeded the prior-year comparison figure by 1.8%. Due to improved volumes, sales revenue rose to €73.8 (69.9) billion. In North America, the Volkswagen Group sold 478 thou- sand vehicles in the reporting period; this was 1.8% more than in the previous year. Volume, exchange rate and mix effects increased sales revenue by 10.6% to €18.9 billion. revenue increased to €4.9 (3.8) billion. Developments in volumes, exchange rates and the mix had a positive impact. In the Asia-Pacific region, we sold a total of 2.1 (2.1) mil- lion vehicles in the first six months of 2017, including the Chinese joint ventures. Sales revenue rose by 6.6% to €18.4 billion; the increase resulted particularly from a higher import volume as well as an improved components business at our consolidated companies. This figure does not include the sales revenue of our equity-accounted Chinese joint ventures. In the South American markets, the Volkswagen Group’s unit sales increased to 246 (219) thousand vehicles. Sales K E Y F I G U R E S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 V E H I C L E S A L E S S A L E S R E V E N U E Thousand vehicles/€ million 2017 2016 2017 2016 Europe/Other markets 2,434 2,392 73,757 69,861 North America 478 469 18,859 17,044 South America Asia-Pacific2 Volkswagen Group2 246 2,113 5,270 219 2,119 5,199 4,854 18,392 115,862 3,777 17,254 107,935 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 25 26 V O L K SWA G E N F I N A N C I A L S E R V I C E S With its innovative products along the automotive value chain, Volkswagen Financial Services supported the Volks- wagen Group’s unit sales in the first half of 2017. Starting January 1, 2017, Porsche’s financial services busi- ness is reported within Volkswagen Financial Services; prior- year figures were not adjusted. With the market launch of the new Volkswagen Crafter, Volkswagen Financial Services introduced an exclusive mobility package specially designed for customers in the courier, express and parcel service businesses. “CarePort Logistics” combines traditional services such as maintenance and spare parts, tire replacement and insurance with modern, telematics-based fleet management. All components can be provided in customized combinations as required. In a survey by “auto motor und sport” magazine, 36.5% of the 123,000 participants chose Volkswagen Bank as the “best brand” for the eleventh time. In AUTO BILD, as many as 42% of the 60,000 participants gave their vote to Volkswagen Bank in 2017, enabling the repeat winner to beat the competition for the sixth time. For the first time, Volkswagen Financial Services partici- pated together with the Volkswagen Group and its sites in the “International Day for Biological Diversity” campaign that is celebrated worldwide every year on May 22. Since 2009, Volkswagen Financial Services has been actively working both nationally and internationally to protect the environment in partnership with Naturschutzbund e.V. (NABU – German Nature and Biodiversity Conservation Union). Since the second quarter of 2017, Volkswagen Financial Services has been offering leasing-based fleet business in Turkey through its newly established subsidiary Volkswagen Dogus Finans, enabling it to participate in fleet tendering there. The first contracts have already been concluded with international companies. Brands and Business Fields The main refinancing sources for Volkswagen Financial Services are money and capital market instruments, asset- backed securities (ABS) transactions and customer deposits from the direct banking business. At the end of June, Volkswagen Leasing GmbH success- fully returned to the primary market for euro-denominated corporate bonds. It raised a total of €3.5 billion on the capital market by placing two floating-rate bonds with terms of two and four years, as well as a fixed-rate bond with a term of seven and a half years. This was the largest transaction by Volkswagen Financial Services to date. Transactions were also successfully placed internationally in the second quarter of 2017. The second bond issued by Volkswagen Finance (China) Co., Ltd. in China has an issue volume of CNY 4 billion (approximately €534 million). In Brazil, the local company Banco Volkswagen S.A. issued a bond with a volume of BRL 500 million, which translates to approximately €134 million. Additional bonds with volumes of MXN 2 billion (approximately €99 million) and INR 1.5 bil- lion (approximately €63 million) were issued. The Driver España four transaction, with a volume of around €1 billion, achieved the lowest coupon of all Spanish auto ABS programs issued by Volkswagen Financial Services to date. It is also the largest Spanish auto ABS transaction since the financial crisis of 2007. The fourth Australian ABS transaction, with a volume of around AUD 500 million (approximately €340 million), was also successfully placed during the reporting period. The number of new financing, leasing, service and insurance contracts signed in the first half of 2017 was on a level with the previous year at 3.3 (3.3) million. Based on unchanged credit eligibility criteria, the penetration rate, expressed as the ratio of leased or financed vehicles to rele- vant Group delivery volumes, increased to 33.1 (32.5)%. At 16.8 million, the total number of contracts at the end of the figure as of reporting period was higher December 31, 2016 (+ 4.2%). The number of contracts in the Customer Financing/Leasing area rose by 4.5% as against year-end 2016 to 9.3 million. At 7.5 (7.2) million, the number of contracts in the Service/Insurance area exceeded the level seen in the previous year. than the As of June 30 of this year, Volkswagen Bank managed around 1.5 (1.5) million deposit accounts. At the end of the first half of 2017, Volkswagen Financial Services had a total of 13,766 employees, an increase of 2.7% on December 31, 2016. Interim Consolidated Financial Statements (Condensed) Income Statement Interim Consolidated Financial Statements (Condensed) Income Statement for the Period January 1 to June 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ F I N A N C I A L S E R V I C E S € million 2017 2016 2017 2016 2017 2016 Sales revenue 115,862 107,935 98,901 92,547 16,961 15,388 Cost of sales –92,618 –86,790 –78,837 –74,290 –13,781 –12,501 Gross profit 23,244 21,145 20,064 18,257 3,180 2,888 Distribution expenses –11,051 –10,751 –10,373 –10,139 –677 –612 Administrative expenses –4,040 –3,670 –3,182 –2,889 –859 –782 Other operating income/expense 763 –1,385 1,142 –1,068 –379 –317 Operating profit 8,916 5,339 7,651 4,162 1,265 1,177 Share of profits and losses of equity-accounted investments 1,635 1,715 1,634 1,679 2 36 Finance costs and Other financial result –1,591 –2,243 –1,595 –2,174 3 –69 Financial result 44 –528 39 –495 5 –34 Profit before tax 8,960 4,810 7,690 3,667 1,270 1,144 Income tax expense –2,366 –1,231 –2,001 –775 –364 –457 Profit after tax 6,595 3,579 5,689 2,892 906 687 of which attributable to Noncontrolling interests 5 6 –16 –44 21 49 Volkswagen AG hybrid capital investors 116 112 116 112 – – Volkswagen AG shareholders 6,474 3,461 5,589 2,824 885 638 Basic earnings per ordinary share (€)² 12.89 6.88 Diluted earnings per ordinary share (€)² 12.89 6.88 Basic earnings per preferred share (€)² 12.95 6.94 Diluted earnings per preferred share (€)² 12.95 6.94 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. 27 28 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period January 1 to June 30 € million 2017 2016 Profit after tax 6,595 3,579 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax 1,961 –7,512 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income –577 2,219 Pension plan remeasurements recognized in other comprehensive income, net of tax 1,384 –5,293 Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax 1 –1 Items that will not be reclassified to profit or loss 1,385 –5,294 Exchange differences on translating foreign operations Unrealized currency translation gains/losses –1,305 –729 Transferred to profit or loss –1 0 Exchange differences on translating foreign operations, before tax –1,306 –729 Deferred taxes relating to exchange differences on translating foreign operations –10 0 Exchange differences on translating foreign operations, net of tax –1,316 –729 Cash flow hedges Fair value changes recognized in other comprehensive income 3,778 3,912 Transferred to profit or loss 223 894 Cash flow hedges, before tax 4,002 4,806 Deferred taxes relating to cash flow hedges –1,159 –1,401 Cash flow hedges, net of tax 2,842 3,405 Available-for-sale financial assets Fair value changes recognized in other comprehensive income –42 60 Transferred to profit or loss 84 16 Available-for-sale financial assets, before tax 42 76 Deferred taxes relating to available-for-sale financial assets –4 –20 Available-for-sale financial assets, net of tax 38 56 Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax –288 –172 Items that may be reclassified subsequently to profit or loss 1,276 2,560 Other comprehensive income, before tax 4,412 –3,531 Deferred taxes relating to other comprehensive income –1,751 798 Other comprehensive income, net of tax 2,661 –2,733 Total comprehensive income 9,256 846 of which attributable to Noncontrolling interests 5 4 Volkswagen AG hybrid capital investors 116 112 Volkswagen AG shareholders 9,135 730 Interim Consolidated Financial Statements (Condensed) Income Statement for the Period April 1 to June 30 V O L K S W A G E N G R O U P € million 2017 2016 Sales revenue 59,665 56,971 Cost of sales –47,612 –46,124 Gross profit 12,052 10,847 Distribution expenses –5,628 –5,647 Administrative expenses –2,045 –1,890 Other operating income/expense 169 –1,412 Operating profit 4,549 1,899 Share of profits and losses of equity-accounted investments 699 601 Finance costs and Other financial result –911 –892 Financial result –212 –291 Profit before tax 4,337 1,607 Income tax expense –1,145 –393 Profit after tax 3,192 1,214 of which attributable to Noncontrolling interests 2 3 Volkswagen AG hybrid capital investors 60 56 Volkswagen AG shareholders 3,129 1,155 Basic earnings per ordinary share (€)² 6.24 2.30 Diluted earnings per ordinary share (€)² 6.24 2.30 Basic earnings per preferred share (€)² 6.24 2.30 Diluted earnings per preferred share (€)² 6.24 2.30 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. A U T O M O T I V E ¹ 2017 51,076 –40,641 10,435 –5,287 –1,626 362 3,884 693 –919 –226 3,657 –909 2,748 –7 60 2,695 D I V I S I O N S 2016 49,017 –39,565 9,452 –5,351 –1,513 –1,275 1,312 585 –896 –312 1,000 –197 804 0 56 748 Income Statement F I N A N C I A L S E R V I C E S 2017 2016 8,589 7,954 –6,971 –6,559 1,618 1,395 –340 –295 –419 –377 –193 –137 665 587 7 16 8 4 15 20 680 607 –236 –197 443 410 9 3 – – 434 408 29 30 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period April 1 to June 30 € million 2017 2016 Profit after tax 3,192 1,214 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax 1,300 –3,201 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income –394 946 Pension plan remeasurements recognized in other comprehensive income, net of tax 906 –2,255 Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax 2 0 Items that will not be reclassified to profit or loss 908 –2,255 Exchange differences on translating foreign operations Unrealized currency translation gains/losses –1,518 153 Transferred to profit or loss –1 – Exchange differences on translating foreign operations, before tax –1,520 153 Deferred taxes relating to exchange differences on translating foreign operations –1 0 Exchange differences on translating foreign operations, net of tax –1,521 153 Cash flow hedges Fair value changes recognized in other comprehensive income 3,797 –80 Transferred to profit or loss –62 467 Cash flow hedges, before tax 3,735 387 Deferred taxes relating to cash flow hedges –1,089 –115 Cash flow hedges, net of tax 2,646 272 Available-for-sale financial assets Fair value changes recognized in other comprehensive income –10 38 Transferred to profit or loss –21 –16 Available-for-sale financial assets, before tax –31 22 Deferred taxes relating to available-for-sale financial assets 13 –7 Available-for-sale financial assets, net of tax –18 14 Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax –241 –2 Items that may be reclassified subsequently to profit or loss 866 438 Other comprehensive income, before tax 3,246 –2,641 Deferred taxes relating to other comprehensive income –1,471 824 Other comprehensive income, net of tax 1,775 –1,817 Total comprehensive income 4,967 –603 of which attributable to Noncontrolling interests 1 2 Volkswagen AG hybrid capital investors 60 56 Volkswagen AG shareholders 4,905 –661 Interim Consolidated Financial Statements (Condensed) Balance Sheet as of June 30, 2017 and December 31, 2016 V O L K S W A G E N G R O U P A U T O M O T I V E 1 € million 2017 2016 2017 Assets Noncurrent assets 250,850 254,010 134,711 Intangible assets 63,229 62,599 63,021 Property, plant and equipment 52,611 54,033 49,955 Lease assets 38,047 38,439 2,895 Financial services receivables 69,997 68,402 –6 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 26,967 30,537 18,847 Current assets 165,397 155,722 89,123 Inventories 42,810 38,978 38,583 Financial services receivables 50,574 49,673 –618 Other receivables and financial assets 33,496 30,286 19,826 Marketable securities 16,229 17,520 13,463 Cash, cash equivalents and time deposits 22,288 19,265 17,870 Total assets 416,247 409,732 223,835 Equity and Liabilities Equity 104,471 92,910 79,239 Equity attributable to Volkswagen AG shareholders 93,238 85,122 68,375 Equity attributable to Volkswagen AG hybrid capital investors 11,010 7,567 11,010 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 104,248 92,689 79,385 Noncontrolling interests 223 221 –146 Noncurrent liabilities 143,179 139,306 66,037 Financial liabilities 74,895 66,358 6,598 Provisions for pensions 31,239 33,012 30,722 Other liabilities 37,045 39,936 28,717 Current liabilities 168,597 177,515 78,559 Put options and compensation rights granted to noncontrolling interest shareholders 3,771 3,849 3,771 Financial liabilities 86,016 88,461 3,105 Trade payables 22,565 22,794 20,206 Other liabilities 56,246 62,411 51,477 Total equity and liabilities 416,247 409,732 223,835 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. D I V I S I O N S 2016 139,003 62,372 51,415 3,385 9 21,822 81,083 34,947 –660 17,561 14,703 14,532 220,085 69,130 61,714 7,567 69,281 –151 69,982 5,876 32,464 31,643 80,973 3,849 –1,019 20,753 57,391 220,085 Balance Sheet F I N A N C I A L S E R V I C E S 2017 2016 116,138 115,007 208 227 2,656 2,619 35,151 35,054 70,003 68,393 8,120 8,715 76,274 74,640 4,227 4,031 51,192 50,333 13,670 12,726 2,767 2,817 4,418 4,733 192,412 189,647 25,232 23,780 24,863 23,408 – – 24,863 23,408 369 373 77,142 69,324 68,297 60,483 517 549 8,327 8,293 90,038 96,542 – – 82,911 89,481 2,358 2,041 4,769 5,021 192,412 189,647 31 32 Statement of Changes in Equity Interim Consolidated Financial Statements (Condensed) Statement of Changes in Equity O T H E R R E S E R V E S € million Subscribed capital Capital reserves Retained earnings Currency translation reserve Balance at Jan. 1, 2016 1,283 14,551 69,039 –987 Profit after tax – – 3,461 – Other comprehensive income, net of tax – – –5,291 –729 Total comprehensive income – – –1,829 –729 Capital increases – – – – Dividends payment – – –68 – Capital transactions involving a change in ownership interest – – – – Other changes – – –13 – Balance at June 30, 2016 1,283 14,551 67,130 –1,716 Balance at Jan. 1, 2017 1,283 14,551 70,446 –1,117 Profit after tax – – 6,474 – Other comprehensive income, net of tax – – 1,383 –1,316 Total comprehensive income – – 7,858 –1,316 Capital increases¹ – – – – Dividends payment – – –1,015 – Capital transactions involving a change in ownership interest – – – – Other changes – – –5 – Balance at June 30, 2017 1,283 14,551 77,284 –2,432 1 Volkswagen AG recorded an inflow of cash funds amounting to €3,500 million, less a discount of €4 million and transaction costs of €23 million, from the hybrid capital issued in June 2017. Additionally, there were noncash effects from the deferral of taxes amounting to €8 million. The hybrid capital is required to be classified as equity instruments granted. Interim Consolidated Financial Statements (Condensed) Cash flow hedges Available-for-sale financial assets –3,912 –16 – – 3,405 56 3,405 56 – – – – – – – – –507 40 –457 –2 – – 2,842 38 2,842 38 – – – – – – – – 2,385 37 Equity-accounted investments 542 – –173 –173 – – – 6 376 417 – –287 –287 – – – – 130 Equity attributable to Volkswagen AG hybrid capital investors 7,560 112 – 112 – –204 – 51 7,519 7,567 116 – 116 3,481 –204 – 51 11,010 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 88,060 3,573 –2,731 842 – –272 – 44 88,675 92,689 6,590 2,661 9,251 3,481 –1,219 – 46 104,248 Statement of Changes in Equity Noncontrolling interests Total equity 210 88,270 6 3,579 –2 –2,733 4 846 – – –5 –277 – – 7 51 215 88,890 221 92,910 5 6,595 0 2,661 5 9,256 – 3,481 –5 –1,224 – – 2 48 223 104,471 33 34 Cash flow statement Interim Consolidated Financial Statements (Condensed) Cash flow statement for the Period January 1 to June 30 V OLKSW A G E N G R OU P D IV ISION S A U T OM OT I V E ¹ F I N A NC I A L SE RV I C ES € million 2017 2016 2017 2016 2017 2016 Cash and cash equivalents at beginning of period 18,833 20,462 14,125 15,294 4,709 5,168 Profit before tax 8,960 4,810 7,690 3,667 1,270 1,144 Income taxes paid –1,910 –1,724 –1,937 –2,138 27 414 Depreciation and amortization expense² 10,790 10,007 7,069 6,813 3,721 3,195 Change in pension provisions 176 169 171 165 5 3 Other noncash income/expense and reclassifications³ 1,467 1,977 1,850 1,981 –383 –4 Gross cash flow 19,484 15,239 14,844 10,487 4,640 4,752 Change in working capital –22,362 –10,128 –12,810 –751 –9,551 –9,377 Change in inventories –5,946 –2,835 –5,676 –2,516 –270 –319 Change in receivables –3,100 –4,545 –2,897 –4,486 –203 –59 Change in liabilities 5,242 4,488 4,649 3,650 592 838 Change in other provisions –8,277 3,159 –8,346 3,092 69 67 Change in lease assets (excluding depreciation) –5,657 –6,078 –488 –567 –5,169 –5,511 Change in financial services receivables –4,623 –4,318 –53 76 –4,570 –4,393 Cash flows from operating activities –2,878 5,111 2,033 9,736 –4,911 –4,625 Cash flows from investing activities attributable to operating activities –7,040 –5,149 –6,829 –4,601 –211 –548 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property –4,327 –4,661 –4,159 –4,515 –168 –146 capitalized development costs –2,919 –2,582 –2,919 –2,582 – – acquisition and disposal of equity investments –38 1,917 24 2,338 –62 –420 Net cash flow4 –9,917 –38 –4,795 5,135 –5,122 –5,173 Change in investments in securities, loans and time deposits 888 926 1,741 1,112 –853 –186 Cash flows from investing activities –6,151 –4,224 –5,088 –3,489 –1,064 –735 Cash flows from financing activities 12,576 8,169 6,855 2,502 5,721 5,667 of which: capital contributions/capital redemptions 3,473 – 2,470 –668 1,002 668 Effect of exchange rate changes on cash and cash equivalents –507 –179 –447 –143 –60 –36 Net change in cash and cash equivalents 3,040 8,877 3,354 8,605 –313 271 Cash and cash equivalents at June 305 21,874 29,338 17,478 23,899 4,395 5,439 Securities, loans and time deposits 27,085 23,328 15,969 13,663 11,116 9,665 Gross liquidity 48,959 52,666 33,448 37,561 15,511 15,104 Total third-party borrowings –160,911 –152,205 –9,702 –8,784 –151,208 –143,421 Net liquidity at June 306 –111,952 –99,539 23,745 28,778 –135,697 –128,317 For information purposes: at Jan. 1 –107,950 –100,530 27,180 24,522 –135,130 –125,052 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments, application of the equity method and reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loan receivables from related parties and time deposits net of third-party borrowings (noncurrent and current financial liabilities). Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements Notes to the Interim Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2016 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2017 were therefore also prepared in accordance with IAS 34 and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 37w of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2017. From January 1, 2017, IAS 7 (Statement of Cash Flows) requires entities to make additional disclosures on changes arising from cash flows and noncash changes in financial liabilities arising from financing activities as reported in the statement of cash flows. These disclosures must be made for the first time in the notes to the 2017 annual financial statements. Since January 1, 2017, the amendments to IAS 12 (Income Taxes) have clarified the recognition of deferred tax assets for unrealized losses in the case of assets carried at fair value. The IASB amended IFRS 12 (Disclosures of Interests in Other Entities) as part of its 2016 annual improvements project, with effect from January 1, 2017. This clarifies that, as a matter of principle, disclosures in accordance with IFRS 12 must also be made for the entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities even if these are classified as held for sale, held for distribution to owners or as discontinued operations. The amendments do not materially affect the Volkswagen Group’s net assets, financial position and results of operations. Transposition of the amendments outlined into European law has not yet taken place; this is expected for the fourth quarter of 2017. A discount rate of 2.1% (December 31, 2016: 1.79%) was applied to German pension provisions in the accompanying interim consolidated financial statements. The increase in the discount rate reduced pension provisions and deferred taxes attributable to pension provisions and also reduced the actuarial losses for pension provisions that are recognized in retained earnings. The income tax expense for the interim consolidated financial statements was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34 (Interim Financial Reporting). 35 36 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) In other respects, the same accounting policies and consolidation methods that were used for the 2016 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2016 consolidated financial statements. In addition, details of the effects of new standards can be found in the “New and amended IFRSs not applied” section. The 2016 consolidated financial statements can also be accessed on the Internet at www.volkswagenag.com/ir. Key events On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain vehicles with Volkswagen Group diesel engines. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2016 consolidated financial statements. Also, the publications released by the reporting date, as well as the investigations and interviews in connection with the diesel issue, did not provide the Group Board of Management with any new reliable findings or assessments regarding the underlying facts and the assessment of the associated risks (e.g. investor lawsuits) and did not reveal any material effects on the consolidated interim financial statements in the first half of fiscal year 2017. Further information on the litigation in connection with the diesel issue can be found in the “Litigation” section. Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. C O N S O L I D AT E D S U B S I D I A R I E S The disposal of part of PGA Group SAS, Paris, France, by POFIN Financial Services Verwaltungs GmbH, Freilassing, to the Emil Frey Group was implemented on June 1, 2017. The sale is in connection with the strategic develop- ment of Porsche Holding Salzburg’s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles. The transaction encompasses dealerships in Poland, the Netherlands, Belgium and in some cases also in France. This had a positive effect of €0.8 billion on net liquidity and, taking into account the disposal of the assets and liabilities, resulted in an insignificant income amount for the Volkswagen Group, which is reported in other operating income. Overall, the transaction led to the disposal of assets in the amount of €2.5 billion and liabilities in the amount of €2.1 billion. The assets mainly consist of noncurrent leased assets (€0.6 billion) and inventories (€1.0 billion). The liabilities principally comprise noncurrent and current other liabilities (€0.9 billion) and trade payables (€0.7 billion). Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements I N V E ST M E N T S I N A S S O C I AT E S At the beginning of September 2016, Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volks- wagen AG, and the US-based commercial vehicle manufacturer Navistar International Corporation, Lisle, USA (Navistar), announced that they had signed an agreement to forge a wide-ranging alliance. The cooperation primarily involves working together on technical components and in procurement. The transaction closed on February 28, 2017. Within the framework of a capital increase, Volkswagen Truck & Bus acquired 16.6% of the shares in Navistar, paying USD 15.76 per share. The purchase price came to €0.3 billion. Due to Volkswagen’s representation on the Board of Directors of Navistar and the agreed cooperation, the investment in Navistar is reported as an equity-accounted investment in the consolidated financial statements. The purchase price allocation has not yet been completed. Audi, the BMW Group and Daimler AG each hold a 33.3% interest in There Holding B.V., Rijswijk, the Netherlands, which was established in 2015. In December 2016, There Holding B.V. signed contracts for the sale of interests in HERE International B.V., Rijswijk, the Netherlands. A 15% stake was sold to Intel Holdings B.V., Schiphol-Rijk, the Netherlands, and a 10% stake to a consortium consisting of NavInfo Co. Ltd., Beijing, China, Tencent Holdings Ltd., Shenzhen, China, and GIC Private Ltd., Singapore, Singapore. The transaction with Intel Holdings B.V. was completed on January 31, 2017. This resulted in a loss of control within the meaning of IFRS 10 at the There Holding B.V. level. The deconsolidation gave rise to a proportionate effect for Volkswagen of €183 million, which is shown in the result from equity-accounted investments. Since a significant influence continues to exist, HERE International B.V. is included in the financial statement of There Holding B.V. as an associate using the equity method. The completion of the transaction with the consortium is dependent on the approval of the relevant authorities. There is no change in the Volkswagen Group’s participating interest in There Holding B.V. as a result of the sales. I N T E R E ST S I N J O I N T V E N T U R E S Through its 50% interest in the joint venture Global Mobility Holding B.V., Amsterdam, the Netherlands (GMH), the Volkswagen Group held a 50% indirect stake in the joint venture’s subsidiary, LeasePlan Corporation N.V., Amsterdam, the Netherlands (LeasePlan). GMH’s business activity consisted of holding the interest in LeasePlan. LeasePlan is a Dutch financial services group whose core business is leasing and fleet management. GMH’s principal place of business is in Amsterdam, the Netherlands. On July 23, 2015, GMH sold its 100% interest in LeasePlan to a consortium of international investors. The final approvals for the sale of LeasePlan to an international consortium of investors were issued by the competent authorities in January 2016. Legal transfer of the LeasePlan shares to the consortium was completed on March 21, 2016. The total value of the transaction was approximately €3.7 billion plus interest in the amount of €31.5 mil- lion. In 2016, this had a positive effect of €2.2 billion on investing activities attributable to operating activities and net liquidity and, taking into account the disposal of equity-accounted investment in GMH, resulted in an income amount of €0.2 billion for the Volkswagen Group, which was reported in the financial result. On completion of the transaction, the existing credit line of €1.3 billion provided by the Volkswagen Group was canceled. 37 38 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Disclosures on the interim consolidated financial statements 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 € million 2017 2016 Vehicles¹ 72,838 68,248 Genuine parts 7,861 7,582 Used vehicles and third-party products¹ 7,820 7,121 Engines, powertrains and parts deliveries 5,297 4,782 Power Engineering 1,578 1,672 Motorcycles 380 409 Leasing business 12,242 10,775 Interest and similar income 3,586 3,309 Other sales revenue 4,260 4,038 115,862 107,935 1 Prior-year figures adjusted. For segment reporting purposes, the sales revenue of the Group is presented by segment and market. Other sales revenue comprises revenue from workshop services and license revenue, among other things. To ensure that sales revenue from company vehicles is presented consistently, sales revenue from vehicles was reclassified to sales revenue from used vehicles and third-party products. Prior-year figures have been adjusted accordingly. 2. Cost of sales Cost of sales includes interest expenses of €985 million (previous year: €948 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on intangible assets, items of property, plant and equipment, and lease assets. The impairment losses identified on the basis of updated impairment tests amount to a total of €405 million (previous year: €572 million). The value in use of Volkswagen Group products is used as the basis for calculating impairment losses. The impair- ment losses in the current fiscal year and the previous year are primarily a result of the lower value in use of various products. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements 3. Research and development costs H 1 € million 2017 2016 Total research and development costs 6,759 6,619 of which: capitalized development costs 2,919 2,582 Capitalization ratio in % 43.2 39.0 Amortization of capitalized development costs 1,705 1,803 Research and development costs recognized in profit or loss 5,546 5,840 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since the basic and diluted number of shares is identical, basic earnings per share also correspond to diluted earnings per share. In accordance with Article 27 of the Articles of Association of Volkswagen AG, preferred shares are entitled to a €0.06 higher dividend than ordinary shares. Q 2 H 1 2017 2016 2017 Weighted average number of shares outstanding Ordinary shares: basic million 295.1 295.1 295.1 diluted million 295.1 295.1 295.1 Preferred shares: basic million 206.2 206.2 206.2 diluted million 206.2 206.2 206.2 Profit after tax € million 3,192 1,214 6,595 Noncontrolling interests € million 2 3 5 Profit attributable to Volkswagen AG hybrid capital investors € million 60 56 116 Profit attributable to Volkswagen AG shareholders € million 3,129 1,155 6,474 Earnings per share Ordinary shares: basic € 6.24 2.30 12.89 diluted € 6.24 2.30 12.89 Preferred shares: basic € 6.24 2.30 12.95 diluted € 6.24 2.30 12.95 % 2.1 13.0 –5.4 –5.0 2016 295.1 295.1 206.2 206.2 3,579 6 112 3,461 6.88 6.88 6.94 6.94 39 40 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A R Y 1 A N D J U N E 3 0 , 2 0 1 7 € million Carrying amount at Jan. 1, 2017 Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2017 Intangible assets 62,599 2,980 195 2,155 63,229 Property, plant and equipment 54,033 3,961 761 4,623 52,611 Lease assets 38,439 9,939 6,328 4,003 38,047 6. Inventories € million June 30, 2017 Dec. 31, 2016 Raw materials, consumables and supplies 4,853 4,396 Work in progress 3,816 4,408 Finished goods and purchased merchandise 28,837 25,719 Current lease assets 5,161 4,276 Prepayments 142 178 42,810 38,978 There was no requirement to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2017 Dec. 31, 2016 Trade receivables 13,269 12,187 Miscellaneous other receivables and financial assets 20,227 18,099 33,496 30,286 In the period January 1 to June 30, 2017, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €355 million (previous year: €271 million). Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements 8. Equity In June 2017, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €3.5 billion via a subsidiary, Volkswagen International Finance N.V., Amsterdam, the Netherlands (issuer). The perpetual hybrid notes were issued in two tranches and can be called by the issuer. The first call date for the first tranche (€1.5 billion and a coupon of 2.700%) is after 5.5 years, and the first call date for the second tranche (€2.0 billion and a coupon of 3.875%) is after ten years. Under IAS 32, the hybrid notes must be classified in their entirety as equity. The capital raised was recognized in equity, less a discount and transaction costs and net of deferred taxes. The interest payments payable to the noteholders will be recognized directly in equity, net of income taxes. The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par- value preferred shares, and amounts to €1,283 million (December 2016: €1,283 million). Volkswagen AG distributed a dividend of €1,015 million in the reporting period (previous year: €68 million). €590 million (previous year: €32 million) of this amount was attributable to ordinary shares and €425 million (previous year: €35 million) to preferred shares. The noncontrolling interests are largely attributable to shareholders of RENK AG and AUDI AG. 9. Noncurrent financial liabilities € million June 30, 2017 Dec. 31, 2016 Bonds, commercial paper and notes 57,974 51,195 Liabilities to banks 12,103 10,816 Deposit business 2,730 2,759 Other financial liabilities 2,088 1,588 74,895 66,358 10. Current financial liabilities € million June 30, 2017 Dec. 31, 2016 Bonds, commercial paper and notes 40,224 42,004 Liabilities to banks 15,332 14,180 Deposit business 29,384 31,019 Other financial liabilities 1,075 1,257 86,016 88,461 41 42 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 11. Fair value disclosures The principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2016 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Assets and liabilities measured at fair value through profit or loss consist of derivatives or components of derivatives that are not included in hedge accounting. These relate primarily to the interest component of currency forwards used to hedge sales revenue, commodity futures and currency forwards relating to commodity futures. Available-for-sale financial assets (debt instruments) are carried at fair value. Changes in fair value are recognized directly in equity, net of deferred taxes. Other equity investments (shares representing an ownership interest of less than 20% as a rule) are also classified as available-for-sale financial assets. They are recognized at cost in the consolidated financial statements if there is no active market for those shares and fair values cannot be reliably ascertained without undue cost or effort. The lower present value of the estimated future cash flows is recognized if there are indications of impairment. There is currently no intention to sell these financial assets. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The fair value of put options and compensation rights granted to noncontrolling interest shareholders is calculated using a present value model based on the contractually agreed cash settlement, including cash compensation, as well as the minimum statutory interest rate and a risk-adjusted discount rate for a matching maturity. Reconciliation of balance sheet items to classes of financial instruments The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. Financial instruments measured at fair value also include shares in partnerships and corporations. There is no active market for these instruments. Since the future cash flows cannot be reliably determined, fair value cannot be determined using measurement models. The shares in these companies are carried at cost. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 6 D E R I VA T I V E F I N A NC I A L B A L A N C E M E A S U R E D I N STR U M EN T S N O T W I T H I N S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E DG E S C O P E O F A T D E C . 3 1 , V A L U E C O S T A C C OU N T IN G I F R S 7 2 0 1 6 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 8,616 8,616 Other equity investments 187 – – – 809 996 Financial services receivables – 68,402 70,766 – – 68,402 Other financial assets 251 4,982 5,008 3,023 – 8,256 Current assets Trade receivables – 12,187 12,187 – – 12,187 Financial services receivables – 49,673 49,673 – – 49,673 Other financial assets 740 9,527 9,527 1,577 – 11,844 Marketable securities 17,520 – – – – 17,520 Cash, cash equivalents and time deposits – 19,265 19,265 – – 19,265 Noncurrent liabilities Noncurrent financial liabilities – 66,358 66,932 – – 66,358 Other noncurrent financial liabilities 885 1,859 1,863 1,745 – 4,488 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,849 3,861 – – 3,849 Current financial liabilities – 88,461 88,461 – – 88,461 Trade payables – 22,794 22,794 – – 22,794 Other current financial liabilities 1,473 6,010 6,010 1,956 – 9,438 43 44 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 1 7 D E R I V A T I V E F I N A N C I A L M E A S U R E D I N S T R U M E N T S N O T W I T H I N B A L A N C E A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E D G E S C O P E O F S H E E T I T E M A T V A L U E C O S T A C C O U N T I N G I F R S 7 J U N E 3 0 , 2 0 1 7 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 6,661 6,661 Other equity investments 278 – – – 859 1,137 Financial services receivables – 69,997 72,292 – – 69,997 Other financial assets 52 4,756 4,779 3,495 – 8,302 Current assets Trade receivables – 13,269 13,269 – – 13,269 Financial services receivables – 50,574 50,574 – – 50,574 Other financial assets 57 11,021 11,021 2,353 – 13,431 Marketable securities 16,229 – – – – 16,229 Cash, cash equivalents and time deposits – 22,288 22,288 – – 22,288 Noncurrent liabilities Noncurrent financial liabilities – 74,895 77,184 – – 74,895 Other noncurrent financial liabilities 569 1,598 1,600 361 – 2,527 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,771 3,772 – – 3,771 Current financial liabilities – 86,016 86,016 – – 86,016 Trade payables – 22,565 22,565 – – 22,565 Other current financial liabilities 904 7,525 7,525 657 – 9,086 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements The following tables contain an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT F A I R VA L U E B Y L E V E L € million Dec. 31, 2016 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 187 76 – 111 Other financial assets 251 – 216 34 Current assets Other financial assets 740 – 734 6 Marketable securities 17,520 17,520 – – Noncurrent liabilities Other noncurrent financial liabilities 885 – 722 163 Current liabilities Other current financial liabilities 1,473 – 1,406 67 € million June 30, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 278 99 – 180 Other financial assets 52 – 14 38 Current assets Other financial assets 57 – 52 6 Marketable securities 16,229 16,229 – – Noncurrent liabilities Other noncurrent financial liabilities 569 – 364 205 Current liabilities Other current financial liabilities 904 – 822 82 45 46 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) D E R I VAT I V E F I N A N C I A L I N ST R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million Dec. 31, 2016 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 3,023 – 3,019 4 Current assets Other financial assets 1,577 – 1,577 – Noncurrent liabilities Other noncurrent financial liabilities 1,745 – 1,745 0 Current liabilities Other current financial liabilities 1,956 – 1,956 – € million June 30, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 3,495 – 3,495 – Current assets Other financial assets 2,353 – 2,353 – Noncurrent liabilities Other noncurrent financial liabilities 361 – 361 – Current liabilities Other current financial liabilities 657 – 657 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Level 3 fair values are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments and residual value protection models are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT F A I R VA L U E B A S E D O N L E V E L 3 € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2016 119 251 Foreign exchange differences –3 0 Total comprehensive income 9 16 recognized in profit or loss 5 19 recognized in other comprehensive income 3 –3 Additions (purchases) 1 – Sales and settlements –1 –36 Transfers into Level 2 0 –23 Balance at June 30, 2016 125 208 Total gains or losses recognized in profit or loss 5 –19 Net other operating expense/income – – of which attributable to assets/liabilities held at the reporting date – – Financial result 5 –19 of which attributable to assets/liabilities held at the reporting date 5 1 € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2017 152 230 Foreign exchange differences –6 – Total comprehensive income 14 97 recognized in profit or loss 19 97 recognized in other comprehensive income –4 0 Additions (purchases) 82 – Sales and settlements –9 –38 Transfers into Level 2 –10 –2 Balance at June 30, 2017 223 287 Total gains or losses recognized in profit or loss 19 –97 Net other operating expense/income – – of which attributable to assets/liabilities held at the reporting date – – Financial result 19 –97 of which attributable to assets/liabilities held at the reporting date 1 –96 47 48 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2017, profit after tax would have been €5 million higher (lower). The equity is not affected. The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values at June 30, 2017 had been 10% higher, earnings after tax would have been €1 million higher. If the assumed enterprise values at June 30, 2017 had been 10% lower, earnings after tax would have been €1 million lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices for the used cars covered by the residual value protection model had been 10% higher as of June 30, 2017, earnings after tax would have been €263 million higher. If the prices for the used cars covered by the residual value protection model had been 10% lower as of June 30, 2017, earnings after tax would have been €263 million lower. 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. € million June 30, 2017 June 30, 2016 Cash, cash equivalents and time deposits as reported in the balance sheet 22,288 29,691 Time deposits –414 –352 Cash and cash equivalents as reported in the cash flow statement 21,874 29,338 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2017 2016 Capital contributions 3,473 – Dividends paid –1,224 –277 Capital transactions with noncontrolling interest shareholders – –3 Other changes – –19 Proceeds from issuance of bonds 16,030 4,560 Repayments of bonds –7,325 –12,464 Changes in other financial liabilities 1,633 16,394 Lease payments –11 –22 12,576 8,169 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars segment cover the development of vehicles and engines, the production and sale of passenger cars, and the corresponding genuine parts business. Given the high degree of techno- logical and economic interlinking in the production network of the individual brands, the Passenger Cars reporting segment combines the Volkswagen Group’s individual car brands to a single reportable segment. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of light commercial vehicles, trucks and buses, the corresponding genuine parts business and related services. Just as in the case of the car brands, there is collaboration within the areas procurement, development and sale. The aim is to achieve further forms of interlinking. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, combinations occur especially while taking into account the comparability of the type of services as well as the regulatory situation permits. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volks- wagen Group are transacted at arm’s length prices. 49 50 Notes to the Interim Consolidated Financial Statements R E P O R T I N G S E G M E N T S : H 1 2 0 1 6 € million Passenger Cars Sales revenue from external customers 80,074 Intersegment sales revenue 8,833 Total sales revenue 88,907 Segment profit or loss (operating profit or loss) 4,145 R E P O R T I N G S E G M E N T S : H 1 2 0 1 7 € million Passenger Cars Sales revenue from external customers 85,580 Intersegment sales revenue 9,570 Total sales revenue 95,150 Segment profit or loss (operating profit or loss) 8,232 R E C O N C I L I AT I O N € million Segment profit or loss (operating profit or loss) Unallocated activities Group financing Consolidation Operating profit Financial result Consolidated profit before tax Commercial Vehicles 12,410 3,179 15,589 285 Commercial Vehicles 13,491 3,761 17,252 1,043 Power Engineering 1,672 1 1,673 –18 Power Engineering 1,578 1 1,579 –46 Financial Services 13,850 1,539 15,388 1,177 Financial Services 15,166 1,795 16,961 1,265 Interim Consolidated Financial Statements (Condensed) Total segments Reconciliation Volkswagen Group 108,005 –70 107,935 13,553 –13,553 – 121,558 –13,623 107,935 5,589 –250 5,339 Total segments Reconciliation Volkswagen Group 115,816 46 115,862 15,127 –15,127 – 130,943 –15,081 115,862 10,494 –1,578 8,916 H 1 2017 2016 10,494 5,589 38 40 5 12 –1,621 –302 8,916 5,339 44 –528 8,960 4,810 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements 14. Related party disclosures At 52.2%, Porsche SE held the majority of the voting rights in Volkswagen AG as of June 30, 2017. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. As a result, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE has the power to participate in the operating policy decisions of the Volkswagen Group and is therefore classified as a related party as defined by IAS 24. S U P P L I E S A N D S E R V I C E S S U P P L I E S A N D S E R V I C E S R E N D E R E D R E C E I V E D H1 H1 € million 2017 2016 2017 2016 Porsche SE 5 6 0 1 Supervisory Board members 1 1 2 2 Unconsolidated subsidiaries 481 419 446 340 Joint ventures and their majority interests 6,898 6,477 499 559 Associates and their majority interests 101 96 345 374 State of Lower Saxony, its majority interests and joint ventures 5 2 3 2 L I A B I L I T I E S ( I N C L U D I N G R E C E I V A B L E S F R O M O B L I G A T I O N S ) T O € million June 30, 2017 Dec. 31, 2016 June 30, 2017 Dec. 31, 2016 Porsche SE 13 323 – 1 Supervisory Board members 0 0 311 297 Unconsolidated subsidiaries 985 1,036 1,292 1,188 Joint ventures and their majority interests 9,274 8,808 1,855 1,784 Associates and their majority interests 57 53 607 495 State of Lower Saxony, its majority interests and joint ventures 3 2 1 1 The supplies and services received from joint ventures and associates that are presented in the above tables do not include resolved dividend distributions amounting to €3,533 million (previous year: €3,488 million). Transactions with related parties are conducted on an arm’s length basis. Some of these transactions also include reservation of title clauses. The decrease in receivables from Porsche SE is attributable to a loan repayment. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €149 million. The outstanding related party receivables were impaired in the amount of €25 million. This incurred expenses of €1 million in the first half of 2017. In the first half of the year, the Volkswagen Group made capital contributions of €65 million to related parties. 51 52 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 15. Performance share plan The Supervisory Board of Volkswagen Aktiengesellschaft resolved to adjust the remuneration system of the Board of Management with effect from January 1, 2017. The new system for remuneration of the Board of Management was approved by the Annual General Meeting on May 10, 2017. The new remuneration system for the Board of Management consists of a fixed and two variable components, comprising an annual bonus with a one-year assessment period and a long-term incentive (“LTI”) in the form of a so-called performance share plan with a three-year term extending into the future. Each performance period of the performance share plan shall have a term of three years. At the time the LTI is granted, the annual target amount under the LTI shall be converted, on the basis of the initial price of the Volkswagen preferred share, into performance shares, which shall be allocated to the respective member of the Board of Management as a pure calculation position. The final determination of the number of performance shares occurs for one-third at the end of each year of the three-year performance period, in accordance with the degree of target achievement for the annual earnings per Volkswagen preferred share. After the end of the three-year term of the performance share plan, a cash settlement shall take place. The payment amount corresponds to the final number of determined performance shares, multiplied by the amount resulting from the closing price at the end of the three-year period plus the dividend equivalent for the relevant term. The payment amount under the performance share plan shall be limited to 200% of the target amount. Where a member of the Board of Management leaves the Company of their own volition before the perfor- mance shares are paid out or that member starts working for a competitor, all unpaid performance shares shall expire. This does not apply to Board of Management members who had already been appointed before the change in the remuneration system for the Board of Management. Their target amount in the year they left the Company shall be reduced pro rata temporis. For further details, please refer to our disclosures in the 2017 interim report for the period from January 1 to March 31, 2017 in the section entitled “Key events”. In accordance with IFRS 2, the obligations under the performance share plan are accounted for as a cash- settled plan and measured at fair value using a recognized valuation technique. Within the framework of the changeover to the new remuneration system, the members of the Board of Management who had already approved the change were allocated a total of 128,519 performance shares. The written approval of the members of the Board of Management is expected shortly, but had not yet been received from all members by the reporting date. The fair value of the obligation as of June 30, 2017 amounts to €7.2 million. If the members of the Board of Management had left as of June 30, 2017, the obligation (intrinsic value) would have amounted to a total of €10.7 million. 16. Litigation On March 10, 2017, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates entered into a settlement agreement resolving the environmental claims of ten states – Connecticut, Delaware, Maine, Massachusetts, New York, Oregon, Pennsylvania, Rhode Island, Vermont and Washington – for an amount of USD 157 million. On March 24, 2017, the United States filed a motion for entry of the second partial consent decree, which had been agreed to between Volkswagen and the Department of Justice (DOJ), the US Environmental Protection Agency (EPA), the US environmental authority of California – the California Air Resources Board (CARB) – and the California Attorney General on December 20, 2016 that resolved claims for injunctive relief under the US Clean Air Act and California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. The federal court in the multidistrict litigation in California approved the second partial consent decree on May 17, 2017. Also on May 17, 2017, the court granted final approval of the 3.0 l California Second Partial Consent Decree and the class action settlement reached with private plaintiffs related to 3.0 l TDI vehicles. On April 13, 2017, the federal court in the multidistrict litigation in California approved the third partial consent decree, which Volkswagen had agreed to with the DOJ and EPA on January 11, 2017 that resolved claims for civil penalties and injunctive relief under the Clean Air Act related to the 2.0 l and 3.0 l TDI vehicles. Various cases filed against Volkswagen AG and its affiliates remain pending before the federal court in the multidistrict Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements litigation in California, including class actions brought by competitor dealerships (i.e. non-Volkswagen car dealerships) and Volkswagen salespersons working at franchise dealerships, as well as purchasers of certain Volkswagen bonds and American Depositary Receipts (ADRs). Moreover, certain members of the consumer and dealer classes have opted out of the settlements in the California multidistrict litigation and instead filed their own lawsuits, which are pending in the California multidistrict litigation and various state courts in the United States. On April 21, 2017, the federal court in Michigan accepted Volkswagen AG’s agreement to plead guilty on January 11, 2017 and to pay a USD 2.8 billion criminal penalty, and imposed a sentence of three years’ pro- bation. Also on April 21, 2017, Canadian courts approved the settlement agreement entered into between con- sumers and Volkswagen AG and other Canadian and US Volkswagen Group companies relating to 2.0 l diesel vehicles. The public prosecutor’s office in Munich initiated a criminal investigation against persons unknown on suspicion of fraud and false advertising in connection with 3.0 l TDI vehicles distributed in the United States. The criminal investigation is still at an early stage and further progress remains to be seen. In June 2017, Larry Thompson was named as an Independent Compliance Monitor and an Independent Compliance Auditor. Together with his team, he will be active for the period of three years pursuant to the criminal plea agreement and the “third partial consent decree”, respectively. Mr. Thompson (the “Monitor”) has significant experience in both public and private sectors, having served inter alia as a Deputy Attorney General; a United States Attorney for the Northern District of Georgia; and as Executive Vice President and General Counsel for Pepsi-Co. Volkswagen AG and relevant related entities are working closely with the Monitor and his team to support them as they execute their mandates. On April 19, 2017, a putative class action was filed against AUDI AG and certain affiliates alleging that defen- dants concealed the existence of “defeat devices” in Audi brand vehicles with automatic gearboxes. There are now 14 such putative class actions pending in the California multidistrict litigation. The court has set a deadline of August 28, 2017 for plaintiffs to file a consolidated class action complaint. In addition, five “mass actions” have been filed in the California multidistrict litigation on behalf of approximately 500 individual plaintiffs alleging similar claims with respect to the existence of “defeat devices” in Audi brand vehicles with automatic gearboxes. The most recent of the mass action complaints was filed on May 26, 2017. In June 2017, the plaintiffs dismissed these actions without prejudice. On May 23, 2017, the federal court in the multidistrict litigation in California remanded the consumer and environmental claims of 12 State Attorneys General (Alabama, Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, New Mexico, Ohio, Oklahoma, Tennessee and Vermont) to their respective state courts, where future litigation of these claims will proceed. In June 2017, Volkswagen Group Canada reached an agreement with its Volkswagen-branded franchise dealers to resolve issues related to the diesel issue. The agreement was reached without court process. On June 28, 2017, the court in the multidistrict litigation in California granted in part and denied in part Volkswagen AG’s motion to dismiss plaintiffs’ First Amended Consolidated Securities Class Action Complaint, which was filed by certain purchasers of Volkswagen ADRs. On July 19, 2017, this court granted in part and denied in part Volkswagen AG’s motion to dismiss the class action complaint filed by purchasers of certain Volkswagen bonds, and permitted the plaintiffs to file an amended complaint by August 18, 2017. On July 21, 2017, the federal court in the multidistrict litigation in California approved a further California Partial Consent Decree, in which Volkswagen AG and certain affiliates had agreed with the California Attorney General and CARB to pay USD 153,8 million in civil penalties and cost reimbursements. These penalties covered California environmental penalties for both the 2.0 l and 3.0 l TDI vehicles. An agreement in principle had been reached on January 11, 2017. Also on July 21, 2017, the California federal court granted the motion of the Plaintiffs’ Steering Committee seeking USD 125 million in attorneys’ fees and costs in connection with the 3.0 l TDI settlement. 53 54 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) On July 21, 2017, AUDI AG offered a software-based retrofit program for up to 850,000 vehicles with V6 and V8 TDI engines meeting the Euro 5 and Euro 6 emission standards in Europe and other markets except the USA and Canada. The measure will mainly serve to further improve the vehicles’ emissions in real driving conditions beyond the current legal requirements. Customers will not be charged for the new software. The full package is also offered for certain Porsche and Volkswagen models and comprises voluntary and compulsory measures that have already been reported to the authorities and partially considered within their decisions. Audi has been systematically checking the emissions of engine-gearbox combinations for months, working closely with the authorities, in particular the German Federal Ministry of Transport and the German Federal Motor Transport Authority (KBA). Audi currently assumes that the overall cost of the software-based retrofit program including the scope related to recalls will be manageable and has already recognized first provisions in this respect. If the investigations by Audi and the discussions with the KBA should reveal that further measures are necessary, Audi will swiftly implement the required solutions in the interest of its customers as part of the retrofit program. The voluntary tests have already reached an advanced stage, but have not yet been completed. In addition, Audi is responding to requests from the US authorities for information regarding automatic gearboxes in certain vehicles. Further field measures with financial consequences can therefore not be ruled out completely at this time. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2017 in the “Report on Expected Developments” and “Report on Risks and Opportunities” chapters – including the “Risks from the diesel issue” and “Litigation/Diesel issue” sections and the underlying description of the issues in the chapter entitled “Diesel Issue” – of the combined management report in the 2016 Annual Report or in publications released by the reporting date concerning the diesel issue and other possible proceedings, as well as the investigations and interviews in connection with the diesel issue. 17. Contingent liabilities On May 5, 2016, the U.S. National Highway Traffic Safety Administration (NHTSA) announced, jointly with the Takata company, a further extension of the recall for various models from different manufacturers containing certain airbags produced by the Takata company. Recalls were also ordered by the local authorities in individual countries. The recalls also included models manufactured by the Volkswagen Group. Appropriate provisions have been recognized. Currently, the possibility of further extensions to the recalls that could also affect Volkswagen Group models cannot be ruled out. It is not possible at the moment to provide further disclosures in accordance with IAS 37.86 in relation to this matter because the technical investigations and consultations with the authorities are still being carried out. As of June 30, 2017, there were no major changes to the contingent liabilities compared with the disclosures in the 2016 annual report. 18. Other financial obligations Other financial liabilities rose by €3.5 billion compared with the 2016 consolidated financial statements to reach €29.4 billion. The higher figure is mainly attributable to the increase in the purchase order commitment for property, plant and equipment as well as to obligations under irrevocable credit and leasing commitments. German Corporate Governance Code The current declarations in accordance with section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) on the German Corporate Governance Code by the Board of Management and Supervisory Board of Volkswagen AG, AUDI AG, MAN SE and RENK AG are permanently available on Internet at www.volkswagenag.com/ir, www.audi.de/cgk-declaration, www.corporate.man.eu/en and www.renk.biz/ corporated-governance.html respectively. the Significant events after the balance sheet date There were no significant events after the end of the first six months of 2017. Interim Consolidated Financial Statements (Condensed) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements prepared in accordance with German accepted accounting principles give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 27, 2017 Volkswagen Aktiengesellschaft The Board of Management Matthias Müller Karlheinz Blessing Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Andreas Renschler Rupert Stadler Hiltrud Dorothea Werner Frank Witter 55 56 Review Report Interim Consolidated Financial Statements (Condensed) Review Report To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg We have reviewed the condensed consolidated interim financial statements - comprising the condensed income statement and condensed statement of comprehensive income, condensed balance sheet, condensed statement of changes in equity, condensed statement of cash flows and selected explanatory notes - and the interim group management report of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, for the period from January 1 to June 30, 2017, which are part of the half-year financial report pursuant to § (Article) 37w WpHG ("Wertpapierhandelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Managing Directors. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. Interim Consolidated Financial Statements (Condensed) Review Report Without qualifying our opinion, we draw attention to the updated information provided in section “Key events” of the notes to the condensed consolidated interim financial statements and in chapter “Report on Expected Developments, Risks and Opportunities” of the interim group management report with regard to the Diesel Issue, which essentially refer to the information provided and statements made in the 2016 consolidated financial statements and in the combined management report as of December 31, 2016. Based on the results of the various measures taken to investigate the issue presented so far, which underlie these financial statements, there is no validation that members of the board of management were aware of the deliberate manipulation of engine management software before summer 2015. Nevertheless, should as a result of the ongoing investigation new solid knowledge be obtained showing that members of the board of management were informed earlier, this could eventually have an impact on the annual and consolidated financial statements and on the combined management report for the fiscal year 2016 and prior years. The provisions for warranties and legal risks recorded so far are based on the presented state of knowledge. Due to the inevitable uncertainties associated with the current and expected litigation it cannot be excluded that a future assessment of the risks may be different. Hanover, July 27, 2017 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft Norbert Winkeljohann Wirtschaftsprüfer Frank Hübner Wirtschaftsprüfer (German Public Auditor) (German Public Auditor) 57 Contact Information P U B L I S H E D B Y Volkswagen AG Financial Publications Letterbox 1848-2 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany Phone + 49 (0) 5361 9-0 Fax + 49 (0) 5361 9-30411 E-Mail investor.relations@volkswagen.de Internet www.volkswagenag.com/ir F I N A N C I A L C A L E N D A R October 27, 2017 Interim Report January – September 2017 This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/ir This version of the Interim Report is a translation of the German original. The German takes precedence. Printed in Germany 758.809.576.20

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Half-Yearly Financial Report J A N UA R – J U N I 2018 J A N UA R Y – J U N E 2018 1 U PDATE D I N F O R M AT I O N 6 I N T E R IM M AN AGEM E N T R E PORT 25 B RAN D S AN D BUSI N ESS FI ELDS 2 9 I N T E R IM CON SOLI DATED F I NA N C IA L STATE M EN T S (CON D E N SE D) 1 Key Facts 2 Key Events 6 Volkswagen Shares 7 Business Development 15 Result of Operations, Finan- cial Position and Net Assets 24 Outlook 29 Income Statement 30 Statement of Comprehensive Income 33 Balance Sheet 34 Statement of Changes in Equity 36 Cash Flow Statement 37 Notes to the Interim Consolidated Financial Statements 65 Responsibility Statement 66 Review Report Key Figures V O L K SWA G E N G R O U P Q 2 H 1 2018 20171 % 2018 20171 % Volume Data2 in thousands Deliveries to customers (units) 2,839 2,660 +6.7 5,519 5,155 +7.1 Vehicle sales (units) 2,807 2,660 +5.5 5,575 5,270 +5.8 Production (units) 3,059 2,696 +13.5 5,786 5,433 +6.5 Employees (on June 30, 2018/Dec. 31, 2017) 649.7 642.3 +1.2 Financial Data (IFRSs), € million Sales revenue 61,149 59,152 +3.4 119,377 115,349 +3.5 Operating result before special items 5,583 4,549 +22.7 9,794 8,916 +9.8 Operating return on sales before special items (%) 9.1 7.7 8.2 7.7 Special items –1,635 – x –1,635 – x Operating result 3,948 4,549 –13.2 8,160 8,916 –8.5 Operating return on sales (%) 6.5 7.7 6.8 7.7 Earnings before tax 4,495 4,207 +6.8 8,972 8,799 +2.0 Return on sales before tax (%) 7.4 7.1 7.5 7.6 Earnings after tax 3,313 3,101 +6.8 6,613 6,474 +2.1 Automotive Division3 Total research and development costs 3,391 3,389 +0.0 6,747 6,759 –0.2 R&D ratio (%) 6.5 6.7 6.6 6.9 Cash flows from operating activities 4,753 1,198 x 10,208 2,033 x Cash flows from investing activities attributable to operating activities4 3,844 3,411 +12.7 6,862 6,829 +0.5 of which: capex 2,481 2,319 +7.0 4,398 4,159 +5.8 capex/sales revenue (%) 4.8 4.6 4.3 4.2 Net cash flow 909 –2,213 x 3,346 –4,795 x Net liquidity at June 30 26,298 23,745 +10.7 1 Adjusted 2 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries updated to reflect subsequent statistical trends. 3 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 4 Excluding acquisition and disposal of equity investments: Q2 €3,702 (3,692) million, H1 €6,782 (6,853) million. All figures shown in the Report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. Updated Information Key Facts > Deliveries to customers of the Volkswagen Group up on the previous year at 5.5 (5.2) million vehicles; growth particularly in Europe, South America and Asia-Pacific > Group sales revenue of €119.4 billion exceeds prior-year figure by 3.5% due to volume- related factors; exchange rate effects negative as expected > Operating profit before special items improved by €0.9 billion to €9.8 billion > Operating profit at €8.2 (8.9) billion; negative special items in connection with the diesel issue (€–1.6 billion) had an adverse impact on the result > Profit before tax increases by €0.2 billion to €9.0 billion > Automotive Division’s net cash flow at €3.3 (–4.8) billion higher than a year before; marked decrease in cash outflows attributable to the diesel issue; capex ratio stands at 4.3 (4.2)% > Net liquidity in the Automotive Division of €26.3 billion; successful placement of hybrid notes strengthens the capital base > Exciting products: Volkswagen Passenger Cars continues its product initiative in China with the new- generation Lavida and the CC Audi shows the new face of the Q family for the first time with the Q8; the Q5L debuts in China as the brand’s first long-wheelbase SUV ŠKODA presents the Kamiq city SUV in China - Bentley introduces the Bentayga with its powerful twin-turbo V8 - Porsche’s electric sports car Mission E to launch as the Taycan - Volkswagen Commercial Vehicles celebrates production of the 500,000th vehicle in the current T series Scania and MAN showcase their flexible and economic vehicles for municipal use at IFAT Key Facts 1 2 Key Events Updated Information Key Events M OTO R S H O W S A N D E V E N T S The Volkswagen Group brands presented impressive new products at numerous motor shows and events in the second quarter of 2018. Auto China 2018 Volkswagen is resolutely pursuing its product and technology initiative in its most important market. The latest generation of the Lavida, the market leader for compact saloons, cele- brated its premiere at Auto China 2018 in Beijing. The model impresses with its clear design language and a much more spacious interior. The new Lavida is based on the Modular Transverse Toolkit (MQB) and draws on the MQB’s strengths in terms of the efficient drivetrain, as well as modern info- tainment and assistance systems. The new Volkswagen CC, the China-produced version of the Arteon, also debuted in Beijing. Already available in Europe, the model impresses with its expressive design and offers a surprising amount of space and comfort for its coupé-style elegant lines. With the new Touareg, Volkswagen also underscored its ambition in the important SUV segment, which now makes up 44% of the overall market in China. Alongside the new Touareg, Volks- wagen is launching three further models on the market in 2018, including the extended-wheelbase Chinese version of the T-Roc. Volkswagen gave an outlook on the sustainable mobility of tomorrow and beyond in Beijing with its I.D. VIZZION concept vehicle, the future flagship of the fully electric I.D. family. The first models based on the Modular Electrification Toolkit will be launched in Europe and China in 2020. The Audi brand introduced the Q5L for the first time in Beijing. The long version of the successful off-roader repre- sents the brand’s first extended-wheelbase SUV and is aimed specifically at customers in China, who can choose between five equipment lines and two power outputs for the 2.0 TFSI engine – 140 kW (190 PS) or 185 kW (252 PS). The quattro all- wheel drive and the seven-speed S tronic gearbox are included as standard. digital lifestyle without interruption. Power comes from an entirely new 1.5 MPI engine generating 81 kW (110 PS). The Bentley brand presented the Bentayga V8 for the first time at Auto China. The SUV combines luxury with strong practicality and sharp performance. Its centerpiece is the 4.0 V8 twin-turbo engine with 404 kW (550 PS) of power, accelerating the Bentayga from 0 to 100 km/h in 4.5 s. The exterior also underscores the model’s sporty character for example with its twin-quad exhaust pipes and optional carbon-ceramic brakes. Porsche used Beijing to celebrate the Asian premieres of the 911 GT3 RS and Mission E Cross Turismo. The former generates 383 kW (520 PS) from its 4 l engine and accelerates from 0 to 100 km/h in 3.2 s. The top speed is an impressive 312 km/h. The Mission E Cross Turismo is the concept version of an electric-powered crossover utility vehicle. It boasts an exciting design, striking off-road elements, and innovative display and control interfaces. Wörthersee GTI Meet Attention at the annual Wörthersee GTI Meet centered on the debut of the Golf GTI TCR concept. The race car-based study that is close to series production puts 213 kW (290 PS) to the wheels via a turbocharged engine and seven-gear dual-clutch transmission. It has a top speed of 264 km/h. Visually, the model stands out thanks in part to its 19-inch alloy wheels, a redesigned bumper, new side sill panels and a chunky diffuser with twin tailpipes. There were two further premieres on the program alongside the GTI TCR Concept. Trainees from Wolfsburg presented the GOLF GTI Next Level with a 302 kW (411 PS) 2.0 l petrol engine and seven-speed dual- clutch transmission. The unique vehicle is sprayed in the standard colors of White Silver Metallic and Deep Black Pearl Effect. Young professionals from Volkswagen in Saxony unveiled the Golf Estate TGI GMOTION with a 96 kW (131 PS) 1.5 TGI natural gas engine, seven-speed dual-clutch trans- mission and integrated all-wheel drive. The show car com- bines sportiness, elegance and sound cross-country perfor- mance, thus demonstrating that alternative drive systems are suitable for everyday use. The ŠKODA Kamiq also celebrated its motor show premiere at Auto China. After the Kodiaq and Karoq, the new SUV is the third member of the modern SUV family to enter the Chinese market, systematically continuing the family's powerful SUV design language. The vehicle combines com- pact dimensions with a very spacious interior that flows seamlessly on from the robust design. The raised infotain- ment display in the center of the dashboard makes it particu- larly easy and convenient for the driver to operate many of the vehicle functions. Thanks to an intelligent connectivity system newly developed by ŠKODA, the young, urban cus- tomers at whom the Kamiq is aimed can continue their Vienna Motor Symposium Volkswagen presented world premieres at the 39th Vienna Motor Symposium in the form of progressive hybrid, natural gas and diesel systems. One of the most important new drive systems is a 48-volt mild hybrid that Volkswagen will launch initially for the next Golf-generation, therefore making hybrid drives affordable for a large customer base. The system will help to significantly reduce fuel consumption and emis- sions and at the same time boost performance and comfort. Updated Information Another technical highlight in Vienna was the new 1.5 TGI evo CNG engine. The 96 kW (130 PS) direct-injection power plant equipped with a latest-generation variable turbocharger uses the Miller combustion cycle, in which an especially high compression ratio, combined with the high octane rating offered by natural gas fuel, considerably increases efficiency. For Volkswagen, this ultra-modern engine is an important component of the natural gas campaign. The great potential of diesel power was demonstrated by Volkswagen in Vienna with the 2.0 TDI engines in the EA288 evo series. Developed from scratch, these engines will be available in combination with hybrid systems for the first time. Partnered with a lithium-ion battery, the mild-hybrid system reduces con- sumption and increases comfort. The new TDI engines stand out thanks to very low emissions in all driving cycles. They meet the current and future emissions requirements used in WLTP (Worldwide Harmonized Light-Duty Vehicles Test Pro- cedure) and RDE (Real Driving Emissions) testing, and power outputs range from 100 kW (136 PS) to 150 kW (204 PS). World premiere of the Audi Q8 In June 2018, the Audi brand presented the new face of its Q family for the first time: the Audi Q8. This combines the elegance of a four-door luxury coupé with the practical versa- tility of a large SUV. Its expressive design is underlined by an imposing octagon-shaped, single-frame radiator grille, an elegant sloping roof line and up to 22-inch wheels. LED head- lights illuminate the road ahead and come as standard, with the option of HD Matrix LED technology. Inside, all info- tainment and comfort functions can be selected using the touch-response Multi Media Interface with two large displays, or by means of voice recognition. The assistance systems include the adaptive driving assistant, efficiency assistant, intersection assist, lane change assist, curb warning and surround view cameras. The remote garage parking assist will follow in early 2019. This drives the SUV in and out of a garage automatically while the driver monitors the maneuver. All- wheel steering and quattro drive ensure agile handling and excellent traction. All drivetrains available in the Q8 are especially efficient thanks to the new mild-hybrid technology. The 48-volt main electrical system combines a lithium-ion battery with a belt-driven starter generator. Porsche’s Mission E to launch as Taycan As part of the celebrations for 70 years of Porsche sports cars, Porsche announced in June that it would launch the brand’s first all-electric model on the market as the Taycan. Until now, the vehicle has been known as the Mission E concept car. The name translates as “lively young horse” and therefore reflects the centerpiece of Porsche’s coat of arms. Porsche plans to invest more than €6 billion in e-mobility by 2022. This will include developing variants and derivatives of the Taycan, Key Events electrification and hybridization of the existing product range, expanding sites, and developing new technologies, charging infrastructure and smart mobility. The Taycan is intended to create around 1,200 new jobs at the Zuffenhausen location alone. IFAT 2018 At IFAT 2018 in Munich, the world's leading trade fair for water, sewage, waste and raw materials management, the Scania and MAN brands presented practical solutions for businesses and local authorities. Scania is contributing to sustainable transport in cities and suburbs with the new L-series, numerous cab options in the P and G product lines, and the new 7-liter range of engines. It also offers a large selection of fuel-efficient Euro 6 engines that can run on diesel, biodiesel, bioethanol and also HVO (hydrotreated vege- table oils). MAN’s TGE, TGL, TGM and TGS product lines offer an extensive range of commercial vehicles – from vans to four-axle chassis models. Combined with industry-specific bodies and equipment, this allows users to configure the most efficient vehicle for the task at hand. AWA R D S In mid-April 2018, readers of the Auto Bild allrad all-wheel- drive motoring magazine chose several Volkswagen Group models as their all-wheel drive cars of the year. ŠKODA’s Kodiaq impressed the jury in the overall rankings and import rankings in the all-terrain and SUV category for vehicles priced at up to €30,000. Besides that, the ŠKODA Superb was voted the winner in the import category for all-wheel-drive passenger cars priced at up to €40,000. The Audi A6 allroad quattro was the overall winner in the all-wheel-drive cross- over category. With the Panamera and 911, Porsche was the overall winner in the category for all-wheel-drive cars priced at over €40,000 as well as in the all-wheel-drive sports cars, coupés and convertibles category. The Multivan from Volks- wagen Commercial Vehicles was crowned overall winner in the all-wheel-drive vans and buses category. SEAT’s Alhambra took the top spot in the same category for imported vehicles. In addition, the Lamborghini Urus received a special prize from the editors for the best design. Participants in the readers’ choice awards held annually by Auto Bild allrad could choose from a total of 219 vehicle models in ten categories. In April 2018, the editors of industry magazine Firmen- auto and the vehicle inspection company Dekra awarded accolades to various Volkswagen Group models in their “Com- pany Car of the Year 2018” awards. The Volkswagen Passenger Cars brand won in the categories for small, compact and mid- size cars with the Polo 1.0 TGI, Golf 1.4 TGI and Passat Estate GTE. ŠKODA’s Octavia Estate 1.6 TDI and Kodiaq 2.0 TDI 4x4 impressed the jury in the compact and mid-size SUV categories for imported vehicles. SEAT triumphed in the 3 4 Key Events imported-vehicle rankings for small cars and compact SUVs with its Ibiza 1.0 TGI and Ateca 1.6 TDI. The vote saw 250 fleet managers closely scrutinizing almost a hundred vehicles. The magazines VerkehrsRundschau and Trucker also gave awards to the most environmentally friendly commercial vehicles in April 2018. The “Green Van of the Year” title went to the Crafter from Volkswagen Commercial Vehicles. In addi- tion to fuel consumption and emissions, loading space and actual payload were also factored into the judging. In early June 2018, the Volkswagen Group won several accolades in the “International Engine of the Year 2018” award organized by UKi Media & Events’ Automotive Maga- zines. The Volkswagen Passenger Cars brand was victorious in the sub-1-liter category with its 1.0 TSI engine. Audi’s 2.5 TFSI engine received the award in the 2 l to 2.5 l category. Porsche impressed the jury with its 2.0 l four-cylinder turbocharged engine and 3.0 l six-cylinder turbocharged engine in the 1.8 l to 2.0 l and 2.5 l to 3.0 l categories. The winners were chosen by an international jury of journalists. In early June 2018, readers of specialist magazine OFF ROAD chose the Amarok from the Volkswagen Commercial Vehicles brand as the best pick-up of the year for the sixth time since 2011. This year, the choice included 196 models. The award began in 1982 and now features 13 categories. In mid-June 2018, the Volkswagen Group and its brands received several accolades at the “AutomotiveINNOVATIONS Award 2018”. The Volkswagen Group was honored as the most innovative automotive group and the Volkswagen Passenger Cars brand recognized as the most innovative volume brand for the third time in a row. In addition, the core brand impressed the jury in the volume segment in the alternative drives, conventional drives, autonomous driving and safety categories. Audi’s A8 was judged the most inno- vative model. The premium brand also won in the auton- omous driving and safety category. The awards are presented annually by the Center of Automotive Management, which is an independent scientific institute, in cooperation with the audit firm PricewaterhouseCoopers. In June 2018, the readers’ prize for the best commercial vehicles awarded by the specialist magazines trans aktuell, FERNFAHRER and lastauto omnibus in the delivery vans, transporters up to 2.8 tonnes and pick-ups categories went for the fifth time in a row to the Caddy, Transporter and Amarok models from Volkswagen Commercial Vehicles. In mid-April 2018, the ŠKODA and SEAT brands won a “Red Dot Award” in the product design category for their Karoq and Arona models. The international expert jury scores the numerous entries using criteria such as the level of innovation, formal quality, functionality and environmental compatibility. In early May 2018, more than 13,000 readers of Auto Zeitung magazine cast their votes for the best new car Updated Information designs in five vehicle categories to select the winners of the “Design Trophy 2018”. The Volkswagen Passenger Cars brand was honored for its Polo in the small cars/city cars category. Furthermore, the new Audi A7 Sportback prevailed in the saloons/estates/MPVs category. In April 2018, the Volkswagen Passenger Cars brand received two awards from the Art Directors Club for Germany for its digital platform for customers, which is called “Volkswagen We”. One award was for the volkswagen-we.de website and one for its web services. A N N I V E R S A R I E S In late May 2018, the Volkswagen Commercial Vehicles brand produced the 100,000th California campervan in Hanover – a California “Ocean” with 4MOTION all-wheel drive, 7-speed DSG and two-tone paintwork in Candy White and Starlight Blue Metallic. The campervan’s success story began 30 years ago and a total of 160,000 vehicles have been produced to date. In early June 2018, staff at Volkswagen Commercial Vehi- cles in Hanover completed the 500,000th vehicle in the current Transporter series – a Multivan with two-tone paintwork in Candy White and Turmeric Yellow. That same month, Volkswagen’s main plant in Wolfsburg manufactured the 45 millionth vehicle since the start of production in December 1945. The anniversary model was an e-Golf. The Wolfsburg plant’s most-produced model is the Golf, followed by the original Beetle, Polo and Tiguan. PA R T N E R S H I P S In mid-April 2018, Volkswagen Truck & Bus AG (formerly Volkswagen Truck & Bus GmbH) and Hino Motors Ltd. signed a framework agreement for a strategic partnership. Based on their common vision, the two companies will explore oppor- tunities to cooperate in the fields of logistics and transport research on existing and new technologies and on procure- ment. In terms of technologies, potential cooperation will concentrate on conventional, hybrid and electric drivetrains, as well as on the fields of connectivity and autonomous driving. Volkswagen Truck & Bus and Hino Motors plan to use the strategic partnership to further expand their global presence and master the challenges posed by the industry. Hino is a leading commercial vehicle manufacturer with a strong presence on the domestic Japanese market and in Asia. In June 2018, the Volkswagen Group and the Ford Motor Company signed a declaration of intent. The aim is to boost the two companies’ competitiveness and better respond to customers’ needs worldwide. Volkswagen and Ford are examining potential projects in a series of business areas, including the development of commercial vehicle models. The Volkswagen Group also launched a new joint venture with QuantumScape in June 2018. The goal is to enable mass production of solid-state batteries and build a production Updated Information facility by 2025. Volkswagen is also investing USD 100 million in QuantumScape, making it the largest automotive share- holder of the innovative company. Completion of this trans- action remains subject to approval by the authorities. D I E S E L I S S U E In June 2018, the public prosecutor in Braunschweig issued Volkswagen AG an administrative order in connection with the diesel issue. The administrative order is linked to negligent breaches of monitoring obligations on the part of Volkswagen AG employees in the Powertrain Development department and relates to the period from mid-2007 to 2015 and a total of 10.7 million vehicles with diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. The administrative order imposes a fine of €1.0 billion in total, comprising of the maximum legal pen- alty of €5 million and the disgorgement of economic benefits in the amount of €995 million. Following thorough exami- nation, the fine has been accepted and has been paid in full by Volkswagen. The administrative order is therefore legally binding. As a result of the administrative order, the ongoing misdemeanor proceeding against Volkswagen AG will be settled. A N N U A L G E N E R A L M E E T I N G The 58th Annual General Meeting of Volkswagen AG was held in Berlin on May 3, 2018. With 93.18% of the voting capital present, the ordinary shareholders of Volkswagen AG agreed to the proposal of the Board of Management and Supervisory Board to pay a dividend of €3.90 per ordinary share and €3.96 per preferred share for fiscal year 2017. They also formally approved the actions of the members of the Board of Man- agement and Supervisory Board. The meeting confirmed Ms. Marianne Heiß as a member of the Supervisory Board and once again elected Dr. Wolfgang Porsche to the Super- visory Board; both members were appointed for a full term of office. Furthermore, the ordinary shareholders of Volkswagen AG elected PricewaterhouseCoopers AG Wirtschaftsprüfungs- Key Events gesellschaft (PwC) as the auditors for the single-entity and consolidated financial statements for fiscal year 2018 and as the auditors to review the condensed consolidated financial statements and interim management report for the first six months of 2018, for the period up to September 30, 2018 and for the first quarter of fiscal year 2019. C A S H S E T T L E M E N T TO T H E N O N C O N T R O L L I N G I N T E R E ST S H A R E H O L D E R S On June 26, 2018, the Higher Regional Court in Munich made a final decision in the award proceedings on the appropri- ateness of the cash settlement and the right to compensation payable to the noncontrolling interest shareholders of MAN SE, ruling that the annual compensation claim per share has to be increased. The cash settlement in the amount of €90.29 per share, increased in the first instance by the Regional Court in Munich I, was confirmed. On July 30, 2018, as part of the amendment process, the Higher Regional Court in Munich established the annual compensation claim of €5.47 gross (less any corporate income tax and any solidarity surcharge according to the respective tax rate applicable to these taxes for the financial year in question). M AT T E R S R E L AT I N G TO T H E B O A R D O F M A N A G E M E N T In July 2018, the Supervisory Board of Volkswagen AG appointed Mr. Stefan Sommer as member of the Group Board of Management with responsibility for Procurement with effect from January 1, 2019 at the latest. He succeeds Mr. Francisco Javier Garcia Sanz, who left the Company in April 2018 of his own volition. Due to his detention in connection with investigations by the public prosecutor’s office into the diesel issue, in June 2018 Mr. Rupert Stadler requested that the Supervisory Boards of AUDI AG and Volkswagen AG release him on a temporary basis from his position as a governing body member in the Board of Management of AUDI AG and in the Board of Management of Volkswagen AG. Both boards complied with his request. 5 6 Volkswagen Shares Interim Management Report Volkswagen Shares In the period from January to June 2018, declining prices overall were seen on the international equity markets amid volatile trading. The DAX recorded a drop compared with the end of 2017. Uncertainty regarding the economic policy of the US govern- ment and the monetary policy of the US Federal Reserve as well as the European Central Bank, had a lasting negative impact on share listings. The promising economic perfor- mance of important industrialized nations and the forma- tion of governments in EU countries had a positive impact. Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website at www.volkswagenag.com/ir. V O L K SWA G E N K E Y S H A R E F I G U R E S A N D M A R K E T I N D I C E S F R O M J A N U A R Y 1 TO J U N E 3 0 , 2 0 1 8 In 2018, Volkswagen AG’s preferred and ordinary share prices followed the decreasing market trend amid high volatility. Strong liquidity and the enhancement of the man- agement structure at the Volkswagen Group provided a positive impetus. Share listings were negatively impacted, especially by uncertainty about the future regulatory frame- work for diesel and electric vehicles, the diesel issue, the US tariff policy and the WLTP (Worldwide Harmonized Light- Duty Vehicles Test Procedure), the test procedure for deter- mining pollutant and CO2 emissions and fuel consumption for passenger cars and light commercial vehicles. Ordinary share Preferred share DAX ESTX Auto & Parts Price (€) Date Price (€) Date Price Date Price Date High 188.00 Jan. 22 188.50 Jan. 22 13,560 Jan. 23 656 Jan. 22 Low 141.50 June 29 142.22 June 29 11,787 Mar. 26 524 June 29 Closing 141.50 June 29 142.22 June 29 12,306 June 29 524 June 29 P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 7 T O J U N E 2 0 1 8 Index based on month-end prices: December 31, 2017 = 100 Volkswagen ordinary shares –16.1% Volkswagen preferred shares –14.6% DAX –4.7% EURO STOXX Automobiles & Parts –11.8% 110 110 100 100 90 90 80 80 D F M A M J J A S O N D Interim Management Report Business Development Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The global economy continued its solid growth in the first six months of 2018. The average expansion rate of gross domes- tic product (GDP) was up year-on-year in both the advanced and the emerging market economies. The majority of energy and commodity prices increased compared with the prior- year period amid a still comparatively low interest rate level. Growing upheaval in trade policy at international level led to substantially increased uncertainty. Amid persistent structural deficits and political challenges, the growth rate of South Africa’s GDP was steady in the first half of 2018 compared to the same period of the previous year. The pace of growth in the US economy increased again in the course of the reporting period, with considerable stimulus being provided by private domestic demand. Given the stable situation in the labor market and the expected inflation trend, the US Federal Reserve decided to gradually raise its key interest rate. Momentum decreased in both Canada and Mexico compared to the prior-year period. As a whole, the economies of Western Europe recorded solid growth from January to June 2018, albeit with a slight decline in momentum. This trend was seen in the majority of both the Northern and Southern European countries. With a favorable situation on the labor market, the growth trend in Germany continued in the period under review, though both business and consumer sentiment has deteriorated slightly over recent months. In the economies of Central Europe, growth rates remained relatively high in the first half of 2018. In Eastern Europe, the higher energy price level compared to the prior- year period boosted economic growth. Russia’s economy slowly continued its economic recovery. Brazil left behind the economic downswing and contin- ued the economic growth seen in the preceding quarters; the situation in South America’s largest economy nevertheless remained tense. Argentina’s economic situation worsened considerably over the first half of the year amid persistently high inflation. Given the difficult situation, the government requested financial aid from the International Monetary Fund. The high growth momentum in the Chinese economy remained virtually unchanged during the reporting period. India expanded strongly, outperforming most emerging markets. Japan registered weaker GDP growth than in the same period of the previous year. E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 7 T O J U N E 2 0 1 8 Index based on month-end prices: as of December 31, 2017= 100 EUR to GBP EUR to USD EUR to CNY EUR to JPY 105 105 100 100 95 95 90 90 D J F M A M J J A S O N D 7 8 Business Development T R E N D S I N T H E PA S S E N G E R C A R M A R K E T S Global demand for passenger cars increased in the period from January to June 2018 (+3.5%). It thus exceeded the com- parable prior-year figure for the ninth year in a row. While demand in Western Europe and North America only saw a slight increase, the Asia-Pacific, South America, as well as Central and Eastern Europe regions enjoyed a marked growth in demand in some cases. In Western Europe, demand for passenger cars in the reporting period was slightly up overall on the prior-year level due to the positive development in the second quarter. New vehicle registrations were mixed in the largest single markets. Attractive incentive programs in particular led to a double-digit growth rate in the Spanish market. In France, the increase in passenger car sales was underpinned by the positive macroeconomic environment. By contrast, new regis- trations in Italy declined slightly overall due to falling private demand. This was influenced, among other things, by the political uncertainty during the formation of a new govern- ment. In the UK, new registrations fell considerably short of the previous years’ high levels. However, the negative effects of the change in vehicle tax as of April 1, 2017 were alleviated by a positive second quarter. The uncertain outcome of the Brexit negotiations between the EU and UK also continued to weigh on demand. The share of new registrations for diesel vehicles (passenger cars) in Western Europe slipped to 37.7 (46.0)% in the reporting period. In Germany, the number of new passenger car regis- trations in the first six months of 2018 increased year-on- year. This was the second-best half-year figure since 1999. In addition to the continuing positive economic situation, sales incentives from dealers, particularly in the form of an environmental bonus, underpinned the very high level of sales. This positive performance was driven exclusively by the large increase in private registrations. In the Central and Eastern Europe region, demand for passenger cars showed another significant year-on-year rise during the reporting period. The EU markets in Central Europe mostly recorded positive rates of change. The number of new passenger car registrations also rose further in Eastern Europe. This was due in particular to the strong rise in the Russian market – bolstered by government programs to promote sales. On the South African passenger car market, new registra- tions stagnated in the first six months of 2018 at the weak level seen in the prior-year period. The new political environ- ment following the change of president had little positive impact. In North America, sales of passenger cars and light commercial vehicles (up to 6.35 tonnes) in the first half of 2018 were slightly up on the prior-year level. In the USA, market growth was driven by the favorable labor market and the greater purchasing power of consumers. The shift in demand from traditional passenger cars to light commercial vehicles such as SUV and pickup models continued in the reporting period. The Canadian automotive market fell just Interim Management Report short of the previous year’s all-time high due to a slight decline in the second quarter. In Mexico, the number of vehicles sold was considerably lower than the record figure seen in the same period of the previous year. In the markets of the South America region, new registra- tions for passenger cars and light commercial vehicles in the first six months of 2018 witnessed a significant improvement on the previous year’s low level. Brazil’s recovery in the demand for automobiles, which had begun in 2017, main- tained its rapid pace. However, the number of new vehicle registrations was still markedly lower than the record level achieved in 2013. Argentina recorded a considerable increase in demand for passenger cars and light commercial vehicles. However, the worsening macroeconomic situation in the second quarter curbed this growth. The Asia-Pacific region recorded by far the highest abso- lute increase in demand once more in the first half of 2018. Once again, the growth driver was the Chinese passenger car market, the expansion of which was faster than average, despite the abolition of the tax break for vehicles with engine sizes of up to 1.6 l at the end of 2017 as well as the announce- ment of a general reduction of import duties from 25% to 15%. The sustained high demand for models from the SUV segment was primarily responsible for the positive impact on growth. Passenger car sales in India also reached a new record high. The strong growth was particularly due to the improved situation caused by the standardized goods and services tax introduced throughout the country on July 1, 2017, coupled with attractive price and financing options. In contrast, the Japanese passenger car market remained moderately down on the comparable prior-year volume. The decline was attributable, among other things, to the subsiding impact stemming from the introduction of new models. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S Global demand for light commercial vehicles was down on the previous year in the period from January to June 2018. Despite the uncertain outcome of the Brexit negotiations between the EU and UK, new registrations in Western Europe were slightly higher than the prior-year level. Demand in Germany was also up year-on-year in the reporting period. Registrations of light commercial vehicles in Central and Eastern Europe recorded a noticeable increase compared with the previous year. Registrations in Russia between January and June 2018 were likewise perceptibly higher than in the previous year. In North and South America, the light vehicle market is reported as part of the passenger car market, which includes both passenger cars and light commercial vehicles. In the Asia-Pacific region, demand for light commercial vehicles declined noticeably compared with the previous year. Registration volumes in China, the region’s dominant market and the greatest market worldwide, fell sharply year- on-year. The number of new vehicle registrations in India, Indonesia and Thailand saw a strong increase versus the previous year. Interim Management Report In the markets that are relevant for the Volkswagen Group, global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was above the prior-year figure between January and June 2018. Demand in Western Europe saw a slight increase over the 2017 level. New registrations in Germany, Western Europe’s largest market, were slightly lower year-on-year in the first half of 2018. While demand in the United Kingdom saw a moderate decline, it rose significantly in Italy, Spain and France. In the Central and Eastern Europe region, the positive economic performance led to significantly higher registra- tion volumes compared with the previous year. Above all, demand in Russia recorded a sizeable increase on the back of the continued recovery of the economy and demand for replacement vehicles. The volume of registrations in South America was sharply higher than in the first half of 2017. In Brazil, the region’s largest market, demand for trucks grew very sharply com- pared with the low figure for the prior-year period as a con- sequence of the economic recovery. A considerable increase in registration volumes was also seen in Argentina. Demand for buses in the markets that are relevant for the Volkswagen Group was moderately above the prior-year level in the period from January to June 2018. The markets in Brazil as well as in Central and Eastern Europe contributed in particular to this growth. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are generally independent of each other. In the first half of 2018, the marine market saw a con- tinuation of the muted order activity and only improved slightly but still on low level compared with the prior-year period. In some cases, recovery was noticeable in the transport sector. Demand for cruise ships, passenger ferries, fishing vessels, dredgers and government vessels remained steady. In the offshore sector, the existing excess market capacity continued to curb investment in offshore oil production. On account of low market volumes, all market segments are continuing to experience considerable com- petitive pressure and a sharp drop in prices as a result. The market for power generation showed a slight recov- ery compared with the same period of the previous year. Higher demand was registered in all areas of application and for gas in particular. This confirms the shift away from oil- fired power plants towards dual-fuel and gas-fired power plants. Demand for energy solutions remains high, with a strong trend towards greater flexibility and decentralized availability. The economies of key emerging markets recov- ered somewhat. However, continued strong pressure from competition and pricing is discernible in all projects, and this is having a negative impact on the earnings quality of orders. Business Development Furthermore, order placement was often delayed due to persistently difficult financing conditions for customers, particularly on larger projects. In the first half of 2018, the market for turbomachinery saw a minor recovery from the low level seen in the previous year. Demand stemming from the raw materials, oil, gas and processing industry experienced increased volatility in some cases, which was due in particular to the political uncertainty in some sales markets. Power generation has been partially impacted by the existing excess capacity; however, signs point towards a slight recovery, especially in regions with a low level of electrification. Although pressure from competi- tion and pricing was somewhat lower compared to the prior- year quarter, the overall level remains high due to low demand and market volatility. The marine and power plant after-sales business for diesel engines performed positively overall and benefited from a continued increase in interest in long-term maintenance contracts. The after-sales market for turbomachinery came under pressure and declined slightly year-on-year. T R E N D S I N T H E M A R K E T S F O R F I N A N C I A L S E R V I C E S Automotive financial services were in high demand in the first half of 2018, which was primarily due to the positive development of the overall market for passenger cars and the persistently low key interest rates in the main currency areas. Higher vehicle sales, particularly in Western and Central Europe, gave a boost to the European market. Financing and leasing were the options preferred by customers, especially for purchases of new vehicles. After-sales products such as inspection contracts, maintenance and spare parts agree- ments and automotive-related insurance were also in high demand in the first six months of 2018. In Germany, the share of loan-financed or leased new vehicles remained stable at a high level in the reporting period. There was greater demand for after-sales products, and the call for integrated mobility solutions in the business customer segment also continued to rise. Demand for financing and insurance products in South Africa was steady. In the US and Mexican markets, automotive financial services remained very popular in the period from January to June 2018. The Brazilian market picked up pace and saw a continu- ation of the recovery in the demand for automobiles that began during 2017. However, the consumer credit business and sales of the country-specific financial services product Consorcio, a lottery-style savings plan, remained stable in the first half of 2018. The Argentinian market also built on the previous year’s positive development. In addition to tradi- tional financing and leasing products, a new form of finan- cing established itself that is tied to the index of inflation. Demand for automotive financial services across the Asia- Pacific region was mixed in the first half of 2018. In China, the proportion of loan-financed vehicle purchases rose 9 10 Business Development compared with the prior-year period. Despite increasing restrictions on registrations in metropolitan areas, there is considerable potential to acquire new customers for auto- motive-related financial services, particularly in the interior of the country. The demand for automotive financial services rose in the Indian market, while it tapered off slightly in Japan. The demand for financial services in the Commercial Vehicles Business Area also varied from region to region. The positive trend from 2017 continued in China, and particularly in Western Europe. The truck and bus business and the related financial services market have stabilized in Brazil. V O L K SWA G E N G R O U P D E L I V E R I E S The Volkswagen Group delivered 5,518,986 vehicles to customers worldwide in the period from January to June 2018. This was 7.1% or 363,537 units more than in the same period of the previous year. At the same time, in terms of deliveries, the Group recorded the best first six months of the year in its corporate history. The chart on page 12 shows the trend in deliveries worldwide by month compared with the previous year. Separate details of deliveries of passenger cars and commercial vehicles are provided in the following. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A R Y 1 TO J U N E 3 0 1 2018 2017 Passenger Cars 5,148,052 4,809,167 Commercial Vehicles 370,934 346,282 Total 5,518,986 5,155,449 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. PA S S E N G E R C A R D E L I V E R I E S W O R L D W I D E Global demand for passenger cars from the Volkswagen Group grew by 7.0% year-on-year in the first six months of 2018 to 5,148,052 vehicles. At 3.5%, growth in the passenger car market as a whole was somewhat slower. In the same period, the Volkswagen Passenger Cars brand (+6.3%) achieved its best ever delivery figures for the first six months of the year. Furthermore, the ŠKODA (+11.6%) and SEAT (+17.6%) brands in particular developed very encouragingly. Audi, Porsche, Lamborghini and Bugatti also increased their delivery volumes. In the regions of Western Europe, Central and Eastern Europe, North America, South America and Asia- Pacific, demand for passenger cars from the Volkswagen % +7.0 +7.1 +7.1 Interim Management Report Group exceeded the corresponding prior-year figure by a considerable margin in some cases. We recorded the highest absolute increase in the Asia-Pacific region. The table on the next page provides an overview of passenger car deliveries to customers by market in the reporting period. Sales trends in the individual markets are as follows. Deliveries in Europe/Other markets In Western Europe, in a slightly growing overall market, we delivered 1,784,271 Group models to customers from January to June 2018, an increase of 5.9% year-on-year – this in spite of the fact that customer confidence has not been fully restored following the diesel issue, and the public discussion on driving bans for diesel vehicles has generated uncertainty among customers. The Golf saloon, Audi Q2, Audi Q5 and Porsche 911 models saw encouraging growth. Furthermore, the new Polo, T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the ŠKODA Karoq and the SEAT Arona were very popular. The Volkswagen Group’s share of the passenger car market in Western Europe rose to 22.4 (21.6)%. In the German passenger car market, demand for vehicles from the Volkswagen Group recovered in the first six months of 2018, rising by 4.2% year-on-year. The market as a whole grew by 2.9% in the same period. The Golf, Passat Estate and Audi Q2 models, among others, recorded promising growth in demand. Moreover, the new T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the ŠKODA Karoq as well as the SEAT Arona were very popular with customers. Seven Group models led the Kraftfahrt- Bundesamt (KBA – German Federal Motor Transport Author- ity) registration statistics in their respective segments: the up!, Polo, Golf, Tiguan, Touran, Passat and Porsche 911. In the first six months of 2018, the Golf was again the number one passenger car in Germany in terms of registrations. In the still-growing passenger car markets in the Central and Eastern Europe region, we delivered 9.9% more vehicles to customers in the reporting period than a year before. In Russia and Poland, demand for Group models rose strongly in some cases, while our deliveries in the Czech Republic saw a moderate decline. The Polo, Tiguan, ŠKODA Rapid and ŠKODA Octavia models were particularly sought after. The new T-Roc, ŠKODA Karoq and SEAT Arona models were also very popular. The Volkswagen Group’s market share in the Central and Eastern Europe region was 21.9 (22.9)%. In South Africa, sales of Volkswagen Group vehicles were down 4.3% year-on-year in the first six months of 2018 in a stagnating overall market. The Polo remained the best-selling Group model in South Africa. Interim Management Report Business Development Deliveries in North America From January to June 2018, demand for Volkswagen Group models in North America grew year-on-year by 1.2% amid a slightly growing overall market for passenger cars and light commercial vehicles. The Group achieved a market share of 4.5 (4.5)% in this region. The Tiguan Allspace replaced the Jetta as the most sought-after Group model in North America. In the USA, the Volkswagen Group delivered 6.3% more vehicles to customers in the first six months of this year compared to the same period of the previous year. The market as a whole grew less strongly in this period. Further- more, demand was highest for models in the SUV and pickup segments. The Group models recording the highest increases were the Audi Q3, Audi Q5, Porsche 911 and Porsche Panamera. In addition, the new Tiguan Allspace and Atlas SUVs from the Volkswagen Passenger Cars brand and the Audi A5 Sportback were particularly popular among cus- tomers. In the slightly weaker overall market in Canada, the number of Volkswagen Group vehicles delivered to customers in the reporting period was up on the corresponding figure for the previous year (+13.5%). The Golf saloon and Audi Q5 models as well as the new Tiguan Allspace and Atlas SUVs from the Volkswagen Passenger Cars brand witnessed especially strong demand. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2018 2017 (%) Europe/Other markets 2,310,275 2,176,194 +6.2 Western Europe 1,784,271 1,685,189 +5.9 of which: Germany 624,096 598,984 +4.2 United Kingdom 287,983 276,752 +4.1 Spain 165,417 151,810 +9.0 Italy 161,260 143,169 +12.6 France 138,053 135,502 +1.9 Central and Eastern Europe 364,304 331,580 +9.9 of which: Russia 94,170 78,822 +19.5 Poland 78,837 74,137 +6.3 Czech Republic 74,028 76,946 –3.8 Other markets 161,700 159,425 +1.4 of which: Turkey 54,080 67,165 –19.5 South Africa 38,735 40,496 –4.3 North America 459,781 454,457 +1.2 of which: USA 311,892 293,432 +6.3 Mexico 90,442 110,423 –18.1 Canada 57,447 50,602 +13.5 South America 235,930 213,374 +10.6 of which: Brazil 150,995 126,656 +19.2 Argentina 59,743 63,874 –6.5 Asia-Pacific 2,142,066 1,965,142 +9.0 of which: China 1,989,578 1,821,082 +9.3 Japan 43,992 42,930 +2.5 India 30,831 35,567 –13.3 Worldwide 5,148,052 4,809,167 +7.0 Volkswagen Passenger Cars 3,118,696 2,935,132 +6.3 Audi 949,282 908,683 +4.5 ŠKODA 652,735 585,013 +11.6 SEAT 289,948 246,493 +17.6 Bentley 4,430 5,238 –15.4 Lamborghini 2,327 2,091 +11.3 Porsche 130,600 126,497 +3.2 Bugatti 34 20 +70.0 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 11 12 Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 1,100 1,100 1,000 1,000 900 900 800 800 700 700 600 600 F M A M In a declining overall market in Mexico, we delivered considerably fewer vehicles to customers in the first six months of 2018 than in the prior-year period (–18.1%). Sales figures of the Polo, Saveiro and Tiguan Allspace models developed encouragingly. Deliveries in South America The upward trend in the South American markets for passenger cars and light commercial vehicles continued in the first half of 2018. The Volkswagen Group delivered 10.6% more vehicles to customers there in this period than in the prior year. The Group’s share of the market in South America was 11.5 (11.6)%. further. The Volkswagen Group benefited from this development and recorded a substantial year-on-year increase of 19.2% in its sales to customers there during the reporting period. Demand for the Suran and Amarok models developed particularly encouragingly. The new Polo and Virtus models were also very popular, and the new Tiguan Allspace was successfully rolled out. The Brazilian market also recovered In Argentina, where the overall market continued to grow significantly, the number of deliveries to Volkswagen Group customers in the first six months of 2018 fell short of the prior-year figure (–6.5%). The Gol and Amarok recorded the highest demand among Group models. The new Polo, Virtus and Tiguan Allspace models were also well received by customers. Interim Management Report 2018 2018 2017 2017 J A S O N D Deliveries in the Asia-Pacific region In the Asia-Pacific region, the growth of the market as a whole continued in the first half of 2018. With a growth of 9.0%, the Volkswagen Group handed over substantially more vehicles to customers there than in the previous year. The Group’s share of the market in this region increased to 12.0 (11.5)%. In the passenger car market in China, which continued to grow at a faster than average rate, the number of Group models sold in the reporting period rose by 9.3% year-on- year. The Group models achieving the largest increases were the Bora, Sagitar, Lamando, Santana, Magotan, Audi A3, Audi A4, Audi Q3, Audi Q5, ŠKODA Rapid and Porsche Panamera. In addition, the new Lavida, Phideon and ŠKODA Octavia Combi models and the new Teramont, Tiguan Allspace and ŠKODA Kodiaq SUVs were very popular. The ŠKODA Karoq was successfully rolled out. The Indian passenger car market recorded a sizeable increase in demand in the first six months of 2018. With a decline of 13.3%, the number of Group models delivered to customers fell short of the previous year’s figure. The Polo was the Group’s most in-demand model in India. In Japan, the number of passenger cars delivered to Group customers between January and June 2018 was up 2.5% year- on-year, while demand in the market as a whole declined over the same period. The Golf and Audi Q2 models recorded promising increases in demand. Interim Management Report Business Development C O M M E R C I A L V E H I C L E D E L I V E R I E S In the first six months of 2018, the Volkswagen Group deliv- ered a total of 370,934 commercial vehicles to customers worldwide (+7.1%). Trucks accounted for 97,705 units (+11.6%) and buses for 11,251 units (+32.7%). Deliveries of light com- mercial vehicles increased by 4.7% year-on-year to 261,978 units. In Western Europe, sales increased by 5.1% to a total of 231,678 units. Of this figure, 182,710 were light commercial vehicles, 46,258 were trucks and 2,710 were buses. The Caddy and the Transporter were the most sought-after Group models in the Western European markets. We delivered 38,939 vehicles to customers in the markets of the Central and Eastern Europe region in the period from January to June 2018 (+13.0%); of this figure, 20,739 were light commercial vehicles, 17,253 were trucks and 947 were buses. The Caddy and the Transporter were the Group models experiencing the highest demand. In Russia, the region’s largest market, sales climbed in the wake of economic recovery by 26.1% year-on-year to 8,748 units. In the Other markets, deliveries of Volkswagen Group commercial vehicles amounted to a total of 28,708 units, an increase of 0.8% on the prior-year figure; of this total, 18,986 were light commercial vehicles, 7,426 were trucks and 2,296 were buses. Sales in North America declined to 5,220 vehicles (–25.0%), almost all of which were delivered to customers in Mexico; of this total, 3,608 were light commercial vehicles, 463 were trucks and 1,149 were buses. Deliveries in South America rose to a total of 45,015 vehi- cles (+28.7%); of this total, 22,627 were light commercial vehicles, 19,239 were trucks and 3,149 were buses. The Amarok was particularly popular. Following continued improvement in the economic climate in Brazil, we were able to increase our sales by 49.8%. Of the units delivered, 6,929 were light commercial vehicles, 14,394 were trucks and 2,072 were buses. In the Asia-Pacific region, the Volkswagen Group sold 21,374 vehicles in the reporting period: 13,308 light com- mercial vehicles, 7,066 trucks and 1,000 buses. Overall, this was 1.8% more than in the prior-year period. The Transporter and the Amarok were the most popular Group models. In China, sales declined by 0.8% to 4,843 vehicles, of which 2,781 were light commercial vehicles, 1,858 were trucks and 204 were buses. C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2018 2017 (%) Europe/Other markets 299,325 283,355 +5.6 Western Europe 231,678 220,398 +5.1 Central and Eastern Europe 38,939 34,474 +13.0 Other markets 28,708 28,483 +0.8 North America 5,220 6,957 – 25.0 South America 45,015 34,976 +28.7 of which: Brazil 23,395 15,616 +49.8 Asia-Pacific 21,374 20,994 +1.8 of which: China 4,843 4,882 – 0.8 Worldwide 370,934 346,282 +7.1 Volkswagen Commercial Vehicles 258,800 249,951 +3.5 Scania 46,778 43,608 +7.3 MAN 65,356 52,723 +24.0 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. 13 14 Business Development D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times typically range from just under one year to several years, and partial deliveries as construction progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. In the period from January to June 2018, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated more than two-thirds of overall sales revenue. G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division includes the Volkswagen Group’s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offer- ings. The division comprises Volkswagen Financial Services and the financial services activities of Scania, and Porsche Holding Salzburg. The Financial Services Division’s products and services remained very popular in the first half of 2018. At 3.9 (3.6) mil- lion, the number of new financing, leasing, service and insurance contracts signed worldwide exceeded the prior- year figure. The ratio of leased or financed vehicles to Group deliveries (penetration rate) in the Financial Services Divi- sion’s markets amounted to 33.5 (33.5)% in the reporting period. On June 30, 2018, the total number of contracts was 19.3 million, up 4.8% compared with December 31, 2017. In the Europe/Other markets region, the number of new contracts signed in the first six months of 2018 increased by 8.0% to 2.9 million. The total number of contracts rose to 14.0 million as of June 30, 2018, up 4.7% compared with the end of 2017; the Customer Financing/Leasing area accounted for 6.7 million contracts (+4.7%). The number of contracts in North America amounted to 2.8 (2.7) million at the end of the reporting period, higher than the level seen on December 31, 2017. The Customer Financing/Leasing area recorded 1.8 (1.8) million contracts. The number of new contracts signed amounted to 451 thou- sand, an increase of 9.1% versus the prior-year period. In South America, 105 (98) thousand new contracts were concluded between January and June of this year. At 489 thou- sand, the total number of contracts at the end of June was Interim Management Report 9.0% lower than the 2017 year-end figure. The contracts mainly related to the Customer Financing/Leasing area. The number of new contracts signed in the Asia-Pacific region was 413 thousand, exceeding the prior year by 14.6%. On June 30, 2018, the total number of contracts amounted to 2.0 million, up 10.7% compared with December 31, 2017. The Customer Financing/Leasing area accounted for 1.5 million contracts (+4.5%). S A L E S T O T H E D E A L E R O R G A N I Z AT I O N In the first six months of 2018, the Volkswagen Group’s unit sales to the dealer organization (including the Chinese joint ventures) rose by 5.8% to 5,575,490 vehicles. This was due especially to higher demand in Europe, China and Brazil. Unit sales outside Germany increased by 6.1% in the reporting period, while in the German market they exceeded the prior- year figure by 3.5%. Vehicles sold in Germany as a proportion of overall unit sales fell to 12.5 (12.8)%. P R O D U C T I O N Between January and June 2018, the Volkswagen Group’s production increased by 6.5% year-on-year to a total of 5,785,559 vehicles. Production in Germany fell by 1.8% to 1,326,997 units. The proportion of production in Germany declined to 22.9 (24.9)%. I N V E N T O R I E S Global inventories at Group companies and in the dealer organization were higher on June 30, 2018 than at year-end 2017, and also exceeded the corresponding prior-year figure. E M P L OY E E S The Volkswagen Group had 625,006 active employees on June 30, 2018. A further 8,716 employees were in the passive phase of their partial retirement. An additional 15,970 young people were in vocational traineeships. At the end of the first half of 2018, the Volkswagen Group had a total of 649,692 employees worldwide, up 1.2% on the number as of Decem- ber 31, 2017. The main contributors to this were expansion due to the increase in volume, the recruitment of specialists inside and outside Germany and the expansion of the work- force at our new plants in China. There were 288,544 employ- ees in Germany, up 0.4% on year-end 2017. The proportion of employees in Germany declined to 44.4 (44.8)%. Interim Management Report Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets A P P L I C AT I O N O F N E W I N T E R N AT I O N A L F I N A N C I A L R E P O R T I N G S E T T L E M E N T W I T H TO N O N C O N T R O L L I N G I N T E R E S T STA N D A R D S The application of IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers” became manda- tory as of January 1, 2018. IFRS 9 changes the accounting requirements for classi- fying and measuring financial assets, for impairment of financial assets, and for hedge accounting. Some of the fair value measurement gains and losses on certain derivatives, which were previously reported under the financial result, are now reported directly in sales revenue and other operating income. This will have a more significant impact on oper- ating profit. S H A R E H O L D E R S O F M A N S E In the award proceedings regarding the appropriateness of the cash settlement and the right to compensation for the noncontrolling interest shareholders of MAN SE, the Higher Regional Court in Munich made a final decision at the end of June 2018, ruling that the right to annual compensation claim per share should be increased. The cash settlement per share, increased in the first instance by the Regional Court in Munich I, was confirmed. The remeasurement of put options and compensation rights resulted in an expense of around €0.4 billion, which was recognized in the other financial result, and is reflected in the “Put options and compensation rights granted to noncontrolling interest shareholders” item. IFRS 15 specifies new accounting rules for revenue recog- nition. In this context, the way income from the reversal of provisions and accrued liabilities is reported was also adjusted; these items were allocated to those functions in which they were originally recognized. In addition, expenses for certain sales programs had to be reclassified. The situation described above has led, among other things, to adjustments to prior-year figures in the income statement. Cost of sales, distribution and administrative expenses and the net other operating result required adjustments in connection with the change in the way reversals of provisions are reported; the reclassification of expenses for certain sales programs led to a decrease in sales revenue and distribution expenses. The operating profit was unchanged. The application of IFRS 9 led to minor adjust- ments to the financial result and consequently also to profit before tax, income tax expense and profit after tax. S P E C I A L I T E M S Special items consist of certain items in the financial state- ments whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance. In the period from January to June 2018, negative special items in connection with the diesel issue affected the Pas- senger Cars Business Area’s operating profit in an amount of €–1.6 billion. They were mainly attributable to the admin- istrative order that imposed a fine by the public prosecutor in Braunschweig (€1.0 billion), which settled the ongoing misdemeanor proceedings against Volkswagen AG, and to higher legal defense costs. in June R E S U LT S O F O P E R AT I O N S O F T H E G R O U P In the first half of 2018, the Volkswagen Group generated sales revenue of €119.4 billion. The 3.5% increase was primar- ily attributable to higher vehicle sales and the healthy busi- ness performance in the Financial Services Division; these factors were partially offset by negative exchange rate trends. The effects of applying the new International Financial Reporting Standards largely offset each other. The Volks- wagen Group generated 79.8 (80.0)% of its sales revenue outside Germany. At €24.8 billion, gross profit was up €1.1 billion year-on- year. The gross margin amounted to 20.8 (20.6)%. The Volkswagen Group’s operating profit before special items improved by €0.9 billion in the first six months of 2018 to €9.8 billion, while the operating return on sales before special items increased to 8.2 (7.7)%. This was largely due to increases in volume, although fair value measurement gains and losses on certain derivatives, which have had to be reported here since the beginning of the year, and a lower capitalization ratio for development costs had a negative impact. Special items in connection with the diesel issue amounting to €–1.6 billion weighed on operating profit. As a result, the Volkswagen Group’s operating profit was down €0.8 billion on the previous year, at €8.2 billion. The operating return on sales declined to 6.8 (7.7)%. result to €0.8 billion. Lower expenses from the reporting date mea- surement of derivative financial instruments used to hedge financing transactions, positive foreign currency measure- The financial increased by €0.9 billion 15 16 Results of Operations, Financial Position and Net Assets ment effects and lower interest expenses had a positive impact, while the effect of the remeasurement of put options and compensation rights in connection with the control and profit and loss transfer agreement with MAN SE was negative. The share of the result of equity-accounted investments was on a level with the previous year, when the remeasurement of the interest in HERE following the acquisition of shares by additional investors had a positive impact. The share of the result of equity-accounted investments in the Chinese joint ventures was up on the previous year. The Volkswagen Group’s profit before taxes rose by 2.0% to €9.0 billion in the reporting period. Compared with the previous year, profit after tax increased by €0.1 billion to €6.6 billion. Results of operations in the Automotive Division In the period from January to June 2018, the Automotive Division’s sales revenue amounted to €101.7 billion, up €3.3 billion on the previous year, particularly because of positive volume effects; this was partially offset by negative exchange rate effects. Sales revenue in both the Passenger Cars and Commercial Vehicles Business Areas as well as in the Power Engineering Business Area was higher than in the first half of 2017. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is reflected in consoli- dated sales revenue primarily by deliveries of vehicles and vehicle parts. Cost of sales rose, mainly for volume-related reasons and higher research and development costs recognized in profit or loss; product cost optimization had an offsetting effect. Expressed as a percentage of sales revenue, cost of sales was down slightly, however. Total research and development costs as a percentage of the Automotive Division’s sales revenue (research and development ratio or R&D ratio) declined to 6.6 (6.9)%. Distribution expenses, as well as the ratio of these expenses to sales revenue, decreased year-on-year. This is attributable to reclassifications of expenses to sales revenue required as a result of the new IFRS 15, the sale of the PGA Group in June 2017 and positive exchange rate effects. Administrative expenses increased in the first half of 2018, but their ratio to sales revenue remained unchanged. The other operating result declined by €1.7 billion to €–1.9 billion, mainly as a result of special items recognized in connection with the diesel issue in the reporting period and the fair value Interim Management Report measurement gains and losses on derivatives to which hedge accounting is not applied, which have been reported here since the beginning of the year. The operating result of the Automotive Division amounted to €6.9 billion in the first half of 2018, €0.8 billion less than in the previous year. The decline was mainly the result of special items recognized in connection with the diesel issue in the reporting period, higher research and development costs recognized in profit or loss (due primarily to a decline in capitalized upfront expenditure) and fair value measurement gains and losses on certain derivatives, which have been reported here since the beginning of the year. Higher vehicle sales had a positive impact. The operating return on sales amounted to 6.8 (7.8)%. Excluding the special items, the Automotive Division’s operating profit rose to €8.5 (7.7) bil- lion. The operating return on sales before special items increased to 8.4 (7.8)%. Our operating profit largely benefits from the business performance of our Chinese joint ventures only in the form of deliveries of vehicles and vehicle parts and of license income, as the joint ventures are accounted for using the equity method and therefore included in the financial result. R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 TO J U N E 3 0 € million 2018 2017 Passenger Cars Sales revenue1 81,766 79,557 Operating result Operating return on sales (%)1 5,649 6.9 6,654 8.4 Commercial Vehicles Sales revenue 18,312 17,252 Operating result 1,275 1,043 Operating return on sales (%) 7.0 6.0 Power Engineering Sales revenue 1,637 1,579 Operating result –58 –46 Operating return on sales (%) –3.5 –2.9 1 Prior-year figures adjusted. Interim Management Report O P E R A T I N G P R O F I T B E F O R E S P E C I A L I T E M S B Y Q U A R T E R Volkswagen Group in € million 6,000 6,000 4,500 4,500 3,000 3,000 1,500 1,500 0 0 Q1 Q2 Results of operations in the Financial Services Division In the first six months of 2018, the Financial Services Divi- sion’s sales revenue stood at €17.7 billion; the 4.1% increase compared with the previous year was driven in particular by growth in the business volume. Cost of sales rose slightly faster than sales revenue, increasing by €0.6 billion to €14.4 billion. Distribution expenses increased, while their ratio to sales revenue was virtually unchanged. Administrative expenses as well as their ratio to sales revenue increased considerably. The rise in expenses compared with the previous year was mainly attributable to higher volumes. At €1.3 billion, the Financial Services Division’s operating result was up 2.3% on the previous year. The operating return on sales stood at 7.3 (7.5)%. F I N A N C I A L P O S I T I O N O F T H E G R O U P The gross cash flow generated by the Volkswagen Group in the period from June 2018 amounted to €20.3 billion, a rise of €0.8 billion compared with the prior- year figure. At €–15.5 billion, the negative impact on the change in working capital was by €6.9 billion lower than a year before, especially because of significantly lower cash outflows attributable to the diesel issue. Consequently, cash flows from operating activities improved by €7.7 billion to €4.8 billion. Included in the special items recognized in the first half of 2018 is a cash outflow attributable to the payment of a fine following the misdemeanor proceedings. January to At €7.2 (7.0) billion, investing activities attributable to operating activities were up on the prior-year figure. Cash inflows from financing activities amounted to €6.4 (12.6) billion. Financing activities primarily include the dividend paid to the shareholders of Volkswagen AG, the Results of Operations, Financial Position and Net Assets 20181 20181 2017 2017 Q3 Q4 issuance of hybrid notes, and the issuance and redemption of bonds and other financial liabilities. On June 30, 2018, the Volkswagen Group’s cash and cash equivalents reported in the cash flow statement amounted to €21.2 (21.9) billion. At the end of June 2018, the Volkswagen Group’s net liquidity stood at €–121.5 billion, compared with €–119.1 bil- lion at the end of 2017. Financial position of the Automotive Division The Automotive Division’s gross cash flow was €15.5 billion in the first half of 2018, an increase of €0.6 billion from the year before. Healthy earnings growth was set against new special items recognized in the reporting period, most of which led to cash outflows, and a year-on-year decline in dividends from the Chinese joint ventures. The €7.6 billion change in working capital to €–5.2 billion mainly reflects the significant decrease in cash outflows attributable to the diesel issue in the reporting period. Cash flows from operating activities consequently rose to €10.2 (2.0) billion. At €6.9 (6.8) billion, the Automotive Division’s investing activities attributable to operating activities were in line with the previous year. This figure includes investments in prop- erty, plant and equipment, investment property and intan- gible assets, excluding capitalized development costs (capex), which were up on the figure for the first half of 2017 and amounted to €4.4 (4.2) billion, while the capex ratio was virtually unchanged at 4.3 (4.2)%. We invested primarily in our production facilities and in models to be launched in 2018 and 2019, as well as in the ecological focus of the model range, drivetrain electrification and modular toolkits. Capital- ized development costs decreased to €2.5 (2.9) billion. The “Acquisition and disposal of equity investments” item was 17 18 Results of Operations, Financial Position and Net Assets F I N A N C I A L P O S I T I O N O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 TO J U N E 3 0 € million 2018 2017 Passenger Cars Gross cash flow 13,169 12,866 Change in working capital –4,125 –11,902 Cash flows from operating activities 9,044 964 Cash flows from investing activities attributable to operating activities –5,955 –5,710 Net cash flow 3,090 –4,746 Commercial Vehicles Gross cash flow 2,125 1,871 Change in working capital –860 –830 Cash flows from operating activities 1,266 1,041 Cash flows from investing activities attributable to operating activities –848 –1,034 Net cash flow 418 6 Power Engineering Gross cash flow 163 107 Change in working capital –265 –79 Cash flows from operating activities –102 28 Cash flows from investing activities attributable to operating activities –59 –84 Net cash flow –161 –56 impacted mainly by the investment in the newly established joint venture with Anhui Jianghuai Automobile (JAC) and the offsetting sale of a part of the shares in There Holding. The prior-year figure had included the acquisition of the shares in Navistar and the disposal of part of the PGA Group. The Automotive Division’s net cash flow amounted to €3.3 billion in the reporting period, up €8.1 billion compared with the prior-year figure, mainly because of significantly lower cash outflows attributable to the diesel issue. in a cash outflow of €–2.7 billion in the first six months of 2018, compared with a cash inflow of €6.9 billion in the prior-year period. The dividend paid to the shareholders of Volkswagen AG in May 2018 amounted to €2.0 billion, an increase of €1.0 billion compared with the previous year. The successful placement of dual-tranche hybrid notes with an aggregate principal amount of €2.75 billion via Volkswagen International Finance N.V. in June 2018 resulted in a cash inflow. The notes consist of a €1.25 billion note that carries a coupon of 3.375% and has a first call date after six years, and a €1.5 billion note that Financing activities resulted Interim Management Report carries a coupon of 4.625% and has a first call date after ten years. Both tranches are perpetual and increase equity, net of transaction costs among other factors. €2.75 billion of the hybrid notes was classified as a capital contribution, which increased net liquidity. In addition, financing activities include the issuance and redemption of bonds and other financial liabilities. At the end of June 2018, the Automotive Division’s net liquidity of €26.3 billion was €3.9 billion higher than the amount reported as of the end of 2017. Financial position of the Financial Services Division In the period from January to June 2018, the Financial Ser- vices Division generated gross cash flow of €4.9 (4.6) billion. Due to the growth in business volume, funds tied up in working capital increased to €10.2 (9.6) billion compared with the first half of 2017. Cash flows from operating activities amounted to €–5.4 (–4.9) billion. Investing activities attributable to operating activities rose to €0.3 (0.2) billion year-on-year. The Financial Services Division’s financing activities include primarily the issuance and redemption of bonds and inflow was financial other €9.1 (5.7) billion. liabilities; the total cash The Financial Services Division’s negative net liquidity, which is common in the industry, stood at €–147.8 billion on June 30, 2018; the figure as of December 31, 2017 was €–141.5 billion. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E At the end of the first half of 2018, the Volkswagen Group had total assets of €441.1 billion, 4.5% more than the figure reported as of December 31, 2017. The Group’s equity rose to €113.9 (109.1) billion. The equity ratio was unchanged, at 25.8 (25.8)%. The implementation of the new International Financial Reporting Standards led to adjustments to the opening balance sheet of the Volkswagen Group as of January 1, 2018. The amounts as of December 31, 2017 were unchanged, apart from movements within equity. Automotive Division balance sheet structure On June 30, 2018, property, plant and equipment reported by the Automotive Division was down, while its intangible assets were virtually unchanged from December 31, 2017. The share of equity-accounted investments mainly declined because of dividend payments resolved by the Chinese joint ventures. The healthy business performance of the Chinese joint ventures and the acquisition of the shares in the joint venture with JAC had an offsetting effect. The decrease in other receivables and financial assets was due, among other factors, to the negative impact from the measurement of derivatives. Overall, noncurrent assets were 1.9% lower than at the end of 2017. Interim Management Report Current assets rose by 13.7%; the inventories included in this figure increased, mainly for production-related reasons. Due to higher volumes, the trade receivables included in current other receivables and financial assets were up significantly. As of June 30, 2018, the Automotive Division reported cash and cash equivalents of €16.6 billion, up 20.3% on the figure as of December 31, 2017. At the end of the first half of 2018, the Automotive Divi- sion’s equity amounted to €86.3 billion, an increase of 4.7% compared with December 31, 2017. Healthy earnings growth and the hybrid notes issued in June 2018 had a positive impact. The dividend paid to the shareholders of Volkswagen AG, negative effects from the measurement of derivatives recognized outside profit or loss and from currency trans- lation as well as the non-recurring impact of the first-time application of the new International Financial Reporting Standards reduced equity. The noncontrolling interests are mainly attributable to RENK AG and AUDI AG. As these were lower overall than the noncontrolling interests attributable to the Financial Services Division, the figure for the Auto- motive Division, where the deduction was recognized, was negative. At €69.7 (69.8) billion, noncurrent liabilities were on a level with the end of the last fiscal year. The noncurrent financial liabilities included in this item decreased. At the end of the first six months of 2018, current liabilities were 5.5% higher than at the end of 2017. Reclas- sifications from noncurrent to current liabilities due to shorter remaining maturities were among the factors that led to a change in current financial liabilities to €–3.2 (–0.5) bil- lion. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Automo- tive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed. Trade payables increased for volume-related reasons. Current other liabilities were up significantly compared with December 31, 2017. The item “Put options and compensation rights granted to noncon- interest shareholders” primarily comprises the trolling liability for the obligation to acquire the shares held by the remaining free float shareholders of MAN; following the ruling in the award proceedings, this item was adjusted accordingly to €4.2 (3.8) billion. On June 30, 2018, the Automotive Division’s total assets of 229.5 billion were 3.8% higher than at the end of 2017. Results of Operations, Financial Position and Net Assets B A L A N C E S H E E T ST R U C T U R E O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S € million Jun. 30, 2018 Dec. 31, 2017 Passenger Cars Noncurrent assets 108,288 111,277 Current assets 68,970 60,052 Total assets 177,258 171,329 Equity 71,270 66,449 Noncurrent liabilities 54,120 55,118 Current liabilities 51,869 49,762 Commercial Vehicles Noncurrent assets 27,505 27,005 Current assets 18,619 16,908 Total assets 46,123 43,913 Equity 12,097 12,194 Noncurrent liabilities 14,817 13,975 Current liabilities 19,209 17,744 Power Engineering Noncurrent assets 2,504 2,629 Current assets 3,575 3,250 Total assets 6,079 5,879 Equity 2,896 2,963 Noncurrent liabilities 721 711 Current liabilities 2,462 2,205 Financial Services Division balance sheet structure At the end of June 2018, total assets in the Financial Services Division of €211.7 billion exceeded the figure as of December 31, 2017 by 5.3%. In total, noncurrent assets increased by 4.4% compared with the end of 2017; the noncurrent receivables included in this item rose mainly due to the growth in business. Current assets were up 6.5%. The revised classification of financial instruments required by IFRS 9 led to reclassifi- cations, in particular of financial services receivables to trade receivables, which are included in the “Other receivables and financial assets” item. Cash and cash equivalents in the Financial Services Division amounted to €5.1 (4.6) billion at the balance sheet date. At the end of the first half of 2018, the Financial Services Division accounted for around 48.0 (47.6)% of the Volkswagen Group’s assets. 19 20 Results of Operations, Financial Position and Net Assets At the end of June 2018, the Financial Services Division’s equity stood at €27.6 billion, and was therefore in line with the level of December 31, 2017. The equity ratio was 13.0 (13.7)%. Noncurrent liabilities were 3.8% higher, mainly because of a rise in noncurrent financial liabilities to refinance the business volume. Current liabilities increased by 8.1% in total, with a significant rise in current financial liabilities, which are included in this item; trade payables were also higher than at the end of 2017. At €31.2 (31.4) billion, deposits from direct banking busi- ness were on a level with the previous year’s balance sheet date. R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S Special items resulting from the diesel issue had a negative impact on operating profit in the second quarter of 2018. Our forecast for operating profit before special items for the Group and the Passenger Cars Business Area remains unchanged. We have reduced the forecast for operating profit including special items. The return on investment (ROI) will consequently be slightly under the previous year’s level. The Outlook for fiscal year 2018 can be found on page 24. For certain T6 models (M1 class) with Euro 6 diesel engines registered as passenger cars, the inspection regarding the conformity of the current production of new vehicles with the approved type (conformity of production) identified that certain technical data could not be fully confirmed. To ensure this conformity of production for new vehicles, Volks- wagen AG developed a software measure, which was approved by the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) at the end of February 2018 and was applied to the production of new vehicles as well as to (a total of approximately 30,000) new vehicles that had not been delivered by then. Volkswagen AG also con- ducted in-use tests to determine whether the around 200,000 T6 used vehicles already on the market are in conformity with the technical data. The tests carried out on the proposal of Volkswagen AG were taking place in close collaboration with the KBA, which included this process in a decision dated March 1, 2018. The results of these tests show that the technical data of the used T6 vehicles are conform. On March 2, 2018, the federal multidistrict litigation court in California dismissed in its entirety the first amended class action complaint alleging that these bonds were trading at artificially inflated prices and that the value of these bonds declined after the U.S. Environmental Protection Agency (EPA) issued its “Notices of Violation,” but granted leave to file a second amended complaint. On April 2, 2018, plaintiffs filed a second amended class action complaint, which Volkswagen has moved to dismiss. Interim Management Report On March 5, 2018, a Tennessee state court granted in part and denied in part a motion to dismiss the state environmental claims asserted against Volkswagen AG and certain affiliates by the Tennessee Attorney General. Volkswagen and Tennessee both moved for and have been granted an interlocutory appeal of the decision. On March 12, 2018, a Minnesota state court granted in part and denied in part a motion to dismiss the state environ- mental claims asserted against Volkswagen AG and certain affiliates by the Minnesota Attorney General. Volkswagen has appealed the decision. On March 15, 2018, co-lead counsel for plaintiffs with regard to the German Automotive Manufacturers Antitrust Litigation filed consolidated amended class action com- plaints against Volkswagen AG and certain affiliates as well as other manufacturers in the Northern District of California on behalf of putative classes of indirect and direct purchasers. The consolidated amended complaints claim that since the 1990s, defendants had engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles by agreeing to share commercially sensitive information and to reach unlawful agreements regarding technology, costs, and suppliers. Moreover, plaintiffs claim that defendants had agreed to limit the size of AdBlue tanks to ensure that U.S. emissions regulators did not scrutinize the emissions control systems in defendants’ vehicles, and that such agreement for Volkswagen was the impetus for the creation of the defeat device. The complaints further claim that defendants had coordinated to fix the price of steel used in their automobiles by agreeing with German steel manufacturers to apply a two component pricing formula to steel purchases and worked closely together to generate scientific studies aimed at promoting diesel vehicles. On May 17, 2018, all defendants filed a joint motion to dismiss the two consolidated class action complaints. On May 24, 2018, Volkswagen defendants also filed an individual motion to dismiss on grounds specific to them. The motions have been fully briefed, and a hearing is currently scheduled for September 17, 2018. On March 22, 2018, Volkswagen AG, certain affiliates and the Arizona Attorney General notified an Arizona state court that they have reached a settlement of Arizona’s consumer protection claims and unfair trade practices claims. On May 24, 2018, the Arizona state court granted a stipulation of dismissal with prejudice of the Arizona action. Interim Management Report In South Korea, approval for the last vehicle clusters with engine type EA 189 was given on March 28, 2018. The Ministry of Environment in South Korea qualified certain emissions strategies in the engine control software of various diesel vehicles with a V6 or V8 engine meeting the Euro 6 emission standard as an unlawful defeat device and ordered a recall on April 4, 2018; the same applied to the Dynamic Shift Program (DSP) in the transmission control of a number of Audi models. On April 11, 2018, a Texas state court granted in part and denied in part a motion for summary judgment on the state environmental claims asserted against Volkswagen AG and certain affiliates by the Texas Attorney General. The Texas court denied Volkswagen’s motion for reconsideration or interlocutory appeal. On April 16, 2018, the federal multidistrict litigation court in California dismissed with prejudice state and local environmental claims asserted against certain Volkswagen AG affiliates by the Environmental Protection Commission of Hillsborough County, Florida and Salt Lake County, Utah, on the basis of the same federal preemption issue that is cur- rently being litigated in the Tennessee, Minnesota, and Texas cases referenced above, as well as in several other state courts. The counties have appealed that decision. The public prosecutor’s office of Stuttgart has opened a criminal investigation. Furthermore, the Stuttgart public prosecutor's office confirmed that it is investigating, among others, the former Chairman of the Board of Management of Volkswagen AG in his capacity as member of the manage- ment board of Porsche SE, regarding his possible involvement in potential market manipulation in connection with this same issue. Moreover, the Stuttgart public prosecutor's office has commenced a criminal investigation into the diesel issue against one board member, one employee and one former employee of Dr. Ing. h.c. F. Porsche AG on suspicion of fraud and illegal advertising. Dr. Ing. h.c. F. Porsche AG has appointed two renowned major law firms to clarify the matter underlying the public prosecutor’s accusations. The investi- gations are at an early stage. The Board of Management and Supervisory Board of Dr. Ing. h.c. F. Porsche AG are being regularly updated on the current state of affairs. If the findings do illustrate reproachable conduct or fault on behalf of the organization, then the Board of Management or Supervisory Board, respectively, will adopt the necessary measures. On April 18, 2018, the EPA and California Air Resources Board (CARB) approved the second phase of the emissions Results of Operations, Financial Position and Net Assets modification for affected 2.0 l TDI vehicles with Generation 3 engines. Thereby the approval process for the technical measures for the relevant vehicles with engine type EA 189 has now been completed in all countries with the exception of Chile. On April 19, 2018, the federal multidistrict litigation court in California approved the stipulation of the parties post- poning the hearing previously scheduled for May 11, 2018, regarding defendants’ motion to dismiss plaintiffs’ consoli- dated class action complaint alleging that defendants con- cealed the existence of defeat devices in Audi brand vehicles with automatic transmissions. The hearing was postponed again. On April 25, 2018, Volkswagen AG, certain affiliates and the Maryland Department of the Environment announced an agreement to resolve the State of Maryland’s environmental and remaining consumer claims for restitution or injunctive relief. The Maryland settlement includes a Consent Decree, which the Maryland state court approved on May 3, 2018. On April 19 and 25, 2018, respectively, Ontario and Quebec courts granted approval of a consumer settlement entered into by Volkswagen AG and other Volkswagen Group companies involving 3.0 l TDI vehicles. On May 1, 2018, Volkswagen AG, certain affiliates, and the West Virginia Attorney General announced an agreement to resolve the State of West Virginia’s consumer claims. The West Virginia settlement includes a consent decree, which the West Virginia state court approved on May 1, 2018. On August 29, 2017, plaintiffs filed a complaint, on behalf of a putative class of purchasers of Volkswagen AG’s Ameri- can Depositary Receipts, against Volkswagen AG, and against three former and one current member of Volkswagen AG’s Board of Management in the U.S. District Court for the Eastern District of New York. Plaintiffs assert claims under the U.S. Securities Exchange Act of 1934 alleging that defendants made material misstatements and omissions concerning Volkswagen AG’s compliance measures, in particular those relating to competition and antitrust law. On July 13, 2018, plaintiffs filed an amended complaint. Defendants plan to move to dismiss this complaint. On May 18, 2018, the EPA and CARB approved an emis- sions modification for Generation 1.1 vehicles with type V6 3.0 l TDI engines. On July 13, 2018, the EPA and CARB approved an emissions modification for Generation 1.2 vehi- cles with type V6 3.0 l TDI engines. On May 22, 2018, plaintiffs filed a consolidated class action complaint on behalf of a putative class of Volkswagen franchise dealerships. On salespersons who work at 21 22 Results of Operations, Financial Position and Net Assets June 7, 2018, the court in the federal multidistrict litigation in California appointed the plaintiffs’ counsel as the interim lead counsel for the putative class. On May 28, 2018, a class action filed in Quebec provincial court was authorized to proceed as to claims relating to Volkswagen AG’s shares and American Depositary Receipts. On June 1, 2018, a notice of amendment to the Third Partial Consent Decree entered into with the Department of Justice (DoJ) and EPA, which modified certain due dates related to annual reporting, was filed with the federal multi- district litigation court in California. On June 5, 2018, an Illinois state court granted a motion to dismiss the state environmental claims asserted against Volkswagen AG and certain affiliates by the Illinois Attorney General. Illinois has appealed that decision. On June 6, 2018, Volkswagen AG, certain affiliates, and the Oklahoma Attorney General announced an agreement to resolve the State of Oklahoma’s consumer claims. The Oklahoma settlement includes a consent decree, which the Oklahoma state court approved on June 6, 2018. In the course of the searches on June 11, 2018, it tran- spired that the public prosecutor’s office of Munich II has extended the criminal investigation pending there. The underlying search warrant shows that the Chairman of the Board of Management of AUDI AG (at the same time a mem- ber of the Board of Management of Volkswagen AG) and a further active member of the AUDI AG Board of Management are now under investigation. The accusations include fraud in connection with the sale of diesel vehicles on the European market in the period after fall 2015. The Chairman of the Board of Management of AUDI AG was arrested on June 18, 2018 and has been in custody ever since. In this context, the public prosecutor’s office of Munich II is currently investi- gating 20 individuals. AUDI AG has appointed two renowned major law firms to clarify the matter underlying the public prosecutor’s accusations. The investigations are at an early stage. The Board of Management and Supervisory Board of AUDI AG are being regularly updated on the current state of affairs. If the findings do illustrate reproachable conduct or fault on behalf of the organization, then the Board of Management or Supervisory Board, respectively, will adopt the necessary measures. Interim Management Report On June 13, 2018, Volkswagen AG, certain affiliates, and the Vermont Attorney General announced an agreement to resolve the State of Vermont’s consumer claims. On July 16, 2018, a joint stipulation of dismissal was filed with the Vermont court. On June 13, 2018, the public prosecutor in Braunschweig issued Volkswagen AG an administrative order in connection with the diesel issue. The administrative order is linked to negligent breaches of monitoring obligations on the part of Volkswagen AG employees in the Powertrain Development department and relates to the period from mid-2007 to 2015 and a total of 10.7 million vehicles with diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. The administrative order imposes a fine of €1.0 billion in total, comprising of the maximum legal penalty of €5 million and the disgorgement of economic benefits in the amount of €995 million. Following thorough examination, the fine has been accepted, has been paid in full by Volkswagen and is therefore legally binding. As a result of the administrative order, the ongoing misdemeanor pro- ceeding against Volkswagen AG will be settled. Further sanctioning or confiscation against Volkswagen AG and its Group companies is therefore not expected in Germany in connection with the particular matter covered by the administrative order concerning diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. As a result, Volkswagen expects that the conclusion of this proceeding will have a substantially positive impact on additional governmental proceedings conducted in Europe against Volkswagen AG and its Group companies. The the matter misdemeanor proceedings to in relation concerning AUDI AG being investigated by the public prosecutor’s office in Munich are continuing. In line with IAS 37.92, no further disclosures have been made in order not to prejudice the proceeding and the interests of the Company. On June 25, 2018, a Pennsylvania state court approved a consent judgment that implemented an earlier settlement agreement resolving the state environmental claims asserted against Volkswagen AG and certain affiliates by the State of Pennsylvania and nine other states that have opted out of federal emissions standards. Interim Management Report On June 26, 2018, a Missouri state court granted a motion to dismiss the state environmental claims asserted against Volkswagen AG and certain affiliates by the Missouri Attorney General. On June 26, 2018, the Higher Regional Court in Munich made a final decision in the award proceedings on the appropriateness of the cash settlement and the right to compensation payable to the noncontrolling interest share- holders of MAN SE, ruling that the annual compensation claim per share has to be increased. The cash settlement in the amount of €90.29 per share, increased in the first instance by the Regional Court in Munich I, was confirmed. On July 30, 2018, as part of the amendment process, the Higher Regional Court in Munich established the annual compensation claim of €5.47 gross (less any corporate income tax and any solidarity surcharge according to the respective tax rate applicable to these taxes for the financial year in question). The decisions by the Higher Regional Court in Munich are final and to be published in the Federal Gazette. In accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act), the cash compen- sation of €90.29 per share may be accepted within two months after this date. On July 6, 2018, the Federal Constitutional Court ruled on the constitutional complaints in connection with the search at the law firm Jones Day and ascertained that the confir- mation of the provisional seizure of client engagement docu- ments and data of Volkswagen AG had not violated consti- tutional law. The companies of the Volkswagen Group will continue to cooperate with the government authorities with due regard for the ruling of the Federal Constitutional Court. In Austria, the first-instance dismissal of the last investor complaint pending in connection with the diesel issue became binding in the reporting period. For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales Results of Operations, Financial Position and Net Assets potentials. From July 2017 to June 2018, the measures proposed by AUDI AG were adopted and mandated in various decisions by the KBA on vehicle models with V6 and V8 TDI engines. The investigations initiated in May 2018 on the current vehicle concepts of the Generation 2 evo and Gener- ation 3 engine generations have been completed. The key results are currently being presented to the KBA. In Germany, around 17,300 product-related individual actions brought by customers in connection with the diesel issue are pending against Volkswagen AG and other Volks- wagen Group companies. Having served Volkswagen AG with an action asserting the rights assigned by approximately 2,000 customers in Switzerland, financialright GmbH has now brought a further such action on behalf of around 6,000 Slovenian customers. The total amount in dispute in these actions is approximately €50 million. The private Spanish consumer protection organisation Organización de Consumidores y Usuarios (OCU) has filed a class action against Volkswagen Group España Distribu- ción S.A. on May 9, 2018. OCU represents around 7,500 Spanish customers, claiming for damages in the amount of almost €23 million. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2018 in the “Report on Expected Developments” and “Report on Risks and Opportunities” chapters – including the “Risks from the diesel issue” and “Litigation/Diesel issue” sections and the underlying description of the issues in the chapter entitled “Diesel Issue” – of the combined management report in the 2017 Annual Report or in publications released by the reporting date, as well as the continuing investigations and interviews in connection with the diesel issue and additional important legal cases. markets, or any significant shifts in exchange rates relevant to the Volkswagen Group, will have a corresponding effect on the development of our business. In addition, expected business development may vary if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities presented in the 2017 Annual Report develop in a way other than we are currently expecting, or additional risks and opportunities or other factors emerge that affect the development of our business. 23 24 Outlook Interim Management Report Outlook The Volkswagen Group’s Board of Management expects the global economy to record slightly weaker growth in 2018. We from protectionist tendencies, believe risks will arise turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We therefore expect somewhat weaker momentum than in 2017 in both the advanced economies and the emerging markets. We expect the strongest rates of expansion in Asia’s emerging economies. We expect trends in the passenger car markets in the individual regions to be mixed in 2018. Overall, growth in global demand for new vehicles will probably be slower than in 2017. We anticipate that unit sales volumes in Western Europe will fall slightly short of those seen in the previous year. In the German passenger car market, we estimate that the market volume will be on a level with the previous year. Passenger car demand is expected to substantially exceed the prior-year figures in markets in Central and Eastern Europe. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America is likely to be slightly lower than in the prior year. We expect demand in the South American markets for passenger cars and light commercial vehicles to grow perceptibly as a whole compared with the previous year. The passenger car markets in the Asia-Pacific region look set to continue their growth trajectory in 2018, albeit at a weaker pace. We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in 2018. Overall, we envisage a slight dip in demand. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group and in the relevant markets for buses, new registrations in 2018 are set to rise slightly above the prior-year level. The Volkswagen Group is well prepared for the future chal- lenges in the mobility business and the mixed developments in regional automotive markets. Our unique brand portfolio, our presence in all major world markets, our broad, selectively expanded product range and pioneering tech- nologies and services place us in a good competitive position worldwide. In the course of transforming our core business, we will define the positioning of our Group brands more clearly and optimize the vehicle and drive portfolio with a view to the most attractive and fastest-growing market seg- ments. In addition, we are working to make even more focused use of the advantages of our multibrand group by continuously developing new technologies and our toolkits. We expect that deliveries to customers of the Volkswagen Group in 2018 will moderately exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situation, the increasing intensity of competition, exchange rate volatility and the diesel issue. In the EU, there is also a new, more time-consuming test procedure for determining pollutant and CO2 emissions as well as fuel consumption in passenger cars and light commercial vehicles known as the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP). We expect the sales revenues of the Volkswagen Group and its business areas to grow by as much as 5% year-on-year. In terms of the operating profit before special items for the Group and the Passenger Cars Business Area, we forecast an operating return on sales in the range of 6.5–7.5% in 2018. For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between 5.0–6.0%. In the Power Engineering Business Area, we expect a lower operating loss than in the previous year. For the Financial Services Division, we are forecasting an operating profit at the prior-year level. We believe that automotive financial services will continue to be very important for vehicle sales worldwide in 2018. After special items, we anticipate that the operating return on sales will fall moderately short of the expected range for both the Group and the Passenger Cars Business Area. Brands and Business Fields Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D In the first half of 2018, the Volkswagen Group generated sales revenue of €119.4 (115.3) billion. Operating profit before special items improved to €9.8 (8.9) billion. In the reporting period, special items totaling €–1.6 billion, which were exclu- sively attributable to the diesel issue, had to be accounted for. The Volkswagen Passenger Cars brand sold 1,931 (1,812) thousand vehicles in the first six months of this year. The T-Roc, Tiguan and Atlas models were exceedingly popular. At €42.7 billion, sales revenue was up 7.7% year-on-year. Oper- ating profit before special items rose to €2.1 (1.8) billion. Higher volumes and improved product costs had a positive effect. However, this was offset by higher distribution expenses resulting from, among other things, the scrapping premium, and upfront expenditures for new products, especially in connection with the implementation of the electric mobility campaign. The diesel issue gave rise to special items of €–1.6 billion. ciency gains and forward-looking currency management. The financial key performance indicators for the Audi brand include the Lamborghini and Ducati brands. Ducati sold 33,834 (36,713) motorcycles in the reporting period. The ŠKODA brand reported sales of 511 (501) thousand vehicles in the first half of 2018. Demand grew for the Karoq and Kodiaq models. At €9.2 billion, sales revenue was up 5.1% on the prior-year figure. Due to negative exchange rate effects and higher upfront expenditures for new products, operating profit declined by 4.5% to €821 million, while volume improve- ments and optimization of costs had a positive impact. The SEAT brand sold 347 thousand vehicles in the reporting period, a year-on-year increase of 14.3%. This figure includes the Q3 manufactured for Audi. Demand was particularly strong for the new Arona and Ibiza models. Sales revenue increased by 14.5% to €5.8 billion. Operating profit improved by 62.7% to €212 million. Positive volume, price and mix effects considerably outweighed upfront expen- ditures for new products and exchange rate effects. Unit sales by the Audi brand increased to 812 (783) thou- sand vehicles worldwide in the period from January to June 2018. Our Chinese joint venture FAW-Volkswagen sold a further 293 (252) thousand Audi vehicles. Demand for the Q2, Q5, A4 and A5 models was particularly strong. Sales revenue rose to €31.2 (30.0) billion. Operating profit improved to €2.8 (2.7) billion due in particular to higher volumes, effi- The Bentley brand sold 4,520 (4,907) vehicles in the first six months of this year. At €757 (867) million, sales revenue was lower than in the same period of 2017. The operating result stood at €–80 (13) million, impacted mainly by lower sales, delays in the start-up of the new Continental GT and exchange rate effects. V O L K S W A G E N G R O U P R E P O R T I N G S T R U C T U R E A U T O M O T I V E D I V I S I O N F I N A N C I A L S E R V I C E S D I V I S I O N Passenger Cars Business Area Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Automotive Others Commercial Vehicles Business Area Volkswagen Commercial Vehicles Scania Vehicles and Services MAN Commercial Vehicles Power Engineering Business Area MAN Power Engineering Dealer and customer financing Leasing Direct bank Insurance Fleet management Mobility offerings 25 26 Brands and Business Fields Porsche Automotive sold 123 (124) thousand vehicles world- wide in the period from January to June 2018. The Panamera and 911 recorded encouraging growth rates. At €11.2 (10.8) bil- lion, sales revenue was higher than in the prior-year period. The operating profit of Porsche Automotive increased by 0.4% to €2.1 billion, above all due to positive mix effects. Volkswagen Commercial Vehicles sold 248 (244) thousand vehicles worldwide in the first half of 2018. Production of the Amarok in South America has been managed by the Volks- wagen Passenger Cars brand since the beginning of the year. The Crafter saw a significant increase in demand. Sales reve- nue climbed by 6.7% to €6.3 billion. Operating profit rose by 26.7% to €567 million, due primarily to volume and mix effects, improved price positioning and material cost optimi- zation. amounted to €6.5 (6.3) billion. At €684 (673) million, oper- ating profit improved on the prior-year period. Cost increases were offset by higher volumes, a favorable exchange rate trend and an improved financial services business. MAN Commercial Vehicles sold 65 thousand units in the reporting period, an increase of 24.0% on the previous year. Sales revenue rose to €5.8 (5.3) billion. Operating profit increased to €258 (193) billion due to volume-related factors. MAN Power Engineering generated sales revenue of €1.6 (1.6) million in the period from January to June 2018. Operating profit amounted to €68 (73) million. In the first half of 2018, the operating profit at Volks- wagen Financial Services climbed by 5.7% to €1.2 billion, due in particular to business growth and improved margins. The Scania brand lifted its unit sales in the first six months of 2018 to 47 (44) thousand vehicles. Sales revenue K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A R Y 1 TO J U N E 3 0 1 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2018 2017 2018 20172 2018 2017 Volkswagen Passenger Cars 1,931 1,812 42,704 39,661 2,130 1,776 Audi 812 783 31,183 30,011 2,761 2,680 ŠKODA 511 501 9,161 8,720 821 860 SEAT 347 304 5,786 5,054 212 130 Bentley Porsche Automotive3 5 123 5 124 757 11,231 867 10,841 –80 2,064 13 2,056 Volkswagen Commercial Vehicles Scania4 248 47 244 44 6,324 6,515 5,927 6,307 567 684 448 673 MAN Commercial Vehicles 65 53 5,814 5,297 258 193 MAN Power Engineering VW China5 Other6 – 1,999 –512 – 1,870 –469 1,637 – –18,399 1,579 – –14,915 68 – –921 73 – –1,152 Volkswagen Financial Services – – 16,664 15,999 1,231 1,165 Volkswagen Group before special items – – – – 9,794 8,916 Special items – – – – –1,635 – Volkswagen Group Automotive Division7 5,575 5,575 5,270 5,270 119,377 101,715 115,349 98,388 8,160 6,866 8,916 7,651 of which: Passenger Cars Business Area 5,219 4,930 81,766 79,557 5,649 6,654 Commercial Vehicles Business Area 357 340 18,312 17,252 1,275 1,043 Power Engineering Business Area – – 1,637 1,579 –58 –46 Financial Services Division – – 17,662 16,961 1,294 1,265 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 Adjusted; see disclosures about the application of new International Financial Reporting Standards on page 15. 3 Porsche (Automotive and Financial Services): sales revenue €12,287 (11,778) million, operating profit €2,154 (2,131) million. 4 Including financial services. 5 The sales revenue and operating profits of the joint venture companies in China are not included in the figures for the Group. These Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €2,318 (2,135) million. 6 In operating profit, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation for Scania, Porsche Holding Salzburg, MAN and Porsche. 7 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. Brands and Business Fields U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T In the Europe/Other markets region, the Volkswagen Group lifted its unit sales by 7.2% year-on-year in the first six months of 2018 to 2.6 million vehicles. Sales revenue climbed to €76.4 (73.8) billion due to volume-related factors, however, exchange rates had a negative impact. The Volkswagen Group’s unit sales in North America amounted to 433 thousand vehicles in the reporting period, a decrease of 9.3% compared with the previous year. Sales revenue decreased by 3.4% to €17.7 billion due to volume and exchange rate effects, changes in the mix had a positive impact. In the South American markets we sold 293 (246) thou- sand vehicles in the period from January to June of this year. Developments in volumes and the mix increased sales revenue to €5.2 (4.9) billion. An unfavorable exchange rate trend had a negative effect. In the first six months of 2018, the Volkswagen Group sold a total of 2.2 (2.1) million vehicles in the Asia-Pacific region (including the Chinese joint ventures). Sales revenue increased by 3.3% year-on-year to €19.0 billion. An improved components business of our consolidated companies made a positive contribution. This figure does not include the sales revenue of our equity-accounted Chinese joint ventures. Since the new accounting standard IFRS 9 was applied on January 1, 2018, income and expenses realized from hedging transactions relating to sales revenue in foreign currency is allocated to sales revenue; in the period from January to June 2018, hedging transactions increased the sales revenue of the Volkswagen Group by €1.0 billion. K E Y F I G U R E S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 V E H I C L E S A L E S S A L E S R E V E N U E Thousand vehicles/€ million 2018 2017 2018 20172 Europe/Other markets 2,608 2,434 76,414 73,757 North America 433 478 17,730 18,346 South America Asia-Pacific3 293 2,241 246 2,113 5,236 18,996 4,854 18,392 Hedges on sales revenue Volkswagen Group3 – 5,575 – 5,270 1,000 119,377 – 115,349 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 Adjusted; see disclosures about the application of new International Financial Reporting Standards on page 15. 3 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 27 28 V O L K SWA G E N F I N A N C I A L S E R V I C E S Volkswagen Financial Services supported the Volkswagen Group’s unit sales in the first half of 2018 with its innovative products along the automotive value chain. The industry magazine Firmenauto presented the “Com- pany Car of the Year” awards for the twentieth time in 2018 in Europe’s largest practical comparison, with around 250 fleet managers testing almost 100 vehicles in twelve categories. Volkswagen Financial Services built on its winning streak of years past and once again took the top spot in the “Leasing” category. Volkswagen Financial Services is systematically imple- menting its digitalization strategy and strengthened its IT expertise with a majority interest taken by Volkswagen Finan- cial Services AG in the Portuguese software company VTXRM. This company covers the entire spectrum of electronic contract processing for financial and leasing companies and is already in use at Volkswagen Financial Services in many countries. The main refinancing sources for Volkswagen Financial Services are money and capital market instruments, asset- backed security (ABS) transactions and customer deposits from the direct banking business. In the second quarter of 2018, Volkswagen Financial Services securitized receivables with a volume of over AUD 750 million (around €470 million) and successfully placed them with investors. The auto ABS transaction Driver Australia five, which is exclusively secured by receivables from Volkswagen Financial Services Australia Pty Ltd., represents the highest-volume transaction that Volkswagen Financial Services has ever conducted in Australian dollars. Brands and Business Fields Volkswagen Bank GmbH securitized receivables from Italian car loans for the first time. The auto ABS transaction Driver Italia one is exclusively secured by receivables from the Italian branch of Volkswagen Bank GmbH and has a volume of over €500 million. In the second quarter of 2018, Volkswagen Financial Ser- vices AG placed three bonds with a total volume of €2.25 bil- lion. Volkswagen Bank GmbH also placed three bonds with a total volume of €2 billion. The transactions generated tremen- dous interest among investors and were oversubscribed by a factor of more than two. The number of new financing, leasing, service and insur- ance contracts signed in the first half of 2018 was up on the prior-year level at 3.5 (3.3) million. Based on unchanged credit eligibility criteria, the penetration rate, expressed as the ratio of leased or financed vehicles to relevant Group delivery volumes, amounted to 33.2 (33.1)%. As of June 30, 2018, the total number of contracts was 17.6 million, up 2.0% on the end of December 2017. The number of contracts in the Customer Financing/Leasing area rose by 3.5% compared with December 31, 2017 to 9.9 million. At 7.6 (7.6) million, the number of contracts in the Service/Insurance area was in line with the 2017 year-end level. At the end of the reporting period, Volkswagen Bank managed around 1.5 (1.5) million deposit accounts. On June 30, 2018, Volkswagen Financial Services had a total of 13,943 (13,766) employees. Interim Consolidated Financial Statements (Condensed) Income Statement Interim Consolidated Financial Statements (Condensed) Income Statement for the Period January 1 to June 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ F I N A N C I A L S E R V I C E S € million 2018 2017³ 2018 2017³ 2018 2017³ Sales revenue 119,377 115,349 101,715 98,388 17,662 16,961 Cost of sales – 94,549 – 91,630 – 80,182 – 77,864 – 14,367 – 13,765 Gross result 24,828 23,719 21,533 20,524 3,295 3,196 Distribution expenses – 10,244 – 10,277 – 9,547 – 9,603 – 697 – 675 Administrative expenses – 4,226 – 3,996 – 3,250 – 3,139 – 976 – 857 Other operating income/expense – 2,198 – 529 – 1,870 – 130 – 328 – 399 Operating result 8,160 8,916 6,866 7,651 1,294 1,265 Share of the result of equity-accounted investments 1,680 1,635 1,641 1,634 39 2 Net interest income and other financial result – 867 – 1,753 – 868 – 1,756 0 3 Financial result 813 – 117 774 – 122 39 5 Earnings before tax 8,972 8,799 7,640 7,529 1,333 1,270 Income tax expense – 2,360 – 2,325 – 1,845 – 1,960 – 515 – 364 Earnings after tax 6,613 6,474 5,794 5,569 818 906 of which attributable to Noncontrolling interests 5 5 – 27 – 16 32 21 Volkswagen AG hybrid capital investors 156 116 156 116 – – Volkswagen AG shareholders 6,452 6,354 5,665 5,469 786 885 Basic earnings per ordinary share (€)² 12.85 12.65 Diluted earnings per ordinary share (€)² 12.85 12.65 Basic earnings per preferred share (€)² 12.91 12.71 Diluted earnings per preferred share (€)² 12.91 12.71 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. 3 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). 29 30 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period January 1 to June 30 € million 2018 2017¹ Earnings after tax 6,613 6,474 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax –159 1,961 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income 46 –577 Pension plan remeasurements recognized in other comprehensive income, net of tax –113 1,384 Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, net of tax 32 48 Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax 1 1 Items that will not be reclassified to profit or loss –80 1,432 Exchange differences on translating foreign operations Unrealized currency translation gains/losses –494 –1,305 Transferred to profit or loss – –1 Exchange differences on translating foreign operations, before tax –494 –1,306 Deferred taxes relating to exchange differences on translating foreign operations 6 –10 Exchange differences on translating foreign operations, net of tax –489 –1,316 Hedging Fair value changes recognized in other comprehensive income (OCI I) –644 3,778 Transferred to profit or loss (OCI I) –1,032 223 Cash flow hedges (OCI I), before tax –1,675 4,002 Deferred taxes relating to cash flow hedges (OCI I) 472 –1,159 Cash flow hedges (OCI I), net of tax –1,203 2,842 Fair value changes recognized in other comprehensive income (OCI II) –582 171 Transferred to profit or loss (OCI II) 116 – Cash flow hedges (OCI II), before tax –466 171 Deferred taxes relating to cash flow hedges (OCI II) 138 –51 Cash flow hedges (OCI II), net of tax –328 120 Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income –2 –16 Transferred to profit or loss 1 1 Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, before tax –1 –15 Deferred taxes relating to fair value valuation of securities and receivables (debt instruments) recognized in other comprehensive income 0 5 Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, net of tax –1 –9 Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax 94 –288 Items that may be reclassified to profit or loss –1,927 1,349 Other comprehensive income, before tax –2,670 4,574 Deferred taxes relating to other comprehensive income 662 –1,793 Other comprehensive income, net of tax –2,008 2,781 Total comprehensive income 4,605 9,256 of which attributable to Noncontrolling interests 4 5 Volkswagen AG hybrid capital investors 156 116 Volkswagen AG shareholders 4,444 9,135 1 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). Interim Consolidated Financial Statements (Condensed) Income Statement for the Period April 1 to June 30 V O L K S W A G E N G R O U P A U T O M O T I V E ¹ € million 2018 2017³ 2018 Sales revenue 61,149 59,152 51,972 Cost of sales – 47,891 – 46,859 – 40,399 Gross result 13,258 12,293 11,573 Distribution expenses – 5,485 – 4,964 – 5,102 Administrative expenses – 2,101 – 2,020 – 1,573 Other operating income/expense – 1,723 – 760 – 1,604 Operating result 3,948 4,549 3,294 Share of the result of equity-accounted investments 852 699 829 Net interest income and other financial result – 305 – 1,041 – 328 Financial result 547 – 341 502 Earnings before tax 4,495 4,207 3,796 Income tax expense – 1,182 – 1,106 – 836 Earnings after tax 3,313 3,101 2,959 of which attributable to Noncontrolling interests 3 2 – 16 Volkswagen AG hybrid capital investors 79 60 79 Volkswagen AG shareholders 3,230 3,038 2,896 Basic earnings per ordinary share (€)² 6.44 6.06 Diluted earnings per ordinary share (€)² 6.44 6.06 Basic earnings per preferred share (€)² 6.44 6.06 Diluted earnings per preferred share (€)² 6.44 6.06 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. 3 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). D I V I S I O N S 2017³ 50,563 – 39,900 10,664 – 4,626 – 1,602 – 552 3,884 693 – 1,049 – 356 3,528 – 870 2,658 – 7 60 2,604 Income Statement F I N A N C I A L S E R V I C E S 2018 2017³ 9,177 8,589 – 7,493 – 6,960 1,685 1,629 – 383 – 338 – 529 – 418 – 119 – 208 654 665 23 7 22 8 45 15 699 680 – 346 – 236 354 443 19 9 – – 334 434 31 32 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period April 1 to June 30 € million 2018 2017¹ Earnings after tax 3,313 3,101 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss 685 –209 477 53 –11 518 1,300 –394 906 –9 2 899 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax 102 – 102 2 103 –1,518 –1 –1,520 –1 –1,521 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) –1,449 –435 –1,884 545 –1,339 –446 117 –329 97 –232 3,797 –62 3,735 –1,089 2,646 130 – 130 –39 91 Cash flow hedges (OCI II), net of tax Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of securities and receivables (debt instruments) recognized in other comprehensive income –22 0 –21 5 –16 1 –15 5 Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to –17 94 –1,391 –1,312 440 –872 2,440 –9 –241 966 3,383 –1,517 1,865 4,967 Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 4 79 2,358 1 60 4,905 1 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). Interim Consolidated Financial Statements (Condensed) Balance Sheet as of June 30, 2018 and December 31, 2017 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2018 2017 2018 2017 Assets Noncurrent assets 264,844 262,081 138,296 140,912 Intangible assets 63,593 63,419 63,393 63,211 Property, plant and equipment 54,510 55,243 51,646 52,503 Lease assets 41,523 39,254 4,854 3,140 Financial services receivables 76,319 73,249 9 – 7 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 28,899 30,916 18,395 22,065 Current assets 176,272 160,112 91,163 80,210 Inventories 45,803 40,415 41,576 36,113 Financial services receivables 52,757 53,145 – 546 – 686 Other receivables and financial assets 39,381 32,040 19,852 17,354 Marketable securities 16,610 15,939 13,655 13,512 Cash, cash equivalents and time deposits 21,720 18,457 16,626 13,826 Held for Sale – 115 – 90 Total assets 441,116 422,193 229,460 221,121 Equity and Liabilities Equity 113,850 109,077 86,262 81,605 Equity attributable to Volkswagen AG shareholders 99,849 97,761 72,887 70,857 Equity attributable to Volkswagen AG hybrid capital investors 13,770 11,088 13,770 11,088 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 113,619 108,849 86,657 81,945 Noncontrolling interests 231 229 – 395 – 339 Noncurrent liabilities 155,692 152,726 69,658 69,805 Financial liabilities 83,819 81,628 5,785 6,709 Provisions for pensions 33,047 32,730 32,493 32,189 Other liabilities 38,826 38,368 31,380 30,906 Current liabilities 171,573 160,389 73,540 69,711 Put options and compensation rights granted to noncontrolling interest shareholders 4,158 3,795 4,158 3,795 Financial liabilities 85,448 81,844 – 3,180 – 458 Trade payables 25,326 23,046 21,816 20,497 Other liabilities 56,642 51,705 50,747 45,877 Total equity and liabilities 441,116 422,193 229,460 221,121 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. Balance Sheet F I N A N C I A L S E R V I C E S 2018 2017 126,548 121,169 200 208 2,864 2,739 36,669 36,114 76,311 73,256 10,505 8,851 85,108 79,902 4,228 4,302 53,302 53,832 19,529 14,686 2,955 2,427 5,094 4,632 – 24 211,656 201,071 27,588 27,472 26,962 26,904 – – 26,962 26,904 627 568 86,034 82,921 78,034 74,919 554 540 7,446 7,462 98,034 90,678 – – 88,629 82,302 3,510 2,548 5,895 5,828 211,656 201,071 33 34 Statement of Changes in Equity Interim Consolidated Financial Statements (Condensed) Statement of Changes in Equity O T H E R R E S E R V E S € million Subscribed capital Capital reserves Retained earnings Currency translation reserve Unadjusted balance at Jan. 1, 2017 1,283 14,551 70,446 – 1,117 Changes in accounting policy to reflect IFRS 9 – – 57 – Balance at Jan. 1, 2017 1,283 14,551 70,503 – 1,117 Earnings after tax – – 6,354 – Other comprehensive income, net of tax – – 1,383 – 1,316 Total comprehensive income – – 7,738 – 1,316 Offsetting of the result for investment hedging – – – – Disposal of equity instruments – – – – Capital increases¹ – – – – Dividends payment – – – 1,015 – Capital transactions involving a change in ownership interest – – – – Other changes – – – 5 – Balance at June 30, 2017 1,283 14,551 77,221 – 2,432 Unadjusted balance at Jan. 1, 2018 1,283 14,551 81,367 – 3,223 Changes in accounting policy to reflect IFRS 9 and 15 – – – 282 – Balance at Jan. 1, 2018 1,283 14,551 81,085 – 3,223 Earnings after tax – – 6,452 – Other comprehensive income, net of tax – – – 113 – 489 Total comprehensive income – – 6,339 – 489 Offsetting of the result for investment hedging – – – – Disposal of equity instruments – – – – Capital increases² – – – – Dividends payment – – – 1,967 – Capital transactions involving a change in ownership interest – – – – Other changes – – – 1 – Balance at June 30, 2018 1,283 14,551 85,456 – 3,712 1 Volkswagen AG recorded an inflow of cash funds amounting to €3,500 million, less a discount of €4 million and transaction costs of €23 million, from the hybrid capital issued in June 2017. Additionally, there were noncash effects from the deferral of taxes amounting to €8 million. The hybrid capital is required to be classified as equity instruments granted. 2 Volkswagen AG recorded an inflow of cash funds amounting to €2,750 million, less transaction costs of €18 million, from the hybrid capital issued in June 2018. Additionally, there were noncash effects from the deferral of taxes amounting to €5 million. The hybrid capital is required to be classified as equity instruments granted. Interim Consolidated Financial Statements (Condensed) H E D G I N G Cash flow hedges (OCI I) Deferred costs of Hedging (OCI II) Equity and debt instruments –457 – –2 – –57 – –457 –57 –2 – – – 2,842 120 38 2,842 120 38 – – – – – – – – – – – – – – – – – – 2,385 63 37 3,525 – 91 56 63 –225 3,581 63 –133 – – – –1,203 –328 31 –1,203 –328 31 – – – – – – – – – – – – – – – – – – 2,378 –265 –102 Equity- accounted investments 417 – 417 – –287 –287 – – – – – – 130 166 – 166 – 94 94 – – – – – – 260 Equity attributable to Volkswagen AG hybrid capital investors 7,567 – 7,567 116 – 116 – – 3,481 –204 – 51 11,010 11,088 – 11,088 156 – 156 – – 2,737 –282 – 70 13,770 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 92,689 – 92,689 6,470 2,781 9,251 – – 3,481 –1,219 – 46 104,248 108,849 –388 108,461 6,608 –2,008 4,600 – – 2,737 –2,249 – 70 113,619 Statement of Changes in Equity Noncontrolling interests Total equity 221 92,910 – – 221 92,910 5 6,474 0 2,781 5 9,256 – – – – – 3,481 –5 –1,224 – – 2 48 223 104,471 229 109,077 1 –387 229 108,690 5 6,613 0 –2,008 4 4,605 – – – – – 2,737 –4 –2,253 – – 2 71 231 113,850 35 36 Cash flow statement Interim Consolidated Financial Statements (Condensed) Cash flow statement for the Period January 1 to June 30 V OLKSW A G E N G R OU P D IV ISION S A U T OM OT I V E ¹ F I N A NC I A L SE RV I C ES € million 2018 20177 2018 20177 2018 20177 Cash and cash equivalents at beginning of period Earnings before tax Income taxes paid Depreciation and amortization expense² Change in pension provisions Share of the result of equity-accounted investments Other noncash income/expense and reclassifications³ Gross cash flow Change in working capital Change in inventories Change in receivables Change in liabilities Change in other provisions Change in lease assets (excluding depreciation) Change in financial services receivables 18,038 8,972 – 1,459 10,745 198 1,479 387 20,323 – 15,487 – 5,502 – 7,811 5,663 1,428 – 5,964 – 3,300 4,836 18,833 8,799 – 1,910 10,790 176 1,893 – 265 19,484 – 22,362 – 5,946 – 3,100 5,242 – 8,277 – 5,657 – 4,623 – 2,878 13,428 7,640 – 1,682 7,388 191 1,519 402 15,457 – 5,250 – 5,663 – 4,541 4,391 1,390 – 671 – 156 10,208 14,125 7,529 – 1,937 7,069 171 1,888 124 14,844 – 12,810 – 5,676 – 2,897 4,649 – 8,346 – 488 – 53 2,033 4,609 1,333 223 3,357 7 – 39 – 15 4,865 – 10,237 161 – 3,270 1,272 38 – 5,294 – 3,144 – 5,372 4,709 1,270 27 3,721 5 6 – 388 4,640 – 9,551 – 270 – 203 592 69 – 5,169 – 4,570 – 4,911 Cash flows from operating activities Cash flows from investing activities attributable to operating activities of which: Investments in intangible assets – 7,158 – 7,040 – 6,862 – 6,829 – 296 – 211 (excluding capitalized development costs), property, plant and equipment, and investment property capitalized development costs acquisition and disposal of equity investments Net cash flow4 Change in investments in securities, loans and time deposits Cash flows from investing activities Cash flows from financing activities of which: capital contributions/capital redemptions Effect of exchange rate changes on cash and cash equivalents Change of loss allowance within cash and cash equivalents Net change in cash and cash equivalents – 4,610 – 2,490 – 196 – 2,322 – 766 – 7,924 6,352 2,732 – 68 0 3,195 – 4,327 – 2,919 – 38 – 9,917 888 – 6,151 12,576 3,473 – 507 – 3,040 – 4,398 – 2,490 – 80 3,346 2,172 – 4,690 – 2,722 2,708 – 69 0 2,728 – 4,159 – 2,919 24 – 4,795 1,741 – 5,088 6,855 2,470 – 447 – 3,354 – 212 – – 116 – 5,668 – 2,939 – 3,235 9,074 24 1 0 468 – 168 – – 62 – 5,122 – 853 – 1,064 5,721 1,002 – 60 – – 313 Cash and cash equivalents at June 305 Securities, loans and time deposits Gross liquidity Total third-party borrowings Net liquidity at June 306 For information purposes: at Jan. 1 21,233 26,535 47,768 – 169,267 – 121,499 – 119,143 21,874 27,085 48,959 – 160,911 – 111,952 – 107,950 16,156 12,746 28,902 – 2,604 26,298 22,378 17,478 15,969 33,448 – 9,702 23,745 27,180 5,077 13,789 18,866 – 166,663 – 147,797 – 141,522 4,395 11,116 15,511 – 151,208 – 135,697 – 135,130 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments, the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loans to affiliates and joint ventures as well as time deposits net of third-party borrowings (noncurrent and current financial liabilities). 7 Prior-year figures adjusted (see disclosures on IFRS 9 and IFRS 15). Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements Notes to the Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2017 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2018 were therefore also prepared in accordance with IAS 34 (Interim Financial Reporting) and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 115 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2018. I F R S 9 – F I N A N C I A L I N ST R U M E N T S IFRS 9 changes the accounting requirements for classifying and measuring financial assets, for impairment of financial assets, and for hedge accounting. Financial assets are classified and measured on the basis of the entity’s business model and the characteristics of the financial asset’s cash flows. A financial asset is initially measured either “at amortized cost”, “at fair value through other comprehensive income”, or “at fair value through profit or loss”. The classification and measurement of financial liabilities under IFRS 9 are largely unchanged compared with the current accounting requirements of IAS 39. The basis for measuring impairment losses and recognizing loss allowances switched from an incurred credit loss model to an expected credit loss model. The change in measurement method leads to an increase in the loss allowance. The increase in the loss allowance results firstly from the requirement to recognize a loss allowance even for financial assets not classified as non-performing and whose credit risk has not increased significantly since initial recognition. Secondly, the increase results from the requirement to recognize loss allowances on the basis of the entire expected remaining life of the contractual asset for financial assets for which there has been a significant increase in credit risk since initial recognition. In the case of hedge accounting, IFRS 9 contains both extended designation options and the need to implement more complex recognition and measurement methods. In addition, IFRS 9 also eliminates the quantitative limits for effectiveness testing. In addition, IFRS 9 has an impact on the entity’s reclassification practice. Depending on market trends, there is an expectation that operating profit or loss will be affected by hedging transactions to a greater extent. Due to the retrospective application of the guidance on designating options, the prior-year figures were adjusted. This resulted in an effect of €–120 million on earnings after tax in the first six months of fiscal year 2017. This will also result in far more extensive disclosures in the notes. 37 38 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The tables below show the main effects of the new accounting rules under IFRS 9 on the classification and measurement of financial assets, the impairment of financial assets and hedge accounting. For the class of derivatives in hedge accounting, IFRS 9 did not result in any reclassifications from or to other classes. A D J U ST M E N T S T O B A L A N C E S H E E T A M O U N T S A S O F J A N U A R Y 1 , 2 0 1 8 A S A R E S U LT O F I F R S 9 D E C . 3 1 , 2 0 1 7 J A N . 1 , 2 0 1 8 € million Before adjustments Adjustments After adjustments Assets Noncurrent assets Financial services receivables 73,249 – 173 73,076 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 30,916 52 30,967 Current assets Financial services receivables 53,145 – 122 53,023 Other receivables and financial assets 32,040 – 206 31,834 Marketable securities 15,939 2 15,941 Cash, cash equivalents and time deposits 18,457 – 2 18,456 Equity and liabilities Equity Total Equity 109,077 – 391 108,687 Noncurrent liabilities Other liabilities 38,368 – 67 38,302 Current liabilities Other liabilities 51,705 7 51,712 In addition to the changes described above, the new rules on the recognition of loss allowances had an impact on the measurement of lease assets. This resulted in an adjustment of €43 million (of which €35 million recognized in lease assets and €7 million in inventories). This transition effect, net of deferred taxes, was recognized directly in equity. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F T H E C L A S S E S O F F I N A N C I A L A S S E T S A N D F I N A N C I A L L I A B I L I T I E S M E A S U R E D AT F A I R VA L U E F R O M I A S 3 9 T O I F R S 9 A S O F J A N U A R Y 1 , 2 0 1 8 T R A N S F E R S MEASURED AT FAIR VALUE IAS 39 FROM MEASURED AT AMORTIZED COST TO MEASURED AT AMORTIZED COST MEASURED AT FAIR VALUE IFRS 9 € million Carrying amount Dec. 31, 2017 Fair value Dec. 31, 2017 Fair value Dec. 31, 2017 Carrying amount Jan. 1, 2018 Noncurrent assets Equity-accounted investments – – – – Other equity investments 243 – – 243 Financial services receivables – 533 – 533 Other financial assets 776 – – 776 Current assets Trade receivables – 44 – 44 Financial services receivables – 0 – 0 Other financial assets 936 5 – 941 Marketable securities 15,939 – 79 15,861 Cash, cash equivalents and time deposits – – – – Noncurrent liabilities Noncurrent financial liabilities – – – – Other noncurrent financial liabilities 774 – – 774 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – – – – Current financial liabilities – – – – Trade payables – – – – Other current financial liabilities 766 – – 766 39 40 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) R E C O N C I L I AT I O N O F T H E C L A S S E S O F F I N A N C I A L A S S E T S A N D F I N A N C I A L L I A B I L I T I E S M E A S U R E D AT A M O R T I Z E D C O S T F R O M I A S 3 9 T O I F R S 9 A S O F J A N U A R Y 1 , 2 0 1 8 T R A N S F E R S MEASURED AT AMORTIZED COST IAS 39 FROM MEASURED AT FAIR VALUE TO MEASURED AT FAIR VALUE MEASURED AT AMORTIZED COST IFRS 9 € million Carrying amount Dec. 31, 2017 Fair value Dec. 31, 2017 Fair value Dec. 31, 2017 Carrying amount adjusted Jan. 1, 2018 Provision for credit risks ad- justment Jan. 1, 2018 Carrying amount Jan. 1, 2018 Carrying amount Dec. 31, 2017 Fair value Dec. 31, 2017 Carrying amount Jan. 1, 2018 Fair value Jan. 1, 2018 Noncurrent assets Equity-accounted investments – – – – – – – – – – Other equity investments – – – – – – – – – – Financial services receivables 73,249 75,049 – – – – 533 533 72,716 74,516 Other financial assets 4,364 4,391 – – – – – – 4,364 4,391 Current assets Trade receivables 13,357 13,357 – – – – 44 44 13,313 13,313 Financial services receivables 53,145 53,145 – – – – 0 0 53,145 53,145 Other financial assets 9,153 9,153 – – – – 5 5 9,148 9,148 Marketable securities – – 79 – 0 78 – – 78 78 Cash, cash equivalents and time deposits 18,457 18,457 – – – – – – 18,457 18,457 Noncurrent liabilities Noncurrent financial liabilities 81,628 82,567 – – – – – – 81,628 82,567 Other noncurrent financial liabilities 1,630 1,633 – – – – – – 1,630 1,633 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders 3,795 3,811 – – – – – – 3,795 3,811 Current financial liabilities 81,844 81,844 – – – – – – 81,844 81,844 Trade payables 23,046 23,046 – – – – – – 23,046 23,046 Other current financial liabilities 7,358 7,358 – – – – – – 7,358 7,358 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F T H E P R O V I S I O N F O R C R E D I T R I S K S I N R E S P E C T O F F I N A N C I A L A S S E T S F R O M I A S 3 9 T O I F R S 9 A S O F J A N U A R Y 1 , 2 0 1 8 € million From financial assets measured at fair value through profit or loss IAS 39 From financial assets measured at amortized cost IAS 39 No measurement category under IAS 39 Total To financial assets measured at fair value through profit or loss IFRS 9 Dec. 31, 2017 63 – – Adjustments – 63 – – Jan. 1, 2018 – – – To financial assets measured at fair value through other comprehensive income IFRS 9 (equity instruments) Dec. 31, 2017 396 – – Adjustments 2 – – Jan. 1, 2018 397 – – To financial assets measured at fair value through other comprehensive income IFRS 9 (debt instruments) Dec. 31, 2017 – – – Adjustments – – – Jan. 1, 2018 – – – To financial assets measured at amortized cost IFRS 9 Dec. 31, 2017 – 3,046 – Adjustments – 318 – Jan. 1, 2018 – 3,364 – To lease receivables Dec. 31, 2017 – – 982 Adjustments – – 238 Jan. 1, 2018 – – 1,221 To assets IFRS 15 Dec. 31, 2017 – – 25 Adjustments – – 3 Jan. 1, 2018 – – 29 To credit commitments Dec. 31, 2017 – – – Adjustments – – 11 Jan. 1, 2018 – – 11 To financial guarantees Dec. 31, 2017 – – – Adjustments – – 5 Jan. 1, 2018 – – 5 Total Jan. 1, 2018 397 3,364 1,266 63 – 63 – 396 2 397 – – – 3,046 318 3,364 982 238 1,221 25 3 29 – 11 11 – 5 5 5,027 41 42 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) R E C O N C I L I AT I O N O F T H E C A R R Y I N G A M O U N T S O F F I N A N C I A L A S S E T S M E A S U R E D AT F A I R VA L U E T H R O U G H P R O F I T O R L O S S F R O M I A S 3 9 T O I F R S 9 € million Carrying amount IAS 39 Dec. 31, 2017 Reclassifications Adjustments IFRS 9 Carrying amount IFRS 9 Jan. 1, 2018 Change in retained earnings Jan. 1, 2018 Financial assets measured at fair value through profit or loss IAS 39 1,712 Additions Available for sale financial assets IAS 39 13,124 – 230 12,894 230 Financial assets measured at amortized cost IAS 39 580 – 9 571 9 Deductions Financial assets measured at amortized cost IFRS 9 – – – – Financial assets measured at fair value through other comprehensive income IFRS 9 – – – – Financial assets measured at fair value through profit or loss IFRS 9 15,177 R E C O N C I L I AT I O N O F T H E C A R R Y I N G A M O U N T S O F F I N A N C I A L A S S E T S M E A S U R E D AT F A I R VA L U E T H R O U G H O T H E R C O M P R E H E N S I V E I N C O M E F R O M I A S 3 9 TO I F R S 9 € million Carrying amount IAS 39 Dec. 31, 2017 Reclassifications Adjustments IFRS 9 Carrying amount IFRS 9 Jan. 1, 2018 Change in retained earnings Jan. 1, 2018 Available for sale financial assets IAS 39 16,182 Additions Financial assets measured at amortized cost IAS 39 5 – 5 – Deductions Financial assets measured at amortized cost IFRS 9 79 – 79 – Financial assets measured at fair value through profit or loss IFRS 9 13,124 – 13,124 – Financial assets measured at fair value through other comprehensive income IFRS 9 2,984 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F T H E C A R R Y I N G A M O U N T S O F F I N A N C I A L A S S E T S M E A S U R E D AT A M O R T I Z E D C O ST F R O M I A S 3 9 T O I F R S 9 € million Carrying amount IAS 39 Dec. 31, 2017 Reclassifications Adjustments IFRS 9 Carrying amount IFRS 9 Jan. 1, 2018 Change in retained earnings Jan. 1, 2018 Financial assets measured at amortized cost IAS 39 125,550 Additions Available for sale financial assets IAS 39 79 0 78 0 Deductions Financial assets measured at fair value through other comprehensive income IFRS 9 5 – 5 – Financial assets measured at fair value through profit or loss IFRS 9 580 – 580 – Financial assets measured at amortized cost IFRS 9 125,044 I F R S 1 5 – R E V E N U E F R O M CO N T R A C T S W I T H C U STO M E R S IFRS 15 specifies new accounting rules for revenue recognition. The Volkswagen Group applies the modified retrospective transition method. This did not result in material transition effects for the Volkswagen Group as of January 1, 2018, because the existing approach used by the Volkswagen Group is already largely in line with the new guidance. In the MAN subgroup, sales revenue for certain types of contract will be recognized at a later point in time than under the previous accounting treatment. Other provisions and other liabilities will be adjusted accordingly. The recognition of prepayments due but not yet transferred by the customer in the form of cash increased total assets by €0.2 billion in the balance sheet as at January 1, 2018 compared with the previous year. Starting in fiscal year 2018, certain items previously recognized in distribution expenses (in particular financing cost subsidies granted to third parties) are allocated to sales allowances. In addition, from 2018 onward, the reversal of sales allowances is no longer presented under other oper- ating income, but under sales revenue. As a result, an amount of €0.2 billion has been moved between other operating income and sales revenue. To make the presentation more consistent and easier to compare, the way other income from the reversal of provisions and accrued liabilities is reported was also adjusted in this context; these items were allocated to those functional area in which they were originally recognized. Prior-year figures were adjusted accordingly, resulting in a €1.3 billion decline in other operating income. This had a corresponding positive effect on cost of sales (€1.0 billion) as well as distribution (€0.3 billion) and administrative expenses (€44 million). In addition, it was established in connection with the introduction of IFRS 15 that certain sales programs in certain countries should be allocated to sales allowances rather than distribution expenses. The prior-period distribution expenses were therefore adjusted by €0.5 billion. There was a corresponding decrease in sales revenue. OT H E R A CCO U N T I N G P O L I C I E S A discount rate of 1.9% (December 31, 2017: 1.9%) was applied to German pension provisions in the accom- panying interim consolidated financial statements. The income tax expense for the interim consolidated financial statements was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34 (Interim Financial Reporting). 43 44 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) In other respects, the same accounting policies and consolidation methods that were used for the 2017 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2017 consolidated financial statements. In addition, details of the effects of new standards can be found in the “New and amended IFRSs not applied” section. The 2017 consolidated financial statements can also be accessed on the Internet at www.volkswagenag.com/ir. Key events On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2017 consolidated financial statements. In the second quarter of fiscal year 2018, additional expenses of €1.6 billion for legal risks had to be recognized in this connection. The main reasons for the expenses are the €1.0 billion penalty imposed by the Braunschweig public prosecutor in connection with the diesel issue as well as higher legal defense costs. Apart from the above, there were no factors with any material effect on the half-yearly consolidated financial statements in the reporting period, including the publications released up to the reporting date or the continuing investigations and interviews in connection with the diesel issue and other significant litigation. The Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agreement between MAN SE and Volkswagen Truck & Bus GmbH, a subsidiary of Volkswagen AG, in June 2013. The agreement sets out that the noncontrolling interest shareholders of MAN SE are entitled to either a cash settlement in accordance with section 305 of the AktG or cash compensation in accordance with section 304 of the AktG for each full fiscal year. In July 2013, award proceedings were instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. On June 26, 2018, the Higher Regional Court in Munich made a final decision in the award proceedings on the appropriateness of the cash settlement and the right to compensation payable to the noncontrolling interest shareholders of MAN SE, ruling that the annual compensation claim per share has to be increased. The cash settlement in the amount of €90.29 per share, increased in the first instance by the Regional Court in Munich I, was confirmed. On July 30, 2018, as part of the amendment process, the Higher Regional Court in Munich established the annual compensation claim of €5.47 gross (less any corporate income tax and any solidarity surcharge according to the respective tax rate applicable to these taxes for the financial year in question). The decision means that the put options and compensation rights granted to the noncontrolling interest shareholders had to be revalued. This resulted in an expense of €0.4 billion, which was recognized in the other financial result. Further information can be found in the “Litigation” section. Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all signifi- cant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements C O N S O L I D AT E D S U B S I D I A R I E S The disposal of part of PGA Group SAS, Paris, France, by POFIN Financial Services Verwaltungs GmbH, Freilassing, to the Emil Frey Group was implemented on June 1, 2017. The sale is in connection with the strategic development of Porsche Holding Salzburg’s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles. The transaction encompassed dealerships in Poland, the Netherlands, Belgium and in some cases also in France. In the previous year, this had a positive effect of €0.8 billion on net liquidity and, taking into account the disposal of the assets and liabilities, resulted in an insignificant income amount for the Volkswagen Group, which was reported in other operating income. Overall, the transaction led to the disposal of assets in the amount of €2.5 billion and liabilities in the amount of €2.1 billion. The assets mainly consisted of noncurrent leased assets (€0.6 billion) and inventories (€1.0 billion). The liabilities principally comprised noncurrent and current other liabilities (€0.9 billion) and trade payables (€0.7 billion). I N V E ST M E N T S I N A S S O C I AT E S In 2015, the Audi Subgroup, the BMW Group and Daimler AG established There Holding B.V., Rijswijk, the Netherlands, each with an interest of 33.3%. In December 2016, There Holding B.V. signed an agreement with Intel Holdings B.V., Schiphol-Rijk, the Netherlands, for the sale of 15% of the shares in HERE International B.V., Rijswijk, the Netherlands. The transaction with Intel Holdings B.V. was completed on January 31, 2017. This resulted in a loss of control within the meaning of IFRS 10 at the There Holding B.V. level. The deconsolidation gave rise to a proportionate effect on earnings for the Volkswagen Group of €183 million, which was shown in the result of equity-accounted investments in the previous year. Since a significant influence continues to exist, HERE International B.V. is included in the financial statement of There Holding B.V. as an associated company using the equity method. There was no change in the Volkswagen Group’s participating interest in There Holding B.V. as a result of this sale. A capital reduction was carried out at There Holding B.V. in February 2018. The share attributable to the Volkswagen Group amounted to €96 million. In December 2017, agreements for the sale of shares in There Holding B.V. were signed with Robert Bosch Investment Nederland B.V., Boxtel, the Netherlands and Continental Automotive Holding Netherlands B.V., Maastricht, the Netherlands. In this process, Robert Bosch Investment Nederland B.V. and Continental Automotive Holding Netherlands B.V. acquired an interest of 5.9% each in There Holding B.V. The transactions were completed on February 28, 2018. The Audi Subgroup, the BMW Group and Daimler AG sold the equivalent number of shares. As a result, the Volkswagen Group’s ownership interest declined to 29.4%. There was no material effect on financial position or financial performance. In June 2018, There Holding B.V. implemented a capital increase in which the Volkswagen Group participated. The shares accounted for using the equity method increased by €31 million and participating interest is now approximately 29.5%. At the beginning of September 2016, Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volks- wagen AG, and the US-based commercial vehicle manufacturer Navistar International Corporation, Lisle, USA (Navistar), announced that they had signed an agreement to forge a wide-ranging alliance. The cooperation primarily involves working together on technical components and in procurement. The transaction was closed on February 28, 2017. Within the framework of a capital increase, Volkswagen Truck & Bus acquired 16.6% of the shares in Navistar, paying USD 15.76 per share. The purchase price came to €0.3 billion. Due to Volkswagen’s representation on the Board of Directors of Navistar and the agreed cooperation, the investment in Navistar is reported as an equity-accounted investment in the consolidated financial statements. 45 46 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Disclosures on the interim consolidated financial statements 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 2 0 1 7 1 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 69,658 12,539 – – 82,196 – 9,872 72,325 Genuine parts 6,315 1,595 – – 7,910 – 49 7,861 Used vehicles and third-party products 7,142 925 – – 8,067 – 247 7,820 Engines, powertrains and parts deliveries 5,523 356 – – 5,879 – 583 5,297 Power Engineering – – 1,579 – 1,579 – 1 1,578 Motorcycles 380 – – – 380 – 380 Leasing business 408 878 – 13,088 14,373 – 2,131 12,242 Interest and similar income 122 2 – 3,541 3,664 – 78 3,586 Hedges sales revenue – – – – – – – Other sales revenue 5,091 957 – 332 6,380 – 2,120 4,260 94,637 17,252 1,579 16,961 130,430 – 15,081 115,349 1 Prior-year figures adjusted (see disclosures on IFRS 15). ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 2 0 1 8 € million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 70,818 13,073 – – 83,891 – 9,037 74,854 Genuine parts 6,358 1,665 – – 8,022 – 51 7,971 Used vehicles and third-party products 5,604 963 – – 6,566 – 276 6,291 Engines, powertrains and parts deliveries 6,542 609 – – 7,151 – 903 6,247 Power Engineering – – 1,637 – 1,637 – 1 1,636 Motorcycles 375 – – – 375 – 375 Leasing business 396 823 – 13,695 14,913 – 2,148 12,765 Interest and similar income 120 3 – 3,564 3,687 – 91 3,597 Hedges sales revenue 906 53 0 – 959 41 1,000 Other sales revenue 5,477 1,125 – 403 7,005 – 2,365 4,640 96,595 18,312 1,637 17,662 134,207 – 14,830 119,377 Other sales revenue comprises revenue from workshop services and license revenue, among other things. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements 2. Cost of sales Cost of sales includes interest expenses of €1,065 million (previous year: €985 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on intangible assets, items of property, plant and equipment, and lease assets. The impairment losses identified on the basis of updated impairment tests amount to a total of €336 million (previous year: €405 million). The value in use is used as the basis for calculating impairment losses. 3. Research and development costs H 1 € million 2018 2017 % Total research and development costs 6,747 6,759 – 0.2 of which: capitalized development costs 2,490 2,919 – 14.7 Capitalization ratio in % 36.9 43.2 Amortization of capitalized development costs 1,845 1,705 8.2 Research and development costs recognized in profit or loss 6,102 5,546 10.0 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since the basic and diluted number of shares is identical, basic earnings per share also correspond to diluted earnings per share. In accordance with Article 27 of the Articles of Association of Volkswagen AG, preferred shares are entitled to a €0.06 higher dividend than ordinary shares. Q 2 H 1 2018 2017¹ 2018 2017¹ Weighted average number of shares outstanding Ordinary shares: basic million 295.1 295.1 295.1 295.1 diluted million 295.1 295.1 295.1 295.1 Preferred shares: basic million 206.2 206.2 206.2 206.2 diluted million 206.2 206.2 206.2 206.2 Earnings after tax € million 3,313 3,101 6,613 6,474 Noncontrolling interests € million 3 2 5 5 Earnings attributable to Volkswagen AG hybrid capital investors € million 79 60 156 116 Earnings attributable to Volkswagen AG shareholders € million 3,230 3,038 6,452 6,354 Earnings per share Ordinary shares: basic € 6.44 6.06 12.85 12.65 diluted € 6.44 6.06 12.85 12.65 Preferred shares: basic € 6.44 6.06 12.91 12.71 diluted € 6.44 6.06 12.91 12.71 1 Prior-year figures adjusted (see disclosures on IFRS 9). 47 48 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A R Y 1 A N D J U N E 3 0 , 2 0 1 8 € million Carrying amount at Jan. 1, 2018 Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2018 Intangible assets 63,419 2,707 333 2,200 63,593 Property, plant and equipment Lease assets 55,243 39,2181 4,529 10,474 494 4,370 4,769 3,800 54,510 41,523 1 Value in the opening balance adjusted (see disclosures on IFRS 9). 6. Inventories € million June 30, 2018 Dec. 31, 2017 Raw materials, consumables and supplies 5,525 4,858 Work in progress 4,241 4,143 Finished goods and purchased merchandise 30,174 26,514 Current lease assets 5,722 4,774 Prepayments 152 127 Hedges on inventories – 12 – 45,803 40,415 There was no requirement to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2018 Dec. 31, 2017 Trade receivables 17,989 13,357 Miscellaneous other receivables and financial assets 21,392 18,683 39,381 32,040 In the period January 1 to June 30, 2018, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €402 million (previous year: €355 million). The trade receivables also include receivables from long-term construction contracts (contract assets). In connection with the revised classification of financial instruments required by IFRS 9, receivables from dealer financing of €2.9 billion were reclassified to trade receivables as of January 1, 2018. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements 8. Equity In June 2018, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €2.8 billion via a subsidiary, Volkswagen International Finance N.V., Amsterdam, the Netherlands (issuer). The perpetual hybrid notes were issued in two tranches and can be called by the issuer. The first call date for the first tranche (€1.3 billion and a coupon of 3.375%) is after six years, and the first call date for the second tranche (€1.5 billion and a coupon of 4.625%) is after ten years. Under IAS 32, the hybrid notes must be classified in their entirety as equity. The capital raised was reduced by transaction costs and recognized in equity, net of deferred taxes. The interest payments payable to the noteholders will be recognized directly in equity, net of income taxes. The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par-value preferred shares, and amounts to €1,283 million (December 2017: €1,283 million). Volkswagen AG distributed a dividend of €1,967 million in the reporting period (previous year: €1,015 million). €1,151 million (previous year: €590 million) of this amount was attributable to ordinary shares and €817 million (previous year: €425 million) to preferred shares. The noncontrolling interests are largely attributable to shareholders of RENK AG and AUDI AG. 9. Noncurrent financial liabilities € million June 30, 2018 Dec. 31, 2017 Bonds, commercial paper and notes 65,136 62,371 Liabilities to banks 14,948 15,357 Deposit business 1,281 2,114 Other financial liabilities 2,454 1,786 83,819 81,628 10. Current financial liabilities € million June 30, 2018 Dec. 31, 2017 Bonds, commercial paper and notes 40,979 36,652 Liabilities to banks 13,243 14,487 Deposit business 30,076 29,291 Other financial liabilities 1,151 1,414 85,448 81,844 49 50 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 11. Fair value disclosures The principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2017 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Assets and liabilities measured at fair value through profit or loss consist of derivatives to which hedge accounting is not applied. They include primarily commodity futures, currency forwards relating to com- modity futures as well as, in certain cases, interest rate swaps, currency swaps and cross-currency interest rate swaps. Moreover, other equity investments (shares representing an ownership interest of less than 20% as a rule) in partnerships (debt instruments), customer financing receivables whose returns contain more than just interest and principal repayments, and financial assets held in special funds controlled by the Volkswagen Group are measured at fair value through profit or loss. Derivative financial instruments within hedge accounting are likewise measured at fair value through profit or loss. Financial assets measured at fair value through other comprehensive income include equity investments (shares representing an ownership interest of less than 20% as a rule) in corporations (equity instruments) and shares for which the Volkswagen Group normally exercises the option of fair value measurement through other comprehensive income, as well as securities (debt instruments) whose cash flows comprise solely payments of interest and principal and that are held under a business model aimed at both collecting contractual cash flows and selling financial assets. For instruments measured through other comprehensive income, changes in fair value are recognized directly in equity, taking deferred taxes into account. Impairment losses on securities (debt instruments) are recognized through profit or loss. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The fair value of put options and compensation rights granted to noncontrolling interest shareholders is calculated using a present value model based on the contractually agreed cash settlement, including cash compensation, as well as the minimum statutory interest rate and a risk-adjusted discount rate for a matching maturity. Reconciliation of balance sheet items to classes of financial instruments The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting the carring amount using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. As a result of the initial application of IFRS 9 and IFRS 15, the carrying amounts of contract assets and receivables from insurance policies are allocated to the “not within the scope of IFRS 7” category, starting in fiscal year 2018. The risk variables governing the fair value of the receivables are risk-adjusted interest rates. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 7 D E R I VA T I V E F I N A NC I A L B A L A N C E I N STR U M EN T S N O T W I T H I N S H E E T I T E M M E A S U R E D A T M E A S U R E D A T W I T H I N H E DG E S C O P E O F A T F A I R V A L U E A M O R T I Z E D C O S T A C C OU N T IN G I F R S 7 D E C . 3 1 , 2 0 1 7 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 8,205 8,205 Other equity investments 243 – – – 1,075 1,318 Financial services receivables – 73,249 75,049 – – 73,249 Other financial assets 776 4,364 4,391 3,315 – 8,455 Current assets Trade receivables – 13,357 13,357 – – 13,357 Financial services receivables – 53,145 53,145 – – 53,145 Other financial assets 936 9,153 9,153 1,909 – 11,998 Marketable securities 15,939 – – – – 15,939 Cash, cash equivalents and time deposits – 18,457 18,457 – – 18,457 Assets held for Sale – – – – 90 90 Noncurrent liabilities Noncurrent financial liabilities – 81,628 82,567 – – 81,628 Other noncurrent financial liabilities 774 1,630 1,633 261 – 2,665 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 3,795 3,811 – – 3,795 Current financial liabilities – 81,844 81,844 – – 81,844 Trade payables – 23,046 23,046 – – 23,046 Other current financial liabilities 766 7,358 7,358 446 – 8,570 51 52 Notes to the Interim Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 1 8 D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S M E A S U R E D A T M E A S U R E D A T W I T H I N H E D G E F A I R V A L U E A M O R T I Z E D C O S T A C C O U N T I N G € million Carrying amount Carrying amount Fair value Carrying amount Noncurrent assets Equity-accounted investments – – – – Other equity investments 356 – – – Financial services receivables 582 75,737 77,654 – Other financial assets 420 4,027 4,039 2,121 Current assets Trade receivables 2 17,629 17,629 – Financial services receivables 23 52,734 52,734 – Other financial assets 1,102 11,007 11,007 1,857 Marketable securities 16,475 135 135 – Cash, cash equivalents and time deposits – 21,720 21,720 – Noncurrent liabilities Noncurrent financial liabilities – 83,819 84,310 – Other noncurrent financial liabilities 754 1,928 1,931 378 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 4,158 4,158 – Current financial liabilities – 85,448 85,448 – Trade payables – 25,326 25,326 – Other current financial liabilities 719 7,471 7,471 634 Interim Consolidated Financial Statements (Condensed) B A L A N C E N O T W I T H I N S H E E T I T E M S C O P E O F A T I F R S 7 J U N E 3 0 , 2 0 1 8 Carrying amount 6,930 6,930 1,165 1,521 – 76,319 – 6,569 359 17,989 – 52,757 17 13,984 – 16,610 – 21,720 – 83,819 – 3,060 – 4,158 – 85,448 – 25,326 – 8,825 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements The following tables contain an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT F A I R VA L U E B Y L E V E L € million Dec. 31, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 243 103 – 140 Other financial assets 776 – 705 71 Current assets Other financial assets 936 – 933 3 Marketable securities 15,939 15,939 – – Noncurrent liabilities Other noncurrent financial liabilities 774 – 242 532 Current liabilities Other current financial liabilities 766 – 533 233 € million June 30, 2018 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 356 84 29 243 Financial services receivables 582 – – 582 Other financial assets 420 – 366 55 Current assets Trade receivables 2 – – 2 Financial services receivables 23 – – 23 Other financial assets 1,102 – 1,101 2 Marketable securities 16,475 16,475 – – Noncurrent liabilities Other noncurrent financial liabilities 754 – 228 526 Current liabilities Other current financial liabilities 719 0 434 285 53 54 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) D E R I VAT I V E F I N A N C I A L I N ST R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million Dec. 31, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 3,315 – 3,315 – Current assets Other financial assets 1,909 – 1,909 – Noncurrent liabilities Other noncurrent financial liabilities 261 – 261 – Current liabilities Other current financial liabilities 446 – 445 0 € million June 30, 2018 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 2,121 – 2,121 – Current assets Other financial assets 1,857 – 1,857 – Noncurrent liabilities Other noncurrent financial liabilities 378 – 378 – Current liabilities Other current financial liabilities 634 – 634 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Fair Values in Level 3 are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models and customer financing receivables are reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity- specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT F A I R VA L U E B A S E D O N L E V E L € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2017 152 230 Foreign exchange differences – 6 – Total comprehensive income 14 97 recognized in profit or loss 19 97 recognized in other comprehensive income – 4 0 Additions (purchases) 82 – Sales and settlements – 9 – 38 Transfers into Level 2 – 10 – 2 Balance at June 30, 2017 223 287 Total gains or losses recognized in profit or loss 19 – 97 Net other operating expense/income – – of which attributable to assets/liabilities held at the reporting date – – Financial result 19 – 97 of which attributable to assets/liabilities held at the reporting date 1 – 96 € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2018 Foreign exchange differences 8231 – 24 765 1 Total comprehensive income 62 88 recognized in profit or loss – 18 88 recognized in other comprehensive income 80 – Additions (purchases) 163 6 Sales and settlements – 88 – 49 Transfers into Level 2 – 30 0 Balance at June 30, 2018 907 811 Total gains or losses recognized in profit or loss – 18 – 88 Net other operating expense/income – 18 – 88 of which attributable to assets/liabilities held at the reporting date – 21 – 94 Financial result 0 0 of which attributable to assets/liabilities held at the reporting date 1 – 1 Value in the opening balance adjusted (see disclosures on IFRS 9). 55 56 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 as of June 30, 2018 had been 10% higher (lower), earnings after tax would have been €11 million (previous year: €5 million) higher (lower). The equity is not affected. The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values at June 30, 2018 had been 10% higher, earnings after tax would have been €3 million (previous year: €1 million) higher. If the assumed enterprise values at June 30, 2018 had been 10% lower, earnings after tax would have been €3 million (previous year: €1 million) lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices for the used cars covered by the residual value protection model had been 10% higher as of June 30, 2018, earnings after tax would have been €317 million (previous year: €263 million) higher. If the prices for the used cars covered by the residual value protection model had been 10% lower as of June 30, 2018, earnings after tax would have been €335 million (previous year: €263 million) lower. If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points highe as of June 30, 2018, earnings after tax would have been €7 million lower. If the risk-adjusted interest rates as of June 30, 2018 had been 100 basis points lower, earnings after tax would have been €7 million higher. 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, cash- in-hand and call deposits. € million June 30, 2018 June 30, 2017 Cash, cash equivalents and time deposits as reported in the balance sheet 21,720 22,288 Time deposits – 487 – 414 Cash and cash equivalents as reported in the cash flow statement 21,233 21,874 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2018 2017 Capital contributions 2,732 3,473 Dividends paid – 2,253 – 1,224 Capital transactions with noncontrolling interest shareholders – – Proceeds from issuance of bonds 13,840 16,030 Repayments of bonds – 7,087 – 7,325 Changes in other financial liabilities – 866 1,633 Lease payments – 14 – 11 6,352 12,576 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars segment cover the development of vehicles and engines, the production and sale of passenger cars, and the corresponding genuine parts business. Given the high degree of techno- logical and economic interlinking in the production network of the individual brands, the Passenger Cars reporting segment combines the Volkswagen Group’s individual car brands to a single reportable segment. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of light commercial vehicles, trucks and buses, the corresponding genuine parts business and related services. Just as in the case of the car brands, there is collaboration within the areas procurement, development and sale. The aim is to achieve further forms of interlinking. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, combinations occur especially while taking into account the comparability of the type of services as well as the regulatory situation permits. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volks- wagen Group are transacted at arm’s length prices. 57 58 Notes to the Interim Consolidated Financial Statements R E P O R T I N G S E G M E N T S H 1 2 0 1 7 1 € million Passenger Cars Sales revenue from external customers 85,067 Intersegment sales revenue 9,570 Total sales revenue 94,637 Segment result (operating result) 8,232 1 Prior-year figures adjusted (see disclosures on IFRS 15). R E P O R T I N G S E G M E N T S H 1 2 0 1 8 € million Passenger Cars Sales revenue from external customers 87,057 Intersegment sales revenue 9,538 Total sales revenue 96,595 Segment result (operating result) 7,029 R E C O N C I L I AT I O N € million Segment result (operating result) Unallocated activities Group financing Consolidation Operating result Financial result Consolidated earnings before tax 1 Prior-year figures adjusted (see disclosures on IFRS 9). Commercial Vehicles 13,491 3,761 17,252 1,043 Commercial Vehicles 14,562 3,750 18,312 1,275 Power Engineering 1,578 1 1,579 – 46 Power Engineering 1,636 1 1,637 – 58 Financial Services 15,166 1,795 16,961 1,265 Financial Services 16,008 1,654 17,662 1,294 Interim Consolidated Financial Statements (Condensed) Total segments Reconciliation Volkswagen Group 115,303 46 115,349 15,127 – 15,127 – 130,430 – 15,081 115,349 10,494 – 1,578 8,916 Total segments Reconciliation Volkswagen Group 119,263 114 119,377 14,943 – 14,943 – 134,207 – 14,830 119,377 9,539 – 1,380 8,160 H 1 2018 2017¹ 9,539 10,494 11 38 – 13 5 – 1,378 – 1,621 8,160 8,916 813 – 117 8,972 8,799 Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements 14. Related party disclosures At 52.2%, Porsche SE held the majority of the voting rights in Volkswagen AG as of June 30, 2018. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. As a result, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE has the power to participate in the operating policy decisions of the Volkswagen Group and is therefore classified as a related party as defined by IAS 24. S U P P L I E S A N D S E R V I C E S S U P P L I E S A N D S E R V I C E S R E N D E R E D R E C E I V E D H 1 H 1 € million 2018 2017 2018 2017 Porsche SE and its majority interests 2 5 0 0 Supervisory Board members 3 1 1 2 Unconsolidated subsidiaries 537 481 724 446 Joint ventures and their majority interests 7,516 6,898 356 499 Associates and their majority interests 96 101 334 345 State of Lower Saxony, its majority interests and joint ventures 6 5 2 3 L I A B I L I T I E S ( I N C L U D I N G R E C E I V A B L E S F R O M O B L I G A T I O N S ) T O € million June 30, 2018 Dec. 31, 2017 June 30, 2018 Dec. 31, 2017 Porsche SE and its majority interests 8 13 114 0 Supervisory Board members 1 0 238 254 Unconsolidated subsidiaries 992 1,480 1,328 1,773 Joint ventures and their majority interests 11,590 9,889 2,484 2,168 Associates and their majority interests 123 76 543 572 State of Lower Saxony, its majority interests and joint ventures 2 2 0 1 The supplies and services received from joint ventures and associates that are presented in the above tables do not include resolved dividend distributions amounting to €3,236 million (previous year: €3,533 million). 59 60 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Receivables from joint ventures are primarily attributable to loans granted in an amount of €6,708 million (previous year: €6,277 million) as well as trade receivables in an amount of €3,168 million (previous year: €3,354 million). Receivables from non-consolidated subsidiaries also result primarily from loans granted in an amount of €653 million (previous year: €1,038 million) as well as trade receivables in an amount of €172 million (previous year: €224 million). Transactions with related parties are conducted on an arm’s length basis. Some of these transactions also include reservation of title clauses. The liabilities to Porsche SE consist mainly of term deposits. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €202 million (previous year: €149 million). Impairment losses of €59 million (previous year: €56 million) were recognized on the outstanding related party receivables. In the first six months of 2018, expenses of €17 million (previous year: €36 million) were incurred in this context. In the first six months, the Volkswagen Group made capital contributions of €455 million (previous year: €203 million) at related parties. 15. Litigation For certain T6 models (M1 class) with Euro 6 diesel engines registered as passenger cars, the inspection regarding the conformity of the current production of new vehicles with the approved type (conformity of production) identified that certain technical data could not be fully confirmed. To ensure this conformity of production for new vehicles, Volkswagen AG developed a software measure, which was approved by the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) at the end of February 2018 and was applied to the production of new vehicles as well as to (a total of approximately 30,000) new vehicles that had not been delivered by then. Volkswagen AG also conducted in-use tests to determine whether the around 200,000 T6 used vehicles already on the market are in conformity with the technical data. The tests carried out on the proposal of Volkswagen AG were taking place in close collaboration with the KBA, which included this process in a decision dated March 1, 2018. The results of these tests show that the technical data of the used T6 vehicles are conform. On March 2, 2018, the federal multidistrict litigation court in California dismissed in its entirety the first amended class action complaint alleging that these bonds were trading at artificially inflated prices and that the value of these bonds declined after the U.S. Environmental Protection Agency (EPA) issued its “Notices of Violation,” but granted leave to file a second amended complaint. On April 2, 2018, plaintiffs filed a second amended class action complaint, which Volkswagen has moved to dismiss. On March 5, 2018, a Tennessee state court granted in part and denied in part a motion to dismiss the state environmental claims asserted against Volkswagen AG and certain affiliates by the Tennessee Attorney General. Volkswagen and Tennessee both moved for and have been granted an interlocutory appeal of the decision. On March 12, 2018, a Minnesota state court granted in part and denied in part a motion to dismiss the state environmental claims asserted against Volkswagen AG and certain affiliates by the Minnesota Attorney General. Volkswagen has appealed the decision. On March 15, 2018, co-lead counsel for plaintiffs with regard to the German Automotive Manufacturers Antitrust Litigation filed consolidated amended class action complaints against Volkswagen AG and certain affiliates as well as other manufacturers in the Northern District of California on behalf of putative classes of indirect and direct purchasers. The consolidated amended complaints claim that since the 1990s, defendants had engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles by agreeing to share commercially sensitive information and to reach unlawful agreements regarding technology, costs, and suppliers. Moreover, plaintiffs claim that defendants had agreed to limit the size of AdBlue tanks to ensure that U.S. emissions regulators did not scrutinize the emissions control systems in defendants’ vehicles, and that Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements such agreement for Volkswagen was the impetus for the creation of the defeat device. The complaints further claim that defendants had coordinated to fix the price of steel used in their automobiles by agreeing with German steel manufacturers to apply a two component pricing formula to steel purchases and worked closely together to generate scientific studies aimed at promoting diesel vehicles. On May 17, 2018, all defendants filed a joint motion to dismiss the two consolidated class action complaints. On May 24, 2018, Volkswagen defendants also filed an individual motion to dismiss on grounds specific to them. The motions have been fully briefed, and a hearing is currently scheduled for September 17, 2018. On March 22, 2018, Volkswagen AG, certain affiliates and the Arizona Attorney General notified an Arizona state court that they have reached a settlement of Arizona’s consumer protection claims and unfair trade practices claims. On May 24, 2018, the Arizona state court granted a stipulation of dismissal with prejudice of the Arizona action. In South Korea, approval for the last vehicle clusters with engine type EA 189 was given on March 28, 2018. The Ministry of Environment in South Korea qualified certain emissions strategies in the engine control software of various diesel vehicles with a V6 or V8 engine meeting the Euro 6 emission standard as an unlawful defeat device and ordered a recall on April 4, 2018; the same applied to the Dynamic Shift Program (DSP) in the transmission control of a number of Audi models. On April 11, 2018, a Texas state court granted in part and denied in part a motion for summary judgment on the state environmental claims asserted against Volkswagen AG and certain affiliates by the Texas Attorney General. The Texas court denied Volkswagen’s motion for reconsideration or interlocutory appeal. On April 16, 2018, the federal multidistrict litigation court in California dismissed with prejudice state and local environmental claims asserted against certain Volkswagen AG affiliates by the Environmental Protection Commission of Hillsborough County, Florida and Salt Lake County, Utah, on the basis of the same federal preemption issue that is currently being litigated in the Tennessee, Minnesota, and Texas cases referenced above, as well as in several other state courts. The counties have appealed that decision. The public prosecutor’s office of Stuttgart has opened a criminal investigation. Furthermore, the Stuttgart public prosecutor's office confirmed that it is investigating, among others, the former Chairman of the Board of Management of Volkswagen AG in his capacity as member of the management board of Porsche SE, regarding his possible involvement in potential market manipulation in connection with this same issue. Moreover, the Stuttgart public prosecutor's office has commenced a criminal investigation into the diesel issue against one board member, one employee and one former employee of Dr. Ing. h.c. F. Porsche AG on suspicion of fraud and illegal advertising. Dr. Ing. h.c. F. Porsche AG has appointed two renowned major law firms to clarify the matter underlying the public prosecutor’s accusations. The investigations are at an early stage. The Board of Management and Supervisory Board of Dr. Ing. h.c. F. Porsche AG are being regularly updated on the current state of affairs. If the findings do illustrate reproachable conduct or fault on behalf of the organization, then the Board of Management or Supervisory Board, respectively, will adopt the necessary measures. On April 18, 2018, the EPA and California Air Resources Board (CARB) approved the second phase of the emissions modification for affected 2.0 l TDI vehicles with Generation 3 engines. Thereby the approval process for the technical measures for the relevant vehicles with engine type EA 189 has now been completed in all countries with the exception of Chile. On April 19, 2018, the federal multidistrict litigation court in California approved the stipulation of the parties postponing the hearing previously scheduled for May 11, 2018, regarding defendants’ motion to dismiss plaintiffs’ consolidated class action complaint alleging that defendants concealed the existence of defeat devices in Audi brand vehicles with automatic transmissions. The hearing was postponed again. On April 25, 2018, Volkswagen AG, certain affiliates and the Maryland Department of the Environment announced an agreement to resolve the State of Maryland’s environmental and remaining consumer claims for 61 62 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) restitution or injunctive relief. The Maryland settlement includes a Consent Decree, which the Maryland state court approved on May 3, 2018. On April 19 and 25, 2018, respectively, Ontario and Quebec courts granted approval of a consumer settle- ment entered into by Volkswagen AG and other Volkswagen Group companies involving 3.0 l TDI vehicles. On May 1, 2018, Volkswagen AG, certain affiliates, and the West Virginia Attorney General announced an agreement to resolve the State of West Virginia’s consumer claims. The West Virginia settlement includes a consent decree, which the West Virginia state court approved on May 1, 2018. On August 29, 2017, plaintiffs filed a complaint, on behalf of a putative class of purchasers of Volkswagen AG’s American Depositary Receipts, against Volkswagen AG, and against three former and one current member of Volkswagen AG’s Board of Management in the U.S. District Court for the Eastern District of New York. Plaintiffs assert claims under the U.S. Securities Exchange Act of 1934 alleging that defendants made material misstate- ments and omissions concerning Volkswagen AG’s compliance measures, in particular those relating to com- petition and antitrust law. On July 13, 2018, plaintiffs filed an amended complaint. Defendants plan to move to dismiss this complaint. On May 18, 2018, the EPA and CARB approved an emissions modification for Generation 1.1 vehicles with type V6 3.0 l TDI engines. On July 13, 2018, the EPA and CARB approved an emissions modification for Gener- ation 1.2 vehicles with type V6 3.0 l TDI engines. On May 22, 2018, plaintiffs filed a consolidated class action complaint on behalf of a putative class of Volks- wagen salespersons who work at franchise dealerships. On June 7, 2018, the court in the federal multidistrict litigation in California appointed the plaintiffs’ counsel as the interim lead counsel for the putative class. On May 28, 2018, a class action filed in Quebec provincial court was authorized to proceed as to claims relating to Volkswagen AG’s shares and American Depositary Receipts. On June 1, 2018, a notice of amendment to the Third Partial Consent Decree entered into with the Depart- ment of Justice (DoJ) and EPA, which modified certain due dates related to annual reporting, was filed with the federal multidistrict litigation court in California. On June 5, 2018, an Illinois state court granted a motion to dismiss the state environmental claims asserted against Volkswagen AG and certain affiliates by the Illinois Attorney General. Illinois has appealed that decision. On June 6, 2018, Volkswagen AG, certain affiliates, and the Oklahoma Attorney General announced an agreement to resolve the State of Oklahoma’s consumer claims. The Oklahoma settlement includes a consent decree, which the Oklahoma state court approved on June 6, 2018. In the course of the searches on June 11, 2018, it transpired that the public prosecutor’s office of Munich II has extended the criminal investigation pending there. The underlying search warrant shows that the Chair- man of the Board of Management of AUDI AG (at the same time a member of the Board of Management of Volkswagen AG) and a further active member of the AUDI AG Board of Management are now under investi- gation. The accusations include fraud in connection with the sale of diesel vehicles on the European market in the period after fall 2015. The Chairman of the Board of Management of AUDI AG was arrested on June 18, 2018 and has been in custody ever since. In this context, the public prosecutor’s office of Munich II is currently investigating 20 individuals. AUDI AG has appointed two renowned major law firms to clarify the matter underlying the public prosecutor’s accusations. The investigations are at an early stage. The Board of Manage- ment and Supervisory Board of AUDI AG are being regularly updated on the current state of affairs. If the findings do illustrate reproachable conduct or fault on behalf of the organization, then the Board of Manage- ment or Supervisory Board, respectively, will adopt the necessary measures. Interim Consolidated Financial Statements (Condensed) Notes to the Interim Consolidated Financial Statements On June 13, 2018, Volkswagen AG, certain affiliates, and the Vermont Attorney General announced an agreement to resolve the State of Vermont’s consumer claims. On July 16, 2018, a joint stipulation of dismissal was filed with the Vermont court. On June 13, 2018, the public prosecutor in Braunschweig issued Volkswagen AG an administrative order in connection with the diesel issue. The administrative order is linked to negligent breaches of monitoring obligations on the part of Volkswagen AG employees in the Powertrain Development department and relates to the period from mid-2007 to 2015 and a total of 10.7 million vehicles with diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. The administrative order imposes a fine of €1.0 billion in total, comprising of the maximum legal penalty of €5 million and the disgorgement of economic benefits in the amount of €995 million. Following thorough examination, the fine has been accepted, has been paid in full by Volkswagen and is therefore legally binding. As a result of the administrative order, the ongoing misdemeanor proceeding against Volkswagen AG will be settled. Further sanctioning or confiscation against Volkswagen AG and its Group companies is therefore not expected in Germany in connection with the particular matter covered by the administrative order concerning diesel engines of types EA 189 worldwide and EA 288 (Generation 3) in the USA and Canada. As a result, Volkswagen expects that the conclusion of this proceeding will have a substantially positive impact on additional governmental proceedings conducted in Europe against Volkswagen AG and its Group companies. The misdemeanor proceedings in relation to the matter concerning AUDI AG being investigated by the public prosecutor’s office in Munich are continuing. In line with IAS 37.92, no further disclosures have been made in order not to prejudice the proceeding and the interests of the Company. On June 25, 2018, a Pennsylvania state court approved a consent judgment that implemented an earlier settlement agreement resolving the state environmental claims asserted against Volkswagen AG and certain affiliates by the State of Pennsylvania and nine other states that have opted out of federal emissions standards. On June 26, 2018, a Missouri state court granted a motion to dismiss the state environmental claims asserted against Volkswagen AG and certain affiliates by the Missouri Attorney General. On June 26, 2018, the Higher Regional Court in Munich made a final decision in the award proceedings on the appropriateness of the cash settlement and the right to compensation payable to the noncontrolling interest shareholders of MAN SE, ruling that the annual compensation claim per share has to be increased. The cash settlement in the amount of €90.29 per share, increased in the first instance by the Regional Court in Munich I, was confirmed. On July 30, 2018, as part of the amendment process, the Higher Regional Court in Munich established the annual compensation claim of €5.47 gross (less any corporate income tax and any solidarity surcharge according to the respective tax rate applicable to these taxes for the financial year in question). The decisions by the Higher Regional Court in Munich are final and to be published in the Federal Gazette. In accordance with section 305 of the Aktiengesetz (AktG – German Stock Corporation Act), the cash compensation of €90.29 per share may be accepted within two months after this date. On July 6, 2018, the Federal Constitutional Court ruled on the constitutional complaints in connection with the search at the law firm Jones Day and ascertained that the confirmation of the provisional seizure of client engagement documents and data of Volkswagen AG had not violated constitutional law. The companies of the Volkswagen Group will continue to cooperate with the government authorities with due regard for the ruling of the Federal Constitutional Court. In Austria, the first-instance dismissal of the last investor complaint pending in connection with the diesel issue became binding in the reporting period. For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit potentials. From July 2017 to June 2018, the measures proposed by AUDI AG were adopted and mandated in various decisions by the KBA on vehicle models with V6 and V8 TDI engines. The investigations initiated in May 2018 on the current vehicle concepts of the Generation 2 evo and Generation 3 engine generations have been completed. The key results are currently being presented to the KBA. 63 64 Notes to the Interim Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) In Germany, around 17,300 product-related individual actions brought by customers in connection with the diesel issue are pending against Volkswagen AG and other Volkswagen Group companies. Having served Volkswagen AG with an action asserting the rights assigned by approximately 2,000 cus- tomers in Switzerland, financialright GmbH has now brought a further such action on behalf of around 6,000 Slovenian customers. The total amount in dispute in these actions is approximately €50 million. The private Spanish consumer protection organisation Organización de Consumidores y Usuarios (OCU) has filed a class action against Volkswagen Group España Distribución S.A. on May 9, 2018. OCU represents around 7,500 Spanish customers, claiming for damages in the amount of almost €23 million. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2018 in the “Report on Expected Developments” and “Report on Risks and Opportunities” chapters – including the “Risks from the diesel issue” and “Litigation/ Diesel issue” sections and the underlying description of the issues in the chapter entitled “Diesel Issue” – of the combined management report in the 2017 Annual Report or in publications released by the reporting date, as well as the continuing investigations and interviews in connection with the diesel issue and additional important legal cases. 16. Contingent liabilities As of June 30, 2018, there were no material changes to the contingent liabilities compared with the disclosures in the 2017 annual report. 17. Other financial obligations Other financial liabilities rose by €2.5 billion compared with the 2017 consolidated financial statements to reach €27.0 billion. The higher figure is mainly attributable to the increase in the purchase order commitment for intangible assets and property, plant and equipment in the amount of €2.1 billion. German Corporate Governance Code The current declarations in accordance with section 161 of the Aktiengesetz (AktG – German Stock Corporation Act) on the German Corporate Governance Code by the Board of Management and Supervisory Board of Volkswagen AG, AUDI AG, MAN SE and RENK AG are permanently available on the Internet at www.volkswagenag.com/ir, www.audi.com/cgk-declaration, www.corporate.man.eu/en and www.renk.biz/ corporated-governance.html respectively. Significant events after the balance sheet date In July 2018, Volkswagen AG called hybrid notes with an aggregate principal amount of €1.25 billion placed in 2013 via a subsidiary, Volkswagen International Finance N.V., Amsterdam, the Netherlands, (issuer). Repayment of the notes including all interest accrued and unpaid by then is scheduled for September 2018. The notes must be classified as debt instruments under IAS 32 now that they have been called, reducing the Volkswagen Group’s equity and net liquidity correspondingly. Interim Consolidated Financial Statements (Condensed) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements prepared in accordance with German accepted accounting principles give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, August 1, 2018 Volkswagen Aktiengesellschaft The Board of Management 65 66 Review Report Interim Consolidated Financial Statements (Condensed) Review Report On completion of our review, we issued the following unqualified review report dated August 1, 2018. This report was originally prepared in German. In case of ambiguities the German version takes precedence: To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg We have reviewed the condensed consolidated interim financial statements - comprising the condensed income statement and condensed statement of comprehensive income, condensed balance sheet, statement of changes in equity, condensed statement of cash flows and selected explanatory notes - and the interim group management report of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, for the period from January 1 to June 30, 2018, which are part of the half-year financial report pursuant to § (Article) 115 WpHG ("Wertpapier- handelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Managing Directors. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. Interim Consolidated Financial Statements (Condensed) Review Report We draw attention to the updated information provided in section “Key events” of the notes to the condensed consolidated interim financial statements and in chapter “Report on Expected Developments, Risks and Opportunities” of the interim group management report with regard to the Diesel Issue, which in addition to the explanations of the recently known cases at two subsidiary companies regarding the suspicion of deceit and prohibited promotion respectively the suspicion of fraud in connection with the selling of Diesel cars on the European market after autumn 2015 essentially refer to the information provided and statements made in the 2017 consolidated financial statements and in the group management report as at December 31, 2017. Based on the results of the various measures taken to investigate the issue presented so far, which underlie these condensed consolidated interim financial statements and interim group management report, there is still no evidence that members of the Company’s Board of Managing Directors were aware of the deliberate manipulation of engine management software before summer 2015. Nevertheless, should as a result of the ongoing investigation new knowledge be obtained showing that members of the Board of Managing Directors were informed earlier about the Diesel Issue, this could eventually have an impact on the condensed interim financial statements and interim group management report as well as on the annual and consolidated financial statements and on the group management report for the financial year 2017 and prior years. The provisions for warranties and legal risks recorded so far are based on the presented state of knowledge including the explanations of the recently known cases at two subsidiary companies regarding the suspicion of deceit and prohibited promotion respectively the suspicion of fraud in connection with the selling of Diesel cars on the European market after autumn 2015. Due to the inevitable uncertainties associated with the current and expected litigation it cannot be excluded that a future assessment of the risks may be different. Our opinions on the condensed consolidated interim financial statements and on the interim group management report are not modified in respect of this matter. Hanover, August 1, 2018 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft Harald Kayser Wirtschaftsprüfer Frank Hübner Wirtschaftsprüfer (German Public Auditor) (German Public Auditor) 67 68 Selected terms at a glance Capitalization ratio The capitalization ratio is defined as the ratio of capitalized development costs to total research and development costs in the Automotive Division. It shows the proportion of primary research and development costs subject to capitalization. Driving Cycles Levels of fuel consumption and exhaust gas emissions for vehicles registered in Europe were previously measured on a chassis dyna- mometer with the help of the “New European Driving Cycle (NEDC)”. Since fall 2017, the existing test procedure for emissions and fuel consumption used in the EU is being gradually replaced by the Worldwide Harmonized Light- Duty Vehicles Test Procedure (WLTP). This has been in place for new vehicle types since fall 2017 and will apply to all new vehicles from September 2018. The aim of this new test cycle is to state CO2 emissions and fuel consumption in a more practice-oriented manner. A further important European regulation is the Real Driving Emissions (RDE) for passenger cars and light commercial vehicles, which also monitors emissions using portable emission measuring technology in real road traffic. Equity ratio The equity ratio measures the percentage of total assets attributable to shareholders’ equity as of a reporting date. This ratio indicates the stability and financial strength of the company and shows the degree of financial indepen- dence. Glossary Gross margin Operating return on sales Gross margin is the percentage of sales revenue The operating return on sales is the ratio of the attributable to gross profit in a period. Gross operating result to sales revenue. margin provides information on profitability net of cost of sales. Ratio of capex to sales revenue The ratio of capex (investments in property, Hybrid notes plant and equipment, investment property and Hybrid notes issued by Volkswagen are intangible assets, excluding capitalized develop- classified in their entirety as equity. The issuer ment costs) to sales revenue in the Automotive has call options at defined dates during their Division reflects both our innovative power and perpetual maturities. They pay a fixed coupon our future competitiveness. It shows our capital until the first possible call date, followed by a expenditure – largely for modernizing and variable rate depending on their terms and expanding our product range and for environ- conditions. mentally friendly drivetrains, as well as for adjusting the production capacity and improving Net cash flow production processes – in relation to the Auto- Net cash flow in the Automotive Division motive Division’s sales revenue. represents the excess funds from operating activities available for dividend payments, for Research and development ratio example. It is calculated as cash flows from The research and development ratio (R&D ratio) operating activities less cash flows from in the Automotive Division shows total research investing activities attributable to operating and development costs in relation to sales activities. revenue. Research and development costs comprise a range of expenses, from futurology Net liquidity through to the development of marketable Net liquidity in the Automotive Division is the products. Particular emphasis is placed on the total of cash, cash equivalents, securities, loans environmentally friendly orientation of our and time deposits not financed by third-party product portfolio. The R&D ratio underscores borrowings. To safeguard our business activ- the efforts made to ensure the Company’s ities, we have formulated the strategic target future viability: the goal of competitive profit- that net liquidity in the Automotive Division ability geared to sustainable growth. should amount to approximately 10% of the consolidated sales revenue. Return on sales before tax The return on sales is the ratio of profit before Operating result tax to sales revenue in a period, expressed as a Sales revenue, which does not include the percentage. It shows the level of profit gener- figures for our equity-accounted Chinese joint ated for each unit of sales revenue. The return ventures, reflects our market success in finan- on sales provides information on the profit- cial terms. Following adjustment for our use of ability of all business activities before resources, the operating result reflects the deducting income tax expense. Company’s actual business activity and docu- ments the economic success of our core busi- ness. Contact Information P U B L I S H E D B Y Volkswagen AG Financial Publications Letterbox 1848-2 38436 Wolfsburg Germany Phone +49 (0) 5361 9-0 Fax +49 (0) 5361 9-28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany Phone +49 (0) 5361 9-0 Fax +49 (0) 5361 9-30411 E-Mail investor.relations@volkswagen.de Internet www.volkswagenag.com/ir F I N A N C I A L C A L E N D A R October 30, 2018 Interim Report January – September 2018 This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/ir This version of the Interim Report is a translation of the German original. The German takes precedence. Printed in Germany 858.809.583.20 www.volkswagenag.com www.volkswagenag.com

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9 1 0 2 Half-Yearly Financial Report J A N UA R Y – J U N E 2019 1 U PDATE D I N F O R M AT I O N 7 I N T E R IM M AN AGEM E N T R E PORT 24 B RAN D S AN D BUSI N ESS FI ELDS 2 7 I N T E R IM CON SOLI DATED F I NA N C IA L STATE M EN T S (CON D E N SE D) 1 Key Facts 2 Key Events 7 Volkswagen Shares 8 Business Development 16 Results of Operations, Finan- cial Position and Net Assets 23 Outlook 27 Income Statement 28 Statement of Comprehensive Income 31 Balance Sheet 32 Statement of Changes in Equity 34 Cash Flow Statement 35 Notes to the Interim Consolidated Financial Statements 57 Responsibility Statement 58 Review Report Key Figures V O L K SWA G E N G R O U P Q 2 H 1 2019 2018 % 2019 2018 % Volume Data1 in thousands Deliveries to customers (units) 2,760 2,840 –2.8 5,365 5,519 –2.8 Vehicle sales (units) 2,756 2,807 –1.8 5,339 5,575 –4.2 Production (units) 2,767 3,059 –9.5 5,422 5,786 –6.3 Employees (on June 30, 2019/Dec. 31, 2018) 662.8 664.5 –0.3 Financial Data (IFRSs), € million Sales revenue 65,185 61,149 +6.6 125,197 119,377 +4.9 Operating result before special items 5,130 5,583 –8.1 9,979 9,794 +1.9 Operating return on sales before special items (%) 7.9 9.1 8.0 8.2 Special items – –1,635 –100.0 –981 –1,635 –40.0 Operating result 5,130 3,948 +29.9 8,997 8,160 +10.3 Operating return on sales (%) 7.9 6.5 7.2 6.8 Earnings before tax 5,486 4,495 +22.1 9,557 8,972 +6.5 Return on sales before tax (%) 8.4 7.4 7.6 7.5 Earnings after tax 4,115 3,313 +24.2 7,168 6,613 +8.4 Automotive Division2 Total research and development costs 3,550 3,391 +4.7 7,033 6,747 +4.2 R&D ratio (%) 6.4 6.5 6.6 6.6 Cash flows from operating activities 8,158 4,753 +71.7 13,523 10,208 +32.5 Cash flows from investing activities attributable to operating activities3 4,580 3,844 +19.2 7,955 6,862 +15.9 of which: capex 3,194 2,481 +28.7 5,202 4,398 +18.3 capex/sales revenue (%) 5.8 4.8 4.9 4.3 Net cash flow 3,578 909 x 5,568 3,346 +66.4 Net liquidity at June 30 15,905 26,298 –39.5 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Excluding acquisition and disposal of equity investments: Q2 €4,350 (3,702) million, H1 €7,451 (6,782) million. This version of the Interim Report is a translation of the German original. The German takes precedence. All figures shown in the Report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. Updated Information Key Facts > Deliveries to Volkswagen Group customers at 5.4 (5.5) million vehicles; decline in Asia- Pacific in particular; growth in South America; passenger car market share expanded in declining overall market worldwide > Group sales revenue rose by 4.9% to €125.2 billion > At €10.0 billion, operating profit before special items exceeds the prior-year figure by €0.2 billion; improvements in the mix and in price positioning > Operating profit improves to €9.0 (8.2) billion; negative special items of €–1.0 (–1.6) billion relating to the diesel issue > Profit before tax increased to €9.6 (9.0) billion > Automotive Division’s net cash flow up by €2.2 billion to €5.6 billion; capex ratio of 4.9 (4.3)% > Net liquidity in the Automotive Division of €15.9 billion; negative effect of €5.1 billion on the net liquidity reported due to the application of the new IFRS 16 > Exciting products: Volkswagen Passenger Cars extends its range of SUVs in China with the T-Cross and Teramont X; the ID. ROOMZZ concept car complements the ID. Family with a large SUV featuring up to seven seats Audi presents the electric-powered Q2L e-tron as well as the AI:ME concept car for the first time ŠKODA celebrates the world premiere of its electric-powered Citigoe iV and Superb iV models Bentley debuts the new generation of the Flying Spur - Porsche expands the Cayenne model range by adding the sporty Cayenne Coupé - Volkswagen Commercial Vehicles showcases the Transporter 6.1, its technically redesigned best seller Scania and MAN present efficient solutions for the construction industry Key Facts 1 2 Key Events Updated Information Key Events M OTO R S H O W S A N D E V E N T S The Volkswagen Group brands presented impressive new products at numerous motor shows and events in the second quarter of 2019. rear can deliver a top speed of 160 km/h. The vehicle offers a range of up to 500 km. ŠKODA also unveiled its innovative electric two-wheel KLEMENT concept vehicle for sustainable urban micromobility. Auto Shanghai 2019 At the Auto Shanghai 2019, the Volkswagen Passenger Cars brand celebrated the world premiere of its ID. ROOMZZ con- cept car. The multivariable all-electric SUV of the five-meter class, which offers up to seven seats, is tailored to both family and business requirements. It’s bodywork design follows the clean, homogeneous lines of the rest of the ID. family. Two electric motors with a system output of 225 kW (306 PS) continuously drive both axles and accelerate the vehicle to 100 km/h in 6.6 seconds. The ID. ROOMZZ combines future IQ.DRIVE systems from Volkswagen such as Travel Assist and Adaptive Cruise Control (ACC), which allows it to glide fully automatically on request (level 4 according to the Verband der Automobilindustrie, VDA – German Automotive Industry Association) through traffic in ID. Pilot mode. The production version will be initially launched on the Chinese market in 2021. Three further Volkswagen models debuted in Shanghai. The Teramont X is a stylish five-seater coupé version. The SUV Coupé Concept combines avant-garde design, sporty propor- tions and outstanding performance. The SMV Concept show car provides an outlook on a large multi-functional SUV with a length of over 5.10 m. Volkswagen Passenger Cars rounded off its presence at the motor show with the lifestyle-oriented T-Cross. The Audi brand celebrated two world premieres in Shanghai. The Q2L e-tron compact SUV has a longer body than the basic version. The electric motor has an output of 100 kW (140 PS) and the battery allows for a range of up to 265 km in accordance with the local homologation process. The visionary AI:ME concept car reveals the Audi designers' and developers' ideas for an electric-powered compact car of the future. The electric motor on the rear axle delivers an output of 125 kW (170 PS). The AI:ME has a spacious and futuristic interior with a broad range of features for com- munication, entertainment and relaxation, because it is also designed for fully automated driving (VDA level 4). In Shanghai, Porsche presented its new model from the Cayenne series, the Cayenne Coupé. It includes all the tech- nical highlights of the third Cayenne generation, but is more progressive, more athletic and more inspiring thanks to its custom design elements with a roof line that falls away more dramatically to the rear. The extensive standard equipment includes a 2.16 m2 panoramic glass roof, speed-sensitive Power Steering Plus, 20-inch alloy wheels, Park Assist, Porsche Active Suspension Management (PASM) and the Sport Chrono Package. A choice of two high-powered engines are available as of market launch: a six-cylinder turbocharged engine with an output of 250 kW (340 PS) and a V8 engine with twin turbocharging and 404 kW (550 PS) in the Cayenne Turbo Coupé. The Bentley brand’s stand displayed the Mulsanne W.O. Edition by Mulliner, of which only a small number were prod- uced to mark the brand’s centenary, as well as the innovative Bentayga Hybrid and the new generations of the popular Continental GT and Continental GTC models. World premieres of ŠKODA’s Citigoe iV and Superb iV models The ŠKODA brand entered the era of electric mobility in May 2019, celebrating the world premieres of its first electric vehi- cles. For the future, ŠKODA is combining the establishment of its electric product family and an integrated networked ecosystem for mobility solutions under the iV sub-brand. The Superb iV is ŠKODA’s first model to be fitted with a plug-in hybrid drive. A powerful TSI engine that delivers 115 kW (156 PS) and an electric motor with an output of 85 kW (115 PS) deliver a combined power output of 160 kW (218 PS) for particularly sustainable mobility without compromising performance. The battery allows for an all-electric range up to 55 km in the WLTP cycle; a range of up to 850 km can be achieved when combined with the petrol engine. The ŠKODA Citigoe iV is the Czech brand manufacturer’s first all- electric vehicle. The city speedster is powered by a 61 kW (83 PS) electric motor and the battery allows for a range of up to 265 km in the WLTP cycle. ŠKODA showcased its VISION iV. concept car with visual and technological adaptations that had been made specifi- cally for the Chinese market. It provides a detailed outlook on the brand’s first production model based on the Modular Electric Toolkit (MEB). The vehicle stands out with an athletic, aerodynamic body and a generous interior space that is typical of the brand. The 150 kW (204 PS) electric motor at the Wörthersee GTI Meet Volkswagen celebrated a double premiere at the annual Wörthersee GTI Meet. A group of apprentices from the Wolfs- burg site presented the 279 kW (380 PS) Golf GTI Aurora. The show car in the colors Nardo Gray and Deep Black Pearl Effect, Updated Information as well as the one-off accent color Mint Green has additional displays in the center console providing the driver with engine and vehicle data, which are particularly useful on racetracks. For the first time, it features a holographic module as the technology highlight which controls the 3,500 watt high-end sound system via a hologram that is intuitive to use. Apprentices from Volkswagen Saxony unveiled the Golf Estate R FighteR at Wörthersee. The show car with an all- wheel drive powered by a 295 kW (400 PS) TSI engine stands out in particular due to its fenders, which are 3 cm wider. The unique vehicle sports a glossy finish in Crystal Silver and Nardo Gray, complimented by the Misano Red and Piano Black design colors. With its rooftop light system, strobe lights in the radiator grille and a 360° camera installed on the roof, the FighteR can be used as a safety car at racing events. In addition, recent sporty production models could be seen at the GTI Meet, such as the Golf GTI TCR and the T-Roc R. Volks- wagen also brought electric mobility to Wörthersee with its electric racing car, the ID.R. Vienna Motor Symposium At the 40th Vienna Motor Symposium, Volkswagen show- cased possibilities for efficient connected mobility. Volks- wagen is entering the next phase of the hybridization of its drives with the new 48-volt mild hybrid drive (mHEV) com- bined with a 1.5 l TSI evo petrol engine. The conventional 12- volt vehicle electrical system is complemented with a 48-volt system, which will increase the opportunities for recuper- ation, among other things. Depending on driving style, it can save around 0.4 liters of fuel every 100 kilometers and cut carbon emissions in the process. In Vienna, Volkswagen also provided the first-ever in-depth insight into its MEB, which will serve as the basis for the next generation of electric vehi- cles. It also forms the basis of the newly developed electronic architecture along with the vw.OS operating system, which can be used to establish new mobility services and driver assist systems, setting the scene for automated driving. In addition, Volkswagen presented current driver assist systems showing the potential as well as the technical and legal chal- lenges in the jump to levels 3 and 4 for automated driving. bauma 2019 At bauma 2019 in Munich, the world’s leading trade fair for construction vehicles, building equipment and mining machines, the Scania brand presented its robust efficient vehicles as well as further innovations. The new Scania XT heavy tipper trucks impress with long operating times and robustness, plus high productivity and flexibility. Thanks to the modular system, an XT truck can be equally suitable for waste collection or operating as a flatbed with a crane. In addition, Scania unveiled its improved DC09 and DC13 engine series, which allow for fuel savings of up to 2%. At bauma, Scania Engines presented networked engines for equipment, vehicles and vessels that enable permanent fleet Key Events monitoring and optimized uptime. This new service is based on the vast knowledge Scania has gained from having 350,000 connected buses and trucks. MAN presented its optimized Euro 6 engine family in Munich. From 2019, the new D15 engine will replace the tried-and-tested D20 engine (Euro 6 version) in the TGS and TGX product lines. The inline six-cylinder engine boasts more power, lower weight and higher fuel efficiency with a smaller capacity. The MAN TGE was represented at the bauma for the first time. Available in many different variants as a panel van, a windowed combi van, a crew cab with platform body or a chassis cab with platform body, the MAN TGE can be used for a diverse range of applications in the fields of construction, agriculture and landscaping. MAN rounded off its trade fair appearance by presenting different driver assist systems, including the ACC cruise control system expanded with Stop & Go Function, the ComfortSteering active steering system with Lane Return Assist and the video turning system (for the right side of the vehicle where visibility is limited) that assists with turning or maneuvering. At bauma, Volkswagen Commercial Vehicles presented the Transporter 6.1, its bestselling van with a comprehen- sively revamped design. Thanks to a switch from hydraulic to electro-mechanical power steering, the Transporter now has an extended spectrum of driver assist systems, which signifi- cantly increase safety and comfort. The new assist systems include technologies such as Lane Assist, Park Assist and Trailer Assist. In addition, the vehicle has been tailored to the requirements of the digital world; now available as an option is the third generation of the Modular Infotainment Toolkit, which enables the use of new applications and online services with an integrated SIM card. New Bentley Flying Spur unveiled The Bentley brand presented the new generation of the Flying Spur in June 2019. The only thing the luxurious four-door grand tourer has in common with its predecessor is its name; the vehicle has been redeveloped from the ground up and combines more than ever the maneuverability of a sports saloon with the finesse of a modern luxury vehicle. The Flying Spur sets new standards in innovation, connectivity, comfort and driving pleasure. Powered by an optimized twin- turbocharged W12 TSI engine, the vehicle has an output of 467 kW (635 PS) that allows it to accelerate from rest to a speed of 100 km/h in 3.8 seconds. Its maximum speed is 333 km/h. The Flying Spur is the first Bentley model to come with electronic all-wheel steering, which combined with the active all-wheel drive and the Bentley Dynamic Ride system provides for an agile handling and driving experience. The interior, which is tailored to the driver’s requirements, combines the advantages of ultra-modern technology – an HD digital instrument panel display, a powerful audio system and touchscreen monitors for rear-seat passengers – with contemporary British craftsmanship. 3 4 Key Events AWA R D S In early April 2019, the US magazine Automotive News honored Audi with the “PACE award” in the category Inno- vation Partnership for its central driver assistance controller (zFAS). The zFAS manages a large number of driver assistance systems in one central, highly integrated domain architec- ture. The magazine confers awards for technical innovations in the auto industry. In April 2019, readers of the Auto Bild Allrad magazine chose multiple Volkswagen Group models as the all-wheel drive cars of 2019. In the all-terrain and SUV category for vehicles priced under €35,000, the Audi Q2 was selected as the overall winner and the ŠKODA Kodiaq as the winning import vehicle. The Audi Q5 was named the overall winner in the all-terrain and SUV category for vehicles priced between €35,000 and €50,000. In the all-wheel-drive crossover cate- gory, the Audi A6 allroad quattro was voted the overall winner and the ŠKODA Octavia Scout the winning import vehicle. The Audi e-tron was the overall winner in the all-wheel-drive hybrid and electric car category. The ŠKODA Superb was voted the winning import vehicle in the all-wheel-drive category for passenger cars priced under €40,000. The Porsche Panamera was selected the overall winner in the all-wheel-drive cate- gory for passenger cars priced over €40,000; the Porsche 911 was also named the overall winner in the all-wheel-drive sports cars, coupés and convertibles category. The Multivan from Volkswagen Commercial Vehicles was crowned overall winner in the all-wheel-drive vans and buses category; here, the SEAT Alhambra was voted the winner in the import category. In the readers’ choice, the editors of Auto Bild Allrad allowed readers to choose their favorites from a total of 219 models from 43 brands in ten categories. In a survey conducted by the Berlin-based consulting institute Trendence, AUDI AG was named the most attractive employer among engineering scientists, taking first place with 15.8% of the vote. Between September 2018 and February 2019, the institute surveyed over 43,500 academics at around 300 German universities about their employer of choice. At the beginning of May 2019, Audi was selected the best manufacturer of connected cars in the “Networks, Services & Manufacturers of the Year 2019” readers’ poll conducted by the German journal connect. The brand with the four rings came out on top against 18 competitors. More than 83,000 connect readers and online users took part in the poll. At the end of May 2019, Porsche in Leipzig received the “Platinum” award from the Deutsche Gesellschaft für Nach- haltiges Bauen (DGNB – German Sustainable Building Coun- cil). DGNB certified the plant – which boasts a size of around 427 hectares and is currently undergoing expansion to meet the future challenges of electric mobility – as a particularly sustainable industrial site. The facility was assessed on the basis of 167 criteria in 28 categories. Also at the end of May 2019, the 2.0 TFSI engine from Audi won the International Engine of the Year award in the 150–250 PS category. Porsche’s 2.5 l turbocharged engine won a prize in the 250–350 PS category. An international panel of Updated Information experts comprising 70 engine journalists voted the engines winners in their class. In early June 2019, AUTO BILD conferred the “Wertmeister 2019” award to the Volkswagen Group in multiple categories. The award is based on the residual value of the vehicle after four years as a percentage of the price for a new car. The Volkswagen Passenger Cars brand won with the up! 1.0 TSI in the subcompact category. Audi was the winner in the cate- gories for electric vehicles, small cars, premium and small SUVs with its e-tron 55 quattro, A1 40 TFSI Sportback S tronic, A6 Avant 35 TDI S tronic and Q2 40 TFSI quattro models. Porsche was honored as the winner in the luxury and sports cars categories for its Panamera 4 and 911 Carrera S PDK models. This year, AUTO BILD and ratings company Schwacke awarded the “Wertmeister” title for the 16th time, selecting winners in 13 vehicle categories. A N N I V E R S A R I E S At the beginning of April 2019, the Passat broke the 30-mil- lion-model mark for production in the Volkswagen plant in Emden. This was a new record for the bestselling Passat in its segment: no other mid-range Group model and no other business vehicle has been sold worldwide more often than the Passat. The anniversary model is a Passat GTE Estate with a plug-in hybrid drive and a Pyrite Silver Metallic finish. In mid-April 2019, the millionth Sharan rolled off the assembly line at Volkswagen Autoeuropa in Palmela, Portu- gal, since production started there 24 years ago. In addition to the Sharan, Volkswagen Autoeuropa currently also produces the sister model the SEAT Alhambra and the compact Volks- wagen T-Roc. The 22 millionth ŠKODA vehicle was also produced in mid-April 2019. The anniversary model, a ŠKODA Kodiaq GT in Velvet Red, rolled off the production line at the SAIC VOLKS- WAGEN joint venture plant in Changsha. Volkswagen’s plant facility in Pune, India, manufactured the one-millionth car at the end of April 2019, a Volkswagen Ameo. Production at the Indian facility started in March 2009. The eight millionth Polo rolled off the assembly line at the Volkswagen plant in Navarra, Spain, at the end of April 2019. The anniversary vehicle in Energetic Orange Metallic is equipped with a 1.6 l TDI engine delivering 70 kW (95 PS). Volkswagen Navarra has been producing the Volkswagen Polo since 1984. PA R T N E R S H I P S At the beginning of April 2019, the Volkswagen Group and Ganfeng Lithium Co., Ltd. based in Jiangxi (China) signed a memorandum of understanding on the long-term supply of lithium for battery cells. Under the agreement, Ganfeng will supply lithium to the Volkswagen Group and its suppliers for the next ten years. In this regard, we are already today pur- suing the goal of securing a significant share of our growing lithium requirements for batteries. Ganfeng Lithium Co., Ltd. was founded in 2000 and is the world’s leading producers of lithium and metals products. Updated Information In mid-April 2019, the Volkswagen Group joined an industry initiative for responsible purchasing of strategic minerals. Blockchain technology is designed to help improve efficiency, sustainability and transparency in global and complex supply chains. The cooperation will give the Volkswagen Group better insight into the source of cobalt, for example, which is used in lithium-ion batteries that power electric vehicles. The path of other minerals used in vehicle produc- tion can also be tracked in this way. The blockchain network already includes participants from all key stages of the supply chain, from the mine to end users. Further participants to date include the Ford Motor Company, Huayou Cobalt, IBM, LG Chem and the RCS Global Group. In mid-June 2019, Volkswagen announced that it wants to invest approximately €900 million in joint battery activities with Northvolt AB. Part of the sum is intended for a planned joint venture with the Swedish battery cell producer; a further share will go directly to Northvolt AB. In return, Volkswagen will receive about 20% of the shares in Northvolt AB and will have one seat on the Supervisory Board. A joint venture of equal partners is supposed to be formed in the course of this year with the aim of building a 16-GWh battery cell factory in Europe. The plan is to establish the factory at the Group’s site in Salzgitter starting in 2020 at the earliest, if all precon- ditions are fulfilled. Battery cell production for Volkswagen is then planned to commence around the turn of the year 2023/2024. Also in mid-June 2019, the Volkswagen Group moved into a new climate-neutral data center in Rjukan, Norway. The facility was set up in just six months in collaboration with the Norwegian partner Green Mountain. The data center will be powered entirely by hydro-power in future, thus saving more than 5,800 tons of CO2 per year compared to a conven- tionally operated data center. The maximum output of 2,750 kilowatts will be used by the Volkswagen Passenger Cars and Audi brands for high-performance servers, which are used for computer-intensive vehicle development projects. These include the simulation of crash tests and virtual wind tunnel tests. The Volkswagen Group focuses on economic and ecologi- cal factors in the development of computing capacity. Thus, Volkswagen already operates a climate-neutral data center in Iceland. At the end of June 2019, Volkswagen concluded a strategic partnership with the Lidl and Kaufland supermarket chains. The food retailers will install a total of 140 public charging stations for their customers’ electric vehicles at 70 branches in Berlin. Volkswagen is to receive the exclusive right to use the new infrastructure for charging its WeShare fleet over- night outside opening hours, which will make the capacity utilization of the charging stations more efficient. The addi- tional charging points will boost the public charging infra- structure in the German capital by almost 20%. Key Events I P O O F T R ATO N S E Since June 28, 2019, shares of TRATON SE have been traded on the regulated market of the Frankfurt Stock Exchange and the NASDAQ Stockholm Exchange. These bearer shares without nominal value were taken from Volkswagen AG’s existing shares and placed with investors. The IPO is intended to lay the foundation for both companies to create even more added value for their stakeholders in the future. Volkswagen will remain an involved majority shareholder. D I E S E L I S S U E The administrative fine order issued on May 7, 2019 by the Stuttgart Office of the Public Prosecutor terminates the regulatory offense proceeding conducted against Dr. Ing. h.c. F. Porsche AG in connection with the diesel issue. The administrative fine order is based on a negligent breach of the obligation to supervise occurring in the organizational unit “Prüffeld Entwicklung Gesamtfahrzeug/Qualität” (Overall Vehicle Development/Quality - Testing Facility). The adminis- trative order imposes a total fine of €535 million, consisting of a penalty payment of €4 million and the forfeiture of eco- nomic benefits in the amount of €531 million. After thorough examination, Dr. Ing. h.c. F. Porsche AG has accepted the fine and paid it in full, rendering the administrative fine order legally final. The administrative fine order terminates the reg- ulatory offense proceeding against Dr. Ing. h.c. F. Porsche AG. A N N U A L G E N E R A L M E E T I N G The 59th Annual General Meeting of Volkswagen AG was held in Berlin on May 14, 2019. With 94.45% of the voting capital present, the ordinary shareholders of Volkswagen AG agreed to the proposal of the Board of Management and Supervisory Board to pay a dividend of €4.80 (previous year: €3.90) per ordinary share and €4.86 (previous year: €3.96) per preferred share for fiscal year 2018. The ordinary shareholders post- poned the formal approval of the actions of Rupert Stadler for fiscal year 2018 due to the ongoing investigations into the diesel issue. The actions of all other members of the Board of Management and the Supervisory Board were formally approved for fiscal year 2018. The terms of office of Dr. Hessa Sultan Al-Jaber, Dr. Hans Michel Piëch and Dr. Ferdinand Oliver Porsche on the Supervisory Board of Volkswagen AG duly ended at the close of the Annual General Meeting. The Annual General Meeting elected all three as members of the Supervisory Board for a full term of office as share- holder representatives. In addition, the ordinary shareholders approved the creation of authorized capital as well as the corresponding amendment of the Articles of Association. The ordinary shareholders also elected PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft (PwC) as the auditor for the single-entity and consolidated financial statements for fiscal year 2019 and as the auditor to review the condensed 5 6 Key Events consolidated financial statements and interim management report for the first six months of 2019, for the period up to September 30, 2019 and for the first quarter of fiscal year 2020. S U P E R V I S O R Y B O A R D M AT T E R S Effective May 31, 2019, Ms. Birgit Dietze stepped down as a member of the Supervisory Board of Volkswagen AG. At the request of the Chairman of the Supervisory Board and in accordance with section 104 AktG, the Braunschweig Registry Court appointed Ms. Conny Schönhardt, Union Secretary to the board of IG Metall, to succeed her as a member of the Volkswagen AG Supervisory Board, effective June 21, 2019. V O L K SWA G E N P R E S E N T S E N H A N C E D TO G E T H E R 2 0 2 5 + ST R AT E G Y In June 2019, the Volkswagen Group announced the enhance- ment of its successful future program, TOGETHER – Strategy 2025. With the revised strategy TOGETHER 2025+, the Group intends to step up the speed of the transformation, further sharpen the focus and drive the implementation of the strategic objectives even more systematically. To this end, the strategic vision was also revised. With “Shaping mobility – for generations to come” we aim to shape the future of mobility in a more active and sustainable manner, while safeguarding it for the long term. Building on the strategic target dimen- sions of the tried-and-tested strategy rhombus, TOGETHER 2025+ comprises five modules as central work packages, which integrates many of the ongoing Group initiatives from the original TOGETHER strategy. These modules are Best Updated Information Governance, Best Performance, Best Brand Equity, Software- Enabled Car Company and Excellent Leadership. The Best Governance module has the goal of forming a focused, lean Group structure that manages its brands, leverages important synergies and accelerates decision- making processes; this also includes intensive discussions with our stakeholders. The aim of Best Performance is to achieve a sustainable increase in our enterprise value by increasing efficiency, productivity and profitability. In the Best Brand Equity module, the focus is on sharpening the brand portfolio; this will enable us to substantially increase the value of the Group brands by 2025. In the Software- Enabled Car Company module, we are working to make soft- ware one of the core competencies of the Volkswagen Group. To this end, we are pooling our existing strengths, strength- ening our workforce and establishing a separate organiza- tional unit. Excellent Leadership will accelerate the transfor- mation to open, partnership-based, value-based leadership. We are taking on the challenges of today and tomorrow with these five modules from TOGETHER 2025+. With electric drives, digital connectivity and autonomous driving, we underline our promise that we want to make the automobile clean, quiet, intelligent and safe. In addition, we are com- mitted to the Paris Agreement and are the first company in our industry to commit ourselves to the zero emissions target by 2050 at the latest. In this way, the car can continue to be a cornerstone of eco-friendly, contemporary, individual and affordable mobility in the future. Interim Management Report Volkswagen Shares Volkswagen Shares In the period from January to June 2019, prices on the inter- national equity markets rose overall amid volatile trading. The DAX recorded an increase compared with the end of 2018. The hopes of a more expansionary US monetary policy had a positive effect, as did corporate data that in some cases exceeded expectations. Uncertainty regarding the economic policy of the US government, the continuing Brexit negoti- ations between the United Kingdom and the European Union (EU) and the growth of the global economy had a negative impact on share prices. Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website at ww.volkswagenag.com/en/InvestorRelations.html. V O L K SWA G E N K E Y S H A R E F I G U R E S A N D M A R K E T I N D I C E S F R O M J A N U A R Y 1 TO J U N E 3 0 , 2 0 1 9 The prices of Volkswagen AG’s preferred and ordinary shares exceeded the 2018 year-end level in the first six months of 2019. Healthy business figures were the main driv- ers of the uptrend. Share listings were negatively impacted in particular by uncertainty regarding the future regulatory framework for diesel and electric vehicles, the US tariff policy, the slowdown of the Chinese market and the WLTP (Worldwide Harmonized Light-Duty Vehicles Test Procedure), which is a test procedure for determining pollutant and CO2 emissions and fuel consumption for passenger cars and light commercial vehicles. Ordinary share Preferred share DAX ESTX Auto & Parts Price (€) Date Price (€) Date Price Date Price High 166.60 Apr. 18 163.14 Apr. 18 12,413 May 3 527 Low 135.60 Jan. 3 134.76 Jan. 3 10,417 Jan. 3 412 Closing 151.15 Jun. 28 148.22 Jun. 28 12,399 Jun. 28 469 Date Apr. 18 Jan. 3 Jun. 28 P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 8 T O J U N E 2 0 1 9 Index based on month-end prices: December 31, 2018 = 100 Volkswagen ordinary share +8.7% Volkswagen preferred share +6.7% DAX +17.4% EURO STOXX Automobiles & Parts +11.0% 120 120 110 110 100 100 90 90 D J F M A M J A S O N D 7 8 Business Development Interim Management Report Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The global economy continued its robust growth in the first six months of 2019 albeit at a slower pace. The average expan- sion rate of gross domestic product (GDP) in this period was down year-on-year in both the advanced and the emerging market economies. Prices for energy and other commodities decreased on average compared with the prior-year period amid a still comparatively low – albeit slightly higher – interest rate level. In connection with the upheaval in trade policy and economic uncertainty, international trade of goods waned in the first half of 2019. In the economies of Central Europe, growth rates remained relatively high in the first two quarters of 2019, while also declining in most cases. GDP growth in Eastern Europe declined. This was due in particular to the economic situation in Russia, as the region’s largest economy. The economic downturn that began in Turkey in 2018 continued in the reporting period. Amid persistent structural deficits and political challenges, the growth rate of South Africa’s GDP was lower than in the same period of the previ- ous year. As a whole, the economies of Western Europe recorded slight growth from January to June 2019, with a decline in momentum. This trend was recorded in nearly all countries in Northern and Southern Europe. The unknown outcome of the Brexit negotiations between the United Kingdom and the EU remained the primary source of uncertainty. Amid a strong labor market, the growth trend in Germany continued at a markedly weaker pace in the period under review, with both business and consumer sentiment deterio- rating further. The robust growth of the US economy continued in the first half of the year, with considerable stimulus being pro- vided by private domestic demand. The US Federal Reserve kept its key rate constant based on the stable situation in the labor market and declining inflation. Momentum decreased in both Canada and Mexico compared to the same period of 2018. Between January and June 2019, Brazil continued the slight economic growth it had seen in preceding quarters, though the situation in South America’s largest economy remained tense. Argentina’s economic situation deteriorated markedly amid persistently high inflation. E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 8 T O J U N E 2 0 1 9 Index based on month-end prices: as of December 31, 2018 = 100 EUR to GBP EUR to USD EUR to CNY EUR to JPY 105 105 100 100 95 95 90 90 D J F M A M J J A S O N D Interim Management Report With high momentum, the Chinese economy continued its growth trajetory in the reporting period. Government support provided in response to the trade policy dispute between China and the US continued in the first half of 2019. India continued to record a high pace of growth. Japan registered weaker GDP growth than in the same period of the previous year. T R E N D S I N T H E M A R K E T S F O R PA S S E N G E R C A R S A N D L I G H T C O M M E R C I A L V E H I C L E S In the first half of 2019, global demand for passenger cars was weaker than in the prior-year period (–5.0%). While new regis- trations in the Central and Eastern Europe region narrowly exceeded the prior-year figure, the overall markets in Western Europe, Middle East, North America, South America and Asia- Pacific recorded dips. Global demand for light commercial vehicles between January and June 2019 was up slightly on the previous year. In Western Europe, passenger car demand in the reporting period fell short of the prior-year level due to the WLTP, among other factors. New vehicle registrations declined by varying degrees in the largest single markets. Passenger car sales in France fell slightly. In the United Kingdom, the pas- senger car market volume was moderately down on the prior- year figure. There, the uncertain outcome of the Brexit nego- tiations with the EU continued to weigh on demand. The passenger car markets in Italy and Spain also contracted in the reporting period. The share of new registrations for diesel vehicles in the overall passenger car market in Western Europe slipped to 33.3 (38.0)% in the period from January to June 2019. Despite the uncertain outcome of the Brexit negotiations between the EU and UK, new light commercial vehicle regis- trations in Western Europe were moderately higher than the prior-year level. In Germany, the number of passenger cars sold in the first six months of 2019 was on the high level seen in the prior-year period. In addition to the economic situation, sales incentives from dealers, particularly in the form of an environmental bonus, underpinned the stable trend. Demand for light commercial vehicles in Germany in the reporting period was considerably higher than in the same period in 2018. In the Central and Eastern Europe region, demand for pas- senger cars in the reporting period was just higher than in the previous year. Developments in the individual markets of Central Europe were mixed. Following a solid start in spite of the value-added tax increase as of January 1, 2019, the Russian passenger car market continued to weaken and was slightly below the prior-year figure at the end of the first half of 2019. Registration volumes of light commercial vehicles in Cen- tral and Eastern Europe were on a level with the previous year, Business Development while the number of vehicles sold in Russia between January and June 2019 was much lower than in the prior-year period. Demand in the Turkish passenger car market fell dramatically from January to June 2019 compared to the first half of 2018 as a result of the deteriorating macroeconomic situation. In South Africa, the number of passenger cars sold remained moderately lower than the weak level seen in the previous year. In North America, sales of passenger cars and light com- mercial vehicles (up to 6.35 tonnes) in the reporting period were down slightly on the prior-year figure. The market volume in the USA also remained slightly below the high prior-year level. The decline affected the passenger car segment in particular, while the trend in demand for light commercial vehicles such as SUV and pick-up models remained positive. In the Canadian automotive market, the downward trend seen since the second quarter of 2018 continued throughout the reporting period. The number of vehicles sold in Mexico was also perceptibly lower than the figure for the same period of the previous year. In the markets of the South America region, new registrations for passenger cars and light commercial vehicles decreased distinctly on the whole in the first six months of 2019. While in Brazil, the recovery in the demand for automobiles contin- ued at a high growth rate, though new registrations still fell markedly short of the record level achieved in the first half of 2013. In the Argentinian market, the deterioration in the macroeconomic situation also had a negative impact on demand for passenger cars and light commercial vehicles, with sales figures plummeting from January to June 2019. The number of new passenger cars registered in the Asia- Pacific region in the reporting period was markedly lower than the prior-year level. This is mainly attributable to the trend in the Chinese passenger car market, where the volume of demand fell noticeably short of the previous year’s level and exhibited negative growth rates until May 2019. The ongoing trade dispute between China and the USA continued to weigh on demand. In addition to the value-added tax cut in April, pull-forward effects resulting from a new emission standard introduced in China starting in early July 2019, led to a minor recovery in demand at the end of the reporting period. In the Indian passenger car market, sales in the first half of 2019 fell significantly compared with a year earlier. The vehicle market was on a level with the previous year in Japan. Demand for light commercial vehicles in the Asia-Pacific region was up slightly on the previous year. Registration volumes in China, the region’s dominant market and the largest market worldwide, also increased slightly year-on- year. The number of new vehicle registrations in India also saw a small increase versus the previous year, while noticeable growth was recorded in Thailand. 9 10 Business Development T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S In the markets that are relevant for the Volkswagen Group, global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was significantly higher between January and June 2019 than in the prior-year period. In the first half of the year, demand in Western Europe climbed sharply compared with 2018. There was a sizeable increase in new registrations in Germany, Western Europe’s largest market, in the first six months of 2019 compared with the prior-year period. While demand in Italy remained at the previous year’s level, it rose in Spain, in France and in the United Kingdom. The first half of 2019 saw a slight year-on-year recovery in registration volumes in the Central and Eastern Europe region. Demand in Russia decreased moderately. There was a marked overall increase in the volume of reg- istrations in South America compared to the first six months of 2018. In Brazil, the region’s largest market, demand for trucks rose very sharply as a consequence of the economic recovery compared with the low figure for the prior-year period. By contrast, a dramatic decline in registration volumes was seen in Argentina. In the period from January to June 2019, demand for buses in the markets that are relevant for the Volkswagen Group was significantly higher than the prior-year level. The markets in Brazil and France contributed in particular to this growth. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business performance trends are generally independent of each other. In the marine market, customers continued to be cau- tious in placing orders in the first half of 2019, consequently the market remained at the previous year’s level overall. In merchant shipping, orders of LNG carriers remained more or less stable, while demand for bulk carriers, container ships and oil tankers dropped to a lower level. Demand for cruise ships, passenger ferries and fishing vessels remained steady. In the offshore sector, the existing overcapacity continued to curb investment in offshore oil production. Plans for tighter emission standards resulted in a positive trend toward gas- powered or dual-fuel-engined ships. On account of the low market volume, all market segments are continuing to experi- ence marked competitive pressure and low prices as a result. The market for power generation deteriorated somewhat in the first half of 2019 compared with the same period of the previous year. A decreasing volume of demand was registered in all areas of application. The trend away from oil-fired power plants toward dual-fuel and gas-fired power plants remained Interim Management Report unchanged. Demand for energy solutions continued to remain high, with a strong trend towards greater flexibility and decentralized availability. Continued strong pressure from competition and pricing was discernible in all projects, having a negative impact on the earnings quality of orders. Furthermore, order placement was often delayed due to per- sistently difficult financing conditions for customers, partic- ularly on larger projects. The market for turbomachinery improved slightly com- pared with the previous year. Particularly the key sales mar- kets for turbo compressors in the raw materials, oil, gas and processing industries experienced an upturn in demand. By contrast, the steam and gas turbine business remained diffi- cult due to existing overcapacity in power generation. There was a minor let-up in the existing pressure from competition and pricing compared to the prior year. The marine after-sales business for diesel engines per- formed positively and benefited from a continued increase in interest in long-term maintenance contracts and retrofitting solutions. The power plant after-sales business was negatively impacted by shifts in the energy mix and regulatory changes in key sales markets. The after-sales market for turbomachin- ery saw a slow recovery. There were also new sales oppor- tunities here in digitalization and long-term service agree- ments. T R E N D S I N T H E M A R K E T S F O R F I N A N C I A L S E R V I C E S Demand for automotive financial services was buoyant in the first half of 2019 due, among other things, to the persistently low key interest rates in the main currency areas. Overall, a small decrease in the demand for new vehicles was recorded in the European market from January to June 2019. As a consequence, the number of new lease and finan- cing contracts signed also fell slightly. Sales of used vehicles in Europe rose somewhat, while a minor decrease was recorded in lease and financing contracts for used vehicles. After-sales products such as inspection contracts, mainte- nance and spare parts agreements were in high demand in the first six months of 2019 and there was a slight increase in the number of automotive-related insurances. In Germany, the share of loan-financed or leased new vehi- cles remained stable at a high level in the reporting period. There was greater demand for after-sales products, and the call for integrated mobility solutions in the business cus- tomer segment also continued to rise. In South Africa, demand for financing and insurance products fell slightly. In the markets of the USA and Mexico, automotive financial services remained very popular in the period from January to June 2019. Interim Management Report In Brazil, the consumer credit business and sales of the country-specific financial services product Consorcio, a lottery- style savings plan, continued the restrained positive trend seen in 2018. In the first half of 2019, more than half of the new vehicle sales were covered by financial services products. In the Argentinian market, the sharp rise in interest rates resulting from the most recent economic crisis posed a chal- lenge for sales of financing and leasing products. Demand for automotive financial services across the Asia- Pacific region was mixed in the first six months of 2019. In China, the proportion of loan-financed vehicle purchases stagnated compared with the prior-year period and new contract growth slowed sharply on account of the decline in passenger car sales. The relaxation of existing restrictions on registrations in metropolitan areas, in addition to the situ- ation in the interior of the country and for the used vehicles market, offers great potential in terms of acquiring new cus- tomers for automotive-related financial services. The demand for financial services products rose in India and in Japan. The demand for financial services in the Commercial Vehicles Business Area also varied from region to region. In China, the positive trend from 2018 continued into the first half of 2019, albeit at a slower pace. In Brazil, the truck and bus business and the related financial services market recorded strong growth. V O L K SWA G E N G R O U P D E L I V E R I E S The Volkswagen Group delivered 5,365,347 vehicles to cus- tomers worldwide in the first half of 2019. This was 2.8% or 154,085 fewer vehicles than in the prior-year period. While sales figures for the Commercial Vehicles Business Area sig- nificantly exceeded the previous year’s level, there was a decline in the number of models delivered to customers from the Passenger Cars Business Area. The Volkswagen Commer- cial Vehicles brand has been reported as part of the Passenger Cars Business Area since January 1, 2019. The prior-year figures have been adjusted accordingly. The chart on page 13 shows the trend in deliveries worldwide by month compared with the previous year. In the following, we report separately on deliveries in the Passenger Cars Business Area and Commercial Vehicles Business Area. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A R Y 1 TO J U N E 3 0 1 2019 2018 Passenger Cars 5,242,011 5,407,298 Commercial Vehicles 123,336 112,134 Total 5,365,347 5,519,432 1 Prior-year deliveries have been updated or amended to reflect subsequent statistical trends and the changed reporting structure. The figures include the Chinese joint ventures. % –3.1 +10.0 –2.8 Business Development G L O B A L D E L I V E R I E S B Y T H E PA S S E N G E R C A R S B U S I N E S S A R E A Global demand for the Volkswagen Group’s passenger cars and light commercial vehicles fell year-on-year by 3.1% to 5,242,011 units during the reporting period amid continu- ously challenging market conditions. The decrease was mainly attributable to declining markets, especially in China. Other causes were the shift to the WLTP, the limited avail- ability of petrol engines and model changes. As a result, the Volkswagen Passenger Cars, Audi and ŠKODA brands fell short of their high prior-year levels, while Volkswagen Commercial Vehicles reached the volume seen in that period. The SEAT (+8.4%) and Lamborghini (+95.7%) brands performed espe- cially well, both recording the best first six months in their corporate history. Porsche, Bentley and Bugatti also increased their deliveries year-on-year. We registered declining sales figures in all regions, however, demand for Group models rose in some core markets. Our passenger car market share expanded in a declining overall market worldwide to 12.5 (12.2)%. The table on the next page provides an overview of deliv- eries of passenger cars and light commercial vehicles to cus- tomers by market in the reporting period. Sales trends in the individual markets are described in the following sections. Deliveries in Europe/Other markets In Western Europe, the Volkswagen Group delivered 1,936,686 vehicles to customers in the first six months of 2019. This was 1.4% fewer than in the same period of 2018. Increases in some core markets were unable to offset negative impacts – especially arising from the shift to the WLTP, customer uncer- tainty due to the public debate on driving bans for diesel vehicles, and restricted capacity for petrol engines. Encourag- ing increases in deliveries were recorded by the T-Roc from Volkswagen Passenger Cars, the Karoq from ŠKODA, the Arona and Ateca from the SEAT brand, the Porsche Macan and the Crafter from Volkswagen Commercial Vehicles. Addition- ally, new or successor models introduced the previous year were very popular with customers, these being the Touareg from Volkswagen Passenger Cars and Audi’s A1 Sportback, Q3, A6 and Q8. The T-Cross from the Volkswagen Passenger Cars brand, the ŠKODA Scala, the e-tron (the Audi brand’s first all-electric production model), the SEAT Tarraco and the Porsche Cayenne Coupé were successfully launched on the market as new or successor models. The Volkswagen Group’s share of the passenger car market in Western Europe rose to 22.7 (22.2)%. In Germany, demand for vehicles from the Volkswagen Group from January to June 2019 was in line with the pre- vious year’s figure (+0.1%), which had been bolstered by the environmental bonus and a pull-forward effect resulting from the WLTP. The most popular Group models included the T-Roc and Tiguan from Volkswagen Passenger Cars, the Audi A3 Sportback, the Karoq, Octavia and Superb from the ŠKODA brand, the Arona and Ateca from the SEAT brand and the Porsche Macan. The Touareg from Volkswagen Passenger 11 12 Business Development Interim Management Report Cars, the Audi A6 Avant and the ŠKODA Fabia, all of which had been introduced in the previous year, were also in high demand from customers. Seven Group models led the Kraft- fahrt-Bundesamt (KBA – German Federal Motor Transport Authority) registration statistics in their respective segments: the Polo, Golf, T-Roc, Tiguan, Touran, Audi A6 and Multivan/ Transporter. In the first six months of 2019, the Golf was again the most popular passenger car in Germany in terms of registrations. In the Central and Eastern Europe region, we delivered 1.6% fewer vehicles to customers in the reporting period than in the same period of 2018. Positive momentum came from Russia and Poland, while deliveries declined in the Czech Republic. Demand developed encouragingly for the T-Roc, Tiguan and Touareg models from the Volkswagen Passenger Cars brand, for ŠKODA’s Rapid/Scala, Karoq and Kodiaq models, and for the SEAT Arona and Ateca. The Volkswagen Group’s share of the passenger car market in the Central and Eastern Europe region amounted to 21.1 (21.8)%. In Turkey, the number of Volkswagen Group vehicles delivered to customers from January to June of this year fell by more than half compared to the same period of the pre- vious year as a result of this market’s decline. On the South African market, the number of Group models sold fell by 0.9%. The Polo from Volkswagen Passenger Cars continued to be the most frequently sold Group model there. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2019 2018 (%) Europe/Other markets 2,476,020 2,529,979 –2.1 Western Europe 1,936,686 1,964,467 –1.4 of which: Germany 693,466 692,464 +0.1 United Kingdom 301,989 312,493 –3.4 Italy 172,016 167,864 +2.5 Spain 171,537 174,682 –1.8 France 155,531 147,999 +5.1 Central and Eastern Europe 378,506 384,786 –1.6 of which: Russia 103,310 97,720 +5.7 Poland 84,335 83,715 +0.7 Czech Republic 69,154 77,660 –11.0 Other markets 160,828 180,726 –11.0 of which: Turkey 30,480 63,698 –52.1 South Africa 41,970 42,337 –0.9 North America 459,091 463,388 –0.9 of which: USA 318,435 311,891 +2.1 Mexico 87,199 94,050 –7.3 Canada 53,457 57,447 –6.9 South America 255,806 258,550 –1.1 of which: Brazil 190,161 157,917 +20.4 Argentina 38,019 71,479 –46.8 Asia-Pacific 2,051,094 2,155,381 –4.8 of which: China 1,914,071 1,992,359 –3.9 Japan 39,169 43,992 –11.0 India 25,264 30,831 –18.1 Worldwide 5,242,011 5,407,298 –3.1 Volkswagen Passenger Cars 2,998,182 3,118,702 –3.9 Audi 906,180 949,233 –4.5 ŠKODA 620,935 652,735 –4.9 SEAT 314,279 289,946 +8.4 Bentley 4,785 4,430 +8.0 Lamborghini 4,553 2,327 +95.7 Porsche 133,484 130,598 +2.2 Bugatti 42 34 +23.5 Volkswagen Commercial Vehicles 259,571 259,293 +0.1 1 Prior-year deliveries have been updated or amended to reflect subsequent statistical trends and the changed reporting structure. The figures include the Chinese joint ventures. Interim Management Report V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 1,100 1,100 1,000 1,000 900 900 800 800 700 700 600 600 J F M A M Deliveries in North America In a declining market for passenger cars and light commercial vehicles in North America, demand for Group models fell by 0.9% from January to June this year compared to the same period of 2018. The Group’s share of the market in this region amounted to 4.6 (4.5)%. The Tiguan Allspace and Jetta from Volkswagen Passenger Cars were the Volkswagen Group’s most in-demand models in North America. In the first six months of 2019, the Volkswagen Group delivered 2.1% more vehicles to customers in the declining US market than in the same period of the previous year. The biggest increases of all Group models were recorded by the Jetta, Tiguan Allspace and Atlas from the Volkswagen Passen- ger Cars brand, the Audi Q5, Audi A6 and Porsche Cayenne. The Audi e-tron was successfully rolled out. In Canada, deliveries to Volkswagen Group customers fell by 6.9% year-on-year in the reporting period. The market as a whole also declined during this period. The Tiguan Allspace and Jetta models from Volkswagen Passenger Cars were par- ticularly popular. In a weaker overall market in Mexico, we handed over 7.3% fewer vehicles to customers than in the same period of the previous year. The Group models with the highest volume of demand were the Vento, Jetta and Tiguan Allspace from the Volkswagen Passenger Cars brand. Deliveries in South America In the South American passenger car and light commercial vehicles markets, the number of Group models delivered to customers fell by 1.1% year-on-year in the first half of 2019. The Gol and Polo from the Volkswagen Passenger Cars brand achieved the highest demand volume of all Group models. The T-Cross from Volkswagen Passenger Cars was successfully J Business Development 2019 2019 2018 2018 A S O N D introduced to the market. The Group’s share of the market in South America was 12.2 (11.6)%. The Volkswagen Group benefited from the sustained recovery in the Brazilian market and recorded a year-on-year increase of 20.4% in its sales to customers there during the reporting period. This was due primarily to the market launch of the new T-Cross from the Volkswagen Passenger Cars brand, as well as the success of the Virtus, Jetta and Tiguan Allspace from Volkswagen Passenger Cars, which had been introduced as new or successor models to the market in the previous year. Demand for this brand’s Fox, Polo and Gol models as well as for the Amarok from Volkswagen Commer- cial Vehicles, was also very encouraging. In Argentina, the number of vehicles delivered to Volks- wagen Group customers in the first six months of 2019 fell by almost half compared to the prior-year period amid a dra- matic contraction in the market as a whole. The Gol and Suran from Volkswagen Passenger Cars and the Amarok from Volkswagen Commercial Vehicles saw the highest demand of all Group models. The Virtus and Tiguan Allspace models, newly introduced by the Volkswagen Passenger Cars brand in the previous year, were also well received by customers. Deliveries in the Asia-Pacific region The Volkswagen Group recorded a decline in demand in the Asia-Pacific region from January to June 2019 amid market conditions that continued to be difficult, delivering 4.8% fewer vehicles to customers than a year earlier. The Group’s share of the passenger car market in this region was at 12.1 (12.0)%. In China, the number of Group models sold during the reporting period fell by 3.9% year-on-year. Pull-forward effects resulting from the new C6 emission standard, which applies 13 14 Business Development Interim Management Report there from July 2019 had a positive impact on sales in the month of June. The T-Roc, Tayron, Tharu, Bora and Lavida models from Volkswagen Passenger Cars, the Audi Q2L and Q5L, the ŠKODA Karoq and Kamiq, and the Porsche Cayenne, all of which had been introduced as new or successor models in the previous year, were in especially high demand. The T- Cross, Polo, Sagitar and Teramont X models from the Volks- wagen Passenger Cars brand and the Audi Q3 and Audi A6L were successfully launched on the market as new or succes- sor models during the reporting period. units, of which 53,602 were trucks and 2,750 were buses. Here, the MAN brand delivered 6,340 light commercial vehicles. In the period from January to June 2019, deliveries in the markets of the Central and Eastern Europe region rose by 6.2% to 19,590 vehicles; of this figure, 18,166 were trucks, 718 were buses and 706 were light commercial vehicles. In Russia, the region’s largest market, sales declined year-on-year by 26.6% to 3,817 units. In the Indian passenger car market, deliveries to Volks- wagen Group customers in the first half of 2019 were 18.1% down on the previous year’s figure. Of the Group's models, the Polo from Volkswagen Passenger Cars was the most popular there. In Japan, we handed over 11.0% fewer vehicles to custom- ers than in same period of the previous year. The Tiguan from the Volkswagen Passenger Cars brand, the Audi Q5 and the Porsche 911 all recorded encouraging growth in demand. C O M M E R C I A L V E H I C L E D E L I V E R I E S In the first six months of 2019, the Volkswagen Group deliv- ered a total of 123,336 commercial vehicles to customers world- wide (+10.0%). Trucks accounted for 105,846 units (+8.3%) and buses for 10,224 units (–9.1%). Deliveries of light com- to mercial vehicles of 7,266 (3,178) units. the MAN brand amounted In Western Europe, sales increased by 20.8% compared with the corresponding prior-year period to a total of 62,692 In the Other markets, particularly in Turkey, deliveries of Volkswagen Group commercial vehicles decreased by 40.2% year-on-year to a total of 5,809 units; of this figure 4.923 were trucks and 668 were buses. Sales in North America declined in the first half of 2019 to 1,481 vehicles (–8.1%), which were handed over almost exclu- sively to customers in Mexico; this included 636 trucks and 845 buses. Deliveries in South America rose to a total of 27,552 vehi- cles (+23.1%); of which 23,068 were trucks and 4,484 were buses. Following continued improvement in the economic climate in Brazil, we were able to increase our sales here by 45.7%. Of the units delivered, 20,732 were trucks and 3,254 were buses. In the Asia-Pacific region, the Volkswagen Group sold 6,212 vehicles to customers in the reporting period; among these 5,451 were trucks and 759 were buses. Overall, this was 23.0% less than in the previous year. In China, sales increased by 21.2% to 2,500 vehicles, of which 2,351 were trucks and 149 were buses. C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2019 2018 (%) Europe/Other markets 88,091 80,068 +10.0 Western Europe 62,692 51,897 +20.8 Central and Eastern Europe 19,590 18,449 +6.2 Other markets 5,809 9,722 –40.2 North America 1,481 1,612 –8.1 South America 27,552 22,388 +23.1 of which: Brazil 23,986 16,466 +45.7 Asia-Pacific 6,212 8,066 –23.0 of which: China 2,500 2,062 +21.2 Worldwide 123,336 112,134 +10.0 Scania 51,524 46,778 +10.1 MAN 71,812 65,356 +9.9 1 Prior-year deliveries have been updated or amended to reflect subsequent statistical trends and the changed reporting structure. Interim Management Report D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times range from just under one year to several years, and partial deliveries as construc- tion progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. In the period from January to June 2019, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated more than two-thirds of overall sales revenue. G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division includes the Volkswagen Group’s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offer- ings. The division comprises Volkswagen Financial Services and the financial services activities of Scania and Porsche Holding Salzburg. As of January 1, 2019, contracts signed by our international joint ventures are also included; the com- parison figures have been adjusted accordingly. The Financial Services Division’s products and services were very popular in the period from January to June 2019. The number of new financing, leasing, service and insurance contracts signed worldwide stood at 4.5 (4.5) million. The ratio of leased and financed vehicles to Group deliveries (penetration rate) in the Financial Services Division’s markets amounted to 34.5 (34.1)% in the first six months of 2019. As of June 30, 2019, the total number of contracts was 23.2 mil- lion, 4.8% higher than on December 31, 2018. In the Europe/Other markets region, the number of new contracts signed in the reporting period increased by 3.8% to 3.5 million. At 17.1 million at the end of June 2019, the total number of contracts exceeded the year-end figure for 2018 by 6.1%. Of these contracts, 7.5 million (+4.5%) related to the Customer Financing/Leasing area. In North America, the number of new contracts signed in the first six months of 2019 fell by 5.8% year-on-year to 473 thousand. At 3.1 (3.0) million, the number of contracts at the end of June 2019 was slightly up on the figure at year- end 2018. The Customer Financing/Leasing area recorded 1.9 (1.9) million contracts. In South America, the initial consolidation of Porsche Volkswagen Servicios Financieros Chile S.p.A. led to a con- siderable increase in the number of contracts. A total of Business Development 151 (138) thousand new contracts were concluded in the first two quarters of this year. At 628 (589) thousand, the total number of contracts at the end of June 2019 exceeded the figure on December 31, 2018. The contracts mainly related to the Customer Financing/Leasing area. At 454 thousand, the number of new contracts signed in the Asia-Pacific region in the first six months of 2019 was 6.4% lower than a year earlier. The total number of contracts at the end of the reporting period stood at 2.4 million. This was 1.1% higher than at the end of 2018. The Customer Finan- cing/Leasing area accounted for 1.8 million contracts (+0.7%). S A L E S T O T H E D E A L E R O R G A N I Z AT I O N In the first six months of 2019, the Volkswagen Group’s unit sales to the dealer organization (including the Chinese joint ventures) fell by 4.2% on the prior-year period to 5,338,759 vehicles. This was due to lower demand, especially in China, Turkey and Argentina. Unit sales outside Germany declined by 5.2% compared to the period from January to June 2018. In Germany, unit sales rose by 2.3% year-on-year. Vehicles sold in Germany as a proportion of overall sales increased to 13.3 (12.5)%. P R O D U C T I O N Between January and June 2019, the Volkswagen Group’s pro- duction decreased by 6.3% year-on-year to a total of 5,421,876 vehicles. Production in Germany fell by 14.7% to 1,132,455 units. The proportion of production in Germany declined to 20.9 (22.9)%. I N V E N T O R I E S Global inventories at Group companies and in the dealer organization were higher on June 30, 2019 than at year-end 2018 but below the corresponding prior-year figure. E M P L OY E E S The Volkswagen Group had 636,988 active employees on June 30, 2019. A further 9,402 employees were in the passive phase of their partial retirement. In addition, there were 16,397 young people in vocational traineeships. At the end of the first half of the year of 2019, the Volkswagen Group had a total of 662,787 employees worldwide. This was roughly on a level with the figure at year-end 2018. At 291,717, the number of employees in Germany was also almost on a level with the end of 2018. 15 16 Results of Operations, Financial Position and Net Assets Interim Management Report Results of Operations, Financial Position and Net Assets A P P L I C AT I O N O F N E W I N T E R N AT I O N A L F I N A N C I A L R E P O R T I N G STA N D A R D S The new accounting standard IFRS 16, which came into effect on January 1, 2019, amends the previous lease accounting rules with the central aim of recognizing all leases in the balance sheet. Accordingly, it establishes that lessees are no longer required to classify their leases as either finance leases or operating leases. They will instead generally be required to recognize a right-of-use asset and a lease liability for every lease in the balance sheet. The right-of-use assets are recog- nized in the balance sheet under those items in which the assets underlying the lease would have been reported if they were owned by the Volkswagen Group. Using the modified retrospective method (adjustments to the opening balance sheet), right-of-use assets were recognized under noncurrent assets and lease liabilities as financial liabilities for the first time as of January 1, 2019. This led to an increase in total assets but did not affect equity. the financial reporting. The Commercial Vehicles segment will continue to correspond to the Commercial Vehicles Business Area, but now excluding the Volkswagen Commer- cial Vehicles brand. The prior-year figures have been adjusted. The Automotive Division will remain unchanged. S P E C I A L I T E M S Special items consist of certain items in the financial state- ments whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance. In the first half of 2019, negative special items in connection with the diesel issue affected the Passenger Cars Business Area’s operating profit in an amount of €–1.0 (–1.6) billion. They are attributable to the administrative fine order of €0.5 billion issued by the Stuttgart Office of the Public Prosecutor, which ended the ongoing regulatory offense proceeding against Dr. Ing. h.c. F. Porsche AG, and higher legal defense costs. The new approach results in a slight increase in operating profit in 2019, because the only items allocated to operating profit as from January 1, 2019 are depreciation charges on right-of-use assets. Interest expenses on lease liabilities in the Automotive Division are recognized in the financial result and have a corresponding negative impact here. In the cash flow statement, the modified presentation of leases in the statement of income as a result of the new IFRS 16 is expected to have a positive effect on full-year gross cash flow, and therefore subsequently also on net cash flow (depreciation is a non-cash expense) in an amount in the mid three-digit million euro range. Repayments of the principal portion of the lease liability have a corresponding negative impact on cash flows from financing activities. The initial recognition of lease liabilities as financial liabilities in the balance sheet led to a significant increase in third-party borrowings in the cash flow statement, which in turn resulted in a negative one-off effect of €–4.8 billion on the disclosure of the Automotive Division’s net liquidity as of January 1, 2019. C O M P E N S AT I O N PA I D T O T H E N O N C O N T R O L L I N G I N T E R E ST S H A R E H O L D E R S O F M A N S E In August 2018, the control and profit and loss transfer agree- ment with MAN SE was terminated by extraordinary notice as of January 1, 2019. Following the announcement that the termination of the control and profit and loss transfer agree- ment had been recorded in the commercial register, the non- controlling shareholders of MAN SE were entitled under the provisions of the control and profit and loss transfer agree- ment to tender their shares to Volkswagen within a two- month period. This resulted in cash outflows of €1.1 billion in the first half of this year for the acquisition of tendered shares and for compensation payments. The “Put options and compensation rights granted to noncontrolling interest shareholders” item reported in the balance sheet was reduced accordingly. The put options granted to noncontrolling interest shareholders of MAN SE expired on March 4, 2019. The remaining amount of €0.7 billion was reclassified directly to equity; €0.3 billion of this amount is attributable to noncontrolling interests. The prior-year figures have not been adjusted. N E W R E P O R T I N G ST R U C T U R E Since January 1, 2019, we have allocated the Volkswagen Commercial Vehicles brand to the Passenger Cars segment and renamed the segment Passenger Cars and Light Com- mercial Vehicles. Consequently, the Passenger Cars Business Area includes the Volkswagen Commercial Vehicles brand in I P O O F T R ATO N S E Since June 28, 2019, shares of TRATON SE have been traded on the regulated market of the Frankfurt Stock Exchange and the NASDAQ Stockholm Exchange. The offer price was set at €27.00 per share. This led to an increase of €1.4 billion in the Interim Management Report Volkswagen Group’s equity, of which €1.2 billion is reported as noncontrolling interests. The payment claim of €1.4 bil- lion from the sale of the shares were recognized as a receivable in the balance sheet as of June 30, 2019; the cash inflow occurred at the beginning of the third quarter of 2019. R E S U LT S O F O P E R AT I O N S O F T H E G R O U P Between January and June 2019, the Volkswagen Group generated sales revenue of €125.2 billion, thus exceeding the prior-year figure by 4.9%. Despite the negative volume trend, sales revenue increased, mainly because of mix and price improvements and the healthy business performance in the Financial Services Division. The proportion of sales revenue generated abroad amounted to 80.8 (79.8)%. Gross profit was on a level with the previous year, at €24.7 (24.8) billion. The gross margin stood at 19.8 (20.8)%. The Volkswagen Group’s operating profit before special items rose by €0.2 billion to €10.0 billion in the first half of 2019, while the operating return on sales before special items amounted to 8.0 (8.2)%. Improvements in the mix and in price positioning, as well as a year-on-year decline in special items, more than offset the rise in fixed costs, negative exchange rate movements and lower vehicle sales. As a result, the Volkswagen Group’s operating profit of €9.0 billion was up €0.8 billion compared with the prior-year figure. The operating return on sales increased to 7.2 (6.8)%. The financial result fell by €0.3 billion to €0.6 billion. The decrease is mainly attributable to higher interest expenses, which were driven up by the rise in the refinancing volume, the interest expense on provisions and the application of the new IFRS 16. The result of equity-accounted investments and the result of the Chinese joint ventures included in that item were down slightly on the previous year. The remeasurement of put options and compensation rights in connection with the control and profit and loss transfer agreement with MAN SE had had a negative impact in the prior-year period. The Volkswagen Group’s profit before tax, which amounted to €9.6 billion, exceeded the previous year’s figure by €0.6 billion. Profit after tax of €7.2 billion was also €0.6 billion higher than at the end of the first half of 2018. Results of operations in the Automotive Division The Automotive Division’s sales revenue amounted to €106.1 billion in the period from January to June 2019, 4.3% more than in the previous year. The rise resulted mainly from improvements in the mix and in price positioning, while a decline in volumes had a negative effect. Sales revenue in the Passenger Cars, Commercial Vehicles and Power Engineering Business Areas exceeded the respective prior-year figures, in some cases significantly. As our Chinese joint ventures are accounted for using the equity method, the Group’s per- formance in the Chinese passenger car market is mainly reflected in consolidated sales revenue only through deliv- eries of vehicles and vehicle parts. Cost of sales rose faster than sales revenue, driven primarily by higher depreciation and amortization charges Results of Operations, Financial Position and Net Assets due to the large volume of capital expenditure as well as higher research and development costs recognized in profit or loss. The ratio of cost of sales to sales revenue was also up on the prior-year period. Total research and development costs as a percentage of the Automotive Division’s sales revenue (research and development ratio or R&D ratio) stood at 6.6 (6.6)% in the reporting period. Both distribution expenses and their ratio to sales revenue declined in the period from January to June 2019. There was a rise in administrative expenses and their ratio to sales revenue. The other operating result amounted to €–0.8 (–1.9) billion. A year-on-year decline, to €–1.0 (–1.6) bil- lion, in special items related to the diesel issue, lower exchange rate losses and a decrease in net fair value losses on derivatives to which hedge accounting is not applied had a positive impact. At €7.6 billion, the Automotive Division’s operating profit of the first six months of 2019 was €0.7 billion higher than the prior-year figure. The increase was particularly attri- butable to mix and price positioning improvements and a year-on-year decline in negative special items. A contraction in new vehicle sales and higher depreciation and amorti- zation charges as well as research and development costs had an offsetting effect. The operating return on sales increased to 7.2 (6.8)%. Excluding special items, the Automotive Division’s operating profit was on a level with the previous year at €8.6 (8.5) billion. The operating return on sales before special items was 8.1 (8.4)%. Since the profit recorded by joint ventures is accounted for in the financial result using R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 TO J U N E 3 0 € million 2019 2018 Passenger Cars1 Sales revenue 90,942 88,090 Operating result 6,693 6,217 Operating return on sales (%) 7.4 7.1 Commercial Vehicles1 Sales revenue 13,320 11,988 Operating result 959 707 Operating return on sales (%) 7.2 5.9 Power Engineering Sales revenue 1,864 1,637 Operating result –63 –58 Operating return on sales (%) –3.4 –3.5 1 The Volkswagen Commercial Vehicles brand has been reported as part of the Passenger Cars Business Area since January 1, 2019. The prior-year figures have been adjusted. 17 18 Results of Operations, Financial Position and Net Assets O P E R A T I N G P R O F I T B E F O R E S P E C I A L I T E M S B Y Q U A R T E R Volkswagen Group in € million 6,000 6,000 4,500 4,500 3,000 3,000 1,500 1,500 0 0 Q1 Q2 the equity method, the business growth of our Chinese joint ventures is primarily reflected in the operating profit only through deliveries of vehicles and vehicle parts, and through license income. Results of operations in the Financial Services Division In the first six months of 2019, the Financial Services Divi- sion recorded sales revenue of €19.1 billion; the year-on-year increase of 8.0% was primarily attributable to a rise in busi- ness volumes. Cost of sales expanded by €1.2 billion to €15.6 billion, growing slightly faster than sales revenue. Distribution expenses increased due to volume effects, while their ratio to sales revenue was largely unchanged. Administrative expenses and their ratio to sales revenue were both lower. The operating profit of the Financial Services Division totaled €1.4 billion, exceeding the prior-year figure by 8.9%. The operating return on sales was 7.4 (7.3)%. F I N A N C I A L P O S I T I O N O F T H E G R O U P In the first half of 2019, the Volkswagen Group’s gross cash flow was €20.7 billion, up €0.4 billion on the prior-year figure. The change in working capital amounted to €–14.3 (–15.5) bil- lion. Included in the special items recognized in the first six months of 2019 is a cash outflow related to the payment of an administrative fine following the regulatory offense proceeding. Cash flows from operating activities rose to €6.4 (4.8) billion. The Volkswagen Group’s investing activities attributable to operating activities stood at €8.1 billion in the reporting period, €0.9 billion more than in the previous year. Interim Management Report 2019 2019 2018 2018 Q3 Q4 Financing activities led to a cash outflow of €–2.1 billion, compared with an inflow of €6.4 billion in the previous year. Financing activities primarily include the dividend paid to the shareholders of Volkswagen AG, the acquisition of MAN shares tendered as a result of the termination of the control and profit and loss transfer agreement, and the issuance and redemption of bonds and other financial liabilities. Following the application of the new IFRS 16, payments for the principal portion of the lease liability have to be recognized under financing activities since January 1, 2019. At the end of the first half of 2019, the Volkswagen Group’s cash and cash equivalents reported in the cash flow statement were €23.0 (21.2) billion. On June 30, 2019, the Volkswagen Group’s net liquidity was €–146.6 billion, compared with €–134.7 billion at the end of 2018. Financial position of the Automotive Division In the period from January to June 2019, the Automotive Division generated gross cash flow of €15.9 (15.5) billion. The increase mainly resulted from higher profits and positive effects of the application of the new IFRS 16. The dividend of the Chinese joint venture FAW-Volkswagen, which has not yet been resolved in the reporting period, had a negative influ- ence compared with the previous year. The change in working capital amounted to €–2.4 (–5.2) billion. The dividend of FAW- Volkswagen, which was not yet recognized as a receivable, and a smaller increase in inventories had a positive effect. The cash outflows attributable to the diesel issue were signifi- cantly lower than in the prior-year period. Cash flows from operating activities were up by €3.3 billion to €13.5 billion. Interim Management Report F I N A N C I A L P O S I T I O N O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 TO J U N E 3 0 € million 2019 2018 Passenger Cars1 Gross cash flow 14,002 13,826 Change in working capital –769 –3,802 Cash flows from operating activities 13,233 10,024 Cash flows from investing activities attributable to operating activities –9,232 –6,270 Net cash flow 4,001 3,754 Commercial Vehicles1 Gross cash flow 1,772 1,468 Change in working capital –1,399 –1,182 Cash flows from operating activities 373 286 Cash flows from investing activities attributable to operating activities 1,412 –533 Net cash flow 1,784 –247 Power Engineering Gross cash flow 121 163 Change in working capital –204 –265 Cash flows from operating activities –83 –102 Cash flows from investing activities attributable to operating activities –135 –59 Net cash flow –217 –161 1 The Volkswagen Commercial Vehicles brand has been reported as part of the Passenger Cars Business Area since January 1, 2019. The prior-year figures have been adjusted. The Automotive Division’s investing activities attributable to operating activities amounted to €8.0 billion in the first six months of 2019, a rise of €1.1 billion compared with the previous year. Investments in property, plant and equipment, investment property and intangible assets, excluding capital- ized development costs (capex) increased by €0.8 billion to €5.2 billion. The ratio of capex to sales revenue was 4.9 (4.3)%. Capex was invested primarily in our production facilities and in models to be launched in 2019 and 2020, as well as in the ecological focus of our model range, the electrification and digitalization of our products and in our modular toolkits. Additions to capitalized development costs declined by €0.2 billion to €2.3 billion in the period from January to June 2019. The “Acquisition and disposal of equity invest- ments” item went up by €0.4 billion to €0.5 billion as a result of strategic investments in a number of companies. The Automotive Division’s net cash flow was €5.6 billion, €2.2 billion more than a year earlier. Financing activities accounted for total cash flows of €–8.7 (–2.7) billion in the first six months of 2019. The divi- Results of Operations, Financial Position and Net Assets dend paid to the shareholders of Volkswagen AG in May 2019 amounted to €2.4 billion, an increase of €0.5 billion com- pared with the previous year. Financing activities also include the acquisition of MAN shares tendered as a result of the termination of the control and profit and loss transfer agreement with MAN SE and the issuance and redemption of bonds and other financial liabilities. Since January 1, 2019, repayments of the principal portion of the lease liability have also been reported in this item, as required following the application of the new IFRS 16. The recognition of lease liabilities as financial liabilities required by IFRS 16 led to a €5.1 billion increase in third- party borrowings in the Automotive Division as of the end of the second quarter of 2019. As a result of this non-cash effect, the Automotive Division’s net liquidity of €15.9 billion reported at the end of June 2019 was down significantly on the figure of €19.4 billion as of December 31, 2018. Financial position of the Financial Services Division The gross cash flow recorded in the Financial Services Divi- sion was €4.8 (4.9) billion in the first half of 2019. The change in working capital of €–12.0 (–10.2) billion was attributable to an increase in funds tied up in working capital, mainly driven by the growth in business volume. As a result, cash flows from operating activities amounted to €–7.1 (–5.4) billion. Investing activities attributable to operating activities decreased by €0.2 billion to €0.1 billion. Financing activities resulted inflow of €6.6 (9.1) billion in the Financial Services Division in the period from January to June 2019. This figure primarily included the issuance and redemption of bonds and other financial liabilities. in a cash On June 30, 2019, the Financial Services Division’s negative net liquidity, which is common in the industry, amounted to €–162.5 billion, compared with €–154.1 billion on December 31, 2018. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E At the end of the first six months of 2019, the Volkswagen Group’s total assets had increased by 4.8% compared with the end of 2018, to €480.0 billion. The rise was mainly attributable to the growth of the Financial Services Division and the application of the new IFRS 16. The Group’s equity was €118.6 billion, €1.3 billion more than at the end of 2018. The equity ratio was 24.7 (25.6)%. Automotive Division balance sheet structure On June 30, 2019, the Automotive Division’s intangible assets were almost unchanged compared with the 2018 balance sheet date. The new IFRS 16 resulted in a marked rise in property, plant and equipment. At the end of the first half of 2019, equity-accounted investments were slightly down on the amount recognized at the end of 2018: the business results of the Chinese joint ventures for the first six months of 2019 were set against the dividend resolved by 19 20 Results of Operations, Financial Position and Net Assets SAIC VOLKSWAGEN. Overall, noncurrent assets were 4.3% higher than at the end of 2018. Current assets rose by 6.7%; the inventories included in this item increased, mainly for production-related reasons. The rise in current other receivables and financial assets is primarily attributable to higher trade receivables, the receiv- able from the sale of the shares of TRATON SE, and the remaining portion of the dividend receivable from SAIC VOLKSWAGEN. Due among other things to the redemption of current financial liabilities, cash and cash equivalents in the Automotive Division declined by €6.7 billion to €17.5 billion. At the end of June 2019, the Automotive Division’s equity stood at €89.1 (88.9) billion. Healthy earnings growth had a positive effect. As a result of the termination of the control and profit and loss transfer agreement as of January 1, 2019, the amount of €0.7 billion remaining from the put options and compensation rights in MAN SE granted to noncontrol- ling interest shareholders was reclassified directly to equity; €0.3 billion of this amount had an increasing effect on non- controlling interests. The issuance of TRATON SE shares led to a further rise of €1.2 billion. The noncontrolling interests are now held by the noncontrolling interest shareholders of TRATON, Renk and Audi. The dividend paid to the share- holders of Volkswagen AG, a rise in actuarial losses from the measurement of pension provisions, and negative effects from the measurement of derivatives recognized directly in equity had a decreasing effect on equity. Noncurrent liabilities increased by 17.4% to a total of €91.2 billion. The noncurrent financial liabilities included in this item were much higher, mainly as a result of the appli- cation of the new IFRS 16. The rise in pension provisions was primarily due to the actuarial remeasurement following a change in the discount rate. Current liabilities amounted to €66.5 (68.0) billion in total, down on the figure recorded at the end of 2018. As a result of the extraordinary termination of the control and profit and loss transfer agreement with MAN SE, the “put options and compensation rights granted to noncontrolling interest shareholders” account was settled: the tendered MAN shares were acquired, the cash compensation was paid and the remaining amount was reclassified directly to equity. Current financial liabilities stood at €–5.8 (–1.5) billion. The figures for the Automotive Division also contain the elimi- nation of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division in both periods, a negative amount was disclosed in each case. The marked increase in current other liabilities compared with the end of 2018 is primarily due to cyclical effects in the buyback business. At €246.9 billion, the Automotive Division’s total assets at the end of the first six months of 2019 were 5.3% up on the figure reported on December 31, 2018. Interim Management Report B A L A N C E S H E E T ST R U C T U R E O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S € million Jun. 30, 2019 Dec. 31, 2018 Passenger Cars1 Noncurrent assets 121,915 116,537 Current assets 80,752 70,408 Total assets 202,667 186,945 Equity 72,894 72,110 Noncurrent liabilities 79,382 66,406 Current liabilities 50,391 48,429 Commercial Vehicles1 Noncurrent assets 24,813 24,117 Current assets 13,084 17,366 Total assets 37,897 41,483 Equity 13,377 13,788 Noncurrent liabilities 10,938 10,532 Current liabilities 13,582 17,162 Power Engineering Noncurrent assets 2,638 2,499 Current assets 3,693 3,597 Total assets 6,331 6,097 Equity 2,869 2,953 Noncurrent liabilities 906 754 Current liabilities 2,556 2,391 1 The Volkswagen Commercial Vehicles brand has been reported as part of the Passenger Cars Business Area since January 1, 2019. The prior-year figures have been adjusted. Financial Services Division balance sheet structure The Financial Services Division had total assets of €233.1 bil- lion on June 30, 2019, 4.2% more than at the end of 2018. Noncurrent assets were up by 5.7% in total. The property, plant and equipment included in this item decreased. Invest- ment property and lease assets rose due to business growth and as a result of the application of the new IFRS 16, while other receivables and financial assets declined by a corre- sponding amount. Noncurrent financial services receivables increased, driven by higher volumes. Current assets were 2.1% up on the figure as of Decem- ber 31, 2018. Current other receivables and financial assets declined considerably, while current financial services receiv- ables increased. As of the balance sheet date, cash and cash equivalents in the Financial Services Division rose by €3.5 billion to €8.3 billion. At the end of the first half of 2019, the Financial Services Division accounted for around 48.6 (48.8)% of the Volkswagen Group’s assets. Interim Management Report At the end of the reporting period, the Financial Services Division’s equity stood at €29.5 billion, 3.5% higher than on December 31, 2018 due to earnings-related factors. The equity ratio was 12.7 (12.7)%. Noncurrent liabilities rose by 8.4%, due mainly to higher noncurrent financial liabilities to refinance the business volume. Current liabilities amounting to €100.4 (100.0) billion were on a level with the end of December 2018. Deposits from the direct banking business totaled €31.4 (29.9) billion at the end of June 2019, slightly above the figure at the end of 2018. R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S Special items resulting from the diesel issue had a negative impact on operating profit in the reporting period. Our fore- cast for operating profit before special items for the Group and the Passenger Cars Business Area remains unchanged. We have reduced the forecast for operating profit including special items. For the Power Engineering Business Area, we anticipate a distinctly higher operating loss due to expenses. The Outlook for fiscal year 2019 can be found on page 23. Diesel issue 1. Product-related lawsuits worldwide (excluding the USA/ Canada) In a pending class action lawsuit in Brazil involving some 17 thousand vehicles, an appeals court rendered a judgment in May 2019 that only partially upheld the lower court's decision. The judgment initially reduced the damage liability of Volkswagen do Brasil significantly to an amount fixed at €35 million plus interest. This amount can increase as a result of the adjudicated inflation rate and the assertion of individual claims alleging declines in the value of affected Amarok vehicles. The judgment remains non-final. In Italy, the court decision dismissing the class action filed by the consumer association Codacons as inadmissible has become legally final. In Germany more than 60,000 individual lawsuits of auto- mobile purchasers are now pending against Volkswagen AG or other Group companies, with the plaintiffs suing for damages or rescission of the contract in most cases. 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The Braunschweig Office of the Public Prosecutor has issued indictments against, among other persons, a former chair- man of the Board of Management of Volkswagen AG. Based on the information available at the present time, no change in the risk situation of the Volkswagen Group results from the indictment of this former chairman of the Board of Manage- ment. The administrative fine order issued on May 7, 2019 by the Stuttgart Office of the Public Prosecutor terminates the Results of Operations, Financial Position and Net Assets regulatory offense proceeding conducted against Dr. Ing. h.c. F. Porsche AG in connection with the diesel issue. The administrative fine order is based on a negligent breach of the obligation to supervise occurring in the organizational unit “Prüffeld Entwicklung Gesamtfahrzeug/Qualität” (Overall Vehicle Development/Quality - Testing Facility). The adminis- trative order imposes a total fine of €535 million, consisting of a penalty payment of €4 million and the forfeiture of eco- nomic benefits in the amount of €531 million. After thorough examination, Dr. Ing. h.c. F. Porsche AG has accepted the fine and paid it in full, rendering the administrative fine order legally final. The administrative fine order terminates the reg- ulatory offense proceeding against Dr. Ing. h.c. F. Porsche AG. Further sanctions against or forfeitures by Dr. Ing. h.c. F. Porsche AG are therefore not to be expected in Europe in connection with the unitary factual situation underlying the administrative fine order. 3. Lawsuits filed by investors worldwide (excluding the USA/ Canada) Holding that the factual situation at issue is by and large already covered by the model case proceedings being heard by the Braunschweig Higher Regional Court and that these proceedings, being paramount in this regard, preclude further such actions, the Stuttgart Higher Regional Court in March 2019 refused to proceed with the capital investor model cases that had been referred to it by the Stuttgart Regional Court. The plaintiff side has appealed one of these decisions to the Federal Court of Justice. 4. Proceedings in the USA/Canada With respect to the consumer protection claims asserted by the New Mexico Attorney General against Volkswagen AG and certain affiliates, in March 2019 a New Mexico state court denied Volkswagen’s motion to dismiss those claims, and in April 2019 the court declined to grant Volkswagen permis- sion to appeal that decision. Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliated companies continue to litigate claims asserted by the attorneys general of certain U.S. states and municipalities based on alleged violations of local environ- mental laws. In March 2019, the Tennessee Court of Appeals dismissed the claims of the Attorney General of the State of Tennessee as preempted by federal law. The Tennessee Attorney General declined to pursue further appeal so the decision of the Tennessee Court of Appeals is final. Also in March 2019, the New Mexico Attorney General voluntarily its environmental claims, and the Alabama dismissed Attorney General declined to appeal the dismissal of its claims against Volkswagen AG by the Alabama Supreme Court. 21 22 Results of Operations, Financial Position and Net Assets In March 2019 the U.S. Securities and Exchange Commission filed a lawsuit against Volkswagen AG, Volkswagen Group of America Finance, LLC, VW Credit, Inc. and a former chairman of the Board of Management of Volkswagen AG, asserting claims under U.S. federal securities law and alleging misstate- ments and omissions in connection with the offer and sale of certain bonds and asset-backed securities. 5. Additional proceedings In June 2019, the Hanover Regional Court rejected the motion by three U.S. funds to replace the special auditor. This decision is not yet legally final. Additional important legal cases In April 2019 the European Commission issued a statement of objections to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in connection with the Commission's antitrust investigation of the automobile industry. These objections state the European Commission's preliminary evaluation of the matter and afford the opportunity to comment. Volks- wagen will examine the statement of objections. The subject matter of the proceedings is limited to the cooperation of German automobile manufacturers on technical questions in connection with the development and introduction of SCR systems and gasoline particulate filters for passenger cars that were sold in the European Economic Area. The manu- facturers are not charged with any other misconduct such as price fixing or allocating markets and customers. Volkswagen was given access to the investigation files in July 2019 and is preparing its reply to the statement of objections of the European Commission.In the same matter, the Chinese Com- petition Authority also issued an information request to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in March 2019. This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales Interim Management Report In the proceedings against a number of captive automobile finance companies regarding potential competition law infringements, Volkswagen AG and Volkswagen Bank GmbH filed an appeal in March 2019 against the administrative fine order issued by the Italian Competition Authority. In June 2019, the U.S. District Court for the Northern District of California dismissed two putative class action complaints brought by purchasers of German luxury vehicles alleging that, since the 1990s, several automobile manufacturers, including Volkswagen AG and other Group companies conspired to unlawfully increase the prices of German luxury vehicles in violation of US antitrust and consumer protection law. The court held that the plaintiffs have not stated a claim for relief because the allegations in the complaints do not plausibly support the alleged anticompetitive agreements. The court granted plaintiffs the opportunity to file amended complaints. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volks- wagen Group’s expected development in fiscal year 2019 contained in the combined management report in the 2018 Annual Report, specifically in the chapters “Report on Expected Developments” and “Report on Risks and Oppor- tunities” including the sections “Risks from the diesel issue” and “Litigation/Diesel issue” and the underlying description of the issues in the chapter entitled “Diesel Issue”. In partic- ular, based on the information as it exists and has been established, there continue to be no conclusive findings or assessments available to the Board of Management of Volks- wagen AG regarding the described facts that would suggest that a different assessment of the associated risks should have been made. markets, or any significant shifts in exchange rates or raw materials relevant to the Volkswagen Group, will have a corresponding effect on the development of our business. In addition, expected business development may vary if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities presented in the 2018 Annual Report develop in a way other than we are currently expecting, or additional risks and opportunities or other factors emerge that affect the development of our business. Interim Management Report Outlook Outlook The Volkswagen Group’s Board of Management expects the growth of the global economy to slow somewhat in 2019. We still believe that risks will continue to arise from protectionist tendencies, turbulence in the financial markets and struc- tural deficits in individual countries. In addition, growth prospects will be negatively impacted by continuing geopoli- tical tensions and conflicts. We therefore expect both the advanced economies and the emerging markets to show weaker momentum than in 2018. We anticipate the strongest rates of expansion in Asia’s emerging economies. We expect trends in the passenger car markets in the individual regions to be mixed in 2019. Overall, global demand for new vehicles will probably be slightly below the prior-year level. We anticipate that the volume of new regis- trations for passenger cars in Western Europe will also fall slightly short of the figure seen in the previous year. After a positive performance overall in recent years, we also estimate that demand in the German passenger car market will fall slightly year-on-year. Sales of passenger cars in 2019 are expected to slightly exceed the prior-year figures in markets in Central and Eastern Europe. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America is likely to be slightly lower than in the prior year. We expect new registrations in the South American markets for passenger cars and light commercial vehicles to be on a level with the previous year overall. The passenger car markets in the Asia-Pacific region are expected to fall slightly short of the prior-year level. Trends in the markets for light commercial vehicles in the individual regions will be mixed again in 2019; on the whole, we anticipate a slight dip in demand. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group and in the relevant mar- kets for buses, new registrations in 2019 are expected to slightly exceed the prior-year level. The Volkswagen Group is well prepared overall for the future challenges pertaining to the automobility business and the mixed developments in regional vehicle markets. Our brand diversity, our presence in all major world markets, our broad, selectively expanded product range and pioneering tech- nologies and services put us in a good competitive position worldwide. As part of the transformation of our core busi- ness, we are positioning our Group brands with a stronger focus on their individual characteristics and optimizing the vehicle and drive portfolio. The focus hereby is primarily on our vehicle fleet’s carbon footprint and on the most attractive and fastest-growing market segments. In addition, we are working to make even more focused use of the advantages of our multibrand group by continuously developing new tech- nologies and our toolkits. We expect that deliveries to customers of the Volkswagen Group in 2019 will slightly exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situ- ation, the increasing intensity of competition, exchange rate volatility and more stringent WLTP (Worldwide Harmonized Light-Duty Vehicles Test Procedure) requirements. We expect the sales revenues of the Volkswagen Group and its Passenger Cars and Commercial Vehicles business areas to grow by as much as 5% year-on-year. In terms of the operating profit before special items for the Group and the Passenger Cars Business Area, we forecast an operating return on sales in the range of 6.5–7.5% in 2019. For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between 6.0% and 7.0%. In the Power Engineering Business Area, we expect a distinctly higher operating loss than in the previous year amid a slight rise in sales revenue. For the Financial Services Division, we are forecasting a moderate increase in sales revenues and an operating profit at the prior-year level. We believe that automotive financial services will continue to be very important for vehicle sales worldwide in 2019. After special items, we anticipate that the operating return on sales will be at the lower end of the expected range for both the Group and the Passenger Cars Business Area. 23 24 Brands and Business Fields Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D The Volkswagen Group generated sales revenue of €125.2 (119.4) billion in the first half of 2019. Operating profit before special items improved to €10.0 (9.8) billion. The diesel issue gave rise to special items of €–1.0 (–1.6) billion in the reporting period. Unit sales at the Volkswagen Passenger Cars brand amounted to 1.9 (1.9) million vehicles in the first six months of 2019. The T-Roc, Tiguan, Touareg and Atlas models were particularly popular. The new T-Cross was well received by the market. Sales revenue increased by 3.4% year-on-year to €44.1 billion. Operating profit before special items rose to €2.3 (2.1) billion. Improvements in the mix and price posi- tioning as well as positive cost development more than offset the negative impact of lower volumes and exchange rates. The diesel issue gave rise to special items of €–0.4 billion in the reporting period. Effective 2019, the multibrand sales companies are separated from the Audi brand and reported in the Others category to increase overall transparency and comparability. The Audi brand sold 632 (812) thousand vehicles worldwide between January and June of this year. The Chinese joint venture FAW-Volkswagen sold a further 258 (293) thousand Audi vehicles. The Q2 and A8 models recorded an increase in demand, the new Q8 was also popular. The Audi e-tron, the all-electric, mass-produced SUV, will be gradually introduced in the market. The new allocation of companies contributed in sales revenue, which decreased to to the decline €28.8 (31.2) billion. Operating profit was down on the prior- year period at €2.3 (2.8) billion. Negative effects resulted from model start-ups and phase-outs, WLTP-related lower volume, higher upfront expenditure for new products and technol- ogies, cost increases and exchange rate effects. Improvements in the mix and product costs had a positive impact. The financial key performance indicators for the Audi brand include the Lamborghini and Ducati brands. Ducati sold 33,315 (33,834) motorcycles in the first half of the year 2019. In the first six months of 2019, the ŠKODA brand lifted its unit sales to 560 thousand vehicles, 9.6% more than a year before. Above, all, the Kodiaq and Karoq models were strongly sought-after. Sales revenue increased by 10.8% year-on-year to €10.2 billion. The gain in unit sales and sales revenue was particularly due to assuming regional responsibility for India. Operating profit rose by €3 million to €824 million. Volume increases and pricing measures compensated for negative exchange rate effects and cost increases. The SEAT brand sold 370 thousand units in the reporting period, an increase of 6.7% on the previous year. This figure includes the A1 manufactured for Audi. Demand was partic- ularly strong for the Arona and Ateca models. At €6.3 billion, sales revenue exceeded the prior-year period’s good figure by 8.3%. Volume and mix improvements boosted operating profit by 1.9% to €216 million, which more than offset the negative impact of cost increases. The Bentley brand lifted its unit sales in the first two quarters of 2019 to 4,670 (4,520) vehicles, which was mainly the result of the availability of the new Continental GT and GTC models. Sales revenue climbed to €835 (757) million. Operating profit increased to €57 (–80) million. In addition to volume, cost savings in connection with the ongoing effi- ciency program as well as mix effects and exchange rate trends had a positive impact. V O L K S W A G E N G R O U P R E P O R T I N G S T R U C T U R E A U T O M O T I V E D I V I S I O N F I N A N C I A L S E R V I C E S D I V I S I O N Passenger Cars Business Area Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Automotive Volkswagen Commercial Vehicles Other Commercial Vehicles Business Area Scania Vehicles and Services MAN Commercial Vehicles Power Engineering Business Area Power Engineering Dealer and customer financing Leasing Direct bank Insurance Fleet management Mobility offerings Brands and Business Fields Porsche Automotive sold 136 thousand vehicles worldwide in the period from January to June 2019, 10.1% more than a year before. Sales revenue amounted to €12.2 (11.2) billion. Oper- ating profit before special items rose by 2.5% to €2.1 billion, primarily due to volume effects. In addition, product costs had a positive impact, while exchange rate trends had a negative influence. The diesel issue gave rise to special items of €–0.5 billion in the reporting period. Services lifted its unit sales during the reporting period to 52 (47) thousand vehicles. Sales revenue rose to €7.1 (6.3) bil- lion. The operating profit of Scania Vehicles and Services improved to €828 (618) million, which was mainly attribut- able to higher vehicle sales, an improvement in the genuine parts and service business and favorable mix effects and exchange rate trends. Meanwhile, cost increases had an offsetting effect. Global sales at Volkswagen Commercial Vehicles amounted to 256 (248) thousand vehicles in the first half of 2019. The Crafter, in particular, recorded increases. Sales revenue rose by 2.6% to €6.5 billion. Despite higher volumes, lower prod- uct costs and improved margins, operating profit declined by 10.8% to €506 million, primarily on the back of increased fixed and development costs as well as a deterioration in the mix. From January 1, 2019, Scania’s financial services business is being reported in the Other category. Scania Vehicles and MAN Commercial Vehicles sold 72 thousand units in the first six months of 2019, up 9.9% year-on-year. Sales revenue rose to €6.3 (5.8) billion. Operating result fell to €248 (258) mil- lion; volume and margin improvements were set against upfront expenditure for the new truck and bus generation, cost increases and negative exchange rate effects. In the first half of 2019, Power Engineering generated sales revenue of €1.9 (1.6) billion. At €42 (68) million, the operating result declined due to expenses. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A R Y 1 TO J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2019 2018 2019 2018 2019 2018 Volkswagen Passenger Cars Audi1 ŠKODA1 1,886 632 560 1,931 812 511 44,146 28,761 10,154 42,704 31,183 9,161 2,286 2,300 824 2,130 2,761 821 SEAT 370 347 6,266 5,786 216 212 Bentley Porsche Automotive2 5 136 5 123 835 12,212 757 11,231 57 2,117 –80 2,064 Volkswagen Commercial Vehicles Scania Vehicles and Services3 256 52 248 47 6,489 7,115 6,324 6,322 506 828 567 618 MAN Commercial Vehicles 72 65 6,283 5,814 248 258 Power Engineering VW China4 Other5 – 1,789 –418 – 1,999 –512 1,864 – –16,919 1,637 – –18,206 42 – –727 68 – –856 Volkswagen Financial Services – – 17,992 16,664 1,281 1,231 Volkswagen Group before special items – – – – 9,979 9,794 Special items – – – – –981 –1,635 Volkswagen Group Automotive Division6 of which: Passenger Cars Business Area7 5,339 5,339 5,215 5,575 5,575 5,463 125,197 106,126 90,942 119,377 101,715 88,090 8,997 7,589 6,693 8,160 6,866 6,217 Commercial Vehicles Business Area7 124 113 13,320 11,988 959 707 Power Engineering Business Area – – 1,864 1,637 –63 –58 Financial Services Division – – 19,071 17,662 1,409 1,294 1 2019 according to the new allocation of companies; the prior-year figures have not been adjusted. 2 Porsche (including Financial Services): sales revenue €13,405 (12,287) million, operating profit before special items €2,209 (2,154) million. 3 Scania (including Financial Services): sales revenue €7,336 (6,515) million, operating profit €895 (684) million. 4 The sales revenue and operating profits of the joint venture companies in China are not included in the figures for the Group. These Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €2,103 (2,318) million. 5 In operating profit, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation as well as companies not allocated to the brands. 6 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 7 The Volkswagen Commercial Vehicles brand has been reported as part of the Passenger Cars Business Area since January 1, 2019. The prior-year figures have been adjusted. 25 26 Brands and Business Fields Since January 1, 2019, Volkswagen Financial Services has also included the contracts concluded by the international joint ventures in its figures. The prior-year figures have been adjusted. The number of new financing, leasing, service and insurance contracts signed in the period from January to June 2019 was 4.1 (4.1) million. Based on unchanged credit eligibility criteria, the penetration rate, expressed as the ratio of leased or financed vehicles to relevant Group delivery volumes, amounted to 34.1 (33.7)%. At the end of the reporting period, there was a total of 20.9 million contracts, thus exceeding the figure for year-end 2018 by 3.2%, while it improved by 2.9% to 11.0 million contracts in the customer financing/leasing area. At 9.9 (9.6) million, the number of contracts in the service/insurance area saw an increase. As of June 30, 2019, Volkswagen Bank managed around 1.5 (1.5) mil- lion deposit accounts. The operating profit improved by 4.0% to €1.3 billion in the reporting period, driven by growth in business and exchange rate effects. of 2019; a decrease of 2.5% compared with the previous year, which was caused by, among other things, the WLTP. Mix improvements increased sales revenue to €77.3 (76.4) billion. At 486 thousand vehicles, the Volkswagen Group’s unit sales in the North American markets were up by 12.2% in the reporting period. Sales revenue rose by 22.7% to €21.8 billion, primarily due to higher volumes and positive exchange rate effects. In South America we sold 280 (293) thousand vehicles in the period from January to June of this year. Sales revenue was in line with the prior-year level at €5.2 (5.2) billion. In the Asia-Pacific region, sales by the Volkswagen Group – including the Chinese joint ventures – fell to a total of 2.0 (2.2) million vehicles in the first two quarters of 2019. Sales revenue rose by 9.5% to €20.8 billion due to mix effects and the improved components business. This figure does not include the sales revenue of our Chinese joint ventures, as these are accounted for using the equity method. U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T In the Europe/Other markets region, the Volkswagen Group’s unit sales amounted to 2.5 million vehicles in the first half In the first six months of 2019, hedging transactions relating to sales revenue in foreign currency increased Volks- wagen Group’s sales revenue by €0.1 (1.0) billion. K E Y F I G U R E S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E Thousand vehicles/€ million 2019 2018 2019 2018 Europe/Other markets 2,543 2,608 77,251 76,414 North America 486 433 21,762 17,730 South America Asia-Pacific1 280 2,029 293 2,241 5,247 20,797 5,236 18,996 Hedges on sales revenue Volkswagen Group1 – 5,339 – 5,575 140 125,197 1,000 119,377 1 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. Interim Consolidated Financial Statements (Condensed) Income Statement Interim Consolidated Financial Statements (Condensed) Income Statement for the Period January 1 to June 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ F I N A N C I A L S E R V I C E S € million 2019 2018 2019 2018 2019 2018 Sales revenue 125,197 119,377 106,126 101,715 19,071 17,662 Cost of sales –100,454 –94,549 –84,883 –80,182 –15,571 –14,367 Gross result 24,743 24,828 21,242 21,533 3,501 3,295 Distribution expenses –9,997 –10,244 –9,223 –9,547 –774 –697 Administrative expenses –4,523 –4,226 –3,599 –3,250 –924 –976 Other operating income/expense –1,226 –2,198 –832 –1,870 –394 –328 Operating result 8,997 8,160 7,589 6,866 1,409 1,294 Share of the result of equity-accounted investments 1,599 1,680 1,570 1,641 29 39 Interest result and other financial result –1,039 –867 –1,060 –868 21 0 Financial result 560 813 509 774 51 39 Earnings before tax 9,557 8,972 8,098 7,640 1,459 1,333 Income tax expense –2,389 –2,360 –1,994 –1,845 –395 –515 Earnings after tax 7,168 6,613 6,104 5,794 1,064 818 of which attributable to Noncontrolling interests 24 5 –7 –27 31 32 Volkswagen AG hybrid capital investors 268 156 268 156 – – Volkswagen AG shareholders 6,875 6,452 5,843 5,665 1,033 786 Basic earnings per ordinary share (€)² 13.69 12.85 Diluted earnings per ordinary share (€)² 13.69 12.85 Basic earnings per preferred share (€)² 13.75 12.91 Diluted earnings per preferred share (€)² 13.75 12.91 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. 27 28 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period January 1 to June 30 € million 2019 2018 Earnings after tax 7,168 6,613 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss –6,494 1,913 –4,580 17 19 –4,545 –159 46 –113 32 1 –80 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax 107 – 107 11 119 –494 – –494 6 –489 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) –256 –520 –777 230 –547 –890 497 –393 116 –277 –644 –1,032 –1,675 472 –1,203 –582 116 –466 138 –328 Cash flow hedges (OCI II), net of tax Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of securities and receivables (debt instruments) recognized in other comprehensive income Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to 52 0 52 –16 36 58 –611 –7,410 2,254 –5,156 2,012 –2 1 –1 0 –1 94 –1,927 –2,670 662 –2,008 4,605 Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 19 268 1,724 4 156 4,444 Interim Consolidated Financial Statements (Condensed) Income Statement for the Period April 1 to June 30 V O L K S W A G E N G R O U P A U T O M O T I V E ¹ € million 2019 2018 2019 Sales revenue 65,185 61,149 55,349 Cost of sales –52,130 –47,891 –44,078 Gross result 13,055 13,258 11,271 Distribution expenses –5,056 –5,485 –4,664 Administrative expenses –2,252 –2,101 –1,790 Other operating income/expense –618 –1,723 –394 Operating result 5,130 3,948 4,422 Share of the result of equity-accounted investments 791 852 771 Interest result and other financial result –434 –305 –431 Financial result 357 547 340 Earnings before tax 5,486 4,495 4,762 Income tax expense –1,372 –1,182 –1,161 Earnings after tax 4,115 3,313 3,601 of which attributable to Noncontrolling interests 17 3 1 Volkswagen AG hybrid capital investors 134 79 134 Volkswagen AG shareholders 3,964 3,230 3,466 Basic earnings per ordinary share (€)² 7.91 6.44 Diluted earnings per ordinary share (€)² 7.91 6.44 Basic earnings per preferred share (€)² 7.91 6.44 Diluted earnings per preferred share (€)² 7.91 6.44 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. D I V I S I O N S 2018 51,972 –40,399 11,573 –5,102 –1,573 –1,604 3,294 829 –328 502 3,796 –836 2,959 –16 79 2,896 Income Statement F I N A N C I A L S E R V I C E S 2019 2018 9,836 9,177 –8,052 –7,493 1,784 1,685 –392 –383 –461 –529 –223 –119 707 654 20 23 –3 22 17 45 724 699 –211 –346 514 354 16 19 – – 498 334 29 30 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period April 1 to June 30 € million 2019 2018 Earnings after tax 4,115 3,313 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss –2,408 714 –1,694 –6 6 –1,694 685 –209 477 53 –11 518 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax –753 – –753 –1 –754 102 – 102 2 103 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) 1,564 –311 1,253 –364 889 –372 262 –110 31 –79 –1,449 –435 –1,884 545 –1,339 –446 117 –329 97 –232 Cash flow hedges (OCI II), net of tax Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of securities and receivables (debt instruments) recognized in other comprehensive income Fair value valuation of securities and receivables (debt instruments) that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to 28 0 28 –8 20 –140 –64 –2,129 371 –1,758 2,357 –22 0 –21 5 –17 94 –1,391 –1,312 440 –872 2,440 Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 13 134 2,209 4 79 2,358 Interim Consolidated Financial Statements (Condensed) Balance Sheet as of June 30, 2019 and December 31, 2018 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2019 2018 2019 2018 Assets Noncurrent assets 288,358 274,620 149,365 143,153 Intangible assets 64,947 64,613 64,746 64,404 Property, plant and equipment 62,781 57,630 61,553 54,619 Lease assets 45,960 43,545 1,908 5,297 Financial services receivables 82,842 78,692 –222 9 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 31,829 30,140 21,379 18,824 Current assets 191,623 183,536 97,530 91,371 Inventories 49,786 45,745 45,263 41,302 Financial services receivables 56,744 54,216 –567 –510 Other receivables and financial assets 42,398 37,557 21,987 13,033 Marketable securities 16,918 17,080 13,347 13,376 Cash, cash equivalents and time deposits 25,778 28,938 17,501 24,169 Total assets 479,981 458,156 246,895 234,524 Equity and Liabilities Equity 118,637 117,342 89,140 88,850 Equity attributable to Volkswagen AG shareholders 104,410 104,522 75,531 76,624 Equity attributable to Volkswagen AG hybrid capital investors 12,471 12,596 12,471 12,596 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 116,881 117,117 88,002 89,219 Noncontrolling interests 1,756 225 1,139 –369 Noncurrent liabilities 194,405 172,846 91,226 77,692 Financial liabilities 113,537 101,126 19,026 14,187 Provisions for pensions 39,787 33,097 39,082 32,535 Other liabilities 41,082 38,623 33,117 30,970 Current liabilities 166,939 167,968 66,529 67,982 Put options and compensation rights granted to noncontrolling interest shareholders – 1,853 – 1,853 Financial liabilities 85,514 89,757 –5,816 –1,504 Trade payables 25,187 23,607 21,873 20,962 Other liabilities 56,238 52,750 50,472 46,671 Total equity and liabilities 479,981 458,156 246,895 234,524 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. Balance Sheet F I N A N C I A L S E R V I C E S 2019 2018 138,993 131,467 201 209 1,227 3,010 44,052 38,249 83,064 78,684 10,449 11,315 94,093 92,165 4,523 4,443 57,311 54,726 20,411 24,524 3,571 3,703 8,277 4,769 233,086 223,632 29,497 28,492 28,879 27,898 – – 28,879 27,898 617 594 103,180 95,154 94,510 86,939 705 563 7,965 7,652 100,410 99,986 – – 91,330 91,261 3,314 2,645 5,766 6,079 233,086 223,632 31 32 Statement of Changes in Equity Interim Consolidated Financial Statements (Condensed) Statement of Changes in Equity O T H E R R E S E R V E S € million Subscribed capital Capital reserve Retained earnings Currency translation reserve Unadjusted balance at Jan. 1, 2018 Changes in accounting policy to reflect IFRS 9 and 15 Balance at Jan. 1, 2018 Earnings after tax Other comprehensive income, net of tax 1,283 – 1,283 – – 14,551 – 14,551 – – 81,367 –282 81,085 6,452 –113 –3,223 – –3,223 – –489 Total comprehensive income Disposal of equity instruments Capital increases/Capital decreases¹ Dividends payment Capital transactions involving a change in ownership interest Other changes – – – – – – – – – – – – 6,339 – – –1,967 – –1 –489 – – – – – Balance at June 30, 2018 1,283 14,551 85,456 –3,712 Balance at Jan. 1, 2019 Earnings after tax Other comprehensive income, net of tax 1,283 – – 14,551 – – 91,105 6,875 –4,575 –3,576 – 119 Total comprehensive income Disposal of equity instruments Capital increases/Capital decreases Dividends payment Capital transactions involving a change in ownership interest² – – – – – – – – – – 2,300 –4 – –2,419 363 119 – – – 169 Other changes – – 62 – Balance at June 30, 2019 1,283 14,551 91,407 –3,288 1 Volkswagen AG recorded an inflow of cash funds amounting to €2,750 million, less transaction costs of €18 million, from the hybrid capital issued in June 2018. Additionally, there were noncash effects from the deferral of taxes amounting to €5 million. The hybrid capital is required to be classified as equity instruments granted. 2 For the change in capital transactions involving a change in ownership interest see the section entitled “Key events”. Interim Consolidated Financial Statements (Condensed) H E D G I N G Cash flow hedges (OCI I) Deferred costs of hedging (OCI II) Equity and debt instruments 3,525 – 91 56 63 –225 3,581 63 –133 – – – –1,203 –328 31 –1,203 –328 31 – – – – – – – – – – – – – – – 2,378 –265 –102 1,790 –629 –230 – – – –547 –277 53 –547 –277 53 – – 4 – – – – – – 1 0 –1 – – – 1,243 –906 –173 Equity- accounted investments 166 – 166 – 94 94 – – – – – 260 228 – 76 76 – – – –11 – 293 Equity attributable to Volkswagen AG hybrid capital investors 11,088 – 11,088 156 – 156 – 2,737 –282 – 70 13,770 12,596 268 – 268 – – –393 – – 12,471 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 108,849 –388 108,461 6,608 –2,008 4,600 – 2,737 –2,249 – 70 113,619 117,117 7,144 –5,151 1,993 – – –2,812 521 62 116,881 Statement of Changes in Equity Noncontrolling interests Total equity 229 109,077 1 –387 229 108,690 5 6,613 0 –2,008 4 4,605 – – – 2,737 –4 –2,253 – – 2 71 231 113,850 225 117,342 24 7,168 –5 –5,156 19 2,012 – – – – –4 –2,816 1,513 2,034 2 65 1,756 118,637 33 34 Cash flow statement Interim Consolidated Financial Statements (Condensed) Cash flow statement for the Period January 1 to June 30 V OLKSW A G E N G R OU P D IV ISION S A U T OM OT I V E ¹ F I N A NC I A L SE RV I C ES € million 2019 2018 2019 2018 2019 2018 Cash and cash equivalents at beginning of period Earnings before tax Income taxes paid Depreciation and amortization expense² Change in pension provisions Share of the result of equity-accounted investments Other noncash income/expense and reclassifications³ Gross cash flow Change in working capital Change in inventories Change in receivables Change in liabilities Change in other provisions Change in lease assets (excluding depreciation) Change in financial services receivables Cash flows from operating activities 28,113 9,557 –1,137 11,975 201 368 –220 20,744 –14,350 –4,004 –3,557 4,636 879 –6,178 –6,127 6,394 18,038 8,972 –1,459 10,745 198 1,479 387 20,323 –15,487 –5,502 –7,811 5,663 1,428 –5,964 –3,300 4,836 23,354 8,098 –703 7,900 190 397 12 15,895 –2,372 –3,929 –3,438 3,851 954 126 63 13,523 13,428 7,640 –1,682 7,388 191 1,519 402 15,457 –5,250 –5,663 –4,541 4,391 1,390 –671 –156 10,208 4,759 1,459 –435 4,075 11 –29 –233 4,849 –11,977 –75 –119 785 –75 –6,303 –6,190 –7,128 4,609 1,333 223 3,357 7 –39 –15 4,865 –10,237 161 –3,270 1,272 38 –5,294 –3,144 –5,372 Cash flows from investing activities attributable to operating activities –8,070 –7,158 –7,955 –6,862 –115 –296 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property capitalized development costs acquisition and disposal of equity investments Net cash flow4 Change in investments in securities, loans and time deposits Cash flows from investing activities Cash flows from financing activities of which: capital transactions with noncontrolling interests –5,300 –2,338 –537 –1,675 –1,485 –9,555 –2,142 –19 – –4,610 –2,490 –196 –2,322 –766 –7,924 6,352 – 2,732 –5,202 –2,338 –504 5,568 –5,645 –13,599 –8,706 –19 –998 –4,398 –2,490 –80 3,346 2,172 –4,690 –2,722 – 2,708 –98 – –33 –7,243 4,160 4,045 6,564 – 998 –212 – –116 –5,668 –2,939 –3,235 9,074 – 24 capital contributions/capital redemptions MAN noncontrolling interest shareholders: compensation payments and acquisition of shares tendered Effect of exchange rate changes on cash and cash equivalents Change of loss allowance within cash and cash equivalents Net change in cash and cash equivalents –1,109 195 1 –5,107 –1 –68 0 3,195 –1,109 163 1 –8,620 –1 –69 0 2,728 – 32 0 3,513 – 1 0 468 Cash and cash equivalents at June 305 Securities, loans and time deposits Gross liquidity Total third-party borrowings Net liquidity at June 306 For information purposes: at Jan. 1 23,006 29,479 52,485 –199,051 –146,565 –134,735 21,233 26,535 47,768 –169,267 –121,499 –119,143 14,734 14,382 29,116 –13,211 15,905 19,368 16,156 12,746 28,902 –2,604 26,298 22,378 8,272 15,097 23,369 –185,840 –162,471 –154,103 5,077 13,789 18,866 –166,663 –147,797 –141,522 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loans to affiliates and joint ventures as well as time deposits net of third-party borrowings (noncurrent and current financial liabilities). Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2018 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial state- ments for the period ended June 30, 2019 were therefore also prepared in accordance with IAS 34 (Interim Financial Reporting) and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 115 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2019. I F R S 1 6 – L E A S E S IFRS 16 amends the rules for lease accounting and replaces the previous IAS 17 standard and related interpretations. The main objective of IFRS 16 is to recognize all leases. It establishes that lessees are no longer required to classify their leases as either finance leases or operating leases. In general, they will instead be required to recognize a right-of-use asset and a lease liability for the leases in the balance sheet. In the Volkswagen Group the lease liability is measured on the basis of the outstanding lease payments, discounted using the incremental borrowing rate, while the right-of-use asset is always measured at the amount of the lease liability plus any initial direct costs. During the lease term, the right-of-use asset must be depreciated and the lease liability adjusted using the effective interest method and taking the lease payments into account. IFRS 16 offers practical expedients for short-term and low-value leases; the Volkswagen Group makes use of this option and therefore does not recognize right-of-use assets or liabilities for these types of leases. In this respect, the lease payments will continue to be recognized in the income statement in the same way as before. At the initial application date, leases whose term ends before January 1, 2020 were reclassified as short-term leases, irrespective of the start date of the lease. In addition, existing leases were not assessed at the initial application date to determine whether or not they are leases under the criteria of IFRS 16. Instead, contracts classified as leases under IAS 17 or IFRIC 4 will continue to be accounted for as leases. Contracts not classified as leases under IAS 17 or IFRIC 4 will continue not to be accounted for as leases. Lessor accounting essentially follows the previous guidance of IAS 17. Lessors will be required to continue to classify their leases as finance leases or operating leases on the basis of the risks and rewards incidental to ownership of the leased asset. 35 36 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The Volkswagen Group accounts for leases in accordance with IFRS 16, using the modified retrospective method, for the first time as of January 1, 2019. Prior-year periods have not been restated. According to this method, the lease liability to be recognized at the transition date is the present value of the outstanding lease payments, which is determined using the incremental borrowing rates as of January 1, 2019. The weighted average interest rate applied in the Volkswagen Group was 3.7%. To simplify, the right-of-use assets are recognized in the amount of the corresponding lease liability, adjusted for any prepaid or accrued lease payments. Applying the permitted exemption, the right-of-use asset is adjusted for the amounts that were recognized in the balance sheet as provisions for onerous operating leases as of December 31, 2018. The right-of-use assets were not tested for impairment in this context at the initial application date. The right-of-use assets are recognized in the balance sheet under those items in which the assets underlying the lease would have been reported if they were owned by the Volkswagen Group. For this reason, the right-of-use assets are presented under noncurrent assets, mostly in property, plant and equipment, as of the balance sheet date. The initial recognition of right-of-use assets and lease liabilities had the following effects as of January 1, 2019: > Right-of-use assets of €5.5 billion were recognized in the opening balance sheet (including €5.4 billion under property, plant and equipment and €0.1 billion under investment property). Prepayments capitalized, accrued liabilities and provisions for onerous operating leases were offset with the right-of-use assets. The right-of-use assets recognized included an amount of €0.4 billion that had already been recognized under finance leases as of December 31, 2018. In connection with the initial application of IFRS 16 there was an adjustment to the classification of noncurrent assets, resulting in the reclassification of property, plant and equipment of €0.4 billion to lease assets and investment property. > Lease liabilities are recognized in the opening balance in an amount of €5.6 billion; they are reported under noncurrent and current financial liabilities. The lease liabilities recognized included an amount of €0.4 bil- lion that had already been recognized under finance leases as of December 31, 2018. > Initial application did not have any effect on equity. The difference between the expected payments for operating leases in an amount of €4.9 billion, discounted using the incremental borrowing rate as of December 31, 2018, and the lease liabilities in an amount of €5.6 billion recognized in the opening balance sheet is mainly the result of taking account of existing finance leases and a new estimate of expected lease payments, attributable to the capitalization of certain variable lease payments, for example. The lease terms taken into account when recognizing lease liabilities were also reassessed in accordance with the rules of IFRS 16. In this process, reasonably certain extension or termination options were taken into account in determining the lease payments to be capitalized. Moreover, the opening balance sheet does not include lease payments for low-value or short-term leases. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Unlike the previous procedure, under which all operating lease expenses were reported under operating profit, the only items allocated to operating profit in the Automotive Division under IFRS 16 are depreciation charges on right-of-use assets. Interest expense from adding interest on lease liabilities in the Automotive Division is reported in the financial result. This had a positive impact of €0.1 billion on the operating result in the first half of 2019. The change in the way expenses from operating leases are presented in the statement of cash flows resulted in an improvement of €0.5 billion in cash flows from operating activities and net cash flow in the first half of the year of 2019, of which €0.4 billion is attributable to the Automotive Division. Cash flows from financing activities declined accordingly. The increase in financial liabilities attributable to the change in accounting rules had a negative impact of €5.4 billion on the Volkswagen Group’s net liquidity as of June 30, 2019, of which €5.1 billion is attributable to the Automotive Division. This standard also results in far more extensive disclosures in the notes. OT H E R A CCO U N T I N G P O L I C I E S A discount rate of 1.2% (December 31, 2018: 2.0%) was applied to German pension provisions in the accompanying interim consolidated financial statements. The income tax expense for the interim consolidated financial statements was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34 (Interim Financial Reporting). In other respects, the same accounting policies and consolidation methods that were used for the 2018 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2018 consolidated financial statements. In addition, details of the effects of new standards can be found in the “New and amended IFRSs not applied” section. The 2018 consolidated financial statements can also be accessed on the Internet at www.volkswagenag.com/en/InvestorRelations.html. 37 38 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Key events On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOX) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2018 consolidated financial statements. In the first half of fiscal year 2019, additional expenses of €1.0 billion had to be recognized for legal risks in this connection. They are mainly attributable to additional expenses for legal risks, in particular the administrative fine order of €0.5 billion issued in May 2019 by the Stuttgart Office of the Public Prosecutor, which ended the ongoing misdemeanor proceedings against Dr. Ing. h.c. F. Porsche AG, and higher legal defense costs. Moreover, the publications released by the reporting date, as well as the investigations and interviews in connection with the diesel issue, did not provide the Group Board of Management with any new reliable findings or judgments regarding the underlying facts and the assessment of the associated risks (e.g. investor lawsuits) and did not reveal any material effects on the quarterly financial statements in the reporting period. Further information on the litigation in connection with the diesel issue can be found in the “Litigation” section. In August 2018, the control and profit and loss transfer agreement with MAN SE was terminated by extraordinary notice as of January 1, 2019. Following the announcement of the termination of the control and profit and loss transfer agreement and the recording thereof in the commercial register, the noncontrolling shareholders of MAN SE had the right to tender their shares to Volkswagen, pursuant to the provisions of the control and profit and loss transfer agreement, within a two-month period. This resulted in cash outflows of €1.1 billion in the first half of this year for the acquisition of shares tendered and compensation payments. There was a corresponding decline in the amount of “put options and compensation rights granted to noncontrolling interest shareholders” reported in the balance sheet. The put options granted to noncontrolling interest shareholders of MAN SE expired on March 4, 2019. The remaining liability of €0.7 billion was reclassified directly to equity; €0.3 billion of this amount is attributable to noncontrolling interests. Since June 28, 2019, 50 million shares of TRATON SE have been traded on the regulated markets of the Frankfurt Stock Exchange and of the Nasdaq Stockholm. The offer price was set at €27.00 per share. This led to an increase of €1.4 billion in the Volkswagen Group’s equity, of which €1.2 billion is reported as noncontrolling interests. The cash inflow of €1.4 billion occurred at the beginning of the third quarter of 2019. In addition, if the banks in the consortium exercised the greenshoe option of up to 7.5 million shares, additional shares could be offered at the offer price in the third quarter of 2019. Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Disclosures on the interim consolidated financial statements 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 2 0 1 8 1 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 73,595 7,641 – – 81,235 –6,381 74,854 Genuine parts 6,358 1,661 – – 8,019 –48 7,971 Used vehicles and third-party products 5,831 710 – – 6,541 –250 6,291 Engines, powertrains and parts deliveries 5,930 326 – – 6,255 –8 6,247 Power Engineering – – 1,637 – 1,637 –1 1,636 Motorcycles 375 – – – 375 – 375 Leasing business 418 801 – 13,695 14,913 –2,148 12,765 Interest and similar income 120 3 – 3,564 3,687 –91 3,597 Hedges sales revenue 950 9 0 – 959 41 1,000 Other sales revenue 3,952 837 – 403 5,192 –552 4,640 97,527 11,988 1,637 17,662 128,815 –9,437 119,377 1 Since January 1, 2019, sales revenue from the sale of light commercial vehicles of the Volkswagen Commercial Vehicles brand has not been reported in the Commercial Vehicles segment. The prior-year figures have been adjusted accordingly. ST R U C T U R E O F G R O U P S A L E S R E V E N U E H 1 2 0 1 9 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 78,061 8,849 – – 86,910 –7,773 79,136 Genuine parts 6,599 1,719 – – 8,318 –58 8,260 Used vehicles and third-party products 6,431 716 – – 7,147 –223 6,924 Engines, powertrains and parts deliveries 5,385 320 – – 5,705 –10 5,695 Power Engineering – – 1,864 – 1,864 –1 1,862 Motorcycles 378 – – – 378 – 378 Leasing business 485 858 0 14,657 16,000 –2,055 13,945 Interest and similar income 112 2 – 3,970 4,084 –109 3,975 Hedges sales revenue 79 –11 – – 68 72 140 Other sales revenue 3,713 867 – 444 5,024 –143 4,881 101,243 13,320 1,864 19,071 135,498 –10,301 125,197 Other sales revenue comprises revenue from workshop services and license revenue, among other things. 39 40 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 2. Cost of sales Cost of sales includes interest expenses of €1,357 million (previous year: €1,065 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on intangible assets, items of property, plant and equipment, and lease assets. The impairment losses identified on the basis of updated impairment tests amount to a total of €502 million (previous year: €336 million). The value in use is used as the basis for calculating impairment losses. 3. Research and development costs H 1 € million 2019 2018 % Total research and development costs of which: capitalized development costs Capitalization ratio in % Amortization of capitalized development costs Research and development costs recognized in profit or loss 7,033 2,338 33.2 1,827 6,522 6,747 2,490 36.9 1,845 6,102 4.2 –6.1 –1.0 6.9 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since the basic and diluted number of shares is identical, basic earnings per share also correspond to diluted earnings per share. In accordance with Article 27 of the Articles of Association of Volkswagen AG, preferred shares are entitled to a €0.06 higher dividend than ordinary shares. Q 2 H 1 2019 2018 2019 2018 Weighted average number of shares outstanding Ordinary shares: basic million 295.1 295.1 295.1 295.1 diluted million 295.1 295.1 295.1 295.1 Preferred shares: basic million 206.2 206.2 206.2 206.2 diluted million 206.2 206.2 206.2 206.2 Earnings after tax € million 4,115 3,313 7,168 6,613 Noncontrolling interests € million 17 3 24 5 Earnings attributable to Volkswagen AG hybrid capital investors € million 134 79 268 156 Earnings attributable to Volkswagen AG shareholders € million 3,964 3,230 6,875 6,452 Earnings per share Ordinary shares: basic € 7.91 6.44 13.69 12.85 diluted € 7.91 6.44 13.69 12.85 Preferred shares: basic € 7.91 6.44 13.75 12.91 diluted € 7.91 6.44 13.75 12.91 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A R Y 1 A N D J U N E 3 0 , 2 0 1 9 € million Carrying amount at Jan. 1, 2019¹ Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2019 Intangible assets 64,613 2,584 63 2,187 64,947 Property, plant and equipment 62,345 5,723 –364 5,652 62,781 Lease assets 43,922 11,773 5,603 4,133 45,960 1 Value in the opening balance adjusted (see disclosures on IFRS 16). 6. Inventories € million June 30, 2019 Dec. 31, 2018 Raw materials, consumables and supplies 6,199 5,543 Work in progress 4,712 4,382 Finished goods and purchased merchandise 32,320 30,553 Current lease assets 6,380 5,107 Prepayments 175 168 Hedges on inventories –1 –8 49,786 45,745 There was no requirement to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2019 Dec. 31, 2018 Trade receivables 19,876 17,888 Miscellaneous other receivables and financial assets 22,522 19,669 42,398 37,557 In the period January 1 to June 30, 2019, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €413 million (previous year: €402 million). The trade receivables also include receivables from long-term construction contracts (contract assets). 41 42 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 8. Equity The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par-value preferred shares, and amounts to €1,283 million (previous year: €1,283 million). Volkswagen AG distributed a dividend of €2,419 million in the reporting period (previous year: €1,967 million). €1,416 million (previous year: €1,151 million) of this amount was attributable to ordinary shares and €1,002 million (previous year: €817 million) to preferred shares. The noncontrolling interests in equity are attributable primarily to shareholders of TRATON SE, MAN SE, SCANIA AB, RENK AG and AUDI AG. 9. Noncurrent financial liabilities € million June 30, 2019 Dec. 31, 2018 Bonds, commercial paper and notes 88,729 81,391 Liabilities to banks 16,354 15,447 Deposit business 1,985 1,455 Lease liabilities 4,825 399 Other financial liabilities 1,644 2,433 113,537 101,126 10. Current financial liabilities € million June 30, 2019 Dec. 31, 2018 Bonds, commercial paper and notes 37,375 41,513 Liabilities to banks 16,289 18,455 Deposit business 29,598 28,555 Lease liabilities 968 51 Other financial liabilities 1,283 1,183 85,514 89,757 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 11. Fair value disclosures Generally, the principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2018 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Assets and liabilities measured at fair value through profit or loss consist of derivatives to which hedge accounting is not applied. They include primarily commodity futures, currency forwards relating to commodity futures as well as, in certain cases, interest rate swaps, currency swaps and cross-currency interest rate swaps. Moreover, other equity investments (shares representing an ownership interest of less than 20% as a rule) in partnerships (debt instruments), customer financing receivables whose returns contain more than just interest and principal repayments, and financial assets held in special funds controlled by the Volkswagen Group are measured at fair value through profit or loss. Derivative financial instruments to which hedge accounting is applied are measured at fair value either directly in equity or through profit or loss, depending on the underlying hedged item. Financial assets measured at fair value through other comprehensive income include equity investments (shares representing an ownership interest of less than 20% as a rule) in corporations (equity instruments) and shares for which the Volkswagen Group normally exercises the option of fair value measurement through other comprehensive income, as well as securities (debt instruments) whose cash flows comprise solely payments of interest and principal and that are held under a business model aimed at both collecting contractual cash flows and selling financial assets. For instruments measured through other comprehensive income, changes in fair value are recognized directly in equity, taking deferred taxes into account. Impairment losses on securities (debt instruments) are recognized through profit or loss. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. Reconciliation of balance sheet items to classes of financial instruments The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting the carrying amount using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. The risk variables governing the fair value of the receivables are risk-adjusted interest rates. 43 44 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 8 D E R I VA T I V E N O T F I N A NC I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N STR U M EN T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E DG E M E A S U R E M E N T A T V A L U E C O S T A C C OU N T IN G C A T E G O R Y D E C . 3 1 , 2 0 1 8 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 8,434 8,434 Other equity investments 134 – – – 1,340 1,474 Financial services receivables 286 46,905 47,789 – 31,501 78,692 Other financial assets 772 4,240 4,252 1,510 – 6,521 Current assets Trade receivables – 17,537 17,537 – 352 17,888 Financial services receivables 22 36,529 36,529 – 17,665 54,216 Other financial assets 1,094 9,179 9,179 1,341 1 11,615 Marketable securities 16,940 140 140 – – 17,080 Cash, cash equivalents and time deposits – 28,938 28,938 – – 28,938 Noncurrent liabilities Noncurrent financial liabilities – 100,727 100,964 – 399 101,126 Other noncurrent financial liabilities 767 2,085 2,087 368 – 3,219 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders – 1,853 1,853 – – 1,853 Current financial liabilities – 89,707 89,707 – 51 89,757 Trade payables – 23,607 23,607 – – 23,607 Other current financial liabilities 718 8,010 8,010 721 – 9,449 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 1 9 D E R I V A T I V E N O T F I N A N C I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N S T R U M E N T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E D G E M E A S U R E M E N T A T V A L U E C O S T A C C O U N T I N G C A T E G O R Y J U N E 3 0 , 2 0 1 9 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 8,348 8,348 Other equity investments 146 – – – 1,522 1,668 Financial services receivables 288 49,235 50,420 – 33,319 82,842 Other financial assets 747 3,237 3,279 1,465 – 5,449 Current assets Trade receivables 2 19,456 19,456 – 418 19,876 Financial services receivables 22 38,344 38,344 – 18,378 56,744 Other financial assets 1,062 12,044 12,044 949 – 14,055 Marketable securities 16,757 161 161 – – 16,918 Cash, cash equivalents and time deposits – 25,778 25,778 – – 25,778 Noncurrent liabilities Noncurrent financial liabilities – 108,712 110,578 – 4,825 113,537 Other noncurrent financial liabilities 963 2,168 2,173 560 – 3,692 Current liabilities Current financial liabilities – 84,546 84,546 – 968 85,514 Trade payables – 25,187 25,187 – – 25,187 Other current financial liabilities 861 8,775 8,775 840 – 10,476 The carrying amount of lease receivables was €51,696 million (previous year: €49,166 million) and their fair value (fair value hierarchy level 3) was €52,575 million (previous year: €49,791 million). The carrying amount of lease liabilities was €5,793 million (previous year: €449 million) and their fair value (fair value hierarchy level 2) was €5,829 million (previous year: €466 million). The increase in lease liabilities is mainly due to the initial application of IFRS 16 (see disclosures on IFRS 16). 45 46 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The following tables contain an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT F A I R VA L U E B Y L E V E L € million Dec. 31, 2018 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 134 56 25 53 Financial services receivables 286 – – 286 Other financial assets 772 – 357 415 Current assets Financial services receivables 22 – – 22 Other financial assets 1,094 – 880 214 Marketable securities 16,940 16,940 – – Noncurrent liabilities Other noncurrent financial liabilities 767 – 250 516 Current liabilities Other current financial liabilities 718 – 419 299 € million June 30, 2019 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 146 66 0 79 Financial services receivables 288 – – 288 Other financial assets 747 – 485 262 Current assets Trade receivables 2 – – 2 Financial services receivables 22 – – 22 Other financial assets 1,062 – 726 336 Marketable securities 16,757 16,757 – – Noncurrent liabilities Other noncurrent financial liabilities 963 – 474 489 Current liabilities Other current financial liabilities 861 – 570 291 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements D E R I VAT I V E F I N A N C I A L I N ST R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million Dec. 31, 2018 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 1,510 – 1,510 – Current assets Other financial assets 1,341 – 1,341 – Noncurrent liabilities Other noncurrent financial liabilities 368 – 368 0 Current liabilities Other current financial liabilities 721 – 721 – € million June 30, 2019 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 1,465 – 1,465 – Current assets Other financial assets 949 – 949 – Noncurrent liabilities Other noncurrent financial liabilities 560 – 560 – Current liabilities Other current financial liabilities 840 – 840 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Fair Values in Level 3 are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models, customer financing receivables and receivables from vehicle financing programs are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. The measurement of vehicle financing programs requires in particular the use of the corresponding vehicle price. 47 48 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The table below provides a summary of changes in level 3 balance sheet items measured at fair value: C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT F A I R VA L U E B A S E D O N L E V E L 3 € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2018 823 765 Foreign exchange differences –24 1 Total comprehensive income 62 88 recognized in profit or loss –18 88 recognized in other comprehensive income 80 – Additions (purchases) 163 6 Sales and settlements –88 –49 Transfers into Level 2 –30 0 Balance at June 30, 2018 907 811 Total gains or losses recognized in profit or loss –18 –88 Net other operating expense/income –18 –88 of which attributable to assets/liabilities held at the reporting date –21 –94 Financial result 0 0 of which attributable to assets/liabilities held at the reporting date 1 – Financial assets Financial liabilities € million measured at fair value measured at fair value Balance at Jan. 1, 2019 990 816 Foreign exchange differences 8 0 Total comprehensive income 48 62 recognized in profit or loss 40 62 recognized in other comprehensive income 8 – Additions (purchases) 20 – Sales and settlements –71 –76 Transfers into Level 2 –6 –21 Balance at June 30, 2019 990 780 Total gains or losses recognized in profit or loss 40 –62 Net other operating expense/income 45 –61 of which attributable to assets/liabilities held at the reporting date 40 –37 Financial result –4 –1 of which attributable to assets/liabilities held at the reporting date –4 – Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2019, earnings after tax would have been €117 million (previous year: €11 million) higher (lower). The equity is not affected. The key risk variable for measuring options on equity instruments held by the Company is the relevant enter- prise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values at June 30, 2019 had been 10% higher, earnings after tax would have been €2 million (previous year: €3 million) higher. If the assumed enterprise values at June 30, 2019 had been 10% lower, earnings after tax would have been €2 million (previous year: €3 million) lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices of the used cars covered by the residual value protection model had been 10% higher as of June 30, 2019, earnings after tax would have been €327 million (previous year: €317 million) higher. If the prices of the used cars covered by the residual value protection model had been 10% lower as of June 30, 2019, earnings after tax would have been €347 million (previous year: €335 million) lower. If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points higher as of June 30, 2019, earnings after tax would have been €2 million (previous year: €7 million) lower. If the risk-adjusted interest rates as of June 30, 2019 had been 100 basis points lower, earnings after tax would have been €2 million (previous year: €7 million) higher. If the corresponding vehicle price used in the vehicle financing programs had been 10% higher as of June 30, 2019, earnings after tax would have been €6 million higher. If the corresponding vehicle prices used in the vehicle financing programs had been 10% lower as of June 30, 2019, earnings after tax would have been €6 million lower. If the result of operations of equity investments measured at fair value had been 10% better as of June 30, 2019, the equity would have been €5 million higher. If the result of operations had been 10% worse, the equity would have been €5 million lower. 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, cash- in-hand and call deposits. € million June 30, 2019 June 30, 2018 Cash, cash equivalents and time deposits as reported in the balance sheet 25,778 21,720 Time deposits –2,772 –487 Cash and cash equivalents as reported in the cash flow statement 23,006 21,233 49 50 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2019 2018 Capital contributions – 2,732 Dividends paid –2,816 –2,253 Capital transactions with noncontrolling interest shareholders –19 – Proceeds from issuance of bonds 15,896 13,840 Repayments of bonds –11,530 –7,087 Changes in other financial liabilities –3,266 –866 Repayments of lease liabilities –407 –14 –2,142 6,352 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering and Financial Services. As a result of an internal management change as from January 1, 2019, light commercial vehicles of the Volkswagen Commercial Vehicles brand are no longer allocated to the Commercial Vehicles segment, but reported under the Passenger Cars and Light Commercial Vehicles segment. The prior-year figures have been adjusted accordingly. The activities of the Passenger Cars and Light Commercial Vehicles segment cover the development of vehicles and engines, the production and sale of passenger cars and light commercial vehicles, and the corresponding genuine parts business. In the Passenger Cars and Light Commercial Vehicles reporting segment, the individual brands are being combined into a single reportable segment, in particular as a response to the high degree of technological and economic interlinking in the production network. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of trucks and buses, the corresponding genuine parts business and related services. Just as in the case of the car brands, there is collaboration within the areas procurement, development and sales. The aim is to achieve further forms of interlinking. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, combinations occur especially while taking into account the comparability of the type of services as well as the regulatory situation. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volks- wagen Group are transacted at arm’s length prices. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements R E P O R T I N G S E G M E N T S H 1 2 0 1 8 1 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 90,122 11,498 1,636 16,008 119,263 114 119,377 Intersegment sales revenue 7,406 490 1 1,654 9,551 –9,551 – Total sales revenue 97,527 11,988 1,637 17,662 128,815 –9,437 119,377 Segment result (operating result) 7,596 707 –58 1,294 9,539 –1,380 8,160 1 The prior-year figures have been adjusted to reflect a change in the allocation of Light Commercial Vehicles of the Volkswagen Commercial Vehicles brand. R E P O R T I N G S E G M E N T S H 1 2 0 1 9 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 92,974 12,784 1,862 17,442 125,062 135 125,197 Intersegment sales revenue 8,269 537 1 1,629 10,436 –10,436 – Total sales revenue 101,243 13,320 1,864 19,071 135,498 –10,301 125,197 Segment result (operating result) 8,558 959 –63 1,409 10,862 –1,865 8,997 R E C O N C I L I AT I O N H 1 € million 2019 2018 Segment result (operating result) 10,862 9,539 Unallocated activities –78 11 Group financing –21 –13 Consolidation –1,766 –1,378 Operating result 8,997 8,160 Financial result 560 813 Consolidated earnings before tax 9,557 8,972 51 52 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 14. Related party disclosures At 53.1%, Porsche SE held the majority of the voting rights in Volkswagen AG as of June 30, 2019. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. As a result, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE has the power to participate in the operating policy decisions of the Volkswagen Group and is therefore classified as a related party as defined by IAS 24. S U P P L I E S A N D S E R V I C E S R E N D E R E D S U P P L I E S A N D S E R V I C E S R E C E I V E D H 1 H 1 € million 2019 2018 2019 2018 Porsche SE and its majority interests Supervisory Board members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests State of Lower Saxony, its majority interests and joint ventures 2 1 816 7,678 84 7 2 3 537 7,516 96 6 1 1 837 314 469 2 0 1 724 356 334 2 R E C E I V A B L E S F R O M L I A B I L I T I E S ( I N C L U D I N G O B L I G A T I O N S ) T O € million June 30, 2019 Dec. 31, 2018 June 30, 2019 Dec. 31, 2018 Porsche SE and its majority interests Supervisory Board members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests State of Lower Saxony, its majority interests and joint ventures 4 0 1,431 12,354 164 2 4 0 1,319 11,989 112 1 0 164 1,574 2,676 716 1 1 205 1,869 2,671 487 2 The tables above do not contain the dividend payments of €1,138 million (previous year: €1,641 million) received from joint ventures and associates. Receivables from joint ventures are primarily attributable to loans granted in an amount of €7,513 million (December 31, 2018: €7,606 million) as well as trade receivables in an amount of €3,778 million (December 31, 2018: €4,045 million). Receivables from non-consolidated subsidiaries also result from loans granted in an amount of €840 million (December 31, 2018: €741 million) as well as trade receivables in an amount of €259 million (December 31, 2018: €214 million). Transactions with related parties are conducted on an arm’s length basis. Some of these transactions also include reservation of title clauses. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €341 million (December 31, 2018: €239 million). Impairment losses of €57 million (previous year: €59 million) were recognized on the outstanding related party receivables. In the first half of the year, expenses of €15 million (previous year: €17 million) were incurred in this context. In the first six months, the Volkswagen Group made capital contributions of €128 million (previous year: €455 million) at related parties. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 15. Litigation Diesel issue 1. Product-related lawsuits worldwide (excluding the USA/Canada) In a pending class action lawsuit in Brazil involving some 17 thousand vehicles, an appeals court rendered a judgment in May 2019 that only partially upheld the lower court's decision. The judgment initially reduced the damage liability of Volkswagen do Brasil significantly to an amount fixed at €35 million plus interest. This amount can increase as a result of the adjudicated inflation rate and the assertion of individual claims alleging declines in the value of affected Amarok vehicles. The judgment remains non-final. In Italy, the court decision dismissing the class action filed by the consumer association Codacons as inadmissible has become legally final. In Germany more than 60,000 individual lawsuits of automobile purchasers are now pending against Volkswagen AG or other Group companies, with the plaintiffs suing for damages or rescission of the contract in most cases. 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The Braunschweig Office of the Public Prosecutor has issued indictments against, among other persons, a former chairman of the Board of Management of Volkswagen AG. Based on the information available at the present time, no change in the risk situation of the Volkswagen Group results from the indictment of this former chairman of the Board of Management. The administrative fine order issued on May 7, 2019 by the Stuttgart Office of the Public Prosecutor terminates the regulatory offense proceeding conducted against Dr. Ing. h.c. F. Porsche AG in connection with the diesel issue. The administrative fine order is based on a negligent breach of the obligation to supervise occurring in the organizational unit “Prüffeld Entwicklung Gesamtfahrzeug/Qualität” (Overall Vehicle Develop- ment/Quality - Testing Facility). The administrative order imposes a total fine of €535 million, consisting of a penalty payment of €4 million and the forfeiture of economic benefits in the amount of €531 million. After thorough examination, Dr. Ing. h.c. F. Porsche AG has accepted the fine and paid it in full, rendering the administrative fine order legally final. The administrative fine order terminates the regulatory offense proceeding against Dr. Ing. h.c. F. Porsche AG. Further sanctions against or forfeitures by Dr. Ing. h.c. F. Porsche AG are therefore not to be expected in Europe in connection with the unitary factual situation underlying the administrative fine order. 3. Lawsuits filed by investors worldwide (excluding the USA/Canada) Holding that the factual situation at issue is by and large already covered by the model case proceedings being heard by the Braunschweig Higher Regional Court and that these proceedings, being paramount in this regard, preclude further such actions, the Stuttgart Higher Regional Court in March 2019 refused to proceed with the capital investor model cases that had been referred to it by the Stuttgart Regional Court. The plaintiff side has appealed one of these decisions to the Federal Court of Justice. 53 54 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 4. Proceedings in the USA/Canada With respect to the consumer protection claims asserted by the New Mexico Attorney General against Volks- wagen AG and certain affiliates, in March 2019 a New Mexico state court denied Volkswagen’s motion to dismiss those claims, and in April 2019 the court declined to grant Volkswagen permission to appeal that decision. Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliated companies continue to litigate claims asserted by the attorneys general of certain U.S. states and municipalities based on alleged violations of local environmental laws. In March 2019, the Tennessee Court of Appeals dismissed the claims of the Attorney General of the State of Tennessee as preempted by federal law. The Tennessee Attorney General declined to pursue further appeal so the decision of the Tennessee Court of Appeals is final. Also in March 2019, the New Mexico Attorney General voluntarily dismissed its environmental claims, and the Alabama Attorney General declined to appeal the dismissal of its claims against Volkswagen AG by the Alabama Supreme Court. In March 2019 the U.S. Securities and Exchange Commission filed a lawsuit against Volkswagen AG, Volkswagen Group of America Finance, LLC, VW Credit, Inc. and a former chairman of the Board of Management of Volkswagen AG, asserting claims under U.S. federal securities law and alleging misstatements and omissions in connection with the offer and sale of certain bonds and asset-backed securities. 5. Additional proceedings In June 2019, the Hanover Regional Court rejected the motion by three U.S. funds to replace the special auditor. This decision is not yet legally final. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Additional important legal cases In April 2019 the European Commission issued a statement of objections to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in connection with the Commission's antitrust investigation of the automobile industry. These objections state the European Commission's preliminary evaluation of the matter and afford the opportunity to comment. Volkswagen will examine the statement of objections. The subject matter of the proceedings is limited to the cooperation of German automobile manufacturers on technical questions in connection with the development and introduction of SCR systems and gasoline particulate filters for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. Volkswagen was given access to the investigation files in July 2019 and is preparing its reply to the statement of objections of the European Commission. In the same matter, the Chinese Competition Authority also issued an information request to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in March 2019. In the proceedings against a number of captive automobile finance companies regarding potential competition law infringements, Volkswagen AG and Volkswagen Bank GmbH filed an appeal in March 2019 against the administrative fine order issued by the Italian Competition Authority. In June 2019, the U.S. District Court for the Northern District of California dismissed two putative class action complaints brought by purchasers of German luxury vehicles alleging that, since the 1990s, several automobile manufacturers, including Volkswagen AG and other Group companies conspired to unlawfully increase the prices of German luxury vehicles in violation of US antitrust and consumer protection law. The court held that the plaintiffs have not stated a claim for relief because the allegations in the complaints do not plausibly support the alleged anticompetitive agreements. The court granted plaintiffs the opportunity to file amended complaints. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2019 contained in the combined management report in the 2018 Annual Report, specifically in the chapters “Report on Expected Developments” and “Report on Risks and Opportunities” including the sections “Risks from the diesel issue” and “Litigation/Diesel issue” and the underlying description of the issues in the chapter entitled “Diesel Issue”. In particular, based on the information as it exists and has been established, there continue to be no conclusive findings or assessments available to the Board of Management of Volkswagen AG regarding the described facts that would suggest that a different assessment of the associated risks should have been made. 55 56 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 16. Contingent liabilities Compared with the 2018 consolidated financial statements, contingent liabilities increased by €0.6 billion to €10.4 billion, mainly due to the recognition of additional tax positions. 17. Other financial obligations Other financial liabilities declined by €3.9 billion compared with the 2018 consolidated financial statements to reach €22.8 billion. The decline is mainly due to the initial application of IFRS 16 (see disclosures on IFRS 16). Higher obligations from credit commitments and a rise in the purchase order commitments for intangible assets and property, plant and equipment had an offsetting effect. Significant events after the balance sheet date The cash raised by the IPO of TRATON SE flowed to the Volkswagen Group after the balance sheet date. More information can be found in the “Key events” section. On July 12, 2019, Volkswagen announced that it would be investing with Ford Motors Corporation in Argo AI, a company that specializes in software platforms for autonomous driving. This step will allow both car companies to integrate Argo AI’s self-driving system into their own models independently of each other. The Volkswagen Group is investing a total of USD 2.6 billion in Argo AI for this purpose. The investment will include the provision of financial resources totaling USD 1.0 billion. In addition, Volkswagen will contribute its subsidiary Autonomous Intelligent Driving (AID), which is valued at USD 1.6 billion. For the contribution of AID, Volkswagen is expecting to realize a non-cash accounting profit from the fair value measurement of the shares in the high three-digit million range. Moreover, Volkswagen will take over Argo AI shares totaling USD 0.5 billion from Ford. The agreement is subject to the approval of the competent supervisory authorities and the fulfillment of contractual conditions. Interim Consolidated Financial Statements (Condensed) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements prepared in accordance with German accepted accounting principles give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 25, 2019 Volkswagen Aktiengesellschaft The Board of Management 57 58 Review Report Interim Consolidated Financial Statements (Condensed) Review Report On completion of our review, we issued the following unqualified review report dated July 25, 2019. This report was originally prepared in German. In case of ambiguities the German version takes precedence: To VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg We have reviewed the condensed consolidated interim financial statements – comprising the condensed income statement and condensed statement of comprehensive income, condensed balance sheet, statement of changes in equity, condensed statement of cash flows and selected explanatory notes – and the interim group management report of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, for the period from January 1 to June 30, 2019, which are part of the half-year financial report pursuant to § (Article) 115 WpHG ("Wertpapierhandelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Management. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Interim Consolidated Financial Statements (Condensed) Review Report Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. We draw attention to the updated information provided in section “Key events” of the notes to the condensed consolidated interim financial statements and in chapter “Report on Expected Developments, Risks and Opportunities” of the interim group management report with regard to the Diesel Issue, which in addition to the explanations of allegations made and claims filed essentially refer to the information provided and statements made in the 2018 consolidated financial statements and in the group management report as at December 31, 2018. Based on the results of the various measures taken to investigate the issue presented so far, which underlie these condensed consolidated interim financial statements and interim group management report, there is still no evidence that members of the Company’s Board of Management were aware of the deliberate manipulation of engine management software before summer 2015. Nevertheless, should as a result of the ongoing investigation new knowledge be obtained showing that members of the Board of Management were informed earlier about the Diesel Issue, this could eventually have an impact on the condensed interim financial statements and interim group management report as well as on the annual and consolidated financial statements and on the group management report for the financial year 2018 and prior years. The provisions for warranties and legal risks recorded so far are based on the presented state of knowledge. Due to the inevitable uncertainties associated with the current and expected litigation it cannot be excluded that a future assessment of the risks may be different. Our opinions on the condensed consolidated interim financial statements and on the interim group management report are not modified in respect of this matter. Hanover, July 25, 2019 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft Harald Kayser Wirtschaftsprüfer (German Public Auditor) Frank Hübner Wirtschaftsprüfer (German Public Auditor) 59 60 Selected terms at a glance Capitalization ratio The capitalization ratio is defined as the ratio of capitalized development costs to total research and development costs in the Automotive Division. It shows the proportion of primary research and development costs subject to capitalization. Driving Cycles Levels of fuel consumption and exhaust gas emissions for vehicles registered in Europe were previously measured on a chassis dyna- mometer with the help of the “New European Driving Cycle (NEDC)”. Since fall 2017, the existing test procedure for emissions and fuel consumption used in the EU is being gradually replaced by the Worldwide Harmonized Light- Duty Vehicles Test Procedure (WLTP). This applies for new vehicle types and all new vehicles. The aim of this new test cycle is to state CO2 emissions and fuel consumption in a more practice-oriented manner. A further important European regulation is the Real Driving Emissions (RDE) for passenger cars and light commercial vehicles, which also monitors emissions using portable emission measuring technology in real road traffic. Equity ratio The equity ratio measures the percentage of total assets attributable to shareholders’ equity as of a reporting date. This ratio indicates the stability and financial strength of the company and shows the degree of financial indepen- dence. Glossary Gross margin Gross margin is the percentage of sales revenue attributable to gross profit in a period. Gross margin provides information on profitability net of cost of sales. Hybrid notes Hybrid notes issued by Volkswagen are classified in their entirety as equity. The issuer has call options at defined dates during their perpetual maturities. They pay a fixed coupon until the first possible call date, followed by a variable rate depending on their terms and conditions. Net cash flow Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities. Net liquidity Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, loans and time deposits not financed by third-party borrowings. To safeguard our business activ- ities, we have formulated the strategic target that net liquidity in the Automotive Division should amount to approximately 10% of the consolidated sales revenue. Operating result Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in finan- cial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and docu- ments the economic success of our core busi- ness. Operating return on sales The operating return on sales is the ratio of the operating result to sales revenue. Ratio of capex to sales revenue The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized develop- ment costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure – largely for modernizing and expanding our product range and for environ- mentally friendly drivetrains, as well as for adjusting the production capacity and improving production processes – in relation to the Auto- motive Division’s sales revenue. Research and development ratio The research and development ratio (R&D ratio) in the Automotive Division shows total research and development costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology through to the development of marketable products. Particular emphasis is placed on the environmentally friendly orientation of our product portfolio. The R&D ratio underscores the efforts made to ensure the Company’s future viability: the goal of competitive profit- ability geared to sustainable growth. Return on sales before tax The return on sales is the ratio of profit before tax to sales revenue in a period, expressed as a percentage. It shows the level of profit gener- ated for each unit of sales revenue. The return on sales provides information on the profit- ability of all business activities before deducting income tax expense. Contact Information P U B L I S H E D B Y Volkswagen AG Financial Publications Letterbox 1848-2 38436 Wolfsburg Germany Phone +49 (0) 5361 9-0 Fax +49 (0) 5361 9-28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany Phone +49 (0) 5361 9-0 Fax +49 (0) 5361 9-30411 E-Mail investor.relations@volkswagen.de Internet www.volkswagenag.com/en/InvestorRelations.html F I N A N C I A L C A L E N D A R October 30, 2019 Interim Report January – September 2019 This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/en/InvestorRelations.html Printed in Germany 958.809.590.20 www.volkswagenag.com 9 1 0 2

Semestriel, 2019, Auto, Volswagen

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0 2 0 2 Half-Yearly Financial Report J A N UA R Y – J U N E 2020 1 U PDATE D I N F ORM AT I ON 7 I N T E R IM M AN AGEM E N T R E PORT 26 B RAN D S AN D BUSI N ESS FI ELDS 2 9 I N T E R IM CON SOLI DATED F I NA N C IA L STATE M EN T S (CON D E N SE D) 1 Key Facts 2 Key Events 7 Volkswagen Shares 8 Business Development 17 Results of Operations, Finan- cial Position and Net Assets 24 Outlook 29 Income Statement 30 Statement of Comprehensive Income 33 Balance Sheet 34 Statement of Changes in Equity 36 Cash Flow Statement 37 Notes to the Interim Consolidated Financial Statements 57 Responsibility Statement 58 Review Report Key Figures V O L K SWA G E N G R O U P Q 2 H 1 2020 2019 % 2020 2019 % Volume Data1 in thousands Deliveries to customers (units) 1,887 2,760 –31.6 3,893 5,365 –27.4 Vehicle sales (units) 1,799 2,756 –34.7 3,736 5,339 –30.0 Production (units) 1,665 2,767 –39.8 3,662 5,422 –32.5 Employees (on June 30, 2020/Dec. 31, 2019) 664.7 671.2 –1.0 Financial Data (IFRSs), € million Sales revenue 41,076 65,185 –37.0 96,131 125,197 –23.2 Operating result before special items –1,707 5,130 x –803 9,979 x Operating return on sales before special items (%) –4.2 7.9 –0.8 8.0 Special items –687 – x –687 –981 –30.0 Operating result –2,394 5,130 x –1,490 8,997 x Operating return on sales (%) –5.8 7.9 –1.5 7.2 Earnings before tax –2,034 5,486 x –1,352 9,557 x Return on sales before tax (%) –5.0 8.4 –1.4 7.6 Earnings after tax –1,536 4,115 x –1,019 7,168 x Automotive Division2 Total research and development costs 3,132 3,550 –11.8 6,695 7,033 –4.8 R&D ratio (%) 9.7 6.4 8.7 6.6 Cash flows from operating activities 1,464 8,158 –82.1 3,009 13,523 –77.7 Cash flows from investing activities attributable to operating activities3 3,751 4,580 –18.1 7,815 7,955 –1.8 of which: capex 2,042 3,194 –36.1 4,130 5,202 –20.6 capex/sales revenue (%) 6.3 5.8 5.4 4.9 Net cash flow –2,288 3,578 x –4,806 5,568 x Net liquidity at June 30 18,663 15,905 + 17.3 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Excluding acquisition and disposal of equity investments: Q2 €3,351 (4,350) million, H1 €6,903 (7,451) million. This version of the Interim Report is a translation of the German original. The German takes precedence. All figures shown in the Report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. Specified vehicle ranges correspond to results obtained through the Worldwide Harmonized Light vehicles Test Procedure (WLTP) on the chassis dynamometer. WLTP value ranges for series-produced vehicles may vary depending on the equipment. The actual range will deviate in practice depending on various other factors. Updated Information Key Facts > Volkswagen Group’s business heavily impacted by Covid-19 pandemic in first half of 2020; countermeasures implemented worldwide > Deliveries to Volkswagen Group customers down 27.4% at 3.9 (5.4) million vehicles; declines in all regions, passenger car market share increased > Group sales revenue decreases by 23.2% to €96.1 billion > Operating result before special items drops €10.8 billion to €–0.8 billion; demand-related fall in volumes; fair value measurements of derivatives to which hedge accounting is not applied (in particular commodity hedges) and exchange-rate effects have a negative impact of €–0.9 billion, non-cash gain of €0.8 billion from the contribution of AID to the autonomous driving joint venture with Ford > Operating result of €–1.5 billion down €10.5 billion on prior-year figure; negative special items of €–0.7 (–1.0) billion relating to diesel issue > Earnings before tax decrease to €–1.4 (9.6) billion > Automotive Division’s net cash flow at €–4.8 (5.6) billion; capex ratio is 5.4 (4.9)% only due to falling revenues > Net liquidity in the Automotive Division at €18.7 billion; successful placement of hybrid notes strengthens capital base > Exciting products: Volkswagen Passenger Cars celebrates world premieres of the new Arteon and the Arteon Shooting Brake, also available as PHEV, and the Nivus, a crossover utility vehicle for the South American market Audi adds dynamic SUV coupé e-tron Sportback to its e-tron family - ŠKODA presents new model versions from its Octavia family - SEAT shows off the updated version of its successful Ateca - Porsche debuts the new generation of its style icon, the 911 Targa - Lamborghini unveils its new Huracán EVO RWD Spyder - Scania presents concept for an electric drive system - MAN launches Lion’s City 18 E electric bus Key Facts 1 2 Key Events Updated Information Key Events G L O B A L S P R E A D O F C O R O N A V I R U S ( S A R S - C O V - 2 ) At the end of December 2019, initial cases of a new, some- times fatal lung disease emerged in Wuhan, in the Chinese province of Hubei. This disease is attributable to a novel coronavirus. Infections also began to appear outside China from mid-January 2020. In Europe, the number of people infected rose continuously in February, and especially in March and April 2020. The countries particularly affected included the United Kingdom, Spain, Italy, France and Germany. While many areas throughout Europe recorded declining numbers of new infections as the second quarter of 2020 progressed, the rate of new infections continued to rise in North, Central and South America, Africa and parts of Asia. Especially in Europe and Asia, the second quarter saw the gradual easing of measures implemented to prevent the spread of the Covid-19 pandemic. This included partially lifting border controls and travel restrictions, relaxing lock- downs as well as the reopening of businesses and public facilities. In addition, the European Commission and numer- ous European governments approved assistance packages to support the economy. Outside of Europe, governments also introduced measures aimed at shoring up the economy to counteract the enormous disruption to everyday life and economic activity caused by the Covid-19 pandemic. N E W G R O U P M O D E L S P R E S E N T E D Due to the spread of the coronavirus and the efforts made to contain the pandemic, the Volkswagen Group brands contin- ued to present their new vehicles and technologies in the second quarter of 2020 primarily using online presentations. The second quarter of 2020 saw the Volkswagen Pas- senger Cars brand celebrating the world premieres of the reengineered Arteon and its new Arteon Shooting Brake variant, offering a completely new interpretation of the estate concept and expanding the brand’s model range in the mid- size segment. Both models have an expressive, avant-garde design characterized by athletic lines. A particularly striking feature is the front end with its continuous light strip, striking chrome bars and new air intakes. From the B-pillar back, the models differ substantially from one another: whereas on the Arteon the roof and window contours arch down from the B-pillars, therefore becoming part of the coupé-shaped rear, on the Shooting Brake the roof and window lines are extended towards the rear and end in the sporty rear end with roof spoiler characteristic of the model. New technical developments have been applied in both models. For the first time in the Arteon, a plug-in hybrid drive is available. The Travel Assist system enables partly auto- mated driving within a speed range from 0 km/h to 210 km/h and makes driving in stop-and-go traffic and through roadworks in particular noticeably easier. The Lane Assist system keeps the vehicle in the center of the lane and Auton- omous Emergency Braking Front Assist with Pedestrian Monitoring also complement the range of Travel Assist functions. The Rear View reversing camera has been further developed and now also features a corner view (which expands the camera image from 90 degrees to a wide angle of 170 degrees) and a special trailer view of the tow bar from above. A new cockpit landscape with touch functions, con- nectivity solutions and a high-end sound system round off the vehicle concept. In another world premiere, the Volks- wagen Passenger Cars brand presented the Nivus. The cross- over utility vehicle (CUV) opens up a new small car segment in the Brazilian market and impresses with dynamic design, an ample vehicle interior, and an elevated seating position. The exterior successfully combines SUV elements and coupé lines. The Nivus is among the largest models in the small vehicle segment with a luggage compartment capacity of 415 liters. Developed in South America, the vehicle is based on the Modular Transverse Toolkit (MQB) and will be built at the Anchieta plant in Brazil using cutting-edge production processes. Following its launch on the Brazilian market, the vehicle will also be available in Argentina in the second half of 2020. Other South American markets will follow in 2021. In future, the new model may also be launched at an interna- tional level and a European version could go on sale as well. Audi is staying consistently true to its strategic direction with the presentation of the second model in its e-tron product line in the reporting period. The Audi e-tron Sport- back is a dynamic SUV coupé that combines the power of a spacious SUV with the elegance of a four-door coupé and the progressive character of an electric car. The all-electric drive provides up to 300 kW (408 PS) of power and a range of up to 446 km from a single battery charge. The range is achieved by the coupé body style and the related outstanding cw value among other things. The e-tron Sportback’s digital matrix LED headlights are a new feature now available for the first time in a large-scale production vehicle. The light is broken down into tiny pixels and can be controlled with exceptional precision. This makes safe lane centering easier on narrow stretches of road and shows the position of the vehicle in the lane. ŠKODA presented new model versions from its Octavia family in the second quarter of 2020. The Octavia iV is the Updated Information second model from the Czech brand to be available as a plug- in hybrid. The best-selling vehicle has an emission-free electric range of up to 55 km. ŠKODA has also equipped the new generation of the Octavia with mild hybrid technology, which helps to make the new petrol engines even more fuel efficient. Thanks to the application of the new twin-dosing method of exhaust gas treatment with two SCR catalytic converters that are arranged one after the other, the diesel engines emit around 80% less nitrogen oxide. The Octavia G-TEC, which is designed to run on particularly environ- mentally friendly compressed natural gas, allows for a range of around 500 km. The Octavia model range is rounded off by the robust Octavia Scout with the look of an off-road vehicle. An EVO-generation 2.0 TDI engine with a power output of 147 kW (200 PS) is also celebrating its premiere – the most powerful diesel in the history of the model range to date. SEAT unveiled the new Ateca in the reporting period. The revamped version of the successful SUV has a refreshed and more emotional appearance. Its standard lighting includes full LED headlights and LED taillights with dynamic indi- cators. The seemingly high-end ambiance of the interior exudes even more dynamism, safety and reliability. The SEAT Virtual Cockpit with its 10.25” display combined with the infotainment system creates a digital control landscape. The package is rounded off by a fully connected user experience, improved levels of safety and comfort and a perceptible increase in efficiency. In addition to the already existing equipment lines, the new Ateca is now also available in the exclusive XPERIENCE line, which emphasizes the compact SUV’s off-road character even more. Porsche celebrated the world premiere of the 911 Targa 4 and 911 Targa 4S models in May, completing its new gener- ation of the 911 with a third vehicle body variant. The inno- vative, fully automatic roof system remains a distinguishing feature on all versions of the Targa; and just like the legendary original Targa model from 1965, it features a characteristic wide bar, a retractable roof section above the front seats and a wraparound rear window. Both 911 Targa models are powered by a six-cylinder, three-liter twin-turbo boxer engine: the 911 Targa 4 now delivers 283 kW (385 PS) and accelerates from zero to 100 km/h in 4.2 seconds when equipped with the optional Sport Chrono Package. The engine in the 911 Targa 4S puts out 331 kW (450 PS) and reaches the 100 km/h mark in 3.6 seconds. Both models are fitted with an eight-speed dual-clutch transmission (PDK) and intelligent all-wheel drive Porsche Traction Management (PTM) as standard to deliver compelling performance, traction and driving pleasure. New technology has also been integrated to expand the range of functions for both 911 models. The Porsche InnoDrive system enhances the adaptive cruise control with additional, innovative functions. Thanks to the improved Smartlift function, the ground clearance can also be programmed to be adjusted for everyday use. New personalization options from the Porsche Exclusive Manu- faktur range complete the list of offers. Key Events Lamborghini unveiled its new Huracán EVO RWD Spyder. The open-top super sports car impresses with lightweight con- struction, rear-wheel drive, and a specially tuned perfor- mance traction control system to deliver a special open air experience. The Spyder’s exterior design ensures drag reduc- tion and the downforce matches that of the coupé without requiring additional aerodynamic appendages. Its naturally aspirated V10 engine delivers a maximum performance of 449 kW (610 PS) and accelerates the vehicle from 0 to 100 km/h in just 3.5 seconds. Its maximum speed is 324 km/h. In June 2020, Scania launched its concept for hybrid and fully electric drive systems that provide outstanding perfor- mance in compact designs. All components work seamlessly together and are controlled by a common management system. The Scania systems are both modular and scalable, allowing customers to select from and combine a number of components based on application and specific demands. A high level of energy efficiency and low maintenance require- ments keep operating costs low. With a potential CO2 emis- sion reduction of up to 92 percent, Scania’s hybrid system combines an electric motor with a combustion engine. The fully electric system enables an almost complete CO2 emis- sion reduction provided that the electricity is generated from renewable sources. Both systems can be used in vehicles and construction equipment, for example excavators, dump trucks, mobile cranes and concrete mixers. For the marine segment, the systems can be beneficial in vessels such as excursion ships, car ferries and patrol boats. MAN celebrated the market launch of its all-electric bus model, the Lion’s City 18 E, in the second quarter. Two electric motors on the second and third axles give the articulated bus the power it needs for emission-free city traffic, and with a length of 18 meters, the city bus can accommodate many passengers. The absence of the engine tower allowed devel- opers to create more appealing lighting and install additional seats in the rear. In the MAN Lion’s City 18 E, the electric drivetrain produces up to 480 kW (653 PS). The energy for this comes from modular batteries from the Group’s toolkit that are positioned on the roof. This saves space, improves crash behavior, and provides easy access for servicing. The MAN Lion’s City 18 E impresses with a range of up to 270 km. AWA R D S At the beginning of April 2020, CUPRA was selected as the overall brand winner in the “Best Brands in All Classes” readers’ survey conducted by Auto Bild magazine, securing 58.1% of the votes. Readers of this magazine rated 37 car brands in 14 vehicle categories. Key criteria for the selection were quality, value for money and design. In mid-April 2020, ŠKODA’s Kamiq GT netted a Red Dot Award in the product design category. This is the first Red Dot Award for a ŠKODA model that has been developed and produced exclusively for the Chinese market and its cus- tomers. The ŠKODA Octavia also secured itself another award in the same category. The Red Dot Award is considered to be 3 4 Key Events a seal of high-quality product design and is one of the world’s most famous design competitions. The international expert jury consists of independent designers, design professors and specialist journalists. At the end of April 2020, Volkswagen was selected as the best manufacturer of connected cars in the “Networks, Services & Manufacturers of the Year 2020” readers’ poll conducted by the German journal connect. More than 76,000 connect readers and online users took part in the poll. In May 2020, the Volkswagen Group received several awards from the German Design Council in the “Automotive Brand Contest 2020”. The CUPRA brand was crowned “Winner” in the Concepts category for the CUPRA Tavascan. The Bentley brand was also named “Winner” in the same category for its EXP 100 GT model. Another “Winner” in this category was the ID. Space Vizzion from Volkswagen Passen- ger Cars. The MAN brand’s fully electric city bus, the MAN Lion’s City E, was selected as a “Winner” in the Commercial Vehicles category. The ID.3 from Volkswagen Passenger Cars was awarded the “Best of Best” award in the Exterior and Interior categories, with the Golf named a “Winner” in these categories. The prestigious design award is the only interna- tional design competition exclusively for automotive brands, with the expert jury being made up of representatives from the media, design, brand communication and academia. In June 2020, readers of the Auto Bild Allrad magazine chose multiple Volkswagen Group models as the all-wheel drive cars of 2020. The Audi A6 Allroad was named the overall winner in the all-wheel-drive crossover category. The Porsche Taycan came first in the all-wheel-drive hybrid and electric car category. The ŠKODA Octavia was voted the overall winner and the winning import vehicle in the all-wheel-drive cate- gory for passenger cars priced under €40,000. The Porsche Panamera was selected as the overall winner in the all-wheel- drive category for passenger cars priced over €40,000 and the ŠKODA Superb as the winning import vehicle. The Porsche 911 Carrera was named the overall winner in the all-wheel- drive sports cars, coupés and convertibles category. The Multivan from Volkswagen Commercial Vehicles was selected as overall winner in the all-wheel-drive vans and buses category; here, the SEAT Alhambra was voted the winner in the import category. In the readers’ choice, the editors of Auto Bild Allrad allowed readers to choose their favorites from a total of 219 models in ten categories. At the end of June 2020, readers of AUTO Straßenverkehr and Leben & erziehen magazines voted several ŠKODA models “Family Car of the Year 2020” in six categories. The ŠKODA Octavia Combi came out on top for “Best Design” both as an import and overall for cars under €25,000. The Octavia Combi and the Superb Combi from ŠKODA also won the import award for “Best Technology” in their respective price range. The Superb Combi was crowned “Best Value for Money” both overall and as an import vehicle costing between €25,000 and €35,000. A total of 128 vehicles com- Updated Information peted, including estates, SUVs and vans priced below €45,000. The main deciding factors in the awards were the interior space, safety and value for money. A N N I V E R S A R I E S The Volkswagen plant in Chattanooga reached an important production milestone in June 2020 when the one-millionth Volkswagen rolled off the production line. The anniversary vehicle was a Passat R-Line. Volkswagen has been producing vehicles in Chattanooga since 2011; the factory currently manufactures the North American version of the Passat plus two SUVs – the Volkswagen Atlas and the Atlas Cross Sport – for the American market and for export. PA R T N E R S H I P S As part of its electrification strategy, Volkswagen decided at the beginning of May 2020 to use its Salzgitter site for construction of the building and development of the infra- structure needed for the lithium-ion battery manufacturing joint venture with Northvolt AB. The objective is to leverage synergies together with the Center of Excellence for Battery Cells already located at the site. Battery cell production is scheduled to commence at the start of 2024 with an initial capacity of 16 gigawatt hours. At the end of May 2020, Volkswagen announced plans to increase its stake in JAC Volkswagen Automotive Co. Ltd. (JAC VW), a joint venture for electric mobility in China. The trans- action with a value of around €1 billion includes the acqui- sition of 50% of JAG, the parent company of Volkswagen partner JAC, and an increase in the interest in JAC VW from 50 to 75%. The capital increase will enable Volkswagen to further advance its electric car offensive in China. In addition, Volks- wagen will acquire a shareholding of around 26% in battery manufacturer Guoxuan High-Tech Co., Ltd. for around €1 bil- lion, making it the company’s largest shareholder. Comple- tion of the transactions is subject to regulatory approval. At the beginning of June 2020, Ford Motor Company and Volkswagen AG signed additional contracts within their existing global alliance for light commercial vehicles, electri- fication and autonomous driving. The contracts serve as the foundation for a total of three vehicle projects. In addition to the collaboration on the mid-sized pickup, projects are now underway for a city van and a one-ton cargo van. The three alliance projects amount to a volume of approximately 8 mil- lion vehicles over the entire life cycles. At the start of June 2020, contracts were concluded for a cooperation to further develop autonomous driving and the Volkswagen Group company AID was incorporated into Argo AI. In June 2020, the Volkswagen Group also announced plans to increase its shareholding in the US battery specialist QuantumScape. The objective is to promote the joint devel- opment of solid-state battery technology. In the future, solid- state batteries should result in a significantly increased range and faster charge times. They are regarded as the most Updated Information promising approach to electric mobility for generations to come. Volkswagen has already been collaborating with QuantumScape since 2012 and is the largest automotive shareholder thus far. Both founded a joint venture in 2018, the aim of which is to prepare the mass production of solid- state batteries for Volkswagen. The new investment of up to USD 200 million and the associated increase in the share- holding is still subject to various conditions precedent. N E W D AT E F O R T H E 2 0 2 0 A N N U A L G E N E R A L M E E T I N G A N D P R O P O S E D D I V I D E N D September 30, 2020 has been set as the new date for the Annual General Meeting for fiscal year 2019. After the Annual General Meeting, originally scheduled for May, was post- poned due to the spread of coronavirus, the meeting in September will not be conducted in the usual manner either. To protect the health of shareholders, employees and service providers, this year’s Annual General Meeting will be held on a virtual platform. At the same time as announcing the new date, the Management has also submitted an amended pro- posal on the appropriation of net retained profits. The enor- mous disruption to all areas of everyday life and economic activity caused by the Covid-19 pandemic has also affected the Volkswagen Group worldwide. Given the scale and extent of the impact and the current inability to reliably estimate future developments, the Board of Management and the Supervisory Board have resolved to now propose to the Annual General Meeting a dividend of €4.80 per ordinary share and €4.86 per preferred share. The Company’s Manage- ment has thus amended the proposal on the appropriation of net retained profits previously announced for fiscal year 2019, which had originally been €6.50 per ordinary share and €6.56 per preferred share. The remaining net retained profits of €855 million will be carried forward to new account. Volkswagen AG continues to be committed to the aim laid down in its Group strategy of achieving a payout ratio of at least 30%. Key Events C A S H C O M P E N S AT I O N S E T F O R A U D I S H A R E H O L D E R S As part of the planned squeeze-out at AUDI AG under the German Stock Corporation Act, Volkswagen AG announced on June 16, 2020 that the cash compensation for the transfer of shares held by minority shareholders had been set at €1,551.53 per share. The resolution on the transfer is due to be passed at AUDI AG’s next Annual General Meeting, which will take place on July 31, 2020. F I R ST J U D G M E N T B Y F E D E R A L C O U R T O F J U ST I C E I N D I E S E L L I T I G AT I O N On May 25, 2020, the Bundesgerichtshof (BGH – Federal Court of Justice) handed down its first decision ever in an individual product-related lawsuit in connection with the diesel issue. The BGH held that the buyer, who had purchased a vehicle with a type EA 189 engine prior to public disclosure of the diesel issue, had a claim for damages against Volkswagen AG. While the buyer can require reimbursement of the vehicle's purchase price, he must accept a deduction for the benefit derived from using the vehicle and must return it to Volkswagen AG. The judgment clarifies the BGH's stance on the fundamental issues underlying a large number of the some 65 thousand individual diesel lawsuits still pending in Germany. In the course of two hearings held in July 2020, the BGH indicated that it was inclined to reject a claim to tort interest by vehicle buyers. M A R K E T M A N I P U L AT I O N P R O C E E D I N G S T E R M I N AT E D Against payment in each case of a court-imposed sum of €4.5 million, the Braunschweig Regional Court on May 20, 2020 definitively terminated the criminal proceedings against the Chairman of the Supervisory Board of Volkswagen AG, Hans Dieter Pötsch, and the Chairman of the Board of Man- agement of Volkswagen AG, Dr. Herbert Diess, on suspicion of violation of the Securities Trading Act in connection with the diesel issue. The proceedings against Volkswagen AG as collat- eral participant have also been terminated to this extent. After careful consideration and deliberation, the Super- visory Board of Volkswagen AG has decided to relieve Mr. Pötsch and Dr. Diess of the burden of making these payments. 5 6 Key Events B O A R D O F M A N A G E M E N T A N D S U P E R V I S O R Y B O A R D M AT T E R S Mr. Johan Järvklo, Secretary-General of the European and Global Group Works Council of Volkswagen AG, stepped down from his post on the Supervisory Board of Volkswagen AG effective May 29, 2020. Mr. Järvklo had been a member of the Supervisory Board since November 22, 2015. He has been suc- ceeded by Mr. Kai Bliesener, Head of Vehicle Construction and Automotive and Supplier Industry Coordinator at IG Metall, who was appointed by the court to replace Mr. Järvklo effec- tive June 20, 2020. On June 5, 2020, the Supervisory Board of Volkswagen AG announced two further appointments to the Executive Com- mittee, expanding it to eight members. The new members are Ms. Bertina Murkovic as an employee representative and Dr. Hans Michel Piëch as a shareholder representative. The decision to expand the committee is due to the increasing number of tasks it performs. Effective June 30, 2020, Dr. Stefan Sommer left the Volks- wagen AG Board of Management. Dr. Sommer had been the Board member responsible for Components and Procure- ment since September 1, 2018. He left the Company at his own request and by mutual agreement. Mr. Frank Witter, member of the Board of Management for Finance & IT, will Updated Information be responsible for Components and Procurement until further notice. The Board of Management has also reorganized respon- sibilities in the management of the brand and Group. The core Volkswagen Passenger Cars brand has been led by its former Chief Operating Officer, Mr. Ralf Brandstätter, since July 1, 2020. The Chairman of the Board of Management of Volkswagen AG, Dr. Herbert Diess, who previously also chaired the Brand Board of Management, will retain overall responsibility for the Volume brand group on the Group Board of Management. This brand group also includes Volks- wagen Passenger Cars. The aim of the change is to enable the Group and brand leaders to focus more closely on their respective tasks during the period of transformation in the automotive industry. Effective July 15, 2020, Mr. Andreas Renschler left the management boards of Volkswagen AG and TRATON SE by mutual agreement. The Truck & Bus brand group, for which he was responsible on the Group Board, will be taken over by Mr. Gunnar Kilian, member of the Board of Management for Human Resources. Mr. Matthias Gründler will succeed Mr. Renschler as Chairman of the Board of Management of TRATON SE. Interim Management Report Volkswagen Shares Volkswagen Shares Following the sharp fall in share prices in the first quarter of this year, which was triggered by the Covid-19 pandemic and its severe negative economic implications, international stock markets started to recover during the second quarter, with some even reporting a strong upward trend. The DAX ended the first half of the year approximately 7% lower than at the end of 2019. After an initially good start to the new financial year with a record high in February, share prices collapsed with the growing spread of the SARS-CoV-2 virus. After reaching a low in March, the leading German stock index has since increasingly gained in value. This development was fueled considerably by economic stimulus measures from central banks and governments throughout the world and the resulting hopes of a more rapid global economic recovery. question of what form this relationship would take in future, also had a negative impact. Positive momentum came from the incipient economic recovery in China and investors’ hopes of improved economic activity in the wake of relaxed restrictions worldwide and government assistance measures, as well as hopes that the Covid-19 pandemic would subside. Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website at www.volkswagenag.com/en/InvestorRelations.html. V O L K SWA G E N K E Y S H A R E F I G U R E S A N D M A R K E T I N D I C E S F R O M J A N U A R Y 1 TO J U N E 3 0 , 2 0 2 0 Following the decline in the first quarter, the prices of Volkswagen AG’s preferred and ordinary shares also pro- ceeded to recover over the further course of the reporting period; however, they are still around 20% lower than at the end of 2019. Uncertainties surrounding the development of the global demand for automobiles caused by the Covid-19 pandemic placed shares under pressure. In addition, negative effects arose from the automotive industry’s current period of transition that requires large-scale investment. Moreover, the impending US punitive tariffs on European vehicles and the unknown outcome of the Brexit negotiations between the United Kingdom and the EU, coupled with the related Ordinary share Preferred share DAX ESTX Auto & Parts Price (€) Date Price (€) Date Price Date Price High 183.10 Jan. 10 185.52 Jan. 10 13,789 Feb. 19 496 Low 101.50 Mar. 18 87.20 Mar. 18 8,442 Mar. 18 255 Closing 143.30 Jun. 30 134.94 Jun. 30 12,311 Jun. 30 375 Date Jan. 10 Mar. 18 Jun. 30 P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 1 9 T O J U N E 2 0 2 0 Index based on month-end prices: December 31, 2019 = 100 Volkswagen ordinary share –17.3% Volkswagen preferred share –23.4% DAX –7.1% EURO STOXX Automobiles & Parts –22.9% 110 110 100 100 90 90 80 80 70 70 60 60 D F M A M A S O N D 7 8 Business Development Interim Management Report Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The global spread of the SARS-CoV-2 virus, the associated restrictions, and the resulting downturn in demand and supply meant that growth in the world economy was nega- tive in the first half of 2020. The average rate of expansion of gross domestic product (GDP) was far below the previous year’s level in both the advanced economies and the emerg- ing markets. At country level, performance in the reporting period depended on the extent to which the negative impacts of the global Covid-19 pandemic were already materializing. The governments and central banks of numerous countries throughout the world responded in some cases with sub- stantial fiscal and monetary policy measures. This meant cuts in the already relatively low interest rates. There was a significant decline in prices for energy resources, while other commodity prices were, on average, down slightly year-on- year. Currencies in some emerging markets depreciated distinctly in the first half of 2020. Global trade in goods declined further in the reporting period. As a whole, the economies of Western Europe recorded a sharp fall in growth from January to June 2020. This trend was seen in all countries in Northern and Southern Europe. The impact of national measures to contain the pandemic, including border closures and spatial/physical distancing, caused deep cuts. In some regions, the measures severely restricted everyday life and also had grave economic conse- quences. During the second quarter, the governments of many European countries started to partially lift restrictions, thus giving rise to a slow economic recovery. government assistance packages enacted to support the economy. The economies in Central and Eastern Europe reported an overall marked decline in the real absolute GDP in the first six months of 2020. This development was also caused by the impact of national measures aimed at preventing the spread of the Covid-19 pandemic. In Turkey, the recovery from the first quarter could not be sustained – the GDP growth rate was negative overall. South Africa’s GDP growth was much weaker in the reporting period amid persistent structural deficits and political challenges. Growth in the US economy receded significantly to nega- tive in the first two quarters of 2020 amid increasing rates of infection. To strengthen the economy in light of the negative impact of the Covid-19 pandemic, the US government passed comprehensive stimulus packages. The US Federal Reserve cut interest rates twice, alongside other measures to support the economy. The weekly number of people filing new claims for unemployment benefits rose by several million and led to a soaring increase in the unemployment rate. In the neigh- boring countries, economic output also fell compared to the same period of 2019, the fall being significant in Canada and sharp in Mexico. Brazil’s economy also recorded a sharp drop from January to June 2020, resulting from the rising rate of infections caused by the Covid-19 pandemic. The economic downturn in Argentina intensified amid high inflation and continuous currency depreciation. Germany recorded a markedly negative growth rate over the reporting period. The labor market was in a favorable situation at the start of the year, but many companies intro- duced short-time working throughout the course of the first half of the year. Both business and consumer sentiment saw only a modest improvement – despite the initial easing of restrictions in everyday life and economic activity as well as Economic output in China, which was exposed to the negative effects of the Covid-19 pandemic much earlier than other economies, fell in the reporting period; however, an increase was recorded in the second quarter. India registered a sharp fall in growth amid the rising number of infections. Japan also recorded a negative GDP growth compared to the same period of the previous year due to the adverse impact of the Covid-19 pandemic. Interim Management Report E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 1 9 T O J U N E 2 0 2 0 Index based on month-end prices: as of December 31, 2019 = 100 110 110 105 105 100 100 95 95 90 90 D F M A M T R E N D S I N T H E M A R K E T S F O R PA S S E N G E R C A R S A N D L I G H T C O M M E R C I A L V E H I C L E S Global demand for passenger cars fell sharply year-on-year from January to June 2020 as a result of the Covid-19 pan- demic (–28.1%). The slump affected all sales regions, with above-average losses recorded in the overall markets of Western Europe and South America. The decline in demand in Asia-Pacific, North America, Central and Eastern Europe, the Middle East and Africa was smaller by comparison. light commercial vehicles also decreased sharply from January to June 2020 compared to the prior year. Global demand for In Western Europe, demand for passenger cars during the reporting period fell drastically short of the previous year's level. The negative impact from the spread of the SARS-CoV-2 virus was noticeable as early as March. New registrations saw declines on a similar scale in all major individual markets, though the fall in demand slowed overall as the second quarter progressed. The passenger car markets in the UK, Italy and Spain lost around half their volume in the first six months of 2020. The volume of new registrations of light commercial vehicles in Western Europe fell very sharply below the prior- year figure. New passenger car registrations in Germany in the first half of 2020 did not match the high level seen in the equivalent period of the previous year. Demand here decreased by more than one-third, a trend amplified by the Covid-19 pandemic and the associated restrictions and prohibitions. Business Development EUR to GBP EUR to USD EUR to CNY EUR to JPY A S O N D Demand for light commercial vehicles in Germany in the reporting period was substantially lower than in the same period of 2019. In the Central and Eastern Europe region, sales of passenger cars in the reporting period were substantially below the previous year’s level. The development of demand in the year to date has differed from market to market. While the EU countries of Central Europe registered shrinking demand from the beginning of the year, the Russian passenger car market remained relatively stable in the first quarter. It was not until the second half of the reporting period that the figures fell substantially short of the previous year as the SARS-CoV-2 virus became increasingly widespread. The volume of light commercial vehicles registered in Central and Eastern Europe decreased sharply compared to the same period in the preceding year, with a substantial year-on-year drop in the number of vehicles sold in Russia between January and June 2020. The volume of the passenger car market in Turkey in the period from January to June 2020 was up by nearly one-third on the very low prior-year level. The growth in demand was bolstered by catch-up effects in the first three months of the year. In the second quarter, however, demand fell at times. In South Africa, the crisis meant that the number of passenger cars sold was down very sharply on the already poor results of the previous year. In North America, too, sales of passenger cars and light com- mercial vehicles (up to 6.35 tonnes) declined substantially in the reporting period compared with the prior year, with the effects of the Covid-19 pandemic worsening in the second quarter. The market volume in the USA remained substan- 9 10 Business Development tially down on the prior-year level. The decline affected both the passenger car segment and light commercial vehicles such as SUVs and pickup models. On the Canadian automotive market, the Covid-19 pandemic accelerated the downward trend that began in 2018 very sharply. The number of vehicles sold in Mexico also fell very sharply below the comparable prior-year figure. In the markets of the South America region, new registrations for passenger cars and light commercial vehicles decreased drastically in the first six months of 2020. This region, along with Western Europe, saw the most severe impact of the Covid-19 pandemic on the automotive markets in terms of percentage. In Brazil, the recovery in demand for cars stalled; the number of new registrations was very much lower than the prior-year period. In the Argentinian market, the dete- rioration in the macroeconomic situation since mid-2018 and the spread of the SARS-CoV-2 virus negatively impacted the demand for passenger cars and light commercial vehicles. Sales figures also fell very sharply there in the first half of 2020. In the Asia-Pacific region, too, the first half of 2020 was adversely impacted by the spread of the SARS-CoV-2 virus. The number of new passenger cars registered in the reporting period was down by around a quarter on the prior-year level. This was due primarily to developments on the Chinese passenger car market, where the volume of demand fell substantially short of the previous year as a result of the Covid-19 pandemic. After the drastic losses in the first three months of the year, there were clear signs of a recovery in the overall market during the second quarter. In the Indian passenger car market, sales in the period from January to June 2020 fell drastically compared with a year earlier. In Japan, vehicle demand in the first six months of 2020 was down substantially on the previous year due not only to the Covid-19 pandemic, but also to the increase in VAT as of October 1, 2019. There was a sharp year-on-year decline in demand for light commercial vehicles in the Asia-Pacific region. Registra- tion volumes in China, the region’s dominant market and the largest market worldwide, fell by around a quarter compared to the previous year. The number of new vehicle registrations in India saw a drastic decrease versus the prior year, while in Thailand the number was substantially below the level seen in the previous year. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S In the markets that are relevant for the Volkswagen Group, global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was much lower in the reporting period than in the prior year due to the spread of the SARS-CoV-2 virus. Demand in the 27 EU states excluding Malta, but including the United Kingdom, Norway and Switzerland (EU27+3), fell drastically short of the 2019 level in the first Interim Management Report half of 2020. The previously anticipated downturn in the market was amplified by the Covid-19 pandemic, especially in the second quarter of 2020. The Russian market recorded a marked downswing. Turkey reported a more than 40% year- on-year increase in new registrations; however, the prior-year figures were very low. By contrast, the South African market declined at a similar rate. In Brazil, the largest market in the South America region, demand for trucks was significantly below the level seen in the previous year as a result of the pandemic. The bus markets were also very strongly impacted by the Covid-19 pandemic. Demand for buses in the EU27+ 3 countries in the first half of 2020 was much lower than in the prior-year period, and the market for coaches in particular all but ground to a halt. Brazil and Mexico recorded a drastic year-on-year decline in demand. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are mostly independent of each other. The global impact of the Covid-19 pandemic and asso- ciated uncertainty meant that order activity in the marine market was significantly lower in the first half of 2020 than in the same period of the previous year, and the period was marked by project postponements. In merchant shipping, the market continued to develop sluggishly despite initial positive indicators, such as the recovery in freight rates. Orders for cruise ships largely ground to a halt and projects were canceled. The passenger ferry segment – similarly affected by a loss of revenue – was also impacted by a decline in demand. The special market for government vessels, which is driven by state investment, continued on a stable trajectory. In the offshore sector, the existing overcapacity and low oil prices virtually stifled investment in offshore oil production. The market for power generation declined slightly in the first half of 2020 compared with the same period of the previous year. This trend was further compounded by the spread of SARS-CoV-2 virus and its impact on the global economic system, which led to renewed pressure on prices overall. Due to the collapse in oil prices, there was short-term demand for lower-priced stock engines run on HFO (heavy fuel oil), though the general trend away from oil-fired power plants towards dual-fuel and gas-fired power plants contin- ued. Demand for new energy solutions such as hydrogen, battery and solar technologies was impacted by project post- ponements, albeit with a continuing trend towards greater flexibility and decentralized availability. The market for turbomachinery deteriorated distinctly compared with the prior-year period in virtually all areas of application. As a consequence of the Covid-19 pandemic, demand for turbo compressors in the raw materials, oil, gas and processing industry weakened noticeably over the course Interim Management Report of the first six months of 2020. Demand for steam turbines for power generation also collapsed in the renewable energy industry towards the end of the first half, showing a down- ward trend overall compared with the prior-year period. Demand for gas turbines for decentralized, industrial com- bined heat and power installations in the power output categories of the new gas turbine range slumped in the first half of 2020. The Covid-19 pandemic has delayed many projects in nearly all regions, with the exception of China. The after-sales business for diesel engines performed positively in the first six months of 2020, particularly in the marine segment, and benefited from a continued increase in interest in retrofitting solutions. However, following a strong first quarter, demand in the subsequent three months of 2020 decreased year-on-year as a result of the pandemic. Also due to Covid-19, the after-sales market for turboma- chinery in the first half of 2020 was markedly weaker than in the same period of the previous year. T R E N D S I N T H E M A R K E T S F O R F I N A N C I A L S E R V I C E S Demand for automotive financial services was buoyant particularly in the first three months of the first half of 2020, due among other things to the persistently low key interest rates in the main currency areas. Nevertheless, the Covid-19 pandemic put pressure on the demand for financial services in almost all regions during the reporting period. The effects of the Covid-19 pandemic were noticeable worldwide, espe- cially in the second quarter of 2020. On the European passenger car market, the second quarter of 2020 was especially affected by the Covid-19 pan- demic, resulting in a drastic decline in demand there for new and used vehicles over the reporting period as a whole. The proportion of new lease and financing contracts, after-sales products such as servicing, maintenance and spare parts agreements, and automotive-related insurance was main- tained, although the absolute number of contracts declined. In Germany, there was a significant fall in the number of loan-financed or leased new vehicles in the reporting period due to the challenges of the Covid-19 pandemic. The figures were down on the previous year especially due to declines in direct business and in loan financing in the individual customer segment. There were also fewer new contracts for after-sales products. In South Africa, demand for financing and insurance products fell significantly. A substantial drop in demand for new vehicles has been seen across the entire North America region as a consequence Business Development of the Covid-19 pandemic. This was accompanied in the first half of 2020 by decreases in absolute numbers of lease, finan- cing and insurance contracts in the three North American markets. In contrast the proportion of lease and financing contracts in the USA in the first half of 2020 remained level with the previous year; on the Canadian market it even increased. In Mexico, the lack of fleet business led to a decline in the proportion of lease and financing contracts. In the markets of the South America region, the spread of the SARS-CoV-2 virus had a negative impact on the demand for vehicles and automotive-related financial services, partic- ularly in the second quarter of 2020. The number of contracts fell very sharply in Brazil and Argentina in the reporting period; however, the manufacturers’ penetration rates – the ratio of leased and financed vehicles to deliveries – increased. China’s passenger car market recovered from the Covid-19 pandemic in the second quarter of 2020. The relaxation of restrictions also led to increasing numbers of new contracts signed for automotive-related financial services, although this increase did not keep pace with the rise in vehicle demand. In the reporting period, demand for passenger cars and for financial services was weaker than in the prior-year lower demand for automotive period. financial services products in the first half of 2020. In India, too, demand for financial services fell as a result of continued weakness in the banking market and the spread of SARS-CoV-2. The Covid-19 pandemic also led to substantial declines in demand for vehicles in the Commercial Vehicles Business Area in the reporting period. As a result, there was a fall in the number of lease and financing contracts in Europe and Brazil; however, this was accompanied by a rise in the penetration rate of these financial products. Japan recorded V O L K SWA G E N G R O U P D E L I V E R I E S The Volkswagen Group delivered 3,893,098 vehicles to cus- tomers worldwide from January to June 2020. The decrease of 27.4% or 1,472,248 units year-on-year was due almost exclusively to the Covid-19 pandemic and the measures taken worldwide to curb its spread. Sales figures for both passenger cars and commercial vehicles declined as a result of the fall in demand. The chart on page 14 shows the trend in deliveries worldwide by month compared with the previous year. Deliv- eries in the Passenger Cars Business Area and Commercial Vehicles Business Area are reported separately in the fol- lowing. 11 12 Business Development V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A R Y 1 TO J U N E 3 0 1 2020 2019 Passenger Cars 3,815,360 5,242,010 Commercial Vehicles 77,738 123,336 Total 3,893,098 5,365,346 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. G L O B A L D E L I V E R I E S B Y T H E PA S S E N G E R C A R S B U S I N E S S A R E A Global demand for the Volkswagen Group’s passenger cars and light commercial vehicles fell by 27.2% year-on-year to 3,815,360 units in the reporting period as a consequence of the debilitating market conditions arising from the uncer- tainty and the measures taken worldwide to tackle the Covid- 19 pandemic. The pandemic led to delays and also had different geographical effects on our deliveries to customers. Bentley was the only Volkswagen Group brand that did not fall short of its prior-year figures. We registered declining demand year-on-year in nearly all regions. The sole exception was the Middle East region, largely thanks to the positive trend in sales figures in Turkey. During the second quarter, month-on-month declines weakened again and we saw growth in demand for Group models in some individual markets. Our passenger car market share in a much weaker overall global market experiencing a sharp downturn was 12.8 (12.6)%. The table on the next page provides an overview of pas- senger car and light commercial vehicle deliveries to custom- ers by market in the reporting period. Sales figure trends in the individual markets are described in the following sec- tions. Deliveries in Europe/Other markets In Western Europe, the Volkswagen Group delivered 1,212,360 vehicles to customers in the first six months of this year in a drastically declining overall market. This was 37.4% fewer than in the same period of 2019. The increasing spread of the SARS-CoV-2 virus and the measures taken to contain it sent demand for the Group’s vehicles into a tailspin during the first quarter and at the beginning of the second quarter. All of the major individual markets demonstrated very similar declines in demand for Group vehicles. By the end of the reporting period, the declines had tapered off. The Group models with the highest volume of demand were the Golf, Tiguan, Polo and T-Roc from the Volkswagen Passenger Cars brand. In addition, the T-Cross and Passat models from Volks- wagen Passenger Cars, the Q3 Sportback, Q7 and e-tron from % –27.2 –37.0 –27.4 Interim Management Report Audi, the Scala and Kamiq from ŠKODA, the Mii electric and Tarraco from SEAT, and the Porsche Cayenne Coupé and Porsche Taycan, all of which had been introduced as new or successor models over the course of the previous year, were very popular with customers. Some of the models success- fully launched on the market during the reporting period as new or successor models were the up!, T-Roc Cabriolet and Golf hatchback models from Volkswagen Passenger Cars, the A3 Sportback, A5 and e-tron Sportback from Audi, the Citigoe iV, Superb iV and Octavia from ŠKODA, and the Leon and Leon ST from SEAT. The Volkswagen Group’s share of the passenger car market in Western Europe rose to 23.6 (22.6)%. In Germany, demand for vehicles from the Volkswagen Group was down 34.9% year-on-year between January and June 2020 in a very sharply contracting overall market. As in the case of the overall market in Western Europe, the decrease was attributable to the negative impact of the spread of the coronavirus. The Group models with the highest volume of demand were the Golf, Tiguan and Passat Estate from the Volkswagen Passenger Cars brand. The T-Cross and Passat models from Volkswagen Passenger Cars, the Audi Q3 Sportback, Q7 and e-tron, the ŠKODA Scala and Kamiq, the Mii electric and the Tarraco from SEAT, and the Porsche Cayenne Coupé and Porsche Taycan, all of which had been introduced as new or successor models over the course of the previous year, were also in high demand from customers. Nine Group models led the Kraftfahrt-Bundesamt (KBA – Ger- man Federal Motor Transport Authority) registration statis- tics in their respective segments: the Polo, Golf, T-Roc, Tiguan, Touran, Passat, Audi A6, Porsche 911 and Caddy. After the first six months of 2020, the Golf was still the most popular passenger car in Germany in terms of registrations. In the Central and Eastern Europe region, the number of vehicles delivered to customers in the reporting period fell by 27.1%, a less sharp decline than in Western Europe due mainly to the rise in deliveries in Russia in the first quarter. Demand developed encouragingly for the T-Cross from Volks- wagen Passenger Cars, for the Audi Q3 Sportback, for ŠKODA’s Scala, Kamiq and Karoq models and for the Porsche Cayenne Coupé. The Volkswagen Group’s share of the passenger car market in the Central and Eastern Europe region amounted to 20.2 (20.5)%. In Turkey, the Volkswagen Group continued to benefit from the catch-up effects in the overall market and increased the number of vehicles handed over to customers between January and June of this year by 41.6% compared with the prior-year period. The Passat saloon was the most sought- after Group model. In the very sharply contracting South African market, the number of Group models sold fell by 30.8%. The Polo from Volkswagen Passenger Cars continued to be the most frequently sold Group model there. Interim Management Report Business Development Deliveries in North America In North America, demand for Volkswagen Group models fell by 26.1% year-on-year in the reporting period, mirroring the trend in the market as a whole. The effects of the Covid-19 pandemic became apparent in this region somewhat later, intensifying at the beginning of the second quarter. The Group’s share of the market in this region amounted to 4.5 (4.6)%. The Tiguan Allspace and Jetta from Volkswagen Passenger Cars were the most sought-after Group models in North America. In the substantially weaker US market, the Volkswagen Group delivered 22.2% fewer vehicles to customers between January and June 2020 than in the same period of the previous year. Of all Group models, the greatest increases were recorded by the Arteon from Volkswagen Passenger Cars, by the Audi Q3 and e-tron and by the Porsche 911 Cabriolet, among others. The Atlas and the Atlas Cross Sport from the Volkswagen Passenger Cars brand, Audi’s Q7 and e-tron Sportback, and the Porsche Cayenne Coupé were successfully launched on the market as new or successor models during the reporting period. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2020 2019 (%) Europe/Other markets 1,603,005 2,476,022 – 35.3 Western Europe 1,212,360 1,936,686 – 37.4 of which: Germany 451,183 693,466 – 34.9 France 91,513 155,531 – 41.2 United Kingdom 157,599 301,989 – 47.8 Italy 101,947 172,016 – 40.7 Spain 91,165 171,537 – 46.9 Central and Eastern Europe 276,052 378,508 – 27.1 of which: Czech Republic 51,833 69,155 – 25.0 Russia 83,279 103,310 – 19.4 Poland 52,792 84,335 – 37.4 Other Markets 114,593 160,828 – 28.7 of which: Turkey 43,165 30,480 + 41.6 South Africa 29,035 41,970 – 30.8 North America 339,245 459,091 – 26.1 of which: USA 247,781 318,435 – 22.2 Canada 33,989 53,457 – 36.4 Mexico 57,475 87,199 – 34.1 South America 169,166 255,806 – 33.9 of which: Brazil 127,043 190,161 – 33.2 Argentina 25,208 38,019 – 33.7 Asia-Pacific 1,703,944 2,051,091 – 16.9 of which: China 1,588,923 1,914,071 – 17.0 India 7,979 25,264 – 68.4 Japan 31,499 39,169 – 19.6 Worldwide 3,815,360 5,242,010 – 27.2 Volkswagen Passenger Cars 2,198,908 2,998,181 – 26.7 Audi 707,225 906,180 – 22.0 ŠKODA 426,712 620,935 – 31.3 SEAT 193,419 314,279 – 38.5 Bentley 4,918 4,785 + 2.8 Lamborghini 3,548 4,553 – 22.1 Porsche 116,964 133,484 – 12.4 Bugatti 33 42 – 21.4 Volkswagen Commercial Vehicles 163,633 259,571 – 37.0 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 13 14 Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 1,100 1,100 1,000 1,000 900 900 800 800 700 700 600 600 500 500 400 400 F M A M In Canada, the number of deliveries to Volkswagen Group customers fell by 36.4% year-on-year. The market as a whole was also far weaker during this period. The Audi Q3 recorded encouraging growth in demand. In the Mexican market, which was also declining very sharply overall, we delivered 34.1% fewer vehicles to custom- ers in the first six months of this year than in the prior-year period. The Group models with the highest volume of demand were the Vento and Jetta from the Volkswagen Passenger Cars brand. Deliveries in South America In the South American passenger car and light commercial vehicles market, which recorded a drastic decline overall, the number of Group models delivered to customers in the first six months of 2020 was down by 33.9% year-on-year. The effects of the Covid-19 pandemic became apparent in this region somewhat later, intensifying at the beginning of the second quarter. The Gol and Polo from Volkswagen Passenger Cars were the Group models in highest demand. Launched on the market in the previous year, the T-Cross from Volkswagen Passenger Cars was also very popular with customers. The Group’s share of the market in South America expanded to 13.7 (12.3)%. The recovery of the Brazilian market was interrupted by the outbreak of the Covid-19 pandemic. The Volkswagen Group delivered 33.2% fewer vehicles to customers there than in the previous year. Along with the Gol and the Polo, the new T-Cross from Volkswagen Passenger Cars launched in the previous year was in especially high demand. In Argentina, the number of vehicles delivered to Volks- wagen Group customers fell short of the prior-year figure (–33.7%) amid a very sharp contraction in the overall market. The Gol and T-Cross from Volkswagen Passenger Cars and the J Interim Management Report 2020 2020 2019 2019 J A S O N D Amarok from Volkswagen Commercial Vehicles saw the highest demand of all Group models. Deliveries in the Asia-Pacific region From January to June 2020, the Volkswagen Group saw demand taper off in the overall market of the Asia-Pacific region, which was contracting substantially due primarily to the Covid-19 pandemic, and handed over 16.9% fewer vehicles to customers than in the year before. The Group’s share of the passenger car market in this region expanded to 13.2 (12.2)%. In China, the Volkswagen Group delivered 17.0% fewer vehicles to customers year-on-year in an overall market that had been substantially weakened, in particular by the spread of the SARS-CoV-2 virus. Following very high declines in volumes in the first quarter, we recorded a slight increase in the second quarter over the same months of the previous year. The T-Cross and Teramont X from the Volkswagen Passenger Cars brand, the VA3 and VS5 from the JETTA brand, the Audi A6 saloon and Audi Q8, the ŠKODA Kamiq GT and the Porsche Cayenne Coupé, all of which had been introduced as new or successor models over the course of the previous year, were in especially high demand. In addition, the Bora, the Tayron and the Tharu from Volkswagen Passenger Cars, the Audi Q2L, Q2L e-tron and Q5, and the Porsche Panamera saloon saw an encouraging growth in demand. The Tacqua and Viloran models from Volkswagen Passenger Cars, the VS7 from the JETTA brand, the Audi Q7 and the ŠKODA Rapid were successfully launched on the market as new or successor models in the reporting period. On the Indian passenger car market, which registered a drastic decline, the Volkswagen Group saw 68.4% less demand in the first six months of this year than in the prior-year period. The Polo from the Volkswagen brand and the Rapid from ŠKODA were the most sought-after Group model there. Interim Management Report Business Development In Japan, the number of Group models delivered to customers between January and June 2020 decreased by 19.6% year-on- year in a substantially weaker overall market. The Group model to record the highest demand was the Volkswagen T-Cross. C O M M E R C I A L V E H I C L E D E L I V E R I E S In the first six months of 2020, the Volkswagen Group handed over 37.0% fewer commercial vehicles to customers worldwide than in the previous year. We delivered a total of 77,738 commercial vehicles to customers. Trucks accounted for 64,134 units (–39.4%) and buses for 7,249 units (–29.1%). A total of 6,355 (7,266) vehicles from the MAN TGE van series were delivered. The decline in the truck business was due to a slump in our core markets, which was exacerbated further in the first half of 2020 by the ongoing uncertainty generated by the Covid-19 pandemic. Group commercial vehicles decreased by 37.4% year-on-year to a total of 1,199 units; of this figure 1,031 were trucks and 168 were buses. Sales in North America declined in the first half of 2020 to 731 vehicles (–50.6%), which were delivered exclusively to customers in Mexico; this included 534 trucks and 197 buses. Deliveries in South America fell to a total of 21,186 vehi- cles (–23.1%), of which 18,079 were trucks and 3,107 were buses. Sales in Brazil decreased by 23.9% in the first half of 2020. Of the units delivered, 15,920 were trucks and 2,329 were buses. In the Asia-Pacific region, the Volkswagen Group sold 5,276 vehicles to customers in the reporting period; among these, 4,614 were trucks and 656 were buses. Overall, this was 15.1% less than in the previous year. In the 27 EU states excluding Malta, but including the United Kingdom, Norway and Switzerland (EU27+3), sales were down by 44.7% on the same period of the previous year to a total of 42,450 units, of which 33,619 were trucks and 2,627 were buses. Here, the MAN brand delivered 6,204 light commercial vehicles. In Russia, sales fell by 27.7% year-on-year to 2,761 units, D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times range from just under one year to several years, and partial deliveries as construc- tion progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. including 2,592 trucks and 169 buses. Between January and June 2020, deliveries in Turkey increased to 860 (287) vehicles. Trucks accounted for 714 units and buses for 91 units, while 55 vehicles from the MAN TGE van series were sold. In South Africa, deliveries of Volkswagen In the period from January to June 2020, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated more than two-thirds of overall sales revenue. C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A R Y 1 T O J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2020 2019 (%) Europe/Other markets 50,545 88,091 – 42.6 of which: EU27+3 42,450 76,825 – 44.7 of which: Germany 12,074 21,367 – 43.5 Russia 2,761 3,817 – 27.7 Turkey 860 287 x South Africa 1,199 1,916 – 37.4 North America 731 1,481 – 50.6 of which: Mexico 731 1,480 – 50.6 South America 21,186 27,552 – 23.1 of which: Brazil 18,249 23,986 – 23.9 Asia-Pacific 5,276 6,212 – 15.1 Worldwide 77,738 123,336 – 37.0 Scania 30,437 51,524 – 40.9 MAN 47,301 71,812 – 34.1 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. 15 16 Business Development V O L K SWA G E N G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division includes the Volkswagen Group’s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania and Porsche Holding Salzburg. The Financial Services Division’s products and services were popular in the first half of 2020, though the Covid-19 pandemic weighed on demand. The number of new finan- cing, leasing, service and insurance contracts signed world- wide declined by 18.0% to 3.7 million. As the Group’s deliv- eries fell at a higher rate than the number of contracts signed, the ratio of leased and financed vehicles to Group deliveries (penetration rate) in the Financial Services Division’s markets increased to 36.3 (34.5)% in the first six months of 2020. The total number of contracts amounted to 23.4 million as of June 30, 2020, a drop of 1.0% compared to the end of 2019. In Europe/Other Markets, the financial services business was impacted by the Covid-19 pandemic, particularly in the second quarter. Here, the number of new contracts signed in the reporting period fell short of the prior-year level at 2.8 (3.5) million. At the end of June 2020, the total number of contracts was 17.2 million, down 2.1% on December 31, 2019. The customer financing/leasing area accounted for 7.5 mil- lion of these contracts (–2.8%). In North America, 417 (473) thousand new contracts were signed in the reporting period. At 3.1 (3.1) million, the num- ber of contracts as of the end of June 2020 was up slightly on the year-end 2019 figure. The customer financing/leasing area recorded 1.9 (1.8) million contracts. In South America, which was impacted by the Covid-19 pandemic mainly in the second quarter, the number of new contracts concluded in the first half of 2020 failed to match the prior-year level, standing at 119 (151) thousand. At 688 (703) thousand, the total number of contracts as of June 30, 2020 was below the figure for December 31, 2019. The contracts mainly related to the customer financing/ leasing area. In Asia-Pacific, where SARS-CoV-2 virus spread first, the number of new contracts signed fell by 7.5% year-on-year to 420 thousand between January and June 2020. At the end of the reporting period, the total number of contracts amounted to 2.5 million, 3.7% more than at year-end 2019. The customer financing/leasing area accounted for 1.8 mil- lion contracts (+4.5%). Interim Management Report S A L E S T O T H E D E A L E R O R G A N I Z AT I O N In the first six months of 2020, the Volkswagen Group’s unit sales to the dealer organization fell by 30.0% on the prior-year period to 3,736,064 vehicles (including the Chinese joint ventures). The main reason for the decline was the negative impact of the Covid-19 pandemic. Ongoing uncertainty in connection with this and national measures introduced to contain the pandemic, such as mobility restrictions and clos- ing stores, were accompanied by a fall in customer demand. Above-average decreases in demand were recorded especially in Western Europe and in North and South America. Unit sales outside Germany declined by 29.3% compared with the period from January to June 2019. In Germany, unit sales fell by 34.6% year-on-year. Vehicles sold in Germany as a propor- tion of overall sales decreased to 12.5 (13.3)%. P R O D U C T I O N Between January and June 2020, the Volkswagen Group’s pro- duction fell by 32.5% year-on-year to a total of 3,662,419 vehi- cles due to the measures taken to stem the spread of the SARS-CoV-2 virus. The impact of national measures to contain the pandemic led to a disruption of supply chains and consequently to production stoppages within the Volkswagen Group. While the production figures for the locations in China saw a year-on-year recovery at the end of the first half of 2020, the delayed impact of the Covid-19 pandemic at the other locations worldwide caused declines in production. Production in Germany fell by 39.9% to 680,614 units. Production abroad decreased by 30.5% year-on-year to a total of 2,981,805 vehicles. The proportion of vehicles produced in Germany decreased to 18.6 (20.9)%. I N V E N T O R I E S Global inventories at Group companies and in the dealer organization were lower on June 30, 2020 than at year-end 2019, and also below the corresponding prior-year figure. E M P L OY E E S The Volkswagen Group had 637,202 active employees on June 30, 2020. A further 10,630 employees were in the passive phase of their partial retirement. In addition, there were 16,885 young people completing vocational traineeships. At the end of the first half of 2020, the Volkswagen Group had a total of 664,717 employees worldwide. Due to the market conditions and employees leaving the Group not being replaced, this was slightly below the year-end 2019 figure. At 294,278, the number of employees in Germany was also modestly lower than the figure at the end of 2019. Interim Management Report Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets C O N T R I B U T I O N O F A U TO N O M O U S I N T E L L I G E N T D R I V I N G On July 12, 2019, Volkswagen announced that, together with Ford Motor Company (Ford), it would be investing in Argo AI, a company that is working on the development of a system for autonomous driving. The investment involves the pro- vision of financial resources totaling USD 1.0 billion, spread over several years, and the contribution by Volkswagen of its consolidated subsidiary Autonomous Intelligent Driving (AID). Furthermore, Volkswagen acquired existing Argo AI shares from Ford for a purchase price of USD 500 million, payable in three equal annual installments. The transaction, including the contribution of AID, was executed as of June 1, 2020. After proportional profit elimination, the contribution of AID to Argo AI at fair value resulted in a non-cash gain of €0.8 bil- lion, which was recognized in the other operating result. Argo AI will be accounted for as a joint venture and included in the consolidated financial statements using the equity method. particular commodity hedges) and the measurement of receivables and liabilities denominated in foreign currencies had a negative effect. The contribution of AID to the joint venture Argo AI led to a gain of €0.8 billion. Special items in connection with the diesel issue weighed on the operating result, reducing this item by €–0.7 (–1.0) billion to €–1.5 (9.0) billion in the reporting period. The operating return on sales fell to –1.5 (7.2)%. The year-on-year decline in the financial result of €0.4 billion to €0.1 billion was also attributable to the spread of the SARS-CoV-2 virus. Due to the change in discount rates used to measure liabilities, interest expenses included in the financial result were down for measurement-related reasons. Changes in share prices weighed on net income from securities and funds. The share of the result of equity- accounted investments was lower than in the prior-year period, due primarily to the lower profit generated by the Chinese joint ventures, which were mainly affected by Covid- 19 during the first quarter of 2020. S P E C I A L I T E M S Special items consist of certain items in the financial state- ments whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance. The Volkswagen Group’s earnings before tax fell by €10.9 billion to €–1.4 billion in the reporting period. Earnings after tax amounted to €–1.0 billion, compared with €7.2 bil- lion in the previous year. From January to June 2020, negative special items in connection with the diesel issue affected the Passenger Cars Business Area’s operating profit in an amount of €–0.7 (–1.0) billion. These items resulted mainly from legal risks. R E S U LT S O F O P E R AT I O N S O F T H E G R O U P In the first half of 2020, the Volkswagen Group generated sales revenue of €96.1 billion, down 23.2% on the previous year. In particular, lower volumes due to the Covid-19 pandemic had a negative impact, as did changes in exchange rates. In contrast, mix effects and an improved price positioning made a positive contribution. The Volkswagen Group generated 80.6 (80.8)% of its sales revenue abroad. Gross profit decreased to €12.9 (24.7) billion; the gross margin stood at 13.4 (19.8)%. The Volkswagen Group’s operating result before special items amounted to €–0.8 (10.0) billion in the period from January to June 2020. The operating return on sales before special items fell to –0.8 (8.0)%. The decline was mainly attributable to the negative impact of the spread of the Covid- 19 pandemic: in addition to lower unit sales because of the fall in customer demand, turbulence in the commodity and capital markets meant that the fair value measurement of derivatives to which hedge accounting is not applied (in Results of operations in the Automotive Division In the first six months of 2020, the Automotive Division reported sales revenue of €77.0 billion. The year-on-year decrease of 27.4% was mainly attributable to falling volumes as a result of the Covid-19 pandemic. Moreover, changes in exchange rates had a negative effect, while the contribution of mix effects and better price positioning was positive. Sales revenue was down substantially on the previous year’s figures in both the Passenger Cars and Commercial Vehicles business areas. In the Power Engineering Business Area, sales revenue was almost on a level with the previous year; due to the nature of the business, there is sometimes a significant time lag between incoming orders and revenue recognition. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is reflected in consolidated sales revenue primarily by deliveries of vehicles and vehicle parts. The downturn in volumes led to a decrease in cost of sales, although its ratio to sales revenue rose year-on-year. A rise in depreciation and amortization charges due to the large capex volume of previous years was set against lower research and development costs recognized in profit or loss. In the period from January to June 2020, total research and devel- 17 18 Results of Operations, Financial Position and Net Assets O P E R A T I N G R E S U L T B E F O R E S P E C I A L I T E M S B Y Q U A R T E R Volkswagen Group in € million 6,000 4,500 3,000 1,500 0 –1,500 –3,000 Q1 Q2 R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 T O J U N E 3 0 € million 2020 Passenger Cars Sales revenue 65,312 Operating result –2,350 Operating return on sales (%) –3.6 Commercial Vehicles Sales revenue 9,854 Operating result –295 Operating return on sales (%) –3.0 Power Engineering Sales revenue 1,850 Operating result –93 Operating return on sales (%) –5.0 opment costs as a percentage of the Automotive Division’s sales revenue (research and development ratio or R&D ratio) increased to 8.7 (6.6)% compared to the prior-year period, due to the decline in sales revenue. Distribution expenses were down in the first half of 2020, although their ratio to sales revenue increased. There was a rise in both administrative expenses and their ratio to sales revenue in the reporting period. The other operating result amounted to €–0.6 (–0.8) billion, due primarily to special items of €–0.6 (–1.0) billion in connection with the diesel issue, as well as a gain of €0.8 billion from the contribution of the consolidated subsidiary Autonomous Intelligent Driving 2019 90,942 6,693 7.4 13,320 959 7.2 1,864 –63 –3.4 Interim Management Report 2020 2020 2019 2019 Q3 Q4 (AID) to Argo AI, a company that is working on the develop- ment of a system for autonomous driving. Other adverse factors included above all the negative effects of the fair value measurement of derivatives to which hedge accounting is not applied (in particular commodity hedges) and the measure- ment of receivables and liabilities denominated in foreign currencies, which had an impact of €–0.9 (–0.1) billion. The Automotive Division’s operating result amounted to €–2.7 billion in the first six months of 2020, €10.3 billion down on the previous year. The operating return on sales in the Automotive Division was –3.6 (7.2)% due to the Covid-19 pandemic, which had a negative impact on unit sales, the fair value measurement of certain derivatives and the measure- ment of receivables and liabilities denominated in foreign currencies. Lower costs and the gain on the contribution of AID had a positive effect, while negative special items weighed on the result. The operating result before special items decreased to €–2.1 (8.6) billion, while the operating return on sales before special items declined to –2.7 (8.1)%. Since the profit recorded by the Chinese joint ventures is accounted for in the financial result using the equity method, the business performance of our Chinese joint ventures is primarily reflected in the operating profit only through deliveries of vehicles and vehicle parts, and through license revenue. Results of operations in the Financial Services Division In the first half of 2020, the Financial Services Division’s sales revenue of €19.1 (19.1) billion was on a level with the pre- vious year. Because of the Financial Services Division’s busi- ness model, the negative effect of the Covid-19 pandemic on sales revenue is less severe here than in the Automotive Division. Cost of sales rose by €0.1 billion to €15.7 billion. When taken together, there was a rise in distribution and adminis- Interim Management Report trative expenses and in the other operating result due to risk costs and exchange rate effects; their ratio to sales revenue also increased. At €1.2 (1.4) billion, the Financial Services Division’s operating profit was down slightly on the previous year. The operating return on sales amounted to 6.5 (7.4)%. F I N A N C I A L P O S I T I O N O F T H E G R O U P Due to earnings-related factors, the Volkswagen Group’s gross cash flow was €12.2 billion in the first half of 2020, €8.5 bil- lion lower than in the previous year. The change in working capital amounted to €–4.9 (–14.3) billion. The Covid-19 pan- demic was responsible among other things for a smaller increase in receivables, lower provisions, lower liabilities and inventories because of downscaled production and a decline in receivables in the financial services business. Cash out- flows attributable to the diesel issue were higher than in the prior-year period. Cash flows from operating activities improved by €0.9 billion to €7.3 billion. Investing activities attributable to operating activities amounted to €7.9 (8.1) billion. Financing activities accounted for total cash inflows of €21.7 (–2.1) billion in the reporting period; their purpose was primarily to boost gross liquidity. Financing activities primarily include the issuance and redemption of bonds and changes in other financial liabilities. In June 2020, a dual- tranche hybrid bond of €3.0 billion was placed successfully. Volkswagen AG’s syndicated credit line of €10 billion was drawn down in full as of the end of the reporting period. In the previous year, financing activities included the acqui- sition of MAN shares tendered as a result of the termination of the control and profit and loss transfer agreement, as well as the dividend payment to Volkswagen AG's shareholders. At the end of the reporting period, the Volkswagen Group’s cash and cash equivalents reported in the cash flow statement amounted to €42.9 (23.0) billion. On June 30, 2020, the Volkswagen Group’s net liquidity stood at €–143.7 billion, compared with €–148.0 billion at the end of 2019. Financial position of the Automotive Division The Automotive Division’s gross cash flow decreased to €6.8 (15.9) billion in the first half of 2020, mainly due to the pandemic-related decline in profit. The change in working capital amounted to €–3.8 (–2.4) billion. The effects of the Covid-19 pandemic included a smaller increase in receivables and lower provisions, as well as lower liabilities and inven- tories because of downscaled production. The cash outflows attributable to the diesel issue in the reporting period were higher than a year earlier. At €3.0 billion, cash flows from operating activities were €10.5 billion lower than the figure for the same period of 2019. Investing activities attributable to operating activities in the Automotive Division amounted to €7.8 billion in the first six months of 2020, down €0.1 billion on the previous year. Results of Operations, Financial Position and Net Assets Investments in property, plant and equipment, investment property and intangible assets, excluding capitalized develop- ment costs (capex) declined by €1.1 billion to €4.1 billion. The increase in the ratio of capex to sales revenue to 5.4 (4.9)% was attributable to the pandemic-related drop in sales revenue. Capex was invested primarily in our pro- duction facilities and in models to be launched in 2019 and 2020, as well as in the ecological focus of our model range, the electrification and digitalization of our products and in our modular toolkits. Additions to capitalized development costs climbed by €0.6 billion to €2.9 billion in the reporting period; this is primarily due to product impairment tests, which have had to be performed at brand level since the end of 2019. The “Acquisition and disposal of equity investments” item went up by €0.4 billion to €0.9 billion as a result of strategic investments in a number of companies, in particular the joint venture Argo AI. The Automotive Division’s net cash flow fell by €10.4 bil- lion to €–4.8 billion. F I N A N C I A L P O S I T I O N O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 T O J U N E 3 0 € million 2020 2019 Passenger Cars Gross cash flow 6,153 14,002 Change in working capital –3,524 –769 Cash flows from operating activities 2,630 13,233 Cash flows from investing activities attributable to operating activities –7,134 –9,232 Net cash flow –4,505 4,001 Commercial Vehicles Gross cash flow 560 1,772 Change in working capital –307 –1,399 Cash flows from operating activities 252 373 Cash flows from investing activities attributable to operating activities –599 1,412 Net cash flow –347 1,784 Power Engineering Gross cash flow 113 121 Change in working capital 15 –204 Cash flows from operating activities 127 –83 Cash flows from investing activities attributable to operating activities –82 –135 Net cash flow 45 –217 19 20 Results of Operations, Financial Position and Net Assets Financing activities include the issuance and redemption of bonds and changes in other financial liabilities. In the first half of 2020, cash inflows totaled €21.1 billion. This helped boost gross liquidity and resulted in higher liabilities to banks. In the prior-year period, there had been a cash outflow of €8.7 billion due to, among other things, the dividend payment to the shareholders of Volkswagen AG and the acquisition of MAN shares tendered as a result of the termi- nation of the control and profit and loss transfer agreement with MAN SE. The dual-tranche hybrid bond with a principal amount of €3.0 billion, which was successfully placed via Volkswagen International Finance N.V. in June 2020, led to a cash inflow. One tranche is a €1.5 billion bond that has a coupon of 3.5% and can first be called after five years, and the other is a €1.5 billion bond that has a coupon of 3.875% and can first be called after nine years. Both tranches have perpetual maturities and increase equity, net of transaction and other costs. An amount of €3.0 billion of the hybrid bond was eligible to be classified as a capital contribution and increased net liquidity. At the end of June 2020, the Automotive Division’s net liquidity stood at €18.7 billion, compared with €21.3 billion on December 31, 2019. Financial position of the Financial Services Division In the reporting period, the Financial Services Division’s gross cash flow was €5.4 (4.8) billion. Given a decrease in funds tied up in working capital caused by the lower business volume in response to the decline in demand following the spread of coronavirus, the change in working capital amounted to €–1.1 (–12.0) billion. Cash flows from operating activities rose to €4.3 (–7.1) billion. At €0.1 (0.1) billion, investing activities attributable to operating activities were on a level with the previous year. The Financial Services Division’s financing activities relate primarily to the issuance and redemption of bonds and other financial liabilities. There was a total cash inflow of €0.6 billion in the first half of 2020, compared with €6.6 bil- lion in the previous year. At the end of June 2020, the Financial Services Division’s negative net liquidity, which is common in the industry, stood at €–162.3 billion; this compares with €–169.3 billion at the end of 2019. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E On June 30, 2020, the Volkswagen Group had total assets of €500.3 billion, 2.5% more than on December 31, 2019. The rise is mostly attributable to the boost in gross liquidity and the successful issue of the hybrid bond. It was offset by exchange rate effects. The Group’s equity amounted to €124.3 (123.7) billion. The equity ratio was 24.8 (25.3)%. Interim Management Report Automotive Division balance sheet structure At the end of the reporting period, the Automotive Division’s intangible assets were virtually on a level with the 2019 balance sheet date. Property, plant and equipment declined because of exchange rate factors and depreciation in excess of additions. Noncurrent assets declined by a total of 0.2% compared with the end of 2019. Current assets increased by 16.9%. As a result of down- scaled production in response to the pandemic, the inven- tories included in this item were slightly lower. Current other receivables and financial assets were higher than at the end of 2019. The Automotive Division reported a €15.6 billion increase in securities and cash and cash equivalents to €48.8 billion. Following the contribution of AID to the joint venture Argo AI, the “Assets held for sale” item consists of the carrying amount of the assets expected to be derecognized in connection with the planned sale of Renk. The “Liabilities held for sale” item comprises the carrying amount of the corresponding liabilities expected to be derecognized. On June 30, 2020, the Automotive Division’s equity was €93.3 (92.8) billion, approximately the same level as at the end of 2019. The hybrid bond issued in June 2020 and the effects of recognizing fair value changes in derivatives directly in equity made a positive contribution, while changes in profits and exchange rates had a negative impact. Noncon- trolling interests are primarily held by the noncontrolling interest shareholders of the TRATON GROUP. Noncurrent liabilities declined by 3.6% compared with December 31, 2019, to €87.6 billion; the decrease in non- current financial liabilities included in this item was driven primarily by reclassifications from noncurrent to current lia- bilities to reflect shorter remaining maturities and by exchange rate effects. Current liabilities amounted to €81.4 billion at the end of the first half of 2020, €18.2 billion higher than on Decem- ber 31, 2019. The increase in current financial liabilities to €15.1 (–7.3) billion was attributable to reclassifications from noncurrent to current liabilities and measures to boost gross liquidity. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division at the end of 2019, a negative amount was disclosed. Trade payables were down because of downscaled production. Likewise, current other liabilities were lower than Interim Management Report B A L A N C E S H E E T ST R U C T U R E O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S € million June 30, 2020 Dec. 31, 2019 Passenger Cars Noncurrent assets 127,080 126,387 Current assets 92,379 75,459 Total assets 219,459 201,846 Equity 77,031 75,773 Noncurrent liabilities 75,723 78,679 Current liabilities 66,704 47,394 Commercial Vehicles Noncurrent assets 24,237 25,143 Current assets 12,286 13,420 Total assets 36,524 38,563 Equity 13,515 14,115 Noncurrent liabilities 11,181 11,367 Current liabilities 11,828 13,081 Power Engineering Noncurrent assets 2,101 2,206 Current assets 4,193 4,202 Total assets 6,293 6,408 Equity 2,775 2,885 Noncurrent liabilities 660 777 Current liabilities 2,857 2,746 at the end of 2019, primarily due to a decline in liabilities from buyback transactions. At the end of the reporting period, the Automotive Divi- sion had total assets of €262.3 billion, 6.3% more than on December 31, 2019. Financial Services Division balance sheet structure Total assets in the Financial Services Division amounted to €238.0 billion at the end of June 2020, a decline of 1.4% com- pared with December 31, 2019. Noncurrent assets were down by a total of 3.4% compared with the end of 2019; the property, plant and equipment included in this item was virtually unchanged. Lease assets increased, while noncurrent financial services receivables decreased because volumes and exchange rates were affected by the Covid-19 pandemic. Current assets were higher than at the end of 2019. While current other receivables and financial assets were up slightly, current financial services receivables were down as a result of the pandemic. On June 30, 2020, cash and cash equivalents in the Financial Services Division stood at €10.6 billion, €4.3 bil- lion higher than on December 31, 2019. Results of Operations, Financial Position and Net Assets At the end of the reporting period, the Financial Services Division accounted for around 47.6 (49.4)% of the Volkswagen Group’s assets. At €31.0 (30.9) billion, the Financial Services Division’s equity was virtually unchanged from the figure recorded on December 31, 2019. The profits generated had a positive effect, which was offset by negative exchange rate factors. The equity ratio was 13.0 (12.8)%. Noncurrent liabilities dropped by 0.9%, driven primarily by a decline in noncurrent financial liabilities. Current liabilities were also down compared with the end of 2019 because of lower current financial liabilities. Deposits from the direct banking business were lower than at the end of 2019, declining to €32.1 (32.5) billion. R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S The global spread of the SARS-CoV-2 virus is bringing enor- mous disruption to all areas of everyday life and the econ- omy, and is also associated with turbulence on the com- modity and capital markets. The consequences, particularly for the further development of individual economies and the world economy as a whole, cannot reliably be predicted at the current time. A second wave with growing numbers of new infections could also add to the strain and uncertainty. Despite this, we expect economic recovery to commence in the course of 2020. All areas of the Volkswagen Group are affected by the Covid-19 pandemic, especially sales due to a fall in customer demand, production and the supply chains. There are risks arising in particular from a sustained fall in demand and an increasing intensity of competition. These risks could be mitigated by government economic programs. We also envisage challenges, especially associated with production, specifically with regard to stable supply chains and protecting the health of our staff. We have put in place increased hygiene and protective measures to ensure plants can operate. The Volkswagen Group Board of Management expects a negative impact on business operations at all locations worldwide. As a result, we will not fulfill the initial expectations for all the Group’s core performance indicators in fiscal year 2020. We expect the Volkswagen Group’s deliveries to custom- ers, sales revenue and operating result to be below the previous year’s figures. In the Automotive Division, the R&D ratio and the ratio of capex to sales revenue in 2020 will probably exceed the previous year’s levels, despite counter- acting measures, due to lower demand and therefore falling sales revenues. In view of the lower customer demand, further payouts in relation to the diesel issue and cash outflows from mergers & acquisitions, we expect net cash flow for 2020 to be below the prior-year figure. As a result, net liquidity in the Automotive Division will also fall short of the previous year’s level. We expect lower return on investment (ROI) than in the previous year due to earnings-related factors 21 22 Results of Operations, Financial Position and Net Assets and do not expect to achieve our defined minimum required rate of return on invested capital of 9%. The outlook for fiscal year 2020 can be found on pages 24 and 25. Diesel issue 1. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The Braunschweig Regional Court named Volkswagen AG as a collateral participant in the criminal proceedings regarding alleged market manipulation relating to capital market disclosure obligations in connection with the diesel issue. In May 2020, these proceedings were definitively terminated by the Braunschweig Regional Court with respect to the current Chairman of the Board of Management of Volkswagen AG and a former member of its Board of Management (currently Chairman of the Supervisory Board) against payment in each case of a court-imposed sum of €4.5 million, thereby also terminating to the same extent the proceedings against Volkswagen AG as collateral participant. The Braunschweig Regional Court must now decide whether to admit the charges still pending against a former Chairman of the Board of Management of Volkswagen AG and go forward with the proceedings also still pending against Volkswagen AG in this regard. In June 2020, the Munich II Regional Court accepted the substantially unchanged indictment of the Munich II Office of the Public Prosecutor, which also charges the former Chairman of the Board of Management of AUDI AG, and opened the main trial proceedings. 2. Product-related lawsuits worldwide (excluding the USA/ Canada) In April 2020, the court in Australia approved the class action settlement that the parties had agreed to. On February 28, 2020, Volkswagen AG and Verbraucher- zentrale Bundesverband e.V. (Federation of Consumer Organi- zations) entered into an out of court settlement to terminate the consumer action for model declaratory judgment. Under the terms of the settlement, Volkswagen AG will offer indi- vidual settlements to consumers who registered claims under the action for model declaratory judgment and meet the settlement criteria. The volume of such settlements amounts to €830 million. Verbraucherzentrale Bundesverband e.V. with- drew the action for model declaratory judgment on April 30, 2020. Volkswagen has entered into individual settlements with some 240 thousand customers in an aggregate amount of roughly €760 million. In April 2020, the High Court in England and Wales ruled in the group litigation that the switch logic in the EA 189 engine constituted an unlawful defeat device; the court believed that it was also bound by the findings of the Kraft- fahrtbundesamt (German Federal Motor Transport Author- Interim Management Report ity) in this respect. Volkswagen AG disagrees with the High Court's legal position on these preliminary issues and has filed an appeal against this decision. The question of liability on the part of Volkswagen AG was not a matter addressed by the decision and will be dealt with at a later stage of the pro- ceedings. In April 2020, the Diesel Emissions Justice Foundation served an opt-out class action lawsuit on Volkswagen AG seeking monetary damages on behalf of Dutch consumers. A change in the law in the Netherlands that took effect on January 1, 2020 permits consumers in the European Union to opt into the class action as well. The class action relates to vehicles with type EA 189 engines, among others. In Germany, the Bundesgerichtshof (BGH – Federal Court of Justice) handed down in May 2020 its first decision ever in an individual product-related lawsuit in connection with the diesel issue. The BGH held that the buyer, who had purchased a vehicle with a type EA 189 engine prior to public disclosure of the diesel issue, had a claim for damages against Volks- wagen AG. While the buyer can require reimbursement of the vehicle's purchase price, he must accept a deduction for the benefit derived from using the vehicle and must return it to Volkswagen AG. The judgment clarifies the BGH's stance on the fundamental issues underlying a large number of the some 65 thousand individual diesel lawsuits still pending in Germany. In the course of two hearings held in July 2020, the BGH indicated that it was inclined to reject a claim to tort interest by vehicle buyers. 3. Lawsuits filed by investors worldwide (excluding the USA/Canada) In decisions handed down in March 2019, the Stuttgart Higher Regional Court refused to conduct additional investor actions for model declaratory judgment. These include an action for model declaratory judgment against Porsche SE and Volkswagen AG alleging violations of ad hoc disclosure obligations in connection with the diesel issue. The plaintiff side appealed the Stuttgart Higher Regional Court's rejection of this model case action to the Federal Court of Justice. In June 2020, the Federal Court of Justice remanded the matter to the Stuttgart Higher Regional Court for redecision on the determination of a model case plaintiff. 4. Proceedings in the USA/Canada In February 2020, the Montana State Court dismissed certain of the environmental claims asserted by the Montana Attor- ney General, but allowed other claims to proceed. Volkswagen has asked the Montana Supreme Court to review this decision. In March 2020, the Ohio Supreme Court, at Volkswagen’s request, agreed to hear an appeal of a lower court's decision concerning Ohio’s remaining claims. In June 2020, the U.S. Court of Appeals for the Ninth Circuit partially reversed the trial court’s decision and held that Hillsborough County, Interim Management Report Florida and Salt Lake County, Utah can proceed with a subset of their claims. In May 2020, the settlement program in the United States for Generation 2 3.0-liter TDI vehicles ended. In the environmental class action lawsuit seeking dam- ages on behalf of the residents of the Province of Quebec, after authorizing the case to proceed as a class, a Quebec court ruled in June 2020 that a motion to dismiss by Volks- wagen is permissible at the present stage of the proceedings. Volkswagen noticed its motion in July 2020. 5. Additional proceedings In April 2020, the Celle Higher Regional Court issued a ruling appointing a special auditor other than the one originally appointed. The decision of the Higher Regional Court of Celle is formally unappealable. Volkswagen AG has filed a consti- tutional complaint with the Federal Constitutional Court contesting this decision as well on grounds of infringement of its constitutionally guaranteed rights and has suggested joinder of this matter with its initial constitutional complaint against the decision to appoint the special auditor. The constitutional complaint has no suspensory effect, however. Additional important legal cases In the tax litigation between the Brazilian tax authorities and MAN Latin America, the amount at risk remains unchanged at BRL 3.1 billion. Solely due to exchange rate fluctuations, the risk in euros as disclosed in the notes under contingent liabilities has declined from €0.7 billion to €0.5 billion. In connection with the factual matters that in principle also underlie the antitrust proceedings instituted by the European Commission against Volkswagen AG, AUDI AG, and Dr. Ing. h.c. F. Porsche AG in April 2019, the South Korean competition authority searched the premises of Audi Volks- wagen South Korea and Porsche South Korea in May 2020 and issued requests for information to Volkswagen AG, AUDI AG, and Dr. Ing. h.c. F. Porsche AG. Furthermore, the Turkish competition authority commenced proceedings in the same matter in July 2020. This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales markets, or any significant shifts in exchange rates or raw materials relevant to the Results of Operations, Financial Position and Net Assets In March 2020, the US District Court for the Northern District of California dismissed two amended class action complaints brought by purchasers of German luxury vehicles alleging that several automobile manufacturers, including Volks- wagen AG and other Group companies, conspired to unlaw- fully increase the prices of German luxury vehicles in violation of US antitrust and consumer protection law. The court held that the plaintiffs have not stated a claim for relief because the allegations in the complaints do not plausibly support that the alleged agreements unreasonably restrained competition in violation of US law. The court granted plain- tiffs leave to file amended complaints with respect to a limited subset of plaintiffs’ original claims. Plaintiffs filed a second set of amended complaints in June 2020. In February 2020, the US District Court for the Northern District of California granted final approval of a class action settlement resolving civil claims relating to approximately 98 thousand Volkswagen, Audi, Porsche and Bentley vehicles with automatic transmissions. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2020 contained in the combined management report in the 2019 Annual Report, specifically in the chapters “Report on Expected Developments” and “Report on Risks and Oppor- tunities,” including the section “Legal risks.” In particular, based on the information as it exists and has been estab- lished, there continue to be no conclusive findings or assess- ments available to the Board of Management of Volks- wagen AG regarding the described facts that would suggest that a different assessment of the associated risks should have been made. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncer- tainty regarding the amount or maturity of provisions and contingent liabilities in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Company. Volkswagen Group, will have a corresponding effect on the development of our business. The same applies should the actual effects of the Covid-19 pandemic differ from the scenario assumed in this report. In addition, expected business development may vary if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities presented in the 2019 Annual Report develop in a way other than we are currently expecting, or additional risks and opportunities or other factors emerge that affect the development of our business. 23 24 Outlook Interim Management Report Outlook The Volkswagen Group Board of Management anticipates a negative growth rate in the world economy in 2020 as a result of the spread of the SARS-CoV-2 virus. We also continue to believe that risks will arise from protectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will be negatively impacted by continuing geopolitical tensions and conflicts. We expect both the advanced economies and the emerging markets to experience a marked decline in economic performance. Despite this, we expect economic recovery to commence in the course of 2020. 2020 compared with the previous year. After the drastic decline in the second quarter, the market is expected to witness only a slow and gradual recovery in the third and fourth quarters, though falling short of the levels recorded in the previous year. The passenger car markets in the Asia- Pacific region are likely to be between 10 and 15% below the prior-year level in 2020. After the very sharp decline in the first three months and the rapid rebound in the second quarter, we expect a return to prior-year levels in the remaining quarters of 2020. In response to the Covid-19 pandemic, we have developed scenarios for the development of the passenger car markets in individual regions in 2020 which, for example, also take account of the trends currently being experienced in China. The scenarios reflect the different timings of the spread of the Covid-19 pandemic in the various geographic regions. In all, we expect the volume of global demand for new vehicles in 2020 to be between 15 and 20% lower than it was the previous year. In Western Europe, we anticipate a fall of around 25% in the volume of new passenger car registrations in 2020 compared to the prior year. Following the drastic decline at the beginning of the second quarter and the marked recovery over the course of the three months, we believe that the market will continue to recover in the third and fourth quarters of 2020, with prior-year levels being reached in individual months. We have assumed a similar but more stable trend for the passenger car markets in Central and Eastern Europe and expect the year-on-year fall in the number of sales in 2020 to be somewhat less sharp here. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America in 2020 is likely to be 25 to 30% lower than in the prior year. We anticipate that following the drastic decline at the beginning of the second quarter and a slight recovery as the period progressed, the remaining quarters of 2020 will register only a sideways trend in the market. We expect to see new registrations of passenger cars and light commercial vehicles in the South American markets fall by up to 40% in Trends in the markets for light commercial vehicles in the individual regions will also be mixed in 2020; on the whole, we anticipate a marked fall in demand due to Covid-19. In the markets relevant for the Commercial Vehicles Busi- ness Area, we expect a substantial year-on-year fall in 2020 in new registrations for both mid-sized and heavy trucks with a gross weight of more than six tonnes and for buses. In our view, automotive financial services will again be very important for vehicle sales worldwide in 2020. Our brand diversity, our presence in all major world markets, our broad and selectively expanded product range, and our technologies and services put us in a good com- petitive position worldwide. As part of the transformation of our core business, we are positioning our Group brands with an even stronger focus on their individual characteristics, and are optimizing the vehicle and drive portfolio. The focus is primarily on our vehicle fleet’s carbon footprint and on the most attractive and fastest-growing market segments. In addition, we are working to leverage the advantages of our multibrand Group even more effectively with the ongoing development of new technologies and the enhancement of our toolkits. We anticipate that deliveries to Volkswagen Group cus- tomers will be significantly down on the previous year in 2020 due to the impact of the Covid-19 pandemic. Challenges will also arise particularly from the increasing intensity of competition, volatile commodity and foreign exchange markets and more stringent emissions-related requirements. Interim Management Report We expect the sales revenue of the Volkswagen Group and its divisions to fall significantly below the previous year’s level in 2020 as a result of the Covid-19 pandemic. We anticipate a severe year-on-year decline in the operating result before and including special items for the Volkswagen Group and its Passenger Cars Business Area as well as in the operating result for the Commercial Vehicles Business Area. In the Power Engineering Business Area and in the Financial Services Division, we expect the pandemic to have less of an Outlook impact on the operating result in 2020 due to their business models. For the Power Engineering Business Area, we anticipate a significantly higher operating loss than that of the previous year. For the Financial Services Division we forecast a significant drop in the operating result compared with the prior year. Overall, we expect the Volkswagen Group’s operating result for 2020 before and including special items to be in positive territory. 25 26 Brands and Business Fields Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D Business at the Volkswagen Group and its brands was strongly affected by the Covid-19 pandemic in the first half of 2020; this led to lower figures in terms of unit sales, sales revenue and profit throughout the Group. The Group’s sales revenue declined to €96.1 (125.2) billion. Operating profit before special items fell to €–0.8 (10.0) billion. The diesel issue gave rise to special items of €–0.7 (–1.0) billion in the reporting period. The Volkswagen Passenger Cars brand sold 1.1 (1.9) mil- lion vehicles from January to June of this year; this was 39.8% fewer than a year earlier. Sales of the T-Cross increased, thus bucking the trend, and the Atlas Cross Sport was also very popular. Sales revenue fell by 35.3% to €28.6 billion. The oper- ating result before special items deteriorated to €–1.5 (2.3) bil- lion. Lower fixed costs and better price positioning were unable to compensate for the impact of lower volumes due to the Covid-19 pandemic. The diesel issue gave rise to special items of €–0.6 (–0.4) billion in the reporting period. Unit sales by the Audi brand fell to 416 (632) thousand vehicles worldwide in the first six months of 2020. A further 271 (258) thousand Audi vehicles were sold through the Chinese joint venture FAW-Volkswagen. The Q3, A6 and e-tron models recorded increasing demand. Sales revenue fell to €20.5 (28.8) billion. The operating result (current-year figure before special items) was €–643 million (€2.3 billion). The decrease in volumes, the impact of the measurement of commodity hedges and derivatives as well as negative exchange rate effects and greater sales incentives were adverse factors, which were partly offset by reduced fixed and development costs and the deconsolidation effect from the divestment of Autonomous Intelligent Driving (AID). The diesel issue resulted in special items of €–0.1 billion in the first half of 2020. The financial key performance indicators for the Audi brand include the Lamborghini and Ducati brands. Ducati sold 22,790 (33,315) motorcycles in the reporting period. The ŠKODA brand sold 372 thousand vehicles in the first half of this year, making it 33.6% fewer than in the same period of 2019. The Kodiaq and Karoq SUVs and the new Scala and Kamiq models were especially popular with customers. Sales revenue fell to €7.5 (10.2) billion, while operating profit declined to €228 (824) million. Product cost optimizations and lower fixed and development costs were unable to make up for the negative impact of lower volumes, exchange rate effects and emissions-related expenses. Unit sales at the SEAT brand stood at 197 thousand vehi- cles in the reporting period; a decline of 46.9% year-on-year. This figure includes the A1 manufactured for Audi. The Arona and Ateca SUV models and the Leon were in high demand. At €3.7 billion, sales revenue was 40.2% lower than in the previous year. The operating result fell to €–271 (216) million, mainly due to lower volumes as a result of the pandemic and emissions-related expenses. Unit sales by the Bentley brand stood at 4,569 (4,670) vehicles in the first half of 2020. Sales revenue improved to €860 (835) million on the back of mix effects. The operating result fell to € –99 (57) million due to higher depreciation and amortization charges and one-off expenses for restructuring measures. Brands and Business Fields Porsche Automotive recorded global sales of 116 thousand vehicles from January to June 2020, down 14.8% year-on-year. Sales revenue amounted to €11.2 (12.2) billion. Lower vehicle sales as well as cost increases, particularly for digitalization and electrification, meant that the operating profit fell to €1.1 (2.1) billion. In addition, changes in exchange rates had a negative impact. Unit sales by Volkswagen Commercial Vehicles fell to 157 (256) thousand vehicles worldwide in the first half of 2020. Sales revenue stood at €4.2 billion, a decline of 34.7% compared with the previous year. The operating result fell to €–334 (506) million; primarily adversely affected by the decrease in volumes and the CO2 incentive tax applicable from this year. Moreover, higher upfront expenditures and write- downs for new products, increases in fixed costs as well as less favorable exchange rates had a negative effect, while product cost optimizations and mix effects had a positive impact. Scania Vehicles and Services sold 31 (52) thousand vehicles in the first six months of 2020. Sales revenue amounted to €5.3 (7.1) billion. Operating profit at Scania Vehicles and Services fell to €221 (828) million. The decline was primarily due to the lower volume. Improvements in the mix and lower fixed costs offset this. MAN Commercial Vehicles sold 47 thousand vehicles in the period from January to June of this year. This figure fell 34.1% short of the 2019 comparison period. Sales revenue declined to €4.7 (6.3) billion. The operating result fell to €–423 (248) million, mainly due to the lower volume of new and used vehicles and costs incurred in connection with the introduction of the new generation of trucks. In the first six months of 2020, Power Engineering generated sales revenue of €1.8 (1.9) billion. Operating profit declined to €21 (42) million due to volume and cost factors; changes in the mix resulted in a positive effect. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A R Y 1 T O J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2020 2019 2020 2019 2020 Volkswagen Passenger Cars 1,134 1,886 28,580 44,146 –1,491 Audi 416 632 20,476 28,761 –643 ŠKODA 372 560 7,546 10,154 228 SEAT 197 370 3,749 6,266 –271 Bentley Porsche Automotive1 5 116 5 136 860 11,192 835 12,212 –99 1,143 Volkswagen Commercial Vehicles 157 256 4,238 6,489 –334 Scania Vehicles and Services2 31 52 5,269 7,115 221 MAN Commercial Vehicles 47 72 4,669 6,283 –423 Power Engineering – – 1,850 1,864 21 VW China3 Other4 1,422 –160 1,789 –418 – –10,361 – –16,919 – –312 Volkswagen Financial Services – – 18,063 17,992 1,155 Volkswagen Group before special items – – – – –803 Special items – – – – –687 Volkswagen Group 3,736 5,339 96,131 125,197 –1,490 Automotive Division5 3,736 5,339 77,015 106,126 –2,738 of which: Passenger Cars Business Area 3,658 5,215 65,312 90,942 –2,350 Commercial Vehicles Business Area 78 124 9,854 13,320 –295 Power Engineering Business Area – – 1,850 1,864 –93 Financial Services Division – – 19,115 19,071 1,248 1 Porsche (including Financial Services): sales revenue €12,421 (13,405) million, operating profit before special items €1,233 (2,209) million. 2 Scania (including Financial Services): sales revenue €5,488 (7,336) million, operating profit €266 (895) million. 3 The sales revenues and operating profits of the joint venture companies in China are not included in the figures for the Group. These Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €1,404 (2,103) million. 4 In operating profit, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation, as well as companies not allocated to the brands. 5 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2019 2,286 2,300 824 216 57 2,117 506 828 248 42 – –727 1,281 9,979 –981 8,997 7,589 6,693 959 –63 1,409 27 28 Brands and Business Fields Customers signed 3.4 (4.1) million new financing, leasing, service and insurance contracts with Volkswagen Financial Services in the first half of this year (–17.4%). The penetration rate, expressed as the ratio of leased or financed vehicles to relevant Group delivery volumes, rose to 36.0 (34.1)% with credit eligibility criteria remaining unchanged. This was because the Group’s deliveries fell at a higher rate than the number of contracts signed. The total number of contracts as of June 30, 2020 stood at 21.3 million, 0.9% less than at the end of 2019. The number of contracts in the customer finan- cing/leasing area was 11.1 (11.2) million, while it decreased to 10.2 (10.3) million in the service/ insurance area. At the end of the reporting period, Volkswagen Bank managed 1.4 (1.4) million deposit accounts. Operating profit fell to €1.2 (1.3) billion in the first six months of 2020. U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T In the first half of 2020, the Volkswagen Group sold 1.6 mil- lion vehicles in the Europe/Other markets region. This was 35.4% fewer than in the previous year. The Covid-19 pan- demic negatively affected business, especially from the end of the first quarter. As a result of lower demand, sales revenue fell to €57.7 (77.3) billion. Mix effects had a positive impact. In the North American markets, the negative effects caused by the spreading of the SARS-CoV-2 virus became apparent somewhat later, namely at the beginning of the second quarter. At 300 thousand vehicles, the Volkswagen Group’s unit sales were down by 38.3% in the reporting period. Sales revenue dropped by 26.8% to €15.9 billion. Positive exchange rate effects were accompanied by the negative impact of lower volumes. Unit sales in South America fell to 183 (280) thousand vehicles from January to June 2020. The Covid-19 pandemic hit demand especially in the second quarter. Sales revenue amounted to €3.7 (5.2) billion. Lower volumes along with exchange rate effects had a negative impact. In the Asia-Pacific region, the first to be affected by the Covid-19 pandemic early in the year, demand began to increase again in the second quarter of 2020 and reached the previous year’s level. Unit sales by the Volkswagen Group – including the Chinese joint ventures – stood at 1.6 (2.0) mil- lion vehicles in the reporting period. Sales revenue fell to €19.3 (20.8) billion due to lower volumes, while mix effects made a positive contribution. This figure does not include the sales revenue of our equity-accounted Chinese joint ventures. Hedging transactions relating to sales revenue in foreign currency reduced the Volks¬wagen Group’s sales revenue by €–0.4 (+0.1) billion in the first six months of 2020. K E Y F I G U R E S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E Thousand vehicles/€ million 2020 2019 2020 2019 Europe/Other markets 1,644 2,543 57,651 77,251 North America 300 486 15,930 21,762 South America 183 280 3,704 5,247 Asia-Pacific1 1,609 2,029 19,267 20,797 Hedges on sales revenue – – –421 140 Volkswagen Group1 3,736 5,339 96,131 125,197 1 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. Interim Consolidated Financial Statements (Condensed) Income Statement Interim Consolidated Financial Statements (Condensed) Income Statement for the Period January 1 to June 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ F I N A N C I A L S E R V I C E S € million 2020 2019 2020 2019 2020 2019 Sales revenue 96,131 125,197 77,015 106,126 19,115 19,071 Cost of sales –83,228 –100,454 –67,559 –84,883 –15,669 –15,571 Gross result 12,903 24,743 9,456 21,242 3,447 3,501 Distribution expenses –8,352 –9,997 –7,767 –9,223 –585 –774 Administrative expenses –4,860 –4,523 –3,804 –3,599 –1,056 –924 Other operating income/expense –1,180 –1,226 –623 –832 –557 –394 Operating result –1,490 8,997 –2,738 7,589 1,248 1,409 Share of the result of equity-accounted investments 1,164 1,599 1,142 1,570 22 29 Interest result and other financial result –1,026 –1,039 –1,004 –1,060 –22 21 Financial result 138 560 138 509 0 51 Earnings before tax –1,352 9,557 –2,600 8,098 1,248 1,459 Income tax expense 333 –2,389 693 –1,994 –361 –395 Earnings after tax –1,019 7,168 –1,907 6,104 887 1,064 of which attributable to Noncontrolling interests –57 24 –93 –7 36 31 Volkswagen AG hybrid capital investors 239 268 239 268 – – Volkswagen AG shareholders –1,201 6,875 –2,053 5,843 852 1,033 Basic/diluted earnings per ordinary share in €² –2.44 13.69 Basic/diluted earnings per preferred share in €² –2.33 13.75 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. 29 30 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period January 1 to June 30 € million 2020 2019 Earnings after tax –1,019 7,168 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss –107 59 –47 –14 6 –55 –6,494 1,913 –4,580 17 19 –4,545 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax –1,863 15 –1,848 4 –1,844 107 – 107 11 119 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) 1,934 –488 1,446 –450 995 –664 659 –6 17 12 –256 –520 –777 230 –547 –890 497 –393 116 –277 Cash flow hedges (OCI II), net of tax Fair value valuation of receivables and securities (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of receivables and securities (debt instruments) that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of receivables and securities (debt instruments) recognized in other comprehensive income Fair value valuation of receivables and securities (debt instruments) that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to 22 0 22 –7 16 –70 –892 –570 –376 –947 –1,966 52 0 52 –16 36 58 –611 –7,410 2,254 –5,156 2,012 Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders –106 239 –2,099 19 268 1,724 Interim Consolidated Financial Statements (Condensed) Income Statement for the Period April 1 to June 30 V O L K S W A G E N G R O U P A U T O M O T I V E ¹ € million 2020 2019 2020 Sales revenue 41,076 65,185 32,365 Cost of sales –37,404 –52,130 –30,266 Gross result 3,672 13,055 2,099 Distribution expenses –3,880 –5,056 –3,619 Administrative expenses –2,415 –2,252 –1,918 Other operating income/expense 229 –618 502 Operating result –2,394 5,130 –2,935 Share of the result of equity-accounted investments 1,035 791 1,031 Interest result and other financial result –675 –434 –661 Financial result 360 357 369 Earnings before tax –2,034 5,486 –2,566 Income tax expense 498 –1,372 637 Earnings after tax –1,536 4,115 –1,929 of which attributable to Noncontrolling interests –51 17 –69 Volkswagen AG hybrid capital investors 122 134 122 Volkswagen AG shareholders –1,607 3,964 –1,981 Basic/diluted earnings per ordinary share in €2 Basic/diluted earnings per preferred share in €2 –3.23 –3.18 7.91 7.91 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. D I V I S I O N S 2019 55,349 –44,078 11,271 –4,664 –1,790 –394 4,422 771 –431 340 4,762 –1,161 3,601 1 134 3,466 Income Statement F I N A N C I A L S E R V I C E S 2020 2019 8,711 9,836 –7,138 –8,052 1,573 1,784 –262 –392 –497 –461 –273 –223 541 707 5 20 –14 –3 –9 17 532 724 –140 –211 392 514 18 16 – – 375 498 31 32 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period April 1 to June 30 € million 2020 2019 Earnings after tax –1,536 4,115 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of other participations and securities (equity instruments) that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss –4,994 1,502 –3,492 9 9 –3,474 –2,408 714 –1,694 –6 6 –1,694 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax –72 15 –57 4 –54 –753 – –753 –1 –754 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) 908 –152 756 –210 546 –85 318 232 –71 161 1,564 –311 1,253 –364 889 –372 262 –110 31 –79 Cash flow hedges (OCI II), net of tax Fair value valuation of receivables and securities (debt instruments) that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of receivables and securities (debt instruments) that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of receivables and securities (debt instruments) recognized in other comprehensive income Fair value valuation of receivables and securities (debt instruments) that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to 30 0 30 –9 21 –65 610 –4,081 1,216 –2,864 –4,401 28 0 28 –8 20 –140 –64 –2,129 371 –1,758 2,357 Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders –48 122 –4,475 13 134 2,209 Interim Consolidated Financial Statements (Condensed) Balance Sheet as of June 30, 2020 and December 31, 2019 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2020 2019 2020 2019 Assets Noncurrent assets 295,324 300,608 153,418 153,736 Intangible assets 66,419 66,214 66,240 66,010 Property, plant and equipment 63,741 66,152 62,615 65,043 Lease assets 48,763 48,938 1,626 2,084 Financial services receivables 81,847 86,973 –406 –390 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 34,554 32,331 23,343 20,989 Current assets 204,929 187,463 108,858 93,081 Inventories 45,932 46,742 41,063 41,898 Financial services receivables 55,216 58,615 –571 –640 Other receivables and financial assets 40,100 38,620 18,782 17,803 Marketable securities 19,472 16,769 15,961 13,546 Cash, cash equivalents and time deposits 43,404 25,923 32,817 19,679 Assets held for sale 805 795 805 795 Total assets 500,253 488,071 262,275 246,816 Equity and liabilities Equity 124,288 123,651 93,321 92,774 Equity attributable to Volkswagen AG shareholders 107,023 109,117 76,708 78,872 Equity attributable to Volkswagen AG hybrid capital investors 15,498 12,663 15,498 12,663 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 122,521 121,781 92,206 91,535 Noncontrolling interests 1,766 1,870 1,115 1,239 Noncurrent liabilities 192,255 196,497 87,564 90,822 Financial liabilities 108,376 113,556 13,360 17,592 Provisions for pensions 41,949 41,389 41,176 40,631 Other liabilities 41,929 41,551 33,029 32,600 Current liabilities 183,710 167,924 81,390 63,220 Financial liabilities 108,221 87,912 15,058 –7,312 Trade payables 20,692 22,745 17,813 19,603 Other liabilities 54,461 56,896 48,183 50,559 Liabilities associated with assets held for sale 336 370 336 370 Total equity and liabilities 500,253 488,071 262,275 246,816 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. Balance Sheet F I N A N C I A L S E R V I C E S 2020 2019 141,906 146,873 179 204 1,126 1,110 47,138 46,853 82,253 87,363 11,211 11,342 96,071 94,382 4,869 4,844 55,787 59,255 21,318 20,817 3,511 3,223 10,586 6,243 – – 237,977 241,255 30,966 30,877 30,315 30,246 – – 30,315 30,246 651 631 104,690 105,675 95,016 95,965 773 759 8,900 8,951 102,321 104,703 93,163 95,224 2,879 3,142 6,278 6,337 – – 237,977 241,255 33 34 Statement of Changes in Equity Interim Consolidated Financial Statements (Condensed) Statement of Changes in Equity O T H E R R E S E R V E S € million Subscribed capital Capital reserve Retained earnings Currency translation reserve Balance at Jan. 1, 2019 Earnings after tax Other comprehensive income, net of tax 1,283 – – 14,551 – – 91,105 6,875 –4,575 –3,576 – 119 Total comprehensive income Disposal of equity instruments Capital increases/Capital decreases Dividends payment Capital transactions involving a change in ownership interest Other changes – – – – – – – – – – – – 2,300 –4 – –2,419 363 62 119 – – – 169 – Balance at June 30, 2019 1,283 14,551 91,407 –3,288 Balance at Jan. 1, 2020 Earnings after tax Other comprehensive income, net of tax 1,283 – – 14,551 – – 96,929 –1,201 –47 –2,824 – –1,799 Total comprehensive income Disposal of equity instruments Capital increases/Capital decreases¹ Dividends payment Capital transactions involving a change in ownership interest Other changes Balance at June 30, 2020 – – – – – – 1,283 – – – – – – 14,551 –1,248 – – – – 6 95,687 –1,799 – – – – 0 –4,623 1 Volkswagen AG recorded an inflow of cash funds amounting to €3,000 million, less transaction costs of €16 million, from the hybrid capital issued in June 2020. Additionally, there were noncash effects from the deferral of taxes amounting to €5 million. The hybrid capital is required to be classified as equity instruments granted. Interim Consolidated Financial Statements (Condensed) H E D G I N G Cash flow hedges (OCI I) Deferred costs of hedging (OCI II) Equity and debt instruments 1,790 –629 –230 – – – –547 –277 53 –547 –277 53 – – 4 – – – – – – 1 0 –1 – – – 1,243 –906 –173 95 –977 –235 – – – 998 12 2 998 12 2 – – – – – – – – – – – – – – – 1,093 –965 –233 Equity- accounted investments 228 – 76 76 – – – –11 – 293 295 – –64 –64 – – – – –1 230 Equity attributable to Volkswagen AG hybrid capital investors 12,596 268 – 268 – – –393 – – 12,471 12,663 239 – 239 – 2,989 –393 – – 15,498 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 117,117 7,144 –5,151 1,993 – – –2,812 521 62 116,881 121,781 –962 –898 –1,860 – 2,989 –393 – 5 122,521 Statement of Changes in Equity Equity attributable to noncontrolling interests Total equity 225 117,342 24 7,168 –5 –5,156 19 2,012 – – – – –4 –2,816 1,513 2,034 2 65 1,756 118,637 1,870 123,651 –57 –1,019 –49 –947 –106 –1,966 – – – 2,989 –3 –397 – – 6 11 1,766 124,288 35 36 Cash flow statement Interim Consolidated Financial Statements (Condensed) Cash flow statement for the Period January 1 to June 30 V OLKSW A G E N G R OU P D IV ISION S A U T OM OT I V E ¹ F I N A NC I A L SE RV I C ES € million 2020 2019 2020 2019 2020 2019 Cash and cash equivalents at beginning of period Earnings before tax Income taxes paid Depreciation and amortization expense² Change in pension provisions Share of the result of equity-accounted investments Other noncash income/expense and reclassifications³ Gross cash flow Change in working capital Change in inventories Change in receivables Change in liabilities Change in other provisions Change in lease assets (excluding depreciation) Change in financial services receivables Cash flows from operating activities 24,329 –1,352 –1,504 13,104 437 1,652 –126 12,211 –4,880 –392 –1,517 –622 –2,147 –4,989 4,787 7,331 28,113 9,557 –1,137 11,975 201 368 –220 20,744 –14,350 –4,004 –3,557 4,636 879 –6,178 –6,127 6,394 18,098 –2,600 –1,200 8,417 430 1,661 118 6,825 –3,816 –245 –854 –707 –2,124 163 –49 3,009 23,354 8,098 –703 7,900 190 397 12 15,895 –2,372 –3,929 –3,438 3,851 954 126 63 13,523 6,231 1,248 –304 4,688 7 –10 –244 5,385 –1,064 –147 –662 85 –23 –5,153 4,837 4,322 4,759 1,459 –435 4,075 11 –29 –233 4,849 –11,977 –75 –119 785 –75 –6,303 –6,190 –7,128 Cash flows from investing activities attributable to operating activities of which: Investments in intangible assets –7,930 –8,070 –7,815 –7,955 –114 –115 (excluding capitalized development costs), property, plant and equipment, and investment property capitalized development costs acquisition and disposal of equity investments Net cash flow4 Change in investments in securities, loans and time deposits Cash flows from investing activities Cash flows from financing activities of which: capital transactions with noncontrolling interests –4,226 –2,950 –953 –599 –2,120 –10,050 21,666 – 2,984 –5,300 –2,338 –537 –1,675 –1,485 –9,555 –2,142 –19 – –4,130 –2,950 –912 –4,806 –1,762 –9,577 21,104 – 2,975 –5,202 –2,338 –504 5,568 –5,645 –13,599 –8,706 –19 –998 –96 – –41 4,207 –358 –473 562 – 9 –98 – –33 –7,243 4,160 4,045 6,564 – 998 capital contributions/capital redemptions MAN noncontrolling interest shareholders: compensation payments and acquisition of shares tendered Effect of exchange rate changes on cash and cash equivalents Change of loss allowance within cash & cash equivalents Net change in cash and cash equivalents 2 –330 –3 18,615 –1,109 195 1 –5,107 2 –265 –2 14,269 –1,109 163 1 –8,620 – –65 0 4,346 – 32 0 3,513 Cash and cash equivalents at June 305 Securities, loans and time deposits Gross liquidity Total third-party borrowings Net liquidity at June 306 For information purposes: at Jan. 1 42,944 30,005 72,949 –216,603 –143,654 –148,040 23,006 29,479 52,485 –199,051 –146,565 –134,735 32,367 14,720 47,087 –28,424 18,663 21,276 14,734 14,382 29,116 –13,211 15,905 19,368 10,577 15,285 25,862 –188,180 –162,318 –169,316 8,272 15,097 23,369 –185,840 –162,471 –154,103 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loans to affiliates and joint ventures as well as time deposits net of third-party borrowings (noncurrent and current financial liabilities). Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2019 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2020 were therefore also prepared in accordance with IAS 34 (Interim Financial Reporting) and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 115 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2020. OT H E R A CCO U N T I N G P O L I C I E S A discount rate of 1.1% (December 31, 2019: 1.1%) was applied to German pension provisions in the accompanying interim consolidated financial statements. The income tax expense for the interim consolidated financial statements was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34 (Interim Financial Reporting). In other respects, the same accounting policies and consolidation methods that were used for the 2019 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2019 consolidated financial statements. In addition, details of the effects of new standards can be found in the “New and amended IFRSs not applied” section. The 2019 consolidated financial statements can also be accessed on the Internet at www.volkswagenag.com/en/InvestorRelations.html. Key events On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOX) emissions had been discovered in emissions tests on certain Volkswagen Group vehicles with type 2.0 l diesel engines in the USA. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2019 consolidated financial statements. In the first half of fiscal year 2020, additional expenses of €0.7 billion had to be recognized in this context, primarily related to legal risks. 37 38 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Furthermore, based on the information as it exists and has been established, there continue to be no conclusive findings or assessments available to the Board of Management of Volkswagen AG regarding the described facts that would suggest that a different assessment of the associated risks should have been made. Further information on the litigation in connection with the diesel issue can be found in the “Litigation” section. The Covid-19 pandemic, which caused a global decline in demand and, to some extent, continuing production stoppages, adversely affected the financial position and performance of the Volkswagen Group in the first half of the year. In response to the Covid-19 pandemic, the carrying amounts of assets, in particular goodwill, brand names, capitalized development costs and property, plant and equipment, were reviewed as of June 30, 2020. Since Volkswagen currently assumes that the pandemic is a temporary event that will not have any lasting negative impact on the Group’s long-term business performance, the period from 2020 to 2024 covered by the previous year’s impairment tests has been adjusted to reflect current expectations with regard to overall market development and the estimated unit sales derived from them. Please refer to our comments in the interim management report for information on the developments expected in the global automotive markets. Furthermore, the weighted average cost of capital (WACC) has been adjusted to June 30, 2020 and individual parameters for financial assets have also been adjusted. Overall, the review has not led to any material additional impairment losses on assets. The turbulence in the commodity and capital markets led to the recognition of expenses of €0.9 billion (previous year: expenses of €0.1 billion) in the other operating result, especially in connection with the treatment of derivatives to which hedge accounting is not applied and the measurement of receivables and liabilities denominated in foreign currencies. On July 12, 2019, Volkswagen announced that, together with Ford Motor Company (Ford), it would be investing in Argo AI, a company that is working on the development of a system for autonomous driving. The investment involves the provision of financial resources totaling USD 1.0 billion, spread over several years, and the contribution by Volkswagen of its consolidated subsidiary Autonomous Intelligent Driving (AID). Furthermore, Volkswagen acquired existing Argo AI shares from Ford for a purchase price of USD 500 million, payable in three equal annual installments. The transaction, including the contribution of AID, was executed as of June 1, 2020. After proportional profit elimination, the contribution of AID to Argo AI at fair value resulted in a non-cash gain of €0.8 billion, which was recognized in the other operating result. Argo AI will be accounted for as a joint venture and included in the consolidated financial statements using the equity method. Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Disclosures on the interim consolidated financial statements 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 1 9 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 78,061 8,849 – – 86,910 –7,773 79,136 Genuine parts 6,599 1,719 – – 8,318 –58 8,260 Used vehicles and third-party products 6,431 716 – – 7,147 –223 6,924 Engines, powertrains and parts deliveries 5,385 320 – – 5,705 –10 5,695 Power Engineering – – 1,864 – 1,864 –1 1,862 Motorcycles 378 – – – 378 – 378 Leasing business 485 858 0 14,657 16,000 –2,055 13,945 Interest and similar income 112 2 – 3,970 4,084 –109 3,975 Hedges sales revenue 79 –11 – – 68 72 140 Other sales revenue 3,713 867 – 444 5,024 –143 4,881 101,243 13,320 1,864 19,071 135,498 –10,301 125,197 ST R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 2 0 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 54,383 5,682 – – 60,065 –5,991 54,074 Genuine parts 5,377 1,592 – – 6,969 –54 6,915 Used vehicles and third-party products 5,183 624 – – 5,807 –335 5,472 Engines, powertrains and parts deliveries 5,344 281 – – 5,625 –7 5,618 Power Engineering – – 1,850 – 1,850 –1 1,849 Motorcycles 277 – – – 277 – 277 Leasing business 374 851 0 14,634 15,860 –2,045 13,814 Interest and similar income 87 4 – 3,867 3,958 –103 3,855 Hedges sales revenue –437 –10 – 0 –447 25 –421 Other sales revenue 3,377 829 – 615 4,821 –143 4,678 73,965 9,854 1,850 19,115 104,784 –8,654 96,131 Other sales revenue comprises revenue from workshop services and license revenue, among other things. 39 40 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 2. Cost of sales Cost of sales includes interest expenses of €1,232 million (previous year: €1,357 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on capitalized development costs, property, plant and equipment, and lease assets. The impairment losses identified on the basis of updated impairment tests amount to a total of €552 million (previous year: €502 million). The value in use is used as the basis for calculating impairment losses. 3. Research and development costs H 1 € million 2020 2019 % Total research and development costs of which: capitalized development costs Capitalization ratio in % Amortization of capitalized development costs Research and development costs recognized in profit or loss 6,695 2,950 44.1 2,224 5,969 7,033 2,338 33.2 1,827 6,522 –4.8 26.2 21.7 –8.5 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since there were no transactions in the reporting period that had a dilutive effect on the number of shares, diluted earnings per share are equivalent to basic earnings per share. In accordance with Article 27(2) No. 1 of the Articles of Association of Volkswagen AG, preferred shares are entitled to a preferred dividend of €0.11 per share if a loss is made. This preferred dividend would have to be paid in subsequent periods, if no dividends were to be distributed for the current fiscal year, and must therefore be taken into account when calculating the loss per share for the year in which the loss was made. The distribution of further dividends is performed in accordance with Article 27(2) Nos. 2 and 3 of the Articles of Association of Volkswagen AG. If a profit after tax is attributable to the shareholders of Volkswagen AG, preferred shares are in general entitled to a dividend that is €0.06 higher per share than that for ordinary shares. Q 2 H 1 2020 2019 2020 2019 Weighted average number of: Ordinary shares – basic/diluted Shares 295,089,818 295,089,818 295,089,818 295,089,818 Preferred shares – basic/diluted Shares 206,205,445 206,205,445 206,205,445 206,205,445 Earnings after tax € million –1,536 4,115 –1,019 7,168 Noncontrolling interests € million –51 17 –57 24 Earnings attributable to Volkswagen AG hybrid capital investors € million 122 134 239 268 Earnings attributable to Volkswagen AG shareholders € million –1,607 3,964 –1,201 6,875 of which: basic/diluted earnings attributable to ordinary shares € million –952 2,333 –721 4,040 of which: basic/diluted earnings attributable to preferred shares € million –655 1,631 –481 2,835 Earnings per ordinary share – basic/diluted € –3.23 7.91 –2.44 13.69 Earnings per preferred share – basic/diluted € –3.18 7.91 –2.33 13.75 41 42 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A R Y 1 A N D J U N E 3 0 , 2 0 2 0 € million Carrying amount at Jan. 1, 2020 Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2020 Intangible assets 66,214 3,154 340 2,609 66,419 Property, plant and equipment 66,152 4,648 1,316 5,744 63,741 Lease assets 48,938 10,436 5,891 4,719 48,763 6. Inventories € million June 30, 2020 Dec. 31, 2019 Raw materials, consumables and supplies 7,491 6,099 Work in progress 4,381 4,110 Finished goods and purchased merchandise 28,661 30,617 Current lease assets 5,155 5,699 Prepayments 248 222 Hedges on inventories –5 –6 45,932 46,742 It was not necessary to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2020 Dec. 31, 2019 Trade receivables 17,505 17,941 Miscellaneous other receivables and financial assets 22,594 20,678 40,100 38,620 In the period January 1 to June 30, 2020, impairment losses and reversals of impairment losses on financial assets reduced operating profit by €653 million (previous year: €413 million). Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 8. Equity In June 2020, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of €3.0 billion via a subsidiary, Volkswagen International Finance N.V., Amsterdam, the Netherlands (issuer). The perpetual hybrid notes were issued in two tranches and can be called by the issuer. The first call date for the first tranche (€1.5 billion and a coupon of 3.500%) is after five years, and the first call date for the second tranche (€1.5 billion and a coupon of 3.875%) is after nine years. Under IAS 32, this hybrid note must be classified in its entirety as equity. The capital raised, less transaction costs and net of deferred taxes, was recognized in equity. The interest payments payable to the noteholders will be recognized directly in equity. The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par value preferred shares, and amounts to €1,283 million (previous year: €1,283 million). Most of the noncontrolling interests in equity are attributable to the TRATON GROUP. 9. Noncurrent financial liabilities € million June 30, 2020 Dec. 31, 2019 Bonds, commercial paper and notes 86,608 88,986 Liabilities to banks 12,669 15,337 Deposit business 2,344 2,395 Lease liabilities 5,028 5,208 Other financial liabilities 1,727 1,629 108,376 113,556 10. Current financial liabilities € million June 30, 2020 Dec. 31, 2019 Bonds, commercial paper and notes 44,589 37,893 Liabilities to banks 31,793 17,337 Deposit business 29,881 30,252 Lease liabilities 970 1,002 Other financial liabilities 989 1,429 108,221 87,912 43 44 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 11. Fair value disclosures Generally, the principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2019 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Financial assets and liabilities measured at fair value through profit or loss consist of derivative financial instruments to which hedge accounting is not applied. They include primarily commodity futures, currency forwards relating to commodity futures as well as, in certain cases, interest rate swaps, currency swaps and cross-currency interest rate swaps. Moreover, other equity investments (in general, shares representing an ownership interest of less than 20%) in partnerships (debt instruments), customer financing receivables whose cash flows contain more than just interest and principal repayments, and financial assets held in special funds controlled by the Volkswagen Group are measured at fair value through profit or loss. Derivative financial instruments to which hedge accounting is applied are measured at fair value either directly in equity or through profit or loss, depending on the underlying hedged item. Financial assets measured at fair value through other comprehensive income include investments (in general, shares representing an ownership interest of less than 20%) in corporations (equity instruments) and shares for which the Volkswagen Group normally exercises the option of fair value measurement through other comprehensive income, as well as securities (debt instruments) whose cash flows comprise solely payments of interest and principal and that are held under a business model aimed at both collecting contractual cash flows and selling financial assets. For instruments measured through other comprehensive income, changes in fair value are recognized directly in equity, taking deferred taxes into account. Impairment losses on securities (debt instruments) are recognized through profit or loss. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and Level 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. Reconciliation of balance sheet items to classes of financial instruments The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting the carrying amount using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. The risk variables governing the fair value of the receivables are risk-adjusted interest rates. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 1 9 D E R I VA T I V E N O T F I N A NC I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N STR U M EN T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E DG E M E A S U R E M E N T A T V A L U E C O S T A C C OU N T IN G C A T E G O R Y D E C . 3 1 , 2 0 1 9 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 8,169 8,169 Other equity investments 54 – – – 1,848 1,902 Financial services receivables 288 51,404 52,581 – 35,281 86,973 Other financial assets 1,012 3,625 3,628 916 – 5,553 Tax receivables – – – – 341 341 Current assets Trade receivables 1 17,940 17,940 – – 17,941 Financial services receivables 22 39,936 39,936 – 18,656 58,615 Other financial assets 1,477 10,120 10,120 619 – 12,216 Tax receivables – 9 9 – 1,181 1,190 Marketable securities 16,681 88 88 – – 16,769 Cash, cash equivalents and time deposits – 25,923 25,923 – – 25,923 Assets held for sale 3 158 158 – 634 795 Noncurrent liabilities Noncurrent financial liabilities – 108,348 110,679 – 5,208 113,556 Other noncurrent financial liabilities 943 2,549 2,554 1,007 – 4,499 Current liabilities Current financial liabilities – 86,911 86,911 – 1,002 87,912 Trade payables – 22,745 22,745 – – 22,745 Other current financial liabilities 817 8,614 8,614 1,427 – 10,858 Tax payables – 19 19 – 389 408 Liabilities associated with assets held for sale – 44 44 – 326 370 45 46 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 2 0 D E R I V A T I V E N O T F I N A N C I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N S T R U M E N T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E D G E M E A S U R E M E N T A T V A L U E C O S T A C C O U N T I N G C A T E G O R Y J U N E 3 0 , 2 0 2 0 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 8,000 8,000 Other equity investments 58 – – – 2,182 2,240 Financial services receivables 273 49,030 49,639 – 32,544 81,847 Other financial assets 1,321 3,577 3,356 2,078 – 6,976 Tax receivables – – – – 347 347 Current assets Trade receivables 6 17,499 17,499 – – 17,505 Financial services receivables 22 36,269 36,269 – 18,925 55,216 Other financial assets 1,154 11,469 11,469 1,528 – 14,151 Tax receivables – 1 1 – 1,395 1,396 Marketable securities 19,457 15 15 – – 19,472 Cash, cash equivalents and time deposits – 43,404 43,404 – – 43,404 Assets held for sale 3 238 238 564 805 Noncurrent liabilities Noncurrent financial liabilities – 103,348 105,442 – 5,028 108,376 Other noncurrent financial liabilities 1,313 2,311 2,310 1,063 – 4,687 Current liabilities Current financial liabilities – 107,252 107,252 – 970 108,221 Trade payables – 20,692 20,692 – – 20,692 Other current financial liabilities 1,360 8,760 8,760 962 – 11,082 Tax payables – 11 11 – 301 312 Liabilities associated with assets held for sale 39 39 – 297 336 The carrying amount of lease receivables was €51.5 billion (previous year: €53.9 billion) and their fair value was €51.9 billion (previous year: €55.0 billion). Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The following tables contain an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT F A I R VA L U E B Y L E V E L € million Dec. 31, 2019 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 54 43 0 11 Financial services receivables 288 – – 288 Other financial assets 1,012 – 595 417 Current assets Trade receivables 1 – – 1 Financial services receivables 22 – – 22 Other financial assets 1,477 – 1,304 173 Marketable securities 16,681 16,681 – – Assets held for Sale 3 – – 3 Noncurrent liabilities Other noncurrent financial liabilities 943 – 425 518 Current liabilities Other current financial liabilities 817 – 570 247 € million June 30, 2020 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 58 30 0 28 Financial services receivables 273 – – 273 Other financial assets 1,321 – 992 329 Current assets Trade receivables 6 – – 6 Financial services receivables 22 – – 22 Other financial assets 1,154 – 1,007 147 Marketable securities 19,457 19,385 72 – Assets held for Sale 3 – – 3 Noncurrent liabilities Other noncurrent financial liabilities 1,313 – 517 797 Current liabilities Other current financial liabilities 1,360 – 1,064 296 47 48 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) D E R I VAT I V E F I N A N C I A L I N ST R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million Dec. 31, 2019 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 916 – 916 – Current assets Other financial assets 619 – 619 – Noncurrent liabilities Other noncurrent financial liabilities 1,007 – 1,007 – Current liabilities Other current financial liabilities 1,427 – 1,427 – € million June 30, 2020 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 2,078 – 2,078 – Current assets Other financial assets 1,528 – 1,528 – Noncurrent liabilities Other noncurrent financial liabilities 1,063 – 1,063 – Current liabilities Other current financial liabilities 962 – 962 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Fair Values in Level 3 are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models, customer financing receivables and receivables from vehicle financing programs are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity- specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. The measurement of vehicle financing programs requires in particular the use of the corresponding vehicle price. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The table below provides a summary of changes in level 3 balance sheet items measured at fair value: C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT F A I R VA L U E B A S E D O N L E V E L 3 € million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, 2019 990 816 Foreign exchange differences 8 0 Total comprehensive income 48 62 recognized in profit or loss 40 62 recognized in other comprehensive income 8 – Additions (purchases) 20 – Sales and settlements –71 –76 Transfers into Level 2 –6 –21 Balance at June 30, 2019 990 780 Total gains or losses recognized in profit or loss 40 –62 Net other operating expense/income 45 –61 of which attributable to assets/liabilities held at the reporting date 40 –37 Financial result –4 –1 of which attributable to assets/liabilities held at the reporting date –4 – Financial assets Financial liabilities € million measured at fair value measured at fair value Assets held for sale Balance at Jan. 1, 2020 913 765 3 Foreign exchange differences –6 –12 – Changes in consolidated Group 0 – – Total comprehensive income –43 533 – recognized in profit or loss –43 533 – recognized in other comprehensive income – – – Additions (purchases) 9 – – Sales and settlements –65 –128 – Transfers into Level 2 –5 –66 – Balance at June 30, 2020 806 1,092 3 Total gains or losses recognized in profit or loss –43 –533 – Net other operating expense/income –43 –533 – of which attributable to assets/liabilities held at the reporting date –46 –469 – Financial result – – – of which attributable to assets/liabilities held at the reporting date – – – 49 50 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2020, earnings after tax would have been €225 million (previous year: €117 million) higher (lower). The equity is not affected. The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values as of June 30, 2020 had been 10% higher, earnings after tax would have been €3 million (previous year: €2 million) higher. If the assumed enterprise values as of June 30, 2020 had been 10% lower, earnings after tax would have been €3 million (previous year: €2 million) lower. Residual value risks result from hedging agreements with dealerships under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices of the used cars covered by the residual value protection model had been 10% higher as of June 30, 2020, earnings after tax would have been €355 million (previous year: €327 million) higher. If the prices of the used cars covered by the residual value protection model had been 10% lower as of June 30, 2020, earnings after tax would have been €379 million (previous year: €347 million) lower. If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points higher as of June 30, 2020, earnings after tax would have been €2 million (previous year: €2 million) lower. If the risk-adjusted interest rates as of June 30, 2020 had been 100 basis points lower, earnings after tax would have been €2 million (previous year: €2 million) higher. If the corresponding vehicle price used in the vehicle financing programs had been 10% higher as of June 30, 2020, earnings after tax would have been €2 million (previous year: €6 million) higher. If the corresponding vehicle prices used in the vehicle financing programs had been 10% lower as of June 30, 2020, earnings after tax would have been €2 million (previous year: €6 million) lower. If the result of operations of equity investments measured at fair value had been 10% better as of June 30, 2020, the equity would have been €0.2 million (previous year: €5 million) higher. If the result of operations of equity investments measured at fair value had been 10% worse, the equity would have been €0.2 million (previous year: €5 million) lower. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. € million June 30, 2020 June 30, 2019 Cash, cash equivalents and time deposits as reported in the balance sheet 43,404 25,778 Held for Sale 115 – Time deposits –575 –2,772 Cash and cash equivalents as reported in the cash flow statement 42,944 23,006 Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2020 2019 Capital contributions 2,984 – Dividends paid –397 –2,816 Capital transactions with noncontrolling interest shareholders – –19 Proceeds from issuance of bonds 13,188 15,896 Repayments of bonds –8,978 –11,530 Changes in other financial liabilities 15,388 –3,266 Repayments of lease liabilities –520 –407 21,666 –2,142 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars and Light Commercial Vehicles segment cover the development of vehicles and engines, the production and sale of passenger cars and light commercial vehicles, and the corresponding genuine parts business. In the Passenger Cars and Light Commercial Vehicles reporting segment, the individual brands are being combined into a single reportable segment, in particular as a response to the high degree of technological and economic interlinking in the production network. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of trucks and buses, the corresponding genuine parts business and related services. As in the case of the passenger car brands, there is collaboration within the areas procurement, development and sales. The aim is to create closer cooperation within the business areas. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealership and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, activities are combined for reporting purposes taking into particular account the comparability of the type of services and of the regulatory environment. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. 51 52 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) At Volkswagen, segment profit or loss is measured on the basis of the operating result. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. R E P O R T I N G S E G M E N T S : H 1 2 0 1 9 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 92,974 12,784 1,862 17,442 125,062 135 125,197 Intersegment sales revenue 8,269 537 1 1,629 10,436 –10,436 – Total sales revenue 101,243 13,320 1,864 19,071 135,498 –10,301 125,197 Segment result (operating result) 8,558 959 –63 1,409 10,862 –1,865 8,997 R E P O R T I N G S E G M E N T S : H 1 2 0 2 0 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 67,220 9,356 1,849 17,469 95,893 237 96,131 Intersegment sales revenue 6,746 498 1 1,646 8,891 –8,891 – Total sales revenue 73,965 9,854 1,850 19,115 104,784 –8,654 96,131 Segment result (operating result) –1,582 –295 –93 1,248 –721 –768 –1,490 R E C O N C I L I AT I O N H 1 € million 2020 2019 Segment result (operating result) –721 10,862 Unallocated activities –37 –78 Group financing 7 –21 Consolidation/Holding company function –739 –1,766 Operating result –1,490 8,997 Financial result 138 560 Consolidated earnings before tax –1,352 9,557 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 14. Related party disclosures Porsche SE holds the majority of the voting rights in Volkswagen AG. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. This means that, even though it holds the majority of voting rights of Volkswagen AG, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE is therefore classified as a related party as defined by IAS 24. S U P P L I E S A N D S E R V I C E S R E N D E R E D S U P P L I E S A N D S E R V I C E S R E C E I V E D H 1 H 1 € million 2020 2019 2020 2019 Porsche SE and its majority interests Supervisory Board members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests State of Lower Saxony, its majority interests and joint ventures 2 3 494 7,136 76 2 2 1 816 7,678 84 7 0 0 558 196 466 3 1 1 837 314 469 2 R E C E I V A B L E S F R O M L I A B I L I T I E S ( I N C L U D I N G O B L I G A T I O N S ) T O € million June 30, 2020 Dec. 31, 2019 June 30, 2020 Dec. 31, 2019 Porsche SE and its majority interests Supervisory Board members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests State of Lower Saxony, its majority interests and joint ventures 4 1 1,386 12,385 403 1 4 0 1,497 12,953 326 1 0 160 1,215 2,391 1,104 1 0 170 1,667 2,683 1,063 0 The tables above do not contain the dividend payments (net of withholding tax) of €1,503 million (previous year: €1,138 million) received from joint ventures and associates. Receivables from joint ventures are primarily attributable to loans granted in an amount of €7,496 million (December 31, 2019: €8,290 million) as well as trade receivables in an amount of €3,438 million (December 31, 2019: €4,375 million). Receivables from non-consolidated subsidiaries also result primarily from loans granted in an amount of €896 million (December 31, 2019: €938 million) as well as trade receivables in an amount of €202 million (December 31, 2019: €188 million). Transactions with related parties are conducted on an arm’s length basis. Some of these transactions also include reservation of title clauses. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €347 million (December 31, 2019: €322 million). Impairment losses of €166 million (previous year: €57 million) were recognized on the outstanding related party receivables. In the first half of the year, expenses of €105 million (previous year: €15 million) were incurred in this context. In the first six months of 2020, the Volkswagen Group made capital contributions of €73 million (previous year: €128 million) at related parties. 53 54 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 15. Litigation Diesel issue 1. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The Braunschweig Regional Court named Volkswagen AG as a collateral participant in the criminal proceedings regarding alleged market manipulation relating to capital market disclosure obligations in connection with the diesel issue. In May 2020, these proceedings were definitively terminated by the Braunschweig Regional Court with respect to the current Chairman of the Board of Management of Volkswagen AG and a former member of its Board of Management (currently Chairman of the Supervisory Board) against payment in each case of a court-imposed sum of €4.5 million, thereby also terminating to the same extent the proceedings against Volkswagen AG as collateral participant. The Braunschweig Regional Court must now decide whether to admit the charges still pending against a former Chairman of the Board of Management of Volkswagen AG and go forward with the proceedings also still pending against Volkswagen AG in this regard. In June 2020, the Munich II Regional Court accepted the substantially unchanged indictment of the Munich II Office of the Public Prosecutor, which also charges the former Chairman of the Board of Management of AUDI AG, and opened the main trial proceedings. 2. Product-related lawsuits worldwide (excluding the USA/Canada) In April 2020, the court in Australia approved the class action settlement that the parties had agreed to. On February 28, 2020, Volkswagen AG and Verbraucherzentrale Bundesverband e.V. (Federation of Consumer Organizations) entered into an out of court settlement to terminate the consumer action for model declaratory judgment. Under the terms of the settlement, Volkswagen AG will offer individual settlements to consumers who registered claims under the action for model declaratory judgment and meet the settlement criteria. The volume of such settlements amounts to €830 million. Verbraucherzentrale Bundesverband e.V. withdrew the action for model declaratory judgment on April 30, 2020. Volkswagen has entered into individual settlements with some 240 thousand customers in an aggregate amount of roughly €760 million. In April 2020, the High Court in England and Wales ruled in the group litigation that the switch logic in the EA 189 engine constituted an unlawful defeat device; the court believed that it was also bound by the findings of the Kraftfahrtbundesamt (German Federal Motor Transport Authority) in this respect. Volkswagen AG disagrees with the High Court's legal position on these preliminary issues and has filed an appeal against this decision. The question of liability on the part of Volkswagen AG was not a matter addressed by the decision and will be dealt with at a later stage of the proceedings. In April 2020, the Diesel Emissions Justice Foundation served an opt-out class action lawsuit on Volks- wagen AG seeking monetary damages on behalf of Dutch consumers. A change in the law in the Netherlands that took effect on January 1, 2020 permits consumers in the European Union to opt into the class action as well. The class action relates to vehicles with type EA 189 engines, among others. In Germany, the Bundesgerichtshof (BGH – Federal Court of Justice) handed down in May 2020 its first decision ever in an individual product-related lawsuit in connection with the diesel issue. The BGH held that the buyer, who had purchased a vehicle with a type EA 189 engine prior to public disclosure of the diesel issue, had a claim for damages against Volkswagen AG. While the buyer can require reimbursement of the vehicle's purchase price, he must accept a deduction for the benefit derived from using the vehicle and must return it to Volkswagen AG. The judgment clarifies the BGH's stance on the fundamental issues underlying a large number of the some 65 thousand individual diesel lawsuits still pending in Germany. In the course of two hearings held in July 2020, the BGH indicated that it was inclined to reject a claim to tort interest by vehicle buyers. 3. Lawsuits filed by investors worldwide (excluding the USA/Canada) In decisions handed down in March 2019, the Stuttgart Higher Regional Court refused to conduct additional investor actions for model declaratory judgment. These include an action for model declaratory judgment against Porsche SE and Volkswagen AG alleging violations of ad hoc disclosure obligations in connection with the diesel issue. The plaintiff side appealed the Stuttgart Higher Regional Court's rejection of this model case action to the Federal Court of Justice. In June 2020, the Federal Court of Justice remanded the matter to the Stuttgart Higher Regional Court for redecision on the determination of a model case plaintiff. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 4. Proceedings in the USA/Canada In February 2020, the Montana State Court dismissed certain of the environmental claims asserted by the Montana Attorney General, but allowed other claims to proceed. Volkswagen has asked the Montana Supreme Court to review this decision. In March 2020, the Ohio Supreme Court, at Volkswagen’s request, agreed to hear an appeal of a lower court's decision concerning Ohio’s remaining claims. In June 2020, the U.S. Court of Appeals for the Ninth Circuit partially reversed the trial court’s decision and held that Hillsborough County, Florida and Salt Lake County, Utah can proceed with a subset of their claims. In May 2020, the settlement program in the United States for Generation 2 3.0-liter TDI vehicles ended. In the environmental class action lawsuit seeking damages on behalf of the residents of the Province of Quebec, after authorizing the case to proceed as a class, a Quebec court ruled in June 2020 that a motion to dismiss by Volkswagen is permissible at the present stage of the proceedings. Volkswagen noticed its motion in July 2020. 5. Additional proceedings In April 2020, the Celle Higher Regional Court issued a ruling appointing a special auditor other than the one originally appointed. The decision of the Higher Regional Court of Celle is formally unappealable. Volkswagen AG has filed a constitutional complaint with the Federal Constitutional Court contesting this decision as well on grounds of infringement of its constitutionally guaranteed rights and has suggested joinder of this matter with its initial constitutional complaint against the decision to appoint the special auditor. The constitutional complaint has no suspensory effect, however. Additional important legal cases In the tax litigation between the Brazilian tax authorities and MAN Latin America, the amount at risk remains unchanged at BRL 3.1 billion. Solely due to exchange rate fluctuations, the risk in euros as disclosed in the notes under contingent liabilities has declined from €0.7 billion to €0.5 billion. In connection with the factual matters that in principle also underlie the antitrust proceedings instituted by the European Commission against Volkswagen AG, AUDI AG, and Dr. Ing. h.c. F. Porsche AG in April 2019, the South Korean competition authority searched the premises of Audi Volkswagen South Korea and Porsche South Korea in May 2020 and issued requests for information to Volkswagen AG, AUDI AG, and Dr. Ing. h.c. F. Porsche AG. Furthermore, the Turkish competition authority commenced proceedings in the same matter in July 2020. In March 2020, the US District Court for the Northern District of California dismissed two amended class action complaints brought by purchasers of German luxury vehicles alleging that several automobile manufacturers, including Volkswagen AG and other Group companies, conspired to unlawfully increase the prices of German luxury vehicles in violation of US antitrust and consumer protection law. The court held that the plaintiffs have not stated a claim for relief because the allegations in the complaints do not plausibly support that the alleged agreements unreasonably restrained competition in violation of US law. The court granted plaintiffs leave to file amended complaints with respect to a limited subset of plaintiffs’ original claims. Plaintiffs filed a second set of amended complaints in June 2020. In February 2020, the US District Court for the Northern District of California granted final approval of a class action settlement resolving civil claims relating to approximately 98 thousand Volkswagen, Audi, Porsche and Bentley vehicles with automatic transmissions. 55 56 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2020 contained in the combined management report in the 2019 Annual Report, specifically in the chapters “Report on Expected Developments” and “Report on Risks and Opportunities,” including the section “Legal risks.” In particular, based on the information as it exists and has been established, there continue to be no conclusive findings or assessments available to the Board of Management of Volkswagen AG regarding the described facts that would suggest that a different assessment of the associated risks should have been made. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilites in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Company. 16. Contingent liabilities Driven in particular by the inclusion of additional product-related commitments and legal risks arising from the diesel issue, which were set against currency translation effects, contingent liabilities went up to €9.4 billion, an increase of €0.5 billion compared with the 2019 consolidated financial statements. 17. Other financial obligations Other financial liabilities, which amounted to €21.9 billion, increased compared with the 2019 consolidated financial statements. The rise is mainly attributable to payment obligations relating to future acquisitions of equity investments. Significant events after the balance sheet date There were no further events with a significant effect on net assets, financial position and results of operations after the end of the first six months of 2020. Interim Consolidated Financial Statements (Condensed) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements prepared in accordance with German accepted accounting principles give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 29, 2020 Volkswagen Aktiengesellschaft The Board of Management 57 58 Review Report Interim Consolidated Financial Statements (Condensed) Review Report To VOLKSWAGEN AKTIENGESELLSCHAFT We have reviewed the condensed interim consolidated financial statements of VOLKSWAGEN AKTIEN- GESELLSCHAFT, Wolfsburg, – comprising the condensed income statement, condensed statement of comprehensive income, condensed balance sheet, statement of changes in equity, condensed cash flow statement as well as selected explanatory notes – and the interim group management report for the period from 1 January 2020 to 30 June 2020, which are part of the half-year financial report pursuant to Sec. 115 WpHG [“Wertpapierhandelsgesetz”: German Securities Trading Act]. The preparation of the condensed interim consolidated financial statements in accordance with IFRSs (International Financial Reporting Standards) on interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the Company’s executive directors. Our responsibility is to issue a report on the condensed interim consolidated financial statements and the interim group management report based on our review. We conducted our review of the condensed interim consolidated financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the review to obtain a certain level of assurance in our critical appraisal to preclude that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU and that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. A review is limited primarily to making inquiries of company personnel and applying analytical procedures and thus does not provide the assurance that we would obtain from an audit of financial statements. In accordance with our engagement, we have not performed an audit and thus cannot issue an auditor’s report. Interim Consolidated Financial Statements (Condensed) Review Report Based on our review, nothing has come to our attention that causes us to believe that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU or that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. Without qualifying this conclusion, we refer to the updated information provided and statements made in connection with the diesel issue by the Board of Management in the “Key events” section in the notes to the interim consolidated financial statements and in the “Report on expected developments, risks and opportunities“ section in the interim group management report, where the allegations made and claims asserted against the Volkswagen Group are explained and where the information provided and statements made in the consolidated financial statements as of 31 December 2019 as well as in the combined management report in the 2019 annual report are referred to. On the basis of the underlying results to date of the various measures introduced to investigate the issue presented there and these interim consolidated financial statements and interim group management report, there is in particular still no confirmation that members of the Company’s Board of Management were aware of the deliberate manipulation of the engine management software before the summer of 2015. The provisions for legal risks recognized in the interim consolidated financial statements as of 30 June 2020 are based on these results and the information presented. Due to the uncertainties necessarily associated with pending and expected litigation, it cannot be ruled out that the risk estimation presented there could change in the future. Hanover, 29 July 2020 Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft Meyer Wirtschaftsprüfer [German Public Auditor] Matischiok Wirtschaftsprüfer [German Public Auditor] 59 60 Selected terms at a glance Hybrid notes Hybrid notes issued by Volkswagen are classified in their entirety as equity. The issuer has call options at defined dates during their perpetual maturities. They pay a fixed coupon until the first possible call date, followed by a variable rate depending on their terms and conditions. Modular Electric Drive Toolkit (MEB) The modular system is being developed for the manufacturing of electric vehicles. The MEB establishes parameters for axles, drive systems, high-voltage batteries, wheelbases and weight ratios to ensure a vehicle optimally fulfills the requirements of e-mobility. The first vehicle based on the MEB should go into series production in 2020. Plug-in hybrid Performance levels of hybrid vehicles. Plug-in hybrid electric vehicles (PHEVs) have a larger battery with a correspond- ingly higher capacity that can be charged via the combustion engine, the brake system, or an electrical outlet. This increases the range of the vehicle. Test procedure Levels of fuel consumption and exhaust gas emissions for vehicles registered in Europe were previously measured on a chassis dynamometer with the help of the “New European Driving Cycle (NEDC)”. Since fall 2017, the existing test procedure for emissions and fuel consumption used in the EU is being gradually replaced by the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP). This has been in place for new vehicle types since fall 2017 and will apply to all new vehicles since fall 2018. The aim of this new test cycle is to state CO2 emissions and fuel consumption in a more practice-oriented manner. A further important European regulation is the Real Driving Emissions (RDE) for passenger cars and light commercial vehicles, which also monitors emissions using portable emission measuring technology in real road traffic. Glossary Capitalization ratio The capitalization ratio is defined as the ratio of capitalized development costs to total research and development costs in the Automotive Division. It shows the proportion of primary research and development costs subject to capitalization. Equity ratio The equity ratio measures the percentage of total assets attributable to shareholders’ equity as of a reporting date. This ratio indicates the stability and financial strength of the company and shows the degree of financial indepen- dence. Gross margin Gross margin is the percentage of sales revenue attributable to gross profit in a period. Gross margin provides information on profitability net of cost of sales. Net cash flow Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities. Net liquidity Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, loans and time deposits not financed by third-party borrowings. To safeguard our business activ- ities, we have formulated the strategic target that net liquidity in the Automotive Division should amount to approximately 10 % of the consolidated sales revenue. Operating result Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in finan- cial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and docu- ments the economic success of our core busi- ness. Operating return on sales The operating return on sales is the ratio of the operating result to sales revenue. Ratio of capex to sales revenue The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized develop- ment costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure – largely for modernizing and expanding our product range and for environ- mentally friendly drivetrains, as well as for adjusting the production capacity and improving production processes – in relation to the Auto- motive Division’s sales revenue. Research and development ratio The research and development ratio (R&D ratio) in the Automotive Division shows total research and development costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology through to the development of marketable products. Particular emphasis is placed on the environmentally friendly orientation of our product portfolio. The R&D ratio underscores the efforts made to ensure the Company’s future viability: the goal of competitive profit- ability geared to sustainable growth. Return on sales before tax The return on sales is the ratio of profit before tax to sales revenue in a period, expressed as a percentage. It shows the level of profit gener- ated for each unit of sales revenue. The return on sales provides information on the profit- ability of all business activities before deducting income tax expense. Contact Information P U B L I S H E D B Y Volkswagen AG Group Financial Publications Letterbox 1848 2 38436 Wolfsburg Germany Phone + 49 (0) 5361 9 0 Fax + 49 (0) 5361 9 28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany Phone + 49 (0) 5361 9 0 Fax + 49 (0) 5361 9 30411 E-Mail Internet www.volkswagenag.com/en/InvestorRelations.html investor.relations@volkswagen.de F I N A N C I A L C A L E N D A R September 30, 2020 Volkswagen AG Annual General Meeting October 29, 2020 Interim Report January – September 2020 This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/en/InvestorRelations.html 058.809.597.20 www.volkswagenag.com 0 2 0 2

Semestriel, 2020, Auto, Volswagen

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Volswagen

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1 2 0 2 | 1 H Half-Yearly Financial Report J A N UA R Y – J U N E 2021 1 U PDATE D I N F ORM AT I ON 7 I N T E R IM M AN AGEM E N T R E PORT 25 B RAN D S AN D BUSI N ESS FI ELDS 2 9 I N T E R IM CON SOLI DATED F I NA N C IA L STATE M EN T S (CON D E N SE D) 1 Key Facts 2 Key Events 7 Volkswagen Shares 8 Business Development 17 Results of Operations, Finan- cial Position and Net Assets 24 Outlook 29 Income Statement 30 Statement of Comprehensive Income 33 Balance Sheet 34 Statement of Changes in Equity 36 Cash Flow Statement 37 Notes to the Interim Consolidated Financial Statements Responsibility Statement 58 59 Review Report Key Figures V O L K SWA G E N G R O U P Q 2 H 1 2021 2020 % 2021 2020 % Volume Data1 in thousands Deliveries to customers (units) 2,546 1,887 +34.9 4,978 3,893 +27.9 Vehicle sales (units) 2,326 1,799 +29.3 4,660 3,736 +24.7 Production (units) 2,194 1,665 +31.7 4,512 3,662 +23.2 Employees (on June 30, 2021/Dec. 31, 2020) 660.0 662.6 –0.4 Financial Data (IFRSs), € million Sales revenue 67,293 41,076 +63.8 129,669 96,131 +34.9 Operating result before special items 6,546 –2,394 x 11,358 –803 x Operating return on sales before special items (%) 9.7 –5.8 8.8 –0.8 Special items – – x – –687 x Operating result 6,546 –2,394 x 11,358 –1,490 x Operating return on sales (%) 9.7 –5.8 8.8 –1.5 Earnings before tax 6,690 –2,034 x 11,153 –1,352 x Return on sales before tax (%) 9.9 –5.0 8.6 –1.4 Earnings after tax 5,040 –1,536 x 8,454 –1,019 x Automotive Division2 Total research and development costs 3,774 3,132 +20.5 7,735 6,695 +15.5 R&D ratio (%) 6.8 9.7 7.2 8.7 Cash flows from operating activities 10,197 1,464 x 19,088 3,009 x Cash flows from investing activities attributable to operating activities3 4,711 3,751 +25.6 8,897 7,815 +13.8 of which: capex 1,853 2,042 –9.3 3,777 4,130 –8.5 capex/sales revenue (%) 3.3 6.3 3.5 5.4 Net cash flow 5,486 –2,288 x 10,191 –4,806 x Net liquidity at June 30 35,048 18,663 +87.8 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries have been updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Excluding acquisition and disposal of equity investments: Q2 €456(–547) million, H1 €7,359 (6,903) million. This version of the Interim Report is a translation of the German original. The German takes precedence. All figures shown in the Report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. Specified vehicle ranges correspond to results obtained through the Worldwide Harmonized Light vehicles Test Procedure (WLTP) on the chassis dynamometer. WLTP value ranges for series-produced vehicles may vary depending on the equipment. The actual range will deviate in practice depending on various other factors. Updated Information Key Facts > Deliveries to Volkswagen Group customers up 27.9% on the pandemic-related weak prior- year figure, reaching 5.0 million vehicles; growth in all regions, with higher demand particularly in Europe and in North and South America; electric vehicle deliveries almost tripled > Group sales revenue up 34.9% year-on-year at €129.7 billion > Operating profit increases by €12.8 billion to €11.4 billion; volume, mix and price improvements as well as positive effects from the fair-value measurement of commodity hedges; one-off expenses for restructuring measures of €0.7 billion > Profit before tax improves to €11.2 (–1.4) billion > Very positive trend in the Automotive Division’s net cash flow of €10.2 (–4.8) billion, due mainly to earnings-related factors; capex/sales revenue of 3.5 (5.4)% > Net liquidity in the Automotive Division at €35.0 billion; dividend payment of €2.4 billion in July > Exciting products: Volkswagen Passenger Cars extends its all-electric ID. family, adding the sporty ID.4 GTX with all-wheel drive, and also presents the redesigned Polo Audi continues its electrification campaign with the compact Q4 e-tron - ŠKODA launches new Fabia based on the MQB - SEAT introduces updated Ibiza and Arona models - Bentley impresses with open-top Continental GT Speed Convertible - Porsche presents new version of the 911 GT3 high-performance sports car - Lamborghini showcases Huracán STO for the first time in China - Volkswagen Commercial Vehicles celebrates world premiere of the new Multivan - Scania R 410 crowned Green Truck 2021 Key Facts 1 2 Key Events Updated Information Key Events C O V I D - 1 9 PA N D E M I C At the end of 2019, initial cases of a potentially fatal respira- tory disease became known in China. This disease is attribut- able to a novel virus belonging to the coronavirus family. Infections also appeared outside China from mid-January 2020. The number of people infected rose very rapidly in the course of 2020, albeit with differences in timing and regional spread. Around the world, measures were taken and adapted at national level and with varying levels of intensity based on the situation. However, these ultimately failed to bringing the spread of the SARS-CoV-2 virus under control. In addition, aid packages to support the economy were agreed by the European Commission and by numerous governments in Europe and other regions, and economic stimulus measures were introduced to counter the pandemic’s impact. Through- out the whole of 2020, the global spread of the SARS-CoV-2 virus brought enormous disruption to all areas of everyday life and the economy. The mostly dynamic increase in the rate of infection continued in many places throughout the first quarter of 2021. This was accompanied by ongoing disruption – such as contact and mobility restrictions or limitations on business activities – in many parts of the world. With the increased availability of testing capacities and vaccines, some countries have permitted the extensive reopening of everyday life and the economy. In China in particular, the measures taken have resulted in a removal of restrictions. In most of the world, infection rates declined in the second quarter of 2021, leading to further easing of the measures taken to contain the pandemic. However, some countries in South and Central America, Asia and Europe recorded a new rise in infections, which was primarily due to new variants of the SARS-CoV-2 virus. Some restrictions returned in response to the situation. N E W P R O D U C T S A N D T E C H N O L O G I E S P R E S E N T E D The Volkswagen Group and its brands presented new vehicles and technologies once again in the second quarter of 2021. Due to the pandemic, the presentations continued to be largely online. its electrification campaign to a new level. The flagship SUV in the ID family is based on the Modular Electric Drive Toolkit (MEB) and was developed exclusively for the Chinese market. The expressive, aerodynamic and modern exterior features illuminated front and rear logos and makes the ID.6 X and ID.6 CROZZ unmistakable on the road. Intuitively user- friendly, the human-machine interface makes for an easier drive thanks to state-of-the-art technologies, such as the augmented reality head-up display and the Volkswagen ID. Light, a strip of light that visually communicates with the driver, for instance to indicate an upcoming turn. Numerous driver assist systems provide added comfort and safety. The vehicle comes as either a six- or seven-seater and has two battery options. The Teramont and Teramont X SUVs have been refreshed with a new design and the latest technology. The full-size Teramont with seven seats features a new front and rear bumper and new lighting for a more distinctive, powerful effect. The Teramont X sister model is sportier than ever, with special R-Line styling including an updated front end with embedded high-gloss black trim, a lower spoiler and a special rear bumper. Both models feature extensive touch control functions and the latest generation of driver assist systems. They come with the option of an efficient 137 kW (186 PS) or high-power 162 kW (220 PS) 2.0-liter turbocharged engine. With the Talagon, Volkswagen is expanding its SUV campaign in China and opening up a new segment that falls between SUVs and MPVs. The model has a wheelbase of 2,980 mm and is available with six or seven seats. The Talagon is based on the Modular Transverse Toolkit (MQB) and has the latest hardware and software on board for the best possible user-friendly driving experience. The modern exterior stands out with a lighting package featuring illuminated door handles and roof rails and an illuminated rear logo. The Inno- vision Cockpit in free-floating design makes for a striking interior. The top-of-the range powertrain has a 2.5-liter V6 engine with all-wheel drive and a power output of 218 kW (296 PS). The Volkswagen Passenger Cars exhibit at the motor show was completed with the presentation of a Golf GTI specially adapted for the Chinese market. Until now, the Golf GTI had not been available in China. Auto Shanghai 2021 The Volkswagen Passenger Cars brand presented a host of new vehicles at Auto Shanghai 2021. With the debut of the all- electric ID.6 X and ID.6 CROZZ models, Volkswagen is taking The Audi brand presented no fewer than four world premieres at Auto Shanghai 2021: the Audi A6 e-tron concept showcar revealed for the first time what an electric car could look like when based on the Premium Platform Electric (PPE) Updated Information architecture. The 4.96-meter-long, dynamic sportback model offers a range of more than 700 km thanks to its 100 kWh battery. The 800-volt on-board technology enables extremely fast charging – it takes just ten minutes to recharge enough energy to cover 300 km under ideal conditions. With the new Audi Q5L presented in Shanghai, the brand completed the upgrade of the Q5 range to include a long-wheelbase version. The completely redesigned Audi A7L saloon, manufactured in China and reserved for the Chinese market, combines the sporty DNA of the A7 Sportback with the prestigious elegance of a large saloon. Innovative technologies such as adaptive air suspension, rear-wheel steering and the permanent quattro four-wheel drive are among the Audi A7L’s features. Audi also brought a concept vehicle called the Audi concept Shanghai to the motor show, albeit still under wraps. The production version of the 4.87-meter-long, all-electric SUV is to be unveiled in the second half of 2021. Lamborghini celebrated three premieres at Auto Shanghai 2021 that underscore the Italian super sports car brand’s passion and racing DNA. The Essenza SCV12 hypercar, pro- duced in a limited edition of 40 units, celebrated its world- wide debut. It has a V12 naturally aspirated engine and a power output of 611 kW (830 PS). It was joined by the road- legal super sports car Huracán STO, making its Chinese debut. With its naturally aspirated V10 engine generating 471 kW (640 PS), it can accelerate from 0 to 100 km/h in just 3.0 seconds and has a top speed of 310 km/h. In addition, the Huracán EVO Fluo Capsule was presented in the Asia-Pacific region for the first time. The super sports car is highly cus- tomizable, coming in a bold yet elegant collection of bright, vibrant exterior color schemes with complementary interior color and trim options. Other new vehicles In a digital world premiere in April 2021, the Volkswagen Pas- senger Cars brand presented its first all-electric high-per- formance model: the ID.4 GTX. The new GTX product brand is bringing new and intelligent sportiness to the world of electric mobility. The design of the ID.4 GTX underscores its extraordinary character, combining driving fun with a robust look. The familiar light strip of the ID.4 has been combined with powerful, dynamic elements. Honeycomb elements that form the daytime running lights maintain the connection with the Golf GTI. Alongside the newly designed bumpers, the eye-catching elements at the rear include the 3D LED taillight cluster with brake lights that form an X shape. The ID.4 GTX is the first model based on the MEB that has dual-motor all- wheel drive with an electric drive motor on both the front and rear axle. Together, they deliver an electrical output of 220 kW (299 PS). The brand also presented the new gene- ration of the Polo in April. A highlight of the compact best- seller is the digital cockpit landscape now fitted as standard: all information relevant to the driver is arranged in a single line of vision, with the digital instrument panel and info- tainment system merging into a single unit that is intuitive Key Events to operate. With its standard systematic integration of infor- mation, communication and entertainment, the Polo sets a new benchmark in its class. As well as the base model, the Polo is available in the Life, Style and R-Line equipment lines, in the special “Fresh” edition and as a dynamic Polo GTI with 152 kW (207 PS) of power. In May, the Volkswagen Passenger Cars brand celebrated the debut of the new Tiguan Allspace. Along with a refreshed exterior, the long-wheelbase version features technical updates: new control and assist systems ensure even more comfort, and the on-board infotainment system gives the Tiguan Allspace a host of online services and functions. With a luggage compartment capacity of up to 1,920 liters and an optional third row of seating, it offers even more space for passengers and luggage. The Audi brand continued its electrification campaign in the second quarter of 2021 and celebrated the digital world premieres of the Q4 e-tron and Q4 Sportback e-tron. The all- electric models represent the brand’s entry into premium e-mobility in the compact segment. They are defined by Audi’s typical design that combines sportiness and progres- siveness. The impressively spacious interior offers an optional augmented reality head-up display for an innovative driving experience. The choice of motors comprises three drive variants, including a top-of-the-range quattro model with a maximum power output of 220 kW (299 PS). The Q4 e-tron has a range of up to 520 km. Thanks to a maximum charging capacity of 125 kW, it takes approximately ten minutes to charge enough energy to cover around 130 km under ideal conditions. ŠKODA presented the fourth generation of the Fabia in the second quarter. The successful small car is the first Fabia to be based on the Volkswagen Group MQB and boasts an emotive design, above-average space for its class, improved comfort, new infotainment functions and numerous new safety and assist systems. The brand’s traditional charac- teristics such as good price-performance ratio, excellent functionality and the many simply clever ideas round off the new Fabia. ŠKODA also presented the redesigned Kodiaq. The emotive design of the highly successful SUV, which includes the option of seven seats, has been further refined and its aerodynamic efficiency enhanced. Innovative LED matrix headlights are also now available on the Kodiaq for the first time. In addition to the visual refinements, the sporty, top-of- the-range Kodiaq RS model has a new, more powerful TSI engine generating 180 kW (245 PS). The SEAT brand has also refreshed its model range and presented new versions of the Arona and Ibiza in the second quarter. The design update of the Arona SUV brings its off- road character even more to the forefront. The successful Ibiza small car now features Eco LED headlights as standard. Both vehicles impress with a modern, digital interior with a larger infotainment system, improved voice recognition and new connectivity solutions. Additional driver assist systems and a wide range of efficient engines are also available. 3 4 Key Events In April, Bentley celebrated the debut of the Continental GT Speed Convertible – the most powerful convertible in the Continental GT model range. The technically advanced sus- pension provides a commanding drive thanks to improved traction and precision. All-wheel steering and an electronic rear differential enhance the vehicle’s agility and stability. The new carbon-ceramic brakes provide powerful braking force. The technically updated 6.0-liter W12 engine delivers 485 kW (659 PS), enabling a sprint from 0 to 100 km/h in 3.7 seconds and a top speed of 335 km/h. Bentley also presented the Bentayga S, the sportiest model in its SUV range. The 4.0-liter, twin-turbocharged V8 engine generating 404 kW (550 PS), along with an improved sports suspension calibration, provides greater agility and dynamic ability. Ath- letic design features, dark tinted headlights, 22-inch wheels and a new split sports exhaust reveal this vehicle's perfor- mance potential. The Porsche brand presented the seventh generation of the 911 GT3 in April. Another successful transfer of tech- nology from motor racing to a road vehicle has further elevated the high-power sports car’s performance, without compromising on practicality. A hanging rear wing with a choice of four positions along with a front diffuser which is also adjustable provides improved aerodynamics and stronger downforce. The 4.0-liter naturally aspirated engine puts 375 kW (510 PS) to the wheels. The 911 GT3 is also available in the popular touring package with special exterior touches and extra interior detailing. The fixed rear wing is replaced here by an automatically extendable spoiler. In June, Porsche presented the 911 GTS version of the 911 model range. The six-cylinder boxer engine generates 353 kW (480 PS). A choice of eight-speed Porsche dual-clutch trans- mission or a seven-speed manual gearbox, combined with a sports chassis specially designed for the GTS with Porsche Active Suspension Management, ensures a superlative power- train. An even sportier-looking Cayenne Turbo GT, available solely as a four-seater, has joined the Cayenne range. With its 471 kW (640 PS) V8 twin-turbo engine, it sprints from 0 to 100 km/h in 3.3 seconds and has a maximum speed of 300 km/h. The Cayenne Turbo GT comes with all available chassis systems fitted as standard and performance tyres developed specially for this model. Volkswagen Commercial Vehicles celebrated the world premiere of the new Multivan in June. Specially designed for families and sports enthusiasts, the all-rounder has a newly developed seating and cargo space system that can adapt to countless mobility scenarios. It excels among other things with a lounge-style interior, easily adjustable and removable individual seats, a panoramic roof and a brand-new instru- ment panel with integrated display landscape. For the first time, the Multivan also comes in a plug-in hybrid drive version. With a power output of 160 kW (218 PS), it combines local emission-free driving with a very large range and low Updated Information overall fuel consumption. The range of assist systems has also expanded significantly: Front Assist with City Emer- gency Braking System, Lane Assist, road sign recognition and swerve support with a new oncoming-vehicle-braking-when- turning function now all come as standard. There is also an innovative new Travel Assist function, which enables semi- automated driving at up to 210 km/h. The standard LED headlights can be optionally upgraded to LED matrix head- lights with interactive light control. As is customary, the new generation of the Multivan is available in a base model and in an extended-wheelbase version with a larger cargo space. AWA R D S In mid-April 2021, several Group models received the renowned Red Dot Award for their outstanding product design. The CUPRA brand’s Formentor won the coveted prize in the product design category thanks to its everyday practicality paired with passion and emotion. The ŠKODA brand also won over the jury with the all-electric Enyaq iV and its emotive, powerful design language. In addition, the Volkswagen Commercial Vehicles brand’s new Multivan, which impresses with its functionality and a modern, inno- vative design, took the coveted Red Dot Award: Best of the Best prize. The Red Dot Award is one of the world’s best- known design competitions and is considered to be a seal of high-quality design. The international expert jury is com- prised of independent designers, design professors and trade journalists. The Volkswagen Passenger Cars brand received the top five-star rating for its all-electric ID.4 in the Euro NCAP test in mid-April 2021. The ŠKODA brand also a achieved a five-star overall rating with the Enyaq iV. CUPRA had a strong start, scoring a five-star rating in the test with its first standalone model, the Formentor. At the end of April 2021, Volkswagen Passenger Cars won the international World Car of the Year Award with the all- electric ID.4. The compact SUV symbolizes the systemic change to e-mobility and also offers superb practicality. With this model, the ID.3 and the planned future ID models, Volks- wagen wants to make electric mobility something for everyone in the volume sector. The World Car Awards are presented annually, with more than 90 international automotive journalists from 24 countries voting for the best new cars on the global market. In mid-June 2021, Scania won the Green Truck 2021 award for the fifth time in a row with its R 410. With this model, the Scania brand combines factors such as fuel savings, sustainability and cost efficiency. As part of the Volkswagen Group, Scania also recognizes its responsibility to help achieve the goals of the Paris Climate Agreement. The focus is not only on the electrification strategy but also on developing efficient combustion engines. The award is organized by Germany’s Trucker and VerkehrsRundschau Updated Information magazines as part of the Green Truck benchmark test. Environmental performance is measured by comparing fuel consumption and CO2 emissions. The accolade seeks to find the most fuel-efficient and environmentally friendly com- mercial vehicle in the class and is awarded annually. A N N I V E R S A R I E S In May 2021, Volkswagen Slovakia celebrated its 30th anni- versary. With sites in Bratislava, Martin and Stupava, Volks- wagen Slovakia is one of the country’s largest employers and automakers. The multi-brand plant in Bratislava produces eight models for four Group brands under one roof and was crowned Factory of the Year 2020 by management consulting firm A.T. Kearney together with the publisher Süddeut- scher Verlag and the industry magazine Produktion. Also in May 2021, Volkswagen Group Services GmbH cele- brated its 20th anniversary. Volkswagen Group Services GmbH provides comprehensive services across many disciplines along the entire value chain in the Volkswagen Group. To mark its anniversary, the company is planting 20,000 trees in partnership with the Harz National Park. With this initiative, Volkswagen Group Services GmbH is helping the Harz National Park to protect and restore the natural forests. The sustain- ability initiative is also linked to a competition for employees, which will make planting more trees possible. PA R T N E R S H I P S At the end of May 2021, ŠKODA announced that it would introduce efficient energy storage units for authorized ŠKODA dealerships in partnership with the Czech technology company IBG Česko, enabling a second life cycle for used batteries from the all-electric Enyaq iV and the plug-in hybrid Superb iV and Octavia iV models. The energy storage units for sustainably generated electricity have a capacity of up to 328 kWh, can be scaled up or down individually and are designed so that the batteries can be exchanged in just a few steps. Dealerships can use them to charge electric vehicles or to power lighting and air conditioning in their showrooms and workshops. In mid-June 2021, Volkswagen and the Swedish battery cell producer Northvolt AB agreed to concentrate production of Volkswagen premium cells in Skellefteå, Sweden. In connection with this, Volkswagen participated in a financing round at Northvolt AB that was proportionate to its share- holding, investing a further USD 650 million in the company. Volkswagen also increased its existing convertible loan by a further €190 million and, at the same time, converted this part of the loan to preferred shares. This has increased Volkswagen’s ownership interest in Northvolt AB to 23.6%. Production of premium cells at Northvolt in Skellefteå is to begin in 2023. At the end of June 2021, Porsche announced the founding of Cellforce Group GmbH, a joint venture with the Fraunhofer Key Events Institute spin-off Customcells GmbH. The aim is to develop and produce high-performance battery cells, initially to be used in motorsport from 2024. The planned production plant in the Stuttgart area will have a capacity of up to 100 MWh per year. TA K E O V E R O F N AV I STA R In November 2020, TRATON SE and Navistar International Corporation (Navistar), a leading US truck manufacturer, announced the signing of a binding merger agreement. On July 1, 2021, after presenting all regulatory approvals, TRATON acquired all outstanding ordinary shares in Navistar for a purchase price of USD 3.7 billion. TRATON now holds 100% of the shares in Navistar. M E R G E R O F M A N S E W I T H T R AT O N S E At the end of February 2020, TRATON SE (TRATON) announced its intention to merge MAN SE (MAN) with TRATON. The shares held by noncontrolling interest shareholders of MAN are to be transferred to TRATON against payment of an appropriate cash settlement in the context of this merger (merger squeeze-out). TRATON holds 94.36% of MAN’S share capital and announced its offer of a cash settlement to MAN’s noncontrolling interest shareholders in the amount of €70.68 per share on May 8, 2021. The merger of MAN with TRATON was agreed by the Annual General Meeting of MAN SE on June 29, 2021. The merger squeeze-out will take effect upon the entry of the transfer resolution and of the merger itself in the commercial register for the headquarters of TRATON SE and MAN SE. S E T T L E M E N T A G R E E M E N T S F O R D A M A G E S At the end of March 2021, the Supervisory Board of Volks- wagen AG announced the completion of the investigation initiated in October 2015 into the causes of and those responsible for the diesel issue. The Board resolved to claim damages from Prof. Dr. Martin Winterkorn, former Chair of the Board of Management of Volkswagen AG, and from Mr. Rupert Stadler, former member of the Board of Man- agement of Volkswagen AG and former Chair of the Board of Management of AUDI AG, for breach of their duty of care under stock corporation law. The resolution was based on identified negligent breaches of duty. The investigation found no breaches of duty by other members of the Volkswagen AG Board of Management. The investigation covered all mem- bers of the Board of Management who were in office during the relevant period. In June 2021, agreements on damage payments were reached in this connection with the goal of achieving speedy, legally certain, and final resolution of the diesel issue as far as the civil liability of members of governing bodies is con- cerned. To this end, Volkswagen and Audi entered into damage settlements (liability settlements) with Prof. Winter- 5 6 Key Events korn and Mr. Stadler respectively in connection with the diesel issue. Prof. Winterkorn's damage payment amounts to €11.2 million and that of Mr. Stadler to €4.1 million. Volks- wagen has furthermore reached agreement with the relevant insurers under its directors and officers liability policies (D&O insurance) on payment of an aggregate sum of €270 million (coverage settlement). In addition, agreement was reached on damage payments by a former member of Audi's Board of Management and by a former member of Porsche's Board of Management. A N T I T R U ST I N V E ST I G AT I O N In April 2019, the European Commission issued an initial statement of objections to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in connection with the Commis- sion's antitrust investigation of the automobile industry. These objections stated the European Commission's prelim- inary evaluation of the matter. Following entry into a formal settlement procedure, the Commission in April 2021 issued a revised statement of objections raising charges that were considerably more narrow. On this basis, a settlement deci- sion was issued on July 8, 2021 concluding the administrative action and assessing a total fine of roughly €502 million against the three brands. The subject matter scope of the decision is limited to the cooperation of German automobile manufacturers on individual technical questions in connec- tion with the development and introduction of SCR (selective catalytic reduction) systems for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. A N N U A L G E N E R A L M E E T I N G The 61st Annual General Meeting of Volkswagen AG took place on July 22, 2021. Due to the Covid-19 pandemic, it was held as a virtual meeting once again. With around 94% of the voting share capital present, the shareholders approved the proposal of the Board of Management and Supervisory Board to pay a dividend of €4.80 per ordinary share and €4.86 per Updated Information preferred share for fiscal year 2020, unchanged from the previous year. Furthermore, the Annual General Meeting approved the actions of the members of the Board of Man- agement and Supervisory Board for fiscal year 2020 and approved two amendments to the Articles of Association. The agenda of the Annual General Meeting also included reso- lutions on settlement agreements for damages in connection with the diesel issue. These resolutions were adopted by the Annual General Meeting. The shareholders also approved the new system presented by the Supervisory Board for remuneration of Board of Management members and confirmed the existing remuneration regulations set out in the Articles of Association for members of the Supervisory Board. In addition, the Annual General Meeting appointed Ernst &Young GmbH Wirtschaftsprüfungsgesellschaft as the auditors for the single-entity and consolidated financial statements for fiscal year 2021 and as the auditors to review the condensed consolidated financial statements and interim management report for the period from January 1 to Septem- ber 30, 2021 and for the first quarter of the 2022 fiscal year. The terms of office of Dr. Louise Kiesling and Mr. Hans Dieter Pötsch as members of the Volkswagen AG Supervisory Board duly ended at the close of the Annual General Meeting. The Annual General Meeting re-elected them both to the Super- visory Board for another full term of office as shareholder representatives. S U P E R V I S O R Y B O A R D M AT T E R S Effective May 11, 2021, Ms. Daniela Cavallo was elected by the court as a replacement member of the Volkswagen AG Super- visory Board. In addition, the Supervisory Board elected her as a member of the Executive Committee effective May 18, 2021. Ms. Cavallo has chaired the General and Group Works Councils at Volkswagen AG since the end of April 2021 and succeeds Mr. Bernd Osterloh on the Volkswagen AG Super- visory Board and Executive Committee. The Supervisory Board of Volkswagen AG re-elected Mr. Hans Dieter Pötsch as its chair on July 22, 2021. Interim Management Report Volkswagen Shares Volkswagen Shares The recovery on the international stock markets, which began in 2020 after the sharp falls in share prices triggered by the Covid-19 pandemic, continued in a largely vigorous fashion in the first half of this year. Optimism was widespread, despite fears of setbacks in tackling the pandemic and of the resulting prolongation of restrictions to public life and the corresponding impact on economic growth. wagen shares. Firstly, the Group’s business performance in 2020 and the first quarter of 2021 was better than had been feared at the outset of the pandemic. Secondly, the plans presented by the Group (that in some cases have already been implemented) for accelerating the expansion of e-mobility along with the necessary battery technology and charging components were well received by investors. On the German stock market, the DAX made a strong start to the fiscal year and hit a new record high in each month of the reporting period. Germany’s benchmark index remained largely unmoved by the continuing spread of the SARS-CoV-2 virus, and more than compensated for the previous year’s slump, although the pace of increase slowed in the second quarter. The main drivers of this development were the start of vaccinations and the continued economic stimulus by central banks and governments all around the world, as well as the signs of an emerging recovery in the global economy. Support also came from gains in automotive stocks. The concerns of market participants regarding rising inflation had a negative impact, however. Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website www.volkswagenag.com/en/InvestorRelations.html. V O L K SWA G E N S H A R E F I G U R E S A N D M A R K E T I N D I C E S F R O M J A N U A R Y 1 TO J U N E 3 0 , 2 0 2 1 High Low Closing Volkswagen AG’s preferred and ordinary shares also recovered from the loss in value caused by the pandemic. Their prices were up by 39% and 63% respectively compared to the end of 2020. At the end of June 2021, they were therefore above the level seen before the Covid-19 pandemic and were above €200 for the first time since 2015. There were two main reasons for the encouraging performance of Volks- Ordinary share Preferred share DAX ESTX Auto & Parts Price (€) Date Price (€) Date Price Date Price 327.20 Mar. 18 246.55 Apr. 6 15,730 June 15 662 165.70 Jan. 12 144.80 Jan. 13 13,433 Jan. 29 491 276.80 June 30 211.20 June 30 15,531 June 30 621 Date June 7 Jan. 11 June 30 P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 2 0 T O J U N E 2 0 2 1 Index based on month-end prices: December 31, 2020 = 100 Volkswagen ordinary share +62.7% Volkswagen preferred share +38.6% DAX +13.2% EURO STOXX Automobiles & Parts +23.1% 180 180 160 160 140 140 120 120 100 100 80 80 D F M A M A S O N D 7 8 Business Development Interim Management Report Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The global spread of the SARS-CoV-2 virus and the associated restrictions continued in the first half of 2021 to varying degrees. The progress made by many countries in adminis- tering vaccines to their populations had a positive effect, while the emergence of new variants of the virus led to a renewed rise in infections at a national level. Compared with the prior-year period, the global economy recorded positive growth. In both the advanced economies and the emerging markets, the average rate of expansion of gross domestic product (GDP) was far higher than the negative growth seen in the first half of 2020. At a national level, performance during the reporting period was in part dependent on the extent to which the negative impacts of the Covid-19 pan- demic were already materializing and the degree of intensity applied to the measures taken to contain the spread. The governments and central banks of numerous countries around the world continued to maintain their expansive fiscal and monetary policy measures. Interest rates remained relatively low. On average, prices for energy and other com- modities rose significantly compared with the prior-year period. Global trade in goods increased in the reporting period. with the prior-year period. This trend was seen in almost all countries in Northern and Southern Europe due among other things to falling infection rates in many countries during the second quarter, which led to the relaxing of measures to contain the pandemic. On the whole, Germany reported a positive growth rate over the reporting period. The unemployment rate rose slightly compared with the prior-year period, while the num- ber of employees affected by short-time working (Kurzarbeit) remained high. Confidence in the industrial and service sectors rose on average, consumer confidence was slightly above the level for the same period of the previous year. As a whole, the economies in Central and Eastern Europe showed an increase in real absolute GDP in the first six months of the year compared with the first half of 2020. This trend was also observed in Russia, the largest economy in Eastern Europe. Turkey’s economy achieved positive GDP growth in the first half of 2021 amid high inflation and a devaluation of the local currency. South Africa also recorded a positive develop- ment in GDP in the reporting period amid persistent struc- tural deficits and political challenges. The economies of Western Europe recorded markedly positive growth overall from January to June 2021 compared The US economy achieved significantly positive growth in the first six months of 2021 as infection rates tapered off. The US government approved a further comprehensive stimulus E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 2 0 T O J U N E 2 0 2 1 Index based on month-end prices: as of December 31, 2020 = 100 EUR to GBP EUR to USD EUR to CNY EUR to JPY 110 110 105 105 100 100 95 95 90 90 D F M A M A S O N D Interim Management Report package in the first quarter of this year to strengthen the economy. Both the weekly number of people filing new claims for unemployment benefits and the unemployment rate fell, but remained at a relatively high level. The average inflation rate increased in the reporting period. In Canada and Mexico, economic output was also significantly higher than in the same period of 2020. Brazil’s economy recorded an increase from January to June 2021 despite high infection rates. Argentina registered a recovery in economic output amid high inflation and con- tinuous currency depreciation. China had been exposed to the negative effects of the Covid-19 pandemic earlier than other economies and bene- fited from a relatively low number of new infections as the year progressed. The country’s economic output continued to rise in the reporting period. India registered positive eco- nomic growth overall amid a spike in infections. Japan also recorded a positive GDP growth rate compared with the same period of the previous year. T R E N D S I N T H E M A R K E T S F O R PA S S E N G E R C A R S A N D L I G H T C O M M E R C I A L V E H I C L E S Between January and June 2021, global demand for passenger cars rose sharply on the whole compared with the weak level recorded in the prior-year period (+29.1%). However, the growth was uneven owing to the effects of the Covid-19 pandemic, which varied strongly from region to region both in the first six months of 2020 and in 2021. The overall markets of the South America and Africa regions recorded above-average growth. The increases in Western Europe, Central and Eastern Europe, North America and Asia-Pacific were roughly in line with the global average. Global demand for light commercial vehicles between January and June 2021 was up significantly on the prior-year level. In Western Europe, demand for passenger cars in the reporting period was up sharply on the previous year. The continuing restrictions aimed at containing the Covid-19 pandemic led to a year-on-year decline in deliveries in the first two months of 2021. From March onwards, demand in the individual months exceeded that of the previous year, which had been affected by the pandemic as of the last third of the first quarter and particularly in the second quarter of 2020. The performance of the large individual passenger car markets was positive without exception: from January to June 2021, new registrations of passenger cars in France, the United Kingdom, Italy and Spain recorded above-average double-digit growth rates. In the first half of 2021, the volume of new registrations of light commercial vehicles in Western Europe was much higher than the prior-year figure. Demand for passenger cars in Germany rose significantly between January and June 2021. In addition to the effects of Business Development the Covid-19 pandemic, early purchases in the fourth quarter of 2020 in anticipation of the expiry of the temporary reduc- tion in value-added tax (VAT) led to a lower volume of new registrations in the first few months of the reporting period. Demand for light commercial vehicles in Germany in the reporting period was substantially higher than in the same period of 2020. In the Central and Eastern Europe region, there was a strong rise in sales of passenger cars in the first six months of 2021 compared with the prior year. The development of demand varied from market to market. In the Central European EU countries as a whole, a lower absolute increase in demand was registered than in Russia, the region’s largest single market. This recorded a very sharp rise in demand in the reporting period after falling moderately short of the prior- year level in the first quarter of 2021. Registration volumes for light commercial vehicles in Central and Eastern Europe rose sharply year-on-year. The number of vehicles sold in Russia in the months of January to June 2021 was up considerably on the prior-year figure. In Turkey, the passenger car market volume in the reporting period exceeded the low level of the previous year by more than 50%. The market recovery that had begun in the fourth quarter of 2019 thus continued in 2021. In South Africa, the number of passenger cars sold between January and June 2021 was up by around a third on the very weak figure recorded the previous year. Between January and June 2021, demand for light com- mercial vehicles rose both in Turkey and in South Africa by more than 50% year-on-year. In North America, sales of passenger cars and light com- mercial vehicles (up to 6.35 tonnes) in the reporting period increased sharply compared with the prior-year figure, which had been impacted by the negative effects of the Covid-19 pandemic. In this region, the market volume in the USA also rose strongly year-on-year. Of the light commercial vehicles, the SUV models in particular benefited from this increase. The Canadian automotive market saw a very strong rise in sales in the reporting period, thereby halting the downtrend that had begun in 2018 and had accelerated in the previous year as a consequence of the Covid-19 pandemic. The number of vehicles sold in Mexico was considerably higher than the comparable prior-year figure. In South America, the volume of new registrations for passenger cars and light commercial vehicles in the first six months of 2021 was on the whole much higher than in the weak prior year, which had been drastically affected by the impact of the Covid-19 pandemic. In both Brazil and Argen- tina, the number of new registrations was approximately one-third higher than in the prior-year period. 9 10 Business Development In the Asia-Pacific region, the volume of the passenger car market in the reporting period increased sharply compared with the prior-year figure, which had been substantially impacted by the SARS-CoV-2 virus, and nearly reached its pre- pandemic level. The absolute rise in demand for passenger cars in the reporting period was attributable in particular to the favorable trend in China. Here, the signs of a recovery that had begun during the second half of 2020 – following the drastic losses in the first three months of the previous year – continued, but weakened towards the end of the reporting period. In the Indian passenger car market, sales in the January to June 2021 period virtually doubled compared with the weak prior year. In Japan, the number of new passenger cars registered in the reporting period was up significantly on the prior-year period. There was a moderate year-on-year improvement in demand for light commercial vehicles in the Asia-Pacific region. Registration volumes in China, the region’s dominant market and the largest market worldwide, fell noticeably year-on-year. The number of new vehicle registrations in India rose very sharply, and in Japan the number was markedly higher than the prior-year level. T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S In the markets that are relevant for the Volkswagen Group, global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was much higher in the reporting period compared with the prior year. Compared with the previous year, which had been adversely affected by the Covid-19 pandemic, a recovery of the truck markets could be observed worldwide. Demand in the 27 EU states excluding Malta, but plus the United Kingdom, Norway and Switzerland (EU27+3), was also up sharply on the previous year’s level in the first half of 2021. Growth could be observed in almost all truck markets in the region. Poland saw demand virtually double, while the UK recorded growth of more than 40%. France and Germany also saw an appreciable rise in demand. The Russian market grew very sharply. New registrations in Turkey impressively more than doubled year-on-year, albeit from a low prior-year level. On the South African market, demand was up by more than 60%. In Brazil, the largest market in the South America region, demand for trucks in the first half of 2021 was up more than 50% year-on-year. In the first six months of 2021, there was noticeable growth in demand overall in the bus markets that are relevant for the Volkswagen Group compared with the same period of the prior year. Between January and June 2021, demand for buses in the EU27+3 markets was unchanged on the weak level of the previous year. Demand for buses in Brazil was up very Interim Management Report sharply year-on-year, while Mexico registered a significant increase on the previous year. As a consequence of the Covid-19 pandemic, demand for coaches in particular was still virtually non-existent in any of the bus markets that are relevant for the Volkswagen Group. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are subject to varying regional and economic factors. Consequently, their business growth trends are mostly independent of each other. Despite the global impact of the Covid-19 pandemic and continuing uncertainty, for instance surrounding future emissions regulations, order activity in the marine market was markedly higher in the first half of 2021 than in the same period of the previous year. In merchant shipping, the market for container ships in particular performed encouragingly thanks to high demand combined with bottlenecks in transport capacity. Demand for cruise ships and passenger ferries remained low due to the difficult liquidity situation of shipping companies as a result of the Covid-19 pandemic. The special market for government vessels, which is driven by state investment, continued on a largely stable trajectory. In the offshore sector, the existing overcapacity continued to curb investment in offshore oil production. The market for power generation improved slightly in the first half of 2021 compared with the same period of the previous year. Overall, initial signs of market recovery are evident, but there remains a great deal of hesitancy around investment decisions. The general trend away from oil-fired power plants toward dual-fuel and gas-fired power plants continued. Demand for new energy solutions remained high with a strong trend towards greater flexibility and decen- tralized availability with an increased focus on hydrogen technologies. The market for turbo machinery recovered in the first half of 2021 from the negative impacts of the Covid-19 pandemic, with a markedly positive year-on-year trend. Prices for raw materials continued to increase significantly, resulting in rising demand for production facilities with turbo compres- sors in the raw materials and processing industry. In contrast, the oil and gas markets saw significant falls in demand. The growth markets for turbo machinery, for instance the market for electro thermal energy storage (ETES), improved signifi- cantly compared with the first half of 2020, driven by greater focus on investment and markedly higher prices for carbon dioxide certificates in European trading. However, demand for steam turbines used for power generation and gas turbines used for decentralized, industrial combined-heat-and- power installations declined and deteriorated once again year-on-year due to the modified focus of investment and overcapacity on the part of electricity producers. Interim Management Report The after-sales business for diesel engines in the marine and power plant business was weaker in the first half of 2021 than in the same period of the previous year, as the Covid-19 pandemic continued to adversely affect demand. The impact of the Covid-19 pandemic was also still clearly felt in the after-sales market for turbo machinery in the first six months of 2021. Due to financial constraints, capital- intensive modifications continued to be postponed or in some cases even canceled. T R E N D S I N T H E M A R K E T S F O R F I N A N C I A L S E R V I C E S Demand for automotive financial services was buoyant in the first half of 2021 due, among other things, to the persistently low key interest rates in the main currency areas. Neverthe- less, the Covid-19 pandemic put pressure on the demand for financial services in almost all regions. The European passenger car market continued to be affected by the impact of the Covid-19 pandemic in the reporting period. Vehicle deliveries, however, saw a sharp increase on the pandemic-related weak level of the previous year. The demand for financing and lease contracts for new vehicles also exceeded the figure for 2020; however, the proportion of contracts to total sales declined year-on-year. A positive trend was also recorded in the campaign business for the financing of used vehicles, where the current market environment enabled further growth particularly in after- sales products such as servicing, maintenance and spare parts agreements. In Germany, the pandemic’s impact also continued to affect the financial services business. Nevertheless, more lease contracts were signed with both individual and fleet customers in the first half of 2021. The number of new financing contracts for new and used vehicles was down on the previous year’s level, though the used vehicle business performed positively especially in the second quarter. The number of new maintenance and insurance products was lower than in the previous year, with a few exceptions. In South Africa, demand for financing and insurance products for new and used vehicles rose slightly in the first half of 2021, continuing to be bolstered by campaigns, vehicle price inflation and interest rates that remained at historic lows. Financed vehicle acquisitions, however, remained diffi- cult overall in light of the subdued economy and continuing pressure on disposable income. In the North America region, vehicle deliveries and the demand for lease and financing contracts, were up on the previous year’s figures in the first half of 2021 along with after-sales products and automotive-related insurance. In the USA, the proportion of lease and financing contracts in per- centage terms was virtually unchanged year-on-year. In Canada, however, it declined due to the previous year’s Covid support programs. In Mexico, vehicle deliveries increased year-on-year. In absolute terms, the number of lease and Business Development financing contracts here reached the previous year’s level, though demand in the fleet business was below the equiva- lent figure for 2020. In the South America region, demand for automotive financial services in the first half of 2021 remained roughly level with the previous year in an automotive market that has recovered since 2020. In Brazil, the trend toward the fleet business and long-term leases strengthened. In Argentina, customers purchased their vehicles mostly in cash in a difficult macroeconomic environment and sales increased through car savings plans. China’s passenger car market continued to recover from the Covid-19 pandemic at the beginning of 2021. This recov- ery weakened, however, in the second quarter, which also meant fewer contracts were signed for automotive-related financial services. The comparative prior-year figures were nearly reached in the reporting period. In the Japanese market, demand for financial services rose slightly compared with the prior-year period. In the first half of 2021, the commercial vehicle market, which was heavily affected by the Covid-19 pandemic in the previous year, recorded a recovery compared to the prior-year period, particularly due to growth in the heavy commercial vehicles category. This positive trend was also seen in finan- cing and lease contracts in Europe and Brazil. V O L K SWA G E N G R O U P D E L I V E R I E S The Volkswagen Group delivered 4,978,238 vehicles to customers worldwide in the first half of 2021. This was 27.9% or 1,085,192 units more than in the same period of the previous year, when demand was strongly impacted by the Covid-19 pandemic and the measures taken worldwide to contain it. Sales figures for both the Passenger Cars Business Area and the Commercial Vehicles Business Area exceeded the previous year’s levels. The chart in this section shows the trend in deliveries worldwide for the individual months compared with the previous year. In the following, we report separately on deliveries in the Passenger Cars Business Area and the Commercial Vehicles Business Area. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N U A R Y 1 TO J U N E 3 0 1 2021 2020 % Passenger Cars 4,851,786 3,815,308 +27.2 Commercial Vehicles 126,452 77,738 +62.7 Total 4,978,238 3,893,046 +27.9 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 11 12 Business Development G L O B A L D E L I V E R I E S B Y T H E PA S S E N G E R C A R S B U S I N E S S A R E A Global demand for Volkswagen Group passenger cars and light commercial vehicles from January to June 2021 rose by 27.2% year-on-year to 4,851,786 units. The uncertainty and the measures taken around the world in connection with the Covid-19 pandemic resulted in market conditions that had a strong impact on the comparative figure for 2020. In terms of the trend in our deliveries to customers, there were some appreciable differences across individual countries and regions in the reporting period, depending on the latest infec- tion rates, the related restrictions and the scale of disruption caused by the pandemic in the prior-year period. Further- more, sales figures were impacted in some regions as a result of supply bottlenecks for semiconductors. All Volkswagen Group brands exceeded their prior-year figures. We registered increased demand year-on-year in all regions. The Group’s sales figures also responded positively to its e-mobility campaign; in the first half of 2021, we delivered 170,939 fully electric vehicles to customers worldwide. This was 106,477 more units than in the same period of the previous year. Our plug-in hybrid models were also very popular with our customers, with 171,300 units being sold (previous year: 56,303). As a result, electric vehicle deliveries nearly tripled year-on-year, rising to 6.9 (3.1)% of total Group deliveries. The Group’s most successful all-electric vehicles included the ID.4, ID.3 and e-up! from the Volkswagen Passenger Cars brand, the Audi e-tron and Audi e-tron Sportback, the ŠKODA Enyaq iV, the SEAT Mii electric and the Porsche Taycan. The most popular plug-in hybrid models included the Golf hatchback, Passat Estate and Tiguan from Volkswagen Passenger Cars, the Audi A3 Sportback and Audi Q5, the ŠKODA Octavia Combi and ŠKODA Superb Combi, the SEAT Leon Sportstourer, the CUPRA Formentor and the Porsche Cayenne. In an overall global market exhibiting strong growth, we achieved a passenger car market share of 12.6 (12.8)%. The following table in this section provides an overview of passenger car and light commercial vehicle deliveries to customers by market in the reporting period. Sales trends in the individual markets are described in the following sec- tions. Deliveries in Europe/Other Markets In Western Europe, the Volkswagen Group delivered 1,582,571 vehicles to customers in the first six months of this year in an overall market that was at a much higher level than the prior year. This was 30.5% more than in the same period of the previous year, which had been strained by the pandemic. While the course of the Covid-19 pandemic and the restric- tions aimed at containing it continued to act as a drag on demand for Group models in the first quarter of 2021, demand rose particularly at the beginning of the second quarter as compared with the same period of the previous Interim Management Report year, the quarter that had been affected most by the pan- demic. Demand for the Volkswagen Group’s electric vehicles was strongest in Western Europe, where we delivered more than two-thirds of our plug-in hybrids and over two-thirds of our all-electric models to customers in the first half of 2021. In this region, electrified vehicles accounted for over 15% of the Group’s total deliveries. The Group models with the highest volume of demand were the Golf, T-Roc, Tiguan and Polo from the Volkswagen Passenger Cars brand. In addition, new or successor models introduced to the market in the previous year proved very popular with customers, including the up!, the T-Roc Cabrio and Arteon Shooting Brake and the first all-electric production models, the ID.3 and ID.4 from the Volkswagen Passenger Cars brand, the A3 saloon, A3 Sport- back and e-tron Sportback from Audi, the ŠKODA Octavia, the SEAT Leon and CUPRA Formentor. Other new or successor models successfully launched on the market in the reporting period included the plug-in hybrid versions of the Tiguan from Volkswagen Passenger Cars, the Q3, Q3 Sportback, Q5 and Q5 Sportback from Audi, the SEAT Tarraco and the CUPRA Formentor, as well as the all-electric e-tron GT and Q4 e-tron from Audi and the Enyaq iV from ŠKODA. The Volkswagen Group’s share of the passenger car market in Western Europe expanded to 24.3 (23.6)%. In Germany, demand for vehicles from the Volkswagen Group was up 19.5% on the pandemic-related weak prior-year figure in an overall market that grew significantly between January and June 2021. The first quarter saw a lower volume of new registrations as an effect of the Covid-19 pandemic as well as early purchases made in the fourth quarter of 2020 in anticipation of the expiry of the temporary reduction in value-added tax (VAT), but demand recovered as the reporting period went on. The Group models with the highest volume of demand were the Golf and Passat Estate from the Volks- wagen Passenger Cars brand. In addition, the new or succes- sor models introduced in the previous year – the up!, T-Roc Cabrio, Tiguan and Arteon Shooting Brake and the first all-electric production models, the ID.3 and ID.4 from Volkswagen Passenger Cars, the A3 Sportback and e-tron Sportback from Audi, the ŠKODA Octavia, the Leon and Ateca from SEAT and the CUPRA Formentor – were very popular with customers. Nine Group models led the Kraftfahrt- Bundesamt (KBA – German Federal Motor Transport Author- ity) registration statistics in their respective segments: the up!, Golf, T-Roc, Tiguan, Touran, Passat, Audi A6, Porsche 911 and Multivan/Transporter. After the first six months of 2021, the Golf was still the most popular passenger car in Germany in terms of registrations. In the Central and Eastern Europe region, the number of vehicles handed over to customers in the reporting period was up 32.9% year-on-year. The overall market also recorded strong growth in demand. Demand developed encouragingly for the Polo saloon, T-Cross, T-Roc and Tiguan models from Interim Management Report Business Development Volkswagen Passenger Cars, for the ŠKODA Rapid, Kamiq, Karoq and Kodiaq models and for the SEAT Arona. The Volks- wagen Group’s share of the passenger car market in the Central and Eastern Europe region increased to 22.7 (22.0)%. In Turkey, the Volkswagen Group continued to benefit from the catch-up effects in the overall market, raising the number of vehicles handed over to customers from January to June of this year by 75.4% compared with the prior-year period. The Passat saloon was the most sought-after Group model. In the South African market, the number of Group models sold increased by 26.7%, a somewhat slower rate than the overall market. The Polo from the Volkswagen Passenger Cars brand remained the most sought-after Group model there. Deliveries in North America In North America, demand for Volkswagen Group models outperformed the overall market and climbed by 45.1% in the reporting period compared with the previous year, which had been weakened by the pandemic. The Group’s share of the market in this region increased to 5.1 (4.5)%. The Tiguan Allspace and Jetta from Volkswagen Passenger Cars were the most sought-after Group models in North America. PA S S E N G E R C A R D E L I V E R I E S TO C U ST O M E R S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2021 2020 (%) Europe/Other Markets 2,132,025 1,601,802 +33.1 Western Europe 1,582,571 1,212,304 +30.5 of which: Germany 539,234 451,183 +19.5 France 137,999 91,512 +50.8 United Kingdom 243,115 157,557 +54.3 Italy 153,122 101,947 +50.2 Spain 130,230 91,165 +42.9 Central and Eastern Europe 365,452 274,905 +32.9 of which: Czech Republic 65,030 51,832 +25.5 Russia 119,504 83,279 +43.5 Poland 73,581 52,792 +39.4 Other Markets 184,002 114,593 +60.6 of which: Turkey 75,724 43,165 +75.4 South Africa 36,791 29,035 +26.7 North America 492,210 339,245 +45.1 of which: USA 372,982 247,781 +50.5 Canada 50,428 33,989 +48.4 Mexico 68,800 57,475 +19.7 South America 236,277 169,166 +39.7 of which: Brazil 170,053 127,043 +33.9 Argentina 35,037 25,208 +39.0 Asia-Pacific 1,991,274 1,705,095 +16.8 of which: China 1,846,208 1,588,923 +16.2 India 16,006 7,979 x Japan 34,512 31,499 +9.6 Worldwide 4,851,786 3,815,308 +27.2 Volkswagen Passenger Cars 2,703,243 2,198,898 +22.9 Audi 981,681 707,225 +38.8 ŠKODA 515,277 426,712 +20.8 SEAT 280,736 193,419 +45.1 Bentley 7,199 4,918 +46.4 Lamborghini 4,852 3,548 +36.8 Porsche 153,656 116,964 +31.4 Bugatti 40 33 +21.2 Volkswagen Commercial Vehicles 205,102 163,591 +25.4 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 13 14 Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 1,100 1,100 1,000 1,000 900 900 800 800 700 700 600 600 500 500 400 400 F M A M In the US market, which is witnessing strong growth, the Volkswagen Group delivered 50.5% more vehicles to cus- tomer between January and June 2021 than in the same period of the previous year. The biggest growth among the Group models in absolute terms was registered by the Tiguan Allspace, Atlas and Atlas Cross Sport from Volkswagen Passenger Cars, by the Q3, Q5, Q7 and e-tron from the Audi brand and by the Macan and Taycan from Porsche. The Taos and the ID.4 from Volkswagen Passenger Cars, the Audi Q5 Sportback and Audi e-tron Sportback and the Porsche Panamera were successfully launched on the market during the reporting period as new or successor models. In Canada, the number of deliveries to Volkswagen Group customers rose by 48.4% year-on-year in the reporting period. The overall market recorded a smaller increase during this period. The Tiguan Allspace and Atlas Cross Sport from Volkswagen Passenger Cars and the Audi Q3 and Audi Q5 were some of the models that registered encouraging growth in demand. In Mexico, where the overall market is seeing consider- able growth, we delivered 19.7% more vehicles to customers in the first half of this year than in the prior-year period. The Group models with the highest volume of demand were the Vento and the new Taos from the Volkswagen Passenger Cars brand. Deliveries in South America In the South American market, which is recording very strong growth for passenger cars and light commercial vehicles, the number of Group models delivered to customers between January and June 2021 increased by 39.7% year-on-year. The Gol, T-Cross and the new Nivus from Volkswagen Passenger Cars were the Group models in highest demand. The Group’s share of the market in South America amounted to 13.6 (13.7)%. J Interim Management Report 2021 2021 2020 2020 J A S O N D Compared to the previous year, the Volkswagen Group delivered 33.9% more vehicles to customers in the first six months of 2021 in the Brazilian market, which is growing at roughly the same pace. Along with the Gol and the T-Cross, the new Nivus from Volkswagen Passenger Cars was in espe- cially high demand. In Argentina, demand for Group models in the reporting period rose along with the very rapidly growing overall market by 39.0% in comparison with the weak previous year. The Group models with the highest volume of demand were the Gol, the T-Cross and the new Nivus from Volkswagen Passenger Cars and the Amarok from Volkswagen Commer- cial Vehicles. Deliveries in the Asia-Pacific region In the first six months of 2021, the Volkswagen Group saw demand in the Asia-Pacific region increase by 16.8% year-on- year in a fast-growing overall market. Supply bottlenecks for semiconductors were most apparent in this region. The Group’s share of the passenger-car market in this region amounted to 12.0 (13.2)%. The Chinese market as a whole continued to recover in the reporting period, albeit at a slower pace. There, the Volkswagen Group increased the number of vehicles deliv- ered to customers by 16.2% year-on-year. New or successor models introduced in the course of the previous year were in particularly high demand: the Tacqua, Tiguan X, Tayron X, Viloran and Phideon models from Volkswagen Passenger Cars, the VS7 from the JETTA brand, the Audi A5 Sportback, Audi Q7 and Audi e-tron and the Porsche Taycan. Demand also developed encouragingly for the Bora, Lavida, Sagitar and Magotan from Volkswagen Passenger Cars, the A4L saloon, the Q5L and A6L saloon from Audi, as well as the Porsche Macan, among others. The ID.4 X, ID.4 CROZZ, CC Shooting Brake and Teramont models from Volkswagen Interim Management Report Business Development Passenger Cars, the Audi A3L saloon and the Audi Q5L Sportback and the Porsche Panamera were successfully launched on the market during the reporting period as new or successor models. In the Indian passenger car market, which expanded by more than 90%, the Volkswagen Group saw demand double in the first six months of this year compared with the weak prior-year period. The Polo from the Volkswagen Passenger Cars brand and the Rapid from ŠKODA were the most sought- after Group models there. In Japan, the number of Group models delivered to customers between January and June 2021 increased by 9.6% year-on-year in an overall market experiencing significant growth. The Group model to record the highest demand was the T-Cross from Volkswagen Passenger Cars. In the 27 EU states excluding Malta, but plus the United Kingdom, Norway and Switzerland (EU27+3), sales were up by 46.3% on the same period of the previous year to a total of 62,100 units, of which 48,996 were trucks and 2,012 were buses. Here, the MAN brand delivered 11,092 light commer- cial vehicles. In Russia, sales rose year-on-year to 6,657 (2,761) units, comprising 6,638 trucks and 19 buses. Between January and June 2021, deliveries in Turkey increased to 3,020 (860) vehicles. Trucks accounted for 2,922 units and buses for 26 units, while 72 vehicles from the MAN TGE van series were sold. In South Africa, deliveries of Volkswagen Group commercial vehicles increased by 47.4% year-on-year to a total of 1,767 units; of this figure 1,620 were trucks and 147 were buses. C O M M E R C I A L V E H I C L E D E L I V E R I E S From January to June 2021, the Volkswagen Group delivered 62.7% more commercial vehicles to customers worldwide than in the same period of the previous year, when demand was affected by a slump in core markets that was further intensified by the uncertainty generated by the Covid-19 pandemic. We delivered a total of 126,452 commercial vehicles to customers in the first half of this year. Trucks accounted for 108,667 units (+ 69.4%) and buses for 6,503 units (– 10.3%). A total of 11,282 (+ 77.5%) vehicles from the MAN TGE van series were delivered. Sales in North America rose in the first half of 2021 to 1,115 vehicles (+ 52.5%), which were delivered almost exclu- sively to customers in Mexico; this included 744 trucks and 371 buses. Deliveries in South America increased to a total of 39,701 vehicles (+ 87.4%), of which 36,827 were trucks and 2,873 were buses. Sales in Brazil increased by 87.4% in the first six months of 2021. Of the units delivered, 31,923 were trucks and 2,272 were buses. In the Asia-Pacific region, the Volkswagen Group sold 6,423 vehicles to customers in the reporting period; among these, 6,012 were trucks and 404 were buses. Overall, this was 20.8 % more than in the previous year. C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N U A R Y 1 T O J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2021 2020 (%) Europe/Other Markets 79,213 50,502 +56.9 of which: EU27+3 62,100 42,450 +46.3 of which: Germany 16,384 12,074 +35.7 Russia 6,657 2,761 x Turkey 3,020 860 x South Africa 1,767 1,199 +47.4 North America 1,115 731 +52.5 of which: Mexico 1,111 731 +52.0 South America 39,701 21,186 +87.4 of which: Brazil 34,195 18,249 +87.4 Asia-Pacific 6,423 5,319 +20.8 Worldwide 126,452 77,738 +62.7 Scania 49,229 30,437 +61.7 MAN 77,223 47,301 +63.3 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. 15 16 Business Development D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment are usually part of major investment projects. Lead times range from just under one year to several years, and partial deliveries as construc- tion progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. In the period from January to June 2021, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated more than three-quarters of overall sales revenue. V O L K SWA G E N G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division covers the Volkswagen Group’s dealer and customer financing, leasing, banking and insur- ance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania and Porsche Holding Salzburg. The Financial Services Division’s products and services were popular in the first six months of 2021. However, demand was affected to varying degrees by the Covid-19 pandemic. The number of new financing, leasing, service and insurance contracts signed worldwide increased by 22.5% to 4.6 million. The ratio of leased and financed vehicles to Group deliveries (penetration rate) in the Financial Services Divi- sion’s markets amounted to 36.1 (36.3)% in the reporting period. The total number of contracts as of June 30, 2021 stood at 24.5 (24.1) million. In the Europe/Other Markets region, the financial services business was still impacted by the Covid-19 pandemic in the first six months of this year. However, the number of new contracts signed in the reporting period was higher than the pandemic-related weak prior-year figure, amounting to 3.3 (2.8) million. At 17.9 (17.6) million, the total number of contracts at the end of June 2021 exceeded the figure for December 31, 2020. The customer financing/leasing area recorded 7.6 (7.6) million of these contracts. In North America, the number of new contracts signed in the reporting period increased year-on-year to 537 (417) thou- sand. At 3.1 (3.1) million, the number of contracts as of June 30, 2021 was on a level with the figure for year-end 2020. The customer financing/leasing area recorded 1.9 (1.9) million contracts. In the South America region, 179 (119) thousand new contracts were signed in the period from January to June of this year. At the end of June 2021, the total number of con- tracts was higher than on December 31, 2020, and amounted to 729 (721) thousand. The contracts mainly related to the customer financing/leasing area. Interim Management Report At 522 thousand, the number of new contracts signed in the Asia-Pacific region in the first six months of 2021 exceeded the previous year’s figure by 24.3%. The total number of con- tracts amounted to 2.7 million at the end of the reporting period, 3.4% more than at year-end 2020. The customer financing/leasing area accounted for 1.9 million contracts (+2.0%). S A L E S T O T H E D E A L E R O R G A N I Z AT I O N The Volkswagen Group’s unit sales to the dealer organization increased by 24.7% year-on-year in the first six months of 2021 to 4,660,309 vehicles (including the Chinese joint ven- tures). At 4,110,686 vehicles, unit sales outside Germany rose by 25.7% compared with the period from January to June 2020. During the reporting period, demand in markets around the world recovered from the declines in sales in the prior-year period precipitated by the Covid-19 pandemic. China, the United States and the United Kingdom in par- ticular recorded growth. Unit sales in Germany increased by 18.0% year-on-year. Vehicles sold in Germany as a proportion of overall sales decreased to 11.8 (12.5)%. P R O D U C T I O N In the reporting period the Volkswagen Group produced 4,512,229 vehicles (including the Chinese joint ventures), 23.2% more than in the same period of the previous year. This had been marked by the impact of national measures to contain the pandemic, which had led to the disruption of supply chains with production subsequently being halted in the Volkswagen Group. Bottlenecks in supply, particularly for semi-conductors, and production restrictions were again registered in the first half of 2021. Between January and June 2021, production outside Germany rose by 21.3% year-on- year, giving a total of 3,616,274 vehicles. The proportion of vehicles produced in Germany rose to 19.9 (18.6)%. I N V E N T O R I E S Global inventories at Group companies and in the dealer organization were lower on June 30, 2021 than at year-end 2020, and also below the corresponding prior-year figure. E M P L OY E E S The Volkswagen Group had 632,825 active employees on June 30, 2021. A further 12,152 employees were in the passive phase of their partial retirement. In addition, there were 15,061 young people completing vocational traineeships. At the end of the first half of 2021, the Volkswagen Group had a total of 660,038 (662,575) employees worldwide. This was roughly on a level with the year-end figure for 2020. A total of 292,986 people were employed in Germany, which was also virtually on a level with December 31, 2020. Interim Management Report Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets E Q U I T Y I N V E ST M E N T S H E L D F O R S A L E In March 2021, Brose Fahrzeugteile SE Co. Kommanditgesell- schaft (Brose) and VW Finance Luxemburg S.A., a subsidiary of Volkswagen AG, entered into an agreement to establish a jointly operated company for the development and manu- facture of complete seat units, seat structures and com- ponents, and solutions for the vehicle interior. As part of this arrangement, Brose will acquire half of the shares of the Volkswagen Group company SITECH Sp. z o.o., Polkowice/ Poland. Brose and Volkswagen will each hold 50% of the planned jointly operated company, whereby Brose will take the industrial lead. Consequently, Brose will control the jointly operated company and Volkswagen, given its signifi- cant influence following the transaction, will account for it as an associate using the equity method. The assets of SITECH are classified as held for sale in accordance with IFRS 5. The transaction is subject to approval by the antitrust authorities and to further closing conditions. The transaction is expected to be completed by the end of the first quarter of 2022. M E R G E R O F M A N S E W I T H T R AT O N S E At the end of February 2020, TRATON SE (TRATON) announced its intention to merge MAN SE (MAN) with TRATON. The shares held by noncontrolling interest shareholders of MAN are to be transferred to TRATON against payment of an appro- priate cash settlement in the context of this merger (merger squeeze-out). TRATON holds 94.36% of MAN’s share capital and announced its offer of a cash settlement to MAN’s noncontrolling interest shareholders in the amount of €70.68 per share on May 8, 2021. The merger of MAN with TRATON was agreed by the Annual General Meeting of MAN SE on June 29, 2021. Following this resolution, the present value of the put options granted, amounting to approximately €586 million, had to be recognized as a current liability not affecting net income. The noncontrolling interests in the Volkswagen Group’s equity, as well as the retained earnings and other reserves attributable to the shareholders of Volks- wagen AG declined accordingly. The merger squeeze-out will take effect upon the entry of the transfer resolution and of the merger itself in the commercial register for the head- quarters of TRATON SE and MAN SE. There are plans to sell MAN Truck & Bus Österreich GesmbH, Steyr/Austria (MTBÖ) as part of restructuring mea- sures. As of June 10, 2021, the date on which the sale agree- ment was signed, the assets and liabilities of MTBÖ are presented as a disposal group in accordance with IFRS 5 in the financial statements of the Volkswagen Group. The shares in MTBÖ are expected to be sold in the third quarter of 2021. The classification of the assets and liabilities as a disposal group led to the recognition of an expense, of which €158 million was attributable to impairment losses on prop- erty, plant and equipment and €141 million to a provision recognized in addition to this. The provision was not recognized as part of the disposal group. The total expense is presented in other operating expenses. R E S U LT S O F O P E R AT I O N S O F T H E G R O U P Against the backdrop of a recovery in the global economy despite the continuing adverse effects of the Covid-19 pan- demic, the Volkswagen Group generated sales revenue of €129.7 billion in the first half of 2021, 34.9% more than in the previous year. The increase was mainly the result of higher vehicle sales, positive mix effects and improved price posi- tioning. Changes in exchange rates had a negative effect. The Volkswagen Group made 82.5 (80.6)% of its sales revenue abroad. Correspondingly, gross profit almost doubled to €24.8 (12.9) billion; the gross margin was 19.2 (13.4)%. In July 2021, the Volkswagen Group and Rimac Auto- mobili d.o.o., Sveta Nedelja/Croatia, agreed to establish a joint venture. Volkswagen will contribute its consolidated sub- sidiaries Bugatti Automobiles S.A.S, Molsheim/France and Bugatti International S.A., Strassen/Luxembourg to the joint venture. The establishment of the new hypercar manu- facturer Bugatti-Rimac, which will have its headquarters in Zagreb/Croatia, is planned for the fourth quarter of 2021. Antitrust approval is required in several countries before the deal can go ahead. The assets of both companies will be classified as held for sale in accordance with IFRS 5 until their final contribution to the joint venture. The Volkswagen Group’s operating profit amounted to €11.4 billion in the period from January to June 2021; this was a rise of €12.2 billion on the prior-year period, in which special items from the diesel issue had weighed on earnings, causing a reduction of €–0.7 billion. The operating return on sales increased to (8.8) (–1.5)%. The reasons were improve- ments in the volume, mix and price positioning, and a positive contribution in the amount of €1.2 (–0.7) billion from the measurement of certain derivatives to which hedge accounting is not applied as well as the good business devel- opment in the Financial Services Division. In the Commercial Vehicles Business Area, one-off expenses for restructuring measures reduced earnings by €0.7 billion. 17 18 Results of Operations, Financial Position and Net Assets O P E R A T I N G P R O F I T B E F O R E S P E C I A L I T E M S B Y Q U A R T E R Volkswagen Group in € million 9,000 9,000 7,000 7,000 5,000 5,000 3,000 3,000 1,000 1,000 –1,000 –3,000 Q1 Q2 R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 T O J U N E 3 0 € million 2021 Passenger Cars Sales revenue 92,041 Operating result 8,521 Operating return on sales (%) 9.3 Commercial Vehicles Sales revenue 13,404 Operating result 334 Operating return on sales (%) 2.5 Power Engineering1 Sales revenue 1,581 Operating result –14 Operating return on sales (%) –0.9 1 Figures up to October 2020 include Renk. The financial result decreased by €0.3 billion year-on-year to €–0.2 billion. The other financial result included negative effects of forward purchase agreements for new shares in QuantumScape. Moreover, the share of the result of equity- accounted investments was down on the prior-year period. In the previous year, changes in share and unit prices had weighed on net income from securities and funds as a result of the Covid-19 pandemic. As a result, the Volkswagen Group’s earnings before tax of €11.2 billion was €12.5 billion higher than in the previous year. Earnings after tax increased by €9.5 billion to €8.5 bil- lion. 2020 65,312 –2,350 –3.6 9,854 –295 –3.0 1,850 –93 –5.0 Interim Management Report 2021 2021 2020 2020 Q3 Q4 Results of operations in the Automotive Division The Automotive Division’s sales revenue was €107.0 billion in the first six months of 2021, an increase of 39.0% compared with the prior-year period, which had been affected to a greater extent by the spread of the Covid-19 pandemic and its negative consequences. Improvements in volumes, in the mix and in price positioning had a beneficial impact. Exchange rate movements had an adverse effect. Sales revenue in both the Passenger Cars and the Commercial Vehicles business areas in the period from January to June 2021 was sharply up on the prior-year figures. In the Power Engineering Business Area, sales revenue was considerably lower than in the first half of 2020, which had still included the Renk business. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is primarily reflected in the Group’s sales revenue only through deliveries of vehicles and vehicle parts. Cost of sales increased, driven mainly by higher volumes and by a rise in research and development costs recognized in profit or loss. The ratio of cost of sales to sales revenue decreased as a result of the very sharp rise in sales revenue; in the previous year, sales revenue was lower on account of the pandemic. Consequently, in the period from January to June 2021, total research and development costs as a percent- age of the Automotive Division’s sales revenue (research and development ratio or R&D ratio) was down on the previous year at 7.2 (8.7)%. Administrative expenses decreased while distribution expenses increased, but the ratio to sales revenue declined for both figures. The other operating result amounted to €0.2 (–0.6) billion, benefiting in particular from the effects of the fair value measurement of derivatives to which hedge accounting is not applied (especially commodity hedging derivatives) in the amount of €1.2 (–0.7) billion. One-off expenses from restructuring measures had an offsetting Interim Management Report effect. The prior-year figure had included a gain of €0.8 billion from the contribution of the consolidated subsidiary Autono- mous Intelligent Driving to Argo AI. At €8.8 billion, the Automotive Division’s operating result in the first half of 2021 exceeded the prior-year figure by €11.6 billion. In addition to the higher volumes, positive factors included the fair value measurement of certain derivatives to which hedge accounting is not applied as well as favorable price positioning and changes in the mix. This was offset by one-off expenses from restructuring measures of €0.7 billion in the Commercial Vehicles Business Area. The operating return on sales increased to 8.3 (–3.6)%. Our oper- ating profit largely benefits from the business performance of our Chinese joint ventures only through deliveries of vehicles and vehicle parts and through license income, as the joint ventures are accounted for using the equity method and are therefore included in the financial result. Results of operations in the Financial Services Division The Financial Services Division’s sales revenue amounted to €22.6 billion in the period from January to June 2021, 18.4% more than in the prior-year period. Cost of sales rose by prac- tically the same percentage, increasing by €2.8 billion to €18.5 billion. Both distribution and administrative expenses were up on the prior-year figure, while their respective ratios to sales revenue were virtually on a level with the previous year. Lower risk costs were a major factor leading to the positive other operating result. Improved business performance and lower risk costs led to a €1.3 billion increase in the Financial Services Division’s operating profit in the reporting period, bringing it to €2.5 billion. The operating return on sales amounted to 11.1 (6.5)%. F I N A N C I A L P O S I T I O N O F T H E G R O U P The Volkswagen Group’s gross cash flow doubled in the period from January to June 2021, rising by €11.9 billion year- on-year to €24.1 billion, due primarily to earnings-related factors. In comparison with the previous year, which had been impacted by the pandemic, higher liabilities and pro- visions and a higher increase in receivables resulted in a change in working capital of €–5.6 (–4.9) billion. Cash out- flows related to the diesel issue in the first six month of 2021 were lower than in the previous year. As a result, cash flows from operating activities improved by €11.1 billion to €18.5 billion. Investing activities attributable to operating activities amounted to €9.1 billion; this was €1.1 billion more than the year before, and was driven in particular by a rise in capital- ized development costs. Financing activities accounted for cash outflows of €1.3 billion. They relate primarily to the redemption of the hybrid note called in the first quarter of 2021, as well as to the Results of Operations, Financial Position and Net Assets F I N A N C I A L P O S I T I O N I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N U A R Y 1 T O J U N E 3 0 € million 2021 2020 Passenger Cars Gross cash flow 15,712 6,153 Change in working capital 2,099 –3,524 Cash flows from operating activities 17,812 2,630 Cash flows from investing activities attributable to operating activities –8,250 –7,134 Net cash flow 9,562 –4,505 Commercial Vehicles Gross cash flow 1,366 560 Change in working capital –229 –307 Cash flows from operating activities 1,137 252 Cash flows from investing activities attributable to operating activities –610 –599 Net cash flow 527 –347 Power Engineering1 Gross cash flow 188 113 Change in working capital –49 15 Cash flows from operating activities 139 127 Cash flows from investing activities attributable to operating activities –36 –82 Net cash flow 103 45 1 Figures up to October 2020 include Renk. issuance and redemption of bonds, and changes in other financial liabilities. In the prior-year period, there had been a cash inflow of €21.7 billion to boost gross liquidity by mea- sures such as the temporary full drawdown of Volkswagen AG’s syndicated credit line of €10 billion. At the end of the first six months of 2021, the Volks- wagen Group’s cash and cash equivalents reported in the cash flow statement amounted to €40.9 (42.9) billion. On June 30, 2021, the Group’s net liquidity stood at €– 132.3 billion, compared with €–137.4 billion at the end of 2020. Financial position of the Automotive Division In the first half of 2021, the Automotive Division’s gross cash flow was up €10.4 billion compared with the previous year, rising to €17.3 billion, due mainly to improved earnings. The change in working capital amounted to €1.8 (–3.8) billion. The improvement of €5.6 billion compared with the first half of 2020, which had continued to reflect the effects of the 19 20 Results of Operations, Financial Position and Net Assets Covid-19 pandemic, was attributable to a rise in liabilities and an increase in other provisions, offset by higher inventories and a rise in receivables. The cash outflows attributable to the diesel issue recorded in the reporting period were down slightly on the previous year. At €19.1 billion, cash flows from operating activities were up €16.1 billion on the comparative figure for 2020. In the first six months of 2021, the Automotive Division’s investing activities attributable to operating activities amounted to €8.9 billion, €1.1 billion more than in the previous year. Investments in property, plant and equipment, investment property and intangible assets, excluding capital- ized development costs (capex) decreased by €0.4 billion to €3.8 billion. The ratio of capex to sales revenue declined to 3.5 (5.4)%; the prior-year figure had been impacted by the pandemic-related fall in sales revenue. Capex was invested primarily in our production facilities and in models to be launched this year and next, as well as in the ecological focus of our model range, the electrification and digitalization of our products, and our modular toolkits. Additions to capital- ized development costs climbed by €0.8 billion to €3.7 billion in the reporting period. The “Acquisition and disposal of equity investments” item amounted to €1.5 (0.9) billion as a result of strategic investments in a number of companies, in particular the associate Northvolt AB and the joint venture Argo AI. The Automotive Division’s net cash flow of €10.2 billion in the first six months of 2021 was €15.0 billion higher than the comparative figure for 2020. In the period from January to June 2021, the financing activities of the Automotive Division resulted in a cash out- flow of €–3.4 billion. This compares to a cash inflow of €21.1 billion in the previous year to boost gross liquidity by measures such as the temporary full drawdown of Volks- wagen AG’s syndicated credit line of €10 billion. The redemp- tion of the hybrid note called in the first quarter of 2021 led to a cash outflow of around €–1.2 billion. Financing activities also include the issuance and redemption of bonds and changes in other financial liabilities. At the end of June 2021, the Automotive Division’s net liquidity stood at €35.0 billion, compared with €26.8 billion on December 31, 2020. Financial position of the Financial Services Division The Financial Services Division generated gross cash flow of €6.8 billion in the reporting period; up 26.6% on the prior- year figure, mainly as a result of better earnings. The change in working capital amounted to €–7.4 (–1.1) billion; the over- all growth in the business volume was responsible for more funds tied up in working capital compared to the prior-year period. As a result, cash flows from operating activities decreased by €4.9 billion to €–0.6 billion. Interim Management Report At €0.2 (0.1) billion, investing activities attributable to oper- ating activities were on a level with the previous year. The Financial Services Division’s financing activities resulted in a cash inflow of €2.1 (0.6) billion in the first half of 2021. This figure relates primarily to the issuance and redemption of bonds and to other financial liabilities At the end of June 2021, the Financial Services Division’s negative net liquidity, which is common in the industry, stood at €–167.3 billion, compared with €–164.2 billion on December 31, 2020. C O N S O L I D AT E D B A L A N C E S H E E T ST R U C T U R E On June 30, 2021, the Volkswagen Group had total assets of €517.1 billion, 4.0% more than on December 31, 2020. The increase was mainly attributable to higher earnings and changes in exchange rates. The Group’s equity amounted to €140.0 billion, up €11.2 billion on the figure as of Decem- ber 31, 2020. The equity ratio was 27.1 (25.9)%. Automotive Division balance sheet structure The Automotive Division’s increased slightly, driven by a rise in capitalized development costs. Property, plant and equipment declined slightly, primarily because of depreciation in excess of additions. Despite dividend resolutions, equity-accounted investments were slightly higher in the first six months of 2021, driven by a rise increases. Total noncurrent assets stood at in capital €155.7 (156.9) billion, slightly lower than the figure recorded on December 31, 2020. intangible assets Current assets at the end of the first half of 2021 were 12.9% higher, at €109.8 billion. This was due to a slight rise in the inventories included in this item, with changes in exchange rates also a contributing factor. Current other receivables and financial assets went up, driven mainly by higher trade receivables. The Automotive Division’s cash and cash equivalents expanded by €6.7 billion to €30.9 billion. The “Assets held for sale” item consists of the carrying amounts of the assets of Bugatti, SITECH and MAN Truck & Bus Österreich GesmbH, Steyr/Austria, which are expected to be derecognized. The “Liabilities held for sale” item com- prises the carrying amount of the corresponding liabilities expected to be derecognized. At the end of the first half of 2021, equity in the Auto- motive Division was higher than on December 31, 2020, at €105.0 (96.7) billion. Good earnings performance, lower actu- arial losses from the remeasurement of pension plans and positive currency translation effects pushed equity higher, while the redemption of the hybrid note called in the first quarter of 2021 and negative effects from the measurement of derivatives recognized directly in equity weighed on this item. Noncontrolling interests are primarily held by the noncontrolling interest shareholders of the TRATON GROUP. Interim Management Report B A L A N C E S H E E T ST R U C T U R E O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S € million Jun. 30, 2021 Dec. 31, 2020 Passenger Cars Noncurrent assets 128,742 130,237 Current assets 92,315 83,180 Total assets 221,057 213,417 Equity 89,175 81,423 Noncurrent liabilities 78,831 82,263 Current liabilities 53,051 49,731 Commercial Vehicles Noncurrent assets 25,183 24,777 Current assets 14,633 11,256 Total assets 39,816 36,033 Equity 13,598 13,389 Noncurrent liabilities 13,842 10,592 Current liabilities 12,375 12,052 Power Engineering Noncurrent assets 1,766 1,847 Current assets 2,856 2,800 Total assets 4,622 4,647 Equity 2,209 1,922 Noncurrent liabilities 574 668 Current liabilities 1,839 2,057 At €93.2 (93.5) billion, noncurrent liabilities were on a level with the end of 2020. The noncurrent financial liabilities included in this figure rose, due partly to exchange rate effects. Pension provisions were down, driven primarily by actuarial remeasurement following a change in the discount rate. Current liabilities were 5.4% higher at the end of the first half of 2021, rising to €67.3 billion. Current financial liabil- ities increased as a result of reclassifications from noncurrent to current liabilities to reflect shorter remaining maturities. The figures for the Automotive Division also contain the Results of Operations, Financial Position and Net Assets elimination of intragroup transactions between the Auto- motive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed in both periods. Trade payables were up compared with the end of 2020. Current other liabilities exceeded the figure as of Decem- ber 31, 2020; they include the provisions for restructuring measures in the Commercial Vehicles Business Area recog- nized in the first half of the year. At the end of the reporting period, the Automotive Divi- sion had total assets of €265.5 billion, 4.5% more than on December 31, 2020. Financial Services Division balance sheet structure At the end of June 2021, the Financial Services Division had total assets of €251.6 billion, 3.5% more than on Decem- ber 31, 2020. Noncurrent assets grew by 5.9% to €153.8 billion. The property, plant and equipment included in this item was virtually unchanged. Lease assets and noncurrent financial services receivables were up, driven by business growth and changes in exchange rates. At €97.8 (97.7) billion, current assets were on a level with the end of 2020. Current other receivables and financial assets were down, while current financial services receivables were driven higher by exchange rate effects. At the end of the first half of 2021, the Financial Services Division accounted for around 48.7 (48.9)% of the Volkswagen Group’s assets. The Financial Services Division’s equity amounted to €35.0 (32.0) billion at the end of the reporting period, an increase over the figure recorded as of December 31, 2020. The equity ratio was 13.9 (13.2)%. Noncurrent liabilities climbed by €1.5 billion to €110.9 bil- lion, driven above all by a rise in noncurrent financial liabil- ities to refinance the business volume. Current financial liabilities and trade payables were the main items showing an increase under current liabilities. In total, current liabilities were €4.2 billion higher than on December 31, 2020, rising to €105.7 billion. Deposits from the direct banking business amounted to €26.9 billion, as against €28.9 billion at the end of 2020. 21 22 Results of Operations, Financial Position and Net Assets R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S Due to our business performance in the first half of 2021, we are adjusting large parts of our forecast for the key perfor- mance indicators. The risk of bottlenecks and disruptions in the supply of semiconductor components has intensified across the entire industry. The adverse impact expected as a result is more likely to affect the second half of the year, prompting us to lower our forecast for deliveries to customers. We are raising the profit forecast for the Group and the Passenger Cars Business Area while keeping the forecast for sales revenue unchanged: in terms of operating result, we expect an operating return on sales in the range of 6.0 to 7.5% for the Group and in the range of 6.0 to 8.0% for the Passen- ger Cars Business Area in 2021. In the Commercial Vehicles Business Area, we have adjusted our forecast for sales revenue and the operating result to reflect firstly our positive business performance and secondly the restructuring measures, which must now be recognized. Moreover, we are raising our forecast for sales revenue and the operating result in the Financial Services Division. In the Automotive Division, we anticipate that lower cash outflows expected from the diesel issue and a marked rise in effects from mergers and acquisitions will lead to a much stronger increase in net cash flow compared with the prior year, which will in turn cause substantial increase in net liquidity. We expect the return on investment (ROI) to be significantly above our minimum required rate of return. Our plans continue to be based on the Volkswagen Group’s current structures. The forecast for the Volkswagen Group does not include the acquisition of all outstanding shares of Navistar International Corporation and the corresponding effects on the results of operations, financial position and net assets. The Outlook for fiscal year 2021 can be found on page 24. Diesel Issue 1. Product-related lawsuits worldwide The number of claims asserted by financialright GmbH based on rights assigned to it has decreased to roughly 37 thousand following the withdrawal of numerous motions. In Italy, the trial court hearing the Altroconsumo class action found in favor of the plaintiffs in July 2021 and entered a judgment holding Volkswagen AG and Volkswagen Group Italia liable in damages to some 63 thousand con- sumers in an aggregate amount of roughly €185 million plus interest. Volkswagen AG and Volkswagen Group Italia intend to appeal this decision. Interim Management Report In the Netherlands, the suspended class action brought by Stichting Car Claim has been resumed. A hearing for oral argument on the merits of the claims took place in May 2021. A declaratory judgment partially granting the relief sought was issued in July 2021. In the opinion of the court, Volks- wagen AG and the other defendant Group companies acted unlawfully with respect to the original engine management software. The court moreover held that consumers are entitled to a purchase price reduction from the defendant dealerships. No specific payment obligations result from the declaratory judgment. Volkswagen AG and the other defen- dant Group companies intend to appeal the decision. In Germany more than 60 thousand individual lawsuits relating to various diesel engine types are currently pending against Volkswagen AG or other Group companies, with the plaintiffs suing for damages or rescission of the contract in most cases. In March 2021, the Bundesgerichtshof (Federal Court of Justice) issued a comprehensively reasoned ruling holding that purchasers of vehicles with Type EA 189 diesel engines cannot raise tort-based damage claims against Volks- wagen AG merely because the engines had a temperature- dependent emissions control feature (so-called thermal window). 2. Proceedings in the USA/Canada In February 2021, Texas sought discretionary review by the Texas Supreme Court of the Texas appellate court decision dismissing Texas’s state environmental claims against Volks- wagen AG and AUDI AG for lack of personal jurisdiction. In June 2021, the Ohio Supreme Court affirmed an intermediate appellate court decision declining to dismiss certain claims brought by Ohio. Volkswagen AG and AUDI AG intend to seek further review by the U.S. Supreme Court. 3. Lawsuits filed by investors worldwide (excluding the USA/Canada) In the Netherlands, a shareholder association filed an unquantified lawsuit seeking a determination that Volks- wagen AG supposedly misled the capital markets. The lawsuit was withdrawn in early July 2021. Volkswagen AG consented to the withdrawal of the action, thereby terminating the litigation. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or regarding uncer- tainty as to the amount or maturity of provisions and contin- gent liabilities in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Company. Interim Management Report Additional important legal cases At the end of March 2021, the Supervisory Board of Volks- wagen AG announced the completion of the investigation initiated in October 2015 into the causes of and those responsible for the diesel issue. The Board resolved to claim damages from Prof. Dr. Martin Winterkorn, former Chair of the Board of Management of Volkswagen AG, and from Rupert Stadler, former member of the Board of Management of Volkswagen AG and former Chair of the Board of Man- agement of AUDI AG, for breach of their duty of care under stock corporation law. The resolution was based on identified negligent breaches of duty. The investigation found no breaches of duty by other members of the Volkswagen AG Board of Management. The investigation covered all mem- bers of the Board of Management who were in office during the relevant period. In June 2021, agreements on damage payments were reached in this connection with the goal of achieving speedy, legally certain, and final resolution of the diesel issue as far as the civil liability of members of governing bodies is concerned. To this end, Volkswagen and Audi entered into damage settlements (liability settlements) with Prof. Winterkorn and Mr. Stadler respectively in con- nection with the diesel issue. Prof. Winterkorn's damage payment amounts to €11.2 million and that of Mr. Stadler to €4.1 million. Volkswagen has furthermore reached agree- ment with the relevant insurers under its directors and officers liability policies (D&O insurance) on payment of an aggregate sum of €270 million (coverage settlement). In addition, agreement was reached on damage payments by a former member of Audi's Board of Management and by a former member of Porsche's Board of Management. One former member of Audi's Board of Management was unwil- ling to reach a settlement; legal action is being prepared against him. Claims were already asserted against a former This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic, political and legal environment in individual countries, economic regions and markets, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales markets, or any significant shifts in exchange rates, Results of Operations, Financial Position and Net Assets member of the Volkswagen Passenger Cars brand Board of Management. In April 2019, the European Commission issued an initial statement of objections to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in connection with the Commis- sion's antitrust investigation of the automobile industry. These objections stated the European Commission's prelimi- nary evaluation of the matter and afforded the opportunity to comment. Following entry into a formal settlement pro- cedure, the Commission in April 2021 issued a revised statement of objections raising charges that were consider- ably more narrow. On this basis, a settlement decision was issued on July 8, 2021 concluding the administrative action and assessing a total fine of roughly €502 million against the three brands. The subject matter scope of the decision is limited to the cooperation of German automobile manufac- turers on individual technical questions in connection with the development and introduction of SCR (selective catalytic reduction) systems for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. The decision was served on Volks- wagen on July 12, 2021. It can be challenged by filing an action with the European Court by mid-September. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volks- wagen Group’s expected development in fiscal year 2021 contained in the combined management report in the 2020 Annual Report, specifically in the chapters “Report on Expected Developments” and “Report on Risks and Oppor- tunities,” including the section “Legal risks.” commodities or the supply with parts relevant to the Volkswagen Group or deviations in the actual effects of the Covid-19 pandemic from the scenario presented in this report will have a corresponding effect on the development of our business. In addition, there may be departures from our expected business development if the assessments of the factors influencing sustainable value enhancement and of risks and opportunities presented in the 2020 annual report develop in a way other than we are currently expecting, or if additional risks and opportunities or other factors emerge that affect the development of our business. 23 24 Outlook Interim Management Report Outlook Our planning is based on the assumption that global eco- nomic output will recover overall in 2021, provided lasting containment of the Covid-19 pandemic is achieved. This growth will most likely be sufficient for the economy to exceed its pre-pandemic level. We continue to believe that risks will arise from protectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will be negatively impacted by ongoing geopolitical tensions and conflicts. We anticipate that both the advanced economies and the emerging markets will experience positive momentum. We predict that trends in the markets for passenger cars in the individual regions will be mixed in 2021. Overall, the volume of demand worldwide for new vehicles is expected to be noticeably up on the previous year, but will not reach the pre-pandemic level, provided successful containment of the Covid-19 pandemic is achieved. For 2021, we anticipate that the volume of new passenger car registrations in Western Europe will be noticeably above that recorded in the previous year. In the German passenger car market, we expect a moderate increase in demand in 2021. Sales of passenger cars in 2021 are expected to noticeably exceed the prior-year figures in markets in Central and Eastern Europe. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America in 2021 is likely to be significantly higher than the previous year’s level. We anticipate a substantial increase overall in new registrations in the South American markets in 2021 compared with the previous year. The passenger car markets in the Asia-Pacific region are expected to be noticeably up on the prior-year level in 2021. Trends in the markets for light commercial vehicles in the individual regions will also be mixed in 2021; on the whole, we anticipate a moderate rise in demand for 2021, assuming that containment of the Covid-19 pandemic is successful . For 2021, we expect a substantially positive development in new registrations for mid-sized and heavy trucks with a gross weight of more than six tonnes compared with the previous year in the markets that are relevant for the Volks- wagen Group. A moderate increase in overall demand for 2021 is likely in the bus markets relevant for the Volkswagen Group. We anticipate that automotive financial services will prove highly important to global vehicle sales in 2021, particularly in the context of the ongoing challenges posed by the Covid-19 pandemic. We believe we are well prepared overall for the future challenges pertaining to automotive business activities and for the mixed development of the regional automotive markets. Our brand diversity, our presence in all major world markets, our broad and selectively expanded product range, and our technologies and services put us in a good compet- itive position worldwide. As part of the transformation of our core business, we are positioning our Group brands with an even stronger focus on their individual characteristics, and are optimizing our vehicle and drive portfolio. The focus is primarily on our vehicle fleet’s carbon footprint and on the most attractive and fastest-growing market segments. In addition, we are working to leverage the advantages of our multibrand Group even more effectively with the ongoing development of new technologies and the enhancement of our toolkits. We anticipate that deliveries to Volkswagen Group cus- tomers will be noticeably above prior year in 2021 – assum- ing successful containment of the Covid-19 pandemic – amid continued challenging market conditions. Challenges will arise particularly from the economic situation, the increasing intensity of competition, volatile commodity and foreign exchange markets, securing supply chains and more stringent emissions-related requirements. We expect the sales revenues of the Volkswagen Group and of the Passenger Cars and Commercial Vehicles business areas in 2021 to be significantly higher than the prior-year figure. In terms of operating profit, we expect an operating return on sales in the range of 6.0 to 7.5% for the Group and in the range of 6.0 to 8.0% for the Passenger Cars Business Area in 2021. For the Commercial Vehicles Business Area, we anticipate an operating return on sales of around 3%, including restructuring measures. We expect the Power Engi- neering Business Area to reach the break-even point amid a noticeable decline in sales revenue compared with the previous year. For the Financial Services Division, we forecast that sales revenue will be noticeably higher than the prior-year figure and that the operating result will be sharply up on the pre- vious year. Brands and Business Fields Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G P R O F I T B Y B R A N D A N D B U S I N E S S F I E L D Ducati sold 35,028 (22,790) motorcycles in the first six months of this year. Against the backdrop of a recovery in the global economy and an easing of the effects of the Covid-19 pandemic, the Volks- wagen Group generated sales revenue of €129.7 (96.1) billion in the first half of 2021. Operating profit improved to €11.4 (– 0.8) billion (prior-year figure before special items). The Volkswagen Passenger Cars brand sold 1.6 (1.1) mil- lion vehicles in the reporting period, a higher figure than in the first half of 2020, which was particularly hard hit by the pandemic. There was strong demand for the T-Roc, T-Cross, Atlas and Passat models, and the ID.3 and ID.4 models were also very popular. Sales revenue rose by 42.4% to €40.7 bil- lion. Operating profit improved to €1.8 (–1.5) billion (prior- year figure before special items), due mainly to volume growth as well as margin and mix improvements. Upfront expenditure for new products and technologies increased. Global unit sales by the Audi brand came to 602 (416) thou- sand vehicles in the period from January to June 2021. The Chinese joint venture FAW-Volkswagen sold a further 367 (271) thousand Audi vehicles. Nearly all models con- tributed to the increase in unit sales. Sales revenue rose to €29.2 (20.5) billion. Alongside higher volumes, positive margin effects and the measurement of commodity hedges lifted operating profit to €3.1 (–0.6) billion (prior-year figure before special items). The financial key performance indicators for the Audi brand include the Lamborghini and Ducati brands. Unit sales by the ŠKODA brand in the reporting period amounted to 463 (372) thousand vehicles, an improvement on the previous year. There was strong demand for the Kamiq and Karoq SUVs, and the new Enyaq iV was also very popular with customers. At €10.2 (7.5) billion, sales revenue was up on the prior-year figure. Operating profit improved to €974 (228) million, due largely to positive volume and exchange rate effects, as well as to the lower excess CO2 emissions premi- ums. SEAT sold 310 thousand vehicles in the first half of 2021, an increase of 57.6% on the previous year. This figure includes the A1 manufactured for Audi. The Arona, Ibiza and Leon were in high demand, and the CUPRA Formentor was also very popular with customers. Sales revenue rose by 50.9% to €5.7 billion. The operating result amounted to €–26 (– 271) million, with unfavorable mix effects being offset by higher volumes. In the period from January to June 2021, the Bentley brand’s unit sales were higher than in the previous year, amounting to 7,132 (4,569) vehicles. Sales revenue rose to €1,324 (860) million. Thanks to higher volumes and improved pricing, the operating profit of €178 (–99) million was better than in the previous year, which had also been impacted by one-off expenses for restructuring measures. 25 26 Brands and Business Fields Porsche Automotive recorded unit sales of 152 thousand vehicles worldwide in the first six months of the year, an increase of 31.3% on the pandemic-related weak prior-year figure. Demand was high for the 911 and the Taycan, the Macan and Panamera models were also popular with cus- tomers. Sales revenue rose to €15.1 (11.2) billion. Operating profit increased to €2.7 (1.1) billion. The higher volumes and positive mix effects significantly outweighed the unfavorable exchange rate trends and a rise in fixed costs attributable to strategy and growth. Unit sales by Volkswagen Commercial Vehicles were higher than in the previous year, amounting to 188 (157) thousand vehicles in the period from January to June 2021. Encour- aging growth was seen above all by the Crafter and the Multi- van/Transporter. Sales revenue amounted to €5.3 (4.2) bil- lion. Operating profit improved to €87 (–334) million; par- ticularly volume effects and cost savings had a positive impact. As in the previous year, excess CO2 emissions premi- ums were taken into account. Unit sales at Scania Vehicles and Services rose to 50 (31) thou- sand vehicles in the first half of 2021. Sales revenue was also higher than in 2020, standing at €7.2 (5.3) billion. The operating profit of Scania Vehicles and Services climbed to €860 (221) million. Adverse exchange rate movements, an increase in costs, and upfront expenditure for new technol- ogies were offset by a better mix and higher volumes. MAN Commercial Vehicles sold 77 thousand units in the reporting period, 63.3% more than in the previous year. Sales revenue amounted to €6.4 (4.7) billion. The operating result came to €–456 (–423) million, due mainly to expenses for restructuring measures in Europe in the amount of €–672 million. The favorable volume trend, an improved market positioning and a strict cost management had a positive effect. In the first six months of 2021, Power Engineering gener- ated sales revenue of €1.6 (1.8) billion. Operating profit increased to €82 (21) million due mainly to cost savings in connection with the restructuring program. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N U A R Y 1 T O J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2021 2020 2021 2020 2021 2020 Volkswagen Passenger Cars 1,552 1,134 40,689 28,580 1,773 –1,491 Audi 602 416 29,212 20,476 3,113 –643 ŠKODA 463 372 10,199 7,546 974 228 SEAT 310 197 5,656 3,749 –26 –271 Bentley 7 5 1,324 860 178 –99 Porsche Automotive1 152 116 15,107 11,192 2,660 1,143 Volkswagen Commercial Vehicles 188 157 5,298 4,238 87 –334 Scania Vehicles and Services2 50 31 7,155 5,269 860 221 MAN Commercial Vehicles Power Engineering3 77 – 47 – 6,405 1,581 4,669 1,850 –456 82 –423 21 VW China4 1,522 1,422 – – – – Other5 –263 –160 –14,513 –10,361 –226 –312 Volkswagen Financial Services – – 21,556 18,063 2,339 1,155 Volkswagen Group before special items – – – – 11,358 –803 Special items – – – – – –687 Volkswagen Group 4,660 3,736 129,669 96,131 11,358 –1,490 Automotive Division6 4,660 3,736 107,027 77,015 8,841 –2,738 of which: Passenger Cars Business Area 4,533 3,658 92,041 65,312 8,521 –2,350 Commercial Vehicles Business Area 127 78 13,404 9,854 334 –295 Power Engineering Business Area – – 1,581 1,850 –14 –93 Financial Services Division – – 22,642 19,115 2,517 1,248 1 Porsche (including Financial Services): sales revenue €16,525 (12,421) million, operating profit €2,792 (1,233) million. 2 Scania (including Financial Services): sales revenue €7,377 (5,488) million, operating profit €960 (266) million. 3 Prior-year figure includes the business of Renk. 4 The sales revenues and operating profits of the joint venture companies in China are not included in the figures for the Group. These Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of €1,272 (1,404) million. 5 In operating profit, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation, as well as companies not allocated to the brands. 6 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. Brands and Business Fields In the first half of 2021, 4.2 million new financing, leasing, service and insurance contracts were signed with Volkswagen Financial Services (+22.9%). The penetration rate, expressed as the ratio of leased or financed vehicles to relevant Group delivery volumes, came to 35.8 (36.0)% with credit eligibility criteria remaining unchanged. At 22.2 (21.9) million, the total number of contracts at the end of June 2021 exceeded the figure for December 31, 2020. The number of contracts in the customer financing/leasing area amounted to 11.3 (11.3) mil- lion, and in the service/insurance area to 11.0 (10.6) million. At the end of the reporting period, Volkswagen Bank managed 1.4 (1.4) million deposit accounts. Operating profit increased to €2.3 (1.2) billion in the first six months of 2021 due to lower risk costs. U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T In the first half of 2021, the Volkswagen Group sold 2.2 mil- lion vehicles in the Europe/Other Markets region, an increase of 32.3% on the pandemic-related weak prior year. Despite negative exchange rate movements, sales revenue rose to €77.6 (57.7) billion, driven mainly by positive volume and mix effects. At 447 thousand vehicles, the Volkswagen Group’s unit sales in the North American markets increased by 48.8% in the first six months of 2021. Sales revenue rose to €22.0 (15.9) billion. In addition to higher volumes, mix effects had a positive impact, more than compensating for unfavorable exchange rate trends. In South America, 260 (183) thousand vehicles were sold in the reporting period, an increase of more than 40% on the 2020 comparative figure. Driven by higher volumes, sales revenue climbed to €5.1 (3.7) billion, while exchange rates had a negative effect. At 1.8 (1.6) million vehicles, the number of units sold by the Volkswagen Group in the Asia-Pacific region – including the Chinese joint ventures – was 10.6% higher in the period from January to June 2021 than a year earlier. Sales revenue rose to €25.0 (19.3) billion as a result of higher volumes. This figure does not include the sales revenue of our equity- accounted Chinese joint ventures. Hedging transactions relating to the Volkswagen Group’s sales revenue in foreign currency made a negative contri- bution of €–23 (–421) million in the first half of 2021. K E Y F I G U R E S B Y M A R K E T F R O M J A N U A R Y 1 TO J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E Thousand vehicles/€ million 2021 2020 2021 Europe/Other Markets 2,175 1,644 77,552 North America 447 300 22,038 South America Asia-Pacific1 260 1,779 183 1,609 5,065 25,036 Hedges on sales revenue – – –23 Volkswagen Group1 4,660 3,736 129,669 1 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 2020 57,651 15,930 3,704 19,267 –421 96,131 27 28 Interim Consolidated Financial Statements (Condensed) Income Statement Interim Consolidated Financial Statements (Condensed) Income Statement for the Period January 1 to June 30 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ F I N A N C I A L S E R V I C E S € million 2021 2020 2021 2020 2021 2020 Sales revenue 129,669 96,131 107,027 77,015 22,642 19,115 Cost of sales –104,820 –83,228 –86,310 –67,559 –18,510 –15,669 Gross result 24,848 12,903 20,716 9,456 4,132 3,447 Distribution expenses –9,065 –8,352 –8,394 –7,767 –670 –585 Administrative expenses –4,934 –4,860 –3,715 –3,804 –1,218 –1,056 Other operating income/expense 508 –1,180 234 –623 274 –557 Operating result 11,358 –1,490 8,841 –2,738 2,517 1,248 Share of the result of equity-accounted investments 899 1,164 896 1,142 3 22 Interest result and other financial result –1,104 –1,026 –1,036 –1,004 –67 –22 Financial result –205 138 –140 138 –65 0 Earnings before tax 11,153 –1,352 8,701 –2,600 2,453 1,248 Income tax expense –2,699 333 –2,059 693 –640 –361 Earnings after tax 8,454 –1,019 6,642 –1,907 1,813 887 of which attributable to Noncontrolling interests 81 –57 36 –93 45 36 Volkswagen AG hybrid capital investors 269 239 269 239 – – Volkswagen AG shareholders 8,104 –1,201 6,337 –2,053 1,768 852 Basic/diluted earnings per ordinary share in €² 16.14 –2.44 Basic/diluted earnings per preferred share in €² 16.20 –2.33 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. 29 30 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period January 1 to June 30 € million 2021 2020 Earnings after tax 8,454 –1,019 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of equity instruments that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss 4,800 –1,418 3,383 364 –2 3,744 –107 59 –47 –14 6 –55 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax 1,493 – 1,493 –1 1,491 –1,863 15 –1,848 4 –1,844 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) –925 –327 –1,252 418 –834 –323 679 356 –104 252 1,934 –488 1,446 –450 995 –664 659 –6 17 12 Cash flow hedges (OCI II), net of tax Fair value valuation of debt instruments that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of debt instruments that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of debt instruments recognized in other comprehensive income Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to –26 0 –26 8 –18 304 1,195 6,037 –1,097 4,939 13,394 22 0 22 –7 16 –70 –892 –570 –376 –947 –1,966 Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 166 269 12,959 –106 239 –2,099 Interim Consolidated Financial Statements (Condensed) Income Statement for the Period April 1 to June 30 V O L K S W A G E N G R O U P A U T O M O T I V E ¹ € million 2021 2020 2021 Sales revenue 67,293 41,076 55,488 Cost of sales –54,772 –37,404 –45,152 Gross result 12,520 3,672 10,337 Distribution expenses –4,704 –3,880 –4,392 Administrative expenses –2,304 –2,415 –1,685 Other operating income/expense 1,035 229 773 Operating result 6,546 –2,394 5,032 Share of the result of equity-accounted investments 380 1,035 398 Interest result and other financial result –236 –675 –181 Financial result 144 360 216 Earnings before tax 6,690 –2,034 5,248 Income tax expense –1,650 498 –1,223 Earnings after tax 5,040 –1,536 4,025 of which attributable to Noncontrolling interests 46 –51 25 Volkswagen AG hybrid capital investors 134 122 134 Volkswagen AG shareholders 4,860 –1,607 3,866 Basic/diluted earnings per ordinary share in €² 9.70 –3.23 Basic/diluted earnings per preferred share in €² 9.70 –3.18 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. D I V I S I O N S 2020 32,365 –30,266 2,099 –3,619 –1,918 502 –2,935 1,031 –661 369 –2,566 637 –1,929 –69 122 –1,981 Income Statement F I N A N C I A L S E R V I C E S 2021 2020 11,804 8,711 –9,621 –7,138 2,183 1,573 –312 –262 –619 –497 262 –273 1,514 541 –18 5 –55 –14 –72 –9 1,442 532 –427 –140 1,015 392 21 18 – – 994 375 31 32 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period April 1 to June 30 € million 2021 2020 Earnings after tax 5,040 –1,536 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of equity instruments that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss 515 –147 367 343 –1 709 –4,994 1,502 –3,492 9 9 –3,474 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax 216 – 216 1 216 –72 15 –57 4 –54 Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) 284 –226 58 –18 40 –86 363 278 –86 192 908 –152 756 –210 546 –85 318 232 –71 161 Cash flow hedges (OCI II), net of tax Fair value valuation of debt instruments that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of debt instruments that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of debt instruments recognized in other comprehensive income Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to –8 0 –8 3 –5 25 469 1,425 –248 1,177 6,217 30 0 30 –9 21 –65 610 –4,081 1,216 –2,864 –4,401 Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 105 134 5,978 –48 122 –4,475 Interim Consolidated Financial Statements (Condensed) Balance Sheet as of June 30, 2021 and December 31, 2020 V O L K S W A G E N G R O U P D I V I S I O N S A U T O M O T I V E ¹ € million 2021 2020 2021 2020 Assets Noncurrent assets 309,535 302,170 155,691 156,861 Intangible assets 69,161 67,968 68,989 67,781 Property, plant and equipment 62,390 63,884 61,304 62,807 Lease assets 56,414 50,686 1,451 1,512 Financial services receivables 84,429 82,565 –370 –377 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 37,140 37,067 24,316 25,137 Current assets 207,585 194,944 109,804 97,236 Inventories 44,942 43,823 41,014 39,055 Financial services receivables 58,393 58,006 –493 –557 Other receivables and financial assets 40,506 38,044 19,733 17,012 Marketable securities 22,028 21,162 17,701 17,503 Cash, cash equivalents and time deposits 40,812 33,909 30,946 24,222 Assets held for sale 903 – 903 – Total assets 517,119 497,114 265,495 254,097 Equity and liabilities Equity 140,013 128,783 104,982 96,733 Equity attributable to Volkswagen AG shareholders 123,999 111,336 89,662 79,913 Equity attributable to Volkswagen AG hybrid capital investors 14,248 15,713 14,248 15,713 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 138,247 127,049 103,910 95,626 Noncontrolling interests 1,767 1,734 1,072 1,107 Noncurrent liabilities 204,098 202,921 93,248 93,523 Financial liabilities 119,227 114,809 19,439 15,637 Provisions for pensions 40,541 45,081 39,754 44,207 Other liabilities 44,330 43,031 34,055 33,680 Current liabilities 173,008 165,410 67,265 63,840 Financial liabilities 87,794 88,648 –7,559 –2,806 Trade payables 23,825 22,677 20,645 19,539 Other liabilities 60,810 54,085 53,602 47,107 Liabilities associated with assets held for sale 578 – 578 – Total equity and liabilities 517,119 497,114 265,495 254,097 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. Balance Sheet F I N A N C I A L S E R V I C E S 2021 2020 153,844 145,309 172 187 1,086 1,077 54,963 49,174 84,799 82,942 12,824 11,930 97,781 97,708 3,929 4,768 58,886 58,562 20,773 21,033 4,327 3,658 9,866 9,687 – – 251,624 243,017 35,032 32,050 34,337 31,423 – – 34,337 31,423 694 627 110,851 109,398 99,789 99,173 787 874 10,274 9,352 105,742 101,569 95,353 91,454 3,181 3,137 7,209 6,978 – – 251,624 243,017 33 34 Statement of Changes in Equity Interim Consolidated Financial Statements (Condensed) Statement of Changes in Equity O T H E R R E S E R V E S € million Subscribed capital Capital reserve Retained earnings Currency translation reserve Balance at Jan. 1, 2020 Earnings after tax Other comprehensive income, net of tax 1,283 – – 14,551 – – 96,929 –1,201 –47 –2,824 – –1,799 Total comprehensive income Disposal of equity instruments Capital increases/Capital decreases Dividends payment Capital transactions involving a change in ownership interest Other changes – – – – – – – – – – – – –1,248 – – – – 6 –1,799 – – – – 0 Balance at June 30, 2020 1,283 14,551 95,687 –4,623 Balance at Jan. 1, 2021 Earnings after tax Other comprehensive income, net of tax 1,283 – – 14,551 – – 100,772 8,104 3,355 –5,659 – 1,467 Total comprehensive income Disposal of equity instruments Capital increases/Capital decreases¹ Dividends payment Capital transactions involving a change in ownership interest² Other changes Balance at June 30, 2021 – – – – – – 1,283 – – – – – – 14,551 11,460 57 – – –268 8 112,029 1,467 – – – –34 – –4,226 1 Redemption of hybrid note issued in fiscal year 2014. 2 For the change in capital transactions involving a change in ownership interest see the “Key events” section. Interim Consolidated Financial Statements (Condensed) H E D G I N G Cash flow hedges (OCI I) Deferred costs of hedging (OCI II) 95 –977 – – 998 12 998 12 – – – – – – – – – – 1,093 –965 1,287 –708 – – –835 253 –835 253 – – – – – – –1 0 – – 451 –456 Equity and debt instruments –235 – 2 2 – – – – – –233 –219 – 319 319 –57 – – 0 – 42 Equity- accounted investments 295 – –64 –64 – – – – –1 230 30 – 295 295 – – – 0 0 324 Equity attributable to Volkswagen AG hybrid capital investors 12,663 239 – 239 – 2,989 –393 – – 15,498 15,713 269 – 269 – –1,237 –497 – – 14,248 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 121,781 –962 –898 –1,860 – 2,989 –393 – 5 122,521 127,049 8,374 4,854 13,228 – –1,237 –497 –304 7 138,247 Statement of Changes in Equity Equity attributable to noncontrolling interests Total equity 1,870 123,651 –57 –1,019 –49 –947 –106 –1,966 – – – 2,989 –3 –397 – – 6 11 1,766 124,288 1,734 128,783 81 8,454 85 4,939 166 13,394 – – 170 –1,068 –18 –515 –283 –586 –2 6 1,767 140,013 35 36 Cash flow statement Interim Consolidated Financial Statements (Condensed) Cash flow statement for the Period January 1 to June 30 V OLKSW A G E N G R OU P D IV ISION S A U T OM OT I V E ¹ F I N A NC I A L SE RV I C ES € million 2021 2020 2021 2020 2021 2020 Cash and cash equivalents at beginning of period Earnings before tax Income taxes paid Depreciation and amortization expense² Change in pension provisions Share of the result of equity-accounted investments Other noncash income/expense and reclassifications³ Gross cash flow Change in working capital Change in inventories Change in receivables Change in liabilities Change in other provisions Change in lease assets (excluding depreciation) Change in financial services receivables Cash flows from operating activities 33,432 11,153 –2,329 13,351 376 1,780 –247 24,083 –5,618 –684 –2,891 5,665 1,491 –9,339 140 18,465 24,329 –1,352 –1,504 13,104 437 1,652 –126 12,211 –4,880 –392 –1,517 –622 –2,147 –4,989 4,787 7,331 23,758 8,701 –1,876 8,811 353 1,770 –493 17,266 1,821 –1,576 –2,828 4,932 1,419 –33 –92 19,088 18,098 –2,600 –1,200 8,417 430 1,661 118 6,825 –3,816 –245 –854 –707 –2,124 163 –49 3,009 9,674 2,453 –453 4,540 23 9 246 6,817 –7,439 892 –63 733 72 –9,306 232 –622 6,231 1,248 –304 4,688 7 –10 –244 5,385 –1,064 –147 –662 85 –23 –5,153 4,837 4,322 Cash flows from investing activities attributable to operating activities –9,062 –7,930 –8,897 –7,815 –165 –114 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property capitalized development costs acquisition and disposal of equity investments Net cash flow4 Change in investments in securities, loans and time deposits Cash flows from investing activities Cash flows from financing activities –3,864 –3,711 –1,642 9,403 –1,048 –10,110 –1,336 –1,071 –4,226 –2,950 –953 –599 –2,120 –10,050 21,666 2,984 –3,777 –3,711 –1,538 10,191 85 –8,812 –3,391 –1,600 –4,130 –2,950 –912 –4,806 –1,762 –9,577 21,104 2,975 –87 – –104 –788 –1,133 –1,298 2,055 530 –96 – –41 4,207 –358 –473 562 9 of which: capital contributions/capital redemptions MAN noncontrolling interest shareholders: compensation payments and acquisition of shares tendered Effect of exchange rate changes on cash and cash equivalents Change of loss allowance within cash & cash equivalents Net change in cash and cash equivalents – 409 0 7,428 2 –330 –3 18,615 – 361 0 7,246 2 –265 –2 14,269 – 48 0 182 – –65 0 4,346 Cash and cash equivalents at June 305 Securities, loans and time deposits Gross liquidity Total third-party borrowings Net liquidity at June 306 For information purposes: at Jan. 1 40,860 33,921 74,780 –207,035 –132,255 –137,380 42,944 30,005 72,949 –216,603 –143,654 –148,040 31,004 15,938 46,941 –11,893 35,048 26,796 32,367 14,720 47,087 –28,424 18,663 21,276 9,856 17,983 27,839 –195,142 –167,303 –164,176 10,577 15,285 25,862 –188,180 –162,318 –169,316 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loans to affiliates and joint ventures as well as time deposits net of third-party borrowings (noncurrent and current financial liabilities). Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2020 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2021 were therefore also prepared in accordance with IAS 34 (Interim Financial Reporting) and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 115 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2021. OT H E R A C C O U N T I N G P O L I C I E S A discount rate of 1.1% (December 31, 2020: 0.7%) was applied to German pension provisions in the accompanying interim consolidated financial statements. The income tax expense for the interim consolidated financial statements was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34 (Interim Financial Reporting). In other respects, the same accounting policies and consolidation methods that were used for the 2020 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2020 consolidated financial statements. In addition, details of the effects of new standards can be found in the “New and amended IFRSs not applied” section. The 2020 consolidated financial statements can also be accessed on the internet at www.volkswagenag.com/en/InvestorRelations.html. 37 38 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Key events Diesel Issue On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOX) emissions had been discovered in emissions tests on certain Volkswagen Group vehicles with type 2.0 l diesel engines in the USA. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2020 consolidated financial statements. There was no need to recognize any material special items in connection with the diesel issue in the first six months of 2021. Further information on the litigation in connection with the diesel issue can be found in the “Litigation” section. Antitrust investigation In April 2019, the European Commission issued an initial statement of objections to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in connection with the Commission's antitrust investigation of the automobile industry. These objections stated the European Commission's preliminary evaluation of the matter. Following entry into a formal settlement procedure, the Commission in April 2021 issued a revised statement of objections raising charges that were considerably more narrow. On this basis, a settlement decision was issued on July 8, 2021 concluding the administrative action and assessing a total fine of roughly €502 million against the three brands. This amount has been recognized under other operating expenses. The subject matter scope of the decision is limited to the cooperation of German automobile manufacturers on individual technical questions in connection with the development and introduction of SCR (selective catalytic reduction) systems for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. Effects of the Covid-19 Pandemic The rate of infections leveled off in the course of the first six months of 2021 for reasons that include the increasing vaccination rate. Despite that, and also because of the emergence of several variants of the virus, disruption – such as contact and mobility restrictions or limitations on business activities – continued in many parts of the world. Accordingly, the effects of the Covid-19 pandemic had to be analyzed during the preparation of the interim consolidated financial statements as of June 30, 2021, in particular in the following areas: The impairment tests on lease assets identified no material impact of the Covid-19 pandemic on residual values forecast for the vehicles of the entire Group. The impairment tests on financial assets, taking adjusted default expectations into account, did not identify any need for material additional impairment losses. The review of the impact of changes in the timings and amounts of hedged items caused by the Covid-19 pandemic on the effectiveness and accounting treatment of hedges did not identify any material factors with an impact on profits. The developments in the commodity and capital markets had a positive effect on the operating profit, particularly in connection with the treatment of derivatives to which hedge accounting is not applied and the measurement of receivables and liabilities denominated in foreign currencies. For more information on these areas, please also refer to our additional comments in the notes to the 2020 consolidated financial statements. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Material Transactions On February 28, 2020, TRATON SE (TRATON) announced its intention to merge MAN SE (MAN) with TRATON. The shares held by noncontrolling interest shareholders of MAN are to be transferred to TRATON against payment of an appropriate cash settlement in the context of this merger (merger squeeze-out). TRATON holds 94.36% of MAN’s share capital and announced its offer of a cash settlement to MAN’s noncontrolling interest shareholders in the amount of €70.68 on May 8, 2021. The merger of MAN with TRATON was agreed by the Annual General Meeting of MAN SE on June 29, 2021. Following this resolution, the present value of the put options granted, amounting to approximately €586 million, had to be recognized as a current liability not affecting net income. The noncontrolling interests in the Volkswagen Group’s equity, as well as the retained earnings and other reserves attributable to the shareholders of Volkswagen AG declined accordingly. The merger squeeze-out will take effect upon the entry of the transfer resolution and of the merger itself in the commercial register for the headquarters of TRATON SE and MAN SE. In mid-June 2021, Volkswagen and the Swedish battery cell producer Northvolt AB agreed to concentrate production of Volkswagen premium cells in Skellefteå, Sweden. In connection with this, Volkswagen participated in a financing round at Northvolt AB that was proportionate to its shareholding, investing a further USD 650 million in the company. Volkswagen also increased its existing convertible loan by a further €190 million and, at the same time, converted this part of the loan to preferred shares. This has increased Volkswagen’s ownership interest in Northvolt AB to 23.6%. Due to favorable terms and conditions on conversion, the measurement of the converted loan resulted in non-cash income of €62 million. As a result, the carrying amount of the equity investment in Northvolt AB rose by €794 million. A convertible loan of €240 million remains on issue. IFRS 5 – Noncurrent assets and liabilities held for sale In July 2021, the Volkswagen Group and Rimac Automobili d.o.o., Sveta Nedelja/Croatia, agreed to establish a joint venture. Volkswagen will contribute its consolidated subsidiaries Bugatti Automobiles S.A.S, Molsheim/France and Bugatti International S.A., Strassen/Luxembourg to the joint venture. The establishment of the new hypercar manufacturer Bugatti-Rimac, which will have its headquarters in Zagreb/Croatia, is planned for the fourth quarter of 2021. Antitrust approval is required in several countries before the deal can go ahead. Rimac will hold 55% of the shares of the joint venture, and Volkswagen will hold a 45% interest through Porsche. In addition, Porsche holds a direct interest of 24% in Rimac. Initially, the new company will produce two hypercar models, the Bugatti Chiron and the Rimac Nevera. Jointly developed Bugatti models are planned further into the future. On March 26, 2021, Brose Fahrzeugteile SE Co. Kommanditgesellschaft (Brose) and VW Finance Luxemburg S.A., a subsidiary of Volkswagen AG, entered into an agreement to establish a jointly operated company for the development and manufacture of complete seat units, seat structures and components, and solutions for the vehicle interior. As part of this arrangement, Brose will acquire half of the shares of the Volkswagen Group company SITECH Sp. z o.o., Polkowice/Poland. Brose and Volkswagen will each hold 50% of the planned jointly operated company, whereby Brose will take the industrial lead. Consequently, Brose will control the jointly operated company and Volkswagen, given its significant influence following the transaction, will account for it as an associate using the equity method. The transaction is subject to approval by the antitrust authorities and to other closing conditions. The transaction is expected to be completed by the end of the first quarter of 2022. 39 40 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) There are plans to sell MAN Truck & Bus Österreich GesmbH, Steyr/Austria (MTBÖ) as part of restructuring measures. As from June 10, 2021, the date on which the sale agreement was signed, the assets and liabilities of MTBÖ are presented as a disposal group in the financial statements of the Volkswagen Group. The shares in MTBÖ are expected to be sold in the third quarter of 2021. The classification of the assets and liabilities as a disposal group led to the recognition of an expense, of which €158 million was attributable to impairment losses on property, plant and equipment and €141 million to a provision recognized in addition to this. The provision was not recognized as part of the disposal group. The total expense is presented in other operating expenses. In this context, assets of €903 million and liabilities of €578 million were classified as held for sale as of June 30, 2021 and presented in a separate line item of the balance sheet in accordance with IFRS 5. The assets and liabilities held for sale have been recognized at the lower of their carrying amount and fair value less expected costs of disposal. Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Disclosures on the interim consolidated financial statements 1. Sales revenue ST R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 2 0 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 54,383 5,682 – – 60,065 –5,991 54,074 Genuine parts 5,377 1,592 – – 6,969 –54 6,915 Used vehicles and third-party products 5,183 624 – – 5,807 –335 5,472 Engines, powertrains and parts deliveries 5,344 281 – – 5,625 –7 5,618 Power Engineering – – 1,850 – 1,850 –1 1,849 Motorcycles 277 – – – 277 – 277 Leasing business 374 851 0 14,634 15,860 –2,045 13,814 Interest and similar income 87 4 – 3,867 3,958 –103 3,855 Hedges sales revenue –437 –10 – 0 –447 25 –421 Other sales revenue 3,377 829 – 615 4,821 –143 4,678 73,965 9,854 1,850 19,115 104,784 –8,654 96,131 ST R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 2 1 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total Segments Reconciliation Volkswagen Group Vehicles 79,274 8,633 – – 87,907 –7,875 80,032 Genuine parts 6,344 1,816 – – 8,160 –67 8,093 Used vehicles and third-party products 6,139 810 – – 6,949 –320 6,629 Engines, powertrains and parts deliveries 5,928 366 – – 6,294 –28 6,266 Power Engineering – – 1,581 – 1,581 0 1,581 Motorcycles 438 – – – 438 – 438 Leasing business 411 866 0 17,892 19,168 –2,289 16,878 Interest and similar income 99 3 – 3,910 4,013 –133 3,880 Hedges sales revenue –26 –22 – 0 –48 25 –23 Other sales revenue 4,426 932 – 839 6,198 –304 5,894 103,033 13,404 1,581 22,642 140,660 –10,992 129,669 Other sales revenue comprises revenue from workshop services and license revenue, among other things. 41 42 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 2. Cost of sales Cost of sales includes interest expenses of €968 million (previous year: €1,232 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on capitalized development costs, property, plant and equipment, and lease assets. The impairment losses amount to a total of €496 million (previous year: €552 million). 3. Research and development costs H 1 € million 2021 2020 % Total research and development costs of which: capitalized development costs Capitalization ratio in % Amortization of capitalized development costs Research and development costs recognized in profit or loss 7,735 3,710 48.0 2,494 6,520 6,695 2,950 44.1 2,224 5,969 15.5 25.8 12.1 9.2 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since there were no transactions in the reporting period that had a dilutive effect on the number of shares, diluted earnings per share are equivalent to basic earnings per share. In accordance with Article 27(2) No. 3 of the Articles of Association of Volkswagen AG, preferred shares are entitled to a €0.06 higher dividend than ordinary shares. Q 2 H 1 2021 2020 2021 2020 Weighted average number of: Ordinary shares – basic/diluted Shares 295,089,818 295,089,818 295,089,818 295,089,818 Preferred shares – basic/diluted Shares 206,205,445 206,205,445 206,205,445 206,205,445 Earnings after tax € million 5,040 –1,536 8,454 –1,019 Noncontrolling interests € million 46 –51 81 –57 Earnings attributable to Volkswagen AG hybrid capital investors € million 134 122 269 239 Earnings attributable to Volkswagen AG shareholders € million 4,860 –1,607 8,104 –1,201 of which: basic/diluted earnings attributable to ordinary shares € million 2,861 –952 4,763 –721 of which: basic/diluted earnings attributable to preferred shares € million 1,999 –655 3,341 –481 Earnings per ordinary share – basic/diluted € 9.70 –3.23 16.14 –2.44 Earnings per preferred share – basic/diluted € 9.70 –3.18 16.20 –2.33 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A R Y 1 A N D J U N E 3 0 , 2 0 2 1 € million Carrying amount at Jan. 1, 2021 Additions/ Changes in consolidated Group Disposals/ Other changes Depreciation and amortization Carrying amount at June 30, 2021 Intangible assets 67,968 4,125 11 2,920 69,161 Property, plant and equipment 63,884 4,261 –111 5,866 62,390 Lease assets 50,686 15,887 5,297 4,862 56,414 6. Inventories € million June 30, 2021 Dec. 31, 2020 Raw materials, consumables and supplies 8,298 6,966 Work in progress 6,589 4,022 Finished goods and purchased merchandise 23,827 27,204 Current lease assets 5,935 5,337 Prepayments 280 288 Hedges on inventories 13 6 44,942 43,823 It was not necessary to recognize or reverse significant impairment losses on inventories in the reporting period. The entire industry is currently experiencing supply shortages of semiconductor components. This fact had an effect on the structure of inventories as of June 30, 2021, causing a reduction in finished goods compared with December 31, 2020, set against an increase in inventories of work in progress and raw materials. 7. Current other receivables and financial assets € million June 30, 2021 Dec. 31, 2020 Trade receivables 17,849 16,243 Miscellaneous other receivables and financial assets 22,657 21,801 40,506 38,044 In the period January 1 to June 30, 2021, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €166 million (previous year: €653 million). 43 44 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 8. Equity The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par value preferred shares, and amounts to €1,283 million (previous year: €1,283 million). In January 2021, Volkswagen AG called a hybrid note (maturity: 7 years) with a principal amount of €1.25 billion, which had been placed in 2014 via Volkswagen International Finance N.V., Amsterdam, the Netherlands (issuer). Once called, the note has to be classified as debt in accordance with IAS 32, thus reducing equity and the liquidity of the Volkswagen Group. The hybrid note was redeemed in March 2021. Most of the noncontrolling interests in equity are attributable to the TRATON GROUP. The merger of MAN SE (MAN) with TRATON SE (TRATON) was resolved by the Annual General Meeting of MAN on June 29, 2021. The shares held by noncontrolling interest shareholders of MAN are also to be transferred to TRATON against payment of an appropriate cash settlement in the context of this merger (merger squeeze-out). As a result, the interest held by TRATON in MAN increases from 94.36% to 100% (see “Key events” section for details). 9. Noncurrent financial liabilities € million June 30, 2021 Dec. 31, 2020 Bonds, commercial paper and notes 91,791 88,097 Liabilities to banks 19,128 17,273 Deposit business 2,358 2,411 Lease liabilities 4,993 5,119 Other financial liabilities 958 1,909 119,227 114,809 10. Current financial liabilities € million June 30, 2021 Dec. 31, 2020 Bonds, commercial paper and notes 46,101 42,055 Liabilities to banks 13,962 18,060 Deposit business 24,697 26,735 Lease liabilities 1,094 1,005 Other financial liabilities 1,940 794 87,794 88,648 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 11. Fair value disclosures Generally, the principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2020 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Financial assets and liabilities measured at fair value through profit or loss consist of derivative financial instruments to which hedge accounting is not applied. They include primarily commodity futures, currency forwards relating to commodity futures, call options on equity instruments as well as, in certain cases, interest rate swaps, currency swaps and cross-currency interest rate swaps. Moreover, other equity investments (shares representing an ownership interest of less than 20% as a rule) in partnerships (debt instruments), customer financing receivables whose returns contain more than just interest and principal repayments, and financial assets held in special funds controlled by the Volkswagen Group are measured at fair value through profit or loss. Derivative financial instruments to which hedge accounting is applied are measured at fair value either directly in equity or through profit or loss, depending on the underlying hedged item. Financial assets measured at fair value through other comprehensive income include equity investments (shares representing an ownership interest of less than 20% as a rule) in corporations (equity instruments) and shares for which the Volkswagen Group normally exercises the option of fair value measurement through other comprehensive income, as well as securities (debt instruments) whose cash flows comprise solely payments of interest and principal and that are held under a business model aimed at both collecting contractual cash flows and selling financial assets. For instruments measured through other comprehensive income, changes in fair value are recognized directly in equity, taking deferred taxes into account. Impairment losses on securities (debt instruments) are recognized through profit or loss. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and Level 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting the carrying amount using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. The risk variables governing the fair value of the receivables are risk-adjusted interest rates. 45 46 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 2 0 D E R I VA T I V E N O T F I N A NC I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N STR U M EN T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E DG E M E A S U R E M E N T A T V A L U E C O S T A C C OU N T IN G C A T E G O R Y D E C . 3 1 , 2 0 2 0 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 10,080 10,080 Other equity investments 177 – – – 1,688 1,865 Financial services receivables 279 47,879 50,231 – 34,408 82,565 Other financial assets 1,512 4,105 4,220 2,217 – 7,834 Tax receivables – – – – 376 376 Current assets Trade receivables 52 16,191 16,191 – – 16,243 Financial services receivables 26 39,474 39,474 – 18,506 58,006 Other financial assets 2,402 9,915 9,915 917 – 13,234 Tax receivables – 9 9 – 1,177 1,186 Marketable securities 21,146 15 15 – – 21,162 Cash, cash equivalents and time deposits – 33,909 33,909 – – 33,909 Noncurrent liabilities Financial liabilities – 109,690 115,282 – 5,119 114,809 Other financial liabilities 1,188 2,322 2,317 748 – 4,257 Current liabilities Financial liabilities – 87,643 87,643 – 1,005 88,648 Trade payables – 22,677 22,677 – – 22,677 Other financial liabilities 1,215 8,545 8,545 831 – 10,590 Tax payables – 38 38 – 301 340 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements R E C O N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S A S O F J U N E 3 0 , 2 0 2 1 D E R I V A T I V E N O T F I N A N C I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N S T R U M E N T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E D G E M E A S U R E M E N T A T V A L U E C O S T A C C O U N T I N G C A T E G O R Y J U N E 3 0 , 2 0 2 1 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 10,234 10,234 Other equity investments 539 – – – 1,782 2,321 Financial services receivables 278 49,434 51,604 – 34,717 84,429 Other financial assets 1,902 4,818 4,924 1,540 – 8,260 Tax receivables – – – – 469 469 Current assets Trade receivables 10 17,839 17,839 – – 17,850 Financial services receivables 25 39,213 39,213 – 19,155 58,393 Other financial assets 1,804 11,185 11,185 462 – 13,452 Tax receivables – 4 4 – 1,489 1,493 Marketable securities 22,013 15 15 – – 22,028 Cash, cash equivalents and time deposits – 40,812 40,812 – – 40,812 Assets held for sale – 372 372 – 532 903 Noncurrent liabilities Financial liabilities – 114,234 120,174 – 4,993 119,227 Other financial liabilities 983 2,212 2,206 587 – 3,782 Current liabilities Financial liabilities – 86,700 86,700 – 1,094 87,794 Trade payables – 23,825 23,825 – – 23,825 Other financial liabilities 1,010 11,880 11,880 1,155 – 14,044 Tax payables – 15 15 – 460 474 Liabilities associated with assets held for sale – 166 166 – 412 578 The carrying amount of lease receivables was €53.9 billion (previous year: €52.9 billion) and their fair value was €55.0 billion (previous year: €55.0 billion). 47 48 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The following tables contain an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D AT F A I R VA L U E B Y L E V E L € million Dec. 31, 2020 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 177 40 0 137 Financial services receivables 279 – – 279 Other financial assets 1,512 – 784 729 Current assets Trade receivables 52 – – 52 Financial services receivables 26 – – 26 Other financial assets 2,402 – 2,242 160 Marketable securities 21,146 21,060 86 – Noncurrent liabilities Other financial liabilities 1,188 – 644 543 Current liabilities Other financial liabilities 1,215 – 851 364 € million June 30, 2021 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 539 413 0 126 Financial services receivables 278 – – 278 Other financial assets 1,902 – 923 979 Current assets Trade receivables 10 – – 10 Financial services receivables 25 – – 25 Other financial assets 1,804 – 1,395 410 Marketable securities 22,013 21,922 91 – Noncurrent liabilities Other financial liabilities 983 – 486 496 Current liabilities Other financial liabilities 1,010 – 788 221 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements D E R I VAT I V E F I N A N C I A L I N ST R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million Dec. 31, 2020 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 2,217 – 2,217 – Current assets Other financial assets 917 – 917 – Noncurrent liabilities Other financial liabilities 748 – 748 – Current liabilities Other financial liabilities 831 – 728 102 € million June 30, 2021 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 1,540 – 1,540 – Current assets Other financial assets 462 – 462 – Noncurrent liabilities Other financial liabilities 587 – 587 – Current liabilities Other financial liabilities 1,155 – 1,155 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves, commodity prices and stock exchange prices of listed shares that are observable in the relevant markets and obtained through pricing services. Fair Values in Level 3 are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models, customer financing receivables and receivables from vehicle financing programs are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. The measurement of vehicle financing programs requires in particular the use of the corresponding vehicle price. 49 50 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The table below provides a summary of changes in level 3 balance sheet items measured at fair value: C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D AT F A I R VA L U E B A S E D O N L E V E L 3 € million Financial assets measured at fair value Financial liabilities measured at fair value Assets held for sale Balance at Jan. 1, 2020 913 765 3 Foreign exchange differences –6 –12 – Total comprehensive income –43 533 – recognized in profit or loss –43 533 – recognized in other comprehensive income – – – Additions (purchases) 9 – – Sales and settlements –65 –128 – Transfers into Level 2 –5 –66 – Balance at June 30, 2020 806 1,092 3 Total gains or losses recognized in profit or loss –43 –533 – Net other operating expense/income –43 –533 – of which attributable to assets/liabilities held at the reporting date Financial result –46 – –469 – – – of which attributable to assets/liabilities held at the reporting date – – – Financial assets Financial liabilities € million measured at fair value measured at fair value Balance at Jan. 1, 2021 1,383 907 Foreign exchange differences 20 9 Changes in consolidated Group –158 – Total comprehensive income 712 –51 recognized in profit or loss 385 47 recognized in other comprehensive income 326 –99 Additions (purchases) 493 – Sales and settlements –104 –137 Transfers into Level 1 –333 – Transfers into Level 2 –184 –11 Balance at June 30, 2021 1,828 717 Total gains or losses recognized in profit or loss 385 –47 Net other operating expense/income 402 –47 of which attributable to assets/liabilities held at the reporting date 207 –30 Financial result –17 – of which attributable to assets/liabilities held at the reporting date – – Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. The transfer out of Level 3 into Level 1 relates to the equity investment in TuSimple Holdings Inc., San Diego, California/USA, for which quoted prices are now available following its IPO. In addition, the “financial liabilities” item contains liabilities from notes measured at amortized cost in an amount of €1,915 million, which were transferred out of Level 2 into Level 1 because the market can be considered active due to increased liquidity. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2021, earnings after tax would have been €262 million (previous year: €225 million) higher (lower). Beyond that, equity would not be affected. The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values at June 30, 2021 had been 10% higher, earnings after tax would have been €4 million (previous year: €3 million) higher. If the assumed enterprise values at June 30, 2021 had been 10% lower, earnings after tax would have been €4 million (previous year: €3 million) lower. Residual value risks result from hedging agreements with dealerships under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices of the used cars covered by the residual value protection model had been 10% higher as of June 30, 2021, earnings after tax would have been €416 million (previous year: €355 million) higher. If the prices of the used cars covered by the residual value protection model had been 10% lower as of June 30, 2021, earnings after tax would have been €462 million (previous year: €379 million) lower. If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points higher as of June 30, 2021, earnings after tax would have been €2 million (previous year: €2 million) lower. If the risk-adjusted interest rates as of June 30, 2021 had been 100 basis points lower, earnings after tax would have been €2 million (previous year: €2 million) higher. If the corresponding vehicle price used in the vehicle financing programs had been 10% higher as of June 30, 2021, earnings after tax would have been €2 million (previous year: €2 million) higher. If the corresponding vehicle price used in the vehicle financing programs had been 10% lower as of June 30, 2021, earnings after tax would have been €2 million (previous year: €2 million) lower. If the result of operations of equity investments measured at fair value had been 10% better as of June 30, 2021, equity would have been €6 million (previous year: €0.2 million) higher, and earnings after tax would have been €4 million (previous year: €– million) higher. If the result of operations of equity investments measured at fair value had been 10% worse, equity would have been €6 million (previous year: €0.2 million) lower, and earnings after tax would have been €4 million (previous year: €– million) lower. 51 52 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. € million June 30, 2021 June 30, 2020 Cash, cash equivalents and time deposits as reported in the balance sheet 40,812 43,404 Cash and cash equivalents held for sale 326 115 Time deposits –278 –575 Cash and cash equivalents as reported in the cash flow statement 40,860 42,944 Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2021 2020 Capital contributions/Capital redemptions –1,071 2,984 Dividends paid –501 –397 Proceeds from issuance of bonds 18,539 13,188 Repayments of bonds –14,898 –8,978 Changes in other financial liabilities –2,859 15,388 Repayments of lease liabilities –546 –520 –1,336 21,666 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars and Light Commercial Vehicles segment cover the development of vehicles, engines and vehicle software, the production and sale of passenger cars and light commercial vehicles, and the corresponding genuine parts business. In the Passenger Cars and Light Commercial Vehicles reporting segment, the individual brands are combined into a single reportable segment, in particular as a response to the high degree of technological and economic interlinking in the production network. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of trucks and buses, the corresponding genuine parts business and related services. As in the case of the passenger car brands, there is collaboration within the areas procurement, development and sales. The aim is to create closer cooperation within the business areas. The Power Engineering segment combines the large-bore diesel engines, turbomachinery, special gear units, and propulsion components businesses. In the first six months of 2020, it still also included the business of Renk. The activities of the Financial Services segment comprise dealership and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, activities are combined for reporting purposes taking into particular account the comparability of the type of services and of the regulatory environment. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. R E P O R T I N G S E G M E N T S : H 1 2 0 2 0 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 67,220 9,356 1,849 17,469 95,893 237 96,131 Intersegment sales revenue 6,746 498 1 1,646 8,891 –8,891 – Total sales revenue 73,965 9,854 1,850 19,115 104,784 –8,654 96,131 Segment result (operating result) –1,582 –295 –93 1,248 –721 –768 –1,490 R E P O R T I N G S E G M E N T S : H 1 2 0 2 1 € million Passenger Cars and Light Commercial Vehicles Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 94,316 12,855 1,581 20,750 129,502 166 129,669 Intersegment sales revenue 8,717 549 0 1,892 11,158 –11,158 – Total sales revenue 103,033 13,404 1,581 22,642 140,660 –10,992 129,669 Segment result (operating result) 9,303 334 –14 2,517 12,141 –783 11,358 R E C O N C I L I AT I O N H 1 € million 2021 2020 Segment result (operating result) 12,141 –721 Unallocated activities –18 –37 Group financing 22 7 Consolidation/Holding company function –786 –739 Operating result 11,358 –1,490 Financial result –205 138 Consolidated earnings before tax 11,153 –1,352 53 54 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 14. Related party disclosures Porsche SE holds the majority of the voting rights in Volkswagen AG. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. This means that, even though it holds the majority of voting rights of Volkswagen AG, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE is therefore classified as a related party as defined by IAS 24. S U P P L I E S A N D S E R V I C E S R E N D E R E D S U P P L I E S A N D S E R V I C E S R E C E I V E D H 1 H 1 € million 2021 2020 2021 2020 Porsche SE and its majority interests Supervisory Board members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests State of Lower Saxony, its majority interests and joint ventures 2 1 541 8,978 174 1 2 3 494 7,136 76 2 0 1 678 348 651 2 0 0 558 196 5221 3 1 Prior year figures adjusted. R E C E I V A B L E S F R O M L I A B I L I T I E S ( I N C L U D I N G O B L I G A T I O N S ) T O € million June 30, 2021 Dec. 31, 2020 June 30, 2021 Dec. 31, 2020 Porsche SE and its majority interests Supervisory Board members Unconsolidated subsidiaries Joint ventures and their majority interests Associates and their majority interests State of Lower Saxony, its majority interests and joint ventures 4 0 1,137 13,590 488 22 4 0 1,164 12,207 397 25 0 160 1,428 2,058 703 2 0 167 1,477 2,250 951 2 The tables above do not contain the dividend payments (net of withholding tax) of €1,471 million (previous year: €1,503 million) received from joint ventures and associates. Receivables from joint ventures are primarily attributable to loans granted in an amount of €8,414 million (December 31, 2020: €8,534 million) as well as trade receivables in an amount of €3,705 million (December 31, 2020: €3,349 million). Receivables from non-consolidated subsidiaries also result primarily from loans granted in an amount of €686 million (December 31, 2020: €642 million) as well as trade receivables in an amount of €179 million (December 31, 2020: €190 million). Transactions with related parties are conducted on an arm’s length basis. Some of these transactions also include reservation of title clauses. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €367 million (December 31, 2020: €354 million). Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Impairment losses of €21 million (previous year: €166 million) were recognized on the outstanding related party receivables. In the first half of 2021, expenses of €1 million (previous year: €105 million) were incurred in this context. In the first six months, the Volkswagen Group made capital contributions of €925 million (previous year: €73 million) at related parties. 15. Litigation D I E S E L I S S U E 1. Product-related lawsuits worldwide The number of claims asserted by financialright GmbH based on rights assigned to it has decreased to roughly 37 thousand following the withdrawal of numerous motions. In Italy, the trial court hearing the Altroconsumo class action found in favor of the plaintiffs in July 2021 and entered a judgment holding Volkswagen AG and Volkswagen Group Italia liable in damages to some 63 thousand consumers in an aggregate amount of roughly €185 million plus interest. Volkswagen AG and Volkswagen Group Italia intend to appeal this decision. In the Netherlands, the suspended class action brought by Stichting Car Claim has been resumed. A hearing for oral argument on the merits of the claims took place in May 2021. A declaratory judgment partially granting the relief sought was issued in July 2021. In the opinion of the court, Volkswagen AG and the other defendant Group companies acted unlawfully with respect to the original engine management software. The court moreover held that consumers are entitled to a purchase price reduction from the defendant dealerships. No specific payment obligations result from the declaratory judgment. Volkswagen AG and the other defendant Group companies intend to appeal the decision. In Germany more than 60 thousand individual lawsuits relating to various diesel engine types are currently pending against Volkswagen AG or other Group companies, with the plaintiffs suing for damages or rescission of the contract in most cases. In March 2021, the Bundesgerichtshof (Federal Court of Justice) issued a comprehensively reasoned ruling holding that purchasers of vehicles with Type EA 189 diesel engines cannot raise tort-based damage claims against Volkswagen AG merely because the engines had a temperature-dependent emissions control feature (so-called thermal window). 2. Proceedings in the USA/Canada In February 2021, Texas sought discretionary review by the Texas Supreme Court of the Texas appellate court decision dismissing Texas’s state environmental claims against Volkswagen AG and AUDI AG for lack of personal jurisdiction. In June 2021, the Ohio Supreme Court affirmed an intermediate appellate court decision declining to dismiss certain claims brought by Ohio. Volkswagen AG and AUDI AG intend to seek further review by the U.S. Supreme Court. 3. Lawsuits filed by investors worldwide (excluding the USA/Canada) In the Netherlands, a shareholder association filed an unquantified lawsuit seeking a determination that Volkswagen AG supposedly misled the capital markets. The lawsuit was withdrawn in early July 2021. Volkswagen AG consented to the withdrawal of the action, thereby terminating the litigation. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or regarding uncertainty as to the amount or maturity of provisions and contingent liabilities in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Company. A D D I T I O N A L I M P O R TA N T L E G A L C A S E S At the end of March 2021, the Supervisory Board of Volkswagen AG announced the completion of the investigation initiated in October 2015 into the causes of and those responsible for the diesel issue. The Board resolved to claim damages from Prof. Dr. Martin Winterkorn, former Chair of the Board of Management of Volkswagen AG, and from Rupert Stadler, former member of the Board of Management of Volkswagen AG and former Chair of the Board of Management of AUDI AG, for breach of their duty of care under stock corporation law. The resolution was based on identified negligent breaches of duty. The investigation found no breaches of duty by other members of the Volkswagen AG Board of Management. The investigation covered all members of the Board of 55 56 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Management who were in office during the relevant period. In June 2021, agreements on damage payments were reached in this connection with the goal of achieving speedy, legally certain, and final resolution of the diesel issue as far as the civil liability of members of governing bodies is concerned. To this end, Volkswagen and Audi entered into damage settlements (liability settlements) with Prof. Winterkorn and Mr. Stadler respectively in connection with the diesel issue. Prof. Winterkorn's damage payment amounts to €11.2 million and that of Mr. Stadler to €4.1 million. Volkswagen has furthermore reached agreement with the relevant insurers under its directors and officers liability policies (D&O insurance) on payment of an aggregate sum of €270 million (coverage settlement). In addition, agreement was reached on damage payments by a former member of Audi's Board of Management and by a former member of Porsche's Board of Management. One former member of Audi's Board of Management was unwilling to reach a settlement; legal action is being prepared against him. Claims were already asserted against a former member of the Volkswagen Passenger Cars brand Board of Management. In April 2019, the European Commission issued an initial statement of objections to Volkswagen AG, AUDI AG and Dr. Ing. h.c. F. Porsche AG in connection with the Commission's antitrust investigation of the automobile industry. These objections stated the European Commission's preliminary evaluation of the matter and afforded the opportunity to comment. Following entry into a formal settlement procedure, the Commission in April 2021 issued a revised statement of objections raising charges that were considerably more narrow. On this basis, a settlement decision was issued on July 8, 2021 concluding the administrative action and assessing a total fine of roughly €502 million against the three brands. The subject matter scope of the decision is limited to the cooperation of German automobile manufacturers on individual technical questions in connection with the development and introduction of SCR (selective catalytic reduction) systems for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. The decision was served on Volkswagen on July 12, 2021. It can be challenged by filing an action with the European Court by mid-September. Beyond this, there were no significant changes in the reporting period compared with the disclosures on the Volkswagen Group’s expected development in fiscal year 2021 contained in the combined management report in the 2020 Annual Report, specifically in the chapters “Report on Expected Developments” and “Report on Risks and Opportunities,” including the section “Legal risks.” Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 16. Contingent liabilities Driven in particular by the inclusion of additional tax and legal items and of currency translation effects, contingent liabilities went up to €9.1 billion, an increase of €0.5 billion compared with the 2020 consolidated financial statements. 17. Other financial obligations Other financial obligations totaled €26.3 billion, an increase of €4.3 billion compared with the 2020 consolidated financial statements. The rise is mainly attributable to obligations relating to development and supply contracts. Significant events after the balance sheet date On July 1, 2021, the TRATON GROUP acquired all of the outstanding ordinary shares in Navistar, a US manufacturer of commercial vehicles. The purchase price of approximately €3.1 billion (USD 3.7 billion) was paid in cash. TRATON now holds 100% of the shares in Navistar International Corporation, which was previously accounted for using the equity method (interest of 16.7%). Given the short period of time since the acquisition date, it is not possible to provide any further information on the acquisition and the resulting effects on the consolidated financial statements of the Volkswagen Group. In June 2021, agreements on the payment of damages by former members of the Board of Management were reached with the goal of achieving speedy, legally certain, and final resolution of the diesel issue as far as the civil liability of members of governing bodies is concerned. To this end, Volkswagen and Audi entered into damage settlements (liability settlements) with Prof. Winterkorn and Mr. Stadler respectively in connection with the diesel issue. Prof. Winterkorn's damage payment amounts to €11.2 million and that of Mr. Stadler to €4.1 million. Volkswagen has furthermore reached agreement with the relevant insurers under its directors and officers liability policies (D&O insurance) on payment of an aggregate sum of €270 million (coverage settlement). In addition, agreement was reached on damage payments by a former member of Audi's Board of Management and by a former member of Porsche's Board of Management. One former member of Audi's Board of Management was unwilling to reach a settlement; legal action is being prepared against him. Claims were already asserted against a former member of the Volkswagen Passenger Cars brand Board of Management. The Annual General Meeting of Volkswagen AG gave its approval to this agreement on July 22 2021. Following this approval, the damages to be paid will be recognized as other operating income in the third quarter. At the end of July 2021, Volkswagen’s Supervisory Board approved an agreement with the investment firm Attestor Limited and Pon Europe B.V. for the submission of a joint public takeover offer for the shares of Europcar Mobility Group S.A., Paris/France through a consortium company. If the offer is accepted, the consortium – according to current information – would assume joint control of Europcar. Wolfsburg, July 28, 2021 Volkswagen Aktiengesellschaft The Board of Management 57 58 Responsibility Statement Interim Consolidated Financial Statements (Condensed) Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements prepared in accordance with German accepted accounting principles give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 28, 2021 Volkswagen Aktiengesellschaft The Board of Management Interim Consolidated Financial Statements (Condensed) Review Report Review Report To VOLKSWAGEN AKTIENGESELLSCHAFT We have financial statements of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, – comprising the condensed income statement, condensed statement of comprehensive income, condensed balance sheet, condensed statement of changes in equity, condensed cash flow statement as well as selected explanatory notes – and the interim group management report for the period from 1 January 2021 to 30 June 2021, which are part of the half-year financial report pursuant to Sec. 115 WpHG [“Wertpapierhandelsgesetz”: German Securities Trading Act]. The preparation of the condensed interim consolidated financial statements in accordance with IFRSs (International Financial Reporting Standards) on interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the Company’s executive directors. Our responsibility is to issue a report on the condensed interim consolidated financial statements and the interim group management report based on our review. reviewed the condensed interim consolidated We conducted our review of the interim condensed consolidated financial statements and of the interim group management report in compliance with German Generally Accepted Standards for the Review of Financial Statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the review to obtain a certain level of assurance in our critical appraisal to preclude that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU and that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. A review is limited primarily to making inquiries of company personnel and applying analytical procedures and thus does not provide the assurance that we would obtain from an audit of financial statements. In accordance with our engagement, we have not performed an audit and thus cannot issue an auditor’s report. Based on our review, nothing has come to our attention that causes us to believe that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU or that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. Hanover, 28 July 2021 Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft Meyer Wirtschaftsprüfer [German Public Auditor] Matischiok Wirtschaftsprüfer [German Public Auditor] 59 60 Selected terms at a glance Hybrid notes Hybrid notes issued by Volkswagen are classi- fied in their entirety as equity. The issuer has call options at defined dates during their perpetual maturities. They pay a fixed coupon until the first possible call date, followed by a variable rate depending on their terms and conditions. Modular Electric Drive Toolkit (MEB) The modular system is for the manu- facturing of electric vehicles. The MEB establishes parameters for axles, drive systems, high-voltage batteries, wheel- bases and weight ratios to ensure a vehicle optimally fulfills the requirements of e- mobility. The production of the first vehicles based on the MEB started into series production in 2020. Plug-in hybrid Performance levels of hybrid vehicles. Plug-in hybrid electric vehicles (PHEVs) have a larger battery with a correspond- ingly higher capacity that can be charged via the combustion engine, the brake system, or an electrical outlet. This increases the range of the vehicle. Premium Platform Electric (PPE) A new vehicle platform for all-electric premium, sport and luxury class vehicles. The components and functions of this platform are especially tailored to meet the high demands of this segment. This platform enables high synergies to be achieved particularly between the Audi, Porsche and Bentley brands. Glossary Capitalization ratio The capitalization ratio is defined as the ratio of capitalized development costs to total research and development costs in the Automotive Division. It shows the proportion of primary research and development costs subject to capitalization. Equity ratio The equity ratio measures the percentage of total assets attributable to shareholders’ equity as of a reporting date. This ratio indicates the stability and financial strength of the company and shows the degree of financial indepen- dence. Gross margin Gross margin is the percentage of sales revenue attributable to gross profit in a period. Gross margin provides information on profitability net of cost of sales. Net cash flow Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities. Net liquidity Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, loans and time deposits not financed by third-party borrowings. To safeguard our business activ- ities, we have formulated the strategic target that net liquidity in the Automotive Division should amount to approximately 10% of the consolidated sales revenue. Operating result Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in finan- cial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and docu- ments the economic success of our core busi- ness. Operating return on sales The operating return on sales is the ratio of the operating result to sales revenue. Ratio of capex to sales revenue The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized develop- ment costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure – largely for modernizing and expanding our product range and for environ- mentally friendly drivetrains, as well as for adjusting the production capacity and improving production processes – in relation to the Auto- motive Division’s sales revenue. Research and development ratio The research and development ratio (R&D ratio) in the Automotive Division shows total research and development costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology through to the development of marketable products. Particular emphasis is placed on the environmentally friendly orientation of our product portfolio. The R&D ratio underscores the efforts made to ensure the Company’s future viability: the goal of competitive profit- ability geared to sustainable growth. Return on sales before tax The return on sales is the ratio of profit before tax to sales revenue in a period, expressed as a percentage. It shows the level of profit gener- ated for each unit of sales revenue. The return on sales provides information on the profit- ability of all business activities before deducting income tax expense. Contact Information P U B L I S H E D B Y Volkswagen AG Group Financial Publications Letterbox 1848 38436 Wolfsburg Germany Phone +49 (0) 5361 9 0 Fax +49 (0) 5361 9 28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany E-Mail Internet www.volkswagenag.com/en/InvestorRelations.html investor.relations@volkswagen.de F I N A N C I A L C A L E N D A R October 28, 2021 Interim Report January – September 2021 This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/en/InvestorRelations.html 158.809.604.20 www.volkswagenag.com 1 2 0 2 | 1 H

Semestriel, 2021, Auto, Volswagen

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JANUARY - JUNE 2022 HALF-YEARLY FINANCIAL REPORT 1 U PDAT E D I N F O R M AT I O N 7 I N T E R IM M AN AGEM E N T R E PORT 2 9 B RA N D S AN D BUSI N ESS FI ELDS 3 3 I N T E R IM CON SOLI DATE D F I NA N C IA L STATE M EN T S (CON D E N SE D) 1 Key Facts 2 Key Events 7 Volkswagen Shares 8 Business Development 19 Results of Operations, Finan- cial Position and Net Assets 27 Outlook 33 Income Statement 34 Statement of Comprehensive Income 37 Balance Sheet 38 Statement of Changes in Equity 40 Cash Flow Statement 41 Notes to the Interim Consolidated Financial Statements 62 Responsibility Statement 63 Review Report Key Figures V O L K SWA G E N G R O U P Q 2 H 1 2022 2021 % 2022 2021 % Volume Data1 in thousands Deliveries to customers (units) 1,977 2,547 –22.4 3,875 4,979 –22.2 Vehicle sales (units) 2,011 2,326 –13.5 4,006 4,660 –14.0 Production (units) 2,116 2,194 –3.5 4,160 4,512 –7.8 Employees (on June 30, 2022/Dec. 31, 2021) 668.0 672.8 –0.7 Financial Data (IFRSs), € million Sales revenue 69,543 67,293 +3.3 132,285 129,669 +2.0 Operating result before special items 4,735 6,546 –27.7 13,188 11,358 +16.1 Operating return on sales before special items (%) 6.8 9.7 10.0 8.8 Special items –230 – x –360 – x Operating result 4,505 6,546 –31.2 12,828 11,358 +12.9 Operating return on sales (%) 6.5 9.7 9.7 8.8 Earnings before tax 5,140 6,690 –23.2 14,034 11,153 +25.8 Return on sales before tax (%) 7.4 9.9 10.6 8.6 Earnings after tax 3,914 5,040 –22.3 10,638 8,454 +25.8 Automotive Division2 Total research and development costs 4,930 3,774 +30.6 9,289 7,735 +20.1 R&D ratio (%) 8.5 6.8 8.5 7.2 Cash flows from operating activities 7,803 10,197 –23.5 13,604 19,088 –28.7 Cash flows from investing activities attributable to operating activities3 7,002 4,711 +48.6 11,311 8,897 +27.1 of which: capex 2,385 1,853 +28.7 4,089 3,777 +8.3 capex/sales revenue (%) 4.1 3.3 3.7 3.5 Net cash flow 801 5,486 –85.4 2,293 10,191 –77.5 Net liquidity at June 30 28,209 35,048 –19.5 1 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries have been updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Excluding acquisition and disposal of equity investments: Q2 €4,846 (3,553) million, H1 €8,694 (7,359) million. This version of the Interim Report is a translation of the German original. The German takes precedence. All figures shown in the Report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. Specified vehicle ranges correspond to results obtained through the Worldwide Harmonized Light vehicles Test Procedure (WLTP) on the chassis dynamometer. WLTP value ranges for series-produced vehicles may vary depending on the equipment. The actual range will deviate in practice depending on various other factors. Updated Information Key Facts > Deliveries to Volkswagen Group customers fall across all regions by 22.2% to 3.9 (5.0) million vehicles; limited vehicle availability caused by the Covid-19 pandemic and parts supply shortages > Deliveries of all-electric vehicles to customers up 27.0%; their share of Group’s total deliveries rises to 5.6 (3.4)% > Group sales revenue of €132.3 billion up 2.0% on the previous year; includes Navistar with €4.7 billion (consolidated as of July 2021), financial services business sees continued success > Operating result before special items up by €1.8 billion to €13.2 billion; improvements in the mix and price positioning > Operating result up by €1.5 billion to €12.8 billion; negative special items of €–0.4 billion in the reporting period relating to the diesel issue > Profit before tax climbs to €14.0 (11.2) billion; profit after tax at €10.6 (8.5) billion > Automotive Division’s net cash flow amounts to €2.3 (10.2) billion; acquisition of Europcar shares amounting to approximately €1.7 billion; capex ratio at 3.7 (3.5)% > Net liquidity of €28.2 billion in the Automotive Division; successful placement of hybrid notes strengthens capital base; dividend payment of €3.8 billion in May > Exciting products: Volkswagen adds four-wheel drive version ID.4 Pro 4MOTION to the ID.4 portfolio; ID. AERO concept vehicle offers a look at an all-electric mid-sized saloon ŠKODA presents reworked Karoq with a new design language - CUPRA outlines its vision and ambitions for the period to 2025 with the Terramar, Tavascan and UrbanRebel vehicles Audi illustrates the premium mobility of tomorrow with the spacious concept car Audi urbansphere Lamborghini presents the Huracán Tecnica super sports car - Bentley expands the Bentayga model range with the luxurious Grand Tourer Bentayga Extended Wheelbase Scania presents battery-electric trucks for regional transport - MAN announces eBus chassis for the global market Key Facts 1 2 Key Events Updated Information Key Events C O V I D - 1 9 PA N D E M I C The global spread of the Omicron variant of coronavirus (SARS-CoV-2) had a substantial impact on social and eco- nomic life in the reporting period in some regions. In China in particular, local infection outbreaks during the first half of 2022 led to tight restrictions under the zero-Covid strategy being pursued there, resulting in economic damage and disruption to international supply chains. which can be used across segments in vehicles ranging from compact crossovers through SUVs or minibuses down to spacious sedans. As a result of the interaction of a powerful 77 kWh lithium-ion battery, efficient drivetrain and excellent aerodynamic properties, the ID. AERO has a range of up to 620 km. The series version for China is expected to be launched in the second half of 2023. Volkswagen is planning to start pro- ducing a European variant at the Emden plant, also in 2023. R U S S I A - U K R A I N E C O N F L I C T In the first six months of 2022, the Russia-Ukraine conflict led to a humanitarian crisis and global market upheaval. Prices rose substantially, particularly on energy and com- modity markets. Parts supply shortages, especially for wire harnesses, also intensified in this context. The Russia-Ukraine conflict led to increased uncertainty in respect of develop- ments in the global economy and prompted large sections of the community of Western states to impose sanctions on Russia ranging from an extensive trade embargo to the exclu- sion of Russia from the global financial system. N E W P R O D U C T S A N D T E C H N O L O G I E S P R E S E N T E D The Volkswagen Group and its brands continued to present new vehicles and technologies in the second quarter of 2022. The Volkswagen Passenger Cars brand added another four- wheel drive version to the all-electric ID.4 product portfolio: the ID.4 Pro 4MOTION. Based on the ID.4 Pro Performance, this model generates a system output of 195 kW (265 PS) and offers greater dynamics and better traction in wet and snowy conditions and on loose surfaces. Thanks to a second electric motor on the front axle, the new more powerful variant transmits its power to the road through all four wheels. This makes the ID.4 Pro 4MOTION a high-performance vehicle and a reliable partner when towing smaller transport or boat trailers. As a result of the all-wheel drive, the (braked) towing capacity increases by 200 kg compared with the classic Pro Performance version to 1,400 kg on up to 8% gradient. Cele- brating the world premiere of the ID. AERO concept vehicle in China, Volkswagen Passenger Cars gave a foretaste of its first all-electric mid-sized sedan. Its progressive, stylish and aero- dynamic design boasts an elegantly sloping coupé-style roof line. The interior is generously proportioned. Based on the Group’s Modular Electric Drive Toolkit (MEB), the ID. AERO shows off the flexibility of the all-electric MEB architecture, ŠKODA presented the reworked Karoq in the second quar- ter of 2022. The consistently enhanced ŠKODA design lan- guage has given the compact SUV more striking looks and improved aerodynamics, with reduced fuel consumption and emissions. Sustainable materials and modern technologies provide higher comfort levels in the interior. For the first time, matrix LED headlights are available for the Karoq. The range of engines comprises five efficient engines from the Volkswagen Group’s current EVO generation; this means that the Kodiaq’s smaller brother benefits from lower fuel con- sumption and CO2 emissions. At Power2Drive in Munich, the trade fair for charging infrastructure, mobility services and e-mobility, ŠKODA also celebrated the launch in Germany of its sporty top-of-the range model, the Enyaq Coupé RS iV. It marks the expansion of ŠKODA’s RS family with the addition of an all-electric model. Two electric motors generate a com- bined system output of 220 kW (299 PS), enabling the Enyaq Coupé RS iV to sprint from 0 to 100 km/h in 6.5 seconds. Its top speed is 180 km/h. The sports chassis also contributes to the dynamic driving experience: the coupé has been lowered by 15 mm at the front and by 10 mm at the back. In June 2022, CUPRA presented its vision and ambitions for the period to 2025, providing a look ahead to three new electrified models: the CUPRA Terramar combines vigorous proportions and striking design to create an emotive, sporty SUV with which the company plans to gain access to further regions of the SUV segment. The CUPRA Terramar will be available both with different combustion engines and with a new generation of plug-in hybrid drives. It is expected to have an electric range of around 100 km. The CUPRA Tavascan embodies CUPRA’s electric vision and is intended to remain true to the 2019 concept vehicle. The dynamic SUV coupé, which is to be launched in 2024, represents not only the vision of contemporary electrification, but is also aimed at making the CUPRA brand more global and at tapping into new markets. With the UrbanRebel, CUPRA wants to challenge Updated Information conventions and stir emotions. The front-wheel-drive urban electric car is expected to use the Volkswagen Group’s MEB platform as a basis for a vehicle that excites customers with inspiring performance. With its three concept cars, Audi skysphere, Audi grand- sphere and Audi urbansphere, the brand with the four rings illustrates its vision of premium mobility in the future, with access to a world of experience that far transcends the per- functory stay on board as a routine way of getting from A to B. The latest model of this trio to be presented by Audi was the urbansphere concept, in the second quarter of 2022; it features a spacious and revolutionary interior where digital technologies provide a sphere of experience for megacity traffic. In terms of technology, the Audi urbansphere is based on the Premium Platform Electric (PPE). The key element of PPE is a battery module between the axles, which – similar to the Audi grandsphere launched before it – provides around 120 kW/h of energy. The 800-volt charging technology enables charging of the battery at up to 270 kW within a short time: it takes just ten minutes at a fast-charging station to load enough energy for a drive of over 300 km; the charge level can be upped from 5% to 80% in less than 25 minutes. The two electric motors of the Audi urbansphere concept, one each on the front and rear axle, generate an aggregate output of 295 kW (401 PS). The fact that the front axle drive can be disengaged as needed to reduce friction, thus cutting energy consumption in roll mode, is a first. In April 2022, Lamborghini presented the latest member of the Huracán model range, the Huracán Tecnica. This latest stage in the evolution of the Huracán boasts improved aero- dynamics, output, stability and user-friendliness – qualities that make it an allrounder on the road and the racing track. The engine of the Huracán Tecnica originates from the Huracán STO; it generates an output of 471 kW (640 PS), 22 kW (30 PS) more than the Huracán EV0 RWD. The super sports car masters the sprint from 0 to 100 km/h in 3.2 sec- onds. The Bentayga Extended Wheelbase, which was unveiled by Bentley in the second quarter of 2022, is a luxury SUV that defines a completely new vehicle class. In the Grand Tourer, which has been made 180 mm longer than the Bentayga, the focus is on well-being: the interior boasts seats styled like those in an aircraft, featuring automatic climate sensors and a progressive system to optimize posture. Carefully crafted elements additionally enhance the first-class interior. The lighting of the Bentley Diamond is designed in such a way that light shines through the handmade leather lining of the interior. Particularly fine thread has been used to produce the remarkably soft diamond quilting. The driving dynamics of the Bentayga Extended Wheelbase are determined by a 4.0 l V8 engine with 405 kW (550 PS), the new rear-axle steering and the Bentley Dynamic Ride system, which comes as standard. Scania wants to offer new electric vehicles to its cus- tomers every year in future. Following the vehicles for intra- city goods transport, Scania has now unveiled battery-electric Key Events trucks for regional transport. The new model range comes with a battery capacity of 624 kWh and is available with R or S cabs. It is based on classic Scania cornerstones such as modu- larity and sustainability, offering companies a multitude of different uses in regional transport applications. In their respective areas of deployment, the vehicles match the out- put and range of conventional trucks, but exceed their perfor- mance in terms of economy and CO2 efficiency. In the migra- tion from conventional to electric trucks, Scania supports its customers in all areas of e-mobility: from the charging infra- structure through service and maintenance down to suitable financing models and insurance options. MAN presented an eBus chassis for the global market in the second quarter of 2022; it is based on the proven technol- ogy of the all-electric Lion’s City E, which is already being used successfully in many European countries. The aim is to continue to advance environmentally friendly mobility and to make city traffic cleaner, quieter and safer across the globe. The first prototypes are expected to hit the road in 2023, with series production planned for 2024. Together with ABB E-mobility, a global leader in the provision of charging solutions for electric vehicles, MAN is taking the next step toward e-mobility in long-haul truck transportation: for the first time, MAN revealed a close-to-production prototype of its upcoming electric truck on the premises of former Berlin Tempelhof airport in the second quarter. A special technical feature of the groundbreaking e-truck, which is expected to celebrate its market debut in 2024, is its preparation for future megawatt charging technology, which ABB E-mobility intends to have ready for the market within the next three years. AWA R D S At the beginning of April 2022, no fewer than four Group brands won first prize in one of the categories of the Top Gear Electric Car Awards. Volkswagen’s ID. Buzz was crowned Electric Car of the Year, while the Readers’ Choice Award went to the Porsche Taycan Sport Turismo. ŠKODA’s Enyaq iV won the Best Value Electric Car award. Audi took home the prize for Best Racer with its RS Q e-tron. The Electric Car Awards are presented in a total of 18 categories by the respected BBC Top Gear magazine. In mid-April, the Audi e-tron GT was honored as World Performance Car at the World Car Awards 2022. The World Car Awards are handed out annually by a professional inter- national panel in New York to reward excellent leadership and innovation in the automotive industry. Audi has been a win- ner eleven times, making it the most successful manufac- turer in the history of the Award. Also in April, the Lamborghini brand received the Green Star Award 2022 for the second time in succession; this award is presented annually by the German Institute for Quality and Finance. This process involves looking at 2,000 companies and analyzing ecological, economic, and social sustainability, as well as innovation and technology. 3 4 Key Events In the “electric buses: city” category, the Scania Citywide BEV came first in the busplaner Innovation Award 2022 in April. In total, more than 1,000 readers of the German busplaner trade magazine took part in the vote. This all-electric low-floor bus is a contribution towards Scania becoming a pioneer of sus- tainable mobility. At the end of April, the Bentley Continental GT Speed was voted Classic Car of the Future in the Motor Klassik Award 2022. It was elected as the winner in the coupé category by over 18,000 readers of the Motor Klassik magazine. At the beginning of May 2022, Scania’s 500 S bagged the Green Truck award for excellent transport services and fuel efficiency for the sixth time in a row. The award is organized as a press comparison test by the German trade magazines Trucker and VerkehrsRundschau. Environmental performance is measured by comparing fuel consumption and CO2 emis- sions. In mid-May 2022, ŠKODA’s Fabia received the Red Dot Award in the product design category. This marks the seven- teenth time overall that the brand has won this award in one of the world’s best known design competitions. It is regarded as a seal of high-quality product design. The international panel of experts consists of independent designers, design professors and trade journalists. Also in May, the seventh generation of the Multivan from the Volkswagen Commercial Vehicles brand received the highest mark of five stars in the Euro NCAP test. The new Multivan was given the top mark in both the crash safety and assistance system function categories. The crash test pro- cedures look at and evaluate safety aspects of the vehicles: occupant protection for adults, child protection, the safety of vulnerable road users such as cyclists and pedestrians and provision of assistance systems as standard. Likewise, the all- electric ID.5 of the Volkswagen Passenger Cars brand came out top in the Euro NCAP driver assist test. Expanding on the ADAC’s traditional crash test procedure, ratings are given in the areas of in-vehicle assistance, driver involvement and safety assistance. At the end of May 2022, two vehicles received the iF Design Award 2022. The MAN Lion’s Intercity LE won the award in the Product/Automobiles/Vehicles category, while the new Multi- van from the Volkswagen Commercial Vehicles brand bagged an impressive two awards in the Automobile category, for both its exterior and interior design. The design competition, which has been held annually since 1954, recognizes design and product development excellence. Ducati was voted “best brand” by the trade journal PS for the fifth time in May 2022. Over 11,000 participants cast their votes in a total of ten categories. Ducati prevailed over its competitors in nine out of the ten categories. At the beginning of June 2022, the Scania brand was voted in first place five times in the ETM Awards. The awards handed out included those for Best Bus and Best Truck. Scania’s performance in the area of alternative drives was also Updated Information impressive: the R 410 LNG won in the long-haul natural gas truck category. In total, almost 6,000 readers cast their votes. Considered the benchmark in the commercial vehicles industry, the ETM Award has been presented by qualified market researchers for 25 years. A N N I V E R S A R I E S In April 2022, the twenty thousandth Lamborghini Huracán rolled off the production line in Sant’Agata Bolognese. The anniversary vehicle was an STO model painted in a Grigio Acheso matte gray finish. The Huracán has offered a wide choice of models since 2014, featuring a total of twelve road and three racing versions. Following its launch in 2002, the Touareg from the Volks- wagen Passenger Cars brand celebrated its twentieth anniver- sary in May. The premium SUV, which marked the entry into a new segment, has already been sold over a million times worldwide. The special-model Touareg “EDITION 20”, with new paintwork and exclusive wheels, as well as an elegant leather interior, was presented to mark the anniversary. In May, Bentley celebrated the seventieth anniversary of the R-Type Continental, which was first built in 1952. The model has since then only been produced 208 times and thus remains a rarity. The Golf R turned 20 in June, and Volkswagen has marked this milestone with the special Golf R model “20 Years”. The powerful anniversary car continues the success story of the Golf R32 with its unique sporty design and everyday practical performance. Design highlights are the exclusive “20 R” logo projection and, for the first time, decorative inlays made of real carbon. in Also June, Porsche celebrated 50 years of the 911 Carrera RS 2.7. Being the first production model with a front and rear spoiler, the sports car started a new trend for vehicles produced in series. The model was given the epithet Carrera – which means “race” – in the first generation of the 911. Starting in September 2022, the Porsche Museum in Stuttgart will be hosting a special exhibition on the 50-year anniversary. In addition, Porsche reached a production milestone in June: 20 years of Porsche production in Leipzig. With over 4,400 employees, the Porsche plant in Leipzig is one of the largest employers in the region. Various anniversary festiv- ities are scheduled to continue until August 2022. The five hundred thousandth DQ400e hybrid transmis- sion was celebrated in Kassel in June. The dual-clutch trans- mission – the only of its kind for transverse installation – is used by almost all of the brands. There are plans to make up to 1,100 units a day in future. The Modular Transverse Toolkit (MQB) – which has served as the production platform for more than 32 million vehicles throughout the Group – celebrated its ten-year anniversary at the end of June 2022. The MQB generates synergies across vehicle types and stands for innovative technology and Updated Information flexible drive concepts. An all-electric technology matrix, the Scalable Systems Platform (SSP), represents the next gene- ration for the Group, as from 2026. V F L W O L F S B U R G W O M E N ’ S T E A M W I N S B U N D E S L I G A C H A M P I O N S H I P A N D D F B C U P The VfL Wolfsburg women’s football team had two reasons to celebrate in May 2022: at the beginning of the month, they secured an early win of their seventh Women’s Bundesliga title. And only a few weeks later, they capped this success by winning the DFB Cup, bringing it home to Wolfsburg for the eighth time in succession and ninth time in total. These successes underscore the important role that these brand ambassadors play for Volkswagen: in particular, the VfL Wolfs- burg women’s team stands for the values of diversity, affinity, professional-ism and team spirit. PA R T N E R S H I P S Volkswagen and bp announced in April 2022 that they would form a strategic partnership for the rapid roll-out of fast- charging stations for electric vehicles in Europe. These are flexible, battery-based charging stations that can be installed quickly as they do not require a high-power grid connection and can be connected directly to a low-voltage network. The two partners have set themselves the goal of improving access to charging facilities for electric vehicles in the most important European markets as a way of driving the tran- sition to e-mobility. bp’s charging network is to be integrated into the navigation systems of several Group brands to allow drivers to easily find the nearest charging station. The first charging station went live in Düsseldorf at the end of April 2022. There are plans for up to 4,000 stations, each with two charging points, across Europe by the end of 2024. The Volkswagen Group and India’s Mahindra Group signed a cooperation agreement in May 2022 to evaluate the extent of future cooperative endeavours. This includes, among other things, investigating ways of using components from Volks- wagen’s MEB, for example in electric motors and battery cells, in Mahindra vehicles. The joint objective of the two com- panies is to drive the electrification of the Indian automotive market. The MEB, which was designed as an open vehicle platform, and its components allow manufacturers to elec- trify their model ranges quickly and in a way that is cost- effective. The MEB is already used by Group brands such as Volkswagen Passenger Cars, Audi, ŠKODA and SEAT/CUPRA as well as by external partners. TA K E O V E R O F E U R O P C A R In 2021, together with the investment firm Attestor Limited and Pon Holdings B.V., Volkswagen made a joint public takeover offer for the shares of Europcar Mobility Group S.A., Paris, France, through the consortium company Green Mobil- ity Holding S.A. (GMH). The European Commission issued final antitrust approval at the end of May 2022. In total, 93.6% Key Events of Europcar shareholders took the opportunity granted by the French financial market supervisory authority to tender their shares to the consortium company. The consortium jointly assumed control of Europcar in mid- June 2022. Because the acceptance rate was over 90%, a squeeze-out was initiated for the remaining Europcar shares in July 2022, and the company was delisted. As a result, the consortium com- pany – of which Volkswagen holds 66% – has held 100% of the shares in Europcar since July 13, 2022. The purchase price was 51 cents per Europcar share. The completion of the Europcar transaction marks another important milestone for Volkswagen in the Group’s Mobility Solutions initiative under the NEW AUTO strategy. The Volkswagen Group hopes that this transaction will help secure a significant share of the global market for mobility services. In this regard, the Europcar Mobility Group is to become one of the cornerstones of the mobility platform planned by Volkswagen. In the future, the range of services offered by the Europcar Mobility Group should cover a broad spectrum of customers’ mobility needs, from car sharing for a few hours to a car subscription for several months. N E W A L L - E L E C T R I C M O D E L S P L A N N E D F O R T H E U S M A R K E T Volkswagen is planning to launch two all-electric models on the US market – a pick-up and a robust SUV (R SUV) – under the historic Scout brand. The vehicles are to be developed and produced in the United States for US customers. Through a separate independent company in the United States, which is to be newly established, Volkswagen wants to tap further into the local market for electric vehicles. The aim is to use a new technical platform concept to realize authentic pick-ups and R SUVs that will expand the Group's existing model portfolio and systematically increase the Group’s presence in this growth market. B AT T E R Y C E N T E R STA R T S O P E R AT I O N I N C H AT TA N O O G A At the beginning of June 2022, Volkswagen Group of America opened the North American Battery Engineering Lab at the Chattanooga site. The plant has been earmarked for applica- tions such as battery tests under extreme climatic conditions and during continuous use. This is part of the location’s elec- trification strategy and is intended to contribute to strength- ening the company’s battery expertise and to advancing e-mobility in North America. In addition to this plant, there are already two in China and one in Germany in the Volks- wagen Group. The work will initially focus on batteries for MEB-based vehicles. ST R AT E G I C PA R T N E R S H I P B E T W E E N E L E C T R I F Y A M E R I C A A N D S I E M E N S Siemens has become the first external investor to acquire a minority interest in Electrify America, a subsidiary of Volks- wagen Group of America. The company, which operates the largest public fast-charging network for customers of all elec- 5 6 Key Events tric vehicles in North America, intends to more than double its local charging infrastructure. In addition to the financial investment, Electrify America has gained an important strate- gic technology partner in Siemens. A N N UA L G E N E R A L M E E T I N G The sixty second Annual General Meeting of Volkswagen AG was held virtually on May 12, 2022. With around 55% of the voting capital in attendance, the shareholders followed the proposal of the Board of Management and Supervisory Board to distribute a dividend that is higher than in the previous year, amounting to €7.50 (4.80) per ordinary share and €7.56 (4.86) per preferred share for fiscal year 2021. Moreover, the Annual General Meeting formally approved the actions of the Board of Management and the Supervisory Board for fiscal year 2021. The shareholders also approved the remu- neration report for 2021, which had been submitted to the Annual General Meeting for the first time in accordance with the Gesetz zur Umsetzung der zweiten Aktionärsrechtericht- linie (ARUG II – German Act on the Implementation of the Second Shareholders’ Rights Directive). In addition, the Annual General Meeting appointed Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft as auditors and Group audi- tors for fiscal year 2022 and for the review of the condensed interim consolidated financial statements and of the interim management report for the first half of 2022 and of the condensed interim consolidated financial statements and interim management report for the period from January 1 to September 30, 2022 and for the first quarter of fiscal year 2023. Supervisory Board member Dr. Hussain Ali Al Abdulla stepped down from his office before the end of his term of Updated Information office. As proposed by the shareholder Qatar Holding, the Annual General Meeting elected Mr. Mansoor Ebrahim Al- Mahmoud to succeed Dr. Al Abdulla for the remainder of his term of office, starting at the end of the Annual General Meeting 2022. B O A R D O F M A N A G E M E N T A N D S U P E R V I S O R Y B O A R D M AT T E R S At the election of employee representatives to the Super- visory Board of Volkswagen AG in Wolfsburg on April 29, 2022, Ms. Simone Mahler, Chair of the Works Council of Volkswagen Financial Services AG at the Braunschweig site, Ms. Daniela Nowak, Chair of the Works Council of Volks- wagen AG at the Braunschweig site, and Dr. Arno Homburg, Chair of the Board of Management of the Volkswagen Man- agement Association, were elected as members of the Super- visory Board of Volkswagen AG for the first time. They succeed Ms. Ulrike Jakob, Ms. Bertina Murkovic and Dr. Hans- Peter Fischer. The other employee representatives on the Supervisory Board were re-elected to the Supervisory Board. The term of office began at the end of the Annual General Meeting on May 12, 2022. On July 22, 2022, the Supervisory Board of Volkswagen AG appointed Dr. Oliver Blume as the new Chair of the Volks- wagen Group Board of Management. Dr. Blume will take over this position with effect from September 1, 2022, combining it with his role as Chair of the Executive Board of Dr. Ing. h. c. F. Porsche AG (Porsche AG) and will also continue in the latter capacity after a potential IPO of Porsche AG. The previous Chair of the Group Board of Management of Volkswagen AG, Dr. Herbert Diess, will step down at the same time by mutual agreement. Interim Management Report Volkswagen Shares Volkswagen Shares The trend in the international stock markets in the first half of the year was initially overshadowed by investors’ concerns about possible interest rate hikes in the face of rising inflation rates and about the spread of the Omicron variant of the SARS-CoV-2 virus. Following Russia’s advance into Ukraine beginning in February, the imposing of sanctions against Russia, and the rise in commodity and energy prices that drove up inflation, the international stock markets came under pressure. In addition, the tight restrictions under the zero-Covid strategy being pursued in China placed further strain on international supply chains. The downward trend in stock prices intensified at the end of the reporting period due to the continuing confrontations in Ukraine, increasing concerns about a sufficient supply of energy, high inflation and the resulting tighter monetary policy of central banks. Volkswagen AG’s preferred and ordinary shares followed the trend on the stock markets. Some automotive stocks dropped at above-average rates. Prices of preferred and ordinary shares were down by 28% and 33% respectively compared with the end of 2021, although the planned IPO of Porsche and the sound operating results were received positively by the market. Information and explanations on earnings per share can be found in the notes to the interim consolidated financial statements. Additional Volkswagen share data, plus corporate news, reports and presentations can be downloaded from our website www.volkswagenag.com/en/InvestorRelations.html. V O L K SWA G E N S H A R E K E Y F I G U R E S A N D M A R K E T I N D I C E S F R O M J A N UA R Y 1 TO J U N E 3 0 , 2 0 2 2 The German stock market index began the year margin- ally up on its previous record achieved in November 2021. After that, concerns about a tightening of monetary policy in the USA dominated investor sentiment. The Russia-Ukraine conflict and the fears this triggered of an energy crisis and its economic fallout provoked uncertainty among market partici- pants and strained the capital market. In view of high infla- tion, the European Central Bank initiated an interest rate turnaround, which, combined with fears of recession, resulted in a 20% fall in the DAX compared with the end of 2021. Ordinary share Preferred share DAX Price (€) Date Price (€) Date Price Date High 279.40 Jan. 5 193.10 Jan. 14 16,272 Jan. 5 Low 173.90 Jun. 30 127.42 Jun. 30 12,784 Jun. 30 Closing 173.90 Jun. 30 127.42 Jun. 30 12,784 Jun. 30 ESTX Auto & Parts Price 684 473 473 Date Jan. 5 Jun. 30 Jun. 30 P R I C E D E V E L O P M E N T F R O M D E C E M B E R 2 0 2 1 T O J U N E 2 0 2 2 Index based on month-end prices: December 31, 2021 = 100 Volkswagen ordinary share – 32.7 % Volkswagen preferred share – 28.2 % DAX – 19.5 % EURO STOXX Automobiles & Parts – 24.9 % 120 100 80 60 D J F M A M J A S O N D 7 8 Business Development Interim Management Report Business Development G E N E R A L E C O N O M I C D E V E L O P M E N T The Russia-Ukraine conflict led to increased uncertainty in respect of developments in the global economy and prompted large sections of the community of Western states to impose sanctions on Russia ranging from extensive trade embargoes to the exclusion of Russia from the global financial system. The resulting higher commodity prices and supply shortages are reinforcing the threat of persistently high inflation. In the first half of 2022, the restrictive measures put in place to protect the population from the SARS-CoV-2 virus were lifted to a large extent in many countries. The progress made by many countries in administering vaccines to their populations had a positive effect, while the emergence of the new Omicron variant and its subvariants led to renewed sharp rises in infections on a national scale, mostly causing milder symptoms but increased rates of sick leave. average, albeit with diminishing momentum. At national level, developments in the reporting period depended on the one hand on the scale of the negative impact of the Covid-19 pandemic and the intensity with which measures were taken to contain it, and on the other on the extent to which national economies were affected by the consequences of the Russia-Ukraine conflict. In response to the further rise of inflation rates around the world, many countries shifted to a more restrictive monetary policy, which led central banks to increase their key interest rates and reduce bond purchases during the reporting period. The resulting recession fears caused major losses on key stock markets in the first half of the year. On average, prices for energy and many other com- modities rose significantly year-on-year and shortages of intermediates and commodities remained high. Global trade in goods increased in the reporting period. Following the slump in global economic output in 2020 and the incipient recovery due to base and catch-up effects in 2021, economic growth in both the advanced economies and the emerging markets remained on course for recovery on The economy in Western Europe recorded positive year- on-year growth in the reporting period, albeit with slowing momentum. This trend was seen in almost all countries in Northern and Southern Europe. The reasons for this included E X C H A N G E R A T E M O V E M E N T S F R O M D E C E M B E R 2 0 2 1 T O J U N E 2 0 2 2 Index based on month-end prices: as of December 31, 2021 = 100 EUR to GBP EUR to USD EUR to CNY EUR to JPY 110 105 100 95 90 D F M A M J J A S O N D Interim Management Report increased economic resilience in the face of high infection rates in many countries, and the associated easing of the measures taken to contain the pandemic. At the same time, national inflation rates rose significantly during the first half of the year and adversely affected consumer sentiment. Germany registered positive economic growth during the reporting period. Compared with the same period of the prior year, unemployment fell on average, and the number of employees affected by Kurzarbeit (short-time working) decreased further from the high levels seen in the previous years. Meanwhile, monthly inflation rates reached their highest levels since reunification. Altogether, the economies in Central and Eastern Europe still showed an increase in real absolute gross domestic product (GDP) in the first three months of this year versus the same period in 2021. While Central Europe’s economic output expanded at a positive, albeit less vigorous pace in the second quarter, GDP declined in the region as a whole as a result of the Russia-Ukraine conflict. The sanctions imposed against Russia had a substantial impact in this region begin- ning in March, so Russian economic output already decreased substantially in the second quarter. In both regions, inflation rates rose significantly. In the reporting period, Turkey’s economy achieved an overall robust but weaker rate of growth in GDP compared to the previous year, amid very high inflation and depreciation of the local currency. South Africa recorded only a slightly positive change in GDP amid persistent structural deficits and political challenges. Gross domestic product in the USA increased year-on-year in the first six months of 2022, but the pace of growth weakened over the final quarters. Given rising inflation and the tight labor market, the US Federal Reserve continued its restrictive monetary policy, raising its key interest rate three times in the first half of 2022. Unemployment declined further in the reporting period from the previous year’s high level. In Canada and Mexico, economic output was also higher than in the same period of 2021. Brazil’s economy grew only modestly in the reporting period in conjunction with rising consumer prices. Argentina saw a recovery in economic output amid very high inflation and the continued collapse of the currency. At the beginning of the Covid-19 pandemic, China was already exposed to the negative effects at an earlier stage than other economies and, due to the zero-Covid strategy pursued there, benefited from a relatively low number of new infections as the pandemic progressed. This strategy resulted in temporary local lockdowns in connection with the spread of the Omicron variant. Chinese economic output rose in the reporting period, though with slowing momentum. India registered positive economic growth on the whole. Japan recorded a positive albeit low GDP growth rate compared with the same period of the previous year. Business Development T R E N D S I N T H E M A R K E T S F O R PA S S E N G E R C A R S A N D L I G H T C O M M E R C I A L V E H I C L E S Between January and June 2022, the volume of the passenger car market worldwide significantly declined overall year-on- year (–10.1%), impacted primarily by bottlenecks and disrup- tion in the global supply chains as a consequence of the semi- conductor shortage, the coronavirus pandemic and the reper- cussions of the Russia-Ukraine conflict. The overall market of the Africa region posted an increase; all other sales regions were affected by losses. The Western Europe and North America regions recorded a considerably weaker sales volume. The South America and Asia-Pacific regions saw a below-average decline in new registrations, while the number of new registrations in the Middle East region was at the level of the previous year. Sales volume fell very sharply in Central and Eastern Europe. The global volume of new registrations of light commer- cial vehicles between January and June 2022 was distinctly lower than the prior-year level. In Western Europe, the number of new registrations of pas- senger cars in the reporting period fell significantly short of the prior-year level. Parts supply shortages, especially for semiconductors, and the resulting limited vehicle availability led to a decline in new registrations in the first half of 2022 with uneven rates of change in all major individual markets; the passenger car market in Italy lost more than 20% of its volume, thus recording the highest loss ahead of France, Spain and the UK. In the first six months of 2022, the volume of new regis- trations of light commercial vehicles in Western Europe was significantly lower than the prior-year figure. New passenger car registrations in Germany between January and June 2022 were also significantly down on the figure for the first six months of the previous year. The prior- year figure was already comparatively low at the beginning of 2021 owing to the expiry of the – temporary – reduction in value-added tax at the end of 2020. In particular, the dete- rioration in the supply situation as a result of the lack of intermediates continued to have a dampening effect. The volume of new registrations of light commercial vehicles in Germany in the reporting period was significantly lower than in the same period of 2021. In the Central and Eastern Europe region, the passenger car market volume in the reporting period showed a very sharp drop on the prior-year level. Here, sales differed from market to market. The biggest decrease in absolute terms by a considerable margin was registered in the Russian market. This was mainly due to the Russia-Ukraine conflict and asso- ciated sanctions, which led to heavy limitations on produc- tion and sales of vehicles in Russia. Registration volumes for light commercial vehicles in Central and Eastern Europe declined sharply year-on-year. 9 10 Business Development Russia even saw a very sharp decline in the number of vehi- cles sold in the months from January to June 2022 compared with the prior-year figure. In Turkey, the volume of the passenger car market was significantly down on the previous year’s level in the reporting period. The market decline seen since 2021 there- fore continued in the first half of 2022. In South Africa, the number of passenger cars sold in the first six months of 2022 rose sharply on the very weak figure recorded in the same period of the previous year. Between January and June 2022, sales of light commercial vehicles declined significantly year-on-year in Turkey and were slightly down in South Africa. Sales of passenger cars and light commercial vehicles (up to 6.35 tonnes) in the North America region fell significantly in the reporting period against the comparable prior-year figure. Within the region, the market volume in the USA declined the most, both in absolute terms and in relative terms compared with the prior-year level. The drop affected both the passenger car segment and light commercial vehicles. In the Canadian automotive market, sales figures also decreased significantly in the period from January to June 2022. In Mexico, the number of vehicles sold was on a level with the previous year. In South America, the overall volume of new registrations for passenger cars and light commercial vehicles in the first six months of 2022 was slightly lower than the prior-year level. Brazil registered a significant decline in new registrations, while the number of vehicles sold in Argentina almost reached the comparable prior-year figure. The percentage decline in new passenger car registrations in the Asia-Pacific region in the reporting period was smaller than in most other regions. The volume of sales in the Chinese market was distinctly down on the same period of the previous year. The development of passenger car sales was hit by limited vehicle availability due to parts supply shortages, especially for semiconductors, and local lock- downs in connection with the spread of the Omicron variant of the SARS-CoV-2 virus. Sales in the Indian passenger car market trended upward in the period from January to June 2022 and were significantly higher than the figure for the prior-year period. However, in Japan, new passenger car regis- trations decreased significantly in the reporting period against the comparable prior-year figure. There was a slight year-on-year decline in the volume of new registrations of light commercial vehicles in the Asia- Pacific region. Registration volumes in China, the region’s dominant market and the largest market worldwide, tapered off distinctly compared with the period one year earlier. The number of new vehicle registrations in India was sharply up on the prior-year level; in Japan this figure was moderately lower than the previous year’s level. Interim Management Report T R E N D S I N T H E M A R K E T S F O R C O M M E R C I A L V E H I C L E S Since July 1, 2021, Navistar has been a TRATON GROUP brand, making it part of the Volkswagen Group’s Commercial Vehi- cles Business Area. This has broadened the relevant markets in the commercial vehicles business, both for trucks and for the school bus segment, which expanded to include North America (consisting of USA, Canada and Mexico). In the markets that are relevant for the Volkswagen Group, global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was slightly lower in the reporting period than in the prior year. Truck markets glob- ally were much weaker than in the previous year, which was primarily due to the fall in demand on the Chinese market as a result of the zero-Covid strategy in place there. Demand in the 27 EU states excluding Malta, but plus the United Kingdom, Norway and Switzerland (EU27+3), was down slightly on the previous year’s level in the first six months of 2022. This decline is attributable to limited availability of vehicles as a result of parts supply shortages. The Russian market increased significantly at the beginning of the first quarter. No updated registration data is available at present. Turkey recorded a distinct decline in new registrations com- pared with the previous year. In the South African market, by contrast, demand was up noticeably. The truck market in North America is divided into weight classes 1 to 8. In the segments relevant for Volkswagen – Class 6 to 8 (8.85 tonnes or heavier) – new registrations were slightly lower than the previous year’s figure. In Brazil, the largest market in the South America region, demand for trucks in the first half of 2022 was on a level with the previous year. In the first six months of 2022, there was a moderate rise in demand overall in the bus markets that are relevant for the Volkswagen Group compared with the same period of the prior year. Demand for buses in the EU27+3 markets in the reporting period was distinctly higher than the weak level of the previous year, with the picture varying from country to country. The school bus segment in North America was roughly on a level with the prior year. Demand for buses in Mexico was significantly higher than in the previous year, while it was slightly below the prior-year figure in Brazil. T R E N D S I N T H E M A R K E T S F O R P O W E R E N G I N E E R I N G The markets for power engineering are influenced by varying regional and economic factors. Consequently, the business growth trends of the respective markets develop mostly inde- pendently of one another. The marine market remained below the prior-year level in the first half of 2022. This is especially attributable to the fact that the demand in merchant shipping and the resulting shipyard utilization declined. The uncertainty regarding future fuel and emissions regulations still persisted in the market. In merchant shipping, performance in the market for container ships, tankers and bulk cargo carriers declined in Interim Management Report comparison with the level of demand seen in the previous year. The market for cruise ships and passenger ferries showed positive development. The easing of Covid-19-related restrictions enabled business activity in this market to grow again. The special market for government vessels, which is supported by state investment, was active due to the current geopolitical situation. In the offshore sector, the existing overcapacity continued to curb investment in offshore oil production despite the sharp rise in oil and gas prices. On the other hand, demand for offshore special ships for wind turbines developed positively. The market for power generation showed clear signs of recovery in the first half of 2022. The trend away from oil- fired power plants towards dual-fuel and gas-fired power plants continued, underpinned by the resolution at the recent COP26 Climate Change Conference and the resulting difficulties in financing oil-fired power plants. However, the Russia-Ukraine conflict is also having a noticeable impact in this regard due to increasing gas and commodity prices, as well as the delayed availability of core components. There was still strong demand for new energy solutions such as hydro- gen and long-term energy storage, with a clear trend towards greater flexibility and decentralized availability. In addition to the risks of a lack of price stability in the markets and bottlenecks in supply chains, the strong competitive and price pressure also continued unabated. The turbomachinery market performed slightly better than in the first half of 2021. Prices for raw materials continued to see significant increases, further lifting demand for produc- tion facilities with turbo compressors in the raw materials and processing industry. The oil and gas markets also received a boost from rising energy prices and followed a stable trend year-on-year. The new business fields for turbo- machinery used in the area of decarbonization also remained at the prior-year level. Demand for steam turbines used for power generation and gas turbines used for decentralized, industrial combined-heat-and-power installations was slightly higher than in the previous year. The after-sales market for engines in the marine and power plant business experienced significantly stronger growth in the first half of 2022 than in the same period of the prior year, even though demand remained affected by the Covid-19 pandemic. The after-sales market for turbomachinery largely recov- ered from the economic effects of the Covid-19 pandemic. The demand in the first half of 2022 was at a significantly higher level than in the prior-year period, almost reaching pre-pandemic levels again. Business Development T R E N D S I N T H E M A R K E T S F O R F I N A N C I A L S E R V I C E S Demand for automotive financial services was buoyant in the first half of 2022 due, among other things, to the persistently low key interest rates in the main currency areas. Never- theless, the Covid-19 pandemic and the vehicle availability, which continued to be limited due to parts supply shortages, put pressure on the demand for financial services in almost all regions. The European passenger car market was still affected in the reporting period by parts supply shortages; vehicle deliv- eries were down on the prior-year period. By contrast, the share of financial services products in the new vehicle busi- ness developed positively and exceeded the 2021 figure. The main drivers of this development were mix effects in the private customer business, which lends itself particularly to financing, and an increased share of leasing contracts in the fleet business. The positive trend in the financing of used vehicles continued in the first half of 2022; particularly sales of after-sales products such as servicing, maintenance and spare parts agreements were increased. Financial services activ- ities in Russia were negatively affected by the Russia-Ukraine conflict and the impact of the international sanctions. In Germany, faltering parts supply in production contin- ued to have a significantly negative effect on the delivery situ- ation and the financial services business. As a result, the number of new contracts for new vehicle leases and new vehicle financing were below the prior-year figures. However, the penetration rate remained at a high level. New contracts for used vehicles were in a similar range as in the previous year. The number of new maintenance and tire service agree- ments declined in the reporting period compared with the prior-year period. In the insurance business, the number of new contracts was slightly lower than a year earlier. In South Africa, the demand for financing and insurance products for new and used cars remained cautious in the first half of 2022, supported by coordinated campaigns which, however, were reduced due to a limited vehicle availability. In view of currently increasing inflation rates, the South African central bank has begun raising interest rates. In the North America region, financed vehicle purchases remained difficult overall in light of the subdued economy, increasing energy prices and the resulting pressure on dis- posable income. Vehicle deliveries in the first half of 2022 were down on the prior-year level due to parts supply short- ages. The US and Canadian markets saw declining demand for leasing and financing contracts because of interest rate hikes. In the Mexican market, the percentage of new leasing and financing contracts remained on a level with the previous year and new contracts for after-sales products were up year- on-year. 11 12 Business Development In the South America region, excess demand for vehicles in a volatile environment – exacerbated in Argentina by restric- tions on imports – and the interest rate level kept the number of cash sales high. In Brazil, there was a significant increase in the number of new financing contracts. In the Chinese market, parts supply shortages and local restrictions due to the pandemic resulted in lower sales of passenger cars. This resulted in a reduction in both the pro- portion of credit-financed vehicle purchases and the growth in new contracts. The comparative prior-year figures were not reached in the reporting period. In the first half of 2022, the financial services business in the market for heavy commercial vehicles was slightly up on the prior-year level, also affecting financing and leasing con- tracts in Europe and Brazil. V O L K SWA G E N G R O U P D E L I V E R I E S The Volkswagen Group delivered 3,875,115 vehicles to cus- tomers worldwide in the first half of 2022. This was 22.2% or 1,103,440 units less than in the same period of the previous year. While sales figures for the Passenger Cars Business Area fell short of the prior-year figure, sales in the Commercial Vehicles Business Area were higher than in the previous year. It is important to note that Navistar was not included in the figure for the previous year because it was only integrated as of July 1, 2021. The chart in this section shows the trend in deliveries worldwide for the individual months compared with the previous year. In the following, we report separately on deliveries in the Passenger Cars Business Area and the Commercial Vehicles Business Area. V O L K SWA G E N G R O U P D E L I V E R I E S F R O M J A N UA R Y 1 TO J U N E 3 0 1 2022 2021 Passenger Cars 3,737,819 4,852,103 Commercial Vehicles 137,296 126,452 Total 3,875,115 4,978,555 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. As of July 1, 2021, the figures include Navistar. G L O B A L D E L I V E R I E S B Y T H E PA S S E N G E R C A R S B U S I N E S S A R E A Sales of Volkswagen Group passenger cars and light com- mercial vehicles worldwide in the first half of 2022 declined % –23.0 +8.6 –22.2 Interim Management Report by 23.0% year-on-year to 3,737,819 units. In addition to the uncertainty and measures being taken around the world to deal with the Covid-19 pandemic, persistent semiconductor shortages and the resulting limited availability of Group models meant that demand could not be adequately met in some regions. From late February 2022 onwards, the Russia- Ukraine conflict also created further parts supply shortages and greater uncertainty in the markets. None of the Volks- wagen Group brands, except Lamborghini and Bentley, reached their prior-year figures. We registered a year-on-year decline in sales in all regions. The Group’s sales figures responded positively to its e-mobility campaign with additional model launches; in the first half of this year, we delivered 217,064 all-electric vehicles to customers worldwide. This was 46,132 or 27.0%, more units than in the same period of the previous year. The share of the Group’s total deliveries rose to 5.6 (3.4)%. A total of 105,832 of our plug-in hybrid models were delivered (–38.5%). Total electric vehicle deliveries declined by 5.9%, with their share of total Group deliveries rising year-on-year to 8.3 (6.9)%. The Group’s most successful all-electric vehicles included the ID.3 and ID.4 from the Volkswagen Passenger Cars brand, the Audi e-tron and Audi Q4 e-tron, the ŠKODA Enyaq iV, the CUPRA Born and the Porsche Taycan and Taycan Cross Turismo. In an overall global market experiencing a significant decline, we achieved a passenger car market share of 10.7 (12.5)%. The following table in this section provides an overview of passenger car and light commercial vehicle deliveries to customers by market in the reporting period. Sales trends in the individual markets are described in the following sections. Deliveries in Europe/Other Markets In Western Europe, the Volkswagen Group delivered 1,252,172 vehicles to customers in the first six months of this year in an overall market that was at a significantly lower level than the prior year. This was 20.9% less than in the same period of the previous year, which had been strained by the pandemic. In addition to the uncertainty and measures being taken around the world to deal with the Covid-19 pandemic, persistent semiconductor shortages and the resulting limited availability of Group models meant that demand could not be adequately met in some regions. From late February 2022 onwards, the Russia-Ukraine conflict also created further parts supply shortages and greater uncertainty in the mar- kets. Customer interest in the Volkswagen Group’s electrified vehicles was strongest in Western Europe, where we delivered around three-quarters of our plug-in hybrids and more than Interim Management Report Business Development half of our all-electric models to customers in the first half of 2022. In this region, electrified vehicles accounted for 15.4 (15.3)% of the Group’s total deliveries; the share of all- electric vehicles stood at 9.6 (7.5)%. The Group models with the highest sales volume were the T-Roc, Golf, Polo and T-Cross from the Volkswagen Passenger Cars brand. The CUPRA Formentor and Porsche 911 were also in high demand. In addition, the following new or successor models introduced to the market during the previous year proved very popular with customers: the Taigo from Volkswagen Passenger Cars, the ŠKODA Fabia and Enyaq iV, the CUPRA Born, the Multivan from Volkswagen Commercial Vehicles, the Audi Q4 e-tron, Q4 Sportback e-tron and Q5 Sportback, as well as the Porsche Macan and Porsche Taycan Cross Turismo. Among others, the T-Roc, T-Roc Cabriolet and ID.5 models from Volkswagen Passenger Cars, the ŠKODA Karoq, the Audi A8 and the Porsche Taycan Sport Turismo were successfully launched on the market during the reporting period as new or successor models. The Volkswagen Group’s share of the passenger car market in Western Europe was 22.5 (24.3)%. PA S S E N G E R C A R D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N UA R Y 1 TO J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2022 2021 (%) Europe/Other Markets 1,596,834 2,132,338 –25.1 Western Europe 1,252,172 1,582,957 –20.9 of which: Germany 467,679 539,234 –13.3 France 103,414 137,999 –25.1 United Kingdom 171,639 243,115 –29.4 Italy 113,165 153,122 –26.1 Spain 103,138 130,229 –20.8 Central and Eastern Europe 216,906 365,378 –40.6 of which: Czech Republic 52,006 65,030 –20.0 Russia 34,402 119,504 –71.2 Poland 51,595 73,581 –29.9 Other Markets 127,756 184,003 –30.6 of which: Turkey 50,206 75,724 –33.7 South Africa 34,518 36,791 –6.2 North America 364,206 492,210 –26.0 of which: USA 262,845 372,982 –29.5 Canada 42,260 50,428 –16.2 Mexico 59,101 68,800 –14.1 South America 157,664 236,277 –33.3 of which: Brazil 99,722 170,053 –41.4 Argentina 22,944 35,037 –34.5 Asia-Pacific 1,619,115 1,991,278 –18.7 of which: China 1,469,106 1,846,204 –20.4 India 48,482 16,006 x Japan 29,138 34,512 –15.6 Worldwide 3,737,819 4,852,103 –23.0 Volkswagen Passenger Cars 2,076,061 2,703,241 –23.2 ŠKODA 360,559 515,277 –30.0 SEAT 204,122 281,129 –27.4 Volkswagen Commercial Vehicles 153,630 205,028 –25.1 Audi 785,099 981,681 –20.0 Lamborghini 5,090 4,852 +4.9 Bentley 7,398 7,199 +2.8 Porsche Bugatti2 145,860 – 153,656 40 –5.1 x 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 2 Until October 31, 2021. 13 14 Business Development V O L K S W A G E N G R O U P D E L I V E R I E S B Y M O N T H Vehicles in thousands 1,100 1,000 900 800 700 600 500 400 F M A M In Germany, the number of Volkswagen Group vehicles handed over to customers in the first half of 2022 was down 13.3% on the already weak prior year in an overall market experiencing a significant decline. In addition to the uncer- tainty and measures being taken around the world to deal with the Covid-19 pandemic, persistent semiconductor short- ages and the resulting limited availability of Group models meant that demand could not be adequately met. From late February 2022 onwards, the Russia-Ukraine conflict also created further parts supply shortages and greater uncer- tainty in the markets. The Group models with the highest sales volume were the Golf and T-Roc from the Volkswagen Passenger Cars brand. Demand also increased for the T-Cross and ID.4 models from Volkswagen Passenger Cars, the CUPRA Formentor and the Audi Q3 and Audi Q3 Sportback among other models. The new or successor models introduced during the previous year – the Taigo from the Volkswagen Passenger Cars brand, the ŠKODA Fabia and Enyaq iV, the CUPRA Born, the Multivan from Volkswagen Commercial Vehicles, the Audi Q5 Sport- back and the Porsche Macan and Taycan Cross Turismo – were also in high demand among customers. Six Group models led the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) registration statistics in their respective segments: the Golf, T-Roc, Tiguan, Passat, Porsche 911 and Multivan/Transporter. The Golf was again the most popular passenger car in Germany in terms of regis- trations in the first half of 2022. J Interim Management Report 2022 2021 A S O N D In the Central and Eastern Europe region, the number of vehicles handed over to customers in the reporting period was more than 40% down year-on-year. This was due in par- ticular to the slump in sales in the Russian market as a con- sequence of the sanctions imposed in connection with the Russia-Ukraine conflict. The overall market recorded a very sharp fall in demand at the same time. Demand developed encouragingly for the Taos and Taigo models from Volks- wagen Passenger Cars and for the CUPRA Formentor. The Volkswagen Group’s share of the passenger car market in the Central and Eastern Europe region amounted to 21.5 (22.7)%. In Turkey, the Volkswagen Group delivered 33.7% fewer vehicles to customers between January and June 2022 than in the prior-year period in an overall market experiencing a significant decline. The Polo was the most sought-after Group model. In the South African market, the number of Group models sold decreased by 6.2%, while the overall market recorded strong growth. The Polo from the Volkswagen Passenger Cars brand remained the most sought-after Group model in this region. Deliveries in North America In North America, the number of Volkswagen Group models delivered to customers in the reporting period was down by around a quarter year-on-year. The overall market showed a significant decline in this period. The Group’s share of the market in this region amounted to 4.5 (5.1)%. The Tiguan Allspace, Taos and Atlas from Volkswagen Passenger Cars Interim Management Report were the most sought-after Group models in North America. In the US market, which is experiencing a significant decline, the Volkswagen Group delivered 29.5% fewer vehicles to customers between January and June 2022 than in the same period of the previous year. Here, too, parts supply shortages acted as a drag on the Group’s sales figures. The Group models to record the greatest increases in absolute terms included the Taos from Volkswagen Passenger Cars, the A3 Saloon, e-tron GT and Q5 Sportback from the Audi brand and the Porsche Taycan Cross Turismo. The Jetta from Volkswagen Passenger Cars and the Porsche Macan were successfully launched on the market during the reporting period as new or successor models. In Canada, the number of deliveries to Volkswagen Group customers decreased by 16.2% year-on-year in the reporting period. The overall market experienced a significant decline during this period. The Taos and ID.4 from Volkswagen Passenger Cars and the Audi A3 and Audi Q5 Sportback were some of the models that saw encouraging growth in demand. In Mexico, where the overall market was on a level with the previous year, we delivered 14.1% fewer vehicles to cus- tomers in the first half of this year than in the prior-year period. Demand developed encouragingly for models such as the Saveiro, Taigun and Nivus from Volkswagen Passenger Cars. Deliveries in South America In the South American market for passenger cars and light commercial vehicles, which was slightly down on the prior- year level, the number of Group models handed over to customers between January and June 2022 decreased by a third year-on-year. The T-Cross, Gol and Nivus from Volks- wagen Passenger Cars were the Group models with the highest sales volume. The Group’s share of the market in South America amounted to 9.4 (13.6)%. Compared with the previous year, the Volkswagen Group delivered 41.4% fewer vehicles to customers in the first six months of 2022 in the considerably weaker Brazilian market. Sales of the T-Cross and Taos from Volkswagen Passenger Cars developed encouragingly. In Argentina, the number of Group models sold in the reporting period fell alongside the slightly declining overall market by 34.5% in comparison with the previous year. The Business Development Group models with the highest sales volume were the Taos from Volkswagen Passenger Cars and the Amarok from Volks- wagen Commercial Vehicles. Deliveries in the Asia-Pacific region In the first six months of 2022, the Volkswagen Group saw its sales in the Asia-Pacific region fall by 18.7% year-on-year in a moderately weaker overall market. Parts supply shortages, especially for semiconductors, affected this region as well, and in addition, local lockdowns in China in connection with the Omicron variant of the SARS-CoV-2 virus resulted in restrictions. The Group’s share of the passenger car market in this region amounted to 10.2 (12.0)%. China’s overall market recorded a distinct decline in the reporting period. The Volkswagen Group delivered 20.4% fewer vehicles to customers there than in the preceding year. The ID.3, ID.4 X, ID.4 CROZZ, ID.6 X, ID.6 CROZZ and Talagon models from Volkswagen Passenger Cars, the Audi Q5L Sport- back and Audi A7L saloon as well as the Porsche Panamera introduced to the market as new or successor models during the previous year also showed a positive trend. The Golf, T-Roc and CC from Volkswagen Passenger Cars and the VS5 and VA3 from the JETTA brand were among the models that saw encouraging demand. The Bora, Lamando, Lavida, Sagitar and Viloran models from Volkswagen Passenger Cars, the ŠKODA Kodiaq and the Audi Q2L e-tron and Audi Q5 e-tron were successfully launched on the market during the reporting period as new or successor models. In the significantly growing Indian passenger car market, the Volkswagen Group sold more than three times as many vehicles in the first six months of this year as compared with the prior-year period. The new Taigun from the Volkswagen Passenger Cars brand as well as the new Kushaq and the Rapid from ŠKODA were the most sought-after Group models there. The ŠKODA Kodiaq and the Porsche Taycan Saloon were successfully launched on the market during the reporting period as new or successor models. In Japan, the number of Group models delivered to cus- tomers between January and June 2022 fell by 15.6% year-on- year in a considerably weaker overall market. Among other things, trends in sales of the Golf from Volkswagen Passenger Cars were encouraging. 15 16 Business Development Interim Management Report C O M M E R C I A L V E H I C L E D E L I V E R I E S Between January and June 2022, the Volkswagen Group deliv- ered 8.6% more commercial vehicles to customers worldwide than in the same period of the previous year. We delivered a total of 137,296 commercial vehicles to customers in the first half of this year. Trucks accounted for 115,117 units (+5.9%) and buses for 12,894 units (+98.3%). A total of 9,285 (–17.7%) vehicles from the MAN TGE van series were delivered. The American commercial vehicle manufacturer Navistar became a TRATON GROUP brand on July 1, 2021. Navistar sold a total of 37,333 heavy commercial vehicles in the first half of 2022. In the 27 EU states excluding Malta, but plus the United Kingdom, Norway and Switzerland (EU27+3), sales from Janu- ary to June 2022 were down by 18.0% on the same period of the previous year to a total of 50,953 units, of which 39,505 were trucks and 2,253 were buses. A total of 9,195 vehicles from the MAN TGE van series were delivered. As a result of the sanctions imposed in connection with the Russia-Ukraine conflict, sales in Russia fell year-on-year to 1,495 (6,657) units, comprising 1,489 trucks and 6 buses. Between January and June 2022, deliveries in Turkey decreased to 1,476 (3,020) vehicles. Trucks accounted for 1,418 units, buses for 28 units and the MAN TGE van series for 30 units. In South Africa, deliveries of Volkswagen Group commercial vehicles amounted to 1,774 units and remained virtually unchanged compared with the previous year; of this figure 1,572 were trucks and 202 were buses. Sales in North America rose in the first half of 2022 to 37,579 vehicles (1,115); this included 31,195 trucks and 6,384 buses. This year, the figures also include Navistar’s sales, whose vehicles were primarily handed over to customers in the United States. Deliveries in South America declined to a total of 35,631 vehicles (–10.3%) in the reporting period, of which 32,349 were trucks and 3,282 were buses. Sales in Brazil were down by 16.7% in the first six months of 2022, falling to 28,479 units. Of the units delivered, 25,738 were trucks and 2,741 were buses. In the Asia-Pacific region, the Volkswagen Group sold 4,852 vehicles to customers in the reporting period; among these, 4,557 were trucks and 289 were buses. Overall, this was 24.5% less than in the previous year. C O M M E R C I A L V E H I C L E D E L I V E R I E S TO C U STO M E R S B Y M A R K E T F R O M J A N UA R Y 1 T O J U N E 3 0 1 D E L I V E R I E S ( U N I T S ) C H A N G E 2022 2021 (%) Europe/Other Markets 59,234 79,213 –25.2 of which: EU27+3 50,953 62,100 –18.0 of which: Germany 13,018 16,384 –20.5 Russia 1,495 6,657 –77.5 Turkey 1,476 3,020 –51.1 South Africa 1,774 1,767 +0.4 North America 37,579 1,115 x of which: USA 30,094 — x Mexico 5,158 1,111 x South America 35,631 39,701 –10.3 of which: Brazil 28,479 34,195 –16.7 Asia-Pacific 4,852 6,423 –24.5 Worldwide 137,296 126,452 +8.6 Scania 36,834 49,229 –25.2 MAN2 34,785 47,231 –26.4 Navistar 37,333 — x Volkswagen Truck & Bus2 28,344 29,992 –5.5 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. As of July 1, 2021, the figures include Navistar. 2 Deliveries for Volkswagen Truck & Bus were previously reported within MAN. Interim Management Report D E L I V E R I E S I N T H E P O W E R E N G I N E E R I N G S E G M E N T Orders in the Power Engineering segment usually relate to individual elements within larger investment projects. Lead times range from just under one year to several years, and partial deliveries as construction progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. In the period from January to June 2022, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated more than three-quarters of overall sales revenue. V O L K SWA G E N G R O U P F I N A N C I A L S E R V I C E S The Financial Services Division covers the Volkswagen Group’s dealer and customer financing, leasing, banking and insur- ance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania and Porsche Holding Salzburg and also extends to the contracts concluded by our international joint ventures. As of July 1, 2021, it also includes the financial services business of Navistar. The Financial Services Division’s products and services were popular in the first half of 2022. However, demand was affected to varying degrees by the Covid-19 pandemic. Limited vehicle availability caused by parts supply shortages, and exacerbated by the Russia-Ukraine conflict, also weighed on demand. The number of new financing, leasing, service and insurance contracts signed worldwide fell by 8.3% to 4.2 million. The ratio of leased and financed vehicles to Group deliveries (penetration rate) in the Financial Services Divi- Business Development sion’s markets stood at 33.1 (36.1)% in the reporting period. The total number of contracts was 24.5 (24.5) million at the end of June 2022. In the period from January to June 2022, the financial services business in the Europe/Other Markets region was impacted by the Covid-19 pandemic and by limited vehicle availability caused by parts supply shortages, as well as by the Russia-Ukraine conflict. At 3.0 million, the number of new contracts signed in the reporting period was down 8.5% on the previous year’s figure. The total number of contracts as of June 30, 2022 was on a level with December 31, 2021 at 18.0 (18.0) million. The customer financing/leasing area was responsible for 7.3 (7.4) million of these contracts. In North America, the number of new contracts signed decreased year-on-year in the reporting period to 371 (537) thousand owing to the decline in vehicle deliveries. The total number of contracts amounted to 3.1 million at the end of June, a 4.7% fall on the level reported at year-end. The customer financing/leasing area recorded 1.7 (1.9) million contracts. In the South America region, 156 (179) thousand new contracts were concluded in the first half of this year. The total number of contracts rose to 761 thousand as of June 30, 2022, compared with 723 thousand as of December 31, 2021. The contracts mainly related to the customer financing/ leasing area. The number of new contracts signed in the Asia-Pacific region in the reporting period rose to 613 (522) thousand, exceeding the comparative figure for 2021. The total number of contracts came to 2.6 million on June 30, 2022, an increase of 2.3% on the 2021 year-end figure. The customer financing/ leasing area recorded 1.7 (1.8) million contracts. 17 18 Business Development S A L E S T O T H E D E A L E R O R G A N I Z AT I O N In the first half of 2022, the Volkswagen Group’s unit sales to the dealer organization declined year-on-year by 14.0% to 4,006,159 vehicles (including the equity-accounted compa- nies in China). In the reporting period, limited vehicle avail- ability as a result of the Covid-19 pandemic and bottlenecks in the supply of parts caused by the shortage of semicon- ductors and the Russia-Ukraine conflict had a negative impact. At 3,521,253 vehicles, unit sales outside Germany declined by 14.3% compared with the period from January to June 2021. China, the United Kingdom and Brazil were particularly affected, as was Russia, where vehicle exports were halted. By contrast, India and Mexico saw growth. Unit sales in Germany decreased by 11.8% year-on-year. Vehicles sold in Germany as a proportion of overall sales increased to 12.1 (11.8)%. P R O D U C T I O N In the reporting period, the Volkswagen Group produced 4,159,533 vehicles (including the equity-accounted compa- nies in China), 7.8% less than in the same period of the previ- ous year. The shortage of semiconductors and the disruption of supply chains caused by the Russia-Ukraine conflict and the Covid-19 pandemic led to production being halted in the Volkswagen Group. Interim Management Report Against the backdrop of the Russia-Ukraine conflict and the resulting consequences, Volkswagen decided to cease vehicle production in Russia until further notice. Between January and June 2022, production outside Germany decreased by 6.7% year-on-year, giving a total of 3,373,929 vehicles. The proportion of vehicles produced in Germany decreased to 18.9 (19.9)%. I N V E N T O R I E S Global inventories of new vehicles at Group companies and in the dealer organization were higher on June 30, 2022 than at year-end 2021, and above the corresponding prior-year figure. Disruptions in logistics, among other factors, had a negative impact in the reporting period. E M P L OY E E S The Volkswagen Group had 641,900 active employees on June 30, 2022. A further 11,837 employees were in the passive phase of their partial retirement. In addition, there were 14,275 young people completing vocational traineeships. At the end of the reporting period, the Volkswagen Group had a total of 668,012 (672,789) employees worldwide. This repre- sented a decrease since the end of 2021. The main reason was the deconsolidation of SITECH. A total of 290,014 people were employed in Germany, which was 1.7% lower than at Decem- ber 31, 2021. Interim Management Report Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets B R O S E S I T E C H S P. Z O. O. T R A N S A C T I O N Following the fulfillment of all closing conditions, Brose Fahrzeugteile SE & Co. Kommanditgesellschaft (Brose) and Volkswagen Finance Luxemburg S.A., a subsidiary of Volks- wagen AG, created a jointly operated company in early 2022 for the development and manufacture of complete seat units, seat structures and components, and solutions for vehicle interiors. As part of this arrangement, Brose acquired half of the shares in the previous Volkswagen Group company SITECH Sp. z o.o., Polkowice/Poland. Brose and Volkswagen each hold 50% of the jointly operated company – Brose Sitech lead and Sp. z o.o. – with Brose taking the industrial controlling the company. Given its significant influence following the transaction, Volkswagen accounts for Brose Sitech as an associate using the equity method. The change in the accounting policy did not have any material effect on the Volkswagen Group’s profit or loss. A C Q U I S I T I O N O F N AV I S TA R On July 1, 2021, a TRATON GROUP company acquired all of the outstanding shares in Navistar International Corporation (Navistar), a US manufacturer of commercial vehicles based in Lisle, Illinois/USA. Due to the size of the transaction, it was not possible to complete the in-house reviews of the infor- mation underlying the purchase price allocation until the current fiscal year. The update to the purchase price allocation did not materially affect the results of operations, financial position and net assets of the Volkswagen Group. TA K E O V E R O F E U R O P C A R In 2021, together with investment firm Attestor Limited and Pon Holdings B.V., Volkswagen made a joint public takeover offer for the shares of Europcar Mobility Group S.A., Paris/ France through the consortium company Green Mobility Holding S.A. (GMH) based in Strassen/Luxembourg. The European Commission issued final antitrust approval at the end of May 2022. During the extended offer period, the French Financial Markets Authority gave Europcar share- holders the opportunity to tender their shares to the consortium company. In total, 93.6% of Europcar’s share- holders accepted the offer. The consortium jointly assumed control of Europcar in mid-June 2022. Because the acceptance rate was over 90%, a squeeze-out was initiated for the remaining Europcar shares in July 2022, and the company was delisted. As a result, the consortium company has held 100% of the shares in Europcar since July 13, 2022. The purchase price was 51 cents per Europcar share. At the end of June 2022, the entire portion of the purchase price attributable to Volkswagen, amounting to €1.7 billion, was contributed to GMH. The company, in which Volkswagen holds 66% of the shares, will be accounted for in the Volkswagen consolidated financial statements using the equity method. In addition, Volkswagen is the writer of put options held by the other members of the consortium, and the other members have granted Volkswagen call options on their shares in the consortium company. The measurement of the options led to a non-cash gain of €7 million in the first half of 2022, which was recognized in the financial result. S P E C I A L I T E M S Special items consist of certain items in the financial state- ments whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance. The operating result in the Passenger Cars Business Area was affected by negative special items of €–0.4 billion in connection with the diesel issue in the period from January to June 2022. These special items were mainly attributable to additional expenses for legal risks. R E S U LT S O F O P E R AT I O N S O F T H E G R O U P In the first half of 2022, the Volkswagen Group’s sales reve- nue, which amounted to €132.3 (129.7) billion, was slightly above the prior-year level. Improved price positioning, positive mix and exchange rate effects and the good business performance of the Financial Services Division were set against the fact that vehicle availability continued to be limited due to parts supply shortages. Consolidated sales revenue includes an amount of €4.7 billion relating to Navistar; Navistar has been included in consolidation since July 1, 2021. In the period from January to June 2022, the Volkswagen Group generated 82.2 (82.5)% of its sales revenue abroad. Gross profit was up at €26.5 (24.8) billion, while the gross margin improved to 20.0 (19.2)%. The Volkswagen Group’s operating result before special items rose by €1.8 billion to €13.2 billion in the reporting period. The operating return on sales before special items increased to 10.0 (8.8)%. Positive effects resulted mainly from the price positioning, the mix and the fair value mea- surement and realization of derivatives to which hedge 19 20 Results of Operations, Financial Position and Net Assets O P E R A T I N G P R O F I T B E F O R E S P E C I A L I T E M S B Y Q U A R T E R Volkswagen Group in € million 9,000 7,500 6,000 4,500 3,000 1,500 0 Q1 Q2 R E S U LT S O F O P E R AT I O N S I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N UA R Y 1 T O J U N E 3 0 € million 2022 Passenger Cars Sales revenue 89,820 Operating result 8,978 Operating return on sales (%) 10.0 Commercial Vehicles1 Sales revenue 17,613 Operating result 618 Operating return on sales (%) 3.5 Power Engineering Sales revenue 1,632 Operating result 129 Operating return on sales (%) 7.9 1 As of July 1, 2021, the figures include Navistar. accounting is not applied (especially commodity and cur- rency hedges) in an amount of €1.6 (1.2) billion. The Financial Services Division’s good business performance and positive effects from derivatives in the Financial Services Division contributed to higher Group earnings. These factors were offset in the first half of 2022 by expenses in the mid-three- digit million euro range relating to loss allowances and risk provisions as a consequence of the direct impact of the Russia-Ukraine conflict, as well as higher product costs, especially for commodities. In the period from January to June 2022, the Passenger Cars Business Area reported one-off 2021 92,041 8,521 9.3 13,404 334 2.5 1,581 –14 –0.9 Interim Management Report 2022 2021 Q3 Q4 expenses for restructuring measures at SEAT in an amount of €0.2 billion. In the previous year, one-off expenses for restructuring measures had been recognized in the Com- mercial Vehicles Business Area. In the reporting period, special items in connection with the diesel issue reduced the operating result by €–0.4 billion. In the first six months of 2022, the Volkswagen Group’s operating result increased by a total of €1.5 billion to €12.8 billion, and the operating return on sales improved to 9.7 (8.8)%. The financial result stood at €1.2 (–0.2) billion. The share of the result of equity-accounted investments was higher than a year earlier. The interest expenses included in the financial result decreased by €0.9 billion due to measure- ment-related factors resulting primarily from a change in the discount rates used in the measurement of provisions. In the other financial result, changes in share prices, mainly as a result of the Russia-Ukraine conflict, weighed on net income from securities and funds; this was set against favorable exchange rate effects. The previous year had also been negatively impacted by measurement effects on forward purchase agreements for new shares in QuantumScape. The Volkswagen Group’s earnings before tax increased by €2.9 billion to €14.0 billion in the period from January to June 2022. Earnings after tax amounted to €10.6 billion, €2.2 billion up on the prior-year value. Results of operations in the Automotive Division The Automotive Division recorded sales revenue of €109.1 (107.0) billion in the first six months of 2022, slightly up on the prior-year period. Improvements, above all in the price positioning, the mix and exchange rate trends were set against adverse factors resulting in particular from lower vehicle sales due to parts supply shortages. In the Passenger Cars Business Area, sales revenue in the reporting period was slightly below that of the prior year. In the Commercial Vehicles Business Area, it rose sharply, by 31.4%, compared Interim Management Report with the previous year, whereby the prior-year figure had not yet included the Navistar business. The sales revenue gene- rated by the Power Engineering Business Area was slightly higher than in the same period of 2021. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is primarily reflected in the Group’s sales revenue only through deliveries of vehicles and vehicle parts. Cost of sales was virtually on a level with the previous year, while the research and development costs recognized in profit or loss included in this figure were higher. The ratio of cost of sales to sales revenue decreased. At 8.5 (7.2)%, total research and development costs as a percentage of the Auto- motive Division’s sales revenue (research and development ratio or R&D ratio) were higher than in the first half of 2021, driven by a significant increase in total research and devel- opment costs. Both distribution expenses and their ratio to sales revenue were similar to the previous year, while adminis- trative expenses and their ratio to sales revenue went up in the same period. The other operating result improved by €0.6 billion to €0.8 billion, benefiting mainly from the effects of the fair value measurement and realization of derivatives to which hedge accounting is not applied (especially com- modity and currency hedges) in the amount of €1.5 (1.2) bil- lion. This was offset in the first half of 2022 mainly by expenses relating to loss allowances and risk provisions as a consequence of the direct impact of the Russia-Ukraine conflict. One-off expenses for restructuring measures had weighed on performance in both periods. Negative special items in connection with the diesel issue in an amount of €–0.4 billion had to be recognized in the first half of 2022. The Automotive Division’s operating result improved by €0.9 billion to €9.7 billion in the period from January to June 2022. The operating return on sales amounted to 8.9 (8.3)%. Favorable price positioning and changes in the mix, as well as the fair value measurement and realization of derivatives to which hedge accounting is not applied had a positive effect, offset by a decline in unit sales as a result of parts supply shortages, higher product costs (especially for commodities) and the recognition of negative special items in the reporting period. At €10.1 (8.8) billion, the operating result before special items exceeded the prior-year amount by €1.2 billion; the operating return on sales before special items climbed to 9.2 (8.3)%. Our operating result largely benefits from the business performance of our equity-accounted Chinese joint ventures only through deliveries of vehicles and vehicle parts and through license income, as the joint ventures are accounted for in the financial result. Results of operations in the Financial Services Division In the period from January to June 2022, the Financial Ser- vices Division recorded sales revenue of €23.2 billion, 2.6% Results of Operations, Financial Position and Net Assets more than a year earlier. Driven by a rise in sales revenue from the leasing business, cost of sales increased more slowly than sales revenue, ending the period on a level with the previous year. Due to its improved business performance, driven primarily by the fact that demand continued to be strong for used vehicles, and by positive effects from derivatives, the Financial Services Division’s operating result increased by a total of €0.6 billion to €3.1 billion. This was offset in the first half of 2022 mainly by expenses relating to loss allowances and by risk provisions due among other things to the direct impact of the Russia-Ukraine conflict. The operating return on sales increased to 13.4 (11.1)%. F I N A N C I A L P O S I T I O N O F T H E G R O U P In the period from January to June 2022, the Volkswagen Group’s gross cash flow was €25.4 billion, €1.4 billion higher than in the first half of 2021. The improved earnings had a positive impact compared to the prior-year period, while the fact that the Chinese joint venture FAW-Volkswagen had not yet passed its dividend resolution in the reporting period had an adverse impact. The change in working capital amounted to €–8.5 (–5.6) billion. A smaller increase in lease assets and a higher increase in liabilities were unable to offset a decline in other provisions and a higher rise in inventories and receiv- ables. The cash outflows attributable to the diesel issue were higher than in the prior-year period. The payment of the fine arising from the EU antitrust proceedings against Scania led to a cash outflow of €0.9 billion in the reporting period. As a result, cash flows from operating activities declined by €1.5 billion to €16.9 billion. Investing activities attributable to operating activities increased by €2.4 billion to €11.5 billion. This also includes the full portion of the purchase price payable by Volkswagen for the acquisition of Europcar, amounting to €1.7 billion, which was contributed to Green Mobility Holding. Financing activities led to a cash outflow of €9.2 (1.3) bil- lion, reflecting mainly the issuance and redemption of bonds and other financial liabilities, the redemption of the hybrid note called in February 2022, the issuance of the hybrid notes successfully placed in March 2022, and the payment of the €3.8 billion dividend to the shareholders of Volkswagen AG. On June 30, 2022, the Volkswagen Group’s cash and cash equivalents reported in the cash flow statement amounted to €33.9 (40.9) billion. At the end of June 2022, the Volkswagen Group’s net liq- uidity stood at €–137.7 billion, compared with €–136.6 billion on December 31, 2021. 21 22 Results of Operations, Financial Position and Net Assets F I N A N C I A L P O S I T I O N I N T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S F R O M J A N UA R Y 1 T O J U N E 3 0 € million 2022 Passenger Cars Gross cash flow 15,174 Change in working capital –1,043 Cash flows from operating activities 14,131 Cash flows from investing activities attributable to operating activities –10,495 Net cash flow 3,636 Commercial Vehicles1 Gross cash flow 1,875 Change in working capital –2,549 Cash flows from operating activities –674 Cash flows from investing activities attributable to operating activities –789 Net cash flow –1,464 Power Engineering Gross cash flow 196 Change in working capital –48 Cash flows from operating activities 147 Cash flows from investing activities attributable to operating activities –26 Net cash flow 121 1 As of July 1, 2021, the figures include Navistar. Financial position of the Automotive Division The Automotive Division’s gross cash flow in the first half of 2022 was on a level with the previous year, at €17.2 (17.3) bil- lion. Higher earnings were set against the fact that FAW- Volkswagen had not yet passed its dividend resolution in the reporting period. The change in working capital, which amounted to €–3.6 (1.8) billion, was due primarily to a decrease in other provisions and a year-on-year increase in inventories, offset by a larger rise in liabilities. The cash outflows attributable to the diesel issue were higher in the reporting period than in the previous year. As a result, cash flows from operating activities went down by €5.5 billion to €13.6 billion. Investing activities attributable to operating activities in the Automotive Division rose by €2.4 billion to €11.3 billion in the period from January to June 2022. Within this figure, investments in property, plant and equipment, investment property and intangible assets, excluding capitalized devel- opment costs (capex) increased by €0.3 billion to €4.1 billion. 2021 15,712 2,099 17,812 –8,250 9,562 1,366 –229 1,137 –610 527 188 –49 139 –36 103 Interim Management Report The ratio of capex to sales revenue went up to 3.7 (3.5)%. A considerable portion of capex was allocated primarily to our production facilities and to models to be launched this year and next, the electrification and digitalization of our products, and our modular toolkits and platforms. At €4.8 billion, additions to capitalized development costs in the first half of 2022 exceeded the prior-year figure by €1.1 bil- lion. As a result of strategic investments in a variety of com- panies, especially in Europcar, the “Acquisition and disposal of equity investments” item increased year-on-year. The sale of Sitech Sp. z o.o had the opposite effect. The Automotive Division’s net cash flow of €2.3 billion in the first six months of 2022 fell €7.9 billion short of the previous year’s figure. Financing activities relate to the issuance and redemption of bonds, as well as to changes in other financial liabilities; in the period from January to June 2022, they resulted in a total cash outflow of €2.8 (3.4) billion. Hybrid notes with a total nominal amount of €2.25 billion, which were successfully issued via Volkswagen International Finance N.V. in March 2022, also led to a cash inflow. This comprises a €1.0 billion note with a coupon of 3.748%, which is noncallable for five years and nine months, and a €1.25 billion note with a coupon of 4.375%, which is noncallable for nine years. Both notes are perpetual and increase net liquidity and equity by the nominal amount less transaction and other costs. The repayment of the hybrid note called in February 2022 resulted in a cash outflow of €1.1 billion in the reporting period. The dividend payment to shareholders of Volks- wagen AG was made in May 2022. This was set against cash inflows from the dividends paid by financial services com- panies. The prior-year period had included the repayment of a hybrid note. At the end of June 2022, the Automotive Division’s net liquidity stood at €28.2 billion, compared with €26.7 billion on December 31, 2021. Financial position of the Financial Services Division The Financial Services Division recorded gross cash flow of €8.2 billion in the reporting period, 20.3% up on the previous year, due mainly to higher earnings. The change in working capital amounted to €–4.9 (–7.4) billion. A smaller rise in lease assets was set against a larger increase in receivables and a smaller decline in inventories year-on-year. As a result, cash flows from operating activities grew by €4.0 billion to €3.3 bil- lion. Investing activities attributable to operating activities were on a level with the previous year, at €0.2 (0.2) billion. Financing activities in the Financial Services Division accounted for cash outflows of €–6.4 billion in the reporting period. This figure relates primarily to the issuance and redemption of bonds and to other financial liabilities as well as the dividend payment by the financing companies. In the prior-year period, there had been a cash inflow of €2.1 billion. Interim Management Report B A L A N C E S H E E T ST R U C T U R E O F T H E PA S S E N G E R C A R S , C O M M E R C I A L V E H I C L E S A N D P O W E R E N G I N E E R I N G B U S I N E S S A R E A S € million June 30, 2022 Dec. 31, 2021 Passenger Cars Noncurrent assets 139,778 133,857 Current assets 92,892 86,362 Total assets 232,670 220,218 Equity 109,725 93,894 Noncurrent liabilities 71,511 80,621 Current liabilities 51,434 45,704 Commercial Vehicles Noncurrent assets 34,552 34,730 Current assets 14,387 12,264 Total assets 48,940 46,994 Equity 13,783 12,807 Noncurrent liabilities 18,130 17,778 Current liabilities 17,027 16,409 Power Engineering Noncurrent assets 1,849 1,804 Current assets 3,028 2,914 Total assets 4,877 4,718 Equity 2,496 2,322 Noncurrent liabilities 391 524 Current liabilities 1,989 1,872 On June 30, the Financial Services Division’s negative net liquidity, which is common in the industry, was €–165.9 bil- lion, compared with €–163.3 billion on December 31, 2021. C O N S O L I D AT E D B A L A N C E S H E E T S T R U C T U R E The Volkswagen Group had total assets of €546.9 billion on June 30, 2022, 3.5% more than at the end of 2021. The increase was mainly attributable to higher earnings, changes in interest and exchange rates and the successful placement of the hybrid notes. The Group’s equity amounted to €166.2 billion at the end of the first half of 2022, up €20.1 billion from December 31, 2021. The equity ratio rose to 30.4 (27.6)%. Automotive Division balance sheet structure At the end of June 2022, the Automotive Division’s intangible assets were higher than at the end of the previous year, mainly because of a rise in capitalized development costs. Property, plant and equipment declined slightly, due primar- ily to depreciation in excess of additions. Equity-accounted Results of Operations, Financial Position and Net Assets investments were higher as a result of the rise stemming from capital increases, especially at Green Mobility Holding, and the positive results of the Chinese joint venture companies, offset in the first half of 2022 by the dividend resolution of SAIC VOLKSWAGEN. Noncurrent other receivables and financial assets were up, mainly because of positive effects from the measurement of derivatives. Overall, noncurrent assets were higher than at the end of 2021, at €176.2 (170.4) billion. At the end of the first half of 2022, current assets climbed by €8.8 billion to €110.3 billion compared with December 31, 2021. The inventories included in this figure expanded, due in particular to production factors and exchange rate move- ments. Current other receivables and financial assets increased, mainly because of higher trade receivables and positive effects from the measurement of derivatives. The Automotive Division’s cash and cash equivalents went down by €1.8 billion to €23.7 billion. The “Assets held for sale” item consists of the carrying amounts of the assets of a TRATON subsidiary intended for derecognition. The “Liabilities held for sale” item comprises the carrying amount of the corresponding liabilities intended for derecognition. The Automotive Division’s equity amounted to €126.0 bil- lion, up €17.0 billion on the figure at the end of 2021. Good earnings performance, lower actuarial losses from the remea- surement of pension plans, positive currency translation effects and the hybrid notes issued in March 2022 pushed equity higher, while the redemption of the hybrid note called in the first quarter of 2022 reduced this item. Noncontrolling interests are primarily held by the noncontrolling interest shareholders of the TRATON GROUP. Noncurrent liabilities decreased by €8.9 billion to €90.0 (98.9) billion. The pension provisions included in this figure decreased, driven primarily by actuarial remeasurement following a change in the discount rate. Noncurrent other liabilities were driven higher by factors such as the effects of derivatives measurement included in other financial liabili- ties. At the end of the first half of 2022, current liabilities rose significantly to €70.4 (64.0) billion. Current financial liabili- ties amounted to €–13.3 (–10.2) billion. The figures for the Automotive Division also contain the elimination of intra- group transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed in both periods. Trade payables increased significantly compared with the end of 2021. Current other liabilities expanded and, due among other things to the effects of the measurement of derivatives, the other financial liabilities included in this item exceeded the figure as of December 31, 2021. 23 24 Results of Operations, Financial Position and Net Assets At the end of June 2022, the Automotive Division had total assets of €286.5 billion, 5.4% more than on December 31, 2021. Financial Services Division balance sheet structure The Financial Services Division’s total assets stood at €260.4 (256.7) billion at the end of June 2022. Total noncurrent assets were 1.7% higher than the level at the end of 2021. The lease assets contained in this item increased due to exchange rate movements. Current assets totaled €99.7 (98.8) billion and were approxi- mately on a level with the end of the previous year. The current financial services receivables, current other receiv- ables and financial assets included in this item were up, while cash and cash equivalents declined. At the end of the first half of 2022, the Financial Services Division accounted for 47.6 (48.6)% of the Volkswagen Group’s assets. On June 30, 2022, the Financial Services Division’s equity stood at €40.2 billion, €3.1 billion more than on Decem- ber 31, 2021. The equity ratio went up to 15.4 (14.5)%. At €117.3 (119.1) billion, noncurrent liabilities were on a level with the end of the previous year. The current financial liabilities included in current liabilities rose, while other current financial liabilities declined. In total, current liabilities were €2.5 billion higher than on December 31, 2021, increasing to €102.9 billion. At €27.2 (26.7) billion, deposits from the direct banking business exceeded those on December 31, 2021. R E P O R T O N E X P E C T E D D E V E L O P M E N T S , R I S K S A N D O P P O R T U N I T I E S As a result of the Russia-Ukraine conflict and the spread of the Omicron variant of the coronavirus in China, combined with the restrictions imposed as part of the zero-Covid stra- tegy in place there, our risk exposure has increased. Interim Management Report The Russia-Ukraine conflict has created considerable uncer- tainty, particularly with regard to the potential impact of the actions of the political players, primarily where the duration, intensity and allocation of energy supplies and their impact on the supply chain are concerned. Particularly, the supply of energy, other raw materials and parts for the production process could result in greater constraints, especially in Europe, where a gas shortage is possible. Higher energy and commodity prices plus greater volatility could add to the strain. Furthermore, inflation rates could reduce purchasing power, adversely affect consumer behavior and put a damper on demand for our products. Moreover, the need might arise to recognize further impair- ment losses on assets and additional risk provisions. Based on developments in the first half of the year, we have adjusted our forecast for the following core performance indicators: In the Automotive Division, we are assuming higher upfront investment in new technologies and therefore anticipate increasing primary research and development costs and an R&D ratio of around 8%. Compared with pre- vious expectations, we are lowering the forecast capex ratio to around 5%. In terms of operating result for the Passenger Cars Busi- ness Area before and after special items, we are lifting the fore- cast for the operating return on sales to a range of 8% to 9%. We are reducing the expected range for the Commercial Vehicles Business Area’s operating return on sales to 4% to 5%. For the Financial Services Division, we have increased our expectation for the operating result to around €5 billion. The forecast for all other core performance indicators remains unchanged. The outlook for fiscal year 2022 can be found on page 27. Interim Management Report Diesel issue 1. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The criminal investigation conducted by the Stuttgart Office of the Public Prosecutor against a member of the Board of Management of Dr. Ing. h.c. F. Porsche AG and others on suspicion of fraud and illegal advertising relating to the diesel issue has in the interim been terminated at the end of April 2022, as regards inter alia the Board of Management member, against payment of a sum set by the court. 2. Product-related lawsuits worldwide (excluding the USA/ Canada) In Brazil, the plaintiff in the second pending consumer pro- tection class action has appealed the trial court’s October 2021 judgment dismissing the complaint. In England and Wales, roughly 91 thousand claims of the group litigation against the Volkswagen Group were settled out of court for the sum of £ 193 million (€231 million) as well as a separate amount for attorney fees and other costs in May 2022. In the Netherlands, the court hearing the class action brought by the Diesel Emissions Justice Foundation (DEJF) rendered an interlocutory judgment in March 2022 holding the new class action regime – which permits damage awards in addition to declaratory judgment on the existence of claims – to be inapplicable to the instant lawsuit. The inter- locutory judgment further finds that the Amsterdam court lacks jurisdiction to hear lawsuits brought by consumers outside the Netherlands. The DEJF has appealed this judg- ment. In Germany, the Bundesgerichtshof (BGH – Federal Court of Justice) rendered a judgment in June 2022 holding, in a case involving the damage claims of Swiss vehicle purchasers, that the assignment of claims to financialright GmbH was valid. The BGH did not address the merits of the claims. Results of Operations, Financial Position and Net Assets In July 2022, the European Court of Justice ruled that a so- called thermal window (i.e. a built-in temperature-dependent emissions control feature) in the range of 15°C and 33°C outside temperature represents a defeat device. In this context, the ECJ has developed a new, unwritten criterion according to which a thermal window, even if it serves to prevent sudden and extraordinary damage, is inadmissible if it is active for the “largest part of a year under the driving conditions which are actually prevailing in the European Union area.” Volkswagen is assessing the effects of this decision and is in discussion with the authorities. 3. Proceedings in the USA/Canada As to private civil law matters, the Superior Court of Quebec approved the settlement of an environmental class action lawsuit seeking punitive damages on behalf of the residents of the Province of Quebec in June 2022; an appeal of that approval on the limited subject of counsel fees is pending. 4. Special audit In the reporting period, Volkswagen AG has filed an action before the Braunschweig Regional Court against the special auditor appointed by the Celle Higher Regional Court; Volks- wagen AG is seeking an injunction enjoining the special auditor from performing the audit as long as he has not furnished sufficient proof of his independence. Additional important legal cases In April 2022, Scania filed an appeal with the European Court of Justice against the February 2022 judgment of the Euro- pean General Court (Court of First Instance) in connection with the monetary fine imposed by the European Com- mission for the alleged illegal information exchange between certain truck manufacturers. 25 26 Results of Operations, Financial Position and Net Assets In connection with the amended antitrust class action, which was initially dismissed with prejudice by the Northern District of California and which alleged that several auto- mobile manufacturers, including Volkswagen AG and other Group companies, had conspired to unlawfully increase vehicle prices in violation of US antitrust and consumer protection law, the Ninth Circuit Court of Appeals in January 2022 dismissed plaintiffs’ motion (filed at the end of 2021) for a new hearing on the decision in which the court had affirmed the judgment of the US District Court. In February 2022, the District Court also denied plaintiffs’ motion to set aside its judgment and to be allowed to file a new complaint. In June 2022, the US Supreme Court definitively rejected the petition filed by the plaintiffs against this decision. In March 2022, the European Commission and the Com- petition and Markets Authority (CMA), the English antitrust authorities, searched the premises of various automotive manufacturers and automotive industry organizations and/or served them with formal requests for information. In the Volkswagen Group, the investigation affects Volkswagen Group UK, which was searched by the CMA, and Volks- wagen AG, which has received a Group-wide information request from the European Commission. The investigation relates to European, Japanese, and Korean manufacturers as well as national organizations operating in such countries and the European organization European Automobile Manu- facturers' Association (ACEA), which are suspected of having agreed from 2001/2002 to the present to avoid paying for the services of recycling companies that dispose of end-of-life vehicles (ELV) (specifically passenger cars and vans up to This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic, political and legal environment in individual countries, economic regions and markets, and in particular for the automotive industry. These assumptions have been made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales markets, or any significant shifts in exchange rates, Interim Management Report 3.75 tons). Also alleged is an agreement to refrain from com- petitive use of ELV issues, that is, not to publicize relevant recycling data (recyclates, recyclability, recovery) for compet- itive purposes. The violation under investigation is alleged to have taken place in particular in the “ACEA” Working Group Recycling and related sub-groups thereof. Volkswagen AG has responded to the European Commission’s information request. Volkswagen Group UK is cooperating with the CMA. The final Profit Sharing Settlement Agreement entered into by Navistar in December 2021 to resolve disputes concerning the calculation of profit sharing amounts for purposes of Navistar’s commitments received final approval from the relevant court in June 2022. Navistar has paid the entire amount of all remaining sums required to fulfill the agreement of about €0.4 billion. corporate retiree healthcare In line with IAS 37.92, no further statements have been made concerning estimates of the financial impact or regarding uncertainties as to the amount or maturity of provisions and contingent liabilities in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Company. Beyond these events, there were no significant changes in the reporting period compared with the disclosure on the Volkswagen Group’s expected development in fiscal year 2022 contained in the combined management report of the 2021 Annual Report in the sections “Report on Expected Developments” and “Report on Risks and Opportunities”, including in section “Legal Risks”. energy and other commodities or the supply of parts relevant to the Volkswagen Group or deviations in the actual effects of the Covid-19 pandemic from the scenario presented in this report will have a corresponding effect on the development of our business. In addition, there may also be departures from our expected business development if the assessments of the factors influencing sustainable value enhancement and of risks and opportunities presented in the 2021 annual report develop in a way other than we are currently expecting, or if additional risks and opportunities or other factors emerge that affect the development of our business. Interim Management Report Outlook Outlook Our planning is based on the assumption that global eco- nomic output will continue to grow in 2022, albeit at a lower level overall, after the recovery observed in the past fiscal year – provided that the Covid-19 pandemic does not flare up and that shortages of intermediates and commodities become less intense. We believe that risks will arise from protectionist tendencies, turbulence in the financial markets, structural deficits in individual countries and the effects of high inflation and rising interest rates worldwide on the economy. In addition, growth prospects will be negatively impacted by ongoing geopolitical tensions and conflicts, with risks arising especially from the Russia-Ukraine conflict, including in relation to the security of supply of energy resources in Europe. We anticipate that both the advanced economies and the emerging markets will experience declining yet positive momentum. The passenger car markets in the Asia-Pacific region are also expected to be slightly up on the prior-year level in 2022. Trends in the markets for light commercial vehicles in the individual regions will also be mixed; on the whole, we anticipate a sales volume for 2022 in the range of the pre- vious year. This assumes that the Covid-19 pandemic does not flare up and that shortages of intermediates, especially semiconductors, and commodities become less intense. For 2022, we expect an overall slightly positive develop- ment in new registrations for mid-sized and heavy trucks with a gross weight of more than six tonnes compared with the previous year, with variations from region to region, in the markets that are relevant for the Volkswagen Group. A distinct increase in overall demand, with regional variations, is expected for 2022 in the bus markets relevant for the Volks- wagen Group. We predict that trends in the markets for passenger cars in the individual regions will be mixed in 2022. Overall, the global volume of new vehicle sales is expected to be on a par with the previous year without reaching the pre-pandemic level. This prediction assumes that the Covid-19 pandemic does not flare up and that shortages of intermediates, especially semiconductors, and commodities become less intense. For 2022, we anticipate that the volume of new passenger car registrations in Western Europe will be in the same range as the previous year’s figure. In the German passenger car market, we expect the volume of new registra- tions in 2022 to also match the prior-year figure. We expect a very sharp drop in the sales of passenger cars in Central and Eastern Europe in 2022 compared to the prior year, due in particular to the slump in the Russian market as a conse- quence of the sanctions imposed. Sales volume in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America in 2022 is forecast to be at the previous year’s level. We anticipate a slight increase overall in new registrations in the South American markets in 2022 compared with the previous year. We anticipate that automotive financial services will continue to prove highly important to global vehicle sales in 2022. We believe we are well prepared overall for the future challenges pertaining to automotive business activities and for the mixed development of the regional automotive markets. Our brand diversity, our presence in all major world markets, our broad and selectively expanded product range, and our technologies and services put us in a good compet- itive position worldwide. As part of the transformation of our core business, we are positioning our Group brands with an even stronger focus on their individual characteristics, and are optimizing our vehicle and drive portfolio. The focus is primarily on our vehicle fleet’s carbon footprint and on the most attractive and fastest-growing market segments. In addition, we are working to leverage the advantages of our multibrand Group even more effectively with the ongoing development of new technologies and the enhancement of our toolkits. 27 28 Outlook We anticipate that, given the continuing challenging market conditions, deliveries to customers of the Volkswagen Group in 2022 will be 5% to 10% up on the previous year. This assumes that the Covid-19 pandemic will not flare up and that shortages of intermediates and commodities will become less intense. The 2022 fiscal year will continue to be affected by shortfalls in supply due to the structural shortage of semiconductors. We anticipate that the supply of semicon- ductors will improve in the second half of the year, compared with the first half. Challenges will arise particularly from the economic situation, the increasing intensity of competition, volatile commodity and foreign exchange markets, securing supply chains and more stringent emissions-related requirements. We expect the sales revenue of the Volkswagen Group and of the Passenger Cars Business Area in 2022 to be 8% to 13% Interim Management Report higher than the prior-year figure. In terms of operating result for the Group before and after special items, we forecast an operating return on sales in the range of 7.0% to 8.5% in 2022. In terms of operating result for the Passenger Cars Business Area before and after special items, we expect an operating return on sales in the range of 8% to 9% in 2022. For the Commercial Vehicles Business Area, we anticipate an oper- ating return on sales of 4% to 5% amid a strong year-on-year increase in sales revenue, including Navistar. In the Power Engineering Business Area, we expect sales revenue to be moderately above the prior-year figure and operating result to be in the low triple-digit million euro range. For the Finan- cial Services Division, we forecast that sales revenue will be noticeably higher than the prior-year figure and that the operating result will be around €5 billion. Brands and Business Fields Brands and Business Fields S A L E S R E V E N U E A N D O P E R AT I N G R E S U LT B Y B R A N D A N D B U S I N E S S F I E L D At the beginning of 2022, we aligned the reporting structure by brand and business field with the Group’s current strategy and management structure. The Volkswagen Group generated sales revenue of €132.3 (129.7) billion from January to June 2022 despite a decline in volumes caused by the Covid-19 pandemic, the Russia- Ukraine conflict and the still limited vehicle availability due to parts supply shortages. The operating result before special items improved to €13.2 (11.4) billion. The diesel issue gave rise to special items of €–0.4 billion in the first six months of this year. In the first half of this year, the Volume brand group sold 2.0 (2.4) million vehicles, generating sales revenue of €53.0 (55.3) billion. The operating result before special items amounted to €2.6 (2.9) billion. vehicles. The decrease in Europe was offset to some extent by the successful growth in India. Growth was recorded partic- ularly by the Enyaq iV. At €10.2 (10.2) billion, sales revenue was in the same range as the prior-year figure. The operating result fell to €676 (974) million driven by product cost and exchange rate effects. In addition, the Russia-Ukraine conflict weighed on the result, while mix effects had a positive impact. Between January and June of this year, 236 thousand SEAT and CUPRA vehicles were sold, a decrease of 23.9% on the prior-year period. This figure includes the A1 manufactured for Audi. The CUPRA Formentor saw rising demand, and the CUPRA Born was well received by the market. Sales revenue decreased by 4.9% to €5.4 billion. Positive mix effects and improved price positioning were the main factors driving SEAT’s operating result clearly into the black, although one- off expenses for restructuring measures of €244 million ultimately led to an operating loss of €-97 (-26) million. The Volkswagen Passenger Cars brand sold 1.2 (1.6) million vehicles in the reporting period. The decline was due pri- marily to the limited vehicle availability caused by parts supply shortages. ID. family models and the T-Cross were increasingly sought-after, and the new Taigo was also very popular. Sales revenue decreased by 7.0% year-on-year to €33.3 billion. The operating result before special items increased to €1.9 (1.2) billion, principally as a result of reduced sales incentives, improved price positioning and positive mix effects. Increased commodity prices adversely affected earnings. The diesel issue gave rise to negative special items. Unit sales by the ŠKODA brand in the reporting period fell short of the previous year’s level at 447 (463) thousand Unit sales of Volkswagen Commercial Vehicles in the reporting period were down on the prior-year level at 153 (188) thousand vehicles worldwide. Sales revenue decreased to €5.0 (5.3) billion. The operating result rose to €187 (87) mil- lion, due mainly to price- and mix-related factors. CO2 emis- sions premiums had to be taken into account in the previous year. Sales revenue for Tech. Components amounted to €8.1 (9.8) billion in the first half of 2022. The operating result fell to €–28 (575) million, primarily as a result of lower volumes. Unit sales at Audi (Premium brand group) amounted to 513 (609) thousand vehicles globally in the first six months of 2022. A further 277 (367) thousand Audi vehicles were sold by the Chinese joint ventures FAW-Volkswagen and SAIC VOLKS- 29 30 Brands and Business Fields WAGEN. Demand for the Audi A3 in particular was up on the previous year. The new Audi Q4 e-tron had a very successful market launch. Despite the lower volume, sales revenue was almost at the level of the figure for the prior-year period at €29.9 (30.5) billion. The operating result before special items improved to €5.0 (3.3) billion, mainly on the back of a strong performance in the new and used car market, positive effects from derivatives and solid results from the Lamborghini, Bentley and Ducati brands, as well as lower fixed costs. The diesel issue resulted in low negative special items. Ducati sold 33,865 (35,028) motorbikes in the first six months of this year. to €16.4 (15.1) billion. The operating result increased to €3.3 (2.7) billion, due primarily to higher earnings contri- butions and positive exchange rate effects. The Navistar brand has been a member of the TRATON GROUP since July 1, 2021, which resulted in higher figures in the first half of 2022 than in the previous year. Unit sales of TRATON Commercial Vehicles went up to 138 (127) thousand vehicles and sales revenue of €17.6 billion was 31.4% higher than in the same period of 2021. Amounting to €617 (355) million, the operating result was higher than in the prior-year period, which had been affected by restructuring measures at MAN Commercial Vehicles in Europe. Mix and exchange rate effects also had a positive effect. In the first half of 2022, Porsche Automotive (Sport & Luxury brand group) sold 149 (152) thousand vehicles worldwide. The 911, Panamera and Cayenne models all sold more units than in the previous year. Sales revenue rose MAN Energy Solutions generated sales revenue of €1.6 (1.6) billion in the reporting period. The operating result improved to €131 (82) million due to mix-related factors. K E Y F I G U R E S B Y B R A N D A N D B U S I N E S S F I E L D F R O M J A N UA R Y 1 T O J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2022 2021 2022 2021 2022 2021 Volume brand group 1,956 2,388 53,010 55,345 2,646 2,874 Volkswagen Passenger Cars 1,218 1,552 33,322 35,819 1,860 1,202 ŠKODA 447 463 10,223 10,199 676 974 SEAT 236 310 5,377 5,656 –97 –26 Volkswagen Commercial Vehicles 153 188 5,046 5,298 187 87 Tech. Components – – 8,147 9,755 –28 575 Consolidation –97 –125 –9,105 –11,382 50 62 Audi (Premium brand group)1 513 609 29,869 30,536 4,965 3,291 Porsche Automotive (Sport & Luxury brand group)2 149 152 16,425 15,107 3,261 2,660 TRATON Commercial Vehicles3 138 127 17,613 13,404 617 355 Equity accounted companies in China4 1,431 1,522 – – – – MAN Energy Solutions – – 1,632 1,581 131 82 CARIAD – – 249 170 –978 –502 Volkswagen Financial Services – – 21,943 21,556 2,983 2,339 Other5 –180 –138 –8,457 –8,029 –438 258 Volkswagen Group before special items – – – – 13,188 11,358 Special items – – – – –360 – Volkswagen Group Automotive Division6 4,006 4,006 4,660 4,660 132,285 109,066 129,669 107,027 12,828 9,726 11,358 8,841 of which: Passenger Cars Business Area 3,868 4,533 89,820 92,041 8,978 8,521 Commercial Vehicles Business Area 138 127 17,613 13,404 618 334 Power Engineering Business Area – – 1,632 1,581 129 –14 Financial Services Division – – 23,220 22,642 3,102 2,517 1 The previous year’s figures were calculated by means of the simple addition of the figures for Bentley. 2 Porsche (including Financial Services): sales revenue €17,922 (16,525) million, operating result €3,480 (2,792) million. 3 Includes Navistar as of July 1, 2021. 4 The sales revenue and operating result of the equity-accounted companies in China are not included in the consolidated figures; the share of the operating result generated by these companies amounted to €1,402 (1,272) million. 5 In the operating result, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation, as well as companies not allocated to the brands. 6 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. Brands and Business Fields CARIAD pools the Volkswagen Group’s software expertise and to this end has also purchased services and acquired rights from the brands. Between January and June of this year, CARIAD increased its sales revenue to €249 (170) million. However, due to upfront expenditures for software platforms, the operating loss increased to €–978 (–502) million. U N I T S A L E S A N D S A L E S R E V E N U E B Y M A R K E T The Volkswagen Group sold 1.7 million vehicles in the Europe/ Other Markets region in the first six months of this year. This was 21.1% fewer than in the previous year. Sales revenue fell to €74.3 (77.6) billion due to lower volumes. Improved price positioning and mix effects had a positive impact. The number of new financing, leasing, service and insur- ance contracts signed with Volkswagen Financial Services in the first half of 2022 stood at 3.8 million (–8.8%). The pene- tration rate, expressed as the ratio of leased or financed vehi- cles to relevant Group delivery volumes, came to 33.0 (35.8)% with credit eligibility criteria remaining unchanged. At 22.0 (22.0) million, the total number of contracts on June 30, 2022 was level with year-end 2021. The number of contracts in the customer financing/leasing area amounted to 10.5 (10.9) mil- lion, and in the service/insurance area to 11.5 (11.1) million. At the end of the reporting period, Volkswagen Bank managed 1.3 (1.4) million deposit accounts. In particular, strong demand for used vehicles and positive effects from derivatives lifted the operating result to €3.0 (2.3) billion. However, expenses relating to loss allowances and risk provisions as a conse- quence of the direct impact of the Russia-Ukraine conflict reduced the operating result. The Volkswagen Group sold 417 thousand vehicles in the North American markets in the reporting period. This was 6.7% fewer than in the previous year. Sales revenue increased to €27.7 (22.0) billion, due mainly to the inclusion of Navistar as of July 1, 2021, as well as exchange rate effects. In South America, unit sales between January and June 2022 fell short of the prior-year figure at 200 (260) thousand vehicles. Driven by mix and exchange rate effects, sales reve- nue rose to €6.6 (5.1) billion. At 1.7 million vehicles, the number of units sold by the Volkswagen Group in the Asia-Pacific region – including the equity-accounted companies in China – was 5.9% lower in the first half of 2022 than a year earlier. Sales revenue decreased to €24.7 (25.0) billion. Positive exchange rate effects were unable to offset the decline resulting from lower volumes. The sales revenue of our equity-accounted companies in China is not included. Hedging transactions relating to the Volkswagen Group’s sales revenue in foreign currency made a negative contri- bution of €–936 (–23) million in the reporting period. K E Y F I G U R E S B Y M A R K E T F R O M J A N UA R Y 1 TO J U N E 3 0 V E H I C L E S A L E S S A L E S R E V E N U E Thousand vehicles/€ million 2022 2021 2022 2021 Europe/Other Markets 1,715 2,175 74,327 77,552 North America 417 447 27,680 22,038 South America 200 260 6,564 5,065 Asia-Pacific1 1,674 1,779 24,650 25,036 Hedges on sales revenue – – –936 –23 Volkswagen Group1 4,006 4,660 132,285 129,669 1 The sales revenue of the equity-accounted companies in China is not included in the figures for the Group and the Asia-Pacific market. 31 32 Interim Consolidated Financial Statements (Condensed) Income Statement Interim Consolidated Financial Statements (Condensed) Income Statement for the Period January 1 to June 30 VOLKSWAGEN GROUP DIVISIONS AUTOMOTIVE¹ FINANCIAL SER VICES € million 2022 2021 2022 2021 2022 2021 Sales revenue 132,285 129,669 109,066 107,027 23,220 22,642 Cost of sales –105,807 –104,820 –87,444 –86,310 –18,363 –18,510 Gross result 26,478 24,848 21,621 20,716 4,857 4,132 Distribution expenses –9,077 –9,065 –8,474 –8,394 –603 –670 Administrative expenses –5,566 –4,934 –4,220 –3,715 –1,345 –1,218 Other operating income/expense 992 508 799 234 193 274 Operating result 12,828 11,358 9,726 8,841 3,102 2,517 Share of the result of equity-accounted investments 1,075 899 1,029 896 46 3 Interest result and other financial result 132 –1,104 169 –1,036 –37 –67 Financial result 1,206 –205 1,198 –140 9 –65 Earnings before tax 14,034 11,153 10,923 8,701 3,111 2,453 Income tax expense –3,396 –2,699 –2,638 –2,059 –758 –640 Earnings after tax 10,638 8,454 8,285 6,642 2,353 1,813 of which attributable to Noncontrolling interests 63 81 –24 36 86 45 Volkswagen AG hybrid capital investors 279 269 279 269 – – Volkswagen AG shareholders 10,296 8,104 8,029 6,337 2,266 1,768 Basic/diluted earnings per ordinary share in €² 20.51 16.14 Basic/diluted earnings per preferred share in €² 20.57 16.20 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. 33 34 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period January 1 to June 30 € million 2022 2021 Earnings after tax 10,638 8,454 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax 14,442 4,800 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income –4,321 –1,418 Pension plan remeasurements recognized in other comprehensive income, net of tax 10,120 3,383 Fair value valuation of equity instruments that will not be reclassified to profit or loss, net of tax –376 364 Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax 1 –2 Items that will not be reclassified to profit or loss 9,745 3,744 Exchange differences on translating foreign operations Unrealized currency translation gains/losses 2,729 1,493 Transferred to profit or loss 15 – Exchange differences on translating foreign operations, before tax 2,744 1,493 Deferred taxes relating to exchange differences on translating foreign operations 2 –1 Exchange differences on translating foreign operations, net of tax 2,746 1,491 Hedging Fair value changes recognized in other comprehensive income (OCI I) –277 –925 Transferred to profit or loss (OCI I) 352 –327 Cash flow hedges (OCI I), before tax 75 –1,252 Deferred taxes relating to cash flow hedges (OCI I) –2 418 Cash flow hedges (OCI I), net of tax 72 –834 Fair value changes recognized in other comprehensive income (OCI II) –680 –323 Transferred to profit or loss (OCI II) 401 679 Cash flow hedges (OCI II), before tax –280 356 Deferred taxes relating to cash flow hedges (OCI II) 78 –104 Cash flow hedges (OCI II), net of tax –202 252 Fair value valuation of debt instruments that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income –273 –26 Transferred to profit or loss 0 0 Fair value valuation of debt instruments that may be reclassified to profit or loss, before tax –273 –26 Deferred taxes relating to fair value valuation of debt instruments recognized in other comprehensive income 73 8 Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax –200 –18 Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax 266 304 Items that may be reclassified to profit or loss 2,682 1,195 Other comprehensive income, before tax 16,598 6,037 Deferred taxes relating to other comprehensive income –4,171 –1,097 Other comprehensive income, net of tax 12,427 4,939 Total comprehensive income 23,065 13,394 of which attributable to Noncontrolling interests 147 166 Volkswagen AG hybrid capital investors 279 269 Volkswagen AG shareholders 22,639 12,959 Interim Consolidated Financial Statements (Condensed) Income Statement for the Period April 1 to June 30 VOLKSWAGEN GROUP AUTOMOTIVE¹ € million 2022 2021 2022 Sales revenue 69,543 67,293 57,856 Cost of sales –55,053 –54,772 –45,801 Gross result 14,490 12,520 12,054 Distribution expenses –4,762 –4,704 –4,496 Administrative expenses –2,788 –2,304 –2,057 Other operating income/expense –2,436 1,035 –2,562 Operating result 4,505 6,546 2,939 Share of the result of equity-accounted investments 448 380 424 Interest result and other financial result 187 –236 201 Financial result 635 144 626 Earnings before tax 5,140 6,690 3,565 Income tax expense –1,226 –1,650 –830 Earnings after tax 3,914 5,040 2,735 of which attributable to Noncontrolling interests 23 46 –29 Volkswagen AG hybrid capital investors 150 134 150 Volkswagen AG shareholders 3,741 4,860 2,614 Basic/diluted earnings per ordinary share in €² 7.46 9.70 Basic/diluted earnings per preferred share in €² 7.46 9.70 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Explanatory information on earnings per share is presented in the “Earnings per share” section. DIVISIONS 2021 55,488 –45,152 10,337 –4,392 –1,685 773 5,032 398 –181 216 5,248 –1,223 4,025 25 134 3,866 Income Statement FINANCIAL SER VICES 2022 2021 11,688 11,804 –9,251 –9,621 2,436 2,183 –266 –312 –731 –619 126 262 1,565 1,514 24 –18 –15 –55 9 –72 1,574 1,442 –396 –427 1,178 1,015 52 21 – – 1,126 994 35 36 Statement of Comprehensive Income Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period April 1 to June 30 € million 2022 2021 Earnings after tax 3,914 5,040 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax 8,487 515 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income –2,532 –147 Pension plan remeasurements recognized in other comprehensive income, net of tax 5,955 367 Fair value valuation of equity instruments that will not be reclassified to profit or loss, net of tax –40 343 Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax 0 –1 Items that will not be reclassified to profit or loss 5,916 709 Exchange differences on translating foreign operations Unrealized currency translation gains/losses 1,587 216 Transferred to profit or loss 0 – Exchange differences on translating foreign operations, before tax 1,587 216 Deferred taxes relating to exchange differences on translating foreign operations 0 1 Exchange differences on translating foreign operations, net of tax 1,587 216 Hedging Fair value changes recognized in other comprehensive income (OCI I) –153 284 Transferred to profit or loss (OCI I) 334 –226 Cash flow hedges (OCI I), before tax 181 58 Deferred taxes relating to cash flow hedges (OCI I) –48 –18 Cash flow hedges (OCI I), net of tax 133 40 Fair value changes recognized in other comprehensive income (OCI II) –528 –86 Transferred to profit or loss (OCI II) 230 363 Cash flow hedges (OCI II), before tax –297 278 Deferred taxes relating to cash flow hedges (OCI II) 95 –86 Cash flow hedges (OCI II), net of tax –202 192 Fair value valuation of debt instruments that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income –124 –8 Transferred to profit or loss 0 0 Fair value valuation of debt instruments that may be reclassified to profit or loss, before tax –124 –8 Deferred taxes relating to fair value valuation of debt instruments recognized in other comprehensive income 34 3 Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax –90 –5 Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax 140 25 Items that may be reclassified to profit or loss 1,568 469 Other comprehensive income, before tax 9,934 1,425 Deferred taxes relating to other comprehensive income –2,451 –248 Other comprehensive income, net of tax 7,483 1,177 Total comprehensive income 11,397 6,217 of which attributable to Noncontrolling interests 66 105 Volkswagen AG hybrid capital investors 150 134 Volkswagen AG shareholders 11,182 5,978 Interim Consolidated Financial Statements (Condensed) Balance Sheet as of June 30, 2022 and December 31, 2021 VOLKSWAGEN GROUP DIVISIONS AUTOMOTIVE¹ € million 2022 2021 2022 2021 Assets Noncurrent assets 336,809 328,261 176,180 170,391 Intangible assets 80,616 77,689 80,209 77,290 Property, plant and equipment 62,738 63,695 61,712 62,684 Lease assets 60,768 59,699 1,990 2,316 Financial services receivables 85,798 84,954 –714 –781 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 46,889 42,224 32,982 28,882 Current assets 210,050 200,347 110,307 101,539 Inventories 49,295 43,725 45,999 40,361 Financial services receivables 58,899 56,498 –884 –936 Other receivables and financial assets 43,847 37,195 22,043 18,275 Marketable securities and time deposits 23,756 22,532 19,166 17,674 Cash and cash equivalents 33,921 39,723 23,651 25,491 Assets held for sale 332 674 332 674 Total assets 546,858 528,609 286,487 271,930 Equity and liabilities Equity 166,216 146,154 126,004 109,022 Equity attributable to Volkswagen AG shareholders 148,890 130,009 109,578 93,592 Equity attributable to Volkswagen AG hybrid capital investors 15,418 14,439 15,418 14,439 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 164,308 144,449 124,995 108,031 Noncontrolling interests 1,908 1,705 1,009 991 Noncurrent liabilities 207,303 218,062 90,033 98,923 Financial liabilities 129,107 131,618 26,032 24,639 Provisions for pensions 27,629 41,550 27,219 40,769 Other liabilities 50,567 44,894 36,782 33,515 Current liabilities 173,339 164,393 70,450 63,984 Financial liabilities 78,640 78,584 –13,316 –10,237 Trade payables 27,878 23,624 25,120 20,977 Other liabilities 66,695 61,948 58,519 53,007 Liabilities associated with assets held for sale 126 238 126 238 Total equity and liabilities 546,858 528,609 286,487 271,930 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. Balance Sheet FINANCIAL SER VICES 2022 2021 160,629 157,871 407 399 1,026 1,011 58,777 57,383 86,512 85,735 13,907 13,342 99,743 98,808 3,296 3,363 59,783 57,434 21,804 18,921 4,590 4,858 10,270 14,232 – – 260,372 256,679 40,212 37,131 39,312 36,417 – – 39,312 36,417 900 714 117,271 119,139 103,075 106,978 410 781 13,785 11,379 102,890 100,409 91,956 88,821 2,759 2,647 8,175 8,940 – – 260,372 256,679 37 38 Statement of Changes in Equity Statement of Changes in Equity € million Subscribed capital Balance at Jan. 1, 2021 1,283 Earnings after tax – Other comprehensive income, net of tax – Total comprehensive income – Disposal of equity instruments – Capital increases/Capital decreases – Dividends payment – Capital transactions involving a change in ownership interest – Other changes – Balance at June 30, 2021 1,283 Balance at Jan. 1, 2022 1,283 Earnings after tax – Other comprehensive income, net of tax – Total comprehensive income – Disposal of equity instruments – Capital increases/Capital decreases¹ – Dividends payment – Capital transactions involving a change in ownership interest – Other changes – Balance at June 30, 2022 1,283 1 For details on capital increases/decreases, see the “Equity” section. Interim Consolidated Financial Statements (Condensed) OTHER RESERVES Currency translation Capital reserve Retained earnings reserve 14,551 100,772 –5,659 – 8,104 – – 3,355 1,467 – 11,460 1,467 – 57 – – – – – – – – –268 –34 – 8 – 14,551 112,029 –4,226 14,551 117,342 –2,351 – 10,296 – – 10,068 2,677 – 20,364 2,677 – – – – – – – –3,772 – – – – – 16 – 14,551 133,950 326 Interim Consolidated Financial Statements (Condensed) HEDGING Cash flow Deferred costs hedges of hedging Equity and debt (OCI I) (OCI II) instruments 1,287 –708 –219 – – – –835 253 319 –835 253 319 – – –57 – – – – – – –1 0 0 – – – 451 –456 42 –635 –367 –355 – – – 71 –202 –538 71 –202 –538 – – – – – – – – – – – – – – – –564 –569 –893 Equity- accounted investments 30 – 295 295 – – – 0 0 324 541 – 266 266 – – – – –2 805 Equity attributable to Volkswagen AG hybrid capital investors 15,713 269 – 269 – –1,237 –497 – – 14,248 14,439 279 – 279 – 1,153 –454 – – 15,418 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 127,049 8,374 4,854 13,228 – –1,237 –497 –304 7 138,247 144,449 10,575 12,343 22,918 – 1,153 –4,226 – 14 164,308 Equity attributable to noncontrolling interests 1,734 81 85 166 – 170 –18 –283 –2 1,767 1,705 63 84 147 – 103 –32 – –15 1,908 Statement of Changes in Equity Total equity 128,783 8,454 4,939 13,394 – –1,068 –515 –586 6 140,013 146,154 10,638 12,427 23,065 – 1,256 –4,258 – –1 166,216 39 40 Cash flow statement Interim Consolidated Financial Statements (Condensed) Cash flow statement for the Period January 1 to June 30 VOLKSWAGEN GROUP DIVISIONS AUTOMOTIVE¹ FINANCIAL SER VICES € million 2022 2021 2022 2021 2022 2021 Cash and cash equivalents at beginning of period 39,123 33,432 24,899 23,758 14,224 9,674 Earnings before tax 14,034 11,153 10,923 8,701 3,111 2,453 Income taxes paid –2,150 –2,329 –1,623 –1,876 –526 –453 Depreciation and amortization expense² 13,993 13,351 9,229 8,811 4,764 4,540 Change in pension provisions 319 376 294 353 24 23 Share of the result of equity-accounted investments –132 1,780 –131 1,770 –1 9 Other noncash income/expense and reclassifications³ –615 –247 –1,447 –493 832 246 Gross cash flow 25,448 24,083 17,245 17,266 8,203 6,817 Change in working capital –8,498 –5,618 –3,641 1,821 –4,857 –7,439 Change in inventories –4,576 –684 –4,684 –1,576 107 892 Change in receivables –3,557 –2,891 –2,474 –2,828 –1,083 –63 Change in liabilities 6,753 5,665 6,187 4,932 566 733 Change in other provisions –2,540 1,491 –2,572 1,419 32 72 Change in lease assets (excluding depreciation) –4,358 –9,339 36 –33 –4,394 –9,306 Change in financial services receivables –220 140 –134 –92 –86 232 Cash flows from operating activities 16,950 18,465 13,604 19,088 3,346 –622 Cash flows from investing activities attributable to operating activities –11,486 –9,062 –11,311 –8,897 –176 –165 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property –4,173 –3,864 –4,089 –3,777 –84 –87 capitalized development costs –4,762 –3,711 –4,762 –3,711 – – acquisition and disposal of equity investments –2,726 –1,642 –2,617 –1,538 –108 –104 Net cash flow⁴ 5,464 9,403 2,293 10,191 3,171 –788 Change in investments in securities, loans and time deposits –2,124 –1,048 –1,155 85 –969 –1,133 Cash flows from investing activities –13,610 –10,110 –12,466 –8,812 –1,145 –1,298 Cash flows from financing activities –9,210 –1,336 –2,811 –3,391 –6,399 2,055 of which: capital contributions/capital redemptions 1,262 –1,071 1,261 –1,600 0 530 Effect of exchange rate changes on cash and cash equivalents 664 409 425 361 239 48 Change of loss allowance within cash & cash equivalents 0 0 0 0 0 0 Net change in cash and cash equivalents –5,206 7,428 –1,248 7,246 –3,958 182 Cash and cash equivalents at June 30⁵ 33,916 40,860 23,651 31,004 10,266 9,856 Securities, loans and time deposits 36,170 33,921 17,276 15,938 18,894 17,983 Gross liquidity 70,086 74,780 40,927 46,941 29,159 27,839 Total third-party borrowings –207,750 –207,035 –12,718 –11,893 –195,031 –195,142 Net liquidity at June 30⁶ –137,663 –132,255 28,209 35,048 –165,872 –167,303 For information purposes: at Jan. 1 –136,576 –137,380 26,685 26,796 –163,261 –164,176 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loans to affiliates and joint ventures as well as time deposits net of third-party borrowings (noncurrent and current financial liabilities). Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2021 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2022 were therefore also prepared in accordance with IAS 34 (Interim Financial Reporting) and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 115 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning on or after January 1, 2022. O T H E R A CC O U N T I N G P O L I C I E S A discount rate of 3.3% (December 31, 2021: 1.2%) was applied to German pension provisions in the accompanying interim consolidated financial statements. Because of the sustained increase in inflation expectations, the pension trend was adjusted to 2.0% as of June 30, 2022 (December 31, 2021: 1.7%). These changes are the main factors responsible for the actuarial gain of €14.4 billion presented in the statement of comprehensive income. In addition, adjustments to the discount rates used in the measurement of other provisions benefited the financial result by €0.9 billion. The income tax expense for the interim consolidated financial statements was calculated on the basis of the average annual tax rate that is expected for the entire fiscal year, in accordance with IAS 34 (Interim Financial Reporting). In other respects, the same accounting policies and consolidation methods that were used for the 2021 consolidated financial statements are generally applied to the preparation of the interim consolidated financial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2021 consolidated financial statements. In addition, details of the effects of new standards can be found in the “New and amended IFRSs not applied” section. The 2021 consolidated financial statements can also be accessed on the internet at www.volkswagenag.com/en/InvestorRelations.html. 41 42 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Key events Diesel issue On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOX) emissions had been discovered in emissions tests on certain Volkswagen Group vehicles with type 2.0 l diesel engines in the USA. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2021 consolidated financial statements. Between January and June 2022, special items in connection with the diesel issue amounted to €360 million; they were recognized in the other operating result. These special items were mainly attributable to additional expenses for legal risks. Further information on the litigation in connection with the diesel issue can be found in the “Litigation” section. Russia-Ukraine conflict / Covid-19 pandemic / semiconductor shortages The start of the Russia-Ukraine conflict in February 2022 led not only to a humanitarian crisis but also brought market upheaval around the world. There are significant price rises, particularly on the energy and commodity markets, and significant increases in inflation rates have been observed internationally. In addition, the parts supply shortages intensified in this context directly after the start of the conflict. In the Volkswagen Group, this particularly affected the supply of cable harnesses from Ukraine. Volkswagen took immediate action to clear these supply bottlenecks from Ukraine, with the result that there are no material bottlenecks in this regard at present. Moreover, different sanctions have been imposed on Russia as a result of the conflict, especially by the EU and the USA. They restrict economic transactions with Russia and have an impact on the Russian companies and plants of the Volkswagen Group and on sales of vehicles to Russia. The sanctions also affect the new financial services business in Russia and could potentially lead to impairment risks to existing lease assets and financial receivables. Against the backdrop of the Russia-Ukraine conflict and the resulting consequences, Volkswagen has decided to suspend vehicle production in Russia until further notice. Vehicle exports to Russia have also been halted. In addition, the respective sanction requirements are also being complied with in relation to parts supplies and the provision of technical information. To date, only an insignificant number of complaints has been received from customers, service providers, or other contract partners about any non-fulfillment of contracts in Russia. It is not clear at present how the situation will develop further. Triggered by the direct impact of the Russia-Ukraine conflict, expenses in the mid-three-digit million euro range relating to loss allowances and risk provisions were recognized in the first half of 2022, primarily in the other operating result. This includes further risk provisions in an amount in the low-three-digit million euro range recognized in the second quarter in response to the continuing conflict, in addition to the expenses recognized in the first quarter. In connection with inflation rate trends, the weighted cost of capital (WACC) used in testing the different cash- generating units for impairment were also subject to significant change. Compared with December 31, 2021, the cost of capital for the different cash-generating units increased by between 0.5 and 3.5 percentage points as of June 30, 2022. In light of this change, further impairment tests were conducted on certain material assets, especially goodwill, brand names, capitalized development costs and property, plant and equipment, as of June 30, 2022. In this process, the cash flows used in the previous year’s impairment tests were adjusted to reflect the latest assumptions. The current assumptions relate in particular to the effects expected on the fiscal year from the parts supply shortages with the corresponding expected losses of production volume and from the suspension of vehicle deliveries to Russia and the discontinuation of vehicle production in Russia. Given the very dynamic developments, it is, however, not possible at present to make a reliable assessment of the many different effects of the growing supply insecurity affecting energy resources in Europe (e.g. the gas deficit situation). As for long-term earnings performance, there is an expectation that the assumptions will generally remain unchanged. Apart from the impairment losses recognized in response to the direct effects described above, the tests conducted to establish recoverability have not resulted in any further need at present to recognize impairment losses on those Volkswagen Group’s cash-generating units subjected to testing. In relation to the MAN Energy Solutions and Navistar cash-generating units, it was found in this context that a possible further increase in the discount rate by 0.2 and 0.8 percentage points respectively would cause the carrying amount to exceed the recoverable amount in each case. For the MAN Truck & Bus cash-generating unit, an increase in the discount rate would also lead to the recoverable amount falling below the carrying amount. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements As a result of the turbulence on the commodity and capital markets, gains totaling €1.6 billion had to be recognized in the other operating result, primarily from the fair value measurement and realization of derivatives to which hedge accounting is not applied (especially commodity and currency hedges). Apart from the effects of the Russia-Ukraine conflict, the global spread of the Omicron variant of coronavirus SARS-CoV-2 continued to lead to considerable disruption to everyday life and the economy in a number of regions in the reporting period. In China particularly, local infection outbreaks during the first half of 2022 led to tight restrictions under the zero-Covid strategy being pursued there, resulting in economic constraints and disruption to supply chains. In addition to the uncertainty and measures being taken around the world to deal with the Covid-19 pandemic, persistent semiconductor supply shortages and the resulting limited availability of Group models meant that demand could not be adequately met in some regions. Material Transactions On July 1, 2021, a TRATON GROUP company acquired all of the outstanding shares in Navistar International Corporation (Navistar), a US manufacturer of commercial vehicles based in Lisle, Illinois/ USA. Due to the size of the transaction, it was not possible to complete the internal reviews of the information underlying the purchase price allocation until the current fiscal year. The update to the purchase price allocation did not materially affect the Volkswagen Group’s net assets, financial position and results of operations. In 2021, together with investment firm Attestor Limited and Pon Holdings B.V., Volkswagen made a joint public takeover offer for the shares of Europcar Mobility Group S.A., Paris/France through the consortium company Green Mobility Holding S.A. (GMH) based in Strassen/Luxembourg. The European Commission issued final antitrust approval at the end of May 2022. During the extended offer period, the French Financial Markets Authority gave Europcar shareholders the opportunity to tender their shares to the consortium company. In total, 93.6% of Europcar’s shareholders accepted the offer. The consortium jointly assumed control of Europcar in mid-June 2022. Because the acceptance rate was over 90%, a squeeze-out was initiated for the remaining Europcar shares in July 2022, and the company was delisted. As a result, the consortium company has held 100% of the shares in Europcar since July 13, 2022. The purchase price was 51 cents per Europcar share. At the end of June 2022, the entire portion of the purchase price attributable to Volkswagen, amounting to €1.7 billion, was contributed to GMH. The company, in which Volkswagen holds 66% of the shares, will be accounted for using the equity method in the Volkswagen consolidated financial statements. In addition, Volkswagen is the writer of put options held by the other members of the consortium, and the other members have granted Volkswagen call options on their shares in the consortium company. The measurement of the options led to a non-cash gain of €7 million in the first half of 2022, which was recognized in the financial result. The completion of the Europcar transaction marks another important milestone for Volkswagen in the Group’s Mobility Solutions initiative under the NEW AUTO strategy. With this transaction, the Volkswagen Group intends to secure a significant share of the global market for mobility services. Europcar Mobility Group is to become one of the cornerstones of the mobility platform planned by Volkswagen. 43 44 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. I N V E ST M E N T S I N A S S O C I AT E S Following the fulfillment of all closing conditions, Brose Fahrzeugteile SE & Co. Kommanditgesellschaft (Brose) and Volkswagen Finance Luxemburg S.A., a subsidiary of Volkswagen AG, created a jointly operated company in early 2022 for the development and manufacture of complete seat units, seat structures and components, and solutions for vehicle interiors. As part of this arrangement, Brose acquired half of the shares in the previous Volkswagen Group company SITECH Sp. z o.o., Polkowice/Poland. Brose and Volkswagen each hold 50% of the jointly operated company – Brose Sitech Sp. z o.o. – with Brose taking the industrial lead and controlling the company. Given its significant influence following the transaction, Volkswagen will account for Brose Sitech as an associate using the equity method. The change in the accounting policy did not have any material effect on the Volkswagen Group’s profit or loss. I F R S 5 – N O N C U R R E N T A S S E T S H E L D F O R S A L E In April 2022, TRATON entered into a definitive agreement with Tupy S.A., Brazil for the sale of International Indústria Automotiva Da América Do Sul Ltda. (MWM). MWM specializes in the manufacture of diesel engines. The transaction is subject to customary closing conditions, including regulatory approvals. The transaction is currently expected to be completed in the second half of 2022. In this context, assets of €332 million and liabilities of €126 million were classified as held for sale as of June 30, 2022 and presented in a separate line item of the balance sheet in accordance with IFRS 5. The assets and liabilities held for sale have been recognized at a lower of their carrying amount and fair value less expected costs of disposal. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Disclosures on the interim consolidated financial statements 1. Sales revenue S T R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 2 2 Passenger Cars and Light Commercial Commercial Power Financial Volkswagen € million Vehicles Vehicles Engineering Services Total Segments Reconciliation Group Vehicles 75,692 10,848 – – 86,540 –6,771 79,768 Genuine parts 7,352 3,253 – – 10,605 –76 10,529 Used vehicles and third-party products 5,831 1,138 – 10,608 17,576 –1,857 15,719 Engines, powertrains and parts deliveries 5,750 415 – – 6,165 –35 6,129 Power Engineering – – 1,632 – 1,632 0 1,631 Motorcycles 457 – – – 457 – 457 Leasing business 310 850 0 8,177 9,338 –595 8,743 Interest and similar income 119 1 – 4,064 4,184 –207 3,977 Hedges sales revenue –903 –11 – – –914 –22 –936 Other sales revenue 5,363 1,120 – 371 6,855 –586 6,269 99,971 17,613 1,632 23,220 142,436 –10,151 132,285 S T R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 2 1 Passenger Cars and Light Commercial Commercial Power Financial Volkswagen € million Vehicles Vehicles Engineering Services Total Segments Reconciliation Group Vehicles¹ 78,974 8,633 – – 87,607 –7,875 79,732 Genuine parts 6,344 1,816 – – 8,160 –67 8,093 Used vehicles and third-party products¹ 6,110 857 – 10,717 17,684 –1,784 15,899 Engines, powertrains and parts deliveries 5,928 366 – – 6,294 –28 6,266 Power Engineering – – 1,581 – 1,581 0 1,581 Motorcycles 438 – – – 438 – 438 Leasing business¹ 411 819 0 7,647 8,876 –882 7,994 Interest and similar income 99 3 – 3,910 4,013 –133 3,880 Hedges sales revenue –26 –22 – 0 –48 25 –23 Other sales revenue¹ 4,756 932 – 367 6,055 –247 5,808 103,033 13,404 1,581 22,642 140,660 –10,992 129,669 1 Beginning in the fourth quarter of fiscal year 2021, all sales of used vehicles that were presented in the vehicles, leasing business and other sales revenue line items in the previous year were allocated to the used vehicles and third-party products line item. Previously, for example, the transfer of a leased vehicle from the lessee had been reported in the leasing business line item. Prior-year figures were adjusted accordingly. Other sales revenue comprises revenue from workshop services and license revenue, among other things. 45 46 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 2. Cost of sales Cost of sales includes interest expenses of €1,228 million (previous year: €968 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on capitalized development costs, property, plant and equipment, and lease assets. The impairment losses totaled €385 million (previous year: €496 million); they are mostly recognized in other operating expenses and in cost of sales. 3. Research and development costs H1 € million 2022 2021 % Total research and development costs 9,289 7,735 20.1 of which: capitalized development costs 4,762 3,710 28.4 Capitalization ratio in % 51.3 48.0 Amortization of capitalized development costs 2,493 2,494 x Research and development costs recognized in profit or loss 7,019 6,520 7.7 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since there were no transactions in the reporting period that had a dilutive effect on the number of shares, diluted earnings per share are equivalent to basic earnings per share. In accordance with Article 27(2) No. 3 of the Articles of Association of Volkswagen AG, preferred shares are entitled to a €0.06 higher dividend than ordinary shares. Q2 H1 2022 2021 2022 2021 Weighted average number of: Ordinary shares – basic/diluted Shares 295,089,818 295,089,818 295,089,818 295,089,818 Preferred shares – basic/diluted Shares 206,205,445 206,205,445 206,205,445 206,205,445 Earnings after tax € million 3,914 5,040 10,638 8,454 Noncontrolling interests € million 23 46 63 81 Earnings attributable to Volkswagen AG hybrid capital investors € million 150 134 279 269 Earnings attributable to Volkswagen AG shareholders € million 3,741 4,860 10,296 8,104 of which: basic/diluted earnings attributable to ordinary shares € million 2,202 2,861 6,053 4,763 of which: basic/diluted earnings attributable to preferred shares € million 1,539 1,999 4,242 3,341 Earnings per ordinary share – basic/diluted € 7.46 9.70 20.51 16.14 Earnings per preferred share – basic/diluted € 7.46 9.70 20.57 16.20 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A R Y 1 A N D J U N E 3 0 , 2 0 2 2 Additions/ Changes in Carrying amount consolidated Disposals/ Depreciation Carrying amount € million at Jan. 1, 2022 Group Other changes and amortization at June 30, 2022 Intangible assets 77,689 5,562 –408 3,042 80,616 Property, plant and equipment 63,695 4,463 –556 5,976 62,738 Lease assets 59,699 11,658 5,319 5,270 60,768 6. Inventories € million June 30, 2022 Dec. 31, 2021 Raw materials, consumables and supplies 9,546 9,331 Work in progress 7,126 6,559 Finished goods and purchased merchandise 27,024 22,201 Current lease assets 5,229 5,291 Prepayments 375 344 Hedges on inventories –6 –2 49,295 43,725 It was not necessary to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2022 Dec. 31, 2021 Trade receivables 18,401 15,521 Miscellaneous other receivables and financial assets 25,446 21,675 43,847 37,195 In the period January 1 to June 30, 2022, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €725 million (previous year: €166 million). 47 48 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 8. Equity The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par value preferred shares, and amounts to €1,283 million (previous year: €1,283 million). In February 2022, Volkswagen AG called a hybrid note (maturity: 7 years) with a principal amount of €1,100 million, which had been placed in 2015 via Volkswagen International Finance N.V., Amsterdam, the Nether- lands (issuer). Once called, the note had to be classified as debt in accordance with IAS 32, thus reducing the equity and net liquidity of the Volkswagen Group. The hybrid note was redeemed on March 21, 2022. From the hybrid capital issued on March 28, 2022, Volkswagen AG recorded a cash inflow of €2,250 million less transaction costs of €11 million. In addition, the recognition of deferred taxes led to noncash effects of €3 million. The hybrid capital is to be classified as equity granted. Most of the noncontrolling interests in equity are attributable to the TRATON GROUP. 9. Noncurrent financial liabilities € million June 30, 2022 Dec. 31, 2021 Bonds, commercial paper and notes 94,283 97,113 Liabilities to banks 26,296 25,904 Deposit business 2,551 2,588 Lease liabilities 5,115 5,137 Other financial liabilities 863 875 129,107 131,618 10. Current financial liabilities € million June 30, 2022 Dec. 31, 2021 Bonds, commercial paper and notes 37,056 38,503 Liabilities to banks 15,092 12,786 Deposit business 24,865 24,243 Lease liabilities 1,098 1,108 Other financial liabilities 529 1,944 78,640 78,584 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 11. Fair value disclosures Generally, the principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2021 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Financial assets and liabilities measured at fair value through profit or loss consist of derivative financial instruments to which hedge accounting is not applied. They include primarily commodity futures, currency forwards relating to commodity futures, call options on equity instruments as well as, in certain cases, interest rate swaps, currency swaps and cross-currency interest rate swaps. Moreover, other equity investments (shares representing an ownership interest of less than 20% as a rule) in partnerships (debt instruments), customer financing receivables whose returns contain more than just interest and principal repayments, and financial assets held in special funds controlled by the Volkswagen Group are measured at fair value through profit or loss. Derivative financial instruments to which hedge accounting is applied are measured at fair value either directly in equity or through profit or loss, depending on the underlying hedged item. Financial assets measured at fair value through other comprehensive income include equity investments (shares representing an ownership interest of less than 20% as a rule) in corporations (equity instruments) and shares for which the Volkswagen Group normally exercises the option of fair value measurement through other comprehensive income, as well as securities (debt instruments) whose cash flows comprise solely payments of interest and principal and that are held under a business model aimed at both collecting contractual cash flows and selling financial assets. For instruments measured through other comprehensive income, changes in fair value are recognized directly in equity, taking deferred taxes into account. Impairment losses on securities (debt instruments) are recognized through profit or loss. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and Level 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. R E CO N C I L I AT I O N O F B A L A N C E S H E E T I T E M S TO C L A S S E S O F F I N A N C I A L I N ST R U M E N T S The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting the carrying amount using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. The risk variables governing the fair value of the receivables are risk-adjusted interest rates. 49 50 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) R E C O N C I L I A T I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N S T R U M E N T S A S O F J U N E 3 0 , 2 0 2 2 DERIVATIVE NOT FINANCIAL ALLOCATED TO BALANCE MEASURED INSTRUMENTS A SHEET ITEM AT FAIR MEASURED AT AMORTIZED WITHIN HEDGE MEASUREMENT AT VALUE COST ACCOUNTING CATEGORY JUNE 30, 2022 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 15,290 15,290 Other equity investments 489 – – – 2,770 3,259 Financial services receivables 246 51,132 50,217 – 34,419 85,798 Other financial assets 4,488 4,953 4,865 2,504 – 11,945 Tax receivables – – – – 714 714 Current assets Trade receivables 5 18,396 18,396 – 0 18,401 Financial services receivables 26 39,534 39,534 – 19,339 58,899 Other financial assets 2,528 11,624 11,624 1,003 – 15,155 Tax receivables – 1 1 – 1,935 1,936 Marketable securities and time deposits 22,049 1,707 1,707 – – 23,756 Cash and cash equivalents – 33,921 33,921 – – 33,921 Assets held for sale – 107 107 – 225 332 Noncurrent liabilities Financial liabilities – 123,992 120,283 – 5,115 129,107 Other financial liabilities 1,151 2,376 2,389 3,697 – 7,223 Current liabilities Financial liabilities – 77,543 77,543 – 1,098 78,640 Trade payables – 27,878 27,878 – – 27,878 Other financial liabilities 1,229 11,221 11,221 2,702 – 15,152 Tax payables – 5 5 – 802 807 Liabilities associated with assets held for sale – 57 57 – 69 126 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements R E C O N C I L I A T I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N S T R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 2 1 DERIVATIVE NOT FINANCIAL ALLOCATED TO BALANCE MEASURED INSTRUMENTS A SHEET ITEM AT FAIR MEASURED AT AMORTIZED WITHIN HEDGE MEASUREMENT AT VALUE COST ACCOUNTING CATEGORY DEC. 31 , 2021 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 12,531 12,531 Other equity investments 760 – – – 2,240 3,000 Financial services receivables 290 50,146 51,326 – 34,519 84,954 Other financial assets 2,830 4,950 5,031 1,377 – 9,156 Tax receivables – – – – 635 635 Current assets Trade receivables 8 15,513 15,513 – – 15,521 Financial services receivables 26 37,204 37,204 – 19,268 56,498 Other financial assets 1,996 10,046 10,046 543 – 12,584 Tax receivables – 9 9 – 1,608 1,618 Marketable securities 22,495 37 37 – – 22,532 Cash, cash equivalents and time deposits – 39,723 39,723 – – 39,723 Assets held for sale – 142 142 – 532 674 Noncurrent liabilities Financial liabilities – 126,481 131,359 – 5,137 131,618 Other financial liabilities 728 2,419 2,437 1,320 – 4,466 Current liabilities Financial liabilities – 77,476 77,476 – 1,108 78,584 Trade payables – 23,624 23,624 – – 23,624 Other financial liabilities 1,009 10,112 10,112 1,880 – 13,002 Tax payables – 27 27 – 588 614 Liabilities associated with assets held for sale – 142 142 – 96 238 The category headed “not allocated to a measurement category” is used in particular for shares in equity- accounted investments, shares in non-consolidated affiliated companies as well as for lease receivables. The carrying amount of lease receivables was €53.8 billion (previous year: €53.8 billion) and their fair value was €53.5 billion (previous year: €54.8 billion). Due to increasing investments in long-term time deposits (maturities of more than 3 months), these time deposits are reported together with securities in the current fiscal year. 51 52 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The following tables contain an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D A T F A I R V A L U E B Y L E V E L € million June 30, 2022 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 489 175 0 314 Financial services receivables 246 – – 246 Other financial assets 4,488 – 2,791 1,697 Current assets Trade receivables 5 – – 5 Financial services receivables 26 – – 26 Other financial assets 2,528 – 1,988 540 Marketable securities and time deposits 22,049 21,969 79 – Noncurrent liabilities Other financial liabilities 1,151 – 1,038 113 Current liabilities Other financial liabilities 1,229 – 1,207 22 € million Dec. 31, 2021 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 760 579 0 181 Financial services receivables 290 – – 290 Other financial assets 2,830 – 1,477 1,353 Current assets Trade receivables 8 – – 8 Financial services receivables 26 – – 26 Other financial assets 1,996 – 1,733 263 Marketable securities 22,495 22,406 89 – Noncurrent liabilities Other financial liabilities 728 – 529 199 Current liabilities Other financial liabilities 1,009 – 905 104 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million June 30, 2022 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 2,504 – 2,504 – Current assets Other financial assets 1,003 – 1,003 – Noncurrent liabilities Other financial liabilities 3,697 – 3,697 – Current liabilities Other financial liabilities 2,702 – 2,702 – € million Dec. 31, 2021 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 1,377 – 1,377 – Current assets Other financial assets 543 – 543 – Noncurrent liabilities Other financial liabilities 1,320 – 1,320 – Current liabilities Other financial liabilities 1,880 – 1,880 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves, commodity prices and stock exchange prices of listed shares that are observable in the relevant markets and obtained through pricing services. Fair Values in Level 3 are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models, customer financing receivables and receivables from vehicle financing programs are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. The measurement of vehicle financing programs requires in particular the use of the corresponding vehicle price. 53 54 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) The table below provides a summary of changes in level 3 balance sheet items measured at fair value: C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D A T F A I R V A L U E B A S E D O N L E V E L 3 Financial assets Financial liabilities € million measured at fair value measured at fair value Balance at Jan. 1, 2022 2,119 303 Foreign exchange differences 86 –3 Total comprehensive income 995 –104 recognized in profit or loss 983 –104 recognized in other comprehensive income 12 – Additions (purchases) 114 – Sales and settlements –113 –49 Transfers into Level 2 –374 –12 Balance at June 30, 2022 2,827 135 Total gains or losses recognized in profit or loss 983 104 Net other operating expense/income 944 104 of which attributable to assets/liabilities held at the reporting date 477 115 Financial result 39 – of which attributable to assets/liabilities held at the reporting date 0 – Financial assets Financial liabilities € million measured at fair value measured at fair value Balance at Jan. 1, 2021 1,383 908 Foreign exchange differences 20 9 Changes in consolidated Group –158 – Total comprehensive income 712 –51 recognized in profit or loss 385 47 recognized in other comprehensive income 326 –99 Additions (purchases) 493 – Sales and settlements –104 –137 Transfers into Level 1 –333 – Transfers into Level 2 –184 –11 Balance at June 30, 2021 1,828 717 Total gains or losses recognized in profit or loss 385 –47 Net other operating expense/income 402 –47 of which attributable to assets/liabilities held at the reporting date 207 –30 Financial result –17 – of which attributable to assets/liabilities held at the reporting date – – Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2022, earnings after tax would have been €270 million (previous year: €262 million) higher (lower). Beyond that, equity would not be affected. The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values at June 30, 2022 had been 10% higher, earnings after tax would have been €6 million (previous year: €4 million) higher. If the assumed enterprise values as of June 30, 2022 had been 10% lower, earnings after tax would have been €6 million (previous year: €4 million) lower. Residual value risks result from hedging agreements with dealerships under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices of the used cars covered by the residual value protection model had been 10% higher as of June 30, 2022, earnings after tax would have been €444 million (previous year: €416 million) higher. If the prices of the used cars covered by the residual value protection model had been 10% lower as of June 30, 2022, earnings after tax would have been €483 million (previous year: €462 million) lower. If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points higher as of June 30, 2022, earnings after tax would have been €8 million (previous year: €2 million) lower. If the risk-adjusted interest rates as of June 30, 2022 had been 100 basis points lower, earnings after tax would have been €4 million (previous year: €2 million) higher. If the corresponding vehicle price used in the vehicle financing programs had been 10% higher as of June 30, 2022, earnings after tax would have been €9 million (previous year: €2 million) higher. If the corresponding vehicle prices used in the vehicle financing programs had been 10% lower as of June 30, 2022, earnings after tax would have been €9 million (previous year: €2 million) lower. If the result of operations of equity investments measured at fair value had been 10% better as of June 30, 2022, equity would have been €15 million (previous year: €6 million) higher, and earnings after tax would have been €4 million (previous year: €4 million) higher. If the result of operations of equity investments measured at fair value had been 10% worse, equity would have been 15 million (previous year: €6 million) lower, and earnings after tax would have been €4 million (previous year: €4 million) lower. 55 56 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. € million June 30, 2022 June 30, 2021 Cash, cash equivalents and time deposits as reported in the balance sheet 33,921 40,812 Cash and cash equivalents held for sale 33 326 Time deposits¹ –38 –278 Cash and cash equivalents as reported in the cash flow statement 33,916 40,860 1 As of June 30, 2022, time deposits with maturities of more than three months are presented in the securities and time deposits item in the balance sheet. Cash inflows and outflows from financing activities are presented in the following table: H1 € million 2022 2021 Capital contributions/Capital redemptions 1,262 –1,071 Dividends paid –4,258 –501 Proceeds from issuance of bonds 13,534 18,539 Repayments of bonds –14,014 –14,898 Changes in other financial liabilities –5,075 –2,859 Repayments of lease liabilities –658 –546 –9,210 –1,336 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own Board of Management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars and Light Commercial Vehicles segment cover the development of vehicles, engines and vehicle software, the production and sale of passenger cars and light commercial vehicles, and the corresponding genuine parts business. In the Passenger Cars and Light Commercial Vehicles reporting segment, the individual brands are combined into a single reportable segment, in particular as a response to the high degree of technological and economic interlinking in the production network. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of trucks and buses, the corresponding genuine parts business and related services. As in the case of the passenger car brands, there is collaboration within the areas procurement, development and sales. The aim is to create closer cooperation within the business areas. As from the second half of 2021, this segment also includes Navistar. The Power Engineering segment combines the large-bore diesel engines, turbomachinery and propulsion components businesses. The activities of the Financial Services segment comprise dealership and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, activities are combined for reporting purposes taking into particular account the comparability of the type of services and of the regulatory environment. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. R E P O R T I N G S E G M E N T S : H 1 2 0 2 2 Passenger Cars and Light Commercial Commercial Power Financial Total Volkswagen € million Vehicles Vehicles Engineering Services segments Reconciliation Group Sales revenue from external customers 91,677 17,045 1,631 21,754 132,107 178 132,285 Intersegment sales revenue 8,294 569 0 1,466 10,329 –10,329 – Total sales revenue 99,971 17,613 1,632 23,220 142,436 –10,151 132,285 Segment result (operating result) 10,528 618 129 3,102 14,377 –1,550 12,828 R E P O R T I N G S E G M E N T S : H 1 2 0 2 1 Passenger Cars and Light Commercial Commercial Power Financial Total Volkswagen € million Vehicles Vehicles Engineering Services segments Reconciliation Group Sales revenue from external customers 94,316 12,855 1,581 20,750 129,502 166 129,669 Intersegment sales revenue 8,717 549 0 1,892 11,158 –11,158 – Total sales revenue 103,033 13,404 1,581 22,642 140,660 –10,992 129,669 Segment result (operating result) 9,303 334 –14 2,517 12,141 –783 11,358 R E C O N C I L I A T I O N H1 € million 2022 2021 Segment result (operating result) 14,377 12,141 Unallocated activities 22 –18 Group financing –16 22 Consolidation/Holding company function –1,555 –786 Operating result 12,828 11,358 Financial result 1,206 –205 Consolidated earnings before tax 14,034 11,153 57 58 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) 14. Related party disclosures Porsche SE holds the majority of the voting rights in Volkswagen AG. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, 2009. This means that, even though it holds the majority of voting rights of Volkswagen AG, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE is therefore classified as a related party as defined by IAS 24. SUPPLIES AND SERVICES SUPPLIES AND SERVICES RENDERED RECEIVED H1 H1 € million 2022 2021 2022 2021 Porsche SE and its majority interests 1 2 0 0 Supervisory Board members 1 1 0 1 Unconsolidated subsidiaries 568 541 789 678 Joint ventures and their majority interests 8,050 8,978 325 348 Associates and their majority interests 181 174 791 651 State of Lower Saxony, its majority interests and joint ventures 6 1 5 2 LIABILITIES (INCLUDING RECEIVABLES OBLIGATIONS) FROM TO € million June 30, 2022 Dec. 31, 2021 June 30, 2022 Dec. 31, 2021 Porsche SE and its majority interests 0 2 0 1 Supervisory Board members 0 0 292 252 Unconsolidated subsidiaries 1,407 1,442 1,743 1,715 Joint ventures and their majority interests 14,325 12,303 2,288 2,029 Associates and their majority interests 650 533 1,233 965 State of Lower Saxony, its majority interests and joint ventures 274 232 2 2 The tables above do not contain the dividend payments (net of withholding tax) of €497 million (previous year: €1,471 million) received from joint ventures and associates. Receivables from joint ventures are primarily attributable to loans granted in an amount of €9,450 million (December 31, 2021: €8,756 million) as well as trade receivables in an amount of €4,250 million (December 31, 2021: €3,289 million). Receivables from non-consolidated subsidiaries also result primarily from loans granted in an amount of €859 million (December 31, 2021: €737 million) as well as trade receivables in an amount of €192 million (December 31, 2021: €344 million). Transactions with related parties are regularly conducted on an arm’s length basis. Some of these transactions also include reservation of title clauses. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €458 million (December 31, 2021: €391 million). Impairment losses of €43 million (previous year: €21 million) were recognized on the outstanding related party receivables. This incurred expenses of €27 million (previous year: €1 million) in the first half of 2022. Between January and June 2022, the Volkswagen Group made capital contributions of €2,187 million (previous year: €925 million) at related parties. The increase relates mainly to the acquisition of Europcar Mobility Group S.A. by GMH (see “Key events” section for more information). 15. Litigation Diesel issue 1. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The criminal investigation conducted by the Stuttgart Office of the Public Prosecutor against a member of the Board of Management of Dr. Ing. h.c. F. Porsche AG and others on suspicion of fraud and illegal advertising relating to the diesel issue has in the interim been terminated at the end of April 2022, as regards inter alia the Board of Management member, against payment of a sum set by the court. 2. Product-related lawsuits worldwide (excluding the USA/Canada) In Brazil, the plaintiff in the second pending consumer protection class action has appealed the trial court’s October 2021 judgment dismissing the complaint. In England and Wales, roughly 91 thousand claims of the group litigation against the Volkswagen Group were settled out of court for the sum of £ 193 million (€231 million) as well as a separate amount for attorney fees and other costs in May 2022. In the Netherlands, the court hearing the class action brought by the Diesel Emissions Justice Foundation (DEJF) rendered an interlocutory judgment in March 2022 holding the new class action regime – which permits damage awards in addition to declaratory judgment on the existence of claims – to be inapplicable to the instant lawsuit. The interlocutory judgment further finds that the Amsterdam court lacks jurisdiction to hear lawsuits brought by consumers outside the Netherlands. The DEJF has appealed this judgment. In Germany, the Bundesgerichtshof (BGH – Federal Court of Justice) rendered a judgment in June 2022 holding, in a case involving the damage claims of Swiss vehicle purchasers, that the assignment of claims to financialright GmbH was valid. The BGH did not address the merits of the claims. In July 2022, the European Court of Justice ruled that a so-called thermal window (i.e. a built-in temperature- dependent emissions control feature) in the range of 15°C and 33°C outside temperature represents a defeat device. In this context, the ECJ has developed a new, unwritten criterion according to which a thermal window, even if it serves to prevent sudden and extraordinary damage, is inadmissible if it is active for the “largest part of a year under the driving conditions which are actually prevailing in the European Union area.” Volkswagen is assessing the effects of this decision and is in discussion with the authorities. 3. Proceedings in the USA/Canada As to private civil law matters, the Superior Court of Quebec approved the settlement of an environmental class action lawsuit seeking punitive damages on behalf of the residents of the Province of Quebec in June 2022; an appeal of that approval on the limited subject of counsel fees is pending. 4. Special audit In the reporting period, Volkswagen AG has filed an action before the Braunschweig Regional Court against the special auditor appointed by the Celle Higher Regional Court; Volkswagen AG is seeking an injunction enjoining the special auditor from performing the audit as long as he has not furnished sufficient proof of his independence. 59 60 Notes to the Consolidated Financial Statements Interim Consolidated Financial Statements (Condensed) Additional important legal cases In April 2022, Scania filed an appeal with the European Court of Justice against the February 2022 judgment of the European General Court (Court of First Instance) in connection with the monetary fine imposed by the European Commission for the alleged illegal information exchange between certain truck manufacturers. In connection with the amended antitrust class action, which was initially dismissed with prejudice by the Northern District of California and which alleged that several automobile manufacturers, including Volkswagen AG and other Group companies, had conspired to unlawfully increase vehicle prices in violation of US antitrust and consumer protection law, the Ninth Circuit Court of Appeals in January 2022 dismissed plaintiffs’ motion (filed at the end of 2021) for a new hearing on the decision in which the court had affirmed the judgment of the US District Court. In February 2022, the District Court also denied plaintiffs’ motion to set aside its judgment and to be allowed to file a new complaint. In June 2022, the US Supreme Court definitively rejected the petition filed by the plaintiffs against this decision. In March 2022, the European Commission and the Competition and Markets Authority (CMA), the English antitrust authorities, searched the premises of various automotive manufacturers and automotive industry organizations and/or served them with formal requests for information. In the Volkswagen Group, the inves- tigation affects Volkswagen Group UK, which was searched by the CMA, and Volkswagen AG, which has received a Group-wide information request from the European Commission. The investigation relates to European, Japanese, and Korean manufacturers as well as national organizations operating in such countries and the European organization European Automobile Manufacturers' Association (ACEA), which are suspected of having agreed from 2001/2002 to the present to avoid paying for the services of recycling companies that dispose of end-of-life vehicles (ELV) (specifically passenger cars and vans up to 3.75 tons). Also alleged is an agreement to refrain from competitive use of ELV issues, that is, not to publicize relevant recycling data (recyclates, recyclability, recovery) for competitive purposes. The violation under investigation is alleged to have taken place in particular in the “ACEA” Working Group Recycling and related sub-groups thereof. Volkswagen AG has responded to the European Commission’s information request. Volkswagen Group UK is cooperating with the CMA. The final Profit Sharing Settlement Agreement entered into by Navistar in December 2021 to resolve disputes concerning the calculation of profit sharing amounts for purposes of Navistar’s corporate retiree healthcare commitments received final approval from the relevant court in June 2022. Navistar has paid the entire amount of all remaining sums required to fulfill the agreement of about €0.4 billion. In line with IAS 37.92, no further statements have been made concerning estimates of the financial impact or regarding uncertainties as to the amount or maturity of provisions and contingent liabilities in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Company. Beyond these events, there were no significant changes in the reporting period compared with the disclosure on the Volkswagen Group’s expected development in fiscal year 2022 contained in the combined management report of the 2021 Annual Report in the sections “Report on Expected Developments” and “Report on Risks and Opportunities”, including in section “Legal Risks”. Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 16. Contingent liabilities Driven in particular by the inclusion of additional legal and product-related items and of currency translation effects, contingent liabilities went up to €10.9 billion, an increase of €1.2 billion compared with the 2021 consolidated financial statements. 17. Other financial obligations Other financial obligations were virtually unchanged compared with the 2021 consolidated financial statements at €35.7 billion. Significant events after the balance sheet date There were no events with a significant effect on the net assets, financial position and results of operations after June 30, 2022. Wolfsburg, July 26, 2022 Volkswagen Aktiengesellschaft The Board of Management 61 62 Responsibility Statement Interim Consolidated Financial Statements (Condensed) Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim consolidated financial statements prepared in accordance with German accepted accounting principles give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group for the remaining months of the fiscal year. Wolfsburg, July 26, 2022 Volkswagen Aktiengesellschaft The Board of Management Interim Consolidated Financial Statements (Condensed) Review Report To VOLKSWAGEN AKTIENGESELLSCHAFT We have financial statements of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, – comprising the condensed income statement, condensed statement of comprehensive income, condensed balance sheet, condensed statement of changes in equity, condensed cash flow statement as well as selected explanatory notes – and the interim group management report for the period from 1 January 2022 to 30 June 2022, which are part of the half-year financial report pursuant to Sec. 115 WpHG [“Wertpapierhandelsgesetz”: German Securities Trading Act]. The preparation of the condensed interim consolidated financial statements in accordance with IFRSs (International Financial Reporting Standards) on interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the Company’s executive directors. Our responsibility is to issue a report on the condensed interim consolidated financial statements and the interim group management report based on our review. reviewed the condensed interim consolidated We conducted our review of the interim condensed consolidated financial statements and of the interim group management report in compliance with German Generally Accepted Standards for the Review of Financial Statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] ( IDW). Those standards require that we plan and perform the review to obtain a certain level of assurance in our critical appraisal to preclude that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU and that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. A review is limited primarily to making inquiries of company personnel and applying analytical procedures and thus does not provide the assurance that we would obtain from an audit of financial statements. In accordance with our engagement, we have not performed an audit and thus cannot issue an auditor’s report. Based on our review, nothing has come to our attention that causes us to believe that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU or that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. Hanover, 27 July 2022 Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft Meyer Wirtschaftsprüfer [German Public Auditor] Matischiok Wirtschaftsprüfer [German Public Auditor] Review Report 63 64 Selected terms at a glance Hybrid notes Hybrid notes issued by Volkswagen are classi- fied in their entirety as equity. The issuer has call options at defined dates during their perpetual maturities. They pay a fixed coupon until the first possible call date, followed by a variable rate depending on their terms and conditions. Modular Electric Drive Toolkit (MEB) The modular system is for the manu- facturing of electric vehicles. The MEB establishes parameters for axles, drive systems, high-voltage batteries, wheel- bases and weight ratios to ensure a vehicle optimally fulfills the requirements of e-mobility. The production of the first vehicles based on the MEB started into series production in 2020. Plug-in hybrid Performance levels of hybrid vehicles. Plug-in hybrid electric vehicles (PHEVs) have a larger battery with a correspond- ingly higher capacity that can be charged via the combustion engine, the brake system, or an electrical outlet. This increases the range of the vehicle. Premium Platform Electric (PPE) A new vehicle platform for all-electric premium, sport and luxury class vehicles. The components and functions of this platform are especially tailored to meet the high demands of this segment. This platform enables high synergies to be achieved particularly between the Audi, Porsche and Bentley brands. Glossary Capitalization ratio The capitalization ratio is defined as the ratio of capitalized development costs to total research and development costs in the Automotive Division. It shows the proportion of primary research and development costs subject to capitalization. Equity ratio The equity ratio measures the percentage of total assets attributable to shareholders’ equity as of a reporting date. This ratio indicates the stability and financial strength of the company and shows the degree of financial indepen- dence. Gross margin Gross margin is the percentage of sales revenue attributable to gross profit in a period. Gross margin provides information on profitability net of cost of sales. Net cash flow Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities. Net liquidity Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, loans and time deposits not financed by third-party borrowings. To safeguard our business activ- ities, we have formulated the strategic target that net liquidity in the Automotive Division should amount to approximately 10% of the consolidated sales revenue. Operating result Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in finan- cial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and docu- ments the economic success of our core busi- ness. Operating return on sales The operating return on sales is the ratio of the operating result to sales revenue. Ratio of capex to sales revenue The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized develop- ment costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure – largely for modernizing and expanding our product range and for environ- mentally friendly drivetrains, as well as for adjusting the production capacity and improving production processes – in relation to the Auto- motive Division’s sales revenue. Research and development ratio The research and development ratio (R&D ratio) in the Automotive Division shows total research and development costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology through to the development of marketable products. Particular emphasis is placed on the environmentally friendly orientation of our product portfolio. The R&D ratio underscores the efforts made to ensure the Company’s future viability: the goal of competitive profit- ability geared to sustainable growth. Return on sales before tax The return on sales is the ratio of profit before tax to sales revenue in a period, expressed as a percentage. It shows the level of profit gener- ated for each unit of sales revenue. The return on sales provides information on the profit- ability of all business activities before deducting income tax expense. Contact Information P U B L I S H E D B Y Volkswagen AG Group Financial Publications Letterbox 1848 38436 Wolfsburg Germany Phone +49 (0) 5361 9 0 Fax +49 (0) 5361 9 28282 I N V E STO R R E L AT I O N S Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany E-Mail Internet www.volkswagenag.com/en/InvestorRelations.html investor.relations@volkswagen.de F I N A N C I A L C A L E N D A R October 27, 2022 Interim Report January – September 2022 This Interim Report is also available on the Internet, in German and English, at: www.volkswagenag.com/en/InvestorRelations.html 258.809.612.20

Semestriel, 2022, Auto, Volswagen

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Volswagen

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Half-Yearly Financial Report January - June 2023 1 U P DAT E D I N FO R M ATI O N 6 I NT E R I M M ANAG E ME NT R E P O RT 3 4 BRAN D S AN D BUSI N E SS F I E L DS 3 8 I NT E R I M CO NSOL I DAT E D FI NANCI AL STAT E M E NT S (CO N DE NSE D) 1 Key Facts 2 Group News 6 Volkswagen Shares 8 Business Development 21 Results of Operations, Finan- cial Position and Net Assets 32 Outlook 38 Income Statement 39 Statement of Comprehensive Income 42 Balance Sheet 43 Statement of Changes in Equity 44 Cash Flow Statement 45 Notes to the Interim Consolidated Financial Statements 72 Responsibility Statement 73 Review Report Key Figures VOLKSWAGEN GROU P Q 2 H 1 2023 20221 % 2023 20221 % Volume Data2 in thousands Deliveries to customers (units) 2,332 1,977 +18.0 4,372 3,875 +12.8 Vehicle sales (units) 2,324 2,011 +15.5 4,448 4,006 +11.0 Production (units) 2,418 2,116 +14.3 4,691 4,160 +12.8 Employees (on June 30, 2023/Dec. 31, 2022) 673.9 675.8 –0.3 Financial Data (IFRSs), € million Sales revenue 80,059 69,500 +15.2 156,257 132,211 +18.2 Operating result before special items 5,600 4,722 +18.6 11,347 13,180 –13.9 Operating return on sales before special items (%) 7.0 6.8 7.3 10.0 Special items – –230 x 0 –360 x Operating result 5,600 4,491 +24.7 11,347 12,820 –11.5 Operating return on sales (%) 7.0 6.5 7.3 9.7 Earnings before tax 5,446 5,139 +6.0 11,898 14,055 –15.3 Return on sales before tax (%) 6.8 7.4 7.6 10.6 Earnings after tax 3,791 3,912 –3.1 8,521 10,655 –20.0 Automotive Division3 Total research and development costs 5,135 4,930 +4.2 10,206 9,289 +9.9 R&D ratio (%) 7.7 8.5 7.8 8.5 Cash flows from operating activities 6,161 7,803 –21.0 13,737 13,604 +1.0 Cash flows from investing activities attributable to operating activities4 5,936 7,002 –15.2 11,267 11,311 –0.4 of which: capex 3,162 2,385 +32.6 5,620 4,089 +37.5 capex/sales revenue (%) 4.7 4.1 4.3 3.7 Net cash flow 226 801 –71.8 2,470 2,293 +7.7 Net liquidity at June 30 33,627 28,209 +19.2 1 Prior-year figures adjusted (see disclosures on IFRS 17). 2 Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method. Prior-year deliveries have been updated to reflect subsequent statistical trends. 3 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 4 Excluding acquisition and disposal of equity investments: Q2 €5,700 (4,846) million, H1 €10,654 (8,694) million. This document is an English translation of the original report written in German. In case of discrepancies, the German version shall take precedence. All figures shown in the report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period. Specified vehicle ranges correspond to results obtained through the Worldwide Harmonized Light Vehicles Test Procedure (WLTP) on the chassis dynamometer. WLTP value ranges for series- produced vehicles may vary depending on the equipment. The actual range will deviate in practice depending on various other factors. Updated Information Key Facts > Deliveries to Volkswagen Group customers increase to 4.4 (3.9) million vehicles in the first half of 2023; growth in nearly every region worldwide, especially Western Europe; Asia-Pacific at prior-year level > Deliveries of all-electric vehicles to customers up by 48.1%; their share of the Group’s total deliveries lies at 7.4 (5.6)% > Group sales revenue amounts to €156.3 billion, 18.2% more than in the first half of 2022 > Operating result down year-on-year at €11.3 (12.8) billion; effects from the fair value measurement of derivatives to which hedge accounting is not applied of €–2.5 (+0.9) billion; improvements particularly in volumes and price positioning > Earnings before tax decrease to €11.9 (14.1) billion; earnings after tax fall by €2.1 billion to €8.5 billion > Automotive Division’s net cash flow improves to €2.5 (2.3) billion; capex ratio of 4.3 (3.7)% > Net liquidity in the Automotive Division amounts to €33.6 billion; includes cash outflows from dividend payments totaling around €11 billion 1 Key Facts Updated Information Group News N EW PRODUCTS AN D TECH NOLOGI ES The Volkswagen Group and its brands presented new vehicles and technologies once again in the second quarter of 2023. In April 2023, the Volkswagen Passenger Cars brand celebrated the world premiere of the new ID.7, its first global electric model in the upper mid-sized class. Measuring almost five meters in length, the aero- dynamic and comfortable long-distance saloon is the first model using the Modular Electric Drive Toolkit (MEB) to feature an all-new, highly efficient generation of powertrain: the 210 kW (286 PS) electric motor is the most powerful unit with the highest ever torque fitted to a Volkswagen ID. model so far. Depending on the battery size, the vehicle can achieve ranges of up to 700 km, making the ID.7 suitable for the long distances covered particularly by frequent drivers and fleet customers. Assistance systems such as Travel Assist (featuring swarm data) and Side Assist further increase driver convenience, along with a Park Assist system that enables the vehicle to be parked using a smartphone app. The ID.7 is the first vehicle to use a new control and display concept, which is based around a 15-inch infotainment system and an augmented reality head-up display. With air-conditioned massage seats and an innovative panorama roof, the ID.7 also offers optional equipment otherwise only found in the premium segment: the smart glass panoramic roof can be electronically switched between opaque and transparent via a touch control. A 700-watt sound system from Harman Kardon rounds off the range of options. The ID.7 is due to launch this year on the European and Chinese markets. Introduction in North America is planned for 2024. The Volkswagen Passenger Cars brand has upgraded the third-generation Touareg with an extensive update. The premium segment SUV’s suspension, as well as the display and control system, have been revised, and the design of the front and rear ends has been honed even further. The newly developed HD matrix headlights are a particularly striking feature at the front: more than 38,000 interactive LEDs project an exact carpet of light onto the driving lane, precisely illuminating the road ahead. As a first on a vehicle available in Germany, the LED rear lights, arranged as a band of light, incorporate the Volkswagen logo illuminated in red. The Touareg comes with a wide range of comfort and assistance systems as standard. Optional features include Travel Assist for assisted driving up to the maximum speed, Park Assist with remote control via an app, Trailer Assist and a Night Vision assistance system. The new Touareg is available in five powertrain versions. In addition to a turbocharged petrol engine, there is a choice of two turbodiesels and two plug-in hybrids. The Touareg R eHybrid is the top-of-the-range model. A V6 petrol engine plus electric motor offers a system output of 340 kW (462 PS), making this the most powerful version. CUPRA unveiled its all-electric Tavascan SUV coupé to the global public in April 2023. The model is based on the Volkswagen Group’s MEB platform. The exterior design delivers athletic, sporty proportions, while the front stands out with LED matrix headlights that create a triangular eye signature. DCC Sport dynamic 2 Group News Updated Information chassis technology, sport suspension and progressive steering along with performance tyres mounted on 21-inch forged alloy wheels make for a sporty driving experience. The Tavascan will be available with two power outputs: the 210 kW (286 PS) version has an electric range of up to 549 km. The higher-output version with dual-motor all-wheel drive and 250 kW (340 PS) of power can cover up to 517 km. Inside, the Tavascan features a 15-inch infotainment system – the largest yet in a CUPRA model. For the first time, the vehicle also integrates a high-fidelity 12-speaker sound system developed in collaboration with premium audio firm Sennheiser. CUPRA has also announced that its UrbanRebel Concept – an urban electric car – will enter series production in 2025 as the CUPRA Raval. Porsche has crowned its mid-engined 718 model line with a sports car designed for maximum driving pleasure: the new 718 Spyder RS is the open-top counterpart to the 718 Cayman GT4 RS. This is the first open-top, mid-engined sports car to use the 368 kW (500 PS) naturally aspirated six-cylinder boxer engine from the 911 GT3. With its unusually light, purist-pleasing manual soft-top roof, the 718 Spyder RS makes the highly evocative sound of the engine an even more compelling experience. This is underpinned by the lightweight stainless steel sports exhaust system as standard and the distinctive side air inlets behind the headrests. In addition, Porsche has thoroughly refined its successful luxury SUV. The new Cayenne is making its debut with a highly digitalized display and control concept, new chassis technology and innovative high- tech features. High-definition matrix LED headlights provide road illumination tailored to every driving situation. An air quality system filters pollutants from the air in the interior, and for the first time in the Cayenne, front passengers have their own infotainment display – allowing them to stream videos during the trip, for example. With its extensively refined design and more powerful engine range, the Cayenne is underlining its claim to be the epitome of the sport utility vehicle. The sports car manufacturer also caused a stir with an innovative concept car: the Mission X is a spectacular reinterpretation of a two-seater hyper- car with doors that open forwards and upwards and a high-performance, efficient electric powertrain. It symbolizes the symbiosis of motorsport DNA with a luxurious overall feel and will provide critical impetus for the development of future vehicle concepts. Measuring approximately 4.5 meters long and 2 meters wide, the Mission X is a relatively compact hypercar. For aerodynamic purposes, the concept car has mixed- size tyres, with 20-inch wheels at the front and 21-inch wheels on the rear axle. In June 2023, the Volkswagen Commercial Vehicles brand celebrated the world premiere of the long- wheelbase ID. Buzz. The additional 250 mm of wheelbase length provides space for a third row of seats, up to 2,469 liters of luggage compartment capacity and a new, larger battery for even more range. The large ID. Buzz will launch with a brand new 210 kW (286 PS) electric motor. An all-wheel-drive GTX version with 250 kW (339 PS) of power has been announced for 2024. New interior features include a head-up display, an updated infotainment system and remote-controlled parking via smartphone. The new panoramic sunroof with smart glass brings back memories of the legendary Samba Bus from the 1950s. At 1.5 square meters, it is the largest glass roof ever to be fitted in a Volkswagen vehicle. The smart glass can be changed from transparent to opaque using a touch slider or voice assistant. AWARDS In early June 2023, readers of the Auto Bild Allrad motoring magazine chose two CUPRA models as their all- wheel-drive cars of the year 2023. The Formentor was crowned overall winner in the all-terrain and SUV category for vehicles priced between €40,000 and €50,000. The Leon Sportstourer VZ won the import rankings in the all-wheel-drive cars up to €50,000 category. Readers could choose from over 200 vehicles in ten categories. Also in June 2023, the British magazine Auto Trader from the automotive trading company of the same name presented its “New Car Awards 2023”. The Bentley Bentayga won the Best Luxury Car category. Porsche was named Most Loved Brand for the third time in a row. Over 220,000 readers voted for the 23 awards in total. 3 Group News Updated Information In the 35th Robb Report “Best of the Best Awards” in June 2023, the Bentley Continental GT S won in the Best Grand Tourer category. The award was Bentley’s fifth victory in the comparative test by the American luxury lifestyle magazine. The first “Auto Elektro Trophy 2023” organized by the Auto Zeitung motor magazine in late June 2023 saw awards for several Volkswagen Group models. The Volkswagen Passenger Cars brand’s ID.4 won the best electric SUV up to €50,000 category. In the import rankings for this category, the ŠKODA Enyaq iV took first place. The ID.3 won the overall rankings in the best electric city cars, small cars and compacts category, while the CUPRA Born topped the same category in the import rankings. CUPRA also surpassed its com- petitors in the import rankings for the category of most sustainable car brand. Volkswagen Commercial Vehicles triumphed in the best electric van category with the ID. Buzz. Audi won the overall rankings in the electric saloons category with the e-tron GT. Readers could choose from a total of 70 models and 43 brands in five vehicle categories. AN N IVERSARI ES At the end of April 2023, the 500,000th battery system was manufactured at ŠKODA’s main plant in Mladá Boleslav. The location produces battery systems for both MEB vehicles and for models with plug-in hybrid drive. Lamborghini has been marking its 60th company anniversary since the beginning of May 2023. The sports car manufacturer has been combining its passions for innovation, style and performance since the very beginning. To commemorate the anniversary, Lamborghini is releasing a special-edition Huracán STO, Huracán Tecnica and Huracán EVO Spyder, each limited to 60 units and with exclusive features. The anni- versary year will also be celebrated with numerous international events. At the end of May 2023, Audi México’s San José Chiapa plant hit the production milestone of one million vehicles. This is the first plant in Mexico to produce premium segment vehicles and employs over 5,000 people. The seven millionth vehicle left the Volkswagen Slovakia plant in Bratislava in mid-June 2023. This mile- stone was celebrated with a presentation at the FUN DAY Festival for employees and their families. The milestone vehicle was a Volkswagen Touareg in limited-edition matt paintwork. The Volkswagen Group achieved another milestone in June 2023 with the delivery of one million electric vehicles based on the Modular Electric Drive Toolkit (MEB). The MEB platform has already been used for more than 50% of all electric vehicles delivered by the Group. Since September 2020, the number of plants around the world producing MEB models now stands at eight. Volkswagen Poznań celebrated its 30th anniversary in late June 2023. Since production launched, more than four million vehicles have been produced at the three Polish sites and are now sold in 55 countries. The four production facilities employ more than 9,500 people. CAPITAL MARKETS DAY 2023 At the Capital Markets Day in June 2023, the Volkswagen Group presented a new leadership model that emphasizes more customer orientation, entrepreneurship and team spirit. The “value over volume” prin- ciple prioritizes sustainable value creation over volume growth. As part of this, the brand groups are being given a new steering model along with an enhanced product range and brand positioning. The realignment also included a renaming of the brand groups: Volume has become Core, Premium is now called Progressive, Sport & Luxury has changed to Sport Luxury and Truck & Bus to Trucks. A strategic return on sales target has been set for each Group brand as well as for the technology platforms PowerCo and CARIAD. Each brand will be responsible for pursuing these targets with structured performance programs. To enable the brands to leverage economies of scale from the technology platforms to the maximum, the technology areas – architecture, battery, software and mobility services – are to be restructured. 4 Group News Updated Information VOLKSWAGEN GROU P IMPROVES ESG RATI NG In June 2023, the Volkswagen Group achieved an improvement in its external sustainability rating from the rating agency ISS ESG. The new rating of C+ compares with a C in 2022. The ESG (Environmental, Social, Governance) rating looks at ESG indicators that reflect a company’s measurable performance and its progress in these three areas. The rating makes Volkswagen one of the six best-scoring automotive companies overall. VFL WOLFSBURG FO OTBALLERS ARE N EW RECORD CU P WI N N ERS Footballers from VfL Wolfsburg won their ninth women’s DFB-Pokal (German football cup) final in a row in front of more than 44,000 fans in Cologne in May 2023. With this win, the VfL women notched up their tenth cup victory in 11 years, making them the most successful women’s cup-winning team ever. Their success underscores the important role that they play as brand ambassadors for Volkswagen: the VfL Wolfs- burg women’s team stands in particular for the values of diversity, affinity, professionalism and team spirit. AN N UAL GEN ERAL MEETI NG Volkswagen AG’s 63rd Annual General Meeting took place in person at the CityCube in Berlin on May 10, 2023. Around 56% of the share capital was represented at the meeting. The shareholders agreed to the proposal by the Board of Management and Supervisory Board to pay a higher dividend for fiscal year 2022 than in the previous year, amounting to €8.70 (7.50) per ordinary share and €8.76 (7.56) per preferred share. Furthermore, the Annual General Meeting approved the actions of the members of the Board of Manage- ment and Supervisory Board for fiscal year 2022. The shareholders also approved changes to the remune- ration system for the Board of Management and to the Supervisory Board remuneration. The Annual General Meeting appointed Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft as auditors and Group auditors for fiscal year 2023 and for the review of the condensed interim consolidated financial statements and of the interim management report for the first half of 2023 and of the condensed interim consolidated financial statements and interim management report for the period from January 1 to September 30, 2023 and for the first quarter of fiscal year 2024. Dr. Günther Horvath was elected to the Supervisory Board to succeed Dr. Louise Kiesling, who has passed away in December 2022. Dr. Wolfgang Porsche and Ms. Marianne Heiß were elected to the Board for a further term of office. Among other matters, the shareholders also approved the amendment to the Articles of Association to be able to hold the Annual General Meeting in a virtual format in future. BOARD OF M ANAGEMENT AN D SU PERVISORY BOARD M ATTERS On June 29, 2023, the Supervisory Board of Volkswagen AG appointed Dr. Gernot Döllner in his new func- tion of Chair of the Board of Management of AUDI AG as a member of the Volkswagen Group Board of Management with effect from September 1, 2023. He will succeed Mr. Markus Duesmann, who is leaving the Group Board of Management and stepping down as Chair of the Board of Management of AUDI AG as of the same date. Effective July 11, 2023, Ms. Karina Schnur, Chair of the Group Works Council at TRATON SE and Chair of the General and Group Works Councils at MAN Truck & Bus SE, was appointed by the court as a member of the Supervisory Board of Volkswagen AG. She succeeds Ms. Simone Mahler, who stepped down from her post effective May 31, 2023. 5 Group News Interim Management Report Volkswagen Shares Volkswagen Shares In the first half of 2023, the international stock markets initially continued their upward trend that had begun in October 2022. However, market developments were overshadowed by further interest rate hikes imposed by the national central banks to rein in persistently high inflation. What is more, the crisis in the international banking sector triggered by the higher interest rates deeply unsettled the financial markets, a situation that was exacerbated among other things by the debt ceiling debate in the United States and recession fears. Subsequently stock prices came under pressure during the further course and only recovered at the end of the reporting period. The German stock market index (DAX) got off to a tremendous start in 2023, surpassing the 2022 year- end closing price. Driven by falling gas prices, declining inflation rates and improved leading economic indicators, sentiment initially improved with hopes that the economic downturn might be smaller than expected. As the quarter continued, stock prices were hit by further interest rate hikes on the part of the European Central Bank in light of continued high inflationary pressure. The DAX transitioned into sideways movement. As the year went on, the turbulence at several international banks triggered by rising interest rates and the US debt ceiling dispute had an adverse effect on share prices. Despite difficult market conditions, the benchmark index rose to a new record in the second quarter; however, this level proved to be unsustainable, with the result that the sideways trend remained around the mark of 16,000 points until the end of the half-year. The prices of Volkswagen AG’s preferred and ordinary shares initially developed very positively at the beginning of the reporting period. The sound results for the 2022 fiscal year, the dividend proposed for 2022 and an ambitious outlook for 2023 caused a temporary rally. However, the capital market was skepti- cal about the high levels of capital required for the Company’s transformation and the intensifying compe- tition in the automotive sector. Price cuts by competitors and the question as to how other automotive manufacturers would react led to investor uncertainty. The assessment by market participants regarding the Group’s dependence on developments in China also weighed on the share price. At the end of the first half of 2023, preferred shares were up 5.6% and ordinary shares were up 3.6% on their year-end 2022 values. Information and explanations on earnings per share can be found in the notes to the interim consoli- dated financial statements. Additional Volkswagen share data, plus corporate news, reports and presenta- tions, is available on our website www.volkswagen-group.com/en/investors-15766. 6 Interim Management Report PRICE DEVELOPMENT FROM DECEMBER 2022 TO JUNE 2023 Index based on month-end prices: December 31, 2022 = 100 Volkswagen ordinary share Volkswagen preferred share DAX EURO STOXX Automobiles & Parts 140 120 100 80 D F M A M J A S O VOLKSWAGEN SHARE KEY FIGU RES AN D MARKET I N DICES F ROM JAN UARY 1 TO J U N E 30, 2023 High Low Ordinary share Price (€) 181.65 140.40 Date Mar. 3 May 31 Preferred share Price (€) 142.20 116.52 Date Mar. 3 May 17 DAX Price 16,358 14,069 Date Jun. 16 Jan. 2 ESTX Auto & Parts Price 630 522 Date Mar. 6 Jan. 2 7 Volkswagen Shares +3.6% +5.6% +16.0% +21.9% N D Closing 152.90 Jun. 30 122.94 Jun. 30 16,148 Jun. 30 617 Jun. 30 Interim Management Report Business Development Business Development GEN ERAL ECONOMIC DEVELOPMENT The Russia-Ukraine conflict led to increased uncertainty in relation to developments in the global economy and prompted large sections of the community of Western states to impose sanctions on Russia, ranging from extensive trade embargoes to the partial exclusion of Russia from the global financial system. Russia itself, in its role as an energy exporter, restricted deliveries to Europe, particularly deliveries of gas. Although calm began to return to the energy and commodity markets in recent months, some raw material prices remain comparatively elevated. Furthermore, salary trends in the overheated labor markets, among other factors, pose the threat of continued high inflation. Following the slump in global economic output in 2020, the incipient recovery due to baseline and catch-up effects in 2021 and further normalization of economic activity in 2022 despite the Russia-Ukraine conflict, economic growth continued to recover in the reporting period on average, albeit with diminishing momentum compared with the prior year. This was mainly due to weaker growth in the advanced econ- omies, whereas the rate of change in the emerging markets remained virtually the same overall. At national level, developments depended on the one hand on the intensity with which central banks had to tighten monetary policy to curb the higher inflation – mainly by raising interest rates and scaling back bond- buying – which had a negative impact on consumer spending and investment activity. On the other hand, the extent to which national economies were affected by the consequences of the Russia-Ukraine conflict was a decisive factor. Prices for energy and many other raw materials were lower than in the previous year, and shortages of intermediate products and commodities eased somewhat. Global trade in goods expressed in nominal terms decreased in the reporting period. The economy in Western Europe recorded positive but lower growth in the first half of 2023, as in the same period of the previous year. This trend was seen in many countries in Northern and Southern Europe. The main reasons for this were the in some cases momentarily significant increases in energy and com- modity prices, which had substantially pushed up inflation rates in the previous year and thus had a negative impact on consumer confidence. The recovery in consumer sentiment in the European Union that commenced in the second half of 2022 continued at a low level in the reporting period, while the mood among companies progressively darkened. In addition, the restrictive monetary policy measures taken to rein in inflation impacted on both consumer spending and investment. Germany registered negative economic growth in the reporting period. Compared with the same period of the prior year, the seasonally adjusted unemployment figures rose on average. After reaching historically high levels in 2022, monthly inflation rates fell though stayed relatively high. 8 Interim Management Report Business Development EXCHANGE RATE MOVEMENTS FROM DECEMBER 2022 TO JUNE 2023 Index based on month-end prices: as of December 31, 2022 = 100 EUR to GBP EUR to USD EUR to CNY EUR to JPY 115 110 105 100 95 D F M A M J A S O N D The economies in Central and Eastern Europe recorded growth in real gross domestic product (GDP) overall in the first six months of 2023, that was lower compared with the prior-year period. While economic output in Central Europe developed at a comparatively low positive rate, GDP in the Eastern Europe region rose again in the second quarter of 2023 for the first time since the outbreak of the Russia-Ukraine conflict versus the same period of the previous year. Inflation rates across the entire Central and Eastern Europe region declined on average in the reporting period, but remained at a high level. In the first half of 2023, Türkiye’s economy achieved a rate of GDP growth that was weaker than in the previous year, amid very high inflation and depreciation of the local currency. South Africa recorded a slight positive change in economic output amid persistent structural deficits and political challenges. Gross domestic product in the USA increased year-on-year in the reporting period while at the same time, the rate of growth slowed. Given the high inflation and the tight labor market, the US Federal Reserve maintained its restrictive monetary policy, raising its key interest rate seven times in 2022 and three more times in the first half of 2023. Unemployment remained at a low level in the reporting period. In Canada and Mexico, economic output was also higher than in the same period of 2022. Brazil’s economy achieved somewhat weaker growth in the 2023 reporting period than in the previous year, combined with declining monthly inflation rates. Argentina saw economic output growing slower on the whole year-on-year amid very high inflation and the continued collapse of the currency. China’s economic output rose faster in the reporting period compared to the prior-year period, posi- tively influenced by the repeal of the zero-Covid strategy. India registered positive but weaker economic growth year-on-year. Japan also recorded a positive albeit low GDP growth rate compared with the same period of the previous year. 9 Interim Management Report Business Development TREN DS I N TH E M ARKETS FOR PASSENGER CARS AN D LIGHT COMMERCIAL VEH ICLES In the first half of 2023, the volume of the global passenger car market was noticeably above the compara- tive figure for 2022 at 36.5 million vehicles (+9.2%). The performance of the largest passenger car markets was positive, due among other things to the weak prior-year figures. While the supply situation for inter- mediates improved compared with 2022, particularly the consequences of the Russia-Ukraine conflict and pull-forward effects generated by state subsidies expiring at the end of the previous year dampened the trend in new registrations in individual markets. Significant growth was recorded in the overall markets of the Western Europe, Middle East and North America regions. The markets of the Central and Eastern Europe, South America and Asia-Pacific regions were slightly to noticeably higher than the prior-year level. The market in Africa fell significantly short of the prior-year volume. In the first half of 2023, the global volume of new registrations for light commercial vehicles was significantly higher (+15.5%) than in the previous year. In Western Europe, the number of new passenger car registrations in the first half of the 2023 reporting year increased significantly year-on-year by +17.9% to 6.0 million vehicles. The performance of the large individual passenger car markets was positive across the board: France (+15.4%), United Kingdom (+18.4%), Italy (+22.7%) and Spain (+23.2%) all exceeded the levels recorded in the first half of 2022 by a significant to strong degree. The volume of new registrations for light commercial vehicles in Western Europe in the reporting period was significantly higher than for the same period of the previous year (+13.5%). At 1.4 million, the total number of new passenger car registrations in Germany in the first six months of 2023 was significantly higher than the weak prior-year level (+12.9%). Disruption in global logistic chains restricted vehicle availability at the beginning of the year. More recently, parts availability improved further, giving a boost to domestic production. Production in Germany in the first half of 2023 rose to 2.2 million vehicles (+32.4%) and passenger car exports grew to 1.7 million units (+32.5%). Sales of light commercial vehicles in Germany in the first six months of 2023 were significantly higher than the 2022 figure, recording an increase of 17.2%. In the Central and Eastern Europe region, the volume of the passenger car market rose noticeably (+5.2%) after the severe slump in 2022 as a whole. However, the pace of growth varied in the individual markets. After the weak prior-year figures, a significant recovery could be observed in Central Europe, specifically in the Czech Republic (+16.8%) and Poland (+12.1%). In the first half of 2023, the market volume of light commercial vehicles in Central and Eastern Europe was noticeably down on the prior-year level (–6.7%). The volume of the passenger car market in Türkiye at the end of the reporting period was 54.5% above the figure for the first half of 2022. The South African passenger car market fell slightly short of the prior- year level (–0.6%), while the Africa region as a whole registered a significant decline (–10.8%). The volume of new registrations of light commercial vehicles in Türkiye rose by 47.3% in the first six months of 2023 on the comparable 2022 figure; South Africa recorded strong growth (+21.5%). Sales of passenger cars and light commercial vehicles (up to 6.35 tonnes) in the North America region rose significantly in the first half of 2023 to 9.2 million vehicles (+12.8%). Within this region, the market volume in the USA also grew significantly to 7.7 million units (+12.6%). The Canadian automotive market registered a noticeable increase in sales figures to 812 thousand units (+8.1%) in the reporting period, while new registrations of passenger cars and light commercial vehicles in Mexico saw a sharp rise to 633 thousand vehicles (+22.1%) compared with the prior-year period. In the South America region, the volume of new passenger car and light commercial vehicle registrations was at 1.7 million units in the first six months of 2023, slightly more than in the comparative prior-year period (+2.0%). The positive growth trend that had commenced in the previous year tapered off during the 10 Interim Management Report Business Development reporting period. In Brazil, the number of new registrations was noticeably higher than the level for the prior-year period at 935 thousand units (+9.6%). In the Argentinian market, demand for passenger cars and light commercial vehicles rose significantly by +13.5% to 222 thousand units. In the Asia-Pacific region, the volume of the passenger car market in the first half of 2023 was noticeably higher than the previous year’s figure at 16.7 million units (+5.7%). The trend in demand for passenger cars in the region was largely determined by developments in the Chinese passenger car market. Here, state subsidies and incentive programs expired at the end of 2022, causing pull-forward effects in vehicle pur- chases and consequently reducing the number of vehicle registrations at the beginning of 2023. Demand initially recovered as the period went on, due for example to discounts and new regional incentive pro- grams, but weakened again at the end of the reporting period. Overall, the volume of demand in China totaled 9.8 million units, slightly above the level of the first half of 2022 (+3.3%). In India, passenger car sales rose significantly by 10.3% compared with the prior-year period, increasing to 1.9 million units. New registrations in the Japanese passenger car market in the reporting period were also up significantly year- on-year at 2.1 million units (+18.6%). The volume of demand for light commercial vehicles in the Asia-Pacific region in the first six months of 2023 was significantly above the level for the prior-year period (+16.4%). Registration volumes in China, the region’s dominant market and the largest market worldwide, experienced a very strong rise of +31.5% com- pared to the prior year. The number of new vehicle registrations in India was on a level with the previous year (0.0%); in Japan this figure was significantly up on the previous year (+10.3%). TREN DS I N TH E M ARKETS F OR COMMERCIAL VEH ICLES In the markets that are relevant for the Volkswagen Group, global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes was significantly higher in the reporting period than in the same period of 2022. Truck markets globally were strongly up on the previous year’s level. This was due to an improved situation in global supply chains and the very strong recovery in China, the world’s largest truck market, following the end of the country’s zero-Covid strategy. Sales volume in the 27 EU states excluding Malta, but plus the United Kingdom, Norway and Switzerland (EU27+3), was significantly higher in the first six months of 2023 than in the prior year. The shortages in parts supplies have largely been overcome. New registrations in Germany, the largest market in this region, rose strongly. Demand on the UK and French markets was significantly up on the prior year. Türkiye recorded a very sharp increase in new registrations compared with the previous year. Demand was up noticeably in the South African market. The truck market in North America is divided into weight classes 1 to 8. In the segments relevant for Volkswagen – Class 6 to 8 (8.85 tonnes or heavier) – new registrations were up strongly on the previous year’s figure. In Brazil, the largest market in the South America region, demand for trucks in the first half of 2023 was significantly down on the previous year’s level due to the introduction of a new emissions standard at the beginning of 2023. In the first half of 2023, there was a very strong rise in demand overall in the bus markets that are relevant for the Volkswagen Group compared with the same period of the prior year. Demand for buses in the EU27+3 markets in the reporting period was up significantly on the level of the previous year, with the picture varying from country to country. The school bus segment in the US and Canada delivered a much stronger performance than in the prior year. Demand for buses in Mexico was also much stronger than in the previous year. In Brazil, demand also increased and was up very strongly on the prior-year figure. 11 Interim Management Report Business Development TREN DS I N TH E M ARKETS FOR POWER ENGI N EERI NG The markets for power engineering are influenced by varying regional and economic factors. Consequently, the business growth trends of the respective markets develop mostly independently of one another. The marine market remained below the prior-year level in the first half of 2023. This is especially attri- butable to a decline in demand in merchant shipping as a result of higher ship prices and long waiting times due to high shipyard utilization rates. In this segment, the market for container ships, LNG tankers and bulk cargo carriers in particular saw a year-on-year decline, while the market for tankers recorded a positive trend. The market for cruise ships and passenger ferries declined in the reporting period. The special market for government vessels, which is funded by state investment, continued to be active due to the current geopolitical situation. In the offshore sector, the existing overcapacity continued to curb invest- ment in offshore oil production. The uncertainty regarding future fuel and emissions regulations persisted in the marine market in the first six months of 2023, but in general a clear trend towards new fuel technologies was confirmed. There was reticence in the market for energy generation in the first half of 2023, particularly in Europe. This was due to the gas supply issues and the continued lack of a finalized framework for power plant oper- ation on the part of policymakers. The current focus on the development of renewable energy sources indicated the potential level of demand for grid balancing facilities. Such facilities are used to meet power requirements if the share of renewables is not sufficient to ensure security of supply. Demand for power-to- methane plants developed very positively. In the engines segment, there is a continuously rising demand for flexible dual-fuel engines. There is also a clear demand on the market for engines that can be converted for use with synthetic fuels such as hydrogen and green ammonia. Demand for new energy solutions such as hydrogen and long-term energy storage continued to be strong, with a clear trend towards greater flex- ibility and decentralized availability. However, in addition to the risks of a lack of price stability in the markets and bottlenecks in supply chains, the strong competitive and price pressure continued unabated in the reporting period. Movement on the turbomachinery market was at a higher level than in the first half of 2022. The consis- tently high prices for raw materials led to stable demand for production facilities with turbo compressors in the raw materials and processing industry. Sales of turbo compressors for oil and gas production were bolstered by the persistently high supply insecurity and were up year-on-year. The new business fields for turbomachinery used in the area of decarbonization remained constant. Demand for steam turbines used for power generation and gas turbines used for decentralized, industrial combined-heat-and-power instal- lations was higher than in the previous year. In the first six months of 2023 the after-sales market for engines in the marine and power plant busi- ness was at the same high level as in the previous year. The high demand in the after-sales market for turbomachinery seen in the first quarter of the year continued in the second quarter and was up on the prior-year level. TREN DS I N TH E M ARKETS F OR FI NANCIAL SERVICES Demand for automotive financial services was at a high level in the first half of 2023; however, higher interest rates put pressure on demand for financial services in almost all regions. The European passenger car market was still affected by shortages in the reporting period. Vehicle deliv- eries nevertheless increased and were up on the prior-year period. Demand for financial services products also grew; however, as a percentage of vehicle deliveries, the figure was down on the equivalent figure for 2022. The positive trend in the financing of used vehicles continued. The sale of after-sales products such as servicing, maintenance and spare parts agreements continued to expand. 12 Interim Management Report Business Development In Germany, persistent challenges presented by parts supply in vehicle production and by logistics chains continued to impact vehicle sales and the financial services business. Nevertheless, the increase in deliveries of new vehicles led to a higher volume of both leasing and financing contracts in the first half of 2023. New vehicle penetration was down on the comparative figure for 2022, however. New contracts for used vehicles exceeded the previous year’s levels. The number of new after-sales contracts also increased and was above the 2022 level in the reporting period. The number of new contracts in the insurance busi- ness was also higher year-on-year. The Turkish market was influenced by very high inflation and very difficult, short-term refinancing. To minimize interest rate risks, interest-bearing financial services business was conducted in a manner that was very restrictive. Meanwhile, the sale of lease returns developed positively. In South Africa, financed vehicle purchases remained difficult due to the subdued economic conditions, higher vehicle prices, increased energy prices and limited energy availability. The South African central bank raised its key interest rate again in May 2023. This was the tenth rate hike in a row, causing borrowing costs to rise to their highest level since May 2009. Vehicle deliveries in the North America region improved year-on-year in the first half of 2023. New vehicle penetration in the USA and Canada was above the previous year’s level. In Mexico, meanwhile, the penetra- tion of leasing and financing contracts declined. The absolute number of new contracts for leasing, financing and after-sales products in the region as a whole was higher than the figures for the first half of 2022. In the South America region, the positive growth trend in the volume of new vehicle sales continued, albeit at a slower pace in some cases. The market for financial services benefited from increased deliveries and the economic recovery. Argentina continued to record excess demand, exacerbated by limited supply due to restrictions on imports. Higher interest rates, high inflation and the continued collapse of the cur- rency increased the proportion of cash purchases; however, the level of financing contracts was stable. In Brazil, there was an increase in the number of new financing contracts. On the Chinese automotive market, demand for automotive financial services began to recover. Sales of electric vehicles continued to rise, resulting in higher demand for associated financing and leasing prod- ucts in the reporting period. In Japan, there was a positive trend in demand for automotive financial services. A relatively low interest rate by international comparison and attractive financial service offerings in many places were key features of this market. The financial services business in the market for heavy commercial vehicles was slightly up on the prior- year level in the first half of 2023. The lengthy delivery times for commercial vehicles are gradually begin- ning to return to normal. The borrowing habits of commercial vehicle customers changed due to rising interest rates: the decision on financing is moving closer to the time of vehicle delivery as customers speculate on interest rates falling. VOLKSWAGEN GROU P DELIVERI ES The Volkswagen Group delivered 4,372,216 vehicles to customers worldwide in the first half of 2023. This was 12.8% or 497,217 units more than in the same period of the previous year, which had suffered in partic- ular from the limited availability of Group models caused by the continued shortage of semiconductors, and from the Russia-Ukraine conflict. Parts supply shortages continued to have an adverse effect in the reporting period. In addition, disruptions in logistics chains had a negative effect; however, this effect diminished in the course of the reporting period. Sales of both passenger cars and commercial vehicles were up year-on-year. The chart in this section shows the trend in deliveries worldwide for the individual months compared with the previous year. 13 Interim Management Report Business Development In the following, we report separately on deliveries in the Passenger Cars Business Area and the Commercial Vehicles Business Area. VOLKSWAGEN GROU P DELIVERI ES FROM JAN UARY 1 TO J U N E 30 1 2023 2022 % Passenger Cars 4,203,944 3,737,703 +12.5 Commercial Vehicles 168,272 137,296 +22.6 Total 4,372,216 3,874,999 +12.8 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. GLOBAL DELIVERI ES BY TH E PASSENGER CARS BUSI N ESS AREA Sales of Volkswagen Group passenger cars and light commercial vehicles worldwide in the first six months of 2023 increased by 12.5% year-on-year to 4,203,944 units. The previous year had suffered in particular from the limited availability of Group models due to the continued shortage of semiconductors, and from the Russia-Ukraine conflict. Parts supply shortages continued to have an adverse effect in the reporting period. In addition, disruptions in logistics chains had a negative effect; however, this effect diminished in the course of the reporting period. With the exception of Bentley, all Volkswagen Group brands delivered more vehicles to customers than in the same period of 2022. Whilst we recorded sales in the Asia-Pacific region at about the same level as the prior-year, sales exceeded the prior-year figures in all other sales regions. The Group’s e-mobility campaign continued to move ahead successfully: we delivered 321,610 all- electric vehicles to customers worldwide in the first six months of this year. This was 104,383 units or 48.1% more than in the same period of the previous year. Their share of the Group’s total deliveries rose to 7.4 (5.6)%. A total of 115,399 of our plug-in hybrid models (+8.1%) were delivered to customers. As a result, total electric vehicle deliveries went up by 34.9% and their share of total Group deliveries rose year-on-year to 10.9 (8.4)%. The Group’s most successful all-electric vehicles included the ID.3 and ID.4 from the Volks- wagen Passenger Cars brand, the Audi Q4 e-tron and Audi Q8 e-tron, the ŠKODA Enyaq iV, the CUPRA Born and the Porsche Taycan and Taycan Cross Turismo. In an overall global market experiencing noticeable growth, we achieved a passenger car market share of 11.0 (10.7)%. The table that follows in this section provides an overview of passenger car and light commercial vehicle deliveries to customers by market in the reporting period. Sales trends in the individual markets are described below. Deliveries in Europe/Other Markets In Western Europe, the Volkswagen Group delivered 1,579,298 vehicles to customers in the first six months of this year in an overall market that was at a significantly higher level than in the previous year. This was 26.1% more than in the weak prior-year period, which had suffered in particular from the limited avail- ability of Group models caused by the continued shortage of semiconductors, and from the Russia-Ukraine conflict. Parts supply shortages continued to have an adverse effect in the reporting period. In addition, disruptions in logistics chains had a negative effect; however, this effect diminished in the course of the reporting period. Customer interest in the Volkswagen Group’s electrified vehicles was strongest in Western Europe, where we delivered almost two-thirds of our all-electric models to customers in the first half of 2023. Their share of Group deliveries in this region was 12.7 (9.6)%. The Group models with the highest sales volume were the T-Roc, Tiguan, Polo and Golf from the Volkswagen Passenger Cars brand. Other models that saw encouraging demand included the ID.4, Taigo, ID.3 and Passat from Volkswagen Passenger 14 Interim Management Report Business Development VOLKSWAGEN GROUP DELIVERIES BY MONTH Vehicles in thousands 2023 2022 1,100 1,000 900 800 700 600 500 400 F M A M J A S O N D Cars, the Octavia Combi, Kodiaq and Kamiq from ŠKODA, the Arona and Ibiza from SEAT, the CUPRA Formentor and CUPRA Born, A3 Sportback, A1 Sportback and Q2 from Audi, as well as the Porsche Macan and the Porsche Cayenne. In addition, the following new or successor models introduced to the market during the previous year proved very popular with customers: the ID.5 from Volkswagen Passenger Cars, the ŠKODA Karoq and the ID. Buzz from Volkswagen Commercial Vehicles. The Volkswagen Passenger Cars brand also successfully introduced the ID.3 to the market as a successor model during the reporting period. The Volkswagen Group’s share of the passenger car market in Western Europe rose to 24.1 (22.5)%. In Germany, 553,052 vehicles were delivered to Volkswagen Group customers between January and June 2023 in an overall market registering significant growth; this was up 18.3% on the weak prior-year period, which had suffered in particular from the limited availability of Group models attributable to the continued shortage of semiconductors, and from the Russia-Ukraine conflict. Parts supply shortages continued to have an adverse effect in the reporting period. In addition, disruptions in logistics chains had a negative effect; however, this effect diminished in the course of the reporting period. The Group models with the highest sales volume were the T-Roc, Passat and Tiguan from the Volkswagen Passenger Cars brand. Models for which there was stronger demand included the ID.4 and ID.3 from the Volkswagen Passenger Cars brand, the ŠKODA Octavia Combi, the CUPRA Born and CUPRA Leon, and the A4 Avant, A6 Avant, A1 Sportback, Q2 and Q4 e-tron from Audi. In addition, the following new models introduced to the market during the previous year proved very popular with customers: the ID.5 from Volkswagen Passenger Cars and the ID. Buzz from Volkswagen Commercial Vehicles. Six Group models led the Kraftfahrt- Bundesamt (KBA – German Federal Motor Transport Authority) registration statistics in their respective segments: the Golf, T-Roc, Tiguan, Audi A6, Porsche 911 and Multivan/Transporter. The Golf was again the most popular passenger car in Germany in terms of registrations in the first six months of 2023. In the Central and Eastern Europe region, the number of Volkswagen Group vehicles handed over to customers in the reporting period was up 10.7% year-on-year. The overall market experienced noticeable growth in the same period. Demand developed encouragingly for a number of models, including the Taigo from Volkswagen Passenger Cars, as well as for the ŠKODA Octavia and ŠKODA Kamiq. The Volkswagen Group’s share of the passenger car market in the Central and Eastern Europe region rose to 22.3 (21.4)%. In Türkiye, the Volkswagen Group delivered almost 50% more vehicles to customers between January and June 2023 than in the prior-year period in an overall market experiencing very strong growth. The T-Roc from Volkswagen Passenger Cars was the most sought-after Group model. In the South African market, the number of Group models sold decreased by 4.5%, while the overall market experienced a slight 15 Interim Management Report Business Development contraction. The Polo from the Volkswagen Passenger Cars brand remained the best-selling Group model in this region. Deliveries in North America In North America, the number of Volkswagen Group models delivered to customers in the reporting period increased by 12.7% year-on-year. The overall market grew at a comparable pace in this period. The Group’s share of the market in this region amounted to 4.5 (4.5)%. The Tiguan Allspace and Taos from Volkswagen Passenger Cars as well as the Audi Q5 were the most sought-after Group models in North America. The share of all-electric vehicles in the Group’s total deliveries in this region rose to 7.6 (4.7)%. From January to June 2023, the Volkswagen Group delivered 11.5% more vehicles to customers in the sig- nificantly expanding US market than in the same period of the previous year, in which parts supply shortages in particular had likewise had an adverse effect. The Group models to record the greatest increases in absolute terms included the ID.4 from Volkswagen Passenger Cars as well as the Audi Q5 and the Audi A5 Sportback. In addition, the Audi Q7 and the Porsche Macan performed encouragingly. In Canada, the number of deliveries to Volkswagen Group customers increased by 14.9% year-on-year in the reporting period. The overall market recorded noticeable growth during this period. The Group models with the highest volume of demand were the Tiguan Allspace from the Volkswagen Passenger Cars brand and the Audi Q5. In Mexico, where the overall market is seeing strong growth, we delivered 16.7% more vehicles to cus- tomers in the first six months of this year than in the prior-year period. Demand developed encouragingly for a number of models, among them the Taos, Virtus and Jetta from Volkswagen Passenger Cars. Deliveries in South America In the South American market for passenger cars and light commercial vehicles, which was slightly up on the prior-year level, the number of Group models handed over to customers between January and June 2023 increased by 24.4% year-on-year. The Polo, T-Cross and Nivus from Volkswagen Passenger Cars were the Group models with the highest sales volumes. The Group’s share of the market in South America rose to 11.5 (9.4)%. Compared with the previous year, the Volkswagen Group delivered 44.2% more vehicles to customers in the first six months of 2023 in the Brazilian market, which recorded noticeable growth. The development of the sales of the Polo, Saveiro and Virtus models from Volkswagen Passenger Cars was particularly encour- aging. In Argentina, the number of Group models sold in the reporting period increased by 19.1% in com- parison with the previous year in an overall market that was undergoing significant growth. Group models with the highest sales volume were the Taos from Volkswagen Passenger Cars and the Amarok from Volkswagen Commercial Vehicles. Deliveries in the Asia-Pacific region In the first six months of 2023, the Volkswagen Group saw sales in the Asia-Pacific region, an overall market that experienced noticeable growth, at about the same level as the preceding year (-0.1%). The Group’s share of the passenger car market in this region amounted to 9.7 (10.2)%. China’s overall market recorded slight growth in the reporting period compared with the previous year, in which parts supply shortages, in particular of semiconductors, and local lockdowns intended to curb the spread of the Omicron variant of the SARS-CoV-2 virus had already had an adverse effect. The Volkswagen Group delivered 1.3% fewer vehicles to customers there than in the preceding year. In addition to parts supply shortages, the increasing intensity of competition had a negative impact in the reporting period. The number of all-electric vehicles delivered to customers in China was 1.6% lower year-on-year at 62,416 units. New or successor models introduced during the previous year – the Sagitar, Tayron, Lamando and Tavendor from the Volkswagen Passenger Cars brand and the Q4 e-tron, A7 saloon, Q5 e-tron and Q6 from the Audi brand – were among those showing a positive trend. Other models that saw encouraging demand 16 Interim Management Report Business Development included the Passat, Magotan, Tiguan Allspace, Polo and ID.3 from the Volkswagen Passenger Cars brand, the Audi A6 saloon, Audi Q7 and Audi A5 Sportback, and the Porsche Panamera and Porsche Macan. Successor models introduced to the market in the reporting period included the Tharu and T-Roc from Volkswagen Passenger Cars. In the Indian passenger car market, which grew significantly, the Volkswagen Group sold 0.9% fewer vehicles in the first six months of this year than in the prior-year period. The Taigun from the Volkswagen Passenger Cars brand as well as the Kushaq from ŠKODA were the most sought-after Group models there. In addition, the Virtus from Volkswagen Passenger Cars and the Kodiaq from ŠKODA, which were introduced as new or successor models to the market during the previous year, saw an encouraging development in demand. In Japan, the number of Group models delivered to customers between January and June 2023 increased by 1.5% year-on-year in a significantly expanding overall market. The Group models with the highest sales volume were the T-Cross and the T-Roc from the Volkswagen Passenger Cars brand. PASSENGER CAR DELIVERI ES TO CUSTOMERS BY M ARKET FROM JAN UARY 1 TO J U N E 30 1 D E L I V E R I E S ( U NI T S ) C H A N G E 2023 2022 (%) Europe/Other Markets 1,980,515 1,596,781 +24.0 Western Europe 1,579,298 1,252,119 +26.1 of which: Germany 553,052 467,627 +18.3 France 128,537 103,414 +24.3 United Kingdom 238,460 171,639 +38.9 Italy 144,219 113,165 +27.4 Spain 129,149 103,137 +25.2 Central and Eastern Europe 240,009 216,906 +10.7 of which: Czech Republic 61,960 52,006 +19.1 Russia 2,573 34,402 –92.5 Poland 69,634 51,595 +35.0 Other Markets 161,208 127,756 +26.2 of which: Türkiye 74,881 50,206 +49.1 South Africa 32,959 34,518 –4.5 North America 410,541 364,206 +12.7 of which: USA 293,035 262,845 +11.5 Canada 48,559 42,260 +14.9 Mexico 68,947 59,101 +16.7 South America 196,009 157,601 +24.4 of which: Brazil 143,768 99,722 +44.2 Argentina 27,319 22,944 +19.1 Asia-Pacific 1,616,879 1,619,115 –0.1 of which: China 1,450,663 1,469,106 –1.3 India 48,044 48,482 –0.9 Japan 29,588 29,138 +1.5 Worldwide 4,203,944 3,737,703 +12.5 Volkswagen Passenger Cars 2,224,704 2,076,009 +7.2 ŠKODA 432,173 360,496 +19.9 SEAT 261,434 204,121 +28.1 Volkswagen Commercial Vehicles 198,731 153,630 +29.4 Audi 907,111 785,099 +15.5 Lamborghini 5,341 5,090 +4.9 Bentley 7,096 7,398 –4.1 Porsche 167,354 145,860 +14.7 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures. 17 Interim Management Report Business Development COMMERCIAL VEH ICLE DELIVERI ES Between January and June 2023, the Volkswagen Group delivered 22.6% more commercial vehicles to cus- tomers worldwide than in the same period of the previous year. We handed over a total of 168,272 commer- cial vehicles to customers in the first half of the year. Trucks accounted for 140,001 units (+21.6%) and buses for 14,848 (+15.2%). Deliveries of the MAN TGE van series amounted to 13,423 (+44.6%). In the 27 EU states excluding Malta, but including the United Kingdom, Norway and Switzerland (EU27+3) sales from January to June 2023 were up by 49.5% on the same period of the previous year and amounted to a total of 76,196 units, of which 60,261 were trucks and 2,749 were buses. Deliveries of the MAN TGE van series amounted to 13,186 vehicles. In the first six months of the year, deliveries in Türkiye rose to 2,795 vehicles. Trucks accounted for 2,609 units and buses for 109 units, while 77 vehicles from the MAN TGE van series were sold. In South Africa, deliveries of Volkswagen Group commercial vehicles amounted to 2,317 units, a very strong increase com- pared with the previous year; of this figure 2,103 units were trucks and 214 were buses. Sales in North America rose in the first half of 2023 to 48,192 vehicles, of which 40,321 were trucks and 7,871 were buses. Deliveries in South America declined to a total of 25,280 vehicles (–29.1%) in the reporting period; 22,185 of these were trucks and 3,095 were buses. Due to the introduction of a new emissions standard at the beginning of 2023, sales in Brazil were down by 29.2% in the first half of the year, falling to 20,161 units. Of the units delivered, 17,663 were trucks and 2,498 were buses. In the Asia-Pacific region, the Volkswagen Group sold 6,040 vehicles to customers in the reporting period including 5,609 trucks and 395 buses. Overall, this was 24.5% more than in the previous year. COMMERCIAL VEH ICLE DELIVERI ES TO CUSTOMERS BY M ARKET F ROM JAN UARY 1 TO J U N E 30 1 D E L I V E R I E S ( U NI T S ) C H A N G E 2023 2022 (%) Europe/Other Markets 88,760 59,236 +49.8 of which: EU27+3 76,196 50,956 +49.5 of which: Germany 22,267 13,032 +70.9 Türkiye 2,795 1,476 +89.4 South Africa 2,317 1,774 +30.6 North America 48,192 37,579 +28.2 of which: USA 37,886 30,094 +25.9 Mexico 7,635 5,158 +48.0 South America 25,280 35,631 –29.1 of which: Brazil 20,161 28,479 –29.2 Asia-Pacific 6,040 4,850 +24.5 Worldwide 168,272 137,296 +22.6 Scania 46,450 36,834 +26.1 MAN 55,999 34,785 +61.0 Navistar 45,791 37,333 +22.7 Volkswagen Truck & Bus 20,032 28,344 –29.3 1 Prior-year deliveries have been updated to reflect subsequent statistical trends. 18 Interim Management Report Business Development DELIVERI ES I N TH E POWER ENGI N EERI NG SEGMENT Orders in the Power Engineering segment are usually part of major investment projects. Lead times typi- cally range from just under one year to several years, and partial deliveries as construction progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new con- struction business. In the period from January to June 2023, sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated more than three- quarters of overall sales revenue. VOLKSWAGEN GROU P FI NANCIAL SERVICES The activities in the Financial Services Division cover the Volkswagen Group’s dealer and customer finan- cing, leasing, banking and insurance activities, fleet management and mobility services. The division comprises Volkswagen Financial Services and the financial services activities of Scania, Navistar and Porsche Holding Salzburg and also extends to the contracts concluded by our international joint ventures. The Financial Services Division's products and services were popular in the first half of 2023. However, limited vehicle availability caused by parts supply shortages and disruptions in logistics chains weighed on demand. The number of new financing, leasing, service and insurance contracts signed worldwide increased by 8.1% to 4.5 million. The ratio of leased and financed vehicles to Group deliveries (penetration rate) in the Financial Services Division’s markets stood at 33.6 (33.1)% in the reporting period. The total number of contracts on June 30, 2023 was 24.2 (24.5) million. At 3.3 million, the number of new contracts signed was up 8.4% on the previous year’s figure in the Europe/Other Markets region even though the financial services business was impacted by limited vehicle availability in the period from January to June 2023. The total number of contracts as of June 30, 2023 was 17.9 (18.1) million, putting it on a level with the figure for December 31, 2022. The customer financing/ leasing area was responsible for 7.1 (7.2) million of these contracts. The number of new contracts signed in North America in the reporting period increased year-on-year to 481 (371) thousand. At 3.0 (3.0) million, the number of contracts at the end of June was on a level with the end of the previous year. The customer financing/leasing area recorded 1.6 (1.7) million contracts. In the South America region, 242 (156) thousand new contracts were concluded in the first half of 2023. Compared with December 31, 2022, the total number of contracts at the end of the reporting period rose to 882 (828) thousand. The existing contracts mainly related to the customer financing/leasing area. The number of new contracts signed in the Asia-Pacific region from January to June declined to 502 (613) thousand, falling short of the comparative prior-year figure. The total number of contracts at the end of June 2023 was 2.5 (2.6) million. The customer financing/leasing area was responsible for 1.6 (1.6) million of these contracts. 19 Interim Management Report Business Development SALES TO TH E DEALER ORGAN IZATION In the first half of 2023, the Volkswagen Group’s unit sales to the dealer organization rose year-on-year by 11.0% to 4,447,828 units (including the equity-accounted companies in China). In the prior-year period, limited vehicle availability caused by parts supply shortages that were attributable in part to the Russia- Ukraine conflict had had an adverse effect. Persistent parts supply shortages had a negative impact in the reporting period as did disruption in the global logistics chains, although this disruption reduced as the year progressed. Unit sales outside Germany rose by 9.8% to 3,867,802 vehicles. Growth was recorded in particular in the United Kingdom, United States, Brazil and Türkiye, while unit sales in China declined. Unit sales in Germany increased by 19.6% year-on-year. Vehicles sold in Germany as a proportion of the Group’s overall sales increased to 13.0 (12.1)%. PRODUCTION The Volkswagen Group produced 4,690,719 vehicles (including the equity-accounted companies in China) from January to June 2023, 12.8% more than in the comparative prior-year period, which had seen pro- duction being halted due to the disruption of supply chains caused by the Russia-Ukraine conflict and the Covid-19 pandemic. Parts supply shortages also impacted production in the reporting period. Production in Germany increased by 37.6% to 1,081,348 vehicles. The proportion of the Group’s total production accounted for by Germany increased to 23.1 (18.9)%. I NVENTORI ES Global inventories of new vehicles at Group companies and in the dealer organization were higher at the end of the reporting period than at year-end 2022 and above the corresponding prior-year figure. The effect of disruption in the logistics chains continued to have a negative impact in the reporting period. EMPLOYEES The Volkswagen Group had 647,716 active employees on June 30, 2023. In addition, 12,034 employees were in the passive phase of their partial retirement and 14,130 young people were in vocational traineeships. At the end of the first half of 2023, the Volkswagen Group had a total of 673,880 employees worldwide, approximately the same level as at the end of 2022. A total of 294,173 people were employed in Germany (+0.1%), while the workforce outside Germany decreased to 379,707 (–0.6%), due mainly to the sale of OOO Volkswagen Group Rus, Kaluga/Russia. 20 Interim Management Report Results of Operations, Financial Position and Net Assets Results of Operations, Financial Position and Net Assets SCOUT MOTORS I NC. In 2022, Scout Motors Inc., Arlington, Virginia/USA, a wholly owned subsidiary of Volkswagen Finance Luxemburg, Strassen/Luxembourg, was established within the Volkswagen Group’s North America stra- tegy. A new vehicle brand is to be created under the name of SCOUT, under which electrified all-terrain vehicles and pickups will be distributed in the USA from 2026. In order to finance the creation of the SCOUT brand, as well as vehicle development and production planning, an amount of around USD 500 million is to be contributed to the company in 2023. By June 30, 2023, payments of USD 240 million had already been made. The company has been included in the Volkswagen consolidated financial statements since Janu- ary 1, 2023. I FRS 17 – I NSU RANCE CONTRACTS IFRS 17 specifies new accounting rules for insurance contracts. First-time application resulted in an insignificant change in equity as of January 1, 2023 and January 1, 2022, respectively. This is due primarily to the changed system for calculating provisions related to the insurance business. In addition, the netting of cash flows when measuring the provisions led to a reduction of €0.7 billion each in assets and provisions related to the insurance business as of January 1, 2023. The change in the system for recognizing income and expenses does not have any material effect on the income statement. Prior-year figures have been adjusted accordingly. SALE OF OOO VOLKSWAGEN GROU P RUS On May 18, 2023, the Volkswagen Group completed the sale of its shares in OOO Volkswagen Group Rus (Volkswagen Group Rus), Kaluga/Russia, and that company’s local subsidiaries (OOO Volkswagen Compo- nents and Services, Kaluga/Russia, OOO Scania Leasing, Moscow/Russia, OOO Scania Finance, Moscow/ Russia, OOO Scania Insurance, Moscow/Russia) to OOO ART-FINANCE, Moscow/Russia, which is supported by the Russian dealer AO Avilon Automotive Group, Moscow/Russia. On registration of the transaction on May 22, 2023, ownership of the shares in Volkswagen Group Rus was transferred from the seller to the buyer. The transaction comprises the production facilities in Kaluga, the importer network of the Group brands Volkswagen Passenger Cars, Volkswagen Commercial Vehicles, AUDI, ŠKODA, Bentley, Lamborghini and Ducati for possible after-sales business and the warehouse activities, as well as Scania’s financial services activities, including all associated employees. The Volkswagen Group had recognized significant impairment losses and corresponding provisions in this context back in 2022. The selling price is €125 million. The deconsolidation of the affected companies results in a loss of €0.4 billion in fiscal year 2023, which is presented in the other operating result. Of this net loss, a loss of €0.4 billion is attributable to the Automotive Division and a gain of €0.1 billion to the 21 Interim Management Report Results of Operations, Financial Position and Net Assets Financial Services Division. The loss is mainly attributable to the realization of currency translation effects of €–0.3 billion, which have been reclassified from the currency translation reserve to other operating expenses. EQU ITY I NVESTMENTS H ELD F OR SALE The assets and liabilities held for sale of the Russian subsidiaries of Volkswagen Financial Services and Porsche, as well as of MAN Energy Solutions, in connection with the gas turbine business and of EURO- Leasing GmbH were recognized in accordance with IFRS 5 at the lower of their carrying amount and fair value less expected disposal costs. SPECIAL ITEMS Special items consist of certain items in the financial statements whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance. No material special items in connection with the diesel issue were recognized in the first six months of fiscal year 2023. RESU LTS OF OPERATIONS Results of operations of the Group In the first half of 2023, the Volkswagen Group generated sales revenue of €156.3 billion, up 18.2% on the prior-year figure. A rise in vehicle sales and improved price positioning were set against adverse exchange rate movements. The prior-year period had been impacted to an even greater extent by limited vehicle availability due to parts supply shortages. The Volkswagen Group generated 81.7 (82.2)% of its sales revenue abroad. Gross profit amounted to €30.9 billion, up €4.5 billion on the prior-year period. The gross margin was 19.8 (20.0)%. In the period from January to June 2023, the Volkswagen Group’s operating result was €11.3 (12.8) billion. The operating return on sales stood at 7.3 (9.7)%. Improvements, especially in the volume and in price positioning, had a beneficial impact on the operating result, while a rise in product costs (in particular for commodities) reduced it. The fair value measurement of derivatives to which hedge accounting is not applied (especially commodity hedges) resulted in €–2.5 billion being charged to the operating result, com- pared with a €0.9 billion increase in the result in the comparative period of 2022. In addition, the decon- solidation of Volkswagen Group Rus and its subsidiaries led to a loss of €0.4 billion. The previous year had included one-off expenses for restructuring measures at SEAT as well as special items in connection with the diesel issue in an amount of €–0.4 billion, while effects from derivatives in the Financial Services Division had had a positive impact. The financial result amounted to €0.6 (1.2) billion. The share of the result of equity-accounted invest- ments was down on the previous year. In the interest result, higher interest income was offset by a rise in interest expenses. Adverse exchange rate effects and other factors included in the other financial result were more than offset in the reporting period by positive net income from securities and funds, which had been negatively impacted in the prior-year period, especially as a result of the Russia-Ukraine conflict. Adjustments to the carrying amounts of investees because of changes in share prices and impairment tests resulted in a non-cash loss. The Volkswagen Group’s earnings before tax declined by €2.2 billion to €11.9 billion in the first half of 2023. Earnings after tax were down by €2.1 billion year-on-year to €8.5 billion. 22 Interim Management Report Results of Operations, Financial Position and Net Assets Results of operations in the Automotive Division In the first six months of 2023, the Automotive Division’s sales revenue improved by €21.5 billion to €130.6 billion. This was mainly the result of a rise in volume and beneficial changes in price positioning. These factors were offset by exchange rate effects. In the prior-year period, parts supply shortages had had an even stronger adverse effect. The Passenger Cars and Power Engineering business areas’ sales revenues were significantly up on the previous year, while the Commercial Vehicles Business Area recorded a strong year-on-year increase. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is essentially reflected in the Group’s sales revenue only through deliveries of vehicles and vehicle parts. RESU LTS OF OPERATIONS I N TH E PASSENGER CARS, COMMERCIAL VEH ICLES AN D POWER ENGI N EERI NG BUSI N ESS AREAS FROM JAN UARY 1 TO J U N E 30 € million 2023 20221 Passenger Cars Sales revenue 106,362 89,820 Operating result 7,118 8,979 Operating return on sales (%) 6.7 10.0 Commercial Vehicles Sales revenue 22,331 17,613 Operating result 1,796 618 Operating return on sales (%) 8.0 3.5 Power Engineering Sales revenue 1,875 1,632 Operating result 206 129 Operating return on sales (%) 11.0 7.9 1 Prior-year figures adjusted (see disclosures on IFRS 17). 23 Interim Management Report Results of Operations, Financial Position and Net Assets Higher product costs (especially for commodities) due to inflation in connection with the Russia-Ukraine conflict and an increase in research and development costs recognized in profit or loss contributed to a significant surge in cost of sales compared with the previous year, but their share of sales revenue went down. As sales revenue rose faster than total research and development costs, the research and develop- ment ratio (R&D ratio of the Automotive Division) decreased year-on-year to 7.8 (8.5)% in the reporting period. In the period from January to June 2023, there was an increase in distribution expenses due to higher logistics costs, among other factors, as well as in administrative expenses; their respective share of sales revenue went down. The other operating result stood at €–3.2 (0.8) billion. The reporting period was weighed down by adverse effects from the fair value measurement of derivatives to which hedge accounting is not applied, especially for commodities, while these factors had had a positive impact in the same period of the previous year. In the first half of 2023, the Automotive Division generated an operating result of €9.1 (9.7) billion. The operating return on sales was 7.0 (8.9)%. The year-on-year decrease was mainly attributable to the effects of measuring derivatives to which hedge accounting is not applied and to higher product costs, especially for commodities. Increased volumes and improvements in price positioning were unable to fully offset these adverse factors. Our operating result largely benefits from the business performance of our equity-accounted Chinese joint ventures only through deliveries of vehicles and vehicle parts and through license income, as these joint ventures are included in the financial result. Results of operations in the Financial Services Division In the period from January to June 2023, the Financial Services Division recorded sales revenue of €25.7 bil- lion, up 11.0% on the previous year. The very strong rise in interest expenses meant that this item increased faster than cost of sales as a whole. As a result, gross profit decreased by €0.6 billion to €4.2 billion. The Financial Services Division’s operating result went down by €0.9 billion to €2.2 billion. In addition to higher interest expenses, the decline from the prior-year figure was mainly attributable to adverse effects from derivatives, which had had a positive effect in the prior-year period. The operating return on sales decreased to 8.7 (13.4)%. FI NANCIAL POSITION Financial position of the Group In the first six months of 2023, the Volkswagen Group generated gross cash flow of €26.0 (25.5) billion. The non-cash measurement effects arising from hedging transactions, which are included in earnings, must be eliminated from the cash flow statement. Comparison with the previous year also has to take account of the dividend resolution that FAW-Volkswagen had not yet adopted in 2022. The change in working capital amounted to €–18.9 (–8.5) billion. The reasons for the year-on-year change were a higher increase in inven- tories, receivables and lease assets. As a result, cash flows from operating activities went down by €9.9 bil- lion to €7.1 billion. The Volkswagen Group’s investing activities attributable to operating activities grew by €0.4 billion to €11.9 billion in the reporting period as a result of higher investments in property, plant and equipment and additions to capitalized development costs. In the previous year, this had also included the full portion of the purchase price payable by Volkswagen for the acquisition of Europcar, amounting to €1.7 billion, which was contributed to Green Mobility Holding. 24 Interim Management Report Results of Operations, Financial Position and Net Assets FI NANCIAL POSITION I N TH E PASSENGER CARS, COMMERCIAL VEH ICLES AN D POWER ENGI N EERI NG BUSI N ESS AREAS F ROM JAN UARY 1 TO J U N E 30 € million 2023 20221 Passenger Cars Gross cash flow 16,844 15,180 Change in working capital –4,635 –1,050 Cash flows from operating activities 12,209 14,131 Cash flows from investing activities attributable to operating activities –10,749 –10,495 Net cash flow 1,460 3,636 Commercial Vehicles Gross cash flow 2,664 1,875 Change in working capital –1,171 –2,549 Cash flows from operating activities 1,492 –674 Cash flows from investing activities attributable to operating activities –473 –789 Net cash flow 1,019 –1,464 Power Engineering Gross cash flow 290 196 Change in working capital –254 –48 Cash flows from operating activities 35 147 Cash flows from investing activities attributable to operating activities –45 –26 Net cash flow –10 121 1 Prior-year figures adjusted (see disclosures on IFRS 17). Financing activities include the dividend distribution of €4.4 billion to the shareholders of Volkswagen AG and the payment of a special dividend to the shareholders of Volkswagen AG in connection with the IPO of Porsche AG completed in the previous year. In the first half of 2023, there was a cash inflow of €3.0 billion overall, which also includes the issuance and redemption of bonds and other financial liabilities. In the prior-year period, there had been a cash outflow of €9.2 billion, which also included the redemption and issuance of hybrid notes. At the end of the reporting period, the Volkswagen Group reported cash and cash equivalents of €37.2 (33.9) billion in its cash flow statement. At the end of June 2023, the Volkswagen Group’s net liquidity stood at €–142.2 billion, compared with €–125.8 billion at the end of 2022. Financial position of the Automotive Division In the first half of 2023, the Automotive Division’s gross cash flow of €19.8 billion exceeded the prior-year figure by €2.5 billion. The non-cash measurement effects arising from hedging transactions, which are included in earnings, must be eliminated from the cash flow statement. Comparison with the previous year also has to take account of the dividend resolution that FAW-Volkswagen had not yet adopted in 2022. The change in working capital amounted to €–6.1 (–3.6) billion and, compared with the previous year, resulted mainly from a higher rise in inventories caused, among other factors, by disruptions in the logistics chains and a larger increase in receivables. 25 Interim Management Report Results of Operations, Financial Position and Net Assets Cash flows from operating activities were almost unchanged at €13.7 (13.6) billion. Investing activities attributable to operating activities in the period from January to June 2023 were on a level with the previous year, at €11.3 (11.3) billion. Within this figure, investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs (capex) increased by €1.5 billion to €5.6 billion. The ratio of capex to sales revenue was 4.3 (3.7)%. A considerable portion of capex was allocated primarily to our production facilities and to models to be launched this year and next, the electrification and digitalization of our products, and enhancements of our modular and all- electric toolkits and platforms. Additions to capitalized development costs rose to €5.2 (4.8) billion in the reporting period. The “Acquisition and disposal of equity investments” item amounted to €–0.6 (–2.6) bil- lion; it included primarily strategic investments in a variety of companies. In the previous year, this had also included the full portion of the purchase price payable by Volkswagen for the acquisition of Europcar, amounting to €1.7 billion, which was contributed to Green Mobility Holding. In the period from January to June 2023, the Automotive Division’s net cash flow improved by €0.2 bil- lion year-on-year to €2.5 billion. Financing activities relate to the issuance and redemption of bonds, as well as to changes in other financial liabilities; in the first half of 2023, they resulted in a cash outflow of €12.8 billion. This was mainly attributable to the dividend distributed to the shareholders of Volkswagen AG and the special dividend paid to the shareholders of Volkswagen AG in connection with the IPO of Porsche AG. There had been a cash out- flow of €2.8 billion in the prior-year period. As a result, the Automotive Division’s net liquidity stood at €33.6 billion at the end of June 2023, com- pared with €43.0 billion on December 31, 2022. Financial position in the Financial Services Division In the period from January to June 2023, the Financial Services Division recorded gross cash flow of €6.2 (8.2) billion. The year-on-year contraction was due to factors such as lower earnings. The change in working capital amounted to €–12.8 (–4.9) billion, leading to a rise in funds tied up in working capital. Compared to the previous year, this resulted mainly from higher growth in receivables and lease assets, offset by a larger increase in liabilities. As a result, cash flows from operating activities went down by €10.0 billion to €–6.7 billion. Investing activities attributable to operating activities amounted to €0.6 (0.2) billion. The Financial Services Division’s financing activities resulted in a cash inflow of €15.8 billion in the reporting period. This figure relates primarily to the issuance and redemption of bonds and to other finan- cial liabilities. There had been a cash outflow of €–6.4 billion in the prior-year period. At the end of the second quarter of 2023, the Financial Services Division’s negative net liquidity, which is common in the industry, was €–175.8 billion as against €–168.8 billion on December 31, 2022. N ET ASSETS Consolidated balance sheet structure On June 30, 2023, the Volkswagen Group had total assets of €581.3 billion, 3.1% more than at the end of 2022. Total assets as of the reporting date reflected the implementation of the new guidance on accounting for insurance contracts (IFRS 17), which led to a decrease in total assets and liabilities. The figure as of the end of 2022 was retrospectively adjusted accordingly. Equity was up by €2.6 billion to €181.0 billion, mainly because of the encouraging earnings. The equity ratio decreased to 31.1 (31.6)%. 26 Interim Management Report Results of Operations, Financial Position and Net Assets BAL ANCE SH EET STRUCTURE OF TH E PASSENGER CARS, COMMERCIAL VEH ICLES AN D POWER ENGI N EERI NG BUSI N ESS AREAS € million Jun. 30, 2023 Dec. 31, 20221 Passenger Cars Noncurrent assets 140,047 142,467 Current assets 105,798 105,055 Total assets 245,845 247,522 Equity 119,667 119,654 Noncurrent liabilities 69,212 71,632 Current liabilities 56,966 56,236 Commercial Vehicles Noncurrent assets 34,601 34,620 Current assets 15,723 14,184 Total assets 50,324 48,804 Equity 15,444 13,804 Noncurrent liabilities 16,221 16,252 Current liabilities 18,659 18,748 Power Engineering Noncurrent assets 1,555 1,579 Current assets 3,593 3,491 Total assets 5,148 5,070 Equity 2,542 2,495 Noncurrent liabilities 433 432 Current liabilities 2,173 2,143 1 Prior-year figures adjusted (see disclosures on IFRS 17). Automotive Division balance sheet structure At the end of June 2023, the Automotive Division’s intangible assets were up on the previous year, driven primarily by a rise in capitalized development costs. Property, plant and equipment was almost unchanged from the figure on December 31, 2022, as depreciation and impairment losses approximately offset additions to property, plant and equipment. Equity-accounted investments were down for reasons that include impairment losses as a result of changes in share prices and in response to impairment tests, the dividend resolutions, and the intragroup transfer of the equity investment in Europcar to the Financial Services Division. In total, noncurrent assets of €176.2 (178.7) billion were below the figure at the end of 2022. Current assets climbed to €125.1 (122.7) billion. The inventories included in this figure increased, due among other factors to disruptions in the logistics chains. Current other receivables and financial assets were higher than on December 31, 2022, due mainly to a rise in trade receivables for volume-related reasons. The Automotive Division’s cash and cash equivalents went up slightly by €0.3 billion to €23.4 billion. Total securities were €11.2 billion lower, at €21.7 billion. The “Assets held for sale” item comprises the carrying amounts of the assets of subsidiaries of Volks- wagen Financial Services and Porsche, which are earmarked for divestment, as well as assets of MAN Energy Solutions and EURO-Leasing GmbH. The “Liabilities held for sale” item comprises the carrying amounts of the corresponding liabilities. The Automotive Division’s equity amounted to €137.7 billion, 1.3% higher than at the end of 2022. Encouraging earnings in the reporting period were the main contributing factor. Accordingly, non- 27 Interim Management Report Results of Operations, Financial Position and Net Assets controlling interests also increased noticeably; they were mostly attributable to the noncontrolling interest shareholders of the Porsche AG Group and the TRATON Group. The equity ratio was 45.7 (45.1)%. Noncurrent liabilities decreased by €2.4 billion to €85.9 billion. The noncurrent financial liabilities included in this item were down, mainly because of reclassifications from noncurrent to current liabilities reflecting shorter remaining maturities. Current liabilities increased slightly by €0.7 billion to €77.8 billion. Current financial liabilities amounted to €–9.7 (–11.0) billion. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed in both periods. Trade payables were up by 9.0% compared with the end of 2022 for volume-related reasons. Current other liabilities were down, primarily because of the special dividend, which was resolved in December 2022 and paid in January 2023. This was offset by the netting of the right to payment from Porsche SE arising from the second tranche of the ordinary shares of Porsche AG. On June 30, 2023, the Automotive Division reported total assets of €301.3 (301.4) billion, which were on a level with December 31, 2022. Financial Services Division balance sheet structure At €280.0 billion, the Financial Services Division’s total assets at the end of June 2023 were 6.6% higher than at the end of 2022. Total assets as of the reporting date reflected the implementation of the new guidance on accounting for insurance contracts (IFRS 17), which led to a decrease in total assets and liabilities. The figure as of the end of 2022 was retrospectively adjusted accordingly. Noncurrent assets went up compared with December 31, 2022 to €167.7 (161.2) billion. The equity- accounted investments included in this item were up for reasons that included the intragroup transfer of the equity investment in Europcar to the Financial Services Division. Current assets climbed by 10.7% to €112.3 billion. The current other receivables and financial assets included in this item went up, buoyed among other factors by the rise in trade receivables. The Financial Services Division’s cash and cash equivalents stood at €13.8 (6.1) billion on June 30, 2023. At the end of the first half of 2023, the Financial Services Division accounted for around 48.2 (46.6)% of the Volkswagen Group’s assets. The Financial Services Division’s equity at the end of June 2023 was €43.3 billion, exceeding the figure on the 2022 reporting date by 2.2% for earnings-related reasons. The equity ratio was 15.5 (16.1)%. Noncurrent liabilities in the Financial Services Division rose to €116.4 (114.6) billion compared with the end of 2022. The noncurrent financial liabilities and noncurrent other liabilities included here were both up. Current liabilities went up, driven primarily by a rise in current financial liabilities. Deposits from the direct banking business increased from their level on December 31, 2022 to €35.1 (26.7) billion. REPORT ON EXPECTED DEVELOPMENTS, RISKS AN D OPPORTUN ITI ES Based on the results achieved, we raised our forecast for the operating result of the Commercial Vehicles Business Area after the first quarter of 2023 and expect to achieve an operating return on sales of between 7% and 8%. In view of parts supply shortages, disruptions in logistics chains and the latest developments in the markets, we now expect deliveries to customers of between 9 million and 9.5 million vehicles. 28 Interim Management Report Results of Operations, Financial Position and Net Assets For the Power Engineering Business Area, we expect an increase in sales revenue, while we anticipate lower sales revenue in the Financial Services Division combined with an improvement in the operating result. In the Automotive Division, where we had forecast an R&D ratio of around 8%, we now expect the figure to be between 8% and 8.5%. Our previous expectation for the capex ratio of 6.5% has been updated to between 6% and 6.5%. The disruptions in the supply chains are also leading to an increase in working capital and, as a consequence, a decline in the expected net cash flow, although this will still be significantly to strongly up on the previous year. The forecast for all other core performance indicators remains unchanged. The outlook for fiscal year 2023 can be found on page 32. Litigation Diesel issue 1. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The Braunschweig Office of the Public Prosecutor conducted investigations on suspicion of fraud in con- nection with type EA 288 engines. The proceedings against the accused employees and against Volks- wagen AG were terminated in late 2022 and early 2023, definitively against payment of a sum set by the court in the case of three of the accused persons and provisionally as regards four others. In late June 2023, the Munich II Regional Court handed down a judgment in the criminal proceedings commenced in June 2020 for, among other things, alleged fraud in connection with the diesel issue involving 3.0 l and 4.2 l TDI engines. A former Chairman of the Board of Management of AUDI AG and the other two defendants were sentenced to prison terms, the enforcement of which was in each case sus- pended subject to probation. In each case, the conditions of probation include paying a sum set by the court. The judgment is at present not yet final as all three defendants as well as the office of the public prosecutor have filed appeals. The proceedings against an additional former defendant were terminated by the Munich II Regional Court in April 2023 against payment of a sum set by the court. In a trial level decision rendered in late February 2023, the Schleswig Administrative Court had granted the relief requested in a lawsuit brought by Deutsche Umwelthilfe (DUH – Environmental Action Germany) against the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) and invalidated the notice of approval for a software update for certain older Golf Plus model vehicles to the extent this notice classified the thermal window feature, the altitude correction feature, and the taxi switch feature as permissible deactivation devices (defeat devices). The so-called thermal window in question is a tempera- ture-dependent exhaust gas recirculation function. Altitude correction refers to altitude-dependent exhaust gas recirculation. The taxi switch modifies exhaust gas recirculation when a vehicle with a running engine stands motionless for a certain period of time. Volkswagen AG is involved in the litigation as an interested party summoned. In late April 2023, Volkswagen AG and the KBA filed an appeal against the judgment of the Schleswig Administrative Court. This decision is thus not legally final. DUH has filed two additional lawsuits with the Schleswig Administrative Court. The first action contests the notices of approval for further Audi and Porsche brand vehicles equipped with type EA 189 engines as well as with selected V-TDI engines; the second action is directed against all Group diesel vehicles with the EU5 and EU6b/c exhaust emission standard. 2. Product-related lawsuits worldwide (excluding the USA/Canada) In Brazil, the appeal filed by the plaintiff against the October 2021 trial court judgment dismissing its complaint in the second consumer protection class action, which pertains to roughly 67 thousand Amarok vehicles, was rejected by the appellate court in June 2023. In the Netherlands class action seeking monetary damages, the Diesel Emissions Justice Foundation has limited its appeal against the March 2022 interlocutory judgment solely to the applicability of the new class action regime, hence the decision of the Amsterdam court that it lacks jurisdiction to hear lawsuits brought by consumers outside the Netherlands is final and binding. 29 Interim Management Report Results of Operations, Financial Position and Net Assets In Portugal, the Supreme Court dismissed the class action in July 2023 as inadmissible because the plaintiff consumer organization lacked standing to sue. In late June 2023, the Bundesgerichtshof (BGH – Federal Court of Justice) handed down judgments in lawsuits against Volkswagen AG and AUDI AG posing the issue as to how the case law of the European Court of Justice (ECJ) on the potential claims of buyers under European type approval law should be implemented in German law. The BGH held that the negligent use of an impermissible defeat device may in principle entitle plaintiffs to differential damages amounting to 5% to 15% of their vehicle’s purchase price. Whether this claim is given in a particular instance is for the appeals courts to determine. The BGH stated that it did not matter whether the limits in the NEDC testing procedure would be complied with even when system functioning was modified. The BGH held that liability does not arise where the manufacturer is not at fault, e.g. because the relevant public authority had approved the deactivation device in its specific configuration and taking account of identified combinations of deactivation devices, or would have done so upon request. Where a claim for differential damages exists in principle, the buyer must furthermore accept an offset for the benefit derived from using the vehicle and for the vehicle’s value to the extent these exceed the vehicle’s diminished value. An implemented software update may also potentially mitigate damages. 3. Lawsuits filed by investors worldwide (excluding the USA/Canada) In the investor action for model declaratory judgment before the Braunschweig Higher Regional Court, the court issued a notification ruling in March 2023, in light of the unforeseeably long remaining duration of the litigation, suggested that the parties each consider their willingness to enter into out-of-court settle- ment negotiations. Without prejudice to its legal position, Volkswagen AG has indicated that it is prepared to consider the Braunschweig Higher Regional Court’s suggestion. In July 2023, the Braunschweig Higher Regional Court issued an order for the taking of evidence including the examination of numerous persons as well as the production and consultation of documents and records. The mandated taking of evidence focuses initially on whether the Board of Management of Volkswagen AG or individual members thereof and/or individual members of Volkswagen AG’s Ad Hoc Disclosure Clearing Office had or, reflecting Volkswagen AG’s state of knowledge, lacked knowledge of the installation of switching devices prohibited under US law in Volkswagen AG vehicles, as well as on the conceptions of these persons regarding the potential share price impact of the information that each respectively possessed. The taking of testimony to begin in the fall of 2023. In the model case proceedings against Porsche Automobil Holding SE (Porsche SE), in which Volks- wagen AG intervened as a third party supporting a party to the dispute, the Stuttgart Higher Regional Court rendered a model declaratory judgment in late March 2023. Based on the determinations made in the model declaratory judgment and the current substantive status of the underlying actions, all of the suspended investor lawsuits against Porsche SE would in effect have to be dismissed. The model declaratory judgment is not yet final. The model case plaintiff, several interested parties summoned, and Porsche SE have petitioned the BGH for review on points of law. Volkswagen AG has declared its intervention as a third- party supporting the petition for review of Porsche SE. 4. Special audit Following the rulings of the Federal Constitutional Court in November 2022 finding both constitutional complaints lodged by Volkswagen AG to be meritorious, the proceedings before the Hanover Regional Court, which had been stayed pending decision by the Federal Constitutional Court, have been resumed as a result of these rulings. The subject of these proceedings is a motion seeking appointment of a special auditor for Volkswagen AG to examine matters relating to the diesel issue. 30 Interim Management Report Results of Operations, Financial Position and Net Assets Additional important legal cases In July 2021, the European Commission assessed a fine totaling roughly €502 million against Volks- wagen AG, AUDI AG, and Dr. Ing. h.c. F. Porsche AG pursuant to a settlement decision. Volkswagen declined to file an appeal, hence the decision became final in 2021. The subject matter scope of the decision is limited to the cooperation of German automobile manufacturers on individual technical questions in con- nection with the development and introduction of SCR (selective catalytic reduction) systems for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. Based on the facts of the EU case, in April 2023 the Korean competition authority KFTC issued the administrative fine decision that it had announced in its February 2023 press release. As announced, no fine was imposed on Volkswagen AG, and Porsche AG is not affected by the decision. A fine equaling just under €3 million was assessed against AUDI AG. AUDI AG and Volkswagen AG have appealed the decision to the relevant court in Seoul/Korea. In April 2023, the English Competition and Markets Authority (CMA) filed an appeal against the Febru- ary 2023 judgment upholding the claim of Volkswagen AG in an action for judicial review. The action challenged the requests for information issued to Volkswagen AG by CMA in the context of CMA’s investi- gations with respect to Volkswagen Group UK, it being the position of Volkswagen AG that CMA lacks jurisdiction to issue them. Volkswagen AG continues to examine the possibilities for reasonable cooper- ation with CMA. Both of the lawsuits that Greenpeace is supporting against Volkswagen AG were dismissed in February 2023 by the Braunschweig Regional Court and the Detmold Regional Court. The lawsuits seek to compel Volkswagen AG to initially reduce in stages and by 2029 completely cease its production and placement into the stream of commerce of vehicles with internal combustion engines, as well as to reduce greenhouse gas emissions from development, production, and marketing (including third party vehicle use). They would furthermore compel Volkswagen AG to exercise influence over Group companies, subsidiaries, and joint ventures so as to cause them to fulfill these demands as well. The plaintiffs have filed appeals against the judgments dismissing their complaints (appeals filed in March 2023 with the Braunschweig Higher Regional Court and in April 2023 with the Hamm Higher Regional Court). In Russia, Automobile Plant “GAZ” LLC (GAZ) has filed several judicial proceedings against Volks- wagen AG and others alleging damage claims totaling around 44 billion Russian ruble. In this connection, GAZ applied for and in some cases initially obtained protective measures relating to the shares in Volks- wagen Group Rus OOO (VGR) as well as to the movable and immovable property of VGR; the courts either rejected or have since vacated these measures. GAZ has appealed these decisions rejecting or vacating pro- tective measures relative to the movable and immovable property of VGR; this appeal has since been rejected at the first appeals level. In May 2023, Volkswagen AG completed the sale of its shares in VGR and its local subsidiaries to Art-Finance LLC, thereby transferring title to the shares in VGR and its local subsidiaries to the buyer upon registration of the transaction. Volkswagen Group Rus was renamed AGR LLC in June 2023. Volkswagen AG is defending itself in all proceedings. In line with IAS 37.92, no further statements have been made concerning estimates of the financial impact or regarding uncertainties as to the amount or maturity of provisions and contingent liabilities in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Com- pany. Beyond these events, there were no significant changes in the reporting period compared with the disclosure on the Volkswagen Group’s expected development in fiscal year 2023 contained in the combined management report of the 2022 Annual Report in the sections “Report on Expected Developments” and “Report on Risks and Opportunities”, including in section “Legal Risks”. 31 Interim Management Report Outlook for 2023 Outlook for 2023 Our planning is based on the assumption that global economic output will grow overall in 2023 albeit at a slower pace. The persistently high inflation in many regions and the resulting restrictive monetary policy measures taken by central banks are expected to increasingly dampen consumer spending. We continue to believe that risks will arise from protectionist tendencies, turbulence in the financial markets and struc- tural deficits in individual countries. In addition, continuing geopolitical tensions and conflicts are weighing on growth prospects; risks continue to be associated with the Russia-Ukraine conflict. Further- more, it cannot be ruled out that risks may also arise if new variants of the SARS-CoV-2 virus occur, par- ticularly with regard to regional outbreaks and the measures associated with these. We assume that both the advanced economies and the emerging markets will show positive momentum on average, but with below-average growth in gross domestic product (GDP). The trend in the automotive industry closely follows global economic developments. We assume that competition in the international automotive markets will intensify further. Uncertainty may arise from the continued shortage of intermediates and commodities. This may be further exacerbated by the fallout from the Russia-Ukraine conflict and, in particular, lead to rising prices and a declining availability of energy. We predict that trends in the markets for passenger cars in the individual regions will be mixed in 2023. Overall, the global volume of new car sales is expected to be noticeably higher than in the previous year. For 2023, we anticipate that the volume of new passenger car registrations in Western Europe will be signifi- cantly above that recorded in the previous year. In the German passenger car market, we predict a noticeable increase in the volume of new registrations in 2023 compared with the previous year. Sales of passenger cars in 2023 are expected to significantly exceed the prior-year figures in markets in Central and Eastern Europe – subject to the further development of the Russia-Ukraine conflict. The volume of sales in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America in 2023 is forecast to be significantly higher than the level seen the previous year. We anticipate that new registrations in the South American markets in 2023 will be on a level with the previous year. The passenger car markets in the Asia-Pacific region are expected to be noticeably up on the prior-year level in 2023. Trends in the markets for light commercial vehicles in the individual regions will also be mixed; on the whole, we expect a significant increase in the sales volume for 2023. 32 Interim Management Report Outlook for 2023 For 2023, we expect to see a noticeable upwards trend in new registrations for mid-sized and heavy trucks with a gross weight of more than six tonnes compared with the previous year in the markets that are relevant for the Volkswagen Group, with variations from region to region. A significant increase in overall demand is anticipated for 2023 in the bus markets relevant for the Volkswagen Group, whereby this will vary depending on the region. We assume that automotive financial services will prove highly important to global vehicle sales in 2023. We anticipate that, amid challenging market conditions, deliveries to customers of the Volkswagen Group in 2023 will stand between 9 million and 9.5 million vehicles. This assumes that the shortages of intermediates and commodities and the bottlenecks in logistics will become less intense. Challenges will arise in particular from the economic situation, the increasing intensity of competition, volatile commodity, energy and foreign exchange markets, and more stringent emissions-related require- ments. We expect the sales revenue of the Volkswagen Group in 2023 to be 10% to 15% higher than the prior- year figure and the operating return on sales to lie between 7.5% and 8.5%. In the Passenger Cars Business Area, we forecast an increase of around 7% to 13% in sales revenue compared with the previous year, with an operating return on sales of between 8% and 9%. For the Commercial Vehicles Business Area, we antici- pate an operating return on sales of 7% to 8% amid a 5% to 15% year-on-year increase in sales revenue. In the Power Engineering Business Area, we expect sales revenue to be noticeably above the prior-year figure and operating profit to be in the low triple-digit million euro range. For the Financial Services Division, we forecast a significant increase in sales revenue compared with the prior year and an operating result in the range of €4 billion. In the Automotive Division, we expect the R&D ratio to come in between 8% and 8.5% in 2023 and the ratio of capex to sales revenue to be between 6% and 6.5%. We anticipate a significant to strong year-on- year increase in net cash flow for 2023. This will particularly include increasing investments for the future and cash outflows from mergers and acquisitions for battery factories, which are a cornerstone of the Volkswagen Group’s transformation. Net liquidity in the Automotive Division in 2023 is expected to be between €35 billion and €40 billion; this includes cash inflows and outflows in connection with the IPO of Porsche AG. We anticipate a return on investment (ROI) of between 12% and 15%. Our declared goal remains unchanged, namely to continue with our robust financing and liquidity policy. This report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic, political and legal environment in individual countries, economic regions and markets, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales markets, or any significant shifts in exchange rates, energy and other commodities or the supply of parts relevant to the Volkswagen Group will have a corresponding effect on the development of our business. In addition, there may also be departures from our expected business development if the assessments of the factors influencing sustainable value enhancement and of risks and opportunities presented in the 2022 annual report develop in a way other than we are currently expecting, or if additional risks and opportunities or other factors emerge that affect the development of our business. 33 Brands and Business Fields Brands and Business Fields SALES REVEN U E AN D OPERATI NG RESULT BY BRAN D AN D BUSI N ESS F I ELD The Volkswagen Group generated sales revenue of €156.3 (132.2) billion in the first half of 2023. The oper- ating result stood at €11.3 (13.2) billion. While the fair value measurement of derivatives to which hedge accounting is not applied had an adverse effect in the first six months of this year (€–2.5 billion), it had had a positive effect in the same period of the previous year (€+0.9 billion). In the previous year, there had been special items of €0.4 billion in connection with the diesel issue. The Core brand group sold 2.4 (2.0) million vehicles in the reporting period. Sales revenue amounted to €68.8 (53.0) billion. The operating result (prior-year figure before special items) improved to €3.8 (2.6) bil- lion. The Volkswagen Passenger Cars brand increased its unit sales by 25.1% to 1.5 million vehicles in the first six months of 2023. The ID. family models, the T-Roc, the Tiguan and the Atlas were particularly popular. The new Taigo was also in strong demand. Sales revenue increased by 28.9% to €43.0 billion. The operating result (prior-year figure before special items) amounted to €1.6 (1.9) billion. The higher volume and price effects had a positive impact, while a rise in product costs and fixed costs, as well as the deconsolidation of Volkswagen Group Rus weighed on the result. The ŠKODA brand sold 545 thousand vehicles in the reporting period, 22.1% more than in the previous year. Growth was recorded particularly by the Enyaq iV and the Octavia. Sales revenue climbed to €13.7 (10.2) billion. The operating result improved to €911 (676) million due to volume and pricing effects. Exchange rate effects and product costs, and the deconsolidation of Volkswagen Group Rus had a negative effect. 34 Brands and Business Fields KEY FIGURES BY BRAN D GROUP AN D BUSI N ESS FI ELD FROM JAN UARY 1 TO J U N E 30 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2023 2022 2023 20221 2023 20221 Core brand group 2,450 1,956 68,764 53,010 3,773 2,646 Progressive brand group Sport Luxury brand group2 655 171 513 149 34,169 18,892 29,869 16,425 3,417 3,653 4,965 3,261 CARIAD – – 329 249 –1,088 –978 Battery – – 0 0 –181 –14 TRATON Commercial Vehicles 168 138 22,331 17,613 1,798 617 MAN Energy Solutions Equity-accounted companies in China3 – 1,352 – 1,431 1,875 – 1,632 – 208 – 131 – Volkswagen Financial Services Other4 – –349 – –180 24,112 –14,215 21,866 –8,454 1,760 –1,993 2,975 –425 Volkswagen Group before special items – – – – 11,347 13,180 Special items – – – – 0 –360 Volkswagen Group Automotive Division5 4,448 4,448 4,006 4,006 156,257 130,569 132,211 109,066 11,347 9,120 12,820 9,726 of which: Passenger Cars Business Area 4,279 3,868 106,362 89,820 7,118 8,979 Commercial Vehicles Business Area 168 138 22,331 17,613 1,796 618 Power Engineering Business Area – – 1,875 1,632 206 129 Financial Services Division – – 25,689 23,146 2,226 3,094 1 Prior-year figures adjusted (see disclosures on IFRS 17). 2 Including Porsche Financial Services: sales revenue €20,626 (17,922) million, operating result €3,852 (3,480) million. 3 The sales revenue and operating result of the equity-accounted companies in China are not included in the consolidated figures; the share of the operating result generated by these companies amounted to €1,152 (1,402) million. 4 In the operating result, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation, as well as companies not allocated to the brands. 5 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. KEY FIGURES FOR TH E CORE BRAN D GROUP FROM JAN UARY 1 TO J UN E 30 V E H I C L E S A L E S S A L E S R E V E N U E O P E R A T I N G R E S U L T Thousand vehicles/€ million 2023 2022 2023 2022 2023 2022 Volkswagen Passenger Cars 1,523 1,218 42,959 33,322 1,641 1,860 ŠKODA 545 447 13,748 10,223 911 676 SEAT 317 236 7,411 5,377 371 –97 Volkswagen Commercial Vehicles 212 153 7,418 5,046 448 187 Tech. Components – – 12,092 8,147 438 –28 Consolidation –148 –97 –14,863 –9,105 –37 50 Core brand group 2,450 1,956 68,764 53,010 3,773 2,646 Unit sales at SEAT and CUPRA increased to 317 thousand vehicles in the period from January to June of this year; this was 34.5% more than a year earlier. The figure includes the A1 manufactured for Audi. Both SEAT and CUPRA saw higher demand. The CUPRA Formentor and the CUPRA Born were especially popular. Sales revenue stood at €7.4 billion, an increase of 37.8% compared with the previous year. At €371 (–97) million, SEAT achieved its highest six-month operating result ever; this was attributable above all to the success of CUPRA, higher volumes and the positive effects of efficiency gains. Unit sales by Volkswagen Commercial Vehicles increased to 212 (153) thousand units worldwide in the first half of 2023. As a result, sales revenue climbed to €7.4 (5.0) billion. The operating result improved to €448 (187) million. In addition to the higher volume, price effects had a particularly positive impact. 35 Brands and Business Fields In the first six months of this year, Tech. Components generated sales revenue of €12.1 (8.1) billion. The operating result improved by €467 million to €438 million. The adverse effects of higher product costs were mainly offset by a rise in volumes. Worldwide unit sales in the Progressive brand group amounted to 655 thousand vehicles in the reporting period, 27.8% more than in the first half of 2022. Growth was seen particularly for the Q5 and Q7, as well as the all-electric Q4 e-tron model. A further 295 (277) thousand Audi vehicles were sold by the Chinese joint ventures FAW-Volkswagen and SAIC VOLKSWAGEN. Sales revenue amounted to €34.2 (29.9) bil- lion. The operating result (prior-year figure before special items) amounted to €3.4 (5.0) billion. The decrease was mainly attributable to the effects of measuring derivatives to which hedge accounting is not applied. Conversely, the rise in volume at the Audi brand and the good results of the Bentley, Lamborghini and Ducati brands had a beneficial effect on profit. Ducati sold 37,602 (33,865) motorcycles in the first six months of this year. In the first half of 2023, the Sport Luxury brand group sold 171 (149) thousand vehicles globally. Demand increased particularly for the 911, Macan and Cayenne models. Sales revenue rose to €18.9 (16.4) billion. The operating result increased to €3.7 (3.3) billion, due primarily to higher volumes combined with continued stable price positioning, and was offset by higher expenditure on products and innovations and an increase in distribution expenses. CARIAD pools the Volkswagen Group’s software expertise. The business model comprises the develop- ment and operation of standardized software platforms for current and future vehicle models. Sales revenue climbed to €329 (249) million in the period from January to June 2023. This increase was due mainly to a rise in license fees thanks to a higher volume of vehicles fitted with CARIAD software. Upfront development expenditure resulted in an operating loss of €–1.1 (–1.0) billion. The Battery business field brings together the Group’s global battery activities, which relate to the future manufacture of battery cells and other activities along the battery value chain. Due to the effect of fixed costs incurred during the establishment of the business, the operating result in the Battery business field in the first half of 2023 amounted to €–181 (–14) million. Unit sales at TRATON Commercial Vehicles were higher than in the prior year at 168 (138) thousand vehicles. Sales revenue increased by 26.8% to €22.3 billion. The operating result improved to €1.8 (0.6) bil- lion. In addition to the higher volume of new vehicles and higher capacity utilization due to a significant increase in production figures, a beneficial effect on profit was also had by a positive product mix and improved price positioning. MAN Energy Solutions generated sales revenue of €1.9 (1.6) billion in the period from January to June 2023. The operating result rose to €208 (131) million due to volume and mix-related factors. The number of new financing, leasing, service and insurance contracts signed with Volkswagen Finan- cial Services in the reporting period stood at 4.1 million (+6.9%). With credit eligibility criteria remaining unchanged, the penetration rate, expressed as the ratio of leased or financed vehicles to relevant Group delivery volumes, stood at 33.4 (33.0)%. The total number of contracts at the end of June 2023 was close to the figure for December 31, 2022 at 21.7 (22.0) million. The number of contracts in the customer finan- cing/leasing area amounted to 10.2 (10.3) million, and in the service/insurance area to 11.5 (11.6) million. As of June 30 of this year, Volkswagen Bank managed 1.5 (1.3) million deposit accounts. As expected, the operating result contracted to €1.8 (3.0) billion; in addition to higher interest expenses, the decline was primarily attributable to adverse effects from derivatives, which had had a positive effect in the prior-year period. In the previous year, lower risk costs and a strong demand for used vehicles had also had a positive impact. 36 Brands and Business Fields U N IT SALES AN D SALES REVEN U E BY MARKET The Volkswagen Group sold 2.1 million vehicles in the Europe/Other Markets region in the first six months of this year. This was 23.9% more than in the previous year. Sales revenue improved to €93.3 (74.3) billion due to volume effects and improved price positioning. The Volkswagen Group’s unit sales in the North American markets increased by 16.0% in the reporting period to 484 thousand vehicles. Driven mainly by higher volumes, sales revenue rose to €32.2 (27.6) billion. Unit sales in South America increased to 229 (200) thousand vehicles from January to June 2023. Sales revenue consequently went up to €7.4 (6.6) billion. In the Asia-Pacific region, the unit sales of the Volkswagen Group – including those of the equity- accounted companies in China – fell by 3.9% to 1.6 million vehicles in the first half of 2023. Sales revenue amounted to €24.0 (24.7) billion. This figure does not include sales revenue from our equity-accounted companies in China. Hedging transactions relating to the Volkswagen Group’s sales revenue in foreign currency made a negative contribution of €–0.6 (–0.9) billion in the reporting period. KEY FIGU RES BY MARKET FROM JAN UARY 1 TO J UN E 30 V E H I C L E S A L E S S A L E S R E V E N U E Thousand vehicles/€ million 2023 2022 2023 Europe/Other Markets 2,126 1,715 93,257 North America 484 417 32,163 South America Asia-Pacific2 229 1,609 200 1,674 7,389 24,021 Hedges on sales revenue Volkswagen Group2 – 4,448 – 4,006 –573 156,257 1 Prior-year figures adjusted (see disclosures on IFRS 17). 2 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market. 37 20221 74,324 27,609 6,564 24,650 –936 132,211 Interim Consolidated Financial Statements (Condensed) Income Statement Interim Consolidated Financial Statements (Condensed) Income Statement for the Period January 1 to June 30 V O L K S W A G E N G R O U P D I V I S I O N S AUTOMOTIVE¹ FINANCIAL SERVICES € million 2023 2022² 2023 2022² 2023 2022² Sales revenue 156,257 132,211 130,569 109,066 25,689 23,146 Cost of sales –125,342 –105,762 –103,896 –87,444 –21,446 –18,319 Gross result 30,915 26,449 26,673 21,622 4,243 4,827 Distribution expenses –10,026 –9,077 –9,443 –8,474 –582 –603 Administrative expenses –6,201 –5,553 –4,874 –4,220 –1,327 –1,333 Other operating result –3,342 1,001 –3,235 799 –107 202 Operating result 11,347 12,820 9,120 9,726 2,226 3,094 Share of the result of equity-accounted investments 883 1,081 837 1,029 46 52 Interest result and other financial result –331 154 –194 175 –137 –20 Financial result 552 1,235 643 1,203 –92 32 Earnings before tax 11,898 14,055 9,764 10,929 2,135 3,125 Income tax expense –3,377 –3,400 –2,757 –2,639 –620 –761 Earnings after tax 8,521 10,655 7,006 8,291 1,515 2,364 of which attributable to Noncontrolling interests 784 63 720 –24 64 86 Volkswagen AG hybrid capital investors 278 279 278 279 – – Volkswagen AG shareholders 7,459 10,313 6,008 8,035 1,451 2,278 Basic/diluted earnings per ordinary share in €3 14.86 20.55 Basic/diluted earnings per preferred share in €3 14.92 20.61 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Prior-year figures adjusted (see disclosures on IFRS 17). 3 Explanatory information on earnings per share is presented in the “Earnings per share” section. 38 Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income Statement of Comprehensive Income for the Period January 1 to June 30 € million 2023 2022¹ Earnings after tax 8,521 10,655 Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax –302 14,442 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income 104 –4,321 Pension plan remeasurements recognized in other comprehensive income, net of tax –198 10,120 Fair value valuation of equity instruments that will not be reclassified to profit or loss Fair value valuation of equity instruments that will not be reclassified to profit or loss, before tax2 32 –449 Deferred taxes relating to fair value valuation of equity instruments that will not be reclassified to profit or loss2 –2 72 Fair value valuation of equity instruments that will not be reclassified to profit or loss, net of tax 30 –376 Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax 14 1 Items that will not be reclassified to profit or loss –154 9,745 Exchange differences on translating foreign operations Unrealized currency translation gains/losses –1,725 2,729 Transferred to profit or loss 348 15 Exchange differences on translating foreign operations, before tax –1,377 2,744 Deferred taxes relating to exchange differences on translating foreign operations 1 2 Exchange differences on translating foreign operations, net of tax –1,375 2,746 Hedging Fair value changes recognized in other comprehensive income (OCI I) 1,114 –277 Transferred to profit or loss (OCI I) –205 352 Cash flow hedges (OCI I), before tax 908 75 Deferred taxes relating to cash flow hedges (OCI I) –253 –2 Cash flow hedges (OCI I), net of tax 655 72 Fair value changes recognized in other comprehensive income (OCI II) –122 –680 Transferred to profit or loss (OCI II) 469 401 Cash flow hedges (OCI II), before tax 347 –280 Deferred taxes relating to cash flow hedges (OCI II) –90 78 Cash flow hedges (OCI II), net of tax 257 –202 Fair value valuation of debt instruments that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income 41 –273 Transferred to profit or loss –3 0 Fair value valuation of debt instruments that may be reclassified to profit or loss, before tax 38 –273 Deferred taxes relating to fair value valuation of debt instruments recognized in other comprehensive income –11 73 Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax 27 –200 Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax –383 261 Items that may be reclassified to profit or loss –819 2,678 Other comprehensive income, before tax –722 16,521 Deferred taxes relating to other comprehensive income –251 –4,099 Other comprehensive income, net of tax –973 12,422 Total comprehensive income 7,548 23,077 of which attributable to Noncontrolling interests 876 147 Volkswagen AG hybrid capital investors 278 279 Volkswagen AG shareholders 6,395 22,651 1 Prior-year figures adjusted (see disclosures on IFRS 17). 2 As from the first quarter of 2023, deferred taxes are reported separately. The prior-year figures were adjusted accordingly. 39 Interim Consolidated Financial Statements (Condensed) Income Statement for the Period April 1 to June 30 V O L K S W A G E N G R O U P AUTOMOTIVE¹ € million 2023 2022² 2023 Sales revenue 80,059 69,500 67,106 Cost of sales –64,337 –55,019 –53,462 Gross result 15,722 14,481 13,644 Distribution expenses –5,190 –4,762 –4,919 Administrative expenses –2,960 –2,784 –2,280 Other operating result –1,972 –2,445 –1,907 Operating result 5,600 4,491 4,537 Share of the result of equity-accounted investments 348 452 296 Interest result and other financial result –502 196 –415 Financial result –154 647 –119 Earnings before tax 5,446 5,139 4,418 Income tax expense –1,655 –1,227 –1,354 Earnings after tax 3,791 3,912 3,065 of which attributable to Noncontrolling interests 402 23 370 Volkswagen AG hybrid capital investors 140 150 140 Volkswagen AG shareholders 3,250 3,739 2,555 Basic/diluted earnings per ordinary share in €3 6.48 7.46 Basic/diluted earnings per preferred share in €3 6.48 7.46 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Prior-year figures adjusted (see disclosures on IFRS 17). 3 Explanatory information on earnings per share is presented in the “Earnings per share” section. 40 D I V I S I O N S 2022² 57,856 –45,800 12,056 –4,496 –2,057 –2,562 2,941 424 203 627 3,569 –831 2,738 –29 150 2,617 Income Statement FINANCIAL SERVICES 2023 2022² 12,953 11,644 –10,875 –9,219 2,078 2,425 –271 –266 –680 –726 –65 117 1,062 1,550 53 27 –87 –7 –35 20 1,028 1,570 –301 –396 727 1,173 32 52 – – 695 1,121 Interim Consolidated Financial Statements (Condensed) Statement of Comprehensive Income for the Period April 1 to June 30 € million Earnings after tax Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Fair value valuation of equity instruments that will not be reclassified to profit or loss Fair value valuation of equity instruments that will not be reclassified to profit or loss, before tax2 Deferred taxes relating to fair value valuation of equity instruments that will not be reclassified to profit or loss2 Fair value valuation of equity instruments that will not be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations Exchange differences on translating foreign operations, net of tax Hedging Fair value changes recognized in other comprehensive income (OCI I) Transferred to profit or loss (OCI I) Cash flow hedges (OCI I), before tax Deferred taxes relating to cash flow hedges (OCI I) Cash flow hedges (OCI I), net of tax Fair value changes recognized in other comprehensive income (OCI II) Transferred to profit or loss (OCI II) Cash flow hedges (OCI II), before tax Deferred taxes relating to cash flow hedges (OCI II) Cash flow hedges (OCI II), net of tax Fair value valuation of debt instruments that may be reclassified to profit or loss Fair value changes recognized in other comprehensive income Transferred to profit or loss Fair value valuation of debt instruments that may be reclassified to profit or loss, before tax Deferred taxes relating to fair value valuation of debt instruments recognized in other comprehensive income Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified to profit or loss, net of tax Items that may be reclassified to profit or loss Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 1 Prior-year figures adjusted (see disclosures on IFRS 17). 2 As from the first quarter of 2023, deferred taxes are reported separately. The prior-year figures were adjusted accordingly. 41 Statement of Comprehensive Income 2023 2022¹ 3,791 3,912 38 8,487 0 –2,532 38 5,955 3 –60 0 20 3 –40 14 0 56 5,916 –913 1,587 348 0 –565 1,587 3 0 –562 1,587 410 –153 –170 334 240 181 –55 –48 185 133 37 –528 254 230 291 –297 –79 95 211 –202 –9 –124 –3 0 –12 –124 –5 34 –16 –90 –240 138 –422 1,565 –231 9,912 –136 –2,431 –367 7,481 3,424 11,392 458 66 140 150 2,827 11,177 Interim Consolidated Financial Statements (Condensed) Balance Sheet as of June 30, 2023 and December 31, 2022 V O L K S W A G E N G R O U P D I V I S I O N S AUTOMOTIVE¹ € million 2023 2022² 2023 2022² Assets Noncurrent assets 343,896 339,853 176,203 178,667 Intangible assets 85,093 83,241 84,702 82,846 Property, plant and equipment 64,101 63,890 63,135 62,908 Lease assets 60,154 59,380 554 1,279 Financial services receivables 90,222 86,944 –749 –767 Investment Property, equity-accounted investments and other equity investments, other receivables and financial assets 44,327 46,399 28,561 32,400 Current assets 237,397 224,159 125,114 122,730 Inventories 60,803 52,274 56,576 48,768 Financial services receivables 62,940 61,549 –817 –799 Other receivables and financial assets 50,346 43,226 24,192 18,764 Marketable securities and time deposits 25,892 37,206 21,696 32,867 Cash and cash equivalents 37,129 29,172 23,371 23,034 Assets held for sale 288 733 96 95 Total assets 581,294 564,013 301,317 301,396 Equity and liabilities Equity 180,953 178,328 137,653 135,954 Equity attributable to Volkswagen AG shareholders 153,273 151,255 110,683 109,565 Equity attributable to Volkswagen AG hybrid capital investors 13,914 14,121 13,914 14,121 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 167,188 165,376 124,597 123,686 Noncontrolling interests 13,766 12,952 13,057 12,267 Noncurrent liabilities 202,281 202,961 85,866 88,316 Financial liabilities 120,681 121,737 19,437 21,871 Provisions for pensions 27,908 27,553 27,448 27,104 Other liabilities 53,693 53,671 38,981 39,341 Current liabilities 198,059 182,723 77,798 77,127 Financial liabilities 99,032 83,448 –9,694 –10,953 Trade payables 31,885 28,738 28,464 26,106 Other liabilities 67,044 70,380 59,023 61,961 Liabilities associated with assets held for sale 98 158 5 12 Total equity and liabilities 581,294 564,013 301,317 301,396 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans. 2 Prior-year figures adjusted (see disclosures on IFRS 17). 42 Balance Sheet FINANCIAL SERVICES 2023 2022² 167,693 161,187 391 394 966 982 59,599 58,100 90,970 87,711 15,766 13,999 112,283 101,430 4,227 3,506 63,758 62,348 26,153 24,462 4,195 4,338 13,758 6,137 191 638 279,976 262,616 43,300 42,375 42,591 41,690 – – 42,591 41,690 709 684 116,415 114,646 101,243 99,866 460 449 14,712 14,330 120,261 105,596 108,726 94,401 3,421 2,631 8,021 8,418 92 146 279,976 262,616 Interim Consolidated Financial Statements (Condensed) € million Subscribed capital Unadjusted balance at Jan. 1, 2022 1,283 Changes in accounting policy to reflect IFRS 17 – Balance at Jan. 1, 2022 1,283 Earnings after tax1 – Other comprehensive income, net of tax1 – Total comprehensive income1 – Disposal of equity instruments – Capital increases/Capital decreases – Dividend payments – Capital transactions involving a change in ownership interest – Other changes – Balance at June 30, 2022¹ 1,283 Unadjusted balance at Jan. 1, 2023 1,283 Changes in accounting policy to reflect IFRS 17 – Balance at Jan. 1, 2023 1,283 Earnings after tax – Other comprehensive income, net of tax – Total comprehensive income – Disposal of equity instruments – Capital increases/Capital decreases – Dividend payments – Capital transactions involving a change in ownership interest – Other changes – Balance at June 30, 2023 1,283 1 Prior-year figures adjusted (see disclosures on IFRS 17). Capital reserve 14,551 – 14,551 – – – – – – – – 14,551 14,551 – 14,551 – – – – – – – – 14,551 Retained earnings 117,342 –11 117,331 10,313 10,068 20,381 – – –3,772 – 16 133,956 137,267 5 137,272 7,459 –193 7,267 13 – –4,374 –42 50 140,186 Statement of Changes in Equity OTHER RESERVES HEDGING Currency Cash flow Deferred costs translation hedges of hedging reserve (OCI I) (OCI II) –2,351 –635 –367 – – – –2,351 –635 –367 – – – 2,677 71 –202 2,677 71 –202 – – – – – – – – – – – – – – – 326 –564 –569 –2,256 1,623 –1,077 – – – –2,256 1,623 –1,077 – – – –1,280 467 242 –1,280 467 242 – – – – – – – – – –11 – – – – – –3,548 2,090 –834 43 Equity and debt instruments –355 – –355 – –538 –538 – – – – – –893 –1,005 – –1,005 – 54 54 –13 – – – – –964 Equity- accounted investments 541 1 542 – 262 262 – – – – –2 801 870 –7 864 – –356 –356 – – – – 0 508 Equity attributable to Volkswagen AG hybrid capital investors 14,439 – 14,439 279 – 279 – 1,153 –454 – – 15,418 14,121 – 14,121 278 – 278 – – –484 – – 13,914 Statement of Changes in Equity Equity attributable to Volkswagen AG Equity shareholders and attributable to hybrid capital noncontrolling investors interests Total equity 144,449 1,705 146,154 –11 – –11 144,438 1,705 146,143 10,592 63 10,655 12,338 84 12,422 22,930 147 23,077 – – – 1,153 103 1,256 –4,226 –32 –4,258 – – – 14 –15 –1 164,309 1,908 166,217 165,378 12,950 178,327 –1 2 1 165,376 12,952 178,328 7,737 784 8,521 –1,064 92 –973 6,673 876 7,548 – – – – – – –4,858 –36 –4,894 –54 –27 –80 51 1 51 167,188 13,766 180,953 Interim Consolidated Financial Statements (Condensed) Cash flow statement Cash flow statement for the Period January 1 to June 30 V O L K S W A G E N G R O U P D I V I S I O N S AUTOMOTIVE¹ FINANCIAL SERVICES € million 2023 2022⁷ 2023 2022⁷ 2023 2022⁷ Cash and cash equivalents at beginning of period 29,738 39,123 23,042 24,899 6,695 14,224 Earnings before tax 11,898 14,055 9,764 10,929 2,135 3,125 Income taxes paid –3,798 –2,151 –2,755 –1,624 –1,043 –526 Depreciation and amortization expense² 13,685 13,993 8,731 9,229 4,954 4,764 Change in pension provisions 125 319 119 294 6 24 Share of the result of equity-accounted investments 1,330 –139 1,302 –131 28 –7 Other noncash income/expense and reclassifications³ 2,739 –615 2,637 –1,447 102 832 Gross cash flow 25,980 25,463 19,798 17,251 6,183 8,212 Change in working capital –18,896 –8,513 –6,061 –3,647 –12,835 –4,865 Change in inventories –8,915 –4,576 –8,176 –4,684 –739 107 Change in receivables –5,695 –3,498 –3,781 –2,469 –1,914 –1,030 Change in liabilities 6,561 6,747 5,236 6,187 1,325 560 Change in other provisions 287 –2,607 323 –2,584 –36 –23 Change in lease assets (excluding depreciation) –6,072 –4,358 365 36 –6,436 –4,394 Change in financial services receivables –5,060 –220 –27 –134 –5,034 –86 Cash flows from operating activities 7,085 16,950 13,737 13,604 –6,652 3,346 Cash flows from investing activities attributable to operating activities –11,908 –11,486 –11,267 –11,311 –641 –176 of which: Investments in intangible assets (excluding capitalized development costs), property, plant and equipment, and investment property –5,719 –4,173 –5,620 –4,089 –99 –84 capitalized development costs –5,197 –4,762 –5,197 –4,762 – – acquisition and disposal of equity investments –1,166 –2,726 –613 –2,617 –553 –108 Net cash flow⁴ –4,823 5,464 2,470 2,293 –7,293 3,171 Change in investments in securities, time deposits and loans 10,052 –2,124 11,269 –1,155 –1,217 –969 Cash flows from investing activities –1,856 –13,610 2 –12,466 –1,857 –1,145 Cash flows from financing activities 3,010 –9,210 –12,758 –2,811 15,768 –6,399 of which: capital transactions with noncontrolling interests –8 – –8 – – – capital contributions/capital redemptions 0 1,262 –130 1,261 130 0 Effect of exchange rate changes on cash and cash equivalents –778 664 –638 425 –140 239 Change of loss allowance within cash and cash equivalents 0 0 0 0 0 0 Net change in cash and cash equivalents 7,461 –5,206 342 –1,248 7,118 –3,958 Cash and cash equivalents at June 30⁵ 37,199 33,916 23,385 23,651 13,814 10,266 Securities and time deposits and loans 40,345 36,170 19,985 17,276 20,360 18,894 Gross liquidity 77,544 70,086 43,370 40,927 34,173 29,159 Total third-party borrowings –219,750 –207,750 –9,744 –12,718 –210,007 –195,031 Net liquidity at June 30⁶ –142,207 –137,663 33,627 28,209 –175,833 –165,872 For information purposes: at Jan. 1 –125,803 –136,576 43,015 26,685 –168,818 –163,261 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, time deposits and loans). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities and time deposits, as well as loans to affiliates and joint ventures net of third-party borrowings (noncurrent and current financial liabilities). 7 Prior-year figures adjusted (see disclosures on IFRS 17). Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement. 44 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Accounting in accordance with International Financial Reporting Standards (IFRSs) In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2022 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. These interim consolidated financial statements for the period ended June 30, 2023 were therefore also prepared in accordance with IAS 34 (Interim Financial Reporting) and are condensed in scope compared with the consolidated financial statements. All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. In addition to the reportable segments, the Automotive and Financial Services divisions are presented in the condensed interim group financial report for explanatory purposes alongside the income statement, balance sheet and cash flow statement for the Volkswagen Group. This supplemental presentation is not required by IFRSs. Eliminations of intragroup transactions between the Automotive and Financial Services divisions are allocated to the Automotive Division. The accompanying interim consolidated financial statements were reviewed by auditors in accordance with section 115 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act). Accounting policies Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods as of January 1, 2023. OTH ER ACCOU NTI NG POL ICI ES A discount rate of 3.6% (December 31, 2022: 3.7%) was applied to German pension provisions in the accom- panying interim consolidated financial statements. The income tax expense for the interim consolidated financial statements is always calculated on the basis of the best estimate of the average annual income tax rate that is expected for the entire fiscal year, in accordance with IAS 34 (Interim Financial Reporting). Impairment losses on equity investments as of June 30, 2023, which are not included in the business plan, are not reflected in the estimated average full-year income tax rate. This non-recurring effect was recognized in the second quarter of 2023 directly – rather than by adjusting the planned tax rate. In some of the countries where the Volkswagen Group operates, statutory provisions for minimum tax have been introduced in accordance with the OECD’s guidance on a global minimum tax. On the basis of amendments to IAS 12 adopted by the IASB in May 2023, the Volkswagen Group has not taken account of the resulting potential effects on deferred taxes. In other respects, the same accounting policies and consolidation methods that were used for the 2022 consolidated financial statements are generally applied to the preparation of the interim consolidated finan- cial statements and the measurement of the prior-year comparatives. A detailed description of the policies and methods applied is published in the “Accounting policies” section of the notes to the 2022 consolidated financial statements. In addition, details of the effects of new standards can be found in the “New and amended IFRSs not applied” section. The 2022 consolidated financial statements can also be accessed on the internet at www.volkswagenag.com/en/InvestorRelations.html. 45 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements I FRS 17 – I NSU RANCE CONTRACTS IFRS 17 specifies new accounting rules for insurance contracts. The Volkswagen Group applied IFRS 17 as of January 1, 2023 for the first time. The transition was conducted using the full retrospective approach, unless using that approach was impracticable. This was the case when not all of the required historical information, in particular for multiyear contracts, was available without undue cost and effort. In these instances, the Volkswagen Group generally used the modified retrospective approach. First-time application resulted in an insignificant change in equity as of January 1, 2023 and January 1, 2022, respectively. This is due primarily to the changed system for calculating provisions related to the insurance business. In addition, netting cash flows when measuring the provisions also led to an equal reduction of €0.7 billion in assets and provisions related to the insurance business as of January 1, 2023. The change in the system for recognizing income and expenses does not have any material effect on the income statement. Prior-year figures have been adjusted accordingly. 46 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Key events DI ES EL ISSU E On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a “Notice of Violation” that irregularities in relation to nitrogen oxide (NOx) emissions had been discovered in emissions tests on certain Volkswagen Group vehicles with 2.0 l diesel engines in the USA. This was followed by further reports on the scope of the diesel issue. Detailed information can be found in the “Key events” section of the 2022 consolidated financial statements. No material special items in connection with the diesel issue were recognized in the first half of fiscal year 2023. Further information on the litigation in connection with the diesel issue can be found in the “Litigation” section. RUSSIA-U KRAI N E CON FL ICT / COVI D -19 PAN DE MIC / PARTS SU PPLY The start of the Russia-Ukraine conflict in February 2022 led not only to a humanitarian crisis but also brought market upheaval around the world. There have been substantial price rises, particularly on the energy and commodity markets, and significant increases in interest and inflation rates have been observed internationally. There were some signs of normalization in the markets in the first half of fiscal year 2023. Against the backdrop of the Russia-Ukraine conflict and the resulting consequences, Volkswagen had decided to suspend vehicle production in Russia for the time being. Vehicle exports to Russia have also been halted. In addition, the respective sanction requirements must also be complied with in relation to parts supplies and the provision of technical information. There was again no easing of the Russia-Ukraine conflict in the first half of fiscal year 2023. For this reason, the discontinuation of business activities in Russia continued to take concrete shape in the Volkswagen Group. In this context, further sales negotiations with a number of investors continued or were concluded in the first half of 2023. On May 18, 2023, Volkswagen Group has completed the sale of its shares in OOO Volkswagen Group Rus (Volkswagen Group Rus), Kaluga/Russia, including its local subsidiaries (OOO Volkswagen Components and Services, Kaluga/Russia, OOO Scania Leasing, Moscow/Russia, OOO Scania Finance, Moscow/Russia , OOO Scania Insurance, Moscow/Russia) to OOO ART-FINANCE, Moscow/Russia, who is supported by the Russian Dealer AO Avilon Automotive Group, Moscow/Russia. With the registration of the transaction on May 22, 2023, ownership of the shares in the authorized capital of Volkswagen Group Rus was transferred from the seller side to the buyer. The transaction includes the production facilities in Kaluga, the importer structure of the Group brands Volkswagen Passenger Cars, Volkswagen Commercial Vehicles, AUDI, ŠKODA, Bentley, Lamborghini and Ducati for potential after-sales business and the warehousing as well as the Scania financial services activities with all its associated employees. In this context, the Volkswagen Group had already made significant impairments in fiscal year 2022 and taken appropriate provisions. The sale price amounts to €125 million. The deconsolidation of the affected companies resulted in a loss of €0.4 billion in the 2023 financial year, which is reported in the other operating result. This result is split between the Automotive Division (€– 0.4 billion) and the Financial Services Division (€0.1 billion). The loss is mainly attributable to the realization of currency translation effects of €– 0.3 billion, which have been reclassified from foreign currency translation reserve to other operating expenses. Apart from winding down Volkswagen Group Rus and its subsidiaries, no additional material expenses were recognized in connection with the Russia-Ukraine conflict in the first half of fiscal year 2023. 47 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements As a result of the fair value measurement and realization of derivatives to which hedge accounting is not applied (especially commodity hedges), losses totaling €2.1 billion (previous year: gains of €2.1 billion) were recognized in the other operating result. While the situation in connection with the SARS-CoV-2 virus eased, the parts supply shortages continued at the beginning of the current fiscal year. Please also refer to the comments in the interim group management report. 48 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements MATERIAL TRANSACTION S Scout Motors Inc. Under the Volkswagen Group’s North America strategy, Scout Motors Inc., Arlington, Virginia/USA, a wholly owned subsidiary of Volkswagen Finance Luxemburg, Strassen/Luxembourg, was established in fiscal year 2022. A new vehicle brand is to be created under the name of Scout, under which electrified all-terrain vehicles and pickups will be distributed in the USA from 2026. In order to finance the creation of the SCOUT brand, as well as vehicle development and production planning, an amount of around USD500 million is to be contributed to the company in fiscal year 2023. Payments of USD240 million had been made by June 30, 2023. The company has been included in the Volkswagen consolidated financial statements since January 1, 2023. Argo AI The process of winding down Argo AI, LLC, Pittsburgh/USA was initiated in the third quarter of 2022. In this context, Volkswagen contributed USD60 million to the company in the first half of 2023. The contribution was written down in full. QuantumScape Corporation In fiscal years 2020 and 2021, the Volkswagen Group acquired new shares in QuantumScape Corporation, San José/United States through forward purchase agreements resulting from a capital increase. Due to QuantumScape Corporation’s simultaneous listing on the New York Stock Exchange, the forward purchase agreements had to be measured at the respective closing prices. As a consequence, a non-cash gain of €1.4 billion was recognized in the financial result in fiscal year 2020 and a non-cash expense of €0.6 billion in fiscal year 2021. In total, there was a non-cash increase of €0.8 billion. Due to the share price performance in the first half of 2023, the Volkswagen Group conducted an impairment test on the shares in QuantumScape Corporation. The carrying amount was adjusted on the basis of the impairment test. This adjustment led to a non-cash expense of €0.3 billion in the second quarter of 2023, which is presented in the other financial result. There Holding B.V. There Holding B.V., Rijswijk/the Netherlands, is an investment company that holds shares in HERE Inter- national B.V., Eindhoven/the Netherlands, one of the world’s largest producers of digital road maps for navigation systems. In the first half of 2023, capital transactions conducted at the level of There Holding B.V. increased the interest held by the Volkswagen Group in There Holding B.V. from 29.7% at the end of fiscal year 2022 to 30.6% at the end of the first six months of 2023. In addition, There Holding B.V. participated in several capital increases at HERE International B.V. in this period. The share of the result of the equity-accounted investment in There Holding B.V. includes an expense of €92 million resulting from an impairment test on There Holding B.V.’s investment in HERE International B.V. 49 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Basis of consolidation In addition to Volkswagen AG, which is domiciled in Wolfsburg and entered in the commercial register at the Braunschweig Local Court under No. HRB 100484, the consolidated financial statements comprise all significant German and non-German subsidiaries, including structured entities, that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. I FRS 5 – NONCU RRENT ASSETS H ELD FOR SALE Assets and disposal groups held for sale of the current fiscal year In December 2022, Dr. Ing. h.c. F. Porsche AG, Stuttgart (Porsche AG) entered into an agreement with an independent, non-Group investor for the sale of two Russian sales companies in the Passenger Cars and Light Commercial Vehicles segment, OOO Porsche Russland, Moscow/Russia, and OOO Porsche Center Moscow, Moscow/Russia, as well as one company assigned to the Financial Services segment, OOO Porsche Finan- cial Services Russland, Moscow/Russia. Moreover, a repurchase option was agreed with this investor, which can be exercised at the earliest five years and at the latest ten years after the sale. An impairment loss of €25 million was recognized for the disposal group as of December 31, 2022. Another minor impairment loss and offsetting currency translation effects were identified in the first half of 2023; they are recognized in the other operating result. It was resolved in the fourth quarter of 2022 to sell the following fully consolidated subsidiaries allocated to the Financial Services segment: OOO Volkswagen Bank RUS, Moscow/Russia, OOO Volkswagen Group Finanz, Moscow/Russia, and OOO Volkswagen Financial Services RUS, Moscow/Russia. The resolution by the competent governing body was immediately followed by the implementation of a disposal plan, which is expected to be completed in the second half of 2023. Impairment losses resulting from measurement requirements under IFRS 5 were not recognized for the disposal group since the carrying amounts previously recognized had already covered the increased macroeconomic uncertainty and the status of the sales negotiations. On December 15, 2022, the Supervisory Board of Volkswagen AG resolved to sell the MAN ES gas turbine business of MAN Energy Solutions SE, Augsburg, and MAN Energy Solutions Schweiz AG, Zurich/Switzer- land, by way of an asset deal to CSIC Longjiang GH Gas Turbine Co. Ltd., Harbin/China, and its subsidiaries under German and Swiss law. The transaction is expected to be completed within fiscal year 2024. In addition, the passenger car business of consolidated subsidiary EURO-Leasing GmbH, Sittensen, was classified as a disposal group held for sale as of June 30, 2023 in accordance with the provisions of IFRS 5. Following the resolution by the relevant boards in the first half of 2023, the disposal project is expected to be completed in the second half of 2023. According to the disposal plan, the passenger car business will first be demerged into a wholly owned subsidiary of EURO-Leasing GmbH and part of this will subsequently be sold. The disposal group as a whole is subject to the measurement provisions of IFRS 5 because it contains assets that fall under the scope of IFRS 5. The measurement of the disposal group at the lower of its carrying amount and fair value less disposal costs did not result in any requirement to recognize an impairment loss. 50 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements In total, assets of €288 million and liabilities of €98 million were presented as assets and liabilities held for sale in accordance with IFRS 5 in a separate line item of the balance sheet as of June 30, 2023. The assets and liabilities held for sale have been recognized at a lower of their carrying amount and fair value less expected costs of disposal. Transactions completed in the current fiscal year On March 3, 2023, sell OOO Volkswagen Group Rus, Kaluga/Russia, and its subsidiaries, OOO Scania Finance, Moscow/Russia, OOO Scania Insurance, Moscow/Russia, and OOO Scania Leasing, Moscow/Russia. These companies were consequently classified as a disposal group held for sale as of March 31, 2023. The sale was completed in May, 2023. Additional disclosures can be found in the “Key events” section. the Supervisory Board of the Volkswagen Group resolved to 51 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements Disclosures on the interim consolidated financial statements 1. Sales revenue S T R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 2 3 Passenger Cars and Light Commercial Commercial Power Financial Volkswagen € million Vehicles Vehicles Engineering Services Total Segments Reconciliation Group Vehicles 93,992 14,976 – – 108,969 –9,460 99,508 Genuine parts 8,022 3,477 – – 11,499 –100 11,399 Used vehicles and third-party products 6,375 1,298 – 11,107 18,780 –2,051 16,729 Engines, powertrains and parts deliveries 5,416 538 – – 5,954 –38 5,917 Power Engineering – – 1,875 – 1,875 0 1,874 Motorcycles 560 – – – 560 – 560 Leasing business 479 784 0 8,616 9,879 –622 9,257 Interest and similar income 129 0 – 5,665 5,795 –413 5,382 Hedges sales revenue –681 20 – – –662 89 –573 Other sales revenue 5,250 1,239 – 301 6,790 –585 6,205 119,543 22,331 1,875 25,689 169,437 –13,180 156,257 S T R U C T U R E O F G R O U P S A L E S R E V E N U E : H 1 2 0 2 2 1 Passenger Cars and Light Commercial Commercial Power Financial Volkswagen € million Vehicles Vehicles Engineering Services Total Segments Reconciliation Group Vehicles 75,692 10,848 – – 86,540 –6,771 79,768 Genuine parts 7,352 3,253 – – 10,605 –76 10,529 Used vehicles and third-party products 5,831 1,138 – 10,608 17,576 –1,857 15,719 Engines, powertrains and parts deliveries 5,750 415 – – 6,165 –35 6,129 Power Engineering – – 1,632 – 1,632 0 1,631 Motorcycles 457 – – – 457 – 457 Leasing business 310 850 0 8,177 9,338 –595 8,743 Interest and similar income 119 1 – 4,063 4,184 –207 3,977 Hedges sales revenue –903 –11 – – –914 –22 –936 Other sales revenue 5,363 1,120 – 298 6,781 –586 6,195 99,971 17,613 1,632 23,146 142,362 –10,151 132,211 1 Prior-year figures adjusted (see disclosures on IFRS 17). Other sales revenue comprises revenue from workshop services and license revenue, among other things. 52 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 2. Cost of sales Cost of sales includes interest expenses of €3,425 million (previous year: €1,228 million) attributable to the financial services business. In addition to depreciation and amortization expenses, cost of sales also includes impairment losses on capitalized development costs, property, plant and equipment, and lease assets. The impairment losses totaled €532 million (previous year: €385 million); they are mostly recognized in the other operating result and in cost of sales. 3. Research and development costs H 1 € million 2023 2022 % Total research and development costs 10,206 9,289 9.9 of which: capitalized development costs 5,197 4,762 9.1 Capitalization ratio in % 50.9 51.3 Amortization of capitalized development costs 2,596 2,493 4.1 Research and development costs recognized in profit or loss 7,605 7,019 8.3 4. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since there were no transactions in the reporting period that had a dilutive effect on the number of shares, diluted earnings per share are equivalent to basic earnings per share. In accordance with Article 27(2) No. 3 of the Articles of Association of Volkswagen AG, preferred shares are entitled to a €0.06 higher dividend than ordinary shares. Q 2 H 1 2023 2022¹ 2023 2022¹ Weighted average number of: Ordinary shares – basic/diluted Shares 295,089,818 295,089,818 295,089,818 295,089,818 Preferred shares – basic/diluted Shares 206,205,445 206,205,445 206,205,445 206,205,445 Earnings after tax € million 3,791 3,912 8,521 10,655 Noncontrolling interests € million 402 23 784 63 Earnings attributable to Volkswagen AG hybrid capital investors € million 140 150 278 279 Earnings attributable to Volkswagen AG shareholders € million 3,250 3,739 7,459 10,313 of which: basic/diluted earnings attributable to ordinary shares € million 1,913 2,201 4,384 6,063 of which: basic/diluted earnings attributable to preferred shares € million 1,337 1,538 3,076 4,249 Earnings per ordinary share – basic/diluted € 6.48 7.46 14.86 20.55 Earnings per preferred share – basic/diluted € 6.48 7.46 14.92 20.61 1 Prior-year figures adjusted (see disclosures on IFRS 17). 53 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 5. Noncurrent assets C H A N G E S I N S E L E C T E D N O N C U R R E N T A S S E T S B E T W E E N J A N U A R Y 1 A N D J U N E 3 0 , 2 0 2 3 Additions/ Changes in Carrying amount consolidated Disposals/ Depreciation Carrying amount € million at Jan. 1, 2023 Group Other changes and amortization at June 30, 2023 Intangible assets 83,241 5,532 414 3,266 85,093 Property, plant and equipment 63,890 5,887 737 4,939 64,101 Lease assets 59,380 14,692 8,592 5,326 60,154 6. Inventories € million June 30, 2023 Dec. 31, 2022 Raw materials, consumables and supplies 10,024 10,458 Work in progress 6,175 6,041 Finished goods and purchased merchandise 37,035 29,466 Current lease assets 6,074 5,170 Prepayments 1,492 1,165 Hedges on inventories 3 –26 60,803 52,274 As in the prior-year period, it was not necessary to recognize or reverse significant impairment losses on inventories in the reporting period. 7. Current other receivables and financial assets € million June 30, 2023 Dec. 31, 2022¹ Trade receivables 21,771 18,534 Miscellaneous other receivables and financial assets 28,575 24,692 50,346 43,226 1 Prior-year figures adjusted (see disclosures on IFRS 17). In the period January 1 to June 30, 2023, impairment losses and reversals of impairment losses on noncurrent and current financial assets reduced operating profit by €313 million (previous year: €725 million). The prior- year figure is primarily the result of increased default risks due to the crisis situation in connection with the Russia-Ukraine conflict. 54 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 8. Equity The subscribed capital is composed of 295,089,818 no-par value ordinary shares and 206,205,445 no-par value preferred shares, and amounts to €1,283 million (previous year: €1,283 million). Noncontrolling interests are mainly attributable to the Porsche AG Group and the TRATON GROUP.. 9. Noncurrent financial liabilities € million June 30, 2023 Dec. 31, 2022 Bonds, commercial paper and notes 88,119 89,869 Liabilities to banks 21,912 23,266 Deposit business 4,857 2,642 Lease liabilities 5,111 5,283 Other financial liabilities 682 677 120,681 121,737 10. Current financial liabilities € million June 30, 2023 Dec. 31, 2022 Bonds, commercial paper and notes 45,694 38,523 Liabilities to banks 20,562 18,840 Deposit business 30,407 24,107 Lease liabilities 1,064 1,102 Other financial liabilities 1,304 876 99,032 83,448 55 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 11. Fair value disclosures Generally, the principles and techniques used for fair value measurement remained unchanged year-on-year. Detailed explanations of the measurement principles and techniques can be found in the “Accounting policies” section of the 2022 consolidated financial statements. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models. Financial assets and liabilities measured at fair value through profit or loss consist of derivative financial instruments to which hedge accounting is not applied. They include primarily commodity futures, currency forwards relating to commodity futures, call options on equity instruments as well as, in certain cases, interest rate swaps, currency swaps and cross-currency interest rate swaps. Moreover, other equity investments (shares representing an ownership interest of less than 20% as a rule) in partnerships (debt instruments), customer financing receivables whose returns contain more than just interest and principal repayments, and financial assets held in special funds controlled by the Volkswagen Group are measured at fair value through profit or loss. Derivative financial instruments to which hedge accounting is applied are measured at fair value either directly in equity or through profit or loss, depending on the underlying hedged item. Financial assets measured at fair value through other comprehensive income include equity investments (shares representing an ownership interest of less than 20% as a rule) in corporations (equity instruments) and shares for which the Volkswagen Group normally exercises the option of fair value measurement through other comprehensive income, as well as securities (debt instruments) whose cash flows comprise solely payments of interest and principal and that are held under a business model aimed at both collecting contractual cash flows and selling financial assets. For instruments measured through other comprehensive income, changes in fair value are recognized directly in equity, taking deferred taxes into account. Impairment losses on securities (debt instruments) are recognized through profit or loss. Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and Level 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. 56 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements RECONCI LIATION OF BA LA NCE SH EET ITEMS TO C LASSES OF FI N ANCIA L I NSTRUMEN TS The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting the carrying amount using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current financial assets and liabilities is generally deemed to be their carrying amount. The risk variables governing the fair value of the receivables are risk-adjusted interest rates. R E C O N C I L I A T I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N S T R U M E N T S A S O F J U N E 3 0 , 2 0 2 3 D E R I V A T I V E N O T F I N A N C I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N S T R U M E N T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E D G E M E A S U R E M E N T A T V A L U E C O S T A C C O U N T I N G C A T E G O R Y J U N E 3 0 , 2 0 2 3 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 10,536 10,536 Other equity investments 354 – – – 3,648 4,003 Financial services receivables 125 52,049 51,925 – 38,048 90,222 Other financial assets 3,178 5,898 5,830 3,841 – 12,917 Tax receivables – – – – 412 412 Current assets Trade receivables – 21,771 21,771 – 0 21,771 Financial services receivables 21 43,035 43,035 – 19,883 62,940 Other financial assets 2,127 13,829 13,829 1,655 – 17,611 Tax receivables – 4 4 – 1,809 1,813 Marketable securities and time deposits 25,472 420 420 – – 25,892 Cash and cash equivalents – 37,129 37,129 – – 37,129 Assets held for sale – 91 91 – 197 288 Noncurrent liabilities Financial liabilities – 115,570 112,194 – 5,111 120,681 Other financial liabilities 1,865 2,638 2,523 3,788 – 8,292 Current liabilities Financial liabilities – 97,968 97,968 – 1,064 99,032 Trade payables – 31,885 31,885 – – 31,885 Other financial liabilities 1,118 11,821 11,821 1,476 – 14,415 Tax payables – 13 13 – 611 624 Liabilities associated with assets held for sale – 41 41 – 56 98 57 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements R E C O N C I L I A T I O N O F B A L A N C E S H E E T I T E M S T O C L A S S E S O F F I N A N C I A L I N S T R U M E N T S A S O F D E C E M B E R 3 1 , 2 0 2 2 1 D E R I V A T I V E N O T F I N A N C I A L A L L O C A T E D T O B A L A N C E M E A S U R E D I N S T R U M E N T S A S H E E T I T E M A T F A I R M E A S U R E D A T A M O R T I Z E D W I T H I N H E D G E M E A S U R E M E N T A T V A L U E C O S T A C C O U N T I N G C A T E G O R Y D E C . 3 1 , 2 0 2 2 € million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments – – – – 12,668 12,668 Other equity investments 342 – – – 3,147 3,489 Financial services receivables 178 51,557 50,721 – 35,209 86,944 Other financial assets 4,735 5,626 5,533 3,471 – 13,832 Tax receivables – – – – 394 394 Current assets Trade receivables 1 18,533 18,533 – 0 18,534 Financial services receivables 24 41,644 41,644 – 19,881 61,549 Other financial assets 2,845 11,032 11,032 1,270 – 15,148 Tax receivables – 10 10 – 1,721 1,732 Marketable securities and time deposits 24,560 12,646 12,646 – – 37,206 Cash and cash equivalents – 29,172 29,172 – – 29,172 Assets held for sale – 570 570 – 163 733 Noncurrent liabilities Financial liabilities – 116,455 112,101 – 5,283 121,737 Other financial liabilities 1,518 2,623 2,502 4,047 – 8,188 Current liabilities Financial liabilities – 82,346 82,346 – 1,102 83,448 Trade payables – 28,738 28,738 – – 28,738 Other financial liabilities 1,004 17,372 17,372 1,430 – 19,807 Tax payables – 17 17 – 709 726 Liabilities associated with assets held for sale – 132 132 – 26 158 1 Prior-year figures adjusted (see disclosures on IFRS 17). The category headed “not allocated to a measurement category” is used in particular for shares in equity- accounted investments, shares in non-consolidated affiliated companies as well as for lease receivables. The carrying amount of lease receivables was €57.9 billion (previous year: €55.1 billion) and their fair value was €56.9 billion (previous year: €54.1 billion). 58 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The following tables contain an overview of the financial assets and liabilities measured at fair value: F I N A N C I A L A S S E T S A N D L I A B I L I T I E S M E A S U R E D A T F A I R V A L U E B Y L E V E L € million June 30, 2023 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 354 104 – 251 Financial services receivables 125 – – 125 Other financial assets 3,178 – 1,931 1,246 Current assets Trade receivables – – – – Financial services receivables 21 – – 21 Other financial assets 2,127 – 1,699 428 Marketable securities and time deposits 25,472 25,397 75 – Noncurrent liabilities Other financial liabilities 1,865 – 1,704 161 Current liabilities Other financial liabilities 1,118 – 1,098 21 € million Dec. 31, 2022 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments 342 91 0 251 Financial services receivables 178 – – 178 Other financial assets 4,735 – 2,571 2,165 Current assets Trade receivables 1 – – 1 Financial services receivables 24 – – 24 Other financial assets 2,845 – 2,283 562 Marketable securities and time deposits 24,560 24,487 73 – Noncurrent liabilities Other financial liabilities 1,518 – 1,439 79 Current liabilities Other financial liabilities 1,004 – 982 23 59 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements D E R I V A T I V E F I N A N C I A L I N S T R U M E N T S W I T H I N H E D G E A C C O U N T I N G B Y L E V E L € million June 30, 2023 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 3,841 – 3,841 – Current assets Other financial assets 1,655 – 1,655 – Noncurrent liabilities Other financial liabilities 3,788 – 3,788 – Current liabilities Other financial liabilities 1,476 – 1,476 – € million Dec. 31, 2022 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 3,471 – 3,471 – Current assets Other financial assets 1,270 – 1,270 – Noncurrent liabilities Other financial liabilities 4,047 – 4,047 – Current liabilities Other financial liabilities 1,430 – 1,430 – The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves, commodity prices and stock exchange prices of listed shares that are observable in the relevant markets and obtained through pricing services. Fair Values in Level 3 are calculated using valuation techniques that incorporate inputs that are not directly observable in active markets. In the Volkswagen Group, long- term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments, residual value protection models, customer financing receivables and receivables from vehicle financing programs are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models. The measurement of vehicle financing programs requires in particular the use of the corresponding vehicle price. 60 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The table below provides a summary of changes in Level 3 balance sheet items measured at fair value: C H A N G E S I N B A L A N C E S H E E T I T E M S M E A S U R E D A T F A I R V A L U E B A S E D O N L E V E L 3 Financial assets Financial liabilities € million measured at fair value measured at fair value Balance at Jan. 1, 2023 3,176 102 Foreign exchange differences –21 3 Changes in consolidated Group 0 – Total comprehensive income –685 100 recognized in profit or loss –678 100 recognized in other comprehensive income –8 – Additions (purchases) 54 – Sales and settlements –249 – Transfers into Level 2 –203 –22 Balance at June 30, 2023 2,071 182 Total gains or losses recognized in profit or loss –678 –100 Other operating result –679 –100 of which attributable to assets/liabilities held at the reporting date –579 –88 Financial result 1 – of which attributable to assets/liabilities held at the reporting date 0 – Financial assets Financial liabilities € million measured at fair value measured at fair value Balance at Jan. 1, 2022 2,119 303 Foreign exchange differences 86 –3 Changes in consolidated Group – – Total comprehensive income 995 –104 recognized in profit or loss 983 –104 recognized in other comprehensive income 12 – Additions (purchases) 114 – Sales and settlements –113 –49 Transfers into Level 1 – – Transfers into Level 2 –374 –12 Balance at June 30, 2022 2,827 135 Total gains or losses recognized in profit or loss 983 104 Other operating result 944 104 of which attributable to assets/liabilities held at the reporting date¹ 664 109 Financial result 39 – of which attributable to assets/liabilities held at the reporting date – – 1 Prior-year figures adjusted. 61 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no further extrapolation is required. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of June 30, 2023, earnings after tax would have been €233 million (previous year: €270 million) higher (lower). Beyond that, equity would not be affected. The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values at June 30, 2023 had been 10% higher, earnings after tax would have been €2 million (previous year: €6 million) higher. If the assumed enterprise values as of June 30, 2023 had been 10% lower, earnings after tax would have been €2 million (previous year: €6 million) lower. Residual value risks result from hedging agreements with dealerships under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices of the used cars covered by the residual value protection model had been 10% higher as of June 30, 2023, earnings after tax would have been €452 million (previous year: €444 million) higher. If the prices of the used cars covered by the residual value protection model had been 10% lower as of June 30, 2023, earnings after tax would have been €483 million (previous year: €483 million) lower. If the risk-adjusted interest rates applied to receivables measured at fair value had been 100 basis points higher as of June 30, 2023, earnings after tax would have been €6 million (previous year: €8 million) lower. If the risk-adjusted interest rates as of June 30, 2023 had been 100 basis points lower, earnings after tax would have been €4 million (previous year: €4 million) higher. If the corresponding vehicle price used in the vehicle financing programs had been 10% higher as of June 30, 2023, earnings after tax would have been €7 million (previous year: €9 million) higher. If the corresponding vehicle prices used in the vehicle financing programs had been 10% lower as of June 30, 2023, earnings after tax would have been €7 million (previous year: €9 million) lower. If the result of operations of equity investments measured at fair value had been 10% better as of June 30, 2023, equity would have been €8 million (previous year: €15 million) higher, and earnings after tax would have been €5 million (previous year: €4 million) higher. If the result of operations of equity investments measured at fair value had been 10% worse, equity would have been €8 million (previous year: €15 million) lower, and earnings after tax would have been €5 million (previous year: €4 million) lower. 62 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 12. Cash flow statement The cash flow statement presents the cash inflows and outflows in the Volkswagen Group and in the Automotive and Financial Services divisions. Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. € million June 30, 2023 June 30, 2022 Cash and cash equivalents as reported in the balance sheet 37,129 33,921 Cash and cash equivalents held for sale 70 33 Time deposits – –38 Cash and cash equivalents as reported in the cash flow statement 37,199 33,916 Cash inflows and outflows from financing activities are presented in the following table: H 1 € million 2023 2022 Capital contributions/Capital redemptions 0 1,262 Dividends paid –11,417 –4,258 Capital transactions with noncontrolling interest shareholders –8 – Proceeds from issuance of bonds 16,804 13,534 Repayments of bonds –13,991 –14,014 Changes in other financial liabilities 12,218 –5,075 Repayments of lease liabilities –596 –658 3,010 –9,210 63 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 13. Segment reporting Segments are identified on the basis of the Volkswagen Group’s internal management and reporting. In line with the Group’s multibrand strategy, each of its brands (operating segments) is managed by its own Board of Management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars and Light Commercial Vehicles segment cover the development of vehicles, engines and vehicle software, the production and sale of passenger cars and light commercial vehicles, and the corresponding genuine parts business. In the Passenger Cars and Light Commercial Vehicles reporting segment, the individual brands are combined into a single reportable segment, in particular as a response to the high degree of technological and economic interlinking in the production network. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of trucks and buses, the corresponding genuine parts business and related services. As in the case of the passenger car brands, there is collaboration within the areas procurement, development and sales. The aim is to create closer cooperation within the business areas. The Power Engineering segment combines the large-bore diesel engines, turbomachinery and propulsion components businesses. The activities of the Financial Services segment comprise dealership and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, activities are combined for reporting purposes taking into particular account the comparability of the type of services and of the regulatory environment. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm’s length prices. 64 Interim Consolidated Financial Statements (Condensed) R E P O R T I N G S E G M E N T S : H 1 2 0 2 3 € million Sales revenue from external customers Intersegment sales revenue Total sales revenue Segment result (operating result) R E P O R T I N G S E G M E N T S : H 1 2 0 2 2 1 € million Sales revenue from external customers Intersegment sales revenue Total sales revenue Segment result (operating result) 1 Prior-year figures adjusted (see disclosures on IFRS 17). R E C O N C I L I A T I O N € million Segment result (operating result) Unallocated activities Group financing Consolidation/Holding company function Operating result Financial result Consolidated earnings before tax 1 Prior-year figures adjusted (see disclosures on IFRS 17). Passenger Cars and Light Commercial Vehicles 108,476 11,067 119,543 10,827 Passenger Cars and Light Commercial Vehicles 91,677 8,294 99,971 10,529 Commercial Vehicles 21,851 481 22,331 1,796 Commercial Vehicles 17,045 569 17,613 618 65 Power Engineering 1,874 0 1,875 206 Power Engineering 1,631 0 1,632 129 Financial Services 23,787 1,901 25,689 2,226 Financial Services 21,680 1,466 23,146 3,094 Notes to the Consolidated Financial Statements Total Volkswagen segments Reconciliation Group 155,988 269 156,257 13,449 –13,449 – 169,437 –13,180 156,257 15,056 –3,709 11,347 Total Volkswagen segments Reconciliation Group 132,033 178 132,211 10,329 –10,329 – 142,362 –10,151 132,211 14,369 –1,550 12,820 H 1 2023 2022¹ 15,056 14,369 70 22 –5 –16 –3,775 –1,555 11,347 12,820 552 1,235 11,898 14,055 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 14. Related party disclosures Porsche Automobil Holding SE (Porsche SE) holds the majority of the voting rights in Volkswagen AG. The creation of rights of appointment for the State of Lower Saxony was resolved at the extraordinary General Meeting of Volkswagen AG on December 3, 2009. This means that, even though it holds the majority of voting rights in Volkswagen AG, Porsche SE cannot appoint the majority of the members of Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE is therefore classified as a related party as defined by IAS 24. I PO OF PO RS CH E AG On September 28, 2022, Volkswagen placed 25% of the preferred shares (including additional allocations) of its subsidiary Porsche AG with investors. These preferred shares have been traded on the stock exchange since the day after the placement. The basis for the IPO was a comprehensive agreement to enter into a number of contracts between Volkswagen and Porsche SE. In this context, the two parties agreed that Porsche SE would acquire 25% of the ordinary shares of Porsche AG plus one ordinary share from Volkswagen. See the disclosures provided in the consolidated financial statements as of December 31, 2022. The resolution of the extraordinary General Meeting of Volkswagen AG on December 16, 2022 gave rise to the obligation to pay a special dividend and led to a total obligation to the shareholders of Volkswagen AG amounting to €9.6 billion as of December 31, 2022. Out of the total, an amount of €3.1 billion was attributable to Porsche SE. Volkswagen AG and Porsche SE agreed to offset the obligation to pay a special dividend to Porsche SE against Volkswagen AG’s claim to the payment of the purchase price still outstanding for the second tranche of ordinary shares. In the consolidated financial statements as of December 31, 2022, the purchase price receivable and the dividend liability were therefore presented on a net basis. Upon payment of the special dividend on January 9, 2023, the netting process was completed. In connection with the IPO of Porsche AG, Volkswagen AG had also assumed obligations for dividend distributions of Porsche AG in 2022. The corresponding dividend of the same amount was resolved at the Annual General Meeting of Porsche AG on June 28, 2023 and paid on July 3, 2023. €114 million of this dividend was attributable to Porsche SE. OTH ER RELATED PARTY DISCLOS U RES I N ACCOR DANCE WITH IAS 24 S U P P L I E S A N D S E R V I C E S S U P P L I E S A N D S E R V I C E S R E N D E R E D R E C E I V E D H 1 H 1 € million 2023 2022 2023 2022 Porsche SE and its majority interests 1 1 0 0 Supervisory Board members 1 1 2 0 Unconsolidated subsidiaries 795 390¹ 954 789 Joint ventures and their majority interests 7,132 8,050 609 325 Associates and their majority interests 199 181 1,485 791 State of Lower Saxony, its majority interests and joint ventures 8 6 2 5 1 Prior-year figures adjusted. 66 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements R E C E I V A B L E S L I A B I L I T I E S ( I N C L U D I N G F R O M O B L I G A T I O N S ) T O € million June 30, 2023 Dec. 31, 2022 June 30, 2023 Dec. 31, 2022¹ Porsche SE and its majority interests 0 1 114 136 Supervisory Board members 0 0 230 276 Unconsolidated subsidiaries 1,493 1,346 2,445 1,865 Joint ventures and their majority interests 16,691 14,046 3,012 2,740 Associates and their majority interests 799 625 1,288 1,096 State of Lower Saxony, its majority interests and joint ventures 24 255 1 1,127 1 Prior-year figures adjusted (see disclosures on IFRS 17). The tables above do not contain the dividend payments (net of withholding tax) of €1,091 million (previous year: €497 million) received from joint ventures and associates and the dividends of €1,415 million (previous year: €1,201 million) paid to Porsche SE. Receivables from joint ventures are primarily attributable to loans granted in an amount of €11,753 million (December 31, 2022: €10,350 million) as well as trade receivables in an amount of €3,539 million (December 31, 2022: €3,491 million). Receivables from non-consolidated subsidiaries also result primarily from loans granted in an amount of €849 million (December 31, 2022: €727 million) as well as trade receivables in an amount of €204 million (December 31, 2022: €222 million). Outstanding related party receivables include doubtful receivables on which impairment losses of €19 million (previous year: €43 million) were recognized. This incurred expenses of €2 million (previous year: €27 million) in the first half of 2023. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of €286 million (December 31, 2022: €296 million). Between January and June 2023, the Volkswagen Group made capital contributions of €490 million (previous year: €2,187 million) at related parties. Obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. Transactions with related parties are regularly conducted on an arm’s length basis. Some of these transactions also include reservation of title clauses. 67 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 15. Litigation DI ES EL ISSU E 1. Criminal and administrative proceedings worldwide (excluding the USA/Canada) The Braunschweig Office of the Public Prosecutor conducted investigations on suspicion of fraud in connec- tion with type EA 288 engines. The proceedings against the accused employees and against Volkswagen AG were terminated in late 2022 and early 2023, definitively against payment of a sum set by the court in the case of three of the accused persons and provisionally as regards four others. In late June 2023, the Munich II Regional Court handed down a judgment in the criminal proceedings commenced in June 2020 for, among other things, alleged fraud in connection with the diesel issue involving 3.0 l and 4.2 l TDI engines. A former Chairman of the Board of Management of AUDI AG and the other two defendants were sentenced to prison terms, the enforcement of which was in each case suspended subject to probation. In each case, the conditions of probation include paying a sum set by the court. The judgment is at present not yet final as all three defendants as well as the office of the public prosecutor have filed appeals. The proceedings against an additional former defendant were terminated by the Munich II Regional Court in April 2023 against payment of a sum set by the court. In a trial level decision rendered in late February 2023, the Schleswig Administrative Court had granted the relief requested in a lawsuit brought by Deutsche Umwelthilfe (DUH – Environmental Action Germany) against the Kraftfahrt-Bundesamt (KBA – German Federal Motor Transport Authority) and invalidated the notice of approval for a software update for certain older Golf Plus model vehicles to the extent this notice classified the thermal window feature, the altitude correction feature, and the taxi switch feature as permissible deactivation devices (defeat devices). The so-called thermal window in question is a temperature-dependent exhaust gas recirculation function. Altitude correction refers to altitude-dependent exhaust gas recirculation. The taxi switch modifies exhaust gas recirculation when a vehicle with a running engine stands motionless for a certain period of time. Volkswagen AG is involved in the litigation as an interested party summoned. In late April 2023, Volkswagen AG and the KBA filed an appeal against the judgment of the Schleswig Administrative Court. This decision is thus not legally final. DUH has filed two additional lawsuits with the Schleswig Administrative Court. The first action contests the notices of approval for further Audi and Porsche brand vehicles equipped with type EA 189 engines as well as with selected V-TDI engines; the second action is directed against all Group diesel vehicles with the EU5 and EU6b/c exhaust emission standard. 2. Product-related lawsuits worldwide (excluding the USA/Canada) In Brazil, the appeal filed by the plaintiff against the October 2021 trial court judgment dismissing its complaint in the second consumer protection class action, which pertains to roughly 67 thousand Amarok vehicles, was rejected by the appellate court in June 2023. In the Netherlands class action seeking monetary damages, the Diesel Emissions Justice Foundation has limited its appeal against the March 2022 interlocutory judgment solely to the applicability of the new class action regime, hence the decision of the Amsterdam court that it lacks jurisdiction to hear lawsuits brought by consumers outside the Netherlands is final and binding. In Portugal, the Supreme Court dismissed the class action in July 2023 as inadmissible because the plaintiff consumer organization lacked standing to sue. In late June 2023, the Bundesgerichtshof (BGH – Federal Court of Justice) handed down judgments in lawsuits against Volkswagen AG and AUDI AG posing the issue as to how the case law of the European Court of Justice (ECJ) on the potential claims of buyers under European type approval law should be implemented in German law. The BGH held that the negligent use of an impermissible defeat device may in principle entitle plaintiffs to differential damages amounting to 5 % to 15 % of their vehicle’s purchase price. Whether this claim is given in a particular instance is for the appeals courts to determine. The BGH stated that it did not matter whether the limits in the NEDC testing procedure would be complied with even when system functioning was modified. The BGH held that liability does not arise where the manufacturer is not at fault, e.g. because the relevant public authority had approved the deactivation device in its specific configuration 68 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements and taking account of identified combinations of deactivation devices, or would have done so upon request. Where a claim for differential damages exists in principle, the buyer must furthermore accept an offset for the benefit derived from using the vehicle and for the vehicle’s value to the extent these exceed the vehicle’s diminished value. An implemented software update may also potentially mitigate damages. 3. Lawsuits filed by investors worldwide (excluding the USA/Canada) In the investor action for model declaratory judgment before the Braunschweig Higher Regional Court, the court issued a notification ruling in March 2023, in light of the unforeseeably long remaining duration of the litigation, suggested that the parties each consider their willingness to enter into out-of-court settlement negotiations. Without prejudice to its legal position, Volkswagen AG has indicated that it is prepared to consider the Braunschweig Higher Regional Court’s suggestion. In July 2023, the Braunschweig Higher Regional Court issued an order for the taking of evidence including the examination of numerous persons as well as the production and consultation of documents and records. The mandated taking of evidence focuses initially on whether the Board of Management of Volkswagen AG or individual members thereof and/or individual members of Volkswagen AG’s Ad Hoc Disclosure Clearing Office had or, reflecting Volkswagen AG’s state of knowledge, lacked knowledge of the installation of switching devices prohibited under US law in Volkswagen AG vehicles, as well as on the conceptions of these persons regarding the poten- tial share price impact of the information that each respectively possessed. The taking of testimony to begin in the fall of 2023. In the model case proceedings against Porsche Automobil Holding SE (Porsche SE), in which Volkswagen AG intervened as a third party supporting a party to the dispute, the Stuttgart Higher Regional Court rendered a model declaratory judgment in late March 2023. Based on the determinations made in the model declaratory judgment and the current substantive status of the underlying actions, all of the suspended investor lawsuits against Porsche SE would in effect have to be dismissed. The model declaratory judgment is not yet final. The model case plaintiff, several interested parties summoned, and Porsche SE have petitioned the BGH for review on points of law. Volkswagen AG has declared its intervention as a third-party supporting the petition for review of Porsche SE. 4. Special audit Following the rulings of the Federal Constitutional Court in November 2022 finding both constitutional complaints lodged by Volkswagen AG to be meritorious, the proceedings before the Hanover Regional Court, which had been stayed pending decision by the Federal Constitutional Court, have been resumed as a result of these rulings. The subject of these proceedings is a motion seeking appointment of a special auditor for Volkswagen AG to examine matters relating to the diesel issue. ADDITIONAL IMPORTANT LEGAL CAS ES In July 2021, the European Commission assessed a fine totaling roughly €502 million against Volkswagen AG, AUDI AG, and Dr. Ing. h.c. F. Porsche AG pursuant to a settlement decision. Volkswagen declined to file an appeal, hence the decision became final in 2021. The subject matter scope of the decision is limited to the cooperation of German automobile manufacturers on individual technical questions in connection with the development and introduction of SCR (selective catalytic reduction) systems for passenger cars that were sold in the European Economic Area. The manufacturers are not charged with any other misconduct such as price fixing or allocating markets and customers. Based on the facts of the EU case, in April 2023 the Korean competition authority KFTC issued the administrative fine decision that it had announced in its February 2023 press release. As announced, no fine was imposed on Volkswagen AG, and Porsche AG is not affected by the decision. A fine equaling just under €3 million was assessed against AUDI AG. AUDI AG and Volkswagen AG have appealed the decision to the relevant court in Seoul/Korea. 69 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements In April 2023, the English Competition and Markets Authority (CMA) filed an appeal against the February 2023 judgment upholding the claim of Volkswagen AG in an action for judicial review. The action challenged the requests for information issued to Volkswagen AG by CMA in the context of CMA’s investigations with respect to Volkswagen Group UK, it being the position of Volkswagen AG that CMA lacks jurisdiction to issue them. Volkswagen AG continues to examine the possibilities for reasonable cooperation with CMA. Both of the lawsuits that Greenpeace is supporting against Volkswagen AG were dismissed in February 2023 by the Braunschweig Regional Court and the Detmold Regional Court. The lawsuits seek to compel Volkswagen AG to initially reduce in stages and by 2029 completely cease its production and placement into the stream of commerce of vehicles with internal combustion engines, as well as to reduce greenhouse gas emissions from development, production, and marketing (including third party vehicle use). They would furthermore compel Volkswagen AG to exercise influence over Group companies, subsidiaries, and joint ventures so as to cause them to fulfill these demands as well. The plaintiffs have filed appeals against the judgments dismissing their complaints (appeals filed in March 2023 with the Braunschweig Higher Regional Court and in April 2023 with the Hamm Higher Regional Court). In Russia, Automobile Plant “GAZ” LLC (GAZ) has filed several judicial proceedings against Volkswagen AG and others alleging damage claims totaling around 44 billion Russian ruble. In this connection, GAZ applied for and in some cases initially obtained protective measures relating to the shares in Volkswagen Group Rus OOO (VGR) as well as to the movable and immovable property of VGR; the courts either rejected or have since vacated these measures. GAZ has appealed these decisions rejecting or vacating protective measures relative to the movable and immovable property of VGR; this appeal has since been rejected at the first appeals level. In May 2023, Volkswagen AG completed the sale of its shares in VGR and its local sub- sidiaries to Art-Finance LLC, thereby transferring title to the shares in VGR and its local subsidiaries to the buyer upon registration of the transaction. Volkswagen Group Rus was renamed AGR LLC in June 2023. Volkswagen AG is defending itself in all proceedings. In line with IAS 37.92, no further statements have been made concerning estimates of the financial impact or regarding uncertainties as to the amount or maturity of provisions and contingent liabilities in relation to the legal risks. This is so as to not compromise the results of the proceedings or the interests of the Company. Beyond these events, there were no significant changes in the reporting period compared with the disclosure on the Volkswagen Group’s expected development in fiscal year 2023 contained in the combined management report of the 2022 Annual Report in the sections “Report on Expected Developments” and “Report on Risks and Opportunities”, including in section “Legal Risks”. 70 Interim Consolidated Financial Statements (Condensed) Notes to the Consolidated Financial Statements 16. Contingent liabilities As of June 30, 2023, there were no material changes to the contingent liabilities as reported in the 2022 annual report. 17. Other financial obligations Compared with the 2022 consolidated financial statements, other financial obligations went up by €2.2 billion to €37.6 billion. The rise was due mainly to higher purchase commitments for property, plant and equipment. Significant events after the balance sheet date On July 26, 2023, Volkswagen entered into an agreement with the electric vehicle company XPeng Inc., Cayman Islands, to acquire up to 4.99% of the ordinary shares of XPeng Inc. for a total purchase price of up to USD710 million. The transaction is expected to close in the fourth quarter of 2023. At the same time, a technological framework agreement was signed with Guangdong Xiaopeng Automotive Technology Co. Ltd., Guangzhou/People's Republic of China, a subsidiary company of XPeng Inc., for the joint development of electric vehicles in China. Wolfsburg, July 25, 2023 Volkswagen Aktiengesellschaft The Board of Management 71 Interim Consolidated Financial Statements (Condensed) Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting and with generally accepted accounting principles, the condensed interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group. Wolfsburg, July 25, 2023 Volkswagen Aktiengesellschaft The Board of Management 72 Interim Consolidated Financial Statements (Condensed) Review Report On completion of our review, we issued the following unqualified review report dated 26 July 2023 in German language. The following text is a translation of this review report. The German text is authoritative: To VOLKSWAGEN AKTIENGESELLSCHAFT We have reviewed the condensed interim consolidated financial statements of VOLKSWAGEN AKTIENGESELLSCHAFT, Wolfsburg, – comprising the condensed income statement, condensed statement of comprehensive income, condensed balance sheet, condensed statement of changes in equity, condensed cash flow statement as well as selected explanatory notes – and the interim group management report for the period from 1 January 2023 to 30 June 2023, which are part of the half-year financial report pursuant to Sec. 115 WpHG [“Wertpapierhandelsgesetz”: German Securities Trading Act]. The preparation of the condensed interim consolidated financial statements in accordance with IFRSs (International Financial Reporting Standards) on interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the Company’s executive directors. Our responsibility is to issue a report on the condensed interim consolidated financial statements and the interim group management report based on our review. We conducted our review of the interim condensed consolidated financial statements and of the interim group management report in compliance with German Generally Accepted Standards for the Review of Financial Statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the review to obtain a certain level of assurance in our critical appraisal to preclude that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU and that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. A review is limited primarily to making inquiries of company personnel and applying analytical procedures and thus does not provide the assurance that we would obtain from an audit of financial statements. In accordance with our engagement, we have not performed an audit and thus cannot issue an auditor’s report. Based on our review, nothing has come to our attention that causes us to believe that the condensed interim consolidated financial statements are not prepared, in all material respects, in accordance with IFRSs on interim financial reporting as adopted by the EU or that the interim group management report is not prepared, in all material respects, in accordance with the provisions of the WpHG applicable to interim group management reports. Hanover, 26 July 2023 Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft Meyer Wirtschaftsprüfer [German Public Auditor] Matischiok Wirtschaftsprüfer [German Public Auditor] 73 Review Report Selected terms at a glance Hybrid notes Hybrid notes issued by Volkswagen are classified in their entirety as equity. The issuer has call options at defined dates during their perpetual maturities. They pay a fixed coupon until the first possible call date, followed by a variable rate depending on their terms and conditions. Modular Electric Drive Toolkit (MEB) The modular system is for the manufacturing of electric vehicles. The MEB establishes parameters for axles, drive systems, high-voltage batteries, wheelbases and weight ratios to ensure a vehicle optimally fulfills the requirements e-mobility. The production of the first vehicles based on the MEB started into series production in 2020. Plug-in hybrid Performance levels of hybrid vehicles. Plug-in hybrid electric vehicles (PHEVs) have a larger battery with a correspondingly higher capacity that can be charged via the combustion engine, the brake system, or an electrical outlet. This increases the range of the vehicle. of Glossary Capitalization ratio The capitalization ratio is defined as the ratio of capitalized development costs to total research and development costs in the Automotive Division. It shows the proportion of primary research and development costs subject to capitalization. Equity ratio The equity ratio measures the percentage of total assets attributable to shareholders’ equity as of a reporting date. This ratio indicates the stability and financial strength of the company and shows the degree of financial independence. Gross margin Gross margin is the percentage of sales revenue attributable to gross profit in a period. Gross margin provides information on profitability net of cost of sales. Net cash flow Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities. Net liquidity Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, loans and time deposits not financed by third-party borrowings. To safeguard our business activities, we have formulated the strategic target that net liquidity in the Auto- motive Division should amount to approximately 10% of the consolidated sales revenue. Operating result Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in financial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and documents the economic success of our core busi- ness. 74 Operating return on sales The operating return on sales is the ratio of the operating result to sales revenue. Ratio of capex to sales revenue The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure – largely for modernizing and expanding our product range and for environmentally friendly drivetrains, as well as for adjusting the production capacity and improving pro- duction processes – in relation to the Automotive Division’s sales revenue. Research and development ratio The research and development ratio (R&D ratio) in the Automotive Division shows total research and develop- ment costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology through to the development of marketable products. Particular emphasis is placed on the environmentally friendly orientation of our product portfolio. The R&D ratio underscores the efforts made to ensure the Company’s future viability: the goal of competitive profitability geared to sustain- able growth. Return on sales before tax The return on sales is the ratio of profit before tax to sales revenue in a period, expressed as a percentage. It shows the level of profit generated for each unit of sales revenue. The return on sales provides infor- mation on the profitability of all business activities before deducting income tax expense. Contact Information PU BLISH ED BY Volkswagen AG Group Financial Publications Letterbox 1848 38436 Wolfsburg Germany Phone +49 (0) 5361 9-0 Fax +49 (0) 5361 9-28282 I NVESTOR REL ATIONS Volkswagen AG Investor Relations Letterbox 1849 38436 Wolfsburg Germany E-Mail investor.relations@volkswagen.de Internet www.volkswagen-group.com/en/investors-15766 FI NANCIAL CALEN DAR October 26, 2023 Interim Report January – September 2023 This document is an English translation of the original report written in German. In case of discrepancies, the German version shall take precedence. This Interim Report is also available on the Internet, in German and English, at: www.volkswagen-group.com/en/investors-15766 358.809.620.20 75 www.volkswagen-group.com

Semestriel, 2023, Auto, Volswagen

write me a financial report

Semestriel

Chemistry

Covestro

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: Covestro ### Response:

T R O P E R M R E T N Financial Report as of June 30, 2019 Half-Year Financial Report I I 2 Covestro Interim Report as of June 30, 2019 KEY DATA COVESTRO GROUP Key Data Covestro Group 2nd quarter 20181 2nd quarter 2019 Change 1st half 20181 1st half 2019 Change € million € million % € million € million % Core volume growth2, 3 +4.4% +1.1% +2.2% –0.4% Sales 3,863 3,211 –16.9 7,642 6,386 –16.4 Change in sales Volume +4.9% +0.8% +1.6% +0.9% Price +9.9% –18.7% +12.1% –18.5% Currency –4.4% +1.8% –5.8% +2.1% Portfolio 0.0% –0.8% 0.0% –0.9% Sales by region EMLA4 1,677 1,379 –17.8 3,356 2,793 –16.8 NAFTA5 885 822 –7.1 1,725 1,610 –6.7 APAC6 1,301 1,010 –22.4 2,561 1,983 –22.6 EBITDA7 985 459 –53.4 2,048 901 –56.0 Changes in EBITDA of which volume +11.7% +0.5% +4.7% +1.9% of which price +40.8% –73.5% +50.7% –69.0% of which raw material price effect –11.1% +8.9% –12.8% +5.8% of which currency –4.1% +1.1% –6.2% +1.1% EBIT8 826 274 –66.8 1,733 538 –69.0 Financial result (27) (23) –14.8 (55) (46) –16.4 Net income9 604 189 –68.7 1,248 368 –70.5 Earnings per share (€)10 3.07 1.03 –66.4 6.31 2.01 –68.1 Operating cash flows11 517 164 –68.3 969 284 –70.7 Cash outflows for additions to property, plant, equipment and intangible assets 153 219 +43.1 241 384 +59.3 Free operating cash flow12 364 (55) . 728 (100) 1 Reference information was not restated; see section 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Core volume growth refers to the core products in the Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties segments. It is calculated as the percentage change in externally sold volumes in thousand tons compared with the prior year. Covestro also takes advantage of business opportunities outside its core business, for example the sale of precursors and by-products such as hydrochloric acid, sodium hydroxide solution and styrene. These transactions are not included in core volume growth. 3 Reference values calculated on the basis of the definition of the core business effective March 31, 2019 4 EMLA: Europe, Middle East, Africa and Latin America (excluding Mexico) region 5 NAFTA: United States, Canada and Mexico region 6 APAC: Asia and Pacific region 7 EBITDA: EBIT plus the sum of depreciation, amortization, impairment losses and impairment loss reversals 8 EBIT: Income after income taxes plus financial result and income taxes 9 Net income: income after income taxes attributable to the stockholders of Covestro AG 10 Earnings per share: according to IAS 33, earnings per share comprise net income divided by the weighted average number of outstanding no-par voting shares of Covestro AG. The calculation was based on 196,605,012 no-par shares for the second quarter of 2018 and on 197,746,827 no-par shares for the first half of 2018, and on 182,704,602 no-par shares for the second quarter of 2019, and for the first half of 2019. 11 Operating cash flows: cash flows from operating activities according to IAS 7 12 Free operating cash flow: operating cash flows less cash outflows for additions to property, plant, equipment and intangible assets 2 Covestro Interim Report as of June 30, 2019 Contents Key Data Covestro Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . About This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Covestro on the Capital Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTERIM GROUP MANAGEMENT REPORT AS OF JUNE 30, 2019 1 . Business Development of the Covestro Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2 . Business Development by Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2 .1 Polyurethanes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2 .2 Polycarbonates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2 .3 Coatings, Adhesives, Specialties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3 . Net Assets and Financial Position of the Covestro Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4 . Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4 .1 Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4 .2 Forecast for Key Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5 . Opportunities and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2019 Covestro Group Consolidated Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Covestro Group Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Covestro Group Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Covestro Group Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Covestro Group Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1 . General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2. Effects of New Financial Reporting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2 .1 Financial Reporting Standards Applied for the First Time in the Reporting Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2 .2 Published Financial Reporting Standards that Have Not Yet Been Applied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3 . Segment and Regional Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4 . Scope of Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4 .1 Changes in the Scope of Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4 .2 Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5 . Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 6 . Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7 . Employees and Pension Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 8 . Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9 . Legal Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 10 . Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 11 . Events after the End of the Reporting Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Responsibility Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FURTHER INFORMATION Segment and Quarterly Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Publishing Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4 5 7 20 . 43 . 44 45 . 46 . 49 . 49 CONTENTS 3 Covestro Interim Report as of June 30, 2019 About This Report Reporting principles The consolidated interim report of Covestro AG meets the requirements for a half-yearly financial report pursuant to the applicable provisions of the German Securities Trading Act (WpHG) and, in accordance with Section 115 of the German Securities Trading Act, comprises condensed consolidated interim financial statements, an interim group management report, and a responsibility statement. The consolidated interim financial statements were prepared in accordance with IAS 34 according to the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU) and in effect at the closing date as well as their Interpretations. The reference information for fiscal year 2018 was not restated to reflect the new financial reporting standards, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” This consolidated interim report should be read alongside the 2018 Annual Report and the additional information about the company contained therein, as well as the First-Quarter 2019 Interim Statement. Forward-looking statements This Interim Report may contain forward-looking statements based on current assumptions and forecasts made by the management of Covestro AG. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company, and the estimates given here. These factors include those discussed in Covestro’s public reports, which are available at www.covestro.com. The company assumes no liability whatsoever to update these forward- looking statements or to conform them to future events or developments. Rounding As the indicators in this report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact. Percentage deviations Percentage deviations are only calculated and reported if they are no more than 100%. Larger deviations are reported as >100%, >200%, etc. If a deviation changes from positive to negative or vice versa, or if it is greater than 1,000%, this is shown by a period. Alternative performance measures Throughout its financial reporting, Covestro uses alternative performance measures (APMs) to assess the performance of the Group. These are not defined in the International Financial Reporting Standards (IFRSs). They should be considered a supplement to, not a replacement for, the performance measures determined in accord- ance with IFRSs. The alternative performance measures of relevance to the Covestro Group include EBITDA, return on capital employed (ROCE), free operating cash flow (FOCF), and net financial debt. Covestro uses ROCE to assess profitability in the context of the company’s internal management system. EBITDA is also calculated as an additional indicator of profitability. FOCF is a key factor in the presentation of the liquidity position that indicates the company’s ability to generate a cash surplus and finance its activities. Net financial debt gauges the Group’s financial condition and financing requirements. The calculation methods for the APMs may vary from those of other companies, thus limiting the extent of the overall comparability. These alternative performance measures should not be viewed in isolation or employed as an alternative to the financial indicators determined in accordance with IFRSs and presented in the consolidated financial statements for purposes of assessing Covestro’s net assets, financial position and results of operations. Explanations of the definition and calculation of the alternative performance measures can be found in section 17 “Alternative Performance Measures” in the combined management report in the 2018 Annual Report. Abbreviations The abbreviations used in this report are explained in the glossary of the 2018 Covestro Annual Report. This Interim Report was published in German and English on July 24, 2019. Only the German version is binding. ABOUT THIS REPORT 4 Covestro Interim Report as of June 30, 2019 COVESTRO ON THE CAPITAL MARKET Covestro on the Capital Market Performance of the Covestro Stock Versus the Market in the First Half of 2019 € (Covestro share) 60 e t r e 55 d n u 50 H 45 40 35 30 Dec. 31, 2018 Jan. 31, 2019 Feb. 28, 2019 Mar. 31, 2019 Apr. 30, 2019 May 31, 2019 June 28, 2019 Covestro stock DAX (indexed) STOXX® Europe 600 Chemicals (indexed) Covestro closing prices Xetra®; source: Bloomberg Positive stock market performance in an unsettled environment Although the macroeconomic environment worldwide is marked by uncertainty, European stock markets performed well in the first six months of 2019, thereby recovering from a weak year for stocks in 2018. Many indices such as the EURO STOXX 50® posted positive performances in the first half of 2019. At the end of June, the DAX, which is relevant for Covestro, was up 17.4% compared with its value at year-end 2018, while the STOXX® Europe 600 Chemicals Index rose 18.5% during the same period. However, individual chemical stocks continued to experience strong volatility and muted growth during this period, driven by uncertainties arising from trade conflicts and the slowing of global economic growth and industrial production. In this capital market environment, Covestro stock finished the first half of 2019 at a Xetra® closing price of €44.71 – an increase of 3.5% compared with the end of 2018. On May 31, 2019, Covestro stock dipped to its low for the half-year with a closing price of €39.23. The high for the first six months was €55.32 on April 12, 2019. Covestro Share at a Glance 2nd quarter 2018 2nd quarter 2019 1st half 2018 1st half 2019 Average daily turnover million shares 1.3 1.4 1.2 1.4 High € 82.10 55.32 95.00 55.32 Low € 71.88 39.23 71.88 39.23 Closing date € 76.42 44.71 76.42 44.71 Outstanding shares (closing date) million shares 192.6 182.7 192.6 182.7 Market capitalization (closing date) € million 14,717 8,169 14,717 8,169 Covestro closing prices, Xetra®; source: Bloomberg Dividend of €2.40 per share paid At this year’s Annual Stockholders’ Meeting on April 12, 2019, which took place at the World Conference Center in Bonn (Germany), stockholders approved the dividend of €2.40 per share proposed by the Board of Management and the Supervisory Board of Covestro AG for 2018. Compared with the prior year (€2.20), this represents an increase of 9%. The dividend was paid on April 17, 2019. 5 Covestro Interim Report as of June 30, 2019 COVESTRO ON THE CAPITAL MARKET New authorization to acquire treasury shares At this year’s Annual Stockholders’ Meeting, stockholders approved the proposal by the Board of Management and the Supervisory Board of Covestro AG to authorize the Board of Management to acquire and use own shares in the amount of up to 10% of the capital stock. According to the German Stock Corporation Act, authorization such as this is required for deciding on possible additional share buy-backs in the future. Moody’s confirms credit rating At the end of the first half of 2019, rating agency Moody’s Investors Service, London (UK), reviewed Covestro’s existing investment-grade rating and confirmed the company’s rating on July 2, 2019. The Baa1 rating with a stable outlook puts Covestro in an excellent position for obtaining financing, particularly on the international debt market. Buy recommendations from eight analysts At the end of the first six months of 2019, Covestro was covered by 23 securities brokers. Eight analysts recommended the stock as a buy, twelve were neutral, and three rated it as a sell. The average share-price target at the end of the period was €51. Basic Covestro Share Information Capital stock €183,000,000 Outstanding shares (half-year end) 182,704,602 Share class No-par ordinary bearer shares ISIN DE0006062144 WKN 606214 Ticker symbol 1COV Reuters symbol 1COV.DE Bloomberg symbol 1COV GY Market segment Regulated market Transparency level Prime standard Sector Chemicals Index DAX 6 Covestro-Zwischenbericht zum 30. Juni 2016Inhalt Text Interim Group Management Report as of June 30, 2019 6 7 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 1. Business Development of the Covestro Group 1. Business Development of the Covestro Group Second quarter of 2019 The Group’s core volumes in the second quarter of 2019 rose by 1.1% compared with the prior-year quarter, in particular due to the performance of the Polycarbonates segment, which increased its volumes by 4.4%. Core volume growth in the Polyurethanes segment amounted to 0.7%, whereas volumes in the Coatings, Adhesives, Specialties segment declined by 4.7%. Group sales amounted to €3,211 million, down 16.9% from the prior-year quarter (previous year: €3,863 million). This was mainly due to lower selling prices, which had a negative effect on sales of 18.7%. Total volumes remained at the level of the prior-year quarter. Exchange rate movements had a positive effect of 1.8% on Group sales. In addition, the change in the portfolio reduced sales by 0.8%. In terms of sales in the second quarter of 2019, the sale of the U.S. sheet business in the third quarter of 2018 had a negative effect, and the step acquisition of shares of Japan-based DIC Covestro Polymer Ltd. in the second quarter of 2019 had a positive effect. All segments were affected by the drop in sales in the second quarter of 2019. Sales in the Polyurethanes segment decreased 24.3% to €1,489 million (previous year: €1,966 million), and in the Polycarbonates segment they were down 15.0% to €898 million (previous year: €1,056 million). In the Coatings, Adhesives, Specialties segment, sales decreased 1.3% to €621 million (previous year: €629 million). Covestro Group Quarterly Sales Covestro Group Quarterly EBITDA € million € million 2018 3,779 20181 1,063 Q1 Q1 2019 3,175 2019 442 2018 3,863 20181 985 Q2 Q2 2019 3,211 2019 459 2018 3,702 20181 859 Q3 Q3 2019 2019 2018 3,272 20181 293 Q4 Q4 2019 2019 0 1,000 2,000 3,000 4,000 0 300 600 900 1,200 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” In the second quarter of 2019, the Group’s EBITDA was down 53.4% to €459 million (previous year: €985 million). The decline in earnings resulted mainly from lower margins in the Polyurethanes and Polycarbonates segments. In contrast, higher volumes, a decrease in provisions for short-term, variable compensation, and the effects of applying the new financial reporting standard IFRS 16 (Leases) had a positive effect on earnings. In addition, earnings were also improved by the one-time gain from the remeasurement of the shares of DIC Covestro Poly- mer Ltd., which were previously recognized according to the equity method. EBITDA in the Polyurethanes segment dropped 70.5% to €172 million (previous year: €583 million), and in the Polycarbonates segment it was down 46.0% to €154 million (previous year: €285 million). In the Coatings, Adhesives, Specialties segment, EBITDA rose 7.9% to €150 million (previous year: €139 million). Depreciation, amortization, impairments and impairment loss reversals increased by 16.4% to €185 million in the second quarter of 2019 (previous year: €159 million). They comprised €180 million (previous year: €153 million) in depreciation and impairments of property, plant and equipment and €5 million (previous year: €6 million) in amortization and impairments of intangible assets. In the second quarter of 2019, the Covestro Group’s EBIT was down 66.8% to €274 million (previous year: €826 million). 8 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 1. Business Development of the Covestro Group Taking into account a financial result of minus €23 million (previous year: minus €27 million), income before income taxes decreased to €251 million, compared with €799 million in the prior-year quarter. After tax expense of €61 million (previous year: €193 million), which declined in line with earnings, income after income taxes was €190 million (previous year: €606 million). After noncontrolling interests, net income amounted to €189 million (previous year: €604 million). Compared with the prior-year quarter, the earnings per share dropped to €1.03 (prior year: €3.07). Operating cash flows decreased to €164 million (previous year: €517 million) despite lower income tax payments, largely on account of lower EBITDA. Free operating cash flow declined to minus €55 million in the second quarter of 2019 (previous year: €364 million). This decrease was due to lower cash outflows from operating activities and the increase in cash outflows for additions to property, plant, equipment and intangible assets, which rose 43.1% to €219 million (previous year: €153 million). First half of 2019 In the first half of 2019, the Group’s core volume growth was negative at minus 0.4%. The Polyurethanes segment saw growth of 0.3%, whereas volumes in the Polycarbonates and Coatings, Adhesives, Specialties segments fell 1.0% and 2.4%, respectively, compared with the prior-year period. Compared with the prior-year period, Group sales dropped 16.4% to €6,386 million in the first six months of 2019 (previous year: €7,642 million). The decline in sales resulted chiefly from an overall decrease of 18.5% in selling prices. In the Polycarbonates and Polyurethanes segments in particular, selling prices were significantly below the prior-year period. In contrast, total volumes remained at the previous year’s level. Exchange rate movements had a positive impact of 2.1%, but the change in the portfolio reduced sales by 0.9%. In the Polyurethanes and Polycarbonates segments, sales were down in the first six months of 2019. Sales in the Polyurethanes segment declined 24.3% to €2,965 million (previous year: €3,916 million), and in the Polycarbonates segment sales decreased 15.8% to €1,758 million (previous year: €2,089 million). However, sales in the Coatings, Adhesives, Specialties segment rose 2.2% to €1,248 million (previous year: €1,221 million). The Group’s EBITDA fell 56.0% from the prior-year period, dropping from €2,048 million to €901 million in the first half of 2019. This was a result of lower earnings in the Polyurethanes and Polycarbonates segments. Depreciation, amortization, impairment and impairment loss reversals increased by 15.2% to €363 million (previ- ous year: €315 million) in the first half of 2019. They comprised €354 million (previous year: €304 million) in depre- ciation and impairments of property, plant and equipment and €9 million (previous year: €11 million) in amortiza- tion and impairments of intangible assets. In the first six months of 2019, the Covestro Group’s EBIT slid 69.0% to €538 million (previous year: €1,733 million). Taking into account a financial result of minus €46 million (previous year: minus €55 million), income before income taxes decreased to €492 million, compared with €1,678 million in the prior-year period. After tax expense of €122 million (previous year: €426 million), which declined in line with earnings, income after income taxes was €370 million (previous year: €1,252 million). After noncontrolling interests, net income amounted to €368 million (previous year: €1,248 million). Earnings per share dropped to €2.01 (previous year: €6.31). Operating cash flows sank to €284 million in the first six months of 2019 (previous year: €969 million). This is mostly due to the decline in EBITDA, which could not be balanced out by lower income tax payments and reduced funds tied up in working capital. Free operating cash flow declined to minus €100 million (previous year: €728 million) in the first half of 2019. In addition to lower cash flows from operating activities, cash outflows for additions to property, plant, equipment and intangible assets rose to €384 million (previous year: €241 million). 9 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 2. Business Development by Segment 2. Business Development by Segment 2.1 Polyurethanes Polyurethanes Key Data 2nd quarter 20181 2nd quarter 2019 Change 1st half 20181 1st half 2019 Change € million € million % € million € million % Core volume growth2 +3.9% +0.7% +1.4% +0.3% Sales 1,966 1,489 –24.3 3,916 2,965 –24.3 Change in sales Volume +3.3% +0.8% +0.3% +1.9% Price +9.2% –26.8% +13.2% –28.1% Currency –4.4% +1.7% –5.9% +1.9% Portfolio 0.0% 0.0% 0.0% 0.0% Sales by region EMLA 871 643 –26.2 1,731 1,312 –24.2 NAFTA 486 444 –8.6 961 855 –11.0 APAC 609 402 –34.0 1,224 798 –34.8 EBITDA 583 172 –70.5 1,220 329 –73.0 EBIT 492 72 –85.4 1,039 129 –87.6 Operating cash flows 364 116 –68.1 540 120 –77.8 Cash outflows for additions to property, plant, equipment and intangible assets 84 138 +64.3 130 240 +84.6 Free operating cash flow 280 (22) . 410 (120) 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2019 Second quarter of 2019 In the second quarter of 2019, core volume growth in Polyurethanes totaled 0.7%. Positive growth in volumes in the furniture and construction sectors was able to balance out weaker demand from the automotive industry. Sales in the Polyurethanes segment amounted to €1,489 million, down 24.3% from the prior-year quarter (previous year: €1,966 million), mainly due to a 26.8% decrease in selling prices as a result of increased competition. Vol- umes had a 0.8% effect on sales. In addition, exchange rate movements had a positive effect of 1.7% on sales. The EMLA region’s sales dropped 26.2% to €643 million (previous year: €871 million) due to much lower average selling prices. Stable total volumes and neutral exchange rate effects stood in contrast to this development. In the NAFTA region, sales declined by 8.6% to €444 million (previous year: €486 million). A significant increase in total volumes and very positive exchange rate effects could not offset the significantly lower selling price level. Sales in the APAC region declined 34.0% to €402 million (previous year: €609 million). Considerably lower average selling prices and total volumes had a negative effect on sales, whereas exchange rate movements improved sales slightly. 10 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 2. Business Development by Segment Polyurethanes Quarterly Sales Polyurethanes Quarterly EBITDA € million € million 2018 1,950 20181 637 Q1 Q1 2019 1,476 2019 157 2018 1,966 20181 583 Q2 Q2 2019 1,489 2019 172 2018 1,849 20181 432 Q3 Q3 2019 2019 2018 1,597 20181 111 Q4 Q4 2019 2019 0 500 1,000 1,500 2,000 0 200 400 600 800 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” In the second quarter of 2019, EBITDA in the Polyurethanes segment decreased 70.5% compared with the prior-year quarter, dropping to €172 million (previous year: €583 million). This decline was driven by the strongly negative development of selling prices as a result of increased competition. EBIT declined to €72 million (previous year: €492 million). Free operating cash flow decreased to minus €22 million (previous year: €280 million). The main reasons for this were lower EBITDA and higher cash outflows for additions to property, plant and equipment. In contrast, freeing up working capital in inventories and other items positively influenced free operating cash flow. First half of 2019 In the first half of 2019, core volume growth in Polyurethanes was 0.3%. Sales in the segment declined 24.3% to €2,965 million (previous year: €3,916 million) in the same period. Selling prices were down 28.1%, which had a negative effect on sales, whereas an increase in total volumes gave sales a 1.9% boost. Exchange rate fluctuations had a positive impact of 1.9% on sales. EBITDA declined 73.0% to €329 million (previous year: €1,220 million) on account of the significantly negative change in selling prices. EBIT decreased 87.6% to €129 million (previous year: €1,039 million). Free operating cash flow fell to minus €120 million (previous year: €410 million). The key reasons for this development were lower EBITDA and higher cash outflows for additions to property, plant and equipment. Freeing up working capital in inventories and receivables had a positive effect. 11 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 2. Business Development by Segment 2.2 Polycarbonates Polycarbonates Key Data 2nd quarter 20181 2nd quarter 2019 Change 1st half 20181 1st half 2019 Change € million € million % € million € million % Core volume growth2 +5.3% +4.4% +4.0% –1.0% Sales 1,056 898 –15.0 2,089 1,758 –15.8 Change in sales Volume +5.6% +5.7% +2.8% +1.5% Price +15.2% –18.8% +15.8% –15.8% Currency –4.9% +1.7% –6.6% +2.1% Portfolio 0.0% –3.6% 0.0% –3.6% Sales by region EMLA 353 306 –13.3 715 595 –16.8 NAFTA 209 190 –9.1 412 378 –8.3 APAC 494 402 –18.6 962 785 –18.4 EBITDA 285 154 –46.0 588 309 –47.4 EBIT 241 99 –58.9 501 204 –59.3 Operating cash flows 155 93 –40.0 234 231 –1.3 Cash outflows for additions to property, plant, equipment and intangible assets 44 42 –4.5 67 81 +20.9 Free operating cash flow 111 51 –54.1 167 150 –10.2 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2019 Second quarter of 2019 In the second quarter of 2019, core volumes in the Polycarbonates segment were 4.4% higher than in the prior- year quarter. Whereas the electrical and electronics industry and the construction sector contributed to this growth, weak demand from the auto industry led to a drop in volumes. Sales in the Polycarbonates segment tumbled 15.0% to €898 million (previous year: €1,056 million). Lower selling prices had the effect of reducing sales by 18.8% due to increased competition, while the rise in total volumes had a positive effect on sales of 5.7%. Exchange rate fluctuations bumped up sales by 1.7%. Moreover, the portfolio effect from the sale of the U.S. sheet business in the third quarter of 2018 also impacted sales in the second quar- ter of 2019 with a negative effect of 3.6%. In the EMLA region, sales were down by 13.3% to €306 million (previous year: €353 million). The decline in total volumes had a slightly negative effect on sales. In addition, lower selling prices pushed sales down considerably. The effect of exchange rate developments remained neutral. The NAFTA region’s sales dropped 9.1% to €190 million (previous year: €209 million) primarily due to the aforementioned significant effect that portfolio changes had on sales.. A significant jump in total volumes and substantially positive exchange rate movements resulted in an increase in sales. In contrast, the drop in the selling price level had a major negative effect on sales. The APAC region’s sales fell 18.6% to €402 million (previous year: €494 million). Significant growth in total volumes and slightly positive exchange rate movements could not compensate for a considerable decrease in the selling price level. 12 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 2. Business Development by Segment Polycarbonates Quarterly Sales Polycarbonates Quarterly EBITDA € million € million 2018 1,033 20181 303 Q1 Q1 2019 860 2019 155 2018 1,056 20181 285 Q2 Q2 2019 898 2019 154 2018 1,038 20181 315 Q3 Q3 2019 2019 2018 924 20181 133 Q4 Q4 2019 2019 0 300 600 900 1,200 0 100 200 300 400 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” In the second quarter of 2019, EBITDA in the Polycarbonates segment decreased 46.0% compared with the prior- year quarter, dropping to €154 million (previous year: €285 million), mostly on account of the negative change in selling prices. In contrast, larger volumes sold and lower raw material prices positively influenced earnings. The portfolio effect from the sale of the U.S. sheet business additionally had a negative impact on EBITDA. EBIT tumbled 58.9% to €99 million (previous year: €241 million). Free operating cash flow decreased 54.1% to €51 million (previous year: €111 million). The key driver here was the decrease in EBITDA, which was partly offset by freeing up working capital in inventories. First half of 2019 In the first half of 2019, core volumes in the Polycarbonates segment were 1.0% lower than in the prior-year period. Sales in the Polycarbonates segment were down 15.8% to €1,758 million in the first six months of 2019 (previous year: €2,089 million). The lower selling price level was the primary factor in the reduction in sales by 15.8%. The changes in total volumes and exchange rates, which had a positive effect of 1.5% and 2.1%, respectively, were able to compensate for the negative effect of 3.6% from the sale of the U.S. sheet business in the third quarter of 2018. In the first half of 2019, EBITDA in the Polycarbonates segment decreased by 47.4% compared with the prior-year period, dropping to €309 million (previous year: €588 million), mostly on account of the negative change in selling prices. EBIT decreased 59.3% to €204 million (previous year: €501 million). Free operating cash flow was down by 10.2% to €150 million (previous year: €167 million). Freeing up working capital in inventories and receivables partly offset the lower EBITDA. 13 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 2. Business Development by Segment 2.3 Coatings, Adhesives, Specialties Coatings, Adhesives, Specialties Key Data 2nd quarter 20181 2nd quarter 2019 Change 1st half 20181 1st half 2019 Change € million € million % € million € million % Core volume growth2 +5.4% –4.7% +2.0% –2.4% Sales 629 621 –1.3 1,221 1,248 +2.2 Change in sales Volume +6.3% –4.5% +2.0% –1.7% Price +1.7% –0.4% +1.3% +0.6% Currency –3.9% +2.2% –4.9% +2.6% Portfolio 0.0% +1.4% 0.0% +0.7% Sales by region EMLA 299 277 –7.4 597 571 –4.4 NAFTA 137 144 +5.1 259 288 +11.2 APAC 193 200 +3.6 365 389 +6.6 EBITDA 139 150 +7.9 275 296 +7.6 EBIT 116 120 +3.4 229 238 +3.9 Operating cash flows 66 38 –42.4 83 50 –39.8 Cash outflows for additions to property, plant, equipment and intangible assets 25 40 +60.0 44 64 +45.5 Free operating cash flow 41 (2) . 39 (14) 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2019 Second quarter of 2019 In the second quarter of 2019, core volumes in the Coatings, Adhesives, Specialties segment were 4.7% lower than in the prior-year quarter because of weaker demand from the automotive and construction industries. Segment sales decreased by 1.3% to €621 million (previous year: €629 million). Lower total volumes negatively affected sales by 4.5%, while the change in the selling price level amounted to minus 0.4%. Exchange rate movements increased sales by 2.2%. In addition, the step acquisition of shares of Japan-based DIC Covestro Polymer Ltd. had a positive effect on sales of 1.4%. In the EMLA region, sales were down 7.4% to €277 million (previous year: €299 million). The drop in total volumes sold caused sales to decline considerably. In contrast, average selling prices remained largely stable at the previous year’s level. The effect of exchange rate movements was also neutral. In the NAFTA region, sales rose by 5.1% to €144 million (previous year: €137 million). Exchange rate movements had a significant positive effect, which more than compensated for the modest decrease in total volumes. The change in average selling prices also had a slightly positive impact on sales. The APAC region’s sales grew 3.6% to €200 million (previous year: €193 million). The aforementioned portfolio effect and changes in exchange rates boosted up sales slightly. Total volumes re- mained stable at the prior-year level, although average selling prices had a modestly negative effect on sales. 14 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 2. Business Development by Segment Coatings, Adhesives, Specialties Quarterly Sales Coatings, Adhesives, Specialties Quarterly EBITDA € million € million 2018 592 20181 136 Q1 Q1 2019 627 2019 146 2018 629 20181 139 Q2 Q2 2019 621 2019 150 2018 606 20181 126 Q3 Q3 2019 2019 2018 534 20181 63 Q4 Q4 2019 2019 0 200 400 600 800 0 50 100 150 200 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” EBITDA in the Coatings, Adhesives, Specialties segment increased by 7.9% in the second quarter of 2019, rising to €150 million (previous year: €139 million). This was mostly due to the one-time gain from the remeasurement of previously held interest in Japan-based DIC Covestro Polymer Ltd., interest that had been accounted for under the equity method. In contrast, lower volumes adversely affected EBITDA performance. EBIT rose 3.4% to €120 million (previous year: €116 million). In the second quarter of 2019, free operating cash flow amounted to minus €2 million (previous year: €41 million). The improvement in EBITDA and freed-up working capital in receivables stood in contrast to higher cash outflows for additions to property, plant and equipment and an increase in cash tied up in liabilities. First half of 2019 In the first half of 2019, core volumes in the Coatings, Adhesives, Specialties segment were 2.4% lower than in the prior-year period. During the same period, sales of Coatings, Adhesives, Specialties rose 2.2% to €1,248 million (previous year: €1,221 million). Average selling prices had an effect on sales that amounted to 0.6%, whereas the decline in total volumes reduced sales by 1.7%. Exchange rate movements had a positive impact on sales of 2.6%. The step acquisition of shares of Japan-based DIC Covestro Polymer Ltd. resulted in a portfolio effect on sales of 0.7%. In the first half of 2019, EBITDA improved by 7.6% compared with the prior-year period, growing to €296 million (previous year: €275 million), mostly on account of the previously mentioned one-time gain. Moreover, the change in selling prices also increased earnings. Lower volumes, however, had a negative effect. EBIT increased 3.9% to €238 million (previous year: €229 million). Free operating cash flow totaled minus €14 million in the first half of 2019 (previous year: €39 million). An increase in cash tied up in inventories and liabilities and higher cash outflows for additions to property, plant and equipment outweighed the increase in EBITDA and the cash freed up from receivables. 15 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 3. Net Assets and Financial Position of the Covestro Group 3. Net Assets and Financial Position of the Covestro Group Covestro Group Summary Statement of Cash Flows 2nd quarter 20181 2nd quarter 2019 1st half 20181 1st half 2019 € million € million € million € million EBITDA 985 459 2,048 901 Income taxes paid (279) (144) (335) (223) Change in pension provisions – 17 8 26 (Gains) losses on retirements of noncurrent assets – (19) 1 (17) Change in working capital/other noncash items (189) (149) (753) (403) Cash flows from operating activities 517 164 969 284 Cash outflows for additions to property, plant, equipment and intangible assets (153) (219) (241) (384) Free operating cash flow 364 (55) 728 (100) Cash flows from investing activities (65) (184) (35) (373) Cash flows from financing activities (903) (109) (1,692) (143) Change in cash and cash equivalents due to business activities (451) (129) (758) (232) Cash and cash equivalents at beginning of period 926 771 1,232 865 Change in cash and cash equivalents due to exchange rate movements – (2) 1 7 Cash and cash equivalents at end of period 475 640 475 640 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” Cash flows from operating activities In the second quarter of 2019, cash flows from operating activities declined to €164 million (previous year: €517 million). Reduced EBITDA was the key reason for this development. However, income tax payments were lower. After deduction of cash outflows for additions to property, plant, equipment and intangible assets, free operating cash flow totaled minus €55 million (previous year: €364 million). In the first half of 2019, cash flows from operating activities amounted to €284 million, down from the previous year’s figure of €969 million. After deduction of cash outflows for additions to property, plant, equipment, and intangible assets totaling €384 million (previous year: €241 million), free operating cash flow was minus €100 million (previous year: €728 million). Cash flows from investing activities In the second quarter of 2019, cash outflows for investing activities totaled €184 million (previous year: cash outflows €65 million). Cash outflows for additions to property, plant and equipment and intangible assets totaling €219 million (previous year: €153 million) stood in contrast to cash inflows from items such as maturing bank deposits. Cash outflows for investing activities in the first half of 2019 totaled €373 million (previous year: cash outflows €35 million). These mainly included cash outflows for additions to property, plant and equipment and intangible assets of €384 million (previous year: €241 million). Cash flows from financing activities The Covestro Group saw cash outflows for financing activities amounting to €109 million in the second quarter of 2019 (previous year: cash outflows €903 million). The Covestro AG dividend paid in April 2019 totaled €438 million, while cash received from issuance of debt stood at €440 million. Additional cash outflows com- prised debt repayments in the amount of €87 million and interest payments of €21 million. Cash outflows for financing activities in the first half of 2019 totaled €143 million (previous year: cash outflows €1,692 million). 16 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 3. Net Assets and Financial Position of the Covestro Group Net Financial Debt Dec. 31, 20181 June 30, 2019 € million € million Bonds 996 997 Liabilities to banks 24 425 Lease liabilities2 193 821 Liabilities from derivatives 12 11 Other financial liabilities – – Receivables from derivatives (12) (10) Financial debt 1,213 2,244 Cash and cash equivalents (865) (640) Current financial assets – – Net financial debt 348 1,604 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 As of June 30, 2019, this also contains the lease liabilities from initial application of IFRS 16. In comparison with December 31, 2018, the Covestro Group’s net financial debt increased by €1,256 million to reach €1,604 million as of June 30, 2019. The rise in financial debt stemmed largely from the initial application of IFRS 16 and the resulting increase in lease liabilities as well as the assumption of short-term loans. Furthermore, cash and cash equivalents decreased by €225 million to €640 million. Covestro Group Summary Statement of Financial Position Dec. 31, 20181 June 30, 2019 € million € million Noncurrent assets2 5,801 6,612 Current assets 5,283 5,049 Total assets 11,084 11,661 Equity 5,375 5,205 Noncurrent liabilities2 3,126 3,957 Current liabilities 2,583 2,499 Liabilities 5,709 6,456 Total equity and liabilities 11,084 11,661 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 As of June 30, 2019, this also contains the lease liabilities from initial application of IFRS 16. Total assets grew by €577 million compared with December 31, 2018, rising to €11,661 million as of June 30, 2019. Noncurrent assets rose €811 million to €6,612 million, primarily due to an increase in property, plant and equipment, which chiefly resulted from the initial application of IFRS 16. Current assets decreased by €234 million to €5,049 million. This resulted mainly from a reduction in cash and cash equivalents and inventories, which stood in contrast to higher income tax refund claims and an increase in assets held for sale. Compared with December 31, 2018, equity declined €170 million to €5,205 million. The drop was attributable to the dividend distribution, which was not offset by income after income taxes. Liabilities were up €747 million, totaling €6,456 million as of June 30, 2019. Provisions for pensions and other post-employment benefits increased by €259 million to €1,704 million. Noncurrent financial liabilities grew by €536 million to €1,702 million, a change mostly attributable to the increase in lease liabilities resulting from the initial application of IFRS 16. Current financial liabilities increased €493 million to €552 million, mainly due to the assumption of short-term loans. 17 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 4. Forecast 4. Forecast 4.1 Economic Outlook Economic Outlook Growth1 2018 Growth1 forecast 2019 (2018 Annual Report) Growth1 forecast 2019 % % % World +3.1 +2.8 +2.7 European Union +2.0 +1.3 +1.3 of which Germany +1.5 +1.0 +0.5 NAFTA +2.7 +2.4 +2.4 of which United States +2.9 +2.5 +2.6 Asia-Pacific +4.8 +4.7 +4.5 of which China +6.6 +6.3 +6.2 1 Real growth of gross domestic product; source: IHS (Global Insight), Growth 2018 and Growth forecast 2019, as of July 2019. We expect global economic growth of 2.7% for 2019, slightly weaker than our outlook in the 2018 Annual Report. The current assessment of developments in the Asia-Pacific region has clouded somewhat, whereas assessments for the NAFTA region and the European Union remain unchanged. The expectation for Germany has, however, been significantly scaled back. Overall, we expect to see ongoing difficult economic conditions due to such issues as political uncertainties in Europe and increasing trade barriers. Main customer industries1 Compared with the expectations we expressed in the 2018 Annual Report, we so far see only minor changes, or none at all, for the performance of the construction sector industry, assuming no further global trade barriers. Growth in the furniture industry is anticipated to be somewhat weaker than presented in the 2018 Annual Report. We expect a significant decline for the electrical and electronics industry and, in particular, for the automotive industry. 4.2 Forecast for Key Data On the basis of the business performance described in this report, along with our consideration of the potential associated risks and opportunities, we confirm the forecast for key data made in both the 2018 Annual Report and the Quarterly Statement as of March 31, 2019, for the rest of the 2019 fiscal year. We expect core volume growth in the low-to-mid-single-digit-percentage range. This projection applies to the Covestro Group as well as to the Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties segments. In fiscal year 2019, we anticipate free operating cash flow (FOCF) of between €300 million and €700 million. For the Polyurethanes segment, we project an increase in cash outflows for additions to property, plant, equipment and intangible assets, which will exceed the expected net cash provided by operating activities. FOCF is anticipated to decline in the Polycarbonates segment as well, although the trend here will likely be much more positive than for the Group as a whole. For the Coatings, Adhesives, Specialties segment, we expect FOCF around the prior-year level. For 2019, we expect ROCE2 of between 8% and 13%. 1 Covestro’s estimate, based on the following sources: LMC Automotive Limited, B+L, CSIL (Centre for Industrial Studies), Oxford Economics 2 ROCE: The return on capital employed is calculated as the ratio of EBIT after taxes to capital employed. Capital employed is the capital used by the company. It is the sum of current and noncurrent assets less noninterest-bearing liabilities such as trade accounts payable. Starting in fiscal year 2019, assets held for sale and the associated liabilities are also included in the calculation of capital employed. 18 Covestro Interim Report as of June 30, 2019 INTERIM GROUP MANAGEMENT REPORT 5. Opportunities and Risks 5. Opportunities and Risks As a global enterprise with a diversified portfolio, the Covestro Group is exposed to a wide range of opportunities and risks. The Covestro Group regards opportunity and risk management as an integral part of corporate governance. Our opportunity and risk management system and the opportunity and risk situation are outlined in detail in section 21 “Opportunities and Risks Report” of the 2018 Covestro Annual Report. There have been no material changes since December 31, 2018. At the time this interim financial report was prepared, the Group faced no risks that could endanger its continued existence. In comparison with the situation presented in the 2018 Annual Report (Note 26 to the Consolidated Financial Statements, “Legal Risks”), there have been no new significant developments in the legal proceedings described there, and no new material legal proceedings are pending. 19 Covestro-Zwischenbericht zum 30. Juni 2016Inhalt Text Consolidated Interim Financial Statements as of June 30, 2019 7 20 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Covestro Group Consolidated Income Statement Covestro Group Consolidated Income Statement 2nd quarter 20181 2nd quarter 2019 1st half 20181 1st half 2019 € million € million € million € million Net sales 3,863 3,211 7,642 6,386 Cost of goods sold (2,480) (2,449) (4,828) (4,856) Gross profit 1,383 762 2,814 1,530 Selling expenses (364) (346) (708) (690) Research and development expenses (68) (68) (136) (136) General administration expenses (132) (97) (247) (193) Other operating income 11 31 23 53 Other operating expenses (4) (8) (13) (26) EBIT2 826 274 1,733 538 Equity-method loss (6) (8) (10) (14) Result from other affiliated companies – – – 1 Interest income 7 9 12 19 Interest expense (21) (22) (41) (45) Other financial result (7) (2) (16) (7) Financial result (27) (23) (55) (46) Income before income taxes 799 251 1,678 492 Income taxes (193) (61) (426) (122) Income after income taxes 606 190 1,252 370 of which attributable to noncontrolling interest 2 1 4 2 of which attributable to Covestro AG stockholders (net income) 604 189 1,248 368 € € € € Basic earnings per share3 3.07 1.03 6.31 2.01 Diluted earnings per share3 3.07 1.03 6.31 2.01 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 EBIT: Income after income taxes plus financial result and income taxes 3 The weighted average number of no-par voting shares of Covestro AG in issue amounted to 182,704,602 in both the second quarter of 2019 (previous year: 196,605,012) and the first half of 2019 (previous year: 197,746,827). 21 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Covestro Group Consolidated Statement of Comprehensive Income Covestro Group Consolidated Statement of Comprehensive Income 2nd quarter 20181 2nd quarter 2019 1st half 20181 1st half 2019 € million € million € million € million Income after income taxes 606 190 1,252 370 Remeasurements of the net defined benefit liability for post-employment benefit plans 6 (20) (94) (220) Income taxes (13) 2 21 74 Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans (7) (18) (73) (146) Changes in fair values of equity instruments – (1) – (1) Income taxes – – – – Other comprehensive income from equity instruments – (1) – (1) Other comprehensive income that will not be reclassified subsequently to profit or loss (7) (19) (73) (147) Changes in fair values of financial assets – – – – Reclassified to profit or loss 1 – – – Income taxes – – – – Other comprehensive income from financial assets 1 – – – Changes in exchange differences recognized on translation of operations outside the eurozone 72 (94) 64 49 Reclassified to profit or loss – – – – Other comprehensive income from exchange differences 72 (94) 64 49 Other comprehensive income that may be reclassified subsequently to profit or loss, if certain conditions are met 73 (94) 64 49 Total other comprehensive income2 66 (113) (9) (98) of which attributable to noncontrolling interest – – 1 1 of which attributable to Covestro AG stockholders 66 (113) (10) (99) Total comprehensive income 672 77 1,243 272 of which attributable to noncontrolling interest 2 1 5 3 of which attributable to Covestro AG stockholders 670 76 1,238 269 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Total change recognized outside profit or loss 22 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Covestro Group Consolidated Statement of Financial Position Covestro Group Consolidated Statement of Financial Position June 30, 20181 June 30, 2019 Dec. 31, 20181 € million € million € million Noncurrent assets Goodwill 254 263 256 Other intangible assets 79 109 77 Property, plant and equipment2 4,262 5,148 4,409 Investments accounted for using the equity method 212 194 214 Other financial assets 30 32 31 Other receivables 40 46 32 Deferred taxes 756 820 782 5,633 6,612 5,801 Current assets Inventories 2,091 2,079 2,213 Trade accounts receivable 2,185 1,803 1,786 Other financial assets 88 16 17 Other receivables 317 351 346 Claims for income tax refunds 81 106 55 Cash and cash equivalents 475 640 865 Assets held for sale 32 54 1 5,269 5,049 5,283 Total assets 10,902 11,661 11,084 Equity Capital stock of Covestro AG 193 183 183 Capital reserves of Covestro AG 4,105 3,480 3,480 Other reserves 1,176 1,498 1,679 Equity attributable to Covestro AG stockholders 5,474 5,161 5,342 Equity attributable to noncontrolling interest 31 44 33 5,505 5,205 5,375 Noncurrent liabilities Provisions for pensions and other post-employment benefits 1,305 1,704 1,445 Other provisions 227 239 237 Financial liabilities2 1,182 1,702 1,166 Income tax liabilities 93 114 107 Other liabilities 19 32 18 Deferred taxes 155 166 153 2,981 3,957 3,126 Current liabilities Other provisions 370 220 493 Financial liabilities2 83 552 59 Trade accounts payable 1,473 1,424 1,637 Income tax liabilities 219 78 172 Other liabilities 269 211 222 Liabilities directly related to assets held for sale 2 14 – 2,416 2,499 2,583 Total equity and liabilities 10,902 11,661 11,084 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 The figures as of June 30, 2019, include right-of-use assets and lease liabilities from initial application of IFRS 16. 23 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Covestro Group Consolidated Statement of Cash Flows Covestro Group Consolidated Statement of Cash Flows 2nd quarter 20181 2nd quarter 2019 1st half 20181 1st half 2019 € million € million € million € million Income after income taxes 606 190 1,252 370 Income taxes 193 61 426 122 Financial result 27 23 55 46 Income taxes paid (279) (144) (335) (223) Depreciation, amortization and impairment losses and impairment loss reversals 159 185 315 363 Change in pension provisions – 17 8 26 (Gains)/losses on retirements of noncurrent assets – (19) 1 (17) Decrease/(increase) in inventories (48) 135 (197) 148 Decrease/(increase) in trade accounts receivable (41) 29 (299) (17) (Decrease)/increase in trade accounts payable 8 (5) (129) (229) Changes in other working capital, other noncash items (108) (308) (128) (305) Cash flows from operating activities 517 164 969 284 Cash outflows for additions to property, plant, equipment and intangible assets (153) (219) (241) (384) Cash inflows from sales of property, plant, equipment and other assets – 1 – 4 Cash outflows for noncurrent financial assets (4) (5) (8) (7) Cash inflows from noncurrent financial assets 1 (1) 1 1 Cash outflows for acquisitions less acquired cash – (8) – (8) Interest and dividends received 7 9 12 18 Cash inflows from/(outflows for) other current financial assets 84 39 201 3 Cash flows from investing activities (65) (184) (35) (373) Reacquisition of treasury shares (413) – (670) – Dividend payments and withholding tax on dividends (440) (441) (440) (441) Issuances of debt 34 440 40 490 Retirements of debt (64) (87) (589) (153) Interest paid (20) (21) (33) (39) Cash flows from financing activities (903) (109) (1,692) (143) Change in cash and cash equivalents due to business activities (451) (129) (758) (232) Cash and cash equivalents at beginning of period 926 771 1,232 865 Change in cash and cash equivalents due to changes in scope of consolidation – – – (1) Change in cash and cash equivalents due to exchange rate movements – (2) 1 8 Cash and cash equivalents at end of period 475 640 475 640 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 24 Covestro Interim Report as of June 30, 2019 Covestro Group Consolidated Statement of Changes in Equity Accumulated other comprehensive income Capital stock of Covestro AG Capital reserves of Covestro AG Retained earnings incl. total income Currency translation Fair value measurement of financial assets € million € million € million € million € million Dec. 31, 20171 201 4,767 113 253 1 Changes in accounting for initial application of new IFRS 8 (1) Jan. 1, 2018, adjusted 201 4,767 121 253 – Reacquisition of treasury shares (8) (662) Dividend payments (436) Income after income taxes 1,248 Other comprehensive income (73) 63 – Total comprehensive income 1,175 63 – June 30, 20182 193 4,105 860 316 – of which treasury shares (10) (803) Dec. 31, 20182 183 3,480 1,356 323 – Dividend payments (438) Other changes3 (12) Income after income taxes 368 Other comprehensive income (147) 48 – Total comprehensive income 221 48 – June 30, 2019 183 3,480 1,127 371 – of which treasury shares – (15) 1 Reference information was not restated for financial reporting standards IFRS 9 and IFRS 15. 2 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 3 Other changes result from a step acquisition of shares in April 2019 and the related equity transaction, see Note 4.2 “Acquisitions and Divestitures”. Equity attributable to Covestro AG stockholders € million 5,335 7 5,342 (670) (436) 1,248 (10) 1,238 5,474 (813) 5,342 (438) (12) 368 (99) 269 5,161 (15) CONSOLIDATED INTERIM FINANCIAL STATEMENTS Covestro Group Consolidated Statement of Changes in Equity Equity attributable to noncontrolling interest Equity € million € million 30 5,365 7 30 5,372 (670) (4) (440) 4 1,252 1 (9) 5 1,243 31 5,505 (813) 33 5,375 (3) (441) 11 (1) 2 370 1 (98) 3 272 44 5,205 (15) 25 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 1. General Information NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. General Information Information on the consolidated interim financial statements Pursuant to Section 115 of the German Securities Trading Act (WpHG), the consolidated interim financial statements of Covestro AG, Leverkusen (Germany), (Covestro AG), as of June 30, 2019, have been prepared according to the International Financial Reporting Standards (IFRSs) — including IAS 34 (Interim Financial Reporting) – of the Inter- national Accounting Standards Board (IASB), London (United Kingdom), the Interpretations (IFRICs) of the IFRS Interpretations Committee (IFRS IC), and the interpretations published by the Standing Interpretations Committee (SIC), endorsed by the European Union and in effect at the closing date. The accounting policies and measurement principles described in the consolidated financial statements as of December 31, 2018, were applied unchanged in preparing the consolidated interim financial statements as of June 30, 2019, subject to the effects of financial reporting standards adopted for the first time in the current fiscal year as described in Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” Reference information for previous periods has not been restated for new financial reporting standards. The consolidated interim financial statements are drawn up in euros. Amounts are stated in millions of euros (€ million) except where otherwise indicated. Exchange rates In the reporting period, the following exchange rates were used for the major currencies of relevance to the Covestro Group: Closing Rates for Major Currencies Average Rates for Major Currencies Closing rates Average rates €1/ June 30, 2018 Dec. 31, 2018 June 30, 2019 €1/ 1st half 2018 1st half 2019 BRL Brazil 4.49 4.44 4.35 BRL Brazil 4.13 4.34 CNY China 7.72 7.87 7.82 CNY China 7.70 7.68 HKD Hong Kong 9.15 8.97 8.89 HKD Hong Kong 9.49 8.86 INR India 79.81 79.73 78.52 INR India 79.44 79.10 JPY Japan 129.04 125.85 122.60 JPY Japan 131.63 124.33 MXN Mexico 22.88 22.49 21.82 MXN Mexico 23.07 21.65 USD United States 1.17 1.15 1.14 USD United States 1.21 1.13 26 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 2. Effects of New Financial Reporting Standards 2. Effects of New Financial Reporting Standards 2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period IFRS pronouncement (published on) Title Effective for annual periods beginning on or after IFRS 16 (January 13, 2016) Leases January 1, 2019 IFRIC Interpretation 23 (June 7, 2017) Uncertainty over Income Tax Treatments January 1, 2019 Amendments to IFRS 9 (October 12, 2017) Prepayment Features with Negative Compensation January 1, 2019 Amendments to IAS 28 (October 12, 2017) Long-term Interests in Associates and Joint Ventures January 1, 2019 Annual Improvements to IFRSs (December 12, 2017) 2015 –2017 Cycle January 1, 2019 Amendments to IAS 19 (February 7, 2018) Plan Amendment, Curtailment or Settlement January 1, 2019 With the exception of IFRS 16 (Leases), initial application of the standards listed in the table had little or no material impact on the presentation of the net assets, financial position and results of operations. Initial Application of IFRS 16 On January 13, 2016, the IASB published IFRS 16 (Leases), a new standard for recognizing leases, which has been applied since January 1, 2019, and replaces the previous accounting provisions for leases. While IFRS 16 basically retains the previous accounting rules for lessors, there is now only one accounting model for use by lessees. This requires a lessee to recognize a right-of-use asset and a corresponding lease liability for each lease. The right-of-use asset reflects a lessee’s right to use the asset being leased. The lease liability recog- nizes the lessee’s obligation to make contractual lease payments. Exemptions are available for leases with a term of less than 12 months or those with a low-value underlying asset. IFRS 16 was applied using the modified retrospective approach. For this reason, the reference figures were not adjusted. These continue to be presented in accordance with the previous accounting rules (for further details, see the 2018 Annual Report, Note 3 “Accounting Policies and Valuation Principles”). The IFRS 16 transition rules stipulate that no new assessment must be made at the date of initial application as to whether an existing agreement meets the definition of a lease according to IFRS 16. Instead, existing assess- ments of leases can continue to be applied. Covestro made use of this exemption when applying IFRS 16 for the first time. With regard to lessees, right-of-use assets required upon initial application of IFRS 16 were generally recognized by Covestro in the amount of the corresponding lease liabilities. In specific cases, the right-of-use asset was adjusted by the amount of the deferred advance payments or liabilities recognized in the financial statements as of the end of fiscal year 2018. The initial application did not affect equity. The corresponding lease liability was measured using the incremental borrowing rate at the date of initial application. In addition, Covestro took advantage of the optional exemptions regarding the carrying amount of short-term leases and leases on low-value assets. The following reconciliations of the carrying amounts of the right-of-use assets and lease liabilities as of January 1, 2019, to the carrying amounts as of June 30, 2019, are broken down into the former finance leases already recognized in the statement of financial position under IAS 17 in conjunction with IFRIC 4 and the former operating leases recognized for the first time as a result of the adoption of IFRS 16. 27 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 2. Effects of New Financial Reporting Standards Right-of-Use Assets Former finance leases Former operating leases Totals € million € million € million Right-of-use assets, January 1, 2019 218 660 878 Additions – 31 31 Depreciation (16) (57) (73) Other changes 4 6 10 Right-of-use assets, June 30, 2019 206 640 846 Lease Liabilities Former finance leases Former operating leases Totals € million € million € million Lease liabilities, January 1, 2019 193 656 849 Additions – 31 31 Repayment (16) (51) (67) thereof lease rate (23) (61) (84) thereof interest portion 7 10 17 Other changes 2 6 8 Lease liabilities, June 30, 2019 179 642 821 As of January 1, 2019, property, plant and equipment and financial liabilities increased by €660 million and €656 million, respectively, due to the initial application of IFRS 16. The underlying leases relate mainly to real estate leases and leases for production and logistics infrastructure. The principal additions in the first half of 2019 comprise new leases for transport vessels, rail cars and electric buses, and the leases acquired through the increase in the stake held in DIC Covestro Polymer Ltd., Tokyo (Japan). 2.2 Published Financial Reporting Standards that Have Not Yet Been Applied Compared with the disclosure presented in the 2018 consolidated financial statements regarding the effects of those published reporting standards that are not yet effective to be applied but whose application could affect the presenta- tion of the net assets, financial position, and results of operations, no new determinations could be made concerning potential effects. 28 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 3. Segment and Regional Reporting 3. Segment and Regional Reporting The Board of Management of Covestro AG, as the chief operating decision maker of the Covestro Group, allocates resources to the operating segments and assesses their performance. The reportable segments and regions are identified, and the disclosures selected, in line with the internal financial reporting system (management approach). They are based on the Covestro Group’s accounting policies, which are outlined in the consolidated financial statements as of December 31, 2018, subject to the effects of the first-time adoption of financial reporting stand- ards in the current fiscal year as described in Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period” above. As of June 30, 2019, the Covestro Group comprises three reportable segments with the following activities: Polyurethanes The Polyurethanes segment develops, produces and markets high-quality precursors for polyurethanes. These precursors are isocyanates (MDI, TDI) and polyether polyols. Flexible polyurethane foam is used especially in the furniture and automotive industries (e.g., in upholstered furniture, mattresses and car seats). Rigid foam is used mainly in the construction industry as an insulating material as well as along the entire refrigeration chain. The segment operates production facilities worldwide as well as systems houses for formulating and supplying customized polyurethane systems. Polycarbonates The Polycarbonates segment develops, produces and markets the high-performance plastic polycarbonate in the form of granules, composite materials and semifinished products (sheets). The material is used primarily in the automotive industry (e.g., in the vehicle interior and for vehicle lighting) and in the construction industry (e.g., for roof structures). It is also used in the electrical and electronics industry (e.g., for connector housings, computer cases and DVDs), the medical technology sector and the lighting industry (e.g., for LED components). The Covestro Group produces polycarbonate all around the world and processes it at compounding centers to meet specific customer requirements. Coatings, Adhesives, Specialties The Coatings, Adhesives, Specialties segment develops, produces and markets precursors for coatings, adhesives and sealants as well as specialties – primarily for polyurethane systems. They include polymer materials and aqueous dispersions based on the isocyanates HDI and IPDI, which are produced at facilities located throughout the world. The main areas of application are automotive and transportation, infrastructure and construction, wood processing, and furniture. The specialties comprise elastomers, high-quality films and precursors for the cosmetics, textiles, and health care sectors. Business activities that cannot be allocated to any of the aforementioned segments are reported under “All other segments.” The external sales from these activities are generated mainly from by-products of chlorine produc- tion and use. The costs of Corporate Center functions and higher or lower expenses for long-term stock-based compensation arising from fluctuations in the performance of Covestro AG stock are presented in the segment reporting as “Corporate Center and reconciliation.” The segment data is calculated as follows: EBIT and EBITDA are not defined in the International Financial Reporting Standards. EBIT is equal to income after income taxes plus financial result and income tax. EBITDA is the EBIT as reported in the income statement plus depreciation and impairment losses on property, plant, and equipment and amortization and impairment losses on intangible assets, less impairment loss reversals. Working capital comprises inventories plus trade accounts receivable, less trade accounts payable. 29 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 3. Segment and Regional Reporting The following tables show the segment reporting data for the second quarter and for the first half year (as of June 30), respectively: Segment Reporting 2nd Quarter Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 2nd quarter 2019 Net sales 1,489 898 621 203 – 3,211 EBITDA 172 154 150 (3) (14) 459 EBIT 72 99 120 (3) (14) 274 2nd quarter 2018 Net sales 1,966 1,056 629 212 – 3,863 EBITDA 583 285 139 7 (29) 985 EBIT 492 241 116 6 (29) 826 Segment Reporting 1st Half Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 1st half 2019 Net sales 2,965 1,758 1,248 415 – 6,386 EBITDA 329 309 296 (1) (32) 901 EBIT 129 204 238 (1) (32) 538 1st half 2018 Net sales 3,916 2,089 1,221 416 – 7,642 EBITDA 1,220 588 275 14 (49) 2,048 EBIT 1,039 501 229 13 (49) 1,733 Working Capital by Segment Dec. 31, 2018 June 30, 2019 € million € million Polyurethanes 1,018 1,040 Polycarbonates 769 735 Coatings, Adhesives, Specialties 500 616 Total of reportable segments 2,287 2,391 All other segments 85 72 Corporate Center (10) (5) Working capital 2,362 2,458 of which inventories 2,213 2,079 of which trade accounts receivable 1,786 1,803 of which trade accounts payable (1,637) (1,424) 30 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 3. Segment and Regional Reporting Information on geographical areas The following tables show information by geographical area. The EMLA region consists of Europe, the Middle East, Africa, and Latin America except Mexico, which together with the United States and Canada forms the NAFTA region. The APAC region includes Asia and the Pacific region. The following tables show the regional reporting data for the second quarter and for the first half year: Regional Reporting 2nd Quarter EMLA NAFTA APAC Total € million € million € million € million 2nd quarter 2019 Net sales (external) by market 1,379 822 1,010 3,211 Net sales (external) by point of origin 1,370 835 1,006 3,211 2nd quarter 2018 Net sales (external) by market 1,677 885 1,301 3,863 Net sales (external) by point of origin 1,659 916 1,288 3,863 Regional Reporting 1st Half EMLA NAFTA APAC Total € million € million € million € million 1st half 2019 Net sales (external) by market 2,793 1,610 1,983 6,386 Net sales (external) by point of origin 2,772 1,640 1,974 6,386 1st half 2018 Net sales (external) by market 3,356 1,725 2,561 7,642 Net sales (external) by point of origin 3,330 1,777 2,535 7,642 Reconciliation The following table shows the reconciliation of EBITDA of the segments to income before income taxes of the Group: Reconciliation of Segments’ EBITDA to Group Income Before Income Taxes 2nd quarter 2018 2nd quarter 2019 1st half 2018 1st half 2019 € million € million € million € million EBITDA of segments 1,014 473 2,097 933 EBITDA of Corporate Center (29) (14) (49) (32) EBITDA 985 459 2,048 901 Depreciation, amortization and impairment losses of segments (159) (185) (315) (363) Depreciation, amortization and impairment losses of Corporate Center – – – – Depreciation, amortization and impairment losses (159) (185) (315) (363) EBIT of segments 855 288 1,782 570 EBIT of Corporate Center (29) (14) (49) (32) EBIT 826 274 1,733 538 Financial result (27) (23) (55) (46) Income before income taxes 799 251 1,678 492 31 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 4. Scope of Consolidation 4. Scope of Consolidation 4.1 Changes in the Scope of Consolidation As of June 30, 2019, the scope of consolidation comprised Covestro AG and 49 consolidated companies (December 31, 2018: 49 companies). As in the financial statements as of December 31, 2018, one joint opera- tion is accounted for in line with Covestro’s share of its assets, liabilities, sales, and expenses in accordance with IFRS 11 (Joint Arrangements). Further, as of June 30, 2019, two associated companies are accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associ- ates and Joint Ventures). OOO Covestro, Moscow (Russia), was reclassified as an immaterial subsidiary in the first quarter of 2019 for reasons including the fact that local production was halted. It has therefore no longer been consolidated since the first quarter of 2019. Effective April 1, 2019, a further 30% of the shares in DIC Covestro Polymer Ltd., Tokyo (Japan) (DCP), was acquired, and the company was subsequently consolidated. Previously, it was classified as a joint venture and accounted for using the equity method in accordance with IAS 28 (Investments in Associates and Joint Ventures). 4.2 Acquisitions and Divestitures Acquisitions Covestro increased its interest in DCP effective April 1, 2019, through a step acquisition of shares. DCP is a Japanese producer of thermoplastic polyurethanes, which are used, for example, in the automotive, IT, electron- ics, health-care and sports sectors. The acquisition of DCP contributes to the goal of benefiting from the future growth potential of the thermoplastic polyurethanes (TPU) business in Japan. Covestro and DIC Corporation (DIC), Tokyo (Japan), previously operated this company as a joint venture in which each held a 50% interest. By acquiring a further 30% of the shares in DCP, Covestro increased its interest to 80% and thus gained control. As a result, DCP has been fully consolidated since April 1, 2019. The shares previously recognized using the equity method of accounting were remeasured at their fair value of €34 million. The remeasurement resulted in a gain of €19 million, which was recognized in other operating income. The carrying amount of the noncontrolling interest, which corresponds to the remaining 20% share held by DIC, was determined proportionately from the net assets of DCP less goodwill. It amounted to €11 million and was recognized in equity. The consideration transferred was €21 million and was settled by a cash transfer. The acquired net assets amount to €66 million. The goodwill of €10 million included in the net assets reflects the anticipated sales synergies resulting from joint marketing of products over the relevant trading platforms. The goodwill is not tax deductible. As of the date of acquisition, the above transaction had the following impact on the assets and liabilities of the Covestro Group in fiscal year 2019 and led to the following cash outflow after adjustment for the cash and cash equivalents acquired: 32 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 4. Scope of Consolidation Acquired Assets and Assumed Liabilities (Fair Values at the Respective Acquisition Dates) DCP € million Goodwill 10 Other intangible assets 29 Property, plant and equipment 14 Other financial assets 3 Inventories 12 Trade accounts receivable 11 Cash and cash equivalents 13 Deferred tax assets 1 Other provisions (1) Financial liabilities (4) Trade accounts payable (9) Other liabilities (1) Deferred tax liabilities (12) Net assets 66 Noncontrolling interest (11) Fair value of pre-existing interest (34) Consideration transferred 21 Acquired cash and cash equivalents (13) Net cash outflow for acquisitions 8 Before the acquisition, Covestro and DCP engaged in operational goods and services transactions, which were recognized by Covestro as trade accounts receivable of €1 million. These transactions were settled when DCP was acquired. In addition, DIC was granted a put option on the remaining 20% shares still held by DIC. If it exercises this put option, the sale of these shares to Covestro would take effect in 2030. The put option is recognized in miscellaneous other financial liabilities while equity was reduced by the counter item recognized in retained earnings. Since its consolidation as of April 1, 2019, DCP has contributed €9 million to net sales and a loss of €2 million to income after income taxes of the Covestro Group. Between January 1, 2019, and March 31, 2019, DCP generated net sales of €9 million and income after income taxes of €1 million. Divestitures In the second quarter of 2019, Covestro’s Polyurethanes segment signed an agreement to divest the assets and liabilities (disposal group) of the European systems house business to H.I.G. Capital, Miami (US). The systems houses provide customers with tailored polyurethane systems. The European systems house business comprises systems houses in Denmark, Germany, the Netherlands and Spain, plus further activities in Italy. In connection with this divestiture, production-related assets and inventories amounting to €54 million and liabilities of €14 million were classified as “held for sale” in accordance with IFRS 5. This transaction should be completed in the fourth quarter of 2019 at the latest. 33 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 5. Net Sales 5. Net Sales Net sales are categorized according to “geographical regions and key countries,” and mainly comprise sales from contracts with customers and an insignificant amount of rental and leasing sales. The table also contains a break- down of net sales by reportable segments. Disaggregation of Net Sales Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and recon- ciliation Covestro Group € million € million € million € million € million € million 1st half 2019 EMLA 1,312 595 571 315 – 2,793 of which Germany 253 143 243 192 – 831 NAFTA 855 378 288 89 – 1,610 of which United States 681 306 260 88 – 1,335 APAC 798 785 389 11 – 1,983 of which China 494 522 198 2 – 1,216 1st half 2018 EMLA 1,731 715 597 313 – 3,356 of which Germany 302 183 262 188 – 935 NAFTA 961 412 259 93 – 1,725 of which United States 755 337 235 91 – 1,418 APAC 1,224 962 365 10 – 2,561 of which China 849 619 191 2 – 1,661 34 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 6. Earnings per Share 6. Earnings per Share Earnings per share are calculated according to IAS 33 (Earnings per Share) by dividing net income for the reporting period by the weighted average number of outstanding no-par voting shares of Covestro AG. Between November 21, 2017, and December 4, 2018, Covestro AG acquired own shares as part of a share buy-back program. In the first half of 2019, a weighted average number of outstanding no-par voting shares of 182,704,602 was used to calculate earnings per share, while in the first half of 2018, these shares numbered 197,746,827. There were no dilution effects to consider. Earnings per Share 1st half 2018 1st half 2019 € million € million Income after income taxes 1,252 370 of which attributable to noncontrolling interest 4 2 of which attributable to Covestro AG stockholders (net income) 1,248 368 Shares Shares Weighted average number of no-par voting shares of Covestro AG 197,746,827 182,704,602 € € Basic earnings per share 6.31 2.01 Diluted earnings per share 6.31 2.01 7. Employees and Pension Obligations As of June 30, 2019, the Covestro Group had 17,136 employees worldwide (December 31, 2018: 16,770). In particular, lower additions to provisions for short-term variable compensation contributed to the reduction of €79 million in personnel expenses to €918 million in the first half of 2019 (previous year: €997 million). Employees by Corporate Function1 Dec. 31, 2018 June 30, 2019 Production 10,479 10,854 Marketing and distribution 3,601 3,464 Research and development 1,123 1,276 General administration 1,567 1,542 Total 16,770 17,136 1 The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTEs). Part-time employees are included on a pro-rated basis in line with their contractual working hours. Provisions for pensions and other post-employment benefits increased to €1,704 million (December 31, 2018: €1,445 million). This was principally due to an increase in the valuation of pension obligations as a result of lower discount rates, but was countered, in particular, by a positive development in the value of plan assets. Discount Rate for Pension Obligations Dec. 31, 2018 June 30, 2019 % % Germany 1.80 1.30 United States 4.00 3.30 35 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 8. Financial Instruments 8. Financial Instruments The following tables show the carrying amounts and fair values of financial assets and liabilities as of June 30, 2019, and December 31, 2018, based on IFRS 9. Carrying Amounts of Financial Instruments According to IFRS 9 and Their Fair Values June 30, 2019 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value through other comprehen sive income Fair value recognized in profit or loss Measure- ment according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 1,803 1,803 1,803 Other financial assets 48 Loans 13 13 13 Derivatives that do not qualify for hedge accounting 18 18 18 Receivables under finance lease agreements 8 8 18 Other investments 9 9 9 Other receivables1 26 26 26 Cash and cash equivalents 640 640 640 Financial liabilities Financial debts 2,254 Bonds 997 997 1,063 Lease liabilities2 821 821 Liabilities to banks 425 425 425 Derivatives that do not qualify for hedge accounting 11 11 11 Trade accounts payable 1,424 1,424 1,424 Other liabilities3 54 Derivatives that do not qualify for hedge accounting 4 4 4 Miscellaneous other liabilities 50 50 50 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €371 million. 2 In accordance with IFRS 7.29 (d), disclosures on the fair value of lease liabilities are no longer required from fiscal year 2019 onward. 3 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €189 million. 36 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 8. Financial Instruments Carrying Amounts of Financial Instruments According to IFRS 9 and Their Fair Values Dec. 31, 2018 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value through other comprehen sive income Fair value recognized in profit or loss Measure- ment according to IAS 17 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 1,786 1,786 1,786 Other financial assets 48 Loans 12 12 12 Derivatives that do not qualify for hedge accounting 20 20 20 Receivables under finance lease agreements 9 9 16 Other investments 7 7 7 Other receivables1 35 35 35 Cash and cash equivalents 865 865 865 Financial liabilities Financial debts 1,225 Bonds 996 996 1,030 Lease liabilities2 193 193 231 Liabilities to banks 24 24 24 Derivatives that do not qualify for hedge accounting 12 12 12 Trade accounts payable 1,637 1,637 1,637 Other liabilities3 26 Derivatives that do not qualify for hedge accounting 4 4 4 Miscellaneous other liabilities 22 22 22 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €343 million. 2 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 3 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €214 million. 37 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 8. Financial Instruments The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below: Level 1 covers fair values determined on the basis of unadjusted prices that exist in active markets. Level 2 comprises fair values determined on the basis of parameters that are observable in an active market. Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data. The following table shows the assignment of the financial instruments to the three-level fair value hierarchy: Fair Value Hierarchy of Financial Instruments Fair value Fair value Dec. 31, 2018 Level 1 Level 2 Level 3 June 30, 2019 Level 1 Level 2 Level 3 € million € million € million € million € million € million € million € million Financial assets carried at fair value Other investments 7 2 5 9 4 5 Derivatives that do not qualify for hedge accounting 20 12 8 18 10 8 Financial assets not carried at fair value Receivables under leasing agreements 16 16 18 18 Financial liabilities carried at fair value Derivatives that do not qualify for hedge accounting 16 12 4 15 11 4 Financial liabilities not carried at fair value Bonds 1,030 1,030 1,063 1,063 Lease liabilities1, 2 231 231 Other financial liabilities 24 24 425 425 1 According IFRS 7.29 (d) fair value disclosures for lease liabilities are not required from fiscal year 2019 onward. 2 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” During the first half of 2019, no transfers were made between the levels of the fair value hierarchy. Because of the generally short maturities of cash and cash equivalents, loans, trade accounts receivable and payable, and other receivables and liabilities, their carrying amounts do not significantly differ from the fair values. The fair value of the bonds issued by Covestro AG is based on quoted, unadjusted prices in active markets and therefore assigned to Level 1 of the fair value hierarchy. The fair value of some of the other investments is also based on quoted prices in active markets (Level 1). The fair values stated for noncurrent financial assets and liabilities are the present values of the respective future cash inflows or outflows. These are determined by discounting the cash flows at a reporting-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. For this reason, these values are assigned to Level 2 of the fair value hierarchy. 38 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 8. Financial Instruments The fair values of derivatives for which no publicly quoted market prices exist are determined using valuation techniques based on observable market data as of the reporting date (Level 2). Credit value adjustments and debt value adjustments are determined to allow for both the contracting party’s credit risk and Covestro’s own credit risk. The currency forward contracts are measured individually at their forward rates or forward prices as of the reporting date. These depend on spot rates or prices including time spreads. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. The fair values of noncurrent leasing receivables, reported for information purposes, are calculated on the basis of interest curves observable in the market. Additionally, a discount for cash flows that are very far in the future was applied as an unobservable factor. Other financial investments exclusively comprised of equity instruments are recognized at fair value directly in equity because they are held for the long term for strategic reasons. The fair value of some of the other invest- ments is based on quoted prices in active markets (Level 1). Where there are no quoted, unadjusted prices in an active market for identical or similar instruments, and there is no suitable valuation method where all major input factors are based on observable market data, the fair value of the other investments is determined using a valua- tion method where the main input factors are not based on observable market data (Level 3). The valuation of certain other investments is based on available performance indicators. Further, the fair values of embedded derivatives are determined on the basis of unobservable input factors (Level 3). They are separated from their respective host contracts, which are purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, or regional and industry-specific price indices, for example. The internal measurement of embedded deriva- tives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include prices or price indices derived from market data. The net carrying amounts of the financial assets and liabilities allocated to level 3 were unchanged at €9 million in the first half of 2019. 39 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 9. Legal Risks 9. Legal Risks As a global enterprise, the Covestro Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law, environmental law, and compliance issues such as corruption and export control. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal judgments or regulatory decisions or future settlements could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect the earnings of the Covestro Group. The legal risks that are material to the Covestro Group were described in Note 26 “Legal Risks” to the consolidated financial statements as of December 31, 2018. In the current fiscal year, there have been no new significant developments regarding the legal proceedings described there, and no new material legal proceedings are pending. 40 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 10. Related Parties 10. Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert at least significant influence on Covestro AG and its subsidiaries or over which Covestro AG or its subsidiaries exercise control or have at least significant influence. They include nonconsolidated subsidiaries, joint ventures and associated companies, post-employment benefit plans and corporate officers of Covestro AG. Receivables from and Liabilities to Related Parties Dec. 31, 2018 June 30, 2019 Receivables Liabilities Receivables Liabilities € million € million € million € million Nonconsolidated subsidiaries and associates 4 9 – 5 Associates 11 1 6 – Sales and Purchases of Goods and Services to/from Related Parties 1st half 2018 1st half 2019 Sales of goods and services Purchases of goods and services Sales of goods and services Purchases of goods and services € million € million € million € million Nonconsolidated subsidiaries and associates 21 24 19 22 Associates 10 328 5 276 The goods and services provided by associated companies mainly result from the ongoing operating business with PO JV, LP, Wilmington (United States). Covestro benefits from fixed long-term supply quotas/volumes of propylene oxide (PO) from this company’s production. Receivables from and payables to related parties mainly comprise leasing and financing matters, trade in goods and services, and other transactions. 41 Covestro Interim Report as of June 30, 2019 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Notes to the Consolidated Interim Financial Statements 11. Events after the End of the Reporting Period 11. Events after the End of the Reporting Period No events have occurred since July 1, 2019, that will have a material impact on the net assets, financial position and results of operations of the Covestro Group. Leverkusen, July 19, 2019 Covestro AG The Board of Management 42 Covestro Interim Report as of June 30, 2019 RESPONSIBILITY STATEMENT Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim reporting, the consolidated interim financial statements give a true and fair view of the net assets, financial position and results of operations of the Covestro Group, and the interim group management report includes a fair review of the develop- ment and performance of the business and the position of the Covestro Group, together with a description of the principal opportunities and risks associated with the expected development of the Covestro Group for the remainder of the fiscal year. Leverkusen, July 19, 2019 Covestro AG The Board of Management 43 Covestro Interim Report as of June 30, 2019 Review Report To Covestro AG, Leverkusen We have reviewed the condensed interim consolidated financial statements — comprising the statement of financial position, income statement, statement of comprehensive income, statement of cash flows, state- ment of changes in equity and selected explanatory notes — together with the interim group management report of Covestro AG, Leverkusen, for the period from January 1, 2019, to June 30, 2019, that are part of the semi-annual financial report according to § 115 WpHG [“Wertpapierhandelsgesetz”: “German Securities Trading Act”]. The preparation of the condensed interim consolidated financial statements in accordance with the IFRSs applicable to interim reporting as adopted by the EU, and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports, is the responsibility of the Company’s management. Our responsibility is to issue a report on the con- densed interim consolidated financial statements and on the interim group management report based on our review. We performed our review of the condensed interim consolidated financial statements and the interim group management report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and additionally observed the Interna- tional Standard on Review Engagements “Review of Interim Financial Information Performed by the Inde- pendent Auditor of the Entity” (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with a certain level of assurance, that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRSs applicable to interim reporting as adopted by the EU, and that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of company employees and analytical assessments and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot issue an auditor’s report. Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRSs applicable to interim reporting as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Düsseldorf, July 22, 2019 KPMG AG Wirtschaftsprüfungsgesellschaft Dr. Zeimes [German Public Auditor] Geier [German Public Auditor] REVIEW REPORT 44 Covestro-Zwischenbericht zum 30. Juni 2016Inhalt Text Further Information 8 45 Covestro Interim Report as of June 30, 2019 Segment and Quarterly Overview Segment Information 2nd Quarter1 Polyurethanes Polycarbonates Coatings, Adhesives, Specialties 2nd quarter 2018 2nd quarter 2019 2nd quarter 2018 2nd quarter 2019 2nd quarter 2018 2nd quarter 2019 € million € million € million € million € million € million Sales 1,966 1,489 1,056 898 629 621 Change in sales Volume +3.3% +0.8% +5.6% +5.7% +6.3% –4.5% Price +9.2% –26.8% +15.2% –18.8% +1.7% –0.4% Currency –4.4% +1.7% –4.9% +1.7% –3.9% +2.2% Portfolio 0.0% 0.0% 0.0% –3.6% 0.0% +1.4% Core volume growth2 +3.9% +0.7% +5.3% +4.4% +5.4% –4.7% Sales by region EMLA 871 643 353 306 299 277 NAFTA 486 444 209 190 137 144 APAC 609 402 494 402 193 200 EBITDA 583 172 285 154 139 150 EBIT 492 72 241 99 116 120 Depreciation, amortization, impairment losses and impairment loss reversals 91 100 44 55 23 30 Operating cash flows 364 116 155 93 66 38 Cash outflows for additions to property, plant, equipment and intangible assets 84 138 44 42 25 40 Free operating cash flow 280 (22) 111 51 41 (2) 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2019. FURTHER INFORMATION Segment and Quarterly Overview Others/consolidation Covestro Group 2nd quarter 2018 2nd quarter 2019 2nd quarter 2018 2nd quarter 2019 € million € million € million € million 212 203 3,863 3,211 +12.7% –7.2% +4.9% +0.8% +18.6% +1.6% +9.9% –18.7% –2.8% +1.4% –4.4% +1.8% 0.0% 0.0% 0.0% –0.8% +4.4% +1.1% 154 153 1,677 1,379 53 44 885 822 5 6 1,301 1,010 (22) (17) 985 459 (23) (17) 826 274 1 – 159 185 (68) (83) 517 164 – (1) 153 219 (68) (82) 364 (55) 46 Covestro Interim Report as of June 30, 2019 Segment Information 1st Half1 Polyurethanes Polycarbonates Coatings, Adhesives, Specialties 1st half 2018 1st half 2019 1st half 2018 1st half 2019 1st half 2018 1st half 2019 € million € million € million € million € million € million Sales 3,916 2,965 2,089 1,758 1,221 1,248 Change in sales Volume +0.3% +1.9% +2.8% +1.5% +2.0% –1.7% Price +13.2% –28.1% +15.8% –15.8% +1.3% +0.6% Currency –5.9% +1.9% –6.6% +2.1% –4.9% +2.6% Portfolio 0.0% 0.0% 0.0% –3.6% 0.0% +0.7% Core volume growth2 +1.4% +0.3% +4.0% –1.0% +2.0% –2.4% Sales by region EMLA 1,731 1,312 715 595 597 571 NAFTA 961 855 412 378 259 288 APAC 1,224 798 962 785 365 389 EBITDA 1,220 329 588 309 275 296 EBIT 1,039 129 501 204 229 238 Depreciation, amortization, impairment losses and impairment loss reversals 181 200 87 105 46 58 Operating cash flows 540 120 234 231 83 50 Cash outflows for additions to property, plant, equipment and intangible assets 130 240 67 81 44 64 Free operating cash flow 410 (120) 167 150 39 (14) 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2019. FURTHER INFORMATION Segment and Quarterly Overview Others/consolidation Covestro Group 1st half 2018 1st half 2019 1st half 2018 1st half 2019 € million € million € million € million 416 415 7,642 6,386 +6.4% –3.7% +1.6% +0.9% +19.6% +1.9% +12.1% –18.5% –3.3% +1.6% –5.8% +2.1% 0.0% 0.0% 0.0% –0.9% +2.2% –0.4% 313 315 3,356 2,793 93 89 1,725 1,610 10 11 2,561 1,983 (35) (33) 2,048 901 (36) (33) 1,733 538 1 – 315 363 112 (117) 969 284 – (1) 241 384 112 (116) 728 (100) 47 Covestro Interim Report as of June 30, 2019 Quarterly Overview1 1st quarter 2018 2nd quarter 2018 3rd quarter 2018 € million € million € million Sales 3,779 3,863 3,702 Polyurethanes 1,950 1,966 1,849 Polycarbonates 1,033 1,056 1,038 Coatings, Adhesives, Specialties 592 629 606 Core volume growth2 0.0% +4.4% +0.2% EBITDA 1,063 985 859 Polyurethanes 637 583 432 Polycarbonates 303 285 315 Coatings, Adhesives, Specialties 136 139 126 EBIT 907 826 707 Polyurethanes 547 492 346 Polycarbonates 260 241 272 Coatings, Adhesives, Specialties 113 116 103 Financial result (28) (27) (25) Income before income taxes 879 799 682 Income after taxes 646 606 497 Net income 644 604 496 Operating cash flows 452 517 766 Cash outflows for additions to property, plant, equipment and intangible assets 88 153 188 Free operating cash flow 364 364 578 1 Reference information was not restated, see Note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2019. 4th quarter 2018 € million 3,272 1,597 924 534 +1.7% 293 111 133 63 140 27 88 39 (24) 116 80 79 641 278 363 FURTHER INFORMATION Segment and Quarterly Overview 1st quarter 2019 2nd quarter 2019 € million € million 3,175 3,211 1,476 1,489 860 898 627 621 –1.8% +1.1% 442 459 157 172 155 154 146 150 264 274 57 72 105 99 118 120 (23) (23) 241 251 180 190 179 189 120 164 165 219 (45) (55) 48 Covestro Interim Report as of June 30, 2019 Financial Calendar Q3 2019 Interim Statement ................................................. October 28, 2019 Annual Report 2019 ................................................................. February 19, 2020 Annual General Meeting 2020 ............................................ April 17, 2020 Q1 2020 Interim Statement ................................................. April 29, 2020 Publishing Information Published by Covestro AG Kaiser-Wilhelm-Allee 60 51373 Leverkusen Germany Email: info@covestro.com Local Court of Cologne HRB 85281 VAT No. DE815579850 IR contact Email: ir@covestro.com Translation Leinhäuser Language Services GmbH Unterhaching, Germany Design and layout TERRITORY CTR GmbH Germany covestro.com Press contact Email: communications@covestro.com Consolidated Interim Report produced with firesys FURTHER INFORMATION Financial Calendar 49

Semestriel, 2019, Chemistry, Covestro

write me a financial report

Semestriel

Chemistry

Covestro

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: Covestro ### Response:

HALF-YEAR FINANCIAL REPORT 2020 INTERIM REPORT AS OF JUNE 30, 2020 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Key Data Covestro Group 2nd quarter 2019 2nd quarter 2020 Change 1st half 2019 1st half 2020 Change € million € million % € million € million % Core volume growth1, 2 Sales +1.1% 3,211 –22.7% 2,156 –32.9 –0.4% 6,386 –13.6% 4,939 –22.7 Change in sales Volume +0.8% –22.3% +0.9% –12.5% Price –18.7% –9.0% –18.5% –9.1% Currency +1.8% –0.1% +2.1% +0.3% Portfolio –0.8% –1.5% –0.9% –1.4% Sales by region EMLA3 NAFTA4 APAC5 EBITDA6 Changes in EBITDA 1,379 822 1,010 459 874 508 774 125 –36.6 –38.2 –23.4 –72.8 2,793 1,610 1,983 901 2,174 1,252 1,513 379 –22.2 –22.2 –23.7 –57.9 of which volume +0.5% –72.3% +1.9% –42.8% of which price –73.5% –63.2% –69.0% –64.4% of which raw material price effect +8.9% +41.4% +5.8% +36.6% of which currency +1.1% +1.5% +1.1% +1.2% EBIT7 Financial result Net income8 Earnings per share (€)9 Operating cash flows10 Cash outflows for additions to property, plant, equipment and intangible assets Free operating cash flow11 274 (23) 189 1.03 164 219 (68) (17) (52) (0.28) 171 147 . –26.1 . . +4.3 –32.9 538 (46) 368 2.01 284 384 (1) (56) (32) (0.17) 61 286 . +21.7 . . –78.5 –25.5 (55) 24 . (100) (225) >100 1 Core volume growth refers to the core products in the Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties segments. It is calculated as the percentage change in externally sold volumes in thousand tons compared with the prior year. Covestro also takes advantage of business opportunities outside its core business, for example the sale of precursors and by-products such as hydrochloric acid, sodium hydroxide solution and styrene. These transactions are not included in core volume growth. 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2020 3 EMLA: Europe, Middle East, Africa and Latin America (excluding Mexico) region 4 NAFTA: United States, Canada and Mexico region 5 APAC: Asia and Pacific region 6 EBITDA: EBIT plus depreciation, amortization and impairment losses, less impairment loss reversals 7 EBIT: Income after income taxes plus financial result and income taxes 8 Net income: income after income taxes attributable to the shareholders of Covestro AG 9 Earnings per share: According to IAS 33, earnings per share comprise net income divided by the weighted average number of outstanding no-par voting shares of Covestro AG. The calculation was based on 182,864,685 no-par shares (previous year: 182,704,602 no-par shares). 10 Operating cash flows: cash flows from operating activities according to IAS 7 11 Free operating cash flow: operating cash flows less cash outflows for additions to property, plant, equipment and intangible assets 2 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Contents Key Data Covestro Group ................................................................................................................................................................................................... 2 Reporting Profile ....................................................................................................................................................................................................................... 4 COVESTRO ON THE CAPITAL MARKET 6 INTERIM GROUP MANAGEMENT REPORT AS OF JUNE 30, 2020 8 Significant Events .................................................................................................................................................................................................................... 9 Business Development of the Covestro Group ................................................................................................................................................... 10 Business Development by Segment .......................................................................................................................................................................... 13 Polyurethanes .................................................................................................................................................................................................................. 13 Polycarbonates ............................................................................................................................................................................................................... 15 Coatings, Adhesives, Specialties .......................................................................................................................................................................... 17 Financial Position and Net Assets of the Covestro Group ........................................................................................................................... 19 Financial Position ........................................................................................................................................................................................................... 19 Net Assets ......................................................................................................................................................................................................................... 21 Forecast ..................................................................................................................................................................................................................................... 22 Economic outlook ......................................................................................................................................................................................................... 22 Forecast for key performance indicators ......................................................................................................................................................... 23 Opportunities and Risks .................................................................................................................................................................................................... 24 CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2020 25 Covestro Group Consolidated Income Statement ................................................................................................................................................... 26 Covestro Group Consolidated Statement of Comprehensive Income .......................................................................................................... 27 Covestro Group Consolidated Statement of Financial Position ........................................................................................................................ 28 Covestro Group Consolidated Statement of Cash Flows ..................................................................................................................................... 29 Covestro Group Consolidated Statement of Changes in Equity ....................................................................................................................... 30 Notes to the Consolidated Interim Financial Statements ................................................................................................................................ 31 1. General Information ...................................................................................................................................................................................................... 31 2. Effects of New Financial Reporting Standards .............................................................................................................................................. 32 2.1 Financial reporting standards applied for the first time in the reporting period .................................................................. 32 2.2 Published financial reporting standards that have not yet been applied ............................................................................... 32 3. Effects of the Coronavirus Pandemic on Financial Reporting ............................................................................................................... 33 4. Segment and Regional Reporting ......................................................................................................................................................................... 35 5. Scope of Consolidation ............................................................................................................................................................................................. 38 5.1 Changes in the scope of consolidation .................................................................................................................................................... 38 5.2 Acquisitions and divestitures ......................................................................................................................................................................... 38 6. Net Sales ............................................................................................................................................................................................................................ 39 7. Earnings per Share ....................................................................................................................................................................................................... 39 8. Employees and Pension Obligations .................................................................................................................................................................. 40 9. Financing ............................................................................................................................................................................................................................ 41 10. Financial Instruments .................................................................................................................................................................................................. 42 11. Legal Risks ........................................................................................................................................................................................................................ 46 12. Related Parties ................................................................................................................................................................................................................ 46 13. Events after the End of the Reporting Period ................................................................................................................................................. 47 RESPONSIBILITY STATEMENT ............................................................................................................................................................................................ 48 REVIEW REPORT ......................................................................................................................................................................................................................... 49 FURTHER INFORMATION 50 Segment and Quarterly Overview ................................................................................................................................................................................ 51 Financial Calendar ................................................................................................................................................................................................................ 54 3 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Reporting Profile Reporting principles The Half-Year Financial Report of Covestro AG meets the requirements pursuant to the applicable provisions of the German Securities Trading Act (WpHG) and, in accordance with Section 115, Paragraphs 2–4 of the WpHG (Half-Year Financial Report; power to issue statutory orders), comprises condensed consolidated interim financial statements, an interim group management report, and a responsibility statement. The consolidated interim financial statements were prepared in accordance with IAS 34 according to the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU) and in effect at the closing date as well as their Interpretations. This Half-Year Financial Report should be read alongside the 2019 Annual Report and the additional information about the company contained therein, as well as the Interim Statement as of March 31, 2020. Forward-looking statements This Report may contain forward-looking statements based on current assumptions and forecasts made by the management of Covestro AG. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. The various influencing factors include those discussed in Covestro’s public reports, which are available at www.covestro.com. The company assumes no liability whatsoever to up- date these forward-looking statements or to conform them to future events or developments. Rounding and percentage deviations As the indicators in this Report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact. Percentage deviations are only calculated and reported if they are no more than 100%. Larger deviations are reported as >100%, >200%, etc. If a deviation changes from positive to negative or vice versa, or if it is greater than 1,000%, this is shown by a period. Alternative performance measures Throughout its financial reporting, Covestro uses alternative performance measures (APMs) to assess the business performance of the Group. These are not defined in the IFRSs. These non-IFRS indicators should be considered a supplement to, not a replacement for, the performance measures determined in accordance with IFRSs. The alternative performance measures of relevance to the Covestro Group include EBITDA, return on capital employed (ROCE), free operating cash flow (FOCF), and net financial debt. Covestro uses ROCE to assess profitability in the context of the company’s internal management system. EBITDA is also calculated as an additional indicator of profitability. FOCF is a key factor in the presentation of the liquidity position that indicates the company’s ability to generate a cash surplus and finance its activities. Net financial debt gauges the Group’s financial condition and financing requirements. The calculation methods for the APMs may vary from those of other companies, thus limiting the extent of the overall comparability. These alternative performance measures should not be viewed in isolation or employed as an alternative to the financial indicators determined in accordance with IFRSs and presented in the consolidated financial statements for purposes of assessing Covestro’s net assets, financial position and results of operations. Explanations of the definition and calculation of these alternative performance measures can be found in the “Alternative performance measures” section in the Combined Management Report in the 2019 Annual Report. Abbreviations The abbreviations used in this Report are explained in the glossary of the 2019 Covestro Annual Report. Publication This Report was published on July 23, 2020. It is available in German and English. Only the German version is binding. 4 Covestro on the Capital Market Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Covestro on the Capital Market Performance of the Covestro Stock Versus the Market in the First Half of 2020 € 50 s d e r 45 d n u 40 H 35 30 25 20 Dec. 31, 2019 Jan. 31, 2020 Feb. 29, 2020 Mar. 31, 2020 Apr. 30, 2020 May 31, 2020 June 30, 2020 Covestro stock DAX (indexed) STOXX Europe 600 Chemicals (indexed) Covestro closing prices Xetra; source: Bloomberg Negative stock market performance in an unsettled environment The macroeconomic situation worldwide has been marked by extreme uncertainty since the outbreak of the coronavirus pandemic. In the first half of 2020, major economies such as those of the United States, the European Union, and Japan contracted. Stock markets also experienced turbulence due to this development in the real economy in the first six months of 2020. Sharp declines in the first quarter of 2020 were followed in the second quarter by an uptick in some stock prices, although market participants remained very jittery. Many indices such as the EURO STOXX 50 posted negative performance overall in the first half of 2020. As of June 30, 2020, the DAX, which is relevant for Covestro, was down by 7.1% compared with its value at year-end 2019, while the STOXX Europe 600 Chemicals index declined 6.0% during the same period. In this capital market environment, Covestro stock finished the first half of 2020 at a Xetra closing price of €33.85 — down by 18.3% from the end of 2019. On March 16, 2020, Covestro stock marked its low for the first six months of 2020 with a closing price of €24.90. The high for the first half of 2020 was €42.18 on January 2, 2020. Covestro Share at a Glance 2nd quarter 2019 2nd quarter 2020 1st half 2019 1st half 2020 Average daily turnover million shares 1.4 1.9 1.4 1.8 High € 55.32 37.44 55.32 42.18 Low € 39.23 26.86 39.23 24.90 Closing date € 44.71 33.85 44.71 33.85 Outstanding shares (closing date) million shares 182.7 182.90 182.7 182.90 Market capitalization (closing date) € billion 8 6 8.2 6.2 Covestro closing prices Xetra; source: Bloomberg 6 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Annual General Meeting on July 30, 2020, and proposed dividend adjusted Covestro AG had to delay the Annual General Meeting originally planned for April 17, 2020, in Bonn to a later date due to the rapid spread of the coronavirus at that time. The Annual General Meeting will now take place on July 30, 2020, and will be conducted as a virtual event for the first time in reaction to the changes in the legal environment. Despite these economically challenging times, Covestro will continue to enable shareholders to take part in the company's success. On May 19, 2020, the Board of Management of Covestro AG voted to propose a dividend of €1.20 per share to the Annual General Meeting for fiscal 2019. The Board of Management had previously proposed a dividend of €2.40 per share to the Annual General Meeting on the originally scheduled date. The current focus of the Board of Management is on safeguarding liquidity and the company's credit rating. As stated in Covestro’s publications since the 2019 Annual Report, the Board of Management expects this fiscal year's earnings to be considerably lower than in the prior fiscal year due to the global coronavirus pandemic. Moody's downgrades Covestro's rating On October 7, 2015, one day after Covestro stock was listed on the Frankfurt Stock Exchange, Covestro AG received an investment-grade rating of Baa2 from London-based Moody's Investors Service. Moody's raised the company’s credit rating from Baa2 to Baa1 with stable outlook on July 30, 2018. On June 2, 2020, Moody's then revised our rating downward again from Baa1 back to Baa2 with negative outlook. Nevertheless, Covestro's credit rating remains firmly in the investment-grade range. In the future, Covestro intends to continue to maintain financing structures and financial ratios that support a solid investment-grade rating. Successful placement of euro bonds On June 5, 2020, Covestro successfully placed €1.0 billion in euro bonds on foreign debt markets. The bonds mature in February 2026 and June 2030 and carry coupon rates of 0.875% and 1.375%, respectively. Robust investor demand led to the placement volume being oversubscribed by more than ten times. The transactions enable Covestro to significantly extend the average maturity of the bond portfolio. The proceeds of the bond placement will be used to further reinforce Covestro's liquidity in view of the economic effects of the coronavirus pandemic and to provide funds to repay the existing bond maturing in fiscal 2021. Thirteen analysts issue buy recommendation for Covestro stock At the end of the first six months of 2020, Covestro was covered by 25 securities brokers. Thirteen analysts recommended the stock as a buy, nine were neutral, and three rated it as a sell. The average share-price target at the end of the period was €35. Basic Covestro Share Information Capital stock €183,000,000 Outstanding shares (Half-year-end) 182,864,685 Share class No-par ordinary bearer shares ISIN DE0006062144 WKN 606214 Ticker symbol 1COV Reuters symbol 1COV.DE Bloomberg symbol 1COV GY Market segment Regulated market Transparency level Prime standard Sector Chemicals Index DAX 7 Interim Group Management Report as of June 30, 2020 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Significant Events Coronavirus pandemic Business performance in the first half of 2020 was heavily influenced by the evolution of the coronavirus pandemic. Early on, Covestro took steps to adjust the company’s activities to current conditions, protect the health of all Covestro employees, guarantee delivery capability for customers, and safeguard Covestro’s strong liquidity position. Covestro decided to implement an extensive list of measures to protect all employees, including a wide range of health, safety and hygiene measures at our sites. Depending on the local situation in each case, staff, particularly employees in administrative departments, began working from home. Production continued for the most part at our sites in the first half of 2020, so Covestro's delivery capability was ensured throughout the period. In reaction to the economic challenges of the coronavirus pandemic, the Board of Management increased the target for achieving short-term cost savings to over €300 million in the 2020 fiscal year (previously: €200 million). This step was taken in addition to the “Perspective” restructuring program underway, which is expected to cut costs by €130 million in fiscal 2020. Moreover, Covestro decreased current investments by around €200 million. In fiscal 2020, investments totaling approximately €700 million are now planned (previously: €900 million). The Board of Management, the Supervisory Board and employees of Covestro are working together in solidarity to reach these goals and put the company in an even more robust position in the current environment. At all German companies, the Board of Management and employee representatives agreed to implement a model to reduce working hours while adjusting pay for all employees. The percentage reduction in compensation in- creases up the pay scale. Covestro's Board of Management and Supervisory Board are participating by accepting a 15% pay cut. These measures have been in effect since June 1, 2020, and are scheduled to run for a period of six months. All Covestro Group companies outside of Germany are implementing comparable country-specific measures to reduce costs. Covestro's Board of Management continues to actively monitor the worldwide development of the coronavirus pandemic. Existing measures are modified or expanded as required in line with recommendations and instruct- tions issued by the relevant governments and committees of experts. Other events On January 2, 2020, Covestro successfully concluded the sale of its European polycarbonate sheets business to the Serafin Group. This included central management and distribution functions in Europe and production sites in Belgium and Italy. Serafin has pledged to continue operations at all sites. Covestro will continue to act as a key supplier of raw materials for the foreseeable future. Covestro has taken various steps to safeguard liquidity. Effective March 17, 2020, Covestro obtained a new syndicated revolving credit facility totaling €2.5 billion with a term of five years. In addition, the Board of Management of Covestro AG voted on May 19, 2020, to propose a dividend of €1.20 per share for fiscal 2019 to the Annual General Meeting scheduled for July 30, 2020. On June 5, 2020, Covestro also successfully placed €1.0 billion in euro bonds on foreign debt markets. More information and other relevant financing activities in the first half of 2020 can be found in “Financial Position and Net Assets of the Covestro Group” 9 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Business Development of the Covestro Group Second quarter of 2020 The Group's core volumes decreased by 22.7% in the second quarter of 2020 compared with the prior-year quarter. This was largely due to considerably weaker demand in all segments as a result of the global coronavirus pandemic. The Polyurethanes and Coatings, Adhesives, Specialties segments saw a decline in core volumes of 25.9% and 25.3%, respectively. In the Polycarbonates segment, core volumes fell by 14.4%. Whereas the Group- wide decline in volumes sold in the initial weeks of the second quarter of 2020 was steeper than in the previous year, the downward trend in volumes sold slowed in the second half of the quarter. Group sales amounted to €2,156 million, down by 32.9% from the prior-year quarter (previous year: €3,211 million). In particular, the decline in total volumes due to a massive coronavirus-driven collapse in demand in all of our main customer industries caused sales to decrease by 22.3%. A lower level of selling prices had an additional negative effect on sales of 9.0%, chiefly due to competition pushing down selling prices in the prior year and lower raw material prices overall in the second quarter of 2020. Exchange rate movements had no notable effect on Group sales. The changes in the portfolio lowered sales by 1.5%. In the second quarter of 2020, the downturn in sales was significantly more pronounced in the EMLA and NAFTA regions than in the APAC region. This was mainly due to a delay in the effects of the coronavirus pandemic. Whereas the APAC region saw sales drop sharply as early as the first quarter of 2020, sales in the EMLA and NAFTA regions did not begin their steep decline until the second quarter of 2020. At the same time, demand in the APAC region, particularly in China, has recovered somewhat, already making the slowdown in sales in the APAC region much less severe than in the other regions in the second quarter of 2020. All segments were affected by lower sales in the second quarter of 2020. In the Polyurethanes segment, sales tumbled by 38.7% to €913 million (previous year: €1,489 million), while the Polycarbonates segment saw sales decrease by 27.8% to €648 million (previous year: €898 million). Sales in the Coatings, Adhesives, Specialties segment declined by 28.7% to €443 million (previous year: €621 million). Covestro Group Quarterly Sales Covestro Group Quarterly EBITDA € million € million 3,175 2,783 3,211 3,162 2,864 442 459 425 2,156 278 254 125 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2019 2020 10 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION In the second quarter of 2020, Group EBITDA decreased by 72.8% to €125 million (previous year: €459 million), chiefly due to a downturn in volumes sold in all segments as a result of the coronavirus pandemic. Lower margins, especially in the Polyurethanes segment, also negatively affected earnings. In contrast, factors such as lower selling expenses and administrative costs had a positive impact on earnings. EBITDA in the Polyurethanes segment slid to minus €24 million (previous year: €172 million) and in the Polycarbonates segment was down by 37.7% to €96 million (previous year: €154 million). In the Coatings, Adhesives, Specialties segment, EBITDA dropped by 60.0% to €60 million (previous year: €150 million). Depreciation, amortization and impairment losses rose by 4.3% to €193 million in the second quarter of 2020 (previous year: €185 million). This item comprised depreciation and impairment losses on property, plant and equipment of €187 million (previous year: €180 million) and amortization and impairment losses on intangible assets of €6 million (previous year: €5 million). The Covestro Group’s EBIT declined to minus €68 million in the second quarter of 2020 (previous year: €274 million). Including the financial result totaling minus €17 million (previous year: minus €23 million), income before income taxes was down from the prior-year quarter to minus €85 million (previous year: €251 million). In contrast to the prior-year quarter's tax expense amounting to €61 million, the second quarter of 2020 saw tax income of €32 million in line with earnings. This resulted in income after taxes of minus €53 million (previous year: €190 million). After noncontrolling interests, net income totaled minus €52 million (previous year: €189 million). Compared with the prior-year quarter, the earnings per share dropped to minus €0.28 (previous year: €1.03). Cash flows from operating activities increased to €171 million (previous year: €164 million). The decline in EBITDA was mainly offset by lower income tax payments compared with the prior-year quarter as well as lower payments for short-term variable compensation. In the second quarter of 2020, free operating cash flow rose to €24 million (previous year: minus €55 million). This was chiefly the result of a reduction in cash outflows for additions to property, plant, equipment and intangible assets, which decreased by 32.9% to €147 million (previous year: €219 million). First half of 2020 The Group's core volumes in the first half of 2020 were down by 13.6%, primarily on account of the effects of the coronavirus pandemic. In the Coatings, Adhesives, Specialties segment and the Polyurethanes segment, volumes dropped by 15.2%, or 14.9%. Core volumes in the Polycarbonates segment fell by 9.8% compared with the prior-year period. Group sales in the first six months of 2020 were down by 22.7% to €4,939 million (previous year: €6,386 million). This was mainly the result of lower total volumes, which reduced sales by 12.5%. Furthermore, a downturn in selling prices had a negative effect of 9.1%. Changes in exchange rates had a positive effect on sales amounting to 0.3%. In contrast, the change in the portfolio reduced sales by 1.4%. All segments saw sales decline in the first half of 2020. Sales in the Polyurethanes segment were down by 26.2% to €2,187 million (previous year: €2,965 million), while in the Polycarbonates segment, sales fell by 21.4% to €1,381 million (previous year: €1,758 million), and in the Coatings, Adhesives, Specialties segment, they declined by 18.7% to €1,015 million (previous year: €1,248 million). The Group’s EBITDA was down by 57.9% from the prior-year period, dropping from €901 million to €379 million in the first half of 2020. This was a result of a decline in earnings in all segments, particularly in the Polyurethanes segment. Depreciation, amortization and impairment losses rose by 4.7% to €380 million in the first six months of 2020 (previous year: €363 million). This item comprised depreciation and impairment losses on property, plant and equipment of €369 million (previous year: €354 million) and amortization and impairment losses on intangible assets of €11 million (previous year: €9 million). 11 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The Covestro Group’s EBIT fell to minus €1 million in the first half of 2020 (previous year: €538 million). Including the financial result amounting to minus €56 million (previous year: minus €46 million), income before income taxes declined from the prior-year period to minus €57 million (previous year: €492 million). The tax expense in the first six months of 2019 totaled €122 million, while tax income amounted to €25 million in line with earnings in the first half-year of 2020. This produced income after taxes of minus €32 million (previous year: €370 million). After noncontrolling interests, net income totaled minus €32 million (previous year: €368 million). In the first half of 2020, earnings per share dropped to minus €0.17 (previous year: €2.01). Cash flows from operating activities were down to €61 million in the first half of 2020 (previous year: €284 million), mostly due to the decline in EBITDA. In contrast, lower income tax payments and lower cash tied up in working capital had a positive effect. In the first six months of 2020, free operating cash flow fell to minus €225 million (previous year: minus €100 million). The lower cash flows provided by operating activities were contrasted by lower cash outflows for additions to property, plant, equipment and intangible assets of €286 million (previous year: €384 million). 12 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Business Development by Segment Polyurethanes Key data Polyurethanes 2nd quarter 2019 2nd quarter 2020 Change 1st half 2019 1st half 2020 Change € million € million % € million € million % Core volume growth1 Sales +0.7% 1,489 –25.9% 913 –38.7 +0.3% 2,965 –14.9% 2,187 –26.2 Change in sales Volume +0.8% –24.8% +1.9% –13.7% Price –26.8% –12.3% –28.1% –11.5% Currency +1.7% –0.4% +1.9% +0.1% Portfolio 0.0% –1.2% 0.0% –1.1% Sales by region EMLA 643 359 –44.2 1,312 948 –27.7 NAFTA 444 266 –40.1 855 661 –22.7 APAC 402 288 –28.4 798 578 –27.6 EBITDA 172 (24) . 329 26 –92.1 EBIT 72 (130) . 129 (181) . Operating cash flows 116 7 –94.0 120 (79) . Cash outflows for additions to property, plant, equipment and intangible assets 138 84 –39.1 240 168 –30.0 Free operating cash flow (22) (77) >200 (120) (247) >100 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2020 Second quarter of 2020 In the second quarter of 2020, core volumes in Polyurethanes decreased by 25.9%. Core volumes fell substan- tially in all main customer industries as a result of the coronavirus pandemic, but particularly in the furniture and wood processing industry as well as the automotive and transportation industry. Sales in the Polyurethanes segment amounted to €913 million, down by 38.7% from the prior-year quarter (previous year: €1,489 million). This was mainly due to a downturn in total volumes, which reduced sales by 24.8%. Lower average selling prices had an additional negative effect on sales amounting to 12.3%, principally due to competition pushing down selling prices in the prior year and lower raw material prices overall in the second quarter of 2020. At the same time, exchange rate changes and the portfolio effect from the sale of the European systems house business in the fourth quarter of 2019 reduced sales by 0.4% and 1.2%, respectively, in the second quarter of 2020. In the EMLA region, sales fell by 44.2% to €359 million (previous year: €643 million). Considerably lower total volumes and a steep decline in average selling prices had a negative effect on sales. The aforementioned portfolio effect reduced sales nominally, whereas exchange rate movements had no notable effect on sales. Sales in the NAFTA region slid by 40.1% to €266 million (previous year: €444 million), primarily due to a substantial decline in total volumes sold. Lower selling prices put slight downward pressure on sales, whereas changes in exchange rates were neutral overall with respect to sales. In the APAC region, sales decreased by 28.4% to €288 million (previous year: €402 million), mainly on account of a sharp drop in selling prices and a significant decline in total volumes sold. During the same period, exchange rate movements and the aforementioned portfolio effect had no noticeable effect on sales. 13 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Polyurethanes Quarterly Sales Polyurethanes Quarterly EBITDA € million € million 1,476 1,489 1,478 196 1,274 1,336 157 172 123 913 50 (24) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2019 2020 In the second quarter of 2020, EBITDA in the Polyurethanes segment was down from the prior-year quarter to minus €24 million (previous year: €172 million). The downturn in total volumes sold adversely affected earnings. Lower selling prices offset the effect of reduced raw material prices and led to a decrease in margins. EBIT declined to minus €130 million (previous year: €72 million). Free operating cash flow fell to minus €77 million (previous year: minus €22 million). This development is attrib- utable chiefly to the decline in EBITDA, which stood in contrast to lower cash outflows for property, plant and equipment, and reduced funds tied up in working capital. First half of 2020 In the first half of 2020, core volumes in Polyurethanes decreased by 14.9%. Core volumes in all main customer industries were down sharply, principally due to lower demand from the furniture and wood processing industry as well as the automotive and transportation industry. Sales in the segment dropped by 26.2% in the same period to €2,187 million (previous year: €2,965 million). In this context, a decline in total volumes cut sales by 13.7%, a decrease in average selling prices by 11.5%, and the aforementioned portfolio effect by 1.1%. In addition, exchange rate movements had a positive effect on sales of 0.1%. EBITDA tumbled by 92.1% in the first half of 2020, dropping to €26 million (previous year: €329 million). Lower raw material prices were unable to offset a decline in selling prices and, with margins down, this reduced earnings. The sharp drop in volumes additionally had a negative impact on EBITDA. EBIT declined to minus €181 million (previous year: €129 million). Free operating cash flow fell to minus €247 million (previous year: minus €120 million). EBITDA declined, whereas cash outflows for additions to property, plant, equipment and intangible assets decreased, and cash tied up in working capital was down. 14 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Polycarbonates Key data Polycarbonates 2nd quarter 2019 2nd quarter 2020 Change 1st half 2019 1st half 2020 Change € million € million % € million € million % Core volume growth1 Sales +4.4% 898 –14.4% 648 –27.8 –1.0% 1,758 –9.8% 1,381 –21.4 Change in sales Volume +5.7% –16.4% +1.5% –9.6% Price –18.8% –7.8% –15.8% –8.6% Currency +1.7% –0.1% +2.1% +0.4% Portfolio –3.6% –3.5% –3.6% –3.6% Sales by region EMLA 306 197 –35.6 595 459 –22.9 NAFTA 190 121 –36.3 378 302 –20.1 APAC 402 330 –17.9 785 620 –21.0 EBITDA 154 96 –37.7 309 205 –33.7 EBIT 99 41 –58.6 204 95 –53.4 Operating cash flows 93 68 –26.9 231 103 –55.4 Cash outflows for additions to property, plant, equipment and intangible assets 42 34 –19.0 81 63 –22.2 Free operating cash flow 51 34 –33.3 150 40 –73.3 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2020 Second quarter of 2020 In the second quarter of 2020, core volumes in the Polycarbonates segment fell by 14.4% from the prior-year quarter. Sales shifts between the customer industries were able to mitigate the negative effects of the corona- virus pandemic. For instance, volume losses due to a sharp decline in demand in the automotive and trans- portation industry were limited by less significant decreases in volumes sold in the electrical, electronics and household appliances industry and volume growth in the construction sector. In the Polycarbonates segment, sales were down by 27.8% to €648 million in the second quarter of 2020 (previous year: €898 million). Sales decreased by 16.4% due to a downturn in total volumes and by 7.8% as a result of lower average selling prices. In addition, exchange rate movements had a negative effect on sales of 0.1%. Moreover, the portfolio effect from the sale of the European polycarbonate sheets business in the first quarter of 2020 decreased sales in the second quarter of 2020 by 3.5%. In the EMLA region, sales were down 35.6% to €197 million (previous year: €306 million). A decline in total volumes, the aforementioned portfolio effect and lower average selling prices each had a significant negative effect on sales. In contrast, exchange rate movements were neutral on the whole with regard to sales. In the NAFTA region, sales decreased by 36.3% to €121 million (previous year: €190 million), mainly on account of a sharp drop in total volumes sold. The selling price level also put slight downward pressure on sales. In contrast, exchange rate changes had no notable effect on sales. In the APAC region, sales fell by 17.9% to €330 million (previous year: €402 million). A significant downturn in average selling prices and substantially lower total volumes decreased sales, whereas exchange rate movements had no noticeable effect on sales. 15 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Polycarbonates Quarterly Sales Polycarbonates Quarterly EBITDA € million € million 860 898 901 814 155 154 733 648 132 109 96 95 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2019 2020 In the second quarter of 2020, EBITDA in the Polycarbonates segment decreased 37.7% from the prior-year quarter, coming in at €96 million (previous year: €154 million). Lower volumes negatively affected earnings. In addition, a reduction in selling prices outweighed the effect of lower raw material prices and led to a decline in margins. EBIT dropped by 58.6% to €41 million (previous year: €99 million). Free operating cash flow fell 33.3% to €34 million (previous year: €51 million). The key driver of this development was the decline in EBITDA, which stood in contrast to lower cash tied up in working capital. First half of 2020 In the first half of 2020, core volumes in the Polycarbonates segment were 9.8% lower than in the prior-year period. The negative effects of the coronavirus pandemic were mitigated by shifts in sales between the customer industries. A steep decline in demand from the automotive and transportation industry, which led to lower volumes, was offset by less sharp decreases in volumes sold in the electrical, electronics and household appliances industry and rising volumes in the construction sector. Sales in the Polycarbonates segment decreased by 21.4% to €1,381 million in the first half of 2020 (previous year: €1,758 million). Lower total volumes reduced sales by 9.6%, and a decline in average selling prices caused an 8.6% drop in sales. Exchange rate changes had a positive effect on sales totaling 0.4%, whereas the portfolio effect from the sale of the European polycarbonate sheets business in the first quarter of 2020 decreased sales in the first half of 2020 by 3.6%. In the first half of 2020, EBITDA in the Polycarbonates segment decreased by 33.7% compared with the prior- year period, coming in at €205 million (previous year: €309 million), mostly on account of the downturn in total volumes sold. At the same time, the drop in selling prices outweighed the effect of the decline in raw material prices and led to lower margins. EBIT was down by 53.4% to €95 million (previous year: €204 million). Free operating cash flow fell by 73.3% to €40 million (previous year: €150 million), mainly on account of lower EBITDA. 16 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Coatings, Adhesives, Specialties Key data Coatings, Adhesives, Specialties 2nd quarter 2019 2nd quarter 2020 Change 1st half 2019 1st half 2020 Change € million € million % € million € million % Core volume growth1 Sales –4.7% 621 –25.3% 443 –28.7 –2.4% 1,248 –15.2% 1,015 –18.7 Change in sales Volume –4.5% –25.8% –1.7% –16.4% Price –0.4% –3.2% +0.6% –3.5% Currency +2.2% +0.3% +2.6% +0.7% Portfolio +1.4% 0.0% +0.7% +0.5% Sales by region EMLA 277 188 –32.1 571 467 –18.2 NAFTA 144 101 –29.9 288 240 –16.7 APAC 200 154 –23.0 389 308 –20.8 EBITDA 150 60 –60.0 296 190 –35.8 EBIT 120 28 –76.7 238 128 –46.2 Operating cash flows 38 94 >100 50 134 >100 Cash outflows for additions to property, plant, equipment and intangible assets 40 29 –27.5 64 54 –15.6 Free operating cash flow (2) 65 . (14) 80 . 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2020 Second quarter of 2020 In the second quarter of 2020, the Coatings, Adhesives, Specialties segment saw core volumes decline by 25.3% from the prior-year quarter. The coronavirus pandemic led to considerably weaker demand from our main customer industries. This is primarily reflected in the negative development of volumes sold in the automotive and transportation industry and in the furniture and wood processing industry as well. Sales in the segment dropped by 28.7% to €443 million (previous year: €621 million). A decline in total volumes had a negative effect on sales of 25.8%, while lower average selling prices reduced sales by 3.2%. Exchange rate fluctuations increased sales by 0.3%. In the EMLA region, sales decreased by 32.1% to €188 million (previous year: €277 million), mainly on account of a sharp drop in total volumes sold. In addition, lower selling prices pushed sales down slightly. Exchange rate fluctuations had no material effect on sales. Sales in the NAFTA region dropped by 29.9% to €101 million (previous year: €144 million) as a result of a steep decline in total volumes sold. At the same time, average selling prices reduced sales somewhat, whereas changes in exchange rates had a slight positive effect on sales. In the APAC region, sales were down 23.0% to €154 million (previous year: €200 million). A considerable drop in total volumes and a significantly lower level of selling prices each reduced sales. Exchange rate movements had no noticeable effect on sales. 17 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Coatings, Adhesives, Specialties Quarterly Sales Coatings, Adhesives, Specialties Quarterly EBITDA € million € million 627 572 621 588 533 146 130 150 443 111 60 62 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2019 2020 EBITDA in Coatings, Adhesives, Specialties fell by 60.0% to €60 million in the second quarter of 2020 (previous year: €150 million). This was mainly attributable to reduced volumes and lower margins, which negatively affected EBITDA performance. EBIT declined by 76.7% to €28 million (previous year: €120 million). In the second quarter of 2020, free operating cash flow rose to €65 million (previous year: minus €2 million). EBITDA declined, while freed-up working capital increased. First half of 2020 In the first half of 2020, core volumes in the Coatings, Adhesives, Specialties segment were 15.2% lower than in the prior-year period. The drivers of this development were considerably weaker demand from our main customer industries, especially due to negative performance of volumes sold in the automotive and trans- portation industry as well as in the furniture and wood processing industry. Sales in the Coatings, Adhesives, Specialties segment dropped by 18.7% in the same period to €1,015 million (previous year: €1,248 million). Negative effects on sales of 16.4% and 3.5% stemmed from total volumes sold and lower selling prices, respectively. At the same time, exchange rate changes increased sales by 0.7%, and the portfolio effect from the step acquisition of shares and subsequent full consolidation of Japan-based DIC Covestro Polymer Ltd. in the second quarter of 2019 gave sales a 0.5% boost. In the first six months of 2020, EBITDA decreased by 35.8% compared to the prior-year period, coming in at €190 million (previous year: €296 million). This was primarily due to the drop in total volumes sold and lower margins. EBIT was down by 46.2% to €128 million (previous year: €238 million). In the first half of 2020, free operating cash flow increased to €80 million (previous year: minus €14 million). A lower level of cash tied up in working capital more than compensated for the decline in EBITDA. 18 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Financial Position and Net Assets of the Covestro Group Financial Position Covestro Group summary statement of cash flows 2nd quarter 2019 2nd quarter 2020 1st half 2019 1st half 2020 € million € million € million € million EBITDA 459 125 901 379 Income taxes paid (144) (12) (223) (102) Change in pension provisions 17 6 26 17 (Gains) losses on retirements of noncurrent assets (19) (1) (17) 1 Change in working capital/other noncash items (149) 53 (403) (234) Cash flows from operating activities 164 171 284 61 Cash outflows for additions to property, plant, equipment and intangible assets (219) (147) (384) (286) Free operating cash flow (55) 24 (100) (225) Cash flows from investing activities (184) (660) (373) (792) Cash flows from financing activities (109) 795 (143) 1,494 Change in cash and cash equivalents due to business activities (129) 306 (232) 763 Cash and cash equivalents at beginning of period 771 1,200 865 748 Change in cash and cash equivalents due to changes in scope of consolidation – – (1) 1 Change in cash and cash equivalents due to exchange rate movements (2) (2) 8 (8) Cash and cash equivalents at end of period 640 1,504 640 1,504 Cash flows from operating activities In the second quarter of 2020, cash flows from operating activities rose to €171 million (previous year: €164 million). An increase in freed-up working capital and lower income tax payments were able to more than offset a decline in EBITDA. After deduction of cash outflows for additions to property, plant, equipment and intangible assets, free operating cash flow totaled €24 million (previous year: minus €55 million). At €61 million, cash flows from operating activities in the first six months of 2020 fell below the prior-year figure of €284 million. After deduction of cash outflows for additions to property, plant, equipment, and intangible assets totaling €286 million (previous year: €384 million), free operating cash flows amounted to minus €225 million (previous year: minus €100 million). Covestro applied a simplification rule at the segment level in calculating the income taxes paid as a component of operating cash flows. More information can be found in Note 4 “Segment and Regional Reporting” in the Consolidated Financial Statements in the 2019 Annual Report. The difference between the income tax payments of the reportable operating segments and the actual income taxes paid by the Covestro Group are taken into account in the segment reporting in “Other/consolidation”. Cash flows from operating activities of €61 million comprise the cash flows from operating activities of the reportable operating segments (PUR: minus €79 million, PCS: €103 million, CAS: €134 million) and “Other/consolidation” (minus €97 million), which includes a difference of minus €92 million. 19 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Cash flows from investing activities In the second quarter of 2020, cash outflows for investing activities came to €660 million (previous year: cash outflows of €184 million). This item comprised investments in money market funds of €530 million and cash outflows for additions to property, plant, equipment and intangible assets of €147 million (previous year: €219 million). Cash outflows for investing activities in the first half of 2020 totaled €792 million (previous year: cash outflows of €373 million). This item mainly comprises the investment in the aforementioned money market funds as well as cash outflows for additions to property, plant, equipment and intangible assets of €286 million (previous year: €384 million). Cash flows from financing activities The Covestro Group saw cash inflows from financing activities amounting to €795 million in the second quarter of 2020 (previous year: cash outflows of €109 million), mainly due to the issue of bonds totaling €1 billion. Furthermore, Covestro repaid a loan amounting to €125 million obtained in the first quarter of 2020. In the first six months of 2020, cash inflows from financing activities totaled €1,494 million (previous year: cash outflows of €143 million). These comprise short-term loans assumed in the first quarter of 2020 in the total amount of €500 million, €125 million of which was repaid in the second quarter of 2020; a loan from the European Investment Bank (EIB) amounting to €225 million; and the aforementioned bonds issued in the second quarter of 2020 (see below the explanation of net financial debt). Net financial debt Dec. 31, 2019 June 30, 2020 € million € million Bonds 997 1,989 Liabilities to banks 10 623 Lease liabilities 735 732 Liabilities from derivatives 10 4 Other financial liabilities – 1 Receivables from derivatives (15) (21) Financial debt 1,737 3,328 Cash and cash equivalents (748) (1,504) Current financial assets – (530) Net financial debt 989 1,294 Compared with December 31, 2019, the Covestro Group’s net financial debt increased by €305 million to €1,294 million as of June 30, 2020. Financial debt in the first half of 2020 rose by €1,591 million to €3,328 million. The rise was attributable to increased liabilities to banks from short-term loans obtained in the first quarter of 2020 totaling €500 million and a loan from the EIB totaling €225 million for research and development. The focus here is, in particular, on sustainability and the circular economy in the European Union. On June 5, 2020, Covestro also successfully placed a total of €1.0 billion in euro bonds on the capital market. This enables Covestro to significantly extend the average maturity of the bond portfolio. The proceeds of the bonds placed will be used to further reinforce Covestro's liquidity in view of the economic effects of the coronavirus pandemic and to provide liquid funds to repay the existing bond maturing in fiscal 2021. The bonds mature in February 2026 and June 2030 and carry coupon rates of 0.875 % and 1.375 %, respectively. On the other hand, a €125 million loan from the first quarter of 2020 was repaid. Moreover, cash and cash equivalents of €530 million were invested in money market funds. Effective March 17, 2020, Covestro obtained a new syndicated revolving credit facility totaling €2.5 billion with a term of five years, including two options for extending the term by one year in each case. An important new feature of the credit line is its link to an ESG (environment, social, governance) rating: The lower (higher) the 20 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION externally calculated ESG score is, the lower (higher) the interest component of the credit facility. The new facility replaces the existing revolving credit line of €1.5 billion and, like it, functions as a backup liquidity reserve. Net Assets Covestro Group summary statement of financial position Dec. 31, 2019 June 30, 2020 € million € million Noncurrent assets 6,791 6,774 Current assets 4,727 5,715 Total assets 11,518 12,489 Equity 5,254 5,254 Noncurrent liabilities 4,129 5,215 Current liabilities 2,135 2,020 Liabilities 6,264 7,235 Total equity and liabilities 11,518 12,489 Compared with December 31, 2019, total assets increased by €971 million to €12,489 million as of June 30, 2020. Noncurrent assets remained largely stable at €6,774 million (December 31, 2019: €6,791 million). Current assets increased by €988 million to €5,715 million (December 31, 2019: €4,727 million), mostly due to an increase in cash and cash equivalents resulting from the aforementioned financing measures as well as the investment in money market funds, which led to an increase in other financial assets. In the second quarter of 2020, these increases stood in contrast to a sales-driven decline in trade accounts receivable and other receivables. Equity remained stable compared to December 31, 2019, at €5,254 million. Noncurrent liabilities rose by €1,086 million to €5,215 million as of June 30, 2020 (December 31, 2019: €4,129 million). This is largely attributable to the increase in noncurrent financial liabilities by €1,216 million to €2,817 million (December 31, 2019: €1,601 million), which resulted from the newly issued euro bonds and the loan obtained from the EIB. In contrast, provisions for pensions and other post-employment benefits were down by €84 million to €1,881 million (December 31, 2019: €1,965 million). Current liabilities fell by €115 million to €2,020 million as of the reporting date (December 31, 2019: €2,135 million). The drivers of this development were the decline in trade accounts payable, which stood in contrast with the increase in current financial liabilities resulting from the short-term loans obtained. 21 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Forecast Economic outlook Global economy The grave consequences of the spread of the coronavirus pandemic will have a substantial negative impact on the global economy. In contrast with our outlook in the 2019 Annual Report, we now project global economic output to drop significantly for a decline in growth of 5.6% for 2020 as a whole. The expectations for all regions were revised sharply downward. According to current estimates, we expect only China to post positive, albeit weak, growth. The economies in Europe, North America and Latin America are forecast to report negative growth rates. After two quarters of recession in the first half of 2020, we expect the global economy to grow again compared with the prior-year quarters in the second half of 2020. Economic growth 1 Growth 2019 Growth forecast 2020 (Annual Report 2019) Growth forecast 2020 % % % World +2.5 +2.5 –5.6 Europe +1.5 +1.2 –8.5 of which Western Europe +1.3 +0.9 –8.8 of which Germany +0.6 +0.4 –6.0 of which Eastern Europe +2.7 +2.4 –7.3 Middle East +0.7 +2.0 –8.5 Latin America –0.4 +0.9 –9.7 Africa North America2 +2.5 +2.1 +2.9 +1.9 –3.6 –6.4 of which United States +2.3 +2.1 –6.1 Asia-Pacific +4.2 +4.2 –2.1 of which China +6.1 +5.8 +0.5 1 Real growth of gross domestic product; source: IHS (Global Insight), Growth 2019 and Growth forecast 2020, as of July 15, 2020 2 North America (not including Central America): Canada, Mexico, United States Main customer industries* We expect the coronavirus pandemic to also have a significant adverse impact on the performance of our main customer industries. Unlike our outlook in the 2019 Annual Report, we now believe the automotive industry will see a steep downturn amounting to a double-digit percentage. Growth in the furniture industry will also likely be considerably weaker than expected. In the electrical, electronics and household appliances industry as well as the construction sector, we project a negative growth rate in the lower single-digit range, down from our forecast in the 2019 Annual Report. Covestro’s estimate, based on the following sources: LMC Automotive Limited, B+L, CSIL (Centre for Industrial Studies), Oxford Economics Economic data is only available for the automotive and furniture segments (not the transportation or wood processing segments) of our “automotive and transportation” and “furniture and wood processing” main customer industries. 22 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Forecast for key performance indicators As a result of the coronavirus pandemic and the resulting increasingly unfavorable business environment, the Board of Management of Covestro AG adjusted the forecasts in the 2019 Annual Report on April 15, 2020. Based on the business performance described in this Half-Year Financial Report and the aforementioned economic outlook, and taking into consideration the changed risk and opportunity potentials, we confirm the compared to the 2019 Annual Report adjusted forecast for the rest of the 2020 fiscal year. We expect our key performance indicators to develop as follows. In the current year, core volume growth is projected to decline year over year (forecast in the 2019 Annual Report: low-single-digit percentage range increase). Free operating cash flow (FOCF) is expected to be in the range between minus €200 million and plus €300 million this year (forecast in the 2019 Annual Report: between €0 million and €400 million). For fiscal 2020, return on capital employed* (ROCE) is projected between minus 1% and plus 4% (forecast in the 2019 Annual Report: between 2% and 7%). The return on capital employed is calculated as the ratio of EBIT after taxes to capital employed. Capital employed is the capital used by the company. It is the sum of current and noncurrent assets less noninterest-bearing liabilities such as trade accounts payable. 23 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Opportunities and Risks As a global enterprise with a diversified portfolio, the Covestro Group is exposed to a wide range of opportunities and risks. The Covestro Group regards opportunity and risk management as an integral part of corporate governance. Our opportunity and risk management system and the opportunity and risk situation are outlined in detail in the “Opportunities and Risks Report” section in the combined management report of the 2019 Covestro Annual Report. Changes in the risk situation Material changes in Covestro's risk situation compared with the situation described in the 2019 Annual Report resulted primarily from the current worldwide coronavirus pandemic. The rapid outbreak of the coronavirus led governments and Covestro alike to take a host of countermeasures to prevent the further spread of the virus and therefore to protect people's health and well-being. The countermeasures range from officially issued stay-at-home orders and temporary business closures to the promotion of certain types of social distancing and compliance with minimum hygiene standards. This alone led to significant curtailment of business activities — at Covestro and at our suppliers and customers — which adversely affected and continues to affect the supply of raw materials as well as demand for our products. The impact of these effects on our volumes sold and the company's operating result also depends on the duration of the individual measures. Covestro has already developed a far-reaching pandemic plan. This plan calls for a global crisis management team as well as local crisis management teams, which work with local authorities to determine options for securing continued operations at Covestro's own production facilities and therefore to ensure our delivery capability. Furthermore, the teams work on measures to protect the health of employees at work, e.g., by providing training sessions or protective gear such as mouth-and-nose masks and disinfectants. Covestro's Board of Management actively monitors the worldwide development of the coronavirus pandemic. Required adjustments or expansion of existing measures are made in line with recommendations and instructions issued by the relevant governments and committees of experts. The full range of the pandemic's consequences for the global economy cannot be foreseen at this time. Substantial economic damage has already occurred. The pandemic is expected to have a long-term impact on the economic situation worldwide and therefore the business performance of Covestro as well. Currently, we estimate this risk to be a mid-level risk based on our assessment matrix. This is currently Covestro's greatest challenge. In addition, we now consider the risk of negative economic performance to be high based on the change in the likelihood of occurrence. However, the company has not identified any risks that could endanger the company’s continued existence at this time or in the future. In comparison with the situation presented in the 2019 Annual Report, there have been no new significant developments in the legal proceedings described there, and no new material legal proceedings are pending. More information can be found in Note 26 “Legal Risks” in the Consolidated Financial Statements in the 2019 Annual Report. 24 Consolidated Interim Financial Statements as of June 30, 2020 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED INCOME STATEMENT 2nd quarter 2019 2nd quarter 2020 1st half 2019 1st half 2020 € million € million € million € million Sales 3,211 2,156 6,386 4,939 Cost of goods sold (2,449) (1,817) (4,856) (4,049) Gross profit 762 339 1,530 890 Selling expenses (346) (268) (690) (589) Research and development expenses (68) (59) (136) (124) General administration expenses (97) (68) (193) (160) Other operating income 31 8 53 17 Other operating expenses EBIT1 Equity-method loss (8) 274 (8) (20) (68) (4) (26) 538 (14) (35) (1) (8) Result from other affiliated companies – – 1 – Interest income 9 7 19 15 Interest expense (22) (18) (45) (37) Other financial result (2) (2) (7) (26) Financial result (23) (17) (46) (56) Income before income taxes 251 (85) 492 (57) Income taxes (61) 32 (122) 25 Income after income taxes 190 (53) 370 (32) of which attributable to noncontrolling interest 1 (1) 2 – of which attributable to Covestro AG shareholders (net income) 189 (52) 368 (32) € € € € Basic earnings per share2 1.03 –0.28 2.01 –0.17 Diluted earnings per share2 1.03 –0.28 2.01 –0.17 1 EBIT: Income after income taxes plus financial result and income taxes 2 The weighted average number of outstanding no-par voting shares of Covestro AG in issue amounted to 182,864,685 in both the second quarter of 2020 (previous year: 182,704,602) and the first half of 2020 (previous year: 182,704,602). 26 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2nd quarter 2019 2nd quarter 2020 1st half 2019 1st half 2020 € million € million € million € million Income after income taxes 190 (53) 370 (32) Remeasurements of the net defined benefit liability for post-employment benefit plans (20) (437) (220) 112 Income taxes 2 136 74 (38) Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans (18) (301) (146) 74 Changes in fair values of equity instruments (1) – (1) – Income taxes – – – – Other comprehensive income from equity instruments (1) – (1) – Other comprehensive income that will not be reclassified subsequently to profit or loss (19) (301) (147) 74 Exchange differences of foreign operations (94) (36) 49 (40) Reclassified to profit or loss – – – – Other comprehensive income from exchange differences (94) (36) 49 (40) Other comprehensive income that may be reclassified subsequently to profit or loss, if certain conditions are met (94) (36) 49 (40) Total other comprehensive income1 (113) (337) (98) 34 of which attributable to noncontrolling interest – – 1 – of which attributable to Covestro AG shareholders (113) (337) (99) 34 Total comprehensive income 77 (390) 272 2 of which attributable to noncontrolling interest 1 (1) 3 – of which attributable to Covestro AG shareholders 76 (389) 269 2 1 Total change recognized outside profit or loss 27 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2019 June 30, 2020 Dec. 31, 2019 € million € million € million Noncurrent assets Goodwill 263 264 264 Other intangible assets 109 109 114 Property, plant and equipment 5,148 5,243 5,286 Investments accounted for using the equity method 194 187 192 Other financial assets 32 35 32 Other receivables 46 75 52 Deferred taxes 820 861 851 6,612 6,774 6,791 Current assets Inventories 2,079 1,922 1,916 Trade accounts receivable 1,803 1,311 1,561 Other financial assets 16 557 27 Other receivables 351 288 359 Claims for income tax refunds 106 133 104 Cash and cash equivalents 640 1,504 748 Assets held for sale 54 – 12 5,049 5,715 4,727 Total assets 11,661 12,489 11,518 Equity Capital stock of Covestro AG 183 183 183 Capital reserves of Covestro AG 3,480 3,487 3,487 Other reserves 1,498 1,539 1,537 Equity attributable to Covestro AG shareholders 5,161 5,209 5,207 Equity attributable to noncontrolling interest 44 45 47 5,205 5,254 5,254 Noncurrent liabilities Provisions for pensions and other post-employment benefits 1,704 1,881 1,965 Other provisions 239 209 230 Financial liabilities 1,702 2,817 1,601 Income tax liabilities 114 96 95 Other liabilities 32 16 32 Deferred taxes 166 196 206 3,957 5,215 4,129 Current liabilities Other provisions 220 208 203 Financial liabilities 552 532 151 Trade accounts payable 1,424 1,048 1,507 Income tax liabilities 78 33 69 Other liabilities 211 199 191 Liabilities directly related to assets held for sale 14 – 14 2,499 2,020 2,135 Total equity and liabilities 11,661 12,489 11,518 28 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CASH FLOWS 2nd quarter 2019 2nd quarter 2020 1st half 2019 1st half 2020 € million € million € million € million Income after income taxes 190 (53) 370 (32) Income taxes 61 (32) 122 (25) Financial result 23 17 46 56 Income taxes paid (144) (12) (223) (102) Depreciation, amortization and impairment losses and impairment loss reversals 185 193 363 380 Change in pension provisions 17 6 26 17 (Gains)/losses on retirements of noncurrent assets (19) (1) (17) 1 Decrease/(increase) in inventories 135 94 148 (21) Decrease/(increase) in trade accounts receivable 29 308 (17) 239 (Decrease)/increase in trade accounts payable (5) (360) (229) (457) Changes in other working capital, other noncash items (308) 11 (305) 5 Cash flows from operating activities 164 171 284 61 Cash outflows for additions to property, plant, equipment and intangible assets (219) (147) (384) (286) Cash inflows from sales of property, plant, equipment and other assets 1 – 4 – Cash inflows from divestments less divested cash – – – (3) Cash outflows for noncurrent financial assets (5) (2) (7) (9) Cash inflows from noncurrent financial assets (1) 1 1 1 Cash outflows for acquisitions less acquired cash (8) – (8) – Interest and dividends received 9 7 18 17 Cash inflows from/(outflows for) other current financial assets 39 (519) 3 (512) Cash flows from investing activities (184) (660) (373) (792) Dividend payments and withholding tax on dividends (441) (2) (441) (2) Issuances of debt 402 1,011 428 1,768 Retirements of debt (49) (198) (91) (234) Interest paid (21) (16) (39) (38) Cash flows from financing activities (109) 795 (143) 1,494 Change in cash and cash equivalents due to business activities (129) 306 (232) 763 Cash and cash equivalents at beginning of period 771 1,200 865 748 Change in cash and cash equivalents due to changes in scope of consolidation – – (1) 1 Change in cash and cash equivalents due to exchange rate movements (2) (2) 8 (8) Cash and cash equivalents at end of period 640 1,504 640 1,504 29 1 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Capital stock of Covestro AG Capital reserves of Covestro AG Retained earnings incl. subtotal income Accumulated other com- prehensive income Equity attributable to Covestro AG shareholders Equity attributable to non- controlling interest € million € million € million € million € million € million Dec. 31, 2018 183 3,480 1,356 323 5,342 33 Dividend payments Other changes1 – – (438) (12) – (438) (12) (3) 11 Income after income taxes 368 368 2 Other comprehensive income (147) 48 (99) 1 Total comprehensive income 221 48 269 3 June 30, 2019 183 3,480 1,127 371 5,161 44 of which treasury shares – (15) (15) Dec. 31, 2019 183 3,487 1,122 415 5,207 47 Dividend payments – – (2) Income after income taxes (32) (32) – Other comprehensive income 74 (40) 34 – Total comprehensive income 42 (40) 2 – June 30, 2020 183 3,487 1,164 375 5,209 45 of which treasury shares – (7) (7) Other changes result from a step acquisition of shares in April 2019 and the related equity transaction, see Covestro 2019 Annual Report, Consolidated Financial Statements, note 5.2 “Acquisitions and Divestitures”. 30 Equity € million 5,375 (441) (1) 370 (98) 272 5,205 (15) 5,254 (2) (32) 34 2 5,254 (7) Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. General Information Information on the consolidated interim financial statements Pursuant to Section 115, Paragraph 3 of the German Securities Trading Act (WpHG), the consolidated interim financial statements of Covestro AG, Leverkusen (Germany), as of June 30, 2020, have been prepared according to the International Financial Reporting Standards (IFRSs) — including IAS 34 (Interim Financial Reporting) — of the International Accounting Standards Board (IASB), London (United Kingdom), the Interpretations (IFRICs) of the IFRS Interpretations Committee (IFRS IC), and the interpretations published by the Standing Interpretations Committee (SIC), endorsed by the European Union and in effect at the closing date. The accounting policies and valuation principles described in the consolidated financial statements as of December 31, 2019, were applied unchanged in preparing the consolidated interim financial statements as of June 30, 2020, except in the case of the financial reporting standards adopted for the first time in the current fiscal year as described in note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” The consolidated interim financial statements are drawn up in euros. Amounts are stated in millions of euros (€ million) except where otherwise indicated. Exchange rates In the reporting period, the following exchange rates were used for the major currencies of relevance to the Covestro Group: Closing rates for major currencies Average rates for major currencies Closing rates Average rates €1/ June 30, 2019 Dec. 31, 2019 June 30, 2020 €1/ 1st half 2019 1st half 2020 BRL Brazil 4.35 4.52 6.11 BRL Brazil 4.34 5.33 CNY China 7.82 7.82 7.92 CNY China 7.68 7.76 HKD Hong Kong 8.89 8.75 8.68 HKD Hong Kong 8.86 8.55 INR India 78.52 80.19 84.62 INR India 79.10 81.60 JPY Japan 122.60 121.94 120.66 JPY Japan 124.33 119.22 MXN Mexico 21.82 21.22 25.95 MXN Mexico 21.65 23.58 USD United States 1.14 1.12 1.12 USD United States 1.13 1.10 31 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 2. Effects of New Financial Reporting Standards 2.1 Financial reporting standards applied for the first time in the reporting period IFRS pronouncement (published on) Title Effective for annual periods beginning on or after Amendments to IFRS Standards (March 29, 2018) Amendments to References to the Conceptual Framework in IFRS Standards January 1, 2020 Amendments to IFRS 3 (October 22, 2018) Definition of a Business January 1, 2020 Amendments to IAS 1 and IAS 8 (October 31, 2018) Definition of Material January 1, 2020 Amendments to IFRS 9, IAS 39 and IFRS 7 (September 26, 2019) Interest Rate Benchmark Reform January 1, 2020 Initial application of the standards listed in the table had little or no material impact on the presentation of the net assets, financial position and results of operations. 2.2 Published financial reporting standards that have not yet been applied Compared with the disclosure presented in the consolidated financial statements as of December 31, 2019, regarding the effects of those published reporting standards that are not yet effective to be applied but whose application could affect the presentation of the net assets, financial position and results of operations, no new determinations were made concerning potential effects. 32 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 3. Effects of the Coronavirus Pandemic on Financial Reporting Business performance in the first half of 2020 was heavily influenced by the coronavirus pandemic. During this period, Covestro saw substantial sales losses, primarily due to a decline in volumes sold. Whereas the APAC region's sales had dropped considerably as early as the first quarter of 2020, sales in the EMLA and NAFTA regions did not begin their steep decline until the second quarter of 2020. In contrast, the slowdown in sales in the APAC region, particularly China, was much less severe than in the other regions in the second quarter of 2020. Sales in all segments fell significantly in the first half of 2020. This was mainly due to a decline in volumes sold and a lower level of selling prices. The change in volumes resulted from weaker demand in all main customer industries. Only in the Polycarbonates segment did volume growth in the construction sector offset the down- turns in the other main customer industries. Additional disclosures on the effects of the coronavirus pandemic and the countermeasures taken by Covestro are presented in the interim group management report. In view of the aforementioned changes in the business environment, preparation of the consolidated interim financial statements required Covestro to make assumptions and estimates to a certain extent that affected the measurement of reported assets and liabilities, as well as income and expenses, and that could deviate from the actual results in individual cases. Such estimates, assumptions and the exercise of discretion related primarily to the following areas: impairment testing of non-financial assets, particularly goodwill; assessment of the probability that deferred tax assets can be utilized in the future; calculation of impairment losses on trade accounts receivable; calculation of provisions relating to contractually agreed minimum purchase volumes (“take-or-pay” clauses) in supply contracts. As a consequence of the significant decline in Covestro’s market capitalization, the carrying amounts of all cash- generating units were subjected to impairment testing as of June 30, 2020. For this purpose, the most recent Covestro corporate planning approved by the Supervisory Board was used under consideration of currently available planning data. As of June 30, 2020, there was no need to recognize an impairment loss for any of the cash-generating units. As part of an extended sensitivity analysis, a 10% reduction in the future free operating cash flow, a 10% increase in the WACC, or a one-percentage-point reduction in the long-term growth rate were assumed. On this basis, there would be no need to recognize an impairment loss for any of the cash-generating units. The same applies at the measurement date of June 30, 2020, to other deviations from the assumptions used in the impairment testing that were deemed possible. The probability that deferred tax assets resulting from temporary differences, tax credits or loss carryforwards can be utilized in the future is the subject of forecasts by the individual companies regarding the future earnings situation in the respective Covestro companies and other parameters. These forecasts have been updated to reflect the effects of the coronavirus pandemic and did not result in any impairment losses on deferred tax assets in the current financial statements. 33 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The level of default risk associated with the Covestro Group's trade accounts receivable depends mainly on the creditworthiness of our customers. The coronavirus pandemic has heightened industry risk (equivalent to the default risk relating to the companies in a particular industry), because demand, and subsequently sales revenues, in certain industries have declined sharply. This can directly affect the creditworthiness of customers in these industries. In order to appropriately reflect the increased default risk when measuring trade accounts receivable, industry risk was additionally considered when assessing the creditworthiness of customers. The expected losses in trade accounts receivable therefore increased by €3 million (additional information on the calculation of default risk for trade accounts receivable can be found in note 24.2 “Financial Risk Management and Information on Derivatives” in the Consolidated Financial Statements in the 2019 Annual Report). Due to weaker demand, the agreed minimum purchase amounts in some supply contracts (“take-or-pay” clauses) cannot be met for 2020. Provisions were recognized for the expected payments resulting from the failure to purchase the agreed volumes. In addition, attention is drawn to the following accounting issues associated with the coronavirus pandemic: In March 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was passed in the United States. This economic relief package gives U.S. companies various options including carrying back losses at the federal tax level, incurred after December 31, 2017, and prior to January 1, 2021, to prior years and offsetting them against taxable income. Tax income of €4 million was realized by Covestro LLC, Pittsburgh (USA), in this context in the first half of 2020. Covestro received public subsidies abroad in accordance with IAS 20 for managing sales losses resulting from the coronavirus pandemic. These subsidies related mainly to a reduction in personnel costs and amounted to €5 million in the first six months of 2020. 34 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 4. Segment and Regional Reporting The Board of Management of Covestro AG, as the chief operating decision maker of the Covestro Group, allocates resources to the operating segments and assesses their performance. The reportable segments and regions are identified, and the disclosures selected, in line with the internal financial reporting system (management approach). They are based on the same accounting policies outlined in the consolidated financial statements as of December 31, 2019. As of June 30, 2020, the Covestro Group comprises three reportable segments with the following activities: Polyurethanes The Polyurethanes segment develops, produces and markets high-quality precursors for polyurethanes. These precursors are toluene diisocyanate (TDI), diphenylmethane diisocyanate (MDI) and polyether polyol. Flexible polyurethane foam is used primarily in the furniture and automotive industries (e.g., in upholstered furniture, mattresses and car seats). Rigid foam is used mainly in the construction sector as an insulating material as well as along the entire refrigeration chain. The segment operates production facilities worldwide as well as systems houses, mainly in the APAC region, for formulating and supplying customized polyurethane systems. Polycarbonates The Polycarbonates segment develops, produces and markets the high-performance plastic polycarbonate in the form of granules and composite materials. The material is used primarily in the automotive industry (e.g., in the vehicle interior and for vehicle lighting) and in the construction sector (e.g., for roof structures). It is also used in the electrical and electronics industry (e.g., for connector housings, computer cases and DVDs), the medical technology sector and the lighting industry (e.g., for LED components). The Covestro Group produces polycar- bonate all around the world and processes it at compounding centers to meet specific customer requirements. Coatings, Adhesives, Specialties The Coatings, Adhesives, Specialties segment develops, produces and markets precursors for coatings, adhe- sives and sealants as well as specialties — primarily for polyurethane systems. They include polymer materials and aqueous dispersions based on the isocyanates HDI and IPDI, which are produced at facilities located throughout the world. The main areas of application are automotive and transportation, infrastructure and construction, wood processing, and furniture. The specialties comprise elastomers, high-quality films and precursors for the cosmetics, textiles, and health care sectors. Business activities that cannot be allocated to any of the aforementioned segments are reported under “All other segments.” The external sales from these activities are generated mainly from by-products of chlorine production and use. The costs of Corporate Center functions and higher or lower expenses for long-term stock-based compensation arising from fluctuations in the performance of Covestro AG stock are presented in the segment reporting as “Corporate Center and reconciliation.” 35 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The segment data is calculated as follows: EBIT and EBITDA are not defined in the International Financial Reporting Standards. EBIT is equal to income after income taxes plus financial result and income taxes. EBITDA is the EBIT as reported in the income statement plus depreciation and impairment losses on property, plant, and equipment and amortization and impairment losses on intangible assets, less impairment loss reversals. Trade working capital comprises inventories plus trade accounts receivable, less trade accounts payable. The following tables show the segment reporting data for the second quarter and for the first half year (as of June 30), respectively: Segment reporting 2nd quarter Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 2nd quarter 2020 Net sales 913 648 443 152 – 2,156 EBITDA (24) 96 60 3 (10) 125 EBIT (130) 41 28 3 (10) (68) 2nd quarter 2019 Net sales 1,489 898 621 203 – 3,211 EBITDA 172 154 150 (3) (14) 459 EBIT 72 99 120 (3) (14) 274 Segment reporting 1st half Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 1st half 2020 Net sales 2,187 1,381 1,015 356 – 4,939 EBITDA 26 205 190 (20) (22) 379 EBIT (181) 95 128 (21) (22) (1) 1st half 2019 Net sales 2,965 1,758 1,248 415 – 6,386 EBITDA 329 309 296 (1) (32) 901 EBIT 129 204 238 (1) (32) 538 Trade working capital by segment Dec. 31, 2019 June 30, 2020 € million € million Polyurethanes 860 987 Polycarbonates 562 638 Coatings, Adhesives, Specialties 485 498 Total of reportable segments 1,907 2,123 All other segments 73 66 Corporate Center (10) (4) Trade working capital 1,970 2,185 of which inventories 1,916 1,922 of which trade accounts receivable 1,561 1,311 of which trade accounts payable (1,507) (1,048) 36 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Information on geographical areas The following tables show information by geographical area. The EMLA region consists of Europe, the Middle East, Africa, and Latin America except Mexico, which together with the United States and Canada forms the NAFTA region. The APAC region includes Asia and the Pacific region. The following tables show the regional reporting data for the second quarter and for the first half year: Regional reporting 2nd quarter EMLA NAFTA APAC Total € million € million € million € million 2nd quarter 2020 Net sales (external) by market 874 508 774 2,156 Net sales (external) by point of origin 869 517 770 2,156 2nd quarter 2019 Net sales (external) by market 1,379 822 1,010 3,211 Net sales (external) by point of origin 1,370 835 1,006 3,211 Regional reporting 1st half EMLA NAFTA APAC Total € million € million € million € million 1st half 2020 Net sales (external) by market 2,174 1,252 1,513 4,939 Net sales (external) by point of origin 2,154 1,278 1,507 4,939 1st half 2019 Net sales (external) by market 2,793 1,610 1,983 6,386 Net sales (external) by point of origin 2,772 1,640 1,974 6,386 Reconciliation The following table shows the reconciliation of EBITDA of the segments to income before income taxes of the Group: Reconciliation of segments’ EBITDA to group income before income taxes 2nd quarter 2019 2nd quarter 2020 1st half 2019 1st half 2020 € million € million € million € million EBITDA of segments 473 135 933 401 EBITDA of Corporate Center (14) (10) (32) (22) EBITDA 459 125 901 379 Depreciation, amortization and impairment losses of segments (185) (193) (363) (380) Depreciation, amortization and impairment losses of Corporate Center – – – – Depreciation, amortization and impairment losses (185) (193) (363) (380) EBIT of segments 288 (58) 570 21 EBIT of Corporate Center (14) (10) (32) (22) EBIT 274 (68) 538 (1) Financial result (23) (17) (46) (56) Income before income taxes 251 (85) 492 (57) 37 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 5. Scope of Consolidation 5.1 Changes in the scope of consolidation As of June 30, 2020, the scope of consolidation comprised Covestro AG and 47 (December 31, 2019: 47) consolidated companies. Effective January 1, 2020, Asellion B.V., Amsterdam (Netherlands), was included in the consolidated financial statements for the first time as a result of growth in business activities. Previously, the company had been classified as an immaterial subsidiary. Asellion B.V. provides a digital platform for online direct sales where manufacturers, suppliers and service providers can do business in a flexible, secure and private environment. Covestro (Tielt) NV, Tielt (Belgium), and Covestro S.p.A., Milan (Italy), were deconsolidated in the course of the sale of the European polycarbonate sheets business to Munich-based Serafin Group concluded on January 2, 2020. Effective June 1, 2020, Covestro International Re, Inc., Colchester (United States), was included in the con- solidated financial statements as a fully consolidated company. This is Covestro's own insurance company, which received a license from the state of Vermont to act as a reinsurer for the primary insurer and to provide coverage for certain insurance risks to which the Covestro Group is exposed. 5.2 Acquisitions and divestitures Acquisitions No reportable acquisitions were made in the first half of 2020. Divestitures On January 2, 2020, Covestro concluded the sale of the assets and liabilities (disposal group) of the European polycarbonate sheets business, belonging to the Polycarbonates segment, to the Serafin Group, Munich (Germany). Polycarbonate sheets are extremely strong and are used primarily in the areas of industrial protection, construction systems and for advertising applications. The European polycarbonate sheets business comprises production sites in Belgium and Italy as well as central management and distribution functions in Europe. Within the scope of the sale, net liabilities totaling €2 million were transferred to the buyer, and net payments amounting to €3 million were made by Covestro to Serafin. The loss on the disposal of this business totaling €1 million was recognized in other operating result. 38 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 6. Net Sales Net sales are categorized according to “geographical regions and key countries,” and mainly comprise sales from contracts with customers and an insignificant amount of rental and leasing sales. The table also contains a breakdown of net sales by reportable segments. Disaggregation of sales Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 1st half 2020 EMLA 948 459 467 300 – 2,174 of which Germany 186 99 202 171 – 658 NAFTA 661 302 240 49 – 1,252 of which United States 539 255 219 49 – 1,062 APAC 578 620 308 7 – 1,513 of which China 351 422 157 2 – 932 1st half 2019 EMLA 1,312 595 571 315 – 2,793 of which Germany 253 143 243 192 – 831 NAFTA 855 378 288 89 – 1,610 of which United States 681 306 260 88 – 1,335 APAC 798 785 389 11 – 1,983 of which China 494 522 198 2 – 1,216 7. Earnings per Share Earnings per share are calculated according to IAS 33 (Earnings per Share) by dividing net income for the reporting period by the weighted average number of outstanding no-par voting shares of Covestro AG. In the first half of 2020, a weighted average number of outstanding no-par voting shares of 182,864,685 was used to calculate earnings per share, while in the first half of 2019, these shares amounted to 182,704,602. There were no dilution effects to consider. Earnings per Share 1st half 2019 1st half 2020 € million € million Income after income taxes 370 (32) of which attributable to noncontrolling interest 2 – of which attributable to Covestro AG shareholders (net income) 368 (32) Shares Shares Weighted average number of no-par voting shares of Covestro AG 182,704,602 182,864,685 € € Basic earnings per share 2.01 (0.17) Diluted earnings per share 2.01 (0.17) 39 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 8. Employees and Pension Obligations As of June 30, 2020, the Covestro Group had 16,803 employees worldwide (December 31, 2019: 17,201). In the first half of 2020, personnel expenses were down €5 million to €913 million (previous year: €918 million), chiefly on account of a decrease in current provisions recognized for short-term variable compensation. Employees by corporate function 1 Dec. 31, 2019 June 30, 2020 Production 11,162 10,917 Marketing and distribution 3,314 3,220 Research and development 1,217 1,210 General administration 1,508 1,456 Total 17,201 16,803 1 The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTEs). Part-time employees are included on a pro- rated basis in line with their contractual working hours. Employees in vocational training are not included. Provisions for pensions and other post-employment benefits declined to €1,881 million (December 31, 2019: €1,965 million). This was principally due to a decrease in the valuation of pension obligations as a result of higher discount rates, but was countered, in particular, by a negative development in the value of plan assets. Discount rate for pension obligations Dec. 31, 2019 June 30, 2020 % % Germany 1.00 1.20 United States 3.00 2.30 A third-party consulting firm has begun calculating the discount rate for pension obligations in the euro area using a standard methodology as of the first quarter of 2020. Without the change in calculation procedure, the discount rate would have remained at 1.20% for Germany as of June 30, 2020. Measurement using the original discount rate would therefore not have changed the pension obligations as of June 30, 2020. 40 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 9. Financing The €5.0 billion Debt Issuance Program launched in the first quarter of 2016 is a key form of external financing. In fiscal 2016, Covestro placed bonds totaling €1.5 billion, of which two fixed-rate tranches with terms until October 2021 (a coupon of 1.00% and a volume of €500 million) and September 2024 (a coupon of 1.75% and a volume of €500 million) remain in the portfolio. An additional €1.0 billion in bonds was placed on June 5, 2020. The fixed-rate bonds have terms expiring in February 2026 (a coupon of 0.875% and a volume of €500 million) and June 2030 (a coupon of 1.375% and a volume of €500 million). The proceeds of the bond placement serve to further reinforce Covestro's liquidity in view of the economic effects of the coronavirus pandemic and to provide funds to repay the existing bond maturing in fiscal 2021. Effective March 17, 2020, Covestro obtained a new syndicated revolving credit facility totaling €2.5 billion with a term of five years, including two options for extending the term by one year in each case. An important new feature of the credit line is its link to an ESG (environment, social, governance) rating: The lower (higher) the externally calculated ESG score is, the lower (higher) the interest component of the credit facility. The new facility replaces the existing revolving credit line of €1.5 billion and, like it, functions as a backup liquidity reserve. Furthermore, Covestro AG obtained a €225 million loan for research and development from the European Investment Bank (EIB) in March 2020. The focus here is, in particular, on sustainability and the circular economy in the European Union. The term of the EIB loan runs until September 30, 2025. In addition, short-term loans totaling €500 million were assumed in the first quarter of 2020, €125 million of which was repaid according to schedule in June 2020. The remaining loan amount of €375 million comes due in September 2020. 41 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 10. Financial Instruments The following tables show the carrying amounts and fair values of financial assets and liabilities based on IFRS 9: Carrying amounts of financial instruments and their fair values as of June 30, 2020 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehen- sive income Fair value recognized in profit or loss Measurement according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 1,311 1,311 – 1,311 Other financial assets 592 Money market funds 530 – – 530 530 Loans 14 9 – 5 14 Other investments 13 13 – 13 Receivables under lease agreements 8 8 21 Derivatives that do not qualify for hedge accounting 27 27 27 Other receivables1 34 28 – 6 34 Cash and cash equivalents 1,504 1,504 – – 1,504 Financial liabilities Financial debts 3,349 Bonds 1,989 1,989 – 2,034 Lease liabilities 732 732 Liabilities to banks 623 623 – 632 Derivatives that do not qualify for hedge accounting 4 4 4 Other financial liabilities 1 1 – 1 Trade accounts payable 1,048 1,048 – 1,048 Other liabilities2 81 Derivatives that do not qualify for hedge accounting 3 3 3 Refund liabilities 36 36 – 36 Miscellaneous other liabilities 42 42 – 42 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €329 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €134 million. 42 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Carrying amounts of financial instruments and their fair values as of December 31, 2019 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehen- sive income Fair value recognized in profit or loss Measurement according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 1,561 1,561 – 1,561 Other financial assets 59 Money market funds – – – – – Loans 16 16 – – 16 Other investments 13 13 – 13 Receivables under lease agreements 8 8 19 Derivatives that do not qualify for hedge accounting 22 22 22 Other receivables1 41 32 – 9 41 Cash and cash equivalents 748 748 – – 748 Financial liabilities Financial debts 1,752 Bonds 997 997 – 1,045 Lease liabilities 735 735 Liabilities to banks 10 10 – 10 Derivatives that do not qualify for hedge accounting 10 10 10 Other financial liabilities – – – – Trade accounts payable 1,507 1,507 – 1,507 Other liabilities2 64 Derivatives that do not qualify for hedge accounting 3 3 3 Refund liabilities 30 30 – 30 Miscellaneous other liabilities 31 31 – 31 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €370 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €159 million. The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below: Level 1 covers fair values determined on the basis of quoted, unadjusted prices that exist in active markets. Level 2 comprises fair values determined on the basis of parameters that are observable in an active market. Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data. 43 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following table shows the assignment of the financial instruments to the three-level fair value hierarchy: Fair value hierarchy of financial instruments Fair value Fair value Dec. 31, 2019 Level 1 Level 2 Level 3 June 30, 2020 Level 1 Level 2 € million € million € million € million € million € million € million Financial assets carried at fair value Money market funds – – – – 530 – 530 Loans – – – – 5 – – Other investments 13 5 – 8 13 4 – Derivatives that do not qualify for hedge accounting 22 – 15 7 27 – 21 Other receivables 9 – – 9 6 – – Financial assets not carried at fair value Receivables under lease agreements 19 – – 19 21 – – Financial liabilities carried at fair value Derivatives that do not qualify for hedge accounting 13 – 10 3 7 – 4 Financial liabilities not carried at fair value Bonds 1,045 1,045 – – 2,034 2,034 – Liabilities to banks 10 – 10 – 632 – 632 Other financial liabilities – – – – 1 – 1 Reallocation between the different levels of the fair value hierarchy takes place at the end of the reporting period in which the change occurred. During the first half of 2020, no transfers were made between the levels of the fair value hierarchy. Because of the generally short maturities of cash and cash equivalents, loans, trade accounts receivable and payable, and other receivables and liabilities, their carrying amounts do not significantly differ from the fair values. The fair value of the bonds issued by Covestro AG is based on quoted, unadjusted prices in active markets and therefore assigned to Level 1 of the fair value hierarchy. The fair value of some of the equity instruments is also based on quoted prices in active markets (Level 1). The fair values stated for noncurrent financial assets and liabilities are the present values of the respective future cash inflows or outflows. These are determined by discounting the cash flows at a reporting-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. For this reason, these values are assigned to Level 2 of the fair value hierarchy. The fair values of money market funds correspond to the quoted prices of the funds in accordance with EU Regulation 2017/1131 on money market funds, Article 29 in conjunction with Article 33 (Level 2). The fair values of derivatives for which no publicly quoted market prices exist are determined using valuation techniques based on observable market data as of the reporting date (Level 2). Credit value adjustments and debt value adjustments are determined to allow for both the contracting party’s credit risk and Covestro’s own credit risk. The currency forward contracts are measured individually at their forward rates or forward prices as of the reporting date. These depend on spot rates or prices including time spreads. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. The fair values of noncurrent leasing receivables, reported for information purposes, are calculated on the basis of interest curves observable in the market. Additionally, a discount for cash flows that are very far in the future is applied as an unobservable factor. 44 Level 3 € million – 5 9 6 6 21 3 – – – Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Debt instruments associated with corporate venture capital activities are recognized in profit or loss at fair value. The fair value is determined using a market price-oriented valuation method for which the main input factors are not based on observable market data (Level 3). The valuation is based on available performance indicators as well as on what are known as “market valuation multipliers.” The estimated fair value of the debt instruments cate- gorized within Level 3 would rise (fall) if the multiple applied were to be greater (smaller). Other financial investments are recognized at fair value directly in equity because they are held for the long term for strategic reasons. The fair value of some of the other investments is based on quoted prices in active markets (Level 1). Where there are no quoted, unadjusted prices in an active market for identical or similar instruments, and there is no suitable valuation method where all major input factors are based on observable market data, the fair value of the other investments is determined using a market price-oriented valuation method where the main input factors are not based on observable market data (Level 3). The valuation of certain other investments is based on available performance indicators as well as on market valuation multipliers. The estimated fair value of the equity instruments categorized within Level 3 would rise (fall) if the multiple applied were to be greater (smaller). Further, the fair values of embedded derivatives are determined on the basis of unobservable input factors (Level 3). They are separated from their respective host contracts, which are purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluc- tuations in exchange rates, or regional and industry-specific price indices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on un- observable inputs. These include prices or price indices derived from market data. The estimated fair value of the embedded derivative would rise (fall) if the expected payment flows were to be higher (lower) as a result of fluctuations in exchange rates or prices. Other receivables include a contingent purchase price receivable from divestments. The fair value of the re- ceivable is measured as the present value of the future cash inflows. The basis is the expected EBITDA of the business unit sold for fiscal 2021. The cash flows are discounted at the current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the buyer. The contingent purchase price receivable is assigned to Level 3 of the fair value hierarchy. The estimated fair value would rise (fall) if the expected cash inflows were to be higher (lower) or if the risk-adjusted discount rate were to be lower (higher). The table below shows the reconciliation of Level 3 financial instruments: Changes in the net amount of financial assets and liabilities recognized at fair value based on unobservable inputs (level 3) 2019 2020 € million € million Net carrying amounts, Jan. 1 9 21 Gains (losses) recognized in profit or loss – (4) of which related to assets / liabilities recognized in the statement of financial position – (4) Gains (losses) recognized outside profit or loss – 1 Additions of assets (liabilities) – 5 Settlements of (assets) liabilities – – Reclassifications – – Net carrying amounts, June 30 9 23 Gains and losses from Level 3 financial instruments recognized in profit or loss from embedded derivatives are reported in other operating expenses or income. 45 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 11. Legal Risks As a company with international operations, the Covestro Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law, environmental law, and compliance issues such as corruption and export control. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal judgments or regulatory decisions or future settlements could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect the earnings of the Covestro Group. The legal risks that are material to the Covestro Group were described in Note 26 “Legal Risks” to the con- solidated financial statements as of December 31, 2019. In the current fiscal year, there have been no new significant developments regarding the legal proceedings are pending. legal proceedings described there, and no new material 12. Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert at least significant influence on Covestro AG and its subsidiaries, or over which Covestro AG or its subsidiaries exercise control, joint control or have at least significant influence. They include nonconsolidated subsidiaries, joint ventures and associated companies, post-employment benefit plans and corporate officers of Covestro AG. Receivables from and liabilities to related parties Dec. 31, 2019 June 30, 2020 Receivables Liabilities Receivables Liabilities € million € million € million € million Nonconsolidated subsidiaries and associates – 5 2 5 Associates 3 – 5 1 Sales and purchases of goods and services to/from related parties 1st half 2019 1st half 2020 Sales of goods and services Purchases of goods and services Sales of goods and services Purchases of goods and services € million € million € million € million Nonconsolidated subsidiaries and associates 19 22 15 20 Associates 5 276 6 216 The goods and services provided by associated companies mainly result from the ongoing operating business with PO JV, LP, Wilmington (United States). Covestro benefits from fixed long-term supply quotas/volumes of propylene oxide (PO) from this company’s production. Receivables from and payables to related parties mainly comprise leasing and financing matters, trade in goods and services, and other transactions. 46 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 13. Events after the End of the Reporting Period No events have occurred since July 1, 2020, that will have a material impact on the net assets, financial position and results of operations of the Covestro Group. Leverkusen (Germany), July 20, 2020 Covestro AG The Board of Management 47 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION RESPONSIBILITY STATEMENT To the best of our knowledge, and in accordance with the applicable reporting principles for interim reporting, the consolidated interim financial statements give a true and fair view of the net assets, financial position and results of operations of the Covestro Group, and the interim group management report includes a fair review of the development and performance of the business and the position of the Covestro Group, together with a description of the principal opportunities and risks associated with the expected development of the Covestro Group for the remainder of the fiscal year. Leverkusen (Germany), July 20, 2020 Covestro AG The Board of Management 48 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION REVIEW REPORT To Covestro AG, Leverkusen We have reviewed the condensed interim consolidated financial statements — comprising the statement of financial position, income statement, statement of comprehensive income, statement of cash flows, statement of changes in equity and selected explanatory notes — together with the interim group management report of Covestro AG, Leverkusen, for the period from January 1, 2020, to June 30, 2020, that are part of the semi-annual financial report according to § 115 WpHG [“Wertpapierhandelsgesetz”: “German Securities Trading Act”]. The preparation of the condensed interim consolidated financial statements in accordance with the IFRSs applicable to interim reporting as adopted by the EU, and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports, is the responsibility of the Company’s management. Our responsibility is to issue a report on the condensed interim consolidated financial statements and on the interim group management report based on our review. We performed our review of the condensed interim consolidated financial statements and the interim group management report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and additionally observed the International Standard on Review Engagements “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with a certain level of assurance, that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRSs applicable to interim reporting as adopted by the EU, and that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of company employees and analytical assessments and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot issue an auditor’s report. Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRSs applicable to interim reporting as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Düsseldorf, July 30, 2020 KPMG AG Wirtschaftsprüfungsgesellschaft Dr. Zeimes [German Public Auditor] Geier [German Public Auditor] 49 Further Information Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment and Quarterly Overview Segment Information 2nd Quarter Polyurethanes Polycarbonates Coatings, Adhesives, Specialties Others/consolidation Covestro Group 2nd quarter 2019 2nd quarter 2020 2nd quarter 2019 2nd quarter 2020 2nd quarter 2019 2nd quarter 2020 2nd quarter 2019 2nd quarter 2020 2nd quarter 2019 2nd quarter 2020 € million € million € million € million € million € million € million € million € million € million Sales 1,489 913 898 648 621 443 203 152 3,211 2,156 Change in sales Volume +0.8% –24.8% +5.7% –16.4% –4.5% –25.8% –7.2% –17.1% +0.8% –22.3% Price –26.8% –12.3% –18.8% –7.8% –0.4% –3.2% +1.6% –8.2% –18.7% –9.0% Currency +1.7% –0.4% +1.7% –0.1% +2.2% +0.3% +1.4% +0.2% +1.8% –0.1% Portfolio 0.0% –1.2% –3.6% –3.5% +1.4% 0.0% 0.0% 0.0% –0.8% –1.5% Core volume growth1 Sales by region +0.7% –25.9% +4.4% –14.4% –4.7% –25.3% +1.1% –22.7% EMLA 643 359 306 197 277 188 153 130 1,379 874 NAFTA 444 266 190 121 144 101 44 20 822 508 APAC 402 288 402 330 200 154 6 2 1,010 774 EBITDA 172 (24) 154 96 150 60 (17) (7) 459 125 EBIT 72 (130) 99 41 120 28 (17) (7) 274 (68) Depreciation, amortization, impairment losses and impairment loss reversals 100 106 55 55 30 32 – – 185 193 Operating cash flows2 Cash outflows for additions to property, plant, equipment and intangible assets 116 138 7 84 93 42 68 34 38 40 94 29 (83) (1) 2 – 164 219 171 147 Free operating cash flow (22) (77) 51 34 (2) 65 (82) 2 (55) 24 Trade working capital3 1,040 987 735 638 616 498 67 62 2,458 2,185 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2020. 2 Covestro applied a simplification rule in calculating the income taxes paid as a component of operating cash flows at the segment level (see note 4 “Segment and Regional Reporting” in the Consolidated Financial Statements in the 2019 Annual Report). The difference between the income tax payments of the reportable operating segments and the actual income taxes paid by the Covestro Group are taken into account in the Others/consolidation column. 3 Trade working capital comprises inventories plus trade accounts receivable, less trade accounts payable, as of June 30, 2020, or June 30, 2019. 51 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment Information 1st Half Polyurethanes Polycarbonates Coatings, Adhesives, Specialties Others/consolidation Covestro Group 1st half 2019 1st half 2020 1st half 2019 1st half 2020 1st half 2019 1st half 2020 1st half 2019 1st half 2020 1st half 2019 1st half 2020 € million € million € million € million € million € million € million € million € million € million Sales 2,965 2,187 1,758 1,381 1,248 1,015 415 356 6,386 4,939 Change in sales Volume +1.9% –13.7% +1.5% –9.6% –1.7% –16.4% –3.7% –4.5% +0.9% –12.5% Price –28.1% –11.5% –15.8% –8.6% +0.6% –3.5% +1.9% –10.0% –18.5% –9.1% Currency +1.9% +0.1% +2.1% +0.4% +2.6% +0.7% +1.6% +0.3% +2.1% +0.3% Portfolio 0.0% –1.1% –3.6% –3.6% +0.7% +0.5% 0.0% 0.0% –0.9% –1.4% Core volume growth1 Sales by region +0.3% –14.9% –1.0% –9.8% –2.4% –15.2% –0.4% –13.6% EMLA 1,312 948 595 459 571 467 315 300 2,793 2,174 NAFTA 855 661 378 302 288 240 89 49 1,610 1,252 APAC 798 578 785 620 389 308 11 7 1,983 1,513 EBITDA 329 26 309 205 296 190 (33) (42) 901 379 EBIT 129 (181) 204 95 238 128 (33) (43) 538 (1) Depreciation, amortization, impairment losses and impairment loss reversals 200 207 105 110 58 62 – 1 363 380 Operating cash flows2 Cash outflows for additions to property, plant, equipment and intangible assets 120 240 (79) 168 231 81 103 63 50 64 134 54 (117) (1) (97) 1 284 384 61 286 Free operating cash flow (120) (247) 150 40 (14) 80 (116) (98) (100) (225) Trade working capital3 1,040 987 735 638 616 498 67 62 2,458 2,185 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2020. 2 Covestro applied a simplification rule in calculating the income taxes paid as a component of operating cash flows at the segment level (see note 4 “Segment and Regional Reporting” in the Consolidated Financial Statements in the 2019 Annual Report). The difference between the income tax payments of the reportable operating segments and the actual income taxes paid by the Covestro Group are taken into account in the Others/consolidation column. 3 Trade working capital comprises inventories plus trade accounts receivable, less trade accounts payable, as of June 30, 2020, or June 30, 2019. 52 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS Quarterly Overview 1st quarter 2019 2nd quarter 2019 3rd quarter 2019 € million € million € million Sales 3,175 3,211 3,162 Polyurethanes 1,476 1,489 1,478 Polycarbonates 860 898 901 Coatings, Adhesives, Specialties 627 621 588 Core volume growth1 EBITDA –1.8% 442 +1.1% 459 +5.3% 425 Polyurethanes 157 172 196 Polycarbonates 155 154 132 Coatings, Adhesives, Specialties 146 150 111 EBIT 264 274 221 Polyurethanes 57 72 97 Polycarbonates 105 99 57 Coatings, Adhesives, Specialties 118 120 82 Financial result (23) (23) (19) Income before income taxes 241 251 202 Income after taxes 180 190 149 Net income 179 189 147 Operating cash flows 120 164 462 Cash outflows for additions to property, plant, equipment and intangible assets 165 219 219 Free operating cash flow (45) (55) 243 1 Previous year values calculated on the basis of the definition of the core business effective March 31, 2020. 53 FURTHER INFORMATION 4th quarter 2019 1st quarter 2020 € million € million 2,864 2,783 1,336 1,274 814 733 533 572 +3.8% –4.1% 278 254 123 50 95 109 62 130 93 67 24 (51) 39 54 32 100 (26) (39) 67 28 38 21 37 20 637 (110) 307 139 330 (249) 2nd quarter 2020 € million 2,156 913 648 443 –22.7% 125 (24) 96 60 (68) (130) 41 28 (17) (85) (53) (52) 171 147 24 Covestro Interim Report as of June 30, 2020 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS Financial Calendar Annual General Meeting 2020 ................................................... July 30, 2020 Interim Statement Q3 2020 ........................................................ October 27, 2020 Annual Report 2020 ......................................................................... February 23, 2021 Annual General Meeting 2021 ................................................... April 16, 2021 Interim Statement Q1 2021 ........................................................ April 28, 2021 Publishing information Published by Local Court of Cologne Translation HRB 85281 Leinhäuser Language Services GmbH Covestro AG VAT No. DE815579850 Unterhaching, Germany Kaiser-Wilhelm-Allee 60 51373 Leverkusen IR contact Design and layout Germany Email: ir@covestro.com nexxar GmbH, Vienna, Austria Email: info@covestro.com Press contact Photo credits covestro.com Email: communications@covestro.com © Covestro Deutschland AG 54 FURTHER INFORMATION

Semestriel, 2020, Chemistry, Covestro

write me a financial report

Semestriel

Chemistry

Covestro

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: Covestro ### Response:

HALF-YEAR FINANCIAL REPORT 2021 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Table of Contents Reporting Profile ............................................................................................................................................................................................................... 3 Covestro Group Key Data ............................................................................................................................................................................................ 5 COVESTRO ON THE CAPITAL MARKET 6 9 INTERIM GROUP MANAGEMENT REPORT AS OF JUNE 30, 2021 Report on Economic Position ........................................................................................................................................................................................ 10 Significant Events.......................................................................................................................................................................................................... 10 Results of Operations, Financial Position, and Net Assets of the Covestro Group ........................................................................ 11 Results of Operations ........................................................................................................................................................................................... 11 Financial Position .................................................................................................................................................................................................... 13 Net Assets.................................................................................................................................................................................................................. 15 Performance of the Reportable Segments ....................................................................................................................................................... 16 Polyurethanes .......................................................................................................................................................................................................... 16 Polycarbonates........................................................................................................................................................................................................ 18 Coatings, Adhesives, Specialties .................................................................................................................................................................... 20 Report on Future Perspectives and on Opportunities and Risks ................................................................................................................... 22 Economic Outlook ........................................................................................................................................................................................................ 22 Forecast for the Covestro Group........................................................................................................................................................................... 24 Opportunities and Risks ............................................................................................................................................................................................. 25 26 CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2021 Covestro Group Consolidated Income Statement .............................................................................................................................................. 27 Covestro Group Consolidated Statement of Comprehensive Income..................................................................................................... 28 Covestro Group Consolidated Statement of Financial Position .................................................................................................................... 29 Covestro Group Consolidated Statement of Cash Flows................................................................................................................................. 30 Covestro Group Consolidated Statement of Changes in Equity ................................................................................................................... 31 Notes to the Consolidated Interim Financial Statements............................................................................................................................ 32 1. General Information ............................................................................................................................................................................................... 32 2. Effects of New Financial Reporting Standards ......................................................................................................................................... 33 2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period ........................................................ 33 2.2 Published Financial Reporting Standards That Have Not Yet Been Applied .................................................................... 33 3. Segment and Regional Reporting ................................................................................................................................................................... 34 4. Scope of Consolidation ....................................................................................................................................................................................... 37 4.1 Changes in the Scope of Consolidation ............................................................................................................................................ 37 4.2 Acquisitions and Divestitures ................................................................................................................................................................. 37 5. Net Sales .................................................................................................................................................................................................................... 40 6. Earnings per Share ................................................................................................................................................................................................ 40 7. Employees and Pension Obligations............................................................................................................................................................. 41 8. Financial Instruments............................................................................................................................................................................................ 42 9. Legal Risks ................................................................................................................................................................................................................. 47 10. Related Parties......................................................................................................................................................................................................... 47 11. Events after the End of the Reporting Period ............................................................................................................................................ 48 49 Responsibility Statement ........................................................................................................................................................................................... 50 Review Report ................................................................................................................................................................................................................. 51 Segment and Quarterly Overview .......................................................................................................................................................................... 52 Financial Calendar ......................................................................................................................................................................................................... 55 FURTHER INFORMATION 2 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Reporting Profile Reporting Principles The Half-Year Financial Report of Covestro AG meets the requirements pursuant to the applicable provisions of the German Securities Trading Act (WpHG) and, in accordance with Section 115, Paragraphs 2–4 of the WpHG (Half-Year Financial Report; power to issue statutory orders), comprises condensed consolidated interim financial statements, an interim group management report, and a responsibility statement. The consolidated interim financial statements were prepared in accordance with IAS 34 (Interim Financial Reporting) according to the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU) and in effect at the closing date as well as their Interpretations. The Half-Year Financial Report should be read alongside the Annual Report 2020 and the additional information about the company contained therein, as well as the Interim Statement as of March 31, 2021. Forward-Looking Statements This Report may contain forward-looking statements based on current assumptions and forecasts made by the management of Covestro AG. Various known and unknown risks, uncertainties, and other factors could lead to material differences between the actual future results, financial situation, development, or performance of the Group and the estimates given here. These factors include those discussed in Covestro’s public reports, which are available at www.covestro.com. The Group assumes no liability whatsoever to update such forward- looking statements or to conform them to future events or developments. Alternative Performance Measures Throughout its financial reporting, Covestro uses alternat ive performance measures (APMs) to assess the business performance of the Group. These are not defined in the IFRSs. These non-IFRS indicators should be considered a supplement to, not a replacement for, the performance measures determined in accordance with IFRSs. The alternative performance measures of relevance to the Covestro Group include earnings before interest, taxes, depreciation, and amortization (EBITDA), return on capital employed (ROCE), free operating cash flow (FOCF), and net financial debt. Covestro uses ROCE to assess profitability in the context of the company’s internal management system. EBITDA is also calculated as an additional indicator of profitability. FOCF is a key factor in the presentation of the liquidity position that indicates the company’s ability to generate a cash surplus and finance its activities. Net financial debt gauges the Group’s financial condition and financing requirements. The calculation methods for the APMs may vary from those of other companies, thus limiting the extent of the overall comparability. These alternative performance measures should not be viewed in isolation or employed as an alternative to the financial indicators determined in accordance with IFRSs and presented in the consolidated financial statements for purposes of assessing Covestro’s net assets, financial position, and results of operations. Explanations of the definition and calculation of these alternative performance measures can be found in the “Management” section in the combined management report in the Annual Report 2020. Abbreviations Acronyms and abbreviations used in this Report are explained in this Report or in the Glossary provided in the Annual Report 2020. Rounding and Percentage Deviations As the indicators in this Report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact. Percentage deviations are only calculated and reported if they are no more than 100%. Larger deviations are reported as >100%, >200%, etc. If a deviation changes from positive to negative or vice versa, or if it is greater than 1,000%, this is shown by a period. 3 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Inclusive Language We consider equal treatment, diversity and inclusion to be important. To ensure better readability, this report avoids gender-specific wordings. All terms should be taken to apply equally to all genders. Publication This Report was published in German and English on August 6, 2021. The German version is binding. 4 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Covestro Group Key Data Covestro Group key data 2nd quarter 2020 2nd quarter 2021 Change 1st half 2020 1st half 2021 Change € million € million % € million € million % Core volume growth1, 2 Sales –22.7% 2,156 +35.0% 3,956 +83.5 –13.6% 4,939 +18.9% 7,263 +47.1 Change in sales Volume –22.3% +29.0% –12.5% +14.6% Price –9.0% +45.9% –9.1% +31.4% Currency –0.1% –5.4% +0.3% –5.0% Portfolio –1.5% +14.0% –1.4% +6.1% Sales by region EMLA3 NA4 APAC5 EBITDA6 Changes in EBITDA 874 508 774 125 1,765 844 1,347 817 >100 +66.1 +74.0 >500 2,174 1,252 1,513 379 3,267 1,493 2,503 1,560 +50.3 +19.2 +65.4 >300 Volume –72.3% +245.6% –42.8% +90.8% Price –63.2% +791.2% –64.4% +409.5% Raw material price effect +41.4% –320.8% +36.6% –106.6% Currency +1.5% –16.0% +1.2% –11.3% EBIT7 Financial result Net income8 Earnings per share (€)9 Cash flows from operating activities10 Cash outflows for additions to property, plant, equipment and intangible assets Free operating cash flow11 (68) (17) (52) (0.28) 171 147 607 (18) 449 2.32 553 179 . +5.9 . . >200 +21.8 (1) (56) (32) (0.17) 61 286 1,163 (47) 842 4.36 981 289 . –16.1 . . . +1.0 24 374 . (225) 692 . 1 Core volume growth refers to the core products in the Polyurethanes, Polycarbonates, and Coatings, Adhesives, Specialties segments. It is calculated as the percentage change in externally sold volumes compared with the prior year. Covestro also takes advantage of business opportunities outside its core business, for example the sale of precursors and by-products such as hydrochloric acid, sodium hydroxide solution and styrene. These transactions are not included in core volume growth. 2 Reference values calculated on the basis of the definition of the core business effective March 31, 2021. 3 EMLA: Europe, Middle East, Latin America (excluding Mexico), Africa region. 4 NA: North America region (United States, Canada, and Mexico). 5 APAC: Asia and Pacific region. 6 EBITDA: EBIT plus depreciation, amortization, and impairment losses; less impairment loss reversals. 7 EBIT: income after income taxes plus financial result and income taxes. 8 Net income: income after income taxes attributable to the shareholders of Covestro AG. 9 Earnings per share: According to IAS 33 (Earnings per Share), earnings per share comprise net income divided by the weighted average number of outstanding no-par voting shares of Covestro AG. The calculation was based on 193,160,544 no-par shares for the second quarter of 2021 (previous year: 182,864,685 no-par shares) and on 193,160,544 no-par shares for the first half of 2021 (previous year: 182,864,685 no-par shares). 10 Cash flows from operating activities according to IAS 7 (Statement of Cash Flows). 11 Free operating cash flow: cash flows from operating activities less cash outflows for additions to property, plant, equipment and intangible assets. 5 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET 6 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Covestro on the Capital Market Performance of Covestro Stock Versus the Market in the First Half of 2021 € (Covestro share) Covestro closing prices Xetra; source: Deutsche Börse Positive Stock Market Performance Driven by Economic Recovery Although the stock markets and the global economy were marked by the impact of the global coronavirus pandemic in the first half of 2021, year-over-year improvements in the real economy led to positive stock market performance on the whole. International stock markets continued the general upward trend that had begun after a pandemic-related low in March 2020. The DAX, the benchmark German index relevant for Covestro, gained 13.2% to reach 15,531 points in the first half of 2021. European chemical stocks followed a similar trajectory. At the end of the first six months, the STOXX Europe 600 Chemicals index was up 13.3% from its level at the beginning of the year. At a Xetra closing price of €54.46, Covestro’s share price also finished the first half-year up, by 7.9% over December 31, 2020. Covestro’s stock marked its low point at the very beginning of the year, closing at €51.28 on January 5, 2021. After volatility in the first two months of the year, Covestro saw its share price close at its high of €62.48 on March 2, 2021. Since April, Covestro’s shares have largely moved sideways and hovered at a price around €56. Covestro share at a glance 2nd quarter 2020 2nd quarter 2021 1st half 2020 1st half 2021 Average daily turnover million shares 1.5 1.0 1.8 1.0 High € 37.44 58.80 42.18 62.48 Low € 26.86 51.78 24.90 51.28 Closing date (June 30) € 33.85 54.46 33.85 54.46 Outstanding shares (June 30) million shares 182.9 193.2 182.9 193.2 Market capitalization (June 30) € billion 6.2 10.5 6.2 10.5 Covestro closing prices Xetra; source: Deutsche Börse Including the dividend for the 2020 fiscal year of €1.30 per share resolved by the Annual General Meeting on April 16, 2021, Covestro’s stock performance (with dividend reinvestment) was 10.4% compared with the 2020 year-end closing price of €50.48. At the end of the first half of 2021, Covestro’s market capitalization stood at around €10.5 billion based on the capital stock of 193.2 million shares. The average daily Xetra trading volume was approximately 1.0 million shares. 7 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Virtual Annual General Meeting (AGM) held on April 16, 2021 Covestro AG’s 2021 Annual General Meeting was held on April 16, 2021. Due to the ongoing coronavirus pandemic, the company had decided early on to hold a virtual AGM as in the previous year to avoid exposing those present to additional health risks. The AGM approved the dividend of €1.30 per share for the fiscal year 2020 proposed by the Board of Management and Supervisory Board. Covestro’s distribution rate is therefore equivalent to 55% of the Group’s net income. Furthermore, Lise Kingo was elected by the AGM as a new member of the Supervisory Board. She succeeded Ferdinando Falco Beccalli, who resigned effective at the end of the 2021 AGM. Among other things, Lise Kingo is an independent member of the Board of Directors at Sanofi SA and until June 2020 was CEO and Executive Director of the United Nations Global Compact, the world’s largest corporate sustainability initiative. New Dividend Policy Covestro announced that it would put its dividend policy on a new footing and thus create a stronger link to the Group’s overall business situation. In the future, Covestro would like to distribute between 35% and 55% of its net income to shareholders. The aim is for the payout ratio to be around the lower end of the scale in years with strong earnings and around the higher end in challenging years. Moody’s Confirms Covestro Rating and Lifts Outlook On March 31, 2021, Moody’s Investors Service, London (United Kingdom), confirmed Covestro’s Baa2 investment- grade rating and lifted the outlook from negative to stable. Covestro intends to continue to maintain financing structures and financial ratios that support a solid investment-grade rating in the future. Buy Recommendation for Covestro Stock from 17 Analysts At the end of the first half of 2021, Covestro was covered by 23 securities brokers. 17 analysts issued a buy recommendation, three gave a neutral assessment, and three advised investors to sell. The average share price target was approximately €69 at the reporting date. Basic Covestro share information Capital stock €193,200,000 Outstanding shares (Half-year-end) 193,160,544 Share class No-par ordinary bearer shares ISIN DE0006062144 WKN 606214 Ticker symbol 1COV Reuters symbol 1COV.DE Bloomberg symbol 1COV GY Market segment Regulated market Transparency level Prime standard Sector Chemicals Index DAX 8 Covestro Half-Year Financial Report 2021 INTERIM GROUP MANAGEMENT REPORT AS OF JUNE 30, 2021 REPORT ON ECONOMIC POSITION 10 Significant Events 10 Results of Operations, Financial Position, and Net Assets of the Covestro Group 11 Results of Operations 11 Financial Position 13 Net Assets 15 Performance of the Reportable Segments 16 Polyurethanes 16 Polycarbonates 18 Coatings, Adhesives, Specialties 20 REPORT ON FUTURE PERSPECTIVES AND ON OPPORTUNITIES AND RISKS 22 Economic Outlook 22 Forecast for the Covestro Group 24 Opportunities and Risks 25 9 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION REPORT ON ECONOMIC POSITION Significant Events Coronavirus Pandemic Despite the ongoing coronavirus pandemic, the growing availability of vaccines and the possibilities for combating the pandemic are having a positive impact on the global economy. In parallel, we are observing a significant recovery in demand compared with the prior-year period. The steps taken by Covestro early on last year to protect the health of all employees will stay in place, so extensive health, safety, and hygiene measures are still in effect at our sites. Covestro supports employee access to vaccinations against the coronavirus, including through cooperation with company health facilities. Depending on the local situation in each case, some staff, particularly employees in administrative departments, continue to work from home. Production at our sites was not affected by the pandemic in the first half of 2021. Covestro is monitoring the development of the coronavirus pandemic worldwide on an ongoing basis to ensure that we can react quickly when necessary. Existing measures are modified and continually expanded as required in line with recommendations and instructions issued by the relevant governments and committees of experts. Other Events On February 25, 2021, Covestro signed an agreement on the sale of its 51% equity investment in subsidiary Pearl Covestro Polyurethane Systems FZCO, which operates the systems house business in Dubai (United Arab Emirates), to current co-shareholder Pearl Industries Overseas Ltd. The sale is part of an ongoing effort to optimize the portfolio and represents another step toward strategically refocusing the Polyurethanes segment. The transaction was completed on July 26, 2021, and generated proceeds of USD 8 million (about 7 Mio. €). See note 11 “Events after the End of the Reporting Period” in the Notes to the Consolidated Interim Financial Statements. On April 1, 2021, Covestro completed the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands). A total of 27 RFM companies were fully consolidated for the first time on that date. Completing the RFM acquisition makes Covestro one of the world’s leading suppliers of sustainable coating resins. See note 4 “Scope of Consolidation” in the Notes to the Consolidated Interim Financial Statements. In keeping with the first chapter of the strategy – “Become the best of who we are” – the Group restructured its organization as of July 1, 2021. The Group’s three reportable segments to date (Polyurethanes, Polycarbonates and Coatings, Adhesives, Specialties) will be replaced in the future with two new reportable segments: Performance Materials and Solutions & Specialties. The Performance Materials segment concentrates on reliably delivering standard products at competitive market prices. The focus of the Solutions & Specialties segment is on complex products with a high pace of innovation, which Covestro combines with application technology services. Covestro’s first report containing the new segment structure will be issued in the third quarter of 2021. See note 11 “Events after the End of the Reporting Period” in the Notes to the Consolidated Interim Financial Statements. 10 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Results of Operations, Financial Position, and Net Assets of the Covestro Group Results of Operations Second Quarter of 2021 Business picked up again considerably in the second quarter of 2021 after the coronavirus pandemic triggered a steep decline in demand in the prior-year quarter. The Group’s core volumes sold rose by 35.0%, driven by the strong recovery in all main customer industries, but especially the automotive and transportation industry. Volumes were also up in the Coatings, Adhesives, Specialties segment due to the initial consolidation of the Resins & Functional Materials (RFM) business, which contributed 10.4% to this increase. The Polyurethanes and Polycarbonates segments reported growth in core volumes sold of 27.8% and 15.4%, respectively. Core volumes sold in the Coatings, Adhesives, Specialties segment more than doubled, taking into account the RFM acquisition. Group sales amounted to €3,956 million, up 83.5% from the prior-year quarter (previous year: €2,156 million). Significantly higher selling prices had a positive effect on sales amounting to 45.9%, chiefly due to a favorable competitive situation in the Polyurethanes and Polycarbonates segments. The growth in total volumes sold also increased sales by 29.0%. Moreover, the portfolio change resulting from the acquisition of the RFM business in the Coatings, Adhesives, Specialties segment in the second quarter of 2021 had a positive effect on sales of 14.0%. In contrast, exchange rate developments reduced sales by 5.4%. All segments contributed to sales growth in the second quarter of 2021. Sales in the Polyurethanes segment more than doubled to €1,841 million (previous year: €913 million). In the Polycarbonates segment, sales were up 56.6% to €1,015 million (previous year: €648 million). The Coatings, Adhesives, Specialties segment also saw sales more than double to €926 million (previous year: €443 million), taking into account the RFM acquisition. Covestro Group Covestro Group Quarterly Sales Quarterly EBITDA € million € million In the second quarter of 2021, the Group’s EBITDA increased to €817 million (previous year: €125 million). This was largely due to higher selling prices, which more than offset the rise in raw material prices. As a result, all segments reported improved margins, especially Polyurethanes. An increase in total volumes sold also had a positive effect on EBITDA. In contrast, higher provisions for variable compensation reduced earnings. Nonrecurring expenses related to the RFM acquisition also had a negative effect on earnings in the low double-digit million range. 11 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION EBITDA in the Polyurethanes segment rose to €452 million (previous year: €–24 million), while the Polycarbonates segment’s EBITDA grew to €260 million (previous year: €96 million). In the Coatings, Adhesives, Specialties segment, EBITDA increased to €134 million (previous year: €60 million) taking into account the RFM acquisition. Depreciation, amortization and impairment losses rose by 8.8% to €210 million in the second quarter of 2021 (previous year: €193 million) for reasons including the takeover of assets as part of the RFM acquisition. They comprised €190 million (previous year: €187 million) in depreciation and impairments of property, plant and equipment and €20 million (previous year: €6 million) in amortization and impairments of intangible assets. In the second quarter of 2021, the Covestro Group improved EBIT to €607 million (previous year: €–68 million). Taking into account a financial result of €–18 million (previous year: €–17 million), income before income taxes increased to €589 million compared with the prior-year quarter (previous year: €–85 million). In contrast to the prior- year quarter’s tax income of €32 million, the second quarter of 2021 saw a tax expense of €139 million in line with earnings. This resulted in income after taxes of €450 million (previous year: €–53 million). After noncontrolling interests, net income amounted to €449 million (previous year: €–52 million). Compared to the prior-year quarter, earnings per share totaled €2.32 (previous year: €–0.28). First Half of 2021 In the first half of 2021, the Group’s core volumes sold rose by 18.9%, driven by the recovery in demand in all main customer industries. The RFM acquisition contributed 4.7% of this growth. In the Coatings, Adhesives, Specialties segment, core volumes sold increased by 62.4%, mainly due to acquisitions. The Polyurethanes and Polycarbonates segments saw core volumes sold rise by 13.7% and 13.5%, respectively, over the prior-year period. Group sales in the first half of 2021 increased by 47.1% to €7,263 million (previous year: €4,939 million). This development was largely attributable to higher selling prices, which boosted sales by 31.4%. An increase in total volumes sold had a positive effect on sales amounting to 14.6%. The portfolio change increased sales by 6.1%. In contrast, exchange rate movements reduced sales by 5.0%. All segments saw sales grow in the first half of 2021. Sales in the Polyurethanes segment thus rose by 60.3% to €3,506 million (previous year: €2,187 million), while the Polycarbonates segment’s sales grew by 37.9% to €1,904 million (previous year: €1,381 million), and sales in the Coatings, Adhesives, Specialties segment were up 49.9% to €1,521 million taking into account the RFM acquisition (previous year: €1,015 million). The Group’s EBITDA rose to €1,560 million in the first half of 2021 compared with the prior-year period (previous year: €379 million). This was mainly due to higher selling prices, which more than offset the rise in raw material prices. As a result, all segments reported improved margins, especially Polyurethanes. The increase in total volumes sold also had a positive impact on earnings. In contrast, higher provisions for short-term variable compensation reduced earnings. Nonrecurring expenses related to the RFM acquisition also had a negative effect on earnings in the low double-digit million range. Depreciation, amortization and impairments in the first half of 2021 increased by 4.5% to €397 million (previous year: €380 million). They comprised €370 million (previous year: €369 million) in depreciation and impairments of property, plant and equipment and €27 million (previous year: €11 million) in amortization and impairments of intangible assets. The Covestro Group’s EBIT rose to €1,163 million in the first half of 2021 (previous year: €–1 million). Taking into account a financial result of €–47 million (previous year: €–56 million), income before income taxes climbed to €1,116 million compared with the previous year (previous year: €–57 million). In contrast to the prior- year period’s tax income of €25 million, the first half of 2021 saw a tax expense of €271 million in line with earnings. This resulted in income after taxes of €845 million (previous year: €–32 million). Net income amounted to €842 million (previous year: €–32 million) after noncontrolling interests. In the first half of 2021, earnings per share increased to €4.36 (previous year: €–0.17). 12 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Financial Position Covestro Group summary statement of cash flows 2nd quarter 2020 2nd quarter 2021 1st half 2020 1st half 2021 € million € million € million € million EBITDA 125 817 379 1,560 Income taxes paid (12) (126) (102) (176) Change in pension provisions 6 12 17 21 (Gains) losses on retirements of noncurrent assets (1) (8) 1 (8) Change in working capital/other noncash items 53 (142) (234) (416) Cash flows from operating activities 171 553 61 981 Cash outflows for additions to property, plant, equipment and intangible assets (147) (179) (286) (289) Free operating cash flow 24 374 (225) 692 Cash flows from investing activities (660) (1,472) (792) (1,145) Cash flows from financing activities 795 (341) 1,494 (395) Change in cash and cash equivalents due to business activities 306 (1,260) 763 (559) Cash and cash equivalents at beginning of period 1,200 2,106 748 1,404 Change in cash and cash equivalents due to changes in scope of consolidation – – 1 – Change in cash and cash equivalents due to exchange rate movements (2) 10 (8) 11 Cash and cash equivalents at end of period 1,504 856 1,504 856 Cash Flows from Operating Activities/Free Operating Cash Flow In the second quarter of 2021, cash flows from operating activities were up, rising to €553 million (previous year: €171 million). The key driver here was an increase in EBITDA, which more than offset any negative effects. These mainly comprised cash tied up in working capital, whereas in the prior-year quarter funds had been freed up from working capital. In addition, higher income tax payments had a negative effect. After deduction of cash outflows for additions to property, plant, equipment and intangible assets of €179 million (previous year: €147 million), free operating cash flow totaled €374 million (previous year: €24 million). At €981 million, cash flows from operating activities in the first half of 2021 exceeded the prior-year figure of €61 million, chiefly on account of higher EBITDA. An increase in funds tied up in working capital and higher income tax payments had the opposite effect. After deduction of cash outflows for additions to property, plant, equipment and intangible assets of €289 million (previous year: €286 million), free operating cash flow totaled €692 million (previous year: €–225 million). Cash Flows from Investing Activities In the second quarter of 2021, net cash used in investing activities totaled €1,472 million (previous year: cash outflow of €660 million). Net purchase price payments of €1,469 million for the acquisition of the RFM business and additions to property, plant, equipment and intangible assets of €179 million (previous year: €147 million) were the main factors here. The net sale of money market fund units produced a cash inflow of €208 million. In the first half of 2021, the net cash outflow for investing activities totaled €1,145 million (previous year: cash outflow of €792 million). This figure largely comprised the aforementioned net purchase price payments for the RFM acquisition and additions to property, plant, equipment and intangible assets of €289 million (previous year: €286 million). In contrast, net redemptions of short-term bank deposits amounted to €335 million, and the net sale of money market fund units generated €269 million. 13 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Cash Flows from Financing Activities In the second quarter of 2021, the Covestro Group’s net cash outflow for financing activities totaled €341 million (previous year: cash inflow of €795 million), mainly due to dividend payments of €257 million. Of this amount, €251 million was attributable to Covestro AG shareholders. Largely due to the aforementioned dividend payments, net cash used in financing activities in the first half of 2021 amounted to €395 million (previous year: cash inflow of €1,494 million). Net cash provided by financing activities in the prior-year period consisted mainly of bond issues totaling €1.0 billion. Net financial debt Dec. 31, 2020 June 30, 2021 € million € million Bonds 1,990 1,991 Liabilities to banks 227 225 Lease liabilities 672 757 Liabilities from derivatives 9 21 Other financial liabilities 1 1 Receivables from derivatives (13) (13) Financial debt 2,886 2,982 Cash and cash equivalents (1,404) (856) Current financial assets (1,126) (522) Net financial debt 356 1,604 In comparison with December 31, 2020, the Covestro Group’s financial debt increased by €96 million to €2,982 million in the first half of 2021. Cash and cash equivalents decreased in comparison with the figure on December 31, 2020, by €548 million to €856 million. This change was mainly driven by the net purchase price payments for the RFM acquisition amounting to €1,469 million. Moreover, cash and cash equivalents declined on account of cash outflows for additions to property, plant, equipment and intangible assets of €289 million and dividend payments of €257 million. In contrast, positive cash flows from operating activities (€981 million), net proceeds of short-term bank deposits maturing (€335 million), and the net sale of money market fund units (€269 million) increased cash and cash equivalents. The redemption of short-term bank deposits and net sale of money market fund units in particular decreased current financial assets, which were down €604 million to €522 million. In comparison with December 31, 2020, the Covestro Group’s net financial debt increased by €1,248 million to €1,604 million as of June 30, 2021. 14 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Net Assets Covestro Group summary statement of financial position Dec. 31, 2020 June 30, 2021 € million € million Noncurrent assets 6,734 8,226 Current assets 6,190 6,533 Total assets 12,924 14,759 Equity 5,644 6,701 Noncurrent liabilities 4,916 4,644 Current liabilities 2,364 3,414 Liabilities 7,280 8,058 Total equity and liabilities 12,924 14,759 Total assets were up €1,835 million as compared with December 31, 2020, to €14,759 million as of June 30, 2021. Noncurrent assets increased by €1,492 million to €8,226 million (December 31, 2020: €6,734 million). The key factor here was the addition of noncurrent assets as part of the initial consolidation of RFM. Current assets were up €343 million to €6,533 million (December 31, 2020: €6,190 million). In particular, this was also due to the acquisition of the RFM business. Equity grew to €6,701 million, increasing by €1,057 million as compared with December 31, 2020. This increase was largly attributable to income after income taxes. Noncurrent liabilities were down €272 million to €4,644 million as of June 30, 2021 (December 31, 2020: €4,916 million). This stemmed principally from the change in provisions for pensions and other post-employment benefits, which dropped by €431 million to €1,692 million (December 31, 2020: €2,123 million). In contrast, noncurrent financial liabilities rose by €74 million to €2,351 million (December 31, 2020: €2,277 million), mainly on account of the initial consolidation of RFM. Current liabilities were also up €1,050 million to €3,414 million as of the reporting date (December 31, 2020: €2,364 million). The key drivers of this development were increases in trade accounts payable and other provisions. 15 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Performance of the Reportable Segments Polyurethanes Polyurethanes key data 2nd quarter 2020 2nd quarter 2021 Change 1st half 2020 1st half 2021 Change € million € million % € million € million % Core volume growth1 Sales –25.9% 913 +27.8% 1,841 >100 –14.9% 2,187 +13.7% 3,506 +60.3 Change in sales Volume –24.8% +29.1% –13.7% +12.3% Price –12.3% +78.5% –11.5% +53.8% Currency –0.4% –6.0% +0.1% –5.8% Portfolio –1.2% 0.0% –1.1% 0.0% Sales by region EMLA 359 874 >100 948 1,678 +77.0 NA 266 457 +71.8 661 814 +23.1 APAC 288 510 +77.1 578 1,014 +75.4 EBITDA (24) 452 . 26 895 . EBIT (130) 348 . (181) 688 . Cash flows from operating activities 7 288 . (79) 490 . Cash outflows for additions to property, plant, equipment and intangible assets 84 113 +34.5 168 184 +9.5 Free operating cash flow (77) 175 . (247) 306 . 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2021. Second Quarter of 2021 In the second quarter of 2021, core volumes sold in the Polyurethanes segment grew by 27.8% over the prior-year quarter, which had been heavily affected by the coronavirus pandemic. Core volumes sold were up in all main customer industries across the three regions. This was particularly evident in the construction industry as well as in the automotive and transportation industry. In contrast, the consequences of the unplanned weather-related production stoppages in the NA region in the first quarter of 2021 continued to be felt well into the second quarter of 2021. This led to limited product availability and impaired our growth potential. The Polyurethanes segment’s sales more than doubled over the prior-year quarter to €1,841 million (previous year: €913 million). Key drivers of this development were an increase in average selling prices, which lifted sales by 78.5%, and especially a favorable competitive situation. Growth in total volumes sold also had a positive effect on sales of 29.1%. In contrast, exchange rate developments had a negative impact on sales of 6.0%. The EMLA region’s sales more than doubled to €874 million (previous year: €359 million). Higher selling prices and growth in total volumes sold contributed substantially to the increase in sales. However, exchange rate changes had a slightly negative effect on sales. In the NA region, sales were up by 71.8% to €457 million (previous year: €266 million). This was the result of a massive rise in average selling prices and strong increase in total volumes sold, both factors which positively affected sales. In contrast, the development of exchange rates pushed sales down significantly. Sales in the APAC region were up by 77.1% to €510 million (previous year: €288 million). A higher selling price level and positive trend in total volumes sold each had a substantially positive effect on sales. Exchange rate movements had a slightly negative impact on sales. 16 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Polyurethanes Polyurethanes Quarterly Sales Quarterly EBITDA € million € million In the second quarter of 2021, the Polyurethanes segment’s EBITDA rose over the prior-year quarter, increasing to €452 million (previous year: €–24 million). The main drivers of this development were the increase in selling prices, which offset the contrasting effect of higher raw material prices and led to higher margins, and the growth in total volumes sold. However, higher provisions for variable compensation reduced earnings. EBIT advanced to €348 million (previous year: €–130 million). Free operating cash flow climbed to €175 million (previous year: €–77 million). This was mainly due to the sharp rise in EBITDA, which stood in contrast to an increase in funds tied up in working capital and higher cash outflows for additions to property, plant and equipment. First Half of 2021 Core volumes sold in the Polyurethanes segment increased by 13.7% in the first half of 2021 in contrast to the prior-year period, which had been adversely affected by the coronavirus pandemic. This development was attributable to the growth in core volumes sold in all main customer industries, especially the automotive and transportation industry as well as the construction industry, particularly in the EMLA and APAC regions. However, the aforementioned effects of the unplanned weather-related production stoppages in the NA region limited product availability and growth potential during the first half of 2021. In the same period, the segment’s sales were up by 60.3% to €3,506 million (previous year: €2,187 million). Higher selling prices attributable to an advantageous competitive situation and growth in total volumes sold had positive effects on sales of 53.8% and 12.3%, respectively. Exchange rate changes reduced sales by 5.8%. In the first half of 2021, EBITDA increased to €895 million (previous year: €26 million). Higher selling prices more than compensated for the rise in raw material prices and increased margins. Likewise, the increase in total volumes sold had a positive effect on EBITDA. However, higher provisions for variable compensation had a negative effect on earnings. EBIT rose to €688 million (previous year: €–181 million). Free operating cash flow was up, amounting to €306 million (previous year: €–247 million), largely due to the improvement in EBITDA. This increase stood in contrast to greater funds tied up in working capital and higher cash outflows for additions to property, plant, equipment and intangible assets. 17 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Polycarbonates Polycarbonates key data 2nd quarter 2020 2nd quarter 2021 Change 1st half 2020 1st half 2021 Change € million € million % € million € million % Core volume growth1 Sales –14.4% 648 +15.4% 1,015 +56.6 –9.8% 1,381 +13.5% 1,904 +37.9 Change in sales Volume –16.4% +28.1% –9.6% +19.9% Price –7.8% +33.3% –8.6% +22.9% Currency –0.1% –4.8% +0.4% –4.9% Portfolio –3.5% 0.0% –3.6% 0.0% Sales by region EMLA 197 310 +57.4 459 602 +31.2 NA 121 166 +37.2 302 313 +3.6 APAC 330 539 +63.3 620 989 +59.5 EBITDA 96 260 >100 205 482 >100 EBIT 41 208 >400 95 376 >200 Cash flows from operating activities 68 140 >100 103 245 >100 Cash outflows for additions to property, plant, equipment and intangible assets 34 22 –35.3 63 38 –39.7 Free operating cash flow 34 118 >200 40 207 >400 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2021. Second Quarter of 2021 In the second quarter of 2021, core volumes sold in the Polycarbonates segment rose by 15.4% over the prior- year quarter, which had been adversely affected by the coronavirus pandemic. This change was mainly due to growth in core volumes sold in the automotive and transportation industry observed across all regions. At the same time, the unplanned weather-related production stoppages in the NA region in the first quarter of 2021 resulted in limited product availability and therefore reduced our growth potential. The Polycarbonates segment’s sales were up by 56.6% to €1,015 million in the second quarter of 2021 (previous year: €648 million). Sales saw positive effects of 33.3% from higher selling prices due to a favorable competitive situation and 28.1% from growth in total volumes sold. Exchange rate changes reduced sales by 4.8%, however. In the EMLA region, sales were up by 57.4% to €310 million (previous year: €197 million). A positive trend in total volumes sold had a strong positive impact on sales. In addition, a rise in the selling price level increased sales significantly, while exchange rate changes were neutral overall with respect to sales. In the NA region, sales climbed by 37.2% to €166 million (previous year: €121 million). This development was driven by a massive increase in total volumes sold. At the same time, exchange rate movements had a considerable negative effect on sales, whereas the decline in average selling prices only reduced sales slightly. In the APAC region, sales grew by 63.3% to €539 million (previous year: €330 million). Higher selling price levels caused sales to increase substantially. Moreover, the expansion of total volumes sold had a considerable positive effect on sales. In contrast, exchange rate developments pushed sales down significantly. 18 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Polycarbonates Polycarbonates Quarterly Sales Quarterly EBITDA € million € million In the second quarter of 2021, the Polycarbonates segment’s EBITDA rose to €260 million over the prior-year quarter (previous year: €96 million). Higher selling prices more than offset the rise in raw material prices and led to substantially improved margins, which had a positive effect on EBITDA. Growth in total volumes sold also increased earnings. However, higher provisions for variable compensation had a negative effect on earnings. EBIT increased more than fivefold, amounting to €208 million (previous year: €41 million). Free operating cash flow rose to €118 million (previous year: €34 million). The key drivers of this development were the higher EBITDA and lower cash outflows for additions to property, plant and equipment, which stood in contrast to an increase in funds tied up in working capital. First Half of 2021 In the first half of 2021, the Polycarbonates segment saw core volumes sold grow by 13.5% over the prior-year period, which was adversely affected by the coronavirus pandemic. Core volumes sold were up, particularly in the automotive and transportation industry across all regions and in the electrical, electronics and household appliance industry in the APAC region. The aforementioned production stoppages in the first quarter of 2021 resulted in limited product availability and impeded our growth opportunities. In the Polycarbonates segment, sales climbed by 37.9% in the first half of 2021 to €1,904 million (previous year: €1,381 million). Higher selling prices increased sales by 22.9% due to an advantageous competitive situation. Growth in total volumes sold also had a positive impact on sales totaling 19.9%. In contrast, exchange rate developments reduced sales by 4.9%. EBITDA in the Polycarbonates segment in the first half of 2021 more than doubled over the prior-year period, growing to €482 million (previous year: €205 million). The main factor driving this development was the rise in margins, with higher selling prices more than offsetting the countereffect of higher raw material prices. At the same time, an increase in total volumes sold gave earnings a boost. However, higher provisions for variable compensation had a negative effect on earnings. EBIT advanced to €376 million (previous year: €95 million). Free operating cash flow grew to €207 million (previous year: €40 million). This was due to the increase in EBITDA and lower cash outflows for additions to property, plant and equipment. An increase in funds tied up in working capital had a negative effect. 19 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Coatings, Adhesives, Specialties Coatings, Adhesives, Specialties key data 2nd quarter 2020 2nd quarter 2021 Change 1st half 2020 1st half 2021 Change € million € million % € million € million % Core volume growth1 Sales –25.3% 443 +133.5% 926 >100 –15.2% 1,015 +62.4% 1,521 +49.9 Change in sales Volume –25.8% +34.4% –16.4% +18.1% Price –3.2% +13.2% –3.5% +7.1% Currency +0.3% –6.5% +0.7% –5.0% Portfolio 0.0% +67.9% +0.5% +29.7% Sales by region EMLA 188 434 >100 467 702 +50.3 NA 101 198 +96.0 240 325 +35.4 APAC 154 294 +90.9 308 494 +60.4 EBITDA 60 134 >100 190 248 +30.5 EBIT 28 81 >100 128 166 +29.7 Cash flows from operating activities 94 132 +40.4 134 177 +32.1 Cash outflows for additions to property, plant, equipment and intangible assets 29 43 +48.3 54 66 +22.2 Free operating cash flow 65 89 +36.9 80 111 +38.8 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2021. Second Quarter of 2021 In the second quarter of 2021, core volumes sold in the Coatings, Adhesives, Specialties segment rose by 133.5% over the prior-year quarter. The initial consolidation of the Resins & Functional Materials (RFM) business contributed 100.6% of this figure. Moreover, volumes sold increased in the main customer industries, especially in the EMLA region, where demand recovered in contrast to the prior-year quarter adversely affected by the coronavirus pandemic. At the same time, raw material bottlenecks ongoing since the first quarter of 2021 continued to limit product availability in the Coatings, Adhesives, Specialties segment in the second quarter of 2021 and impeded our organic growth opportunities. In the second quarter of 2021, the segment’s sales more than doubled, growing to €926 million (previous year: €443 million). The portfolio effect stemming from the acquisition of RFM had a positive effect on sales of 67.9%. Likewise, growth in total volumes sold and higher selling prices also increased sales by 34.4% and 13.2%, respectively. However, exchange rate movements reduced sales by 6.5%. In the EMLA region, sales more than doubled over the prior-year quarter, amounting to €434 million (previous year: €188 million). Key drivers here were the aforementioned portfolio effect and an increase in total volumes sold, both of which massively increased sales. Higher average selling prices also had a significantly positive effect on sales. Exchange rate developments were neutral overall in terms of sales. Sales in the NA region were up by 96.0% to €198 million (previous year: €101 million). Both the aforementioned portfolio effect and an increase in total volumes sold substantially boosted sales. At the same time, a rise in the selling price level had a significant positive impact on sales, whereas exchange rate changes reduced sales considerably. In the APAC region, sales climbed by 90.9% to €294 million (previous year: €154 million). The above-mentioned portfolio effect, a positive trend in total volumes sold, and higher average selling prices strongly increased sales. In contrast, exchange rate movements had a clearly negative effect on sales. 20 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Coatings, Adhesives, Specialties Coatings, Adhesives, Specialties Quarterly Sales Quarterly EBITDA € million € million In the second quarter of 2021, EBITDA in the Coatings, Adhesives, Specialties segment more than doubled over the prior-year period, growing to €134 million (previous year: €60 million). The increase in total volumes sold was the key factor in this development. At the same time, a higher selling price level led to improved margins despite an increase in raw material prices, which in turn buoyed earnings. However, higher provisions for variable compensation reduced earnings. Nonrecurring expenses in the low double-digit million range resulting from the RFM acquisition also had a negative effect on earnings. EBIT was up, increasing to €81 million (previous year: €28 million). In the second quarter of 2021, free operating cash flow rose to €89 million (previous year: €65 million). Higher EBITDA had a positive effect here, whereas a decrease in funds freed up from working capital and higher cash outflows for additions to property, plant and equipment each had a negative effect on free operating cash flow. First Half of 2021 In the first half of 2021, core volumes sold in the Coatings, Adhesives, Specialties segment were up by 62.4% over the prior-year period. This was chiefly due to the aforementioned RFM acquisition and growth in volumes sold across all main customer industries as a result of the recovery in demand since the prior-year quarter, which had felt the impact of the coronavirus pandemic. At the same time, persistent raw material bottlenecks and the resulting limited availability of products curbed our organic growth potential. Sales of Coatings, Adhesives, Specialties were up by 49.9% to €1,521 million in the same period (previous year: €1,015 million). The above-mentioned portfolio effect and higher total volumes sold increased sales by 29.7% and 18.1%, respectively. Average selling prices also increased, which gave sales a 7.1% lift, but exchange rate movements reduced sales by 5.0%. In the first half of 2021, EBITDA grew by 30.5% to €248 million over the prior-year period (previous year: €190 million), mainly due to the increase in total volumes sold. In addition, higher selling prices led to improved margins despite an increase in raw material prices, which had a positive effect on earnings. However, higher provisions for variable compensation had a negative effect on EBITDA. At the same time, nonrecurring effects in the low double-digit million range in connection with the RFM acquisition also reduced earnings. EBIT increased by 29.7% to €166 million (previous year: €128 million). Free operating cash flow rose by 38.8% in the first half of 2021 to €111 million (previous year: €80 million). The rise in EBITDA more than offset higher cash outflows for additions to property, plant, equipment and intangible assets and an increase in funds tied up in working capital. 21 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION REPORT ON FUTURE PERSPECTIVES AND ON OPPORTUNITIES AND RISKS Economic Outlook Global Economy The lingering coronavirus pandemic is likely to make the year 2021 another challenging one for the global economy. Likewise, the spread of coronavirus variants raise the possibility of new waves of the pandemic, which could affect growth negatively. However, as a result of the increasing availability of vaccines and the start of a controlled approach to fighting the pandemic, we continue to expect a return to positive growth rates in all regions. In contrast to the outlook we published in the Annual Report 2020, we now anticipate a faster recovery of the global economy and a resulting greater increase in economic performance of 5.8%. We revised our estimates for all regions upward, principally due to expected higher production volumes and consumer spending. In the NA region, we anticipate a more significant increase in expected economic growth compared with our outlook published in the Annual Report 2020. This is due to factors including the increase in the US economic stimulus package to USD 1.9 trillion and the demand for travel and services in excess of expectations to date. Another overall economic situation significantly better than the assessment we presented in our Annual Report 2020 is taking shape in the EMLA region. This is mostly due to rising vaccination rates and an increasing number of pandemic-related restrictions being lifted. In the APAC region, we expect the economic recovery to proceed slightly faster than stated in our outlook in the Annual Report 2020, driven mainly by growth in China coming in stronger than expected. Economic growth 1 Growth 2020 Growth forecast 2021 (Annual Report 2020) Growth forecast 2021 % % % World Europe, Middle East, Latin America2, Africa (EMLA) –3.6 –5.8 +4.4 +3.4 +5.8 +4.8 of which Europe –6.1 +3.2 +5.0 of which Germany –5.1 +2.8 +3.8 of which Middle East of which Latin America2 of which Africa North America3 (NA) –4.0 –7.5 –2.8 –3.9 +4.5 +3.7 +2.4 +4.0 +4.4 +4.9 +3.7 +6.5 of which United States –3.5 +4.0 +6.6 Asia-Pacific (APAC) –1.1 +5.7 +6.2 of which China +2.3 +7.6 +8.5 1 Real growth of gross domestic product; source: IHS (Global Insight), “Growth 2020” and “Growth forecast 2021” as of July 2021. 2 Latin America (excluding Mexico). 3 North America (Canada, Mexico, United States). 22 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Main Customer Industries In all main customer industries, we continue to forecast positive growth for the year 2021. However, we expect the pace of growth to differ in the individual industries. Growth in main customer industries 1 Growth 2020 Growth forecast 2021 (Annual Report 2020) Growth forecast 2021 % % % Automotive –15.9 +17.3 +13.8 Construction –1.8 +0.6 +1.3 Electrical, electronics and household appliances +4.5 +6.3 +13.9 Furniture –6.8 +4.6 +4.7 1 Covestro’s estimate, based on the following sources: LMC Automotive Limited, B+L, CSIL (Centre for Industrial Studies), Oxford Economics. We limited the economic data of our “automotive and transportation” and “furniture and wood processing” main customer industries to the automotive and furniture segments (not the transportation or wood processing segments). As of: July 2021. Growth in the automotive industry is projected to be 13.8%, down from the outlook presented in the Annual Report 2020. This is chiefly due to bottlenecks in the supply of semiconductors and petrochemical by-products, and the resulting limitations in car manufacturing. At 1.3%, growth in the construction industry will likely exceed the projection in the Annual Report 2020. Likewise, we anticipate the growth rate in the electrical, electronic, and household appliances industry to come in at 13.9%, higher than expected in the Annual Report 2020, on account of the growth in consumer expenditure persisting throughout the pandemic. The projected growth rate for the furniture industry was raised to 4.7%. 23 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Forecast for the Covestro Group The analysis of the development of our key management indicators is based on the business performance described in this Half-Year Financial Report, the economic outlook outlined above, and consideration of our potential risks and opportunities. The acquisition completed on April 1, 2021, and the integration of the Resins & Functional Materials (RFM) business of Koninklijke DSM N.V., Heerlen (Netherlands), into the Coatings, Adhesives, Specialties segment has been factored into this forecast. Covestro adjusted the forecast presented in the Annual Report 2020 on April 13, 2021, as a result of business development that has been better than previously expected. An increasingly positive outlook led to the forecast being raised again on July 12, 2021. We hereby confirm the forecast for fiscal year 2021 amended on July 12, 2021, and expect the following development of our key performance indicators: Forecast key management indicators 2020 Forecast 2021 (Annual Report 2020) Previous forecast 2021 (April 13, 2021) Adjusted forecast 2021 (July 12, 2021) Core volume growth –5.6% Between 10% and 15% Between 10% and 15% Between 10% and 15% Free operating cash flow (FOCF) €530 million Between €900 million and €1,400 million Between €1,300 million and €1,800 million Between €1,600 million and €2,000 million Return on capital employed (ROCE)1 +7.0% Between 7% and 12% Between 12% and 17% Between 16% and 20% 1 ROCE: The return on capital employed is calculated as the ratio of EBIT after taxes to capital employed. Capital employed is the capital used by the company. It is the sum of noncurrent and current assets less noninterest-bearing liabilities such as trade accounts payable. We still anticipate that core volume growth for the Covestro Group will be between 10% and 15%, with around 6 percentage points attributable to the acquisition of the RFM business. We also continue to project growth for the Coatings, Adhesives, Specialties segment significantly above the corridor expected for the Group. For the Polyurethanes and Polycarbonates segments, our growth projection remains in the mid- to high-single-digit percentage range. This year, FOCF is forecast to fall between €1,600 million and €2,000 million. We continue to expect a FOCF well over the prior-year figures for the Polyurethanes and Polycarbonates segments and now project a similar trend for the Coatings, Adhesives, Specialties segment (previously: FOCF well under the prior-year figure). For fiscal year 2021, we now expect a ROCE of between 16% and 20%. 24 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Opportunities and Risks As a company with global operations and a diversified portfolio, the Covestro Group is subject to a number of opportunities and risks. Opportunity and risk management at Covestro is an integral part of the Group’s corporate governance system. See the “Opportunities and Risks Report” in the Combined Management Report in the Annual Report 2020 for a detailed explanation of our opportunity and risk management system and opportunity and risk situation. Changes in the Risk Situation At the time this Half-Year Financial Report was prepared, there had been no fundamental changes in the opportunity or risk situation since December 31, 2020. Additionally, there are no risks that could endanger the Group’s continued existence, and no such risks are currently identifiable for the future. No new material developments have occurred in the legal proceedings presented in the Annual Report 2020, and no new material legal proceedings are pending. See note 28 “Legal Risks” in the Notes to the Consolidated Financial Statements for additional information. 25 Covestro Half-Year Financial Report 2021 CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF JUNE 30, 2021 Covestro Group Consolidated Income Statement 27 Covestro Group Consolidated Statement of Comprehensive Income 28 Covestro Group Consolidated Statement of Financial Position 29 Covestro Group Consolidated Statement of Cash Flows 30 Covestro Group Consolidated Statement of Changes in Equity 31 Notes to the Consolidated Interim Financial Statements 32 1. General Information 32 2. Effects of New Financial Reporting Standards 33 3. Segment and Regional Reporting 34 4. Scope of Consolidation 37 5. Net Sales 40 6. Earnings per Share 40 7. Employees and Pension Obligations 41 8. Financial Instruments 42 9. Legal Risks 47 10. Related Parties 47 11. Events after the End of the Reporting Period 48 26 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED INCOME STATEMENT 2nd quarter 2020 2nd quarter 2021 1st half 2020 1st half 2021 € million € million € million € million Sales 2,156 3,956 4,939 7,263 Cost of goods sold (1,817) (2,813) (4,049) (5,074) Gross profit 339 1,143 890 2,189 Selling expenses (268) (357) (589) (670) Research and development expenses (59) (87) (124) (160) General administration expenses (68) (105) (160) (203) Other operating income 8 40 17 52 Other operating expenses EBIT1 (20) (68) (27) 607 (35) (1) (45) 1,163 Equity-method loss (4) (4) (8) (7) Result from other affiliated companies – – – 1 Interest income 7 9 15 15 Interest expense (18) (22) (37) (41) Other financial result (2) (1) (26) (15) Financial result (17) (18) (56) (47) Income before income taxes (85) 589 (57) 1,116 Income taxes 32 (139) 25 (271) Income after income taxes (53) 450 (32) 845 of which attributable to noncontrolling interest (1) 1 – 3 of which attributable to Covestro AG shareholders (net income) (52) 449 (32) 842 € € € € Basic earnings per share2 (0.28) 2.32 (0.17) 4.36 Diluted earnings per share2 (0.28) 2.32 (0.17) 4.36 1 EBIT: income after income taxes plus financial result and income taxes 2 Earnings per share: According to IAS 33 (Earnings per Share) corresponds to net income divided by the weighted average number of outstanding no-par voting shares of Covestro AG. The calculation was based on 193,160,544 no-par shares for the second quarter of 2021 (previous year: 182,864,685 no-par shares) and on 193,160,544 no-par shares for the first half of 2021 (previous year: 182,864,685). 27 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2nd quarter 2020 2nd quarter 2021 1st half 2020 1st half 2021 € million € million € million € million Income after income taxes (53) 450 (32) 845 Remeasurements of the net defined benefit liability for post-employment benefit plans (437) 113 112 484 Income taxes 136 (46) (38) (154) Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans (301) 67 74 330 Other comprehensive income that will not be reclassified subsequently to profit or loss (301) 67 74 330 Exchange differences of foreign operations (36) (30) (40) 100 Reclassified to profit or loss – – – – Other comprehensive income from exchange differences (36) (30) (40) 100 Other comprehensive income that may be reclassified subsequently to profit or loss (36) (30) (40) 100 Total other comprehensive income1 (337) 37 34 430 of which attributable to noncontrolling interest – – – – of which attributable to Covestro AG shareholders (337) 37 34 430 Total comprehensive income (390) 487 2 1,275 of which attributable to noncontrolling interest (1) 1 – 3 of which attributable to Covestro AG shareholders (389) 486 2 1,272 1 Total change recognized outside profit or loss 28 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2020 June 30, 2021 Dec. 31, 2020 € million € million € million Noncurrent assets Goodwill 264 739 255 Other intangible assets 109 716 109 Property, plant and equipment 5,243 5,747 5,175 Investments accounted for using the equity method 187 169 173 Other financial assets 35 31 32 Other receivables 75 88 65 Deferred taxes 861 736 925 6,774 8,226 6,734 Current assets Inventories 1,922 2,363 1,663 Trade accounts receivable 1,311 2,266 1,593 Other financial assets 557 561 1,144 Other receivables 288 335 295 Claims for income tax refunds 133 93 55 Cash and cash equivalents 1,504 856 1,404 Assets held for sale – 59 36 5,715 6,533 6,190 Total assets 12,489 14,759 12,924 Equity Capital stock of Covestro AG 183 193 193 Capital reserves of Covestro AG 3,487 3,925 3,925 Other reserves 1,539 2,510 1,489 Equity attributable to Covestro AG shareholders 5,209 6,628 5,607 Equity attributable to noncontrolling interest 45 73 37 5,254 6,701 5,644 Noncurrent liabilities Provisions for pensions and other post-employment benefits 1,881 1,692 2,123 Other provisions 209 211 218 Financial liabilities 2,817 2,351 2,277 Income tax liabilities 96 103 88 Other liabilities 16 31 31 Deferred taxes 196 256 179 5,215 4,644 4,916 Current liabilities Other provisions 208 407 155 Financial liabilities Trade accounts payable1 532 1,024 644 1,846 622 1,241 Income tax liabilities Other liabilities1 33 223 223 280 74 262 Liabilities directly related to assets held for sale – 14 10 2,020 3,414 2,364 Total equity and liabilities 12,489 14,759 12,924 1 Reference information as of June 30, 2020, was restated accordingly, see note 4.1 “Change in Presentation of Rebates Granted to Customers” in the Annual Report 2020. 29 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CASH FLOWS 2nd quarter 2020 2nd quarter 2021 1st half 2020 1st half 2021 € million € million € million € million Income after income taxes (53) 450 (32) 845 Income taxes (32) 139 (25) 271 Financial result 17 18 56 47 Income taxes paid (12) (126) (102) (176) Depreciation, amortization and impairment losses and impairment loss reversals 193 210 380 397 Change in pension provisions 6 12 17 21 (Gains)/losses on retirements of noncurrent assets (1) (8) 1 (8) Decrease/(increase) in inventories 94 (298) (21) (528) Decrease/(increase) in trade accounts receivable (Decrease)/increase in trade accounts payable1 Changes in other working capital, other noncash items1 308 (347) (2) (191) 255 92 239 (405) (47) (446) 394 164 Cash flows from operating activities 171 553 61 981 Cash outflows for additions to property, plant, equipment and intangible assets (147) (179) (286) (289) Cash inflows from sales of property, plant, equipment and other assets – 10 – 10 Cash inflows from divestments less divested cash – – (3) – Cash outflows for noncurrent financial assets (2) (22) (9) (22) Cash inflows from noncurrent financial assets 1 2 1 2 Cash outflows for acquisitions less acquired cash – (1,469) – (1,469) Interest and dividends received 7 11 17 17 Cash inflows from/(outflows for) other current financial assets (519) 175 (512) 606 Cash flows from investing activities (660) (1,472) (792) (1,145) Dividend payments and withholding tax on dividends (2) (257) (2) (257) Issuances of debt 1,011 1 1,768 2 Retirements of debt (198) (63) (234) (98) Interest paid (16) (22) (38) (42) Cash flows from financing activities 795 (341) 1,494 (395) Change in cash and cash equivalents due to business activities 306 (1,260) 763 (559) Cash and cash equivalents at beginning of period 1,200 2,106 748 1,404 Change in cash and cash equivalents due to changes in scope of consolidation – – 1 – Change in cash and cash equivalents due to exchange rate movements (2) 10 (8) 11 Cash and cash equivalents at end of period 1,504 856 1,504 856 1 Reference information was restated accordingly, see note 4.1 “Change in Presentation of Rebates Granted to Customers” in the Annual Report 2020. 30 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Capital stock of Covestro AG Capital reserves of Covestro AG Retained earnings incl. total income Accumulated other com- prehensive income Equity attributable to Covestro AG shareholders Equity attributable to non- controlling interest € million € million € million € million € million € million Dec. 31, 2019 183 3,487 1,122 415 5,207 47 Dividend payments – – (2) Income after income taxes (32) (32) – Other comprehensive income 74 (40) 34 – Total comprehensive income 42 (40) 2 – June 30, 2020 183 3,487 1,164 375 5,209 45 of which treasury shares (7) (7) Dec. 31, 2020 193 3,925 1,280 209 5,607 37 Dividend payments Other changes1 (251) – (251) – (6) 39 Income after income taxes 842 842 3 Other comprehensive income 330 100 430 – Total comprehensive income 1,172 100 1,272 3 June 30, 2021 193 3,925 2,201 309 6,628 73 of which treasury shares – (2) (2) 1 Other changes in noncontrolling interests result from the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands), see note 4.2 “Acquisitions and Divestitures.” 31 Equity € million 5,254 (2) (32) 34 2 5,254 (7) 5,644 (257) 39 845 430 1,275 6,701 (2) Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. General Information Information on the Consolidated Interim Financial Statements Pursuant to Section 115, Paragraph 3 of the German Securities Trading Act (WpHG), the consolidated interim financial statements of Covestro AG, Leverkusen (Germany), as of June 30, 2021, have been prepared according to the International Financial Reporting Standards (IFRSs) — including IAS 34 (Interim Financial Reporting) — of the International Accounting Standards Board (IASB), London (United Kingdom), the Interpretations (IFRICs) of the IFRS Interpretations Committee (IFRS IC), and the interpretations published by the Standing Interpretations Committee (SIC), endorsed by the European Union and in effect at the closing date. The accounting policies and measurement principles described in the consolidated financial statements as of December 31, 2020, were applied unchanged in preparing the consolidated interim financial statements as of June 30, 2021, subject to the effects of financial reporting standards adopted for the first time in the current fiscal year as described in note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” The consolidated interim financial statements are drawn up in euros. Amounts are stated in millions of euros (€ million) except where otherwise indicated. Exchange Rates In the reporting period, the following exchange rates were used for the major currencies of relevance to the Covestro Group: Closing rates for major currencies Average rates for major currencies Closing rates Average rates €1/ June 30, 2020 Dec. 31, 2020 June 30, 2021 €1/ 1st half 2020 1st half 2021 BRL Brazil 6.11 6.37 5.91 BRL Brazil 5.33 6.49 CNY China 7.92 7.98 7.68 CNY China 7.76 7.80 HKD Hong Kong 8.68 9.51 9.23 HKD Hong Kong 8.55 9.35 INR India 84.62 89.66 88.32 INR India 81.60 88.38 JPY Japan 120.66 126.49 131.43 JPY Japan 119.22 129.76 MXN Mexico 25.95 24.42 23.58 MXN Mexico 23.58 24.32 USD United States 1.12 1.23 1.19 USD United States 1.10 1.21 32 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 2. Effects of New Financial Reporting Standards 2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period IFRS pronouncement (published on) Title Effective for annual periods beginning on or after Amendments to IFRS 16 (May 28, 2020) COVID-19-Related Rent Concessions June 1, 2020 Amendments to IFRS 4 (June 25, 2020) Extension of the Temporary Exemption from Applying IFRS 9 January 1, 2021 Amendments to IFRS 9, IAS 38, IFRS 7, IFRS 4 and IFRS 16 (August 27, 2020) Interest Rate Benchmark Reform – Phase 2 January 1, 2021 Initial application of the standards listed in the table had little or no material impact on the presentation of the net assets, financial position and results of operations. 2.2 Published Financial Reporting Standards That Have Not Yet Been Applied There were no new findings regarding the potential effects of reporting standards newly published up to the authorization for issue of the financial statements, but not yet required to be applied, whose application could affect the presentation of the net assets, financial position and results of operations that differ from the information presented in the 2020 consolidated financial statements. “Amendments to IFRS 16 Leases: COVID-19-Related Rent Concessions beyond 30 June 2021“ approved by the IASB on March 31, 2021, and “Amendments to IAS 12 Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction” approved by the IASB on May 7, 2021, have not yet been adopted in the EU. Subject to an analysis to be completed, their initial application is not expected to (materially) affect the presentation of net assets, financial position and results of operations. 33 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 3. Segment and Regional Reporting The Board of Management of Covestro AG, as the chief operating decision maker of the Covestro Group, allocates resources to the operating segments and assesses their performance. The reportable segments and regions are identified, and the disclosures selected, in line with the internal financial reporting system (management approach). They are based on the same accounting policies outlined in the consolidated financial statements as of December 31, 2020. As of June 30, 2021, the Covestro Group comprises three reportable segments with the following activities: Polyurethanes The Polyurethanes segment develops, produces and markets high-quality precursors for polyurethanes. These precursors are diphenylmethane diisocyanate (MDI), toluene diisocyanate (TDI), and polyether polyols. Rigid foam based on MDI is used mainly in the construction industry as an insulating material as well as along the entire refrigeration chain. Flexible polyurethane foam based on TDI is used primarily in the furniture and automotive industries (e.g., in upholstered furniture, mattresses and car seats). The segment operates production facilities worldwide. Formulating and supplying customized polyurethane systems takes place primarily in the APAC region. Polycarbonates The Polycarbonates segment develops, produces and markets the high-performance plastic polycarbonate in the form of granules, composite materials and semifinished products. The material is used primarily in the automotive industry (e.g., in the vehicle interior and for vehicle lighting) and in the construction industry (e.g., for roof structures). It is also used in the electrical and electronics industry (e.g., for connectors and laptop cases), the medical technology industry and the lighting industry (e.g., for LED components). The Covestro Group produces polycarbonate all around the world and processes it at compounding centers to meet specific customer requirements. Coatings, Adhesives, Specialties The Coatings, Adhesives, Specialties segment develops, produces and markets Covestro’s precursors for coatings, adhesives and sealants as well as specialties — primarily for polyurethane systems. They include polymer materials and aqueous dispersions based on the isocyanates HDI and IPDI, which are produced at facilities located throughout the world. The main areas of application are automotive and transportation, infrastructure and construction, wood processing, and furniture. The specialties comprise elastomers, high-quality films and precursors for the cosmetics, textiles and health care industries. On April 1, 2021, Covestro additionally completed the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands). The Completion of this acquisition of RFM in the Coatings, Adhesives, Specialties segment makes Covestro one of the world’s leading suppliers of sustainable coating resins. Business activities that cannot be allocated to any of the aforementioned segments are reported under “All other segments.” The external sales from these activities are generated mainly from by-products of chlorine production and use. The costs of Corporate Center functions, higher or lower expenses for long-term stock-based compensation arising from fluctuations in the performance of Covestro AG stock, as well as one-time costs in the course of the LEAP transformation program are presented in the segment reporting as “Corporate Center and reconciliation.” The segment data is calculated as follows: EBIT and EBITDA are not defined in the International Financial Reporting Standards. EBIT is equal to income after income taxes plus financial result and income taxes. EBITDA is the EBIT as reported in the income statement plus depreciation and impairment losses on property, plant and equipment, and amortization and impairment losses on intangible assets, less impairment loss reversals. Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities and refund liabilities. 34 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following tables show the segment reporting data for the second quarter and for the first half year (as of June 30), respectively: Segment reporting 2nd quarter Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 2nd quarter 2021 Net sales 1,841 1,015 926 174 – 3,956 EBITDA 452 260 134 (11) (18) 817 EBIT 348 208 81 (12) (18) 607 2nd quarter 2020 Net sales 913 648 443 152 – 2,156 EBITDA (24) 96 60 3 (10) 125 EBIT (130) 41 28 3 (10) (68) Segment reporting 1st half Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 1st half 2021 Net sales 3,506 1,904 1,521 332 – 7,263 EBITDA 895 482 248 (24) (41) 1,560 EBIT 688 376 166 (26) (41) 1,163 1st half 2020 Net sales 2,187 1,381 1,015 356 – 4,939 EBITDA 26 205 190 (20) (22) 379 EBIT (181) 95 128 (21) (22) (1) Trade working capital by segment Dec. 31, 2020 June 30, 2021 € million € million Polyurethanes 900 1,238 Polycarbonates 550 760 Coatings, Adhesives, Specialties 444 675 Total of reportable segments 1,894 2,673 All other segments 66 67 Corporate Center (11) (15) Trade working capital 1,949 2,725 of which inventories 1,663 2,363 of which trade accounts receivable 1,593 2,266 of which trade accounts payable of which IFRS 15 items1 (1,241) (66) (1,846) (58) 1 The item includes contract assets, contract liabilities, and refund liabilities. 35 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Information on geographical areas The following tables show information by geographical area. The EMLA region consists of Europe, the Middle East, Latin America except Mexico, and Africa. Mexico forms together with the United States and Canada the NA region. The APAC region includes Asia and the Pacific region. The following tables show the regional reporting data for the second quarter and for the first half year: Regional reporting 2nd quarter EMLA NA APAC Total € million € million € million € million 2nd quarter 2021 Net sales (external) by market 1,765 844 1,347 3,956 Net sales (external) by point of origin 1,785 851 1,320 3,956 2nd quarter 2020 Net sales (external) by market 874 508 774 2,156 Net sales (external) by point of origin 869 517 770 2,156 Regional reporting 1st half EMLA NA APAC Total € million € million € million € million 1st half 2021 Net sales (external) by market 3,267 1,493 2,503 7,263 Net sales (external) by point of origin 3,273 1,515 2,475 7,263 1st half 2020 Net sales (external) by market 2,174 1,252 1,513 4,939 Net sales (external) by point of origin 2,154 1,278 1,507 4,939 Reconciliation The following table shows the reconciliation of EBITDA of the segments to income before income taxes of the Group: Reconciliation of segments’ EBITDA to Group income before income taxes 2nd quarter 2020 2nd quarter 2021 1st half 2020 1st half 2021 € million € million € million € million EBITDA of segments 135 835 401 1,601 EBITDA of Corporate Center (10) (18) (22) (41) EBITDA 125 817 379 1,560 Depreciation, amortization and impairment losses of segments (193) (210) (380) (397) Depreciation, amortization and impairment losses of Corporate Center – – – – Depreciation, amortization and impairment losses (193) (210) (380) (397) EBIT of segments (58) 625 21 1,204 EBIT of Corporate Center (10) (18) (22) (41) EBIT (68) 607 (1) 1,163 Financial result (17) (18) (56) (47) Income before income taxes (85) 589 (57) 1,116 36 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 4. Scope of Consolidation 4.1 Changes in the Scope of Consolidation As of June 30, 2021, the scope of consolidation comprised Covestro AG and 74 (December 31, 2020: 47) consolidated companies. The increase in the number of consolidated companies in the first half of 2021 is attributable to the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands). A total of 27 RFM companies were fully consolidated effective April 1, 2021, for the first time. 4.2 Acquisitions and Divestitures Acquisitions On April 1, 2021, Covestro successfully completed the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands), which was included in the consolidated financial statements for the first time as of that date. The responsible authorities approved the transaction after Covestro and Koninklijke DSM N.V. reached an agreement on the purchase at the end of September 2020. The acquisition of RFM makes the Coatings, Adhesives, Specialties segment a leading supplier of sustainable coating resins. A due to the acquisition even more comprehensive and highly innovative product portfolio will offer customers clear added value. The transaction covers innovative projects such as Additive Manufacturing, Advanced Solar Coatings and Niaga. The acquisition was accounted for as a business combination in accordance with IFRS 3 (Business Combinations). For purposes of the purchase price allocation, the acquired company’s identifiable assets, the assumed liabilities and contingent liabilities, and any noncontrolling interest in the acquiree were recognized at fair value. According to IFRS 3, the purchase price allocation can be adjusted within one year of the acquisition date based on new information and findings. This can affect especially items that are based on assumptions and estimates, which mainly include provisions, contingent liabilities and deferred taxes. No assurance can be given that other items may not change. The acquisition also includes the following shares and voting rights in four companies with noncontrolling interests that are nonetheless fully consolidated: the 50% interest (57% voting rights) in DSM Eternal Resins Kunshan Co. Ltd., Kunshan, (China); the 60% interest (60% voting rights) in Covestro Eternal Resins (Far East) Ltd., Pingtung (Taiwan); the 72% (72% voting rights) interest in Covestro Amulix V.O.F., Zwolle (Netherlands); and the 70% interest (100% voting rights) in Japan Fine Coatings Co., Ltd., Tsukuba (Japan). Covestro and Koninklijke DSM N.V. agreed on a preliminary consideration transferred of €1,544 million, which was paid in cash. The purchase price allocation resulted in a goodwill of €481 million. This goodwill includes expected synergies arising from administrative processes and infrastructure, including cost savings in procurement, sales and general administration, and from unlocking future business opportunities with new customers. Goodwill is not tax deductible in the countries involved in the acquisition, except the United States. The share of tax deductible goodwill attributable to the United States amounts to €68 million. 37 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following overview shows the acquired assets and liabilities at fair value as of the acquisition date: Fair value of acquired assets and liabilities at acquisition RFM € million Goodwill 481 Other intangible assets 624 Property, plant and equipment 462 Inventories 147 Trade accounts receivable 202 Other receivables 21 Cash and cash equivalents 75 Deferred tax assets 21 Provisions (33) Financial liabilities (33) Trade accounts payable (194) Other liabilities (42) Deferred tax liabilities (148) Net assets 1,583 Noncontrolling interest (39) Consideration transferred 1,544 Acquired cash and cash equivalents (75) Net cash outflow for acquisitions 1,469 The other intangible assets mainly include customer relationships in the amount of € 411 million as well as technologies relating to water-based hybrid technologies, powder coating resins and radiation curing resins in the amount of € 176 million. The fair value of acquired receivables totaling €223 million relates mainly to trade accounts receivable. At the acquisition date, gross contractual receivables amounted to €225 million, with €2 million of this amount estimated to be unrecoverable. Noncontrolling interests were measured according to the partial goodwill method in the course of initial consolidation. Based on the partial goodwill method, the value of the noncontrolling interests totals €39 million. Acquisition related costs associated with the business combination of €41 million were recognized in the income statement in the amount of €37 million and in equity in the amount of €4 million. Of this amount, €38 million had already been recognized in the previous year. The sales generated by the acquired RFM business since the acquisition date amounted to €294 million, with income after taxes amounting to €– 7 million. The income after taxes comprised expenses resulting from one-time effects and the purchase price allocation. If the aforementioned acquisition had been completed by January 1, 2021, Covestro would have reported net sales of €7,626 million. Income after taxes would have amounted to €861 million, including expenses from one-time effects and the purchase price allocation. Intercompany profits between Covestro and RFM companies were eliminated in this case. The purchase price allocation for RFM has not yet been completed, because the preparation and audit of the underlying financial information will still take some time. Allocations of the purchase price to the individual assets and liabilities could therefore still change. 38 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Divestitures On January 29, 2021, RFM signed an agreement on the sale of assets (disposal group) in Taoyuan (Taiwan), which were also part of the RFM acquisition, to Evermore Chemical Industry Co. Ltd., Nantou (Taiwan). In connection with the sale, production-related assets of €12 million were classified as “held for sale” in accordance with IFRS 5 (Non- current Assets Held for Sale and Discontinued Operations). Inventories, which are measured separately, are also being transferred. The transaction is scheduled to be closed up in the third quarter of 2021 at the latest. On February 25, 2021, Covestro signed an agreement to sell the assets and liabilities (disposal group) of the systems house business in the Middle East to the current co-shareholder Pearl Industries Overseas Ltd., Dubai (United Arab Emirates). The sale of this systems house business is part of Covestro’s portfolio optimization process, during the course of which Covestro sold the only North American systems house in April 2017 and the European systems house business in November 2019. The systems house business is part of the company’s Polyurethanes segment and offers customer-specific polyurethane systems to the construction sector in particular. The transaction is structured as a share deal. The expected selling price was lower than the value of the net assets to be sold, which were written down accordingly. Impairment charges led to a loss totaling €16 million reported in manufacturing costs, selling expenses and general administration expenses in fiscal year 2020. In connection with this sale, current assets amounting to €30 million and liabilities of €14 million were classified as “held for sale” in accordance with IFRS 5. This transaction was expected to be closed in the third quarter of 2021 and was subject to approval by regulators. The transaction was completed on July 26, 2021. See note 11 “Events after the End of the Reporting Period” in the Consolidated Interim Financial Statements. 39 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 5. Net Sales Net sales are categorized according to “geographical regions and key countries” and mainly comprise sales from contracts with customers and an insignificant amount of rental and leasing sales. The table also contains a breakdown of net sales by reportable segments. Disaggregation of sales Other/consolidation Polyure- thanes Polycar- bonates Coatings, Adhesives, Specialties All other segments Corporate Center and reconciliation Covestro Group € million € million € million € million € million € million 1st half 2021 EMLA 1,678 602 702 285 – 3,267 of which Germany 328 140 269 192 – 929 NA 814 313 325 41 – 1,493 of which United States 644 256 295 41 – 1,236 APAC 1,014 989 494 6 – 2,503 of which China 663 662 267 2 – 1,594 1st half 2020 EMLA 948 459 467 300 – 2,174 of which Germany 186 99 202 171 – 658 NA 661 302 240 49 – 1,252 of which United States 539 255 219 49 – 1,062 APAC 578 620 308 7 – 1,513 of which China 351 422 157 2 – 932 6. Earnings per Share Earnings per share are calculated according to IAS 33 (Earnings per Share) as the relationship of the Group’s income after income taxes (net income) for the reporting period to the weighted average number of outstanding no-par voting shares of Covestro AG. In the first half of 2021, a weighted average number of outstanding no-par voting shares of 193,160,544 was used to calculate earnings per share, while in the first half of 2020, these shares amounted to 182,864,685. There were no dilution effects to consider. Earnings per Share 1st half 2020 1st half 2021 € million € million Income after income taxes (32) 845 of which attributable to noncontrolling interest – 3 of which attributable to Covestro AG shareholders (net income) (32) 842 Shares Shares Weighted average number of no-par voting shares of Covestro AG 182,864,685 193,160,544 € € Basic earnings per share (0.17) 4.36 Diluted earnings per share (0.17) 4.36 40 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 7. Employees and Pension Obligations As of June 30, 2021, the Covestro Group had 18,039 employees worldwide (December 31, 2020: 16,501). The increase resulted mainly from the acquisition of the Resins & Functional Materials (RFM) business. In the first half of 2021, personnel expenses rose by €233 million to €1,146 million (previous year: €913 million), largely due to higher expenses for provisions for short-term variable compensation. Employees by division1 Dec. 31, 2020 June 30, 2021 Production 10,753 11,607 Marketing and distribution 3,101 3,360 Research and development 1,205 1,489 General administration 1,442 1,583 Total 16,501 18,039 1 The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTEs). Part-time employees are included on a pro- rated basis in line with their contractual working hours. Employees in vocational training are not included. Provisions for pensions and other post-employment benefits decreased to €1,692 million (December 31, 2020: €2,123 million), mainly on account of lower obligations due to higher discount rates. Discount rate for pension obligations Dec. 31, 2020 June 30, 2021 % % Germany 0.70 1.20 United States 2.10 2.50 41 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 8. Financial Instruments The following tables show the carrying amounts and fair values of financial assets and liabilities based on IFRS 9: Carrying amounts of financial instruments and their fair values as of June 30, 2021 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehensi ve income Fair value recognized in profit or loss Measureme nt according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 2,266 2,266 2,266 Other financial assets 592 Money market funds 502 – – 502 502 Loans and bank deposits 50 45 – 5 50 Other investments 13 13 – 13 Receivables under lease agreements 8 8 25 Derivatives that do not qualify for hedge accounting 19 19 19 Other receivables1 37 29 – 8 37 Cash and cash equivalents 856 856 – – 856 Financial liabilities Financial debts 2,995 Bonds 1,991 1,991 – 2,090 Lease liabilities 757 757 Liabilities to banks 225 225 – 231 Derivatives that do not qualify for hedge accounting 21 21 21 Other financial liabilities 1 1 – 1 Trade accounts payable 1,846 1,846 – 1,846 Other liabilities2 129 Derivatives that do not qualify for hedge accounting 3 3 3 Refund liabilities 77 77 – 77 Miscellaneous other liabilities 49 49 – 49 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €386 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €182 million . 42 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Carrying amounts of financial instruments and their fair values as of December 31, 2020 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehensi ve income Fair value recognized in profit or loss Measureme nt according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 1,593 1,593 – – 1,593 Other financial assets 1,176 Money market funds 771 – – 771 771 Loans and bank deposits 365 360 – 5 365 Other investments 14 14 – 14 Receivables under lease agreements 8 8 21 Derivatives that do not qualify for hedge accounting 18 18 18 Other receivables1 31 25 – 6 31 Cash and cash equivalents 1,404 1,404 – – 1,404 Financial liabilities Financial debts 2,899 Bonds 1,990 1,990 – 2,107 Lease liabilities 672 672 Liabilities to banks 227 227 – 234 Derivatives that do not qualify for hedge accounting 9 9 9 Other financial liabilities 1 1 – 1 Trade accounts payable 1,241 1,241 – 1,241 Other liabilities2 150 Derivatives that do not qualify for hedge accounting 3 3 3 Refund liabilities 87 87 – 87 Miscellaneous other liabilities 60 60 – 60 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €329 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €143 million. The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below: Level 1 covers fair values determined on the basis of quoted, unadjusted prices that exist in active markets. Level 2 comprises fair values determined on the basis of parameters that are observable in an active market. Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data. 43 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following table shows the assignment of the financial instruments to the three-level fair value hierarchy: Fair value hierarchy of financial instruments Fair value Fair value Dec. 31, 2020 Level 1 Level 2 Level 3 June 30, 2021 Level 1 Level 2 € million € million € million € million € million € million € million Financial assets carried at fair value Money market funds 771 – 771 – 502 – 502 Loans 5 – – 5 5 – – Other investments 14 5 – 9 13 4 – Derivatives that do not qualify for hedge accounting 18 – 13 5 19 – 13 Other receivables 6 – – 6 8 – – Financial assets not carried at fair value Receivables under lease agreements 21 – – 21 25 – – Financial liabilities carried at fair value Derivatives that do not qualify for hedge accounting 12 – 9 3 24 – 21 Financial liabilities not carried at fair value Bonds 2,107 2,107 – – 2,090 2,090 – Liabilities to banks 234 – 234 – 231 – 231 Other financial liabilities 1 – 1 – 1 – 1 Reallocation between the different levels of the fair value hierarchy takes place at the end of the reporting period in which the change occurred. During the first half of 2021, no transfers were made between the levels of the fair value hierarchy. Because of the generally short maturities of cash and cash equivalents, loans and bank deposits, trade accounts receivable and payable, and other receivables and liabilities, their carrying amounts do not significantly differ from the fair values. The fair value of the bonds issued by Covestro AG is based on quoted, unadjusted prices in active markets and therefore assigned to Level 1 of the fair value hierarchy. The fair value of some of the other investments is also based on quoted prices in active markets (Level 1). The fair values stated for noncurrent financial assets and liabilities are the present values of the respective future cash inflows or outflows. These are determined by discounting the cash flows at a reporting-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. For this reason, these values are assigned to Level 2 of the fair value hierarchy. The fair values of money market funds correspond to the quoted prices of the funds in accordance with Article 29 in conjunction with Article 33 of EU Regulation 2017/1131 on money market funds (Level 2). The fair values of derivatives for which no publicly quoted market prices existed are determined using valuation techniques based on observable market data as of the reporting date (Level 2). Credit value adjustments and debt value adjustments are determined to allow for both the contracting party’s credit risk and Covestro’s own credit risk. The currency forward contracts are measured individually at their forward rates or forward prices as of the reporting date. These depend on spot rates or prices including time spreads. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. The fair values of noncurrent receivables under lease agreements are reported are calculated on the basis of interest 44 Level 3 € million – 5 9 6 8 25 3 – – – Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION curves observable in the market. Additionally, a discount for cash flows that are very far in the future is applied as an unobservable factor. Covestro works with and invests in start-ups under the auspices of the Covestro Venture Capital (COVeC) approach, which was newly developed during the 2020 fiscal year. Debt instruments associated with COVeC activities are recognized at fair value through profit and loss. The fair value is calculated as the present value of the future cash flows estimated based on available performance indicators. The cash flows are discounted at the current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the venture capital company. The main input factors are not based on observable market data (Level 3). The estimated fair value of the debt instruments classified in Level 3 would rise (fall) if the expected cash inflows were to be higher (lower) or if the risk-adjusted discount rate were to be lower (higher). Other financial investments are recognized at fair value directly in equity because they are held for the long term for strategic reasons. The fair value of some of the other investments is based on quoted prices in active markets (Level 1). Where there are no quoted, unadjusted prices in an active market for identical or similar instruments, and there is no suitable valuation method where all major input factors are based on observable market data, the fair value of the other investments is determined using a market price-oriented valuation method where the main input factors are not based on observable market data (Level 3). The valuation of certain other investments is based on available performance indicators as well as on market valuation multipliers. The estimated fair value of the equity instruments categorized within Level 3 would rise (fall) if the multiple applied were to be greater (smaller). Further, the fair values of embedded derivatives are determined on the basis of unobservable input factors (Level 3). They are separated from their respective host contracts, which are purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, or regional and industry-specific price indices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include prices or price indices derived from market data. The estimated fair value of the embedded derivative would rise (fall) if the expected payment flows were to be higher (lower) as a result of fluctuations in exchange rates or prices. Other receivables include a contingent purchase price receivable from divestments. The fair value of the receivable is measured as the present value of the future cash inflows. The basis is the expected EBITDA of the business unit sold for fiscal year 2021. The cash flows are discounted at the current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the buyer. The contingent purchase price receivable is assigned to Level 3 of the fair value hierarchy. The estimated fair value would rise (fall) if the expected cash inflows were to be higher (lower) or if the risk-adjusted discount rate were to be lower (higher). 45 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The table below shows the reconciliation of Level 3 financial instruments: Changes in the net amount of financial assets and liabilities recognized at fair value based on unobservable inputs (level 3) 2020 2021 € million € million Net carrying amounts, Jan. 1 21 22 Gains (losses) recognized in profit or loss (4) 3 of which related to assets / liabilities recognized in the statement of financial position (4) 3 Gains (losses) recognized outside profit or loss 1 – Additions of assets (liabilities) 5 – Net carrying amounts, June 30 23 25 Gains and losses from embedded derivatives (Level 3) recognized in profit or loss are reported in other operating expenses or income. 46 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 9. Legal Risks As a company with international operations, the Covestro Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law, environmental law, and compliance issues such as corruption and export control. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal judgments or regulatory decisions or future settlements could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect the earnings of the Covestro Group. The legal risks that are material to the Covestro Group were described in note 28 “Legal Risks” to the Consolidated Financial Statements as of December 31, 2020. In the current fiscal year, there have been no new significant developments regarding the legal proceedings described there, and no new material legal proceedings are pending. 10. Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert at least significant influence on Covestro AG and its subsidiaries or over which Covestro AG or its subsidiaries exercise control, joint control or have at least significant influence. They include nonconsolidated subsidiaries, joint ventures and associated companies, post-employment benefit plans and corporate officers of Covestro AG. Receivables from and liabilities to related parties Dec. 31, 2020 June 30, 2021 Receivables Liabilities Receivables Liabilities € million € million € million € million Nonconsolidated subsidiaries and associates 3 8 4 10 Associates 6 – 9 – Sales and purchases of goods and services to/from related parties 1st half 2020 1st half 2021 Sales of goods and services Purchases of goods and services Sales of goods and services Purchases of goods and services € million € million € million € million Nonconsolidated subsidiaries and associates 15 20 22 30 Associates 6 216 12 362 The goods and services provided by associated companies mainly result from the ongoing operating business with PO JV, LP, Wilmington (United States). Covestro benefits from fixed long-term supply quotas/volumes of propylene oxide (PO) from this company’s production. Receivables from and payables to related parties mainly comprise leasing and financing matters, trade in goods and services, and other transactions. 47 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 11. Events after the End of the Reporting Period In keeping with the first chapter of the strategy – “Become the best of who we are” – the Group restructured its organization as of July 1, 2021. The Group’s three reportable segments to date (Polyurethanes, Polycarbonates, and Coatings, Adhesives, Specialties) will be replaced in the future with two new reportable segments: Performance Materials and Solutions and Specialties. The Performance Materials segment forms a separate business entity comprising Covestro’s standard polycarbonates, standard urethane components and base chemicals businesses. The focus here is on reliably delivering standard products at competitive market prices. The Solutions and Specialties segment comprises six business entities: Engineering Plastics, Coatings and Adhesives, Tailored Urethanes, Thermoplastic Polyurethanes, Specialty Films and Elastomers. The focus here is on complex products with a high pace of innovation combined by Covestro with application technology services. On July 7, 2021, the Eurobond placed in 2016 with a total volume of €500 million and maturing in October 2021 was fully repaid at par value ahead of schedule. On July 26, 2021, Covestro successfully completed the sale of the assets and liabilities of the system house business in the Middle East to the current co-shareholder Pearl Industries Overseas Ltd., Dubai (United Arab Emirates). The sale has an expected insignificant effect on earnings due to recognition of impairment losses on the assets of the business sold in fiscal year 2020. See note 4.2 “Acquisitions and Divestitures” in the Consolidated Interim Financial Statements. Leverkusen (Germany), August 3, 2021 Covestro AG The Board of Management 48 Covestro Half-Year Financial Report 2021 FURTHER INFORMATION Responsibility Statement 50 Review Report 51 Segment and Quarterly Overview 52 Financial Calendar 55 49 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the net assets, financial position and results of operations of the Covestro Group, and the interim group management report includes a fair review of the development and performance of the business and the position of the Covestro Group, together with a description of the principal opportunities and risks associated with the expected development of the Covestro Group during the rest of the fiscal year. Leverkusen (Germany), August 3, 2021 Covestro AG The Board of Management 50 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Review Report To Covestro AG, Leverkusen We have reviewed the condensed interim consolidated financial statements – comprising the statement of financial position, income statement, statement of comprehensive income, statement of cash flows, statement of changes in equity and selected explanatory notes – together with the interim group management report of Covestro AG, Leverkusen, for the period from January 1, 2021 to June 30, 2021 that are part of the semi annual financial report according to § 115 WpHG [“Wertpapierhandelsgesetz“: “German Securities Trading Act”]. The preparation of the condensed interim consolidated financial statements in accordance with the IFRSs applicable to interim report-ing as adopted by the EU, and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports, is the responsibility of the Company’s management. Our responsibility is to issue a report on the condensed interim con-solidated financial statements and on the interim group management report based on our review. We performed our review of the condensed interim consolidated financial statements and the interim group management report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and additionally observed the International Standard in Review Engagements “Review of Interim Finan-cial Information Performed by the Independent Auditor of the Entity“ (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with a certain level of assurance, that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRSs applicable to interim reporting as adopted by the EU, and that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of company employees and analytical assessments and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot issue an auditor’s report. Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRSs applicable to interim reporting as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Düsseldorf, August 4, 2021 KPMG AG Wirtschaftsprüfungsgesellschaft Dr. Zeimes Wirtschaftsprüfer [German Public Auditor] Schenk Wirtschaftsprüferin [German Public Auditor] 51 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment and Quarterly Overview Segment information 2nd quarter Polyurethanes Polycarbonates Coatings, Adhesives, Specialties Others/consolidation Covestro Group 2nd quarter 2020 2nd quarter 2021 2nd quarter 2020 2nd quarter 2021 2nd quarter 2020 2nd quarter 2021 2nd quarter 2020 2nd quarter 2021 2nd quarter 2020 2nd quarter 2021 € million € million € million € million € million € million € million € million € million € million Sales 913 1,841 648 1,015 443 926 152 174 2,156 3,956 Change in sales Volume –24.8% +29.1% –16.4% +28.1% –25.8% +34.4% –17.1% +17.1% –22.3% +29.0% Price –12.3% +78.5% –7.8% +33.3% –3.2% +13.2% –8.2% –1.2% –9.0% +45.9% Currency –0.4% –6.0% –0.1% –4.8% +0.3% –6.5% +0.2% –1.4% –0.1% –5.4% Portfolio –1.2% 0.0% –3.5% 0.0% 0.0% +67.9% 0.0% 0.0% –1.5% +14.0% Core volume growth1 Sales by region –25.9% +27.8% –14.4% +15.4% –25.3% +133.5% –22.7% +35.0% EMLA 359 874 197 310 188 434 130 147 874 1,765 NA 266 457 121 166 101 198 20 23 508 844 APAC 288 510 330 539 154 294 2 4 774 1,347 EBITDA (24) 452 96 260 60 134 (7) (29) 125 817 EBIT (130) 348 41 208 28 81 (7) (30) (68) 607 Depreciation, amortization, impairment losses and impairment loss reversals 106 104 55 52 32 53 – 1 193 210 Cash flows from operating activities 7 288 68 140 94 132 2 (7) 171 553 Cash outflows for additions to property, plant, equipment and intangible assets 84 113 34 22 29 43 – 1 147 179 Free operating cash flow (77) 175 34 118 65 89 2 (8) 24 374 Trade working capital2 959 1,238 650 760 497 675 62 52 2,168 2,725 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2021. 2 Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities, and refund liabilities as of June 30, 2020/2021. Reference information was restated accordingly, see note 4 “Change in presentation for rebates granted to customers and trade working capital” in the Annual Report 2020. 52 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment information 1st half Polyurethanes Polycarbonates Coatings, Adhesives, Specialties Others/consolidation Covestro Group 1st half 2020 1st half 2021 1st half 2020 1st half 2021 1st half 2020 1st half 2021 1st half 2020 1st half 2021 1st half 2020 1st half 2021 € million € million € million € million € million € million € million € million € million € million Sales 2,187 3,506 1,381 1,904 1,015 1,521 356 332 4,939 7,263 Change in sales Volume –13.7% +12.3% –9.6% +19.9% –16.4% +18.1% –4.5% –2.0% –12.5% +14.6% Price –11.5% +53.8% –8.6% +22.9% –3.5% +7.1% –10.0% –3.7% –9.1% +31.4% Currency +0.1% –5.8% +0.4% –4.9% +0.7% –5.0% +0.3% –1.0% +0.3% –5.0% Portfolio –1.1% 0.0% –3.6% 0.0% +0.5% +29.7% 0.0% 0.0% –1.4% +6.1% Core volume growth1 Sales by region –14.9% +13.7% –9.8% +13.5% –15.2% +62.4% –13.6% +18.9% EMLA 948 1,678 459 602 467 702 300 285 2,174 3,267 NA 661 814 302 313 240 325 49 41 1,252 1,493 APAC 578 1,014 620 989 308 494 7 6 1,513 2,503 EBITDA 26 895 205 482 190 248 (42) (65) 379 1,560 EBIT (181) 688 95 376 128 166 (43) (67) (1) 1,163 Depreciation, amortization, impairment losses and impairment loss reversals 207 207 110 106 62 82 1 2 380 397 Cash flows from operating activities (79) 490 103 245 134 177 (97) 69 61 981 Cash outflows for additions to property, plant, equipment and intangible assets 168 184 63 38 54 66 1 1 286 289 Free operating cash flow (247) 306 40 207 80 111 (98) 68 (225) 692 Trade working capital2 959 1,238 650 760 497 675 62 52 2,168 2,725 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2021. 2 Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities, and refund liabilities as of June 30, 2020/2021. Reference information was restated accordingly, see note 4 “Change in presentation for rebates granted to customers and trade working capital” in the Annual Report 2020. 53 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS Quarterly Overview 1st quarter 2020 2nd quarter 2020 3rd quarter 2020 € million € million € million Sales 2,783 2,156 2,760 Polyurethanes 1,274 913 1,315 Polycarbonates 733 648 801 Coatings, Adhesives, Specialties 572 443 495 Core volume growth1 EBITDA –4.1% 254 –22.7% 125 +3.0% 456 Polyurethanes 50 (24) 220 Polycarbonates 109 96 148 Coatings, Adhesives, Specialties 130 60 99 EBIT 67 (68) 265 Polyurethanes (51) (130) 114 Polycarbonates 54 41 94 Coatings, Adhesives, Specialties 100 28 68 Financial result (39) (17) (22) Income before income taxes 28 (85) 243 Income after taxes 21 (53) 180 Net income 20 (52) 179 Cash flows from operating activities (110) 171 538 Cash outflows for additions to property, plant, equipment and intangible assets 139 147 177 Free operating cash flow (249) 24 361 1 Reference values calculated on the basis of the definition of the core business effective March 31, 2021. 54 FURTHER INFORMATION 4th quarter 2020 1st quarter 2021 € million € million 3,007 3,307 1,519 1,665 803 889 529 595 +1.7% +5.3% 637 743 379 443 200 222 52 114 432 556 264 340 143 168 19 85 (13) (29) 419 527 306 395 312 393 635 428 241 110 394 318 2nd quarter 2021 € million 3,956 1,841 1,015 926 +35.0% 817 452 260 134 607 348 208 81 (18) 589 450 449 553 179 374 Covestro Half-Year Financial Report 2021 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Financial Calendar Quarterly Statement Third Quarter 2021............................. November 08, 2021 Annual Report 2021 ......................................................................... March 01, 2022 Annual General Meeting 2022 ................................................... April 21, 2022 Quarterly Statement First Quarter 2022 .............................. May 03, 2022 Publishing information Published by Local Court of Cologne HRB 85281 Translation Leinhäuser Language Services GmbH Covestro AG VAT No. DE815579850 Unterhaching (Germany) Kaiser-Wilhelm-Allee 60 51373 Leverkusen Investor contact Design and layout Germany Email: info@covestro.com Email: ir@covestro.com nexxar GmbH, Vienna (Austria) covestro.com Press contact Email: communications@covestro.com 55

Semestriel, 2021, Chemistry, Covestro

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Semestriel

Chemistry

Covestro

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HALF-YEAR FINANCIAL REPORT 2022 CONTENTS Reporting Profile 3 Notes to the Consolidated Interim Financial Covestro Group Key Data 4 Statements 31 1. General Information 31 COVESTRO ON THE CAPITAL MARKET 5 2. Effects of New Financial Reporting Standards 32 INTERIM GROUP MANAGEMENT REPORT 8 2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period 32 Report on Economic Position 9 Significant Events 9 2.2 Published Financial Reporting Standards That Have Not Yet Been Applied 32 Results of Operations, Financial Position, and 3. Segment and Regional Reporting 33 Net Assets of the Covestro Group 11 Results of Operations 11 4. Scope of Consolidation 37 4.1 Changes in the Scope of Consolidation 37 Financial Position 14 4.2 Acquisitions and Divestitures 37 Net Assets 16 5. Sales 38 Performance of the Segments 17 6. Earnings per Share 38 Performance Materials 17 7. Employees and Pension Obligations 39 Solutions & Specialties 19 8. Financial Instruments 40 Report on Future Perspectives and on Opportunities and Risks 21 9. Legal Risks 45 Economic Outlook 21 10. Related Parties Forecast for the Covestro Group 23 11. Events after the End of the Reporting Period 46 11. Events after the End of the Reporting Period 46 Opportunities and Risks 24 FURTHER INFORMATION 47 CONSOLIDATED INTERIM FINANCIAL STATEMENTS 25 Responsibility Statement Review Report 48 49 Covestro Group Consolidated Income Statement 26 Segment and Quarterly Overview 50 Covestro Group Consolidated Statement of Financial Calendar 53 Comprehensive Income 27 Covestro Group Consolidated of Financial Position 28 Covestro Group Consolidated Statement of Cash Flows 29 Covestro Group Consolidated Statement of Changes in Equity 30 2 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Reporting Profile Reporting Principles The Half-Year Financial Report of Covestro AG, Leverkusen (Germany), meets the requirements of the German Securities Trading Act (WpHG) and, in accordance with Section 115 (2) through (4) of the WpHG (half-year financial report; power to issue statutory instruments), comprises Condensed Interim Consolidated Financial Statements, an Interim Group Management Report, and a Responsibility Statement by Management. This report covers the period from January 1 to June 30, 2022. The Interim Consolidated Financial Statements have been prepared in accordance with IAS 34 (Interim Financial Reporting) under the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB) and their Interpretations, as adopted by the European Union (EU) and applicable as of the reporting date. The Half-Year Financial Report should be read alongside the Annual Report for fiscal 2021 and the additional information about the company contained therein, as well as the Interim Statement as of March 31, 2022. Forward-Looking Statements This Report may contain forward-looking statements based on current assumptions and forecasts made by the management of Covestro AG. Various known and unknown risks, uncertainties, and other factors could lead to material differences between the actual results, financial situation, development, or performance of the Covestro Group and the estimates given here. The various factors include those discussed in Covestro AG’s public reports, which are available at www.covestro.com. Covestro AG assumes no liability whatsoever to update these forward- looking statements or to conform them to future events or developments. Alternative Performance Measures Throughout its financial reporting, Covestro uses alternative performance measures (APMs) to assess the business performance of the Group. These are not defined in the IFRSs. These non-IFRS indicators should be considered a supplement to, not a replacement for, the financial performance measures determined in accordance with IFRSs. The alternative performance measures of relevance to the Covestro Group include earnings before interest, taxes, depreciation, and amortization (EBITDA), return on capital employed (ROCE), free operating cash flow (FOCF), and net financial debt. Covestro uses ROCE to determine profitability, while EBITDA is analyzed to assess profitable growth. FOCF is a key factor in the presentation of the liquidity position that indicates the company’s ability to generate a cash surplus and finance its activities. Net financial debt gauges the Group’s financial condition and financing requirements. The calculation methods for the APMs may vary from those of other companies, thus limiting the extent of the overall comparability. These alternative performance measures should not be viewed in isolation or employed as an alternative to the financial indicators determined in accordance with IFRSs and presented in the consolidated financial statements for purposes of assessing Covestro’s net assets, financial position, and results of operations. Explanations of the definition and calculation of these alternative performance measures can be found in the “Management” section of the Combined Management Report in the 2021 Annual Report Acronyms and Abbreviations Acronyms and abbreviations used in this Report are explained in this Report or in the Glossary provided in the Annual Report 2021. Rounding and Percentage Deviations As the indicators in this Report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact. If a deviation changes from positive to negative or vice versa, or if it is greater than 1,000%, this is shown by a period. Inclusive Language Diversity, equity, and inclusion are important to Covestro. To ensure better readability, we therefore strive to use gender-neutral language and avoid gender-specific terms in this Report. All terms should be taken to apply equally to all genders. Publication This Report was published on August 2, 2022. It is available in German and English. The German version is binding. 3 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Covestro Group Key Data 2nd quarter 2021 2nd quarter 2022 Change 1st half 2021 1st half 2022 Change € million € million % € million € million % Sales 3,956 4,703 18.9 7,263 9,386 29.2 Change in sales Volume 29.0% –2.1% 14.6% 0.5% Price 45.9% 14.5% 31.4% 18.3% Currency –5.4% 6.5% –5.0% 6.1% Portfolio 1 14.0% 0.0% 6.1% 4.3% EBITDA 817 547 –33.0 1,560 1,353 –13.3 Changes in EBITDA Volume 245.6% –5.8% 90.8% –0.5% Price 791.2% 70.3% 409.5% 85.3% Raw material price –320.8% –96.5% –106.6% –103.1% Currency –16.0% 4.9% –11.3% 5.8% Other 3 EBIT 2 –146.4% 607 –5.9% 307 –49.4 –70.7% 1,163 –0.8% 896 –23.0 Financial result (18) (44) 144.4 (47) (72) 53.2 Net income 4 449 199 –55.7 842 615 –27.0 5 Earnings per share (€) 2.32 1.04 –55.2 4.36 3.20 –26.6 Cash flows from operating activities 6 553 (272) . 981 (115) . Cash outflows for additions to property, plant, equipment and intangible assets 179 190 6.1 289 330 14.2 Free operating cash flow 7 374 (462) . 692 (445) . 1 Earnings before interest, taxes, depreciation and amortization (EBITDA): EBIT plus depreciation, amortization, and impairment losses; less impairment loss reversals on intangible assets and property, plant and equipment. 2 Other changes in EBITDA such as changes in provisions for variable compensation. 3 Earnings before interest and taxes (EBIT): income after income taxes plus financial result and income taxes. 4 Net income: income after income taxes attributable to the shareholders of Covestro AG. 5 Earnings per share: according to IAS 33 (Earnings per Share), net income divided by the weighted average number of outstanding no-par value voting shares of Covestro AG. The calculation was based on 191,070,836 no-par shares for the second quarter of 2022 (previous year: 193,160,544 no-par shares) and on 192,101,348 no-par shares for the first half of 2022 (previous year: 193,160,544 no-par shares). 6 Cash flows from operating activities according to IAS 7 (Statement of Cash Flows). 7 Free operating cash flow (FOCF): cash flows from operating activities less cash outflows for additions to property, plant, equipment and intangible assets. 4 COVESTRO ON THE CAPITAL MARKET 5 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Covestro on the Capital Market Performance of Covestro shares versus market in the first half of 2022 € (Covestro shares) Xetra closing prices for Covestro; source: Deutsche Börse Stock Market Performance Impacted by Effects of Russian War against Ukraine and the Continuing Coronavirus Pandemic Both on the stock exchanges and in the global economy, the first half of the year 2022 continued to be affected by the global coronavirus pandemic and the Russian war against Ukraine, which started in February 2022. China’s zero-COVID strategy and the resulting restrictions in many economic hubs in China, in particular the lockdown in the Shanghai region, had a serious negative impact on local production and global supply chains. The significant increases in energy prices caused by the war in Ukraine weighed heavily on many branches of industry and, together with the worsening outlook for the global economy, led to negative share price performance on the stock exchanges. The discussions around gas supply security and potential gas rationing hit the share price performance of energy-intensive industries such as the chemical industry particularly hard. As of June 30, 2022, the German DAX benchmark index, which is relevant for Covestro, was down 19.5% compared with the end of the year 2021. European chemical stocks tracked this development. As of June 30, 2022, the STOXX Europe 600 Chemicals index was 18.5% lower than at the beginning of the year. At a Xetra closing price of €32.98, Covestro’s share price was also down at the end of the first half of 2022, losing 39.2% compared with December 31, 2021. Covestro’s share price marked its low for the period toward the end of the second quarter, on June 29, 2022, closing at €32.98. After a brief boom at the beginning of January, the share price reached its high of €57.48 on January 7, 2022. Since April 2022, Covestro share prices have primarily trended downward, with brief phases of recovery. Including the 2021 fiscal year dividend of €3.40 per share, which was resolved by the Annual General Meeting on April 21, 2022, Covestro’s share performance (with dividend reinvestment) for fiscal 2021 was –34.2% compared with the 2021 year-end closing price of €54.20. At the end of the first half of 2022, Covestro’s market capitalization stood at around €6.3 billion based on 189.7 million shares outstanding. The average daily Xetra trading volume was around 1.3 million shares. 6 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Virtual Annual General Meeting Held on April 21, 2022 Covestro AG’s 2022 Annual General Meeting (AGM) was held on April 21, 2022. Due to the ongoing coronavirus pandemic, Covestro once again has decided early on to hold a virtual AGM as in the previous year to avoid exposing those present to additional health risks. The AGM approved the dividend of €3.40 per share for the fiscal year 2021 proposed by the Board of Management and Supervisory Board. That means Covestro’s payout ratio was 40% of consolidated net income. Furthermore, Dr. Sven Schneider was elected by the AGM as a new member of the Supervisory Board. He succeeds Prof. Dr. Rolf Nonnenmacher, who resigned effective at the end of the 2022 AGM. Dr. Schneider is the CFO of Infineon Technologies AG. He brings with him extensive professional knowledge, and experience as a CFO and was elected as Chairman of the Audit Committee. Share Buyback Program Based on the resolution adopted at the 2019 AGM, Covestro AG’s Board of Management on February 28, 2022 resolved a share buyback program totaling around €500 million (excluding transaction costs). The share buyback program is to be completed within two years. All repurchased shares are subsequently expected to be retired and the capital stock reduced accordingly. By the end of the first half of 2022, 3,479,956 million shares worth €150 million had already been bought back in two tranches at an average price of €43.0785 per share. Moody’s Confirms Covestro Rating and Outlook On May 10, 2022, Moody’s Investors Service, London (United Kingdom), confirmed Covestro’s Baa2 investment- grade rating with a stable outlook. Covestro intends to continue to maintain financing structures and financial ratios that support a solid investment-grade rating in the future. 12 Analysts Issue Buy Recommendation for Covestro Shares At the end of the first six months of 2022, Covestro was covered by 21 securities brokers. Of these, 12 analysts issued buy recommendations, eight were neutral, and one advised investors to sell. The average share price target was approximately €55 at the reporting date. Basic Covestro share information Capital stock €193,200,000 Outstanding shares (Half-year-end) 189,720,044 Share class No-par ordinary bearer shares ISIN DE0006062144 WKN 606214 Ticker symbol 1COV Reuters symbol 1COV.DE Bloomberg symbol 1COV GY Market segment Regulated market Transparency level Prime standard Sector Chemicals Index DAX 7 INTERIM GROUP MANAGEMENT REPORT Report on Economic Position 9 Significant Events 9 Results of Operations, Financial Position, and Net Assets of the Covestro Group 11 Results of Operations 11 Financial Position 14 Net Assets 16 Performance of the Segments 17 Performance Materials 17 Solutions & Specialties 19 Report on Future Perspectives and on Opportunities and Risks 21 Economic Outlook 21 Forecast for the Covestro Group 23 Opportunities and Risks 24 8 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION REPORT ON ECONOMIC POSITION Significant Events War in Ukraine The Russian war against Ukraine, which began in February 2022, has had a notable impact on the global economy. The global consequences for the energy and raw material markets and on supply chains also influenced Covestro’s business situation. In the first half of 2022, production at Covestro was not affected by the reductions in gas supplies from Russia implemented to date. However, there is uncertainty about future supplies, in particular since further significant cuts in, or a suspension of, gas supplies from Russia could have considerable consequences for Covestro’s European sites, especially in Germany. There is no short-term substitute for gas in Covestro’s production processes, where it is predominantly used as a source of energy and as process gas in chemical reactions. As in the previous year, less than 1% of Group sales are generated in the countries affected by the war, Russia, Belarus, and Ukraine, combined. The existing trade accounts receivable from customers in these countries were evaluated and impaired, if needed. Covestro does not operate any production sites in any of the three countries. The sanctions imposed on Russia and Belarus by the international community therefore only minimally affect Covestro’s business. See “Opportunities and Risks.” In March 2022, Covestro reacted to the humanitarian crisis in Ukraine and its neighboring countries by donating aid for this purpose. We have made available €250,000 to UNO-Flüchtlingshilfe, the German partner organization to the United Nations High Commissioner for Refugees (UNHCR). Covestro has also provided its companies in Slovakia and Poland an additional €40,000 for local aid organizations. Coronavirus Pandemic Strict measures to curb the spread of the coronavirus pandemic, most of which were imposed by the Chinese government, impacted on the global economy in the first half of 2022. Production at Covestro’s sites continued to be unaffected by the pandemic, although logistical bottlenecks emerged at the Shanghai (China) site in the course of the first half of 2022. This also had significant effects on business performance in the APAC region. The health, safety, and hygiene measures implemented by Covestro are regularly reviewed and modified to address current conditions. Employees in the EMLA and NA regions were gradually returning to the workplace. Especially in China, part of the workforce, particularly employees in administrative departments, worked from home due to the restrictions described earlier. CEO Dr. Markus Steilemann’s Contract Extended The Supervisory Board has prematurely extended, to May 31, 2028, the contract with Dr. Markus Steilemann, which was due to expire in May 2023. This means that he will remain the CEO of Covestro AG for another five years. Dr. Steilemann has been a member of Covestro’s Board of Management since September 2015 and its Chair since June 2018. In his function as CEO, he is responsible for the Strategy, Sustainability & Public Affairs, Group Innovation, Corporate Audit, Human Resources, and Communications corporate functions. Share Buyback Program On February 28, 2022, Covestro AG’s Board of Management resolved to initiate a share buyback program. The total volume of the program is approximately €500 million (excluding transaction costs), and it is expected to be completed within two years. All repurchased shares are subsequently expected to be retired and the capital stock reduced accordingly. Share buybacks began in March 2022. By the end of the first half of 2022, Covestro AG had acquired 3,479,956 shares valued at €150 million in two tranches. Additional information is available at: www.covestro.com/en/investors/share-performance/share-buyback 9 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Climate Neutrality by the Year 2035 In the course of Covestro’s efforts to make plastics production fully circular, on March 1, 2022, the company communicated new climate targets to reduce its direct GHG emissions from its own production activities (Scope 1) and indirect GHG emissions from external energy sources (Scope 2). The Group is striving to become climate- neutral and to reach net-zero greenhouse gas (GHG) emissions* by the year 2035. The company plans to reduce Scope 1 and Scope 2 GHG emissions by 60% to 2.2 million metric tons of CO2 equivalents by the year 2030. In the long term, Covestro’s goal is to use up to 100% renewable energy such as wind and solar power as well as alternative raw materials such as biomass, waste, CO2, and hydrogen in its production processes. In addition, a target for the long-term reduction of indirect GHG emissions from upstream and downstream processes in the value chain (Scope 3) is to be defined in the year 2023. Extension of the Revolving Credit Facility and Establishment of the Green Financing Framework In March 2022, the second of two agreed options was exercised to extend the term of the five-year, €2.5 billion syndicated revolving credit facility obtained in fiscal 2020 by another year until March 2027. This facility provides a back-up cash reserve and is linked to an environmental, social, and governance (ESG) rating. In May 2022, Covestro published a Green Financing Framework, which supports Covestro’s strategic goals and allows it to finance green projects with green financing instruments (such as bonds or other debt instruments). See “Financial Management” in the Annual Report 2021 and further information at: www.covestro.com/en/investors/debt/ green-financing-framework production activities and by external energy sources) and anthropogenic reduction of greenhouse gases. Achievement of net zero greenhouse gas emissions is defined as a balance between anthropogenic emissions (those caused by the company’s own 10 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Results of Operations, Financial Position, and Net Assets of the Covestro Group Results of Operations Covestro Group Covestro Group Quarterly Sales Quarterly EBITDA € million € million Second Quarter of 2022 In the second quarter of 2022, Group sales grew by 18.9% to €4,703 million (previous year: €3,956 million). This was mainly due to a considerably higher selling price level, which had a positive impact on sales amounting to 14.5%. In addition, exchange rate movements caused sales to rise by 6.5%. In contrast, a decline in volumes sold resulted in a 2.1% decline in sales. The sales increase in the second quarter of 2022 was driven by both segments. Sales in the Performance Materials segment grew by 25.8% to €2,461 million (previous year: €1,957 million), while sales in the Solutions & Specialties segment were up 11.0% to €2,165 million (previous year: €1,951 million). In the EMLA region, sales were 22.8% higher, at €2,167 million (previous year: €1,765 million), while sales in the NA region increased 42.2% to €1,200 million (previous year: €844 million). Logistical bottlenecks in China limited the growth potential in the APAC region, leading to a decline in sales of 0.8% to €1,336 million (previous year: €1,347 million). Sales by segment and region in the second quarter of 2022 € million 1 EMLA: Europe, Middle East, Latin America (excluding Mexico), Africa region. 2 3 NA: North America region (Canada, Mexico, United States). APAC: Asia and Pacific region. 11 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION In the second quarter of 2022, the Group’s EBITDA decreased by 33.0% to €547 million (previous year: €817 million). This was largely driven by a rise in raw material and energy prices, partially offset by a higher selling price level. The resulting decline in margins affected primarily the Performance Materials segment. The drop in volumes sold also had a negative effect on earnings. In contrast, lower provisions for short-term variable compensation and exchange rate movements both boosted earnings. EBITDA decreased to €367 million (previous year: €644 million) in the Performance Materials segment and to €213 million (previous year: €237 million) in the Solutions & Specialties segment. Depreciation, amortization, impairment losses, and impairment loss reversals rose by 14.3% to €240 million in the second quarter of 2022 (previous year: €210 million), of which €205 million (previous year: €190 million) was attributable to property, plant and equipment and €35 million (previous year: €20 million) to intangible assets. In the second quarter of 2022, the Covestro Group’s EBIT dropped by 49.4% to €307 million (previous year: €607 million). Taking into account a financial result of €–44 million (previous year: €–18 million), income before income taxes fell to €263 million compared with the prior-year quarter (previous year: €589 million). The tax expense in the second quarter of 2022 amounted to €65 million (previous year: €139 million). This resulted in income after taxes of €198 million (previous year: €450 million). After noncontrolling interests, net income amounted to €199 million (previous year: €449 million). Compared to the prior-year quarter, earnings per share fell to €1.04 (previous year: €2.32). First Half of 2022 Group sales in the first half of 2022 rose by 29.2% to €9,386 million (previous year: €7,263 million), mainly due to a higher selling price level, which boosted sales growth by 18.3%. Moreover, changes in exchange rates had a positive effect of 6.1% on sales. The portfolio change arising from the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands), in the second quarter of 2021 had the effect of increasing sales by 4.3%. The change in volumes sold had a positive effect of 0.5% on sales. Both segments saw sales go up in the first half of 2022, with sales up 31.2% to €4,849 million (previous year: (previous year: in the Performance Materials segment and up 26.1% to €4,387 million €3,697 million) €3,480 million) in the Solutions & Specialties segment. In the EMLA region, sales were 29.8% higher, at €4,241 million (previous year: €3,267 million), while sales in the NA region increased 55.1% to €2,316 million (previous year: €1,493 million). Sales in the APAC region rose by 13.0% to €2,829 million (previous year: €2,503 million). Sales by segment and region in the first half of 2022 € million 1 EMLA: Europe, Middle East, Latin America (excluding Mexico), Africa region. 2 NA: North America region (Canada, Mexico, United States). 3 APAC: Asia and Pacific region. 12 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The Group’s EBITDA contracted by 13.3% to €1,353 million in the first half of 2022 compared with the prior-year period (previous year: €1,560 million). This was mainly driven by a rise in raw material and energy prices, which were partially offset by the higher selling price level and led to lower margins. In contrast, lower provisions for short-term variable compensation and exchange rate movements both had the effect of increasing earnings. The change in volumes sold did not have any notable effect on earnings. Depreciation, amortization, impairment losses, and impairment loss reversals rose by 15.1% to €457 million in the first half of 2022 (previous year: €397 million), of which €402 million (previous year: €370 million) was attributable to property, plant and equipment and €55 million (previous year: €27 million) to intangible assets. The Covestro Group’s EBIT was down 23.0% to €896 million in the first half of 2022 (previous year: €1,163 million). Taking into account a financial result of €–72 million (previous year: €–47 million), income before income taxes declined to €824 million compared with the prior-year period (previous year: €1,116 million). After deduction of the tax expense of €209 million for the first half of 2022 (previous year: €271 million), income after taxes totaled €615 million (previous year: €845 million). After noncontrolling interests, net income amounted to €615 million (previous year: €842 million). In the first half of 2022, earnings per share decreased to €3.20 (previous year: €4.36). 13 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Financial Position Covestro Group summary statement of cash flows 2nd quarter 2021 2nd quarter 2022 1st half 2021 1st half 2022 € million € million € million € million EBITDA 817 547 1,560 1,353 Income taxes paid (126) (262) (176) (360) Change in pension provisions 12 10 21 12 (Gains)/losses on retirements of noncurrent assets (8) – (8) – Change in working capital/other noncash items (142) (567) (416) (1,120) Cash flows from operating activities 553 (272) 981 (115) Cash outflows for additions to property, plant, equipment and intangible assets (179) (190) (289) (330) Free operating cash flow 374 (462) 692 (445) Cash flows from investing activities (1,472) 233 (1,145) 154 Cash flows from financing activities (341) (276) (395) (381) Change in cash and cash equivalents due to business activities (1,260) (315) (559) (342) Cash and cash equivalents at beginning of period 2,106 623 1,404 649 Change in cash and cash equivalents due to exchange rate movements 10 7 11 8 Cash and cash equivalents at end of period 856 315 856 315 Cash Flows from Operating Activities/ Free Operating Cash Flow In the second quarter of 2022, net cash outflows from the Covestro Group’s operating activities amounted to €272 million (previous year: net cash inflows of €553 million). The key drivers of this development were higher funds tied up in working capital, due especially to the payment of short-term variable compensation for fiscal 2021 in April 2022, as well as a decline in EBITDA and a rise in income tax payments. After deduction of cash outflows of €190 million for additions to property, plant, equipment and intangible assets (previous year: €179 million), free operating cash flow totaled €–462 million (previous year: €374 million). Cash flows from operating activities in the first half of 2022 accounted for net outflows of €115 million (previous year: cash inflows of €981 million). This was mainly due to an increase in funds tied up in working capital, lower EBITDA, and higher income tax payments. After deduction of cash outflows of €330 million for additions to property, plant, equipment and intangible assets (previous year: €289 million), free operating cash flow totaled €–445 million (previous year: €692 million). Cash Flows from Investing Activities In the second quarter of 2022, net cash provided by investing activities totaled €233 million (previous year: cash outflow of €1,472 million), mainly as a result of net proceeds of short-term bank deposits maturing, amounting to €420 million. This was set against cash outflows of €190 million for additions to property, plant, equipment and intangible assets (previous year: €179 million). The cash outflows in the prior-year period arose primarily from the net purchase price payments of €1,469 million for the acquisition of the RFM business. In the first half of 2022, the net cash inflow from investing activities totaled €154 million (previous year: cash outflow of €1,145 million). This was attributable to net proceeds of short-term bank deposits maturing in an amount of €374 million, and cash inflows of €65 million from the net sale of money market fund units. Cash outflows of €330 million for additions to property, plant, equipment and intangible assets (previous year: €289 million) had an offsetting effect. Here, the cash outflows in the prior-year period were also mainly attributable to the net purchase price payments for the acquisition of the RFM business. 14 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Cash Flows from Financing Activities In the second quarter of 2022, the Covestro Group’s net cash outflow for financing activities totaled €276 million (previous year: €341 million), mainly due to dividend payments of €653 million. Of this amount, €651 million was attributable to Covestro AG shareholders. In addition, the share buyback program in the second quarter of 2022 led to cash outflows of €102 million. This was set against the proceeds of borrowing amounting to €565 million. See “Share Buyback Program.” In the first half of 2022, financing activities gave rise to a cash outflow of €381 million (previous year: €395 million). This was driven to a significant extent by the above-mentioned dividend payments of €653 million and the share buyback program, which accounted for €150 million. This was set against the proceeds of borrowing, which brought cash inflows of €579 million. Net financial debt Dec. 31, 2021 June 30, 2022 € million € million Bonds 1,492 1,493 Liabilities to banks 275 840 Lease liabilities 761 772 Liabilities from derivatives 11 53 Other financial liabilities 2 1 Receivables from derivatives (34) (46) Financial debt 2,507 3,113 Cash and cash equivalents (649) (315) Current financial assets (453) (14) Net financial debt 1,405 2,784 Financial debt amounted to €3,113 million on June 30, 2022, an increase of €606 million compared with December 31, 2021, due in particular to the €565 million increase in liabilities to banks. Cash and cash equivalents decreased in comparison with the figure on December 31, 2021, by €334 million to €315 million. This was mainly attributable to dividend payments of €653 million and cash outflows of €330 million for additions to property, plant, equipment and intangible assets. Cash and cash equivalents also decreased because of the purchase of treasury shares worth €150 million in connection with the share buyback program and because of cash outflows of €115 million for operating activities. In contrast, cash inflows from an increase in liabilities to banks, net proceeds of short-term bank deposits maturing (€374 million), and the net sale of money market fund units (€65 million) increased cash and cash equivalents. Net proceeds of short-term bank deposits maturing and the net sale of money market fund units led to a decrease in current financial assets, which were down €439 million to €14 million. In comparison with December 31, 2021, the Covestro Group’s net financial debt increased by €1,379 million to €2,784 million as of June 30, 2022. 15 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Net Assets Covestro Group summary statement of financial position Dec. 31, 2021 June 30, 2022 € million € million Noncurrent assets 8,610 8,693 Current assets 6,961 7,429 Total assets 15,571 16,122 Equity 7,762 8,494 Noncurrent liabilities 4,203 3,488 Current liabilities 3,606 4,140 Liabilities 7,809 7,628 Total equity and liabilities 15,571 16,122 Total assets were up €551 million as compared with December 31, 2021, to €16,122 million as of June 30, 2022. Noncurrent assets increased by €83 million to €8,693 million (December 31, 2021: €8,610 million). Current assets were up €468 million to €7,429 million (December 31, 2021: €6,961 million). This change can be attributed to a rise in inventories and trade accounts receivable as a result of higher raw material and selling prices. The main factors with an offsetting effect were the decrease in current financial assets and in cash and cash equivalents. Equity grew to €8,494 million, increasing by €732 million as compared with December 31, 2021. The increase in equity is primarily due to actuarial gains on the remeasurement of pension obligations, income after income taxes for the first half of 2022, and positive foreign exchange differences. The dividend distribution for fiscal 2021 had the opposite effect. Noncurrent liabilities were down €715 million to €3,488 million as of June 30, 2022 (December 31, 2021: €4,203 million). This stemmed principally from the decline in provisions for pensions and other post-employment benefits, which dropped by €726 million to €473 million (December 31, 2021: €1,199 million). Net defined benefit liability for post-employment benefits Dec. 31, 2021 June 30, 2022 € million € million Provisions for pensions and other post-employment benefits 1,199 473 Net defined benefit asset (4) (164) Net defined benefit liability for post-employment benefits 1,195 309 The net defined benefit liability for post-employment benefits (pension obligations less plan assets) was down by €886 million in the reporting year to €309 million (previous year: €1,195 million). This was due to the increase in the discount rate in Germany and the United States. Current liabilities were also up €534 million to €4,140 million as of the reporting date (December 31, 2021: €3,606 million). The main factors driving this development were the rise in current financial liabilities and in trade accounts payable; this contrasts with a reduction in other provisions as compared with December 31, 2021. 16 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Performance of the Segments Performance Materials 1 Performance Materials key data 2nd quarter 2021 2nd quarter 2022 Change 1st half 2021 1st half 2022 Change € million € million % € million € million % Sales (external) 1,957 2,461 25.8 3,697 4,849 31.2 Intersegment sales 468 524 12.0 951 1,181 24.2 Sales (total) 2,425 2,985 23.1 4,648 6,030 29.7 Change in sales (external) Volume 19.5% 1.6% 7.1% 3.5% Price 71.2% 17.5% 49.5% 21.7% Currency –5.2% 6.7% –5.0% 6.0% Portfolio 0.0% 0.0% 0.0% 0.0% Sales by region (external) EMLA 955 1,255 31.4 1,845 2,397 29.9 NA 445 625 40.4 779 1,229 57.8 APAC 2 EBITDA 2 EBIT 557 644 502 581 367 204 4.3 –43.0 –59.4 1,073 1,274 991 1,223 987 679 14.0 –22.5 –31.5 Cash flows from operating activities 498 95 –80.9 835 301 –64.0 Cash outflows for additions to property, plant, equipment and intangible assets 125 132 5.6 203 226 11.3 Free operating cash flow 373 (37) . 632 75 –88.1 1 Reference information calculated based on the organizational and reporting structure as of July 1, 2021. 2 EBITDA and EBIT include the effect on earnings of intersegment sales. Second Quarter of 2022 The Performance Materials segment’s sales increased compared with the prior-year quarter, rising 25.8% to €2,461 million (previous year: €1,957 million). This was mainly driven by a higher selling price level, which helped raise sales by 17.5%. At the same time, exchange rate movements and an increase in total volumes sold each had a positive impact, increasing sales by 6.7% and 1.6% respectively. The logistical bottlenecks in China in the second quarter of 2022 limited the segment’s further growth, particularly in the APAC region. In the EMLA region, sales were up 31.4% to €1,255 million (previous year: €955 million). Higher average selling prices increased sales substantially. At the same time, an increase in total volumes sold as well as exchange rate movements each had a slightly positive impact on sales. In the NA region, sales expanded by 40.4% to €625 million (previous year: €445 million), driven primarily by a higher selling price level, which led to a sharp increase in sales. Exchange rate movements drove sales up significantly and the increase in volumes sold led sales slightly higher. Sales in the APAC region were up 4.3% to €581 million (previous year: €557 million). Exchange rate movements contributed considerably to higher sales, while an increase in average selling prices had a slightly positive effect on sales. However, the change in volumes sold reduced sales significantly. In the second quarter of 2022, the Performance Materials segment’s EBITDA was down 43.0% on the prior-year quarter, declining to €367 million (previous year: €644 million). This was attributable in particular to lower margins, as higher selling prices were outweighed by the rise in raw material and energy prices. In contrast, earnings were boosted by lower provisions for short-term variable compensation and exchange rate movements. The trend in volumes sold had no notable effect on earnings. EBIT declined 59.4% to €204 million (previous year: €502 million). Free operating cash flow declined to €–37 million (previous year: €373 million). This is predominantly due to the decline in EBITDA and an increase in funds tied up in working capital. 17 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Performance Materials Performance Materials Quarterly Sales Quarterly EBITDA € million € million First Half of 2022 Segment sales in the first half of 2022 rose by 31.2% to €4,849 million (previous year: €3,697 million), mainly driven by a rise in average selling prices, which helped raise sales by 21.7%. Exchange rate movements and an increase in volumes sold each had a positive impact, increasing sales by 6.0% and 3.5% respectively. EBITDA was down 22.5% to €987 million in the first half of 2022 (previous year: €1,274 million). This was mainly attributable to a decline in margins, with higher selling prices partially offsetting increased raw material and energy prices. In contrast, lower provisions for short-term variable compensation, exchange rate movements, and an increase in volumes sold had a positive effect on earnings. EBIT declined 31.5% to €679 million (previous year: €991 million). Free operating cash flow decreased 88.1% to €75 million (previous year: €632 million), driven mainly by lower EBITDA and higher funds tied up in working capital. 18 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Solutions & Specialties 1 Solutions & Specialties key data 2nd quarter 2021 2nd quarter 2022 Change 1st half 2021 1st half 2022 Change € million € million % € million € million % Sales (external) 1,951 2,165 11.0 3,480 4,387 26.1 Intersegment sales 6 8 33.3 11 17 54.5 Sales (total) 1,957 2,173 11.0 3,491 4,404 26.2 Change in sales (external) Volume 39.1% –7.3% 23.3% –4.4% Price 22.4% 11.8% 14.4% 15.2% Currency –5.8% 6.5% –5.3% 6.3% Portfolio 28.4% 0.0% 12.5% 9.0% Sales by region (external) EMLA 772 851 10.2 1,355 1,724 27.2 NA 392 563 43.6 700 1,064 52.0 APAC 2 EBITDA 2 EBIT 787 237 170 751 213 139 –4.6 –10.1 –18.2 1,425 418 308 1,599 437 291 12.2 4.5 –5.5 Cash flows from operating activities 82 (83) . 125 (184) . Cash outflows for additions to property, plant, equipment and intangible assets 53 56 5.7 85 101 18.8 Free operating cash flow 29 (139) . 40 (285) . 1 Reference information calculated based on the organizational and reporting structure as of July 1, 2021. 2 EBITDA and EBIT include the effect on earnings of intersegment sales. Second Quarter of 2022 Sales in the Solutions & Specialties segment were up 11.0% to €2,165 million in the second quarter of 2022 (previous year: €1,951 million). A rise in the selling price level and exchange rate movements, impacted positively on sales, increasing them by 11.8% and 6.5% respectively. This was offset by a decline in volumes sold, which had the effect of decreasing sales by 7.3%. The drivers of this development include, e.g., the lockdown in Shanghai (China) in the second quarter of 2022 and the Russian war against Ukraine, which led, among other things, to logistical bottlenecks, especially in the EMLA and APAC regions. In the EMLA region, sales were up 10.2% to €851 million (previous year: €772 million). A rise in the selling price level increased sales significantly. A decline in volumes sold, in contrast, resulted in a considerable decrease in sales. On aggregate, exchange rate changes did not have any notable effect on sales. Sales in the NA region were up 43.6% to €563 million (previous year: €392 million). Changes in exchange rates, higher average selling prices, and growth in the volumes sold each had the effect of driving up sales considerably. In the APAC region, sales were down 4.6% to €751 million (previous year: €787 million). The key driver here was a decline in volumes sold, which led to significantly lower sales. In contrast, exchange rate movements contributed considerably to higher sales, while a higher selling price level had a slightly positive impact on sales. In the second quarter of 2022, the Solutions & Specialties segment’s EBITDA was down 10.1% on the prior-year quarter, declining to €213 million (previous year: €237 million). This was mainly caused by a decline in volumes sold and lower margins, with higher selling prices partially offsetting increased raw material and energy prices. However, lower provisions for short-term variable compensation and exchange rate movements both had a positive impact on earnings. EBIT fell 18.2% to €139 million (previous year: €170 million). Free operating cash flow was down, amounting to €–139 million (previous year: €29 million), largely due to higher funds tied up in working capital. 19 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Solutions & Specialties Solutions & Specialties Quarterly Sales Quarterly EBITDA € million € million First Half of 2022 In the first half of 2022, sales in the Solutions & Specialties segment rose by 26.1% to €4,387 million (previous year: €3,480 million). A rise in average selling prices had a positive effect, increasing sales by 15.2%. The portfolio effect arising from the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands), in the second quarter of 2021 as well as exchange rate movements drove up sales by 9.0% and 6.3% respectively. A decline in volumes sold had a decreasing effect on sales amounting to 4.4%. EBITDA in the Solutions & Specialties segment increased 4.5% over the prior-year period in the first half of 2022, growing to €437 million in the first half of 2022 (previous year: €418 million). This is mainly attributable to a decline in provisions for short-term variable compensation, exchange rate movements, and the RFM acquisition. It was set against a drop in volumes sold, which had a negative effect on earnings. Lower margins reduced earnings, although a rise in the selling price level partially offset higher raw material and energy prices. EBIT declined 5.5% to €291 million (previous year: €308 million). Free operating cash flow amounted to €–285 million (previous year: €40 million), driven primarily by a year-on-year increase in funds tied up in working capital. Increased cash outflows for additions to property, plant, equipment and intangible assets also had a negative effect. 20 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION REPORT ON FUTURE PERSPECTIVES AND ON OPPORTUNITIES AND RISKS Economic Outlook Global Economy The Russian war against Ukraine has fundamentally changed the geopolitical landscape and has had an extensive impact on the global economy. We anticipate additional consequences for global supply chains as a result of this conflict, along with a high level of raw material and energy prices, higher inflation, and weaker global economic growth compared with the outlook we published in the Annual Report 2021. Moreover, the possibility of another reduction in gas supplies from Russia to Europe poses an additional risk. Increases in key interest rates by a number of central banks are further exacerbating the risk of recession. In addition, the zero-COVID strategy in China and the resulting lockdowns put the brakes on global economic performance in the first half of 2022. Existing and possible future tight restrictions in China in reaction to the spread of the coronavirus hold risks for the entire global economy. Compared to the outlook we published in the Annual Report 2021, we still anticipate slight growth in the global economy, but now with a less robust increase in economic performance of 2.6%. Due to the aforementioned effects, the estimates were reduced for all three regions for the reporting year. Economic growth 1 Growth 2021 Growth forecast 2022 (Annual Report 2021) Growth forecast 2022 % % % World 5.8 4.2 2.6 Europe, Middle East, Latin America 2 , Africa (EMLA) 5.5 3.7 2.0 of which Europe 5.5 3.7 1.2 of which Germany 2.9 3.8 1.7 of which Middle East 5.2 4.9 5.0 2 of which Latin America 6.9 2.3 2.5 of which Africa 4.4 3.3 3.3 North America 3 (NA) 5.5 4.0 1.6 of which United States 5.7 4.1 1.4 Asia-Pacific (APAC) 6.2 4.8 4.0 of which China 8.1 5.4 4.0 1 Real growth of gross domestic product; source: IHS (Global Insight), “Growth 2021” and “Growth forecast 2022” as of July 2022. 2 Latin America (excluding Mexico). 3 North America (Canada, Mexico, United States). 21 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Main Customer Industries In all main customer industries, we continue to forecast positive growth for the year 2022. Growth in the automotive industry is projected to remain strongly positive but, at 6.0%, below the outlook presented in the Annual Report 2021. The growth rates expected for the furniture and construction industries as well as for the electrical, electronics, and household appliances industry have also been reduced. 1 Growth in main customer industries Growth 2021 Growth forecast 2022 (Annual Report 2021) Growth forecast 2022 % % % Automotive 2.9 12.5 6.0 Construction 3.1 3.6 2.6 Electrical, electronics and household appliances 12.2 4.5 2.7 Furniture 8.0 3.7 2.6 1 Covestro’s estimate, based on the following sources: LMC Automotive Limited (published on July 4, 2022), B+L (published on May 16, 2022), CSIL (Centre for Industrial Studies) (published on May 16, 2022), Oxford Economics (published on June 17, 2022). We limited the economic data of our “automotive and transportation” and “furniture and wood processing” main customer industries to the automotive and furniture segments (excluding the transportation or wood processing segments). As of: July 2022. 22 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Forecast for the Covestro Group The analysis of the development of our key management indicators is based on the business performance described in this Half-Year Financial Report and consideration of our potential risks and opportunities. Our forecast does not include the potential effects of a supply bottleneck as the result of a considerable disruption to Russian natural gas deliveries. On July 29, 2022, Covestro adjusted the forecast for fiscal 2022 in response to another significant increase in energy costs and continued weakening of the global economy. We now expect the following developments in our key management indicators: Forecast key management indicators 2021 Forecast 2022 (Annual Report 2021) Previous forecast 2022 (May 2, 2022) Adjusted forecast 2022 (July 29, 2022) 1 EBITDA €3,085 million Between €2,500 million and €3,000 million Between €2,000 million and €2,500 million Between €1,700 million and €2,200 million 2 Free operating cash flow €1,429 million Between €1,000 million and €1,500 million Between €400 million and €900 million Between €0 million and €500 million 3 ROCE 4 above WACC 12.9% points Between 5% points and 9% points Between 1% point and 5% points Between –2% points and 2% points Greenhouse gas emissions (CO2 equivalents) 5 5.2 million metric tons Between 5.6 million metric tons and 6.1 million metric tons Between 5.5 million metric tons and 6.0 million metric tons Between 5.3 million metric tons and 5.8 million metric tons 1 Earnings before interest, taxes, depreciation and amortization (EBITDA): EBIT plus depreciation, amortization, and impairment losses; less impairment loss reversals on intangible assets and property, plant and equipment. 2 Free operating cash flow (FOCF): cash flows from operating activities less cash outflows for additions to property, plant, equipment and intangible assets. 3 Return on capital employed (ROCE): ratio of the adjusted operating result (EBIT) after imputed income taxes to capital employed. 4 Weighted average cost of capital (WACC): weighted average cost of capital reflecting the expected return on the company’s equity and debt capital. A figure of 7.0% has been taken into account for the year 2022 (2021: 6.6%). 5 Greenhouse gas (GHG) emissions (Scope 1 and 2, GHG Protocol) at main production sites (responsible for more than 95% of our energy usage). For the Covestro Group’s EBITDA, we now forecast a figure between €1,700 million and €2,200 million (previously: between €2,000 million and €2,500 million). The Performance Materials segment’s EBITDA is still expected to be significantly down on the prior-year amount. In the Solutions & Specialties segment, however, we project an EBITDA slightly above the prior-year figure (previously: well above the prior-year figure). The Covestro Group’s FOCF is now forecast to total between €0 million and €500 million (previously: between €400 million and €900 million). For the Performance Materials segment, we still expect FOCF to fall significantly short of the figure for the year 2021. For the Solutions & Specialties segment, we are now also forecasting FOCF to be considerably below the prior-year figure (previously: FOCF well above the prior-year figure). We now forecast ROCE above WACC of between –2% points and 2% points (previously: between 1% point and 5% points). The Covestro Group’s GHG emissions measured as CO2 equivalents are now projected to be between 5.3 million and 5.8 million metric tons (previously: between 5.5 million and 6.0 million metric tons). 23 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Opportunities and Risks As a company with global operations and a diversified portfolio, the Covestro Group is subject to a number of opportunities and risks. Opportunity and risk management at Covestro is an integral part of the Group’s corporate governance system. See the “Opportunities and Risks Report” in the Combined Management Report in the Annual Report 2021 for a detailed explanation of our opportunity and risk management system and opportunity and risk situation. Changes in the Risk Situation Geopolitical risks increased considerably in the first half of 2022, especially as a result of the Russian war against Ukraine. This means that the continued supply of natural gas to Europe is subject to major uncertainty. In contrast to the presentation in the Annual Report 2021, we have identified another material individual risk for Covestro in the production/value chain risk category. If supplies of natural gas from Russia were to become significantly scarce or halt entirely, this could, depending on the duration, necessitate the closure of certain of Covestro’s production facilities, or of entire plants or product lines in Germany. This could in turn result in production outages of certain chemical precursors, intermediates, and by-products that are needed at other sites in the EMLA region. Several teams of experts in the company are monitoring the current situation closely, studying the consequences of the war in detail, and working on mitigation plans. The potential losses are being analyzed continually; and these analyses are integrated into existing processes to also monitor factors such as risk bearing capacity. As a result of the assessment of the aforementioned risks as well as with regard to the Covestro Group’s other opportunity or risk factors, no material changes have been made to the presentation of risk categories in the Annual Report 2021. At the time this Half-Year Financial Report was prepared, there were again no risks that could endanger the Group’s continued existence. No new material developments have occurred in the legal proceedings presented in the Annual Report 2021, and no new material legal proceedings are pending. See note 26 “Legal Risks” in the Notes to the 2021 Consolidated Financial Statements for additional information. 24 CONSOLIDATED INTERIM FINANCIAL STATEMENTS Covestro Group Consolidated Income Statement 26 Covestro Group Consolidated Statement of Comprehensive Income 27 Covestro Group Consolidated Statement of Financial Position 28 Covestro Group Consolidated Statement of Cash Flows 29 Covestro Group Consolidated Statement of Changes in Equity 30 Notes to the Consolidated Interim Financial Statements 31 1. General Information 31 2. Effects of New Financial Reporting Standards 32 2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period 32 2.2 Financial Reporting Standards That Have Not Yet Been Applied 32 3. Segment and Regional Reporting 33 4. Scope of Consolidation 37 4.1 Changes in the Scope of Consolidation 37 4.2 Acquisitions and Divestitures 37 5. Sales 38 6. Earnings per Share 38 7. Employees and Pension Obligations 39 8. Financial Instruments 40 9. Legal Risks 45 10. Related Parties 45 11. Events after the End of the Reporting Period 46 25 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED INCOME STATEMENT 2nd quarter 2021 2nd quarter 2022 1st half 2021 1st half 2022 € million € million € million € million Sales 3,956 4,703 7,263 9,386 Cost of goods sold (2,813) (3,783) (5,074) (7,280) Gross profit 1,143 920 2,189 2,106 Selling expenses (357) (409) (670) (797) Research and development expenses (87) (96) (160) (190) General administration expenses (105) (96) (203) (189) Other operating income 40 16 52 34 Other operating expenses (27) (28) (45) (68) 1 EBIT 607 307 1,163 896 Equity-method loss (4) (6) (7) (10) Result from other affiliated companies – – 1 – Interest income 9 22 15 37 Interest expense (22) (34) (41) (57) Other financial result (1) (26) (15) (42) Financial result (18) (44) (47) (72) Income before income taxes 589 263 1,116 824 Income taxes (139) (65) (271) (209) Income after income taxes 450 198 845 615 of which attributable to noncontrolling interest 1 (1) 3 – of which attributable to Covestro AG shareholders (net income) 449 199 842 615 € € € € Basic earnings per share 2 2.32 1.04 4.36 3.20 Diluted earnings per share 2 2.32 1.04 4.36 3.20 1 EBIT: income after income taxes plus financial result and income taxes 2 Earnings per share: According to IAS 33 (Earnings per Share) corresponds to net income divided by the weighted average number of outstanding no-par voting shares of Covestro AG. The calculation was based on 191,070, 836 no-par shares for the second quarter of 2022 (previous year: 193,160,544 no-par shares) and on 192,101,348 no-par shares for the first half of 2022 (previous year: 193,160,544). 26 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2nd quarter 2021 2nd quarter 2022 1st half 2021 1st half 2022 € million € million € million € million Income after income taxes 450 198 845 615 Remeasurements of the net defined benefit liability for post-employment benefit plans 113 551 484 926 Income taxes (46) (161) (154) (268) Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans 67 390 330 658 Changes in fair values of equity instruments – – – (1) Income taxes – – – – Other comprehensive income from equity instruments – – – (1) Other comprehensive income that will not be reclassified subsequently to profit or loss 67 390 330 657 Exchange differences of foreign operations (30) 160 100 266 Reclassified to profit or loss – – – – Other comprehensive income from exchange differences (30) 160 100 266 Other comprehensive income that may be reclassified subsequently to profit or loss (30) 160 100 266 Total other comprehensive income 37 550 430 923 of which attributable to noncontrolling interest – (1) – (2) of which attributable to Covestro AG shareholders 37 551 430 925 Total comprehensive income 487 748 1,275 1,538 of which attributable to noncontrolling interest 1 (2) 3 (2) of which attributable to Covestro AG shareholders 486 750 1,272 1,540 27 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2021 June 30, 2022 Dec. 31, 2021 € million € million € million Noncurrent assets Goodwill 739 753 757 Other intangible assets 716 692 706 Property, plant and equipment 5,747 6,171 6,032 Investments accounted for using the equity method 169 181 172 Other financial assets 31 45 49 Other receivables 88 247 76 Deferred taxes 736 604 818 8,226 8,693 8,610 Current assets Inventories 2,363 3,673 2,914 Trade accounts receivable 2,266 2,771 2,343 Other financial assets 561 67 493 Other receivables 335 456 434 Claims for income tax refunds 93 147 128 Cash and cash equivalents 856 315 649 Assets held for sale 59 – – 6,533 7,429 6,961 Total assets 14,759 16,122 15,571 Equity Capital stock of Covestro AG 193 190 193 Capital reserves of Covestro AG 3,925 3,780 3,927 Other reserves 2,510 4,473 3,576 Equity attributable to Covestro AG shareholders 6,628 8,443 7,696 Equity attributable to noncontrolling interest 73 51 66 6,701 8,494 7,762 Noncurrent liabilities Provisions for pensions and other post-employment benefits 1,692 473 1,199 Other provisions 211 196 223 Financial liabilities 2,351 2,353 2,349 Income tax liabilities 103 113 98 Other liabilities 31 29 34 Deferred taxes 256 324 300 4,644 3,488 4,203 Current liabilities Other provisions 407 338 637 Financial liabilities 644 806 192 Trade accounts payable 1,846 2,560 2,214 Income tax liabilities 223 128 239 Other liabilities 280 308 324 Liabilities directly related to assets held for sale 14 – – 3,414 4,140 3,606 Total equity and liabilities 14,759 16,122 15,571 28 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CASH FLOWS 2nd quarter 2021 2nd quarter 2022 1st half 2021 1st half 2022 € million € million € million € million Income after income taxes 450 198 845 615 Income taxes 139 65 271 209 Financial result 18 44 47 72 Income taxes paid (126) (262) (176) (360) Depreciation, amortization and impairment losses and impairment loss reversals 210 240 397 457 Change in pension provisions 12 10 21 12 (Gains)/losses on retirements of noncurrent assets (8) – (8) – Decrease/(increase) in inventories (298) (341) (528) (651) Decrease/(increase) in trade accounts receivable (191) (23) (446) (335) (Decrease)/increase in trade accounts payable 255 296 394 291 Changes in other working capital, other noncash items 92 (499) 164 (425) Cash flows from operating activities 553 (272) 981 (115) Cash outflows for additions to property, plant, equipment and intangible assets (179) (190) (289) (330) Cash inflows from sales of property, plant, equipment and other assets 10 2 10 3 Cash inflows from divestments less divested cash – 5 – 6 Cash outflows for noncurrent financial assets (22) (5) (22) (7) Cash inflows from noncurrent financial assets 2 – 2 1 Cash outflows for acquisitions less acquired cash (1,469) – (1,469) – Interest and dividends received 11 19 17 33 Cash inflows from other current financial assets 175 402 606 448 Cash flows from investing activities (1,472) 233 (1,145) 154 Reacquisition of treasury shares – (102) – (150) Dividend payments and withholding tax on dividends (257) (653) (257) (653) Issuances of debt 1 565 2 579 Retirements of debt (63) (52) (98) (90) Interest paid (22) (34) (42) (63) Cash outflows for the purchase of additional interests in subsidiaries – – – (4) Cash flows from financing activities (341) (276) (395) (381) Change in cash and cash equivalents due to business activities (1,260) (315) (559) (342) Cash and cash equivalents at beginning of period 2,106 623 1,404 649 Change in cash and cash equivalents due to exchange rate movements 10 7 11 8 Cash and cash equivalents at end of period 856 315 856 315 29 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Capital stock of Covestro AG Capital reserves of Covestro AG Retained earnings incl. total income Accumulated other com- prehensive income Equity attributable to Covestro AG shareholders Equity attributable to non- controlling interest € million € million € million € million € million € million Dec. 31, 2020 193 3,925 1,280 209 5,607 37 Dividend payments (251) (251) (6) Other changes 1 – – – – – 39 Income after income taxes 842 842 3 Other comprehensive income 330 100 430 – Total comprehensive income 1,172 100 1,272 3 June 30, 2021 193 3,925 2,201 309 6,628 73 of which treasury shares – (2) (2) Dec. 31, 2021 193 3,927 3,002 574 7,696 66 Reacquisition of treasury shares (3) (147) (150) Dividend payments (651) (651) (2) Other changes 2 8 8 (11) Income after income taxes 615 615 – Other comprehensive income 657 268 925 (2) Total comprehensive income 1,272 268 1,540 (2) June 30, 2022 190 3,780 3,631 842 8,443 51 of which treasury shares (3) (147) (150) 1 Other changes in fiscal 2021 in noncontrolling interests result from the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands), see note 5.2 “Acquisitions and Divestitures” in the Annual Report 2021. 2 Other changes in 2022 shareholders mainly include the acquisition of the remaining 30% of shares in Japan Fine Coatings Co. Ltd., Ibaraki (Japan). 30 1,275 1,538 Equity € million 5,644 (257) 39 845 430 6,701 (2) 7,762 (150) (653) (3) 615 923 8,494 (150) Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. General Information Information on the Consolidated Interim Financial Statements Pursuant to Section 115, Paragraph 3 of the German Securities Trading Act (WpHG), the consolidated interim financial statements of Covestro AG, Leverkusen (Germany), as of June 30, 2022, have been prepared in accordance with the International Financial Reporting Standards (IFRSs) — including IAS 34 (Interim Financial Reporting) — of the International Accounting Standards Board (IASB), London (United Kingdom), the Interpretations (IFRICs) of the IFRS Interpretations Committee (IFRS IC), and the interpretations published by the Standing Interpretations Committee (SIC), endorsed by the European Union and in effect at the reporting date. The accounting policies and measurement principles described in the consolidated financial statements as of December 31, 2021, were applied unchanged in preparing the consolidated interim financial statements as of June 30, 2022, subject to the effects of financial reporting standards adopted for the first time in the current fiscal year as described in note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” The consolidated interim financial statements are drawn up in euros. Amounts are stated in millions of euros (€ million) unless otherwise noted. The Board of Management approved the Condensed Interim Consolidated Financial Statements for publication on August 1, 2022. The Interim Consolidated Financial Statements were subjected to a review by the group auditor. Exchange Rates In the reporting period, the following exchange rates were used for the major currencies of relevance to the Covestro Group: Closing rates for major currencies Average rates for major currencies Closing rates Average rates €1/ June 30, 2021 Dec. 31, 2021 June 30, 2022 €1/ 1st half 2021 1st half 2022 BRL Brazil 5.91 6.31 5.42 BRL Brazil 6.49 5.53 CNY China 7.68 7.20 6.97 CNY China 7.80 7.09 HKD Hong Kong 1 9.23 8.83 8.15 HKD Hong Kong 1 9.35 8.55 INR India 88.32 84.23 82.11 INR India 88.38 83.31 JPY Japan 131.43 130.38 141.54 JPY Japan 129.76 134.10 MXN Mexico 23.58 23.14 20.96 MXN Mexico 24.32 22.14 USD United States 1.19 1.13 1.04 USD United States 1.21 1.09 1 Special Administration Region (China) 31 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 2. Effects of New Financial Reporting Standards 2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period IFRS pronouncement (published on) Title Effective for annual periods beginning on or after Amendments to IFRS 3 (May 14, 2020) Reference to the Conceptual Framework January 1, 2022 Amendments to IAS 16 (May 14, 2020) Property, Plant and Equipment – Proceeds before Intended Use January 1, 2022 Amendments to IAS 37 (May 14, 2020) Onerous Contracts – Cost of Fulfilling a Contract January 1, 2022 Annual Improvements to IFRSs (May 14, 2020) 2018–2020 Cycle January 1, 2022 Initial application of the standards listed in the table had little or no material impact on the presentation of the net assets, financial position and results of operations. 2.2 Published Financial Reporting Standards That Have Not Yet Been Applied There were no new findings regarding the potential effects of reporting standards newly published up to the authorization for issue of the financial statements, but not yet required to be applied, whose application could affect the presentation of the net assets, financial position and results of operations that differ from the information presented in the 2021 consolidated financial statements. 32 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 3. Segment and Regional Reporting The Board of Management of Covestro AG, as the chief operating decision maker of the Covestro Group, allocates resources to the reportable segments and assesses their performance. The reportable segments are identified, and the disclosures selected, in line with the internal management and reporting system (management approach). The segments pursue the following activities: Performance Materials The Performance Materials segment focuses on developing, producing, and reliably supplying high-performance materials such as standard polyurethanes and polycarbonates, as well as base chemicals. These include diphenylmethane diisocyanate (MDI), toluene diisocyanate (TDI), long-chain polyols, and polycarbonate resins. Those materials are used in sectors such as the furniture and wood processing industry, the construction industry as well as the automotive and transportation industry. These materials are used in roof structures, insulation for buildings and refrigerators, mattresses, and car seats, among other applications. Solutions & Specialties The Solutions & Specialties segment consolidates Covestro’s solutions and specialties businesses, and combines chemical products with application technology services. A fast pace of innovation is a key success factor since customer requirements change quickly. Covestro’s Solutions & Specialties business comprises a variety of polymer products including polycarbonates, precursors for coatings and adhesives, MDI specialties and polyols, thermoplastic polyurethanes, specialty films, and elastomers. They are used in sectors such as the automotive and transportation industry; the electrical, electronics and household appliances industry; the construction industry; and the healthcare industry. These materials include composite resins for wind turbine rotor blades; precursors for coatings and adhesives; laptop cases; floodlights; and high-quality specialty films. Business activities that cannot be allocated to any of the aforementioned segments, costs associated with central corporate functions, and higher or lower expenses resulting from more or less favorable Covestro share performance as part of long-term variable compensation are reported in “Others/Consolidation.” External sales are generated primarily from the sale of energy, site management services, and rentals and leasing. As a rule, the segment data is calculated in accordance with the International Financial Reporting Standards (IFRSs) listed in note 3 of the Annual Report 2021 “Accounting Policies and Valuation Principles” with the following specifics: Intersegment sales are based on arm’s length transactions between the units that make up Covestro’s segments. EBIT and EBITDA are not defined in the IFRSs. EBIT is equal to income after income taxes plus financial result and income taxes. EBITDA is EBIT plus amortization and impairment losses on intangible assets, and depreciation and impairment losses on property, plant and equipment, less impairment loss reversals. EBIT and EBITDA per segment include intersegment sales and, in each case, the effects of the allocation of property, plant and equipment and intangible assets, including noncurrent assets used jointly by both segments, and the associated depreciation, amortization, impairment losses, and impairment loss reversals. Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities and refund liabilities. 33 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following tables show the segment reporting data for the second quarter and for the first half year (as of June 30), respectively: 1 Segment reporting 2nd quarter Performance Materials Solutions & Specialties Others/ Consolidation Covestro Group € million € million € million € million 2nd quarter 2022 Sales (external) 2,461 2,165 77 4,703 Intersegment sales 524 8 (532) – Sales (total) 2,985 2,173 (455) 4,703 2 EBITDA 367 213 (33) 547 2 EBIT 204 139 (36) 307 2nd quarter 2021 Sales (external) 1,957 1,951 48 3,956 Intersegment sales 468 6 (474) – Sales (total) 2,425 1,957 (426) 3,956 2 EBITDA 644 237 (64) 817 2 EBIT 502 170 (65) 607 1 Reference information calculated based on the organizational and reporting structure as of July 1, 2021. 2 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect on earnings of intersegment sales. 1 Segment reporting 1st half Performance Materials Solutions & Specialties Others/ Consolidation Covestro Group € million € million € million € million 1st half 2022 Sales (external) 4,849 4,387 150 9,386 Intersegment sales 1,181 17 (1,198) – Sales (total) 6,030 4,404 (1,048) 9,386 2 EBITDA 987 437 (71) 1,353 2 EBIT 679 291 (74) 896 1st half 2021 Sales (external) 3,697 3,480 86 7,263 Intersegment sales 951 11 (962) – Sales (total) 4,648 3,491 (876) 7,263 2 EBITDA 1,274 418 (132) 1,560 2 EBIT 991 308 (136) 1,163 1 Reference information calculated based on the organizational and reporting structure as of July 1, 2021. 2 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect on earnings of intersegment sales. Covestro’s market capitalization fell below the carrying amount of the Group’s equity in the second quarter of 2022. As a consequence of this and due to a significant rise in the risk-free interest rate, the assumptions used for impairment testing of the cash generating units in fiscal 2021 were reviewed. With regard to the Standard Polyether Polyols (SPET) cash generating unit in the Performance Materials Segment, the impairment test conducted on the basis of the available planning data identified an impairment. As of June 30, 2022, the fair value less costs of disposal was determined using a cost of capital rate of 7.14%. The measurement methodology and growth assumptions are unchanged compared with the annual impairment test conducted in fiscal 2021. In accordance with IAS 36 (Impairment of Assets), impairment losses of €18 million were recognized in EBIT, including €16 million for goodwill previously recognized by SPET and €2 million for miscellaneous noncurrent assets of this cash generating unit. 34 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Trade working capital by segment Dec. 31, 2021 June 30, 2022 € million € million Performance Materials 1,392 1,831 Solutions & Specialties 1,560 2,010 Total of reportable segments 2,952 3,841 All other segments – (5) Corporate Center – – Trade working capital 2,952 3,836 of which inventories 2,914 3,673 of which trade accounts receivable 2,343 2,771 of which trade accounts payable (2,214) (2,560) of which IFRS 15 items 1 (91) (48) 1 The item includes contract assets, contract liabilities, and refund liabilities. Information on Geographical Areas The following tables show information by geographical area. The EMLA region consists of Europe, the Middle East, Latin America except Mexico, and Africa. Mexico forms together with the United States and Canada the NA region. The APAC region includes Asia and the Pacific region. The following tables show the regional reporting data for the second quarter and for the first half year: Regional reporting 2nd quarter EMLA NA APAC Total € million € million € million € million 2nd quarter 2022 Sales (external) by market 2,167 1,200 1,336 4,703 Sales (external) by point of origin 2,162 1,223 1,318 4,703 2nd quarter 2021 Sales (external) by market 1,765 844 1,347 3,956 Sales (external) by point of origin 1,785 851 1,320 3,956 Regional reporting 1st half EMLA NA APAC Total € million € million € million € million 1st half 2022 Sales (external) by market 4,241 2,316 2,829 9,386 Sales (external) by point of origin 4,252 2,352 2,782 9,386 1st half 2021 Sales (external) by market 3,267 1,493 2,503 7,263 Sales (external) by point of origin 3,273 1,515 2,475 7,263 35 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Reconciliation The following table shows the reconciliation of EBITDA of the segments to income before income taxes of the Group: Reconciliation of segments’ EBITDA to Group income before income taxes 2nd quarter 2021 2nd quarter 2022 1st half 2021 1st half 2022 € million € million € million € million EBITDA of segments 881 580 1,692 1,424 EBITDA of Others/Consolidation (64) (33) (132) (71) EBITDA 817 547 1,560 1,353 Depreciation, amortization and impairment losses of segments (209) (237) (393) (454) Depreciation, amortization and impairment losses of Others/Consolidation (1) (3) (4) (3) Depreciation, amortization and impairment losses (210) (240) (397) (457) EBIT of segments 672 343 1,299 970 EBIT of Others/Consolidation (65) (36) (136) (74) EBIT 607 307 1,163 896 Financial result (18) (44) (47) (72) Income before income taxes 589 263 1,116 824 36 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 4. Scope of Consolidation 4.1 Changes in the Scope of Consolidation As of June 30, 2022, the scope of consolidation comprised Covestro AG and 60 (December 31, 2021: 66) consolidated companies. Covestro Invest GmbH, Leverkusen (Germany), was consolidated for the first time effective April 1, 2022. This company was previously classified as an immaterial subsidiary. The purpose of Covestro Invest GmbH is to acquire, hold and manage the company’s investments, provide services for third parties, especially within the scope of intragroup management of investments, in each case insofar as these does not constitute activities requiring authorization under the German Banking Act (Kreditwesengesetz), and the assumption of personal liability and management functions for commercial partnerships. The decrease in the number of consolidated companies in the first half of 2022 is attributable to intragroup mergers of consolidated companies, which were transferred in connection with the acquisition of the Resins & Functional Materials (RFM) business from Koninklijke DSM N.V., Heerlen (Netherlands). As of June 1, 2022, Covestro Coating Resins B.V., Zwolle (Netherlands), Covestro Desotech B.V., Hoek van Holland (Netherlands), and Covestro Resins B.V., Zwolle (Netherlands) were merged into Covestro (Netherlands) B.V., Geleen (Netherlands), and Covestro Coating Resins, Inc., Wilmington, Massachusetts (USA), and Covestro Desotech Inc., Elgin, Illinois (USA), were merged into Covestro LLC, Pittsburgh, Pennsylvania (USA). In addition, Covestro Coating Resins Spain S.L., Barcelona (Spain) was merged into Covestro, S.L., Barcelona (Spain), while Covestro Resins (ROA) Ltd., Taipei City (Taiwan, Greater China), was merged into Covestro (Taiwan) Ltd., Kaohsiung City (Taiwan, Greater China). 4.2 Acquisitions and Divestitures No reportable acquisitions or divestitures were made in the first half of 2022. 37 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 5. Sales Sales are categorized according to “geographical regions and key countries” and mainly comprise sales from contracts with customers and an insignificant amount of rental and leasing sales. The table also contains a breakdown of sales by reportable segments. Disaggregation of sales Performance Materials Solutions & Specialties Others/ Consolidation Covestro Group € million € million € million € million 1st half 2022 EMLA 2,397 1,724 120 4,241 of which Germany 609 506 79 1,194 NA 1,229 1,064 23 2,316 of which United States 1,029 883 22 1,934 APAC 1,223 1,599 7 2,829 of which China 792 946 1 1,739 1 1st half 2021 EMLA 1,845 1,355 67 3,267 of which Germany 469 422 38 929 NA 779 700 14 1,493 of which United States 658 565 13 1,236 APAC 1,073 1,425 5 2,503 of which China 706 888 – 1,594 1 Reference information calculated based on the organizational and reporting structure as of July 1, 2021. 6. Earnings per Share Earnings per share are calculated according to IAS 33 (Earnings per Share) as the relationship of the Group’s income after income taxes (net income) for the income period to the weighted average number of outstanding no- par voting shares of Covestro AG. Since March 12, 2022, Covestro AG has purchased treasury shares under a 1 . In the first half of 2022, a weighted average number of outstanding no-par voting shares share buyback program of 192,101,348 was used to calculate earnings per share, while in the first half of 2021, these shares amounted to 193,160,544. There were no dilution effects to consider. See Covestro on the Capital Market, in the section entitled “Share Buyback Program” for further information on the share buyback program. Earnings per share 1st half 2021 1st half 2022 € million € million Income after income taxes 845 615 of which attributable to noncontrolling interest 3 – of which attributable to Covestro AG shareholders (net income) 842 615 Shares Shares Weighted average number of no-par voting shares of Covestro AG 193,160,544 192,101,348 € € Basic earnings per share 4.36 3.20 Diluted earnings per share 4.36 3.20 1 38 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 7. Employees and Pension Obligations As of June 30, 2022, the Covestro Group had 17,978 employees worldwide (December 31, 2021: 17,909). In the first half of 2022, personnel expenses decreased by €32 million to €1,114 million (previous year: €1,146 million), largely due to lower expenses for short-term variable compensation. Employees by division 1 Dec. 31, 2021 June 30, 2022 Production 11,618 11,751 Marketing and distribution 3,254 3,330 Research and development 1,477 1,457 General administration 1,560 1,440 Total 17,909 17,978 1 The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTEs). Part-time employees are included on a pro- rated basis in line with their contractual working hours. Employees in vocational training are not included. Provisions for pensions and other post-employment benefits decreased to €473 million (December 31, 2021: €1,199 million). This was mainly due to a reduction in the measurement of obligations as a result of significantly higher discount rates. The rise in projected future benefit increases in Germany to 1.9% (December 31, 2021: 1.8%) had an offsetting effect on the measurement of obligations. Discount rate for pension obligations Dec. 31, 2021 June 30, 2022 % % Germany 1.20 3.30 United States 2.60 4.30 39 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 8. Financial Instruments The following tables show the carrying amounts and fair values of financial assets and liabilities based on IFRS 9: Carrying amounts of financial instruments and their fair values as of June 30, 2022 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehen- sive income Fair value recognized in profit or loss Measure- ment according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 2,771 2,771 – – 2,771 Other financial assets 112 Money market funds – – – – – Loans and bank deposits 27 17 – 10 27 Other investments 26 26 – 26 Receivables under lease agreements 8 8 18 Derivatives that do not qualify for hedge accounting 51 51 51 Other receivables 1 24 24 – – 24 Cash and cash equivalents 315 315 – – 315 Financial liabilities Financial debts 3,159 Bonds 1,493 1,493 – 1,356 Lease liabilities 772 772 Liabilities to banks 840 840 – 839 Derivatives that do not qualify for hedge accounting 53 53 53 Other financial liabilities 1 1 – 1 Trade accounts payable 2,560 2,560 – 2,560 Other liabilities 2 130 Derivatives that do not qualify for hedge accounting 3 3 3 Refund liabilities 82 82 – 82 Miscellaneous other liabilities 45 45 – 45 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €679 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €207 million. 40 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Carrying amounts of financial instruments and their fair values as of December 31, 2021 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehen- sive income Fair value recognized in profit or loss Measure- ment according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 2,343 2,343 – – 2,343 Other financial assets 542 Money market funds 65 – – 65 65 Loans and bank deposits 402 393 – 9 402 Other investments 27 27 – 27 Receivables under lease agreements 8 8 19 Derivatives that do not qualify for hedge accounting 40 40 40 Other receivables 1 30 22 – 8 30 – – – Cash and cash equivalents 649 649 – – 649 Financial liabilities Financial debts 2,541 – Bonds 1,492 1,492 – 1,568 Lease liabilities 761 – 761 Liabilities to banks 275 275 – 280 Derivatives that do not qualify for hedge accounting 11 – 11 11 Other financial liabilities 2 2 – 2 Trade accounts payable 2,214 2,214 – 2,214 Other liabilities 2 172 – Derivatives that do not qualify for hedge accounting 3 – 3 3 Refund liabilities 116 116 – 116 Miscellaneous other liabilities 53 53 – 53 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €480 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €186 million. The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below: Level 1 covers fair values determined on the basis of quoted, unadjusted prices which exist in active markets. Level 2 comprises fair values determined on the basis of parameters which are observable in an active market. Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data. 41 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following table shows the assignment of the financial instruments to the three-level fair value hierarchy: Fair value hierarchy of financial instruments Fair value Fair value Dec. 31, 2021 Level 1 Level 2 Level 3 June 30, 2022 Level 1 Level 2 € million € million € million € million € million € million € million Financial assets carried at fair value Money market funds 65 – 65 – – – – Loans 9 – – 9 10 – – Other investments 27 4 – 23 26 3 – Derivatives that do not qualify for hedge accounting 40 – 34 6 51 – 46 Other receivables 8 – – 8 – – – Financial assets not carried at fair value Receivables under lease agreements 19 – – 19 18 – – Financial liabilities carried at fair value Derivatives that do not qualify for hedge accounting 14 – 11 3 56 – 53 Financial liabilities not carried at fair value Bonds 1,568 1,568 – – 1,356 1,356 – Liabilities to banks 280 – 280 – 839 – 839 Other financial liabilities 2 – 2 – 1 – 1 Reallocation between the different levels of the fair value hierarchy takes place at the end of the reporting period in which the change occurred. In the first half of 2022, no transfers were made between the levels of the fair value hierarchy. Because of the generally short maturities of cash and cash equivalents, loans and bank deposits, trade accounts receivable and payable, and other receivables and liabilities, their carrying amounts do not significantly differ from the fair values. The fair value of the bonds issued by Covestro AG is based on quoted, unadjusted prices in active markets and therefore assigned to Level 1 of the fair value hierarchy. The fair value of some of the other investments is also based on quoted prices in active markets (Level 1). The fair values stated for noncurrent financial assets and liabilities are the present values of the respective future cash inflows or outflows. These are determined by discounting the cash flows at a reporting-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. For this reason, these values are assigned to Level 2 of the fair value hierarchy. The fair values of money market funds correspond to the quoted prices of the funds in accordance with Article 29 in conjunction with Article 33 of EU Regulation 2017/1131 on money market funds (Level 2). The fair values of derivatives for which no publicly quoted market prices exist are determined using valuation techniques based on observable market data as of the reporting date (Level 2). Credit value adjustments and debt value adjustments are determined to allow for both the contracting party’s credit risk and Covestro’s own credit risk. The currency forward contracts are measured individually at their forward rates or forward prices as of the reporting date. These depend on spot rates or prices including time spreads. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. The fair values of noncurrent receivables under lease agreements are calculated on the basis of interest curves observable 42 Level 3 € million – 10 23 5 – 18 3 – – – Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION in the market. Additionally, a discount for cash flows that are very far in the future is applied as an unobservable factor. Covestro works with and invests in start-ups under the auspices of the Covestro Venture Capital (COVeC) approach, which was newly developed in fiscal 2020. Investments associated with COVeC activities are recognized either as debt instruments at fair value through profit and loss or as other financial investments at fair value directly in equity, depending on the contractual design. The fair value is calculated as the present value of the future cash flows estimated based on available performance indicators. The cash flows are discounted at the current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the venture capital company. The main input factors are not based on observable market data (Level 3). The estimated fair value of the debt instruments classified in Level 3 would rise (fall) if the expected cash inflows were to be higher (lower) or if the risk-adjusted discount rate were to be lower (higher). Other financial investments are recognized at fair value directly in equity because they are held for the long term for strategic reasons. The fair value of some of the other investments is based on quoted prices in active markets (Level 1). Where there are no quoted, unadjusted prices in an active market for identical or similar instruments, and there is no suitable valuation method where all major input factors are based on observable market data, the fair value of the other investments is determined using a market price-oriented valuation method where the main input factors are not based on observable market data (Level 3). The valuation of certain other investments is based on available performance indicators as well as on market valuation multipliers. The estimated fair value of the equity instruments categorized within Level 3 would rise (fall) if the multiple applied were to be greater (smaller). Further, the fair values of embedded derivatives are determined on the basis of unobservable input factors (Level 3). They are separated from their respective host contracts, which are purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, or regional and industry-specific price indices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include prices or price indices derived from market data. The estimated fair value of the embedded derivative would rise (fall) if the expected payment flows were to be higher (lower) as a result of fluctuations in exchange rates or prices. The fair value of the contingent purchase price receivable from divestments recognized in other receivables was calculated as the present value of future cash flows. The basis was the expected EBITDA of the business unit sold for fiscal year 2021. The actual EBITDA reported for 2021 was well below expectations, so no purchase price payment will be made. 43 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The table below shows the changes in Level 3 financial instruments: Changes in the net amount of financial assets and liabilities recognized at fair value based on unobservable inputs (level 3) 2021 2022 € million € million Net carrying amounts, Jan. 1 22 43 Gains (losses) recognized in profit or loss 3 (8) of which related to assets / liabilities recognized in the statement of financial position 3 – Gains (losses) recognized outside profit or loss – – Net carrying amounts, June 30 25 35 The gains and losses from Level 3 financial assets and liabilities are reported as follows: gains and losses from embedded derivatives recognized in profit or loss are reported in other operating expenses or income; gains and losses from the contingent purchase price receivable from divestments and debt instruments recognized in profit or loss are reported in other financial result; gains and losses from other financial investments are reported in other comprehensive income from equity instruments. 44 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 9. Legal Risks As a company with international operations, the Covestro Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law, environmental law, and compliance issues such as corruption and export control. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal judgments or regulatory decisions or future settlements could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect the earnings of the Covestro Group. The legal risks that are material to the Covestro Group were described in note 26 “Legal Risks” to the Consolidated Financial Statements as of December 31, 2021. In the current fiscal year, there have been no new significant developments regarding the legal proceedings described there, and no new material legal proceedings are pending. 10. Related Parties Related entities as defined in IAS 24 (Related Party Disclosures) are those legal entities that are able to exert at least significant influence on Covestro AG and its subsidiaries or over which Covestro AG or its subsidiaries exercise control or have at least a significant influence, or which are controlled by a related person or a close family member of such a person. They include nonconsolidated subsidiaries, joint ventures, associated companies, and other related companies and persons. In the course of its operating business, Covestro sources materials, supplies and services from a large number of business partners worldwide, including companies in which it has a direct or indirect interest. Transactions with these companies are undertaken on an arm’s length basis. The goods and services received from associated companies result from ongoing operating business with PO JV, LP, Houston, Texas (USA) and amounted to €463 million in the first half of 2022 (previous year: €362 million). Covestro benefits from fixed long-term supply quotas/volumes of propylene oxide (PO) from this company’s production. There are no further reportable business relationships with other related parties. 45 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 11. Events after the End of the Reporting Period Covestro will sell its Additive Manufacturing business, which offers material solutions for common polymer 3D printing processes. The business to be divested, which is reported in the Solutions & Specialties segment, includes, among other things, research & development facilities, production assets and employees. The portfolio also includes products that are part of the Resins & Functional Materials business (RFM) acquired from from Koninklijke DSM N.V., Heerlen, (Netherlands), in fiscal 2021. The divestment is planned to be closed in the first quarter of 2023, subject to the finalization of contractual negotiations. Leverkusen, August 1, 2022 Covestro AG The Board of Management 46 FURTHER INFORMATION Responsibility Statement 48 Review Report 49 Segment and Quarterly Overview 50 Financial Calendar 53 47 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION RESPONSIBILITY STATEMENT To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the net assets, financial position and results of operations of the Covestro Group, and the interim group management report includes a fair review of the development and performance of the business and the position of the Covestro Group, together with a description of the principal opportunities and risks associated with the expected development of the Covestro Group during the rest of the fiscal year. Leverkusen, August 1, 2022 Covestro AG The Board of Management 48 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Review Report To Covestro AG, Leverkusen We have reviewed the condensed interim consolidated financial statements – comprising the statement of financial position, income statement, statement of comprehensive income, statement of cash flows, statement of changes in equity and selected explanatory notes – together with the interim group management report of the Covestro AG, Leverkusen, for the period from January 1, 2022 to June 30, 2022 that are part of the semi annual (or quarterly financial report) according to § 115 WpHG [“Wertpapierhandelsgesetz“: “German Securities Trading Act”]. The preparation of the condensed interim consolidated financial statements in accordance with International Accounting Standard IAS 34 “Interim Financial Reporting” as adopted by the EU, and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports, is the responsibility of the Company’s management. Our responsibility is to issue a report on the condensed interim consolidated financial statements and on the interim group management report based on our review. We performed our review of the condensed interim consolidated financial statements and the interim group management report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and additionally observed the International Standard in Review Engagements “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with a certain level of assurance, that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with IAS 34, “Interim Financial Reporting” as adopted by the EU, and that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of company employees and analytical assessments and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot issue an auditor’s report. Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with IAS 34, “Interim Financial Reporting” as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Düsseldorf, August 1, 2022 KPMG AG Wirtschaftsprüfungsgesellschaft Ufer Wirtschaftsprüfer [German Public Auditor] Dr. Ackermann Wirtschaftsprüferin [German Public Auditor] 49 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment and Quarterly Overview Segment information 2nd quarter Performance Materials 1 Solutions & Specialties 1 Others/Consolidation 1 Covestro Group 2nd quarter 2021 2nd quarter 2022 2nd quarter 2021 2nd quarter 2022 2nd quarter 2021 2nd quarter 2022 2nd quarter 2021 2nd quarter 2022 € million € million € million € million € million € million € million € million Sales (external) 1,957 2,461 1,951 2,165 48 77 3,956 4,703 Intersegment sales 468 524 6 8 (474) (532) – – Sales (total) 2,425 2,985 1,957 2,173 (426) (455) 3,956 4,703 Change in sales Volume 19.5% 1.6% 39.1% –7.3% 18.9% 57.1% 29.0% –2.1% Price 71.2% 17.5% 22.4% 11.8% 0.0% 0.0% 45.9% 14.5% Currency –5.2% 6.7% –5.8% 6.5% –1.8% 3.3% –5.4% 6.5% Portfolio 0.0% 0.0% 28.4% 0.0% 0.0% 0.0% 14.0% 0.0% Sales by region EMLA 955 1,255 772 851 38 61 1,765 2,167 NA 445 625 392 563 7 12 844 1,200 APAC 2 EBITDA 2 EBIT 557 644 502 581 367 204 787 237 170 751 213 139 3 (64) (65) 4 (33) (36) 1,347 817 607 1,336 547 307 Depreciation, amortization, impairment losses and impairment loss reversals 142 163 67 74 1 3 210 240 Cash flows from operating activities 498 95 82 (83) (27) (284) 553 (272) Cash outflows for additions to property, plant, equipment and intangible assets 125 132 53 56 1 2 179 190 Free operating cash flow 373 (37) 29 (139) (28) (286) 374 (462) Trade working capital 3 1,278 1,831 1,447 2,010 – (5) 2,725 3,836 1 Reference information calculated based on the organizational and reporting structure as of July 1, 2021. 2 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect on earnings of intersegment sales. 3 Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities, and refund liabilities as of June 30, 2021/2022. 50 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment information 1st half Performance Materials 1 Solutions & Specialties 1 Others/Consolidation 1 Covestro Group 1st half 2021 1st half 2022 1st half 2021 1st half 2022 1st half 2021 1st half 2022 1st half 2021 1st half 2022 € million € million € million € million € million € million € million € million Sales (external) 3,697 4,849 3,480 4,387 86 150 7,263 9,386 Intersegment sales 951 1,181 11 17 (962) (1,198) – – Sales (total) 4,648 6,030 3,491 4,404 (876) (1,048) 7,263 9,386 Change in sales Volume 7.1% 3.5% 23.3% –4.4% –12.5% 71.7% 14.6% 0.5% Price 49.5% 21.7% 14.4% 15.2% 0.0% 0.0% 31.4% 18.3% Currency –5.0% 6.0% –5.3% 6.3% –1.5% 2.7% –5.0% 6.1% Portfolio 0.0% 0.0% 12.5% 9.0% 0.0% 0.0% 6.1% 4.3% Sales by region EMLA 1,845 2,397 1,355 1,724 67 120 3,267 4,241 NA 779 1,229 700 1,064 14 23 1,493 2,316 APAC 2 EBITDA 2 EBIT 1,073 1,274 991 1,223 987 679 1,425 418 308 1,599 437 291 5 (132) (136) 7 (71) (74) 2,503 1,560 1,163 2,829 1,353 896 Depreciation, amortization, impairment losses and impairment loss reversals 283 308 110 146 4 3 397 457 Cash flows from operating activities 835 301 125 (184) 21 (232) 981 (115) Cash outflows for additions to property, plant, equipment and intangible assets 203 226 85 101 1 3 289 330 Free operating cash flow 632 75 40 (285) 20 (235) 692 (445) Trade working capital 3 1,278 1,831 1,447 2,010 – (5) 2,725 3,836 1 Reference information calculated based on the organizational and reporting structure as of July 1, 2021. 2 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect on earnings of intersegment sales. 3 Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities, and refund liabilities as of June 30, 2021/2022. 51 Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Quarterly Overview 1st quarter 1 2021 2nd quarter 1 2021 3rd quarter 1 2021 4th quarter 2021 1st quarter 2022 € million € million € million € million € million Sales (external) 3,307 3,956 4,302 4,338 4,683 Performance Materials 1,740 1,957 2,186 2,259 2,388 Solutions & Specialties 1,529 1,951 2,069 2,005 2,222 EBITDA 743 817 862 663 806 Performance Materials 2 630 644 708 590 620 Solutions & Specialties 2 181 237 221 112 224 EBIT 556 607 654 445 589 Performance Materials 2 489 502 567 445 475 Solutions & Specialties 2 138 170 154 41 152 Financial result (29) (18) (20) (10) (28) Income before income taxes 527 589 634 435 561 Income after taxes 395 450 473 301 417 Net income 393 449 472 302 416 Cash flows from operating activities 428 553 564 648 157 Cash outflows for additions to property, plant, equipment and intangible assets 110 179 183 292 140 Free operating cash flow 318 374 381 356 17 1 The values were recalculated retroactively as of October 1, 2021, based on a change in the underlying market prices for compensation for transactions between the Performance Materials and Solutions & Specialties segments and the reference information restated accordingly. 2 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect on earnings of intersegment sales. 52 2nd quarter 2022 € million 4,703 2,461 2,165 547 367 213 307 204 139 (44) 263 198 199 (272) 190 (462) Covestro Half-Year Financial Report 2022 COVESTRO ON THE CAPITAL MARKET INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Financial Calendar Quarterly Statement Third Quarter 2022............................. October 25, 2022 Annual Report 2022 ......................................................................... March 2, 2023 Annual General Meeting 2023 ................................................... April 19, 2023 Quarterly Statement First Quarter 2023 .............................. April 28, 2023 Publishing information Published by Local Court of Cologne Translation HRB 85281 Leinhäuser Language Services GmbH Covestro AG Kaiser-Wilhelm-Allee 60 VAT No. DE815579850 Unterhaching (Germany) 51373 Leverkusen Investor contact Design and layout Germany Email: info@covestro.com covestro.com Email: ir@covestro.com Press contact Email: communications@covestro.com nexxar GmbH, Vienna (Austria) Photo credits © Covestro Deutschland AG 53

Semestriel, 2022, Chemistry, Covestro

write me a financial report

Semestriel

Chemistry

Covestro

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: Covestro ### Response:

HALF-YEAR FINANCIAL REPORT 2023 Covestro Half-Year Financial Report 2023 INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Reporting Profile ................................................................................................................................................................................................................... 3 Covestro Group Key Data................................................................................................................................................................................................ 5 COVESTRO SHARES ......................................................................................................................................................................................................... 6 INTERIM GROUP MANAGEMENT REPORT ........................................................................................................................................................... 9 Report on Economic Position .................................................................................................................................................................................... 10 Significant Events ....................................................................................................................................................................................................... 10 Results of Operations, Financial Position, and Net Assets of the Covestro Group .............................................................. 12 Results of Operations ......................................................................................................................................................................................... 12 Financial Position .................................................................................................................................................................................................. 15 Net Assets................................................................................................................................................................................................................. 17 Performance of the Segments............................................................................................................................................................................ 18 Performance Materials ...................................................................................................................................................................................... 18 Solutions & Specialties ...................................................................................................................................................................................... 20 Report on Future Perspectives and on Opportunities and Risks .......................................................................................................... 22 Economic Outlook ...................................................................................................................................................................................................... 22 Forecast for the Covestro Group ...................................................................................................................................................................... 24 Opportunities and Risks .......................................................................................................................................................................................... 25 CONSOLIDATED INTERIM FINANCIAL STATEMENTS ............................................................................................................................... 26 Covestro Group Consolidated Income Statement ........................................................................................................................................ 27 Covestro Group Consolidated Statement of Comprehensive Income ............................................................................................. 28 Covestro Group Consolidated Statement of Financial Position ............................................................................................................ 29 Covestro Group Consolidated Statement of Cash Flows ......................................................................................................................... 30 Covestro Group Consolidated Statement of Changes in Equity ........................................................................................................... 31 Notes to the Consolidated Interim Financial Statements .......................................................................................................................... 32 1. General Information .................................................................................................................................................................................... 32 2. Effects of New Financial Reporting Standards ........................................................................................................................... 33 3. Segment and Regional Reporting....................................................................................................................................................... 34 4. Scope of Consolidation ............................................................................................................................................................................ 38 5. Sales .................................................................................................................................................................................................................... 39 6. Earnings per Share ...................................................................................................................................................................................... 39 7. Employees and Pension Obligations ................................................................................................................................................ 40 8. Financial Instruments ................................................................................................................................................................................. 41 9. Legal Risks ....................................................................................................................................................................................................... 45 10. Related Parties ............................................................................................................................................................................................... 45 11. Events after the End of the Reporting Period .............................................................................................................................. 46 FURTHER INFORMATION ............................................................................................................................................................................................. 47 Responsibility Statement .............................................................................................................................................................................................. 48 Review Report...................................................................................................................................................................................................................... 49 Segment and Quarterly Overview ............................................................................................................................................................................ 50 Financial Calendar ............................................................................................................................................................................................................. 53 2 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Reporting Profile Reporting Principles The Half-Year Financial Report of Covestro AG, Leverkusen (Germany), meets the requirements of the German Securities Trading Act (WpHG) and, in accordance with Section 115 (2) through (4) of the WpHG (half-year financial report; power to issue statutory instruments), comprises Condensed Consolidated Interim Financial Statements, an Interim Group Management Report, and a Responsibility Statement by Management. This report covers the period from January 1 to June 30, 2023. The Consolidated Interim Financial Statements have been prepared in accordance with IAS 34 (Interim Financial Reporting) under the International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB) and their Interpretations, as adopted by the European Union (EU) and applicable as of the reporting date. The Half-Year Financial Report should be read alongside the Annual Report for fiscal 2022 and the additional information about the company contained therein, as well as the Quarterly Statement as of March 31, 2023.* Forward-Looking Statements This Report may contain forward-looking statements based on current assumptions and forecasts made by the management of Covestro AG. Various known and unknown risks, uncertainties, and other factors could lead to material differences between the actual results, financial situation, development, or performance of the Covestro Group and the estimates given here. The various factors include those discussed in Covestro AG’s public reports, which are available at www.covestro.com. Covestro AG assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. Alternative Performance Measures Throughout its financial reporting, Covestro uses alternative performance measures (APMs) to assess the business performance of the Group. These are not defined in the IFRSs. These non-IFRS indicators should be considered a supplement to, not a replacement for, the financial performance measures determined in accordance with IFRSs. The alternative performance measures of relevance to the Covestro Group include earnings before interest, taxes, depreciation, and amortization (EBITDA), return on capital employed (ROCE), free operating cash flow (FOCF), and net financial debt. Covestro uses ROCE above the weighted average cost of capital (WACC) to determine profitability, while EBITDA is analyzed to assess profitable growth. FOCF is a key factor in the presentation of the liquidity position that indicates the company’s ability to generate a cash surplus and finance its activities. Net financial debt gauges the Group’s financial condition and financing requirements. The calculation methods for the APMs may vary from those of other companies, thus limiting the extent of the overall comparability. These alternative performance measures should not be viewed in isolation or employed as an alternative to the financial indicators determined in accordance with IFRSs and presented in the consolidated financial statements for purposes of assessing Covestro’s net assets, financial position, and results of operations. Explanations of the definition and calculation of these alternative performance measures can be found in the “Management” section of the Combined Management Report in the Annual Report 2022. Acronyms and Abbreviations Acronyms and abbreviations used in this Report are explained in this Report or in the Glossary provided in the Annual Report 2022. Rounding and Percentage Deviations As the indicators in this Report are stated in accordance with commercial rounding principles, totals and percentages may not always be exact. If a deviation changes from positive to negative or vice versa, or if it is greater than 1,000%, this is shown by a period. This Quarterly Statement was prepared in accordance with Section 53 of the Stock Exchange Rules and Regulations (Börsenordnung) of the Frankfurt Stock Exchange; it is not an interim report within the meaning of IAS 34 (Interim Financial Reporting) or a set of financial statements within the meaning of IAS 1 (Presentation of Financial Statements). 3 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Inclusive Language Diversity, equity, and inclusion are important to Covestro. To ensure better readability, we therefore strive to use gender-neutral language and avoid gender-specific terms in this Report. All terms should be taken to apply equally to all genders. Publication This Report was published on August 1, 2023. It is available in German and English. The German version is binding. 4 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Covestro Group Key Data 2nd quarter 2022 2nd quarter 2023 Change 1st half 2022 1st half 2023 Change Sales €4,703 million €3,720 million –20.9% €9,386 million €7,463 million –20.5% Change in sales Volume –2.1% –8.0% 0.5% –12.5% Price 14.5% –11.0% 18.3% –7.4% Currency 6.5% –1.9% 6.1% –0.6% Portfolio 0.0% 0.0% 4.3% 0.0% EBITDA 1 €547 million €385 million –29.6% €1,353 million €671 million –50.4% Changes in EBITDA Volume –5.8% –22.5% –0.5% –30.7% Price 70.3% –94.5% 85.3% –51.6% Raw material price –96.5% 63.4% –103.1% 18.6% Currency 4.9% –3.1% 5.8% –1.3% Other 3 EBIT 2 –5.9% €307 million 27.1% €166 million –45.9% –0.8% €896 million 14.6% €205 million –77.1% Financial result (€44 million) (€36 million) –18.2% (€72 million) (€65 million) –9.7% Net income 4 €199 million €46 million –76.9% €615 million €20 million –96.7% 5 Earnings per share €1.04 €0.24 –76.9% €3.20 €0.11 –96.6% Cash flows from operating activities 6 (€272 million) €149 million . (€115 million) €130 million . Cash outflows for additions to property, plant, equipment and intangible assets €190 million €159 million –16.3% €330 million €279 million –15.5% Free operating cash flow 7 (€462 million) (€10 million) –97.8% (€445 million) (€149 million) –66.5% 1 Earnings before interest, taxes, depreciation and amortization (EBITDA): EBIT plus depreciation, amortization, and impairment losses; less impairment loss reversals on property, plant and equipment and intangible assets. 2 Other changes in EBITDA such as changes in provisions for variable compensation. 3 Earnings before interest and taxes (EBIT): income after income taxes plus financial result and income taxes. 4 5 Net income: income after income taxes attributable to the shareholders of Covestro AG. Earnings per share: according to IAS 33 (Earnings per Share), net income divided by the weighted average number of outstanding no-par value voting shares of Covestro AG. The calculation was based on 189,638,752 no-par shares for the second quarter of 2023 (previous year: 191,070,836 no-par shares) and on 189,792,703 no-par shares for the first half of 2023 (previous year: 192,101,348 no-par shares). 6 Cash flows from operating activities according to IAS 7 (Statement of Cash Flows). 7 Free operating cash flow (FOCF): cash flows from operating activities less cash outflows for additions to property, plant and equipment and intangible assets. 5 COVESTRO SHARES Covestro Half-Year Financial Report 2023 INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS 6 FURTHER INFORMATION Covestro Half-Year Financial Report 2023 COVEST RO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Covestro Shares Performance of Covestro shares versus market in the first half of 2023 € (Covestro shares) Covestro closing prices on Xetra; source: Deutsche Börse Share Price Recovers in Poor Economic Environment Stock exchange performance in the first half of the year 2023 and the global economy both continued to be weighed down by the effects of Russia’s war against Ukraine, which started in February 2022, and a global demand crisis, which has persisted in many industries since the middle of the year 2022. Energy prices, which had been driven up by the war in Ukraine, have been declining significantly in the year 2023. Due to the unfavorable supply and demand situation, most of the benefits of lower raw material prices have to be passed on to customers, and the challenging earnings situation therefore continues. As of June 30, 2023, the German DAX benchmark index, which is relevant for Covestro, was up 16.0% compared with the end of the year 2022. The performance of European chemical stocks was significantly more restrained. At the end of the six-month period, the STOXX Europe 600 Chemicals index was only 6.2% higher than at the beginning of the year. However, at a Xetra closing price of €47.58, Covestro’s share price was up at the end of the first half of 2023, gaining 30.2% compared with December 31, 2022. The share price started the year 2023 with an upward movement, but then declined in the course of the first quarter of 2023, reaching a low of €35.36 on March 15, 2023. During the second quarter of 2023, Covestro’s share price trended slightly higher, interspersed by brief periods of price weakness. Since the beginning of June 2023, the share price has been on an upward trajectory, boosted further by market rumors. It reached its high of the first half of 2023 of € 49.60 on June 23, 2023. Compared with the closing price of €36.55 for the year 2022, this corresponds to a share price performance (without dividend reinvestment since no dividend was paid for fiscal 2022) of 30.2%. At the end of the first half of 2023, Covestro’s market capitalization stood at around €9.0 billion based on 188.7 million shares outstanding. The average daily Xetra trading volume was around 1.4 million shares. Virtual Annual General Meeting Held on April 19, 2023 Covestro AG’s 2023 Annual General Meeting (AGM) was held on April 19, 2023. Taking account, in particular, of legislation, the ownership structure, expected costs, the pandemic situation at the time, and the experience made in recent years, Covestro resolved at the end of the year 2022 to hold a virtual AGM, as in the previous year. 7 Covestro Half-Year Financial Report 2023 COVEST RO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The Group’s net income was negative for the first time in fiscal 2022, showing a net loss of €272 million. Under the current dividend policy, this means that no dividend was distributed to shareholders of Covestro AG. Share Buyback Program Based on the resolution adopted at the 2019 AGM, Covestro AG’s Board of Management on February 28, 2022 resolved a share buyback program totaling around €500 million (excluding transaction costs). The share buyback program is to be completed within two years. All repurchased shares are subsequently expected to be retired and the capital stock reduced accordingly. By the end of the first half of 2022, 3,479,956 shares worth €150 million had already been bought back in two tranches at an average price of €43.0785 per share. Due to the weakening economic outlook, the Board of Management resolved in the second half of 2022 to pause the share buyback program temporarily. In view of the revised guidance and the sequential improvement in earnings and volumes, the current program resumed in the second quarter of 2023. The third tranche, which had a volume of €49 million, was completed at the end of June 2023 and resulted in the buyback of 1,208,035 shares at an average price of €40.8147 per share. Moody’s Confirms Covestro Rating and Outlook On June 21, 2023, Moody’s Investors Service, London (United Kingdom), confirmed Covestro’s Baa2 investment- grade rating with a stable outlook. Covestro intends to continue to maintain financing structures and financial ratios that support a solid investment-grade rating in the future. 12 Analysts Issue Buy Recommendation for Covestro Shares At the end of the first half of 2023, Covestro was covered by 18 securities brokers. Of these, 12 analysts issued buy recommendations and six were neutral. The average share price target was approximately €47 at the reporting date. Basic Covestro share information Capital stock €193,200,000 Outstanding shares (Half-year-end) 188,740,330 Share class No-par ordinary bearer shares ISIN DE0006062144 WKN 606214 Ticker symbol 1COV Reuters symbol 1COV.DE Bloomberg symbol 1COV GY Market segment Regulated market Transparency level Prime standard Sector Chemicals Index DAX 8 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS INTERIM GROUP MANAGEMENT REPORT Report on Economic Position 10 Significant Events Results of Operations, Financial Position, and 10 Net Assets of the Covestro Group Results of Operations Financial Position Net Assets Performance of the Segments Performance Materials Solutions & Specialties 12 12 15 17 18 18 20 Report on Future Perspectives and on Opportunities and Risks 22 Economic Outlook Forecast for the Covestro Group Opportunities and Risks 22 24 25 9 FURTHER INFORMATION Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION REPORT ON ECONOMIC POSITION Significant Events Events outside the Company Challenging Economic Environment The situation in the European energy markets largely stabilized in the first half of 2023 compared with the volatile full-year 2022, mainly due to a significant decrease in gas prices. This is, however, countered by persistently weak demand, driven especially by lower consumer spending. The adverse macroeconomic conditions affected Covestro primarily by impacting on the volumes sold and the selling price level. War in Ukraine The Russian war against Ukraine, which began in February 2022, has had a notable impact on the global economy. However, Covestro’s business situation is not directly affected by the consequences of the war, as Covestro does not operate any sites in the countries affected by the war (Russia, Belarus, and Ukraine). As in the previous year, the sanctions imposed on Russia and Belarus by the international community therefore affected Covestro’s business only indirectly. Events within the Company Business in Europe, the Middle East, and Africa to Be Centralized at the Leverkusen Site In line with its Sustainable Future strategy and Group-wide initiatives to increase operating effectiveness and efficiency, Covestro is planning to manage the business in Europe, the Middle East, and Africa centrally from Leverkusen (Germany) in the future. As a consequence, Covestro International SA, based in Fribourg (Switzerland), is expected to be closed down by the middle of fiscal 2024. The relocation is not expected to have any effects on the Group’s sales activities or sales. The main factors in the second quarter of 2023 were a net tax expense of €29 million and provisions for restructuring of €14 million. Sale of Additive Manufacturing Business As of April 3, 2023, Covestro successfully completed the sale of the additive manufacturing business of the Solutions & Specialties segment to Stratasys, a U.S.-Israeli manufacturer of 3D printers and 3D production systems. The sale resulted in an inflow of purchase price payments of €50 million for Covestro in the second quarter of 2023; the net gain on the disposal amounted to €35 million. In addition, a variable earn-out payment has been agreed, which will depend on the achievement of various success factors and will be determined in the year 2025. See “Acquisitions and Divestitures.” Operations Start at New Chlorine Plant in Tarragona In February 2023, Covestro successfully commissioned a new large-scale plant for the manufacture of chlorine in Tarragona (Spain). It is the world’s first industrial-scale production plant using the innovative and energy-efficient oxygen-depolarized cathode technology developed by Covestro and partners. The new plant guarantees efficient, continuous, and independent supplies of chlorine for the diphenylmethane diisocyanate (MDI) production in Tarragona, thus strengthening the European MDI production network. Maezio® Product Line to be Discontinued As part of its continuous Group-wide activities to optimize the portfolio, Covestro will in the future align the Engineering Plastics business entity in the Solutions & Specialties segment with its core business. As a result, the Board of Management has resolved that the manufacture of the highly specialized Maezio® products, and therefore the operations at the production site in Markt Bibart (Germany), will be discontinued. In this context, impairment losses of €30 million were recognized on goodwill, intangible assets, and property, plant and equipment in the first half of 2023, and personnel-related provisions and valuation allowances on inventories of €7 million were recognized through profit or loss. 10 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Changes in the Board of Management Chief Technology Officer Dr. Klaus Schäfer retired from the company as of June 30, 2023. His successor, Dr. Thorsten Dreier, takes on responsibility for the corporate functions of Process Technology; Engineering; Group Health, Safety and Environment; and Group Procurement as of July 1, 2023. In February 2023, Chief Financial Officer (CFO) and Labor Director Dr. Thomas Toepfer requested the early termination of his contract, which was due to expire on March 31, 2026, to pursue a new role as CFO at the European aircraft manufacturer Airbus. The Supervisory Board of Covestro AG acceded to this request, and Dr. Thomas Toepfer will leave the company as of August 31, 2023. Until then, he will continue his work as CFO and Labor Director to the full extent. The Supervisory Board immediately initiated the search for a successor. Financing Measures Share Buyback Program On February 28, 2022, Covestro AG’s Board of Management resolved a share buyback program totaling around €500 million (excluding transaction costs), which was launched in March 2022 and is expected to be completed within two years. All repurchased shares are subsequently expected to be retired and the capital stock reduced accordingly. Following the resumption of the program in May 2023, 1,208,035 shares with a total value of €49 million were bought back during the third tranche in the second quarter of 2023. By June 30, 2023, Covestro AG had acquired a total of 4,687,991 shares valued at €199 million in three tranches. Issuance of Schuldschein Loans On October 7, 2022, Covestro for the first time issued Schuldschein loans with a total volume equivalent to around €650 million, of which the remaining €100 million was transferred to Covestro in the first quarter of 2023. Linked to an ESG rating, these Schuldschein loans were issued in tranches comprising fixed and variable interest rates with terms of three, five, and seven years. 11 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Results of Operations, Financial Position, and Net Assets of the Covestro Group Results of Operations Covestro Group Covestro Group Quarterly Sales Quarterly EBITDA € million € million Second Quarter of 2023 In the second quarter of 2023, Group sales were down by 20.9% to €3,720 million (previous year: €4,703 million). This was mainly due to a significant drop in the selling price level, which had a negative impact on sales of 11.0%, as well as to lower volumes sold, with a lowering effect on sales of 8.0%. These trends were driven above all by the unfavorable global demand situation and availability constraints, especially in the EMLA region. In addition, exchange rate movements had a reducing effect on sales of 1.9%. Both segments saw sales decline in the second quarter of 2023. Sales in the Performance Materials segment declined by 27.3% to €1,789 million (previous year: €2,461 million), while sales in the Solutions & Specialties segment were down 13.5% to €1,872 million (previous year: €2,165 million). Sales by segment and region in the second quarter of 2023 € million 1 EMLA: Europe, Middle East, Latin America (excluding Mexico), Africa region. 2 NA: North America region (Canada, Mexico, United States). 3 APAC: Asia and Pacific region. 12 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION In the EMLA region, sales were 26.3% lower, at €1,597 million (previous year: €2,167 million), and sales in the NA region were down 19.1% to €971 million (previous year: €1.200 million). The APAC region saw sales drop by 13.8% to €1,152 million (previous year: €1,336 million). In the second quarter of 2023, the Group’s EBITDA decreased by 29.6% to €385 million (previous year: €547 million), mainly due to a demand-related decline in average selling prices, which lower raw material and energy prices were unable to offset. The resulting drop in margins and a reduction in volumes sold driven by demand and availability factors were among the key factors reducing earnings. Provisions for long-term variable compensation, which increased due to the share price performance, also had a negative effect. This was set against, among other factors, positive effects on earnings in an amount of €35 million from a decline in fixed costs and from the sale of the additive manufacturing business to Stratasys, a U.S.-Israeli manufacturer of 3D printers and 3D production systems. Depreciation, amortization, impairment losses, and impairment loss reversals went down by 8.8% to €219 million in the second quarter of 2023 (previous year: €240 million), of which €198 million (previous year: €205 million) was attributable to property, plant and equipment and €21 million (previous year: €35 million) to intangible assets. In the second quarter of 2023, the Covestro Group’s EBIT decreased by 45.9% to €166 million (previous year: €307 million). Taking into account a financial result of €–36 million (previous year: €–44 million), income before income taxes fell to €130 million compared with the prior-year quarter (previous year: €263 million). The tax expense incurred in the second quarter of 2023 was €85 million (previous year: €65 million), resulting in income after taxes totaling €45 million (previous year: €198 million). After noncontrolling interests, net income amounted to €46 million (previous year: €199 million). Compared to the prior-year quarter, earnings per share fell to €0.24 (previous year: €1.04). First Half of 2023 In the first half of 2023, Group sales were down by 20.5% to €7,463 million (previous year: €9,386 million). The decline was primarily due to a reduction in volumes sold driven by demand and availability factors, with a sales- reducing effect of 12.5%, and a lower selling price level, which had an adverse effect of 7.4%. Moreover, exchange rate movements had a negative impact of 0.6% on sales. Both segments saw sales decline in the first half of 2023. In the Performance Materials segment, sales fell by 26.1% to €3,581 million (previous year: €4,849 million), while the Solutions & Specialties segment recorded a decrease of 14.4% to €3,755 million (previous year: €4,387 million). Sales by segment and region in the first half of 2023 € million 1 EMLA: Europe, Middle East, Latin America (excluding Mexico), Africa region. 2 NA: North America region (Canada, Mexico, United States). 3 APAC: Asia and Pacific region. 13 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION In the EMLA region, sales were 23.4% lower, at €3,247 million (previous year: €4,241 million), and sales in the NA region were down 15.7% to €1,953 million (previous year: €2,316 million). Sales in the APAC region decreased by 20.0% to €2,263 million (previous year: €2,829 million). The Group’s EBITDA contracted by 50.4% to €671 million in the first half of 2023 compared with the prior-year period (previous year: €1,353 million). This was mainly attributable to a demand-related decline in the selling price level, which lower raw material and energy prices were unable to offset. In particular the resulting drop in margins and a reduction in volumes sold driven by demand and availability factors had a negative impact on earnings. Provisions for long-term variable compensation, which increased due to the share price performance, also reduced earnings. This was offset by earnings-enhancing effects arising from lower fixed costs, the above- mentioned sale of the additive manufacturing business, and a decline in provisions for short-term variable compensation. Depreciation, amortization, impairment losses, and impairment loss reversals rose by 2.0% to €466 million in the first half of 2023 (previous year: €457 million), of which €409 million (previous year: €402 million) was attributable to property, plant and equipment and €57 million (previous year: €55 million) to intangible assets. The Covestro Group’s EBIT was down 77.1% to €205 million in the first half of 2023 (previous year: €896 million). Taking into account a financial result of €–65 million (previous year: €–72 million), income before income taxes went down to €140 million compared with the previous year (previous year: €824 million). After deduction of the tax expense of €122 million for the first half of 2023 (previous year: €209 million), income after taxes totaled €18 million (previous year: €615 million). After noncontrolling interests, net income amounted to €20 million (previous year: €615 million). In the first half of 2023, earnings per share decreased to €0.11 (previous year: €3.20). 14 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Financial Position Covestro Group summary statement of cash flows 2nd quarter 2022 2nd quarter 2023 1st half 2022 1st half 2023 € million € million € million € million EBITDA 547 385 1,353 671 Income taxes paid (262) (95) (360) (117) Change in pension provisions 10 (7) 12 (17) (Gains)/losses on retirements of noncurrent assets – (34) – (34) Change in working capital/other noncash items (567) (100) (1,120) (373) Cash flows from operating activities (272) 149 (115) 130 Cash outflows for additions to property, plant, equipment and intangible assets (190) (159) (330) (279) Free operating cash flow (462) (10) (445) (149) Cash flows from investing activities 233 (179) 154 (458) Cash flows from financing activities (276) (173) (381) (126) Change in cash and cash equivalents due to business activities (315) (203) (342) (454) Cash and cash equivalents at beginning of period 623 949 649 1,198 Change in cash and cash equivalents due to exchange rate movements 7 (5) 8 (3) Cash and cash equivalents at end of period 315 741 315 741 Cash Flows from Operating Activities/Free Operating Cash Flow In the second quarter of 2023, net cash inflows from the Covestro Group’s operating activities amounted to €149 million (previous year: net cash outflows of €272 million). A decline in EBITDA was more than offset by a smaller amount of cash tied up in working capital and lower income tax payments. In the prior-year quarter, the change in working capital had been impacted especially by the payment of short-term variable compensation for fiscal 2021. No short-term variable compensation was paid for fiscal 2022. After deduction of cash outflows of €159 million for additions to property, plant and equipment and intangible assets (previous year: €190 million), free operating cash flow in the second quarter of 2023 totaled €–10 million (previous year: €–462 million). Cash flows from operating activities in the first half of 2023 accounted for net inflows of €130 million (previous year: cash outflows of €115 million). A decline in cash tied up in working capital and lower income tax payments more than offset the drop in EBITDA. After deduction of cash outflows of €279 million for additions to property, plant and equipment and intangible assets (previous year: €330 million), free operating cash flow totaled €–149 million (previous year: €–445 million). Cash Flows from Investing Activities Net cash outflow for investing activities in the second quarter of 2023 totaled €179 million (previous year: net cash inflow of €233 million). This was mainly attributable to cash outflows of €159 million (previous year: €190 million) for additions to property, plant and equipment and intangible assets and net outflows of €85 million for short-term bank deposits (previous year: net proceeds of €420 million). This was set against cash received in an amount of €50 million from the sale of the additive manufacturing business to Stratasys, a U.S.-Israeli manufacturer of 3D printers and 3D production systems, as well as an inflow of €39 million from the partial reversal of the tranche of the initial funding loan drawn down in December 2022, as announced by the pension fund. In the first half of 2023, the net cash outflow from investing activities totaled €458 million (previous year: net cash inflow of €154 million). This was mainly attributable to cash outflows of €279 million (previous year: €330 million) for additions to property, plant and equipment and intangible assets and net outflows of €272 million for short- term bank deposits (previous year: net proceeds of €374 million). This was offset in particular by the above- mentioned cash inflows from divestitures. 15 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Cash Flows from Financing Activities In the second quarter of 2023, the Covestro Group’s net cash outflow for financing activities totaled €173 million (previous year: €276 million), mainly due to debt repayments of €121 million. The main drivers here were repayments of current liabilities to banks of €60 million in China and lease payments of €38 million. In addition, the third tranche of the share buyback program led to cash outflows of €49 million in the second quarter of 2023 (previous year: €102 million). See “Share Buyback Program” and note 8 “Financial Instruments” in the Notes to the Consolidated Interim Financial Statements. In the first half of 2023, financing activities gave rise to a cash outflow of €126 million (previous year: €381 million). The main factors driving these cash flows related to the repayment of a loan of Covestro AG in an amount of €125 million, lease payments of €78 million, and interest payments of €68 million. In addition, the above- mentioned current liabilities to banks in China and the third tranche of the share buyback program led to cash outflows. This was set against cash inflows of €149 million, primarily from current liabilities to banks in China, and cash inflows of €100 million from the Schuldschein loans. Net financial debt Dec. 31, 2022 June 30, 2023 € million € million Bonds 1,988 1,989 Liabilities to banks 922 978 Lease liabilities 746 778 Liabilities from derivatives 32 63 Other financial liabilities 1 2 Receivables from derivatives (42) (20) Financial debt 3,647 3,790 Cash and cash equivalents (1,198) (741) Current financial assets (15) (287) Net financial debt 2,434 2,762 Financial debt grew by €143 million compared with the figure on December 31, 2022, to €3,790 million as of June 30, 2023. In addition to the increase of €56 million in liabilities to banks, this was also due to a rise of €32 million in lease liabilities. The rise in liabilities to banks was due to the Schuldschein loan referred to above and the net increase in current liabilities to banks in China in an amount of €82 million. The repayment of the loan of Covestro AG had an offsetting effect. Cash and cash equivalents decreased in comparison with the figure on December 31, 2022, by €457 million to €741 million. This was mainly due to cash outflows for additions to property, plant and equipment and intangible assets of €279 million and net outflows for short-term bank deposits of €272 million. Conversely, higher cash flows from operating activities led to a €130 million increase in cash and cash equivalents. The net cash outflows for short-term bank deposits drove up current financial assets by €272 million to €287 million. In comparison with December 31, 2022, the Covestro Group’s net financial debt rose by €328 million to €2,762 million as of June 30, 2023. 16 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Net Assets Covestro Group summary statement of financial position Dec. 31, 2022 June 30, 2023 € million € million Noncurrent assets 7,916 7,667 Current assets 6,669 6,626 Total assets 14,585 14,293 Equity 7,122 6,877 Noncurrent liabilities 4,408 4,473 Current liabilities 3,055 2,943 Liabilities 7,463 7,416 Total equity and liabilities 14,585 14,293 Total assets were down €292 million as compared with December 31, 2022, to €14,293 million as of June 30, 2023. Noncurrent assets decreased by €249 million to €7,667 million (December 31, 2022: €7,916 million), largely due to a decline in property, plant and equipment and other intangible assets. At the same time, current assets were also down €43 million to €6,626 million (December 31, 2022: €6,669 million). This change is attributable in particular to the decline in cash and cash equivalents described in the “Financial Position” section. A rise in other current financial assets and in other receivables were the main offsetting factors. See “Financial Position.” Equity decreased by €245 million to €6,877 million, compared with €7,122 million as of December 31, 2022. The main reasons for the decline are negative foreign exchange differences and the acquisition of treasury shares. Offsetting movements include in particular the return on plan assets and income after income taxes for the first half of 2023. Noncurrent liabilities were up €65 million to €4,473 million as of June 30, 2023 (December 31, 2022: €4,408 million), mainly as a result of higher noncurrent financial liabilities. This was set against lower deferred tax liabilities and a decrease in provisions for pensions and other post-employment benefits. Net defined benefit liability for post-employment benefit plans Dec. 31, 2022 June 30, 2023 € million € million Provisions for pensions and other post-employment benefits 486 445 Net defined benefit asset (56) (62) Net defined benefit liability 430 383 The net defined benefit liability for post-employment benefits (provisions for pensions and other post- employment benefits less net defined benefit asset) was down by €47 million in the reporting year to €383 million (previous year: €430 million). This is above all due to the return on plan assets. Current liabilities were down €112 million to €2,943 million as of the reporting date (December 31, 2022: €3,055 million). The main factor driving this development was a decline in trade accounts payable, while other provisions were higher than on December 31, 2022. 17 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Performance of the Segments Performance Materials Performance Materials key data 2nd quarter 2022 2nd quarter 2023 Change 1st half 2022 1st half 2023 Change Sales (external) €2,461 million €1,789 million –27.3% €4,849 million €3,581 million –26.1% Intersegment sales 1 €753 million €557 million –26.0% €1,563 million €1,164 million –25.5% Sales (total) €3,214 million €2,346 million –27.0% €6,412 million €4,745 million –26.0% Change in sales (external) Volume 1.6% –10.3% 3.5% –14.4% Price 17.5% –15.3% 21.7% –11.2% Currency 6.7% –1.7% 6.0% –0.5% Portfolio 0.0% 0.0% 0.0% 0.0% Sales by region (external) EMLA €1,255 million €813 million –35.2% €2,397 million €1,652 million –31.1% NA €625 million €476 million –23.8% €1,229 million €965 million –21.5% APAC 2 EBITDA 2 EBIT €581 million €367 million €204 million €500 million €302 million €158 million –13.9% €1,223 million –17.7% €987 million –22.5% €679 million €964 million €475 million €187 million –21.2% –51.9% –72.5% Cash flows from operating activities 3 €95 million €26 million –72.6% €301 million €45 million –85.0% Cash outflows for additions to property, plant, equipment and intangible assets €132 million €103 million –22.0% €226 million €179 million –20.8% Free operating cash flow 3 (€37 million) (€77 million) 108.1% €75 million (€134 million) . 1 In accordance with internal reporting to the Board of Management since July 1, 2022, these figures also include sales recognized in the amount of cost of goods sold. To ensure comparability, the segment data is presented on a consistent basis. 2 EBITDA and EBIT include the effect on earnings of intersegment sales. 3 An imputed tax rate of 25% has been used since the Annual Report 2022 to calculate income taxes paid by the reportable segments; see the Notes to the Consolidated Financial Statements in the Annual Report 2022, note 4 “Segment and Regional Reporting.” The tax rate for the reference value has not changed. Second Quarter of 2023 Compared to the prior-year quarter, sales in the Performance Materials segment went down by 27.3% to €1,789 million (previous year: €2,461 million). This was largely driven by lower average selling prices and a decline in volumes sold, which had a decreasing effect on sales of 15.3% and 10.3% respectively. This was attributable in particular to weak demand worldwide, combined with availability constraints, especially in the EMLA region. At the same time, exchange rate movements had a negative effect on sales of 1.7%. In the EMLA region, sales were down 35.2% to €813 million (previous year: €1,255 million). This is mainly due to a decline in volumes sold and a lower selling price level, both of which had a significantly negative effect on sales, while exchange rate changes had a neutral impact on sales overall. In the NA region, sales were down 23.8% to €476 million (previous year: €625 million). This was primarily driven by lower average selling prices and a decline in volumes sold, both of which had a significant decreasing effect on sales. Exchange rate movements, on the other hand, had no notable effect. Sales in the APAC region declined by 13.9% to €500 million (previous year: €581 million). Contributing factors were a decrease in the selling price level and exchange rate movements, both of which contributed significantly to lower sales. In contrast, higher volumes sold had a slight positive effect on sales compared with the prior-year quarter, which had been adversely affected by logistics bottlenecks. 18 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION In the second quarter of 2023, the Performance Materials segment’s EBITDA was down 17.7% on the prior-year quarter, declining to €302 million (previous year: €367 million). This was mainly driven by reduced margins as a result of the unfavorable demand situation, as lower raw material and energy prices were unable to offset the decline in selling prices. Additional negative factors weighing on earnings included a reduction in volumes sold and exchange rate movements. This was offset by the recognition of a receivable for insurance compensation for production stoppages, which had a neutral effect at the Group level, but benefited the Performance Materials segment’s earnings. In addition, lower fixed costs had the effect of increasing earnings. See note 3 “Segment and Regional Reporting“ in the Notes to the Consolidated Interim Financial Statements for additional information on the presentation of the insurance compensation at Group level. EBIT fell 22.5% to €158 million (previous year: €204 million). Free operating cash flow decreased 108.1% to €–77 million (previous year: €–37 million), largely driven by lower EBITDA and a higher amount of cash tied up in working capital. The main reason was that cash was freed up in trade accounts payable in the prior-year quarter, while cash was tied up in the current quarter, and this had a negative effect. Performance Materials Performance Materials Quarterly Sales Quarterly EBITDA € million € million First Half of 2023 Sales of the Performance Materials segment decreased by 26.1% to €3,581 million in the first half of 2023 (previous year: €4,849 million), driven to a significant extent by a drop in volumes sold and lower average selling prices, which had a decreasing effect on sales of 14.4% and 11.2% respectively. The first half of 2023 was impacted above all by the unfavorable global demand situation and availability constraints, especially in the EMLA region. In addition, exchange rate movements had a negative effect on sales of 0.5%. EBITDA was down 51.9% to €475 million in the first half of 2023 (previous year: €987 million). This was mainly driven by reduced margins, as lower raw material and energy prices were unable to offset the decline in selling prices. Additional negative factors weighing on earnings included a reduction in volumes sold and exchange rate movements. This was offset by the positive impact of recognizing a receivable for insurance compensation for production stoppages, which had a neutral effect at the Group level, as well as lower fixed costs. See note 3 “Segment and Regional Reporting“ in the Notes to the Consolidated Interim Financial Statements for additional information on the presentation of the insurance compensation at Group level. EBIT declined 72.5% to €187 million (previous year: €679 million). Free operating cash flow declined to €–134 million (previous year: €75 million), driven primarily by the drop in EBITDA. On the other hand, a smaller amount of cash tied up in working capital and a decline in cash outflows for property, plant and equipment and intangible assets had a positive effect. 19 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Solutions & Specialties Solutions & Specialties key data 2nd quarter 2022 2nd quarter 2023 Change 1st half 2022 1st half 2023 Change Sales (external) €2,165 million €1,872 million –13.5% €4,387 million €3,755 million –14.4% Intersegment sales 1 €8 million €7 million –12.5% €17 million €15 million –11.8% Sales (total) €2,173 million €1,879 million –13.5% €4,404 million €3,770 million –14.4% Change in sales (external) Volume –7.3% –4.7% –4.4% –10.1% Price 11.8% –6.6% 15.2% –3.5% Currency 6.5% –2.2% 6.3% –0.8% Portfolio 0.0% 0.0% 9.0% 0.0% Sales by region (external) EMLA €851 million €736 million –13.5% €1,724 million €1,491 million –13.5% NA €563 million €487 million –13.5% €1,064 million €972 million –8.6% APAC 2 EBITDA 2 EBIT €751 million €213 million €139 million €649 million €221 million €149 million –13.6% €1,599 million €1,292 million 3.8% €437 million €386 million 7.2% €291 million €212 million –19.2% –11.7% –27.1% Cash flows from operating activities 3 (€83 million) €205 million . (€184 million) €200 million . Cash outflows for additions to property, plant, equipment and intangible assets €56 million €55 million –1.8% €101 million €98 million –3.0% Free operating cash flow 3 (€139 million) €150 million . (€285 million) €102 million . 1 In accordance with internal reporting to the Board of Management since July 1, 2022, these figures also include sales recognized in the amount of cost of goods sold. To ensure comparability, the segment data is presented on a consistent basis. 2 EBITDA and EBIT include the effect on earnings of intersegment sales. 3 An imputed tax rate of 25% has been used since the Annual Report 2022 to calculate income taxes paid by the reportable segments; see the Notes to the Consolidated Financial Statements in the Annual Report 2022, note 4 “Segment and Regional Reporting.” The tax rate for the reference value has not changed. Second Quarter of 2023 Sales in the Solutions & Specialties segment were down 13.5% to €1,872 million in the second quarter of 2023 (previous year: €2,165 million). A drop in the selling price level and a decline in volumes sold had a negative effect of 6.6% and 4.7% on sales respectively. This is attributable to the weak demand situation worldwide in the second quarter of 2023, as against the advantageous competitive situation in the prior-year quarter. At the same time, exchange rate movements had a negative effect on sales of 2.2%. In the EMLA region, sales fell by 13.5% to €736 million (previous year: €851 million). In particular, a demand- induced decline in volumes sold had a significant negative effect on sales, while a drop in the selling price level had a slightly negative impact on sales. In contrast, exchange rate movements had no notable effect on sales. Sales in the NA region were also down by 13.5% to €487 million (previous year: €563 million). The main reason is a drop in volumes sold due to weak demand, which had a significant adverse impact on sales. Lower average selling prices had an additional, slightly negative effect on sales. The exchange rate trend had a neutral effect on sales overall. In the APAC region, sales decreased by 13.6% to €649 million (previous year: €751 million). This was predominantly due to a decline in the selling price level as well as exchange rate movements, both of which had a significant negative effect on sales. An increase in volumes sold, on the other hand, drove sales significantly upward, on the back of a recovery after the logistics bottlenecks in China in the prior-year quarter. In the second quarter of 2023, the Solutions & Specialties segment’s EBITDA was up 3.8% on the prior-year quarter, rising to €221 million (previous year: €213 million). This was driven in particular by the beneficial effect of lower fixed costs. At the same time, the sale of the additive manufacturing business to Stratasys, a U.S.-Israeli manufacturer of 3D printers and 3D production systems, had a positive effect on earnings in an amount of €35 million. This was offset by a reduction in volumes sold and exchange rate movements, both of which had a reducing effect on earnings. Another negative factor was the decline in margins, although lower raw material and energy prices almost fully offset reduced selling prices. EBIT was up 7.2% to €149 million (previous year: €139 million). 20 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Free operating cash flow amounted to €150 million (previous year: €–139 million), largely driven by higher funds tied up in working capital in the prior-year quarter. This was set against cash freed up in the current quarter, which had a positive impact. The main reason was the payment of short-term variable compensation for fiscal 2021 in the prior-year quarter as well as changes in inventories. No short-term variable compensation was paid for fiscal 2022. Solutions & Specialties Solutions & Specialties Quarterly Sales Quarterly EBITDA € million € million First Half of 2023 Sales in the Solutions & Specialties segment decreased by 14.4% to €3,755 million (previous year: €4,387 million) in the first half of 2023, which was weighed down overall by weak demand worldwide. A reduction in volumes sold and lower average selling prices both led sales lower, with a respective effect of 10.1% and 3.5%. In addition, exchange rate movements had a negative effect on sales of 0.8%. EBITDA in the Solutions & Specialties segment was 11.7% lower than in the prior-year period, declining to €386 million in the first half of 2023 (previous year: €437 million), mainly due to a decrease in volumes sold. In contrast, the margins had a beneficial impact on EBITDA, since lower raw material and energy prices more than offset the decline in the selling price level. At the same time, lower fixed costs and the sale of the additive manufacturing business to Stratasys, a U.S.-Israeli manufacturer of 3D printers and 3D production systems, had a positive effect on earnings. EBIT fell 27.1% to €212 million (previous year: €291 million). Free operating cash flow stood at €102 million (previous year: €–285 million). The main contributors to this development were higher funds tied up in working capital, due especially to the payment of short-term variable compensation for fiscal 2021 in the second quarter of 2022, as well as changes in inventories. The decline in EBITDA had an offsetting effect. 21 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION REPORT ON FUTURE PERSPECTIVES AND ON OPPORTUNITIES AND RISKS Economic Outlook Global Economy For the current fiscal year, we expect global economic output to rise slightly more strongly – now by 2.4% – than indicated in the outlook published in the Annual Report 2022. Backed by the robust performance of the services sector, the economic data for the leading industrialized countries was more positive in the first half of the year than previously expected, and this has had a boosting effect on global economic growth in the year 2023. However, there are signs that tighter monetary policy in response to inflation in the United States and Europe will weigh significantly on economic performance during the remainder of the year. It is therefore to be anticipated that the United States will enter a mild recession. The pace of growth is expected to slow in the United States and Europe, especially in the manufacturing industry. The recovery initiated by the relaxation of China’s zero-COVID policy in the year 2022 is slowing noticeably, so that only limited positive momentum for global economic growth can now be expected in the second half of 2023. The economic growth forecast for the EMLA and NA regions continues to be below the global growth rate. As referred to above, global economic growth in the first half of the year in particular has had a positive impact on expected full-year economic growth in both regions, compared with the outlook published in the Annual Report 2022. We now forecast that the economy will expand by 1.1% in the EMLA region and by 1.7% in the NA region. In the APAC region, we expect growth of 4.1%, in excess of global economic expansion. Although the recovery of macroeconomic performance in China is slowing down, we are still anticipating that – driven by economic stimulus measures – economic performance will increase faster than suggested in the outlook published in the Annual Report 2022. Economic growth 1 Growth 2022 Growth forecast 2023 (Annual Report 2022) Growth forecast 2023 % % % World 3.1 1.5 2.4 Europe, Middle East, Latin America 2 , Africa (EMLA) 3.6 0.6 1.1 of which Europe 3.3 0.2 0.7 of which Germany 1.9 –0.2 –0.5 of which Middle East 6.3 2.7 2.0 2 of which Latin America 3.6 0.3 1.6 of which Africa 3.7 2.4 2.5 North America 3 (NA) 2.2 –0.1 1.7 of which United States 2.1 0.0 1.8 Asia-Pacific (APAC) 3.2 3.4 4.1 of which China 3.0 4.5 5.5 1 Real growth of gross domestic product; source: IHS (Global Insight), “Growth 2022” and “Growth forecast 2023” as of July 2023. 2 Latin America (excluding Mexico). 3 North America (Canada, Mexico, United States). 22 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Main Customer Industries Compared with the outlook presented in the Annual Report 2022, growth expectations are significantly lower for all sectors, except the automotive industry. The stronger rise in global economic output than indicated in the outlook published in the Annual Report 2022 is largely due to the robust performance of the services sector and not reflected in the performance of the industries relevant to Covestro. For the automotive industry, we anticipate significant growth in the year 2023. We now expect stagnant growth in the electrical, electronics, and household appliances industry. In contrast, the latest expectations for the construction and furniture industry are for slightly negative growth in the year 2023. Growth in main customer industries 1 Growth 2022 Growth forecast 2023 (Annual Report 2022) Growth forecast 2023 % % % Automotive 7.0 4.6 6.0 Construction 0.4 0.8 –1,0 Electrical, electronics and household appliances 4.9 2.0 0.5 Furniture –3,6 0.3 –2,8 1 Covestro’s estimate, based on the following sources: LMC Automotive Limited, B+L, CSIL (Centre for Industrial Studies), Oxford Economics. We limited the economic data of our “automotive and transportation” and “furniture and wood processing” main customer industries to the automotive and furniture segments (excluding the transportation or wood processing segments). As of: July 2023. 23 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Forecast for the Covestro Group The analysis of the development of our key management indicators is based on the business performance described in this Half-Year Financial Report and consideration of our potential risks and opportunities. In view of the results of the first quarter of 2023 and higher margins and an improved cost level compared with the forecast published in the Annual Report 2022, Covestro’s Board of Management on April 28, 2023, adjusted the guidance presented in the Annual Report 2022. On the basis of the business performance described in this Half-Yearly Report and taking into account our potential opportunities and risks, we confirm the adjusted guidance for fiscal 2023. For the remainder of the year we have, however, identified potential risk, mainly because of weak demand in our main customer industries. As a consequence, we currently expect that we will more likely meet the targets in the bottom half of each of the forecast ranges for our key management indicators presented below: Forecast key management indicators 2022 Forecast 2023 (Annual Report 2022) Forecast 2023 (April 28, 2023) 1 EBITDA €1,617 million Significantly down on previous year Between €1,100 million and €1,600 million Free operating cash flow 2 €138 million Significantly down on previous year Between €0 million and €500 million ROCE above WACC 3, 4 –5.0% points Significantly down on previous year Between –6% points and –2% points Greenhouse gas emissions (CO2 equivalents) 5 4.7 million metric tons Similar to previous year 6 Between 4.2 million metric tons and 4.8 million metric tons 1 Earnings before interest, taxes, depreciation and amortization (EBITDA): EBIT plus depreciation, amortization, and impairment losses; less impairment loss 2 reversals on property, plant and equipment and intangible assets. Free operating cash flow (FOCF): cash flows from operating activities less cash outflows for additions to property, plant and equipment and intangible assets. 3 Return on capital employed (ROCE): ratio of the adjusted operating result (EBIT) after imputed income taxes to capital employed. 4 Weighted average cost of capital (WACC): weighted average cost of capital reflecting the expected return on the company’s equity and debt capital. A figure of 5 7.0% has been taken into account for the year 2022 (2021: 6.6%). Greenhouse gas emissions (Scope 1 and Scope 2, GHG Protocol) at main production sites (responsible for more than 95% of our energy usage). 6 This may entail a variance in the single-digit percentage range. For the Covestro Group’s EBITDA, we project a figure between €1,100 million and €1,600 million (forecast in the Annual Report 2022: significantly down on the previous year). The forecast for the Performance Materials segment’s EBITDA is expected to be significantly below the figure for the year 2022. In the Solutions & Specialties segment, we project EBITDA on a level with the year 2022.* The Covestro Group’s FOCF is forecast between €0 million and €500 million (forecast in the Annual Report 2022: significantly down on the previous year). For the Performance Materials segment, we expect FOCF to fall significantly short of the figure for the year 2022. In the Solutions & Specialties segment, however, we expect FOCF to be significantly higher than the amount of the year 2022. We expect ROCE above WACC of between –6% points and –2% points (forecast in the Annual Report 2022: significantly down on the previous year). The Covestro Group’s GHG emissions measured as CO2 equivalents are projected to be between 4.2 million metric tons and 4.8 million metric tons (forecast in the Annual Report 2022: on a level with the previous year*). This may entail a variance in the single-digit percentage range. 24 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP M ANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Opportunities and Risks As a company with global operations and a diversified portfolio, the Covestro Group is subject to a number of opportunities and risks. Opportunity and risk management at Covestro is an integral part of the Group’s corporate governance system. See the “Opportunities and Risks Report” in the Combined Management Report in the Annual Report 2022 for a detailed explanation of our opportunity and risk management system and opportunity and risk situation. See the “Opportunities and Risks Report” in the Annual Report 2022 for additional information. No Changes in the Risk Situation With regard to the Covestro Group’s other opportunity or risk factors, no material changes have been made to the presentation of risk categories in the Annual Report 2022. At the time this Half-Year Financial Report was prepared, there were again no risks that could endanger the Group’s continued existence. No new material developments have occurred in the legal proceedings presented in the Annual Report 2022, and no new material legal proceedings are pending. See note 9 “Legal Risks” in the Notes to the Consolidated Interim Financial Statements for additional information. 25 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS CONSOLIDATED INTERIM FINANCIAL STATEMENTS Covestro Group Consolidated Income Statement 27 Covestro Group Consolidated Statement of Comprehensive Income 28 Covestro Group Consolidated Statement of Financial Position 29 Covestro Group Consolidated Statement of Cash Flows 30 Covestro Group Consolidated Statement of Changes in Equity 31 Notes to the Consolidated Interim Financial Statements 32 1. General Information 2. Effects of New Financial Reporting Standards 3. Segment and Regional Reporting 4. Scope of Consolidation 5. Sales 6. Earnings per Share 7. Employees and Pension Obligations 8. Financial Instruments 9. Legal Risks 10. Related Parties 11. Events after the End of the Reporting Period 32 33 34 38 39 39 40 41 45 45 46 26 FURTHER INFORMATION Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED INCOME STATEMENT 2nd quarter 2022 2nd quarter 2023 1st half 2022 1st half 2023 € million € million € million € million Sales 4,703 3,720 9,386 7,463 Cost of goods sold (3,783) (3,022) (7,280) (6,146) Gross profit 920 698 2,106 1,317 Selling expenses (409) (385) (797) (764) Research and development expenses (96) (93) (190) (198) General administration expenses (96) (92) (189) (179) Other operating income 16 133 34 148 Other operating expenses (28) (95) (68) (119) EBIT 1 307 166 896 205 Equity-method loss (6) (5) (10) (12) Interest income 22 17 37 34 Interest expense (34) (42) (57) (83) Other financial result (26) (6) (42) (4) Financial result (44) (36) (72) (65) Income before income taxes 263 130 824 140 Income taxes (65) (85) (209) (122) Income after income taxes 198 45 615 18 attributable to noncontrolling interest (1) (1) – (2) attributable to Covestro AG shareholders (net income) 199 46 615 20 € € € € Basic/Diluted earnings per share 2 1.04 0.24 3.20 0.11 1 EBIT: income after income taxes plus financial result and income taxes 2 Earnings per share: according to IAS 33 (Earnings per Share), net income divided by the weighted average number of outstanding no-par value voting shares of Covestro AG. The calculation was based on 189,638,752 no-par shares for the second quarter of 2023 (previous year: 191,070,836 no-par shares) and on 189,792,703 no-par shares for the first half of 2023 (previous year: 192,101,348 no-par shares). 27 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2nd quarter 2022 2nd quarter 2023 1st half 2022 1st half 2023 € million € million € million € million Income after income taxes 198 45 615 18 Remeasurements of the net defined benefit liability for post-employment benefit plans 551 18 926 35 Income taxes (161) (2) (268) – Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans 390 16 658 35 Changes in fair values of equity instruments – 1 (1) 1 Income taxes – – – – Other comprehensive income from equity instruments – 1 (1) 1 Other comprehensive income that will not be reclassified subsequently to profit or loss 390 17 657 36 Exchange differences of foreign operations 160 (168) 266 (249) Reclassified to profit or loss – – – – Other comprehensive income from exchange differences 160 (168) 266 (249) Other comprehensive income that may be reclassified subsequently to profit or loss 160 (168) 266 (249) Total other comprehensive income 550 (151) 923 (213) attributable to noncontrolling interest (1) (2) (2) (3) attributable to Covestro AG shareholders 551 (149) 925 (210) Total comprehensive income 748 (106) 1,538 (195) attributable to noncontrolling interest (2) (3) (2) (5) attributable to Covestro AG shareholders 750 (103) 1,540 (190) 28 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION June 30, 2022 June 30, 2023 Dec. 31, 2022 € million € million € million Noncurrent assets Goodwill 753 713 729 Other intangible assets 692 548 603 Property, plant and equipment 6,171 5,652 5,801 Investments accounted for using the equity method 181 177 185 Other financial assets 45 103 143 Other receivables 247 145 110 Deferred taxes 604 329 345 8,693 7,667 7,916 Current assets Inventories 3,673 2,863 2,814 Trade accounts receivable 2,771 2,086 2,011 Other financial assets 67 310 62 Other receivables 456 532 451 Claims for income tax refunds 147 94 115 Cash and cash equivalents 315 741 1,198 Assets held for sale – – 18 7,429 6,626 6,669 Total assets 16,122 14,293 14,585 Equity Capital stock of Covestro AG 190 189 190 Capital reserves of Covestro AG 3,780 3,740 3,788 Other reserves 4,473 2,917 3,108 Equity attributable to Covestro AG shareholders 8,443 6,846 7,086 Equity attributable to noncontrolling interest 51 31 36 8,494 6,877 7,122 Noncurrent liabilities Provisions for pensions and other post-employment benefits 473 445 486 Other provisions 196 186 184 Financial liabilities 2,353 3,516 3,368 Income tax liabilities 113 27 26 Other liabilities 29 37 32 Deferred taxes 324 262 312 3,488 4,473 4,408 Current liabilities Other provisions 338 378 171 Financial liabilities 806 294 321 Trade accounts payable 2,560 1,781 2,016 Income tax liabilities 128 164 149 Other liabilities 308 326 396 Liabilities directly related to assets held for sale – – 2 4,140 2,943 3,055 Total equity and liabilities 16,122 14,293 14,585 29 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CASH FLOWS 2nd quarter 2022 2nd quarter 2023 1st half 2022 1st half 2023 € million € million € million € million Income after income taxes 198 45 615 18 Income taxes 65 85 209 122 Financial result 44 36 72 65 Income taxes paid (262) (95) (360) (117) Depreciation, amortization and impairment losses and impairment loss reversals 240 219 457 466 Change in pension provisions 10 (7) 12 (17) (Gains)/losses on retirements of noncurrent assets – (34) – (34) Decrease/(increase) in inventories (341) (38) (651) (119) Decrease/(increase) in trade accounts receivable (23) 47 (335) (101) (Decrease)/increase in trade accounts payable 296 (169) 291 (197) Changes in other working capital, other noncash items (499) 60 (425) 44 Cash flows from operating activities (272) 149 (115) 130 Cash outflows for additions to property, plant, equipment and intangible assets (190) (159) (330) (279) Cash inflows from sales of property, plant, equipment and other assets 2 1 3 2 Cash inflows from divestments less divested cash 5 51 6 51 Cash outflows for noncurrent financial assets (5) (6) (7) (8) Cash inflows from noncurrent financial assets – 41 1 41 Interest and dividends received 19 16 33 34 Cash inflows from/(Cash outflows for) other current financial assets 402 (123) 448 (299) Cash flows from investing activities 233 (179) 154 (458) Acquisition of treasury shares (102) (49) (150) (49) Dividend payments (653) – (653) (2) Issuances of debt 565 31 579 302 Retirements of debt (52) (121) (90) (309) Interest paid (34) (34) (63) (68) Cash outflows for the purchase of additional interests in subsidiaries – – (4) – Cash flows from financing activities (276) (173) (381) (126) Change in cash and cash equivalents due to business activities (315) (203) (342) (454) Cash and cash equivalents at beginning of period 623 949 649 1,198 Change in cash and cash equivalents due to exchange rate movements 7 (5) 8 (3) Cash and cash equivalents at end of period 315 741 315 741 30 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION COVESTRO GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Capital stock of Covestro AG Capital reserves of Covestro AG Retained earnings incl. total income Accumulated other com- prehensive income Equity attributable to Covestro AG shareholders Equity attributable to non- controlling interest € million € million € million € million € million € million Dec. 31, 2021 193 3,927 3,002 574 7,696 66 Acquisition of treasury shares (3) (147) (150) Dividend payments (651) (651) (2) Other changes 1 8 8 (11) Income after income taxes 615 615 – Other comprehensive income 657 268 925 (2) Total comprehensive income 1,272 268 1,540 (2) June 30, 2022 190 3,780 3,631 842 8,443 51 of which treasury shares (3) (147) (150) Dec. 31, 2022 190 3,788 2,480 628 7,086 36 Acquisition of treasury shares 2 Other changes (1) (48) (1) (49) (1) – Income after income taxes 20 20 (2) Other comprehensive income 36 (246) (210) (3) Total comprehensive income 56 (246) (190) (5) June 30, 2023 189 3,740 2,535 382 6,846 31 of which treasury shares (4) (184) (188) 1 Other changes in the first half of 2022 primarily include the purchase of additional interests in subsidiaries. 2 Other changes in the first half of 2023 resulted from the sale of long-term interests in other companies by a Japanese subsidiary. 31 Equity € million 7,762 (150) (653) (3) 615 923 1,538 8,494 (150) 7,122 (49) (1) 18 (213) (195) 6,877 (188) Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. General Information Information on the Consolidated Interim Financial Statements Pursuant to Section 115, Paragraph 3 of the German Securities Trading Act (WpHG), the consolidated interim financial statements of Covestro AG, Leverkusen (Germany), as of June 30, 2023, have been prepared in accordance with the International Financial Reporting Standards (IFRSs) – including IAS 34 (Interim Financial Reporting) – of the International Accounting Standards Board (IASB), London (United Kingdom), the Interpretations (IFRICs) of the IFRS Interpretations Committee (IFRS IC), and the interpretations published by the Standing Interpretations Committee (SIC), endorsed by the European Union and in effect at the reporting date. The accounting policies and measurement principles described in the consolidated financial statements as of December 31, 2022, were applied unchanged in preparing the consolidated interim financial statements as of June 30, 2023, subject to the effects of financial reporting standards adopted for the first time in the current fiscal year as described in note 2.1 “Financial Reporting Standards Applied for the First Time in the Reporting Period.” The consolidated interim financial statements are drawn up in euros. Amounts are stated in millions of euros (€ million) unless otherwise noted. The Board of Management approved the Condensed Consolidated Interim Financial Statements for publication on July 26, 2023. The Consolidated Interim Financial Statements and the Interim Group Management Report were subjected to a review by the group auditor. Exchange Rates In the reporting period, the following exchange rates were used for the major currencies of relevance to the Covestro Group: Closing rates for major currencies Average rates for major currencies Closing rates Average rates €1/ June 30, 2022 Dec. 31, 2022 June 30, 2023 €1/ 1st half 2022 1st half 2023 BRL Brazil 5.42 5.64 5.28 BRL Brazil 5.53 5.48 CNY China 6.97 7.37 7.91 CNY China 7.09 7.49 HKD Hong Kong 1 8.15 8.32 8.52 HKD Hong Kong 1 8.55 8.47 INR India 82.11 88.17 89.21 INR India 83.31 88.84 JPY Japan 141.54 140.66 157.16 JPY Japan 134.10 145.48 MXN Mexico 20.96 20.86 18.56 MXN Mexico 22.14 19.65 USD United States 1.04 1.07 1.09 USD United States 1.09 1.08 1 Special Administration Region (China) 32 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 2. 2.1 Financial Reporting Standards Applied for the First Time in the Reporting Period Effects of New Financial Reporting Standards IFRS pronouncement (published on) Title Effective for annual periods beginning on or after IFRS 17 (May 18, 2017) Amendments to IFRS 17 (June 25, 2020) Amendments to IAS 1 and the practice statement (February 12, 2021) Amendments to IAS 8 (February 12, 2021) Amendments to IAS 12 (May 7, 2021) Amendments to IFRS 17 (December 9, 2021) Insurance Contracts Amendments to IFRS 17 – Insurance Contracts Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) Definition of Accounting Estimates (Amendments to IAS 8) Deferred Tax related to Assets and Liabilities arising from a Single Transaction Initial Application of IFRS 17 and IFRS 9 – Comparative Information January 1, 2023 January 1, 2023 January 1, 2023 January 1, 2023 January 1, 2023 January 1, 2023 Initial application of the standards listed in the table had little or no material impact on the presentation of the net assets, financial position and results of operations. 2.2 Published Financial Reporting Standards That Have Not Yet Been Applied There were no new findings regarding the potential effects of reporting standards newly published up to the authorization for issue of the financial statements, but not yet required to be applied, whose application could affect the presentation of the net assets, financial position and results of operations that differ from the information presented in the 2022 consolidated financial statements. In relation to the Amendments to IAS 12 Income Taxes: International Tax Reform – Pillar Two Model Rules approved by the IASB on May 23, 2023, adoption into European law is still pending. These amendments propose temporary relief from accounting for deferred taxes arising from the implementation of the new EU Directive, Global Anti-Base Erosion Model Rules (Pillar Two), as well as supplementary notes disclosures. Subject to the completion of the analysis, the initial application is not expected to have any, or any material, effect on the presentation of Covestro’s net assets, financial position, and results of operations. 33 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 3. Segment and Regional Reporting The Board of Management of Covestro AG, as the chief operating decision maker of the Covestro Group, allocates resources to the reportable segments and assesses their performance. The reportable segments are identified, and the disclosures selected, in line with the internal financial reporting system (management approach). The segments pursue the following activities: Performance Materials The Performance Materials segment focuses on developing, producing, and reliably supplying high-performance materials such as standard polyurethanes and polycarbonates, as well as base chemicals. This includes diphenylmethane diisocyanate (MDI), toluene diisocyanate (TDI), long-chain polyols, and polycarbonate resins, among others. These materials are used in sectors such as the furniture and wood processing industry, the construction industry as well as the automotive and transportation industry, for example in roof structures, insulation for buildings and refrigerators, mattresses, and car seats, among other applications. Solutions & Specialties The Solutions & Specialties segment consolidates Covestro’s solutions and specialties businesses, and combines chemical products with application technology services. A fast pace of innovation is a key success factor since customer requirements change quickly. Covestro’s Solutions & Specialties business comprises a variety of polymer products including polycarbonates, precursors for coatings and adhesives, MDI specialties and polyols, thermoplastic polyurethanes, specialty films, and elastomers. They are used in sectors such as the automotive and transportation industry; the electrical, electronics and household appliances industry; the construction industry; and the healthcare industry. These materials include composite resins for wind turbine rotor blades; precursors for coatings and adhesives, laptop cases, floodlights, and high-quality specialty films. Business activities that cannot be allocated to any of the aforementioned segments, costs associated with central corporate functions, higher or lower expenses resulting from more or less favorable Covestro share performance as part of long-term variable compensation, and the difference between the imputed income tax payments of the reportable segments and the actual income taxes paid by the Covestro Group can be found in the segment reporting under “Others/Consolidation.” The external sales presented there are generated primarily from the sale of energy, site management services, and rentals and leasing. As a rule, the segment data is calculated in accordance with the International Financial Reporting Standards (IFRSs) listed in note 3 of the Annual Report 2022 “Accounting Policies and Valuation Principles” with the following specifics: Intersegment sales are generally based on arm’s length transactions between the units that make up Covestro’s segments. Market prices and, in exceptional cases, cost of goods sold serve as the settlement basis. EBIT and EBITDA are not defined in the IFRSs. EBIT is equal to income after income taxes plus financial result and income taxes. EBITDA is EBIT plus amortization and impairment losses on intangible assets, and depreciation and impairment losses on property, plant and equipment, less impairment loss reversals. Trade working capital comprises inventories, trade accounts receivable, and contract assets, less trade accounts payable, contract liabilities, and refund liabilities. In line with internal reporting to the Board of Management since July 1, 2022, intersegment sales also include sales at cost of goods sold. However, this has no effect on the level of the earnings measures EBIT and EBITDA per segment. 34 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following tables show the segment reporting data for the second quarter and for the first half year (as of June 30), respectively: Segment reporting 2nd quarter Performance Materials Solutions & Specialties Others/ Consolidation Covestro Group € million € million € million € million 2nd quarter 2023 Sales (external) 1,789 1,872 59 3,720 Intersegment sales 557 7 (564) – Sales (total) 2,346 1,879 (505) 3,720 1 EBITDA 302 221 (138) 385 1 EBIT 158 149 (141) 166 2nd quarter 2022 Sales (external) 2,461 2,165 77 4,703 Intersegment sales 753 8 (761) – Sales (total) 3,214 2,173 (684) 4,703 1 EBITDA 367 213 (33) 547 1 EBIT 204 139 (36) 307 1 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect of intersegment sales on earnings. Segment reporting 1st half Performance Materials Solutions & Specialties Others/ Consolidation Covestro Group € million € million € million € million 1st half 2023 Sales (external) 3,581 3,755 127 7,463 Intersegment sales 1,164 15 (1,179) – Sales (total) 4,745 3,770 (1,052) 7,463 1 EBITDA 475 386 (190) 671 1 EBIT 187 212 (194) 205 1st half 2022 Sales (external) 4,849 4,387 150 9,386 Intersegment sales 1,563 17 (1,580) – Sales (total) 6,412 4,404 (1,430) 9,386 1 EBITDA 987 437 (71) 1,353 1 EBIT 679 291 (74) 896 1 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect of intersegment sales on earnings. The recognition of a receivable of €75 million from the primary insurer for insurance compensation for production stoppages had a positive effect on the Performance Materials segment’s EBITDA and EBIT in the second quarter of 2023. This was offset by a decline, by the same amount, in the EBITDA and EBIT of the business activities reported in the “Others/Consolidation” category due to the recognition of a provision for reimbursement of the insurance amount by the intragroup reinsurer Covestro International Re., Inc., Colchester, Vermont (United States), to the primary insurer. In connection with the closure of the production site in Markt Bibart (Germany), the Solutions & Specialties segment’s EBIT decreased by €37 million in the first half of 2023 as a result of impairment losses on noncurrent assets, allowances on inventories, and the recognition of provisions. See “Significant Events” in the Interim Group Management Report for additional information. 35 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Trade working capital by segment Dec. 31, 2022 June 30, 2023 € million € million Performance Materials 1,135 1,428 Solutions & Specialties 1,592 1,701 Total of reportable segments 2,727 3,129 All other segments (18) (12) Corporate Center (3) (12) Trade working capital 2,706 3,105 Inventories 2,814 2,863 Trade accounts receivable 2,011 2,086 Trade accounts payable (2,016) (1,781) IFRS 15 items 1 (103) (63) 1 The item includes contract assets, contract liabilities, and refund liabilities. Information on Geographical Areas The geographical areas comprise the EMLA, NA, and APAC regions. The EMLA region consists of Europe, the Middle East, Africa, and Latin America except Mexico, which together with the United States and Canada forms the NA region. The APAC region includes Asia and the Pacific region. The following tables show the regional reporting data for the second quarter and for the first half year: Regional reporting 2nd quarter EMLA NA APAC Total € million € million € million € million 2nd quarter 2023 Sales (external) by market 1,597 971 1,152 3,720 Sales (external) by point of origin 1,575 995 1,150 3,720 2nd quarter 2022 Sales (external) by market 2,167 1,200 1,336 4,703 Sales (external) by point of origin 2,162 1,223 1,318 4,703 Regional reporting 1st half EMLA NA APAC Total € million € million € million € million 1st half 2023 Sales (external) by market 3,247 1,953 2,263 7,463 Sales (external) by point of origin 3,211 1,993 2,259 7,463 1st half 2022 Sales (external) by market 4,241 2,316 2,829 9,386 Sales (external) by point of origin 4,252 2,352 2,782 9,386 36 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Reconciliation The following table shows the reconciliation of EBITDA of the segments to income before income taxes of the Group: Reconciliation of segments’ EBITDA to Group income before income taxes 2nd quarter 2022 2nd quarter 2023 1st half 2022 1st half 2023 € million € million € million € million EBITDA of reportable segments 580 523 1,424 861 EBITDA of Others/Consolidation (33) (138) (71) (190) EBITDA 547 385 1,353 671 Depreciation, amortization and impairment losses and impairment loss reversals of reportable segments (237) (216) (454) (462) Depreciation, amortization and impairment losses and impairment loss reversals of Others/Consolidation (3) (3) (3) (4) Depreciation, amortization and impairment losses (240) (219) (457) (466) EBIT of reportable segments 343 307 970 399 EBIT of Others/Consolidation (36) (141) (74) (194) EBIT 307 166 896 205 Financial result (44) (36) (72) (65) Income before income taxes 263 130 824 140 37 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 4. Scope of Consolidation 4.1 Changes in the Scope of Consolidation As of June 30, 2023, the scope of consolidation comprised Covestro AG and 59 (December 31, 2022: 60) consolidated companies. The decline in the number of consolidated companies in the first half of 2023 is due to the sale of Covestro Resins (Taiwan) Ltd., Taipei (Taiwan, Greater China), which was successfully completed as of May 31, 2023. 4.2 Acquisitions and Divestitures Acquisitions No reportable acquisitions were made in the first half of 2023. Divestitures On April 3, 2023, the sale of assets and liabilities (disposal group) of the additive manufacturing business to Stratasys, a U.S.-Israeli manufacturer of 3D printers and 3D production systems, was successfully completed. The business sold by Covestro includes employees, research and development facilities, production units, and offices in the Netherlands, the United States, China, Japan, Germany, and the United Kingdom as well as access to a large network of partners around the world. The portfolio also includes products that are part of the Resins & Functional Materials business acquired from Koninklijke DSM N.V., Heerlen (Netherlands), in fiscal 2021. The additive manufacturing business, which was part of the Solutions & Specialties segment, offers material solutions for common polymer 3D printing processes. Covestro’s decision to sell the additive manufacturing business is consistent with the optimization of its portfolio to make its organization more efficient and allow the company to sharpen its focus on the extensive range of offerings for customers in its main customer industries. The preliminary selling price is €50 million. There is an additional purchase price receivable of €4 million. The agreement also specifies a variable earn-out payment, which depends on the achievement of various success factors. The transaction is structured as an asset deal. Noncurrent assets and inventories of €21 million as well as liabilities of €2 million were sold as part of this transaction. The net gain of €35 million on the disposal of this business was recognized in other operating result. 38 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 5. Sales Sales are categorized according to “geographical regions and key countries” and mainly comprise sales from contracts with customers and an immaterial amount of rental and leasing income. The table also contains a reconciliation of the breakdown of sales to the reportable segments. Breakdown of sales Performance Materials Solutions & Specialties Others/ Consolidation Covestro Group € million € million € million € million 1st half 2023 EMLA 1,652 1,491 104 3,247 of which Germany 454 462 69 985 NA 965 972 16 1,953 of which United States 827 795 15 1,637 APAC 964 1,292 7 2,263 of which China 667 762 1 1,430 Total 3,581 3,755 127 7,463 1st half 2022 EMLA 2,397 1,724 120 4,241 of which Germany 609 506 79 1,194 NA 1,229 1,064 23 2,316 of which United States 1,029 883 22 1,934 APAC 1,223 1,599 7 2,829 of which China 792 946 1 1,739 Total 4,849 4,387 150 9,386 6. Earnings per Share Earnings per share are calculated according to IAS 33 (Earnings per Share) as the relationship of the Group’s income after income taxes (net income) for the income period to the weighted average number of outstanding no-par voting shares of Covestro AG. Since March 12, 2022, Covestro AG has purchased treasury shares under a share buyback program. In the first half of 2023, a weighted average number of outstanding no-par voting shares of 189,792,703 was used to calculate earnings per share, while in the first half of 2022, these shares amounted to 192,101,348. There were no dilution effects to consider. See the “Share Buyback Program” in the Interim Group Management Report for additional information on the share buyback program. Earnings per share 1st half 2022 1st half 2023 € million € million Income after income taxes 615 18 of which attributable to noncontrolling interest – (2) of which attributable to Covestro AG shareholders (net income) 615 20 Shares Shares Weighted average number of no-par voting shares of Covestro AG 192,101,348 189,792,703 € € Basic earnings per share 3.20 0.11 Diluted earnings per share 3.20 0.11 39 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 7. Employees and Pension Obligations As of June 30, 2023, the Covestro Group had 17,591 employees worldwide (December 31, 2022: 17,985). In the first half of 2023, personnel expenses increased by €20 million to €1,134 million (previous year: €1,114 million) and were therefore approximately at the previous year’s level. Employees by division 1 Dec. 31, 2022 June 30, 2023 Production 11,760 11,949 Marketing and distribution 3,261 2,851 Research and development 1,477 1,385 General administration 1,487 1,406 Total 17,985 17,591 1 The number of employees on either permanent or temporary contracts is stated in full-time equivalents (FTEs). Part-time employees are included on a pro- rated basis in line with their contractual working hours. Employees in vocational training are not included. Provisions for pensions and other post-employment benefits decreased to €445 million (December 31, 2022: €486 million). This is mainly attributable to the return on plan assets. Discount rate for pension obligations Dec. 31, 2022 June 30, 2023 % % Germany 3.70 3.70 United States 4.90 4.90 40 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 8. Financial Instruments The following tables show the carrying amounts and fair values of financial assets and liabilities based on IFRS 9. Carrying amounts of financial instruments and their fair values as of June 30, 2023 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehen- sive income Fair value recognized in profit or loss Measure- ment according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 2,086 2,086 – 2,086 Other financial assets 413 Loans and bank deposits 362 290 – 72 362 Other investments 22 22 – 22 Receivables under lease agreements 8 8 17 Derivatives that do not qualify for hedge accounting 21 21 21 Other receivables 1 109 109 – – 109 Cash and cash equivalents 741 741 – – 741 Financial liabilities Financial debts 3,810 Bonds 1,989 1,989 – 1,915 Lease liabilities 778 778 Liabilities to banks 978 978 – 1,007 Derivatives that do not qualify for hedge accounting 63 63 63 Other financial liabilities 2 2 – 2 Trade accounts payable 1,781 1,781 – 1,781 Other liabilities 2 152 Derivatives that do not qualify for hedge accounting 1 1 1 Refund liabilities 78 78 – 78 Miscellaneous other liabilities 73 73 – 73 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €568 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €211 million. 41 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Carrying amounts of financial instruments and their fair values as of December 31, 2022 Measurement according to IFRS 9 Carrying amount Carried at amortized cost Fair value recognized in other comprehen- sive income Fair value recognized in profit or loss Measure- ment according to IFRS 16 Fair value € million € million € million € million € million € million Financial assets Trade accounts receivable 2,011 2,011 – – 2,011 Other financial assets 205 Loans and bank deposits 128 17 – 111 128 Other investments 24 24 – 24 Receivables under lease agreements 8 8 17 Derivatives that do not qualify for hedge accounting 45 45 45 Other receivables 1 20 – 20 – – – – 20 Cash and cash equivalents 1,198 1,198 – – 1,198 Financial liabilities Financial debts 3,689 – Bonds 1,988 1,988 – 1,852 Lease liabilities 746 – 746 Liabilities to banks 922 922 – 946 Derivatives that do not qualify for hedge accounting 32 – 32 32 Other financial liabilities 1 1 – 1 Trade accounts payable 2,016 2,016 – 2,016 Other liabilities 2 170 – Derivatives that do not qualify for hedge accounting 2 – 2 2 Refund liabilities 111 111 – 111 Miscellaneous other liabilities 57 57 – 57 1 The other receivables recognized in the consolidated statement of financial position also include nonfinancial assets totaling €541 million. 2 The other liabilities recognized in the consolidated statement of financial position also include nonfinancial liabilities totaling €258 million. The fair values of financial instruments are determined and reported in accordance with IFRS 13 (Fair Value Measurement) on the basis of the fair value hierarchy described below: Level 1 covers fair values determined on the basis of quoted, unadjusted prices which exist in active markets. Level 2 comprises fair values determined on the basis of parameters which are observable in an active market. Level 3 applies to fair values determined using parameters whose input factors are not based on observable market data. 42 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION The following table shows the assignment of the financial instruments to the three-level fair value hierarchy: Fair value hierarchy of financial instruments Fair value Fair value Dec. 31, 2022 Level 1 Level 2 Level 3 June 30, 2023 Level 1 Level 2 € million € million € million € million € million € million € million Financial assets carried at fair value Loans 111 – 101 10 72 – 62 Other investments 24 2 – 22 22 – – Derivatives that do not qualify for hedge accounting 45 – 42 3 21 – 20 Financial assets not carried at fair value Receivables under lease agreements 17 – – 17 17 – – Financial liabilities carried at fair value Derivatives that do not qualify for hedge accounting 34 – 32 2 64 – 63 Financial liabilities not carried at fair value Bonds 1,852 1,852 – – 1,915 1,915 – Liabilities to banks 946 946 1,007 – 1,007 Other financial liabilities 1 – 1 – 2 – 2 Reallocation between the different levels of the fair value hierarchy takes place at the end of the reporting period in which the change occurred. In the first half of 2023, no transfers were made between the levels of the fair value hierarchy. Because of the generally short maturities of cash and cash equivalents, loans and bank deposits, trade accounts receivable and payable, and other receivables and liabilities, their carrying amounts do not significantly differ from the fair values. The fair value of the bonds issued by Covestro AG is based on quoted, unadjusted prices in active markets and therefore assigned to Level 1 of the fair value hierarchy. The fair value of some of the other investments is also based on quoted prices in active markets (Level 1). The fair values stated for noncurrent financial assets and liabilities are the present values of the respective future cash inflows or outflows. These are determined by discounting the cash flows at a reporting-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. For this reason, these values are assigned to Level 2 of the fair value hierarchy. The fair values of derivatives for which no publicly quoted market prices exist are determined using valuation techniques based on observable market data as of the reporting date (Level 2). Credit value adjustments and debt value adjustments are determined to allow for both the contracting party’s credit risk and Covestro’s own credit risk. The forward exchange contracts are measured individually at their respective forward rates or prices on the balance sheet date. Forward rates and prices are based on spot rates and prices, taking into account forward premiums and discounts. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. The fair values of noncurrent receivables under lease agreements are calculated on the basis of interest curves observable in the market. Additionally, a discount for cash flows that are very far in the future is applied as an unobservable factor. Covestro works with and invests in start-ups under the auspices of the Covestro Venture Capital (COVeC) approach, which was newly developed in fiscal 2020. Investments associated with COVeC activities are 43 Level 3 € million 10 22 1 17 1 – – – Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION recognized either as debt instruments at fair value through profit and loss or as other financial investments at fair value directly in equity, depending on the contractual design. The fair value is calculated as the present value of the future cash flows estimated based on available performance indicators. The cash flows are discounted at the current interest rate for the appropriate term on the reporting date and reflecting the creditworthiness of the venture capital company. The main input factors are not based on observable market data (Level 3). The estimated fair value of the debt instruments classified in Level 3 would rise (fall) if the expected cash inflows were to be higher (lower) or if the risk-adjusted discount rate were to be lower (higher). Other financial investments are recognized at fair value directly in equity because they are held for the long term for strategic reasons. The fair value of some of the other investments is based on quoted prices in active markets (Level 1). Where there are no quoted, unadjusted prices in an active market for identical or similar instruments, and there is no suitable valuation method where all major input factors are based on observable market data, the fair value of the other investments is determined using a market price-oriented valuation method where the main input factors are not based on observable market data (Level 3). The valuation of certain other investments is based on available performance indicators as well as on market valuation multipliers. The estimated fair value of the equity instruments categorized within Level 3 would rise (fall) if the multiple applied were to be greater (smaller). Further, the fair values of embedded derivatives are determined on the basis of unobservable input factors (Level 3). They are separated from their respective host contracts, which are regularly purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, or regional and industry-specific price indices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include prices or price indices derived from market data. The estimated fair value of the embedded derivative would rise (fall) if the expected payment flows were to be higher (lower) as a result of fluctuations in exchange rates or prices. The table below shows the changes in Level 3 financial instruments: Changes in the net amount of financial assets and liabilities recognized at fair value based on unobservable inputs (level 3) 2022 2023 € million € million Net carrying amounts, Jan. 1 43 33 Gains (losses) recognized in profit or loss (8) (1) of which related to assets / liabilities recognized in the statement of financial position – (1) Gains (losses) recognized outside profit or loss – – Net carrying amounts, June 30 35 32 The gains and losses from Level 3 financial assets and liabilities are reported as follows: gains and losses from embedded derivatives recognized in profit or loss are reported in other operating expenses or income; gains and losses from debt instruments recognized in profit or loss are reported in other financial result; gains and losses from other financial investments are reported in other comprehensive income from equity instruments. 44 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 9. Legal Risks As a company with international operations, the Covestro Group is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax law, environmental law, and compliance issues such as corruption and export control. The outcome of any current or future proceedings cannot be predicted. It is therefore possible that legal judgments or regulatory decisions or future settlements could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect the earnings of the Covestro Group. The legal risks that are material to the Covestro Group were described in note 26 “Legal Risks” to the Consolidated Financial Statements as of December 31, 2022. In the current fiscal year, there have been no new significant developments regarding the legal proceedings described there, and no new material legal proceedings are pending. 10. Related Parties Related entities as defined in IAS 24 (Related Party Disclosures) are those legal entities that are able to exert at least significant influence on Covestro AG and its subsidiaries or over which Covestro AG or its subsidiaries exercise control or have at least a significant influence, or which are controlled by a related person or a close family member of such a person. These include nonconsolidated subsidiaries, joint ventures and associated companies, post-employment benefit plans, and other related parties. In the course of its operating business, Covestro sources materials, supplies, and services from a large number of business partners worldwide, including companies in which it has a direct or indirect interest. Transactions with these companies are undertaken on an arm’s length basis. The goods and services received from associated companies result from the ongoing operating business with PO JV, LP, Houston, Texas (United States), and amounted to €385 million in the first half of 2023 (previous year: €463 million). Covestro benefits from fixed long- term supply quotas/volumes of propylene oxide (PO) from this company’s production. In addition, receivables from pension plans in the amount of €62 million as of June 30, 2023 (previous year: €0 million) resulted from initial funding loans granted. Covestro AG has agreed to provide Bayer-Pensionskasse VVaG, Leverkusen (Germany), with an interest-bearing initial funding loan of up to €208 million and Rheinische Pensionskasse VVaG, Leverkusen (Germany), with an interest-bearing initial funding loan of up to €11 million, both at their request. The pension funds are entitled to draw down amounts necessary to meet their regulatory solvency requirements at any time up to the amounts disclosed. The outstanding receivables are subject to a five-year interest rate adjustment mechanism. In April 2023, Bayer-Pensionskasse VVaG notified Covestro of the partial reversal of the tranche of the initial funding loan drawn down in December 2022. Following the reversal in an amount of €39 million, the loan commitments to the pension funds increased accordingly from €117 million as of December 31, 2022, to €156 million as of June 30, 2023 (previous year: €219 million). The loan commitments to the pension funds are recognized as other financial obligations. There are no further reportable business relationships with other related parties. 45 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION 11. Events after the End of the Reporting Period No events have occurred since July 1, 2023, that have a material impact on the net assets, financial position and results of operations of the Covestro Group. Leverkusen, July 26, 2023 Covestro AG The Board of Management 46 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Responsibility Statement 48 Review Report 49 Segment and Quarterly Overview 50 Financial Calendar 53 47 FURTHER INFORMATION Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the net assets, financial position and results of operations of the Covestro Group, and the interim group management report includes a fair review of the development and performance of the business and the position of the Covestro Group, together with a description of the principal opportunities and risks associated with the expected development of the Covestro Group during the rest of the fiscal year. Leverkusen, July 26, 2023 Covestro AG The Board of Management 48 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Review Report To Covestro AG, Leverkusen We have reviewed the condensed interim consolidated financial statements – comprising the income statement, statement of comprehensive income, statement of financial position, statement of cash flows, statement of changes in equity and selected explanatory notes – together with the interim group management report of the Covestro AG, Leverkusen, for the period from January 1, 2023 to June 30, 2023 that are part of the half-year financial report according to § 115 WpHG [“Wertpapierhandelsgesetz“: “German Securities Trading Act”]. The preparation of the condensed interim consolidated financial statements in accordance with International Accounting Standard IAS 34 “Interim Financial Reporting” as adopted by the EU, and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports, is the responsibility of the Company’s management. Our responsibility is to issue a report on the condensed interim consolidated financial statements and on the interim group management report based on our review. We performed our review of the condensed interim consolidated financial statements and the interim group management report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and additionally observed the International Standard in Review Engagements “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with a certain level of assurance, that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with IAS 34, “Interim Financial Reporting”as adopted by the EU, and that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of company employees and analytical assessments and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot issue an auditor’s report. Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with IAS 34, “Interim Financial Reporting” as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Düsseldorf, July 28, 2023 KPMG AG Wirtschaftsprüfungsgesellschaft Ufer Wirtschaftsprüfer [German Public Auditor] Dr. Ackermann Wirtschaftsprüferin [German Public Auditor] 49 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment and Quarterly Overview Segment information 2nd quarter Performance Materials Solutions & Specialties Others/Consolidation Covestro Group 2nd quarter 2022 2nd quarter 2023 2nd quarter 2022 2nd quarter 2023 2nd quarter 2022 2nd quarter 2023 2nd quarter 2022 2nd quarter 2023 € million € million € million € million € million € million € million € million Sales (external) 2,461 1,789 2,165 1,872 77 59 4,703 3,720 Intersegment sales 1 753 557 8 7 (761) (564) – – Sales (total) 3,214 2,346 2,173 1,879 (684) (505) 4,703 3,720 Change in sales Volume 1.6% –10.3% –7.3% –4.7% –2.1% –8.0% Price 17.5% –15.3% 11.8% –6.6% 14.5% –11.0% Currency 6.7% –1.7% 6.5% –2.2% 6.5% –1.9% Portfolio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Sales by region EMLA 1,255 813 851 736 61 48 2,167 1,597 NA 625 476 563 487 12 8 1,200 971 APAC 2 EBITDA 2 EBIT 581 367 204 500 302 158 751 213 139 649 221 149 4 (33) (36) 3 (138) (141) 1,336 547 307 1,152 385 166 Depreciation, amortization, impairment losses and impairment loss reversals 163 144 74 72 3 3 240 219 Cash flows from operating activities 3 95 26 (83) 205 (284) (82) (272) 149 Cash outflows for additions to property, plant, equipment and intangible assets 132 103 56 55 2 1 190 159 Free operating cash flow 3 (37) (77) (139) 150 (286) (83) (462) (10) Trade working capital 4 1,831 1,428 2,010 1,701 (5) (24) 3,836 3,105 1 In line with the internal reporting to the Board of Management since July 1, 2022, the figures also include sales generated in the amount of the cost of sales. To ensure comparability, the segment data is presented on a consistent basis. 2 EBITDA and EBIT include the effect of intersegment sales on earnings. 3 An imputed tax rate of 25% has been used since the Annual Report 2022 to calculate income taxes paid by the reportable segments; see note 4 “Segment and Regional Reporting” in the Notes to the Consolidated Financial Statements in the Annual Report 2022. The tax rate for the reference value has not changed. 4 Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities, and refund liabilities as of June 30, 2022/2023. 50 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Segment information 1st half Performance Materials Solutions & Specialties Others/Consolidation Covestro Group 1st half 2022 1st half 2023 1st half 2022 1st half 2023 1st half 2022 1st half 2023 1st half 2022 1st half 2023 € million € million € million € million € million € million € million € million Sales (external) 4,849 3,581 4,387 3,755 150 127 9,386 7,463 Intersegment sales 1 1,563 1,164 17 15 (1,580) (1,179) – – Sales (total) 6,412 4,745 4,404 3,770 (1,430) (1,052) 9,386 7,463 Change in sales Volume 3.5% –14.4% –4.4% –10.1% 0.5% –12.5% Price 21.7% –11.2% 15.2% –3.5% 18.3% –7.4% Currency 6.0% –0.5% 6.3% –0.8% 6.1% –0.6% Portfolio 0.0% 0.0% 9.0% 0.0% 4.3% 0.0% Sales by region EMLA 2,397 1,652 1,724 1,491 120 104 4,241 3,247 NA 1,229 965 1,064 972 23 16 2,316 1,953 APAC 2 EBITDA 2 EBIT 1,223 987 679 964 475 187 1,599 437 291 1,292 386 212 7 (71) (74) 7 (190) (194) 2,829 1,353 896 2,263 671 205 Depreciation, amortization, impairment losses and impairment loss reversals 308 288 146 174 3 4 457 466 Cash flows from operating activities 3 301 45 (184) 200 (232) (115) (115) 130 Cash outflows for additions to property, plant, equipment and intangible assets 226 179 101 98 3 2 330 279 Free operating cash flow 3 75 (134) (285) 102 (235) (117) (445) (149) Trade working capital 4 1,831 1,428 2,010 1,701 (5) (24) 3,836 3,105 1 In line with the internal reporting to the Board of Management since July 1, 2022, the figures also include sales generated in the amount of the cost of sales. To ensure comparability, the segment data is presented on a consistent basis. 2 EBITDA and EBIT include the effect of intersegment sales on earnings. 3 An imputed tax rate of 25% has been used since the Annual Report 2022 to calculate income taxes paid by the reportable segments; see note 4 “Segment and Regional Reporting” in the Notes to the Consolidated Financial Statements in the Annual Report 2022. The tax rate for the reference value has not changed. 4 Trade working capital includes inventories plus trade accounts receivable and contract assets, less trade accounts payable, contract liabilities, and refund liabilities as of June 30, 2022/2023. 51 Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS FURTHER INFORMATION Quarterly Overview 1st quarter 2022 2nd quarter 2022 3rd quarter 2022 4th quarter 2022 1st quarter 2023 € million € million € million € million € million Sales (external) 4,683 4,703 4,618 3,964 3,743 Performance Materials 2,388 2,461 2,330 1,916 1,792 Solutions & Specialties 2,222 2,165 2,196 1,975 1,883 EBITDA 806 547 302 (38) 286 Performance Materials 1 620 367 53 (89) 173 Solutions & Specialties 1 224 213 280 108 165 EBIT 589 307 66 (695) 39 Performance Materials 1 475 204 (107) (600) 29 Solutions & Specialties 1 152 139 207 (37) 63 Financial result (28) (44) (40) (25) (29) Income before income taxes 561 263 26 (720) 10 Income after income taxes 417 198 11 (907) (27) Net income 416 199 12 (899) (26) Cash flows from operating activities 2 157 (272) 246 839 (19) Cash outflows for additions to property, plant, equipment and intangible assets 140 190 213 289 120 Free operating cash flow 2 17 (462) 33 550 (139) 1 The earnings of the Performance Materials and Solutions & Specialties reportable segments include the effect of intersegment sales on earnings. 2 An imputed tax rate of 25% has been used since the Annual Report 2022 to calculate income taxes paid by the reportable segments; see note 4 “Segment and Regional Reporting” in the Notes to the Consolidated Financial Statements in the Annual Report 2022. The tax rate for the reference value has not changed. 52 2nd quarter 2023 € million 3,720 1,789 1,872 385 302 221 166 158 149 (36) 130 45 46 149 159 (10) Covestro Half-Year Financial Report 2023 COVESTRO SHARES INTERIM GROUP MANAGEMENT REPORT CONSOLIDATED INTERIM FINANCIAL STATEMENTS Financial Calendar Quarterly Statement Third Quarter 2023 ............................. October 27, 2023 Annual Report 2023 ......................................................................... February 29, 2024 Annual General Meeting 2024 ................................................... April 17, 2024 Quarterly Statement First Quarter 2024 .............................. April 30, 2024 Publishing Information Published by Covestro AG Kaiser-Wilhelm-Allee 60 51373 Leverkusen Germany Email: info@covestro.com www.covestro.com Local Court of Cologne HRB 85281 VAT No. DE815579850 Investor contact Email: ir@covestro.com Press contact Email: communications@covestro.com Translation Leinhäuser Language Services GmbH Unterhaching, Germany Design and layout nexxar GmbH Vienna, Austria 53 FURTHER INFORMATION

Semestriel, 2023, Chemistry, Covestro

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

2009 Half-Year Financial Report Free translation – for information purpose only Société anonyme au capital de 604 549 730 euros Siège social : 420, rue d’Estienne d’Orves 92700 Colombes RCS 445 074 685 Nanterre HALF-YEAR FINANCIAL REPORT First half ended June 30th 2009 2009 Half-Year Financial Report Free translation – for information purpose only Content I-Half-year activity report-------------------------------------------------------------------------------------3 II-Condensed consolidated interim financial statements at June 30th 2009--------------------------7 III-Declaration by the person responsible for the half-year financial report---------------------- 54 IV-Report from statutory auditors on condensed consolidated interim financial statements at June 30th 2009---------------------------------------------------------------------------------------------- 55 2 2009 Half-Year Financial Report Free translation – for information purpose only I- HALF-YEAR ACTIVITY REPORT I. HIGHLIGHTS OF THE FIRST HALF OF THE YEAR In the first half of 2009 Arkema announced a number of projects to improve its productivity and refocus its portfolio. 1. Main restructuring projects Arkema announced three new projects to improve its productivity. In March 2009 Arkema presented a project for the shutdown by the end of the year of methyl ethyl ketone production at the La Chambre site (France). This project includes the sale of the marketing and sales assets to the company Sasol Solvent Germany GmbH. In May 2009 Arkema announced the restructuring of its North American operations in order to adapt to the current economic situation and boost its long-term competitiveness. Headcounts reductions, significant cuts in overhead costs and efficiency improvements in the organization will achieve savings of US$40 million (€30 million) from 2010, reaching US$50 million (€37 million) in 2012. Finally, in June 2009 Arkema presented a restructuring project aimed at consolidating its MMA/PMMA activities in Europe1 , which should entail: - the shutdown of MMA (methyl methacrylate) production at the Carling site (France) in order to focus on the Rho plant in Italy, which is more competitive; - the recentering of PMMA (« acrylic glass ») sheet production at the Bernouville site (France) on higher added value products. These restructuring measures in the MMA/PMMA activities would entail the loss of 239 positions. 2. Portfolio management In the first six months of 2009, Arkema conducted a number of operations designed to refocus its portfolio. Arkema completed the acquisition of : - the organic peroxide activity of Geo Specialty Chemicals, representing annual sales of around $30 million. - the company Winkelmann Mineraria by its subsidiary CECA (Specialty Chemicals). With sales of the order of €6 million, this company will enable CECA to boost its position in filtration for the agro-food industry. Meanwhile, Arkema has announced three divestment operations designed to refocus its portfolio without any significant impact on the first half 2009 acconts; they concern: - the aluminum chloride activity (European customer list and the Indian subsidiary ARCIL) accounting for total annual sales of the order of €24 million; - the vinyl compounding activity based on the Vanzaghello site (Italy), representing sales of approximately €22 million. - non-strategic activities (ceramic opacifiers and catalysts for polyester resins) within its Functional Additives BU, based at the Guangzhou site, China, and accounting for annual sales of the order of €13 million. 3. Other highlights In February 2009 Arkema signed a long-term contract for the supply in Europe of the HCFC-22 fluorogas to Dyneon, a world leader in fluorinated polymers. The HCFC-22 is to be produced on the Pierre Bénite site (France) from 2010. 1 The implementation of the project is subject to the legal information and consultation process involving the trade unions. 3 2009 Half-Year Financial Report Free translation – for information purpose only II. ANALYSIS OF FINANCIAL RESULTS FOR FIRST HALF 2009 (in millions of euros) Sales ............................................................... EBITDA......................................................... Recurring operating income ........................ Other income and expenses ............................ Operating income.......................................... Adjusted net income ..................................... Net income – Group share................................ Recurring CAPEX 1st half 2009 1st half 2008 3,001 317 197 -10 187 140 132 92 2,259 127 -10 -98 -108 -55 -149 125 Variations in % -24.7% -60% n.a. n.a. n.a. 36% Net debt 420 (06/30/09) 495 (12/31/08) 15% Sales In the first half of 2009 Arkema achieved sales of €2,259 million, 24.7% down on the first half of 2008. This drop is due primarily to a sharp reduction in volumes (-22.7%) related to the downturn in demand in a large number of market segments and to de-stocking at customers. The –3.9% price effect essentially reflects the evolution of sales prices in PVC and Acrylics resulting from the very steep drop in ethylene and propylene prices. The conversion effect was positive (+2.5%) following the strengthening of the dollar vs the euro. The variation in the scope of business was limited to –0.6%. In the 2nd quarter 2009, the decline in volumes was lower than in the 1st quarter, reflecting both a recovery in the activity in China and a gradual decrease in de-stocking. EBITDA EBITDA in the first half of 2009 stood at €127 million against €317 million in the first half of 2008. In a very deteriorated economic environment with an estimated impact of –€240 million, the sharp decrease in volumes was partly offset by the many internal productivity initiatives launched by Arkema and by a very strict control of overhead costs. These initiatives helped reduce fixed costs by €86 million in the 1st half 2009 compared to the 1st half 2008, yielding a €70 million improvement in EBITDA. Additionally, EBITDA included an inventory effect of –€40 million, booked in the Corporate segment. Recurring operating income Recurring operating income was negative in the first half 2009 at –€10 million, against +€197 million in the first half 2008, in line with the EBITDA variation. It also included €137 million depreciation and amortization, a €17 million increase from the €120 million in the first half of 2008. Operating income Operating income stood at –€108 million against +€187 million in the first half 2008. It included –€98 million for other income and expenses (against -€10 million in the first half 2008), mostly corresponding to expenses related to the plans to restructure Arkema’s activities in North America and in the methacrylics sector in Europe announced in the 2nd quarter. Net income, Group share Net income, group share stood at –€149 million against €132 million in the first half 2008. It included a €30 million tax charge (against €43 million in the first half 2008). Segments’ performance Vinyl Products sales were 33.3% down to €523 million against €784 million in the first half of 2008. The first six months were marked by a very mixed situation in the caustic soda market between the 1st and the 2nd quarters: caustic soda prices in the 1st quarter 2009 were significantly higher than in the 1st quarter 2008, followed by a sharp decline in the 2nd quarter 2009. EBITDA was negative at –€5 million against €31 million in the first half of 2008, while fixed costs 4 2009 Half-Year Financial Report Free translation – for information purpose only savings due to the many productivity measures launched in the PVC downstream activities partly made up for the impact of a drop in demand. Industrial Chemicals sales stood at €1,052 million against €1,357 million in the first half of 2008, a 22.5% drop reflecting weak demand and lower sales prices in Acrylics. EBITDA remained resilient at €148 million against €190 million in the first half 2008, with the sound performance of the Thiochemicals, Fluorochemicals and Specialty Acrylic Polymers activities together with the productivity measures launched in particular in PMMA, Acrylics and Thiochemicals helping offset in part the impact of the economic environment on the segment’s results. EBITDA margin remained constant at 14.0% between the two six-month periods despite a highly challenging economic environment. Performance Products sales stood at €678 million against €857 million in the first half of 2008. This 20.9% drop was due primarily to weak demand in the automotive and construction sectors, which had a major adverse effect on sales volumes in Technical Polymers and Functional Additives. EBITDA stood at €40 million against €119 million in the 1st half 2008, with structural fixed cost savings achieved in the segment’s three activities and the strict control of overhead costs helping mitigate the impact of the current economic environment. Cash flow In the 1st half 2009, free cash flow2 stood at €135 million against –€33 million at end of 1st half 2008. Arkema therefore confirms its ability to generate cash, which is its priority for 2009. This cash flow included €125 million recurring capital expenditure, €41 million expenses related to restructuring plans, and a +€220 million variation in working capital. This sharp reduction is the result of lower raw material costs and volumes, a significant effort to optimize inventory levels, and very tight credit control. Net debt After taking account of the impact of portfolio management operations (-€28 million) and the payment of a €0.60 dividend per share (-€36 million), the Group’s net debt at end June 2009 stood at €420 million against €435 million as at March 31st 2009 and €495 million as at December 31st 2008. This amount represents less than 1.5 times the EBITDA for the last 12 months, and illustrates Arkema’s actions to maintain the quality and strength of its balance sheet. Gearing remained low at 23%. III. TRANSACTIONS WITH RELATED PARTIES Transactions with related parties are described in note 16 to the condensed consolidated financial statements as at June 30 2009. IV. HIGHLIGHTS SINCE JUNE 30 2009 In order to sustain market growth in specialty acrylic polymers in Asia, Arkema announced the construction of a production plant on its Changshu site (China) by mid-2011, requiring overall expenditure of some €15 million. This project represents a further step in Arkema’s transformation and development drive, in particular in Asia. The project is fully in line with the Group’s strategy to strenghthen its acrylics and downstream acrylics activities. V. 2009 OUTLOOK The global economic environment half-way through the year remains highly challenging overall despite a few more positive signs, including an improvement in volumes in China and a gradual reduction in de-stocking at customers. Accordingly, Arkema remains very cautious regarding economic environment assumptions for the 2nd half of the year, and will continue to implement progress actions with the same determination. Accordingly, Arkema will continue to adapt its organization and will pursue its efforts to reduce fixed costs, which should amount to €170 million in 2009, in line with a new target of €600 million cumulated fixed cost savings over the 2006 – 2010 period. 2 Cash flow from operating and investing activities excluding M&A. 5 2009 Half-Year Financial Report Free translation – for information purpose only Meanwhile, for Arkema the priority remains managing cash flow rigorously and maintaining the Group’s financial strength. The Group’s target for 2009 has been revised upward and is to generate free cash flow of the order of €80 million. In this regard, Arkema will continue to improve its working capital and will limit its capital expenditures to €260 million in 2009. VI. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2008 Reference Document filed with the Autorité des marchés financiers (« AMF ») on April 21st 2009 under number R.09- 024. This document the heading « Investor Relations » (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in a note to the half-year financial statements. is available on Arkema’s website under 6 Free translation – for information purpose only II- CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT JUNE 30, 2009 CONSOLIDATED INCOME STATEMENT............................................................................................... 9 STATEMENT OF RECOGNIZED INCOME AND EXPENSES ............................................................ 10 CONSOLIDATED BALANCE SHEET...................................................................................................... 11 CONSOLIDATED CASH FLOW STATEMENT ..................................................................................... 12 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY.......................... 13 A. HIGHLIGHTS .......................................................................................................................................... 15 B. ACCOUNTING POLICIES..................................................................................................................... 15 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ................................................. 30 1 Effects of seasonality ....................................................................................................................... 30 2 Information by business segment................................................................................................... 30 3 Information by geographical area.................................................................................................. 31 4 Other income and expenses ............................................................................................................ 32 5 Adjusted net income ........................................................................................................................ 32 6 Income taxes..................................................................................................................................... 33 7 Earnings per share .......................................................................................................................... 33 8 Intangible assets............................................................................................................................... 33 9 Property, plant and equipment ...................................................................................................... 33 10 Inventories........................................................................................................................................ 34 11 Shareholders’ equity........................................................................................................................ 34 12 Provisions and other non-current liabilities.................................................................................. 35 7 Free translation – for information purpose only 13 Contingent liabilities........................................................................................................................ 37 14 Debt................................................................................................................................................... 41 15 Management of risks related to financial assets and liabilities ................................................... 43 16 Related parties ................................................................................................................................. 45 17 Share-based payments..................................................................................................................... 45 18 Off-balance sheet commitments ..................................................................................................... 48 19 Subsequent events............................................................................................................................ 50 SCOPE OF CONSOLIDATION AT JUNE 30, 2009 ................................................................................. 51 8 Free translation – for information purpose only CONSOLIDATED INCOME STATEMENT In millions of euros Notes 1st half 2009 1st half 2008 Sales (C2&C3) 2,259 3,001 Operating expenses (2,014) (2,525) Research and development expenses (68) (79) Selling and administrative expenses (187) (200) Recurring operating income (C2) (10) 197 Other income and expenses (C4) (98) (10) Operating income (C2) (108) 187 Equity in income of affiliates 5 3 Financial result (15) (14) Income taxes (C6) (30) (43) Net income of continuing operations (148) 133 Net income of discontinued operations Net income (148) 133 Of which: minority interests 1 1 Net income – Group share (149) 132 Earnings per share (amount in euros) (C7) (2.47) 2.18 Diluted earnings per share (amount in euros) (C7) (2.46) 2.17 Depreciation and amortization (C2) (137) (120) EBITDA* (C2) 127 317 Adjusted net income* (C5) (55) 140 Adjusted earnings per share (amount in euros) (C7) (0.91) 2.32 Adjusted diluted earnings per share (amount in euros) (C7) (0.91) 2.31 See note B19, “Accounting policies / Main accounting and financial indicators” 9 Free translation – for information purpose only STATEMENT OF RECOGNIZED INCOME AND EXPENSES 1st half 2008 In millions of euros Group share Minority interests Total Net income Hedging adjustments Actuarial gains and losses Change in translation adjustments Other 132 1 18 (70) (1) 1 - - (2) - 133 1 18 (72) (1) Tax impact Total income and expenses recognized directly through equity (52) (2) (54) Total recognized income and expenses 80 (1) 79 2nd half 2008 In millions of euros Group share Minority interests Total Net income Hedging adjustments Actuarial gains and losses Change in translation adjustments Other (32) 8 (78) 126 (1) - - 2 - (32) 8 (78) 128 (1) Tax impact 27 27 Total income and expenses recognized directly through equity 82 2 84 Total recognized income and expenses 50 2 52 1st half 2009 In millions of euros Group share Minority interests Total Net income Hedging adjustments Actuarial gains and losses Change in translation adjustments Other (149) (10) (14) 17 - 1 - - (1) - (148) (10) (14) 16 - Tax impact 4 4 Total income and expenses recognized directly through equity (3) (1) (4) Total recognized income and expenses (152) (152) 10 Free translation – for information purpose only CONSOLIDATED BALANCE SHEET In millions of euros Notes June 30, 2009 December 31, 2008 ASSETS Intangible assets, net Property, plant and equipment, net Equity affiliates: investments and loans Other investments Deferred income tax assets Other non-current assets TOTAL NON-CURRENT ASSETS (C8) (C9) 486 1,602 52 20 27 105 2,292 466 1,638 53 22 25 137 2,341 Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Other current assets Cash and cash equivalents Total assets of discontinued operations TOTAL CURRENT ASSETS (C10) 816 791 120 16 8 64 - 1,815 1,026 838 149 22 30 67 - 2,132 TOTAL ASSETS 4,107 4,473 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Cumulative translation adjustment SHAREHOLDERS' EQUITY – GROUP SHARE Minority interests TOTAL SHAREHOLDERS' EQUITY Deferred income tax liabilities (C11) 605 1,271 - (67) 1,809 22 1,831 605 1,476 (1) (84) 1,996 22 2,018 Provisions and other non-current liabilities Non-current debt TOTAL NON-CURRENT LIABILITIES (C12) (C14) 46 880 82 1,008 47 835 69 951 Accounts payable Other creditors and accrued liabilities Income taxes payable Other current liabilities Current debt Total liabilities of discontinued operations TOTAL CURRENT LIABILITIES (C14) 563 275 17 11 402 - 1,268 690 259 17 45 493 - 1,504 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,107 4,473 11 Free translation – for information purpose only CONSOLIDATED CASH FLOW STATEMENT In millions of euros Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities Intangible assets and property, plant, and equipment additions Change in fixed asset payables Acquisitions of subsidiaries, net of cash acquired Increase in long-term loans (1) 1st half 2009 (148) 164 32 (2) - 220 (3) 263 (156) (53) (3) (15) (227) 1st half 2008 133 128 (31) (25) (3) (117) 5 90 (103) (42) (13) (24) (182) Total expenditures Proceeds from sale of intangible assets and property, plant and equipment Change in fixed asset receivables Proceeds from sale of subsidiaries, net of cash sold Proceeds from sale of other investments Repayment of long-term loans Total divestitures Cash flow from investing activities Issuance (repayment) of shares Purchase of treasury shares Dividends paid to parent company shareholders Dividends paid to minority shareholders Increase/decrease in long-term debt Increase/decrease in short-term borrowings and bank overdrafts Cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD (1) (1) 5 14 1 4 47 71 (156) - (1) (36) - 15 (95) (117) (10) 7 67 64 27 (14) - - 9 22 (160) 18 (11) (46) - 107 44 112 42 (27) 58 73 At June 30, 2009, income taxes paid amounted to €21 million (€28 million at June 30, 2008). Interest received and paid included in cash flow from operating activities at June 30, 2009 amounted, respectively, to €0.1 million and €5.9 million (€0.1 million and €13.8 million at June 30, 2008). (1) With effect from the end of 2008, the neutralization of the non-cash flows relating to unrealized foreign exchange gains and losses has been incorporated in the “Effect of exchange rates and changes in scope” line item. The comparative data for 2008 has been equally modified. 12 Free translation – for information purpose only CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY In millions of euros Shares issued Number Amount Paid-in surplus Retained earnings Cumulative translation adjustment Treasury shares Number Amount Shareholders' equity – Group share Minority interests Total share- holders' equity At January 1, 2008 Cash dividend 60,453,823 605 1,006 440 (46) (140) 1,911 (46) 21 - 1,932 (46) Issuance of share capital Purchase of treasury shares 618,462 6 12 (315,580) (11) 18 (11) - 18 (11) Cancellation of purchased treasury shares Grants of treasury shares to employees Sale of treasury shares Share-based payments - - - 5 - - - 5 - 5 Other Transactions with shareholders Net income 618,462 6 12 (41) 132 (315,580) (11) (34) 132 - 1 (34) 133 Income and expenses recognized directly through equity 18 (70) (52) (2) (54) Total recognized income and expenses 150 (70) 80 (1) 79 At June 30, 2008 Cash dividend 61,072,285 - 611 - 1,018 - 549 - (210) (315,580) - (11) - 1,957 - 20 - 1,977 - Issuance of share capital Purchase of treasury shares 142,255 1 (2) 1 (483,694) (14) (14) - (14) Cancellation of purchased treasury shares Grants of treasury shares to employees Sale of treasury shares Share-based payments (759,567) (7) (17) 3 759,567 24 3 - 3 Other Transactions with shareholders Net income (617,312) - (6) - (19) - 4 (32) 275,873 - - 10 - (11) (32) - (11) (32) Income and expenses recognized directly through equity (44) 126 82 2 84 Total recognized income and expenses (76) 126 50 2 52 At December 31, 2008 60,454,973 605 999 477 (84) (39,707) (1) 1,996 22 2,018 13 In millions of euros At January 1, 2009 Cash dividend Issuance of share capital Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees Sale of treasury shares Share-based payments Other Transactions with shareholders Net income Income & expenses recognized directly through equity Total recognized income and expenses At June 30, 2009 Shares issued Number Amount 60,454,973 - 60,454,973 605 - 605 Paid-in surplus 999 - 999 Retained earnings 477 (36) (2) 2 (36) (149) (20) (169) 272 Free translation – for information purpose only Treasury shares Cumulative translation adjustment Number Amount Shareholders' equity – Group share Minority interests Total share- holders' equity (84) (39,707) (1) 1,996 22 2,018 (36) (36) (48,300) (1) (1) - (1) 87,600 2 - - - 2 - 2 39,300 1 (35) (35) (149) 1 (148) 17 (3) (1) (4) 17 (152) (152) (67) (407) 0 1,809 22 1,831 14 Free translation – for information purpose only A. HIGHLIGHTS Main restructuring plans The accounting impacts are presented in the “Other income and expenses” line item (see note C4). In May 2009, ARKEMA announced a restructuring plan at its American subsidiary Arkema Inc. designed to respond to the current economic context and reinforce the long-term competitiveness of the Group’s North American operations. The reorganization will involve job losses, a significant reduction in the entity’s overheads and optimization of its organizational structure. In June 2009, ARKEMA announced a planned reorganization of its European MMA/PMMA business. The plan, subject to the process of communication and consultation required by law, involves ending production of MMA (methyl methacrylate) at the Group’s Carling facility in France and reducing its level of activity at the PMMA Bernouville facility in France. 239 jobs would be lost. B. ACCOUNTING POLICIES ARKEMA is a global chemical player with three business segments: Vinyl Products, Industrial Chemicals and Performance Products. Arkema S.A. is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and to all other legal provisions applicable to French commercial companies. The company’s head office is at 420 rue d’Estiennes d’Orves, 92700 Colombes (France). It was incorporated on January 31, 2003 and the shares of Arkema S.A. are listed on the Paris stock market (Euronext) since May 18, 2006. The condensed consolidated interim financial statements of ARKEMA at June 30, 2009 were prepared under the responsibility of the Chairman and CEO of Arkema S.A. and were approved by the Board of Directors of Arkema S.A. on July 31, 2009. The condensed consolidated interim financial statements at June 30, 2009 were prepared in accordance with the international accounting standards issued by the IASB (International Accounting Standards Board) as endorsed by the European Union at June 30, 2009 and in compliance with IAS 34 “Interim financial reporting”. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended December 31, 2008. 15 Free translation – for information purpose only The accounting framework and standards adopted by the European Commission can be consulted on the following internet site: http://ec.europa.eu/internal_market/accounting/ias_fr.htm#adopted-commission. The accounting policies applied in preparing the consolidated financial statements at June 30, 2009 are identical to those used in the consolidated financial statements at December 31, 2008 except for the IFRS standards, amendments and interpretations adopted by the European Union and the IASB for obligatory application with effect from accounting periods commencing on or after January 1, 2009 (and which had not been applied earlier by the Group), namely: Standards Amendments to IAS 32 & IAS 1 Title Puttable financial instruments at fair value and obligations arising on liquidation Amendments to IFRS 1 & IAS 27 Amendment to IFRS 2 IAS 1 (Revised) IAS 23 (Revised) * IFRIC 13 IFRS 8** Cost of an investment in a Subsidiary, Jointly Controlled Entity or Associate Share-based payment - vesting conditions and cancellations Presentation of financial statements Borrowing costs Customer loyalty programmes Operating segments Annual Improvements to IFRS (published in May 2008) except for the amendments to IFRS 5 and IFRS 1 The Group has made use of the transitional provisions of IAS 23 (Revised), “Borrowing Costs”, by incorporating borrowing costs to qualifying assets for which the commencement date for capitalization was on or after January 1, 2009. **The application of IFRS 8 has not involved the Group in modifying the information previously communicated (see note B13, “Information by segment”). The application of these standards and amendments did not have any significant impact on the Group’s consolidated financial statements. The impact of the other standards, amendments or interpretations published by the IASB and the IFRIC (International Financial Reporting Interpretations Committee) which are not yet in force at June 30, 2009 and which have not been applied early by the Group, is currently being analyzed. The following texts are involved: Amendment to IAS 39 IAS 27 (Revised) IFRIC 12 IFRIC 15 Financial instruments : recognition and measurement of eligible hedged items Consolidated and separate financial statements Service concession arrangements Agreements for the construction of real estate Not adopted by the EU by June 30, 2009 Adopted - Applicable for accounting periods commencing on or after June 30, 2009 Adopted - Applicable for accounting periods commencing on or after March 29, 2009 Not adopted by the EU by June 30, 2009 16 Free translation – for information purpose only IFRIC 16 IFRIC 17 IFRIC 18 Amendment to IFRS7 Joint amendment to IAS 39 / IFRIC 9 IFRS 3 (Revised) Hedges of a net investment in a foreign operation Distributions of non-cash assets to owners Transfers of assets from customers Financial instruments : disclosures – improving disclosures about financial instruments Embedded derivatives Business combinations Annual improvements to IFRS (published in May 2008) – Amendments IFRS 5 and IFRS 1 Adopted - Applicable for accounting periods commencing on or after June 30, 2009 Not adopted by the EU by June 30, 2009 Not adopted by the EU by June 30, 2009 Not adopted by the EU by June 30, 2009 Not adopted by the EU by June 30, 2009 Adopted - Applicable for accounting periods commencing on or after June 30, 2009 Adopted - Applicable for accounting periods commencing on or after June 30, 2009 Not adopted by the EU by June 30, 2009 Annual improvements to IFRS (published in April 2009) IFRIC 12 and IFRIC 15 are not expected to have any impact on the Group’s consolidated financial statements. Preparation of consolidated financial statements in accordance with IFRS requires Group management to make estimates and retain assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for the calculation of depreciation and impairment, of pension benefit obligations, of deferred taxes and of provisions. The disclosures provided concerning contingent assets and liabilities at the date of preparation of the consolidated financial statements also involve the use of estimates. The consolidated financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The consolidated financial statements are presented in millions of euros, rounded to the nearest million, unless otherwise indicated. The principal accounting policies applied by the Group are presented below. 17 Free translation – for information purpose only 1 Consolidation principles Companies which are directly or indirectly controlled by ARKEMA have been fully included in the consolidated financial statements. The entities, assets and operations over which joint control is exercised are consolidated using the proportionate method. Investments in associates over which significant influence is exercised are consolidated under the equity method. Where the ownership interest is less than 20%, the equity method is only applied in cases where significant influence can be demonstrated. Shares owned in companies which do not meet the above criteria are included in other investments. All material transactions between consolidated companies, and all intercompany profits, have been eliminated. 2 Foreign currency translation 2.1 Translation of financial statements of foreign companies The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period; the statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Cumulative translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share or in “Minority interests” for the minority share. 2.2 Transactions in foreign currencies In application of IAS 21, “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income. 3 Intangible assets Intangible assets include goodwill, software, patents, trademarks, leasehold rights, development costs and electricity consumption rights. Intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized. 18 Free translation – for information purpose only Intangible assets other than goodwill and trademarks with indefinite useful lives are amortized on a straight-line basis over 3 to 20 years depending on the pattern according to which the entity envisages using the future economic benefits related to the assets. 3.1 Goodwill and trademarks Goodwill represent the difference between the purchase price, as increased by related costs, of shares of consolidated companies and the Group share of the fair value of their net assets and contingent liabilities at the acquisition date. In accordance with IFRS 3, “Business Combinations”, goodwill are not amortized. They are subject to impairment tests as soon as any indicators of potential impairment are identified and are at least performed annually. The methodology used for the performance of impairment tests is described in paragraph B5, “Impairment of long-lived assets”. Trademarks with indefinite useful lives are not amortized and are subject to impairment tests. 3.2 Research and development costs Research costs are recognized in expenses in the period in which they are incurred. Grants received are recognized as a deduction from research costs. Under IAS 38, “Intangible Assets”, development costs are capitalized as soon as ARKEMA can demonstrate, in particular: its intention and its financial and technical ability to complete the development project; that it is probable that future economic benefits attributable to the development costs will flow to the enterprise, which also implies having successfully completed the main non-toxicity studies related to the new product; and that the cost of the asset can be measured reliably. Grants received in respect of development activities are recognized as a deduction from capitalized development costs if they have been definitively earned by the Group. The Group also receives public financing in the form of repayable advances for the development of certain projects. Repayment of these advances is generally related to the future revenues generated by the development. The Group recognizes these advances in balance sheet liabilities (in the “Other non-current liabilities” caption) taking account of the probability of their repayment. 3.3 Research tax credit The Group recognizes the research tax credit as a deduction from operating expenses. 19 Free translation – for information purpose only 4 Property, plant and equipment 4.1 Gross value The gross value of items of property, plant and equipment corresponds to their acquisition or production cost in accordance with IAS 16 “Property, plant & equipment”. Gross value is not subject to revaluation. Equipment subsidies are deducted directly from the cost of the assets which they financed. With effect from January 1, 2009 and in accordance with the Revised version of IAS 23, borrowing costs that are directly attributable to financing tangible assets that necessarily take a substantial period of time to get ready for its intended use or sale, are eligible for capitalization as part of the cost of the assets for the portion of the cost incurred over the period. Routine maintenance and repairs are charged to income in the period in which they are incurred. Costs related to major maintenance turnarounds of industrial facilities which take place at intervals of greater than 12 months are capitalized at the time they are incurred and depreciated over the period between two such turnarounds. Fixed assets which are held under finance lease contracts, as defined in IAS 17, “Leases”, which have the effect of transferring substantially all the risks and rewards inherent to ownership of the asset from the lessor to the lessee, are capitalized in assets at their market value or at the discounted value of future lease payments if lower (such assets are depreciated using the methods and useful lives described below). The corresponding lease obligation is recorded as a liability. Leases which do not meet the above definition of finance leases are accounted for as operating leases. 4.2 Depreciation Depreciation is calculated on a straight-line basis on the basis of the acquisition or production cost. Assets are depreciated over their estimated useful lives by category of asset. The principal categories and useful lives are as follows: Machinery and tools: • Transportation equipment: • Specialized complex installations: • Buildings: 5 - 10 years 5 - 20 years 10 - 20 years 10 - 30 years These useful lives are reviewed annually and modified if expectations change from the previous estimates. Such changes in accounting estimate are accounted for on a prospective basis. 5 Impairment of long-lived assets The recoverable amount of property, plant & equipment and intangible assets is tested as soon as any indication of impairment is identified, and reviewed at each year-end. An impairment test is performed at least once a year in respect of goodwill and trademarks. An asset’s recoverable amount corresponds to the greater of its value in use and its fair value net of costs of disposal. 20 Free translation – for information purpose only Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group management’s expectation of future economic and operating conditions over the next five years or, when the asset is to be sold, by comparison with its market value. In 2008, the terminal value was determined on the basis of a perpetuity annual growth rate of 1.5%, and an after tax rate of 7.5% was used in 2008 to discount future cash flows and the terminal value. Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment recognized on goodwill cannot be reversed (in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be reversed). The sensitivity analysis performed as of December 31, 2008, evaluating the impact of reasonable changes in the basic assumptions, and in particular, the impact of a change of plus or minus 1% in the discount rate applied, has confirmed the carrying amounts of the different CGUs retained as of December 31, 2008. An update of the Vinyl Products impairment test was performed as of June 30, 2009, based on recent market changes, and taking into account the up-to- date business forecasts. This test confirmed the carrying amounts in the balance sheet at June 30, 2009. The assumptions used such as discount rate, perpetuity growth rate and sensitivity analysis remain unchanged compared to those used at December 31, 2008. 6 Financial assets and liabilities Financial assets and liabilities are principally comprised of: Other investments; • Loans and financial receivables, included in other non-current assets; • Accounts receivable; • Cash and cash equivalents; • Debt and other financial liabilities (including accounts payable); • Derivatives, reported as part of other current assets and liabilities. 6.1 Other investments These instruments are accounted for, in accordance with IAS 39, as available-for-sale assets and are thus recognized at their fair value. In exceptional cases where fair value cannot be reliably determined, the securities are recognized at their historical cost. Changes in fair value are recognized directly through shareholders’ equity. 21 Free translation – for information purpose only If an objective indicator of impairment in the value of a financial asset is identified, an irreversible impairment loss is recognized, in general, through recurring operating income. Release of such impairment losses through profit and loss only occurs at the date of disposal of the securities. 6.2 Loans and financial receivables These financial assets are recognized at amortized cost. They are subject to impairment tests involving a comparison of their carrying amount to the present value of estimated recoverable future cash flows. These tests are carried out as soon as any indicator inferring that the present value of these assets is lower than their carrying amount is identified. As a minimum such tests are performed at each balance sheet date. Any impairment loss is recognized in recurring operating income. 6.3 Accounts receivable Accounts receivable are initially recognized at their fair value. Subsequent to initial recognition, they are recognized at amortized cost. If required, a bad debt provision is recognized on the basis of the risk of non-recovery of the receivables. 6.4 Cash and cash equivalents Cash and cash equivalents are liquid assets and assets which can be converted into cash within less than three months and that are subject to a negligible risk of change in value. 6.5 Non-current and current debt (including accounts payable) Non-current and current debt (other than derivatives) is recognized at amortized cost. 6.6 Derivatives The Group may use derivatives to manage its exposure to foreign currency risks and risks of changes in the prices of raw materials and energy. Derivatives used by the Group are recognized at their fair value in the balance sheet, in accordance with IAS 39. Changes in the fair value of these derivatives are recognized within operating income and, for foreign currency instruments, in financial result for the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the differences between the spot exchange rate and the forward exchange rate, except for those on instruments which are considered to meet the criteria for cash flow hedge accounting under IAS 39. In this case, the effective portion of the change in fair value is recognized in shareholders’ equity under the “income and expenses recognized directly through shareholders’ equity” caption until such time as the underlying hedged item is recognized through the income statement. Any ineffective portion is recognized in operating income. 22 Free translation – for information purpose only 7 Inventories Inventories are valued in the consolidated financial statements at the lower of cost and net realizable value, in accordance with IAS 2, “Inventories”. Cost of inventories is generally determined using the weighted average cost (WAC) method. Cost of manufactured products inventories includes raw material and direct labor costs and an allocation of production overheads and depreciation. Start-up costs and general and administrative costs are excluded from the cost of manufactured products inventories. 8 Provisions and other non-current liabilities A provision is recognized when: The Group has a legal, regulatory or contractual obligation to a third party resulting from past events. An obligation can also result from Group practices or public commitments that create a reasonable expectation among the third parties in question that the Group will assume certain responsibilities; It is certain or probable that the obligation will lead to an outflow of resources for the benefit of the third party; and Its amount can be estimated reliably and corresponds to the best possible estimate of the commitment. In exceptional cases where the amount of the obligation cannot be measured with sufficient reliability, disclosure is made in the notes to the financial statements in respect of the obligation (see note C13, “Contingent liabilities”). When it is expected that the Group will obtain partial or total reimbursement of the cost that was provided against, the expected reimbursement is recognized in receivables if, and only if, the Group is virtually certain of the receipt. Long-term provisions, other than provisions for pensions and similar post-employment benefit obligations, are not discounted as the Group considers that the impact of discounting would not be significant. The current (less than one year) portion of provisions is maintained within the “Provisions and other non-current liabilities” caption. 9 Pension and similar post-employment benefit obligations In accordance with IAS 19 “Employee benefits”: payments made in the context of defined contribution plans are recognized in expenses of the period; obligations in respect of defined benefit plans are recognized and valued using the actuarial projected unit credit method. 23 Free translation – for information purpose only Post-employment benefits For defined benefit plans, the valuation of obligations under the projected unit credit method principally takes into account: an assumption concerning the date of retirement; a discount rate which depends on the geographical region and the duration of the obligations; an inflation rate; assumptions in respect of future increases in salaries, rates of employee turnover and increases in health costs. Differences which arise between the valuation of obligations and forecasts of such obligations (on the basis of new projections or assumptions) and between forecasts and outcomes of returns on plan assets are termed actuarial gains and losses. The Group has opted to recognize actuarial gains and losses directly in shareholders’ equity under the “Income and expenses recognized directly through equity” caption, in accordance with the amendment to IAS 19 of December 2004. On modification or creation of a plan, the portion of obligations which vest immediately as a result of past service is charged immediately to income; the portion of obligations which do not vest immediately is amortized over the remaining vesting period. The amount of the provision takes account of the value of assets which are allocated to cover pension and other post- employment benefit obligations. The value of these assets is deducted from the provision for such benefit obligations. A pension asset can be generated where a defined benefit plan is overfunded. The amount at which such an asset is recognized in the balance sheet may be subject to a ceiling, in application of paragraph 58 of IAS 19 and of IFRIC 14. Other long-term benefits In respect of other long-term benefits, and in accordance with applicable laws and regulations, provisions are recognized using a simplified method. Thus, if an actuarial valuation using the projected unit cost method is required, actuarial gains and losses and all past service costs are recognized immediately in the provision, with a double entry being recognized to the income statement. The net expense related to pension benefit obligations and other employee benefit obligations is recognized in recurring operating income, with the exception of: the effect of curtailments or settlements of plans which are presented under the “Other income and expenses” caption in the case of substantial modifications to such plans; the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits, which are classified within the financial result caption. At interim period ends, expenses relating to pensions and other long-term employee benefits are calculated using an extrapolation of the actuarial valuations performed at the previous year end. These valuations are modified if significant 24 Free translation – for information purpose only changes have occurred in market conditions since the previous year end or in the case of settlements, curtailments or other material non-recurring events (see note C12.2, “Provisions and other non-current liabilities/Provisions”). 10 Greenhouse gas emissions allowances and certified emission reductions (CER) In the absence of an IFRS standard or interpretation relating to accounting for CO2 emissions allowances, the following treatment has been adopted: allowances allocated without payment of consideration are recognized for a nil value, transactions carried out in the market are recognized at the transaction amount. At this point, greenhouse gas emissions allowances (EUA) allocated are adequate to cover the operational needs of ARKEMA’s European units and a deficit is not currently forecast. ARKEMA does not carry out a trading activity in respect of CO2 emissions allowances. However, in the normal course of its operations, ARKEMA may carry out cash or forward sales of its surpluses. These sales do not enter into the scope of application of IAS 39 because of the “own use” exception. The CERs produced by the Group in the context of projects to reduce its greenhouse gas emissions are recognized in inventories and sales are recorded on delivery of the CERs. 11 Recognition of sales Sales are measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Sales are recognized on transfer to the purchaser of the risks and rewards related to ownership of the goods, which is determined mainly on the basis of the terms and conditions of the sales contracts. 12 Income taxes 12.1 Current taxes Current taxes are the amount of income taxes that the Group expects to pay in respect of taxable profits of consolidated companies in the period. They also include adjustments to current taxes in respect of prior periods. The French tax consolidation regime enables certain French companies in the Group to offset their taxable results in determining the tax charge for the entire French tax group. The overall tax charge is payable by Arkema S.A., as the parent company of the tax group. Tax consolidation regimes also exist in countries outside France. 12.2 Deferred taxes The Group uses the liability method whereby deferred income taxes are recognized based upon the temporary differences between the financial statement and tax basis of assets and liabilities, as well as on tax loss carry forwards and other tax credits, in accordance with IAS 12 “Income taxes”. 25 Free translation – for information purpose only Deferred tax assets and liabilities are valued at the tax rates that are expected to apply in the year in which the asset will be realized or the liability settled, on the basis of tax rates (and tax legislation) that have been enacted or virtually enacted at the balance sheet date. The effect of any changes in tax rates is recognized in income for the period, unless it relates to items that were previously debited or credited through equity. Deferred tax assets and liabilities are not discounted. Deferred tax assets are recognized to the extent that their recovery is probable. In order to assess the likelihood of recovery of such assets, account is notably taken of the profitability outlook determined by the Group and of historical taxable profits or losses. A deferred tax liability is recognized for all taxable temporary differences related to investments in subsidiaries, associates and joint ventures, unless: the Group controls the timing of the reversal of the temporary difference, and it is probable that this difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset if a legally enforceable right to offset current tax assets and liabilities exists and if they relate to income taxes levied by the same tax authority. 13 Information by segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. The Group’s activities are conducted through three business segments: Vinyl Products, Industrial Chemicals and Performance Products. The directors of the business segments report directly to the Chairman and CEO, the Group’s chief operating decision-maker as defined by the standard, and are in regular contact with him for the purpose of discussing their segments’ operating activity, financial results, forecasts and plans. Vinyl Products includes the following business units: Chlorine/Caustic Soda, PVC, Vinyl Compounds and downstream converting (Pipes and Profiles). They are used in areas such as water treatment, healthcare, hygiene, electronics, sports and leisure and automobile equipment. Industrial Chemicals brings together the following business units: Acrylics, Specialty Acrylic Polymers, PMMA, Thiochemicals, Fluorochemicals and Hydrogen Peroxide. These intermediates are used as raw materials in numerous industrial sectors such as refrigeration, insulation, production of paper pulp, textiles, pharmaceuticals, animal feed, ink and paint, electronics and the automobile sector. Performance Products groups the following business units: Technical Polymers, Specialty Chemicals and Functional Additives. Performance Products are used in a variety of sectors from transport to sporting equipment, cosmetics to medical equipment, construction, civil engineering and even electronics. 26 Free translation – for information purpose only Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together under a Corporate section. 14 Cash flow statements Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). In consequence, cash flows cannot be recalculated on the basis of the amounts shown in the balance sheet. Changes in short-term borrowings and bank overdrafts are included in cash flows from financing activities. 15 Share-based payments In application of IFRS2 “Share-based payments”, the stock options and free shares granted to management and certain Group employees are measured at their fair value at the date of grant, which generally corresponds to the date of the Board of Directors’ meeting that grants stock options and free shares. The fair value of the options is calculated using the Black & Scholes model. It is recognized in personnel expenses on a straight-line basis over the period from the date of grant to the date from which the options can be exercised. The fair value of rights under free share grants corresponds to the opening market price of the shares on the day of the Board of Directors meeting that decides on the grant, adjusted for dividends not received during the vesting period. It is recognized in personnel expenses on a straight-line basis over the vesting period of the rights. 16 Earnings per share Earnings per share correspond to the division of net income (Group share) by the weighted average number of ordinary shares in circulation since the start of the year. Diluted earnings per share correspond to the division of net income (Group share) by the weighted number of ordinary shares, both of these figures being adjusted to take account of the effects of all dilutive potential ordinary shares. The effect of dilution is thus calculated taking account of stock options and grants of free shares to be issued. 17 Business combinations The Group uses the purchase accounting method for the recognition of all business combinations entering into the scope of IFRS 3. The cost of a business combination corresponds to the fair value, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree, plus any costs directly attributable to the acquisition. The Group recognizes, at the acquisition date, the identifiable assets of the acquiree, together with the identifiable liabilities and contingent liabilities assumed, at fair value. 27 Free translation – for information purpose only Determined goodwill is recognized as an asset and is initially valued at the excess of the acquisition cost over the acquirer’s share in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Negative goodwill is recognized immediately in the income statement. Where the business combination agreement provides for a purchase price adjustment depending on future events, the Group includes the amount of this adjustment in the cost of the business combination at the acquisition date if the adjustment is probable and can be measured reliably. The Group has a period of twelve months from the acquisition date to finalize the initial accounting of assets’ and liabilities’ fair value and goodwill allocation. 18 Discontinued operations and non-current assets held for sale A discontinued operation is defined, according to IFRS 5, as a component of the Group’s activity that either has been disposed of, or is classified as held for sale and which represents a separate major line of business or geographical area of operations that forms part of a single coordinated disposal plan. The income statement, cash flow statement and balance sheet items relating to discontinued operations are presented in a specific note to the financial statements for the current financial year, with comparatives for the previous year. The Group presents, for the financial year in question, assets and liabilities of continuing operations in the standard manner, to which assets and liabilities of discontinued operations and non-current assets held for sale are added. These latter assets and liabilities are not offset but are rather presented respectively in two specific balance sheet captions. The balance sheet of the previous financial year is not modified. The Group presents, for the financial year in question and the previous financial year, the income statement of continuing operations in the standard manner, to which a single amount representing the income or loss after tax of discontinued operations is added. For the two financial years considered, the Group presents the cash flow statement without distinguishing between continuing operations and discontinued operations. Disclosures regarding the cash flows of discontinued operations are nevertheless provided in a specific note to the financial statements. 19 Main accounting and financial indicators The main performance indicators used are as follows: Operating income: this includes all income and expenses of continuing operations other than financial result, equity in income of affiliates and income taxes; Other income and expenses: these correspond to a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. These items of income and expense notably include: 28 Free translation – for information purpose only impairment losses in respect of property, plant and equipment and intangible assets, gains or losses on sale of assets, certain large restructuring and environmental expenses which would hamper the interpretation of recurring operating income (including substantial modifications to employee benefit plans and the effect of onerous contracts), certain expenses related to litigation and claims or major damages, whose nature is not directly related to ordinary operations; Recurring operating income: this is calculated as the difference between operating income and other income and expenses as previously defined; Adjusted net income: this corresponds to “Net income – Group share” adjusted for the “Group share” of the following items: other income and expenses, after taking account of the tax impact of these items, income and expenses from taxation of an exceptional nature, the amount of which is deemed significant, net income of discontinued operations; EBITDA: this corresponds to recurring operating income increased by depreciation and amortization; • Working capital: this corresponds to the difference between inventories, accounts receivable, other receivables and prepaid expenses, income tax receivables and other current assets on the one hand and accounts payable, other creditors and accrued liabilities, income tax liabilities and other current liabilities on the other hand. These items are classified in current assets and liabilities in the consolidated balance sheet; • Capital employed: this is calculated by aggregating the net carrying amounts of intangible assets, property, plant and equipment, equity affiliate investments and loans, other investments, other non-current assets (excluding deferred tax assets) and working capital; Net debt: this is the difference between current and non-current debt and cash and cash equivalents. 29 Free translation – for information purpose only C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Effects of seasonality Arkema’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by ARKEMA is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and in Southern Europe; in certain businesses, particularly those serving the refrigeration market, the level of sales is generally higher in the first half of the year than in the second half; and annual maintenance shutdowns of production plants occur more often in the second half than in the first half. These seasonality effects observed in the past are not necessarily representative of future trends, but they can however influence variations in results and in working capital between the different quarters of the financial year. Revenues from ordinary activities earned in a seasonal, cyclical or occasional manner during a financial year are neither anticipated nor deferred at interim reporting dates unless it would be appropriate to anticipate or defer them at year-end. The economic conditions of the first half of 2009, and the lack of visibility as to the rest of the year, make it difficult to assess the impact of seasonality effects in 2009. 2 Information by business segment Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. 1st half 2009 In millions of euros Vinyl Products Industrial Chemicals Performance Products Corporate Group total Third party sales 523 1,052 678 6 2,259 Inter segment sales 22 46 7 Total sales 545 1,098 685 6 Recurring operating income (29) 83 (7) (57)* (10) Other income and expenses (4) (83) (6) (5) (98) Operating income (33) (13) (62) (108) Equity in income of affiliates 5 5 Details of certain significant non-cash expenses by segment: Depreciation and amortization (24) (65) (47) (1) (137) Asset impairment charges (27) (1) (28) Provisions 12 (46) 16 (18) EBITDA (5) 148 40 (56) 127 Intangible assets and property, plant and equipment additions Of which: exceptional capital expenditures 22 1 55 3 78 27 1 156 31 Of which inventories impacts not related to business segments of -€40 million over the period, linked to raw-material prices’ decrease (-€25 million) and to inventories’ volumes’ decrease (-€15 million). 30 Free translation – for information purpose only 1st half 2008 In millions of euros Vinyl Products Industrial Chemicals Performance Products Corporate Group total Third party sales 784 1,357 857 3 3,001 Inter segment sales 33 75 10 Total sales 817 1,432 867 3 Recurring operating income 12 131 77 (23) 197 Other income and expenses (2) (7) (4) 3 (10) Operating income 10 124 73 (20) 187 Equity in income of affiliates 3 3 Details of certain significant non-cash expenses by segment: Depreciation and amortization (19) (59) (42) (120) Asset impairment charges Provisions 9 5 1 4 19 EBITDA 31 190 119 (23) 317 Intangible assets and property, plant and equipment additions Of which: exceptional capital expenditures 29 9 46 2 27 1 103 11 3 Information by geographical area Third party sales are presented on the basis of the geographical location of customers. 1st half 2009 In millions of euros France Rest of Europe NAFTA (1) Asia Rest of the world Total Third party sales 393 818 527 417* 104* 2,259 1st half 2008 In millions of euros France Rest of Europe NAFTA (1) Asia Rest of the world Total Third party sales 554 1,232 634 463* 117* 3,001 (1) NAFTA: United States, Canada and Mexico With effect from June 30, 2009, sales to the Middle East have been reclassified from the “Rest of the world” to “Asia”. The comparative data for June 30, 2008 has been restated (reclassification of €48 million from the “Rest of the world” to “Asia”). 31 Free translation – for information purpose only 4 Other income and expenses In millions of euros 1st half 2009 Income Expenses Net Expenses 1st half 2008 Income Net Restructuring and environmental charges Goodwill impairment charges Asset impairment charges (other than goodwill) Litigation and claims Gains/(losses) on sales of assets Other Total other income and expenses (101) - - (1) - (102) 2 2 - - 4 (99) - 2 (1) - (98) (24) - (1) - - (25) 2 - - 13 - 15 (22) - (1) 13 - (10) In the first half of 2009, restructuring (including the assets’ depreciations related to the restructuring plans) and environmental charges mainly include restructuring costs (net of reversals) in the Vinyl Products segment (€4 million), in the Industrial Chemicals segment (€85 million), in the Performance Products segment (€6 million) and in Corporate (€4 million) (see note A, “Highlights”). Income in respect of litigation and claims mainly reflects the additional compensation receivable following hurricane Ike in 2008 in Texas (USA). In the first half of 2008, restructuring (including the assets’ depreciations related to the restructuring plans) and environmental charges mainly included restructuring costs (net of reversals) in the Vinyl Products segment (€2 million), in the Industrial Chemicals segment (€6 million), in the Performance Products segment (€6 million) and, lastly, in Corporate in respect of the creation of the Human Resources and Accounting Shared Services Center for Arkema France (€8 million). The gains/(losses) on sales of assets mainly included the sale of the R&D Center in Levallois (France). 5 Adjusted net income Net income – Group share may be reconciled to adjusted net income as follows: In millions of euros Net income – Group share Notes 1st half 2009 (149) 1st half 2008 132 Other income and expenses Tax impact of other income and expenses (C4) 98 (4) 10 (2) Exceptional taxation Discontinued operations Adjusted net income (55) 140 32 Free translation – for information purpose only 6 Income taxes The income tax expense is broken down as follows: In millions of euros 1st half 2009 1st half 2008 Current income taxes (31) (42) Deferred income taxes 1 (1) Total income taxes (30) (43) The total income tax expense amounts to €30 million at June 30, 2009 compared with €43 million at June 30, 2008. 7 Earnings per share Earnings per share and diluted earnings per share are presented below: 1st half 2009 1st half 2008 Weighted average number of ordinary shares 60,418,018 60,461,195 Dilutive effect of stock options 132 256 Dilutive effect of free share grants 36,955 141 295 Weighted average number of potential ordinary shares 60,454,973 60,734,746 1st half 2009 1st half 2008 Earnings per share (€) (2.47) 2.18 Diluted earnings per share (€) (2.46) 2.17 Adjusted net income per share (€) (0.91) 2.32 Diluted adjusted net income per share (€) (0.91) 2.31 8 Intangible assets The increase mainly reflects the acquisition of Geo Speciality Chemicals’ assets. In the first half of 2009, as in the first half of 2008, the Group did not recognize any impairment on its intangible assets. 9 Property, plant and equipment In the first half of 2009, capital expenditure on property, plant and equipment amounted to €121 million (€96 million in the first half of 2008). The Group also sold and scrapped property, plant and equipment with a gross value of €26 million (€21 million in the first half of 2008). 33 Free translation – for information purpose only In the first half of 2009, the Group did not recognize any impairment on its property, plant and equipment other than the approximately €28 million recorded in the context of restructuring transactions. 10 Inventories The gross amount of the Group’s inventories fell from €1,126 million at December 31, 2008 to €902 million at June 30, 2009 following both a significant reduction in the volumes carried and a reduction in the cost of raw material content. In the first half of 2009, the Group recognized a net decrease of €15 million in provisions for impairment of inventories. This compared to a net increase of €2 million in provisions for impairment of inventories in the first half of 2008. 11 Shareholders’ equity At January 1, 2008, ARKEMA’s share capital amounted to €604.5 million and was composed of 60,453,823 shares with a nominal value of 10 euros. On April 30, 2008, the Group carried out a capital increase reserved to Group employees: 618,462 shares were subscribed at a price of 30.42 euros per share, with the price being set by the Board of Directors in its meeting of March 4, 2008. Following this operation, Arkema S.A.’s share capital was increased to €610.7 million divided into 61,072,285 shares. The shareholders’ general meeting of May 20, 2008 adopted a resolution proposing to distribute a dividend of 0.75 euros per share, being a total amount of €46 million, in respect of the 2007 financial year. During the second half of 2008, the company firstly carried out a capital increase of €1.4 million (being 141,105 shares) by incorporating reserves into share capital following the free share grant and, secondly, carried out a capital decrease of €7.6 million (being 759,567 shares) by cancelling a portion of the treasury shares purchased in the context of the share buyback program. At December 31, 2008, the Group still held 39,707 treasury shares accounted for as a deduction from shareholders’ equity. Following the above transactions, Arkema S.A.’s share capital amounted to €604.5 million and was composed of 60,454,973 shares. During the first half of 2009, the company bought back 48,300 treasury shares (accounted for as a deduction from shareholders’ equity), and allocated 87,600 treasury shares to employees. The company therefore only holds 407 treasury shares at June 30, 2009. The shareholders’ general meeting of June 15, 2009 adopted a resolution proposing to distribute a dividend of 0.60 euros per share, being a total amount of €36 million, in respect of the 2008 financial year. 34 Free translation – for information purpose only 12 Provisions and other non-current liabilities 12.1 Other non-current liabilities Other non-current liabilities amount to €35 million at June 30, 2009 compared with €34 million at December 31, 2008. 12.2 Provisions In millions of euros Pensions and other employee benefit obligations Environmental contingencies Restructuring Litigation and other Total At December 31, 2008 341 206 109 145 801 Increases in provisions 14 1 68 6 89 Reversals in provisions on use (6) (5) (32) (7) (50) Reversals of unused provisions (3) (1) (1) (5) Changes in scope 1 1 Translation adjustments (2) (1) (3) Other* 12 12 Discontinued operations At June 30, 2009 *Including actuarial gains and losses for the period. 357 201 144 143 845 Certain provisions are covered by non-current assets (receivables, deposits or pension assets): In millions of euros Pensions and other employee benefit obligations Environmental contingencies Restructuring Other Total provisions at June 30, 2009 357 201 144 143 Portion of provisions covered by receivables or deposits 38 30 Deferred tax asset related to amounts covered 22 4 Pension assets 2 Provisions at June 30, 2009 net of non-current assets 355 141 144 109 12.3 Provisions for pensions and similar benefits At June 30, 2009, provisions for pensions and similar benefits are comprised of pension benefit obligations for €251 million (€236 million at December 31, 2008), healthcare plans for €57 million (€57 million at December 31, 2008), long-service awards for €45 million (€43 million at December 31, 2008) and Group pre-retirement plans for €4 million (€5 million at December 31, 2008). Net pension assets amount to €2 million at June 30, 2009 (€3 million at December 31, 2008). 35 Total 845 68 26 2 749 Free translation – for information purpose only ARKEMA retained the following discount rates at June 30, 2009: Pension benefit commitments and healthcare plans commitments Europe USA At June 30, 2009 5.10% - 5.90% 6.20% At December 31, 2008 5.40% - 6.35% 6.20% Long-service awards Europe At June 30, 2009 4.50% At December 31, 2008 5.00% - 5.50% The present value of the defined benefit obligations at the end of 2008 was adjusted, on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2008 closing, to take account of the change in interest rates in the half-year. The fair value of plan assets was reassessed on the basis of new valuations at June 30, 2009. The changes in discount rates and the remeasurement of plan assets have the following effects at June 30, 2009: In millions of euros Changes in discount rates Remeasurement of plan assets Actuarial gains and losses recognized in shareholders’ equity (net of income taxes) Actuarial gains & losses related to pensions and healthcare plans (8) (2) Benefit obligations recognized in balance sheet liabilities Pensions and other long-term benefits 12 3 Income or expenses recognized in the income statement Other employee benefits (1) 12.4 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: In France for €102 million; 36 Free translation – for information purpose only In the United States for €78 million, of which €60 million in respect of former industrial sites covered by the indemnity from Total (receivable recognized in “other non-current assets” for an amount of €38 million) (see note C18.2, “Off-balance sheet commitments / Commitments received”). 12.5 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €125 million, in Europe outside France for €7 million and in the United States for €10 million. 12.6 Other provisions Other provisions are comprised of provisions for removal of asbestos for €11 million and provisions for litigation recognized in relation to proceedings being carried out in Europe in the area of antitrust legislation (provision in liabilities for €31 million minus €24 million recognized in other non-current assets, standing for the fines already paid but in respect of which Arkema has brought appeals against). 13 Contingent liabilities 13.1 Environment ARKEMA’s business activities are subject to constantly changing local, national and international regulations on the environment and safety, which entail meeting increasingly complex and restrictive requirements. In this regard, these activities can involve a risk of ARKEMA’s liability being called upon, particularly in respect of clean-up of sites and industrial safety. Taking account of the information available, agreements signed with Total, and the provisions for environmental contingencies recognized, ARKEMA’s management considers that the environmental liabilities identified at this point are valued and recognized in the financial statements to the best of their knowledge. However if laws, regulations or government policy in respect of environmental matters were to change, ARKEMA’s obligations could change, which could lead to additional costs. Clean-up of sites The competent authorities have made, are making or may in the future make specific demands that the Group rehabilitate or control emissions at certain sites that it is currently operating, or that it operated or disposed of in the past, at neighboring sites or at sites where the Group stored or disposed of waste. Sites currently in operation: ARKEMA has many sites of which a certain number are probably polluted in view of their age and the range of activities that are carried out on them, or that were carried out on them in the past. As regards these sites, certain situations have been identified and ARKEMA has already carried out certain clean-up work, or otherwise developed action plans and recognized provisions in order to cover future clean-up work. 37 Free translation – for information purpose only However, in the light of (i) the uncertainties over the technical means to be implemented, (ii) potential issues that are unknown (iii) uncertainties over the actual time required for remediation compared with the estimated time (e.g. “pump and treat”), and (iv) potential changes in regulations, the possibility that the expenses that the Group will incur will be higher than the amounts covered by reserves cannot be excluded. These potential excess costs relate mainly to the sites in Calvert City (United States), Carling (France), Günzburg (Germany), Jarrie (France), Pierre-Bénite (France), Riverview (United States), Rotterdam (the Netherlands) and Saint-Auban (France) and could adversely affect the Group’s business, results and financial condition. As regards the site of Saint-Auban, different legal proceedings brought against Arkema France have been grouped together (merging of proceedings – “jonction de procédures”) with the Nanterre correctional court. These proceedings are currently under preliminary investigation. Closed industrial sites (Former industrial sites): Total has directly or indirectly taken over the closed industrial sites. 13.2 Litigation, claims and proceedings in progress 13.2.1 Antitrust litigation The Group is involved in a number of proceedings in the United States, Canada and Europe alleging violations of antitrust laws relating to cartel behavior. To cover the risks associated with the proceedings in the United States and Europe, which arose prior to completion of the spin-off of Arkema’s businesses, Total S.A. and one of its subsidiaries have granted indemnities for the benefit of Arkema S.A. and Arkema Amériques SAS, the main terms of which are described in the “Off-balance sheet commitments” note to the consolidated financial statements at December 31, 2008. The financial risk associated with all the proceedings described below is not easily quantifiable. Based on its analysis of the cases, and taking into account the indemnities granted by Total S.A. (see note C18.2, “Off- balance sheet commitments / Commitments received”), the Group has recorded provisions in respect of these proceedings of €31 million (at June 30, 2009) of which €24.2 million have given rise to payments covered by appeals by Arkema France filed with the Court of First Instance of the European Communities. Proceedings carried out by the European Commission In March 2009, the European Commission provided Arkema France with a statement of objection relating to alleged breaches of European law concerning the “Heat stabilizers” case for which the Commission’s investigation began in February 2003. Arkema France provided the Commission with a written response in May 2009. The Commission’s decision is expected by the end of 2009. The proceedings resulting from the appeal made by Arkema France to the Court of First Instance of the European Communities regarding the European Commission's decision in the monochloroacetic acid, hydrogen peroxide, methacrylates and sodium chlorate cases are still pending with the court. 38 Free translation – for information purpose only In May 2009, Arkema France was informed of a claim for compensation lodged with the Dortmund (Germany) Tribunal by Cartel Damage Claim (CDC) Hydrogen Peroxyde SA, an entity formed for the specific purpose of bringing civil claims against the former members of the hydrogen peroxide cartel already condemned by the European Commission. To this end, CDC has purchased the rights to claim of a certain number of hydrogen peroxide customers in whose name it is thus now acting. Given the elements at its disposal, the Group is not currently able to estimate the total amount of the claims liable to be definitively held against it by the competent jurisdiction after exercise of any recourse available and so has not recognized any provisions in this respect. These various events have not led to any change being made to the overall provision recognized at December 31, 2008. Proceedings in the United States and Canada In 2008 and early 2009, the appeal courts ruled that the trial courts erred when they granted class certification of direct purchaser classes in the hydrogen peroxide matter and in the plastics additives matters; the appeal court has remanded each of those cases back to the trial courts for further proceedings consistent with proper class certification standards. Following those appellate decisions, Arkema Inc. and Arkema France executed separate settlement agreements during the first half of 2009, subject to court approval, with the direct purchaser class in hydrogen peroxide and with the direct purchaser class of MMA/PMMA products. The issue of class certification in the plastics additives direct purchaser action remains pending before the trial court. A direct purchaser of plastics additives and several direct purchasers of hydrogen peroxide had also brought individual actions against Arkema Inc. and Arkema France, alleging violation of federal US antitrust laws. At the end of the first half of 2009, only one individual claim brought by direct purchasers of hydrogen peroxide remains pending. Indirect purchasers of hydrogen peroxide, and of plastics additives, respectively, had brought putative class actions against Arkema Inc. alleging violation of state competition laws. These cases are still pending in federal court in the United States and California state court. During the first half of 2009 Arkema Inc. and Arkema France executed a settlement, subject to court approval, with the indirect purchaser class of MMA/PMMA; following questions raised by the court at the preliminary approval hearing, the indirect class voluntarily dismissed the action, making, as a result, the said settlement null and void. In Canada, a number of civil actions alleging violations of Canadian competition laws concerning hydrogen peroxide products were filed in Quebec, Ontario and British Columbia in 2005 and 2006. As at the date of this document, no class has been certified by the courts. 39 Free translation – for information purpose only 13.2.2 Occupational illness In the manufacture of its products, the Group uses and has used toxic or hazardous substances. Despite the safety and monitoring procedures that have been instituted at Group level and for each production site, Group employees may have been exposed to such substances and may develop specific pathologies as a result of such exposure. In this respect, like most industrial companies, in the past the Group has used a variety of insulating or heat-proofing materials containing asbestos in its production facilities. Consequently, certain employees may have been exposed to such materials before they were gradually eliminated and replaced with substitute products. At its French sites, the Group anticipated the regulatory provisions applicable to asbestos (Decrees No. 96-97 and 96-98 of February 7, 1996 and Decree No. 96-1133 of December 24, 1996). The Group made an inventory of asbestos- containing building materials within its premises, notified employees of the results of these investigations and took the collective and individual protective measures required by the applicable laws. However, claims for occupational illness related to past asbestos exposure have been filed against the Group, mostly for periods before 1980. Given the latency period of asbestos-related pathologies, a large number of claims for occupational illness are likely to be filed in the years ahead. The Group has recognized provisions to cover the risks of employer liability claims related to notified cases of occupational illness. 13.2.3 Other litigation and claims and contingent liabilities Arkema France During the 1st half of 2009, no particular developments arose on either the litigation with Gasco relating to its claim for damages in respect of an alleged breach of contract and breach of an exclusivity agreement, the contingent liability relating to Arkema France’s supply of various products for coating of items used in sanitary treatment facilities, or the action brought by Total against the customs administration with the aim of obtaining cancellation of the pollution tax levied in respect of emissions produced by Total on behalf of Arkema France in particular. In 2005, 260 employees and former employees of the Pierre-Bénite site made a claim for damages with the Lyon employee claims court (Conseils de prud’hommes) for alleged non-compliance with the terms of the chemicals industry collective branch agreement. The provisions of this agreement provide workers, technicians and supervisors working at continuously or semi-continuously operating positions for a period in excess of six hours with a thirty minute break during which the employees are released from all work. The claimants consider that, given the manner in which work is organized and structured on this site, the break granted to them does not allow them to be released from all work and to be able to freely go about their personal affairs. They claim that they have suffered a prejudice justifying damages. The claim amounted to €5.2 million. Arkema France contests these claims. A judge has been appointed to reach a decision following the inconclusive decision issued by the Lyon employee claims court on January 19, 2007. A court session was held on March 27, 2008. A judgment issued on June 24, 2008 fully rejected all of the employees’ claims. The 40 Free translation – for information purpose only employees appealed this decision. A provision has been recognized in the financial statements for an amount that the Group considers adequate. CECA No particular developments arose in the 1st half of 2009 in the litigation opposing CECA and a company called Intradis under which this latter company is seeking to render CECA liable for the pollution on a site which it acquired from CECA. Arkema Inc. Norit Americas, Inc. (Norit) acquired an active carbon production unit from Arkema Inc., located in Pryor (Oklahoma, United States). Initially, Norit made a claim against Arkema Inc. for an indemnity, alleging breach by Arkema Inc. of the provisions of the Clean Air Act on that site. The parties had entered into a standstill agreement upon the expiry of which in August 2009 they would continue to proceed with their respective claims. Arkema Inc.’s claim is for the payment of the balance of the price of the production unit yet to be paid by Norit, and Norit’s claims are for indemnities in respect of environmental matters. Provisions have been made in the Group’s accounts for this litigation, in amounts which the Group considers to be sufficient. In the United States, the Group is currently involved in a substantial number of proceedings in various courts. No notable developments arose in the first half of 2009 in the proceedings concerning claims by third parties relating to (i) alleged exposure to asbestos on the Group’s sites, or (ii) exposure to products containing asbestos and sold by former subsidiaries of the Group in the United States and elsewhere. Arkema Quimica Limitada Following a declaration as to the unconstitutional nature of certain taxes, the Brazilian subsidiary of Arkema Amériques, Arkema Quimica Limitada, offset certain tax assets and liabilities commencing in 2000. The Brazilian government contests the justification for this offset and has claimed repayment of 16.7 million of reais (around €5.5 million). Arkema Quimica Limitada has been required to provide a guarantee for the amount of the tax administration’s claim (in the form of a cash deposit and a pledge of other assets) and in parallel has lodged via its lawyers, in mid-June, a counter-claim for cancellation of the tax administration’s claim which is deemed to have reasonable chances of success. No provision has therefore been recognized in this respect at June 30, 2009. 14 Debt Group net debt amounted to €420 million at the end of June 2009, taking account of cash and cash equivalents of €64 million; it is mainly denominated in euros and bears interest at variable rates. The Group has a multi-currency syndicated credit facility in a maximum amount of €1.1 billion and maturing on March 31, 2013. 41 Free translation – for information purpose only At the end of June 2009, the average interest rate of the syndicated credit facility is approximately 1.6% and the unused amount under the credit facility is €800 million. 14.1 Analysis of net debt by category In millions of euros 30.06.2009 31.12.2008 Finance lease obligations Bank loans Other non-current debt Non-current debt Finance lease obligations Syndicated credit facility* Other bank loans Other current debt 15 41 26 82 2 300 90 10 16 28 25 69 2 410 69 12 Current debt Debt Cash and cash equivalents Net debt *Cf. 14.2 402 484 64 420 493 562 67 495 14.2 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: In millions of euros 30.06.2009 31.12.2008 Less than 1 year* 406 497 Between 1 and 2 years 9 8 Between 2 and 3 years 9 8 Between 3 and 4 years 29 27 Between 4 and 5 years 6 3 More than 5 years 41 34 Total 500 577 Amounts maturing in less than 1 year include the current drawings under the syndicated credit facility. Even though it matures in March 2013, this syndicated credit facility is classified in current debts as it is used in the form of revolving short-term drawings. 42 Free translation – for information purpose only 14.3 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. In millions of euros Euros US dollars Chinese Yuan Korean Won Other currencies Total 30.06.2009 411 18 48 4 3 484 31.12.2008 491 20 39 8 4 562 15 Management of risks related to financial assets and liabilities ARKEMA’s businesses expose it to various risks, including market risks (risk of changes in exchange rates, interest rates and the prices of raw materials and energy) and liquidity risk. 15.1 Foreign currency risk The Group is exposed to transaction risks related to foreign currencies. The Group hedges its foreign currency risk mainly through spot foreign currency transactions or through forward transactions over short maturities, generally not exceeding 6 months. The fair value of the Group’s forward foreign currency contracts is a liability of €2.7 million. The foreign exchange gains and losses recognized in recurring operating income at June 30, 2009 are a gain of €1.2 million (loss of €2.9 million at June 30, 2008). The portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate is recorded in financial result and amounts to - €0.7 million at June 30, 2009 (-€0.8 million at June 30, 2008). 15.2 Interest rate risk The Group obtains most of its financing through the variable rate syndicated credit facility of €1,100 million available to it. The general financing policy defined by the Group is to favor variable rate debt over fixed rate debt. Exposure to interest rate risk is managed by the Group’s central treasury department and simple derivatives are used as hedging instruments. The Group had not entered into any interest rate hedges at June 30, 2009. 15.3 Liquidity risk The Group’s central treasury department manages the liquidity risk related to the Group’s debt. In almost all cases, Group companies obtain their financing from, and manage their cash with, Arkema France or other Group entities that manage cash pooling mechanisms. 43 Free translation – for information purpose only The main circumstance in which early repayment or termination of the syndicated credit facility (see note C14, “Debt”) could occur is if the ratio of consolidated net debt to consolidated EBITDA were to become greater than 3. At June 30, 2009, consolidated net debt represents 1.4 times consolidated EBITDA of the last 12 months. Note C14, “Debt” provides details of the maturities of debt. 15.4 Credit risk The Group is potentially exposed to credit risk on its accounts receivable and as regards its banking counterparts. Credit risk on accounts receivable is limited because of the large number of its clients and their geographical dispersion. The Group’s general policy for managing credit risk involves assessing the solvency of each new customer before entering into business relations: each customer is allocated a credit limit, which constitutes the maximum level of outstandings (receivables plus orders) accepted by the Group on the basis of the financial information obtained on the customer and the analysis of solvency carried out by the Group. These credit limits are revised regularly and, in any case, every time that a material change occurs in the customer’s financial position. Customers who cannot obtain a credit limit because their financial position is not compatible with the Group’s requirements in terms of solvency only receive deliveries when they have paid for their order. Even though the Group has incurred very few bad debts for the last number of years, it has decided to cover all of its accounts receivable credit risk by putting in place a global credit insurance program. Roll-out of this program is in progess. On account of the statistically low bad debt rate experienced by the Group, the rate of cover is significant. Customers with whom the Group wishes to continue commercial relations but which are not covered by this insurance are subject to specific centralized monitoring. In addition, the Group’s policy for recognizing bad debt provisions in respect of receivables not covered by credit insurance, or the portion of receivables that are not so covered, has two components: receivables are individually provided against as soon as a specific risk of loss (economic and financial difficulties of the customer in question, entry into receivership etc.) is clearly identified. The Group may also recognize general provisions for receivables that are overdue for such a period that the Group considers that a statistical risk of loss exists. These periods are adapted depending on the BUs and geographical regions in question. Banking credit risk is related to financial investments, derivatives and credit facilities granted by banks. The Group limits its exposure to credit risk by only investing in liquid securities with first-class commercial banks. 15.5 Risk related to raw materials and energy In order to limit the impact of price volatility of the principal raw materials and energy resources it uses, ARKEMA can decide to use derivatives matched with existing contracts or can negotiate fixed price contracts for limited periods. The effects of recognition of such derivatives in the financial statements for the first half of 2009 amount to a charge of €1.4 million (amount not material in the first half of 2008). 44 Free translation – for information purpose only 16 Related parties 16.1 Transactions with non-consolidated or equity accounted companies Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are consolidated under the equity method. These transactions mainly concern purchases of raw materials and interest charges on current accounts. The amounts are presented in the table below. The corresponding transactions were carried out at market prices. In millions of euros Equity-accounted affiliates Transactions 1st half 2009 1st half 2008 Sales of goods Other income Purchases of goods and services Other expenses (including financial expenses) Balance sheet amounts resulting from transactions 8 (14) - 30.06.2009 1 (11) - 31.12.2008 Assets Accounts receivable Financial receivables and other receivables 1 4 1 4 Liabilities Accounts payable Debt and other creditors 1 - 1 - 16.2 Compensation of key management personnel No specific transaction was made with key management personnel over the 1st half of 2009, except the waiver of free shares’ allocation, as mentioned in note 17.2. 17 Share-based payments 17.1 Stock options In the light of the current unprecedented economic context and following a proposal from its Chairman, Arkema’s Board of Directors decided not to grant any stock options in 2009. 45 Free translation – for information purpose only The main characteristics of the outstanding stock option plans at June 30, 2009 are as follows: 2006 Plan 2007 Plan 2008 Plan Date of Annual General Meeting 10-May-06 10-May-06 10-May-06 Date of Board of Directors meeting 04-July-06 14-May-07 13-May-08 Minimum period until exercise 2 years 2 years 2 years Minimum period until sale 4 years 4 years 4 years Period of validity Exercise price 8 years 28.36 8 years 44.63 8 years 36.21 Number of options Total In circulation at January 1, 2007 Granted Cancelled 540,000 - 4,000 600,000 - - - 540,000 600,000 4,000 Exercised In circulation at December 31, 2007 536,000 600,000 1,136,000 In circulation at January 1, 2008 Granted Cancelled 536,000 - - 600,000 - 7,800 460,000 - 1,136,000 460,000 7,800 Exercised 1,150 1,150 In circulation at December 31, 2008 534,850 592,200 460,000 1,587,050 In circulation at January 1, 2009 Granted 534,850 - 592,200 - 460,000 - 1,587,050 - Cancelled Exercised - 1,000 - 5,586 - 6,586 - In circulation at June 30, 2009 534,850 591,200 454,414 1,580,464 Valuation method The fair value of the options granted was determined using the Black and Scholes method on the basis of assumptions of which the main ones are as follows: Volatility Risk-free interest rate Maturity Exercise price (in euros) Fair value of stock options (in euros) 2006 Plan 22% 2.82% 4 years 28.36 6.29 2007 Plan 20% 3.39% 4 years 44.63 7.89 2008 Plan 25% 4.00% 4 years 36.21 8.99 The amount of the expense recognized at June 30, 2009 in respect of stock options is €1.9 million (€2.3 million at June 30, 2008). 17.2 Free share grants On May 12, 2009, the Board of Directors decided to put in place a performance share award scheme for the benefit of employees and in particular, of those employees with responsibilities whose exercise influences the Group’s results. 46 Free translation – for information purpose only The Chairman and CEO, as well as the members of the Group’s Executive Committee, have decided to waive any such grant of performance shares. The definitive grant of such performance shares will be subject to a vesting period of two years, with effect from the Board of Directors’ grant, and subject to compliance with performance criteria expressed in terms both of free cash flow and of the trend in ARKEMA’s EBITDA compared to a panel of other manufacturers of chemicals. The main characteristics of the free share plans in force are as follows: 2007 Plan 2008 Plan 1 2008 Plan 2 2009 Plan Date of Annual General Meeting 10-May-06 10-May-06 10-May-06 10-May-06 Date of Board of Directors meeting 14-May-07 13-May-08 13-May-08 12-May-09 Vesting period Conservation period 2 years 2 years 2 years 2 years 2 years 2 years 2 years 2 years Performance condition Yes Yes No Yes Number of free shares Total In circulation at January 1, 2007 Allocated Cancelled Definitively granted In circulation at December 31, 2007 In circulation at January 1, 2008 Allocated 125,000 125,000 125,000 - 135,556 - 44,444 - - - - - 150,000 125,000 6,685 268,315 268,315 180,000 Cancelled Definitively granted 995 - - - - 3,205 141,105 In circulation at December 31, 2008 124,005 135,556 44,444 304,005 In circulation at January 1, 2009 Allocated Cancelled 124,005 - 36,405 135,556 - 3,150 44,444 - 1,157 184,850 49,000 304,005 184,850 89,712 Definitively granted 87,600 87,600 In circulation at June 30, 2009 0 132,406 43,287 135,850 311,543 The amount of the expense recognized at June 30, 2009 in respect of free share plans is €0.1 million (€2.8 million at June 30, 2008). 47 Free translation – for information purpose only 18 Off-balance sheet commitments 18.1 Commitments given 18.1.1 Off-balance sheet commitments given in the ordinary course of business The main commitments given are summarized in the table below: In millions of euros 30.06.2009 31.12.2008 Guarantees granted 65 65 Comfort letters 2 2 Contractual guarantees 12 23 Customs and excise guarantees 8 8 Total 87 98 Guarantees granted are mainly bank guarantees in favor of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 18.1.2 Contractual commitments Irrevocable purchase commitments In the normal course of business, ARKEMA signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods of between 1 to 15 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” type clauses. The total amount of the Group’s financial commitments is valued at €609 million at June 30, 2009 (see the maturity schedule below). The decrease in purchase commitments mainly reflects the drop in raw material prices observed during the first half of 2009. 48 Free translation – for information purpose only In millions of euros 30.06.2009 31.12.2008 2009 124 299 2010 135 159 2011 112 139 2012 51 68 2013 until expiry of the contracts 187 298 Total 609 963 Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land, Fos port concession) and transportation equipment (rail cars, containers, transport barges). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). 30.06.2009 31.12.2008 In millions of euros 2009 2010 2011 2012 2013 and beyond Capitalized leases 1 3 3 2 12 Non- capitalized leases 16 25 24 22 102 Capitalized leases 3 3 3 2 12 Non- capitalized leases 20 20 17 16 78 Nominal value of future lease payments Finance cost Present value 21 5 16 189 NA NA 22 5 17 151 NA NA NA: not applicable 18.1.3 Other commitments given Warranties related to sales of businesses Sales of businesses sometimes involve the provision of warranties in respect of unrecorded liabilities to the purchaser. ARKEMA has sometimes granted such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of litigation and claims. In the majority of cases, they cover risks of occurrence of environmentally related claims. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by ARKEMA amounted to €85 million at June 30, 2009 (€84 million at December 31, 2008). These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 49 Free translation – for information purpose only 18.2 Commitments received Commitments received from TOTAL in 2006 In connection with the spin-off of Arkema’s businesses, Total S.A. and certain Total companies have extended certain indemnities, or have extended certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the spin-off of Arkema’s businesses. These indemnities and obligations are described in note 28.2 to the consolidated financial statements for the year ended December 31, 2008. 19 Subsequent events None 50 Free translation – for information purpose only SCOPE OF CONSOLIDATION AT JUNE 30, 2009 (a) Companies consolidated for the first time in the 2nd half of 2008 (b) Companies acquired in the 2nd half of 2008 (c) Companies merged in the 2nd half of 2008 (d) Companies consolidated for the first time in 2009 (e) Companies acquired in 2009 (f) Companies sold in 2009 The percentage of control indicated below also corresponds to the Group’s ownership interest in each entity. Akishima Chemical Industries Co.ltd Japan 100.00 Alphacan BV Netherlands 100.00 Alphacan DOO Croatia 100.00 Alphacan Espana SA Spain 99.92 Alphacan Perfiles SLU Spain 99.92 Alphacan SA France 100.00 Alphacan SPA Italy 100.00 Altuglas International Denmark A/S Denmark 100.00 Altuglas International SPA Italy 100.00 Altuglas International BV Netherlands 100.00 Altuglas International Mexico Inc United States 100.00 Altuglas International S.A. France 100.00 Altuglas International UK Ltd United Kingdom 100.00 Altuglas Polivar Spa Italy 100.00 Altumax Deutschland GmbH Germany 100.00 Altumax Europe SAS France 100.00 American Acryl LP United States 50.00 American Acryl NA LLC United States 50.00 Arkema South Korea 100.00 Arkema SA France 100.00 Arkema Amériques SAS France 100.00 Arkema Asie France 100.00 Arkema Beijing Chemicals Co. Ltd China 100.00 Arkema BV Netherlands 100.00 Arkema Canada Inc Canada 100.00 Arkema Catalyst India Ltd India 100.00 Arkema Changshu Chemicals Co Ltd China 100.00 Arkema Changshu Fluorochemical Co. Ltd China 100.00 FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC PC PC FC FC FC FC FC FC FC FC FC FC 51 Arkema Changshu Haike Chemicals Arkema China Investment Co. Ltd Arkema Company Ltd Arkema Daikin Fluorochemical Co ltd Arkema Delaware Inc. Arkema Europe SAS Arkema Europe Holdings BV Arkema Finance Nederland BV Arkema France Arkema Gas Odorants LLC Arkema GmbH Arkema Guangzhou Chemicals Co. Ltd Arkema Holding Ltd Arkema Holland Holding BV Arkema Inc. Arkema Iniciadores SA de CV Arkema KK Arkema Ltd (UK) Arkema Ltd (Vietnam) Arkema Mexico Arkema North Europe BV Arkema Peroxides India Private Limited Arkema Pte Ltd Arkema Quimica ltda Arkema Quimica SA Arkema Hydrogen Peroxide Co. Ltd, Shanghaï Arkema RE Arkema Rotterdam BV Arkema Shanghai Distribution Arkema sp Z.o.o Arkema SRL Arkema Vlissingen BV Arkema Yoshitomi Ltd Ceca Italiana SRL Ceca SA Changshu Resichina Engeneering Polymers Co Ltd Coatex SAS Coatex Netherlands BV Coatex Inc Free translation – for information purpose only China 49.00 China 100.00 Hong-Kong 100.00 China 60.00 United States 100.00 France 100.00 (c) Netherlands 100.00 (c) Netherlands 100.00 France 100.00 (b) United States 100.00 Germany 100.00 (f) China 100.00 United Kingdom 100.00 (c) Netherlands 100.00 United States 100.00 Mexico 100.00 Japan 100.00 United Kingdom 100.00 Vietnam 100.00 (d) Mexico 100.00 Netherlands 100.00 India 100.00 Singapore 100.00 Brazil 100.00 Spain 99.92 China 66.67 Ireland 100.00 Netherlands 100.00 China 100.00 Poland 100.00 Italy 100.00 Netherlands 100.00 Japan 49.00 Italy 100.00 France 100.00 China 100.00 France 100.00 Netherlands 100.00 United States 100.00 FC FC FC PC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC EM FC FC FC FC FC FC 52 Free translation – for information purpose only Coatex Korea South Korea 100.00 Coatex CEE Slovakia 100.00 Coatex NA United States 100.00 Coatex Asia Pacific South Korea 100.00 Daikin Arkema Refrigerants Asia Ltd Hong-Kong 40.00 Daikin Arkema Refrigerants Trading (Shanghai) (a) China 40.00 Delaware Chemicals Corporation United States 100.00 Dorlyl snc France 100.00 Febex SA Switzerland 96.77 Luperox Iniciadores SA de CV Mexico 100.00 Maquiladora General de Matamoros sa de cv Mexico 100.00 Michelet Finance, Inc. United States 100.00 MLPC International France 100.00 Oxford Performance Materials (b) United States 84.50 Oxochimie France 50.00 Ozark Mahoning Company United States 100.00 Plasgom Spain 99.92 Plasticos Altumax SA Spain 100.00 Qatar Vinyl Company Limited Qatar 12.91 Résil Belgium Belgium 100.00 Resilia SRL Italy 100.00 Resinoplast France 100.00 Resinoplast North America (d) Mexico 100.00 SEKI Arkema South Korea 51.00 Shanghaï Arkema Gaoyuan Chemicals Co, Ltd China 93.40 Stannica LLC United States 40.00 Sunclear France 100.00 Turkish Products, Inc. United States 100.00 Viking chemical company United States 100.00 Vinilis Spain 34.97 Vinylberre France 65.05 Vinylfos France 79.00 Winkelmann (e) Italy 100.00 NB: FC: full consolidation PC: proportionate consolidation EM: consolidation by the equity method FC FC FC FC PC PC FC FC FC FC FC FC FC FC PC FC FC FC EM FC FC FC FC FC FC PC FC FC FC EM FC FC FC 53 Free translation – for information purpose only III- DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements at June 30th 2009 have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Thierry Le Hénaff Chairman and CEO 54 KPMG Audit Ernst & Young Audit Département de KPMG S.A. Commissaire aux Comptes Membre de la Compagnie de Versailles 1, cours Valmy 92923 Paris La Défense Cedex Commissaire aux Comptes Membre de la Compagnie de Versailles Faubourg de l’Arche 11, allée de l’Arche 92037 Paris La Défense Cedex S.A.S. à capital variable Arkema S.A. Statutory Auditor’s Review Report on the first half-year information for 2009 (free translation of the French original) Arkema S.A. 420, rue d’Estiennes d’Orves - 92700 Colombes 55 KPMG Audit Département de KPMG S.A. Commissaire aux Comptes Membre de la Compagnie de Versailles 1, cours Valmy 92923 Paris La Défense Cedex Ernst & Young Audit Commissaire aux Comptes Membre de la Compagnie de Versailles Faubourg de l’Arche 11, allée de l’Arche 92037 Paris La Défense Cedex S.A.S. à capital variable This is a free translation into English of the statutory auditors’ review report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France. Arkema S.A. Registered office: 420, rue d’Estiennes d’Orves - 92700 Colombes – France Share capital: €.604 549 730 Statutory Auditors’ Review Report on the first half-year financial information for 2009 (free translation of the French original) To the Shareholders, Following our appointment as statutory auditors by your Annual General Meetings, and in accordance with article L.451-1-2 III of the French Monetary and Financial Law (Code Monétaire et Financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of Arkema for the period from January 1st to June 30, 2009; the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. They have been prepared in a context, described in the chapter V “Outlooks for 2009” of the half year management report, of strong volatility of markets and economic crisis, which is also characterized by a true difficulty to assess what future prospects will be (as it was already the case at the end of the year ended December 31, 2008). Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France. Consequently, the assurance, in the context of a review, that the financial statements taken as a whole are free of significant mistatements is a moderate assurance, lower than that given by an audit. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRS as adopted by the European Union applicable to interim financial information. 56 Arkema S.A. Statutory Auditors’ Report on the first half-year financial information for 2009 (free translation of the French original) 2. Specific verification We have also verified the information given in the half-year management report, commenting the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half- year consolidated financial statements. Paris La Défense, July 31, 2009 The Statutory Auditors French original signed by French original signed by KPMG Audit Ernst & Young Audit Bertrand Desbarrières Jean-Louis Caulier François Carrega Isabelle Triquéra - Lamazière Partner Partner Partner Partner 57

Semestriel, 2009, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

2011 Half -Year Financial Report Free translation for information purposes only Société anonyme au capital de 618 438 270 euros Siège social : 420, rue d’Estienne d’Orves 92700 Colombes RCS 445 074 685 Nanterre HALF-YEAR FINANCIAL REPORT First half ended June 30th 2011 1 2011 Half -Year Financial Report Free translation for information purposes only Content I- Half-year activity report ------------------------------------------------------------------------------ 3 II- Condensed consolidated interim financial statement at June 30th 2011----------------------- 8 III- Declaration by the person responsible for the half-year financial report --------------------61 IV- Report from the statutory auditors on condensed consolidated interim financial statement at June 30th 2011 -----------------------------------------------------------------------------------------62 This is a free translation in English of Arkema’s half-year financial report for the 1st half ended June 30th 2011 issued in French and it is provided solely for the convenience of English speaking readers. 2 2011 Half -Year Financial Report Free translation for information purposes only I- HALF-YEAR ACTIVITY REPORT I. HIGHLIGHTS OF THE FIRST HALF OF THE YEAR 1 Growth projects In March 2011, Arkema successfully started up its new Kynar® PVDF fluoropolymer production plant on schedule at the Changsu site in China. In accordance with the Group’s growth strategy in emerging countries, this new plant dedicated to production of the Kynar® PDVF polymer and the VF2 (vinylidene fluoride) monomer strengthens Arkema’s position in Asia. It will serve the traditional markets for Kynar® (high-performance industrial coatings, oil and gas, chemical engineering) and new high-growth markets (photovoltaics, lithium-ion batteries). 2 Other highlights In April 2011, the European Commission authorized the French State to provide a 40% subsidy to finance Technological Risk Prevention Plans (Plans de Prévention des Risques Technologiques - PPRT). This will enable Arkema to finalize the study of a reorganization of its chlorochemicals and hydrogen peroxide activities on the Jarrie site in the Isère region of France. On June 1st 2011, the Arkema Group subsidiary Alphacan completed the divestment of its pipelines business in France to Pipelife France, a subsidiary of the Pipelife Group. This activity represents annual sales of some €45 million, with its industrial operations located at the Gaillon site in the Eure region of France. This transaction is part of Alphacan’s ongoing strategy to refocus its business on PVC Profiles in France, in order to develop specialty activities with higher added value. In June 2011, Arkema and Canada Fluorspar Inc. (CFI) signed a memorandum of understanding for joint development by the two groups of a fluorspar mine in St. Lawrence (Newfoundland, Canada). Fluorspar is the mineral used in production of hydrofluoric acid, the main raw material for the production of refrigerant gas and fluoropolymers. Arkema will progressively acquire a 19.9% stake in CFI, with an initial investment of CDN 15.5 million. The first stage of this operation took place at 30 June, raising Arkema’s ownership to 11%. Subsequently, the two groups will jointly develop and run the St. Lawrence mine, through a 50/50 joint venture expected to start operations in early 2013. Arkema will then make a second investment of CDN 68 million. Arkema will thus benefit from long-term, competitive access to a key commodity for its North American fluorochemicals operations. 3 2011 Half -Year Financial Report Free translation for information purposes only II. ANALYSIS OF FINANCIAL RESULTS FOR FIRST HALF 2011 (In millions of euros) 1st half 2011 1st half 2010 Variations in % Sales……………....................................... 3,506 EBITDA..................................................... 607 Recurring operating income.........……... 464 Other income and expenses........................ (10) Operating income……............................. 454 Adjusted net income................................. 344 Net income – Group share...............…...... 335 2,913 378 236 (4) 232 158 159 +20% +61% +97% +96% x2.2 x2.1 CAPEX courant 128 113 13% Net debt 265 (06/30/11) (12/31/10) 94 x2.8 Sales ARKEMA’s sales in 1st half 2011 reached €3,506 million, 20.4% up over 1 st half 2010. The +3.0% volume effect includes a +4.9% increase in volume for Industrial Chemicals and Performance Products overall, and a reduction in volume for Vinyl Products primarily related to the impact of the major maintenance turnaround at Lavera and a softer activity in June related to the announcement of lower ethylene prices. The +18.2% price effect translates the Group’s ability to pass on raw material price rises to its sales prices. The +1.1% scope of business effect includes a positive contribution from the acrylics assets purchased in North America and a negative impact from the sale of the PVC pipes business in France. The -1.9% currency translation effect essentially reflects the strengthening of the euro versus the US dollar. EBITDA EBITDA was up 61% compared to 1st half 2010, reaching €607 million, a new historica l high for the Group for a half-year period. This excellent performance is the result of the many progress initiatives underway across the Group’s activities. Above all it illustrates the excellent repositioning of the various business lines in fast-growing markets (photovoltaics, animal nutrition, water treatment, electronics, etc.), our growing positions in Asia in particular with the new production units in China in the fluorochemicals sector (HFC-125 gas unit started in April 2010 and Kynar® PVDF polymer unit started in March 2011), the increasing contribution of innovations in sustainable development solutions, and finally ARKEMA’s ability to pass on rises in raw material costs to its sales prices. 4 2011 Half -Year Financial Report Free translation for information purposes only EBITDA margin reached a new record level at 17.3% of sales against 13.0% in 1st half 2010, with Industrial Chemicals and Performance Products overall achieving an EBITDA margin of 21.8%. Operating income Operating income reached €454 million against €232 million in 1st half 2010. It includes €143 million amortization and -€10 million other income and expe nses. In 1st half 2010 amortization amounted to €142 million, while other income and expenses stood at -€4 million. Net income Group share Net income Group share was multiplied by 2.1, rising to €335 million. It includes a €113 million tax c harge representing 24.4% of the recurring operating income. Segment performance Industrial Chemicals sales rose to €1,889 million against €1,515 millio n in 1st half 2010, a 25% increase sustained by growing volumes and significant price increases above raw material cost rises across all product lines. EBITDA rose by 67% to €454 million against €272 mil lion in 1st half 2010. Beyond the improvement in margins for acrylic monomers that benefited from tight supply/demand balance conditions, the significant improvement in EBITDA reflects sustained demand across the segment’s traditional markets (refrigeration for Fluorochemicals, animal nutrition, oil, gas and petrochemicals for Thiochemicals, automotive and consumer goods for PMMA, coatings and superabsorbents for the acrylics activities), a fast increase in PMMA sales for the LED television market, and the success of many growth projects. In particular, the new HFC-125 fluorogas production unit started in China in April 2010 and the integration of the acrylics activities purchased in North America made a major contribution to the segment’s EBITDA growth. EBITDA margin reached a record high of 24.0% of sales, against 18.0% in 1st half 2010. Performance Products sales grew by 19% to €976 million against €820 mil lion in 1st half 2010. This increase was sustained by the major price increases across all product lines, the product portfolio shifting toward higher added value applications, and a rise in volumes in particular in Technical Polymers and in Asia. EBITDA stood at €172 million, 32% up on 1 st half 2010. This improvement reflects the segment’s strong growth momentum with both the development of new applications in many sectors related to sustainable development (photovoltaics, high performance biopolymers for automotive, filtration, etc.) and a greater presence in Asia, in particular with the rapid ramp-up of the Kynar® PVDF unit started in China in March 2011. EBITDA margin reached 17.6% against 15.9% in 1st half 2010. 5 2011 Half -Year Financial Report Free translation for information purposes only Vinyl Products sales stood at €631 million against €569 million i n 1st half 2010. In a challenging European construction market, volumes decreased. They were limited by the five-yearly maintenance turnaround at Lavera and by softer demand in June related to the announcement of a drop in ethylene prices. PVC and caustic soda prices were increased, offsetting the rise in electricity and ethylene costs, but unit margins remained low. EBITDA stood at €2 million against -€8 million in 1 st half 2010. Improvement in competitiveness and refocusing on the more profitable activities remain the top priorities of this segment. Accordingly, Arkema finalized in June the divestment of the PVC pipes business in France, which accounted for €45 million sales. Finally, Qatar Vinyl Company, in which ARKEMA has a 13% shareholding, once again reported an excellent performance, with a contribution of €9 million equi ty income. Cash flow Free cash flow at June 30th 2011 was negative at €130 million. It includes a € 431 million increase in working capital. The traditional increase in working capital in the first half of the year was intensified this year by the very strong surge in sales combined with the significant increase in sales prices and raw material costs, as well as a build-up of some inventories in the run-up to the maintenance turnarounds planned for later in the year. The working capital on sales ratio objective for the year of below 15% is maintained. Current investments amounted to €128 million in 1 st half 2011, against €113 million in 1 st half 2010. Net debt Net debt stood at €265 million (against €94 million at December 31st 2010), i.e. 10.7% gearing. It includes the payment of a €1.0 dividend per share as well as the impact of the investment in Canada Fluorspar Inc. amounting to CDN$15 million (approximately €11 million) and s ome acquisition costs for Total’s specialty resins activities (approximately €6 million). III. TRANSACTION WITH RELATED PARTIES Transactions with related parties are described in note 17 to the condensed consolidated financial statements as at June 30th 2011. 6 2011 Half -Year Financial Report Free translation for information purposes only IV. HIGHLIGHTS SINCE JUNE 30 2011 On July 1st 2011, Arkema finalized the acquisition, for an enterprise value of €550 million, of two of Total’s specialty chemicals businesses: coating resins (Cray Valley, and Cook Composites and Polymers), and photocure resins (Sartomer). On the basis of 2010 figures, both businesses, once included in the Arkema business base, will represent annual sales of some €750 million. In the first half of 2011, prior to these activities joining the Arkema Group, their sales reached €490 million, a 13% incr ease over last year. On July 26th 2011, Arkema put in place a new €700 million multi -currency bank credit line, with a 5-year term. At the same date, the Group also reduced to €300 mi llion the amount of the syndicated multi-currency credit line set up in 2006. V. OUTLOOK In 2nd half 2011, Arkema will continue implementing its many internal projects, in particular the integration of Total’s specialty resins which are expected to contribute EBITDA of some €35 million over the next 6 m onths, the surge to full capacity of the Kynar® PVDF fluoro-polymer unit in China, and, on the same Changshu site, the start-up in the summer of the Coatex specialty acrylic polymer unit. The Group will continue to monitor closely the macro-economic and political environment around the globe as well as trends in its raw materials costs. In this context, Arkema will maintain a strict control of its costs and working capital, and is confident in its ability to adapt to raw material and energy price variations. Following on from the outstanding performance in 1st half 2011, and taking into account the traditional seasonality effect for Arkema in 2nd half of the year related to some of its activities (fluorogases, paint, PVC) and to some major planned maintenance turnarounds, Arkema reaffirms its strong confidence for 2011. The Group anticipates an annual EBITDA increase of around 30%, thereby exceeding for the first time in its history the symbolic €1 billion EBITDA milestone.. VI. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2010 Reference Document filed with the Autorité des marchés financiers (« AMF ») on March 31st 2011 under number D.11-0203. This document is available on Arkema’s website under the heading « Investor Relations » (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in a note to the half-year financial statements. 7 2011 Half -Year Financial Report Free translation for information purposes only II- CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2011 CONSOLIDATED INCOME STATEMENT ...............................................................................10 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ....................................11 CONSOLIDATED BALANCE SHEET.........................................................................................12 CONSOLIDATED CASH FLOW STATEMENT ........................................................................13 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY ............14 A. HIGHLIGHTS.............................................................................................................................15 B. ACCOUNTING POLICIES .......................................................................................................16 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS....................................32 1 Impact of seasonality...........................................................................................................32 2 Information by business segment.......................................................................................32 3 Information by geographical area .....................................................................................34 4 Other income and expenses ................................................................................................34 5 Adjusted net income ............................................................................................................35 6 Income taxes.........................................................................................................................35 7 Business combinations.........................................................................................................35 8 Earnings per share ..............................................................................................................36 9 Intangible assets...................................................................................................................36 10 Property, plant & equipment .............................................................................................36 11 Inventories............................................................................................................................37 8 2011 Half -Year Financial Report Free translation for information purposes only 12 Shareholders’ equity ...........................................................................................................37 13 Provisions and other non-current liabilities......................................................................37 14 Contingent liabilities ...........................................................................................................39 15 Debt.......................................................................................................................................46 16 Management of risks related to financial assets and liabilities .......................................49 17 Related parties .....................................................................................................................51 18 Share-based payments.........................................................................................................51 19 Off-balance sheet commitments (En cours d’actualisation)............................................55 20 Subsequent events................................................................................................................57 SCOPE OF CONSOLIDATION AT 30 JUNE 2011.....................................................................58 9 2011 Half -Year Financial Report Free translation for information purposes only CONSOLIDATED INCOME STATEMENT Notes 1st half 2011 1st half 2010 (In millions of euros) Sales (C2&C3) 3,506 2,913 Operating expenses (2,771) (2,418) Research and development expenses (72) (68) Selling and administrative expenses (199) (191) Recurring operating income (C2) 464 236 Other income and expenses (C4) (10) (4) Operating income (C2) 454 232 Equity in income of affiliates 10 7 Financial result (13) (12) Income taxes (C6) (113) (67) Net income of continuing operations 338 160 Net income of discontinued operations Net income 338 160 Of which: non-controlling interests 3 1 Net income - Group share 335 159 Earnings per share (amount in euros) (C8) 5.45 2.62 Diluted earnings per share (amount in euros) (C8) 5.38 2.61 Depreciation and amortization (C2) (143) (142) EBITDA * (C2) 607 378 Adjusted net income * (C5) 344 158 Adjusted net income per share (amount in euros) (C8) 5.59 2.60 Diluted adjusted net income per share (amount in euros) (C8) 5.52 2.60 see note B19 Accounting policies / Main accounting and financial indicators 10 2011 Half -Year Financial Report Free translation for information purposes only CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1st half 2011 1st half 2010 (In millions of euros) Net income Hedging adjustments 338 13 160 (2) Deferred taxes on hedging adjustments 1 Actuarial gains and losses 17 (31) Deferred taxes on actuarial gains and losses (5) 7 Other items 1 Deferred taxes on other items Change in translation adjustments (70) 185 Other comprehensive income of continuing operations (44) 160 Other comprehensive income of discontinued operations Total income and expenses recognized directly in equity (44) 160 Comprehensive income 294 320 Of which : non-controlling interests 2 4 Comprehensive income – Group share 292 316 11 2011 Half -Year Financial Report Free translation for information purposes only CONSOLIDATED BALANCE SHEET (In millions of euros) Notes 30 June 2011 31 December 2010 ASSETS Intangible assets, net Property, plant and equipment, net Equity affiliates: investments and loans Other investments Deferred tax assets Other non-current assets (C9) (C10) 483 1,650 52 44 28 97 494 1,703 55 38 29 89 TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Other current financial assets Cash and cash equivalents Total assets of discontinued operations (C11) 2,354 1,054 1,143 127 18 1 549 - 2,408 864 875 120 20 4 527 - TOTAL CURRENT ASSETS 2,892 2,410 TOTAL ASSETS 5,246 4,818 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Translation adjustments (C12) 618 1,871 (27) 615 1,567 (6) 43 SHAREHOLDERS' EQUITY - GROUP SHARE Non-controlling interests 2,462 23 2,219 21 TOTAL SHAREHOLDERS' EQUITY Deferred tax liabilities Provisions and other non-current liabilities Non-current debt (C13) (C15) 2,485 49 771 592 2,240 52 807 587 TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Other current financial liabilities Current debt Total liabilities of discontinued operations (C15) 1,412 804 274 43 6 222 1,446 779 279 37 3 34 - TOTAL CURRENT LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,349 5,246 1,132 4,818 12 2011 Half -Year Financial Report Free translation for information purposes only CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) 1st half 2011 1st half 2010 Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities Intangible assets and property, plant, and equipment additions Change in fixed asset payables Acquisitions of subsidiaries, net of cash acquired Increase in long-term loans 338 144 (16) (3) (1) (431) 3 34 (138) (35) (6) (18) (197) 160 144 (32) (8) 1 (166) 2 101 (123) (13) (17) (24) (177) Total expenditures Proceeds from sale of intangible assets and property, plant, and equipment Change in fixed asset receivables Proceeds from sale of subsidiaries, net of cash sold Proceeds from sale of unconsolidated investments Repayment of long-term loans Total divestitures Cash flow from investing activities Issuance (repayment) of shares and other equity Purchase of treasury shares Dividends paid to parent company shareholders Dividends paid to minority shareholders Increase / decrease in long-term debt Increase / decrease in short-term borrowings and bank overdrafts Cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 7 2 - - 7 16 (181) 9 - (61) - 14 187 149 2 20 527 549 12 - - 35 47 (130) 17 (1) (37) (1) 1 (6) (27) (56) 39 89 72 At 30 June 2011, income taxes paid amount to €93 mi llion (€31 million at 30 June 2010). Interest received and paid included in cash flow from operating activities at 30 June 2011 amount, respectively, to €3 million and €3 million (€0.3 million and €3.9 million at 30 June 2010). 13 2011 Half -Year Financial Report Free translation for information purposes only CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Shares issued Treasury shares (In millions of euros) At 1 January 2011 Cash dividend Issuance of share capital Purchase of treasury shares Number Amount 615 61,493,794 350,033 3 Paid-in surplus 1,011 9 Retained earnings 556 (61) Translation adjustments Number Amount (6) 43 (136,280) Sharehold ers' equity – Group share 2,219 (61) 12 - Non- controlling interests 21 - - Cancellation of purchased treasury shares Grants of treasury shares to employees (6) 132,200 6 Sale of treasury shares Share-based payments Other 3 (3) 3 (3) - - Transactions with shareholders 350,033 3 9 (67) 132,200 6 (49) Net income Income and expense recognized directly through equity Total comprehensive income At 30 June 2011 61,843,827 618 1,020 335 26 361 850 (69) (69) (26) (4,080) 335 (43) 292 2,462 3 (1) 2 23 Shares issued Treasury shares (In millions of euros) At 1 January 2010 Cash dividend Issuance of share capital Purchase of treasury shares Number Amount 605 60,454,973 824,424 8 Paid-in surplus 999 9 Retained earnings 265 (37) Translation adjustments Number Amount - (78) (407) (42,000) (1) Sharehold ers' equity – Group share 1,791 (37) 17 (1) Non- controlling interests 22 (1) - - Cancellation of purchased treasury shares Grants of treasury shares to employees (1) 42,127 1 Sale of treasury shares Share-based payments - - - 2 - - - 2 - Other Transactions with shareholders 824,424 8 9 (36) 127 (19) (1) Net income Income and expense recognized directly through equity Total comprehensive income At 30 June 2010 61,279,397 613 1,008 159 (25) 134 363 182 182 104 (280) 159 157 316 2,088 1 3 4 25 14 Share- holders’ equity 2,240 (61) 12 - 3 (3) (49) 338 (44) 294 2,485 Share- holders’ equity 1,813 (38) 17 (1) 2 (20) 160 160 320 2,113 2011 Half -Year Financial Report Free translation for information purposes only A. HIGHLIGHTS 3 Growth projects In March 2011, Arkema successfully started up its new Kynar® PVDF fluoropolymer production plant on schedule at the Changsu site in China. In accordance with the Group’s growth strategy in emerging countries, this new plant dedicated to production of the Kynar® PDVF polymer and the VF2 (vinylidene fluoride) monomer strengthens Arkema’s position in Asia. It will serve the traditional markets for Kynar® (high-performance industrial coatings, oil and gas, chemical engineering) and new high-growth markets (photovoltaics, lithium-ion batteries). 4 Other highlights In April 2011, the European Commission authorized the French State to provide a 40% subsidy to finance Technological Risk Prevention Plans (Plans de Prévention des Risques Technologiques - PPRT). This will enable Arkema to finalize the study of a reorganization of its chlorochemicals and hydrogen peroxide activities on the Jarrie site in the Isère region of France. On June 1st 2011, the Arkema Group subsidiary Alphacan completed the divestment of its pipelines business in France to Pipelife France, a subsidiary of the Pipelife Group. This activity represents annual sales of some €45 million, with its industrial operations located at the Gaillon site in the Eure region of France. This transaction is part of Alphacan’s ongoing strategy to refocus its business on PVC Profiles in France, in order to develop specialty activities with higher added value. In June 2011, Arkema and Canada Fluorspar Inc. (CFI) signed a memorandum of understanding for joint development by the two groups of a fluorspar mine in St. Lawrence (Newfoundland, Canada). Fluorspar is the mineral used in production of hydrofluoric acid, the main raw material for the production of refrigerant gas and fluoropolymers. Arkema will progressively acquire a 19.9% stake in CFI, with an initial investment of CAD 15.5 million. The first stage of this operation took place at 30 June, raising Arkema’s ownership to 11%. Subsequently, the two groups will jointly develop and run the St. Lawrence mine, through a 50/50 joint venture expected to start operations in early 2013. Arkema will then make a second investment of CAD 68 million. Arkema will thus benefit from long-term, competitive access to a key commodity for its North American fluorochemicals operations. 15 2011 Half -Year Financial Report Free translation for information purposes only B. ACCOUNTING POLICIES ARKEMA is a global chemicals player, with three business segments: Vinyl Products, Industrial Chemicals and Performance Products. Arkema S.A. is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema S.A. have been listed on the Paris stock exchange (Euronext) since 18 May 2006. ARKEMA’s condensed consolidated interim financial statements at 30 June 2011 were prepared under the responsibility of the Chairman and CEO of Arkema S.A. and were approved by the Board of Directors of Arkema S.A. on 1 August 2011. The condensed consolidated interim financial statements at 30 June 2011 were prepared in accordance with the international accounting standards issued by the IASB (International Accounting Standards Board) as released at 30 June 2011, in compliance with IAS 34 “Interim financial reporting” and the international standards endorsed by the European Union at 30 June 2011. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2010. The accounting framework and standards adopted by the European Commission can be consulted on the following website: http://ec.europa.eu/internal_market/accounting/ias/index_fr.htm The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2011 are identical to those used in the consolidated financial statements at 31 December 2010, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after 1 January 2011 (and which had not been applied early by the Group), namely: Standards IAS 24 (Amended) Title Related party disclosures Amendments to IAS 32 Classification of rights issues Amendments to IFRS 1 Additional Exemptions for First-time Adopters Amendments to IFRIC 14 Prepayments of a minimum funding requirement IFRIC 19 Extinguishing financial liabilities with equity instruments Annual improvements to IFRS (published in May 2010) 16 2011 Half -Year Financial Report Free translation for information purposes only The application of these standards, amendments and interpretations did not have any significant impact on the Group’s consolidated financial statements. The impact of the other standards, amendments or interpretations published by the IASB and the IFRIC (International Financial Reporting Interpretations Committee) which were not yet in force at 1 January 2011 and have not been applied early by the Group, is currently being analyzed. The following texts are involved: IFRS 1 First-time Adoption of International Financial Reporting Standards - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters Not adopted at 30 June 2011 IFRS 7 IFRS 10 IFRS 11 IFRS 12 Disclosures - transfers of financial assets Consolidated financial statements Joint arrangements Disclosure of interests in other entities Not adopted at 30 June 2011 Not adopted at 30 June 2011 Not adopted at 30 June 2011 Not adopted at 30 June 2011 IFRS 13 Fair value measurement Amendments to IAS 1 IAS 12 Presentation of Items of Other Comprehensive Income (OCI) Deferred Tax: Recovery of Underlying Assets Amendments to IAS 19 Employee benefits IAS 27 (Revised) IAS 28 (Revised) Separate financial statements Investments in associates and joint ventures Not adopted at 30 June 2011 Not adopted at 30 June 2011 Not adopted at 30 June 2011 Not adopted at 30 June 2011 Not adopted at 30 June 2011 Not adopted at 30 June 2011 Preparation of consolidated financial statements in accordance with IFRS requires Group management to make estimates and retain assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for calculation of the recoverable value of property, plant and equipment and intangibles, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities at the date of preparation of the consolidated financial statements also involve the use of estimates. The consolidated financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The consolidated financial statements are presented in millions of euros, rounded to the nearest million, unless otherwise indicated. 17 2011 Half -Year Financial Report Free translation for information purposes only The principal accounting policies applied by the Group are presented below. 1 Consolidation principles Companies which are directly or indirectly controlled by ARKEMA have been fully included in the consolidated financial statements. The entities, assets and operations over which joint control is exercised are consolidated using the proportionate method Investments in associates over which significant influence is exercised are consolidated under the equity method. Where the ownership interest is less than 20%, the equity method is only applied in cases where significant influence can be demonstrated. Shares owned in companies which do not meet the above criteria are included in other investments and recognized as available-for-sale financial assets in accordance with IAS 39. All material transactions between consolidated companies, and all intercompany profits, have been eliminated. 2 Foreign currency translation 2.1 Translation of financial statements of foreign companies The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period; the statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share or in “Non-controlling interests” for the share not directly or indirectly attributable to the Group. 2.2 Transactions in foreign currencies In application of IAS 21 “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income. 3 Goodwill and business combinations Operations after 1 January 2010 The Group uses the acquisition method for the recognition of business combinations, in accordance with IFRS 3 (Revised). The identifiable assets acquired and liabilities assumed are stated at fair value at the acquisition date. 18 2011 Half -Year Financial Report Free translation for information purposes only Where the business combination agreement provides for a purchase price adjustment, the Group includes the fair value of this adjustment at the acquisition date in the cost of the business combination, even if the adjustment is optional. Non-controlling interests are measured at the acquisition date, either at fair value (the full goodwill method) or the NCI's proportionate share of identifiable net assets of the entity acquired (the partial goodwill method). The decision of which option to use is made for each business combination. Subsequent acquisitions of non- controlling interests are always recorded in equity, regardless of the choice made at the time of the acquisition. At the acquisition date, goodwill is measured as the difference between: the acquisition price plus the amount of any non-controlling interests in the acquired entity and the fair value of the acquirer's previously-held equity interest in that acquired entity, and the fair value of the identifiable assets and liabilities. Goodwill is recognized in the balance sheet assets. Any negative goodwill arising on an acquisition, and direct acquisition expenses, are recognized immediately in the income statement under “Other income and expenses" (see note B19 Main accounting and financial indicators). Contingent liabilities are recognized in the balance sheet when the obligation concerned is current at the acquisition date and their fair value can be reliably measured. The Group has a maximum of 12 months to finalize determination of the acquisition price and goodwill. Operations prior to 31 December 2009 The Group applied IFRS 3. The main points affected by IFRS 3 (revised) are the following: goodwill was calculated as the difference between the purchase price, as increased by related costs, of shares of consolidated companies and the Group share of the fair value of their net assets and contingent liabilities at the acquisition date; for any subsequent acquisition in the same entity, the difference between the acquisition cost and book value of non-controlling interests was included in goodwill; price adjustments were included in the cost of the business combination if the adjustment was probable and could be measured reliably; contingent liabilities arising from potential obligations were recognized. 4 Intangible assets Intangible assets include goodwill, software, patents, trademarks, leasehold rights, development costs and electricity consumption rights. Intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized. Intangible assets other than goodwill and trademarks with indefinite useful lives are amortized on a straight-line basis over 3 to 20 years depending on the pattern according to which the entity envisages using the future economic benefits related to the asset. The main categories of intangible assets and the amortization periods applied by the Group are as follows: 19 2011 Half -Year Financial Report Free translation for information purposes only Patents: • Licences: • Softwares: • Capitalized research expenses: • REACH registration fees: residual period until expiry of patent protection term of the contract 3 to 5 years useful life of the project protection period of study data 4.1 Goodwill Goodwill is not amortized. It is subject to impairment tests as soon as any indicators of potential impairment are identified. Impairment tests are performed at least annually. The methodology used for the performance of impairment tests is described in paragraph B6 Impairment of long-lived assets. Goodwill is measured and recognized as described in note B3 Goodwill and business combinations. 4.2 Trademarks Trademarks with indefinite useful lives are not amortized and are subject to impairment tests. 4.3 Research and development expenses Research costs are recognized in expenses in the period in which they are incurred. Grants received are recognized as a deduction from research costs. Under IAS 38 “Intangible assets”, development costs are capitalized as soon as ARKEMA can demonstrate, in particular: • • its intention and its financial and technical ability to complete the development project; that it is probable that future economic benefits attributable to the development costs will flow to the enterprise, which also implies having successfully completed the main non-toxicity studies relating to the new product; and that the cost of the asset can be measured reliably. Grants received in respect of development activities are recognized as a deduction from capitalized development costs if they have been definitively earned by the Group. The Group also receives public financing in the form of repayable advances for the development of certain projects. Repayment of these advances is generally related to the future revenues generated by the development. The Group recognizes these advances in balance sheet liabilities (in the “Other non-current liabilities” caption) taking account of the probability of their repayment. 4.4 Research tax credit The Group recognizes the research tax credit as a deduction from operating expenses. 20 2011 Half -Year Financial Report Free translation for information purposes only 4.5 REACH As no specific IFRIC interpretations exist on the subject, Arkema applies the following methods based on IAS 38: when most of the tests required for preparing the registration file have been acquired from a third party, ARKEMA records an operating right in the intangible assets; when most of the expenses involved in preparing the registration file have been carried out internally or outsourced, ARKEMA capitalizes the development costs that meet the requirements for capitalization defined by IAS 38 (see 4.3). 5 Property, plant & equipment 5.1 Gross value The gross value of items of property, plant and equipment corresponds to their acquisition or production cost in accordance with IAS 16 “Property, plant & equipment”. Gross value is not subject to revaluation. Equipment subsidies are deducted directly from the cost of the assets which they financed. With effect from 1 January 2009 and in accordance with the revised version of IAS 23, borrowing costs that are directly attributable to financing tangible assets that necessarily take a substantial period of time to get ready for their intended use or sale are eligible for capitalization as part of the cost of the assets for the portion of the cost incurred over the construction period. Routine maintenance and repairs are charged to income in the period in which they are incurred. Costs related to major maintenance turnarounds of industrial facilities which take place at intervals of greater than 12 months are capitalized at the time they are incurred and depreciated over the period between two such turnarounds. Fixed assets which are held under finance lease contracts, as defined in IAS 17 “Leases”, which have the effect of transferring substantially all the risks and rewards inherent to ownership of the asset from the lessor to the lessee, are capitalized in assets at their market value or at the discounted value of future lease payments if lower (such assets are depreciated using the methods and useful lives described below). The corresponding lease obligation is recorded as a liability. Leases which do not meet the above definition of finance leases are accounted for as operating leases. 5.2 Depreciation Depreciation is calculated on a straight-line basis on the basis of the acquisition or production cost. Assets are depreciated over their estimated useful lives by category of asset. The principal categories and useful lives are as follows: Machinery and tools: • Transportation equipment: • Specialized complex installations: • Buildings: 5-10 years 5-20 years 10-20 years 10-30 years 21 2011 Half -Year Financial Report Free translation for information purposes only These useful lives are reviewed annually and modified if expectations change from the previous estimates. Such changes in accounting estimate are accounted for on a prospective basis. 6 Impairment of long-lived assets The recoverable amount of property, plant & equipment and intangible assets is tested as soon as any indication of impairment is identified. A review to identify if any such indication exists is performed at each year-end. An impairment test is performed at least once a year in respect of goodwill and trademarks. An asset’s recoverable amount corresponds to the greater of its value in use and its fair value net of costs of disposal. Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. For ARKEMA, the CGUs are the business units presented in note B14. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group management's expectation of future economic and operating conditions over the next 5 years or, when the asset is to be sold, by comparison with its market value. In 2010, the terminal value was determined on the basis of a perpetuity annual growth rate of 1.5%. An after-tax rate of 7.5% is used to discount future cash flows and the terminal value in 2010. Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment losses on goodwill are irreversible (in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be written back). 7 Financial assets and liabilities Financial assets and liabilities are principally comprised of: • • • • • other investments; loans and financial receivables included in other non-current assets; accounts receivable; cash and cash equivalents; debt and other financial liabilities (including accounts payable); derivatives, reported as part of other current assets and liabilities. 22 2011 Half -Year Financial Report Free translation for information purposes only 7.1 Other investments These securities are accounted for, in accordance with IAS 39, as available-for-sale assets and are thus recognized at their fair value. In cases where fair value cannot be reliably determined, the securities are recognized at their historical cost. Changes in fair value are recognized directly through shareholders’ equity. If an objective indicator of impairment in the value of a financial asset is identified, an irreversible impairment loss is recognized, in general through recurring operating income. Such impairment is only reversed via income at the date of disposal of the securities. 7.2 Loans and financial receivables These financial assets are recognized at amortized cost. They are subject to impairment tests involving a comparison of their carrying amount to the present value of estimated recoverable future cash flows. These tests are carried out as soon as any indicator inferring that the present value of these assets is lower than their carrying amount is identified. As a minimum such tests are performed at each balance sheet date. Any impairment loss is recognized in recurring operating income. 7.3 Accounts receivable Accounts receivable are initially recognized at their fair value. Subsequent to initial recognition, they are recognized at amortized cost. If required, a bad debt provision is recognized on the basis of the risk of non- recovery of the receivables. 7.4 Cash and cash equivalents Cash and cash equivalents are liquid assets and assets which can be converted into cash within less than 3 months that are subject to a negligible risk of change in value. 7.5 Non-current and current debt (including accounts payable) Non-current and current debt (other than derivatives) is recognized at amortized cost. 7.6 Derivatives The Group may use derivatives to manage its exposure to foreign currency risks and risks of changes in the prices of raw materials and energy. Derivatives used by the Group are recognized at their fair value in the balance sheet, in accordance with IAS 39. The fair value of these unlisted derivatives is determined by reference to current prices for contracts with similar maturity. They therefore correspond to the "Level 2" category defined in IFRS 7. Changes in the fair value of these derivatives are recognized within operating income and, for foreign currency instruments, in financial result for the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the differences between the spot exchange rate and the forward exchange rate, 23 2011 Half -Year Financial Report Free translation for information purposes only except for those on instruments which are considered to meet the criteria for cash flow hedge accounting or hedge accounting of a net investment in a foreign operation under IAS 39. For items that qualify for cash flow hedge accounting, the effective portion of the change in fair value is recognized in shareholders’ equity under the “Income and expense recognized directly through equity” caption until such time as the underlying hedged item is recognized through the income statement. Any ineffective portion is recognized in net income. A hedge of a net investment in a foreign operation hedges the exposure to foreign exchange risk of the net assets of the foreign operation (IAS 21, “The effects of changes in foreign exchange rates”). The effects of this hedge are recorded directly in shareholders’ equity under the “Income and expense recognized directly through equity” caption. 8 Inventories Inventories are valued in the consolidated financial statements at the lower of cost and net realizable value, in accordance with IAS 2 “Inventories”. Cost of inventories is generally determined using the weighted average cost (WAC) method. Cost of manufactured products inventories includes raw material and direct labour costs, and an allocation of production overheads and depreciation based on normal production capacity. Start-up costs and general and administrative costs are excluded from the cost of manufactured products inventories. The net realizable value is the sale price as estimated for the normal course of business, less estimated costs for completion and sale. 9 Provisions and other non-current liabilities A provision is recognized when: the Group has a legal, regulatory or contractual obligation to a third party resulting from past events. An obligation can also result from Group practices or public commitments that create a reasonable expectation among the third parties in question that the Group will assume certain responsibilities; it is certain or probable that the obligation will lead to an outflow of resources to the benefit of the third party; and its amount can be estimated reliably and corresponds to the best possible estimate of the commitment. In exceptional cases where the amount of the obligation cannot be measured with sufficient reliability, disclosure is made in the notes to the financial statements in respect of the obligation (See note C14 Contingent liabilities). When it is expected that the Group will obtain partial or total reimbursement of the cost that was provided against, the expected reimbursement is recognized in receivables if, and only if, the Group is virtually certain of the receipt. Legal expenses required for defence of the Group’s interests are covered by a provision when significant. 24 2011 Half -Year Financial Report Free translation for information purposes only Long-term provisions, other than provisions for pensions and similar post-employment benefit obligations, are not inflation-indexed or discounted as the Group considers that the impact of such adjustments would not be significant. The current (less than one year) portion of provisions is maintained within the “Provisions and other non-current liabilities” caption. 10 Pension and similar post-employment benefit obligations In accordance with IAS 19 “Employee benefits”: • payments made in the context of defined contribution plans are recognized in expenses of the period; obligations in respect of defined benefit plans are recognized and valued using the actuarial projected unit credit method. Post-employment benefits For defined benefit plans, the valuation of obligations under the projected unit credit method principally takes into account: • • • • an assumption concerning the date of retirement; a discount rate which depends on the geographical region and the duration of the obligations; an inflation rate; assumptions in respect of future increases in salaries, rates of employee turnover and increases in health costs; the most recent mortality statistics for the countries concerned. Differences which arise between the valuation of obligations and forecasts of such obligations (on the basis of new projections or assumptions) and between forecasts and outcomes of returns on plan assets are termed actuarial gains and losses. The Group has opted to recognize actuarial gains and losses directly in shareholders’ equity under the “Income and expense recognized directly through equity” caption, in accordance with the amendment to IAS 19 of December 2004. On modification or creation of a plan, the portion of obligations which vest immediately as a result of past service is charged immediately to income; the portion of obligations which do not vest immediately is amortized over the remaining vesting period. The amount of the provision takes account of the value of assets which are allocated to cover pension and other post-employment benefit obligations. The value of these assets is deducted from the provision for such benefit obligations. 25 2011 Half -Year Financial Report Free translation for information purposes only A pension asset can be generated where a defined benefit plan is overfunded. The amount at which such an asset is recognized in the balance sheet may be subject to a ceiling, in application of paragraph 58 of IAS 19 and IFRIC 14. Other long-term benefits In respect of other long-term benefits, and in accordance with applicable laws and regulations, provisions are recognized using a simplified method. Thus, if an actuarial valuation using the projected unit cost method is required, actuarial gains and losses and all past service costs are recognized immediately in the provision, with a double entry being recognized to the income statement. The net expense related to pension benefit obligations and other employee benefit obligations is recognized in recurring operating income, with the exception of: the effect of curtailments or settlements of plans which are presented under the “Other income and expenses” caption in the case of substantial modifications to such plans; the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits, which are classified within the financial result caption. At interim period ends, expenses relating to pensions and other long-term employee benefits are calculated using an extrapolation of the actuarial valuations performed at the previous year-end. These valuations are modified if significant changes have occurred in market conditions since the previous year-end or in the case of settlements, curtailments or other material non-recurring events (see note C13.2 Provisions and other non-current liabilities/Provisions). 11 Greenhouse gas emissions allowances (EUA) and certified emission reductions (CER) In the absence of an IFRS standard or interpretation relating to accounting for CO2 emissions allowances, the following treatment has been adopted: • allowances allocated without payment of consideration are recognized for a nil value, transactions carried out in the market are recognized at the transaction amount. At this point, greenhouse gas emissions allowances (EUA) allocated are adequate to cover the operational needs of ARKEMA’s European units and a deficit is not currently forecast. ARKEMA does not carry out a trading activity in respect of CO2 emissions allowances. However, in the normal course of its operations, ARKEMA may carry out cash or forward sales of its surpluses. These sales do not enter into the scope of application of IAS 39 because of the “own use” exception. The CERs produced by the Group in the context of projects to reduce its greenhouse gas emissions are recognized in inventories, and sales are recorded at their net-of-tax value on delivery of the CERs. 26 2011 Half -Year Financial Report Free translation for information purposes only 12 Recognition of sales Sales are measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Sales are recognized on transfer to the purchaser of the risks and rewards related to ownership of the goods, which is determined mainly on the basis of the terms and conditions of the sales contracts. 13 Income taxes 13.1 Current taxes Current taxes are the amount of income taxes that the Group expects to pay in respect of taxable profits of consolidated companies in the period. They also include adjustments to current taxes in respect of prior periods. The French tax consolidation regime enables certain French companies in the Group to offset their taxable results in determining the tax charge for the entire French tax group. The overall tax charge is payable by Arkema S.A., as the parent company of the tax group. Tax consolidation regimes also exist in countries outside France. The French Finance Act for 2010 introduced the local tax named CET (Contribution Economique Territoriale). One of its components is the contribution based on companies’ value added (Cotisation sur la Valeur Ajoutée des Entreprises – CVAE). After analyzing the methods for determining this contribution in the light of the positions of the IFRIC and France’s Accounting Standards Authority ANC (Autorité des Normes Comptables) in late 2009, the Group considered that in this specific case, the contribution meets the requirements to be treated as a current tax under IAS 12. The CVAE is therefore classified under “income taxes” from 1 January 2010. 13.2 Deferred taxes The Group uses the liability method whereby deferred taxes are recognized based upon the temporary differences between the financial statement and tax basis of assets and liabilities, as well as on tax loss carry forwards and other tax credits, in accordance with IAS 12 “Income taxes”. Deferred tax assets and liabilities are valued at the tax rates that are expected to apply in the year in which the asset will be realized or the liability settled, on the basis of tax rates (and tax legislation) that have been enacted or virtually enacted at the balance sheet date. The effect of any changes in tax rates is recognized in income for the period, unless it relates to items that were previously debited or credited through equity. Deferred tax assets and liabilities are not discounted. Deferred tax assets are recognized to the extent that their recovery is probable. In order to assess the likelihood of recovery of such assets, account is notably taken of the profitability outlook determined by the Group and historical taxable profits or losses. A deferred tax liability is recognized for all taxable temporary differences related to investments in subsidiaries, associates and joint ventures, unless: the Group controls the timing of the reversal of the temporary difference, and 27 2011 Half -Year Financial Report Free translation for information purposes only it is probable that this difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset if a legally enforceable right to offset current tax assets and liabilities exists and if they relate to income taxes levied by the same tax authority. As the contribution based on companies’ value added CVAE (Cotisation sur la Valeur Ajoutée des Entreprises) is considered as a component of income taxes, the relevant calculation methods generate temporary differences for which a deferred tax liability of 1.5% of the value is recorded. 14 Information by segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. The Group’s activities are conducted through three business segments: Vinyl Products, Industrial Chemicals and Performance Products. The directors of the business segments report directly to the Chairman and CEO, the Group’s chief operating decision-maker as defined by the standard, and are in regular contact with him for the purpose of discussing their segments’ operating activity, financial results, forecasts and plans. Vinyl Products includes the following business units: Chlorochemicals-PVC, Vinyl compounds and downstream converting (Pipes and Profiles). From June 2011, this segment is divided into two business units: Chlorochemicals-PVC and Innovative Vinyls, which comprises Pipes and Profiles, Vinyl compounds and CPVC which was previously part of the Chlorochemicals-PVC business unit. Vinyl products are used in areas such as construction and civil engineering, and also in water treatment, healthcare, domestic hygiene, the automobile sector and electric equipment. Industrial Chemicals brings together the following business units: Acrylics, Specialty Acrylic Polymers, PMMA, Thiochemicals, Fluorochemicals, Hydrogen Peroxide and Emulsions. Industrial Chemicals products are used in numerous industrial sectors such as ink and paint, healthcare and hygiene, the environment, refrigeration, oil and gas, production of paper pulp, animal feed, electronics and the automobile sector. Performance Products groups the following business units: Technical Polymers, Specialty Chemicals and Functional Additives. Performance Products are used in a variety of sectors from transport to sporting equipment, oil extraction to renewable energies, cosmetics to medical equipment, construction to household electrical goods. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together under a Corporate section. 28 2011 Half -Year Financial Report Free translation for information purposes only 15 Cash flow statements Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). In consequence, cash flows cannot be recalculated on the basis of the amounts shown in the balance sheet. 16 Share-based payments In application of IFRS 2 “Share-based payments”, the stock options and free shares granted to management and certain Group employees are measured at their fair value at the date of grant, which generally corresponds to the date of the Board of Directors’ meeting that granted the stock options and free shares. The fair value of the options is calculated using the Black & Scholes model, adjusted, in the case of plans awarded from 2011, for an illiquidity cost due to the non-transferability of instruments; the expense is recognized in personnel expenses on a straight-line basis over the period from the date of grant to the date from which the options can be exercised. The fair value of rights under free share grants corresponds to the opening market price of the shares on the day of the Board of Directors’ meeting that decides on the grant, adjusted for dividends not received during the vesting period and, in the case of plans awarded from 2011, for an illiquidity cost related to the period of non- transferability. The expense recognized also reflects the probability that the presence condition will be fulfilled. This expense is included in personnel expenses on a straight-line basis over the vesting period of the rights. 17 Earnings per share Earnings per share corresponds to the division of net income (Group share) by the weighted average number of ordinary shares in circulation since the start of the year. Diluted earnings per share corresponds to the division of net income (Group share) by the weighted number of ordinary shares, both of these figures being adjusted to take account of the effects of all dilutive potential ordinary shares. The effect of dilution is thus calculated taking account of stock options and grants of free shares to be issued. 18 Discontinued operations and assets held for sale A discontinued operation is defined, according to IFRS 5, as a component of the Group’s activity that either has been disposed of, or is classified as held for sale and which represents a separate major line of business or geographical area of operations that forms part of a single coordinated disposal plan. 29 2011 Half -Year Financial Report Free translation for information purposes only The income statement, cash flow statement and balance sheet items relating to discontinued operations are presented in a specific note to the financial statements for the current financial year, with comparatives for the previous year. The Group presents, for the financial year in question, assets and liabilities of continuing operations in the standard manner, to which assets and liabilities of discontinued operations and assets held for sale are added. These assets and liabilities are not offset but are rather presented respectively in two specific balance sheet captions. The balance sheet of the previous financial year is not modified. The Group presents, for the financial year in question and the previous financial year, the income statement of continuing operations in the standard manner, to which a single amount representing the income or loss after tax of discontinued operations is added. For the two financial years considered, the Group presents the cash flow statement without distinguishing between continuing operations and discontinued operations. Disclosures regarding the cash flows of discontinued operations are nevertheless provided in a specific note to the financial statements. 19 Main accounting and financial indicators The main performance indicators used are as follows: Operating income: this includes all income and expenses of continuing operations other than financial result, equity in income of affiliates and income taxes; Other income and expenses: these correspond to a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. These items of income and expense notably include: (cid:1) (cid:1) gains or losses on sale of assets, acquisition costs, negative goodwill on acquisitions and the impairment losses in respect of property, plant and equipment and intangible assets, valuation difference on inventories between their fair value at the acquisition date and their production cost, (cid:1) large restructuring and environmental expenses which would hamper the interpretation of recurring operating income (including substantial modifications to employee benefit plans and the effect of onerous contracts), (cid:1) expenses related to litigation and claims or major damages, whose nature is not directly related to ordinary operations; Recurring operating income: this is calculated as the difference between operating income and other income and expenses as previously defined; Adjusted net income: this corresponds to “Net income – Group share” adjusted for the “Group share” of the following items: (cid:1) other income and expenses, after taking account of the tax impact of these items, 30 • 2011 Half -Year Financial Report Free translation for information purposes only (cid:1) income and expenses from taxation of an exceptional nature, the amount of which is deemed significant, (cid:1) net income of discontinued operations; EBITDA: this corresponds to recurring operating income increased by depreciation and amortization; Working capital: this corresponds to the difference between inventories, accounts receivable, other receivables and prepaid expenses, income tax receivables and other current financial assets on the one hand and accounts payable, other creditors and accrued liabilities, income tax liabilities and other current financial liabilities on the other hand. These items are classified in current assets and liabilities in the consolidated balance sheet; Capital employed: this is calculated by aggregating the net carrying amounts of intangible assets, property, plant and equipment, equity affiliate investments and loans, other investments, other non- current assets (excluding deferred tax assets) and working capital; Net debt: this is the difference between current and non-current debt and cash and cash equivalents. 31 2011 Half -Year Financial Report Free translation for information purposes only C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Impact of seasonality ARKEMA’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: • demand for products manufactured by ARKEMA is generally weaker in the summer months (July- August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and Southern Europe; in some of ARKEMA’s businesses, particularly those serving the refrigeration, construction and coatings markets, the level of sales is generally higher in the first half of the year than in the second half; and major maintenance turnarounds at ARKEMA’s production plants tend to take place in the second half of the year rather than in the first half. Seasonality effects observed in the past are not necessarily representative of future trends, but they could have a material influence on the changes in results and working capital between the different quarters of the financial year. Revenues from ordinary activities earned on a seasonal, cyclical or occasional basis during a financial year are neither recognized in advance nor deferred at interim reporting dates unless it would be appropriate to recognize them in advance or defer them at the year-end. 2 Information by business segment Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. 32 1st half 2011 (In millions of euros) Non-Group sales Inter segment sales Total sales Recurring operating income Other income and expenses Operating income Equity in income of affiliates Details of certain significant non-cash expenses by segment: Depreciation and amortization Asset impairment charges Provisions EBITDA Intangible assets and property, plant, and equipment additions Of which additions of an exceptional nature 1st half 2010 (In millions of euros) Non-Group sales Inter segment sales Total sales Recurring operating income Other income and expenses Operating income Equity in income of affiliates Details of certain significant non-cash expenses by segment: Depreciation and amortization Asset impairment charges Provisions EBITDA Intangible assets and property, plant, and equipment additions Of which additions of an exceptional nature Vinyl Products 631 35 666 (27) (1) (28) 9 (29) 1 2 34 3 Vinyl Products 569 29 598 (35) (1) (36) 6 (28) 8 (8) 20 2011 Half -Year Financial Report Free translation for information purposes only Industrial Chemicals 1,889 Performance Products 976 Corporate 10 85 10 1,974 986 10 385 128 (22) (6) (3) 379 128 (25) 1 (69) (44) (1) 9 (3) 6 454 172 (21) 54 42 8 6 Industrial Chemicals 1,515 Performance Products 820 Corporate 9 70 8 1,585 828 9 202 85 (16) (2) (1) 200 85 (17) 1 (69) (45) (1) 21 (2) 13 272 130 (16) 57 43 3 7 3 Group Total 3,506 464 (10) 454 10 (143) 13 607 138 9 Group Total 2,913 236 (4) 232 7 (142) (1) 40 378 123 10 33 2011 Half -Year Financial Report Free translation for information purposes only 3 Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2011 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world Non-Group sales 475 1,226 993 685 127 1st half 2010 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world Non-Group sales 419 1,020 853 501 120 (1) NAFTA: United States, Canada, Mexico 4 Other income and expenses (In millions of euros) 1st half 2011 Income Expenses Net 1st half 2010 Income Expenses Restructuring and environmental charges Goodwill impairment charges Asset impairment charges (other than goodwill) (5) - 1 - (4) - - 1 - Litigation and claims Gains (losses) on sales and purchases of assets (6) (6) (4) (12) 11 Other Total other income and expenses (11) 1 (10) (16) 12 In the first half of 2011, gains and losses on sales and purchases of assets comprise the costs related to acquisition of Total’s photocure and coatings resins businesses (see note C7, Business combinations). In the first half of 2010, net expenses for litigation and claims mainly relate to events arising in 2008 and 2009. The €1 million loss on sales of assets concerns acq uisition of some of the activities of The Dow Chemical Company in the US. The transaction generated negative goodwill of €11 million. Expenses and the stock valuation difference between the fair value at the acquisition date and the production cost amounted to €(12) million. 34 Total 3,506 Total 2,913 Net 1 - (4) (1) (4) 2011 Half -Year Financial Report Free translation for information purposes only 5 Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Net income - Group share Notes 1st half 2011 335 1st half 2010 159 Other income and expenses (C4) 10 4 Taxes on other income and expenses (1) (5) Exceptional taxation Discontinued operations Adjusted net income 344 158 6 Income taxes The income tax expense is broken down as follows: (In millions of euros) 1st half 2011 1st half 2010 Current income taxes (111) (75) Deferred income taxes (2) 8 Total income taxes (113) (67) The income tax expense amounts to €113 million at 3 0 June 2011, including €8 million for the CVAE (com pared with €67 million at 30 June 2010, including €5 mill ion for the CVAE). 7 Business combinations On 1 July 2011, ARKEMA finalized its acquisition for an enterprise value of €550 million of two of Tot al’s specialty chemicals businesses: coatings resins (Cray Valley and Cook Composites Polymers), and photocure resins (Sartomer). Based on 2010 figures, these two business lines will contribute annual sales in the region of €750 million once included in the ARKEMA consolidat ion. This acquisition will make Arkema a worldwide leader in the coatings resins market and is a perfect illustration of the group’s strategy to develop its specialty businesses. Following integration of the acrylic business, this latest transaction offers significant potential for growth and synergies. The expenses incurred have been recorded at €6 mill ion (see note C4 Other income and expenses). If the acquisition had taken place at 1 January 2011, it would have generated additional sales of approximately €440 million in the first half of 2011. 35 2011 Half -Year Financial Report Free translation for information purposes only Since the information required for initial recognition of the acquisition was being analyzed by the Board of Directors at the date of finalization of the financial statements, the Group is unable to determine the amount of goodwill resulting from the operation, the fair value of the total consideration transferred, and its breakdown by nature. 8 Earnings per share Earnings per share and diluted earnings per share are presented below: 1st half 2011 Weighted average number of ordinary shares 61,520,842 Dilutive effect of stock options 666,976 Dilutive effect of free share grants 99,558 Weighted average number of potential ordinary shares 62,287,376 Earnings per share is determined below: 1st half 2011 Earnings per share (€) 5.45 Diluted earnings per share (€) 5.38 Adjusted net income per share (€) 5.59 Diluted adjusted net income per share (€) 5.52 At 30 June 2011, all outstanding stock option plans had a dilutive effect, except for the plans awarded in 2011 which were ultimately non-dilutive. 9 Intangible assets In the first half of 2011, acquisitions of intangible assets amounted to €9 million (€11 million in th e first half of 2010). 10 Property, plant & equipment In the first half of 2011, capital expenditure on property, plant and equipment amounted to €128 milli on (€111 million in the first half of 2010). The Group also sold or scrapped property, plant and equipment with total gross value of €61 million (€54 million in the firs t half of 2010). 1st half 2010 60,789,944 4,745 8,539 60,803,228 1st half 2010 2.62 2.61 2.60 2.60 36 2011 Half -Year Financial Report Free translation for information purposes only 11 Inventories The gross amount of the Group’s inventories rose from €942 million at 31 December 2010 to €1,136 milli on at 30 June 2011. In the first half of 2011, the Group recognized a net increase of €4 million in impairment of inventor ies. This compared to a net decrease of €5 million in impairm ent of inventories in the first half of 2010. 12 Shareholders’ equity At 31 December 2010, Arkema S.A.’s share capital amounted to €615 million and was composed of 61,493,7 94 shares with a nominal value of 10 euros. On 30 June 2011, the Group carried out a capital increase of €3 million following the exercise of 350, 033 stock options. Following this operation, Arkema S.A.’s share capital was increased to €618 million divided i nto 61,843,827 shares. During the first half of 2011, the company allocated 132,200 treasury shares to employees. The shareholders’ general meeting of 24 May 2011 adopted a resolution proposing to distribute a dividend of €1 per share, or a total amount of €61 million, in res pect of the 2010 financial year. 13 Provisions and other non-current liabilities 13.1 Other non-current liabilities Other non-current liabilities amount to €37 million at 30 June 2011 as against €36 million at 31 Decem ber 2010. 13.2 Provisions (In millions of euros) Pensions and other employee benefit obligations Environmental contingencies Restructuring Other At 31 December 2010 352 198 100 121 Increases in provisions 11 1 2 14 Reversals from provisions on use (8) (6) (18) (8) Reversals of unused provisions (3) (1) (1) Changes in scope Translation adjustments (6) (6) (1) (3) Other (17)* 13 Assets held for sale At 30 June 2011 (*) including actuarial gains and losses for the period 329 187 82 136 37 Total 771 28 (40) (5) (16) (4) 734 2011 Half -Year Financial Report Free translation for information purposes only In addition, certain provisions are covered by non-current assets (receivables, deposits or pension assets): (In millions of euros) Pensions and other employee benefit obligations Environmental contingencies Restructuring Other Total provisions at 30 June 2011 329 187 82 136 Portion of provisions covered by receivables or deposits 1 35 4 Deferred tax asset related to amounts covered by the Total indemnity 19 3 Net pension assets Provisions at 30 June 2011 net of non- current assets 328 133 82 129 13.3 Provisions for pensions and similar benefits At 30 June 2011, provisions for pensions and similar benefits are comprised of pension benefit obligations for €223 million (€239 million at 31 December 2010), he althcare plans for €53 million (€56 million at 31 D ecember 2010), long-service awards for €44 million (€47 mil lion at 31 December 2010) and Group pre-retirement plans for €9 million (€10 million at 31 December 2010). Certain defined-benefit plans in the Netherlands were overfunded at 30 June 2011, but no net asset can be recognized due to the limits imposed by paragraph 58 of IAS 19 and IFRIC 14. The current overfunding on these Dutch plans is not expected to be reimbursed to the company nor set against future contributions. ARKEMA applied the following discount rates at 30 June 2011: Pension benefit and healthcare plan commitments Europe USA At 30 June 2011 4.80% - 5.50% 5.50% At 31 December 2010 4.50% - 5.20% 5.25% Long-service awards Europe At 30 June 2011 4.50% At 31 December 2010 3.60% - 5.17% The present value of defined benefit obligations at the end of 2010 was adjusted at 30 June 2011 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2010 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets was reassessed on the basis of new valuations at 30 June 2011. Total 734 40 22 672 38 2011 Half -Year Financial Report Free translation for information purposes only The changes in discount rates and the remeasurement of plan assets have the following effects at 30 June 2011: (In millions of euros) Actuarial gains and losses recognized in shareholders’ equity Changes in discount rates Remeasurement of plan assets Actuarial gain (loss) related to pensions and healthcare plans 10 3 Benefit obligations recognized in balance sheet liabilities Pension and other long-term benefits (17) (4) Income or expenses recognized in the income statement Other employee benefits 3 13.4 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €97 million (€98 million at 31 Dece mber 2010) in the United States for €68 million (€78 million at 31 December 2010), of which €54 million in respect of former industrial sites covered 100% by the Total Group indemnity (receivable recognized in “other non-current assets” for an amount of €35 million and €19 million of deferred taxes) (see note C19.2 Off balance sheet commitments/Commitments received). 13.5 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €71 million (€8 5 million at 31 December 2010). 14 Contingent liabilities 14.1 Environment ARKEMA’s business activities are subject to constantly changing local, national and international regulations on the environment and safety, which entail meeting increasingly complex and restrictive requirements. In this regard, these activities can involve a risk of ARKEMA’s liability being called upon, particularly in respect of clean-up of sites and industrial safety. Taking account of the information available, agreements signed with Total, and the provisions for environmental contingencies recognized, ARKEMA’s management considers that the environmental liabilities identified at this point are valued and recognized to the best of their knowledge in the financial statements. However if laws, regulations or government policy in respect of environmental matters were to change, ARKEMA’s obligations could change, which could lead to additional costs. 39 2011 Half -Year Financial Report Free translation for information purposes only Clean-up of sites The competent authorities have made, are making or may in the future make specific demands that the Group rehabilitate or control emissions at certain sites that it is currently operating, or that it operated or disposed of in the past, at neighboring sites or at sites where the Group stored or disposed of waste. Sites currently in operation: ARKEMA has many sites of which a certain number are probably polluted in view of their age and the range of activities that are carried out on them, or that were carried out on them in the past. As regards these sites, certain situations have been identified and ARKEMA has already carried out certain clean-up work, or otherwise developed action plans and recognized provisions in order to cover future clean-up work. However, in the light of (i) the uncertainties over the technical means to be implemented, (ii) potential issues that are unknown, (iii) uncertainties over the actual time required for remediation compared with the estimated time (e.g. “pump and treat”), and (iv) potential changes in regulations, the possibility that the expenses that the Group will incur will be higher than the amounts covered by provisions cannot be excluded. These potential excess costs relate mainly to the sites in Calvert City (United States), Carling (France), Günzburg (Germany), Jarrie (France), Lannemezan (France), Mont (France), Pierre-Bénite (France), Riverview (United States), Rotterdam (the Netherlands), Saint-Auban (France) and Saint Fons (France), and could adversely affect the Group’s business, results and financial condition. As regards the site of Saint-Auban, different legal proceedings brought against Arkema France have been grouped together (merging of proceedings - “jonction de procédures") with the Nanterre correctional court. An administrative procedure was also initiated in 2009 concerning the Spinetta site (Italy - Arkema srl). Closed industrial sites (Former industrial sites): Total directly or indirectly took over the closed industrial sites at the date of the Spin-Off of Arkema’s Businesses. 14.2 Litigation, claims and proceedings in progress 14.2.1 Antitrust litigation The Group is involved in a number of proceedings in the United States, Canada and Europe alleging violations of antitrust laws relating to cartel behavior. To cover the risks associated with the proceedings in the United States and Europe, which arose prior to completion of the Spin-Off of Arkema’s Businesses, Total S.A. and one of its subsidiaries have granted indemnities for the benefit of Arkema S.A. and Arkema Amériques SAS, the main terms of which are described in note C28, “Off-balance sheet commitments”, to the consolidated financial statements at 31 December 2010, which can be found in Chapter 28.2 of ARKEMA’s 2010 Reference Document. Some of the European Commission proceedings are currently under appeal by Arkema France before the European Union’s General Court or the European Court of Justice. 40 2011 Half -Year Financial Report Free translation for information purposes only Proceedings carried out by the European Commission Arkema France currently remains a party to several proceedings being carried out by the European Commission alleging violations of the rules of EU competition law restricting anticompetitive agreements. The appeal proceedings by Arkema France before the European Union’s General Court following the European Commission’s decisions in the heat stabilizers case are still pending. The appeal proceedings concerning the MCAA case are still ongoing before the European Court of Justice following the General Court’s judgement issued in 2009. In the first half of 2011, the European Union’s General Court issued its decision in the sodium chlorate and methacrylates cases. In the former, the Court upheld the Commission’s decision and in the latter, it reduced Arkema France’s fine from €219.1 million to €113.3 million. At 30 June 2011, since the European Commission was entitled to appeal, Arkema France did not recognize its 10% share of the reimbursement as required by the Total indemnity. In July 2011, the European Union’s General Court issued its ruling in the hydrogen peroxide case, which confirmed the Commission's decision. In addition to the proceedings carried out by the European Commission, it cannot be ruled out that civil suits for damages are filed by third parties claiming to be victims of the violations in relation to which fines have been imposed by the European Commission. There were no significant developments in the first half of 2011 in connection with the claim for compensation lodged with the Dortmund (Germany) Tribunal by Cartel Damage Claim (CDC) Hydrogen Peroxyde SA as a result of Arkema France’s participation in the hydrogen peroxide cartel. In June 2011, a further claim was made against Arkema France before the Amsterdam court by an affiliate of CDC (CDC Project 13 S.A.), concerning sodium chlorate. These proceeding are identical to those initiated by CDC in Germany for hydrogen peroxide. Given the elements at its disposal, the Group is not currently able to estimate the total amount of the claims liable to be definitively held against it by the competent jurisdiction after exercise of any recourse available, and so has not recognized any provisions in this respect. Proceedings in the United States and Canada a) US civil actions In 2008 and early 2009, the appeals court ruled that the trial courts erred when they granted class certification of direct purchaser classes in the hydrogen peroxide matter and in the plastics additives matter; the appeals court remanded each of those cases back to the trial courts for further proceedings consistent with proper class 41 2011 Half -Year Financial Report Free translation for information purposes only certification standards. Following those appellate decisions, the trial court finally approved the settlement agreements that Arkema Inc. and Arkema France separately executed with the direct purchaser class in Hydrogen Peroxide and with the direct purchaser class of MMA/PMMA products. In the plastics additives direct purchaser action, on remand and after a full hearing, the court denied the plaintiffs’ request for class certification. Plaintiffs’ request for reconsideration of the court’s denial of class certification was rejected by the trial court. During the first half of 2011, the plaintiffs announced that they intended to continue proceedings individually, for a more restricted class of products than in the initial action. During the first quarter of 2010, Arkema Inc. reached a signed settlement agreement with the indirect purchasers of hydrogen peroxide from five American states which had initiated action alleging violation of state competition laws. Under this agreement, which has now received court approval, Arkema Inc. will make no payments and will provide limited cooperation if the case proceeds to trial against other defendants. b) Canadian civil actions In Canada, a number of civil actions alleging violations of Canadian competition laws concerning hydrogen peroxide products were filed in Quebec, Ontario and British Columbia in 2005 and 2006. The trial court in Ontario has certified a class of direct and indirect purchasers. Arkema SA, Arkema Inc. and Arkema Canada Inc.’s request for leave to appeal that decision was denied in June 2010. The plaintiffs and the defendants have reached an agreement on May 31, 2011 in principle to settle all of the pending Canadian actions for a payment of CAD100,000 and some specific cooperation, subject to conditions that include the approval of the courts in all three jurisdictions in which the cases are pending. The Ontario court has set an approval hearing for September of 2011. 14.2.2 Occupational illness In the manufacture of its products, the Group uses and has used toxic or hazardous substances. Despite the safety and monitoring procedures that have been instituted at Group level and for each production site, Group employees may have been exposed to such substances and may develop specific pathologies as a result of such exposure. In this respect, like most industrial companies, in the past, the Group has used a variety of insulating or heat- proofing materials containing asbestos in its production facilities. Consequently, certain employees may have been exposed to such materials before they were gradually eliminated and replaced with substitute products. At its French sites, the Group anticipated the regulatory provisions applicable to asbestos (Decrees No. 96-97 and 96-98 of 7 February 1996 and Decree No. 96-1133 of 24 December 1996). The Group made an inventory of asbestos-containing building materials within its premises, notified employees of the results of these investigations and took the collective and individual protective measures required by the applicable laws. However, claims for occupational illness related to past asbestos exposure have been filed against the Group, 42 2011 Half -Year Financial Report Free translation for information purposes only mostly for periods before 1980. Given the latency period of asbestos-related pathologies, a large number of claims for occupational illness are likely to be filed in the years ahead. The Group has recognized provisions to cover the risks of employer liability claims related to notified cases of occupational illness. 14.2.3 Other litigation and claims and contingent liabilities Arkema France In 1995, the company Gasco brought a claim for damages against Elf Atochem (the former name of Arkema France) before the court in Ghent (Belgium) in respect of an alleged breach of contract and breach of an exclusivity agreement. At first instance, Gasco obtained a judgment against Atofina for payment of €24 8,000 by way of damages for breach of contract (payment of that sum has been made) but its claim for breach of the exclusivity agreement was dismissed. Appeal proceedings have been pending before the Ghent Court of Appeal since 1999, and no developments have arisen since then. Having regard to the weak basis of the allegations made against it and the defenses available to the Group, the Group’s view as the matter currently stands is that the amount of the provision made for this matter in the accounts is sufficient. No significant developments arose on this case in the first half of 2011. Arkema France supplies various products for the coating of items used in a number of European countries in the manufacture of sanitary treatment facilities. These products are subject to inspection on the part of approved laboratories which must certify their conformity with the applicable sanitary regulations. Arkema France has an interpretation of the regulations applicable in France that diverges from that of a French laboratory and the public authorities as regards regulatory clearance in France of a product, even though this product is approved in other European Union countries. The Group takes the view that this problem is essentially administrative in nature. However, the possibility that users might seek to attach liability to Arkema France as the supplier cannot be excluded. In the event that such claims were successful, the costs of replacement of the products and the damages that could be claimed could prove to be extremely high. Under the terms of a services agreement, Arkema France has the effluent produced by its industrial operations at Lacq and Mourenx treated by Total E&P France, which has specific authorization to inject this effluent, together with effluent it produces itself, into a cavity called Crétacé 4000. The French customs authorities issued a tax demand of €6.7 million to Total, covering the years 2003 to 2006, for non-payment of the French general tax on polluting activities (taxe générale sur les activités polluantes, or TGAP) which, according to the authorities, should be applied to these injections of effluent. Following the authorities’ rejection of Total’s appeal at the end of 2008, Total initiated a case in the court of first instance against them in early 2009, seeking cancellation of the tax demand. Total’s main argument is that the injections are not carried out in a context subject to Classified Facilities regulations and are thus not subject to the TGAP. The court’s decision issued in April 2011 rejected Total’s principal claim while acknowledging that its own effluents should be exempt from the TGAP. However, 43 2011 Half -Year Financial Report Free translation for information purposes only the possibility cannot be fully ruled out that, at the end of the proceeding, Total may be required to pay all or part of the TGAP assessed, of which ARKEMA could be liable for a portion. In 2005, 260 employees and former employees of the Pierre-Bénite site made a claim for damages with the Lyon employee claims courts (Conseils de prud’hommes) for alleged non-compliance with the terms of the chemicals industry branch agreement over break times. The claimants consider that, given the manner in which work is organized and structured on this site, the break granted to them does not allow them to be released from all work and to be able to freely go about their personal affairs. The claim for compensation amounts to €5.2 m illion. Arkema France has contested these claims. A judgment issued on 24 June 2008 fully rejected all of the employees’ claims. The employees appealed this decision. The Lyon appeal court is expected to rule on the case by the end of 2011, and a provision has been recognized in the financial statements for an amount that the Group considers adequate. In the first half of 2011, 98 former employees of Arkema France who left the company under the early retirement system for asbestos workers brought proceedings before employee claims courts, claiming compensation for losses of income caused by their departure under this system. The conditions for departure under the early retirement system and the amount of the allocation received by beneficiaries - the subject of the current litigation - are defined by French law. These proceedings follow rulings by the Paris and Bordeaux appeal courts awarding compensation to former employees of other companies who also left their jobs under the same system. The damages awarded varied, ranging up to the full amount of salary. In a ruling of 11 May 2010, the labour chamber of the Court of Cassation partly overturned the decisions by the Paris and Bordeaux appeal courts, judging that no compensation could be claimed for loss of revenue resulting from departure under the early retirement system. This judgement has since been confirmed several times. The court did however accept the existence for these employees of a prejudice of anxiety eligible for compensation. For Arkema France, in the cases currently in process, two former employees have so far received a favourable ruling by the Forbach employee claims court. Their claim concerning the prejudice of anxiety was rejected, but the court agreed to order partial compensation for the loss of salary resulting from departure under the CAATA system, whereas the Court of Cassation takes the opposite position. Arkema France has appealed these decisions. The Martigues employee claims court took a contrary view to the labour chamber of the Court of Cassation in rulings of 23 February 2011, ordering Arkema France to compensate five former employees for economic prejudice, and also finding against Arkema France on the question of the prejudice of anxiety. Arkema France has appealed these decisions. The rest are expected in the next few months. It is likely that other former employees of Arkema France who benefited from the asbestos-related early retirement system, or other employees who may have been exposed to asbestos, may themselves claim compensation before an employee claims court for the prejudice of anxiety. In June 2011 for example, based on this precedent, 95 former employees of the Saint Auban establishment began action to seek damages for the prejudice of anxiety. 44 2011 Half -Year Financial Report Free translation for information purposes only A provision has been recognized in the financial statements in respect of the litigations currently in progress, for an amount that the Group considers adequate. In 2009, the Council of State cancelled the decision by the Lyon administrative court confirming the rulings against Arkema France, ordering the company to complete the pollution diagnosis for part of the Saint Fons site and propose preventive or remedial work. However, during proceedings before the Council of State, the Prefect of the Rhône region issued a new decision in 2007 still concerning the Saint Fons site, ordering Arkema France to carry out a quality monitoring on underground water and propose a pollution management plan. Arkema France considers that this decision, which it has appealed, should also be ultimately cancelled. If not, the possibility that rehabilitation of the site affected by the pollution will finally be the responsibility of Arkema France cannot be ruled out. Arkema France has already begun legal action against Rhodia Chimie, the previous operator of the site. Arkema Srl In a criminal investigation related to the Spinetta site in Italy and concerning a certain number of managers and directors of Arkema Srl, the Judge ruled in June 2011 that applications by third parties to bring civil claims for damages were valid. Given the circumstances, Arkema Srl considers it is still too early to determine the precise nature and extent of the potential liability of the managers or directors cited in this criminal investigation. CECA There were no significant developments during the first half of 2011 in the litigation between Intradis and CECA over CECA’s alleged liability for pollution of land purchased by Intradis. Arkema Inc. In the United States, the Group is currently involved in a substantial number of proceedings in various courts. No notable developments arose in the first half of 2011 in the proceedings concerning claims by third parties relating to (i) alleged exposure to asbestos on the Group’s sites, or (ii) exposure to products containing asbestos and sold by former subsidiaries of the Group in the United States and elsewhere. When they are not covered by insurance policies, provisions have been made for these proceedings in an amount which the Group considers sufficient. However, due to the continuing uncertainties as to the outcome of these proceedings, the Group is not, as at the date of these financial statements, in a position, having regard to the information available to it, to estimate the total amount of the claims that might finally be upheld against it by the various competent courts after the exhaustion of any avenues of appeal. On 5 August 2010, Rohm and Haas served Arkema Inc. and Arkema France with a petition in the District Court of Harris County, Texas. The petition asserts various claims against Arkema associated with the Deer Park, Texas Capacity Reservation Contract, MMA Swap Agreement, and MMA Supply Agreement. The claims are in particular for breaches of contract. 45 2011 Half -Year Financial Report Free translation for information purposes only On 1 October 2010 an Amended Complaint sought to terminate Arkema Inc.’s right under the Capacity Reservation Contract as of 1 April 2014. On 21 April 2011, the Court in Texas issued an order granting Arkema Inc.’s motion for summary judgment on one count in the complaint, holding, in relevant part, that the Capacity Reservation Contract “remains in full force and effect” and that Arkema Inc.’s purchase rights under such contract “shall continue for the life of the Deer Park Facility.” Rohm and Haas has sought permission from the trial court to appeal that decision. On 13 August 2010, Rohm and Haas filed a Notice of Arbitration and Statement of Claim with the American Arbitration Association in New York. The arbitration claim seeks relief from the alleged failure of Arkema to enter into a replacement swap agreement for MMA. As of 30 June 2011 the Texas case and the AAA arbitration described above were proceeding simultaneously. Arkema Quimica Limitada In the tax litigation between the Brazilian government and Arkema Quimica Limitada, the company received confirmation during the first half of 2011 that the judge would accept a guarantee in the form of a cash deposit and a pledge of other assets for the current portion of the liability. If the tax authorities give final consent to the terms for payment of the liability subject to amnesty, only an amount of 9.2 million reais or around € 4 million at 30 June 2011 would be concerned by an appeal before the courts, which Arkema considers would have reasonable chances of success. 15 Debt Group net debt amounted to €265 million at 30 June 2011, taking account of cash and cash equivalents of €549 million; it is mainly denominated in euros. The Group has the following instruments: • In October 2010, the Group issued a €500 million bo nd that will mature on 25 October 2017, with a fixed coupon of 4.00%. On 31 March 2006, the Group put in place a multi-currency syndicated credit facility in a maximum amount of €1,100 million, with an initial duration of five years, maturing on 31 March 2011. In February 2007, the credit facility was extended a first time until 31 March 2012, for an amount of €1,094 million. In February 2 008, the credit facility was extended a second time until 31 March 2013, for an amount of €1,049 million. Final ly, on 26 July 2011, the Group reduced the total value of the credit facility to €300 million. The purpose of the credit facility is to finance, in the form of drawings and bank guarantees, the Group’s general corporate purposes; the credit facility provides for prepayment in certain cases, including a change of control over ARKEMA; should this clause be triggered by a lender, it could lead to prepayment and cancellation of the commitments of such a lender and incorporates: 46 2011 Half -Year Financial Report Free translation for information purposes only (i) information undertakings, including a representation pertaining to the continued validity and enforceability against the guarantors of the indemnities granted by Total S.A. and certain entities of Total as described in note C28, Off-balance sheet commitments, in the consolidated financial statements for the year ended 31 December 2010; (ii) standard undertakings for this type of agreement, including, undertakings relating, among other things, to certain restrictions in connection with (but not limited to) the granting of securities, the completion of merger or restructuring transactions, the sale or purchase of assets and the Group’s debt. Depending on the case, such restrictions will not apply to ordinary operations or to transactions involving amounts below certain thresholds; (iii) a financial undertaking: ARKEMA undertakes to maintain a ratio of consolidated net debt to consolidated EBITDA (tested twice a year) of less than 3. This facility was not used in 2011. On 26 July 2011, the Group put in place a multi-currency syndicated credit facility in the amount of €700 million, with a duration of five years, maturi ng on 26 July 2016. This credit facility is intended to finance the Group’s general requirements and includes an early repayment clause in the event of certain situations including a change in control of ARKEMA. It includes: (i) standard undertakings and commitments for this type of financing (ii) a financial undertaking in which ARKEMA undertakes to maintain a ratio of consolidated net debt to consolidated EBITDA (tested twice a year) of less than 3; this may be raised to 3.5 in the event of an acquisition that would justify the increase, for a maximum of two non-consecutive test dates. The Group also has a securitization program for sales receivables which remain in the consolidated accounts, representing a maximum financing of €240 million, used in the amount of €168 million at 30 J une 2011. 47 15.1 Analysis of net debt by category In millions of euros Bond Finance lease obligations Bank loans Other non-current debt Non-current debt Finance lease obligations Syndicated credit facility Other bank loans Other current debt Current debt Debt Cash and cash equivalents Net debt 2011 Half -Year Financial Report Free translation for information purposes only 30 June 2011 31 December 2010 495 495 11 12 58 52 28 28 592 587 2 2 0 0 194 25 26 7 222 34 814 621 549 527 265 94 48 2011 Half -Year Financial Report Free translation for information purposes only 15.2 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. In millions of euros 30 June 2011 31 December 2010 Euros 722 536 US Dollars 15 17 Chinese Yuan 70 64 Korean Won 3 1 Other 4 3 Total 814 621 15.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: In millions of euros 30 June 2011 31 December 2010 Less than 1 year 247 56 Between 1 and 2 years 40 50 Between 2 and 3 years 37 29 Between 3 and 4 years 34 27 Between 4 and 5 years 38 28 More than 5 years 579 584 Total 975 774 16 Management of risks related to financial assets and liabilities ARKEMA’s businesses expose it to various risks, including market risks (risk of changes in exchange rates, interest rates and the prices of raw materials and energy), credit risk and liquidity risk. 16.1 Foreign currency risk The Group is exposed to transaction risks related to foreign currencies. The Group hedges the foreign currency risk mainly through spot foreign currency transactions or through forward transactions over short maturities, generally not exceeding 6 months. The fair value of the Group’s forward foreign currency contracts is a liability of €5 million. The amount of foreign exchange gains and losses recognized in recurring operating income at 30 June 2011 is a loss of €0.5 million (loss of €3.2 million at 30 Ju ne 2010). 49 2011 Half -Year Financial Report Free translation for information purposes only The portion of foreign exchange gains and losses corresponding to interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate is recorded in financial result. It amounts to a positive €0.5 million at 30 June 2011 (non-significant at 30 June 2010). 16.2 Interest rate risk Exposure to interest rate risk is managed by the Group’s central treasury department and simple derivatives are used as hedging instruments. The Group has not entered into any interest rate hedges at 30 June 2011. An increase (decrease) of 1% (100 basis points) in interest rates would have the effect of increasing (decreasing) the interest on financial liabilities measured at amortized cost by €1 million. 16.3 Liquidity risk The Group’s central treasury department manages the liquidity risk associated with the Group’s debt. Liquidity risk is managed with the main objective of ensuring renewal of the Group’s financing and, in the context of meeting this objective, optimizing the annual financial cost of the debt. In almost all cases, Group companies obtain their financing from, and manage their cash with, Arkema France or other Group entities that manage cash pooling mechanisms. The main circumstances in which early repayment or termination could occur concern the syndicated credit facility (see note C15 Debt), if the ratio of consolidated net debt to consolidated EBITDA were to become greater than 3. At 30 June 2011, consolidated net debt represents 0.3 times consolidated EBITDA for the last 12 months. Note C15 Debt provides details of the maturities of debt. 16.4 Credit risk The Group is potentially exposed to credit risk on its accounts receivable and as regards its banking counterparts. The credit risk associated with accounts receivable is limited because of the large number of its customers and their geographical dispersion. The Group’s general policy for managing credit risk involves assessing the solvency of each new customer before entering into business relations: each customer is allocated a credit limit, which constitutes the maximum level of outstandings (receivables plus orders) accepted by the Group, on the basis of the financial information obtained on the customer and the analysis of solvency carried out by the Group. These credit limits are revised regularly and, in any case, every time that a material change occurs in the customer’s financial position. Customers who cannot obtain a credit limit because their financial position is not compatible with the Group’s requirements in terms of solvency only receive deliveries when they have paid for their order. Even though the Group has incurred very few bad debts for the last number of years, it has decided to cover all of its accounts receivable credit risk by putting in place a global credit insurance program. On account of the statistically low bad debt rate experienced by the Group, the rate of cover is significant. Customers with whom 50 2011 Half -Year Financial Report Free translation for information purposes only the Group wishes to continue commercial relations but which are not covered by this insurance are subject to specific centralized monitoring. In addition, the Group’s policy for recognizing bad debt provisions in respect of receivables not covered by credit insurance, or the portion of receivables that are not so covered, has two components: receivables are individually provided against as soon as a specific risk of loss (economic and financial difficulties of the customer in question, entry into receivership, etc.) is clearly identified. The Group may also recognize general provisions for receivables that are overdue for such a period that the Group considers that a statistical risk of loss exists. These periods are adapted depending on the Business Units and the geographical regions in question. Banking credit risk is related to financial investments, derivatives and credit facilities granted by banks. The Group limits its exposure to credit risk by only investing in liquid securities with first-class commercial banks. 16.5 Risk related to raw materials and energy The prices of certain raw materials used by ARKEMA are highly volatile and their fluctuations lead to significant variations in cost of production of the Group's products; in addition, because of the importance of the Group’s requirements in terms of energy resources resulting notably from the electrically intensive nature of certain of its manufacturing processes, ARKEMA is also very sensitive to changes in the price of energy. In order to limit the impact of price volatility of the principal raw materials it uses, ARKEMA can decide to use derivatives matched with existing contracts or can negotiate fixed price contracts for limited periods. Recognition of these derivatives had no impact on the income statement at 30 June 2011 (also no impact at 30 June 2010). 17 Related parties 17.1 Transactions with non-consolidated or equity accounted companies Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are accounted for under the equity method. The values involved are not significant. 18 Share-based payments 18.1 Stock options On 4 May 2011, the Board of Directors decided to put in place two stock option plans for the benefit of members of the Group’s Executive Committee. 51 2011 Half -Year Financial Report Free translation for information purposes only In Plan 1, stock options will be awarded subject to a vesting period of two years, with effect from the Board of Directors’ grant, and subject to compliance with performance criteria expressed in terms of ROCE. In Plan 2, stock options will be awarded subject to a vesting period of 4 years, with effect from the Board of Directors’ grant, and subject to compliance with a performance objective relating to ARKEMA’s average EBITDA margin for the period 2011-2014. The main characteristics of the outstanding stock option plans at 30 June 2011 are as follows: 2006 Plan 2007 Plan 2008 Plan 2010 Plan 1 2010 Plan 2 2011 Plan 1 2011 Plan 2 Date of Annual General Meeting 10 May 06 10 May 06 10 May 06 15 June 09 15 June 09 15 June 09 15 June 09 Date of Board of Directors’ meeting 04 July 06 14 May 07 13 May 08 10 May 10 10 May 10 4 May 11 4 May 11 Vesting period 2 years 2 years 2 years 2 years 5 years 2 years 4 years Conservation period 4 years 4 years 4 years 4 years 5 years 4 years 4 years Period of validity 8 years 8 years 8 years 8 years 8 years 8 years 8 years Exercise price 28.36 44.63 36.21 30.47 30.47 68.48 68.48 Number of options granted 540,000 600,000 460,000 225,000 225,000 105,000 105,000 to corporate officers: Thierry Le Hénaff 55,000 70,000 52,500 35,000 35,000 29,250 29,250 to the 10 largest beneficiaries* 181,000 217,000 169,350 104,000 104,000 75,750 75,750 Total number of options exercised 396,450 153,900 14,080 by corporate officers 22,000 10,000 by the 10 largest beneficiaries* 171,000 79,050 9,750 Number of options In circulation at 1 January 2009 534,850 592,200 460,000 Granted Cancelled 1,000 5,586 Exercised In circulation at 31 December 2009 534,850 591,200 454,414 In circulation at 1 January 2010 534,850 591,200 454,414 Granted 225,000 225,000 Cancelled 11,900 12,000 11,992 Exercised 214,397 In circulation at 31 December 2010 308,553 579,200 442,422 225,000 225,000 En circulation au 1 January 2011 308,553 579,200 442,422 225,000 225,000 Granted 105,000 105,000 Cancelled 2,000 1,299 5,000 5,000 Exercised 182,053 153,900 14,080 In circulation at 30 June 2011 126,500 423,300 427,043 220,000 220,000 105,000 105,000 Employees who are not corporate officers of Arkema SA or any other Group company Total 2,260,000 306,000 926,850 564,430 32,000 259,800 1,587,050 6,586 1,580,464 1,580,464 450,000 35,892 214,397 1,780,175 1,780,175 210,000 13,299 350,033 1,626,843 52 2011 Half -Year Financial Report Free translation for information purposes only Valuation method The fair value of the options granted was determined using the Black & Scholes method on the basis of assumptions, of which the main ones are as follows: Volatility Risk-free interest rate Maturity Exercise price (in euros) Fair value of stock options (in euros) 2006 Plan 22% 2.82% 4 years 28.36 6.29 2007 Plan 20% 3.39% 4 years 44.63 7. 89 2008 Plan 25% 4.00% 4 years 36.21 8.99 2010 Plan 1 35% 0.34% 4 years 30.47 6.69 2010 Plan 2 32% 0.34% 5 years 30.47 6.67 2011 Plan 1 32% 1.29% 4 years 68.48 12.73 The volatility assumption was determined on the basis of observation of historical movements in the ARKEMA share since its admission to listing, restated for certain non-representative days in order to better represent the long-term trend. The maturity adopted for the options corresponds to the period of unavailability for tax purposes. The amount of the IFRS2 expense recognized in respect of stock options at 30 June 2011 was €1 million (€1 million at 30 June 2010). 18.2 Free share grants On 4 May 2011, the Board of Directors decided to put in place three performance share award schemes for the benefit of employees, particularly employees with responsibilities whose exercise influences the Group’s results. In Plan 1, intended for employees of the Group's French companies, the definitive grant of such performance shares will be subject to a vesting period of two years, with effect from the Board of Directors’ grant, and subject to compliance with performance criteria expressed in terms of both ARKEMA’s EBITDA for 2011, and the variation in the EBITDA margin compared to a panel of other manufacturers of chemicals. In Plan 2, intended for certain Group employees, the definitive grant of such performance shares will be subject to a vesting period of 3 years, with effect from the Board of Directors’ grant, and subject to compliance with the same performance criteria. In Plan 3, intended for Group company employees outside France, the definitive grant of such performance shares will be subject to a vesting period of 4 years, with effect from the Board of Directors’ grant, and subject to compliance with the same performance criteria as in Plans 1 and 2. 53 2011 Plan 2 32% 1.29% 4 years 68.48 12.73 2011 Half -Year Financial Report Free translation for information purposes only The main characteristics of the free share grant plans in force at 30 June 2011 are as follows: Plan 2009 Plan 2010-1 Plan 2010-2 Plan 2011-1 Plan 2011-2 Plan 2011-3 Date of Annual General Meeting Date of Board of Directors’ meeting Vesting period 10 May 06 15 June 09 15 June 09 15 June 09 15 June 09 15 June 09 12 May 09 10 May 10 10 May 10 4 May 11 4 May 11 4 May 11 4 years 2 years 2 years 4 years 2 years 3 years Conservation period Performance condition 2 years Yes 2 years Yes (3) Yes (3) 2 years Yes (4) 2 years Yes (4) Yes (4) Number of free shares granted 184,850 153,705 50,795 88,305 59,380 52,315 to corporate officers: Thierry Le Hénaff - to the 10 largest beneficiaries(1) 14,000 41,500 18,800 54,700 8,100 8,200 24,450 8,200 24,450 14,850 Number of free shares In circulation at 1 January 2009 Granted Cancelled 184,850 49,000(2) Definitively granted In circulation at 31 December 2009 135,850 In circulation at 1 January 2010 135,850 Granted 153,705 50,795 Cancelled 2,500 638 Definitively granted In circulation at 31 December 2010 133,350 153,705 50,157 In circulation at 1 January 2011 Granted Cancelled Definitively granted 133,350 - 1,150 132,200 0 153,705 - 3,220 - 150,485 50,157 - 460 - 49,697 88,305 355 - 87,950 59,380 355 - 59,025 In circulation at 30 June 2011 (1) Employees who are not corporate officers of Arkema SA or any other Group company (2) Waived by the Chairman and CEO and members of the Executive Committee (3) Performance conditions do not apply to beneficiaries of less than 100 shares (4) Performance conditions will apply only to the portion of rights in excess of 80 held under all plans, except for Executive 52,315 - - 52,315 Committee members, all of whose rights will be subject to performance criteria. (5) The total includes plans dating from before 2009. The amount of the IFRS2 expense recognized in respect of free shares at 30 June 2011 is €2 million (€1 million at 30 June 2010). 54 Total(5) 304,005 184,850 90,855 87,600 310,400 310,400 204,500 135,561 42,127 337,212 337,212 200,000 5,540 132,200 399,472 2011 Half -Year Financial Report Free translation for information purposes only 19 Off-balance sheet commitments 19.1 Commitments given 19.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: In millions of euros Guarantees granted 30 June 2011 54 31 December 2010 67 Comfort letters 0 0 Contractual guarantees 23 25 Customs and excise guarantees 8 8 Total 85 100 Guarantees granted are mainly bank guarantees in favor of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 19.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, ARKEMA has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods of 1 to 20 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The total amount of the Group’s financial commitments is valued on the basis of the last known prices and amounts to €796 million at 30 June 2011 (see maturi ty schedule below): In millions of euros 30 June 2011 31 December 2010 2011 146 198 2012 171 131 2013 97 80 2014 90 74 2015 until expiry of the contracts 292 222 Total 796 705 55 2011 Half -Year Financial Report Free translation for information purposes only Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land, Fos port concession) and transportation equipment (rail cars, containers, transport barges). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). In millions of euros 30 June 2011 Capitalized leases Non- capitalized leases 31 December 2010 Non- capitalized leases Capitalized leases 2011 1 18 2 32 2012 2 19 2 22 2013 2 18 2 20 2014 2 17 2 18 2015 and beyond 7 66 8 69 Nominal value of future lease payments 14 138 16 161 Finance cost 3 NA 3 NA Present value NA: not applicable 11 NA 13 NA 19.1.3 Off balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses Sales of businesses sometimes involve the provision of warranties in respect of unrecorded liabilities to the purchaser. ARKEMA sometimes grants such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of litigation and claims. In the majority of cases, they cover risks of occurrence of environmentally related claims. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted in the past by ARKEMA amounted to €63 million at 30 June 2011 (€64 million at 31 December 2010). These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 19.1.4 Off balance sheet commitments related to Group financing These commitments are described in note C15 Debt. 56 2011 Half -Year Financial Report Free translation for information purposes only 19.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described in the notes to the consolidated financial statements for the year ended 31 December 2010 (note C28.2). 20 Subsequent events On 1 July 2011, ARKEMA finalized its acquisition, for an enterprise value of €550 million, of two of T otal’s specialty chemicals businesses: coatings resins (Cray Valley and Cook Composites Polymers), and photocure resins (Sartomer) (see note C7 Business combinations). On 26 July 2011, the Group put in place a new multi-currency syndicated credit facility in the amount of €700 million, with a duration of five years, maturing on 26 July 2016. On 26 July 2011, the Group also reduced the amount of the multi-currency syndicated credit facility set up in 2006 to €300 million (see note C15 D ebt). 57 2011 Half -Year Financial Report Free translation for information purposes only SCOPE OF CONSOLIDATION AT 30 JUNE 2011 (a) Companies merged in 2011 (b) Companies consolidated for the first time in 2011 The percentage of control indicated below also corresponds to the Group’s ownership interest in each entity. Akishima Chemical Industries Co.Ltd Japan 100.00 FC Alphacan France 100.00 FC Alphacan BV Netherlands 100.00 FC Alphacan Doo Croatia 100.00 FC Alphacan SPA Italy 100.00 FC Altuglas International Denmark A/S Denmark 100.00 FC Altuglas International Ltd United Kingdom 100.00 FC Altuglas International Mexico Inc. United States 100.00 FC Altuglas International S.A.S. France 100.00 FC Altumax Deutschland GmbH (a) Germany 100.00 FC Altumax Europe SAS (a) France 100.00 FC American Acryl LP United States 50.00 PC American Acryl NA LLC United States 50.00 PC Arkema South Korea 100.00 FC Arkema France 100.00 FC Arkema Afrique SAS (b) France 100.00 FC Arkema Amériques SAS France 100.00 FC Arkema Asie SAS France 100.00 FC Arkema Beijing Chemical Co. Ltd China 100.00 FC Arkema Canada Inc. Arkema Changshu Chemicals Co. Ltd Arkema Changshu Fluorochemical Co. Ltd Arkema China Investment Co. Ltd Arkema Coatings Resins SAU (ex Alphacan Espana Transformados SAU) Canada China China China Spain 100.00 100.00 100.00 100.00 99.92 FC FC FC FC FC Arkema Coatings Resins SRL (ex Altuglas Polivar Spa) Italy 100.00 FC Arkema Co. Ltd Hong Kong 100.00 FC Arkema Daikin Advanced Fluorochemicals Co. Ltd China 60.00 PC Arkema Delaware Inc. United States 100.00 FC Arkema Europe France 100.00 FC Arkema France France 100.00 FC Arkema GmbH Germany 100.00 FC Arkema Holdings Ltd United Kingdom 100.00 FC Arkema Hydrogen Peroxide Co. Ltd, Shanghaï China 66.67 FC Arkema Inc. United States 100.00 FC Arkema Iniciadores SA de CV Mexico 100.00 FC 58 Arkema KK Arkema Ltd Arkema Ltd Arkema Mexico SA de CV Arkema North Europe BV Arkema PEKK Inc (ex Oxford Performance Materials Inc.) Arkema Peroxides India Private Limited Arkema Pte Ltd Arkema Quimica Ltda Arkema Quimica SA Arkema RE Ltd Arkema RE SA Arkema Rotterdam BV Arkema Shanghai Distribution Co. Ltd Arkema sp Z.o.o Arkema Srl Arkema Vlissingen BV Arkema Yoshitomi Ltd Ceca Italiana Srl Ceca SA Changshu Coatex Additives Co. Ltd Changshu Haike Chemicals Co. Ltd Changshu Resichina Engeneering Polymers Co Ltd Coatex Asia Pacific (ex Coatex Korea) Coatex Asia Pacific Inc. Coatex Central Eastern Europe sro Coatex Inc. Coatex Netherlands BV Coatex SAS Daikin Arkema Refrigerants Asia Ltd Daikin Arkema Refrigerants Trading (Shanghai) Co. Ltd Delaware Chemicals Corporation Dorlyl snc Febex SA Luperox Iniciadores SA de CV Maquiladora General de Matamoros SA de CV Michelet Finance, Inc. Meglas srl MLPC International ODOR-TECH LLC Oxochimie Ozark Mahoning Company Plasgom SAU (b) (a) 2011 Half -Year Financial Report Free translation for information purposes only Japan 100.00 FC United Kingdom 100.00 FC Vietnam 100.00 FC Mexico 100.00 FC Netherlands 100.00 FC United States 100,00 FC India 100.00 FC Singapore 100.00 FC Brazil 100.00 FC Spain 99.92 FC Ireland 100.00 FC France 100.00 FC Netherlands 100.00 FC China 100.00 FC Poland 100.00 FC Italy 100.00 FC Netherlands 100.00 FC Japan 49.00 EM Italy 100.00 FC France 100.00 FC China 100.00 FC China 49.00 FC China 100.00 FC South Korea 100.00 FC South Korea 100.00 FC Slovakia 100.00 FC United States 100.00 FC Netherlands 100.00 FC France 100.00 FC Hong Kong 40.00 PC China United States 40.00 100.00 PC FC France 100.00 FC Switzerland 96.77 FC Mexico 100.00 FC Mexico 100.00 FC United States 100.00 FC Italy 33.00 EM France 100.00 FC United States 100.00 FC France 50.00 PC United States 100.00 FC Spain 99.92 FC 59 2011 Half -Year Financial Report Free translation for information purposes only Qatar Vinyl Company Limited QSC Qatar 12.91 EM Résil Belgium Belgium 100.00 FC Resilia SRL Italy 100.00 FC Resinoplast France 100.00 FC Resinoplast North America Srl de CV Mexico 100.00 FC Seki Arkema South Korea 51.00 FC Shanghaï Arkema Gaoyuan Chemicals Co. Ltd China 93.40 FC Stannica LLC United States 50.00 PC Sunclear SA Espana (ex Plasticos Altumax SA) Spain 99.92 FC Sunclear SA France (ex Sunclear France) France 100.00 FC Sunclear SRL (ex Altuglas International SRL) Italy 100.00 FC Turkish Products, Inc. United States 100.00 FC Viking chemical company United States 100.00 FC Vinylberre (a) France 100.00 FC Vinylfos France 100.00 FC NB: FC: Full consolidation PC: Proportionate consolidation EM: consolidation by the equity method 60 2011 Half -Year Financial Report Free translation for information purposes only III- DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements at June 30th 2011 have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Thierry Le Hénaff Chairman and CEO 61 2011 Half -Year Financial Report Free translation for information purposes only Arkema S.A. Statutory Auditor’s Review Report on the first half-year information for 2011 (free translation of the French original) January 1st to June 30th 2011 Arkema S.A. 420, rue d’Estienne d’Orves - 92700 Colombes This report contains 3 pages 62 2011 Half -Year Financial Report Free translation for information purposes only KPMG Audit Département de KPMG S.A. 1, cours Valmy 92923 Paris La Défense Cedex Ernst & Young Audit Faubourg de l’Arche 11, allée de l’Arche 92037 Paris la Défense Cedex S.A.S. à capital variable Commissaire aux Comptes Membre de la Compagnie Régionale de Versailles Commissaire aux Comptes Membre de la Compagnie Régionale de Versailles This is a free translation into English of the statutory auditors’ review report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France. Arkema S.A. Registered office : 420, rue d’Estienne d’Orves - 92700 Colombes Share capital : €. 618, 438, 270 Statutory Auditors’ Review Report on the first half-year financial information for 2011 (free translation of the French original) January 1st to June 30th 2010 To the Shareholders, Following our appointment as statutory auditors by your Annual General Meetings, and in accordance with article L.451-1-2 III of the French Monetary and Financial Law (Code Monétaire et Financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of Arkema S.A. for the period January 1st to June 30th 2011; the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I - Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with 63 2011 Half -Year Financial Report Free translation for information purposes only professional standards applicable in France. Consequently, the assurance, in the context of a review, that the financial statements taken as a whole are free of significant misstatements is a moderate assurance, lower than that given by an audit. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRS as adopted by the European Union applicable to interim financial information. II – Specific verification We have also verified the information given in the half-year management report, commenting the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. Paris la Défense, August 1st 2011 The Statutory Auditors KPMG Audit Ernst & Young Audit Département de KPMG S.A Bertrand Desbarrières François Carrega Valérie Quint Partner Partner Partner 64

Semestriel, 2011, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

HALF-YEAR FINANCIAL REPORT First half ended June 30th 2013 ARKEMA 420, rue d’Estienne d’Orves – F-92705 COLOMBES Cedex – France Standard : +33 (0)1 49 00 80 80 – Fax : +33 (0)1 49 00 83 96 Société anonyme au capital de 628 772 150 euros – 445 074 685 RCS 2013 Half-year financial report Free translation for information purposes only I- Half-year activity report……..………………………………………………………………………… 3 II- Consolidated financial statements at June 30th 2013………………………………………..….. 9 III- Declaration by the person responsible for the Half-year financial report…….………….…. 34 IV- Report from the statutory auditors on consolidated financial statements at June 30th 2013 35 This document is a free translation in English of Arkema’s Half-year financial report for the First Half ended June 30th 2013. This translation has been prepared solely for the information and convenience of English speaking readers. No assurances are given as to the accuracy or completeness of this translation, and Arkema assumes no responsibility with respect to this translation or any misstatement or omission that may be contained therein. In the event of any ambiguity or discrepancy between this translation and the French document, the French document shall prevail. 2 HALF-YEAR ACTIVITY REPORT I. FIRST HALF 2013 HIGHLIGHTS 1. Organic growth projects On June 5th 2013, ARKEMA announced the startup of the acrylic acid capacity extension at its Clear Lake site in Texas. This project, which raises the site’s capacity to some 270KT per year, represents the main part of the US$110 million investment plan announced in November 2010. The other two parts of this investment plan entail (i) the startup in 2nd half 2012, on the Bayport site in Texas, of a 2-ethyl hexyl acrylate (2EHA) production plant for the pressure-sensitive adhesives market, and (ii) the addition of a methyl acrylate plant, used in the water treatment and specialty polymers markets, due to come on stream by end of 2013. • On June 18th 2013, ARKEMA announced a 15% increase in its bis-peroxide global capacities at both its Spinetta (Italy) and Franklin (Virginia, United States) sites. These new capacities, already operational, represent the first stage of a multi-phase program aiming at increasing bis-peroxide global capacity by 30% by end of 2014 in the Organic Peroxide business unit of the High Performance Materials segment. These will help meet strong demand in the synthetic rubber industry for crosslinking agents, in particular in Asia, while also supporting recent developments. 2. Acquisitions In first half 2013, ARKEMA announced two acquisition projects in line with its strategy in High Performance Materials: Securing access to its strategic raw materials: On April 11th 2013, ARKEMA signed an agreement with Indian company Jayant Agro, one of the world leading producers of castor oil and derivatives, with a view to acquiring a stake of around 25% in Ihsedu Agrochem, one of its subsidiaries specializing in castor oil production. This joint venture aims to develop castor oil production, and will provide ARKEMA with competitive and secured long-term access to this strategic raw material for the manufacture of its biosourced polyamides (PA 10 and PA 11). This project should be finalized in 3rd quarter 2013 ; Speeding up development through innovation: On April 3rd 2013, ARKEMA announced its acquisition of a majority stake in AEC Polymers, which produces in particular structural adhesives from methacrylates developed by an ARKEMA technology. 3. Update on the consequences for ARKEMA of Kem One situation On March 27th 2013, ARKEMA was informed of the opening by the Lyon commercial court of insolvency proceedings with continuation of business for a six-month observation period concerning the company Kem One SAS, corresponding to the upstream part (chlorine / caustic soda electrolysis and PVC production) of the businesses sold by ARKEMA to the Klesch group in July 2012. Accordingly, ARKEMA booked a €125 million non-recurring charge in its 1st quarter 2013 accounts corresponding to the Group’s exposure to Kem One SAS (receivables on Kem One and warranties granted to third parties). In a writ received on March 12th 2013, the Klesch group initiated arbitration proceedings against ARKEMA as part of the divestment of its vinyl activities, which have now become Kem One, with a view to seeking damages amounting to €310 million. ARKEMA, which vigorously rejects these unfounded claims, has launched all necessary initiatives to defend its rights and prove its good faith before the relevant authorities, and is fully confident in its ability to demonstrate this. 3 II. ANALYSIS OF FINANCIAL RESULTS FOR FIRST HALF 2013 Following the divestment of its vinyl activities in early July 2012, ARKEMA announced a change in its organization and reporting structure with three new business segments: High Performance Materials, Industrial Specialties, and Coating Solutions. The data herein reflects this new organization, as presented in September 2012 at an Investor Day and described in greater detail in chapter 1 of the 2012 Reference Document. In accordance with IFRS 5 standard, income statement items for the vinyl activities have been accounted for in the Group’s consolidated income statement as « discontinued operations » for 2012. Cash flows for 1st half 2012 included flows relating to these activities which are presented as cash flows of discontinued operations. (In millions of euros) 1st half 2013 1st half 2012 Variation in % Sales ................................................................................ 3,192 EBITDA............................................................................. 507 EBITDA margin (%)……………………………….............. 15.9% 353 Recurring operating income ......................................... (140) Other income and expenses............................................. 213 Operating income ........................................................... 82 Net income – Group share of continuing operations ............... - Net income – Group share of discontinued operations ................ Net income – Group share ………………………………..... 82 Adjusted net income1 ………………………………......... 221 3,342 559 16.7% 409 (25) 384 252 (164) 88 274 4% -9% 14% 45% -67% 7% -19% Capex ………………………………………………………… 174 180 3% Net debt ……………………………………………………… 1,150 (06/30/13) 900 (12/31/12) +28% Sales In first half 2013, sales reached €3,192 million, 4 .5% down on 1st half 2012 and 1.3% down at constant exchange rate and scope of business. The -2.2% scope of business effect mostly reflected the impact of the divestment of the tin stabilizer business finalized on October 1st 2012. Volumes increased slightly (+1.2%). Strong growth in volumes for the Coating Solutions segment, which benefited in particular from an increased presence in North America where the housing market has been gradually improving, and the favorable momentum in Thiochemicals offset the impact of the slow start of the High Performance Materials segment at the beginning of 2013; as expected, this segment was affected by weak demand in some end-markets, particularly for fluoropolymers. The -2.4% price / product mix effect reflected in particular the decrease in certain raw material costs and the different product mix than in 2012 in High Performance Materials. The -1% translation effect mostly corresponded to the slight strengthening of the euro versus the US dollar. EBITDA In an economic environment that was less favorable than last year, EBITDA stood at €507 million agains t €559 million in 1 st half 2012, thereby confirming the strength of the portfolio of the Group’s specialty activities and its balanced geographic presence. The performance of High Performance Materials declined compared to 1st half 2012 due to weaker demand than last year in the photovoltaic market and to delays in certain oil and gas projects. Industrial Specialties delivered a very high performance, at the same level than last year, and Coating Solutions improved over 1st half 2012, supported by strong positions developed in North America in both these segments. EBITDA margin maintained a very good level at 15.9% of sales, and stood among the highest in the industry, reflecting the strong positions developed by ARKEMA in specialty chemicals. 1 For 1st half 2012, adjusted net income of continuing operations (excluding impact of vinyl activities sold beginning of July 2012). 4 Operating income million in 1st half 2012. It included €154 million Operating income stood at €213 million against €384 depreciation and amortization, close to 1st half 2012 levels (€150 million). The operating inc ome also included other income and expenses totalling -€140 million, corresponding mainly to a €125 million non-recurrin g charge recognized in the accounts following the insolvency proceeding concerning Kem One SAS, the company that comprises the upstream part (chlorine / caustic soda electrolysis and PVC) of the vinyl activities sold by ARKEMA to the Klesch group. The amount that has been provisioned corresponds to the Group’s estimated exposure to Kem One SAS. In 1st half 2012, other income and expenses amounted to -€25 million which mostly included the impact of the shortage in the supply of CDT (raw material of polyamide 12) totalling -€16 million, and to various charges related to divestment and acquisition operations. Income taxes Income taxes in 1st half 2013 amounted to €106 million (€112 million i n 1st half 2012), representing 30% of recurring operating income. This tax rate reflects the geographic spread of the results with a significant part of the Group’s results achieved in North America and a smaller part in Europe. Net income, Group share, of discontinued operations As part of its refocus on its specialty chemical businesses, ARKEMA divested its vinyl activities in early July 2012. The net result of these activities in 1st half 2012 stood at -€164 million. It included (i) the -€70 million net result from operations of this activity, which reflected the sluggish demand in European construction, and the complexity of simultaneously conducting a major divestment process and the day-to-day operational management of the activity, and (ii) other income and expenses totalling -€94 million. These expenses included the impact of the implementation of warranties negotiated during the workers council’s information/consultation process, the cost of establishing the business into a stand-alone structure (information systems, legal and accounting costs related to transfer of activities, etc.), and post-closing adjustments. Net income, Group share, and adjusted net income Net income, Group share stood at €82 million agains t €88 million in 1 st half 2012. Excluding the impact, after tax, of non-recurring items, adjusted net income reached €221 million agai nst €274 million (adjusted net income of continuing ope rations) in 1st half 2012. 5 Segment performance High Performance Materials (In millions of euros) 1st half 2013 1st half 2012 Variation in % 925 Sales ............................................................................... 163 EBITDA............................................................................. EBITDA margin (%)……………………………….............. 17.6% 112 Recurring operating income.......................................... 1,106 211 19.1% 158 16% -23% 29% Sales in High Performance Materials stood at €925 million against €1,106 million in 1 st half 2012. They included a -7% scope of business effect essentially corresponding to the impact of the divestment of the tin stabilizer business, a negative price effect which mostly reflected a different product mix than in 2012 and the decrease of certain raw material costs as well as lower volumes in fluoropolymers compared to the high comparison base of the 1st half 2012. Finally, the slight strengthening of the euro versus the US dollar had a negative impact. n 1st half 2012. Within Technical Polymers, specialty EBITDA stood at €163 million against €211 million i polyamides achieved a very good performance which reflects the innovation momentum in the field of lightweight materials and a stronger than expected seasonality in the 2nd quarter, while a weaker demand in photovoltaics and delays in certain projects in the oil and gas sector affected fluoropolymers. Organic Peroxides EBITDA margin benefited from its reshaped portfolio of business following the divestment of the tin stabilizer business closed on October 1st, 2012. EBITDA margin maintained a solid level at 17.6% against 19.1% in 1st half 2012. Industrial Specialties (In millions of euros) 1st half 2013 1st half 2012 Variation in % Sales ............................................................................... 1,079 EBITDA............................................................................. 218 EBITDA margin (%)……………………………….............. 20.2% 161 Recurring operating income.......................................... 1,098 222 20.2% 166 2% -2% 3% Industrial Specialties maintained excellent results, close to those in 1st half 2012. Sales reached €1,079 million, slightly down on 1st half 2012. EBITDA stood at €218 million, and EBITD A margin was stable at 20.2%. All of the segment’s activities continued to benefit from an ongoing favorable environment in the United States where the Group has developed a strong industrial presence over the years. The performance of Thiochemicals remained well oriented, supported by animal feed as well as petrochemicals and refining markets in the US. The performance of refrigerant fluorogas business remained strong despite competitive pressure in Europe and China on the unit margins of certain fluorogases as well as poor weather conditions in 2nd quarter. In PMMA, market conditions were mixed, reflecting different momentum in the automotive and construction markets by region. Finally, Hydrogen Peroxide performance remained stable overall. 6 Coating Solutions (In millions of euros) 1st half 2013 1st half 2012 Variation in % Sales ............................................................................... 1,164 EBITDA............................................................................. 161 EBITDA margin (%)……………………………….............. 13.8% 116 Recurring operating income.......................................... 1,126 156 13.9% 116 +3% +3% Coating Solutions sales reached €1,164 million, 3% up on 1 st half 2012. This increase reflected mostly higher volumes in North America, supported by a gradual improvement in demand in the decorative paint market and the startup in the 2nd quarter of the acrylic acid production capacity extension in Clear Lake (Texas). EBITDA stood at €161 million and EBITDA margin at 1 3.8%. Acrylics benefited from higher volumes. Their unit margins in 2nd quarter were down versus their high level of 2nd quarter 2012, which benefited at that time from the drop of propylene price. Market conditions in Coating Resins remained mixed. Demand for decorative paints grew in North America, but remained lackluster in Europe where weather conditions were adverse in the 2nd quarter. Finally, the performance of Sartomer and Coatex remained resilient sustained by new product development. Cash flow Free cash flow2 stood at -€16 million against -€23 million in 1 st half 2012. This flow included a -€156 million variation in working capital related to the traditional increase in sales in 1st half of the year. The working capital to sales ratio, however, remained well under control at 17.3%, at the same level as at June 30th 2012. Capex reached €174 million and should accelerate in the 2nd half of the year, as it is the case each year, to reach €500 million for the full year 2013. The Group also paid on 11th June a €1.80 dividend per share, totaling €113 mil lion. Moreover, as part of its commitments previously made regarding Kem One, Arkema cashed out an amount of €75 million in the 2 nd quarter. This amount was already fully booked in the accounts at the end of the 1st quarter. Net debt Net debt stood at €1,150 million at 30 th June 2013 (€900 million at 31 st December 2012), i.e. 49.6% gearing, close to last year’s level (48.7% at 30th June 2012). However, the Group confirmed its objective to reduce its gearing to around 40% by the end of the year. 2 Cash flow from operations and investments, excluding impact of portfolio management and before the impact of cash-outs related to Kem One situation. 7 III. TRANSACTIONS WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or companies which are accounted for under the equity method with non-significant values. IV. HIGHLIGHTS SINCE JUNE 30TH 2013 On July 3rd 2013, the Fonds Stratégique de Participation (FSP), a mutual fund set up by four major insurance companies in France – BNP Paribas Cardif, CNP Assurances, Crédit Agricole Assurances through its subsidiary Predica, and Sogécap (Société Générale Group) – in order to promote long-term investment in listed companies, announced that it now owns 6% of Arkema’s share capital. ARKEMA considers this acquisition of a stake in its share capital as a positive sign showing the confidence of the FSP in the long-term strategy implemented by the Group and in its management. With a prospect of maintaining a long-term investment of at least 6% of Arkema's share capital, the FSP has shared with the Board of Directors its intent to seek the appointment of a representative on the Board of Directors. The Board of Directors will consider favorably this request for the appointment of an independent representative made by the FSP. Upon approval of the proposed representative, the Board of Directors should submit the proposed resolution to Arkema’s next annual general meeting on May 15th 2014. V. 2013 OUTLOOK Market conditions in the second half of the year should be in the continuity of the first half of the year with a marked contrast by regions and a limited visibility. They should continue to be solid in North America, and challenging but stable in Europe. In Asia, China in particular, growth should remain slower than expected. High Performance Materials should continue to be impacted in the 3rd quarter by the weakness in photovoltaic market and delays in some oil and gas projects. However, those markets should as expected improve by year end. In this environment, Arkema should achieve in the second half of the year an EBITDA similar to the record level of the 2nd half of 2012. Compared to 2012, the 3rd quarter EBITDA should be lower than the high reference of last year and the 4th quarter stronger. The Group thereby confirms its ability to achieve a strong annual performance in a macro-economic environment that is less favorable than in 2012. The Group, however, will continue to carefully monitor the macro-economic environment developments and will implement the necessary adjustment initiatives if it was to be necessary. The Group continues to implement its focused growth strategy with several progresses and confirms its ambition for 2016 to achieve €8 billion sales and 16% EBITDA margin while maintaining gearing below 40%. VI. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2012 Reference Document filed with the Autorité des marchés financiers (« AMF ») on March 27th 2013 under number D.13-0229. This document is available on ARKEMA’s website under the heading « Investor Relations » (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities is given in the notes to the half-year consolidated financial statements. 8 Condensed consolidated interim financial statements at 30 June 2013 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2013 CONSOLIDATED INCOME STATEMENT............................................................................ 11 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME .................................. 12 CONSOLIDATED BALANCE SHEET..................................................................................... 13 CONSOLIDATED CASH FLOW STATEMENT..................................................................... 14 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY ........... 15 A. HIGHLIGHTS ....................................................................................................................... 16 B. ACCOUNTING POLICIES................................................................................................... 16 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.................................. 19 1 Information by business segment................................................................................... 19 2 Information by geographical area.................................................................................. 20 3 Other income and expenses ............................................................................................ 21 4 Adjusted net income ....................................................................................................... 21 5 Income taxes.................................................................................................................... 22 6 Earnings per share.......................................................................................................... 22 7 Intangible assets.............................................................................................................. 23 8 Property, plant & equipment ......................................................................................... 23 9 Shareholders’ equity....................................................................................................... 24 10 Provisions for pensions and other employee benefits .................................................... 24 11 Other provisions and other non-current liabilities........................................................ 25 12 Liabilities and contingent liabilities ............................................................................... 27 9 Condensed consolidated interim financial statements at 30 June 2013 13 Debt ................................................................................................................................. 27 14 Share-based payments .................................................................................................... 30 15 Off-balance sheet commitments ..................................................................................... 31 16 Subsequent events........................................................................................................... 33 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2013............................................................. 33 10 Condensed consolidated interim financial statements at 30 June 2013 CONSOLIDATED INCOME STATEMENT Notes 1st half 2013 (In millions of euros) Sales Operating expenses (C1&C2) 3,192 (2,549) Research and development expenses (76) Selling and administrative expenses (214) Recurring operating income (C1) 353 Other income and expenses (C3) (140) Operating income (C1) 213 Equity in income of affiliates 3 Financial result (27) Income taxes (C5) (106) Net income of continuing operations 83 Net income of discontinued operations Net income 83 Of which: non-controlling interests 1 Net income - Group share (C4) 82 Of which: continuing operations 82 Of which: discontinued operations Earnings per share (amount in euros) (C6) 1.31 Earnings per share of continuing operations (amount in euros) (C6) 1.31 Diluted earnings per share (amount in euros) (C6) 1.29 Diluted earnings per share of continuing operations (amount in euros) (C6) 1.29 Depreciation and amortization (C1) (154) EBITDA * (C1) 507 Adjusted net income of continuing operations * (C4) 221 Adjusted earnings per share of continuing operations (amount in euros) Diluted adjusted earnings per share of continuing operations (amount in euros) * see note B19 to the consolidated financial statements at 31 December 2012 – Accounting policies / Main accounting and financial indicators (C6) 3.53 (C6) 3.49 1st half 2012 3,342 (2,645) (74) (214) 409 (25) 384 6 (25) (112) 253 (164) 89 1 88 252 (164) 1.42 4.07 1.40 4.02 (150) 559 274 4.42 4.37 11 Condensed consolidated interim financial statements at 30 June 2013 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1st half 2013 1st half 2012 (In millions of euros) Net income Hedging adjustments 83 (2) 89 (6) Other items Deferred taxes on hedging adjustments and other items Change in translation adjustments 1 40 Other recyclable comprehensive income of continuing operations Actuarial gains and losses (1) 41 34 (44) Deferred taxes on actuarial gains and losses (16) 9 Other non-recyclable comprehensive income of continuing operations Other comprehensive income of continuing operations 25 24 (35) (1) Other comprehensive income of discontinued operations (5) Total income and expenses recognized directly in equity Comprehensive income 24 107 (6) 83 Of which: non-controlling interests 1 1 Comprehensive income – Group share 106 82 12 Condensed consolidated interim financial statements at 30 June 2013 CONSOLIDATED BALANCE SHEET (In millions of euros) Notes 30 June 2013 31 December 2012 ASSETS Intangible assets, net Property, plant and equipment, net Equity affiliates: investments and loans Other investments Deferred tax assets Other non-current assets (C7) (C8) 969 1,876 67 58 67 151 962 1,852 71 36 83 147 TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Other current financial assets Cash and cash equivalents TOTAL CURRENT ASSETS Assets held for sale 3,188 954 1,024 172 27 3 299 2,479 - 3,151 920 920 147 35 8 360 2,390 - TOTAL ASSETS 5,667 5,541 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Translation adjustments 629 1,581 (12) 83 629 1,587 (16) 82 SHAREHOLDERS' EQUITY - GROUP SHARE Non-controlling interests (C9) 2,281 36 2,282 29 TOTAL SHAREHOLDERS' EQUITY Deferred tax liabilities Provisions for pensions and other employee benefits Other provisions and non-current liabilities Non-current debt (C10) (C11) (C13) 2,317 43 392 413 1,068 2,311 33 432 446 1,071 TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Other current financial liabilities Current debt TOTAL CURRENT LIABILITIES Liabilities associated with assets held for sale TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (C13) 1,916 739 272 40 2 381 1,434 - 1,982 683 318 56 2 189 1,248 - 5,667 5,541 13 Condensed consolidated interim financial statements at 30 June 2013 CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities Of which: Cash flow from operating activities of discontinued operations Intangible assets and property, plant, and equipment additions Change in fixed asset payables Acquisitions of operations, net of cash acquired Increase in long-term loans Total expenditures 1st half 2013 83 155 (24) (4) 6 (156) 4 64 (174) (25) (10) (16) (225) 1st half 2012 89 188 14 (10) 3 (209) 3 78 (123) (217) (32) (243) (25) (517) Proceeds from sale of intangible assets and property, plant, and equipment Change in fixed asset receivables Proceeds from sale of operations, net of cash sold Proceeds from sale of unconsolidated investments Repayment of long-term loans Total divestitures Cash flow from investing activities Of which: Cash flow from investing activities of discontinued operations 5 - - - 14 19 (206) 13 - - - 8 21 (496) (48) Issuance (repayment) of shares and other equity Purchase of treasury shares Dividends paid to parent company shareholders Dividends paid to minority shareholders Increase / decrease in long-term debt Increase / decrease in short-term borrowings and bank overdrafts Cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD Of which: Cash and cash equivalents of discontinued operations 8 - (113) - (5) 191 81 (62) 1 360 299 - 33 (13) (81) (1) 226 106 270 (148) 1 254 107 - 14 Condensed consolidated interim financial statements at 30 June 2013 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Shares issued Treasury shares (In millions of euros) At 1 January 2013 Cash dividend Number Amount 62,877,215 629 Paid-in surplus 977 (113) Retained earnings 610 Translation adjustments Number Amount 82 (314,034) (16) Shareholders' equity – Group share 2,282 (113) Non- controlling interests 29 Issuance of share capital 70,958 2 2 Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees (4) 87,060 4 Sale of treasury shares Share-based payments - - - 4 - - - 4 - Other 6 Transactions with shareholders 70,958 (111) 87,060 4 (107) 6 Net income Total income and expenses recognized directly through equity Comprehensive income 82 23 105 1 1 82 24 106 1 1 At 30 June 2013 62,948,173 629 866 715 83 (226,974) (12) 2,281 36 Shares issued Treasury shares (In millions of euros) At 1 January 2012 Cash dividend Number Amount 61,864,577 619 Paid-in surplus 1,021 (81) Retained earnings 463 Translation adjustments Number Amount 97 (214,080) (10) Shareholders' equity – Group share 2,190 (81) Non- controlling interests 27 (1) Issuance of share capital 674,241 6 28 34 Purchase of treasury shares (250,000) (13) (13) Cancellation of purchased treasury shares Grants of treasury shares to employees (7) 150,035 7 Sale of treasury shares Share-based payments - - - 5 - - - 5 - Other (2) (2) 1 Transactions with shareholders 674,241 6 (53) (4) (99,965) (6) (57) Net income Total income and expenses recognized directly through equity Comprehensive income 88 (46) 42 40 40 88 (6) 82 1 1 At 30 June 2012 62,538,818 625 968 501 137 (314,045) (16) 2,215 28 15 Share- holders’ equity 2,311 (113) 2 4 6 (101) 83 24 107 2,317 Share- holders’ equity 2,217 (82) 34 (13) 5 (1) (57) 89 (6) 83 2,243 Condensed consolidated interim financial statements at 30 June 2013 A. HIGHLIGHTS On 27 March 2013, ARKEMA was informed of the opening by the Lyon commercial court of insolvency proceedings with continuation of business for a six-month observation period concerning the company Kem One SAS, which corresponds to the upstream part (chlorine / caustic soda electrolysis and PVC production) of the businesses sold by ARKEMA to the Klesch group in July 2012. In the first quarter of 2013 ARKEMA booked a €125 million exc eptional expense corresponding to the Group's exposure in relation to Kem One SAS (receivables on Kem One and warranties granted to third parties). In a writ received on 12 March 2013, the Klesch group initiated arbitration proceedings against ARKEMA regarding the sale of its vinyls activities, which have now become Kem One, seeking damages amounting to €310 millio n. ARKEMA, which vigorously refutes these unfounded claims, has launched all necessary initiatives to defend its rights and prove its good faith before the relevant authorities, and has full confidence in its ability to demonstrate this. B. ACCOUNTING POLICIES Arkema S.A. is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema S.A. have been listed on the Paris stock exchange (Euronext) since 18 May 2006. Basis for preparation ARKEMA’s condensed consolidated interim financial statements at 30 June 2013 were prepared under the responsibility of the Chairman and CEO of Arkema S.A. and were approved by the Board of Directors of Arkema S.A. on 31 July 2013. The condensed consolidated interim financial statements at 30 June 2013 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRSs (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and the IFRSs adopted by the European Union at 30 June 2013. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2012. The accounting framework and standards adopted by the European Union can be consulted on the following website: http://ec.europa.eu/internal_market/accounting/ias/index_en.htm. 16 Condensed consolidated interim financial statements at 30 June 2013 Changes in IFRSs and interpretations The accounting policies applied in preparing the consolidated financial statements at 30 June 2013 are identical to those used in the consolidated financial statements at 31 December 2012, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after 1 January 2013 (and which had not been applied early by the Group), namely: Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters Amendments to IFRS 1 Government loans Amendments to IFRS 7 Disclosures – Offsetting financial assets and financial liabilities IFRS 13 Fair value measurement Amendments to IAS 1 Presentation of Items of Other Comprehensive Income (OCI) Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets IAS 19 (Revised) Employee benefits IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine Annual improvements to IFRS (published in May 2012) The application of these standards, amendments and interpretations does not have any significant impact on the Group’s consolidated financial statements. The following standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) were not yet in force at 1 January 2013 and have not been applied early by the Group: Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities Adopted by the European Union on 28 December 2012 Amendments to IAS 36 Amendments to IAS 39 Amendments to IFRS 9 and IFRS 7 Amendments to IFRS 10, IFRS 11 and IFRS 12 Amendments to IFRS 10, IFRS 12 and IAS 27 IFRS 10 Recoverable amount disclosures for non-financial assets Novation of Derivatives and Continuation of Hedge Accounting Mandatory effective date and transition disclosures Transition guidance for IFRS 10, IFRS 11 and IFRS 12 Investment entities Consolidated financial statements Not adopted by the European Union at 30 June 2013 Not adopted by the European Union at 30 June 2013 Not adopted by the European Union at 30 June 2013 Adopted by the European Union on 5 April 2013 Not adopted by the European Union at 30 June 2013 Adopted by the European Union on 28 December 2012 IFRS 11 Joint arrangements Adopted by the European Union on 28 December 2012 IFRS 12 Disclosure of interests in other entities Adopted by the European Union on 28 December 2012 IFRIC 21 Levies Not adopted by the European Union at 30 June 2013 IAS 27 (Revised) Separate financial statements Adopted by the European Union on 28 December 2012 IAS 28 (Revised) Investments in associates and joint ventures Adopted by the European Union on 28 December 2012 17 Condensed consolidated interim financial statements at 30 June 2013 The Group does not expect any significant impact to result from application of IFRS 10, 11, 12, IAS 27 (revised) or IAS 28 (revised), applicable from 1 January 2014. The impact of the other standards, amendments and interpretations are currently being analyzed. Use of assumptions Preparation of the interim consolidated financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities at the date of preparation of the consolidated financial statements also involve the use of estimates. Impact of seasonality ARKEMA’s standard pattern of business exposes the Group to seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by ARKEMA is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity observed primarily in France and the rest of Europe; in some of ARKEMA’s businesses, particularly those serving the paints, coatings and refrigeration markets, the level of sales is generally higher in the first half of the year than in the second half; major maintenance turnarounds at ARKEMA’s production plants have an influence on seasonality. Seasonality effects observed in the past are not necessarily representative of future trends, but they could have a material influence on the changes in results and working capital between the different quarters of the financial year. 18 Condensed consolidated interim financial statements at 30 June 2013 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Information by business segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. ARKEMA has three business segments: High Performance Materials, Industrial Specialties and Coating Solutions. Two members of the Executive Committee supervise these segments; they report directly to the Chairman and CEO, the Group’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their sector’s operating activity, financial results, forecasts and plans. High Performance Materials includes the following business units: Technical Polymers, Filtration and Adsorption (Ceca) and Organic Peroxides. High Performance Materials provide innovative solutions with high value added, used in varied sectors such as transportation, oil extraction, renewable energies (photovoltaics, lithium-ion batteries), consumer goods (beauty products, sports equipment, packaging, etc), electronics, construction, coatings and water treatment. Industrial Specialties groups the following business units: Thiochemicals, Fluorochemicals, PMMA and Hydrogen Peroxide. These integrated industrial niche markets on which ARKEMA is among the world leaders concern products used in several industrial sectors such as production of cold (refrigeration and air conditioning), oil and gas, paper pulp, animal nutrition, electronics and the automotive industry. Coating Solutions comprises the following business units: Acrylics, Coatings Resins, Rheology Additives (Coatex) and UV-curing resins (Sartomer). This segment proposes solutions for decorative paints, industrial coatings, adhesives and high-growth acrylic applications (superabsorbers for disposable nappies, water treatment, oil and gas extraction). Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income and assets of continuing operations are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. 19 Condensed consolidated interim financial statements at 30 June 2013 1st half 2013 (In millions of euros) High Performance Materials Industrial Specialties Coating Solutions Corporate Non-Group sales 925 1,079 1,164 24 Inter segment sales 6 52 42 Total sales 931 1,131 1,206 24 EBITDA 163 218 161 (35) Depreciation and amortization (51) (57) (45) (1) Recurring operating income 112 161 116 (36) Other income and expenses (7) (5) (128) Operating income 105 161 111 (164) Equity in income of affiliates Intangible assets and property, plant, and equipment additions - including: Recurring capital expenditure 31 27 85 35 45 44 3 13 13 The table below excludes discontinued activities. 1st half 2012 (In millions of euros) High Performance Materials Industrial Specialties Coating Solutions Corporate Non-Group sales 1,106 1,098 1,126 12 Inter segment sales 12 66 48 Total sales 1,118 1,164 1,174 12 EBITDA 211 222 156 (30) Depreciation and amortization (53) (56) (40) (1) Recurring operating income 158 166 116 (31) Other income and expenses (25) 4 (3) (1) Operating income 133 170 113 (32) Equity in income of affiliates Intangible assets and property, plant, and equipment additions - including: Recurring capital expenditure 49 49 63 41 60 51 6 8 7 2 Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2013 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world Non-Group sales 340 981 1,117 611 143 Total 3,192 507 (154) 353 (140) 213 3 174 119 Total 3,342 559 (150) 409 (25) 384 6 180 148 Total 3,192 20 Condensed consolidated interim financial statements at 30 June 2013 1st half 2012 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world Total Non-Group sales 328 1,018 1,160 674 162 3,342 (1) NAFTA: United States, Canada, Mexico 3 Other income and expenses (In millions of euros) Expenses 1st half 2013 Income Net Expenses 1st half 2012 Income Net Restructuring and environmental items (6) (6) (3) 1 (2) Goodwill impairment Asset impairment (other than goodwill) Litigation and claims Gains (losses) on sales and purchases of assets (8) (128) - 2 (8) (126) (16) (11) 2 2 (14) (9) Other Total other income and expenses (142) 2 (140) (30) 5 (25) In the first half of 2013, gains and losses on sales and purchases of assets include €125 million corr esponding to the provision established after insolvency proceedings began for Kem One SAS. In the first half of 2012, litigation and claims mainly concern the insurance deductible associated with the incident that occurred at one of the Evonik sites. Gains and losses on sales and purchases of assets include acquisition and selling costs, gains on sales and the difference between the fair value of inventories at acquisition date and their production cost. 4 Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Net income - Group share Notes 1st half 2013 82 1st half 2012 88 Other income and expenses (C3) 140 25 Taxes on other income and expenses (1) (3) Non-current taxation Net income of discontinued operations 164 Adjusted net income of continuing operations 221 274 21 Condensed consolidated interim financial statements at 30 June 2013 5 Income taxes The income tax expense is broken down as follows: (In millions of euros) 1st half 2013 1st half 2012 Current income taxes (96) (107) Deferred income taxes (10) (5) Total income taxes (106) (112) The income tax expense amounts to €106 million at 3 0 June 2013, including €6 million for the CVAE and €3 million relating to the additional income tax contribution due on distributed income (compared with €112 milli on at 30 June 2012, including €6 million for the CVAE). 6 Earnings per share 1st half 2013 1st half 2012 Weighted average number of ordinary shares 62,630,259 61,954,600 Dilutive effect of stock options 485,152 544,703 Dilutive effect of free share grants 286,949 164,534 Weighted average number of potential ordinary shares 63,402,359 62,663,837 Earnings per share is determined below: 1st half 2013 1st half 2012 Earnings per share (€) 1.31 1.42 Diluted earnings per share (€) 1.29 1.40 Earnings per share of continuing operations (€) 1.31 4.07 Diluted earnings per share of continuing operations (€) 1.29 4.02 Earnings per share of discontinued operations (€) (2.65) Diluted earnings per share of discontinued operations (€) (2.62) Adjusted earnings per share is determined below: 1st half 2013 1st half 2012 Adjusted earnings per share (€) 3.53 3.36 Diluted adjusted earnings per share (€) 3.49 3.32 Adjusted earnings per share of continuing operations (€) 3.53 4.42 Diluted adjusted earnings per share of continuing operations (€) 3.49 4.37 22 Condensed consolidated interim financial statements at 30 June 2013 7 Intangible assets 7.1 Goodwill (In millions of euros) Gross book value 30 June 2013 Accumulated amortization and impairment Net book value 31 December 2012 Net book value Goodwill 1,099 (427) 672 670 7.2 Other intangible assets (In millions of euros) Gross book value 30 June 2013 Accumulated amortization and impairment Net book value 31 December 2012 Net book value Patents Trademarks Software and licences Other intangible assets Total 144 27 156 359 686 (117) (3) (108) (161) (389) 27 25 48 197 297 33 26 45 188 292 8 Property, plant & equipment Gross book value 30 June 2013 Accumulated depreciation and impairment Net book value 31 December 2012 Net book value (In millions of euros) Land and buildings 1,339 (880) 459 463 Complex industrial facilities 2,992 (2,334) 658 616 Other property, plant and equipment 1,800 (1,372) 428 443 Construction in progress 332 (1) 331 330 Total 6,463 (4,587) 1,876 1,852 23 Condensed consolidated interim financial statements at 30 June 2013 9 Shareholders’ equity At 30 June 2013, after the capital increase due to 70,958 options being exercised, Arkema’s share capital amounts to €629 million, divided into 62,948,173 shares with a nominal value of 10 euros. Treasury shares The Company did not buy back any treasury shares during the first half of 2013. On 5 May 2013, ARKEMA permanently allocated 87,060 free shares to employees in application of plan 2011-01. Dividends The shareholders’ general meeting of 4 June 2013 adopted a resolution proposing to distribute a dividend of €1.80 per share in respect of the 2012 financial year, or a total amount of €113 million. This dividend was paid on 11 June 2013. 10 Provisions for pensions and other employee benefits Since the Group had already opted to include actuarial gains and losses in shareholders’ equity, the impact of the revision of IAS 19 is negligible. (In millions of euros) Pension obligations Healthcare plans 30 June 2013 294 50 31 December 2012 332* 52* Post-employment benefits 344 384 Long service awards 42 42 Other long-term benefits 6 6 Other long-term benefits 48 48 Provisions for pensions and other employee benefits *These figures have been restated for the unamortized past service cost as a result of application of IAS 19 (revised). This restatement has no impact on the total provision, as the effects concerning pension obligations and healthcare costs offset each other. 392 432 The discount rates used by ARKEMA are as follows: Pension obligations and healthcare plans Europe (excl. UK) UK USA At 30 June 2013 3.00% 4.40% 4.85% At 31 December 2012 3.00% 4.00% 3.75% The present value of defined benefit obligations at the end of 2012 has been adjusted at 30 June 2013 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2012 closing, to take 24 Condensed consolidated interim financial statements at 30 June 2013 account of the change in interest rates over the half-year. The fair value of plan assets was also reassessed on the basis of new valuations at 30 June 2013. The change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. The change in net provisions for post-employment benefits in the first half-year is as follows: (In millions of euros) Net (asset) liability at 1 January 2013* Pension obligations 331 Healthcare costs 52 Total post- employment benefits 383 Amount of provision recognized in liabilities 332 52 384 Amount recognized in assets (1) (1) Operating expense for the period 8 0 8 Net interest expense 5 1 6 Net contributions and benefits paid by the employer (12) (2) (14) Other Actuarial gains and losses recognized in shareholders’ equity (40) (1) 0 (41) Net (asset) liability at 30 June 2013 292 50 342 Amount of provision recognized in liabilities 294 50 344 Amount recognized in assets *Opening figures have been restated for the unamortized past service cost as a result of application of IAS 19 (revised). This restatement has no impact on the total provision, as the effects concerning pension obligations and healthcare costs offset each other. (2) (2) 11 Other provisions and other non-current liabilities 11.1 Other non-current liabilities Other non-current liabilities amount to €45 million at 30 June 2013 as against €46 million at 31 Decem ber 2012. 25 Condensed consolidated interim financial statements at 30 June 2013 11.2 Other provisions Environmental (In millions of euros) contingencies Restructuring Other Total At 1 January 2013 179 50 171 400 Increases in provisions 1 3 70 74 Reversals from provisions on use (12) (11) (79) (102) Reversals of unused provisions (5) (5) Changes in scope Translation adjustments 1 1 Liabilities associated with assets held for sale At 30 June 2013 In addition, certain provisions are covered by non-current assets (receivables, deposits or pension assets): 169 42 157 368 Environmental (In millions of euros) contingencies Restructuring Other Total Total provisions at 30 June 2013 169 42 157 368 Portion of provisions covered by receivables or deposits 31 1 32 Deferred tax asset related to amounts covered by the Total indemnity 19 19 Provisions at 30 June 2013 net of non-current assets For information: Provisions at 1 January 2013 net of non-current assets 119 123 42 50 156 170 317 343 11.2.1 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €81 million (€83 million at 31 Dece mber 2012), in the United States for €68 million (€76 million at 31 December 2012), of which €49 million in resp ect of former industrial sites covered 100% by the Total Group indemnity (receivable recognized in “other non- current assets” for an amount of €31 million and €1 9 million of deferred taxes) (see note C15.2 Off-balance sheet commitments / Commitments received). 11.2.2 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €38 million (€4 3 million at 31 December 2012). 26 Condensed consolidated interim financial statements at 30 June 2013 11.2.3 Other provisions Other provisions amount to €157 million and mainly comprise: provisions for labour litigation for €38 million (€ 39 million at 31 December 2012), provisions for commercial litigation and warranties for €51 million (€56 million at 31 December 2012), provisions for tax litigation for €26 million (€30 million at 31 December 2012), provisions for other risks for €42 million (€46 mil lion at 31 December 2012). 12 Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note C21 of the consolidated financial statements at 31 December 2012. This note describes the liabilities and contingent liabilities with an actual or potential significant effect on the Group’s consolidated financial statements. Kem One ARKEMA sold its vinyls activities, grouped into the Kem One Group, to the Klesch Group which specializes in development of industrial commodity businesses, with effect from 1 July 2012. On 27 March 2013, the Lyon commercial court began insolvency proceedings concerning Kem One, with continuation of its business for a six-month observation period. ARKEMA’s contribution to finances for the observation period amounts to €68.7 million. Part of this amount corresponds t o the payment of contractual sale price adjustments for which provisions were booked in the financial statements at 31 December 2012. The rest corresponds to the provision by ARKEMA to Kem One of certain warranties for third parties throughout the observation period. ARKEMA’s exposure in relation to Kem One is estimated at a total €125 mi llion, and ARKEMA has booked an exceptional expense of an equivalent amount in its financial statements. Klesch has initiated arbitration proceedings against ARKEMA. The Company does not consider it necessary to establish a provision. 13 Debt 13.1 Analysis of net debt by category Group net debt amounts to €1,150 million at 30 June 2013, taking account of cash and cash equivalents of €299 million. It is mainly denominated in euros. (In millions of euros) 30 June 2013 31 December 2012 Bonds 988 989 27 Condensed consolidated interim financial statements at 30 June 2013 Finance lease obligations 2 3 Bank loans 62 59 Other non-current debt 16 20 Non-current debt 1,068 1,071 Finance lease obligations Syndicated credit facility Commercial paper 160 Other bank loans 192 160 Other current debt 29 29 Current debt 381 189 Debt 1,449 1,260 Cash and cash equivalents 299 360 Net debt 1,150 900 Bonds At 30 June 2013, the fair values of the €500 millio n and €480 million bonds are €543 million and €516 million respectively. Commercial paper In April 2013 the Group introduced a French Commercial paper (billet de trésorerie) programme with a ceiling of €1 billion. Issues as part of this programme amount to €160 mil lion at 30 June 2013. Securitization of sales receivables The securitization programme is in use for an amount of €120 million at 30 June 2013. 28 Condensed consolidated interim financial statements at 30 June 2013 13.2 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. (In millions of euros) 30 June 2013 31 December 2012 Euros 1,330 1,137 US Dollars 9 11 Chinese Yuan 98 98 Other 12 14 Total 1,449 1,260 13.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2013 31 December 2012 Less than 1 year 405 211 Between 1 and 2 years 52 49 Between 2 and 3 years 52 52 Between 3 and 4 years 57 53 Between 4 and 5 years 566 560 More than 5 years 530 575 Total 1,662 1,500 29 Condensed consolidated interim financial statements at 30 June 2013 14 Share-based payments 14.1 Stock options The Board of Directors has decided not to introduce any further stock option plans. Movements in the stock option plans granted in previous years and still outstanding at 30 June 2013 are as follows: Plan 2006 Plan 2007 Plan 2008 Plan 2010-1 Plan 2010-2 Plan 2011-1 Plan 2011-2 Total Number of options granted - to corporate officers: Thierry Le Hénaff 540,000 55,000 600,000 70,000 460,000 52,500 225,000 35,000 225,000 35,000 105,000 29,250 105,000 29,250 2,260,000 306,000 to the 10 largest beneficiaries* Total number of options exercised by corporate officers by the 10 largest beneficiaries* Total number of options cancelled 181,000 490,492 50,530 178,362 15,900 217,000 398,152 24,000 158,550 22,800 169,350 215,954 24,000 40,350 18,877 104,000 30,315 - 26,915 5,000 104,000 - - 5,000 75,750 - - - 75,750 - - - 926,850 1,134,913 98,530 404,177 67,577 Number of options In circulation at 1 January 2013 Granted Cancelled 43,858 201,298 - - 261,827 - - 191,485 - - 10,250 33,608 * Employees who are not corporate officers of Arkema SA or any other Group company Exercised 22,250 179,048 36,658 225,169 1,800 189,685 In circulation at 30 June 2013 220,000 - - - 220,000 105,000 - - - 105,000 105,000 - - - 105,000 1,128,468 - - 70,958 1,057,510 The amount of the IFRS2 expense recognized in respect of stock options at 30 June 2013 is €0.2 million (€1 million at 30 June 2012). 14.2 Free share grants No new free share plan was adopted by the Board of Directors during the first half of 2013. 30 Condensed consolidated interim financial statements at 30 June 2013 Movements in the free share grant plans awarded in previous years and still in force at 30 June 2013 are as follows: Plan 2010-2 Plan 2011-1 Plan 2011-2 Plan 2011-3 Plan 2012-1 Plan 2012-2 Plan 2012-3 Total Number of free shares granted - to corporate officers: Thierry Le Hénaff - to the 10 largest beneficiaries* 50,795 8,100 88,305 8,200 24,450 59,380 8,200 24,450 52,315 14,850 101,860 13,000 36,100 74,805 13,000 36,100 65,335 16,400 Number of free shares 50,995 47,723 - - - 4 - - 50,995 47,719 In circulation at 30 June 2013 * Employees who are not corporate officers of Arkema SA or any other Group company In circulation at 1 January 2013 Granted Cancelled Definitively granted 87,160 - 100 87,060 0 58,825 - 100 - 58,725 101,735 - 230 - 101,505 74,805 - 230 - 74,575 64,745 - - - 64,745 485,988 - 664 87,060 398,264 The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2013 is €4 million (€ 4 million at 30 June 2012). 15 Off-balance sheet commitments 15.1 Commitments given 15.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2013 78 31 December 2012 67 Comfort letters Contractual guarantees 14 20 Customs and excise guarantees 12 12 Total 104 99 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 15.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, ARKEMA signs multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such 31 Condensed consolidated interim financial statements at 30 June 2013 contracts over periods initially of 1 to 20 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments are valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” type clauses. The total amount of the Group’s financial commitments amounts to €476 million at 30 June 2013 (see mat urity schedule below). (In millions of euros) 30 June 2013 31 December 2012 2013 73 119 2014 87 82 2015 74 71 2016 65 66 2017 until expiry of the contracts 177 182 Total 476 520 Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land) and transportation equipment (rail cars, containers). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). (In millions of euros) 30 June 2013 Capitalized leases Non- capitalized leases 31 December 2012 Non- capitalized leases Capitalized leases 2013 0 11 0 22 2014 0 22 0 20 2015 0 19 0 19 2016 0 16 0 16 2017 and beyond 2 20 2 19 Nominal value of future lease payments 3 88 3 96 Finance cost 0 NA 1 NA Present value NA: not applicable 3 NA 2 NA 32 Condensed consolidated interim financial statements at 30 June 2013 15.1.3 Off balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses Sales of businesses sometimes involve the provision of warranties in respect of unrecorded liabilities to the purchaser. ARKEMA sometimes grants such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of litigation and claims. In the majority of cases, they cover risks of occurrence of environmentally related claims. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted in the past by ARKEMA is €108 million at 30 June 2013 (€108 millio n at 31 December 2012). This amount is stated net of provisions recognized in the balance sheet in respect of such warranties. 15.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C22 to the consolidated financial statements at 31 December 2012 - Debt. 15.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described in the notes to the consolidated financial statements for the year ended 31 December 2012 (note C29.2 Commitments received). 16 Subsequent events On 9 July 2013 the works council of Kem One’s Fos-sur-Mer site brought an action before the district court of Lyon against Arkema, certain Kem One entities and the Klesch group for alleged fraudulent action between Arkema and Klesch Chemicals. Arkema vigorously contests these allegations, and will defend its interests. D. SCOPE OF CONSOLIDATION AT 30 JUNE 2013 No change in scope significantly affecting the consolidated financial statements took place during the first half of 2013. 33 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, August 1st 2013. Thierry Le Hénaff Chairman and CEO 34 KPMG Audit Département de KPMG S.A. Commissaire aux Comptes Membre de la Compagnie régionale de Versailles 1, cours Valmy 92923 Paris La Défense Cedex ERNST & YOUNG Audit Commissaire aux Comptes Membre de la Compagnie régionale de Versailles 1 /2 Place des Saisons 92400 Courbevoie La Défense Cedex Arkema Statutory Auditors’ Review Report On the first half-year Financial information for 2013 (free translation of the French original) January 1st to June 30th 2013 Arkema 420, rue d’Estienne d’Orves - 92700 Colombes appx 0 35 This is a free translation into English of the statutory auditors’ review report on the half-year consolidated financial statements issued in the French language and is provided solely for the convenience of English-speaking readers. This report also includes information relating to the specific verification of information given in the Group’s interim management report. This report should be read in conjunction with, and is construed in accordance with, French law and professional standards applicable in France. Arkema Registered office: 420, rue d’Estienne d’Orves - 92700 Colombes Share capital: €.629,481,730 Statutory Auditor’s Review Report on the first half-year financial information for 2013 (free translation of the French original) January 1st to June 30th 2013 To the Shareholders, In compliance with the assignment entrusted to us by your Annual General Meetings, and in accordance with requirements of article L.451-1-2 III of the French Monetary and Financial code (Code Monétaire et Financier), we hereby report to you on: • the review of the accompanying condensed half-year consolidated financial statements of Arkema for the period January 1st to June 30th 2013,and the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared in all material respects- in accordance with IAS 34 - standard of the IFRS as adopted by the European Union applicable to interim financial information. 36 Arkema S.A. Statutory auditors’ half-year review report on the financial information 2013 II. Specific verification We have also verified the information presented in the half-year management report in respect of the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. Paris La Défense, July 31 2013 The Statutory Auditors French original signed by French original signed by KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Jacques-François Lethu François Quédiniac Valérie Quint Partners Partner 37

Semestriel, 2013, Chemistry, ARKEMA

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Semestriel

Chemistry

ARKEMA

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Half-year Financial Report First half ended 30 June 2015 ARKEMA 420, rue d’Estienne d’Orves – F-92705 COLOMBES Cedex – France Standard : +33 (0)1 49 00 80 80 – Fax : +33 (0)1 49 00 83 96 Société anonyme au capital de 743 607 230 euros – 445 074 685 RCS I- Half-year activity report .................................................................................................................... 3 II- Consolidated financial statements at 30 June 2015 .................................................................... 14 III- Declaration by the person responsible for the half-year financial report ................................. 41 IV- Report from the statutory auditors on half-yearly financial information .................................. 42 This document is a free translation in English of ARKEMA’s half-year financial report for the 1st half ended 30 June 2015. This translation has been prepared solely for the information and convenience of English speaking readers. No assurances are given as to the accuracy or completeness of this translation, and ARKEMA assumes no responsibility with respect to this translation or any misstatement or omission that may be contained therein. In the event of any ambiguity or discrepancy between this translation and the French document, the French document shall prevail. 2 II – HALF-YEAR FINANCIAL REPORT 1. FIRST HALF 2015 HIGHLIGHTS 1.1. Acquisitions and divestments Acquisition of BOSTIK On 2 February 2015, ARKEMA finalized the acquisition of BOSTIK, the world’s number 3 in adhesives. This acquisition is fully in line with the Group’s strategy to continue developing its High Performance Materials segment, of which BOSTIK constitutes a new business line 1 . The financing of this operation was successfully finalized on 13 January 2015 with a 700 million euros bond issue with a 10-year maturity and a 1.5% coupon, and complements the hybrid bond issue conducted in October 2014 and the share capital increase completed in December 2014. BOSTIK’s first results within ARKEMA are promising (see paragraph 2.2. of this report). Acquisition of acrylic assets in China On 17 February 2015, ARKEMA and Jurong Chemical announced that they had concluded an agreement which extends until January 2016 the period for ARKEMA to exercise its call option to increase its share in Sunke, the manufacturing joint venture comprising the acrylic assets of the Taixing site in China, and so access a total 320,000 t/year acrylic acid production capacity. During this period, the joint venture is being operated jointly by both partners, and production is adjusted to market conditions. The financial terms of the initial agreement signed in January 2014 have been adjusted to reflect the extension of the option. All other conditions remain unchanged. Sunke’s performance is impacted by current low cycle conditions in acrylics. However, this project has to be assessed over the long term. Other operations As part of its strategy to strengthen its High Performance Materials segment, ARKEMA finalized the acquisition on 2 March 2015 of Italian company Oxido, which specializes in the formulation of organic peroxides used in the crosslinking of synthetic rubber, generating sales of some 20 million euros. This acquisition offers significant synergies and will help strengthen ARKEMA’s position as a leading player in organic peroxides. ARKEMA announced in June 2015 a project to divest Sunclear, a business included in the PMMA business line, which generates sales of some 180 million euros and represents an enterprise value of 105 million euros. The information - consultation process of works council in France has been finalized. This project remains however subject to the approval of antitrust authorities. 1.2. Organic growth Start-up of Thiochemicals platform in Malaysia ARKEMA brought on stream its Thiochemicals plant in Malaysia at the beginning of 2015. This new world- scale site strengthens the Group’s world leading position in the production of high added value sulfur derivatives, and will contribute to its development in a fast-growing region, in particular in the animal feed, petrochemicals and refining markets. In second quarter 2015, the Group benefited from the ramp-up, a touch faster than initially planned, of this new platform. Expansion of PEKK production capacities in France and the United States In order to meet growing demand in the carbon fiber composites and the 3D printing markets, ARKEMA announced on 9 March 2015 its project to double production capacities for its Kepstan® PEKK ultra high performance polymer in France in the first half of 2016. ARKEMA also intends to build a world-scale PEKK production plant on its Mobile site in the United States that could come on stream in the second half of 2018. Doubling of specialty molecular sieves production capacities at Honfleur (France) To support its customers’ growth, in particular in the refining and petrochemicals sector in Asia and Middle East, ARKEMA, through its subsidiary CECA, an adsorption and filtration specialist, announced end of June 2015 a project to double its specialty molecular sieves production capacity. This capacity extension, representing capital expenditure of some 60 million euros, will take place in France at Honfleur site. It will produce adsorbents for aromatics separation in petrochemicals, in particular the latest generation of ultra- 1 Business lines are Business Units or groups of Business Units 3 high performance CECA molecular sieves - Siliporite® SPX 5003. Production is scheduled to come on stream in two phases, the first in summer 2016 and the second in early 2017. 1.3. Competitiveness improvement In first quarter 2015, ARKEMA announced a project to shut down coating resins production at its Villers- Saint-Paul site in France, which will entail the loss of 26 positions. ARKEMA also presented, in second quarter, a project to close down operations at its Altuglas Bernouville site in France (PMMA extruded sheets). The project is subject to the information-consultation process involving the trade unions in France, and would result in the loss of 38 positions. In first half 2015, discussions with social partners in Spain as part of the project to shut down fluorogas production at Zaramillo site in Spain have been finalized. 1.4. Other highlights 2014 dividend and option for payment in shares The annual combined general meeting of Arkema’s shareholders approved on 2 June 2015 the distribution of a 1.85 euro dividend per share for 2014 with an option for each shareholder to receive the payment of its entire dividend in new Arkema shares. The issue price of the new shares was set at 61.64 euros. At the close of the option period which was open from 12 June 2015 to 25 June 2015 inclusive, 65.2% of the rights were exercised in favor of the payment of the dividend in shares. 1,430,888 new shares were issued, representing 1.96% of the Company’s share capital on the basis of the existing share capital at 31 May 2015. The settlement and delivery of the shares and their listing on Euronext Paris took effect on 8 July 2015. The dividend to be paid in cash to shareholders who did not elect to receive the dividend in shares amounts to 47 million euros, and will be paid from 8 July 2015. 4 2. ANALYSIS OF FIRST HALF 2015 FINANCIAL RESULTS The figures in this section are provided on a consolidated basis and in accordance with ARKEMA’s organization into 3 segments: High Performance Materials, Industrial Specialties, and Coating Solutions. The new composition of the three business segments, including 9 business lines2, was presented at the Capital Markets Day organized by ARKEMA on 29 June 2015 as follows: the High Performance Materials segment comprises the following business lines: Specialty Adhesives (Bostik), Technical Polymers (specialty polyamides and PVDF), and Performance Additives (filtration and adsorption (Ceca), organic peroxides, and UV-curing resins (Sartomer)); the Fluorochemicals, PMMA, and Hydrogen Peroxide; Industrial specialties segment comprises the following business lines: Thiochemicals, the Coating Solutions segment comprises the following business lines: Acrylics, and Coating Resins and Additives (coating resins and rheology additives (Coatex)). The 1st half 2014 figures have been restated to reflect the new reporting structure and in accordance with the IFRIC 21 standard “Levies”. Pursuant to this text, the Group now accounts in its 1st quarter financial statements the totality of an expense previously spread over the 4 quarters of the year. Accordingly, financial statements for the 1st half 2015 include a supplementary expense of approximately 8 million euros. However, this standard has no impact on the consolidated annual financial statements. 2.1. Analysis of ARKEMA’s income statement (In millions of euros) 1st half 2015 1st half 2014 Variation in % Sales …………….............................................................. 3,977 EBITDA............................................................................. 557 EBITDA margin (%)…..……………………………............ 14.0% 341 Recurring operating income …...................................... (82) Other income and expenses ............................................. 259 Operating income ........................................................... Net income – Group share …………………..…………….. 175 177 Adjusted net income ………..……………………............ 3,043 411 13.5% 253 (32) 221 116 148 +30.7% +35.5% +34.8% +17.2% +50.9% +19.6% Capital expenditure ……………………………………….. 151 203 25.6% Sales In first half 2015, sales reached 3,977 million euros, 30.7% up on 1st half 2014 with a +24.7% business scope effect mainly related to the acquisition of BOSTIK finalized on 2 February 2015 and the purchase of a stake in Sunke in Acrylics in China. The currency effect was favorable at +9.4% mostly due to the strengthening of the US dollar versus euro. Volumes are stable (-0.3%) compared to last year, the marked increase of demand towards the end of the 2nd quarter 2015 offsetting a slow start to the year. Prices, down 3.1%, mainly reflect lower prices in Coating Solutions partially offset by the strength of MMA and higher prices in Fluorogases. The breakdown of sales by business segment reflects the acceleration in the development of High Performance Materials mainly supported by BOSTIK acquisition. High Performance Materials accounted for 42% of Group’s total sales (29% in 1st half 2014), Industrial Specialties 33% (38% in 1st half 2014), and Coating Solutions 25% (33% in 1st half 2014). The breakdown of sales by geographic region was more balanced compared to 1st half 2014. Europe represented 38% of Group’s total sales (42% in 1st half 2014), North America 34% (34% in 1st half 2014), Asia 23% (20% in 1st half 2014), and the rest of the world 5% (4% in 1st half 2014). EBITDA and recurring operating income At 557 million euros, EBITDA is significantly up (+36%) compared to 1st half 2014. All business lines were up over last year, except for acrylic monomers which are in low cycle conditions, as expected. This strong EBITDA increase reflects in particular the contribution of BOSTIK over five months, the gradual 2 Business lines are Business Units or groups of Business Units 5 improvement of fluorogases compared to 1st half 2014 and the ramp-up, mainly in 2nd quarter 2015, of the new Thiochemicals platform in Malaysia. EBITDA also includes a positive currency exchange effect (translation) slightly above 50 million euros, mainly related to the strengthening of the US dollar versus euro. EBITDA margin grew to 14.0% from 13.5% in 1st half 2014 despite the acrylics cycle and the mechanically dilutive effect of BOSTIK’s integration. In line with EBITDA improvement, recurring operating income grew to 341 million euros from 253 million euros in 1st half 2014. It includes 216 million euros depreciation and amortization, up on last year (158 million euros) as a result of BOSTIK acquisition, the purchase of a stake in Sunke, the impact of currencies, and the start-up of new production plants. Operating income After deduction of -82 million euros other income and expenses, operating income amounted to 259 million euros in 1st half 2015 compared to 221 million euros in 1st half 2014. In 1st half 2015, other income and expenses mainly correspond to the impact of BOSTIK purchase price allocation and, in particular, to the step-up of inventories at market price for 36 million euros and to 16 million euros additional depreciation and amortization booked as a result of the revaluation at fair value of tangible and intangible fixed assets. They also include restructuring expenses for a total amount of -20 million euros and charges related to divestment and acquisition operations. In 1er half 2014, the -32 million euros other income and expenses mainly corresponded to various restructuring expenses and charges related to divestment and acquisition operations. Equity in income of affiliates Equity in income of affiliates reached 5 million euros, reflecting primarily the contribution of CJ Bio Malaysia Sdn. Bhd. in which ARKEMA owns a 14% stake. Financial result Financial result stood at -54 million euros against -29 million euros in 1st half 2014. This decrease mainly results from a higher cost of debt relating to the financing of BOSTIK acquisition as well as a 12 million euros unrealized currency loss, in accordance with accounting standards, on the financing in US dollars of the investments made in Thiochemicals in Malaysia. Income taxes Income taxes in 1st half 2015 amounted to 36 million euros (75 million euros in 1st half 2014). They include a 76 million euro tax profit booked as part of BOSTIK purchase price allocation and the valuation at fair market value of assets acquired and liabilities assumed. This profit corresponds to a 16 million euros reversal of provisions for deferred tax liabilities and to the recognition of deferred tax assets in France for a provisional amount of 60 million euros. Taxes also include a 1 million euro tax due on the 2014 dividend paid in cash. Excluding these items, the tax rate would stand at 32.6% of recurring operating income, reflecting the geographical split of results and in particular the relative weight of North America in the Group’s results. Net income, Group share and adjusted net income Net income Group share reached 175 million euros (116 million euros in 1st half 2014). Excluding the after- tax impact of non-recurring items, adjusted net income stood at 177 million euros compared to 148 million euros in 1st half 2014, i.e. 2.43 euros per share. 6 2.2. Analysis of results by segment HIGH PERFORMANCE MATERIALS (In millions of euros) 1st half 2015 1st half 2014 Variation in % Sales …………….............................................................. 1,649 EBITDA............................................................................. 260 EBITDA margin (%)…..……………………………............ 15.8% 187 Recurring operating income …...................................... 878 163 18.6% 115 +87.8% +59.5% +62.6% High Performance Materials sales reached 1,649 million euros, up by +88% on 1st half 2014, supported by BOSTIK’s contribution (690 million euros sales over five months) and a +8.4% currency effect mainly relating to the increase of the US dollar versus euro. Volumes are overall stable (+0.2%) compared to 1st half 2014; the good demand in automotive, especially in Europe in 2nd quarter 2015, and new developments offset a slower than expected demand in China and lower demand for some applications in the oil and gas market. Price effect was almost nil (-0.4%) on the first half. EBITDA increased by 60% to 260 million euros compared to 163 million euros in 1st half 2014. This very significant improvement was mainly due to the contribution of BOSTIK over five months, a good performance of specialty molecular sieves for petrochemicals, up year-over-year, and the improvement in the polyamide 12 performance which was affected in the 2nd quarter 2014 by a large maintenance turnaround on a site in France. Over the first six months of the year (including five months inside ARKEMA), BOSTIK achieved 89 million euros EBITDA, up 15% on 1st half 2014 and an EBITDA margin close to 11%. This good performance results from the successful implementation of the development strategy and from a positive currency effect. The teams continue to actively implement synergies, although their benefit remained limited at this stage. EBITDA margin reached 15.8%. Excluding the mechanically dilutive effect of the integration of BOSTIK, it would be close to last year level. Recurring operating income amounts to 187 million euros and includes 73 million euros depreciation and amortization, up versus last year (48 million euros) mainly as a result of BOSTIK acquisition and the impact of currencies. INDUSTRIAL SPECIALTIES (In millions of euros) 1st half 2015 1st half 2014 Variation in % Sales …………….............................................................. 1,310 EBITDA............................................................................. 221 EBITDA margin (%)…..……………………………............ 16.9% 136 Recurring operating income …...................................... 1,154 155 13.4% 89 +13.5% +42.6% +52.8% Industrial Specialties sales grew by +13.5% compared to 1st half 2014 at 1,310 million euros. The currency effect was favorable at +10.1%. At constant foreign exchange rate and scope of business, sales are up 2.6% supported by a +2.2% price effect resulting mainly from the improvement in the price of certain fluorogases as well as a continuing favorable environment in MMA. Volumes are overall stable (+0.4%), the benefit from the ramp-up of the new Thiochemicals plant in Malaysia being offset by slightly lower volumes, in particular in PMMA. At 221 million euros, EBITDA improved by 42.6% compared to 1st half 2014 and EBITDA margin increased strongly at 16.9%. The segment’s four main product lines reported a good performance. Results of Fluorogases improved gradually compared to last year supported by higher prices of some gases and the benefit from productivity initiatives. Thiochemicals achieved an excellent performance with a significant contribution on the 2nd quarter 2015 of the new Kerteh platform (Malaysia) which benefited, in particular, from sustained demand in Asia in the animal feed market. This ramp up, a touch faster than initially planned, should continue for the remainder of 2015. PMMA results remained at very good levels. 7 Recurring operating income amounts to 136 million euros and includes 85 million euros depreciation and amortization, up on last year (66 million euros) as a result of the start-up of new production plants and the impact of currencies. COATING SOLUTIONS (In millions of euros) 1st half 2015 1st half 2014 Variation in % Sales …………….............................................................. 1,005 EBITDA............................................................................. 114 EBITDA margin (%)…..……………………………............ 11.3% 57 Recurring operating income …...................................... 1,000 120 12.0% 77 +0.5% -5.0% 26.0% Coating Solutions sales were slightly up on last year (+0.5%) at 1,005 million euros. The currency effect was favorable at +9.6%, and the acquisition of a stake in Sunke in China resulted in a +4.4% business scope effect. These effects offset slightly lower volumes (-0.7%3) which reflect a soft demand in decorative paints in Europe. The -11.8% price effect reflects the acrylics cycle and lower raw materials. EBITDA stood at 114 million euros compared to 120 million euros in 1st half 2014. This variation reflects lower unit margins in acrylic monomers. In this business line, margins are at low-cycle levels and should remain so over 2015. The contribution from Sunke in the first half was quite limited given current market conditions in Asia. This market situation should persist for the remainder of the year. However, the results of acrylic monomers were almost totally offset by the good performance of downstream businesses, up compared to 1st half 2014 supported by new developments at Coatex and further actions to improve profitability in coating resins. EBITDA margin at 11.3% reflects the acrylics cycle. Recurring operating income amounts to 57 million euros and includes 57 million euros depreciation and amortization, up on last year (43 million euros) mainly as a result of the purchase of a stake in Sunke and the impact of currencies. 3 Excluding impact of the shutdown of Chauny activities in France effective in 1st quarter 2014 8 2.3. Group’s cash flow analysis (In millions of euros) Cash flow from operating activities Cash flow from investing activities Net cash flow Of which: Non-recurring items including non-recurring capital expenditure Net cash flow from portfolio management Recurring cash flow (1) Free cash flow (2) Cash flow from financing activities Variation in cash and cash equivalents (1) Net cash flow excluding impact of portfolio management and non-recurring items. (2) Net cash flow excluding impact of portfolio management. 1st half 2015 254 (1,531) (1,277) (21) (1,328) 72 51 484 (793) Cash flow from operating activities On 1st half 2015, ARKEMA generated 254 million euros operating cash flow. It includes a -112 million euros4 variation in working capital which reflects the usual working capital seasonality relating to sales increase versus year-end. It also includes (i) current income taxes of -110 million euros, (ii) cash items in the financial result of -42 million euros, and (iii) non-recurring items of -21 million euros mostly corresponding to restructuring expenses. Compared to 1st half 2014, operating cash flow improved by 80 million euros supported by a strong EBITDA increase which was partially offset by changes in current income taxes reflecting the geographical split of results and by a higher cost of debt as part of the financing of BOSTIK acquisition. Cash flow from investing activities Cash flow from investing activities amounted to -1,531 million euros in 1st half 2015. It includes primarily: • 147 million euros capital expenditure in tangible and intangible assets (excluding capital expenditure related to portfolio management operations); a 1,328 million euros net cash outflow recorded in relation to acquisitions made over the period, primarily the BOSTIK acquisition. This outflow corresponds to the share price of purchased companies net of acquired cash, and to the expenses and investments relating to these acquisitions. The gross amount paid for BOSTIK acquisition on closing day was 1,629 million euros from which will be deducted an 18 million euros provisional price adjustment. As regards the Group’s capital expenditure (including BOSTIK), the 450 million euros guidance for 2015 was made on the basis of a 1.25 euro / US dollar exchange rate for budget purposes. It will require adjusting depending on the variation in exchange rate. A 10-cent variation in this rate would result in a variation of close to 15 million euros in total capital expenditure. Recurring cash flow and free cash flow Excluding non-recurring items and portfolio management operations, recurring cash flow stood at 72 million euros in 1st half 2015 against 2 million euros in 1st half 2014. Free cash flow, which corresponds to net cash flow excluding the impact of portfolio management, stood at 51 million euros in 1st half 2015 against -100 million euros in 1st half 2014. This good cash generation over the 1st half 2015 is consistent with the Group’s ambition presented at its Capital Markets Day held on 29 June 2015 to increase cash conversion of EBITDA. 4 Excluding +44 million euros non-recurring items which primarily include a 36 million euros non-cash flow related to the inventory step-up carried out as part of BOSTIK purchase price allocation 1st half 2014 174 (271) (97) (102) 3 2 (100) (107) (204) 9 Group’s net cash flow After taking account of the impact of portfolio management, the Group’s net cash flow stood at -1,277 million euros in 1st half 2015. Cash flow from financing activities Cash flow from financing activities amounted to 484 million euros in 1st half 2015. This includes a bond issue completed in January 2015 for a net amount of 691 million euros as part of BOSTIK acquisition. It also includes the payment of a 1.85 euro dividend per share in respect of the 2014 financial year, totalling 135 million euros. This amount was partially paid in new shares, which resulted in an 88 million euros share capital increase accounted for in 2nd quarter 2015. The 47 million euros cash dividend payable to shareholders who did not elect to receive the dividend in shares will be cashed out in 3rd quarter 2015 and was thus not included in the net debt at 30 June 2015. 2.4. Group’s balance sheet analysis (In millions of euros) Non-current assets (1) Working capital Capital employed 30/06/2015 5,389 1,428 6,817 31/12/2014 3,607 958 4,565 Deferred tax assets 196 76 Provisions for pensions and employee benefits Other provisions Total provisions Long-term assets covering some provisions Total provisions net of non-current assets 613 392 1,005 68 937 456 361 817 66 751 Deferred tax liabilities 327 57 Net debt 1,773 154 Shareholders’ equity (1) Excluding deferred tax and including pension assets. 3,861 3,573 Between 31 December 2014 and 30 June 2015, non-current assets increased by 1,782 million euros. This variation was primarily due to: the integration of BOSTIK’s assets for 1,710 million euros (amount on the day of their integration within ARKEMA on 2 February 2015). It includes a provisional goodwill of 617 million euros, 151 million euros capital expenditure, • net depreciation and amortization amounting to 237 million euros, including 16 million euros depreciation and amortization resulting from the revaluation at fair value of tangible and intangible fixed assets as part of BOSTIK purchase price allocation, and 123 million euros positive currency translation effect related to the strengthening of the US dollar versus euro at the close of the period. Working capital increased by 470 million euros between 31 December 2014 and 30 June 2015, including +40 million euros translation effect given the significant strengthening of the US dollar versus euro at 30 June 2015 compared to 31 December 2014. This increase mainly results from (i) the integration of the working capital of BOSTIK acquired beginning February 2015 and representing, on the day of its integration, a total amount of 320 million euros and (ii) a 112 million euros5 increase in working capital reflecting the usual seasonality relating to sales increase versus year-end. Finally, it includes a 47 million euros payable at 30 June 2015 corresponding to the balance due in cash for the dividend to the shareholders who did not elect for the payment in shares. Excluding this amount which will be cashed-out in 3rd quarter 2015, the 5 Excluding +44 million euros non-recurring items which primarily include a 36 million euros non-cash flow related to the inventory step-up carried out as part of BOSTIK purchase price allocation Variation +49.4% +49.1% +49.3% +34.4% +8.6% +23.0% +3.0% +24.8% +8.1% 10 working capital to sales ratio6 stood at 17.5%, overall stable versus 30 June 2014 (17.3%). This result reflects the continued efforts to control working capital and maintain a strict operational discipline. Consequently, between 31 December 2014 and 30 June 2015, the Group’s capital employed increased by 2,252 million euros at 6,817 million euros at 30 June 2015. At 30 June 2015, deferred tax assets amounted to 196 million euros, up by 120 million euros versus 31 December 2014, including a +60 million euros provisional amount related to the recognition of deferred tax assets in France, in view of the Group’s tax position in this country, booked as part of the BOSTIK purchase price allocation. The rest of the increase mainly resulted from BOSTIK integration. At 30 June 2015, gross provisions amounted to 1,005 million euros. Some of these provisions, accounting for a total of 68 million euros at 30 June 2015, are mostly covered by the guarantee facility granted by Total and described in note 30.2 of the notes to the consolidated financial statements at 31 December 2014 (paragraph 4.3.3 of the 2014 Reference Document) and therefore by long term assets recognized in the balance sheet. These consist mainly of provisions related to former industrial sites in the United States. Accordingly, at 30 June 2015, provisions net of these non-current assets amounted to 937 million euros. The breakdown of net provisions by type was as follows: pension liabilities of 424 million euros, other employee benefit obligations of 188 million euros, environmental contingencies of 130 million euros, restructuring provisions of 57 million euros and other provisions of 138 million euros. Between 31 December 2014 and 30 June 2015, net provisions for pension liabilities and other employee benefit obligations (mainly healthcare costs, welfare costs, long-service awards) increased by 157 million euros. This variation results essentially from the integration of BOSTIK for a total provisional amount on the day of its integration of 181 million euros, from higher discount rates and the revaluation of financial assets over the period thus resulting in a 42 million euros decrease of the amount of provisions, and finally from a positive currency impact of 14 million euros. The other net provisions increased by 29 million euros over the same period due primarily to BOSTIK integration. Long term deferred tax liabilities amounted at 30 June 2015 to 327 million euros up by 270 million euros compared to 31 December 2014. This increase corresponds to 272 million euros deferred tax liabilities accounted for as part of the BOSTIK purchase price allocation and the valuation at fair market value of assets acquired and liabilities assumed. Net debt amounted to 1,773 million euros at 30 June 2015 (against 154 million euros at 31 December 2014), i.e. 45.9% of shareholders’ equity. This variation in net debt is explained by cash flows, as detailed in paragraph 2.3 of this report. It does not include the payment of the balance due in cash for the dividend to the shareholders who did not elect for the payment in shares. This amount of 47 million euros will be cashed-out in 3rd quarter 2015. Shareholders’ equity amounted to 3,861 million euros against 3,573 million euros at end 2014. The 288 million euros increase primarily includes (i) the payment of a dividend of 1.85 euros per share totalling 135 million euros, (ii) 88 million euros share capital increase achieved as part of the option for the payment of dividend in shares, (iii) 175 million euros net income over the period, (iv) 115 million euros net positive currency translation adjustments, and (v) 42 million euros variation in actuarial differences for pension provisions recognised through equity. 3. TRANSACTIONS WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non- consolidated companies or companies which are accounted for under the equity method. The values involved are not significant. 6 Calculated as working capital at 30 June / (2nd quarter sales *4) 11 4. HIGHLIGHTS SINCE 30 JUNE 2015 Expansion of BOSTIK production capacities in India In line with its strategy to expand in high growth regions, BOSTIK announced in July 2015 an expansion of its production capacities in Bangalore (India) with the start-up of a new hot melt pressure sensitive adhesives (HMPSA) production unit. This expansion will in particular enhance BOSTIK’s ability to serve its global customers in the Disposable Hygiene market. Securitization programme The contract concerning the securitization programme for sales receivables valid for a maximum amount of 120 million euros, which was used to the extent of 2 million euros at 31 December 2014, expired on 15 July 2015 and has not been renewed. 5. OUTLOOK ARKEMA enters the second half of the year with confidence, while remaining cautious on the future development of the global economic environment. Market conditions should remain volatile and contrasted with different dynamics depending on geographic regions and end-markets. Trends in foreign exchange rates, primarily US dollar versus euro, should remain favorable compared to last year, albeit with a more limited benefit in second half of the year than in the first half. In acrylic monomers, unit margins should remain at low-cycle levels until year-end. Over 2015, the Group will benefit from the contribution of BOSTIK over eleven months as well as the ramp- up of its Thiochemicals platform in Malaysia. The contribution from Sunke should remain well below expectations given current market conditions in acrylics in Asia. The Group should continue to benefit from its plan to gradually improve its fluorogas business and from its operational excellence initiatives to offset part of the inflation on fixed costs. Based on these drivers, assuming a continuity in current market conditions, and given the usual seasonality of the second half of the year, ARKEMA expects an EBITDA slightly above 1 billion euros (including BOSTIK contribution) in 2015. For 2017, assuming normalized market conditions, the Group aims to generate 1.3 billion euros EBITDA versus 784 million euros in 2014. This target is based on: (i) expected contribution from a number of major projects for a total amount of 180 million euros additional EBITDA in 2017 compared to 2014. These projects primarily entail the ramp-up of the Thiochemicals platform in Malaysia, the organic growth of BOSTIK amounting to some 50 million euros, the benefits of internal measures taken to improve the profitability of Fluorochemicals representing around 40 million euros, the development of applications for petrochemicals in the filtration and adsorption business, and the benefits of the investment plan finalized in Acrylics in North America in 2014. Additionally, organic growth in other product lines and benefits of the operational excellence programme, which should generate overall 100 million euros fixed and variable costs savings over the period 2015 to 2017, should help offset inflation on fixed costs; (ii) impact of portfolio management which should represent an EBITDA net contribution of some 190 million euros. This amount includes the initial contribution of BOSTIK, acquired in early February 2015, of 158 million euros (corresponding to the EBITDA generated by BOSTIK in 2014) and the full-year contribution in mid-cycle conditions of two acrylic acid lines representing a 320,000 tonnes overall production capacity in China. It also takes account of the expected impact of the divestment programme which should entail the divestment of non-core businesses accounting for overall sales of some 700 million euros by end 2017. The project to divest Sunclear, representing sales of some 180 million euros, was announced, as part of this programme, on 18 June 2015; (iii) certain assumptions reflecting a normalized economic environment and representing a net EBITDA contribution of some 150 million euros. Hence ARKEMA has assumed (1) return to mid-cycle market conditions in Acrylics, (2) gradual improvement in Fluorochemicals prices that could represent some 40 million euros EBITDA, (3) return to normalized market conditions in PMMA, (4) a 1.15 euro versus US dollar exchange rate, and (5) a Brent oil price at US$ 70 / bbl. 12 Furthermore, in order to maintain a solid balance sheet, the Group has set itself a target to return to gearing of some 40% by end 2017. Over the longer term, still in the normalized conditions defined in (iii) above, the Group aims to achieve, by 2020, 10 billion euros sales and an EBITDA margin close to 17%, while maintaining a net debt to EBITDA ratio of around 1.5. To achieve these ambitious targets, the Group is implementing a targeted growth strategy focused on the strengthening of its presence in higher growth countries, customer intimacy, technological innovation, and bolt-on acquisitions mostly after 2017 representing total additional sales of between 1 and 1.5 billion euros. Development investments will be focused first and foremost on businesses that offer the best growth prospects. Thus ARKEMA has set out a number of priorities for the next few years, including: (i) accelerating the development of its High Performance Materials through innovation in composite materials, new energies and water treatment, and through bolt-on acquisitions; (ii) significantly developing BOSTIK (Specialty Adhesives) with a strong ambition to almost double EBITDA compared to 2014 at 300 million euros; (iii) capitalizing on several other well-identified growth drivers: new thiochemicals platform in Malaysia, introduction of new generation fluorogases, reinforcement of acrylics downstream, and applications for oil and gas markets in particular in the filtration and adsorption business; (iv) continuing operational excellence initiatives. The Group has detailed its long-term objectives by business segment. Over the longer-term, High Performance Materials should thus represent around 50% of Group’s sales (compared to 44% of 2014 proforma Group sales), Industrial Specialties 25% (30% of 2014 proforma) and Coating Solutions 25% (26% of 2014 proforma). The potential EBITDA margin range between low cycle and peak cycle would stand at between 17 and 18% for High Performance Materials, between 17 and 19% for Industrial Specialties, and between 12 and 18% for Coating Solutions. From a geographic standpoint, the Group aims to have in the longer term a perfectly balanced breakdown between Europe, North America, and Asia/rest of the world, with one third of its sales in each of these three regions. The Group indicates that the achievement of its objectives is based on assumptions deemed reasonable by the Group, as of the date of this document and within this time frame (in particular regarding future development of global demand, conditions relating to raw material and energy costs, balance between supply and demand for products marketed by ARKEMA and their price levels, and currency exchange rates). However, it takes no account of the occurrence, as the case may be, of certain risks described more precisely in the 2014 Reference Document, in particular in the paragraph 1.7.2, or any unknown factors related to the economic, financial, competitive or regulatory environment in which the Group operates, liable to affect the achievement of its objectives. 6. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2014 Reference Document filed with the Autorité des marchés financiers (“AMF”) on 30 March 2015 under number D.15-0231. This document is available on ARKEMA’s website under the heading “Investor Relations” (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities is given in the notes to the half-year financial statements. 13 Condensed consolidated interim financial statements at 30 June 2015 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2015 CONSOLIDATED INCOME STATEMENT ............................................................................................................................................. 15 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME........................................................................................................ 16 CONSOLIDATED BALANCE SHEET .................................................................................................................................................... 17 CONSOLIDATED CASH FLOW STATEMENT ...................................................................................................................................... 18 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY .................................................................................. 19 A. HIGHLIGHTS ..................................................................................................................................................................................... 20 B. ACCOUNTING POLICIES ................................................................................................................................................................. 21 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ....................................................................................................... 24 1. Information by business segment ...................................................................................................................................... 24 2. Information by geographical area ...................................................................................................................................... 25 3. Other income and expenses ............................................................................................................................................... 26 4. Adjusted net income ........................................................................................................................................................... 26 5. Income taxes ........................................................................................................................................................................ 26 6. Business combinations ...................................................................................................................................................... 27 7. Earnings per share .............................................................................................................................................................. 28 8. Intangible assets ................................................................................................................................................................. 28 9. Property, plant and equipment ........................................................................................................................................... 29 10. Shareholders’ equity ........................................................................................................................................................... 29 11. Provisions for pensions and other employee benefits ..................................................................................................... 30 12. Other provisions and other non-current liabilities ............................................................................................................ 31 13. Liabilities and contingent liabilities ................................................................................................................................... 32 14. Debt ...................................................................................................................................................................................... 33 15. Share-based payments ....................................................................................................................................................... 34 16. Off-balance sheet commitments ......................................................................................................................................... 35 17. Subsequent events .............................................................................................................................................................. 36 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2015 ............................................................................................................................ 37 14 Condensed consolidated interim financial statements at 30 June 2015 CONSOLIDATED INCOME STATEMENT (In millions of euros) Notes 1st half 2015 1st half 2014 (after IFRIC 21 restatements) Sales (C1&C2) 3,977 3,043 Operating expenses (3,209) (2,502) Research and development expenses (103) (77) Selling and administrative expenses (324) (211) Recurring operating income * (C1) 341 253 Other income and expenses * (C3) (82) (32) Operating income * (C1) 259 221 Equity in income of affiliates 5 Financial result (54) (29) Income taxes (C5) (36) (75) Net income 174 117 Of which: non-controlling interests (1) 1 Net income - Group share (C4) 175 116 Earnings per share (amount in euros) ** (C7) 2.40 1.77 Diluted earnings per share (amount in euros) ** (C7) 2.39 1.76 Depreciation and amortization (C1) (216) (158) EBITDA * (C1) 557 411 Adjusted net income (C4) 177 148 Adjusted earnings per share (amount in euros) ** (C7) 2.43 2.26 Diluted adjusted earnings per share (amount in euros) ** (C7) 2.42 2.24 see note B17 to the consolidated financial statements at 31 December 2014 – Accounting policies / Main accounting and financial indicators. ** Elements for the calculation of earnings per share and adjusted earnings per share for first-half 2014 have been restated: in application of IFRIC 21 “Levies”; and to reflect the dilution factor resulting from the capital increase of 15 December 2014 and the dividend distribution approved at the shareholders’ general meeting of 2 June 2015. 15 Condensed consolidated interim financial statements at 30 June 2015 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of euros) Net income 1st half 2015 174 1st half 2014 (after IFRIC 21 restatements) 117 Hedging adjustments 5 (3) Other items 1 Deferred taxes on hedging adjustments and other items 1 Change in translation adjustments 117 12 Other recyclable comprehensive income 124 9 Actuarial gains and losses 41 (41) Deferred taxes on actuarial gains and losses (10) 7 Other non-recyclable comprehensive income 31 (34) Total income and expenses recognized directly through equity 155 (25) Comprehensive income 329 92 Of which: non-controlling interests 1 1 Comprehensive income – Group share 328 91 16 Condensed consolidated interim financial statements at 30 June 2015 CONSOLIDATED BALANCE SHEET (In millions of euros) ASSETS Notes 30 June 2015 31 December 2014 Intangible assets, net (C8) 2,485 1,094 Property, plant and equipment, net (C9) 2,640 2,272 Equity affiliates: investments and loans 23 18 Other investments 31 33 Deferred tax assets 196 76 Other non-current assets 210 190 TOTAL NON-CURRENT ASSETS 5,585 3,683 Inventories 1,193 977 Accounts receivable 1,356 839 Other receivables and prepaid expenses 178 137 Income taxes recoverable 32 27 Other current financial assets 12 2 Cash and cash equivalents 350 1,149 TOTAL CURRENT ASSETS 3,121 3,131 TOTAL ASSETS 8,706 6,814 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital 743 728 Paid-in surplus and retained earnings 2,779 2,626 Treasury shares (3) Translation adjustments 293 178 SHAREHOLDERS' EQUITY - GROUP SHARE (C10) 3,815 3,529 Non-controlling interests 46 44 TOTAL SHAREHOLDERS' EQUITY 3,861 3,573 Deferred tax liabilities 327 57 Provisions for pensions and other employee benefits (C11) 613 456 Other provisions and non-current liabilities (C12) 439 401 Non-current debt (C14) 1,889 1,196 TOTAL NON-CURRENT LIABILITIES 3,268 2,110 Accounts payable 858 704 Other creditors and accrued liabilities 406 274 Income taxes payable 62 33 Other current financial liabilities 17 13 Current debt (C14) 234 107 TOTAL CURRENT LIABILITIES 1,577 1,131 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 8,706 6,814 17 Condensed consolidated interim financial statements at 30 June 2015 CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) 1st half 2015 1st half 2014 (after IFRIC 21 restatements) Net income 174 117 Depreciation, amortization and impairment of assets 237 164 Provisions, valuation allowances and deferred taxes (85) (38) (Gains)/losses on sales of assets (5) 5 Undistributed affiliate equity earnings (4) 5 Change in working capital (67) (84) Other changes 4 5 Cash flow from operating activities 254 174 Intangible assets and property, plant, and equipment additions (151) (203) Change in fixed asset payables (76) (52) Acquisitions of operations, net of cash acquired (1,298) (1) Increase in long-term loans (22) (30) Total expenditures (1,547) (286) Proceeds from sale of intangible assets and property, plant, and equipment 6 4 Change in fixed asset receivables Proceeds from sale of operations, net of cash sold Proceeds from sale of unconsolidated investments 5 Repayment of long-term loans 10 6 Total divestitures 16 15 Cash flow from investing activities (1,531) (271) Issuance (repayment) of shares and other equity 92 38 Issuance of hybrid bonds Purchase of treasury shares (4) Dividends paid to parent company shareholders (135) (117) Dividends paid to minority shareholders (2) (3) Changes in dividends payable 47 Increase / decrease in long-term debt 450 (5) Increase / decrease in short-term borrowings and bank overdrafts 36 (20) Cash flow from financing activities 484 (107) Net increase/(decrease) in cash and cash equivalents (793) (204) Effect of exchange rates and changes in scope (6) (4) Cash and cash equivalents at beginning of period 1,149 377 CASH AND CASH EQUIVALENTS AT END OF PERIOD 350 169 18 Condensed consolidated interim financial statements at 30 June 2015 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (In millions of euros) Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests At 1 January 2015 728 1,093 689 844 178 (3) 3,529 44 Cash dividend* Issuance of share capital 15 77 (135) (135) 92 (2) Purchase of treasury shares (4) (4) Grants of treasury shares to employees (7) 7 - Share-based payments 3 3 Other 2 2 3 Transactions with shareholders 15 77 (137) - 3 (42) 1 Net income 175 175 (1) Total income and expense recognized directly through equity 38 115 153 2 Comprehensive income 213 115 328 1 At 30 June 2015 743 1,170 689 920 293 3,815 46 See note C.10 Shareholders’ equity (In millions of euros) Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Au 1er janvier 2014 630 868 819 7 (12) 2,312 37 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees 7 (55) 31 14 (62) (25) 11 (117) (3) 38 - Share-based payments (14) 19 5 Other - Transactions with shareholders 7 (24) (68) 11 (74) (3) Net income * 116 116 1 Total income and expense recognized directly through equity (37) 12 (25) Comprehensive income * 79 12 91 1 At 30 June 2014 637 844 830 19 (1) 2,329 35 After IFRIC 21 restatements 19 Shareholders’ equity 3,573 (137) 92 (4) 3 5 (41) 174 155 329 3,861 Shareholders’ equity 2,349 (120) 38 5 (77) 117 (25) 92 2,364 Condensed consolidated interim financial statements at 30 June 2015 A. HIGHLIGHTS A.1 Portfolio management Acquisition of BOSTIK On 2 February 2015 ARKEMA completed the acquisition of BOSTIK which is a new Business Line* in the High Performance Materials segment. The final stage of financing for this operation took place on 13 January 2015 through issuance of a €700 million bond with a 10- year maturity and a fixed 1.50% annual coupon. Acquisition of acrylic assets in China On 17 February 2015, ARKEMA and Jurong Chemical announced that they had reached an agreement extending until January 2016 the exercise period for ARKEMA’s option to increase its share in Sunke, the production joint venture that holds the acrylic assets at the Taixing site in China, and thus access a total acrylic acid production capacity of 320,000 tonnes per year. In the meantime, the joint venture is operated jointly by the two partners. Other operations In the High Performance Materials segment, on 2 March 2015 ARKEMA finalized the acquisition of the Italian company Oxido, which specializes in the formulation of organic peroxides used in crosslinking of synthetic rubbers, and generates sales of some €20 million. In June 2015 ARKEMA announced its intention to sell the three Sunclear companies, which report sales of some €180 million, for an enterprise value of €105 million. This sale project concerns the PMMA Business Line*, and is subject to approval by the competition authorities in France. A.2 Organic growth Early in 2015 ARKEMA started up its Thiochemicals plant in Malaysia. This new world-scale unit, which represented an investment of some €200 million, strengthens ARKEMA’s position as world leader in high value-added sulphur intermediates, and will contribute to its development in a fast growing region, particularly on the animal feed, petrochemicals and refining markets. In the second quarter of 2015 the Group benefited from the gradual ramp-up of this new production platform. A.3 Competitiveness During the first half of 2015, ARKEMA announced that it was planning to shut down coating resins production at its Villers-Saint-Paul site in France and also, subject to the information and consultation procedure with personnel representative bodies in France, to discontinue extruded PMMA sheet manufacturing at the Altuglas site at Bernouville in France. See note C1 20 Condensed consolidated interim financial statements at 30 June 2015 A.4 Other highlights On 2 June 2015 the general meeting of Arkema’s shareholders approved the distribution of a €1.85 divid end per share in respect of the 2014 financial year. Each shareholder can elect to receive payment of the entire dividend either in cash or in new Arkema shares. The issue price for the new shares was set at €61.6 4. By the end of the option period 65.2% of rights to payment of the dividend in shares had been exercised, and consequently 1,430,888 new shares were issued. Settlement and delivery of the shares and their listing on Euronext Paris took place on 8 July 2015. The cash dividend payable to shareholders who did not elect to receive the dividend in shares amounts to €47 million, and was paid out from 8 Jul y 2015. B. ACCOUNTING POLICIES Arkema is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. Basis for preparation ARKEMA’s condensed consolidated interim financial statements at 30 June 2015 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved by the Board of Directors of Arkema on 30 July 2015. The condensed consolidated interim financial statements at 30 June 2015 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRSs (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and IFRSs newly adopted by the European Union at 30 June 2015. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2014. The accounting framework and standards adopted by the European Union can be consulted on the following website: http://ec.europa.eu/internal_market/accounting/ias/index_en.htm Changes in IFRSs and interpretations The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2015 are identical to those used in the consolidated financial statements at 31 December 2014, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after 1 January 2015 (and which had not been applied early by the Group), namely: IFRIC 21 Levies Annual improvements to IFRS cycle 2011-2013 IFRIC 21 has an impact on the Group’s half-yearly financial statements: the financial statements for the first half-year of 2015 now contain a supplementary expense of approximately €8 million that was previously spread across the whole year. The figures for 2014 have been restated accordingly. 21 Condensed consolidated interim financial statements at 30 June 2015 The standards, amendments or interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which were not yet in force at 1 January 2015 and have not been applied early by the Group, are: Amendments to IAS 1 Presentation of financial statements Not adopted by the European Union at 30 June 2015 Amendments to IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortization Not adopted by the European Union at 30 June 2015 Amendments to IAS 19 Defined benefit plans: employee contributions Adopted by the European Union at 9 January 2015 Amendments to IAS 27 Equity method in separate financial statements Not adopted by the European Union at 30 June 2015 Amendments to IFRS 9 and IFRS 7 Mandatory effective date and transition disclosures Not adopted by the European Union at 30 June 2015 Amendments to IFRS 9 Hedge accounting and amendments to IFRS 9, IFRS 7 and IAS 39 Not adopted by the European Union at 30 June 2015 Amendments to IFRS 10 and IAS 28 Sale or contribution of assets between an investor and its associate/joint venture Not adopted by the European Union at 30 June 2015 Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation exception Not adopted by the European Union at 30 June 2015 Amendments to IFRS 11 Accounting for acquisitions of interests in joint operations Not adopted by the European Union at 30 June 2015 IFRS 9 Financial instruments Not adopted by the European Union at 30 June 2015 IFRS 14 Regulatory deferral accounts Not adopted by the European Union at 30 June 2015 IFRS 15 Revenue from contracts with customers Not adopted by the European Union at 30 June 2015 Annual improvements to IFRS cycle 2010-2012 Adopted by the European Union on 9 January 2015 Annual improvements to IFRS cycle 2012-2014 Not adopted by the European Union at 30 June 2015 Use of assumptions Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the condensed interim financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. Impact of seasonality ARKEMA’s standard pattern of business exposes the Group to seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by ARKEMA is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity observed primarily in France and the rest of Europe; in some of ARKEMA’s businesses, particularly those serving the paints, coatings and refrigeration markets, the level of sales is generally higher in the first half of the year than in the second half; 22 Condensed consolidated interim financial statements at 30 June 2015 major maintenance turnarounds at ARKEMA’s production plants have an influence on seasonality. Seasonality effects observed in the past are not necessarily representative of future trends, but they could have a material influence on the changes in results and working capital between the different quarters of the financial year. Main accounting and financial indicators The “Other income and expenses” performance indicator has been modified to incorporate a new category specifically related to the impacts of asset revaluation as part of allocation of the acquisition price for BOSTIK. Other income and expenses: these correspond to a limited number of well-identified non-recurring items of income and expense of a particularly material amount that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. These items of income and expense notably include: impairment losses in respect of property, plant and equipment and intangible assets; gains or losses on sale of assets, acquisition costs, negative goodwill on acquisitions on favourable terms and the valuation difference on inventories between their fair value at the acquisition date and their production cost; large restructuring and environmental expenses which would hamper the interpretation of recurring operating income (including substantial modifications to employee benefit plans and the effect of onerous contracts); expenses related to litigation and claims or major damages, whose nature is not directly related to ordinary operations; depreciation and amortization related to revaluation of identified intangible and tangible assets for the allocation of the acquisition price for BOSTIK. 23 Condensed consolidated interim financial statements at 30 June 2015 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Information by business segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. ARKEMA has three business segments: High Performance Materials, Industrial Specialties and Coating Solutions. Two members of the Executive committee supervise these segments; they report directly to the Chairman and CEO, the Group’s chief operating decision- maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their segment’s operating activity, financial results, forecasts and plans. As announced in late June 2015, ARKEMA has reorganized its three business segments. The new reporting structure is applied retroactively from 1 January 2015, and the financial information by segment presented in these notes has been restated for the first half of 2014. Details of the business segments are as follows: High Performance Materials includes the following Business Lines†: o Specialty Adhesives (BOSTIK) since completion of the acquisition of BOSTIK on 2 February 2015, o Technical Polymers, comprising specialty polyamides and PVDF, o Performance Additives, comprising the filtration and adsorption (CECA), organic peroxides and photocure resins (Sartomer) Business Units. High Performance Materials provide innovative solutions with high value added, used in varied sectors such as transport, oil extraction, renewable energies (photovoltaics, lithium-ion batteries), consumer goods (beauty products, sports equipment, packaging, etc), electronics, construction, coatings and water treatment. Industrial Specialties groups the following Business Lines: Thiochemicals, Fluorochemicals, PMMA and Hydrogen Peroxides. These integrated industrial niche markets on which ARKEMA is among the world leaders concern products used in several industrial sectors such as production of cold (refrigeration and air conditioning), petrochemicals, refining, paper pulp, animal nutrition, electronics and the automotive industry. Coating Solutions comprises the following Business Lines: o Acrylics, o Coatings Resins and Additives, comprising the coatings resins and Coatex rheological additives Business Units. This segment proposes solutions for decorative paints, industrial coatings, adhesives and high-growth acrylic applications (superabsorbers for disposable nappies, water treatment, oil and gas extraction). Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. † Business Lines are Business Units or groups of Business Units 24 Condensed consolidated interim financial statements at 30 June 2015 1st half 2015 (In millions of euros) Non-Group sales High Performance Materials 1,649 Industrial Specialties 1,310 Coating Solutions 1,005 Corporate 13 Inter-segment sales 7 64 35 Total sales 1,656 1,374 1,040 13 EBITDA 260 221 114 (38) Depreciation and amortization (73) (85) (57) (1) Recurring operating income 187 136 57 (39) Other income and expenses (61) (8) (12) (1) Operating income Equity in income of affiliates 126 128 5 45 (40) Intangible assets and property, plant, and equipment additions 50 82 16 3 1st half 2014 (after IFRIC 21 restatements, using the new reporting structure) (In millions of euros) Non-Group sales High Performance Materials 878 Industrial Specialties 1,154 Coating Solutions 1,000 Corporate 11 Inter segment sales 7 61 41 Total sales 885 1,215 1,041 11 EBITDA 163 155 120 (27) Depreciation and amortization (48) (66) (43) (1) Recurring operating income 115 89 77 (28) Other income and expenses (11) (14) (7) Operating income Equity in income of affiliates 115 78 63 (35) Intangible assets and property, plant, and equipment additions 41 130 31 1 2. Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2015 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Non-Group sales 408 1,113 1,357 911 188 1st half 2014 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Non-Group sales 344 936 1,039 596 128 (1) NAFTA: USA, Canada, Mexico 25 Total 3,977 557 (216) 341 (82) 259 5 151 Total 3,043 411 (158) 253 (32) 221 203 Total 3,977 Total 3,043 Condensed consolidated interim financial statements at 30 June 2015 3. Other income and expenses (In millions of euros) 1st half 2015 Income Expenses Net Expenses 1st half 2014 Income Net Restructuring and environment (20) (20) (17) (17) Goodwill impairment Asset impairment (other than goodwill) Litigation and claims (4) (4) Gains (losses) on sales and purchases of assets (46) (46) (11) (11) Depreciation and amortization related acquisition price for BOSTIK Other Total other income and expenses to allocation of the (16) (82) - (16) (82) (32) - (32) Net restructuring and environment expenses amount to €20 million in the first half of 2015. They inclu de asset impairment and provisions recorded in connection with discontinuation of coatings resin production at the Villers-Saint-Paul site amounting to a total of €6 million (including €2 million of asset impairment), and a p rovision of €6 million concerning the shutdown of t he Bernouville site for the PMMA Business Line. Gains and losses on sales and purchases of assets mainly comprise the revaluation difference on BOSTIK inventories (difference between production cost and the fair value at acquisition date), which amounts to €36 million. Depreciation an d amortization related to revaluation of tangible and intangible assets of BOSTIK amount to €16 million. In the first half of 2014, restructuring and environment expenses included a €9 million expense (of wh ich €5 million corresponds to asset impairment) related to the discontinuation of coatings resin production at the Stallingborough site in the United Kingdom. Gains and losses on sales and purchases of assets mainly comprised the disposal of shares in Canada Fluorspar Inc. 4. Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Net income - Group share Notes 1st half 2015 175 1st half 2014 116 * Other income and expenses (C3) 82 32 Taxes on other income and expenses (20) Non-current taxation (C5) (60) Adjusted net income 177 148 * After IFRIC 21 restatements 5. Income taxes The income tax expense is broken down as follows: (In millions of euros) Current income taxes 1st half 2015 (110) 1st half 2014 (70) Deferred income taxes 74 (5) Total income taxes (36) (75) 26 Condensed consolidated interim financial statements at 30 June 2015 The income tax expense amounts to €36 million at 30 June 2015, including €7 million for the CVAE and € 1 million relating to the additional income tax contribution due on distributed income (compared with €75 million at 30 June 2014, includin g €3 million for the CVAE and €4 million relating to the additional income tax contribution due on distributed income). Deferred tax liabilities are recognized in the financial statements at 30 June 2015 in connection with the fair value measurement of identifiable assets and liabilities acquired from BOSTIK. As a result of this operation and in view of the Group’s tax position in France, a deferred tax asset has been recognized in the provisional amount of €60 million. 6. Business combinations On 2 February 2015 ARKEMA finalized the acquisition of BOSTIK for an enterprise value of €1.74 billion and a provisional price of €1.61 billion. In compliance with IFRS 3 (revised), the Group has used the acquisition method for the accounting treatment of this operation. The provisional fair value of the identifiable assets acquired and liabilities transferred at the acquisition date breaks down as follows: (In millions of euros) Fair value acquired from BOSTIK Intangible assets 736 Property, plant and equipment 354 Deferred tax assets 63 Other non-current assets 3 TOTAL NON-CURRENT ASSETS 1,156 Inventories 233 Accounts receivable 279 Cash and cash equivalents 347 Other current assets 41 TOTAL CURRENT ASSETS 900 TOTAL ASSETS 2,056 Non-controlling interests 2 Deferred tax liabilities 264 Provisions and other non-current liabilities 221 Non-current debt 261 TOTAL NON-CURRENT LIABILITIES 746 Accounts payable 155 Other current liabilities 159 TOTAL CURRENT LIABILITIES 314 TOTAL LIABILITIES 1,062 Fair value of net assets 994 Provisional goodwill 617 The intangible assets measured at fair value mainly comprise the BOSTIK brand, and technologies which are amortized over an average period of 18 years. Revaluations of property, plant and equipment essentially concern buildings and equipment, and will be amortized over a residual useful life of 3 years. The revalued inventories were consumed during the first half-year of 2015. Other adjustments, mainly 27 Condensed consolidated interim financial statements at 30 June 2015 concerning employee benefit obligations, are still being finalized. All the impacts of these revaluations are recorded in the Income Statement under Other income and expenses. These adjustments can be reviewed, and amended where necessary, up to 12 months after the acquisition date. The resulting goodwill of €617 million has been det ermined provisionally, and mainly comprises future business developments, expected synergies, and potential improvements in the profitability of BOSTIK. The potential tax impact of the residual goodwill in various countries is currently being analyzed. The expenses incurred for the whole of this operation have been recorded in Other income and expenses at the amount of €16 million (€7 million in 2014 and €9 million in 2015). If the BOSTIK acquisition had been completed at 1 January 2015, additional sales of some €130 million and additional EBITDA of some €6 million would have been recognized; this EBITDA takes into account the BOSTIK IFRIC 21 impact. 7. Earnings per share 1st half 2015 1st half 2014 Weighted average number of ordinary shares 72,946,518 65,465,752 Dilutive effect of stock options 277,536 426,411 Dilutive effect of free share grants 62,773 171,786 Weighted average number of potential ordinary shares 73,286,827 66,063,949 Earnings per share is determined below: 1st half 2015 1st half 2014* Earnings per share (€) 2.40 1.77 Diluted earnings per share (€) 2.39 1.76 Adjusted earnings per share is determined below: 1st half 2015 1st half 2014* Adjusted earnings per share (€) 2.43 2.26 Diluted adjusted earnings per share (€) 2.42 2.24 Elements for the calculation of earnings per share and adjusted earnings per share for first-half 2014 have been restated: in application of IFRIC 21 “Levies”; and to reflect the dilution factor resulting from the capital increase of 15 December 2014 and the dividend payment in shares, recorded on 8 July 2015. 8. Intangible assets 8.1 Goodwill (In millions of euros) Goodwill Gross book value 1,891 30 June 2015 Accumulated amortization and impairment (495) Net book value 1,396 31 December 2014 Net book value 747 The increase in goodwill results mainly from acquisition of BOSTIK (see note C6, “Business Combinations”). 28 Condensed consolidated interim financial statements at 30 June 2015 8.2 Other intangible assets 30 June 2015 31 December 2014 Gross book value Accumulated amortization and impairment Net book value Net book value (In millions of euros) Patents and technologies 380 (126) 254 26 Trademarks 442 (2) 440 24 Software and IT licences 220 (140) 80 52 Capitalized REACH costs 35 (11) 24 24 Other capitalized research expenses 5 (1) 4 3 Capitalized contracts 281 (209) 72 77 Asset rights 70 (11) 59 43 Other intangible assets 82 (14) 68 10 Intangible assets in progress 88 88 88 Total 1,603 (514) 1,089 347 The increase in trademarks, patents, technologies and other intangible assets mainly results from the acquisition of BOSTIK (see note C6 “Business combinations”). 9. Property, plant and equipment 30 June 2015 31 December 2014 (In millions of euros) Gross book value Accumulated depreciation and impairment Net book value Net book value Land and buildings 1,806 (1,090) 716 535 Complex industrial facilities 3,726 (2,840) 886 856 Other property, plant and equipment 2,308 (1,725) 583 462 Construction in progress 460 (5) 455 419 Total 8,300 (5,660) 2,640 2,272 The increase in land and buildings and other property, plant and equipment mainly results from the acquisition of BOSTIK (see note C6 “Business combinations”). 10. Shareholders’ equity At 30 June 2015 Arkema’s share capital amounts to € 743 million, divided into 74,360,723 shares with a nominal value of 10 euros. 2015 2014 Number of shares at 1 January 72,822,695 63,029,692 Issuance of shares following the capital increase related to payment of dividends 1,430,888 Issuance of shares following the capital increase reserved for employees 491,502 Issuance of shares following the exercise of subscription options 107,140 175,668 Issuance of shares following the capital increase with preferential subscription rights Number of shares at 30 June 74,360,723 63,696,862 29 Condensed consolidated interim financial statements at 30 June 2015 Following the exercise of 107,140 share subscription options, 107,140 shares were issued, giving rise to a capital increase in the total nominal amount of €1 million. The Company bought back 70,641 treasury shares during the first half of 2015. In May 2015, ARKEMA definitively granted 121,635 free shares to Group employees in application of plans 2011-3 and 2012-2 The combined shareholders’ general meeting of 2 June 2015 approved the distribution of a €1.85 dividen d per share in respect of the 2014 financial year, or a total amount of €135 mill ion. Each shareholder can elect to receive payment of the entire dividend either in cash or in new Arkema shares. The issue price for the new shares was set at €61.6 4. By the end of the option period on 25 June 2015, 65.2% of rights to payment of the dividend in shares had been exercised, and consequently 1,430,888 new shares were issued with total value of €88 million. The cash dividend payable to shareholders who did not elect to receive the dividend in shares amounts to €47 mi llion, and was paid out from 8 July 2015. 11. Provisions for pensions and other employee benefits (In millions of euros) 30 June 2015 31 December 2014 Pension obligations 425 349 Healthcare and similar coverage 128 56 Post-employment benefits 553 405 Long service awards 54 47 Other long-term benefits 6 4 Other long-term benefits 60 51 Provisions for pensions and other employee benefits 613 456 The discount rates used by ARKEMA are as follows: Pension obligations, healthcare and similar coverage Europe (excl UK) UK USA At 30 June 2015 2.00% 3.50% 4.50% At 31 December 2014 1.50% 3.50% 4.00% The present value of accumulated defined benefit obligations at the end of 2014 has been adjusted at 30 June 2015 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2014 closing, to take account of the change in interest rates over the half-year.The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2015. The change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. 30 Condensed consolidated interim financial statements at 30 June 2015 The change in net provisions for post-employment benefits over the first half-year is as follows: (In millions of euros) Pension obligations Healthcare and similar coverage Total post- employment benefits Net liability (asset) at 1 January 348 56 404 Provision recognized in liabilities 349 56 405 Amount recognized in assets (1) (1) Operating expense for the period Net interest expense 12 3 2 1 14 4 Net contributions and benefits paid by the employer (13) (1) (14) Changes in scope Other Actuarial gains and losses recognized in shareholders’ equity 101 12 (39) 71 2 (3) 172 14 (42) Net liability (asset) at 30 June 424 128 552 Provision recognized in liabilities 425 128 553 Amount recognized in assets (1) (1) The value of BOSTIK’s employee benefit obligations, which is still being finalized, accounts for most of the €172 million recorded under “Changes in scope” (see note C6, “Business combinations”). 12. Other provisions and other non-current liabilities 12.1. Other non-current liabilities Other non-current liabilities amount to €47 million at 30 June 2015 as against €40 million at 31 Decem ber 2014. 12.2. Other provisions (In millions of euros) Environmental contingencies Restructuring Other Total At 1 January 2015 181 55 125 361 Increases in provisions 2 13 9 24 Reversals from provisions on use (6) (16) (14) (36) Reversals of unused provisions (1) (1) Changes in scope 4 5 25 34 Translation adjustments 7 3 10 Other At 30 June 2015 188 57 147 392 In addition, certain provisions are covered by non-current assets (receivables, deposits): (In millions of euros) Environmental contingencies Restructuring Other Total Total provisions at 30 June 2015 188 57 147 392 Portion of provisions covered by receivables or deposits 36 9 45 Deferred tax asset related to amounts covered by the Total indemnity 22 0 22 Provisions at 30 June 2015 net of non-current assets 130 57 138 325 For information: Provisions at 1 January 2015 net of non-current assets 125 55 116 296 31 Condensed consolidated interim financial statements at 30 June 2015 12.2.1 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €84 million (€81 million at 31 Dece mber 2014), in the United States for €78 million (€75 million at 31 December 2014), of which €57 million in resp ect of former industrial sites covered 100% by the Total Group indemnity (receivable recognized in “other non-current assets” for an amount of €36 million and €22 million of deferred taxes) (see note C16.2 “Off-balance sheet commitments / Commitments received”). 12.2.2 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €34 million (€2 9 million at 31 December 2014), in Europe outside France for €19 million (€24 million at 31 December 2014) and in the United States for € 3 million (€1 million at 31 December 2014). 12.2.3 Other provisions Other provisions amount to €147 million and mainly comprise: provisions for labour litigation for €45 million ( €39 million at 31 December 2014), provisions for commercial litigation and warranties for €40 million (€24 million at 31 December 2014) , provisions for tax litigation for €22 million (€20 million at 31 December 2014), provisions for other risks for €40 million (€42 mi llion at 31 December 2014). 13. Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note C21 to the consolidated financial statements at 31 December 2014. There was no development in liabilities and contingent liabilities during the first half of 2015 with an actual or potential significant effect on the Group’s consolidated financial statements. The arbitration proceedings initiated by Klesch against Arkema in connection with the sale of the vinyls activity are expected to end during the second half-year. 32 Condensed consolidated interim financial statements at 30 June 2015 14. Debt 14.1 Analysis of net debt by category Group net debt amounts to €1,773 million at 30 June 2015, taking account of cash and cash equivalents of €350 million. (In millions of euros) 30 June 2015 31 December 2014 Bonds 1,828 1,137 Finance lease obligations 2 2 Bank loans 45 42 Other non-current debt 15 15 Non-current debt 1,890 1,196 Finance lease obligations 0 0 Commercial paper 20 Other bank loans 185 85 Other current debt 28 22 Current debt 233 107 Debt 2,123 1,303 Cash and cash equivalents 350 1,149 Net debt 1,773 154 Bonds At 30 June 2015, the fair values of the bonds issued by the Group are as follows: €500 million bond: €540 million, €480 million bond: €545 million, €150 million bond (issued as Euro Medium Term Note s (EMTN)): €164 million, €700 million bond (issued as Euro Medium Term Note s (EMTN)): €667 million. 14.2 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. (In millions of euros) 30 June 2015 31 December 2014 Euros 1,892 1,178 Chinese Yuan 177 100 Other 54 25 Total 2,123 1,303 14.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2015 31 December 2014 Less than 1 year 263 135 Between 1 and 2 years 93 65 Between 2 and 3 years 564 562 Between 3 and 4 years 35 32 Between 4 and 5 years 35 24 More than 5 years 1,431 679 Total 2,421 1,497 33 Condensed consolidated interim financial statements at 30 June 2015 15. Share-based payments 15.1 Stock options The Board of Directors has decided not to introduce any further stock option plans. Movements in the stock option plans granted in previous years and still outstanding at 30 June 2015 are as follows: Plan 2007 Plan 2008 Plan 2010-1 Plan 2010-2 Plan 2011-1 Plan 2011-2 Number of options granted 603,074 465,437 230,044 233,513 109,082 109,082 to corporate officers: Thierry Le Hénaff 70,389 52,676 36,361 36,361 30,386 30,386 to the 10 largest beneficiaries * 218,128 172,130 105,505 107,851 78,696 78,696 Total number of options exercised 563,643 329,837 99,832 5,037 by corporate officers 70,389 52,676 by the 10 largest beneficiaries * 218,128 100,592 60,325 Total number of options cancelled 39,431 18,877 7,000 22,174 NUMBER OF OPTIONS In circulation at 1 January 2015 81,922 142,578 134,169 226,513 109,082 109,082 Granted Cancelled 16,631 15,174 Exercised 65,291 25,855 10,957 5,037 In circulation at 30 June 2015 116,723 123,212 206,302 109,082 109,082 Employees who are not corporate officers of Arkema or any other Group company The amount of the IFRS 2 expense recognized in respect of stock options at 30 June 2015 is below €0.5 million (also below €0.5 million at 30 June 2014). 15.2 Free share grants No new free share plan was adopted by the Board of Directors during the first half of 2015. Movements in the free share grant plans awarded in previous years and still in force at 30 June 2015 are as follows: Plan 2011-3 Plan 2012-2 Plan 2012-3 Plan 2013 Plan 2014-1 Plan 2014-2 Total number of free shares granted 52,315 74,805 65,335 250,000 750 275,000 to corporate officers: Thierry Le Hénaff 13,000 26,000 26,000 to the 10 largest beneficiaries * 14,850 36,100 16,400 75,400 50 71,600 NUMBER OF FREE SHARES In circulation at 1 January 2015 49,080 73,450 62,905 246,870 415 275,000 Granted Cancelled 895 40 360 455 Definitively granted 48,185 73,450 In circulation at 30 June 2015 62,865 246,510 415 274,545 Employees who are not corporate officers of Arkema or any other Group company. 34 Condensed consolidated interim financial statements at 30 June 2015 The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2015 is €3 million (€ 4 million at 30 June 2014). 16. Off-balance sheet commitments 16.1 Commitments given 16.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2015 81 31 December 2014 80 Comfort letters Contractual guarantees 10 6 Customs and excise guarantees 14 12 Total 105 98 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 16.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, ARKEMA signs multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods initially of 1 to 30 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments are valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” type clauses. The total amount of the Group’s financial commitments amounts to €422 million at 30 June 2015 (see mat urity schedule below). (In millions of euros) 30 June 2015 31 December 2014 2015 141 176 2016 76 70 2017 59 53 2018 43 36 2019 until expiry of the contracts 103 92 Total 422 427 Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land) and transportation equipment (rail cars, containers). 35 Condensed consolidated interim financial statements at 30 June 2015 The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). 30 June 2015 31 December 2014 Capitalized leases Non-capitalized leases Capitalized leases Non-capitalized leases (In millions of euros) 2015 0 12 0 19 2016 0 18 0 17 2017 0 14 0 14 2018 0 12 0 11 2019 and beyond 1 43 1 40 Nominal value of future lease payments 2 99 2 101 Finance cost 0 NA 0 NA Present value NA: not applicable 2 NA 2 NA 16.1.3 Off-balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses Sales of businesses sometimes involve the provision of warranties in respect of unrecorded liabilities to the purchaser. ARKEMA sometimes grants such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by ARKEMA is €97 million at 30 June 2015 (€95 million at 31 December 2014). This amount is stated net of provisions recognized in the balance sheet in respect of such warranties. 16.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C22 to the consolidated financial statements at 31 December 2014 “Debt”. 16.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described in the notes to the consolidated financial statements for the year ended 31 December 2014 (note C30.2 “Commitments received”). 17. Subsequent events The contract concerning the securitization programme for sales receivables valid for a maximum amount of €120 million, which was used to the extent of €2 million at 31 December 2014, ex pired on 15 July 2015 and has not been renewed. 36 Condensed consolidated interim financial statements at 30 June 2015 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2015 (a) Companies consolidated for the first time in 2015 (b) Companies acquired in 2015 The percentage of control indicated below also corresponds to the Group’s ownership interest. Altuglas International Denmark A/S Denmark 100.00 FC Altuglas International Mexico Inc. United States 100.00 FC Architectural & structural adhesives Pty Ltd (b) Australia 100.00 FC Altuglas International SAS France 100.00 FC American Acryl LP United States 50.00 JO American Acryl NA LLC United States 50.00 JO Arkema South Korea 100.00 FC Arkema France 100.00 FC Arkema Afrique SAS France 100.00 FC Arkema Amériques SAS France 100.00 FC Arkema Asie SAS France 100.00 FC Arkema BV Netherlands 100.00 FC Arkema Canada Inc. Canada 100.00 FC Arkema Changshu Chemicals Co. Ltd China 100.00 FC Arkema Changshu Fluorochemical Co. Ltd China 100.00 FC Arkema Chemicals India Private Ltd. India 100.00 FC Arkema China Investment Co. Ltd. China 100.00 FC Arkema Coating Resins Malaysia Sdn. Bhd. Malaysia 100.00 FC Arkema Coatings Resins UK United Kingdom 100.00 FC Arkema Co. Ltd Hong Kong 100.00 FC Arkema Daikin Advanced Fluorochemicals Co. Ltd China 60.00 JO Arkema Delaware Inc. United States 100.00 FC Arkema Europe France 100.00 FC Arkema France France 100.00 FC Arkema GmbH Germany 100.00 FC Arkema Hydrogen Peroxide Co. Ltd. Shanghai China 66.67 FC Arkema Inc. United States 100.00 FC Arkema Insurance Ltd Ireland 100.00 FC Arkema KK Japan 100.00 FC Arkema Kimya Sanayi ve Ticaret AS (a) Turkey 100.00 FC Arkema Ltd. United Kingdom 100.00 FC Arkema Mexico SA de CV Mexico 100.00 FC Arkema Mexico Servicios SA de CV Mexico 100.00 FC Arkema PEKK Inc. United States 100.00 FC Arkema Peroxides India Private Limited India 100.00 FC Arkema Pte Ltd. Singapore 100.00 FC Arkema Pty Ltd. (a) Australia 100.00 FC Arkema Quimica Ltda Brazil 100.00 FC Arkema Quimica SA Spain 99.92 FC 37 Arkema Rotterdam BV Arkema (Shanghai) Distribution Co. Ltd Arkema Spar NL Limited Partnership Arkema sp Z.o.o Arkema Srl Arkema Taixing Chemicals Arkema Thiochemicals Sdn Bhd Arkema Yoshitomi Ltd. ATO Findley Deutschland Gmbh Bostik AB (Sweden) Bostik AS Bostik Argentina Bostik AS (Denmark) Bostik AS (Norway) Bostik Australia Bostik Belux NV SA Bostik BV Bostik Canada Bostik Egypt For Production of Adhesives S.A.E Bostik Findley (China) Co Ltd. Bostik Findley Malaysia Sdn.-Bhd. Bostik Gmbh Bostik Holding Australia Ltd Bostik Holding BV Bostik Holding Hong Kong Ltd. Bostik Holding SA Bostik Inc. Bostik India Private Ltd. Bostik Industries Ltd. Bostik Korea Ltd. Bostik Ltd. Bostik Mexicana SA de CV Bostik Nederland BV Bostik New Zealand Bostik-Nitta Co. Ltd. Bostik OOO Bostik OY Bostik Philippines Inc. Bostik Polska SP Z.O.O Bostik SA Bostik SA (Spain) Bostik SIA Bostik (Shanghai) Management Co. Ltd. Bostik (Thailand) Co. Ltd Bostik UAB Condensed consolidated interim financial statements at 30 June 2015 Netherlands 100.00 FC China 100.00 FC Canada 100.00 FC Poland 100.00 FC Italy 100.00 FC China 100.00 FC Malaysia 86.00 FC Japan 49.00 SI (b) Germany 100.00 FC (b) Sweden 100.00 FC (b) Estonia 100.00 FC (b) Argentina 100.00 FC (b) Denmark 100.00 FC (b) Norway 100.00 FC (b) Australia 100.00 FC (b) Belgium 100.00 FC (b) Netherlands 100.00 FC (b) Canada 100.00 FC (b) Egypt 100.00 FC (b) China 100.00 FC (b) Malaysia 100.00 FC (b) Germany 100.00 FC (b) Australia 100.00 FC (b) Netherlands 100.00 FC (b) Hong Kong 100.00 FC (b) France 100.00 FC (b) United States 100.00 FC (b) India 100.00 FC (b) Ireland 100.00 FC (b) South Korea 100.00 FC (b) United Kingdom 100.00 FC (b) Mexico 100.00 FC (b) Netherlands 100.00 FC (b) New Zealand 100.00 FC (b) Japan 66.00 FC (b) Russia 100.00 FC (b) Finland 100.00 FC (b) Philippines 100.00 FC (b) Poland 100.00 FC (b) France 100.00 FC (b) Spain 100.00 FC (b) Latvia 100.00 FC (b) China 100.00 FC (b) Thailand 100.00 FC (b) Lithuania 100.00 FC 38 Bostik Unipessoal Bostik Vietnam Company Ltd Ceca Belgium Ceca Italiana Srl Ceca LC Ceca SA Ceca Watan Saudi Arabia Cekomastik Kimya Sanayi Ve Ticaret A.S Changshu Coatex Additives Co. Ltd. Changshu Haike Chemicals Co. Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Coatex Central Eastern Europe sro Coatex Inc. Coatex Latin America Industria et Comercio Ltda Coatex Netherlands BV Coatex SAS Daikin Arkema Refrigerants Asia Ltd. Daikin Arkema Refrigerants Trading (Shanghai) Co. Ltd. Delaware Chemicals Corporation Febex SA Hebei Casda Biomaterials Co. Ltd Ihsedu Agrochem Private Ltd Jiangsu Bostik Adhesive Co. Ltd Maquiladora General de Matamoros SA de CV Meglas Srl MEM BAUCHEMIE Gmbh Michelet Finance, Inc. MLPC International Newspar Mydrin Srl ODOR-TECH LLC Oxido Srl Oxochimie Ozark Mahoning Company PT Bostik Indonesia Sartomer Asia Limited Sartomer Guangzhou Chemical Co. Ltd. Sartomer Shanghai Distribution Company Limited Seki Arkema Shanghai Arkema Gaoyuan Chemicals Co. Ltd Société Marocaine des Colles Sovereign Chemicals Ltd Sunclear SA Espana Sunclear Condensed consolidated interim financial statements at 30 June 2015 (b) Portugal 100.00 FC (b) Vietnam 100.00 FC Belgium 100.00 FC Italy 100.00 FC France 100.00 FC France 100.00 FC (a) Saudi Arabia 51.00 FC (b) Turkey 100.00 FC China 100.00 FC China 49.00 FC Malaysia 14.00 SI South Korea 100.00 FC Slovakia 100.00 FC United States 100.00 FC Brazil 100.00 FC Netherlands 100.00 FC France 100.00 FC Hong Kong 40.00 JV China 40.00 JV United States 100.00 FC Switzerland 96.77 FC China 100.00 FC India 24.90 SI (b) China 100.00 FC Mexico 100.00 FC Italy 33.00 SI (b) Germany 100.00 FC United States 100.00 FC France 100.00 FC Canada 50.00 JO (b) Italy 100.00 FC United States 100.00 FC (b) Italy 100.00 FC France 50.00 JO United States 100.00 FC (b) Indonesia 100.00 FC Hong Kong 100.00 FC China 100.00 FC China 100.00 FC South Korea 51.00 FC China 100.00 FC (b) Morocco 97.01 FC (b) United Kingdom 100.00 FC Spain 99.92 FC France 100.00 FC 39 Condensed consolidated interim financial statements at 30 June 2015 Sunclear Srl Italy 100.00 FC Suzhou Hipro Polymers Co. Ltd China 100.00 FC Taixing Sunke Chemicals China 55.00 JO Tamer Endustriyel Madencilik Anonim Sirketi Turkey 50.00 FC Tekbau Yapi Malzemeleri Madencilik Sanayi AS (b) Turkey 100.00 FC Turkish Products, Inc. United States 100.00 FC Usina Fortaleza Industria E commercio de massa fina Ltda (b) Brazil 100.00 FC Vetek Argentina 60.00 FC Viking chemical company United States 100.00 FC Zhuhai Bostik Adhesive Ltd (b) China 100.00 FC NB: FC: full consolidation JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses JV: joint venture - consolidation by the equity method SI: significant influence - consolidation by the equity method 40 III - DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2015 I certify that, to the best of my knowledge, the condensed consolidated financial statements have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, 3 August 2015 Thierry Le Hénaff Chairman and CEO 41 KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit This is a free translation into English of the statutory auditors' review report on the half-yearly financial information issued in French and is provided solely for the convenience of English- speaking users. This report includes information relating to the specific verification of information given in the group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Arkema Period from January 1 to June 30, 2015 Statutory auditors’ review report on the half-yearly financial information 42 KPMG Audit Département de KPMG S.A. Tour Eqho 2, avenue Gambetta 92066 Paris-La Défense Cedex ERNST & YOUNG Audit 1/2, place des Saisons 92400 Courbevoie - Paris-La Défense 1 S.A.S. à capital variable Commissaire aux Comptes Membre de la compagnie régionale de Versailles Commissaire aux Comptes Membre de la compagnie régionale de Versailles Arkema Period from January 1 to June 30, 2015 Statutory auditors’ review report on the half-yearly financial information To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L. 451-1-2 III of the French monetary and financial code (Code monétaire et financier), we hereby report to you on: the review of the accompanying condensed half-yearly consolidated financial statements of Arkema, for the period from January 1 to June 30, 2015, the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements are the responsibility of the board of directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 – standard of the IFRSs as adopted by the European Union applicable to interim financial information. 43 II. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, July 30, 2015 The statutory auditors French original signed by KPMG Audit Départment de KPMG S.A. ERNST & YOUNG Audit Jacques-François Lethu François Quédiniac Denis Thibon 44

Semestriel, 2015, Chemistry, ARKEMA

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Semestriel

Chemistry

ARKEMA

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1/1 Half- year financial report First half ended 30 June 2017 Arkema 420, rue d’Estienne d’Orves – F-92705 Colombes Cedex – France Tél. : +33 1 49 00 80 80 – Fax : +33 1 49 00 83 96 Société anonyme au capital de 757 738 650 euros – 445 074 685 RCS Nanterre arkema.com I- Half-year activity report .................................................................................................................... 3 II- Condensed consolidated interim financial statements at 30 June 2017 ................................... 12 III- Declaration by the person responsible for the half-year financial report ................................. 39 IV- Report from the statutory auditors on half-year financial information ..................................... 40 This document is a free translation in English of Arkema’s half-year financial report for the first half ended 30 June 2017. This translation has been prepared solely for the information and convenience of English-speaking readers. No assurances are given as to the accuracy or completeness of this translation, and Arkema assumes no responsibility with respect to this translation or any misstatement or omission that may be contained therein. In the event of any ambiguity or discrepancy between this translation and the French document, the French document shall prevail. 2 I - HALF-YEAR FINANCIAL REPORT 1. FIRST HALF 2017 HIGHLIGHTS 1.1. Organic growth projects In January 2017, as part of its operational excellence program, the Group announced plans to replace two 45,000 tonnes per year acrylic acid reactors at the end of their life with a single new 90,000 tonnes per year reactor at its Clear Lake site in the United States. With this investment of some US$90 million, Clear Lake will further increase its competitiveness. In February 2017, the Group announced that it doubled its Kepstan® PEKK production capacities in France, and confirmed an investment in a Kepstan® PEKK world-scale plant at its Mobile site (Alabama) in the United States, expected to come on stream end 2018. Start-up of new production capacities In April 2017, Arkema announced that it had brought on stream the 25 % increase in its Kynar® PVDF production capacities on its Changshu platform in China. This investment supports Arkema’s growth strategy in Advanced Materials (1) and will enable the Group to continue supporting its customers’ growth in Asia, in particular in the new energies and water management markets, as well as in more traditional applications like construction coatings and the chemical process industry. Arkema inaugurated on 24 April 2017 its new specialty molecular sieve capacity at its Honfleur plant in France. This investment of some €60 million will enable the Group to support its customers’ growth in the refining and petrochemicals markets, in particular in Asia and the Middle East and to consolidate its n° 2 world ranking in molecular sieves. 1.2. Acquisitions and divestments Divestment of oxo-alcohol business As part of its divestment program, the Group announced, in March 2017, that it had completed the sale to INEOS of its 50 % stake in Oxochimie, their oxo-alcohols manufacturing joint venture, and of the associated business. The revenues thus divested amount, for the Group share, to around €40 million. Acquisition of CMP Specialty Products business In May 2017, the Group announced the acquisition by Bostik of CMP Specialty Products, the flooring and floor preparation business of US based specialist CGM. This business, which generated U$15 million sales in 2016, offers strong synergies with Bostik. This acquisition fits perfectly with Bostik's strategy to expand in the growing US construction market and to offer its customers a complete range of solutions for the flooring market. This acquisition is also fully part of the Group strategy to accelerate its growth in Specialty Adhesives with bolt-on acquisitions. 1.3. Financing On 11 April 2017, Arkema completed a €700 million bond issue with a ten-year maturity at a coupon of 1.5 % per year. On 23 June 2017, Arkema completed a €200 million tap of this bond. These operations enabled the Group to refinance and extend the average maturity of its financial resources in favorable market conditions. 1.4. Miscellaneous Arkema filed a new complaint with the European Commission against Honeywell for abuse of dominant position with respect to patents covering the use of the refrigerant 1234yf in car air conditioning systems. Consistent with the new complaint, Arkema has withdrawn its previous complaint. (1) Advanced Materials include two Business Lines: Technical Polymers and Performance Additives. 3 2. ANALYSIS OF THE FIRST HALF 2017 FINANCIAL RESULTS The figures in this section are provided on a consolidated basis and in accordance with Arkema’s organization into three divisions: High Performance Materials, Industrial Specialties, and Coating Solutions. 2.1. Analysis of Arkema’s results (In millions of euros) 1st half 2017 1st half 2016 Sales 4,350 3,845 EBITDA 753 643 EBITDA margin (%) 17.3 % 16.7 % Recurring operating income (REBIT) 530 420 REBIT margin 12.2 % 10.9 % Other income and expenses (30) (1) Operating income 500 419 Equity in income of affiliates 0 6 Financial result (51) (50) Income taxes (148) (126) Net income 301 249 Of which: non-controlling interests 4 4 Net income – Group share 297 245 Adjusted net income 319 240 Sales In 1st half 2017, sales reached €4,350 million, +13.1% up on 1st half 2016. At constant exchange rates and business scope, growth stood at +9.2%. Volumes +3.2% up, grew in the three divisions, driven notably by good demand in Asia and benefits from innovation, in particular in Advanced Materials. The +6.0% price effect, positive in all three business divisions, reflects the gradual improvement in the acrylic cycle, higher prices of certain fluorogases, as well as the Group’s actions to adjust its sales prices to the higher raw material cost environment. The +3.2% scope effect primarily reflects the contribution of Den Braven and the impact of the divestment of the activated carbon and filter aid and of the oxo-alcohol businesses. The currency effect was limited at +0.8%. The share of High Performance Materials represents 45% of Group sales (46% in 1st half 2016). Industrial Specialties are stable at 31%, and Coating Solutions represent 24% (23% in 1st half 2016). From a geographic standpoint, Europe accounts for 38% of Group sales (37% in 1st half 2016), North America 33% (34% in 1st half 2016), Asia 25% (24% in 1st half 2016), and the rest of the world 4% (5% in 1st half 2016). EBITDA and recurring operating income At €753 million, EBITDA reached an all-time high for a semester. +17.1% up on 1st half 2016, it grew significantly in all three business divisions. This excellent performance is supported by growth in Specialty Adhesives with the integration of Den Braven, the benefits from innovation and new projects in Advanced Materials, the return of Fluorogases to high level of results, continuing very favorable market conditions in the MMA/PMMA chain, and a gradual improvement in the acrylic cycle. At 17.3%, EBITDA margin grew compared to 1st half 2016 (16.7%) despite higher raw material prices. In line with the very strong EBITDA increase, recurring operating income rose to €530 million from €420 million in 1st half 2016. It includes €223 million depreciation and amortization, stable compared to last year. REBIT margin, corresponding to recurring operating income over sales, grew at 12.2% from 10.9% in 1st half 2016. Operating income Operating income stood at €500 million in 1st half 2017 against €419 million in 1st half 2016. It includes -€30 million other income and expenses. These items essentially correspond to (i) -€23 million depreciation Change + 13.1 % + 17.1 % + 26.2 % + 19.3 % + 2.0 % + 17.5 % + 20.9 % + 21.2 % + 32.9 % 4 and amortization related to revaluations of tangible and intangible fixed assets carried out as part of the Bostik and Den Braven purchase price allocations and (ii) -€5 million impact of the step-up at market price of Den Braven inventories. Over the 1st half of 2016, other income and expenses, which amounted to -€1 million, corresponded mostly to depreciation and amortization related to the revaluation of tangible and intangible fixed assets carried out as part of the Bostik purchase price allocation, and the financial consequences of changes to some pension schemes within the Group. Equity in income of affiliates Equity in income of affiliates mostly reflects the contribution of the company CJ Bio Malaysia Sdn. Bhd. in which the Group has a 14% stake. Financial result Financial result stood at -€51 million against -€50 million in 1st half 2016. Following a €900 million bond issue with a yearly 1.5% coupon in 2nd quarter and before the repayment in the 4th quarter 2017 of a €500 million bond with a yearly 4% coupon, cost of debt temporarily increased compared to last year. This change in the cost of debt was offset by favorable currency effects on debt of certain foreign subsidiaries denominated in currencies other than the one of their accounts and by the variation due to higher discount rates of actuarial gains and losses on provisions for long service awards. Income taxes Income taxes amounted to -€148 million against -€126 million in 1st half 2016. It includes a €5 million tax paid on 2016 dividend as well as a €7 million reversal of provisions for deferred tax liabilities accounted for as part of the allocation of the Bostik and Den Braven purchase prices. Excluding these two items, tax rate amounted to 28.3% of the recurring operating income, reflecting the geographic split of the results. Net income, Group share and adjusted net income Net income Group share rose significantly to €297 million against €245 million in 1sr half 2016. Excluding the impact after tax of non-recurring items, adjusted net income stood at €319 million against €240 million in 1st half 2016, i.e. €4.22 per share (€3.21 per share in 1st half 2016). 5 2.2. Analysis of results by division HIGH PERFORMANCE MATERIALS (In millions of euros) 1st half 2017 1st half 2016 Sales 1,966 1,747 EBITDA 340 314 EBITDA margin (%) 17.3 % 18.0 % Recurring operating income (REBIT) 262 237 REBIT margin 13.3 % 13.6 % Sales in High Performance Materials stood at €1,966 million, +12.5 % up on 1st half 2016. The +7.5% scope effect mainly reflects the integration of Den Braven, as well as the divestment of the activated carbon and filter aid business. At constant exchange rate and business scope, sales grew by +5.0% with volumes up +3.5%, in particular in Asia in Technical Polymers, where demand in the areas of lightweighting and design of materials, new energies and automotive is strong. Demand progressed in specialty molecular sieves for petrochemical applications with the ramp-up of the new Honfleur unit (France). The price effect was positive at +1.5%, reflecting the Group’s actions to adjust its sales prices to higher raw material costs. EBITDA grew to €340 million, +8.3% up on 1st half 2016 (€314 million in 1st half 2016), and EBITDA margin stood at 17.3% (18.0% in 1st half 2016), resisting well in a context of higher raw material costs and despite the impact of the large maintenance turnaround in 2nd quarter 2017 in specialty polyamides in Marseille (France). This performance was supported by good volume growth, in particular in Advanced Materials, which comprise Technical Polymers and Performance Additives, and by the growth of Specialty Adhesives which benefited notably from the integration of Den Braven. In Specialty Adhesives, which now account for over half of the division’s sales, EBITDA margin over the 1st half of the year resisted well at 13.3% (13.8% in 1st half 2016). In line with the very strong EBITDA progression, recurring operating income stood at €262 million, and included €78 million depreciation and amortization, overall stable compared to last year. REBIT margin amounted to 13.3% in 1st half, close to last year (13.6% in 1st half 2016). INDUSTRIAL SPECIALTIES (In millions of euros) 1st half 2017 1st half 2016 Sales 1,345 1,195 EBITDA 316 263 EBITDA margin (%) 23.5 % 22.0 % Recurring operating income (REBIT) 227 177 REBIT margin 16.9 % 14.8 % Sales in Industrial Specialties reached €1,345 million, +12.6% up on 1st half 2016. At constant exchange rate and business scope, sales grew by +11.1%, driven by a +4.2% increase in volumes. The +6.9% price effect mostly reflects the ongoing improvement in the prices of certain fluorogases in the three main geographic regions as well as market conditions in the MMA/PMMA chain. The currency effect was positive at +1.5%. At €316 million, the division’s EBITDA was up by +20.2% compared to the 1st half 2016 (€263 million), while EBITDA margin rose to 23.5 %, strongly up on last year (22.0% in 1st half 2016). These results reflect the return of fluorogases to high levels of results, the ongoing very good market conditions in MMA/PMMA, that could however start to normalize by year-end, and the solid performance of Thiochemicals. In Fluorogases, the Group should by year-end achieve the target it had set itself for end 2018 to improve this activity’s EBITDA by €100 million compared to 2014. Recurring operating income stood at €227 million and included €89 million depreciation and amortization, slightly up compared to last year (€86 million). REBIT margin reached 16.9%, strongly up on last year (14.8% in first half 2016). Change + 12.5 % + 8.3 % + 10.5 % Change + 12.6 % + 20.2 % + 28.2 % 6 COATING SOLUTIONS (In millions of euros) 1st half 2017 1st half 2016 Sales 1,024 889 EBITDA 138 113 EBITDA margin (%) 13.5 % 12.7 % Recurring operating income (REBIT) 83 54 REBIT margin 8.1 % 6.1 % At €1,024 million, sales in Coating Solutions rose by +15.2% compared to 1st half 2016, supported by a +13.9% price effect reflecting some improvement in the acrylic cycle and the actions to raise sales prices in the entire chain. Volumes were up by +1.1%, and include in the 2nd quarter 2017 the impact of the large maintenance turnaround at Clear Lake in the United States in acrylic monomers and of inventory adjustments at certain customers in paints and coatings following the very strong start to the year in a context of rising propylene prices. The divestment of the oxo-alcohol business resulted in a -1.1% scope effect. The currency effect was positive at +1.2%. At €138 million, EBITDA was +22.1% up over last year (€113 million in 1st half 2016), and EBITDA margin stood at 13.5% (12.7% in 1st half 2016). In line with the Group’s assumptions for 2017, unit margins in acrylic monomers gradually improved compared to the low points of 1st half 2016. This improvement largely offset the impact of the Clear Lake large maintenance turnaround and the impact in acrylic downstream activities of higher raw material costs, including acrylic acid, which affected their performance in particular during the 2nd quarter. This latter impact should diminish significantly over the rest of the year given the actions made to pass through the higher cost of raw materials. Recurring operating income stood at €83 million and included €55 million depreciation and amortization down on last year (€59 million). REBIT margin reached 8.1% over the 1st half 2017, up compared to the 1st half 2016 (6.1%). Change + 15.2 % + 22.1 % + 53.7 % 7 2.3. Group’s cash flow analysis (In millions of euros) 1st half 2017 1st half 2016 Cash flow from operating activities 315 259 Cash flow from investing activities (203) (222) Net cash flow 112 37 Net cash flow from portfolio management Free cash flow * (2) 114 (5) 42 Non-recurring items including non-recurring capital expenditure Recurring cash flow ** (13) 127 (19) 61 Cash flow from financing activities 720 (104) Variation in cash and cash equivalents 832 (67) Cash flow from operations and investments excluding the impact of portfolio management ** Net cash flow excluding the impact of portfolio management and non-recurring items Cash flow from operating activities In 1st half 2017, the Group generated +€315 million operating cash flow, up +€56 million on that of 1st half 2016 (+€259 million). This strong increase reflects the +€110 million growth in EBITDA compared to the 1st half of 2016, partially offset by an increase in working capital excluding non-recurring items (2 ) (-€237 million working capital outflow in 1st half 2017 against -€189 million in 1st half 2016) due to the usual seasonality of the activity, a significant increase in sales and higher prices of some raw materials since end 2016. Cash flow from operating activities also includes -€145 million current income taxes (-€129 million in 1st half 2016) and -€46 million cash items in the financial result (-€42 million in 1st half 2016). Finally, it includes non- recurring items mostly corresponding to restructuring costs totaling -€15 million (-€21 million in 1st half 2016) and portfolio management operations amounting to -€3 million (-€1 million in 1st half 2016). Cash flow from investing activities Cash flow from investing activities amounted to -€203 million in 1st half 2017 against -€222 million in 1st half 2016. It includes €137 million (3) capital expenditure in tangible and intangible assets against €148 million in 1st half 2016. Over the full year, the Group’s capital expenditure should be close to €450 million. It also includes a -€56 million variation in fixed asset payables (-€47 million in 1st half 2016) and included, in 1st half 2016, a -€17 million flow corresponding to the loans granted to employees as part of the share capital increase reserved for employees finalized in April 2016. Cash flow from portfolio management was very limited over the semester (+€1 million), the impact of the acquisition of CMP business being almost fully compensated by the impact of the divestment of the oxo- alcohol business. Recurring cash flow and free cash flow Excluding non-recurring items and portfolio management operations, recurring cash flow stood at +€127 million in 1st half 2017 against +€61 million in 1st half 2016. Free cash flow, which corresponds to the net cash flow excluding the impact of portfolio management, stood at +€114 million in 1st half 2017 against +€42 million in 1st half 2016. Group’s net cash flow After taking account of the impact of portfolio management, the Group’s net cash flow stood at +€112 million in 1st half 2017 compared to +€37 million in 1st half 2016. Cash flow from financing activities Cash flow from financing activities reached +€720 million in 1st half 2017, against -€104 million in 1st half 2016. It primarily includes a bond issue for a net amount totaling €891 million and the payment of a €2.05 dividend per share in respect of the 2016 financial year, totaling €155 million. (2) Excluding +€8 million non-recurring items mostly linked to portfolio management operations. ( 3 ) Excluding investments relating to portfolio management operations. In 2016, excluding €20 million corresponding to asset reallocation without impact on net debt. 8 In 1st half 2016, the -€104 million cash flow from financing activities included mainly the dividend payment and a share capital increase reserved for employees. 2.4. Group’s balance sheet analysis (In millions of euros) 30/06/2017 31/12/2016 Non-current assets (1) 5,502 5,724 Working capital 1,366 1,105 Capital employed 6,868 6,829 Deferred tax assets 163 171 Provisions for pensions and employee benefits 506 520 Other provisions 397 419 Total provisions 903 939 Long-term assets covering some provisions 69 76 Total provisions net of non-current assets 834 863 Deferred tax liabilities 321 285 Net debt 1,471 1,482 Shareholders’ equity 4,293 4,249 (1) Excluding deferred taxes. Between 31 December 2016 and 30 June 2017, non-current assets decreased by €222 million. This variation was primarily due to: €137 million tangible and intangible capital expenditure (4); €246 million net depreciation and amortization including €23 million depreciation and amortization resulting from the revaluation at fair value of tangible and intangible fixed assets as part of Bostik and Den Braven purchase price allocations; a €168 million negative currency effect mainly related to the strengthening of the euro versus the US dollar at the close of the period; and a €45 million net amount resulting from the finalization of Den Braven purchase price allocation, the integration of CMP’s assets and the disposal of the assets of the oxo-alcohol business. At 30 June 2017, working capital was up by €261 million compared to 31 December 2016 including a -€55 million currency effect due to the weakening of the US dollar versus the euro at the close of the period. This increase mainly reflects the usual seasonality of working capital and a stronger business activity than last year. At 30 June 2017, the working capital to annualized sales ratio (5) stood at 15.5%, significantly down compared to 30 June 2016 (17.2%). Consequently, between 31 December 2016 and 30 June 2017, the Group’s capital employed increased by €39 million to reach €6,868 million by 30 June 2017. At 30 June 2017, gross provisions amounted to €903 million. Some of these provisions, accounting for a total of €69 million at this date, are covered by a guarantee facility granted by Total and described in note 16.2 to the notes to the condensed interim consolidated financial statements at 30 June 2017 and therefore by long- term assets recognized on the balance sheet. These mainly consist of provisions related to former industrial sites in the United States. Accordingly, at 30 June 2017, the provisions net of these non-current assets amounted to €834 million. The breakdown of net provisions by type was as follows: €352 million pension liabilities (€366 million at 31 December 2016), €154 million other employee benefit obligations, stable compared to 31 December 2016, €130 million environmental contingencies (€131 million at 31 December 2016), €41 million restructuring provisions (€47 million at 31 December 2015), and €157 million other provisions (€165 million at 31 December 2016). (4) Excluding investments relating to portfolio management operations. (5) Computed as working capital at 30 June / (2nd quarter sales * 4). At 30 June 2016, the working capital included fixed asset payable relating to the transfer of an acrylic acid production line to the joint- venture Taixing Sunke Chemicals. The ratio computation at 30 June 2016 excludes this item. Change 3.9 % +23.6 % +0,6 % 4.7 % 2.7 % 5.3 % 3.8 % 9.2 % 3.4 % +12.6 % 0.7 % +1.0 % 9 Between 31 December 2016 and 30 June 2017, net provisions for pension liabilities decreased by €14 million, the negative impact of changes in discount rates being offset by the revaluation of financial assets and by a positive currency impact resulting from the strengthening of the euro versus the US dollar at the close of the period. The €15 million decrease in other net provisions mainly came from a -€16 million currency effect mainly resulting from the strengthening of the euro versus the US dollar at the close of the period, the reversal of provisions being offset by the increase in provisions booked during the same semester. Net debt amounted to €1,471 million at 30 June 2017 (€1,482 million at 31 December 2016), i.e. 34% of shareholders’ equity. It includes the payment of the dividend for a total amount of €155 million. The variation in net debt is explained by cash flows as detailed in paragraph 2.3 of this report, and by a positive currency effect on the Group’s debt swapped in US dollars. Shareholders’ equity amounted to €4,293 million against €4,249 million at end 2016. The €44 million increase primarily corresponds to (i) €301 million net income for the period, (ii) the payment of a dividend of €2.05 per share totaling €155 million, and (iii) €132 million net negative currency translation adjustments. Over the 1st half 2017, variation in actuarial gains and losses on provisions for pensions booked in equity was not material. 3. TRANSACTION WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or companies which are accounted for under the equity method. The values involved are not significant. 4. HIGHLIGHTS SINCE 30 JUNE 2017 In July 2017, Arkema announced several significant growth projects in two of its main future growth pillars: Advanced Materials and Thiochemicals. In Advanced Materials, the Group announced an investment plan of some €300 million in Asia over five years in the bio-based polyamide 11 chain to support the strong growth of its customers in particular in automotive, 3D printing, as well as in consumer goods like sports or electronics. This new plant, which will produce both amino 11 monomer and its polymer Rilsan® PA 11, should come on stream in late 2021. It will enable Arkema to increase by 50% its Rilsan® PA 11 global production capacity. This investment also includes a 50% increase in global production capacities for Pebax®. The Group also announced, in Advanced Materials, a project to expand by over 30% its production capacity of UV photocure resins at its Nansha site facility in China. This new production line of Sartomer, the world leader in specialty photocure resins, should come on stream early 2019. It will in particular help meet strong customer demand in Asia in the electronics, 3D-printing and inkjet printing cutting-edge markets. Finally, in Thiochemicals, Arkema announced a project to double its methyl mercaptan production capacity at its Kerteh site in Malaysia to support the strong growth of the animal feed, petrochemical and refining markets in Asia and to strengthen its world leading position in high value added sulfur derivatives. This project should come on stream in 2020. 5. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2016 Reference Document filed with the Autorité des marchés financiers (“AMF”) on 30 March 2017 under number D.17-0259. This document is available on Arkema’s website under the heading “Investor Relations” (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in the notes to the half-year consolidated financial statements. 6. OUTLOOK In the second half of 2017, the global macro-economic environment should remain volatile with contrasted dynamics by end-market and by region, higher raw material costs than last year, and the euro strengthening versus the US dollar. 10 In this context, Arkema will continue to benefit from growth in adhesives and the integration of Den Braven, innovation in Advanced Materials and downstream acrylics, as well as better prices in fluorogases. The Group will continue to ensure that the higher cost of certain raw materials is reflected in its selling prices. Finally, it will continue implementing its operational excellence initiatives to offset part of fixed cost inflation. The performance of the first half of the year leads the Group to upgrade its initial EBITDA objective for 2017. The Group now anticipates to exceed €1.3 billion EBITDA and achieve between €1,310 million and €1,350 million EBITDA for the full year. At a Capital Markets Day in July 2017, the Group recalled its 2020 ambition and announced ambitious financial objectives for 2023, with a REBIT margin between 11.5% and 12.5%, significantly up on 2016, and an EBITDA to free cash conversion rate maintained at 35%. These objectives will be achieved over time while keeping a net debt over EBITDA ratio below 2, a return on capital employed of at least 10%, and a solid investment grade rating by financial rating agencies. This ambition will be driven by accelerating the development of specialty businesses, which should represent more than 80% of the Group’s sales by 2023. In this context, Arkema aims to more than double the sales of its Specialty Adhesives in 2023 compared to 2016, which should then represent more than one third of its total sales, while also aiming to achieve a 12.5% to 13% REBIT margin in this activity by then. In Advanced Materials, which should represent more than 25% of its total sales in 2023, the Group aims to achieve a 14% to 15% REBIT margin. The Group indicates that all its objectives are defined in normalized market conditions and under current IFRS rules, and notes that the achievement of its objectives is based on assumptions deemed reasonable by the Group, as of the date of this document and within this time frame (in particular regarding any future development of global demand, conditions relating to raw material and energy costs, balance between supply and demand for products marketed by the Group and their price levels, and currency exchange rates). However, it takes no account of the occurrence, as the case may be, of certain risks described in greater detail in the 2016 Reference Document, in particular in paragraph 1.7.2, or any unknown factors related to the economic, financial, competitive or regulatory environment in which the Group operates, liable to affect the achievement of its objectives. 7. GLOSSARY The main performance indicators used by the Group are defined in note B.17 of the notes to the consolidated financial statements at 31 December 2016 in section 4.3.3 of 2016 Reference document. As part of the analysis of its results or to define its objectives, the Group also uses the following indicators: • • REBIT margin: corresponds to the recurring operating income (REBIT) as a percentage of sales; Free cash flow: corresponds to cash flow from operating activities and investing activities excluding the impact of portfolio management; EBITDA to free cash conversion: corresponds to the ratio of EBITDA on the free cash flow excluding exceptional capital expenditure. Free cash flow will be restated to offset the impact of the raw material environment on changes in working capital; Return on capital employed: corresponds to the ratio: (REBIT – current income taxes) / (net debt + shareholders’ equity) under current IFRS rules. In analyzing variations in its results, particularly variations in sales, the Group analyzes the following effects (such analyses are non-audited): effect of changes in scope of business: effects of changes in scope of business arise on acquisition or disposal of an entire business or first-time consolidation or deconsolidation of an entity. An increase or reduction in capacity is not analyzed as creating a change in the scope of business; effect of foreign currency movements: the effect of foreign currency movements is the mechanical impact of consolidation of accounts denominated in currencies other than the euro at different exchange rates from one period to another. The effect of foreign currency movements is calculated by applying the foreign exchange rates of the previous period to the figures of the current period; effect of changes in prices: the impact of changes in average sales prices is estimated by comparing the weighted average net unit sales price of a range of related products in the current period with their weighted average net unit sales price in the prior period, multiplied in both cases by the volumes sold in the current period; effect of changes in volumes: the impact of changes in volumes is estimated by comparing the quantities delivered in the current period with the quantities delivered in the prior period, multiplied in both cases by the weighted average net unit sales price in the prior period. 11 Condensed consolidated interim financial statements at 30 June 2017 II - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2017 CONSOLIDATED INCOME STATEMENT ............................................................................................................................................. 13 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME........................................................................................................ 14 CONSOLIDATED BALANCE SHEET .................................................................................................................................................... 15 CONSOLIDATED CASH FLOW STATEMENT ...................................................................................................................................... 16 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY .................................................................................. 17 A. HIGHLIGHTS ..................................................................................................................................................................................... 18 B. ACCOUNTING POLICIES ................................................................................................................................................................. 18 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ....................................................................................................... 21 1. Information by business segment ...................................................................................................................................... 21 2. Information by geographical area ...................................................................................................................................... 22 3. Other income and expenses ............................................................................................................................................... 23 4. Adjusted net income ........................................................................................................................................................... 23 5. Income taxes ........................................................................................................................................................................ 24 6. Business combination ........................................................................................................................................................ 24 7. Earnings per share .............................................................................................................................................................. 25 8. Intangible assets ................................................................................................................................................................. 25 9. Property, plant and equipment ........................................................................................................................................... 26 10. Shareholders’ equity ........................................................................................................................................................... 27 11. Provisions for pensions and other employee benefits ..................................................................................................... 28 12. Other provisions and other non-current liabilities ............................................................................................................ 29 13. Liabilities and contingent liabilities ................................................................................................................................... 30 14. Debt ...................................................................................................................................................................................... 30 15. Share-based payments ....................................................................................................................................................... 31 16. Off-balance sheet commitments ......................................................................................................................................... 32 17. Subsequent events .............................................................................................................................................................. 34 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2017 ............................................................................................................................ 35 12 Condensed consolidated interim financial statements at 30 June 2017 CONSOLIDATED INCOME STATEMENT (In millions of euros) Sales Notes (C1&C2) 1st half 2017 4,350 1st half 2016 3,845 Operating expenses (3,328) (2,965) Research and development expenses (121) (112) Selling and administrative expenses (371) (348) Recurring operating income * (C1) 530 420 Other income and expenses * (C3) (30) (1) Operating income * (C1) 500 419 Equity in income of affiliates 0 6 Financial result (51) (50) Income taxes (C5) (148) (126) Net income 301 249 Of which: non-controlling interests 4 4 Net income - Group share (C4) 297 245 Earnings per share (amount in euros) (C7) 3.92 3.28 Diluted earnings per share (amount in euros) (C7) 3.91 3.27 Depreciation and amortization (C1) (223) (223) EBITDA * (C1) 753 643 Adjusted net income * (C4) 319 240 See note B17 to the consolidated financial statements at 31 December 2016 – Accounting policies / Main accounting and financial indicators. 13 Condensed consolidated interim financial statements at 30 June 2017 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1st half 2017 1st half 2016 (In millions of euros) Net income 301 249 Hedging adjustments 24 11 Other items (6) Deferred taxes on hedging adjustments and other items (1) Change in translation adjustments (135) (42) Other recyclable comprehensive income (111) (38) Actuarial gains and losses 5 (16) Deferred taxes on actuarial gains and losses 2 Other non-recyclable comprehensive income 5 (14) Total income and expenses recognized directly through equity (106) (52) Comprehensive income 195 197 Of which: non-controlling interests 1 Comprehensive income – Group share 194 197 14 Condensed consolidated interim financial statements at 30 June 2017 CONSOLIDATED BALANCE SHEET (In millions of euros) ASSETS Notes 30 June 2017 31 December 2016 Intangible assets, net (C8) 2,742 2,777 Property, plant and equipment, net (C9) 2,461 2,652 Equity affiliates: investments and loans 33 35 Other investments 33 33 Deferred tax assets 163 171 Other non-current assets 233 227 TOTAL NON-CURRENT ASSETS 5,665 5,895 Inventories 1,144 1,111 Accounts receivable 1,319 1,150 Other receivables and prepaid expenses 178 197 Income taxes recoverable 50 64 Other current financial assets 12 10 Cash and cash equivalents 1,499 623 TOTAL CURRENT ASSETS 4,202 3,155 TOTAL ASSETS 9,867 9,050 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital 758 757 Paid-in surplus and retained earnings 3,328 3,150 Treasury shares (7) (4) Translation adjustments 169 301 SHAREHOLDERS' EQUITY - GROUP SHARE (C10) 4,248 4,204 Non-controlling interests 45 45 TOTAL SHAREHOLDERS' EQUITY 4,293 4,249 Deferred tax liabilities 321 285 Provisions for pensions and other employee benefits (C11) 506 520 Other provisions and non-current liabilities (C12) 440 464 Non-current debt (C14) 2,268 1,377 TOTAL NON-CURRENT LIABILITIES 3,535 2,646 Accounts payable 898 932 Other creditors and accrued liabilities 359 402 Income taxes payable 74 62 Other current financial liabilities 6 31 Current debt (C14) 702 728 TOTAL CURRENT LIABILITIES 2,039 2,155 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 9,867 9,050 15 Condensed consolidated interim financial statements at 30 June 2017 CONSOLIDATED CASH FLOW STATEMENT 1st half 2017 1st half 2016 (In millions of euros) Net income 301 249 Depreciation, amortization and impairment of assets 246 243 Provisions, valuation allowances and deferred taxes (1) (51) (Gains)/losses on sales of assets (2) (2) Undistributed affiliate equity earnings 0 (4) Change in working capital (229) (186) Other changes 0 10 CASH FLOW FROM OPERATING ACTIVITIES 315 259 Intangible assets and property, plant, and equipment additions (152) (168) Change in fixed asset payables (56) (50) Acquisitions of operations, net of cash acquired 1 Increase in long-term loans Total expenditures (23) (230) (39) (257) Proceeds from sale of intangible assets and property, plant, and equipment 5 7 Change in fixed asset receivables 0 Proceeds from sale of operations, net of cash sold 11 20 Proceeds from sale of unconsolidated investments 0 Repayment of long-term loans Total divestitures 11 27 8 35 CASH FLOW FROM INVESTING ACTIVITIES (203) (222) Issuance (repayment) of shares and paid-in surplus (C10) 2 46 Purchase of treasury shares (C10) (4) (6) Dividends paid to parent company shareholders (C10) (155) (143) Dividends paid to non-controlling interests (1) (1) Increase / decrease in debt CASH FLOW FROM FINANCING ACTIVITIES (C14) 878 720 0 (104) Net increase/(decrease) in cash and cash equivalents 832 (67) Effect of exchange rates and changes in scope 44 33 Cash and cash equivalents at beginning of period 623 711 CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,499 677 16 (In millions of euros) At 1 January 2017 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees Share-based payments Other Transactions with shareholders Net income Total income and expenses recognized directly through equity Comprehensive income At 30 June 2017 (In millions of euros) At 1 January 2016 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees Share-based payments Other Transactions with shareholders Net income Total income and expenses recognized directly through equity Comprehensive income At 30 June 2016 Condensed consolidated interim financial statements at 30 June 2017 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity 757 1,211 689 1,250 301 (4) 4,204 45 4,249 (155) (155) (1) (156) 1 1 2 2 (4) (4) (4) (1) 1 - 7 7 7 1 1 (149) - (3) (150) (1) (151) 297 297 4 301 29 (132) (103) (3) (106) 326 (132) 194 1 195 758 1 212 689 1,427 169 (7) 4,248 45 4,293 Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity 745 1,172 689 1,003 294 (3) 3,900 49 3,949 11 35 (143) - (143) 46 (1) - (144) 46 (6) (6) (6) (4) 4 7 7 7 11 35 (140) (2) (96) (1) (97) 245 245 4 249 (8) (40) (48) (4) (52) 237 (40) 197 197 756 1,207 689 1,100 254 (5) 4,001 48 4,049 17 Condensed consolidated interim financial statements at 30 June 2017 A. HIGHLIGHTS A.1 Portfolio management In March 2017 the Group announced that it had completed the sale to INEOS of its 50% stake in Oxochimie, their oxo alcohols manufacturing joint venture, and the associated business assets. A.2 Other highlights On 11 April 2017 Arkema completed a €700 million bo nd issue with a ten-year maturity at a coupon of 1.50%. This operation enabled the Group to refinance and extend the average maturity of its financial resources, taking advantage of favourable market conditions. A €200 million tap issue was carried out on 23 June 2017. B. ACCOUNTING POLICIES Arkema is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. Basis for preparation The Group’s condensed consolidated interim financial statements at 30 June 2017 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved by the Board of Directors of Arkema on 1 August 2017. The condensed consolidated interim financial statements at 30 June 2017 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRSs (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and IFRSs newly adopted by the European Union at 30 June 2017. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2016. The accounting framework and standards adopted by the European Union can be consulted on the following website: https://ec.europa.eu/info/law/international-accounting-standards-regulation-ec-no-1606-2002. 18 Condensed consolidated interim financial statements at 30 June 2017 Changes in IFRSs and interpretations The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2017 are identical to those used in the consolidated financial statements at 31 December 2016, except for IFRS standards, amendments and interpretations that are obligatorily applicable for accounting periods commencing on or after 1 January 2017 (and which had not been applied early by the Group), namely: Amendments to IAS 12 Amendments to IAS 7 Recognition of deferred tax assets for unrealised losses Disclosure initiative Annual improvements to IFRS standards 2014–2016 cycle Not adopted by the European Union at 30 June 2017 Not adopted by the European Union at 30 June 2017 Not adopted by the European Union at 30 June 2017 Application of these amendments has no impact on the financial statements at 30 June 2017. The standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which were not yet in force for years beginning on or after 1 January 2017 and have not been applied early by the Group, are: Amendments to IFRS 9 and IFRS 7 Mandatory effective date and transition disclosures Not adopted by the European Union at 30 June 2017 Amendments to IFRS 9 Amendments to IFRS 10 and IAS 28 Amendments to IFRS 2 IFRS 9 Hedge accounting and amendments to IFRS 9, IFRS 7 and IAS 39 Sale or contribution of assets between an investor and its associate/joint venture Classification and measurement of share-based payment transactions Financial instruments Not adopted by the European Union at 30 June 2017 Not adopted by the European Union at 30 June 2017 Not adopted by the European Union at 30 June 2017 Adopted by the European Union on 29 November 2016 IFRS 15 Revenue from contracts with customers Adopted by the European Union on 29 October 2016 Clarifications to IFRS 15 IFRS 16 IFRIC 22 IFRIC 23 Revenue from contracts with customers Leases Foreign currency transactions and advance consideration Uncertainty over Income tax treatments (IAS12) Not adopted by the European Union at 30 June 2017 Not adopted by the European Union at 30 June 2017 Not adopted by the European Union at 30 June 2017 Not adopted by the European Union at 30 June 2017 Use of assumptions Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The disclosures provided concerning contingent assets and liabilities and off-balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. Impact of seasonality The Group’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by the Group is generally lower in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and the rest of Europe; 19 Condensed consolidated interim financial statements at 30 June 2017 in some of the Group’s businesses, particularly those serving the paints and coatings as well as the refrigeration and air-conditioning markets, sales are generally higher in the first half of the year than in the second half. By contrast, in Specialty Adhesives (Bostik), both halves of the year are more balanced; the major multi-annual maintenance turnarounds at the Group’s production plants also have an impact on seasonality, and tend in general to be carried out in the second half of the year. These seasonal effects in the past are not necessarily representative of future trends, but can have a material effect on the variations in results and working capital from one quarter of the year to another. 20 Condensed consolidated interim financial statements at 30 June 2017 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Information by business segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. The Arkema Group has three business segments: High Performance Materials, Industrial Specialties and Coating Solutions. Three members of the Executive Committee supervise these segments; they report directly to the Chairman and CEO, the Group’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their sector’s operating activity, financial results, forecasts and plans. The content of the business segments is as follows: High Performance Materials includes the following Business Lines: o Specialty Adhesives (Bostik), o Technical Polymers, comprising specialty polyamides and PVDF, o Performance Additives, comprising the filtration and adsorption (CECA) activities, organic peroxides and photocure resins (Sartomer). High Performance Materials provide innovative solutions with high value added, used in varied sectors such as transport, oil extraction, renewable energies (photovoltaics, lithium-ion batteries), consumer goods (beauty products, sports equipment, packaging, etc), electronics, construction, coatings and water treatment. Industrial Specialties groups the following Business Lines: o Thiochemicals, o Fluorochemicals, o PMMA, o Hydrogen Peroxides. These integrated industrial niche markets on which the Arkema Group is among the world leaders concern products used in several industrial sectors such as production of cold (refrigeration and air conditioning), petrochemicals, refining, paper pulp, animal nutrition, electronics and the automotive industry. Coating Solutions comprises the following Business Lines: o Acrylics, o Coatings Resins and Additives, comprising the coatings resins and Coatex rheological additives activities. This segment proposes solutions for decorative paints, industrial coatings, adhesives and high-growth acrylic applications (superabsorbers for disposable nappies, water treatment, oil and gas extraction). Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales between segments take place at market prices. 21 Condensed consolidated interim financial statements at 30 June 2017 1st half 2017 (In millions of euros) Non-Group sales High Performance Materials 1,966 Industrial Specialties 1,345 Coating Solutions 1,024 Corporate 15 Inter-segment sales 3 74 37 Total sales 1,969 1,419 1,061 15 EBITDA 340 316 138 (41) Depreciation and amortization (78) (89) (55) (1) Recurring operating income 262 227 83 (42) Other income and expenses (31) 2 0 (1) Operating income Equity in income of affiliates Intangible assets and property, plant, and equipment additions Of which: Recurring capital expenditure 231 1 72 57 229 (1) 48 48 83 27 27 (43) 5 5 1st half 2016 (In millions of euros) Non-Group sales High Performance Materials 1,747 Industrial Specialties 1,195 Coating Solutions 889 Corporate 14 Inter-segment sales 9 60 29 Total sales 1,756 1,255 918 14 EBITDA 314 263 113 (47) Depreciation and amortization (77) (86) (59) (1) Recurring operating income 237 177 54 (48) Other income and expenses (21) (2) 1 21 Operating income Equity in income of affiliates Intangible assets and property, plant, and equipment additions Of which: Recurring capital expenditure 216 1 66 66 175 5 72 52 55 25 25 (27) 5 5 2. Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2017 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Non-Group sales 352 1,289 1,437 1,089 183 1st half 2016 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Non-Group sales 335 1,101 1,304 918 187 (1) NAFTA: USA, Canada, Mexico 22 Total 4,350 753 (223) 530 (30) 500 0 152 137 Total 3,845 643 (223) 420 (1) 419 6 168 148 Total 4,350 Total 3,845 Condensed consolidated interim financial statements at 30 June 2017 3. Other income and expenses 1st half 2017 1st half 2016 (In millions of euros) Expenses Income Net Expenses Income Net Restructuring and environment (4) 1 (3) (3) (3) Goodwill impairment Asset impairment (other than goodwill) 0 1 1 Litigation and claims 0 0 Gains (losses) on sales and purchases of assets (7) 2 (5) (5) (5) Depreciation and amortization related to purchase price allocations following acquisition of businesses (23) (23) (19) (19) Other 0 0 26 26 Total other income and expenses (34) 4 (30) (27) 26 (1) In the first half of 2017, gains and losses on sales and purchases of assets principally comprise €(7) million related to the acquisition of Den Braven, including €(5) million resulting from r evaluation of inventories (see Note 6, Business combination). Depreciation and amortization related to revaluation of tangible and intangible assets amount to €19 million for the ac quisition of Bostik and €4 million for the acquisition of Den Braven. In the first half of 2016, depreciation and amortization related to revaluation of tangible and intangible assets for the purpose of allocation of the acquisition price of Bostik amounted to €19 million. Other income mainly included the financial consequences of the discontinuation of the Chairman and CEO’s complementary defined-benefit pension plan from 7 June 2016, and the final phase of pension plan outsourcing in the Netherlands. 4. Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Adjusted net income Notes 1st half 2017 319 1st half 2016 240 Other income and expenses (C3) (30) (1) Taxes on other income and expenses 8 6 Non-current taxation Net income - Group share 297 245 23 Condensed consolidated interim financial statements at 30 June 2017 5. Income taxes The income tax expense is broken down as follows: (In millions of euros) Current income taxes 1st half 2017 (145) 1st half 2016 (127) Deferred income taxes (3) 1 Total income taxes (148) (126) The income tax expense amounts to €148 million at 3 0 June 2017, including €7 million for the CVAE and €5 million relating to the additional income tax contribution due on distributed income (compared with €126 million at 30 June 2016, includi ng €7 million for the CVAE and €4 million relating to the additional income tax contribution due on distributed income). 6. Business combination On 1 December 2016 the Arkema Group finalized the acquisition of Den Braven for an enterprise value of €485 million and a final purchase price of €427 million. In compliance with IFRS 3 (revised), the Group used the acquisition method for the accounting treatment of this operation. The amount recorded in the financial statements at 30 June 2017 for the identifiable assets acquired and liabilities assumed at the acquisition date breaks down as follows: (In millions of euros) Fair value acquired from Den Braven Intangible assets 167 Property, plant and equipment 63 Deferred tax assets 2 Other non-current assets 5 TOTAL NON-CURRENT ASSETS 237 Inventories 33 Accounts receivable 52 Cash and cash equivalents 90 Other current assets 4 TOTAL CURRENT ASSETS 179 TOTAL ASSETS 416 Deferred tax liabilities 47 Provisions and other non-current liabilities 1 Non-current debt 58 TOTAL NON-CURRENT LIABILITIES 106 Accounts payable 40 Other current liabilities 101 TOTAL CURRENT LIABILITIES 141 FAIR VALUE OF NET ASSETS 169 GOODWILL 258 24 Condensed consolidated interim financial statements at 30 June 2017 Intangible assets stated at fair value mainly consist of the Den Braven® brand, technologies and customer relations, the two latter assets being amortized over 15 years. The revalued inventories were consumed during the first half of 2017. The expenses incurred for the entire operation have been recorded in Other income and expenses at the amount of €5 million of which €3 million were booked in 2016. The resulting goodwill of €258 million is final. It principally comprises the expected synergies and the step-up in business activity thanks to geographical, technological and commercial complementarities between Bostik and Den Braven. 7. Earnings per share 1st half 2017 1st half 2016 Weighted average number of ordinary shares 75,671,629 74,799,919 Dilutive effect of stock options 133,732 160,387 Dilutive effect of free share grants 67,418 59,553 Weighted average number of potential ordinary shares 75,872,779 75,019,859 Earnings per share is determined below: 1st half 2017 1st half 2016 Earnings per share (€) 3.92 3.28 Diluted earnings per share (€) 3.91 3.27 Adjusted earnings per share is determined below: 1st half 2017 1st half 2016 Adjusted earnings per share (€) 4.22 3.21 Diluted adjusted earnings per share (€) 4.20 3.20 8. Intangible assets 8.1 Goodwill (In millions of euros) Goodwill Gross book value 2,083 30 June 2017 Accumulated amortization and impairment (537) Net book value 1,546 31 December 2016 Net book value 1,703 Changes in the net book value of goodwill are as follows: Net book value (In millions of euros) 30 June 2017 At 1 January 1,703 Changes in scope (118) Translation adjustments (39) At 30 June 1,546 The decrease in goodwill in the first half of 2017 essentially results from allocation of the goodwill on acquisition of Den Braven to tangible and intangible assets (see note 6. Business combination). 25 Condensed consolidated interim financial statements at 30 June 2017 8.2 Other intangible assets Gross book value 30 June 2017 Accumulated amortization and impairment Net book value 31 December 2016 Net book value (In millions of euros) Patents and technologies 396 (149) 247 233 Trademarks 534 (4) 530 440 Software and IT licences 283 (174) 109 111 Capitalized REACH costs 47 (18) 29 29 Other capitalized research expenses 12 (3) 9 3 Capitalized contracts 297 (239) 58 63 Asset rights 69 (28) 41 43 Customer relations 95 (10) 85 52 Other intangible assets 31 (16) 15 12 Intangible assets in progress 91 (18) 73 88 Total 1,855 (659) 1,196 1,074 Changes in the net book value of intangible assets are as follows: Net book value (In millions of euros) 30 June 2017 At 1 January 1,074 Acquisitions 16 Amortization and impairment (40) Changes in scope 165 Translation adjustments (20) Reclassifications 1 At 30 June 1,196 9. Property, plant and equipment (In millions of euros) Land and buildings Gross book value 1,851 30 June 2017 Accumulated amortization and impairment (1,166) Net book value 685 31 December 2016 Net book value 729 Complex industrial facilities 3,502 (2,779) 723 774 Other property, plant and equipment 2,909 (2,122) 787 844 Construction in progress 276 (10) 266 305 Total 8,538 (6,077) 2,461 2,652 26 Condensed consolidated interim financial statements at 30 June 2017 Changes in the net book value of property, plant and equipment are as follows: Net book value (In millions of euros) 30 June 2017 At 1 January 2,652 Acquisitions 121 Amortization and impairment (206) Disposals (2) Changes in scope (1) Translation adjustments (101) Reclassifications (2) At 30 June 2,461 10. Shareholders’ equity At 30 June 2017, Arkema’s share capital amounts to €758 million, divided into 75,773,865 shares with a nominal value of 10 euros. Number of shares at 1 January 2016 74,472,101 Issuance of shares following the capital increase reserved for employees 998,072 Issuance of shares following the exercise of subscription options 110,952 Number of shares at 30 June 2016 75,581,125 Issuance of shares following the exercise of subscription options 136,822 Number of shares at 31 December 2016 75,717,947 Number of shares at 1 January 2017 75,717,947 Issuance of shares following the exercise of subscription options 55,918 Number of shares at 30 June 2017 75,773,865 Changes in share capital Following the exercise of 55,918 share subscription options, the Company carried out a capital increase in the total nominal amount of €1 million. Treasury shares The Company bought back 45,865 treasury shares during the first half of 2017. In May 2017, the Arkema Group definitively granted 20,246 free shares to its employee in application of plans 2014-1, 3 and 2016-3. Number of treasury shares at 1 January 2016 36,925 Repurchases of treasury shares 100,617 Grants of treasury shares (71,719) Number of treasury shares at 31 December 2016 65,823 Number of treasury shares at 1 January 2017 65,823 Repurchases of treasury shares 45,865 Grants of treasury shares (20,246) Number of treasury shares at 30 June 2017 91,442 27 Condensed consolidated interim financial statements at 30 June 2017 Dividends The combined shareholders’ general meeting of 23 May 2017 approved the distribution of a €2.05 dividen d per share in respect of the 2016 financial year, or a total amount of €155 mill ion. The dividend was paid out on 29 May 2017. 11. Provisions for pensions and other employee benefits (In millions of euros) Pension obligations 30 June 2017 352 31 December 2016 366 Healthcare and similar coverage 90 93 Post-employment benefits 442 459 Long service awards 55 56 Other long-term benefits 9 5 Other long-term benefits 64 61 Provisions for pensions and other employee benefits 506 520 The discount rates used by the Arkema Group are as follows: Pension obligations, healthcare and similar coverage Europe (excl. UK) UK USA At 30 June 2017 2.05% 2.60% 3.90% At 31 December 2016 1.70% 2.60% 4.25% The present value of benefit obligations at the end of 2016 has been adjusted at 30 June 2017 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2016 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2017. The effects of the change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. The change in net provisions for post-employment benefits over the first half-year is as follows: (In millions of euros) Pension obligations Healthcare and similar coverage Total post- employment benefits Net liability (asset) at 1 January 366 93 459 Provision recognized in liabilities 366 93 459 Amount recognized in assets Operating expense for the period Net interest expense 8 5 0 1 8 6 Net contributions and benefits paid by the employer (10) (1) (11) Liquidations Other * Actuarial gains and losses recognized in shareholders’ equity 0 (11) (6) (4) 1 0 (15) (5) Net liability (asset) at 30 June 352 90 442 Provision recognized in liabilities 352 90 442 Amount recognized in assets 0 0 Other items essentially consist of translation adjustments. 28 Condensed consolidated interim financial statements at 30 June 2017 12. Other provisions and other non-current liabilities 12.1. Other non-current liabilities Other non-current liabilities amount to €43 million at 30 June 2017 as against €45 million at 31 Decem ber 2016. 12.2. Other provisions (In millions of euros) Environmental contingencies Restructuring Other At 1 January 2017 194 47 178 Increases in provisions 4 0 20 Reversals from provisions on use (5) (6) (20) Reversals of unused provisions (3) Changes in scope 0 Translation adjustments (6) (0) (6) Other (0) At 30 June 2017 187 41 169 In addition, certain provisions are covered by non-current assets (receivables, deposits): (In millions of euros) Environmental contingencies Restructuring Other Total provisions at 30 June 2017 187 41 169 Portion of provisions covered by receivables or deposits 36 12 Deferred tax asset related to amounts covered by the Total indemnity 21 0 Provisions at 30 June 2017 net of non-current assets 130 41 157 For information: Provisions at 1 January 2017 net of non-current assets 131 47 165 12.2.1 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €83 million (€81 million at 31 Dece mber 2016), in the United States for €78 million (€88 million at 31 December 2016), of which €56 million in resp ect of former industrial sites covered 100% by the Total group indemnity (receivable recognized in “Other non-current assets” for an amount of €36 million and €21 million recognized in deferred tax assets) (see note C16.2 “Off-balance sheet commitments / Commitments received”). 12.2.2 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €28 million (€3 3 million at 31 December 2016), in Europe outside France for €7 million (€8 million at 31 December 2016) and in the United States for €5 million (€6 million at 31 December 2016). 12.2.3 Other provisions Other provisions amount to €169 million and mainly comprise: provisions for labour litigation for €52 million ( €53 million at 31 December 2016), provisions for commercial litigation and warranties for €53 million (€50 million at 31 December 2016) , provisions for tax litigation for €36 million (€36 million at 31 December 2016), provisions for other risks for €28 million (€39 mi llion at 31 December 2016). 29 Total 419 24 (31) (3) 0 (12) (0) 397 Total 397 48 21 328 343 Condensed consolidated interim financial statements at 30 June 2017 13. Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note C21 to the consolidated financial statements at 31 December 2016. There was no development in liabilities and contingent liabilities during the first half of 2017 with an actual or potential significant effect on the Group’s consolidated financial statements. 14. Debt 14.1 Analysis of net debt by category Group net debt amounts to €1,471 million at 30 June 2017, taking account of cash and cash equivalents of €1,499 million. (In millions of euros) 30 June 2017 31 December 2016 Bonds 2,219 1,328 Finance lease obligations 1 1 Bank loans 22 27 Other non-current debt 26 21 Non-current debt 2,268 1,377 Bonds 500 500 Finance lease obligations 0 Syndicated credit facility Negotiable European Commercial Paper Other bank loans 175 194 Other current debt 27 34 Current debt 702 728 Debt 2,970 2,105 Cash and cash equivalents 1,499 623 Net debt 1,471 1,482 Bonds At 30 June 2017, the fair values of the bonds issued by the Group are as follows: €500 million bond maturing in October 2017: €506 m illion, €480 million bond maturing in April 2020: €530 mil lion, €150 million bond (issued as Euro Medium Term Note s (EMTN)) maturing in December 2023: €169 million, €700 million bond (issued as Euro Medium Term Note s (EMTN)) maturing in January 2025: €720 million, €900 million bond (issued as Euro Medium Term Note s (EMTN)) maturing in April 2027: €899 million. 14.2 Analysis of debt by currency The Arkema Group’s debt is mainly denominated in euros. (In millions of euros) 30 June 2017 31 December 2016 Euros 2,768 1,871 US Dollars 8 12 Chinese Yuan 168 188 Other 26 34 Total 2,970 2,105 Part of the debt in euros is converted through swaps to the accounting currency of internally-financed subsidiaries, in line with the Group’s policy; one third of the Group’s Net debt is therefore in US dollars. 30 Condensed consolidated interim financial statements at 30 June 2017 14.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2017 31 December 2016 Less than 1 year 750 765 Between 1 and 2 years 56 42 Between 2 and 3 years 535 43 Between 3 and 4 years 36 522 Between 4 and 5 years 36 23 More than 5 years 1,870 922 Total 3,283 2,317 15. Share-based payments 15.1 Stock options The Board of Directors has decided not to introduce any further stock option plans. Movements in the stock option plans granted in previous years and still outstanding at 30 June 2017 are as follows: Plan Total number of options granted * Exercise price* Number of options exercised in 1st half 2017 Number of options cancelled in 1st half 2017 Total number of options exercised Total number of options outstanding Final year for exercising options 2010-1 2010-2 2011-1 2011-2 230,044 233,513 109,082 109,082 29.33 29.33 65.92 65.92 25,085 24,033 5,195 1,605 - - - 183,859 151,626 54,614 19,474 39,185 59,713 54,468 89,608 2018 2018 2019 2019 after adjustment following the capital increase with preferential subscription rights of November 2014 The amount of the IFRS 2 expense recognized in respect of stock options at 30 June 2017 was nil (also nil at 30 June 2016). 15.2 Free share grants Movements in the free share grant plans awarded up until 30 June 2017 are as follows: Plan Grant date Vesting period Conservation period Total number of free shares granted Number of shares subject to performance conditions Fair value (euros per share) Number of shares definitively granted in 1st half 2017 Number of shares cancelled in 1st half 2017 Total number of shares still to be granted at 30 June 2017 2013 6 Nov 2013 4 years 250,000 182,810 51.60 150 243,590 2014-1, 3 6 May 2014 3-4 years 0-3 years 17,118 53.63 3,579 40 13,144 2014-2 13 Nov 2014 4 years 275,000 203,535 33.41 250 271,875 2015-1 9 Nov 2015 4 years 285,525 285,525 42.31 650 282,835 2015-2 9 Nov 2015 4 years 59,595 42.31 80 58,575 2016-1, 2 10 May 2016 3-4 years 0-3 years 43,278 22.91-39.70 43,278 2016-3 7 Jun 2016 1-3 years 2 years 50,000 41.04-53.53 16,667 33,333 2016-4 9 Nov 2016 3 years 2 years 235,835(1) 226,040 47.31 600 235,235 2016-5 9 Nov 2016 4 years 122,080(2) 112,860 50.01 260 121,820 (1) May be raised to 258,439 in the event of outperformance (2) May be raised to 133,366 in the event of outperformance The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2017 is €7 million (€ 7 million at 30 June 2016). 31 Condensed consolidated interim financial statements at 30 June 2017 16. Off-balance sheet commitments 16.1 Commitments given 16.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2017 76 31 December 2016 73 Comfort letters Contractual guarantees 10 3 Customs and excise guarantees 14 14 Total 100 90 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 16.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, the Arkema Group has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over initial periods generally comprised between 1 and 10 years is a normal practice for companies in the Group’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, the Arkema Group’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige the Group to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The total amount of the Group’s financial commitments is €513 million at 30 June 2017, maturing as fol lows: (In millions of euros) 30 June 2017 31 December 2016 2017 173 190 2018 80 63 2019 72 54 2020 53 34 2021 until expiry of the contracts 135 68 Total 513 409 Lease commitments In the context of its business, the Arkema Group has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by the Group are mainly in respect of property rental (head offices, land) and transportation equipment (rail cars, containers). 32 Condensed consolidated interim financial statements at 30 June 2017 The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). Non-capitalized leases (In millions of euros) 30 June 2017 31 December 2016 2017 14 26 2018 22 23 2019 19 19 2020 16 16 2021 and beyond 43 45 Non-discounted value of future lease payments 114 129 16.1.3 Off-balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses When selling businesses, the Arkema Group has sometimes granted the purchaser warranties in respect of unrecorded liabilities. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by the Group amounts to €102 million at 30 June 2017 (€132 million at 31 December 2016). Th ese amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 16.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C22 to the consolidated financial statements at 31 December 2016 “Debt”. 16.2 Commitments received Commitments received from Total in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies extended certain indemnities, or assumed certain obligations, for the benefit of the Arkema Group. Some are still in application while others terminated during 2017. The warranties and commitments concerned are described below, and relate to (i) actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (ii) tax matters. 16.2.1 Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), Total S.A. companies have entered into indemnity and service agreements with Arkema or its subsidiaries. Pursuant to these agreements, the obligations and environmental responsibilities associated with these former industrial sites in France and at Rieme in Belgium were transferred to Total S.A. group companies. Agreement relating to certain Former Industrial Sites located in the United States In March 2006, Arkema Amériques SAS completed the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company for most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Site Services and Arkema Amériques SAS, dated 7 March 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use $270 million to capitalize a new subsidiary, Legacy Site Services LLC, that performs remediation services, and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of waste shipments from the sites other than currently operated 33 Condensed consolidated interim financial statements at 30 June 2017 sites. In exchange for this indemnification, Arkema Amériques SAS agreed to grant to Legacy Site Services LLC control over remediation activities and the defence of claims relating to contamination liabilities at these facilities and sites. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group, certain sites where no significant restoration work is currently underway or anticipated, and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non-existent based upon information available at the time when the indemnity was entered into. Arkema Amériques SAS has waived any claims against Legacy Site Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Site Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defence and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure and criminal liability. The indemnity described above is capped at $270 million. The amount received by Arkema under this indemnity amounts to $96 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnify the liabilities of the Group in excess of $270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. 16.2.2 Tax indemnity granted by Total S.A. The final litigation fully covered by the Total tax indemnity was settled during the first half of 2017, and this Total tax indemnity is now terminated. 17. Subsequent events 34 Condensed consolidated interim financial statements at 30 June 2017 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2017 (a) Companies sold in 2017 (b) Companies merged in 2017 (c) Companies liquidated in 2017 The percentage of control indicated below also corresponds to the Group’s ownership interest. Altuglas International Denmark A/S Denmark 100.00 FC Altuglas International Mexico Inc. United States 100.00 FC Altuglas International SAS France 100.00 FC American Acryl LP United States 50.00 JO American Acryl NA LLC United States 50.00 JO Arkema South Korea 100.00 FC Arkema France 100.00 FC Arkema Afrique SAS France 100.00 FC Arkema Amériques SAS France 100.00 FC Arkema Asie SAS France 100.00 FC Arkema BV Netherlands 100.00 FC Arkema Canada Inc. Canada 100.00 FC Arkema Changshu Chemicals Co. Ltd China 100.00 FC Arkema Changshu Fluorochemical Co. Ltd China 100.00 FC Arkema Chemicals India Private Ltd. India 100.00 FC Arkema Changshu Polyamides Co. Ltd China 100.00 FC Arkema China Investment Co. Ltd. China 100.00 FC Arkema Coating Resins Malaysia Sdn. Bhd. Malaysia 100.00 FC Arkema Coatings Resins UK United Kingdom 100.00 FC Arkema Co. Ltd Hong Kong 100.00 FC Arkema Daikin Advanced Fluorochemicals Co. Ltd China 60.00 JO Arkema Delaware Inc. United States 100.00 FC Arkema Europe France 100.00 FC Arkema France France 100.00 FC Arkema GmbH Germany 100.00 FC Arkema Hydrogen Peroxide Co. Ltd. Shanghai China 66.67 FC Arkema Inc. United States 100.00 FC Arkema Insurance Ltd Ireland 100.00 FC Arkema KK Japan 100.00 FC Arkema Kimya Sanayi ve Ticaret AS Turkey 100.00 FC Arkema Ltd. United Kingdom 100.00 FC Arkema Mexico SA de CV Mexico 100.00 FC Arkema Mexico Servicios SA de CV Mexico 100.00 FC Arkema PEKK Inc. United States 100.00 FC Arkema Peroxides India Private Limited India 100.00 FC Arkema Pte Ltd. Singapore 100.00 FC Arkema Pty Ltd. Australia 100.00 FC Arkema Quimica Ltda Brazil 100.00 FC Arkema Quimica SA Spain 100.00 FC 35 Arkema Shanghai Distribution Co. Ltd Arkema Spar NL Limited Partnership Arkema sp Z.o.o Arkema Srl Arkema Taixing Chemicals Arkema Thiochemicals Sdn Bhd Arkema Yoshitomi Ltd. Ato Findley Deutschland Gmbh Bostik AB (Sweden) Bostik AS Bostik Argentina Bostik AS (Denmark) Bostik AS (Norway) Bostik Australia Bostik Belux NV SA Bostik BV Bostik Canada Bostik Egypt For Production of Adhesives S.A.E Bostik Findley China Co Ltd. Bostik Findley Malaysia Sdn.-Bhd. Bostik Gmbh Bostik Holding Australia Ltd Bostik Holding Hong Kong Ltd. Bostik Holding SA Bostik Inc. Bostik India Private Ltd. Bostik Industries Ltd. Bostik Korea Ltd. Bostik Ltd. Bostik Mexicana SA de CV Bostik Nederland BV Bostik New Zealand Bostik-Nitta Co. Ltd. Bostik OOO Bostik OY Bostik Philippines Inc. Bostik Polska SP Z.O.O Bostik SA Bostik SA (Spain) Bostik SIA Bostik Shanghai Management Co. Ltd. Bostik (Thailand) Co. Ltd Bostik UAB Bostik Vietnam Company Ltd Ceca Belgium Ceca LC Condensed consolidated interim financial statements at 30 June 2017 China 100.00 FC (c) Canada 100.00 FC Poland 100.00 FC Italy 100.00 FC China 100.00 FC Malaysia 86.00 FC Japan 49.00 SI Germany 100.00 FC Sweden 100.00 FC Estonia 100.00 FC Argentina 100.00 FC Denmark 100.00 FC Norway 100.00 FC Australia 100.00 FC Belgium 100.00 FC Netherlands 100.00 FC Canada 100.00 FC Egypt 100.00 FC China 100.00 FC Malaysia 100.00 FC Germany 100.00 FC Australia 100.00 FC Hong Kong 100.00 FC France 100.00 FC United States 100.00 FC India 100.00 FC Ireland 100.00 FC South Korea 100.00 FC United Kingdom 100.00 FC Mexico 100.00 FC Netherlands 100.00 FC New Zealand 100.00 FC Japan 66.00 FC Russia 100.00 FC Finland 100.00 FC Philippines 100.00 FC Poland 100.00 FC France 100.00 FC Spain 100.00 FC Latvia 100.00 FC China 100.00 FC Thailand 100.00 FC Lithuania 100.00 FC Vietnam 100.00 FC Belgium 100.00 FC (b) France 100.00 FC 36 Ceca SA Ceca Watan Saudi Arabia Cekomastik Kimya Sanayi Ve Ticaret A.S Changshu Coatex Additives Co. Ltd. Changshu Haike Chemicals Co. Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Coatex Central Eastern Europe sro Coatex Inc. Coatex Latin America Industria et Comercio Ltda Coatex Netherlands BV Coatex SAS Daikin Arkema Refrigerants Asia Ltd. Daikin Arkema Refrigerants Trading Shanghai Co. Ltd. DBEW Holding BV Debratec GmbH Den Braven Aerosols GmbH Den Braven Beheer BV Den Braven Belgium N.V. Den Braven Benelux BV Den Braven East sp Z.o.o Den Braven Endustriel Den Braven France Sarl Den Braven Hellas SA Den Braven Holding BV Den Braven OG BV Den Braven Productos Quim. Ldo. Den Braven Romania Srl Den Braven Sealants Espana SL Den Braven Sealants GmbH Den Braven Sealants South Africa Pty Ltd Delaware Chemicals Corporation Distri Mark France SAS Febex SA Hebei Casda Biomaterials Co. Ltd Ihsedu Agrochem Private Ltd Jiangsu Bostik Adhesive Co. Ltd Maquiladora General de Matamoros SA de CV MEM BAUCHEMIE Gmbh Michelet Finance, Inc. MLPC International Mydrin Srl Odor-Tech LLC Oxochimie Ozark Mahoning Company PT Bostik Indonesia Condensed consolidated interim financial statements at 30 June 2017 (b) France 100.00 FC Saudi Arabia 51.00 FC Turkey 100.00 FC China 100.00 FC China 49.00 FC Malaysia 14.00 SI South Korea 100.00 FC Slovakia 100.00 FC United States 100.00 FC Brazil 100.00 FC Netherlands 100.00 FC France 100.00 FC Hong Kong 40.00 JV China 40.00 JV Netherlands 100.00 FC Germany 100.00 FC Germany 100.00 FC Netherlands 100.00 FC Belgium 100.00 FC Netherlands 100.00 FC Poland 100.00 FC Turkey 100.00 FC France 100.00 FC Greece 100.00 FC Netherlands 100.00 FC Netherlands 100.00 FC Portugal 100.00 FC Romania 100.00 FC Spain 100.00 FC Austria 100.00 FC South Africa 100.00 FC United States 100.00 FC France 100.00 FC Switzerland 96.77 FC China 100.00 FC India 24.90 SI China 100.00 FC (b) Mexico 100.00 FC Germany 100.00 FC United States 100.00 FC France 100.00 FC Italy 100.00 FC United States 100.00 FC (a) France 50.00 JO United States 100.00 FC Indonesia 100.00 FC 37 Condensed consolidated interim financial statements at 30 June 2017 Sartomer Asia Limited Hong Kong 100.00 FC Sartomer Guangzhou Chemical Co. Ltd. China 100.00 FC Sartomer Shanghai Distribution Company Limited China 100.00 FC Seki Arkema South Korea 51.00 FC Siroflex Inc. United States 100.00 FC Siroflex Ltd United Kingdom 100.00 FC Société Marocaine des Colles Morocco 97.01 FC Sovereign Chemicals Ltd United Kingdom 100.00 FC Suzhou Hipro Polymers Co. Ltd China 100.00 FC Taixing Sunke Chemicals China 55.00 JO Tamer Endustriyel Madencilik Anonim Sirketi Turkey 50.00 FC Turkish Products, Inc. United States 100.00 FC Usina Fortaleza Industria E commercio de massa fina Ltda Brazil 100.00 FC Vetek Argentina 60.00 FC Viking chemical company United States 100.00 FC Zhuhai Bostik Adhesive Ltd China 100.00 FC NB: FC: full consolidation JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses JV: joint venture - consolidation by the equity method SI: significant influence - consolidation by the equity method 38 III - DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2017 I certify that, to the best of my knowledge, the condensed consolidated financial statements have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report on pages 3 to 11 includes a fair review of the main events of the first six months of the year, their impact on the consolidated financial statements, the major transactions between related parties, and that it describes the main risks and uncertainties for the remaining six months of the financial year. Colombes, 1 August 2017 Thierry Le Hénaff Chairman and CEO 39 KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit This is a free translation into English of the statutory auditors' review report on the half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France Arkema For the period from January 1 to June 30, 2017 Statutory auditors’ review report on the half-yearly financial information 40 KPMG Audit Département de KPMG S.A. Tour EQHO 2, avenue Gambetta CS 60055 92066 Paris-La Défense Cedex ERNST & YOUNG Audit 1/2, place des Saisons 92400 Courbevoie - Paris-La Défense 1 S.A.S. à capital variable Commissaire aux Comptes Membre de la compagnie régionale de Versailles Commissaire aux Comptes Membre de la compagnie régionale de Versailles Arkema For the period from January 1 to June 30, 2017 Statutory auditors’ review report on the half-yearly financial information To the Shareholders, In compliance with the assignment entrusted to us by your Annual General Meetings and in accordance with the requirements of article L.451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying condensed half-yearly consolidated financial statements of Arkema, for the period from January 1 to June 30, 2017. the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 – standard of the IFRSs as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, August 1, 2017 The Statutory Auditors French original signed by KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Bertrand Desbarrières François Quédiniac Denis Thibon

Semestriel, 2017, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

HALF YEAR FINANCIAL REPORT First half ended 30 June 2019 Arkema 420, rue d’Estienne d’Orves – F-92705 Colombes Cedex – France Tél. : +33 1 49 00 80 80 – Fax : +33 1 49 00 83 96 French société anonyme with share capital of €766,242,200 – 445 074 685 RCS Nanterre arkema.com 1 HALF YEAR ACTIVITY REPORT page 3 2 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2019 page 13 3 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF YEAR FINANCIAL REPORT AT 30 JUNE 2019 page 43 4 STATUTORY AUDITORS’ REVIEW REPORT ON THE HALF-YEARLY FINANCIAL INFORMATION page 44 This document is a free translation in English of Arkema’s half-year financial report for the first half ended 30 June 2019. This translation has been prepared solely for the information and convenience of English-speaking readers. No assurances are given as to the accuracy or completeness of this translation, and Arkema assumes no responsibility with respect to this translation or any misstatement or omission that may be contained therein. In the event of any ambiguity or discrepancy between this translation and the French document, the French document shall prevail. 2 1 HALF-YEAR ACTIVITY REPORT 1.1 MANAGEMENT ANALYSIS PRINCIPLES AND ACCOUNTING STANDARDS The main alternative performance indicators used by the Group are defined in note C.1 to the condensed consolidated interim financial statements at 30 June 2019 presented in section 2 of this document. As of 1 January 2019, the Group applies IFRS 16 "Leases". The income statement, balance sheet and cash flow statement for the first half of 2019 include the impacts of the Group’s first-time application of IFRS 16, which are detailed in notes B, C.1 and C.10 to the condensed consolidated interim financial statements at 30 June 2019 presented in section 2 of this document. The comparative figures for 2018 have not been restated. When analyzing changes in its results, particularly changes in sales, the Group identifies the impact of the following effects (such analysis is unaudited): scope effect: the impact of changes in the Group’s scope of consolidation, which arise from acquisitions and divestments of entire businesses or as a result of the first-time consolidation or deconsolidation of entities. Increases or reductions in capacity are not included in the scope effect; currency effect: the mechanical impact of consolidating accounts denominated in currencies other than the euro at different exchange rates from one period to another. The currency effect is calculated by applying the foreign exchange rates of the prior period to the figures for the period under review; price effect: the impact of changes in average selling prices is estimated by comparing the weighted average net unit selling price of a range of related products in the period under review with their weighted average net unit selling price in the prior period, multiplied, in both cases, by the volumes sold in the period under review; volume effect: the impact of changes in volumes is estimated by comparing the quantities delivered in the period under review with the quantities delivered in the prior period, multiplied, in both cases, by the weighted average net unit selling price in the prior period. 1.2 FIRST-HALF 2019 HIGHLIGHTS 1.2.1 Organic growth projects In order to support its customers’ growth with innovative solutions for sustainable development and mobility, Arkema announced: the opening, with Hexcel, of a joint research and development laboratory in France as part of their strategic alliance to develop thermoplastic composites for the aerospace sector; the start-up of the Kepstan® PEKK facility at its site in Mobile, United States, to support the strong demand for carbon fiber reinforced composites and 3D printing. Through this investment, Arkema strengthens its offering of advanced materials that contribute notably to lightweighting materials in markets such as aerospace, oil and gas, electronics and automotive; the start-up of a new polyester resins manufacturing plant in Navi Mumbai (India) to support its customers’ development throughout this region in this fast-growing market; the start-up by Sartomer, in April 2019, of a 30% capacity extension at its photocure liquid resin production plant in Nansha (China), in order to meet strong demand from customers in Asia in the electronics, 3D printing, adhesives and inkjet printing markets; and the choice of Jurong Island in Singapore as the location to build its new world-scale plant for the production of the amino 11 monomer and Rilsan® polyamide 11. With this project to increase by 50% its global capacities, the Group will support the strong demand from its customers in Asia for high-performance bio-based solutions to address notably the major opportunity of material lightweighting. This project is part of the Group’s exceptional capital expenditure totaling some €500 million to be spread over the 20 18-2021 period essentially. Construction is scheduled to be completed by late 2021. 3 1.2.2 Acquisitions Acquisition of ArrMaz In May 2019, Arkema reached a new milestone in the development of its specialty businesses, with the announcement of its planned acquisition of ArrMaz, a global leader in specialty surfactants for the crop nutrition, mining and infrastructure markets, with sales of US$290 million and an 18% EBITDA margin. Completed on 1 July 2019, the acquisition of this profitable, resilient and low capital intensive business, will lead to the creation of a new leader in specialty surfactants thanks to the excellent fit between Arkema and ArrMaz in terms of technologies, geographic reach and formulation expertise. The acquisition was based on a US$570 million enterprise value, which corresponds to an EV/EBITDA multiple of 10.8 times that should be reduced to around 7 times 2023 EBITDA taking into account synergies and ArrMaz’s organic growth. ArrMaz has been integrated into Arkema’s Performance Additives Business Line within the High Performance Materials division. Acquisition of an equity interest in Carbon® In June 2019, Arkema, through its subsidiary Sartomer, and Carbon®, a world leader in digital manufacturing, entered into a strategic partnership to deliver new high performance materials for Carbon®’s customers and partners. As part of this partnership, Arkema announced it acquired a US$20 million equity interest in Carbon®. 1.2.3 Financing Arkema took advantage of favorable market conditions to partially refinance on 17 June 2019 its existing hybrid bonds through a combination of a new bond issue and a bond tender offer. Consequently, the Group accepted the tender of existing perpetual hybrid bonds amounting to €400 milli on at a tender price of 106.137%. These bonds, which have a residual nominal value of €300 million, have a first call date on 29 October 2020 and carry an annual coupon of 4.75% until that date. At the same time, the Group issued a €400 million pe rpetual hybrid bond. These bonds carry a first-call redemption option that Arkema may exercise at any time between 17 June 2024 and 17 September 2024, and have an annual coupon of 2.75% until the first call date, subject to early redemption. 4 1.3 ANALYSIS OF FIRST-HALF 2019 FINANCIAL RESULTS The figures in this section are provided on a consolidated basis and in accordance with Arkema's organization into three divisions: High Performance Materials, Industrial Specialties and Coating Solutions. 1.3.1 Analysis of Arkema’s results (In millions of euros) First-half 2019 First-half 2018 Year-on-year change Sales 4,469 4,442 +0.6% EBITDA 777 813 4.4% EBITDA margin 17.4% 18.3% Recurring depreciation and amortization (252) (218) +15.6% Recurring operating income (REBIT) 525 595 11.8% REBIT margin 11.7% 13.4% Other income and expenses (23) (4) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (19) (18) Operating income 483 573 15.7% Equity in income of affiliates (1) 1 Financial result (60) (47) +27.7% Income taxes (95) (116) 18.1% Net income 327 411 20.4% Of which: non-controlling interests 4 4 Net income – Group share 323 407 20.6% Adjusted net income 357 421 15.2% The Group applied IFRS 16 for the first time at 1 January 2019, under the modified retrospective approach which does not require restatement of the comparative figures for 2018. SALES At €4,469 million, sales for the first half of 2019 were up 0.6% year-on-year. Prices were overall stable for the Group as a whole (up 0.3%), with continued strong initiatives to raise selling prices in the High Performance Materials division (up 4.7%) more than offsetting the decrease observed in Industrial Specialties and Coating Solutions in a context of volatile raw materials costs. Volumes declined 2.4% compared with the very high level recorded in the first half of 2018. This mainly reflects lower demand year-on-year in the automotive, consumer electronics and oil and gas markets, overshadowing the strong dynamic in batteries and 3D printing as well as higher volumes in Coating Solutions. The currency effect was a positive 2.3%, mainly due to the appreciation of the US dollar against the euro. The scope effect was limited to a positive 0.4%. Excluding the corporate segment (1), the breakdown of sales by division was similar to first-half 2018, with High Performance Materials accounting for 45% of Group sales (unchanged year-on-year), Industrial Specialties 30% (31% in first-half 2018) and Coating Solutions 25% (24% in first-half 2018). The regional sales split is also similar to that of first-half 2018, with Europe representing 38% of Group sales (39% in first- half 2018), North America 31% (unchanged from first-half 2018), Asia 27% (26% in first-half 2018) and the rest of the world unchanged at 4%. (1) As defined in note C.2 to the consolidated financial statements at 30 June 2019 in section 2 of this document. 5 EBITDA AND RECURRING OPERATING INCOME In a complex macroeconomic context that was less favorable than last year’s, Arkema achieved a high EBITDA at €777 million, slightly down on the record performan ce of first-half 2018 (€813 million). Despite volum es being impacted by end markets, High Performance Materials resisted well, driven by innovation and the pro-active policy of raising selling prices, while growth in Coating Solutions mitigated the impact of market conditions in Fluorogases and of MMA/PMMA normalization compared with their historically high performances last year. The first-half 2019 EBITDA figure includes a €27 million positive impact from IFRS 16. EBITDA margin remained excellent at 17.4% (18.3% in first-half 2018 and 17.3% in first-half 2017). Recurring depreciation and amortization amounted to €252 million, up €34 million year-on-year, as a re sult of the €26 million impact of IFRS 16 and an unfavorable cur rency effect. Recurring operating income (REBIT) amounted to €525 m illion, in line with the year-on-year changes in EBITDA and recurring depreciation and amortization. REBIT margin stood at 11.7%. OPERATING INCOME Operating income came in at €483 million, including €23 million in net other expenses, mainly correspo nding to restructuring costs and asset impairments, as well as €19 million in depreciation and amortization resulting from the revaluation of assets carried out as part of purchase price allocations. FINANCIAL RESULT The financial result represented a net expense of € 60 million against a €47 million net expense in fir st-half 2018. The year-on-year change mostly reflects an unfavourable interest rate effect on the portion of the Group’s debt swapped into US dollars and actuarial losses on certain provisions for employee benefits. INCOME TAXES The income tax expense was down year-on-year at €95 million (versus €116 million in first-half 2018) i n line with the change in results. Excluding non-recurring items, the tax rate for the first half of the year amounted to around 20% of recurring operating income. NET INCOME GROUP SHARE AND ADJUSTED NET INCOME Consequently, net income – Group share totaled €323 million (€407 million in first-half 2018) while ne t earnings per share amounted to €3.75 after deduction of the €37 millio n expense resulting from the refinancing of hybrid bonds. Excluding the post-tax impact of non-recurring items, adjusted net income came in at €357 million, rep resenting €4.68 per share. 6 1.3.2 Analysis of results by division 1.3.2.1 HIGH PERFORMANCE MATERIALS (45% OF GROUP SALES) (In millions of euros) First-half 2019 First-half 2018 Year-on-year change Sales 2,006 2,005 EBITDA 332 353 5.9% EBITDA margin 16.6% 17.6% Recurring operating income (REBIT) 243 275 11.6% REBIT margin 12.1% 13.7% Other income and expenses (17) (2) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (17) (18) Operating income 209 255 18.0% At €2,006 million, sales for the High Performance Mat erials division were stable compared with the first half of 2018, driven by a +4.7% price effect, positive across all product lines, reflecting continued actions to raise selling prices and optimization of the product mix towards higher value-added applications. In line with market trends, volumes were down 7.4% due to notably lower demand compared with last year in the automotive, consumer electronics and oil & gas markets, inventory adjustments in some of these chains and the particularly strong contribution from specialty molecular sieves in the first quarter of 2018. The scope effect was a positive 0.8%, corresponding to the integration of targeted acquisitions in adhesives. The positive 1.9% currency effect was mainly driven by the appreciation of the US dollar against the euro. At €332 million, EBITDA was slightly down on the very g ood first-half 2018 performance, in an environment marked by the weakness of certain markets which weighed on volumes, particularly in advanced materials. These impacts were mitigated to a large extent by the benefits of pricing actions, particularly in adhesives, where EBITDA increased significantly year-on-year. At 16.6%, EBITDA margin remained high, above the division’s margin for full-year 2018, while Bostik’s EBITDA margin reached 13%, up by one percentage point year-on-year. Recurring operating income totaled €243 million. Th is figure includes €89 million in recurring depreci ation and amortization, up €11 million on first-half 2018, mainly stemming from the impact of IFRS 16 and an unfavorable currency effect. REBIT margin came in at 12.1%. Operating income amounted to €209 million and inclu ded €17 million in depreciation and amortization re lated to the revaluation of assets carried out as part of purchase price allocations, and €17 million in net other expenses, mainly corresponding to restructuring costs in adhesives and asset impairments. 1.3.2.2 INDUSTRIAL SPECIALTIES (30% OF GROUP SALES) (In millions of euros) First-half 2019 First-half 2018 Year-on-year change Sales 1,315 1,370 4.0% EBITDA 336 370 9.2% EBITDA margin 25.6% 27.0% Recurring operating income (REBIT) 232 283 18.0% REBIT margin 17.6% 20.7% Other income and expenses (2) (1) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses Operating income 230 282 18.4% 7 Industrial Specialties sales totaled €1,315 million, down 4.0% year-on-year with a negative 4.1% price effect and a 2.3% decrease in volumes. It reflects lower volumes and prices in Fluorogases and the MMA/PMMA chain compared with the very high levels reached in 2018. The currency effect was a positive 2.4%, mainly reflecting the appreciation of the US dollar against the euro. At €336 million, the division's EBITDA was down on the record first-half 2018 performance as Fluorogases were impacted in particular by illegal HFC imports in Europe, which weighed on both volumes and prices of this business. The performance also reflects, to a lesser extent, the normalization of market conditions in the MMA/PMMA chain. These impacts were mitigated by the very good performance of Thiochemicals. In this context, EBITDA margin remained excellent at 25.6%. Recurring operating income amounted to €232 million and included €104 million in recurring depreciatio n and amortization, €17 million higher than in first-half 2018 due to t he impact of IFRS 16 and an unfavorable currency effect. Operating income was €230 million and included €2 m illion in net other expenses. 1.3.2.3 COATING SOLUTIONS (25% OF GROUP SALES) (In millions of euros) First-half 2019 First-half 2018 Year-on-year change Sales 1,134 1,054 +7.6% EBITDA 158 134 +17.9% EBITDA margin 13.9% 12.7% Recurring operating income (REBIT) 102 83 +22.9% REBIT margin 9.0% 7.9% Other income and expenses (1) (2) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (2) Operating income 99 81 +22.2% Coating Solutions sales grew 7.6% year-on-year to € 1,134 million, driven by a good volume dynamic (+6.8%), in particular in acrylic monomers, and a 3.0% positive currency effect. The negative 2.2% price effect mainly reflects lower propylene prices for acrylic monomers, while the Group continued its actions to raise selling prices in its more downstream activities. The division’s EBITDA increased sharply by 18% year-on-year to €158 million, driven by gradually improvin g market conditions in acrylic monomers and the progressive recovery of unit margins in downstream businesses. In this context, EBITDA margin rose to 13.9% in first-half 2019 from 12.7% in the same period of 2018. In line with the change in EBITDA, recurring operating income increased to €102 million. This figure incl udes €56 million in recurring depreciation and amortization, up €5 m illion compared with first-half 2018 due to the impact of IFRS 16 and an unfavorable currency effect. REBIT margin improved to 9% in the first half. Operating income totaled €99 million, up 22% year-o n-year. 8 1.3.3 Group cash flow analysis (In millions of euros) First-half 2019 First-half 2018 Cash flow from operating activities 484 250 Cash flow from investing activities (346) (408) Net cash flow 138 (158) Of which net cash flow from portfolio management operations (25) (174) Free cash flow 163 16 Cash flow from financing activities (238) (169) EBITDA can be reconciled to free cash flow as follows: (In millions of euros) First-half 2019 First-half 2018 EBITDA 777 813 Taxes (94) (117) Cash items included in the financial result (49) (42) Change in working capital (167) (373) Change in fixed asset payables (1) (62) (29) Recurring capital expenditure (187) (148)* Exceptional capital expenditure (38) (18) Non-recurring items (18) (17) Other 1 (53)* Free cash flow 163 16 Restated in order to present investments with no impact on net debt separately (see note C.1 to the condensed consolidated interim financial statements at 30 June 2019 presented in section 2 of this document). (1) Excluding cash flows related to non-recurring items and portfolio management operations. These two items represented a net cash outflow of €34 million in first-half 2019 primarily related to the discontinuation of a project that was fully financed by a partner, for which a corresponding exceptional gain was recognized in the same amount. These two amounts, which offset each other, have been included in “Non-recurring items”. In first-half 2018, non-recurring items and portfolio management operations represented a net cash inflow of €3 million. NET CASH FLOW AND FREE CASH FLOW The Group’s net cash flow represented an inflow of €138 million in the first half of 2019 versus a €15 8 million outflow in the same period of 2018. The first-half 2019 figure includes a €25 million outflow from portfolio management operations, mainly corresponding to a US$20 million equity investment in Carbon®. In first-half 2018, net cash flow from portfolio management operations represented an outflow of €17 4 million and mainly related to the acquisition of XL Brands assets. Consequently, free cash flow – which corresponds to net cash flow excluding the impact of portfolio management operations – came to €163 million. This represents a significant year-on-year increase on first-half 2018 (€16 million), which mainly reflects a lower increase in working capital than in first-half 2018, as a result of tight management, activity levels and the favorable impact of lower raw materials costs on inventories. This limited rise in working capital offset the €59 million year-on-year increase in recurring and exceptional capital expenditure, in line with the Group’s ambitious organic investment policy to support its future growth. In first-half 2018 free cash flow also included a €21 million outflow for loans granted to employees in connection with a share capital increase reserved for employees carried out during that period. This amount was recognized in the “Other” line. Capital expenditure for first-half 2019 amounted to €233 million (€175 million in first-half 2018), in recurring capital expenditure and €38 million in ex ceptional capital expenditure, which primarily concerns the project to double the Group’s thiochemicals production capacity in Malaysia, as well as investments relating to specialty polyamides in Asia (for further details, see note C.1 to the condensed consolidated interim financial statements at 30 June 2019). For full-year 2019, recurring and exceptional capital expenditure is expected to total around €610 million . cluding €187 million in Free cash flow in the first half of 2019 included an €18 million outflow for non-recurr ing items, mainly relating to restructuring costs and expenses related to the termination of a supply agreement. 9 CASH FLOW FROM FINANCING ACTIVITIES Cash flow from financing activities represented a net outflow of €238 million in the first six months of 2019 against a €169 million net outflow in first-half 2018. The fi rst-half 2019 figure includes a €2.50 per-share div idend payment, representing a total payout of €190 million and €17 million in share buybacks. It also includes the €3 8 million net global cost of partially refinancing the Group’s hybrid bonds. This refinancing – which represented a total nominal value of €400 million – combined the issue of new bonds with the partial repurchase of outstanding hybrid bonds. Following these transactions, the total nominal value of the Group’s hybrid bonds remains unchanged at €700 million. In first-half 2018, cash flow from financing activities included the dividend payment, share buybacks and a share capital increase reserved for employees. 1.3.4 Balance sheet analysis (In millions of euros) 30 June 2019 31 December 2018 Year-on-year change Non-current assets* 5,958 5,818 +2.4% Working capital 1,447 1,178 +22.8% Capital employed 7,405 6,996 +5.8% Deferred tax assets 207 209 1.0% Provisions for pensions and employee benefits 517 470 +10.0% Other provisions 393 409 3.9% Total provisions 910 879 +3.5% Long-term assets covering some provisions 76 79 3.8% Total provisions net of non-current assets 834 800 +4.3% Deferred tax liabilities 265 268 1.1% Net debt 1,308 1,006 +30.0% Shareholders’ equity 5,110 5,028 +1.6% Excluding deferred tax and including pension assets The Group applied IFRS 16 for the first time at 1 January 2019, under the modified retrospective approach which does not require restatement of the comparative figures for 2018. Between 31 December 2018 and 30 June 2019, non-current assets increased by €140 million, primarily due to: €233 million in capital expenditure, including €18 7 million recurring capital expenditure and €38 mil capital expenditure; the recognition of a total €180 million in right-o f-use assets for leases, resulting from the Group’s application of IFRS 16 from 1 January 2019; €316 million in depreciation and amortization incl uding (i) €252 million in recurring depreciation an d amortization, of which €26 million arising from the application of I FRS 16, (ii) €19 million in depreciation and amorti zation related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses, and (iii) a €45 million impairment of industrial assets, with t he vast majority of this amount recognized following the discontinuation of a project that was fully financed by a partner, and which was offset by the recognition of an exceptional gain of the same amount; an €18 million equity investment in Carbon ®; • a €21 million positive currency translation effect , mainly linked to the slight appreciation of the US dollar against the euro at the end of the period. At 30 June 2019, working capital was €269 million hi gher than at 31 December 2018. This increase notably reflects the usual seasonality of sales. The currency effect during the period was limited. At 30 June 2019, the working capital to annualized sales ratio (1) stood at 16.0% versus 16.5% at 30 June 2018. As a result of the above factors, the Group's capital employed increased by €409 million between 31 Dec ember 2018 and 30 June 2019 to €7,405 million. (1) Calculated as working capital at 30 June/(2nd quarter sales x 4). 10 At 30 June 2019, gross provisions amounted to €910 m illion. Some of these provisions, accounting for a total of €76 million, are mainly covered by the guarantee facility granted by Total and described in note 18.2 to the condensed consolidated interim financial statements at 30 June 2019 (see section 2 of this document) and therefore by long-term assets recognized in the balance sheet. These essentially consist of provisions related to former industrial sites in the United States. At 30 June 2019, provisions net of these non-current assets amounted to €834 million against €800 million at 31 D ecember 2018. Net provisions can be analyzed as follows by type: (In millions of euros) 30 June 2019 31 December 2018 Pension liabilities 357 322 Other employee benefit obligations 157 145 Environmental contingencies 127 129 Restructuring 33 36 Other 160 168 Between 31 December 2018 and 30 June 2019, net provisions for pension liabilities increased by €35 mill ion due to a significant decrease in discount rates, partially offset by the revaluation of plan assets. The currency effect during the period was limited. Provisions for other employee benefit obligations (healthcare costs, welfare costs and long-service awards) increased by €12 million over the period due to low er discount rates. Net debt stood at €1,308 million at 30 June 2019, r epresenting a gearing of 26% and 0.9 times EBITDA of the last 12 months. The increase compared with end-December 2018 was mainly attributable to the cash flows described in section 1.3.3 of this document and the €156 million impact at 30 June 201 9 due to the Group’s application of IFRS 16. Shareholders’ equity amounted to €5,110 million at 3 0 June 2019 versus €5,028 million at 31 December 20 18. The 327 million in net income for the period, (ii) the payment of a dividend of €82 million increase primarily corresponds to (i) € €2.50 per share representing a total payout of €190 million, (iii) the €38 million net global cost of partially refinancing the hybrid bonds, and (iv) €17 million in share buyback s. A €28 million actuarial loss was recognized in sh areholders’ equity in first-half 2019 for provisions for pension liabilities and other employee benefit obligations. 1.4 TRANSACTIONS WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or companies which are accounted for under the equity method. The amounts involved are not material. 1.5 SUBSEQUENT EVENTS Significant events occurring after the reporting date are described in note C.19 to the condensed consolidated interim financial statements at 30 June 2019 (see section 2 of this document). 1.6 MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are the same as those described in chapter 2 of the 2018 Reference Document filed with the Autorité des marchés financiers (“AMF”) on 11 April 2019 under number D.19-0308. This document is available on Arkema’s website under the heading “Investor Relations” (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update on the Group’s contingent liabilities is provided in the notes to the condensed consolidated interim financial statements at 30 June 2019. 11 1.7 OUTLOOK In the second half of the year, the macroeconomic environment is expected to remain volatile and complex, marked by continued geopolitical uncertainties, which are weighing on global demand and raw material volatility. However, the inventory adjustments observed in the first half of the year in certain end-markets are expected to ease. In this context, Arkema will maintain its focus on internal momentum and the implementation of its long-term strategy. The Group will therefore continue to roll out its industrial projects, its innovation drive for sustainable development and mobility, and its targeted acquisition dynamic. In the second half of the year, the Group should, in particular, benefit from the start-up of certain industrial projects in Sartomer resins in Asia, technical polymers in France and acrylics in the United States, as well as the contribution from the acquisition of ArrMaz, finalized on 1 July, and of Sunke, which is due to be completed in the third quarter of the year. The Group will also continue to implement its operational excellence initiatives and its policy of selectively raising selling prices in a context of still high oil prices. While remaining attentive to the development of the macroeconomic environment, Arkema confirms its ambition to consolidate its financial performance at high levels and to achieve in 2019 (1) an EBITDA comparable with the 2018 record level. The Group’s medium- and long-term targets are described in the section “Profile, ambition and strategy” in the introduction to the 2018 Reference Document. The Group specifies that all of these targets are defined in normalized conditions and in accordance with current IFRS. The Group also notes that the achievement of these targets is based on assumptions deemed reasonable by the Group, as of the date of this document and within this time frame (in particular regarding future development of global demand, conditions relating to raw materials and energy costs, balance between supply and demand for products marketed by the Group and their price levels, as well as currency exchange rates). However, it takes no account of the potential occurrence of certain risks described in chapter 2, section 2.1 of the 2018 Reference Document or any unknown factors related to the economic, financial, competitive or regulatory environment in which the Group operates, that could affect the achievement of its targets. (1) 2019 takes into account the new IFRS 16 standard 12 Condensed consolidated interim financial statements at 30 June 2019 2 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2019 CONSOLIDATED INCOME STATEMENT ............................................................................................................................................. 14 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME........................................................................................................ 15 CONSOLIDATED BALANCE SHEET .................................................................................................................................................... 16 CONSOLIDATED CASH FLOW STATEMENT ...................................................................................................................................... 17 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY .................................................................................. 18 A. HIGHLIGHTS ..................................................................................................................................................................................... 19 B. ACCOUNTING POLICIES ................................................................................................................................................................. 19 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ....................................................................................................... 22 1. Alternative performance indicators .................................................................................................................................... 22 2. Information by business division ....................................................................................................................................... 25 3. Information by geographical area ...................................................................................................................................... 27 4. Other income and expenses ............................................................................................................................................... 27 5. Financial result .................................................................................................................................................................... 27 6. Income taxes ........................................................................................................................................................................ 28 7. Earnings per share .............................................................................................................................................................. 28 8. Intangible assets ................................................................................................................................................................. 28 9. Property, plant and equipment ........................................................................................................................................... 29 10. IFRS 16 leases: rights of use and IFRS 16 debt ................................................................................................................. 30 11. Other investments ............................................................................................................................................................... 31 12. Shareholders’ equity ........................................................................................................................................................... 31 13. Provisions for pensions and other employee benefits ..................................................................................................... 33 14. Other provisions and other non-current liabilities ............................................................................................................ 33 15. Liabilities and contingent liabilities ................................................................................................................................... 34 16. Debt ...................................................................................................................................................................................... 35 17. Share-based payments ....................................................................................................................................................... 36 18. Off-balance sheet commitments ......................................................................................................................................... 37 19. Subsequent events .............................................................................................................................................................. 39 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2019 ............................................................................................................................ 40 13 Condensed consolidated interim financial statements at 30 June 2019 CONSOLIDATED INCOME STATEMENT (In millions of euros) Notes 1st half 2019 1st half 2018 Sales (C2&C3) 4,469 4,442 Operating expenses Research and development expenses Selling and administrative expenses Other income and expenses (C4) (3,456) (123) (384) (23) (3,377) (118) (370) (4) Operating income (C2) 483 573 Equity in income of affiliates Financial result Income taxes Net income (C5) (C6) (1) (60) (95) 327 1 (47) (116) 411 Of which: non-controlling interests Net income - Group share 4 323 4 407 Earnings per share (in euros) Diluted earnings per share (in euros) (C7) (C7) 3.75 3.73 5.35 5.34 The Group applied IFRS 16 for the first time at 1 January 2019, under the modified retrospective approach which does not require restatement of the comparative figures for 2018. 14 Condensed consolidated interim financial statements at 30 June 2019 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of euros) Net income 1st half 2019 327 1st half 2018 411 Hedging adjustments (1) Other items 1 Deferred taxes on hedging adjustments and other items Change in translation adjustments (C12) 14 28 Other recyclable comprehensive income 14 28 Actuarial gains and losses (C13) (33) 18 Deferred taxes on actuarial gains and losses 5 (4) Other non-recyclable comprehensive income (28) 14 Total income and expenses recognized directly through equity (14) 42 Comprehensive income 313 453 Of which: non-controlling interests 4 5 Comprehensive income – Group share 309 448 The Group applied IFRS 16 for the first time at 1 January 2019, under the modified retrospective approach which does not require restatement of the comparative figures for 2018. 15 Condensed consolidated interim financial statements at 30 June 2019 CONSOLIDATED BALANCE SHEET (In millions of euros) Notes 30 June 2019 31 December 2018 ASSETS Intangible assets, net (C8) 2,863 2,877 Property, plant and equipment, net (C9 & 10) 2,758 2,627 Investments in equity affiliates 37 38 Other investments (C11) 52 33 Deferred tax assets 207 209 Other non-current assets 248 243 TOTAL NON-CURRENT ASSETS 6,165 6,027 Inventories 1,167 1,136 Accounts receivable 1,370 1,247 Other receivables and prepaid expenses 184 173 Income taxes receivables 74 80 Other current financial assets 8 7 Cash and cash equivalents 1,331 1,441 TOTAL CURRENT ASSETS 4,134 4,084 TOTAL ASSETS 10,299 10,111 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital 766 766 Paid-in surplus and retained earnings 4,180 4,099 Treasury shares (44) (28) Translation adjustments 156 142 SHAREHOLDERS’ EQUITY – GROUP SHARE (C12) 5,058 4,979 Non-controlling interests 52 49 TOTAL SHAREHOLDERS’ EQUITY 5,110 5,028 Deferred tax liabilities 265 268 Provisions for pensions and other employee benefits (C13) 517 470 Other provisions and non-current liabilities (C14) 412 433 Non-current debt (C16) 1,875 2,246 TOTAL NON-CURRENT LIABILITIES 3,069 3,417 Accounts payable 926 1,037 Other creditors and accrued liabilities 348 343 Income taxes payable 75 78 Other current financial liabilities 7 7 Current debt (C16) 764 201 TOTAL CURRENT LIABILITIES 2,120 1,666 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 10,299 10,111 The Group applied IFRS 16 for the first time at 1 January 2019, under the modified retrospective approach which does not require restatement of the comparative figures for 2018. 16 Condensed consolidated interim financial statements at 30 June 2019 CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) 1st half 2019 1st half 2018 Net income 327 411 Depreciation, amortization and impairment of assets 316 235 Other provisions and deferred taxes (1) (28) (Gains)/losses on sales of long-term assets (4) (2) Undistributed affiliate equity earnings 1 (1) Change in working capital (167) (373) Other changes 12 8 CASH FLOW FROM OPERATING ACTIVITIES 484 250 Intangible assets and property, plant, and equipment additions (233) (175) Change in fixed asset payables (96) (26) Acquisitions of operations, net of cash acquired (19) (174) Increase in long-term loans (20) (44) Total expenditures (368) (419) Proceeds from sale of intangible assets and property, plant, and equipment 6 1 Repayment of long-term loans 16 10 Total divestitures 22 11 CASH FLOW FROM INVESTING ACTIVITIES (346) (408) Issuance (repayment) of shares and paid-in surplus (C12) 3 51 Purchase of treasury shares (C12) (17) (19) Issuance of hybrid bonds (C12) 399 Redemption of hybrid bonds (C12) (425) Dividends paid to parent company shareholders (C12) (190) (176) Interest paid to bearers of subordinated perpetual notes (C12) (12) Dividends paid to non-controlling interests (1) (1) Increase in long-term debt 2 1 Decrease in long-term debt (C16.1) (515) (9) Increase / decrease in short-term debt (C16.1) 518 (16) CASH FLOW FROM FINANCING ACTIVITIES (238) (169) Net increase/(decrease) in cash and cash equivalents (100) (327) Effect of exchange rates and changes in scope (10) (7) Cash and cash equivalents at beginning of period 1,441 1,438 CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,331 1,104 The Group applied IFRS 16 for the first time at 1 January 2019, under the modified retrospective approach which does not require restatement of the comparative figures for 2018. 17 Condensed consolidated interim financial statements at 30 June 2019 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (In millions of euros) Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity At 1 January 2019 766 1,263 689 2,147 142 (28) 4,979 49 5,028 Cash dividend Issuance of share capital 0 3 (202) (202) 3 (1) (203) 3 Purchase of treasury shares (17) (17) (17) Grants of treasury shares to employees (1) 1 Share-based payments Issuance of hybrid bonds* Redemption of hybrid bonds* Other 399 (394) 12 (31) 12 399 (425) 12 399 (425) Transactions with shareholders 0 3 5 (222) (16) (230) (1) (231) Net income 323 323 4 327 Total income and expenses recognized directly through equity (28) 14 (14) (14) Comprehensive income 295 14 309 4 313 At 30 June 2019 766 1,266 694 2,220 156 (44) 5,058 52 5,110 Cf C12.2 “Hybrid bonds” (In millions of euros) Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity At 1 January 2018 759 1,216 689 1,670 101 (2) 4,433 41 4,474 Cash dividend Issuance of share capital Purchase of treasury shares 6 45 (176) (19) (176) 51 (19) (1) (177) 51 (19) Grants of treasury shares to employees (2) 2 Share-based payments 11 11 11 Other Transactions with shareholders 6 45 (167) (17) (133) (1) (134) Net income 407 407 4 411 Total income and expenses recognized directly through equity 14 27 41 1 42 Comprehensive income 421 27 448 5 453 At 30 June 2018 765 1,261 689 1,924 128 (19) 4,748 45 4,793 18 Condensed consolidated interim financial statements at 30 June 2019 A. HIGHLIGHTS A.1 Portfolio management In May 2019, Arkema announced the planned acquisition of ArrMaz, a global leader in specialty surfactants for crop nutrition, mining and infrastructure markets, with sales of US$290 million and an EBITDA margin of 18%. The offer was based on an enterprise value of US$570 million. The operation was completed on 1 July 2019. The newly-acquired business has joined the Performance Additives Business Line in the High Performance Materials division. Arkema also announced an investment of US$20 million in Carbon® in June 2019. A.2 Other highlights Arkema took advantage of favourable market conditions to partially refinance its existing hybrid bonds through a combination of a new bond issue and a bond tender offer. On 17 June 2019 Arkema thus issued a €400 million p erpetual hybrid bond. These bonds carry a first-call redemption option that Arkema may exercise at any time between 17 June 2024 and 17 September 2024, and have a coupon of 2.75% until the first call date, subject to early redemption. Arkema also accepted the tender of perpetual hybrid bonds amounting to €400 million at a tender price of 106.137%. These bonds were issued on 29 October 2014 in the total amount of €700 million, with a first call opti on on 29 October 2020 and an annual coupon of 4.75% until that date. See note C12.2 “Hybrid bonds”. B. ACCOUNTING POLICIES Arkema is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. Basis for preparation The Group’s condensed consolidated interim financial statements at 30 June 2019 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved by the Board of Directors of Arkema on 31 July 2019. The condensed consolidated interim financial statements at 30 June 2019 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRS (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and IFRS endorsed by the European Union at 30 June 2019. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2018. The accounting framework and standards adopted by the European Union can be consulted on the following website: https://ec.europa.eu/info/law/international-accounting-standards-regulation-ec-no-1606-2002 Changes in IFRS and interpretations The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2019 are identical to those used in the consolidated financial statements at 31 December 2018, except for IFRS standards, amendments and interpretations that are mandatory for accounting periods commencing on or after 1 January 2019 (and which had not been applied early by the Group), namely: 19 Condensed consolidated interim financial statements at 30 June 2019 Amendments to IAS 19 Plan amendment, curtailment or settlement Adopted by the European Union on 14 March 2019 Amendments to IAS 28 Long-term interests in associates and joint ventures Adopted by the European Union on 11 February 2019 Amendments to IFRS 9 Prepayment features with negative compensation Adopted by the European Union on 26 March 2018 IFRS 16 Leases Adopted by the European Union on 9 November 2017 IFRIC 23 Uncertainty over income tax treatments (IAS12) Adopted by the European Union on 24 October 2018 Annual improvements to IFRS - 2015-2017 cycle Adopted by the European Union on 15 March 2019 Application of these amendments and interpretations had no significant impact on the financial statements at 30 June 2019. Impact of the application of IFRS 16 The impact of IFRS 16 is described in notes C1.8 “Impact of IFRS 16 in the first half of 2019” and C10 “IFRS 16 leases”. From 1 January 2019, the Group’s lease obligations are recorded in application of IFRS 16 “Leases”. In the balance sheet, the Group recognizes an asset corresponding to the right to use the leased asset, and an equivalent financial liability. In the income statement, the lease payment expense is replaced by amortization of the right to use the asset, recorded in “Depreciation, amortization and impairment”, and a financial interest expense, recorded in “Financial result”. The cash flow statement is also impacted. Instead of the lease payments previously presented in “cash flow from operating activities”, the Group records repayments of the financial liability presented in “Cash flow from financing activities” and a financial interest expense, presented in “Cash flow from operating activities”. The Group applies this standard under the modified retrospective approach, and opted to use the two exemptions from capitalization allowed for leases of less than twelve months and leases of assets with an individual value of less than USD5,000 when new. For purposes of simplification, the Group excludes a certain number of subsidiaries from the scope of application of IFRS 16. The combined impact of the excluded lease contracts is not material for the Group. The right of use is recognized at an amount corresponding to the initial debt, adjusted for prepaid and accrued payments on the original lease, and any estimated repair costs. The right of use is amortized on a straight-line basis over the term of the lease. The lease term is the irrevocable period, extended where relevant by any renewal options the Group is reasonably certain to use; in particular, the Group applies the recommendation issued by the Autorité des normes comptables to real estate property leases in France, taking as the maximum term the longest term, i.e. 9 years. The lease obligation at 1 January 2019 is calculated under IFRS 16, applying the discount rates in force at that date over the residual term of the lease. As the implicit interest rate of the leases is not easily determined, the Group applies a discount rate based on the subsidiaries’ estimated incremental borrowing rate. The principal leases affected by IFRS 16 concern real estate property and logistics equipment, excluding servicing obligations associated with the lease. 20 Condensed consolidated interim financial statements at 30 June 2019 For the first-time application of IFRS16, a reconciliation with off-balance sheet commitments is presented below: (in millions of euros) 1 January 2019 Lease obligations Service component included in leases Leases outside the scope of IFRS 16 at 1 January 2019 Materiality threshold effect on off-balance sheet commitments 126 (6) (16) 76 IFRS16 lease obligation 180 Discount effect (22) TOTAL IFRS 16 DEBT 158 Non-mandatory IFRS standards and interpretations at 1 January 2019 The standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which are not yet mandatory for accounting periods commencing on or after 1 January 2019 are: Amendments to IAS 1 and IAS 8 Definition of material Not adopted by the European Union at 30 June 2019 Amendments to IFRS 3 Definition of a business Not adopted by Union at 30 June 2019 the European Conceptual framework Amendments to references to the conceptual framework Not adopted by the European Union at 30 June 2019 IFRS 17 Insurance contracts Not adopted by Union at 30 June 2019 the European Use of assumptions Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off- balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. Impact of seasonality The Group’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by the Group is generally lower in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and the rest of Europe; in some of the Group’s businesses, particularly those serving the paints and coatings as well as the refrigeration and air-conditioning markets, sales are generally higher in the first half of the year than in the second half. By contrast, in adhesives, the two halves of the year are more evenly balanced; the major multi-annual maintenance turnarounds at the Group’s production plants also have an impact on seasonality, and tend in general to be carried out in the second half of the year. These seasonal effects observed in the past are not necessarily representative of future trends, but can have a material effect on the variations in results and working capital from one quarter of the year to another. 21 Condensed consolidated interim financial statements at 30 June 2019 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Alternative performance indicators To monitor and analyse the financial performance of the Group and its activities, Group management uses alternative performance indicators. These are financial indicators that are not defined by IFRS. This note presents a reconciliation of these indicators and the aggregates from the consolidated financial statements under IFRS. Note C.2 “Information by business division” partly refers to these alternative performance indicators. 1.1 Recurring operating income (REBIT) and EBITDA (In millions of euros) Notes 1st half 2019 1st half 2018 OPERATING INCOME 483 573 Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (19) (18) Other income and expenses RECURRING OPERATING INCOME (REBIT) - Recurring depreciation and amortization of tangible and intangible assets EBITDA Other income and expenses RECURRING OPERATING INCOME (REBIT) - Recurring depreciation and amortization of tangible and intangible assets EBITDA (23) 525 (252) 777 (4) 595 (218) 813 Details of depreciation and amortization of tangible and intangible assets (In millions of euros) Notes 1st half 2019 1st half 2018 Depreciation and amortization of tangible and intangible assets (C8 & C9 & C10) (316) (236) Of which: Recurring depreciation and amortization of tangible and intangible assets (252) (218) Of which: Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (19) (18) Of which: Impairment included in other income and expenses (C4) (45) 0 1.2 Adjusted net income and adjusted earnings per share (In millions of euros) NET INCOME – GROUP SHARE - Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses Notes 1st half 2019 323 (19) 1st half 2018 407 (18) Other income and expenses (C4) (23) (4) Other income and expenses attributable to non-controlling interests Taxes on depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses 5 4 Taxes on other income and expenses 3 2 One-time tax-effects 2 ADJUSTED NET INCOME Weighted average number of ordinary shares Weighted average number of potential ordinary shares ADJUSTED EARNINGS PER SHARE (IN EUROS) (C7) 357 76,214,216 76,608,099 4.68 421 76,070,820 76,169,120 5.53 DILUTED ADJUSTED EARNINGS PER SHARE (IN EUROS) 4.66 5.53 22 Condensed consolidated interim financial statements at 30 June 2019 1.3 Recurring capital expenditure (In millions of euros) 1st half 2019 1st half 2018 INTANGIBLE ASSETS AND PROPERTY, PLANT, AND EQUIPMENT ADDITIONS 233 175 Exceptional capital expenditure 38 18 Investments relating to portfolio management operations Capital expenditure with no impact on net debt 8 9* RECURRING CAPITAL EXPENDITURE 187 148* Restated figures Exceptional capital expenditure corresponds to a very limited number of capital expenditure items that the Group presents separately in its financial reporting due to their unusual size or nature (major development projects, accidents or damage, exceptional restructuring operations). They mainly concern capital expenditure for thiochemicals in Malaysia and specialty polyamides in Asia. Investments relating to portfolio management operations reflect the impact of acquisition operations. Capital expenditure with no impact on net debt corresponds to capital expenditure items financed by non-Group entities, or reclassifications of assets. 1.4 Free cash flow (In millions of euros) 1st half 2019 1st half 2018 Cash flow from operating activities 484 250 + Cash flow from net investments (346) (408) NET CASH FLOW 138 (158) Net cash flow from portfolio management operations (25) (174) FREE CASH FLOW 163 16 The net cash flow from portfolio management operations corresponds to the impact of acquisition and divestment operations. 1.5 Working capital (In millions of euros) 30 June 2019 31 December 2018 Inventories 1,167 1,136 + Accounts receivable 1,370 1,247 + Other receivables including income taxes 258 253 + Other current financial assets 8 7 Accounts payable 926 1,037 Other liabilities including income taxes 423 421 Other current financial liabilities 7 7 WORKING CAPITAL 1,447 1,178 1.6 Capital employed (In millions of euros) Notes 30 June 2019 31 December 2018 Goodwill, net 1,622 1,618 + Intangible assets (excluding goodwill) and property, plant and equipment, net (C8, C9 & C10) 3,999 3,886 + Investments in equity affiliates 37 38 + Other investments and other non-current assets 300 276 + Working capital 1,447 1,178 CAPITAL EMPLOYED 7,405 6,996 23 Condensed consolidated interim financial statements at 30 June 2019 1.7 Net debt (In millions of euros) Notes 30 June 2019 31 December 2018 Non-current debt (C16) 1,875 2,246 + Current debt (C16) 764 201 Cash and cash equivalents 1,331 1,441 NET DEBT 1,308 1,006 1.8 Impact of IFRS 16 in the first half of 2019 As of 1 January 2019 Arkema applies IFRS 16 “Leases”. The impacts of this standard in the first half of 2019 on the main aggregates and alternative performance indicators used by the Group are described below. The 2018 figures have not been restated. Income statement (In millions of euros) 1st half 2019 EBITDA 27 Recurring depreciation and amortization Recurring operating income (REBIT) Operating income (26) 1 1 Financial result (2) Adjusted net income (1) Net income (1) Cash flow statement (In millions of euros) 1st half 2019 Cash flow from operating activities 25 Cash flow from financing activities (25) Free cash flow 25 Balance sheet (In millions of euros) 30 June 2019 Property, plant and equipment 155 Total assets 155 Non-current debt 113 Current debt 43 Net debt 156 Net income (1) Total liabilities and shareholders’ equity 155 Information by business division (1st half 2019) (In millions of euros) High Performance Materials Industrial Specialties Coating Solutions Corporate EBITDA 8.5 12.5 5 1 Recurring depreciation and amortization Recurring operating income (REBIT) (8) 0.5 (12) 0.5 (5) (1) 24 Condensed consolidated interim financial statements at 30 June 2019 2. Information by business division As required by IFRS 8 “Operating Segments”, segment information for the Group is presented in accordance with the business divisions identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. Arkema has three business divisions: High Performance Materials, Industrial Specialties and Coating Solutions. Three members of the Executive Committee supervise these divisions; they report directly to the Chairman and CEO, Arkema’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their sector’s operating activity, financial results, forecasts and plans. The content of the business divisions is as follows: High Performance Materials includes the following Business Lines (1): Bostik, Technical Polymers, comprising specialty polyamides and PVDF, Performance Additives, comprising photocure resins (Sartomer), organic peroxides and the adsorption activity. High Performance Materials provide innovative solutions with high value added, used in varied sectors such as transport, oil extraction, renewable energies (photovoltaics, lithium-ion batteries), consumer goods (beauty products, sports equipment, packaging, etc), electronics, construction, coatings and water treatment; Industrial Specialties groups the following Business Lines: Thiochemicals, Fluorogases, PMMA, Hydrogen Peroxides. These integrated industrial niche markets in which Arkema Group benefits from global positions, concern products used in several industrial sectors such as refrigeration and air conditioning, petrochemicals, refining, paper pulp, animal nutrition, electronics and the automotive industry; Coating Solutions comprises the following Business Lines: Acrylics, Coating Resins and Additives, comprising the coating resins and Coatex rheological additives activities. This division proposes solutions for decorative paints, industrial coatings, adhesives and high-growth acrylic applications (superabsorbents for disposable nappies, water treatment, oil and gas extraction). Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate division. Operating income and assets are allocated between business divisions prior to inter-division adjustments. Sales between divisions take place at market prices. (1) Business Lines are activities or groups of activities. 25 1st half 2019 (In millions of euros) Non-Group sales Inter-division sales Total sales EBITDA* Recurring depreciation and amortization of tangible and intangible assets* Recurring operating income (REBIT)* Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses Operating income Equity in income of affiliates Intangible assets and property, plant, and equipment additions Of which: recurring capital expenditure* 1st half 2018 (In millions of euros) Non-Group sales Inter-division sales Total sales EBITDA* Recurring depreciation and amortization of tangible and intangible assets * Recurring operating income (REBIT)* Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses Operating income Equity in income of affiliates Intangible assets and property, plant, and equipment additions Of which: recurring capital expenditure* See C1 “Alternative performance indicators” (1) Restated figures Condensed consolidated interim financial statements at 30 June 2019 High Performance Materials Industrial Specialties Coating Solutions Corporate 2,006 1,315 1,134 14 5 78 39 2,011 1,393 1,173 14 332 336 158 (49) (89) (104) (56) (3) 243 232 102 (52) (17) (2) (17) (2) (1) (3) 209 230 99 (55) 0 (1) 104 81 43 5 83 56 43 5 High Performance Materials Industrial Specialties Coating Solutions Corporate 2,005 1,370 1,054 13 5 94 38 2,010 1,464 1,092 13 353 370 134 (44) (78) (87) (51) (2) 275 283 83 (46) (18) (2) (1) (2) 1 255 282 81 (45) 0 1 62 51 75 59 (1) 26 26 12 12 Total 4,469 777 (252) 525 (19) (23) 483 (1) 233 187 Total 4,442 813 (218) 595 (18) (4) 573 1 175 148 (1) 26 Condensed consolidated interim financial statements at 30 June 2019 3. Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2019 (In millions of euros) Non-Group sales France 366 Rest of Europe 1,322 NAFTA* 1,405 Asia 1,196 Rest of the world 180 Total 4,469 1st half 2018 (In millions of euros) Non-Group sales France 373 Rest of Europe 1,345 NAFTA* 1,371 Asia 1,151 Rest of the world 202 Total 4,442 NAFTA: USA, Canada, Mexico 4. Other income and expenses 1st half 2019 1st half 2018 (In millions of euros) Expenses Income Net Expenses Income Net Restructuring and environment (10) (10) (5) 1 (4) Goodwill impairment Asset impairment (excluding goodwill) (7) (7) 0 0 Litigation and claims (5) 4 (1) (2) 1 (1) Gains (losses) on sales and purchases of assets (4) (4) (1) 2 1 Other (37) 36 (1) 0 0 Total other income and expenses (63) 40 (23) (8) 4 (4) In the first half of 2019, restructuring and environment expenses mainly include restructuring costs in adhesives. Exceptional asset impairment concerns industrial assets in the United States. “Other” items essentially comprise exceptional asset impairment recognized after discontinuation of a project that was fully financed by a partner; consequently, this impairment is offset by an exceptional gain of the same amount. 5. Financial result Financial result includes the cost of debt adjusted for capitalized financial expenses, and as regards provisions for pensions and employee benefits, the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits. It also includes the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate, and the foreign exchange gain/loss on unhedged financing. (In millions of euros) 1st half 2019 1st half 2018 Cost of debt (30) (30) Financial income/expenses on provisions for pensions and employee benefits (10) (6) Spot/forward exchange rate difference and foreign exchange gain/loss on unhedged financing (20) (12) Capitalized interest 2 1 Financial expenses related to the IFRS 16 debt (2) Other 0 0 Financial result (60) (47) 27 Condensed consolidated interim financial statements at 30 June 2019 6. Income taxes The income tax expense is broken down as follows: (In millions of euros) 1st half 2019 1st half 2018 Current income taxes (92) (117) Deferred income taxes (3) 1 Total income taxes (95) (116) The income tax expense amounts to €95 million for t he first half of 2019, including €8 million for the CVAE (compared with €116 million for the first half of 2018, including €8 million fo r the CVAE). 7. Earnings per share 1st half 2019 1st half 2018 Weighted average number of ordinary shares 76,214,216 76,070,820 Dilutive effect of stock options 4,392 54,341 Dilutive effect of free share grants 389,491 43,959 Weighted average number of potential ordinary shares 76,608,099 76,169,120 The calculation of earnings per share is presented below: (In millions of euros) Notes 1st half 2019 1st half 2018 Net income – Group share 323 407 Interest on subordinated perpetual notes, net of tax (C12.2) (37) Net income used in calculating earnings per share 286 407 1st half 2019 1st half 2018 Earnings per share (in euros) 3.75 5.35 Diluted earnings per share (in euros) 3.73 5.34 8. Intangible assets 8.1 Goodwill 30 June 2019 31 December 2018 (In millions of euros) Goodwill Gross book value 2,160 Accumulated amortization and impairment (538) Net book value 1,622 Net book value 1,618 Changes in the net book value of goodwill are as follows: (In millions of euros) 2019 At 1 January 1,618 Changes in scope Translation adjustments 4 At 30 June 1,622 28 Condensed consolidated interim financial statements at 30 June 2019 8.2 Other intangible assets (In millions of euros) Gross book value 30 June 2019 Accumulated amortization and impairment Net book value 31 December 2018 Net book value Patents and technologies 432 (197) 235 244 Trademarks 550 (3) 547 546 Software and IT licences 336 (238) 98 102 Capitalized REACH costs 61 (29) 32 34 Other capitalized research expenses 23 (8) 15 16 Capitalized contracts 351 (272) 79 81 Asset rights 48 (17) 31 32 Customer relations 95 (22) 73 76 Other intangible assets 85 (28) 57 60 Intangible assets in progress Total 96 2,077 (22) (836) 74 1,241 68 1,259 Changes in the net book value of other intangible assets are as follows: (In millions of euros) 2019 At 1 January 1,259 Acquisitions 27 Amortization and impairment (48) Disposals Changes in scope Translation adjustments 3 Reclassifications At 30 June 1,241 9. Property, plant and equipment 9.1 Property, plant and equipment 30 June 2019 31 December 2018 (In millions of euros) Land and buildings Gross book value 1,943 Accumulated depreciation and impairment (1,280) Net book value 663 Net book value 655 Complex industrial facilities 3,624 (2,953) 671 659 Other property, plant and equipment 3,158 (2,317) 841 850 Construction in progress Total property, plant and equipment excluding rights of use Rights of use (C10) 438 9,163 180 (10) (6,560) (25) 428 2,603 155 463 2,627 Total property, plant and equipment 9,343 (6,585) 2,758 2,627 29 Condensed consolidated interim financial statements at 30 June 2019 9.2 Changes in property, plant and equipment excluding rights of use Changes in the net book value of property, plant and equipment excluding rights of use are as follows: (In millions of euros) 2019 At 1 January 2,627 Acquisitions 206 Amortization and impairment (242) Disposals (1) Changes in scope Translation adjustments 13 Reclassifications At 30 June 2,603 10. IFRS 16 leases: rights of use and IFRS 16 debt From 1 January 2019, the Group’s lease obligations are accounted for in accordance with IFRS 16 “Leases” and classified in property, plant and equipment. The principles applied and the impacts on the alternative performance indicators are described in notes B “Accounting policies” and C1.8 “Impact of IFRS 16 in the first half of 2019”. At 30 June 2019, the net book value of the rights of use associated with leases is €155 million. 30 June 2019 (In millions of euros) Gross book value Accumulated depreciation and impairment Net book value Rights of use: real estate assets (head offices, offices) Rights of use: industrial assets (factories, land, warehouses) Rights of use: logistics assets (trucks, containers, trolleys) Rights of use: other assets (cars, etc) 59 24 80 17 (6) (2) (14) (3) 53 22 66 14 Total rights of use 180 (25) 155 Changes in the net book value of rights of use are as follows: (In millions of euros) 2019 At 1 January 158 Acquisitions and contract revisions 23 Amortization (26) Disposals and contract revisions (1) Changes in scope Translation adjustments 1 At 30 June 155 30 Condensed consolidated interim financial statements at 30 June 2019 The IFRS 16 debt amounts to €156 million at 30 June 2019 (see note C16 “Debt”). The total non-discounted value of the Group’s future lease payments amounts to €177 million at 30 June 2 019, maturing as follows: (In millions of euros) 30 June 2019 Within one year 1 - 5 years After 5 years 47 99 31 TOTAL 177 At 30 June 2019, the cash outflows associated with leases amount to €27 million. The financial expense s related to the IFRS 16 debt amount to €2 million. The application of exemptions for short-term leases and leases of low-value assets concerns amounts that are not significant at Group level. For purposes of simplification, the Group has excluded a certain number of subsidiaries from the scope of application of IFRS 16 because their right-of-use assets are below the materiality threshold defined by the Group. 11. Other investments The main movements in the first half of 2019 concern the investment in Carbon®. See note A.1 “Portfolio management”. 12. Shareholders’ equity At 30 June 2019 Arkema’s share capital amounts to € 766 million, divided into 76,624,220 shares with a nominal value of 10 euros. Number of shares at 1 January 2018 75,870,506 Issuance of shares following the capital increase reserved for employees 610,405 Issuance of shares following the exercise of subscription options 51,545 Number of shares at 30 June 2018 76,532,456 Issuance of shares following the exercise of subscription options 49,036 Number of shares at 31 December 2018 76,581,492 Number of shares at 1 January 2019 76,581,492 Issuance of shares following the exercise of subscription options 42,728 Number of shares at 30 June 2019 76,624,220 12.1 Changes in share capital Following the exercise of 42,728 share subscription options, the Company carried out a capital increase in the total nominal amount of €0.4 million. 12.2 Hybrid bonds The amount of the perpetual hybrid bonds recorded in shareholders’ equity is €694 million at 30 June 2 019. On 17 June 2019 Arkema issued a perpetual hybrid bond with a nominal value of €400 million, or €399 mi llion net of issue premiums and fees. These bonds carry a first-call redemption option that Arkema may exercise at any time between 17 June 2024 and 17 September 2024, and have a coupon of 2.75% until the first call date, subject to early redemption. In parallel, Arkema redeemed some of its existing perpetual hybrid bonds for the nominal value of €400 million plus a redemption premium of €25 million including bank charges. These bonds were issued on 29 October 2014 in the total nominal value of €700 million, with a first call option on 29 October 2020 and an annual coupon of 4.75% until that date. As part of this bond redemption, Arkema also paid accrued coupons due on the redeemed portion of these bonds, amounting to €12 million, on 17 June 2019. 31 Condensed consolidated interim financial statements at 30 June 2019 Following these combined operations, the total nominal value of Arkema’s perpetual hybrid bonds is unchanged at €700 million. The breakdown is as follows at 30 June 2019: Issue date 29 October 2014 17 June 2019 Nominal value (in millions of €) 300 400 Currency EUR EUR Redemption option 6 years 5.25 years Annual coupon rate 4.75% 2.75% Arkema has an option to defer payment of coupons for the above bonds. In accordance with IAS 32, when there is an unconditional right to avoid delivering cash or another financial asset in the form of repayment of principal or interest, an instrument is recognized in shareholders’ equity. In application of this principle, the hybrid bonds are recorded in shareholders’ equity, and the coupons paid are recorded as dividends in the Group’s consolidated financial statements. 12.3 Treasury shares The Company bought back 205,621 treasury shares during the first half of 2019. Arkema Group definitively granted 22,749 free shares to its employees between April and June 2019, principally in application of plans 2016-1, 2 and 2016-3. Number of treasury shares at 1 January 2018 33,225 Purchases of treasury shares 557,642 Grants of treasury shares (271,869) Number of treasury shares at 31 December 2018 318,998 Number of treasury shares at 1 January 2019 318,998 Purchases of treasury shares 205,621 Grants of treasury shares (22,749) Number of treasury shares at 30 June 2019 501,870 12.4 Dividends The combined shareholders’ general meeting of 21 May 2019 approved the distribution of a €2.50 dividen d per share in respect of the 2018 financial year, or a total amount of €190 mill ion. The dividend was paid out on 29 May 2019. 12.5 Translation adjustments The change in translation adjustments recognized in other recyclable comprehensive income mainly comprises the impacts of movements in the USD-EUR exchange rate. 32 Condensed consolidated interim financial statements at 30 June 2019 13. Provisions for pensions and other employee benefits (In millions of euros) Pension obligations 30 June 2019 360 31 December 2018 325 Healthcare and similar coverage 80 74 Post-employment benefits 440 399 Long service awards 72 66 Other 5 5 Other long-term benefits 77 71 Provisions for pensions and other employee benefits 517 470 In addition, certain provisions are covered by non-current assets: (In millions of euros) Provision recognized in liabilities 30 June 2019 517 31 December 2018 470 Amount recognized in assets (3) (3) Net provisions for pensions and employee benefits 514 467 The discount rates used by Arkema Group are as follows: Pension obligations, healthcare and similar coverage Europe (excl. UK) UK USA At 30 June 2019 1.30%-1.50% 2.30% 3.40% At 31 December 2018 1.90%-1.95% 2.70% 4.20% The present value of benefit obligations at the end of 2018 has been adjusted at 30 June 2019 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2018 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2019. The effects of the change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. The change in net provisions for post-employment benefits over the first half of 2019 is as follows: (In millions of euros) Net liability (asset) at 1 January 2019 Pension obligations 322 Healthcare and similar coverage 74 Total post- employment benefits 396 Provision recognized in liabilities 325 74 399 Amount recognized in assets (3) (3) (Income)/Expense for the period Net interest expense 8 5 1 8 6 Net contributions and benefits paid by the employer (5) (1) (6) Liquidations Other * Actuarial gains and losses recognized in shareholders’ equity Net liability (asset) at 30 June 2019 0 27 357 0 6 80 0 33 437 Provision recognized in liabilities 360 80 440 Amount recognized in assets (3) (3) Other items essentially consist of translation adjustments 14. Other provisions and other non-current liabilities 14.1. Other non-current liabilities Other non-current liabilities amount to €19 million at 30 June 2019 as against €24 million at 31 Decem ber 2018. 33 Condensed consolidated interim financial statements at 30 June 2019 14.2. Other provisions (In millions of euros) At 1 January 2019 Environmental contingencies 189 Restructuring 36 Other 184 Increases in provisions 2 2 12 Reversals from provisions on use (7) (5) (15) Reversals of unused provisions (0) (0) (6) Changes in scope Translation adjustments 0 0 1 Other At 30 June 2019 184 33 176 In addition, certain provisions are covered by non-current assets (receivables, deposits): (In millions of euros) Environmental contingencies Restructuring Other Total provisions at 30 June 2019 184 33 176 Portion of provisions covered by receivables or deposits 44 16 Deferred tax assets related to amounts covered by the Total Indemnity 13 Provisions at 30 June 2019 net of non-current assets 127 33 160 For information: Provisions at 1 January 2019 net of non-current assets 129 36 168 14.2.1 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €88 million (€90 million at 31 Dece mber 2018), in the United States for €77 million (€80 million at 31 December 2018), of which €57 million in resp ect of former industrial sites covered 100% by the Total group indemnity (receivable recognized in “Other non-current assets” for an amount of €44 million and €13 million recognized in deferred tax assets) (see note C18.2 “Off-balance sheet commitments/Commitments received”). 14.2.2 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €21 million (€2 2 million at 31 December 2018), in Europe outside France for €8 million (€10 million a t 31 December 2018) and in the United States for €4 million (€4 million at 31 December 2018). 14.2.3 Other provisions Other provisions amount to €176 million and mainly comprise: provisions for labour litigation and risks for €62 million (€61 million at 31 December 2018), provisions for commercial litigation and warranties for €49 million (€61 million at 31 December 2018) , provisions for tax litigation for €29 million (€29 million at 31 December 2018), provisions for other risks for €36 million (€33 mi llion at 31 December 2018). 15. Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note 20 to the consolidated financial statements at 31 December 2018. There was no development in liabilities and contingent liabilities during the first half of 2019 with an actual or potential significant effect on the Group’s consolidated financial statements. Total 409 16 (27) (6) 1 393 Total 393 60 13 320 333 34 Condensed consolidated interim financial statements at 30 June 2019 16. Debt 16.1 Analysis of net debt by category Group net debt amounts to €1,308 million at 30 June 2019, taking account of cash and cash equivalents of €1,331 million. (In millions of euros) Bonds 30 June 2019 1,738 31 December 2018 2,219 Bank loans 11 11 Other non-current debt 13 16 Non-current debt excluding IFRS 16 debt 1,762 2,246 Bonds 482 Syndicated credit facility Negotiable European Commercial Paper Other bank loans 201 145 Other current debt 38 56 Current debt excluding IFRS 16 debt 721 201 Debt excluding IFRS 16 debt 2,483 2,447 Non-current IFRS 16 debt 113 Current IFRS 16 debt 43 Debt 2,639 2,447 Cash and cash equivalents 1,331 1,441 Net debt 1,308 1,006 Bonds At 30 June 2019, the fair values of the bonds issued by the Group are as follows: • €480 million bond maturing in April 2020: €495 mil lion, €150 million bond issued as Euro Medium Term Notes (EMTN) maturing in December 2023: €166 million, €700 million bond issued as Euro Medium Term Notes (EMTN) maturing in January 2025: €749 million, €900 million bond issued as Euro Medium Term Notes (EMTN) maturing in April 2027: €967 million. IFRS 16 debt The maturities of non-discounted future lease payments on the Group’s lease obligations are presented in note C10 “IFRS 16 leases”. 16.2 Analysis of debt (excluding IFRS 16 debt) by currency Arkema Group’s debt (excluding IFRS 16 debt) is mainly denominated in euros (In millions of euros) Euros 30 June 2019 2,280 31 December 2018 2,270 Chinese Yuan 149 147 US Dollars 23 9 Other Total debt (excluding IFRS 16 debt) 31 2,483 21 2,447 Part of the debt in euros is converted through swaps to the accounting currency of internally-financed subsidiaries, in line with the Group’s policy. At 30 June 2019 the swapped portion, principally in US dollars, represented approximately 57% of gross debt (excluding IFRS 16 debt). 35 Condensed consolidated interim financial statements at 30 June 2019 16.3 Analysis of debt (excluding IFRS 16 debt) by maturity The breakdown of debt (excluding IFRS 16 debt), including interest costs, by maturity is as follows: (In millions of euros) Less than 1 year 30 June 2019 761 31 December 2018 223 Between 1 and 2 years 35 534 Between 2 and 3 years 35 35 Between 3 and 4 years 29 29 Between 4 and 5 years 179 179 More than 5 years 1,652 1,679 Total debt (excluding IFRS 16 debt) 2,691 2,679 17. Share-based payments 17.1 Stock options The Board of Directors has decided not to introduce any further stock option plans. Movements in the stock option plans granted in previous years and still outstanding are as follows: Plan Total number of options granted* Exercise price* Number of options exercised in 1st half 2019 Number of options cancelled in 1st half 2019 Total number of options exercised Total number of options outstanding Final year for exercising options 2011-1 2011-2 109,082 109,082 65.92 65.92 10,000 32,728 - 109,082 109,082 - 2019 2019 After adjustment following the capital increase with preferential subscription rights of November 2014 The amount of the IFRS 2 expense recognized in respect of stock options at 30 June 2019 is nil (also nil at 30 June 2018). 17.2 Free share grants Movements in the free share grant plans awarded up until 30 June 2019 are as follows: Plan Grant date Vesting period Conser- vation period Total number of free shares granted 2015-1 2015-2 2016-1, 2 2016-3 2016-4 2016-5 2017-1 2017-2 2018-1, 2 2018-3 2018-4 4 years - 4 years 0-3 years 3-4 years 2 years 1-3 years 2 years 3 years - 4 years 2 years 3 years - 4 years 0-3 years 3-4 years 2 years 231,820 (5) 3 years 127,665 (6) 4 years (1) May be raised to 258,439 in the event of outperformance (2) May be raised to 133,366 in the event of outperformance (3) May be raised to 252,521 in the event of outperformance (4) May be raised to 140,890 in the event of outperformance (5) May be raised to 254,011 in the event of outperformance (6) May be raised to 139,261 in the event of outperformance 9 Nov 2015 9 Nov 2015 10 May 2016 7 June 2016 9 Nov 2016 9 Nov 2016 8 Nov 2017 8 Nov 2017 2 May 2018 5 Nov 2018 5 Nov. 2018 285,525 59,595 43,278 50,000 235,835(1) 122,080(2) 230,695(3) 129,405(4) 41,137 Number of shares subject to performance conditions 285,525 - - - 226,040 112,860 218,255 114,845 - 217,570 111,235 Fair value (euros per share) 42.31 42.31 22.91-39.70 41.04-53.53 47.31 50.01 63.59 67.88 59.31-61.13 62.64 64.15 Number of shares definitively granted in 1st half 2019 400 - 5,058 16,666 - 400 - 200 25 - - Number of shares cancelled in 1st half 2019 1,075 2,020 189 - 830 1,740 140 790 10 520 715 Total number of shares still to be granted at 30 June 2019 272,940 53,295 38,031 - 230,205 114,605 230,095 124,415 41,087 231,300 126,950 The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2019 is €12 million ( €11 million at 30 June 2018). 36 Condensed consolidated interim financial statements at 30 June 2019 18. Off-balance sheet commitments 18.1 Commitments given 18.1.1 Off-balance sheet commitments related to the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2019 73 31 December 2018 75 Comfort letters Contractual guarantees 7 7 Customs and excise guarantees 21 17 Total 101 99 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 18.1.2 Contractual commitments related to the Group’s operating activities Some of the commitments described in the lease commitments in note 29.1.2 to the consolidated financial statements at 31 December 2018, “Contractual commitments related to the Group’s operating activities”, do not fall within the scope of IFRS 16. Many of them are irrevocable purchase commitments described below, and service contracts or contracts making available assets that are not controlled by Arkema at 30 June 2019. Only the irrevocable portion of outstanding future purchases has been valued, and the corresponding amounts are included in the table below at 30 June 2019. As of 1 January 2019 Arkema applies IFRS 16 “Leases”. The impacts of this standard in the first half of 2019 are described in notes B “Accounting policies”, C1.8 “Impact of IFRS 16 in the first half of 2019”, and C10 “IFRS 16 leases”. A reconciliation table of lease commitments at 31 December 2018 and the IFRS 16 debt is presented in note B, “Accounting policies”. In the normal course of business, Arkema Group has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over initial periods generally comprised between one and ten years is a normal practice for companies in the Group’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, Arkema’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige the Group to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase contracts in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The value of these agreements thus corresponds to the minimum amount payable to suppliers as indemnification in the event of termination of the contracts or failure to take delivery of the minimum contractual quantities, less any quantities that can be resold on the market when the Group is able to do so. The total amount of the Group’s financial commitments is €644 million at 30 June 2019, maturing as fol lows: (In millions of euros) 30 June 2019 31 December 2018 2019 144 202 2020 77 69 2021 85 67 2022 46 38 2023 until expiry of the contracts 292 282 Total 644 658 37 Condensed consolidated interim financial statements at 30 June 2019 18.1.3 Off-balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses When selling businesses, Arkema Group has sometimes granted the purchaser warranties in respect of unrecorded liabilities. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by the Group amounts to €83 million at 30 June 2019 (€85 million at 31 December 2018). The se amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 18.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C21 to the consolidated financial statements at 31 December 2018, “Debt”. 18.2 Commitments received Commitments received from Total in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies extended certain indemnities, or assumed certain obligations, for the benefit of Arkema Group. Some are still in application while others terminated during 2017. The warranties and commitments concerned are described below, and relate to actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which have ceased in the majority of cases. Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), Total S.A. companies have entered into indemnity and service agreements with Arkema or its subsidiaries. Pursuant to these agreements, the obligations and environmental responsibilities associated with these Former Industrial Sites in France and at Rieme in Belgium were transferred to Total S.A. group companies. Agreement relating to certain Former Industrial Sites located in the United States In March 2006, Arkema Amériques SAS completed the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company for most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Site Services and Arkema Amériques SAS, dated 7 March 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use $270 million to capitalize a new subsidiary, Legacy Site Services LLC, that performs remediation services and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of waste shipments from the sites other than currently operated sites. In exchange for this indemnification, Arkema Amériques SAS agreed to grant to Legacy Site Services LLC control over remediation activities and the defence of claims relating to contamination liabilities at these facilities and sites. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group, certain sites where no significant restoration work is currently underway or anticipated, and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non-existent based upon information available at the time when the indemnity was entered into. Arkema Amériques SAS has waived any claims against Legacy Site Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Site Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defence and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure and criminal liability. 38 Condensed consolidated interim financial statements at 30 June 2019 The indemnity described above is capped at $270 million. The amount received by Arkema under this indemnity amounts to $111 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnify the liabilities of the Group in excess of $270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. 19. Subsequent events The acquisition of ArrMaz was completed on 1 July 2019. For more details see note A1, “Portfolio management”. In adhesives, Arkema announced at the end of July the planned acquisition by Bostik of Prochimir, a company specialized in high- performance thermobonding adhesive films with sales of €30 million. Closing of the deal is expected in fourth quarter 2019, after consultation of trade unions and subject to approval by the antitrust authorities in the relevant countries. End-July, Arkema also announced a project to acquire Lambson, a company specializing in photoinitiators for curing, reporting sales of some €45 million. Closing of the deal is expected i n fourth quarter 2019, subject to approval of antitrust authorities in the relevant countries. 39 Condensed consolidated interim financial statements at 30 June 2019 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2019 (a) Companies which changed their name in 2019. (b) Companies merged in 2019. (c) Companies liquidated in 2019. (d) Companies consolidated for the first time in 2019. (e) Companies for which the percentage ownership was changed in 2019, with no change to control. The percentage of control indicated below also corresponds to the Group’s ownership interest. AEC Polymers Afinitica Process Technologies S.L. Afinitica Technologies S.L. Altuglas International Denmark A/S Altuglas International Mexico Inc. Altuglas International SAS American Acryl LP American Acryl NA, LLC Arkema Arkema Arkema Afrique Arkema Amériques S.A.S. Arkema Antwerp Arkema Asie S.A.S. Arkema B.V. Arkema Canada Inc. Arkema (Changshu) Chemicals Co., Ltd. Arkema (Changshu) Fluorochemical Co., Ltd. Arkema Chemicals India Private Ltd. Arkema (Changshu) Polyamides Co., Ltd. Arkema (China) Investment Co., Ltd. Arkema Coatex Brasil Indústria e Comércio Ltda. Arkema Coating Resins Malaysia Sdn. Bhd. Arkema Coating Resins Ltd. France Spain Spain Denmark United States France United States United States South Korea France France France Belgium France Netherlands Canada China China India China China Brazil Malaysia United Kingdom 100.00 100.00 100.00 100.00 100.00 100.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Arkema Company Ltd. Arkema Daikin Advanced Fluorochemicals (Changshu) Co., Ltd. Arkema Delaware Inc. Arkema Europe Arkema France Arkema GmbH Arkema (Hong Kong) Co., Ltd. Arkema Hydrogen Peroxide Co., Ltd. Shanghai Arkema Inc. Arkema Insurance Designated Activity Company Arkema K.K. Arkema Kimya Sanayi ve Ticaret AS Arkema Ltd. Arkema Mexico S.A. de C.V. Arkema Mexico Servicios S.A. de C.V. Arkema Peroxides India Private Limited Arkema Pte. Ltd. Arkema Pty Ltd. Arkema Quimica Ltda Arkema Quimica SAU Arkema Chemicals Saudi Arabia Arkema (Shanghai) Distribution Co., Ltd. Arkema Sp z.o.o Arkema S.r.l Arkema (Suzhou) Polyamides Co., Ltd. Arkema Taixing Chemicals Co., Ltd. Hong Kong China United States France France Germany Hong Kong China United States Ireland Japan Turkey United Kingdom Mexico Mexico India Singapore Australia Brazil Spain Saudi Arabia China Poland Italy China China 100.00 60.00 100.00 100.00 100.00 100.00 100.00 66.67 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 100.00 100.00 100.00 FC FC FC FC FC FC OC OC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC OC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC 40 Arkema Thiochemicals Sdn Bhd Arkema Yoshitomi Ltd. Barrflex TU LLC Bostik AB Bostik Argentina S. A. Bostik A/S Bostik AS Bostik Australia Pty Ltd. Bostik Belux S.A. – N.V. Bostik Benelux B.V. Bostik B .V. Bostik Canada Ltd. Bostik Egypt For Production of Adhesives S.A.E Bostik Findley China Co., Ltd Bostik Findley (Malaysia) Sdn. Bhd. Bostik GmbH Bostik Hellas S.A. Bostik Holding Hong Kong Ltd. Bostik Holding SA Bostik Inc. Bostik India Private Ltd. Bostik Industries Ltd. Bostik Kimya Sanayi Ve Ticaret A.S Bostik Korea Ltd. Bostik Ltd. Bostik Mexicana S.A. de C.V. Bostik Nederland B .V. Bostik New Zealand Ltd. Bostik-Nitta Co., Ltd. Bostik L.L.C. Bostik OY Bostik Philippines Inc. Bostik Romania S.r.l Bostik SA Bostik S.A. Bostik (Shanghai) Management Co., Ltd. Bostik Sp z.o.o. Bostik (Thailand) Co., Ltd Bostik UAB Bostik Vietnam Company Ltd. Casda Biomatérials Co., Ltd Changshu Coatex Additives Co., Ltd. Changshu Haike Chemical Co., Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Inc. Coatex CEE s.r.o Coatex Inc. Coatex Netherlands B.V. Coatex Daikin Arkema Refrigerants Asia Ltd. Daikin Arkema Refrigerants Trading (Shanghai) Co., Ltd. Debratec GmbH Den Braven Aerosols GmbH & Co. Kg Den Braven Belgium N.V. Den Braven France Den Braven Produtos Quimicos, Unipessoal, Lda. Den Braven Sealants GmbH Den Braven SA (Proprietary) Ltd. Delaware Chemicals Corporation Condensed consolidated interim financial statements at 30 June 2019 Malaysia Japan United States Sweden Argentina Denmark Norway Australia Belgium Netherlands Netherlands Canada Egypt China Malaysia Germany Greece Hong Kong France United States India Ireland Turkey South Korea United Kingdom Mexico Netherlands New Zealand Japan Russia Finland Philippines Romania France Spain China Poland Thailand Lithuania Vietnam China China China Malaysia South Korea Slovakia United States Netherlands France Hong Kong China Germany Germany Belgium France Portugal Austria South Africa United States (a) (a) 86.00 49.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 49.00 14.00 100.00 100.00 100.00 100.00 100.00 40.00 40.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 (b) FC SI JV FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC JV JV FC FC FC FC FC FC FC FC 41 Condensed consolidated interim financial statements at 30 June 2019 Distri-Mark France Febex SA Ihsedu Agrochem Private Ltd. Jiangsu Bostik Adhesive Co., Ltd MEM BAUCHEMIE GmbH Michelet Finance, Inc. MLPC International Odor-Tech LLC Ozark Mahoning Company PT.Bostik Indonesia Sartomer (Guangzhou) Chemicals Co., Ltd. Sartomer Distribution (Shanghai) Co., Ltd. Seki Arkema Co. Ltd. Siroflex Inc. Siroflex Ltd. Société Marocaine des Colles Sovereign Chemicals Ltd. Taixing Sunke Chemicals Co., Ltd. Tamer Endüstriyel Madencilik Anonim Sirketi The LightLock Company Limited Turkish Products, Inc. Usina Fortaleza Industria E commercio de massa fina Ltda Vetek SAU Viking Chemical Company (b) France Switzerland India China Germany United States France United States United States Indonesia China China South Korea United States United Kingdom Morocco United Kingdom China Turkey Hong Kong United States Brazil Argentina United States 100.00 96.77 24.90 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 97.01 100.00 55.00 50.00 55.00 100.00 100.00 100.00 100.00 NB: FC: full consolidation. JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses. JV: joint venture – consolidation by the equity method. SI: significant influence – consolidation by the equity method. FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC FC OC FC FC FC FC FC FC 42 3 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2019 I declare that, to the best of my knowledge, the condensed consolidated interim financial statements for the six months ended 30 June 2019 have been prepared in accordance with the applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and results of the Company and all of the companies included in the scope of consolidation. I further declare that the management report, presented on pages 3 to 12, presents a fair review of the major events that occurred in the first six months of the year and of their impact on the financial statements, as well as the main related-party transactions, and that the said management report provides a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, 31 July 2019 Thierry Le Hénaff Chairman and Chief Executive Officer 43 KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit This is a free translation into English of the statutory auditors’ review report on the condensed half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with French law and professional auditing standards applicable in France. Arkema For the period from January 1 to June 30, 2019 Statutory auditors’ review report on the half-yearly financial information 44 KPMG Audit Département de KPMG S.A. Tour Egho CS 60055 2, avenue Gambetta 92066 Paris-La Défense cedex 775 726 417 R.C.S. Nanterre ERNST & YOUNG Audit Tour First TSA 14444 92037 Paris-La Défense cedex S.A.S. à capital variable 344 366 315 R.C.S. Nanterre Commissaire aux Comptes Membre de la compagnie régionale de Versailles Commissaire aux Comptes Membre de la compagnie régionale de Versailles Arkema For the period from January 1 to June 30, 2019 Statutory auditors’ review report on the half-yearly financial information To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying condensed half-yearly consolidated financial statements of Arkema, for the period from January 1 to June 30, 2019, the verification of the information presented in the half-yearly management report These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. 45 Without qualifying the conclusion expressed above, we draw your attention to the matter set out in note B. « Accounting policies - Impact of the application of IFRS 16» to the condensed half-yearly consolidated financial statements which presents the first application of the IFRS standard “Lease contract”. 2. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, July 31, 2019 The Statutory Auditors French original signed by KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Bertrand Desbarrières Eric Dupré Denis Thibon 46

Semestriel, 2019, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

HALF-YEAR FINANCIAL REPORT Six months ended 30 June 2021 Arkema 420, rue d'Estienne d'Orves – F-92705 Colombes Cedex – France Tel: +33 1 49 00 80 80 – Fax: +33 1 49 00 83 96 A French société anonyme (joint stock corporation) with share capital of €767,364,760 – Registered in Nanterre: RCS 445 074 685 arkema.com 1 2 3 4 2 HALF-YEAR ACTIVITY REPORT CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2021 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2021 STATUTORY AUDITORS’ REVIEW REPORT ON THE HALF-YEARLY FINANCIAL INFORMATION page 3 page 15 page 47 page 49 1 HALF-YEAR ACTIVITY REPORT 1.1 MANAGEMENT ANALYSIS PRINCIPLES AND ACCOUNTING STANDARDS The main alternative performance indicators used by the Group are defined in note 4 to the condensed consolidated interim financial statements at 30 June 2021 presented in section 2 of this document. When analyzing changes in its results, particularly changes in its sales, the Group identifies the impact of the following effects (such analysis is unaudited): scope effect: the impact of changes in the Group’s scope of consolidation, which arise from acquisitions and divestments of entire businesses or as a result of the first-time consolidation or deconsolidation of entities. Increases or reductions in capacity are not included in the scope effect; currency effect: the mechanical impact of consolidating accounts denominated in currencies other than the euro at different exchange rates from one period to another. The currency effect is calculated by applying the foreign exchange rates of the prior period to the figures for the period under review; price effect: the impact of changes in average selling prices is estimated by comparing the weighted average net unit selling price of a range of related products in the period under review with their weighted average net unit selling price in the prior period, multiplied, in both cases, by the volumes sold in the period under review; volume effect: the impact of changes in volumes is estimated by comparing the quantities delivered in the period under review with the quantities delivered in the prior period, multiplied, in both cases, by the weighted average net unit selling price in the prior period. 1.2 FIRST-HALF 2021 HIGHLIGHTS 1.2.1 Covid-19 The Covid-19 pandemic continued to spread throughout the world in the first half of 2021, with the emergence of more contagious variants leading to new lockdowns in a certain number of countries. Nevertheless the economic rebound that began in late 2020 continued, and the Group was able to take advantage of the strong growth in demand for high performance, innovative and sustainable materials, driven by the challenges of lightweight materials, new energies, natural resources management and home insulation. However, Arkema remains attentive to the evolution of the public health situation, which has benefited from the ramp-up of vaccination programs since late 2020, but is still uncertain in several regions. 1.2.2 Organic growth projects Following the start-up in December 2020 of a 50% expansion of fluoropolymer production capacity for battery applications at its Changshu site in China, Arkema announced on 23 February 2021 that it was again investing in this site to increase capacity by a further 35%. The new expansion, which is scheduled to come on stream before the end of 2022, will notably serve the fast-growing lithium-ion battery sector, as well as the water filtration, construction and industrial coatings and semiconductor markets. Moreover, on 7 June 2021, Arkema announced plans to develop the supply of 1233zd, a new generation of fluorospecialties with no or minimal emissive impact, to support increasing market needs for sustainable solutions in insulation materials and in an emerging application in batteries for electric vehicles. As part of these plans, an agreement to manufacture 1233zd in China was finalized with Aofan, whose initial production capacity of 5 kt/year is expected to start mid-2022. At the same time, Arkema will accelerate its detailed planning of 15 kt/year capacity at its Calvert City site in the United States, which is expected to start end-2023 for an estimated investment of US$60 million. With these two organic growth projects, Arkema continues its strategy of sustainable growth in response to new social needs linked to greater environmental awareness, increasing urbanization and new technologies. 3 1.2.3 Acquisitions and divestments In the first half of 2021, Arkema continued its bolt-on acquisition policy and review of divestment possibilities, in line with its ambition to become a pure Specialty Materials player by 2024. Thus, in the Intermediates segment, Arkema took a major step in refocusing on Specialty Materials with the divestment on 3 May 2021 of the PMMA business to Trinseo, a US-based company specialized in the production of plastics, synthetic rubber and latex binders. The divestment of this business is based on an enterprise value of €1,137 mi llion, or over 9 times EBITDA. Moreover, Arkema finalized two bolt-on acquisitions in Adhesive Solutions in first-half 2021: Poliplas on 1 March 2021, a leader in hybrid-technology sealants and adhesives, enabling Bostik to reinforce its presence in the high-growth Brazilian construction adhesives market. With fast-growing sales of around €10 million, Poliplas is a key player in the Brazilia n adhesives market and will complete Bostik's existing offering around the Fortalezza brand; and the Edge Adhesives business in Texas on 1 June 2021, which markets custom formulations in fast-growing easy- install window, door and roofing applications. The business, which generates annual sales of around US$12 million, is complementary to Bostik in hot-melt adhesives and pressure-sensitive adhesive tapes for residential construction and will enable the Group to offer its customers an extended range of value-added and sustainable solutions. Arkema stepped up its commitment in the essential field of the circular economy with the acquisition of Agiplast, finalized on 1 June 2021. This company, specialized in the regeneration of high performance polymers and a historical partner of the Group in recycling operations, generates annual sales of around €15 million. With this acquisition , Arkema has become the first fully integrated high performance polymer manufacturer, offering both bio-based and recycled materials in order to address the challenges of resource scarcity and end-of-life products. Lastly, in High Performance Polymers, Arkema announced on 8 June 2021 that it had acquired a 10% stake in ERPRO 3D FACTORY, a company specialized in large-series additive manufacturing, mainly using polyamide 11 powder, thus enabling the Group to gain new expertise and accelerate the development of new applications for its high performance polymers. 1.2.4 Share buyback In the context of the Group’s announcement on 25 February 2021 regarding its intention to implement a share buyback program for an amount of €300 million after the clo sing of the divestment of the PMMA business, Arkema signed a share purchase agreement with an investment services provider on 20 May 2021. This agreement sets a maximum amount of €300 million over a period from 21 May 2021 to 30 N ovember 2021, at a maximum price of €135 per share, as stipulated in the authorization voted by the annual general meeting of 20 May 2021. The shares purchased under this agreement will be allocated to the implementation of performance share plans or employee share ownership operations up to a limit of €30 million and will be canceled above that limit. At 30 June 2021, €76 million worth of shares had bee n bought back under this agreement and the residual commitment of €224 million was recognized in current debt. 1.2.5 Corporate Social Responsibility In February 2021, Arkema published the final audited and certified results of the 4th year of the “Pragati” project, the world’s first sustainable castor crop program. Arkema joined the program in 2016 alongside BASF, Jayant Agro-Organics and Solidaridad, in line with its commitment to create sustainable value for its entire ecosystem of stakeholders. With over 4,500 farmers in North Gujarat trained in best agricultural practices, yields have improved by more than 50% relative to comparable yields in the region. After successfully completing the initial three-year Phase 1 of the program, the founding members committed to a second phase for a further three years, beginning in late 2019. Furthermore, the Group’s commitment and continuous progress in the field of Corporate Social Responsibility were once again recognized in early 2021 when Arkema joined: S&P Global’s Sustainability Year Book 2021, which recognizes the best performing companies in terms of corporate social responsibility among their industry peers. Having received the bronze award, Arkema ranks as one of the 6 leaders in the sector; and the new CAC40 ESG index on the Paris Stock Exchange, which lists the 40 largest companies that have demonstrated environmental, social and governance best practices. Lastly, in line with its ambitions in terms of Corporate Social Responsibility, Arkema has signed an addendum to its €1 billion syndicated credit facility set up in Jul y 2020 in order to integrate three key CSR criteria for the Group into the 4 calculation of the cost of credit: greenhouse gas emissions, volatile organic compound emissions and the total recordable injury rate (TRIR). Arkema also obtained approval from all lenders for the first one-year extension, bringing the maturity date for the syndicated credit facility to 29 July 2024. 1.3 GOVERNANCE At the combined annual general meeting, which was held behind closed doors on 20 May 2021 at the Company’s headquarters, shareholders approved the appointment of Ilse Henne, Thierry Pilenko and of Bpifrance Investissement represented by Sébastien Moynot, as independent directors for four-year terms, to replace Thierry Morin, Marc Pandraud and Yannick Assouad, whose terms of office had expired. Consequently, 73% of the members the Board of Directors are independent and the proportion of women directors remains at 45%. The Board of Directors also decided to create, with effect from the close of the annual general meeting of 20 May 2021, a new Innovation and Sustainable Growth Committee, whose mission is to assess the contribution of Arkema’s innovation and strategy to environmental challenges and sustainable growth. This committee, chaired by Victoire de Margerie and made up of five directors, meets at least twice a year and contributes, alongside the Nominating, Compensation and Corporate Governance Committee, to performing a comprehensive review of the Group’s CSR and non-financial matters. Lastly, in light of these developments, the Board of Directors decided to alter the composition of its committees with effect from 20 May 2021, as described in section 3.2.1 of the 2020 Universal Registration Document. 5 1.4 ANALYSIS OF FIRST-HALF 2021 FINANCIAL RESULTS The figures in this section are provided on a consolidated basis and in accordance with Arkema’s organization comprising the following three coherent and complementary segments dedicated to Specialty Materials: Adhesive Solutions, Advanced Materials and Coating Solutions, as well as the Intermediates segment which groups together activities whose results are more volatile. 1.4.1 Analysis of Group’s results (In millions of euros) First-half 2021 First-half 2020 Year-on-year change Sales 4,621 3,990 +15.8% EBITDA 836 586 +42.7% Specialty Materials 723 489 +47.9% Intermediates 162 134 +20.9% Corporate (49) (37) EBITDA margin 18.1% 14.7% Specialty Materials 18.8% 15.3% Intermediates 21.1% 17.3% Recurring depreciation and amortization (268) (282) 5.0% Recurring operating income (REBIT) 568 304 +86.8% REBIT margin 12.3% 7.6% Other income and expenses 708 93 Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses (34) (29) Operating income 1,242 368 +237.5% Equity in income of affiliates 1 (1) Financial result (28) (45) 37.8% Income taxes (263) (124) +112.1% Net income 952 198 +380.8% Attributable to non-controlling interests 2 1 Net income – Group share 950 197 +382.2% Adjusted net income 426 190 +124.2% SALES Sales amounted to €4,621 million, up by a strong 15. 8% compared to first-half 2020, which had been impacted by the consequences of the pandemic and by lockdowns in many regions, especially in the second quarter. At constant scope and currency, sales were up 23.2% versus H1’20 and up 7.5% versus the pre-Covid level of H1’19. Sales benefited from a positive market dynamic that lasted the entire first half, with volumes rising by a sharp 12.2% year on year, and also around 3% above 2019 levels. Demand was high in most of the Group’s end markets, in particular construction and DIY, batteries, electronics, transportation and consumer goods. Arkema is thus reaping the benefits of its positioning on growth markets and on innovative, sustainable, high performance solutions, where demand, linked to global megatrends, is accelerating. The evolution of volumes in the packaging, nutrition and hygiene markets reflects the high 2020 comparison base. The price effect was a positive 11.0%, reflecting price increase initiatives in all product lines to pass on the particularly steep rise in raw materials, energy and logistics costs, and benefiting as well from tight market conditions in the acrylics chain. The negative 3.1% scope effect relates to the divestments of the Functional Polyolefins business on 1 June 2020 and the PMMA business on 3 May 2021, which were partially offset by acquisitions in Specialty Materials. The euro’s rise against the US dollar was the main factor behind the negative 4.3% currency effect. 6 In first-half 2021, Specialty Materials represented 83.5% of total Group sales (80% in first-half 2020). The breakdown of sales by segment reflects Arkema’s evolving portfolio and more favorable market conditions compared to the prior-year period, which was marked by the Covid-19 pandemic. Excluding the corporate segment, Adhesive Solutions accounted for 24.5% of Group sales (24% in first-half 2020), Advanced Materials 31% (32% in first-half 2020), Coating Solutions 28% (24% in first-half 2020) and Intermediates 16.5% (20% in first-half 2020). The difference in the regional sales split in first-half 2021 versus the prior-year period is mainly attributable to the regional impact of the pandemic in 2020, which was not as great in North America in the first half of that year. Europe represented 38% of total Group sales in first-half 2021 (37% in first-half 2020), North America 30% (34% in first-half 2020), Asia 28% (25% in first-half 2020) and the rest of the world 4% (unchanged from first-half 2020). EBITDA AND RECURRING OPERATING INCOME Group EBITDA, at €836 million, was up by a very shar p 42.7% compared to first-half 2020, despite a negative currency and scope effect of around €45 million. This excellent performance was driven by growth in volumes, particularly in Adhesive Solutions, High Performance Polymers and Coating Solutions, the benefits of our price increase initiatives in a significantly higher raw materials environment, as well as tight market conditions in the acrylics chain. At €723 million, Specialty Materials’ EBITDA was well above 2019 pre-Covid levels (+21.3% versus H1’19 and +47.9% versus H1’20), with strong growth in all three segments. The Group’s EBITDA margin reached the very high level of 18.1%, up 340 bps from H1’20. Recurring depreciation and amortization totaled €26 8 million, €14 million lower than in first-half 202 0, essentially due to currency and scope effects. In line with the year-on-year changes in EBITDA and recurring depreciation and amortization, recurring operating income (REBIT) came to €568 million, up 86.8% compared to H1 ’20. The REBIT margin was up by 470 bps to 12.3%, thus repositioning the return on capital employed above the Group’s long-term objective of 10%. OPERATING INCOME Operating income rose significantly to €1,242 milli on (€368 million in first-half 2020) and notably in cluded a pre-tax capital gain of close to €950 million relating to the dives tment of PMMA, as well as one-off expenses corresponding primarily to asset impairments, acquisition costs, expenses linked to the consequences of Winter storm Uri in the United States, as well as restructuring charges (for additional detail, see note 5.1 to the condensed consolidated interim financial statements at 30 June 2021). FINANCIAL RESULT The financial result represented a net expense of € 28 million versus a €45 million net expense in first-half 2020. The year- on-year change mainly reflects a less adverse interest rate effect on the portion of the Group’s debt swapped into US dollars, lower bond costs, and the impact of actuarial differences on certain provisions for employee benefits. INCOME TAXES The income tax expense was up €139 million to €263 million (€124 million in first-half 2020), mainly r eflecting the close to €170 million tax impact of the divestiture of the PM MA business in 2021 compared with the €75 million ta x charge recorded in first-half 2020 related to the divestment of the Functional Polyolefins business. In first-half 2020, the tax expense also included a €55 million reversal of deferred tax ass ets due to the use of tax losses. In the first half, excluding exceptional items, the tax rate came in at 20% of recurring operating income, versus 22% last year, reflecting the geographic mix of the Group’s earnings. NET INCOME – GROUP SHARE AND ADJUSTED NET INCOME As a result, net income – Group share totaled €950 m illion (€197 million in first-half 2020), and net e arnings per share amounted to €12.38. Excluding the post-tax impact of non-recurring items, adjusted net income came in at €426 million, rep resenting €5.58 per share. 7 1.4.2 Analysis of results by segment 1.4.2.1 ADHESIVE SOLUTIONS (24.5% OF TOTAL GROUP SALES) (In millions of euros) First-half 2021 First-half 2020 Year-on-year change Sales 1,130 968 +16.7% EBITDA 168 119 +41.2% EBITDA margin 14.9% 12.3% Recurring operating income (REBIT) 136 89 +52.8% REBIT margin 12.0% 9.2% Other income and expenses (29) (29) Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses (24) (18) Operating income 83 42 +97.6% Sales of the Adhesive Solutions segment totaled €1,130 million, up a strong 16.7% compared to first-half 2020. Volumes rose by 14.2%, lifted by positive trends in the construction and DIY markets and by a significant rebound in the great majority of industrial applications. In the continuity of the first quarter, the packaging and hygiene markets faced the high prior-year comparison base. Up 1.5%, the price effect reflected the Group’s actions to pass on raw materials inflation, which clearly accelerated in the second quarter. Further pricing initiatives will be implemented in the third quarter, as the impact of rising raw materials will intensify. The 4.4% positive scope effect corresponds to the integration of Fixatti, Ideal Work, Poliplas and Edge Adhesives and the currency effect was a negative 3.4%. EBITDA for the segment totaled €168 million, up by a v ery sharp 41.2% versus H1’20, and up 26.3% versus H1’19. This performance was driven by high volumes, operational excellence actions, the integration of acquisitions and initiatives to increase selling prices which overall enabled to offset the rise in raw materials costs. Despite the mechanical dilutive impact of price increases on this ratio, the EBITDA margin reached 14.9% in the first half, 260 bps higher than in the prior year, thereby consolidating the target of 14% set for 2021 despite the raw materials context. In line with the year-on-year change in EBITDA, recurring operating income (REBIT) came to €136 million. Th is figure includes €32 million in recurring depreciation and amortization, virtually stable compared to first-half 2020. REBIT margin stood at 12.0% in the first half of 2021. Operating income of €83 million included €24 millio n in depreciation and amortization related to asset revaluations carried out as part of purchase price allocations, up €6 mi llion year on year following the implementation of our bolt-on acquisition strategy. It also included €29 million in net other expenses, corresponding notably to acquisition costs and some restructuring charges. 1.4.2.2 ADVANCED MATERIALS (31% OF TOTAL GROUP SALES) (In millions of euros) First-half 2021 First-half 2020 Year-on-year change Sales 1,432 1,280 +11.9% EBITDA 320 246 +30.1% EBITDA margin 22.3% 19.2% Recurring operating income (REBIT) 197 122 +61.5% REBIT margin 13.8% 9.5% Other income and expenses (114) (18) Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses (7) (8) Operating income 76 96 20.8% Sales of the Advanced Materials segment rose by a significant 11.9% to €1,432 million. Volumes grew by 1 2.0%, driven primarily by the excellent dynamic in High Performance Polymers, which benefited from the acceleration of new developments, particularly in lightweight materials, clean mobility and bio-based products. The trend in volumes was 8 favorable in most of the segment’s end markets, including construction, batteries, electronics, consumer goods and transportation. While gradually improving, the oil and gas market was down year on year, and growth was limited in the animal nutrition market due to the high comparison base in first-half 2020. The 4.2% positive price effect reflects the price increases carried out to pass on the rise in raw materials costs. The currency effect was a negative 4.3%. At €320 million, the segment’s EBITDA increased by near ly 10% compared to pre-Covid H1’19 levels and by 30.1% year on year, driven in particular by the excellent performance in the second quarter. These results mainly reflect the marked increase in volumes and the high technological content of Arkema’s solutions. In this context, EBITDA margin reached a high level at 22.3%, up 310 bps year on year. The recurring operating income (REBIT) of €197 millio n included €123 million in recurring depreciation a nd amortization, stable compared to last year. Operating income amounted to €76 million, including €114 million in net other expenses corresponding m ainly to the exceptional impairment of assets in the Hydrogen Peroxide business, linked to the downward trend in European markets described in note 8.5 to the condensed consolidated interim financial statements at 30 June 2021, as well as to restructuring costs. 1.4.2.3 COATING SOLUTIONS (28% OF TOTAL GROUP SALES) (In millions of euros) First-half 2021 First-half 2020 Year-on-year change Sales 1,279 953 +34.2% EBITDA 235 124 +89.5% EBITDA margin 18.4% 13.0% Recurring operating income (REBIT) 177 64 +176.6% REBIT margin 13.8% 6.7% Other income and expenses (13) (3) Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses (3) (3) Operating income 161 58 +177.6% Sales of the Coating Solutions segment rose by a very strong 34.2% to €1,279 million. The 14.8% increase in volumes reflects the strong dynamic in the segment’s main markets, namely decorative paints, electronics, 3D printing, graphic arts and industrial coatings, but somewhat impacted in the first quarter by product availability temporarily affected by winter storm Uri in the United States. The segment also benefited from its broader offering of more environmentally friendly products, such as waterborne paints and powder coatings. The 25.2% positive price effect reflects price initiatives to offset the increased cost of propylene, acrylics and VAM, as well as a tight acrylics market for activities not integrated downstream. The currency effect was a negative 5.8%. At €235 million, EBITDA for the segment was up by a ver y significant 89.5% year on year, and by 38.2% compared to H1’19, benefiting from higher volumes and prices, the shift in the product mix toward higher added-value applications, and more favorable market conditions in activities not integrated downstream linked to tightness in the acrylics chain. In this context, the EBITDA margin came out at 18.4%, a historically high level in a half-year, up 540 bps relative to H1’20 and up 350 bps relative to H1’19, thereby confirming the segment’s profitability potential, in line with the ambition presented at the Capital Market Days. Recurring operating income (REBIT) of €177 million in cludes €58 million in recurring depreciation and am ortization, virtually stable year on year. Operating income amounted to €161 million and inclu ded €13 million in net other expenses, corresponding ma inly to the consequences of winter storm Uri in Texas. 9 1.4.2.4 INTERMEDIATES (16.5% OF TOTAL GROUP SALES) (In millions of euros) First-half 2021 First-half 2020 Year-on-year change Sales 766 776 1.3% EBITDA 162 134 +20.9% EBITDA margin 21.1% 17.3% Recurring operating income (REBIT) 111 70 +58.6% REBIT margin 14.5% 9.0% Other income and expenses 876 184 Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Operating income 987 254 +288.6% Sales of the Intermediates segment fell 1.3% year on year to €766 million, impacted by a negative 21.1% scope effect corresponding to the divestments of the PMMA business on 3 May 2021 and of the Functional Polyolefins business on 1 June 2020. Volumes grew by 6.9% and the price effect was a positive 16.5%, primarily reflecting much more favorable market conditions in acrylics in Asia as well as a slight improvement in the Fluorogases environment in the second quarter, particularly in the United States. The currency effect was a negative 3.6%. EBITDA increased by 20.9% year on year to €162 million , with more favorable market conditions in the segment’s various activities more than offsetting the negative scope effect. The EBITDA margin rose to 21.1%, driven notably by the tightness observed in the acrylics chain since the beginning of the year. Recurring operating income (REBIT) totaled €111 milli on, including €51 million in recurring depreciation and amortization, down €13 million year on year following the divestm ent of PMMA. REBIT margin stood at 14.5% for the first half of 2021. Operating income was up at €987 million and primari ly included a pre-tax capital gain of close to €950 million relating to the divestment of PMMA on 3 May 2021, as well as exceptional asset impairments and restructuring and environmental contingency expenses in Fluorogases. First-half 2020 operating income included a €235 million pre-tax capital gain, net of costs, generated on the divestment of the Functional Polyolefins business and limited exceptional write-downs of goodwill recognized following impairment tests carried out in the unprecedented context of Covid-19. 1.4.3 Group cash flow analysis (In millions of euros) First-half 2021 First-half 2020 Cash flow from operating activities 433 416 Cash flow from investing activities 760 (19) Net cash flow 1,193 397 Of which net cash flow from portfolio management operations 896 147 Free cash flow 297 250 Of which non-recurring cash flow including exceptional capital expenditure (1) (21) Recurring cash flow 298 271 Cash flow from financing activities (350) (429) 10 EBITDA can be reconciled to free cash flow as follows: (In millions of euros) First-half 2021 First-half 2020 EBITDA 836 586 Taxes (117) (55) Cash items included in the financial result (27) (42) Change in working capital (205) (24) Change in fixed asset payables (1) (35) (54) Recurring capital expenditure (165) (157) Other 11 17 Recurring cash flow 298 271 Exceptional capital expenditure (117) (57) Non-recurring items 116 36 Free cash flow 297 250 (1) Excluding cash flows related to non-recurring items and portfolio management operations. These items represented a net cash outflow of €1 million in first-half 2021 and in first-half 2020. RECURRING CASH FLOW, FREE CASH FLOW AND NET CASH FLOW For the sake of comparability between different years and to neutralize in particular significant non-recurring inflows linked to the tax impacts of recent disposals, a recurring cash flow excluding exceptional items is now calculated. This recurring cash flow (1) thus came to €298 million, up compared to first-ha lf 2020 (€271 million). It includes a much more mar ked increase in working capital in the semester than in the prior year, which was strongly impacted by the Covid-19 pandemic, especially in the second quarter. This rise reflects volume growth and raw materials inflation in a context of a sharp improvement in activity. At 30 June 2021, working capital remains well controlled and represented 11.9% of annualized quarterly sales (2) excluding the PMMA business (16.5% at 30 June 2020 and 16.0% at 30 June 2019), an exceptionally low ratio that remains below the normative level due to strong demand and some difficulties to source raw materials, which did not allow to rebuild inventories. Free cash flow, which includes exceptional items, amounted to €297 million versus €250 million in 2020. It included a non- recurring inflow of €116 million, mainly reflecting tax liabilities relating to the capital gains tax on the PMMA divestment. This tax has been recorded in net cash flow from portfolio management operations but will be disbursed in the second half of the year. Free cash flow for first-half 2020 also included a non-recurring €36 million cash inflow, partly attributable to tax savings of €55 million linked to the use of tax los ses. In the first half, free cash flow also included an increase in exceptional capital expenditure (€117 m illion versus €57 million in H1’20) relating to the ramp-up of construction of the polyamide bio-factory in Singapore and the hydrofluoric acid supply project with Nutrien in the United States. Net cash flow, which includes the impact of portfolio management, came in at a very high €1,193 millio n in first-half 2021 compared to €397 million in first-half 2020. This s trong increase was primarily linked to the net cash inflow from portfolio management operations, which amounted to €896 milli on versus €147 million in first-half 2020. It mainly corresp onds to the gross proceeds from the PMMA divestment finalized on 3 May 2021 for €1.1 billion, and also includes the bolt-on acquisitions of Agiplast and the Edge Adhesives business in Texas. In first-half 2020, the net cash inflow from portfolio management operations corresponded mainly to the divestment of the Functional Polyolefins business and the acquisition of LIP in Adhesive Solutions. CASH FLOW FROM FINANCING ACTIVITIES The cash outflow for financing activities amounted to €350 million in first-half 2021 versus €429 million in the first six months of 2020. The first-half 2021 figure primarily includes a €2.50 per-share dividend payment for fiscal y ear 2020 for a total amount of €191 million and €104 million in share bu yback costs. (1) Recurring cash flow corresponds to free cash flow before exceptional items. It excludes non-recurring items and exceptional capital expenditure. (2) Calculated as working capital at 30 June/(2nd quarter sales * 4). 11 In first-half 2020, the cash outflow for financing activities mainly included the dividend payment for €168 million, share buybacks for €21 million, net proceeds from the hyb rid bonds issued in January 2020 for €299 million a nd the redemption of the bonds with a face value of €480 million that matured in April 2020. 1.4.4 Balance sheet analysis (In millions of euros) 30 June 2021 31 December 2020 Year-on-year change Non-current assets* 6,511 6,489 +0.3% Working capital 968 875 +10.6% Capital employed 7,479 7,364 +1.6% Deferred tax assets 145 159 8.8% Provisions for pensions and employee benefits 505 530 4.7% Other provisions 399 370 +7.8% Total provisions 904 900 +0.4% Long-term assets covering some provisions 101 91 +11.0% Total provisions net of non-current assets 803 809 0.7% Deferred tax liabilities 339 320 +5.9% Net debt (excluding hybrid bonds) 581 1,210 52.0% Shareholders’ equity 5,789 5,235 +10.6% Excluding deferred tax and including pension assets. Between 31 December 2020 and 30 June 2021, non-current assets increased by €22 million, primarily due t o: €285 million in capital expenditure, including €16 5 million in recurring capital expenditure and €117 million in exceptional capital expenditure; a €19 million increase in right-of-use assets rela ted to the Group’s lease commitments under IFRS 16; • €421 million in depreciation and amortization main ly including (i) €268 million in recurring deprecia tion and amortization, of which €28 million arising from the application of IFRS 16, (ii) €34 million in depreci ation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses, and (iii) €127 million in exceptional write-downs of industrial and intangible assets; the impact of acquisitions for an amount of €57 mi llion, corresponding to the integration of Poliplas, Edge Adhesives Texas and Agiplast assets, together with final purchase price allocation adjustments for Fixatti, Ideal Work, CMC and CPS; and a €110 million positive currency translation effec t, mainly linked to the appreciation of the euro against the US dollar at 30 June. At 30 June 2021, working capital was €93 million hig her than at 31 December 2020. This increase mainly reflects volume growth and raw materials inflation in a context of a strong improvement in activity, and includes a positive currency effect of €25 million. The impact of the finalization of the PMMA divestment was negligible, as this business had already been classified as assets held for sale at 31 December 2020 in accordance with IFRS 5. At 30 June 2021, working capital remains well controlled and represented 11.9% of annualized sales excluding the PMMA business (16.5% at 30 June 2020 and 16.0% at 30 June 2019), an exceptionally low ratio that remains below the normative level due to strong demand and some difficulties to source raw materials, which did not allow to rebuild inventories. As a consequence, the Group’s capital employed increased by €115 million between 31 December 2020 and 3 0 June 2021 to €7,479 million at 30 June 2021. Deferred tax assets amounted to €145 million at 30 June 2021, down €14 million on 31 December 2020 fol of €14 million in tax losses during the period. lowing the use Gross provisions totaled €904 million. Some of thes e provisions, accounting for an aggregate €101 mill ion, are covered mainly by the guarantee facility granted by Total and described in note 9.1.2 to the condensed consolidated interim financial statements at 30 June 2021 (section 2 of this document) and therefore by long-term assets recognized in the balance sheet. These essentially consist of provisions related to former industrial sites in the United States. At 30 June 2021, provisions net of these non-current assets remained stable at €803 million (€809 million at 31 December 2020), with t he decrease in employee benefit obligations offset by changes in provisions for restructuring and for litigation and claims. 12 Net provisions can be analyzed as follows by type: (In millions of euros) 30 June 2021 31 December 2020 Pension liabilities 342 388 Other employee benefit obligations 155 142 Environmental contingencies 117 116 Restructuring 51 40 Other 138 123 Between 31 December 2020 and 30 June 2021, net provisions for pension liabilities decreased by €46 mill ion primarily due to a significant increase in the discount rates applied in all regions, particularly in the United States and the United Kingdom. This resulted in a decrease in pension obligations, partially offset by the revaluation of plan assets in the United States and the United Kingdom over the period. The currency effect was limited. Provisions for other employee benefit obligations (healthcare costs, welfare costs and long-service awards) increased by €13 million, mainly reflecting the recognition of a provision corresponding to the dispensation from work mechanism in France for certain categories of employees, as described in note 6.1 to the condensed consolidated interim financial statements at 30 June 2021. The increase in provisions for litigation and claims primarily concerns the consequences of winter storm Uri in Texas in the first quarter of 2021, and legal fees for other ongoing proceedings in the United States. Net debt and hybrid bonds amounted to €1,281 millio n at 30 June 2021 (€1,910 million at 31 December 20 20), representing 0.9 times last-twelve-months EBITDA. This reduction mainly reflects the receipt of €1.1 billion in gros s proceeds from the ion commitment PMMA divestment, the €2.50 per-share dividend payment corresponding to the share buyback program launched in May 2021. for a total payout of €191 million and a €300 mill Shareholders’ equity amounted to €5,789 million versus €5,235 million at 31 December 2020. The €554 milli on increase primarily relates to (i) €952 million in net income for the period, which includes a pre-tax capital gain of close to €950 million relating to the divestment of PMMA, (ii) the payment of a €2.50 per-share dividend for a total amount o f €191 million, and (iii) €104 million for share buybacks together with the residual commitment of €224 million concerning the €300 million share buyback program launched in late May. In first-half 2021, a €53 million actuarial gain was recognized in equity for provisions for pension liabilities and other post-employment benefit obligations, as well as a positive €92 milli on translation adjustment. 1.5 TRANSACTIONS WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. Moreover, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are accounted for under the equity method. The values involved are not significant. 1.6 MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are the same as those described in chapter 2 of the 2020 Universal Registration Document filed with the French financial markets authority (Autorité des marchés financiers – AMF) on 26 March 2021 under number D.21-0206. This document is available on Arkema’s website (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update on the Group’s contingent liabilities is provided in the notes to the condensed consolidated interim financial statements at 30 June 2021. 1.7 OUTLOOK The positive dynamic observed in the first half is continuing, benefiting from solid demand in most of the Group’s end markets. Arkema will nevertheless remain vigilant and ready to respond rapidly to the current evolution of the health crisis and the rising raw materials context, and will pursue its price increase initiatives. Moreover, Arkema will continue to leverage its strong sustainable innovation dynamic and its recent capacity expansions in order to capitalize on accelerating demand for sustainable, high performance solutions, driven by global megatrends. 13 In light of its first-half financial performance, and while remaining attentive to the macroeconomic context which remains volatile, the Group has significantly raised its full-year guidance once again. Excluding a systemic resumption of the health crisis, Arkema is now targeting for 2021, around 30% growth in Specialty Materials’ EBITDA relative to 2020 at constant scope and currency (1), versus the 20% previously announced. Group EBITDA should therefore reach around €1.4 billion for the full year. Finally, Arkema will continue to deploy its strategic roadmap, in line with its ambition to become a pure Specialty Materials player by 2024. (1) With the assumption of a €/$ exchange rate of 1.2 for 2021, the impact on 2020 EBITDA is estimated at a negative €30 million for Specialty Materials and a negative €10 million for Intermediates. 14 2 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2021 CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET CONSOLIDATED CASH FLOW STATEMENT CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 30 JUNE 2021 15 page 16 page 17 page 18 page 19 page 20 page 21 (cid:23)(cid:35)(cid:34)(cid:39)(cid:35)(cid:32)(cid:29)(cid:24)(cid:21)(cid:40)(cid:25)(cid:24)(cid:1)(cid:29)(cid:34)(cid:23)(cid:35)(cid:33)(cid:25)(cid:1)(cid:39)(cid:40)(cid:21)(cid:40)(cid:25)(cid:33)(cid:25)(cid:34)(cid:40)(cid:1) (cid:3)(cid:26)(cid:50)(cid:1)(cid:49)(cid:45)(cid:48)(cid:48)(cid:45)(cid:51)(cid:50)(cid:55)(cid:1)(cid:51)(cid:42)(cid:1)(cid:41)(cid:57)(cid:54)(cid:51)(cid:55)(cid:4) 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(cid:26)(cid:10)(cid:13)(cid:21)(cid:10)(cid:14) (cid:26)(cid:10)(cid:17) (cid:26)(cid:10)(cid:13)(cid:19) (cid:26)(cid:10)(cid:13)(cid:14)(cid:10)(cid:13) (cid:26)(cid:10)(cid:13)(cid:14)(cid:10)(cid:14) (cid:26)(cid:10)(cid:13)(cid:14)(cid:10)(cid:15) (cid:26)(cid:10)(cid:13)(cid:14)(cid:10)(cid:16) (cid:26)(cid:10)(cid:13)(cid:14)(cid:10)(cid:17) (cid:26)(cid:10)(cid:13)(cid:14)(cid:10)(cid:19) (cid:26)(cid:10)(cid:14)(cid:12) (cid:27) 3 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2021 I declare that, to the best of my knowledge, the condensed consolidated interim financial statements for the six months ended 30 June 2021 have been prepared in accordance with the applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and results of the Company and all of the companies included in the scope of consolidation. I further declare that the management report, presented on pages 3 to 14, presents a fair review of the major events that occurred in the first six months of the year and of their impact on the financial statements, as well as the main related-party transactions, and that the said management report provides a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, 28 July 2021 Thierry Le Hénaff Chairman and Chief Executive Officer 47 48 49 KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Arkema Statutory Auditors’ Review Report on the Half- yearly Financial Information 2021 For the period from January 1 to June 30, 2021 KPMG Audit Département de KPMG S.A. Tour Egho CS 60055 2, avenue Gambetta 92066 Paris-La Défense cedex 775 726 417 R.C.S. Nanterre ERNST & YOUNG Audit Tour First TSA 14444 92037 Paris-La Défense cedex S.A.S. à capital variable 344 366 315 R.C.S. Nanterre Commissaire aux Comptes Membre de la compagnie régionale de Versailles et du Centre Commissaire aux Comptes Membre de la compagnie régionale de Versailles et du Centre This is a free translation into English of the statutory auditors’ review report on the half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half- yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Arkema Statutory Auditors’ Review Report on the Half-yearly Financial Information 2021 For the period from January 1 to June 30, 2021 To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying condensed half-yearly consolidated financial statements of Arkema, for the period from January 1 to June 30, 2021, the verification of the information presented in the half-yearly management report. Due to the global crisis related to the Covid-19 pandemic, the condensed half-yearly consolidated financial statements have been prepared and reviewed under specific conditions. Indeed, this crisis and the exceptional measures taken in the context of the state of sanitary emergency have had numerous consequences for companies, particularly on their operations and their financing, and have led to greater uncertainties on their future prospects. Those measures, such as travel restrictions and remote working, have also had an impact on the companies' internal organization and the performance of our review procedures. These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain 50 ERNST & YOUNG Audit Arkema Statutory Auditors’ Review Report on the Half-yearly Financial Information 2021 28 July 2021 assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. II. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, July 28, 2021 The Statutory Auditors French original signed by KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Bertrand Desbarrières Eric Dupré Christine Vitrac 51

Semestriel, 2021, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

HALF-YEAR FINANCIAL REPORT 2023 Six months ended 30 June 2023 1 2 3 4 HALF-YEAR FINANCIAL REPORT Half-year activity report page 3 Condensed consolidated interim financial statements at 30 June 2023 page 15 Declaration by the person responsible for the half-year financial report at 30 June 2023 page 49 Statutory auditors’ review report on the half-yearly financial information page 51 2 HALF-YEAR FINANCIAL REPORT 1 Half-year activity report 1.1 Management analysis principles and accounting standards The main alternative performance indicators used by the Group are defined in note 4 to the condensed consolidated interim financial statements at 30 June 2023 in section 2 of this document. When analyzing changes in its results, and more particularly changes in its sales, the Group identifies the impact of the following effects (such analysis is unaudited): scope effect: the scope effect corresponds to the impact of changes in the Group’s scope of consolidation, which arise from acquisitions and divestments of entire businesses or as a result of the first-time consolidation or deconsolidation of entities. Increases or reductions in capacity are not included in the scope effect; currency effect: the currency effect corresponds to the mechanical impact of consolidating accounts denominated in currencies other than the euro at different exchange rates from one period to another. The currency effect is calculated by applying the foreign exchange rates of the prior period to the figures for the period under review; price effect: the impact of changes in average selling prices is estimated by comparing the weighted average net unit selling price of a range of related products in the period under review with their weighted average net unit selling price in the prior period, multiplied, in both cases, by the volumes sold in the period under review; and volume effect: the impact of changes in volumes is estimated by comparing the quantities delivered in the period under review with the quantities delivered in the prior period, multiplied, in both cases, by the weighted average net unit selling price in the prior period. 1.2 First-half 2023 highlights 1.2.1 Organic growth projects In line with its sustainable growth strategy and its ambition to become a pure Specialty Materials player, Arkema continued to invest in highly profitable organic growth projects, to support the rising demand for innovative, high performance materials, driven in particular by sustainable megatrends such as urbanization and social change, climate change, resource scarcity and technological transformation. In Advanced Materials, for example, Arkema successfully started up its new PVDF production lines at its Changshu site in China in the first half of 2023. This 50% increase in site capacity will enable the Group to meet the strong demand in the lithium-ion battery sector and serve the water filtration, high performance coatings and semiconductor markets. Arkema is furthermore in the start-up phase of its PA11 facility in Singapore, of the production by Nutrien of HF supply in the United States, and of a PVDF capacity expansion in France. 1.2.2 Acquisitions and divestments On 28 June 2023, the Group announced the proposed acquisition of Glenwood Private Equity’s 54% stake in the listed South Korean company PI Advanced Materials (PIAM), for an enterprise value of €728 million. The company will be fully consolidated in Arkema’s financial statements. With sales of over €200 million in 2022, an EBITDA margin of around 30% and best-in-class manufacturing, PIAM is the global leader in polyimide films, benefiting from superior growth in the attractive consumer electronics and electric vehicles markets. 3 HALF-YEAR FINANCIAL REPORT This transaction represents a new significant milestone in Arkema’s transformation into a pure Specialty Materials player and will strengthen the Advanced Materials segment’s portfolio and performance, given PIAM’s best-in-class innovation, ultra-high performance product portfolio and leading position. The transaction price represents around 20x the average 2021/2022 EBITDA, with a target of reaching 8x estimated EBITDA in 2027, post synergies evaluated at €30 million. The deal, which is subject to the approval of Chinese and Korean anti-trust authorities, should be finalized end-2023. In addition, on 1 June 2023, Arkema expanded its offering of engineering adhesives by finalizing the acquisition of Polytec PT, a German company specialized in adhesives for batteries and electronics applications. Polytec PT delivers around €15 million in sales with one main production site in Karlsbad, Germany. The Group also continued its dynamic business portfolio management, and finalized, on 3 January 2023, the divestment of Febex, a company specialized in phosphorus-based chemistry, to Belgian group Prayon. 1.2.3 Corporate Social Responsibility The Group, which had already strengthened its climate plan in July 2022, raised its decarbonization targets thanks to significant progress made in 2022, and obtained SBTi validation for its 1.5°C trajectory by 2030. As a result, Arkema now aims to reduce its greenhouse gas emissions by 48.5% for Scopes 1+2 and by 54% for Scope 3 by 2030 versus 2019. To fulfill this new commitment, the Group will draw on a precise action plan structured around major levers, including: a greater share of low-carbon steam and electricity consumed at its facilities, in particular through long-term contracts with producers, such as the major supply contract signed with ENGIE for the supply in France of 300 GWh per year of biomethane; improving energy efficiency and optimizing industrial processes; and increasing the share of its renewable or recycled raw materials, reducing its most emissive activities, and developing polymer recycling channels. The whole initiative is supported by a capital expenditure envelope linked to decarbonization that could reach €400 million in total by 2030. 1.2.4 Financing On 16 January 2023, Arkema successfully completed a €400 million bond issue with an eight-year maturity and an annual coupon of 3.50%. This issuance, which was carried out as part of the Group’s financing policy, enables the Group to extend the average maturity of its financial resources and initiate the refinancing of its upcoming bond maturities. 1.3 Governance At the combined annual general meeting held on 11 May 2023 at the Maison de la Mutualité in Paris, shareholders approved the reappointment, for four-year terms, of the following directors: Hélène Moreau-Leroy, senior independent director and member of the Nominating, Compensation and Corporate Governance Committee; and Ian Hudson, member of the Audit and Accounts Committee and the Innovation and Sustainable Growth Committee. Shareholders also approved the appointment of Florence Lambert and Séverin Cabannes as independent directors for four-year terms to replace Victoire de Margerie and Laurent Mignon, whose terms of office expired. 4 HALF-YEAR FINANCIAL REPORT Following these changes, the independence rate at the Board of Directors stands once again at 73% and the proportion of women directors is stable at 45%. 1.4 Analysis of first-half 2023 financial results The figures in this section are provided on a consolidated basis and in accordance with Arkema’s organization comprising the following three coherent and complementary segments dedicated to Specialty Materials: Adhesive Solutions, Advanced Materials and Coating Solutions, as well as the Intermediates segment which groups together activities with more volatile results. 1.4.1 Analysis of the Group’s results (In millions of euros) First-half 2023 First-half 2022 YoY change Sales 4,966 6,071 18.2% EBITDA 784 1,324 40.8% Specialty Materials 715 1,156 38.1% Intermediates 118 223 47.1% Corporate 49 55 EBITDA margin 15.8% 21.8% Specialty Materials 15.8% 21.2% Intermediates 27.4% 37.6% Recurring depreciation and amortization 265 266 Recurring operating income (REBIT) 519 1,058 50.9% REBIT margin 10.5% 17.4% Other income and expenses 39 70 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 63 40 Operating income 417 948 56.0% Equity in income of affiliates 5 1 Financial result 35 14 Income taxes 92 201 Net income 285 732 61.1% Of which: non-controlling interests 1 2 Net income – Group share 284 730 61.1% Adjusted net income 369 819 54.9% 5 HALF-YEAR FINANCIAL REPORT SALES At €4,966 million, Group sales were down by 18.2% compared with the particularly elevated level in first-half 2022. Volumes were down by 16.7% in a context of destocking and overall weak demand, more particularly in Europe and the United States. In China, demand remained down, despite the return of more positive dynamics in batteries following the destocking seen in the first few months of the year. Some markets, such as automotive, medical and energy, also showed more positive momentum. Penalized by very different market conditions in upstream acrylics and PVDF relative to the prior year, the overall price effect was a negative 2.2%, but was positive for most other product lines. It reflects the prior year’s price increase initiatives in the face of cost inflation, and the benefits of repositioning the portfolio toward innovative, higher value-added solutions. The 1.3% positive scope effect mainly reflects the acquisitions in Adhesive Solutions, partially offset by the divestment of Febex in early January. The currency effect reversed in the second quarter and had a limited impact of negative 0.6% for the half-year period. The breakdown of sales by segment reflects the changes in the scope of Arkema’s portfolio, the benefits of its sustainable innovation in high performance solutions, as well as the normalization of market conditions in upstream acrylics and PVDF. Adhesive Solutions thus now represents 28% of Group sales (1) (24% in H1’22), Advanced Materials 37% (36% in H1’22), Coating Solutions 26% (30% in H1’22) and Intermediates 9% (10% in H1’22). The change in the regional sales breakdown relative to the prior year mainly reflects weak demand in Asia, with Europe representing 36% of total Group sales in first-half 2023 (33.5% in H1’22), North America 37% (34.5% in H1’22), Asia 22% (28% in H1’22) and the rest of the world 5% (4% in H1’22). EBITDA AND RECURRING OPERATING INCOME At €784 million, EBITDA was down relative to the prior year (€1,324 million in H1’22), which included exceptional profits in PVDF and upstream acrylics. This figure also reflects the general economic slowdown and benefits from easing tightness in raw materials in the second quarter. Despite significantly lower volumes, the EBITDA margin remained solid and amounted to 15.8%, supported in particular by dynamic price management and an improved mix toward higher value-added solutions. Including recurring depreciation and amortization, virtually stable in the first half at €265 million (€266 million H1’22), recurring operating income (REBIT) amounted to €519 million (€1,058 million in H1’22), and REBIT margin reached 10.5% (17.4% in H1’22). OPERATING INCOME In line with the change in REBIT, operating income came in at €417 million in the first half of 2023. This figure includes €39 million in one-off expenses, corresponding notably to start-up costs for the Singapore platform and restructuring costs, which were partly offset by the capital gain on the divestment of Febex (for further details, see note 5.1 to the condensed consolidated interim financial statements at 30 June 2023). In first-half 2022, these expenses corresponded mainly to acquisition costs for Ashland’s adhesives, asset impairments and restructuring costs. FINANCIAL RESULT The financial result represented a net expense of €35 million in the first half of 2023, up compared with the prior-year figure, which included a strong positive impact from actuarial differences on certain provisions for employee benefits. (1) Calculated excluding Corporate segment sales (€19 million in H1’23 and in H1’22). 6 HALF-YEAR FINANCIAL REPORT INCOME TAXES The income tax expense fell sharply and amounted to €92 million (€201 million in H1’22), in line with the change in the Group’s operating performance. Excluding exceptional items, the tax rate for the first half amounted to 21% of recurring operating income. NET INCOME – GROUP SHARE AND ADJUSTED NET INCOME Net income – Group share totaled €284 million (€730 million in H1’22), and net earnings per share amounted to €3.73. Excluding the post-tax impact of non-recurring items, adjusted net income came in at €369 million, representing €4.94 per share. 1.4.2 Analysis of results by segment ADHESIVE SOLUTIONS (28% OF TOTAL GROUP SALES) (In millions of euros) First-half 2023 First-half 2022 YoY change Sales 1,390 1,449 4.1% EBITDA 188 201 6.5% EBITDA margin 13.5% 13.9% Recurring operating income (REBIT) 147 165 10.9% REBIT margin 10.6% 11.4% Other income and expenses 12 32 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 51 28 Operating income 84 105 20.0% Sales in the Adhesive Solutions segment totaled €1,390 million, down by 4.1% compared to first-half 2022. Sales were impacted by a 12.7% volume decrease, reflecting destocking and overall weaker demand in most end markets, with the exception of the automotive market which remained better oriented. The 4.3% positive price effect reflects the teams' efforts to take into account the general inflationary context that persisted in 2022. The scope effect added 5.7% to the segment's sales and corresponds to the additional two-month contribution of Ashland’s adhesives and to the integration of Permoseal and Polytec PT at the end of the first-half. The currency effect was a negative 1.4% in the period. EBITDA for the segment came in at €188 million (€201 million in H1’22), impacted mainly by the decline in volumes, but benefiting nevertheless from the integration of acquisitions, the evolution in the product mix towards higher value-added solutions and the raw material costs decrease at the end of the first half. In this context, the EBITDA margin held up well at 13.5% (13.9% in H1’22). Recurring operating income (REBIT) amounted to €147 million (€165 million in H1’22), including €41 million in recurring depreciation and amortization, up €5 million compared with first-half 2022, mainly due to the integration of acquisitions. REBIT margin stood at 10.6% (11.4% in H1’22). Operating income came to €84 million (€105 million in H1’22), including €51 million in depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses, up €23 million year-on-year following the integration of Ashland’s adhesives. It also included €12 million in net other expenses, down by €20 million compared with the prior year, which included acquisition costs for Ashland’s adhesives, and corresponding mainly to restructuring costs. 7 HALF-YEAR FINANCIAL REPORT ADVANCED MATERIALS (37% OF TOTAL GROUP SALES) (In millions of euros) First-half 2023 First-half 2022 YoY change Sales 1,849 2,188 15.5% EBITDA 345 556 37.9% EBITDA margin 18.7% 25.4% Recurring operating income (REBIT) 210 422 50.2% REBIT margin 11.4% 19.3% Other income and expenses 16 22 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 8 9 Operating income 186 391 52.4% Sales in the Advanced Materials segment were down by 15.5% compared to first-half 2022 to €1,849 million. Segment volumes fell by 14.2%, impacted mainly by temporary destocking in batteries in China affecting fluoropolymers in the first quarter, as well as by destocking and overall lower demand, more particularly in Performance Additives. Volumes of High Performance Polymers rose in the second quarter, driven in particular by demand in the automotive and energy markets, as well as by improved momentum in batteries in China. The price effect of positive 0.3% reflects the expected normalization of PVDF prices in batteries, overshadowing a positive trend in the segment’s other activities linked to the pricing policy implemented since last year in the face of inflation, as well as a positive product mix supported by new developments. The scope effect was a negative 1.1%, linked to the divestment of Febex, and the currency effect was a negative 0.5%. At €345 million, EBITDA for the segment was down compared with the prior year’s very high comparison base (€556 million in H1’22, €326 million in H1’21), which was linked to exceptionally favorable conditions in PVDF for batteries. Although impacted by sharply lower volumes, Performance Additives’ EBITDA was stable, reflecting the quality and resilience of the portfolio. In this context, the segment’s EBITDA margin reached a good level of 18.7%, supported by the positive momentum in high performance solutions. In line with the change in EBITDA, recurring operating income (REBIT) came to €210 million, including €135 million in recurring depreciation and amortization, stable relative to the prior year. At €186 million (€391 million in H1’22), operating income included €16 million in net other expenses (€22 million in H1’22), corresponding mainly to start-up costs for the Singapore platform and specific asset impairments, partly offset by the capital gain on the divestment of Febex. 8 HALF-YEAR FINANCIAL REPORT COATING SOLUTIONS (26% OF TOTAL GROUP SALES) (In millions of euros) First-half 2023 First-half 2022 YoY change Sales 1,278 1,822 29.9% EBITDA 182 399 54.4% EBITDA margin 14.2% 21.9% Recurring operating income (REBIT) 121 336 64.0% REBIT margin 9.5% 18.4% Other income and expenses 1 0 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 4 3 Operating income 116 333 65.2% Sales in the Coating Solutions segment were down by a sharp 29.9% compared with the very high comparison base in first-half 2022 and came to €1,278 million. In a context of falling overall demand in Europe and the United States, volumes were down by 21.8%, also penalized by the effects of destocking in decorative paints and industrial markets. The price effect was a negative 9.2% and mainly reflects markedly less favorable conditions in upstream acrylics. The scope effect, linked to the acquisition of Polimeros Especiales, amounted to a positive 0.9% and the currency effect was a very limited positive 0.2%. In this context, EBITDA fell sharply and amounted to €182 million (€399 million in H1’22), impacted mainly by the normalization of market conditions in upstream acrylics and by sharply lower volumes, while downstream activities proved far more resilient. The EBITDA margin held up well given the economic context, coming in at 14.2%. Recurring operating income (REBIT) totaled €121 million (€366 million in H1’22), including recurring depreciation and amortization of €61 million, broadly stable year-on-year (€63 million). Operating income amounted to €116 million in first-half 2023 and included a €4 million expense for depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses. INTERMEDIATES (9% OF TOTAL GROUP SALES) (In millions of euros) First-half 2023 First-half 2022 YoY change Sales 430 593 27.5% EBITDA 118 223 47.1% EBITDA margin 27.4% 37.6% Recurring operating income (REBIT) 93 193 51.8% REBIT margin 21.6% 32.5% Other income and expenses 0 2 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses Operating income 93 191 51.3% 9 HALF-YEAR FINANCIAL REPORT Sales in the Intermediates segment fell by 27.5% compared with first-half 2022 to €430 million. Volumes were down by 20.6%, impacted mainly by weak demand for acrylics in China. The 5.7% negative price effect was affected by markedly less favorable market conditions in acrylics in Asia, but the momentum in refrigerant gases remained positive overall. The currency effect was a negative 1.2%. In this context, segment EBITDA amounted to €118 million versus €223 million in first-half 2022, and the EBITDA margin came to 27.4% (37.6% in H1’22). Recurring operating income (REBIT) totaled €93 million (€193 million in H1’22), including recurring depreciation and amortization of €25 million, down by €5 million year-on-year. As a result, operating income came in at €93 million for the period (€191 million in H1’22). 1.4.3 Group cash flow analysis (In millions of euros) First-half 2023 First-half 2022 Cash flow from operating activities 417 531 Cash flow from/(used in) investing activities 387 1,850 Net cash flow 30 1,319 Of which net cash flow from portfolio management operations 39 1,507 Free cash flow 69 188 Of which non-recurring cash flow including exceptional capital expenditure 55 73 Recurring cash flow 124 261 EBITDA can be reconciled to free cash flow as follows: (In millions of euros) First-half 2023 First-half 2022 EBITDA 784 1,324 Taxes 112 218 Cash items included in the financial result 28 26 Change in working capital (1) 161 529 Change in fixed asset payables (2) 124 99 Recurring capital expenditure 212 171 Other 23 20 Recurring cash flow 124 261 Exceptional capital expenditure 12 66 Non-recurring cash flow 43 7 Free cash flow 69 188 (1) Excluding cash flows related to non-recurring items and portfolio management operations. These items represented a net cash outflow of €3 million in first-half 2023 and a net cash inflow of €11 million in first-half 2022. (2) Excluding cash flows related to non-recurring items and portfolio management operations. These items represented a nil amount in first-half 2023 and in first-half 2022. 10 HALF-YEAR FINANCIAL REPORT RECURRING CASH FLOW AND FREE CASH FLOW Recurring cash flow came to €124 million (€261 million in H1’22). This figure reflects the Group’s solid operating performance and includes a limited increase in working capital, in a context of lower raw material costs and weak activity. At end-June 2023, working capital represented 16.9% of annualized sales (14.9% at end-June 2022). Recurring cash flow also included recurring capital expenditure of €212 million (€171 million in H1’22). At €69 million, free cash flow included exceptional capital expenditure which were down sharply to €12 million (€66 million in H1’22), as well as non-recurring expenses linked in particular to the start-up of the Singapore platform and restructuring costs. The net cash outflow from portfolio management operations of €39 million includes the payment of the Polytec PT acquisition finalized on 1 June 2023, as well as the proceeds from the Febex divestment in early January. In the prior year, portfolio management operations generated a €1,507 million net cash outflow and corresponded essentially to the acquisition of Ashland’s adhesives. 1.4.4 Balance sheet analysis (In millions of euros) 30 June 2023 31 December 2022 Change Non-current assets* 8,475 8,583 1.3% Working capital 1,650 1,440 +14.6% Capital employed 10,125 10,023 +1.0% Deferred tax assets 163 166 1.8% Assets held for sale 18 Provisions for pensions and employee benefits 389 382 +1.8% Other provisions 415 444 6.5% Total provisions 804 826 2.7% Long-term assets covering some provisions 105 118 11.0% Total provisions net of non-current assets 699 708 1.3% Deferred tax liabilities 354 362 2.2% Other non-current liabilities 14 14 Net debt (excluding hybrid bonds) 1,945 1,666 +16.7% Shareholders’ equity 7,171 7,339 2.3% Excluding deferred tax and including pension assets. Between 31 December 2022 and 30 June 2023, non-current assets decreased by €108 million. This change was primarily due to the currency translation effect, with other effects offsetting each other, including: the impact of acquisitions for an amount of €70 million, corresponding essentially to the integration of Polytec PT’s assets, which notably led to the recognition of €60 million provisional goodwill. Given the finalization of Permoseal’s and PMP’s purchase price allocation, the provisional goodwill recorded on the first half came to €44 million (for further details, see notes 3.1 and 8.1 to the condensed consolidated interim financial statements at 30 June 2023); €224 million in capital expenditure, including €212 million in recurring capital expenditure and €12 million in exceptional capital expenditure; a €36 million increase in right-of-use assets related to the Group’s lease commitments under IFRS 16; 11 HALF-YEAR FINANCIAL REPORT €334 million in depreciation and amortization mainly including (i) €265 million in recurring depreciation and amortization, of which €33 million arising from the application of IFRS 16, (ii) €63 million in depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses, and (iii) €6 million in exceptional write-downs of industrial and intangible assets; and a €111 million negative currency translation effect, mainly linked to the euro’s strong appreciation against the US dollar at 30 June 2023. At 30 June 2023, working capital rose by €210 million compared with 31 December 2022, including a negative currency effect of €42 million. This increase mainly reflects the higher level of capital expenditure at the end of the year, and a moderate business seasonality effect in a context of lower raw material costs. As a consequence, the Group’s capital employed increased by €102 million between 31 December 2022 and 30 June 2023 to €10,125 million at 30 June 2023. Deferred tax assets amounted to €163 million at 30 June 2023, down €3 million compared with 31 December 2022. Gross provisions totaled €804 million. Some of these provisions, accounting for an aggregate €104 million, are covered mainly by the guarantee facility granted by TotalEnergies and described in note 9.1.2 to the condensed consolidated interim financial statements at 30 June 2023 (see section 2 of this document) and therefore by long-term assets recognized in the balance sheet. These consist mainly of provisions related to former industrial sites in the United States. A pension asset of €1 million was also recognized in the balance sheet. At 30 June 2023, provisions net of these non-current assets were down by €9 million to €699 million. Net provisions can be analyzed as follows by type: (In millions of euros) 30 June 2023 31 December 2022 Pension liabilities 261 254 Other employee benefit obligations 127 127 Environmental contingencies 133 132 Restructuring 33 38 Other 145 157 Between 31 December 2022 and 30 June 2023, net provisions for pension liabilities increased by €7 million, primarily due to a slight decrease in the discount rates applied in the United States and the United Kingdom leading to an increase in pension obligations, and included a negative currency effect of around €3 million. Provisions for other employee benefit obligations (healthcare costs, welfare costs and long-service awards) remained stable at €127 million and other provisions decreased by €12 million in conjunction with the reduction in commercial provisions. Net debt and hybrid bonds amounted to €2,645 million at 30 June 2023 (€2,366 million at 31 December 2022), representing 1.7 times last-twelve-months EBITDA. This increase primarily reflects the cash flows described in section 1.4.3 of this document, and also includes the payment of the dividend of €3.40 per share for a total amount of €253 million, as well as a total of €23 million in share buybacks in the first half of 2023. In this context, on 6 July 2023, credit rating agency Standard & Poor’s raised the outlook associated to the Group’s rating from “stable” to ”positive” while confirming its rating of BBB+/A-2. Moreover, in July 2023, the Group extended its €1.1 billion syndicated line of credit by one year, with maturity now on 28 July 2028. Shareholders’ equity amounted to €7,171 million versus €7,339 million at 31 December 2022. The €168 million decrease primarily included (i) €285 million in net income for the period, (ii) the payment of a dividend of €3.40 per share for a total amount of €253 million, (iii) share buybacks for a total amount of €23 million, as well as (iv) a negative €143 million translation adjustment due to the depreciation of the US dollar and the Chinese yuan against the euro. 12 HALF-YEAR FINANCIAL REPORT 1.5 Transactions with related parties Transactions between consolidated companies have been eliminated in the consolidation process. Moreover, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are accounted for under the equity method. The values involved are not significant. 1.6 Main risks and uncertainties The main risks and uncertainties which the Group could face over the next six months are the same as those described in chapter 2 of the 2022 Universal Registration Document filed with the French financial markets authority (Autorité des marchés financiers – AMF) on 28 March 2023 under number D.23-0171. This document is available on Arkema’s website (www.arkema.com) in the “Investors” section and on the AMF website (www.amf-france.org). Additionally, an update on the Group’s liabilities and contingent liabilities is provided in the notes to the condensed consolidated interim financial statements at 30 June 2023. 1.7 Outlook In a macroeconomic environment which is in line with that of the first six months of the year, volumes remain sharply lower than last year with reduced visibility at the start of the second half. The price of certain raw materials and energy continues to decrease. In this context, the Group will strive to continue tightly managing its operations, in particular by controlling fixed costs and optimizing working capital. It will also continue its innovation drive in high-growth areas linked to sustainability, and ramp up recently started growth capital expenditure projects. In this environment, in light of its first-half results and based on the projected momentum in the second half, Arkema confirms its full-year guidance and aims to achieve in 2023 EBITDA of around €1.5 billion to €1.6 billion. Furthermore, the Group expects a high EBITDA to cash conversion rate over the year, consistent with its medium-term target of at least 40%. 13 14 HALF-YEAR FINANCIAL REPORT HALF-YEAR FINANCIAL REPORT 2 Condensed consolidated interim financial statements at 30 June 2023 Consolidated income statement page 16 Consolidated statement of comprehensive income page 17 Consolidated balance sheet page 18 Consolidated cash flow statement page 19 Consolidated statement of changes in shareholders’ equity page 20 Notes to the consolidated financial statements at 30 June 2023 page 21 15 CONSOLIDATED INCOME STATEMENT (In millions of euros) Sales Operating expenses Research and development expenses Selling and administrative expenses Other income and expenses Operating income Equity in income of affiliates Financial result Income taxes Net income Attributable to non-controlling interests Net income – Group share Earnings per share (in euros) Diluted earnings per share (in euros) 16 HALF-YEAR FINANCIAL REPORT Notes (4.8 & 4.9) (5.1) (4.8) (10.1) (7) (11.6) (11.6) 1st half 2023 4,966 (3,922) (136) (452) (39) 417 (5) (35) (92) 285 1 284 3.73 3.72 1st half 2022 6,071 (4,485) (133) (435) (70) 948 (1) (14) (201) 732 2 730 9.80 9.76 HALF-YEAR FINANCIAL REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of euros) Net income Hedging adjustments Other items Deferred taxes on hedging adjustments and other items Change in translation adjustments Other recyclable comprehensive income/(loss) Impact of remeasuring unconsolidated investments Actuarial gains and losses Deferred taxes on actuarial gains and losses Other non-recyclable comprehensive income/(loss) Notes (11.5) (6.1) 1st half 2023 285 (38) 0 2 (143) (179) — (7) 1 (6) 1st half 2022 732 16 — (3) 327 340 (1) 115 (19) 95 TOTAL INCOME AND EXPENSES RECOGNIZED DIRECTLY THROUGH EQUITY Total comprehensive income Attributable to non-controlling interests Total comprehensive income – Group share (185) 100 (1) 101 435 1,167 3 1,164 17 CONSOLIDATED BALANCE SHEET (In millions of euros) ASSETS Goodwill Other intangible assets, net Property, plant and equipment, net Investments in equity affiliates Other investments Deferred tax assets Other non-current assets TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Current financial derivative assets Cash and cash equivalents Assets held for sale TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Translation adjustments SHAREHOLDERS’ EQUITY – GROUP SHARE Non‑controlling interests TOTAL SHAREHOLDERS’ EQUITY Deferred tax liabilities Provisions for pensions and other employee benefits Other provisions and non‑current liabilities Non-current debt TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Current financial derivative liabilities Current debt Liabilities associated with assets held for sale TOTAL CURRENT LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 18 HALF-YEAR FINANCIAL REPORT Notes 30 June 2023 31 December 2022 (8.1) (8.2) (8.3) (3.2) 2,676 2,109 3,364 18 52 163 256 8,638 1,379 1,460 218 112 43 1,666 — 4,878 13,516 2,655 2,178 3,429 24 52 166 245 8,749 1,399 1,360 202 130 57 1,592 22 4,762 13,511 (11.1) (11.3) (6.1) (9.1) (10.2) (10.2) (3.2) 750 6,214 (43) 211 7,132 39 7,171 354 389 429 2,951 4,123 998 424 88 52 660 — 2,222 13,516 750 6,218 (20) 352 7,300 39 7,339 362 382 458 2,560 3,762 1,149 437 109 13 698 4 2,410 13,511 CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) Operating cash flows Net income Depreciation, amortization and impairment of assets Other provisions and deferred taxes (Gains)/Losses on sales of long-term assets Undistributed affiliate equity earnings Change in working capital Other changes CASH FLOW FROM OPERATING ACTIVITIES Investing cash flows Intangible assets and property, plant and equipment additions Change in fixed asset payables Acquisitions of operations, net of cash acquired Increase in long-term loans Total expenditures Proceeds from sale of intangible assets and property, plant and equipment Proceeds from sale of operations, net of cash transferred Repayment of long-term loans Total divestitures CASH FLOW FROM INVESTING ACTIVITIES Financing cash flows Issuance/(Repayment) of shares and paid-in surplus Purchase of treasury shares Dividends paid to parent company shareholders Interest paid to bearers of subordinated perpetual notes Dividends paid to non-controlling interests and buyout of minority interests Increase in long-term debt Decrease in long-term debt Increase/(Decrease) in short-term debt CASH FLOW FROM FINANCING ACTIVITIES Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 19 HALF-YEAR FINANCIAL REPORT Notes 1st half 2023 1st half 2022 (5.2) 285 334 (26) (28) 5 (164) 11 417 732 326 (22) (4) 2 (518) 15 531 (4.3) (3.1) (3.2) (224) (124) (65) (33) (446) 7 32 20 59 (387) (237) (99) (1,493) (40) (1,869) 6 — 13 19 (1,850) (11.1) (11.3) (11.4) (11.2) 0 (23) (253) (5) (2) 396 (42) (34) 37 — (2) (222) (5) (1) 3 (37) 648 384 67 7 1,592 1,666 (935) (8) 2,285 1,342 HALF-YEAR FINANCIAL REPORT CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (In millions of euros) At 1 January 2023 Cash dividend Issuance of share capital Share capital 750 — — Paid-in surplus 1,067 — — Hybrid bonds 700 — — Retained earnings 4,451 (258) — Translation adjustments 352 — — Treasury shares (20) — — Shareholders’ equity – Group share 7,300 (258) — Non‑controlling interests 39 (1) — Shareholders’ equity 7,339 (259) — Capital reduction by cancellation of treasury shares Purchase of treasury shares Grants of treasury shares to employees Share-based payments Issuance of hybrid bonds Redemption of hybrid bonds Other — — — — — — — — — — — — — — — — — — — — — — — 0 12 — — 0 — — — — — — — — (23) 0 — — — — — (23) — 12 — — — — — — — — — 2 — (23) — 12 — — 2 Transactions with shareholders Net income Total income and expenses recognized directly through equity Total comprehensive income At 30 June 2023 — — — — 750 — — — — 1,067 — — — — 700 (246) 284 (42) 242 4,447 — — (141) (141) 211 (23) — — — (43) (269) 284 (183) 101 7,132 1 1 (2) (1) 39 (268) 285 (185) 100 7,171 (In millions of euros) At 1 January 2022 Cash dividend Issuance of share capital Capital reduction by cancellation of treasury shares Purchase of treasury shares Grants of treasury shares to employees Share-based payments Issuance of hybrid bonds Redemption of hybrid bonds Other Transactions with shareholders Net income Total income and expenses recognized directly through equity Total comprehensive income At 30 June 2022 Share capital 767 — — (24) — — — — — — (24) — — Paid-in surplus 1,272 — — (246) — — — — — — (246) — — Hybrid bonds 700 — — — — — — — — — — — — Retained earnings 3,626 (227) — — — (3) 13 — — — (217) 730 108 Translation adjustments 243 — — — — — — — — — — — 326 Treasury shares (305) — — 270 (2) 3 — — — — 271 — — Shareholders’ equity – Group share 6,303 (227) — — (2) — 13 — — — (216) 730 434 Non‑controlling interests 47 (1) — — — — — — — 1 — 2 1 Shareholders’ equity 6,350 (228) — — (2) — 13 — — 1 (216) 732 435 — 743 — 1,026 — 700 838 4,247 326 569 — (34) 1,164 7,251 3 50 1,167 7,301 20 HALF-YEAR FINANCIAL REPORT Notes to the consolidated financial statements at 30 June 2023 Note 1: Highlights Note 2: Accounting policies and new standards Note 3: Scope of consolidation Note 4: Alternative performance indicators and information by segment Note 5: Other information relating to operating activities Note 6: Provisions for pensions and other employee benefits Note 7: Income taxes Note 8: Intangible assets and property, plant and equipment Note 9: Other provisions and other non-current liabilities, contingent liabilities and litigation Note 10: Financing Note 11: Shareholders’ equity and earnings per share Note 12: Subsequent events Note 13: List of consolidated companies 21 22 22 24 25 30 32 34 34 38 41 44 45 45 HALF-YEAR FINANCIAL REPORT Note 1: Highlights 1.1. PORTFOLIO MANAGEMENT On 28 June 2023, the Group announced the proposed acquisition of Glenwood Private Equity’s 54% stake in the listed South Korean company PI Advanced Materials (PIAM), for an enterprise value of €728 million. With sales of over €200 million, an EBITDA margin of around 30% and best-in-class manufacturing, PIAM is the global leader in polyimide films, delivering superior growth in the attractive consumer electronics and electric vehicles markets. The transaction price represents around 20x the average 2021/2022 EBITDA. Given PIAM’s best-in-class innovation, ultra-high performance product portfolio and leading position, this project is perfectly aligned with the Group’s ambition to be a pure player in Specialty Materials and will strengthen the Advanced Materials segment’s portfolio and performance. The deal is expected to be finalized in late 2023. In addition, on 1 June 2023, Arkema expanded its offering of engineering adhesives by finalizing the acquisition of Polytec PT, a German company specialized in adhesives for batteries and electronics applications. The business generates annual sales of around €15 million. The Group also continued its dynamic business portfolio management. On 3 January 2023, it finalized the divestment of Febex, a company specialized in phosphorus-based chemistry, to Belgian group Prayon. At 31 December 2022, Febex’s assets and liabilities had been reclassified in the balance sheet as assets and liabilities held for sale. The impacts of these operations are described in note 3.1 “Business combinations” and note 3.2 “Assets held for sale”. 1.2. OTHER HIGHLIGHTS On 16 January 2023, Arkema successfully completed a €400 million bond issue with an eight-year maturity and an annual coupon of 3.50%. The operation, which was carried out as part of the Group’s financing policy, will enable the Group to extend the average maturity of its financial resources and initiate the refinancing of its upcoming bond maturities. Note 2: Accounting policies and new standards The condensed consolidated interim financial statements should be read in conjunction with the Group’s most recent annual consolidated financial statements for the year ended 31 December 2022. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group’s financial position and performance since the last annual financial statements. Arkema, a major player in Specialty Materials, is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Arkema Group’s LEI is 9695000EHMS84KKP2785. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. The Group’s parent company is Arkema S.A. The Group’s condensed consolidated interim financial statements at 30 June 2023 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved for publication by the Board of Directors of Arkema on 27 July 2023. The condensed consolidated interim financial statements at 30 June 2023 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRS (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) as released at 30 June 2023 and the IFRS endorsed by the European Union at 30 June 2023. The accounting framework and standards adopted by the European Commission can be accessed from the following website: https://ec.europa.eu/info/law/international-accounting-standards-regulation-ec-no-1606-2002. The accounting policies applied in preparing the consolidated financial statements at 30 June 2023 are identical to those used in the consolidated financial statements at 31 December 2022, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are mandatory for accounting periods commencing on or after 1 January 2023 (and which had not been applied early by the Group), namely: 22 HALF-YEAR FINANCIAL REPORT Amendments to IAS 1 Disclosure of accounting policies Adopted by the European Union on 3 March 2022 Amendments to IAS 8 Definition of accounting estimates Adopted by the European Union on 3 March 2022 Amendments to IAS 12 Deferred tax related to assets and liabilities arising from a single transaction Adopted by the European Union on 12 August 2022 Amendments to IFRS 17 Initial application of IFRS 17 and IFRS 9 – Comparative information Adopted by the European Union on 9 September 2022 IFRS 17 Insurance contracts Adopted by the European Union on 23 November 2021 Application of these amendments had no significant impact on the financial statements at 30 June 2023. The standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which are not yet mandatory for accounting periods commencing on or after 1 January 2023 (and which have not been applied early by the Group) are: Amendments to IAS 1 Classification of liabilities as current or non-current Not adopted by the European Union at 30 June 2023 Amendments to IAS 7 and IFRS 7 Supplier financing arrangements Not adopted by the European Union at 30 June 2023 Amendments to IAS 12 International tax reform – Pillar Two model rules Not adopted by the European Union at 30 June 2023 Amendments to IFRS 16 Lease liability in a sale and leaseback Not adopted by the European Union at 30 June 2023 The Group does not expect application of the amendments to IAS 1, IAS 7, IFRS 7 and IFRS 16 to have a significant impact. The Group is continuing to assess its exposure to Pillar Two provisions. Given the small number of countries affected by the reform, it currently believes that the impact will not be significant. Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. These interim financial statements therefore take into consideration in particular the current conflict in Ukraine and are based on information available at the closing date. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off-balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. These estimates are also consistent with the Group’s climate commitments. The condensed consolidated interim financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The condensed consolidated interim financial statements are presented in millions of euros, rounded to the nearest million, unless otherwise indicated. The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period. The statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share, or in “Non-controlling interests” for the share not directly or indirectly attributable to the Group. In exceptional cases, a company’s functional currency may differ from the local currency. 23 HALF-YEAR FINANCIAL REPORT In application of IAS 21 “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income, unless they result from unhedged financing, in which case they are included in the financial result. The Group’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by the Group is generally lower in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and the rest of Europe; in some of the Group’s businesses, particularly those serving the paints and coatings as well as the refrigeration and air-conditioning markets, sales are generally higher in the first half of the year than in the second half. By contrast, in adhesives, the two halves of the year are more evenly balanced; the major multi-annual maintenance turnarounds at the Group’s production plants also have an impact on seasonality, and tend in general to be carried out in the second half of the year. These seasonal effects observed in the past are not necessarily representative of future trends, but can have a material effect on the variations in results and working capital from one quarter of the year to another. Note 3: Scope of consolidation 3.1 BUSINESS COMBINATIONS 3.1.1. Business combinations during the period As described in note 1.1 “Portfolio management”, business combinations in 2023 correspond to the acquisition of Polytec PT Gmbh Polymere Technologien. In accordance with IFRS 3 (Revised), the Group used the acquisition method for the accounting treatment of these operations. The amount recognized in the financial statements at 30 June 2023 for the identifiable assets acquired and liabilities assumed at the acquisition date is €7 million, of which €6 million in property, plant and equipment. The goodwill of €60 million recognized in relation to Polytec PT Gmbh Polymere Technologien at 30 June 2023 is provisional and may be amortized for tax purposes for €12 million. Under IFRS 3 (Revised), the Group has 12 months from the acquisition date to finalize the value of the assets acquired and liabilities assumed. 3.1.2. Finalization of the BOSTIK SOUTH AFRICA (PTY) LTD (formerly Permoseal) and Shanghai Zhiguan Polymer Materials (PMP) purchase price allocation The Group has finalized the purchase price allocation for BOSTIK SOUTH AFRICA (PTY) LTD (formerly Permoseal) and Shanghai Zhiguan Polymer Materials (PMP). Intangible assets stated at fair value primarily comprise trademarks, a non-compete agreement, technologies and customer relations. They amount to €29 million. Final goodwill totals €52 million for the two acquisitions and mainly corresponds to the value of future technologies and expected business development. This goodwill is not amortizable for tax purposes. 3.2 ASSETS HELD FOR SALE On 28 October 2022, Arkema announced the proposed divestment of Febex to Belgian group Prayon. Specialized in phosphorus- based chemistry, Febex reported sales of around €30 million in 2021. This divestment was finalized on 3 January 2023. In application of IFRS 5 “Non-current assets held for sale and discontinued operations”, the assets held for sale and the associated liabilities were presented in two specific lines of the balance sheet at 31 December 2022. Non-current assets and groups of assets held for sale were stated at the lower of book value and fair value net of costs of disposal. 24 HALF-YEAR FINANCIAL REPORT The assets sold on 3 January 2023 are identical to those classified as assets held for sale in the 2022 financial statements, and are as follows: (In millions of euros) Property, plant and equipment Total non-current assets Inventories Accounts receivable Other receivables and prepaid expenses Cash and cash equivalents Total current assets ASSETS SOLD Accounts payable Income taxes payable Other current liabilities Total current liabilities LIABILITIES TRANSFERRED 2023 4 4 9 3 1 5 18 22 2 1 1 4 4 In the first-half 2023 income statement, the capital gain amounts to €23 million before tax and is included in “Other income and expenses” for €23 million in 2023 (see note 5.1 “Other income and expenses”). The price received is included in “Proceeds from sale of operations, net of cash transferred” in the cash flow statement in 2023. 3.3. WARRANTIES RELATED TO SALES OF BUSINESSES When selling businesses, the Arkema Group has sometimes granted the purchaser warranties in respect of unrecorded liabilities. In most cases, these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by the Group amounts to €55 million at 30 June 2023 (€55 million at 31 December 2022). These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. Note 4: Alternative performance indicators and information by segment To monitor and analyze the financial performance of the Group and its activities, Group management uses alternative performance indicators. These are financial indicators that are not defined by IFRS. This note presents a reconciliation of these indicators and the aggregates from the consolidated financial statements under IFRS. 4.1 RECURRING OPERATING INCOME (REBIT) AND EBITDA (In millions of euros) OPERATING INCOME - Depreciation and amortization related to the revaluation of Notes 1st half 2023 417 1st half 2022 948 property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses RECURRING OPERATING INCOME (REBIT) - Recurring depreciation and amortization of property, plant and EBITDA (5.1) (63) (39) 519 (265) 784 (40) (70) 1,058 (266) 1,324 25 HALF-YEAR FINANCIAL REPORT Details of depreciation and amortization of property, plant and equipment and intangible assets: (In millions of euros) Depreciation and amortization of property, plant and equipment and intangible assets (including goodwill) Of which: Recurring depreciation and amortization of property, plant and equipment and intangible assets Of which: Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Of which: Impairment included in other income and expenses Notes (8.1 & 8.2 & 8.3) (5.1) 1st half 2023 (334) (265) (63) (6) 1st half 2022 (326) (266) (40) (20) 4.2 ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE (In millions of euros) NET INCOME – GROUP SHARE - Depreciation and amortization related to the revaluation of Notes 1st half 2023 284 1st half 2022 730 property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses - Other income and expenses attributable to non-controlling interests (5.1) (63) (39) — (40) (70) — Taxes on depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Taxes on other income and expenses - One-time tax effects ADJUSTED NET INCOME Weighted average number of ordinary shares Weighted average number of potential ordinary shares ADJUSTED EARNINGS PER SHARE (IN EUROS) DILUTED ADJUSTED EARNINGS PER SHARE (IN EUROS) RECURRING CAPITAL EXPENDITURE (11.6) 13 8 (4) 369 74,716,206 75,043,514 4.94 4.92 8 7 6 819 73,954,187 74,286,041 11.07 11.02 (In millions of euros) INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT ADDITIONS - Exceptional capital expenditure - Investments relating to portfolio management operations - Capital expenditure with no impact on net debt RECURRING CAPITAL EXPENDITURE 1st half 2023 224 12 — — 212 1st half 2022 237 66 — 0 171 Exceptional capital expenditure corresponds to a very limited number of capital expenditure items for major development projects that the Group presents separately in its financial reporting due to their size and nature. In the two periods presented, exceptional capital expenditure concerned investments in Specialty Polyamides in Asia and the partnership with Nutrien in the United States for the supply of anhydrous hydrogen fluoride. Investments relating to portfolio management operations reflect the impact of acquisition operations. 26 HALF-YEAR FINANCIAL REPORT 4.4 FREE CASH FLOW (In millions of euros) 1st half 2023 417 (387) 30 (39) 69 (12) (43) 124 Cash flow from operating activities + Cash flow from investing activities NET CASH FLOW - Net cash flow from portfolio management operations FREE CASH FLOW Exceptional capital expenditure - Non-recurring cash flow RECURRING CASH FLOW The net cash flow from portfolio management operations corresponds to the impact of acquisition and divestment operations described in note 1 “Highlights”. Non-recurring cash flow corresponds to cash flow from other income and expenses, as described in note 5.1. “Other income and expenses”. 1st half 2022 531 (1,850) (1,319) (1,507) 188 (66) (7) 261 4.5 NET DEBT (In millions of euros) Non-current debt + Current debt - Cash and cash equivalents NET DEBT + + NET DEBT AND HYBRID BONDS Hybrid bonds Notes (10.2) (10.2) (10.2) (11.2) 30 June 2023 31 December 2022 2,560 698 1,592 1,666 700 2,366 2,951 660 1,666 1,945 700 2,645 4.6 WORKING CAPITAL (In millions of euros) Inventories + Accounts receivable + Other receivables including income taxes recoverable + Current financial derivative assets - Accounts payable (operating suppliers) Other liabilities including income taxes - Current financial derivative liabilities WORKING CAPITAL Notes 30 June 2023 31 December 2022 1,399 1,360 332 57 1,149 546 13 1,440 1,379 1,460 330 43 998 512 52 1,650 4.7 CAPITAL EMPLOYED (In millions of euros) Goodwill, net + Intangible assets (excluding goodwill) and property, plant and equipment, net + Investments in equity affiliates + Other investments and other non-current assets Working capital CAPITAL EMPLOYED Notes (8.1) (8.2 & 8.3) 30 June 2023 31 December 2022 2,655 2,676 5,473 18 308 1,650 10,125 5,607 24 297 1,440 10,023 27 HALF-YEAR FINANCIAL REPORT 4.8 INFORMATION BY SEGMENT As required by IFRS 8 “Operating segments”, segment information for the Group is presented in accordance with the internal reporting structure that is used by executive management in order to assess financial performance and allocate resources. Arkema is organized around three complementary, coherent segments dedicated to Specialty Materials, namely Adhesive Solutions, Advanced Materials and Coating Solutions, and an Intermediates segment consisting of activities with more volatile results. The Adhesive Solutions segment is headed by a member of the Executive Committee, and the Advanced Materials, Coating Solutions and Intermediates segments are directed by the Chief Operating Officer who is also a member of the Executive Committee. Both of these segment heads report to the Chairman and CEO, Arkema’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their segments’ operating activities, financial results, forecasts and plans. The Chief Operating Officer is supported by three other Executive Committee members, who report to him and are respectively in charge of the Coating Solutions segment and each of the two Business Lines1 making up the Advanced Materials segment: High Performance Polymers and Performance Additives. The content of the segments is as follows: Adhesive Solutions comprises the following Business Lines: Construction and Consumer, providing solutions for construction, renovation of buildings, and DIY; and Industrial Assembly, comprising high performance adhesives for durable goods, and adhesive solutions for packaging and non-woven. The Adhesive Solutions segment supplies technologies used in building activities for businesses and individuals, including sealants, tile and flooring adhesives and waterproofing systems, and technologies used in industry, including state-of-the-art know-how in the automotive, textiles, glazing, flexible and rigid packaging, and hygiene markets. Advanced Materials comprises the following Business Lines: High Performance Polymers, consisting of specialty polyamides and PVDF; and Performance Additives, covering interface agents combining specialty surfactants and molecular sieves, organic peroxides, thiochemicals and hydrogen peroxide. The Advanced Materials segment offers innovative solutions with high added value to meet the major challenges of sustainable development, including lightweighting, new energies, access to water, bio-based products and recycling. These solutions are used in a wide variety of sectors such as the automotive and transportation sectors, oil and gas, renewable energies (photovoltaics, lithium-ion batteries, wind power), consumer goods (sports equipment, packaging, beauty and health products, etc.), electronics, construction, coatings, animal nutrition and water treatment. Coating Solutions comprises the following Business Lines: Coating Resins, combining the EU/US acrylics activities and coating resins; and Coating Additives, combining Sartomer photocure resins and Coatex rheology additives. This segment offers a broad range of innovative products for decorative paints, industrial coatings and adhesives, and also provides solutions for applications in the paper industry, superabsorbents, water treatment and oil and gas extraction, and in cutting-edge high-growth markets such as 3D printing and electronics. The Intermediates segment comprises the following activities: Fluorogases, and Asia Acrylics. 1 Business Lines are activities or groups of activities. 28 HALF-YEAR FINANCIAL REPORT These industrial intermediate chemicals activities, in which Arkema holds leading positions, concern competitive global product lines used in several industrial sectors such as construction, production of cold (refrigeration and air conditioning), the automotive industry, coatings and water treatment. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income and assets are allocated between segments prior to inter-segment adjustments. Sales between segments take place at market prices. 1st half 2023 Adhesive Solutions 1,390 188 (In millions of euros) Sales EBITDA* Recurring depreciation and amortization of property, plant and equipment and intangible assets* Recurring operating income (REBIT)* Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses Operating income Equity in income of affiliates Intangible assets and property, plant and equipment additions Of which: Recurring capital expenditure** * See note 4.1 “Recurring operating income (REBIT) and EBITDA”. ** See note 4.3 “Recurring capital expenditure”. (41) 147 (51) (12) 84 — 33 33 Advanced Materials 1,849 345 (135) 210 (8) (16) 186 (5) 137 125 Coating Solutions 1,278 182 (61) 121 (4) (1) 116 — 39 39 Intermediates Corporate 19 430 (49) 118 (25) 93 (3) (52) — 0 93 — — (10) (62) — 8 8 7 7 1st half 2022 Adhesive Solutions 1,449 201 (In millions of euros) Sales EBITDA* Recurring depreciation and amortization of property, plant and equipment and intangible assets Recurring operating income (REBIT)* Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses Operating income Equity in income of affiliates Intangible assets and property, plant and equipment additions Of which: Recurring capital expenditure** * See note 4.1 “Recurring operating income (REBIT) and EBITDA”. (36) 165 (28) (32) 105 — 27 27 Advanced Materials 2,188 556 (134) 422 (9) (22) 391 (1) 160 94 Coating Solutions 1,822 399 (63) 336 (3) (0) 333 — 39 39 Intermediates Corporate 19 593 (55) 223 (30) 193 (3) (58) — (2) 191 0 — (14) (72) — 5 5 6 6 ** See note 4.3 “Recurring capital expenditure”. 29 Total 4,966 784 (265) 519 (63) (39) 417 (5) 224 212 Total 6,071 1,324 (266) 1,058 (40) (70) 948 (1) 237 171 HALF-YEAR FINANCIAL REPORT 4.9 INFORMATION BY GEOGRAPHICAL AREA Sales are presented on the basis of the geographical location of customers. 1st half 2023 Non-Group sales (In millions of euros) Europe of which France NAFTA* of which United States Asia of which China** Rest of the world Total 1,769 396 1,830 1,640 1,105 496 262 4,966 1st half 2022 Non-Group sales (In millions of euros) Europe of which France NAFTA* of which United States Asia of which China** Rest of the world Total * NAFTA: USA, Canada, Mexico. 2,039 449 2,098 1,893 1,708 962 226 6,071 ** China, Hong Kong and Taiwan. Note 5: Other information relating to operating activities 5.1 OTHER INCOME AND EXPENSES Other income and expenses concern a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. (In millions of euros) Restructuring and environment Goodwill impairment Asset impairment (excluding goodwill) Litigation and claims Gains (losses) on sales and purchases of assets Other TOTAL OTHER INCOME AND EXPENSES Expenses (23) — (6) (1) (2) (31) (63) 1st half 2023 Income 1 — — — 23 — 24 Net Expenses (17) (22) — — (16) (6) (6) (1) (27) 21 (6) (31) (72) (39) 1st half 2022 Income — — — — 2 — 2 In the first half of 2023, restructuring and environment expenses mainly concern the Corporate segment, notably due to an increase in the environmental provision for the Saint-Fons site (see note 9.2 “Liabilities and contingent liabilities”) and the Adhesives segment. Specific asset impairments have mainly been recognized in the Hydrogen Peroxide activities for the Jarrie site in France (see note 8.3 “Property, plant and equipment”). The income and expenses relating to sales of assets are mainly attributable to the divestment of Febex. The item “Other” primarily includes start-up costs related to exceptional capital expenditure in Specialty Polyamides in Asia (see note 4.3 “Recurring capital expenditure”). 30 Net (17) — (16) (6) (25) (6) (70) HALF-YEAR FINANCIAL REPORT In the first half of 2022, restructuring and environment expenses mainly concerned the Corporate and Adhesive Solutions segments. Specific asset impairments were mainly recognized in the Hydrogen Peroxide activities for the Jarrie site in France (see note 8.3 “Property, plant and equipment”). Expenses related to litigation and claims mainly concerned legal fees for ongoing proceedings in the United States. The income and expenses relating to sales and purchases of assets were mainly attributable to the acquisition of Ashland’s Performance Adhesives business. The item “Other” primarily included start-up costs related to exceptional capital expenditure in Specialty Polyamides in Asia (see note 4.3 “Recurring capital expenditure”). The total impairment (including goodwill impairment) included in other income and expenses amounts to a net expense of €6 million at 30 June 2023 compared with a net expense of €20 million at 30 June 2022. 5.2 WORKING CAPITAL Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). The change in working capital reported in the cash flow statement amounts to €164 million in cash flow from operating activities and €124 million in cash flow from investing activities. (In millions of euros) Inventories + Accounts receivable, excluding fixed asset receivables 31 December 2022 1,399 1,360 Changes in scope 2 1 Monetary flows in the cash flow statement (operating and investing activities) (2) 116 Translation adjustment Reclassifications (19) (1) (17) — 30 June 2023 1,379 1,460 + Other receivables, including income taxes recoverable - Accounts payable, excluding fixed asset payables 332 1 — (3) — 330 927 — (16) (9) — 902 Other liabilities, including income taxes TOTAL OPERATING CATEGORIES - Other creditors and fixed asset payables TOTAL INVESTING CATEGORIES + Current financial derivative assets and liabilities TOTAL WORKING CAPITAL 546 1,618 221 (221) 43 1,440 2 2 — — — 2 (34) 164 (124) 124 2 290 (2) (28) (1) 1 (16) (43) — (1) — — (38) (39) 512 1,755 96 (96) (9) 1,650 5.3. OFF-BALANCE SHEET COMMITMENTS RELATED TO OPERATING ACTIVITIES 5.3.1 Off-balance sheet commitments related to the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted Comfort letters Contractual guarantees Customs and excise guarantees TOTAL Guarantees granted are mainly bank guarantees in favor of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites, as well as rent guarantees for the Group’s future headquarters. 30 June 2023 31 December 2022 132 — 2 32 166 136 — 2 34 172 31 HALF-YEAR FINANCIAL REPORT 5.3.2 Contractual commitments related to the Group’s operating activities In the normal course of business, the Arkema Group has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over initial periods generally comprised between one and ten years is a normal practice for companies in the Group’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, Arkema’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige the Group to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase contracts in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The value of these agreements thus corresponds to the minimum amount payable to suppliers as indemnification in the event of termination of the contracts or failure to take delivery of the minimum contractual quantities, less any quantities that can be resold on the market when the Group is able to do so. Some lease or purchase commitments do not fall within the scope of IFRS 16. Many of them are irrevocable purchase commitments described above, and service contracts or contracts making available assets that are not identified or not controlled by Arkema at 30 June 2023. Only the irrevocable portion of outstanding future purchases has been valued, and the corresponding amounts are included in the table below at 30 June 2023. The total amount of the Group’s financial commitments is €1,288 million at 30 June 2023, maturing as follows: (In millions of euros) Y Y+1 Y+2 Y+3 Y+4 Y+5 until expiry of the contracts Total 30 June 2023 31 December 2022 273 140 106 103 97 652 1,371 219 144 113 108 95 609 1,288 Note 6: Provisions for pensions and other employee benefits 6.1 PROVISIONS FOR PENSIONS AND OTHER EMPLOYEE BENEFITS (In millions of euros) Pension obligations Healthcare and similar coverage Dispensation from work Post-employment benefits Long service awards Other long-term benefits Provisions for pensions and other employee benefits 30 June 2023 31 December 2022 255 46 15 316 66 66 382 262 46 14 322 67 67 389 (In millions of euros) Provision recognized in liabilities Amount recognized in assets Net provisions for pensions and other employee benefits 30 June 2023 31 December 2022 382 (1) 381 389 (1) 388 The discount rates used by the Arkema Group are as follows: Pension obligations, healthcare and similar coverage At 30 June 2023 At 31 December 2022 France 4.10 4.10 Germany 4.13 4.13 UK 5.15 4.80 Rest of Europe 3.64 2.93 USA 4.90 5.20 32 HALF-YEAR FINANCIAL REPORT The present value of benefit obligations at the end of 2022 has been adjusted at 30 June 2023 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full-year 2022 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2023. The effects of the change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. 2023 French pension reform On 14 April 2023, France passed amended 2023 social security financing law no. 2023-270, which gradually increases the legal retirement age (from 62 to 64) and lengthens the amount of time workers are required to make contributions. The Group considers the reform to have no material impact on its long service awards and pension obligations, as the retirement age assumptions used in previous years were already higher than the minimum age required under the new reform. The Group is awaiting the publication of the forthcoming implementing decrees on dispensation from work mechanisms, notably for long careers, which could have an impact on the year-end provision. The change in net provisions for post-employment benefits over the first half of 2023 is as follows: (In millions of euros) Net liability (asset) at beginning of period Provision recognized in liabilities Amount recognized in assets (Income)/Expense for the period Net benefits paid by the employer Changes in scope Actuarial gains and losses recognized in shareholders’ equity Translation adjustments Net liability (asset) at end of period Provision recognized in liabilities Amount recognized in assets Pension obligations 254 255 (1) 14 (9) — 4 (2) 261 262 (1) Healthcare and similar coverage 46 46 — — (1) — 1 — 46 46 — Dispensation from work 15 15 — 1 (2) — — — 14 14 — Total post-employment benefits 315 316 (1) 15 (12) — 5 (2) 321 322 (1) 33 HALF-YEAR FINANCIAL REPORT 6.2 SHARE-BASED PAYMENTS 6.2.1. Free share grants On 9 November 2022, the Board of Directors decided to introduce two free performance share plans for employees, particularly people in positions of responsibility whose work has an influence on the Group’s results. Performance shares are generally granted on the condition of continued presence within the Group and achievement of financial and CSR objectives, including a GHG emissions reduction target. Movements in the free share grant plans existing at 30 June 2023 are as follows: Total number of free shares granted - 131,035(1) 9,129 0-3 years 3 years 2 years 238,550 (2) 4 years - 128,245 (3) 3 years 2 years 239,575 (4) - 124,713 (5) 4 years 4 years 52,255 - 3 years 2 years 234,715 (6) - 128,540 (7) 4 years Vesting period 4 years 3-4 years Holding period Grant date Plan 29 Oct. 2019 2019-2 5 May 2020 2020-1, 2 4 Nov. 2020 2020-3 4 Nov. 2020 2020-4 9 Nov. 2021 2021-1 2021-2 9 Nov. 2021 2022-1, 2 9 Nov. 2022 9 Nov. 2022 2022-3 2022-4 9 Nov. 2022 (1) May be raised to 153,583 in the event of outperformance. (2) May be raised to 283,750 in the event of outperformance. (3) May be raised to 150,518 in the event of outperformance. (4) May be raised to 285,052 in the event of outperformance. (5) May be raised to 145,772 in the event of outperformance. (6) May be raised to 278,682 in the event of outperformance. (7) May be raised to 149,843 in the event of outperformance. Number of shares subject to performance conditions 112,740 Fair value (euros per share) 59.76 - 10.09-20.94 52.58 54.33 81.91 83.92 - 63.45-70.51 68.26 66.15 226,000 111,365 227,387 105,293 219,835 106,515 Number of shares vested in 1st half 2023 1,135 50 Number of shares canceled in 1st half 2023 1,250 41 1,210 1,690 1,495 1,950 765 1,425 Total number of shares still to be granted at 30 June 2023 117,840 7,939 226,385 118,325 234,010 118,178 52,255 233,770 126,845 The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2023 is €12 million (€13 million at 30 June 2022). Note 7: Income taxes The income tax expense breaks down as follows: (In millions of euros) Current income taxes Deferred income taxes TOTAL INCOME TAXES The income tax expense amounts to €92 million for the first half of 2023, compared with €201 million for the first half of 2022. 1st half 2023 (98) 6 (92) 1st half 2022 (201) (0) (201) Note 8: Intangible assets and property, plant and equipment 8.1. GOODWILL Goodwill is initially recognized when a business combination takes place. Goodwill is not amortized after initial recognition. It is included in the cash-generating units (CGUs) that are subject to impairment tests as soon as any indicators of potential impairment are identified. Impairment tests are performed at least annually, following the methodology described in note 8.5 “Asset value monitoring”. 34 HALF-YEAR FINANCIAL REPORT (In millions of euros) Goodwill The breakdown by segment is as follows: Gross book value 3,301 30 June 2023 Accumulated amortization and impairment (625) Net book value 2,676 31 December 2022 Net book value 2,655 Goodwill by segment 30 June 2023 Net book value 31 December 2022 Net book value Adhesive Solutions Advanced Materials Coating Solutions Intermediates Corporate TOTAL 1,773 478 381 44 — 2,676 1,736 484 391 44 — 2,655 Changes in the net book value of goodwill are as follows: (In millions of euros) At 1 January Acquisitions Impairment Disposals Translation adjustments Reclassifications At 30 June 2023 2,655 44 — — (23) — 2,676 In 2023, the “Acquisitions” item corresponds to the initial recognition of goodwill for Polytec PT offset by the reduction in goodwill following the Polimeros Especiales and Shanghai Zhiguan Polymer Materials (PMP) purchase price allocation. 8.2. OTHER INTANGIBLE ASSETS Other intangible assets mainly include patents and technologies, trademarks, software and IT licenses, capitalized contracts, customer relations, and capitalized research expenses. These intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized following impairment tests as described in note 8.5 “Asset value monitoring”. 30 June 2023 Accumulated amortization and impairment 31 December 2022 (In millions of euros) Patents and technologies Trademarks Software and IT licenses Capitalized REACH costs Other capitalized research expenses Capitalized contracts Asset rights Customer relations Other intangible assets Intangible assets in progress TOTAL Trademarks essentially comprise the Bostik® and Den Braven® trademarks, which are part of the Adhesive Solutions segment. Gross book value 617 636 451 87 21 89 95 857 105 243 3,201 Net book value Net book value (269) (4) (384) (54) (20) (80) (47) (116) (95) (23) (1,092) 348 632 67 33 1 9 48 741 10 220 2,109 343 632 83 34 2 12 51 782 27 212 2,178 35 HALF-YEAR FINANCIAL REPORT Changes in the net book value of intangible assets are as follows: (In millions of euros) At 1 January Acquisitions Amortization Impairment Disposals Changes in scope Translation adjustments Reclassifications At 30 June 2023 2,178 20 (84) 0 — 14 (21) 2 2,109 The line “Changes in scope” includes intangible assets for Polimeros Especiales and Shanghai Zhiguan Polymer Materials (PMP). 8.3 PROPERTY, PLANT AND EQUIPMENT (In millions of euros) Land and buildings Complex industrial facilities Other property, plant and equipment Construction in progress TOTAL PROPERTY, PLANT AND EQUIPMENT EXCLUDING RIGHTS OF USE Rights of use TOTAL PROPERTY, PLANT AND EQUIPMENT Gross book value 2,216 3,764 3,935 953 10,868 403 11,271 30 June 2023 Accumulated depreciation and impairment (1,513) (3,228) (2,929) (34) (7,704) (203) (7,907) Net book value 703 536 1,006 919 3,164 200 3,364 31 December 2022 Net book value 724 571 1,053 884 3,232 197 3,429 Changes in the net book value of property, plant and equipment excluding rights of use are as follows: (In millions of euros) At 1 January Acquisitions Depreciation Impairment Disposals Changes in scope Translation adjustments Other Reclassifications At 30 June Impairment at 30 June 2023 mainly concerns specific property, plant and equipment for Hydrogen Peroxide activities at the Jarrie site in France. 2023 3,232 204 (208) (8) (2) 9 (61) — (2) 3,164 36 HALF-YEAR FINANCIAL REPORT 8.4. IFRS 16 LEASES: RIGHTS OF USE AND IFRS 16 DEBT At 30 June 2023, the net book value of rights of use related to leases is €200 million. (In millions of euros) Rights of use: real estate assets (head offices, offices) Rights of use: industrial assets (factories, land, warehouses) Rights of use: logistics assets (trucks, containers, trolleys) Rights of use: other assets (cars, etc.) Total rights of use Gross book value 87 64 215 37 403 30 June 2023 Accumulated depreciation and impairment (48) (21) (118) (16) (203) Net book value 39 43 97 21 200 31 December 2022 Net book value 35 44 96 22 197 Changes in the net book value of rights of use are as follows: (In millions of euros) At 1 January Acquisitions Depreciation Disposals Changes in scope Translation adjustments Reclassifications At 30 June 2023 197 38 (34) (2) 3 (2) — 200 The IFRS 16 debt amounts to €207 million at 30 June 2023 (see note 10.2 “Debt”). The total non-discounted value of the Group’s future lease payments amounts to €229 million at 30 June 2023, maturing as follows: (In millions of euros) Within one year 1-5 years After 5 years TOTAL 30 June 2023 69 102 58 229 At 30 June 2023, the cash outflows associated with leases amount to €37 million. The financial expenses related to the IFRS 16 debt amount to €3 million. The application of exemptions for short-term leases and leases of low-value assets concerns amounts that are not material at Group level. 8.5. ASSET VALUE MONITORING The recoverable amount of property, plant and equipment and intangible assets is tested as soon as any indication of impairment is identified. A review to identify if any such indication exists is performed at each year-end, based on a five-year plan validated by the Executive Committee. This impairment test is performed at least once a year and includes goodwill and trademarks with indefinite useful lives. An asset’s recoverable amount corresponds to the greater of its value in use and its fair value less costs to sell. 37 HALF-YEAR FINANCIAL REPORT Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group executive management’s expectation of future economic and operating conditions over the next five years or, when the asset is to be sold, by comparison with its market value. In 2022, the terminal value was determined on the basis of a perpetuity annual growth rate of 2% and mid-cycle cash flow. The rate used to discount future cash flows and the terminal value is the Group’s weighted average cost of capital, estimated at 8.5% in 2022, except for the Asia Acrylics CGU, for which the rate was estimated at 9.6%. Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment losses on goodwill are irreversible (in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be written back). At the end of June 2023, new tests were carried out for certain CGUs after indications of impairment were identified – in particular a change in EBITDA in first-half 2023 compared with first-half 2022. The tests assumed a perpetuity growth rate of 2% for all these CGUs except the Fluorogases CGU and the Adhesive Solutions segment CGU, for which the rates used were 0% and 2.5%, respectively. The update confirmed the discount rates used in 2022. These tests did not lead to recognition of impairment. In addition, the usual sensitivities to reasonable changes in the basic assumptions – in particular a 1-point increase in the discount rate, or a change of minus 0.5 of a point in the perpetuity growth rate, or minus 10% in EBITDA, or plus 20% in capital expenditure – also confirmed the net carrying amounts of the different CGUs tested. For the Hydrogen Peroxide CGU, which was not tested for impairment at 30 June 2023, the assumption of a change of plus 20% in capital expenditure would lead to impairment losses of up to €20 million, as indicated at 31 December 2022. Note 9: Other provisions and other non-current liabilities, contingent liabilities and litigation 9.1 OTHER PROVISIONS AND OTHER NON-CURRENT LIABILITIES 9.1.1 Other non-current liabilities Other non-current liabilities amount to €14 million at 30 June 2023 versus €14 million at 31 December 2022. 9.1.2 Other provisions (In millions of euros) At 1 January 2023 Increases in provisions Reversals of provisions on use Reversals of unused provisions Changes in scope Translation adjustments Other At 30 June 2023 Environmental contingencies 217 12 (16) (1) 0 (2) — 210 Restructuring 38 3 (8) 0 — 0 0 33 Other 189 12 (12) (15) — (1) (1) 172 38 Total 444 27 (36) (16) 0 (3) (1) 415 HALF-YEAR FINANCIAL REPORT Furthermore, certain provisions are covered by non-current assets (receivables and deposits): (In millions of euros) Environmental contingencies Restructuring Other Total provisions at 30 June 2023 210 33 172 Portion of provisions covered by receivables or deposits Deferred tax asset related to amounts covered by the Total indemnity Provisions at 30 June 2023 net of non-current assets 59 18 133 — — 33 27 — 145 For information: Provisions at 1 January 2023 net of non- current assets 132 38 157 Provisions for environmental contingencies Provisions for environmental contingencies are recognized mainly to cover expenses related to soil and water table clean-up, as well as expenses related to the reinforcement of certain structures to address physical climate risks such as flooding. These provisions are primarily attributable to: France for €100 million (€98 million at 31 December 2022); the United States for €98 million (€107 million at 31 December 2022), of which €77 million in respect of former industrial sites covered 100% by the Total group indemnity (receivable recognized in “Other non-current assets” for an amount of €59 million and €18 million recognized in deferred tax assets). Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €22 million (€25 million at 31 December 2022), in Europe excluding France for €6 million (€7 million at 31 December 2022) and in the United States for €3 million (€3 million at 31 December 2022). Increases in such provisions in the period mainly correspond to the restructuring plans described in note 5.1 “Other income and expenses”. Other provisions Other provisions amount to €172 million and mainly comprise: provisions for labor litigation for €67 million (€61 million at 31 December 2022); provisions for commercial litigation and warranties for €49 million (€71 million at 31 December 2022); provisions for tax litigation for €30 million (€30 million at 31 December 2022); and provisions for other risks for €26 million (€27 million at 31 December 2022). 9.2 LIABILITIES AND CONTINGENT LIABILITIES Liabilities and contingent liabilities are described in note 10.2 to the consolidated financial statements at 31 December 2022. There was no development in liabilities and contingent liabilities during the first half of 2023 with an actual or potential material effect on the Group’s consolidated financial statements, outside of the developments outlined below. Emotional distress lawsuit (Arkema France) Fifty-two former employees of the Carling site are suing Arkema France for emotional distress due to alleged exposure to trichloroethane, which was formerly used to degrease and clean industrial facilities, mechanical and electrical equipment and metal parts. The Group has recognized a provision to cover this risk. 39 Total 415 86 18 311 327 HALF-YEAR FINANCIAL REPORT Saint-Fons As planned, in April 2023, Arkema France submitted a plan to manage the legacy pollution in the Saint-Fons T112 zone and adjusted its provisions accordingly at the end of June 2023. However, in the light of (i) potential issues that are unknown, (ii) uncertainties over the actual time required for remediation compared with the estimated time, and (iii) potential changes in regulations, the possibility that the expenses the Group will incur on the Saint-Fons site will be higher than the amounts covered by provisions cannot be excluded. Pierre Bénite Pursuant to a prefectural decision issued on 14 June 2023, Arkema is required to perform additional analyses for certain PFAS in the area around the site, as well as an environmental assessment (interprétation de l’état des milieux) and a health risk assessment. The provisions set aside at 30 June 2023 are sufficient to cover the cost of these studies. Given (i) the results of studies to come, and (ii) possible changes in regulations, it cannot be ruled out that the Group’s exposure will be greater than the provisioned amounts. COEM (Arkema France) Industrie Generali has appealed the matter to France’s Court of Cassation (Cour de cassation), where proceedings are underway. Arkema considers that these claims have no legal foundation, and no provision has been recognized in the financial statements. Fluorinated substances On the AFFF PFAS litigation, Arkema Inc continues to be sued in the US in the AFFF MDL, along with numerous other users and multiple fluorochemical manufacturers. Other than the new lawsuits in the AFFF MDL, there has been no major development in the procedures involving Arkema that impacts our analysis at 31 December 2022 regarding these contingent liabilities. 9.3 COMMITMENTS RECEIVED Commitments received from TotalEnergies SE (formerly Total S.A.) in 2006 In connection with the Spin-Off of Arkema’s Businesses, TotalEnergies SE (formerly Total S.A.) and certain companies of TotalEnergies SE (formerly Total S.A.) extended certain indemnities, or assumed certain obligations, for the benefit of the Arkema Group. Some are still in application while others terminated during 2017. The indemnities and obligations concerned are described below, and relate to actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations of which in the majority of cases have ceased. Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), TotalEnergies SE (formerly Total S.A.) companies have entered into indemnity and service agreements with Arkema or its subsidiaries. Pursuant to these agreements, the obligations and environmental responsibilities associated with these former industrial sites in France and at Rieme in Belgium were transferred to TotalEnergies SE (formerly Total S.A.) group companies. 40 HALF-YEAR FINANCIAL REPORT Agreement relating to certain former industrial sites located in the United States In March 2006, Arkema Participations (which absorbed Arkema Amériques in 2023) completed the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company for most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Site Services and Arkema Participations (which absorbed Arkema Amériques in 2023), dated 7 March 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use US$270 million to capitalize a new subsidiary, Legacy Site Services LLC, to perform remediation services and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of waste shipments from the sites other than currently operated sites. In exchange for this indemnification, Arkema Participations (which absorbed Arkema Amériques in 2023) agreed to grant to Legacy Site Services LLC control over remediation activities and the defense of claims relating to contamination liabilities at these facilities and sites. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group, certain sites where no significant restoration work is currently underway or anticipated, and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non- existent based upon information available at the time when the indemnity was entered into. Arkema Participations (which absorbed Arkema Amériques in 2023) has waived any claims against Legacy Site Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Site Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defense and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure, and criminal liability. The indemnity described above is capped at US$270 million. The amount received by Arkema under this indemnity amounts to US$157 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnify the liabilities of the Group in excess of US$270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. Note 10: Financing 10.1 FINANCIAL RESULT Financial result includes the cost of debt adjusted for capitalized financial expenses, and as regards provisions for pensions and employee benefits, the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits. It also includes the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate, and the foreign exchange gain/loss on unhedged financing. (In millions of euros) Cost of debt Spot/forward exchange rate difference and foreign exchange gain/loss on unhedged financing Financial income/expenses on provisions for pensions and employee benefits Capitalized interest Interest expenses on leases Other FINANCIAL RESULT 1st half 2023 (11) (16) (7) 2 (3) 0 (35) 1st half 2022 (20) (5) 12 1 (2) 0 (14) 41 HALF-YEAR FINANCIAL REPORT 10.2 DEBT Group net debt amounted to €1,945 million at 30 June 2023, taking account of cash and cash equivalents of €1,666 million. 10.2.1 Analysis of net debt by category (In millions of euros) Bonds Bank loans Other non-current debt Non-current debt excluding IFRS 16 debt Bonds Syndicated credit facility Negotiable European Commercial Paper Other bank loans Other current debt Current debt excluding IFRS 16 debt Debt excluding IFRS 16 debt Non-current IFRS 16 debt Current IFRS 16 debt Debt Cash and cash equivalents Net debt 30 June 2023 31 December 2022 2,392 0 22 2,414 150 — 442 20 23 635 3,049 146 63 3,258 1,592 1,666 2,787 0 22 2,809 150 — 412 13 20 595 3,404 142 65 3,611 1,666 1,945 Bonds In December 2013, the Group issued a €150 million bond that will mature on 6 December 2023, with a fixed coupon of 3.125%. At 30 June 2023, the fair value of this bond is €149 million. In January 2015, the Group issued a €700 million bond that will mature on 20 January 2025, with a fixed coupon of 1.50%. At 30 June 2023, the fair value of this bond is €674 million. In April 2017, the Group issued a €700 million bond that will mature on 20 April 2027, with a fixed coupon of 1.50%. A further €200 million tap issue was undertaken in June 2017, bringing the total amount of this bond issue to €900 million. At 30 June 2023, the fair value of this bond is €832 million. In December 2019, the Group issued a €500 million bond that will mature on 3 December 2029, with a fixed coupon of 0.75%. At 30 June 2023, the fair value of this bond is €415 million. In October 2020, the Group issued a €300 million green bond that will mature on 14 October 2026, with a fixed coupon of 0.125%. This bond is entirely dedicated to the financing of Arkema’s new, world-scale plant in Singapore to manufacture 100% bio-based Rilsan® polyamide 11. At 30 June 2023, the fair value of this bond is €266 million. In January 2023, the Group issued a €400 million bond that will mature on 23 January 2031, with a fixed coupon of 3.5%. At 30 June 2023, the fair value of this bond is €386 million. These issues are part of the Group’s Euro Medium Term Notes (EMTN) program introduced in October 2013. 42 HALF-YEAR FINANCIAL REPORT Negotiable European Commercial Paper In April 2013, the Group introduced an annually renewed Negotiable European Commercial Paper program. Its ceiling was increased from €1 billion to €2 billion in 2022. Issues outstanding as part of this program amount to €415 million at 30 June 2023. Syndicated line of credit On 28 July 2022, the Group amended and extended its syndicated line of credit maturing on 29 July 2024. The amount was increased to €1.1 billion and the maturity extended to 28 July 2027 with two one-year extension options subject to lender approval. Following this amendment, the financial commitment to respect a certain ratio of net debt/EBITDA no longer appears among the criteria for early payment. The cost of the credit line is linked to three key CSR criteria for the Group: greenhouse gas emissions, volatile organic compound emissions and the total recordable injury rate (TRIR). This line is intended to finance the general needs of the Group and serves as a back-up facility for the short-term negotiable securities program. IFRS 16 debt The maturities of the Group’s future lease payments, at non-discounted value, are presented in note 8.4 “IFRS 16 leases”. 10.2.2. Analysis of debt excluding IFRS 16 debt by currency The Arkema Group’s debt excluding IFRS 16 debt is mainly denominated in euros. (In millions of euros) Euros US Dollars Other TOTAL DEBT EXCLUDING IFRS 16 DEBT Part of the debt in euros is converted through swaps to the accounting currency of internally financed subsidiaries, in line with the Group’s policy. At 30 June 2023, the swapped portion, mainly in US dollars, represented approximately 13% of gross debt excluding IFRS 16 debt. 30 June 2023 31 December 2022 3,019 11 19 3,049 3,378 13 13 3,404 10.2.3. Analysis of debt excluding IFRS 16 debt by maturity The breakdown of debt by maturity, excluding IFRS 16 debt and including interest costs, is as follows: (In millions of euros) Less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years More than 5 years TOTAL DEBT EXCLUDING IFRS 16 DEBT 30 June 2023 31 December 2022 648 29 731 319 918 517 3,162 625 743 35 1,232 18 954 3,607 10.2.4. Changes in liabilities from financing activities (In millions of euros) Non-current debt excluding IFRS 16 debt Current debt excluding IFRS 16 debt IFRS 16 debt - Cash and cash equivalents 31 December 2022 2,414 635 209 1,592 Changes in scope 0 0 3 (3) Monetary flows in the cash flow statement (financing activities) 396 (39) (37) 70 Translation adjustment 0 (2) (3) 7 Non- current/ current reclassifi- cations (1) 1 0 0 Other non- monetary flows 0 0 35 0 30 June 2023 2,809 595 207 1,666 Net debt 1,666 6 250 (12) 0 35 1,945 43 HALF-YEAR FINANCIAL REPORT Note 11: Shareholders’ equity and earnings per share At 30 June 2023, Arkema’s share capital amounted to €750 million, divided into 75,043,514 shares with a par value of €10. 11.1 CHANGES IN SHARE CAPITAL AND PAID-IN SURPLUS Number of shares at 1 January Issuance of shares following the capital increase reserved for employees Issuance of shares following the exercise of subscription options Share capital reduction Number of shares at end of period 1st half 2023 75,043,514 — — — 75,043,514 2022 76,736,476 757,473 — (2,450,435) 75,043,514 11.2 HYBRID BONDS At 30 June 2023, the total nominal value of Arkema’s perpetual hybrid bonds is €700 million. The breakdown is as follows: Issue date Nominal value Currency Redemption option Annual coupon rate 17 June 2019 21 January 2020 (in millions) 400 300 EUR EUR 5.25 years 6 years 2.75% 1.50% Arkema has an option to defer payment of coupons for the above bonds. In accordance with IAS 32, when there is an unconditional right to avoid delivering cash or another financial asset in the form of repayment of principal or interest, an instrument is recognized in shareholders’ equity. In application of this principle, the hybrid bonds are recorded in shareholders’ equity, and the coupons paid are recorded as dividends in the Group’s consolidated financial statements. 11.3 TREASURY SHARES The Company bought back 257,726 treasury shares during 2023. In the first half of 2023, 1,185 free shares vested to Arkema Group employees (see note 6.2 “Share-based payments”). Number of treasury shares at 1 January Purchase of treasury shares Grants of treasury shares Share capital reduction Number of treasury shares at end of period 1st half 2023 231,087 257,726 (1,185) — 487,628 2022 2,779,553 262,945 (360,976) (2,450,435) 231,087 11.4 DIVIDENDS The combined annual general meeting of 11 May 2023 approved the distribution of a €3.40 dividend per share in respect of the 2022 financial year, or a total amount of €253 million. This dividend was paid out on 17 May 2023. 11.5 TRANSLATION ADJUSTMENTS The change in translation adjustments recognized in other recyclable comprehensive income mainly comprises the impacts of movements in the USD-EUR exchange rate. 11.6 EARNINGS PER SHARE In accordance with IAS 33, the earnings per share and diluted earnings per share are calculated based on net income (Group share) less the net-of-tax interest paid to bearers of subordinated perpetual notes (hybrid bonds). After this adjustment, the net income (Group share) is divided by the weighted average number of ordinary shares outstanding since the start of the year to calculate the earnings per share. 44 HALF-YEAR FINANCIAL REPORT For the diluted earnings per share, the effect of dilution is thus calculated taking account of stock options and grants of free shares to be issued. Weighted average number of ordinary shares Dilutive effect of stock options Dilutive effect of free share grants Weighted average number of potential ordinary shares 1st half 2023 74,716,206 0 327,308 75,043,514 1st half 2022 73,954,187 0 331,854 74,286,041 (In millions of euros) Net income – Group share Interest on subordinated perpetual notes, net of tax Net income used in calculating earnings per share 1st half 2023 284 (5) 279 1st half 2022 730 (5) 725 Earnings per share (in euros) 1st half 2023 3.73 1st half 2022 9.80 Diluted earnings per share (in euros) 3.72 9.76 Note 12: Subsequent events On 5 July 2023, the Group exercised the first one-year extension option of its syndicated credit facility, bringing its maturity to 28 July 2028. Note 13: List of consolidated companies The percentage of control indicated below also corresponds to the Group’s ownership interest. AEC Polymers Afinitica Technologies S.L. Agiplast Italia S.r.l. American Acryl L.P. American Acryl NA, LLC Arkema Arkema Arkema Ameriques SAS Arkema Antwerp Arkema Argentina S.A.U. Arkema B.V. Arkema Canada Inc. Arkema (Changshu) Chemicals Co., Ltd. Arkema (Changshu) Fluorochemical Co., Ltd. Arkema Chemicals India Private Limited Arkema (Changshu) Polyamides Co., Ltd. Arkema (China) Investment Co., Ltd. Arkema Coatex Brasil Indústria e Comércio Ltda. Arkema Coating Resins Malaysia Sdn. Bhd. ARKEMA UK LIMITED Arkema Company Limited Arkema Delaware Inc. Arkema France Arkema GmbH Arkema Hydrogen Peroxide Co., Ltd. Shanghai Arkema Inc. Arkema Insurance Designated Activity Company Arkema K.K. Arkema Kimya Sanayi ve Ticaret AS France Spain Italy United States United States South Korea France France Belgium Argentina Netherlands Canada China China India China China Brazil Malaysia United Kingdom Hong Kong United States France Germany China United States Ireland Japan Turkey (b) 100.00 100.00 100.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 66.67 100.00 100.00 100.00 100.00 FC FC FC JO JO FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC 45 ARKEMA Holding Limited Arkema Mexico S.A. de C.V. Arkema Participations Arkema Peroxides India Private Limited Arkema Pte. Ltd. Arkema Pty Ltd. Arkema Quimica S.A.U. Arkema Chemicals Saudi Arabia Arkema (Shanghai) Distribution Co., Ltd. Arkema Sp z.o.o Arkema S.r.l Arkema (Suzhou) Polyamides Co., Ltd. Arkema Taixing Chemicals Co., Ltd. Arkema Thiochemicals Sdn. Bhd. Arkema Yoshitomi, Ltd. AMP Trucking, Inc. ARR MAZ GLOBAL HOLDINGS, S.L. ARR-MAZ Brazil LLC ArrMaz Chemicals (Yunnan) Co., Ltd. ArrMaz China, LLC ARR-MAZ DO BRASIL LTDA. ArrMaz Gulf Chemicals Ltd. ARRMAZ MOROCCO SARLAU ArrMaz Morocco, LLC ArrMaz Products Inc. ArrMaz Speciality Chemicals, Inc. ARRMAZ TECHNOLOGY AFRICA, SARL A/S LIP Bygningsartikler. Nørre Aaby Barrflex TU, LLC Bostik AB Bostik Adhesives Limited Bostik Aerosols GmbH Bostik Argentina S. A. Bostik A/S Bostik AS Bostik Australia Pty Ltd. Bostik Belux S.A. – N.V. Bostik Benelux B.V. Bostik B.V. Bostik Canada Ltd. Bostik Egypt for the production adhesive materials (Bostik Egypt) S.A.E Bostik Findley (China) Co., Ltd Bostik Findley (Malaysia) Sdn. Bhd. Bostik GmbH Bostik Hellas S.A. Bostik Holding Hong Kong Ltd. Bostik Holding Bostik Inc. Bostik India Private Limited Bostik Industries Limited Bostik Kimya Sanayi Ve Ticaret AS Bostik Korea Limited Bostik Limited Bostik Mexicana S.A. de C.V. Bostik Nederland B.V. Bostik New Zealand Limited Bostik-Nitta Co., Ltd. 46 HALF-YEAR FINANCIAL REPORT United Kingdom Mexico France India Singapore Australia Spain Saudi Arabia China Poland Italy China China Malaysia Japan United States Spain United States China United States Brazil Saudi Arabia Morocco United States United States United States Morocco Denmark United States Sweden United Kingdom Germany Argentina Denmark Norway Australia Belgium Netherlands Netherlands Canada Egypt (e) (e) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 65.00 100.00 100.00 100.00 100.00 100.00 86.00 49.00 100.00 100.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 China Malaysia Germany Greece Hong Kong France United States India Ireland Turkey South Korea United Kingdom Mexico Netherlands New Zealand Japan 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 80.00 FC FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC JV FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC Bostik L.L.C. Bostik OY Bostik Philippines Inc. Bostik Portugal Unipessoal Lda Bostik Technology GmbH Bostik Romania S.r.l Bostik SA Bostik S.A. Bostik (Shanghai) Management Co., Ltd. BOSTIK SOUTH AFRICA (PTY) LTD Bostik Sp z.o.o. Bostik (Thailand) Co., Ltd Bostik Vietnam Company Limited Casda Biomaterials Co., Ltd Changshu Coatex Additives Co., Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Inc. Coatex CEE s.r.o Coatex Inc. Coatex Netherlands B.V. Coatex CRACKLESS MONOMER Co Ltd Den Braven SA (Pty) Ltd Delaware Chemicals Corporation DIFI 13 DIFI 14 DIFI 16 DIFI 19 DIFI 20 ERPRO 3D FACTORY Febex SA FIXATTI FIXATTI (CHINA) Polymer Specialties Co., Ltd. LTD Fixatti AG FIXATTI GmbH Fixatti Holding AG IDEAL WORK Srl Ihsedu Agrochem Private Limited Jiangsu Bostik Adhesive Co., Ltd Lambson Limited Lip Norge AS Lip Sverige AB Michelet Finance, Inc. MLPC International Ozark Mahoning Company Polimeros Especiales, S.A. de C.V. POLYTEC PT Gmbh Polymere Technologien Prochimir PT.Bostik Indonesia Sartomer (Guangzhou) Chemicals Ltd. SDP Holding Seki Arkema Co. Ltd. Shanghai Zhiguan Polymer Materials Co. Ltd Siroflex Limited Société Marocaine des Colles Sovereign Chemicals Limited Taixing Sunke Chemicals Co., Ltd. The LightLock Company Limited 47 HALF-YEAR FINANCIAL REPORT Russia Finland Philippines Portugal Germany Romania France Spain China South Africa Poland Thailand Vietnam China China Malaysia South Korea Slovakia United States Netherlands France Taiwan South Africa United States France France France France France France Switzerland Belgium China Switzerland Germany Switzerland Italy India China United Kingdom Norway Sweden United States France United States Mexico Germany France Indonesia China Belgium South Korea China United Kingdom Morocco United Kingdom China Hong Kong (a) (d) (g) (d) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 14.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 10.00 96.77 100.00 100.00 100.00 100.00 100.00 100.00 24.90 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 97.01 100.00 100.00 55.00 FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC HALF-YEAR FINANCIAL REPORT Thermoplastic Powder Holding AG Turkish Products, Inc. Usina Fortaleza Industria E Comércio de Massa Fina Ltda Viking Chemical Company Switzerland United States Brazil United States 100.00 100.00 100.00 100.00 (a) Companies that changed their name in 2023. (b) Companies merged in 2023. (c) Companies liquidated in 2023. (d) Companies consolidated for the first time in 2023. (e) Companies for which the percentage ownership changed in 2023, with no change in control. (f) Companies for which the percentage ownership changed in 2023, with change in control. (g) Companies deconsolidated in 2023. NB: FC: full consolidation. JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses. JV: joint venture – consolidation by the equity method. SI: significant influence – consolidation by the equity method. 48 FC FC FC FC HALF-YEAR FINANCIAL REPORT 3 Declaration by the person responsible for the half-year financial report at 30 June 2023 I declare that, to the best of my knowledge, the condensed consolidated interim financial statements for the six months ended 30 June 2021 have been prepared in accordance with the applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and results of the Company and all of the companies included in the scope of consolidation. I further declare that the management report, presented on pages 3 to 13, presents a fair review of the major events that occurred in the first six months of the year and of their impact on the financial statements, as well as the main related-party transactions, and that the said management report provides a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, 27 July 2023 Thierry Le Hénaff Chairman and Chief Executive Officer 49 50 HALF-YEAR FINANCIAL REPORT KPMG S.A. Arkema S.A. For the period from January 1 to June 30, 2023 Statutory Auditors’ Review Report on the Half-yearly Financial Information 2023 51 HALF-YEAR FINANCIAL REPORT ERNST & YOUNG Audit HALF-YEAR FINANCIAL REPORT KPMG S.A. ERNST & YOUNG Audit Tour Eqho 2, avenue Gambetta CS 60055 92066 Paris-La Défense cedex S.A. au capital de € 5 497 100 775 726 417 R.C.S. Nanterre Tour First TSA 14444 92037 Paris-La Défense cedex S.A.S. à capital variable 344 366 315 R.C.S. Nanterre Commissaire aux Comptes Membre de la compagnie régionale de Versailles et du Centre Commissaire aux Comptes Membre de la compagnie régionale de Versailles et du Centre This is a free translation into English of the statutory auditors’ review report on the half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Arkema S.A. For the period from January 1 to June 30, 2023 Statutory Auditors’ Review Report on the Half-yearly Financial Information 2023 To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: ➢ the review of the accompanying condensed half-yearly consolidated financial statements of Arkema S.A., for the period from January 1 to June 30, 2023, ➢ the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 52 HALF-YEAR FINANCIAL REPORT Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. II. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, July 28th 2023 The Statutory Auditors French original signed by KPMG S.A. ERNST & YOUNG Audit François Quédiniac Eric Dupré Christine Vitrac 53 Arkema, a French société anonyme (limited company) with share capital of €750,435,140 – Registered in Nanterre: RCS 445 074 685 Nanterre 54 HALF-YEAR FINANCIAL REPORT

Semestriel, 2023, Chemistry, ARKEMA

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Semestriel

Chemistry

ARKEMA

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HALF-YEAR FINANCIAL REPORT 2022 Six months ended 30 June 2022 1 2 3 4 HALF-YEAR FINANCIAL REPORT Half-year activity report page 3 Condensed consolidated interim financial statements at 30 June 2022 page 16 Declaration by the person responsible for the half-year financial report at 30 June 2022 page 49 Statutory auditors’ review report on the half-yearly financial information page 50 2 HALF-YEAR FINANCIAL REPORT 1 Half-year activity report 1.1 Management analysis principles and accounting standards The main alternative performance indicators used by the Group are defined in note 4 to the condensed consolidated interim financial statements at 30 June 2022 in section 2 of this document. For the purpose of tracking changes in its results, and more particularly its sales figures, the Group analyzes the following effects (unaudited analyses): scope effect: the scope effect corresponds to the impact of changes in the Group’s scope of consolidation, which arise from acquisitions and divestments of entire businesses or as a result of the first-time consolidation or deconsolidation of entities. Increases or shutdowns of capacity are not included in the scope effect; currency effect: the currency effect corresponds to the mechanical impact of consolidating accounts denominated in currencies other than the euro at different exchange rates from one period to another. The currency effect is calculated by applying the foreign exchange rates of the prior period to the figures for the period under review; price effect: the impact of changes in average selling prices is estimated by comparing the weighted average net unit selling price of a range of related products in the period under review with their weighted average net unit selling price in the prior period, multiplied, in both cases, by the volumes sold in the period under review; and volume effect: the impact of changes in volumes is estimated by comparing the quantities delivered in the period under review with the quantities delivered in the prior period, multiplied, in both cases, by the weighted average net unit selling price in the prior period. 1.2 First-half 2022 highlights 1.2.1 Organic growth projects In line with its sustainable growth strategy and its ambition to become a pure Specialty Materials player, Arkema continued to invest in highly profitable organic growth projects, to support the rising demand for innovative, high performance materials, driven in particular by sustainable megatrends such as urbanization and social change, climate change, resource scarcity and technological transformation. In Advanced Materials, on 17 January 2022 Arkema announced plans to increase its global production capacity for Pebax® elastomers by 25% through an investment at its Serquigny plant in France, to support its customers’ strong growth, in particular in the sports and consumer goods markets. In addition, this investment, which is scheduled to come on stream in mid-2023, will lower the water consumption of the site by 25% thanks to process optimization. Also in Advanced Materials, on 26 January 2022 Arkema announced that it was now targeting a capacity increase of 50% in fluoropolymer production at its Changshu site in China to support strong demand in lithium-ion batteries, as well as the significant growth in the water filtration, specialty coatings, and semiconductor sectors. The capacity extension is scheduled to start up in late 2022. Lastly, on 31 May 2022, Arkema and Nippon Shokubai announced a strategic partnership to mass- produce ultrapure and high performance LiFSI electrolyte salts, a key component of battery cells for electric mobility. Combining Arkema’s fluorochemicals expertise and Nippon Shokubai’s unique know- how in the industrial-scale production of high-purity LiFSI electrolyte salts, this industrial project will support the development of the European battery value chain. 3 HALF-YEAR FINANCIAL REPORT 1.2.2 Acquisitions and divestments On 28 February 2022, Arkema finalized the acquisition of Ashland’s Performance Adhesives business, a first-class leader in high performance adhesives in the United States. With 2021 sales of approximately US$360 million and an EBITDA margin of over 25%, Ashland has strong technological and geographical complementarities with Bostik. This operation, based on a US$1,650 million enterprise value, i.e., 8.7x the expected 2026 EBITDA after taking into account growth and synergies estimated at 12.5% of sales, marks a major step in Arkema’s strengthening of its Adhesive Solutions segment. The Group also expanded its offering of engineering adhesives with the acquisition, finalized on 1 April 2022, of Shanghai Zhiguan Polymer Materials (PMP) in China, specialized in hot-melt adhesives for the consumer electronics market and generating slightly over €1 million in annual sales. 1.2.3 Share buybacks Following the completion on 24 November 2021 of the €300 million share buyback program, the Board of Directors decided on 24 January 2022 to reduce Arkema’s share capital by 3.19%, by canceling 2,450,435 treasury shares acquired at a total cost of €270 million. Following this operation, Arkema’s share capital amounted to €742,860,410, divided into 74,286,041 shares with a par value of €10. 1.2.4 Corporate Social Responsibility In early January, the Group and other founding members of the “Pragati” project for sustainable castor crop farming published the results of the fifth year of their program, which saw a 50% increase in certified castor beans (36,000 tonnes) and over 5,800 farmers trained by the end of this fifth year. 1.3 Governance At the combined annual general meeting held on 19 May 2022 at the Palais Brongniart in Paris, shareholders approved the reappointment, for four-year terms, of the following directors: Marie-Ange Debon, Chairman of the Audit and Accounts Committee;  The Fonds Stratégique de Participations, whose permanent representative is Isabelle Boccon- Gibod, a member of the Audit and Accounts Committee and the Innovation and Sustainable Growth Committee; and Philippe Sauquet, a member of the Nominating, Compensation and Corporate Governance Committee. The shareholders also approved the appointment of Nicolas Patalano, a member of the Arkema Actionnariat France company mutual fund (FCPE), as a director representing shareholder employees, for a four-year term, to replace Jean-Marc Bertrand, whose term was due to expire. Following these changes, the proportion of independent directors on the Board is still 73% and the proportion of women directors is stable at 45%. 4 HALF-YEAR FINANCIAL REPORT 1.4 Analysis of first-half 2022 financial results The figures in this section are provided on a consolidated basis and in accordance with Arkema’s organization comprising the following three coherent and complementary segments dedicated to Specialty Materials: Adhesive Solutions, Advanced Materials and Coating Solutions, as well as the Intermediates segment which groups together activities whose results are more volatile. As of 1 January 2022, upstream PVDF has been reclassified from the Intermediates segment (formerly Fluorogases) to the Advanced Materials segment (High Performance Polymers). Data for 2021 has been restated accordingly. 1.4.1 Analysis of the Group’s results (In millions of euros) First-half 2022 First-half 2021 YoY change Sales 6,071 4,621 +31.4% EBITDA 1,324 836 +58.4% Specialty Materials 1,156 729 +58.6% Intermediates 223 156 +42.9% Corporate 55 49 EBITDA margin 21.8% 18.1% Specialty Materials 21.2% 18.5% Intermediates 37.6% 23.6% Recurring depreciation and amortization 266 268 Recurring operating income (REBIT) 1,058 568 +86.3% REBIT margin 17.4% 12.3% Other income and expenses 70 708 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 40 34 Operating income 948 1,242 23.7% Equity in income of affiliates 1 1 Financial result 14 28 50.0% Income taxes 201 263 23.6% Net income 732 952 23.1% Of which: non-controlling interests 2 2 Net income – Group share 730 950 23.2% Adjusted net income 819 426 +92.3% SALES At €6,071 million, the Group’s sales were up by a sharp 31.4% compared with first-half 2021. Specialty Materials, at the core of the Group’s strategy and which represented 90% of sales in the first half, saw volumes decline slightly by 2.2% compared with last year’s elevated level. The Group’s volumes were down by a moderate 3.8%. While underlying demand remained well oriented in most of the Group’s end markets in the first half, particularly in the United States and to a lesser extent in Asia following 5 HALF-YEAR FINANCIAL REPORT the lockdowns in China, volumes were impacted by logistics difficulties, shortages of certain raw materials, especially in Adhesives, and by the slowdown observed in Europe in the second quarter, notably in the construction and automotive markets. The 30.0% positive price effect reflects in particular increased selling prices in Specialty Materials in the face of very high inflation in raw materials, energy and transportation costs, better conditions in upstream acrylics, as well as the improved product mix. The scope effect was a negative 1.5% in the first half, as the divestment of the PMMA business in May 2021 was only partially offset by the integration of acquisitions in Specialty Materials, particularly that of Ashland’s performance adhesives, which was finalized on 28 February 2022. With the significant appreciation of the US dollar and Chinese yuan against the euro, particularly in the second quarter, the positive 6.7% currency effect reflects the strength of the Group’s positioning in the United States and in China. The breakdown of sales by segment reflects the changes in the scope of Arkema’s portfolio, accelerated demand for high performance solutions serving sustainable megatrends, as well as more favorable market conditions in the acrylics chain. Adhesive Solutions thus now represents 24% of Group sales (1) (24.5% in H1’21), Advanced Materials 36% (33% in H1’21), Coating Solutions 30% (28% in H1’21) and Intermediates 10% (14.5% in H1’21). The change in the regional sales split compared with first-half 2021 reflects the dynamism of the American region, as well as the slowdown in Europe in the second quarter. Europe represented 33.5% of Group sales in first-half 2022 (38% in H1’21), North America 34.5% (30% in H1’21), Asia 28% (28% in H1’21) and the rest of the world 4% (unchanged from H1’21). EBITDA AND RECURRING OPERATING INCOME Group EBITDA rose by a very significant 58.4% year-on-year and reached a historic high for a half-year period of €1,324 million. Growing strongly in each of the three segments, thus reflecting the Group’s balance, Specialty Materials’ EBITDA amounted to €1,156 million (€729 million in H1’21), supported in particular by the price effect in a highly inflationary context, the product mix improvement toward innovative, higher value-added solutions for sustainable megatrends, the integration of recent acquisitions in Adhesive Solutions, as well as by more favorable market conditions in upstream acrylics. Despite the negative scope effect of around €45 million linked to the divestment of PMMA, Intermediates’ EBITDA amounted to €223 million (€156 million in H1’21), reflecting improved market conditions for refrigerant gases, particularly in the United States, and for acrylics in Asia, but also the quality of the positioning work carried out by the teams. Despite a lower level of demand than last year and the mechanical dilution of the price effect, the EBITDA margin reached a historic high for a half-year period, coming in at 21.8%, up 370 bps compared with H1’21. Recurring depreciation and amortization were virtually stable year-on-year, totaling €266 million in the period (€268 million in H1’21), with the decrease due to the PMMA divestment offset by the currency effect. As a result, recurring operating income (REBIT) was also up by a strong 86.3% compared with first- half 2021, amounting to €1,058 million, and the REBIT margin grew by 510 bps to 17.4% (12.3% in H1’21). OPERATING INCOME Operating income amounted to €948 million in first-half 2022, 23.7% lower than the first-half 2021 figure, which included a pre-tax capital gain of close to €950 million arising on the divestment of the PMMA business. The first-half 2022 figure includes €70 million in one-off expenses, corresponding notably to transaction costs related to Ashland’s performance adhesives acquisition, asset impairments and restructuring expenses (for further details, see note 5.1 to the condensed consolidated interim financial statements at 30 June 2022). (1) Calculated excluding Corporate segment sales (€19 million in H1’22 and €14 million in H1’21). 6 HALF-YEAR FINANCIAL REPORT FINANCIAL RESULT The financial result represented a net expense of €14 million in the first half of 2022, down 50.0% year- on-year, primarily reflecting the impact of actuarial differences on certain provisions for employee benefits. INCOME TAXES The income tax expense came to €201 million, down by €62 million compared with the first-half 2021 figure, which included the close-to €170 million tax impact of the divestment of the PMMA business. Excluding this impact, the income tax expense increased in the first half of 2022, in line with the Group’s improved operating performance. In the first half, excluding exceptional items, the tax rate came in at 21% of recurring operating income, versus 20% last year, reflecting the geographic mix of the Group’s earnings. NET INCOME – GROUP SHARE AND ADJUSTED NET INCOME Net income – Group share totaled €730 million (€950 million in H1’21), and net earnings per share amounted to €9.80. Excluding the post-tax impact of non-recurring items, adjusted net income came in at €819 million, representing €11.07 per share. 1.4.2 Analysis of results by segment As a reminder, 2021 data has been restated following the reclassification of upstream PVDF to the Advanced Materials segment (from the Intermediates segment). ADHESIVE SOLUTIONS (24% OF TOTAL GROUP SALES) (In millions of euros) First-half 2022 First-half 2021 YoY change Sales 1,449 1,130 +28.2% EBITDA 201 168 +19.6% EBITDA margin 13.9% 14.9% Recurring operating income (REBIT) 165 136 +21.3% REBIT margin 11.4% 12.0% Other income and expenses 32 29 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 28 24 Operating income 105 83 +26.5% Sales in the Adhesive Solutions segment totaled €1,449 million, up 28.2% compared with first-half 2021, driven by a 16.6% positive price effect in response to very high raw materials, energy and logistics cost inflation. The scope effect was a positive 12.1%, with the segment benefiting from the successful integration of Ashland’s performance adhesives as from March, as well as Poliplas in the first quarter and Edge Adhesives Texas for the full six months. Volumes decreased by 5.4% compared with last year’s high comparison base. They were up strongly in the United States but impacted by the slowdown in the construction and DIY market in Europe that began at the end of the first quarter, and by raw materials shortages, which eased in the second quarter. The currency effect was a positive 4.9% in the period. 7 HALF-YEAR FINANCIAL REPORT At €201 million, EBITDA was up significantly by almost 20% compared with first-half 2021 (€168 million), driven in particular by the discipline in adjusting selling prices in the face of cost inflation, the evolution of the product mix toward higher value-added solutions, as well as by the very good performance of Ashland’s adhesives right from the first months of integration. The EBITDA margin was 13.9% (14.9% in H1’21), despite the mechanical dilutive effect of price increases of some 200 bps. Recurring operating income (REBIT) amounted to €165 million (€136 million in H1’21), including €36 million in recurring depreciation and amortization, up €4 million compared with first-half 2021, mainly due to the integration of acquisitions. REBIT margin stood at 11.4% in the period (12.0% in H1’21). Operating income came to €105 million (€83 million in H1’21), including €28 million in depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses, up €4 million year-on-year following the integration of bolt-on acquisitions. It also included €32 million in net other expenses, corresponding mainly to acquisition costs for Ashland’s adhesives and restructuring expenses. ADVANCED MATERIALS (36% OF TOTAL GROUP SALES) (In millions of euros) First-half 2022 First-half 2021 YoY change Sales 2,188 1,537 +42.4% EBITDA 556 326 +70.6% EBITDA margin 25.4% 21.2% Recurring operating income (REBIT) 422 191 +120.9% REBIT margin 19.3% 12.4% Other income and expenses 22 142 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 9 7 Operating income 391 42 +831.0% Up by a very strong 42.4% compared with first-half 2021, sales in the Advanced Materials segment amounted to €2,188 million. Volumes decreased moderately by 3.0% year-on-year, impacted by the slowdown in Europe, logistics disruptions and lockdowns in China. With the exception of the automotive market, which continued to be impacted by component shortages, demand remained well oriented in most of the segment’s key end markets. The price effect, coming in at +38.8%, was highly positive in both of the segment’s Business Lines, reflecting the Group’s increased selling prices in a highly inflationary context for raw materials, energy and transportation costs, as well as the product mix improvement toward innovative, high performance solutions in batteries, lightweighting, sports, bio-based materials, healthcare, electronics, etc. The 0.6% negative scope effect was attributable to the divestment of the epoxides business in December 2021, partly offset by the acquisition of Agiplast. The currency effect was a positive 7.2%. At €556 million, the segment’s EBITDA was up by a strong 70.6% on the prior-year period, and the EBITDA margin reached the high level of 25.4%, reflecting mainly the growth in demand for solutions coming from the Group’s innovation, the strength of positions developed in the United States and in China which benefited from favorable exchange rates, and a particular tightness in the availability of certain product lines. In line with the increase in EBITDA, recurring operating income (REBIT) came to €422 million, including €134 million in recurring depreciation and amortization, which are stable compared with first-half 2021. 8 HALF-YEAR FINANCIAL REPORT Operating income amounted to €391 million (€42 million in H1’21), including €22 million in net other expenses, which corresponded mainly to asset impairments and start-up costs. In the first half of 2021, net other expenses totaled €142 million and notably included the exceptional impairment of assets in the hydrogen peroxide business linked to the downward trend in European markets. COATING SOLUTIONS (30% OF TOTAL GROUP SALES) (In millions of euros) First-half 2022 First-half 2021 YoY change Sales 1,822 1,279 +42.5% EBITDA 399 235 +69.8% EBITDA margin 21.9% 18.4% Recurring operating income (REBIT) 336 177 +89.8% REBIT margin 18.4% 13.8% Other income and expenses 0 13 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 3 3 Operating income 333 161 +106.8% Sales in the Coating Solutions segment grew by 42.5% year-on-year and came in at €1,822 million, around one third of which were in acrylic monomers. At a positive 33.4%, the price effect was very high and consistent across all the segment’s activities. In an environment of high raw materials, energy and transportation cost inflation, this reflects the Group’s selling price increases to offset the impact of higher costs, and more favorable market conditions in upstream acrylics. Benefiting from a significant increase in the United States, volumes rose by 1.7% during the period, but were nevertheless impacted by logistics difficulties in the first quarter, as well as by the slowdown in Europe and lockdowns in China in the second quarter. The currency effect increased segment sales by 7.4%. The segment’s EBITDA amounted to €399 million, up by a very significant 69.8% compared with the prior year, which was impacted in the first quarter by the consequences of winter storm Uri in the United States. Both upstream acrylics and downstream activities were up significantly. EBITDA margin reached an excellent level at 21.9%. Moreover, the segment’s performance was driven by the product mix improvement toward higher value-added and more environmentally friendly solutions, particularly photocure resins in new energies, electronics and 3D printing, as well as powders and rheology additives. Recurring operating income (REBIT) totaled €336 million (€177 million in H1’21), including recurring depreciation and amortization of €63 million, up €5 million year-on-year, mainly due to the currency effect. Operating income came in at €333 million in first-half 2022. In the first half of 2021, it amounted to €161 million and included €13 million in net other expenses, corresponding mainly to the consequences of winter storm Uri in Texas. 9 HALF-YEAR FINANCIAL REPORT INTERMEDIATES (10% OF TOTAL GROUP SALES) (In millions of euros) First-half 2022 First-half 2021 YoY change Sales 593 661 10.3% EBITDA 223 156 +42.9% EBITDA margin 37.6% 23.6% Recurring operating income (REBIT) 193 117 +65.0% REBIT margin 32.5% 17.7% Other income and expenses 2 904 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses Operating income 191 1,021 81.3% Sales in the Intermediates segment amounted to €593 million, down by 10.3% year-on-year, reflecting in particular a 29.8% negative scope effect relating to the divestment of the PMMA business on 3 May 2021. Benefiting from more favorable market conditions in acrylics in Asia and positive momentum in refrigerant gases, particularly in the United States, the price effect was a positive 26.0%. Volumes were down by 14.1%, impacted by the mechanical effect of quotas in the United States in fluorogases, and by the impact in acrylics of lockdown measures in China. The currency effect was a positive 7.6%. In this context, the segment’s EBITDA grew by a significant 42.9% compared with first-half 2021 at €223 million, despite a negative scope effect of around €45 million during the period. The EBITDA margin reached 37.6% (23.6% in H1’21), reflecting the much-improved performance of refrigerant gases compared with the low comparison base of last year, and tightness in upstream acrylics in Asia. Recurring operating income (REBIT) totaled €193 million (€117 million in H1’21), including €30 million in recurring depreciation and amortization, down €9 million year-on-year following the divestment of PMMA. REBIT margin stood at 32.5% for the first half of 2022. Operating income came in at €191 million for the period and included €2 million in net other expenses. In first-half 2021, operating income was €1,021 million and primarily included a pre-tax capital gain of close to €950 million relating to the divestment of PMMA on 3 May 2021, as well as exceptional asset impairments, and restructuring and environmental contingency expenses in Fluorogases. 1.4.3 Group cash flow analysis (In millions of euros) First-half 2022 First-half 2021 Cash flow from operating activities 531 433 Cash flow from investing activities 1,850 760 Net cash flow 1,319 1,193 Of which net cash flow from portfolio management operations 1,507 896 Free cash flow 188 297 Of which non-recurring cash flow including exceptional capital expenditure 73 1 Recurring cash flow 261 298 Cash flow from financing activities 384 350 10 HALF-YEAR FINANCIAL REPORT EBITDA can be reconciled to free cash flow as follows: (In millions of euros) First-half 2022 First-half 2021 EBITDA 1,324 836 Taxes 218 117 Cash items included in the financial result 26 27 Change in working capital 529 205 Change in fixed asset payables (1) 99 35 Recurring capital expenditure 171 165 Other 20 11 Recurring cash flow 261 298 Exceptional capital expenditure 66 117 Non-recurring cash flow 7 116 Free cash flow 188 297 (1) Excluding cash flows related to non-recurring items and portfolio management operations. These items represented a nil amount in first-half 2022 and a net cash outflow of €1 million in first-half 2021. RECURRING CASH FLOW, FREE CASH FLOW AND NET CASH FLOW Recurring cash flow came to €261 million (€298 million in H1’21). It reflects the Group’s excellent operating performance and includes the increase in working capital, which was impacted by the strong inflation in raw materials and energy costs, by the higher selling prices, as well as by the first half’s traditional seasonality. At end-June 2022, working capital remained well under control and represented 14.9% of annualized sales (11.9% at end-June 2021 in the context of the post-Covid rebound and sourcing difficulties, and 16.0% at end-June 2019). Recurring cash flow also included recurring capital expenditure of €171 million, virtually stable compared to last year (€165 million). At €188 million, free cash flow included a strong year-on-year decrease in exceptional capital expenditure at €66 million (€117 million in first-half 2021), due to the upcoming start-up of the two major projects concerned. In 2021, free cash flow also included a non-recurring inflow of €116 million corresponding mainly to tax liabilities related to the capital gains tax on the PMMA divestment. The net cash outflow from portfolio management operations of €1,507 million in first-half 2022 corresponds essentially to the acquisition of Ashland’s performance adhesives finalized on 28 February 2022. In first-half 2021, portfolio management operations generated a €896 million net cash inflow and included in particular the proceeds from the PMMA divestment finalized in May 2021. CASH FLOW FROM FINANCING ACTIVITIES The cash inflow from financing activities amounted to €384 million in first-half 2022 versus an outflow of €350 million in the first six months of 2021. The first-half 2022 figure primarily includes an increase in short-term debt of close to €650 million, with no impact on net debt, and a €3 per-share dividend payment for fiscal year 2021 for a total amount of €222 million. The first-half 2021 figure primarily included a €2.50 per-share dividend payment for fiscal year 2020 for a total amount of €191 million and €104 million in share buyback costs. 11 HALF-YEAR FINANCIAL REPORT 1.4.4 Balance sheet analysis (In millions of euros) 30 June 2022 31 December 2021 Change Non-current assets* 8,541 6,772 +26.1% Working capital 1,902 1,185 +60.5% Capital employed 10,443 7,957 +31.2% Deferred tax assets 134 144 6.9% Assets held for sale 4 4 Provisions for pensions and employee benefits 376 493 23.7% Other provisions 438 429 +2.1% Total provisions 814 922 11.7% Long-term assets covering some provisions 134 127 +5.5% Total provisions net of non-current assets 680 795 14.5% Deferred tax liabilities 362 342 +5.8% Other non-current liabilities 15 14 +7.1% Net debt (excluding hybrid bonds) 2,089 477 +337.9% Shareholders’ equity 7,301 6,350 +15.0% Excluding deferred tax and including pension assets. Between 31 December 2021 and 30 June 2022, non-current assets increased by €1,769 million. This change was primarily due to: the impact of acquisitions for an amount of €1,437 million, corresponding essentially to the integration of Ashland’s performance adhesives assets, which notably led to the recognition of €1,191 million in provisional goodwill (for further details, see note 3.1, “Business Combinations” to the condensed consolidated interim financial statements at 30 June 2022); €237 million in capital expenditure, including €171 million in recurring capital expenditure and €66 million in exceptional capital expenditure; a €42 million increase in right-of-use assets related to the Group’s lease commitments under IFRS 16; €326 million in depreciation and amortization mainly including (i) €266 million in recurring depreciation and amortization, of which €33 million arising from the application of IFRS 16, (ii) €40 million in depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses, and (iii) €20 million in exceptional write-downs of industrial and intangible assets (including goodwill); and a €354 million positive currency translation effect, mainly linked to the strong depreciation of the euro against the US dollar at 30 June. At 30 June 2022, working capital was €717 million higher than at 31 December 2021. This increase mainly reflects activity levels and traditional seasonality, high selling prices, as well as strong inflation in raw materials and energy costs. 12 HALF-YEAR FINANCIAL REPORT It also includes a positive currency effect of €30 million. At 30 June 2022, working capital remained well under control, representing 14.9% of annualized sales (11.9% at end-June 2021 in the context of the post-Covid rebound and sourcing difficulties, and 16.0% at end-June 2019). As a consequence, the Group’s capital employed increased by €2,486 million between 31 December 2021 and 30 June 2022 to €10,443 million at 30 June 2022. Deferred tax assets amounted to €134 million at 30 June 2022, down €10 million compared with 31 December 2021. Gross provisions totaled €814 million. Some of these provisions, accounting for an aggregate €102 million, are covered mainly by the guarantee facility granted by Total and described in note 9.1.2 to the condensed consolidated interim financial statements at 30 June 2022 (see section 2 of this document) and therefore by long-term assets recognized in the balance sheet. These essentially consist of provisions related to former industrial sites in the United States. At 30 June 2022, provisions net of these non-current assets were down €115 million to €680 million, with the decrease essentially due to a reduction in employee benefit obligations. Net provisions can be analyzed as follows by type: (In millions of euros) 30 June 2022 31 December 2021 Pension liabilities 232 324 Other employee benefit obligations 130 158 Environmental contingencies 116 120 Restructuring 46 49 Other 156 144 Between 31 December 2021 and 30 June 2022, net provisions for pension liabilities decreased by €92 million primarily due to a very significant increase in the discount rates applied in all regions. This resulted in a decrease in pension obligations, partially offset by the revaluation of plan assets in the United States and the United Kingdom. The currency effect was a positive €9 million in first-half 2022. Provisions for other employee benefit obligations (healthcare costs, welfare costs and long-service awards) decreased by €28 million. The decrease in these provisions was also due primarily to the much higher discount rates applied in all regions. The increase in provisions for litigation and claims mainly related to legal fees for ongoing proceedings in the United States. Net debt and hybrid bonds amounted to €2,789 million at 30 June 2022 (€1,177 million at 31 December 2021), representing 1.3 times last-twelve-months EBITDA. This increase primarily reflects the payment for the acquisition of Ashland’s performance adhesives of close to €1.5 billion and the payment of the dividend of €3.0 per share for a total amount of €222 million. Shareholders’ equity amounted to €7,301 million versus €6,350 million at 31 December 2021. The €951 million increase primarily relates to (i) €732 million in net income for the period, and (ii) the payment of a €3.0 per-share dividend for a total amount of €222 million. In first-half 2022, a €96 million actuarial gain was recognized in equity for provisions for pension liabilities and other post- employment benefit obligations, as well as a positive €327 million translation adjustment. 1.5 Transactions with related parties Transactions between consolidated companies have been eliminated in the consolidation process. Moreover, in the normal course of business, the Group has business relationships with certain non- consolidated companies or with companies which are accounted for under the equity method. The values involved are not significant. 13 HALF-YEAR FINANCIAL REPORT 1.6 Significant events since 30 June 2022 1.6.1 Acquisitions and divestments On 1 July 2022, Arkema finalized the acquisition of Permoseal in South Africa, a leader in adhesive solutions for DIY, packaging and construction. Permoseal has a strong presence in retail channels and generated sales of €43 million in 2021. This acquisition will enable Bostik to complete its offering in the region and strengthen its positions in South Africa’s and Sub-Saharan Africa’s dynamic industrial, construction and DIY markets. On 21 July 2022, the Group announced the planned acquisition of Polimeros Especiales, a leading player in solvent-free waterborne acrylic resins in Mexico, which will enable Arkema to strengthen its position in this fast-growing region. The company employs 230 people and achieved sales of around US$40 million in 2021. 1.6.2 Financing On 28 July 2022, the Group amended and extended its syndicated line of credit maturing on 29 July 2024. The amount was increased to €1.1 billion and the maturity extended to 28 July 2027 with two one-year extension options subject to lender approval. Following this amendment, the financial commitment to respect a certain ratio of net debt/EBITDA no longer appears among the criteria for early payment. In addition, the CSR indicators take into account the Group’s new objectives. This line is intended to finance the general needs of the Group and serves as a back-up facility for the short- term negotiable securities program. 1.6.3 Corporate Social Responsibility On 7 July 2022, Arkema reinforced its commitment to fight global warming by publishing its new climate plan. In line with the expectations of the Paris Agreement to contain global warming to 1.5°C above pre-industrial levels by the end of the century, the Group has set itself an ambitious target, based on an SBT (Science Based Target) approach, to reduce its scope 1 and 2 greenhouse gas (GHG) emissions and its scope 3 emissions by 46% by 2030 relative to 2019. Thus, the Group has raised its level of commitment from a trajectory well below 2°C for scopes 1 and 2 to a 1.5°C trajectory across its entire value chain. This decarbonization target is based on energy efficiency and the evolution of the energy mix for scopes 1 and 2, as well as, for scope 3, on the reduction of the most emissive activities, innovation contributing to a reduction in greenhouse gas emissions and suppliers’ commitment to climate action. Moreover, this target will be supported by an increase in investments contributing to decarbonization, which could reach €400 million by 2030 and which will be included in the Group’s recurring capital expenditure envelope. 1.7 Main risks and uncertainties The main risks and uncertainties which the Group could face over the next six months are the same as those described in chapter 2 of the 2021 Universal Registration Document filed with the French financial markets authority (Autorité des marchés financiers – AMF) on 29 March 2022 under number D.22-0185. This document is available on Arkema’s website (www.arkema.com) in the “Investors” section and on the AMF website (www.amf-france.org). Additionally, an update on the Group’s contingent liabilities is provided in the notes to the condensed consolidated interim financial statements at 30 June 2022. 14 HALF-YEAR FINANCIAL REPORT 1.8 Outlook The second half is marked by a context of risks of lockdowns in China, geopolitical tensions linked to the war in Ukraine, concerns regarding the availability and price of natural gas and electricity in Europe, as well as the significant increase in the level of inflation, which are all factors that could weigh on demand going forward. In this context, the Group will benefit from its balanced geographic presence and will remain attentive to the evolution of market conditions. Moreover, it will ensure to take inflation into account in its selling prices, strictly manage its fixed costs and inventories and pursue its innovation in high performance materials. Despite the uncertain macroeconomic environment and the decline in volumes observed in Europe, Arkema is raising its annual targets and now aims to achieve in 2022, excluding further significant disruptions of the global context, annual EBITDA growth at constant scope of 17% to 22% compared with the record level of 2021 (vs. “slight growth” previously), representing an EBITDA of around €2,100 million. The Group is also reaffirming its confidence in its ability to achieve the ambitious targets it has set for 2024 and will continue to implement its strategic roadmap for sustainable development. Arkema will thus leverage its bolt-on acquisition policy, its industrial capacity expansions to support its customers’ growth in high-potential markets, its numerous initiatives in CSR, and lastly the strength of its innovation which should enable the company to generate €1.5 billion of new revenues from 2019 to 2030 around its five large R&D platforms. 15 HALF-YEAR FINANCIAL REPORT 2 Condensed consolidated interim financial statements at 30 June 2022 Consolidated income statement page 17 Consolidated statement of comprehensive income page 18 Consolidated balance sheet page 19 Consolidated cash flow statement page 20 Consolidated statement of changes in shareholders’ equity page 21 Notes to the consolidated financial statements at 30 June 2022 page 22 16 CONSOLIDATED INCOME STATEMENT (In millions of euros) Sales Operating expenses Research and development expenses Selling and administrative expenses Other income and expenses Operating income Equity in income of affiliates Financial result Income taxes Net income Attributable to non-controlling interests Net income – Group share Earnings per share (in euros) Diluted earnings per share (in euros) 17 HALF-YEAR FINANCIAL REPORT Notes (4.8 & 4.9) (5.1) (4.8) (10.1) (7) (11.6) (11.6) 1st half 2022 6,071 (4,485) (133) (435) (70) 948 (1) (14) (201) 732 2 730 9.80 9.76 1st half 2021 4,621 (3,581) (119) (387) 708 1,242 1 (28) (263) 952 2 950 12.38 12.31 HALF-YEAR FINANCIAL REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of euros) Net income Hedging adjustments Other items Deferred taxes on hedging adjustments and other items Change in translation adjustments Other recyclable comprehensive income Impact of remeasuring unconsolidated investments Actuarial gains and losses Deferred taxes on actuarial gains and losses Other non-recyclable comprehensive income TOTAL INCOME AND EXPENSES RECOGNIZED DIRECTLY THROUGH EQUITY Total comprehensive income Attributable to non-controlling interests Total comprehensive income – Group share Notes (11.5) (6.1) 1st half 2022 732 16 — (3) 327 340 (1) 115 (19) 95 435 1,167 3 1,164 1st half 2021 952 (25) — — 92 67 (2) 67 (14) 51 118 1,070 3 1,067 18 CONSOLIDATED BALANCE SHEET (In millions of euros) ASSETS Goodwill Other intangible assets, net Property, plant and equipment, net Investments in equity affiliates Other investments Deferred tax assets Other non-current assets TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Current financial derivative assets Cash and cash equivalents Assets held for sale TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Translation adjustments SHAREHOLDERS’ EQUITY – GROUP SHARE Non‑controlling interests TOTAL SHAREHOLDERS’ EQUITY Deferred tax liabilities Provisions for pensions and other employee benefits Other provisions and non‑current liabilities Non-current debt TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Current financial derivative liabilities Current debt Liabilities associated with assets held for sale TOTAL CURRENT LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 19 HALF-YEAR FINANCIAL REPORT Notes 30 June 2022 31 December 2021 (8.1) (8.2) (8.3) (3.2) 3,259 1,712 3,231 29 52 134 258 8,675 1,662 1,945 208 88 63 1,342 4 5,312 13,987 1,925 1,517 3,031 29 52 144 218 6,916 1,283 1,432 181 91 109 2,285 4 5,385 12,301 (11.1) (11.3) (6.1) (9.1) (10.2) (10.2) (3.2) 743 5,973 (34) 569 7,251 50 7,301 362 376 453 2,698 3,889 1,400 456 173 35 733 — 2,797 13,987 767 5,598 (305) 243 6,303 47 6,350 342 493 443 2,680 3,958 1,274 430 155 52 82 — 1,993 12,301 CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) Operating cash flows Net income Depreciation, amortization and impairment of assets Other provisions and deferred taxes (Gains)/losses on sales of long-term assets Undistributed affiliate equity earnings Change in working capital Other changes CASH FLOW FROM OPERATING ACTIVITIES Investing cash flows Intangible assets and property, plant and equipment additions Change in fixed asset payables Acquisitions of operations, net of cash acquired Increase in long-term loans Total expenditures Proceeds from sale of intangible assets and property, plant and equipment Proceeds from sale of operations, net of cash transferred Proceeds from sale of unconsolidated investments Repayment of long-term loans Total divestitures CASH FLOW FROM INVESTING ACTIVITIES Financing cash flows Issuance (repayment) of shares and paid-in surplus Purchase of treasury shares Issuance of hybrid bonds Redemption of hybrid bonds Dividends paid to parent company shareholders Interest paid to bearers of subordinated perpetual notes Dividends paid to non-controlling interests Increase in long-term debt Decrease in long-term debt Increase/(Decrease) in short-term debt CASH FLOW FROM FINANCING ACTIVITIES Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 20 HALF-YEAR FINANCIAL REPORT Notes 1st half 2022 1st half 2021 (5.2) 732 326 (22) (4) 2 (518) 15 531 952 421 47 (949) (1) (43) 6 433 (4.3) (3.1) (3.2) (237) (99) (1,493) (40) (1,869) 6 — — 13 19 (1,850) (285) (36) (42) (16) (379) 6 1,120 4 9 1,139 760 (11.1) (11.3) (11.2) (11.2) (11.4) (11.2) — (2) — — (222) (5) (1) 3 (37) 648 384 — (104) — — (191) (4) (1) 6 (26) (30) (350) (935) (8) 2,285 1,342 843 (15) 1,587 2,415 HALF-YEAR FINANCIAL REPORT CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (In millions of euros) At 1 January 2022 Cash dividend Issuance of share capital Capital reduction by cancellation of treasury shares Purchase of treasury shares Grants of treasury shares to employees Share-based payments Issuance of hybrid bonds Redemption of hybrid bonds Other Transactions with shareholders Net income Total income and expenses recognized directly through equity Total comprehensive income At 30 June 2022 Share capital 767 — — (24) — — — — — — (24) — — — 743 Paid-in surplus 1,272 — — (246) — — — — — — (246) — — — 1,026 Hybrid bonds 700 — — — — — — — — — — — — — 700 Retained earnings 3,626 (227) — — — (3) 13 — — — (217) 730 108 838 4,247 Translation adjustments 243 — — — — — — — — — — — 326 326 569 Treasury shares (305) — — 270 (2) 3 — — — — 271 — — — (34) Shareholders’ equity – Group share 6,303 (227) — — (2) — 13 — — — (216) 730 434 1,164 7,251 Non‑controlling interests 47 (1) — — — — — — — 1 — 2 1 3 50 Shareholders’ equity 6,350 (228) — — (2) — 13 — — 1 (216) 732 435 1,167 7,301 Shareholders’ equity – Group share 5,187 (195) — (104) Translation adjustments (32) — — — Retained earnings 2,486 (195) — — Hybrid bonds 700 — — — Paid-in surplus 1,272 — — — Treasury shares (6) — — (104) Share capital 767 — — — Non‑controlling interests 48 (1) — — (In millions of euros) At 1 January 2021 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees Share-based payments Issuance of hybrid bonds Redemption of hybrid bonds Other* Transactions with shareholders Net income Total income and expenses recognized directly through equity Total comprehensive income At 30 June 2021 * Including the Group’s residual commitment of €224 million under the 2021 share buyback program, with a corresponding entry in current debt. — — — — — (1) 8 — — (226) 1 — — — — — — — — — — — — — — — 8 — — (226) — — — — — — — — — 2 — — — — (414) 950 (517) 950 1 2 — — — — (103) — 117 — 26 91 — — — 1 91 59 976 3,048 1,067 5,737 — 700 — 1,272 3 52 — 767 — (109) Shareholders’ equity 5,235 (196) — (104) — 8 — — (224) (516) 952 118 1,070 5,789 21 HALF-YEAR FINANCIAL REPORT Notes to the consolidated financial statements at 30 June 2022 Note 1: Highlights Note 2: Accounting policies and new standards Note 3: Scope of consolidation Note 4: Alternative performance indicators and information by segment Note 5: Other information relating to operating activities Note 6: Provisions for pensions and other employee benefits Note 7: Income taxes Note 8: Intangible assets and property, plant and equipment Note 9: Other provisions and other non-current liabilities, contingent liabilities and litigation Note 10: Financing Note 11: Shareholders’ equity and earnings per share Note 12: Subsequent events Note 13: List of consolidated companies 22 23 23 25 26 31 33 35 35 38 41 43 45 45 HALF-YEAR FINANCIAL REPORT Note 1: Highlights 1.1. PORTFOLIO MANAGEMENT On 28 February 2022, the Group finalized the acquisition of Ashland’s Performance Adhesives business, which was announced on 31 August 2021 based on a US$1,650 million enterprise value. This operation marks a major step in Arkema’s strengthening of its Adhesive Solutions segment. This activity, which employs approximately 330 people and operates 6 production plants, mainly in North America, offers excellent commercial, technological and geographic complementarities with Bostik. Moreover, the Group expanded its offer of engineering adhesives with the acquisition, finalized on 1 April 2022, of Shanghai Zhiguan Polymer Materials (PMP) in China, specialized in hot-melt adhesives for the consumer electronics market. The impacts of these operations are described in note 3.1 “Business combinations”. 1.2. OTHER HIGHLIGHTS Following the completion on 24 November 2021 of the €300 million share buyback program, the Board of Directors decided on 24 January 2022 to reduce Arkema’s share capital by 3.19%, by canceling 2,450,435 treasury shares acquired at a total cost of €270 million. Following this operation, Arkema’s share capital amounted to €742,860,410, divided into 74,286,041 shares with a par value of €10. Note 2: Accounting policies and new standards The condensed consolidated interim financial statements should be read in conjunction with the Group’s most recent annual consolidated financial statements for the year ended 31 December 2021. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group’s financial position and performance since the last annual financial statements. Arkema, a major player in Specialty Materials, is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Arkema Group’s LEI is 9695000EHMS84KKP2785. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. The Group’s parent company is Arkema S.A. The Group’s condensed consolidated interim financial statements at 30 June 2022 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved for publication by the Board of Directors of Arkema on 28 July 2022. The condensed consolidated interim financial statements at 30 June 2022 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRS (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) as released at 30 June 2022 and the IFRS endorsed by the European Union at 30 June 2022. The accounting framework and standards adopted by the European Commission can be accessed from the following website: https://ec.europa.eu/info/law/international-accounting-standards-regulation-ec-no-1606-2002. The accounting policies applied in preparing the consolidated financial statements at 30 June 2022 are identical to those used in the consolidated financial statements at 31 December 2021, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are mandatory for accounting periods commencing on or after 1 January 2022 (and which had not been applied early by the Group), namely: 23 HALF-YEAR FINANCIAL REPORT Amendments to IFRS 3 Amendments to IAS 16 Amendments to IAS 37 Annual improvements Reference to the conceptual framework Property, plant and equipment – Proceeds before intended use Onerous contracts – Cost of fulfilling a contract 2018-2020 cycle Adopted by the European Union on 2 July 2022 Adopted by the European Union on 2 July 2022 Adopted by the European Union on 2 July 2022 Adopted by the European Union on 2 July 2022 Application of these amendments had no significant impact on the financial statements at 30 June 2022. A reform of the main interest rate benchmarks is currently underway, with the Interbank Offered Rates (IBORs) being replaced by alternative risk-free rates. The Group has taken steps to ensure a gradual transition to risk-free rates and is keeping a close eye on market practices and publications by the relevant bodies. The reform is mainly operational in scope and has no material impact on the interim financial statements at 30 June 2022. The standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which are not yet mandatory for accounting periods commencing on or after 1 January 2022 (and which have not been applied early by the Group) are: Amendments to IAS 1 Classification of liabilities as current or non-current Not adopted by the European Union at 30 June 2022 Amendments to IAS 1 Disclosure of accounting policies Adopted by the European Union on 3 March 2022 Amendments to IAS 8 Definition of accounting estimates Adopted by the European Union on 3 March 2022 Amendments to IAS 12 Income taxes – Recognition of deferred tax assets for unrealized losses Not adopted by the European Union at 30 June 2022 Amendments to IFRS 17 Initial application of IFRS 17 and IFRS 9 – Comparative information Not adopted by the European Union at 30 June 2022 IFRS 17 Insurance contracts Adopted by the European Union on 23 November 2021 The Group does not expect application of these amendments and this standard to have a significant impact. Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. These interim financial statements therefore take into consideration in particular the current Covid-19 health crisis and the conflict in Ukraine and are based on information available at the closing date. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off-balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. The condensed consolidated interim financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The condensed consolidated interim financial statements are presented in millions of euros, rounded to the nearest million, unless otherwise indicated. 24 HALF-YEAR FINANCIAL REPORT The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period. The statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share, or in “Non-controlling interests” for the share not directly or indirectly attributable to the Group. In exceptional cases, a company’s functional currency may differ from the local currency. In application of IAS 21 “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income, unless they result from unhedged financing, in which case they are included in the financial result. The Group’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by the Group is generally lower in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and the rest of Europe; in some of the Group’s businesses, particularly those serving the paints and coatings as well as the refrigeration and air-conditioning markets, sales are generally higher in the first half of the year than in the second half. By contrast, in adhesives, the two halves of the year are more evenly balanced; the major multi-annual maintenance turnarounds at the Group’s production plants also have an impact on seasonality, and tend in general to be carried out in the second half of the year. These seasonal effects observed in the past are not necessarily representative of future trends, but can have a material effect on the variations in results and working capital from one quarter of the year to another. Note 3: Scope of consolidation 3.1 BUSINESS COMBINATIONS 3.1.1. Business combinations during the period As described in note 1.1 “Portfolio management”, business combinations in 2022 concerned the acquisition of Ashland’s Performance Adhesives business and of Shanghai Zhiguan Polymer Materials (PMP). In accordance with IFRS 3 (Revised), the Group used the acquisition method for the accounting treatment of these operations. The amount recorded in the financial statements at 30 June 2022 for the identifiable assets acquired and liabilities assumed for Ashland’s Performance Adhesives business at the acquisition date can be analyzed as follows: (In millions of euros) Fair value of Ashland’s Performance Adhesives business Intangible assets Property, plant and equipment Total non-current assets Inventories Accounts receivable Total current assets Long-term provisions Non-current debt Total non-current liabilities Accounts payable Other current liabilities Total current liabilities Fair value of net assets Goodwill 166 66 232 41 43 84 2 1 3 21 2 23 290 1,191 Intangible assets correspond to technology for €132 million and the trademark for €34 million. 25 HALF-YEAR FINANCIAL REPORT The goodwill of €1,191 million recognized for Ashland’s Performance Adhesives business at 30 June 2022 is provisional and a portion of this goodwill is amortizable for tax purposes in the United States. Under IFRS 3 (Revised), the Group has 12 months from the acquisition date to finalize the value of the assets acquired and liabilities assumed. 3.1.2. Finalization of the purchase price allocation for Poliplas, Agiplast and the Edge Adhesives business in Texas The Group has finalized the purchase price allocation for Poliplas, Agiplast and the Edge Adhesives business in Texas. Intangible assets stated at fair value primarily comprise technologies and customer relations and amount to €27 million. Final goodwill totals €17 million for the three acquisitions and mainly corresponds to the value of future technologies and expected business development. Goodwill amortizable for tax purposes amounts to €4 million. 3.2 ASSETS HELD FOR SALE The finalization of the divestment of the PMMA business was announced on 3 May 2021. In the income statement for the first half of 2021, the provisional capital gain before deduction of disposal costs amounted to €947 million before tax and is included in “Other income and expenses” in 2021 (see note 5.1 “Other income and expenses”). The price received is included in “Proceeds from sale of operations, net of cash transferred” in the cash flow statement in 2021. As part of the divestment of the PMMA activity, Arkema signed an agreement with Hanwha on 6 May 2021 providing for the shutdown of production at the Jinhae site (South Korea) and the sale of the land in the third quarter of 2022. These assets are presented in “Assets held for sale” at 31 December 2021 and 30 June 2022. 3.3. WARRANTIES RELATED TO SALES OF BUSINESSES When selling businesses, the Arkema Group has sometimes granted the purchaser warranties in respect of unrecorded liabilities. In most cases, these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by the Group amounts to €58 million at 30 June 2022 (€89 million at 31 December 2021). These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. Note 4: Alternative performance indicators and information by segment To monitor and analyze the financial performance of the Group and its activities, Group management uses alternative performance indicators. These are financial indicators that are not defined by IFRS. This note presents a reconciliation of these indicators and the aggregates from the consolidated financial statements under IFRS. 4.1 RECURRING OPERATING INCOME (REBIT) AND EBITDA (In millions of euros) OPERATING INCOME - Depreciation and amortization related to the revaluation of Notes 1st half 2022 948 1st half 2021 1,242 property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses RECURRING OPERATING INCOME (REBIT) - Recurring depreciation and amortization of property, plant and EBITDA (5.1) (40) (70) 1,058 (266) 1,324 (34) 708 568 (268) 836 26 HALF-YEAR FINANCIAL REPORT Details of depreciation and amortization of property, plant and equipment and intangible assets: (In millions of euros) Depreciation and amortization of property, plant and equipment and intangible assets (including goodwill) Notes (8.1 & 8.2 & 8.3) 1st half 2022 (326) 1st half 2021 (421) Of which: Recurring depreciation and amortization of property, plant and equipment and intangible assets Of which: Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Of which: Impairment included in other income and expenses (5.1) (266) (40) (20) (268) (34) (119) 4.2 ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE (In millions of euros) NET INCOME – GROUP SHARE - Depreciation and amortization related to the revaluation of Notes 1st half 2022 730 1st half 2021 950 property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses - Other income and expenses attributable to non-controlling interests (5.1) (40) (70) — (34) 708 — Taxes on depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Taxes on other income and expenses - One-time tax effects ADJUSTED NET INCOME Weighted average number of ordinary shares Weighted average number of potential ordinary shares ADJUSTED EARNINGS PER SHARE (IN EUROS) DILUTED ADJUSTED EARNINGS PER SHARE (IN EUROS) RECURRING CAPITAL EXPENDITURE (11.6) 8 7 6 819 73,954,187 74,286,041 11.07 11.02 8 (158) — 426 76,338,552 76,736,476 5.58 5.55 (In millions of euros) INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT ADDITIONS Exceptional capital expenditure - Investments relating to portfolio management operations - Capital expenditure with no impact on net debt RECURRING CAPITAL EXPENDITURE Exceptional capital expenditure corresponds to a very limited number of capital expenditure items for major development projects that the Group presents separately in its financial reporting due to their size and nature. In the two periods presented, exceptional capital expenditure concerned investments in Specialty Polyamides in Asia and the partnership with Nutrien in the United States for the supply of anhydrous hydrogen fluoride. FREE CASH FLOW (In millions of euros) Cash flow from operating activities + Cash flow from investing activities NET CASH FLOW - Net cash flow from portfolio management operations FREE CASH FLOW - Exceptional capital expenditure - Non-recurring cash flow RECURRING CASH FLOW 1st half 2022 531 (1,850) (1,319) (1,507) 188 (66) (7) 261 1st half 2021 433 760 1,193 896 297 (117) 116 298 27 HALF-YEAR FINANCIAL REPORT The net cash flow from portfolio management operations corresponds to the impact of acquisition and divestment operations described in note 1 “Highlights”. Non-recurring cash flow corresponds to cash flow from other income and expenses, as described in note 5.1 “Other income and expenses”. In first-half 2021, the non-recurring cash inflow corresponded mainly to tax liabilities relating to the capital gains tax on the PMMA divestment. The tax was recorded in net cash flow from portfolio management operations in first-half 2021 and was disbursed in second-half 2021. 4.5 NET DEBT (In millions of euros) Non-current debt + Current debt - Cash and cash equivalents NET DEBT + Hybrid bonds NET DEBT AND HYBRID BONDS Notes (10.2) (10.2) (10.2) (11.2) 30 June 2022 31 December 2021 2,680 82 2,285 477 700 1,177 2,698 733 1,342 2,089 700 2,789 4.6 WORKING CAPITAL (In millions of euros) Inventories + Accounts receivable + Other receivables including income taxes recoverable + Current financial derivative assets - Accounts payable (operating suppliers) - Other liabilities including income taxes - Current financial derivative liabilities WORKING CAPITAL Notes 30 June 2022 31 December 2021 1,283 1,432 272 109 1,274 585 52 1,185 1,662 1,945 296 63 1,400 629 35 1,902 4.7 CAPITAL EMPLOYED (In millions of euros) Goodwill, net + Intangible assets (excluding goodwill) and property, plant and equipment, net + Investments in equity affiliates + Other investments and other non-current assets + Working capital CAPITAL EMPLOYED Notes (8.1) (8.2 & 8.3) 30 June 2022 31 December 2021 1,925 3,259 4,943 29 310 1,902 10,443 4,548 29 270 1,185 7,957 4.8 INFORMATION BY SEGMENT As required by IFRS 8 “Operating segments”, segment information for the Group is presented in accordance with the internal reporting structure that is used by executive management in order to assess financial performance and allocate resources. Arkema is organized around three complementary, coherent segments dedicated to Specialty Materials, namely Adhesive Solutions, Advanced Materials and Coating Solutions, and an Intermediates segment consisting of activities with more volatile results. The Adhesive Solutions segment is headed by a member of the Executive Committee, and the Advanced Materials, Coating Solutions and Intermediates segments are directed by the Chief Operating Officer who is also a member of the Executive Committee. Both of these segment heads report to the Chairman and CEO, Arkema’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their segments’ operating activities, financial results, forecasts and plans. 28 HALF-YEAR FINANCIAL REPORT The Chief Operating Officer is supported by three other Executive Committee members, who report to him and are respectively in charge of the Coating Solutions segment and each of the two Business Lines12 making up the Advanced Materials segment: High Performance Polymers and Performance Additives. The content of the segments is as follows: Adhesive Solutions comprises the following Business Lines: Construction and Consumer, providing solutions for construction, renovation of buildings, and DIY; and Industrial Assembly, comprising high performance adhesives for durable goods, and adhesive solutions for packaging and non-woven. The Adhesive Solutions segment supplies technologies used in building activities for businesses and individuals, including sealants, tile and flooring adhesives and waterproofing systems, and technologies used in industry, including state-of-the-art know-how in the automotive, textiles, glazing, flexible and rigid packaging, and hygiene markets. Advanced Materials comprises the following Business Lines: High Performance Polymers, consisting of specialty polyamides and PVDF23; and Performance Additives, covering interface agents combining specialty surfactants and molecular sieves, organic peroxides, thiochemicals and hydrogen peroxide. The Advanced Materials segment offers innovative solutions with high added value to meet the major challenges of sustainable development, including lightweighting, new energies, access to water, bio-based products and recycling. These solutions are used in a wide variety of sectors such as the automotive and transportation sectors, oil and gas, renewable energies (photovoltaics, lithium-ion batteries, wind power), consumer goods (sports equipment, packaging, beauty and health products, etc.), electronics, construction, coatings, animal nutrition and water treatment. Coating Solutions comprises the following Business Lines: Coating Resins, combining the EU/US acrylics activities and coating resins; and Coating Additives, combining Sartomer photocure resins and Coatex rheology additives. This segment offers a broad range of innovative products for decorative paints, industrial coatings and adhesives, and also provides solutions for applications in the paper industry, superabsorbents, water treatment and oil and gas extraction, and in cutting-edge high-growth markets such as 3D printing and electronics. The Intermediates segment comprises the following activities: Fluorogases 2; PMMA; and Asia Acrylics. These industrial intermediate chemicals activities, in which Arkema holds leading positions, concern competitive global product lines used in several industrial sectors such as construction, production of cold (refrigeration and air conditioning), the automotive industry, coatings and water treatment. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income and assets are allocated between segments prior to inter-segment adjustments. Sales between segments take place at market prices. 21 Business Lines are activities or groups of activities. 32 As of 1 January 2022, upstream PVDF has been reclassified from the Intermediates segment (formerly Fluorogases) to the Advanced Materials segment (High Performance Polymers). The comparative segment information presented for the period ended 30 June 2021 has been restated accordingly. 29 HALF-YEAR FINANCIAL REPORT The segment information includes the PMMA activity until its divestment, announced on 3 May 2021. 1st half 2022 Adhesive Solutions 1,449 201 (In millions of euros)*** Sales EBITDA* Recurring depreciation and amortization of property, plant and equipment and intangible assets* Recurring operating income (REBIT)* Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses Operating income Equity in income of affiliates Intangible assets and property, plant and equipment additions Of which: Recurring capital expenditure** * See note 4.1 “Recurring operating income (REBIT) and EBITDA”. ** See note 4.3 “Recurring capital expenditure”. (36) 165 (28) (32) 105 — 27 27 Advanced Materials 2,188 556 (134) 422 (9) (22) 391 (1) 160 94 Coating Solutions 1,822 399 (63) 336 (3) (0) 333 — 39 39 Intermediates Corporate 593 19 (55) 223 (30) 193 (3) (58) — (2) 191 0 5 5 — (14) (72) — 6 6 *** As of 1 January 2022, upstream PVDF has been reclassified to the Advanced Materials segment (from the Intermediates segment). Data for 2021 has been restated accordingly. 1st half 2021 Adhesive Solutions 1,130 168 (32) 136 (In millions of euros)*** Sales EBITDA* Recurring depreciation and amortization of property, plant and equipment and intangible assets Recurring operating income (REBIT)* Depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets as part of the allocation of the purchase price of businesses Other income and expenses Operating income Equity in income of affiliates Intangible assets and property, plant and equipment additions Of which: Recurring capital expenditure** * See note 4.1 “Recurring operating income (REBIT) and EBITDA”. ** See note 4.3 “Recurring capital expenditure”. (24) (29) 83 — 28 28 Advanced Materials 1,537 326 (135) 191 (7) (142) 42 1 211 94 Coating Solutions 1,279 235 (58) 177 (3) (13) 161 — 25 22 Intermediates Corporate 14 661 (49) 156 (4) (39) (53) 117 — 904 1,021 (0) 14 14 — (12) (65) — 7 7 *** As of 1 January 2022, upstream PVDF has been reclassified to the Advanced Materials segment (from the Intermediates segment). Data for 2021 has been restated accordingly. 4.9 INFORMATION BY GEOGRAPHICAL AREA Sales are presented on the basis of the geographical location of customers. 1st half 2022 (In millions of euros) Sales France 449 Rest of Europe 1,590 NAFTA* 2,098 Asia 1,708 Rest of the world 226 1st half 2021 (In millions of euros) Sales * NAFTA: USA, Canada, Mexico. France 384 Rest of Europe 1,364 NAFTA* 1,400 Asia 1,293 Rest of the world 180 30 Total 6,071 1,324 (266) 1,058 (40) (70) 948 (1) 237 171 Total 4,621 836 (268) 568 (34) 708 1,242 1 285 165 Total 6,071 Total 4,621 HALF-YEAR FINANCIAL REPORT Note 5: Other information relating to operating activities 5.1 OTHER INCOME AND EXPENSES Other income and expenses concern a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. (In millions of euros) Restructuring and environment Goodwill impairment Asset impairment (excluding goodwill) Litigation and claims Gains (losses) on sales and purchases of assets Other TOTAL OTHER INCOME AND EXPENSES Expenses (17) — (16) (6) (27) (6) (72) 1st half 2022 Income — — — — 2 — 2 Net Expenses (27) (17) (41) — (107) (16) (26) (6) (42) (25) (17) (6) (260) (70) 1st half 2021 Income 3 — — — 965 — 968 In the first half of 2022, restructuring and environment expenses mainly concern the Corporate and Adhesive Solutions segments. Specific asset impairments have mainly been recognized in the Hydrogen Peroxide activities for the Jarrie site in France (see note 8.3 “Property, plant and equipment”). Expenses related to litigation and claims mainly concern legal fees for ongoing proceedings in the United States. The income and expenses relating to sales and purchases of assets are mainly attributable to the acquisition of Ashland’s Performance Adhesives business. The item “Other” primarily includes start-up costs related to exceptional capital expenditure in Specialty Polyamides in Asia (see note 4.3 “Recurring capital expenditure”). In the first half of 2021, restructuring and environment expenses mainly concerned the Adhesive Solutions segment and the Thiochemicals and Fluorogases activities in France. The goodwill in the Hydrogen Peroxide Cash Generating Unit (CGU) has been fully impaired as have certain other assets in the CGU. Asset impairments were also recognized for Asia, mainly in the Fluorogases activities, and on a debt receivable from Canada Fluorspar NL Inc. (CFI). Expenses related to litigation and claims mainly concerned the consequences of Winter Storm Uri in Texas in the first quarter of 2021, and legal fees for ongoing proceedings in the United States. The income and expenses relating to sales and purchases of assets were mainly attributable to the divestment of the PMMA activity. The item “Other” primarily included the impact of taking into account the dispensation from work mechanism in France over the long term in the Group’s financial statements. The total impairment (including goodwill impairment) included in other income and expenses amounts to a net expense of €20 million at 30 June 2022 compared with a net expense of €119 million at 30 June 2021. 5.2 WORKING CAPITAL Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). The change in working capital reported in the cash flow statement amounts to €518 million in cash flow from operating activities and €99 million in cash flow from investing activities. 31 Net (24) (41) (107) (26) 923 (17) 708 HALF-YEAR FINANCIAL REPORT (In millions of euros) 31 December 2021 Changes in scope Monetary flows in the cash flow statement (operating and investing activities) Translation adjustment Reclassifications 30 June 2022 Inventories + Accounts receivable, excluding fixed asset receivables + Other receivables, including income taxes recoverable - Accounts payable, excluding fixed asset payables - Other liabilities, including income taxes TOTAL OPERATING CATEGORIES - Other creditors and fixed asset payables TOTAL INVESTING CATEGORIES + Current financial derivative assets and liabilities TOTAL WORKING CAPITAL 1,283 1,432 272 1,034 574 1,379 251 (251) 57 1,185 41 44 — 21 3 60 — — — 60 282 406 29 166 33 518 (99) 99 (2) 615 54 65 9 36 15 78 8 (8) (39) 32 2 (2) (14) (6) (9) 1 — — 11 12 1,662 1,945 296 1,251 628 2,024 149 (149) 27 1,902 5.3. OFF-BALANCE SHEET COMMITMENTS RELATED TO OPERATING ACTIVITIES 5.3.1 Off-balance sheet commitments related to the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted Comfort letters Contractual guarantees Customs and excise guarantees TOTAL Guarantees granted are mainly bank guarantees in favor of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites, bank guarantees given to Nutrien in connection with the partnership project in the Fluorogases activity in the United States, and rent guarantees for the Group’s future headquarters. 30 June 2022 31 December 2021 110 — 4 42 156 140 — 2 31 173 5.3.2 Contractual commitments related to the Group’s operating activities In the normal course of business, the Arkema Group has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over initial periods generally comprised between one and ten years is a normal practice for companies in the Group’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, Arkema’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige the Group to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase contracts in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The value of these agreements thus corresponds to the minimum amount payable to suppliers as indemnification in the event of termination of the contracts or failure to take delivery of the minimum contractual quantities, less any quantities that can be resold on the market when the Group is able to do so. Some lease or purchase commitments do not fall within the scope of IFRS 16. Many of them are irrevocable purchase commitments described above, and service contracts or contracts making available assets that are not identified or not controlled by Arkema at 30 June 2022. Only the irrevocable portion of outstanding future purchases has been valued, and the corresponding amounts are included in the table below at 30 June 2022. 32 HALF-YEAR FINANCIAL REPORT The total amount of the Group’s financial commitments is €1,311 million at 30 June 2022, maturing as follows: (In millions of euros) Y Y+1 Y+2 Y+3 Y+4 Y+5 until expiry of the contracts Total 30 June 2022 31 December 2021 257 104 85 71 72 483 1,072 214 139 112 96 95 655 1,311 The increase in the Group’s commitments is mainly due to the signing of a long-term raw materials supply contract in connection with the expansion in 1233ZD production capacity in the United States. Note 6: Provisions for pensions and other employee benefits 6.1 PROVISIONS FOR PENSIONS AND OTHER EMPLOYEE BENEFITS (In millions of euros) Pension obligations Healthcare and similar coverage Dispensation from work Post-employment benefits Long service awards Other long-term benefits Provisions for pensions and other employee benefits 30 June 2022 31 December 2021 335 59 19 413 80 80 493 246 50 17 313 63 63 376 (In millions of euros) Provision recognized in liabilities Amount recognized in assets Net provisions for pensions and other employee benefits 30 June 2022 31 December 2021 493 (11) 482 376 (14) 362 The discount rates used by the Arkema Group are as follows: Pension obligations, healthcare and similar coverage At 30 June 2022 At 31 December 2021 France 3.40 1.40 Germany 3.45 1.50 UK 3.80 2.00 Rest of Europe 3.30 1.20 USA 4.60 2.65 The present value of benefit obligations at the end of 2021 has been adjusted at 30 June 2022 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full-year 2021 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2022. The effects of the change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. 33 HALF-YEAR FINANCIAL REPORT The change in net provisions for post-employment benefits over the first half of 2022 is as follows: (In millions of euros) Net liability (asset) at beginning of period Provision recognized in liabilities Amount recognized in assets (Income)/Expense for the period Net contributions and benefits paid by the employer Changes in scope Actuarial gains and losses recognized in shareholders’ equity Translation adjustments Other Net liability (asset) at end of period Provision recognized in liabilities Amount recognized in assets Pension obligations 324 335 (11) 11 (8) 1 (103) 7 — 232 246 (14) Healthcare and similar coverage 59 59 — — — — (12) 3 — 50 50 — Dispensation from work 19 19 — — (2) — — — — 17 17 — Total post-employment benefits 402 413 (11) 11 (10) 1 (115) 10 — 299 313 (14) 6.2 SHARE-BASED PAYMENTS 6.2.1. Free share grants On 9 November 2021, the Board of Directors decided to introduce two free performance share plans for employees, particularly people in positions of responsibility whose work has an influence on the Group’s results. Movements in the free share grant plans existing at 30 June 2022 are as follows: Plan Grant date Vesting period Holding period Total number of free shares granted Number of shares subject to performance conditions Fair value (euros per share) Number of shares vested in 1st half 2022 Number of shares canceled in 1st half 2022 Total number of shares still to be granted at 30 June 2022 2018-1, 2 2018-4 2019-1 2019-2 2020-1, 2 2020-3 2020-4 2021-1 2021-2 2 May 2018 5 Nov. 2018 29 Oct. 2019 29 Oct. 2019 5 May 2020 4 Nov. 2020 4 Nov. 2020 9 Nov. 2021 9 Nov. 2021 4 years 4 years 3 years 4 years 35,654 - - 127,665 (1) 2 years 237,945 (2) - 131,035 (3) 9,129 2 years 238,550 (4) - 128,245 (5) 2 years 239,575 (6) - 124,713 (7) 3-4 years 0-3 years 3 years 4 years 3 years 4 years 111,235 225,015 112,740 226,000 111,365 227,387 105,293 59.31 64.15 57.73 59.76 10.09- 20.94 52.58 54.33 81.91 83.92 32,123 - - - - - - - 5,129 1,450 1,395 1,845 1,430 1,910 1,200 360 93,088 230,380 122,830 9,115 232,090 123,180 238,285 123,723 (1) May be raised to 138,789 in the event of outperformance. (2) May be raised to 282,948 in the event of outperformance. (3) May be raised to 153,583 in the event of outperformance. (4) May be raised to 283,750 in the event of outperformance. (5) May be raised to 150,518 in the event of outperformance. (6) May be raised to 285,052 in the event of outperformance. (7) May be raised to 145,772 in the event of outperformance. The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2022 is €13 million (€12 million at 30 June 2021). 34 HALF-YEAR FINANCIAL REPORT Note 7: Income taxes The income tax expense breaks down as follows: (In millions of euros) Current income taxes Deferred income taxes TOTAL INCOME TAXES The income tax expense amounts to €201 million for the first half of 2022, compared with €263 million for the first half of 2021. 1st half 2022 (201) (0) (201) 1st half 2021 (262) (1) (263) Note 8: Intangible assets and property, plant and equipment 8.1. GOODWILL Goodwill is initially recognized when a business combination takes place. Goodwill is not amortized after initial recognition. It is included in the CGUs that are subject to impairment tests as soon as any indicators of potential impairment are identified. Impairment tests are performed at least annually, following the methodology described in note 8.5 “Asset value monitoring”. 30 June 2022 31 December 2021 (In millions of euros) Goodwill The breakdown by segment is as follows: Gross book value 3,907 Accumulated amortization and impairment (648) Net book value 3,259 Net book value 1,925 Goodwill by segment 30 June 2022 Net book value 31 December 2021 Net book value Adhesive Solutions Advanced Materials Coating Solutions Intermediates Corporate TOTAL Changes in the net book value of goodwill are as follows: (In millions of euros) At 1 January Acquisitions Impairment Disposals Translation adjustments Reclassifications At 30 June For 2022, the “Acquisitions” item corresponds to new goodwill recognized for Ashland’s Performance Adhesives business and 2,344 494 377 44 — 3,259 2022 1,925 1,182 — — 152 — 3,259 1,038 475 368 44 — 1,925 Shanghai Zhiguan Polymer Materials (PMP) offset by the reduction in goodwill following the finalization of the Poliplas and Agiplast purchase price allocation. 8.2. OTHER INTANGIBLE ASSETS Other intangible assets mainly include patents and technologies, trademarks, software and IT licenses, capitalized contracts, customer relations, and capitalized research expenses. These intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized following impairment tests as described in note 8.5 “Asset value monitoring”. 35 HALF-YEAR FINANCIAL REPORT 30 June 2022 31 December 2021 Accumulated amortization and impairment (249) (3) (354) (48) (18) (73) (50) (77) (45) (25) (940) (In millions of euros) Patents and technologies Trademarks Software and IT licenses Capitalized REACH costs Other capitalized research expenses Capitalized contracts Asset rights Customer relations Other intangible assets Intangible assets in progress TOTAL Trademarks essentially comprise the Bostik® and Den Braven® trademarks, which are part of the Adhesive Solutions segment. Gross book value 615 636 427 76 21 91 77 336 102 271 2,652 Net book value 366 633 74 28 3 18 28 259 57 246 1,712 Net book value 240 595 84 28 4 23 27 243 54 219 1,517 Changes in the net book value of intangible assets are as follows: (In millions of euros) At 1 January Acquisitions Amortization Impairment Disposals Changes in scope Translation adjustments Reclassifications At 30 June 2022 1,517 20 (64) (1) 0 188 47 5 1,712 The item “Changes in scope” includes the intangible assets for Ashland’s Performance Adhesives business described in note 3.1.1 “Business combinations during the period”. 8.3. PROPERTY, PLANT AND EQUIPMENT 30 June 2022 31 December 2021 (In millions of euros) Land and buildings Complex industrial facilities Other property, plant and equipment Construction in progress TOTAL PROPERTY, PLANT AND EQUIPMENT EXCLUDING RIGHTS OF USE Rights of use TOTAL PROPERTY, PLANT AND EQUIPMENT Gross book value 2,233 3,866 3,832 790 10,721 346 11,067 Accumulated depreciation and impairment Net book value 726 596 990 741 (1,507) (3,270) (2,842) (49) (7,668) (168) (7,836) 3,053 178 3,231 Net book value 716 583 957 618 2,874 157 3,031 36 HALF-YEAR FINANCIAL REPORT Changes in the net book value of property, plant and equipment excluding rights of use are as follows: (In millions of euros) At 1 January Acquisitions Depreciation Impairment Disposals Changes in scope Translation adjustments Other Reclassifications At 30 June Impairment at 30 June 2022 mainly concerns specific property, plant and equipment for Hydrogen Peroxide activities at the 2022 2,874 217 (211) (20) (2) 66 134 — (5) 3,053 Jarrie site in France. 8.4. IFRS 16 LEASES: RIGHTS OF USE AND IFRS 16 DEBT At 30 June 2022, the net book value of rights of use related to leases is €178 million. 30 June 2022 31 December 2021 (In millions of euros) Rights of use: real estate assets (head offices, offices) Rights of use: industrial assets (factories, land, warehouses) Rights of use: logistics assets (trucks, containers, trolleys) Rights of use: other assets (cars, etc.) Total rights of use Gross book value 81 54 187 24 346 Accumulated depreciation and impairment Net book value 33 (48) (14) 40 (93) 94 (13) (168) 11 178 Net book value 38 39 69 11 157 Changes in the net book value of rights of use are as follows: (In millions of euros) At 1 January Acquisitions Depreciation Disposals Changes in scope Translation adjustments Reclassifications At 30 June 2022 158 44 (33) (2) 1 10 — 178 The IFRS 16 debt amounts to €190 million at 30 June 2022 (see note 10.2 “Debt”). The total non-discounted value of the Group’s future lease payments amounts to €205 million at 30 June 2022, maturing as follows: (In millions of euros) Within one year 1-5 years After 5 years TOTAL At 30 June 2022, the cash outflows associated with leases amount to €33 million. The financial expenses related to the IFRS 16 debt amount to €2 million. 30 June 2022 57 92 56 205 The application of exemptions for short-term leases and leases of low-value assets concerns amounts that are not material at Group level. 37 HALF-YEAR FINANCIAL REPORT 8.5. ASSET VALUE MONITORING The recoverable amount of property, plant and equipment and intangible assets is tested as soon as any indication of impairment is identified. A review to identify if any such indication exists is performed at each year-end, based on a five-year plan validated by the Executive Committee. This impairment test is performed at least once a year and includes goodwill and trademarks with indefinite useful lives. An asset’s recoverable amount corresponds to the greater of its value in use and its fair value less costs to sell. Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group executive management’s expectation of future economic and operating conditions over the next five years or, when the asset is to be sold, by comparison with its market value. In 2021, the terminal value was determined on the basis of a perpetuity annual growth rate of 1.5% and mid-cycle cash flow. The after-tax rate used to discount future cash flows and the terminal value is the Group’s weighted average cost of capital, estimated at 7.5% in 2021. Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment losses on goodwill are irreversible (in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be written back). Sensitivity analyses carried out at 31 December 2021, evaluating the impact of reasonable changes in the basic assumptions – in particular the impact of a 1-point increase in the discount rate, or of a change of minus 0.5 of a point in the perpetuity growth rate, or minus 10% in EBITDA, or plus 20% in capital expenditure – confirmed the net carrying amounts of the different CGUs, excluding the Hydrogen Peroxide CGU for which these assumptions would lead to asset impairments of between €40 million and €70 million. At 30 June 2022, the Group considered that the assumptions used to determine the value of property, plant and equipment and intangible assets at 31 December 2021 had not changed to an extent that would require new impairment tests on the CGUs for the period, in particular given the sensitivity assumptions used for weighted average cost of capital rates described in the financial statements at 31 December 2021. EBITDA and capital expenditure sensitivities are now considered sufficient to take into account any climate-related impacts, and in particular the Group’s target to reduce its Scope 1 and 2 greenhouse gas (GHG) emissions and its Scope 3 emissions by 46% by 2030 relative to 2019. This target will be supported by an increase in investments contributing to decarbonization, which could reach €400 million by 2030 and which will be included in the Group’s recurring capital expenditure envelope. In addition, the Group believes that climate issues have no impact on the useful lives of assets and that no additional impairment is required. Note 9: Other provisions and other non-current liabilities, contingent liabilities and litigation 9.1 OTHER PROVISIONS AND OTHER NON-CURRENT LIABILITIES 9.1.1 Other non-current liabilities Other non-current liabilities amount to €15 million at 30 June 2022 versus €14 million at 31 December 2021. 38 HALF-YEAR FINANCIAL REPORT 9.1.2 Other provisions (In millions of euros) At 1 January 2022 Increases in provisions Reversals of provisions on use Reversals of unused provisions Changes in scope Translation adjustments Other At 30 June 2022 Environmental contingencies 202 2 (13) (1) 0 9 — 199 Restructuring 49 2 (3) (3) — 1 0 46 Other 178 31 (8) (17) — 9 (0) 193 Furthermore, certain provisions are covered by non-current assets (receivables and deposits): (In millions of euros) Total provisions at 30 June 2022 Environmental contingencies 199 Restructuring 46 Other 193 Portion of provisions covered by receivables or deposits Deferred tax asset related to amounts covered by the Total indemnity Provisions at 30 June 2022 net of non-current assets For information: Provisions at 1 January 2022 net of non- current assets 64 19 116 120 — — 46 49 37 — 156 144 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €83 million (€88 million at 31 December 2021); in the United States for €105 million (€102 million at 31 December 2021), of which €83 million in respect of former industrial sites covered 100% by the Total group indemnity (receivable recognized in “Other non-current assets” for an amount of €64 million and €19 million recognized in deferred tax assets). Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €25 million (€26 million at 31 December 2021), in Europe excluding France for €6 million (€7 million at 31 December 2021) and in the United States for €11 million (€13 million at 31 December 2021). Increases in such provisions in the period mainly correspond to the restructuring plans described in note 5.1 “Other income and expenses”. Other provisions Other provisions amount to €193 million and mainly comprise: provisions for labor litigation for €81 million (€80 million at 31 December 2021); provisions for commercial litigation and warranties for €57 million (€46 million at 31 December 2021); provisions for tax litigation for €35 million (€33 million at 31 December 2021); and provisions for other risks for €20 million (€19 million at 31 December 2021). 9.2 LIABILITIES AND CONTINGENT LIABILITIES Liabilities and contingent liabilities are described in note 10.2 to the consolidated financial statements at 31 December 2021. There was no development in liabilities and contingent liabilities during the first half of 2022 with an actual or potential material effect on the Group’s consolidated financial statements, outside of the developments outlined below. 39 Total 429 35 (24) (21) 0 19 (0) 438 Total 438 101 19 318 313 HALF-YEAR FINANCIAL REPORT Presence of perchlorate in the groundwater around Geneva (Arkema France) By order of 26 January 2022, the Administrative Court of Grenoble granted the Swiss authorities’ request for an expert assessment of this matter. The assessment is currently underway. CFI (Arkema France) On 21 February 2022, CFI and Canada Fluorspar, Inc. (CFI’s parent company) were placed into receivership by the Supreme Court of Newfoundland and Labrador, which placed an automatic hold on Arkema France’s litigation, as described in note 5.1. Harvey (Arkema Inc.) Among the twenty-five lawsuits that were filed against Arkema Inc. since September 2017, one of them has been certified as a class action, and Arkema Inc. has sought to leave to appeal that certification. Perfluorinated substances (Arkema Inc. and Arkema France) Arkema Inc. and in some instances Arkema France, along with numerous other users and multiple fluorogas manufacturers, have been sued in the United States in a substantial number of cases involving per- and poly-fluoroalkyl substances. The majority of these concern fluorinated substances used in firefighting foams. Many have been filed in or transferred to a single multi-district litigation action pending in federal court in South Carolina. There is also a class action filed in federal court in Ohio, on behalf of all persons in the United States who have been exposed to such substances. In March 2022, the District Court issued a decision certifying the following class: “Individuals subject to the laws of Ohio who have .05 parts per trillion (ppt) of PFOA (C-8) and at least .05 ppt of any other PFAS in their blood serum.” Defendants (including Arkema Inc. and Arkema France) have filed a petition for leave to appeal that class certification decision. Additionally, there are similar claims filed in other various state and federal courts. There are also cases involving a former operating site in New Jersey for which Arkema Inc. is indemnified by Legacy Site Services, LLC as more fully described in note 10.3 “Commitments received”. The two companies are vigorously defending against the allegations of these lawsuits. The Group is not, as at the date of these financial statements, in a position, having regard to the information available to it, to estimate the amount of the claims that might finally be upheld against it by the various competent courts after the exhaustion of any avenues of appeal. Therefore, although the uncertain nature of the existing legal and factual circumstances involved lead the Group to the overall assessment that it cannot, at this time, reasonably estimate the probability or amount of any financial impact associated with these contingent liabilities, the Group has taken provisions for the expected costs of defense associated with these ongoing legal matters. COEM (Arkema France) In a decision handed down on 19 May 2022, the Versailles Court of Appeal upheld the 6 May 2020 ruling dismissing Industrie Generali’s claims. 9.3 COMMITMENTS RECEIVED Commitments received from Total in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies extended certain indemnities, or assumed certain obligations, for the benefit of the Arkema Group. Some are still in application while others terminated during 2017. The indemnities and obligations concerned are described below, and relate to actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations of which in the majority of cases have ceased. Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), TotalEnergies SE (formerly Total S.A.) companies have entered into indemnity and service agreements with Arkema or its subsidiaries. Pursuant to these agreements, the obligations and environmental responsibilities associated with these former industrial sites in France and at Rieme in Belgium were transferred to TotalEnergies SE (formerly Total S.A.) group companies. 40 HALF-YEAR FINANCIAL REPORT Agreement relating to certain former industrial sites located in the United States In March 2006, Arkema Amériques SAS completed the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company for most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Site Services and Arkema Amériques SAS, dated 7 March 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use US$270 million to capitalize a new subsidiary, Legacy Site Services LLC, to perform remediation services and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of waste shipments from the sites other than currently operated sites. In exchange for this indemnification, Arkema Amériques SAS agreed to grant to Legacy Site Services LLC control over remediation activities and the defense of claims relating to contamination liabilities at these facilities and sites. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group, certain sites where no significant restoration work is currently underway or anticipated, and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non- existent based upon information available at the time when the indemnity was entered into. Arkema Amériques SAS has waived any claims against Legacy Site Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Site Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defense and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure, and criminal liability. The indemnity described above is capped at US$270 million. The amount received by Arkema under this indemnity amounts to US$139 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnify the liabilities of the Group in excess of US$270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. Note 10: Financing 10.1 FINANCIAL RESULT Financial result includes the cost of debt adjusted for capitalized financial expenses, and as regards provisions for pensions and employee benefits, the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits. It also includes the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate, and the foreign exchange gain/loss on unhedged financing. (In millions of euros) Cost of debt Spot/forward exchange rate difference and foreign exchange gain/loss on unhedged financing Financial income/expenses on provisions for pensions and employee benefits Capitalized interest Interest expenses on leases Other FINANCIAL RESULT 1st half 2022 (20) (5) 12 1 (2) 0 (14) 1st half 2021 (23) (3) (1) 1 (2) 0 (28) 41 HALF-YEAR FINANCIAL REPORT 10.2 DEBT Group net debt amounted to €2,089 million at 30 June 2022, taking account of cash and cash equivalents of €1,342 million. 10.2.1. Analysis of net debt by category (In millions of euros) Bonds Bank loans Other non-current debt Non-current debt excluding IFRS 16 debt Bonds Syndicated credit facility Negotiable European Commercial Paper Other bank loans Other current debt Current debt excluding IFRS 16 debt Debt excluding IFRS 16 debt Non-current IFRS 16 debt Current IFRS 16 debt Debt Cash and cash equivalents Net debt 30 June 2022 31 December 2021 2,539 2 21 2,562 — — — 9 23 32 2,594 118 50 2,762 2,285 477 2,541 0 21 2,562 — — 641 22 15 678 3,240 136 55 3,431 1,342 2,089 Bonds In December 2013, the Group issued a €150 million bond that will mature on 6 December 2023, with a fixed coupon of 3.125%. At 30 June 2022, the fair value of this bond is €153 million. In January 2015, the Group issued a €700 million bond that will mature on 20 January 2025, with a fixed coupon of 1.50%. At 30 June 2022, the fair value of this bond is €685 million. In April 2017, the Group issued a €700 million bond that will mature on 20 April 2027, with a fixed coupon of 1.50%. A further €200 million tap issue was undertaken in June 2017, bringing the total amount of this bond issue to €900 million. At 30 June 2022, the fair value of this bond is €845 million. In December 2019, the Group issued a €500 million bond that will mature on 3 December 2029, with a fixed coupon of 0.75%. At 30 June 2022, the fair value of this bond is €415 million. In October 2020, the Group issued a €300 million green bond that will mature on 14 October 2026, with a fixed coupon of 0.125%. At 30 June 2022, the fair value of this bond is €272 million. These issues are part of the Group’s Euro Medium Term Notes (EMTN) program introduced in October 2013. IFRS 16 liabilities The maturities of the Group’s future lease payments, at non-discounted value, are presented in note 8.4 “IFRS 16 leases”. 42 HALF-YEAR FINANCIAL REPORT 10.2.2. Analysis of debt excluding IFRS 16 debt by currency The Arkema Group’s debt excluding IFRS 16 debt is mainly denominated in euros. (In millions of euros) Euros US Dollars Other TOTAL DEBT EXCLUDING IFRS 16 DEBT Part of the debt in euros is converted through swaps to the accounting currency of internally financed subsidiaries, in line with the Group’s policy. At 30 June 2022 the swapped portion, mainly in US dollars, represented approximately 28% of gross debt excluding IFRS 16 debt. 30 June 2022 31 December 2021 2,571 9 14 2,594 3,203 17 20 3,240 10.2.3. Analysis of debt excluding IFRS 16 debt by maturity The breakdown of debt by maturity, excluding IFRS 16 debt and including interest costs, is as follows: (In millions of euros) Less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years More than 5 years TOTAL DEBT EXCLUDING IFRS 16 DEBT 30 June 2022 31 December 2021 45 184 30 731 319 1,429 2,738 700 184 729 21 1,218 518 3,370 Note 11: Shareholders’ equity and earnings per share At 30 June 2022, Arkema’s share capital amounted to €743 million, divided into 74,286,041 shares with a par value of €10. 11.1 CHANGES IN SHARE CAPITAL AND PAID-IN SURPLUS Following the completion on 24 November 2021 of the €300 million share buyback program, the Board of Directors decided on 24 January 2022 to reduce Arkema’s share capital by 3.19%, by canceling 2,450,435 treasury shares acquired at a total cost of €270 million. Following this operation, Arkema’s share capital amounted to €742,860,410, divided into 74,286,041 shares with a par value of €10. Number of shares at 1 January Issuance of shares following the capital increase reserved for employees Issuance of shares following the exercise of subscription options Share capital reduction Number of shares at end of period 1st half 2022 76,736,476 — — (2,450,435) 74,286,041 2021 76,736,476 — — — 76,736,476 11.2 HYBRID BONDS At 30 June 2022, the total nominal value of Arkema’s perpetual hybrid bonds is €700 million. The breakdown is as follows: Issue date 17 June 2019 21 January 2020 Nominal value (in millions) 400 300 Currency EUR EUR Redemption option 5.25 years 6 years Annual coupon rate 2.75% 1.50% Arkema has an option to defer payment of coupons for the above bonds. In accordance with IAS 32, when there is an unconditional right to avoid delivering cash or another financial asset in the form of repayment of principal or interest, an instrument is recognized in shareholders’ equity. In application of this principle, the hybrid bonds are recorded in shareholders’ equity, and the coupons paid are recorded as dividends in the Group’s consolidated financial statements. 43 HALF-YEAR FINANCIAL REPORT 11.3 TREASURY SHARES The Company purchased 20,000 treasury shares in 2022. In the first half of 2022, 32,123 free shares vested to Arkema Group employees (see note 6.2 “Share-based payments”). Following the completion on 24 November 2021 of the €300 million share buyback program, the Board of Directors decided on 24 January 2022 to reduce Arkema’s share capital by 3.19%, by canceling 2,450,435 treasury shares acquired at a total cost of €270 million. Number of treasury shares at 1 January Purchase of treasury shares Grants of treasury shares Share capital reduction Number of treasury shares at end of period 1st half 2022 2,779,553 20,000 (32,123) (2,450,435) 316,995 2021 59,756 3,033,726 (313,929) — 2,779,553 11.4 DIVIDENDS The combined annual general meeting of 19 May 2022 approved the distribution of a €3 dividend per share in respect of the 2021 financial year, or a total amount of €222 million. This dividend was paid out on 25 May 2022. 11.5 TRANSLATION ADJUSTMENTS The change in translation adjustments recognized in other recyclable comprehensive income mainly comprises the impacts of movements in the USD-EUR exchange rate. 11.6 EARNINGS PER SHARE In accordance with IAS 33, the earnings per share and diluted earnings per share are calculated based on net income (Group share) less the net-of-tax interest paid to bearers of subordinated perpetual notes (hybrid bonds). After this adjustment, the net income (Group share) is divided by the weighted average number of ordinary shares outstanding since the start of the year to calculate the earnings per share. For the diluted earnings per share, the effect of dilution is thus calculated taking account of stock options and grants of free shares to be issued. Weighted average number of ordinary shares Dilutive effect of stock options Dilutive effect of free share grants Weighted average number of potential ordinary shares 1st half 2022 73,954,187 0 331,854 74,286,041 1st half 2021 76,338,552 0 397,924 76,736,476 (In millions of euros) Net income – Group share Interest on subordinated perpetual notes, net of tax Net income used in calculating earnings per share 1st half 2022 730 (5) 725 1st half 2021 950 (5) 945 Earnings per share (in euros) Diluted earnings per share (in euros) 1st half 2022 9.80 9.76 1st half 2021 12.38 12.31 44 HALF-YEAR FINANCIAL REPORT Note 12: Subsequent events On 1 July 2022, Arkema finalized the acquisition of Permoseal in South Africa, a leader in adhesive solutions for DIY, packaging and construction. Permoseal has a strong presence in retail channels and generated sales of €43 million in 2021. This acquisition will enable Bostik to round out its offering in the region and strengthen its positions in South Africa’s and Sub-Saharan Africa’s dynamic industrial, construction and DIY markets. On 21 July 2022, the Group announced the planned acquisition of Polimeros Especiales, a leading player in solvent-free waterborne acrylic resins in Mexico, to strengthen Arkema’s position in this fast-growing region. The company employs 230 people and achieved sales of around US$40 million in 2021. On 28 July 2022, the Group amended and extended its syndicated credit facility maturing on 29 July 2024. The amount of the facility was increased to €1.1 billion and its maturity was extended to 28 July 2027, with two 1-year extension options subject to the lenders’ approval. The amendment also removed the financial covenant to stay below a specified net debt to EBITDA ratio to avoid triggering early repayment. In addition, the CSR indicators take into account the Group’s new objectives. The purpose of the facility is to finance the Group’s general corporate purposes and serve as a back-up facility for the commercial paper program. Note 13: List of consolidated companies The percentage of control indicated below also corresponds to the Group’s ownership interest. AEC Polymers Afinitica Technologies S.L. Agiplast Italia S.r.l. American Acryl LP American Acryl NA, LLC Arkema Arkema Arkema Ameriques SAS Arkema Antwerp Arkema Argentina S.A.U. Arkema B.V. Arkema Canada Inc. Arkema (Changshu) Chemicals Co., Ltd. Arkema (Changshu) Fluorochemical Co., Ltd. Arkema Chemicals India Private Limited Arkema (Changshu) Polyamides Co., Ltd. Arkema (China) Investment Co., Ltd. Arkema Coatex Brasil Indústria e Comércio Ltda. Arkema Coating Resins Malaysia Sdn. Bhd. ARKEMA UK LIMITED Arkema Company Limited Arkema Delaware Inc. Arkema Europe Arkema France Arkema GmbH Arkema (Hong Kong) Co., Limited Arkema Hydrogen Peroxide Co., Ltd. Shanghai Arkema Inc. Arkema Insurance Designated Activity Company Arkema K.K. Arkema Kimya Sanayi ve Ticaret AS ARKEMA Holding Limited Arkema Mexico S.A. de C.V. Arkema Mexico Servicios S.A. de C.V. France Spain Italy United States United States South Korea France France Belgium Argentina Netherlands Canada China China India China China Brazil Malaysia United Kingdom Hong Kong United States France France Germany Hong Kong China United States Ireland Japan Turkey United Kingdom Mexico Mexico (b) 100.00 100.00 100.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 66.67 100.00 100.00 100.00 100.00 100.00 100.00 100.00 45 FC FC FC JO JO FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC Arkema Participations Arkema Peroxides India Private Limited Arkema Pte. Ltd. Arkema Pty Ltd. Arkema Quimica SAU Arkema Chemicals Saudi Arabia Arkema (Shanghai) Distribution Co., Ltd. Arkema Sp z.o.o Arkema S.r.l Arkema (Suzhou) Polyamides Co., Ltd. Arkema Taixing Chemicals Co., Ltd. Arkema Thiochemicals Sdn Bhd Arkema Yoshitomi Ltd. AMP Trucking, Inc. ARR MAZ GLOBAL HOLDINGS, S.L. ARR-MAZ Brazil LLC ArrMaz Chemicals (Yunnan) Co., Ltd. ArrMaz China, LLC ARR-MAZ DO BRASIL LTDA. ArrMaz Gulf Chemicals Ltd. ARRMAZ MOROCCO SARLAU ArrMaz Morocco, LLC ArrMaz Products Inc. ArrMaz Speciality Chemicals, Inc. ARRMAZ TECHNOLOGY AFRICA, SARL A/S LIP Bygningsartikler. Nørre Aaby Barrflex TU LL Bostik AB Bostik Adhesives Limited Bostik Aerosols GmbH Bostik Argentina S. A. Bostik A/S Bostik AS Bostik Australia Pty Ltd. Bostik Belux S.A. – N.V. Bostik Benelux B.V. Bostik B.V. Bostik Canada Ltd. Bostik Egypt for the production adhesive materials (Bostik Egypt) S.A.E Bostik Findley (China) Co., Ltd Bostik Findley (Malaysia) Sdn. Bhd. Bostik GmbH Bostik Hellas S.A. Bostik Holding Hong Kong Ltd. Bostik Holding Bostik Inc. Bostik India Private Limited Bostik Industries Limited Bostik Kimya Sanayi Ve Ticaret A.S Bostik Korea Limited Bostik Limited Bostik Mexicana S.A. de C.V. Bostik Nederland B.V. Bostik New Zealand Limited Bostik-Nitta Co., Ltd. Bostik L.L.C. Bostik OY 46 HALF-YEAR FINANCIAL REPORT (a) France India Singapore Australia Spain Saudi Arabia China Poland Italy China China Malaysia Japan United States Spain United States China United States Brazil Saudi Arabia Morocco United States United States United States Morocco Denmark United States Sweden United Kingdom Germany Argentina Denmark Norway Australia Belgium Netherlands Netherlands Canada Egypt 100.00 100.00 100.00 100.00 100.00 65.00 100.00 100.00 100.00 100.00 100.00 86.00 49.00 100.00 100.00 100.00 100.00 100.00 99.99 100.00 75.00 75.00 100.00 100.00 100.00 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 China Malaysia Germany Greece Hong Kong France United States India Ireland Turkey South Korea United Kingdom Mexico Netherlands New Zealand Japan Russia Finland 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 80.00 100.00 100.00 FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC JV FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC Bostik Philippines Inc. Bostik Portugal Unipessoal Lda Bostik Technology GmbH Bostik Romania S.r.l Bostik SA Bostik S.A. Bostik (Shanghai) Management Co., Ltd. Bostik Sp z.o.o. Bostik (Thailand) Co., Ltd Bostik Vietnam Company Limited Casda Biomaterials Co., Ltd Changshu Coatex Additives Co., Ltd. Changshu Haike Chemical Co., Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Inc. Coatex CEE s.r.o Coatex Inc. Coatex Netherlands B.V. Coatex CRACKLESS MONOMER Co Ltd Den Braven France Den Braven SA (Pty) Ltd. Delaware Chemicals Corporation DIFI 13 DIFI 16 DIFI 17 DIFI 18 ERPRO 3D FACTORY Febex SA FIXATTI FIXATTI (CHINA) POLYMER SPECIALTIES Co LTD Fixatti AG FIXATTI GmbH Fixatti Holding AG IDEAL WORK Srl Ishedu Agrochem Private Limited Jiangsu Bostik Adhesive Co., Ltd Lambson Limited Lip Norge AS Lip Sverige AB Michelet Finance, Inc. MLPC International Ozark Mahoning Company POLIPLAS SELANTES E ADESIVOS LIMITADA Prochimir PT.Bostik Indonesia Sartomer (Guangzhou) Chemicals Ltd. SDP Holding Seki Arkema Co. Ltd. Shanghai Zhiguan Polymer Materials Co. Ltd Siroflex Limited Société Marocaine des Colles Sovereign Chemicals Limited Taixing Sunke Chemicals Co., Ltd. The LightLock Company Limited Termoplastic Powder Holding AG Turkish Products, Inc. 47 HALF-YEAR FINANCIAL REPORT Philippines Portugal Germany Romania France Spain China Poland Thailand Vietnam China China China Malaysia South Korea Slovakia United States Netherlands France Taiwan France South Africa United States France France France France France Switzerland Belgium China Switzerland Germany Switzerland Italy India China United Kingdom Norway Sweden United States France United States Brazil France Indonesia China Belgium South Korea China United Kingdom Morocco United Kingdom China Hong Kong Switzerland United States (b) (b) (d) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 49.00 14.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 10.00 96.77 100.00 100.00 100.00 100.00 100.00 100.00 24.90 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 97.01 100.00 100.00 55.00 100.00 100.00 FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC HALF-YEAR FINANCIAL REPORT Usina Fortaleza Industria E Comércio de Massa Fina Ltda Viking Chemical Company Brazil United States 100.00 100.00 (a) Companies that changed their name in 2022. (b) Companies merged in 2022. (c) Companies liquidated in 2022. (d) Companies consolidated for the first time in 2022. (e) Companies for which the percentage ownership changed in 2022, with no change in control. (f) Companies for which the percentage ownership changed in 2022, with change in control. (g) Companies deconsolidated in 2022. NB: FC: full consolidation. JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses. JV: joint venture – consolidation by the equity method. SI: significant influence – consolidation by the equity method. 48 FC FC HALF-YEAR FINANCIAL REPORT 3 Declaration by the person responsible for the half-year financial report at 30 June 2022 I declare that, to the best of my knowledge, the condensed consolidated interim financial statements for the six months ended 30 June 2021 have been prepared in accordance with the applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and results of the Company and all of the companies included in the scope of consolidation. I further declare that the management report, presented on pages 3 to 14, presents a fair review of the major events that occurred in the first six months of the year and of their impact on the financial statements, as well as the main related-party transactions, and that the said management report provides a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, 28 July 2022 Thierry Le Hénaff Chairman and Chief Executive Officer 49 KPMG Audit Département de KPMG S.A. Arkema S.A. For the period from January 1 to June 30, 2022 Statutory Auditors’ Review Report on the Half-yearly Financial Information 2022 50 HALF-YEAR FINANCIAL REPORT ERNST & YOUNG Audit HALF-YEAR FINANCIAL REPORT KPMG Audit ERNST & YOUNG Audit Département de KPMG S.A. Tour Eqho 2, avenue Gambetta CS 60055 92066 Paris-La Défense cedex S.A. au capital de € 5 497 100 775 726 417 R.C.S. Nanterre Tour First TSA 14444 92037 Paris-La Défense cedex S.A.S. à capital variable 344 366 315 R.C.S. Nanterre Commissaire aux Comptes Membre de la compagnie régionale de Versailles et du Centre Commissaire aux Comptes Membre de la compagnie régionale de Versailles et du Centre This is a free translation into English of the statutory auditors’ review report on the half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Arkema S.A. For the period from January 1 to June 30, 2022 Statutory Auditors’ Review Report on the Half-yearly Financial Information 2022 To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying condensed half-yearly consolidated financial statements of Arkema S.A., for the period from January 1 to June 30, 2022, the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is 51 HALF-YEAR FINANCIAL REPORT substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. II. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, July 28th 2022 The Statutory Auditors French original signed by KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Eric Dupré François Quédiniac Christine Vitrac 52 53 HALF-YEAR FINANCIAL REPORT Arkema, a French société anonyme (limited company) with share capital of €742,860,410 – Registered in Nanterre: RCS 445 074 685 Nanterre 54 HALF-YEAR FINANCIAL REPORT

Semestriel, 2022, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

HALF-YEAR FINANCIAL REPORT Six months ended 30 June 2020 Arkema 420, rue d'Estienne d'Orves – F-92705 Colombes Cedex – France Tel: +33 1 49 00 80 80 – Fax: +33 1 49 00 83 96 A French société anonyme (joint stock corporation) with share capital of €767,364,760 - Registered in Nanterre: RCS 445 074 685 arkema.com 1 2 3 4 HALF-YEAR ACTIVITY REPORT CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2020 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2020 STATUTORY AUDITORS' REVIEW REPORT ON THE HALF-YEARLY FINANCIAL INFORMATION 2 page 3 page 15 page 49 page 51 1 HALF-YEAR ACTIVITY REPORT 1.1 MANAGEMENT ANALYSIS PRINCIPLES AND ACCOUNTING STANDARDS The main alternative performance indicators used by the Group are defined in note C.1 to the condensed consolidated interim financial statements at 30 June 2020 presented in section 2 of this document. When analyzing changes in its results, particularly changes in its sales, the Group identifies the impact of the following effects (such analysis is unaudited): scope effect: the impact of changes in the Group’s scope of consolidation, which arise from acquisitions and divestments of entire businesses or as a result of the first-time consolidation or deconsolidation of entities. Increases or reductions in capacity are not included in the scope effect; currency effect: the mechanical impact of consolidating accounts denominated in currencies other than the euro at different exchange rates from one period to another. The currency effect is calculated by applying the foreign exchange rates of the prior period to the figures for the period under review; price effect: the impact of changes in average selling prices is estimated by comparing the weighted average net unit selling price of a range of related products in the period under review with their weighted average net unit selling price in the prior period, multiplied, in both cases, by the volumes sold in the period under review; volume effect: the impact of changes in volumes is estimated by comparing the quantities delivered in the period under review with the quantities delivered in the prior period, multiplied, in both cases, by the weighted average net unit selling price in the prior period. 1.2 FIRST-HALF 2020 HIGHLIGHTS 1.2.1 Covid-19 The spread of the Covid-19 pandemic across the world since the beginning of 2020 – which has proven to be an unprecedented public health crisis triggering strict lockdown and health measures in many countries – took a heavy toll on the global economy in first-half 2020. While it should continue to weigh on the macroeconomic environment, it is uncertain at this stage how long this will last. The fall in demand, which accelerated in the second quarter, across many sectors in which Arkema’s customers operate, weighed on the Group’s financial performance. In order to mitigate the impact of this crisis and maintain a very solid level of liquidity, Arkema has put in place significant measures aimed at reducing, in 2020, its costs by €50 million compared with 2019 and its capital expenditure by €100 million compared with the amount originally planned. Moreover, the Group benefits from the diversity of its end markets and geographic footprint. Given the global scale of the crisis, it is difficult to identify with any sufficient degree of reliability its impact on the Group’s EBITDA, which was estimated at €45 million for the first quarter. In this highly exceptional context linked to the Covid-19 crisis, the decline in sales and EBITDA led the Group to assess the value of its assets. To that effect, impairment tests were carried out, resulting in the recognition of exceptional asset write- downs representing a very limited amount. 1.2.2 Organic growth projects On 3 June 2020, Arkema announced that it had entered into an innovative and long-term partnership in the United States with Nutrien Ltd, securing a competitive access to anhydrous hydrogen fluoride (AHF) for the Group’s Calvert City site. About half of the AHF supplied by Nutrien will be used for the production of high added-value polymers and fluoro-derivatives, and the remainder for the production of low-GWP (global warming potential) fluorogases. This project, which offers greater environmental protection than more traditional production processes, will enable the Group to support the growth of fluorinated polymers in the attractive segments of water treatment, electronics and batteries. As part of this agreement, Arkema will invest US$150 million in a 40 kt per year AHF production plant at Nutrien’s site in Aurora (North Carolina), scheduled to come on stream in the first half of 2022. This project fits perfectly with Arkema's strategy presented on 2 April 2020, as it enables, in the United States, its fluorinated polymers and other fluorinated specialty derivatives within the 3 Specialty Materials platform (1) to grow in a sustainable way and it strengthens the long-term competitiveness of its emissive fluorogases. In Performance Additives, Arkema successfully started the expansion of production capacity at its Kerteh thiochemicals site in Malaysia in the first quarter of 2020 to support the strong growth of the animal nutrition, petrochemical and refining markets in Asia and consolidate its leading position in high value-added sulfur derivatives. 1.2.3 Acquisitions and divestments In the first half of 2020, Arkema continued its acquisition and divestment policy, which is fully in line with its strategy of refocusing the Group’s activities on Specialty Materials. Thus, in Adhesive Solutions, on 3 January 2020, Arkema completed the acquisition of LIP Bygningsartikler AS (LIP) – a Danish leader in tile adhesives, waterproofing systems and floor preparation solutions – with annual sales of approximately This acquisition, which offers strong geographic and commercial synergies, will allow Bostik to offer its €30 million. customers an extended range of high value-added solutions and boost its presence in the Nordic countries. In the Intermediates segment, on 1 June 2020, Arkema completed the divestment of its Functional Polyolefins business to the South Korean corporation SK Global Chemical, based on an enterprise value of €335 million. Part of the PMMA activity, this business, which represents annual sales of around €250 million, produces ethylene copolymers and terpolymers for the food packaging, cable, electronics and coatings markets. 1.2.4 Financing Taking advantage of favorable market conditions, on 21 January 2020, Arkema carried out a €300 million undated hybrid bond issue with an annual coupon of 1.5% until the Group's first call date after 6 years. This issue complements the previous €400 million hybrid refinancing operation in June 2 019, giving the Group the possibility of refinancing the remaining €300 million portion of its outstanding hybrid bonds with a 4.75% coupon and a first call date in October 2020. In April 2020, the Group redeemed at maturity €480 m illion of bonds with an annual coupon of 3.85%. Arkema had refinanced this bond issue in December 2019 by issuing €500 mi llion of senior bonds with a 10-year maturity and an annual coupon of 0.75%. 1.2.5 Corporate social responsibility Arkema committed to help keep global warming well below 2°C by announcing on 25 February 2020 its new climate plan, which is in line with the Paris Agreement. The Group thereby takes its environmental action plan to the next level, setting itself the target of reducing its absolute greenhouse gas emissions by more than 1.7 million tons of CO2 equivalent compared with 2015. The Group thus aims to reduce its emissions to less than 3 million tons by 2030, regardless of the increase in production volumes, representing a 38% reduction over 15 years. At the same time, Arkema also decided to revise its environmental targets expressed in EFPI (Environmental Footprint Performance Indicator) terms by setting new targets for 2030. All these initiatives are detailed in the CSR section of Arkema’s website (www.arkema.com). In June 2020, the Group became a member of the World Business Council for Sustainable Development (WBCSD), with the objective of acting in partnership with this network to help accelerate the transition to a more sustainable world. 1.2.6 Capital increase reserved for employees In April 2020 Arkema carried out a capital increase reserved for employees. A total of 112,256 shares were subscribed at a price of €68.56 per share, representing a net amoun t of €7 million. (1)Specialty Materials include the three following segments: Adhesive Solutions, Advanced Materials and Coating Solutions. 4 1.3 CORPORATE GOVERNANCE 1.3.1 Composition of the Board of Directors Pursuant to Arkema's Articles of Association, as amended at the combined annual general meeting of 19 May 2020, in accordance with the provisions of article L. 225-27-1 of the French Commercial Code (Code de commerce) modified by French Law no. 2019-486 of 22 May 2019 on the action plan for business growth and transformation, at the meeting of the European Group Works Council on 3 July 2020: the French Group Works Council (whose functions are assured by the French delegation of the European Works Council) elected to reappoint Nathalie Muracciole as director representing employees for a four-year term; the European Works Council appointed Susan Rimmer as the second director representing employees for a four-year term. She joined Arkema’s Board of Directors on 29 July 2020. 1.3.2 Composition of the Executive Committee During the first half of 2020, Thierry Le Hénaff made a number of changes to Arkema’s Executive Committee, notably giving the business lines a broader and more diversified representation in order to continue adapting the Group to the world’s current and future challenges: Marc Schuller was appointed as Arkema’s Chief Operating Officer (COO) as from 3 March 2020, reporting to Thierry Le Hénaff. He is responsible for overseeing the Advanced Materials, Coating Solutions and Intermediates segments and also has responsibility for North America, raw materials and energy procurement, as well as commercial excellence. The following three people were promoted to the Executive Committee, reporting to Marc Schuller, as from 4 May:  Marie-Pierre Chevallier, in charge of the Performance Additives business line  Erwoan Pezron, in charge of the High Performance Polymers business line  Richard Jenkins, in charge of the Coating Solutions segment The other Executive Committee members who report to Thierry Le Hénaff are Bernard Boyer, Vincent Legros, Luc Benoit-Cattin, Marie-José Donsion and Thierry Parmentier. 5 1.4 ANALYSIS OF FIRST-HALF 2020 FINANCIAL RESULTS The figures in this section are provided on a consolidated basis and in accordance with Arkema's organization comprising the following three coherent and complementary segments dedicated to Specialty Materials: Adhesive Solutions, Advanced Materials and Coating Solutions, as well as the Intermediates segment which groups together activities whose results are more volatile. 1.4.1 Analysis of Arkema’s results (In millions of euros) First-half 2020 First-half 2019 Year-on-year change Sales 3,990 4,469 10.7% EBITDA 586 777 24.6% EBITDA margin 14.7% 17.4% Recurring depreciation and amortization (282) (252) +11.9% Recurring operating income (REBIT) 304 525 42.1% REBIT margin 7.6% 11.7% Other income and expenses 93 (23) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (29) (19) Operating income 368 483 23.8% Equity in income of affiliates (1) (1) Financial result (45) (60) 25.0% Income taxes (124) (95) +30.5% Net income 198 327 39.4% Of which: non-controlling interests 1 4 Net income – Group share 197 323 39.0% Adjusted net income 190 357 46.8% SALES Given the challenging context linked to Covid-19, the Group demonstrated its resilience. Sales for the first half totaled €3,990 million, down 10.7% year on year. Volumes declined 8.6%, mainly due to the economic downturn caused by the health crisis linked to Covid-19 and the lockdown measures imposed in many countries. The automotive, transportation and oil & gas sectors were marked by a strong slowdown during the period, and the construction and industrial markets were more particularly impacted in the second quarter. However, demand remained robust for packaging, nutrition and hygiene, as well as for certain niche applications that are key in fighting the virus, such as disinfection, medical as well as protective barriers and masks, in which Arkema has strong expertise. In addition, the construction market improved in June in Europe and the United States. The Group benefitted from the diversity of its end markets and geographic footprint. The price effect was a negative 5.5%, mainly reflecting more challenging market conditions for Intermediates in a context of lower demand, but also a relative stability of prices overall in Specialty Materials. The consolidation of ArrMaz in Advanced Materials, Prochimir and LIP in Adhesive Solutions and Lambson in Coating Solutions, as well as the divestment of the Functional Polyolefins business at 1 June, resulted in a 3.2% positive scope effect. The currency effect was limited at a positive 0.2%. In first-half 2020, Specialty Materials accounted for 80% of total Group sales (78% in first-half 2019). Excluding the corporate segment (1), the breakdown of sales by segment was similar to 2019, with Adhesive Solutions accounting for 24% of Group sales (23% in first-half 2019), Advanced Materials 32% (30% in first-half 2019), Coating Solutions 24% (25% in first-half 2019) and Intermediates 20% (22% in first-half 2019). (1) As defined in note C.2 to the condensed consolidated interim financial statements at 30 June 2020 in section 2 of this document. 6 The regional sales split was also similar to first-half 2019, with Europe representing 37% of Group sales (38% in first-half 2019), North America 34% (31% in first-half 2019) and Asia 25% (27% in first-half 2019) and the rest of the world (unchanged from first-half 2019) at 4%. EBITDA AND RECURRING OPERATING INCOME Group EBITDA came in at €586 million (€777 million in first-half 2019), mainly reflecting the impact of much lower demand. Advanced Materials held up well in this context thanks to the good performance of certain end markets such as nutrition, the benefits of innovation in niche applications used in the fight against the virus, and the contribution of ArrMaz. After a very good first quarter, Adhesive Solutions logically suffered in April and May from the construction market's slump in Europe and the United States, but delivered a much better performance in June as lockdowns were lifted in a number of countries that are important for the Group. The Group’s results for the first half of 2020 also include the negative impacts of illegal HFC imports into Europe, although the effect of this eased as from June, and to a lesser extent, the impact of national pension reform strikes in France that took place in the first quarter, which particularly affected the Advanced Materials segment. The EBITDA margin, which was impacted by the slowdown linked to the Covid-19 health crisis, remained solid at 14.7% (17.4% in first-half 2019). It was notably supported by the very good first quarter in Adhesive Solutions, a solid second-quarter performance from Advanced Materials with an EBITDA margin of 20%, and by initiatives to reduce fixed costs. Recurring depreciation and amortization totaled €28 2 million, €30 million higher than in first-half 20 19 essentially due to the start-up of production units in 2019 and early 2020, and the consolidation of newly acquired entities. In line with the year-on-year changes in EBITDA and recurring depreciation and amortization, recurring operating income (REBIT) came to €304 million and REBIT margin was 7.6%. OPERATING INCOME Operating income amounted to €368 million (€483 mil lion in first-half 2019), including €93 million in net other income, primarily corresponding to the €235 million pre-tax capital g ain, net of costs, relating to the divestment of the Functional Polyolefins business, exceptional asset write-downs recognized following impairment tests performed in the very exceptional context of Covid-19, and €29 million in depreciation and amort ization related to asset revaluations carried out as part of purchase price allocations. FINANCIAL RESULT The financial result represented a net expense of € 45 million versus a €60 million net expense in firs t-half 2019. The year-on-year change mainly reflects a less adverse interest rate effect on the portion of the Group’s debt swapped into US dollars, and the impact of actuarial differences on certain provisions for employee benefits. INCOME TAXES The income tax expense was up year on year at €124 million (€95 million in first-half 2019), including a €55 million reversal of deferred tax assets due to the use of tax losses during the period. Excluding non-recurring items, the tax rate for the first half of 2020 amounted to approximately 22% of recurring operating income. NET INCOME – GROUP SHARE AND ADJUSTED NET INCOME As a result, net income – Group share totaled €197 m illion (€323 million in first-half 2019), and net e arnings per share amounted to €2.58. Excluding the post-tax impact of non-recurring items, adjusted net income came in at €190 million, rep resenting €2.49 per share. 7 1.4.2 Analysis of results by segment 1.4.2.1 ADHESIVE SOLUTIONS (24% OF TOTAL GROUP SALES) (In millions of euros) First-half 2020 First-half 2019 Year-on-year change Sales 968 1,033 6.3% EBITDA 119 133 10.5% EBITDA margin 12.3% 12.9% Recurring operating income (REBIT) 89 103 13.6% REBIT margin 9.2% 10.0% Other income and expenses (29) (5) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (18) (17) Operating income 42 81 48.1% Sales for the Adhesive Solutions segment totaled €968 million in first-half 2020, down 6.3% year on year. Volumes declined by 8.2%, reflecting the sharp slowdown in demand in the construction market in the second quarter, as well as the decline in the transportation and industrial sectors throughout the first half. However, the decrease in volumes was mitigated thanks to the good performance of the packaging and hygiene markets and an improvement in the construction and DIY markets seen in Europe and the United States in June. Prices held up well during the period, down just 0.2%, reflecting measures taken by the Group in 2019 to optimize the product mix. The scope effect was a positive 2.8% and corresponds to the integration of LIP and Prochimir. Currencies had a limited negative impact of 0.7%. The segment’s EBITDA totaled €119 million, down 10.5% on first-half 2019. Despite a very good first quarter, with an EBITDA increase of 11% year on year, the sharp drop in volumes during April and May in the construction sector, combined with weak demand in the industrial assembly sector, weighed on the segment’s EBITDA in the second quarter. Bostik’s performance picked up sharply in June thanks to the rebound seen in the construction and DIY markets, confirming the operational improvement of the segment. In addition, EBITDA was supported by operational excellence initiatives and fixed cost savings announced in May, as well as by the favorable evolution of certain raw materials and the integration of LIP and Prochimir. EBITDA margin was 12.3% in the first half (12.9% in first-half 2019), temporarily down in the second quarter following the significant increase seen in the first quarter. In line with the year-on-year decrease in EBITDA, recurring operating income (REBIT) came to €89 million. T his figure includes €30 million in recurring depreciation and amortization, stable compared with first-half 2019. REBIT margin stood at 9.2% for the first half of 2020. preciation and Operating income for the Adhesive Solutions segment amounted to €42 million, including €18 million in de amortization related to asset revaluations carried out as part of purchase price allocations and €29 m illion in net other expenses, corresponding notably to restructuring costs. 1.4.2.2 ADVANCED MATERIALS (32% OF TOTAL GROUP SALES) (In millions of euros) First-half 2020 First-half 2019 Year-on-year change Sales 1,280 1,322 3.2% EBITDA 246 293 16.0% EBITDA margin 19.2% 22.2% Recurring operating income (REBIT) 122 184 33.7% REBIT margin 9.5% 13.9% Other income and expenses (18) (11) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (8) Operating income 96 173 44.5% 8 At €1,280 million, sales posted by the Advanced Mater ials segment for first-half 2020 were down slightly by 3.2% compared with the first half of 2019. Volumes fell 10.7% year on year, mainly due to the impact of the Covid-19 crisis which weighed particularly on demand for High Performance Polymers. The strong decline in the transportation, consumer electronics and oil and gas sectors overshadowed the good performance of the nutrition market, and the benefits of innovation in niche applications used in protection against the virus. The price effect was contained at a negative 1.8%. The consolidation of ArrMaz added 8.9% to the segment’s sales, driven by favorable end markets such as crop nutrition. The currency effect was a positive 0.4%. EBITDA for Advanced Materials fell 16.0% year on year to €246 million, reflecting the sharp contraction in volumes linked to the Covid-19 crisis, notably for High Performance Polymers, and, to a lesser extent, the national pension reform strikes that took place in France in January. With the consolidation of ArrMaz, Performance Additives were more resilient, notably in the second quarter. EBITDA margin remained high for the Advanced Materials segment, coming in at 19.2% (22.2% in first-half 2019), benefitting from a good product mix, the favorable evolution of certain raw materials, and fixed cost reductions. Recurring operating income (REBIT) came to €122 milli on, including €124 million in recurring depreciatio n and amortization, which was €15 million higher year on year, due nota bly to the integration of ArrMaz, the start-up of the capacity expansion of high performance powders at Mont, France in the second half of 2019, and the doubling in capacity of the Kerteh site in Malaysia in first-quarter 2020. The segment's operating income totaled €96 million and included €8 million in depreciation and amortiz ation related to asset revaluations carried out as part of the purchase price allocation for ArrMaz and €18 million in net oth er expenses, mainly corresponding to the impact of Hurricane Harvey in 2017 in the United States and exceptional asset write-downs for a very limited amount. 1.4.2.3 COATING SOLUTIONS (24% OF TOTAL GROUP SALES) (In millions of euros) First-half 2020 First-half 2019 Year-on-year change Sales 953 1,139 16.3% EBITDA 124 170 27.1% EBITDA margin 13.0% 14.9% Recurring operating income (REBIT) 64 116 44.8% REBIT margin 6.7% 10.2% Other income and expenses (3) (1) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (3) (2) Operating income 58 113 48.7% Sales for the Coating Solutions segment were down 16.3% year on year to €953 million. Despite holding up well in the first quarter – thanks notably to the start-up of the acrylic acid reactor at Clear Lake in the United States – volumes fell 9.3% over the period, due to the weak demand during the second quarter in construction, paints and in some industrial markets. The price effect was a negative 8.9%, stemming mainly from lower propylene prices. The scope effect was a positive 1.4%, linked to the acquisition of Lambson, and currencies had a slight positive impact of 0.5%. At €124 million, the segment’s EBITDA was down signific antly on the very good performance achieved in first-half 2019 (€170 million). The results were impacted by the ef fects of the Covid-19 crisis and, to a lesser extent, the strikes that took place in France in the first quarter of the year, but benefitted from the improvement in the decorative paints market in June. In a context of strong volume declines, the EBITDA margin resisted well, coming in at 13.0%, thanks notably to the benefits of the integration between upstream and downstream activities. Recurring operating income (REBIT) came in at €64 mil lion, including €60 million in recurring depreciati on and amortization, representing a €6 million year on year increase pri marily resulting from the start-up of the acrylic acid reactor at Clear Lake in the United States. Operating income totaled €58 million. 9 1.4.2.4 INTERMEDIATES (20% OF TOTAL GROUP SALES) (In millions of euros) First-half 2020 First-half 2019 Year-on-year change Sales 776 961 19.3% EBITDA 134 230 41.7% EBITDA margin 17.3% 23.9% Recurring operating income (REBIT) 70 174 59.8% REBIT margin 9.0% 18.1% Other income and expenses 184 (3) Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses Operating income 254 171 +48.5% At €776 million, sales for the Intermediates segment was down 19.3% compared with first-half 2019. The decrease includes a negative 12.2% price effect, which primarily stemmed from the challenging market conditions in Fluorogases and lower propylene prices. Volumes fell by 5.3%, reflecting the slowdown in demand in the automotive sector over the entire six-month period and in the construction sector in the second quarter, partly offset by the good dynamic in the niche market of PMMA protective sheets. The scope effect was a negative 2.2%, corresponding to the divestment of the Functional Polyolefins business which was completed on 1 June. The currency effect was limited, at a positive 0.4%. In this context of strong declines in volumes and prices, the segment’s EBITDA came in at €134 million (€ 230 million in first-half 2019). Those results also reflect continued illegal HFC imports into Europe, although the effect of this eased towards the end of the period. EBITDA margin contracted to 17.3%. Recurring operating income (REBIT) totaled €70 millio n, including €64 million in recurring depreciation and amortization, up €8 million year on year as a result of Arkema's acqu isition of Jurong's interest in Taixing Sunke Chemicals. REBIT margin stood at 9.0% for the first half of 2020. the €235 million pre-tax capital gain, net of costs , generated on the Operating income rose to €254 million and included divestment of the Functional Polyolefins business, and limited exceptional write-downs of goodwill recognized following impairment tests carried out in the unprecedented context of Covid-19. 1.4.3 Group cash flow analysis (In millions of euros) First-half 2020 First-half 2019 Cash flow from operating activities 416 484 Cash flow used in investing activities (19) (346) Net cash flow 397 138 Of which net cash flow from portfolio management operations 147 (25) Free cash flow 250 163 Cash flow used in financing activities (429) (238) 10 EBITDA can be reconciled to free cash flow as follows: (In millions of euros) First-half 2020 First-half 2019 EBITDA 586 777 Taxes (55) (96)* Cash items included in the financial result (42) (49) Change in working capital (24) (167) Change in fixed asset payables(1) (54) (62) Recurring capital expenditure (157) (187) Exceptional capital expenditure (57) (38) Non-recurring items 36 (24)* Other 17 9 Free cash flow 250 163 Restated for the impact of taxes on non-recurring items. (1) Excluding cash flows related to non-recurring items and portfolio management operations. These items represented a net cash outflow of €1 million in first-half 2020. In first-half 201 9 they represented a net cash outflow of €34 millio n, primarily relating to the discontinuation of a project that was fully financed by a partner, for which a corresponding exceptional gain was recognized in the same amount. These two amounts, which offset each other, have been included in “Non-recurring items”. NET CASH FLOW AND FREE CASH FLOW The Group’s net cash flow represented a strong inflow of €397 million in the first half of 2020, versu s a €138 million inflow in first-half 2019. This amount includes a €147 millio n net cash inflow from portfolio management operations, corresponding mainly to the acquisition of LIP in Adhesive Solutions and the divestment of the Functional Polyolefins business, for which a tax rate of 32% was applied to the related capital gain. In the first half of 2019, cash flows from portfolio management operations represented a net outflow of €25 million and primarily corresponded to a US$20 million equity investment in Carbon®. Consequently, free cash flow – which corresponds to net cash flow excluding the impact of portfolio management operations – amounted to the very good level of €250 million ( €163 million in first-half 2019). This amount inclu des a slight seasonal increase in working capital during the period, which was much lower than in first-half 2019 thanks to strict management of inventory and receivables in a context of lower sales and costs for certain raw materials. The first-half 2020 free cash flow figure also reflects a slight year-on-year decrease in capital expenditure to €215 million (€233 million in first-half 2019). Recurring capita l expenditure amounted to €157 million for the peri od and exceptional capital expenditure totaled €57 million. The exceptional ca pex related to the polyamides project in Asia and the partnership with Nutrien announced in June for the long-term supply of anhydrous hydrogen fluoride in the United States. As stated in the Group’s first-quarter 2020 results release, recurring and exceptional capital expenditure for the full year is expected to total some €600 million – €100 million lower than the amo unt originally planned for 2020. Lastly, free cash flow in the first half of 2020 included a €36 million inflow for non-recurring items , of which tax savings linked to the use of tax losses for an amount of €55 milli on. CASH FLOW USED IN FINANCING ACTIVITIES ion in the first six months The cash outflow for financing activities amounted to €429 million in first-half 2020 versus €238 mill of 2019. The first-half 2020 figure includes a €2.2 0 per-share dividend payment for fiscal year 2019 for a total amount of nd €7 million in net proceeds from the capital incr ease reserved for €168 million, €21 million in share buyback costs, a employees. It also includes the net proceeds from the hybrid bonds issued in January 2020 for €299 mil lion and the redemption of the bonds with a face value of €480 m illion that matured in April 2020. In first-half 2019, cash flow used in financing activities included the dividend payment, share buybacks, and the overall net cost of partially refinancing the Group’s hybrid bonds, which involved a new bond issue and the partial buyback of outstanding hybrid bonds. 11 1.4.4 Balance sheet analysis (In millions of euros) 30 June 2020 31 December 2019 Year-on-year change Non-current assets* 6,621 6,744 1.8% Working capital 1,231 1,173 +4.9% Capital employed 7,852 7,917 0.8% Deferred tax assets 161 216 25.5% Provisions for pensions and employee benefits 562 525 +7.0 % Other provisions 374 374 Total provisions 936 899 +4.1% Long-term assets covering some provisions 90 94 4.3% Total provisions net of non-current assets 846 805 +5.1% Deferred tax liabilities 334 334 Net debt including hybrid bonds 2,134 2,331 8.5% Shareholders’ equity 5,594 5,324 +5.1% Excluding deferred tax and including pension assets. Between 31 December 2019 and 30 June 2020, non-current assets decreased by €123 million, primarily due to: €215 million in capital expenditure, including €15 7 million in recurring capital expenditure and €57 million in exceptional capital expenditure; the recognition of €39 million in right-of-use ass ets related to lease commitments following the Group's application of IFRS 16; €422 million in depreciation and amortization incl uding (i) €282 million in recurring depreciation an d amortization, of which €28 million arising from the application of I FRS 16, (ii) €29 million in depreciation and amortiz ation related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses, and (iii) €111 million in exceptional write-downs of in dustrial and intangible assets; the impact of the LIP acquisition, amounting to €91 million; and • a €25 million negative currency translation effect , mainly linked to the slight appreciation of the euro against the US dollar at the end of the period. At 30 June 2020, working capital was €58 million hig her than at 31 December 2019. This limited increase reflects in particular the Group's strict management of inventory and receivables in a context of lower sales and costs for certain raw materials. It also includes a negative €39 million linked to curr encies and an €8 million scope effect related to th e acquisition of LIP in Adhesive Solutions. At 30 June 2020, the ratio of working capital to annualized sales (1) was 16.5%, close to the year-earlier figure of 16.0%. As a consequence, the Group's capital employed decreased by €65 million between 31 December 2019 and 30 June 2020 to €7,852 million. Deferred tax assets amounted to €161 million at 30 June 2020, down €55 million on 31 December 2019 fol €55 million in tax losses during the period. lowing the use of Gross provisions totaled €936 million. Some of these provisions, accounting for an aggregate €90 millio n, are covered mainly by the guarantee facility granted by Total and described in note C.19.2 to the condensed consolidated interim financial statements at 30 June 2020 (section 2 of this document) and therefore by long-term assets recognized in the balance sheet. These essentially consist of provisions related to former industrial sites in the United States. At 30 June 2020, provisions net of these non-current assets stood at €846 million v ersus €805 million at 31 December 2019, with the in crease mainly attributable to the rise in net provisions for pension liabilities. (1) Calculated as working capital at 30 June/(2nd quarter sales * 4). 12 Net provisions can be analyzed as follows by type: (In millions of euros) 30 June 2020 31 December 2019 Pension liabilities 420 381 Other employee benefit obligations 142 143 Environmental contingencies 121 124 Restructuring 33 34 Other 130 123 Between 31 December 2019 and 30 June 2020, net provisions for pension liabilities increased by €39 mill ion primarily due to a sharp decrease in the discount rates applied in the United States and the United Kingdom, partially offset by higher discount rates in Europe and the revaluation of plan assets in the United Kingdom. The currency effect during the period was limited. Provisions for other employee benefit obligations (healthcare costs, welfare costs and long-service awards) decreased by €1 million. Net debt and hybrid bonds amounted to €2,134 millio n at 30 June 2020 (€2,331 million at 31 December 20 19), representing 1.7 times last-twelve-months EBITDA. The increase compared with end-December 2019 was mainly attributable to the net cash flow, the outflows related to the dividend payment and share buybacks, and the inflow related to the capital increase reserved for employees. Shareholders’ equity amounted to €5,594 million vers us €5,324 million at 31 December 2019. The €270 mil lion increase primarily relates to (i) €198 million in net income for the period, (ii) the payment of a €2.20 per-sh are dividend for a total amount of €168 million, (iii) the January 2020 hybrid bond issue for a net €299 million, (iv) €21 million for million in net proceeds from the capital increase reserved for employees. In first-half 2020, a €28 mi recognized in equity for provisions for pension liabilities and other post-employment benefit obligations. share buybacks and (v) €7 llion actuarial loss was 1.5 TRANSACTIONS WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. Moreover, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are accounted for under the equity method. The values involved are not significant. 1.6 SUBSEQUENT EVENTS Significant events occurring after the reporting date are described in note C.20 to the condensed consolidated interim financial statements at 30 June 2020 (see section 2 of this document). 1.7 MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are the same as those described in chapter 2 of the 2019 Universal Registration Document filed with the French financial markets authority (Autorité des marchés financiers – AMF) on 26 March 2020 under number D.20-0182 and the amendment thereto filed on 30 July 2020. These documents are available on Arkema's website (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update on the Group’s contingent liabilities is provided in the notes to the condensed consolidated interim financial statements at 30 June 2020. 13 1.8 OUTLOOK Based on the progressive lifting of lockdown measures in some important countries for the Group, Arkema expects that demand will continue to improve gradually in the second part of the year, while remaining below last year’s level. The pace and strength of this improvement are still uncertain, dependent on the evolution of the pandemic, and will vary between end- markets and geographies. Arkema estimates at this stage that sales in the third quarter will decline by around 10% year-on- year at constant scope and currency, representing a clear improvement compared to the decline of around 20% recorded in the second quarter. In this context, Arkema will focus its efforts on the elements that are within its control, in particular costs, capital expenditure and working capital in order to maintain a strong level of liquidity. The Group thus confirms it is on track to reduce in 2020 its fixed costs by €50 million compared to 2019 and to reduce capital expenditure by €100 million comp ared to the level originally planned. Its innovation efforts in Specialty Materials will be preserved in order to meet its customers’ numerous technological and sustainable development opportunities. Thanks to those initiatives, and on the back of its solid performance in the second quarter given the current environment, the Group remains very confident in its ability to deal with this unprecedented crisis, drawing also on its balanced geographic exposure, diversified end markets and strong balance sheet. Finally, Arkema will continue its acquisition strategy, the roll-out of its major organic growth projects, as well as its strategic review for Intermediates, in line with its ambition to become a pure Specialty Materials player by 2024. 14 Condensed consolidated interim financial statements at 30 June 2020 2 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2020 CONSOLIDATED INCOME STATEMENT ............................................................................................................................................. 16 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME........................................................................................................ 17 CONSOLIDATED BALANCE SHEET .................................................................................................................................................... 18 CONSOLIDATED CASH FLOW STATEMENT ...................................................................................................................................... 19 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY .................................................................................. 20 A. HIGHLIGHTS ..................................................................................................................................................................................... 21 B. ACCOUNTING POLICIES ................................................................................................................................................................. 21 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ....................................................................................................... 24 1. Alternative performance indicators .................................................................................................................................... 24 2. Information by business segment ...................................................................................................................................... 26 3. Information by geographical area ...................................................................................................................................... 29 4. Other income and expenses ............................................................................................................................................... 29 5. Financial result .................................................................................................................................................................... 29 6. Income taxes ........................................................................................................................................................................ 30 7. Earnings per share .............................................................................................................................................................. 30 8. Business combination ........................................................................................................................................................ 30 9. Assets held for sale ............................................................................................................................................................. 31 10. Intangible assets ................................................................................................................................................................. 32 11. Property, plant and equipment ........................................................................................................................................... 34 12. IFRS 16 leases: rights of use and IFRS 16 debt ................................................................................................................. 35 13. Shareholders’ equity ........................................................................................................................................................... 36 14. Provisions for pensions and other employee benefits ..................................................................................................... 37 15. Other provisions and other non-current liabilities ............................................................................................................ 38 16. Liabilities and contingent liabilities ................................................................................................................................... 39 17. Debt ...................................................................................................................................................................................... 40 18. Share-based payments ....................................................................................................................................................... 41 19. Off-balance sheet commitments ......................................................................................................................................... 42 20. Subsequent events .............................................................................................................................................................. 45 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2020 ............................................................................................................................ 46 15 (In millions of euros) Sales Operating expenses Research and development expenses Selling and administrative expenses Other income and expenses Operating income Equity in income of affiliates Financial result Income taxes Net income Of which: non-controlling interests Net income - Group share Earnings per share (in euros) Diluted earnings per share (in euros) Condensed consolidated interim financial statements at 30 June 2020 CONSOLIDATED INCOME STATEMENT Notes 1st half 2020 1st half 2019 (C2&C3) 3,990 4,469 (C4) (3,211) (120) (384) 93 (3,456) (123) (384) (23) (C2) 368 483 (C5) (C6) (1) (45) (124) 198 (1) (60) (95) 327 1 197 4 323 (C7) (C7) 2.58 2.57 3.75 3.73 16 Condensed consolidated interim financial statements at 30 June 2020 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of euros) Net income 1st half 2020 198 1st half 2019 327 Hedging adjustments 8 (1) Other items 1 Deferred taxes on hedging adjustments and other items Change in translation adjustments (C13) (36) 14 Other recyclable comprehensive income (28) 14 Actuarial gains and losses (C14) (38) (33) Deferred taxes on actuarial gains and losses 10 5 Other non-recyclable comprehensive income (28) (28) Total income and expenses recognized directly through equity (56) (14) Comprehensive income 142 313 Of which: non-controlling interests 1 4 Comprehensive income – Group share 141 309 17 Condensed consolidated interim financial statements at 30 June 2020 CONSOLIDATED BALANCE SHEET (In millions of euros) Notes 30 June 2020 31 December 2019 ASSETS Intangible assets, net (C10) 3,365 3,392 Property, plant and equipment, net (C11 & C12) 2,944 3,026 Investments in equity affiliates 32 33 Other investments 56 53 Deferred tax assets 161 216 Other non-current assets 224 240 TOTAL NON-CURRENT ASSETS 6,782 6,960 Inventories 1,006 1,014 Accounts receivable 1,184 1,204 Other receivables and prepaid expenses 183 184 Income taxes recoverable 74 113 Other current financial assets 20 17 Cash and cash equivalents 1,400 1,407 Assets held for sale (C9) 78 TOTAL CURRENT ASSETS 3,867 4,017 TOTAL ASSETS 10,649 10,977 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital 767 766 Paid-in surplus and retained earnings 4,663 4,340 Treasury shares (29) (11) Translation adjustments 142 178 SHAREHOLDERS’ EQUITY – GROUP SHARE (C13) 5,543 5,273 Non-controlling interests 51 51 TOTAL SHAREHOLDERS’ EQUITY 5,594 5,324 Deferred tax liabilities 334 334 Provisions for pensions and other employee benefits (C14) 562 525 Other provisions and non-current liabilities (C15) 389 391 Non-current debt (C17) 2,380 2,377 TOTAL NON-CURRENT LIABILITIES 3,665 3,627 Accounts payable 783 905 Other creditors and accrued liabilities 352 366 Income taxes payable 86 80 Other current financial liabilities 15 8 Current debt (C17) 154 661 Liabilities associated with assets held for sale (C9) 6 TOTAL CURRENT LIABILITIES 1,390 2,026 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 10,649 10,977 18 Condensed consolidated interim financial statements at 30 June 2020 CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) Net income 1st half 2020 198 1st half 2019 327 Depreciation, amortization and impairment of assets 422 316 Other provisions and deferred taxes 54 (1) (Gains)/losses on sales of long-term assets (245) (4) Undistributed affiliate equity earnings 2 1 Change in working capital (26) (167) Other changes 11 12 CASH FLOW FROM OPERATING ACTIVITIES 416 484 Intangible assets and property, plant, and equipment additions (215) (233) Change in fixed asset payables (55) (96) Acquisitions of operations, net of cash acquired (C8) (92) (19) Increase in long-term loans Total expenditures (23) (385) (20) (368) Proceeds from sale of intangible assets and property, plant, and equipment 2 6 Proceeds from sale of businesses, net of cash transferred (C9) 327 Repayment of long-term loans 37 16 Total divestitures 366 22 CASH FLOW FROM INVESTING ACTIVITIES (19) (346) Issuance (repayment) of shares and paid-in surplus (C13) 7 3 Purchase of treasury shares (C13) (21) (17) Issuance of hybrid bonds (C13) 299 399 Redemption of hybrid bonds (C13) (425) Dividends paid to parent company shareholders (C13) (168) (190) Interest paid to bearers of subordinated perpetual notes (C13) (12) Dividends paid to non-controlling interests (1) (1) Increase in long-term debt 3 2 Decrease in long-term debt (C17.1) (40) (515) Increase / decrease in short-term debt (C17.1) (508) 518 CASH FLOW FROM FINANCING ACTIVITIES (429) (238) Net increase/(decrease) in cash and cash equivalents (32) (100) Effect of exchange rates and changes in scope 25 (10) Cash and cash equivalents at beginning of period 1,407 1,441 CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,400 1,331 19 Condensed consolidated interim financial statements at 30 June 2020 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (In millions of euros) At 1 January 2020 Share capital 766 Paid-in surplus 1,266 Hybrid bonds 694 Retained earnings 2,380 Translation adjustments 178 Treasury shares (11) Shareholders ’ equity – Group share 5,273 Non- controlling interests 51 Shareholders ’ equity 5,324 Cash dividend Issuance of share capital 1 6 (168) (168) 7 (1) (169) 7 Purchase of treasury shares (21) (21) (21) Grants of treasury shares to employees (3) 3 0 0 Share-based payments Issuance of hybrid bonds* Other Transactions with shareholders 1 6 299 299 12 (159) (18) 12 299 129 (1) 12 299 128 Net income 197 197 1 198 Total income and expenses recognized directly through equity (20) (36) (56) (56) Comprehensive income At 30 June 2020 767 1,272 993 177 2,398 (36) 142 (29) 141 5,543 1 51 142 5,594 * * See note C13.2 “Hybrid bonds” (In millions of euros) Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders ’ equity – Group share Non- controlling interests Shareholders ’ equity At 1 January 2019 766 1,263 689 2,147 142 (28) 4,979 49 5,028 Cash dividend Issuance of share capital Purchase of treasury shares 0 3 (202) (17) (202) 3 (17) (1) (203) 3 (17) Grants of treasury shares to employees (1) 1 Share-based payments 12 12 12 Issuance of hybrid bonds* 399 399 399 Redemption of hybrid bonds (394) (31) (425) (425) Other Transactions with shareholders Net income 0 3 5 (222) 323 (16) (230) 323 (1) 4 (231) 327 Total income and expenses recognized directly through equity (28) 14 (14) (14) Comprehensive income 295 14 309 4 313 At 30 June 2019 766 1,266 694 2,220 156 (44) 5,058 52 5,110 20 Condensed consolidated interim financial statements at 30 June 2020 A. HIGHLIGHTS A.1 Impact of COVID-19 The financial performance for the first half of 2020 has been clearly marked by the effects of the COVID-19 pandemic. Sales for this period, particularly in the second quarter, were significantly impacted by the substantial decline in global demand given the scale of the governmental lockdown measures introduced in many countries. The Group has endeavoured to continue operating while ensuring due protection for its employees, and is implementing decisive cost and investment adjustments in order to limit the impact of this crisis on its results. Thanks to these initiatives, the positioning of its product lines, its moderate indebtedness and its high level of liquidity, Arkema confirms that it is very confident in its ability to withstand this unprecedented crisis and be well positioned when normal business resumes. In the extraordinary context of COVID-19, the substantial decreases in sales and EBITDA were identified by the Group as indications of impairment, and consequently impairment tests of the Cash Generating Units (CGUs) were conducted in accordance with IAS 36. The results of these tests showed a good level of resilience in all CGUs except for Asia Acrylics, for which the goodwill was partly written down. In addition to testing the CGUs, the Group carried out an exhaustive analysis of specific assets that can be tested separately and showed signs of potential impairment. Impairment was recorded in respect of a small number of assets, mainly used in the oil and gas, automotive and aeronautics markets. The assumptions and judgements used for the tests of the CGUs, and details of the impairment recognized, are presented in notes C4 “Other income and expenses”, C10 “Intangible assets” and C11 “Property, plant and equipment”. A.2 Portfolio management On 3 January 2020 Arkema finalized the acquisition of LIP Bygningsartikler AS (LIP), a Danish leader in tile adhesives, waterproofing systems and floor preparation solutions, with annual sales of approximately €30 million. The impacts o f this operation are detailed in note C8 “Business combination”. In the Intermediates business segment, on 1 June 2020 Arkema completed the divestment of its Functional Polyolefins business, which was part of the PMMA activity and had annual sales of approximately €250 million. The operation was based on an enterprise value of €335 million and is fully in line with the strategy of refocusing the Group’s activities on Specialty Materials. The impacts of this operation are detailed in note C9 “Assets held for sale”. A.3 Other highlights Taking advantage of favourable market conditions, on 21 January 2020 Arkema undertook a €300 million u ndated hybrid bond issue with an annual coupon of 1.5% until the first call date after 6 years. This issue complements the previous €400 million hybrid refinancing operation of June 2019 and puts the Group in a position to refinance the remaining €300 million portion of its o utstanding 4.75% hybrid bonds with a first call date in October 2020. See note C13.2 “Hybrid bonds”. Also, the Group redeemed its €480 million bonds wit h an annual coupon of 3.85% that reached maturity in April. The Group had refinanced this issue in December 2019 through a €500 million senior bond issue with 10-year maturity and an annual coupon of 0.75%. Finally, in April 2020, Arkema carried out a capital increase reserved for employees. 112,256 shares were subscribed at the price of €68.56 per share, giving a total amount of €7 million net of expenses (see notes C13 “Shareholders’ equity” and C18 “Share-based payments”). B. ACCOUNTING POLICIES Arkema is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. 21 Condensed consolidated interim financial statements at 30 June 2020 Basis for preparation The Group’s condensed consolidated interim financial statements at 30 June 2020 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved by the Board of Directors of Arkema on 29 July 2020. The condensed consolidated interim financial statements at 30 June 2020 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRS (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and IFRS endorsed by the European Union at 30 June 2020. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2019. The accounting framework and standards adopted by the European Union can be consulted on the following website: https://ec.europa.eu/info/law/international-accounting-standards-regulation-ec-no-1606-2002 Changes in IFRS and interpretations The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2020 are identical to those used in the consolidated financial statements at 31 December 2019, except for IFRS standards, amendments and interpretations that are mandatory for accounting periods commencing on or after 1 January 2020 (and which had not been applied early by the Group), namely: Amendments to IAS 1 and IAS 8 Definition of material Adopted by the European Union on 10 December 2019 Amendments to IFRS 3 Definition of a business Adopted by the European Union on 22 April 2020 Amendments to IFRS 9, IAS 39 and IFRS 7 Interest rate benchmark reform Adopted by the European Union on 16 January 2020 Conceptual framework Amendments to references to the conceptual framework Adopted by the European Union on 6 December 2019 Application of these amendments and interpretations had no significant impact on the financial statements at 30 June 2020. Non-mandatory IFRS standards and interpretations at 1January 2020 The standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which are not yet mandatory for accounting periods commencing on or after 1 January 2020 (and which had not been applied early by the Group) are: Amendments to IAS 1 Classification of liabilities as current or non-current Not adopted by the European Union at 30 June 2020 IFRS 17 Insurance contracts Not adopted by the European Union at 30 June 2020 22 Condensed consolidated interim financial statements at 30 June 2020 Use of assumptions Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. These interim financial statements therefore take into consideration the current COVID-19 health crisis and are based on parameters available at the closing date. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off-balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. The information for the condensed consolidated interim financial statements at 30 June 2020 was prepared in the extraordinary context of the COVID-19 pandemic, and the Group conducted impairment tests as explained in note A1 “Impact of COVID-19” (see also notes C4 “Other income and expenses”, C10 “Intangible assets” and C11 “Property, plant and equipment”). Impact of seasonality The Group’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by the Group is generally lower in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and the rest of Europe; in some of the Group’s businesses, particularly those serving the paints and coatings as well as the refrigeration and air-conditioning markets, sales are generally higher in the first half of the year than in the second half. By contrast, in adhesives, the two halves of the year are more evenly balanced; the major multi-annual maintenance turnarounds at the Group’s production plants also have an impact on seasonality, and tend in general to be carried out in the second half of the year. These seasonal effects observed in the past are not necessarily representative of future trends, but can have a material effect on the variations in results and working capital from one quarter of the year to another. In the extraordinary context of COVID-19, the above seasonal effects may also be impacted by the development and consequences of the pandemic. 23 Condensed consolidated interim financial statements at 30 June 2020 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Alternative performance indicators To monitor and analyse the financial performance of the Group and its activities, Group management uses alternative performance indicators. These are financial indicators that are not defined by IFRS. This note presents a reconciliation of these indicators and the aggregates from the consolidated financial statements under IFRS. Note C.2 “Information by business segment” partly refers to these alternative performance indicators. 1.1 Recurring operating income (REBIT) and EBITDA (In millions of euros) Notes 1st half 2020 1st half 2019 OPERATING INCOME 368 483 Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (29) (19) Other income and expenses (C4) 93 (23) RECURRING OPERATING INCOME(REBIT) 304 525 Recurring depreciation and amortization of tangible and intangible assets (282) (252) EBITDA 586 777 Details of depreciation and amortization of tangible and intangible assets: (In millions of euros) Notes 1st half 2020 1st half 2019 Depreciation and amortization of tangible and intangible assets (C10, C11 & C12) (422) (316) Of which: Recurring depreciation and amortization of tangible and intangible assets (282) (252) Of which: Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (29) (19) Of which: Impairment included in other income and expenses (C4) (111) (45) 1.2 Adjusted net income and adjusted earnings per share (In millions of euros) NET INCOME – GROUP SHARE - Depreciation and amortization related to the revaluation of tangible and Notes 1st half 2020 197 1st half 2019 323 intangible assets as part of the allocation of the purchase price of businesses (29) (19) Other income and expenses (C4) 93 (23) Other income and expenses attributable to non-controlling interests Taxes on depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses 7 5 Taxes on other income and expenses (64) 3 One-time tax effects ADJUSTED NET INCOME Weighted average number of ordinary shares Weighted average number of potential ordinary shares ADJUSTED EARNINGS PER SHARE (IN EUROS) (C7) 190 76,457,621 76,667,395 2.49 357 76,214,216 76,608,099 4.68 DILUTED ADJUSTED EARNINGS PER SHARE (IN EUROS) 2.48 4.66 24 Condensed consolidated interim financial statements at 30 June 2020 1.3 Recurring capital expenditure (In millions of euros) 1st half 2020 1st half 2019 INTANGIBLE ASSETS AND PROPERTY, PLANT, AND EQUIPMENT ADDITIONS 215 233 Exceptional capital expenditure 57 38 Investments relating to portfolio management operations Capital expenditure with no impact on net debt 1 8 RECURRING CAPITAL EXPENDITURE 157 187 Exceptional capital expenditure corresponds to a very limited number of capital expenditure items that the Group presents separately in its financial reporting due to their unusual size or nature (major development projects, accidents or damage, exceptional restructuring operations). In 2020, exceptional capital expenditure mainly concerns the Polyamide project in Asia and the long-term partnership with Nutrien in the United States for the supply of anhydrous hydrogen fluoride. In 2019, it mainly concerned investments in thiochemicals in Malaysia and specialty polyamides in Asia. Investments relating to portfolio management operations reflect the impact of acquisition operations. Capital expenditure with no impact on net debt corresponds to capital expenditure items financed by non-Group entities, or reclassifications of assets. 1.4 Free cash flow (In millions of euros) 1st half 2020 1st half 2019 Cash flow from operating activities 416 484 + Cash flow from net investments (19) (346) NET CASH FLOW 397 138 Net cash flow from portfolio management operations 147 (25) FREE CASH FLOW 250 163 The net cash flow from portfolio management operations corresponds to the impact of acquisition and divestment operations. In 2020, a tax rate of 32% was applied to the capital gain related to the Functional Polyolefins business divestment. 1.5 Working capital (In millions of euros) 30 June 2020 31 December 2019 Inventories 1,006 1,014 + Accounts receivable 1,184 1,204 + Other receivables including income taxes 257 297 + Other current financial assets 20 17 Accounts payable 783 905 Other liabilities including income taxes 438 446 Other current financial liabilities 15 8 WORKING CAPITAL 1,231 1,173 1.6 Capital employed (In millions of euros) Notes 30 June 2020 31 December 2019 Goodwill, net 1,875 1,917 + Intangible assets (excluding goodwill) and property, plant and equipment, net (C10, C11 & C12) 4,434 4,501 + Investments in equity affiliates 32 33 + Other investments and other non-current assets 280 293 + Working capital 1,231 1,173 CAPITAL EMPLOYED 7,852 7,917 25 Condensed consolidated interim financial statements at 30 June 2020 1.7 Net debt (In millions of euros) Notes 30 June 2020 31 December 2019 Non-current debt (C17) 2,380 2,377 + Current debt (C17) 154 661 Cash and cash equivalents 1,400 1,407 NET DEBT 1,134 1,631 + Hybrid bonds (C13) 1,000 700 NET DEBT AND HYBRID BONDS 2,134 2,331 2. Information by business segment As required by IFRS 8 “Operating Segments”, segment information for the Group is presented in accordance with the internal reporting structure that is used by executive management in order to assess financial performance and allocate resources. Arkema is organized around three complementary, coherent business segments dedicated to Specialty Materials, namely Adhesive Solutions, Advanced Materials and Coating Solutions, and an Intermediates business segment consisting of activities with more volatile results. The Adhesive Solutions segment is headed by a member of the Executive Committee, and the Advanced Materials, Coating Solutions and Intermediates segments are directed by a Chief Operating Officer who is also a member of the Executive Committee. Both of them report to the Chairman and CEO, Arkema’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their segments’ operating activities, financial results, forecasts and plans. The Chief Operating Officer is supported by three other Executive Committee members, who report to him and are respectively in charge of the Coating Solutions business segment and each of the two Business Lines1 making up the Advanced Materials business segment: High Performance Polymers and Performance Additives. The composition of the business segments is as follows: the Adhesive Solutions segment comprises the following Business Lines: o Construction and Consumer, providing solutions for construction, renovation of buildings, and DIY, o Industrial Assembly, comprising high performance adhesives for durable goods, and adhesive solutions for packaging and non- woven. The Adhesive Solutions business segment supplies technologies used in building activities for businesses and individuals, including sealants, tile and flooring adhesives and waterproofing systems, and technologies used in industry, including state-of-the-art knowhow in the automotive, textiles, glazing, flexible and rigid packaging, and hygiene sectors. the Advanced Materials segment comprises the following Business Lines: o High Performance Polymers, consisting of specialty polyamides and PVDF, o Performance Additives, covering interface agents combining specialty surfactants and molecular sieves, organic peroxides, thiochemicals and hydrogen peroxide. The Advanced Materials segment offers innovative solutions with high added value to meet the major challenges of sustainable development, including lightweighting, new energies, access to water, bio-source products and recycling. These solutions are used in a wide variety of sectors such as the automotive and transport sectors, oil and gas, renewable energies (photovoltaics, lithium-ion batteries, wind power), consumer goods (beauty and health products, sports equipment, packaging, etc), electronics, construction, coatings, animal feed and water treatment. the Coating Solutions segment comprises the following Business Lines: o Coating Resins, combining the EU/US acrylics activities and coating resins, o Coating Additives, combining Sartomer photocure resins and Coatex rheology additives. 1 Business Lines are activities or groups of activities. 26 Condensed consolidated interim financial statements at 30 June 2020 This business segment offers a broad range of innovative products for decorative paints, industrial coatings and adhesives, and also provides solutions for applications in the paper industry, superabsorbents, water treatment and oil and gas extraction, and in cutting- edge high-growth markets such as 3D printing and electronics. the Intermediates segment comprises the following activities: o Fluorogases, o PMMA, o Asia Acrylics. These industrial intermediate chemicals activities, in which Arkema holds leading positions, concern competitive global product lines used in several industrial sectors such as construction, production of cold (refrigeration and air conditioning), the automotive industry, coatings and water treatment. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales between segments take place at market prices. This new reporting structure was announced by the Group at the Strategy Update presentation on 2 April 2020. The 2019 figures shown below have been restated accordingly. 27 Condensed consolidated interim financial statements at 30 June 2020 1st half 2020 (In millions of euros) Adhesive Solutions Advanced Materials Coating Solutions Inter- mediates Corporate Total Sales 968 1,280 953 776 13 3,990 EBITDA* 119 246 124 134 (37) 586 Recurring depreciation and amortization of tangible and intangible assets* (30) (124) (60) (64) (4) (282) Recurring operating income (REBIT)* 89 122 64 70 (41) 304 Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (18) (8) (3) (29) Other income and expenses (29) (18) (3) 184 (41) 93 Operating income 42 96 58 254 (82) 368 Equity in income of affiliates (2) 1 (1) Intangible assets and property, plant, and equipment additions 34 83 29 62 7 215 Of which: recurring capital expenditure* 34 55 28 33 7 157 1st half 2019(1) (In millions of euros) Adhesive Solutions Advanced Materials Coating Solutions Inter- mediates Corporate Total Sales 1,033 1,322 1,139 961 14 4,469 EBITDA* 133 293 170 230 (49) 777 Recurring depreciation and amortization of tangible and intangible assets* (30) (109) (54) (56) (3) (252) Recurring operating income (REBIT)* 103 184 116 174 (52) 525 Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (17) (2) (19) Other income and expenses (5) (11) (1) (3) (3) (23) Operating income 81 173 113 171 (55) 483 Equity in income of affiliates (3) 2 (1) Intangible assets and property, plant, and equipment additions 21 134 46 27 5 233 Of which: recurring capital expenditure* 21 88 46 27 5 187 See C1 “Alternative performance indicators” (1) The 2019 figures have been restated in accordance with the new reporting structure announced by the Group on 2 April 2020. 28 Condensed consolidated interim financial statements at 30 June 2020 3. Information by geographical area Group sales are presented on the basis of the geographical location of customers. 1st half 2020 (In millions of euros) Sales France 311 Rest of Europe 1,161 NAFTA* 1,362 Asia 985 Rest of the world 171 Total 3,990 1st half 2019 (In millions of euros) Sales France 366 Rest of Europe 1,322 NAFTA* 1,405 Asia 1,196 Rest of the world 180 Total 4,469 NAFTA: USA, Canada, Mexico 4. Other income and expenses 1st half 2020 1st half 2019 (In millions of euros) Expenses Income Net Expenses Income Net Restructuring and environment (8) (8) (10) (10) Goodwill impairment (70) (70) Asset impairment (excluding goodwill) (47) (47) (7) (7) Litigation and claims (13) (13) (5) 4 (1) Gains (losses) on sales and purchases of assets (4) 235 231 (4) (4) Other Total other income and expenses (142) 235 93 (37) (63) 36 40 (1) (23) In the first half of 2020, restructuring and environment expenses mainly include restructuring costs at Bostik, and expenses related to the strategic restructuring of the Coating Solutions segment. In the context of COVID-19, impairment tests were conducted, leading to recognition of goodwill impairment of €70 million ( see note C10 “Intangible assets”). Impairment was also booked on a small number of tangible assets (see note C11 “Property, plant and equipment”) and other intangible assets (see note C10 “Intangible assets”). Expenses related to litigation and claims concern the consequences of Hurricane Harvey in the United States in 2017, and legal expenses on other ongoing proceedings in the United States. Gains (losses) on sales and purchases of assets include the pre-tax gain of €235 million (net of expenses) on the sale of the Functional Polyolefins business. In the first half of 2019, restructuring and environment expenses mainly included restructuring costs in adhesives. Asset impairments concerned industrial assets in the United States. “Other” items essentially comprised asset impairments recognized after discontinuation of a project that was fully financed by a partner; consequently, this impairment was offset by an exceptional gain of the same amount. 5. Financial result Financial result includes the cost of debt adjusted for capitalized financial expenses, and as regards provisions for pensions and employee benefits, the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits. It also includes the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate, and the foreign exchange gain/loss on unhedged financing. 29 Condensed consolidated interim financial statements at 30 June 2020 (In millions of euros) 1st half 2020 1st half 2019 Cost of debt Financial income/expenses on provisions for pensions and employee benefits Spot/forward exchange rate difference and foreign exchange gain/loss on unhedged financing Capitalized interest Interest expenses on leases Other (28) (3) (12) 0 (2) 0 (30) (10) (20) 2 (2) 0 Financial result (45) (60) 6. Income taxes The income tax expense is broken down as follows: (In millions of euros) Current income taxes 1st half 2020 (73) 1st half 2019 (92) Deferred income taxes (51) (3) Total income taxes (124) (95) The income tax expense amounts to €124 million for the first half of 2020, including €7 million for th e CVAE (compared with €95 million for the first half of 2019, including €8 million for th e CVAE). The change in deferred taxes essentially corresponds to reversal of €55 million of deferred tax assets following use of tax losses during the period. 7. Earnings per share 1st half 2020 1st half 2019 Weighted average number of ordinary shares 76,457,621 76,214,216 Dilutive effect of stock options 4,392 Dilutive effect of free share grants 209,774 389,491 Weighted average number of potential ordinary shares 76,667,395 76,608,099 The calculation of earnings per share is presented below: (In millions of euros) 1st half 2020 1st half 2019 Net income – Group share 197 323 Interest on subordinated perpetual notes, net of tax (37) Net income used in calculating earnings per share 197 286 1st half 2020 1st half 2019 Earnings per share (in euros) 2.58 3.75 Diluted earnings per share (in euros) 2.57 3.73 8. Business combination On 3 January 2020 Arkema finalized the acquisition of LIP Bygningsartikler AS (LIP), the Danish leader in tile adhesives, waterproofing systems and floor preparation solutions, with annual sales of approximately €30 million. The Group used the acquisition method for the accounting treatment of this operation. The amount recorded in the financial statements at 30 June 2020 for the identifiable assets acquired and liabilities assumed at the acquisition date is € 86 million. 30 Condensed consolidated interim financial statements at 30 June 2020 Intangible assets stated at fair value mainly consist of the LIP® trademark, technologies and customer relations, and a non-compete clause. The latter three assets are amortized over periods of 23 years, 16 years and 3 years respectively and amount to €39 million. The goodwill resulting from allocation of the purchase price amounts to €31 million and mainly corresp onds to the value of future technologies and expected commercial development. This goodwill is provisional and may be adjusted for deferred tax effects. Goodwill is not amortizable for tax purposes. 9. Assets held for sale In the Intermediates business segment, on 1 June 2020 Arkema completed the divestment of its Functional Polyolefins business, which was part of the PMMA activity and had annual sales of approximately €250 million. The operation was based on an enterprise value of €335 million and is fully coherent with the strateg y of refocusing the Group’s activities on Specialty Materials. In accordance with IFRS 5, “Non-current assets held for sale and discontinued operations”, assets held for sale and the associated liabilities were presented in two specific lines of the balance sheet at 31 December 2019, and were not offset. Non-current assets and groups of assets held for sale are stated at the lower of book value and fair value net of costs of disposal. At 31 December 2019, the following balance sheet items were classified as assets held for sale: (In millions of euros) Intangible assets Deferred tax assets Other non-current assets Total non-current assets Inventories Other current assets Total current assets ASSETS HELD FOR SALE Deferred tax liabilities Provisions and other non-current liabilities Total non-current liabilities Accounts payable Other current liabilities Total current liabilities LIABILITIES ASSOCIATED WITH ASSETS HELD FOR SALE 31 2019 31 1 3 35 42 1 43 78 2 5 7 (3) 2 (1) 6 Condensed consolidated interim financial statements at 30 June 2020 The assets sold during the first half of 2020 are the following: (In millions of euros) Intangible assets Deferred tax assets Other non-current assets Total non-current assets Inventories Other current assets Total current assets TOTAL ASSETS SOLD Deferred tax liabilities Provisions and other non-current liabilities Total non-current liabilities Accounts payable Other current liabilities Total current liabilities TOTAL LIABILITIES TRANSFERRED The gain on sale, net of selling expenses, recognized in the income statement amounts to €235 million before tax and is included in “Other income and expenses”. The price received is reported as “Proceeds from sale of businesses, net of cash transferred” in the cash flow statement. 10. Intangible assets The recoverable amount of property, plant and equipment and intangible assets is tested as soon as any indication of impairment is identified. A review to identify if any such indication exists is performed at each year-end, based on a 5-year plan validated by the Executive Committee. This impairment test is performed at least once a year and includes goodwill and trademarks with indefinite useful lives. As indications of impairment were observed in the context of COVID-19, in accordance with IAS 36 the Group conducted sensitivity analyses for the CGUs already subjected to impairment tests at 31 December 2019, and carried out impairment tests for the new CGUs resulting from the new reporting structure. An asset’s recoverable amount corresponds to the greater of its value in use and its fair value net of costs of disposal. Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group management’s expectation of future economic and operating conditions over the next 5 years or, when the asset is to be sold, by comparison with its market value. In 2019, the terminal value was determined on the basis of a perpetuity annual growth rate of 1.5% (the same rate as used in 2018) and mid-cycle cash flows. The after-tax rate used to discount future cash flows and the terminal value is the Group’s weighted average cost of capital, estimated at 7.5% in 2020 (the same rate as used in 2019). Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment losses on goodwill are irreversible (in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be written back). In the extraordinary context of the COVID-19 pandemic, as indications of impairment were identified, sensitivity analyses were carried out well beyond the 10 points in EBITDAs tested at the 2019 year-end. These analyses were carried out for every CGU existing at 31 December 2019, based on the percentage change in each CGU’s EBITDA between the first half of 2019 and the first half of 2020, projected over the 5 years of the plan, including the standard final year. Note that the change in total Group EBITDA between 2019 and the first half of 2020 was -25%. This sensitivity analysis, which is not a management assumption, did not lead to recognition of impairment. In addition to 32 41 0 3 44 40 0 40 84 0 4 4 (3) 1 (2) 2 Condensed consolidated interim financial statements at 30 June 2020 sensitivity to changes in EBITDA, the standard sensitivities to a change of plus or minus 1 point in the discount rate and plus or minus 0.5 point in the perpetuity growth rate confirmed the net book values of the various CGUs. Based on updated plans, the Group also tested the new CGU Asia Acrylics, using a specific discount rate of 9% for the Asia zone at 30 June 2020. This rate would have been 8.5% in 2019. The result of this test led to recognition of goodwill impairment of €20 million. The same test applyi ng the 2019 discount rate would not have led to any impairment. A change of -10% in EBITDA or +0.5% in the discount rate would lead to a complete write-off of all the residual goodwill allocated to this CGU, i.e. €44 million. 10.1 Goodwill 30 June 2020 31 December 2019 (In millions of euros) Goodwill Gross book value 2,489 Accumulated amortization and impairment (614) Net book value 1,875 Net book value 1,917 The breakdown by segment is as follows: Goodwill by segment 30/06/2020 Net Book Value 31/12/2019 Net Book Value Adhesive Solutions 965 949 Advanced Materials 489 488 Coating Solutions 364 366 Intermediates 57 106 Corporate 0 8 TOTAL 1,875 1,917 Changes in the net book value of goodwill are as follows: (In millions of euros) 2020 At 1 January 1,917 Changes in scope 32 Impairment (70) Translation adjustments (4) At 30 June 1,875 Goodwill impairment mainly concerns Fluorogases in China and the Asia Acrylics CGU (€50 million), Adhe sives (€12 million), and activities positioned on the aeronautics market (€8 million). 33 Condensed consolidated interim financial statements at 30 June 2020 10.2 Other intangible assets 30 June 2020 31 December 2019 (In millions of euros) Patents and technologies Gross book value 504 Accumulated amortization and impairment (224) Net book value 280 Net book value 281 Trademarks 595 (3) 592 579 Software and IT licences 362 (277) 85 94 Capitalized REACH costs 68 (36) 32 34 Other capitalized research expenses 20 (7) 13 12 Capitalized contracts 356 (295) 61 71 Asset rights 50 (18) 32 34 Customer relations 263 (41) 222 229 Other intangible assets 91 (33) 58 54 Intangible assets in progress Total 147 2,456 (32) (966) 115 1,490 87 1,475 Changes in the net book value of other intangible assets are as follows: (In millions of euros) 2020 At 1 January 1,475 Acquisitions 55 Amortization and impairment Disposals (76) 0 Changes in scope 39 Translation adjustments (3) Reclassifications 0 At 30 June 1,490 Impairment of intangible assets mainly relates to capitalized R&D (€9 million) for certain activities where growth is insufficient to confirm the value of the assets. 11. Property, plant and equipment 11.1 Property, plant and equipment 30 June 2020 31 December 2019 (In millions of euros) Land and buildings Gross book value 2,087 Accumulated depreciation and impairment (1,359) Net book value 728 Net book value 730 Complex industrial facilities 3,935 (3,183) 752 801 Other property, plant and equipment 3,354 (2,422) 932 901 Construction in progress Total property, plant and equipment excluding rights of use Rights of use (C12) 382 9,758 235 (12) (6,976) (73) 370 2,782 162 442 2,874 152 Total property, plant and equipment 9,993 (7,049) 2,944 3,026 34 Condensed consolidated interim financial statements at 30 June 2020 11.2 Changes in property, plant and equipment excluding rights of use Changes in the net book value of property, plant and equipment excluding rights of use are as follows: (In millions of euros) 2020 At 1 January 2,874 Acquisitions 160 Depreciation and impairment (248) Disposals (10) Changes in scope 23 Translation adjustments (17) Reclassifications 0 At 30 June 2,782 Impairment of property, plant and equipment mainly concerns activities linked to the aeronautics market (€18 million) and Adhesives (€7 million). 12. IFRS 16 leases: rights of use and IFRS 16 debt From 1 January 2019, the Group’s lease obligations are accounted for in accordance with IFRS 16 “Leases” and classified in property, plant and equipment. At 30 June 2020, the net book value of the rights of use associated with leases is €162 million. 30 June 2020 31 December 2019 (In millions of euros) Gross book value Accumulated depreciation and impairment Net book value Net book value Rights of use: real estate assets (head offices, offices) Rights of use: industrial assets (factories, land, warehouses) Rights of use: logistics assets (trucks, containers, trolleys) Rights of use: other assets (cars, etc) 64 39 110 22 (19) (5) (40) (9) 45 34 70 13 49 21 68 14 Total rights of use 235 (73) 162 152 Changes in the net book value of rights of use are as follows: (In millions of euros) 2020 At 1 January 152 Acquisitions and contract revisions 39 Amortization (28) Disposals and contract revisions 0 Changes in scope Translation adjustments (1) At 30 June 162 35 Condensed consolidated interim financial statements at 30 June 2020 The IFRS 16 debt amounts to €164 million at 30 June 2020 (see note C17 “Debt”). The total non-discounted value of the Group’s future lease payments amounts to €186 million at 30 June 2 020, maturing as follows: (In millions of euros) 30 June 2020 Within one year 1 - 5 years After 5 years 48 92 46 TOTAL 186 At 30 June 2020, the cash outflows associated with leases amount to €27 million. The financial expense s related to the IFRS 16 debt amount to €2 million. The application of exemptions for short-term leases and leases of low-value assets concerns amounts that are not material at Group level. 13. Shareholders’ equity At 30 June 2020, Arkema’s share capital amounted to €767 million, divided into 76,736,476 shares with nominal value of €10. Number of shares at 1 January 2019 76,581,492 Issuance of shares following the exercise of subscription options 42,728 Number of shares at 30 June 2019 76,624,220 Issuance of shares following the exercise of subscription options Number of shares at 31 December 2019 76,624,220 Number of shares at 1 January 2020 76,624,220 Issuance of shares following the capital increase reserved for employees 112,256 Issuance of shares following the exercise of subscription options Number of shares at 30 June 2020 76,736,476 13.1 Changes in share capital On 21 April 2020, Arkema carried out a capital increase reserved for employees totalling €7 million ne t of expenses, resulting from subscription of 112,256 shares (see note C18.3 “Capital increase reserved for employees”). 13.2 Hybrid bonds The amount of the perpetual hybrid bonds recorded in shareholders’ equity is €993 million at 30 June 2 020. On 21 January 2020 Arkema issued a perpetual hybrid bond with a nominal value of €300 million, or €299 million net of issue premiums and fees. These bonds carry a first-call redemption option that Arkema may exercise at any time between 21 October 2025 and 21 January 2026, and have a coupon of 1.5% until the second of these dates, subject to early redemption. Following this issue, the total nominal value of Arkema’s perpetual hybrid bonds is €1,000 million. Th e breakdown is as follows at 30 June 2020: Issue date 29 October 2014 17 June 2019 21 January 2020 Nominal value (in millions of €) 300 400 300 Currency EUR EUR EUR Redemption option 6 years 5.25 years 6 years Annual coupon rate 4.75% 2.75% 1.50% Arkema has an option to defer payment of coupons for the above bonds. In accordance with IAS 32, when there is an unconditional right to avoid delivering cash or another financial asset in the form of repayment of principal or interest, an instrument is recognized in shareholders’ equity. In application of this principle, the hybrid bonds are recorded in shareholders’ equity, and the coupons paid are recorded as dividends in the Group’s consolidated financial statements. 36 Condensed consolidated interim financial statements at 30 June 2020 13.3 Treasury shares The Company bought back 280,000 treasury shares during the first half of 2020. The Arkema Group definitively granted 33,124 free shares to its employees in May 2020, mainly in application of plans 2016-1,2. Number of treasury shares at 1 January 2019 318,998 Purchases of treasury shares 408,621 Grants of treasury shares (596,591) Number of treasury shares at 31 December 2019 131,028 Number of treasury shares at 1 January 2020 131,028 Purchases of treasury shares 280,000 Grants of treasury shares (33,124) Number of treasury shares at 30 June 2020 377,904 13.4 Dividends The combined shareholders’ general meeting of 19 May 2020 approved the distribution of a €2.20 dividen d per share in respect of the 2019 financial year, or a total amount of €168 million. The dividend was paid out on 27 May 2020. 13.5 Translation adjustments The change in translation adjustments recognized in other recyclable comprehensive income mainly comprises the impacts of movements in the US-EUR exchange rate. 14. Provisions for pensions and other employee benefits (In millions of euros) Pension obligations 30 June 2020 420 31 December 2019 382 Healthcare and similar coverage 65 64 Post-employment benefits 485 446 Long service awards 74 74 Other 3 5 Other long-term benefits 77 79 Provisions for pensions and other employee benefits 562 525 In addition, certain provisions are covered by non-current assets: (In millions of euros) Provision recognized in liabilities 30 June 2020 562 31 December 2019 525 Amount recognized in assets (1) Net provisions for pensions and other employee benefits 562 524 The discount rates used by the Arkema Group are as follows: Pension obligations, healthcare and similar coverage At 30 June 2020 Europe (excl. UK) 1.45%-1.65% UK 1.45% USA 2.50% At 31 December 2019 1.25%-1.30% 2.00% 3.15% The present value of benefit obligations at the end of 2019 has been adjusted at 30 June 2020 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2019 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2020. The effects of the change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. 37 Condensed consolidated interim financial statements at 30 June 2020 The change in net provisions for post-employment benefits over the first half of 2020 is as follows: (In millions of euros) Net liability (asset) at 1 January 2020 Pension obligations 381 Healthcare and similar coverage 64 Total post- employment benefits 445 Provision recognized in liabilities 382 64 446 Amount recognized in assets (Income)/Expense for the period (1) 11 0 (1) 11 Net interest expense 4 1 5 Net contributions and benefits paid by the employer (12) (1) (13) Liquidations Other * (1) (1) Actuarial gains and losses recognized in shareholders’ equity 37 1 38 Net liability (asset) at 30 June 2020 420 65 485 Provision recognized in liabilities 420 65 485 Amount recognized in assets Other items essentially consist of translation adjustments 15. Other provisions and other non-current liabilities 15.1. Other non-current liabilities Other non-current liabilities amount to €15 million at 30 June 2020 as against €17 million at 31 Decem ber 2019. 15.2. Other provisions (In millions of euros) At 1 January 2020 Environmental contingencies 197 Restructuring 34 Other 143 Total 374 Increases in provisions 2 4 24 30 Reversals from provisions on use (8) (5) (15) (28) Reversals of unused provisions (2) (2) Changes in scope 0 0 Translation adjustments 0 (0) (0) Other 0 0 (0) (0) At 30 June 2020 191 33 150 374 Furthermore, certain provisions are covered by non-current assets (receivables and deposits): (In millions of euros) Environmental contingencies Restructuring Other Total Total provisions at 30 June 2020 191 33 150 374 Portion of provisions covered by receivables or deposits 54 20 74 Deferred tax assets related to amounts covered by the Total Indemnity 16 16 Provisions at 30 June 2020 net of non-current assets 121 33 130 284 For information: Provisions at 1 January 2020 net of non-current assets 124 34 123 281 38 Condensed consolidated interim financial statements at 30 June 2020 15.3. Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €83 million (€85 million at 31 Dece mber 2019), in the United States for €90 million (€94 million at 31 December 2019), of which €70 million in resp ect of former industrial sites covered 100% by the Total group indemnity (receivable recognized in “Other non-current assets” for an amount of €54 million and €16 million recognized in deferred tax assets) (see note C19.2 “Off-balance sheet commitments/Commitments received”). 15.4. Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €19 million (€1 9 million at 31 December 2019), in Europe outside France for €7 million (€7 million at 31 December 2019) and in the United States for €7 million (€8 million at 31 December 2019). 15.5. Other provisions Other provisions amount to €150 million and mainly comprise: provisions for labour litigation and risks for €62 million (€62 million at 31 December 2019), provisions for commercial litigation and warranties for €29 million (€33 million at 31 December 2019) , provisions for tax litigation for €27 million (€28 million at 31 December 2019), provisions for other risks for €32 million (€20 mi llion at 31 December 2019). 16. Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note 22 to the consolidated financial statements at 31 December 2019. There was no development in liabilities and contingent liabilities during the first half of 2020 with an actual or potential significant effect on the Group’s consolidated financial statements, except regarding the prejudice of anxiety. Two decisions by the French Supreme Court (Cour de Cassation, on 5 April 2019 and 11 September 2019) extended the right to compensation for the prejudice of anxiety to employees who have not worked in an establishment classified as exposing workers to asbestos, but can prove they have been exposed to a harmful or toxic substance entailing a high risk of developing a serious medical condition. Two compensation claims for the prejudice of anxiety, filed in the first half of 2020, have so far been brought against Arkema France before the employee claims courts. The possibility remains that current or former employees of the Arkema Group who have been exposed during their career to harmful or toxic substances that could cause serious medical conditions may bring other cases before the employee claims courts on the grounds of these latest court rulings. 39 Condensed consolidated interim financial statements at 30 June 2020 17. Debt 17.1 Analysis of net debt by category Group net debt amounts to €1,134 million at 30 June 2020, taking account of cash and cash equivalents of €1,400 million. (In millions of euros) Bonds 30 June 2020 2,238 31 December 2019 2,237 Bank loans 5 11 Other non-current debt 18 19 Non-current debt excluding IFRS 16 debt Bonds Syndicated credit facility Negotiable European Commercial Paper Other bank loans 2,261 - - - 74 2,267 481 79 Other current debt 35 57 Current debt excluding IFRS 16 debt 109 617 Debt excluding IFRS 16 debt 2,370 2,884 Non-current IFRS 16 debt 119 110 Current IFRS 16 debt 45 44 Debt 2,534 3,038 Cash and cash equivalents 1,400 1,407 Net debt 1,134 1,631 Bonds At 30 June 2020, the fair values of the bonds issued by the Group are as follows: • €150 million senior bond issued as Euro Medium Ter m Notes (EMTN) maturing in December 2023: €163 mill ion, €700 million senior bond issued as Euro Medium Ter m Notes (EMTN) maturing in January 2025: €733 milli on, €900 million senior bond issued as Euro Medium Ter m Notes (EMTN) maturing in April 2027: €943 million . €500 million senior bond issued as Euro Medium Ter m Notes (EMTN) maturing in December 2029: €487 mill ion. IFRS 16 debt The maturities of the Group’s future lease payments, at non-discounted value, are presented in note C12 “IFRS 16 leases: rights of use and IFRS 16 debt”. 17.2 Analysis of debt excluding IFRS 16 debt by currency The Arkema Group’s debt excluding IFRS 16 debt is mainly denominated in euros. (In millions of euros) Euros 30 June 2020 2,265 31 December 2019 2,761 Chinese Yuan 76 89 US Dollars 15 10 Other Total debt excluding IFRS 16 debt 14 2,370 24 2,884 Part of the debt in euros is converted through swaps to the accounting currency of internally-financed subsidiaries, in line with the Group’s policy. At 30 June 2020 the swapped portion, mainly in US dollars, represented approximately 38% of gross debt excluding IFRS 16 debt. 17.3 Analysis of debt excluding IFRS 16 debt by maturity The breakdown of debt excluding IFRS 16 debt, including interest costs, by maturity is as follows: 40 Condensed consolidated interim financial statements at 30 June 2020 (In millions of euros) Less than 1 year 30 June 2020 132 31 December 2019 639 Between 1 and 2 years 39 44 Between 2 and 3 years 33 33 Between 3 and 4 years 184 183 Between 4 and 5 years 728 29 More than 5 years 1,448 2,175 Total debt and interest excluding IFRS 16 debt 2,564 3,103 18. Share-based payments 18.1 Stock options The Board of Directors has decided not to introduce any further stock option plans, and there are no remaining stock option plans outstanding. 18.2 Free share grants Movements in the free share grant plans existing at 30 June 2020 are as follows: Total number of free shares granted 43,278 122,080(1) 230,695(2) 129,405(3) 41,137 231,820(4) 127,665(5) 237,945(6) 131,035(7) 9,129 Vesting period Conservation period Plan 2016-1, 2 2016-5 2017-1 2017-2 2018-1, 2 2018-3 2018-4 2019-1 2019-2 2020-1, 2 Grant date 3-4 years 4 years 3 years 4 years 3-4 years 3 years 4 years 3 years 4 years 3-4 years (1) May be raised to 133,366 in the event of outperformance (2) May be raised to 252,521 in the event of outperformance (3) May be raised to 140,890 in the event of outperformance (4) May be raised to 254,011 in the event of outperformance (5) May be raised to 139,261 in the event of outperformance (6) May be raised to 282,948 in the event of outperformance (7) May be raised to 153,583 in the event of outperformance 10 May 2016 9 Nov 2016 8 Nov 2017 8 Nov 2017 2 May 2018 5 Nov 2018 5 Nov 2018 29 Oct 2019 29 Oct 2019 5 May 2020 0-3 years - 2 years - 0-3 years 2 years - 2 years - 0-3 years Number of shares subject to performance conditions 112,860 218,255 114,845 - 217,570 111,235 225,015 112,740 0 Fair value (euros per share) 22.91-39.70 50.01 63.59 67.88 59.31-61.13 62.64 64.15 57.73 59.76 10.09-20.94 Number of shares definitively granted in 1st half 2020 33,124 - - - - - - - - - Number of shares cancelled in 1st half 2020 4,907 1350 55 1500 50 70 1,650 60 1,140 - Total number of shares still to be granted at 30 June 2020 111,825 229,590 120,720 41,037 230,770 122,335 237,885 129,715 9,129 The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2020 is €12 million ( €12 million at 30 June 2019). 18.3. Capital increase reserved for employees In application of its employee shareholding policy, the Arkema Group offered its employees the possibility to subscribe to a reserved capital increase at the subscription price of €68.56. This price corresponds to the average opening price of the Arkema share quoted on the Paris stock exchange in the 20 trading days prior to the Chairman and CEO’s decision of 3 March 2020 setting the terms of the capital increase, minus a 20% discount. The shares subscribed through this operation cannot be sold for 5 years, except in the United States where the minimum holding period is 3 years. The employees subscribed 112,256 shares for the total value of €7 million net of expenses. The capital increase was completed and recognized on 21 April 2020. 41 Condensed consolidated interim financial statements at 30 June 2020 Arkema shares were also given to Group employees located outside France, via a free share grant plan: one free share was awarded for every four shares subscribed, up to a maximum of 25 free shares per person. As a result, on 5 May 2020 the Board of Directors formally recorded the attribution of 7,629 free shares to employees located outside France. These shares will only be definitively granted after a vesting period of 3 or 4 years, depending on the country. Finally, on 5 May 2020, the Board of Directors decided to put in place a plan to award 1,500 free shares for the benefit of Group employees who had not been able to participate in the capital increase reserved for employees undertaken on 21 April 2020. The only condition for awarding these shares is a presence condition, and they will be definitively granted after a vesting period of 4 years from the date of the Board’s decision to award them. Valuation method In accordance with the method recommended by France’s national accounting standards authority (Autorité des normes comptables), the calculation used to value the cost of being unable to sell the shares for a certain period is based on the cost of a two-step strategy assuming that these shares will ultimately be sold, and that the same number of shares will be purchased and settled immediately, financed by a loan. The rate used for the loan is the mean rate that a bank or a credit institution would grant to a private individual presenting an average risk profile in the context of a 5-year consumer loan. The fair values of the shares subscribed in France and outside France have been calculated separately in order to reflect the grants of free shares to Group employees located outside France. The main market parameters used in the valuation of the cost of being unable to sell the shares are as follows: Country of subscription France United States Italy and Spain Other countries Date of the Chairman and CEO’s decision setting the terms of the operation 3 March 2020 3 March 2020 3 March 2020 3 March 2020 Share price at the date of the decision(€) 82.74 82.74 82.74 82.74 Risk-free interest rate (at 3 March 2020)* 0.62% 0.71% 0.02% 0.81% Borrowing rate* 7.06% 8.24% 7.06% 9.33% Cost of not being able to sell the shares (as a percentage of the share price) 28.65% 20.02% 26.61% 35.19% 5-year risk-free rate, except for the United States (3 years) The difference between the share price at the date of the Chairman and CEO’s decision setting the terms of the operation and the subscription price is €14.18 per share, representin g a total benefit granted to employees of €2 millio n. An IFRS 2 expense of €0.1 million will also be reco gnized in respect of the free shares granted to Group employees located outside France. This expense will be spread over the vesting period of the shares concerned (see note C18.2 “Free share grants”). 19. Off-balance sheet commitments 19.1 Commitments given 19.1.1 Off-balance sheet commitments related to the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2020 127 31 December 2019 75 Comfort letters Contractual guarantees 17 11 Customs and excise guarantees 33 21 Total 177 107 42 Condensed consolidated interim financial statements at 30 June 2020 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 19.1.2 Off-balance sheet commitments related to the Group’s operating activities In the normal course of business, the Arkema Group has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over initial periods generally comprised between one and ten years is a normal practice for companies in the Group’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, Arkema’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige the Group to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase contracts in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The value of these agreements thus corresponds to the minimum amount payable to suppliers as indemnification in the event of termination of the contracts or failure to take delivery of the minimum contractual quantities, less any quantities that can be resold on the market when the Group is able to do so. Some lease commitments do not fall within the scope of IFRS 16. Many of them are irrevocable purchase commitments described below, and service contracts or contracts making available assets that are not controlled by Arkema at 30 June 2020. Only the irrevocable portion of outstanding future purchases has been valued, and the corresponding amounts are included in the table below at 30 June 2020. The total amount of the Group’s financial commitments is €720 million at 30 June 2020, maturing as fol lows: (In millions of euros) 2020 30 June 2020 168 31 December 2019 186 2021 111 105 2022 71 62 2023 45 45 2024 until expiry of the contracts 325 256 Total 720 654 19.1.3 Off-balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses When selling businesses, the Arkema Group has sometimes granted the purchaser warranties in respect of unrecorded liabilities. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by the Group amounts to €75 million at 30 June 2020 (€85 million at 31 December 2019). The se amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 43 Condensed consolidated interim financial statements at 30 June 2020 19.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C23 to the consolidated financial statements at 31 December 2019, “Debt”. 19.2 Commitments received Commitments received from Total in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies extended certain indemnities, or assumed certain obligations, for the benefit of the Arkema Group. Some are still in application while others terminated during 2017. The warranties and commitments concerned are described below, and relate to actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which have ceased in the majority of cases. Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), Total S.A. companies have entered into indemnity and service agreements with Arkema or its subsidiaries. Pursuant to these agreements, the obligations and environmental responsibilities associated with these Former Industrial Sites in France and at Rieme in Belgium were transferred to Total S.A. group companies. Agreement relating to certain Former Industrial Sites located in the United States In March 2006, Arkema Amériques SAS completed the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company for most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Site Services and Arkema Amériques SAS, dated 7 March 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use US$270 million to capitalize a new subsidiary, Legacy Site Services LLC, that performs remediation services and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of waste shipments from the sites other than currently operated sites. In exchange for this indemnification, Arkema Amériques SAS agreed to grant to Legacy Site Services LLC control over remediation activities and the defence of claims relating to contamination liabilities at these facilities and site. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group, certain sites where no significant restoration work is currently underway or anticipated, and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non-existent based upon information available at the time when the indemnity was entered into. Arkema Amériques SAS has waived any claims against Legacy Site Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Site Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defence and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure, and criminal liability. The indemnity described above is capped at US$270 million. The amount received by Arkema under this indemnity amounts to US$120 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnify the liabilities of the Group in excess of US$270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. 44 Condensed consolidated interim financial statements at 30 June 2020 20. Subsequent events On 20 July 2020, Arkema announced its proposed acquisition of Fixatti, a company specialized in high-performance thermobonding adhesive powders reporting annual sales of around € 55 million. This acquisition will enable Bostik to strengthen its global offering of hotmelt adhesive solutions for niche industrial applications in the construction, technical coating, battery, automotive, and textile printing markets. The deal is expected to close in the fourth quarter of 2020, subject to approval by the antitrust authorities in the relevant countries. Also, on 29 July 2020, the Group secured refinancing for its €900 million credit facility maturing on 29 October 2021 by setting up a new multi-currency syndicated credit facility whose amount was raised to €1 billion. This new facility has an initial term of three years with a maturity date of 29 July 2023 and two one-year extension options exercisable, subject to the lenders' approval, at the end of the first and the second year. It is intended to finance the Group’s general corporate needs and to serve as a back-up facility for the Negotiable European Commercial Paper program. 45 Condensed consolidated interim financial statements at 30 June 2020 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2020 (a) Companies which changed their name in 2020. (b) Companies merged in 2020. (c) Companies liquidated in 2020. (d) Companies consolidated for the first time in 2020. (e) Companies for which the percentage ownership was changed in 2020, with no change to control. The percentage of control indicated below also corresponds to the Group’s ownership interest. AEC Polymers Afinitica Process Technologies S.L. Afinitica Technologies S.L. Altuglas International Denmark A/S Altuglas International Mexico Inc. Altuglas International SAS American Acryl LP American Acryl NA, LLC Arkema Arkema Arkema Afrique Arkema Amériques S.A.S. Arkema Antwerp Arkema Argentina S.A.U. Arkema Asie S.A.S. Arkema B.V. Arkema Canada Inc. Arkema (Changshu) Chemicals Co., Ltd. Arkema (Changshu) Fluorochemical Co., Ltd. Arkema Chemicals India Private Ltd. Arkema (Changshu) Polyamides Co., Ltd. Arkema (China) Investment Co., Ltd. Arkema Coatex Brasil Indústria e Comércio Ltda. Arkema Coating Resins Malaysia Sdn. Bhd. Arkema Coating Resins Ltd. France Spain Spain Denmark United States France United States United States South Korea France France France Belgium Argentina France Netherlands Canada China China India China China Brazil Malaysia United Kingdom (b) (a) 100.00 100.00 100.00 100.00 100.00 100.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Arkema Company Ltd. Arkema Daikin Advanced Fluorochemicals (Changshu) Co., Ltd. Arkema Delaware Inc. Arkema Europe Arkema France Arkema GmbH Arkema (Hong Kong) Co., Ltd. Arkema Hydrogen Peroxide Co., Ltd. Shanghai Arkema Inc. Arkema Insurance Designated Activity Company Arkema K.K. Arkema Kimya Sanayi ve Ticaret AS Arkema Ltd. Arkema Mexico S.A. de C.V. Arkema Mexico Servicios S.A. de C.V. Arkema Peroxides India Private Limited Arkema Pte. Ltd. Arkema Pty Ltd. Arkema Quimica Ltda Arkema Quimica SAU Arkema Chemicals Saudi Arabia Arkema (Shanghai) Distribution Co., Ltd. Arkema Sp z.o.o Arkema S.r.l Arkema (Suzhou) Polyamides Co., Ltd. Hong Kong China United States France France Germany Hong Kong China United States Ireland Japan Turkey United Kingdom Mexico Mexico India Singapore Australia Brazil Spain Saudi Arabia China Poland Italy China 100.00 60.00 100.00 100.00 100.00 100.00 100.00 66.67 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 100.00 100.00 46 FC FC FC FC FC FC JO JO FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC JO FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC Arkema Taixing Chemicals Co., Ltd. Arkema Thiochemicals Sdn Bhd Arkema Yoshitomi Ltd. AMP Trucking, Inc. AMZ Holding Corp. AMZ Intermediate Holding Corp. ARR MAZ GLOBAL HOLDINGS, S.L. ArrMaz Africa I, LLC ArrMaz Africa II, LLC ARR-MAZ Brazil LLC ArrMaz Chemicals (Yunnan) Co., Ltd. ArrMaz Chemicals SAS ArrMaz China, LLC ARR-Maz Custom Chemicals, Inc. ARR-MAZ DO BRASIL LTDA. ArrMaz Gulf Chemical Company Ltd. ARR-MAZ Management Company ARRMAZ MOROCCO SARLAU ArrMaz Morocco, LLC ArrMaz Products, Inc. ArrMaz Speciality Chemicals, Inc. ARRMAZ TECHNOLOGY AFRICA, SARL A/S LIP Bygningsartikler. Nørre Aaby BarrflexTU LLC Blueridge Films Inc. Bostik AB Bostik Aerosols GmbH Bostik Argentina S. A. Bostik A/S Bostik AS Bostik Australia Pty Ltd. Bostik Belux S.A. – N.V. Bostik Benelux B.V. Bostik B .V. Bostik Canada Ltd. Bostik Egypt For Production of Adhesives S.A.E Bostik Findley China Co., Ltd Bostik Findley (Malaysia) Sdn. Bhd. Bostik GmbH Bostik Hellas S.A. Bostik Holding Hong Kong Ltd. Bostik Holding SA Bostik Inc. Bostik India Private Ltd. Bostik Industries Ltd. Bostik Kimya Sanayi Ve Ticaret A.S Bostik Korea Ltd. Bostik Ltd. Bostik Mexicana S.A. de C.V. Bostik Nederland B .V. Bostik New Zealand Ltd. Bostik-Nitta Co., Ltd. Bostik L.L.C. Bostik OY Bostik Philippines Inc. Bostik Technology GmbH Bostik Romania S.r.l Bostik SA Condensed consolidated interim financial statements at 30 June 2020 China Malaysia Japan United States United States United States Spain United States United States United States China France United States United States Brazil Saudi Arabia United States Morocco United States United States United States Morocco Denmark United States United States Sweden Germany Argentina Denmark Norway Australia Belgium Netherlands Netherlands Canada Egypt China Malaysia Germany Greece Hong Kong France United States India Ireland Turkey South Korea United Kingdom Mexico Netherlands New Zealand Japan Russia Finland Philippines Germany Romania France (b) (b) (b) (a) (d) (b) 100.00 86.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.99 100.00 100.00 75.00 75.00 100.00 100.00 100.00 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 80.00 100.00 100.00 100.00 100.00 100.00 100.00 47 FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC JV FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC Condensed consolidated interim financial statements at 30 June 2020 Bostik S.A. Bostik (Shanghai) Management Co., Ltd. Bostik Sp z.o.o. Bostik (Thailand) Co., Ltd Bostik UAB Bostik Vietnam Company Ltd. Casda Biomatérials Co., Ltd Changshu Coatex Additives Co., Ltd. Changshu Haike Chemical Co., Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Inc. Coatex CEE s.r.o Coatex Inc. Coatex Netherlands B.V. Coatex CUSTOM CHEMICALS CORPORATION Daikin Arkema Refrigerants Asia Ltd. Daikin Arkema Refrigerants Trading (Shanghai) Co., Ltd. Den Braven France Den Braven Produtos Quimicos, Unipessoal, Lda. Den Braven Sealants GmbH Den Braven SA (Proprietary) Ltd. Delaware Chemicals Corporation Febex SA Ihsedu Agrochem Private Ltd. Jiangsu Bostik Adhesive Co., Ltd Lambson Europe Lambson Limited Lip Sverige AB Lip Norge AS MEM BAUCHEMIE GmbH Michelet Finance, Inc. MLPC International Odor-Tech LLC Ozark Mahoning Company Prochimir Prochimmo Prochimmo2 Prochitech Prochimir Inc. Prochimir Real Estate Holdings Inc. PT.Bostik Indonesia Sartomer (Guangzhou) Chemicals Co., Ltd. Sartomer Distribution (Shanghai) Co., Ltd. Seki Arkema Co. Ltd. Siroflex LLC Siroflex Ltd. Société Marocaine des Colles Sovereign Chemicals Ltd. Taixing Sunke Chemicals Co., Ltd. Tamer Endüstriyel Madencilik Anonim Sirketi The LightLock Company Limited Turkish Products, Inc. Usina Fortaleza Industria E commercio de massa fina Ltda Viking Chemical Company Spain China Poland Thailand Lithuania Vietnam China China China Malaysia South Korea Slovakia United States Netherlands France United States Hong Kong China France Portugal Austria South Africa United States Switzerland India China France United Kingdom Sweden Norway Germany United States France United States United States France France France France United States United States Indonesia China China South Korea United States United Kingdom Morocco United Kingdom China Turkey Hong Kong United States Brazil United States (b) (b) (d) (d) (b) (b) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 49.00 14.00 100.00 100.00 100.00 100.00 100.00 100.00 40.00 40.00 100.00 100.00 100.00 100.00 100.00 96.77 24.90 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 97.01 100.00 100.00 50.00 55.00 100.00 100.00 100.00 NB: FC: full consolidation. JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses. JV: joint venture – consolidation by the equity method. SI: significant influence – consolidation by the equity method. 48 FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC JV JV FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC 3 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2020 I declare that, to the best of my knowledge, the condensed consolidated interim financial statements for the six months ended 30 June 2020 have been prepared in accordance with the applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and results of the Company and all of the companies included in the scope of consolidation. I further declare that the management report, presented on pages 3 to 14, presents a fair review of the major events that occurred in the first six months of the year and of their impact on the financial statements, as well as the main related-party transactions, and that the said management report provides a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, 29 July 2020 Thierry Le Hénaff Chairman and Chief Executive Officer 49 50 KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Arkema Statutory Auditors’ Review Report on the Half-yearly Financial Information 2020 For the period from January 1 to June 30, 2020 51 KPMG Audit Département de KPMG S.A. Tour Egho CS 60055 2, avenue Gambetta 92066 Paris-La Défense cedex 775 726 417 R.C.S. Nanterre ERNST & YOUNG Audit Tour First TSA 14444 92037 Paris-La Défense cedex S.A.S. à capital variable 344 366 315 R.C.S. Nanterre Commissaire aux Comptes Membre de la compagnie régionale de Versailles Commissaire aux Comptes Membre de la compagnie régionale de Versailles This is a free translation into English of the statutory auditors’ review report on the half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Arkema Statutory Auditors’ Review Report on the Half-yearly Financial Information 2020 For the period from January 1 to June 30, 2020 To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying condensed half-yearly consolidated financial statements of Arkema, for the period from January 1 to June 30, 2020, the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements were approved by the Board of Directors on July 29, 2020 based on the information available at that date and in the evolving context of the Covid-19 crisis and related difficulties to apprehend its impacts and outlooks. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 52 ERNST & YOUNG Audit Arkema Statutory Auditors’ Review Report on the Half-yearly Financial Information 2020 29 July 2020 Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. II. Specific verification We have also verified the information presented in the half-yearly management report established on the July 29, 2020, on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, July 29, 2020 The Statutory Auditors French original signed by KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Bertrand Desbarrières Eric Dupré Denis Thibon 53

Semestriel, 2020, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

Half-year financial report First half ended 30 June 2018 Arkema 420, rue d'Estienne d'Orves - F-92705 Colombes Cedex - France Tel: +33 1 49 00 80 80 - Fax: +33 1 49 00 83 96 A French société anonyme (joint stock corporation) with share capital of €765,324,560 euros - Registered in Nanterre under no. RCS 445 074 685 arkema.com I- Half-year activity report .................................................................................................................... 3 II- Condensed consolidated interim financial statements at 30 June 2018 ................................... 13 III- Declaration by the person responsible for the half-year financial report ................................. 41 IV- Report from the statutory auditors on half-year financial information ..................................... 42 This document is a free translation in English of Arkema’s half-year financial report for the first half ended 30 June 2018. This translation has been prepared solely for the information and convenience of English-speaking readers. No assurances are given as to the accuracy or completeness of this translation, and Arkema assumes no responsibility with respect to this translation or any misstatement or omission that may be contained therein. In the event of any ambiguity or discrepancy between this translation and the French document, the French document shall prevail. 2 I - HALF-YEAR ACTIVITY REPORT 1. FIRST-HALF 2018 HIGHLIGHTS 1.1. Organic growth projects In order to meet high customer demand for advanced materials in the coming years and to continue to bring innovative sustainable solutions to the market, Arkema announced: a 25 % increase in its global specialty polyamide 12 production capacity in China, which is expected to come on stream in mid-2020. This investment – which represents a few tens of millions of euros – will support the strong demand in growth applications such as cable protection, lightweighting for the automotive industry, high performance sports shoes and consumer electronics; the signature of a strategic alliance with Hexcel to develop thermoplastic composite solutions for the aerospace sector, combining the expertise of Hexcel in carbon fiber and that of Arkema in PEKK powders. As part of this partnership, a joint research and development laboratory will be set up in France; the start-up, in April 2018, of a 20% increase in Kynar® PVDF production capacity in the United States in order to support the growth of Arkema’s customers in the region in applications such as water filtration, chemical process industry and high performance cables (automotive, fiber optics and oil industry); and a more-than 50% increase in global production capacity for specialty polyamides powders in France, which is expected to come on stream in the second half of 2019. This investment of some €20 million will help meet the strong demand for these powders for use in industrial applications such as coatings, composites and 3D printing. In Thiochemicals – one of the Group’s major future growth drivers – Arkema confirmed a detailed investment review with its partner, Novus, of a project to double the production capacity at its Beaumont site in the United States in order to support the strong global growth in the animal feed market that is expected in the coming years and to further strengthen Arkema's world-leading position in high value-added sulfur derivatives. Subject to a final decision on this investment, the new units should come on stream in the summer of 2021. Lastly, Arkema has expanded its new-generation fluorogases offering in order to assist its customers in making the transition to fluorogases with a lower GWP (global warming potential). For industrial and commercial refrigeration applications, Arkema markets Forane® 449A (XP40) in Europe, which offers a straightforward substitution solution compatible with equipment designed to run on the R-404A/507A gases and on lubricants in the refrigeration market. In the polyurethane foam market for insulation applications, Arkema offers Forane® 1233zd in Europe and other parts of the world, an HFO blowing agent that is ozone-friendly and non-flammable and has a very low GWP. 1.2. Acquisitions In line with its strategy of continuing to expand in adhesives, which is one of the major drivers of the Group’s long-term growth, Arkema pursued its bolt-on acquisition policy with notably: the acquisition, on 2 January 2018, of the assets of XL Brands, a leader in floor covering adhesives in the United States. This bolt-on acquisition, based on a US$205 million enterprise value, enables Bostik to offer a full range of solutions for this growing high added-value market. The Group’s aim is to reduce the EV/EBITDA multiple paid from 11 times to 7 times within four to five years after leveraging synergies. This business had a good start to the year in a favorable environment for construction in the United States; and the proposed acquisition by the Bostik-Nitta joint venture of the industrial adhesives business of Nitta- Gelatin Inc., which generates around €30 million in annual sales, as well as a project to build a new adhesives plant in Japan. These operations will enable Bostik to supply its Japanese customers in the buoyant markets for non-woven hygiene products and in the packaging, labeling, transportation and electronics markets. The proposed acquisition is expected to close in the summer of 2018 and the new plant is scheduled to come on stream in early 2020. 3 1.3. Share capital increase reserved for employees In April 2018 Arkema carried out a share capital increase reserved for employees. A total of 610,405 shares were subscribed at a per share price of €81.97, representing an aggregate €50 million. 2. ANALYSIS OF FIRST-HALF 2018 FINANCIAL RESULTS The figures in this section are presented on a consolidated basis and in accordance with Arkema's organization in three divisions: High Performance Materials, Industrial Specialties and Coating Solutions. 2.1. Analysis of Arkema's results (In millions of euros) First-half 2018 First-half 2017 Year-on-year change Sales 4,442 4,350 +2.1% EBITDA 813 753 +8.0% EBITDA margin (%) 18.3% 17.3% Recurring depreciation and amortization (218) (223) Recurring operating income (REBIT) 595 530 +12.3% REBIT margin 13.4% 12.2% Other income and expenses* (4) (7) Depreciation and amortization related to purchase price allocation* (18) (23) Operating income 573 500 +14.6% Equity in income of affiliates 1 0 Financial result (47) (51) 7.8% Income taxes (116) (148) 21.6% Net income 411 301 +36.5% Of which non-controlling interests 4 4 Net income - Group share 407 297 +37.0% Adjusted net income 421 319 +32.0% Depreciation and amortization related to the revaluation of tangible and intangible assets carried out as part of the allocation of the purchase price of businesses are now recognized in “Operating expenses”. For first-half 2017, “Other income and expenses” have been restated to reflect this reclassification. Sales Sales for the first half of 2018 amounted to €4,442 million, up 2.1% on the first six months of 2017. At constant exchange rates and business scope, sales rose 7.0%, driven by a 5.6% positive price effect with increases in all of the divisions that stemmed from the Group's continued policy of raising its selling prices and from market conditions for the intermediate chemicals businesses. Up 1.4% overall, volumes increased sharply year-on-year in High Performance Materials (up 4.4% year on year), led by Asia, innovation and the start-up of new production units, as well as in Coating Solutions (up 4.1% year on year). These positive factors more than offset the impact of lower selling quotas for Fluorogases. The currency effect was a negative 5.4%, mainly due to the euro's rise against the US dollar. The 0.5% positive scope effect reflects the integration of XL Brands and the CMP business, as well as the divestment of the oxo-alcohols business. The breakdown of consolidated sales by division (excluding the corporate (1) division) was stable compared to first-half 2017, with High Performance Materials accounting for 45% of the total, Industrial Specialties 31% and Coating Solutions 24%. By geographic region, Europe represented 39% of total Group sales (versus 38% in first-half 2017), North America 31% (versus 33%), Asia 26% (versus 25%), and the rest of the world 4% (unchanged from first-half 2017). (1) As defined in note C.2 to the consolidated financial statements at 30 June 2018 in section II of this document. 4 EBITDA and recurring operating income At €813 million, EBITDA for first-half 2018 reached an all-time high for a six-month period. It was up 8.0% on the first-half 2017 high performance in spite of the sharp increase in the euro particularly against the US dollar which resulted in a €44 million currency translation loss. This performance was driven by high demand for advanced materials (Technical Polymers and Performance Additives), the integration of the Group’s bolt-on acquisitions in adhesives, the gradual pass-through of higher raw materials costs and a very good performance from the four Business Lines that make up the Industrial Specialties division. EBITDA margin increased to 18.3% from 17.3% in the first half of 2017. Recurring operating income (REBIT) rose in line with the increase in EBITDA, to €595 million from €530 million in the first half of 2017. It includes €218 million in recurring depreciation and amortization, representing an improvement on the €223 million recorded for first-half 2017, primarily thanks to a favorable currency effect. REBIT margin, which corresponds to recurring operating income as a percentage of sales, rose to 13.4% in first-half 2018 from 12.2% in the same period of 2017. Operating income Operating income totaled €573 million, up 14.6% on first-half 2017. This amount includes €4 million in net other expenses, mainly corresponding to restructuring expenses, and €18 million in depreciation and amortization related to the revaluation of assets carried out as part of the Bostik, Den Braven and XL Brands purchase price allocation processes. The €7 million net expense recorded under “Other income and expenses” in first-half 2017 primarily corresponded to the step-up at market price of Den Braven’s inventories. Depreciation and amortization related to the revaluation of assets carried out as part of the purchase price allocation processes amounted to €23 million. Equity in income of affiliates Equity in income of affiliates mainly includes the contribution from CJ Bio Malaysia Sdn. Bhd. in which the Group owns a 14% stake. Financial result Financial result represented a net expense of €47 million. This €4 million improvement on first-half 2017 reflects the refinancing in 2017 of a bond issue at more favorable market conditions. Income taxes Income taxes for first-half 2018 represented a net expense of €116 million versus a net expense of €148 million for the same period of 2017. Excluding exceptional items, the tax rate corresponded to 21% of recurring operating income, down significantly on the 29% rate for first-half 2017, notably due to the positive impact of the US tax reform. Net income – Group share and adjusted net income Net income – Group share rose sharply to €407 million from €297 million in first-half 2017. Excluding the post-tax impact of non-recurring items, adjusted net income came to €421 million, representing €5.53 per share (versus €319 million and €4.22 per share in first-half 2017). 5 2.2. Analysis of results by division HIGH PERFORMANCE MATERIALS: 45% OF TOTAL GROUP SALES (In millions of euros) First-half 2018 First-half 2017 Year-on-year change Sales 2,005 1,966 +2.0% EBITDA 353 340 +3.8% EBITDA margin (%) 17.6% 17.3% Recurring operating income (REBIT) 275 262 +5.0% REBIT margin 13.7% 13.3% Other income and expenses (2) (8) Depreciation and amortization related to the revaluation of assets carried out as part of the allocation of the purchase price of businesses (18) (23) Operating income 255 231 +10.4% Sales generated by the High Performance Materials division came in at €2,005 million, up 2.0% year on year. At constant exchange rates and business scope, sales grew by 5.6%, driven by a 4.4% rise in volumes, led by high demand for advanced materials in the areas of lightweight materials, new energies, 3D printing and consumer goods (sports, electronics, etc.), and the large number of projects carried out during the first quarter of 2018 in specialty molecular sieves. The sustainability R&D pipeline continued to be strengthened during the period, offering good growth opportunities. The price effect was a positive 1.2%, reflecting the Group’s policy of raising its selling prices. The currency effect was a negative 5.2%, primarily reflecting the appreciation of the euro against the US dollar. The 1.6% positive scope effect was attributable to the integration of XL Brands and the CMP business. At €353 million, EBITDA was up 3.8% year on year in spite of the much stronger euro and higher costs for some raw materials. This achievement reflects strong demand for advanced materials, the integration of XL Brands in adhesives, the gradual pass-through of higher raw materials costs and the impact on certain French production sites of France’s national rail strikes which took place in the second quarter of 2018. EBITDA margin rose to 17.6% from 17.3% in first-half 2017, notably reflecting the increasingly beneficial effects of actions taken to raise selling prices and pass on increases in raw materials costs, particularly in Adhesives and Technical Polymers. Recurring operating income rose to €275 million, in line with the increase in EBITDA. This amount includes €78 million in recurring depreciation and amortization, on a par with first-half 2017. REBIT margin was up to 13.7% from 13.3%. Operating income totaled €255 million, including €2 million in net other expenses and €18 million in depreciation and amortization related to the revaluation of assets carried out as part of the Bostik, Den Braven and XL Brands purchase price allocation processes. INDUSTRIAL SPECIALTIES: 31% OF TOTAL GROUP SALES (In millions of euros) First-half 2018 First-half 2017 Year-on-year change Sales 1,370 1,345 +1.9% EBITDA 370 316 +17.1% EBITDA margin (%) 27.0% 23.5% Recurring operating income (REBIT) 283 227 +24.7% REBIT margin 20.7% 16.9% Other income and expenses (1) 2 Depreciation and amortization related to the revaluation of assets carried out as part of the allocation of the purchase price of businesses Operating income 282 229 +23.1% 6 Industrial Specialties sales were up 1.9% year on year to €1,370 million. At constant exchange rates and business scope, sales growth came to 7.3%. The price effect was positive for all four of the division’s product lines, totaling 12.2% and reflecting the impact of the implementation of the F-Gas regulation in Europe in Fluorogases, tight market conditions in the MMA/PMMA chain, the Group’s strong positioning in Thiochemicals and favorable market conditions for hydrogen peroxide in China. The 4.9% negative volume effect was mainly due to lower selling quotas for Fluorogases in Europe and the United States. The currency effect was a negative 5.5% and primarily stemmed from the appreciation of the euro against the US dollar. At €370 million, EBITDA was 17.1% higher than in first-half 2017 and EBITDA margin was up sharply year on year, to 27.0% from 23.5%. The increase is material in all of the division’s four Business Lines. Recurring operating income advanced to €283 million, in line with the increase in EBITDA. This amount includes €87 million in recurring depreciation and amortization, slightly down on the €89 million recorded for the first six months of 2017, primarily due to a favorable currency effect. REBIT margin reached 20.7%, up sharply on the first-half 2017 figure of 16.9%. Operating income was €282 million, including €1 million in net other expenses. COATING SOLUTIONS: 24% OF TOTAL GROUP SALES (In millions of euros) First-half 2018 First-half 2017 Year-on-year change Sales 1,054 1,024 +2.9% EBITDA 134 138 2.9% EBITDA margin (%) 12.7% 13.5% Recurring operating income (REBIT) 83 83 +0.0% REBIT margin 7.9% 8.1% Other income and expenses (2) Depreciation and amortization related to the revaluation of assets carried out as part of the allocation of the purchase price of businesses Operating income 81 83 2.4% Coating Solutions sales came in at €1,054 million, up 2.9% on first-half 2017. At constant exchange rates and business scope, year-on-year sales increased 9.6%, driven by the Group’s continued actions to raise its selling prices across the entire acrylic chain, which had a 5.5% positive price effect. Volumes rose 4.1% compared with first-half 2017, which saw, in particular, a large maintenance turnaround in the United States in acrylic monomers. The currency effect was a negative 5.8%, primarily attributable to the appreciation of the euro versus the US dollar. Lastly, the divestment of the oxo-alcohol business in March 2017 resulted in a 0.7% negative scope effect. At €134 million, EBITDA was slightly lower than in the first six months of 2017 (€138 million), and EBITDA margin stood at 12.7 % (versus 13.5%). After contracting at the start of the year due to the high basis of comparison with first-quarter 2017 – particularly in China where unit margins reached very high levels – the division’s EBITDA was up year on year in the second quarter. The division’s results were overall solid despite higher propylene prices and an unfavorable currency effect. The picture was mixed, however, depending on the region, with a robust performance in the United States but still disappointing in China. Recurring operating income (REBIT) is stable compared with first-half 2017, at €83 million. This amount includes €51 million in recurring depreciation and amortization, down on the €55 million recorded for the first six months of 2017, primarily due to a favorable currency effect. REBIT margin amounted to 7.9% in first-half 2018, close to first-half 2017 (8.1%). Operating income totaled €81 million, including €2 million in net other expenses. 7 2.3. Analysis of consolidated cash flows (In millions of euros) First-half 2018 First-half 2017 Cash flow from operating activities 250 315 Cash flow from investing activities (408) (203) Net cash flow (158) 112 Cash flow from financing activities (169) 720 Change in cash and cash equivalents (327) 832 EBITDA can be reconciled to net cash flow as follows: (In millions of euros) EBITDA First-half 2018 813 First-half 2017 753 Current taxes (117) (145) Cash elements included in the financial result (42) (46) Recurring capital expenditure (1) (157) (135) Change in working capital (2) (373) (237) Change in fixed asset payables (3) (29) (56) Other (44) (5) Recurring cash flow (4) Exceptional investments (1) Other non-recurring items in cash flow from operating activities and investing activities 51 (18) (17) 129 (2) (13) Free cash flow (5) Net cash flow from portfolio management operations Net cash flow 16 (174) (158) 114 (2) 112 (1) “Recurring capital expenditure” and “Exceptional investments” for first-half 2017 have been restated following the announcement by the Group in summer 2017 of several major capital expenditure projects that have been classified as exceptional investments. (2) Excluding cash flows related to non-recurring items and portfolio management operations (corresponding to a nil amount in first-half 2018 and a positive €8 million in first-half 2017). (3) Excluding cash flows related to non-recurring items and portfolio management operations (totaling a positive €3 million in first-half 2018 and a nil amount in first-half 2017). (4) Net cash flow excluding impact of portfolio management and non-recurring items. (5) Net cash flow excluding impact of portfolio management. Free cash flow and net cash flow In the first half of 2018, the Group’s net cash flow (cash flow from operating activities less cash flow from investing activities) represented an outflow of €158 million, versus a €112 million inflow in first-half 2017. Free cash flow was €16 million, corresponding to net cash flow excluding the €174 million cash outflow from portfolio management operations. It primarily reflects (i) the increase in working capital as a result of the usual seasonality of the Group’s business and the mechanical impact of the material rise in selling prices and raw material costs, (ii) higher capital expenditure in line with the Group’s guidance for the full year, and (iii) loans granted to employees in connection with a share capital increase reserved for employees carried out in April 2018 (which had a €21 million negative effect on free cash flow). For full-year 2018, cash generation is expected to be consistent with the Group’s ambition of 35% EBITDA to free cash flow conversion. Recurring capital expenditure stood at €157 million in first-half 2018 and exceptional investments totaled €18 million. The main exceptional investments incurred during the period relate to the project to double thiochemicals production capacity in Malaysia and investments relating to specialty polyamides in Asia. For full-year 2018, total capital expenditure is expected to amount to around €550 million, corresponding to recurring capital expenditure (representing approximately 5.5% of sales) and exceptional investments for the specialty polyamides and thiochemicals projects in Asia. Finally, free cash flow includes a net outflow of €17 million from non-recurring items, mainly corresponding to restructuring costs. Excluding non-recurring items and portfolio management operations, recurring cash flow totaled €51 million in the first half of 2018 (€129 million in first-half 2017). 8 Net cash flow from portfolio management operations represented a €174 million outflow and essentially related to the acquisition of XL Brands’ assets in early January 2018. The net cash outflow for this item in first-half 2017 was just €2 million as the impact of acquiring the assets of CMP Specialty Products in the adhesives business was almost entirely offset by the divestment of the oxo-alcohols business. Cash flow from financing activities Cash flow from financing activities represented a net outflow of €169 million in the first six months of 2018 (against a €720 million net inflow in first-half 2017) and mainly included (i) the impact of a €2.30 per-share dividend payment, representing a total amount of €176 million, (ii) €50 million in proceeds from the share capital increase reserved for employees, and (iii) a €19 million cash out for share buybacks. In first-half 2017, cash flow from financing activities included €891 million in net proceeds from a bond issue and the dividend payment. 2.4. Balance sheet analysis (In millions of euros) 30 June 2018 31 December 2017 Non-current assets (1) 5,650 5,460 Working capital 1,499 1,094 Capital employed 7,149 6,554 Deferred tax assets 148 150 Provisions for pensions and employee benefits 436 460 Other provisions 394 409 Total provisions 830 869 Long-term assets covering some provisions 73 72 Total provisions net of non-current assets 757 797 Deferred tax liabilities 273 271 Net debt 1,372 1,056 Shareholders’ equity 4,793 4,474 (1) Excluding deferred tax and including pension assets. Between 31 December 2017 and 30 June 2018, non-current assets increased by €190 million, primarily due to: an aggregate €175 million in recurring capital expenditure and exceptional investments (2); net depreciation, amortization and impairment expense totaling €236 million including €18 million in depreciation and amortization related to the revaluation of property, plant and equipment and intangible assets carried out as part of the Bostik, Den Braven and XL Brands purchase price allocation processes; a currency translation effect of €42 million, primarily due to the appreciation of the US dollar against the euro at the period-end; the impact of acquisitions, amounting to an aggregate €170 million and primarily resulting from the integration of XL Brands’ assets and the completion of the purchase price allocation process for this acquisition, which led to the recognition of €56 million in goodwill; and €21 million in loans granted to employees in connection with the share capital increase reserved for employees carried out in April 2018. At 30 June 2018, working capital was €405 million higher than at 31 December 2017 including a €6 million positive currency effect due to the slightly stronger US dollar versus the euro at the period-end. This increase mainly reflects the usual seasonality of sales and the mechanical impact of the material rise in selling prices and raw materials costs. At 30 June 2018, the ratio of working capital to annualized sales (3) stood at 16.5%, versus the record low of 15.5% at 30 June 2017 (17.2% at 30 June 2016). (2) See Note C.1 to the consolidated financial statements at 30 June 2018 in section II of this document. (3) Calculated as working capital at 30 June / (2nd quarter sales * 4). Change +3.5% +37.0% +9.1% 1.3% 5.2% 3.7% 4.5% +1.4% 4.9% +0.7% +29.9% +7.1% 9 Consequently, between 31 December 2017 and 30 June 2018, the Group's capital employed increased by €595 million to €7,149 million. At 30 June 2018, gross provisions amounted to €830 million. Some of these provisions – a part of which is covered by the guarantee facility granted by Total and described in note 16.2 to the condensed interim consolidated financial statements at 30 June 2018 – are covered by long-term assets recognized in the balance sheet. These provisions account for a total of €73 million and mainly consist of provisions related to former industrial sites in the United States. Accordingly, at 30 June 2018, provisions net of these non-current assets amounted to €757 million against €797 million at 31 December 2017. The breakdown of net provisions by type was as follows: €296 million for pension liabilities (€321 million at 31 December 2017), €139 million for other employee benefit obligations (€139 million at 31 December 2017), €130 million for environmental contingencies (€132 million at 31 December 2017), €37 million for restructuring provisions (€42 million at 31 December 2017) and €155 million for other provisions (€163 million at 31 December 2017). Between 31 December 2017 and 30 June 2018, net provisions for pension liabilities decreased by €25 million thanks to the positive impact of changes in the discount rates which was partially offset by the changes in the fair value of plan assets. The currency effect during the period was not material. Net debt stood at €1,372 million at 30 June 2018 (against €1,056 million at 31 December 2017), representing 29% of shareholders’ equity and 0.9 times EBITDA for the last twelve months. The increase in first-half 2018 resulted principally from the cash flows detailed in section 2.3 of this document as well as a slightly unfavorable currency effect on the portion of the Group’s debt converted through swaps into US dollars. Net debt included, in particular, €164 million related to the acquisition of XL Brands’ assets, and €176 million for the dividend payment. Shareholders’ equity amounted to €4,793 million versus €4,474 million at end 2017. The €319 million increase primarily corresponds to (i) €411 million in net income for the period, (ii) the payment of a dividend of €2.30 per share (representing an aggregate €176 million), (iii) €50 million from the share capital increase reserved for employees, and (iv) a positive €28 million net currency translation effect. A €14 million actuarial gain was recognized in shareholders’ equity in first-half 2018 for provisions for pension liabilities and other employee benefit obligations. 3. TRANSACTIONS WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or companies which are accounted for under the equity method but the amounts involved are not material. 4. SIGNIFICANT EVENTS SINCE 30 JUNE 2018 None. 5. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are the same as those described in the 2017 Reference Document filed with the Autorité des marchés financiers ("AMF") on 29 March 2018 under number D.18-0216. This document is available on Arkema's website under the heading "Investor Relations" (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in the notes to the condensed consolidated interim financial statements at 30 June 2018. 10 6. OUTLOOK In the second half of 2018, the Group will remain attentive to macro-economic and geopolitical developments as well as volatility in raw materials prices and currencies. In this context, the Group will continue to benefit from its strong innovation drive in advanced materials, the integration of its bolt-on acquisitions in adhesives and a globally robust market environment for its intermediate chemical businesses. It will continue to implement its major manufacturing projects, as presented at its Capital Markets Day, for thiochemicals, specialty polyamides and Sartomer. Lastly, the Group will continue its actions to pass on the rises in raw materials costs in its selling prices and the rollout of its operational excellence initiatives to partly offset the impact of inflation on its fixed costs. For 2018, on the back of the first half and assuming that the current macro-economic environment remains unchanged, Arkema now expects a mid-single digit (4) EBITDA growth compared to the excellent performance already achieved in 2017. At its Capital Markets Day in July 2017, the Group reminded investors of its ambition to achieve €10 billion in sales and an EBITDA margin of close to 17% in 2020. It also announced its long-term targets for 2023 of achieving REBIT margin of between 11.5% and 12.5% – significantly higher than in 2016 – and maintaining an EBITDA conversion rate into free cash flow of 35%. The achievement of this ambition also entails the following financial principles: a net debt to EBITDA ratio of less than 2, a return on capital employed of at least 10%, and maintaining a solid investment grade rating with the rating agencies. This ambition relies on stepping up the development of specialty businesses, which should represent over 80% of Group sales by 2023. In this context, the Group is aiming for a two-fold increase in Bostik's sales between 2016 and 2023, when this business is expected to account for more than one-third of Arkema sales, as well as a REBIT margin of between 12.5% and 13%. In advanced materials, which are expected to account for over 25% of Group sales in 2023, Arkema is targeting a REBIT margin of between 14% and 15%. Geographically, the Group aims to have in the longer term a perfectly balanced breakdown between Europe, North America, and Asia/rest of the world, with one-third of its sales in each of these three regions. The Group notes that all of these objectives have been formulated based on normalized market conditions and in accordance with the IFRS standards currently in force. The Group also notes that the achievement of these objectives is based on assumptions deemed reasonable by the Group, as of the date of this document and within this time frame (in particular regarding the future development of global demand, conditions relating to raw materials and energy costs, the balance between supply and demand for products marketed by the Group and their price levels, and currency exchange rates). However, it takes no account of the potential occurrence of certain risks described in section 1.7.2 of the 2017 Reference Document or any unknown factors related to the economic, financial, competitive or regulatory environment in which the Group operates, which could affect the achievement of its objectives. 7. GLOSSARY The main alternative performance indicators used by the Group are defined in note C.1 to the consolidated financial statements at 30 June 2018 in section II of this document. For the purpose of analyzing its results and defining its targets, the Group also uses the following indicators: REBIT margin: recurring operating income (REBIT) as a percentage of sales; EBITDA to free cash flow conversion rate: free cash flow excluding exceptional investments divided by EBITDA. Free cash flow will be restated to offset the impact of the raw material environment on changes in working capital; Return on capital employed: calculated as follows: (REBIT — current income taxes) / (net debt + shareholders’ equity) in accordance with current IFRS. (4) Of around 5%. 11 When analyzing changes in its results, and particularly its sales figures, the Group analyzes the following effects (such analysis is unaudited): scope effect: the impact of changes in the Group’s scope of consolidation, which arise from acquisitions and divestments of entire businesses or as a result of the first-time consolidation or deconsolidation of entities. Increases or reductions in capacity are not included in the scope effect; currency effect: the mechanical impact of consolidating accounts denominated in currencies other than the euro at different exchange rates from one period to another. The currency effect is calculated by applying the foreign exchange rates of the prior period to the figures for the period under review; price effect: the impact of changes in average selling prices is estimated by comparing the weighted average net unit selling price of a range of related products in the period under review with their weighted average net unit selling price in the prior period, multiplied, in both cases, by the volumes sold in the period under review; volume effect: the impact of changes in volumes is estimated by comparing the quantities delivered in the period under review with the quantities delivered in the prior period, multiplied, in both cases, by the weighted average net unit selling price in the prior period. 12 Condensed consolidated interim financial statements at 30 June 2018 II - CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2018 CONSOLIDATED INCOME STATEMENT ............................................................................................................................................. 14 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME........................................................................................................ 15 CONSOLIDATED BALANCE SHEET .................................................................................................................................................... 16 CONSOLIDATED CASH FLOW STATEMENT ...................................................................................................................................... 17 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY .................................................................................. 18 A. HIGHLIGHTS ..................................................................................................................................................................................... 19 B. ACCOUNTING POLICIES ................................................................................................................................................................. 19 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ....................................................................................................... 21 1. Alternative performance indicators .................................................................................................................................... 21 2. Information by business division ....................................................................................................................................... 23 3. Information by geographical area ...................................................................................................................................... 25 4. Other income and expenses ............................................................................................................................................... 25 5. Income taxes ........................................................................................................................................................................ 25 6. Business combination ........................................................................................................................................................ 26 7. Earnings per share .............................................................................................................................................................. 26 8. Intangible assets ................................................................................................................................................................. 27 9. Property, plant and equipment ........................................................................................................................................... 28 10. Shareholders’ equity ........................................................................................................................................................... 28 11. Provisions for pensions and other employee benefits ..................................................................................................... 29 12. Other provisions and other non-current liabilities ............................................................................................................ 30 13. Liabilities and contingent liabilities ................................................................................................................................... 31 14. Debt ...................................................................................................................................................................................... 31 15. Share-based payments ....................................................................................................................................................... 32 16. Off-balance sheet commitments ......................................................................................................................................... 34 17. Subsequent events .............................................................................................................................................................. 37 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2018 ............................................................................................................................ 38 13 Condensed consolidated interim financial statements at 30 June 2018 CONSOLIDATED INCOME STATEMENT (In millions of euros) Notes 1st half 2018 1st half 2017 Sales (C2&C3) 4,442 4,350 Operating expenses (3,377) (3,351)* Research and development expenses (118) (121) Selling and administrative expenses (370) (371) Other income and expenses (C4) (4) (7)* Operating income (C2) 573 500 Equity in income of affiliates Financial result Income taxes Net income (C5) 1 (47) (116) 411 0 (51) (148) 301 Of which: non-controlling interests Net income - Group share 4 407 4 297 3.92 Earnings per share (amount in euros) 3.91 Diluted earnings per share (amount in euros) * Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses previously included in “Other income and expenses” have been reclassified as “Operating expenses”. (C7) (C7) 5.35 5.34 14 Condensed consolidated interim financial statements at 30 June 2018 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1st half 2018 1st half 2017 (In millions of euros) Net income 411 301 Hedging adjustments 24 Other items Deferred taxes on hedging adjustments and other items Change in translation adjustments (C10) 28 (135) Other recyclable comprehensive income 28 (111) Actuarial gains and losses (C11) 18 5 Deferred taxes on actuarial gains and losses (4) Other non-recyclable comprehensive income 14 5 Total income and expenses recognized directly through equity 42 (106) Comprehensive income 453 195 Of which: non-controlling interests 5 1 Comprehensive income – Group share 448 194 15 Condensed consolidated interim financial statements at 30 June 2018 CONSOLIDATED BALANCE SHEET (In millions of euros) ASSETS Notes 30 June 2018 31 December 2017 Intangible assets, net (C8) 2,858 2,706 Property, plant and equipment, net (C9) 2,462 2,464 Investments in equity affiliates 32 30 Other investments 32 30 Deferred tax assets 148 150 Other non-current assets 266 230 TOTAL NON-CURRENT ASSETS 5,798 5,610 Inventories 1,246 1,145 Accounts receivable 1,437 1,115 Other receivables and prepaid expenses 210 181 Income taxes recoverable 63 70 Other current financial assets 8 17 Cash and cash equivalents 1,104 1,438 TOTAL CURRENT ASSETS 4,068 3,966 TOTAL ASSETS 9,866 9,576 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital 765 759 Paid-in surplus and retained earnings 3,874 3,575 Treasury shares (19) (2) Translation adjustments 128 101 SHAREHOLDERS’ EQUITY – GROUP SHARE (C10) 4,748 4,433 Non-controlling interests 45 41 TOTAL SHAREHOLDERS’ EQUITY 4,793 4,474 Deferred tax liabilities 273 271 Provisions for pensions and other employee benefits (C11) 436 460 Other provisions and non-current liabilities (C12) 423 443 Non-current debt (C14) 2,249 2,250 TOTAL NON-CURRENT LIABILITIES 3,381 3,424 Accounts payable 1,003 965 Other creditors and accrued liabilities 368 377 Income taxes payable 86 82 Other current financial liabilities 8 10 Current debt (C14) 227 244 TOTAL CURRENT LIABILITIES 1,692 1,678 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 9,866 9,576 16 Condensed consolidated interim financial statements at 30 June 2018 CONSOLIDATED CASH FLOW STATEMENT 1st half 2018 1st half 2017 (In millions of euros) Net income 411 301 Depreciation, amortization and impairment of assets 235 246 Provisions, valuation allowances and deferred taxes (28) (1) (Gains)/losses on sales of assets (2) (2) Undistributed affiliate equity earnings (1) 0 Change in working capital (373) (229) Other changes 8 0 CASH FLOW FROM OPERATING ACTIVITIES 250 315 Intangible assets and property, plant, and equipment additions (175) (152) Change in fixed asset payables (26) (56) Acquisitions of operations, net of cash acquired (174) 1 Increase in long-term loans Total expenditures (44) (419) (23) (230) Proceeds from sale of intangible assets and property, plant, and equipment 1 5 Change in fixed asset receivables 0 Proceeds from sale of operations, net of cash sold 11 Proceeds from sale of unconsolidated investments 0 Repayment of long-term loans Total divestitures 10 11 11 27 CASH FLOW FROM INVESTING ACTIVITIES (408) (203) Issuance (repayment) of shares and paid-in surplus (C10) 51 2 Purchase of treasury shares (C10) (19) (4) Dividends paid to parent company shareholders (C10) (176) (155) Dividends paid to non-controlling interests (1) (1) Increase in long-term debt 1 908 Decrease in long-term debt Increase / decrease in short-term debt (9) (16) (14) (16) CASH FLOW FROM FINANCING ACTIVITIES (169) 720 Net increase/(decrease) in cash and cash equivalents (327) 832 Effect of exchange rates and changes in scope (7) 44 Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,438 1,104 623 1,499 17 (In millions of euros) At 1 January 2018 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees Share-based payments Other Transactions with shareholders Net income Total income and expenses recognized directly through equity Comprehensive income At 30 June 2018 (In millions of euros) At 1 January 2017 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees Share-based payments Other Transactions with shareholders Net income Total income and expenses recognized directly through equity Comprehensive income At 30 June 2017 Condensed consolidated interim financial statements at 30 June 2018 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity 759 1,216 689 1,670 101 (2) 4,433 41 4,474 (176) (176) (1) (177) 6 45 51 51 (19) (19) (19) (2) 2 11 11 11 6 45 (167) (17) (133) (1) (134) 407 407 4 411 14 27 41 1 42 421 27 448 5 453 765 1,261 689 1,924 128 (19) 4,748 45 4,793 Share capital Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity 757 1,211 689 1,250 301 (4) 4204 45 4,249 (155) (155) (1) (156) 1 1 2 2 (4) (4) (4) (1) 1 7 7 7 1 1 (149) (3) (150) (1) (151) 297 297 4 301 29 (132) (103) (3) (106) 326 (132) 194 1 195 758 1,212 689 1,427 169 (7) 4,248 45 4,293 18 Condensed consolidated interim financial statements at 30 June 2018 A. HIGHLIGHTS A.1 Portfolio management On 2 January 2018 Bostik acquired the assets of XL Brands, one of the leaders in floor covering adhesives in the United States. This transaction was based on a US$205 million enterprise value. Its impacts are described in note C6 “Business combination”. In May 2018 Arkema announced the Bostik-Nitta joint venture’s plan to acquire the industrial adhesives of Nitta-Gelatin Inc., which generate annual sales of approximately €30 million. This acquisition should be completed in the summer of 2018. A.2 Other highlights In April 2018, Arkema carried out a capital increase reserved for employees. 610,405 shares were subscribed at the price of €81.97 per share, giving a total amount of €50 million (see no te C10 “Shareholders’ equity” and C15 “Share-based payments”). B. ACCOUNTING POLICIES Arkema is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. Basis for preparation The Group’s condensed consolidated interim financial statements at 30 June 2018 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved by the Board of Directors of Arkema on 31 July 2018. The condensed consolidated interim financial statements at 30 June 2018 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRSs (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and IFRSs endorsed by the European Union at 30 June 2018. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2017. The accounting framework and standards adopted by the European Union can be consulted on the following website: https://ec.europa.eu/info/law/international-accounting-standards-regulation-ec-no-1606-2002 Changes in IFRSs and interpretations The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2018 are identical to those used in the consolidated financial statements at 31 December 2017, except for IFRS standards, amendments and interpretations that are obligatorily applicable for accounting periods commencing on or after 1 January 2018 (and which had not been applied early by the Group), namely: Amendments to IAS 40 Transfers of investment property Adopted by the European Union on 15 March 2018 Amendments to IFRS 2 Classification and measurement of share-based payment transactions Adopted by the European Union on 27 February 2018 Amendments to IFRS 4 Applying IFRS 9 ‘Financial Instruments’ with IFRS 4 ‘Insurance Contracts’ Adopted by the European Union on 9 November 2017 IFRS 9 Financial instruments Adopted by the European Union on 29 November 2016 19 Condensed consolidated interim financial statements at 30 June 2018 IFRS 15 Revenue from contracts with customers Adopted by the European Union on 29 October 2016 Clarifications to IFRS 15 Revenue from contracts with customers Adopted by the European Union on 9 November 2017 Annual improvements to IFRS standards -2014-2016 cycle Adopted by the European Union on 8 February 2018 IFRIC 22 Foreign currency transactions and advance consideration Adopted by the European Union on 3 April 2018 Application of IFRS 9 and IFRS 15 and interpretations had no significant impact on the financial statements at 30 June 2018. At the date of application of IFRS 9, the Group opted to record changes in the fair value of unconsolidated investments in “Other comprehensive income”, except for investments in the process of liquidation. The standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which were not yet in force for years beginning on or after 1 January 2018, and have not been applied early by the Group, are: Amendments to IAS 19 Plan Amendment, Curtailment or Settlement Not adopted by the European Union at 30 June 2018 Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures Not adopted by the European Union at 30 June 2018 Amendments to IFRS 9 Prepayment Features with Negative Compensation Adopted by the European Union on 26 March 2018 Amendments to IFRS 9, IFRS 7 and IAS 39 Mandatory effective date and transition disclosures Not adopted by the European Union at 30 June 2018 Amendments to IFRS 9 Hedge accounting and amendments to IFRS 9, IFRS 7 and IAS 39 Not adopted by the European Union at 30 June 2018 Amendments to IFRS 10 and IAS 28 Sale or contribution of assets between an investor and its associate/joint venture Not adopted by the European Union at 30 June 2018 Conceptual framework Not adopted by the European Union at 30 June 2018 IFRS 16 * Leases Adopted by the European Union on 9 November 2017 IFRS 17 Insurance contracts Not adopted by the European Union at 30 June 2018 IFRIC 23 Uncertainty over income tax treatments (IAS12) Not adopted by the European Union at 30 June 2018 Annual improvements to IFRS standards - 2015-2017 cycle *See C16 “Off-balance sheet commitments” Not adopted by the European Union at 30 June 2018 Use of assumptions Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off-balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. 20 Condensed consolidated interim financial statements at 30 June 2018 Impact of seasonality The Group’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by the Group is generally lower in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and the rest of Europe; in some of the Group’s businesses, particularly those serving the paints and coatings as well as the refrigeration and air- conditioning markets, sales are generally higher in the first half of the year than in the second half. By contrast, in adhesives, the two halves of the year are more evenly balanced; the major multi-annual maintenance turnarounds at the Group’s production plants also have an impact on seasonality, and tend in general to be carried out in the second half of the year. These seasonal effects observed in the past are not necessarily representative of future trends, but can have a material effect on the variations in results and working capital from one quarter of the year to another. C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Alternative performance indicators To monitor and analyse the financial performance of the Group and its activities, the Group management uses alternative performance indicators. These are financial indicators that are not defined by the IFRS. This note presents a reconciliation of these indicators and the aggregates from the consolidated financial statements under IFRS. Note C.2 “Information by business division” partly refers to these alternative performance indicators. 1.1 Recurring operating income (REBIT) and EBITDA (In millions of euros) Notes 1st half 2018 1st half 2017 OPERATING INCOME 573 500 Depreciation and amortization related to the revaluation of tangible and intangible assets as part of the allocation of the purchase price of businesses (18) (23) Other income and expenses RECURRING OPERATING INCOME (REBIT) - Recurring depreciation and amortization EBITDA (C4) (4) 595 (218) 813 (7) 530 (223) 753 Details of depreciation and amortizations: (In millions of euros) Notes 1st half 2018 1st half 2017 Depreciation and amortization (C8 & C9) (236) (246) Of which: Recurring depreciation and amortization (218) (223) Of which: Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses (18) (23) Of which: Impairment included in other income and expenses (C4) 0 21 Condensed consolidated interim financial statements at 30 June 2018 1.2 Adjusted net income and adjusted earnings per share (In millions of euros) Notes 1st half 2018 1st half 2017 NET INCOME – GROUP SHARE 407 297 Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses (18) (23) Other income and expenses (C4) (4) (7) Other income and expenses attributable to non-controlling interests Taxes on depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses 4 6 Taxes on other income and expenses 2 2 One-time tax-effects 2 ADJUSTED NET INCOME 421 319 Weighted average number of ordinary shares 76,070,820 75,671,629 Weighted average number of potential ordinary shares (C7) 76,169,120 75,872,779 ADJUSTED EARNINGS PER SHARE (€) 5.53 4.22 DILUTED ADJUSTED EARNINGS PER SHARE (€) 5.53 4.20 1.3 Free cash flow (In millions of euros) 1st half 2018 1st half 2017 Cash flow from operating activities 250 315 + Cash flow from investing activities (408) (203) NET CASH FLOW (158) 112 ‘ Net cash flow from portfolio management operations (174) (2) FREE CASH FLOW 16 114 The net cash flow from portfolio management operations corresponds to the impact of acquisition and disposal operations. 1.4 Recurring capital expenditure (In millions of euros) 1st half 2018 1st half 2017 INTANGIBLE ASSETS AND PROPERTY, PLANT, AND EQUIPMENT ADDITIONS 175 152 Exceptional investments 18 2 Investments relating to portfolio management operations 15 Investments with no impact on net debt RECURRING CAPITAL EXPENDITURE 157 135 Exceptional investments correspond to a very limited number of investments that the Group presents separately in its financial reporting due to their unusual size or nature. They mainly concern investments in thiochemicals in Malaysia and specialty polyamides, particularly in Asia. The figures for the first half of 2017 have been restated. Investments relating to portfolio management operations reflect the impact of acquisition operations. In the first half of 2017 they concerned the acquisition of the assets of CMP Specialty Products. Investments with no impact on net debt correspond to investments financed by non-Group entities, or reclassifications of assets. 22 Condensed consolidated interim financial statements at 30 June 2018 1.5 Working capital (In millions of euros) 30 June 2018 31 December 2017 Inventories 1,246 1,145 + Accounts receivable 1,437 1,115 + Other receivables including income taxes 273 251 + Other current financial assets 8 17 Accounts payable 1,003 965 Other liabilities including income taxes 454 459 --Other current financial assets 8 10 WORKING CAPITAL 1,499 1,094 1.6 Capital employed (In millions of euros) Notes 30 June 2018 31 December 2017 Goodwill, net 1,599 1,525 + Intangible assets other than goodwill, and property, plant and equipment, net (C8 & C9) 3,721 3,645 + Investments in equity affiliates 32 30 + Other investments and other non-current assets 298 260 Working capital 1,499 1,094 CAPITAL EMPLOYED 7,149 6,554 2. Information by business division As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business divisions identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. Arkema has three business divisions: High Performance Materials, Industrial Specialties and Coating Solutions. Three members of the Executive Committee supervise these divisions; they report directly to the Chairman and CEO, the Group’s chief operating decision- maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their sector’s operating activity, financial results, forecasts and plans. The content of the business divisions is as follows: High Performance Materials includes the following Business Lines (*): Bostik (previously named Specialty Adhesives), Technical Polymers, comprising specialty polyamides and PVDF, Performance Additives, comprising photocure resins (Sartomer), organic peroxides and the adsorption activity. High Performance Materials provide innovative solutions with high value added, used in varied sectors such as transport, oil extraction, renewable energies (photovoltaics, lithium-ion batteries), consumer goods (beauty products, sports equipment, packaging, etc), electronics, construction, coatings and water treatment; Industrial Specialties groups the following Business Lines: Thiochemicals, Fluorogases, PMMA, Hydrogen Peroxide. (*) Business Lines are activities or groups of activities. 23 Condensed consolidated interim financial statements at 30 June 2018 These integrated industrial niche markets on which the Arkema Group is among the world leaders concern products used in several industrial sectors such as production of cold (refrigeration and air conditioning), petrochemicals, refining, paper pulp, animal nutrition, electronics and the automotive industry; Coating Solutions comprises the following Business Lines: Acrylics, Coatings Resins and Additives, comprising the coatings resins and Coatex rheological additives activities. This division proposes solutions for decorative paints, industrial coatings, adhesives and high-growth acrylic applications (superabsorbents for disposable nappies, water treatment, oil and gas extraction). Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate division. Operating income and assets are allocated between business divisions prior to inter-division adjustments. Sales between divisions take place at market prices. 1st half 2018 (In millions of euros) Non-Group sales Inter-division sales Total sales EBITDA* Depreciation and amortization* High Performance Materials 2,005 5 2,010 353 (78) 275 Industrial Specialties 1,370 94 1,464 370 (87) 283 Coating Solutions 1,054 38 1,092 134 (51) 83 Corporate 13 - 13 (44) (2) (46) Recurring operating income (REBIT)* Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses (18) Other income and expenses (2) (1) (2) 1 Operating income 255 282 81 (45) Equity in income of affiliates 0 1 Intangible assets and property, plant, and equipment additions Of which: recurring investments * 62 51 75 68 26 26 12 12 1st half 2017 (In millions of euros) High Performance Materials Industrial Specialties Coating Solutions Corporate Non-Group sales 1,966 1,345 1,024 15 Inter-division sales 3 74 37 Total sales 1,969 1,419 1,061 15 EBITDA* 340 316 138 (41) Depreciation and amortization* (78) (89) (55) (1) Recurring operating income (REBIT)* 262 227 83 (42) Depreciation and amortization related to the revaluation of assets as part of the allocation of the purchase price of businesses (23) Other income and expenses (8) 2 0 (1) Operating income 231 229 83 (43) Equity in income of affiliates 1 (1) Intangible assets and property, plant, and equipment additions 72 48 27 5 Of which: recurring investments * 57 46 27 5 See C1 “Alternative performance indicators” 24 Total 4,442 813 (218) 595 (18) (4) 573 1 175 157 Total 4,350 753 (223) 530 (23) (7) 500 0 152 135 Condensed consolidated interim financial statements at 30 June 2018 3. Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2018 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Total Non-Group sales 373 1,345 1,371 1,151 202 4,442 1st half 2017 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Total Non-Group sales 352 1,289 1,437 1,089 183 4,350 NAFTA: USA, Canada, Mexico 4. Other income and expenses 1st half 2018 1st half 2017 (In millions of euros) Expenses Income Net Expenses Income Net Restructuring and environment (5) 1 (4) (4) 1 (3) Goodwill impairment Asset impairment (other than goodwill) 0 0 0 1 1 Litigation and claims (2) 1 (1) 0 0 Gains (losses) on sales and purchases of assets (1) 2 1 (7) 2 (5) Other 0 0 0 0 Total other income and expenses (8) 4 (4) (11) 4 (7) In the first half of 2017, gains and losses on sales and purchases of assets principally comprised €(7 ) million related to the acquisition of Den Braven, including €(5) million resulting from r evaluation of inventories. 5. Income taxes The income tax expense is broken down as follows: (In millions of euros) Current income taxes 1st half 2018 (117) 1st half 2017 (145) Deferred income taxes 1 (3) Total income taxes (116) (148) The income tax expense amounts to €116 million at 3 0 June 2018, including €8 million for the CVAE (com pared with €148 million at 30 June 2017, including €7 million for the CVAE and €5 million relating to the additional income tax contribution due on distributed income). The decrease in the income tax expense essentially results from the positive impact of the tax reform in the United States. 25 Condensed consolidated interim financial statements at 30 June 2018 6. Business combination On 2 January 2018 the Arkema Group finalized the acquisition of XL Brands®, for an enterprise value of US$205 million and a final price of €164 million. In compliance with IFRS 3 (revised), the Group used the acquisition method for the accounting treatment of this operation. The amount recorded in the financial statements at 30 June 2018 for the identifiable assets acquired and liabilities assumed at the acquisition date breaks down as follows: (In millions of euros) Fair value acquired from XL Brands Intangible assets 98 Property, plant and equipment 6 TOTAL NON-CURRENT ASSETS 104 Inventories 4 TOTAL CURRENT ASSETS 4 TOTAL ASSETS 108 FAIR VALUE OF NET ASSETS 108 GOODWILL 56 Intangible assets stated at fair value mainly consist of the XL Brands ® brand, technologies, customer relations, and the non- competition agreement, the three latter assets being amortized over 12.5 years, 16 years and 7 years respectively. The revalued inventories were consumed during the first half of 2018. The goodwill of €56 million is final. It principall y comprises the synergies and the step-up in business activity expected of the geographical, technological and commercial complementarities between Bostik and XL Brands. The goodwill and the brand are amortizable for tax purposes. 7. Earnings per share 1st half 2018 1st half 2017 Weighted average number of ordinary shares 76,070,820 75,671,629 Dilutive effect of stock options 54,341 133,732 Dilutive effect of free share grants 43,959 67,418 Weighted average number of potential ordinary shares 76,169,120 75,872,779 Earnings per share is determined below: 1st half 2018 1st half 2017 Earnings per share (€) 5.35 3.92 Diluted earnings per share (€) 5.34 3.91 26 Condensed consolidated interim financial statements at 30 June 2018 8. Intangible assets 8.1 Goodwill (In millions of euros) Goodwill Gross book value 2,126 30 June 2018 Accumulated amortization and impairment (527) Net book value 1,599 31 December 2017 Net book value 1,525 Changes in the net book value of goodwill are as follows: Net book value (In millions of euros) 2018 At 1 January 1,525 Changes in scope 66 Translation adjustments 8 At 30 June 1,599 The increase during the first half of 2018 essentially reflects the goodwill resulting from acquisition of XL Brands (see note 6 “Business combination”). 8.2 Other intangible assets Gross book value 30 June 2018 Accumulated amortization and impairment Net book value 31 December 2017 Net book value (In millions of euros) Patents and technologies 418 (176) 242 238 Trademarks 548 (3) 545 528 Software and IT licences 307 (202) 105 109 Capitalized REACH costs 55 (23) 32 30 Other capitalized research expenses 22 (5) 17 8 Capitalized contracts 333 (250) 83 58 Asset rights 48 (17) 31 31 Customer relations 138 (17) 121 81 Other intangible assets 40 (20) 20 20 Intangible assets in progress 86 (23) 63 78 Total 1,995 (736) 1,259 1,181 Changes in the net book value of intangible assets are as follows: Net book value (In millions of euros) 2018 At 1 January 1,181 Acquisitions 16 Amortization and impairment (45) Changes in scope 98 Translation adjustments 8 Reclassifications 1 At 30 June 1,259 27 Condensed consolidated interim financial statements at 30 June 2018 9. Property, plant and equipment (In millions of euros) Gross book value 30 June 2018 Accumulated amortization and impairment Net book value 31 December 2017 Net book value Land and buildings 1,872 (1,213) 659 665 Complex industrial facilities 3,481 (2,803) 678 692 Other property, plant and equipment 3,040 (2,214) 826 790 Construction in progress 309 (10) 299 317 Total 8,702 (6,240) 2,462 2,464 Changes in the net book value of property, plant and equipment are as follows: Net book value (In millions of euros) 2018 At 1 January 2,464 Acquisitions 159 Amortization and impairment (191) Disposals (0) Changes in scope 6 Translation adjustments 25 Reclassifications (1) At 30 June 2,462 10. Shareholders’ equity At 30 June 2018 Arkema’s share capital amounts to € 765 million, divided into 76,532,456 shares with a nominal value of 10 euros. Number of shares at 1 January 2017 75,717,947 Issuance of shares following the exercise of subscription options 55,918 Number of shares at 30 June 2017 75,773,865 Issuance of shares following the exercise of subscription options 96,641 Number of shares at 31 December 2017 75,870,506 Number of shares at 1 January 2018 75,870,506 Issuance of shares following the capital increase reserved for employees 610,405 Issuance of shares following the exercise of subscription options 51,545 Number of shares at 30 June 2018 76,532,456 10.1 Changes in share capital and paid-in surplus On 26 April 2018, Arkema carried out a capital increase reserved for employees. 610,405 shares were subscribed at the price of €81.97 per share set by the Chairman and CEO on 6 March 2018, giving a total amount of €50 million. Following the exercise of 51,545 share subscription options, the Company carried out a capital increase in the total nominal amount of €1 million. 28 Condensed consolidated interim financial statements at 30 June 2018 10.2 Treasury shares The Company bought back 183,642 treasury shares during the first half of 2018. The Arkema Group definitively granted 11,865 free shares to its employees in application of plan 2014-1,3 in May 2018, then 16,667 free shares in application of plan 2016 -3 in June 2018. Number of treasury shares at 1 January 2017 65,823 Repurchases of treasury shares 180,000 Grants of treasury shares (212,598) Number of treasury shares at 31 December 2017 33,225 Number of treasury shares at 1 January 2018 33,225 Repurchases of treasury shares 183,642 Grants of treasury shares (28,532) Number of treasury shares at 30 June 2018 188,335 10.3 Dividends The combined shareholders’ general meeting of 18 May 2018 approved the distribution of a €2.30 dividen d per share in respect of the 2017 financial year, or a total amount of €176 mill ion. The dividend was paid out on 29 May 2018. 10.4 Translation adjustments The change in translation adjustments recognized in other recyclable comprehensive income mainly comprises the impacts of movements in the US-EUR exchange rate. 11. Provisions for pensions and other employee benefits (In millions of euros) Pension obligations 30 June 2018 296 31 December 2017 321 Healthcare and similar coverage 74 75 Post-employment benefits 370 396 Long service awards 59 57 Other 6 7 Other long-term benefits 65 64 Provisions for pensions and other employee benefits 435 460 Details of pension obligations Recognized liability 297 321 Amount recognized in assets (1) 0 Net liability (asset) at end of period 296 321 The discount rates used by the Arkema Group are as follows: Pension obligations, healthcare and similar coverage Europe (excl. UK) UK USA At 30 June 2018 2.00% 2.90% 4.20% At 31 December 2017 2.00% 2.60% 3.70% The present value of benefit obligations at the end of 2017 has been adjusted at 30 June 2018 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2017 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2018. The effects of the change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. 29 Condensed consolidated interim financial statements at 30 June 2018 The change in net provisions for post-employment benefits over the first half-year is as follows: (In millions of euros) Pension obligations Healthcare and similar coverage Total post- employment benefits Net liability (asset) at 1 January Provision recognized in liabilities 321 321 75 75 396 396 Amount recognized in assets (Income)/Expense for the period Net interest expense 6 4 0 1 6 5 Net contributions and benefits paid by the employer (20) (1) (21) Liquidations Other * Actuarial gains and losses recognized in shareholders’ equity 1 (16) 1 (2) 2 (18) Net liability (asset) at 30 June 296 74 370 Provision recognized in liabilities 297 74 371 Amount recognized in assets (1) (1) Other items essentially consist of translation adjustments. 12. Other provisions and other non-current liabilities 12.1. Other non-current liabilities Other non-current liabilities amount to €29 million at 30 June 2018 as against €34 million at 31 Decem ber 2017. 12.2. Other provisions (In millions of euros) Environmental contingencies Restructuring Other Total At 1 January 2018 189 42 178 409 Increases in provisions 2 1 21 24 Reversals from provisions on use (6) (6) (14) (26) Reversals of unused provisions (16) (16) Changes in scope Translation adjustments 2 0 1 3 Other (0) 0 0 At 30 June 2018 187 37 170 394 In addition, certain provisions are covered by non-current assets (receivables, deposits): (In millions of euros) Environmental contingencies Restructuring Other Total Total provisions at 30 June 2018 187 37 170 394 Portion of provisions covered by receivables or deposits 44 15 59 Deferred tax asset related to amounts covered by the Total Indemnity 13 13 Provisions at 30 June 2018 net of non-current assets 130 37 155 322 For information: Provisions at 1 January 2018 net of non-current assets 132 42 163 337 30 Condensed consolidated interim financial statements at 30 June 2018 12.2.1 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €91 million (€92 million at 31 Dece mber 2017), in the United States for €76 million (€77 million at 31 December 2017), of which €57 million in resp ect of former industrial sites covered 100% by the Total group indemnity (receivable recognized in “Other non-current assets” for an amount of €44 million and €13 million recognized in deferred tax assets) (see note C16.2 “Off-balance sheet commitments/Commitments received”). 12.2.2 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €22 million (€2 8 million at 31 December 2017), in Europe outside France for €10 million (€10 million at 31 December 2017) and in the United States for € 5 million (€4 million at 31 December 2017). 12.2.3 Other provisions Other provisions amount to €170 million and mainly comprise: provisions for labour litigation for €55 million ( €55 million at 31 December 2017), provisions for commercial litigation and warranties for €43 million (€53 million at 31 December 2017) , provisions for tax litigation for €34 million (€38 million at 31 December 2017), provisions for other risks for €38 million (€32 mi llion at 31 December 2017). 13. Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note 20 to the consolidated financial statements at 31 December 2017. There was no development in liabilities and contingent liabilities during the first half of 2018 with an actual or potential significant effect on the Group’s consolidated financial statements. 14. Debt 14.1 Analysis of net debt by category Group net debt amounts to €1,372 million at 30 June 2018, taking account of cash and cash equivalents of €1,104 million. (In millions of euros) 30 June 2018 31 December 2017 Bonds 2,219 2,219 Finance lease obligations 1 1 Bank loans 14 16 Other non-current debt 15 14 Non-current debt 2,249 2,250 Bonds Finance lease obligations 1 1 Syndicated credit facility Negotiable European Commercial Paper Other bank loans 196 202 Other current debt 30 41 Current debt 227 244 Debt 2,476 2,494 Cash and cash equivalents 1,104 1,438 Net debt 1,372 1,056 31 Condensed consolidated interim financial statements at 30 June 2018 Bonds At 30 June 2018, the fair values of the bonds issued by the Group are as follows: • €480 million bond maturing in April 2020: €514 mil lion, €150 million bond (issued as Euro Medium Term Note s (EMTN)) maturing in December 2023: €165 million, €700 million bond (issued as Euro Medium Term Note s (EMTN)) maturing in January 2025: €716 million, €900 million bond (issued as Euro Medium Term Note s (EMTN)) maturing in April 2027: €900 million. 14.2 Analysis of debt by currency The Arkema Group’s debt is mainly denominated in euros. (In millions of euros) 30 June 2018 31 December 2017 Euros 2,279 2,305 Chinese Yuan 148 142 US Dollars 12 12 Other 37 35 Total 2,476 2,494 Part of the debt in euros is converted through swaps to the accounting currency of internally-financed subsidiaries, in line with the Group’s policy. At 30 June 2018 the swapped portion, principally in US dollars, represented approximately 32% of gross debt. 14.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2018 31 December 2017 Less than 1 year 270 268 Between 1 and 2 years 535 55 Between 2 and 3 years 36 535 Between 3 and 4 years 33 35 Between 4 and 5 years 30 30 More than 5 years 1,830 1,853 Total 2,734 2,776 15. Share-based payments 15.1 Stock options The Board of Directors has decided not to introduce any further stock option plans. Movements in the stock option plans granted in previous years and still outstanding at 30 June 2018 are as follows: Plan Total number of options granted * Exercise price* Number of options exercised in 1st half 2018 Number of options cancelled in 1st half 2018 Total number of options exercised Total number of options outstanding Final year for exercising options 2010-1 2010-2 2011-1 2011-2 230,044 233,513 109,082 109,082 29.33 29.33 65.92 65.92 21,290 22,555 4,200 3,500 1,559 1,465 - - 221,485 209,874 86,104 40,296 - 22,978 68,786 2018 2018 2019 2019 after adjustment following the capital increase with preferential subscription rights of November 2014 The amount of the IFRS 2 expense recognized in respect of stock options at 30 June 2018 was nil (also nil at 30 June 2017). 32 Condensed consolidated interim financial statements at 30 June 2018 15.2 Free share grants Movements in the free share grant plans awarded up until 30 June 2018 are as follows: Plan Grant date Vesting period Conser- vation period Total number of free shares initially granted Number of shares subject to performance conditions Fair value (euros per share) Number of shares definitively granted in 1st half 2018 Number of shares cancelled in 1st half 2018 Total number of shares still to be granted at 30 June 2018 2014-1, 3 6 May 2014 3-4 years 0-3 years 17,118 53.63 11,865 1,279 2014-2 13 Nov 2014 4 years 275,000 203,535 33.41 1,225 267,800 2015-1 9 Nov 2015 4 years 285,525 285,525 42.31 1,400 278,425 2015-2 9 Nov 2015 4 years 59,595 42.31 1,170 56,765 2016-1, 2 10 May 2016 3-4 years 0-3 years 43,278 22.91-39.70 43,278 2016-3 7 Jun 2016 1-3 years 2 years 50,000 41.04-53.53 16,667 16,666 2016-4 9 Nov 2016 3 years 2 years 235,835(1) 226,040 47.31 570 232,915 2016-5 9 Nov 2016 4 years 122,080(2) 112,860 50.01 1,620 120,000 2017-1 8 Nov 2017 3 years 2 years 230,695(3), 218,255 63.59 60 230,615 2017-2 8 Nov 2017 4 years 129,405(4) 114,845 67.88 200 129,015 2018-1, 2 3-4 years (1) May be raised to 258,439 in the event of outperformance (2) May be raised to 133,366 in the event of outperformance (3) May be raised to 252,521 in the event of outperformance (4) May be raised to 140,890 in the event of outperformance 2 May 2018 0-3 years 41,137 59.31-61.13 41,137 The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2018 is €11 million ( €7 million at 30 June 2017). 15.3. Capital increase reserved for employees In line with its employee shareholding policy, the Arkema Group offered its employees the possibility to subscribe to a reserved capital increase at the subscription price of €81.97. This price corresponds to the average opening price of the Arkema share quoted on the Paris stock exchange in the 20 trading days prior to the Chairman and CEO’s decision of 6 March 2018 setting the terms of the capital increase, minus a 20% discount. The shares subscribed through this operation cannot be sold for five years, except in the United States where the minimum holding period is 3 years. The employees subscribed 610,405 shares for the total value of €50 million. The capital increase was r ecognized on 25 April 2018 and completed on 26 April 2018. Arkema shares were also given to Group employees located outside France, via a free share grant plan: one free share was awarded for every four shares subscribed up to a maximum of 25 free shares per person. As a result, on 2 May 2018 the Board of Directors formally recorded the attribution of 39,407 free shares to employees located outside France. These shares will only be definitively granted after a vesting period of 3 or 4 years, depending on the country. Finally, on 2 May 2018, the Board of Directors decided to put in place a plan to award 1,730 free shares for the benefit of Group employees who had not been able to participate in the capital increase reserved for employees undertaken on 26 April 2018. The only condition for awarding these shares is a presence condition, and they will be definitively granted after a vesting period of 4 years from the date of the Board’s decision to award them. 33 Condensed consolidated interim financial statements at 30 June 2018 Valuation method In accordance with the method recommended by France’s national accounting standards authority (Autorité des Normes Comptables), the calculation used to value the cost of not being able to sell the shares for a certain period is based on the cost of a two-step strategy assuming that these shares will ultimately be sold, and that the same number of shares will be purchased and settled immediately, financed by a loan. The rate used for the loan is the rate that a bank or a credit institution would grant to a private individual presenting an average risk profile in the context of a 5-year consumer loan. The fair values of the shares subscribed in France and outside France have been calculated separately in order to reflect the grants of free shares to Group employees located outside France. The main market parameters used in the valuation of the cost of not being able to sell the shares are as follows: Country of subscription France United States Italy and Spain Other countries Date of the Board meeting which decided on the capital increase 06 March 18 06 March 18 06 March 18 06 March 18 Share price at the date of the board meeting (€) 107.15 107.15 107.15 107.15 Risk-free interest rate (at 6 March 2018)* 0.11% 2.42% 0.64% 0.05% Borrowing rate** Cost of not being able to sell the shares (as a percentage of the share price) * 5-year risk-free rate, except for the United States (3 years) 7.19% 27.37% 9.64% 20.37% 7.19% 27.65% 9.47% 34.68% ** Rate on 5-year borrowings The difference between the share price at the date of the Chairman and CEO’s decision setting the terms of the operation and the subscription price is €25.18 per share, representin g a total benefit granted to employees of €15 milli on. An IFRS 2 expense of €2 million will also be recogn ized in respect of the free shares granted to Group employees located outside France. This expense will be spread over the vesting period of the shares concerned (see note C15.2 “Free share grants”). 16. Off-balance sheet commitments 16.1 Commitments given 16.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2018 72 31 December 2017 76 Comfort letters Contractual guarantees 11 11 Customs and excise guarantees 14 14 Total 97 101 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 16.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, the Arkema Group has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over 34 Condensed consolidated interim financial statements at 30 June 2018 initial periods generally comprised between one and ten years is a normal practice for companies in the Group’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, Arkema’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige the Group to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase contracts in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The value of these agreements thus corresponds to the minimum amount payable to suppliers as indemnification in the event of termination of the contracts or failure to take delivery of the minimum contractual quantities, less any quantities that can be resold on the market when the Group is able to do so. The total amount of the Group’s financial commitments is €449 million at 30 June 2018, maturing as fol lows: (In millions of euros) 30 June 2018 31 December 2017 2018 177 207 2019 83 77 2020 63 55 2021 40 39 2022 until expiry of the contracts 86 86 Total 449 464 Lease commitments In the context of its business, the Arkema Group has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by the Group are mainly in respect of property rental (head offices, land) and transportation equipment (rail cars, containers). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). Non-capitalized leases (In millions of euros) 30 June 2018 31 December 2017 2018 13 25 2019 23 21 2020 21 17 2021 16 14 2022 until expiry of the contracts 42 34 Non-discounted value of future lease payments 115 111 From 1 January 2019, the Group’s lease commitments will be recorded in application of IFRS 16 “Leases”. In the balance sheet, the Group will recognize an asset corresponding to the right to use the leased asset, and an equivalent financial liability for the future lease payments. In the income statement, the lease expense will be replaced by an amortization expense and an interest expense. The cash flow statement will be impacted by reclassification of the amount of lease liability repayments from the “operating cash flows” category to the “financing cash flows” category. The Group has decided to apply this standard under the modified retrospective approach. The lease term will be the irrevocable period, extended where applicable by any renewal options the Group is reasonably certain to use ; in particular, the Group will apply the recommendation made by the the Autorité des Normes Comptables to real estate property leases in France, taking as the maximum term the longest term, i.e. 9 years for French “3/6/9” leases. The lease commitment at 1 January 2019 will be calculated under IFRS 16, using the discount rates in force at that date. The principal leases will concern real estate properties and logistics equipment, excluding lease-related services. The Group is finalizing identification of its leases, and continuing to assess the impacts of IFRS 16 on its financial statements. The chosen IT solution is currently being implemented and rolled out to the Group’s subsidiaries. 35 Condensed consolidated interim financial statements at 30 June 2018 16.1.3 Off-balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses When selling businesses, the Group has sometimes granted the purchaser warranties in respect of unrecorded liabilities. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by the Group amounts to €84 million at 30 June 2018 (€83 million at 31 December 2017). The se amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 16.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C21 to the consolidated financial statements at 31 December 2017 “Debt”. 16.2 Commitments received Commitments received from Total in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies extended certain indemnities, or assumed certain obligations, for the benefit of the Arkema Group. Some are still in application while others terminated during 2017. The warranties and commitments concerned are described below, and relate to actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased. 16.2.1 Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), Total S.A. companies have entered into indemnity and service agreements with Arkema or its subsidiaries. Pursuant to these agreements, the obligations and environmental responsibilities associated with these former industrial sites in France and at Rieme in Belgium were transferred to Total S.A. group companies. Agreement relating to certain Former Industrial Sites located in the United States In March 2006, Arkema Amériques SAS completed the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company for most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Site Services and Arkema Amériques SAS, dated 7 March 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use $270 million to capitalize a new subsidiary, Legacy Site Services LLC, that performs remediation services and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of waste shipments from the sites other than currently operated sites. In exchange for this indemnification, Arkema Amériques SAS agreed to grant to Legacy Site Services LLC control over remediation activities and the defence of claims relating to contamination liabilities at these facilities and sites. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group, certain sites where no significant restoration work is currently underway or anticipated, and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non-existent based upon information available at the time when the indemnity was entered into. Arkema Amériques SAS has waived any claims against Legacy Site Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Site Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defence and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities 36 Condensed consolidated interim financial statements at 30 June 2018 unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure and criminal liability. The indemnity described above is capped at $270 million. The amount received by Arkema under this indemnity amounts to $104 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnity the liabilities of the Group in excess of $270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. 17. Subsequent events None 37 Condensed consolidated interim financial statements at 30 June 2018 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2018 (a) Companies sold in 2018. (b) Companies merged in 2018. (c) Companies liquidated in 2018. (d) Companies consolidated for the first time in 2018. (e) Companies in which the percentage ownership changed in 2018, with no change to control. The percentage of control indicated below also corresponds to the Group’s ownership interest. AEC Polymers APT Altuglas International Denmark A/S Altuglas International Mexico Inc. Altuglas International SAS American Acryl LP American Acryl NA LLC Arkema Arkema Arkema Afrique SAS Arkema Amériques SAS Arkema Asie SAS Arkema BV Arkema Canada Inc. Arkema Changshu Chemicals Co. Ltd Arkema Changshu Fluorochemical Co. Ltd Arkema Chemicals India Private Ltd. Arkema Changshu Polyamides Co. Ltd Arkema China Investment Co. Ltd. Arkema Coating Resins Malaysia Sdn. Bhd. Arkema Coatings Resins UK Arkema Co. Ltd Arkema Daikin Advanced Fluorochemicals Co. Ltd Arkema Delaware Inc. Arkema Europe Arkema France Arkema GmbH Arkema Hydrogen Peroxide Co. Ltd. Shanghai Arkema Inc. Arkema Insurance Ltd Arkema KK Arkema Kimya Sanayi ve Ticaret AS Arkema Ltd. Arkema Mexico SA de CV Arkema Mexico Servicios SA de CV Arkema Peroxides India Private Limited Arkema Pte Ltd. Arkema Pty Ltd. Arkema Quimica Ltda Arkema Quimica SA Arkema Shanghai Distribution Co. Ltd Arkema sp Z.o.o Arkema Srl Arkema Taixing Chemicals Arkema Thiochemicals Sdn Bhd Arkema Yoshitomi Ltd. Bostik AB (Sweden) Bostik Argentina France Spain Denmark United States France United States United States South Korea France France France France Netherlands Canada China China India China China Malaysia United Kingdom Hong Kong China United States France France Germany China United States Ireland Japan Turkey United Kingdom Mexico Mexico India Singapore Australia Brazil Spain China Poland Italy China Malaysia Japan Sweden Argentina (d) 100.00 100.00 100.00 100.00 100.00 50.00 50.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 60.00 100.00 100.00 100.00 100.00 66.67 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 86.00 49.00 100.00 100.00 38 FC FC FC FC FC JO JO FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC JO FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC Bostik AS (Denmark) Bostik AS (Norway) Bostik Australia Bostik Belux NV SA Bostik BV Bostik Canada Bostik Egypt For Production of Adhesives S.A.E Bostik Findley China Co. Ltd. Bostik Findley Malaysia Sdn. Bhd. Bostik Gmbh Bostik Holding Hong Kong Ltd. Bostik Holding SA Bostik Inc. Bostik India Private Ltd. Bostik Industries Ltd. Bostik Korea Ltd. Bostik Ltd. Bostik Mexicana SA de CV Bostik Nederland BV Bostik New Zealand Bostik-Nitta Co. Ltd. Bostik OOO Bostik OY Bostik Philippines Inc. Bostik Polska sp Z.o.o Bostik SA Bostik SA (Spain) Bostik Shanghai Management Co. Ltd. Bostik (Thailand) Co. Ltd Bostik UAB Bostik Vietnam Company Ltd CECA Belgium CECA Watan Saudi Arabia Cekomastik Kimya Sanayi Ve Ticaret A.S Changshu Coatex Additives Co. Ltd. Changshu Haike Chemicals Co. Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Coatex Central Eastern Europe sro Coatex Inc. Coatex Latin America Industria et Comercio Ltda Coatex Netherlands BV Coatex SAS Daikin Arkema Refrigerants Asia Ltd. Daikin Arkema Refrigerants Trading (Shanghai) Co. Ltd. DBEW Holding BV Debratec GmbH Den Braven Aerosols GmbH Den Braven Beheer BV Den Braven Belgium N.V. Den Braven Benelux BV Den Braven East sp Z.o.o Den Braven Endustriel Den Braven France Sarl Den Braven Hellas SA Den Braven Holding BV Den Braven OG BV Condensed consolidated interim financial statements at 30 June 2018 Denmark Norway Australia Belgium Netherlands Canada Egypt China Malaysia Germany Hong Kong France United States India Ireland South Korea United Kingdom Mexico Netherlands New Zealand Japan Russia Finland Philippines Poland France Spain China Thailand Lithuania Vietnam Belgium Saudi Arabia Turkey China China Malaysia South Korea Slovakia United States Brazil Netherlands France Hong Kong China Netherlands Germany Germany Netherlands Belgium Netherlands Poland Turkey France Greece Netherlands Netherlands (b) (b) (b) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 66.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 49.00 14.00 100.00 100.00 100.00 100.00 100.00 100.00 40.00 40.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 (b) (b) (b) 39 FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC JV JV FC FC FC FC FC FC FC FC FC FC FC FC Condensed consolidated interim financial statements at 30 June 2018 Den Braven Productos Quim. Ldo. Den Braven Romania Srl Den Braven Sealants Espana SL Den Braven Sealants GmbH Den Braven Sealants South Africa Pty Ltd Delaware Chemicals Corporation Distri Mark France SAS Febex SA Hebei Casda Biomaterials Co. Ltd Ihsedu Agrochem Private Ltd Jiangsu Bostik Adhesive Co. Ltd MEM BAUCHEMIE Gmbh Michelet Finance, Inc. MLPC International Mydrin Srl Odor-Tech LLC Ozark Mahoning Company PT Bostik Indonesia Sartomer Asia Limited Sartomer Guangzhou Chemical Co. Ltd. Sartomer Shanghai Distribution Company Limited Seki Arkema Siroflex Inc. Siroflex Ltd Société Marocaine des Colles Sovereign Chemicals Ltd Suzhou Hipro Polymers Co. Ltd Taixing Sunke Chemicals Tamer Endustriyel Madencilik Anonim Sirketi Turkish Products, Inc. Usina Fortaleza Industria E commercio de massa fina Ltda Vetek Viking chemical company Zhuhai Bostik Adhesive Ltd Portugal Romania Spain Austria South Africa United States France Switzerland China India China Germany United States France Italy United States United States Indonesia Hong Kong China China South Korea United States United Kingdom Morocco United Kingdom China China Turkey United States Brazil Argentina United States China (b) (b) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 96.77 100.00 24.90 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 51.00 100.00 100.00 97.01 100.00 100.00 55.00 50.00 100.00 100.00 100.00 100.00 100.00 NB: FC: full consolidation. JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses. JV: joint venture – consolidation by the equity method. SI: significant influence – consolidation by the equity method. 40 FC FC FC FC FC FC FC FC FC SI FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC JO FC FC FC FC FC FC III - DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2018 I certify that, to the best of my knowledge, the condensed consolidated financial statements have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report on pages 3 to 12 includes a fair review of the main events of the first six months of the year, their impact on the consolidated financial statements, the major transactions between related parties, and that it describes the main risks and uncertainties for the remaining six months of the financial year. Colombes, 31 July 2018 Thierry Le Hénaff Chairman and CEO 41 Statutory Auditors’ Review Report on the Half- yearly Financial Information For the period from January 1 to June 30, 2018 Arkema 420, rue d’Estienne d’Orves - 92700 Colombes 42 This is a free translation into English of the statutory auditors’ review report on the half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half- yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Arkema Registered office: 420, rue d’Estienne d’Orves - 92700 Colombes Share capital: €.765,324,560 Statutory Auditors’ Review Report on the Half-yearly Financial Information For the period from January 1 to June 30, 2018 To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L. 451-1-2 III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying half-yearly consolidated financial statements of Arkema, for the period from January 1 to June 30, 2018, the verification of the information presented in the half-yearly management report. These half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying half-yearly consolidated financial statements do not give a true and fair view of the assets and liabilities and of the financial position of the Group as at June 30, 2018 and of the results of its operations for the period then ended in accordance with IFRSs as adopted by the European Union. 43 KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Arkema Statutory Auditors’ Review Report on the Half-yearly Financial Information 31 July 2018 II. Specific verification We have also verified the information presented in the half-yearly management report on the half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the half-yearly consolidated financial statements. Paris-La Défense, July 31, 2018 The Statutory Auditors French original signed by KPMG Audit ERNST & YOUNG Audit Bertrand Desbarrières François Quédiniac Partner Partner Denis Thibon Partner 44

Semestriel, 2018, Chemistry, ARKEMA

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Semestriel

Chemistry

ARKEMA

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Half-year Financial Report First half ended 30 June 2016 ARKEMA 420, rue d’Estienne d’Orves – F-92705 COLOMBES Cedex – France Standard : +33 (0)1 49 00 80 80 – Fax : +33 (0)1 49 00 83 96 Société anonyme au capital de 755 811 250 euros – 445 074 685 RCS I- Half-year activity report .................................................................................................................... 3 II- Condensed consolidated interim financial statements at 30 June 2016 ................................... 12 III- Declaration by the person responsible for the half-year financial report ................................. 40 IV- Report from the statutory auditors on half-year financial information ..................................... 41 This document is a free translation in English of Arkema’s half-year financial report for the 1st half ended 30 June 2016. This translation has been prepared solely for the information and convenience of English speaking readers. No assurances are given as to the accuracy or completeness of this translation, and Arkema assumes no responsibility with respect to this translation or any misstatement or omission that may be contained therein. In the event of any ambiguity or discrepancy between this translation and the French document, the French document shall prevail. 2 I - HALF-YEAR FINANCIAL REPORT 1. FIRST HALF 2016 HIGHLIGHTS 1.1. Acquisitions and divestments Project to divest the Activated Carbon and Filter Aid business After completing the divestment of Sunclear in November 2015 which reported sales of some €180 million , Arkema has been actively pursuing the implementation of its program with the target to divest some €700 million sales between 2015 and 2017 and announ ced in April 2016 the proposed divestment of its Activated Carbon and Filter Aid business, which reports sales of some €93 million and employs around 3 00 people. The offer received is based on a €145 milli on enterprise value, i.e. a multiple of 9.5 on the basis of the 2015 EBITDA. The project, subject to the approval of the relevant antitrust authorities, should be finalized in 4th quarter 2016. Acquisition of acrylics assets in China Early 2016, Arkema decided not to exercise its €200 million option to double its rights to production capacities in the Taixing Sunke Chemicals joint venture. The Group has nevertheless continued discussions with its partner to reach a scheme based on a 50/50 split of the rights to capacities which would enable Arkema to access an additional 80 kt acrylic acid production capacity per year for a limited cash-out of around €40 million. The contracts have now been sig ned and are being implemented, with cash-out expected in 3rd quarter 2016. 1.2. Organic growth In line with its ambition to expand in higher growth regions, Bostik announced in 1st half 2016 increases in its production capacities of cementitious products in the Philippines and in Malaysia. These developments will help support the strong demand growth in the construction market in both regions. 1.3. Share capital increase reserved for employees Arkema carried out a share capital increase reserved for employees in April 2016. 998,072 shares were subscribed at a price of €42.16 per share for a tot al amount of €42.1 million. 2. CORPORATE GOVERNANCE 2.1 Composition of the Board of Directors Mrs Claire Pedini resigned from Arkema’s Board of Directors on 17 June 2016 due to the proposed acquisition by Saint-Gobain of the Sika group, a major player in the adhesives market. The Nominating, Compensation and Corporate Governance Committee will meet to review profiles and put forward candidates to replace her as a director. Furthermore, in accordance with regulatory changes in 2015 and following the approval by the annual general meeting on 7 June 2016 of an amendment to the Articles of Association allowing the appointment of a director representing employees, Mrs Nathalie Muracciole, has been appointed by the European Group Works Council, and joined Arkema’s Board of Directors effective 7 July 2016. At the date of this report, Arkema’s Board of Directors comprises 12 members. 2.2 Composition of the Executive Committee Effective 1st September 2016, Bernard Pinatel, Executive Vice President High Performance Materials, will leave the Group. As a result, the responsibility for the High Performance Materials division will be divided up between: Christophe André who will be appointed Executive Vice President Technical Polymers and Performance Additives, and - Vincent Legros who will be appointed Executive Vice President Specialty Adhesives (Bostik). 3 On this date they will join Arkema’s Executive Committee, which will then comprise: Thierry Le Hénaff, Chairman and Chief Executive Officer, - three operational Executive Vice Presidents : Marc Schuller (Industrial Specialties and Coating Solutions divisions), Christophe André (Technical Polymers and Performance Additives), and Vincent Legros (Bostik), and - four functional Executive Vice Presidents: Luc Benoit-Cattin (Industry), Bernard Boyer (Strategy), Michel Delaborde (Human Resources and Communication), and Thierry Lemonnier (Finance). 2.3 Creation of a Group Management Committee As of 1st September 2016, Arkema will put in place a Group Management Committee in addition to the Executive Committee, the Group’s decision-making body. This committee, chaired by Thierry le Hénaff, Chairman and Chief Executive Officer, will comprise the members of the Executive Committee and a limited number of Business Lines Managing Directors, Country Managers, and Support Functions Vice Presidents. It will meet four times a year, and its missions will entail in particular the quarterly review of the Group’s performance (HSE, financial and operational results) and the follow-up of the major projects and priorities. As a discussion and reflection body, it will also discuss Arkema’s medium- and long-term orientations. 3. ANALYSIS OF THE FIRST HALF 2016 FINANCIAL RESULTS The figures in this section are provided on a consolidated basis and in accordance with Arkema’s organization into 3 divisions: High Performance Materials, Industrial Specialties, and Coating Solutions. 3.1 Analysis of Arkema’s results (In millions of euros) 1st half 2016 1st half 2015 Variations in % Sales.......................................................................................... EBITDA...................................................................................... EBITDA margin (%)………………………………........................ Recurring operating income.................................................... Other income and expenses....................................................... Operating income..............................................................…… Equity in income of affiliates………………………………………. Financial result............................................................................ Income taxes............................................................................... Net income – Group share………………………………................. Adjusted net income………………………………...................... 3,845 643 16.7% 420 (1) 419 6 (50) (126) 245 240 3,977 557 14.0% 341 (82) 259 5 (54) (36) 175 188 3.3% +15.4% +23.2% +61.8% +40.0% +27.7% Sales In 1st half 2016, sales reached €3,845 million, 3.3% down on 1st half 2015. Volumes grew by +2.6%, supported by innovation in Technical Polymers, developments in adhesives, the thiochemicals plant in Malaysia, and growth in acrylic downstream. The -5.4% price effect resulted from the acrylics cycle and the impact on sales prices of lower raw materials. The +1.1% business scope effect mostly reflects Bostik’s contribution in January as well as the divestment of Sunclear. The translation effect amounted to -1.7%. The step up of the Group’s profile continues in line with strategy. The share of High Performance Materials grew to represent 46% of Group sales (42% in 1st half 2015). Industrial Specialties represent 31% (33% in 1st half 2015), and Coating Solutions 23% (25% in 1st half 2015). From a geographic standpoint, Europe accounts for 37% of Group sales (38% in 1st half 2015), North America 34% (34% in 1st half 2015), Asia 24% (23% in 1st half 2015), and the rest of the world 5% (5% in 1st half 2015). 4 EBITDA and recurring operating income At €643 million, EBITDA increased significantly (+1 5%) compared to 1st half 2015. This growth reflects the ramp-up and contribution over an extra month of Bostik, the benefits of innovation, in particular in Technical Polymers, the gradual improvement in the results of fluorogases in line with the Group’s assumptions, the development of the thiochemicals platform in Malaysia started in 1st quarter 2015, and some lower raw material costs. Beyond these elements, EBITDA margin, significantly up at 16.7% against 14.0% in 1st half 2015, reflects the growing share of higher added value activities and the improvement in Bostik’s margin at 13.8%. Consistent with the EBITDA improvement, recurring operating income stood at €420 million against €341 million in 1 st half 2015. It includes €223 million depreciation a nd amortization, slightly up on last year (€216 million) due mainly to the integration of Bos tik and the start-up of new production plants. Operating income After deduction of other income and expenses, operating income stood at €419 million in 1 st half 2016 against €259 million in 1 st half 2015. Over 1st half 2016, other income and expenses amounting to -€1 million corresponded mostly to (i) €19 million depreciation and amortization related to the revaluation of tangible and intangible fixed assets carried out as part of the Bostik purchase price allocation, and (ii) the financial consequences of changes to some pension schemes within the Group, including the termination effective 7 June 2016 of the supplementary defined benefit pension scheme for the Chairman and Chief Executive Officer and the finalization of the outsourcing of pensions in the Netherlands. In 1st half 2015, other income and expenses amounting to -€82 million corresponded mostly to the consequences of the Bostik purchase price allocation and to various restructuring charges. Equity in income of affiliates Equity in the income of affiliates stood at €6 mill CJ Bio Malaysia Sdn. Bhd. in which the Group has a 14% stake. ion. It mostly reflects the contribution of the company Financial result €54 million in 1 st half 2015. In 1st half 2015, the financial The financial results stood at -€50 million against result included a €12 million unrealized foreign ex change loss on the financing in US dollars of the investments made in Malaysia in the Thiochemicals subsidiary which was still keeping its accounts in Malaysian ringgits at that time. Excluding this impact, the increase in the financial result primarily reflects the variation, due to lower discount rates, of actuarial gains and losses on certain provisions for long service awards. Income taxes 1st half 2015). They include a Income taxes in 1st half 2016 amounted to €126 million (€36 million in €4 million tax due on the dividend paid in cash for 2015 and a €6 million provision reversal for defer red income tax as part of the allocation of Bostik purchase price. Excluding these items, the tax rate would stand at 30.5% of recurring operating income. This tax rate reflects the geographic split of results, in particular the weight of North America in the Group’s results. In 1st half 2015, income taxes included €76 million income recognized as part of Bostik pur chase price allocation. Net income, Group share and adjusted net income Net income, group share stood at €245 million (€175 million in 1st half 2015). Excluding the impact, after tax, of non-recurring items, adjusted net income reached €240 million agai nst €188 million in 1 st half 2015, i.e. €3.21 per share (€2.58 per share in 1 st half 2015). The adjusted net income in 1st half 2015 has been restated to exclude the impact of the financing in US dollars of the investments made in the Thiochemicals subsidiary in Malaysia, which has been keeping its accounts in US dollars and no longer in Malaysian ringgits since 4th quarter 2015 with retroactive effect from 1st January of that year. 5 3.2 Analysis of results by division HIGH PERFORMANCE MATERIALS (In millions of euros) 1st half 2016 1st half 2015 Variations in % Sales.............................................................................. EBITDA.......................................................................... EBITDA margin (%)………………………………........... Recurring operating income....................................... 1,747 314 18.0% 237 1,649 260 15.8% 187 +5.9% +20.8% +26.7% Sales in the High Performance Materials division stood at €1,747 million, 6% 1 up on 1st half 2015, corresponding mainly to Bostik’s contribution in January. Volumes grew by +2.8%, driven by innovation particularly in lightweight materials and new energies, and by geographic expansion at Bostik. This increase in volumes largely offset a slightly negative price effect of -1.4% given the changes in raw material prices. The translation effect amounted to -2.4%. lion in 1st half 2015. Bostik improved significantly, EBITDA rose by 21% to €314 million against €260 mil benefiting from its development projects, synergies with Arkema, lower costs, and the contribution of an extra month. With a 13.8% EBITDA margin in 1st half 2016, Bostik is catching-up with its major competitors, and confirms both its good momentum and a faster ramp-up than initially anticipated. Excluding Specialty Adhesives, EBITDA grew significantly thanks in particular to a very good performance in Technical Polymers. As expected, the trend is less favorable than in 2015 in molecular sieves within the filtration and adsorption business. At 18%, EBITDA margin recorded a strong increase compared to 1st half 2015 (15.8%) thanks to the progress made at Bostik as well as in the division’s other activities where the average margin is excellent just over 21.5%. Recurring operating income stood at €237 million an d includes €77 million depreciation and amortizatio n, up on last year (€73 million) due mainly to the int egration of Bostik over one extra month. INDUSTRIAL SPECIALTIES (In millions of euros) 1st half 2016 1st half 2015 Variations in % Sales............................................................................. EBITDA......................................................................... EBITDA margin (%)……………………………….......... Recurring operating income....................................... 1,195 263 22.0% 177 1,310 221 16.9% 136 8.8% +19.0% +30.1% Industrial Specialties sales amounted to €1,195 million, 8.8% 1 down on 1st half 2015. This decrease essentially results from a -6.4% scope effect related to the divestment of Sunclear finalized in 4th quarter 2015. Volumes grew by +1.9% driven mainly by the contribution of the thiochemicals platform in Malaysia which came on stream in 1st quarter 2015. The -4.4% price effect essentially reflects changes in the cost of some raw materials. EBITDA rose by 19% compared to 1st half 2015 to €263 million, while EBITDA margin gre w sharply to a very high 22.0% (17.1% in full year 2015). All of the division’s product lines showed an improvement. Fluorogases continued to improve in line with the Group’s assumptions. Thiochemicals benefited, in 1st quarter 2016, from the contribution of an additional quarter for its Kerteh platform in Malaysia, thereby achieving, on a rolling twelve month basis, the EBITDA target which the Group had set for this project over time; as expected, the platform’s contribution in 2nd quarter was close to that in 2nd quarter 2015. Market conditions in PMMA remained favorable. Hydrogen Peroxide results reflected the development of specialty grades. Recurring operating income amounted to €177 million and includes €86 million depreciation and amortization, stable overall compared to last year (€85 million). 1 As at 1st January 2016, a business from the High Performance Materials division was reassigned to the Industrial Specialties division. The reported variation in sales includes the impact of this change for a €16 mil lion amount. 6 COATING SOLUTIONS (In millions of euros) 1st half 2016 1st half 2015 Variations in % Sales............................................................................. EBITDA......................................................................... EBITDA margin (%)……………………………….......... Recurring operating income....................................... 889 113 12.7% 54 1,005 114 11.3% 57 11.5% -0.9% 5.3% Coating Solutions sales reached €889 million, -11.5% down on 1 st half 2015. Volumes rose by +3.0%, reflecting good demand in acrylic monomers and the ongoing benefits of innovation in downstream activities. The -13.2% price effect reflects the acrylics cycle and lower raw material prices. In the continuity of 2015, the division’s results showed good resilience and continued to fully benefit from solid downstream integration. EBITDA stood at €113 million, stable overall compared to 1st half 2015, while EBITDA margin stood at 12.7%, up on 1st half 2015. The good performance of downstream activities helped compensate to a large extent the results in acrylic monomers below their 1st half 2015 level. In the latter activity, which accounts for 9% of Group sales, unit margins are overall stabilized at low cycle level, in line with Group’s assumptions for the first part of 2016. Recurring operating income stood at €54 million and includes €59 million depreciation and amortization , slightly up on last year (€57 million). 3.3 Group’s cash flow analysis (In millions of euros) Cash flow from operating activities Cash flow from investing activities Net cash flow Of which: Non-recurring items including non-recurring capital expenditure Net cash flow from portfolio management Recurring cash flow (1) Free cash flow (2) Cash flow from financing activities Variation in cash and cash equivalents (1) Net cash flow excluding impact of portfolio management and non-recurring items. (2) Net cash flow excluding impact of portfolio management. 1st half 2016 259 (222) 37 (19) (5) 61 42 (104) (67) 1st half 2015 254 (1,531) (1,277) (21) (1,328) 72 51 484 (793) Cash flow from operating activities In 1st half 2016, the Group generated €259 million operat the strong increase in EBITDA being offset by an increase in working capital and income taxes. ing cash flow, slightly up on that of 1st half 2015, This cash flow includes (i) a -€189 million 2 variation in working capital which reflects the usual seasonality of the activity and the very good start to the year, (ii) -€129 million current income taxes, (iii) -€42 million cash items in the financial result, and (iv) -€21 millio n non-recurring items mostly corresponding to restructuring expenses. In 1st half 2015, the €254 million operating cash flow in cluded (i) a -€112 million 3 variation in working capital, (ii) -€110 million current income taxes, (iii) -€42 non-recurring items mostly corresponding to restructuring expenses. million cash items in the financial result, and (iv) -€21 million 2 Excluding +€3 million non-recurring items 3 Excluding flows related to non-recurring items totalling +€44 million, which primarily included a €36 million non-cash flow related to the inventory step-up carried out as part of the allocation of Bostik purchase price. 7 Cash flow from investing activities Cash flow from investing activities amounted to -€2 22 million in 1st half 2016. It primarily includes €148 million 4 capital expenditure in tangible and intangible assets. Over the full year, Group capital expenditure should amount to some €450 million base d on a euro / US dollar exchange rate of 1.10. This cash flow also includes -€17 million loans granted to employees as part of the share capital increase reserved for employees finalized in April 2016, and the variation in fixed asset payables traditionally high in 1st half of the year. In 1st half 2015, cash flow from investing activities amounted to -€1,531 million, and mainly included (i) €147 million capital expenditure (excluding cap ital expenditure related to portfolio management flow recorded in relation to acquisitions made over the operations), and (ii) a €1,328 million net cash out period, primarily the Bostik acquisition. Recurring cash flow and free cash flow Excluding non-recurring items and portfolio management operations, recurring cash flow stood at €61 million in 1 st half 2016 against €72 million in 1 st half 2015. It includes a -€17 million flow corresp onding to the loans granted to employees as part of the share capital increase reserved for employees finalized in April 2016. Free cash flow, which corresponds to net cash flow excluding the impact of portfolio management, stood at €42 million in 1 st half 2016 against €51 million in 1 st half 2015. This good cash generation, despite the usual strong seasonality in working capital, reflects the Group’s priority to actively pursue its efforts in this area. Group’s net cash flow After taking account of the impact of portfolio management, the Group’s net cash flow stood at €37 mil 1st half 2016. Cash flow from financing activities Cash flow from financing activities amounted to -€1 04 million in 1st half 2016. This includes the payment of a €1.90 dividend per share in respect of the 2015 fin ancial year, totaling €143 million, and a share cap ital increase reserved for employees conducted in April 2016 totalling €42 million. In 1st half 2015, the €484 million cash flow from financi ng activities included, in addition to the payment of the dividend, a bond issue for a net amount of €691 million made as part of the Bostik acquisition. 3.4 Group’s balance sheet analysis (In millions of euros) Non-current assets (1) Working capital Capital employed 30/06/2016 5,251 1,295 6,546 31/12/2015 5,399 1,067 6,466 Provisions for pensions and employee benefits Other provisions Total provisions Long-term assets covering some provisions Total provisions net of some non-current assets 546 389 935 68 867 571 407 978 71 907 Net debt 1,406 1,379 Shareholders’ equity (1) Excluding deferred taxes and including pension assets. 4,049 3,949 4 Excluding €20 million corresponding to reassigned fixed assets following the agreement reached with Canada Fluorspar Inc. under which Arkema sold it its share in their joint affiliate Newspar and signed a long-term purchasing contract for fluorspar. This operation, which also entailed the recognition of an equivalent amount in the proceeds from sales of operations, has no impact on the Group’s net debt. lion in Variation -2.7% +21.4% +1.2% 4.4% -4.4% -4.4% -4.2% 4.4% +2.5% 8 Between 31 December 2015 and 30 June 2016, non-current assets decreased by €148 million. This variation was primarily due to: • net depreciation and amortization amounting to €2 44 million, including €19 million depreciation and amortization resulting from the revaluation at fair value of tangible and intangible fixed assets as part of Bostik purchase price allocation; €148 million capital expenditure 5; a €75 million negative currency effect related to the strengthening of the euro versus the US dollar at the close of the period; and a €30 million increase in loans and receivables m ostly corresponding to the loans granted to employees as part of the share capital increase finalized in April 2016. At 30 June 2016, working capital was up by €228 mil -€18 million currency effect due to the strengtheni ng of the euro versus the US dollar at the close of the period. This increase mainly reflects the usual seasonality of working capital resulting from higher sales versus year-end. It includes €48 million fixed asse t payables at 30 June 2016 relating to the transfer in 3rd quarter 2015 of an acrylic acid production line to the Taixing Sunke Chemicals joint venture. Excluding this amount, the working capital to annualized sales ratio6 stood at 17.2%, overall stable compared to 30 June 2015 (17.5%). This performance reflects continued efforts to manage working capital and maintain a strict operational discipline. lion compared to 31 December 2015 including a Consequently, between 31 December 2015 and 30 June 2016, the Group’s capital employed increased by €80 million to reach €6,546 million by 30 June 2016 . At 30 June 2016, gross provisions amounted to €935 million. Some of these provisions, accounting for a total of €68 million at this date, are mostly cover ed by a guarantee facility granted by Total and described in note 15.2.2 to the condensed interim consolidated financial statements at 30 June 2016 and therefore by long-term assets recognized on the balance sheet. It mainly consists of provisions related to former industrial sites in the United States. Accordingly, at 30 June 2016, provisions net of these non-current assets amounted to €867 million. The breakdown of net provisions by type was as follows: pension liabilities of €388 million (€388 mill 31 December 2015), other employee benefits of €158 million (€183 million at 31 December 2015), environmental contingencies of €132 million (€134 m illion at 31 December 2015), €40 million restructur ing provisions (€51 million at 31 December 2015), and o ther provisions amounting to €149 million (€151 mil lion at 31 December 2015). ion at Between 31 December 2015 and 30 June 2016, net provisions for pension liabilities remained stable, the impact of lower discount rates being fully offset by the revaluation of financial assets, the reversal of provisions following the termination of the supplementary defined benefit pension scheme of the Chairman and Chief Executive Officer, and the finalization of the outsourcing of pensions in the Netherlands. Provisions for employee benefits (mainly healthcare costs, welfare costs, long-service awards) decreased by €25 million over the period due mainly to the up dating of certain actuarial assumptions. Net debt amounted to €1,406 million at 30 June 2016 (against €1,379 million at 31 December 2015), i.e. 34.7% of shareholders’ equity. This variation in net debt is explained by cash flows, as detailed in paragraph 3.3 of this report. Shareholders’ equity amounted to €4,049 million aga inst €3,949 at end 2015. The €100 million increase primarily includes (i) the payment of a dividend of €1.90 per share totaling €143 million, (ii) a €42 share capital increase reserved for employees, (iii) the €249 million net income over the period, and €42 million net negative translation adjustments. million (iv) 4. TRANSACTION WITH RELATED PARTIES Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non- consolidated companies or companies which are accounted for under the equity method. The values involved are not significant. 5 Excluding €20 million corresponding to fixed assets reassigned as part of the operations conducted with Canada Fluorspar Inc. described in paragraph 3.3 of this report. 6 Computed as working capital at 30 June / (sales for 2nd quarter *4) 9 5. HIGHLIGHTS SINCE 30 JUNE 2016 Planned acquisition of Den Braven On 20 July 2016, Arkema announced the planned acquisition of Den Braven, a leading player in high performance sealants in Europe, for a €485 million enterprise value, i.e. 11 times the 2016 EBITDA estimate. This project is consistent with the Group’s strategy to actively develop its High Performance Materials division and in particular its Specialty Adhesives business. With €350 million sales (2016 estimate), a 12.5% EBITDA margin (2016 estimate) and some 1,000 employees, Den Braven will reinforce Bostik’s offering in the insulation and construction markets, and will help create a global market leader in high performance sealants. With synergies assessed at €30 million pe r year at least, fully achieved within 5 years, this is a strong value-creating project. The operation should be EPS and cash accretive from first year, and the EV/EBITDA multiple should be reduced to around 6.5 times including synergies. With this new milestone in the achievement of our long-term ambition for Bostik, the EBITDA margin target for Bostik has been upgraded to 15% by 2020. This project is subject to the legal information and consultation process at Arkema BV’s works council and to the approval of antitrust authorities in the countries concerned. Closing is expected to take place in last quarter 2016. Organic growth project As part of its geographic expansion strategy, Bostik has opened in Sweden a new manufacturing plant for cement-based tile adhesives, mortars and flooring products. This plant will help meet growing demand in the markets of Northern Europe and the Baltic countries. 6. OUTLOOK The current macro-economic environment remains marked by moderate global growth overall, low visibility with different dynamics by region, and volatility in currencies, energy and raw material prices. In these conditions, Arkema continues to focus on its internal drivers. Hence the Group actively continues to develop Bostik and implement synergies, in line with its ambition and the medium- and long-term targets it has set for this business. The Group also pursues its plan to gradually improve its fluorogas activity and the roll-out of its operational excellence program to offset part of the inflation on fixed costs. Finally, the Group will carry out, in the 2nd half of the year, a regulatory maintenance turnaround in Kerteh, Malaysia, in Thiochemicals, one year after its start-up. Assuming an energy, raw material and currency environment in line with the first semester, and taking into account the traditional seasonality of the second half of the year, Arkema reaffirms its confidence in its ability to grow EBITDA in 2016, and now targets a significant growth in EBITDA of some 7% to 9% over the year. For 2017 and 2020, the targets, defined in normalized conditions, were presented at the Capital Markets Day held in June 2015. The roadmap presented on this occasion which explains the EBITDA increase from €784 million in 2014 to €1.3 billion in 2017 details three different contri butors: internal projects, portfolio management and economic environment. The underlying assumptions for the contribution of both internal projects and the economic environment are those described in the 2015 Reference Document. Following the developments recently announced, the contribution of portfolio management now includes a lower right to acrylic acid production capacities as part of the Taixing Sunke Chemicals joint-venture in China and the planned acquisition of Den Braven. Furthermore, in order to maintain a solid financial structure, the Group has also a gearing target of some 40% by the end of 2017. Over the longer term, still in normalized conditions, it is recalled that the Group aims to achieve, by 2020, €10 billion sales and an EBITDA margin close to 17% , while maintaining a net debt to EBITDA ratio of around 1.5. All these targets are detailed in section 4.2. of the 2015 Reference Document. 10 7. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2015 Reference Document filed with the Autorité des marchés financiers (“AMF”) on 4 April 2016 under number D.16-0263. This document is available on Arkema’s website under the heading “Investor Relations” (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities is given in the notes to the half-year financial statements. 11 Condensed consolidated interim financial statements at 30 June 2016 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2016 CONSOLIDATED INCOME STATEMENT ............................................................................................................................................. 13 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME........................................................................................................ 14 CONSOLIDATED BALANCE SHEET .................................................................................................................................................... 15 CONSOLIDATED CASH FLOW STATEMENT ...................................................................................................................................... 16 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY .................................................................................. 17 A. HIGHLIGHTS ..................................................................................................................................................................................... 18 B. ACCOUNTING POLICIES ................................................................................................................................................................. 18 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ....................................................................................................... 21 1. Information by business segment ...................................................................................................................................... 21 2. Information by geographical area ...................................................................................................................................... 22 3. Other income and expenses ............................................................................................................................................... 23 4. Adjusted net income ........................................................................................................................................................... 23 5. Income taxes ........................................................................................................................................................................ 24 6. Earnings per share .............................................................................................................................................................. 24 7. Intangible assets ................................................................................................................................................................. 24 8. Property, plant and equipment ........................................................................................................................................... 25 9. Shareholders’ equity ........................................................................................................................................................... 25 10. Provisions for pensions and other employee benefits ..................................................................................................... 26 11. Other provisions and other non-current liabilities ............................................................................................................ 27 12. Liabilities and contingent liabilities ................................................................................................................................... 28 13. Debt ...................................................................................................................................................................................... 29 14. Share-based payments ....................................................................................................................................................... 30 15. Off-balance sheet commitments ......................................................................................................................................... 32 16. Subsequent events .............................................................................................................................................................. 35 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2016 ............................................................................................................................ 36 12 Condensed consolidated interim financial statements at 30 June 2016 CONSOLIDATED INCOME STATEMENT (In millions of euros) Sales Notes (C1&C2) 1st half 2016 3,845 1st half 2015 3,977 Operating expenses (2,965) (3,209) Research and development expenses (112) (103) Selling and administrative expenses (348) (324) Recurring operating income * (C1) 420 341 Other income and expenses * (C3) (1) (82) Operating income * (C1) 419 259 Equity in income of affiliates 6 5 Financial result (50) (54) Income taxes (C5) (126) (36) Net income 249 174 Of which: non-controlling interests 4 (1) Net income - Group share (C4) 245 175 Earnings per share (amount in euros) (C6) 3.28 2.40 Diluted earnings per share (amount in euros) (C6) 3.27 2.39 Depreciation and amortization (C1) (223) (216) EBITDA * (C1) 643 557 Adjusted net income ** (C4) 240 188 Adjusted earnings per share (amount in euros) ** (C6) 3.21 2.58 Diluted adjusted earnings per share (amount in euros) ** (C6) 3.20 2.57 see note B17 to the consolidated financial statements at 31 December 2015 – Accounting policies / Main accounting and financial indicators. ** see note C4. The components of adjusted net income, adjusted earnings per share and diluted adjusted earnings per share for the first half of 2015 have been restated to exclude unrealized foreign exchange differences on foreign currency financing for investments of an exceptional nature. 13 Condensed consolidated interim financial statements at 30 June 2016 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1st half 2016 1st half 2015 (In millions of euros) Net income 249 174 Hedging adjustments 11 5 Other items (6) 1 Deferred taxes on hedging adjustments and other items (1) 1 Change in translation adjustments (42) 117 Other recyclable comprehensive income (38) 124 Actuarial gains and losses (16) 41 Deferred taxes on actuarial gains and losses 2 (10) Other non-recyclable comprehensive income (14) 31 Total income and expenses recognized directly through equity (52) 155 Comprehensive income 197 329 Of which: non-controlling interests 1 Comprehensive income – Group share 197 328 14 Condensed consolidated interim financial statements at 30 June 2016 CONSOLIDATED BALANCE SHEET (In millions of euros) ASSETS Notes 30 June 2016 31 December 2015 Intangible assets, net (C7) 2,377 2,410 Property, plant and equipment, net (C8) 2,577 2,727 Equity affiliates: investments and loans 33 29 Other investments 29 29 Deferred tax assets 183 193 Other non-current assets 235 204 TOTAL NON-CURRENT ASSETS 5,434 5,592 Inventories 1,118 1,129 Accounts receivable 1,247 1,051 Other receivables and prepaid expenses 192 190 Income taxes recoverable 35 33 Other current financial assets 7 15 Cash and cash equivalents 677 711 TOTAL CURRENT ASSETS 3,276 3,129 TOTAL ASSETS 8,710 8,721 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital 756 745 Paid-in surplus and retained earnings 2,996 2,864 Treasury shares (5) (3) Translation adjustments 254 294 SHAREHOLDERS' EQUITY - GROUP SHARE (C9) 4,001 3,900 Non-controlling interests 48 49 TOTAL SHAREHOLDERS' EQUITY 4,049 3,949 Deferred tax liabilities 292 307 Provisions for pensions and other employee benefits (C10) 546 571 Other provisions and non-current liabilities (C11) 436 453 Non-current debt (C13) 1,868 1,873 TOTAL NON-CURRENT LIABILITIES 3,142 3,204 Accounts payable 846 884 Other creditors and accrued liabilities 378 378 Income taxes payable 63 68 Other current financial liabilities 17 21 Current debt (C13) 215 217 TOTAL CURRENT LIABILITIES 1,519 1,568 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 8,710 8,721 15 Condensed consolidated interim financial statements at 30 June 2016 CONSOLIDATED CASH FLOW STATEMENT 1st half 2016 1st half 2015 (In millions of euros) Net income 249 174 Depreciation, amortization and impairment of assets 243 237 Provisions, valuation allowances and deferred taxes (51) (85) (Gains)/losses on sales of assets (2) (5) Undistributed affiliate equity earnings (4) (4) Change in working capital (186) (67) Other changes 10 4 Cash flow from operating activities 259 254 Intangible assets and property, plant, and equipment additions (168) (151) Change in fixed asset payables (50) (76) Acquisitions of operations, net of cash acquired (1,298) Increase in long-term loans (39) (22) Total expenditures (257) (1,547) Proceeds from sale of intangible assets and property, plant, and equipment 7 6 Change in fixed asset receivables Proceeds from sale of operations, net of cash sold 20 Proceeds from sale of unconsolidated investments Repayment of long-term loans 8 10 Total divestitures 35 16 Cash flow from investing activities (222) (1,531) Issuance (repayment) of shares and other equity 46 92 Purchase of treasury shares (6) (4) Dividends paid to parent company shareholders (143) (135) Dividends paid to minority shareholders (1) (2) Changes in dividends payable 47 Increase / decrease in long-term debt (3) 450 Increase / decrease in short-term borrowings and bank overdrafts 3 36 Cash flow from financing activities (104) 484 Net increase/(decrease) in cash and cash equivalents (67) (793) Effect of exchange rates and changes in scope 33 (6) Cash and cash equivalents at beginning of period 711 1,149 CASH AND CASH EQUIVALENTS AT END OF PERIOD 677 350 16 (In millions of euros) At 1 January 2016 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees Share-based payments Other Transactions with shareholders Net income Total income and expense recognized directly through equity Comprehensive income At 30 June 2016 (In millions of euros) At 1 January 2015 Cash dividend Issuance of share capital Purchase of treasury shares Grants of treasury shares to employees Share-based payments Other Transactions with shareholders Net income Total income and expense recognized directly through equity Comprehensive income At 30 June 2015 Share capital 745 11 11 756 Share capital 728 15 15 743 Condensed consolidated interim financial statements at 30 June 2016 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity 1,172 689 1,003 294 (3) 3,900 49 3,949 (143) (143) (1) (144) 35 46 46 (6) (6) (6) (4) 4 7 7 7 35 (140) (2) (96) (1) (97) 245 245 4 249 (8) (40) (48) (4) (52) 237 (40) 197 197 1,207 689 1,100 254 (5) 4,001 48 4,049 Paid-in surplus Hybrid bonds Retained earnings Translation adjustments Treasury shares Shareholders’ equity – Group share Non- controlling interests Shareholders’ equity 1,093 689 844 178 (3) 3,529 44 3,573 (135) (135) (2) (137) 77 92 92 (4) (4) (4) (7) 7 3 3 3 2 2 3 5 77 (137) 3 (42) 1 (41) 175 175 (1) 174 38 115 153 2 155 213 115 328 1 329 1,170 689 920 293 3,815 46 3,861 17 Condensed consolidated interim financial statements at 30 June 2016 A. HIGHLIGHTS A.1 Portfolio management Project to divest the Activated Carbon and Filter Aid business On 14 April 2016 Arkema announced a project to divest its Activated Carbon and Filter Aid business, which represents sales of some €93 million and has around 300 employees, to the American group Calgon Carbon. The offer received is based on a €145 million enterprise value, i.e. a multiple of 9.5 on the basis of the 2015 EBITDA. This proposed divestment requires the approval of the relevant antitrust authorities. It should be finalized in the 4th quarter of 2016. Acquisition of acrylics assets in China In early 2016 Arkema decided not to exercise its €2 00 million option to double its capacity rights in the joint venture Taixing Sunke Chemicals. However, the Group continued discussions with its partner to establish an optimized arrangement based on a 50/50 division of capacity rights, allowing Arkema access to an additional 80,000 tonnes of annual acrylic acid capacity for a cash outlay limited to approximately €40 million. As the contracts have no w been signed and implementation is in progress, the cash payment should be made during the third quarter of 2016. This joint venture will continue to be accounted for as a joint operation. A.2 Other highlights In April 2016, Arkema successfully carried out its fifth capital increase reserved for employees. 998,072 shares were subscribed at the price of €42.16 per share, giving a total amount of €42 million (see notes C9 and C14). B. ACCOUNTING POLICIES Arkema is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema have been listed on the Paris stock exchange (Euronext) since 18 May 2006. Basis for preparation The Group’s condensed consolidated interim financial statements at 30 June 2016 were prepared under the responsibility of the Chairman and CEO of Arkema and were approved by the Board of Directors of Arkema on 2 August 2016. The condensed consolidated interim financial statements at 30 June 2016 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRSs (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and IFRSs newly adopted by the European Union at 30 June 2016. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2015. The accounting framework and standards adopted by the European Union can be consulted on the following website: http://ec.europa.eu/internal_market/accounting/ias/index_en.htm 18 Condensed consolidated interim financial statements at 30 June 2016 Changes in IFRSs and interpretations The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2016 are identical to those used in the consolidated financial statements at 31 December 2015, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after 1 January 2016 (and which had not been applied early by the Group), namely: Amendments to IAS 1 Presentation of financial statements Adopted by the European Union on 19 December 2015 Amendments to IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortization Adopted by the European Union on 3 December 2015 Amendments to IAS 19 Defined benefit plans: employee contributions Adopted by the European Union on 9 January 2015 Amendments to IAS 27 Equity method in separate financial statements Adopted by the European Union on 23 December 2015 Amendments to IFRS 11 Accounting for acquisitions of interests in joint operations Adopted by the European Union on 25 November 2015 Annual improvements to IFRS cycle 2010-2012 Adopted by the European Union on 9 January 2015 Annual improvements to IFRS cycle 2012-2014 Adopted by the European Union on 16 December 2015 The standards, amendments and interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which were not yet in force at 1 January 2016 and have not been applied early by the Group, are: Amendments to IFRS 9 and IFRS 7 Amendments to IFRS 9 Amendments to IFRS 10 and IAS 28 Amendments to IFRS 10, IFRS 12 and IAS 28 Amendments to IAS 12 Mandatory effective date and transition disclosures Hedge accounting and amendments to IFRS 9, IFRS 7 and IAS 39 Sale or contribution of assets between an investor and its associate/joint venture Investment Entities: Applying the Consolidation exception Recognition of Deferred Tax Assets for Unrealised Losses Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Amendments to IAS 7 Amendments to IFRS 2 IFRS 9 IFRS 15 Clarifications to IFRS 15 Disclosure Initiative Classification and Measurement of Share-based Payment Transactions Financial instruments Revenue from contracts with customers Clarifications to IFRS 15 'Revenue from Contracts with Customers' Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 Not adopted by the European Union at 30 June 2016 IFRS 16 Leases 19 Condensed consolidated interim financial statements at 30 June 2016 Use of assumptions Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the condensed interim financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. Impact of seasonality The Group’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by the Group is generally softer in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and the rest of Europe; in some of the Group’s businesses, particularly those serving the paints and coatings as well as the refrigeration and air-conditioning markets, sales are generally higher in the first half of the year than in the second half. By contrast, in adhesives, both halves of the year are relatively well balanced; the major multi-annual maintenance turnarounds at the Group’s production plants also have an impact on seasonality. These seasonal effects in the past are not necessarily representative of future trends, but can have a material effect on the changes in earnings and working capital from one quarter of the year to another. 20 Condensed consolidated interim financial statements at 30 June 2016 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Information by business segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. The Arkema Group has three business segments: High Performance Materials, Industrial Specialties and Coating Solutions. Two members of the Executive Committee supervise these segments; they report directly to the Chairman and CEO, the Group’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their sector’s operating activity, financial results, forecasts and plans. The content of the business segments is as follows: High Performance Materials includes the following Business Lines: o Specialty Adhesives (Bostik), o Technical Polymers, comprising specialty polyamides and PVDF, o Performance Additives, comprising the filtration and adsorption (CECA) activities, organic peroxides and photocure resins (Sartomer). High Performance Materials provide innovative solutions with high value added, used in varied sectors such as transport, oil extraction, renewable energies (photovoltaics, lithium-ion batteries), consumer goods (beauty products, sports equipment, packaging, etc), electronics, construction, coatings and water treatment. Industrial Specialties groups the following Business Lines: Thiochemicals, Fluorochemicals, PMMA and Hydrogen Peroxides. These integrated industrial niche markets on which the Arkema Group is among the world leaders concern products used in several industrial sectors such as production of cold (refrigeration and air conditioning), petrochemicals, refining, paper pulp, animal nutrition, electronics and the automotive industry. Coating Solutions comprises the following Business Lines: o Acrylics, o Coatings Resins and Additives, comprising the coatings resins and Coatex rheological additives activities. This segment proposes solutions for decorative paints, industrial coatings, adhesives and high-growth acrylic applications (superabsorbers for disposable nappies, water treatment, oil and gas extraction). Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. 21 Condensed consolidated interim financial statements at 30 June 2016 1st half 2016 (In millions of euros) Non-Group sales High Performance Materials 1,747 Industrial Specialties 1,195 Coating Solutions 889 Corporate 14 Total 3,845 Inter-segment sales 9 60 29 Total sales 1,756 1,255 918 14 EBITDA 314 263 113 (47) 643 Depreciation and amortization (77) (86) (59) (1) (223) Recurring operating income 237 177 54 (48) 420 Other income and expenses (21) (2) 1 21 (1) Operating income Equity in income of affiliates Intangible assets and property, plant, and equipment additions 216 1 66 175 5 72 55 25 (27) 5 419 6 168 1st half 2015 (In millions of euros) Non-Group sales High Performance Materials 1,649 Industrial Specialties 1,310 Coating Solutions 1,005 Corporate 13 Total 3,977 Inter-segment sales 7 64 35 Total sales 1,656 1,374 1,040 13 EBITDA 260 221 114 (38) 557 Depreciation and amortization (73) (85) (57) (1) (216) Recurring operating income 187 136 57 (39) 341 Other income and expenses (61) (8) (12) (1) (82) Operating income Equity in income of affiliates Intangible assets and property, plant, and equipment additions 126 50 128 5 82 45 16 (40) 3 259 5 151 2. Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2016 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Total Non-Group sales 335 1,101 1,304 918 187 3,845 1st half 2015 (In millions of euros) France Rest of Europe NAFTA(1) Asia Rest of the world Total Non-Group sales 408 1,113 1 357 911 188 3,977 (1) NAFTA: USA, Canada, Mexico 22 Condensed consolidated interim financial statements at 30 June 2016 3. Other income and expenses 1st half 2016 1st half 2015 (In millions of euros) Expenses Income Net Expenses Income Net Restructuring and environment (3) (3) (20) (20) Goodwill impairment Asset impairment (other than goodwill) Litigation and claims Gains (losses) on sales and purchases of assets Depreciation and amortization related to allocation of the acquisition price for Bostik Other (5) (19) 26 (5) (19) 26 (46) (16) (46) (16) Total other income and expenses (27) 26 (1) (82) (82) In the first half of 2016, depreciation and amortization related to revaluation of tangible and intangible assets for the allocation of the acquisition price of Bostik amount to €19 million. Other income mainly includes the financial consequences of the discontinuation of the Chairman and CEO’s complementary defined-benefit pension plan from 7 June 2016, and the final phase of pension plan outsourcing in the Netherlands. Net restructuring and environment expenses amount to €20 million in the first half of 2015. They inclu de asset impairment and provisions recorded in connection with discontinuation of coatings resin production at the Villers-Saint-Paul site amounting to a total €6 million (including €2 million of asset impairment), and a p rovision of €6 million concerning the shutdown of t he Bernouville site for the PMMA Business Line. Gains and losses on sales and purchases of assets mainly comprise the revaluation difference on Bostik inventories (difference between production cost and the fair value at acquisition date), which amounts to €36 million. Depreciation an d amortization related to revaluation of tangible and intangible assets of Bostik amount to €16 million. 4. Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Net income - Group share Notes 1st half 2016 245 1st half 2015 175 Other income and expenses Unrealised exchange differences on foreign currency financing for investments of an exceptional nature* Taxes on other income and expenses (C3) 1 (6) 82 11 (20) Non-current taxation (C5) (60) Adjusted net income 240 188 The components of adjusted net income for the first half of 2015 have been restated to exclude unrealized foreign exchange differences on foreign currency financing for investments of an exceptional nature by the Malaysian company that holds the investments in Thiochemicals. The Arkema Group’s financial statements at 31 December 2015 have been restated to reflect the change in this subsidiary’s functional currency: this restatement was not applied in the financial statements at 30 June 2015 (see note C5 to the consolidated financial statements at 31 December 2015 – Financial result). 23 Condensed consolidated interim financial statements at 30 June 2016 5. Income taxes The income tax expense is broken down as follows: (In millions of euros) Current income taxes 1st half 2016 (127) 1st half 2015 (110) Deferred income taxes 1 74 Total income taxes (126) (36) The income tax expense amounts to €126 million at 3 0 June 2016, including €7 million for the CVAE and €4 million relating to the additional income tax contribution due on distributed income (compared with €36 million at 30 June 2015, includin g €7 million for the CVAE, €1 million relating to the additional income tax contribution due on distributed income, and a deferred tax asset of €60 million related to acquisition of Bostik and the Group’s tax position in France). 6. Earnings per share 1st half 2016 1st half 2015 Weighted average number of ordinary shares 74,799,919 72,946,518 Dilutive effect of stock options 160,387 277,536 Dilutive effect of free share grants 59,553 62,773 Weighted average number of potential ordinary shares 75,019,859 73,286,827 Earnings per share is determined below: 1st half 2016 1st half 2015 Earnings per share (€) 3.28 2.40 Diluted earnings per share (€) 3.27 2.39 Adjusted earnings per share is determined below: 1st half 2016 1st half 2015 Adjusted earnings per share (€)* 3.21 2.58 Diluted adjusted earnings per share (€)* 3.20 2.57 The components of adjusted earnings per share and diluted adjusted earnings per share for the first half of 2015 have been restated to exclude unrealised foreign exchange differences on foreign currency financing for investments of an exceptional nature (see note C4). 7. Intangible assets 7.1 Goodwill 30 June 2016 31 December 2015 (In millions of euros) Goodwill Gross book value 1,849 Accumulated amortization and impairment (550) Net book value 1,299 Net book value 1,320 In the first half of 2016, the change in goodwill corresponds to a foreign exchange effect. 24 Condensed consolidated interim financial statements at 30 June 2016 7.2 Other intangible assets 30 June 2016 31 December 2015 Gross book value Accumulated amortization and impairment Net book value Net book value (In millions of euros) Patents and technologies 380 (142) 238 248 Trademarks 444 (5) 439 442 Software and IT licences 254 (153) 101 93 Capitalized REACH costs 39 (15) 24 24 Other capitalized research expenses 5 (2) 3 3 Capitalized contracts 288 (224) 64 69 Asset rights 57 (12) 45 50 Customer relations 58 (5) 53 57 Other intangible assets 24 (15) 9 9 Intangible assets in progress 102 102 95 Total 1,651 (573) 1,078 1,090 8. Property, plant and equipment 30 June 2016 31 December 2015 (In millions of euros) Gross book value Accumulated depreciation and impairment Net book value Net book value Land and buildings 1,824 (1,120) 704 743 Complex industrial facilities 3,568 (2,801) 767 810 Other property, plant and equipment 2,816 (2,002) 814 876 Construction in progress 300 (8) 292 298 Total 8,508 (5,931) 2,577 2,727 9. Shareholders’ equity At 30 June 2016 Arkema’s share capital amounts to € 756 million, divided into 75,581,125 shares with a nominal value of 10 euros. Number of shares at 1 January 2015 72,822,695 Issuance of shares following the capital increase related to payment of dividends 1,430,888 Issuance of shares following the exercise of subscription options 107,140 Number of shares at 30 June 2015 74,360,723 Issuance of shares following the exercise of subscription options 111,378 Number of shares at 31 December 2015 74,472,101 Number of shares at 1 January 2016 74,472,101 Issuance of shares following the capital increase reserved for employees 998,072 Issuance of shares following the exercise of subscription options 110,952 Number of shares at 30 June 2016 75,581 125 25 Condensed consolidated interim financial statements at 30 June 2016 Changes in share capital Following the exercise of 110,952 share subscription options 110,952 shares were issued, giving rise to a capital increase in the total nominal amount of €1 million. On 19 April 2016, Arkema carried out a capital increase reserved for employees. 998,072 shares were subscribed at the price of €42.16 per share, the price set by the Board of Directors at its meeting of 2 March 2016, giving a total amount of €42 million. Treasury shares The Company bought back 100,617 treasury shares during the first half of 2016. In May 2016, the Arkema Group definitively granted 71,719 free shares to its employees in application of plans 2012-3, 2012-4, 2014-3. Number of treasury shares at 1 January 2015 55,014 Repurchases of treasury shares 106,519 Allocation of treasury shares (124,608) Number of treasury shares at 31 December 2015 36,925 Number of treasury shares at 1 January 2016 36,925 Repurchases of treasury shares 100,617 Allocation of treasury shares (71,719) Number of treasury shares at 30 June 2016 65,823 Dividends The combined shareholders’ general meeting of 7 June 2016 approved the distribution of a €1.90 dividen d per share in respect of the 2015 financial year, or a total amount of €143 mill ion. The dividend was paid out on 13 June 2016. 10. Provisions for pensions and other employee benefits (In millions of euros) 30 June 2016 31 December 2015 Pension obligations 388 388 Healthcare and similar coverage 98 123 Post-employment benefits 486 511 Long service awards 56 55 Other long-term benefits 4 5 Other long-term benefits 60 60 Provisions for pensions and other employee benefits 546 571 The discount rates used by the Arkema Group are as follows: Pension obligations, healthcare and similar coverage Europe (excl. UK) UK USA At 30 June 2016 1.55%-1.75% 3.00% 3.70% At 31 December 2015 2.00% 3.50% 4.50% The present value of accumulated defined benefit obligations at the end of 2015 has been adjusted at 30 June 2016 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2015 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2016. The change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. 26 Condensed consolidated interim financial statements at 30 June 2016 The change in net provisions for post-employment benefits over the first half-year is as follows: (In millions of euros) Net liability (asset) at 1 January Pension obligations 388 Healthcare and similar coverage 123 Total post-employment benefits 511 Provision recognized in liabilities 388 123 511 Amount recognized in assets Operating expense for the period Net interest expense 7 5 (1) 2 6 7 Net contributions and benefits paid by the employer (12) (1) (13) Liquidations (35) (35) Other (4) (2) (6) Actuarial gains and losses recognized in shareholders’ equity 39 (23) 16 Net liability (asset) at 30 June 388 98 486 Provision recognized in liabilities 388 98 486 Amount recognized in assets 0 0 Liquidations concern the complementary pension plan for management and the Arkema BV defined-benefit plan: Liquidations of the executive management complementary pension plans principally concerned the Chairman and CEO following the resolution adopted at the shareholders’ general meeting of 7 June 2016. Arkema BV’s defined-benefit pension plan in the Netherlands was closed retroactively at 1 January 2016 and outsourced to an insurance company during the first half of 2016; a new defined-contribution plan was set up as of 1 January 2016. These items were recorded under Other income and expenses in the financial statements at 30 June 2016. The change in actuarial gains and losses on healthcare and similar coverage mainly relates to the impact of updating actuarial assumptions (discount rates and experience adjustments) for a healthcare plan in the United States. 11. Other provisions and other non-current liabilities 11.1. Other non-current liabilities Other non-current liabilities amount to €47 million at 30 June 2016 as against €47 million at 31 Decem ber 2015. 11.2. Other provisions (In millions of euros) Environmental contingencies Restructuring Other Total At 1 January 2016 194 51 162 407 Increases in provisions 2 16 18 Reversals from provisions on use (6) (11) (12) (29) Reversals of unused provisions (4) (4) Changes in scope Translation adjustments (2) (1) (3) Other At 30 June 2016 188 40 161 389 27 Condensed consolidated interim financial statements at 30 June 2016 In addition, certain provisions are covered by non-current assets (receivables, deposits): (In millions of euros) Environmental contingencies Restructuring Other Total Total provisions at 30 June 2016 188 40 161 389 Portion of provisions covered by receivables or deposits 35 12 47 Deferred tax asset related to amounts covered by the Total indemnity 21 0 21 Provisions at 30 June 2016 net of non-current assets 132 40 149 321 For information: Provisions at 1 January 2016 net of non-current assets 134 51 151 336 11.2.1 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €83 million (€84 million at 31 Dece mber 2015), In the United States for €79 million (€84 million at 31 December 2015), of which €56 million in resp ect of former industrial sites covered 100% by the Total Group indemnity (receivable recognized in “other non-current assets” for an amount of €35 million and €21 million of deferred taxes) (see note C15.2 “Off-balance sheet commitments / Commitments received”). 11.2.2 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €22 million (€2 9 million at 31 December 2015), in Europe outside France for €13 million (€17 million at 31 December 2015) and in the United States for € 5 million (€5 million at 31 December 2015). 11.2.3 Other provisions Other provisions amount to €161 million and mainly comprise: provisions for labour litigation for €50 million ( €49 million at 31 December 2015), provisions for commercial litigation and warranties for €48 million (€47 million at 31 December 2015) , provisions for tax litigation for €24 million (€25 million at 31 December 2015), provisions for other risks for €39 million (€41 mi llion at 31 December 2015). 12. Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note C21 to the consolidated financial statements at 31 December 2015. There was no development in liabilities and contingent liabilities during the first half of 2016 with an actual or potential significant effect on the Group’s consolidated financial statements. 28 Condensed consolidated interim financial statements at 30 June 2016 13. Debt 13.1 Analysis of net debt by category Group net debt amounts to €1,406 million at 30 June 2016, taking account of cash and cash equivalents of €677 million. (In millions of euros) 30 June 2016 31 December 2015 Bonds 1,828 1,828 Finance lease obligations 2 2 Bank loans 17 28 Other non-current debt 21 15 Non-current debt 1,868 1,873 Finance lease obligations 0 0 Syndicated credit facility Commercial paper , Other bank loans 189 191 Other current debt 26 26 Current debt 215 217 Debt 2,083 2,090 Cash and cash equivalents 677 711 Net debt 1,406 1,379 Bonds At 30 June 2016, the fair values of the bonds issued by the Group are as follows: €500 million bond: €526 million, €480 million bond: €547 million, €150 million bond (issued as Euro Medium Term Note s (EMTN)): €172 million, €700 million bond (issued as Euro Medium Term Note s (EMTN)): €726 million. 13.2 Analysis of debt by currency The Arkema Group’s debt is mainly denominated in euros. (In millions of euros) 30 June 2016 31 December 2015 Euros 1,863 1,878 US Dollars 24 31 Chinese Yuan 159 147 Other 37 34 Total 2,083 2,090 Part of the debt in Euros is converted through swaps to the accounting currency of internally-financed subsidiaries, in line with the Group’s policy. 29 Condensed consolidated interim financial statements at 30 June 2016 13.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2016 31 December 2015 Less than 1 year 260 246 Between 1 and 2 years 566 585 Between 2 and 3 years 35 35 Between 3 and 4 years 517 35 Between 4 and 5 years 16 515 More than 5 years 915 928 Total 2,309 2,344 14. Share-based payments 14.1 Stock options The Board of Directors has decided not to introduce any further stock option plans. Movements in the stock subscription option plans granted up until 30 June 2016 are as follows: Plan 2008 Plan 2010-1 Plan 2010-2 Plan 2011-1 Plan 2011-2 Number of options granted 465,437 230,044 233,513 109,082 109,082 to a corporate officer 52,676 36,361 36,361 30,386 30,386 to the 10 largest beneficiaries* 172,130 105,505 107,851 78,696 78,696 Total number of options exercised 440,203 129,702 70,093 8,519 8,519 by a corporate officer 52,676 12,000 22,000 to the 10 largest beneficiaries* 160,130 65,416 19,315 8,519 8,519 Total number of options cancelled 25,234 7,000 22,174 NUMBER OF OPTIONS In circulation at 1 January 2016 69,313 98,708 166,838 109,082 109,082 Granted Cancelled 6,357 Exercised 62,956 5,366 25,592 8,519 8,519 In circulation at 30 June 2016 93,342 141,246 100,563 100,563 Employees who are not corporate officers of Arkema or any other Group company The amount of the IFRS 2 expense recognized in respect of stock options at 30 June 2016 is nil (below €0.5 million at 30 June 2015). 14.2 Free share grants Following the general meeting of the Company’s shareholders held on 7 June 2016 (18th resolution), the Board of Directors confirmed on 7 June 2016 the attribution of 50,000 free shares to the Chairman and CEO in compensation for some of the conditional rights vested to him under the complementary defined-benefit pension plan from which he previously benefited and which has now been terminated by the Board. In view of this decision, the entire expense for attribution of these free shares was recognized in Other income and expenses in the financial statements at 30 June 2016. 30 Condensed consolidated interim financial statements at 30 June 2016 Movements in the free share grant plans awarded up until 30 June 2016 are as follows: Plan 2012-3 Plan 2012-4 Plan 2013 Plan 2014-1 Plan 2014-2 Plan 2014-3 Plan 2015-1 Plan 2015-2 Plan 2016-1(1) Plan 2016-2(1) Plan 2016-3 Total number of free shares granted 65,335 17,163 250,000 750 275,000 16,368 285,525 59,595 41,228 2,050 50,000 to a corporate officer 26,000 26,000 26,000 50,000 to the 10 largest beneficiaries(2) 16,400 200 75,400 50 71,600 200 79,600 1,000 250 50 NUMBER OF FREE SHARES In circulation at 1 January 2016 62,665 14,059 246,110 415 273,895 16,368 284,275 59,355 Granted 41,228 2,050 50,000 Cancelled 3,835 1,190 1,570 970 1,300 Definitively granted 58,830 12,869 20 In circulation at 30 June 2016 244,540 415 272,925 16,348 282,975 59,355 41,228 2,050 50,000 (1) Plans described in note C14.3 “Capital increase reserved for employees” (2) Employees who are not corporate officers of Arkema S.A. or any other Group company The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2016 is €7 million (€ 3 million at 30 June 2015). 14.3 Capital increase reserved for employees In line with its employee shareholding policy, the Arkema Group offered its employees the possibility to subscribe to a reserved capital increase at the subscription price of €42.16. This price corresponds to the average opening price of the Arkema share quoted on the Paris stock exchange in the 20 trading days prior to the date of the Board of Directors’ meeting of 2 March 2016, minus a 20% discount. The shares subscribed through this operation cannot be sold for five years, except in the United States where the minimum holding period is 3 years. The employees subscribed for 998,072 shares for the total amount of €42 million, and the capital incre ase was recognized on 19 April 2016 and completed on 26 April 2016. Arkema shares were also given to Group employees located outside France via a free share grant plan: one free share was awarded for every four shares subscribed up to a maximum of 25 free shares per person. On 10 May 2016, the Board of Directors formally noted the attribution of 41,228 free shares to employees located outside France, as part of this operation. These shares will only be definitively granted after variable vesting periods of 3 and 4 years, depending on the country. Finally, on 10 May 2016, the Board of Directors decided to put in place a plan to award 2,050 free shares for the benefit of Group employees who had not been able to participate in the capital increase reserved for employees undertaken on 26 April 2016. The only condition for awarding these shares is a presence condition, and they will be definitively granted after a vesting period of 4 years from the date of the Board’s decision to award them. Valuation method In accordance with the method recommended by France’s national accounting standards authority (Autorité des Normes Comptables), the calculation used to value the cost of not being able to sell the shares for a certain period is based on the cost of a two-step strategy assuming that these shares will ultimately be sold, and that the same number of shares will be purchased and settled immediately, financed by a loan. The rate used for the loan is the rate that a bank would grant to a private individual presenting an average risk profile in the context of a 5-year consumer loan. The fair values of the shares subscribed in France and outside France have been calculated separately in order to reflect attribution of free shares to Group employees located outside France. 31 Condensed consolidated interim financial statements at 30 June 2016 The main market parameters used in the valuation of the cost of not being able to sell the shares are as follows: Country of subscription France United States Italy and Spain Other main countries Date of the Board meeting which decided on the capital increase 2 March 2016 2 March 2016 2 March 2016 2 March 2016 Share price at the date of the board meeting (€) 58.60 58.60 58.60 58.60 Risk-free interest rate (at 2 March 2016)* 0.24% 0.98% 0.39% 0.38% Borrowing rate** 10.38% 11.34% 10.38% 11.00% Cost of not being able to sell the shares 36.23% 27.50% 36.68% 39.05% 5-year risk-free rate, except for the United States (3 years) ** Rate on 5-year borrowings On the basis of the share price at the date of the Board of Director’s meeting that decided on the capital increase reserved for employees, the benefit granted represents a value of €16 milli on. Based on the cost of not being able to sell the shares as indicated above, an IFRS 2 expense of €1 mil lion will be recognized over the vesting period of the shares concerned. 15. Off-balance sheet commitments 15.1 Commitments given 15.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2016 79 31 December 2015 77 Comfort letters Contractual guarantees 10 7 Customs and excise guarantees 20 21 Total 109 106 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 15.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, the Arkema Group has signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods initially of 1 to 30 years is a normal practice for companies in the Group’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, the Arkema Group’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige the Group to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. 32 Condensed consolidated interim financial statements at 30 June 2016 The total amount of the Group’s financial commitments is €357 million at 30 June 2016 (see maturity sc hedule below). (In millions of euros) 30 June 2016 31 December 2015 2016 139 167 2017 62 58 2018 50 44 2019 40 35 2020 until expiry of the contracts 66 63 Total 357 367 Lease commitments In the context of its business, the Arkema Group has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by the Group are mainly in respect of property rental (head offices, land) and transportation equipment (rail cars, containers). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). 30 June 2016 31 December 2015 (In millions of euros) Capitalized leases Non- capitalized leases Capitalized leases Non- capitalized leases 2016 0 15 0 17 2017 0 21 0 13 2018 0 18 0 11 2019 0 14 0 10 2020 and beyond 0 49 1 35 Nominal value of future lease payments 2 117 2 86 Finance cost 0 NA 0 NA Present value NA: not applicable 2 NA 2 NA 15.1.3 Off-balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses When selling businesses, the Arkema Group has sometimes granted the purchaser warranties in respect of unrecorded liabilities. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by the Group amounts to €112 million at 30 June 2016 (€113 million at 31 December 2015). Th ese amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 33 Condensed consolidated interim financial statements at 30 June 2016 15.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C22 to the consolidated financial statements at 31 December 2015 “Debt”. 15.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies extended certain indemnities, or assumed certain obligations, for the benefit of the Arkema Group, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described below. 15.2.1 Indemnities extended by Total in respect of certain antitrust litigation In order to cover potential risks in connection with antitrust litigation relating to anti-competitive agreements in Europe and the United States and arising from facts prior to 18 May 2006 (or prior to 7 March 2006, as the case may be), Total S.A. extended indemnities to Arkema and Elf Aquitaine, Inc. extended indemnities to Arkema Amériques SAS. All these indemnities terminated at 18 May 2016. 15.2.2 Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), Total S.A. companies have entered into indemnity and service agreements with Arkema or its subsidiaries. Pursuant to these agreements, the obligations and environmental responsibilities associated with these former industrial sites in France and at Rieme in Belgium were transferred to Total S.A. group companies. Agreement relating to certain former industrial sites located in the United States In March 2006, Arkema Amériques SAS completed the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company for most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Site Services LLC and Arkema Amériques SAS, dated 7 March 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use $270 million to capitalize a new subsidiary, Legacy Site Services LLC, that will perform remediation services and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of waste shipments from the sites other than currently operated sites. In exchange for this indemnification, Arkema Amériques SAS agreed to grant to Legacy Site Services LLC control over remediation activities and the defence of claims relating to contamination liabilities at these facilities and sites. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group, certain sites where no significant restoration work is currently underway or anticipated, and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non-existent based upon information available at the time when the indemnity was entered into. Arkema Amériques SAS has waived any claims against Legacy Site Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Site Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defence and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure and criminal liability. 34 Condensed consolidated interim financial statements at 30 June 2016 The indemnity described above is capped at $270 million. The amount received by Arkema under this indemnity amounted to $93 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnify the liabilities of the Group in excess of $270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. 15.2.3 Tax indemnity granted by Total S.A. In order to cover potential tax risks related to the business activities transferred by the Group to Total or from the reorganization in connection with the Spin-Off of Arkema’s Businesses, Total S.A. has undertaken to indemnify Arkema for (i) liabilities arising from any tax, customs or levies not covered by reserves, for which the Group would remain liable, when such liabilities arise from (x) activities in the petrochemicals and specialties sectors that were transferred by the Group to Total and the triggering event of which occurred prior to the date of such transfer; or (y) the reorganization undertaken for the purpose of spinning off Arkema’s Businesses from Total’s Chemicals sector, including, in particular, the Elf Spin-Off, the Total Spin-Off, the Merger and certain prior securities reclassification transactions; (ii) interest, fines, penalties, additional charges or other costs related thereto; and (iii) provided that Total S.A. has given its prior consent, the expenses incurred by Arkema or the relevant Group company in connection with such liabilities. A litigation covered by this indemnity is still ongoing. 15.2.4 Other indemnities given in the context of the Spin-Off of Arkema’s Businesses As part of the Total Spin-Off Agreement, Total S.A. and Arkema made certain representations and warranties, some of them in connection with the separation of the Arkema Group from Total; these representations and warranties terminated on 18 May 2016. 16. Subsequent events On 20 July 2016 Arkema announced the planned acquisition of Den Braven, a leading player in high-performance sealants in Europe, for an enterprise value of €485 million. This project i s part of the Group’s strategy for active development of its High Performance Materials business segment, particularly the Specialty Adhesives business line. With annual sales of €350 millio n (estimate for 2016), an EBITDA margin of 12.5% (estimate for 2016) and around 1,000 employees, Den Braven will reinforce Bostik’s offering in the insulation and construction markets, and help create a global leader in the high-performance sealants market. Offering significant synergies of at least €30 million a year which should be fully realized o ver a 5-year horizon, this acquisition is a high value-creation project. It is subject to the legally-required process for information and consultation of Arkema BV’s employee representatives in the Netherlands, and must be approved by the antitrust authorities. The operation is expected to be completed in the final quarter of 2016. 35 Condensed consolidated interim financial statements at 30 June 2016 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2016 (a) Companies sold in 2016 The percentage of control indicated below also corresponds to the Group’s ownership interest. Altuglas International Denmark A/S Denmark 100.00 FC Altuglas International Mexico Inc. United States 100.00 FC Architectural & structural adhesives Pty Ltd Australia 100.00 FC Altuglas International SAS France 100.00 FC American Acryl LP United States 50.00 JO American Acryl NA LLC United States 50.00 JO Arkema South Korea 100.00 FC Arkema France 100.00 FC Arkema Afrique SAS France 100.00 FC Arkema Amériques SAS France 100.00 FC Arkema Asie SAS France 100.00 FC Arkema BV Netherlands 100.00 FC Arkema Canada Inc. Canada 100.00 FC Arkema Changshu Chemicals Co. Ltd China 100.00 FC Arkema Changshu Fluorochemical Co. Ltd China 100.00 FC Arkema Chemicals India Private Ltd. India 100.00 FC Arkema China Investment Co. Ltd. China 100.00 FC Arkema Coating Resins Malaysia Sdn. Bhd. Malaysia 100.00 FC Arkema Coatings Resins UK United Kingdom 100.00 FC Arkema Co. Ltd Hong Kong 100.00 FC Arkema Daikin Advanced Fluorochemicals Co. Ltd China 60.00 JO Arkema Delaware Inc. United States 100.00 FC Arkema Europe France 100.00 FC Arkema France France 100.00 FC Arkema GmbH Germany 100.00 FC Arkema Hydrogen Peroxide Co. Ltd. Shanghai China 66.67 FC Arkema Inc. United States 100.00 FC Arkema Insurance Ltd Ireland 100.00 FC Arkema KK Japan 100.00 FC Arkema Kimya Sanayi ve Ticaret AS Turkey 100.00 FC Arkema Ltd. United Kingdom 100.00 FC Arkema Mexico SA de CV Mexico 100.00 FC Arkema Mexico Servicios SA de CV Mexico 100.00 FC Arkema PEKK Inc. United States 100.00 FC Arkema Peroxides India Private Limited India 100.00 FC Arkema Pte Ltd. Singapore 100.00 FC Arkema Pty Ltd. Australia 100.00 FC Arkema Quimica Ltda Brazil 100.00 FC 36 Arkema Quimica SA Arkema (Shanghai) Distribution Co. Ltd Arkema Spar NL Limited Partnership Arkema sp Z.o.o Arkema Srl Arkema Taixing Chemicals Arkema Thiochemicals Sdn Bhd Arkema Yoshitomi Ltd. ATO Findley Deutschland Gmbh Bostik AB (Sweden) Bostik AS Bostik Argentina Bostik AS (Denmark) Bostik AS (Norway) Bostik Australia Bostik Belux NV SA Bostik BV Bostik Canada Bostik Egypt For Production of Adhesives S.A.E Bostik Findley (China) Co Ltd. Bostik Findley Malaysia Sdn.-Bhd. Bostik Gmbh Bostik Holding Australia Ltd Bostik Holding BV Bostik Holding Hong Kong Ltd. Bostik Holding SA Bostik Inc. Bostik India Private Ltd. Bostik Industries Ltd. Bostik Korea Ltd. Bostik Ltd. Bostik Mexicana SA de CV Bostik Nederland BV Bostik New Zealand Bostik-Nitta Co. Ltd. Bostik OOO Bostik OY Bostik Philippines Inc. Bostik Polska SP Z.O.O Bostik SA Bostik SA (Spain) Bostik SIA Bostik (Shanghai) Management Co. Ltd. Bostik (Thailand) Co. Ltd Condensed consolidated interim financial statements at 30 June 2016 Spain 99.92 FC China 100.00 FC Canada 100.00 FC Poland 100.00 FC Italy 100.00 FC China 100.00 FC Malaysia 86.00 FC Japan 49.00 SI Germany 100.00 FC Sweden 100.00 FC Estonia 100.00 FC Argentina 100.00 FC Denmark 100.00 FC Norway 100.00 FC Australia 100.00 FC Belgium 100.00 FC Netherlands 100.00 FC Canada 100.00 FC Egypt 100.00 FC China 100.00 FC Malaysia 100.00 FC Germany 100.00 FC Australia 100.00 FC Netherlands 100.00 FC Hong Kong 100.00 FC France 100.00 FC United States 100.00 FC India 100.00 FC Ireland 100.00 FC South Korea 100.00 FC United Kingdom 100.00 FC Mexico 100.00 FC Netherlands 100.00 FC New Zealand 100.00 FC Japan 66.00 FC Russia 100.00 FC Finland 100.00 FC Philippines 100.00 FC Poland 100.00 FC France 100.00 FC Spain 100.00 FC Latvia 100.00 FC China 100.00 FC Thaïland 100.00 FC 37 Bostik UAB Bostik Vietnam Company Ltd Ceca Belgium Ceca Italiana Srl Ceca LC Ceca SA Ceca Watan Saudi Arabia Cekomastik Kimya Sanayi Ve Ticaret A.S Changshu Coatex Additives Co. Ltd. Changshu Haike Chemicals Co. Ltd. CJ Bio Malaysia Sdn. Bhd. Coatex Asia Pacific Coatex Central Eastern Europe sro Coatex Inc. Coatex Latin America Industria et Comercio Ltda Coatex Netherlands BV Coatex SAS Daikin Arkema Refrigerants Asia Ltd. Daikin Arkema Refrigerants Trading (Shanghai) Co. Ltd. Delaware Chemicals Corporation Febex SA Hebei Casda Biomaterials Co. Ltd Ihsedu Agrochem Private Ltd Jiangsu Bostik Adhesive Co. Ltd Maquiladora General de Matamoros SA de CV MEM BAUCHEMIE Gmbh Michelet Finance, Inc. MLPC International Newspar Mydrin Srl ODOR-TECH LLC Oxido Srl Oxochimie Ozark Mahoning Company PT Bostik Indonesia Sartomer Asia Limited Sartomer Guangzhou Chemical Co. Ltd. Sartomer Shanghai Distribution Company Limited Seki Arkema Shanghai Arkema Gaoyuan Chemicals Co. Ltd Société Marocaine des Colles Sovereign Chemicals Ltd Suzhou Hipro Polymers Co. Ltd Taixing Sunke Chemicals Condensed consolidated interim financial statements at 30 June 2016 Lithuania 100.00 FC Vietnam 100.00 FC Belgium 100.00 FC Italy 100.00 FC France 100.00 FC France 100.00 FC Saudi Arabia 51.00 FC Turkey 100.00 FC China 100.00 FC China 49.00 FC Malaysia 14.00 SI South Korea 100.00 FC Slovaquie 100.00 FC United States 100.00 FC Brazil 100.00 FC Netherlands 100.00 FC France 100.00 FC Hong Kong 40.00 JV China 40.00 JV United States 100.00 FC Switzerland 96.77 FC China 100.00 FC India 24.90 SI China 100.00 FC Mexico 100.00 FC Germany 100.00 FC United States 100.00 FC France 100.00 FC (a) Canada 50.00 JO Italy 100.00 FC United States 100.00 FC Italy 100.00 FC France 50.00 JO United States 100.00 FC Indonesia 100.00 FC Hong Kong 100.00 FC China 100.00 FC China 100.00 FC South Korea 51.00 FC China 100.00 FC Morocco 97.01 FC United Kingdom 100.00 FC China 100.00 FC China 55.00 JO 38 Condensed consolidated interim financial statements at 30 June 2016 Tamer Endustriyel Madencilik Anonim Sirketi Turkey 50.00 FC Turkish Products, Inc. United States 100.00 FC Usina Fortaleza Industria E commercio de massa fina Ltda Brazil 100.00 FC Vetek Argentina 60.00 FC Viking chemical company United States 100.00 FC Zhuhai Bostik Adhesive Ltd China 100.00 FC Nb : FC : full consolidation. JO: joint operation – consolidated based on shares of assets, liabilities, income and expenses JV: joint venture - consolidation by the equity method. SI: significant influence - consolidation by the equity. 39 III - DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT AT 30 JUNE 2016 I certify that, to the best of my knowledge, the condensed consolidated financial statements have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, 3 August 2016 Thierry Le Hénaff Chairman and CEO 40 KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit This is a free translation into English of the statutory auditors' review report on the half-yearly financial information issued in French and is provided solely for the convenience of English- speaking users. This report includes information relating to the specific verification of information given in the Group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France Arkema For the period from January 1 to June, 30, 2016 Statutory auditors’ review report on the half-yearly financial information KPMG Audit Département de KPMG S.A. Tour EQHO 2, avenue Gambetta CS 60055 92066 Paris-La Défense Cedex ERNST & YOUNG Audit 1/2, place des Saisons 92400 Courbevoie - Paris-La Défense 1 S.A.S. à capital variable Commissaire aux Comptes Membre de la compagnie régionale de Versailles Commissaire aux Comptes Membre de la compagnie régionale de Versailles Arkema For the period from January 1 to June 30, 2016 Statutory auditors’ review report on the half-yearly financial information To the Shareholders, In compliance with the assignment entrusted to us by your annual general meetings and in accordance with the requirements of article L.451-1-2 III of the French monetary and financial code ("code monétaire et financier"), we hereby report to you on: the review of the accompanying (condensed) half-yearly consolidated financial statements of Arkema, for the period from January 1 to June 30, 2016. the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements are the responsibility of the board of directors. Our role is to express a conclusion on these financial statements based on our review. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 – standard of the IFRSs as adopted by the European Union applicable to interim financial information. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 42 Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 – standard of the IFRSs as adopted by the European Union applicable to interim financial information. 2. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La Défense, August 2, 2016 The statutory auditors French original signed by KPMG Audit Département de KPMG S.A. ERNST & YOUNG Audit Bertrand Desbarrières François Quédiniac Denis Thibon 43

Semestriel, 2016, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

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Half-year Financial Report First half ended June 30th 2014 ARKEMA 420, rue d’Estienne d’Orves – F-92705 COLOMBES Cedex – France Standard : +33 (0)1 49 00 80 80 – Fax : +33 (0)1 49 00 83 96 Société anonyme au capital de 636 968 620 euros – 445 074 685 RCS 2014 Half-year financial report Free translation for information purposes only I- Half-year activity report........................................................................................................................ 3 II- Consolidated financial statements at June 30th 2014 ............................................................................ 9 III- Declaration by the person responsible for the Half-year financial report .................................. 32 IV- Report from the statutory auditors on consolidated financial statements at June 30th 2014 .......... 35 This document is a free translation in English of Arkema’s Half-year financial report for the First Half ended June 30th 2014. This translation has been prepared solely for the information and convenience of English speaking readers. No assurances are given as to the accuracy or completeness of this translation, and Arkema assumes no responsibility with respect to this translation or any misstatement or omission that may be contained therein. In the event of any ambiguity or discrepancy between this translation and the French document, the French document shall prevail. 2 HALF-YEAR FINANCIAL REPORT I. FIRST HALF 2014 HIGHLIGHTS 1. Acquisition In January 2014, ARKEMA announced the creation of Sunke, a joint venture in which ARKEMA will have a majority interest, comprising the assets of Jurong’s acrylic acid production site in Taixing opened in 2012, with current capacity running at 320,000 t/year. This acquisition, in the wake of ARKEMA’s recent startup of its coating resins and Coatex production plants on the Changshu site, will enable the Group to accelerate the development of its Coating Solutions segment in China and in Asia and to assist its customers in particular in fast-growing markets such as superabsorbents, paints, adhesives and water treatment. It also reinforces the Group’s presence in higher growth countries. When the deal closes1, due in September 2014, ARKEMA will have access to half of the site’s installed production, namely 160,000 t/year, for a US$240 million investment. When a third line comes on stream, ARKEMA will have the option to access 2/3rd of the site’s acrylic acid installed capacity, namely 320,000 t/year, for an additional US$235 million investment. In a full year, sales corresponding to both these lines are estimated at around US$600 million. 2. Organic growth project In May 2014, ARKEMA announced the creation of a joint venture between CECA, its Filtration and Adsorption subsidiary, and Saudi company Watan Industrial Investment. The joint venture, majority-owned by ARKEMA, will operate a petroleum additives blending plant and storage facility in Saudi Arabia. The new site will enable CECA to meet the high demand for petroleum additives in the Gulf region, and will consolidate the Group’s presence in fast- growing countries, in line with its mid-term strategy and ambition. The new site is due to come on stream in 2nd half 2014. 3. Improvement of competitiveness In line with its medium term target to generate a 15% EBITDA margin in the Coating Solutions segment, ARKEMA continues to optimise its Coating Resins business, and has announced in May 2014 a project to discontinue production of coating resins on its Stallingborough site (UK), which will result in the loss of 58 jobs. A €9 mill ion exceptional charge, including €5 million asset impairment, was booked in the 2nd quarter 2014 accounts. The production plants were shut down in July 2014. On 30 April 2014, the inauguration of the new electrolysis unit at the Jarrie plant marked a new milestone in the site’s modernisation. This investment of some €100 million , including €60 million for ARKEMA, has enabled the fa cility to adapt to the latest regulations on industrial risks (‘PPRT’) and to convert its mercury electrolysis to the membrane technology, thereby pre-empting the mandatory deadline by several years. 4. Other highlights In April 2014, ARKEMA successfully conducted its fourth share capital increase operation reserved for employees. 491,502 shares were subscribed at a price of €64.19 per share, totalling €32 million. The share of the capital held by employees now stands at some 4.7%. On 29 May 2014, American company Golden Gate Capital finalised its takeover bid for the entire capital of Canada Fluorspar Inc. This operation resulted in the accounts of ARKEMA, which owned a 19% stake in this company, in a €6 million capital loss. 1 This operation is subject to authorisation by the relevant authorities in China as well as a number of administrative formalities. 3 II. ANALYSIS OF FINANCIAL RESULTS FOR FIRST HALF 2014 (In millions of euros) 1st half 2014 1st half 2013 Variations in % 3,043 Sales .............................................................................. 419 EBITDA........................................................................... EBITDA margin (%)………………………………............ 13.8% 261 Recurring operating income........................................ (32) Other income and expenses........................................... 229 Operating income.......................................................... Net income – Group share …………………………….…... 124 156 Adjusted net income ………………………………......... 3,192 507 15.9% 353 (140) 213 82 221 4.7% -17.4% 26.1% +7.5% +51.2% -29.4% Capital expenditures…………………………………….. 203 174 +16.7% Net debt ………………………………………………….... 1,106 (30/06/14) 1,150 (30/06/13) 3.8% Sales Sales in 1st half 2014 amounted to €3,043 million, 4.7% down on 1st half 2013, and 1.4% down at constant scope of business and foreign exchange rate. Volumes grew by 2.1% (+3.5% excluding the impact of the shutdown of the Chauny site in France effective in 1st quarter 2014), supported by High Performance Materials and Industrial Specialties. The -3.5% price effect essentially reflects lower prices and unfavourable product mix in fluorogases. The - 2.3% currency effect (translation only) primarily corresponds to the weakening of the US dollar versus the euro. The -1.0% business scope effect reflects the deconsolidation of the coating resins companies in South Africa currently being divested as well as the change in the consolidation method used for certain joint ventures. EBITDA and recurring operating income st half 2013. This decrease reflects challenging market EBITDA stood at €419 million against €507 million in 1 conditions in fluorogases, several specific and temporary unfavourable elements in polyamide 12 in 2nd quarter 2014, and volumes below expectations in Coating Solutions in 2nd quarter 2014. The other product lines reported a solid performance. Finally, the strength of the euro versus the US dollar continued to impact the Group’s performance with a -€10 million translation effect in 1 st half 2014. EBITDA margin held up well as 13.8% of sales despite market conditions in fluorogases and in acrylics. st half 2013. It In line with the EBITDA trend, recurring operating income stood at €261 million against €353 million in 1 includes €158 million depreciation and amortization , slightly up on last year (€154 million). The incr ease in depreciation and amortization relating to the start-up of new production plants was to a large extent offset by a currency effect related to the weakening of the US dollar compared to the euro and by changes in the scope of consolidation. Operating income After deduction of €32 million other income and expe nses (-€140 million in 1 st half 2013), operating income stood at €229 million against €213 million in 1 In 1st half 2014, other income and expenses corresponded mainly to various restructuring charges including those related to the shutdown of production of coating resins on the Stallingborough site (United Kingdom) as well as costs related to acquisition and divestment operations. In 1st half 2013, other income and expenses mainly corresponded to a €125 million non-recurring charge booked in the acc ounts following the insolvency proceeding concerning Kem One SAS, the company that comprises the upstream part (chlorine / caustic soda electrolysis and PVC) of the vinyl activities sold by ARKEMA. st half 2013. 4 Financial result million in 1st half 2013. It includes a €3 million charge relatin g to Financial result stood at -€29 million against -€27 actuarial losses on certain provisions for long service awards due to employees in France booked to take into account lower discount rates. Income taxes Income taxes in 1st half 2014 amounted to €75 million (€106 million in 1st half 2013), i.e. 28.7% of recurring operating income. They included a €4 million contribution pai d on the dividend paid out in May 2014. Excluding this contribution, the tax rate would stand at 27.2% of recurring operating income. This tax rate reflects the geographic breakdown of the results and in particular the weight of North America in the Group’s results. Net income, Group share, and adjusted net income Net income, Group share stood at €124 million again st €82 million in 1 st half 2013. Excluding the impact, after tax, of non-recurring items, adjusted net income reached €156 million agai nst €221 million in 1st half 2013. 5 Segment performance High Performance Materials (In millions of euros) 1st half 2014 1st half 2013 Variations In % 925 Sales ............................................................................... 150 EBITDA............................................................................ EBITDA margin (%)………………………………............. 16.2% 98 Recurring operating income......................................... 925 163 17.6% 112 -8.0% 12.5% High Performance Materials sales were stable compared to 1st half 2013 at €925 million. At constant scope of business and foreign exchange rate, sales grew by 2.2%, supported by strong growth in volumes (+4.3%) compared to a relatively low basis of comparison at the beginning of 2013. Fluoropolymers, driven by the latest developments (lithium-ion batteries, etc.), and organic peroxides benefited from good growth momentum. The -2.1% price effect resulted primarily from stronger competitive pressure in polyamide 12 partly offset by a favourable product mix in the Filtration and Adsorption business at the beginning of the year. The -2.2% translation effect corresponded mostly to the strengthening of the euro versus the US dollar. st half 2013. Following a good start to the year significantly up on EBITDA stood at €150 million against €163 million in 1 the previous year, the 2nd quarter reported a lower performance due to temporary unfavourable factors in polyamide 12. These factors include the large maintenance turnaround in Mont in France (-€7 million EBITDA), increased competitive pressure, and higher negative transaction effect than in the Group’s other business segments. EBITDA margin remained high at 16.2% against 17.6% in 1st half 2013 thanks to solid performances in fluoropolymers, the Filtration and Adsorption activity, and Organic Peroxides. Industrial Specialties (In millions of euros) 1st half 2014 1st half 2013 Variations In % Sales ................................................................................ 1,005 EBITDA............................................................................. 152 EBITDA margin (%)……………………………….............. 15.1% 93 Recurring operating income.......................................... 1,079 218 20.2% 161 6.9% -30.3% 42.2% The performance of the Industrial Specialties segment was, as expected, impacted by challenging market conditions in fluorogases for refrigeration and air-conditioning. Aside from the seasonality effect, these conditions remained stable throughout the 1st half of the year. Sales reached €1,005 million, 3.7% down on 1 st half 2013 at constant scope of business and foreign exchange rate. Volumes rose by 4.2%, in particular in fluorogases where weather conditions in 2nd quarter 2014 were more favourable than in the previous year, and in PMMA supported by the recovery in European automotive. Nevertheless, this increase did not offset a -7.9% price effect due essentially to lower prices and an unfavourable product mix in fluorogases. The - 1.1% business scope effect corresponds to a change in the consolidation method used for certain joint ventures. The - 2.0% translation effect corresponds mostly to the strengthening of the euro versus the US dollar. st half 2013), and EBITDA margin at 15.1%. This lower performance EBITDA stood at €152 million (€218 million in 1 than the previous year reflects lower results in fluorogases compared to the high basis of comparison of 1st half 2013 as well as the impact, in 2nd quarter, of the maintenance turnaround in Thiochemicals in Beaumont (United States) estimated at -€5 million. Thiochemicals and PMMA repo rted a solid performance in 1st half. The performance of the segment in 2nd quarter improved over 1st quarter thanks to more favourable seasonality and despite the impact of the maintenance turnaround in Beaumont. 6 Coating Solutions (In millions of euros) 1st half 2014 1st half 2013 Variations In % Sales ................................................................................ 1,102 144 EBITDA............................................................................. EBITDA margin (%)……………………………….............. 13.1% 98 Recurring operating income.......................................... 1,164 161 13.8% 116 5.3% -10.6% 15.5% Following a good start to the year supported by positive momentum in the decorative paint market, growth in volumes slowed in 2nd quarter. Hence, unlike 1st quarter and the Group’s assumption for the full year, volumes, below expectations, were not able to fully offset the anticipated lower unit margins in acrylic monomers. in 1st half 2013, 2.7% up at constant scope of business and foreign Sales stood at €1,102 million against €1,164 million exchange rate, and excluding the impact of the shutdown of the Chauny site in France, effective in 1st quarter 2014. Excluding Chauny, volumes grew by 3.3%. Demand in decorative paints and construction was lower than expected in the United States, where no catching-up occurred after a harsh winter, but improved gradually in Europe. In this context, the contribution of organic growth projects remained limited in 1st half of the year, but should improve in 2nd half in particular with the start-up of the methyl acrylate plant at end of June. Prices were slightly below those of 1st half 2013 (-0.6%). The translation effect stood at -2.5%, while the -1.9% consolidation scope effect was due to the coating resins companies currently being divested in South Africa being removed from the consolidation basis. st half 2013. Volumes together with productivity efforts partly EBITDA stood at €144 million against €161 million in 1 offset the impact of unfavourable foreign exchange rates and unit margins below those of 1st half 2013 in acrylic monomers (acid and esters). In this activity, which represents 14.5% of the Group’s overall sales, unit margins currently stand between the middle and the lower end of the cycle. This situation, which should continue until the end of the year, is consistent with the assumption adopted by the Group for full year 2014. EBITDA margin at 13.1% confirms the segment’s resilience in less favourable market conditions. Cash flow In 1st half 2014, ARKEMA generated -€100 million free cash flow 2 against -€16 million in 1 st half 2013. This flow includes a -€92 million variation in working capita l, which reflects the usual seasonality of working capital related to an increase in sales compared to year-end. The working capital to quarterly sales ratio3 stood at 17.3%, stable compared to end of June 2013. Free cash flow also includes € 203 million capital expenditures including €78 mill ion exceptional capital expenditures related to the construction of the Thiochemicals platform in Malaysia and the finalisation of the investment plan in Lacq (France) designed to secure the site’s sulphur feedstock over the next 30 years. Over 2014, capital expenditures should amount to some €450 mil lion. Net debt Net debt stood at €1,106 million at 30 June 2014 ag ainst €923 million at 31 December 2013. It includes the payment in May of a €1.85 dividend per share, totalling €117 m illion, as well as the share capital increase reserved for employees totalling €32 million. Net debt was slightly below that at end of June 2013 (€1,150 million at 30 June 2013) despite the evolution in EBITDA and the higher capital expenditure. Gearing stood at 46.6%, down compared to end of June 2013 (49.6%). 2 Cash flow from operations and investments excluding the impact of portfolio management (for 2013, excluding flows related to Kem One). 3 Working capital at 30 June divided by 4 times the 2nd quarter sales. 7 III. TRANSACTIONS WITH RELATED PARTIES Transactions between companies that are fully consolidated within the Group have been eliminated in the consolidation process. Furthermore, in the normal course of its operations, the Group has business relationships with certain non- consolidated companies or companies recognized under the equity method with non-significant values. IV. HIGHLIGHTS SINCE 30 JUNE 2014 End of July, ARKEMA announced the start-up of its new 45,000 tonnes plant for the production of methyl acrylate, an acrylic acid derivative used in the manufacture of polymers for water treatment, elastomers and engineering polymers. This investment, on its Clear Lake site in Texas, represents the last phase of a US$110 million investment plan intended to strengthen the Group’s position in the US acrylics market. V. The economic environment in 2nd half should remain in continuity with 2nd quarter 2014, in particular in fluorogases and acrylics. In these conditions, including the expected contribution from structural growth projects, 2014 EBITDA should be close to €800 million. 2014 OUTLOOK Beyond this, the Group maintains its targeted growth strategy and should benefit from 2015 onwards from major organic growth projects like the Thiochemicals platform in Malaysia, the contribution of acrylic assets currently being acquired in China and improvements in the oil and gas market. However, in order to take account of current performance, Arkema is strengthening the control of its fixed and variable costs, over and above its operational excellence programme, with a further optimisation target of some €50 million over the next three years, and will continue to work to reduce the cyclicality of its business profile. Following a thorough review of each business unit, the Group confirms its mid-term targets (€8bn sales and 16% EBITDA margin). However, their achievement, initially planned for 2016, is now set for 2017 to take into account a more progressive return to normalized conditions. The Group confirms its 2020 targets. VI. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2013 Reference Document filed with the Autorité des marchés financiers (“AMF”) on 27 March 2014 under number D.14- 0221. This document “Investor Relations” (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in a note to the half-year financial statements. is available on ARKEMA’s website under the heading 8 CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2014 CONSOLIDATED INCOME STATEMENT....................................................................................................... 10 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ....................................................................... 11 CONSOLIDATED BALANCE SHEET ............................................................................................................ 12 CONSOLIDATED CASH FLOW STATEMENT................................................................................................. 13 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY...................................................... 14 A. HIGHLIGHTS ....................................................................................................................................... 15 B. ACCOUNTING POLICIES ....................................................................................................................... 16 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS....................................................................... 19 1 Information by business segment................................................................................................. 19 2 Information by geographical area ................................................................................................. 20 3 Other income and expenses ........................................................................................................ 21 4 Adjusted net income .................................................................................................................. 21 5 Income taxes ............................................................................................................................ 21 6 Earnings per share .................................................................................................................... 22 7 Intangible assets ....................................................................................................................... 22 8 Property, plant and equipment..................................................................................................... 23 9 Shareholders’ equity .................................................................................................................. 23 10 Provisions for pensions and other employee benefits...................................................................... 23 11 Other provisions and other non-current liabilities ........................................................................... 24 12 Liabilities and contingent liabilities............................................................................................... 25 13 Debt ........................................................................................................................................ 26 14 Share-based payments ............................................................................................................... 27 15 Off-balance sheet commitments................................................................................................... 29 16 Subsequent events .................................................................................................................... 31 D. SCOPE OF CONSOLIDATION AT 30 JUNE 2014 ........................................................................................ 31 9 CONSOLIDATED INCOME STATEMENT (In millions of euros) Notes 1st half 2014 Sales (C1&C2) 3,043 Operating expenses (2,495) Research and development expenses (77) Selling and administrative expenses (210) Recurring operating income * (C1) 261 Other income and expenses * (C3) (32) Operating income * (C1) 229 Equity in income of affiliates Financial result (29) Income taxes (C5) (75) Net income 125 Of which: non-controlling interests 1 Net income - Group share (C4) 124 Earnings per share (amount in euros) (C6) 1.96 Diluted earnings per share (amount in euros) (C6) 1.95 Depreciation and amortization (C1) (158) EBITDA * (C1) 419 Adjusted net income* (C4) 156 Adjusted earnings per share (amount in euros) (C6) 2.47 Diluted adjusted earnings per share (amount in euros) (C6) 2.45 see note B18 to the consolidated financial statements at 31 December 2013 – Accounting policies / Main accounting and financial indicators. 1st half 2013 3,192 (2,549) (76) (214) 353 (140) 213 3 (27) (106) 83 1 82 1.31 1.29 (154) 507 221 3.53 3.49 10 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In millions of euros) Net income Hedging adjustments Other items Deferred taxes on hedging adjustments and other items Change in translation adjustments Other recyclable comprehensive income Actuarial gains and losses Deferred taxes on actuarial gains and losses Other non-recyclable comprehensive income Other comprehensive income Total income and expenses recognized directly in equity Comprehensive income Of which: non-controlling interests Comprehensive income – Group share 1st half 2014 125 (3) 12 9 (41) 7 (34) (25) (25) 100 1 99 1st half 2013 83 (2) 1 (1) 41 (16) 25 24 24 107 1 106 11 CONSOLIDATED BALANCE SHEET (In millions of euros) Notes ASSETS Intangible assets, net (C7) Property, plant and equipment, net (C8) Equity affiliates: investments and loans Other investments Deferred tax assets Other non-current assets TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Other current financial assets Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Translation adjustments SHAREHOLDERS' EQUITY - GROUP SHARE (C9) Non-controlling interests TOTAL SHAREHOLDERS' EQUITY Deferred tax liabilities Provisions for pensions and other employee benefits (C10) Other provisions and non-current liabilities (C11) Non-current debt (C13) TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Other current financial liabilities Current debt (C13) TOTAL CURRENT LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 30 June 2014 978 1,982 18 40 67 199 3,284 921 936 147 23 1 169 2,197 5,481 637 1,682 (1) 19 2,337 35 2,372 63 401 393 1,202 2,059 673 267 33 4 73 1,050 5,481 31 December 2013 973 1,943 17 52 66 177 3,228 896 824 125 24 2 377 2,248 5,476 630 1,687 (12) 7 2,312 37 2,349 64 361 439 1,207 2,071 687 256 19 1 93 1,056 5,476 12 CONSOLIDATED CASH FLOW STATEMENT (In millions of euros) Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities Intangible assets and property, plant, and equipment additions Change in fixed asset payables Acquisitions of operations, net of cash acquired Increase in long-term loans Total expenditures Proceeds from sale of intangible assets and property, plant, and equipment Change in fixed asset receivables Proceeds from sale of operations, net of cash sold Proceeds from sale of unconsolidated investments Repayment of long-term loans Total divestitures Cash flow from investing activities Issuance (repayment) of shares and other equity Purchase of treasury shares Dividends paid to parent company shareholders Dividends paid to minority shareholders Increase / decrease in long-term debt Increase / decrease in short-term borrowings and bank overdrafts Cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD 1st half 2014 125 164 (38) 5 5 (92) 5 174 (203) (52) (1) (30) (286) 4 5 6 15 (271) 38 (117) (3) (5) (20) (107) (204) (4) 377 169 1st half 2013 83 155 (24) (4) 6 (156) 4 64 (174) (25) (10) (16) (225) 5 14 19 (206) 8 (113) (5) 191 81 (62) 1 360 299 13 (In millions of euros) At 1 January 2014 Cash dividend Issuance of share capital Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees Sale of treasury shares Share-based payments Other Transactions with shareholders Net income Total income and expense recognized directly through equity Comprehensive income At 30 June 2014 (In millions of euros) At 1 January 2013 Cash dividend Issuance of share capital Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees Sale of treasury shares Share-based payments Other Transactions with shareholders Net income Total income and expense recognized directly through equity Comprehensive income At 30 June 2013 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Shares issued Treasury shares Number Amount Paid-in surplus Retained earnings Translation adjustments Number Amount 63,029,692 630 868 819 7 (226,974) (12) (55) (62) 667,170 7 31 14 (25) 204,603 11 (14) 19 667,170 7 (24) (68) 204,603 11 124 (37) 12 87 12 63,696,862 637 844 838 19 (22,371) (1) Shares issued Treasury shares Number Amount Paid-in surplus Retained earnings Translation adjustments Number Amount 62,877,215 629 977 610 82 (314,034) (16) (113) 70,958 2 (4) 87,060 4 4 70,958 (111) 87,060 4 82 23 1 105 1 62,948,173 629 866 715 83 (226,974) (12) Shareholders’ equity – Group share 2,312 (117) 38 5 (74) 124 (25) 99 2,337 Shareholders’ equity – Group share 2,282 (113) 2 4 (107) 82 24 106 2,281 Non- controllin g interests 37 (3) (3) 1 1 35 Non- controlling interests 29 6 6 1 1 36 14 Shareholders’ equity 2,349 (120) 38 5 (77) 125 (25) 100 2,372 Shareholders’ equity 2,311 (113) 2 4 6 (101) 83 24 107 2,317 A. HIGHLIGHTS Acquisition In January 2014 ARKEMA announced the creation of Sunke, a company in which ARKEMA will hold the majority interest and control. This company will comprise the assets of Jurong’s acrylic acid production site in Taixing which opened in 2012 and currently has an annual capacity of 320,000 tonnes. This operation 4 is due to be completed in September 2014, giving ARKEMA access to half of the site’s installed production or 160,000 tonnes per year, for a USD 240 million investment. Once a third line is on stream, ARKEMA will have the option to access two thirds of the site’s installed acrylic acid capacity, or 320,000 tonnes per year, for an additional investment of USD 235 million. On a full- year basis, the sales revenues from these two lines are estimated at approximately USD 600 million. Finally, ARKEMA has a further option allowing it to acquire the remaining third of the acrylic acid production capacities in the coming 5 years, for the sum of USD 165 million. The new company will be fully consolidated in ARKEMA’s financial statements. Improving competitiveness In the Coating Solutions segment, ARKEMA announced in May 2014 that it was planning to stop production of coatings resins at the Stallingborough site in the United Kingdom, leading to the elimination of 58 jobs. Discontinuation of production took effect in July 2014, and as a result an expense of €9 million was recogn ised in other income and expenses (see note C3 “Other income and expenses”). Other highlights In April 2014 Arkema successfully carried out its fourth capital increase reserved for employees. 491,502 shares were subscribed at the price of €64.19 per share, for a total of €31.5 mil lion. The portion of capital held by employees is now close to 4.7%. On 29 May 2014, the US company Golden Gate Capital finalized its takeover of the entire capital of Canada Fluorspar Inc. The transaction price was CAD 0.35 per share, and the operation is reflected in the financial statements of ARKEMA, which previously held 19% of Canada Fluorspar Inc., by recognition of a € 6 million loss (see note C3 “Other income and expenses”). 4 This operation requires the authorization of the competent authorities in China and is subject to a certain number of administrative formalities. 15 B. ACCOUNTING POLICIES Arkema S.A. is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The Company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema S.A. have been listed on the Paris stock exchange (Euronext) since 18 May 2006. Basis for preparation ARKEMA’s condensed consolidated interim financial statements at 30 June 2014 were prepared under the responsibility of the Chairman and CEO of Arkema S.A. and were approved by the Board of Directors of Arkema S.A. on 31 July 2014. The condensed consolidated interim financial statements at 30 June 2014 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with the IFRSs (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and IFRSs newly adopted by the European Union at 30 June 2014. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2013. The accounting framework and standards adopted by the European Union can be consulted on the following website: http://ec.europa.eu/internal_market/accounting/ias/index_en.htm Changes in IFRSs and interpretations The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2014 are identical to those used in the consolidated financial statements at 31 December 2013, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after 1 January 2014 (and which had not been applied early by the Group), namely: Amendments to IAS 32 Offsetting financial assets and financial liabilities Amendments to IAS 36 Recoverable amount disclosures for non-financial assets Amendments to IAS 39 Novation of derivatives and continuation of hedge accounting Amendments to IFRS 10, IFRS 11 and IFRS 12 Transition guidance for IFRS 10, IFRS 11 and IFRS 12 Amendments to IFRS 10, IFRS 12 and IAS 27 Investment entities IFRS 10 Consolidated financial statements IFRS 11 Joint arrangements IFRS 12 Disclosure of interests in other entities IAS 27 (Revised) Separate financial statements IAS 28 (Revised) Investments in associates and joint ventures IFRS 10 replaces the rules for consolidated financial statements laid down in IAS 27 “Consolidated and separate financial statements” and interpretation SIC 12 “Consolidation – special purpose entities”. IFRS 10 defines the principle of control based on 3 criteria only: • exposure or rights to variable return on an investee, and • the fact of having power over an investee, the ability to use the power over an investee to affect the amount of the investor’s returns. An entity must be consolidated by its parent company when these three criteria are fulfilled. Application of this standard had no impact for the Group. IFRS 11 replaces IAS 31, “Interests in joint ventures” and interpretation SIC 13 “Jointly Controlled Entities – Non-Monetary Contributions by Venturers”. This new standard defines the accounting treatment of interests in a joint arrangement (jointly-controlled operation): a joint venture (joint arrangement where the parties exercising joint control have rights to its net assets) must be accounted for by the equity method; 16 a joint operation (joint arrangement where the parties exercising joint control over an arrangement have rights to the assets and obligations for the liabilities) must be consolidated under a method similar to proportional consolidation. The Group must refer to several factors in order to classify a joint arrangement: • when it takes the form of a separate vehicle: the legal form of the vehicle, the terms of the contractual arrangements and other facts and circumstances where relevant. its structure, Assessment of the other facts and circumstances has led the Group to classify a certain number of joint arrangements as joint operations. Application of IFRS 11 had no significant impact on the Group, as the main joint arrangements (jointly-controlled operations) are classified as joint operations under this standard and were already proportionally consolidated. Only two companies, Daikin Arkema Refrigerants Asia Ltd and Daikin Arkema Refrigerants Trading Ltd, were previously proportionally consolidated and are now accounted for by the equity method. The impact is non-significant in the Group’s financial statements (below 0.4% of the 1st semester sales). IFRS 12 lists the disclosures required on interests in other entities. The first application of this standard will lead to greater detail in the notes to the annual financial statements. The application of the other standards, amendments and interpretations did not have any significant impact on the Group’s consolidated financial statements. The standards, amendments or interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which were not yet in force at 1 January 2014 and have not been applied early by the Group, are: Amendments to IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortisation Not adopted by the European Union at 30 June 2014 Amendments to IAS 19 Defined benefit plans: employee contributions Not adopted by the European Union at 30 June 2014 Amendments to IFRS 9 and IFRS 7 Mandatory effective date and transition disclosures Not adopted by the European Union at 30 June 2014 Amendments to IFRS 9 Hedge accounting and amendments to IFRS 9, IFRS 7 and IAS 39 Not adopted by the European Union at 30 June 2014 Amendments to IFRS 11 Accounting for acquisitions of interests in joint operations Not adopted by the European Union at 30 June 2014 IFRS 14 Regulatory deferral accounts Not adopted by the European Union at 30 June 2014 IFRS 15 Revenue from contracts with customers Not adopted by the European Union at 30 June 2014 IFRIC 21 Levies Adopted by the European Union on 13 June 2014 Annual improvements to IFRS cycle 2010-2012 Not adopted by the European Union at 30 June 2014 Annual improvements to IFRS cycle 2011-2013 Not adopted by the European Union at 30 June 2014 Use of assumptions Preparation of the condensed consolidated interim financial statements in accordance with IFRS requires Group management to make estimates and determine assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the condensed consolidated interim financial statements are those used for measuring the recoverable value of property, plant and equipment and intangible assets, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities and off-balance sheet commitments at the date of preparation of the condensed consolidated interim financial statements also involve the use of estimates. 17 Impact of seasonality ARKEMA’s standard pattern of business exposes the Group to seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by ARKEMA is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity observed primarily in France and the rest of Europe; in some of ARKEMA’s businesses, particularly those serving the paints, coatings and refrigeration markets, the level of sales is generally higher in the first half of the year than in the second half; major maintenance turnarounds at ARKEMA’s production plants have an influence on seasonality. Seasonality effects observed in the past are not necessarily representative of future trends, but they could have a material influence on the changes in results and working capital between the different quarters of the financial year. 18 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Information by business segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. ARKEMA has three business segments: High Performance Materials, Industrial Specialties and Coating Solutions. Two members of the Executive committee supervise these segments; they report directly to the Chairman and CEO, the Group’s chief operating decision- maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their segment’s operating activity, financial results, forecasts and plans. High Performance Materials includes the following business units: Technical Polymers, Filtration and Adsorption (CECA) and Organic Peroxides. High Performance Materials provide innovative solutions with high value added, used in varied sectors such as transport, oil extraction, renewable energies (photovoltaics, lithium-ion batteries), consumer goods (beauty products, sports equipment, packaging, etc), electronics, construction, coatings and water treatment. Industrial Specialties groups the following Business Units: Thiochemicals, Fluorochemicals, PMMA and Hydrogen Peroxides. These integrated industrial niche markets on which ARKEMA is among the world leaders concern products used in several industrial sectors such as production of cold (refrigeration and air conditioning), oil and gas, paper pulp, animal nutrition, electronics and the automotive industry. Coating Solutions comprises the following Business Units: Acrylics, Coatings Resins, Rheology Additives (Coatex) and UV- curing resins (Sartomer). This segment proposes solutions for decorative paints, industrial coatings, adhesives and high- growth acrylic applications (superabsorbers for disposable nappies, water treatment, oil and gas extraction). Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together in a Corporate segment. Operating income is allocated between business segments prior to inter segment adjustments. Sales prices between segments approximate market prices. 19 1st half 2014 (In millions of euros) High Performance Materials Industrial Specialties Non-Group sales 925 1,005 Inter segment sales 7 58 Total sales 932 1,063 EBITDA 150 152 Depreciation and amortization (52) (59) Recurring operating income 98 93 Other income and expenses (4) (7) Operating income 94 86 Equity in income of affiliates Intangible assets and property, plant, and equipment additions - including: Recurring capital expenditure 43 40 124 52 1st half 2013 (In millions of euros) High Performance Materials Industrial Specialties Non-Group sales 925 1,079 Inter segment sales 6 52 Total sales 931 1,131 EBITDA 163 218 Depreciation and amortization (51) (57) Recurring operating income 112 161 Other income and expenses (7) Operating income Equity in income of affiliates 105 - 161 - Intangible assets and property, plant, and equipment additions - including: Recurring capital expenditure 31 27 85 35 2 Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2014 (In millions of euros) France Rest of Europe NAFTA(1) Non-Group sales 344 936 1,039 1st half 2013 (In millions of euros) France Rest of Europe NAFTA(1) Non-Group sales 340 981 1,117 (1) NAFTA: United States, Canada, Mexico Coating Solutions 1,102 40 1,142 144 (46) 98 (14) 84 34 31 Coating Solutions 1,164 42 1,206 161 (45) 116 (5) 111 - 45 44 Asia 596 Asia 611 Corporate 11 11 (27) (1) (28) (7) (35) 2 2 Corporate 24 24 (35) (1) (36) (128) (164) 3 13 13 Rest of the world 128 Rest of the world 143 20 Total 3,043 419 (158) 261 (32) 229 203 125 Total 3,192 507 (154) 353 (140) 213 3 174 119 Total 3,043 Total 3,192 3 Other income and expenses (In millions of euros) Expenses 1st half 2014 Income Net Expenses 1st half 2013 Income Net Restructuring and environment (17) (17) (6) (6) Goodwill impairment Asset impairment (other than goodwill) Litigation and claims (4) (4) (8) (8) Gains (losses) on sales and purchases of assets (11) (11) (128) 2 (126) Other Total other income and expenses (32) (32) (142) 2 (140) In the first half of 2014, restructuring and environment expenses include a €9 million expense (of whi ch €5 million correspond to asset impairment) related to the discontinuation of coatings resins production at the Stallingborough site in the United Kingdom. Gains and losses on sales of assets mainly comprise the disposal of shares in Canada Fluorspar Inc. In the first half of 2013, gains and losses on sales and purchases of assets included €125 million cor responding to the provision established after insolvency proceedings began for Kem One SAS. 4 Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Net income - Group share Notes 1st half 2014 124 1st half 2013 82 Other income and expenses (C3) 32 140 Taxes on other income and expenses (1) Non-current taxation Adjusted net income 156 221 5 Income taxes The income tax expense is broken down as follows: (In millions of euros) 1st half 2014 1st half 2013 Current income taxes (70) (96) Deferred income taxes (5) (10) Total income taxes (75) (106) The income tax expense amounts to €75 million at 30 June 2014, including €3 million for the CVAE and € 4 million relating to the additional income tax contribution due on distributed income (compared with €106 million at 30 June 20 13, including €6 million for the CVAE and €3 million relating to the additional inco me tax contribution due on distributed income). 21 6 Earnings per share Weighted average number of ordinary shares Dilutive effect of stock options Dilutive effect of free share grants Weighted average number of potential ordinary shares Earnings per share is determined below: Earnings per share (€) Diluted earnings per share (€) Adjusted earnings per share is determined below: Adjusted earnings per share (€) Diluted adjusted earnings per share (€) 7 Intangible assets 7.1 Goodwill Gross book value (In millions of euros) Goodwill 1,074 7.2 Other intangible assets Gross book value (In millions of euros) Patents 136 Trademarks 26 Software and licences 143 Capitalized REACH costs 32 Other capitalized research expenses 3 Capitalized contracts 223 Asset rights 40 Other intangible assets 21 Intangible assets in progress 64 Total 688 30 June 2014 Accumulated amortization and impairment (411) 30 June 2014 Accumulated amortization and impairment (111) (2) (93) (7) (1) (144) (5) (10) (373) 1st half 2014 63,115,022 411,100 165,618 63,691,740 1st half 2014 1.96 1.95 1st half 2014 2.47 2.45 Net book value 663 Net book value 25 24 50 25 2 79 35 11 64 315 1st half 2013 62,630,259 485,152 286,949 63,402,359 1st half 2013 1.31 1.29 1st half 2013 3.53 3.49 31 December 2013 Net book value 661 31 December 2013 Net book value 27 24 19 24 2 85 36 10 85 312 22 8 Property, plant and equipment (In millions of euros) Gross book value 30 June 2014 Accumulated depreciation and impairment Net book value 31 December 2013 Net book value Land and buildings 1,351 (886) 465 457 Complex industrial facilities 3,083 (2,382) 701 643 Other property, plant and equipment 1,826 (1,406) 420 441 Construction in progress 396 396 402 Total 6,656 (4,674) 1,982 1,943 9 Shareholders’ equity At 30 June 2014 Arkema’s share capital amounts to € 637 million, divided into 63,696,862 shares with a nominal value of 10 euros. Changes in share capital On 23 April 2014, the Group carried out a capital increase reserved for employees: 491,502 shares were subscribed at the price of €64.19 per share, the price set by the Board of Dir ectors at its meeting of 3 March 2014. After 175,668 stock options were exercised, the Company increased its capital by €2 million on 30 June 2014. Treasury shares The Company did not buy back any treasury shares during the first half of 2014. In May 2014, ARKEMA definitively granted 204,603 free shares to employees in application of plans 2010-2, 2011-2 and 2012-1. Dividends The shareholders’ general meeting of 15 May 2014 adopted a resolution proposing to distribute a dividend of €1.85 per share in respect of the 2013 financial year, or a total amount of €117 million. This dividend was paid on 22 Ma y 2014. 10 Provisions for pensions and other employee benefits (In millions of euros) 30 June 2014 31 December 2013 Pension obligations 303 269 Healthcare and similar coverage 50 46 Post-employment benefits 353 315 Long service awards 45 42 Other long-term benefits 3 4 Other long-term benefits 48 46 Provisions for pensions and other employee benefits 401 361 23 The discount rates used by ARKEMA are as follows: Pension obligations, healthcare and similar coverage Europe (excl. UK) UK USA At 30 June 2014 2.30% 4.20% 4.30% At 31 December 2013 3.20% 4.50% 4.85% The present value of defined benefit obligations at the end of 2013 has been adjusted at 30 June 2014 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2013 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets has also been reassessed on the basis of new valuations at 30 June 2014. The change in discount rates and the revaluation of assets are included in actuarial gains and losses for the period. The change in net provisions for post-employment benefits over the first half-year is as follows: (In millions of euros) Pension obligations Healthcare and similar coverage Total post- employment benefits Net liability (asset) at 1 January 2014 264 46 310 Provision recognized in liabilities 269 46 315 Amount recognized in assets Operating expense for the period Net interest expense (5) 5 5 1 0 (5) 6 5 Net contributions and benefits paid by the employer (11) (1) (12) Other Actuarial gains and losses recognized in shareholders’ equity 37 4 41 Net liability (asset) at 30 June 2014 300 50 350 Provision recognized in liabilities 303 50 353 Amount recognized in assets (3) (3) 11 Other provisions and other non-current liabilities 11.1 Other non-current liabilities Other non-current liabilities amount to €41 million at 30 June 2014 as against €42 million at 31 Decem ber 2013. 11.2 Other provisions (In millions of euros) Environmental contingencies Restructuring Other Total At 1 January 2014 171 50 176 397 Increases in provisions 6 9 15 Reversals from provisions utilized (5) (11) (44) (60) Reversals of unutilized provisions (1) (1) Changes in scope Translation adjustments 1 1 At 30 June 2014 167 45 140 352 24 In addition, certain provisions are covered by non-current assets (receivables, deposits or pension assets): (In millions of euros) Environmental contingencies Restructuring Other Total provisions at 30 June 2014 167 45 140 Portion of provisions covered by receivables or deposits 30 5 Deferred tax asset related to amounts covered by the Total indemnity 17 0 Provisions at 30 June 2014 net of non-current assets 120 45 135 For information: Provisions at 1 January 2014 net of non-current assets 122 50 170 11.2.1 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €83 million (€84 million at 31 Dece mber 2013), in the United States for €64 million (€67 million at 31 December 2013), of which €47 million in resp ect of former industrial sites covered 100% by the Total group indemnity (receivable recognized in “other non-current assets” for an amount of €30 million and €17 million of deferred taxes) (see note C15.2 “Off-balance sheet commitments / Commitments received”). 11.2.2 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €38 million (€4 6 million at 31 December 2013). 11.2.3 Other provisions Other provisions amount to €140 million and mainly comprise: provisions for labour litigation for €42 million ( €39 million at 31 December 2013), provisions for commercial litigation and warranties for €31 million (€40 million at 31 December 2013) , provisions for tax litigation for €20 million (€20 million at 31 December 2013), provisions for other risks for €47 million (€77 mi llion at 31 December 2013). 12 Liabilities and contingent liabilities Liabilities and contingent liabilities are described in note C20 of the consolidated financial statements at 31 December 2013. There was no development in liabilities and contingent liabilities during the first half of 2014 with an actual or potential significant effect on the Group’s consolidated financial statements. The arbitration proceedings initiated by Klesch against Arkema in connection with the sale of the vinyls activity are expected to end during the first half of 2015. 25 Total 352 35 17 300 342 13 Debt 13.1 Analysis of net debt by category Group net debt amounts to €1,106 million at 30 June 2014, taking account of cash and cash equivalents of €169 million. It is mainly denominated in euros. (In millions of euros) 30 June 2014 31 December 2013 Bonds 1,137 1,138 Finance lease obligations 2 2 Bank loans 49 53 Other non-current debt 14 14 Non-current debt 1,202 1,207 Finance lease obligations 0 0 Syndicated credit facility Commercial paper Other bank loans 48 65 Other current debt 25 28 Current debt 73 93 Debt 1,275 1,300 Cash and cash equivalents 169 377 Net debt 1,106 923 Bonds At 30 June 2014, the fair values of the bonds issued by the Group are as follows: €549 million for the €500 million bond, €543 million for the €480 million bond, €159 million for the €150 million bond (issued as Euro Medium Term Notes (EMTN)). Securitization of sales receivables The securitization programme is in use for an amount of €2 million at 30 June 2014. 13.2 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. (In millions of euros) 30 June 2014 31 December 2013 Euros 1,176 1,195 US dollars 7 7 Chinese Yuan 80 81 Other 12 17 Total 1,275 1,300 26 13.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2014 31 December 2013 Less than 1 year 96 120 Between 1 and 2 years 56 55 Between 2 and 3 years 57 55 Between 3 and 4 years 567 557 Between 4 and 5 years 29 46 More than 5 years 683 701 Total 1,488 1,534 14 Share-based payments 14.1 Stock options The Board of Directors has decided not to introduce any further stock option plans. Movements in the stock option plans granted in previous years and still outstanding at 30 June 2014 are as follows: Plan 2006 Plan 2007 Plan 2008 Plan 2010-1 Plan 2010-2 Plan 2011-1 Plan 2011-2 Number of options granted - to corporate officers: Thierry Le Hénaff 540,000 55,000 600,000 70,000 460,000 52,500 225,000 35,000 225,000 35,000 105,000 29,250 105,000 29,250 to the 10 largest beneficiaries * 181,000 217,000 169,350 104,000 104,000 75,750 75,750 Total number of options exercised 511,400 496,352 300,985 83,363 by corporate officers 55,000 60,000 48,000 by the 10 largest beneficiaries * 181,000 188,000 85,200 60,325 Total number of options cancelled 15,900 22,800 18,877 7,000 7,000 Number of options In circulation at 1 January 2014 22,800 153,198 194,478 173,515 218,000 105,000 105,000 Granted Cancelled Exercised 10,100 72,350 54,340 38,878 In circulation at 30 June 2014 12,700 80,848 140,138 134,637 218,000 105,000 105,000 Employees who are not corporate officers of Arkema SA or any other Group company The amount of the IFRS 2 expense recognized in respect of stock options at 30 June 2014 is below €0.5 million (also below €0.5 million at 30 June 2013). 27 14.2 Free share grants No new free share plan was adopted by the Board of Directors during the first half of 2014. Movements in the free share grant plans awarded in previous years and still in force at 30 June 2014 are as follows: Plan 2010-2 Plan 2011-2 Plan 2011-3 Plan 2012-1 Plan 2012-2 Plan 2012-3 Number of free shares granted 50,795 59,380 52,315 101,860 74,805 65,335 to corporate officers: Thierry Le Hénaff 8,200 13,000 13,000 to the 10 largest beneficiaries * 8,100 24,450 14,850 36,100 36,100 16,400 Number of free shares In circulation at 1 January 2014 47,619 57,825 50,925 100,505 73,575 64,640 Granted Cancelled 1,071 1,070 275 125 1,190 Definitively granted 46,548 57,825 100,230 In circulation at 30 June 2014 0 0 49,855 0 73,450 63,450 Employees who are not corporate officers of Arkema SA or any other Group company The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2014 is €4 million (€ 4 million at 30 June 2013). 14.3 Capital increase reserved for employees In application of the Group’s employee share ownership policy, ARKEMA offered its employees the opportunity to subscribe to a capital increase reserved for employees at the subscription price of €64.19 per share. This price corr esponds to the Arkema share’s average opening price on the Paris stock exchange over the 20 trading days preceding the Board of Directors’ meeting of 3 March 2014, less a 20% discount. The shares subscribed must be retained for a period of 5 years, except in the United States where the required retention period is 3 years. The employees subscribed a total 491,502 shares, and the capital increase was recorded on 18 April 2014 and became definitive on 23 April 2014. As part of the same operation, Arkema shares were offered to Group employees located outside France through a free share grant plan awarding one free share for every five shares subscribed, up to a maximum 20 free shares. At its meeting of 6 May 2014, the Board of Directors recorded grants of 3,619 free shares to employees in Italy and Spain, and 12,749 free shares to employees in all other countries outside France. These grants will only be definitive after a vesting period of 3 and 4 years respectively. Valuation method In compliance with the method recommended by France’s national accounting standards authority (Autorité des Normes Comptables), the valuation of the cost of not being able to sell the shares for five years is based on the cost of a two-step strategy assuming that these shares will ultimately be sold, and that the same number of shares will be purchased and settled immediately, financed by a loan. The rate used for the loan is the rate that a bank would grant to a private individual presenting an average risk profile for a 5- year consumer loan (or a 3-year loan for an employee located in the United States). The fair values of the shares subscribed in France and outside France have been calculated separately in order to reflect grants of free shares to Group employees established outside France. 28 Plan 2013 250,000 26,000 75,400 250,000 1,825 248,175 The main market parameters used in the valuation of the cost of not being able to sell the shares are as follows: Country of subscription France United States Italy and Spain All other countries Date of the Board meeting which decided on the capital increase 3 March 2014 3 March 2014 3 March 2014 3 March 2014 Share price at the date of the Board meeting (€) 78.04 78.04 78.04 78.04 Risk-free interest rate (at 3 March 2014)* 0.96% 0.70% 2.24% 1.42% Interest rate on borrowings** 6.50% 11.00% 10.50% 8.00% Cost of not being able to sell the shares 22.57% 26.81% 32.67% 27.04% Risk-free interest rate on 5-year borrowings, except for the United States (3 years) ** 5-year borrowings, except for the United States (3 years) On the basis of the share price at the date of the Board meeting, the benefit granted represents a value of €8 million. As the cost of not being able to sell the shares, calculated using the above parameters, is roughly equivalent to this amount, no expense has been recognized in the income statement. 15 Off-balance sheet commitments 15.1 Commitments given 15.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) 30 June 2014 31 December 2013 Guarantees granted 76 81 Comfort letters Contractual guarantees 9 15 Customs and excise guarantees 14 14 Total 99 110 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 15.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, ARKEMA signs multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods initially of 1 to 30 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments are valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” type clauses. 29 The total amount of the Group’s financial commitments amounts to €495 million at 30 June 2014 (see mat urity schedule below). (In millions of euros) 30 June 2014 31 December 2013 2014 159 213 2015 76 79 2016 69 72 2017 55 58 2018 until expiry of the contracts 136 129 Total 495 551 Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land) and transportation equipment (rail cars, containers). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). 30 June 2014 31 December 2013 (In millions of euros) Capitalized leases Non-capitalized leases Capitalized leases Non-capitalized leases 2014 9 0 20 2015 0 17 0 19 2016 0 16 0 17 2017 0 13 1 10 2018 and beyond 1 48 1 16 Nominal value of future lease payments 2 103 2 82 Finance cost 0 NA 0 NA Present value NA: not applicable 2 NA 2 NA 15.1.3 Off-balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses Sales of businesses sometimes involve the provision of warranties in respect of unrecorded liabilities to the purchaser. ARKEMA sometimes grants such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of expenses or litigation. In the majority of cases, they cover risks of occurrence of environmentally related expenses or litigation. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted by ARKEMA is €92 million at 30 June 2014 (€96 million at 31 December 2013). Thi s amount is stated net of provisions recognized in the balance sheet in respect of such warranties. 15.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C21 to the consolidated financial statements at 31 December 2013 - Debt. 30 15.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described in the notes to the consolidated financial statements for the year ended 31 December 2013 (note C29.2 “Commitments received”). 16 Subsequent events None. D. SCOPE OF CONSOLIDATION AT 30 JUNE 2014 No change in scope significantly affecting the consolidated financial statements took place during the first half of 2014. 31 DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Colombes, August 5th 2014. Thierry Le Hénaff Chairman and CEO 32 KPMG Audit Département de KPMG S.A. 1, cours Valmy 92923 Paris-La Défense Cedex ERNST & YOUNG Audit 1/2, place des Saisons 92400 Courbevoie –Paris-La Défense 1 S.A.S. à capital variable Commissaire aux Comptes Membre de la Compagnie Régionale de Versailles Commissaire aux Comptes Membre de la Compagnie Régionale de Versailles Arkema S.A. Statutory Auditors’ Review Report On the first half-year Financial information for 2014 (free translation of the French original) January 1st to June 30th 2014 Arkema S.A. 420, rue d’Estienne d’Orves - 92700 Colombes 33 This is a free translation into English of the statutory auditors’ review report on the half-year consolidated financial statements issued in the French language and is provided solely for the convenience of English-speaking readers. This report also includes information relating to the specific verification of information given in the Group’s interim management report. This report should be read in conjunction with, and is construed in accordance with, French law and professional standards applicable in France. Arkema S.A. Registered office: 420, rue d’Estienne d’Orves - 92700 Colombes Share capital: €.636,968,620 Statutory Auditor’s Review Report on the first half-year financial information for 2014 (free translation of the French original) January 1st to June 30th 2014 To the Shareholders, In compliance with the assignment entrusted to us by your Annual General Meetings, and in accordance with requirements of article L.451-1-2 III of the French Monetary and Financial code (Code Monétaire et Financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of Arkema S.A. for the period January 1st to June 30th 2014,and the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared in all material respects- in accordance with IAS 34 - standard of the IFRS as adopted by the European Union applicable to interim financial information. 34 Arkema S.A. Statutory auditors’ half-year review report on the financial information 2014 II. Specific verification We have also verified the information presented in the half-year management report in respect of the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. Paris La Défense, July 31 2014 The Statutory Auditors French original signed by KPMG Audit ERNST & YOUNG Audit Département de KPMG S.A. Jacques-François Lethu François Quédiniac Valérie Quint Partner Partner Partner 35

Semestriel, 2014, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

2012 Half-year Financial Report Free translation for information purposes only Société anonyme au capital de 625.388.180 euros Siège social : 420 rue d’Estienne d’Orves 92700 Colombes 445 074 685 RCS Nanterre HALF-YEAR FINANCIAL REPORT First half ended June 30th 2012 1 2012 Half-year Financial Report Free translation for information purposes only Content I- Half-year activity report……………………………………………………………………………. 3 II- Condensed consolidated interim financial statement at June 30th 2012………………………….. 9 III- Declaration by the person responsible for the half-year financial report………………………… 66 IV- Report from the statutory auditors on condensed consolidated interim financial statement at June 30th 2012 ………………………………………………………………………………….. 67 This is a free translation in English of Arkema’s half-yer financial report for the 1st half ended June 30th 2012 issued in French and it is provided solely for the convenience of English speaking readers 2 2012 Half-year Financial Report Free translation for information purposes only I- HALF-YEAR ACTIVITY REPORT I- FIRST HALF 2012 HIGHLIGHTS 1. Development projects On February 1st 2012, Arkema finalized the acquisition of Chinese companies Hipro Polymers, producer of biosourced specialty polyamides 10.10, and Casda Biomaterials, world leader in sebacic acid, derived from castor oil and used as a raw material for the production of polyamide 10.10. These acquisitions have enabled Arkema to complement its range of biosourced specialty polyamides, boost its presence in Asia, and enhance its positions in green chemistry. These companies reported aggregate sales of US$230 million in 2011. On February 27th 2012, Arkema announced the establishment of a global partnership with Elevance Renewable Sciences Inc. for the development and production of biosourced specialty polymers. The pooling of Elevance’s expertise in the synthesis of biosourced intermediates with Arkema’s polymer know-how will help develop a new biosourced specialty polymer integrated activity. On June 18th 2012, Arkema, Total and Sobegi (a Total and GDF Suez subsidiary) officially inaugurated the « Lacq Cluster Chimie 2030 » project. This project aims to redevelop the site’s industrial activity, in particular by extending, over the next 30 years, gas extraction at a lower flow rate in order to supply sulphur raw materials for Arkema’s thiochemicals activities. The new installations will be operational from mid-2013. The share of the investment financed by Arkema amounts to €36 millio n. On June 28th 2012, Arkema announced a major project for the development of its Kynar® PVDF activity in Europe. Over €70 million are to be invested on the Pierre-Bénite site in France, in particular to increase by 50% the site’s production capacity and accommodate the development of its fast-growing markets such as offshore oil extraction, water treatment, lithium-ion batteries, and photovoltaic panels. As part of this project, some investments will also be made on the Saint-Auban site (France). Arkema now ranks as leader in the global PVDF market with a unique industrial presence in the 3 major regions of the world. 2. Other highlights In April 2012, Arkema successfully conducted its third share capital increase operation reserved for employees. 535,013 shares were subscribed at a price of €54.51 per share, totalling €29.2 million. Employee shareholding now stands at 5.5%. On April 26th 2012, Arkema concluded a €230 million bond issue, maturing on April 30th 2020 and with an annual coupon of 3.85%. This operation falls in line with the Group’s long- term financing policy to diversify its financing sources and extend their maturity. 3 2012 Half-year Financial Report Free translation for information purposes only II. ANALYSIS OF FINANCIAL RESULTS FOR FIRST HALF 2012 (In millions of euros) 1st half 2012 1st half Variations in % 2011 3,342 Sales ................................................................................ 559 EBITDA............................................................................. 409 Recurring operating income.......................................... (25) Other income and expenses............................................. 384 Operating income ........................................................... Adjusted net income of continuing activities............... 274 Net income – Group share of continuing activities…...... 252 Net income – Group share of divested activities…….…. (164) Net income – Group share ……………………………….... 88 2,913 610 488 (9) 479 373 365 (30) 335 +15% - 8% -16% 20% -27% -31% 74% CAPEX ………………………………………………………148 100 +48% Net debt 603 (30/06/12) (31/12/11) 1,093 +81% The contribution of the vinyl activities, divested on July 3rd 2012, has been presented in accordance with IFRS 5 rules and terms. Income statement items and balance sheet items for this business have been presented on a separate line in the income statement and the balance sheet. However, the cash flow statement includes flows related to the vinyl business concerned. Sales Arkema’s sales in 1st half 2012 reached €3,342 million, 14.7% up over 1 st half 2011. This increase includes the contribution of the acquisition of specialty resins (Cray Valley and Sartomer), alkoxylates, and Chinese companies Hipro Polymers and Casda Biomaterials (+17% scope of business effect). Volumes dropped by -4% compared to 1st half 2011 which represented a very high basis for comparison marked by restocking in several product lines and by an exceptionally strong activity in Asia. Prices fell slightly (-2%), mostly reflecting a return to normalized market conditions in acrylic acid and the expected adjustment of HFC- 125 prices in China. In Performance Products however, the price effect was positive thanks to a favorable change in the product mix towards higher added value products. The currency translation effect was positive at +4%. 4 2012 Half-year Financial Report Free translation for information purposes only EBITDA EBITDA reached €559 million, close to the record le vel of last year (€610 million). This high performance illustrates the Group’s resilience in a more challenging macro-economic environment than last year, marked by mixed market conditions between the various geographic regions of the world and the price fluctuations of raw materials. It reflects the very solid performance of the Group’s activities and the contribution from the acquisitions as well as internal growth projects. Industrial Chemicals reported a very strong performance, while Performance Products confirmed the quality of the repositioning of the product portfolio in high added value niches. EBITDA margin stood at 16.7% of sales (20.9% in 1st half 2010), confirming the positioning of Arkema’s product lines in high added value specialty activities. Operating income st half 2011. It includes Operating income reached €384 million against €479 million in 1 lion up on 1st half 2011 due primarily to €150 million depreciation and amortization, €28 mil acquisitions. Other income and expenses stood at -€ 25 million (-€9 million in 1 st half 2011), corresponding mainly to the impact of the shortage in the supply of CDT (raw material of polyamide 12) following the accident at the Evonik site in Marl (Germany), totalling -€16 million, and to various charges related to div estment and acquisition operations. Net income, Group share, of continuing activities Net income, Group share, of continuing activities stood at €252 million against €365 million in 1st half 2011. This includes a €112 million tax charge representing 27.4% of recurring operating income. Net income, Group share, of discontinued activities Net income, Group share, of discontinued activities stood at -€164 million (see paragraph on vinyl activities). Net income, Group share Consequently, net income, Group share, stood at €88 million. Segment performance 27 million in 1st half Industrial Chemicals sales rose by 15.4% to €2,224 million against €1,9 2011. This increase mainly reflects the contribution of specialty resins which joined the Group on July 1st 2011. Volumes were down compared to 1st half 2011, which represents a very high basis for comparison, marked by restocking and exceptional demand in Asia. In a context of highly volatile raw material costs, prices were down compared to the peaks reached in 1st half 2011. Finally, the strengthening of the US dollar versus the euro had a positive effect. At €378 million and a 17.0% margin, EBITDA reflects the excellent resilience of the segment’s activities in a significantly more challenging market environment than in 1st half 2011. Unit margins for acrylic acid stood at a mid-cycle point, in line with the assumption made for 2012. Specialty acrylics (Sartomer, Coatex) reported an excellent performance thanks to their positioning in growing niche applications. Demand for decorative paints remained disappointing in Europe and in North America. Fluorogases generated good results despite rather more normalized margins on HFC-125 in China and moderate volumes. 5 2012 Half-year Financial Report Free translation for information purposes only Demand remained favorable in Thiochemicals, for example in animal feed, and PMMA benefited from a healthy automotive market in the United States. 6 million in 1st half Performance Products sales rose by 13.4% to €1,106 million, against €97 2011. This improvement reflects the impact of acquisitions (alkoxylates from Seppic, and bio- sourced PA10.10 business from Hipro and Casda), as well as a positive price effect, reflecting the positioning of Technical Polymers in higher added value applications and a favorable product mix in Specialty Chemicals. Volumes recorded a slight decline compared to last year’s peak. The currency translation effect was positive due to the rise in the US dollar versus the euro. EBITDA rose to a new record of €211 million, 22% up on 1st half 2011. This excellent performance reflects the successful strategy of the positioning strategy for the segment’s activities in high added value niche applications such as deep offshore oil exploration, biopolymers, and metal substitution in vehicles, as well as developments in Asia. The activities acquired recently (alkoxylates and Chinese companies Hipro and Casda) made a noticeable contribution to the segment’s performance. EBITDA margin reached a very high 19.1%, against 17.7% in 1st half 2011. Vinyl Products activities concerned by a divestment project On July 3rd, Arkema completed the divestment of the vinyl business, which generated annual sales of €1 billion. Net income for these activitie s stood at -€164 million in 1 st half, and included: - the -€70 million net income of the activity, whic h reflects in part the ongoing sluggish environment in the European construction market, as well as the complexity of managing in parallel a major divestment project and day-to-day operations; - the impact of the implementation of the warranties negotiated during the workers councils information / consultation process, amounting to -€ 33 million; - the cost of establishing the business into a self-sufficient structure (information systems, legal and accounting costs related to the transfer of activities, etc.) amounting to -€34 million; - post-closing adjustments of -€27 million, related in particular to additional write-offs corresponding to changes in working capital since the beginning of the year. Cash flow Over the 1st half of 2012, free cash flow for the continuing activities stood at -€23 million against -€29 million in 1 st half 2011. This flow includes a -€190 million vari ation in working capital related to the traditional increase in sales in the first half of the year. It also includes non-recurring items amounting to -€67 million corre sponding in particular to investments in Thiochemicals (platform under construction in Malaysia and Lacq 2014 project) and the consequences of the force majeure declared in polyamide 12. Recurring capex stood at €148 million, in line with the €350 million annual target. After taking into account the impact of divestments and acquisitions and primarily the acquisition of Hipro Polymers and Casda Biomaterials, net cash flow for the continuing activities stood at -€246 million. Net debt Net debt stood at €1,093 million at June 30 th 2012 against €603 million at December 31 st 2011, i.e. 49% gearing. It includes the payment in June of a €1.30 dividend per share, totalling 6 2012 Half-year Financial Report Free translation for information purposes only €81 million, the share capital increase operation r eserved for employees amounting to €29 million in total, and a €13 million share buyba ck operation. The net debt amount will benefit from the gradual and traditional decrease in working capital, as with every year in the second half of the year. The Group’s objective is to return to gearing of around 40%. III. TRANSACTIONS WITH RELATED PARTIES Transactions with related parties are described in note 18 to the condensed consolidated financial statements as at June 30th 2012. IV. HIGHLIGHTS SINCE 30TH JUNE 2012 On July 3rd 2012, Arkema completed the divestment announced in November 2011 of its Vinyl Products segment to the Klesch Group. This marks a major step forward in Arkema’s transformation, and confirms its ambition to become one of the world leaders in specialty chemicals. On July 10th 2012, Arkema announced a project for the sale of its tin stabilizer business. Based on tin chemistry, these products are used mostly in PVC production, much of which for the construction sector. This activity, which is currently part of the Functional Additives BU, concerns 234 employees and 4 production sites around the world, and reports sales of the order of €180 million. This operation, due to be co mpleted in the fall of 2012, is subject to the trade unions information and consultation process and to approval by the relevant antitrust authorities. On July 16th 2012, Arkema announced a project for the acquisition of an acrylic specialties production site from Brazilian company Resicryl. This project illustrates the Group’s commitment to speeding up its development in Latin America around high added value products. On completion of the deal in 2nd half of 2012, Coatex should achieve sales in Brazil of the order of US$20 million. V. 2012 OUTLOOK The Group will continue to carefully monitor the changes in the macro-economic environment which remains uncertain, marked by the challenging situation in a number of countries, in particular in Europe, and by high volatility, for example in raw materials and exchange rates. In this environment, Arkema will continue to give priority to its internal dynamics, to reinforcing its positioning in specialty niches, and to industrial capital expenditure in higher growth product lines and countries. While remaining cautious about changes in the macro-economic environment, and assuming continuity with the 1st half of the year, Arkema confirms its confidence in its ability to deliver a very solid year in 2012, and should achieve an EBITDA close to €1 billion. Beyond this, Arkema aims to achieve €8 billion sale s and €1,250 million EBITDA by 2016. 7 2012 Half-year Financial Report Free translation for information purposes only VI. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2011 Reference Document filed with the Autorité des marchés financiers (« AMF ») on April 4th 2012 under number D.12-0280. This document is available on Arkema’s website under the heading « Investor Relations » (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in a note to the half-year financial statements. 8 Condensed consolidated interim financial statements at 30 June 2012 II. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2012 CONSOLIDATED INCOME STATEMENT ...............................................................................11 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME....................................12 CONSOLIDATED BALANCE SHEET ........................................................................................13 CONSOLIDATED CASH FLOW STATEMENT........................................................................14 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY............15 A. HIGLIGHTS................................................................................................................................16 B. ACCOUNTING POLICIES .......................................................................................................17 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ...................................32 1 Impact of seasonality...........................................................................................................32 2 Information by business segment ......................................................................................32 3 Information by geographical area .....................................................................................34 4 Other income and expenses ................................................................................................34 5 Adjusted net income............................................................................................................35 6 Income taxes ........................................................................................................................35 7 Business combinations ........................................................................................................35 8 Discontinued operations and assets held for sale .............................................................37 9 Earnings per share ..............................................................................................................38 10 Intangible assets ..................................................................................................................39 9 Condensed consolidated interim financial statements at 30 June 2012 11 Property, plant & equipment .............................................................................................40 12 Inventories ...........................................................................................................................40 13 Shareholders’ equity ...........................................................................................................41 14 Provisions and other non-current liabilities .....................................................................41 15 Liabilities and contingent liabilities...................................................................................43 16 Debt.......................................................................................................................................51 17 Management of risks related to financial assets and liabilities.......................................53 18 Related parties .....................................................................................................................55 19 Share-based payments ........................................................................................................56 20 Off-balance sheet commitments.........................................................................................60 21 Subsequent events ...............................................................................................................62 SCOPE OF CONSOLIDATION AT 30 JUNE 2012 ....................................................................63 10 Condensed consolidated interim financial statements at 30 June 2012 CONSOLIDATED INCOME STATEMENT Notes 1st half 2012 (In millions of euros) Sales (C2&C3) 3,342 Operating expenses (2,645) Research and development expenses (74) Selling and administrative expenses (214) Recurring operating income (C2) 409 Other income and expenses (C4) (25) Operating income (C2) 384 Equity in income of affiliates 6 Financial result (25) Income taxes (C6) (112) Net income of continuing operations 253 Net income of discontinued operations (C8) (164) Net income 89 Of which: non-controlling interests 1 Net income - Group share (C5) 88 Of which: continuing operations 252 Of which: discontinued operations (C8) (164) Earnings per share (amount in euros) (C9) 1.42 Earnings per share of continuing operations (amount in euros) (C9) 4.07 Diluted earnings per share (amount in euros) (C9) 1.40 Diluted earnings per share of continuing operations (amount in euros) (C9) 4.02 Depreciation and amortization (C2) (150) EBITDA * (C2) 559 Adjusted net income 208 Adjusted net income of continuing operations * (C5) 274 Adjusted net income per share of continuing operations (amount in euros) Diluted adjusted net income per share of continuing operations (amount in euros) * see note B19 – Accounting policies / Main accounting and financial indicators (C9) (C9) 4.42 4.37 1st half 2011 2,913 (2,187) (64) (174) 488 (9) 479 10 (12) (109) 368 (30) 338 3 335 365 (30) 5.45 5.93 5.38 5.86 (122) 610 344 373 6.06 5.99 11 Condensed consolidated interim financial statements at 30 June 2012 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 1st half 2012 1st half 2011 (In millions of euros) Net income Hedging adjustments 89 (6) 338 13 Deferred taxes on hedging adjustments 1 Actuarial gains and losses (44) 17 Deferred taxes on actuarial gains and losses 9 (5) Other items Deferred taxes on other items Change in translation adjustments 40 (69) Other comprehensive income of continuing operations (1) (43) Other comprehensive income of discontinued operations (5) (1) Total income and expenses recognized directly in equity (6) (44) Comprehensive income 83 294 Of which: non-controlling interests 1 2 Comprehensive income – Group share 82 292 12 Condensed consolidated interim financial statements at 30 June 2012 CONSOLIDATED BALANCE SHEET (In millions of euros) Notes 30 June 2012 31 December 2011 ASSETS Intangible assets, net Property, plant and equipment, net Equity affiliates: investments and loans Other investments Deferred tax assets Other non-current assets (C10) (C11) 962 1,808 68 34 63 126 777 1,706 66 35 66 109 TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Other current financial assets Cash and cash equivalents TOTAL CURRENT ASSETS Assets held for sale (C12) 3,061 1,039 1,068 131 26 3 107 2,374 424 2,759 945 834 117 36 9 252 2,193 380 (C8) TOTAL ASSETS 5,859 5,332 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Translation adjustments (C13) 625 1,469 (16) 137 619 1,484 (10) 97 SHAREHOLDERS' EQUITY - GROUP SHARE Non-controlling interests 2,215 28 2,190 27 TOTAL SHAREHOLDERS' EQUITY Deferred tax liabilities Provisions and other non-current liabilities Non-current debt (C14) (C16) 2,243 33 811 812 2,217 35 791 583 TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Other current financial liabilities Current debt TOTAL CURRENT LIABILITIES Liabilities associated with assets held for sale TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (C16) (C8) 1,656 754 267 53 3 388 1,465 495 1,409 665 265 39 12 272 1,253 453 5,859 5,332 13 Condensed consolidated interim financial statements at 30 June 2012 CONSOLIDATED CASH FLOW STATEMENT 1st half 2012 1st half 2011 (In millions of euros) Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities Of which: Cash flow from operating activities of discontinued operations Intangible assets and property, plant, and equipment additions Change in fixed asset payables Acquisitions of operations, net of cash acquired Increase in long-term loans Total expenditures 89 188 14 (10) 3 (209) 3 78 (123) (217) (32) (243) (25) (517) 338 144 (16) (3) (1) (431) 3 34 (61) (138) (35) (6) (18) (197) Proceeds from sale of intangible assets and property, plant, and equipment Change in fixed asset receivables Proceeds from sale of operations, net of cash sold Proceeds from sale of unconsolidated investments Repayment of long-term loans Total divestitures Cash flow from investing activities Of which: Cash flow from investing activities of discontinued operations 13 - - 8 21 (496) (48) 7 2 - - 7 16 (181) (41) Issuance (repayment) of shares and other equity Purchase of treasury shares Dividends paid to parent company shareholders Dividends paid to minority shareholders Increase / decrease in long-term debt Increase / decrease in short-term borrowings and bank overdrafts Cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD Of which: Cash and cash equivalents of discontinued operations 33 (13) (81) (1) 226 106 270 (148) 1 254 107 - 9 - (61) - 14 187 149 2 20 527 549 2 At 30 June 2012, income taxes paid amount to €83 mi llion (€93 million at 30 June 2011). Interest received and paid included in cash flow from operating activities at 30 June 2012 amount, respectively, to €1 million and €7 million (€3 million and €3 millio n respectively at 30 June 2011). 14 Condensed consolidated interim financial statements at 30 June 2012 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Shares issued Treasury shares (In millions of euros) At 1 January 2012 Cash dividend Number Amount 61,864,577 619 Paid-in surplus 1,021 (81) Retained earnings 463 Translation adjustments Number Amount 97 (214,080) (10) Shareholders' equity – Group share 2,190 (81) Non- controlling interests 27 (1) Issuance of share capital 674,241 6 28 34 Purchase of treasury shares (250,000) (13) (13) Cancellation of purchased treasury shares Grants of treasury shares to employees (7) 150,035 7 Sale of treasury shares Share-based payments - - - 5 - - - 5 - Other (2) (2) 1 Transactions with shareholders 674,241 6 (53) (4) (99,965) (6) (57) Net income Total income and expenses recognized directly in equity Comprehensive income 88 (46) 42 40 40 88 (6) 82 1 1 At 30 June 2012 62,538,818 625 968 501 137 (314,045) (16) 2,215 28 Shares issued Treasury shares (In millions of euros) At 1 January 2011 Cash dividend Number Amount 61,493,794 615 Paid-in surplus 1,011 Retained earnings 556 (61) Translation adjustments Number Amount 43 (136,280) (6) Shareholders' equity – Group share 2,219 (61) Non- controlling interests 21 - Issuance of share capital 350,033 3 9 12 Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees (6) 132,200 6 Sale of treasury shares Share-based payments 3 3 Other (3) (3) Transactions with shareholders 350,033 3 9 (67) 132,200 6 (49) Net income Total income and expenses recognized directly in equity Comprehensive income 335 26 361 (69) (69) 335 (43) 292 3 (1) 2 At 30 June 2011 61,843,827 618 1,020 850 (26) (4,080) 2,462 23 15 Share- holders’ equity 2,217 (82) 34 (13) 5 (1) (57) 89 (6) 83 2,243 Share- holders’ equity 2,240 (61) 12 3 (3) (49) 338 (44) 294 2,485 Condensed consolidated interim financial statements at 30 June 2012 A. HIGLIGHTS 1 Acquisitions and divestments On 1 February 2012, ARKEMA acquired two Chinese companies: Hipro Polymers, a fast-expanding producer of biosourced polyamide 10.10, and Casda Biomaterials, world leader in sebacic acid, derived from castor oil and used as a raw material in manufacturing these polyamides 10.10. Through these acquisitions, ARKEMA can complete its range of specialty biosourced polyamides, strengthen its presence in Asia and expand its positions in green chemicals. Their impact on the financial statements is presented in note C7 Business combinations. As part of the move to refocus on its specialty chemicals activities, on 23 November 2011 ARKEMA announced a project to dispose of its vinyls activities to the Klesch Group. These activities generate annual sales of approximately €1 billion. The operation took place on 3 July 2012 with effect from 1 July. During the first half-year, balance sheet, income statement and cash flow items relating to these activities have been classified as discontinued operations: details are given in note C8 Discontinued operations and assets held for sale. 2 Other highlights On 6 April 2012, ARKEMA had to declare itself in a situation of force majeure on its polyamides 12 chain following the incident in late March at Evonik’s Marl site in Germany, which produces CDT, a raw material used in production of polyamide 12. In view of the insurance coverage subscribed by the Group, the impact should remain limited to an exceptional expense of approximately €17 million, o f which an amount of €16 million was recorded in th e 2nd quarter of 2012 (see note C4 Other income and expenses). In April 2012, ARKEMA carried out its third capital increase reserved to employees, totalling €29.2 mi llion. 535,013 shares were subscribed at the price of €54.51 per s hare, which is the average opening market price of the ARKEMA share on the Paris stock exchange in the 20 trading days preceding the Board of Directors’ meeting of 7 March 2012 which set the price, less a discount of 20%. On 26 April 2012, ARKEMA placed a €230 million bond that will mature on 30 April 2020, with an annual coupon of 3.85%. ARKEMA is thus continuing to diversify its sources of financing and extend the maturity of its debt in favourable market conditions. 16 Condensed consolidated interim financial statements at 30 June 2012 B. ACCOUNTING POLICIES ARKEMA is a global chemicals player, with two business segments: Industrial Chemicals and Performance Products. Arkema S.A. is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The company’s head office is at 420 rue d’Estienne d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema S.A. have been listed on the Paris stock exchange (Euronext) since 18 May 2006. ARKEMA’s condensed consolidated interim financial statements at 30 June 2012 were prepared under the responsibility of the Chairman and CEO of Arkema S.A. and were approved by the Board of Directors of Arkema S.A. on 31 July 2012. The condensed consolidated interim financial statements at 30 June 2012 were prepared in compliance with IAS 34 “Interim financial reporting” and established in accordance with IFRS (International Financial Reporting Standards) issued by the IASB (International Accounting Standards Board) and the IFRS adopted by the European Union at 30 June 2012. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2011. The accounting framework and standards adopted by the European Commission can be consulted on the following website: http://ec.europa.eu/internal_market/accounting/ias/index_en.htm. The accounting policies applied in preparing the condensed consolidated interim financial statements at 30 June 2012 are identical to those used in the consolidated financial statements at 31 December 2011, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after 1 January 2012 (and which had not been applied early by the Group), namely: Standards Amendment to IFRS 7 Title Disclosures – Transfers of Financial Assets The application of this amendment did not have any significant impact on the Group’s consolidated financial statements. The impact of the other standards, amendments or interpretations published by the IASB and the IFRS IC (IFRS Interpretations Committee) which were not yet in force at 1 January 2012 and have not been applied early by the Group, is currently being analyzed. The following texts are involved: 17 Condensed consolidated interim financial statements at 30 June 2012 Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters Not adopted by the European Union at 30 June 2012 Amendments to IFRS 1 Amendments to IFRS 7 Amendments to IFRS 9 and IFRS 7 Amendments to IFRS 10, IFRS 11 and IFRS 12 IFRS 9 Government loans Disclosures – Offsetting financial assets and financial liabilities Mandatory effective date and transition disclosures Transition guidance for IFRS 10, IFRS 11 and IFRS 12 Financial instruments Not adopted by the European Union at 30 June 2012 Not adopted by the European Union at 30 June 2012 Not adopted by the European Union at 30 June 2012 Not adopted by the European Union at 30 June 2012 Not adopted by the European Union at 30 June 2012 IFRS 10 Consolidated financial statements Not adopted by the European Union at 30 June 2012 IFRS 11 Joint arrangements Not adopted by the European Union at 30 June 2012 IFRS 12 Disclosure of interests in other entities Not adopted by the European Union at 30 June 2012 IFRS 13 Fair value measurement Not adopted by the European Union at 30 June 2012 Amendments to IAS 1 Amendments to IAS 12 Presentation of Items of Other Comprehensive Income (OCI) Deferred Tax: Recovery of Underlying Assets Adopted by the European Union at 5 June 2012 Not adopted by the European Union at 30 June 2012 IAS 19 (Revised) Employee benefits Adopted by the European Union at 5 June 2012 IAS 27 (Revised) Separate financial statements Not adopted by the European Union at 30 June 2012 IAS 28 (Revised) Investments in associates and joint ventures Not adopted by the European Union at 30 June 2012 Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities Not adopted by the European Union at 30 June 2012 IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine Annual improvements to IFRS (published in May 2012) Not adopted by the European Union at 30 June 2012 Not adopted by the European Union at 30 June 2012 Preparation of consolidated financial statements in accordance with IFRS requires Group management to make estimates and retain assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for calculation of the recoverable value of property, plant and equipment and intangibles, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities at the date of preparation of the consolidated financial statements also involve the use of estimates. 18 Condensed consolidated interim financial statements at 30 June 2012 The consolidated financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The consolidated financial statements are presented in millions of euros, rounded to the nearest million, unless otherwise indicated. The principal accounting policies applied by the Group are presented below. 1 Consolidation principles Companies which are directly or indirectly controlled by ARKEMA have been fully included in the consolidated financial statements. The entities, assets and operations over which joint control is exercised are consolidated using the proportionate method. Investments in associates over which significant influence is exercised are consolidated under the equity method. Where the ownership interest is less than 20%, the equity method is only applied in cases where significant influence can be demonstrated. Shares owned in companies which do not meet the above criteria are included in other investments and recognized as available-for-sale financial assets in accordance with IAS 39. All material transactions between consolidated companies, and all intercompany profits, have been eliminated. 2 Foreign currency translation 2.1 Translation of financial statements of foreign companies The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period; the statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share or in “Non-controlling interests” for the share not directly or indirectly attributable to the Group. 2.2 Transactions in foreign currencies In application of IAS 21 “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income. 19 Condensed consolidated interim financial statements at 30 June 2012 3 Goodwill and business combinations Operations after 1 January 2010 The Group uses the acquisition method for the recognition of business combinations, in accordance with IFRS 3 (Revised). The identifiable assets acquired and liabilities assumed are stated at fair value at the acquisition date. Where the business combination agreement provides for a purchase price adjustment, the Group includes the fair value of this adjustment at the acquisition date in the cost of the business combination, even if the adjustment is optional. Non-controlling interests are measured at the acquisition date, either at fair value (the full goodwill method) or the NCI's proportionate share of identifiable net assets of the entity acquired (the partial goodwill method). The decision of which option to use is made for each business combination. Subsequent acquisitions of non-controlling interests are always recorded in equity, regardless of the choice made at the time of the acquisition. At the acquisition date, goodwill is measured as the difference between: the acquisition price plus the amount of any non-controlling interests in the acquired entity and the fair value of the acquirer's previously-held equity interest in that acquired entity, and the fair value of the identifiable assets and liabilities. Goodwill is recognized in the balance sheet assets. Any negative goodwill arising on an acquisition on favourable terms, and direct acquisition expenses, are recognized immediately in the income statement under “Other income and expenses" (see note B19 Main accounting and financial indicators). Contingent liabilities are recognized in the balance sheet when the obligation concerned is current at the acquisition date and their fair value can be reliably measured. The Group has a maximum of 12 months to finalize determination of the acquisition price and goodwill. Operations prior to 31 December 2009 The Group applied IFRS 3. The main points affected by IFRS 3 (revised) are the following: goodwill was calculated as the difference between the purchase price, as increased by related costs, of shares of consolidated companies and the Group share of the fair value of their net assets and contingent liabilities at the acquisition date; for any subsequent acquisition in the same entity, the difference between the acquisition cost and book value of non-controlling interests was included in goodwill; price adjustments were included in the cost of the business combination if the adjustment was probable and could be measured reliably; contingent liabilities arising from potential obligations were recognized. 20 Condensed consolidated interim financial statements at 30 June 2012 4 Intangible assets Intangible assets include goodwill, software, patents, trademarks, leasehold rights, development costs and electricity consumption rights. Intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized. Intangible assets other than goodwill and trademarks with indefinite useful lives are amortized on a straight-line basis over 3 to 20 years depending on the pattern according to which the entity envisages using the future economic benefits related to the asset. The main categories of intangible assets and the amortization periods applied by the Group are as follows: Patents: • Licences: • Softwares: • Capitalized research expenses: • REACH registration fees: residual period until expiry of patent protection term of the contract 3 to 5 years useful life of the project protection period of study data 4.1 Goodwill Goodwill is not amortized. It is subject to impairment tests as soon as any indicators of potential impairment are identified. Impairment tests are performed at least annually. The methodology used for the performance of impairment tests is described in paragraph B6 Impairment of long-lived assets. Goodwill is measured and recognized as described in note B3 Goodwill and business combinations. 4.2 Trademarks Trademarks with indefinite useful lives are not amortized and are subject to impairment tests. 4.3 Research and development expenses Research costs are recognized in expenses in the period in which they are incurred. Grants received are recognized as a deduction from research costs. Under IAS 38 “Intangible assets”, development costs are capitalized as soon as ARKEMA can demonstrate, in particular: • its intention and its financial and technical ability to complete the development project; that it is probable that future economic benefits attributable to the development costs will flow to the enterprise, which also implies having successfully completed the main non-toxicity studies relating to the new product; and that the cost of the asset can be measured reliably. Grants received in respect of development activities are recognized as a deduction from capitalized development costs if they have been definitively earned by the Group. The Group also receives public financing in the form of repayable advances for the development of certain projects. Repayment of these advances is generally related to the future revenues generated by the development. The Group recognizes these advances in balance sheet liabilities (in the “Other non- current liabilities” caption) taking account of the probability of their repayment. 21 Condensed consolidated interim financial statements at 30 June 2012 4.4 Research tax credit The Group recognizes the research tax credit as a deduction from operating expenses. 4.5 REACH As no specific IFRS IC interpretations exist on the subject, Arkema applies the following methods based on IAS 38: when most of the tests required for preparing the registration file have been acquired from a third party, ARKEMA records an operating right in the intangible assets; when most of the expenses involved in preparing the registration file have been carried out internally or outsourced, ARKEMA capitalizes the development costs that meet the requirements for capitalization defined by IAS 38 (see B4.3). 5 Property, plant & equipment 5.1 Gross value The gross value of items of property, plant and equipment corresponds to their acquisition or production cost in accordance with IAS 16 “Property, plant & equipment”. Gross value is not subject to revaluation. Equipment subsidies are deducted directly from the cost of the assets which they financed. With effect from 1 January 2009 and in accordance with the revised version of IAS 23, borrowing costs that are directly attributable to financing tangible assets that necessarily take a substantial period of time to get ready for their intended use or sale are eligible for capitalization as part of the cost of the assets for the portion of the cost incurred over the construction period. Routine maintenance and repairs are charged to income in the period in which they are incurred. Costs related to major maintenance turnarounds of industrial facilities which take place at intervals of greater than 12 months are capitalized at the time they are incurred and depreciated over the period between two such turnarounds. Fixed assets which are held under finance lease contracts, as defined in IAS 17 “Leases”, which have the effect of transferring substantially all the risks and rewards inherent to ownership of the asset from the lessor to the lessee, are capitalized in assets at their market value or at the discounted value of future lease payments if lower (such assets are depreciated using the methods and useful lives described below). The corresponding lease obligation is recorded as a liability. Leases which do not meet the above definition of finance leases are accounted for as operating leases. 5.2 Depreciation Depreciation is calculated on a straight-line basis on the basis of the acquisition or production cost. Assets are depreciated over their estimated useful lives by category of asset. The principal categories and useful lives are as follows: Machinery and tools: • Transportation equipment: • Specialized complex installations: • Buildings: 5-10 years 5-20 years 10-20 years 10-30 years 22 Condensed consolidated interim financial statements at 30 June 2012 These useful lives are reviewed annually and modified if expectations change from the previous estimates. Such changes in accounting estimate are accounted for on a prospective basis. 6 Impairment of long-lived assets The recoverable amount of property, plant & equipment and intangible assets is tested when any indication of impairment is identified, and no less than each year-end. An asset’s recoverable amount corresponds to the greater of its value in use and its fair value net of costs of disposal. Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. For ARKEMA, the CGUs are the Business Units presented in note B14. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group management's expectation of future economic and operating conditions over the next 5 years or, when the asset is to be sold, by comparison with its market value. In 2011, the terminal value was determined on the basis of a perpetuity annual growth rate of 1.5% (the same rate as used in 2010). An after-tax rate of 8% is used to discount future cash flows and the terminal value in 2011 (7.5% in 2010). Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment losses on goodwill are irreversible (in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be written back). 7 Financial assets and liabilities Financial assets and liabilities principally comprise: • • • • • other investments; loans and financial receivables included in other non-current assets; accounts receivable; cash and cash equivalents; debt and other financial liabilities (including accounts payable); derivatives, reported as part of other current assets and liabilities. 7.1 Other investments These securities are accounted for, in accordance with IAS 39, as available-for-sale assets and are thus recognized at their fair value. In cases where fair value cannot be reliably determined, the securities are recognized at their historical cost. Changes in fair value are recognized directly through shareholders’ equity. 23 Condensed consolidated interim financial statements at 30 June 2012 If an objective indicator of impairment in the value of a financial asset is identified, an irreversible impairment loss is recognized, in general through recurring operating income. Such impairment is only reversed via income at the date of disposal of the securities. 7.2 Loans and financial receivables These financial assets are recognized at amortized cost. They are subject to impairment tests involving a comparison of their carrying amount to the present value of estimated recoverable future cash flows. These tests are carried out as soon as any indicator inferring that the present value of these assets is lower than their carrying amount is identified. As a minimum such tests are performed at each balance sheet date. Any impairment loss is recognized in recurring operating income. 7.3 Accounts receivable Accounts receivable are initially recognized at their fair value. Subsequent to initial recognition, they are recognized at amortized cost. If required, a bad debt provision is recognized on the basis of the risk of non-recovery of the receivables. 7.4 Cash and cash equivalents Cash and cash equivalents are liquid assets and assets which can be converted into cash within less than 3 months that are subject to a negligible risk of change in value. 7.5 Non-current and current debt (including accounts payable) Non-current and current debt (other than derivatives) is recognized at amortized cost. 7.6 Derivatives The Group may use derivatives to manage its exposure to foreign currency risks and risks of changes in the prices of raw materials and energy. Derivatives used by the Group are recognized at their fair value in the balance sheet, in accordance with IAS 39. The fair value of these unlisted derivatives is determined by reference to current prices for contracts with similar maturity. They therefore correspond to the "Level 2" category defined in IFRS 7. Changes in the fair value of these derivatives are recognized within operating income and, for foreign currency instruments, in financial result for the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the differences between the spot exchange rate and the forward exchange rate, except for those on instruments which are considered to meet the criteria for cash flow hedge accounting or hedge accounting of a net investment in a foreign operation under IAS 39. For items that qualify for cash flow hedge accounting, the effective portion of the change in fair value is recognized in shareholders’ equity under the “Total income and expenses recognized directly in equity” caption until such time as the underlying hedged item is recognized through the income statement. Any ineffective portion is recognized in operating income. 24 Condensed consolidated interim financial statements at 30 June 2012 A hedge of a net investment in a foreign operation hedges the exposure to foreign exchange risk of the net assets of the foreign operation (IAS 21, “The effects of changes in foreign exchange rates”). The effects of this hedge are recorded directly in shareholders’ equity under the “Total income and expenses recognized directly in equity” caption. 8 Inventories Inventories are valued in the consolidated financial statements at the lower of cost and net realizable value, in accordance with IAS 2 “Inventories”. Cost of inventories is generally determined using the weighted average cost (WAC) method. Cost of manufactured products inventories includes raw material and direct labour costs, and an allocation of production overheads and depreciation based on normal production capacity. Start-up costs and general and administrative costs are excluded from the cost of manufactured products inventories. The net realizable value is the sale price as estimated for the normal course of business, less estimated costs for completion and sale. 9 Provisions and other non-current liabilities A provision is recognized when: the Group has a legal, regulatory or contractual obligation to a third party resulting from past events. An obligation can also result from Group practices or public commitments that create a reasonable expectation among the third parties in question that the Group will assume certain responsibilities; it is certain or probable that the obligation will lead to an outflow of resources to the benefit of these third parties; and its amount can be estimated reliably and corresponds to the best possible estimate of the commitment. In exceptional cases where the amount of the obligation cannot be measured with sufficient reliability, disclosure is made in the notes to the financial statements in respect of the obligation (See note C15 Liabilities and contingent liabilities). When it is expected that the Group will obtain partial or total reimbursement of the cost that was provided against, the expected reimbursement is recognized in receivables if, and only if, the Group is virtually certain of the receipt. Legal expenses required for defence of the Group’s interests are covered by a provision when significant. Long-term provisions, other than provisions for pensions and similar post-employment benefit obligations, are not inflation-indexed or discounted as the Group considers that the impact of such adjustments would not be significant. The current (less than one year) portion of provisions is maintained within the “Provisions and other non-current liabilities” caption. 25 Condensed consolidated interim financial statements at 30 June 2012 10 Pension and similar post-employment benefit obligations In accordance with IAS 19 “Employee benefits”: • payments made in the context of defined contribution plans are recognized in expenses of the period; obligations in respect of defined benefit plans are recognized and valued using the actuarial projected unit credit method. Post-employment benefits For defined benefit plans, the valuation of obligations under the projected unit credit method principally takes into account: • • • • • an assumption concerning the date of retirement; a discount rate which depends on the geographical region and the duration of the obligations; an inflation rate; assumptions in respect of future increases in salaries, rates of employee turnover and increases in health costs; the most recent mortality statistics for the countries concerned. Differences which arise between the valuation of obligations and forecasts of such obligations (on the basis of new projections or assumptions) and between forecasts and outcomes of returns on plan assets are termed actuarial gains and losses. The Group has opted to recognize actuarial gains and losses directly in shareholders’ equity under the “Total income and expenses recognized directly in equity” caption, in accordance with the amendment to IAS 19 of December 2004. On modification or creation of a plan, the portion of obligations which vest immediately as a result of past service is charged immediately to income; the portion of obligations which do not vest immediately is amortized over the remaining vesting period. The amount of the provision takes account of the value of assets which are allocated to cover pension and other post- employment benefit obligations. The value of these assets is deducted from the provision for such benefit obligations. A pension asset can be generated where a defined benefit plan is overfunded. The amount at which such an asset is recognized in the balance sheet may be subject to a ceiling, in application of paragraph 58 of IAS 19 and IFRIC 14. Other long-term benefits In respect of other long-term benefits, and in accordance with applicable laws and regulations, provisions are recognized using a simplified method. Thus, if an actuarial valuation using the projected unit cost method is required, actuarial gains and losses and all past service costs are recognized immediately in the provision, with a double entry being recognized to the income statement. The net expense related to pension benefit obligations and other employee benefit obligations is recognized in recurring operating income, with the exception of: 26 Condensed consolidated interim financial statements at 30 June 2012 the effect of curtailments or settlements of plans which are presented under the “Other income and expenses” caption in the case of substantial modifications to such plans; the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits, which are classified within the financial result caption. At interim period ends, expenses relating to pensions and other long-term employee benefits are calculated using an extrapolation of the actuarial valuations performed at the previous year-end. These valuations are modified if significant changes have occurred in market conditions since the previous year-end or in the case of settlements, curtailments or other material non-recurring events (see note C14.2 Provisions and other non-current liabilities/Provisions). 11 Greenhouse gas emissions allowances (EUAs) and certified emission reductions (CERs) In the absence of an IFRS standard or interpretation relating to accounting for CO2 emissions allowances, the following treatment has been adopted: • allowances allocated without payment of consideration are recognized for a nil value, transactions carried out in the market are recognized at the transaction amount. At this point, greenhouse gas emissions allowances (EUA) allocated are adequate to cover the operational needs of ARKEMA’s European units and a deficit is not currently forecast. ARKEMA does not carry out a trading activity in respect of CO2 emissions allowances. However, in the normal course of its operations, ARKEMA may carry out cash or forward sales of its surpluses. These sales do not enter into the scope of application of IAS 39 because of the “own use” exception. The CERs produced by the Group in the context of projects to reduce its greenhouse gas emissions are recognized in inventories, and sales are recorded at their net-of-tax value on delivery of the CERs. 12 Recognition of sales Sales are measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Sales are recognized on transfer to the purchaser of the risks and rewards related to ownership of the goods, which is determined mainly on the basis of the terms and conditions of the sales contracts. 13 Income taxes 13.1 Current taxes Current taxes are the amount of income taxes that the Group expects to pay in respect of taxable profits of consolidated companies in the period. They also include adjustments to current taxes in respect of prior periods. 27 Condensed consolidated interim financial statements at 30 June 2012 The French tax consolidation regime enables certain French companies in the Group to offset their taxable results in determining the tax charge for the entire French tax group. The overall tax charge is payable by Arkema S.A., as the parent company of the tax group. Tax consolidation regimes also exist in countries outside France. The French Finance Act for 2010 introduced the local tax named CET (Contribution Economique Territoriale). One of its components is the contribution based on companies’ value added (Cotisation sur la Valeur Ajoutée des Entreprises – CVAE). After analyzing the methods for determining this contribution in the light of the positions of the IFRS IC and France’s Accounting Standards Authority ANC (Autorité des Normes Comptables) in late 2009, the Group considered that in this specific case, the contribution meets the requirements to be treated as a current tax under IAS 12. The CVAE is therefore classified under “income taxes” from 1 January 2010. 13.2 Deferred taxes The Group uses the liability method whereby deferred taxes are recognized based upon the temporary differences between the financial statement and tax basis of assets and liabilities, as well as on tax loss carry forwards and other tax credits, in accordance with IAS 12 “Income taxes”. Deferred tax assets and liabilities are valued at the tax rates that are expected to apply in the year in which the asset will be realized or the liability settled, on the basis of tax rates (and tax legislation) that have been enacted or virtually enacted at the balance sheet date. The effect of any changes in tax rates is recognized in income for the period, unless it relates to items that were previously debited or credited through equity. Deferred tax assets and liabilities are not discounted. Deferred tax assets are recognized to the extent that their recovery is probable. In order to assess the likelihood of recovery of such assets, account is notably taken of the profitability outlook determined by the Group and historical taxable profits or losses. A deferred tax liability is recognized for all taxable temporary differences related to investments in subsidiaries, associates and joint ventures, unless: the Group controls the timing of the reversal of the temporary difference, and it is probable that this difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset if a legally enforceable right to offset current tax assets and liabilities exists and if they relate to income taxes levied by the same tax authority. As the contribution based on companies’ value added CVAE (Cotisation sur la Valeur Ajoutée des Entreprises) is considered as a component of income taxes, the relevant calculation methods generate temporary differences for which a deferred tax liability of 1.5% of the value is recorded. 14 Information by segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. Since assets held for sale, the associated liabilities and the income from discontinued operations in the Vinyl Products segment are now reported under “Discontinued operations”, in compliance with IFRS 5, ARKEMA now has two 28 Condensed consolidated interim financial statements at 30 June 2012 business segments: Industrial Chemicals and Performance Products. Activities at the Jarrie and Saint Auban sites (Arkema France) to be retained by the Group are included in the Industrial Chemicals segment. The directors of the operational segments report directly to the Chairman and CEO, the Group’s chief operating decision-maker as defined by IFRS 8, and are in regular contact with him for the purpose of discussing their segments’ operating activity, financial results, forecasts and plans. Industrial Chemicals brings together the following business units: Acrylics, Specialty Acrylic Polymers, Coatings resins, Photocure resins, PMMA, Thiochemicals, Fluorochemicals and Hydrogen Peroxide. Industrial Chemicals products are used in numerous industrial sectors such as ink and paint, healthcare and hygiene, the environment, refrigeration, oil and gas, production of paper pulp, animal feed, electronics and the automobile sector. Performance Products groups the following business units: Technical Polymers, Specialty Chemicals and Functional Additives. Performance Products are used in a variety of sectors from transport to sporting equipment, oil extraction to renewable energies (photovoltaics, lithium-ion batteries), cosmetics to medical equipment, construction to household electrical goods and water treatment. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together under a Corporate section. 15 Cash flow statements Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). In consequence, cash flows cannot be recalculated on the basis of the amounts shown in the balance sheet. 16 Share-based payments In application of IFRS2 “Share-based payments”, the stock options and free shares granted to management and certain Group employees are measured at their fair value at the date of grant, which generally corresponds to the date of the Board of Directors’ meeting that granted the stock options and free shares. The fair value of the options is calculated using the Black & Scholes model, adjusted, in the case of plans awarded from 2011, for an illiquidity cost due to the non-transferability of instruments; the expense is recognized in personnel expenses on a straight-line basis over the period from the date of grant to the date from which the options can be exercised. The fair value of rights under free share grants corresponds to the opening market price of the shares on the day of the Board of Directors’ meeting that decides on the grant, adjusted for dividends not received during the vesting period and, in the case of plans awarded from 2011, for an illiquidity cost related to the period of non-transferability. The expense recognized also reflects the probability that the presence condition will be fulfilled. This expense is included in personnel expenses on a straight-line basis over the vesting period of the rights. 29 Condensed consolidated interim financial statements at 30 June 2012 17 Earnings per share Earnings per share corresponds to the division of net income (Group share) by the weighted average number of ordinary shares in circulation since the start of the year. Diluted earnings per share corresponds to the division of net income (Group share) by the weighted average number of ordinary shares, both of these figures being adjusted to take account of the effects of all dilutive potential ordinary shares. The effect of dilution is thus calculated taking account of stock options and grants of free shares to be issued. 18 Discontinued operations and assets held for sale A discontinued operation is defined, according to IFRS 5, as a component of the Group’s activity that either has been disposed of, or is classified as held for sale and which represents a separate major line of business or geographical area of operations that forms part of a single coordinated disposal plan. In accordance with IFRS 5, “Non-current assets held for sale and discontinued operations”: assets held for sale and related liabilities are presented on two specific lines of the balance sheet, without offsetting, a single amount, comprising the total profit or loss after taxes of discontinued operations, is reported in the income statement for the current period and the previous period, the Group’s cash flow statement reports flows related to discontinued operations separately, except for cash flows related to financing if they cannot be identified separately for sales of assets, no further depreciation or amortization is recorded on depreciable/amortizable assets once they are classified as held for sale. Assets held for sale net of the associated liabilities are measured and recognized at the lower of net book value and market value less costs necessary to complete the sale. Any losses are charged to income from discontinued operations. The income statement, cash flow statement and balance sheet items relating to discontinued operations are presented in a specific note to the financial statements for the current period, with comparatives for the previous period. 19 Main accounting and financial indicators The main performance indicators used are as follows: operating income: this includes all income and expenses of continuing operations other than financial result, equity in income of affiliates and income taxes; other income and expenses: these correspond to a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. These items of income and expense notably include: (cid:1) impairment losses in respect of property, plant and equipment and intangible assets, 30 Condensed consolidated interim financial statements at 30 June 2012 (cid:1) gains or losses on sale of assets, acquisition costs, negative goodwill on acquisitions on favourable terms and the valuation difference on inventories between their fair value at the acquisition date and their production cost, (cid:1) large restructuring and environmental expenses which would hamper the interpretation of recurring operating income (including substantial modifications to employee benefit plans and the effect of onerous contracts), (cid:1) expenses related to litigation and claims or major damages, whose nature is not directly related to ordinary operations; recurring operating income: this is calculated as the difference between operating income and other income and expenses as previously defined; adjusted net income: this corresponds to “Net income – Group share” adjusted for the “Group share” of the following items: (cid:1) other income and expenses, after taking account of the tax impact of these items, (cid:1) income and expenses from taxation of an exceptional nature, the amount of which is deemed significant, (cid:1) net income of discontinued operations; EBITDA: this corresponds to recurring operating income increased by depreciation and amortization; • and prepaid expenses, income tax receivables and other current financial assets on the one hand and accounts payable, other creditors and accrued liabilities, income tax liabilities and other current financial liabilities on the other hand. These items are classified in current assets and liabilities in the consolidated balance sheet; capital employed: this is calculated by aggregating the net carrying amounts of intangible assets, property, plant and equipment, equity affiliate investments and loans, other investments, other non-current assets (excluding deferred tax assets) and working capital; net debt: this is the difference between current and non-current debt and cash and cash equivalents. 31 Condensed consolidated interim financial statements at 30 June 2012 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Impact of seasonality ARKEMA’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by ARKEMA is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity generally observed during these periods in a certain number of countries including France; in some of ARKEMA’s businesses, particularly those serving the paints, coatings and refrigeration markets, the level of sales is generally higher in the first half of the year than in the second half; and major maintenance turnarounds at ARKEMA’s production plants tend to take place in the second half of the year rather than in the first half. However, the second quarter of 2012 saw a particularly large number of maintenance turnarounds, involving temporary shutdowns at Bayport (US) concerning Acryclics, Marseille (France) concerning Polyamides and Lacq (France) and Beaumont (US) concerning Thiochemicals. Seasonality effects observed in the past are not necessarily representative of future trends, but they could have a material influence on the changes in results and working capital between the different quarters of the financial year. Revenues from ordinary activities earned on a seasonal, cyclical or occasional basis during a financial year are neither recognized in advance nor deferred at interim reporting dates unless it would be appropriate to recognize them in advance or defer them at the year-end. 2 Information by business segment Operating income and assets of continuing operations are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. 32 1st half 2012 (In millions of euros) Non-Group sales Inter segment sales Total sales Recurring operating income Other income and expenses Operating income Equity in income of affiliates Details of certain significant non-cash expenses by segment: Depreciation and amortization Asset impairment charges Provisions EBITDA Intangible assets and property, plant, and equipment additions Of which additions of an exceptional nature 1st half 2011 (In millions of euros) Non-Group sales Inter segment sales Total sales Recurring operating income Other income and expenses Operating income Equity in income of affiliates Details of certain significant non-cash expenses by segment: Depreciation and amortization Asset impairment charges Provisions EBITDA Intangible assets and property, plant, and equipment additions Of which additions of an exceptional nature Condensed consolidated interim financial statements at 30 June 2012 Industrial Chemicals 2,224 114 Performance Products 1,106 12 Corporate 12 - Total 3,342 2,338 282 1 283 - 1,118 158 (25) 133 - 12 (31) (1) (32) 6 409 (25) 384 6 (96) (2) 22 378 (53) (5) (2) 211 (1) - 23 (30) (150) (7) 43 559 123 49 8 180 31 1 32 Industrial Chemicals 1,927 95 Performance Products 976 10 Corporate 10 - Total 2,913 2,022 378 (6) 372 - 986 127 - 127 1 10 (17) (3) (20) 9 488 (9) 479 10 ,,,,,,,,,,,,,,,,,,10,,, (75) - 10 453 (46) - (3) 173 (1) - 6 (16) (122) - 13 610 57 43 8 108 8 8 33 Condensed consolidated interim financial statements at 30 June 2012 3 Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2012 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world Non-Group sales 328 1,018 1,160 674 162 1st half 2011 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world Non-Group sales (1) NAFTA: United States, Canada, Mexico 325 876 981 627 104 4 Other income and expenses (In millions of euros) 1st half 2012 Income Expenses Net Expenses 1st half 2011 Income Restructuring and environmental charges Goodwill impairment charges Asset impairment charges (other than goodwill) Litigation and claims Gains (losses) on sales and purchases of assets Other Total other income and expenses (3) - - (16) (11) - (30) 1 - - 2 2 - 5 (2) - - (14) (9) - (25) (3) - - - (6) - (9) - - - - - - In the first half of 2012, litigation and claims mainly concern operating losses associated with the incident that occurred at one of the Evonik sites. Gains and losses on sales and purchases of assets include acquisition and selling costs, gains on sales and the difference between the fair value of inventories at acquisition date and their production cost. In the first half of 2011, gains and losses on sales and purchases of assets comprise the costs related to acquisition of Total’s photocure and coatings resins businesses. Total 3,342 Total 2,913 Net (3) - - - (6) - (9) 34 Condensed consolidated interim financial statements at 30 June 2012 5 Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Net income - Group share Notes 1st half 2012 88 1st half 2011 335 Other income and expenses (C4) 25 9 Taxes on other income and expenses (3) (1) Non-current taxation Net income of discontinued operations (C8) 164 30 Adjusted net income of continuing operations 274 373 6 Income taxes The income tax expense is broken down as follows: (In millions of euros) 1st half 2012 1st half 2011 Current income taxes (107) (107) Deferred income taxes (5) (2) Total income taxes (112) (109) The income tax expense amounts to €112 million at 3 0 June 2012, including €6 million for the CVAE (com pared with €109 million at 30 June 2011, including €7 million for the CVAE). 7 Business combinations ARKEMA has finalized allocation of the acquisition price for the Total resins businesses and Seppic’s specialty alkoxylate business, leading to adjustment of the associated goodwill; see note C10 Intangible assets. On 1 February 2012, ARKEMA completed acquisition of two Chinese companies: Hipro Polymers, a fast-expanding producer of biosourced polyamide 10.10, and Casda Biomaterials, world leader in sebacic acid, derived from castor oil and used in particular to manufacture these polyamides 10.10. The acquisition price is based on an enterprise value of US$ 365 million for 100% of the capital of both companies. 35 Condensed consolidated interim financial statements at 30 June 2012 (In millions of euros) Intangible assets Property, plant and equipment Deferred tax asset Other non-current assets Total non-current assets Inventories Accounts receivable Other receivables Cash and cash equivalents Total current assets TOTAL ASSETS Deferred tax liabilities Provisions and other non-current liabilities Total non-current liabilities Accounts payable Other current liabilities Current debt Total current liabilities TOTAL LIABILITIES Fair value of net assets Fair value of Hipro Polymers and Casda Biomaterials acquired 15 44 - - 59 18 14 2 15 49 108 - 2 2 8 5 13 26 28 80 Goodwill 174 The values assigned to the assets, liabilities and contingent liabilities acquired are provisional. Recognition of this operation will be finalized within 12 months of the acquisition date. Goodwill results mainly from expected development synergies and the businesses’ potential for growth. The expenses incurred were recorded in expenses for a total €1 million (see note C4 Other income and e xpenses). 36 Condensed consolidated interim financial statements at 30 June 2012 8 Discontinued operations and assets held for sale 8.1 Income statement The consolidated income statement for the vinyls activity is as follows: (In millions of euros) 1st half 2012 1st half 2011 Sales Recurring operating income Other income and expenses Operating income Financial result Income taxes Net income of discontinued operations Of which: non-controlling interests Net income - Group share Depreciation and amortization EBITDA * (*) see note B19 Accounting policies / Main accounting and financial indicators 548 (62) (95) (157) (5) (2) (164) - (164) - (62) 593 (24) (1) (25) (1) (4) (30) (30) (21) (3) The divestment of the Vinyl Products segment is reflected in the first half of 2012 in an additional expense of €98 million, comprising: €95 million in other income and expenses, including €71 million in the form of a provision for expense s; €3 million in financial result. 8.2 Balance sheet The balance sheet items classified as assets held for sale are the following: (In millions of euros) 30 June 2012 31 December 2011 Non-current assets 8 1 Current assets 416 379 Assets held for sale 424 380 Non-current liabilities 259 215 Current liabilities 236 238 Liabilities associated with assets held for sale 495 453 In application of IFRS 5, in order to adjust the value of non-current assets to market value, impairment of €31 million was recorded at 30 June 2012 in respect of investments undertaken in the period. The €28 million provi sion for risks established at 31 December was reversed. At 31 December 2011, impairment of €264 million and a provision for risk of €151 million were recorded . 37 Condensed consolidated interim financial statements at 30 June 2012 8.3 Cash flow statement (In millions of euros) 1st half 2012 1st half 2011 Net income (164) (30) Depreciation, amortization and impairment of assets 31 21 Provisions, valuation allowances and deferred taxes 43 (3) (Gains)/losses on sales of assets (2) Change in working capital (33) (47) Cash flow from operating activities (123) (61) Cash flow from net investments (48) (41) 9 Earnings per share Earnings per share and diluted earnings per share are presented below: 1st half 2012 1st half 2011 Weighted average number of ordinary shares 61,954,600 61,520,842 Dilutive effect of stock options 544,703 666,976 Dilutive effect of free share grants 164,534 99,558 Weighted average number of potential ordinary shares 62,663,837 62,287,376 Earnings per share is determined below: 1st half 2012 1st half 2011 Earnings per share (€) 1.42 5.45 Diluted earnings per share (€) 1.40 5.38 Earnings per share of continuing operations (€) 4.07 5.93 Diluted earnings per share of continuing operations (€) 4.02 5.86 Earnings per share of discontinued operations (€) ( 2.65) (0.48) Diluted earnings per share of discontinued operations (€) (2.62) (0.48) Adjusted net income per share (€) 3.36 5.59 Diluted adjusted net income per share (€) 3.32 5.52 Adjusted net income per share of continuing operations (€) 4.42 6.06 Diluted adjusted net income per share of continuing operations (€) 4.37 5.99 At 30 June 2012, all outstanding stock option plans had a dilutive effect, except for the plans awarded in 2011 which were ultimately non-dilutive. 38 Condensed consolidated interim financial statements at 30 June 2012 10 Intangible assets Gross book value 30 June 2012 Accumulated amortization and impairment Net book value 31 December 2011 Net book value (In millions of euros) Goodwill Other intangible assets Total 1,121 726 1,847 (443) (442) (885) 678 284 962 467 310 777 The change in goodwill during the half-year essentially corresponds to: acquisition of Hipro Polymers and Casda Biomaterials (€174 million), see note C7 Business combinations, acquisition of Seppic’s specialty alkoxylate business (€2 million), finalization of acquisition of Total’s resins businesses (€31 million), mainly as a result of reclassification of know-how as goodwill. Changes in the net book value of intangible assets are as follows: (In millions of euros) Net book value 30 June 2012 31 December 2011 At 1 January Acquisitions Amortization and impairment Disposals Changes in scope Translation adjustments Reclassifications Assets held for sale 777 15 (15) 0 177 7 1 0 962 494 43 (24) 0 238 17 12 (3) 777 At end of period 39 Condensed consolidated interim financial statements at 30 June 2012 11 Property, plant & equipment Gross book value 30 June 2012 Accumulated depreciation and impairment Net book value 31 December 2011 Net book value (In millions of euros) Land and buildings 1,334 (865) 469 455 Complex industrial facilities 2,960 (2,346) 614 566 Other property, plant and equipment 1,734 (1,295) 439 444 Construction in progress 287 (1) 286 241 Total 6,315 (4,507) 1,808 1,706 Changes in the net book value of property, plant and equipment are as follows: (In millions of euros) Net book value 30 June 2012 31 December 2011 At 1 January 1,706 1,703 Acquisitions Depreciation and impairment Disposals Changes in scope Translation adjustments Reclassifications Assets held for sale At end of period 202 (142) (2) 59 23 (2) (36) 1,808 381 (304) (5) 162 40 (10) (261) 1,706 12 Inventories The gross amount of the Group’s inventories declined from €1,015 million at 31 December 2011 to €1,106 million at 30 June 2012. In the first half of 2012, the Group recognized a net increase of €3 million in impairment of inventor ies. This compared to a net increase of €4 million in impairment of in ventories in the first half of 2011. The net value of inventories reclassified as assets held for sale is €163 million at 30 June 2012 (€14 2 million at 31 December 2011). 40 Condensed consolidated interim financial statements at 30 June 2012 13 Shareholders’ equity At 31 December 2011, Arkema S.A.’s share capital amounted to €619 million and was composed of 61,864,5 77 shares with a nominal value of 10 euros. On 18 April 2012, the Group carried out a capital increase reserved to Group employees: 535,013 shares were subscribed at a price of €54.51 per share set by the Board of Directors in its meeting of 7 March 2012. The Company carried out a capital increase of €1 mi llion following the exercise of 139,228 stock options. Following these two operations, Arkema S.A.’s share capital was increased to €625 million divided into 62,538,81 8 shares. During the first half of 2012, the Company allocated 150,035 shares to employees. The Annual General Meeting of 23 May 2012 adopted a resolution proposing to distribute a dividend of € 1.30 per share, or a total amount of €81 million, in respect of the 2011 financial year. 14 Provisions and other non-current liabilities 14.1 Other non-current liabilities Other non-current liabilities amount to €47 million at 30 June 2012 as against €41 million at 31 Decem ber 2011. 14.2 Provisions (In millions of euros) Pensions and other employee benefit obligations Environmental contingencies Restructuring Other At 31 December 2011 355 189 72 134 Increases in provisions 20 6 7 Reversals from provisions on use (21) (6) (16) (18) Reversals of unused provisions (5) Changes in scope 1 Translation adjustments Other (1) Liabilities associated with assets held for sale (2) 4 42 (4) 2 1 1 At 30 June 2012 (1) “Other” includes actuarial gains and losses for the period (2) See note C8 Discontinued operations and assets held for sale 396 185 63 120 Total 750 33 (61) (5) 1 8 42 (4) 764 41 Condensed consolidated interim financial statements at 30 June 2012 In addition, certain provisions are covered by non-current assets (receivables, deposits or pension assets): (In millions of euros) Pensions and other employee benefit obligations Environmental contingencies Restructuring Other Total Total provisions at 30 June 2012 396 185 63 120 764 Portion of provisions covered by receivables or deposits 38 1 39 Deferred tax asset related to amounts covered by the Total indemnity 22 22 Net pension assets 1 1 Provisions at 30 June 2012 net of non-current assets 395 125 63 119 702 14.3 Provisions for pensions and similar benefits At 30 June 2012, provisions for pensions and similar benefits are comprised of pension benefit obligations for €293 million (€262 million at 31 December 2011), he althcare plans for €60 million (€56 million at 31 D ecember 2011), long-service awards for €35 million (€33 million at 31 December 2011) and Group pre-retirement plans for €8 million (€4 million at 31 December 2011). ARKEMA applied the following discount rates: Pension benefit and healthcare plan commitments France UK Rest of Europe USA At 30 June 2012 3.40% 4.25% 3.40% 4.25% At 31 December 2011 4.35% 5.00% 4.35% 4.85% Long-service awards Europe At 30 June 2012 3.00% At 31 December 2011 4.00% The present value of defined benefit obligations at the end of 2011 was adjusted at 30 June 2012 on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2011 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets was also reassessed on the basis of new valuations at 30 June 2012. 42 Condensed consolidated interim financial statements at 30 June 2012 The changes in discount rates and the remeasurement of plan assets have the following effects at 30 June 2012: (In millions of euros) Actuarial gains and losses recognized in shareholders’ equity, net of deferred taxes Actuarial gain (loss) related to pensions and healthcare plans Change in discount rates (40) Remeasurement of plan assets 7 Benefit obligations recognized in balance sheet liabilities Pension and other long-term benefits 56 (10) Income or expenses recognized in the income statement Other employee benefits (3) 14.4 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €84 million (€85 million at 31 Dece mber 2011) in the United States for €79 million (€81 million at 31 December 2011), of which €60 million in resp ect of former industrial sites covered 100% by the Total Group indemnity (receivable recognized in “other non-current assets” for an amount of €38 million and €22 million of deferred t axes) (see note C20.2 Off-balance sheet commitments/Commitments received). 14.5 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €53 million (€6 4 million at 31 December 2011). 15 Liabilities and contingent liabilities 15.1 Environment ARKEMA’s business activities are subject to constantly changing local, national and international regulations on the environment and safety, which entail meeting increasingly complex and restrictive requirements. In this regard, these activities can involve a risk of ARKEMA’s liability being called upon, particularly in respect of clean-up of sites and industrial safety. Taking account of the information available, agreements signed with Total, and the provisions for environmental contingencies recognized, ARKEMA’s management considers that the environmental liabilities identified at this point are valued and recognized to the best of their knowledge in the financial statements. However if laws, regulations or government policy in respect of environmental matters were to change, ARKEMA’s obligations could change, which could lead to additional costs. 43 Condensed consolidated interim financial statements at 30 June 2012 Clean-up of sites The competent authorities have made, are making or may in the future make specific demands that the Group rehabilitate or control emissions at certain sites that it is currently operating, or that it operated or disposed of in the past, at neighboring sites or at sites where the Group stored or disposed of waste. Sites currently in operation: ARKEMA has many sites of which a certain number are probably polluted in view of their age and the range of activities that are carried out on them, or that were carried out on them in the past. As regards these sites, certain situations have been identified and ARKEMA has already carried out certain clean-up work, or otherwise developed action plans and recognized provisions in order to cover future clean-up work. However, in the light of (i) the uncertainties over the technical means to be implemented, (ii) potential issues that are unknown, (iii) uncertainties over the actual time required for remediation compared with the estimated time (e.g. “pump and treat”), and (iv) potential changes in regulations, the possibility that the expenses that the Group will incur will be higher than the amounts covered by provisions cannot be excluded. These potential excess costs relate mainly to the sites in Calvert City (United States), Carling (France), Günzburg (Germany), Jarrie (France), Lannemezan (France), Mont (France), Pierre-Bénite (France), Riverview (United States), Rotterdam (the Netherlands), Saint-Auban (France) and Saint-Fons (France), and could adversely affect the Group’s business, results and financial condition. The legal proceedings against Arkema France before the Nanterre correctional court regarding the Saint-Auban site are now closed: Arkema France was ordered by Nanterre court on 9 March 2012 to pay a fine of €30,000 for p ollution of the Durance, €15,000 in damages to the associations in the opposing party and €10,000 compensation for mor al prejudice. Closed industrial sites (Former industrial sites): Total directly or indirectly took over the closed industrial sites at the date of the Spin-Off of Arkema’s Businesses. 15.2 Litigation, claims and proceedings in progress 15.2.1 Antitrust litigation The Group is involved in a number of proceedings in the United States, Canada and Europe alleging violations of antitrust laws relating to cartel behavior. To cover the risks associated with the proceedings in the United States and Europe, which arose prior to completion of the Spin-Off of Arkema’s Businesses, Total S.A. and one of its subsidiaries have granted indemnities for the benefit of Arkema S.A. and Arkema Amériques SAS, the main terms of which are described in note C29 “Off-balance sheet commitments”, to the consolidated financial statements at 31 December 2011, which can be found in Chapter 20 of ARKEMA’s 2011 Reference Document. 44 Condensed consolidated interim financial statements at 30 June 2012 Proceedings carried out by the European Commission The appeal proceedings by Arkema France before the European Union’s General Court following the European Commission’s decisions in the heat stabilizers case are still pending. In addition, it cannot be ruled out that civil suits for damages are filed by third parties claiming to be victims of the violations in relation to which fines have been imposed by the European Commission. The hydrogen peroxide proceedings against Arkema France initiated by Cartel Damage Claim (CDC) Hydrogen Peroxyde SA before the Dortmund (Germany) Tribunal is still pending. The same applies to the claim concerning sodium chlorate brought before the Amsterdam court by an affiliate of CDC (CDC Project 13 S.A.). Given the elements at its disposal, the Group is not currently able to estimate the total amount of the claims liable to be definitively held against it by the relevant jurisdictions after exercise of any recourse available, and so has not recognized any provisions in this respect. Proceedings in the United States and Canada a) US civil actions In 2008 and early 2009, the appeals court ruled that the trial courts erred when they granted class certification of direct purchaser classes in the hydrogen peroxide matter and in the plastics additives matter; the appeals court remanded each of those cases back to the trial courts for further proceedings consistent with proper class certification standards. Following those appellate decisions, the trial court finally approved the settlement agreements that Arkema Inc. and Arkema France separately executed with the direct purchaser class in Hydrogen Peroxide and with the direct purchaser class of MMA/PMMA products. In the plastics additives direct purchaser action, the federal court denied the plaintiffs’ request for class certification. During the third quarter of 2011, Arkema Inc. reached a final settlement with the individual plaintiffs. In the plastics additives direct purchaser class action before the federal court, the plaintiffs voluntarily ceased their action against Arkema Inc. during the third quarter of 2011, such that the case is now closed to appeal before the courts. In the plastics additives direct purchaser action in California, the court of first instance gave final approval to the settlement reached between the purchasers and ARKEMA, and the case is no longer open to appeal. During the first quarter of 2010, Arkema Inc. reached a settlement with the indirect purchasers of hydrogen peroxide from five American states which had initiated class action, in this case before the federal court, alleging violation of state 45 Condensed consolidated interim financial statements at 30 June 2012 competition laws. Under this agreement, which has received court approval, Arkema Inc. made no payments but agreed to cooperate if the case proceeds to trial against other defendants. This was not contested and the case is now closed. The class action in California by indirect purchasers of hydrogen peroxide was rejected in the first quarter of 2011. This decision is not open to appeal. b) Canadian civil actions In Canada, Arkema Inc. and Arkema Canada Inc. reached an agreement with the direct and indirect purchasers of hydrogen peroxide who initiated civil actions alleging violations of competition laws, to settle all of the pending Canadian actions for a payment of CAD 100,000 and cooperation commitments. The competent Canadian courts have approved this settlement. To date ARKEMA has fulfilled the cooperation commitments made to the same courts. 15.2.2 Occupational illness In the manufacture of its products, the Group uses and has used toxic or hazardous substances. Despite the safety and monitoring procedures that have been instituted at Group level and for each production site, Group employees may have been exposed to such substances and may develop specific pathologies as a result of such exposure. In this respect, like most industrial companies, in the past, the Group has used a variety of insulating or heat-proofing materials containing asbestos in its production facilities. Consequently, certain employees may have been exposed to such materials before they were gradually eliminated and replaced with substitute products. At its French sites, the Group anticipated the regulatory provisions applicable to asbestos (Decrees No. 96-97 and 96-98 of 7 February 1996 and Decree No. 96-1133 of 24 December 1996). The Group made an inventory of asbestos- containing building materials within its premises, notified employees of the results of these investigations and took the collective and individual protective measures required by the applicable laws. However, claims for occupational illness related to past asbestos exposure have been filed against the Group, mostly for periods before 1980. Given the latency period of asbestos-related pathologies, a large number of claims for occupational illness are likely to be filed in the years ahead. The Group has recognized provisions to cover the risks of employer liability claims related to notified cases of occupational illness. 15.2.3 Other litigation and claims and contingent liabilities Arkema France In 1995, the company Gasco brought a claim for damages against Elf Atochem (the former name of Arkema France) before the court in Ghent (Belgium) in respect of an alleged breach of contract and breach of an exclusivity agreement. At first instance, Gasco obtained a judgment against Atofina for payment of €248,000 by way of damages for breach of contract (payment of that sum has been made) but its claim for breach of the exclusivity agreement was dismissed. Appeal proceedings have been pending before the Ghent Court of Appeal since 1999, and no developments have arisen 46 Condensed consolidated interim financial statements at 30 June 2012 since then. Having regard to the weak basis of the allegations made against it and the defenses available to the Group, the Group’s view as the matter currently stands is that the amount of the provision made for this matter in the accounts is sufficient. No significant developments arose on this case in the first half of 2012. Arkema France supplies various products for the coating of items used in a number of European countries in the manufacture of sanitary treatment facilities. These products are subject to inspection on the part of approved laboratories which must certify their conformity with the applicable sanitary regulations. Arkema France has an interpretation of the regulations applicable in France that diverges from that of a French laboratory and the public authorities as regards regulatory clearance in France of a product, even though this product is approved in other European Union countries. The Group takes the view that this problem is essentially administrative in nature. However, the possibility that users might seek to attach liability to Arkema France as the supplier cannot be excluded. In the event that such claims were successful, the costs of replacement of the products and the damages that could be claimed could prove to be extremely high. Under the terms of a services agreement, Arkema France has the effluent produced by its industrial operations at Lacq and Mourenx treated by Total E&P France, which has specific authorization to inject this effluent, together with effluent it produces itself, into a cavity called Crétacé 4000. The French customs authorities issued a tax demand of €6.7 million to Total, covering the years 2003 to 2006, for non-payment of the French general tax on polluting activities (taxe générale sur les activités polluantes, or TGAP) which, according to the authorities, should be applied to these injections of effluent. Following the authorities’ rejection of Total’s appeal at the end of 2008, Total initiated a case in the court of first instance against them in early 2009, seeking cancellation of the tax demand. Total’s main argument is that the injections are not carried out in a context subject to Classified Facilities regulations and are thus not subject to the TGAP. The court’s decision issued in April 2011 rejected Total’s principal claim while acknowledging that its own effluents should be exempt from the TGAP. However, the possibility cannot be fully ruled out that, at the end of the proceeding, Total may be required to pay all or part of the TGAP assessed, of which ARKEMA could be liable for a portion. In 2005, 260 employees and former employees of the Pierre-Bénite site made a claim for damages with the Lyon employee claims courts (Conseils de prud’hommes) for alleged non-compliance with the terms of the chemicals industry branch agreement over break times. The claimants consider that, given the manner in which work is organized and structured on this site, the break granted to them does not allow them to be released from all work and to be able to freely go about their personal affairs. The claim for compensation amounts to €5.2 million. Arkema France has contested these claims. A judgment issued on 24 June 2008 fully rejected all of the employees’ claims. The employees appealed this decision. On 21 November 2011 the Lyon appeal court upheld the judgment of 24 June 2008 and fully rejected the appeals of all claimants. The provision previously recognized in the financial statements was reversed. Arkema France has been informed of 176 appeals, but in view of the known information on the matter no provision will be booked in the financial statements until a ruling has been made as to whether the appeals are admissible. 47 Condensed consolidated interim financial statements at 30 June 2012 A large number of former employees of Arkema France who left the Company under the early retirement system for asbestos workers are parties to proceedings before the employee claims court claiming compensation for losses of income caused by their departure under this system. The conditions for departure under the early retirement system and the amount of the allocation received by beneficiaries the subject of the current litigation - are defined by French law. These proceedings follow rulings by the Paris and Bordeaux appeal courts awarding compensation to former employees of other companies who also left their jobs under the same system. The damages awarded varied, ranging up to the full amount of salary. In a ruling of 11 May 2010, the labour chamber of the Court of Cassation partly overturned the decisions by the Paris and Bordeaux appeal courts, judging that no compensation could be claimed for loss of revenue resulting from departure under the early retirement system. This judgement has since been confirmed several times. The court did however accept the existence for these employees of a prejudice of anxiety eligible for compensation. For Arkema France, in the cases currently in process, the decisions issued in the courts of first instance contradict each other on the question of compensation for economic prejudice and the prejudice of anxiety. For example, in rulings of 23 February 2011 and 15 September 2011, the Martigues employee claims court took a contrary view to the labour chamber of the Court of Cassation and ordered Arkema France to compensate several former employees for economic prejudice; the same court also found against Arkema France on the question of the prejudice of anxiety. Arkema France has appealed these decisions. In a ruling of 2 December 2011 the Grenoble employee claims court took a similar view to Martigues, ordering Arkema France to compensate 46 employees for the prejudice associated with “upheaval in living conditions”, which can be considered comparable to economic prejudice and the prejudice of anxiety. However on 28 September 2011, the Forbach employee claims court refused 14 former employees compensation for economic prejudice and the prejudice of anxiety. The rest of the rulings are expected in the next few months. It is likely that other former employees of Arkema France who benefited from the asbestos-related early retirement system, or other employees who may have been exposed to asbestos, may themselves claim compensation before an employee claims court for the prejudice of anxiety or the economic prejudice. 533 former employees have initiated action before employee claims courts seeking damages for the prejudice of anxiety and/or the economic prejudice caused by exposure to asbestos. A provision has been recognized in the financial statements in respect of the litigations currently in progress, for an amount that the Group considers adequate. In 2009, the Council of State cancelled the decision by the Lyon administrative court confirming the rulings against Arkema France, ordering the company to complete the pollution diagnosis for part of the Saint Fons site and propose preventive or remedial work. However, during proceedings before the Council of State, the Prefect of the Rhône region issued a new decision on 14 May 2007 still concerning the Saint Fons site, ordering Arkema France to carry out a quality monitoring on underground water and propose a pollution management plan. In a ruling of 29 September 2011, the Lyon administrative court rejected Arkema France’s petition against this decision. Arkema France has appealed this ruling. If Arkema France loses its appeal, rehabilitation of the site affected by the pollution will be the company’s responsibility. Arkema France has already begun legal action against Rhodia Chimie, the previous operator of the site. 48 Condensed consolidated interim financial statements at 30 June 2012 Arkema Srl During 2009, following pollution by an industrial operator at the Spinetta site (Italy) affecting a landfill unused since 1995 located on the part of the land owned by Arkema Srl, Arkema Srl was ordered by the local authorities to supply information on the history of the landfill and monitor pollution affecting it. In late 2009, a certain number of managers and directors of Arkema Srl were named in a criminal investigation for underground water pollution at the Spinetta site and withholding information from the authorities on the true extent of existing pollution. This investigation also concerns employees of the main industrial operator on the site. In late August 2010, the Public Prosecutor heading the case ended the first phase of the procedure by deciding to send the matter before the Preliminary Hearing Judge, who ruled in June 2011 that third party petitions to join the prosecution as claimants of civil damages were valid. After hearing all the parties, the Judge decided in early 2012 that the only charge applicable to representatives of Arkema Srl is the failure to take remedial action against the pollution observed. Arkema Srl considers that it is difficult to determine with certainty whether the company or the managers or directors cited in this new phase of the criminal investigation could be considered to have liability. CECA In 1999, the company Intradis commissioned the company Antéa to carry out a survey on a site located in France which had been used for industrial purposes and in particular by CECA (manufacture of sulphuric acid) and the company Hydro Agri (a fertilizer factory which does not belong to the Group). The survey classified the site as in category 1 (a site requiring in-depth investigations and a detailed risk assessment). After receipt of the report by the expert appointed to determine the nature and extent of the pollution, Intradis applied to the Administrative Court to have the prefectoral order requiring it to take measures to protect the site overturned. Intradis appealed this decision to the Administrative appeal court of Douai. In a judgment dated 18 October 2007, the Court overturned the previous judgment, cancelled the prefectoral order and decided that there was no need to rule on Intradis’ conclusions against CECA. In the absence of a quantified claim, no provision has been made for this dispute in the accounts of the Group. No particular developments have arisen on this litigation since 2008. The judgment of the Administrative appeal court of Douai definitively closes the proceedings initiated by Intradis in the administrative court system. As of today, it is not possible to evaluate whether any other forms of appeal, notably through civil proceedings, may be initiated. The past environmental engineering activities of CECA have given rise to various claims by third parties. These claims have been transmitted to the Group’s insurers. The Group has recognized provisions that it considers adequate. The possibility cannot be excluded that this activity, which has now ceased, may give rise to further claims in the future. Arkema Inc. In the United States, the Group is currently involved in a substantial number of proceedings in various courts. No notable developments have arisen in the proceedings concerning claims by third parties relating to (i) alleged exposure to asbestos on the Group’s sites, or (ii) exposure to products containing asbestos and sold by former subsidiaries of the Group in the United States and elsewhere. When they are not covered by insurance policies, provisions have been made for these proceedings in an amount which the Group considers sufficient. However, due to the continuing uncertainties as to the outcome of these proceedings, the Group is not, as at the date of these financial statements, in a position, having 49 Condensed consolidated interim financial statements at 30 June 2012 regard to the information available to it, to estimate the total amount of the claims that might finally be upheld against it by the various competent courts after the exhaustion of any avenues of appeal. On 5 August 2010, Rohm and Haas served Arkema Inc. and Arkema France with a petition in the District Court of Harris County, Texas. The petition asserts various claims against Arkema Inc. associated with the Deer Park, Texas Capacity Reservation Contract, MMA Swap Agreement, and MMA Supply Agreement. The claims are in particular for breaches of contract. On 1 October 2010 an Amended Complaint filed by Rohm and Haas sought to terminate Arkema Inc.’s right under the Deer Park Capacity Reservation Contract as of 1 April 2014. On 21 April 2011, the Court in Texas held that the Capacity Reservation Contract “remains in full force and effect” and that Arkema Inc.’s purchase rights under such contract “shall continue for the life of the Deer Park Facility.” Rohm and Haas was refused permission from the trial court to appeal that decision. After a settlement was reached on 29 June 2012, the parties withdrew the ongoing action. On 13 August 2010, Rohm and Haas filed a Notice of Arbitration and Statement of Claim with the American Arbitration Association in New York. The arbitration claim seeks relief from the alleged failure of Arkema France to enter into a replacement swap agreement for MMA. The final hearing was held in April 2012, the parties’ statements were filed and they now await the arbitration decision. Arkema Quimica Limitada Following a declaration as to the unconstitutional nature of certain taxes, the Brazilian subsidiary of Arkema Amériques, Arkema Química Limitada, offset certain tax assets and liabilities commencing in 2000. The Brazilian government contests the modalities of this offset and is now claiming its reimbursement amounting to 19.5 million reais (around €7.6 million). Arkema Química Limitada was initially required to provide a guarantee (in the form of a cash deposit and a pledge of other assets) for the current portion of the liability, and in parallel lodged a counter-claim in mid-June 2009 for cancellation of the tax administration’s claim for that portion. In October and November 2009, Arkema Quimica Limitada applied to benefit from a new tax amnesty law that would allow it to pay only part of the overall liability. During the first quarter of 2010 Arkema Química Limitada gave the tax authorities confirmation of its application to benefit from the tax amnesty law that would allow it to pay only part of its overall tax liability. Once the tax authorities give final consent to the terms for payment of the liability subject to amnesty, only an amount of 9.2 million reais or around €3.6 million at 30 June 2012 would be concer ned by an appeal before the courts, which ARKEMA considers would have reasonable chances of success. 50 Condensed consolidated interim financial statements at 30 June 2012 16 Debt Group net debt amounted to €1,093 million at 30 Jun e 2012, taking account of cash and cash equivalents of €107 million. It is mainly denominated in euros. The Group has the following instruments: • In April 2012, the Group issued a €230 million bond that will mature on 30 April 2020, with a fixed coupon of 3.85%. On 26 July 2011, the Group put in place a multi-currency syndicated credit facility of €700 million, w ith a duration of five years, maturing on 26 July 2016. This credit facility is intended to finance the Group’s general requirements and includes an early repayment clause in the event of certain situations including a change in control of ARKEMA. It includes: (i) standard information undertakings and commitments for this type of financing (ii) a financial undertaking in which ARKEMA undertakes to maintain a ratio of consolidated net debt to consolidated EBITDA (tested twice a year) of less than 3; this may be raised to 3.5 in the event of acquisition(s) of assets or securities, capital increase(s) or investment(s) in joint ventures. This facility can be used for a maximum of two non-consecutive test dates during the term of the credit. In October 2010, the Group issued a €500 million bo nd that will mature on 25 October 2017, with a fixed coupon of 4.00%. The Group has a securitization programme for sales receivables with no deconsolidating effect, representing a maximum financing of €240 million, used for an amou nt of €95 million at 30 June 2012. The Group has a multi-currency syndicated credit facility put in place on 31 March 2006, maturing in March 2013. The amount of this facility was reduced to €288 mil lion on 31 March 2012. The purpose of the credit facility is to finance the Group’s general corporate purposes; it provides for prepayment in certain cases, including a change of control over ARKEMA, and incorporates: (i) standard undertakings for this type of financing; (iii) a financial undertaking: ARKEMA undertakes to maintain a ratio of consolidated net debt to consolidated EBITDA (tested twice a year) of less than 3. 51 16.1 Analysis of net debt by category (In millions of euros) Bond Finance lease obligations Bank loans Other non-current debt Non-current debt Finance lease obligations Syndicated credit facility Other bank loans Other current debt Current debt Debt Cash and cash equivalents Net debt * See note 17.3 16.2 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. (In millions of euros) Euros US Dollars Chinese Yuan Korean Won Other Total Condensed consolidated interim financial statements at 30 June 2012 30 June 2012 31 December 2011 725 496 3 3 52 48 32 36 812 583 0 210* 1 0 142 149 36 122 388 272 1,200 855 107 252 1,093 603 30 June 2012 31 December 2011 1,076 722 15 17 98 105 3 2 8 9 1,200 855 52 Condensed consolidated interim financial statements at 30 June 2012 16.3 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2012 31 December 2011 Less than 1 year 404 293 Between 1 and 2 years 37 30 Between 2 and 3 years 41 34 Between 3 and 4 years 42 35 Between 4 and 5 years 47 39 More than 5 years 822 567 Total 1,393 998 17 Management of risks related to financial assets and liabilities ARKEMA’s businesses expose it to various risks, including market risks (risk of changes in exchange rates, interest rates and the prices of raw materials and energy), credit risk and liquidity risk. 17.1 Foreign currency risk The Group is exposed to transaction risks and translation risks related to foreign currencies. The Group hedges the foreign currency risk mainly through spot foreign currency transactions or through forward transactions over short maturities, generally not exceeding 6 months. The fair value of the Group’s forward foreign currency contracts is a liability of €1 million. The amount of foreign exchange gains and losses recognized in recurring operating income at 30 June 2012 is a loss of €1.2 million (loss of €0.5 million at 30 June 2011) . The portion of foreign exchange gains and losses corresponding to interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate is recorded in financial result. It amounts to a negative €0.2 million at 30 June 2012 (positive €0.5 million at 30 June 2011). 17.2 Interest rate risk Exposure to interest rate risk is managed by the Group’s central treasury department and simple derivatives are used as hedging instruments. The Group has not entered into any interest rate hedges at 30 June 2012. An increase (decrease) of 1% (100 basis points) in interest rates would have the effect of increasing (decreasing) the interest on financial assets and liabilities measured at amortized cost by €2.2 million. 17.3 Liquidity risk The Group’s central treasury department manages the liquidity risk associated with the Group’s debt. 53 Condensed consolidated interim financial statements at 30 June 2012 Liquidity risk is managed with the main objective of ensuring renewal of the Group’s financing and, in the context of meeting this objective, optimizing the annual financial cost of the debt. In almost all cases, Group companies obtain their financing from, and manage their cash with, Arkema France or other Group entities that manage cash pooling mechanisms. The Group reduces the liquidity risk by spreading maturities, favouring long maturities and diversifying its sources of financing. The Group thus has: a €230 million bond maturing on 30 April 2020 a €500 million bond maturing on 25 October 2017 a €700 million syndicated credit facility maturing on 26 July 2016 a €288 million syndicated credit facility maturing on 31 March 2013 a securitization programme for sales receivables, representing a maximum financing of €240 million. These financing arrangements are intended to cover all the Group's financing requirements and give it sufficient flexibility to meet its obligations. Apart from a change of control, the main circumstances in which early repayment or termination could occur concern the syndicated credit facilities (see note C16 Debt), if the ratio of consolidated net debt to consolidated EBITDA were to become greater than 3. In the case of the €700 mill ion facility this ratio may be raised to 3.5 in the event of acquisition(s) of assets or securities, capital increase(s) or investment(s) in joint ventures. This facility can be used for a maximum of two non-consecutive test dates during the term of the credit. Consolidated net debt amounts to €1,093 million at 30 June 2012, representing 1.1 times consolidated EBITDA for the last 12 months. At 30 June 2012, the amount available under the syndicated credit facility is €778 million and the amo unt of cash and cash equivalents is €107 million. Note C16 Debt provides details of the maturities of debt. 17.4 Credit risk The Group is potentially exposed to credit risk on its accounts receivable and as regards its banking counterparts. Credit risk on accounts receivable is limited because of the large number of its customers and their geographical dispersion. The Group’s general policy for managing credit risk involves assessing the solvency of each new customer before entering into business relations: each customer is allocated a credit limit, which constitutes the maximum level of outstandings (receivables plus orders) accepted by the Group, on the basis of the financial information obtained on the customer and the analysis of solvency carried out by the Group. These credit limits are revised regularly and, in any case, every time that a material change occurs in the customer’s financial position. Customers who cannot obtain a credit limit because their financial position is not compatible with the Group’s requirements in terms of solvency only receive deliveries when they have paid for their order. Even though the Group has incurred very few bad debts for the last number of years, it has decided to cover its accounts receivable credit risk by putting in place a global credit insurance program. On account of the statistically low bad debt 54 Condensed consolidated interim financial statements at 30 June 2012 rate experienced by the Group, the rate of cover is significant. Customers with whom the Group wishes to continue commercial relations but which are not covered by this insurance are subject to specific centralized monitoring. In addition, the Group’s policy for recognizing bad debt provisions in respect of receivables not covered by credit insurance, or the portion of receivables that are not so covered, has two components: receivables are individually provided against as soon as a specific risk of loss (economic and financial difficulties of the customer in question, entry into receivership, etc.) is clearly identified. The Group may also recognize general provisions for receivables that are overdue for such a period that the Group considers that a statistical risk of loss exists. These periods are adapted depending on the BUs and the geographical regions in question. Banking credit risk is related to financial investments, derivatives and credit facilities granted by banks. The Group limits its exposure to credit risk by only investing in liquid securities with first-class commercial banks. 17.5 Risk related to raw materials and energy The prices of certain raw materials used by ARKEMA are highly volatile and their fluctuations lead to significant variations in the cost price of the Group's products; in addition, because of the importance of the Group’s requirements in terms of energy resources resulting notably from the electrically intensive nature of certain of its manufacturing processes, ARKEMA is also very sensitive to changes in the price of energy. In order to limit the impact of price volatility of the principal raw materials it uses, ARKEMA can decide to use derivatives matched with existing contracts or can negotiate fixed price contracts for limited periods. Recognition of these derivatives generated an expense of €2 million on the income statement at 30 June 2012 (no impact at 30 June 2011). 18 Related parties Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are accounted for under the equity method. The values involved are not significant. 55 Condensed consolidated interim financial statements at 30 June 2012 19 Share-based payments 19.1 Stock options No new stock option plans have been adopted by the Board of Directors. The main characteristics of the outstanding stock option plans at 30 June 2012 are as follows: 2006 Plan 2007 Plan 2008 Plan 2010 Plan 1 2010 Plan 2 2011 Plan 1 2011 Plan 2 Date of Annual General Meeting Date of Board of Directors’ meeting 10 May 06 10 May 06 10 May 06 15 June 09 15 June 09 15 June 09 15 June 09 04 July 06 14 May 07 13 May 08 10 May 10 10 May 10 4 May 11 4 May 11 Vesting period 2 years 2 years 2 years 2 years 5 years 2 years 4 years Conservation period 4 years 4 years 4 years 4 years 5 years 4 years 4 years Period of validity 8 years 8 years 8 years 8 years 8 years 8 years 8 years Exercise price 28.36 44.63 36.21 30.47 30.47 68.48 68.48 Number of options granted - to corporate officers: Thierry Le Hénaff 540,000 55,000 600,000 70,000 460,000 52,500 225,000 35,000 225,000 35,000 105,000 29,250 105,000 29,250 to the 10 largest beneficiaries* Total number of options exercised by corporate officers by the 10 largest beneficiaries* Total number of options cancelled 181,000 436,136 27,250 171,000 15,900 217,000 244,952 10,000 97,050 22,800 169,350 40,220 - 9,750 18,877 104,000 4,250 - 3,500 5,000 104,000 - - 5,000 75,750 - - - 75,750 - - - Number of options In circulation at 1 January 2010 Granted Cancelled Exercised 534,850 11,900 214,397 591,200 - 12,000 - 454,414 - 11,992 - 225,000 - - 225,000 - - - - - - In circulation at 31 December 2010 308,553 579,200 442,422 225,000 225,000 In circulation at 1 January 2011 Granted Cancelled Exercised 308,553 187,603 579,200 - 2,000 169,100 442,422 - 1,299 14,080 225,000 - 5,000 - 225,000 - 5,000 - 105,000 - - 105,000 - - In circulation at 31 December 2011 120,950 408,100 427,043 220,000 220,000 105,000 105,000 In circulation at 1 January 2012 Granted Cancelled Exercised In circulation at 30 June 2012 120,950 32,986 87,964 408,100 - - 75,852 332,248 427,043 - - 26,140 400,903 220,000 - - 4,250 215,750 220,000 - - - 220,000 105,000 - - - 105,000 105,000 - - - 105,000 Employees who are not corporate officers of Arkema SA or any other Group company Total 2,260,000 306,000 926,850 725,558 37,250 281,300 67,577 1,580,464 450,000 35,892 214,397 1,780,175 1,780,175 210,000 13,299 370,783 1,606,093 1,606,093 - - 139,228 1,466,865 56 Condensed consolidated interim financial statements at 30 June 2012 Valuation method The fair value of the options granted was determined using the Black & Scholes method on the basis of assumptions, of which the main ones are as follows: Volatility Risk-free interest rate Maturity Exercise price (in euros) Fair value of stock options (in euros) 2006 Plan 2007 Plan 2008 Plan 20% 3.39% 4 years 44.63 7.89 22% 2.82% 4 years 28.36 6.29 25% 4.00% 4 years 36.21 8.99 2010 Plan 1 35% 0.34% 4 years 30.47 6.69 2010 Plan 2 32% 0.34% 5 years 30.47 6.67 2011 Plan 1 32% 1.29% 4 years 68.48 12.73 2011 Plan 2 32% 1.29% 4 years 68.48 12.73 The volatility assumption was determined on the basis of observation of historical movements in the ARKEMA share since its admission to listing, restated for certain non-representative days in order to better represent the long-term trend. The maturity adopted for the options corresponds to the period of unavailability for tax purposes. The amount of the IFRS2 expense recognized in respect of stock options at 30 June 2012 was €1 million (€1 million at 30 June 2011). 19.2 Free share grants On 9 May 2012, the Board of Directors decided to put in place three performance share award schemes for the benefit of employees, particularly employees with responsibilities whose exercise influences the Group’s results. In Plan 1, intended for employees of the Group's French companies, the definitive grant of such performance shares will be subject to a vesting period of 2 years, with effect from the Board of Directors’ grant, and subject to compliance with performance criteria expressed in terms of both ARKEMA’s EBITDA for 2012, and the variation in the average EBITDA margin in 2012 and 2013 compared to the average margin of a selection of other chemicals manufacturers over the same period. In Plan 2, intended for certain Group employees, the definitive grant of such performance shares will be subject to a vesting period of 3 years, with effect from the Board of Directors’ grant, and subject to compliance with the same performance criteria. In Plan 3, intended for Group company employees outside France, the definitive grant of such performance shares will be subject to a vesting period of 4 years, with effect from the Board of Directors’ grant, and subject to compliance with the same performance criteria as in Plans 1 and 2. 57 Condensed consolidated interim financial statements at 30 June 2012 The main characteristics of the free share grant plans in force at 30 June 2012 are as follows: 2010 Plan 1 2010 Plan 2 2011 Plan 1 2011 Plan 2 2011 Plan 3 2012 Plan 1 2012 Plan 2 2012 Plan 3 Date of Annual General Meeting Date of Board of Directors’ meeting Vesting period 15 June 09 15 June 09 15 June 09 15 June 09 15 June 09 15 June 09 15 June 09 15 June 09 10 May 10 10 May 10 4 May 11 4 May 11 4 May 11 4 years 2 years 2 years 4 years 3 years 9 May 12 2 years 9 May 12 3 years 9 May 12 4 years Conservation period Performance condition 2 years Yes (2) Yes (2) 2 years Yes (3) 2 years Yes (3) Yes (3) 2 years Yes (3) 2 years Yes (3) Yes (3) Total (4) Number of free shares granted - to corporate officers: Thierry Le Hénaff - to the 10 largest beneficiaries(1) 153,705 18,800 54,700 50,795 8,100 88,305 8,200 24,450 59,380 8,200 24,450 52,315 14,850 101,860 13,000 36,100 74,805 13,000 36,100 65,335 16,400 Number of free shares In circulation at 1 January 2010 310,400 Granted 153,705 50,795 204,500 Cancelled 638 135,561 Definitively granted 42,127 In circulation at 31 December 2010 153,705 50,157 337,212 In circulation at 1 January 2011 Granted Cancelled Definitively granted In circulation at 31 December 2011 153,705 - 3,690 - 150,015 50,157 - 1,000 - 49,157 88,305 455 - 87,850 59,380 455 - 58,925 52,315 125 - 52,190 - - - - - - - - - 337,212 200,000 6,875 132,200 398,137 In circulation at 1 January 2012 Granted Cancelled Definitively granted In circulation at 30 June 2012 150,015 - 180 149,835 0 49,157 - 742 - 48,415 87,850 - 180 100 87,570 58,925 - - 100 58,825 52,190 - 395 - 51,795 101,860 - - 101,860 74,805 - - 74,805 65,335 575 - 64,760 398,137 242,000 2,072 150,035 488,030 (1) Employees who are not corporate officers of Arkema SA or any other Group company (2) Performance conditions do not apply to beneficiaries of less than 100 shares (3) Performance conditions will apply only to the portion of rights in excess of 80 held under all plans, except for Executive Committee members, all of whose rights will be subject to performance criteria. (4) The total includes plans dating from before 2010. The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2012 is €4 million (€ 2 million at 30 June 2011). 19.3 Capital increase reserved to employees In the context of the Group’s employee shareholding policy, ARKEMA offered its employees the opportunity to subscribe to a reserved capital increase at a subscription price of €54.51. This price corresponds to the average opening 58 Condensed consolidated interim financial statements at 30 June 2012 market price of the ARKEMA share on the Paris stock exchange in the 20 trading days preceding the Board of Directors’ meeting of 7 March 2012, to which a discount of 20% was applied. Through this operation ARKEMA shares were offered to Group employees outside France via a free share grant plan. One free share was granted for each five shares subscribed, up to a maximum of 20 free shares. The employees subscribed 535,013 shares, and the capital increase was completed and recognized on 18 April 2012. On 9 May 2012 the Board of Directors recorded grants of 3,073 free shares to employees in Italy and Spain, and 14,090 free shares to employees in other countries outside France. The definitive grant of these shares will be subject to a vesting period of 3 and 4 years respectively. Valuation method In accordance with the method recommended by France’s national accounting standards authority (Autorité des Normes Comptables), the calculation used to value the cost of not being able to sell the shares for five years is based on the cost of a two-step strategy assuming that these shares will ultimately be sold, and that the same number of shares will be purchased and settled immediately, financed by a loan. The rate used for the loan is the rate that a bank would grant to a private individual presenting an average risk profile in the context of a 5-year consumer loan. The fair values of the shares subscribed in France and outside France have been calculated separately in order to reflect grants of free shares to Group employees established outside France. The main market parameters used in the valuation of the cost of not being able to sell the shares are as follows: Date of the Board meeting which decided on the capital increase: 7 March 2012 Share price at the date of the board meeting: €63.8 5 5-year risk free interest rate: 1.78% Interest rate on 5-year borrowings: 8.67% Cost of not being able to sell the shares: • • • 28.3% (shares subscribed in France) 29.2% (shares subscribed outside France in countries other than Italy and Spain) 39% (shares subscribed in Italy and Spain) On the basis of the share price at the date of the Board meeting, the benefit granted represents a value of €7 million. As the cost of not being able to sell the shares, calculated on the basis of the above parameters, is higher than this amount, no expense has been recognized in the income statement. 59 Condensed consolidated interim financial statements at 30 June 2012 20 Off-balance sheet commitments The commitments reported exclude commitments given to and received from third parties related to activities concerned by the divestment project for the Vinyl Products segment. 20.1 Commitments given 20.1.1 Off-balance sheet commitments given in the Group’s operating activities The main commitments given are summarized in the table below: (In millions of euros) Guarantees granted 30 June 2012 59 31 December 2011 50 Comfort letters 0 0 Contractual guarantees 25 30 Customs and excise guarantees 10 9 Total 94 89 Guarantees granted are mainly bank guarantees in favour of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 20.1.2 Contractual commitments related to the Group’s operating activities Irrevocable purchase commitments In the normal course of business, ARKEMA signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods initially of 1 to 20 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” type clauses. The total amount of the Group’s financial commitments is valued on the basis of the last known prices and amounts to €418 million at 30 June 2012 (see maturity schedule below). 60 Condensed consolidated interim financial statements at 30 June 2012 (In millions of euros) 30 June 2012 31 December 2011 2012 61 112 2013 74 63 2014 66 62 2015 51 48 2016 until expiry of the contracts 166 145 Total 418 430 Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land) and transportation equipment (rail cars, containers). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). (In millions of euros) 30 June 2012 Capitalized leases Non- capitalized leases 31 December 2011 Non- capitalized leases Capitalized leases 2012 0 13 0 20 2013 0 19 0 20 2014 0 18 0 17 2015 0 18 0 16 2016 and beyond 2 28 2 18 Nominal value of future lease payments 3 96 3 91 Finance cost 1 NA 1 NA Present value NA: not applicable 2 NA 2 NA 20.1.3 Off balance sheet commitments related to changes in the scope of consolidation Warranties related to sales of businesses Sales of businesses sometimes involve the provision of warranties in respect of unrecorded liabilities to the purchaser. ARKEMA sometimes grants such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of litigation and claims. In the majority of cases, they cover risks of occurrence of environmentally related claims. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted in the past by ARKEMA amounted to €63 million at 30 June 2012 (€58 million at 31 December 2011). These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 61 Condensed consolidated interim financial statements at 30 June 2012 In the divestment of its vinyls activities, ARKEMA provided the usual warranties for such operations for a total amount of up to €38 million. ARKEMA also issued warranties to third parties for the activity sold during a transitional period of no more than 15 months, and will remain jointly liable for the obligations of the activity sold over their residual duration. The total of these commitments to third parties are covered by a counter-guarantee provided by Klesch Chemicals Ltd., and collateral security received. ARKEMA also entered into a hydrogen supply agreement with Kem One until December 2016, representing an irrevocable purchase commitment of approximately €7 million. 20.1.4 Off-balance sheet commitments related to Group financing These commitments are described in note C16 Debt. . 20.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described in the notes to the consolidated financial statements for the year ended 31 December 2011 (note C29.2 Commitments received, in chapter 20 of ARKEMA’s Reference Document). 21 Subsequent events On 10 July 2012 ARKEMA announced its plan to sell its tin stabilizers business to PMC Group, continuing its move to refocus its activities on fast-growing core specialty businesses. As part of the Group’s Functional Additives business unit, this business generates sales of approximately €180 million and employs 234 people on 4 industrial sites worldwide. The project is subject to the works council information and consultation process in the Netherlands, and must be approved by the relevant antitrust authorities. ARKEMA is to gain a foothold in Brazil in acrylic specialities. On 16 July 2012 it announced a project to acquire an additives and emulsions production site from the Brazilian company Resicryl. This illustrates the Group’s commitment to stepping up the pace of its development in Latin America through projects with high value added. The new entity would combine the current sales of Coatex in Brazil with the sales of the new site, giving total sales of US$20 million. The operation is due to be finalized during the 2nd half of 2012. 62 Condensed consolidated interim financial statements at 30 June 2012 SCOPE OF CONSOLIDATION AT 30 JUNE 2012 (a) Companies acquired in 2012 (c) Companies merged in 2012 (b) Companies consolidated for the first time in 2012 (d) Companies concerned by disposal described in A. Highlights the planned The percentage of control indicated below also corresponds to the Group’s ownership interest in each entity. Akishima Chemical Industries Co.Ltd (d) Japan 100.00 FC Alphacan (d) France 100.00 FC Alphacan BV (d) Netherlands 100.00 FC Alphacan Doo (d) Croatia 100.00 FC Alphacan SPA (d) Italy 100.00 FC Altuglas International Denmark A/S Denmark 100.00 FC Altuglas International Ltd United Kingdom 100.00 FC Altuglas International Mexico Inc. United States 100.00 FC Altuglas International SAS American Acryl LP American Acryl NA LLC France United States United States 100.00 50.00 50.00 FC PC PC Arkema South Korea 100.00 FC Arkema France 100.00 FC Arkema Afrique SAS France 100.00 FC Arkema Amériques SAS France 100.00 FC Arkema Asie SAS France 100.00 FC Arkema Beijing Chemical Co. Ltd China 100.00 FC Arkema Canada Inc. Canada 100.00 FC Arkema Changshu Chemicals Co. Ltd China 100.00 FC Arkema Changshu Fluorochemical Co. Ltd China 100.00 FC Arkema Chemicals India Private Ltd India 100.00 FC Arkema China Investment Co. Ltd China 100.00 FC Arkema Coatings Resins BV Netherlands 100.00 FC Arkema Coatings Resins SAU Spain 99.92 FC Arkema Coating Resins Malaysia Sdn. Bhd. Malaysia 100.00 FC Arkema Coatings Resins SRL Italy 100.00 FC Arkema Coatings Resins UK United Kingdom 100.00 FC Arkema Co. Ltd Hong Kong 100.00 FC Arkema Daikin Advanced Fluorochemicals Co. Ltd China 60.00 PC Arkema Delaware Inc. United States 100.00 FC Arkema Europe France 100.00 FC Arkema France (d) France 100.00 FC Arkema GmbH (d) Germany 100.00 FC Arkema Hydrogen Peroxide Co. Ltd, Shanghaï China 66.67 FC Arkema Inc. United States 100.00 FC 63 Arkema Iniciadores SA de CV Arkema KK Arkema Ltd Arkema Ltd Arkema Mexico SA de CV Arkema Mexico Servicios SA de CV Arkema North Europe BV Arkema PEKK Inc. Arkema Peroxides India Private Limited Arkema Pte Ltd Arkema Quimica Ltda Arkema Quimica SA Arkema RE Ltd Arkema RE Arkema Resins (Pty) Ltd. Arkema Rotterdam BV Arkema (Shanghai) Distribution Co. Ltd Arkema Spar NL Limited Partnership Arkema sp Z.o.o Arkema Srl Arkema Thiochemicals Sdn Bhd Arkema Vlissingen BV Arkema Yoshitomi Ltd Austinland Ceca Belgium Ceca Italiana Srl CECALC Ceca SA Changshu Coatex Additives Co. Ltd Changshu Haike Chemicals Co. Ltd Changshu Resichina Engineering Polymers Co Ltd CJ Bio Malaysia Sdn Bhd Coatex Asia Pacific Coatex Central Eastern Europe sro Coatex Inc. Coatex Netherlands BV Coatex SAS Daikin Arkema Refrigerants Asia Ltd Daikin Arkema Refrigerants Trading (Shanghai) Co. Ltd Delaware Chemicals Corporation Difi 6 Difi 7 Difi 8 Condensed consolidated interim financial statements at 30 June 2012 (c) Mexico 100.00 Japan 100.00 United Kingdom 100.00 (d) Vietnam 100.00 Mexico 100.00 (b) Mexico 100.00 Netherlands 100.00 United States 100.00 India 100.00 Singapore 100.00 Brazil 100.00 (d) Spain 99.92 Ireland 100.00 (c) France 100.00 South Africa 100.00 Netherlands 100.00 China 100.00 Canada 100.00 Poland 100.00 Italy 100.00 Malaysia 86.00 Netherlands 100.00 Japan 49.00 (a) Spain 100.00 Belgium 100.00 Italy 100.00 France 100.00 France 100.00 China 100.00 China 49.00 (d) China 100.00 (b) Malaysia 14.00 South Korea 100.00 Slovakia 100.00 United States 100.00 Netherlands 100.00 France 100.00 Hong Kong 40.00 China 40.00 United States 100.00 (b)+(d) France 100.00 (b)+(d) (b)+(d) France France 100.00 100.00 FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC EM FC FC FC FC FC FC FC FC EM FC FC FC FC FC PC PC FC FC FC FC 64 Condensed consolidated interim financial statements at 30 June 2012 Difi 9 Difi 10 Difi 11 Difi 12 (b)+(d) (b)+(d) (b)+(d) (b)+(d) France German German Italy 100.00 100.00 100.00 100.00 Dorlyl snc (c) France 100.00 Febex SA Switzerland 96.77 Harveys Composites South Africa South Africa 100.00 Hebei Casda (a) China 100.00 Little Rock Invest Sl (a)+(d) Spain 100.00 Luperox Iniciadores SA de CV (c) Mexico 100.00 Maquiladora General de Matamoros SA de CV Mexico 100.00 Meglas Italy 33.00 Michelet Finance, Inc. United States 100.00 MLPC International France 100.00 Newspar Canada 50.00 Noble Synthetics Private Limited India 100.00 ODOR-TECH LLC United States 100.00 Oxochimie France 50.00 Ozark Mahoning Company United States 100.00 Peninsula Polymers LLC United States 100.00 Plasgom SAU (d) Spain 99.92 Qatar Vinyl Company Limited QSC Qatar 12.91 Résil Belgium Belgium 100.00 Resilia SRL Resinoplast Resinoplast North America Srl de CV (d) (d) (d) Italy France Mexico 100.00 100.00 100.00 Sartomer Asia Limited Hong Kong 100.00 Sartomer Guangzhou Chemical Co, Ltd China 100.00 Sartomer Japan Inc. (c) Japan 100.00 Sartomer Shangai Distribution Company Limited China 100.00 Sartomer USA LLC United States 100.00 Seki Arkema South Africa 51.00 Shanghaï Arkema Gaoyuan Chemicals Co. Ltd China 100.00 Stannica LLC United States 50.00 Sunclear SA Espana (ex Plasticos Altumax SA) Spain 99.92 Sunclear (ex Sunclear France) France 100.00 Sunclear SRL (ex Altuglas International SRL) Italy 100.00 Suzhou Hipro Polymers Co Ltd (a) China 100.00 Turkish Products, Inc. United States 100.00 Viking chemical company United States 100.00 Vinylfos (c)+(d) France 100.00 NB: FC: Full consolidation PC: Proportionate consolidation EM: consolidation by the equity method FC FC FC FC FC FC FC FC FC FC FC EM FC FC PC FC FC PC FC FC FC EM FC FC FC FC FC FC FC FC FC FC FC PC FC FC FC FC FC FC FC 65 2012 Half-year Financial Report Free translation for information purposes only III- DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements at June 30th 2012 have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Thierry Le Hénaff Chairman and CEO 66 KPMG Audit Ernst & Young Audit Département de KPMG S.A. Commissaire aux Comptes Membre de la Compagnie régionale de Versailles 1, cours Valmy 92923 Paris La Défense Cedex Commissaire aux Comptes Membre de la Compagnie régionale de Versailles 1 /2 Place des Saisons 92400 Courbevoie La Défense Cedex S.A.S. à capital variable Arkema S.A. Statutory Auditors’ Review Report On the first half-year Financial information for 2012 (free translation of the French original) January 1st to June 30th 2012 Arkema S.A. 420, rue d’Estienne d’Orves - 92700 Colombes appx 0 67 Arkema S.A. Statutory auditors’ half-year review report on the financial information 2012 This is a free translation into English of the statutory auditors’ review report on the half-year consolidated financial statements issued in the French language and is provided solely for the convenience of English-speaking readers. This report also includes information relating to the specific verification of information given in the Group’s interim management report. This report should be read in conjunction with, and is construed in accordance with, French law and professional standards applicable in France. Arkema S.A. Registered office: 420, rue d’Estienne d’Orves - 92700 Colombes Share capital: €.625,388,180 Statutory Auditor’s Review Report on the first half-year financial information for 2012 (free translation of the French original) January 1st to June 30th 2012 To the Shareholders, In compliance with the assignment entrusted to us by your Annual General Meetings, and in accordance with requirements of article L.451-1-2 III of the French Monetary and Financial code (Code Monétaire et Financier), we hereby report to you on: • the review of the accompanying condensed half-year consolidated financial statements of Arkema S.A. for the period January 1st to June 30th 2012,and the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared in all material respects- in accordance with IAS 34 - standard of the IFRS as adopted by the European Union applicable to interim financial information. 68 Arkema S.A. Statutory auditors’ half-year review report on the financial information 2012 II. Specific verification We have also verified the information presented in the half-year management report in respect of the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. Paris La Défense, July 31 2012 The Statutory Auditors French original signed by French original signed by KPMG Audit Département de KPMG S.A. Ernst & Young Audit Jacques-François Lethu Valérie Quint Partner Partner 69

Semestriel, 2012, Chemistry, ARKEMA

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Semestriel

Chemistry

ARKEMA

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Société anonyme au capital de 612 793 970 euros Siège social : 420, rue d’Estienne d’Orves 92700 Colombes RCS 445 074 685 Nanterre HALF-YEAR FINANCIAL REPORT First half ended June 30th 2010 1 2010 Half-Year Financial Report Free translation for information purposes only Content I- Half-year activity report--------------------------------------------------------------------------------------- 3 II- Condensed consolidated interim financial statements at June 30th 2010 ---------------------------- 7 III- Declaration by the person responsible for the half-year financial report ------------------------58 IV- Report from statutory auditors on condensed consolidated interim financial statements at June 30th 2010---------------------------------------------------------------------------------------------59 This is a free translation in English of Arkema’s half-year financial report for the 1st half ended June 30th 2010 issued in French and it is provided solely for the convenience of English speaking readers. 2 2010 Half-Year Financial Report Free translation for information purposes only I- HALF-YEAR ACTIVITY REPORT I. HIGHLIGHTS OF THE FIRST HALF OF THE YEAR Arkema continued to implement the transformation strategy launched four years ago. Accordingly, two major projects were closed successfully in the first half of the year: the start-up and ramp-up of a new production plant in China in Fluorochemicals which contributes to increase our presence in Asia, and the integration of assets purchased from Dow which is strengthening our position in the acrylics sector. 1. Growth projects On January 25th 2010 Arkema achieved a major step in its development with the acquisition of certain acrylic assets in North America from The Dow Chemical Company. The acrylic acid and esters production plant at Clear Lake (Texas) became part of the Acrylics BU, while the specialty acrylic latex business (UCAR™ Emulsion Systems) formed the Group’s new Emulsion Systems BU. This acquisition enables Arkema to expand its offering in the Coatings sector, and to consolidate its position in acrylic monomers, in which the Group is now the 3rd and the 2nd leading player in the world and in North America respectively. In May 2010, as part of the Arkema Daikin Advanced Fluorochemicals Co. Ltd joint venture, Arkema announced the startup of a Forane® 125 (HFC-125 fluorinated gas) world-scale production plant built on its Changshu site in China. HFC-125 is an essential component of new generation refrigerant blends. This project contributes to increase the Group’s position in China and in Asia, a region in which the Group aims to achieve 22% of its overall sales by 2014. 2. Other highlights In April 2010 Arkema conducted a share capital increase reserved for its employees, with the aim of continuing to encourage them to be part of the Group’s transformation. 824,424 securities were subscribed for at a purchase price of €20.63 per share, representing a total value of €17 million. Employee shareholding on June 30th 2010 accounted for over 5%. In May 2010 Arkema announced the sale of three licenses for the use of PVC production processes to the Chinese company Qinghai Salt Lake Industry Group Co., Ltd. As part of a cooperation agreement reached in November 2008 between Arkema and Aker Solutions (a leading global provider of engineering and construction services), this sale illustrates the success of this partnership. Following the effective release of the necessary funding for the running of the Exeltium consortium, which it is part of, Arkema France has subscribed for its quota of the share capital increase conducted by Exeltium. Arkema plans to draw some of its electricity requirements from the beginning of 2011 under the terms set out in the industrial partnership agreement for the long-term supply of electricity signed between Exeltium and EDF. 3 2010 Half-Year Financial Report Free translation for information purposes only II. ANALYSIS OF FINANCIAL RESULTS FOR FIRST HALF 2010 (In millions of euros) Sales ............................................................... EBITDA......................................................... Recurring operating income ........................ Other income and expenses ............................ Operating income.......................................... Adjusted net income ..................................... Net income – Group share................................ Recurring CAPEX 1st half 2010 1st half 2009 2,259 127 -10 -98 -108 -55 -149 125 2,913 378 236 -4 232 158 159 113 Variations in % +29% 3.0x n.a. n.a. n.a. n.a. -10% Net debt 367 (06/30/10) 341 (12/31/09) +8% Sales ARKEMA’s sales in 1st half 2010 reached €2,913 million, 29% up over 1st half 2009. Volumes increased by 15.8% at constant scope of business, supported by strong demand in Asia, a recovery in North America, in particular in 2nd quarter 2010, and the contribution of new developments in fast growing sectors. Volumes, however, were still below pre-crisis levels. The 8.4% scope of business effect corresponded primarily to the integration of the acrylics activities purchased from Dow. The price effect accounted for 3.6% in an environment marked by rising raw material costs. The positive translation effect stood at 1.2%. EBITDA EBITDA in 1st half 2010 reached €378 million, the Group’s best ever performance. This is a threefold increase on 1st half 2009, and is 22% up on EBITDA for the whole of 2009 (€310 million). Beyond the much improved market conditions (except for Vinyl Products), this performance reflects the extent of ARKEMA’s transformation in the last 4 years. The new developments in fast growing sectors, the start up of new plants in Asia, and fixed cost reductions fully bore fruit as volumes started to recover. The acrylics assets purchased from Dow benefited from an improvement in market conditions in this sector. These various internal actions made a €77 million contribution to EBITDA. EBITDA margin rose to 13.0% of sales against 5.6% in 1st half 2009, and 10.6%, its previous highest historical level (1st half 2008). Operating income Operating income stood at €232 million in 1st half 2010 against a loss of €108 million in 1st half 2009. It includes €142 million depreciation and amortization and €4 million other expenses. In 1st half 2009 depreciation and amortization amounted to €137 million, while other expenses stood at €98 million, mostly corresponding to expenses related to the plans to restructure Arkema’s activities in North America and in the Methacrylates sector in Europe. Net income, Group share ARKEMA regained profitability in 1st half 2010 with a €159 million net income - Group share, against a loss of €149 million in 1st half 2009. It includes a €67 million income tax charge representing 28% of the recurring operating income. Segment performance Vinyl Products sales stood at €569 million against €523 million in 1st half 2009. Volumes improved in a construction market that has remained challenging in Europe. PVC prices increase offset the rise in the cost of ethylene, but unit margins remained low. By contrast, caustic soda prices were much below those of 1st half 2009, particularly compared to the peak of 1st quarter 2009; however, they did improve over 1st half 2010. EBITDA remained negative at –€8 million (–€5 million in 1st half 2009). Cost reduction has continued, and remains this segment’s priority for the coming months. Finally, Qatar Vinyl Company, in which ARKEMA owns a 13% stake, continued to report a very good performance. Industrial Chemicals sales stood at €1,515 million against €1,052 million in 1st half 2009, 44% up. At constant scope of business, sales grew by 25%, volume and price effects representing 15% and 8% respectively. Dow’s former acrylic 4 2010 Half-Year Financial Report Free translation for information purposes only activities generated sales of €203 million over the period. EBITDA rose by 84% to €272 million against €148 million in 1st half 2009. Beyond the recovery in volumes and the improvement in margins for acrylic monomers, the significant improvement in EBITDA reflected the success of many internal progress initiatives. The successful start up in 2nd quarter 2010 of the new HFC-125 fluorogas production plant at Changshu (China), the restructuring of the Methacrylates activities in France, and the integration of the acrylic activities from Dow all made a major contribution to EBITDA. EBITDA margin reached a record high of 18.0% of sales, against 14.1% in 1st half 2009. Performance Products sales stood at €820 million against €678 million in 1st half 2009. This 21% increase essentially reflects a rise in volumes driven by sustained demand in Asia, an improvement in the United States and Europe, in particular in 2nd quarter, and the growing contribution of new developments in renewable energies and very high performance polymers. In this more favorable environment, EBITDA was 3.3 times greater than in 1st half 2009, at €130 million. Beyond the impact of new products developed by R&D and developments in Asia, this progress reflects the productivity efforts achieved in particular in Technical Polymers and Functional Additives, as well as the resilience of unit margins despite rising raw material costs. Cash flow Free cash flow1 at June 30th 2010 was positive at +€14 million despite a –€131 million2 change in working capital related to the significant increase in sales. In 1st half of the year ARKEMA continued to optimize its working capital. The working capital on sales ratio3 dropped to 14.7% at June 30th 2010 against 16.2% at December 31st 2009 and 19.0% at June 30th 2009. Recurring capital expenditures amounted to €113 million in 1st half 2010 against €125 million in 1st half 2009. Net debt Net debt remained low at €367 million (€341 million at December 31st 2009), representing an 18% gearing. This included the impact of the acquisition of Dow’s acrylics assets, the subscription to Exeltium’s capital, and the payment of a €0.60 dividend per share, all three items totaling €80 million. III. TRANSACTIONS WITH RELATED PARTIES Transactions with related parties are described in note 17 to the condensed consolidated financial statements as at June 30 2010. IV. HIGHLIGHTS SINCE JUNE 30 2010 Arkema and SolVin have reached an agreement for the purchase of their reciprocal interests within three joint production entities for VCM (vinyl chloride monomer) and PVC (polyvinyl chloride). Accordingly, in July 2010 Arkema became the sole shareholder of the Vinylfos and Vinylberre entities, based in France, respectively producing VCM and PVC and in which Arkema had a 79% and 65% shareholding initially. Meanwhile, Arkema sold to SolVin its 35% stake in Vinilis, the entity located in Spain producing VCM and PVC. This operation aimed at streamlining the operation of these industrial structures will have no impact on Arkema’s results. In July 2010 ARKEMA was granted registration by the United States Environmental Protection Agency (EPA) for Paladin®, a new pre-plant soil fumigant. Developed by ARKEMA’s R&D, this innovation will contribute to the objective to generate, by 2014, €400 million sales from new products. V. 2010 OUTLOOK Market conditions in July are in line with those observed in the 2nd quarter. In the second half 2010, Arkema will continue to improve its competitiveness, while strengthening its presence in emerging markets and technologies. 1 Cash flow from operating and investment activities excluding the impact of portfolio management. 2 Variation of working capital from consolidated cash flow statement excluding impact of portfolio management. 3 At end June: working capital at June 30th divided by 4 times the 2nd quarter sales. 5 2010 Half-Year Financial Report Free translation for information purposes only Confident for full year 2010, while taking into account the usual seasonality of August and December, notably in Europe, Arkema increases significantly its full-year EBITDA target with an EBITDA that should exceed €600 million, representing approximately twice the EBITDA reported in 2009. VI. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties which the Group could face over the next six months are those described in the 2009 Reference Document filed with the Autorité des marchés financiers (« AMF ») on April 1st 2010 under number D.10- 0209. This document the heading « Investor Relations » (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in a note to the half-year financial statements. is available on Arkema’s website under 6 Condensed consolidated interim financial statements at 30 June 2010 II- CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT 30 JUNE 2010 CONSOLIDATED INCOME STATEMENT .................................................................................9 STATEMENT OF RECOGNIZED INCOME AND EXPENSE.................................................10 CONSOLIDATED BALANCE SHEET ........................................................................................11 CONSOLIDATED CASH FLOW STATEMENT........................................................................12 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY............13 A. HIGHLIGHTS.............................................................................................................................15 B. ACCOUNTING POLICIES .......................................................................................................15 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ...................................31 1 Effects of seasonality ...........................................................................................................31 2 Information by business segment ......................................................................................31 3 Information by geographical area .....................................................................................32 4 Other income and expenses ................................................................................................33 5 Adjusted net income............................................................................................................33 6 Income taxes ........................................................................................................................34 7 Business combinations ........................................................................................................34 8 Earnings per share ..............................................................................................................35 9 Intangible assets ..................................................................................................................35 10 Property, plant & equipment .............................................................................................35 11 Inventories ...........................................................................................................................35 7 Condensed consolidated interim financial statements at 30 June 2010 12 Shareholders’ equity ...........................................................................................................36 13 Provisions and other non-current liabilities .....................................................................36 14 Contingent liabilities ...........................................................................................................38 15 Debt.......................................................................................................................................43 16 Management of risks related to financial assets and liabilities.......................................45 17 Related parties .....................................................................................................................47 18 Share-based payments ........................................................................................................47 19 Off-balance sheet commitments.........................................................................................51 20 Subsequent events ...............................................................................................................54 SCOPE OF CONSOLIDATION AT 30 JUNE 2010 ....................................................................55 8 Condensed consolidated interim financial statements at 30 June 2010 CONSOLIDATED INCOME STATEMENT 1st half 2010 1st half 2009 In millions of euros Notes Sales (C2&C3) 2,913 2,259 Operating expenses (2,418) (2,014) Research and development expenses (68) (68) Selling and administrative expenses (191) (187) Recurring operating income (C2) 236 (10) Other income and expenses (C4) (4) (98) Operating income (C2) 232 (108) Equity in income of affiliates 7 5 Financial result (12) (15) Income taxes (C6) (67) (30) Net income of continuing operations 160 (148) Net income of discontinued operations Net income 160 (148) Of which: non-controlling interests 1 1 Net income - Group share 159 (149) Earnings per share (amount in euros) (C8) 2.62 (2.47) Diluted earnings per share (amount in euros) (C8) 2.61 (2.46) Depreciation and amortization (C2) (142) (137) EBITDA * (C2) 378 127 Adjusted net income * 158 (55) Adjusted net income per share (amount in euros) (C8) 2.60 (0.91) Diluted adjusted net income per share (amount in euros) (C8) 2.60 (0.91) see note B19 Accounting policies / Main accounting and financial indicators 9 Condensed consolidated interim financial statements at 30 June 2010 STATEMENT OF RECOGNIZED INCOME AND EXPENSE 1st half 2009 In millions of euros Net income Hedging adjustments Actuarial gains and losses Change in translation adjustments Other Group share (149) (10) (14) 17 - Non-controlling interests 1 - - (1) - Total (148) (10) (14) 16 - Tax impact 4 4 Total income and expense recognized directly through equity Total recognized income and expense (3) (152) (1) (4) (152) 2nd half 2009 In millions of euros Net income Hedging adjustments Actuarial gains and losses Change in translation adjustments Other Group share (23) 1 12 (11) 4 Non-controlling interests - - 1 Total (23) 1 12 (10) 4 Tax impact (3) (3) Total income and expense recognized directly through equity Total recognized income and expense 3 (20) 1 1 4 (19) 1st half 2010 In millions of euros Net income Hedging adjustments Actuarial gains and losses Change in translation adjustments Other Group share 159 (2) (31) 182 1 Non-controlling interests 1 - - 3 - Total 160 (2) (31) 185 1 Tax impact 7 7 Total income and expense recognized directly through equity 157 3 160 Total recognized income and expense 316 4 320 10 Condensed consolidated interim financial statements at 30 June 2010 CONSOLIDATED BALANCE SHEET In millions of euros Notes 30 June 2010 31 December 2009 ASSETS Intangible assets, net Property, plant and equipment, net Equity affiliates: investments and loans Other investments Deferred income tax assets Other non-current assets TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Other current financial assets Cash and cash equivalents Total assets of discontinued operations TOTAL CURRENT ASSETS TOTAL ASSETS (C9) (C10) (C11) 497 1,700 67 39 23 84 2,410 853 1,080 156 10 6 72 2,177 4,587 481 1,608 59 21 21 88 2,278 737 710 118 9 4 89 - 1,667 3,945 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Translation adjustments 613 1,371 104 605 1,264 - (78) SHAREHOLDERS' EQUITY - GROUP SHARE Non-controlling interests TOTAL SHAREHOLDERS' EQUITY Deferred tax liabilities Provisions and other non-current liabilities Non-current debt TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Other current financial liabilities Current debt Total liabilities of discontinued operations TOTAL CURRENT LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (C12) (C13) (C15) (C15) 2,088 25 2,113 47 829 95 971 838 273 40 8 344 1,503 4,587 1,791 22 1,813 53 791 85 929 603 233 20 2 345 - 1,203 3,945 11 Condensed consolidated interim financial statements at 30 June 2010 CONSOLIDATED CASH FLOW STATEMENT In millions of euros Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities Intangible assets and property, plant, and equipment additions Change in fixed asset payables Acquisitions of subsidiaries, net of cash acquired Increase in long-term loans Total expenditures 1st half 2010 160 144 (32) (8) 1 (166) 2 101 (123) (13) (17) (24) (177) 12 1st half 2009 (148) 164 32 (2) - 220 (3) 263 (156) (53) (3) (15) (227) 5 Proceeds from sale of intangible assets and property, plant, and equipment Change in fixed asset receivables Proceeds from sale of subsidiaries, net of cash sold Proceeds from sale of unconsolidated investments Repayment of long-term loans Total divestitures Cash flow from investing activities Issuance (repayment) of shares Purchase of treasury shares Dividends paid to parent company shareholders Dividends paid to minority shareholders Increase / decrease in long-term debt Increase / decrease in short-term borrowings and bank overdrafts Cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD - - 35 47 (130) 17 (1) (37) (1) 1 (6) (27) (56) 39 89 72 14 1 4 47 71 (156) - (1) (36) - 15 (95) (117) (10) 7 67 64 At 30 June 2010, income taxes paid amount to €31 million, including €4 million for the contribution based on companies’ value added (Cotisation sur la Valeur Ajoutée des Entreprises – CVAE) (€21 million at 30 June 2009). Interest received and paid included in cash flow from operating activities at 30 June 2010 amount, respectively, to €0.3 million and €3.9 million (€0.1 million and €5.9 million at 30 June 2009). 12 Condensed consolidated interim financial statements at 30 June 2010 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Shares issued Treasury shares In millions of euros At 1 January 2009 Cash dividend Issuance of share capital Number Amount 605 60,454,973 Paid-in surplus 999 Retained earnings 477 (36) Translation adjustments Number Amount (1) (84) (39,707) Shareholders' equity – Group share 1,996 (36) - Non- controlling interests 22 - - Shareholders’ equity 2,018 (36) - Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees (2) (48,300) 87,600 (1) 2 (1) (1) Sale of treasury shares Share-based payments Other 2 2 - - 2 - Transactions with shareholders Net income (36) (149) 39,300 1 (35) (149) 1 (35) (148) Income and expenses recognized directly through equity (20) 17 (3) (1) (4) Total recognized income and expense (169) 17 (152) (152) At 30 June 2009 Cash dividend Issuance of share capital 60,454,973 605 999 272 (67) (407) 1,809 - - 22 (1) - 1,831 (1) - Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees Sale of treasury shares Share-based payments Other Transactions with shareholders Net income Income and expenses recognized directly through equity 2 2 (23) 14 (11) 2 - 2 (23) 3 - (1) - 1 2 - 1 (23) 4 Total recognized income and expense (9) (11) (20) 1 (19) At 31 December 2009 60,454,973 605 999 265 (78) (407) 1,791 22 1,813 13 In millions of euros At 1 January 2010 Cash dividend Issuance of share capital Purchase of treasury shares Cancellation of purchased treasury shares Grants of treasury shares to employees Sale of treasury shares Share-based payments Other Transactions with shareholders Net income Income and expenses recognized directly through equity Total recognized income and expense At 30 June 2010 Shares issued Number Amount 605 60,454,973 824,424 8 - - 824,424 8 61,279,397 613 Paid-in surplus 999 9 - 9 1,008 Condensed consolidated interim financial statements at 30 June 2010 Treasury shares Retained earnings 265 Translation adjustments Number Amount - (78) (407) Shareholders' equity – Group share 1,791 Non- controlling interests 22 Shareholders’ equity 1,813 (37) (37) (1) (38) (42,000) (1) 17 (1) - 17 (1) (1) 42,127 1 2 - - - 2 - 2 (36) 159 127 (19) 159 (1) 1 (20) 160 (25) 182 157 3 160 134 182 316 4 320 363 104 (280) 2,088 25 2,113 14 Condensed consolidated interim financial statements at 30 June 2010 A. HIGHLIGHTS 1 Growth projects On 25 January 2010, ARKEMA completed its acquisition of The Dow Chemical Company’s acrylic acid and esters business located at Clear Lake, Texas and its UCAR Emulsion Systems specialty latex business in North America. This acquisition extends ARKEMA’s product offering in Coatings and strengthens its position in acrylic monomers, where the Group is now the third-largest player worldwide and the second-largest in the US. The transaction took place for a fair value consideration of US $50 million (see note C7 Business Combinations). In May 2010, ARKEMA announced the successful start-up of the world-scale production plant for Forane® 125 (HFC- 125 fluorinated gas) built on the Changshu site, China, through the Arkema Daikin Advanced Fluorochemicals Co. Ltd joint venture. HFC-125 is an essential component in new-generation refrigerant blends. This project will help to develop the Group’s position in China and Asia, with the objective of achieving 22% of worldwide sales in this region by 2014. 2 Other highlights In April 2010 Arkema S.A. carried out a capital increase reserved to employees, in order to foster employee involvement in the Group’s transformation. 824,424 shares were subscribed at the fixed price of €20.63 per share, resulting in a total of €17 million. At June 30, 2010, employees owned more than 5% of the share capital (see note C12 Shareholders’ equity and note C18.3 Share-based payments/Capital increase reserved to employees). Once the Exeltium consortium’s financing was implemented, Arkema France, a member of Exeltium, subscribed to Exeltium’s share capital increase in proportion to its interest. ARKEMA plans to draw some of its electricity requirements under the industrial partnership agreement between Exeltium and EDF for long-term electricity supply from the beginning of 2011. B. ACCOUNTING POLICIES ARKEMA is a global chemicals player, with three business segments: Vinyl Products, Industrial Chemicals and Performance Products. Arkema S.A. is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code and all other legal provisions applicable to French commercial companies. The company’s head office is at 420 rue d’Estiennes d’Orves, 92700 Colombes (France). It was incorporated on 31 January 2003 and the shares of Arkema S.A. have been listed on the Paris stock market (Euronext) since 18 May 2006. 15 Condensed consolidated interim financial statements at 30 June 2010 ARKEMA’s condensed consolidated interim financial statements at 30 June 2010 were prepared under the responsibility of the Chairman and CEO of Arkema S.A. and were approved by the Board of Directors of Arkema S.A. on 2 August 2010. The condensed consolidated interim financial statements at 30 June 2010 were prepared in accordance with the international accounting standards issued by the IASB (International Accounting Standards Board) as released at 30 June 2010, in compliance with IAS 34 “Interim financial reporting” and the international standards endorsed by the European Union at 30 June 2010. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended 31 December 2009. The accounting framework and standards adopted by the European Commission can be consulted on the following website: http://ec.europa.eu/internal_market/accounting/ias/index_en.htm. The accounting policies applied in preparing the consolidated financial statements at 30 June 2010 are identical to those used in the consolidated financial statements at 31 December 2009, except for IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after 1 January 2010 (and which had not been applied early by the Group), namely: Standards Title IAS 27 (Revised) Consolidated and separate financial statements Amendment to IAS 39 Eligible hedged items IFRS 1 (Revised) First-time adoption of IFRS Amendments to IFRS 2 Group cash-settled share-based payment transactions IFRS 3 (Revised) Business combinations Annual Improvements to IFRS (published in May 2008) - amendments to IFRS 5 and IFRS 1 Annual improvements to IFRS (published in April 2009) IFRIC 12 Service concession arrangements IFRIC 15 Agreements for the construction of real estate IFRIC 16 Hedges of a net investment in a foreign operation IFRIC 17 Distributions of non-cash assets to owners IFRIC 18 Transfers of assets from customers The application of these standards, amendments and interpretations did not have any significant impact on the Group’s consolidated financial statements. The impact of the other standards, amendments or interpretations published by the IASB and the IFRIC (International Financial Reporting Interpretations Committee) which were not yet in force at 1 January 2010 and have not been applied early by the Group, is currently being analyzed. The following texts are involved: 16 Condensed consolidated interim financial statements at 30 June 2010 IAS 24 (Amended) Related party disclosures Adopted - Applicable for accounting periods commencing after 31 December 2010 Amendments to IAS 32 Classification of rights issues Adopted - Applicable for accounting periods commencing after 31 January 2010 Amendments to IFRS 1 Additional exemptions for first-time adopters Adopted - Applicable for accounting periods commencing after 30 June 2010 IFRS 9 Financial instruments Amendments to IFRIC 14 Prepayments of a minimum funding requirement Suspended Adopted - Applicable for accounting periods commencing after 31 December 2010 IFRIC 19 Extinguishing financial liabilities with equity instruments Adopted - Applicable for accounting periods commencing after 30 June 2010 Annual improvements to IFRS (published in May 2010) Not adopted by the EU at 30 June 2010 Preparation of consolidated financial statements in accordance with IFRS requires Group management to make estimates and retain assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for the calculation of depreciation and impairment, pension benefit obligations, deferred taxes and provisions. The disclosures provided concerning contingent assets and liabilities at the date of preparation of the consolidated financial statements also involve the use of estimates. The consolidated financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The consolidated financial statements are presented in millions of euros, rounded to the nearest million, unless otherwise indicated. The principal accounting policies applied by the Group are presented below. 1 Consolidation principles Companies which are directly or indirectly controlled by ARKEMA have been fully included in the consolidated financial statements. 17 Condensed consolidated interim financial statements at 30 June 2010 The entities, assets and operations over which joint control is exercised are consolidated using the proportionate method. Investments in associates over which significant influence is exercised are consolidated under the equity method. Where the ownership interest is less than 20%, the equity method is only applied in cases where significant influence can be demonstrated. Shares owned in companies which do not meet the above criteria are included in other investments and recognised as available-for-sale financial assets in accordance with IAS 39. All material transactions between consolidated companies, and all intercompany profits, have been eliminated. 2 Foreign currency translation 2.1 Translation of financial statements of foreign companies The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period; the statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share or in “Non-controlling interests” for the minority share. 2.2 Transactions in foreign currencies In application of IAS 21 “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income. 3 Goodwill and Business combinations Operations after 1 January 2010 The Group uses the acquisition method for the recognition of business combinations, in accordance with IFRS 3 (Revised). The identifiable assets acquired and liabilities assumed are stated at fair value at the acquisition date. Where the business combination agreement provides for a purchase price adjustment, the Group includes the fair value of this adjustment at the acquisition date in the cost of the business combination, even if the adjustment is optional. Non-controlling interests are measured at the acquisition date, either at fair value (the full goodwill method) or the NCI's proportionate share of net assets of the entity acquired (the partial goodwill method). The decision of which option to use 18 Condensed consolidated interim financial statements at 30 June 2010 is made for each business combination. Subsequent acquisitions of non-controlling interests are always recorded in equity, regardless of the choice made at the time of the acquisition. At the acquisition date, goodwill is measured as the difference between: the acquisition price plus the amount of any non-controlling interests in the acquired entity and the fair value of the acquirer's previously-held equity interest in that acquired entity, and the fair value of the net identifiable assets. Goodwill is recognised in the balance sheet assets. Any negative goodwill arising on an acquisition is recognized immediately in the income statement under “Other income and expenses" (see note B19 Main accounting and financial indicators). Contingent liabilities are recognized in the balance sheet when the obligation concerned is current at the acquisition date and their fair value can be reliably measured. The Group has a maximum of 12 months to finalize determination of the acquisition price and goodwill. Operations prior to 31 December 2009 The Group applied IFRS 3. The main points affected by IFRS 3 (revised) are the following: Goodwill was calculated as the difference between the purchase price, as increased by related costs, of shares of consolidated companies and the Group share of the fair value of their net assets and contingent liabilities at the acquisition date. For any subsequent acquisition in the same entity, the difference between the acquisition cost and book value of non- controlling interests was included in goodwill. Price adjustments were included in the cost of the business combination if the adjustment was probable and could be measured reliably; Contingent liabilities arising from potential obligations were recognized. 4 Intangible assets Intangible assets include goodwill, software, patents, trademarks, leasehold rights, development costs and electricity consumption rights. Intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized. Intangible assets other than goodwill and trademarks with indefinite useful lives are amortised on a straight-line basis over 3 to 20 years depending on the pattern according to which the entity envisages using the future economic benefits related to the asset. 4.1 Goodwill Goodwill is not amortized. It is subject to impairment tests as soon as any indicators of potential impairment are identified. Impairment tests are performed at least annually. The methodology used for the performance of impairment tests is described in paragraph B6 Impairment of long-lived assets. 19 Condensed consolidated interim financial statements at 30 June 2010 Goodwill is measured and recognised as described in note B3 Goodwill and business combinations. 4.2 Trademarks Trademarks with indefinite useful lives are not amortized and are subject to impairment tests. 4.3 Research and development expenses Research costs are recognized in expenses in the period in which they are incurred. Grants received are recognized as a deduction from research costs. Under IAS 38 “Intangible assets”, development costs are capitalized as soon as ARKEMA can demonstrate, in particular: its intention and its financial and technical ability to complete the development project; that it is probable that future economic benefits attributable to the development costs will flow to the enterprise, which also implies having successfully completed the main non-toxicity studies relating to the new product; and that the cost of the asset can be measured reliably. Grants received in respect of development activities are recognized as a deduction from capitalized development costs if they have been definitively earned by the Group. The Group also receives public financing in the form of repayable advances for the development of certain projects. Repayment of these advances is generally related to the future revenues generated by the development. The Group recognizes these advances in balance sheet liabilities (in the “Other non- current liabilities” caption) taking account of the probability of their repayment. 4.4 Research tax credit The Group recognizes the research tax credit as a deduction from operating expenses. 4.5 REACH As no specific IFRIC interpretations exist on the subject, ARKEMA applies the following methods based on IAS 38: when most of the tests required for the registration file have been acquired from a third party, ARKEMA records an operating right in the intangible assets; when most of the expenses involved in preparing the registration file have been carried out internally or outsourced, ARKEMA capitalizes the development costs that meet the requirements for capitalization defined by IAS 38 (see 4.3). 5 Property, plant & equipment 5.1 Gross value The gross value of items of property, plant and equipment corresponds to their acquisition or production cost in accordance with IAS 16 “Property, plant & equipment”. Gross value is not subject to revaluation. Equipment subsidies are deducted directly from the cost of the assets which they financed. With effect from 1 January 2009 and in accordance with the revised version of IAS 23, borrowing costs that are directly attributable to financing 20 Condensed consolidated interim financial statements at 30 June 2010 tangible assets that necessarily take a substantial period of time to get ready for their intended use or sale are eligible for capitalization as part of the cost of the assets for the portion of the cost incurred over the construction period. Routine maintenance and repairs are charged to income in the period in which they are incurred. Costs related to major maintenance turnarounds of industrial facilities which take place at intervals of greater than 12 months are capitalized at the time they are incurred and depreciated over the period between two such turnarounds. Fixed assets which are held under finance lease contracts, as defined in IAS 17 “Leases”, which have the effect of transferring substantially all the risks and rewards inherent to ownership of the asset from the lessor to the lessee, are capitalized in assets at their market value or at the discounted value of future lease payments if lower (such assets are depreciated using the methods and useful lives described below). The corresponding lease obligation is recorded as a liability. Leases which do not meet the above definition of finance leases are accounted for as operating leases. 5.2 Depreciation Depreciation is calculated on a straight-line basis on the basis of the acquisition or production cost. Assets are depreciated over their estimated useful lives by category of asset. The principal categories and useful lives are as follows: Machinery and tools: • Transportation equipment: • Specialized complex installations: • Buildings: 5 - 10 years 5 - 20 years 10 - 20 years 10 - 30 years These useful lives are reviewed annually and modified if expectations change from the previous estimates. Such changes in accounting estimate are accounted for on a prospective basis. 6 Impairment of long-lived assets The recoverable amount of property, plant & equipment and intangible assets is tested as soon as any indication of impairment is identified. A review to identify if any such indication exists is performed at each year-end. An impairment test is performed at least once a year in respect of goodwill and trademarks. An asset’s recoverable amount corresponds to the greater of its value in use and its fair value net of costs of disposal. Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. For ARKEMA, the CGUs are the business units presented in note B14. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group management's expectation of future economic and operating conditions over the next 5 years or, when the asset is to be sold, by comparison with its market value. In 2009, the terminal value was determined on the basis of a perpetuity annual growth rate of 1.5%. An after-tax rate of 7.5% was used to discount future cash flows and the terminal value in 2009. Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement 21 Condensed consolidated interim financial statements at 30 June 2010 under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment losses on goodwill are irreversible (in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be written back). 7 Financial assets and liabilities Financial assets and liabilities are principally comprised of: other investments; loans and financial receivables included in other non-current assets; accounts receivable; cash and cash equivalents; debt and other financial liabilities (including accounts payable); derivatives, reported as part of other current assets and liabilities. 7.1 Other investments These securities are accounted for, in accordance with IAS 39, as available-for-sale assets and are thus recognized at their fair value. In cases where fair value cannot be reliably determined, the securities are recognized at their historical cost. Changes in fair value are recognized directly through shareholders’ equity. If an objective indicator of impairment in the value of a financial asset is identified, an irreversible impairment loss is recognized, in general through recurring operating income. Such impairment is only reversed via income at the date of disposal of the securities. 7.2 Loans and financial receivables These financial assets are recognized at amortized cost. They are subject to impairment tests involving a comparison of their carrying amount to the present value of estimated recoverable future cash flows. These tests are carried out as soon as any indicator inferring that the present value of these assets is lower than their carrying amount is identified. As a minimum such tests are performed at each balance sheet date. Any impairment loss is recognized in recurring operating income. 7.3 Accounts receivable Accounts receivable are initially recognized at their fair value. Subsequent to initial recognition, they are recognized at amortized cost. If required, a bad debt provision is recognized on the basis of the risk of non-recovery of the receivables. 22 Condensed consolidated interim financial statements at 30 June 2010 7.4 Cash and cash equivalents Cash and cash equivalents are liquid assets and assets which can be converted into cash within less than 3 months that are subject to a negligible risk of change in value. 7.5 Non-current and current debt (including accounts payable) Non-current and current debt (other than derivatives) is recognized at amortized cost. 7.6 Derivatives The Group may use derivatives to manage its exposure to foreign currency risks and risks of changes in the prices of raw materials and energy. Derivatives used by the Group are recognized at their fair value in the balance sheet, in accordance with IAS 39. The fair value of these unlisted derivatives is determined by reference to current prices for contracts with similar maturity. They therefore correspond to the "Level 2" category defined in IFRS 7. Changes in the fair value of these derivatives are recognized within operating income and, for foreign currency instruments, in financial result for the portion of foreign exchange gains and losses corresponding to the interest income/expense reflected by the differences between the spot exchange rate and the forward exchange rate, except for those on instruments which are considered to meet the criteria for cash flow hedge accounting or hedge accounting of a net investment in a foreign operation under IAS 39. For items that qualify for cash flow hedge accounting, the effective portion of the change in fair value is recognized in shareholders’ equity under the “Income and expenses recognized directly through equity” caption until such time as the underlying hedged item is recognized through the income statement. Any ineffective portion is recognized in operating income. A hedge of a net investment in a foreign operation hedges the exposure to foreign exchange risk of the net assets of the foreign operation (IAS 21, “The effects of changes in foreign exchange rates”). The effects of this hedge are recorded directly in shareholders’ equity under the “Income and expenses recognized directly through equity” caption. 8 Inventories Inventories are valued in the consolidated financial statements at the lower of cost and net realizable value, in accordance with IAS 2 “Inventories”. Cost of inventories is generally determined using the weighted average cost (WAC) method. Cost of manufactured products inventories includes raw material and direct labour costs, and an allocation of production overheads and depreciation based on normal production capacity. Start-up costs and general and administrative costs are excluded from the cost of manufactured products inventories. The net realizable value is the sale price as estimated for the normal course of business, less estimated costs for completion and sale. 23 Condensed consolidated interim financial statements at 30 June 2010 9 Provisions and other non-current liabilities A provision is recognized when: the Group has a legal, regulatory or contractual obligation to a third party resulting from past events. An obligation can also result from Group practices or public commitments that create a reasonable expectation among the third parties in question that the Group will assume certain responsibilities; it is certain or probable that the obligation will lead to an outflow of resources to the benefit of the third party; and its amount can be estimated reliably and corresponds to the best possible estimate of the commitment. In exceptional cases where the amount of the obligation cannot be measured with sufficient reliability, disclosure is made in the notes to the financial statements in respect of the obligation (See note C14 Contingent liabilities). When it is expected that the Group will obtain partial or total reimbursement of the cost that was provided against, the expected reimbursement is recognized in receivables if, and only if, the Group is virtually certain of the receipt. Long-term provisions, other than provisions for pension and similar post-employment benefit obligations, are not inflation-indexed or discounted as the Group considers that the impact of such adjustments would not be significant. The current (less than one year) portion of provisions is maintained within the “Provisions and other non-current liabilities” caption. 10 Pension and similar post-employment benefit obligations In accordance with IAS 19 “Employee benefits”: payments made in the context of defined contribution plans are recognized in expenses of the period; obligations in respect of defined benefit plans are recognized and valued using the actuarial projected unit credit method. Post-employment benefits For defined benefit plans, the valuation of obligations under the projected unit credit method principally takes into account: an assumption concerning the date of retirement; a discount rate which depends on the geographical region and the duration of the obligations; an inflation rate; assumptions in respect of future increases in salaries, rates of employee turnover and increases in health costs; the most recent mortality statistics for the countries concerned. Differences which arise between the valuation of obligations and forecasts of such obligations (on the basis of new projections or assumptions) and between forecasts and outcomes of returns on plan assets are termed actuarial gains and losses. 24 Condensed consolidated interim financial statements at 30 June 2010 The Group has opted to recognize actuarial gains and losses directly in shareholders’ equity under the “Income and expenses recognized directly through equity” caption, in accordance with the amendment to IAS 19 of December 2004. On modification or creation of a plan, the portion of obligations which vest immediately as a result of past service is charged immediately to income; the portion of obligations which do not vest immediately is amortized over the remaining vesting period. The amount of the provision takes account of the value of assets which are allocated to cover pension and other post- employment benefit obligations. The value of these assets is deducted from the provision for such benefit obligations. A pension asset can be generated where a defined benefit plan is overfunded. The amount at which such an asset is recognized in the balance sheet may be subject to a ceiling, in application of paragraph 58 of IAS 19 and IFRIC 14. Other long-term benefits In respect of other long-term benefits, and in accordance with applicable laws and regulations, provisions are recognized using a simplified method. Thus, if an actuarial valuation using the projected unit cost method is required, actuarial gains and losses and all past service costs are recognized immediately in the provision, with a double entry being recognized to the income statement. The net expense related to pension benefit obligations and other employee benefit obligations is recognized in recurring operating income, with the exception of: the effect of curtailments or settlements of plans which are presented under the “Other income and expenses” caption in the case of substantial modifications to such plans; the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits, which are classified within the financial result caption. At interim period ends, expenses relating to pensions and other long-term employee benefits are calculated using an extrapolation of the actuarial valuations performed at the previous year end. These valuations are modified if significant changes have occurred in market conditions since the previous year-end or in the case of settlements, curtailments or other material non-recurring events (see note C13.2 Provisions and other non-current liabilities/Provisions). 11 Greenhouse gas emissions allowances (EUA) and certified emission reductions (CER) In the absence of an IFRS standard or interpretation relating to accounting for CO2 emissions allowances, the following treatment has been adopted: allowances allocated without payment of consideration are recognized for a nil value, transactions carried out in the market are recognized at the transaction amount. At this point, greenhouse gas emissions allowances (EUA) allocated are adequate to cover the operational needs of ARKEMA’s European units and a deficit is not currently forecast. ARKEMA does not carry out a trading activity in respect of CO2 emissions allowances. However, in the normal course of its operations, ARKEMA may carry out cash or 25 Condensed consolidated interim financial statements at 30 June 2010 forward sales of its surpluses. These sales do not enter into the scope of application of IAS 39 because of the “own use” exception. The CERs produced by the Group in the context of projects to reduce its greenhouse gas emissions are recognized in inventories, and sales are recorded at their net-of-tax value on delivery of the CERs. 12 Recognition of sales Sales are measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Sales are recognized on transfer to the purchaser of the risks and rewards related to ownership of the goods, which is determined mainly on the basis of the terms and conditions of the sales contracts. 13 Income taxes 13.1 Current taxes Current taxes are the amount of income taxes that the Group expects to pay in respect of taxable profits of consolidated companies in the period. They also include adjustments to current taxes in respect of prior periods. The French tax consolidation regime enables certain French companies in the Group to offset their taxable results in determining the tax charge for the entire French tax group. The overall tax charge is payable by Arkema S.A., as the parent company of the tax group. Tax consolidation regimes also exist in countries outside France. The French Finance Act for 2010 introduced the local tax named CET (Contribution Economique Territoriale). One of its components is the contribution based on companies’ value added (Cotisation sur la Valeur Ajoutée des Entreprises – CVAE). After analysing the methods for determining this contribution at the end of 2009 in the light of the positions of the IFRIC and France’s national accounting standards body ANC (Autorité des Normes Comptables), the Group considers that in this specific case, it meets the requirements to be treated as a current tax under IAS 12. The CVAE is therefore classified as “income taxes” from 1 January 2010. 13.2 Deferred taxes The Group uses the liability method whereby deferred income taxes are recognized based upon the temporary differences between the financial statement and tax basis of assets and liabilities, as well as on tax loss carry forwards and other tax credits, in accordance with IAS 12 “Income taxes”. Deferred tax assets and liabilities are valued at the tax rates that are expected to apply in the year in which the asset will be realized or the liability settled, on the basis of tax rates (and tax legislation) that have been enacted or virtually enacted at the balance sheet date. The effect of any changes in tax rates is recognized in income for the period, unless it relates to items that were previously debited or credited through equity. Deferred tax assets and liabilities are not discounted. Deferred tax assets are recognized to the extent that their recovery is probable. In order to assess the likelihood of recovery of such assets, account is notably taken of the profitability outlook determined by the Group and historical taxable profits or losses. 26 Condensed consolidated interim financial statements at 30 June 2010 A deferred tax liability is recognized for all taxable temporary differences related to investments in subsidiaries, associates and joint ventures, unless: the Group controls the timing of the reversal of the temporary difference, and it is probable that this difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset if a legally enforceable right to offset current tax assets and liabilities exists and if they relate to income taxes levied by the same tax authority. As the contribution based on companies’ value added CVAE (Cotisation sur la Valeur Ajoutée des Entreprises) is considered as income taxes, the relevant calculation methods generate temporary differences for which a deferred tax liability of 1.5% of the value was recorded. 14 Information by segment As required by IFRS 8, “Operating Segments”, segment information for the Group is presented in accordance with the business segments identified in the internal reports that are regularly reviewed by general management in order to allocate resources and assess financial performance. The Group has three business segments: Vinyl Products, Industrial Chemicals and Performance Products. The directors of the business segments report directly to the Chairman and CEO, the Group’s chief operating decision-maker as defined by the standard, and are in regular contact with him for the purpose of discussing their segments’ operating activity, financial results, forecasts and plans. Vinyl Products includes the following business units: Chlorine/Caustic Soda, PVC, Vinyl Compounds and downstream converting (Pipes and Profiles). They are used in areas such as water treatment, healthcare, hygiene, electronics, sports and leisure and automobile equipment. Industrial Chemicals brings together the following business units: Acrylics, Specialty Acrylic Polymers, PMMA, Thiochemicals, Fluorochemicals, Hydrogen Peroxide and Emulsions. These intermediates are used as raw materials in numerous industrial sectors such as refrigeration, insulation, production of paper pulp, textiles, pharmaceuticals, animal feed, ink and paint, electronics and the automobile sector. Performance Products groups the following business units: Technical Polymers, Specialty Chemicals and Functional Additives. Performance Products are used in a variety of sectors from transport to sporting equipment, cosmetics to medical equipment, construction, civil engineering and even household electrical goods. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together under a Corporate section. 27 Condensed consolidated interim financial statements at 30 June 2010 15 Cash flow statements Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). In consequence, cash flows cannot be recalculated on the basis of the amounts shown in the balance sheet. Changes in short-term borrowings and bank overdrafts are included in cash flows from financing activities. 16 Share-based payments In application of IFRS2 “Share-based payments”, the stock options and free shares granted to management and certain Group employees are measured at their fair value at the date of grant, which generally corresponds to the date of the Board of Directors’ meeting that granted the stock options and free shares. The fair value of the options is calculated using the Black & Scholes model. It is recognized in personnel expenses on a straight-line basis over the period from the date of grant to the date from which the options can be exercised. The fair value of rights under free share grants corresponds to the opening market price of the shares on the day of the Board of Directors’ meeting that decides on the grant, adjusted for dividends not received during the vesting period. It is recognized in personnel expenses on a straight-line basis over the vesting period of the rights. 17 Earnings per share Earnings per share correspond to the division of net income (Group share) by the weighted average number of ordinary shares in circulation since the start of the year. Diluted earnings per share correspond to the division of net income (Group share) by the weighted number of ordinary shares, both of these figures being adjusted to take account of the effects of all dilutive potential ordinary shares. The effect of dilution is thus calculated taking account of stock options and grants of free shares to be issued. 18 Discontinued operations and non-current assets held for sale A discontinued operation is defined, according to IFRS 5, as a component of the Group’s activity that either has been disposed of, or is classified as held for sale and which represents a separate major line of business or geographical area of operations that forms part of a single coordinated disposal plan. The income statement, cash flow statement and balance sheet items relating to discontinued operations are presented in a specific note to the financial statements for the current financial year, with comparatives for the previous year. The Group presents, for the financial year in question, assets and liabilities of continuing operations in the standard manner, to which assets and liabilities of discontinued operations and non-current assets held for sale are added. These 28 Condensed consolidated interim financial statements at 30 June 2010 assets and liabilities are not offset but are rather presented respectively in two specific balance sheet captions. The balance sheet of the previous financial year is not modified. The Group presents, for the financial year in question and the previous financial year, the income statement of continuing operations in the standard manner, to which a single amount representing the income or loss after tax of discontinued operations is added. For the two financial years considered, the Group presents the cash flow statement without distinguishing between continuing operations and discontinued operations. Disclosures regarding the cash flows of discontinued operations are nevertheless provided in a specific note to the financial statements. 19 Main accounting and financial indicators The main performance indicators used are as follows: Operating income: this includes all income and expenses of continuing operations other than financial result, equity in income of affiliates and income taxes; Other income and expenses: these correspond to a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. These items of income and expense notably include: impairment losses in respect of property, plant and equipment and intangible assets, gains or losses on sale of assets, acquisition costs, negative goodwill on acquisitions and the valuation difference on inventories between their fair value at the acquisition date and their production cost, certain large restructuring and environmental expenses which would hamper the interpretation of recurring operating income (including substantial modifications to employee benefit plans and the effect of onerous contracts), certain expenses related to litigation and claims or major damages, whose nature is not directly related to ordinary operations; Recurring operating income: this is calculated as the difference between operating income and other income and expenses as previously defined; Adjusted net income: this corresponds to “Net income – Group share” adjusted for the “Group share” of the following items: other income and expenses, after taking account of the tax impact of these items, income and expenses from taxation of an exceptional nature, the amount of which is deemed significant, net income of discontinued operations; EBITDA: this corresponds to recurring operating income increased by depreciation and amortization; • Working capital: this corresponds to the difference between inventories, accounts receivable, other receivables and prepaid expenses, income tax receivables and other current financial assets on the one hand and accounts payable, other creditors and accrued liabilities, income tax liabilities and other current financial liabilities on the other hand. These items are classified in current assets and liabilities in the consolidated balance sheet; 29 Condensed consolidated interim financial statements at 30 June 2010 Capital employed: this is calculated by aggregating the net carrying amounts of intangible assets, property, plant and equipment, equity affiliate investments and loans, other investments, other non-current assets (excluding deferred tax assets) and working capital; Net debt: this is the difference between current and non-current debt and cash and cash equivalents. 30 Condensed consolidated interim financial statements at 30 June 2010 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Effects of seasonality ARKEMA’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by ARKEMA is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and Southern Europe; in certain businesses, particularly those serving the refrigeration market, the level of sales is generally higher in the first half of the year than in the second half; and annual maintenance shutdowns of production plants occur more often in the second half than in the first half. These seasonality effects observed in the past are not necessarily representative of future trends, but they can influence variations in results and working capital between the different quarters of the financial year. Revenues from ordinary activities earned in a seasonal, cyclical or occasional manner during a financial year are neither recognized in advance nor deferred at interim reporting dates unless it would be appropriate to recognize them in advance or defer them at year end. 2 Information by business segment Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. 1st half 2010 (In millions of euros) Non-Group sales Vinyl Products 569 Industrial Chemicals 1,515 Performance Products 820 Corporate 9 Group Total 2,913 Inter segment sales 29 70 8 Total sales 598 1, 585 828 9 Recurring operating income (35) 202 85 (16) 236 Other income and expenses (1) (2) (1) (4) Operating income (36) 200 85 (17) 232 Equity in income of affiliates 6 1 7 Details of certain significant non-cash expenses by segment: Depreciation and amortization (28) (69) (45) (142) Asset impairment charges (1) (1) Provisions 8 21 (2) 13 40 EBITDA (8) 272 130 (16) 378 Intangible assets and property, plant, and equipment additions Of which additions of an exceptional nature 20 57 7 43 3 3 123 10 31 Condensed consolidated interim financial statements at 30 June 2010 1st half 2009 (In millions of euros) Non-Group sales Vinyl Products 523 Industrial Chemicals 1,052 Performance Products 678 Corporate 6 Group Total 2,259 Inter segment sales 22 46 7 Total sales 545 1,098 685 6 Recurring operating income (29) 83 (7) (57)* (10) Other income and expenses (4) (83) (6) (5) (98) Operating income (33) (13) (62) (108) Equity in income of affiliates 5 5 Details of certain significant non-cash expenses by segment: Depreciation and amortization (24) (65) (47) (1) (137) Asset impairment charges (27) (1) (28) Provisions 12 (46) 16 (18) EBITDA (5) 148 40 (56) 127 Intangible assets and property, plant, and equipment additions Of which additions of an exceptional nature 22 1 55 3 78 27 1 156 31 Of which inventories impacts not related to business segments of -€40 million over the period, linked to a decrease in raw material prices (-€25 million) and the lower quantities in stock (-€15 million). 3 Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. 1st half 2010 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world TOTAL Non-Group sales 419 1,020 853 501 120 2,913 1st half 2009 (In millions of euros) France Rest of Europe NAFTA (1) Asia Rest of the world TOTAL Non-Group sales 393 818 527 417 104 2,259 (1) NAFTA: United States, Canada, Mexico 32 Condensed consolidated interim financial statements at 30 June 2010 4 Other income and expenses 1st half 2010 1st half 2009 (In millions of euros) Expenses Income Net Expenses Income Net Restructuring and environmental charges 1 1 (101) 2 (99) Goodwill impairment charges Asset impairment charges (other than goodwill) Litigation and claims (4) (4) 2 2 Gains (losses) on sales and purchases of assets (12) 11 (1) (1) (1) Other Total other income and expenses (16) 12 (4) (102) 4 (98) In the first half of 2010, net expenses for litigation and claims mainly relate to events arising in 2008 and 2009. The €1 million loss on sales of assets concerns acquisition of some of the businesses of The Dow Chemical Company in the US. The transaction generated negative goodwill of €11 million. Expenses and the stock valuation difference between the fair value at the acquisition date and the production cost amounted to €(12) million. In the first half of 2009, restructuring charges (including related asset impairment) and environmental charges mainly concern restructuring expenses (net of reversals) for the Vinyl Products segment (€4 million), Industrial Chemicals segment (€85 million), Performance Products segment (€6 million) and Corporate segment (€4 million). Income relating to litigation and claims mainly comprises an additional indemnity receivable for damage caused by Hurricane Ike in 2008 in Texas (USA). 5 Adjusted net income Net income - Group share may be reconciled to adjusted net income as follows: (In millions of euros) Net income - Group share Notes 1st half 2010 159 1st half 2009 (149) Other income and expenses (C4) 4 98 Taxes on other income and expenses (5) (4) Exceptional taxation Discontinued operations Adjusted net income 158 (55) 33 Condensed consolidated interim financial statements at 30 June 2010 6 Income taxes The income tax expense is broken down as follows: (In millions of euros) 1st half 2010 1st half 2009 Current income taxes (75) (31) Deferred income taxes 8 1 Total income taxes (67) (30) The income tax expense amounts to €67 million at 30 June 2010, including €5 million for the CVAE (compared with €30 million at 30 June 2009). 7 Business combinations On 25 January 2010, Arkema acquired The Dow Chemical Company's acrylic acid and esters business located at Clear Lake, Texas and its UCAR Emulsion Systems specialty latex business in North America. This acquisition was fully settled in cash (see note A Highlights). In compliance with IFRS 3 (revised), the Group has used the purchase method for the accounting treatment of the operation. The fair values of identifiable assets acquired and liabilities transferred at the acquisition date are as follows: (In millions of euros) Fair value acquired Deferred tax assets Inventories Other receivables 2 37 3 Total Assets 42 Deferred tax liabilities Provisions and other non-current liabilities Other liabilities 9 1 6 Total Liabilities 16 Fair value of net assets 26 This operation led to recognition of negative goodwill on acquisition of €11 million (see note C4 Other income and expenses). Sales for the first half of 2010 since the acquisition date amount to €203 million. Expenses incurred in connection with this acquisition, which were included in other receivables at 31 December 2009, are treated as expenses in 2010. 34 Condensed consolidated interim financial statements at 30 June 2010 8 Earnings per share Earnings per share and diluted earnings per share are presented below: 1st half 2010 1st half 2009 Weighted average number of ordinary shares 60,789,944 60,418,018 Dilutive effect of stock options 4,745 Dilutive effect of free share grants 8,539 36,955 Weighted average number of potential ordinary shares 60,803,228 60,454,973 Earnings per share is determined below: 1st half 2010 1st half 2009 Earnings per share (€) 2.62 (2.47) Diluted earnings per share (€) 2.61 (2.46) Adjusted net income per share (€) 2.60 (0.91) Diluted adjusted net income per share (€) 2.60 (0.91) 9 Intangible assets In the first half of 2010, acquisitions of intangible assets amounted to €11 million (€38 million in the first half of 2009). 10 Property, plant & equipment In the first half of 2010, capital expenditure on property, plant and equipment amounted to €111 million (€121 million in the first half of 2009). The Group also sold or scrapped property, plant and equipment with total gross value of €54 million (€26 million in the first half of 2009). 11 Inventories The gross amount of the Group’s inventories fell from €820 million at 31 December 31 2009 to €928 million at 30 June 2010. In the first half of 2010, the Group recognized a net decrease of €5 million in impairment of inventories. This compared to a net decrease of €15 million in provisions for impairment of inventories in the first half of 2009. 35 Condensed consolidated interim financial statements at 30 June 2010 12 Shareholders’ equity At 31 December 2009, Arkema S.A.’s share capital amounted to €604.5 million and was composed of 60,454,973 shares with a nominal value of 10 euros. On 15 April 2010, the Group carried out a capital increase reserved to Group employees: 824,424 shares were subscribed at a price of €20.63 per share, with the price having been set by the Board of Directors in its meeting of 3 March 2010. Following this operation, Arkema S.A.’s share capital was increased to €612.8 million divided into 61,279,397 shares. During the first half of 2010, the company bought back 42,000 treasury shares (accounted for as a deduction from shareholders’ equity), and allocated 42,127 treasury shares to employees. The shareholders’ general meeting of 1 June 2010 adopted a resolution proposing to distribute a dividend of €0.60 per share, or a total amount of €37 million, in respect of the 2009 financial year. 13 Provisions and other non-current liabilities 13.1 Other non-current liabilities Other non-current liabilities amount to €38 million at 30 June 2010 as against €35 million at 31 December 2009. 13.2 Provisions (In millions of euros) Pension and other employee benefit obligations Environmental contingencies Restructuring Other TOTAL At 31 December 2009 337 197 111 111 756 Increases in provisions 17 1 2 11 31 Reversals from provisions on use (10) (8) (34) (7) (59) Reversals of unused provisions (2) (2) Changes in scope 1 1 Translation adjustments 14 12 1 7 34 Other * 30 4 (4) 30 Discontinued operations At 30 June 2010 * “Other” includes actuarial gains and losses for the period 389 202 84 116 791 36 Condensed consolidated interim financial statements at 30 June 2010 In addition, certain provisions are covered by non-current assets (receivables, deposits or pension assets): (In millions of euros) Pension and other employee benefit obligations Environmental contingencies Restructuring Other TOTAL Total provisions at 30 June 2010 389 202 84 116 791 Portion of provisions covered by receivables or deposits Deferred tax asset related to amounts covered 40 24 6 4 46 28 Pension assets Provisions at 30 June 2010 net of non- current assets 3 386 138 84 106 3 714 13.3 Provisions for pensions and similar benefits At 30 June 2010, provisions for pensions and similar benefits are comprised of pension benefit obligations for €278 million (€237 million at 31 December 2009), healthcare plans for €58 million (€53 million at 31 December 2009), long-service awards for €44 million (€43 million at 31 December 2009) and Group pre-retirement plans for €9 million (€4 million at 31 December 2009). Furthermore, pension assets amount to €3 million at 30 June 2010 (€3 million at 31 December 2009). ARKEMA applied the following discount rates at 30 June 2010: Pension benefit and healthcare plan commitments: Europe USA At 30 June 2010 4.40% - 5.40% 5.60% At 31 December 2009 5.00% - 5.40% 5.60% Long-service awards Europe At 30 June 2010 4.00% At 31 December 2009 4.30% - 5.50% The present value of defined benefit obligations at the end of 2009 was adjusted, on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2009 closing, to take account of the change in interest rates over the half-year. The fair value of plan assets and obligations under managers’ pension plans was reassessed on the basis of new valuations at 30 June 2010. 37 Condensed consolidated interim financial statements at 30 June 2010 The changes in discount rates and the remeasurement of plan assets have the following effects at 30 June 2010: (In millions of euros) Actuarial gains and losses recognized in shareholders’ equity Actuarial gain (loss) related to pensions and healthcare plans Changes in discount rates (17) Remeasurement of plan assets (2) Benefit obligations recognized in balance sheet liabilities Pension and other long-term benefits 22 5 Income or expenses recognized in the income statement Other employee benefits (1) 13.4 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €98 million. in the United States for €84 million, of which €64 million in respect of former industrial sites covered 100% by the Total Group indemnity (receivable recognized in “other non-current assets” for an amount of €40 million and €24 million of deferred taxes) (see note C19.2 Off balance sheet commitments/Commitments received). 13.5 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €78 million. 14 Contingent liabilities 14.1 Environment ARKEMA’s business activities are subject to constantly changing local, national and international regulations on the environment and safety, which entail meeting increasingly complex and restrictive requirements. In this regard, these activities can involve a risk of ARKEMA’s liability being called upon, particularly in respect of clean-up of sites and industrial safety. Taking account of the information available, agreements signed with Total, and the provisions for environmental contingencies recognized, ARKEMA’s management considers that the environmental liabilities identified at this point are valued and recognized to the best of their knowledge in the financial statements. However if laws, regulations or government policy in respect of environmental matters were to change, ARKEMA’s obligations could change, which could lead to additional costs. 38 Condensed consolidated interim financial statements at 30 June 2010 Clean-up of sites The competent authorities have made, are making or may in the future make specific demands that the Group rehabilitate or control emissions at certain sites that it is currently operating, or that it operated or disposed of in the past, at neighboring sites or at sites where the Group stored or disposed of waste. Sites currently in operation: ARKEMA has many sites of which a certain number are probably polluted in view of their age and the range of activities that are carried out on them, or that were carried out on them in the past. As regards these sites, certain situations have been identified and ARKEMA has already carried out certain clean-up work, or otherwise developed action plans and recognized provisions in order to cover future clean-up work. However, in the light of (i) the uncertainties over the technical means to be implemented, (ii) potential issues that are unknown (iii) uncertainties over the actual time required for remediation compared with the estimated time (e.g. “pump and treat”), and (iv) potential changes in regulations, the possibility that the expenses that the Group will incur will be higher than the amounts covered by provisions cannot be excluded. These potential excess costs relate mainly to the sites in Calvert City (United States), Carling (France), Günzburg (Germany), Jarrie (France), Pierre-Bénite (France), Riverview (United States), Rotterdam (the Netherlands), Saint-Auban (France) and Saint Fons (France), and could adversely affect the Group’s business, results and financial condition. As regards the site of Saint-Auban, different legal proceedings brought against Arkema France are under investigation in Nanterre. An order to send the case before Nanterre correctional court was issued on 15 April 2010. Also, the Spinetta site (Italy - Arkema srl) is the subject of an administrative procedure due to the presence of pollutants in the ground and below the ground. Closed industrial sites (Former industrial sites): Total has directly or indirectly taken over the closed industrial sites. 14.2 Litigation, claims and proceedings in progress 14.2.1 Antitrust litigation The Group is involved in a number of proceedings in the United States, Canada and Europe alleging violations of antitrust laws relating to cartel behavior. To cover the risks associated with the proceedings in the United States and Europe, which arose prior to completion of the Spin-Off of Arkema’s Businesses, Total S.A. and one of its subsidiaries have granted indemnities for the benefit of Arkema S.A. and Arkema Amériques SAS, the main terms of which are described in note C27 Off-balance sheet commitments to the consolidated financial statements at 31 December 2009, which can be found in Chapter 20.3 of ARKEMA’s 2009 reference document. All the European Commission proceedings are currently under appeal by Arkema France before the European Union’s General Court or the European Court of Justice. 39 Condensed consolidated interim financial statements at 30 June 2010 Proceedings carried out by the European Commission Arkema France currently remains a party to several proceedings being carried out by the European Commission alleging violations of the rules of EU competition law restricting anticompetitive agreements. Appeal proceedings by Arkema France before the European Union’s General Court following the European Commission’s decisions in the monochloroacetic (MCAA) acid case, the hydrogen peroxide case, and the methacrylates, sodium chlorate and heat stabilizers cases are still pending. The appeal proceedings concerning the MCAA case are still ongoing before the European Court of Justice following the General Court’s judgement issued in 2009. In addition to the proceedings carried out by the European Commission, it cannot be ruled out that civil suits for damages are filed by third parties claiming to be victims of the violations in relation to which fines have been imposed by the European Commission. There has been no significant development in the first half of 2010 regarding the claim for compensation lodged with the Dortmund (Germany) Tribunal by Cartel Damage Claim (CDC) Hydrogen Peroxyde SA. Given the elements at its disposal, the Group is not currently able to estimate the total amount of the claims liable to be definitively held against it by the competent jurisdiction after exercise of any recourse available, and so has not recognized any provisions in this respect. Proceedings in the United States and Canada a) US civil actions In 2008 and early 2009, the appeals court ruled that the trial courts erred when they granted class certification of direct purchaser classes in the hydrogen peroxide matter and in the plastics additives matter; the appeals court has remanded each of those cases back to the trial courts for further proceedings consistent with proper class certification standards. Following those appellate decisions, the trial court finally approved the settlement agreements that Arkema Inc. and Arkema France separately executed with the direct purchaser class in Hydrogen Peroxide and with the direct purchaser class of MMA/PMMA products. The issue of class certification in the plastics additives direct purchaser action remains pending before the trial court. During the first half of 2010, Arkema Inc. reached a signed settlement agreement with the indirect purchasers of hydrogen peroxide from five American states which had initiated action alleging violation of state competition laws. Under this agreement, which has not yet received court approval, Arkema Inc. will make no payments and will provide limited cooperation if the case proceeds to trial against other defendants. b) Canadian civil actions In Canada, a number of civil actions alleging violations of Canadian competition laws concerning hydrogen peroxide products were filed in Quebec, Ontario and British Columbia in 2005 and 2006. The trial court in Ontario has certified a 40 Condensed consolidated interim financial statements at 30 June 2010 class of direct and indirect purchasers. Arkema France, Arkema Inc. and Arkema Canada’s request for leave to appeal that decision was denied in June 2010. 14.2.2 Occupational illness In the manufacture of its products, the Group uses and has used toxic or hazardous substances. Despite the safety and monitoring procedures that have been instituted at Group level and for each production site, Group employees may have been exposed to such substances and may develop specific pathologies as a result of such exposure. In this respect, like most industrial companies, in the past, the Group has used a variety of insulating or heat-proofing materials containing asbestos in its production facilities. Consequently, certain employees may have been exposed to such materials before they were gradually eliminated and replaced with substitute products. At its French sites, the Group anticipated the regulatory provisions applicable to asbestos (Decrees No. 96-97 and 96-98 of 7 February 1996 and Decree No. 96-1133 of 24 December 1996). The Group made an inventory of asbestos- containing building materials within its premises, notified employees of the results of these investigations and took the collective and individual protective measures required by the applicable laws. However, claims for occupational illness related to past asbestos exposure have been filed against the Group, mostly for periods before 1980. Given the latency period of asbestos-related pathologies, a large number of claims for occupational illness are likely to be filed in the years ahead. The Group has recognized provisions to cover the risks of employer liability claims related to notified cases of occupational illness. 14.2.3 Other litigation and claims and contingent liabilities Arkema France In 1995, the company Gasco brought a claim for damages against Elf Atochem (the former name of Arkema France) before the court in Ghent (Belgium) in respect of an alleged breach of contract and breach of an exclusivity agreement. At first instance, Gasco obtained a judgment against Atofina for payment of €248,000 by way of damages for breach of contract (payment of that sum has been made) but its claim for breach of the exclusivity agreement was dismissed. Appeal proceedings have been pending before the Ghent Court of Appeal since 1999, and no developments have arisen since then. Having regard to the weak basis of the allegations made against it and the defenses available to the Group, the Group’s view as the matter currently stands, is that the amount of the provision made for this matter in the accounts is sufficient. No significant development arose on this case in the first half of 2010. Arkema France supplies various products for the coating of items used in a number of European countries in the manufacture of sanitary treatment facilities. These products are subject to inspection on the part of approved laboratories which must certify their conformity with the applicable sanitary regulations. Arkema France has an interpretation of the regulations applicable in France that diverges from that of a French laboratory and the public authorities as regards regulatory clearance in France of a product, even though this product is approved in other European Union countries. The Group takes the view that this problem is essentially administrative in nature. However, the possibility that users might 41 Condensed consolidated interim financial statements at 30 June 2010 seek to attach liability to Arkema France as the supplier cannot be excluded. In the event that such claims were successful, the costs of replacement of the products and the damages that could be claimed could prove to be extremely high. There were no developments during the first half of 2010 in Total’s case at the court of first instance against the French Customs authorities, seeking cancellation of the demand for tax on polluting activities on its effluent discharge, which was largely produced for Arkema France. In 2005, 260 employees and former employees of the Pierre-Bénite site made a claim for damages with the Lyon employee claims court (Conseils de prud’hommes) for alleged non-compliance with the terms of the chemicals industry branch agreement over break times. The claimants consider that, given the manner in which work is organized and structured on this site, the break granted to them does not allow them to be released from all work and to be able to freely go about their personal affairs. The claim for compensation amounts to €5.2 million. Arkema France has contested these claims. A judgment issued on 24 June 2008 fully rejected all of the employees’ claims. The employees appealed this decision. A provision has been recognized in the financial statements for an amount that the Group considers adequate. 24 former employees of Arkema France who left the company under the early retirement system for asbestos workers brought proceedings before the employee claims court, claiming compensation for losses of income caused by their departure under this system and for the prejudice of anxiety relating to their exposure to asbestos and the possible discovery of an asbestos-related illness. These proceedings follow rulings by the Paris and Bordeaux appeal courts recognising the existence of an economic prejudice due to the fall in income for employees who left under the asbestos-related early retirement system, and a prejudice of anxiety related to exposure to asbestos. In a ruling of 11 May 2010, the labour chamber of the Court of Cassation refused to grant compensation for the economic prejudice resulting from resignation by an employee who had opted for the early retirement system. However, the court accepted the existence of a prejudice of anxiety for employees who had worked in an establishment classified as containing asbestos, on the grounds that through the fault of the employer these employees found themselves in a situation of permanent anxiety over the risk of developing an asbestos-related pathology. For Arkema France, of the 24 cases currently in process, before publication of the decision by the labour chamber of the Court of Cassation, two former employees had so far received a favourable ruling by the Forbach employee claims court on the question of compensation for the economic prejudice. Their claim concerning the prejudice of anxiety, however, was rejected. Arkema France has appealed these decisions, and the rest are expected in the next few months. The first half of 2010 saw no significant developments in Arkema France’s appeal against the 2007 decision concerning the Saint Fons site, ordering Arkema France to carry out a quality monitoring on underground water and propose a pollution management plan. 42 Condensed consolidated interim financial statements at 30 June 2010 Arkema Srl There were no significant developments in the first half of 2010 in the criminal investigation in process at the Spinetta site (Italy) concerning a certain number of managers and directors of Arkema Srl.Given the circumstances, Arkema Srl considers it is still too early for accurate determination of the nature and scope of the potential liability of the managers or directors cited in this criminal investigation. CECA The litigation between Intradis and CECA over recognition of CECA’s liability for pollution of land acquired by Intradis saw no particular developments during the first half of 2010. Arkema Inc. In the United States, the Group is currently involved in a substantial number of proceedings in various courts. No notable developments arose in the first half of 2010 in the proceedings concerning claims by third parties relating to (i) alleged exposure to asbestos on the Group’s sites, or (ii) exposure to products containing asbestos and sold by former subsidiaries of the Group in the United States and elsewhere. When they are not covered by insurance policies, provisions have been made for these proceedings in an amount which the Group considers sufficient. However, due to the continuing uncertainties as to the outcome of these proceedings, the Group is not, as at the date of these financial statements, in a position, having regard to the information available to it, to estimate the total amount of the claims that might finally be upheld against it by the various competent courts after the exhaustion of any avenues of appeal. Arkema Quimica Limitada During the first half of 2010 Arkema Quimica Limitada gave the tax authorities confirmation of its application to benefit from the tax amnesty law that would allow it to pay only part of its overall tax liability. If the tax authorities give final consent to the terms for payment of the liability subject to amnesty, only an amount of 9.2 million reais or around €4.2 million at 30 June 2010 would be concerned by an appeal before the courts, which Arkema considers would have reasonable chances of success. 15 Debt Group net debt amounted to €367 million at 30 June 2010, taking account of cash and cash equivalents of €72 million; it is mainly denominated in euros and bears interest at variable rates. The Group has a multi-currency syndicated credit facility in a maximum amount of €1.1 billion, maturing on 31 March 2013. At 30 June 2010, the average interest rate of the syndicated credit facility is approximately 0.7% and the unused amount under this credit facility is €970 million. The Group also has a securitisation programme for sales receivables which remain in the consolidated accounts, representing a maximum financing of €240 million. At 30 June 2010 the amount used under this programme is €166 million. 43 Condensed consolidated interim financial statements at 30 June 2010 15.1 Analysis of net debt by category (In millions of euros) 30 June 2010 31 December 2009 Finance lease obligations 14 14 Bank loans 53 43 Other non-current debt 29 28 Non-current debt 95 84 Finance lease obligations 2 Syndicated credit facility * 130 315 Other bank loans 204 21 Other current debt 10 7 Current debt 344 345 Debt 439 430 Cash and cash equivalents 72 89 Net debt * See note 15.2 367 341 15.2 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: (In millions of euros) 30 June 2010 31 December 2009 Less than 1 year * 346 349 Between 1 and 2 years 10 9 Between 2 and 3 years 31 29 Between 3 and 4 years 6 6 Between 4 and 5 years 7 6 More than 5 years 61 48 Total * Amounts maturing in less than 1 year include the current drawings under the syndicated credit facility. Even though it matures in 460 447 March 2013, this syndicated credit facility is classified in current debt as it is used in the form of revolving short-term drawings. 15.3 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. 44 Condensed consolidated interim financial statements at 30 June 2010 (In millions of euros) 30 June 2010 31 December 2009 Euros 342 354 US Dollars 19 17 Chinese Yuan 71 53 Korean Won 2 3 Other 4 3 Total 439 430 16 Management of risks related to financial assets and liabilities ARKEMA’s businesses expose it to various risks, including market risks (risk of changes in exchange rates, interest rates and the prices of raw materials and energy), credit risk and liquidity risk. 16.1 Foreign currency risk The Group is exposed to transaction risks related to foreign currencies. The Group hedges its foreign currency risk mainly through spot foreign currency transactions or through forward transactions over short maturities, generally not exceeding 6 months. The fair value of the Group’s forward foreign currency contracts is a liability of €2.5 million. The amount of foreign exchange gains and losses recognized in recurring operating income at 30 June 2010 is a loss of €3.2 million (gain of €1.2 million at 30 June 2009). The portion of foreign exchange gains and losses corresponding to interest income/expense reflected by the difference between the spot exchange rate and the forward exchange rate is recorded in financial result. It is non-significant at 30 June 2010 (-€0.7 million at 30 June 2010). 16.2 Interest rate risk The Group obtains most of its financing through the variable rate syndicated credit facility of €1,100 million available to it. The general financing policy defined by the Group is to favor variable rate debt over fixed rate debt. Exposure to interest rate risk is managed by the Group’s central treasury department and simple derivatives are used as hedging instruments. The Group has not entered into any interest rate hedges at 30 June 2010. 16.3 Liquidity risk The Group’s central treasury department manages the liquidity risk related to the Group’s debt. In almost all cases, Group companies obtain their financing from, and manage their cash with, Arkema France or other Group entities that manage cash pooling mechanisms. 45 Condensed consolidated interim financial statements at 30 June 2010 The main circumstances in which early repayment or termination could occur concern: the syndicated credit facility (see note C15 Debt), if the ratio of consolidated net debt to consolidated EBITDA were to become greater than 3. At 30 June 2010, consolidated net debt represents 0.7 times consolidated EBITDA for the previous 12 months. the securitisation programme for sales receivables, in the event of non-compliance with the standard portfolio financial performance ratios (dilution ratio, overdue ratio and default ratio) or accelerated repayment of the syndicated credit facility following a default on payment. Note C15 Debt provides details of the maturities of debt. 16.4 Credit risk The Group is potentially exposed to credit risk on its accounts receivable and as regards its banking counterparts. Credit risk on accounts receivable is limited because of the large number of its clients and their geographical dispersion. The Group’s general policy for managing credit risk involves assessing the solvency of each new customer before entering into business relations: each customer is allocated a credit limit, which constitutes the maximum level of outstandings (receivables plus orders) accepted by the Group, on the basis of the financial information obtained on the customer and the analysis of solvency carried out by the Group. These credit limits are revised regularly and, in any case, every time that a material change occurs in the customer’s financial position. Customers who cannot obtain a credit limit because their financial position is not compatible with the Group’s requirements in terms of solvency only receive deliveries when they have paid for their order. Even though the Group has incurred very few bad debts for the last number of years, it has decided to cover all of its accounts receivable credit risk by putting in place a global credit insurance program. On account of the statistically low bad debt rate experienced by the Group, the rate of cover is significant. Customers with whom the Group wishes to continue commercial relations but which are not covered by this insurance are subject to specific centralized monitoring. In addition, the Group’s policy for recognizing bad debt provisions in respect of receivables not covered by credit insurance, or the portion of receivables that are not so covered, has two components: receivables are individually provided against as soon as a specific risk of loss (economic and financial difficulties of the customer in question, entry into receivership, etc.) is clearly identified. The Group may also recognize general provisions for receivables that are overdue for such a period that the Group considers that a statistical risk of loss exists. These periods are adapted depending on the BUs and the geographical regions in question. Banking credit risk is related to financial investments, derivatives and credit facilities granted by banks. The Group limits its exposure to credit risk by only investing in liquid securities with first-class commercial banks. 16.5 Risk related to raw materials and energy The prices of certain raw materials used by ARKEMA are highly volatile and their fluctuations lead to significant variations in cost of production of the Group's products; in addition, because of the importance of the Group’s requirements in terms of energy resources resulting notably from the electrically intensive nature of certain of its 46 Condensed consolidated interim financial statements at 30 June 2010 manufacturing processes, ARKEMA is also very sensitive to changes in the price of energy. In order to limit the impact of price volatility of the principal raw materials it uses, ARKEMA can decide to use derivatives matched with existing contracts or can negotiate fixed price contracts for limited periods. Recognition of these derivatives has no effect on the income statement at 30 June 2010 (€1.4 million at 30 June 2009). 17 Related parties 17.1 Transactions with non-consolidated or equity accounted companies Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are consolidated under the equity method. These transactions mainly concern purchases of raw materials and interest charges on current accounts. The amounts of transactions with equity affiliates are presented in the table below. The corresponding transactions were carried out at market prices. The amounts of transactions with unconsolidated companies are not material. (In millions of euros) Equity accounted affiliates Transactions 1st half 2010 1st half 2009 Sales of goods Other income Purchases of goods and services Other expenses (including financial expenses) 9 (11) - 8 (14) - Balance transactions sheet amounts resulting from 30 June 2010 31 December 2009 Assets Accounts receivable Financial receivables and other receivables 3 1 4 Liabilities Accounts payable Debt and other creditors 1 - 1 - 18 Share-based payments 18.1 Stock options On 10 May 2010, the Board of Directors decided to put in place two stock option plans for the benefit of employees, particularly employees with responsibilities whose exercise influences the Group’s results. 47 Condensed consolidated interim financial statements at 30 June 2010 In Plan 1, stock options will be awarded subject to a vesting period of two years, with effect from the Board of Directors’ grant, and subject to compliance with performance criteria expressed in terms both ARKEMA’s EBITDA for 2010, and the trend in this EBITDA compared to a panel of other manufacturers of chemicals. In Plan 2, stock options will be awarded subject to a vesting period of five years, with effect from the Board of Directors’ grant, and subject to compliance with a performance objective relating to ARKEMA’s EBITDA margin for 2014. The main characteristics of the outstanding stock option plans at 30 June 2010 are as follows: 2006 Plan 2007 Plan 2008 Plan 2010 Plan 1 2010 Plan 2 Date of Annual General Meeting 10 May 06 10 May 06 10 May 06 15 June 09 15 June 09 Date of Board of Directors’ meeting 4 July 06 14 May 07 13 May 08 10 May 10 10 May 10 Vesting period 2 years 2 years 2 years 2 years 5 years Conservation period 4 years 4 years 4 years 4 years 5 years Period of validity 8 years 8 years 8 years 8 years 8 years Exercise price 28.36 44.63 36.21 30.47 30.47 Number of options granted 540,000 600,000 460,000 225,000 225,000 to corporate officers: Thierry Le Hénaff 55,000 70,000 52,500 35,000 35,000 to the 10 largest beneficiaries* Total number of options exercised by corporate officers by the 10 largest beneficiaries* 181,000 1,150 - 1,150 217,000 - - - 169,350 - - - 104,000 - - - 104,000 - - - Number of options In circulation at 1 January 2008 536,000 600,000 Granted 460,000 Cancelled 7,800 Exercised 1,150 In circulation at 31 December 2008 534,850 592,200 460,000 In circulation at 1 January 2009 Granted Cancelled Exercised 534,850 592,200 - 1,000 - 460,000 - 5,586 - - - - - - - In circulation at 31 December 2009 534,850 591,200 454,414 In circulation at 1 January 2010 Granted 534,850 591,200 - 454,414 - Cancelled 12,000 12,000 - 579,200 11,992 - 442,422 Exercised In circulation at 30 June 2010 * Employees who are not corporate officers of Arkema SA or any other Group company 522,850 225,000 - - 225,000 225,000 - - 225,000 48 Total 2,050,000 247,500 775,350 1,150 - 1,150 1,136,000 460,000 7,800 1,150 1,587,050 1,587,050 - 6,586 - 1,580,464 1,580,464 450,000 35,992 1,994,472 Condensed consolidated interim financial statements at 30 June 2010 Valuation method The fair value of the options granted was determined using the Black & Scholes method on the basis of assumptions, of which the main ones are as follows: 2006 Plan 2007 Plan 2008 Plan 2010 Plan 1 2010 Plan 2 Volatility Risk-free interest rate Maturity Exercise price (in euros) Fair value of stock options (in euros) 22% 2.82% 4 years 28.36 6.29 20% 3.39% 4 years 44.63 7. 89 25% 4.00% 4 years 36.21 8.99 35% 0.34% 4 years 30.47 6.69 32% 0.34% 5 years 30.47 6.67 The volatility assumption was determined on the basis of observation of historical movements in the ARKEMA share since its admission to listing, restated for certain non-representative days in order to better represent the long-term trend. The maturity adopted for the options corresponds to the period of unavailability for tax purposes. The amount of the IFRS 2 expense recognized in respect of stock options at 30 June 2010 was €0.8 million (€1.9 million at 30 June 2009). The decrease in this expense mostly reflects the fact that no stock options were granted in 2009. 18.2 Free share grants On 10 May 2010, the Board of Directors decided to put in place two performance share award schemes for the benefit of employees, particularly employees with responsibilities whose exercise influences the Group’s results. In Plan 1, intended for employees of the Group's French companies, the definitive grant of such performance shares will be subject to a vesting period of two years, with effect from the Board of Directors’ grant, and subject to compliance with performance criteria expressed in terms of both ARKEMA’s EBITDA for 2010, and the trend in this EBITDA compared to a panel of other manufacturers of chemicals. In Plan 2, intended for other Group employees, the definitive grant of such performance shares will be subject to a vesting period of four years, with effect from the Board of Directors’ grant, and subject to compliance with the same performance criteria. 49 Condensed consolidated interim financial statements at 30 June 2010 The main characteristics of the free share grant plans in force at 30 June 2010 are as follows: 2007 Plan 2008 Plan 1 2008 Plan 2 2009 Plan 2010 Plan 1 2010 Plan 2 Date of Annual General Meeting 10 May 06 10 May 06 10 May 06 10 May 06 15 June 09 15 June 09 Date of Board of Directors’ meeting 14 May 07 13 May 08 13 May 08 12 May 09 10 May 10 10 May 10 Vesting period 2 years 2 years 2 years 2 years 2 years 4 years Conservation period Performance condition 2 years Yes 2 years Yes 2 years No 2 years Yes 2 years Yes (3) Yes (3) Number of free shares granted to corporate officers: Thierry Le Hénaff to the 10 largest beneficiaries (1) 125,000 7,000 21,700 135,556 14,000 44,170 44,444 - 1,830 184,850 14,000 41,500 153,235 18,800 54,700 49,765 8,100 Number of free shares In circulation at 1 January 2008 125,000 Granted 135,556 44,444 Cancelled 995 Definitively granted In circulation at 31 December 2008 124,005 135,556 44,444 0 0 0 In circulation at 1 January 2009 124,005 135,556 44,444 0 0 0 Granted Cancelled 36,405 3,350 2,100 184,850 49,000(2) Definitively granted 87,600 In circulation at 31 December 2009 0 132,206 42,344 135,850 0 0 In circulation at 1 January 2010 0 132,206 42,344 135,850 0 0 Granted 153,235 49,765 Cancelled 132,206 217 Definitively granted 42,127 In circulation at 30 June 2010 (1) Employees who are not corporate officers of Arkema S.A. or any other Group company (2) Waived by the Chairman and CEO and members of the Executive Committee (3) Performance conditions do not apply to beneficiaries of less than 100 shares 0 0 0 135,850 153,235 49,765 The amount of the IFRS 2 expense recognized in respect of free shares at 30 June 2010 is €1.2 million (€0.1 million at 30 June 2009). The low expense for 2009 reflects the non-achievement of performance and service conditions in the 2008 Plan 1. 18.3 Capital increase reserved to employees In the context of the Group’s employee shareholding policy, ARKEMA offered its employees the opportunity to subscribe to a reserved capital increase at a subscription price of 20.63 euros. This price corresponds to the average opening market price of the ARKEMA share on the Paris stock market in the 20 trading days preceding the Board of Directors’ meeting of 3 March 2010, to which a discount of 20% was applied. The employees subscribed to 824,424 shares, and the capital increase was completed and recognized on 15 April 2010. 50 Total 268,315 180,000 3,205 141,105 304,005 304,005 184,850 90,855 87,600 310,400 310,400 203,000 132,423 42,127 338,850 Condensed consolidated interim financial statements at 30 June 2010 Valuation method In accordance with the method recommended by France’s national accounting standards body (Autorité des Normes Comptables), the calculation used to value the cost of not being able to sell the shares for five years is based on the cost of a two-step strategy assuming that these shares will ultimately be sold, and that the same number of shares will be purchased and settled immediately, financed by a loan. The rate used for the loan is the rate that a bank would grant to a private individual presenting an average risk profile in the context of a 5-year consumer loan. The main market parameters used in the valuation of the cost of not being able to sell the shares are as follows: Date of the Board meeting which decided on the capital increase: 3 March 2010 Share price at the date of the board meeting: 25.36 euros 5-year risk free interest rate: 2.76% Interest rate on 5-year borrowings: 7.5% Cost of not being able to sell the shares: 20.5% On the basis of the share price at the date of the Board meeting, the benefit granted represents €4 million. As the cost of not being able to sell the shares, calculated on the basis of the above parameters, is equivalent in amount, no expense has been recognized in the income statement. 19 Off-balance sheet commitments 19.1 Commitments given 19.1.1 Off-balance sheet commitments given in the ordinary course of business The main commitments given are summarized in the table below: (In millions of euros) 30 June 2010 31 December 2009 Guarantees granted 74 68 Comfort letters 2 2 Contractual guarantees 29 10 Customs and excise guarantees 8 8 Total 113 88 Guarantees granted are mainly bank guarantees in favor of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. Market guarantees were set up for certain new contracts entered into during the first half of 2010. 51 Condensed consolidated interim financial statements at 30 June 2010 19.1.2 Contractual commitments Irrevocable purchase commitments In the normal course of business, ARKEMA signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods of between 1 to 15 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The total amount of the Group’s financial commitments is valued on the basis of the last known prices and amounts to €877 million at 30 June 2010 (see maturity schedule below): (In millions of euros) 30 June 2010 31 December 2009 2010 143 207 2011 177 136 2012 122 99 2013 78 69 2014 until expiry of the contracts 357 220 Total 877 731 Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land, Fos port concession) and transportation equipment (rail cars, containers, transport barges). The amounts presented in the table below correspond to the future minimum payments that will need to be made under these contracts (only the irrevocable portion of future lease payments has been valued). 52 Condensed consolidated interim financial statements at 30 June 2010 30 June 2010 31 December 2009 (In millions of euros) Capitalized leases Non-capitalized leases Capitalized leases Non-capitalized leases 2010 1 24 2 24 2011 2 24 2 22 2012 2 22 2 20 2013 2 20 2 18 2014 and beyond 10 85 10 81 Nominal value of future lease payments 17 175 18 165 Finance cost 4 NA 4 NA Present value NA: not applicable 21 NA 22 NA 19.1.3 Other commitments given Warranties related to sales of businesses Sales of businesses generally involve the provision of warranties in respect of unrecorded liabilities to the purchaser. ARKEMA sometimes grants such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of litigation and claims. In the majority of cases, they cover risks of occurrence of environmentally related claims. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted in the past by ARKEMA amounted to €93 million at 30 June 2010 (€85 million at 31 December 2009). These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 19.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described in note C27.2 to the consolidated financial statements at 31 December 2009. 53 Condensed consolidated interim financial statements at 30 June 2010 20 Subsequent events ARKEMA and SolVin have signed an agreement effective as of 1 July 2010 for the purchase of their reciprocal interests in three joint production entities for VCM (vinyl chloride monomer) and PVC (polyvinyl chloride). As a result, ARKEMA is now the sole shareholder of the two French-located companies Vinylfos and Vinylberre, producers of VCM and PVC respectively, in which ARKEMA previously held 79% and 65% shareholdings. The CVM and PVC producer Vinilis located in Spain, in which Arkema previously held a 35% stake, is now controlled entirely by SolVin. The purpose of this agreement is to streamline these industrial structures, and it will have no impact on ARKEMA’s results. 54 Condensed consolidated interim financial statements at 30 June 2010 SCOPE OF CONSOLIDATION AT 30 JUNE 2010 (a) Companies merged in 2010 (b) Companies acquired in 2010 The percentage of control indicated below also corresponds to the Group’s ownership interest in each entity. Akishima Chemical Industries Co.ltd Japan 100.00 FC Alphacan BV Netherlands 100.00 FC Alphacan DOO Croatia 100.00 FC Alphacan Espana SA Spain 99.92 FC Alphacan Perfiles SLU Spain 99.92 FC Alphacan SA France 100.00 FC Alphacan SPA Italy 100.00 FC Altuglas International Denmark A/S Denmark 100.00 FC Altuglas International SPA Italy 100.00 FC Altuglas International BV (a) Netherlands 100.00 FC Altuglas International Mexico Inc United States 100.00 FC Altuglas International S.A. France 100.00 FC Altuglas International UK Ltd United Kingdom 100.00 FC Altuglas Polivar Spa Italy 100.00 FC Altumax Deutschland GmbH Germany 100.00 FC Altumax Europe SAS France 100.00 FC American Acryl LP United States 50.00 PC American Acryl NA LLC United States 50.00 PC Arkema South Korea 100.00 FC Arkema SA France 100.00 FC Arkema Amériques SAS France 100.00 FC Arkema Asie France 100.00 FC Arkema Beijing Chemicals Co. Ltd China 100.00 FC Arkema BV (a) Netherlands 100.00 FC Arkema Canada Inc Canada 100.00 FC Arkema Changshu Chemicals Co Ltd China 100.00 FC Arkema Changshu Fluorochemical Co. Ltd China 100.00 FC Arkema Changshu Haike Chemicals China 49.00 FC Arkema China Investment Co. Ltd China 100.00 FC Arkema Company Ltd Hong Kong 100.00 FC Arkema Daikin Fluorochemical Co ltd China 60.00 PC Arkema Delaware Inc. United States 100.00 FC Arkema Europe SAS France 100.00 FC 55 Arkema France Arkema Gas Odorants LLC Arkema GmbH Arkema Holding Ltd Arkema Inc. Arkema Iniciadores SA de CV Arkema KK Arkema Ltd (UK) Arkema Ltd (Vietnam) Arkema Mexico Arkema North Europe BV Arkema Peroxides India Private Limited Arkema Pte Ltd Arkema Quimica ltda Arkema Quimica SA Arkema Hydrogen Peroxide Co. Ltd, Shanghaï Arkema RE Arkema Rotterdam BV Arkema Shanghai Distribution Arkema sp Z.o.o Arkema Srl Arkema Vlissingen BV Arkema Yoshitomi Ltd Ceca Italiana SRL Ceca SA Changshu Resichina Engeneering Polymers Co Ltd Coatex SAS Coatex Netherlands BV Coatex Inc Coatex Korea Coatex CEE Coatex NA Coatex Asia Pacific Coatex Changshu Additives Daikin Arkema Refrigerants Asia Ltd Daikin Arkema Refrigerants Trading (Shanghai) Delaware Chemicals Corporation Dorlyl snc Febex SA Luperox Iniciadores SA de CV Maquiladora General de Matamoros sa de cv Condensed consolidated interim financial statements at 30 June 2010 France 100.00 FC United States 100.00 FC Germany 100.00 FC United Kingdom 100.00 FC United States 100.00 FC Mexico Japan 100.00 100.00 FC FC United Kingdom 100.00 FC Vietnam Mexico 100.00 100.00 FC FC Netherlands 100.00 FC India 100.00 FC Singapore 100.00 FC Brazil 100.00 FC Spain 99.92 FC China 66.67 FC Ireland 100.00 FC Netherlands 100.00 FC China 100.00 FC Poland 100.00 FC Italy 100.00 FC Netherlands 100.00 FC Japan 49.00 EM Italy 100.00 FC France 100.00 FC China 100.00 FC France 100.00 FC Netherlands 100.00 FC United States 100.00 FC South Korea 100.00 FC Slovakia 100.00 FC (a) United States 100.00 FC South Korea 100.00 FC China 100.00 FC Hong-Kong 40.00 PC China 40.00 PC United States 100.00 FC France 100.00 FC Switzerland 96.77 FC Mexico Mexico 100.00 100.00 FC FC 56 Condensed consolidated interim financial statements at 30 June 2010 Michelet Finance, Inc. United States 100.00 FC Meglas (b) Italy 33.00 EM MLPC International France 100.00 FC Oxford Performance Materials United States 84.50 FC Oxochimie France 50.00 PC Ozark Mahoning Company United States 100.00 FC Plasgom Spain 99.92 FC Plasticos Altumax SA Spain 100.00 FC Qatar Vinyl Company Limited Qatar 12.91 EM Résil Belgium Belgium 100.00 FC Resilia SRL Italy 100.00 FC Resinoplast Resinoplast North America France Mexico 100.00 100.00 FC FC SEKI Arkema South Korea 51.00 FC Shanghaï Arkema Gaoyuan Chemicals Co, Ltd China 93.40 FC Stannica LLC United States 40.00 PC Sunclear France 100.00 FC Turkish Products, Inc. United States 100.00 FC Viking chemical company United States 100.00 FC Vinilis Spain 34.97 EM Vinylberre France 65.05 FC Vinylfos France 79.00 FC NB: FC: Full consolidation PC: Proportionate consolidation EM: consolidation by the equity method 57 III- DECLARATION BY THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements at June 30th 2010 have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the Company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Thierry Le Hénaff Chairman and CEO 58 Arkema S.A. Statutory Auditor’s Review Report on the first half-year information for 2010 (free translation of the French original) January 1st to June 30th 2010 Arkema S.A. 420, rue d’Estienne d’Orves - 92700 Colombes This report contains 3 pages 59 KPMG Audit Département de KPMG S.A. Commissaire aux Comptes Membre de la Compagnie de Versailles 1, cours Valmy 92923 Paris La Défense Cedex Ernst & Young Audit Commissaire aux Comptes Membre de la Compagnie de Versailles Faubourg de l’Arche 11, allée de l’Arche 92037 Paris La Défense Cedex S.A.S. à capital variable This is a free translation into English of the statutory auditors’ review report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France. Arkema S.A. Registered office: 420, rue d’Estiennes d’Orves - 92700 Colombes – France Share capital: €612,793,970 Statutory Auditors’ Review Report on the first half-year financial information for 2010 (free translation of the French original) January 1st to June 30th 2010 To the Shareholders, Following our appointment as statutory auditors by your Annual General Meetings, and in accordance with article L.451-1-2 III of the French Monetary and Financial Law (Code Monétaire et Financier), we hereby report to you on: the review of the accompanying condensed half-year consolidated financial statements of Arkema S.A. for the period January 1st to June 30th 2010; the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. I – Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France. Consequently, the assurance, in the context of a review, that the financial statements taken as a whole are free of significant misstatements is a moderate assurance, lower than that given by an audit. 60 Arkema S.A. Statutory Auditors’ Report on the first half-year Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRS as adopted by the European Union applicable to interim financial information. Without calling into question the conclusion given above, we would draw your attention to notes B.3 “Goodwill and business combinations”, B.19 “Accounting policies / Main accounting and financial indicators”, and C7 “Business combinations”, in the annex to the condensed half- year consolidated financial statements, which describe the incidence of the new revised standard IFRS3 applied in the first half of the year. II – Specific verification We have also verified the information given in the half-year management report, commenting the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. Paris la Défense, August 2nd 2010 The Statutory Auditors KPMG Audit Département de KPMG S.A. Ernst & Young Audit Bertrand Desbarrières François Carrega Valérie Quint Partner Partner Partner 61

Semestriel, 2010, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

Half year financial report 1st half 2008 2008 half year financial report Free translation for information purpose only 1 2008 half year financial report Free translation for information purpose only Content Half-year activity report---------------------------------------------------------------------------- ----------3 Condensed consolidated interim financial statements at June 30, 2008------------------------------8 Declaration of the person responsible for the half-year financial report--------------------------- 51 Report from statutory auditors on condensed consolidated interim financial statements at June 30, 2008 ---------------------------------------------------------------------------------------------- 52 2 2008 half year financial report Free translation for information purpose only HALF-YEAR ACTIVITY REPORT I. HIGHLIGHTS OF THE FIRST HALF OF THE YEAR 1. Main self-help projects announced in the first half of 2008 During the first half of the year, Arkema announced new productivity and growth projects, confirming thereby its willingness to actively pursue the implementation of its strategy and its transformation. In February 2008, Arkema announced the reorganisation of the Human Resources and Accounting functions of its French subsidiary Arkema France with the creation of two dedicated Shared Services Centers with a view to streamlining the organization and improving the productivity and responsiveness of services. The progressive implementation of the new organization will take place between June 2008 and October 2008. It will result in the redeployment of 132 positions from the existing sites to the two Shares Services Centers and the net loss of 30 positions. In the restructuring process which has taken place since 2006 in its Performance Products segment, Arkema announced, in April 2008, the shutdown of the production of methacrylic-butadiene-styrene (MBS) impact modifiers at its American site in Axis (Alabama) in order to concentrate its worldwide production in Europe at the Vlissingen facility in the Netherlands. This reorganization should result in an annual cost reduction in the order of 3.2 million euros from the first of implementation. Finally, in June 2008, Alphacan, a subsidiary of Arkema which specializes in Pipes and Profiles announced a plan to optimize its structures and reduce its operating costs. This plan entails the rationalization of the support functions at the company’s headquarters and at its French production plant in Gaillac leading to a reduction of 29 positions. The gains resulting from the implementation of these new initiatives will contribute to Arkema’s objectives to reduce its fixed costs by 500 million euros in 2010 compared to 2005, thus resulting in an improvement in EBITDA estimated to 200 million euros. During the first half of the year, Arkema finalized acquisitions to reinforce its best product lines and its downstream integration. On February 29, 2008, Arkema finalized the acquisition of the PMMA business from Repsol YPF. This business that will be integrated to its PMMA business unit will enable Altuglas International, a subsidiary of Arkema, to consolidate its ranking as a European leader in acrylic sheet. This business, split between the industrial sites of Bronderslev in Denmark and Polivar in Italy, achieves annual sales of around 30 millions euros. In April 2008, Arkema announced the acquisition by its subsidiary CECA (Specialty Chemicals) of the « Activated Carbon and Regeneration » business from the company SNF Italia representing annual sales of around 4 million euros in the environment market. This acquisition will enable CECA to consolidate its leading ranking in Southern European in the activated carbon business for the environment, in particular the treatment of water and air. In June 2008, Arkema announced the acquisition by its subsidiary Coatex (Specialty Acrylic Polymers) of LyondellBasell’s Ethacryl business. This business generates annual sales of around 4 million euros. It will enable Coatex to strengthen its know-how in the concrete and plaster additives markets and speed up its global growth. Finally, Arkema continues actively to prepare the long term with the announcement of new growth projects. Arkema announced in March 2008 the doubling of its hydrogen peroxide production capacity at its Leuna site in Germany to 80,000 tonnes per year by mid-2010. This capacity increase correspond to an investment of around 40 millions euros. It will enable Arkema to reinforce its position among the worldwide leader in hydrogen peroxide with competitive and world-class facilities in each geographical area. In May 2008, Altuglas International, a subsidiary of Arkema, announced a project to expand the capacity of its compounding unit at Bristol (Pennsylvania) to meet growing demand on the American continent for its Plexiglas® acrylic resin and acrylic capstock products. 3 2008 half year financial report Free translation for information purpose only Finally, Arkema started-up, in the first quarter, a capacity extension of over 2,000 tonnes a year for Kynar® PVDF at its Amercian site of Calvert City. Moreover, Arkema signed an agreement, effective April 1st, 2008 with Sumitomo Seika, one of the world leading producers of superabsorbant polymers. According to this agreement, Arkema will supply the acrylic acid produced at its Carling site (France) and will continue to manufacture superabsorbants, the going-concern of this business, representing annual sales of around 20 million euros, being sold Sumitomo Seika. 2. Other highlights During the first half of 2008, Arkema launched several initiatives in numerous areas and announced various projects especially to reduce its greenhouse gas emissions or to develop the share ownership among its employees. Project to reduce greenhouse gas emissions On April 15, 2008, Arkema announced a plan to reduce greenhouse gas emissions from its Forane® 22 production plant at the Changshu industrial facility in China. Once the incinerator has been commissioned and certified by a specialized committee of the United Nations (UNFCCC), the plan should give rise to an annual allowance of 3.4 million tonnes of certified emission reductions (CER, or carbon credits). Genesis program In June 2008, the European Commission gave its green light for the funding, up to 46 millions euros by a French public body (OSEO), of the Genesis program. This program coordinated by Arkema and amounting to to a total cost of 107 million euros will open the way for the development in Europe of an innovative and competitive sector in nanostructured materials. It will especially enable Arkema, a leader in the nanostructured materials and only European producer of functional copolymers with controlled architecture, to speed up the industrial development of nanostructured materials in direct cooperation with the relevant user sectors (automotive, cable, structural composites, energy, environment as well as information and communication technologies). Capital increase reserved to employees In order to closely associate its employees with the Group’s development, Arkema carried out a capital increase reserved to employees at a subscription price set, by the Board of Directors meeting on March 4, 2008, at 30.42 euros by share. This operation resulted in the subscription of 618,462 shares for a total amount of 19 million euros, representing more than 1% of share capital. Share buy-back During the first quarter 2008, the company bought back 300,830 shares for a total amount of 10.4 million euros. These shares were allocated for the purpose of covering the 2007 and 2008 free share allocation plans. During the second quarter 2008, the company bought back 14,750 shares for a total amount of 0.5 million euros . Decision from the European Commission regarding past anti-trust practices In June 2008, the European Commission ordered Arkema France and its former parent company Elf Aquitaine to pay a fine of 59 million euros relating to past anti-trust practices in the sodium chlorate market. This fine does not have an impact on Arkema’s results considering both the provisions already booked and the warranty mechanism agreed with Total on the occasion of the spin-off. This decision will be appealed within the allowed timeframe to the Court of First Instance of the European Communities. 4 2008 half year financial report Free translation for information purpose only II. ANALYSIS OF FINANCIAL RESULTS FOR THE FIRST HALF OF 2008 (In millions of euros) Sales ............................................................... EBITDA......................................................... Recurring operating income ........................ Other income and expenses ............................ Operating income.......................................... Adjusted net income ..................................... Net income – group share.................................. CAPEX Net debt (vs. 12/31/07) 1st half 2007 1st half 2008 3,001 317 197 -10 187 140 132 103 592 2,977 284 177 -79 98 119 67 108 459 Variations In % +0.8% +12% +11% x1.9 +18% x2.0 -5% +29% Sales In the first six months of 2008, Arkema’s sales are up 0.8 % to 3,001 million euros against 2,977 million euros in the first half of 2007. Excluding the conversion effect mainly related to the weakening of the US dollar versus euro (-4.3 %) and the changes in the scope of perimeter (-1.2%), sales increased by 6.3%. This improvement results mainly from a strong rise in average sale prices in Industrial Chemicals and Performance Products segments (+5.7 %) while volumes increased slightly (+0.6%). EBITDA EBITDA is up 12% from 284 million euros in the first six months 2007 to 317 million euros in the first half 2008. This improvement reflects the contribution of new products to the results of Industrial Chemicals and Performance Products segments and the benefits from productivity initiatives launched especially on the site of Pierre-Bénite and at the headquarters in France. Over the first half of the year, self-help initiatives, which should result in an EBITDA gain of 80 million euros in 2008, compensated fully for the impact of a tougher economic environment especially in Vinyl Products and the impact of the conversion effect related to the weakening of the US dollar versus euro estimated to –19 million euros on the first half of the year. Portfolio management has had little impact of the result. Arkema generated an EBITDA margin of 10.6% of sales for the first half of the year against 9.5% on the first half of 2007 and 7.9% over the first half of 2006. Recurring operating income Recurring operating income amounts to 197 million euros against 177 million euros on the first half of 2007, up 11% in line with the EBITDA improvement. It includes higher depreciations and amortizations totalling 120 million euros (compared to 107 million euros in the first six months of 2007) following start-ups of new units. Operating income Operating income is up 89 million euros from 98 million euros in the first six months of 2007 to 187 million euros in the first half of 2008. It includes other income and expenses for a total amount of –10 million euros (against –79 million euros in the first half 2007) relating to the costs of restructuring plans for an amount of–22 million euros and a net capital gain of 12 million euros on the sale of buildings in the Paris area. Net income, group share Net income, group share, is multiplied by 2 increasing from 67 million euros to 132 million euros in the first half 2008. It includes income taxes of 43 million euros (against 40 million euros in the first six months 2007), i.e. a taxation rate compared to the recurring operating income of 22% (23% In the first six months of 2007). In the first half of 2007, the net income, group share included 18 million euros net income from discontinued activities corresponding to the capital gain generated by the sale of the agrochemicals business (Cerexagri). Segments’ performance Vinyl Products sales are up 4.5% at 784 million euros against 750 million euros in the first half 2007, mainly supported by a strong demand in caustic soda and correct volumes for PVC in Europe in the second quarter with variations from one country to the other. EBITDA amounts to 31 million euros compared to 61 million euros in the first 5 2008 half year financial report Free translation for information purpose only six months 2007, unit margins being affected by the continuous increase in ethylene and natural gas prices. Productivity efforts in the segment continue to be implemented. Industrial Chemicals sales increase by 3.7% to 1,357 million euros compared to 1,308 million euros in the first half 2007. Excluding the negative impact of conversion and the positive impact of changes in the scope of perimeter (acquisitions of Coatex and Repsol’s PMMA business, and divestitures of specialty amines at Riverview and of superabsorbants), sales increase 7.5%, supported by increases in unit prices. EBITDA increases sharply (+29%) and amounts over the first six months to 190 million euros compared to 147 million euros in the first half 2007. EBITDA margin on sales reached a high level at 14.0% compared to 11.2% in the first half 2007, despite acrylics remaining in low cycle conditions. Progress achieved comes from new developments in Thiochemicals and Fluorochemicals, the successful integration of Coatex (Specialty Acrylic Polymers BU) and productivity initiatives launched since two years especially at Pierre-Bénite (France) in Fluorochemicals, at Lacq (France) in Thiochemicals et at Carling (France) in Acrylics. Performance Products sales amount to 857 million euros compared to 916 millions euros in the first half 2007. They increased 6.4% at constant conversion rate and perimeter, mainly supported by increases in unit sale prices which compensate for the slight decrease in volumes. EBITDA is up 14% and amounts to 119 million euros. EBITDA margin reachs an historical high at 13.9% compared to 11.4% in the first half 2007 and 9% in the first half 2006. Development in new products in fast growing markets (polyamides, fluoropolymers, molecular sieves…) and productivity initiatives launched especially in polyamides business (Technical Polymers) and in Functional Additives largely contributed to the growth of the segment’s results. These initiatives also help compensating for the impact, on the Functional Additives BU results, of the slowdown of the construction market in the United Stated and the increase in tin prices. Cash flow Excluding change in working capital, cash flow related to operations amounts to 207 million euros in the first half 2008 in working capital stood at compared -128 million euros reflecting the usual seasonality of sales. to 171 million euros in the first half 2007. The change Cash flow related to operations and investments in the first half of the year amounts to –81 million euros compared to +132 million euros in the first half 2007 which included proceed from portfolio management operations amounting to +137 million euros. Net debt Net debt stood end of June at 592 million euros compared to 459 million euros end of December 2007. It includes the impact of the share capital increase reserved to employees for a total amount of 19 million euros, the payment of the dividend for a total amount of 46 million euros and share buy-back for an amount of 11 million euros. End of June 2008, the balance of non-recurring pre-spin off items stood at 99 million euros. The ratio between the sum of both items and the shareholders’ equity stood at 35% end of June compared to 30% end of December 2007. III. TRANSACTIONS WITH RELATED PARTIES Transactions with related parties are described in note 16 of the condensed financial statements as at June 30, 2008. IV. HIGHLIGHTS SINCE JUNE 30, 2008 In July 2008, Arkema, the world leader in the odorization of natural gas and liquefied petroleum gas (LPG), announces the acquisition of Odor-Tech Inc, which specializes in the production, storage and marketing of odorant blends for the gas market. This activity, which reported in 2007 sales approaching US$ 8 million, will bolster Arkema’s position in the North American market. 6 2008 half year financial report Free translation for information purpose only V. 2008 OUTLOOK The economic environment in the second half of the year should remain challenging and uncertain, characterized, in particular, by high and volatile raw material and energy costs and a weak US dollar versus the euro. In this context, Arkema will focus on increasing its prices, while continuing to implement self-help initiatives. Self-help initiatives already underway, the impact of which has been estimated for 2008 at €80 million, will underpin EBITDA growth. Furthermore, Arkema will remain attentive to the evolution of the economic environment, and continue to take the necessary measures to adapt accordingly. Arkema’s 2008 target of 10% EBITDA margin is on course. Based on the quality of ongoing projects, the results of the Industrial Chemicals and Performance Products segments should support this improvement in the results. Vinyl Products will continue to be affected by the sharp increase of ethylene. VI. MAIN RISKS AND UNCERTAINTIES The main risks and uncertainties that the group may have to face in the next six months are those described in the group’s 2007 reference document filed with the Autorité des marchés financiers (“AMF”) on April 17, 2008 with the number R.08-026. This document is available on Arkema’s website under the heading “Investor Relations” (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in a note to the half-year financial statements. 7 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT JUNE 30, 2008 CONSOLIDATED INCOME STATEMENT ...............................................................................10 CONSOLIDATED BALANCE SHEET ........................................................................................11 CONSOLIDATED CASH FLOW STATEMENT........................................................................12 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY .............13 A. HIGHLIGHTS.............................................................................................................................15 B. ACCOUNTING POLICIES .......................................................................................................16 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ...................................28 1 Effects of seasonality ...........................................................................................................28 2 Information by business segment ......................................................................................28 3 Information by geographical area .....................................................................................29 4 Other income and expenses ................................................................................................30 5 Discontinued operations .....................................................................................................30 6 Earnings per share ..............................................................................................................31 7 Impact of reclassifications on the published 2007 financial statements.........................32 8 Intangible assets ..................................................................................................................32 9 Property, plant and equipment ..........................................................................................32 10 Inventories ...........................................................................................................................32 11 Shareholders’ equity ...........................................................................................................32 12 Provisions and other non-current liabilities .....................................................................33 13 Contingent liabilities ...........................................................................................................35 8 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only 14 Debt.......................................................................................................................................39 15 Management of risks related to financial assets and liabilities.......................................40 16 Related parties .....................................................................................................................41 17 Share-based payments ........................................................................................................42 18 Off-balance sheet commitments.........................................................................................45 19 Subsequent events ...............................................................................................................47 SCOPE OF CONSOLIDATION AT JUNE 30, 2008 ...................................................................48 9 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only CONSOLIDATED INCOME STATEMENT In millions of euros Notes Six months ended June 30, 2008 Six months ended June 30, 2007 Sales (C2&C3) 3,001 2,977 Operating expenses (2,525) (2,520) Research and development expenses (79) (76) Selling and administrative expenses (200) (204) Recurring operating income (C2) 197 177 Other income and expenses (C4) (10) (79) Operating income (C2) 187 98 Equity in income of affiliates 3 1 Financial result (14) (9) Income taxes (43) (40) Net income of continuing operations 133 50 Net income of discontinued operations (C5) 18 Net income 133 68 Of which: minority interests 1 1 Net income - Group share 132 67 Earnings per share (amount in euros) (C6) 2.18 1.11 Diluted earnings per share (amount in euros) (C6) 2.17 1.10 Depreciation and amortization (C2) (120) (107) EBITDA * (C2) 317 284 Adjusted net income * 140 119 See note B19 - Accounting policies / Main accounting and financial indicators 10 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only CONSOLIDATED BALANCE SHEET In millions of euros Notes June 30, 2008 December 31, 2007 ASSETS Intangible assets, net Property, plant and equipment, net Equity affiliates: investments and loans Other investments Deferred income tax assets Other non-current assets TOTAL NON-CURRENT ASSETS Inventories Accounts receivable Other receivables and prepaid expenses Income taxes recoverable Other current assets Cash and cash equivalents Total assets of discontinued operations TOTAL CURRENT ASSETS (C8) (C9) (C10) 440 1,497 43 24 16 127 2,147 1,015 1,151 142 11 4 73 - 2,396 460 1,525 42 24 18 117 2,186 1,017 1,000 160 14 1 58 - 2,250 TOTAL ASSETS 4,543 4,436 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Treasury shares Cumulative translation adjustment SHAREHOLDERS' EQUITY – Group share Minority interests TOTAL SHAREHOLDERS' EQUITY Deferred income tax liabilities Provisions and other non-current liabilities Non-current debt TOTAL NON-CURRENT LIABILITIES Accounts payable Other creditors and accrued liabilities Income taxes payable Other current liabilities Current debt Total liabilities of discontinued operations TOTAL CURRENT LIABILITIES (C11) (C12) (C14) (C14) 611 1,570 (11) (210) 1,960 20 1,980 49 774 67 890 737 299 32 7 598 - 1,673 605 1,449 - (140) 1,914 21 1 935 54 833 61 948 786 290 15 6 456 - 1,553 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,543 4,436 The amounts shown at December 31, 2007 include the effects of the reclassifications described in note C7 “Impact of reclassifications on the published 2007 financial statements”. 11 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only CONSOLIDATED CASH FLOW STATEMENT In millions of euros Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities Intangible assets and property, plant, and equipment additions Change in fixed asset payables (1) Acquisitions of subsidiaries, net of cash acquired Increase in long-term loans (2) (1) (2) Six months ended June 30, 2008 133 128 (31) (25) (3) (128) 5 79 (103) (42) (13) (24) (182) Six months ended June 30, 2007 68 127 29 (56) (1) (36) 4 135 (108) (38) (5) (8) (159) Total expenditures Proceeds from sale of intangible assets and property, plant, and equipment Change in fixed asset receivables Proceeds from sale of subsidiaries, net of cash sold Proceeds from sale of other investments Repayment of long-term loans Total divestitures Cash flow from investing activities Issuance (repayment) of shares Purchase of treasury shares Dividends paid to parent company shareholders Dividends paid to minority shareholders Increase / decrease in long-term debt Increase / decrease in short-term borrowings and bank overdrafts Cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period Cash and cash equivalents of discontinued operations at end of period Cash advance granted to discontinued operations CASH AND CASH EQUIVALENTS ET END OF PERIOD 27 (14) - - 9 22 (160) 18 (11) (46) - 107 24 92 11 4 58 - 73 35 106 - 15 156 (3) 5 - - - (4) (225) (224) (92) (11) 171 - 68 At June 30, 2008, income taxes paid amounted to €28 million (€16 million at June 30, 2007). Interest received and paid included in cash flow from operating activities at June 30, 2008 amounted, respectively, to €0.1 million and €13.8 million (€0.1 million and €7 million at June 30, 2007). (1) (2) The cash flow statement incorporates: The reclassification of fixed asset payables from the “Change in working capital” caption to the “Change in fixed asset payables” caption; The reclassification of the long-term portion of the research tax credit (RTC) from the “Change in working capital” caption to the “Increase in long-term loans” caption (see note C7 “Impact of reclassifications on the published 2007 financial statements”). 12 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Shares issued Treasury shares In millions of euros Number Amount Paid-in surplus Retained earnings Cumulative translation adjustment Number Amount Shareholders' equity – Group share Minority interests At January 1, 2007 Cash dividend Issuance of share capital 60,453,823 - 605 - 1,006 - 307 - (27) - 1,891 - - 15 - 5 Purchase of treasury shares Cancellation of purchased treasury shares Sale of treasury shares Other - - - - Transactions with shareholders Net income - - - 67 - - - 67 5 1 Changes in items recognized directly through equity 3 3 Actuarial gains and losses Change in translation adjustments Other - - - - - - 4 - 2 (21) - - - - - 4 (21) 2 (1) - Total recognized income and expenses 76 (21) 55 At June 30, 2007 Cash dividend 60,453,823 605 1,006 383 (48) 1,946 - 20 - Issuance of share capital Purchase of treasury shares - - Cancellation of purchased treasury shares Sale of treasury shares Other Transactions with shareholders Net income - - - 55 - - - 55 1 Changes in items recognized directly through equity 4 4 Actuarial gains and losses Change in translation adjustments Other - - - - - - 5 - (4) (92) - - - - - 5 (92) (4) - - Total recognized income and expenses 60 (92) (32) 1 At December 31, 2007 60,453,823 605 1,006 443 (140) 1,914 21 13 Total share- holders' equity 1,906 - 5 - - 5 68 3 4 (22) 2 55 1,966 - - 56 4 5 (92) (4) (31) 1,935 In millions of euros At January 1, 2008 Cash dividend Issuance of share capital Purchase of treasury shares Cancellation of purchased treasury shares Sale of treasury shares Other Transactions with shareholders Net income Changes in items recognized directly through equity Actuarial gains and losses Change in translation adjustments Other Total recognized income and expenses At June 30, 2008 Shares issued Number Amount 60,453,823 618,462 618,462 61,072,285 605 6 6 611 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only Treasury shares Paid-in surplus Retained earnings Cumulative translation adjustment Number Amount Shareholders' equity – Group share Minority interests 1,006 443 (140) 1,914 21 12 (46) (46) 18 - (315,580) (11) (11) 12 (46) 132 5 (315,580) (11) - (39) 132 5 - - 1 18 155 (70) (70) 18 (70) - 85 (2) - (1) 1,018 552 (210) (315,580) (11) 1,960 20 14 Total share- holders' equity 1,935 (46) 18 (11) - (39) 133 5 18 (72) - 84 1,980 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only A. HIGHLIGHTS 1 Main restructuring plans in the half year The accounting impacts are presented in the “Other income and expenses” caption (see note C4). 1.1 Restructuring of support functions In February 2008, ARKEMA announced the reorganization of the Human Resources and Accounting functions of Arkema France, with the creation of two dedicated shared services centers, with a view to simplifying the organization, improving productivity and strengthening the responsiveness and availability of services. This project would result in the redeployment of 132 positions from the existing sites to the two SSCs and would lead to a net headcount reduction of 30. 1.2 Restructuring in the Performance Products segment In April 2008, ARKEMA announced the shutdown of its production of methacrylic-butadiene-styrene (MBS) impact modifiers at its American site in Axis (Alabama) in order to concentrate its worldwide production at its Vlissingen plant in the Netherlands. 2 Plan to reduce greenhouse gas emissions On April 15, 2008, ARKEMA announced a plan to reduce greenhouse gas emissions from its Forane® 22 production plant at the Changshu industrial facility in China. Once the incinerator has been commissioned and certified by a specialized committee of the United Nations (UNFCCC), the plan should give rise to an annual allowance of 3.4 million tonnes of certified emission reductions (CER, or carbon credits). 3 Capital increase reserved to employees In order to closely associate its employees with the Group’s development, ARKEMA carried out a capital increase reserved to employees. This operation resulted in the subscription of 618,462 shares for a total amount of €19 million, representing more than 1% of share capital. Following this operation, the number of shares in ARKEMA’s share capital is 61,072,285, of which slightly more than 2% are held by employees (see note C17.3 - Share based payments / Capital increase reserved to employees). 4 Fine related to past anti-trust practices In June 2008, the European Commission ordered Arkema France and its former parent company Elf Aquitaine to pay a fine of €59 million relating to past anti-trust practices in the sodium chlorate market. This fine does not have an impact on ARKEMA’s results considering both the provisions already booked and the warranty mechanism agreed with Total on the occasion of the spin-off. 15 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only This decision will be appealed within the allowed timeframe to the Court of First Instance of the European Communities. B. ACCOUNTING POLICIES ARKEMA is a global chemical player, with three coherent and related business segments: Vinyl Products, Industrial Chemicals and Performance Products. Arkema S.A. is a French limited liability company (société anonyme) with a Board of Directors, subject to the provisions of book II of the French Commercial Code as well as all other legal provisions applicable to French commercial companies. The company’s head office is at 420, rue d’Estiennes d’Orves, 92700 Colombes (France). It was formed on January 31, 2003 and the shares of Arkema S.A. are listed on the Paris stock market (Euronext) since May 18, 2006. ARKEMA’s condensed consolidated interim financial statements at June 30, 2008 were prepared under the responsibility of the Chairman and CEO of Arkema S.A and were approved by the Board of Directors of Arkema SA on August 6, 2008. The condensed consolidated interim financial statements at June 30, 2008 are prepared in accordance with the international accounting standards issued by the IASB (International Accounting Standards Board) as endorsed by the European Union at June 30, 2008 and in compliance with IAS 34 “Interim financial reporting”. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended December 31, 2007. The accounting framework and standards adopted by the European Commission can be consulted on the following internet site: http://ec.europa.eu/internal_market/accounting/ias_en.htm#adopted-commission. The accounting policies applied in preparing the consolidated financial statements at June 30, 2008 are identical to those used in the consolidated financial statements at December 31, 2007, except for: IFRS standards, amendments and interpretations, as adopted by the European Union and the IASB, that are obligatorily applicable for accounting periods commencing on or after January 1, 2008 (and which had not been applied early by the Group), being IFRIC 11. Its application does not have any impact on the Group’s consolidated financial statements at June 30, 2008. IFRIC 12, which was adopted by the IASB but not by the European Union, would not have an impact on the Group’s consolidated financial statements at June 30, 2008. The impacts of IFRIC 14, which was adopted by the IASB but not by the European Union, are currently being studied. The Group does not expect a material impact on the financial statements. Furthermore, the impact of the standards or interpretations published respectively by the IASB and the IFRIC (International Financial Reporting Interpretations Committee) which are not yet in force at June 30, 2008, and which 16 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only have not been applied early by the Group, such as IFRS 8, IAS 1 as revised, IAS 23 as revised, IFRS 3 as revised, IFRIC 13 and the amendments to IAS 27, IAS 32 and IFRS 2, are currently being analyzed. In addition, entities, assets and operations over which joint control is exercised are consolidated using the proportionate method since 1 January 2007. As this change in accounting policy was made in the 2nd half of 2007, the impacts on the financial statements at June 30, 2007 would have been a decrease of €14 million on sales and an increase of €4 million on EBITDA. Preparation of consolidated financial statements in accordance with IFRS requires Group management to make estimates and retain assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for the calculation of depreciation and impairment, of pension benefit obligations, of deferred taxes and for the valuation of assets (property, plant & equipment, intangibles and investments), provisions and certain financial instruments. The disclosures provided concerning contingent assets and liabilities at the date of preparation of the consolidated financial statements also involve the use of estimates. The consolidated financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The consolidated financial statements are presented in millions of euros, rounded to the nearest million, unless otherwise indicated. The principal accounting policies applied by the Group are presented below. 1 Consolidation principles Companies which are directly or indirectly controlled by ARKEMA have been fully included in the consolidated financial statements. The entities, assets and operations over which joint control is exercised are consolidated using the proportionate method since January 1, 2007. Investments in associates over which significant influence is exercised are consolidated under the equity method. Where the ownership interest is less than 20%, the equity method is only applied in cases where significant influence can be demonstrated. Shares owned in companies which do not meet the above criteria are included in other investments. All material transactions between consolidated companies, and all intercompany profits have been eliminated. 17 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only 2 Foreign currency translation 2.1 Translation of financial statements of foreign companies The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period; the statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Cumulative translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share or in “Minority interests” for the minority share. 2.2 Transactions in foreign currencies In application of IAS 21 “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income. 3 Intangible assets Intangible assets include goodwill, software, patents, trademarks, leasehold rights, development costs and electricity consumption rights. Intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized. Intangible assets other than goodwill and trademarks with indefinite useful lives are amortized on a straight-line basis over 3 to 20 years depending on the pattern according to which the entity envisages using the future economic benefits related to the asset. 3.1 Goodwill and trademarks Goodwill represents the difference between the purchase price, as increased by related costs, of shares of consolidated companies and the Group share of the fair value of their net assets and contingent liabilities at the acquisition date. Goodwill is not amortized, in accordance with IFRS 3 “Business combinations”. It is subject to impairment tests as soon as any indicators of potential impairment are identified. At a minimum, impairment tests are performed annually. The methodology used for the performance of impairment tests is described in paragraph B5 - Impairment of long-lived assets. Trademarks with indefinite useful lives are not amortized and are subject to impairment tests. 3.2 Research and development costs Research costs are recognized in expenses in the period in which they are incurred. 18 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only Under IAS 38 “Intangible assets”, development costs are capitalized as soon as ARKEMA can demonstrate, in particular: its intention and its financial and technical ability to complete the development project; that it is probable that future economic benefits attributable to the development costs will flow to the enterprise, which implies being certain of obtaining the required authorization to commercialize the product; and that the cost of the asset can be measured reliably. 4 Property, plant and equipment 4.1 Gross value The gross value of items of property, plant and equipment corresponds to their acquisition or production cost in accordance with IAS 16 “Property, plant & equipment”. Gross value is not subject to revaluation. Equipment subsidies are deducted directly from the cost of the assets which they financed. Borrowing costs relating to the acquisition or the construction of items of property, plant and equipment are not capitalized but are rather recognized in expenses in the period in which they are incurred. Routine maintenance and repairs are charged to income in the period in which they are incurred. Costs related to major maintenance turnarounds of industrial facilities which take place at intervals of greater than 12 months are capitalized at the time they are incurred and depreciated over the period between two such turnarounds. Fixed assets which are held under finance lease contracts, as defined in IAS 17 “Leases”, which have the effect of transferring substantially all the risks and rewards inherent to ownership of the asset from the lessor to the lessee, are capitalized in assets at their market value or at the discounted value of future lease payments if lower (such assets are depreciated using the methods and useful lives described below). The corresponding lease obligation is recorded as a liability. Leases which do not meet the above definition of finance leases are accounted for as operating leases. 4.2 Depreciation Depreciation is calculated on a straight-line basis on the basis of the acquisition or production cost. Assets are depreciated over their estimated useful lives by category of asset. The principal categories and useful lives are as follows: machinery and tools: • transportation equipment: 5 - 10 years 5 - 20 years specialized complex installations: 10 - 20 years buildings: 10 - 30 years These useful lives are reviewed annually and modified if expectations change from the previous estimates. Such changes in accounting estimate are accounted for on a prospective basis. 19 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only 5 Impairment of long-lived assets The recoverable amount of property, plant & equipment and intangible assets is tested as soon as any indications of impairment are identified. A review to identify if any such indications exist is performed at each year-end. An impairment test is performed at least once a year in respect of goodwill and trademarks. An asset’s recoverable amount corresponds to the greater of its value in use or its fair value net of costs of disposal. Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group management’s expectation of future economic and operating conditions or, when the asset is to be sold, by comparison with its market value. In 2007, the terminal value was determined on the basis of a growth rate of 1.5%. An after tax rate of 7.5% was used to discount future cash flows and the terminal value in 2007. Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment recognized on goodwill cannot be reversed under any circumstances. In particular, in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be reversed. 6 Financial assets and liabilities Financial assets and liabilities are principally comprised of: other investments; loans and financial receivables included in other non-current assets; accounts receivable; cash and cash equivalents; debt and other financial liabilities (including accounts payable); derivatives. 6.1 Other investments These instruments are accounted for, in accordance with IAS 39, as available-for-sale assets and are thus recognized at their fair value. In exceptional cases where fair value cannot be reliably determined, the securities are recognized at their historical cost. Changes in fair value are recognized directly through shareholders’ equity. If an objective indicator of impairment in the value of a financial asset is identified (particularly a material long-term decrease in its value), an irreversible impairment loss is recognized, in general, through recurring operating income. Release of such provisions only occurs at the date of disposal of the securities. 20 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only 6.2 Loans and financial receivables These financial assets are recognized at amortized cost. They are subject to impairment tests involving a comparison of their carrying amount to the present value of estimated recoverable future flows. These tests are carried out as soon as any indicators inferring that the present value of these assets is lower than their carrying amount are identified. As a minimum such tests are performed at each balance sheet date. Any impairment loss is recognized in recurring operating income. 6.3 Accounts receivable Accounts receivable are initially recognized at their fair value. Subsequent to initial recognition, they are recognized at amortized cost. If required, a bad debt provision is recognized on the basis of the risk of non-recovery of the receivables. 6.4 Cash and cash equivalents Cash and cash equivalents are liquid assets and assets which can be converted into cash within less than 3 months that are subject to a negligible risk of change in value. 6.5 Non-current and current debt (including accounts payable) Non-current and current debt (other than derivatives) is recognized at amortized cost. 6.6 Derivatives The Group may use derivatives to manage its exposure to foreign currency risks and risks of changes in the prices of raw materials and energy. Derivatives used by the Group are recognized at their fair value in the balance sheet, in accordance with IAS 39. Changes in the fair value of these derivatives are recognized within operating income, except for those on instruments which are considered to meet the criteria for cash flow hedge accounting under IAS 39. In this case, the effective portion of the change in fair value is recognized in shareholders’ equity under the “Changes in items recognized directly through shareholders’ equity” caption until such time as the underlying hedged item is recognized through the income statement. Any ineffective portion is recognized immediately in the income statement. 7 Inventories Inventories are valued in the consolidated financial statements at the lower of cost and net realizable value, in accordance with IAS 2 “Inventories”. Cost of inventories is generally determined using the weighted average cost (WAC) method. Cost of chemical products inventories includes raw material and direct labor costs and an allocation of production overheads and depreciation. Start-up costs and general and administrative costs are excluded from the cost of chemical products inventories. 21 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only 8 Provisions and other non-current liabilities A provision is recognized when: the Group has a legal, regulatory or contractual obligation to a third party resulting from past events. An obligation can also result from Group practices or public commitments that create a reasonable expectation among the third parties in question that the Group will assume certain responsibilities; it is certain or probable that the obligation will lead to an outflow of resources to the benefit of the third party; and its amount can be estimated reliably and corresponds to the best possible estimate of the commitment. In exceptional cases where the amount of the obligation cannot be measured with sufficient reliability, disclosure is made in the notes to the financial statements in respect of the obligation (See Note C13 – Contingent liabilities). When it is expected that the Group will obtain partial or total reimbursement of the cost that was provided against, the expected reimbursement is recognized in receivables if, and only if, the Group is virtually certain of the receipt. Long-term provisions, other than provisions for pension and similar post-employment benefit obligations, are not discounted as the Group considers that the impact of discounting would not be significant. 9 Pension and similar post-employment benefit obligations In accordance with IAS 19 “Employee benefits”: payments made in the context of defined contribution plans are recognized in expenses of the period; obligations in respect of defined benefit plans are recognized and valued using the actuarial projected unit credit method. Post-employment benefits For defined benefit plans, the valuation of obligations under the projected unit credit method principally takes into account: an assumption concerning the date of retirement; a discount rate which depends on the geographical region and the duration of the obligations; an inflation rate; assumptions in respect of future increases in salaries, rates of employee turnover and increases in health costs. Differences which arise between the valuation of obligations and forecasts of such obligations (on the basis of new projections or assumptions) and between forecasts and outcomes of returns on plan assets are termed actuarial gains and losses. 22 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only The Group uses the option provided by the “Actuarial Gains and Losses, Group plans and disclosures” amendment to IAS 19 of December 2004 which enables recognition of actuarial gains and losses directly in shareholders’ equity under the “Actuarial gains and losses” caption. On modification or creation of a plan, the portion of obligations which vest immediately as a result of past service is charged immediately to income; the portion of obligations which do not vest immediately is amortized over the remaining vesting period. The amount of the provision takes account of the value of assets which are allocated to cover pension and other post- employment benefit obligations. The value of these assets is deducted from the provision for such benefit obligations. Other long-term benefits In respect of other long-term benefits, and in accordance with applicable laws and regulations, provisions are recognized using a simplified method. Thus, if an actuarial valuation using the projected unit cost method is required, actuarial gains and losses and all past service costs are recognized immediately in the provision, with a double entry being recognized to the income statement. The net expense related to pension benefit obligations and other employee benefit obligations is recognized in recurring operating income, with the exception of: the effect of curtailments or settlements of plans which are presented under the “Other income and expenses” caption in the case of substantial modifications to such plans; the interest cost, the expected return on plan assets and the actuarial gains and losses related to changes in the discount rate on other long-term benefits, which are classified within the financial result caption. At interim period ends, expenses relating to pensions and other long-term employee benefits are calculated using an extrapolation of the actuarial valuations performed at the previous year end. These valuations are modified if significant changes have occurred in market conditions since the previous year end or in the case of settlements, curtailments or other material non-recurring events (see note C12.2 Provisions and other non-current liabilities / Provisions). 10 Greenhouse gas emissions allowances In the absence of an IFRS standard or interpretation relating to accounting for CO2 emissions allowances, the following treatment has been adopted: allowances allocated without payment of consideration are recognized for a nil value, transactions carried out in the market are recognized at the transaction amount. At this point, allowances allocated are adequate to cover the operational needs of ARKEMA’s European units and a deficit is not currently forecast. ARKEMA does not carry out a trading activity in respect of CO2 emissions allowances. 23 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only However, in the normal course of its operations, ARKEMA may carry out cash or forward sales of its surpluses. These sales do not enter into the scope of application of IAS 39 because of the “own use” exception. 11 Recognition of sales Sales are recognized on transfer to the purchaser of the risks and rewards related to ownership of the goods. 12 Deferred taxes The Group uses the liability method whereby deferred income taxes are recognized based upon the temporary differences between the financial statement and tax basis of assets and liabilities, as well as on tax loss carry forwards and other tax credits, in accordance with IAS 12 “Income taxes”. Deferred tax assets and liabilities are valued at the tax rates that are expected to apply in the year in which the asset will be realized or the liability settled, on the basis of tax rates (and tax legislation) that have been enacted or virtually enacted at the balance sheet date. The effect of any changes in tax rates is recognized in income for the period, unless it relates to items that were previously debited or credited through equity. Deferred tax assets and liabilities are not discounted. Deferred tax assets are recognized to the extent that their recovery is probable. In order to assess the likelihood of recovery of such assets, account is notably taken of the profitability outlook determined by the Group and of historical taxable profits or losses. A deferred tax liability is recognized for all taxable temporary differences related to investments in subsidiaries, associates and joint ventures, unless: the Group controls the timing of the reversal of the temporary difference, and it is probable that this difference will not reverse in the foreseeable future. 13 Information by segment Information by segment is prepared on the basis of two separate criteria. The primary criterion is based on the Group’s business segments; the secondary criterion is based on the main geographical areas in which the Group operates. The financial information for each business segment is reported on the same basis as that used internally by management in assessing segment performance and in allocation of segment resources. The Group’s activities are conducted through three business segments: Vinyl Products, Industrial Chemicals and Performance Products. Vinyl Products include Chlorine/Caustic Soda, PVC, Vinyl Compounds and downstream converting (Pipes and Profiles). They are used in areas such as water treatment, healthcare, hygiene, electronics, sports and leisure and automobile equipment. 24 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only Industrial Chemicals brings together Acrylics, Specialty Acrylic Polymers as from October 1, 2007, PMMA, Thiochemicals, Fluorochemicals and Hydrogen Peroxide. These intermediates are used as raw materials in numerous industrial sectors such as refrigeration, insulation, production of paper pulp, textiles, pharmaceuticals, animal feed, ink and paint, electronics and the automobile sector. Performance Products brings together Technical Polymers, Specialty Chemicals, Functional Additives and, up until October 31, 2007, Urea Formaldehyde Resins. Performance Products are used in a variety of sectors from transport to sporting equipment, cosmetics to medical equipment, construction, civil engineering and even electronics. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together under a Corporate section. 14 Cash flow statements Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). In consequence, cash flows cannot be recalculated on the basis of the amounts shown in the balance sheet. Changes in short-term borrowings and bank overdrafts are included in cash flows from financing activities. 15 Share-based payment In application of IFRS2 “Share-based payment”, the stock options and free shares granted to management and certain Group employees are measured at their fair value at the date of grant, which generally corresponds to the date of the Board of Directors’ meeting. The fair value of the options is calculated using the Black & Scholes model. It is recognized in personnel expenses on a straight-line basis over the period from the date of grant to the date from which the options can be exercised. The fair value of rights under free share grants corresponds to the opening market price of the shares on the day of the Board of Directors meeting that decides on the grant, adjusted for dividends not received during the vesting period. It is recognized in personnel expenses on a straight-line basis over the vesting period of the rights. 16 Earnings per share Earnings per share correspond to the division of net income (Group share) by the weighted average number of ordinary shares in circulation since the start of the year. Diluted earnings per share correspond to the division of net income (Group share) by the weighted number of ordinary shares, both of these figures being adjusted to take account of the effects of all dilutive potential ordinary shares. The effect of dilution is thus calculated taking account of stock options and grants of free shares to be issued. 25 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only 17 Business combinations The Group uses the purchase accounting method for the recognition of all business combinations entering into the scope of IFRS 3. The cost of a business combination corresponds to the fair value, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree, plus any costs directly attributable to the acquisition. The Group recognizes, at the acquisition date, the identifiable assets of the acquiree, together with the identifiable liabilities and contingent liabilities assumed, at fair value. Purchased goodwill is recognized as an asset and is initially valued at the excess of the acquisition cost over the acquirer’s share in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Where the business combination agreement provides for a purchase price adjustment depending on future events, the Group includes the amount of this adjustment in the cost of the business combination at the acquisition date if the adjustment is probable and can be measured reliably. The Group has a period of 12 months from the acquisition date to finalize accounting for a given business combination. 18 Discontinued operations and non-current assets held for sale A discontinued operation is defined, according to IFRS 5, as a component of the Group’s activity that either has been disposed of, or is classified as held for sale and which represents a separate major line of business or geographical area of operations that forms part of a single coordinated disposal plan. The income statement, cash flow statement and balance sheet items relating to discontinued operations are presented in a specific note to the financial statements for the current financial year, with comparatives for the previous year. The Group presents, for the financial year in question, assets and liabilities of continuing operations in the standard manner, to which assets and liabilities of discontinued operations and non-current assets held for sale are added. These latter assets and liabilities are not offset but are rather presented respectively in two specific balance sheet captions. The balance sheet of the previous financial year is not modified. The Group presents, for the financial year in question and the previous financial year, the income statement of continuing operations in the standard manner, to which a single amount representing the income or loss after tax of discontinued operations is added. For the two financial years considered, the Group presents the cash flow statement without distinguishing between continuing operations and discontinued operations. Disclosures regarding the cash flows of discontinued operations are nevertheless provided in a specific note to the financial statements. 19 Main accounting and financial indicators The main performance indicators used are as follows: Operating income: this includes all income and expenses of continuing operations other than financial result, equity in income of affiliates and income taxes; 26 Condensed consolidated interim financial statments at June 30, 2008 Free translation for information purpose only Other income and expenses: these correspond to a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. These items of income and expense notably include: impairment losses in respect of property, plant and equipment and intangible assets, gains or losses on sale of assets, certain large restructuring and environmental expenses which would hamper the interpretation of recurring operating income, certain expenses related to litigation and claims or major damages, whose nature is not directly related to ordinary operations, costs related to the Spin-off of the Arkema Businesses; Recurring operating income: this is calculated as the difference between operating income and other income and expenses as previously defined; Adjusted net income: this corresponds to “Net income – Group share” adjusted for the “Group share” of the following items: other income and expenses, after taking account of the tax impact of these items, income and expenses from taxation of an exceptional nature, the amount of which is deemed significant, net income of discontinued operations; EBITDA: this corresponds to recurring operating income increased by depreciation and amortization (previously called “Recurring EBITDA”); Working capital: this corresponds to the difference between inventories, accounts receivable, other receivables and prepaid expenses and income tax receivables on the one hand and accounts payable, other creditors and accrued liabilities and income tax liabilities on the other hand; Capital employed: this is calculated by aggregating the net carrying amounts of intangible assets, property, plant and equipment, equity affiliate investments and loans, other investments, other non-current assets (excluding deferred tax assets) and working capital; Net debt: this is the difference between current and non-current debt and cash and cash equivalents. 27 Condensed consolidated interim financial statements at June 30, 2008 C. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Effects of seasonality Arkema’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by ARKEMA is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and in Southern Europe; in certain businesses, particularly those serving the refrigeration market, the level of sales is generally higher in the first half of the year than in the second half; and annual maintenance shutdowns of production plants occur more often in the second half than in the first half. These seasonality effects observed in the past are not necessarily representative of future trends, but they can however influence variations in results and in working capital between the different quarters of the financial year. Revenues from ordinary activities earned in a seasonal, cyclical or occasional manner during a financial year are neither anticipated nor deferred at interim reporting dates unless it would be appropriate to anticipate or defer them at year end. 2 Information by business segment Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. June 30, 2008 In millions of euros Non-Group sales Vinyl Products 784 Industrial Chemicals 1,357 Performance Products 857 Corporate 3 Group total 3,001 Inter segment sales 33 75 10 Total sales 817 1,432 867 3 Recurring operating income 12 131 77 (23) 197 Other income and expenses (2) (7) (4) 3 (10) Operating income 10 124 73 (20) 187 Equity in income of affiliates 3 3 Details of certain non-cash expenses by segment: Depreciation and amortization Asset impairment Changes in non-current provisions recognized through income EBITDA (19) - 9 31 (59) - 5 190 (42) - 1 119 - 4 (23) (120) - 19 317 Intangible assets and property, plant, and equipment additions 29 46 27 1 103 28 Condensed consolidated interim financial statements at June 30, 2008 June 30, 2007 In millions of euros Non-Group sales Vinyl Products 750 Industrial Chemicals 1,308 Performance Products 916 Corporate 3 Group total 2,977 Inter segment sales 31 80 10 Total sales 781 1,388 926 3 Recurring operating income 49 96 61 (29) 177 Other income and expenses (4) (51) (22) (2) (79) Operating income 45 45 39 (31) 98 Equity in income of affiliates 1 1 Details of certain non-cash expenses by segment: Depreciation and amortization Asset impairment Changes in non-current provisions recognized through income EBITDA (12) - (3) 61 (51) - (38) 147 (43) - (12) 104 (1) - 24 (28) (107) - (29) 284 Intangible assets and property, plant, and equipment additions 32 36 38 2 108 3 Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. June 30, 2008 In millions of euros France Rest of Europe NAFTA (1) Asia Rest of the world Total Non-Group sales 554 1,232 634 416 165 3,001 June 30, 2007 In millions of euros France Rest of Europe NAFTA (1) Asia Rest of the world Total Non-Group sales 545 1,213 684 385 150 2,977 (1) NAFTA: United States, Canada and Mexico 29 Condensed consolidated interim financial statements at June 30, 2008 4 Other income and expenses 30.06.2008 30.06.2007 In millions of euros Expenses Income Net Expenses Income Restructuring and environmental charges (24) 2 (22) (80) Goodwill impairment charges Asset impairment charges (other than goodwill) Damages, litigation and claims (1) (1) (15) Gains (losses) on sales of assets 13 13 16 Other Total other income and expenses (25) 15 (10) (95) 16 The amounts related to discontinued operations are presented in note C5 “Discontinued operations”. In the first half of 2008, restructuring and environmental charges mainly include restructuring costs in the Vinyl Products segment (€2 million), in the Industrial Chemicals segment (€6 million), in the Performance Products segment (€6 million) and, lastly, in Corporate in respect of the creation of the Human Resources and Accounting Shared Services Center for Arkema France (€8 million). The Gains (losses) on sales of assets mainly include the sale of the R&D Center in Levallois (France). In the first half of 2007, restructuring and environmental charges mainly include the French sites of Pierre-Bénite (€48 million), Carling (€6 million) and Doryl at Le Havre (€8 million), together with the sites in Bonn (Germany, €8 million) and Vlissingen (Netherlands, €7 million). Damages, litigation and claims costs mainly relate to the fire which occurred in May 2007 at Lavera (France). Gains (losses) on sales of assets mainly include the proceeds on the sale of the land at Tacoma (United States). 5 Discontinued operations Discontinued operations include the Cerexagri business sold on 1 February 2007. The Cerexagri business is presented at June 30, 2007 under a single income statement caption “Net income of discontinued operations” including, for 2007, the capital gain on the sale. 30 Net (80) (15) 16 (79) Condensed consolidated interim financial statements at June 30, 2008 Cerexagri income statement Consolidated accounts 30.06.08 Consolidated accounts 30.06.07 In millions of euros Sales Recurring operating income Other income and expenses Operating income Net income Minority interests Net income – Group share Depreciation and amortization - - - - - - - - 18 18 18 18 EBITDA (*) corresponds to the capital gain made on the sale 6 Earnings per share The calculation of earnings per share and diluted earnings per share is presented below: Weighted average number of ordinary shares Dilutive effect of stock options Dilutive effect of free share grants Weighted average number of potential ordinary shares June 30, 2008 60,461,195 132,256 141,295 60,734,746 June 30, 2007 60,453,823 143,063 96,366 60,693,252 Earnings per share are calculated as follows: June 30, 2008 June 30, 2007 Net income – Group share Earnings per share (€) Diluted earnings per share (€) 132 2.18 2.17 67 1.11 1.10 Earnings per share of continuing operations (€) 2.18 0.81 Diluted earnings per share of continuing operations (€) 2.17 0.80 31 Condensed consolidated interim financial statements at June 30, 2008 7 Impact of reclassifications on the published 2007 financial statements These reclassifications relate to asset accounts, and in consequence affect the corresponding cash flow statement captions. The impacts of these reclassifications are as follows: In millions of euros 31.12.07 published Reclassifications 31.12.07 after effects of reclassifications Other non-current assets 100 17 (1) 117 Income taxes recoverable 31 (17) (1) 14 (1) The long-term portion of the research tax credit (RTC) has been reclassified from the “Income taxes recoverable” caption to the “Other non-current assets” caption. 8 Intangible assets In the first half of 2008, as in the first half of 2007, the Group did not recognize any impairment on its intangible assets. 9 Property, plant and equipment In the first half of 2008, capital expenditure on property, plant and equipment amounted to €96 million (€106 million in the first half of 2007). Furthermore, the Group sold and scrapped property, plant and equipment with a gross value of €21 million (€44 million in the first half of 2007). In the first half of 2008, the Group did not recognize any impairment on its property, plant and equipment other than the approximately €9 million recorded in the context of the restructuring transactions. 10 Inventories In the first half of 2008, the Group recognized a net increase of €2 million in provisions for impairment of inventories. This compared to a net increase of €3 million in provisions for impairment of inventories in the first half of 2007. 11 Shareholders’ equity At January 1, 2007, the share capital amounted to €604.5 million and was composed of 60,453,823 shares with a nominal value of 10 euros. 32 Condensed consolidated interim financial statements at June 30, 2008 On April 30, 2008, the Group carried out a capital increase reserved to Group employees: 618,462 shares were subscribed at a price of 30.42 euros per share. The price was set by the Board of Directors in its meeting of March 4, 2008. Following this operation, ARKEMA’s share capital was increased to €610.7 million divided into 61,072,285 shares. During the 1st half of 2008, the company bought back 315,580 treasury shares accounted for as a deduction from shareholders’ equity. The shareholders general meeting of May 20, 2008 adopted a resolution proposing to distribute a dividend of 0.75 euros per share, being a total amount of €46 million, in respect of the 2007 financial year. 12 Provisions and other non-current liabilities 12.1 Other non-current liabilities Other non-current liabilities amount to €30 million at June 30, 2008, compared with €29 million at December 31, 2007. 12.2 Provisions In millions of euros Pensions and similar post employment benefit obligations Litigation and claims Environmental contingencies Restructuring Other Total (1) (2) (1) (2) December 31, 2007 published, before reclassifications 261 54 207 113 169 804 Reclassifications 45 (54) 9 0 At January 1, 2008 after reclassifications 306 207 113 178 804 Increases in provisions 10 1 12 14 37 Reversals in provisions on use (14) (7) (28) (9) (58) Reversals of unused provisions (1) (10) (11) Changes in scope (3) (3) Translation adjustments (2) (5) (3) (10) Other (3) (16) 1 (15) Discontinued operations At June 30, 2008 284 195 97 168 744 (1) Provisions for long-service awards have been reclassified from the “Other” column to the “Pensions and similar post employment benefit obligations” column (2) Provisions for litigation and claims have been reclassified to the “Other” column (3) The “other” caption comprises the actuarial gains and losses for the period 33 Condensed consolidated interim financial statements at June 30, 2008 12.3 Provisions for pensions and similar benefits At June 30, 2008, provisions for pensions and similar benefits are comprised of pension benefits for €143 million, healthcare plans for €82 million, long-service awards for €44 million and other benefits for €15 million Furthermore, pension assets amount to €16 million at June 30, 2008. As the market interest rates on high quality bonds fluctuated materially, ARKEMA retained the following discount rates at June 30, 2008: Europe USA At June 30, 2008 5.60% - 5.80% 6.30% At December 31, 2007 5.10% - 5.75% 6.00% The present value of the defined benefit obligations at the end of 2007 was adjusted, on the basis of sensitivity analysis tables prepared by the Group’s external actuaries in the context of the full year 2007 closing, to take account of the change in interest rates in the half year. The fair value of plan assets was reassessed on the basis of new valuations at June 30, 2008. The changes in discount rates and the remeasurement of plan assets have the following effects at June 30, 2008: In millions of euros Actuarial gains and losses recognized in shareholders’ Equity Changes in discount rates Remeasurement of plan assets Actuarial gains related to pensions and healthcare plans 30 (12) Benefit obligations recognized in balance sheet liabilities Pensions and other long-term benefits (39) 20 Income or expenses recognized in the income statement Other employee benefits 1 12.4 Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: in France for €95 million. 34 Condensed consolidated interim financial statements at June 30, 2008 in the United States for €72 million, of which €55 million in respect of former industrial sites covered by the indemnity from Total (receivable recognized in “other non-current assets” for an amount of €35 million). 12.5 Restructuring provisions Restructuring provisions are mainly in respect of restructuring measures in France for €85 million, in Europe outside France for €8 million and in the United States for €3 million. 12.6 Other provisions Other provisions are comprised of provisions for removal of asbestos for €14 million and provisions for litigation and claims recognized in respect of European competition law proceedings in progress (provision of €31 million in liabilities less €18 million in “Other non-current assets”). 13 Contingent liabilities 13.1 Environment ARKEMA’s business activities are subject to constantly changing local, national and international regulations on the environment and safety, which entail meeting increasingly complex and restrictive requirements. In this regard, these activities can involve a risk of ARKEMA’s liability being called upon, particularly in respect of clean-up of sites and industrial safety. Taking account of the information available, agreements signed with Total, and the provisions for environmental contingencies recognized, ARKEMA’s management considers that the environmental liabilities identified at this point are valued and recognized to the best of their knowledge in the financial statements. However if laws, regulations or government policy in respect of environmental matters were to change, ARKEMA’s obligations could change, which could lead to additional costs. Clean-up of sites The competent authorities have made, are making or may in the future make specific demands that the Group rehabilitate or control emissions at certain sites that it is currently operating, or that it operated or disposed of in the past, at neighboring sites or at sites where the Group stored or disposed of waste. Sites currently in operation: ARKEMA has many sites of which a certain number are probably polluted in view of their age and the range of activities that are carried out on them, or that were carried out on them in the past. As regards these sites, certain situations have been identified and ARKEMA has already carried out certain clean-up work, or otherwise developed action plans and recognized provisions in order to cover future clean-up work. However, in the light of (i) the uncertainties over the technical means to be implemented, (ii) potential issues that are unknown (iii) uncertainties over the actual time required for remediation compared with the estimated time (e.g. “pump and treat”), and (iv) potential changes in regulations, the possibility that the expenses that the Group will incur will be 35 Condensed consolidated interim financial statements at June 30, 2008 higher than the amounts covered by reserves cannot be excluded. These potential excess costs relate mainly to the sites in Calvert City (United States), Carling (France), Günzburg (Germany), Jarrie (France), Pierre-Bénite (France), Riverview (United States), Rotterdam (the Netherlands) and Saint-Auban (France) and could adversely affect the Group’s business, results and financial condition. As regards the site of Saint-Auban, different legal proceedings brought against Arkema France have been grouped together (merging of proceedings - “jonction de procédures") with the Nanterre correctional court. These proceedings are currently under preliminary investigation. Closed industrial sites (Former industrial sites): Total has directly or indirectly taken over the closed industrial sites. 13.2 Litigation, claims and proceedings in progress 13.2.1 Antitrust litigation The Group is involved in a number of proceedings in the United States, Canada and Europe alleging violations of antitrust laws relating to cartel behavior. To cover the risks associated with the proceedings in the United States and Europe, which arose prior to completion of the Spin-Off of Arkema’s Businesses, Total S.A. and one of its subsidiaries have granted indemnities for the benefit of Arkema S.A. and Arkema Amériques SAS, the main terms of which are described in the “Off-balance sheet commitments” note to the consolidated financial statements at December 31, 2007. The financial risk associated with all proceedings described below is not easily quantifiable. Based on its analysis of the cases, and taking into account the indemnities granted by Total S.A. (see note C18.2 - Off- balance sheet commitments / Commitments received), the Group has recorded provisions in respect of these proceedings of €31 million (at June 30, 2008), of which €18 million related to the appeals by Arkema France with the Court of First Instance of the European Communities. Proceedings carried out by the European Commission In the first half of 2008, the European Commission ordered Arkema France and its former parent company Elf Aquitaine to pay a fine of €59 million in the context of the “sodium chlorate” case, which was initiated in 2004. This decision will be appealed within the allowed timeframe to the Court of First Instance of the European Communities. As regards the “Heat stabilizers” case, the European Commission is continuing its investigation. No significant development occurred in the first half of 2008. The proceeding resulting from the appeal made by Arkema France to the Court of First Instance of the European Communities regarding the European Commission's decision in the monochloroacetic acid case led to a request to attend a court session on June 19, 2008. The Court is expected to issue a decision in the months following the court session. 36 Condensed consolidated interim financial statements at June 30, 2008 The proceedings resulting from the appeals made by Arkema to the Court of First Instance of the European Communities regarding the European Commission’s decisions in the hydrogen peroxide and methacrylates cases are still pending with the court. No particular developments arose in the first half of 2008 on the legal claim made by Basell Polyolefine in Germany at the end of 2006. These different events did not lead to any change being made to the overall provision recognized at December 31, 2007. Proceedings in the United States and Canada In the class action lawsuits initiated in the United States by direct purchasers of plastic additives against Arkema Inc. and other producers of plastics additives alleging violation of U.S. antitrust laws, the trial court has certified several “sub-classes” composed of purchasers of different categories of plastic additives products. Arkema Inc. has appealed this class certification decision. Similarly, during the first half of 2008, in the class actions initiated in the U.S against Arkema Inc. and Arkema France, alleging violations of U.S. antitrust laws, the district court certified a single class of direct purchasers of hydrogen peroxide and persalts. Arkema Inc and Arkema France have also appealed that class certification decision. Oral argument on the hydrogen peroxide/persalts class certification appeal took place before the U.S. Court of Appeals for the Third Circuit on April 17, 2008. No decision has yet been issued by that court. No notable developments arose in the first half of 2008 with respect to Arkema Inc. in the grand jury investigation initiated by the Antitrust Division of the Department of Justice regarding hydrogen peroxide. Similarly, for the same period, no notable developments occurred with respect to the respective class action civil lawsuits filed by: (a) indirect purchasers of hydrogen peroxide; and (b) indirect purchasers of plastic additives. In the putative class action involving direct purchasers of methyl methacrylate and polymethyl methacrylate, Arkema Inc. and its codefendants have filed a motion to dismiss the plaintiffs’ complaint. No decision on the motion to dismiss has been issued, and no class has been certified. One group of direct purchasers who have “opted out” of the class action lawsuit in the hydrogen peroxide matter has stipulated and agreed to dismiss their claims against Arkema Inc. and Arkema France in the Unites States without prejudice. There have been no other notable developments in the one other opt-out lawsuit brought by a direct hydrogen peroxide purchaser. There have been no notable developments in the civil actions filed in Canada alleging violations of Canadian competition laws. 13.2.2 Occupational illness In the manufacture of its products, the Group uses and has used toxic or hazardous substances. Despite the safety and monitoring procedures that have been instituted at Group level and for each production site, Group employees may have been exposed to such substances and may develop specific pathologies as a result of such exposure. 37 Condensed consolidated interim financial statements at June 30, 2008 In this respect, like most industrial companies, in the past, the Group has used a variety of insulating or heat-proofing materials containing asbestos in its production facilities. Consequently, certain employees may have been exposed to such materials before they were gradually eliminated and replaced with substitute products. At its French sites, the Group anticipated the regulatory provisions applicable to asbestos (Decrees No. 96-97 and 96-98 of February 7, 1996 and Decree No. 96-1133 of December 24, 1996). The Group made an inventory of asbestos- containing building materials within its premises, notified employees of the results of these investigations and took the collective and individual protective measures required by the applicable laws. However, claims for occupational illness related to past asbestos exposure have been filed against the Group, mostly for periods before 1980. Given the latency period of asbestos-related pathologies, a large number of claims for occupational illness are likely to be filed in the years ahead. The Group has recognized provisions to cover the risks of employer liability claims related to notified cases of occupational illness. 13.2.3 Other litigation and claims and contingent liabilities Arkema France During the 1st half of 2008, no particular developments arose on either the litigation with Gasco relating to its claim for damages in respect of an alleged breach of contract and breach of an exclusivity agreement or the contingent liability relating to Arkema France’s supply of various products for coating of items used in sanitary treatment facilities. In 2005, 260 employees and former employees of the Pierre-Bénite site made a claim for damages with the Lyon employee claims court (Conseils de prud’hommes) for alleged non-compliance with the terms of the chemicals industry branch agreement. The provisions of this agreement provide workers, technicians and supervisors working at continuously or semi-continuously operating positions for a period in excess of six hours with a thirty minute break during which the employees are released from all work. The claimants consider that, given the manner in which work is organized and structured on this site, the break granted to them does not allow them to be released from all work and to be able to freely go about their personal affairs. They claim that they have suffered a prejudice justifying damages. The claim amounted to €5.2 million. Arkema France contests these claims. A judge has been appointed to reach a decision following the inconclusive decision issued by the Lyon employee claims court on January 19, 2007. A court session was held on March 27, 2008. A judgment issued on June 24, 2008 fully rejected all of the employees’ claims. The employees appealed this decision. A provision has been recognized in the financial statements for an amount that the Group considers adequate. CECA No particular developments arose in the 1st half of 2008 in the litigation opposing CECA and a company called Intradis under which this latter company is seeking to render CECA liable for the pollution on a site which it acquired from CECA. 38 Condensed consolidated interim financial statements at June 30, 2008 Arkema Inc. No notable developments arose in the first half of 2008 in the proceedings in progress with the IRS civil audit, or in the proceedings in respect of third party claims relating to exposure to asbestos or products containing asbestos. With respect to the matter involving Arkema Inc. and Norit Americas, Inc., in the context of the latter company’s acquisition of an activated carbon production unit, Norit made an indemnity demand of US$7.5 million for alleged non- compliance with the “Clean Air Act” but did not make any statement regarding Arkema Inc.'s claim for the payment of the balance of the price of the production unit yet to be paid by Norit. Provisions have been made for this matter in amounts which the Group considers to be sufficient. In the case brought by the family of an employee of a transportation company who died during the delivery of an odorizing product, a trial date has been set for September 8, 2008. 14 Debt Group net debt amounted to €592 million at the end of June 2008, taking account of cash and cash equivalents of €73 million; it is mainly denominated in euros and bears interest at variable rates. The Group has a multi-currency syndicated credit facility in a maximum amount of €1,100 million, with an initial duration of five years, maturing on March 31, 2011. In February 2007, the credit facility was extended a first time until 31 March 2012, for an amount of €1,094 million. In February 2008, the credit facility was extended a second time until 31 March 2013, for an amount of €1,049 million. At the end of June 2008, the average interest rate of the syndicated credit facility is approximately 4.54% and the unused amount under the credit facility is €600 million. 14.1 Analysis of net debt by category In millions of euros 30.06.2008 31.12.2007 Finance lease obligations Bank loans Other non-current debt 16 26 24 17 15 29 Non-current debt 66 61 Finance lease obligations Syndicated credit facility Other bank loans Other current debt 2 500 86 11 1 405 43 7 Current debt 599 456 Debt 665 517 Cash and cash equivalents 73 58 Net debt 592 459 39 Condensed consolidated interim financial statements at June 30, 2008 14.2 Analysis of debt by maturity The breakdown of debt, including interest costs, by maturity is as follows: In millions of euros 30.06.2008 31.12.2007 Less than 1 year 603 460 Between 1 and 2 years 5 9 Between 2 and 3 years 5 7 Between 3 and 4 years 5 6 Between 4 and 5 years 21 9 More than 5 years 44 37 Total 683 528 Amounts maturing in less than 1 year include the current drawings under the syndicated credit facility for an amount of €500 million. 14.3 Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. In millions of euros Euros US Dollars Chinese Yuan Korean Won Other Total 30.06.2008 595 17 40 8 5 665 31.12.2007 465 20 22 5 5 517 15 Management of risks related to financial assets and liabilities ARKEMA’s businesses expose it to various risks, including market risks (risk of changes in exchange rates, interest rates and the prices of raw materials and energy) and liquidity risk. 15.1 Foreign currency risk The Group is exposed to transaction risks related to foreign currencies. The Group hedges its foreign currency risk mainly through spot foreign currency transactions or through forward transactions over short maturities, generally not exceeding 6 months. The fair value of forward foreign currency contracts is - €4.3 million. 40 Condensed consolidated interim financial statements at June 30, 2008 The amount of foreign exchange gains and losses recognized in recurring operating income at June 30, 2008 is a loss of €2.9 million (gain of €2.3 million at June 30, 2007). The portion of foreign exchange gains and losses corresponding to the interest income/expense arising on the difference between the spot exchange rate and the forward exchange rate is recognized, since January 1, 2008, in financial result, and amounts to - €0.8 million at June 30, 2008 (+ €1.8 million at June 30, 2007). 15.2 Interest rate risk The Group obtains most of its financing through the variable rate syndicated credit facility of €1,100 million available to it. The general financing policy defined by the Group is to favor variable rate debt over fixed rate debt. Exposure to interest rate risk is managed by the Group’s central treasury department and simple derivatives are used as hedging instruments. The Group has not entered into any interest rate hedges at June 30, 2008. 15.3 Liquidity risk The Group’s central treasury department manages the liquidity risk related to the Group’s debt. In almost all cases, Group companies obtain their financing from, and manage their cash with, Arkema France or other Group entities that manage cash pooling mechanisms. The main circumstance in which early repayment or termination of the syndicated credit facility (see note C14 “Debt”) could occur is if the ratio of consolidated net debt to consolidated EBITDA were to become greater than 3. At June 30, 2008, consolidated net debt represents 1.1 times consolidated EBITDA of the last 12 months. Note C14 “Debt” provides details of the maturities of debt. 15.4 Credit risk The Group’s exposure to credit risk has not changed from the position described in the notes to the consolidated financial statements at December 31, 2007. 15.5 Risk related to raw materials and energy In order to limit the impact of price volatility of the principal raw materials and energy resources it uses, ARKEMA can decide to use derivatives matched with existing contracts or can negotiate fixed price contracts for limited periods. The effects of recognition of these derivatives in the financial statements for the first half of 2008 are not material. 16 Related parties Transactions between consolidated companies have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non-consolidated companies or with companies which are consolidated under the equity method. These transactions mainly concern purchases of raw materials and interest charges on current accounts. The amounts are presented in the table below. The corresponding transactions were carried out at market prices. 41 Condensed consolidated interim financial statements at June 30, 2008 In millions of euros Equity accounted affiliates Non-consolidated companies Transactions 30.06.2008 30.06.2007 30.06.2008 30.06.2007 Sales of goods Other income Purchases of goods and services Other expenses (including financial expenses) 1 (11) - 14 6 (49) (7) 2 - (1) 2 - - Balance sheet amounts resulting from transactions 30.06.2008 31.12.2007 30.06.2008 31.12.2007 Assets Accounts receivable Financial receivables and other receivables - - - - Liabilities Accounts payable Debt and other creditors 2 - 2 - - - NB: the new companies consolidated in 2008 are listed in “Scope of consolidation”. At June 30, 2008, the transactions presented with equity accounted affiliates are reduced because of the change in consolidation method in respect of Oxochimie, American Acryl NA LLC and Stannica LLC (change from the equity method to the proportionate consolidation method in December 2007). 17 Share-based payments 17.1 Stock options ARKEMA’s Board of Directors granted stock options to management and certain Group employees in order to closely associate them with the Group’s development and its financial and stock market performance. 42 Condensed consolidated interim financial statements at June 30, 2008 The main characteristics of the stock option plans are as follows: Date of Annual General Meeting Date of Board of Directors meeting Minimum period until exercise Minimum period until sale Period of validity Exercise price Number of options In circulation at January 1, 2007 Granted Cancelled Exercised In circulation at December 31, 2007 In circulation at January 1, 2008 Granted Cancelled Exercised In circulation at June 30, 2008 2006 Plan 10-May-06 04-July-06 2 years 4 years 8 years 28.36 540,000 - 4,000 - 536,000 536,000 - - - 536,000 2007 Plan 10-May-06 14-May-07 2 years 4 years 8 years 44.63 600,000 - - 600,000 600,000 - 7,800 - 592,200 2008 Plan 10-May-06 13-May-08 2 years 4 years 8 years 36.21 - - - - - 460,000 - - 460,000 Total 540,000 600,000 4,000 - 1,136,000 1,136,000 460,000 7,800 - 1,588,200 Valuation method The fair value of the options granted was determined using the Black & Scholes method on the basis of assumptions, of which the main ones are as follows: Volatility Risk-free rate Maturity Exercise price (in euros) 2006 plan 22% 2.82% 4 years 28.36 2007 plan 20% 3.39% 4 years 44.63 2008 plan 25% 4.00% 4 years 36.21 Fair value of stock-options (in euros) 6.29 7. 89 8.99 The volatility assumption was determined on the basis of observation of historical movements in the ARKEMA share since its admission to listing. Certain periods of listing were restated and others were weighted in order to better reflect the long-term trend. The maturity retained for the options corresponds to the period of unavailability for tax purposes. The amount of the expense recognized at June 30, 2008 in respect of stock options was €2 million (€1 million at June 30, 2007). 17.2 Free share grant On May 13, 2008, the Board of Directors validated two free share grant plans on the basis of a proposal from the appointments and compensation committee. Plan 1 relates to management and certain Group employees, particularly those with responsibilities whose exercise influences the results of the Group. Under this plan, the free grant is definitive after a vesting period of 2 years 43 Condensed consolidated interim financial statements at June 30, 2008 commencing on the date of the Board of Directors meeting which makes the grant, subject to compliance with a condition concerning presence in the Group and a performance condition relating to growth in the Group’s profitability. Plan 2 relates to: Group employees whose performance is outstanding and whose loyalty the Group wishes to secure; • Employees of subsidiaries located in countries where it was not possible to propose subscription to the capital increase. Under this plan, the free grant is definitive after a vesting period of 2 years commencing on the date of the Board of Directors meeting which makes the grant, subject only to compliance with a condition concerning presence in the Group. The main characteristics of the free share grant plans are as follows: Date of Shareholders’ meeting Date of Board of Directors meeting Vesting period Conservation period Performance condition Number of free shares In circulation at January 1, 2007 Granted Cancelled Definitively granted In circulation at December 31, 2007 In circulation at January 1, 2008 Granted Cancelled Definitively granted In circulation at June 30, 2008 2006 Plan 10-May-06 04-July-06 2 years 2 years Yes 150,000 - 6,685 - 143,315 143,315 - 2,020 - 141,295 2007 Plan 10-May-06 14-May-07 2 years 2 years Yes 125,000 - - 125,000 125,000 - 995 - 124,005 2008 Plan 1 2008 Plan 2 10-May-06 10-May-06 13-May-08 13-May-08 2 years 2 years 2 years 2 years No Yes - - - - - 135,556 - - 135,556 44,444 Total 150,000 125,000 6,685 - 268,315 268,315 180,000 3,015 - 445,300 44,444 The amount of the expense recognized at June 30, 2008 in respect of free share grants was €3 million (€1 million at June 30, 2007). 17.3 Capital increase reserved to employees In the context of the Group’s employee shareholding policy, ARKEMA proposed its employees that they subscribe to a reserved capital increase at a subscription price of 30.42 euros. This price corresponds to the average opening market price of the ARKEMA share on the Paris stock market in the 20 trading days preceding the Board of Directors meeting of March 4, 2008, to which a discount of 20% was applied. The employees subscribed to 618,462 shares. The capital increase was completed and recognized on April 30, 2008. Valuation method In accordance with the method recommended by the French National Accounting Board (Conseil National de la Comptabilité), the calculation used to value the cost of not being able to sell the shares for five years is based on the cost of a two-step strategy involving (i) a 5-year forward sale of the shares in question and (ii) a cash purchase of the 44 Condensed consolidated interim financial statements at June 30, 2008 same number of shares, financed by a loan. The rate used for the loan is the rate that a bank would grant to a private individual presenting an average risk profile in the context of a 5-year consumer loan. The main market parameters used in the valuation of the cost of not being able to sell the shares are as follows: Date of the board meeting which decided on the capital increase: March 4, 2008 Share price at the date of the board meeting: 37.15 euros 5-year risk free interest rate: 3.54% 5 year loan rate: 7.75% Cost of not being able to sell the shares: 20% On the basis of the share price at the date of the board meeting, the benefit granted represents €4.2 million. As the cost of not being able to sell the shares, calculated on the basis of the above parameters, is an equivalent amount, no expense was recognized in the income statement. 18 Off-balance sheet commitments 18.1 Commitments given 18.1.1 Off-balance sheet commitments given in ordinary course of business The main commitments given are summarized in the table below: In millions of euros 30.06.2008 31.12.2007 Guarantees granted 45 46 Comfort letters 2 2 Contractual guarantees 28 19 Customs and excise guarantees 8 8 Total 83 75 Guarantees granted are mainly bank guarantees in favor of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites. 18.1.2 Contractual commitments Irrevocable purchase commitments In the normal course of business, ARKEMA signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods of between 1 to 15 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. 45 Condensed consolidated interim financial statements at June 30, 2008 These purchase commitments were valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The total amount of the Group’s financial commitments thus valued amounted to €904 million at June 30, 2008 (see maturity schedule below): In millions of euros 2008 2009 2010 2011 30.06.2008 152 178 164 98 31.12.2007 221 135 132 72 2012 until expiry of the contracts Total 312 904 309 869 Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land, Fos port concession) and transportation equipment (rail cars, containers, transport barges). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). 30.06.2008 31.12.2007 In millions of euros 2008 2009 2010 2011 2012 and beyond Nominal value of payments Finance cost Present value future lease Capitalized leases 1 3 3 3 14 23 5 18 Non-capitalized leases 11 19 18 16 83 147 NA NA Capitalized leases 3 3 3 3 14 25 6 19 Non- capitalized leases 21 20 17 14 77 149 NA NA NA: not applicable 46 Condensed consolidated interim financial statements at June 30, 2008 18.1.3 Other commitments given Warranties related to sales of businesses Sales of businesses sometimes involve the provision of warranties in respect of unrecorded liabilities to the purchaser. In the past, ARKEMA has granted such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of litigation and claims. In the majority of cases, they cover risks of occurrence of environmentally related claims. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted in the past by ARKEMA amounted to €82 million at June 30, 2008 (€87 million at December 31, 2007). These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 18.2 Commitments received Commitments received from TOTAL in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations are described in note 29.2 to the consolidated financial statements for the year ended December 31, 2007. 19 Subsequent events NONE 47 Condensed consolidated interim financial statements at June 30, 2008 SCOPE OF CONSOLIDATION AT JUNE 30, 2008 (a) Companies consolidated for the first time in 2008 (b) Companies merged at January 1, 2008 (c) Companies deconsolidated in 2008 (d) Companies consolidated for the first time in the 2nd half of 2007 (e) Companies whose consolidation method changed from the equity method to the proportionate consolidation method in the 2nd half of 2007 The percentage of control indicated below also corresponds to the Group’s ownership interest in each entity. Akishima Chemical Industries Co.ltd Japan 100.00 Alphacan BV Netherlands 100.00 Alphacan DOO (d) Croatia 100.00 Alphacan Espana SA Spain 99.92 Alphacan Perfiles SAU Spain 99.92 Alphacan SA France 100.00 Alphacan Soveplast (b) France 100.00 Alphacan SPA Italy 100.00 Altuglas International Denmark A/S (a) Denmark 100.00 Altuglas International Services SAS (b) France 100.00 Altuglas International SPA Italy 100.00 Altuglas International BV Netherlands 100.00 Altuglas International Mexico Inc United States 100.00 Altuglas International S.A. France 100.00 Altuglas International UK Ltd United Kingdom 100.00 Altuglas Polivar Spa (a) Italy 100.00 Altumax Deutschland GmbH Germany 100.00 Altumax Europe SAS France 100.00 American Acryl LP (e) United States 50.00 American Acryl NA LLC (e) United States 50.00 Arkema South Korea 100.00 Arkema S.A. France 100.00 Arkema Amériques SAS France 100.00 Arkema Asie France 100.00 Arkema Beijing Chemicals Co. Ltd Chine 100.00 Arkema BV Netherlands 100.00 Arkema Canada Inc Canada 100.00 Arkema Catalyst India Ltd India 100.00 48 FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC PC PC FC FC FC FC FC FC FC FC Arkema Changshu Chemicals Co Ltd Arkema Changshu Fluorochemical Co. Ltd Arkema Changshu Haike Chemicals Arkema China Investment Co. Ltd Arkema Company Ltd Arkema Daikin Fluorochemical Co ltd Arkema Delaware Inc. Arkema Europe SAS Arkema Europe Holdings BV Arkema Finance Nederland BV Arkema France Arkema GmbH Arkema Guangzhou Chemicals Co. Ltd Arkema Holding Ltd Arkema Holland Holding BV Arkema Inc. Arkema Iniciadores SA de CV Arkema KK Arkema Ltd (UK) Arkema Ltd (Vietnam) Arkema North Europe BV Arkema Peroxides India Private Limited Arkema Pte Ltd Arkema Pty Ltd Arkema Quimica ltda Arkema Quimica SA Arkema Hydrogen Peroxide Co. Ltd, Shanghaï Arkema RE Arkema Rotterdam BV Arkema Shanghai Distribution Arkema sp Z.o.o Arkema SRL Arkema Vlissingen BV Arkema Yoshitomi Ltd Ceca Italiana SRL Ceca SA Changshu Resichina Engeneering Polymers Co Ltd Coatex SAS Coatex Netherlands BV Condensed consolidated interim financial statements at June 30, 2008 China 100.00 China 100.00 China 49.00 China 100.00 Hong-Kong 100.00 (a) China 60.00 USA 100.00 France 100.00 Netherlands 100.00 Netherlands 100.00 France 100.00 Germany 100.00 China 100.00 United Kingdom 100.00 Netherlands 100.00 USA 100.00 Mexico 100.00 Japan 100.00 United Kingdom 100.00 Vietnam 100.00 Netherlands 100.00 India 100.00 Singapore 100.00 (c ) Australia 100.00 Brazil 100.00 Spain 99.92 China 66.67 Ireland 100.00 Netherlands 100.00 China 100.00 Poland 100.00 Italy 100.00 Netherlands 100.00 Japan 49.00 Italy 100.00 France 100.00 (a) China 100.00 (d) France 100.00 (d) Netherlands 100.00 49 FC FC FC FC FC PC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC EM FC FC FC FC FC Condensed consolidated interim financial statements at June 30, 2008 Coatex Inc (d) USA 100.00 Coatex Korea (d) South Korea 100.00 Coatex CEE (d) Slovakia 100.00 Coatex NA (d) USA 100.00 Coatex Asia Pacific (d) South Korea 100.00 Daikin Arkema Refrigerants Asia Ltd (a) Hong-Kong 40.00 Delaware Chemicals Corporation USA 100.00 Dorlyl snc France 100.00 Febex SA Switzerland 96.77 Luperox Iniciadores SA de CV Mexico 100.00 Maquiladora General de Matamoros sa de cv Mexico 100.00 Michelet Finance, Inc. United States 100.00 MLPC International France 100.00 Oxochimie (e) France 50.00 Ozark Mahoning Company United States 100.00 Plasgom Spain 99.92 Plasticos Altumax SA Spain 100.00 Qatar Vinyl Company Limited Qatar 12.91 Résil Belgium Belgium 100.00 Resilia SRL Italy 100.00 Resinoplast France 100.00 SEKI Arkema South Korea 51.00 Shanghaï Arkema Gaoyuan Chemicals Co, Ltd China 91.07 Stannica LLC (e) United States 40.00 Sunclear France 100.00 Turkish Products, Inc. United States 100.00 Viking chemical company United States 100.00 Vinilis Spain 34.97 Vinylberre France 65.05 Vinylfos France 79.00 NB: FC: Full consolidation PC: Proportionate consolidation EM: consolidation by the equity method 50 FC FC FC FC FC PC FC FC FC FC FC FC FC PC FC FC FC EM FC FC FC FC FC PC FC FC FC EM FC FC 2008 half year financial report Free translation for information purpose only DECLARATION OF THE PERSON RESPONSIBLE FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements at June 30, 2008 have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Thierry Le Hénaff Chairman and CEO 51 KPMG Audit Ernst & Young Audit Département de KPMG S.A. Commissaire aux Comptes Membre de la Compagnie de Versailles 1, cours Valmy 92923 Paris La Défense Cedex Commissaire aux Comptes Membre de la Compagnie de Versailles Faubourg de l’Arche 11, allée de l’Arche 92037 Paris La Défense Cedex S.A.S. à capital variable Arkema S.A. Statutory Auditor’s Report on the first half-year information for 2008 (free translation of the French original) Arkema S.A. 420, rue d’Estiennes d’Orves - 92700 Colombes KPMG Audit Département de KPMG S.A. Commissaire aux Comptes Membre de la Compagnie de Versailles 1, cours Valmy 92923 Paris La Défense Cedex Ernst & Young Audit Commissaire aux Comptes Membre de la Compagnie de Versailles Faubourg de l’Arche 11, allée de l’Arche 92037 Paris La Défense Cedex S.A.S. à capital variable This is a free translation into English of the statutory auditors’ report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France. Arkema S.A. Registered office: 420, rue d’Estiennes d’Orves - 92700 Colombes – France Share capital: €.612 133 900 Statutory Auditors’ Report on the first half-year financial information for 2008 (free translation of the French original) To the Shareholders, Following our appointment as statutory auditors by your Annual General Meetings, and in accordance with the requirements of article L. 232-7 of the French Commercial Law (Code de commerce) and of article L.451-1-2 III of the French Monetary and Financial Law (Code Monétaire et Financier), we hereby report to you on: (cid:120) the review of the accompanying condensed half-year consolidated financial statements of Arkema for the period from January 1st to June 30, 2008; (cid:120) the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. 1. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France. Consequently, the assurance, in the context of a review, that the financial statements taken as a whole are free of significant mistatements is a moderate assurance, lower than that given by an audit. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standards of the IFRSs as adopted by the European Union applicable to interim financial information. Arkema S.A. Statutory Auditors’ Report on the first half-year financial information for 2008 (free translation of the French original) 2. Specific verification We have also verified the information given in the half-year management report, commenting the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half- year consolidated financial statements. Paris La Défense, August 6, 2008 The Statutory Auditors French original signed by KPMG Audit Ernst & Young Audit Bertrand Desbarrières Jean-Louis Caulier François Carrega Isabelle Triquéra- Lamazière Partner Partner Partner Partner 3

Semestriel, 2008, Chemistry, ARKEMA

write me a financial report

Semestriel

Chemistry

ARKEMA

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Chemistry ### Company: ARKEMA ### Response:

Société anonyme au capital de 604.538.230 euros Siège social : 420, rue d’Estienne d’Orves 92700 Colombes RCS 445 074 685 Nanterre FINANCIAL REPORT 1st HALF 2007 First half ended June 30th 2007 Half year financial report Free translation – For information purposes only Content Half-year activity report---------------------------------------------------------------------------------------- Condensed consolidated interim financial statements at June 30, 2007------------------------------- Declaration of the person responsible for the half-year financial report------------------------------ Report from statutory auditors on condensed consolidated interim financial statements at June 30, 2007 2 Half year financial report Free translation – For information purposes only HALF-YEAR ACTIVITY REPORT I. HIGHLIGHTS Over the first six months of 2007, ARKEMA actively pursued its transformation as well as the implementation of its strategy around its three priorities, i.e. improvement in competitiveness, organic growth, and portfolio management. In the Vinyl Products segment, the Pipes and Profiles business unit announced in January 2007 a project for the future of the Soveplast industrial site at Chantonnay (France) designed to restore the site’s competitiveness. In February 2007 the Vinyl Compounds business unit also announced a plan to shutdown Dorlyl activities in France and in Italy. In May 2007, ARKEMA sold its land at the port of Tacoma in the United States. A fire broke out in the night of May 23rd to May 24th in one of the three furnaces of the vinyl chloride (VCM) production unit in Lavéra (France), resulting in the shutdown of the plant. The production units were gradually brought back into service in July. The affected furnace is scheduled to be restarted in late September. This incident deeply affected VCM manufacture, but actually had little impact on PVC sales. Force majeure was not declared. In the Industrial Chemicals segment, the Thiochemicals business unit launched an action plan in January 2007 to improve the competitiveness of its Lacq-Mourenx production site (France). The project will help streamline the organization, while also entailing a 30% production capacity increase for DMDS. In the first quarter 2007, the Acrylics business unit launched a performance plan at its Carling-Saint-Avold site (France) in order to increase its competitiveness. Finally, in March 2007, the Fluorochemicals business unit announced the refocus of the Pierre-Bénite plant (France) on its best performing businesses in order to make it a competitive European site over the long term. The information and consultation process with the works council was completed on June 18th. The Industrial Chemicals segment also refocused its activities by selling to Taminco on May 1st 2007 its specialty amines business (part of the Thiochemicals BU), with production based on the Riverview site (United States). This activity generated sales of 72 million US dollars in 2006. The divestment has no impact on the group’s financial statements. ARKEMA continued to develop this segment with the announcement of a 10% production capacity increase for Hydrogen Peroxide in Jarrie (France) and the signature of an MOU with the Essar Group for the proposed construction of an acrylics plant in India. In line with 2006, when the priority was to restore the competitiveness of the Performance Products segment, new measures were announced in this segment in the first half of the year. In May 2007 the Technical Polymers business unit announced the two-step shutdown of its copolyamide powder production plant in Bonn (Germany). In June 2007, the Functional Additives business unit launched a project to reorganize its Vlissingen site (Netherlands). Finally, also in June 2007, the Specialty Chemicals business unit announced a project to reorganize its Feuchy site (France). The Performance Products business unit also simplified its portfolio with the divestment on February 1st 2007 of its Cerexagri agrochemicals business to the Indian company United Phosphorus Limited (UPL). This activity generated sales of 202 million euros in 2006. In May 2007, ARKEMA announced a project to sell to the American company Hexion Specialty Chemicals its Urea Formaldehyde Resins business, for which production is based at the Leuna site (Germany). This activity generated sales of 101 million euros in 2006. This sale should produce a positive impact in the 2007 accounts. Finally, ARKEMA confirmed its intention to participate in the consortium under the terms proposed by Exeltium. The draft contract between Exeltium and EDF is currently being examined by the European antitrust authorities. 3 Half year financial report Free translation – For information purposes only II. ANALYSIS OF FINANCIAL RESULTS FOR THE FIRST HALF OF 2007 (in millions of euros) Sales ............................................................... EBITDA......................................................... Recurring operating income ........................ Other income and expenses ............................ Operating income.......................................... Net income – Group share................................ CAPEX Net debt (vs 12/31/06) 1st half 2006 1st half 2007 2,977 284 177 -79 98 67 108 198 2,954 234 124 -40 84 37 134 324 Variations in % +0.8 % +21% +43% +17% +81% -19% -39% Sales In the first six months of 2007, ARKEMA’s sales grew by 0.8 % to 2,977 million euros against 2,954 million euros in the first half of 2006. Excluding the impact of exchange rates (-2.4 %) and variations in the scope of business (-0.4%), sales increased by 3.6%. This increase results from a strong rise in average sales prices in all three business segments (+2.9 %) as well as organic growth in volumes (+1.7%). Over the first half of the year, loss in volumes related to the Chlorochemicals and Urea Formaldehyde Resins restructuring plans represented (-0.9%). Sales for the Vinyl Products segment recorded a major increase (+5.6 %) thanks to a favorable environment in PVC leading to a rise in average sales prices and volumes. Sales for the Industrial Chemicals and Performance Products segments, adjusted for the negative effect of exchange rates, rose by +2.6 % and +2.3 % respectively. Recurring operating income The recurring operating income rose by 43 % from 124 million euros in the first six months of 2006 to 177 million euros in the first six months of 2007. This significant improvement results from an organic growth in volumes and a reduction in fixed costs under favorable market conditions overall despite ongoing low unit margins in Acrylics, Fluorochemicals for refrigeration, and tin-based Additives. EBITDA rose by 21 % from 234 million euros to 284 million euros, i.e. an EBITDA margin of 9.5 % against 7.9 % for the first six months of 2006. Operating income Operating income rose by 14 million euros, from 84 million euros in the first half of 2006 to 98 million euros over the first half of 2007, despite a 39 million euro increase in net expenses related to the competitiveness measures announced in the first half of 2007. This other income and expenses mainly include the cost of the restructuring plans for all three segments, Vinyl Products (10 million euros), Industrial Chemicals (50 million euros), and Performance Products (21 million euros), with a 16 million euros capital gain from the sale of the Tacoma land and (-13) million euros corresponding to the financial consequences in the second quarter of the Lavéra fire. Based on our present estimates and on the deductibles under the terms of our insurance policies, the financial consequences of this accident should represent beyond the second quarter an additional amount inferior to (-10) million euros in operating income. Net income - Group share Net income - Group share rose by 81 %, from 37 million euros to 67 million euros. This major rise results up to 20 million euros from the improvement in the net income of continuing activities. This result also include the net income from discontinued activities for an amount of 18 million euros (against 8 million euros in the first half of 2006), which corresponds to the capital gain from the sale of the Agrochemicals business, Cerexagri. Activity per segment Vinyl Products sales grew by 5.6% to 750 million euros against 710 million euros in the first half of 2006, in a context of sustained demand in Europe. EBITDA for this segment rose significantly, to 61 million euros against 25 million euros in the first half of 2006, the margin reaching 8.1%. The improvement in the results reflects the increase in unit margins and the positive impact of the implementation of the Chlorochemicals consolidation plan initiated in 2005. The closure of the Lavéra production units (France) deeply affected VCM manufacture, but actually had little impact on PVC sales. Force majeure was not declared. 4 Half year financial report Free translation – For information purposes only Industrial Chemicals sales dropped by 0.8% to 1,308 million euros. Following adjustments for the negative exchange rate impact from the decline of the US dollar versus the euro, sales grew by 2.6%, bolstered by higher volumes, primarily in Fluorochemicals and Hydrogen Peroxide, and unit prices. EBITDA in the first half of the year reached 147 million euros, i.e. an 11.2% EBITDA margin, reflecting better balanced results between the segment’s business units. The improvement in the Thiochemicals and PMMA results and a strict control of fixed costs, boosted by the initial impact of restructuring measures, helped offset more difficult market conditions in Fluorochemicals for refrigeration as well as Acrylics. Performance Products sales declined by 0.7% to 916 million euros, i.e. a 2.3% improvement given constant exchange rates, and despite the impact of the closure of the Urea Formaldehyde Resins activity at Villers-Saint-Paul (France) end of June 2006. This improvement is the result of an increase in unit sales prices and in volumes in every business unit. In line with 2006, when the priority focused on restoring the segment’s competitiveness, EBITDA showed a major improvement to 104 million euros, with an EBITDA margin of 11.4% against 9% in the first half of 2006. This significant improvement results from projects initiated in the last two years, which have now translated into the launch of new products in Technical Polymers and Specialty Chemicals, and from a tight control of fixed costs, offsetting the negative impact of exchange rates. Cash flow Cash flow related to operations and investments in the first half of the year was positive at +132 million euros against (-149) million euros in the first half of 2006. It includes the proceeds from the divestments finalized in the first half of the year (€ +137 million), as well as cash flow from non-recurring pre spin-off items1 (-36 million euros), including 14 million euros capital expenditures relating to the Chlorochemicals consolidation plan. Following adjustments for these items, cash flow for the first half of the year remained positive at +31 million euros, despite an increase in working capital (-78 million euros) resulting from the seasonal increase in activity, with capital expenditures (excluding the Chlorochemicals consolidation plan) totalling 94 million euros. Net debt Net debt at the end of June stood at 198 million euros, and the balance of non-recurring pre-spin off items at 172 million euros. The ratio between the sum of both items and the shareholders’ equity stood at 19% at the end of June compared to 28% at the end of December 2006. III. TRANSACTIONS WITH RELATED PARTIES Transactions with related parties feature in note 16 to the condensed consolidated financial statements as at June 30th 2007. IV. SIGNIFICANT EVENTS POST JUNE 30TH 2007 ARKEMA announced on July 3rd 2007 a plan to acquire the Coatex group currently owned by the Omya group. This acquisition is fully in line with the strategy to refocus ARKEMA on its strongest product lines. It will reinforce the integration of the acrylics business, thereby helping ARKEMA to become more resilient to economic cycles. Furthermore, the Coatex activities offer strong synergies with those of ARKEMA in raw material, process and R&D terms. The legal information and consultation process involving the works councils of the three groups involved - ARKEMA, Coatex and Omya – has been completed, and the deal is now awaiting approval from the antitrust authorities. With its headquarters and main site in Genay, near Lyon (France), Coatex also operates industrial facilities in Europe, the United States and Asia. It employs 300 people around the world, and in 2006 reported sales of 150 million euros. 1 Non-recurring pre-spin off items correspond to items taken into account for the computation of the theoretical financial debt at the time of the spin off. 5 Half year financial report Free translation – For information purposes only V. OUTLOOK The market conditions of the first half of 2007 should overall continue to prevail in the second half of the year with sustained demand in Europe and in Asia and good conditions in caustic soda and PVC. However, margins should remain low in Acrylics and in some Fluorochemicals, and US dollar should remain weak versus the euro. ARKEMA will remain attentive to the evolution of raw material costs and to the US economy. In this context, ARKEMA is confident of reaching, over 2007, the higher range of the EBITDA growth objective of 10 to 15% per year. This outlook takes into account the seasonal nature of ARKEMA’s results, with the first six months of the year traditionally stronger than the last six months and the impact of the turnarounds scheduled for this period, primarily in Fos for Vinyl Products and in Lacq for Thiochemicals. In 2007, capital expenditures should be around 350 million euros including those related to the Chlorochemicals restructuring plan. Over the same period, the main risks and uncertainties of the group are those described in the group’s 2006 Reference Document registered with the Autorité des marchés financiers (« AMF ») on May 21st 2007 under number R.07-073. This document is available on ARKEMA’s website, Finance section (www.finance.arkema.com) and on the AMF website (www.amf-france.org). Additionally, an update of contingent liabilities, where applicable, is given in a note to the half-year financial statements. 6 Half year financial report Free translation – For information purposes only CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT JUNE 30, 2007 CONSOLIDATED INCOME STATEMENT ................................................................................................................ 8 CONSOLIDATED BALANCE SHEET ......................................................................................................................... 9 CONSOLIDATED CASH FLOW STATEMENT....................................................................................................... 10 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY............................................. 11 A. HIGHLIGHTS ........................................................................................................................................................... 12 B. ACCOUNTING POLICIES...................................................................................................................................... 13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS........................................................................ 22 1. Effects of seasonality............................................................................................................................................ 22 2. Information by business segment ....................................................................................................................... 22 3. Information by geographical area ...................................................................................................................... 23 4. Other income and expenses................................................................................................................................. 23 5. Income taxes ......................................................................................................................................................... 24 6. Discontinued operations ...................................................................................................................................... 24 7. Earnings per share............................................................................................................................................... 24 8. Changes in accounting policies and reclassifications to the published consolidated financial statements ... 25 9. Intangible assets ................................................................................................................................................... 26 10. Property, plant and equipment........................................................................................................................... 26 11. Inventories ............................................................................................................................................................ 26 12. Provisions and other non-current liabilities ...................................................................................................... 26 13. Contingent liabilities............................................................................................................................................ 27 14. Debt ....................................................................................................................................................................... 29 15. Derivatives ............................................................................................................................................................ 31 16. Related parties...................................................................................................................................................... 32 17. Share-based payment .......................................................................................................................................... 32 18. Off-balance sheet commitments.......................................................................................................................... 34 19. Subsequent events ................................................................................................................................................ 41 SCOPE OF CONSOLIDATION AT JUNE 30, 2007 .................................................................................................. 42 7 Half year financial report Free translation – For information purposes only CONSOLIDATED INCOME STATEMENT Six months ended Six months ended In millions of euros Notes June 30, 2006 June 30, 2007 Sales (2&3) 2954 2977 Operating expenses Research and development expenses Selling and administrative expenses Recurring operating income Other income and expenses Operating income Equity in income of affiliates Cost of debt Income taxes Net income of continuing operations Net income of discontinued operations Net income Minority interests Net income – Group share Earnings per share (amount in euros) Diluted earnings per share (amount in euros) (2) (4) (2) (5) (6) (7) (7) (2531) (83) (216) 124 (40) 84 - (5) (49) 30 8 38 1 37 0.61 0.61 (2520) (76) (204) 177 (79) 98 1 (9) (40) 50 18 68 1 67 1.11 1.10 Depreciation and amortization EBITDA * (2) (2) (110) 234 (107) 284 see note B-15 Accounting policies / Main accounting and financial indicators The consolidated accounts at June 30, 2006 have been restated for the disposal of the Cerexagri business in application of IFRS5. As from January 1, 2007, the interest expense and expected return on plan assets calculated in the valuation of pension benefits have been reclassified from operating income to cost of debt. At June 30, 2007, the amount reclassified is a net expense of €2.8 million. For comparative purposes, the reclassification would have amounted to €3.5 million at June 30, 2006. At June 30, 2007, the research tax credit of the French companies is recorded as a deduction from “operating expenses” for €4.1 million. At June 30, 2006, this credit was recorded under “Income taxes” for €4.3 million. 8 Half year financial report Free translation – For information purposes only CONSOLIDATED BALANCE SHEET In millions of euros Notes December 31, 2006 June 30, 2007 ASSETS Intangible assets, net Property, plant and equipment, net Equity affiliates: investments and loans Other investments Deferred income tax assets Other non-current assets TOTAL NON-CURRENT ASSETS (9) (10) * * 236 1376 104 21 36 121 1894 228 1353 102 21 34 111 1849 Inventories Accounts receivable Prepaid expenses and other current assets Income taxes recoverable Cash and cash equivalents Total assets of discontinued operations TOTAL CURRENT ASSETS (11) * * 1036 1011 202 36 171 144 2600 962 1179 205 35 68 0 2449 TOTAL ASSETS 4494 4298 LIABILITIES AND SHAREHOLDERS' EQUITY Share capital Paid-in surplus and retained earnings Cumulative translation adjustment Treasury shares SHAREHOLDERS' EQUITY - GROUP SHARE Minority interests TOTAL SHAREHOLDERS' EQUITY 605 1313 (27) - 1891 15 1906 605 1389 (48) - 1946 20 1966 Deferred income tax liabilities Provisions and other non-current liabilities Non-current debt TOTAL NON-CURRENT LIABILITIES (12) * (14) 14 891 52 957 14 908 48 970 Accounts payable Other creditors and accrued liabilities Income taxes payable Current debt Total liabilities of discontinued operations TOTAL CURRENT LIABILITIES * (14) 791 314 14 443 69 1631 743 371 30 218 0 1362 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4494 4298 The amounts shown at December 31, 2006 include the effects of the changes in accounting policies and reclassifications described in note 8. 9 Half year financial report Free translation – For information purposes only CONSOLIDATED CASH FLOW STATEMENT In millions of euros Six months ended June 30, 2006 Six months ended June 30, 2007 Net income Depreciation, amortization and impairment of assets Provisions, valuation allowances and deferred taxes (Gains)/losses on sales of assets Undistributed affiliate equity earnings Change in working capital Other changes Cash flow from operating activities 38 111 (33) (3) - (128) - (15) 68 127 29 (56) (1) (78) 4 93 Intangible assets and property, plant, and equipment additions Acquisitions of subsidiaries, net of cash acquired Increase in long-term loans Total expenditures (134) - (30) (164) (108) (5) (4) (117) Proceeds from sale of intangible assets and property, plant, and equipment Proceeds from sale of subsidiaries, net of cash sold Proceeds from sale of other investments Repayment of long-term loans Total divestitures 1 9 20 30 35 106 - 15 156 Cash flow from investing activities (134) 39 Issuance (repayment) of shares Dividends paid to Parent company shareholders Dividends paid to Minority shareholders Issuance of long-term debt Repayment of long-term debt Increase in short-term borrowings and bank overdrafts Decrease in short-term borrowings and bank overdrafts Cash flow from financing activities 532 - (1) - (2) - (371) 158 5 - - - (4) - (225) (224) Net increase/(decrease) in cash and cash equivalents Effect of exchange rates and changes in scope Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 9 (10) 67 66 (92) (11) 171 68 The cash flow statement at June 30, 2006 includes cash flows of discontinued operations (Cerexagri) (see note 6). At June 30, 2007, income taxes paid amounted to €16 million. Interest received and paid at June 30, 2007 amounted, respectively, to €0.1 million and €7 million. 10 Half year financial report Free translation – For information purposes only CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Shares issued Treasury shares In millions of euros Number Amount Paid-in surplus Retained earnings Cumulative translation adjustment Number Amount Shareholders' equity - Group share Minority interests At January 1, 2006 4 000 1 312 83 1 395 14 Cash dividend (1) Net income 37 37 1 Issuance of share capital 60 449 823 605 1 006 (1078) 532 Purchase of treasury shares Cancellation of purchased treasury shares Sale of treasury shares Other Transactions with shareholders 60 449 823 605 1 006 (1041) 569 Changes in items recognized directly through equity Statement of recognized income and expenses (*) 17 17 Change in translation adjustments (73) (73) Items other than transactions with shareholders 17 (73) (55) At June 30, 2006 60 453 823 605 1 006 288 10 1 909 14 Cash dividend Net income 8 8 1 Issuance of share capital Purchase of treasury shares Cancellation of purchased treasury shares Sale of treasury shares Other 5 5 Transactions with shareholders 13 13 1 Changes in items recognized directly through equity 1 1 Statement of recognized income and expenses (*) 5 5 Change in translation adjustments (37) (37) Items other than transactions with Shareholders 6 (37) (31) At December 31, 2006 60 453 823 605 1 006 307 (27) 1 891 15 The amounts at January 1, 2006 and at December 31, 2006 include the effects of the changes in accounting policies and reclassifications presented in note 8. See note B-10 Accounting policies / Pension and similar post-employment benefit obligations 11 Total share- holders' equity 1 409 (1) 38 532 569 17 (73) (55) 1 923 9 5 14 1 5 (37) (31) 1 906 Half year financial report Free translation – For information purposes only Shares issued Treasury shares In millions of euros Number Amount Paid-in surplus Retained earnings Cumulative translation adjustment Number Amount Shareholders' equity - Group share Minority interests Total share- holders' equity At January 1, 2007 60 453 823 605 1 006 307 (27) 1 891 15 1 906 Cash dividend Net income 67 67 1 68 Issuance of share capital 5 5 Purchase of treasury shares Cancellation of purchased treasury shares Sale of treasury shares Other Transactions with shareholders 67 67 6 73 Changes in items recognized 3 3 3 directly through equity Statement of recognized income and expenses (*) 4 4 4 Change in translation adjustments (21) (21) (1) (22) Other 2 2 2 Items other than transactions with shareholders 9 (21) (12) (1) (13) At June 30, 2007 60 453 823 605 1 006 383 (48) 1 946 20 1 966 See note B-10 Accounting policies / Pension and similar post-employment benefit obligations 12 Half year financial report Free translation – For information purposes only A. HIGHLIGHTS 1. Main restructuring initiatives in the half year 1.1. Restructuring plans in the Vinyl Products segment A project for the future of Soveplast’s industrial site at Chantonnay, France (Pipes and Profiles BU) was announced in January 2007 with a view to restoring the site’s competitiveness. In February 2007, Arkema also announced a project to shutdown Dorlyl activities in France and Italy in its Vinyl Compounds BU. 1.2. Restructuring plans in the Industrial Chemicals segment In January 2007, the Thiochemicals BU launched an action plan to improve the competitiveness of its production site at Lacq-Mourenx (France). This project will result in the simplification of the organization and in a 30% increase in the production capacity of DMDS. During the first quarter of 2007, the Acrylics BU launched a performance plan on its site at Carling-Saint-Avold (France) with a view to increasing its competitiveness. Finally, in March 2007, the Group announced, in its Fluorochemicals BU, the refocus of its plant at Pierre-Bénite (France) on its best performing businesses in order to make it a competitive fluorochemicals European site. The information and consultation process was completed on June 18. 1.3. Restructuring plans in the Performance Products segment In May 2007, Arkema announced, in its Technical Polymers BU, the closure in two steps of its co-polyamide powder production plant at Bonn (Germany). In June 2007, Arkema announced restructuring measures in respect of its functional additives site at Vlissingen (Netherlands). 2. Main changes in the portfolio of businesses 2.1. Sale of Cerexagri to UPL In November 2006, Arkema announced the sale of its agrochemicals business, Cerexagri, which specializes in the formulation and production of phytosanitary products to United Phosphorus Limited (UPL), an Indian company. This business generated sales of €202 million in 2006. On February 1, 2007, Arkema finalized the sale of Cerexagri to UPL. After taking account of selling costs and the warranties granted to the purchaser, the capital gain on sale amounted to approximately €18 million (see note 6). 2.2. Sale to Taminco of the specialty amines business in the United States On May 1, 2007, Arkema sold its specialty amines business (which formed part of the Thiochemicals Business Unit), whose production is based at the Riverview (Michigan) site, to Taminco, a Belgian group. This business generated sales of $72 million in 2006 and sales of $21 million in the first three months of 2007. The sale has no impact on the Group’s financial statements. 2.3. Project to sell the Urea Formaldehyde Resins business based on the Leuna site to Hexion In May 2007, Arkema announced its project to sell its Urea Formaldehyde Resins business, whose production is based on the German site of Leuna, to Hexion Specialty Chemicals, an American company. This business generated sales of €101 million in 2006 and sales of €56 million in the first half of 2007. This sale should have a positive impact on the financial statements in the second half of 2007. 2.4. Sale of property assets In May 2007, Arkema sold its land at the port of Tacoma in the United States. The accounting impacts of this sale are presented in “Other income and expenses” (note 4). 3. Events on the site of Lavéra (France) In the night of May 23 to May 24, 2007, a fire started in one of the three ovens of the vinyl chloride production unit causing the shutdown of the production units. The financial consequences of this incident at June 30, 2007 are included in “Other income and expenses”. 13 Half year financial report Free translation – For information purposes only B. ACCOUNTING POLICIES Arkema’s condensed consolidated interim financial statements at June 30, 2007 were prepared under the responsibility of the Chairman and CEO of Arkema S.A and were approved by the Board of Directors of Arkema SA on August 8, 2007. The condensed consolidated interim financial statements at June 30, 2007 are prepared in accordance with the international accounting standards issued by the IASB (International Accounting Standards Board) that have been approved by the European Union at June 30, 2007 and in compliance with IAS 34 “Interim financial reporting”. As condensed interim financial statements, they do not incorporate all of the disclosures required in full financial statements and must thus be read in conjunction with the consolidated financial statements for the year ended December 31, 2006. The accounting policies applied in preparing the consolidated financial statements at June 30, 2007 are identical to those used in the consolidated financial statements at December 31, 2006, except for: the treatment of actuarial gains and losses, for which Arkema has decided to abandon the “corridor” method and to use the option provided by the “Actuarial Gains and Losses , Group plans and disclosures” amendment to IAS 19 of December 2004, which enables recognition of actuarial gains and losses arising from changes in actuarial assumptions directly in shareholders’ equity under the “Statement of recognized income and expenses” caption, the classification, as from January 1, 2007, of interest expense and expected return on plan assets (as defined by IAS 19) within the cost of debt caption, as against the previous classification within operating income and expenses, IFRS standards, amendments and interpretations that are obligatorily applicable for accounting periods commencing on or after January 1, 2007 (and which had not been applied early by the Group), being: IFRICs 7, 8, 9 & 10, IFRS 7, and the amendment to IAS 1. Their application does not have any impact on the Group’s condensed consolidated financial statements at June 30, 2007. Preparation of consolidated financial statements in accordance with IFRS requires Group management to make estimates and retain assumptions that can have an impact on the amounts recognized in assets and liabilities at the balance sheet date, and have a corresponding impact on the income statement. Management made its estimates and determined its assumptions on the basis of past experience and taking into account different factors considered to be reasonable for the valuation of assets and liabilities. Use of different assumptions could have a material effect on these valuations. The main assumptions made by management in preparing the financial statements are those used for the calculation of depreciation, amortization and impairment, of pension benefit obligations, of deferred taxes and for the valuation of assets (property, plant & equipment, intangibles and investments), provisions and certain financial instruments. The disclosures provided concerning contingent assets and liabilities at the date of preparation of the consolidated financial statements also involve the use of estimates. The consolidated financial statements are prepared in accordance with the historical cost convention, except for certain financial assets and liabilities which are recognized at fair value. The consolidated financial statements are presented in euros, rounded to the nearest million, unless otherwise indicated. 1. Basis of preparation of the consolidated financial statements at June 30, 2006 and at December 31, 2006 The Arkema Group was legally formed on May 18, 2006, being the date on which the “Spin-off of Arkema’s Businesses” took place. The two partial spin-offs and the merger were accounted for at net book value as exchanges of assets between entities under common control. All companies in the Arkema scope were consolidated as of January 1, 2006, as: i) The Arkema Group existed operationally prior to May 18, 2006, and ii) All businesses were controlled at January 1, 2006 (effective control as a result of the existence of a Group management team). The consolidated financial statements for 2006 cover the period from January 1, 2006, notwithstanding the date of finalization of the legal transactions. The consolidated financial statements at June 30, 2006 and at December 31, 2006 14 Half year financial report Free translation – For information purposes only are prepared on the basis of the individual financial statements of consolidated companies covering the same period, restated if necessary to comply with the accounting policies of the Arkema Group. The principal accounting policies applied by the Group are presented below. 2. Consolidation principles Companies which are directly or indirectly controlled by Arkema have been fully included in the consolidated financial statements. Investments in companies under joint control are accounted for by the equity method. Investments in associates over which significant influence is exercised are accounted for under the equity method. Where the ownership interest is less than 20%, the equity method is only applied in cases where significant influence can be demonstrated. Shares owned in companies which do not meet the above criteria are included in other investments. All material transactions between consolidated companies, and all intercompany profits have been eliminated. 3. Foreign currency translation 3.1. Translation of financial statements of foreign companies The functional operating currency of foreign companies in the scope of consolidation is their local currency, in which most of their transactions are denominated. Their balance sheets are translated into euros on the basis of exchange rates at the end of the period; the statements of income and of cash flows are translated using the average exchange rates during the period. Foreign exchange differences resulting from translation of the financial statements of these subsidiaries are recorded either in “Cumulative translation adjustments” in shareholders’ equity in the consolidated financial statements for the Group share or in “Minority interests” for the minority share. 3.2. Transactions in foreign currencies In application of IAS 21 “The effects of changes in foreign exchange rates”, transactions denominated in foreign currencies are translated by the entity carrying out the transaction into its functional currency at the exchange rate applicable on the transaction date. Monetary balance sheet items are restated at the closing exchange rate at the balance sheet date. Gains and losses resulting from translation are recognized in recurring operating income. 4. Intangible assets Intangible assets include goodwill, software, patents, trademarks, leasehold rights, development costs and electricity consumption rights. Intangible assets are recognized in the balance sheet at their acquisition or production cost, less any accumulated amortization and impairment losses recognized. Intangible assets other than goodwill and trademarks with indefinite useful lives are amortized on a straight-line basis over 3 to 20 years depending on the pattern according to which the entity envisages using the future economic benefits related to the asset. 4.1. Goodwill and trademarks Goodwill represents the difference between the purchase price, as increased by related costs, of shares of consolidated companies and the Group share of the value of their net assets and contingent liabilities at the acquisition date. Goodwill is not amortized, in accordance with IFRS 3 “Business combinations”. It is subject to impairment tests as soon as any indicators of potential impairment are identified. At a minimum, impairment tests are performed annually. The methodology used for the performance of impairment tests is described in paragraph 6. Trademarks with indefinite useful lives are treated in the same way as goodwill. Those with finite useful lives are amortized over their useful lives. 4.2. Research and development costs Research costs are recognized in expenses in the period in which they are incurred. 15 Half year financial report Free translation – For information purposes only Under IAS 38 “Intangible assets”, development costs are capitalized as soon as Arkema can demonstrate, in particular: its intention and its financial and technical ability to complete the development project; that it is probable that future economic benefits attributable to the development costs will flow to the enterprise, which implies being certain of obtaining the required authorization to commercialize the product; and that the cost of the asset can be measured reliably. 5. Property, plant and equipment 5.1. Gross value The gross value of items of property, plant and equipment corresponds to their acquisition or production cost in accordance with IAS 16 “Property, plant & equipment”. Gross value is not subject to revaluation. Equipment subsidies are deducted directly from the cost of the assets which they financed. Routine maintenance and repairs are charged to income in the period in which they are incurred. Costs related to major maintenance shutdowns of large chemical facilities are capitalized at the time they are incurred and depreciated over the period between two such major shutdowns. Fixed assets which are held under finance lease contracts, as defined in IAS 17 “Leases”, which have the effect of transferring substantially all the risks and rewards inherent to ownership of the asset from the lessor to the lessee, are capitalized in assets at their market value or at the discounted value of future lease payments if lower (such assets are depreciated using the methods and useful lives described below). The corresponding lease obligation is recorded as a liability. Leases which do not meet the above definition of finance leases are accounted for as operating leases. 5.2. Depreciation Depreciation is calculated on a straight-line basis on the basis of the acquisition or production cost. Assets are depreciated over their estimated useful lives by category of asset. The principal categories and useful lives are as follows: machinery and tools: 5 - 10 years transportation equipment: 5 - 20 years specialized complex installations: 10 - 20 years buildings: 10 - 30 years These useful lives are reviewed annually and modified if expectations change from the previous estimates; such changes in accounting estimate are accounted for on a prospective basis. 6. Impairment of long-lived assets The recoverable amount of property, plant & equipment and intangible assets is tested as soon as any indications of impairment are identified. A review to identify if any such indications exist is performed at each year-end. An impairment test is performed at least once a year in respect of goodwill and trademarks with indefinite useful lives. An asset’s recoverable amount corresponds to the greater of its value in use or its fair value net of costs of disposal. Tests are performed for each autonomous group of assets, termed Cash Generating Units (CGUs). A CGU is a group of assets whose continued use generates cash flows that are substantially independent of cash flows generated by other groups of assets. They are worldwide business operations, which bring together groups of similar products in strategic, commercial and industrial terms. The value in use of a CGU is determined on the basis of the discounted future cash flows that are expected to be generated by the assets in question, based upon Group management’s expectation of future economic and operating conditions or, when the asset is to be sold, by comparison with its market value. The rate used to discount future cash flows and the terminal value is the weighted average cost of capital after tax. Any impairment is calculated as the difference between the recoverable amount and the carrying amount of the CGU. Because of its unusual nature, any such impairment is presented separately in the income statement under the “Other income and expenses” caption. Impairment may be reversed, to the maximum carrying amount that would have been recognized for the asset had the asset not been impaired. Impairment recognized on goodwill cannot be reversed under any 16 Half year financial report Free translation – For information purposes only circumstances. In particular, in application of IFRIC 10, impairment losses on goodwill recognized in previous interim accounting periods cannot be reversed. 7. Financial assets and liabilities For the Group, financial assets and liabilities are principally comprised of: other investments (non-consolidated companies and investment securities), other non-current assets (loans and advances), accounts receivable, debt and other financial liabilities (including accounts payable), derivatives. 7.1. Other investments (in non-consolidated companies and investment securities) These instruments are accounted for, in accordance with IAS 39, as available-for-sale assets and are thus recognized at their fair value. In exceptional cases where fair value cannot be reliably determined, the securities are recognized at their historical cost. Changes in fair value are recognized directly through shareholders’ equity. If an objective indicator of impairment in the value of a financial asset is identified (particularly a material long-term decrease in its value), an irreversible impairment loss is recognized, in general, through recurring operating income. Release of such provisions only occurs at the date of disposal of the securities. 7.2. Loans and financial receivables These instruments are recognized at amortized cost. They are subject to impairment tests involving a comparison of their carrying amount to the present value of estimated recoverable future flows. These tests are carried out as soon as any indicators inferring that the present value of these assets is lower than their carrying amount are identified. As a minimum such tests are performed at each balance sheet date. Any impairment loss is recognized in recurring operating income. 7.3. Accounts receivable Accounts receivable and other current assets are initially recognized at their fair value. Subsequent to initial recognition, they are recognized at amortized cost in accordance with the effective interest rate method. If required, a bad debt provision is recognized on the basis of the risk of non-recovery of the receivables. 7.4. Cash and cash equivalents Cash and cash equivalents are liquid assets and assets which can be converted into cash within less than 3 months that are subject to a negligible risk of change in value. 7.5. Non-current and current debt Non-current and current debt (other than derivatives) is recognized at amortized cost. 7.6. Derivatives The Group may use derivatives to manage its exposure to foreign currency risks and risks of changes in the prices of raw materials and energy. Derivatives used by the Group are recognized at their fair value in the balance sheet, in accordance with IAS 39. Changes in the fair value of derivatives are recognized through the income statement, except for those on instruments which are considered to meet the criteria for cash flow hedge accounting under IAS 39. In this case, the effective portion of the change in fair value is recognized in shareholders’ equity under the “Changes in items recognized directly through shareholders’ equity” caption until such time as the underlying hedged item is recognized through the income statement. Any ineffective portion is recognized immediately in the income statement. 17 Half year financial report Free translation – For information purposes only 8. Inventories Inventories are valued in the consolidated financial statements at the lower of cost and net realizable value, in accordance with IAS 2 “Inventories”. Cost of inventories is generally determined using the weighted average cost (WAC) method. Cost of chemical products inventories includes raw material and direct labor costs and an allocation of production overheads and straight-line depreciation. Start-up costs and general and administrative costs are excluded from the cost of chemical products inventories. 9. Provisions and other non-current liabilities A provision is recognized when: the Group has a legal, regulatory or contractual obligation to a third party resulting from past events. An obligation can also result from Group practices or public commitments that create a reasonable expectation among the third parties in question that the Group will assume certain responsibilities. it is certain or probable that the obligation will lead to an outflow of resources to the benefit of the third party, and its amount can be estimated reliably and corresponds to the best possible estimate of the commitment. In exceptional cases where the amount of the obligation cannot be measured with sufficient reliability, disclosure is made in the notes to the financial statements in respect of the obligation (See Note 13 – Contingent liabilities). When it is expected that the Group will obtain partial or total reimbursement of the cost that was provided against, the expected reimbursement is recognized in receivables if, and only if, the Group is virtually certain of the receipt. Long-term provisions, other than provisions for pension and similar post-employment benefit obligations, are not discounted as the Group considers that the impact of discounting would not be material. 10. Pension and similar post-employment benefit obligations In accordance with IAS 19 “Employee benefits”: payments made in the context of defined contribution plans are recognized in expenses of the period. obligations in respect of defined benefit plans are recognized and valued using the actuarial projected unit credit method. Post-employment benefits For defined benefit plans, the valuation of obligations under the projected unit credit method principally takes into account: an assumption concerning the date of retirement, a discount rate which depends on the geographical region and the duration of the obligations, an inflation rate, assumptions in respect of future increases in salaries, rates of employee turnover and increases in health costs. Differences which arise between the valuation of obligations and forecasts of such obligations (on the basis of new projections or assumptions) and between forecasts and outcomes of returns on plan assets are termed actuarial gains and losses. As from January 1, 2007, the Group has decided to abandon the “corridor” method and to use the option provided by the “Actuarial Gains and Losses, Group plans and disclosures” amendment to IAS 19 of December 2004 which enables recognition of actuarial gains and losses arising from changes in actuarial assumptions directly in shareholders’ equity under the “Statement of recognized income and expenses” caption, 18 Half year financial report Free translation – For information purposes only On modification or creation of a plan, the portion of obligations which vest immediately as a result of past service is charged immediately to income; the portion of obligations which do not vest immediately is amortized over the remaining vesting period. The amount of the provision takes account of the value of assets which are allocated to cover pension and other post- employment benefit obligations. The value of these assets is deducted from the provision for such benefit obligations. Long-term benefits In respect of long-term benefits, and in accordance with applicable laws and regulations, provisions are recognized using a simplified method. Thus, if an actuarial valuation using the projected unit cost method is required, actuarial gains and losses and all past service costs are recognized immediately in the provision, with a double entry being recognized to the income statement. The net expense related to pension benefit obligations and other employee benefit obligations is recognized in recurring operating income, with the exception of: the effect of curtailments or settlements of plans which are presented under the “Other income and expenses” caption in the case of substantial modifications to such plans. the interest expense and expected return on plan assets which are classified within the “Cost of debt” caption as from January 1, 2007. 11. CO2 emissions allowances In the absence of an IFRS standard or interpretation relating to accounting for CO2 emissions allowances, the following treatment has been adopted: allowances allocated without payment of consideration are recognized for a nil value, transactions carried out in the market are recognized at the transaction amount. At this point, allowances allocated are adequate to cover the operational needs of Arkema’s European units and a deficit is not currently forecast. Arkema does not carry out a trading activity in respect of CO2 emissions allowances. However, in the normal course of its operations, Arkema may carry out cash or forward sales of its surpluses. These sales do not enter into the scope of application of IAS 39 because of the “own use” exception. 12. Recognition of sales Sales are recognized on transfer to the purchaser of the risks and rewards related to ownership of the goods. 13. Deferred taxes The Group uses the liability method whereby deferred income taxes are recognized based upon the temporary differences between the financial statement and tax basis of assets and liabilities, as well as on tax loss carry forwards and other tax credits, in accordance with IAS 12 “Income taxes”. Deferred tax assets and liabilities are valued on the basis of tax rates enacted or virtually enacted at the balance sheet date. The effect of any changes in tax rates is recognized in income for the period. Deferred tax assets are recognized to the extent that their recovery is probable. In order to assess the likelihood of recovery of such assets, account is notably taken of the profitability outlook determined by the Group. 14. Information by segment Information by segment is prepared on the basis of two separate criteria. The primary criterion is based on the Group’s business segments; the secondary criterion is based on the main geographical areas in which the group operates. The financial information for each business segment is reported on the same basis as that used internally by management in assessing segment performance and in allocation of segment resources. 19 Half year financial report Free translation – For information purposes only The Group’s activities are conducted through three business segments: Vinyl Products, Industrial Chemicals and Performance Products. Vinyl Products include Chlorine/Caustic Soda and PVC, Vinyl Compounds and downstream converting (Pipes and Profiles). They are used in areas such as water treatment, healthcare, hygiene, electronics, sports and leisure and automobile equipment. Industrial Chemicals brings together Acrylics, PMMA, Thiochemicals, Fluorochemicals and Hydrogen Peroxide. These intermediates are used as raw materials in numerous industrial sectors such as refrigeration, insulation, production of paper pulp, textiles, pharmaceuticals, animal feed, ink and paint, electronics and the automobile sector. Performance Products brings together Technical Polymers, Specialty Chemicals, Organic Peroxides, Functional Additives and Urea Formaldehyde Resins. Performance Products are used in a variety of sectors from transport to sporting equipment, cosmetics to medical equipment, construction, civil engineering and even household appliances. Functional and financial activities which cannot be directly allocated to operational activities (notably certain research costs and central costs) are brought together under a Corporate section. 15. Main accounting and financial indicators The main performance indicators used are as follows: Operating income: this includes all income and expenses other than the cost of debt, equity in income of affiliates and income taxes. Other income and expenses: these correspond to a limited number of well-identified non-recurring items of income and expense of a particularly material nature that the Group presents separately in its income statement in order to facilitate understanding of its recurring operational performance. These items of income and expense notably include: impairment losses in respect of property, plant and equipment and intangible assets, gains or losses on sale of assets, certain large restructuring and environmental expenses which would hamper the interpretation of recurring operating income, certain expenses related to litigation and claims or major damages, whose nature is not directly related to ordinary operations, costs related to the spin-off of the Arkema Businesses. Recurring operating income: this is calculated as the difference between operating income and other income and expenses as previously defined. EBITDA: this corresponds to recurring operating income increased by depreciation and amortization (previously called “Recurring EBITDA”). Working capital: this corresponds to the difference between inventories, accounts receivable, prepaid expenses and other current assets and tax receivables on the one hand and accounts payable, other creditors and accrued liabilities and income tax liabilities on the other hand. Capital employed: this is calculated by aggregating the net carrying amounts of intangible assets, property, plant and equipment, equity affiliate investments and loans, other investments, other non-current assets (excluding deferred tax assets) and working capital. Net debt: this is the difference between current and non-current debt and cash and cash equivalents. 16. Cash flow statements Cash flows in foreign currencies are translated into euros using the average exchange rates of each period. Cash flow statements exclude foreign exchange differences arising from the translation into euros of assets and liabilities 20 Half year financial report Free translation – For information purposes only recognized in balance sheets denominated in foreign currencies at the end of the period (except for cash and cash equivalents). In consequence, cash flows cannot be recalculated on the basis of the amounts shown in the balance sheet. Changes in short-term borrowings and bank overdrafts are included in cash flows from financing activities. 17. Share-based payment In application of IFRS2 “Share-based payment”, the stock options and free shares granted to management and certain Group employees are measured at their fair value at the date of grant. The fair value of the options is calculated using the Black & Scholes model. It is recognized in personnel expenses on a straight-line basis over the period from the date of grant to the date from which the options can be exercised. The fair value of rights under free share grants corresponds to the opening market price of the shares on the day of the Board of Directors meeting that decides on the grant, adjusted for dividends not received during the vesting period. It is recognized in personnel expenses on a straight-line basis over the vesting period of the rights. 18. Earnings per share Earnings per share correspond to the division of net income (Group share) by the weighted average number of ordinary shares in circulation during the period in question. Diluted earnings per share correspond to the division of net income (Group share) by the weighted number of ordinary shares, both of these figures being adjusted to take account of the effects of all dilutive potential ordinary shares. The effect of dilution is thus calculated taking account of stock options and free share grants. 19. Discontinued operations A discontinued operation is defined, according to IFRS 5, as a component of the Group’s activity that either has been disposed of or is classified as held for sale and which represents a separate major line of business or geographical area of operations that forms part of a single coordinated disposal plan. The income statement, cash flow statement and balance sheet items relating to discontinued operations are presented in a specific note to the financial statements for the current financial year, with comparatives for the previous year. The Group presents, for the financial year in question, assets and liabilities of continuing operations in the standard manner, to which assets and liabilities of discontinued operations are added. These latter assets and liabilities are not offset but are rather presented respectively in two specific balance sheet captions. The balance sheet of the previous financial year is not modified. The Group presents, for the financial year in question and the previous financial year, the income statement of continuing operations in the standard manner, to which a single amount representing the income or loss after tax of discontinued operations is added. For the two financial years considered, the Group presents the cash flow statement without distinguishing between continuing operations and discontinued operations. 20. New accounting standards and interpretations which are not yet applicable The impact of standards and interpretations published, respectively, by the IASB (International Accounting Standards Board) and the IFRIC (International Financial Reporting Interpretations Committee) that are not yet in force at June 30, 2007 and that have not been applied early by the Group, such as the amendment to IAS23, IFRS8, IFRIC11 and IFRIC12, are currently being analyzed. 21 Half year financial report Free translation – For information purposes only NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Effects of seasonality Arkema’s standard pattern of business shows seasonality effects. Various characteristics contribute to these effects: demand for products manufactured by Arkema is generally weaker in the summer months (July-August) and in December, notably as a result of the slowdown in industrial activity during these months, particularly in France and in Southern Europe; in certain businesses, particularly those serving the refrigeration market, the level of sales is generally higher in the first half of the year than in the second half. annual maintenance shutdowns of production plants occur more often in the second half than in the first half. These seasonality effects observed in the past are not necessarily representative of future trends, but they can however influence variations in results and in working capital between the different quarters of the financial year. Revenues from ordinary activities earned in a seasonal, cyclical or occasional manner during a financial year are neither anticipated nor deferred at interim reporting dates unless it would be appropriate to anticipate or defer them at year end. 2. Information by business segment Operating income and assets are allocated between business segments prior to inter-segment adjustments. Sales prices between segments approximate market prices. June 30, 2006 In millions of euros Non-Group sales Inter segment sales Total sales Recurring operating income Other income and expenses Operating income Equity in income of affiliates Details of certain non-cash expenses by segment: Depreciation and amortization Asset impairment Changes in non-current provisions recognized through income Vinyl Products 710 40 750 17 (5) 12 - (8) - 14 Industrial Chemicals 1318 92 1410 104 - 104 - (57) - (3) Performance Products 923 8 931 39 (23) 16 - (44) - (32) Corporate 4 - 4 (36) (12) (48) - (1) - 36 Group Total 2954 124 (40) 84 - (110) - 15 EBITDA 25 161 83 (35) 234 Intangible assets and property, plant, and equipment additions 37 57 38 2 134 The June 30, 2006 consolidated financial statements were restated for discontinued operations in respect of all the above items except “Intangible assets and property, plant, and equipment additions” which is taken from the cash flow statement (see note B19 accounting policies / Discontinued operations). 22 Half year financial report Free translation – For information purposes only June 30, 2007 In millions of euros Non-Group sales Inter segment sales Total sales Recurring operating income Other income and expenses Operating income Equity in income of affiliates Details of certain non-cash expenses by segment: Depreciation and amortization Asset impairment Changes in non-current provisions recognized through income EBITDA Intangible assets and property, plant, and equipment additions Vinyl Products 750 31 781 49 (4) 45 1 (12) - (3) 61 32 Industrial Chemicals 1 308 80 1 388 96 (51) 45 - (51) - (38) 147 36 Performance Products 916 10 926 61 (22) 39 - (43) - (12) 104 38 Corporate 3 - 3 (29) (2) (31) - (1) - 24 (28) 2 Group Total 2977 177 (79) 98 1 (107) - (29) 284 108 3. Information by geographical area Non-Group sales are presented on the basis of the geographical location of customers. June 30, 2006 In millions of euros Non-Group sales France 541 Rest of Europe 1 144 NAFTA (1) 765 Asia 371 Rest of the world 133 Total 2 954 June 30, 2007 In millions of euros France Rest of Europe NAFTA (1) Asia Rest of the world Total Non-Group sales 545 1 213 684 385 150 2 977 (1) NAFTA: United States, Canada and Mexico The figures at June 30, 2006 do not take into account amounts related to discontinued operations presented in note 6. 4. Other income and expenses In millions of euros 30.06.2006 30.06.2007 Expenses Income Net Expenses Income Net Restructuring and environmental charges (31) (31) (80) (80) Goodwill impairment charges Asset impairment charges (other than goodwill) Damages, litigation and claims (1) (1) (15) (15) Gains (losses) on sales of assets 16 16 Other (10) 2 (8) Total other income and expenses (42) 2 (40) (95) 16 (79) The amounts related to discontinued operations are presented in note 6. 23 Half year financial report Free translation – For information purposes only In the first half of 2006, restructuring and environmental charges mainly include additional expenses in relation to the consolidation of the chlorochemicals business in France for €5 million (these expenses were not able to be provided for because of their nature) and an increase of €23 million in provisions following the announcement of the definitive closure of the production site at Villers-Saint-Paul (France). Other expenses mainly relate to costs arising on the Spin-Off of the Arkema Businesses. In the first half of 2007, restructuring and environmental charges mainly include the French sites of Pierre-Bénite (€48 million), Carling (€6 million) and Doryl at Le Havre (€8 million), together with the sites in Bonn (Germany, €8 million) and Vlissingen (Netherlands, €7 million). (See note A-1 Highlights). Damages, litigation and claims costs mainly relate to the fire which occurred at Lavera (France). (See note A-3 Highlights). Gains (losses) on sales of assets mainly include the proceeds on the sale of the land at Tacoma (United States). (See note A-2.4 Highlights). 5. Income taxes The effect of French tax consolidation put in place in 2007 was a current tax saving of €8.8 million in the Group’s financial statements at the end of June 2007. 6. Discontinued operations Discontinued operations include the Cerexagri business sold on 1 February 2007. The Cerexagri business is presented at June 30, 2006 and June 30, 2007 under a single income statement caption “Net income of discontinued operations” (including, for 2007, the capital gain on the sale). In millions of euros Consolidated accounts 30.06.06 Consolidated accounts 30.06.07 Cerexagri income statement Sales Recurring operating income Other income and expenses Operating income Net income Minority interests Net income – Group share Depreciation and amortization EBITDA (*) corresponds to the capital gain made on the sale. 122 12 - 12 8 - 8 (1) 13 - * 18 18 18 - 18 - - 7. Earnings per share The calculation of earnings per share and diluted earnings per share is presented below: June 30, 2006 June 30, 2007 Weighted average number of ordinary shares * 60 453 823 60 453 823 Dilutive effect of stock options 143 063 Dilutive effect of free share grants 96 366 Weighted average number of potential ordinary shares 60 453 823 60 693 252 (*)The weighted average number of ordinary shares used for the calculation of earnings per share for the first half of 2006 is the number of ordinary shares in circulation since the Spin-Off on May 18, 2006. 24 Half year financial report Free translation – For information purposes only Earnings per share are calculated as follows: June 30, 2006 June 30, 2007 Net income – Group share 37 67 Earnings per share (€) 0.61 1.11 Diluted earnings per share (€) 0.61 1.10 8. Changes in accounting policies and reclassifications to the published consolidated financial statements As set out in section B, Arkema decided to abandon the “corridor” method and to use the option provided by the “Actuarial Gains and Losses, Group plans and disclosures” amendment to IAS 19 of December 2004 which enables recognition of actuarial gains and losses arising from changes in actuarial assumptions directly in shareholders’ equity under the “Statement of recognized income and expenses” caption. This change in accounting policy was treated retrospectively in accordance with IAS 8. The impacts on shareholders’ equity and the balance sheet are presented in the tables below in (1) and (6). Amortization of actuarial gains and losses in the published accounts at June 30, 2006 was not material. In addition, reclassifications were made to the consolidated financial statements at December 31, 2006 in order to ensure their comparability with the consolidated financial statements for 2007, in accordance with the provisions of IAS 8 relating to accounting policies, changes in accounting estimates and errors. These reclassifications relate to asset and liability accounts, and in consequence affect the corresponding cash flow statement captions. The impacts of these accounting changes are as follows: In millions of euros 01.01.2006 published Changes in accounting policies and reclassifications 01.01.2006 after effects of changes Paid-in surplus and retained earnings 1366 (54) (1) 1312 In millions of euros Equity affiliates: investments and loans 31.12.2006 published 100 Changes in accounting policies and reclassifications 4 (2) 31.12.2006 after effects of changes 104 Other non-current assets 125 (4) (2) 121 Accounts receivable 1051 (40) (3) 1011 Accounts payable 786 5 (4) (5) 791 Prepaid expenses and other current assets 213 (11) (4) 202 Other creditors and accrued liabilities 369 (55) (3) (5) 314 Provisions and other non-current liabilities 855 36 (6) 891 Paid-in surplus and retained earnings 1345 (36) + 4 (6) 1313 Deferred income tax assets 32 4 (6) 36 (1) At January 1, 2006, group paid-in surplus and retained earnings were decreased by €54 million, with a double entry being recognized to provisions (+€69 million) and deferred income tax assets (+€15 million). This follows the change in the accounting policy in respect of actuarial gains and losses, which are now recognized immediately against shareholders’ equity, in application of IAS 19. 25 Half year financial report Free translation – For information purposes only At January 1, 2006, the balance of actuarial gains and losses was €45 million for pension benefits and €24 million for other employee benefit obligations. (2) The “Equity affiliates: investments and loans” caption is impacted by a reclassification of + €4 million correcting the “Other non-current assets” caption. (3) Credit balances on receivables accounts are reclassified from the “Other creditors and accrued liabilities” caption to the “Accounts receivable” caption for €40 million. (4) Debit balances on payables accounts are reclassified from the “Prepaid expenses and other current assets” caption to the “Accounts payable” caption for €11 million. (5) The “Accounts payable” caption is also impacted by a reclassification of + €16 million from the “Other creditors and accrued liabilities” caption. (6) The “Provisions and other non-current liabilities” caption was increased by €36 million with a double entry to reserves: (cid:1) Including €26 million of actuarial gains and losses recognized immediately against shareholders’ equity following the change in accounting policy described in (1). Before recognition of the change in accounting policy, the balance of unamortized actuarial gains and losses at December 31, 2006 was €8 million for pension benefits and €18 million for other employee benefit obligations. (cid:1) Including €10 million of actuarial gains and losses generated by the effects of the French social security financing law of November 30, 2006 which modified French retirement mechanisms. The consequences of these adjustments have been reflected in the change in deferred taxes. The “Deferred income tax assets” caption was increased by €4 million with a double entry to retained earnings. 9. Intangible assets In the first half of 2007, no provisions for impairment of intangible assets were recorded. This was also the case in the first half of 2006. 10. Property, plant and equipment In the first half of 2007, capital expenditure on property, plant and equipment amounted to €106 million (€130 million in the first half of 2006). Furthermore, the Group sold and scrapped property, plant and equipment with a gross value of €44 million (€20 million in the first half of 2006). In the first half of 2007, no provisions for impairment of property, plant and equipment were recorded apart from those booked in the context of restructuring and sale transactions, which amounted to approximately €20 million. 11. Inventories In the first half of 2007, the Group recognized a net increase of €3 million of provisions for impairment of inventories. This compared to a net reversal of €6 million in provisions for impairment of inventories in the first half of 2006. 12. Provisions and other non-current liabilities 12.1. Other non-current liabilities Other non-current liabilities amount to €32 million at June 30, 2007, compared with €34 million at December 31, 2006. 26 Half year financial report Free translation – For information purposes only 12.2. Provisions In millions of euros Pensions and similar post employment benefit obligations Litigation and claims Environmental contingencies Restructuring Other At January 1, 2007 296 * 52 213 127 169 Increases in provisions 13 1 75 4 Reversals in provisions on use (13) (1) (7) (34) (4) Reversals of unused provisions (4) Changes in scope Translation adjustments (1) (2) (1) Other (9) (1) 3 Discontinued operations At June 30, 2007 51 * The amounts at January 1, 2007 take into account the effects of changes in accounting policies and reclassifications described in note 8. 286 204 168 167 12.3. Provisions for pensions and similar post-employment benefit obligations At June 30, 2007, provisions for pensions and similar benefits are mainly comprised of a Group pre-retirement plan in an amount of €16 million, pension benefits of €173 million and other benefits of €97 million. Other benefits are mainly comprised of healthcare plans. Pension assets amount to €15 million at June 30, 2007. 12.4. Provisions for litigation and claims These mainly correspond to provisions recognized in respect of proceedings in progress in Europe pertaining to antitrust legislation (provision of €31 million in liabilities less €18 million in “other non-current assets”). 12.5. Provisions for environmental contingencies Provisions for environmental contingencies are recognized to cover expenses related to soil and water table clean-up, mainly: In France for €103 million. In the United States for €84 million, of which €64 million in respect of former industrial sites covered by the Total indemnity (receivable recognized in “Other non-current assets” for an amount of €46 million). 12.6. Restructuring provisions Restructuring provisions are mainly in respect of restructuring of activities in France for €136 million and in the United States for €6 million. 12.7. Other provisions Other provisions are mainly comprised of long-service awards of €50 million and provisions for removal of asbestos of €15 million. 13. Contingent liabilities 13.1. Environment Arkema’s business activities are subject to constantly changing local, national and international regulations on the environment and safety, which entail meeting increasingly complex and restrictive requirements. In this regard, these activities can involve a risk of Arkema’s liability being called upon, particularly in respect of cleanup of sites and industrial safety. 27 Total 857 93 (59) (4) (4) (7) 876 Half year financial report Free translation – For information purposes only Taking account of the information available, agreements signed with Total, and the provisions for environmental contingencies recognized in the accounts, ARKEMA’s management considers that the environmental liabilities identified at this point are valued and recognized in the financial statements to the best of their knowledge at these dates. However if laws, regulations or government policy in respect of environmental matters were to change, Arkema’s obligations could change, which could lead to additional costs. Clean-up of sites The competent authorities have made, are making or may in the future make specific demands that the Group rehabilitate or control emissions at certain sites that it is currently operating, or that it operated or disposed of in the past, at neighboring sites or at sites where the Group stored or disposed of waste. Sites currently in operation: Arkema has many sites of which a certain number are probably polluted in view of their age and the range of activities that are carried out on them, or that were carried out on them in the past. As regards these sites, certain situations have been identified and Arkema has already carried out certain clean-up work, or otherwise developed action plans and recognized provisions in order to cover future clean-up work. In the light of (i) the uncertainties over the technical means to be implemented, (ii) potential issues that are unknown (iii) uncertainties over the actual time required for remediation compared with the estimated time (e.g. “pump and treat”), and (iv) potential changes in regulations, the possibility that the expenses that the Group will incur will be higher than the amounts covered by reserves cannot be excluded. These potential excess costs relate mainly to the sites in Calvert City (United States), Carling (France), Günzburg (Germany), Jarrie (France), Pierre-Bénite (France), Riverview (United States), Rotterdam (the Netherlands) and Saint-Auban (France) and could adversely affect the Group’s business, results and financial condition. Closed industrial sites (Former industrial sites): Total has directly or indirectly taken over the closed industrial sites. 13.2. Litigation, claims and proceedings in progress 13.2.1. Antitrust litigation Proceedings carried out by the European Commission During the first half of 2007, out of the four cases initiated by the European Commission (concerning heat stabilizers, plasticizers and alcohols, sodium chlorate and solvents) the European Commission informed Arkema that it was abandoning the two in respect of plasticizers and alcohols and solvents. Furthermore, on July 31, 2007, Arkema received a Statement of Objections in respect of sodium chlorate. No particular developments arose on the heat stabilizers' case during the period. Similarly, the cases resulting from Arkema France’s appeals to the European Court of First Instance in respect of the European Commission’s decisions in the monochloracetic acid, hydrogen peroxide and methacrylates cases are still pending before the court. These various events did not cause any changes to be made to the overall provision recognized at December 31, 2006 Proceedings in the United States and Canada In the class action lawsuits initiated in the United States by direct purchasers of plastic additives against Arkema Inc. and other producers of plastics additives alleging violation of U.S. antitrust laws, the trial court has certified several “sub-classes” composed of purchasers of different categories of plastic additives products. Arkema Inc. has appealed this class certification decision. Similarly, during the first half of 2007, in the class actions initiated in the U.S against Arkema Inc., Arkema France, alleging violations of U.S. antitrust laws, the district court certified a single class of direct purchasers of hydrogen peroxide and persalts. Arkema Inc and Arkema France have also appealed that class certification decision. No notable developments arose in the first half of 2007 with respect to Arkema Inc. in the grand jury investigations initiated by the Antitrust Division of the Department of Justice regarding hydrogen peroxide and polymethyl methacrylate. Similarly, for the same period, no notable developments occurred with respect to Arkema Inc. or Arkema France in the respective class action civil lawsuits filed by: (a) indirect purchasers of hydrogen peroxide; (b) indirect purchasers of plastic additives; (c) and direct and indirect purchasers of methyl methacrylate and polymethyl methacrylate, against Arkema Inc or Arkema France, in the United States and Canada. There have also been no notable 28 Half year financial report Free translation – For information purposes only developments in the cases filed in the United States against Arkema Inc. or Arkema France by direct purchasers who have “opted out” of the class action lawsuits in the plastics additives and hydrogen peroxide matters. 13.2.2 Occupational illness In the manufacture of its products, the Group uses and has used toxic or hazardous substances. Despite the safety and monitoring procedures that have been instituted at Group level and for each production site, Group employees may have been exposed to such substances and may develop specific pathologies as a result of such exposure. In this respect, like most industrial companies, in the past, the Group has used a variety of insulating or heat-proofing materials containing asbestos in its production facilities. Consequently, certain employees may have been exposed to such materials before they were gradually eliminated and replaced with substitute products. At its French sites, the Group anticipated the regulatory provisions applicable to asbestos (Decrees No. 96-97 and 96-98 of February 7, 1996 and Decree No. 96-1133 of December 24, 1996). The Group made an inventory of asbestos- containing building materials within its premises, notified employees of the results of these investigations and took the collective and individual protective measures required by the applicable laws. However, claims for occupational illness related to past asbestos exposure have been filed against the Group, mostly for periods before 1980. Given the latency period of asbestos-related pathologies, a large number of claims for occupational illness are likely to be filed in the years ahead. The Group has recognized provisions to cover the risks of employer liability claims related to notified cases of occupational illness. 13.2.3 Other litigation and claims and contingent liabilities Arkema France During the first half of 2007, no notable developments arose in respect of either the litigation with Gasco relating to its request for damages for an alleged breach of contract and breach of an exclusivity agreement, or the contingent liability relating to the supply by Arkema France of various products for the coating of items used in sanitary treatment equipment. During the same period, Arkema France was sued by the liquidator appointed for a company called Pyrénées Transport, and two ex-shareholders of this company, for a total amount of €1.7 million. The plaintiffs maintain that Arkema France made the recovery of Pyrénées Transport from its court-administered receivership pronounced in July 2001 impossible by ceasing all commercial relations with this company some time afterwards. CECA The litigation between Intradis and CECA, under which the former company is seeking to have CECA rendered liable in the matter of the pollution of a site acquired by Intradis, did not undergo any particular developments in the first half of 2007. The companies are awaiting the judgment of the Administrative Appeals Court of Douai to which Intradis appealed. Arkema Inc In May of 2007, the U.S. Internal Revenue Service (“IRS”) closed its investigation into non-issuance of W-2 forms for certain foreign “immigrant” employees and the non-declaration of certain remuneration relating to stock option or stock purchase plans by certain U.S. affiliates of Total, S.A., which had included Arkema Inc. Arkema Inc. is not aware of any additional development in the investigation by the civil branch of the IRS, which investigation remains pending. No notable developments arose in the first half of 2007 in the proceedings in progress with Norit Americas Inc following this company’s acquisition of an active carbon production unit, or in the proceedings in respect of third party claims relating to exposure to asbestos or products containing asbestos or in the case brought by the family of an employee of a company called ETC who died during the delivery of an odorizing product. 14. Debt Group net debt amounted to €198 million at the end of June 2007, taking account of cash and cash equivalents of €68 million; it is mainly denominated in euros and bears interest at variable rates. 29 Half year financial report Free translation – For information purposes only The Group has a multi-currency syndicated credit facility in a maximum amount of €1,100 million, with a five-year duration, maturing on March 31, 2012, with a possible extension for an additional period of one year after this date. In February 2007 a request to extend the duration of the facility for an additional year was accepted by the lenders in an amount of €1,094 million. The purpose of the credit facility is to finance, in the form of drawings and bank guarantees, the Group's general corporate purposes. The credit facility provides for prepayment in certain cases, including a change of control over Arkema; should this clause be triggered by a lender, it could lead to prepayment and cancellation of the commitments of such a lender. It also incorporates: (i) information undertakings, including a representation pertaining to the continued validity and enforceability against the guarantors of the indemnities granted by Total S.A. and certain entities of Total as described in note 18 on off- balance sheet commitments, (ii) standard undertakings for this type of agreement, including, undertakings relating, among other things, to certain restrictions in connection with (but not limited to) the granting of securities, the completion of merger or restructuring transactions, the sale or purchase of assets and the Group's debt. Depending on the case, such restrictions will not apply to ordinary operations or to transactions involving amounts below certain thresholds (iii) a financial undertaking: ARKEMA undertakes to maintain a ratio of consolidated net debt to consolidated EBITDA (tested every six months) of less than 3. At the end of June 2007, the average interest rate of the syndicated credit facility is approximately 4.1 % and the unused amount under the credit facility is €1,010 million; 14.1. Analysis of net debt by category In millions of euros 31.12.2006 30.06.2007 Finance lease obligations Bank loans Other non-current debt 19 20 13 18 18 12 Non-current debt 52 48 Finance lease obligations Syndicated credit facility Other bank loans Other current debt 2 330 108 3 2 90 119 7 Current debt 443 218 Debt 495 266 Cash and cash equivalents (171) (68) Net debt 324 198 14.2. Analysis of debt by maturity The breakdown of debt by maturity is as follows: In millions of euros 31.12.2006 30.06.2007 2007 2008 2009 2010 2011 2012 and beyond 443 16 6 5 5 20 215 15 6 5 5 20 Total 495 266 30 Half year financial report Free translation – For information purposes only Amounts maturing in 2007 include the current drawings under the syndicated credit facility for an amount of €90 million. 14.3. Analysis of debt by currency ARKEMA’s debt is mainly denominated in euros. In millions of euros Euros US Dollars Chinese Yuan Korean Won Other Total 31.12.2006 457 2 17 8 10 495 30.06.2007 232 2 18 6 8 266 15. Derivatives 15.1. Foreign currency risk The Group’s subsidiaries are exposed to transaction risks related to foreign currencies. Exchange rates can fluctuate between the time when the price is agreed with the customer or supplier and the date at which the transaction is settled. Group policy is to consider that a risk exists, and should thus be taken into account in the foreign currency position to be hedged, as soon as the event generating the risk is certain: this leads the Group to hedge, in almost all cases, its accounting foreign currency positions generated by sales and purchases. Conversely, the Group only rarely hedges forecast transaction flows. Foreign currency risk is identified at subsidiary level, each of which hedges, in almost all cases, its net foreign currency positions with Arkema’s central treasury department. Arkema’s central treasury department manages foreign currency risk at Group level in an overall manner and thus covers a net foreign currency position. As a result, the conditions required under IAS 39 for application of hedge accounting are not met. Hedging is mainly carried out through spot foreign currency transactions in the transaction currency. In certain subsidiaries ARKEMA uses derivative instruments, mainly forward purchases and sales of foreign currencies (in particular American dollars) with short maturities with a fair value close to zero. In millions of euros Notional amount at 31/12/06 > 6 months and < 12 months < 6 months > 12 months Notional amount at 30/06/07 > 6 months and < 12 months < 6 months > 12 months Forward purchases and sales of foreign currencies 208 _ _ 366 _ _ 15.2. Interest rate risk The Group, in almost all cases, finances its business through the variable rate syndicated credit facility of €1,100 million available to it. ARKEMA has not entered into any interest rate derivatives. 15.3. Risk related to raw materials and energy The prices of certain raw materials used by Arkema are highly volatile and their fluctuations lead to significant variations in cost of production of the Group’s products; in addition, because of the importance of the Group’s requirements in terms of energy resources resulting notably from the electrically intensive nature of certain of its manufacturing processes, Arkema is also very sensitive to changes in the price of energy. In order to limit the impact of price volatility of the principal raw materials it uses, Arkema can decide to use derivatives matched with existing contracts or can negotiate fixed price contracts for limited periods. 31 Half year financial report Free translation – For information purposes only The notional amounts and the fair values of these derivatives are presented below. Swap contracts Notional amount of contracts at 30.06.2006 Notional amount of contracts at 30.06.2007 Fair value of contracts (€ millions) < 1 year < 5 years > 5 years < 1 year < 5 years > 5 years 30.06.2007 30.06.2006 and > 1 year et > 1 an Aluminum (in tons) 925 675 600 Immaterial 0.02 Gas (in MMBTU) 550,000 (0.19) Tin (in tons) 10 (0.02) Naphtha (in tons) 2,000 0.05 When the conditions required under IAS 39 for application of hedge accounting are met, the raw materials derivatives used by the Group are designated as cash flow hedges. At June 30, 2007, no hedging reserve has been recognized in shareholders equity in this respect because of the immaterial nature of the amounts in question. Furthermore, recognition in the balance sheet, at fair value, of derivatives that did not meet the criteria for hedge accounting did not have a material impact on the financial statements for the first half of 2007. 16. Related parties Transactions between companies that are fully consolidated within the Group have been eliminated in the consolidation process. In addition, in the normal course of business, the Group has business relationships with certain non- consolidated companies or with companies which are consolidated under the equity method. These transactions mainly concern purchases of raw materials and interest charges on current accounts. The amounts are presented in the table below. The corresponding transactions were carried out at normal market prices. In millions of euros Equity accounted affiliates Non-consolidated companies Transactions 30.06.2006 30.06.2007 30.06.2006 30.06.2007 Sales of goods Other income Purchases of goods and services Other expenses (including cost of debt) 12 12 (39) - 14 6 (49) (7) 27 - (23) (5) 2 - - Balance sheet amounts resulting from transactions 31.12.2006 30.06.2007 31.12.2006 30.06.2007 Assets Accounts receivable Financial receivables and other current assets 6 23 13 19 - - Liabilities Accounts payable Debt and other creditors NB: The new companies consolidated in 2007 are listed in “Scope of consolidation”. 7 - 15 - - 17. Share-based payment 17.1. Stock options In May 2007, the Board of Directors granted Arkema stock options to management and certain Group employees. 32 Half year financial report Free translation – For information purposes only The main characteristics of the stock option plans are as follows: 2006 plan 2007 plan Date of Shareholders’ meeting Date of Board of Directors meeting Minimum period until exercise Minimum period until sale Period of validity Exercise price Number of options In circulation at January 1, 2006 Granted Cancelled Exercised In circulation at December 31, 2006 In circulation at January 1, 2007 Granted Cancelled Exercised In circulation at June 30, 2007 May 10, 2006 May 10, 2006 July 4, 2006 May 14, 2007 2 years 4 years 8 years 28.36 2 years 4 years 8 years 44.63 540 000 - - 540 000 540 000 - - - 540 000 - - - - - 600 000 - - 600 000 Total - 540 000 - - 540 000 540 000 600 000 - - 1 140 000 17.2. Free share grant In May 2007, the Board of Directors granted rights to free shares in Arkema to management and certain Group employees. The grant will only be definitive after a vesting period of 2 years as from the date of the Board of Directors meeting that decided on the grant and subject to meeting a performance criterion. Shares definitively granted will only be able to be sold after a conservation period of 2 years. The main characteristics of the free share grant plans are as follows: 2006 plan 2007 plan Date of Shareholders’ meeting Date of Board of Directors meeting Vesting period Conservation period Number of free share grants In circulation at January 1, 2006 Granted Cancelled Exercised In circulation at December 31, 2006 In circulation at January 1, 2007 Granted Cancelled Exercised In circulation at June 30, 2007 May 10, 2006 May 10, 2006 July 4, 2006 May 14, 2007 2 years 2 years 2 years 2 years 150 000 - - 150 000 150 000 - - - 150 000 - - - - - 125 000 - - 125 000 Total - 150 000 - - 150 000 150 000 125 000 - - 275 000 17.3. Expense related to share-based payment The amount of the expense recognized at June 30, 2007 in respect of share based payment was €2.6 million, broken down as follows: (cid:3) €1.1 million in respect of the stock option plans in progress (cid:3) €1.5 million in respect of the free share grant plans in progress 33 Half year financial report Free translation – For information purposes only 18. Off-balance sheet commitments 18.1. Commitments given 18.1.1. Off-balance sheet commitments given in ordinary course of business The main commitments given are summarized in the table below: In millions of euros 31.12.2006 30.06.2007 Guarantees granted 121 68 Comfort letters 2 2 Share of partnership (EIG) liabilities 6 0 Contractual guarantees 10 23 Customs and excise guarantees 7 8 Total 146 101 The guarantees granted mainly concern bank guarantees granted in favor of local authorities and public bodies (state agencies, environmental agencies) in respect of environmental obligations or concerning classified sites and bank guarantees granted to secure the debt of partnership entities (amount net of the counter-guarantee issued by the partner to the extent of its interest in the partnership entity). 18.1.2. Contractual commitments Irrevocable purchase commitments In the normal course of business, ARKEMA signed multi-year purchase agreements for raw materials and energy for the operational requirements of its factories, in order to guarantee the security and continuity of supply. Signature of such contracts over periods of between 1 to 15 years is a normal practice for companies in ARKEMA’s business sector in order to cover their needs. These purchase commitments were valued taking into account, on a case-by-case basis, ARKEMA’s financial commitment to its suppliers, as certain of these contracts include clauses which oblige ARKEMA to take delivery of the minimum volumes as set out in the contract or, otherwise, to pay financial compensation to the supplier. Depending on the case, these commitments are reflected in the purchase agreements in the form of notice periods, indemnification to be paid to the supplier in case of early termination of the contract or “take or pay” clauses. The total amount of the Group’s financial commitments thus valued amounted to €853 million June 30, 2007 (see maturity schedule below): In millions of euros 31.12.2006 30.06.2007 2007 221 157 2008 144 177 2009 120 128 2010 73 87 2011 until expiry of the contracts 289 304 Total 847 853 34 Half year financial report Free translation – For information purposes only Lease commitments In the context of its business, ARKEMA has signed lease contracts, of which the majority are operating lease agreements. Lease agreements signed by ARKEMA are mainly in respect of property rental (head offices, land, Fos port concession) and transportation equipment (rail cars, containers, transport barges). The amounts presented in the table below correspond to the future minimum payments that will need to be made in accordance with these contracts (only the irrevocable portion of future lease payments has been valued). The change at June 30, 2007 mainly relates to the signature of the lease relating to the new head office. 31.12.2006 30.06.2007 In millions of euros 2007 Capitalized leases 2 Non- capitalized leases 18 Capitalized leases 1 Non- capitalized leases 12 2008 3 16 3 23 2009 3 13 3 20 2010 3 9 3 17 2011 and beyond 17 64 17 93 Nominal value of future lease payments 29 120 28 165 Finance cost 8 NA 8 NA Present value NA: not applicable 21 NA 20 NA 18.1.3. Other commitments given Warranties in respect of unrecorded liabilities granted Sales of businesses generally involve the provision of warranties in respect of unrecorded liabilities to the purchaser. In the past, ARKEMA has granted such warranties on the sale of businesses. In most cases these warranties are capped and granted for a limited period of time. They are also limited in terms of their coverage to certain types of litigation and claims. In the majority of cases, they cover risks of occurrence of environmentally related claims. The cumulative residual amount of capped warranties in respect of unrecorded liabilities granted in the past by ARKEMA amounted to €58 million at December 31, 2006 and €73 million at June 30, 2007. These amounts are stated net of provisions recognized in the balance sheet in respect of such warranties. 18.2. Commitments received Commitments received from Total in 2006 In connection with the Spin-Off of Arkema’s Businesses, Total S.A. and certain Total companies have extended certain indemnities, or have assumed certain obligations, for the benefit of ARKEMA, relating to (i) certain antitrust litigation, (ii) certain actual or potential environmental liabilities of the Group arising from certain sites in France, Belgium and the United States, the operations on which in the majority of cases have ceased, (iii) certain tax matters, and (iv) the Spin-Off of Arkema’s Businesses. These indemnities and obligations granted in the context of the spin-off are described below. 18.2.1. The Indemnities extended by Total in respect of certain antitrust litigation concurrence In order to cover potential risks in connection with antitrust litigation relating to anti-competitive agreements in Europe and the United States and arising from facts prior to the Completion Date (or prior to March 7, 2006, as the case may be), Total S.A. has extended to Arkema S.A. and Elf Aquitaine, Inc. has extended to Arkema Finance France, a subsidiary of Total S.A., the share capital of which was transferred to Arkema S.A. in the Spin-Off of Arkema Businesses, the indemnities, the principal terms of which can be described as follows. 35 Half year financial report Free translation – For information purposes only Subject-matter of the Indemnities By an agreement dated March 15, 2006 (the Arkema European Indemnity), Total S.A. agreed to indemnify Arkema S.A. for 90% of (i) any payment due by Arkema S.A. or any of its subsidiaries (with the exception of Arkema Finance France and its subsidiaries) pursuant to a money judgment imposed by EU antitrust authorities, or by national antitrust authorities of a Member State of the European Union, for violations of antitrust laws relating to anticompetitive agreements, (ii) any damages payable by Arkema S.A. or any of its subsidiaries (with the exception of Arkema Finance France and its subsidiaries) pursuant to civil proceedings arising from the same facts which form the basis of a judgment referred to in (i), and (iii) certain expenses incurred in connection with such proceedings by Arkema S.A. or any of its subsidiaries (with the exception of Arkema Finance France and its subsidiaries). By an agreement dated March 15, 2006 (the Arkema U.S. Indemnity), Total S.A. also agreed to indemnify Arkema S.A. for 90% of (i) any payment due by Arkema S.A. or any of its subsidiaries (with the exception of Arkema Finance France and its subsidiaries) pursuant to a money judgment imposed by U.S. courts or antitrust authorities for violations of U.S. federal or state antitrust laws relating to anticompetitive agreements, or in respect of a settlement entered into in the context of such proceedings, (ii) any damages payable by Arkema S.A. or any of its subsidiaries (with the exception of Arkema Finance France and its subsidiaries) pursuant to civil proceedings arising from the same facts which form the basis of a judgment referred to in (i), and (iii) certain expenses incurred in connection with such proceedings by Arkema S.A. or any of its subsidiaries (with the exception of Arkema Finance France and its subsidiaries). In connection with the sale of Arkema Delaware, Inc. shares by Elf Aquitaine, Inc. to Arkema Finance France, Elf Aquitaine, Inc. agreed, in the agreement dated March 7, 2006 (the Arkema Delaware Indemnity), to indemnify Arkema Finance France for 90% of (i) any payment due by Arkema Finance France or any of its subsidiaries pursuant to a money judgment imposed by U.S. courts or antitrust authorities for violations occurring prior to March 7, 2006 of U.S. federal or state antitrust laws relating to anticompetitive agreements, or in respect of the settlement entered into in the context of such proceedings, (ii) any damages payable by Arkema Finance France or any of its subsidiaries pursuant to civil proceedings arising from the same facts which form the basis of a judgment referred to in (i), and (iii) certain expenses incurred by Arkema Finance France or any of its subsidiaries in connection with such proceedings. Arkema Finance France has benefited from an indemnification of $8 million under the Arkema Delaware Indemnity. At June 30, 2007, the residual amount covered by this indemnity amounts to $885 million. Finally, Total S.A. extended to Arkema S.A. a supplemental indemnity dated March 15, 2006 (the Supplemental Arkema Delaware Indemnity) covering 90% of sums payable by Arkema Finance France or any of its subsidiaries in respect of litigation relating to anticompetitive agreements in the United States in excess of the maximum amount covered by the Arkema Delaware Indemnity. The Arkema European Indemnity, the Arkema U.S. Indemnity, the Arkema Delaware Indemnity and the Supplemental Arkema Delaware Indemnity are hereinafter referred to together as the Indemnities and individually as an Indemnity. Liabilities not covered by the Indemnities The following liabilities are not covered by the Indemnities: — liabilities arising from facts occurring after the Completion Date in the case of the Arkema European Indemnity and the Arkema U.S. Indemnity, or after March 7, 2006 in the case of the Arkema Delaware Indemnity and the Supplemental Arkema Delaware Indemnity (including, in case of liabilities arising from facts occurring both before and after the relevant date, the portion of the liability relating to the period after the Completion Date or after March 7, 2006, as the case may be); — liabilities arising from violations of antitrust laws other than those prohibiting anticompetitive agreements; and — liabilities imposed by authorities outside the European Union (in the case of the Arkema European Indemnity) or the United States (in the case of the other Indemnities). Participation of Total in the management of litigation covered by the Indemnities The Indemnities provide for the participation by Total S.A. or Elf Aquitaine, Inc., as the case may be, in the management of litigation covered by the Indemnities, which involves a certain number of obligations on the part of Arkema S.A. and Arkema Finance France, in particular the obligation to notify Total S.A. or Elf Aquitaine, Inc., as the case may be, of certain events occurring in the context of proceedings covered by the Indemnities and act in accordance with the advice and instructions of Total S.A. or Elf Aquitaine, Inc, as the case may be, relating to such proceedings. Total S.A. and Elf Aquitaine, Inc., as the case may be, also have the right to assume sole control of the defence of the 36 Half year financial report Free translation – For information purposes only Group entity in question. Failure by Arkema S.A. or Arkema Finance France to comply with these obligations can result, in certain circumstances, in the automatic termination of the Indemnity, as described below. Amount of the indemnification The Arkema European Indemnity, whose deductible of €176.5 million has been exceeded, gave rise to indemnification of €171 million being received from Total SA. The Arkema U.S. Indemnity, the Arkema Delaware Indemnity and the Supplemental Arkema Delaware Indemnity do not have a deductible. Cross-indemnities of Arkema S.A. and Arkema Inc. Arkema S.A. and Arkema Inc. have agreed to indemnify Total S.A. in respect of any liability covered by the Indemnities but which is borne, not by a Group entity but by Total S.A. or one of its subsidiaries due to facts attributable to a Group company, whether the liability of Total S.A. or of its subsidiaries is determined to be direct or derivative, exclusive or joint and several, relative to the liability of the Group entity to which the facts are attributable. However, this cross-indemnity by Arkema S.A. and Arkema Inc. will be reduced by the indemnity which would have been paid by Total S.A. or Elf Aquitaine, Inc., as the case may be, under the relevant Indemnity if the liability had been borne by a Group company. Consequently, if the cross-indemnity of Arkema S.A. and Arkema Inc. is triggered, Arkema S.A. or Arkema Inc., as the case may be, would only be obligated to indemnify Total S.A. for 10% of the liabilities borne by Total S.A. or one of its subsidiaries (in the case of the Arkema European Indemnity, this 10% relates to the amount, if any, that exceed the deductible). Term of the indemnities The Arkema European Indemnity and the Arkema U.S. Indemnity are valid for a term of 10 years from the Completion Date. The Arkema Delaware Indemnity and the Supplemental Arkema Delaware Indemnity are valid for a term of 10 years from March 7, 2006. The Arkema S.A. cross-indemnity is valid for a term of 10 years from the Completion Date. The Arkema Inc. cross-indemnity is valid for a term of 10 years from March 7, 2006. Termination of the Indemnities Indemnities shall terminate in the event that a natural person or legal entity, acting alone or in concert with others, acquires, directly or indirectly, more than one third of the voting rights of Arkema S.A. (voting rights are subject to a ceiling of 10% — and 20% in the case of double voting rights — unless a purchaser acquires at least two thirds of the Total number of Arkema S.A. shares in a public transaction targeting all Arkema S.A. shares) or if the Group transfers, directly or indirectly, in one or several times, to the same third party or to several third parties acting in concert, assets representing more than 50% of the Group’s “enterprise value” (as defined in the Indemnities) at the time of the relevant transfer. The Arkema European Indemnity and the Arkema U.S. Indemnity will terminate if Arkema S.A. loses control of Arkema France. The Arkema Delaware Indemnity and the Supplemental Arkema Delaware Indemnity will terminate if Arkema S.A. loses control of Arkema Finance France, or if Arkema Finance France loses control of Arkema Delaware Inc. Finally, the Indemnities will terminate in the event of a material breach by the Group of its obligations under the relevant Indemnity if such breach has remained uncured for 30 days after notice by the indemnifying party demanding its cure. The Indemnities provide that, upon the occurrence of a termination event, the only liabilities of Group companies that will remain covered by the Indemnities are those, if any, which (i) fell due prior to the termination event and (ii) were notified to Total S.A. or to Elf Aquitaine, Inc., as the case may be, prior to the termination event. 18.2.2. Obligations and indemnities given in respect of Former Industrial Sites In order to cover certain risks relating to certain industrial sites situated in France, Belgium and the United States in respect of which the Group is or could be held liable, and where, for the most part, operations have ceased (the Former Industrial Sites), Total S.A. companies have entered with Arkema S.A. or its subsidiaries into indemnity and service agreements the principal terms of which can be described as follows: 37 Half year financial report Free translation – For information purposes only Agreement relating to Former Industrial Sites located in France Arkema France has entered into various agreements with Total companies and in particular Retia. Pursuant to these agreements, the Total companies concerned, in consideration of a flat fee already paid by Arkema France, assume all the investigation, restoration and monitoring obligations that could be imposed on Arkema France by the competent administrative authorities in respect of industrial sites located in France the operation of which, for the most part, has ceased. To this end, the agreements provide, in particular, (i) in the majority of cases, for the transfer of ownership of the sites concerned by Arkema France to the Total companies concerned, (ii) for the Total companies concerned to be substituted for Arkema France in the capacity of last operator of those sites whenever that is possible, (iii) for the performance by the Total companies concerned of the restoration obligations of the sites in question in accordance with the applicable rules and (iv) for the indemnity by the Total companies in respect of the financial consequences of claims which could be brought against Arkema France by reason of the impact of those sites on the environment. In most cases, Arkema France retains responsibility for the consequences concerning employees and former employees of Arkema France as well as third parties, in terms of public health or occupational pathologies, of the industrial activities formerly carried out by Arkema France and its predecessors on the sites which are the subject of the aforementioned agreements. Agreement relating to the Former Industrial Site at Rieme in Belgium On December 30, 2005, Arkema France sold all of the shares that it held in the share capital of the Belgian company Resilium Belgium to the company Septentrion Participations, a subsidiary of Total S.A. The company Resilium Belgium is the owner of a Former Industrial Site located at Rieme in Belgium. Having regard to the future costs that might arise from the restoration of the Former Industrial at Rieme, Arkema France has paid the company Septentrion Participations financial compensation. In exchange, Septentrion Participations has undertaken to assume all restoration obligations in respect of the site at Rieme and to indemnify Arkema France against all claims, actions and complaints relating to Resilium Belgium, its assets and its liabilities. Agreement relating to certain Former Industrial Sites located in the United States In March 2006, Arkema Finance France consummated the acquisition from Elf Aquitaine Inc. and Arkema France of Arkema Delaware Inc., a holding company of most of the Group’s operations in the United States. The negotiated terms of the stock purchase agreement among Elf Aquitaine Inc., Legacy Sites Services LLC and Arkema Finance France, dated March 7, 2006 (the Arkema Delaware Main SPA) required Elf Aquitaine Inc. to use $270 million to capitalize a new subsidiary, Legacy Sites Services LLC that will perform remediation services and indemnify the Group against the cost of environmental contamination liabilities incurred by the Group entities covered by this indemnity, and related personal injury and property damage claims associated with contamination at 35 of the Group’s closed and formerly operated facilities and 24 third party sites where the Group’s liability arises solely out of wastes shipments from the sites other than currently operated sites. In exchange for this indemnification, Arkema Finance France agreed to grant to Legacy Sites Services LLC control over remediation activities and the defence of claims relating to contamination liabilities at these facilities and sites, subject to certain exceptions and exclusions. The sites currently operated by the Group are excluded from this indemnity, as are sites that received waste associated with current operations of the Group and certain sites where no significant restoration work is currently underway or anticipated and other sites where the Group could be held liable for environmental pollution. These other sites include, for example, sites where remediation has been conducted in the past or where future remediation costs or liability are believed to be insignificant or non-existent based upon information available at the time when the indemnity was entered into. Arkema Finance France has waived any claims against Legacy Sites Services LLC, Total S.A. or their respective subsidiaries in respect of the sites not covered by the indemnity. The Legacy Sites Services LLC indemnity covers the costs of restoration and clean-up of the soil and groundwater, the costs of related defence and settlement costs and personal injury, property and natural resource damages. The indemnity does not cover liabilities unrelated to site remediation, in particular liabilities in respect of products manufactured on the said sites, liability arising from certain dangerous and potentially dangerous substances, particularly asbestos exposure and criminal liability The indemnity described above is capped at $270 million. The amount received by ARKEMA under this indemnity amounted to $16 million. At the same time as the stock purchase agreement and the indemnity described above, Legacy Site Services LLC and Arkema Inc. entered into a supplemental contamination indemnity agreement pursuant to which Legacy Site Services LLC will indemnify the liabilities of the Group in excess of $270 million, on the same terms, for the same sites and subject to the same exceptions as the indemnity described in the preceding paragraph. 38 Half year financial report Free translation – For information purposes only 18.2.3. Tax indemnity granted by Total S.A In order to cover potential tax risks related to the business activities transferred by the Group to Total or from the reorganization in connection with the Spin-Off of Arkema’s Businesses, Total S.A. has granted an indemnity to Arkema S.A., the main terms of which can be described as follows. Purpose of the tax indemnity Under the terms of an agreement dated March 15, 2006 (the Tax Indemnity), Total S.A. has undertaken to indemnify Arkema S.A. for (i) liabilities arising from any tax, customs or levies not covered by reserves, for which the Group would remain liable, when such liabilities arise from (x) activities in the petrochemicals and specialties sectors that were transferred by the Group to Total and the triggering event of which occurred prior to the date of such transfer; or (y) the reorganization undertaken for the purpose of spinning off Arkema’s Businesses from Total’s Chemicals sector, including, in particular, the Elf Spin-Off, the Total Spin-Off, the Merger and certain prior securities reclassification transactions; (ii) interest, fines, penalties, additional charges or other costs related thereto; and (iii) provided that Total S.A. has given its prior consent, the expenses incurred by Arkema S.A. or the relevant Group company in connection with such liabilities. The Tax Indemnity, however, does not cover tax reassessments in connection with Arkema’s Businesses (with the exception of reassessments that may affect Arkema UK, as indicated below) and is subject to the specific terms described hereafter. Involvement of Total S.A. in the management of litigation covered by the Tax Indemnity The Tax Indemnity provides for a procedure pursuant to which Arkema S.A. must involve Total S.A. in the management of the tax audits or litigation relating to the tax liabilities covered by the Tax Indemnity. In particular, this procedure entails the obligation to notify Total S.A. of any event that is likely to give rise to a liability covered by the Tax Indemnity and to comply with the advice and instructions of Total S.A. in defending the interests of the relevant Group company. In the event of unresolved disagreements on the strategy, means, method or type of such defence, the final decision will be taken by Total S.A.. Arkema S.A.’s failure to comply with its obligations may result in automatic termination of the Tax Indemnity. Amount of the indemnity The Tax Indemnity includes no deductible, trigger threshold or cap. In the event that a liability cannot be clearly connected to the petrochemicals and specialties sector transferred by the Group to Total in relation to Arkema’s Businesses, Arkema S.A. and Total S.A. will each bear 50% of the said liability. Special provisions applying to Group companies that were included in the Total S.A. French tax group (groupe d’intégration fiscale de Total S.A.) The tax sharing agreements (conventions d’intégration fiscale) between Total S.A. and the Group companies that were included in the Total S.A. French tax group provide that these companies will be required to pay to Total S.A. any additional taxes and penalties that may be due by Total S.A., as the head company of the tax group, where they relate to the taxable income of such companies during the time they were included in the tax group. However, these companies will be exempt from such payments to Total S.A. with respect to tax liabilities relating to their taxable income for fiscal years during which they were included in the Total S.A. tax group, if such liabilities are covered by the Tax Indemnity. In exchange, these companies waive the indemnity to which they would have been entitled pursuant to the Tax Indemnity. Furthermore, in the event of a tax reassessment of a Group company relating to Arkema’s Businesses (which are not covered by the Tax Indemnity) for a fiscal year during which such company was included in the Total S.A. tax group, such company shall be liable to pay Total S.A. a contribution calculated on the basis of the net amount of the reassessment after the following allowances: — if, following this reassessment, the Group Company has realized a profit in respect of the fiscal year to which the reassessment applies, a deductible of €3 million per company and per fiscal year; — if, following this reassessment, the Group Company has relished a loss in respect of the fiscal year to which the reassessment applies, an allowance equal to the amount of the losses generated by such company with respect to Arkema’s Businesses, as determined by Arkema S.A. and Total S.A. 39 Half year financial report Free translation – For information purposes only Special provisions applying to certain foreign companies of the Group No recourse shall be taken against Arkema Deutschland in respect of any tax reassessments applying to the years during which it was included in the German tax groups formed by Total Mineralöl und Chemie and Total Deutschland. Tax liabilities arising from the reorganization undertaken for purposes of separating Arkema’s Businesses from Total’s Chemicals sector in the Netherlands, which may have been incurred by Atotech B.V. and Atotech Nederland B.V. as a result of the Dutch tax group of which Arkema North Europe B.V. is the parent company are excluded from the Tax Indemnity. Any other tax liabilities arising from reassessments that may be applied to Atotech B.V. and Atotech Nederland B.V. as a result of the Dutch tax group will be assumed by these companies, which remain under Total S.A.’s control. Arkema UK will benefit from a UK corporation tax indemnity covering any tax reassessments against it relating to Arkema’s Businesses. This indemnity will be limited to the amount of losses generated by the Arkema Businesses that have been transferred by Arkema UK as result of the group relief instituted by Total Holdings UK for corporation tax purposes in the United Kingdom. Payment of the indemnity The liabilities covered by the Tax Indemnity will give rise to an indemnification payment only if they are definitely determined by an enforceable decision that is not subject to appeal. Duration of the Tax Indemnity The Tax Indemnity shall expire at the end of two months following the statute of limitations effectively applicable to the tax liabilities covered by the Tax Indemnity. Beneficiary of the Tax Indemnity The Tax Indemnity is only for the benefit of Arkema S.A. or, as the case may be, Arkema France, if Arkema S.A. is merged into Arkema France. 18.2.4. Other indemnities given in the context of the Spin-Off of Arkema’s Businesses As part of the Total Spin-Off Agreement, Total S.A. and Arkema S.A. made certain representations and warranties, some of them in connection with the separation of ARKEMA from Total. The agreement states that Total S.A. grants no indemnities, other than the indemnities and agreements entered into by the Total entities that are described in this paragraph, particularly with respect to the assets and the business activities of all ARKEMA entities, or the liabilities or obligations associated with such entities or activities, which Arkema S.A. declares that it is aware of and for which Arkema S.A. shall be responsible, including in the case of the appearance of any item that is not known as of the date of the Total Spin-Off Agreement, or of an increase in the amount of the aforesaid liabilities or obligations. Arkema S.A. releases Total S.A. from any such claim, except in the case of New Claims as defined below. Representations and warranties relating to information exchanged in preparing the Spin-off of Arkema’s Businesses Total S.A. and Arkema S.A. have made mutual representations and warranties with respect to the accuracy and completeness of the information exchanged by the two companies in preparing the Spin-Off of Arkema’s Businesses. Representations and warranties relating to potential claims After conducting all necessary and customary due diligence, Arkema S.A. has declared, recognized and warranted that, to its knowledge and to the knowledge of the ARKEMA entities, as of the date of the Total Spin-Off Agreement, there were no grounds for claims, actions or complaints by any ARKEMA entity or by any one of its de facto or de jure directors, corporate officers or executives against any Total entity or any one of its de facto or de jure employees, directors, corporate officers or executives (a Total Entity). The claims, actions or complaints mentioned above are hereinafter referred to as the Arkema Claim(s). Consequently, Arkema S.A. has undertook to indemnify Total S.A. and hold it harmless for the consequences of any Arkema Claim against any Total Entity. Arkema S.A. has waived all Arkema Claims other than New Claims, as defined below. Arkema S.A.’s indemnity and the waiver mentioned in the two preceding paragraphs do not apply to any potential Arkema Claim that would be based on (i) events attributable to a Total Entity or (ii) grounds of which no ARKEMA entity has any knowledge as of the date of the Total Spin-Off agreement, after completing the necessary and customary 40 Half year financial report Free translation – For information purposes only due diligences, but only if and insofar as such events or grounds do not relate solely to the fact that the ARKEMA companies belonged to Total prior to the Completion Date, or relate solely to the exercise of corporate offices or management functions by Total Entities within ARKEMA (the New Claim(s)). At the same time, Total S.A. has declared, recognized and warranted that to its knowledge and to the knowledge of the Total entities, as of the date of the Total Spin-Off agreement, there were no grounds for claims, actions or complaints by any Total entity or by any one of its de facto or de jure directors, corporate officers or executives against any ARKEMA entity or any one of its de facto or de jure employees, directors, corporate officers or executives (the ARKEMA Entity(ies)), arising from the ownership or operation by ARKEMA entities of the companies or businesses acquired by Total before the Completion Date (the Total Claim(s)). Total S.A. has declared, recognized and warranted that it had no Total Claim(s) arising from the exercise of corporate offices or functions by Arkema Entities within Total, and has waived all Total Claims on its part. Consequently, Total S.A. has agreed to indemnify and hold harmless Arkema S.A. for the consequences of any Total Claim against any ARKEMA Entity. Duration of the indemnities No indemnity given in the Total Spin-Off agreement will survive after 10 years from the Completion Date. In addition, the Arkema Delaware Main SPA provides that Arkema Finance France, which became a subsidiary of Arkema S.A. on the Completion Date, will indemnify Elf Aquitaine, Inc., a subsidiary of Total S.A., for any taxes that may result from a breach of representations or covenants under the Arkema Delaware Main SPA or the Tax Sharing Agreement dated January 1, 2001, among Total Holdings USA, Inc. and certain of its subsidiaries, by Arkema Finance France, Arkema Delaware Inc., or certain of the subsidiaries of Arkema Delaware Inc. Elf Aquitaine, Inc. will likewise indemnify Arkema Finance France for any taxes resulting from such breaches by Elf Aquitaine, Inc. Moreover, the Arkema Delaware Main SPA provides that Elf Aquitaine Inc. and its US subsidiaries, on the one hand, and Arkema Delaware Inc. with certain of its US subsidiaries, on the other hand, will each be responsible for their share of US federal and state income taxes before March 7, 2006, as computed under the Tax Sharing Agreement, because for this period Elf Aquitaine, Inc. files a consolidated US federal income tax return that includes Arkema Delaware Inc. and certain of its subsidiaries and pays the taxes due in respect of the consolidated US federal income tax return. Arkema Delaware Inc. and certain of its subsidiaries will be required to pay such amounts to Elf Aquitaine, Inc. For periods after March 7, 2006, Arkema Delaware, Inc. and its US subsidiaries will be responsible to file income tax returns separately from Elf Aquitaine, Inc. and separately to make all tax payments in respect of these returns. With the exception of the obligations or indemnities described in this section, Total has not given to ARKEMA other material commitments or indemnities of the kind referred to in the first paragraph of this section "Commitments received from Total in 2006”. 19. Subsequent events Acquisition of Coatex On July 3, 2007, Arkema announced its intention to acquire Coatex, a company currently owned by the Omya group. This acquisition is being made in the context of the strategy of refocusing Arkema’s portfolio of businesses. Coatex’s businesses present strong synergies with those of Arkema. This operation remains subject to the approval of the competition authorities. Coatex, whose head office and main site are at Genay, near Lyon, also has industrial sites in Europe, the United States and Asia. It employs 300 people worldwide and had sales of €150 million in 2006. 41 Half year financial report Free translation – For information purposes only SCOPE OF CONSOLIDATION AT JUNE 30, 2007 Companies consolidated for the first time in 2007 are marked with an asterisk (*). Companies sold in 2007 that formed part of discontinued operations in 2006 are marked with two asterisks (**). Arkema Wyoming Holdings Inc and Wyoming Holdings Delaware Inc were liquidated. The percentage of control indicated below also corresponds to the Group’s ownership interest in each entity. Akishima Chemical Industries Co.ltd Japan 100.00 FC Alphacan BV Netherlands 100.00 FC Alphacan Espana SA Spain 99.84 FC Alphacan Omniplast GmbH Germany 100.00 FC Alphacan Perfiles SAU Spain 99.84 FC Alphacan SA France 100.00 FC Alphacan Soveplast France 100.00 FC Alphacan SPA Italy 100.00 FC Altuglas International Services SAS France 100.00 FC Altuglas International SPA Italy 100.00 FC Altuglas International BV Netherlands 100.00 FC Altuglas International Mexico Inc United States 100.00 FC Altuglas International S.A. France 100.00 FC Altuglas International UK Ltd United Kingdom 100.00 FC Altumax Deutschland GmbH Germany 100.00 FC Altumax Europe SAS France 100.00 FC American Acryl LP United States 50.00 EM American Acryl NA LLC United States 50.00 EM Anning Decco Fine Chemical Co. Ltd. ** China 55.00 FC Arkema South Korea 100.00 FC Arkema SA France 100.00 FC Arkema Ameriques SAS (ex Arkema Finance France) France 100,00 FC Arkema Asie (ex Sofia) France 100,00 FC Arkema Beijing Chemicals Co. Ltd China 100.00 FC Arkema BV Netherlands 100.00 FC Arkema Canada Inc Canada 100.00 FC Arkema Catalyst India Ltd India 100.00 FC Arkema Changshu Chemicals Co Ltd China 100.00 FC Arkema Changshu Fluorochemical Co. Ltd China 100.00 FC Arkema Changshu Haike Chemicals * China 49.00 FC 42 Arkema China Investment Co. Ltd Arkema Company Ltd Arkema Delaware Inc. Arkema Europe (ex Mimosa SAS) Arkema Europe Holdings BV Arkema Finance Nederland BV Arkema France Arkema GmbH Arkema Guangzhou Chemicals Co. Ltd Arkema Holding Ltd Arkema Holland Holding BV Arkema Inc. Arkema Iniciadores SA de CV Arkema KK Arkema Ltd (UK) Arkema Ltd (Vietnam) Arkema North Europe BV Arkema Peroxides India Private Limited Arkema Pte Ltd Arkema Pty Ltd Arkema Quimica ltda Arkema Quimica SA Arkema Hydrogen Peroxide Co. Ltd, Shanghaï Arkema RE Arkema Rotterdam BV Arkema Shanghai Distribution Arkema sp Z.o.o Arkema SRL Arkema Vlissingen BV Arkema Yoshitomi Ltd Ceca Italiana SRL Ceca SA Cerexagri ** Cerexagri B.V. ** Cerexagri Delaware Inc. ** Cerexagri Iberica SA Unipersonal ** Half year financial report Free translation – For information purposes only China 100.00 FC Hong-Kong 100.00 FC United States 100.00 FC France 100,00 FC Netherlands 100.00 FC Netherlands 100.00 FC France 100.00 FC Germany 100.00 FC China 100.00 FC United Kingdom 100.00 FC Netherlands 100.00 FC United States 100.00 FC Mexico 100.00 FC Japan 100.00 FC United Kingdom 100.00 FC Vietnam 100.00 FC Netherlands 100.00 FC India 100.00 FC Singapore 100.00 FC Australia 100.00 FC Brazil 100.00 FC Spain 99.84 FC China 66.67 FC Ireland 100.00 FC Netherlands 100.00 FC China 100.00 FC Poland 100.00 FC Italy 100.00 FC Netherlands 100.00 FC Japan 49.00 EM Italy 100.00 FC France 100.00 FC France 100.00 FC Netherlands 100.00 FC USA 100.00 FC Spain 99.84 FC 43 Half year financial report Free translation – For information purposes only Cerexagri Inc. ** USA 100.00 FC Cerexagri Italia SRL ** Italy 100.00 FC Cerexagri Ziraat VE Kimya Sanayi Ve Ticaret Ltd Sirketi ** Turkey 100.00 FC Delaware Chemicals Corporation United States 100.00 FC Desarollo Quimica Industrial SA ** Spain 100.00 FC Dorlyl snc France 100.00 FC Febex SA Switzerland 96.77 FC Luperox Iniciadores SA de CV Mexico 100.00 FC Maquiladora General de Matamoros sa de cv Mexico 100.00 FC Michelet Finance, Inc. United States 100.00 FC MLPC International France 100.00 FC Oxochimie France 50.00 EM Ozark Mahoning Company United States 100.00 FC Plasgom Spain 99.84 FC Plasticos Altumax SA Spain 100.00 FC Qatar Vinyl Company Limited Qatar 12.90 EM Résil Belgium Belgium 100.00 FC Resilia SRL Italy 100.00 FC Resinoplast France 100.00 FC Safepack Products Ltd ** Israel 100.00 FC SEKI Arkema South Korea 51.00 FC Shanghaï Arkema Gaoyuan Chemicals Co, Ltd China 91.07 FC Stannica LLC United States 40.00 EM Sunclear France 100.00 FC Turkish Products, Inc. United States 100.00 FC Viking chemical company United States 100.00 FC Vinilis Spain 35.00 EM Vinylberre France 65.05 FC Vinylfos France 79.00 FC NB: FC: Full consolidation EM: Equity method 44 Half year financial report Free translation – For information purposes only Declaration of the person responsIble FOR THE HALF-YEAR FINANCIAL REPORT I certify that, to the best of my knowledge, the condensed consolidated financial statements at June 30, 2007 have been prepared in accordance with the applicable accounting standards, and give a fair view of the assets, liabilities, financial position and profit or loss of the company and all its consolidated companies, and that the half-year activity report includes a fair review of the main events of the first six months of the year, their impact on the condensed consolidated financial statements, the major transactions between related parties, and a description of the main risks and uncertainties for the remaining six months of the financial year. Thierry Le Hénaff Chairman and CEO 45 Half year financial report Free translation – For information purposes only This is a free translation into English of the statutory auditors' review report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Arkema, S.A. Period from January 1st to June 30, 2007 Statutory Auditors’ Review report on the first half-year financial information for 2007 (free translation of the French original) To the shareholders, In our capacity of statutory auditors of ARKEMA S.A. and in accordance with the requirements of article L. 232-7 of the French Commercial Law (Code de commerce), we hereby report to you on: : the review of the accompanying condensed half-year consolidated financial statements of Arkema for the period January 1st to June 30, 2007; the verification of information contained in the half-year management report. These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half- year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standards of the IFRSs as adopted by the European Union applicable to Interim financial information. Without qualifying the conclusion expressed above, we draw attention to note 8, "Changes in accounting policies and reclassifications to the published consolidated financial statements", and to the information mentioned below the income statement, which set out the changes in accounting policies performed over the period. In accordance with professional standards applicable in France, we have also verified the information given in the half- year activity report, commenting the condensed half-year consolidated financial statements subject of our review. We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements. Paris la Défense, August 8th, 2007 The Statutory Auditors French original signed by KPMG AUDIT Département de KPMG S.A. ERNST & YOUNG Audit Bertrand Desbarrières Jean-Louis Caulier François Carrega 46

Semestriel, 2007, Chemistry, ARKEMA

write me a financial report

Semestriel

Retail

Carrefour

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Retail ### Company: Carrefour ### Response:

2022 HALF-YEAR FINANCIAL REPORT Groupe Carrefour – Comptes consolidés au 31 décembre 2020 - 1 - Carrefour group – Half-year financial report – June 30, 2022 2 Contents Business review for the six-month period ended June 30, 2022 page 4 Condensed consolidated financial statements for the six-month period ended June 30, 2022 page 22 Statutory Auditors’ review report on the half-yearly financial information page 69 Declaration by the persons responsible page 71 The English version of the Half-year Financial Report is a free translation from the original which was prepared in French. The original French version of the document prevails over this translation. Carrefour group – Half-year financial report – June 30, 2022 3 Business review for the six-month period ended June 30, 2022 1. Business review and consolidated income analysis 1.1. Main income statement indicators 1.2. Analysis of the main income statement items 1. Business review and consolidated income analysis 1.1. Main income statement indicators 1.2. Analysis of the main income statement items 2. Group financial position and cash flows 2.1. Shareholders' equity 2.2. Net debt 2.3. Statement of cash flows 2.4. Financing and liquidity resources 2.5. Restrictions on the use of capital resources 2.6. Expected sources of funding 2. Group financial position and cash flows 2.1. Shareholders' equity 2.2. Net debt 2.3. Statement of cash flows 2.4. Financing and liquidity resources 2.5. Restrictions on the use of capital resources 2.6. Expected sources of funding 3. Outlook page 15 4. Other information page 16 4.1. Accounting principles 4.2. Significant events of the period 4.3. Restatement of the 2021 consolidated half-year financial statements 4.4. Main related-party transactions 4.5. Subsequent events 4.6. Risk factors Carrefour group – Business review for the six-month period ended June 30, 2022 - 4 - 1. Business review and consolidated income analysis 1.1 Main income statement indicators Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the condensed consolidated half-year financial statements as of June 30, 2022; data for the comparative period presented have also been adjusted for inflation. At June 30, 2022, comparative data for the first half of 2021 have been restated (indicated as “first-half 2021 restated” below) in the consolidated financial statements to reflect the decision by the IFRS Interpretations Committee (IFRS IC) published in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements (see Note 4.2 to the condensed consolidated half-year financial statements as of June 30, 2022). (in millions of euros) First-half 2022 First-half 2021 restated % change % change at constant exchange rates Net sales 39,054 34,462 13.3% 10.3% Gross margin from recurring operations 7,824 7,365 6.2% 3.6% in % of net sales 20.0% 21.4% Sales, general and administrative expenses, depreciation and amortisation (7,010) (6,625) 5.8% 3.8% Recurring operating income 814 740 10.0% 1.6% Recurring operating income before depreciation and amortisation 1,987 1,873 6.1% 1.6% Recurring operating income after net income from equity-accounted companies 826 730 13.1% 4.6% Non-recurring income and expenses, net (85) (70) 22.7% 21.8% Finance costs and other financial income and expenses, net (186) (132) 40.3% 22.8% Income tax expense (202) (186) 8.4% 4.4% Net income/(loss) from continuing operations - Group share 250 248 0.8% (6.5)% Net income/(loss) from discontinued operations - Group share 5 23 (76.8)% (76.8)% Net income/(loss) - Group share 255 271 (5.7)% (12.4)% Free cash-flow¹ (1,177) (1,398) Net free cash-flow² (1,880) (1,990) Net debt³ 6,533 5,525 (1) Free cash flow corresponds to cash flow from operating activities before net finance costs and net interest related to lease commitments, after the change in working capital, less net cash from/(used in) investing activities. (2) Net free cash flow corresponds to free cash flow after net finance costs and net lease payments. (3) Net debt does not include lease liabilities or right-of-use assets (see Note 2.2). Net sales amounted to 39.1 billion euros in first-half 2022, an increase of 10.3% at constant exchange rates. Recurring operating income before depreciation and amortisation came in at 1,987 million euros, an improvement of 1.6% at constant exchange rates. Recurring operating income increased by 1.6% at constant exchange rates, to 814 million euros. Non-recurring operating income and expenses represented a net expense of 85 million euros, versus a net expense of 70 million euros in first-half 2021 as restated. This expense mainly corresponds to the combination of gains and losses on disposals of various assets (notably in France and Italy), revised estimates of historical risks (primarily tax risks), costs related to the acquisition of Grupo BIG in Brazil and impairment of assets (including Showroomprivé shares due to the alignment with the stock market share price at June 30, 2022). Finance costs and other financial income and expenses represented a net expense of 186 million euros, an increase of 53 million euros from first-half 2021, reflecting a higher cost of net Carrefour group – Business review for the six-month period ended June 30, 2022 - 5 - 1. Business review and consolidated income analysis debt (see Note 1.2), partially offset by a higher positive impact of hyperinflation in Argentina under IAS 29. The income tax expense for first-half 2022 amounted to 202 million euros, compared with the 186 million-euro expense recorded in first-half 2021 as restated. The Group reported net income from continuing operations of 250 million euros, which was stable compared with the restated amount for the first-half 2021. Net income – Group share came to 255 million euros, versus 271 million euros in first-half 2021 as restated. Free cash flow amounted to a negative 1,177 million euros, versus a negative 1,398 million euros in first-half 2021. Net free cash flow was a negative 1,880 million euros, versus a negative 1,990 million euros in first-half 2021. 1.2 Analysis of the main income statement items The Group’s operating segments consist of the countries in which it does business, combined by region, and “Global functions”, corresponding to the holding companies and other administrative, finance and marketing support entities. Net sales by region (in millions of euros) First-half 2022 First-half 2021 % change % change at constant exchange rates France 17,910 16,889 6.0% 6.0% Europe (excluding France) 10,636 10,158 4.7% 5.0% Latin America 9,244 6,208 48.9% 33.2% Asia (Taiwan) 1,263 1,208 4.6% (3.1)% TOTAL 39,054 34,462 13.3% 10.3% The Carrefour group reported net sales of 39.1 billion euros in first-half 2022, up 10.3% at constant exchange rates and up 10.0% restated for the application of IAS 29. In France, sales increased by 6.0% up 0.7% on a like-for-like basis1 (up 1.4% LFL in food and down 4.4% in non-food), reflecting a high basis of comparison relating to the health restrictions in place in the first half of 2021. The Group's market share increased in the first and second quarters, particularly in the hypermarket and convenience store formats. In Europe, excluding France, net sales increased by 5.0% at constant exchange rates and by 2.3% like-for-like compared with first-half 2021. This performance reflects growth in almost all countries. In Spain, lifted by steady market share gains, sales continued to grow during the period (up 4.1% LFL), notably with a good performance in food. In Italy (up 2.6% LFL), Carrefour confirmed its recovery with four consecutive quarters of like-for-like sales growth, driven by continuous improvement in customer satisfaction. In Belgium, sales were down 5.9% like-for-like in the first half of 2022 in an environment that remains highly competitive, still challenged by logistical difficulties that arose in the fourth quarter of 2021 due to significant disruptions experienced by an important logistics partner. In Poland (up 10.3% LFL), Carrefour confirmed its strong business momentum in a buoyant environment. In Romania (up 4.1% LFL), Carrefour posted solid growth. In Latin America, total sales rose by 33.2% at constant exchange rates and by 22.4% on a like-for-like basis. In Brazil, sales grew by 25.7% at constant exchange rates and 13.7% like- 1 Like-for-like sales generated by stores open for at least 12 months, excluding temporary store closures, at constant exchange rates, excluding petrol and calendar effects and excluding the IAS 29 impact. Carrefour group – Business review for the six-month period ended June 30, 2022 - 6 - 1. Business review and consolidated income analysis for-like, with a return to positive volumes observed during the first half of the year. Foreign exchange had a favourable effect of 22.7%. This excellent momentum reflects the ramp-up and success of sales initiatives designed to increase competitiveness. In Argentina, net sales growth was very strong, with a 67.0% increase on a like-for-like basis (pre IAS 29), particularly in food; Carrefour continued to strengthen its leadership position with continuous market share gains and increased volumes, amid high inflation. In Taiwan (Asia), sales fell by 3.1% at constant exchange rates (down 2.5% like-for-like), reflecting the impact of Covid-19-related store closures, compared with a strong historical performance associated with precautionary purchases in 2021. Net sales by region – contribution to the consolidated total (in %) First-half 2022¹ First-half 2021 France 47.1% 49.0% Europe (excluding France) 28.1% 29.5% Latin America 21.8% 18.0% Asia (Taiwan) 3.1% 3.5% TOTAL 100% 100% (1) At constant exchange rates. At constant exchange rates, the portion of sales generated outside France continued to rise, representing 52.9% in first-half 2022 versus 51.0% in first-half 2021. Recurring operating income by region (in millions of euros) First-half 2022 First-half 2021 % change % change at constant exchange rates France 194 187 3.8% 3.8% Europe (excluding France) 163 225 (27.8)% (27.5)% Latin America 444 309 43.7% 24.8% Asia (Taiwan) 40 47 (14.8)% (22.0)% Global functions (26) (28) (5.5)% (0.5)% TOTAL 814 740 10.0% 1.6% Recurring operating income increased by 74 million euros in first-half 2022 (up 1.6% at constant exchange rates), to 814 million euros. The sales margin represented 20.0% of net sales, down 134 bps. The change reflects investments in competitiveness, the increased proportion of low-margin petrol sales in total sales, and changes in the integrated/franchised store mix. In France, recurring operating income for the first half of 2022 totalled 194 million euros, up 3.8% in comparison with the first half of 2021. Operating margin was stable at 1.1%. This reflects the solid sales performance, combined with good cost reduction momentum, offsetting distribution cost inflation and investments in competitiveness. In Europe (excluding France), recurring operating income stood at 163 million euros, versus 225 million euros in first-half 2021, a decrease of 27.5% at constant exchange rates, mostly due to a sharp drop in Belgium. Excluding Belgium, recurring operating income for the region was stable overall. In Latin America, recurring operating income stood at 444 million euros, an increase of 24.8% at constant exchange rates, including a negative 16 million-euro impact related to the application of Carrefour group – Business review for the six-month period ended June 30, 2022 - 7 - 1. Business review and consolidated income analysis IAS 29 for Argentina. Operating margin fell by 17 bps to 4.8%. In Brazil, recurring operating income increased by 55 million euros in first-half 2022 at constant exchange rates, to 414 million euros. The sales margin shrank by 33 bps, reflecting the commercial policy implemented by Carrefour Brazil to enhance its attractiveness and its price leadership, to protect its customers’ purchasing power, and stronger promotional events. This resulted in steady market share gains in first-half 2022. In Argentina, recurring operating income improved significantly to represent 30 million euros, an increase of 22 million euros at constant exchange rates, thanks to excellent sales momentum and constant cost discipline. Operating margin increased by 77 bps to 2.1%. In Taiwan (Asia), recurring operating income came to 40 million euros, versus 47 million euros in first-half 2021. Depreciation and amortisation Depreciation and amortisation of property and equipment, intangible assets and investment property amounted to 653 million euros in first-half 2022 compared with 633 million euros in first-half 2021. Depreciation of right-of-use assets (IFRS 16) relating to property and equipment and investment property totalled 388 million euros in first-half 2022 compared with 369 million euros in first-half 2021. Including depreciation and amortisation of logistics equipment and of the related right-of-use assets (IFRS 16) included in the cost of sales, a total depreciation and amortisation expense of 1,173 million euros was recognised in the consolidated income statement for first-half 2022, compared with an expense of 1,133 million euros for first-half 2021. Net income/(loss) from equity-accounted companies The net income/(loss) from equity-accounted companies represented net income of 12 million euros, versus a net loss of 10 million euros in first-half 2021, reflecting the improved operational performance of Carmila, after it was heavily impacted by the health crisis in 2020 and 2021. Carrefour group – Business review for the six-month period ended June 30, 2022 - 8 - 1. Business review and consolidated income analysis Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as impairment of non-current assets, gains and losses on sales of non-current assets, restructuring costs and provision charges and income recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group's attention during the period. Non-recurring items represented a net expense of 85 million euros in first-half 2022, and the detailed breakdown is as follows: (in millions of euros) First-half 2022 First-half 2021 restated Gains and losses on disposals of assets 62 248 Restructuring costs (16) (260) Other non-recurring income and expenses (86) 4 Non-recurring income and expenses, net before asset impairments and write-offs (40) (9) Asset impairments and write-offs (45) (61) of which impairments and write-offs of goodwill − − of which impairments and write-offs of property and equipment, intangible assets and others (45) (61) NON-RECURRING INCOME AND EXPENSES, NET (85) (70) of which: Non-recurring income Non-recurring expense 135 (220) 405 (474) Gains and losses on disposals of non-current assets comprise gains and losses arising on various asset disposals, notably in France and Italy. Other non-recurring income and expenses recorded in first-half 2022 mainly included revised estimates of historical risks, mostly tax-related, as well as the costs related to the acquisition of Grupo BIG in Brazil (see Note 3.1 to the condensed consolidated half-year financial statements as of June 30, 2022). Asset impairments and write-offs recorded in first-half 2022 include the retirement of a variety of non-current assets, notably IT equipment in France for 8 million euros and related to certain stores, namely in France and Argentina. Write-offs of property, plant and equipment – offset by insurance payouts receivable classified under other non-recurring income and expenses – were also recognised in Taiwan following the fire at the Yang Mei logistics centre (see Note 3.2 to the condensed consolidated half-year financial statements as of June 30, 2022). In addition, the alignment of the net carrying amount of Showroomprivé shares with the stock market share price at June 30, 2022 represented a non-recurring expense of 10 million euros. Main non-recurring items in first-half 2021 (restated) Gains and losses on sales of assets mainly included the gain arising on the loss of control of Market Pay in France for a net amount of around 230 million euros (see Note 2.3 to the 2021 consolidated financial statements). Restructuring costs resulted from continued work towards objectives to improve operating performance and organisational efficiency. The expense included in non-recurring items related chiefly to severance paid or payable within the scope of the transformation plan concerning the headquarters in France (see Note 2.2 to the 2021 consolidated financial statements). Carrefour group – Business review for the six-month period ended June 30, 2022 - 9 - 1. Business review and consolidated income analysis Other non-recurring income and expenses recorded in first-half 2021 resulted primarily from the following items in Brazil: the impact of the Pinheiros real estate transaction, which generated income of 81 million euros following an exchange of assets in the city of São Paulo (see Note 2.3 to the 2021 consolidated financial statements); provision reversals (net of costs) on ICMS credits notably related to transfers between states on “basic products” were recognised for around 23 million euros following expiry of the limitation period for tax claims or further relief under tax amnesty programmes introduced by certain Brazilian states (see Note 6.3 to the 2020 consolidated financial statements); following the death of Mr Silveira Freitas, commitments were made by Carrefour Brazil to public authorities and non-profit organisations as part of a settlement agreement (“Termo de ajustamento de Conduta”) signed on June 11, 2021. It led to the recognition of a provision for 17 million euros (see Note 11.3 to the 2021 consolidated financial statements). Other non-recurring income and expenses recorded in first-half 2021 also included revised estimates of historical risks in Spain and the impacts related to the decision taken in May 2021 to discontinue Carrefour Banque's operations in Italy (see Note 2.3 to the 2021 consolidated financial statements). Asset impairments and write-offs included the retirement of a variety of non-current assets, in particular relating to IT in France for 23 million euros. Asset impairments and write-offs also include the write-off of configuration and customisation costs for SaaS solutions that can no longer be capitalised as a result of the application of the final IFRS IC decision published in April 2021, for 28 million euros (see Note 4.2 to the condensed consolidated half-year financial statements as of June 30, 2022). Operating income The Group ended first-half 2022 with operating income of 741 million euros, versus 660 million euros in first-half 2021 as restated. Finance costs and other financial income and expenses Finance costs and other financial income and expenses represented a net expense of 186 million euros in first-half 2022, corresponding to a negative 0.5% of sales versus a negative 0.4% of sales in first-half 2021. (in millions of euros) First-half 2022 First-half 2021 Finance costs, net (151) (80) Net interest, related to lease commitment (72) (52) Other financial income and expenses, net 37 (1) FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES, NET (186) (132) Finance costs, net amounted to 151 million euros, an increase of 71 million euros compared with first- half 2021. The change is attributable to Brazil and reflects several factors: the increase in bank borrowings relating to the acquisition of Grupo BIG, the increase in CDI (Certificado de Deposito Interbancário) interest rates, and the increase in the value of the Brazilian real against the euro. From 2019, in accordance with IFRS 16, finance costs and other financial income and expenses also include interest expenses on leases along with interest income on finance sub-leasing arrangements. Other financial income and expenses consist for the most part of late payment fees payable on certain liabilities, financial transaction taxes and the impacts of hyperinflation in Argentina, which increased in comparison with first-half 2021 due to rising inflation. Carrefour group – Business review for the six-month period ended June 30, 2022 - 10 - 1. Business review and consolidated income analysis Income tax expense The income tax expense for first-half 2022 amounted to 202 million euros, i.e., an effective tax rate of 36.4%, compared with the 186 million-euro expense recorded in first-half 2021 as restated, which corresponded to an effective tax rate of 35.3%. The effective tax rates for the first six months of 2022 and 2021 (restated) were impacted by the recognition of the CVAE (local business tax) in France and the absence of deferred tax assets in Italy. Apart from these factors, the first-half 2022 effective tax rate reflects the geographical breakdown of income before tax, with no other items significantly distorting the tax proof. The restated effective tax rate for first-half 2021 combined several factors which: decreased the rate, such as the low tax rates applied to capital gains arising on disposal of 60% of Market Pay in France and on the Pinheiros asset exchange in Brazil; increased the rate, such as the rise in deferred tax liabilities relating to the remeasurement of non-current assets in accordance with IAS 29 as a result of the increase in the applicable tax rate in Argentina. Net income attributable to non-controlling interests Net income attributable to non-controlling interests came to 103 million euros in first-half 2022, versus 94 million euros in first-half 2021 as restated. Net income/(loss) from continuing operations – Group share As a result of the items described above, the Group share of net income from continuing operations amounted to 250 million euros in first-half 2022, compared with 248 million euros in first-half 2021 as restated. Net income/(loss) from discontinued operations – Group share Net income from discontinued operations totalled 5 million euros in first-half 2022, compared with 23 million euros in first-half 2021. Carrefour group – Business review for the six-month period ended June 30, 2022 - 11 - 2. Group financial position and cash flows 2.1 Shareholders' equity At June 30, 2022, shareholder’s equity stood at 12,122 million euros, compared with 11,830 million euros at December 31, 2021, an increase of 293 million euros. The increase mainly reflects: net income for the period of 358 million euros; • other comprehensive income net of taxes amounting to 655 million euros, which reflected the significant increase in the value of the Brazilian real compared to December 31, 2021 and, under other consolidated reserves and net income, the remeasurement of the net defined benefit liability following the increase in discount rates applied for the eurozone as of June 30, 2022; 2021 dividends distributed in a total amount of 413 million euros, of which 380 million euros paid to Carrefour shareholders (entirely in cash) and 33 million euros to non-controlling shareholders, relating mainly to the Spanish and Brazilian subsidiaries; the reduction of Carrefour SA's share capital by cancelling 21,232,106 shares and then 12,506,325 shares, following the share buyback carried out in first-half 2022 in two tranches of 400 million euros and 350 million euros respectively; the portion of the Grupo BIG acquisition paid for in newly issued Carrefour Brazil shares for approximately 430 million euros. 2.2 Net debt Consolidated net debt increased from 2,633 million euros at December 31, 2021 to 6,533 million euros at June 30, 2022. The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year-end figure being structurally lower due to the significant volume of business recorded during December. The Group’s net debt breaks down as follows: (in millions of euros) June 30, 2022 December 31, 2021 Bonds and notes 6,593 6,052 Other borrowings 1,587 741 Commercial paper 1,400 − Total borrowings excluding derivative instruments recorded in liabilities 9,580 6,793 Derivative instruments recorded in liabilities 144 40 TOTAL BORROWINGS [1] 9,724 6,834 of which borrowings due in more than one year 5,915 5,491 of which borrowings due in less than one year 3,809 1,342 Other current financial assets ¹ 653 498 Cash and cash equivalents 2,539 3,703 TOTAL CURRENT FINANCIAL ASSETS [2] 3,192 4,201 NET DEBT [1] – [2] 6,533 2,633 (1) This item does not include the current portion of amounts receivable from finance sub-leasing arrangements (see Note 13.2.5 to the condensed consolidated financial statements for the six-month period ended June 30, 2022). Long and short-term borrowings (excluding derivatives) mature at different dates, through 2029 for the longest tranche of bond debt, leading to balanced repayment obligations in the coming years, as shown below: (in millions of euros) June 30, 2022 December 31, 2021 Due within 1 year 3,665 1,302 Due in 1 to 2 years 1,386 1,259 Due in 2 to 5 years 2,782 2,731 Due beyond 5 years 1,747 1,502 TOTAL BORROWINGS (EXCLUDING DERIVATIVE INSTRUMENTS RECORDED IN LIABILITIES) 9,580 6,793 Carrefour group – Business review for the six-month period ended June 30, 2022 - 12 - 2. Group financial position and cash flows Cash and cash equivalents totalled 2,539 million euros at June 30, 2022 compared with 3,703 million euros at December 31, 2021, representing a decrease of 1,165 million euros. 2.3 Statement of cash flows Net debt rose by 991 million euros in first-half 2022, versus a 307 million-euro increase in first-half 2021. The change is analysed in the Group's simplified statement of cash flows presented below: (in millions of euros) First-half 2022 First-half 2021 Change Opening net debt (2,633) (2,616) (16) Cash flow from operations 1,645 1,566 79 Change in working capital requirement (2,115) (2,138) 23 Change in consumer credit granted by the financial services companies 54 (103) 157 Net cash (used in)/from operating activities - total (416) (675) 259 Acquisitions of property and equipment and intangible assets ¹ Proceeds from the disposal of property and equipment and intangible assets - Business-related Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets (557) 68 (273) (539) 35 (219) (18) 33 (54) Free cash flow Payments related to leases (principal and interest) net of subleases payments received Finance costs, net (1,177) (551) (151) (1,398) (513) (80) 220 (39) (71) Net Free cash flow (1,880) (1,990) 110 Acquisitions of investments (936) (248) (688) Disposal of investments 25 188 (163) Change in treasury stock and other equity instruments (96) (443) 347 Decrease in capital of Carrefour SA (657) − (657) Increase in capital subscribed by non-controlling interests 2 0 1 Dividends paid (424) (473) 49 Other (including effect of changes in exchange rates) 66 57 9 Decrease/(Increase) in net debt (3,900) (2,909) (991) CLOSING NET DEBT (6,533) (5,525) (1,008) (1) Restated for the acquisition of Makro Atacadista stores in Brazil (acquisition of the 29th and last store on a full-ownership basis in first-half 2022 versus two in first-half 2021). Free cash flow came to a negative 1,177 million euros in first-half 2022, compared with a negative 1,398 million euros in first-half 2021, and mainly comprised: cash flow from operations of 1,645 million euros, versus 1,566 million euros in first-half 2021, an increase reflecting the higher recurring operating income before depreciation and amortisation; the change in working capital requirement, which amounted to a negative 2,115 million euros, versus a negative 2,138 million euros in first-half 2021; operational investments in an amount of 557 million euros, compared with 539 million euros in first-half 2021. Carrefour group – Business review for the six-month period ended June 30, 2022 - 13 - 2. Group financial position and cash flows 2.4 Financing and liquidity resources The Group’s main measures for strengthening its overall liquidity consist of: promoting prudent financing strategies in order to ensure that the Group's credit rating allows it to raise funds on the bond and commercial paper markets; maintaining a presence in the debt market through regular debt issuance programmes, mainly in euros, in order to create a balanced maturity profile. The Group's issuance capacity under its Euro Medium-Term Notes (EMTN) programme totals 12 billion euros; using the 5 billion-euro commercial paper programme on Euronext Paris, described in a prospectus filed with the Banque de France; maintaining undrawn medium-term bank facilities that can be drawn down at any time according to the Group's needs. The Group’s financial position and liquidity were solid at end-June 2022. The average maturity of bond debt of Carrefour SA was 3.8 years at end-June 2022, compared with 3.1 years at end-December 2021 and 3.6 years at end-June 2021. At June 30, 2022, the Group was rated Baa1 with a stable outlook by Moody's and BBB with a stable outlook by Standard & Poor's. The main transactions in first-half 2022 included a bond issue consisting of two Sustainability-Linked tranches indexed to the Group's sustainability goals, for a total amount of 1.5 billion euros, and bonds redeemed ahead of maturity for a total amount of 1 billion euros (see Note 4.2.3). 2.5 Restrictions on the use of capital resources There are no material restrictions on the Group's ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. At June 30, 2022, as at December 31, 2021, there was no restricted cash. 2.6 Expected sources of funding To meet its commitments, Carrefour can use its net free cash flow and raise debt capital using its EMTN and commercial paper programmes, as well as its credit lines. Carrefour group – Business review for the six-month period ended June 30, 2022 - 14 - 3. Outlook The Group remains very attentive to macroeconomic and market developments, especially food inflation and cost inflation, household consumption and customer satisfaction. The Group is confident in its teams and its model to: preserve its customers’ purchasing power by relying on Carrefour-branded products, a dynamic promotional activity and its omnichannel model which offers, beyond its loyalty program, an unrivalled choice of formats, especially those offering the biggest discounts (hypermarkets, Supeco); consolidate its economic model with heightened vigilance on operational costs. In this context, the Group: is raising its cost savings objective from 900 million euros to 1.0 billion euros for 2022, or 2.8 billion euros over the 2021-2023 period; confirms the level of capex of 1.85 billion euros for 2022, including approximately 150 million euros related to the integration of Grupo BIG in Brazil, which will be invested in the second half of the year; confirms its objective of generating at least 1 billion euros of net free cash flow in 2022. Carrefour group – Business review for the six-month period ended June 30, 2022 - 15 - 4. Other information 4.1 Accounting principles The accounting policies used to prepare the condensed consolidated financial statements for the six- month period ended June 30, 2022 are the same as those used for the 2021 consolidated financial statements, except for specific requirements of IAS 34 – Interim Financial Reporting (see Note 1.3 to the condensed consolidated financial statements for the six-month period ended June 30, 2022) and the following standards, amendments and interpretations which were applicable as of January 1, 2022: Amendments to IFRS 3 – Business Combinations, IAS 16 – Property, Plant and Equipment, IAS 37 – Provisions, Contingent Liabilities and Contingent Assets and Annual Improvements to IFRSs – 2018-2020 cycle The application of these amendments had no material impact on the Group’s consolidated financial statements. Note that, in the consolidated financial statements for the year ended December 31, 2021, the Group applied the IFRS IC decision published in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements, as well as the decision published in May 2021 on attributing benefit to periods of service in the calculation of the provision for employee benefits falling within the scope of IAS 19 (see Notes 1.2 and 4 to the 2021 consolidated financial statements). The consequences of applying these decisions in the comparative consolidated financial statements for the six-month period ended June 30, 2021 are presented in Note 4 to the condensed consolidated financial statements for the six-month period ended June 30, 2022. Adopted by the European Union but not yet applicable Standards, amendments and interpretations Effective date IFRS 17 – Insurance Contracts January 1, 2023 Amendments to IAS 1 – Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies January 1, 2023 Amendments to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates January 1, 2023 Not yet adopted by the European Union Standards, amendments and interpretations Effective date(1) Amendments to IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current January 1, 2023 Amendments to IAS 12 – Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction January 1, 2023 Amendments to IFRS 17 – Insurance Contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information January 1, 2023 (1) Subject to adoption by the European Union. Carrefour does not expect the application of this standard and these amendments to have a material impact on its consolidated financial statements. Carrefour group – Business review for the six-month period ended June 30, 2022 - 16 - 4. Other information 4.2 Significant events of the period 4.2.1 Main acquisitions, disposals and other transactions during the period Acquisition of Grupo BIG (Brazil) – Business combination On March 24, 2021, Carrefour Brazil entered into an agreement with Advent International and Walmart for the acquisition of Grupo BIG, Brazil’s third biggest food retailer. The acquiree reported net sales of around 20 billion Brazilian reals (approximately 3.1 billion euros) in 2021 and operates a multi-format network of 388 stores, including 181 stores owned by the Group. With Carrefour Brazil's acquisition of Grupo BIG, the Company can expand into regions where its penetration is limited, such as the north-east and south of the country. This geographic fit will enrich the Company's ecosystem of products and services, which currently serves over 45 million customers, and broaden its customer base thanks to the addition of Grupo BIG customers. The acquisition will allow the Company to expand in its traditional formats (mainly cash & carry and hypermarkets), while extending its footprint in formats in which it has a more limited presence, in particular supermarkets (98 Bompreço and Nacional stores) and soft discounters (97 Todo Dia stores). In addition, Carrefour Brazil will operate in a new market segment with the Sam's Club format, through a license agreement with Walmart Inc. This unique and highly profitable premium business model for the B2C segment is based on a membership system, with over two million members, and focuses mainly on private-label products. Carrefour Brazil’s Extraordinary Shareholders’ Meeting and CADE, the Brazilian competition authority, approved this transaction on May 19, 2022 and May 25, 2022, respectively (subject to the disposal of 14 stores by the end of the year). The acquisition was finalised on June 1, 2022, with payment made on June 6, 2022. The preliminary purchase price for the entire share capital of Grupo BIG is 7,465 million Brazilian reals (1,471 million euros at the exchange rate as of the transaction date), which breaks down as follows: a cash payment of 5,292 million Brazilian reals (approximately 1 billion euros), representing 70% of the baseline price plus various preliminary earn-outs for 42 million Brazilian reals (approximately 8 million euros), including 900 million Brazilian reals (139 million euros) paid as part of a downpayment in March 2021; a share-based payment of 117 million new Carrefour Brazil shares (representing 30% of the baseline price), with a fair value of 2,173 million Brazilian reals (approximately 430 million euros) at June 6, 2022. As a result of this share-based payment, the Carrefour group’s interest in Carrefour Brazil was 67.6% at June 30, 2022 compared to 71.6% at December 31, 2021. As this was a transaction with minority shareholders, the impact of paying for 30% of Grupo BIG in Carrefour Brazil shares was recognised in consolidated equity for approximately 180 million euros attributable to the Carrefour group and approximately 250 million euros attributable to non-controlling interests. The agreement also provides for an earn-out to be paid six months after completion of the transaction if the Carrefour Brazil share price exceeds the reference value of 19.26 Brazilian reals. The price of the Carrefour Brazil share was 16.67 Brazilian reals at June 30, 2022. Grupo BIG's preliminary opening balance sheet at June 1, 2022, as included in the Group's half-year consolidated financial statements, is presented in Note 3.1 to the condensed consolidated half-year financial statements as of June 30, 2022. Changes in the period (i.e., Grupo BIG operations carried out in June 2022) are included in the consolidated income statement and statement of cash flows for first-half 2022. They are not material at the level of the Group. Carrefour group – Business review for the six-month period ended June 30, 2022 - 17 - 4. Other information The purchase price allocation process stipulated in IFRS 3 – Business Combinations was implemented and led to the recognition of provisional goodwill in the amount of 484 million euros in the consolidated half-year financial statements as of June 30, 2022. This preliminary purchase price allocation process will continue in second-half 2022 and first-half 2023. As the process continues, the fair value adjustments may differ – even materially – at December 31, 2022 and June 30, 2023 from those included in the condensed consolidated half-year financial statements as of June 30, 2022. Ofelia (Spain) – Acquisition of assets The property company Ofelia leased nine stores and a shopping mall to Carrefour Spain. In February 2022, Carrefour Spain exercised its pre-emptive right and acquired these assets for approximately 40 million euros. The disposal of these nine stores is expected to take place in the second half of 2022. Given the high probability of this disposal being completed, the stores have been classified as assets held for sale in the condensed consolidated half-year financial statements as of June 30, 2022 and valued at their net carrying amount. Sale of the Group's stake in Cajoo (France) On May 16, 2022, Germany-based Flink, Europe's leading quick commerce company, announced the acquisition of Cajoo from Carrefour and its founders in exchange for its own shares. This acquisition was finalised on June 23, 2022. The gain on the disposal of the Cajoo shares, amounting to approximately 6 million euros, net of fees, was recognised within non-recurring items for the period. Also in June 2022, the Group contributed to Flink's reserved capital increase. All Flink shares held by the Group at June 30, 2022 are recognised as investments in non-consolidated companies measured at fair value through other comprehensive income (see Note 13.5 to the condensed consolidated half-year financial statements as of June 30, 2022). 4.2.2 Warehouse fire in Taiwan On March 14, 2022, a fire broke out in a logistics centre leased by Carrefour in the Yang Mei district of Taiwan. All employees were evacuated immediately with no injuries or casualties and the fire was brought under control on March 15, 2022. A claim was submitted to the Group's insurance companies in this respect and was still being assessed at June 30, 2022. Losses incurred as a result of destroyed inventories and equipment were recorded in first-half 2022 against the payout receivable from insurers classified under other current assets. The same applies to the estimated operating losses up to June 30, 2022. 4.2.3 Securing the Group’s long-term financing On March 30, 2022, the Group issued its first Sustainability-Linked Bond (SLB) indexed to its sustainable development goals. The 1.5 billion-euro bond comprises two tranches of 750 million euros each, with a maturity of 4.6 years (due in October 2026) and 7.6 years (due in October 2029) respectively, and paying a coupon of 1.88% and 2.38%. This bond was issued as part of a financing strategy aligned with the Group's CSR objectives and ambitions as well as the Sustainability-Linked Bond Framework of its Euro Medium-Term Notes (EMTN) programme published in June 2021, whose CSR component was revised and enhanced in May 2022. On June 8, 2022, the Group redeemed 1 billion euros worth of 1.75% 8-year bonds, ahead of their maturity (July 2022). These transactions guarantee the Group's liquidity over the short- and medium-term in an unstable economic environment, and are part of the strategy to ensure the necessary financing is in place to Carrefour group – Business review for the six-month period ended June 30, 2022 - 18 - 4. Other information meet Carrefour's needs. The average maturity of bond debt of Carrefour SA was 3.8 years at end-June 2022, compared with 3.1 years at end-December 2021 and 3.6 years at end-June 2021. Financing of the Brazilian subsidiary Atacadão Following the 2021 transactions, Carrefour's Brazilian subsidiary Atacadão has set up financing arrangements in 2022 enabling it to secure its medium- and long-term needs in connection with the acquisition of Grupo BIG. The US dollar bank financing facilities put in place in December 2021 were finalised on January 5, 2022, with a total of 2,942 million Brazilian reals (approximately 537 million euros at the closing exchange rate of June 30, 2022) immediately swapped for Brazilian reals with maturities of 16 to 17 months. On January 6 and May 17, 2022, two inter-company financing lines were set up between the companies Carrefour Finance and Atacadão. The first revolving credit facility (RCF) for an amount of 4 billion Brazilian reals (approximately 729 million euros at the closing exchange rate of June 30, 2022), bearing annual interest at 12%, falls due in July 2023 and had been fully drawn at the end of June 2022. The second RCF for 1.9 billion Brazilian reals (approximately 346 million euros at the closing exchange rate of June 30, 2022), bearing annual interest at 14.25%, has a maturity of three years and had not been drawn down at June 30, 2022. Finally, on May 20, 2022, the Brazilian subsidiary obtained bank financing in euros and in US dollars, which was immediately swapped for Brazilian reals, for 1,500 million reals (approximately 274 million euros at the closing exchange rate of June 30, 2022). This facility falls due in six months and will be replaced by a medium-term financing facility in second-half 2022. 4.2.4 Payment of the 2021 dividend in cash At the Shareholders’ Meeting held on June 3, 2022, the shareholders decided to set the 2021 dividend at 0.52 euros per share to be paid entirely in cash. On June 9, 2022, the dividend was paid out in an amount of 380 million euros. 4.2.5 Share buyback programme As part of its share capital allocation policy, the Group commissioned an investment services provider to buy back shares corresponding to a maximum amount of 750 million euros, as authorised by the Shareholders’ Meeting of May 21, 2021. The first tranche of the share buyback programme began on March 7, 2022 and ended on April 13, 2022, with 21,232,106 shares acquired at an average price of 18.84 euros per share for a total amount of 400 million euros. These shares were cancelled following a decision by the Board of Directors on April 20, 2022 to reduce the share capital of Carrefour SA. A second tranche of the share buyback programme began on May 2, 2022 and ended on May 24, 2022, with 17,191,700 shares acquired at an average price of 20.36 euros per share for a total amount of 350 million euros. Of the shares bought back, 12,506,325 shares were cancelled following a decision by the Board of Directors on June 3, 2022 to reduce the share capital of Carrefour SA. These shares were cancelled in accordance with the authorisation granted by the Shareholders’ Meeting of May 21, 2021. Following cancellation of these shares, Carrefour SA has 742,157,461 shares outstanding and, consequently, 11,544,870 treasury shares, representing approximately 1.6% of the share capital. Carrefour group – Business review for the six-month period ended June 30, 2022 - 19 - 4. Other information 4.3 Restatement of the 2021 consolidated half-year financial statements IAS 19 – Employee Benefits – Application of the IFRS IC decision of May 2021 In May 2021, the IFRS IC published a final decision clarifying the attribution of benefit to periods of service. The decision came in response to a request regarding a defined benefit plan with the following characteristics: provided they are still with the company when they reach retirement age, employees are entitled to a lump-sum benefit depending on their length of service, which is capped at a specified number of consecutive years of service. This decision has been applied retrospectively, and its impacts have been recognised in retained earnings in the comparative period presented in the consolidated financial statements for the year ended December 31, 2021 (see Note 4 of these financial statements). This decision has not been applied in the issued consolidated financial statements for the six months ended June 30, 2021. The estimated impact for first-half 2021 was deemed immaterial for the Group; therefore, the comparative information for the six months ended June 30, 2021 has not been restated to reflect this decision in the consolidated half-year financial statements as of June 30, 2022. Impact of the IFRS IC decision issued in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements In the consolidated financial statements for the year ended December 31, 2021, the Group applied the IFRS IC decision published in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements (see Note 1.2 to the 2021 consolidated financial statements). As a result of this decision, the Group changed the accounting policy for customisation and configuration costs when they do not meet the recognition criteria under IAS 38 (when the Group does not control the SaaS solution) or when they do not relate to the development of an interface (middleware) with this SaaS solution. These costs are now recognised as an expense either (a) as and when they are incurred if the development work is carried out internally or by a third party integrator (not related to the SaaS solution publisher), or (b) over the term of the SaaS arrangement if the development work is carried out by the SaaS solution publisher or its subcontractor. This decision was applied in the consolidated financial statements as of December 31, 2021. For SaaS solutions implemented before January 1, 2021, the estimated impact was not deemed material for the Group; therefore, the comparative information for the year ended December 31, 2020 was not restated in light of this decision. The integration costs of SaaS solutions capitalised at December 31, 2020 that no longer meet the recognition criteria were written off at January 1, 2021, against non-recurring income and expenses, in accordance with the Group's accounting principles (see Note 6.3 to the 2021 consolidated financial statements). As the consolidated financial statements for the six-month period ended June 30, 2021 did not include this write-off, the comparative information was restated in the consolidated half-year financial statements as of June 30, 2022 (see Notes 4.3 and 4.4 of these financial statements). For SaaS solutions implemented between January 1, 2021 and June 30, 2021, the estimated impact was not deemed material for the Group; therefore, the comparative information for the six months ended June 30, 2021 was not restated in light of this decision for these solutions in the consolidated half- year financial statements as of June 30, 2022. The impacts on the consolidated half-year income statement as of June 30, 2021 are described in detail in Note 4 to the condensed consolidated financial statements for the six-month period ended June 30, 2022. Carrefour group – Business review for the six-month period ended June 30, 2022 - 20 - 4. Other information 4.4 Main related-party transactions There were no material changes in the nature of the Group’s related-party transactions in first-half 2022 compared with the situation at December 31, 2021. 4.5 Subsequent events Sale of Carrefour Taiwan to the Uni-President group On July 19, 2022, the Group signed an agreement to sell its entire interest in its Taiwanese subsidiary (i.e., 60%) to the Uni-President group (holder of the remaining 40%). If the conditions precedent are met, this agreement will result in loss of control of the subsidiary. The enterprise value is around 2.0 billion euros. Closing of the transaction is subject to approval by Taiwanese competition authorities (TFTC) and other customary conditions, and is expected by mid-2023. Following the completion of the transaction, the Uni-President group will own 100% of Carrefour Taiwan. The sale of Carrefour Taiwan announced on July 19, 2022 was not highly probable at June 30, 2022 within the meaning of IFRS 5, given certain uncertainties existing at the reporting date as to whether the sale would be completed. Accordingly, this subsidiary's assets and liabilities were not reclassified as assets held for sale and related liabilities in the consolidated statement of financial position at June 30, 2022. Similarly, the net income and cash flows of this subsidiary were not reclassified within line items for discontinued operations in the consolidated income statement and consolidated cash flow statement for first-half 2022. It should be noted that since Carrefour Taiwan represents a geographical area presented under segment reporting (“Asia”), the main indicators on the subsidiary's income statement (net sales, other revenue, recurring operating income before depreciation and amortisation, depreciation and amortisation expense and recurring operating income), cash flow statement (capital expenditure) and balance sheet (goodwill, other intangible assets, property and equipment, investment property, right-of-use assets, other segment assets and segment liabilities) are presented in Note 5 to the condensed consolidated half-year financial statements as of June 30, 2022. 4.6 Risk factors The risk factors at June 30, 2022 are the same as those set out in Chapter 4 Risk Management of the 2021 Universal Registration Document. Carrefour group – Business review for the six-month period ended June 30, 2022 - 21 - Condensed consolidated financial statements for the six-month period ended June 30, 2022 Consolidated income statement page 23 Consolidated statement of comprehensive income page 24 Consolidated statement of financial position page 25 Consolidated statement of cash flows page 26 Consolidated statement of changes in shareholders’ equity page 27 Notes to the condensed consolidated financial statements page 28 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 22 - Consolidated income statement Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the condensed consolidated financial statements for the six-month period ended June 30, 2022; data for the comparative period presented have also been adjusted for inflation. At June 30, 2022, comparative data for the first half of 2021 have been restated (indicated as “first- half 2021 restated” below) in the consolidated financial statements to reflect the decision by the IFRS Interpretations Committee (IFRS IC) published in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements (see Note 4.2). The consolidated financial statements are presented in millions of euros, rounded to the nearest million. As a result, there may be rounding differences between the amounts reported in the various statements. (in millions of euros) Notes First-half 2022 First-half 2021 restated % change Net sales 6.1 39,054 34,462 13.3% Loyalty program costs (428) (403) 6.3% Net sales net of loyalty program costs 38,625 34,059 13.4% Other revenue 6.1 1,215 1,040 16.8% Total revenue 39,840 35,100 13.5% Cost of sales (32,016) (27,734) 15.4% Gross margin from recurring operations 7,824 7,365 6.2% Sales, general and administrative expenses, depreciation and amortisation 6.2 (7,010) (6,625) 5.8% Recurring operating income 814 740 10.0% Net income/(loss) from equity-accounted companies 9.1 12 (10) 213.8% Recurring operating income after net income from equity-accounted companies 826 730 13.1% Non-recurring income and expenses, net 6.3 (85) (70) 22.7% Operating income 741 660 12.1% Finance costs and other financial income and expenses, net 13.6 (186) (132) 40.3% Finance costs, net (151) (80) 89.8% Net interest related to lease commitments (72) (52) 39.9% Other financial income and expenses, net 37 (1) 3306.0% Income before taxes 555 528 5.1% Income tax expense 10 (202) (186) 8.4% Net income/(loss) from continuing operations 353 342 3.2% Net income/(loss) from discontinued operations 5 23 (76.8)% Net income/(loss) for the period 358 365 (1.7)% Group share 255 271 (5.7)% of which net income/(loss) from continuing operations - Group share 250 248 0.8% of which net income/(loss) from discontinued operations - Group share 5 23 (76.8)% Attributable to non-controlling interests 103 94 9.7% of which net income/(loss) from continuing operations - attributable to non- controlling interests 103 94 9.7% of which net income/(loss) from discontinued operations - attributable to non- controlling interests − − − Basic earnings per share (in euros) First-half 2022 First-half 2021 restated % change Net income/(loss) from continuing operations - Group share - per share 12.3 0.33 0.31 7.7% Net income/(loss) from discontinued operations - Group share - per share 12.3 0.01 0.03 (75.2)% Net income/(loss) – Group share - per share 12.3 0.34 0.34 0.8% Diluted earnings per share (in euros) First-half 2022 First-half 2021 restated % change Net income/(loss) from continuing operations - Group share - per share 12.3 0.33 0.31 7.5% Net income/(loss) from discontinued operations - Group share - per share 12.3 0.01 0.03 (75.2)% Net income/(loss) – Group share - per share 12.3 0.34 0.34 0.6% Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 23 - Consolidated statement of comprehensive income (in millions of euros) Notes First-half 2022 First-half 2021 restated Net income/(loss) - Group share 255 271 Net income - Attributable to non-controlling interests 103 94 Net income/(loss) for the period 358 365 Effective portion of changes in the fair value of cash flow hedges ¹ Changes in the fair value of debt instruments through other comprehensive income Exchange differences on translating foreign operations ² 12.2 12.2 12.2 82 (16) 461 31 (2) 251 Items that may be reclassified subsequently to profit or loss 527 280 Remeasurements of defined benefit plans obligation ³ 12.2 128 49 Items that will not be reclassified to profit or loss 128 49 Other comprehensive income/(loss) after tax 655 329 Total comprehensive income/(loss) 1,013 694 Group share 703 520 Attributable to non-controlling interests 310 173 These items are presented net of the tax effect (see Note 12.2). (1) In first-half 2022, Carrefour Finance granted an intra-group revolving credit facility (RCF) to Atacadão, treated as part of the net investment in that operation. The derivatives contracted to hedge part of this loan were classified as a net investment hedge (see Note 3.3). (2) Exchange differences recognised on translating foreign operations in first-half 2022 mainly reflect the significant increase in the value of the Brazilian real. Exchange differences recognised on translating foreign operations in first-half 2021 mainly reflected the slight increase in the value of the Brazilian real. (3) Remeasurement of the net defined benefit liability recognised in first-half 2022 reflects the strong increase in discount rates applied for the eurozone, from 0.80% at end-December 2021 to 3.20% at end-June 2022. In first-half 2021, these discount rates increased from 0.40% at end- December 2020 to 0.80% at end-June 2021. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 24 - Consolidated statement of financial position ASSETS (in millions of euros) Notes June 30, 2022 December 31, 2021 Goodwill 7.1 8,527 7,995 Other intangible assets 7.1 1,453 1,333 Property and equipment 7.2 12,521 10,721 Investment property 7.3 313 291 Right-of-use assets 8.1 4,654 4,361 Investments in companies accounted for by the equity method 9.1 1,200 1,256 Other non-current financial assets 13.5 1,288 1,152 Consumer credit granted by the financial services companies – portion more than one year 6.5 1,866 1,821 Deferred tax assets 667 631 Other non-current assets 679 321 Non-current assets 33,169 29,883 Inventories 7,227 5,858 Trade receivables 3,402 2,581 Consumer credit granted by the financial services companies – portion less than one year 6.5 3,708 3,473 Other current financial assets 13.2 687 532 Tax receivables 800 675 Other current assets 1,127 943 Cash and cash equivalents 13.2 2,539 3,703 Assets held for sale 96 20 Current assets 19,586 17,785 TOTAL ASSETS 52,755 47,668 SHAREHOLDERS’ EQUITY AND LIABILITIES (in millions of euros) Notes June 30, 2022 December 31, 2021 Share capital 1,855 1,940 Consolidated reserves (including net income) 8,164 8,311 Shareholders’ equity, Group share 10,019 10,251 Shareholders’ equity attributable to non-controlling interests 2,103 1,579 Total shareholders' equity 12,122 11,830 Borrowings - portion more than one year 13.2 5,915 5,491 Lease commitments - portion more than one year 8.2 3,900 3,602 Provisions 11 3,652 2,455 Consumer credit financing – portion more than one year 6.5 2,115 1,573 Deferred tax liabilities 425 374 Tax payables - portion more than one year 210 193 Non-current liabilities 16,216 13,688 Borrowings - portion less than one year 13.2 3,809 1,342 Lease commitments - portion less than one year 8.2 1,047 995 Suppliers and other creditors 13,283 13,072 Consumer credit financing – portion less than one year 6.5 2,497 2,868 Tax payables - portion less than one year 1,121 1,108 Other current payables 2,659 2,765 Liabilities related to assets held for sale − − Current liabilities 24,417 22,150 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 52,755 47,668 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 25 - Consolidated statement of cash flows (in millions of euros) Income before taxes First-half 2022 555 First-half 2021 restated 528 CASH FLOWS FROM OPERATING ACTIVITIES Income tax (205) (165) Depreciation and amortisation expense 1,173 1,133 Gains and losses on sales of assets (26) (253) Change in provisions and impairment (115) 152 Finance costs, net 151 80 Net interest related to lease commitment 72 52 Net income and dividends received from equity-accounted companies 45 48 Impact of discontinued operations ¹ (4) (9) Cash flow from operations 1,645 1,566 Change in working capital requirement ² (2,115) (2,138) Net cash (used in)/from operating activities (excluding financial services companies) (470) (572) Change in consumer credit granted by the financial services companies 54 (103) Net cash (used in)/from operating activities - total (416) (675) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets ³ (562) (558) Acquisitions of non-current financial assets ⁴ (20) (147) Acquisitions of subsidiaries and investments in associates ⁵ (911) (87) Proceeds from the disposal of subsidiaries and investments in associates ⁶ 21 186 Proceeds from the disposal of property and equipment and intangible assets 69 40 Proceeds from the disposal of non-current financial assets 4 2 Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets ³ (273) (219) Investments net of disposals - subtotal (1,672) (782) Other cash flows from investing activities 94 44 Net cash (used in)/from investing activities - total (1,579) (739) CASH FLOWS FROM FINANCING ACTIVITIES Carrefour SA capital increase / (decrease) ⁷ (657) − Proceeds from share issues to non-controlling interests 2 0 Dividends paid by Carrefour SA ⁸ (380) (383) Dividends paid by consolidated companies to non-controlling interests (44) (90) Change in treasury stock and other equity instruments ⁷ (96) (443) Change in current financial assets ⁹ (1) 15 Issuance of bonds ⁹ 1,500 − Repayments of bonds ⁹ (1,082) (871) Net financial interest paid (99) (82) Other changes in borrowings ⁹ 2,056 649 Payments related to leases (principal) ¹⁰ (500) (480) Net interest related to leases ¹⁰ (70) (51) Net cash (used in)/from financing activities - total 629 (1,735) Net change in cash and cash equivalents before the effect of changes in exchange rates (1,366) (3,149) Effect of changes in exchange rates 201 4 Net change in cash and cash equivalents (1,165) (3,145) Cash and cash equivalents at beginning of period 3,703 4,439 Cash and cash equivalents at end of period 2,539 1,294 (1) In accordance with IFRS 5, this item concerned the remaining cash flows related to the discontinued operations reported in 2018 (integrated convenience stores in France). (2) The change in working capital requirement is set out in Note 6.4. (3) Acquisitions include operational investments in growth formats – in particular the payment of 27 million Brazilian reals (approximately 5 million euros) to acquire the final Makro Atacadista store in Brazil, bringing the total to 29 acquired stores as of June 30, 2022, the Group’s digitalisation, and the roll-out of a leading omni-channel offering. In first-half 2021, acquisitions notably included the payment for two Makro Atacadista stores in Brazil. (4) In first-half 2021, this item mainly corresponded to the downpayment of 900 million Brazilian reals in March 2021 (approximately 139 million euros) relating to the acquisition of Grupo BIG in Brazil (see Note 3.1). (5) This line mainly corresponds to the acquisition of the entire share capital of Grupo BIG in Brazil (excluding the downpayment in March 2021) for 866 million euros (4,392 million Brazilian reals, see Note 3.1). In first-half 2021, this line mainly corresponded to the acquisition of Supersol franchise stores in Spain. In first-half 2021, this line corresponded to the 189 million-euro cash payment (before transaction costs) received on the sale of 60% of Market Pay. (6) (7) This item corresponds to the share buyback programme for 750 million euros (see Note 3.5) implemented between March and May 2022, of which 401 million euros worth of shares (including associated costs) were cancelled on April 20, 2022 following a decision by the Board of Directors and another 256 million euros worth (including associated costs) were cancelled on June 3, 2022. The shares covered by this programme, which were still held in treasury at June 30, 2022, are presented within “Change in treasury stock and other equity instruments”. (8) The dividend approved by the Shareholders' Meeting of June 3, 2022 was paid entirely in cash on June 9, 2022 for an amount of 380 million euros (see Note 3.4). In 2021, the dividend was paid entirely in cash on May 28, 2021 for 383 million euros. (9) Note 13.2 provides a breakdown of net debt. Changes in liabilities arising from financing activities are detailed in Note 13.4. (10) In accordance with IFRS 16, effective from January 1, 2019, payments under leases along with any related interest are shown in financing cash flows. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 26 - Consolidated statement of changes in shareholders’ equity Shareholders’ equity, Group share (in millions of euros) Share capital ¹ Effect of changes in foreign exchange rates Fair value reserve ² Other consolidated reserves and net income Total Shareholders’ equity, Group share Non- controlling interests Total Shareholders’ equity Shareholders' equity at December 31, 2020 2,044 (2,078) (42) 10,178 10,103 1,507 11,609 Net income/(loss) – First-half 2021 restated ³ − − − 271 271 94 365 Other comprehensive income/(loss) after tax ⁴ − 172 29 49 250 79 329 Total comprehensive income/(loss) – First-half 2021 restated − 172 29 319 520 173 694 Share-based payments − − − 13 13 0 13 Treasury stock (net of tax) ⁶ − − − (502) (502) − (502) 2020 dividend payment ⁵ − − − (383) (383) (83) (466) Change in capital and additional paid-in capital − − − − − 0 0 Effect of changes in scope of consolidation and other movements − − − (1) (1) 0 (1) Shareholders' equity at June 30, 2021 restated 2,044 (1,906) (13) 9,625 9,750 1,597 11,347 Shareholders' equity at December 31, 2021 1,940 (1,990) (4) 10,305 10,251 1,579 11,830 Net income/(loss) – First-half 2022 − − − 255 255 103 358 Other comprehensive income/(loss) after tax ⁴ − 252 69 127 448 207 655 Total comprehensive income/(loss) – First-half 2022 − 252 69 382 703 310 1,013 Share-based payments − − − 12 12 1 13 Treasury stock (net of tax) ⁶ − − − (96) (96) − (96) 2021 dividend payment ⁵ − − − (380) (380) (33) (413) Change in capital and additional paid-in capital ⁶ (84) − − (570) (655) (0) (655) Effect of changes in scope of consolidation and other movements ⁷ − 63 − 120 183 247 430 Shareholders' equity at June 30, 2022 1,855 (1,675) 65 9,774 10,019 2,103 12,122 (1) The share capital was made up of 742,157,461 ordinary shares at June 30, 2022. (2) This item comprises: the hedge reserve (effective portion of changes in the fair value of cash flow hedges); - the financial asset fair value reserve (changes in the fair value of financial assets carried at fair value through other comprehensive income). (3) In April 2021, the IFRS IC issued a final decision on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements. Carrefour did not apply these decisions when preparing its condensed consolidated half-year financial statements as of June 30, 2021, since their potential impacts were still being analysed. As a result, the comparative information has been restated in the consolidated financial statements as of June 30, 2022 (see Note 4). (4) In first-half 2022, other comprehensive income after tax reflects both the significant increase in the value of the Brazilian real compared to December 31, 2021 and, under other consolidated reserves and net income, the remeasurement of the net defined benefit liability following the increase in discount rates applied for the eurozone. In first-half 2021, other comprehensive income after tax reflected both the slight increase in the value of the Brazilian real compared to December 31, 2020 and, under other consolidated reserves and net income, the remeasurement of the net defined benefit liability following the increase in discount rates applied for the eurozone as of June 30, 2021. (5) The 2021 dividend distributed by Carrefour SA, totalling 380 million euros, was paid entirely in cash in first-half 2022. The 2020 dividend distributed by Carrefour SA, totalling 383 million euros, was paid entirely in cash in first-half 2021. Dividends paid to non-controlling interests mainly concern the Spanish and Brazilian subsidiaries for an amount of 33 million euros in first-half 2022, and 83 million euros in first-half 2021. (6) The 750 million-euro share buyback programme announced on February 16, 2022 was launched in first-half 2022 in two tranches of 400 million euros and 350 million euros, corresponding to 38,423,806 shares. Carrefour SA's share capital was subsequently reduced by cancelling 33,738,431 shares (see Note 3.5). Following cancellation of these shares, Carrefour SA has 11,544,870 treasury shares, representing approximately 1.6% of the share capital in June 30, 2022. In first-half 2021, a share buyback programme was launched for a maximum amount of 500 million euros. At the date the agreement was signed with the investment services provider, a short-term financial liability of 500 million euros in shares and related fees of 2 million euros were recorded against shareholders’ equity. (7) The effect of changes in the scope of consolidation and other movements mainly corresponds to the acquisition of Grupo BIG for the portion paid in newly issued Carrefour Brazil shares (see Note 3.1). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 27 - Notes to the condensed consolidated financial statements Notes to the condensed consolidated financial statements NOTE 1: BASIS OF PREPARATION OF THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS ................................................................................................................ - 29 - NOTE 2: SEASONAL FLUCTUATIONS IN BUSINESS .............................................................. - 32 - NOTE 3: SIGNIFICANT EVENTS OF THE PERIOD ................................................................. - 33 - NOTE 4: RESTATEMENT OF THE 2021 CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS ..... - 38 - NOTE 5: SEGMENT INFORMATION .................................................................................... - 41 - NOTE 6: OPERATING ITEMS ............................................................................................ - 43 - NOTE 7: INTANGIBLE ASSETS, PROPERTY AND EQUIPMENT, INVESTMENT PROPERTY ............. - 48 - NOTE 8: LEASES ............................................................................................................ - 51 - NOTE 9: INVESTMENTS IN COMPANIES ACCOUNTED FOR BY THE EQUITY METHOD ................. - 52 - NOTE 10: INCOME TAX ................................................................................................... - 54 - NOTE 11: PROVISIONS AND CONTINGENT LIABILITIES ...................................................... - 55 - NOTE 12: EQUITY, OTHER COMPREHENSIVE INCOME AND EARNINGS PER SHARE ................... - 58 - NOTE 13: FINANCIAL ASSETS AND LIABILITIES, FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES ............................................................................................................. - 60 - NOTE 14: OTHER INFORMATION ...................................................................................... - 67 - Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 28 - Notes to the condensed consolidated financial statements NOTE 1: BASIS OF PREPARATION OF THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS The condensed consolidated financial statements for the six-month period ended June 30, 2022 were approved for publication by the Board of Directors on July 27, 2022. Carrefour SA (the “Company”) is domiciled in France at 93, avenue de Paris, 91300 Massy. The condensed consolidated financial statements for the six-month period ended June 30, 2022 reflect the financial position and results of operations of the Company and its subsidiaries (together “Carrefour” or the “Group”), along with the Group’s share of the profits and losses and net assets of equity-accounted associates and joint ventures. The presentation currency of the consolidated financial statements is the euro, which is the Company's functional currency. 1.1 Statement of compliance In accordance with European Regulation (EC) 1606/2002 dated July 19, 2002, the condensed consolidated financial statements for the six-month period ended June 30, 2022 have been prepared in compliance with the International Financial Reporting Standards (IFRS) as adopted for use in the European Union as of June 30, 2022 and applicable at that date, with comparative information for the same period of 2021 and at December 31, 2021 prepared using the standards applicable at the reporting date. All of the standards and interpretations endorsed by the European Union are published in the Official Journal of the European Union, which can be accessed in the EUR-Lex. At June 30, 2022, the standards and interpretations adopted for use in the European Union were the same as those published by the IASB and applicable at that date. 1.2 Changes in accounting policies The accounting policies used to prepare the condensed consolidated financial statements for the six- month period ended June 30, 2022 are the same as those used for the 2021 consolidated financial statements, except for specific requirements of IAS 34 – Interim Financial Reporting (see Note 1.3) and the following standards, amendments and interpretations which were applicable as of January 1, 2022: Amendments to IFRS 3 – Business Combinations, IAS 16 – Property, Plant and Equipment, IAS 37 – Provisions, Contingent Liabilities and Contingent Assets and Annual Improvements to IFRSs – 2018-2020 cycle. The application of these amendments had no material impact on the Group’s consolidated financial statements. Note that, in the consolidated financial statements for the year ended December 31, 2021, the Group applied the IFRS IC decision published in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements, as well as the decision published in May 2021 on attributing benefit to periods of service in the calculation of the provision for employee benefits falling within the scope of IAS 19 (see Notes 1.2 and 4 to the 2021 consolidated financial statements). The consequences of applying these decisions in the comparative consolidated financial statements for the six-month period ended June 30, 2021 are presented in Note 4. Adopted by the European Union but not yet applicable Standards, amendments and interpretations Effective date IFRS 17 – Insurance Contracts January 1, 2023 Amendments to IAS 1 – Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies January 1, 2023 Amendments to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates January 1, 2023 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 29 - Notes to the condensed consolidated financial statements Not yet adopted by the European Union Standards, amendments and interpretations Effective date(1) Amendments to IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current January 1, 2023 Amendments to IAS 12 – Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction January 1, 2023 Amendments to IFRS 17 – Insurance Contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information January 1, 2023 (1) Subject to adoption by the European Union. Carrefour does not expect the application of this standard and these amendments to have a material impact on its consolidated financial statements. 1.3 Specific reporting treatments in the preparation of interim financial statements 1.3.1 Reporting principles The condensed consolidated financial statements for the six-month period ended June 30, 2022 have been prepared in accordance with IAS 34 – Interim Financial Reporting. Condensed interim consolidated financial statements do not contain all of the disclosures that would be required in a complete set of annual financial statements. Consequently, these interim financial statements should be read jointly with the Group’s consolidated financial statements for the year ended December 31, 2021, as included in the Universal Registration Document filed with the AMF (French financial markets authority) and available on request from the Company’s head office at 93 avenue de Paris – 91300 Massy, France, or on the Company’s website, www.carrefour.com. 1.3.2 Estimation of income tax expense In accordance with IAS 34, income tax expense for first-half 2022 is calculated based on the estimated weighted average annual income tax rate for full-year 2022 (the effective tax rate), for each entity and tax sub-group (see Note 10). The tax impact of specific transactions is reflected in income tax expense for the period. 1.3.3 Post-employment benefits and other long-term benefits The provision for pensions and other post-employment benefits is calculated using actuarial projections based on data from the previous period-end. The discount rate for the main contributing countries (eurozone) is reviewed at June 30 (see Note 11.3). The actuarial projections are updated to take into account any material changes to assumptions or one-off impacts (discount rates, applicable legislation, the population concerned, etc.) during the six-month period. 1.3.4 Conflict in Ukraine The Group does not do business in Ukraine, Russia or Belarus. It does not hold any assets or interests in entities in these countries, nor is it party to any franchise agreements. In addition, the Group's exposure to the Russian and Belarusian markets is not deemed to be material. The Group is not materially affected by the trade restrictions and sanctions imposed by certain governments on Russia. However, the Group is impacted to some extent by the macro-economic consequences of the conflict, particularly due to the resulting energy price fluctuations, which have led to the recognition of higher energy costs in the financial statements. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 30 - Notes to the condensed consolidated financial statements The Group is closely monitoring the development of the conflict and its macroeconomic and potentially operational consequences, particularly in its integrated countries bordering Ukraine (Poland and Romania). As expected, the inflationary pressure that began in the second half of 2021 intensified in the first half of 2022. In the current situation, Carrefour is committed to preserving consumer purchasing power while continuing to consolidate its business model. Carrefour did not encounter any significant supply problems during the first half of the year, despite a few localised, temporary shortages. However, in a tight supply environment, the Group is fully mobilised to ensure a steady supply of products, for example by increasing back-up inventory in certain sensitive categories, in order to improve the availability of products under favourable purchasing conditions. 1.4 Use of estimates and judgement Preparation of consolidated financial statements involves the use of Group Management estimates and assumptions that may affect the reported amounts of certain assets, liabilities, income and expenses, as well as the disclosures contained in the notes. These estimates and assumptions are reviewed at regular intervals by Group management to ensure that they are reasonable in light of past experience and the current economic situation. Depending on changes in those assumptions, actual results may differ from current estimates. In addition to using estimates, Group management exercises its judgement when determining the appropriate accounting treatment of certain transactions and activities and how it should be applied. The main estimates and judgements applied for the preparation of the condensed consolidated financial statements for the six-month period ended June 30, 2022 are the same as those described in the consolidated financial statements for the year ended December 31, 2021, except as explained in Note 1.3. 1.5 Measurement bases The consolidated financial statements have been prepared using the historical cost convention, except for: certain financial assets and liabilities measured using the fair value model (see Note 13); assets acquired and liabilities assumed in business combinations, measured using the fair value model ; assets acquired through exchange, assessed at fair value if the exchange has commercial substance and if it is possible to reliably measure the fair value of the asset received or sold; non-current assets held for sale, measured at the lower of their carrying amount and fair value less costs to sell. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with the hierarchy defined in IFRS 13 – Fair Value Measurement, there are three levels of inputs: Level 1 inputs: unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 inputs: models that use inputs that are observable for the asset or liability, either directly (i.e., prices) or indirectly (i.e., price-based data); Level 3 inputs: inputs that are intrinsic to the asset or liability and are not based on observable market data for the asset or liability. Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the consolidated financial statements for the six-months ended June 30, 2022; data for the comparative period presented have also been adjusted for inflation. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 31 - Notes to the condensed consolidated financial statements NOTE 2: SEASONAL FLUCTUATIONS IN BUSINESS Like those of other retailers, Carrefour's sales are subject to significant seasonal fluctuations, with the result that comparisons between the consolidated financial statements for the first and second halves of the year are not particularly meaningful. This is particularly the case for recurring operating income and cash flow generation between the two periods. The Group's second-half sales are traditionally higher than those for the first half, due to increased activity in December. Most of the operating expenses on the other hand – such as payroll costs, depreciation and amortisation – are spread more or less evenly over the year. As a result, the Group's recurring operating income is generally lower in the first half than in the second. Cash flows generated by the Group are also strongly impacted by seasonal trends, with working capital requirement rising sharply in the first half as a result of the large volume of supplier payments due at the beginning of the year for the purchases made ahead of the previous year's peak selling period in December. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 32 - Notes to the condensed consolidated financial statements NOTE 3: SIGNIFICANT EVENTS OF THE PERIOD 3.1 Main acquisitions, disposals and other transactions during the period Acquisition of Grupo BIG (Brazil) – Business combination On March 24, 2021, Carrefour Brazil entered into an agreement with Advent International and Walmart for the acquisition of Grupo BIG, Brazil’s third biggest food retailer. The acquiree reported net sales of around 20 billion Brazilian reals (approximately 3.1 billion euros) in 2021 and operates a multi-format network of 388 stores, including 181 stores owned by the Group. With Carrefour Brazil's acquisition of Grupo BIG, the Company can expand into regions where its penetration is limited, such as the north-east and south of the country. This geographic fit will enrich the Company's ecosystem of products and services, which currently serves over 45 million customers, and broaden its customer base thanks to the addition of Grupo BIG customers. The acquisition will allow the Company to expand in its traditional formats (mainly cash & carry and hypermarkets), while extending its footprint in formats in which it has a more limited presence, in particular supermarkets (98 Bompreço and Nacional stores) and soft discounters (97 Todo Dia stores). In addition, Carrefour Brazil will operate in a new market segment with the Sam's Club format, through a license agreement with Walmart Inc. This unique and highly profitable premium business model for the B2C segment is based on a membership system, with over two million members, and focuses mainly on private-label products. Carrefour Brazil’s Extraordinary Shareholders’ Meeting and CADE, the Brazilian competition authority, approved this transaction on May 19, 2022 and May 25, 2022, respectively (subject to the disposal of 14 stores by the end of the year). The acquisition was finalised on June 1, 2022, with payment made on June 6, 2022. The preliminary purchase price for the entire share capital of Grupo BIG is 7,465 million Brazilian reals (1,471 million euros at the exchange rate as of the transaction date), which breaks down as follows: a cash payment of 5,292 million Brazilian reals (approximately 1 billion euros), representing 70% of the baseline price plus various preliminary earn-outs for 42 million Brazilian reals (approximately 8 million euros), including 900 million Brazilian reals (139 million euros) paid as part of a downpayment in March 2021; a share-based payment of 117 million new Carrefour Brazil shares (representing 30% of the baseline price), with a fair value of 2,173 million Brazilian reals (approximately 430 million euros) at June 6, 2022. As a result of this share-based payment, the Carrefour group’s interest in Carrefour Brazil was 67.6% at June 30, 2022 compared to 71.6% at December 31, 2021. As this was a transaction with minority shareholders, the impact of paying for 30% of Grupo BIG in Carrefour Brazil shares was recognised in consolidated equity for approximately 180 million euros attributable to the Carrefour group and approximately 250 million euros attributable to non-controlling interests. The agreement also provides for an earn-out to be paid six months after completion of the transaction if the Carrefour Brazil share price exceeds the reference value of 19.26 Brazilian reals. The price of the Carrefour Brazil share was 16.67 Brazilian reals at June 30, 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 33 - Notes to the condensed consolidated financial statements Grupo BIG's preliminary opening balance sheet at June 1, 2022, as included in the Group's half-year consolidated financial statements, is as follows: ASSETS (in millions of Brazilian reals) Reference Opening balance sheet (Net Book Value) Fair Value adjustments Opening balance sheet (Fair Value) Opening balance sheet (in millions of euros) Goodwill (a) 220 2,234 2,454 484 Other intangible assets (e) 265 263 527 104 Property and equipment (c) 4,887 3,804 8,691 1,713 Right-of-use assets (b) 2,465 2,465 486 Other non-current financial assets (f) 586 586 116 Deferred tax assets (g) 2,407 (2,106) 302 59 Other non-current assets (d) / (h) 3,095 (870) 2,226 439 Non-current assets 13,925 3,325 17,250 3,400 Inventories (k) 2,955 2,955 582 Trade receivables (k) 702 702 138 Other current financial assets (k) 77 77 15 Tax receivables (k) 513 513 101 Other current assets (k) 204 204 40 Cash and cash equivalents (k) 317 317 62 Assets held for sale (i) − 323 323 64 Current assets 4,769 323 5,092 1,003 TOTAL ASSETS 18,694 3,648 22,342 4,403 SHAREHOLDERS’ EQUITY AND LIABILITIES (in millions of Brazilian reals) Reference Opening balance sheet (Net Book Value) Fair Value adjustments Opening balance sheet (Fair Value) Opening balance sheet (in millions of euros) Total shareholders' equity 8,859 (1,394) 7,465 1,471 Lease commitments - portion more than one year (b) 2,598 2,598 512 Provisions (d) / (j) 2,464 5,041 7,505 1,479 Deferred tax liabilities (g) 150 150 30 Non-current liabilities 5,212 5,041 10,254 2,021 Borrowings - portion less than one year (k) 631 631 124 Lease commitments - portion less than one year (b) 196 196 39 Suppliers and other creditors (k) 2,681 2,681 528 Tax payables - portion less than one year (k) 96 96 19 Other current payables (k) 1,018 1,018 201 Current liabilities 4,622 4,622 911 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 18,694 3,648 22,342 4,403 Changes in the period (i.e., Grupo BIG operations carried out in June 2022) are included in the consolidated income statement and statement of cash flows for first-half 2022. They are not material at the level of the Group. The purchase price allocation process stipulated in IFRS 3 – Business Combinations was implemented and led to the recognition of provisional goodwill (a) in the amount of 484 million euros in the consolidated half-year financial statements as of June 30, 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 34 - Notes to the condensed consolidated financial statements This preliminary purchase price allocation process will continue in second-half 2022 and first-half 2023 : (b) In this respect, given the significant number of stores leased by Grupo BIG, the right-of-use assets and lease commitments have not been reviewed. (c) Similarly, given the significant number of stores owned by Grupo BIG, only the land has been subject to a preliminary fair value measurement in the financial statements as of June 30, 2022. Other property and equipment have been included at their net carrying amounts, with the fair value measurement exercise set to be conducted in the second half of 2022. (d) Reviews of the validity and value of ICMS and PIS COFINS tax credits will continue in second- half 2022 given their volume. The same applies to tax, labour and legal risks. As the purchase price allocation process is still ongoing, the fair value adjustments may differ – even materially – at December 31, 2022 and June 30, 2023 from those included in the consolidated half-year financial statements as of June 30, 2022. In the 2022 half-year financial statements, Grupo BIG's preliminary opening balance sheet consists of the following items: (e) recognition and measurement of acquired brands (Maxxi, Big, Bompreço, Nacional and TodoDia) and their indefinite useful lives; (f) continued recognition of other non-current financial assets at their net carrying amount, mainly relating to legal deposits paid in connection with disputes; (g) impairment of almost all deferred tax assets (before netting and tax effects relating to fair value adjustments to assets and liabilities) of legal entities within Grupo BIG due to the lack of taxable profits in recent years; (h) partial impairment of other non-current assets, consisting mainly of ICMS and PIS COFINS tax credits, following a preliminary analysis of possible future use; (i) classification as assets held for sale of the 14 stores to be disposed of in accordance with CADE's decision; (j) increase in provisions, in particular for tax risks and to a lesser extent for labour and legal risks, following the review of litigation and contingent liabilities; (k) continued recognition of other current assets and liabilities at their net carrying amount (including inventories, trade receivables, suppliers and other creditors, other current financial assets, cash and cash equivalents and borrowings, tax receivables and payables). Ofelia (Spain) – Acquisition of assets The property company Ofelia leased nine stores and a shopping mall to Carrefour Spain. In February 2022, Carrefour Spain exercised its pre-emptive right and acquired these assets for approximately 40 million euros. The disposal of these nine stores is expected to take place in the second half of 2022. Given the high probability of this disposal being completed, the stores have been classified as assets held for sale in the condensed consolidated half-year financial statements as of June 30, 2022 and valued at their net carrying amount. Sale of the Group's stake in Cajoo (France) On May 16, 2022, Germany-based Flink, Europe's leading quick commerce company, announced the acquisition of Cajoo from Carrefour and its founders in exchange for its own shares. This acquisition was finalised on June 23, 2022. The gain on the disposal of the Cajoo shares, amounting to approximately 6 million euros, net of fees, was recognised within non-recurring items for the period. Also in June 2022, the Group contributed to Flink's reserved capital increase. All Flink shares held by the Group at June 30, 2022 are recognised as investments in non-consolidated companies measured at fair value through other comprehensive income (see Note 13.5). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 35 - Notes to the condensed consolidated financial statements 3.2 Warehouse fire in Taiwan On March 14, 2022, a fire broke out in a logistics centre leased by Carrefour in the Yang Mei district of Taiwan. All employees were evacuated immediately with no injuries or casualties and the fire was brought under control on March 15, 2022. A claim was submitted to the Group's insurance companies in this respect and was still being assessed at June 30, 2022. Losses incurred as a result of destroyed inventories and equipment were recorded in first-half 2022 against the payout receivable from insurers classified under other current assets. The same applies to the estimated operating losses up to June 30, 2022. 3.3 Securing the Group’s long-term financing On March 30, 2022, the Group issued its first Sustainability-Linked Bond (SLB) indexed to its sustainable development goals. The 1.5 billion-euro bond comprises two tranches of 750 million euros each, with a maturity of 4.6 years (due in October 2026) and 7.6 years (due in October 2029) respectively, and paying a coupon of 1.88% and 2.38%. This bond was issued as part of a financing strategy aligned with the Group's CSR objectives and ambitions as well as the Sustainability-Linked Bond Framework of its Euro Medium-Term Notes (EMTN) programme published in June 2021, whose CSR component was revised and enhanced in May 2022. On June 8, 2022, the Group redeemed 1 billion euros worth of 1.75% 8-year bonds, ahead of their maturity (July 2022). These transactions guarantee the Group's liquidity over the short- and medium-term in an unstable economic environment, and are part of the strategy to ensure the necessary financing is in place to meet Carrefour's needs. The average maturity of bond debt of Carrefour SA was 3.8 years at end-June 2022, compared with 3.1 years at end-December 2021 and 3.6 years at end-June 2021. Financing of the Brazilian subsidiary Atacadão Following on from the 2021 transactions, Carrefour's Brazilian subsidiary Atacadão has set up financing arrangements in 2022 enabling it to secure its medium- and long-term needs in connection with the acquisition of Grupo BIG. The US dollar bank financing facilities put in place in December 2021 were finalised on January 5, 2022, with a total of 2,942 million Brazilian reals (approximately 537 million euros at the closing exchange rate of June 30, 2022) immediately swapped for Brazilian reals with maturities of 16 to 17 months. On January 6 and May 17, 2022, two inter-company financing lines were set up between the companies Carrefour Finance and Atacadão. The first revolving credit facility (RCF) for an amount of 4 billion Brazilian reals (approximately 729 million euros at the closing exchange rate of June 30, 2022), bearing annual interest at 12%, falls due in July 2023 and had been fully drawn at the end of June 2022. The second RCF for 1.9 billion Brazilian reals (approximately 346 million euros at the closing exchange rate of June 30, 2022), bearing annual interest at 14.25%, has a maturity of three years and had not been drawn down at June 30, 2022. These intra-group RCF loans are qualified as net investments in foreign operations and are therefore remeasured at fair value through equity. They are hedged in an amount of 1.4 billion Brazilian reals by derivatives classified as net investment hedges. Finally, on May 20, 2022, the Brazilian subsidiary obtained bank financing in euros and in US dollars, which was immediately swapped for Brazilian reals, for 1,500 million reals (approximately 274 million euros at the closing exchange rate of June 30, 2022). This facility falls due in six months and will be replaced by a medium-term financing facility in second-half 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 36 - Notes to the condensed consolidated financial statements 3.4 Payment of the 2021 dividend in cash At the Shareholders’ Meeting held on June 3, 2022, the shareholders decided to set the 2021 dividend at 0.52 euros per share to be paid entirely in cash. On June 9, 2022, the dividend was paid out in an amount of 380 million euros. 3.5 Share buyback programme As part of its share capital allocation policy, the Group commissioned an investment services provider to buy back shares corresponding to a maximum amount of 750 million euros, as authorised by the Shareholders’ Meeting of May 21, 2021. The first tranche of the share buyback programme began on March 7, 2022 and ended on April 13, 2022, with 21,232,106 shares acquired at an average price of 18.84 euros per share for a total amount of 400 million euros. These shares were cancelled following a decision by the Board of Directors on April 20, 2022 to reduce the share capital of Carrefour SA. A second tranche of the share buyback programme began on May 2, 2022 and ended on May 24, 2022, with 17,191,700 shares acquired at an average price of 20.36 euros per share for a total amount of 350 million euros. Of the shares bought back, 12,506,325 shares were cancelled following a decision by the Board of Directors on June 3, 2022 to reduce the share capital of Carrefour SA. These shares were cancelled in accordance with the authorisation granted by the Shareholders’ Meeting of May 21, 2021. Following cancellation of these shares, Carrefour SA has 742,157,461 shares outstanding and, consequently, 11,544,870 treasury shares, representing approximately 1.6% of the share capital. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 37 - Notes to the condensed consolidated financial statements NOTE 4: RESTATEMENT OF THE 2021 CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS 4.1 IAS 19 – Employee Benefits – Application of the IFRS IC decision of May 2021 In May 2021, the IFRS IC published a final decision clarifying the attribution of benefit to periods of service. The decision came in response to a request regarding a defined benefit plan with the following characteristics: provided they are still with the company when they reach retirement age, employees are entitled to a lump-sum benefit depending on their length of service, which is capped at a specified number of consecutive years of service. This decision has been applied retrospectively, and its impacts have been recognised in retained earnings in the comparative period presented in the consolidated financial statements for the year ended December 31, 2021 (see Note 4 of these financial statements). This decision has not been applied in the issued consolidated financial statements for the six months ended June 30, 2021. The estimated impact for first-half 2021 was deemed immaterial for the Group; therefore, the comparative information for the six months ended June 30, 2021 has not been restated to reflect this decision in the consolidated half-year financial statements as of June 30, 2022. 4.2 Impact of the IFRS IC decision issued in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements In the consolidated financial statements for the year ended December 31, 2021, the Group applied the IFRS IC decision published in April 2021 on the recognition of configuration and customisation costs in Software as a Service (SaaS) arrangements (see Note 1.2 to the 2021 consolidated financial statements). As a result of this decision, the Group changed the accounting policy for customisation and configuration costs when they do not meet the recognition criteria under IAS 38 (when the Group does not control the SaaS solution) or when they do not relate to the development of an interface (middleware) with this SaaS solution. These costs are now recognised as an expense either (a) as and when they are incurred if the development work is carried out internally or by a third party integrator (not related to the SaaS solution publisher), or (b) over the term of the SaaS arrangement if the development work is carried out by the SaaS solution publisher or its subcontractor. This decision was applied in the consolidated financial statements as of December 31, 2021. For SaaS solutions implemented before January 1, 2021, the estimated impact was not deemed material for the Group; therefore, the comparative information for the year ended December 31, 2020 was not restated in light of this decision. The integration costs of SaaS solutions capitalised at December 31, 2020 that no longer meet the recognition criteria were written off at January 1, 2021, against non-recurring income and expenses, in accordance with the Group's accounting principles (see Note 6.3 to the 2021 consolidated financial statements). As the consolidated financial statements for the six-month period ended June 30, 2021 did not include this write-off, the comparative information was restated in the consolidated half-year financial statements as of June 30, 2022 (see Notes 4.3 and 4.4). For SaaS solutions implemented between January 1, 2021 and June 30, 2021, the estimated impact was not deemed material for the Group; therefore, the comparative information for the six months ended June 30, 2021 was not restated in light of this decision for these solutions in the consolidated half-year financial statements as of June 30, 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 38 - Notes to the condensed consolidated financial statements 4.3 Impact on the consolidated income statement for first-half 2021 (in millions of euros) First-half 2021 published SaaS IFRIC decision impacts First-half 2021 restated Net sales 34,462 − 34,462 Loyalty program costs (403) − (403) Net sales net of loyalty program costs 34,059 − 34,059 Other revenue 1,040 − 1,040 Total revenue 35,100 − 35,100 Cost of sales (27,734) − (27,734) Gross margin from recurring operations 7,365 − 7,365 Sales, general and administrative expenses, depreciation and amortisation (6,625) − (6,625) Recurring operating income 740 − 740 Net income/(loss) from equity-accounted companies (10) − (10) Recurring operating income after net income from equity-accounted companies 730 − 730 Non-recurring income and expenses, net (41) (28) (70) Operating income 689 (28) 660 Finance costs and other financial income and expenses, net (132) − (132) Finance costs, net (80) − (80) Net interest related to lease commitments (52) − (52) Other financial income and expenses, net (1) − (1) Income before taxes 556 (28) 528 Income tax expense (187) 1 (186) Net income/(loss) from continuing operations 369 (27) 342 Net income/(loss) from discontinued operations 23 − 23 Net income/(loss) for the period 392 (27) 365 Group share 298 (27) 271 of which net income/(loss) from continuing operations - Group share 275 (27) 248 of which net income/(loss) from discontinued operations - Group share 23 − 23 Attributable to non-controlling interests 94 (0) 94 of which net income/(loss) from continuing operations - attributable to non- controlling interests of which net income/(loss) from discontinued operations - attributable to non- controlling interests 94 − (0) − 94 − Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 39 - Notes to the condensed consolidated financial statements 4.4 Impact on the consolidated statement of cash flows for first-half 2021 (in millions of euros) First-half 2021 published SaaS IFRIC decision impacts Income before taxes 556 (28) CASH FLOWS FROM OPERATING ACTIVITIES Income tax (165) − Depreciation and amortisation expense 1,133 − Gains and losses on sales of assets (281) 28 Change in provisions and impairment 152 − Finance costs, net 80 − Net interest related to lease commitments 52 − Net income and dividends received from equity-accounted companies 48 − Impact of discontinued operations (9) − Cash flow from operations 1,566 − Change in working capital requirement Net cash (used in)/from operating activities (excluding financial services companies) (2,138) (572) − − Change in consumer credit granted by the financial services companies (103) − Net cash (used in)/from operating activities - total (675) − CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets (558) − Acquisitions of non-current financial assets (147) − Acquisitions of subsidiaries and investments in associates (87) − Proceeds from the disposal of subsidiaries and investments in associates 186 − Proceeds from the disposal of property and equipment and intangible assets 40 − Proceeds from the disposal of non-current financial assets Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets Investments net of disposals - subtotal 2 (219) (782) − − − Other cash flows from investing activities 44 − Net cash (used in)/from investing activities - total (739) − CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid by Carrefour SA (383) − Dividends paid by consolidated companies to non-controlling interests (90) − Change in treasury stock and other equity instruments (443) − Change in current financial assets 15 − Issuance of bonds − − Repayments of bonds (871) − Net financial interest paid (82) − Other changes in borrowings 649 − Payments related to leases (principal) (480) − Net interest related to lease commitments (51) − Net cash (used in)/from financing activities - total (1,735) − Net change in cash and cash equivalents before the effect of changes in exchange rates Effect of changes in exchange rates (3,149) 4 − − Net change in cash and cash equivalents (3,145) − Cash and cash equivalents at beginning of period 4,439 − Cash and cash equivalents at end of period 1,294 − Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 First-half 2021 restated 528 (165) 1,133 (253) 152 80 52 48 (9) 1,566 (2,138) (572) (103) (675) (558) (147) (87) 186 40 2 (219) (782) 44 (739) (383) (90) (443) 15 − (871) (82) 649 (480) (51) (1,735) (3,149) 4 (3,145) 4,439 1,294 - 40 - Notes to the condensed consolidated financial statements NOTE 5: SEGMENT INFORMATION 5.1 Segment results First-half 2022 (in millions of euros) Group total France Europe Latin America Asia Global Functions Net sales 39,054 17,910 10,636 9,244 1,263 − Other revenue 1,215 383 278 474 47 33 Recurring operating income before depreciation and amortisation 1,987 703 585 596 125 (23) Recurring operating income 814 194 163 444 40 (26) Capital expenditure ¹ 562 217 143 193 5 3 Depreciation and amortisation expense ² (1,173) (509) (423) (153) (86) (3) First-half 2021 (in millions of euros) Group total France Europe Latin America Asia Global Functions Net sales 34,462 16,889 10,158 6,208 1,208 − Other revenue 1,040 374 270 318 43 35 Recurring operating income before depreciation and amortisation 1,873 710 648 414 126 (25) Recurring operating income 740 187 225 309 47 (28) Capital expenditure ¹ 558 217 97 220 18 5 Depreciation and amortisation expense ² (1,133) (523) (423) (105) (80) (2) (1) In first-half 2021, capital expenditure included the acquisition of two additional Makro Atacadista stores on a full ownership basis for approximately 19 million euros as well as operational investments for the 25 acquired stores at end-2020. On June 30, 2022, the 29th and final store was acquired on a full ownership basis for 5 million euros. (2) Including the depreciation and amortisation relating to logistics equipment included in the cost of sales. The increase in Latin America's segment earnings reflects the significant upturn in profitability, particularly in Brazil, in local currency terms, further reinforced by the increase in the value of the Brazilian real compared to first-half 2021. Segment results also reflect Grupo BIG's contribution for June 2022 (see Note 3.1). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 41 - Notes to the condensed consolidated financial statements 5.2 Segment assets and liabilities June 30, 2022 (in millions of euros) Group total France Europe Latin America Asia Global Functions ASSETS Goodwill 8,527 5,187 2,374 815 149 1 Other intangible assets 1,453 578 573 266 29 7 Property and equipment 12,521 4,478 2,768 4,872 401 2 Investment property 313 10 114 134 54 − Right-of-use assets 4,654 1,529 1,874 852 394 4 Other segment assets 18,809 7,862 3,398 6,790 338 420 Total segment assets 46,277 19,645 11,102 13,730 1,365 434 Unallocated assets 6,478 TOTAL ASSETS 52,755 LIABILITIES (excluding equity) Segment liabilities 26,623 11,361 6,975 6,726 1,142 419 Unallocated liabilities 14,010 TOTAL LIABILITIES 40,633 December 31, 2021 (in millions of euros) Group total France Europe Latin America Asia Global Functions ASSETS Goodwill 7,995 5,147 2,379 321 147 1 Other intangible assets 1,333 580 574 144 28 6 Property and equipment 10,721 4,627 2,871 2,784 437 2 Investment property 291 11 115 111 54 − Right-of-use assets 4,361 1,636 1,945 344 432 4 Other segment assets 15,672 7,326 3,126 4,569 315 336 Total segment assets 40,373 19,327 11,009 8,274 1,414 350 Unallocated assets 7,295 TOTAL ASSETS 47,668 LIABILITIES (excluding equity) Segment liabilities 25,983 11,612 7,497 5,276 1,221 377 Unallocated liabilities 9,856 TOTAL LIABILITIES 35,839 The increase in assets and liabilities in the Latin America region at June 30, 2022 compared to December 31, 2021 derives chiefly from Brazil and reflects two main components: the consolidation of Grupo BIG from June 1, 2022 (see Note 3.1); the increase in the value of the Brazilian real by 15%.  Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 42 - Notes to the condensed consolidated financial statements NOTE 6: OPERATING ITEMS 6.1 Revenue 6.1.1 Net sales (in millions of euros) First-half 2022 First-half 2021 % change Net sales 39,054 34,462 13.3% At constant exchange rates, first-half 2022 net sales amounted to 38,018 million euros compared with 34,462 million euros in first-half 2021, an increase of 10.3%. Changes in exchange rates reduced net sales by 1 billion euros in first-half 2022, almost exclusively attributable to the Latin America region. Restated for IAS 29 in Argentina, consolidated net sales for first-half 2022 would have increased by 10.0% at constant exchange rates. Net sales by country(1) (in millions of euros) First-half 2022 First-half 2021 France 17,910 16,889 Europe (excluding France) 10,636 10,158 Spain 4,815 4,353 Italy 1,907 1,935 Belgium 1,884 1,998 Poland 973 872 Romania 1,058 1,000 Latin America 9,244 6,208 Brazil 7,824 5,271 Argentina 1,421 937 Asia 1,263 1,208 Taiwan 1,263 1,208 TOTAL NET SALES 39,054 34,462 (1) Substantially all revenue is recognised on a specific date. Revenue recognised over time is not material at Group level. 6.1.2 Other revenue (in millions of euros) First-half 2022 First-half 2021 % change Financing fees and commissions ¹ 661 549 20.5% Franchise and business lease fees 193 185 4.5% Rental revenue 101 75 33.9% Revenue from sub-leases 18 15 14.8% Property development revenue ² 2 4 (58.6)% Other revenue ³ 240 212 13.5% TOTAL OTHER REVENUE 1,215 1,040 16.8% (1) Including net banking revenue and net insurance revenue generated by the Group's financial services and insurance companies. (2) Corresponding to the sale price of properties developed by the Group for resale. Taking into account development costs recorded in “Cost of sales”, the property development margin amounted to 2 million euros in first-half 2022 (3 million euros in first-half 2021). (3) Other revenue notably includes sales commissions, commissions received from suppliers, revenue from ticket/travel agency sales and in-store advertising fees. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 43 - Notes to the condensed consolidated financial statements Financing fees and commissions recognised in first-half 2022 bounced back, notably following the end of restrictive measures linked to the health crisis. In addition, growth observed in Brazil in local currency was buoyed by its translation into euros, given a more favourable average exchange rate over the period than in first-half 2021. Furthermore, franchise and lease management fees continued to increase in France. 6.2 Sales, general and administrative expenses, and depreciation and amortisation (in millions of euros) First-half 2022 First-half 2021 Sales, general and administrative expenses (5,968) (5,622) Depreciation and amortisation of property and equipment, intangible assets, and investment property (653) (633) Depreciation of right-of-use asset - Property and equipment and investment properties (388) (369) TOTAL SG&A EXPENSES AND DEPRECIATION AND AMORTISATION (7,010) (6,625) Sales, general and administrative expenses Sales, general and administrative expenses break down as follows: (in millions of euros) First-half 2022 First-half 2021 Employee benefits expense (3,641) (3,630) Maintenance and repair costs (377) (347) Fees (373) (319) Energy and electricity (372) (219) Taxes other than on income (360) (350) Advertising expense (316) (300) Property rentals (excl. IFRS 16) (40) (36) Other SG&A expenses (488) (422) TOTAL SG&A EXPENSES (5,968) (5,622) The increase in sales, general and administrative expenses results from a combination of factors in the first-half 2022, including a significant increase in energy costs (see Note 1.3.4), price inflation on certain purchased services, and the increase in the value of the Brazilian real. Depreciation and amortisation Including supply chain depreciation and amortisation recognised in cost of sales, total depreciation and amortisation expense recognised in the consolidated income statement amounted to 1,173 million euros in first-half 2022 (versus 1,133 million euros in first-half 2021), as follows: (in millions of euros) First-half 2022 First-half 2021 Property and equipment (520) (507) Intangible assets (128) (122) Investment property (6) (5) Depreciation and amortisation of property and equipment, intangible assets, and investment property (653) (633) Depreciation of right-of-use asset - Property and equipment and investment properties (388) (369) Depreciation and amortisation of supply chain (30) (29) Depreciation of right-of-use asset - Supply chain (101) (101) TOTAL DEPRECIATION AND AMORTISATION (1,173) (1,133) Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 % change 6.2% 3.1% 5.1% 5.8% % change 0.3% 8.7% 16.9% 70.3% 2.9% 5.3% 13.5% 15.8% 6.2% % change 2.6% 4.7% 19.2% 3.1% 5.1% 6.2% 0.0% 3.5% - 44 - Notes to the condensed consolidated financial statements 6.3 Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as impairment of non-current assets, gains and losses on sales of non-current assets, restructuring costs and provision charges and income recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group's attention during the period. Non-recurring items represented a net expense of 85 million euros in first-half 2022, and the detailed breakdown is as follows: (in millions of euros) First-half 2022 First-half 2021 restated Gains and losses on disposals of assets 62 248 Restructuring costs (16) (260) Other non-recurring income and expenses (86) 4 Non-recurring income and expenses, net before asset impairments and write-offs (40) (9) Asset impairments and write-offs (45) (61) of which impairments and write-offs of goodwill − − of which impairments and write-offs of property and equipment, intangible assets and others (45) (61) NON-RECURRING INCOME AND EXPENSES, NET (85) (70) of which: Non-recurring income Non-recurring expense 135 (220) 405 (474) Gains and losses on disposals of non-current assets comprise gains and losses arising on various asset disposals, notably in France and Italy. Other non-recurring income and expenses recorded in first-half 2022 mainly included revised estimates of historical risks, mostly tax-related, as well as the costs related to the acquisition of Grupo BIG in Brazil (see Note 3.1). Asset impairments and write-offs recorded in first-half 2022 include the retirement of a variety of non-current assets, notably IT equipment in France for 8 million euros and related to certain stores, namely in France and Argentina. Write-offs of property, plant and equipment – offset by insurance payouts receivable classified under other non-recurring income and expenses – were also recognised in Taiwan following the fire at the Yang Mei logistics centre (see Note 3.2). In addition, the alignment of the net carrying amount of Showroomprivé shares with the stock market share price at June 30, 2022 represented a non-recurring expense of 10 million euros. Main non-recurring items in first-half 2021 (restated) Gains and losses on sales of assets mainly included the gain arising on the loss of control of Market Pay in France for a net amount of around 230 million euros (see Note 2.3 to the 2021 consolidated financial statements). Restructuring costs resulted from continued work towards objectives to improve operating performance and organisational efficiency. The expense included in non-recurring items related chiefly to severance paid or payable within the scope of the transformation plan concerning the headquarters in France (see Note 2.2 to the 2021 consolidated financial statements). Other non-recurring income and expenses resulted primarily from the following items in Brazil: the impact of the Pinheiros real estate transaction, which generated income of 81 million euros following an exchange of assets in the city of São Paulo (see Note 2.3 to the 2021 consolidated financial statements); provision reversals (net of costs) on ICMS credits notably related to transfers between states on “basic products” were recognised for around 23 million euros following expiry of the Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 45 - Notes to the condensed consolidated financial statements limitation period for tax claims or further relief under tax amnesty programmes introduced by certain Brazilian states (see Note 6.3 to the 2020 consolidated financial statements); following the death of Mr Silveira Freitas, commitments were made by Carrefour Brazil to public authorities and non-profit organisations as part of a settlement agreement (“Termo de ajustamento de Conduta”) signed on June 11, 2021. It led to the recognition of a provision for 17 million euros (see Note 11.3 to the 2021 consolidated financial statements). Other non-recurring income and expenses also included revised estimates of historical risks in Spain and the impacts related to the decision taken in May 2021 to discontinue Carrefour Banque's operations in Italy (see Note 2.3 to the 2021 consolidated financial statements). Asset impairments and write-offs included the retirement of a variety of non-current assets, in particular relating to IT in France for 23 million euros. Asset impairments and write-offs also include the write-off of configuration and customisation costs for SaaS solutions that can no longer be capitalised as a result of the application of the final IFRS IC decision published in April 2021, for 28 million euros (see Note 4.2). 6.4 Change in working capital requirement The change in working capital requirement reported in the consolidated statement of cash flows under “Net cash from operating activities” breaks down as follows: (in millions of euros) First-half 2022 First-half 2021 Change Change in inventories (631) (426) (205) Change in trade receivables (422) (103) (319) Change in trade payables (844) (1,448) 604 Change in loyalty program liabilities 16 25 (8) Change in trade working capital requirement (1,881) (1,953) 71 Change in other receivables and payables (234) (186) (48) CHANGE IN WORKING CAPITAL REQUIREMENT (2,115) (2,138) 23 These items, like all other items in the statement of cash flows, are translated at the average rate for the period. 6.5 Banking and insurance businesses 6.5.1 Consumer credit granted by the financial services companies At June 30, 2022, consumer credit granted by the financial services companies totalled 5,574 million euros (compared with 5,294 million euros at December 31, 2021), as follows: (in millions of euros) June 30, 2022 December 31, 2021 Payment card receivables 4,985 4,474 Loans 1,494 1,549 Consumer credit (on purchases made in Carrefour stores) 35 44 Other financing ¹ 240 254 Impairment (1,179) (1,027) Total Consumer credit granted by the financial services companies 5,574 5,294 Portion due in less than one year 3,708 3,473 Portion due in more than one year 1,866 1,821 (1) Other financing corresponds mainly to restructured loans and credit facilities. Consumer credit granted by the financial services companies corresponds to customer receivables (credit card debt, personal loans, etc.). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 46 - Notes to the condensed consolidated financial statements The gross value of consumer credit increased by approximately 430 million euros compared with December 31, 2021. This reflects strong momentum in the consumer credit business in Brazil, boosted by the increase in the value of the Brazilian real during the period. Gross consumer credit in Spain and France remain relatively stable, excluding the impact of sales of mainly category 3 credit in both countries over the period. At June 30, 2022, 71% of the gross value of consumer credit granted by the financial services companies was classified in category 1, 11% in category 2 and 18% in category 3. At December 31, 2021, categories 1, 2 and 3 represented 73%, 11% and 16%, respectively, of the gross value of consumer credit granted by the financial services companies. The average impairment rate for consumer credit remains close to 17%. 6.5.2 Consumer credit financing The related consumer credit financing amounted to 4,612 million euros at June 30, 2022 (December 31, 2021: 4,441 million euros), as follows: (in millions of euros) June 30, 2022 December 31, 2021 Bonds and notes ¹ 832 1,202 Debt securities (Neu CP and Neu MTN) ² 1,291 866 Bank borrowings ³ 562 498 Customer passbook savings deposits 292 304 Securitisations ⁴ 298 369 Other refinancing debt to financial institutions 1,333 1,202 Other 3 − TOTAL CONSUMER CREDIT FINANCING 4,612 4,441 Portion due in less than one year 2,497 2,868 Portion due in more than one year 2,115 1,573 (1) In March 2022, Carrefour Banque redeemed ahead of term the 400 million-euro bond issued in June 2021 with a fixed rate swapped for the 3-month Euribor (4 years – June 2025 maturity, 3-month Euribor coupon +49 bps). (2) Debt securities mainly comprised negotiable European Commercial Paper (NEU CP) and negotiable European Medium-Term Notes (NEU MTN) issued by Carrefour Banque. (3) This item mainly includes the 360 million-euro refinancing operation with the European Central Bank (maturity March 2024) and drawdowns of credit lines. (4) This item corresponds to the “Master Credit Cards Pass” reloadable securitisation programme with compartments launched by Carrefour Banque in November 2013 for an initial asset pool of 560 million euros. Proceeds from the securitisation amounted to 400 million euros. This vehicle was maintained at June 30, 2022 with a balance of 298 million euros. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 47 - Notes to the condensed consolidated financial statements NOTE 7: INTANGIBLE ASSETS, PROPERTY AND EQUIPMENT, INVESTMENT PROPERTY 7.1 Goodwill and other intangible assets Goodwill, which constitutes the main intangible asset, is reported separately from other intangible assets in the statement of financial position. (in millions of euros) June 30, 2022 December 31, 2021 Goodwill 8,527 7,995 Other intangible assets 1,453 1,333 TOTAL INTANGIBLE ASSETS 9,980 9,328 The carrying amount of goodwill is monitored at the level of the operating segments corresponding to the countries in which the Group conducts its business through its integrated store networks. The net carrying amount of goodwill can be broken down as follows: (in millions of euros) June 30, 2022 December 31, 2021 France 5,187 5,147 Spain 1,031 1,031 Belgium 950 950 Brazil 809 314 Poland 224 229 Taiwan 149 147 Romania 99 99 Italy 69 69 Argentina 7 8 Global Functions 1 1 TOTAL 8,527 7,995 The 531 million-euro increase in goodwill over first-half 2022 reflects the following: completion of the acquisition of Grupo BIG in Brazil (see Note 3.1), including the recognition of provisional goodwill in the amount of 484 million euros. various acquisitions in France for a total of 40 million euros, corresponding mainly to the Carré d'Or franchisee. a favourable 11 million-euro effect of changes in foreign exchange rates following the increase in the value of the Brazilian real compared with December 31, 2021. Impairment tests at June 30, 2022 In accordance with IAS 36 - Impairment of Assets, goodwill recognised on business combinations is not amortised but is tested for impairment every year, or more frequently if there is an indication that its carrying amount may not be recovered. At each interim closing, as prescribed by IAS 36, the Group determines whether there are any indications of impairment and, if this is the case, performs additional impairment tests. The main impairment indicators used by the Group are as follows: internal impairment indicator: a material deterioration in the ratio of recurring operating income before depreciation and amortisation to net revenues excluding petrol between the budget and the most recent forecast, external impairment indicator: a material increase in the discount rate and/or a severe downgrade in the IMF’s GDP growth forecast. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 48 - Notes to the condensed consolidated financial statements Focus on Italy Note that an impairment loss of 700 million euros was recorded against Italian goodwill in 2017 to reflect the significant decline in the value in use of the Group's operations in this country. In light of this, an in-depth analysis was carried out to determine the Italian operations' fair value. This analysis adopted a multi-criteria valuation approach which took into account multiples observed for comparable companies in the retail sector in Europe, and the market value of Italian real estate assets, determined based on independent appraisals. In the impairment tests carried out at December 31, 2020 and 2021, partial impairments of Italian goodwill were recorded in an amount of 104 million euros and 80 million euros, respectively. This reflected the decline in net sales, earnings and property values. The multi-criteria approach was also used to test goodwill for impairment at June 30, 2022 (as at December 31, 2019, 2020 and 2021). This approach did not lead to any additional impairment of Italian goodwill. Ultimately, at June 30, 2022, the tests performed by the Group did not lead to the recognition of any goodwill impairment losses. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 49 - Notes to the condensed consolidated financial statements 7.2 Property and equipment June 30, 2022 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land 3,686 − (73) 3,614 Buildings 11,585 (6,037) (202) 5,347 Equipments, fixtures and fittings 15,453 (12,338) (317) 2,799 Other fixed assets 622 (394) (4) 224 Assets under construction 538 − − 538 TOTAL PROPERTY AND EQUIPMENT 31,885 (18,768) (595) 12,521 December 31, 2021 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land 2,698 − (72) 2,626 Buildings 10,591 (5,860) (205) 4,527 Equipments, fixtures and fittings 15,208 (12,091) (321) 2,797 Other fixed assets 447 (326) (4) 117 Assets under construction 655 − − 655 TOTAL PROPERTY AND EQUIPMENT 29,600 (18,277) (602) 10,721 The significant increase in the net carrying amount of property and equipment compared with December 31, 2021 mainly reflects the acquisition of such assets held by Grupo BIG, whose land has been measured at fair value in accordance with IFRS 3 (see Note 3.1). This fair value remains preliminary and will be adjusted based on the measurement of the buildings and other property and equipment in the second half of 2022. To a lesser extent, the increase in this item also reflects translation gains resulting from the increase in the value of the Brazilian real as of the reporting date. 7.3 Investment property (in millions of euros) June 30, 2022 December 31, 2021 Investment property (gross carrying amount) 541 493 Depreciation and impairment (229) (202) TOTAL INVESTMENT PROPERTY, NET 313 291 Investment property consists mainly of shopping malls located adjacent to the Group's stores. The slight increase in the net carrying amount of investment property compared with December 31, 2021 chiefly reflects translation gains resulting from the increase in the value of the Brazilian real as of the reporting date. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 50 - Notes to the condensed consolidated financial statements NOTE 8: LEASES The increase in right-of-use assets and lease commitments compared to December 31, 2021 mainly reflects the consolidation of those recognised by Grupo BIG at their net carrying amount; the fair value allocation process will be implemented in second-half 2022 (see Note 3.1). To a lesser extent, the increase in this item also reflects translation gains resulting from the increase in the value of the Brazilian real as of the reporting date. 8.1 Right-of-use assets June 30, 2022 December 31, 2021 (in millions of euros) Gross carrying amount Depre- ciation Impairment Net carrying amount Gross carrying amount Depre- ciation Impairment Net carrying amount Land & Buildings 7,618 (3,120) (4) 4,494 6,917 (2,733) (4) 4,180 Equipment, fixtures and fittings 147 (40) − 107 146 (24) − 122 Investment property 93 (40) − 53 92 (34) − 58 TOTAL RIGHT-OF-USE ASSET 7,857 (3,200) (4) 4,654 7,155 (2,791) (4) 4,361 8.2 Lease commitments Lease commitments by maturity (in millions of euros) June 30, 2022 December 31, 2021 Due within 1 year 1,047 995 Due in 1 to 2 years 910 917 Due in 2 to 5 years 1,608 1,619 Due beyond 5 years 1,383 1,065 TOTAL LEASE COMMITMENTS 4,947 4,597 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 51 - Notes to the condensed consolidated financial statements NOTE 9: INVESTMENTS IN COMPANIES ACCOUNTED FOR BY THE EQUITY METHOD 9.1 Changes in investments in equity-accounted companies Changes in investments in equity-accounted companies can be analysed as follows: (in millions of euros) At December 31, 2021 1,256 Acquisitions and capital increases (net of decreases) 11 Disposals (27) Dividends (56) Share of net income 12 Effect of changes in foreign exchange rates and other movements 5 At June 30, 2022 1,200 9.2 Information about associates At June 30, 2022, the two main associates were Carmila with a carrying amount of 732 million euros (December 31, 2021: 749 million euros) and Provencia with a carrying amount of 137 million euros (December 31, 2021: 132 million euros). These two associates represented 72% of the total value of equity-accounted companies at end-June 2022. Main transactions in first-half 2022 Carmila (France) In first-half 2022, Carmila carried out two share buyback programmes followed by cancellation of the shares, representing approximately 1.4% of the share capital. This led to an increase in Carrefour's interest in Carmila, from 35.5% to 36.0%. As a reminder, Carmila is accounted for by the equity method because the governance established with the co-investors allows Carrefour to exercise significant influence over Carmila (see Note 9.2 to the 2021 consolidated financial statements). CarrefourSA (Turkey) In first-half 2022, the Group sold on the market around 5% of its stake in the listed company CarrefourSA for 14 million euros, leading to the recognition in non-recurring items of a capital gain on disposal for the same amount. The remaining interest in CarrefourSA is 32% at June 30, 2022, compared with 38% at December 31, 2021. Cosmopolitano (Brazil) On April 1, 2022, the Group acquired the remaining 50% of shares in Cosmopolitano in Brazil, which has been fully consolidated since that date. Proceeds of approximately 80 million Brazilian reals (15 million euros) were recognised within non-recurring items as a result of this takeover, which was accounted for in accordance with IFRS 3 and IAS 28. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 52 - Notes to the condensed consolidated financial statements Cajoo (France) In July 2021, the Group acquired a 40% non-controlling interest in Cajoo, a French trailblazer in quick commerce, which has been accounted for by the equity method in the Group's consolidated financial statements since that date. On May 16, 2022, Germany-based Flink, Europe's leading quick commerce company, announced the acquisition of Cajoo from Carrefour and its founders in exchange for its own shares. This acquisition was finalised on June 23, 2022. The gain on the disposal of the Cajoo shares, amounting to approximately 6 million euros, net of fees, was recognised within non-recurring items for the period. Also in June 2022, the Group contributed to Flink's reserved capital increase. All Flink shares held by the Group at June 30, 2022 are recognised as investments in non-consolidated companies measured at fair value through other comprehensive income (see Note 13.5). Showroomprivé (France) In first-half 2022, additional impairment of 10 million euros on the Showroomprivé shares was recognised against non-recurring income and expenses in order to align their value with the company’s share price at June 30, 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 53 - Notes to the condensed consolidated financial statements NOTE 10: INCOME TAX The income tax expense for first-half 2022 amounted to 202 million euros, i.e., an effective tax rate of 36.4%, compared with the 186 million-euro expense recorded in first-half 2021 as restated, which corresponded to an effective tax rate of 35.3%. The effective tax rates for the first six months of 2022 and 2021 (restated) were impacted by the recognition of the CVAE (local business tax) in France and the absence of deferred tax assets in Italy. Apart from these factors, the first-half 2022 effective tax rate reflects the geographical breakdown of income before tax, with no other items significantly distorting the tax proof. The restated effective tax rate for first-half 2021 combined several factors which: decreased the rate, such as the low tax rates applied to capital gains arising on disposal of 60% of Market Pay in France and on the Pinheiros asset exchange in Brazil; increased the rate, such as the rise in deferred tax liabilities relating to the remeasurement of non-current assets in accordance with IAS 29 as a result of the increase in the applicable tax rate in Argentina. Furthermore, the probable recoverability of deferred tax assets recognised in the consolidated statement of financial position at December 31, 2021 was confirmed at June 30, 2022, based in particular on a comparison between the budgeted performance of the different countries and the most recent forecasts. Lastly, the amount of deferred tax assets net of deferred tax liabilities (before tax effects relating to adjustments to assets and liabilities at fair value) reported by Grupo BIG was almost fully written down in the preliminary opening balance sheet due to its lack of taxable profits in recent years (see Note 3.1). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 54 - Notes to the condensed consolidated financial statements NOTE 11: PROVISIONS AND CONTINGENT LIABILITIES 11.1 Changes in provisions (in millions of euros) December 31, 2021 Increases ³ Reversals of surplus provisions Utilisations Discounting adjustment Effect of changes in foreign exchange rates ⁴ Other ⁵ June 30, 2022 Employee benefits 786 25 (7) (22) (165) 1 (68) 550 Claims and litigation 844 130 (75) (70) − (41) 1,440 2,228 Tax litigations 503 75 (37) (13) − (32) 1,195 1,690 Employee related disputes 109 32 (13) (19) − (6) 140 242 Legal disputes 232 23 (25) (39) − (2) 106 297 Restructuring 356 27 (20) (88) − (0) − 275 Provisions related to banking and insurance businesses ¹ 247 56 (6) (10) − 7 − 295 Other ² 222 17 (39) (7) − (3) 114 304 TOTAL PROVISIONS 2,455 255 (146) (198) (165) (36) 1,487 3,652 (1) Provisions relating to the banking and insurance businesses notably include provisions for credit risk on loan commitments (off-balance sheet) recognised in accordance with IFRS 9, and provisions set aside to cover insurance underwriting risk. (2) Other provisions mainly concern onerous contracts. They also include provisions for dismantling assets under property leases or for restoring assets to the requisite condition, recognised against the related right-of-use asset following application of IFRS 16. (3) Increases in provisions relating to the banking and insurance businesses for 56 million euros correspond, for 48 million euros, to the estimated cost incurred due to the fire that broke out in the Yang Mei logistics centre in Taiwan in March 2022. Payouts receivable from insurance companies in respect of this claim for an amount of 42 million euros are recognised under other current assets (see Note 3.2). (4) The effect of changes in foreign exchange rates mainly reflects the decrease in the value of the Brazilian real during June 2022 on the provisions of Grupo BIG. (5) This item corresponds mainly to the provisions recorded in the preliminary opening balance sheet of Grupo BIG, for which the fair value allocation process will continue in second-half 2022 (see Note 3.1). It also corresponds to the reclassification of the provision for employee benefits to other provisions for 68 million euros (see Note 11.3) following the transfer of integrated stores to lease management contracts in France in first-half 2022. Group companies are involved in a certain number of pre-litigation and litigation proceedings in the normal course of business. Furthermore, they have been or are currently the subject of tax audits, some of which may result in reassessments. The Group is also subject to regular audits by the authorities responsible for overseeing compliance with the laws applicable to the retail industry and by the competition authorities. As for any company, disputes may also arise between the Group and its co-contractors, particularly its franchisees, service providers or suppliers. In each case, the risk is assessed by Group management and their advisors. 11.2 Contingent liabilities To the best of the Group's knowledge, there are no contingent liabilities that may be considered likely to have a material impact on the Group's results, financial position, assets and liabilities or business. During first-half 2022, there was no material change in contingent liabilities compared to those described in Note 11.3 to the 2021 consolidated financial statements. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 55 - Notes to the condensed consolidated financial statements 11.3 Post-employment benefits The Group's post-employment benefit obligation (defined benefit plans) is calculated on the basis of actuarial assumptions such as future salary levels, retirement age, mortality, staff turnover and the discount rate. At June 30, 2022, a discount rate of 3.20% was used for France, Belgium and Italy (December 31, 2021: 0.80%). The discount rate is based on an index of AA-rated corporate bonds with maturities that correspond to the expected cash outflows of the plans. (in millions of euros) France Belgium Italy Other countries Group total Provision at December 31, 2021 445 215 88 39 786 Service cost 22 9 0 0 31 Settlement and plan amendments (4) − (1) (0) (5) Interest cost (discount effect) 2 2 0 0 4 Return on plan assets (0) (1) − (0) (1) Other items (3) − − − (3) Movements recorded in the income statement 17 10 (1) 1 27 Benefits paid directly by the employer (8) (7) (8) − (23) Effect of changes in scope of consolidation ¹ (68) − − − (68) Change in actuarial gains and losses (83) (64) (18) (0) (165) Other − (4) − (3) (6) Provision at June 30, 2022 301 150 62 38 550 (1) The effect of changes in the scope of consolidation, which reduced the provision by 68 million euros, corresponds to the reclassification of the provision for employee benefits to other provisions (see Note 11.1) following the transfer of integrated stores to lease management contracts in France during first-half 2022. The cost of services rendered was recognised in employee benefits expense, and interest income and expenses were recognised in financial income and expenses. Sensitivity tests show that: a 25-bps increase in the discount rate would reduce the defined benefit obligation under the French, Belgian and Italian plans by around 17 million euros; a 25-bps increase in the inflation rate would increase the defined benefit obligation under the French, Belgian and Italian plans by around 13 million euros. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 56 - Notes to the condensed consolidated financial statements 11.4 Performance share plan Under the 2019 performance share plan which expired on February 27, 2022, the level of attainment achieved by the Carrefour group was 100%. Accordingly, 2,592,746 shares were delivered to the beneficiaries in accordance with the relevant settlement terms. In addition, 5,298 shares were also delivered to heirs of employees under the ongoing 2020 and 2021 performance plans. On February 16, 2022, based on the Compensation Committee's recommendation, Carrefour SA's Board of Directors decided to use the authorisation given in the 29th resolution of the Annual Shareholders' Meeting held on May 21, 2021 to grant new or existing performance shares. The plan provided for the grant of a maximum of 3,104,000 shares (representing 0.40% of the share capital at February 16, 2022). The shares will vest subject to a service condition and several performance conditions. The vesting period is three years from the date of the Board of Directors' meeting at which the rights were granted. The number of shares that vest will depend on the achievement of four performance conditions: two conditions linked to financial performance (recurring operating income growth for 25% and net free cash flow growth for 25%); a condition linked to an external performance criterion (TSR), benchmarking the Carrefour SA share price against a panel of companies in the retail sector (for 25%); a CSR-related condition for 25%. Details of the 2022 performance share plan are presented below. 2022 Performance Plan Shareholders' Meeting date May 21, 2021 Grant date ¹ February 16, 2022 Vesting date ² February 16, 2025 Total number of shares approved at the grant date 3,104,000 Number of grantees at the grant date 809 Fair value of each share (in euros) ³ 14.21 (1) Date of the Board of Directors’ decision to grant shares. (2) The shares will vest only if the grantee remains with the Group until the end of the vesting period and performance conditions are met. (3) The fair value of shares is determined according to a reference price adjusted for dividends expected during the vesting period. 11.5 Restructuring Provisions set aside at December 31, 2021 for restructuring in an amount of 356 million euros mainly comprised costs related to plans undertaken to streamline operating structures, chiefly in France and Italy (see Note 2.2 to the 2021 consolidated financial statements). These costs primarily corresponded to severance pay, early retirement benefits, costs of notice periods not served, and costs of training and other support measures offered to employees being made redundant under restructuring plans. Some of these provisions were used during first-half 2022 (see Note 11.1). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 57 - Notes to the condensed consolidated financial statements NOTE 12: EQUITY, OTHER COMPREHENSIVE INCOME AND EARNINGS PER SHARE 12.1 Share capital and treasury stock At June 30, 2022, the share capital was made up of 742,157,461 ordinary shares with a par value of 2.5 euros each, all fully paid. Furthermore, at June 30, 2022 a total of 11,544,870 shares were held in treasury. (in thousands of shares) Number of shares Of which treasury stocks Outstanding at January 1, 2022 775,896 9,458 Issued for cash − − Issued / (used) under performance share plans ¹ − (2,598) Issued in payment of dividends − − Share buyback programme ² − 38,424 Cancelled shares ² (33,738) (33,738) Outstanding at June 30, 2022 742,157 11,545 (1) See Note 11.4. (2) See Note 3.5. 12.2 Other comprehensive income Group share (in millions of euros) First-half 2022 First-half 2021 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges ¹ 85 (8) 77 39 (9) 30 Changes in the fair value of debt instruments through other comprehensive income (10) 3 (7) (1) 0 (1) Exchange differences on translating foreign operations ² 252 − 252 172 − 172 Items that may be reclassified subsequently to profit or loss 327 (6) 321 209 (8) 201 Remeasurements of defined benefit plans obligation ³ 164 (37) 127 63 (14) 49 Items that will not be reclassified to profit or loss 164 (37) 127 63 (14) 49 Total other comprehensive income / (loss) - Group share 491 (43) 448 272 (22) 250 Non-controlling interests (in millions of euros) First-half 2022 First-half 2021 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges 7 (2) 5 2 (1) 1 Changes in the fair value of debt instruments through other comprehensive income (11) 3 (8) (1) 0 (1) Exchange differences on translating foreign operations ² 209 − 209 79 − 79 Items that may be reclassified subsequently to profit or loss 205 1 206 79 (1) 79 Remeasurements of defined benefit plans obligation ³ 1 (0) 1 1 0 1 Items that will not be reclassified to profit or loss 1 (0) 1 1 0 1 Total other comprehensive income / (loss) - Non-controlling interests 206 0 207 80 (0) 79 (1) In first-half 2022, Carrefour Finance granted an intra-group revolving credit facility (RCF) to Atacadão, treated as part of the net investment in that operation. The derivatives contracted to hedge part of this loan were classified as a net investment hedge (see Note 3.3). (2) Exchange differences recognised on translating foreign operations in first-half 2022 mainly reflect the significant increase in the value of the Brazilian real. Exchange differences recognised on translating foreign operations in first-half 2021 mainly reflected the slight increase in the value of the Brazilian real. (3) Remeasurement of the net defined benefit liability recognised in first-half 2022 reflects the strong increase in discount rates applied for the eurozone, from 0.80% at end-December 2021 to 3.20% at end-June 2022. In first-half 2021, these discount rates increased from 0.40% at end-December 2020 to 0.80% at end-June 2021. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 58 - Notes to the condensed consolidated financial statements 12.3 Earnings per share (Group share) Basic earnings per share First-half 2022 First-half 2021 restated Net income/(loss) from continuing operations 250 248 Net income/(loss) from discontinued operations 5 23 Net income/(loss) for the period 255 271 Weighted average number of shares outstanding ¹ 752,242,509 803,785,482 Basic income/(loss) from continuing operations - per share (in euros) 0.33 0.31 Basic income/(loss) from discontinued operations - per share (in euros) 0.01 0.03 Basic income/(loss) - per share (in euros) 0.34 0.34 (1) In accordance with IAS 33, the weighted average number of shares used to calculate earnings per share as of June 30, 2022 was adjusted to take into account the impact of the share buybacks carried out during the period (see Note 3.5). Diluted earnings per share First-half 2022 First-half 2021 restated Net income/(loss) from continuing operations 250 248 Net income/(loss) from discontinued operations 5 23 Net income/(loss) for the period 255 271 Weighted average number of shares outstanding, before dilution 752,242,509 803,785,482 Potential dilutive shares 4,129,274 3,165,431 Performance shares 4,129,274 3,165,431 Diluted weighted average number of shares outstanding 756,371,783 806,950,913 Diluted income/(loss) from continuing operations - per share (in euros) 0.33 0.31 Diluted income/(loss) from discontinued operations - per share (in euros) 0.01 0.03 Diluted income/(loss) - per share (in euros) 0.34 0.34 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 59 - Notes to the condensed consolidated financial statements NOTE 13: FINANCIAL ASSETS AND LIABILITIES, FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES 13.1 Financial instruments by category At June 30, 2022 Breakdown by category (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OCI Amortised cost Derivative instruments not designated as hedges Derivative instruments designated as hedges Fair value Investments in non-consolidated companies Other long-term investments 161 1,127 14 84 147 158 − 885 − − − − 161 1,127 Other non-current financial assets 1,288 99 305 885 − − 1,288 Consumer credit granted by the financial services companies 5,574 − − 5,574 − − 5,574 Trade receivables 3,402 − − 3,402 − − 3,402 Other current financial assets 687 1 119 241 36 291 687 Other current assets ¹ 683 − − 683 − − 683 Cash and cash equivalents 2,539 2,539 − − − − 2,539 ASSETS 14,174 2,638 423 10,785 36 291 14,173 Total borrowings 9,724 − − 9,580 32 112 9,452 Total leases commitment 4,947 − − 4,947 − − 4,947 Total consumer credit financing 4,612 − − 4,584 3 25 4,612 Suppliers and other creditors 13,283 − − 13,283 − − 13,283 Other current payables ² 2,505 − − 2,505 − − 2,505 LIABILITIES 35,071 − − 34,899 35 137 34,799 At December 31, 2021 Breakdown by category (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OCI Amortised cost Derivative instruments not designated as hedges Derivative instruments designated as hedges Fair value Investments in non-consolidated companies Other long-term investments 126 1,026 14 159 112 163 − 704 − − − − 126 1,026 Other non-current financial assets 1,152 174 274 704 − − 1,152 Consumer credit granted by the financial services companies 5,294 − − 5,294 − − 5,294 Trade receivables 2,581 − − 2,581 − − 2,581 Other current financial assets 532 − 79 246 24 182 532 Other current assets ¹ 467 − − 467 − − 467 Cash and cash equivalents 3,703 3,703 − − − − 3,703 ASSETS 13,729 3,877 353 9,292 24 182 13,729 Total borrowings 6,834 − − 6,793 22 18 7,101 Total leases commitment 4,597 − − 4,597 − − 4,597 Total consumer credit financing 4,441 − − 4,431 1 9 4,441 Suppliers and other creditors 13,072 − − 13,072 − − 13,072 Other current payables ² 2,660 − − 2,660 − − 2,660 LIABILITIES 31,604 − − 31,553 24 27 31,871 (1) Excluding prepaid expenses. (2) Excluding deferred revenue. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 60 - Notes to the condensed consolidated financial statements Analysis of assets and liabilities measured at fair value The table below shows assets and liabilities presented according to the fair value hierarchy provided for in IFRS 13 – Fair Value Measurement (see Note 1.5): June 30, 2022 (in millions of euros) Level 1 Level 2 Level 3 Total Investments in non-consolidated companies − 14 147 161 Other long-term investments 242 − − 242 Other current financial assets – Fair Value through OCI 119 − − 119 Other current financial assets - Fair Value through profit or loss 1 − − 1 Other current financial assets - Derivative instruments − 326 − 326 Cash and cash equivalents 2,539 − − 2,539 Consumer credit financing - Derivative instruments recorded in liabilities − (28) − (28) Borrowings - Derivative instruments recorded in liabilities − (144) − (144) December 31, 2021 (in millions of euros) Level 1 Level 2 Level 3 Total Investments in non-consolidated companies − 14 112 126 Other long-term investments 322 − − 322 Other current financial assets – Fair Value through OCI 79 − − 79 Other current financial assets - Derivative instruments − 207 − 207 Cash and cash equivalents 3,703 − − 3,703 Consumer credit financing - Derivative instruments recorded in liabilities − (11) − (11) Borrowings - Derivative instruments recorded in liabilities − (40) − (40) 13.2 Net debt 13.2.1 Breakdown of net debt Consolidated net debt at end-June 2022 amounted to 6,533 million euros, breaking down as follows: (in millions of euros) June 30, 2022 December 31, 2021 Bonds and notes 6,593 6,052 Other borrowings 1,587 741 Commercial paper 1,400 − Total borrowings excluding derivative instruments recorded in liabilities 9,580 6,793 Derivative instruments recorded in liabilities 144 40 TOTAL BORROWINGS [1] 9,724 6,834 of which borrowings due in more than one year 5,915 5,491 of which borrowings due in less than one year 3,809 1,342 Other current financial assets ¹ 653 498 Cash and cash equivalents 2,539 3,703 TOTAL CURRENT FINANCIAL ASSETS [2] 3,192 4,201 NET DEBT [1]-[2] 6,533 2,633 (1) The current portion of amounts receivable from finance sub-leasing arrangements is not included in this caption (see Note 13.2.5). The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year-end figure being structurally lower due to the significant volume of business recorded during December. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 61 - Notes to the condensed consolidated financial statements 13.2.2 Breakdown of bond debt Face value Book value of the debt (in millions of euros) Maturity December 31, 2021 Issues Repayments Translation adjustments June 30, 2022 June 30, 2022 Public placements by Carrefour SA 5,883 1,500 (1,000) 80 6,463 6,402 EMTN, EUR, 8 years, 1.75% 2022 1,000 − (1,000) − − − Cash-settled convertible bonds, USD 500 million, 6 years, 0% 2023 441 − − 40 481 469 EMTN, EUR, 8 years, 0.750% 2024 750 − − − 750 748 EMTN, EUR, 10 years, 1.25% 2025 750 − − − 750 748 Cash-settled convertible bonds, USD 500 million, 6 years, 0% 2024 441 − − 40 481 457 EMTN, EUR, 5 years, 0.88% 2023 500 − − − 500 499 EMTN, EUR, 7.5 years, 1.75% 2026 500 − − − 500 498 EMTN, EUR, 8 years, 1.00% 2027 500 − − − 500 498 EMTN, EUR, 7.5 years, 2.625% 2027 1,000 − − − 1,000 994 EMTN, EUR, 4.6 years, 1.88% 2026 − 750 − − 750 748 EMTN, EUR, 7.6 years, 2.38% 2029 − 750 − − 750 743 Placements by Atacadão SA 237 − (82) 36 191 191 Debentures, BRL 500 million, 5 years, 105.75% CDI 2023 79 − − 12 91 91 Debentures, BRL 450 million, 3 years, 100% CDI 2022 71 − (82) 11 − − Debentures, BRL 350 million, 5 years, 100% CDI 2024 55 − − 8 64 64 Debentures, BRL 200 million, 7 years, 100% CDI 2026 32 − − 5 36 36 TOTAL BONDS AND NOTES 6,120 1,500 (1,082) 116 6,654 6,593 On March 30, 2022, Carrefour SA issued 1.5 billion euros worth of bonds. The issue consists of two Sustainability-Linked tranches indexed to the Group's sustainability goals: a fixed-rate tranche for 750 million euros maturing in 4.6 years and paying a coupon of 1.88% per year; a second fixed-rate tranche for 750 million euros maturing in 7.6 years and paying a coupon of 2.38% per year. On June 8, 2022, Carrefour SA redeemed 1 billion euros worth of 1.75% 8-year bonds, ahead of their maturity (July 2022). The Group’s financial position and liquidity were solid at end-June 2022. The average maturity of bond debt of Carrefour SA was 3.8 years at end-June 2022, compared with 3.1 years at end-December 2021 and 3.6 years at end-June 2021. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 62 - Notes to the condensed consolidated financial statements 13.2.3 Breakdown of other borrowings (in millions of euros) June 30, 2022 December 31, 2021 Latin America borrowings 1,386 610 Other borrowings 87 59 Accrued interest ¹ 33 38 Other financial liabilities 81 33 TOTAL OTHER BORROWINGS 1,587 741 (1) Accrued interest on total borrowings, including bonds and notes. “Latin America borrowings” include USD and EUR financing swapped into Brazilian reals by the Brazilian subsidiary Atacadão: 750 million Brazilian reals (approximately 137 million euros at the closing exchange rate of June 30, 2022) in April 2020; 1,937 million Brazilian reals (approximately 353 million euros at the closing exchange rate of June 30, 2022) in September 2021; 2,942 million Brazilian reals (approximately 537 million euros at the closing exchange rate of June 30, 2022) in January 2022; 1,500 million Brazilian reals (approximately 274 million euros at the closing exchange rate of June 30, 2022) in May 2022. These euro- and US dollar-denominated facilities, which were originally fixed-rate, were converted into Brazilian reals and indexed to the Brazilian interbank deposit (Certificado de Deposito Interbancário – CDI) rate at the time of issue through cross-currency swaps over the life of the borrowings. These instruments are documented and recognised as hedges (Fair Value Hedge). 13.2.4 Cash and cash equivalents (in millions of euros) June 30, 2022 December 31, 2021 Cash 1,316 1,108 Cash equivalents 1,223 2,596 TOTAL CASH AND CASH EQUIVALENTS 2,539 3,703 There are no material restrictions on the Group's ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. At June 30, 2022, as at December 31, 2021, there was no restricted cash. 13.2.5 Other current financial assets (in millions of euros) June 30, 2022 December 31, 2021 Derivative instruments ¹ 326 207 Financial receivable ² 153 162 Other current financial assets – Fair Value through OCI 119 79 Other current financial assets - Fair Value through profit or loss 1 − Sub-lease receivable - less than one year 34 34 Deposits with maturities of more than three months 41 40 Other 13 10 TOTAL OTHER CURRENT FINANCIAL ASSETS 687 532 (1) The 120 million-euro increase compared to December 31, 2021 primarily reflects higher mark-to-market adjustments on the currency swaps and call hedging the US dollar-denominated convertible bonds (see Note 13.2.2) related to the increase in value of the US dollar against the euro over the period. (2) This amount represents the financial receivable relating to the 20% stake in Carrefour China. In accordance with the agreement signed with Suning.com on September 26, 2019, the Carrefour group exercised its put option on the disposal of the remaining 20% interest in Carrefour China in the second half of 2021, with payment set to be made in the second half of 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 63 - Notes to the condensed consolidated financial statements 13.3 Analysis of borrowings (excluding derivative instruments recorded in liabilities) 13.3.1 Analysis by interest rate June 30, 2022 December 31, 2021 (in millions of euros) Before hedging After hedging Before hedging After hedging Fixed rate borrowings 7,789 6,545 6,518 5,936 Variable rate borrowings 1,791 3,035 276 857 Total borrowings (excluding derivative instruments recorded in liabilities) 9,580 9,580 6,793 6,793 13.3.2 Analysis by currency (in millions of euros) June 30, 2022 December 31, 2021 Euro 7,994 5,935 Brazilian real 1,583 855 Polish zloty 2 2 Romanian lei 1 1 Total borrowings (excluding derivative instruments recorded in liabilities) 9,580 6,793 The above analysis includes the effect of hedging. Euro-denominated borrowings represented 83% of total borrowings (excluding derivative instruments recorded in liabilities) at June 30, 2022 (87% at December 31, 2021). 13.3.3 Analysis by maturity (in millions of euros) June 30, 2022 December 31, 2021 Due within 1 year 3,665 1,302 Due in 1 to 2 years 1,386 1,259 Due in 2 to 5 years 2,782 2,731 Due beyond 5 years 1,747 1,502 Total borrowings (excluding derivative instruments recorded in liabilities) 9,580 6,793 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 64 - Notes to the condensed consolidated financial statements 13.4 Changes in liabilities arising from financing activities (in millions of euros) Other current financial assets ¹ Borrowings Total Liabilities arising from financing activities At December 31, 2021 (498) 6,834 6,336 Changes from financing cash flows (19) 2,374 2,355 Change in current financial assets (19) − (19) Issuance of bonds − 1,500 1,500 Repayments of bonds − (1,082) (1,082) Net financial interest paid − (99) (99) Issuance of commercial paper ² − 1,400 1,400 Other changes in borrowings − 656 656 Non-cash changes (136) 517 380 Effect of changes in foreign exchange rates (16) 162 145 Effect of changes in scope of consolidation ³ − 126 126 Changes in fair values (33) (14) (46) Finance costs, net − 151 151 Other movements (87) 92 5 At June 30, 2022 (653) 9,724 9,071 (1) The current portion of amounts receivable from finance sub-leasing arrangements totalling 34 million euro is not included in this caption. (2) In first-half 2022, the Group issued short-term commercial paper to secure its liquidity. (3) The effects of changes in the scope of consolidation are mainly due to Grupo BIG's 124 million-euro debt. 13.5 Other non-current financial assets (in millions of euros) June 30, 2022 December 31, 2021 Deposits and guarantees ¹ 742 559 Financial services companies' portfolio of assets 242 322 Sub-lease receivable - more than one year ² 64 76 Investments in non-consolidated companies ³ 161 126 Other 79 69 TOTAL OTHER NON-CURRENT FINANCIAL ASSETS 1,288 1,152 (1) Deposits and guarantees include legal deposits paid in Brazil in connection with tax disputes (relating mainly to tax reassessments challenged by the Group) pending final court rulings, as well as security deposits paid to lessors under property leases. (2) Amounts receivable from finance sub-leasing arrangements were recognised following the application of IFRS 16 from January 1, 2019. (3) At June 30, 2022, investments in non-consolidated companies notably included Flink (see Note 3.1). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 65 - Notes to the condensed consolidated financial statements 13.6 Finance costs and other financial income and expenses This item corresponds mainly to finance costs. In accordance with IFRS 16, from 2019 it also includes interest expenses on leases along with interest income on finance sub-leasing arrangements. Other financial income and expenses consist for the most part of late payment fees payable on certain liabilities, financial transaction taxes and the impacts of hyperinflation in Argentina. (in millions of euros) First-half 2022 First-half 2021 Interest income from loans and cash equivalents (2) (5) Interest income from bank deposits (2) (5) Interest income from loans (0) 0 Finance costs (149) (74) Interest expense on financial liabilities measured at amortised cost, adjusted for income and expenses from interest rate instruments (137) (72) Cost of receivables discounting in Brazil (13) (3) Finance costs, net (151) (80) Interest charge related to leases commitment (72) (52) Interest income related to financial sublease contracts 0 0 Net interest, related to leases commitment (72) (52) Interest expense on defined employee benefit debt (4) (3) Interest income on pension plan assets 1 0 Financial transaction tax (16) (10) Late interest due in connection with tax reassessments and employee-related litigation (8) (15) Dividends received on available-for-sale financial assets 2 1 Proceeds from the sale of available-for-sale financial assets 6 2 Cost of sold available-for-sale financial assets (2) 2 Exchange gains and losses 1 6 Cost of bond buybacks (7) (6) Changes in the fair value of interest rate derivatives (1) (8) Impact of hyperinflation in Argentina - application of IAS 29 61 28 Other 4 1 Other financial income and expenses, net 37 (1) Finance costs and other financial income and expenses, net (186) (132) Financial expenses (261) (257) Financial income 75 124 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 66 - Notes to the condensed consolidated financial statements NOTE 14: OTHER INFORMATION 14.1 Scope of consolidation 14.1.1 Main changes in first-half 2022 The acquisition of Grupo BIG in Brazil and the sale of the Carrefour group's interest in Cajoo in exchange for Flink shares are detailed in Note 3.1. With the exception of these transactions, there were no other material changes in the Carrefour group’s scope of consolidation in first-half 2022. 14.1.2 Main changes in first-half 2021 The main changes in the scope of consolidation in first-half 2021 concerned the acquisition of Supersol in Spain, the equity-accounting of the investment in Cargan-LOG in France and the sale of a 60% stake in Market Pay in France. 14.2 Related parties Group transactions with related parties mainly concern: compensation and other benefits granted to members of the Group Executive Committee and the Board of Directors; transactions with companies over which the Group exercises significant influence. Related-party transactions are carried out on an arm's length basis. There were no material changes in the nature of the Group’s related-party transactions in first-half 2022 compared with the situation at December 31, 2021. 14.3 Off-balance sheet commitments Commitments given and received by the Group that are not recognised in the statement of financial position correspond to contractual obligations whose performance depends on the occurrence of conditions or transactions after the period-end. There are four types of off-balance sheet commitments, related to: cash transactions, operations, acquisitions/disposals of securities, and leases (excluding contracts restated in accordance with IFRS 16). 14.4 Subsequent events Sale of Carrefour Taiwan to the Uni-President group On July 19, 2022, the Group signed an agreement to sell its entire interest in its Taiwanese subsidiary (i.e., 60%) to the Uni-President group (holder of the remaining 40%). If the conditions precedent are met, this agreement will result in loss of control of the subsidiary. The subsidiary has an enterprise value of around 2.0 billion euros. Closing of the transaction is subject to approval by Taiwanese competition authorities (TFTC) and other customary conditions, and is expected by mid-2023. Following the completion of the transaction, the Uni-President group will own 100% of Carrefour Taiwan. The sale of Carrefour Taiwan announced on July 19, 2022 was not highly probable at June 30, 2022 within the meaning of IFRS 5, given certain uncertainties existing at the reporting date as to whether the sale would be completed. Accordingly, this subsidiary's assets and liabilities were not reclassified as assets held for sale and related liabilities in the consolidated statement of financial position at June 30, 2022. Similarly, the net income Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 67 - Notes to the condensed consolidated financial statements and cash flows of this subsidiary were not reclassified within line items for discontinued operations in the consolidated income statement and consolidated cash flow statement for first-half 2022. It should be noted that since Carrefour Taiwan is designated as a region (“Asia”) for segment reporting purposes, the main indicators in its income statement (net sales, other revenue, recurring operating income before depreciation and amortisation, depreciation and amortisation expense and recurring operating income), cash flow statement (capital expenditure) and balance sheet (goodwill, other intangible assets, property and equipment, investment property, right-of-use assets, other segment assets and segment liabilities) are presented in Note 5. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 68 - Notes to the condensed consolidated financial statements CARREFOUR Société anonyme 93 avenue de Paris 91300 MASSY _______________________________ Statutory Auditors’ Review Report on the Half-yearly Financial Information For the period from January 1 to June 30, 2022 _______________________________ This is a free translation into English of the statutory auditors’ review report on the half- yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half-yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. To the Shareholders of CARREFOUR company, In compliance with the assignment entrusted to us by Shareholders’ Meetings and in accordance with the requirements of article L. 451-1-2-III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on:  the review of the accompanying condensed half-yearly consolidated financial statements of the company, for the period from January 1 to June 30, 2022, the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 69 - Notes to the condensed consolidated financial statements Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. Specific verification We have also verified the information presented in the half-yearly management report on the half-yearly condensed consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the half-yearly condensed consolidated financial statements. Paris-La-Défense and Courbevoie, July 27, 2022 The Statutory Auditors French original signed by DELOITTE & ASSOCIES BERTRAND BOISSELIER MAZARS JEROME DE PASTORS Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2022 - 70 - Declaration by the persons responsible We hereby certify that, to the best of our knowledge, the condensed consolidated financial statements for the six-month period ended June 30, 2022 were prepared in accordance with applicable accounting standards and give a true and fair view of the assets and liabilities, financial situation and income of the company Carrefour and of all the consolidated companies, and that the attached half-year financial report gives a true and fair view of the significant events having occurred during the first six months of the financial year, of their impact on the financial statements, of the main related party transactions, as well as a description of the main risks and uncertainties for the remaining six months of the financial year. July 27, 2022 Mr. Alexandre Bompard Chairman and Chief Executive Officer Mr. Matthieu Malige Chief Financial Officer Carrefour group – Half-year financial report – June 30, 2022 - 71 -

Semestriel, 2022, Retail, Carrefour

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Semestriel

Retail

Carrefour

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Half-Year Financial Report 2023 Groupe Carrefour – Comptes consolidés au 31 décembre 2020 1 Carrefour group – Half-year financial report – June 30, 2023 - 2 - Contents Business review for the six-month period ended June 30, 2023 Condensed consolidated financial statements for the six-month period ended June 30, 2023 Statutory Auditors’ review report on the half-yearly financial information Declaration by the persons responsible Carrefour group – Half-year financial report – June 30, 2023 page 4 page 25 page 75 page 78 - 3 - Business review for the six-month period ended June 30, 2023 1. Business review and consolidated income analysis page 5 1.1. Main income statement indicators 1.2. Analysis of the main income statement items 2. Group financial position and cash flows 2.1. Shareholders’ equity 2.2. Net debt 2.3. Statement of cash flows 2.4. Financing and liquidity resources 2.5. Restrictions on the use of capital resources 2.6. Expected sources of funding 2. Group financial position and cash flows 2.1. Shareholders’ equity 2.2. Net debt 2.3. Statement of cash flows 2.4. Financing and liquidity resources 2.5. Restrictions on the use of capital resources 2.6. Expected sources of funding 3. Outlook page 16 4. Other information page 17 4.1. Accounting principles 4.2. Significant events of the period 4.3. Restatement of the 2022 consolidated half-year and full-year financial statements 4.4. Main related-party transactions 4.5. Subsequent events 4.6. Risk factors Carrefour group – Business review for the six-month period ended June 30, 2023 - 4 - 1. Business review and consolidated income analysis 1.1 Main income statement indicators The comparative consolidated income and cash flow statement information presented in this document has been restated to reflect the classification of Carrefour Taiwan in discontinued operations in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations (see Note 4.3). In addition, the consolidated statement of financial position at December 31, 2022 has been restated in accordance with IFRS 3 – Business Combinations to reflect the changes affecting the opening balance sheet of Grupo BIG in Brazil (see Note 4.3). Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the condensed consolidated financial statements for the six-month period ended June 30, 2023; data for the comparative period presented have also been adjusted for inflation. (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change % change at constant exchange rates Net sales 40,743 37,790 7.8% 12.4% Gross margin from recurring operations 8,074 7,504 7.6% 13.8% in % of net sales Sales, general and administrative expenses, depreciation and amortisation 19.8% (7,374) 19.9% (6,729) 9.6% 15.7% Recurring operating income 700 775 (9.6)% (2.2)% Recurring operating income before depreciation and amortisation 1,852 1,862 (0.5)% 4.0% Recurring operating income after net income from equity- accounted companies 724 786 (7.9)% (0.6)% Non-recurring income and expenses, net (186) (82) 125.6% 131.3% Operating income 538 704 (23.6)% (16.1)% Finance costs and other financial income and expenses, net (276) (181) 52.0% 34.8% Income tax expense (153) (193) (20.8)% (11.8)% Net income/(loss) from continuing operations – Group share 118 239 (50.5)% (22.5)% Net income/(loss) from discontinued operations - Group share 749 16 4457.5% 4462.7% Net income/(loss) - Group share 867 255 239.6% 266.2% Free cash-flow ¹ (867) (1,177) Net free cash-flow ² (1,684) (1,880) Net debt (including discontinued operations) ³ 5,040 6,480 (1) Free cash flow corresponds to cash flow from operating activities before net finance costs and net interest related to lease commitments, after the change in working capital requirement, less net cash from/(used in) investing activities. (2) Net free cash flow corresponds to free cash flow after net finance costs and net lease payments. (3) Net debt does not include lease commitments or right-of-use assets (see Note 2.2). At June 30, 2022, net debt was restated by 52 million euros in accordance with IFRS 3 (see above). Net sales amounted to 40.7 billion euros in first-half 2023, an increase of 12.4% at constant exchange rates. Recurring operating income before depreciation and amortisation came in at 1,852 million euros, a 4.0% rise at constant exchange rates. Recurring operating income contracted by 2.2% at constant exchange rates, to 700 million euros. Non-recurring operating income and expenses represented a net expense of 186 million euros, versus a net expense of 82 million euros in first-half 2022 as restated for IFRS 5. The first-half 2023 figure primarily relates to severance paid or payable within the scope of the voluntary redundancy Carrefour group – Business review for the six-month period ended June 30, 2023 - 5 - 1. Business review and consolidated income analysis plan put in place at headquarters in France, and the measures implemented in stores and headquarters in Italy, Spain and Brazil. It also includes asset impairments and write-offs related to stores in France, Belgium and Brazil, as well as the retirement of IT equipment in France and Belgium. These expenses were partially offset by (i) reversals of provisions for tax risks relating to PIS-COFINS tax credits in Brazil following the expiry of statutory limitation periods or favourable judgements, (ii) capital gains on various asset disposals, notably to franchisees in France, and (iii) the gain on the sale and leaseback of five stores and four warehouses in Brazil (see Note 1.2). Finance costs and other financial income and expenses represented a net expense of 276 million euros, an increase of 94 million euros on the first-half 2022 figure as restated for IFRS 5, reflecting a rise in the cost of net debt and net interest expense on leases (see Note 1.2). The income tax expense for first-half 2023 amounted to 153 million euros, compared with 193 million euros for first-half 2022 as restated for IFRS 5. The Group share of net income from continuing operations of 118 million euros, versus 239 million euros in the first six months of 2022 as restated for IFRS 5. The Group share of net income from discontinued operations totalled 749 million euros in first-half 2023, corresponding almost exclusively to the gain realised on the disposal of Carrefour Taiwan (see Note 4.2.1). In view of the above, net income – Group share came to 867 million euros, versus 255 million euros in first-half 2022 as restated for IFRS 5. Free cash flow amounted to a negative 867 million euros, versus a negative 1,177 million euros for first-half 2022. Net free cash flow was a negative 1,684 million euros, compared with a negative 1,880 million euros for the same period of 2022. 1.2 Analysis of the main income statement items The Group’s operating segments consist of the countries in which it does business, combined by region, and “Global functions”, corresponding to the holding companies and other administrative, finance and marketing support entities. Net sales by region (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change % change at constant exchange rates France 18,694 17,910 4.4% 4.4% Europe (excluding France) 11,301 10,636 6.3% 6.2% Latin America 10,748 9,244 16.3% 35.1% TOTAL 40,743 37,790 7.8% 12.4% The Carrefour group reported net sales of 40.7 billion euros, up by 12.4% at constant exchange rates and by 11.8% restated for the application of IAS 29. In France, net sales rose by 4.4% in first-half 2023. Like-for-like growth1 was 7.2%, with food sales up 8.4% LFL and all formats contributing to the increase. Carrefour made further market share gains in volume terms during the period. In Europe (excluding France), net sales increased by 6.2% at constant exchange rates and by 8.1% like-for-like compared with first-half 2022. In Spain, Carrefour maintained its solid momentum (with net sales up 8.5% LFL), driven in particular by growth in the food segment 1 Like-for-like (LFL) sales generated by stores open for at least 12 months, excluding temporary store closures, at constant exchange rates, excluding petrol and calendar effects and excluding the IAS 29 impact. Carrefour group – Business review for the six-month period ended June 30, 2023 - 6 - 1. Business review and consolidated income analysis despite a slowdown in food inflation. In Italy, the Group’s good performance (up 5.1% LFL) continued to reflect rising customer satisfaction, thanks in particular to Carrefour’s improved positioning and price perception. In Belgium, Carrefour achieved LFL growth of 11.3%, with market share gains (at constant scope) higher than those of other banners in the second quarter. In Poland, Carrefour posted 3.1% LFL growth despite a high basis of comparison, due in particular to the war in Ukraine. In Romania, sales momentum remained robust, with LFL growth of 9.8%. In Latin America, net sales rose by 35.1% at constant exchange rates and by 21.0% on a like-for-like basis. In Brazil, net sales grew by 17.2% at constant exchange rates and 0.8% like-for-like. The market environment was difficult during the period, particularly in the second quarter, with food price inflation slowing sharply to 2.9% in June (a sequential deflation compared with the first quarter), falling prices for many agricultural products, and volumes continuing to contract as a result of pressure on purchasing power. After seeing first-quarter growth (9.2% at constant exchange rates and 5.7% LFL), cash & carry stores (Atacadão) were particularly hit in the second quarter (down 4.3% LFL) by price deflation for raw materials – which account for a significant proportion of sales – and by the BtoB business, where customers are postponing certain purchases as prices trend downwards. Carrefour Retail posted stable net sales in the second quarter (up 0.3% LFL) following pronounced growth in the first quarter (up 5.7% LFL). Sam’s Club saw net sales grow throughout the period (up 7.6% LFL in the first quarter and 4.2% LFL in the second), as did financial services, with a 28.1% increase in credit portfolio and a 14.0% rise in billings. In Argentina, the Group continued its growth, in terms of volume and market share, in a highly inflationary environment (up 122.4% LFL). Net sales by region – contribution to the consolidated total (in %) First-half 2023¹ First-half 2022 IFRS 5 restated France 44.0% 47.4% Europe (excluding France) 26.6% 28.1% Latin America 29.4% 24.5% TOTAL 100% 100% (1) At constant exchange rates. At constant exchange rates, the portion of sales generated outside France continued to rise, representing 56.0% in first-half 2023 versus 52.6% in first-half 2022 as restated for IFRS 5. Recurring operating income by region (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change % change at constant exchange rates France 270 194 38.6% 38.6% Europe (excluding France) 164 163 1.0% 1.0% Latin America 304 444 (31.5)% (18.6)% Global functions (38) (26) 44.5% 44.4% TOTAL 700 775 (9.6)% (2.2)% Recurring operating income totaled 700 million euros in first-half 2023, decreasing by 75 million euros (representing a 2.2% decrease at constant exchange rates). This change reflects contrasting situations within the Group, with France delivering an excellent performance, Europe holding firm, mainly weighed down by high bases of comparison in Poland, and Latin America reporting a significant decline, due to the integration of Grupo BIG in an unfavourable market Carrefour group – Business review for the six-month period ended June 30, 2023 - 7 - 1. Business review and consolidated income analysis environment in Brazil. Carrefour’s business momentum remained solid, with high market shares maintained in all key countries, and strong cost discipline, as demonstrated by the successful execution of the Group’s cost-savings plan. Operating margin stood at 1.7%, compared with 2.0% in the first half of 2022 as restated for IFRS 5 (33 bps decrease); excluding the effects of Grupo BIG, the figure was 2.1%, in line with the prior-year period as restated for IFRS 5 (up 4 bps). In France, recurring operating income for the first half of 2023 totalled 270 million euros, increasing by 38.6% compared to first-half 2022. In a context of high inflation, operating margin increased by 36 bps to 1.4%, versus 1.1% in first-half 2022, led by a good sales performance and strong cost-cutting momentum. This performance reflects the benefits of the strategic initiatives of the Carrefour 2026 plan, including the increase in sales of Carrefour-brand products, the transformation of operating modes and the improved profitability of digital activities. In Europe (excluding France), recurring operating income came to 164 million euros, versus 163 million euros in first-half 2022, representing an increase of 1.0% at constant exchange rates. Western Europe posted growth in both recurring operating income and margin, led by Spain and Italy. Poland was impacted by a very high basis of comparison, against the backdrop of the outbreak of war in Ukraine in the first half of 2022, while Romania improved its profitability level. In Latin America, recurring operating income totalled 304 million euros, representing a decrease of 18.6% at constant exchange rates. In Brazil, recurring operating income was down 39.6% at constant exchange rates, reflecting the accelerated integration of Grupo BIG and the unfavourable market environment, with falling inflation, volumes under pressure and the opening of a large number of stores in the cash & carry segment. As part of this accelerated integration, one-off costs were incurred, particularly for store conversions; in addition, converted stores traditionally make an operating loss in the first few months after reopening. Against this backdrop, the performance and operating margins of the legacy business remained very resilient. In Argentina, recurring operating income continued to improve significantly, rising to 53 million euros compared to 30 million euros in first-half 2022, thanks to excellent sales momentum and constant cost discipline. Operating margin improved by 130 bps to 3.4%, including the 10 million euro negative impact of adjustments relating to the application of IAS 29. Depreciation and amortisation Depreciation and amortisation of property and equipment, intangible assets and investment property amounted to 657 million euros in first-half 2023 compared with 616 million euros in first-half 2022 as restated for IFRS 5. Depreciation of right-of-use assets (IFRS 16) relating to property and equipment and investment property totalled 362 million euros compared with 344 million euros in first-half 2022 as restated for IFRS 5. Including depreciation and amortisation of logistics equipment and of the related IRS 16 right-of-use assets included in the cost of sales, a total depreciation and amortisation expense of 1,152 million euros was recognised in the consolidated income statement for first-half 2023, compared with an expense of 1,087 million euros for first-half 2022 as restated for IFRS 5. Net income from equity-accounted companies Net income from equity-accounted companies amounted to 24 million euros, versus 12 million euros in first-half 2022. The first-half 2022 figure was affected by the loss realised on Cajoo. Besides Cajoo, which has since been exchanged for Flink shares (see Note 2.1 to the 2022 consolidated financial statements), net income from equity-accounted companies was similar to that for the first half of 2022, with a stable contribution from Carmila in particular. Carrefour group – Business review for the six-month period ended June 30, 2023 - 8 - 1. Business review and consolidated income analysis Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as impairment charges of non-current assets, gains and losses on disposals of non-current assets, restructuring costs and provision charges and income recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group’s attention during the period. Non-recurring items represented a net expense of 186 million euros in first-half 2023, and the detailed breakdown is as follows: (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated Gains and losses on disposals of assets 42 62 Restructuring costs (257) (16) Other non-recurring income and expenses 85 (87) Non-recurring income and expenses, net before asset impairments and write-offs (130) (42) Asset impairments and write-offs (56) (41) of which impairments and write-offs of goodwill − − of which impairments and write-offs of property and equipment, intangible assets and others (56) (41) NON-RECURRING INCOME AND EXPENSES, NET (186) (82) of which: Non-recurring income Non-recurring expense 276 (461) 133 (215) Gains and losses on disposals of assets Gains and losses on disposals of non-current assets comprise gains and losses arising on various asset disposals (store premises, land and businesses), notably to franchisees in France. The first-half 2023 figure also includes the gain on the sale and leaseback of five stores and four warehouses in Brazil (see Note 4.2.1). Restructuring costs Restructuring costs recognised in first-half 2023 relate to the new Carrefour 2026 strategic plan (see Note 4.2.2). This plan is based on a project to transform the Group’s various headquarters with a view to safeguarding its competitiveness over the long term, and boosting performance and agility, and simplifying its organisation, all of which will benefit its stores. The expense included in non-recurring items relates primarily to severance paid or payable within the scope of the voluntary redundancy plan put in place at headquarters in France, involving a maximum of 979 jobs, and, secondarily, to the measures implemented in stores and headquarters in Italy, Spain and Brazil. Other non-recurring income and expenses Other non-recurring income and expenses in the first half of 2023 mainly included reversals of provisions for tax risks relating to PIS-COFINS tax credits in Brazil following the expiry of statutory limitation periods or favourable judgements, offset slightly by costs relating to store closures in Brazil. Asset impairments and write-offs Asset impairments and write-offs recorded in first-half 2023 related to stores in France, Belgium and Brazil. They also included the impact of the retirement of IT equipment in France and Belgium, and the alignment of the net carrying amount of Showroomprivé shares with the stock market share price at June 30, 2023. Carrefour group – Business review for the six-month period ended June 30, 2023 - 9 - 1. Business review and consolidated income analysis Main non-recurring items in first-half 2022 (restated for IFRS 5) Gains and losses on disposals of non-current assets comprised gains and losses arising on various disposals of store premises and businesses to franchisees, notably in France and Italy. Other non-recurring income and expenses recorded in first-half 2022 as restated for IFRS 5 mainly included revised estimates of historical risks, mostly tax-related, as well as the costs related to the acquisition of Grupo BIG in Brazil. Asset impairments and write-offs recorded in first-half 2022 (as restated for IFRS 5) related to certain stores, particularly in France and Argentina. They also included the impact of the retirement of various assets, in particular relating to IT equipment in France, and the alignment of the net carrying amount of Showroomprivé shares with the stock market share price at June 30, 2022. Operating income The Group ended first-half 2023 with operating income of 538 million euros, versus 704 million euros in first-half 2022 as restated for IFRS 5. Finance costs and other financial income and expenses Finance costs and other financial income and expenses represented a net expense of 276 million euros in first-half 2023, corresponding to a negative 0.7% of sales, versus a negative 0.5% in first-half 2022 as restated for IFRS 5. (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated Finance costs, net (191) (151) Net interests related to leases (100) (68) Other financial income and expenses, net 15 38 TOTAL (276) (181) Finance costs, net amounted to 191 million euros, an increase of 39 million euros compared with first-half 2022 as restated for IFRS 5. The change is attributable to Brazil and reflects (i) the increase in bank borrowings relating to the acquisition of Grupo BIG and store conversions to Carrefour group banners, and (ii) the rise in the CDI (Certificado de Deposito Interbancário) interest rates. In accordance with IFRS 16, finance costs and other financial income and expenses also include interest expenses on leases along with interest income on finance sub-leasing arrangements. The increase in net interests reflects in particular the inclusion of six months’ rent for stores leased by Grupo BIG in first-half 2023, compared with one month in the first-half 2022. Other financial income and expenses consist for the most part of late interest payable on tax and labour disputes (mostly in Brazil), financial transaction taxes, and the impact of hyperinflation in Argentina (IAS 29), which increased slightly in comparison with first-half 2022 due to rising inflation. Income tax expense The income tax expense for first-half 2023 amounted to 153 million euros, i.e., an effective tax rate of 58%, compared with the 193 million euro expense recorded in first-half 2022 as restated for IFRS 5, which corresponded to an effective tax rate of 37%. The effective tax rates for the first six months of 2023 and 2022 (restated for IFRS 5) were mainly impacted by the absence of deferred tax assets at Grupo BIG in Brazil, in Italy and Belgium in 2023, and in Italy in 2022 and, to a lesser extent, by the recognition of the CVAE (local business tax) in France. Apart from these factors, the first-half 2023 effective tax rate reflects the geographical breakdown of income before tax, with no other items significantly distorting the tax proof. Furthermore, the probable recoverability of deferred tax assets recognised in the consolidated statement of financial position at December 31, 2022 was confirmed at June 30, 2023, based in Carrefour group – Business review for the six-month period ended June 30, 2023 - 10 - 1. Business review and consolidated income analysis particular on a comparison between the budgeted performance of the different countries and the most recent forecasts. Net income attributable to non-controlling interests Net income attributable to non-controlling interests came to 4 million euros in first-half 2023, versus 103 million euros in first-half 2022 as restated for IFRS 5. Net income from continuing operations – Group share As a result of the items described above, the Group share of net income from continuing operations amounted to 118 million euros in first-half 2023, compared with 239 million euros in first-half 2022 as restated for IFRS 5. Net income from discontinued operations – Group share The Group share of net income from discontinued operations totalled 749 million euros in first-half 2023, compared with 16 million euros in first-half 2022 as restated for IFRS 5. This increase reflects the 0.75 billion euros disposal gain recorded on the sale of the Carrefour Taiwan subsidiary on June 30, 2023. Carrefour group – Business review for the six-month period ended June 30, 2023 - 11 - 2. Group financial position and cash flows 2.1 Shareholders’ equity At June 30, 2023, shareholder’s equity stood at 13,276 million euros, compared with 13,186 million euros at December 31, 2022, representing an increase of 90 million euros. The increase mainly reflects: net income for the period of 871 million euros; other comprehensive income, net of tax, of 142 million euros, reflecting the slight increase in the value of the Brazilian real compared with December 31, 2022, partly offset by the reversal of the positive translation adjustments recorded by Carrefour Taiwan following its disposal (see Note 4.2.1), and the 35 million euro decrease in the fair value of the shares in Flink; 2022 dividends distributed in a total amount of 450 million euros, of which 405 million euros paid to Carrefour SA shareholders (entirely in cash) and 45 million euros to non-controlling shareholders, relating to the Spanish and Brazilian subsidiaries; the execution of the first two share buyback mandates for 200 million euros each pursuant to the 2023 programme representing a total of 800 million euros; the “Carrefour Invest” international employee share ownership plan launched on March 1, 2023 of, which resulted in a 75 million euro capital increase for Carrefour SA (4,713,735 new ordinary shares); the derecognition of non-controlling interests in Carrefour Taiwan for 185 million euros, following the sale of the subsidiary effective June 30, 2023. Carrefour group – Business review for the six-month period ended June 30, 2023 - 12 - 2. Group financial position and cash flows 2.2 Net debt Consolidated net debt (including discontinued operations) amounted to 5,040 million euros at June 30, 2023 compared to 3,378 million euros at December 31, 2022, as restated for IFRS 3. The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year-end figure being structurally lower due to the significant volume of business recorded during December. The Group’s net debt breaks down as follows: (in millions of euros) June 30, 2023 December 31, 2022 IFRS 3 restated Bonds and notes 7,341 7,697 Other borrowings 1,164 1,223 Commercial paper 831 490 Total borrowings excluding derivative instruments recorded in liabilities 9,336 9,410 Derivative instruments recorded in liabilities 147 148 TOTAL BORROWINGS 9,483 9,558 of which borrowings due in more than one year 6,479 6,912 of which borrowings due in less than one year 3,004 2,646 Other current financial assets ¹ 584 728 Cash and cash equivalents 3,859 5,216 TOTAL CURRENT FINANCIAL ASSETS 4,443 5,944 NET DEBT 5,040 3,614 Net debt of discontinued operations − (236) NET DEBT INCLUDING DISCONTINUED OPERATIONS 5,040 3,378 (1) This item does not include the current portion of amounts receivable from finance sub-leasing arrangements (see Note 13.2.5 to the condensed consolidated half-year financial statements as of June 30, 2023). Long and short-term borrowings (excluding derivatives) mature at different dates, through 2030 for the longest tranche of bond debt, leading to balanced repayment obligations in the coming years, as shown below: (in millions of euros) June 30, 2023 December 31, 2022 Due within 1 year 2,857 2,498 Due in 1 to 2 years 1,137 1,514 Due in 2 to 5 years 3,246 3,799 Due beyond 5 years 2,096 1,599 TOTAL BORROWINGS (EXCLUDING DERIVATIVE INSTRUMENTS RECORDED IN LIABILITIES) 9,336 9,410 Cash and cash equivalents totalled 3,859 million euros at June 30, 2023 compared with 5,216 million euros at December 31, 2022, representing a decrease of 1,357 million euros. Carrefour group – Business review for the six-month period ended June 30, 2023 - 13 - 2. Group financial position and cash flows 2.3 Statement of cash flows Net debt rose by 1,662 million euros in first-half 2023, versus a 3,848 million euro increase in first-half 2022 as restated for IFRS 3. The change is analysed in the Group’s simplified statement of cash flows presented below: (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated Change OPENING NET DEBT ¹ (3,378) (2,633) (745) Cash flow from operations 1,785 1,645 140 Change in working capital requirement (1,926) (2,067) 141 Change in consumer credit granted by the financial services companies (18) 54 (72) Impact of discontinued operations (54) (49) (6) Net cash (used in)/from operating activities - total (213) (416) 203 Acquisitions of property and equipment and intangible assets ² (687) (551) (135) Proceeds from the disposal of property and equipment and intangible assets - Business-related 289 68 221 Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets (246) (262) 17 Impact of discontinued operations (11) (16) 5 Free cash flow Payments related to leases (principal and interest) net of subleases payments received Finance costs, net (867) (581) (191) (1,177) (497) (151) 310 (84) (39) Impact of discontinued operations (45) (55) 10 Net Free cash flow (1,684) (1,880) 196 Acquisitions of investments (9) (936) 927 Disposal of investments 1,075 25 1,050 Change in treasury stock and other equity instruments (336) (96) (241) Carrefour SA capital increase / (decrease) 75 (657) 732 Proceeds from share issues to non-controlling interests 8 2 6 Dividends paid (462) (424) (39) Other (including effect of changes in exchange rates) (113) 115 (229) Impact of discontinued operations (216) 3 (219) Decrease/(Increase) in net debt (1,662) (3,848) 2,185 CLOSING NET DEBT ¹ (5,040) (6,480) 1,440 (1) Closing net debt for the first half of 2022 and opening net debt for the first half of 2023 were restated for the reduction in Grupo BIG’s acquisition price, in accordance with IFRS 3. (2) Restated for the acquisition of Makro Atacadista stores in Brazil (acquisition of the 29th and last store on a full-ownership basis in first-half 2022). Free cash flow came to a negative 867 million euros in first-half 2023, compared with a negative 1,177 million euros in first-half 2022, and mainly comprised: cash flow from operations of 1,785 million euros, compared with 1,645 million euros in the first half of 2022, an increase that mainly reflects (i) the reduction in tax paid due in particular to the use of tax credits generated in 2022 on Atacadão, (ii) the receipt of the insurance payout for the damage suffered in Taiwan (Yang Mei warehouse), and (ii) amounts paid out in relation to disputes in France and Belgium in 2022; the 1,926 million euro negative change in working capital requirement compared with a 2,067 million euro negative change in first-half 2022 as restated for IFRS 5; operational investments in an amount of 687 million euros in first-half 2023, compared with 551 million euros in first-half 2022 as restated for IFRS 5. Carrefour group – Business review for the six-month period ended June 30, 2023 - 14 - 2. Group financial position and cash flows 2.4 Financing and liquidity resources The Group’s main measures for strengthening its overall liquidity consist of: promoting prudent financing strategies in order to ensure that the Group’s credit rating allows it to raise funds on the bond and commercial paper markets; maintaining a presence in the debt market through regular debt issuance programmes, mainly in euros, in order to create a balanced maturity profile. The Group’s issuance capacity under its Euro Medium-Term Notes (EMTN) programme totals 12 billion euros; using the 5 billion euro commercial paper programme on Euronext Paris, described in a prospectus filed with the Banque de France; maintaining undrawn medium-term bank facilities that can be drawn down at any time according to the Group’s needs. The main transactions in first-half 2023 corresponded to a Sustainability-Linked Bond issue indexed to two goals related to greenhouse gas emissions, for a total amount of 500 million euros, and two bond issues redeemed ahead of maturity for 500 million euros and 500 million US dollars respectively (see Note 4.2.3). At June 30, 2023, the Group was rated BBB with a stable outlook by Standard & Poor’s and Baa1 with a stable outlook by Moody’s. The Group’s financial position and liquidity were solid at end-June 2023. The average maturity of Carrefour SA’s bond debt was 3.8 years at end-June 2023, compared with 3.6 years at end-December 2022 and 3.8 years at end-June 2022. 2.5 Restrictions on the use of capital resources There are no material restrictions on the Group’s ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. At June 30, 2023, as at December 31, 2022, there was no restricted cash. 2.6 Expected sources of funding To meet its commitments, Carrefour can use its net free cash flow and raise debt capital using its EMTN and commercial paper programmes, as well as its credit lines. Carrefour group – Business review for the six-month period ended June 30, 2023 - 15 - 3. Outlook The Group’s objectives for 2026, as well as the situation at the end of 2022 and in first-half 2023, are detailed below: Operational objectives End of 2022 First-half 2023 2026 objective Private labels 33% of food sales 35% of food sales (+3 pts vs. H1 2022) 40% of food sales Convenience store openings +295 +2,400 vs. 2022 Atacadão store openings +14 >200 vs. 2022 ESG objectives End of 2022 First-half 2023 2026 objective Sales of certified sustainable products €5.4bn €3.1bn €8bn Top 100 suppliers to adopt a 1.5°C trajectory 27% 36% 100% Employees with disabilities 11,281 12,679 15,000 Financials objectives End of 2022 First-half 2023 2026 objective E-commerce GMV €4.2bn €2.4bn (+20%) €10bn Cost savings €1.0bn €490m €4bn (cumul. 2023-26) Net Free Cash Flow (1) €1,262m +€196m vs. N-1 >€1.7bn Capital expenditures €1,861m €687m €2bn/year Cash dividend growth €0.56 (+8%) >+5%/year (1) Net Free Cash Flow corresponds to free cash flow after net finance costs and net lease payments. It includes cash-out for exceptional expenses. Carrefour group – Business review for the six-month period ended June 30, 2023 - 16 - 4. Other information 4.1 Accounting principles The accounting policies used to prepare the condensed consolidated financial statements for the six-month period ended June 30, 2023 are the same as those used for the 2022 consolidated financial statements, except for the following standard and amendments whose application is mandatory as of January 1, 2023: IFRS 17 – Insurance Contracts; Amendments to IFRS 17 – Insurance Contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information; Amendments to IAS 1 – Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies; Amendments to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates; Amendments to IAS 12 – Income Taxes: Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction. The application of IFRS 17 – Insurance Contracts had no impact on the Group’s consolidated financial statements. The application of the amendments had no impact on the Group’s consolidated financial statements either. Adopted by the European Union but not yet applicable Standards, amendments and interpretations Effective date Amendments to IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current – Deferral of Effective Date; Non-current Liabilities with Covenants January 1, 2024 Amendments to IFRS 16 – Leases: Lease Liability in a Sale and Leaseback January 1, 2024 Amendments to IAS 7 – Statement of Cash Flows and IFRS 7 – Financial instruments: Disclosures: Supplier Finance Arrangements January 1, 2024 Not yet adopted by the European Union Standards, amendments and interpretations Effective date (1) Amendments to IAS 12 – Income Taxes: International Tax Reform – Pillar Two Model Rules January 1, 2023 (1) Subject to adoption by the European Union. Carrefour does not expect the application of these amendments to have a material impact on its consolidated financial statements. Carrefour group – Business review for the six-month period ended June 30, 2023 - 17 - 4. Other information 4.2 Significant events of the period 4.2.1 Main acquisitions, disposals and other transactions during the period Sale of Carrefour Taiwan On July 19, 2022, the Group signed an agreement to sell its entire interest in its Taiwanese subsidiary (i.e., 60%) to the Uni-President group (holder of the remaining 40%). As the applicable conditions precedent were met, particularly clearance from the local competition authority obtained in May 2023, this agreement resulted in loss of control of the subsidiary on June 30, 2023. The preliminary sale price is 31.1 billion New Taiwan dollars, representing 1.0 billion euros (after taking account of currency hedging). The disposal gain, amounting to approximately 0.75 billion euros, was recognised within net income from discontinued operations. This is because Carrefour Taiwan represents a separate major geographic area of operations and has therefore been treated as a discontinued operation in accordance with IFRS 5 since the date its disposal was announced. For more details on the impacts of this sale on the consolidated half-year financial statements as of June 30, 2023, see Note 4.1 to these consolidated financial statements. As a reminder, on March 14, 2022, a fire broke out in a logistics centre leased by Carrefour in the Yang Mei district of Taiwan. A claim was submitted to the Group’s insurance companies in this respect. Losses incurred as a result of destroyed inventories and equipment were recorded in 2022 against the payout receivable from insurers classified under other current assets. The same applies to the estimated operating losses for 2022 and first-half 2023. In June 2023, further to their final conclusions, the Group’s insurance companies paid the balance of the compensation recognised for the damage incurred, after deducting the two instalments already paid last year. The related impacts are recorded in net income from discontinued operations for the periods concerned. Acquisition of Grupo BIG (Brazil) – Reduced acquisition price On March 24, 2021, Carrefour Brazil entered into an agreement with Advent International and Walmart for the acquisition of Grupo BIG, Brazil’s third biggest food retailer. The acquiree reported net sales of around 20 billion Brazilian reals (approximately 3.1 billion euros) in 2021 and operates a multi-format network of 388 stores, including 181 owned stores. Carrefour Brazil’s Extraordinary Shareholders’ Meeting and CADE, the Brazilian competition authority, approved this transaction on May 19, 2022 and May 25, 2022, respectively (subject to the disposal of 14 stores which took effect before June 30, 2023). The acquisition was finalised on June 1, 2022, with payment made on June 6, 2022. The preliminary purchase price for the entire share capital of Grupo BIG was 7,465 million Brazilian reals (1,471 million euros at the exchange rate as of the transaction date), which broke down as follows: a cash payment of 5,292 million Brazilian reals (approximately 1 billion euros), representing 70% of the baseline price plus various preliminary earn-outs for 42 million Brazilian reals (approximately 8 million euros), including 900 million Brazilian reals (139 million euros) paid as part of a downpayment in March 2021; a share-based payment of 117 million new Carrefour Brazil shares (representing 30% of the baseline price), with a fair value of 2,173 million Brazilian reals (approximately 430 million euros) at June 6, 2022. As this was a transaction with minority shareholders, the impact of paying for 30% of Grupo BIG in Carrefour Brazil shares was recognised in consolidated equity for approximately 180 million euros attributable to the Carrefour group and approximately 250 million euros attributable to non-controlling interests. The agreement also provided for an earn-out that would have been paid six months after completion of the transaction if the Carrefour Brazil share price had exceeded the reference value of 19.26 Brazilian reals. No earn-out was paid for 2022, as the price of the Carrefour Brazil share was 15.10 Brazilian reals at December 6, 2022. Carrefour group – Business review for the six-month period ended June 30, 2023 - 18 - 4. Other information Developments in first-half 2023 Discussions between the sellers (Advent International and Walmart) and the buyer (Carrefour Brazil) under the terms of the Grupo BIG acquisition contract led the parties to agree on a firm price reduction of 900 million Brazilian reals (paid in two instalments of 350 and 550 million Brazilian reals respectively) and a potential further reduction of up to 100 million Brazilian reals. This agreement was signed on March 31, 2023 with the following two conditions precedent: immediate payment of the first tranche of 350 million Brazilian reals (317 million Brazilian reals after minor adjustments); provision by the sellers of a first demand guarantee from a leading bank. The agreement was finalised on April 11, 2023 following the satisfaction of both conditions precedent. In addition to the 350 million Brazilian reals paid on April 11, 2023, the agreement mainly provides for the following price reductions: A second tranche of 550 million reals to be paid 60 days after the publication of Carrefour Brazil’s 2023 annual consolidated financial statements. The 550 million Brazilian reals bear interest at SELIC rates calculated as from April 11, 2023; An additional variable receivable of up to 100 million Brazilian reals, calculated using a metric agreed by the stakeholders. This top-up also bears interest at SELIC rates calculated as from April 11, 2023. The acquisition price for Grupo BIG is 6,687 million Brazilian reals (or 1,318 million euros at the exchange rate on the transaction date), after discounting to present value the 900 million Brazilian real price reduction at June 1, 2022. Carrefour Brazil also increased the provisions set aside for labour and tax risks (net of associated deferred tax) by a non-material amount of 33 million Brazilian reals. In accordance with IFRS 3 – Business Combinations, the price reduction and other adjustments occurring within 12 months of the acquisition’s closing are recognised retrospectively in Grupo BIG’s opening balance sheet with an offsetting adjustment to goodwill (see Note 4.2 to the condensed consolidated half-year financial statements as of June 30, 2023 for more details on the restatement of the consolidated statement of financial position at December 31, 2022). Grupo BIG’s final opening balance sheet at June 1, 2022, as included in the Group’s consolidated financial statements, is presented in Note 3.1 to the condensed consolidated half-year financial statements as of June 30, 2023. Ongoing acquisition of Cora (Romania) – Business combination In April 2023, Carrefour entered into an agreement with the Louis Delhaize group to acquire its activities in Romania, including 10 Cora hypermarkets and eight Cora Urban stores, with almost 2,400 employees. This transaction will consolidate Carrefour’s presence in Romania, with hypermarkets in prime locations that will be converted to the Carrefour formats and banner. Closing of the transaction is subject to the customary conditions, in particular clearance by the relevant competition authorities. The transaction is expected to be completed by the end of 2023. Creation of Unlimitail in partnership with Publicis Groupe On November 8, 2022, the Carrefour group and Publicis Groupe announced their intention to create a joint entity in the fast-growing retail media market in continental Europe and Latin America. On June 15, 2023, this intention became a reality with the announcement of the launch of Unlimitail (51% owned by Carrefour and 49% by Publicis). The company has been fully consolidated in the Carrefour group’s financial statements since that date. Unlimitail will partner with retailers and brands, bringing retail expertise and connectivity to these regions. Unlimitail combines one of Publicis’ most advanced technologies, “CitrusAd powered by Epsilon”, with Carrefour Links’ in-depth knowledge of retail media. Carrefour group – Business review for the six-month period ended June 30, 2023 - 19 - 4. Other information Sale and leaseback transaction (Brazil) On May 12, 2023, Carrefour Brazil announced that it had entered into exclusive negotiations with Barzel, a real estate investment and asset management company, with a view to the sale and leaseback of five stores and four warehouses, for a total of approximately 1.2 billion Brazilian reals i.e., approximately 220 million euros. CADE, the Brazilian competition authority, approved the transaction on June 12, 2023. With negotiations on the agreements finalised and the other conditions precedent satisfied, these assets have been leased to Carrefour since June 30, 2023 (date of the transaction’s completion and the signing of the leases for fixed 20-year terms, with a five-year renewal option). This transaction led to the recognition of around 10 million euros in non-recurring income. 4.2.2 Simplification of the organisation as part of the transformation plan On November 8, 2022, the Group presented its new strategic plan, Carrefour 2026, to accelerate its transformation, following on from its previous strategic plan. The plan draws on the Group’s raison d’être, its commitment to the food transition for all, and its digital-driven omni-channel model. The Carrefour 2026 plan has two pillars: Commitment to making the best available to all our customers, Building a cutting-edge Group. This second pillar involves transforming our organisational structure in order to optimise our internal operations by leveraging digitalisation. In early June 2023, Carrefour France initiated a dialogue process with its employee representatives concerning a transformation project for its various French headquarters, with the aim of safeguarding competitiveness over the long term, and boosting performance and agility and simplifying the organisation, which will benefit our stores. The proposed new organisational structure was presented to the employee representatives on June 26, 2023. At that time, Carrefour confirmed that the voluntary redundancy plan currently under discussion with the employee representatives will involve a maximum of 979 departures, on a strictly voluntary basis. Following four negotiation sessions, the agreement on the collective voluntary redundancy plan was signed on July 12, 2023 by the trade unions representing a large majority of the employees concerned. The amount of the related provision recognised in the consolidated financial statements for the six-month period ended June 30, 2023 was calculated based on various assumptions and represents the best estimate of the costs that the Group expects to incur in relation to the restructuring plan currently being implemented (see Note 1.2). 4.2.3 Securing the Group’s long-term financing On May 2, 2023, the Group carried out a new Sustainability-Linked Bond issue indexed to its two goals related to greenhouse gas emissions, for a total of 500 million euros, maturing in 7.5 years (due in October 2030) and paying a coupon of 3.75%. This bond issue is part of a financing strategy aligned with the Group’s CSR objectives and ambitions as well as the Sustainability-Linked Bond Framework of its Euro Medium-Term Notes (EMTN) programme published in June 2021, whose CSR component was revised and enhanced in May 2022. On June 12, 2023, the Group redeemed 500 million euros worth of 0.88% 5-year bonds. On June 14, 2023, the Group redeemed 500 million US dollars worth of convertible, non-dilutive 0% 6-year bonds. These transactions guarantee the Group’s liquidity over the short and medium term in an unstable economic environment, and are part of the strategy to ensure the necessary financing is in place to meet Carrefour’s needs. The average maturity of Carrefour SA’s bond debt was 3.8 years at end-June 2023, compared with 3.6 years at end-December 2022 and 3.8 years at end-June 2022. Carrefour group – Business review for the six-month period ended June 30, 2023 - 20 - 4. Other information Financing of the Brazilian subsidiary Atacadão Following on from the 2021 and 2022 transactions, Carrefour’s Brazilian subsidiary Atacadão has set up financing arrangements in 2023 enabling it to secure its medium- and long-term needs. US dollar bank financing facilities were finalised on January 10, 2023 and immediately swapped for a total of 2,293 million Brazilian reals (approximately 436 million euros at the June 30, 2023 exchange rate) with an 11-month maturity. On April 14, 2023, new euro and US dollar bank financing facilities were put in place, immediately swapped for a total of 744 million Brazilian reals, which enabled a bank loan maturing on the same date to be repaid. The repaid loan amounted to 750 million Brazilian reals. On April 27, 2023, Atacadão redeemed debenture-type debt representing 500 million Brazilian reals (approximately 95 million euros at the June 30, 2023 exchange rate) maturing in 5 years and paying a coupon of 105.75% of the CDI (Certificado de Depósito Interbancário) rate. Two bank loans covered by Brazil’s law 4131/1962 matured in May 2023: one of 793 million Brazilian reals on May 5 and one of 568 million Brazilian reals on May 8 (approximately 259 million euros at the June 30, 2023 exchange rate). In June 2023, two other bank loans were repaid, one on June 5 for an amount of 1,014 million Brazilian reals and one on June 7 for an amount of 568 million Brazilian reals (approximately 300 million euros at the June 30, 2023 exchange rate). In addition, on June 2, 2023, the Brazilian subsidiary issued simple unsecured, non-convertible debentures (Certificado de recebíveis do agronegócio – CRA) for an amount of 930 million Brazilian reals (approximately 177 million euros at the June 30, 2023 exchange rate) in three series: an initial series for 330 million Brazilian reals, with a coupon of CDI+0.95% and a maturity of 3 years; a second series for 468 million Brazilian reals, with a coupon of 111.20% of the CDI (after hedging) and a maturity of 4 years; a third series for 132 million Brazilian reals, with a coupon of CDI+1.00% and a maturity of 5 years. As a reminder, in 2022, two inter-company financing lines were set up between the companies Carrefour Finance and Atacadão: The first revolving credit facility (RCF) for an amount of 4 billion Brazilian reals bearing annual interest at 12% falls due in July 2023; The second RCF for 1.9 billion Brazilian reals, bearing annual interest at 14.25% has a maturity of 3 years. In first-half 2023, another inter-company financing line was set up between the companies Carrefour Finance and Atacadão: The third RCF for 6.3 billion Brazilian reals (approximately 1.2 billion euros at June 30, 2023 exchange rate), bearing annual interest at 14.95%, has a 3-year maturity and has been drawn for 2.3 billion Brazilian reals. The remaining 4 billion Brazilian reals will be drawn down in July 2023 to refinance the first RCF, which will have reached maturity. These intra-group RCF loans, totalling 8.2 billion Brazilian reals at June 30, 2023, are qualified as net investments in foreign operations and are therefore remeasured at fair value through equity. They are hedged in an amount of 4.1 billion Brazilian reals by derivatives classified as net investment hedges. At June 30, 2023, the Group was rated BBB with a stable outlook by Standard & Poor’s and Baa1 with a stable outlook by Moody’s. 4.2.4 Payment of the 2022 dividend in cash At the Shareholders’ Meeting held on May 26, 2023, the shareholders decided to set the 2022 dividend at 0.56 euro per share to be paid entirely in cash. On June 8, 2023, the dividend was paid out in an amount of 405 million euros. Carrefour group – Business review for the six-month period ended June 30, 2023 - 21 - 4. Other information 4.2.5 Share buyback programmes As part of its share capital allocation policy, the Group commissioned investment services providers to buy back shares corresponding to a maximum amount of 800 million euros for 2023, as authorised by the Shareholders’ Meetings of June 3, 2022 and May 26, 2023. The objective of the share buybacks is to allow the Group to hold the shares with a view to cancelling them subsequently. The first share buyback mandate began on February 27, 2023 and ended on March 31, 2023, with 11,099,084 shares acquired at an average price of 18.02 euros per share for a total amount of 200 million euros. A second share buyback mandate began on May 2, 2023 and was ongoing at June 30, 2023, with 7,918,989 shares acquired at an average price of 17.07 euros per share for a total amount of 135 million euros at that date. At the date the related buyback mandate was signed, a short-term financial liability of 200 million euros was recognised (in “Other current payables”), with a corresponding reduction in equity. At June 30, 2023, this liability was reduced to 65 million euros to take into account the actual amount of the share acquisitions carried out during the first half of the year. At that date, Carrefour held 28,510,134 shares in treasury (i.e. 3.8% of the share capital made up of 746,871,196 shares), with an average unit price of 17.64 euros per share for the 19,018,073 shares acquired. The second share buyback mandate ended on July 21, 2023, with 3,768,591 additional shares acquired at an average price of 17.19 euros per share. At the end of the second share buyback mandate, the number of shares making up the share capital amounted to 746,871,196 and the number of shares held in treasury was 32,278,725 representing approximately 4.3% of the share capital. In addition, pursuant to the authorisation granted by the Extraordinary Shareholders’ Meeting of May 26, 2023, the Board of Directors decided on July 26, 2023, to reduce the share capital of Carrefour SA by cancelling 26,887,362 treasury shares representing approximately 3.6% of the share capital. The cancellation is expected to occur on or about July 28, 2023. Following cancellation of the shares, Carrefour SA will have 719,983,834 shares outstanding and, consequently, 5,391,363 shares in treasury, representing approximately 0.7% of the share capital. 4.2.6 Employee share ownership programme On March 1, 2023, the Group launched Carrefour Invest, an international employee share ownership plan. Two options were offered: Carrefour Classic and Carrefour Secure. The reservation period ran from March 1 to March 20, 2023 and the subscription/revocation period from May 5 to May 9, 2023, with the shares delivered on May 31, 2023. As part of the offer, beneficiaries subscribed to Carrefour shares either directly or through a company mutual fund (FCPE), depending on the option chosen and/or their country of residence. Shareholders must hold directly-subscribed shares or FCPE units until May 31, 2028 (inclusive), unless an early release event occurs. The offer entitled employees to a 15% discount on the share price and a matching employer contribution. The reference price communicated on May 3, 2023 was 18.67 euros (average of the closing prices over the previous 20 days). After application of the 15% discount, the subscription price of the shares for both options stood at 15.87 euros per share. The operation resulted in a capital increase of 75 million euros (4,713,735 new ordinary shares) for Carrefour SA and the recognition of an operating expense of approximately 30 million euros in respect of the discount and the company contribution. Carrefour group – Business review for the six-month period ended June 30, 2023 - 22 - 4. Other information 4.3 Restatement of the 2022 consolidated half-year and full-year financial statements Classification of Carrefour Taiwan in discontinued operations in accordance with IFRS 5 On July 19, 2022, the Group signed an agreement to sell its entire interest in its Taiwanese subsidiary (i.e., 60%) to the Uni-President group (holder of the remaining 40%). As Carrefour Taiwan represents a separate major geographic area of operations, it has been treated as a discontinued operation in accordance with IFRS 5, from the date its disposal was announced (see Notes 2 and 4 to the 2022 consolidated financial statements). Therefore the assets and liabilities recognised by the subsidiary were reclassified as assets held for sale and related liabilities in the consolidated statement of financial position at December 31, 2022 (see Note 4.3 to these consolidated financial statements). The Group lost control of Carrefour Taiwan on June 30, 2023, following the approval of the Taiwanese competition authority (TFTC) and the satisfaction of other customary conditions. In addition, the net income and cash flows of Carrefour Taiwan were reclassified within line items for discontinued operations in the consolidated income statement and consolidated cash flow statement for first-half 2022. The reclassifications are presented in Notes 4.1.1 and 4.1.2 to the condensed consolidated half-year financial statements as of June 30, 2023. Key consolidated income statement aggregates for Carrefour Taiwan for first-half 2023 and 2022 are as follows: (in millions of euros) First-half 2023 First-half 2022 Recurring operating income 37 40 Operating income 39 37 Income before taxes 37 32 Income tax expense (6) (9) Net income/(loss) for the period 31 24 Capital expenditure 2 5 Restatement of the consolidated statement of financial position at December 31, 2022 to reflect the reduction in the acquisition price of Grupo BIG in Brazil On March 31, 2023, an agreement was signed with the sellers of Grupo BIG, leading to a firm reduction in its price for a minimum of 900 million Brazilian reals (see Note 4.2.1 for further details). In accordance with IFRS 3 – Business Combinations, the price reduction occurring within 12 months of the acquisition’s closing is recognised retrospectively in Grupo BIG’s opening balance sheet with an offsetting adjustment to goodwill. The consolidated statement of financial position at December 31, 2022 has therefore been restated for this price reduction (on the line “Other non-current financial assets” for its long-term portion and on the line “Other current financial assets” for its short-term portion), as well as for other minor adjustments. The reclassifications are presented in Note 4.2 to the condensed consolidated half-year financial statements as of June 30, 2023. Carrefour group – Business review for the six-month period ended June 30, 2023 - 23 - 4. Other information 4.4 Main related-party transactions There were no material changes in the nature of the Group’s related-party transactions in first-half 2023 compared with the situation at December 31, 2022. 4.5 Subsequent events One of the objectives of the Carrefour 2026 strategic plan is to enhance the Group’s real estate assets in France through the development of mixed-use real estate projects. To that end, on July 6, 2023, the Group announced that it has joined forces with Nexity to develop 76 sites covering all Carrefour retail formats (hypermarkets, supermarkets and convenience stores). This long-term partnership will enable Carrefour and Nexity to develop mixed-use programmes with high environmental performance for housing, serviced residences, retail outlets, offices and hotels. The related property venture, which is expected to be up and running by the first quarter of 2024 at the latest, will be 80% owned by Carrefour and 20% by Nexity. On July 12, 2023, Carrefour announced that it had entered into an agreement with the Louis Delhaize group to acquire the Cora and Match banners in France, which operate 60 hypermarkets and 115 supermarkets respectively, and employ some 24,000 people. This acquisition will enable the Group to reaffirm its leadership in food retail in France, with the acquired stores offering a very strong geographical fit with Carrefour, particularly in the east and north of the country. The transaction values the acquired assets on the basis of an enterprise value of 1.05 billion euros and will be paid entirely in cash. Subject to certain customary conditions, particularly approval by the French competition authority, the transaction is expected to close in the summer of 2024. 4.6 Risk factors The risk factors are the same as those set out in Chapter 4 Risk Management of the 2022 Universal Registration Document. Carrefour group – Business review for the six-month period ended June 30, 2023 - 24 - Condensed consolidated financial statements for the six-month period ended June 30, 2023 Consolidated income statement page 26 Consolidated statement of comprehensive income page 27 Consolidated statement of financial position page 28 Consolidated statement of cash flows page 29 Consolidated statement of changes in shareholders’ equity page 31 Notes to the condensed consolidated financial statements page 32 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 25 - Consolidated income statement The comparative consolidated income and cash flow statement information presented in this document has been restated to reflect the classification of Carrefour Taiwan in discontinued operations in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations. These restatements are described in Note 4. In addition, the consolidated statement of financial position at December 31, 2022 has been restated in accordance with IFRS 3 – Business Combinations to reflect the changes affecting the opening balance sheet of Grupo BIG in Brazil (see Notes 3.1 and 4.2). Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the condensed consolidated financial statements for the six-month period ended June 30, 2023; data for the comparative period presented have also been adjusted for inflation. The consolidated financial statements are presented in millions of euros, rounded to the nearest million. As a result, there may be rounding differences between the amounts reported in the various statements. (in millions of euros) Notes First-half 2023 First-half 2022 IFRS 5 restated % change Net sales 6.1 40,743 37,790 7.8% Loyalty program costs (441) (400) 10.3% Net sales net of loyalty program costs 40,302 37,391 7.8% Other revenue 6.1 1,287 1,168 10.2% Total revenue 41,589 38,558 7.9% Cost of sales (33,515) (31,055) 7.9% Gross margin from recurring operations 8,074 7,504 7.6% Sales, general and administrative expenses, depreciation and amortisation 6.2 (7,374) (6,729) 9.6% Recurring operating income 700 775 (9.6)% Net income/(loss) from equity-accounted companies 9.1 24 12 106.8% Recurring operating income after net income from equity-accounted companies 724 786 (7.9)% Non-recurring income and expenses, net 6.3 (186) (82) 125.6% Operating income 538 704 (23.6)% Finance costs and other financial income and expenses, net 13.6 (276) (181) 52.0% Finance costs, net (191) (151) 26.1% Net interests related to leases (100) (68) 47.6% Other financial income and expenses, net 15 38 (59.9)% Income before taxes 262 522 (49.8)% Income tax expense 10 (153) (193) (20.8)% Net income/(loss) from continuing operations 109 329 (66.8)% Net income/(loss) from discontinued operations 761 29 2520.0% Net income/(loss) for the period 871 358 143.1% Group share 867 255 239.6% of which net income/(loss) from continuing operations - Group share 118 239 (50.5)% of which net income/(loss) from discontinued operations - Group share 749 16 4457.5% Attributable to non-controlling interests 4 103 (96.1)% of which net income/(loss) from continuing operations - attributable to non- controlling interests (9) 90 (109.7)% of which net income/(loss) from discontinued operations - attributable to non- controlling interests 13 13 0.8% Basic earnings per share (in euros) First-half 2023 First-half 2022 IFRS 5 restated % change Net income/(loss) from continuing operations - Group share - per share 12.3 0.16 0.32 (48.7)% Net income/(loss) from discontinued operations - Group share - per share 12.3 1.03 0.02 4624.8% Net income/(loss) – Group share - per share 12.3 1.19 0.34 252.1% Diluted earnings per share (in euros) First-half 2023 First-half 2022 IFRS 5 restated % change Net income/(loss) from continuing operations - Group share - per share 12.3 0.16 0.32 (48.7)% Net income/(loss) from discontinued operations - Group share - per share 12.3 1.03 0.02 4622.1% Net income/(loss) – Group share - per share 12.3 1.19 0.34 251.9% Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 26 - Consolidated statement of comprehensive income (in millions of euros) Notes First-half 2023 First-half 2022 Net income/(loss) - Group share 867 255 Net income - Attributable to non-controlling interests 4 103 Net income/(loss) for the period 871 358 Effective portion of changes in the fair value of cash flow hedges ¹ Changes in the fair value of debt instruments through other comprehensive income Exchange differences on translation of intercompany loans qualifying as net investment of foreign operations, net of hedge effect ² Exchange differences on translation of foreign operations ³ 12.2 12.2 12.2 12.2 (56) (36) 21 217 63 (16) 19 461 Items that may be reclassified subsequently to profit or loss 146 527 Remeasurements of defined benefit plans obligation ⁴ 12.2 (4) 128 Items that will not be reclassified subsequently to profit or loss (4) 128 Other comprehensive income/(loss) after tax 142 655 Total comprehensive income/(loss) 1,013 1,013 Group share 929 703 Attributable to non-controlling interests 84 310 These items are presented net of the tax effect (see Note 12.2). (1) The currency swap eligible for cash flow hedge accounting, set up by the Group in 2022 in order to hedge the risk of unfavourable changes in the New Taiwan dollar up to the amount of the Group’s share in the value of Carrefour Taiwan, was settled when Carrefour Taiwan was sold, generating an expense of 46 million euros net of tax (see Note 3.1). (2) In first-half 2023 and in 2022, Carrefour Finance granted two intra-group revolving credit facilities (RCF) to the Brazilian subsidiary Atacadão for 2.3 billion Brazilian reals and 5.9 billion Brazilian reals respectively. These facilities were treated as part of the net investment in that operation. The derivatives contracted to hedge part of the facilities were classified as a net investment hedge (see Note 3.3). (3) Exchange differences recognised on translation of foreign operations in first-half 2023 mainly reflect the slight increase in the value of the Brazilian real, partially offset by the 52 million euro reversal of positive translation adjustments recognised by Carrefour Taiwan further to its sale. Exchange differences recognised on translating foreign operations in first-half 2022 mainly reflected the significant increase in the value of the Brazilian real. (4) Remeasurement of the net defined benefit liability recognised in first-half 2023 reflects the slight decline in discount rates applied for the eurozone, from 3.80% at end-December 2022 to 3.70% at end-June 2023 (see Note 11.3). In first-half 2022, these discount rates had increased sharply, from 0.80% at end-December 2021 to 3.20% at end-June 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 27 - Consolidated statement of financial position ASSETS (in millions of euros) Notes June 30, 2023 December 31, 2022 IFRS 3 restated Goodwill 7.1 8,720 8,644 Other intangible assets 7.1 1,523 1,499 Property and equipment 7.2 12,603 12,612 Investment property 7.3 292 279 Right-of-use assets 8.1 4,190 4,190 Investments in companies accounted for by the equity method 9.1 1,151 1,197 Other non-current financial assets 13.5 1,161 1,251 Consumer credit granted by the financial services companies – portion more than one year 6.5 1,970 1,867 Deferred tax assets 450 475 Other non-current assets 641 609 Non-current assets 32,702 32,622 Inventories 7,047 6,893 Trade receivables 3,349 3,330 Consumer credit granted by the financial services companies – portion less than one year 6.5 4,358 4,111 Other current financial assets 13.2 631 771 Tax receivables 927 948 Other current assets 1,222 1,025 Cash and cash equivalents 13.2 3,859 5,216 Assets held for sale 52 1,641 Current assets 21,444 23,935 TOTAL ASSETS 54,146 56,558 SHAREHOLDERS’ EQUITY AND LIABILITIES (in millions of euros) Notes June 30, 2023 December 31, 2022 IFRS 3 restated Share capital 1,867 1,855 Consolidated reserves (including net income) 9,500 9,289 Shareholders’ equity, Group share 11,367 11,144 Shareholders’ equity attributable to non-controlling interests 1,910 2,042 Total shareholders' equity 13,276 13,186 Borrowings - portion more than one year 13.2 6,479 6,912 Lease commitments - portion more than one year 8.2 3,626 3,574 Provisions 11 4,228 3,979 Consumer credit financing – portion more than one year 6.5 1,678 1,550 Deferred tax liabilities 373 365 Tax payables - portion more than one year 62 85 Non-current liabilities 16,446 16,464 Borrowings - portion less than one year 13.2 3,004 2,646 Lease commitments - portion less than one year 8.2 936 955 Suppliers and other creditors 12,831 14,393 Consumer credit financing – portion less than one year 6.5 3,791 3,592 Tax payables - portion less than one year 1,129 1,182 Other current payables 2,733 2,943 Liabilities related to assets held for sale − 1,196 Current liabilities 24,423 26,907 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 54,146 56,558 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 28 - Consolidated statement of cash flows (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated Income before taxes 262 522 OPERATING ACTIVITIES Income tax paid (146) (198) Depreciation and amortisation expense 1,152 1,087 Gains and losses on sales of assets and other 15 (31) Change in provisions and impairment 82 (111) Finance costs, net 191 151 Net interests related to leases 100 68 Share of profit and dividends received from equity-accounted companies 39 45 Impact of discontinued operations ¹ 89 111 Cash flow from operations 1,785 1,645 Change in working capital requirement ² (1,926) (2,067) Impact of discontinued operations ¹ (54) (49) Net cash (used in)/from operating activities (excluding financial services companies) (195) (470) Change in consumer credit granted by the financial services companies (18) 54 Net cash (used in)/from operating activities - total (213) (416) INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets ³ (687) (556) Acquisitions of non-current financial assets (6) (20) Acquisitions of subsidiaries and investments in associates ⁴ (3) (911) Proceeds from the disposal of subsidiaries and investments in associates ⁵ 1,004 21 Proceeds from the disposal of property and equipment and intangible assets ⁶ 289 69 Proceeds from the disposal of non-current financial assets 7 4 Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets ³ (246) (262) Investments net of disposals - subtotal 359 (1,656) Other cash flows from investing activities 61 93 Impact of discontinued operations ¹ (225) (15) Net cash (used in)/from investing activities - total 195 (1,579) FINANCING ACTIVITIES Carrefour SA capital increase / (decrease) ⁷ ⁸ 75 (657) Proceeds from share issues to non-controlling interests 8 2 Dividends paid by Carrefour SA ⁹ (405) (380) Dividends paid to non-controlling interests (57) (44) Change in treasury stock and other equity instruments ⁸ (336) (96) Change in current financial assets ¹⁰ 233 (1) Issuance of bonds ¹⁰ 675 1,500 Repayments of bonds ¹⁰ (1,058) (1,082) Net financial interests paid (51) (100) Other changes in borrowings ¹⁰ 155 2,056 Payments related to leases (principal) ¹¹ (504) (449) Net interests paid related to leases ¹¹ (100) (66) Impact of discontinued operations ¹ (45) (54) Net cash (used in)/from financing activities - total (1,411) 629 Net change in cash and cash equivalents before the effect of changes in exchange rates (1,429) (1,366) Effect of changes in exchange rates (163) 201 NET CHANGE IN CASH AND CASH EQUIVALENTS (1,592) (1,165) Cash and cash equivalents at beginning of the period 5,451 3,703 Cash and cash equivalents at end of the period 3,859 2,539 of which cash and cash equivalents at end of period from continuing operations 3,859 2,331 of which cash and cash equivalents at end of period from discontinued operations − 208 (1) Restatements made to reflect the classification of cash flows relating to discontinued operations in accordance with IFRS 5 are detailed in Note 4. They correspond almost exclusively to the disposal of Carrefour Taiwan, effective June 30, 2023. (2) The change in working capital requirement is set out in Note 6.4. (3) Acquisitions include operational investments in growth formats, in particular those relating to the Grupo BIG store conversions and the Group’s digitalisation. (4) In first-half 2022, this line mainly corresponded to the cash payment in respect of the acquisition of the entire share capital of Grupo BIG in Brazil (excluding the downpayment in March 2021) for 866 million euros (4,392 million Brazilian reals). (5) This item corresponds to the disposal of Carrefour Taiwan for 1.0 billion euros (see Note 3.1). (6) This line mainly corresponds to the sale and leaseback of five stores and four warehouses in Brazil (see Note 3.1) and the sale of store premises and businesses to franchisees in France. In first-half 2022, this item mainly corresponded to the sale of store businesses to franchisees in France and Italy. (7) During the first half of 2023, Carrefour SA’s capital was increased by 75 million euros following the implementation of the “Carrefour Invest” plan (see Note 3.6). (8) These lines correspond to the first two share buyback mandates, amounting to 200 million euros each (see Note 3.5), implemented up to June 30, 2023 for 336 million euros (including associated costs). In first-half 2022, this item corresponded to the share buyback programme for 750 million euros implemented between March and May 2022, of which 401 million euros worth of shares (including associated costs) were cancelled on April 20, 2022 following a decision by the Board of Directors and another 256 million euros worth (including associated costs) were Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 29 - Consolidated statement of cash flows cancelled on June 3, 2022. The shares covered by this programme, which were still held in treasury at June 30, 2022, were presented within “Change in treasury stock and other equity instruments”. (9) The dividend approved by the Shareholders’ Meeting of May 26, 2023 was paid entirely in cash on June 8, 2023 for an amount of 405 million euros (see Note 3.4). In 2022, the dividend was paid entirely in cash on June 9, 2022 for 380 million euros. (10) Note 13.2 provides a breakdown of net debt. Changes in liabilities arising from financing activities are detailed in Note 13.4. (11) In accordance with IFRS 16, payments under leases along with any related interest are shown in financing cash flows. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 30 - Consolidated statement of changes in shareholders’ equity Shareholders’ equity, Group share (in millions of euros) Share capital ¹ Foreign exchange translation reserve Fair value reserve ² Other consolidated reserves and net income Total Shareholders’ equity, Group share Total Non- controlling interests Shareholders' equity at December 31, 2021 1,940 (1,990) (4) 10,305 10,251 1,579 Net income/(loss) for the period - First-half 2022 − − − 255 255 103 Other comprehensive income/(loss) after tax ³ − 252 69 127 448 207 Total comprehensive income/(loss) - First-half 2022 − 252 69 382 703 310 Share-based payments − − − 12 12 1 Treasury stock (net of tax) ⁵ − − − (96) (96) − 2021 dividend payment ⁴ − − − (380) (380) (33) Change in capital and additional paid-in capital ⁵ (84) − − (570) (655) (0) Effect of changes in scope of consolidation and other movements ⁷ − 63 − 120 183 247 Shareholders' equity at June 30, 2022 1,855 (1,675) 65 9,774 10,019 2,103 Shareholders' equity at December 31, 2022 1,855 (1,670) 78 10,881 11,144 2,042 Net income/(loss) for the period - First-half 2023 − − − 867 867 4 Other comprehensive income/(loss) after tax ³ − 135 (69) (4) 62 80 Total comprehensive income/(loss) - First-half 2023 − 135 (69) 863 929 84 Share-based payments − − − 31 31 1 Treasury stock (net of tax) ⁵ − − − (400) (400) − 2022 dividend payment ⁴ − − − (405) (405) (45) Change in capital and additional paid-in capital ⁶ 12 − − 63 75 9 Effect of changes in scope of consolidation and other movements ⁷ − (1) − (7) (8) (181) Shareholders' equity at June 30, 2023 1,867 (1,536) 9 11,027 11,367 1,910 (1) The share capital was made up of 746,871,196 ordinary shares at June 30, 2023. (2) This item comprises: the hedge reserve (effective portion of changes in the fair value of cash flow hedges); - the financial asset fair value reserve (changes in the fair value of financial assets carried at fair value through other comprehensive income); - exchange differences on translation of intercompany loans qualifying as net investment of foreign operations, net of hedge effect. (3) In first-half 2023, the Group’s share of exchange differences recognised on translating foreign operations mainly reflects the slight increase in the value of the Brazilian real compared with December 31, 2022, partially offset by the reversal of the positive translation adjustments recognised by Carrefour Taiwan further to its disposal (see Note 3.1). The figure also includes the decrease in the fair value of Flink shares (see Note 12.2). In first-half 2022, other comprehensive income after tax reflected both the significant increase in the value of the Brazilian real compared to December 31, 2021 and, under other consolidated reserves and net income, the remeasurement of the net defined benefit liability following the increase in discount rates applied for the eurozone. (4) The 2022 dividend distributed by Carrefour SA, totalling 405 million euros, was paid entirely in cash in first-half 2023. The 2021 dividend distributed by Carrefour SA, totalling 380 million euros, was paid entirely in cash in first-half 2022. Dividends paid to non-controlling interests mainly concern the Spanish and Brazilian subsidiaries for an amount of 45 million euros in first-half 2023, and 33 million euros in first-half 2022. (5) The 800 million euro share buyback programme, as authorised by the Shareholders’ Meetings of June 3, 2022 and May 26, 2023, was launched in first-half 2023 in the form of two buyback mandates of 200 million euros each. The first 200 million euro mandate ended on March 31, 2023. The second share buyback mandate began on May 2, 2023 and was still ongoing at June 30, 2023. At that date, 135 million euros worth of shares had been bought back, leading to the recognition of a short-term financial liability of 65 million euros, with a corresponding reduction in shareholders’ equity (see Note 3.5). In first-half 2022, a 750 million euro share buyback programme was launched in two tranches of 400 million euros and 350 million euros, corresponding to 38,423,806 shares. Carrefour SA’s share capital was subsequently reduced by cancelling 33,738,431 shares. Following cancellation of these shares, Carrefour SA had 11,544,870 treasury shares, representing approximately 1.6% of the share capital at June 30, 2022. (6) On March 1, 2023, the Group launched Carrefour Invest, an international employee share ownership plan. The transaction resulted in a capital increase of 75 million euros (4,713,735 new ordinary shares) by Carrefour SA (see Note 3.6). (7) The effect of changes in the scope of consolidation and other movements in first-half 2023 mainly corresponds to the disposal of Carrefour Taiwan (see Note 3.1). At June 30, 2022, it mainly corresponded to the acquisition of Grupo BIG for the portion paid in newly-issued Carrefour Brazil shares (see Note 3.1 to the half-year financial statements as of June 30, 2022). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 Total Shareholders’ equity 11,830 358 655 1,013 13 (96) (413) (655) 430 12,122 13,186 871 142 1,013 32 (400) (450) 83 (189) 13,276 - 31 - Notes to the condensed consolidated financial statements NOTE 1: BASIS OF PREPARATION OF THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS ............................................................................................................................... - 33 - NOTE 2: SEASONAL FLUCTUATIONS IN BUSINESS ....................................................................... - 36 - NOTE 3: SIGNIFICANT EVENTS OF THE PERIOD ........................................................................... - 37 - NOTE 4: RESTATEMENT OF THE 2022 CONSOLIDATED HALF-YEAR AND FULL-YEAR FINANCIAL STATEMENTS ............................................................................................................................... - 44 - NOTE 5: SEGMENT INFORMATION ............................................................................................... - 48 - NOTE 6: OPERATING ITEMS ......................................................................................................... - 50 - NOTE 7: INTANGIBLE ASSETS, PROPERTY AND EQUIPMENT, INVESTMENT PROPERTY ................ - 55 - NOTE 8: LEASES ........................................................................................................................... - 57 - NOTE 9: INVESTMENTS IN COMPANIES ACCOUNTED FOR BY THE EQUITY METHOD .................... - 58 - NOTE 10: INCOME TAX................................................................................................................. - 59 - NOTE 11: PROVISIONS AND CONTINGENT LIABILITIES .............................................................. - 60 - NOTE 12: EQUITY, OTHER COMPREHENSIVE INCOME AND EARNINGS PER SHARE ...................... - 63 - NOTE 13: FINANCIAL ASSETS AND LIABILITIES, FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES .................................................................................................................................... - 66 - NOTE 14: OTHER INFORMATION .................................................................................................. - 73 - Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 32 - Notes to the condensed consolidated financial statements NOTE 1: BASIS OF PREPARATION OF THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS The condensed consolidated financial statements for the six-month period ended June 30, 2023 were approved for publication by the Board of Directors on July 26, 2023. Carrefour SA (the “Company”) is domiciled in France at 93, avenue de Paris, 91300 Massy. The condensed consolidated financial statements for the six-month period ended June 30, 2023 reflect the financial position and results of operations of the Company and its subsidiaries (together “Carrefour” or the “Group”), along with the Group’s share of the profits and losses and net assets of equity-accounted associates and joint ventures. The presentation currency of the consolidated financial statements is the euro, which is the Company’s functional currency. 1.1 Statement of compliance In accordance with European Regulation (EC) 1606/2002 dated July 19, 2002, the condensed consolidated financial statements for the six-month period ended June 30, 2023 have been prepared in compliance with the International Financial Reporting Standards (IFRS) as adopted for use in the European Union as of June 30, 2023 and applicable at that date, with comparative information for the same period of 2022 and at December 31, 2022 prepared using the standards applicable at the reporting date. All of the standards and interpretations endorsed by the European Union are published in the Official Journal of the European Union, which can be accessed in the EUR-Lex. At June 30, 2023, the standards and interpretations adopted for use in the European Union were the same as those published by the IASB and applicable at that date, except for the amendments to IAS 12 – Income Taxes: International Tax Reform – Pillar Two Model Rules which have not yet been adopted for use in the European Union. 1.2 Changes in accounting policies The accounting policies used to prepare the condensed consolidated financial statements for the six- month period ended June 30, 2023 are the same as those used for the 2022 consolidated financial statements, except for the following standard and amendments whose application is mandatory as of January 1, 2023: IFRS 17 – Insurance Contracts; Amendments to IFRS 17 – Insurance Contracts: Initial Application of IFRS 17 and IFRS 9 – Comparative Information; Amendments to IAS 1 – Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies; Amendments to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates; Amendments to IAS 12 – Income Taxes: Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction. The application of IFRS 17 – Insurance Contracts had no impact on the Group’s consolidated financial statements. The application of the amendments had no impact on the Group’s consolidated financial statements either. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 33 - Notes to the condensed consolidated financial statements Adopted by the European Union but not yet applicable Standards, amendments and interpretations Effective date Amendments to IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current – Deferral of Effective Date; Non-current Liabilities with Covenants January 1, 2024 Amendments to IFRS 16 – Leases: Lease Liability in a Sale and Leaseback January 1, 2024 Amendments to IAS 7 – Statement of Cash Flows and IFRS 7 – Financial instruments: Disclosures: Supplier Finance Arrangements January 1, 2024 Not yet adopted by the European Union Standards, amendments and interpretations Effective date (1) Amendments to IAS 12 – Income Taxes: International Tax Reform – Pillar Two Model Rules January 1, 2023 (1) Subject to adoption by the European Union. Carrefour does not expect the application of these amendments to have a material impact on its consolidated financial statements. 1.3 Specific reporting treatments in the preparation of interim financial statements 1.3.1 Reporting principles The condensed consolidated financial statements for the six-month period ended June 30, 2023 have been prepared in accordance with IAS 34 – Interim Financial Reporting. Condensed interim consolidated financial statements do not contain all of the disclosures that would be required in a complete set of annual financial statements. Consequently, these interim financial statements should be read jointly with the Group’s consolidated financial statements for the year ended December 31, 2022, as included in the Universal Registration Document filed with the AMF (French financial markets authority) and available on request from the Company’s head office at 93 avenue de Paris – 91300 Massy, France, or on the Company’s website, www.carrefour.com. 1.3.2 Estimation of income tax expense In accordance with IAS 34, income tax expense for first-half 2023 is calculated based on the estimated weighted average annual income tax rate for full-year 2023 (the effective tax rate), for each entity and tax sub-group (see Note 10). The tax impact of specific transactions is reflected in income tax expense for the period. The impact of applying the Pillar Two international tax reform is currently being analysed. Given the tax rates in the jurisdictions where the Group operates, the overall impact on the Group is not thought to be material at this stage. 1.3.3 Post-employment benefits and other long-term benefits The provision for pensions and other post-employment benefits is calculated using actuarial projections based on data from the previous period-end. The discount rate for the main contributing countries (eurozone) is reviewed at June 30 (see Note 11.3). The actuarial projections are updated to take into account any material changes to assumptions or one-off impacts (discount rates, applicable legislation, the population concerned, etc.) during the six-month period. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 34 - Notes to the condensed consolidated financial statements Following the enactment of France’s amended social security financing law no. 2023-270 on April 15, 2023, the pension reform has been taken into account in determining provisions for defined benefit plans at June 30, 2023: the changes brought about by this reform have been analysed as a plan amendment within the meaning of IAS 19; the impact has been treated accordingly as a past service cost and therefore recognised in operating income. 1.3.4 Conflict in Ukraine The Group does not do business in Ukraine, Russia or Belarus. It does not hold any assets or interests in entities in these countries, nor is it party to any franchise agreements. In addition, the Group’s exposure to the markets of these countries is not deemed to be material. The Group is not materially affected by the trade restrictions and sanctions imposed by certain governments on Russia. However, the Group is impacted to some extent by the macro-economic consequences of the conflict, particularly due to the resulting energy price fluctuations, which have led to the recognition of higher energy costs in the financial statements since 2022. The Group is closely monitoring the development of the conflict and its macroeconomic and potentially operational consequences, particularly in its integrated countries bordering Ukraine (Poland and Romania). 1.4 Use of estimates and judgement Preparation of consolidated financial statements involves the use of Group Management estimates and assumptions that may affect the reported amounts of certain assets, liabilities, income and expenses, as well as the disclosures contained in the notes. These estimates and assumptions are reviewed at regular intervals by Group management to ensure that they are reasonable in light of past experience and the current economic situation. Depending on changes in those assumptions, actual results may differ from current estimates. In addition to using estimates, Group management exercises its judgement when determining the appropriate accounting treatment of certain transactions and activities and how it should be applied. The main estimates and judgements applied for the preparation of the condensed consolidated financial statements for the six-month period ended June 30, 2023 are the same as those described in the consolidated financial statements for the year ended December 31, 2022, except as explained in Note 1.3. 1.5 Measurement bases The consolidated financial statements have been prepared using the historical cost convention, except for: certain financial assets and liabilities measured using the fair value model (see Note 13); assets acquired and liabilities assumed in business combinations, measured using the fair value model; assets acquired through exchange, assessed at fair value if the exchange has commercial substance and if it is possible to reliably measure the fair value of the asset received or sold; non-current assets held for sale, measured at the lower of their carrying amount and fair value less costs to sell. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 35 - Notes to the condensed consolidated financial statements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with the hierarchy defined in IFRS 13 – Fair Value Measurement, there are three levels of inputs: Level 1 inputs: unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 inputs: models that use inputs that are observable for the asset or liability, either directly (i.e., prices) or indirectly (i.e., price-based data); Level 3 inputs: inputs that are intrinsic to the asset or liability and are not based on observable market data for the asset or liability. Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the condensed consolidated financial statements for the six-month period ended June 30, 2023; data for the comparative period presented have also been adjusted for inflation. NOTE 2: SEASONAL FLUCTUATIONS IN BUSINESS Like those of other retailers, Carrefour’s sales are subject to significant seasonal fluctuations, with the result that comparisons between the consolidated financial statements for the first and second halves of the year are not particularly meaningful. This is particularly the case for recurring operating income and cash flow generation between the two periods. The Group’s second-half sales are traditionally higher than those for the first half, due to increased activity in December. Most of the operating expenses on the other hand – such as payroll costs, depreciation and amortisation – are spread more or less evenly over the year. As a result, the Group’s recurring operating income is generally lower in the first half than in the second. Cash flows generated by the Group are also strongly impacted by seasonal trends, with working capital requirement rising sharply in the first half as a result of the large volume of supplier payments due at the beginning of the year for the purchases made ahead of the previous year’s peak selling period in December. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 36 - Notes to the condensed consolidated financial statements NOTE 3: SIGNIFICANT EVENTS OF THE PERIOD 3.1 Main acquisitions, disposals and other transactions during the period Sale of Carrefour Taiwan On July 19, 2022, the Group signed an agreement to sell its entire interest in its Taiwanese subsidiary (i.e., 60%) to the Uni-President group (holder of the remaining 40%). As the applicable conditions precedent were met, particularly clearance from the local competition authority obtained in May 2023, this agreement resulted in loss of control of the subsidiary on June 30, 2023. The preliminary sale price is 31.1 billion New Taiwan dollars, representing 1.0 billion euros (after taking account of currency hedging). The disposal gain, amounting to approximately 0.75 billion euros, was recognised within net income from discontinued operations. This is because Carrefour Taiwan represents a separate major geographic area of operations and has therefore been treated as a discontinued operation in accordance with IFRS 5 since the date its disposal was announced. For more details on the impacts of this sale on the consolidated half-year financial statements as of June 30, 2023, see Note 4.1. As a reminder, on March 14, 2022, a fire broke out in a logistics centre leased by Carrefour in the Yang Mei district of Taiwan. A claim was submitted to the Group’s insurance companies in this respect. Losses incurred as a result of destroyed inventories and equipment were recorded in 2022 against the payout receivable from insurers classified under other current assets. The same applies to the estimated operating losses for 2022 and first-half 2023. In June 2023, further to their final conclusions, the Group’s insurance companies paid the balance of the compensation recognised for the damage incurred, after deducting the two instalments already paid last year. The related impacts are recorded in net income from discontinued operations for the periods concerned. Acquisition of Grupo BIG (Brazil) – Reduced acquisition price On March 24, 2021, Carrefour Brazil entered into an agreement with Advent International and Walmart for the acquisition of Grupo BIG, Brazil’s third biggest food retailer. The acquiree reported net sales of around 20 billion Brazilian reals (approximately 3.1 billion euros) in 2021 and operates a multi-format network of 388 stores, including 181 owned stores. Carrefour Brazil’s Extraordinary Shareholders’ Meeting and CADE, the Brazilian competition authority, approved this transaction on May 19, 2022 and May 25, 2022, respectively (subject to the disposal of 14 stores which took effect before June 30, 2023). The acquisition was finalised on June 1, 2022, with payment made on June 6, 2022. The preliminary purchase price for the entire share capital of Grupo BIG was 7,465 million Brazilian reals (1,471 million euros at the exchange rate as of the transaction date), which broke down as follows: a cash payment of 5,292 million Brazilian reals (approximately 1 billion euros), representing 70% of the baseline price plus various preliminary earn-outs for 42 million Brazilian reals (approximately 8 million euros), including 900 million Brazilian reals (139 million euros) paid as part of a downpayment in March 2021; a share-based payment of 117 million new Carrefour Brazil shares (representing 30% of the baseline price), with a fair value of 2,173 million Brazilian reals (approximately 430 million euros) at June 6, 2022. As this was a transaction with minority shareholders, the impact of paying for 30% of Grupo BIG in Carrefour Brazil shares was recognised in consolidated equity for approximately 180 million euros attributable to the Carrefour group and approximately 250 million euros attributable to non-controlling interests. The agreement also provided for an earn-out that would have been paid six months after completion of the transaction if the Carrefour Brazil share price had exceeded the reference value of 19.26 Brazilian reals. No earn-out was paid for 2022, as the price of the Carrefour Brazil share was 15.10 Brazilian reals at December 6, 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 37 - Notes to the condensed consolidated financial statements Developments in first-half 2023 Discussions between the sellers (Advent International and Walmart) and the buyer (Carrefour Brazil) under the terms of the Grupo BIG acquisition contract led the parties to agree on a firm price reduction of 900 million Brazilian reals (paid in two instalments of 350 and 550 million Brazilian reals respectively) and a potential further reduction of up to 100 million Brazilian reals. This agreement was signed on March 31, 2023 with the following two conditions precedent: immediate payment of the first tranche of 350 million Brazilian reals (317 million Brazilian reals after minor adjustments); provision by the sellers of a first demand guarantee from a leading bank. The agreement was finalised on April 11, 2023 following the satisfaction of both conditions precedent. In addition to the 350 million Brazilian reals paid on April 11, 2023, the agreement mainly provides for the following price reductions: A second tranche of 550 million reals to be paid 60 days after the publication of Carrefour Brazil’s 2023 annual consolidated financial statements. The 550 million Brazilian reals bear interest at SELIC rates calculated as from April 11, 2023; An additional variable receivable of up to 100 million Brazilian reals, calculated using a metric agreed by the stakeholders. This top-up also bears interest at SELIC rates calculated as from April 11, 2023. The acquisition price for Grupo BIG is 6,687 million Brazilian reals (or 1,318 million euros at the exchange rate on the transaction date), after discounting to present value the 900 million Brazilian real price reduction at June 1, 2022. Carrefour Brazil also increased the provisions set aside for labour and tax risks (net of associated deferred tax) by a non-material amount of 33 million Brazilian reals. In accordance with IFRS 3 – Business Combinations, the price reduction and other adjustments occurring within 12 months of the acquisition’s closing are recognised retrospectively in Grupo BIG’s opening balance sheet with an offsetting adjustment to goodwill (see Note 4.2 for more details on the restatement of the consolidated statement of financial position at December 31, 2022). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 38 - Notes to the condensed consolidated financial statements Grupo BIG’s final opening balance sheet at June 1, 2022, as included in the Group’s consolidated financial statements, is as follows: ASSETS (in millions of reals) Reference Opening balance sheet (Net Book Value) Fair Value adjustments Preliminary opening balance sheet (Fair Value) Price reduction and others adjustments Final opening balance sheet (Fair Value) Goodwill (a) 220 4,556 4,776 (745) 4,031 Other intangible assets (e) 265 263 527 527 Property and equipment (c) 4,887 5,033 9,920 9,920 Right-of-use assets (b) 2,465 (22) 2,443 2,443 Other non-current financial assets (f) 586 586 586 Deferred tax assets (g) 2,407 (2,407) − Other non-current assets (h) 3,095 (1,108) 1,987 1,987 Non-current assets 13,925 6,315 20,240 (745) 19,495 Inventories (j) 2,955 (168) 2,787 2,787 Trade receivables (l) 702 702 702 Other current financial assets (l) 77 77 77 Tax receivables (l) 513 513 513 Other current assets (k) 204 (20) 184 184 Cash and cash equivalents (l) 317 317 317 Assets held for sale (i) − 323 323 323 Current assets 4,769 135 4,904 − 4,904 TOTAL ASSETS 18,694 6,450 25,144 (745) 24,399 SHAREHOLDERS’ EQUITY AND LIABILITIES (in millions of reals) Reference Opening balance sheet (Net Book Value) Fair Value adjustments Preliminary opening balance sheet (Fair Value) Price reduction and others adjustments Final opening balance sheet (Fair Value) Total shareholders' equity 8,859 (1,394) 7,465 (778) 6,687 Lease commitments - portion more than one year (b) 2,598 (292) 2,306 2,306 Provisions (d) 2,528 8,058 10,586 27 10,613 Deferred tax liabilities (g) 150 61 211 6 217 Non-current liabilities 5,276 7,827 13,103 33 13,136 Borrowings - portion less than one year (l) 982 982 982 Lease commitments - portion less than one year (b) 196 (124) 72 72 Suppliers and other creditors (k) 2,617 139 2,756 2,756 Tax payables - portion less than one year (l) 96 96 96 Other current payables (k) 667 667 667 Current liabilities 4,558 15 4,573 4,573 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 18,694 6,450 25,144 (745) 24,399 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 39 - Final opening balance sheet (in millions of euros) 795 104 1,955 482 116 392 3,843 549 138 15 101 36 62 64 966 4,810 Final opening balance sheet (in millions of euros) 1,318 454 2,092 43 2,589 194 14 543 19 131 901 4,810 Notes to the condensed consolidated financial statements The purchase price allocation process stipulated in IFRS 3 – Business Combinations was implemented and led to the recognition of final goodwill (a) in the amount of 795 million euros in the consolidated half-year financial statements as of June 30, 2023. Grupo BIG’s final opening balance sheet has been prepared based on the following: (b) estimated right-of-use assets and related lease commitments of the stores leased by Grupo BIG, taking into account the reasonably certain term of the leases in application of the rules defined by the Group (see Note 8 to the 2022 consolidated financial statements); (c) fair value measurement (determined on the basis of the market value of similar assets) of land and store premises owned by the company; (d) significant increase in provisions following analyses of litigation and contingent liabilities (recognised in accordance with IFRS 3) by the Brazilian subsidiary and its advisors in 2022. The increase provides, in particular, for tax and labour risks (see Note 11 to the 2022 consolidated financial statements); (e) recognition and measurement of acquired brands (Maxxi, Big, Bompreço, Nacional and TodoDia) and their indefinite useful lives; (f) continued recognition of other non-current financial assets at their net carrying amount, mainly relating to legal deposits paid in connection with disputes; (g) impairment of all deferred tax assets (before deferred tax effects relating to fair value adjustments to assets and liabilities) of legal entities within Grupo BIG due to the lack of taxable profits in recent years; (h) partial impairment of other non-current assets, consisting mainly of ICMS and PIS-COFINS tax credits, following an analysis of the possible future use and validity of the credits; (i) classification as assets held for sale of the 14 stores to be disposed of in accordance with CADE’s decision. These stores were sold in 2022 and first-half 2023; (j) standardised accounting practices for inventories in order to incorporate all components of the purchase cost of goods sold and to take into account the rebates and commercial income negotiated with suppliers in accordance with the rules defined by the Group (see Note 6.4 to the 2022 consolidated financial statements). A portion of the value of inventories has also been written down in order to reflect their fair value; (k) standardised accounting practices for other current assets/liabilities and suppliers and other creditors; (l) continued recognition of other assets and liabilities at their net carrying amount (including trade receivables, other current financial assets, cash and cash equivalents and borrowings, tax receivables and payables). Ongoing acquisition of Cora (Romania) – Business combination In April 2023, Carrefour entered into an agreement with the Louis Delhaize group to acquire its activities in Romania, including 10 Cora hypermarkets and eight Cora Urban stores, with almost 2,400 employees. This transaction will consolidate Carrefour’s presence in Romania, with hypermarkets in prime locations that will be converted to the Carrefour formats and banner. Closing of the transaction is subject to the customary conditions, in particular clearance by the relevant competition authorities. The transaction is expected to be completed by the end of 2023. Creation of Unlimitail in partnership with Publicis Groupe On November 8, 2022, the Carrefour group and Publicis Groupe announced their intention to create a joint entity in the fast-growing retail media market in continental Europe and Latin America. On June 15, 2023, this intention became a reality with the announcement of the launch of Unlimitail (51% owned by Carrefour and 49% by Publicis). The company has been fully consolidated in the Carrefour group’s financial statements since that date. Unlimitail will partner with retailers and brands, bringing retail expertise and connectivity to these regions. Unlimitail combines one of Publicis’ most advanced technologies, “CitrusAd powered by Epsilon”, with Carrefour Links’ in-depth knowledge of retail media. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 40 - Notes to the condensed consolidated financial statements Sale and leaseback transaction (Brazil) On May 12, 2023, Carrefour Brazil announced that it had entered into exclusive negotiations with Barzel, a real estate investment and asset management company, with a view to the sale and leaseback of five stores and four warehouses, for a total of approximately 1.2 billion Brazilian reals i.e., approximately 220 million euros. CADE, the Brazilian competition authority, approved the transaction on June 12, 2023. With negotiations on the agreements finalised and the other conditions precedent satisfied, these assets have been leased to Carrefour since June 30, 2023 (date of the transaction’s completion and the signing of the leases for fixed 20-year terms, with a five-year renewal option). This transaction led to the recognition of around 10 million euros in non-recurring income. 3.2 Simplification of the organisation as part of the transformation plan On November 8, 2022, the Group presented its new strategic plan, Carrefour 2026, to accelerate its transformation, following on from its previous strategic plan. The plan draws on the Group’s raison d’être, its commitment to the food transition for all, and its digital-driven omni-channel model. The Carrefour 2026 plan has two pillars: Commitment to making the best available to all our customers,  Building a cutting-edge Group. This second pillar involves transforming our organisational structure in order to optimise our internal operations by leveraging digitalisation. In early June 2023, Carrefour France initiated a dialogue process with its employee representatives concerning a transformation project for its various French headquarters, with the aim of safeguarding competitiveness over the long term, and boosting performance and agility and simplifying the organisation, which will benefit our stores. The proposed new organisational structure was presented to the employee representatives on June 26, 2023. At that time, Carrefour confirmed that the voluntary redundancy plan currently under discussion with the employee representatives will involve a maximum of 979 departures, on a strictly voluntary basis. Following four negotiation sessions, the agreement on the collective voluntary redundancy plan was signed on July 12, 2023 by the trade unions representing a large majority of the employees concerned. The amount of the related provision recognised in the consolidated financial statements for the six-month period ended June 30, 2023 was calculated based on various assumptions and represents the best estimate of the costs that the Group expects to incur in relation to the restructuring plan currently being implemented (see Notes 6.3 and 11.5). 3.3 Securing the Group’s long-term financing On May 2, 2023, the Group carried out a new Sustainability-Linked Bond issue indexed to its two goals related to greenhouse gas emissions, for a total of 500 million euros, maturing in 7.5 years (due in October 2030) and paying a coupon of 3.75%. This bond issue is part of a financing strategy aligned with the Group’s CSR objectives and ambitions as well as the Sustainability-Linked Bond Framework of its Euro Medium-Term Notes (EMTN) programme published in June 2021, whose CSR component was revised and enhanced in May 2022. On June 12, 2023, the Group redeemed 500 million euros worth of 0.88% 5-year bonds. On June 14, 2023, the Group redeemed 500 million US dollars worth of convertible, non-dilutive 0% 6-year bonds. These transactions guarantee the Group’s liquidity over the short and medium term in an unstable economic environment, and are part of the strategy to ensure the necessary financing is in place to meet Carrefour’s needs. The average maturity of Carrefour SA’s bond debt was 3.8 years at end-June 2023, compared with 3.6 years at end-December 2022 and 3.8 years at end-June 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 41 - Notes to the condensed consolidated financial statements Financing of the Brazilian subsidiary Atacadão Following on from the 2021 and 2022 transactions, Carrefour’s Brazilian subsidiary Atacadão has set up financing arrangements in 2023 enabling it to secure its medium- and long-term needs. US dollar bank financing facilities were finalised on January 10, 2023 and immediately swapped for a total of 2,293 million Brazilian reals (approximately 436 million euros at the June 30, 2023 exchange rate) with an 11-month maturity. On April 14, 2023, new euro and US dollar bank financing facilities were put in place, immediately swapped for a total of 744 million Brazilian reals, which enabled a bank loan maturing on the same date to be repaid. The repaid loan amounted to 750 million Brazilian reals. On April 27, 2023, Atacadão redeemed debenture-type debt representing 500 million Brazilian reals (approximately 95 million euros at the June 30, 2023 exchange rate) maturing in 5 years and paying a coupon of 105.75% of the CDI (Certificado de Depósito Interbancário) rate. Two bank loans covered by Brazil’s law 4131/1962 matured in May 2023: one of 793 million Brazilian reals on May 5 and one of 568 million Brazilian reals on May 8 (approximately 259 million euros at the June 30, 2023 exchange rate). In June 2023, two other bank loans were repaid, one on June 5 for an amount of 1,014 million Brazilian reals and one on June 7 for an amount of 568 million Brazilian reals (approximately 300 million euros at the June 30, 2023 exchange rate). In addition, on June 2, 2023, the Brazilian subsidiary issued simple unsecured, non-convertible debentures (Certificado de recebíveis do agronegócio – CRA) for an amount of 930 million Brazilian reals (approximately 177 million euros at the June 30, 2023 exchange rate) in three series: an initial series for 330 million Brazilian reals, with a coupon of CDI +0.95% and a maturity of 3 years; a second series for 468 million Brazilian reals, with a coupon of 111.20% of the CDI (after hedging) and a maturity of 4 years; a third series for 132 million Brazilian reals, with a coupon of CDI +1.00% and a maturity of 5 years. As a reminder, in 2022, two inter-company financing lines were set up between the companies Carrefour Finance and Atacadão: The first revolving credit facility (RCF) for an amount of 4 billion Brazilian reals bearing annual interest at 12% falls due in July 2023; The second RCF for 1.9 billion Brazilian reals, bearing annual interest at 14.25% has a maturity of 3 years. In first-half 2023, another inter-company financing line was set up between the companies Carrefour Finance and Atacadão: The third RCF for 6.3 billion Brazilian reals (approximately 1.2 billion euros at the June 30, 2023 exchange rate), bearing annual interest at 14.95%, has a 3-year maturity and has been drawn for 2.3 billion Brazilian reals. The remaining 4 billion Brazilian reals will be drawn down in July 2023 to refinance the first RCF, which will have reached maturity. These intra-group RCF loans, totalling 8.2 billion Brazilian reals at June 30, 2023, are qualified as net investments in foreign operations and are therefore remeasured at fair value through equity. They are hedged in an amount of 4.1 billion Brazilian reals by derivatives classified as net investment hedges. At June 30, 2023, the Group was rated BBB with a stable outlook by Standard & Poor’s and Baa1 with a stable outlook by Moody’s. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 42 - Notes to the condensed consolidated financial statements 3.4 Payment of the 2022 dividend in cash At the Shareholders’ Meeting held on May 26, 2023, the shareholders decided to set the 2022 dividend at 0.56 euro per share to be paid entirely in cash. On June 8, 2023, the dividend was paid out in an amount of 405 million euros. 3.5 Share buyback programmes As part of its share capital allocation policy, the Group commissioned investment services providers to buy back shares corresponding to a maximum amount of 800 million euros for 2023, as authorised by the Shareholders’ Meetings of June 3, 2022 and May 26, 2023. The objective of the share buybacks is to allow the Group to hold the shares with a view to cancelling them subsequently. The first share buyback mandate began on February 27, 2023 and ended on March 31, 2023, with 11,099,084 shares acquired at an average price of 18.02 euros per share for a total amount of 200 million euros. A second share buyback mandate began on May 2, 2023 and was ongoing at June 30, 2023, with 7,918,989 shares acquired at an average price of 17.07 euros per share for a total amount of 135 million euros at that date. At the date the related buyback mandate was signed, a short-term financial liability of 200 million euros was recognised (in “Other current payables”), with a corresponding reduction in equity. At June 30, 2023, this liability was reduced to 65 million euros to take into account the actual amount of the share acquisitions carried out during the first half of the year. At that date, Carrefour held 28,510,134 shares in treasury (i.e. 3.8% of the share capital made up of 746,871,196 shares), with an average unit price of 17.64 euros per share for the 19,018,073 shares acquired. The second share buyback mandate ended on July 21, 2023, with 3,768,591 additional shares acquired at an average price of 17.19 euros per share. At the end of the second share buyback mandate, the number of shares making up the share capital amounted to 746,871,196 and the number of shares held in treasury was 32,278,725 representing approximately 4.3% of the share capital. In addition, pursuant to the authorisation granted by the Extraordinary Shareholders’ Meeting of May 26, 2023, the Board of Directors decided on July 26, 2023, to reduce the share capital of Carrefour SA by cancelling 26,887,362 treasury shares representing approximately 3.6% of the share capital. The cancellation is expected to occur on or about July 28, 2023. Following cancellation of the shares, Carrefour SA will have 719,983,834 shares outstanding and, consequently, 5,391,363 shares in treasury, representing approximately 0.7% of the share capital. 3.6 Employee share ownership programme On March 1, 2023, the Group launched Carrefour Invest, an international employee share ownership plan. Two options were offered: Carrefour Classic and Carrefour Secure. The reservation period ran from March 1 to March 20, 2023 and the subscription/revocation period from May 5 to May 9, 2023, with the shares delivered on May 31, 2023. As part of the offer, beneficiaries subscribed to Carrefour shares either directly or through a company mutual fund (FCPE), depending on the option chosen and/or their country of residence. Shareholders must hold directly-subscribed shares or FCPE units until May 31, 2028 (inclusive), unless an early release event occurs. The offer entitled employees to a 15% discount on the share price and a matching employer contribution. The reference price communicated on May 3, 2023 was 18.67 euros (average of the closing prices over the previous 20 days). After application of the 15% discount, the subscription price of the shares for both options stood at 15.87 euros per share. The operation resulted in a capital increase of 75 million euros (4,713,735 new ordinary shares) for Carrefour SA and the recognition of an operating expense of approximately 30 million euros in respect of the discount and the company contribution. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 43 - Notes to the condensed consolidated financial statements NOTE 4: RESTATEMENT OF THE 2022 CONSOLIDATED HALF-YEAR AND FULL-YEAR FINANCIAL STATEMENTS 4.1 Classification of Carrefour Taiwan in discontinued operations in accordance with IFRS 5 On July 19, 2022, the Group signed an agreement to sell its entire interest in its Taiwanese subsidiary (i.e., 60%) to the Uni-President group (holder of the remaining 40%). As Carrefour Taiwan represents a separate major geographic area of operations, it has been treated as a discontinued operation in accordance with IFRS 5, from the date its disposal was announced (see Notes 2 and 4 to the 2022 consolidated financial statements). Therefore the assets and liabilities recognised by the subsidiary were reclassified as assets held for sale and related liabilities in the consolidated statement of financial position at December 31, 2022 (see Note 4.3 to these consolidated financial statements). The Group lost control of Carrefour Taiwan on June 30, 2023, following the approval of the Taiwanese competition authority (TFTC) and the satisfaction of other customary conditions. In addition, the net income and cash flows of Carrefour Taiwan were reclassified within line items for discontinued operations in the consolidated income statement and consolidated cash flow statement for first-half 2022. The reclassifications are presented in Notes 4.1.1 and 4.1.2 below. Key consolidated income statement aggregates for Carrefour Taiwan for first-half 2023 and 2022 are as follows: (in millions of euros) First-half 2023 First-half 2022 Recurring operating income 37 40 Operating income 39 37 Income before taxes 37 32 Income tax expense (6) (9) Net income/(loss) for the period 31 24 Capital expenditure 2 5 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 44 - Notes to the condensed consolidated financial statements 4.1.1 Impact on the first-half 2022 consolidated income statement of the IFRS 5 restatement applied to Carrefour Taiwan (in millions of euros) First-half 2022 published IFRS 5 Restatement First-half 2022 IFRS 5 restated Net sales 39,054 (1,263) 37,790 Loyalty program costs (428) 29 (400) Net sales net of loyalty program costs 38,625 (1,235) 37,391 Other revenue 1,215 (47) 1,168 Total revenue 39,840 (1,282) 38,558 Cost of sales (32,016) 962 (31,055) Gross margin from recurring operations 7,824 (320) 7,504 Sales, general and administrative expenses, depreciation and amortisation (7,010) 280 (6,729) Recurring operating income 814 (40) 775 Net income/(loss) from equity-accounted companies 12 − 12 Recurring operating income after net income from equity-accounted companies 826 (40) 786 Non-recurring income and expenses, net (85) 3 (82) Operating income 741 (37) 704 Finance costs and other financial income and expenses, net (186) 4 (181) Finance costs, net (151) (0) (151) Net interests related to leases (72) 4 (68) Other financial income and expenses, net 37 0 38 Income before taxes 555 (32) 522 Income tax expense (202) 9 (193) Net income/(loss) from continuing operations 353 (24) 329 Net income/(loss) from discontinued operations 5 24 29 Net income/(loss) for the period 358 358 Group share 255 255 of which net income/(loss) from continuing operations - Group share 250 (11) 239 of which net income/(loss) from discontinued operations - Group share 5 11 16 Attributable to non-controlling interests 103 103 of which net income/(loss) from continuing operations - attributable to non- controlling interests 103 (13) 90 of which net income/(loss) from discontinued operations - attributable to non- controlling interests − 13 13 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 45 - Notes to the condensed consolidated financial statements 4.1.2 Impact on the first-half 2022 consolidated cash flow statement of the IFRS 5 restatement applied to Carrefour Taiwan (in millions of euros) First-half 2022 published IFRS 5 Restatement First-half 2022 IFRS 5 restated Income before taxes 555 (32) 522 OPERATING ACTIVITIES Income tax paid (205) 7 (198) Depreciation and amortisation expense 1,173 (86) 1,087 Gains and losses on sales of assets and other (26) (5) (31) Change in provisions and impairment (115) 4 (111) Finance costs, net 151 0 151 Net interests related to leases 72 (4) 68 Share of profit and dividends received from equity-accounted companies 45 45 Impact of discontinued operations (4) 116 111 Cash flow from operations 1,645 − 1,645 Change in working capital requirement (2,115) 49 (2,067) Impact of discontinued operations Net cash (used in)/from operating activities (excluding financial services companies) (470) (49) − (49) (470) Change in consumer credit granted by the financial services companies 54 − 54 Net cash (used in)/from operating activities - total (416) − (416) INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets (562) 5 (556) Acquisitions of non-current financial assets (20) − (20) Acquisitions of subsidiaries and investments in associates (911) − (911) Proceeds from the disposal of subsidiaries and investments in associates 21 − 21 Proceeds from the disposal of property and equipment and intangible assets 69 (0) 69 Proceeds from the disposal of non-current financial assets 4 − 4 Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets (273) 11 (262) Investments net of disposals - subtotal (1,672) 16 (1,656) Other cash flows from investing activities 94 (1) 93 Impact of discontinued operations (15) (15) Net cash (used in)/from investing activities - total (1,579) − (1,579) FINANCING ACTIVITIES Carrefour SA capital increase / (decrease) (657) − (657) Proceeds from share issues to non-controlling interests 2 − 2 Dividends paid by Carrefour SA (380) − (380) Dividends paid to non-controlling interests (44) − (44) Change in treasury stock and other equity instruments (96) − (96) Change in current financial assets (1) (0) (1) Issuance of bonds 1,500 − 1,500 Repayments of bonds (1,082) − (1,082) Net financial interests paid (99) (0) (100) Other changes in borrowings 2,056 − 2,056 Payments related to leases (principal) (500) 50 (449) Net interests paid related to leases (70) 4 (66) Impact of discontinued operations (54) (54) Net cash (used in)/from financing activities - total 629 − 629 Net change in cash and cash equivalents before the effect of changes in exchange rates Effect of changes in exchange rates (1,366) 201 − − (1,366) 201 NET CHANGE IN CASH AND CASH EQUIVALENTS (1,165) − (1,165) Cash and cash equivalents at beginning of the period 3,703 − 3,703 Cash and cash equivalents at end of the period 2,539 − 2,539 of which cash and cash equivalents at end of period from continuing operations 2,539 (208) 2,331 of which cash and cash equivalents at end of period from discontinued operations − 208 208 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 46 - Notes to the condensed consolidated financial statements 4.2 Restatement financial position at December 31, 2022 to reflect the reduction in the acquisition price of Grupo BIG in Brazil of the consolidated statement of On March 31, 2023, an agreement was signed with the sellers of Grupo BIG, leading to a firm reduction in its price for a minimum of 900 million Brazilian reals (see Note 3.1 for further details). In accordance with IFRS 3 – Business Combinations, the price reduction occurring within 12 months of the acquisition’s closing is recognised retrospectively in Grupo BIG’s opening balance sheet with an offsetting adjustment to goodwill. The consolidated statement of financial position at December 31, 2022 has therefore been restated for this price reduction (on the line “Other non-current financial assets” for its long-term portion and on the line “Other current financial assets” for its short-term portion), as well as for other minor adjustments. ASSETS (in millions of euros) December 31, 2022 published IFRS 3 restatement December 31, 2022 IFRS 3 restated Goodwill 8,778 (134) 8,644 Other intangible assets 1,499 1,499 Property and equipment 12,612 12,612 Investment property 279 279 Right-of-use assets 4,190 4,190 Investments in companies accounted for by the equity method 1,197 1,197 Other non-current financial assets 1,162 88 1,251 Consumer credit granted by the financial services companies – portion more than one year 1,867 1,867 Deferred tax assets 475 475 Other non-current assets 609 609 Non-current assets 32,667 (45) 32,622 Inventories 6,893 6,893 Trade receivables Consumer credit granted by the financial services companies – portion less than one year Other current financial assets 3,330 4,111 720 51 3,330 4,111 771 Tax receivables 948 948 Other current assets 1,025 1,025 Cash and cash equivalents 5,216 5,216 Assets held for sale 1,641 1,641 Current assets 23,884 51 23,935 TOTAL ASSETS 56,551 6 56,558 SHAREHOLDERS’ EQUITY AND LIABILITIES (in millions of euros) December 31, 2022 published IFRS 3 restatement December 31, 2022 IFRS 3 restated Share capital 1,855 1,855 Consolidated reserves (including net income) 9,289 9,289 Shareholders’ equity, Group share 11,144 11,144 Shareholders’ equity attributable to non-controlling interests 2,042 2,042 Total shareholders' equity 13,186 13,186 Borrowings - portion more than one year 6,912 6,912 Lease commitments - portion more than one year 3,574 3,574 Provisions 3,974 5 3,979 Consumer credit financing – portion more than one year 1,550 1,550 Deferred tax liabilities 364 1 365 Tax payables - portion more than one year 85 85 Non-current liabilities 16,458 6 16,464 Borrowings - portion less than one year 2,646 2,646 Lease commitments - portion less than one year 955 955 Suppliers and other creditors 14,393 14,393 Consumer credit financing – portion less than one year 3,592 3,592 Tax payables - portion less than one year 1,182 1,182 Other current payables 2,943 2,943 Liabilities related to assets held for sale 1,196 1,196 Current liabilities 26,907 26,907 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 56,551 6 56,558 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 47 - Notes to the condensed consolidated financial statements NOTE 5: SEGMENT INFORMATION 5.1 Segment results First-half 2023 (in millions of euros) Group total France Europe Latin America Global Functions Net sales 40,743 18,694 11,301 10,748 − Other revenue 1,287 390 300 561 36 Recurring operating income before depreciation and amortisation 1,852 780 590 517 (35) Recurring operating income 700 270 164 304 (38) Capital expenditure 687 289 107 289 2 Depreciation and amortisation expense ² (1,152) (511) (426) (214) (2) First-half 2022 IFRS 5 restated (in millions of euros) Group total France Europe Latin America Global Functions Net sales 37,790 17,910 10,636 9,244 − Other revenue 1,168 383 278 474 33 Recurring operating income before depreciation and amortisation 1,862 703 585 596 (23) Recurring operating income 775 194 163 444 (26) Capital expenditure ¹ 556 217 143 193 3 Depreciation and amortisation expense ² (1,087) (509) (423) (153) (3) (1) At June 30, 2022, investments in property and equipment and intangible assets included the acquisition of the 29th and final Makro Atacadista store on a full ownership basis for 5 million euros. (2) Including the depreciation and amortisation relating to logistics equipment included in the cost of sales. Latin America’s segment earnings reflect Grupo BIG’s contribution over six months for first-half 2023, versus one month for first-half 2022 (acquisition of Grupo BIG effective June 1, 2022, see Note 3.1). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 48 - Notes to the condensed consolidated financial statements 5.2 Segment assets and liabilities June 30, 2023 (in millions of euros) Group total France Europe Latin America Global Functions ASSETS Goodwill 8,720 5,187 2,386 1,146 1 Other intangible assets 1,523 631 590 294 8 Property and equipment 12,603 4,493 2,667 5,442 2 Investment property 292 10 115 168 − Right-of-use assets 4,190 1,401 1,856 931 1 Other segment assets 19,513 8,289 3,557 7,286 381 Total segment assets 46,842 20,012 11,169 15,267 393 Unallocated assets 7,304 TOTAL ASSETS 54,146 LIABILITIES (excluding equity) Segment liabilities 26,723 11,656 7,443 7,272 352 Unallocated liabilities 14,147 TOTAL LIABILITIES 40,870 December 31, 2022 IFRS 3 restated (in millions of euros) Group total France Europe Latin America Global Functions ASSETS Goodwill 8,644 5,184 2,374 1,085 1 Other intangible assets 1,499 625 596 271 7 Property and equipment 12,612 4,570 2,733 5,307 2 Investment property 279 10 114 154 − Right-of-use assets 4,190 1,491 1,854 843 3 Other segment assets 18,783 7,990 3,348 6,927 519 Total segment assets 46,007 19,870 11,018 14,587 532 Unallocated assets 10,551 TOTAL ASSETS 56,558 LIABILITIES (excluding equity) Segment liabilities 28,190 11,995 7,719 8,123 352 Unallocated liabilities 15,182 TOTAL LIABILITIES 43,371 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 49 - Notes to the condensed consolidated financial statements NOTE 6: OPERATING ITEMS Operating items for first-half 2023 reflect Grupo BIG’s contribution in Brazil over six months, compared with one month in first-half 2022 (see Note 3.1). 6.1 Revenue 6.1.1 Net sales (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change Net sales 40,743 37,790 7.8% At constant exchange rates, first-half 2023 net sales amounted to 42,481 million euros versus 37,790 million euros in first-half 2022 as restated for IFRS 5, representing an increase of 12.4%. Changes in exchange rates reduced net sales by 1.7 billion euros in first-half 2023, almost exclusively attributable to the Latin America region (Argentina). Restated for IAS 29 in Argentina, consolidated net sales for first-half 2023 increased by 11.8% at constant exchange rates. Net sales by country (1) (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated France 18,694 17,910 Europe (excluding France) 11,301 10,636 Spain 5,125 4,815 Belgium 2,073 1,884 Italy 1,938 1,907 Romania 1,176 1,058 Poland 989 973 Latin America 10,748 9,244 Brazil 9,190 7,824 Argentina 1,558 1,421 TOTAL NET SALES 40,743 37,790 (1) Substantially all revenue is recognised on a specific date. Revenue recognised over time is not material at Group level. 6.1.2 Other revenue (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change Financing fees and commissions ¹ 700 661 6.0% Franchise and lease management fees 205 193 6.1% Rental revenue 90 79 14.6% Revenue from sub-leases 10 12 (20.6)% Property development revenue ² 14 2 674.8% Other revenue ³ 269 221 21.4% TOTAL OTHER REVENUE 1,287 1,168 10.2% (1) Including net banking revenue and net insurance revenue generated by the Group’s financial services and insurance companies. (2) Corresponding to the sale price of properties developed by the Group for resale. Taking into account development costs recorded in “Cost of sales”, the property development margin was 6 million euros for first-half 2023 versus 2 million euros for first-half 2022. (3) Other revenue notably includes sales commissions, commissions received from suppliers, revenue from ticket/travel agency sales and in-store advertising fees. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 50 - Notes to the condensed consolidated financial statements Financing fees and commissions recognised in first-half 2023 built on the sharp increase that began in 2022, lifted in particular by strong business momentum in Brazil. Similarly, revenue from rentals as well as retail services, including ticketing and travel and in-store advertising, continued to grow in first-half 2023. Lastly, franchise and lease management fees continued to increase in France. 6.2 Sales, general and administrative expenses, depreciation and amortisation (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change Sales, general and administrative expenses (6,356) (5,769) 10.2% Depreciation of property and equipment and of investment property, and amortisation of intangible assets (657) (616) 6.6% Depreciation of right-of-use asset - property and equipment and investment property (362) (344) 5.1% TOTAL SG&A EXPENSES AND DEPRECIATION AND AMORTISATION (7,374) (6,729) 9.6% Sales, general and administrative expenses Sales, general and administrative expenses break down as follows: (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change Employee benefits expense (3,736) (3,523) 6.0% Energy and electricity (463) (357) 29.8% Fees (455) (364) 25.0% Maintenance and repair costs (389) (355) 9.4% Taxes other than on income (389) (357) 8.9% Advertising expense (332) (307) 7.9% Property rentals (excluding IFRS 16) (38) (34) 10.3% Other SG&A expenses (555) (470) 17.9% TOTAL SG&A EXPENSES (6,356) (5,769) 10.2% The increase in sales, general and administrative expenses reflects in particular the significant rise in energy costs and price inflation on certain purchased services. Depreciation and amortisation Including supply chain depreciation and amortisation recognised in cost of sales, total depreciation and amortisation expense recognised in the consolidated income statement amounted to 1,152 million euros in first-half 2023 (versus 1,087 million euros in first-half 2022 as restated for IFRS 5), as follows: (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated % change Property and equipment (521) (486) 7.3% Intangible assets (130) (125) 3.7% Investment property (6) (5) 11.3% Depreciation of property and equipment and of investment property, and amortisation of intangible assets (657) (616) 6.6% Depreciation of right-of-use asset - property and equipment and investment property (362) (344) 5.1% Depreciation and amortisation of supply chain (32) (30) 9.5% Depreciation of right-of-use asset - supply chain (102) (97) 4.6% TOTAL DEPRECIATION AND AMORTISATION (1,152) (1,087) 6.0% Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 51 - Notes to the condensed consolidated financial statements 6.3 Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as impairment charges of non-current assets, gains and losses on disposals of non-current assets, restructuring costs and provision charges and income recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group’s attention during the period. Non-recurring items represented a net expense of 186 million euros in first-half 2023, and the detailed breakdown is as follows: (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated Gains and losses on disposals of assets 42 62 Restructuring costs (257) (16) Other non-recurring income and expenses 85 (87) Non-recurring income and expenses, net before asset impairments and write-offs (130) (42) Asset impairments and write-offs (56) (41) of which impairments and write-offs of goodwill − − of which impairments and write-offs of property and equipment, intangible assets and others (56) (41) NON-RECURRING INCOME AND EXPENSES, NET (186) (82) of which: Non-recurring income Non-recurring expense 276 (461) 133 (215) Gains and losses on disposals of assets Gains and losses on disposals of non-current assets comprise gains and losses arising on various asset disposals (store premises, land and businesses), notably to franchisees in France. The first-half 2023 figure also includes the gain on the sale and leaseback of five stores and four warehouses in Brazil (see Note 3.1). Restructuring costs Restructuring costs recognised in first-half 2023 relate to the new “Carrefour 2026” strategic plan (see Note 3.2). This plan is based on a project to transform the Group’s various headquarters with a view to safeguarding its competitiveness over the long term, and boosting performance and agility, and simplifying its organisation, which will benefit its stores. The expense included in non-recurring items relates primarily to severance paid or payable within the scope of the voluntary redundancy plan put in place at headquarters in France, involving a maximum of 979 jobs, and, secondarily, to the measures implemented in stores and headquarters in Italy, Spain and Brazil. Other non-recurring income and expenses Other non-recurring income and expenses in the first half of 2023 mainly included reversals of provisions for tax risks relating to PIS-COFINS tax credits in Brazil following the expiry of statutory limitation periods or favourable judgements, offset slightly by costs relating to store closures in Brazil. Asset impairments and write-offs Asset impairments and write-offs recorded in first-half 2023 related to stores in France, Belgium and Brazil. They also included the impact of the retirement of IT equipment in France and Belgium, and the alignment of the net carrying amount of Showroomprivé shares with the stock market share price at June 30, 2023. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 52 - Notes to the condensed consolidated financial statements Main non-recurring items in first-half 2022 (restated for IFRS 5) Gains and losses on disposals of non-current assets comprised gains and losses arising on various disposals of store premises and businesses to franchisees, notably in France and Italy. Other non-recurring income and expenses recorded in first-half 2022 as restated for IFRS 5 mainly included revised estimates of historical risks, mostly tax-related, as well as the costs related to the acquisition of Grupo BIG in Brazil. Asset impairments and write-offs recorded in first-half 2022 (as restated for IFRS 5) related to certain stores, particularly in France and Argentina. They also included the impact of the retirement of various assets, in particular relating to IT equipment in France, and the alignment of the net carrying amount of Showroomprivé shares with the stock market share price at June 30, 2022. 6.4 Change in working capital requirement The change in working capital requirement reported in the consolidated statement of cash flows under “Net cash (used in)/from operating activities” breaks down as follows: (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated Change Change in inventories (114) (650) 537 Change in trade receivables (115) (427) 312 Change in trade payables (1,422) (824) (599) Change in loyalty program liabilities (2) 24 (27) Change in trade working capital requirement (1,654) (1,877) 223 Change in other receivables and payables (272) (190) (82) CHANGE IN WORKING CAPITAL REQUIREMENT (1,926) (2,067) 141 These items, like all other items in the statement of cash flows, are translated at the average rate for the period. 6.5 Banking and insurance businesses 6.5.1 Consumer credit granted by the financial services companies At June 30, 2023, consumer credit granted by the financial services companies totalled 6,328 million euros (compared with 5,978 million euros at December 31, 2022), as follows: (in millions of euros) June 30, 2023 December 31, 2022 Payment card receivables 6,110 5,583 Loans 1,559 1,448 Consumer credit (linked to in-store purchases) 44 59 Other financing ¹ 215 245 Impairment (1,600) (1,356) TOTAL CONSUMER CREDIT GRANTED BY THE FINANCIAL SERVICES COMPANIES 6,328 5,978 Portion due in less than one year 4,358 4,111 Portion due in more than one year 1,970 1,867 (1) Other financing corresponds mainly to restructured loans and credit facilities. Consumer credit granted by the financial services companies corresponds to customer receivables (credit card debt, personal loans, etc.). The gross value of consumer credit increased by approximately 600 million euros compared with December 31, 2022. This reflects strong momentum in the consumer credit business in Brazil, driven Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 53 - Notes to the condensed consolidated financial statements in part by the acquisition of Grupo BIG customers who now use payment solutions from our Brazilian bank (Banco CSF) – an impact that was reinforced by the appreciation of the Brazilian real over the period – and, to a lesser extent, the upturn in France, particularly in digital channels. Gross consumer credit in Spain remained relatively stable, before the impact of sales of category 3 credit over the period. At June 30, 2023, 70% of the gross value of consumer credit granted by the financial services companies was classified in category 1, 9% in category 2 and 21% in category 3. At December 31, 2022, categories 1, 2 and 3 represented 72%, 9% and 19%, respectively, of the gross value of consumer credit granted by the financial services companies. As a result, the average impairment rate for consumer credit increased by approximately 1.7% compared with December 31, 2022, reflecting expected credit losses in Spain and Brazil. 6.5.2 Consumer credit financing The related consumer credit financing amounted to 5,469 million euros at June 30, 2023 (December 31, 2022: 5,142 million euros), and was provided by the following sources of financing: (in millions of euros) June 30, 2023 December 31, 2022 Bonds and notes ¹ 918 824 Debt securities (Neu CP and Neu MTN) ² 1,707 1,553 Bank borrowings ³ 572 572 Customer passbook savings deposits 248 279 Securitisation ⁴ 291 297 Other refinancing debt to financial institutions 1,683 1,577 Other 50 41 TOTAL CONSUMER CREDIT FINANCING 5,469 5,142 Portion due in less than one year 3,791 3,592 Portion due in more than one year 1,678 1,550 (1) In May 2023, Carrefour Banque issued a new 500 million euro bond with a fixed rate swapped for the 3-month Euribor (4 years maturing in May 2027, 3-month Euribor coupon +95 basis points) and, in June 2023, redeemed ahead of term the 400 million euro floating-rate bond issued in September 2019 (4 years maturing in September 2023, 3-month Euribor coupon +65 basis points). (2) Debt securities mainly comprised Negotiable EUropean Commercial Paper (NEU CP) and Negotiable EUropean Medium-Term Notes (NEU MTN) issued by Carrefour Banque. (3) This item mainly includes the 324 million euro refinancing operation with the European Central Bank (maturity March 2024) and drawdowns of credit lines. (4) This item corresponds to the “Master Credit Cards Pass” reloadable securitisation programme with compartments launched by Carrefour Banque in November 2013 for an initial asset pool of 560 million euros. Proceeds from the securitisation amounted to 400 million euros. This vehicle was maintained at June 30, 2023 with a balance of 291 million euros. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 54 - Notes to the condensed consolidated financial statements NOTE 7: INTANGIBLE ASSETS, PROPERTY AND EQUIPMENT, INVESTMENT PROPERTY 7.1 Goodwill and other intangible assets Goodwill, which constitutes the main intangible asset, is reported separately from other intangible assets in the statement of financial position. (in millions of euros) June 30, 2023 December 31, 2022 IFRS 3 restated Goodwill 8,720 8,644 Other intangible assets 1,523 1,499 TOTAL INTANGIBLE ASSETS 10,243 10,143 The carrying amount of goodwill is monitored at the level of the operating segments corresponding to the countries in which the Group conducts its business through its integrated store networks. The net carrying amount of goodwill can be broken down as follows: (in millions of euros) June 30, 2023 December 31, 2022 IFRS 3 restated France 5,187 5,184 Brazil 1,143 1,080 Spain 1,031 1,031 Belgium 950 950 Poland 237 225 Romania 99 99 Italy 69 69 Argentina 3 5 Global Functions 1 1 TOTAL 8,720 8,644 The 76 million euro increase in goodwill in first-half 2023 chiefly reflects a 63 million euro positive translation adjustment resulting from the increase in the value of the Brazilian real compared with December 31, 2022. Impairment tests at June 30, 2023 In accordance with IAS 36 – Impairment of Assets, goodwill recognised on business combinations is not amortised but is tested for impairment every year, or more frequently if there is an indication that its carrying amount may not be recovered. At each interim closing, as prescribed by IAS 36, the Group determines whether there are any indications of impairment and, if this is the case, performs additional impairment tests. The main impairment indicators used by the Group are as follows: internal impairment indicator: a material deterioration in the ratio of recurring operating income before depreciation and amortisation to net revenues excluding petrol between the budget and the most recent forecasts. external impairment indicators: a material increase in the discount rate and/or a severe downgrade in the IMF’s GDP growth forecast. The tests performed by the Group at June 30, 2023 did not lead to the recognition of any goodwill impairment losses. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 55 - Notes to the condensed consolidated financial statements 7.2 Property and equipment June 30, 2023 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land 3,472 − (66) 3,405 Buildings 11,820 (6,062) (175) 5,583 Equipment, fixtures and fittings 14,830 (11,705) (292) 2,833 Other fixed assets 999 (783) (3) 213 Assets under construction 569 − − 569 TOTAL PROPERTY AND EQUIPMENT 31,689 (18,550) (536) 12,603 December 31, 2022 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land 3,405 − (68) 3,336 Buildings 11,675 (5,894) (175) 5,606 Equipment, fixtures and fittings 14,798 (11,771) (299) 2,728 Other fixed assets 707 (455) (3) 249 Assets under construction 692 − − 692 TOTAL PROPERTY AND EQUIPMENT 31,277 (18,120) (546) 12,612 7.3 Investment property (in millions of euros) June 30, 2023 December 31, 2022 Investment property (gross carrying amount) 540 502 Depreciation and impairment (248) (223) TOTAL INVESTMENT PROPERTY, NET 292 279 Investment property consists mainly of shopping malls located adjacent to the Group’s stores. The slight increase in the net carrying amount of investment property compared with December 31, 2022 chiefly reflects the hyperinflation effect in Argentina in accordance with IAS 29, partially offset by the depreciation of the Argentine peso as of the reporting date. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 56 - Notes to the condensed consolidated financial statements NOTE 8: LEASES The change in right-of-use assets and lease commitments compared to December 31, 2022 reflects the consolidation of those items recognised following the sale and lease back of five stores and four warehouses in Brazil (see Note 3.1), offset by depreciation and rent payments over the period. 8.1 Right-of-use assets June 30, 2023 December 31, 2022 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Gross carrying amount Depreciation Impairment Net carrying amount Land & Buildings 7,564 (3,427) (53) 4,083 7,154 (3,036) (49) 4,068 Equipment, fixtures and fittings 143 (36) − 107 143 (22) − 121 TOTAL RIGHT-OF-USE ASSET 7,707 (3,464) (53) 4,190 7,297 (3,058) (49) 4,190 8.2 Lease commitments Lease commitments by maturity (in millions of euros) June 30, 2023 December 31, 2022 Due within 1 year 936 955 Due in 1 to 2 years 780 794 Due in 2 to 5 years 1,347 1,432 Due beyond 5 years 1,499 1,349 TOTAL LEASE COMMITMENTS 4,562 4,530 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 57 - Notes to the condensed consolidated financial statements NOTE 9: INVESTMENTS IN COMPANIES ACCOUNTED FOR BY THE EQUITY METHOD 9.1 Changes in investments in equity-accounted companies Changes in investments in equity-accounted companies can be analysed as follows: (in millions of euros) At December 31, 2022 1,197 Acquisitions and capital increases (net of reductions) 2 Disposals Dividends (63) Share of net income 24 Exchange differences and other movements (9) At June 30, 2023 1,151 9.2 Information about associates At June 30, 2023, the two main associates were Carmila with a carrying amount of 709 million euros (December 31, 2022: 754 million euros) and Provencia with a carrying amount of 139 million euros (December 31, 2022: 134 million euros). These two associates represented 74% of the total value of equity-accounted companies at end-June 2023. Main changes in investments in equity-accounted companies in first-half 2023 Carmila (France) Following share buybacks carried out during the period, Carrefour’s interest in Carmila was increased from 36.02% to 36.37% at June 30, 2023. As a reminder, Carmila is accounted for by the equity method because the governance established with the co-investors allows Carrefour to exercise significant influence over Carmila (see Note 9.2 to the 2022 consolidated financial statements). Showroomprivé (France) In first-half 2023, additional impairment of 3 million euros on the Showroomprivé shares was recognised against non-recurring income and expenses in order to align their value with the company’s share price at June 30, 2023. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 58 - Notes to the condensed consolidated financial statements NOTE 10: INCOME TAX The income tax expense for first-half 2023 amounted to 153 million euros, i.e., an effective tax rate of 58%, compared with the 193 million euro expense recorded in first-half 2022 as restated for IFRS 5, which corresponded to an effective tax rate of 37%. The effective tax rates for the first six months of 2023 and 2022 (restated for IFRS 5) were mainly impacted by the absence of deferred tax assets at Grupo BIG in Brazil, in Italy and Belgium in 2023, and in Italy in 2022 and, to a lesser extent, by the recognition of the CVAE (local business tax) in France. Apart from these factors, the first-half 2023 effective tax rate reflects the geographical breakdown of income before tax, with no other items significantly distorting the tax proof. Furthermore, the probable recoverability of deferred tax assets recognised in the consolidated statement of financial position at December 31, 2022 was confirmed at June 30, 2023, based in particular on a comparison between the budgeted performance of the different countries and the most recent forecasts. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 59 - Notes to the condensed consolidated financial statements NOTE 11: PROVISIONS AND CONTINGENT LIABILITIES 11.1 Changes in provisions (in millions of euros) December 31, 2022 IFRS 3 restated ⁴ Increases Reversals of surplus provisions ⁵ Utilisations Discounting adjustment Exchange differences, changes in scope of consolidation and other ⁶ June 30, 2023 Employee benefits 537 28 (31) (12) 5 (9) 517 Claims and litigation 2,773 214 (124) (83) − 120 2,900 Tax litigations 1,773 63 (67) (4) − 93 1,856 Employee related disputes 599 61 (32) (56) − 22 594 Legal disputes 401 90 (25) (22) − 6 450 Restructuring ¹ 138 212 (2) (54) − 0 294 Provisions related to banking and insurance businesses ² 280 15 (5) (25) − 3 269 Other ³ 251 9 (7) (11) − 7 249 TOTAL PROVISIONS 3,979 478 (170) (184) 5 121 4,228 (1) See Note 11.5. (2) Provisions relating to the banking and insurance businesses notably include provisions for credit risk on loan commitments (off-balance sheet) recognised in accordance with IFRS 9, and provisions set aside to cover insurance underwriting risk. Out of the provisions relating to the estimated cost of the claim arising from the fire that occurred in March 2022 in the Yang Mei logistics centre in Taiwan, 24 million euros were reversed (utilised) during the period following payment by the Group’s insurance companies of the balance of the compensation due (see Note 3.1). (3) Other provisions notably include provisions for dismantling or restoring assets at the end of the property leases, provisions for employee benefits of stores transferred to lease management contracts and provisions for onerous contracts. (4) Provisions for tax and labour risks have been retrospectively restated in Grupo BIG’s opening balance sheet with a corresponding adjustment to goodwill in accordance with IFRS 3 (see Note 3.1). (5) Reversals of surplus provisions mainly relate to tax risks in Brazil following the expiry of statutory limitation periods or favourable judgments. (6) Exchange differences totalled 134 million euros, corresponding almost entirely to the increase in the value of the Brazilian real over the period. Other changes mainly correspond to the reclassification of the provision for employee benefits to other provisions for 9 million euros following the transfer of integrated stores to lease management contracts in France in first-half 2023. Group companies are involved in a certain number of pre-litigation and litigation proceedings in the normal course of business. Furthermore, they have been or are currently the subject of tax audits, some of which may result in reassessments. The Group is also subject to regular audits by the authorities responsible for overseeing compliance with the laws applicable to the retail industry and by the competition authorities. As for any company, disputes may also arise between the Group and its co-contractors, particularly its franchisees, service providers or suppliers. In each case, the risk is assessed by Group management and their advisors. 11.2 Contingent liabilities To the best of the Group’s knowledge, there are no contingent liabilities that may be considered likely to have a material impact on the Group’s results, financial position, assets and liabilities or business. During first-half 2023, there was no material change in contingent liabilities compared to those described in Note 11.3 to the 2022 consolidated financial statements. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 60 - Notes to the condensed consolidated financial statements 11.3 Post-employment benefits The Group’s post-employment benefit obligation (defined benefit plans) is calculated on the basis of actuarial assumptions such as future salary levels, retirement age, mortality, staff turnover and the discount rate. At June 30, 2023, a discount rate of 3.70% was used for France, Belgium and Italy (December 31, 2022: 3.80%). The discount rate is based on an index of AA-rated corporate bonds with maturities that correspond to the expected cash outflows of the plans. (in millions of euros) France Belgium Italy Other countries Group total Provision at December 31, 2022 313 154 59 10 537 Service cost 15 7 − 0 22 Settlement and plan amendments ¹ (31) − 0 − (31) Interest cost (discount effect) 7 7 1 − 14 Return on plan assets (0) (4) − − (4) Other items 3 0 − − 3 Impact on income statement (6) 10 1 0 5 Benefits paid directly by the employer (9) (6) (4) − (18) Effect of changes in scope of consolidation ² (9) − − − (9) Change in actuarial gains and losses 2 2 1 0 5 Other − (3) − 0 (3) Provision at June 30, 2023 291 158 57 11 517 (1) This line includes a 17 million euro reduction corresponding to the amendment of the benefits granted to beneficiaries following the enactment on April 15, 2023 of the French Amended Social Security Financing Law (law no. 2023-270). This Act provides for, among other things, a gradual increase in the statutory retirement age as from September 1, 2023 to 64 in 2030. The line also includes the impact of curtailments following the remeasurement of commitments resulting from the restructuring plan being implemented in France (see Note 3.2), recognised in non-recurring income. (2) The effect of changes in the scope of consolidation, which reduced the provision by 9 million euros, corresponds to the reclassification of the provision for employee benefits to other provisions (see Note 11.1) following the transfer of integrated stores to lease management contracts in France during first-half 2023. The net expense for first-half 2023 breaks down as 8 million euros recognised in employee benefits expense, 13 million euros recognised in non-recurring income, and 11 million euros recognised in financial expense. Sensitivity tests show that: a 25-bps increase in the discount rate would reduce the defined benefit obligation under the French, Belgian and Italian plans by around 11 million euros; a 25-bps increase in the inflation rate would increase the defined benefit obligation under the French, Belgian and Italian plans by around 12 million euros. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 61 - Notes to the condensed consolidated financial statements 11.4 Performance share plan Under the 2020 performance share plan which expired on February 27, 2023, the level of attainment achieved by the Carrefour group was 100%. Accordingly, in the first half of 2023, 2,046,409 shares were delivered to the beneficiaries in accordance with the relevant settlement terms. In addition, 6,400 shares were also delivered to heirs of employees under the ongoing 2021 and 2022 performance plans. Lastly, on February 14, 2023, based on the Compensation Committee’s recommendation, Carrefour SA’s Board of Directors decided to use the authorisation given in the 29th resolution of the Annual Shareholders’ Meeting held on May 21, 2021 to grant new or existing performance shares. The plan provided for the grant of a maximum of 2,833,260 shares (representing 0.38% of the share capital at February 14, 2023). The shares will vest subject to a service condition and several performance conditions. The vesting period is three years from the date of the Board of Directors’ meeting at which the rights were granted. The number of shares that vest will depend on the achievement of four performance conditions: two conditions linked to financial performance (recurring operating income growth for 25% and net free cash flow growth for 25%); a condition linked to an external performance criterion (TSR), benchmarking the Carrefour SA share price against a panel of companies in the retail sector (for 25%); a CSR-related condition for 25%. Details of the 2023 performance share plan are presented below. 2023 Performance Plan Shareholders' Meeting date May 21, 2021 Grant date ¹ February 14, 2023 Vesting date ² February 14, 2026 Total number of shares approved at the grant date 2,833,260 Number of grantees at the grant date 681 Fair value of each share (in euros) ³ 13.23 (1) Date of the Board of Directors’ decision to grant shares. (2) The shares will vest subject to a service condition and several performance conditions. (3) The fair value of shares is determined according to a reference price adjusted for dividends expected during the vesting period. 11.5 Restructuring The provisions for restructuring set aside during the period, which amounted to 212 million euros (recognised in non-recurring expenses) mainly comprised costs relating to severance paid or payable within the scope of the voluntary redundancy plan put in place at headquarters in France, involving a maximum of 979 people (see Note 3.2). The amount recognised in the consolidated financial statements for the six-month period ended June 30, 2023 was calculated on the basis of various assumptions and represents the best estimate of the costs that the Group expects to incur in relation to the restructuring plan currently being implemented. These costs primarily correspond to severance pay, costs of notice periods not served, and costs of training and other support measures offered to employees made redundant under the plan. Provisions set aside at December 31, 2022 for restructuring in an amount of 138 million euros mainly comprised costs related to plans undertaken to streamline operating structures, chiefly in France and Italy (see Note 2.2 to the 2021 consolidated financial statements). Some of these provisions were used during first-half 2023 (see Note 11.1). Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 62 - Notes to the condensed consolidated financial statements NOTE 12: EQUITY, OTHER COMPREHENSIVE INCOME AND EARNINGS PER SHARE 12.1 Share capital and treasury stock At June 30, 2023, the share capital was made up of 746,871,196 ordinary shares with a par value of 2.5 euros each, all fully paid. Furthermore, at June 30, 2023 a total of 28,510,134 shares were held in treasury. (in thousands of shares) Number of shares Of which treasury stock Outstanding at January 1, 2023 742,157 11,545 Issued for cash ¹ 4,714 − Issued/(used) under performance share plans ² − (2,053) Share buyback program ³ − 19,018 Cancelled shares − − Outstanding at June 30, 2023 746,871 28,510 (1) See Note 3.6. (2) See Note 11.4. (3) See Note 3.5. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 63 - Notes to the condensed consolidated financial statements 12.2 Other comprehensive income Group share (in millions of euros) First-half 2023 First-half 2022 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges ¹ (72) 18 (54) 60 (2) 58 Changes in the fair value of debt instruments through other comprehensive income ² (35) (0) (35) (10) 3 (7) Exchange differences on translation of intercompany loans qualifying as net investment of foreign operations, net of hedge effect ³ 28 (7) 21 25 (7) 19 Exchange differences on translating foreign operations ⁴ 135 − 135 252 − 252 Items that may be reclassified subsequently to profit or loss 55 11 66 327 (6) 321 Remeasurements of defined benefit plans obligation ⁵ (5) 1 (4) 164 (37) 127 Items that will not be reclassified subsequently to profit or loss (5) 1 (4) 164 (37) 127 TOTAL GROUP SHARE 50 12 62 491 (43) 448 Non-controlling interests (in millions of euros) First-half 2023 First-half 2022 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges (2) 0 (2) 7 (2) 5 Changes in the fair value of debt instruments through other comprehensive income (1) (0) (1) (11) 3 (8) Exchange differences on translating foreign operations ⁴ 82 − 82 209 − 209 Items that may be reclassified subsequently to profit or loss 80 0 80 205 1 206 Remeasurements of defined benefit plans obligation ⁵ (0) 0 (0) 1 (0) 1 Items that will not be reclassified subsequently to profit or loss (0) 0 (0) 1 (0) 1 TOTAL NON-CONTROLLING INTERESTS SHARE 80 0 80 206 0 207 (1) The currency swap eligible for cash flow hedge accounting, set up by the Group in 2022 in order to hedge the risk of unfavourable changes in the New Taiwan dollar up to the amount of the Group’s share in the value of Carrefour Taiwan, was settled when Carrefour Taiwan was sold, generating an expense of 46 million euros net of tax (see Note 3.1). (2) At June 30, 2023, the change in fair value of Flink shares was a 35 million euro decrease (see Note 2.1 to the 2022 consolidated financial statements). (3) In first-half 2023 and in 2022, Carrefour Finance granted two intra-group revolving credit facilities (RCF) to the Brazilian subsidiary Atacadão for 2.3 billion Brazilian reals and 5.9 billion Brazilian reals respectively. These facilities were treated as part of the net investment in that operation. The derivatives contracted to hedge part of the facilities were classified as a net investment hedge (see Note 3.3). (4) Exchange differences recognised on translating foreign operations in first-half 2023 mainly reflect the slight increase in the value of the Brazilian real since December 31, 2022, partially offset by the 52 million euro reversal of positive translation adjustments recognised by Carrefour Taiwan further to its sale. Exchange differences recognised in first-half 2022 reflected the significant increase in the value of the Brazilian real compared with December 31, 2021. (5) Remeasurement of the net defined benefit liability recognised in first-half 2023 reflects the slight decline in discount rates applied for the eurozone, from 3.80% at end-December 2022 to 3.70% at end-June 2023. In first-half 2022, these discount rates had increased sharply, from 0.80% at end-December 2021 to 3.20% at end-June 2022. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 64 - Notes to the condensed consolidated financial statements 12.3 Earnings per share (Group share) Basic earnings per share First-half 2023 First-half 2022 IFRS 5 restated Net income/(loss) from continuing operations 118 239 Net income/(loss) from discontinued operations 749 16 Net income/(loss) (in millions of euros) 867 255 Weighted average number of shares outstanding ¹ 725,605,959 752,242,509 Basic income/(loss) from continuing operations - per share (in euros) 0.16 0.32 Basic income/(loss) from discontinued operations - per share (in euros) 1.03 0.02 Basic income/(loss) - per share (in euros) 1.19 0.34 (1) In accordance with IAS 33, the weighted average number of shares used to calculate earnings per share for first-half 2023 was adjusted to take into account the impact of the share buybacks carried out during the period (see Note 3.5). Diluted earnings per share First-half 2023 First-half 2022 IFRS 5 restated Net income/(loss) from continuing operations 118 239 Net income/(loss) from discontinued operations 749 16 Net income/(loss) (in millions of euros) 867 255 Weighted average number of shares outstanding, before dilution 725,605,959 752,242,509 Potential dilutive shares 4,400,952 4,129,274 Performance shares 4,400,952 4,129,274 Diluted weighted average number of shares outstanding 730,006,911 756,371,783 Diluted income/(loss) from continuing operations - per share (in euros) 0.16 0.32 Diluted income/(loss) from discontinued operations - per share (in euros) 1.03 0.02 Diluted income/(loss) - per share (in euros) 1.19 0.34 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 65 - Notes to the condensed consolidated financial statements NOTE 13: FINANCIAL ASSETS AND LIABILITIES, FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES 13.1 Financial instruments by category At June 30, 2023 Breakdown by category (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OCI Amortised cost Derivative instruments not designated as hedges Derivative instruments designated as hedges Investments in non-consolidated companies Other long-term investments 147 1,014 14 77 134 164 − 773 − − − − Other non-current financial assets Consumer credit granted by the financial services companies Trade receivables 1,161 6,328 3,349 91 − − 298 − − 773 6,328 3,349 − − − − − − Other current financial assets 631 1 168 320 16 126 Other current assets ¹ 720 − − 720 − − Cash and cash equivalents 3,859 3,859 − − − − ASSETS 16,048 3,950 466 11,490 16 126 Total borrowings 9,483 − − 9,336 14 133 Total lease commitments 4,562 − − 4,562 − − Total consumer credit financing 5,469 − − 5,407 19 42 Suppliers and other creditors 12,831 − − 12,831 − − Other current payables ² 2,558 − − 2,558 − − LIABILITIES 34,902 − − 34,694 33 175 At December 31, 2022 IFRS 3 restated Breakdown by category (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OCI Amortised cost Derivative instruments not designated as hedges Derivative instruments designated as hedges Investments in non-consolidated companies Other long-term investments 178 1,073 12 90 166 152 − 831 − − − − Other non-current financial assets Consumer credit granted by the financial services companies Trade receivables 1,251 5,978 3,330 102 − − 318 − − 831 5,978 3,330 − − − − − − Other current financial assets 771 1 149 296 18 307 Other current assets ¹ 606 − − 606 − − Cash and cash equivalents 5,216 5,216 − − − − ASSETS 17,153 5,319 467 11,041 18 307 Total borrowings 9,558 − − 9,410 18 130 Total lease commitments 4,530 − − 4,530 − − Total consumer credit financing 5,142 − − 5,089 16 37 Suppliers and other creditors 14,393 − − 14,393 − − Other current payables ² 2,813 − − 2,813 − − LIABILITIES 36,435 − − 36,235 34 167 (1) Excluding prepaid expenses. (2) Excluding deferred revenue. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 Fair value 147 1,014 1,161 6,328 3,349 631 720 3,859 16,048 9,202 4,562 5,469 12,831 2,558 34,621 Fair value 178 1,073 1,251 5,978 3,330 771 606 5,216 17,153 9,212 4,530 5,142 14,393 2,813 36,089 - 66 - Notes to the condensed consolidated financial statements Analysis of assets and liabilities measured at fair value The table below shows assets and liabilities presented according to the fair value hierarchy provided for in IFRS 13 – Fair Value Measurement (see Note 1.5): June 30, 2023 (in millions of euros) Level 1 Level 2 Level 3 Total Investments in non-consolidated companies − 14 134 147 Other long-term investments 239 − 2 241 Other current financial assets - Fair Value through OCI 168 − − 168 Other current financial assets - Fair Value through profit or loss 1 − − 1 Other current financial assets - Derivative instruments − 142 − 142 Cash and cash equivalents 3,859 − − 3,859 Consumer credit financing - Derivative instruments recorded in liabilities − (61) − (61) Borrowings - Derivative instruments recorded in liabilities − (147) − (147) December 31, 2022 (in millions of euros) Level 1 Level 2 Level 3 Total Investments in non-consolidated companies − 12 166 178 Other long-term investments 243 − − 243 Other current financial assets - Fair Value through OCI 149 − − 149 Other current financial assets - Fair Value through profit or loss 1 − − 1 Other current financial assets - Derivative instruments − 325 − 325 Cash and cash equivalents 5,216 − − 5,216 Consumer credit financing - Derivative instruments recorded in liabilities − (53) − (53) Borrowings - Derivative instruments recorded in liabilities − (148) − (148) 13.2 Net debt 13.2.1 Breakdown of net debt Consolidated net debt at end-June 2023 amounted to 5,040 million euros, breaking down as follows: (in millions of euros) June 30, 2023 December 31, 2022 IFRS 3 restated Bonds and notes 7,341 7,697 Other borrowings 1,164 1,223 Commercial paper 831 490 Total borrowings excluding derivative instruments recorded in liabilities 9,336 9,410 Derivative instruments recorded in liabilities 147 148 TOTAL BORROWINGS 9,483 9,558 of which borrowings due in more than one year 6,479 6,912 of which borrowings due in less than one year 3,004 2,646 Other current financial assets ¹ 584 728 Cash and cash equivalents 3,859 5,216 TOTAL CURRENT FINANCIAL ASSETS 4,443 5,944 NET DEBT 5,040 3,614 Net debt of discontinued operations − (236) NET DEBT INCLUDING DISCONTINUED OPERATIONS 5,040 3,378 (1) The current portion of amounts receivable from finance sub-leasing arrangements is not included in this caption (see Note 13.2.5). The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year-end figure being structurally lower due to the significant volume of business recorded during December. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 67 - Notes to the condensed consolidated financial statements 13.2.2 Breakdown of bond debt Face value (in millions of euros) Maturity December 31, 2022 Issues Repayments Exchange differences June 30, 2023 Public placements by Carrefour SA 7,288 500 (963) (15) 6,810 Cash-settled convertible bonds, USD 500 million, 6 years, 0% 2023 469 − (463) (6) − EMTN, EUR, 8 years, 0.750% 2024 750 − − − 750 EMTN, EUR, 10 years, 1.25% 2025 750 − − − 750 Cash-settled convertible bonds, USD 500 million, 6 years, 0% 2024 469 − − (9) 460 EMTN, EUR, 5 years, 0.88% 2023 500 − (500) − − EMTN, EUR, 7.5 years, 1.75% 2026 500 − − − 500 EMTN, EUR, 8 years, 1.00% 2027 500 − − − 500 EMTN, EUR, 7.5 years, 2.625% 2027 1,000 − − − 1,000 EMTN, EUR, 4.6 years, 1.88% 2026 750 − − − 750 EMTN, EUR, EUR, 6 years, 4.125% 2028 850 − − − 850 EMTN, EUR, 7.6 years, 2.38% 2029 750 − − − 750 EMTN, EUR, 7.5 years, 3.75% 2030 − 500 − − 500 Placements by Atacadão SA 458 175 (95) 28 566 Debenture, BRL 500 million, 5 years, 105.75% CDI 2023 90 − (95) 5 − Debenture, BRL 350 million, 5 years, 100% CDI+0.55% Debenture, BRL 200 million, 7 years, 100% CDI+0.65% Debenture ("CRA"), BRL 467 million, 4 years, 100% CDI+0.55% Debenture ("CRA"), BRL 188 million, 5 years, 100% CDI+0.60% Debenture ("CRA") BRL 844 million, 5 years, 100% CDI+0.79% Debenture ("CRA"), BRL 330 million, 3 years, 100% CDI+0.95% Debenture ("CRA"), BRL 468 million, 4 years, 11.87% Debenture ("CRA"), BRL 132 million, 5 years, 100% CDI+1.00% 2024 2026 2026 2027 2027 2026 2027 63 36 84 34 152 − − − − − − − 62 88 − − − − − − − 4 2 5 2 9 1 1 67 38 89 36 160 63 89 2028 − 25 − 0 25 TOTAL BONDS AND NOTES 7,746 675 (1,058) 14 7,377 On May 2, 2023, the Group carried out a new Sustainability-Linked Bond issue indexed to its two goals related to greenhouse gas emissions, for a total of 500 million euros, maturing in 7.5 years (due in October 2030) and paying a coupon of 3.75%. On June 12, 2023, Carrefour SA redeemed 500 million euros worth of 0.88% 5-year bonds. On June 14, 2023, Carrefour SA redeemed 500 million dollars worth of cash-settled convertible 0% 6-year bonds. The Group’s financial position and liquidity were solid at end-June 2023. The average maturity of bond debt was 3.8 years at end-June 2023, compared with 3.6 years at end-December 2022 and 3.8 years at end-June 2022. Financing of the Brazilian subsidiary Atacadão On April 27, 2023, Atacadão redeemed 500 million reals worth of debenture-type debt maturing in 5 years and paying a coupon of 105.75% of the CDI (Certificado de Depósito Interbancário) rate. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 Book value of the debt June 30, 2023 6,774 − 749 749 447 − 498 498 995 748 848 744 497 566 − 67 38 89 36 160 63 89 25 7,341 - 68 - Notes to the condensed consolidated financial statements In addition, on June 2, 2023, the Brazilian subsidiary issued simple unsecured, non-convertible debentures (Certificado de recebíveis do agronegócio – CRA) for an amount of 930 million Brazilian reals (approximately 177 million euros at the June 30, 2023 exchange rate) in three series: an initial series for 330 million Brazilian reals, with a coupon of CDI+0.95% and a maturity of 3 years; a second series for 468 million Brazilian reals, with a coupon of 11.87% before hedging, amounting to 111.20% of the CDI after hedging, and a maturity of 4 years; a third series for 132 million Brazilian reals, with a coupon of CDI+1.00% and a maturity of 5 years. 13.2.3 Breakdown of other borrowings (in millions of euros) June 30, 2023 December 31, 2022 Latin America borrowings 885 1,025 Other borrowings 100 72 Accrued interest ¹ 96 57 Other financial liabilities 83 69 TOTAL OTHER BORROWINGS 1,164 1,223 (1) Accrued interest on total borrowings, including bonds and notes. “Latin America borrowings” include USD and EUR financing swapped for Brazilian reals by the Brazilian subsidiary Atacadão: in September 2021, for 1,937 million Brazilian reals (approximately 368 million euros at the June 30, 2023 closing exchange rate); in January 2023, for 2,293 million Brazilian reals (approximately 436 million euros at the June 30, 2023 closing exchange rate); in April 2023, for 744 million Brazilian reals (approximately 141 million euros at the June 30, 2023 closing exchange rate). These euro- and US dollar-denominated facilities, which were originally fixed-rate, were converted into Brazilian reals and indexed to the Brazilian interbank deposit (Certificado de Depósito Interbancário – CDI) rate at the time of issue through cross-currency swaps over the life of the borrowings. These instruments are documented and recognised as hedges (Fair Value Hedge). 13.2.4 Cash and cash equivalents (in millions of euros) June 30, 2023 December 31, 2022 Cash 1,169 1,420 Cash equivalents 2,690 3,796 TOTAL CASH AND CASH EQUIVALENTS 3,859 5,216 There are no material restrictions on the Group’s ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. At June 30, 2023, as at December 31, 2022, there was no restricted cash. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 69 - Notes to the condensed consolidated financial statements 13.2.5 Other current financial assets (in millions of euros) June 30, 2023 December 31, 2022 IFRS 3 restated Derivative instruments ¹ 142 325 Financial receivable ² 232 188 Other current financial assets - Fair Value through OCI 168 149 Other current financial assets - Fair Value through profit or loss 1 1 Sub-lease receivable - less than one year 46 43 Deposits with maturities of more than three months 39 64 Other 3 1 TOTAL OTHER CURRENT FINANCIAL ASSETS 631 771 (1) The 183 million euro decrease in this item compared to December 31, 2022 primarily reflects (i) the unwinding of the EUR/TWD currency swap – for which mark-to-market amounted to 64 million euros at end-2022 – following the sale of Carrefour Taiwan on June 30, 2023, and (ii) the unwinding of the currency swap hedging the cash-settled convertible bonds – for which mark-to-market amounted to 69 million euros at end-2022 – following its repayment in June 2023 (see Note 13.2.2). (2) This amount corresponds to the financial receivables relating to the 20% stake in Carrefour China and the reduction in the purchase price of Grupo BIG in Brazil (see Note 3.1). 13.3 Analysis of borrowings (excluding derivative instruments recorded in liabilities) 13.3.1 Analysis by interest rate June 30, 2023 December 31, 2022 (in millions of euros) Before hedging After hedging Before hedging After hedging Fixed rate borrowings 8,815 7,850 8,843 7,902 Variable rate borrowings 521 1,485 567 1,508 TOTAL BORROWINGS (EXCLUDING DERIVATIVE INSTRUMENTS RECORDED IN LIABILITIES) 9,336 9,336 9,410 9,410 13.3.2 Analysis by currency (in millions of euros) June 30, 2023 December 31, 2022 Euro 7,852 7,901 Brazilian real 1,482 1,506 Polish zloty 1 2 Romanian leu 2 1 TOTAL BORROWINGS (EXCLUDING DERIVATIVE INSTRUMENTS RECORDED IN LIABILITIES) 9,336 9,410 The above analysis includes the effect of hedging. Euro-denominated borrowings represented 84% of total borrowings (excluding derivative instruments recorded in liabilities) at June 30, 2023 (84% at December 31, 2022). 13.3.3 Analysis by maturity (in millions of euros) June 30, 2023 December 31, 2022 Due within 1 year 2,857 2,498 Due in 1 to 2 years 1,137 1,514 Due in 2 to 5 years 3,246 3,799 Due beyond 5 years 2,096 1,599 TOTAL BORROWINGS (EXCLUDING DERIVATIVE INSTRUMENTS RECORDED IN LIABILITIES) 9,336 9,410 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 70 - Notes to the condensed consolidated financial statements 13.4 Changes in liabilities arising from financing activities (in millions of euros) Other current financial assets ¹ Borrowings Total Liabilities arising from financing activities, net At December 31, 2022 (728) 9,558 8,830 Changes from financing cash flows 209 (279) (69) Change in current financial assets 209 − 209 Issuance of bonds − 675 675 Repayments of bonds − (1,058) (1,058) Net financial interests paid − (51) (51) Issuance of commercial paper ² − 341 341 Other changes in borrowings − (186) (186) Non-cash changes (66) 204 138 Exchange differences (14) 11 (4) Effect of changes in scope of consolidation − − − Changes in fair values (32) 26 (6) Finance costs, net − 191 191 Other movements (20) (23) (43) At June 30, 2023 (584) 9,483 8,899 (1) Amounts receivable from finance sub-leasing arrangements are not included in this caption. (2) In first-half 2023, the Group issued short-term commercial paper to secure its liquidity. 13.5 Other non-current financial assets (in millions of euros) June 30, 2023 December 31, 2022 IFRS 3 restated Deposits and guarantees ¹ 639 594 Financial services companies' portfolio of assets 239 243 Sub-lease receivable - more than one year ² 67 72 Financial receivable ³ − 88 Investments in non-consolidated companies ⁴ 147 178 Other 70 75 TOTAL OTHER NON-CURRENT FINANCIAL ASSETS 1,161 1,251 (1) Deposits and guarantees include legal deposits paid in Brazil in connection with tax disputes (relating mainly to tax reassessments challenged by the Group) pending final court rulings, as well as security deposits paid to lessors under property leases. (2) Amounts receivable from finance sub-leasing arrangements were recognised following the application of IFRS 16. (3) The amount recognised under this line at December 31, 2022 corresponded to the long-term financial receivable relating to the reduction in the price of Grupo BIG in Brazil (see Note 3.1). At June 30, 2023, this receivable has been reclassified as “Other current financial assets”. (4) The decrease in investments in non-consolidated companies in first-half 2023 was mainly due to the change in the fair value of Flink shares. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 71 - Notes to the condensed consolidated financial statements 13.6 Finance costs and other financial income and expenses This item corresponds mainly to finance costs. In accordance with IFRS 16, it also includes interest expenses on leases along with interest income on finance sub-leasing arrangements. Other financial income and expenses consist for the most part of late payment fees payable on certain liabilities, financial transaction taxes and the impacts of hyperinflation in Argentina. (in millions of euros) First-half 2023 First-half 2022 IFRS 5 restated Interest income from loans and cash equivalents 33 (2) Interest income from bank deposits 30 (2) Interest income from loans 3 (0) Finance costs (223) (149) Interest expense on financial liabilities measured at amortised cost, adjusted for income and expenses from interest rate instruments (205) (137) Cost of receivables discounting in Brazil (19) (13) Finance costs, net (191) (151) Interest charge related to leases (100) (68) Interest income related to financial sublease contracts 0 0 Net interests related to leases (100) (68) Interest expense on defined employee benefit debt (14) (4) Interest income on pension plan assets 4 1 Financial transaction tax (18) (16) Late interest due in connection with tax reassessments and employee-related litigation (52) (8) Dividends received on financial assets at FVOCI 1 2 Gain on disposal of financial assets at FVOCI 7 6 Loss on disposal of financial assets at FVOCI (1) (2) Exchange gains and losses 12 1 Cost of bond buybacks − (7) Changes in the fair value of interest rate derivatives (1) (1) Impact of hyperinflation in Argentina - application of IAS 29 63 61 Other 16 3 Other financial income and expenses, net 15 38 FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES, NET (276) (181) Financial expenses (411) (256) Financial income 135 75 Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 72 - Notes to the condensed consolidated financial statements NOTE 14: OTHER INFORMATION 14.1 Scope of consolidation 14.1.1 Main changes in first-half 2023 On June 15, 2023, Carrefour and Publicis announced the launch of Unlimitail (51% owned by Carrefour and 49% by Publicis). On June 30, 2023, the Group completed the sale of its entire interest in its Taiwanese subsidiary (i.e., 60%) to the Uni-President group (holder of the remaining 40%). These transactions are described in Note 3.1. In June 2023, the Group contributed to a capital increase carried out by its Argentinian subsidiary Banco de Servicios Financieros for approximatively 10 million euros, increasing its interest from 88% to 92%. This transaction did not have a material anti-dilutive impact. With the exception of these transactions, there were no other material changes in the Carrefour group’s scope of consolidation in first-half 2023. 14.1.2 Main changes in first-half 2022 The main changes in the scope of consolidation in first-half 2022 included the acquisition of Grupo BIG in Brazil (effective from June 1, 2022, see Note 3.1) and the sale of the Carrefour group’s interest in Cajoo in exchange for Flink shares. 14.2 Related parties Group transactions with related parties mainly concern: compensation and other benefits granted to members of the Group Executive Committee and the Board of Directors; transactions with companies over which the Group exercises significant influence. Related-party transactions are carried out on an arm’s length basis. There were no material changes in the nature of the Group’s related-party transactions in first-half 2023 compared with the situation at December 31, 2022. 14.3 Off-balance sheet commitments Commitments given and received by the Group that are not recognised in the statement of financial position correspond to contractual obligations whose performance depends on the occurrence of conditions or transactions after the period-end. There are four types of off-balance sheet commitments, related to: cash transactions, operations, acquisitions/disposals of securities, and leases (excluding contracts accounted for in accordance with IFRS 16). 14.4 Other disclosures Between the night of June 29, 2023 and early July 2023, a number of the Group’s stores were damaged in France. The impact is currently being estimated and will be covered by our insurers. 14.5 Subsequent events One of the objectives of the Carrefour 2026 strategic plan is to enhance the Group’s real estate assets in France through the development of mixed-use real estate projects. To that end, on July 6, 2023, the Group announced that it has joined forces with Nexity to develop 76 sites covering all Carrefour retail formats (hypermarkets, supermarkets and convenience stores). This long-term partnership will enable Carrefour and Nexity to develop mixed-use programmes with high environmental performance Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 73 - Notes to the condensed consolidated financial statements for housing, serviced residences, retail outlets, offices and hotels. The related property venture, which is expected to be up and running by the first quarter of 2024 at the latest, will be 80% owned by Carrefour and 20% by Nexity. On July 12, 2023, Carrefour announced that it had entered into an agreement with the Louis Delhaize group to acquire the Cora and Match banners in France, which operate 60 hypermarkets and 115 supermarkets respectively, and employ some 24,000 people. This acquisition will enable the Group to reaffirm its leadership in food retail in France, with the acquired stores offering a very strong geographical fit with Carrefour, particularly in the east and north of the country. The transaction values the acquired assets on the basis of an enterprise value of 1.05 billion euros and will be paid entirely in cash. Subject to certain customary conditions, particularly approval by the French competition authority, the transaction is expected to close in the summer of 2024. Carrefour group – Condensed consolidated half-year financial statements as of June 30, 2023 - 74 - Mazars 61 rue Henri Regnault 92400 Courbevoie Deloitte & Associés 6, place de la Pyramide 92908 Paris-La Défense Cedex CARREFOUR Société anonyme 93 avenue de Paris 91300 MASSY ___________________________________ Statutory Auditors’ Review Report on the Half-yearly Financial Information For the period from January 1 to June 30, 2023 ___________________________________ This is a free translation into English of the statutory auditors’ review report on the half-yearly financial information issued in French and is provided solely for the convenience of English-speaking users. This report includes information relating to the specific verification of information given in the Group’s half- yearly management report. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. - 75 - To the Shareholders of CARREFOUR company, In compliance with the assignment entrusted to us by Shareholders’ Meetings and in accordance with the requirements of article L. 451-1-2-III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying condensed half-yearly consolidated financial statements of the company, for the period from January 1 to June 30, 2023, the verification of the information presented in the half-yearly management report. These condensed half-yearly consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. l CARREFOUR l Statutory Auditors’ Review Report on the Half-yearly Financial Information l For the period from January 1 to June 30, 2023 - 76 - Specific verification We have also verified the information presented in the half-yearly management report on the half- yearly condensed consolidated financial statements subject to our review. We have no matters to report as to its fair presentation and consistency with the half-yearly condensed consolidated financial statements. Courbevoie and Paris-La-Défense, July 26, 2023 The Statutory Auditors French original signed by Mazars Deloitte & Associés Jérôme de PASTORS Marc BIASIBETTI Bertrand BOISSELIER Olivier BROISSAND l CARREFOUR l Statutory Auditors’ Review Report on the Half-yearly Financial Information l For the period from January 1 to June 30, 2023 - 77 - Declaration by the persons responsible We hereby certify that, to the best of our knowledge, the condensed consolidated financial statements for the six-month period ended June 30, 2023 were prepared in accordance with applicable accounting standards and give a true and fair view of the assets and liabilities, financial situation and income of the company Carrefour and of all the consolidated companies, and that the attached half-year financial report gives a true and fair view of the significant events having occurred during the first six months of the financial year, of their impact on the financial statements, of the main related-party transactions, as well as a description of the main risks and uncertainties for the remaining six months of the financial year. July 26, 2023 Alexandre Bompard Chairman and Chief Executive Officer Matthieu Malige Chief Financial Officer Carrefour group – Half-year financial report – June 30, 2023 - 78 -

Semestriel, 2023, Retail, Carrefour

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Half-year financial report June 30, 2019 Carrefour – Half-year Financial Report – June 30, 2019 Contents Business Review for the six-month period ended June 30, 2019 page 4 Condensed Financial Statements for the six-month period ended June 30, 2019 Consolidated page 25 Statutory Auditors’ review report on the half-yearly financial information page 68 page 71 Declaration by the persons responsible The English version of the Half-year Financial Report is a free translation from the original which was prepared in French. The original French version of the document prevails over this translation. Carrefour – Half-year Financial Report – June 30, 2019 Business review for the six-month period ended June 30, 2019 1. Consolidated sales and earnings performance 1.1. Main earnings indicators 1.2. Analysis of the main income statement items 1. Consolidated sales and earnings performance 1.1. Main earnings indicators 1.2. Analysis of the main income statement items 2. Group financial position 2.1. Shareholders' equity 2.2. Net debt 2.3. Cash flows for the period and cash and cash equivalents 2.4. Financing and liquidity resources 2.5. Restrictions on the use of capital resources 2.6. Expected sources of funding page 11 3. Outlook page 15 4. Other information page 17 4.1. Accounting principles 4.2. Significant events of the period 4.3. Impact of changes in accounting policies 4.4. Discontinued operations and restatement of comparative information 4.5. Main related-party transactions 4.6. Subsequent events 4.7 Risk factors Carrefour – Half-year Financial Report – June 30, 2019 1. Consolidated sales and earnings performance 1.1 Main earnings indicators The comparative consolidated income and cash flow statement information presented in this report has been restated to reflect the reclassification of Carrefour China in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations. These restatements are described in Note 5 to the Condensed Consolidated Financial Statements. On June 30, 2018, the integrated convenience stores business in France was classified in discontinued operations in accordance with IFRS 5. The Group applied IFRS 16 – Leases and IFRIC 23 – Uncertainty over Income Tax Treatments as of January 1, 2019. IFRIC 23 had no impact on the Consolidated Financial Statements for the six-month period ended June 30, 2019. Data presented for the comparative period was not restated, as allowed by the transitional provisions of IFRS 16. Argentina is classified as a hyperinflationary economy within the meaning of IFRSs. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the Consolidated Financial Statements for the six-month period ended June 30, 2019. Since IAS 21 does not allow comparative figures presented in prior-year financial statements to be restated in a stable currency, comparative data for first-half 2018 does not include the adjustment for inflation. (in € millions) First-half 2019 First-half 2018 restated % change % change at constant exchange rates Net sales 34 885 35 147 (0,7)% 2,5% Gross margin from recurring operations 7 667 7 736 (0,9)% 3,1% in % of net sales 22,0% 22,0% Sales, general and administrative expenses & amortisation (7 043) (7 134) (1,3)% 3,0% Recurring operating income 624 602 3,6% 3,6% Recurring operating income before depreciation and amortisation (1) 1 770 1 328 33,3% 35,0% Recurring operating income after net income from equity-accounted companies 622 596 4,4% 2,2% Non-recurring income and expenses, net (610) (765) (20,2)% (16,8)% Finance costs and other financial income and expenses, net (165) (147) 12,3% 12,4% Income tax expense (192) (173) 10,6% 14,6% Net income/(loss) from continuing operations - Group share (415) (603) (31,2)% (23,7)% Net income/(loss) from discontinued operations - Group share (43) (259) (83,3)% (83,4)% Net income/(loss) - Group share (458) (861) (46,8)% (41,6)% Free cash flow (1) (1 689) (2 219) Net debt at June 30, 2019 (2) 6 043 5 970 Net debt at June 30, 2019 including discontinued operations 5 958 5 970 1 Free cash flow corresponds to cash flow from operating activities before net finance costs, and after the change in working capital, less net cash from/(used in) investing activities. 2 Net debt does not include finance lease liabilities (Note 2.2). Net debt stood at 6,255 million euros as of June 30, 2018 and at 5,970 million euros excluding finance lease liabilities. The Group's net sales amounted to 34.9 billion euros in first-half 2019, up 2.5% at constant exchange rates and 2.2% restated for the application of IAS 29. Recurring operating at 1,770 million euros, an improvement of 35% at constant exchange rates. income before depreciation and amortisation came in Recurring operating 624 million euros. income increased by 3.6% at constant exchange rates, to Carrefour – Half-year Financial Report – June 30, 2019 1. Consolidated sales and earnings performance Non-recurring operating income and expenses represented a net expense of 610 million euros, a 155 million-euro improvement compared with first-half 2018, due mainly to lower restructuring costs (342 million euros) than in the prior-year period. Finance costs and other financial income and expenses, net amounted to 165 million euros, a rise of 18 million euros on first-half 2018. This reflects net interest expense of 60 million euros on leases resulting from the first-time application of IFRS 16 – Leases, partially offset by the positive 21 million-euro impact of applying IAS 29 in Argentina. Income tax expense amounted to 192 million euros, representing a negative effective tax rate of 125% as a result of non-recurring items recorded in the period. The net loss from continuing operations – Group share, totalled 415 million euros, a 188 million-euro improvement on first-half 2018 as restated. The net loss from discontinued operations – Group share, totalled 43 million euros compared to 259 million euros in first-half 2018, mainly reflecting the ongoing sale of Carrefour China reclassified within discontinued operations in accordance with IFRS 5 – Non-current Assets Held for sale and Discontinued Operations. The net loss from discontinued operations in first-half 2018 included 229 million euros relating to the deconsolidation of ex-Dia stores. Taking into account all of these items, the Group ended the year with a net loss – Group share of 458 million euros, versus a net loss of 861 million euros in first-half 2018. Free cash flow1 was a negative 1,689 million euros, versus a negative 2,219 million euros in first-half 2018. 1.2 Analysis of the main income statement items Net sales by region The Group’s operating segments consist of the countries in which it does business, combined by region, and “Global functions”, corresponding to the holding companies and other administrative, finance and marketing support entities. (in € millions) First-half 2019 First-half 2018 restated % change % change at constant exchange rates France 16 789 17 150 (2,1)% (2,1)% Rest of Europe 9 988 10 093 (1,0)% (0,7)% Latin America 7 134 6 976 2,3% 18,7% Asia 974 927 5,1% 2,9% Total 34 885 35 147 (0,7)% 2,5% Carrefour group reported net sales of 34.9 billion euros in first-half 2019, up 2.5% at constant exchange rates and up 2.2% restated for the application of IAS 29. Despite an actual decline of 2.1%, first-half sales in France edged up 0.8% versus the prior-year period on a like-for-like basis(2). Second-quarter sales (up 0.7% like for like) were broadly in line with the performance in the first three months of the year (up 1.0% like for like). The Group’s food business (up 1.9% like for like in the second quarter put in a satisfactory performance, while the non-food segment remained sluggish). 1 Free cash flow corresponds to cash flow from operating activities before net finance costs, and after the change in working capital, less net cash from/(used in) investing activities. 2 Sales generated by stores opened for at least 12 months, excluding temporary store closures, at constant exchange rates, excluding petrol and calendar effects and excluding the IAS 29 impact.. Carrefour – Half-year Financial Report – June 30, 2019 1. Consolidated sales and earnings performance In Europe (excluding France), first-half 2019 sales slipped 0.7% like for like, reflecting a period-on-period improvement in sales trends in the second quarter (stable like-for-like performance in the second quarter versus a 1.5% like-for-like decrease in first) across the region (with the exception of Belgium). In Latin America, like-for-like sales climbed 15.2% in the period (up 15.9% in the second quarter) and 18.7% at constant exchange rates, reflecting strong sales momentum. The Asia region now represents the operations of Carrefour Taiwan as Carrefour China was classified within discontinued operations in accordance with IFRS 5. Carrefour Taiwan sales edged up 0.8% like for like, with a return to growth in the second quarter (up 3.0% like for like). Net sales by region – contribution to the consolidated total En % First-half 2019 (1) First-half 2018 restated France 47% 49% Rest of Europe 28% 29% Latin America 23% 20% Asia 3% 3% Total 100% 100% (1) at constant exchange rates At constant exchange rates, the portion of sales generated outside France continued to rise, representing 54% in first-half 2019 versus 52% in first-half 2018 as restated. Recurring operating income by region (in € millions) First-half 2019 First-half 2018 restated % change % change at constant exchange rates France 120 110 9,2% 9,2% Rest of Europe 126 152 (17,3)% (17,3)% Latin America 362 319 13,6% 14,1% Asia 40 37 8,7% 6,4% Global functions (25) (16) 57,1% 58,4% Total 624 602 3,6% 3,6% Recurring operating income increased by 3.6% at constant exchange rates, to 624 million euros. It includes the negative 17 million-euro impact of applying IAS 29 in Argentina as well as the positive 23 million-euro impact of applying IFRS 16 for the first time. In France, recurring operating income for the period was 10 million euros higher than in first-half 2018, reflecting: • strong cost reduction trends and organisational change; investments in competitive prices, a more attractive offer, services and digital segments. In Europe (excluding France), recurring operating income was down sharply, reflecting: • a disappointing sales performance in competitive markets; significant investments to revitalise business, particularly in Italy amid rapidly worsening market conditions, offset by cost reductions. Carrefour – Half-year Financial Report – June 30, 2019 1. Consolidated sales and earnings performance In Latin America, recurring operating income rose 14.1% at constant exchange rates, buoyed by robust like-for-like growth, new store openings in Brazil and strong growth in financial services. In Argentina, benefits from the transformation plan continued to filter through, driving up volumes in particular. In Asia, recurring operating income came to 40 million euros in first-half 2019. Depreciation and amortisation Depreciation and amortisation of property and equipment, intangible assets and investment property amounted to 665 million euros in first-half 2019 compared to 690 million euros in first-half 2018 as restated. IFRS 16 depreciation of right-of-use assets relating to property and equipment, intangible assets and investment property totalled 363 million euros in first-half 2019. Including depreciation of logistics equipment and the related right-of-use assets included in the cost of sales, a total depreciation and amortisation expense of 1,147 million euros was recognised in the consolidated income statement for first-half 2019, compared with an expense of 726 million euros for the prior-year period. The rise in this caption results solely from the first-time application of IFRS 16. Net income/(loss) of equity-accounted companies Net income/(loss) of equity-accounted companies represented a net loss of 1 million euros, versus a net loss of 6 million euros in first-half 2018. Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as non-recurring impairment charges, restructuring costs and provision charges recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group's attention during the reporting period. Non-recurring items represented a net expense of 610 million euros in first-half 2019. The detailed breakdown is as follows: (in € millions) First-half 2019 First-half 2018 restated Net gains on sales of assets 17 16 Restructuring costs (342) (675) Other non-recurring income and expenses (194) (63) Non-recurring income and expenses net before asset impairments and write-offs (518) (723) Asset impairment and write-offs (92) (42) Impairments and write-offs of goodwill Impairments and write-offs of property and equipment and intangible assets (92) (42) Non-recurring income and expenses, net (610) (765) Total non-recurring income 262 26 Total non-recurring expenses (873) (791) Carrefour – Half-year Financial Report – June 30, 2019 1. Consolidated sales and earnings performance As in first-half 2018, net gains on sales of assets in the period primarily related to sales of various individually non-material assets. Restructuring costs recognised in first-half 2019 result from plans to streamline operating structures launched as part of the first pillar of the “Carrefour 2022” transformation plan. The expense included in non-recurring items relates chiefly to severance paid or payable within the scope of: the transformation plan for hypermarkets in France (mutually agreed termination) concerning up to 3,000 employees; restructuring measures launched in Italy and potentially affecting up to 590 employees. The amount of the provision recognised at June 30, 2019 was estimated based on various assumptions and is the best estimate of the costs the Group expects to incur in relation to the restructuring plans currently being implemented (Note 11.3 to the Condensed Consolidated Financial Statements). The expense recognised for first-half 2018 primarily included costs relating to the voluntary redundancy plans in France and Argentina and to restructuring measures in Belgium. Other non-recurring income and expenses recorded in first-half 2019 mainly concerned Brazil and resulted primarily from two rulings. In May 2019, the Brazilian Supreme Court handed down an unfavourable decision to adjust its ruling on inter-state transfers of ICMS tax credits relating to “commodities”. As a result of this decision, a provision (including interest and penalties) was recognised in the Consolidated Financial Statements against the related non-recurring expenses in order to cover current tax disputes as well as possible new ones arising from years still potentially subject to tax audits. In June 2019, following a favourable and final ruling, PIS-COFINS (social security) tax credits from prior years were recognised against the related non-recurring income. Operating income The Group ended the period with operating income of 12 million euros, versus an operating loss of 169 million euros in first-half 2018 as restated. Finance costs and other financial income and expenses Finance costs and other financial income and expenses represented a net expense of 165 million euros in first-half 2019, corresponding to a negative 0.5% of sales versus a negative 0.4% of sales in first-half 2018. (in € millions) First-half 2019 First-half 2018 restated Finance costs, net (112) (119) Net interests related to leases commitments (60) Other financial income and expenses, net Total 7 (165) (28) (147) Finance costs, net improved by 7 million euros to 112 million euros. Following the first-time application of IFRS 16, finance costs and other financial income and expenses now include interest expense on leases as well as interest income on finance lease sub-letting arrangements, representing a net expense of 60 million euros. Other financial income and expenses mainly consist of discounting adjustment costs, late payment fees payable on certain liabilities, and the 21 million-euro impact of hyperinflation in Argentina (IAS 29). Carrefour – Half-year Financial Report – June 30, 2019 1. Consolidated sales and earnings performance Income tax expense The income tax expense for first-half 2019 amounts to 192 million euros, representing a negative effective tax rate of 125%, compared with the 173 million euro expense recorded in first-half 2018 as restated, corresponding to a negative effective tax rate of 55%. This reflects the fact that no deferred tax assets were recognised on temporary differences or tax loss carryforwards because of material non-recurring expenses recognised during the period. Net income attributable to non-controlling interests Net income attributable to non-controlling interests came to 68 million euros in first-half 2019, versus 112 million euros in first-half 2018. Net income/(loss) from continuing operations – Group share As a result of the elements described above, the Group reported a 415 million-euro net loss from continuing operations in first-half 2019, compared with a net loss of 603 million euros in first-half 2018 as restated. Net income/(loss) from discontinued operations – Group share The net loss from discontinued operations – Group share came to 43 million euros in first-half 2019 and reflects the 27 million-euro loss from Chinese operations in the period and the 16 million-euro loss on the deconsolidation of ex-Dia stores following the decision taken in 2018, resulting in their reclassification in accordance with IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations. In first-half 2018, the net loss from discontinued operations amounted to 259 million euros, corresponding mainly to the 229 million euro loss on the deconsolidation of ex-Dia stores and the 30 million-euro loss on Chinese operations, reclassified in accordance with IFRS 5. Carrefour – Half-year Financial Report – June 30, 2019 2. Group financial position 2.1 Shareholders’ equity At June 30, 2019, shareholders’ equity stood at 10,434 million euros compared with 11,286 million euros at December 31, 2018, a decrease of 852 million euros. This decrease mainly reflects: the net loss for the year of 390 million euros; other comprehensive expense amounting to 34 million euros, reflecting 76 million euros in actuarial losses net of tax resulting from the lower discount rates applied for the eurozone (down from 1.60% at December 31, 2018 to 0.80% at June 30, 2019), partially offset by 56 million euros in exchange gains resulting from the appreciation of the Brazilian real; dividends paid in an amount of 405 million euros, of which 359 million euros paid to Carrefour shareholders and 46 million euros to non-controlling shareholders of subsidiaries. The first-time application of IFRS 16 – Leases has a negative 9 million-euro impact on opening equity at January 1, 2019 (Note 4 to the Condensed Consolidated Financial Statements). 2.2 Net debt Consolidated net debt decreased from 3,785 million euros at December 31, 2018 to 3,510 million euros at January 1, 2019 following the reclassification of 275 million euros in finance lease liabilities recognised in accordance with IAS 17 in lease liabilities (Note 13.2.1 to the Condensed Consolidated Financial Statements). Net debt increased from 3,510 million euros at January 1, 2019 to 6,043 million euros at June 30, 2019 and to 5,958 million euros including discontinued operations (Carrefour China). Year-end net debt is systematically lower due to the high volume of business generated in the month of December. Net debt stood at 6,255 million euros at June 30, 2018 and at 5,970 million euros excluding finance lease liabilities. Net debt breaks down as follows: (in € millions) June 30, 2019 December 31, 2018 Bonds and notes 7 231 7 545 Other borrowings 257 405 C ommercial paper 270 Finance lease liabilities (1) 275 Total borrowings before derivative instruments recorded in liabilities 7 758 8 225 Derivative instruments recorded in liabilities 81 50 Total borrowings [1] 7 839 8 275 of which, Long-term borrowings 6 215 6 936 of which, Short-term borrowings 1 624 1 339 Other current financial assets (2) 274 190 C ash and C ash equivalents 1 522 4 300 Total current financial assets [2] 1 796 4 490 Net debt [1] - [2] 6 043 3 785 Discontinued activities -Net debt [3] (85) Net debt including discontinued activities [1] - [2] + [3] 5 958 3 785 (1) Finance lease liabilities recognised in accordance with IAS 17 for 275 million euros at December 31, 2018 were reclassified within lease liabilities at January 1, 2019 (Note 9.3 to the Condensed Consolidated Financial Statements). Lease liabilities also include liabilities under leases accounted for in accordance with IFRS 16 as of that date. Net debt totalled 3,510 million euros at January 1, 2019. (2) For consistency, at June 30, 2019 the current portion of amounts receivable from finance lease sub-letting arrangements is not included in the calculation of net debt. Carrefour – Half-year Financial Report – June 30, 2019 2. Group financial position Long and short-term borrowings (excluding derivatives) mature at different dates, through 2027 for the longest tranche of bond debt, leading to balanced repayment obligations in the coming years, as shown below: (in € millions) June 30, 2019 December 31 2018 Due within 1 year 1 543 1 289 Due in 1 to 2 years 1 321 1 129 Due in 2 to 5 years 3 137 3 298 Due beyond 5 years 1 757 2 510 Total borrowings (before derivative instruments recorded in liabilities) 7 758 8 225 Cash and cash equivalents totalled 1,522 million euros at June 30, 2019 compared with 4,300 million euros at December 31, 2018, representing a decrease of 2,778 million euros. 2.3 Cash flows for the period and cash and cash equivalents Net debt rose by 2,448 million euros in first-half 2019, versus a 2,545 million-euro increase in first-half 2018 as restated. The change is analysed in the simplified statement of cash flows presented below: (in € millions) First-half 2019 First-half 2018 restated C ash flow from operations 1 367 890 C hange in trade working capital requirement (1 636) (2 137) C hange in other receivables and payables (486) (176) C hange in consumer credit granted by the financial services companies (36) 24 Investments (628) (547) C hange in amounts due to suppliers of fixed assets (183) (283) Impact of discontinued activities (136) (63) Other 49 73 Free cash flow (1 689) (2 219) Acquisition and disposals of subsidiaries and investments in associates 1 (145) C ash dividends / reinvested dividends (14) 5 Finance costs, net (without finance lease under IAS 17) (112) (109) Exchange rate (5) (92) Payments related to lease commitments and corresponding interests (including finance lease under IAS 17) (496) (24) Impact of discontinued activities (117) 58 Other (15) (20) Decrease / (Increase) in net debt (2 448) (2 545) Free cash flow was a negative 1,689 million euros in first-half 2019 (versus a negative 2,219 million euros in first-half 2018 as restated), and mainly comprised: cash flow from operating activities totalling 1,367 million euros, an increase compared to first-half 2018 mainly attributable to the application of IFRS 16 (payments under leases along with any related interest are shown in financing cash flows in first-half 2019); Carrefour – Half-year Financial Report – June 30, 2019 2. Group financial position the change in trade working capital and other receivables and payables, which amounted to a negative 2,123 million euros in first-half 2019 versus a negative 2,313 million euros in first-half 2018 as restated; operational investments in an amount of 628 million euros, compared with 547 million euros in first-half 2018. 2.4 Financing and liquidity resources Corporate Treasury and Financing's liquidity management strategy consists of: promoting prudent financing strategies in order to ensure that the Group's credit rating allows it to raise funds on the bond and commercial paper markets; maintaining a presence in the debt market through regular debt issuance programmes, mainly in euros, in order to create a balanced maturity profile. The Group's issuance capacity under its Euro Medium Term Notes (EMTN) programme totals 12 billion euros; using the 5 billion-euro commercial paper programme on Euronext Paris, described in a prospectus filed with the Banque de France; maintaining undrawn medium-term bank facilities that can be drawn down at any time according to the Group’s needs. As of June 30, 2019, the Group had two undrawn syndicated lines of credit obtained from a pool of leading banks, for a total of 3.9 billion euros. In June 2019, Carrefour amended and extended these two credit facilities, incorporating an innovative Corporate Social Responsibility (CSR) component in the first CSR-linked credit transaction in the European retail sector. The first credit facility (“Club deal”) was completed with a syndicate of eight banks for a total of 1.4 billion euros. The second credit facility (“Syndicated facility”) was negotiated with a syndicate of 21 banks for a total of 2.5 billion euros. Both facilities fall due in June 2024 and each can be extended twice for a further one-year period at Carrefour’s request. Group policy consists of keeping these facilities on stand-by to support the commercial paper programme. The loan agreements for the syndicated lines of credit include the usual commitments clauses, including pari passu, negative pledge, change of control and cross-default clauses and a clause restricting substantial sales of assets. The pricing grid may be adjusted up or down to reflect changes in the long-term credit rating. In Brazil, besides the two debentures issued by Atacadão S.A. in 2018 for a total of 1.5 billion reals and with maturities of three and five years, respectively, a short-term bond issue was carried out by Atacadão S.A. on January 7, 2019, in two tranches, amounting to 200 million reals and 700 million reals, respectively (around 45 and 160 million euros). The first tranche matured and was redeemed on March 8, 2019, and the second tranche will mature on January 6, 2020. The Group considers that its liquidity position is robust. The Group’s debt profile is balanced, with no peak in refinancing needs across the remaining life of bond debt, which averages 3.9 years, up from 3.6 years as of December 31, 2018. As of June 30, 2019, Carrefour was rated BBB with a stable outlook by Standard & Poor’s and Baa1 with a negative outlook by Moody’s. Carrefour – Half-year Financial Report – June 30, 2019 2. Group financial position 2.5 Restrictions on the use of capital resources There are no material restrictions on the Group’s ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. 2.6 Expected sources of funding To meet its commitments, Carrefour can use its free cash flow and raise debt capital using its EMTN and commercial paper programmes, as well as its credit lines. Carrefour – Half-year Financial Report – June 30, 2019 3. Outlook Carrefour is confident in the ongoing transformation momentum. It will continue in the second half in an uncertain macroeconomic and market environment. Carrefour reaffirms its ambitions and confirms the financial targets of the Carrefour 2022 plan: A cost-reduction plan of €2.8bn on an annual basis by 2020 (€2.6bn excluding China) • €5bn in food e-commerce sales in 2022 (€4.2bn excluding China) • €5bn in sales of organic products in 2022 (€4.8bn excluding China) • The disposal of non-strategic real estate assets for €500m by 2020 Operational targets are also confirmed: Reduction of 400,000 sqm of hypermarket sales area worldwide by 2022 (350,000 sqm excluding China) -15% reduction in assortments by 2020 (-15% excluding China) • Carrefour-branded products accounting for one-third of sales in 2022 (one-third excluding China) 3,000 convenience store openings by 2022 (2,700 excluding China) Carrefour – Half-year Financial Report – June 30, 2019 4. Other information 4.1 Accounting principles The accounting and calculation methods used to prepare the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 are the same as those used for the 2018 Consolidated Financial Statements, except for specific requirements of IAS 34 – Interim Financial Reporting and the following standards, amendments and interpretations which were applicable as of January 1, 2019: IFRS 16 – Leases: the impacts of IFRS 16 on the Consolidated Financial Statements are described in Note 4.3.1; IFRIC 23 – Uncertainty over Income Tax Treatments: the impacts of IFRIC 23 on the Consolidated Financial Statements are described in Note 4.3.2; Amendments to IFRS 9 – Prepayment Features with Negative Compensation: these amendments had no material impact on the Consolidated Financial Statements; Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures: these amendments had no material impact on the Consolidated Financial Statements; Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement: these amendments had no material impact on the Consolidated Financial Statements; IFRS Annual Improvements 2015-2017 Cycle: these amendments had no material impact on the Group’s Consolidated Financial Statements. No standards, amendments or interpretations were adopted for use in the European Union and available for early adoption. Not yet adopted for use in the European Union Standards, amendments and interpretations Effective date(1) Amendments to IFRS 10 and IAS 28 – Sales or Contribution of Assets between an Investor and its Associate or Joint Venture Application indefinitely IASB deferred the by Amendments to IFRS 3 – Definition of a Business January 1, 2020 Amendments to References to the Conceptual Framework in IFRS Standards January 1, 2020 Amendments to IAS 1 and IAS 8 – Definition of Material January 1, 2020 IFRS 17 – Insurance Contracts January 1, 2022 (1) Subject to adoption by the European Union. The Group is currently analysing the potential impacts of applying IFRS 17. It does not expect the application of the other standards, amendments or interpretations to have a material impact on its Consolidated Financial Statements. 4.2 Significant events of the period 4.2.1 Continuation of the “Carrefour 2022” transformation plan On January 23, 2018, the Carrefour Group unveiled “Carrefour 2022”, its transformation plan based on four pillars: deploy a streamlined and open organisation; achieve productivity and competitiveness gains; create a leading omni-channel universe; Carrefour – Half-year Financial Report – June 30, 2019 4. Other information overhaul the offering to promote food quality. As part of this initiative, the following transformation plans were announced for France and Italy in the first half of 2019: On May 15, 2019, Carrefour hypermarkets in France signed a majority mutually agreed termination arrangement (rupture conventionnelle collective – RCC) with its trade unions, providing for the departure of up to 3,000 employees. The agreement notably concerns shutting down the jewellery department, moving the multimedia department to self-service, and automating the petrol stations. On February 15, 2019, Carrefour Italy announced its transformation plan for 2019-2022 to the trade unions. The plan sets out several operational measures, such as opening several hundred stores in the Market and Express formats, stepping up the e-commerce business, updating the hypermarket model to comprise three clusters and reducing surface area on a targeted basis in some supermarkets. The plan also details reorganisation measures that will reduce the number of employees by a maximum of 590 people. The amount of the provision recognised at June 30, 2019 was estimated based on various assumptions and is the best estimate of the costs the Group expects to incur in relation to the restructuring plans currently being implemented (Notes 7.3 and 11.3 to the Condensed Consolidated Financial Statements). 4.2.2 Carrefour China sale agreement On June 23, 2019, the Group announced that it had signed an agreement to sell an 80% equity interest in Carrefour China to Chinese group Suning.com. With a presence in China dating back to 1995, Carrefour China operates a network of 210 hypermarkets and 24 convenience stores. In 2018, it generated net sales of 3.6 billion euros and EBITDA of 66 million euros. Suning.com is a leading retailer in China. It operates a network of over 8,881 stores in more than 700 cities and runs the country’s third-largest B2C e-commerce platform. The strong complementarity between Carrefour China and Suning.com’s businesses will accelerate the development of Carrefour China. Carrefour Group will retain a 20% stake in the business and two seats out of seven on Carrefour China’s Supervisory Board. Closing of the transaction is subject to approval by Chinese competition authorities and other customary conditions, and is expected by the end of 2019. The sale price for the 80% equity interest in Carrefour China is 4.8 billion renminbi (620 million euros). The price may be adjusted at the transaction date based on changes in Carrefour China’s net debt and working capital requirement. The agreement signed with Suning.com gives several liquidity windows for the Group’s residual 20% interest in Carrefour China once the transaction is completed: During the 90 days following the second anniversary of the transaction date, the Group may exercise a put option to sell its residual 20% interest to Suning.com at a price equal to 20% of equity as calculated at the date of the sale of the 80% interest, i.e., 20% of 6 billion renminbi (20% of 774 million euros); At the end of this period and for a period of 90 days, Suning.com may exercise a call option to purchase the residual 20% interest held by Carrefour at a price equal to 20% of equity as calculated at the date of the sale of the 80% interest; During the three years following the third anniversary of the transaction date, Carrefour may exercise a put option to sell its residual 20% interest to Suning.com at market value; Carrefour – Half-year Financial Report – June 30, 2019 4. Other information During the three years following the fourth anniversary of the transaction date, Suning.com may exercise a call option to purchase the residual 20% interest held by Carrefour at market value. For more details on the impacts of this sale on the Consolidated Financial Statements for the six-month period ended June 30, 2019, see Note 5 to the Condensed Consolidated Financial Statements. 4.2.3 Cargo Property Assets sale agreement In early 2019, the Group began the process to sell its subsidiary Cargo Property Assets, which owns 22 distribution centres in France. A preliminary agreement to sell the subsidiary’s entire share capital was signed on July 10, 2019 with Argan, a listed property company. The subsidiary’s assets were classified as held for sale at April 1, 2019, and comprise property and equipment with a net carrying amount of 567 million euros at June 30, 2019. The sale price attributable to the Group amounts to 288 million euros (corresponding to 32%). The price will be settled in cash for 230 million euros and in the acquirer’s listed shares for 58 million euros, representing around 5% of Argan on completion of the transaction. Closing of the transaction will be subject to the approval of Argan’s shareholders and other customary conditions, and is expected by the end of 2019. For accounting purposes, the capital gain will be adjusted for the impact of applying IFRS 16 to sale and leaseback transactions. 4.2.4 Securing the Group’s long-term financing On May 7, 2019, the Group carried out a new 500-million euro 8-year 1.00% bond issue maturing in May 2027. The issue's settlement date was May 15, 2019. On May 22, 2019, Carrefour redeemed 1 billion euros worth of six-year 1.75% bonds. These two transactions consolidated the Group’s long-term financing, extended the average maturity of its bond debt (to 3.9 years at June 30, 2019, vs. 3.6 years at December 31, 2018) and further reduced its borrowing costs. In June 2019, Carrefour amended and extended two credit facilities for a total amount of 3.9 billion euros, incorporating an innovative Corporate Social Responsibility (CSR) component in the first CSR-linked credit transaction in the European retail sector. The first credit facility (“Club deal”) was completed with a syndicate of eight banks for a total of 1.4 billion euros. The second credit facility (“Syndicated facility”) was negotiated with a syndicate of 21 banks for a total of 2.5 billion euros. Both facilities fall due in June 2024 and each can be extended twice for a further one-year period at Carrefour’s request. These two operations are part of Carrefour’s strategy to secure its long-term financing sources, extending the average maturity of these facilities from 3.1 years to 5 years. On January 7, 2019, Brazilian subsidiary Atacadão also issued short-term debentures in two tranches, for 200 and 700 million reals respectively (around 45 and 160 million euros). The first tranche matured and was redeemed on March 8, 2019, and the second tranche will mature on January 6, 2020. 4.2.5 2018 dividend reinvestment option At the Annual Shareholders’ Meeting held on June 14, 2019, the shareholders decided to set the 2018 dividend at 0.46 euros per share with a dividend reinvestment option. The issue price of the shares to be issued in exchange for reinvested dividends was set at 14.78 euros per share, representing 90% of the average of the opening prices quoted on Euronext Paris during the 20 trading days preceding the date of the Annual Shareholders’ Meeting, less the net amount of the dividend of 0.46 euros per share and rounded up to the nearest euro cent. Carrefour – Half-year Financial Report – June 30, 2019 4. Other information The option period was open from June 24, 2019 to July 5, 2019 and a liability of 359 million euros was recorded in the consolidated statement of financial position at June 30, 2019. (Note 14.4.1 to the Condensed Consolidated Financial Statements). On July 11, 2019, the Group paid the cash dividend to shareholders who chose not to reinvest their dividends, representing a total payout of 106 million euros. 4.3 Impact of changes in accounting policies The Group applied IFRS 16 – Leases and IFRIC 23 – Uncertainty over Income Tax Treatments as of January 1, 2019. A description of the main changes in accounting policies as a result of applying these standards and the impacts of these changes are summarised below. Changes resulting from the application of IFRS 16 led to a net positive impact of 5.0 billion euros on total assets, including a negative impact of 9 million euros on equity. Carrefour has chosen to apply IFRS 16 using the simplified retrospective approach as of January 1, 2019. There was no IFRIC 23 impact on the Consolidated Financial Statements for the six-month period ended June 30, 2019. For purposes of assessing tax uncertainties, IFRIC 23 does not affect the methods used by the Group to date. In addition, the IFRIC was consulted as to how income tax risks should be presented on the statement of financial position but they have not yet given a definitive opinion. For this reason, in the absence of a final decision, no assets or liabilities were reclassified at June 30, 2019. Tax risks relating to income tax are still classified under provisions. Data presented for the comparative period was not restated, as allowed by the transitional provisions of IFRS 16. Carrefour – Half-year Financial Report – June 30, 2019 4. Other information The table below summarises the impact of applying IFRS 16 on the opening statement of financial position in the Consolidated Financial Statements for the six-month period ended June 30, 2019: ASSETS (in € millions) December 31, 2018 IFRS 16 first application impacts January 1st, 2019 Goodwill 7 983 7 983 Other intangible assets 1 461 (41) 1 420 Property and equipment 12 637 (367) 12 270 Investment property 389 389 Right-of-use Assets 0 5 244 5 244 Investments in companies accounted for by the equity method 1 374 1 374 Other non-current financial assets 1 275 191 1 466 C onsumer credit granted by the financial services companies – long term 2 486 2 486 Deferred tax assets 723 723 Other non-current assets 379 (26) 353 Non-current assets 28 709 5 000 33 709 Inventories 6 135 6 135 Trade receivables 2 537 2 537 C onsumer credit granted by the financial services companies – short term 3 722 3 722 Other current financial assets 190 42 232 Tax receivables 853 853 Other assets 887 (17) 870 C ash and cash equivalents 4 300 4 300 Assets held for sale 46 46 Current assets 18 670 25 18 694 TOTAL ASSETS 47 378 5 025 52 403 SHAREHOLDERS’ EQUITY AND LIABILITIES (in € millions) December 31, 2018 IFRS 16 first application impacts January 1st, 2019 Share capital 1 973 1 973 C onsolidated reserves and income for the year 7 196 (9) 7 188 Shareholders’ equity, Group share 9 169 (9) 9 161 Shareholders’ equity attributable to non-controlling interests 2 117 2 117 Total shareholders' equity 11 286 (9) 11 278 Long-term borrowings 6 936 (230) 6 706 Lease commitments - long term 4 272 4 272 Provisions 3 521 54 3 575 C onsumer credit financing – long term 1 932 1 932 Deferred tax liabilities 541 541 Non-current liabilities 12 930 4 096 17 026 Short-term borrowings 1 339 (45) 1 294 Lease commitments - short term 984 984 Suppliers and other creditors 14 161 (2) 14 160 C onsumer credit financing – short term 3 582 3 582 Tax payables 1 142 1 142 Other payables 2 938 (1) 2 937 Liabilities related to assets held for sale Current liabilities 23 162 937 24 099 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 47 378 5 025 52 403 4.3.1. IFRS 16 – Leases This note details the impacts of applying IFRS 16 – Leases on Carrefour’s Consolidated Financial Statements. The IFRS 16 accounting policies applied to the Consolidated Financial Statements for the six-month period ended June 30, 2019 are described in Note 9 to the Condensed Consolidated Financial Statements. Carrefour – Half-year Financial Report – June 30, 2019 4. Other information i) Impacts recognised at January 1, 2019, date of the first-time application of IFRS 16 Carrefour has chosen to apply IFRS 16 using the simplified retrospective approach as of January 1, 2019. The 2018 Financial Statements were not restated. At January 1, 2019, the amount of lease liabilities represents the present value of lease payments due over the reasonably certain term of the lease. The amount of right-of-use assets represents the amount of lease liabilities, adjusted where necessary for leasehold rights and for any prepaid lease payments or lease incentives receivable from the lessor and recognised at December 31, 2018. This figure also includes a provision for dismantling where applicable. Right-of-use assets are adjusted for any onerous leases. The discount rate used at January 1, 2019 is the incremental borrowing rate (the average incremental borrowing rate at January 1, 2019 is 4.62%) as calculated over the initial term of each lease. This was calculated for each country using the risk-free yield curve and a spread (the same spread is used for all subsidiaries in a given country). Leases concern: mainly property assets, both used directly by the Group and sub-let to third parties, such as store premises sub-let to franchisees and retail units located in shopping malls and shopping centres; to a lesser extent, vehicles; as well as a few warehousing and storage contracts with a lease component. The leased assets’ reasonably certain period of use is determined based on: the inherent characteristics of the different types of assets (stores, logistics warehouses, administrative buildings) and the country concerned by the lease. In the case of leased store premises, the characteristics taken into account include the store’s profitability, any recent capital expenditure in the store and the existence of significant termination penalties in the case of integrated or franchised stores; a portfolio approach for leased vehicles with similar characteristics and periods of use. Four portfolios have been identified, corresponding to (i) Company cars, (ii) cars and vans for rental to customers, (iii) trucks and (iv) light commercial vehicles. Carrefour – Half-year Financial Report – June 30, 2019 4. Other information Reconciliation of off-balance sheet commitments at December 31, 2018 with IFRS 16 lease liabilities at January 1, 2019 (in € millions) Operating leases commitments at December 31, 2018 3 569 IFRS 16 exemptions Differences in duration determined under IFRS 16 related to termination and extension options which are reasonably certain (95) 2 301 Non discounted leases commitments under IFRS 16 at January 1st, 2019 5 775 Discount impact (793) Discounted leases commitments under IFRS 16 at January 1st, 2019 4 981 Finance leases liability under IAS 17 at December 31, 2018 275 Leases commitments at January 1st, 2019 5 256 including leases commitments - less than 1 year 984 including leases commitments - more than 1 year 4 272 Applying IFRS 16 also impacts the following items in the Consolidated Financial Statements: At the transition date, right-of-use assets and lease liabilities relating to leases previously classified as finance leases under IAS 17 are written back at their carrying amount immediately before the date of first-time application. Right-of-use assets relating to leases previously classified as finance leases represent 367 million euros, while finance lease liabilities represent 275 million euros; Leasehold rights are now included as part of the initial measurement of the right-of-use assets. Reclassifications were made in the opening statement of financial position in this respect for 41 million euros; Prepaid lease payments and lease incentives to be recognised over the lease term, which were initially shown in other assets and other liabilities, are now included in right-of-use assets; Right-of-use assets have been derecognised and financial receivables recognised in respect of sub-letting arrangements granted over the residual period of the leases concerned. Recognition of these receivables had a negative impact of 9 million euros on opening equity. At January 1, 2019, right-of-use assets relate to the following asset categories: (in € millions) Right of Use Asset Land & Buildings 4 970 Equipment, fixtures and fittings 116 Investment property Total 158 5 244 ii) Impact on segment information At January 1, 2019, segment assets and liabilities increased in all regions following the application of IFRS 16: (in € millions) Right-of-use Asset Group 5 244 France 1 265 Europe 2 252 Latin America 240 Asia 1 251 Global Functions 235 Lease commitment 5 256 1 255 2 433 241 1 100 228 Carrefour – Half-year Financial Report – June 30, 2019 4. Other information iii) Practical expedients adopted by the Group at January 1, 2019 The Group applied the following practical expedients upon the first-time application of IFRS 16: use of a single discount rate for a portfolio of leases with reasonably similar characteristics. This approach was applied to vehicle fleets; use of its assessment of whether leases are onerous by applying IAS 37 – Provisions, Contingent Liabilities and Contingent Assets immediately before the date of first-time impairment at application as an alternative to testing right-of-use assets January 1, 2019. Right-of-use assets were adjusted by the amount recognised in respect of any provisions for onerous leases (leases at above-market rates) immediately before the date of first-time application; for exclusion of initial direct costs from the measurement of right-of-use assets at the date of first-time application; use of hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease. The Group also chose not to review contracts to determine whether or not they contained a lease at the transition date. Accordingly, contracts not identified as leases under IAS 17 and IFRIC 4 before the date of first-time application were not reviewed. This practical expedient applies to all contracts entered into before January 1, 2019. 4.3.2 IFRIC 23 – Uncertainty over Income Tax Treatments IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 – Income Taxes when there is uncertainty over applicable tax treatments. This interpretation has no impact on the Consolidated Financial Statements for the six-month period ended June 30, 2019. For purposes of assessing tax uncertainties, IFRIC 23 does not affect the methods used by the Group to date. In addition, the IFRIC was consulted as to how income tax risks should be presented on the statement of financial position but they have not yet given a definitive opinion. For this reason, in the absence of a final decision, no assets or liabilities were reclassified at June 30, 2019. Tax risks relating to income tax are still classified under provisions. 4.4 Discontinued operations and restatement of comparative information On June 23, 2019, the Group signed an agreement to sell an 80% equity interest in its subsidiary, Carrefour China. If the conditions precedent are met, this agreement will result in loss of control of the subsidiary. At June 30, 2019, all of the subsidiary’s assets and liabilities therefore fall within the scope of IFRS 5 and have been reclassified as held for sale. As Carrefour China represents a separate major geographic area of operations, it is considered as a discontinued operation in accordance with IFRS 5. Accordingly: net income for the subsidiary is shown on a separate line of the income statement, “Net income/(loss) from discontinued operations”. To enable a meaningful comparison, its net income for first-half 2018 has also been reclassified on this line; all cash flows relating to this subsidiary are shown on the "Impact of discontinued operations" lines in the consolidated statement of cash flows. Data for first-half 2018 has been similarly restated. Carrefour – Half-year Financial Report – June 30, 2019 4. Other information Key consolidated figures for Carrefour China, classified as held for sale in first-half 2019 and first-half 2018 in accordance with IFRS 5, are as follows: (in € millions) First-half of 2019 First-half of 2018 Net sales 1 818 1 924 Gross margin from recurring operations 456 485 Sales, general and administrative expenses, depreciation and amortisation (435) (490) Recurring operating loss 21 (5) Operating loss 20 (25) Loss before taxes (23) (27) Income tax expense (5) (5) Net loss for the period (28) (32) 4.5 Main related-party transactions During first-half 2019, there were no major changes in the nature of related-party transactions carried out by the Group. 4.6 Subsequent events At the Annual Shareholders’ Meeting held on June 14, 2019, the shareholders decided to set the 2018 dividend at 0.46 euros per share with a dividend reinvestment option. At the end of the option period on July 5, 2019, shareholders owning 70.44% of Carrefour’s shares had elected to reinvest their 2018 dividend. July 11, 2019 was set as the date for: settlement/delivery of the 17,096,567 new shares corresponding to reinvested dividends, representing a total capital increase including premiums of 253 million euros; payment of the cash dividend to shareholders who chose not to reinvest their dividends, representing a total payout of 106 million euros. Carrefour and Glovo signed a strategic partnership agreement with a view of offering customers a 30-minute home delivery service. The partnership is designed to offer a simple, fast and convenient experience for customers to buy groceries online. The partnership will cover four countries – France, Spain, Italy and Argentina – and will start operating by early October at the latest. The sale agreement for Cargo Property Assets is described in Note 4.2.3. 4.7 Risk factors The risk factors at June 30, 2019 are the same as those identified in Section 4.8.1 of the 2018 Registration Document. Carrefour – Half-year Financial Report – June 30, 2019 Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 Consolidated income statement page 26 Consolidated statement of comprehensive income page 27 Consolidated statement of financial position page 28 Consolidated statement of cash flows page 29 Consolidated statement of changes in shareholders’ equity page30 Notes to the Condensed Consolidated Financial Statements page 31 Carrefour – Half-year Financial Report – June 30, 2019 Consolidated income statement The comparative consolidated income and cash flow statement information presented in this report has been restated to reflect the reclassification of Carrefour China in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations. These restatements are described in Note 5. On June 30, 2018, the integrated convenience stores business in France was classified in discontinued operations in accordance with IFRS 5. The Group applied IFRS 16 – Leases and IFRIC 23 – Uncertainty over Income Tax Treatments as of January 1, 2019. IFRIC 23 had no impact on the Consolidated Financial Statements for the six-month period ended June 30, 2019. Data presented for the comparative period was not restated, as allowed by the transitional provisions of IFRS 16. Argentina is classified as a hyperinflationary economy within the meaning of IFRSs. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the Consolidated Financial Statements for the six-month period ended June 30, 2019. Since IAS 21 does not allow comparative figures presented in prior-year financial statements to be restated in a stable currency, comparative data for first-half 2018 do not include the adjustment for inflation. The Consolidated Financial Statements are presented in millions of euros, rounded to the nearest million. As a result, there may be rounding differences between the amounts reported in the various statements. (in € millions) Notes First-half 2019 First-half 2018 restated % change Net sales 7.1 34 885 35 147 (0,7%) Loyalty program costs (336) (286) 17,6% Net sales net of loyalty program costs 34 549 34 861 (0,9%) Other revenue 7.1 1 204 1 199 0,4% Total revenue 35 752 36 060 (0,9%) C ost of sales (28 086) (28 324) (0,8%) Gross margin from recurring operations Sales, general and administrative expenses, depreciation and amortisation 7.2 7 667 (7 043) 7 736 (7 134) (0,9%) (1,3%) Recurring operating income 624 602 3,6% Net income / (loss) from equity-accounted companies (1) (6) (75,6%) Recurring operating income after net income from equity- accounted companies 622 596 4,4% Non-recurring income and expenses, net Operating income 7.3 (610) 12 (765) (169) (20,2%) (106,9%) Finance costs and other financial income and expenses, net 13.6 (165) (147) 12,3% Finance costs, net (112) (119) (5,4%) Net interests related to leases commitment (60) Other financial income and expenses, net 7 (28) (124,2%) Income before taxes (153) (316) (51,4%) Income tax expense Net income / (loss) from continuing operations 10 (192) (345) (173) (489) 10,6% (29,5%) Net loss from discontinued operations 5 (45) (261) (82,8%) Net income / (loss) for the half-year (390) (750) (48,0%) Group share (458) (861) (46,8%) of which net income / (loss) from continuing operations (415) (603) (31,2%) of which net income / (loss) from discontinued operations Attributable to non-controlling interests of which net income / (loss) from continuing operations - attributable to non-controlling interests of which net income / (loss) from discontinued operations - attributable to non-controlling interests (43) 68 70 (2) (259) 112 113 (2) (83,3%) (39,0%) (38,5%) (4,9%) Basic earnings per share, in € First-half 2019 First-half 2018 restated % change Loss from continuing operations per share - Group share (0,53) (0,78) (32,5)% Loss from discontinued operations per share - Group share (0,06) (0,34) (83,6%) Basic loss per share – Group share (0,59) (1,12) (47,8)% Diluted earnings per share, in € First-half 2019 First-half 2018 restated % change Diluted loss from continuing operations per share - Group share (0,53) (0,78) (32,5)% Diluted loss from discontinued operations per share - Group share (0,06) (0,34) (83,6%) Diluted loss per share – Group share (0,59) (1,12) (47,8)% Details of earnings per share calculations are provided in Note 12.2. Carrefour – Half-year Financial Report – June 30, 2019 Consolidated statement of comprehensive income (in € millions) First-half 2019 First-half 2018 restated Net loss for the year (390) (750) Effective portion of changes in the fair value of cash flow hedges C hanges in the fair value of debt instruments through other comprehensive income Exchange differences on translating foreign operations (1) (27) (3) 71 (3) (2) (430) Items that may be reclassified subsequently to profit or loss 41 (434) Remeasurements of defined benefit plans obligation (2) C hanges in the fair value of equity instruments through other comprehensive income (76) 1 2 0 Items that will not be reclassified to profit or loss (75) 2 Other comprehensive loss after tax (34) (432) Total comprehensive income/(loss) (424) (1 182) Group share (508) (1 160) Attributable to non-controlling interests 84 (22) Presented net of the tax effect (Note 12.1). (1) Exchange differences recognised on translating foreign operations in first-half 2019 mainly reflect the increase in the value of the Brazilian real. Exchange differences recognised on translating foreign operations in first-half 2018 mainly reflect the fall in the value of the Brazilian real. (2) Remeasurement of the net defined benefit liability in first-half 2019 reflects the decrease in discount rates applied for the eurozone, from 1.60% at December 31, 2018 to 0.80% at June 30, 2019. Carrefour – Half-year Financial Report – June 30, 2019 Consolidated statement of financial position ASSETS (in € millions) Notes June 30, 2019 December 31, 2018 Goodwill 8.1 7 999 7 983 Other intangible assets 8.1 1 411 1 461 Property and equipment 8.2 11 311 12 637 Investment property 8.3 312 389 Right-of-use Assets 9.2 4 226 Investments in companies accounted for by the equity method 1 242 1 374 Other non-current financial assets 13.5 1 443 1 275 C onsumer credit granted by the financial services companies – long term 7.5 2 406 2 486 Deferred tax assets 770 723 Other non-current assets 513 379 Non-current assets 31 633 28 709 Inventories 5 848 6 135 Trade receivables 2 752 2 537 C onsumer credit granted by the financial services companies – short term 7.5 4 163 3 722 Other current financial assets 13.2 316 190 Tax receivables 895 853 Other assets 884 887 C ash and cash equivalents 13.2 1 522 4 300 Assets held for sale 5 2 452 46 Current assets 18 832 18 670 TOTAL ASSETS 50 465 47 378 SHAREHOLDERS’ EQUITY AND LIABILITIES (in € millions) Notes June 30, 2019 December 31, 2018 Share capital 1 973 1 973 C onsolidated reserves and income for the period 6 304 7 196 Shareholders’ equity, Group share 8 277 9 169 Shareholders’ equity attributable to non-controlling interests 2 157 2 117 Total shareholders' equity 10 434 11 286 Long-term borrowings 13.2 6 215 6 936 Lease commitments - long term 9.3 3 495 Provisions 11 3 991 3 521 C onsumer credit financing – long term 7.5 1 878 1 932 Deferred tax liabilities 598 541 Non-current liabilities 16 178 12 930 Short-term borrowings 13.2 1 624 1 339 Lease commitments - short term 9.3 822 Suppliers and other creditors 11 619 14 161 C onsumer credit financing – short term 7.5 3 975 3 582 Tax payables 996 1 142 Other payables 2 773 2 938 Liabilities related to assets held for sale 5 2 046 Current liabilities 23 854 23 162 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 50 465 47 378 Carrefour – Half-year Financial Report – June 30, 2019 Consolidated statement of cash flows (in € millions) First-half 2019 First-half 2018 restated INCOME BEFORE TAXES (153) (316) CASH FLOWS FROM OPERATING ACTIVITIES Income tax (231) (236) Depreciation and amortisation expense 1 147 727 C apital (gains)/losses on sales of assets (28) (24) C hange in provisions and impairment 283 612 Finance costs, net 112 119 Net interests related to leases obligations 60 Net income and dividends received from equity-accounted companies Impact of discontinued operations (1) 75 104 43 (35) Cash flow from operations C hange in working capital requirement (2) Impact of discontinued operations (1) 1 367 (2 123) (113) 890 (2 313) (25) Net cash from operating activities (excluding financial services companies) (868) (1 447) C hange in consumer credit granted by the financial services companies (36) 24 Net cash from operating activities (904) (1 423) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets (3) (628) (547) Acquisitions of non-current financial assets Acquisitions of subsidiaries and investments in associates (4) (14) (59) (16) (142) Proceeds from the disposal of subsidiaries and investments in associates 52 0 Proceeds from the disposal of property and equipment and intangible assets 62 40 Proceeds from the disposal of non-current financial assets 22 13 C hange in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets (3) (191) (249) Investments net of disposals (756) (901) Other cash flows from investing activities Impact of discontinued operations (1) (64) (23) (24) (32) Net cash used in investing activities (842) (956) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from share issues to non-controlling interests (5) Dividends paid by C arrefour (parent company) (6) Dividends paid by consolidated companies to non-controlling interests 45 (60) 36 (31) C hange in treasury stock and other equity instruments C hange in current financial assets (7) Issuance of bonds (7) Repayments of bonds (7) (6) 707 (1 046) 42 (38) 1 257 (351) Net financial interests paid Other changes in borrowings (7) (159) 227 (161) 96 Payments related to leases contracts (8) (451) Net interests related to leases obligations (8) Impact of discontinued operations (1) (45) (48) 102 Net cash from financing activities (834) 951 Net change in cash and cash equivalents before the effect of changes in exchange rates (2 580) (1 428) Effect of changes in exchange rates 3 (171) Net change in cash and cash equivalents (2 578) (1 600) Cash and cash equivalents at beginning of period 4 300 3 593 Cash and cash equivalents at end of period 1 723 1 993 of which cash and cash equivalent at end of period from continuing operations of which cash and cash equivalent at end of period from discontinued operations 1 522 200 1 743 250 (1) Restatements made to reflect the classification of cash flows relating to discontinued operations in accordance with IFRS 5 are detailed in Note 5. (2) The change in working capital is analysed in Note 7.4. (3) Acquisitions mostly include operational investments in fast-growing formats, the Group’s digitisation and the roll-out of a leading omni-channel offering. (4) This item mainly relates to the acquisition of a majority interest in the capital of So.bio (transaction described in Note 14.1.1). In 2018, this item mainly related to the acquisition of a minority interest in the capital of Showroomprivé and a majority interest in the capital of Quitoque. (5) In first-half 2019 and first-half 2018, proceeds from share issues to non-controlling interests mainly correspond to the share capital of Cargo Property Assets subscribed and paid up during the period by third-party investors (non-controlling interests). (6) The dividend approved by shareholders at the Annual Shareholders’ Meeting of June 14, 2019 was paid on July 11, 2019 (Notes 3.5 and 14.4.1). In 2018, the dividend was paid on July 13 (cash dividend of 152 million euros paid to the shareholders who chose not to reinvest their dividends). (7) Note 13.2 provides a breakdown of total borrowings. Changes in liabilities arising from financing activities are detailed in Note 13.4. (8) In accordance with IFRS 16, effective as from January 1, 2019 (Note 4), payments under leases along with any related interest are shown in financing cash flows. Carrefour – Half-year Financial Report – June 30, 2019 Consolidated statement of changes in shareholders’ equity Shareholders’ equity, Group share (in € millions) Share capital Translation reserve Fair value reserve (4) Other consolidated reserves and net income Total Shareholders’ equity, Group share Non- controlling interests Total Shareholders’ equity Shareholders' equity at December 31, 2017 1 937 (885) (24) 9 032 10 059 2 099 12 159 IFRS 9 first application adjustments (1) (141) (141) (119) (259) Shareholders' equity at January 1, 2018 1 937 (885) (24) 8 891 9 919 1 980 11 899 Net income / (loss) for the half-year 2018 (861) (861) 112 (750) Other comprehensive income / (loss) after tax (297) (3) 2 (298) (134) (432) Total comprehensive income / (loss) at June 30, 2018 (297) (3) (859) (1 160) (22) (1 182) Share-based payments 5 5 0 6 Treasury stock (net of tax) 2017 dividend payment (2) C hange in capital and additional paid-in capital 42 (352) 1 42 (352) 1 (23) 3 42 (375) 3 Effect of changes in scope of consolidation and other movements (16) (16) 16 (0) Shareholders' equity at June 30, 2018 1 937 (1 183) (27) 7 712 8 439 1 954 10 393 Shareholders' equity at December 31, 2018 1 973 (1 219) (30) 8 445 9 169 2 117 11 286 IFRS 16 first application adjustments (3) (9) (9) (9) Shareholders' equity at January 1st, 2019 1 973 (1 219) (30) 8 436 9 161 2 117 11 278 Net income / (loss) for the half-year 2019 (458) (458) 68 (390) Other comprehensive income / (loss) after tax 54 (28) (75) (50) 15 (34) Total comprehensive income / (loss) at June 30, 2019 54 (28) (533) (508) 84 (424) Share-based payments 6 6 6 2018 dividend payment (2) C hange in capital and additional paid-in capital Effect of changes in scope of consolidation and other movements (359) 0 (24) (359) 0 (24) (46) 1 1 (405) 2 (22) Shareholders' equity at June 30, 2019 1 973 (1 165) (58) 7 527 8 277 2 157 10 434 (1) The Group applied IFRS 9 – Financial Instruments for the first time as of January 1, 2018. In light of the Group’s chosen transition approach, comparative data have not been restated and the impact (net of tax) resulting from the first-time application of IFRS 9 was recognised in equity at January 1, 2018. (2) The 2017 dividend, totalling 352 million euros, was paid in second-half 2018: in cash for 152 million euros; and - in new shares for 200 million euros (corresponding to the aggregate par value of the new shares for 36 million euros and premiums for 164 million euros). The 2018 dividend, totalling 359 million euros, corresponds to the total dividend amount approved at the Annual Shareholders’ Meeting of June 14, 2019. It was paid on July 11, 2019 (i) in cash for 106 million euros and (ii) in 17,096,567 new shares for 253 million euros (Notes 3.5 and 14.4.1). Dividends paid to non-controlling interests, totalling 23 million euros in first-half 2018 and 46 million euros in first-half 2019, mainly concern Spanish, French and Brazilian subsidiaries. (3) The Group applied IFRS 16 – Leases for the first time as of January 1, 2019. In light of the Group’s chosen transition approach, comparative data have not been restated and the impact resulting from the first-time application of IFRS 16 (detailed in Note 4) has been recognised in equity at January 1, 2019. (4) This item comprises: the effective portion of changes in the fair value of cash flow hedges; - the financial asset fair value reserve (changes in the fair value of financial assets carried at fair value through other comprehensive income). NB: In accordance with IAS 29 – Financial Reporting in Hyperinflationary Economies, equity at June 30, 2019 includes the impact of hyperinflation in Argentina. Since IAS 21 does not allow comparative figures presented in prior-year financial statements to be restated in a stable currency, equity at June 30, 2018 does not include the adjustment for hyperinflation. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements Notes to the Condensed Consolidated Financial Statements Note 1: Basis of preparation of the Condensed Consolidated Financial Statements page 32 Note 2: Seasonal fluctuations in business page 34 Note 3: Significant events of the period page 35 Note 4: Impact of changes in accounting policies page 38 Note 5: Discontinued operations and restatement of comparative information page 42 Note 6: Segment information page 46 Note 7: Operating items page 48 Note 8: Intangible assets, property and equipment, investment property page 52 Note 9: Leases page 53 Note 10: Income tax page 56 Note 11: Provisions and contingent liabilities page 56 Note 12: Other comprehensive income and earnings per share page 58 Note 13: Financial assets and liabilities, finance costs and other financial income and expenses page 60 Note 14: Other information page 66 Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 1: BASIS OF PREPARATION OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 were reviewed by the Board of Directors on July 25, 2019. Carrefour (the “Company”) is domiciled in France. The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 reflect the financial position and results of operations of the Company and its subsidiaries (together the “Group”), along with the Group’s share of the profits and losses and net assets of associates and joint ventures accounted for by the equity method. The presentation currency of the Consolidated Financial Statements is the euro, which is the Company’s functional currency. 1.1 Statement of compliance In accordance with European Regulation (EC) no. 1606/2002 dated July 19, 2002, the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 have been prepared in compliance with the international accounting standards adopted for use in the European Union as of June 30, 2019 and applicable at that date, with comparative information for the same period of 2018 and at December 31, 2018 prepared using the standards applicable at the reporting date. International accounting standards comprise International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), IFRS Interpretations Committee (IFRIC) Interpretations and Standing Interpretations Committee (SIC) Interpretations. All of the standards and interpretations endorsed by the European Union are published in the Official Journal of the European Union, which can be accessed in the EUR-Lex. At June 30, 2019, the standards and interpretations adopted for use in the European Union were the same as those published by the IASB and applicable at that date. 1.2 IFRSs and interpretations applied by the Group The accounting and calculation methods used to prepare the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 are the same as those used for the 2018 Consolidated Financial Statements, except for specific requirements of IAS 34 – Interim Financial Reporting (Note 1.3) and the following standards, amendments and interpretations which were applicable as of January 1, 2019: IFRS 16 – Leases: the impacts of IFRS 16 on the Consolidated Financial Statements are described in Note 4; IFRIC 23 – Uncertainty over Income Tax Treatments: the impacts of IFRIC 23 on the Consolidated Financial Statements are described in Note 4; Amendments to IFRS 9 – Prepayment Features with Negative Compensation: these amendments had no material impact on the Consolidated Financial Statements; Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures: these amendments had no material impact on the Consolidated Financial Statements; Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement: these amendments had no material impact on the Consolidated Financial Statements; IFRS Annual Improvements 2015-2017 Cycle: these amendments had no material impact on the Consolidated Financial Statements. No standards, amendments or interpretations were adopted for use in the European Union and available for early adoption. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements Not yet adopted for use in the European Union Standards, amendments and interpretations Effective date(1) Amendments to IFRS 10 and IAS 28 – Sales or Contribution of Assets between an Investor and its Associate or Joint Venture Application deferred indefinitely by the IASB Amendments to IFRS 3 – Definition of a Business January 1, 2020 Amendments to References to the Conceptual Framework in IFRS Standards January 1, 2020 Amendments to IAS 1 and IAS 8 – Definition of Material January 1, 2020 IFRS 17 – Insurance Contracts January 1, 2022 (1) Subject to adoption by the European Union. The Group is currently analysing the potential impacts of applying IFRS 17. It does not expect the application of the other standards, amendments or interpretations to have a material impact on its Consolidated Financial Statements. 1.3 Specific reporting treatments in the preparation of interim financial statements 1.3.1 Reporting principles The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 have been prepared in accordance with IAS 34 – Interim Financial Reporting. Condensed interim consolidated financial statements do not contain all of the disclosures that would be required in a complete set of annual financial statements. Consequently, these interim financial statements should be read jointly with the Group’s Consolidated Financial Statements for the year ended December 31, 2018, as included in the Registration Document filed with the AMF and available on request from the Company’s head office at 93 avenue de Paris – 91300 Massy, France, or on the Company’s website, www.carrefour.com. 1.3.2 Estimation of income tax expense In accordance with IAS 34, income tax expense for first-half 2019 is calculated based on the estimated weighted average annual income tax rate for full-year 2019 (the effective tax rate), for each entity and tax sub-group (Note 10). The tax impact of specific transactions is reflected in income tax expense for the period. 1.3.3 Post-employment benefits and other long-term benefits The provision for pensions and other post-employment benefits is calculated using actuarial projections based on data from the previous period-end. The discount rate for the main contributing countries (eurozone) is reviewed at June 30 (Note 11). The actuarial projections are updated to take into account any material changes to assumptions or one-off impacts (discount rates, applicable legislation, the population concerned, etc.) during the six-month period. 1.4 Use of estimates and judgement Preparation of Consolidated Financial Statements involves the use of management estimates and assumptions that may affect the reported amounts of certain assets, liabilities, income and expenses, as well as the disclosures contained in the notes. These estimates and assumptions are reviewed at regular intervals by Group management to ensure that they are reasonable in light of past experience and the current economic situation. Actual results may differ from current estimates. In addition to using estimates, Group management is required to exercise judgement Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements when determining the appropriate accounting treatment of certain transactions and activities and how it should be applied. The main estimates and judgements applied by management for the preparation of the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019 are the same as those described in the Consolidated Financial Statements for the year ended December 31, 2018. However, they also include estimates and judgements relating to the measurement of right-of-use assets and lease liabilities recognised in accordance with IFRS 16 – Leases (Note 9). 1.5 Measurement methods The Consolidated Financial Statements have been prepared using the historical cost convention, except for assets acquired and liabilities assumed in business combinations and certain financial assets and liabilities, which are measured using the fair value model, and non-current assets held for sale, which are measured at the lower of carrying amount and fair value less costs to sell. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Based on the hierarchy defined in IFRS 13 – Fair Value Measurement, fair value may be measured using the following inputs: Level 1 inputs: unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 inputs: models that use inputs that are observable for the asset or liability, either directly (i.e., prices) or indirectly (i.e., price-based data); Level 3 inputs: inputs that are intrinsic to the asset or liability and are not based on observable market data for the asset or liability. Argentina is classified as a hyperinflationary economy within the meaning of IFRSs. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the Consolidated Financial Statements for the six-month period ended June 30, 2019. Since IAS 21 does not allow comparative figures presented in prior-year financial statements to be restated in a stable currency, comparative data for first-half 2018 do not include the adjustment for inflation. NOTE 2: SEASONAL FLUCTUATIONS IN BUSINESS Like those of other retailers, Carrefour’s sales are subject to significant seasonal fluctuations, with the result that comparisons between the consolidated financial statements for the first and second halves of the year are not particularly meaningful. This is particularly the case for recurring operating income and cash flow generation between the two periods. Second-half sales are traditionally higher than those for the first half, due to increased activity in December. Operating expenses on the other hand – such as payroll costs, depreciation and amortisation – are spread more or less evenly over the year. As a result, recurring operating income is generally lower in the first half than in the second. Cash flows generated by the Group are also strongly impacted by seasonal trends, with working capital requirement rising sharply in the first half as a result of the large volume of supplier payments due at the beginning of the year for the purchases made ahead of the previous year’s peak selling period in December. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 3: SIGNIFICANT EVENTS OF THE PERIOD 3.1 Continuation of the “Carrefour 2022” transformation plan On January 23, 2018, the Carrefour Group unveiled “Carrefour 2022”, its transformation plan based on four pillars: deploy a streamlined and open organisation; achieve productivity and competitiveness gains; create a leading omni-channel universe; overhaul the offering to promote food quality. As part of this initiative, the following transformation plans were announced for France and Italy in the first half of 2019: On May 15, 2019, Carrefour Hypermarchés France signed a majority mutually agreed termination arrangement (rupture conventionnelle collective – RCC) with its trade unions, providing for the departure of up to 3,000 employees. The agreement notably concerns shutting down the jewellery department, moving the multimedia department to self- service, and automating the petrol stations. On February 15, 2019, Carrefour Italy announced its transformation plan for 2019-2022 to the trade unions. The plan sets out several operational measures, such as opening several hundreds of stores in the Market and Express formats, stepping up the e-commerce business, updating the hypermarket model to comprise three clusters and reducing surface area on a targeted basis in some supermarkets. The plan also details reorganisation measures that will reduce the number of employees by a maximum of 590 people. The amount of the provision recognised at June 30, 2019 was estimated based on various assumptions and is the best estimate of the costs the Group expects to incur in relation to the restructuring plans currently being implemented (Notes 7.3 and 11.3). 3.2 Carrefour China sale agreement On June 23, 2019, the Group announced that it had signed an agreement to sell an 80% equity interest in Carrefour China to Chinese group Suning.com. With a presence in China dating back to 1995, Carrefour China operates a network of 210 hypermarkets and 24 convenience stores. In 2018, it generated net sales of 3.6 billion euros and EBITDA of 66 million euros. Suning.com is a leading retailer in China. It operates a network of over 8,881 stores in more than 700 cities and runs the country’s third-largest B2C e-commerce platform. The strong complementarity between Carrefour China and Suning.com’s businesses will accelerate the development of Carrefour China. Carrefour Group will retain a 20% stake in the business and two seats out of seven on Carrefour China’s Supervisory Board. Closing of the transaction is subject to approval by Chinese competition authorities and other customary conditions, and is expected by the end of 2019. The sale price for the 80% equity interest in Carrefour China is 4.8 billion renminbi (620 million euros). The price may be adjusted at the transaction date based on changes in Carrefour China’s net debt and working capital requirement. The agreement signed with Suning.com gives several liquidity windows for the Group’s residual 20% interest in Carrefour China once the transaction is completed: During the 90 days following the second anniversary of the transaction date, the Group may exercise a put option to sell its residual 20% interest to Suning.com at a price equal Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements to 20% of equity as calculated at the date of the sale of the 80% interest, i.e., 20% of 6 billion renminbi (20% of 774 million euros); At the end of this period and for a period of 90 days, Suning.com may exercise a call option to purchase the residual 20% interest held by Carrefour at a price equal to 20% of equity as calculated at the date of the sale of the 80% interest; During the three years following the third anniversary of the transaction date, Carrefour may exercise a put option to sell its residual 20% interest to Suning.com at market value; During the three years following the fourth anniversary of the transaction date, Suning.com may exercise a call option to purchase the residual 20% interest held by Carrefour at market value. For more details on the impacts of this ongoing sale on the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019, see Note 5. 3.3 Cargo Property Assets sale agreement In early 2019, the Group began the process to sell its subsidiary Cargo Property Assets, which owns 22 distribution centres in France. A preliminary agreement to sell the subsidiary’s entire share capital was signed on July 10, 2019 with Argan, a listed property company. The subsidiary’s assets were classified as held for sale at April 1, 2019, and comprise property and equipment with a net carrying amount of 567 million euros at June 30, 2019. The sale price attributable to the Group amounts to 288 million euros (corresponding to 32%). The price will be settled in cash for 230 million euros and in the acquirer’s listed shares for 58 million euros, representing around 5% of Argan on completion of the transaction. Closing of the transaction is subject to the approval of Argan’s shareholders and other customary conditions, and is expected by the end of 2019. For accounting purposes, the capital gain will be adjusted for the impact of applying IFRS 16 to sale and leaseback transactions. 3.4 Securing the Group’s long-term financing On May 7, 2019, the Group carried out a new 500-million euro 8-year 1.00% bond issue due May 2027. The issue’s settlement date was May 15, 2019. On May 22, 2019, Carrefour redeemed 1 billion euros worth of six-year 1.75% bonds. These two transactions consolidated the Group’s long-term financing, extended the average maturity of its bond debt (to 3.9 years at June 30, 2019, vs. 3.6 years at December 31, 2018) and further reduced its borrowing costs. In June 2019, Carrefour amended and extended two credit facilities for a total amount of 3.9 billion euros, incorporating an innovative Corporate Social Responsibility (CSR) component in the first CSR-linked credit transaction in the European retail sector. The first credit facility (“Club deal”) was completed with a syndicate of eight banks for a total of 1.4 billion euros. The second credit facility (“Syndicated facility”) was negotiated with a syndicate of 21 banks for a total of 2.5 billion euros. Both facilities fall due in June 2024 and each can be extended twice for a further one-year period at Carrefour’s request. These two operations are part of Carrefour’s strategy to secure its long-term financing sources, extending the average maturity of these facilities from 3.1 years to 5 years. On January 7, 2019, Brazilian subsidiary Atacadão also carried out a bond issue (short-term debentures) in two tranches, for 200 and 700 million reals respectively (around 45 and 160 million euros). The first tranche matured and was redeemed on March 8, 2019, and the second tranche will mature on January 6, 2020. 3.5 2018 dividend reinvestment option At the Annual Shareholders’ Meeting held on June 14, 2019, the shareholders decided to set the 2018 dividend at 0.46 euros per share with a dividend reinvestment option. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements The issue price of the shares to be issued in exchange for reinvested dividends was set at 14.78 euros per share, representing 90% of the average of the opening prices quoted on Euronext Paris during the 20 trading days preceding the date of the Annual Shareholders’ Meeting, less the net amount of the dividend of 0.46 euros per share and rounded up to the nearest euro cent. The option period was open from June 24, 2019 to July 5, 2019 and a liability of 359 million euros was recorded in the consolidated statement of financial position at June 30, 2019 (Note 14.4.1). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 4: IMPACT OF CHANGES IN ACCOUNTING POLICIES The Group applied IFRS 16 – Leases and IFRIC 23 – Uncertainty over Income Tax Treatments as of January 1, 2019. A description of the main changes in accounting policies as a result of applying these standards and the impacts of these changes are summarised below. Changes resulting from the application of IFRS 16 led to a net positive impact of 5.0 billion euros on total assets, including a negative impact of 9 million euros on equity. Carrefour has chosen to apply IFRS 16 using the simplified retrospective approach as of January 1, 2019. There was no IFRIC 23 impact on the Consolidated Financial Statements for the six-month period ended June 30, 2019. For purposes of assessing tax uncertainties, IFRIC 23 does not affect the methods used by the Group to date. In addition, the IFRIC was consulted as to how income tax risks should be presented on the statement of financial position but they have not yet given a definitive opinion. For this reason, in the absence of a final decision, no assets or liabilities were reclassified at June 30, 2019. Tax risks relating to income tax are still classified under provisions. Data presented for the comparative period was not restated, as allowed by the transitional provisions of IFRS 16. The table below summarises the impact of applying IFRS 16 on the opening statement of financial position in the Consolidated Financial Statements for the six-month period ended June 30, 2019: ASSETS (in € millions) December 31, 2018 IFRS 16 first application impacts January 1st, 2019 Goodwill 7 983 7 983 Other intangible assets 1 461 (41) 1 420 Property and equipment 12 637 (367) 12 270 Investment property 389 389 Right-of-use Assets 0 5 244 5 244 Investments in companies accounted for by the equity method 1 374 1 374 Other non-current financial assets 1 275 191 1 466 C onsumer credit granted by the financial services companies – long term 2 486 2 486 Deferred tax assets 723 723 Other non-current assets 379 (26) 353 Non-current assets 28 709 5 000 33 709 Inventories 6 135 6 135 Trade receivables 2 537 2 537 C onsumer credit granted by the financial services companies – short term 3 722 3 722 Other current financial assets 190 42 232 Tax receivables 853 853 Other assets 887 (17) 870 C ash and cash equivalents 4 300 4 300 Assets held for sale 46 46 Current assets 18 670 25 18 694 TOTAL ASSETS 47 378 5 025 52 403 Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements SHAREHOLDERS’ EQUITY AND LIABILITIES (in € millions) December 31, 2018 IFRS 16 first application impacts January 1st, 2019 Share capital 1 973 1 973 C onsolidated reserves and income for the year 7 196 (9) 7 188 Shareholders’ equity, Group share 9 169 (9) 9 161 Shareholders’ equity attributable to non-controlling interests 2 117 2 117 Total shareholders' equity 11 286 (9) 11 278 Long-term borrowings 6 936 (230) 6 706 Lease commitments - long term 4 272 4 272 Provisions 3 521 54 3 575 C onsumer credit financing – long term 1 932 1 932 Deferred tax liabilities 541 541 Non-current liabilities 12 930 4 096 17 026 Short-term borrowings 1 339 (45) 1 294 Lease commitments - short term 984 984 Suppliers and other creditors 14 161 (2) 14 160 C onsumer credit financing – short term 3 582 3 582 Tax payables 1 142 1 142 Other payables 2 938 (1) 2 937 Liabilities related to assets held for sale Current liabilities 23 162 937 24 099 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 47 378 5 025 52 403 4.1. IFRS 16 – Leases This note details the impacts of the first-time application of IFRS 16 – Leases on Carrefour’s Consolidated Financial Statements. The IFRS 16 accounting policies applied to the Consolidated Financial Statements for the six-month period ended June 30, 2019 are described in Note 9. i) Impacts recognised at January 1, 2019, date of the first-time application of IFRS 16 Carrefour has chosen to apply IFRS 16 using the simplified retrospective approach as of January 1, 2019. The 2018 Financial Statements have not been restated. At January 1, 2019, the amount of lease liabilities represents the present value of lease payments due over the reasonably certain term of the lease. The amount of right-of-use assets represents the amount of lease liabilities, adjusted where necessary for leasehold rights and for any prepaid lease payments or lease incentives receivable from the lessor and recognised at December 31, 2018. This figure also includes a provision for dismantling where applicable. Right-of-use assets are adjusted for any onerous leases. The discount rate used at January 1, 2019 is the incremental borrowing rate (the weighted average incremental borrowing rate at January 1, 2019 is 4.62%) as calculated over the initial term of each lease. This was calculated for each country using a risk-free yield curve and a spread (the same spread is used for all subsidiaries in a given country). Leases concern: mainly property assets, both used directly by the Group and sub-let to third parties, such as store premises sub-let to franchisees and retail units located in shopping malls and shopping centres; to a lesser extent, vehicles; as well as a few warehousing and storage contracts with a lease component. The leased assets’ reasonably certain period of use is determined based on: Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements the inherent characteristics of the different types of assets (stores, logistics warehouses, administrative buildings) and the country concerned by the lease. In the case of leased store premises, the characteristics taken into account include the store’s profitability, any recent capital expenditure in the store and the existence of significant termination penalties in the case of integrated or franchised stores; a portfolio approach for leased vehicles with similar characteristics and periods of use. Four portfolios have been identified, corresponding to (i) Company cars, (ii) cars and vans for rental to customers, (iii) trucks and (iv) light commercial vehicles. Reconciliation of off-balance sheet commitments at December 31, 2018 with IFRS 16 lease liabilities at January 1, 2019 (in € millions) Operating leases commitments at December 31, 2018 3 569 IFRS 16 exemptions Differences in duration determined under IFRS 16 related to termination and extension options which are reasonably certain (95) 2 301 Non discounted leases commitments under IFRS 16 at January 1st, 2019 5 775 Discount impact (793) Discounted leases commitments under IFRS 16 at January 1st, 2019 4 981 Finance leases liability under IAS 17 at December 31, 2018 275 Leases commitments at January 1st, 2019 5 256 including leases commitments - less than 1 year 984 including leases commitments - more than 1 year 4 272 Applying IFRS 16 also impacts the following captions in the Consolidated Financial Statements: At the transition date, right-of-use assets and lease liabilities relating to leases previously classified as finance leases under IAS 17 are written back at their carrying amount immediately before the date of first-time application. Right-of-use assets relating to leases previously classified as finance leases represent 367 million euros, while finance lease liabilities represent 275 million euros; Leasehold rights are now included as part of the initial measurement of the right-of-use assets. Reclassifications were made in the opening statement of financial position in this respect for 41 million euros; Prepaid lease payments and lease incentives to be recognised over the lease term, which were initially shown in other assets and other liabilities, are now included in right-of-use assets; Right-of-use assets have been derecognised and financial receivables recognised in respect of sub-letting arrangements granted over the residual period of the leases concerned. Recognition of these receivables had a negative impact of 9 million euros on opening equity. At January 1, 2019, right-of-use assets relate to the following asset categories: (in € millions) Right of Use Asset Land & Buildings 4 970 Equipment, fixtures and fittings 116 Investment property Total 158 5 244 Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements ii) Impact on segment information At January 1, 2019, segment assets and liabilities increased in all regions following the application of IFRS 16: (in € millions) Right-of-use Asset Group 5 244 France 1 265 Europe 2 252 Latin America 240 Asia 1 251 Global Functions 235 Lease commitment 5 256 1 255 2 433 241 1 100 228 iii) Practical expedients adopted by the Group at January 1, 2019 The Group applied the following practical expedients upon the first-time application of IFRS 16: use of a single discount rate for a portfolio of leases with reasonably similar characteristics. This approach was applied to vehicle fleets; use of its assessment of whether leases are onerous by applying IAS 37 – Provisions, Contingent Liabilities and Contingent Assets immediately before the date of first-time impairment at application as an alternative to testing right-of-use assets January 1, 2019. Right-of-use assets were adjusted by the amount recognised in respect of any provision for onerous leases (leases at above-market rates) immediately before the date of first-time application; for exclusion of initial direct costs from the measurement of right-of-use assets at the date of first-time application; use of hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease. The Group also chose not to review contracts to determine whether or not they contained a lease at the transition date. Accordingly, contracts not identified as leases under IAS 17 and IFRIC 4 before the date of first-time application were not reviewed. This practical expedient applies to all contracts entered into before January 1, 2019. 4.2. IFRIC 23 – Uncertainty over Income Tax Treatments IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 – Income Taxes when there is uncertainty over applicable tax treatments. This interpretation has no impact on the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2019. For purposes of assessing tax uncertainties, IFRIC 23 does not affect the methods used by the Group to date. In addition, the IFRIC was consulted as to how income tax risks should be presented on the statement of financial position but they have not yet given a definitive opinion. For this reason, in the absence of a final decision, no assets or liabilities were reclassified at June 30, 2019. Tax risks relating to income tax are still classified under provisions. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 5: DISCONTINUED OPERATIONS AND RESTATEMENT OF COMPARATIVE INFORMATION On June 23, 2019, the Group signed an agreement to sell an 80% equity interest in its subsidiary, Carrefour China. If the conditions precedent are met, this agreement will result in loss of control of the subsidiary. At June 30, 2019, all of the subsidiary’s assets and liabilities therefore fall within the scope of IFRS 5 and have been reclassified as held for sale. As Carrefour China represents a separate major geographic area of operations, it is considered a discontinued operation in accordance with IFRS 5. Accordingly: net income for the subsidiary is shown on a separate line of the income statement, “Net income/(loss) from discontinued operations”. To enable a meaningful comparison, its net income for first-half 2018 has also been reclassified on this line; all cash flows relating to this subsidiary are shown on the “Impact of discontinued operations” lines in the consolidated statement of cash flows. Data for first-half 2018 have been similarly restated. Key consolidated figures for Carrefour China, classified as held for sale in first-half 2019 and first-half 2018 in accordance with IFRS 5, are as follows: (in € millions) First-half of 2019 First-half of 2018 Net sales 1 818 1 924 Gross margin from recurring operations 456 485 Sales, general and administrative expenses, depreciation and amortisation (435) (490) Recurring operating loss 21 (5) Operating loss 20 (25) Loss before taxes (23) (27) Income tax expense (5) (5) Net loss for the period (28) (32) Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 5.1 Impact on the consolidated income statement for first-half 2018 (in € millions) First-half 2018 published IFRS 5 reclassification First-half 2018 restated Net sales 37 071 (1 924) 35 147 Loyalty program costs (343) 57 (286) Net sales net of loyalty program costs 36 728 (1 867) 34 861 Other revenue 1 309 (110) 1 199 Total revenue 38 037 (1 977) 36 060 C ost of sales (29 816) 1 492 (28 324) Gross margin from recurring operations Sales, general and administrative expenses, depreciation and amortisation Recurring operating income 8 221 (7 624) 597 (485) 490 5 7 736 (7 134) 602 Net income from equity-accounted companies (6) (6) Recurring operating income after net income from equity- accounted companies 591 5 596 Non-recurring income and expenses, net Operating income (785) (194) 20 25 (765) (169) Finance costs and other financial income and expenses, net Finance costs, net (149) (121) 2 2 (147) (119) Other financial income and expenses, net (28) (0) (28) Income before taxes (342) 27 (316) Income tax expense Net loss from continuing operations (179) (521) 5 32 (173) (489) Net income/(loss) from discontinued operations (229) (32) (261) Net income / (loss) for the period (750) (750) Group share (861) (861) of which net loss from continuing operations (633) 30 (603) of which net income/(loss) from discontinued operations (229) (30) (259) Attributable to non-controlling interests of which net income / (loss) from continuing operations - attributable to non-controlling interests of which net income / (loss) from discontinued operations - attributable to non-controlling interests 112 112 2 (2) 112 113 (2) Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 5.2 Impact on the consolidated cash flow statement for first-half 2018 (in € millions) First-half 2018 published IFRS 5 reclassification First-half 2018 restated INCOME BEFORE TAXES (342) 27 (316) CASH FLOWS FROM OPERATING ACTIVITIES Income tax (245) 9 (236) Depreciation and amortisation expense 777 (50) 727 C apital (gains)/losses on sales of assets (24) (0) (24) C hange in provisions and impairment 619 (7) 612 Finance costs, net 121 (2) 119 Net income and dividends received from equity-accounted companies 43 43 Impact of discontinued operations (58) 23 (35) Cash flow from operations 890 890 C hange in working capital requirement (2 389) 76 (2 313) Impact of discontinued operations 51 (76) (25) Net cash from operating activities (excluding financial services companies) (1 447) 0 (1 447) C hange in consumer credit granted by the financial services companies Impact of discontinued operations Net cash from operating activities 24 0 (1 423) - 0 24 0 (1 423) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets (566) 19 (547) Acquisitions of non-current financial assets (14) (3) (16) Acquisitions of subsidiaries and investments in associates (142) (142) Proceeds from the disposal of subsidiaries and investments in associates 0 0 Proceeds from the disposal of property and equipment and intangible assets 41 (1) 40 Proceeds from the disposal of non-current financial assets C hange in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets Investments net of disposals 13 (265) (933) 17 33 13 (249) (901) Other cash flows from investing activities (22) (1) (24) Impact of discontinued operations (1) (31) (32) Net cash from/(used in) investing activities (956) 0 (956) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from share issues to non-controlling interests 36 (0) 36 Acquisitions and disposals of investments without any change of control Dividends paid by C arrefour (parent company) Dividends paid by consolidated companies to non-controlling interests (31) (31) C hange in treasury stock and other equity instruments 42 42 C hange in current financial assets (38) (0) (38) Issuance of bonds 1 257 1 257 Repayment of bonds (351) (351) Net financial interests paid (163) 2 (161) Other changes in borrowings Impact of discontinued operations Net cash from/(used in) financing activities 200 0 951 (104) 102 0 96 102 951 Net change in cash and cash equivalents before the effect of changes in exchange rates (1 428) 0 (1 428) Effect of changes in exchange rates (171) (171) Net change in cash and cash equivalents (1 600) 0 (1 600) Cash and cash equivalents at beginning of the period 3 593 3 593 Cash and cash equivalents at end of the period 1 993 1 993 of which cash and cash equivalent from continuing operations at the end of the period of which cash and cash equivalent from discontinued operations at the end of the period 1 993 0 (250) 250 1 743 250 Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 5.3. Impact on the consolidated statement of financial position at June 30, 2019 In accordance with IFRS 5, Carrefour China’s assets and liabilities have been reclassified as assets held for sale and related liabilities in the consolidated statement of financial position at June 30, 2019. (in € millions) IFRS 5 reclassification Goodwill 46 Other intangible assets 20 Property and equipment 276 Investment property 71 Right-of-use Asset 753 Other non-current financial assets 55 Deferred tax assets 8 Other non-current assets 14 Non-current assets 1 245 Inventories 331 Trade receivables 42 Other current financial assets 6 Tax receivables 12 Other assets 21 C ash and cash equivalents 200 Current assets 612 TOTAL ASSETS HELD FOR SALE 1 856 SHAREHOLDERS’ EQUITY AND LIABILITIES (in € millions) IFRS 5 reclassification Lease commitment - long term 510 Provisions 25 Deferred tax liabilities 8 Non-current liabilities 543 Short-term borrowings 122 Lease commitment - short term 146 Suppliers and other creditors 1 074 Tax payables 5 Other payables 157 Current liabilities 1 503 TOTAL LIABILITIES HELD FOR SALE 2 046 Property and equipment owned by Cargo Property Assets, which had a net carrying amount of 567 million euros, were reclassified as assets held for sale at June 30, 2019. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 6: SEGMENT INFORMATION 6.1 Segment results First-half 2019 (in € millions) Total France Europe Latin America Asia Global Functions Net sales 34 885 16 789 9 988 7 134 974 Other revenue Recurring operating income before depreciation and amortisation (1) Recurring operating income (2) 1 204 1 770 624 410 615 120 314 556 126 407 505 362 41 101 40 31 (7) (25) C apital expenditure Depreciation and amortisation expense (3)(4) 628 (1 147) 297 (495) 112 (431) 206 (143) 6 (61) 8 (17) First-half 2018 restated (in € millions) Total France Europe Latin America Asia Global Functions Net sales 35 147 17 150 10 093 6 976 927 0 Other revenue Recurring operating income before depreciation and amortisation 1 199 1 328 419 468 329 384 385 420 39 67 27 (11) Recurring operating income 602 110 152 319 37 (16) C apital expenditure Depreciation and amortisation expense (4) 547 (726) 256 (358) 90 (232) 184 (101) 6 (30) 11 (5) (1) In first-half 2019, recurring operating income before depreciation and amortisation does not include lease expenses under contracts now accounted for in accordance with IFRS 16, excluding exemptions (Note 4). (2) In first-half 2019, recurring operating income does not include lease expenses under contracts now accounted for in accordance with IFRS 16, excluding exemptions. However, it includes depreciation charged against the corresponding right-of-use assets (Note 4). In all, the net impact of applying IFRS 16 is a 23 million-euro increase in first-half 2019 recurring operating income. Recurring operating income in Latin America also takes into account a 17 million-euro negative adjustment resulting from the application of IAS 29 in Argentina (Note 1.5). (3) In first-half 2019, depreciation and amortisation includes right-of-use assets under leases now accounted for in accordance with IFRS 16, excluding exemptions (Note 4). (4) Including the depreciation and amortisation relating to logistics equipment included in the cost of sales. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 6.2 Segment assets and liabilities At June 30, 2019 and in accordance with IFRS 5, Carrefour China’s assets and liabilities have been reclassified as assets held for sale and related liabilities (Note 5). June 30, 2019 (in € millions) Total France Europe Latin America Asia Global Functions ASSETS Goodwill 7 999 4 955 2 509 473 60 1 Other intangible assets (2) 1 411 657 510 166 13 65 Property and equipment (2) 11 311 4 773 3 352 2 832 353 2 Investment property 312 10 134 117 50 Right-of-use Asset (1) 4 226 1 210 2 142 247 403 224 Other segment assets 17 461 9 267 3 212 4 183 184 614 Total segment assets 42 720 20 873 11 860 8 017 1 062 907 Unallocated assets 7 746 Total Assets 50 465 LIABILITIES (excluding equity) Segment liabilities (3) 25 558 12 559 6 927 4 047 902 1 123 Unallocated liabilities 14 474 Total Liabilities 40 032 December 31, 2018 (in € millions) Total France Europe Latin America Asia Global Functions ASSETS Goodwill 7 983 4 901 2 508 467 107 1 Other intangible assets (2) 1 461 700 503 161 34 64 Property and equipment (2) 12 637 5 453 3 642 2 677 863 2 Investment property 389 9 137 120 122 Right-of-use Asset (1) Other segment assets 16 999 8 904 3 135 3 633 863 465 Total segment assets 39 470 19 967 9 925 7 057 1 989 532 Unallocated assets 7 908 Total Assets 47 378 LIABILITIES (excluding equity) Segment liabilities (3) 23 756 11 349 5 553 4 440 2 085 329 Unallocated liabilities 12 336 Total Liabilities 36 092 (1) Segment assets include right-of-use assets recognised following the application of IFRS 16 as of January 1, 2019, representing 5,244 million euros at that date (Note 4). (2) Leasehold rights and assets held under finance leases, previously recognised in other intangible assets and other property and equipment, are included in right-of-use assets following the application of IFRS 16 as of January 1, 2019. These represented 41 million euros and 367 million euros, respectively, at January 1, 2019 (Note 4). (3) Segment liabilities include lease liabilities (current and non-current portions) recognised following the application of IFRS 16 as of January 1, 2019. Segment liabilities amounted to 5,256 million euros at January 1, 2019, including a non-current portion of 4,272 million euros (of which 230 million euros relating to finance leases recognised in accordance with IAS 17) and a current portion of 984 million euros (of which 45 million euros relating to finance leases recognised in accordance with IAS 17) (Note 4). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 7: OPERATING ITEMS 7.1 Revenue 7.1.1 Net sales (in € millions) First-half 2019 First-half 2018 restated % change Net sales 34 885 35 147 (0,7) % Excluding the currency effect, first-half 2019 net sales amounted to 36,041 million euros, an increase of 2.5%. Changes in exchange rates reduced net sales by almost 1.16 billion euros in first-half 2019, with negative currency effects of 1.14 billion euros in Latin America. Restated for IAS 29 in Argentina, consolidated net sales for first-half 2019 would have increased by 2.2% at constant exchange rates. Net sales by country (in € millions) First-half 2019 First-half 2018 restated (in € millions) First-half 2019 First-half 2018 restated France 16 789 17 150 Latin America 7 134 6 976 Brazil Argentina 6 153 981 5 839 1 137 Rest of Europe Spain Italy Belgium Poland Romania 9 988 4 072 2 244 1 847 892 933 10 093 4 079 2 359 1 902 871 881 Asia C hina Taiwan 974 - 974 927 - 927 7.1.2 Other revenue (in € millions) First-half 2019 First-half 2018 restated % change Financing fees and commissions (1) 728 694 5,0% Franchise and location-gérance fees 142 132 7,6% Rental revenue 95 97 (2,6)% Revenue from sub-leases (2) Property development revenue (3) Other revenue (4) 10 15 214 33 25 218 (71,2)% (38,9)% (2,0)% Total Other revenue 1 204 1 199 0,4% (1) Including net banking revenue and net insurance revenue generated by the Group’s financial services and insurance companies. (2) The decrease is a result of the proceeds from finance lease sub-letting arrangements being recognised as financial income following the application of IFRS 16 as of January 1, 2019 (Note 4). (3) Corresponding to the sale price of properties developed by the Group for resale. After deducting development costs recorded in “Cost of sales”, the property development margin amounts to 12 million euros in first-half 2019 (5 million euros in first-half 2018). (4) Other revenue includes sales commissions, commissions received from suppliers, revenue from ticket/travel agency sales and in-store advertising fees. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 7.2 Sales, general and administrative expenses, and depreciation and amortisation (in € millions) First-half 2019 First-half 2018 restated % change Sales, general and administrative expenses (1) (6 015) (6 444) (6,7)% Depreciation and amortisation of property and equipment, intangible assets, and investment property (3) Amortisation of right-of-use assets (2) (665) (363) (690) (3,6)% Total SG&A expenses and depreciation and amortisation (7 043) (7 134) (1,3)% Sales, general and administrative expenses Sales, general and administrative expenses break down as follows: (in € millions) First-half 2019 First-half 2018 restated % change Employee benefits expense (3 821) (3 888) (1,7)% Property rentals (1) (24) (409) (94,1)% Maintenance and repair costs (344) (360) (4,5)% Fees (410) (384) 6,8% Advertising expense (382) (379) 0,6% Taxes other than on income (331) (348) (5,0)% Energy and electricity (265) (247) 7,2% Other SG&A expenses (438) (428) 2,4% Total SG&A expenses (1) (6 015) (6 444) (6,7)% (1) In first-half 2019, lease expenses under property leases do not include lease expenses under contracts accounted for in accordance with IFRS 16 (Note 4), which would have amounted to 412 million euros in first-half 2019 had IFRS 16 not been applied as of January 1, 2019. Depreciation and amortisation Including supply chain depreciation recognised in cost of sales, total depreciation and amortisation expense recognised in the consolidated income statement amounted to 1,147 million euros in first-half 2019 (first-half 2018 restated: 726 million euros), as follows: (in € millions) First-half 2019 First-half 2018 restated % change Property and equipment (552) (577) (4,3)% Intangible assets (106) (99) 6,8% Assets under finance leases (3) (8) Investment property (7) (6) 24,2% Depreciation and amortisation of property and equipment, intangible assets, and investment property (3) (665) (690) (3,6)% Amortisation of right-of-use asset - Property and equipment and investment properties (2) (363) Depreciation and amortisation of logistic activity (30) (36) (15,6)% Depreciation and amortisation of right-of-use asset - logistic activity (88) Total Depreciation and amortisation (1 147) (726) 57,9% (2) In first-half 2019, right-of-use assets under leases are accounted for in accordance with IFRS 16. These right-of-use assets are depreciated over the reasonably certain period of use for the asset (Note 4). (3) Depreciation charged against fixed assets under finance leases recognised in accordance with IAS 17 in first-half 2018 is shown within “Depreciation of right-of-use assets” as from 2019 (Note 4). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 7.3 Non-recurring income and expenses To make it easier to analyse recurring operating performance, certain material items that are unusual in terms of their nature and frequency are reported under "Non-recurring income" or "Non-recurring expenses", as follows: (in € millions) First-half 2019 First-half 2018 restated Net gains on sales of assets 17 16 Restructuring costs (342) (675) Other non-recurring income and expenses Non-recurring income and expenses, net before asset impairments and write-offs (194) (518) (63) (723) Asset impairments and write-offs (92) (42) of which Impairments and write-offs of goodwill of which Impairments and write-offs of property and equipment and intangible assets (92) (42) Non-recurring income and expenses, net (610) (765) of which: Non-recurring income Non-recurring expense 262 (873) 26 (791) Restructuring costs recognised in first-half 2019 result from plans to streamline operating structures launched as part of the first pillar of the “Carrefour 2022” transformation plan. The expense included in non-recurring items relates chiefly to severance paid or payable within the scope of: the transformation plan for hypermarkets in France (mutually agreed termination) concerning up to 3,000 employees; restructuring measures launched in Italy and potentially affecting up to 590 employees. The amount of the provision recognised at June 30, 2019 was estimated based on various assumptions and is the best estimate of the costs the Group expects to incur in relation to the restructuring plans currently being implemented (Note 11.3). The expense recognised for first-half 2018 primarily included costs relating to the voluntary redundancy plans in France and Argentina and to restructuring measures in Belgium. Other non-recurring income and expenses recorded in first-half 2019 mainly concerned Brazil and resulted primarily from the following two rulings. In May 2019, the Brazilian Supreme Court handed down an unfavourable decision to adjust its ruling on inter-state transfers of ICMS tax credits relating to “commodities”. As a result of this decision, a provision (including interest and penalties) was recognised in the Consolidated Financial Statements against the related non- recurring expenses in order to cover current tax disputes as well as possible new ones arising from years still potentially subject to tax audits. In June 2019, following a favourable and final ruling, PIS-COFINS (social security) tax credits from prior years were recognised against the related non- recurring income. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 7.4 Change in working capital requirement The change in working capital reported in the consolidated statement of cash flows under “Cash flows from operating activities” breaks down as follows: (in € millions) First-half 2019 First-half 2018 restated Change C hange in inventories (172) 2 (173) C hange in trade receivables (146) (63) (83) C hange in trade payables (1 323) (2 061) 738 C hange in loyalty program liabilities 4 (14) 19 Change in trade working capital requirement (1 636) (2 137) 500 C hange in other receivables and payables (486) (176) (310) Change in working capital requirement (2 123) (2 313) 190 7.5 Banking and insurance businesses 7.5.1 Consumer credit granted by the financial services companies At June 30, 2019, consumer credit totalled 6,569 million euros (December 31, 2018: 6,208 million euros), breaking down as follows: (in € millions) June 30, 2019 December 31, 2018 Payment card receivables 4 681 4 511 Loans 2 041 2 110 C onsumer credit (on purchases made in C arrefour stores) 76 97 Other financing (1) 566 627 Impairment Financing - loans and receivables on financial institutions (2) (1 231) 437 (1 136) - Total Consumer credit granted by the financial services companies 6 569 6 208 Short-term financing 4 163 3 722 Long-term financing 2 406 2 486 (1) Other financing corresponds mainly to restructured loans and credit facilities. (2) Securitisation instruments were closed out on July 11, 2019. 7.5.2 Consumer credit financing The related consumer credit financing amounted to 5,853 million euros at June 30, 2019 (December 31, 2018: 5,514 million euros), as follows: (in € millions) June 30, 2019 December 31, 2018 Bonds and notes Debt securities (retail certificates of deposit, medium-term notes) (1) 1 764 2 071 1 764 1 363 Bank borrowings 508 601 C ustomer passbook savings deposits Securitisations (2) 409 456 300 Other refinancing debt to financial institutions 1 080 1 017 Other 20 12 Total Consumer credit financing 5 853 5 514 Short-term borrowings 3 975 3 582 Long-term borrowings 1 878 1 932 (1) Debt securities mainly comprised certificates of deposit and medium-term notes issued by Carrefour Banque. (2) This item corresponds to the Master Credit Cards Pass reloadable securitisation programme with compartments launched by Carrefour Banque in November 2013 for an asset pool: 560 million euros. Proceeds from the securitisation amounted to 400 million euros. The 300 million euros remaining at December 31, 2018 was repaid over first-half 2019. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 8: INTANGIBLE ASSETS, PROPERTY AND EQUIPMENT, INVESTMENT PROPERTY 8.1 Goodwill and other intangible assets The recoverable amount of goodwill is generally monitored at the level of the cash-generating units (CGUs) represented by the countries in which the Group conducts its business through its integrated store networks. The carrying amount of goodwill can be broken down as follows: (in € millions) June 30, 2019 (1) December 31, 2018 France 4 955 4 901 Belgium 955 956 Spain 952 952 Brazil 454 446 Italy 251 251 Poland 248 244 Argentina 18 20 Other countries 165 213 Total 7 999 7 983 (1) Carrefour China goodwill (46 million euros) was reclassified in assets held for sale at June 30, 2019 in accordance with IFRS 5 (Note 5). Leasehold rights, included within other intangible assets up to December 31, 2018, are now included as part of the initial measurement of right-of-use assets. Reclassifications were made in this respect in the opening statement of financial position at January 1, 2019 for an amount of 41 million euros. Impairment tests at June 30, 2019 Non-amortised intangible assets are tested for impairment at least once a year, at the year-end, in accordance with IAS 36. At each interim closing, the Group determines whether there are any indications of impairment and, if this is the case, performs additional impairment tests, as prescribed by IAS 36. At June 30, 2019, the tests performed by the Group did not lead to the recognition of any impairment losses. 8.2 Property and equipment June 30, 2019 (1) (in € millions) Cost Depreciation Impairment Net carrying amount Land Buildings Equipment, fixtures and fittings Other fixed assets Assets under construction Total property and equipment 2 719 10 882 14 806 423 530 29 359 (52) (5 734) (11 395) (300) - (17 481) (96) (236) (231) (4) - (567) 2 571 4 912 3 179 119 530 11 311 Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements December 31, 2018 (2) (in € millions) Cost Depreciation Impairment Net carrying amount Land Buildings Equipment, fixtures and fittings Other fixed assets Assets under construction Finance leases – land Finance leases – buildings Finance leases – equipment, fixtures and fittings Total property and equipment Of which assets held under finance leases 2 606 10 611 16 060 430 567 448 1 166 83 31 971 1 697 (88) (5 175) (12 055) (298) - - (915) (83) (18 614) (998) (99) (264) (352) (5) - - - - (719) - 2 419 5 173 3 653 127 567 448 250 0 12 637 699 (1) Carrefour China property and equipment (276 million euros) was reclassified in assets held for sale at June 30, 2019 in accordance with IFRS 5 (Note 5). (2) Property and equipment, net, decreased from 12,637 million euros at December 31, 2018 to 12,270 million euros at January 1, 2019 following the reclassification of 367 million euros in fixed assets held under finance leases in accordance with IAS 17 in right-of-use assets recognised pursuant to IFRS 16 (Note 4). Other fixed assets held under finance leases recognised at December 31, 2018 and with a net carrying amount of 332 million euros were reclassified as “Land” or “Buildings” for a net amount of 206 million euros and 125 million euros, respectively. 8.3 Investment property Investment property consists mainly of shopping malls located adjacent to the Group’s stores. The properties’ carrying amount at June 30, 2019 was 312 million euros and their estimated fair value at that date (determined by capitalising future rentals or based on independent valuations) was 753 million euros. At December 31, 2018, these amounts were 389 million euros (of which 72 million euros in China) and 982 million euros (of which 379 million euros in China), respectively. NOTE 9: LEASES 9.1 Accounting principles Accounting principles Leases concern: mainly property assets, both used directly by the Group and sub-let to third parties, such as store premises sub-let to franchisees and retail units located in shopping malls and shopping centres; to a lesser extent, vehicles; as well as a few warehousing and storage contracts with a lease component. • As of January 1, 2019, all leases (excluding the recognition exemptions set out in IFRS 16 – see below) are included in the statement of financial position by recognising a right-of-use asset and a lease liability corresponding to the present value of the lease payments due over the reasonably certain term of the lease. IFRS 16 also affects the presentation of lease transactions in the income statement (with the lease expense recognised in recurring operating expenses replaced by a depreciation expense in recurring operating expenses and an interest expense in finance costs and other financial income and expenses) and in the statement of cash flows (lease payments, representing payment of interest and repayment of the outstanding liability, will impact financing cash flows). The changes introduced by IFRS 16 therefore mainly concern leases that met the definition of operating leases under IAS 17 (applicable until December 31, 2018) and which therefore did not give rise to the recognition of leased assets in the statement of financial position. Operating lease payments were previously recognised within recurring operating expenses on a straight-line basis over the lease term. Recognition of lease liabilities Amounts taken into account in the initial measurement of the lease liability are: • • • • fixed lease payments, less any lease incentives receivable from the lessor; variable lease payments that depend on an index or a rate; amounts expected to be payable under residual value guarantees; the exercise price of a purchase option if the option is reasonably certain to be exercised; and penalties for terminating or not renewing the lease, if this is reasonably certain. Lease payments are discounted at the interest rate implicit in the lease if this can be readily determined and otherwise at the lessee’s incremental borrowing rate (case applied in practice). The discount rate is tied to the weighted average date for repayment of the outstanding liability. The discount rate is calculated for each country using a risk-free yield curve and a spread (the same spread is applied for all subsidiaries in a given country). The risk-free yield curve is updated quarterly, while the spread and rating are updated annually, except in the case of a significant event expected to impact assessment of a subsidiary’s credit risk. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements This lease liability is subsequently measured at amortised cost using the effective interest method. The lease liability may be adjusted if the lease has been modified or the lease term has been changed, or in order to take into account contractual changes in lease payments resulting from a change in an index or a rate used to determine those payments. Recognition of right-of-use assets Right-of-use assets are measured at cost, which includes: • • • the amount of the initial measurement of the lease liability; any prepaid lease payments made to the lessor; any initial direct costs incurred; an estimate of the costs to be incurred in dismantling the underlying asset or restoring the underlying asset to the condition required by the terms and conditions of the lease. Right-of-use assets are then depreciated on a straight-line basis over the lease term used to measure the lease liability. The value of the right-of-use asset may be adjusted if the lease has been modified or the lease term has been changed, or in order to take into account contractual changes in lease payments resulting from a change in an index or a rate used to determine those payments. In the event the lease is terminated before the end of the lease term under IFRS 16, the impact of derecognising the right-of-use asset and lease liability will be included within non-recurring items. When the lease contracts provide for initial payment of leasehold rights to the former lessee of the premises, these rights will be accounted for as a component of the right-of-use asset. Payments under short-term leases (12 months or less) or under leases of a low-value underlying asset are recognised in recurring operating expenses on a straight-line basis over the lease term (IFRS 16 recognition exemptions). The recoverable amount of the right-of-use asset is tested for impairment whenever events or changes in the market environment indicate that the asset may have suffered a loss in value. Impairment test procedures are identical to those for property and equipment and intangible assets that are described in Note 8.3 to the Consolidated Financial Statements for the year ended December 31, 2018. Lease term The lease term to be used to determine the present value of lease payments is the non-cancellable period of a lease, adjusted to reflect: periods covered by an option to extend the lease if the Group is reasonably certain to exercise that option; periods covered by an option to terminate the lease if the Group is reasonably certain not to exercise that option. The leased assets’ reasonably certain period of use is determined based on: the inherent characteristics of the different types of assets (stores, logistics warehouses, administrative buildings) and the country concerned by the lease. In the case of leased store premises, the characteristics taken into account include the store’s profitability, any recent capital expenditure in the store and the existence of significant termination penalties in the case of integrated or franchised stores; a portfolio approach for leased vehicles with similar characteristics and periods of use. Four portfolios have been identified, corresponding to (i) Company cars, (ii) cars and vans for rental to customers, (iii) trucks and (iv) light commercial vehicles. In France, several hundred commercial leases are traditional “3/6/9”-type contracts. Pursuant to commercial lease legislation in France, these leases grant the lessee a right to renew the lease at the end of the lease term or to eviction compensation. In situations where the lessor is required to pay the lessee more than negligible compensation in the event it refuses to renew the lease, the issue is whether or not the lessee holds a renewal option. In this respect, the Group has applied the view expressed by the French accounting authorities (ANC) in its position statement published on February 16, 2018. Accordingly, the enforceable period of an automatically renewable lease is nine years and beyond, and the lease term used in accordance with IFRS 16 represents the notice period (generally six months). It should be noted that in June 2019, the IFRIC was asked to clarify: determination of the enforceable period of an automatically renewable lease, or of an indefinite-term lease, that may be terminated by one of the parties subject to a specified notice period. The issue to be clarified concerned the notion of penalties on which the definition of the enforceable period is based; the relationship between the useful life of non-removable leasehold improvements and the lease term. Accounting treatment for finance lease sub-letting arrangements When the Group leases and then sub-lets a property, it recognises the main lease, for which it is the lessee, and the sublease, for which it is the lessor, as two different contracts. If the sublease is classified as an operating lease, the right-of-use assets resulting from the main lease are maintained under assets in the statement of financial position and the proceeds from the sublease are recognised in recurring income for the term of the sublease. If the sublease is classified as a finance lease: • right-of-use assets resulting from the main lease are de-recognised; a receivable is recognised in an amount corresponding to the net investment in the sublease is recognised; any difference between the right-of-use assets and the net investment in the sublease is recognised in Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements financial income and expenses; the lease liability (in respect of the main lease) is maintained in liabilities. Income tax Deferred tax is recognised based on the net amount of temporary taxable and deductible differences. Upon initial recognition of the right-of-use asset and lease liability, no deferred tax is recognised if the amount of the asset equals the amount of the liability. Net temporary differences that may result from subsequent changes in the right-of-use asset and lease liability give rise to the recognition of deferred tax. 9.2 Right-of-use assets January 1st, 2019 June 30, 2019 (2) (in € millions) Net carrying amount IAS 17 (1) IFRS 16 Total Cost Depreciation Impairment Net carrying amount Land & buildings Equipments 367 - 4 603 116 4 970 116 4 744 125 (692) (24) (3) 4 049 100 Investment property Right-of-use asset 367 158 4 877 158 5 244 82 4 950 (5) (721) (3) 77 4 226 (1) At January 1, 2019, 367 million euros in fixed assets under finance leases recognised at December 31, 2018 in accordance with IAS 17 were reclassified under right-of-use assets, recognised pursuant to IFRS 16 (Note 4). (2) Right-of-use assets relating to the Carrefour China property and equipment (753 million euros) were reclassified in assets held for sale at June 30, 2019 in accordance with IFRS 5 (Note 5). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements Change in right-of-use assets June 30, 2019 (in € millions) Net carrying amount (1) January 1st, 2019 5 244 Increase 406 Decrease (133) C harge of amortisation (547) Depreciation 3 Exchange differences on translating foreign operations 1 Reclassification of C hina Right-of-use asset to discontinued activities (753) Perimeter and other changes 6 June 30, 2019 4 226 (1) Transactions mentioned above includes transactions related to right-of-use asset for Carrefour China during the first semester of 2019 ; as these amounts are reclassified in assets held for sale at June 30, 2019 in accordance with IFRS 5 (Note 5). 9.3 Lease liabilities Lease liabilities by maturity (in € millions) June 30, 2019 Less than 1 year 822 between 1 and 2 years 667 between 2 and 5 years 1 451 more than 5 years 1 377 Lease commitment 4 317 NOTE 10: INCOME TAX The income tax expense for first-half 2019 amounts to 192 million euros, representing a negative effective tax rate of 125%, compared with the 173 million euro expense recorded in first-half 2018 as restated, corresponding to a negative effective tax rate of 55%. This primarily reflects the fact that no deferred tax assets were recognised on temporary differences or tax loss carryforwards because of material non-recurring expenses recognised during the period. NOTE 11: PROVISIONS AND CONTINGENT LIABILITIES 11.1 Changes in provisions (in € millions) December 31, 2018 IFRS 16 first application adjustments At January 1, 2019 Translation adjustment Increases Discounting adjustment Reversals without utilisation Reversals with utilisation Other June 30, 2019 Post-employment benefit obligations 1 095 1 095 (0) 26 105 (32) (18) 0 1 175 C laims and litigation 1 290 1 290 8 486 (127) (48) 3 1 612 Tax reassessments 998 998 7 415 (95) (4) 4 1 324 Disputes with current and former employees 143 143 0 43 (9) (29) 0 149 Legal disputes 149 149 1 28 (23) (16) (1) 139 Restructuring 697 697 (1) 306 (28) (212) (22) 740 Provisions related to banking and insurance business (1) 276 276 0 7 (9) (24) 0 250 Other (2) 163 54 217 (0) 25 (12) (14) (2) 214 Total Provisions 3 521 54 3 575 7 850 105 (208) (318) (21) 3 991 (1) Provisions relating to the banking and insurance businesses include provisions for credit risk on loan commitments (off-balance sheet) and provisions set aside to cover insurance underwriting risk. (2) Other provisions mainly concern onerous contracts. As of January 1, 2019, other provisions also include provisions for dismantling assets under property leases or for restoring assets to the requisite condition, recognised against the related right-of-use asset following application of IFRS 16 at that date (Note 4). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 11.2 Post-employment benefits The Group’s post-employment benefit obligation (defined benefit plans) is calculated on the basis of actuarial assumptions such as future salary levels, retirement age, mortality, staff turnover and the discount rate. At June 30, 2019, a discount rate of 0.80% was used for France, Belgium and Italy, compared with 1.60% at December 31, 2018. The discount rate is based on an index of AA-rated corporate bonds with maturities that correspond to the expected cash outflows of the plans. (in € millions) France Belgium Italy Other countries Group total Provision at December 31, 2018 764 181 115 35 1 095 Service costs Settlements and plan amendements (1) Interest cost (discount effect) Return on plan assets Other items Movements recorded in the income statement Benefit paid directly by the employer C hange in actuarial gains and losses Other Provision at June 30, 2019 18 (32) 6 (0) 3 (4) (13) 72 - 820 7 3 (2) - 9 (5) 25 (4) 206 0 (0) 1 - 1 (4) 8 119 0 0 0 (0) (0) 0 0 0 (5) 31 26 (32) 11 (2) 3 6 (22) 105 (9) 1 175 (1) This line primarily includes the impact of curtailments recognised following the remeasurement of commitments made under the restructuring plans implemented in France and Italy (Note 3.1) and recognised in non-recurring income. The cost of services rendered was recognised in employee benefits expense, and interest income and expenses were recognised in financial income and expenses. Sensitivity tests show that: a 25-bps increase in the discount rate would reduce the present value of the defined benefit obligation under the French, Belgian and Italian plans by around 30 million euros; a 25-bps increase in the inflation rate would increase the present value of the defined benefit obligation under the French, Belgian and Italian plans by around 19 million euros. 11.3 Restructuring Provisions set aside over the period for restructuring in an amount of 342 million euros (impacting non-recurring expenses) mainly comprise costs related to plans undertaken to streamline operating structures as part of the first pillar of the transformation plan described in Note 3.1, chiefly in France and Italy. These costs primarily correspond to severance pay, early retirement benefits, costs of notice periods not served, and costs of training and other support measures offered to employees being made redundant under restructuring plans. The amount of the provision recognised at June 30, 2019 was estimated based on various assumptions (e.g., the number and seniority of the employees concerned by each of the support measures offered) and is the best estimate of the costs the Group expects to incur in relation to the restructuring plans currently being implemented. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 12: OTHER COMPREHENSIVE INCOME AND EARNINGS PER SHARE 12.1 Other comprehensive income (in € millions) Group share First-half 2019 First-half 2018 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges C hanges in the fair value of debt instruments through other comprehensive income Exchange differences on translating foreign operations (28) (3) 53 2 (0) 0 (26) (3) 53 3 (1) (297) (5) 0 0 (3) (1) (297) Items that may be reclassified subsequently to profit or loss 22 2 24 (296) (5) (301) Remeasurements of defined benefit plans obligation C hanges in the fair value of equity instruments through other comprehensive income (104) 1 29 (0) (75) 1 2 0 (0) (0) 2 0 Items that will not be reclassified to profit or loss (103) 29 (74) 3 (0) 2 Total other comprehensive income - Group share (81) 31 (50) (293) (5) (298) (in € millions) Non-controlling interests First-half 2019 First-half 2018 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges (2) 1 (1) (0) 0 (0) C hanges in the fair value of debt instruments through other comprehensive income 1 (0) 1 (1) 0 (1) Exchange differences on translating foreign operations 17 0 17 (132) 0 (132) Items that may be reclassified subsequently to profit or loss 16 0 16 (134) 0 (134) Remeasurements of defined benefit plans obligation C hanges in the fair value of equity instruments through other comprehensive income (1) 0 0 0 (1) 0 0 0 0 0 0 0 Items that will not be reclassified to profit or loss (1) 0 (1) 0 0 0 Total other comprehensive income - Non-controlling interests 15 1 15 (134) 0 (134) Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 12.2 Earnings per share (Group share) Basic earnings per share First-half 2019 First-half 2018 restated Net income/(loss) from continuing operations (415) (603) Net income/(loss) from discontinued operations (43) (259) Net income/(loss) for the period Weighted average number of shares outstanding (1) (458) 782 363 530 (861) 767 641 301 Basic earnings/(loss) from continuing operations per share (in €) (0,53) (0,78) Basic earnings/(loss) from discontinued operations per share (in €) (0,06) (0,34) Basic earnings/(loss) per share (in €) (0,59) (1,12) (1) In accordance with IAS 33, the weighted average number of shares used to calculate 2018 earnings per share has been adjusted to take into account the impact of the payment of the dividend in shares on July 11, 2019. Diluted earnings per share Net income/(loss) from continuing operations First-half 2019 (415) First-half 2018 restated (603) Net income/(loss) from discontinued operations (43) (259) Net income/(loss) for the period (458) (861) Weighted average number of shares outstanding, before dilution 782 363 530 767 641 301 Potential dilutive shares Stock grants Stock options Diluted weighted average number of shares outstanding Diluted earnings/(loss) from continuing operations per share (in €) 782 363 530 (0,53) 767 641 301 (0,78) Diluted earnings/(loss) from discontinued operations per share (in €) (0,06) (0,34) Diluted earnings/(loss) per share (in €) (0,59) (1,12) Free shares awarded under the 2016 and 2019 plans are not considered to have a dilutive impact, since the Group reported a net loss from continuing operations in first-half 2019. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 13: FINANCIAL ASSETS AND LIABILITIES, FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES 13.1 Financial instruments by category Breakdown by category Fair value At June 30, 2019 (in € millions) Carrying amount Financial assets at fair value through profit or loss Financial assets at fair value through OCI Amortised cost Derivative instruments at fair value through profit or loss Derivative instruments at fair value through OCI (CFH) Investments in non-consolidated companies Other long-term investments (3) 100 1 343 16 48 84 357 938 100 1 343 Other non-current financial assets 1 443 63 442 938 1 443 C onsumer credit granted by the financial services companies 6 569 6 569 6 569 Trade receivables 2 752 2 752 2 752 Other current financial assets (3) Other assets (4) 316 518 67 129 518 66 54 316 518 C ash and cash equivalents 1 522 1 522 1 522 ASSETS 13 121 1 585 509 10 907 66 54 13 121 Total long- and short-term borrowings (2) 7 839 7 758 64 17 8 146 Lease commitment (1) 4 317 4 317 4 317 Total consumer credit financing 5 853 5 833 0 20 5 853 Suppliers and other creditors Other payables (5) 11 619 2 634 11 619 2 634 11 619 2 634 LIABILITIES 32 261 32 160 64 38 32 568 Breakdown by category At December 31, 2018 (in € millions) Carrying amount Financial assets at fair value through profit or loss Financial assets at fair value through OCI Amortised cost Derivative instruments at fair value through profit or loss Derivative instruments at fair value through OCI (CFH) Fair value Investments in non-consolidated companies Other long-term investments (3) 92 1 183 12 44 80 360 780 92 1 183 Other non-current financial assets 1 275 56 440 780 1 275 C onsumer credit granted by the financial services companies 6 208 6 208 6 208 Trade receivables 2 537 2 537 2 537 Other current financial assets (3) Other assets (4) 190 558 67 37 558 46 40 190 558 C ash and cash equivalents 4 300 4 300 4 300 ASSETS 15 069 4 356 507 10 120 46 40 15 069 Total long- and short-term borrowings (2) 8 275 8 225 41 9 8 421 Lease commitment (1) Total consumer credit financing 5 514 5 502 0 12 5 514 Suppliers and other creditors Other payables (5) 14 161 2 818 14 161 2 818 14 161 2 818 LIABILITIES 30 768 30 706 41 21 30 915 (1) Lease liabilities reflect the application of IFRS 16 as of January 1, 2019. They also include 275 million euros in finance lease liabilities recognised at December 31, 2018 in accordance with IAS 17 and reclassified within lease liabilities (Note 4). (2) Following the reclassification, total borrowings decreased from 8,275 million euros at December 31, 2018 to 8,000 million euros at January 1, 2019 (Note 4). (3) Amounts receivable from finance lease sub-letting arrangements were recognised following the application of IFRS 16 as of January 1, 2019. They were recorded in other non-current financial assets for 191 million euros and in other current financial assets for 42 million euros (Note 4). (4) Excluding prepaid expenses. (5) Excluding deferred revenue. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements Analysis of assets and liabilities measured at fair value The table below shows assets and liabilities presented according to the fair value hierarchy provided for in IFRS 13 – Fair Value Measurement (Note 1.5): (in € millions) June 30, 2019 Level 1 Level 2 Level 3 Total Investments in non-consolidated companies 16 84 100 Other long-term investments 405 405 Other current financial assets - FVOC I 67 67 Other current financial assets - Derivative instruments recorded in current financial assets 120 120 C ash and cash equivalents 1 522 1 522 C onsumer credit financing - Derivative instruments recorded in liabilities (20) (20) Borrowings - Derivative instruments recorded in liabilities (81) (0) (81) (in € millions) December 31, 2018 Level 1 Level 2 Level 3 Total Investments in non-consolidated companies Other long-term investments Other current financial assets - Available-for-sale 404 67 12 80 92 404 67 Other current financial assets - Derivative instruments recorded in current financial assets 86 86 C ash and cash equivalents 4 300 4 300 C onsumer credit financing - Derivative instruments recorded in liabilities (12) (12) Borrowings - Derivative instruments recorded in liabilities (49) (1) (50) 13.2 Net debt 13.2.1 Net debt calculation Consolidated net debt at June 30, 2019 amounted to 6,043 million euros, breaking down as follows: (in € millions) June 30, 2019 December 31, 2018 Bonds and notes 7 231 7 545 Other borrowings 257 405 C ommercial paper 270 Finance lease liabilities (1) 0 275 Total borrowings before derivative instruments recorded in liabilities 7 758 8 225 Derivative instruments recorded in liabilities 81 50 Total borrowings [1] 7 839 8 275 of which, Long-term borrowings 6 215 6 936 of which, Short-term borrowings 1 624 1 339 Other current financial assets 274 190 C ash and C ash equivalents 1 522 4 300 Total current financial assets [2] 1 796 4 490 Net debt [1] - [2] 6 043 3 785 Discontinued activities -Net debt [3] (85) Net debt including discontinued activities [1] - [2] + [3] 5 958 3 785 (1) Finance lease liabilities recognised in accordance with IAS 17 for 275 million euros at December 31, 2018 were reclassified in lease liabilities at January 1, 2019 (Note 9.3). Lease liabilities also include liabilities under leases accounted for in accordance with IFRS 16 as of that date. Net debt totalled 3,510 million euros at January 1, 2019. (2) For consistency, at June 30, 2019 the current portion of amounts receivable from finance lease sub-letting arrangements is not included in the calculation of net debt. The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year-end figure being structurally lower due to the significant volume of business recorded during December. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 13.2.2 Bonds and notes (in € millions) Face value Book value of the debt Maturity December 31, 2018 Issues Repayments Translation adjustments June 30, 2019 June 30, 2019 Public placements - Carrefour S.A. EMTN, EUR, 6 years, 1.75% 2019 7 373 1 000 500 (1 000) (1 000) 5 6 879 6 726 EMTN, EUR, 10 years, 4.00% 2020 1 000 1 000 999 EMTN, EUR, 11 years, 3.875% 2021 1 000 1 000 996 EMTN, EUR, 8 years, 1.75% 2022 1 000 1 000 963 C ash-settled convertible bonds, USD 500 million, 6 years, 0% 2023 437 3 439 403 EMTN, EUR, 8 years, 0.750% 2024 750 750 745 EMTN, EUR, 10 years, 1.25% 2025 750 750 746 C ash-settled convertible bonds, 6 years, 0% 2024 437 3 439 386 EMTN, EUR, 5 years, 0.88% 2023 500 500 496 EMTN, EUR, 7.5 years, 1.75% 2026 500 500 496 EMTN, EUR, 8 years, 1,00% 2027 500 500 496 Placements - Atacadão S.A. Debentures, BRL 500 million, 5 years, 105.75% C DI Debentures, BRL 1,000 million, 3 years, 104.4% C DI Debentures, BRL 900 millions, 1 year, 102.3% C DI 2023 2021 2020 338 113 225 - 207 - - 207 (46) - - (46) 6 2 4 (1) 505 115 229 161 505 115 229 161 Total Bonds and notes 7 711 707 (1 046) 11 7 384 7 231 13.2.3 Other borrowings (in € millions) June 30, 2019 December 31, 2018 Latin America borrowings 82 90 Other borrowings Accrued interest (1) 63 46 165 92 Other financial liabilities 66 58 Total Other borrowings 257 405 (1) Accrued interest on total borrowings, including bonds and notes. 13.2.4 Cash and cash equivalents (in € millions) June 30, 2019 December 31, 2018 C ash 1 138 1 309 C ash equivalents 384 2 991 Total Cash and cash equivalents 1 522 4 300 13.2.5 Other current financial assets (1) Amounts receivable from finance lease sub-letting arrangements were recognised following the application of IFRS 16 as of January 1, 2019. The current portion of these receivables represented 42 million euros. Other current financial assets increased from 190 million euros at December 31, 2018 to 232 million euros at January 1, 2019 (Note 4). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 13.3 Analysis of borrowings (excluding derivative instruments recorded in liabilities) 13.3.1 Analysis by interest rate June 30, 2019 December 31, 2018 (1) (in € millions) Before hedging After hedging Before hedging After hedging Fixed rate borrowings 7 143 7 143 7 791 7 791 Variable rate borrowings Total borrowings (before derivative instruments recorded in liabilities) 615 7 758 615 7 758 434 8 225 434 8 225 (1) Total borrowings excluding derivative instruments recorded in liabilities decreased from 8,225 million euros at December 31, 2018 to 7,950 million euros at January 1, 2019 following the reclassification of finance lease liabilities recognised in accordance with IAS 17 in lease liabilities recognised pursuant to IFRS 16, applicable as of that date (Note 9.3). Total borrowings of 7,950 million euros break down as 7,517 million euros of fixed-rate borrowings and 433 million euros of variable-rate borrowings. 13.3.2 Analysis by currency (1) Total borrowings excluding derivative instruments recorded in liabilities decreased from 8,225 million euros at December 31, 2018 to 7,950 million euros at January 1, 2019 following the reclassification of finance lease liabilities recognised in accordance with IAS 17 in lease liabilities recognised pursuant to IFRS 16, applicable as of that date (Note 9.3). Total borrowings of 7,950 million euros break down as 7,465 million euros denominated in euros, 432 million euros denominated in Brazilian reals, 51 million euros denominated in Chinese yuan, and 2 million euros in Romanian lei. The analysis by currency above concerns borrowings including the impact of currency swaps. Euro-denominated borrowings represented 92% of total borrowings (excluding derivative instruments recorded in liabilities) at June 30, 2019 (December 31, 2018: 92%). 13.3.3 Analysis by maturity (in € millions) June 30, 2019 December 31, 2018 (1) Due within 1 year 1 543 1 289 Due in 1 to 2 years 1 321 1 129 Due in 2 to 5 years 3 137 3 298 Due beyond 5 years Total borrowings (before derivative instruments recorded in liabilities 1 757 7 758 2 510 8 225 (1) Total borrowings excluding derivative instruments recorded in liabilities decreased from 8,225 million euros at December 31, 2018 to 7,950 million euros at January 1, 2019 following the reclassification of finance lease liabilities recognised in accordance with IAS 17 in lease liabilities recognised pursuant to IFRS 16, applicable as of that date (Note 9.3). Total borrowings of 7,950 million euros break down as 1,243 million euros due in less than one year, 1,105 million euros due between one and two years, 3,227 million euros due between two and five years, and 2,376 million euros due after five years. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 13.4 Changes in liabilities arising from financing activities (in € millions) Other current financial assets (1) Borrowings Total Liabilities arising from financing activities At December 31, 2018 (190) 8 275 8 085 Finance lease liability 0 (275) (275) At January 1, 2019 (190) 8 000 7 810 C hanges from financing cash flows (95) (90) (184) C hange in current financial assets (95) (95) Issuance of bonds 707 707 Repayments of bonds (1 046) (1 046) Net financial interest paid (159) (159) Other changes in borrowings 408 408 Non-cash changes 11 (71) (61) Effect of changes in foreign exchange rates (1) 7 6 Effect of changes in scope of consolidation 13 (45) (33) C hanges in fair values 1 1 Finance costs, net 108 108 Other changes (1) (142) (143) At June 30, 2019 (274) 7 839 7 565 (1) At June 30, 2019, the current portion of amounts receivable from finance lease sub-letting arrangements is not included in this caption. 13.5 Other non-current financial assets (in € millions) June 30, 2019 December 31, 2018 Deposits (1) 690 701 Financial services companies' portfolio of assets 475 405 Sub-lease receivable - less than 1 year (2) 168 0 Investments in non-consolidated companies 100 92 Long-term loans 10 10 Other 0 68 Total Other non-current financial assets (2) 1 443 1 275 (1) Deposits and guarantees include legal deposits paid in Brazil in connection with tax disputes (disputes relating mainly to tax reassessments challenged by the Group) pending final court rulings, as well as security deposits paid to lessors under property leases. (2) Amounts receivable from finance lease sub-letting arrangements were recognised following the application of IFRS 16 as of January 1, 2019. The non-current portion of these receivables represented 191 million euros. Other non-current financial assets increased from 1,275 million euros at December 31, 2018 to 1,466 million euros at January 1, 2019 (Note 4). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements 13.6 Finance costs and other financial income and expenses This item corresponds mainly to finance costs. In accordance with IFRS 16, as from first-half 2019 it also includes interest expenses on leases along with interest income on finance lease sub-letting arrangements (Note 4). Other financial income and expenses consist for the most part of discounting adjustments, late payment fees payable on certain liabilities, and the impacts of hyperinflation in Argentina. (in € millions) First-half 2019 First-half 2018 restated (1) Interest income from loans and cash equivalents Interest income from bank deposits Interest income from loans (1) 2 (3) 8 8 0 Finance costs (111) (127) Interest expense on financial liabilities measured at amortised cost, adjusted for income and expenses from interest rate instruments C ost of receivables discounting in Brazil (97) (14) (104) (12) Interest expense on finance lease liabilities (10) Ineffective portion of fair value hedges of borrowings Finance costs, net (112) (119) Interest charge related to leases commitment Interest income related to financial sublease contracts (61) 1 - Net interest related to lease commitment (60) Other financial income and expenses 7 (28) Actualisation cost on defined employee benefit debt (11) (11) Interest income on pension plan assets 2 2 Financial transaction tax (11) (14) Late interest due in connection with tax reassessments and employee-related litigation (16) (6) Dividends received on available-for-sale financial assets 1 1 Proceeds from the sale of available-for-sale financial assets 22 13 C ost of sold available-for-sale financial assets Exchange gains and losses (0) (3) (12) 13 Impact of hyperinflation in Argentina - application of IAS 29 21 C ost of bond buybacks (5) (5) C hanges in the fair value of interest rate derivatives 7 Other 1 (9) Finance costs and other financial income and expenses, net (165) (147) Financial expenses Financial income (221) 56 (183) 37 (1) Finance costs and other financial income and expenses for first-half 2018 were not restated for hyperinflation in Argentina in accordance with IAS 29 (Note 1.5). Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements NOTE 14: OTHER INFORMATION 14.1 Scope of consolidation 14.1.1 Main changes in the scope of consolidation in first-half 2019 Acquisition of So.bio On July 18, 2018, Carrefour announced that it had acquired So.bio, a chain of retail stores specialised in organic products (10 outlets currently in south-western France). This acquisition was subject to approval by the relevant anti-trust authorities. On February 28, 2019, the transaction was approved by the anti-trust authorities. In accordance with IFRS 3 – Business Combinations, the Group measured the assets acquired and liabilities assumed at the acquisition date. Based on these provisional measurements, provisional goodwill in the amount of 37 million euros was recognised in the consolidated statement of financial position at June 30, 2019 in respect of the So.bio acquisition. The revenue and profit attributable to So.bio recorded in the consolidated statement of comprehensive income for the period was not material. With the exception of this transaction, there were no other material changes in the scope of consolidation in first-half 2019. 14.1.2 Main changes in the scope of consolidation in first-half 2018 In first-half 2018, the main changes in the scope of consolidation were as follows: strategic partnership with Showroomprivé; acquisition of Quitoque in France (final goodwill of 36 million euros as of June 30, 2019). 14.2 Related parties Group transactions with related parties mainly concern: compensation and other benefits granted to members of the Group Executive Committee and the Board of Directors; transactions with companies over which the Group exercises significant influence. Related-party transactions are carried out on an arm’s length basis. During first-half 2019, there were no major changes in the nature of related-party transactions carried out by the Group. 14.3 Off-balance sheet commitments Commitments given and received by the Group that are not recognised in the statement of financial position correspond to contractual obligations whose performance depends on the occurrence of conditions or transactions after the period-end. There are three types of off-balance sheet commitments, related to (i) cash transactions, (ii) retailing operations and (iii) acquisitions of securities. Carrefour – Half-year Financial Report – June 30, 2019 Notes to the Consolidated Financial Statements The Group is also party to leases that gave rise to future commitments such as for the payment of rent on retail units leased by the Group from owners (commitments given at December 31, 2018), and the payment of rent on retail units in shopping malls owned by the Group and leased to other parties (commitments received at December 31, 2018). As a result of applying IFRS 16 at January 1, 2019, right-of-use assets are recognised against lease liabilities for leases not meeting the IFRS 16 criteria for recognition exemptions. Consequently, at June 30, 2019, off-balance sheet commitments under leases solely concern future commitments given or received in respect of leases meeting the IFRS 16 criteria for recognition exemptions (Note 4). No events arose during first-half 2019 that had a material impact on the Group’s off-balance sheet commitments. 14.4 Subsequent events 14.4.1 2018 dividend payment with reinvestment option At the Annual Shareholders’ Meeting held on June 14, 2019, the shareholders decided to set the 2018 dividend at 0.46 euros per share with a dividend reinvestment option. At the end of the option period on July 5, 2019, shareholders owning 70.44% of Carrefour’s shares had elected to reinvest their 2018 dividend. July 11, 2019 was set as the date for: settlement/delivery of the 17,096,567 new shares corresponding to reinvested dividends, representing a total capital increase including premiums of 253 million euros; payment of the cash dividend to shareholders who chose not to reinvest their dividends, representing a total payout of 106 million euros. 14.4.2 Cargo Property Assets sale agreement See Note 3.3. Carrefour – Half-year Financial Report – June 30, 2019 DELOITTE & ASSOCIES KPMG S.A. MAZARS Commissaire aux Comptes Membre de la Compagnie de Versailles 6, place de la Pyramide 92908 Paris-La-Défense Cedex France Commissaire aux Comptes Membre de la Compagnie de Versailles 2, avenue Gambetta 92066 Paris-La-Défense Cedex France Commissaire aux Comptes Membre de la Compagnie de Versailles 61, rue Henri Regnault 92400 Courbevoie France Carrefour Société anonyme 93, avenue de Paris 91300 Massy _______________________________ Statutory auditors’ review report on the condensed consolidated financial statements For the six-month financial period ended June 30, 2019 _______________________________ This is a free translation into English of the statutory auditors’ review report issued in French and is provided solely for the convenience of English speaking readers. This report includes information relating to the specific verification of information presented in the business review. This report should be read in conjunction with, and construed in accordance with, French law and professional standards applicable in France. Carrefour – Half-year Financial Report – June 30, 2019 To the Shareholders, In compliance with the assignment entrusted to us by your Shareholders’ meetings and in accordance with the requirements of article L.451-1-2 III of the French Monetary and Financial Code (“Code monétaire et financier”), we hereby report to you on : the review of the accompanying condensed consolidated financial statements of Carrefour, for the period ended June 30, 2019, and the verification of the information presented in the business review. These condensed consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 « Interim Financial Reporting » as adopted by the European Union. Without qualifying our conclusion above, we would draw attention to Note 4 to the condensed consolidated financial statements setting out the impacts of first-time application as of January 1, 2019 of IFRS 16 « Leases » and IFRIC 23 « Uncertainty over income tax treatments ». Our opinion is not modified in respect of this matter. Carrefour – Half-year Financial Report – June 30, 2019 Specific verification We have also verified the information presented in the business review on the condensed consolidated financial statements subject to our review. We have no comments to make on its fair presentation and its consistency with the condensed consolidated financial statements. French original signed at Paris-La-Défense and Courbevoie, on July 25, 2019 The Statutory Auditors DELOITTE & ASSOCIES STÉPHANE RIMBEUF BERTRAND BOISSELIER KPMG S.A. CAROLINE BRUNO-DIAZ PATRICK-HUBERT PETIT MAZARS EMILIE LORÉAL DAVID CHAUDAT Carrefour – Half-year Financial Report – June 30, 2019 Declaration by the persons responsible Declaration by the persons responsible We hereby certify that, to the best of our knowledge, the condensed consolidated financial statements for the six-month period ended June 30, 2019 were prepared in accordance with applicable accounting standards and give a true and fair view of the assets and liabilities, financial situation and income of the company Carrefour and of all the consolidated companies, and that the attached half-year financial report gives a true and fair view of the significant events having occurred during the first six months of the financial year, of their impact on the financial statements, of the main related party transactions, as well as a description of the main risks and uncertainties for the remaining six months of the financial year. July 25, 2019 Mr. Alexandre Bompard Chairman and Chief Executive Officer Mr. Matthieu Malige Chief Financial Officer Carrefour – Half-year Financial Report – June 30, 2019 www.carrefour.com @CarrefourGroup Société anonyme with capital of €2,015,873,515 Head office: 93, avenue de Paris – 91300 Massy – France 652 014 051 RCS Évry

Semestriel, 2019, Retail, Carrefour

write me a financial report

Semestriel

Retail

Carrefour

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Retail ### Company: Carrefour ### Response:

THE FOODTRANSITION FOR ALL.”our ambition is to be the leader of”Our mission is to provide our customers with quality services, products and food accessible to all across all distribution channels. Thanks to the competence of our employees, to a responsible and multicultural approach, to our broad territorial presence and to our ability to adapt to production and consumption modes, Half-year financial reportJune 30, 2020 Carrefour – Half-year Financial Report – June 30, 2020 2 Contents Business Review for the six-month period ended June 30, 2020 page 04 Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 page 24 Statutory Auditors’ review report on the half-yearly financial information page 62 Declaration by the persons responsible page 65 The English version of the Half-year Financial Report is a free translation from the original which was prepared in French. The original French version of the document prevails over this translation. 3 Carrefour – Half-year Financial Report – June 30, 2020 Business Review for the six-month period ended June 30, 2020 1. Business review and consolidated income analysis 1.1. Main income statement indicators 1.2. Analysis of the main income statement items 1. Business review and consolidated income analysis 1.1. Main income statement indicators 1.2. Analysis of the main income statement items 2. Group financial position and cash flows 2.1. Shareholders' equity 2.2. Net debt 2.3. Statement of cash flows 2.4. Financing and liquidity resources 2.5. Restrictions on the use of capital resources 2.6. Expected sources of funding 2. Group financial position and cash flows 2.1. Shareholders' equity 2.2. Net debt 2.3. Statement of cash flows 2.4. Financing and liquidity resources 2.5. Restrictions on the use of capital resources 2.6. Expected sources of funding 3. Outlook page 14 4. Other information page 15 4.1. Accounting principles 4.2. Significant events of the period 4.3. Impact of changes in accounting policies 4.4. Main related-party transactions 4.5. Subsequent events 4.6. Risk factors Carrefour – Half-year Financial Report – June 30, 2020 4 1. Business review and consolidated income analysis 1.1 Main income statement indicators Note that Carrefour China was classified as a discontinued operation at June 30, 2019 in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations. Control of Carrefour China was lost on September 26, 2019, when the business was sold to Suning.com (see Notes 2 and 5 to the 2019 Consolidated Financial Statements). (in millions of euros) First-half 2020 First-half 2019 % change % change at constant exchange rates Net sales 34 265 34 885 (1.8)% 3.9% Gross margin from recurring operations 7 457 7 667 (2.7)% 3.3% in % of net sales 21.8% 22.0% Sales, general and administrative expenses and amortisation (6 739) (7 043) (4.3)% 1.0% Recurring operating income 718 624 15.2% 29.1% Recurring operating income before depreciation and amortisation 1 886 1 770 6.5% 13.4% Recurring operating income after net income from equity-accounted companies 716 622 15.2% 29.0% Non-recurring operating income and expenses, net (234) (610) (61.6)% (60.8)% Finance costs and other financial income and expenses, net (173) (165) 5.1% 15.8% Income tax expense (238) (192) 24.3% 37.2% Net income / (loss) from continuing operations - Group share (23) (415) (94.4)% (99.4)% Net income / (loss) from discontinued operations - Group share 3 (43) 106.8% 106.8% Net income / (loss) - Group share (21) (458) (95.5)% (100.1)% Free cash-flow (1) Net free cash-flow (2) Net debt at June 30 (3) (1 595) (2 193) 5 218 (1 689) (2 390) 6 043 Net debt at June 30 including discontinued operations 5 218 5 958 (1) Free cash flow corresponds to cash flow from operating activities before net finance costs and net interests related to lease commitments, after the change in working capital, less net cash from/(used in) investing activities. (2) Net free cash flow corresponds to free cash flow after net finance costs and net lease payments. (3) Net debt does not include lease liabilities (see Note 2.2). Net sales amounted to 34.3 billion euros in first-half 2020, up 3.9% at constant exchange rates. Recurring operating income before depreciation and amortisation came in at 1,886 million euros, an improvement of 13.4% at constant exchange rates. Recurring operating income increased by 29.1% at constant exchange rates, to 718 million euros. Non-recurring operating income and expenses represented a net expense of 234 million euros, a 376 million-euro improvement compared with first-half 2019, due mainly to lower restructuring costs (42 million euros) than in the prior-year period (342 million euros). Finance costs and other financial income and expenses represented a net expense of 173 million euros, a rise of 8 million euros from the previous year, despite an improvement in net debt. Gains on sales of financial assets had a positive effect on finance costs in the first half of 2019. The income tax expense for first-half 2020 amounted to 238 million euros, representing an effective tax rate of 77%, mainly impacted by the fact that no deferred tax assets were recognised during the period in certain countries and by the recognition of taxes other than on income within tax expense (Cotisation sur la Valeur Ajoutée des Entreprises (CVAE) in France, in particular). The net loss from continuing operations – Group share, totalled 23 million euros, a 391 million-euro improvement on first-half 2019. 5 Carrefour – Half-year Financial Report – June 30, 2020 1. Business review and consolidated income analysis The net loss – Group share came to 21 million euros, versus a net loss of 458 million euros in first-half 2019. Free cash flow amounted to a negative 1,595 million euros, versus a negative 1,689 million euros in first-half 2019. Net free cash flow was a negative 2,193 million euros, versus a negative 2,390 million euros in first-half 2019. 1.2 Analysis of the main income statement items The Group’s operating segments consist of the countries in which it does business, combined by region, and “Global functions”, corresponding to the holding companies and other administrative, finance and marketing support entities. Net sales by region (in millions of euros) France First-half 2020 16 357 First-half 2019 16 789 % change (2.6)% % change at constant exchange rates (2.6)% Europe (excluding France) 10 246 9 988 2.6% 3.0% Latin America 6 569 7 134 (7.9)% 20.0% Asia (Taiwan) 1 092 974 12.1% 6.0% Total 34 265 34 885 (1.8)% 3.9% The Carrefour group reported net sales of 34.3 billion euros in first-half 2020, up 3.9% at constant exchange rates and up 3.8% restated for the application of IAS 291. First-half sales in France decreased by 2.6% as reported, but edged up 2.4% versus the prior-year period on a like-for-like basis2. This growth reflects, in particular, a like-for-like increase of 4.3% in first-quarter 2020, buoyed by the performance in food (up 5.9% like- for-like). Sales were up 0.7% on a like-for-like basis in the second quarter of 2020, reflecting the unfavourable impact of hypermarkets (down 3.6% like for like), which were hurt by restrictions on freedom of movement during lockdown. However, their performance has significantly improved since mid-May. Sales momentum was particularly strong in supermarkets and convenience formats during the period. In Europe excluding France, sales were up 3.0% at constant exchange rates in first-half 2020, mainly driven by like-for-like growth of 8.3% in Spain and 11.2% in Belgium. In Spain, Carrefour took advantage of its enhanced attractiveness, including in hypermarkets, and thereby sustained its excellent momentum. Constant attention to customer satisfaction continued to pay off. Belgium was able to make further market share gains during the period. The Group capitalised on a particularly well-adapted store network and the price repositioning initiated in November 2019, reinforced in May by a second wave of investments in 1,000 products. Italy saw a 2.6% decline in like-for-like sales, affected by a 7.4% decrease in the second quarter due to its exposure to shopping centres, which were closed until May 18, and tourist areas particularly affected during the crisis. Growth in Poland (up 2.0%) and in Romania (up 3.5%) in the first half was attributable to very solid performances in the first quarter (up 8.8% and 9.7% like-for-like respectively). The second quarter of 2020 saw a decrease (down 4.2% in Poland and 2.2% in Romania) due to 1 Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the Consolidated Financial Statements for the six-month period ended June 30, 2020. Comparative data for 2019 have also been adjusted for hyperinflation. 2 Like-for-like sales generated by stores opened for at least twelve months, excluding temporary store closures, at constant exchange rates, excluding petrol and calendar effects and excluding the IAS 29 impact. Carrefour – Half-year Financial Report – June 30, 2020 6 1. Business review and consolidated income analysis Carrefour's high exposure to stores located in shopping centres, which have only been gradually reopening since May. In Latin America, total sales rose by 20.0% at constant exchange rates and 19.0% like-for-like, reflecting strong commercial momentum in Brazil and Argentina. Foreign exchange nevertheless had an unfavourable impact of 23.3%. The performance in Brazil was solid during the period. Carrefour Retail had strong momentum in food and non-food, with sales up 19.8% on a like-for-like basis. This growth reflects the repositioning of hypermarkets since 2018, enabling significant market share gains. Atacadão’s sales were up 13.5% at constant exchange rates, with like-for-like growth of 7.9% and a contribution from store openings of 6.1%. The banner continued its expansion, with five new stores opened in the first half of 2020. In Argentina, good commercial momentum continued, with volumes increasing continuously. Strengthening price leadership and proximity to customers are differentiating assets. In Taiwan (Asia), sales increased by 6.0% at constant exchange rates. Effects linked to the Covid-19 pandemic situation were less marked than in other Group geographies. In the first quarter of 2020, Carrefour benefited from successful marketing campaigns during Chinese New Year and from the integration of eight Taisuco stores in 2019. In the second quarter of 2020, in a shrinking market, market share remained stable. Net sales by region – contribution to the consolidated total (in %) France First-half 2020 (1) 45% First-half 2019 48% Europe (excluding France) 28% 29% Latin America 24% 20% Asia (Taiwan) 3% 3% Total 100% 100% (1) at constant exchange rates At constant exchange rates, the portion of sales generated outside France continued to rise, representing 54.9% in first-half 2020 versus 51.9% in first-half 2019. Recurring operating income by region (in millions of euros) First-half 2020 First-half 2019 % change % change at constant exchange rates France 125 120 4.2% 4.2% Europe (excluding France) 199 126 58.9% 59.0% Latin America 373 362 2.9% 27.5% Asia (Taiwan) 49 40 21.6% 15.0% Global functions (28) (25) (12.7)% (13.4)% Total 718 624 15.2% 29.1% Recurring operating income increased by 95 million euros in first-half 2020 (up 29.1% at constant exchange rates), to 718 million euros. In France, recurring operating income for the first half of 2020 was 125 million euros, up 4.2% in comparison with the first half of 2019. Operating margin increased by 5 bps to 0.8%. This change reflects the good momentum of retail activities, despite the drop in hypermarket activity during lockdown. Recurring operating income was reduced by approximately 70 million euros due to the Carrefour – Half-year Financial Report – June 30, 2020 7 1. Business review and consolidated income analysis increase in the cost of risk in financial services and the sharp slowdown in retail services and Promocash. In Europe (excluding France), recurring operating income stood at 199 million euros versus 126 million euros in first-half 2019, an increase of 59.0% at constant exchange rates. Operating margin improved by 69 bps to 1.9% at current exchange rates. All countries contributed to this increase. Carrefour benefited from a significant increase in activity and good cost-cutting dynamics across all geographies. In Latin America, recurring operating income rose by 27.5% at constant exchange rates to 373 million euros. Operating margin increased by 60 bps to 5.7% at current exchange rates, reflecting a commercial strategy promoting volume growth. In Brazil, the significant increase in volumes resulted in strong operational leverage fuelled by increased cost discipline and greater operational efficiency. Recurring operating income therefore surged by 20.3% at constant exchange rates. In Argentina, recurring operating income was positive in the first half for the first time since 2012. In Taiwan (Asia), profitability improved again with recurring operating income increasing by 9 million euros to 49 million euros in first-half 2020, with an increasing operating margin of 4.5% (versus 4.1% in first-half 2019). This increase reflects good expansion momentum and tight cost control. Depreciation and amortisation Depreciation and amortisation of property and equipment, intangible assets and investment property amounted to 675 million euros in first-half 2020 compared with 665 million euros in first-half 2019. Depreciation of right-of-use assets (IFRS 16) relating to property and equipment and investment property totalled 364 million euros in first-half 2020 compared with 363 million euros in first-half 2019. Including depreciation of logistics equipment and the related IFRS 16 right-of-use assets included in the cost of sales, a total depreciation and amortisation expense of 1,168 million euros was recognised in the consolidated income statement for first-half 2020, compared with an expense of 1,147 million euros for the prior-year period. Net income/(loss) of equity-accounted companies Net income/(loss) of equity-accounted companies represented a net loss of 2 million euros, versus a net loss of 1 million euros in first-half 2019. Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as impairment of non-current assets, gains and losses on sales of non-current assets, restructuring costs and provisions recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group’s attention during the reporting year. Non-recurring items represented a net expense of 234 million euros in first-half 2020. Carrefour – Half-year Financial Report – June 30, 2020 8 1. Business review and consolidated income analysis The detailed breakdown is as follows: (in millions of euros) First-half 2020 First-half 2019 Net gain/(loss) on sales of assets (31) 17 Restructuring costs (42) (342) Other non-recurring items (106) (194) Non-recurring income and expenses net before asset impairments and write-offs (180) (518) Asset impairments and write-offs (55) (92) Impairments and write-offs of goodwill Impairments and write-offs of property and equipment, intangible assets and others (55) (92) Non-recurring income and expenses, net (234) (610) Of which : Non-recurring income 86 262 Non-recurring expense (320) (873) Gains and losses on disposals of assets include the loss recognised on the sale of Rue du Commerce, which was completed on April 30, 2020 (see Note 3.2 to the Condensed Consolidated Financial Statements for the six months ended June 30, 2020). The costs incurred in connection with the Covid-19 health crisis were recognised in recurring operating income for first-half 2020, including necessary costs relating to logistics or product distribution in stores or to customers’ homes, as well as costs relating to protecting the health of employees, customers and service providers. In accordance with the Group’s accounting principles, exceptional bonuses and similar benefits have been recognised in non-current expenses for a total amount of 128 million euros. Asset impairments and write-offs recorded in first-half 2020 corresponded mainly to the write-down of non-current assets by Carrefour Banque following the decision of its Board of Directors to discontinue the C-zam business (see Note 3.2 to the Condensed Consolidated Financial Statements) and impairment losses on certain Promocash stores in France. The main non-recurring items in first-half 2019 were as follows: Restructuring costs recognised in first-half 2019 corresponded for the most part to employee severance costs incurred in connection with the hypermarket transformation plan in France. Other non-recurring income and expenses mainly concerned Brazil and resulted primarily from the following two rulings: o o in May 2019, the Brazilian Supreme Court handed down an unfavourable decision to adjust its ruling on inter-state transfers of ICMS tax credits relating to "basic products". As a result of this decision, a provision (including interest and penalties) was recognised in the Consolidated Financial Statements against the related non- recurring expenses in order to cover current tax disputes as well as possible new ones arising from years still potentially subject to tax audits; in June 2019, following a favourable and final ruling, PIS-COFINS credits from prior years were recognised against the related non-recurring income. Asset impairments and write-offs included a 52 million euro write-down of the investment in Showroomprivé to align its carrying amount with the company’s share price at June 30, 2019. Carrefour – Half-year Financial Report – June 30, 2020 9 1. Business review and consolidated income analysis Operating income The Group ended the period with an operating income of 482 million euros, versus 12 million euros in first-half 2019. Finance costs and other financial income and expenses Finance costs and other financial income and expenses represented a net expense of 173 million euros in first-half 2020, corresponding to a negative 0.5% of sales for the period (unchanged from first-half 2019). (in millions of euros) First-half 2020 First-half 2019 Finance costs, net (91) (112) Net interests, related to leases commitment (48) (60) Other financial income and expenses, net (34) 7 Finance costs and other financial income and expenses, net (173) (165) Finance costs, net improved by 21 million euros to 91 million euros. In accordance with IFRS 16, from 2019 finance costs and other financial income and expenses also include interest expense on leases as well as interest income on finance lease sub-letting arrangements. Other financial income and expenses consist for the most part of discounting adjustments, late payment fees payable on certain liabilities, and the impacts of hyperinflation in Argentina. Gains on sales of financial assets had a positive effect on finance costs in the first half of 2019. Income tax expense The income tax expense for first-half 2020 amounted to 238 million euros, representing an effective tax rate of 77%, compared with the 192 million euro expense recorded in first-half 2019, which corresponded to a negative effective tax rate of 125%. This reflects the fact that no deferred tax assets were recognised on temporary differences or in respect of tax loss carryforwards arising on significant non-recurring expenses recognised during the period. The effective rate also reflects the inclusion of the CVAE tax in current tax. Net income attributable to non-controlling interests Net income attributable to non-controlling interests came to 94 million euros in first-half 2020, versus 68 million euros in first-half 2019. Net income/(loss) from continuing operations – Group share As a result of the factors described above, the Group reported a 23 million-euro net loss from continuing operations in first-half 2020, compared with a net loss of 415 million euros in the prior-year period. Carrefour – Half-year Financial Report – June 30, 2020 10 2. Group financial position and cash flows 2.1 Shareholders' equity At June 30, 2020, shareholders’ equity stood at 10,763 million euros compared with 11,675 million euros at December 31, 2019, a decrease of 912 million euros. This decrease mainly reflects: net income for the year of 73 million euros; other comprehensive income items amounting to an 863 million-euro loss, impacted by unfavourable exchange differences resulting from the significant depreciation of the Brazilian real in first-half 2020; dividends paid in an amount of 130 million euros, of which 57 million euros paid to Carrefour shareholders (representing the cash portion) and 73 million euros to non-controlling shareholders, relating mainly to Spanish and Taiwanese subsidiaries. 2.2 Net debt Consolidated net debt increased from 2,615 million euros at December 31, 2019 to 5,218 million euros at June 30, 2020. The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year-end figure being structurally lower due to the significant volume of business recorded during December. Net debt breaks down as follows: (in millions of euros) June 30, 2020 December 31, 2019 Bonds and notes 7 047 6 981 Other borrowings 481 261 Commercial paper 719 Total borrowings excluding derivative instruments recorded in liabilities 8 247 7 241 Derivative instruments recorded in liabilities 41 59 Total long and short term borrowings [1] 8 288 7 300 Of which borrowings due in more than one year 6 379 6 303 Of which borrowings due in less than one year 1 909 997 Other current financial assets (1) 320 219 Cash and cash equivalents 2 750 4 466 Total current financial assets [2] 3 070 4 685 Net debt [1] - [2] 5 218 2 615 (1) Net debt does not include the current portion of amounts receivable from finance lease sub-letting arrangements (see Note 15.2 to the 2019 Consolidated Financial Statements). Long and short-term borrowings (excluding derivatives) mature at different dates, through 2027 for the longest tranche of bond debt, leading to balanced repayment obligations in the coming years, as shown below: (in millions of euros) June 30, 2020 December 31, 2019 Due within 1 year 1 868 939 Due in 1 to 2 years 170 1 127 Due in 2 to 5 years 4 171 3 368 Due beyond 5 years 2 039 1 808 Total borrowings excluding derivative instruments recorded in liabilities 8 247 7 241 Carrefour – Half-year Financial Report – June 30, 2020 11 2. Group financial position and cash flows Cash and cash equivalents totalled 2,750 million euros at June 30, 2020 compared with 4,466 million euros at December 31, 2019, representing a decline of 1,717 million euros. 2.3 Statement of cash flows Net debt rose by 2,603 million euros in first-half 2020, versus a 2,448 million-euro increase in first-half 2019. The change is analysed in the simplified statement of cash flows presented below: (in millions of euros) First-half 2020 First-half 2019 Cash flow from operations 1 233 1 367 Change in trade working capital requirement (1 830) (1 636) Change in other receivables and payables (233) (486) Change in consumer credit granted by the financial services companies (38) (36) Operational investments (1) (449) (628) Change in amounts due to suppliers of fixed assets (328) (183) Impact of discontinued operations (136) Other 51 49 Free cash flow (1 595) (1 689) Acquisitions of subsidiaries and investments in associates (109) 1 Dividends paid/Capital increase (145) (14) Finance costs, net (91) (112) Foreign exchange (130) (5) Lease commitments and interests (525) (496) Impact of discontinued operations (117) Other (9) (15) Decrease/(Increase) in net debt (2 603) (2 448) (1) Excluding the 10% downpayment in February 2020 relating to the ongoing acquisition of 30 Makro stores in Brazil. Free cash flow came to 1,595 million euros in first-half 2020, compared with free cash flow of 1,689 million euros in first-half 2019, and mainly comprised: cash flow from operating activities totalling 1,233 million euros, compared with 1,367 million euros at June 30, 2019. Excluding discontinued operations, cash flow came to 1,260 million euros, compared with 1,263 million euros in first-half 2019; the change in trade working capital and other receivables and payables, which amounted to a negative 2,064 million euros in first-half 2020 versus a negative 2,123 million euros in first-half 2019; operational 628 million euros in first-half 2019. investments in an amount of 449 million euros, compared with 2.4 Financing and liquidity resources The Group’s main measures for strengthening its overall liquidity consist of: promoting prudent financing strategies in order to ensure that the Group's credit rating allows it to raise funds on the bond and commercial paper markets; maintaining a presence in the debt market through regular debt issuance programmes, mainly in euros, in order to create a balanced maturity profile. The Group's issuance capacity under its Euro Medium-Term Notes (EMTN) programme totals 12 billion euros; Carrefour – Half-year Financial Report – June 30, 2020 12 2. Group financial position and cash flows using the 5 billion-euro commercial paper programme on Euronext Paris, described in a prospectus filed with the Banque de France; maintaining undrawn medium-term bank facilities that can be drawn down at any time according to the Group’s needs. At June 30, 2020, the Group had two undrawn syndicated lines of credit obtained from a pool of leading banks, for a total of 3.9 billion euros. The Group considers that its liquidity position is robust. It has sufficient cash reserves to meet its debt repayment obligations in the coming year. The Group's debt profile is balanced, with no peak in refinancing needs across the remaining life of bond debt, which averages 4.1 years. At June 30, 2020, the Group was rated BBB with a stable outlook by Standard & Poor’s and Baa1 with a negative outlook by Moody’s. These ratings were confirmed after the publication of the 2019 annual results. The main transactions of first-half 2020 included the issue on March 25, 2020 of 1 billion euros worth of 2.625% bonds maturing in around 7.5 years and the redemption on April 9, 2020 of 802 million euros worth of 4% ten-year bonds (see Note 12.2.2 to the Condensed Consolidated Financial Statements). These transactions, which provide secure financing for 2020, are part of the strategy to ensure the necessary financing is in place to meet the Group’s long-term needs. 2.5 Restrictions on the use of capital resources There are no material restrictions on the Group’s ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. 2.6 Expected sources of funding To meet its commitments, Carrefour can use its free cash flow and raise debt capital using its EMTN and commercial paper programmes, as well as its credit lines. Carrefour – Half-year Financial Report – June 30, 2020 13 3. Outlook The Group is continuously working to precisely assess the impact of the Covid-19 pandemic, particularly on changes in consumer purchasing behaviour. The Group is reiterating the key focuses of the “Carrefour 2022” strategic plan, raising its cost-reduction plan objective and confirming all of its other operational and financial objectives. Operational objectives: Improvement in the Group NPS® of 15 points over the 2020-2022 period, i.e., a 23-point increase since the start of the plan; Reduction of 350,000 sq.m. in hypermarket sales area worldwide by 2022; 15% reduction in assortments by 2020; Carrefour own-brand products accounting for one-third of sales in 2022; 2,700 convenience store openings by 2022. Financial objectives: 4.2 billion euros in food e-commerce sales in 2022; 4.8 billion euros in sales of organic products in 2022; Three-year cost-reduction plan raised to 3.0 billion euros (versus 2.8 billion euros previously) on full-year basis by end-2020. Continued cost-reduction momentum beyond 2020; 300 million euros in additional disposals of non-strategic real estate assets by 2022. 14 Carrefour – Half-year Financial Report – June 30, 2020 4. Other information 4.1 Accounting principles The accounting and measurement methods used to prepare the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 are the same as those used for the 2019 Consolidated Financial Statements, except for specific requirements of IAS 34 – Interim Financial Reporting (see Note 1.3 to the Interim Consolidated Financial Statements) and the following standards, amendments and interpretations which were applicable as of January 1, 2020. Amendments to IAS 1 and IAS 8 – Definition of Material • Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest Rate Benchmark Reform • Amendments to IFRS 3 – Definition of a Business • Amendments to References to the Conceptual Framework in IFRS Standards Application of these amendments had no material impact on the Group’s Condensed Consolidated Financial Statements. No standards, amendments or interpretations were adopted for use in the European Union and available for early adoption. Not yet adopted for use in the European Union Standards, amendments and interpretations Effective date(1) Amendment to IFRS 16 – Leases: Covid-19-Related Rent Concessions June 1, 2020 Amendments to IFRS 3 – Business Combinations, IAS 16 – Property, Plant and Equipment, IAS 37 – Provisions, Contingent Liabilities and Contingent Assets and Annual Improvements to IFRSs – 2018-2020 cycle January 1, 2022 IFRS 17 – Insurance Contracts January 1, 2023 Amendments to IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current January 1, 2023(2) (1) Subject to adoption by the European Union. (2) Subject to publication of the final version of the amendment. The Group is currently analysing the potential impacts of applying IFRS 17. It does not expect the application of the other standards, amendments or interpretations to have a material impact on its Consolidated Financial Statements. Carrefour – Half-year Financial Report – June 30, 2020 15 4. Other information 4.2 Significant events of the period 4.2.1 Covid-19 health crisis a. First-half 2020 context and business activity In the first half of 2020, the Covid-19 pandemic had a severe impact on the global economy and led to a serious, unprecedented situation. In response to the Covid-19 pandemic, Carrefour’s teams mobilised in an exceptional manner to ensure the continuity of food distribution and meet new consumer expectations in a complex and rapidly changing environment. The Group immediately implemented strong measures to protect the health of employees and customers. In most cases, these measures anticipated and went beyond the health rules recommended by the public authorities in each country. Carrefour also took social responsibility measures and carried out concrete solidarity initiatives, such as rolling out dedicated services for priority customers (particularly the elderly and caregivers), making donations via the Carrefour Foundation and supporting local producers. The unusual first half comprised three periods – pre-lockdown, lockdown and post-lockdown – each of which varied depending on the region. Thanks to its multi-format model, the Group was able to respond to each stage of the crisis. In January and February, sales were boosted by the success of the strategic initiatives launched in the past two years. In March, Carrefour recorded a strong increase in sales, with consumers making precautionary purchases ahead of lockdown, mainly in dry groceries and shelf stable products. All store formats and e-commerce benefited from this very sustained momentum in food. Across all geographies, fairly similar consumption behaviours were observed as the pandemic spread and governments took lockdown decisions. Once lockdown measures were implemented, consumers favoured convenience stores and supermarkets, which are closer to home and more accessible, at the expense of hypermarkets. Across all formats, the number of store visits was reduced, while average basket increased significantly. Food e-commerce kept up its strong momentum. The non-food market was penalised during lockdown, notably certain categories such as apparel, which was not considered a priority. Furthermore, in several Group countries, particularly Spain and Italy, the authorities also imposed the closure of certain non-food departments. From May onwards, European countries gradually began to ease lockdown measures. In Brazil, public health policy varies from one state to the next with lockdowns being applied on a local basis, while Argentina remains confined to this date. While the health situation and the timing of lockdown easing varies from country to country, certain trends emerged. In May and June, food markets generally performed well as consumers continued to dine at home. Convenience stores and supermarkets maintained their appeal, while hypermarkets – now fully reopened – enjoyed brisk sales. Carrefour – Half-year Financial Report – June 30, 2020 16 4. Other information b. Covid-19 measures taken by the Group Carrefour took action in the face of the Covid-19 pandemic. Protection of employees and customers The Group immediately implemented strong measures to protect the health of employees and customers. In most cases, these measures anticipated and went beyond the health rules recommended by the public authorities in each country. They were adjusted daily. • Reinforcement of disinfection and hygiene protocols. • Installation of plexiglass screens at checkouts. • Regular supply of hydroalcoholic gel. • • Queuing at the store entrance in case of crowds. • Ground markers to respect a safe distance. • Specific disinfection protocols and quarantine in case of suspected contamination. Providing employees with gloves, full visor caps, masks and thermometers. Introduction of protective measures. The proper application of health, hygiene and safety rules is regularly and strictly controlled and audited. Working conditions have been adapted to spare the teams: Adaptation of store opening hours. • Closure of integrated stores in France on Sundays and generalisation of teleworking for headquarters employees during the strict lockdown period. Continuity of food distribution ensured during lockdown Carrefour teams mobilised in an exceptional manner to ensure the continuity of food distribution in a complex context. The Group has kept the supply chain running smoothly: Establishment of plans to secure supply in stores and warehouses, with specific measures for the most sensitive, priority products. Establishment of a crisis unit dedicated to steering the supply chain and work with suppliers to increase direct flows. Rationalisation of supplier ranges (SKU reallocation, new suppliers, etc.), risk mapping, especially of shortages, and monitoring of alerts. Mobilisation of headquarters teams in the field, on a voluntary basis. • Recruitment of 5,000 employees in Brazil to strengthen the store teams. In e-commerce, Carrefour has adapted to the very high demand since the start of the crisis and has reached record NPS® in this segment in France: Operations: Immediate implementation of virtual queues on all our websites, versatility of store teams and opening of numerous order preparation points, acceleration of mechanisation and work rotations in warehouses. Services: Development of Drive in Spain and Italy and launch of the model in Argentina and Poland, launch of the "Les Essentiels Carrefour" offer deployed in France and Italy, using a dedicated mini-site to make baskets of essential food items available to customers. Delivery partnerships: Signing of contracts with UberEats in France and Glovo in Poland. Mobilisation in favour of purchasing power In the first quarter of 2020, Carrefour took action to defend its customers’ purchasing power by strengthening its commitments and freezing prices on thousands of products in all countries, for example on 5,000 Carrefour own-brand products and 500 “Unbeatable” products in France. Carrefour – Half-year Financial Report – June 30, 2020 17 4. Other information In the second quarter, Carrefour strengthened its price competitiveness in most countries, notably in France with the “committed prices” and “market premium” initiatives, and in Belgium with price cuts on 1,000 products. Special focus is placed on Carrefour own-brand products, which offer excellent value for money. Numerous solidarity initiatives Carrefour is committed to helping hospital and medical staff, as well as the most vulnerable people. • New services (taking orders by phone, meal deliveries, etc.) have been specially set up for them. Priority checkouts and time slots have been dedicated to them in most stores. The Carrefour Foundation has released 3 million euros for emergency food aid and hospitals: Contribution to the emergency fund of the Assistance Publique-Hôpitaux de Paris Foundation in France to help medical teams in French hospitals and medical research to defeat Covid-19. Support for medical teams at San Carlo and San Paolo hospitals in Italy. • Purchase of equipment to help the local Red Cross in Poland and Romania. In addition, Carrefour Brazil has distributed the equivalent of 15 million reals in food to families that are the most vulnerable in the face of the virus. Support for agricultural sectors in the crisis The health crisis has reduced opportunities for many SMEs in the agricultural/fish and food industries. Carrefour supports players in these sectors and is mobilising to limit the economic impact they face. Carrefour is committed to wholesalers to support French fishing, by guaranteeing volumes and purchase prices on some ten major species. For seasonal products in hypermarkets, Carrefour is committed to sourcing exclusively from French farmers. The Group was the first retailer to contribute to the Solidarity Fund for Consumers and Citizens created by "C'est qui le patron ?". This fund aims to support people whose self- employed professional activity has been significantly impacted by the crisis (freelancers, shops, farmers, very small businesses). Social and societal responsibility measures In the exceptional context of the Covid-19 pandemic and as part of a responsible corporate approach, at its meeting on April 20, 2020, Carrefour’s Board of Directors decided to reduce the recommended 2019 dividend by 50% compared with the amount announced on February 27, 2020. In line with this decision, the Board recommended setting the 2019 dividend at 0.23 euros per share versus the initially planned 0.46 euros per share and versus the 2018 dividend of 0.46 euros per share paid in 2019. This recommended dividend was approved at the Annual Shareholders’ Meeting of May 29, 2020. At the same Board of Directors meeting, Alexandre Bompard, Carrefour’s Chairman and Chief Executive Officer, informed the Board of his decision to: (i) waive 25% of his fixed compensation for a two-month period corresponding to the acute phase of the crisis, (ii) freeze the 2020 fixed compensation of the members of the Group’s Executive Committee for the entire year, and (iii) ask said members to waive 10% of their fixed compensation for a two-month period. Lastly, Alexandre Bompard and his fellow members of the Board of Directors decided to reduce their attendance fees by 25% for the current year. The corresponding amounts will be allocated to fund community service initiatives for Group employees, in France and abroad. Carrefour – Half-year Financial Report – June 30, 2020 18 4. Other information c. Solid balance sheet, enhanced liquidity and financial discipline Since 2018, Carrefour has shown great financial discipline and has strengthened its balance sheet and liquidity. Carrefour's solid balance sheet is an important asset in the context of the fast-changing food retail sector as well as in the face of the current pandemic. At June 30, 2020, the Group was rated Baa1 with a negative outlook by Moody's and BBB with a stable outlook by Standard & Poor's. These ratings were reiterated after the publication of the 2019 annual results. The main financing transactions carried out in first-half 2020 are described in detail in Note 4.2.3. d. Impact of the Covid-19 pandemic on the Interim Financial Statements and implementation of additional work The resulting impacts on the Consolidated Financial Statements and the implementation of additional work are set out in Note 3.1.c to the Condensed Consolidated Financial Statements. 4.2.2 Main acquisitions and disposals during first-half 2020 Acquisition of Potager City and Dejbox (France) On January 8, 2020, Carrefour acquired a 50% controlling interest in Potager City, a company based in Lyon that delivers fruit and vegetable baskets directly from the farm to the consumer. At the end of March 2020, a shareholder’s advance from Carrefour was used to underwrite a share issue, giving Carrefour 56% of Potager City’s capital and voting rights. On January 24, 2020, Carrefour acquired a majority stake (68%) in the company Dejbox, a pioneer in lunch delivery for business employees located in suburban and outlying areas. Operating in Lille, Lyon, Paris, Bordeaux, Nantes and Grenoble, plus hundreds of other nearby towns and cities, Dejbox delivers over 400,000 meals each month. In accordance with IFRS 3 – Business Combinations, following the Group’s measurement of the assets acquired and liabilities assumed at the acquisition dates, provisional goodwill has been accounted for at June 30, 2020 in the amount of 20 million euros for the Potager City acquisition and 53 million euros for the Dejbox acquisition. The revenue and profit attributable to Potager City and Dejbox recorded in the consolidated statement of comprehensive income for the period were not material. Accelerated expansion of the growing Atacadão format (Brazil) On February 15, 2020, Atacadão signed an agreement with Makro Atacadista to acquire 30 Cash & Carry stores (including the real estate of 22 stores, which are fully owned, and 8 leased stores) and 14 petrol stations, located in 17 states across Brazil, for a total price of 1.95 billion reals (approximately 325 million euros at the closing rate on June 30, 2020), to be paid entirely in cash. A downpayment of 195 million reals (approximately 35 million euros) was paid during the first quarter of 2020. The 30 stores represent a total retail surface area of over 165,000 sq.m. and annual sales of some 2.8 billion reals (2019 figure). Closing of the transaction remains subject to certain customary conditions, notably including agreement by the owners of the rented properties and approval by CADE, Brazil's anti-trust authority. The deal is expected to be completed during the second half of 2020. Carrefour – Half-year Financial Report – June 30, 2020 19 4. Other information On-going acquisition of Wellcome (Taiwan) In June 2020, Carrefour signed an agreement with Dairy Farm for the acquisition of Wellcome Taiwan. The deal covers 224 convenience stores and a warehouse (including title to the land and buildings). Wellcome Taiwan has an enterprise value of 97 million euros. It reported net sales of some 390 million euros in 2019. Closing of the transaction remains subject to the customary conditions and the deal is expected to be completed before the end of the year. Disposal of Rue du Commerce (France) On November 8, 2019, the Group announced that it had received a firm offer from Shopinvest for the acquisition of 100% of the share capital of Rue du Commerce. In accordance with IFRS 5, the subsidiary's assets and liabilities were classified within assets held for sale and related liabilities at December 31, 2019, and measured at the lower of their net carrying amount and fair value less costs to sell. In light of the financial terms of the unilateral promise given by Shopinvest, these assets were written down in full at December 31, 2019 against non-recurring operating income. The sale of Rue du Commerce was completed on April 30, 2020. The disposal loss recognised in 2020 amounts to approximatively 40 million euros. It was accounted for in non-recurring operating expense (see Note 6.3 to the Condensed Consolidated Financial Statements). Discontinuation of Carrefour Banque’s C-zam business (France) In April 2020, the Board of Directors of Carrefour Banque decided to discontinue the C-zam business (current account management services for retail banking customers), in order to focus on the bank’s core consumer finance business. This decision led to the write-down of non-current assets allocated to the C-zam business, against non-recurring operating expense (see Note 6.3 to the Condensed Consolidated Financial Statements). 4.2.3 Securing the Group’s long-term financing In early March 2020, the Covid-19 health crisis cut off access to the money market and the primary long-term bond market. The primary bond market re-opened on March 20, after a ten-day closure, with credit spreads at 200 bps versus 150 bps pre-closure. On March 25, 2020, Carrefour became the first BBB-rated issuer to tap the market, issuing 1 billion euros worth of 2.625% bonds maturing in around 7.5 years (due December 15, 2027). On April 9, 2020, the Group redeemed 802 million euros worth of 4% ten-year bonds. These transactions, which ensure the Group’s liquidity over the short- and medium-term, are part of the strategy to ensure the necessary financing is in place to meet Carrefour’s needs. They have also extended the average maturity of bond financing from 3.5 years at end-December 2019 to 4.1 years at June 30, 2020, while reducing Carrefour’s cost of debt. Furthermore, in May 2020, Carrefour exercised its option to extend its two credit facilities totalling 3.9 billion euros, from June 2024 to June 2025. This option has been applied to more than 95% of the Group’s banking facilities. Carrefour – Half-year Financial Report – June 30, 2020 20 4. Other information On April 16, 2020, the Brazilian subsidiary Atacadão obtained various types of financing in US dollars and euros that were immediately swapped for reals, for a total amount of 1.5 billion reals (representing approximately 250 million euros at the closing rate on June 30, 2020). These financing facilities have two and three year maturities. The above operations have ensured that the subsidiary’s short- and medium-term financing needs are met in the current health crisis. 4.2.4 2019 dividend payment with a dividend reinvestment option At the Annual Shareholders’ Meeting held on May 29, 2020, the shareholders decided to set the 2019 dividend at 0.23 euros per share with a dividend reinvestment option. The issue price of the shares to be issued in exchange for reinvested dividends was set at 12.19 euros per share, representing 95% of the average of the opening prices quoted on Euronext Paris during the 20 trading days preceding the date of the Annual Shareholders’ Meeting, less the net amount of the dividend of 0.23 euros per share and rounded up to the nearest euro cent. The option period was open from June 10 to June 23, 2020. At the end of this period, shareholders owning 69% of Carrefour's shares had elected to reinvest their 2019 dividends. June 29, 2020 was set as the date for: settlement/delivery of the 10,358,336 new shares corresponding to reinvested dividends, leading to a total capital increase including premiums of 126 million euros; payment of the cash dividend to shareholders who chose not to reinvest their dividends, representing a total payout of 57 million euros. 4.3 Impact of changes in accounting policies There were no changes in the accounting policies applied to prepare the Interim Consolidated Financial Statements for the six months ended June 30, 2020 compared with those applied at December 31, 2019. IFRS 16 – Leases – IFRS IC decision of December 16, 2019 On December 16, 2019, the IFRS IC published its decision in response to a request for clarification on the following matters: determination of the enforceable period of an automatically renewable lease, or of an indefinite-term lease, that may be terminated by one of the parties subject to a specified notice period. The issue to be clarified concerned the notion of penalties on which the definition of the enforceable period is based; the relationship between the useful life of non-removable leasehold improvements and the lease term under IFRS 16. The IFRS IC: concluded that the economics of a lease (rather than just the legal form) should be taken into account to determine the enforceable period of a lease; provided clarification on the relationship between the lease term under IFRS 16 and the useful life of non-removable leasehold improvements. Note that Carrefour did not apply this decision when preparing its Consolidated Financial Statements for the year ended December 31, 2019, since it is currently analysing the potential impacts of the guidance. In view of the large number of leases entered into by the Group in the Carrefour – Half-year Financial Report – June 30, 2020 21 4. Other information countries in which it does business, and the publication of this decision late in the financial year, the Group did not have sufficient time to analyse the decision and precisely determine its impacts. For the reasons explained at December 31, 2019 and in light of the additional work involved in drawing up the Interim Consolidated Financial Statements due to the Covid-19 crisis, the analyses required to determine the effects of the IFRS IC’s decision and implement it in the Group's financial and accounting systems had not been completed as of June 30, 2020. Consequently, the decision was not applied for the preparation of the Condensed Consolidated Financial Statements for the six months ended June 30, 2020. The Group’s analyses are still focusing mainly on leases: that are automatically renewable or can be cancelled at any time; that concern underlying assets (stores, warehouses) such as non-removable leasehold improvements and installations whose residual net carrying amount at the end of the IFRS 16 lease term could represent a significant penalty (within the meaning of the IFRS IC’s decision) for the Group. These cases could have led to an extension in the term of the corresponding leases under IFRS 16 and/or to an adjustment of the useful life of non- removable leasehold improvements and installations. Based on the analyses performed during the first half of 2020, the following rules are being considered: Confirmation of depreciation periods of non-removable leasehold improvements for all the underlying assets concerned. For the determination of reasonably certain periods of use under IFRS 16: o Application of a different approach taking into account the issues specific to each store format (convenience, hypermarket, supermarket, cash & carry) or warehouse format and the issues specific to each geographic area. o Adjustment to take into account the economic incentive associated with material non-removable leasehold improvements to leased supermarkets, hypermarkets and cash & carry stores, where this incentive could lead to an increase in the IFRS 16 lease term for a certain number of leases. o No change in IFRS 16 periods of use for other underlying assets (convenience stores, logistics warehouses and miscellaneous assets) due to the fact that existing leasehold improvements are not material. Analyses and discussions are in progress among users of IFRS 16 concerning the IFRS 16 periods of use to be applied to 3-6-9 year commercial leases in France (representing several hundred leases), which are currently determined in accordance with the guidelines issued by France’s accounting standards board, ANC, in February 2018. Concerning the preparation of the Condensed Consolidated Financial Statements for the six months ended June 30, 2020, as the IFRS IC's decision of December 16, 2019 was still being analysed, the IFRS 16 accounting policies applied in those financial statements were the same as those described in the Consolidated Financial Statements for the year ended December 31, 2019 (see Note 9). 4.4 Main related-party transactions During first-half 2020, there were no major changes in the nature of related-party transactions carried out by the Group. Carrefour – Half-year Financial Report – June 30, 2020 22 4. Other information 4.5 Subsequent events There were no significant events after the balance sheet date requiring disclosure. 4.6 Risk factors The risk factors at June 30, 2020 are the same as those set out in Chapter 4 Risk Management of the 2019 Universal Registration Document. Carrefour – Half-year Financial Report – June 30, 2020 23 Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 Consolidated income statement page 25 Consolidated statement of comprehensive income page 26 Consolidated statement of financial position page 27 Consolidated statement of cash flows page 28 Consolidated statement of changes in shareholders’ equity page 29 Notes to the Condensed Consolidated Financial Statements page 30 Carrefour – Half-year Financial Report – June 30, 2020 24 Consolidated income statement Note that Carrefour China was classified as a discontinued operation at June 30, 2019 in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations. Control of Carrefour China was lost on September 26, 2019, when the business was sold to Suning.com (see Notes 2 and 5 to the 2019 Consolidated Financial Statements). The Consolidated Financial Statements are presented in millions of euros, rounded to the nearest million. As a result, there may be rounding differences between the amounts reported in the various statements. (in millions of euros) Notes First-half 2020 First-half 2019 % change Net sales 6.1 34 265 34 885 (1,8)% Loyalty program costs (317) (336) (5,8)% Net sales net of loyalty program costs 33 949 34 549 (1,7)% Other revenue 6.1 1 121 1 204 (6,9)% Total revenue 35 070 35 752 (1,9)% Cost of sales (27 612) (28 086) (1,7)% Gross margin from recurring operations Sales, general and administrative expenses, depreciation and amortisation 6.2 7 457 (6 739) 7 667 (7 043) (2,7)% (4,3)% Recurring operating income 718 624 15,2% Net income/(loss) from equity-accounted companies (2) (1) 42,5% Recurring operating income after net income from equity-accounted companies 716 622 15,2% Non-recurring income and expenses, net 6.3 (234) (610) (61,6)% Operating income 482 12 4035,4% Finance costs and other financial income and expenses, net 12.6 (173) (165) 5,1% Finance costs, net (91) (112) (18,6)% Net interests related to leases commitment (48) (60) (19,5)% Other financial income and expenses, net (34) 7 (597,1)% Income before taxes 308 (153) 301,2% Income tax expense Net income/(loss) from continuing operations 9 (238) 70 (192) (345) 24,3% 120,4% Net income/(loss) from discontinued operations 3 (45) 106,5% Net income/(loss) for the half-year 73 (390) 118,8% Group share (21) (458) (95,5)% of which net income/(loss) from continuing operations (23) (415) (94,4)% of which net income/(loss) from discontinued operations 3 (43) 106,8% Attributable to non-controlling interests 94 68 37,5% of which net income/(loss) from continuing operations - attributable to non-controlling interests of which net income/(loss) from discontinued operations - attributable to non-controlling interests 94 70 (2) 34,3% Basic earnings per share, in € First-half 2020 First-half 2019 % change Net income/(loss) from continuing operations - Group share - per share (0,03) (0,53) (94,5)% Net income/(loss) from discontinued operations - Group share - per share 0,00 (0,06) (106,6)% Net income/(loss) - Group share - per share (0,03) (0,59) (95,6)% Diluted earnings per share, in € First-half 2020 First-half 2019 % change Diluted net income/(loss) from continuing operations - Group share - per share (0,03) (0,53) (94,5)% Diluted net income/(loss) from discontinued operations - Group share - per share 0,00 (0,06) (106,6)% Diluted net income/(loss) - Group share - per share (0,03) (0,59) (95,6)% Details of earnings per share calculations are provided in Note 11.2. Carrefour – Half-year Financial Report – June 30, 2020 25 Consolidated statement of comprehensive income (in millions of euros) First-half 2020 First-half 2019 Net income/(loss) - Group share (21) (458) Net income - Attributable to non-controlling interests 94 68 Net income/(loss) for the period 73 (390) Effective portion of changes in the fair value of cash flow hedges 21 (27) Changes in the fair value of debt instruments through other comprehensive income Exchange differences on translating foreign operations (1) (3) (881) (3) 71 Items that may be reclassified subsequently to profit or loss (862) 41 Remeasurements of defined benefit plans obligation (2) Changes in the fair value of equity instruments through other comprehensive income (0) 0 (76) 1 Items that will not be reclassified to profit or loss (0) (75) Other comprehensive income/(loss) after tax (863) (34) Total comprehensive income/(loss) (790) (424) Group share (593) (508) Attributable to non-controlling interests (197) 84 Items presented net of the tax effect (see Note 11.1). (1) Exchange differences recognised on translating foreign operations in first-half 2020 mainly reflect the significant decrease in the value of the Brazilian real. Exchange differences recognised on translating foreign operations in first-half 2019 mainly reflected the increase in the value of the Brazilian real. (2) There was no remeasurement of the net defined benefit obligation in first-half 2020, reflecting the stable discount rates applied for the eurozone (0.75%) between December 31, 2019 and June 30, 2020. In first-half 2019, the discount rates declined from 1.60% at December 31, 2018 to 0.80% at June 30, 2019, leading to an increase in the net obligation at June 30, 2019. Carrefour – Half-year Financial Report – June 30, 2020 - 26 - Consolidated statement of financial position ASSETS (in millions of euros) Notes June 30, 2020 December 31, 2019 Goodwill 7.1 7 930 7 976 Other intangible assets 7.1 1 370 1 452 Property and equipment 7.2 10 424 11 370 Investment property 7.3 277 312 Right-of-use assets 8.1 4 052 4 388 Investments in companies accounted for by the equity method 1 169 1 246 Other non-current financial assets 12.5 1 393 1 507 Consumer credit granted by the financial services companies – portion more than one year 6.5 2 070 2 283 Deferred tax assets 770 823 Other non-current assets 451 569 Non-current assets 29 906 31 927 Inventories 5 555 5 867 Trade receivables 2 532 2 669 Consumer credit granted by the financial services companies – portion less than one year 6.5 3 179 4 007 Other current financial assets 12.2 357 252 Tax receivables 793 838 Other assets 957 738 Cash and cash equivalents 12.2 2 750 4 466 Assets held for sale 24 37 Current assets 16 147 18 875 TOTAL ASSETS 46 053 50 802 SHAREHOLDERS’ EQUITY AND LIABILITIES (in millions of euros) Notes June 30, 2020 December 31, 2019 Share capital 2 044 2 018 Consolidated reserves (including net income) 7 239 7 921 Shareholders’ equity, Group share 9 283 9 940 Shareholders’ equity attributable to non-controlling interests 1 480 1 736 Total shareholders' equity 10 763 11 675 Borrowings - portion more than one year 12.2 6 379 6 303 Lease commitments - portion more than one year 8.2 3 348 3 660 Provisions 10 2 854 3 297 Consumer credit financing – portion more than one year 6.5 1 298 1 817 Deferred tax liabilities 600 655 Tax payables - portion more than one year 314 335 Non-current liabilities 14 793 16 066 Borrowings - portion less than one year 12.2 1 909 997 Lease commitments - portion less than one year 8.2 892 912 Suppliers and other creditors 11 157 13 646 Consumer credit financing – portion less than one year 6.5 3 275 3 712 Tax payables - portion less than one year 1 030 1 095 Other payables 2 234 2 649 Liabilities related to assets held for sale 49 Current liabilities 20 496 23 061 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 46 053 50 802 Carrefour – Half-year Financial Report – June 30, 2020 - 27 - Consolidated statement of cash flows (in millions of euros) First-half 2020 First-half 2019 INCOME BEFORE TAXES 308 (153) CASH FLOWS FROM OPERATING ACTIVITIES Income tax (227) (231) Depreciation and amortisation expense 1 168 1 147 Gains and losses on sales of assets 27 (28) Change in provisions and impairment (158) 283 Finance costs, net 91 112 Net interests related to leases 48 60 Net income and dividends received from equity-accounted companies Impact of discontinued operations (1) Cash flow from operations Change in working capital requirement (2) Impact of discontinued operations (1) Net cash (used in)/from operating activities (excluding financial services companies) 3 (27) 1 233 (2 064) (831) 75 104 1 367 (2 123) (113) (868) Change in consumer credit granted by the financial services companies (38) (36) Net cash (used in)/from operating activities - total (869) (904) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets (3) Acquisitions of non-current financial assets Acquisitions of subsidiaries and investments in associates (4) Proceeds from the disposal of subsidiaries and investments in associates (485) (9) (77) 5 (628) (14) (59) 52 Proceeds from the disposal of property and equipment and intangible assets 53 62 Proceeds from the disposal of non-current financial assets 9 22 Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets (3) Investments net of disposals - subtotal (329) (834) (191) (756) Other cash flows from investing activities Impact of discontinued operations (1) Net cash (used in)/from investing activities - total (68) (901) (64) (23) (842) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from share issues to non-controlling interests (5) Dividends paid by Carrefour (parent company) (6) Dividends paid by consolidated companies to non-controlling interests Change in current financial assets (7) Issuance of bonds (7) Repayments of bonds (7) Net financial interests paid Other changes in borrowings (7) Payments related to leases (principal) 1 (57) (88) (88) 1 000 (802) (129) 1 046 45 (60) (6) 707 (1 046) (159) 227 (481) (451) Net interests related to leases Impact of discontinued operations (1) Net cash (used in)/from financing activities - total (44) 358 (45) (48) (834) Net change in cash and cash equivalents before the effect of changes in exchange rates (1 412) (2 580) Effect of changes in exchange rates (304) 3 Net change in cash and cash equivalents (1 717) (2 578) Cash and cash equivalents at beginning of period 4 466 4 300 Cash and cash equivalents at end of period 2 750 1 723 of which cash and cash equivalent at end of period from continuing operations of which cash and cash equivalent at end of period from discontinued operations 2 750 - 1 522 200 (1) Cash flows from discontinued operations reclassified in accordance with IFRS 5 concern Carrefour China (from June 2019) and the integrated convenience stores business in France (from June 2018). (2) The change in working capital is analysed in Note 6.4. (3) Acquisitions mostly include operational investments in growth formats, notably the approximately 35 million-euro downpayment in February 2020 on 30 Makro stores in Brazil that are in the process of being acquired (see Note 3.2), the Group's digitisation and the roll-out of a leading omni-channel offering. (4) This item mainly reflects the January 2020 acquisition of Dejbox and Potager City in France (see Note 3.2) and the February 2020 acquisition of Sant’Ambroeus in Italy (see Note 13.1). In 2019, this item mainly reflected the acquisition of a majority interest in the capital of So.bio. (5) In 2019, this item mainly corresponded to the share capital of Cargo Property Assets subscribed and paid up during the period by third-party investors (non-controlling interests). Cargo Property Assets was divested on October 15, 2019. (6) The dividend approved by the Shareholders’ Meeting of May 29, 2020 was paid on June 29, 2020. Cash dividends paid to shareholders who chose not to reinvest their dividends amounted to 57 million euros (see Note 3.4). In 2019, the dividend was paid on July 11, 2019 (leading to a cash outflow of 106 million euros). (7) Note 12.2 provides a breakdown of total borrowings. Changes in liabilities arising from financing activities are detailed in Note 12.4. Carrefour – Half-year Financial Report – June 30, 2020 - 28 - Consolidated statement of changes in shareholders’ equity Shareholders’ equity, Group share (in millions of euros) Share capital Translation reserve Fair value reserve (3) Other consolidated reserves and net income Total Shareholders’ equity, Group share Non-controlling interests Total Shareholders’ equity Shareholders' equity at December 31, 2018 1 973 (1 219) (30) 8 445 9 169 2 117 11 286 IFRS 16 first application adjustments (2) Shareholders' equity at January 1st, 2019 1 973 (1 219) (30) (9) 8 436 (9) 9 161 2 117 (9) 11 278 Net income/(loss) for the half-year 2019 (458) (458) 68 (390) Other comprehensive income / (loss) after tax 54 (28) (75) (50) 15 (34) Total comprehensive income / (loss) for the half-year 2019 54 (28) (533) (508) 84 (424) Share-based payments 6 6 0 6 2018 dividend payment (1) (359) (359) (46) (405) Change in capital and additional paid-in capital 0 0 1 2 Effect of changes in scope of consolidation and other movements (24) (24) 1 (22) Shareholders' equity at June 30, 2019 1 973 (1 165) (58) 7 527 8 277 2 157 10 434 Shareholders' equity at December 31, 2019 2 018 (1 381) (33) 9 335 9 940 1 736 11 675 Net income / (loss) for the half-year 2020 Other comprehensive income / (loss) after tax (4) Total comprehensive income / (loss) for the half-year 2020 (592) (592) 20 20 (21) (0) (21) (21) (572) (593) 94 (290) (197) 73 (863) (790) Share-based payments 2019 dividend payment (1) Change in capital and additional paid-in capital Effect of changes in scope of consolidation and other movements 26 7 (83) (14) 7 (57) (14) 0 (73) 1 13 8 (130) 1 (1) Shareholders' equity at June 30, 2020 2 044 (1 973) (13) 9 225 9 283 1 480 10 763 (1) The 2018 dividend distributed by Carrefour S.A., totalling 359 million euros, was paid in second-half 2019: in cash for 106 million euros; and - in new shares for 253 million euros (corresponding to the aggregate par value of the new shares for 43 million euros and premiums for 210 million euros). The 2019 dividend distributed by Carrefour S.A., totalling 183 million euros, was paid in first-half 2020: in cash for 57 million euros; and - in new shares for 126 million euros (corresponding to the aggregate par value of the new shares for 26 million euros and premiums for 100 million euros). Dividends paid to non-controlling interests mainly pertain to the Spanish and Taiwanese subsidiaries for an amount of 73 million euros in first-half 2020, and to the Spanish, French and Brazilian subsidiaries for a total amount of 46 million euros in first-half 2019. (2) The Group applied IFRS 16 – Leases for the first time as of January 1, 2019. In light of the Group’s chosen transition approach, comparative data for 2018 were not restated and the impact resulting from the first-time application of the standard was recognised in equity at January 1, 2019 (see Note 4 to the 2019 Consolidated Financial Statements). (3) This item comprises: the hedge reserve (effective portion of changes in the fair value of cash flow hedges); - the financial asset fair value reserve (changes in the fair value of financial assets carried at fair value through other comprehensive income). (4) Other comprehensive income/(loss) after tax (Group share and non-controlling interests) chiefly reflects the decrease in the value of the Brazilian real over the period. Carrefour – Half-year Financial Report – June 30, 2020 - 29 - Notes to the Condensed Consolidated Financial Statements Notes to the Condensed Consolidated Financial Statements Note 1: Basis of preparation of the Condensed Consolidated Financial Statements page 31 Note 2: Seasonal fluctuations in business page 33 Note 3: Significant events of the period page 34 Note 4: Impact of changes in accounting policies page 39 Note 5: Segment information page 41 Note 6: Operating items page 43 Note 7: Intangible assets, property and equipment, investment property page 47 Note 8: Leases page 49 Note 9: Income tax page 50 Note 10: Provisions and contingent liabilities page 50 Note 11: Other comprehensive income and earnings per share page 53 Note 12: Financial assets and liabilities, finance costs and other financial income and expenses page 55 Note 13: Other information page 61 Carrefour – Half-year Financial Report – June 30, 2020 30 Notes to the Condensed Consolidated Financial Statements NOTE 1: BASIS OF PREPARATION OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 were reviewed by the Board of Directors on July 28, 2020. Carrefour (the "Company") is domiciled in France. The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 reflect the financial position and results of operations of the Company and its subsidiaries (together the “Group”), along with the Group’s share of the profits and losses and net assets of associates and joint ventures accounted for by the equity method. The presentation currency of the Consolidated Financial Statements is the euro, which is the Company's functional currency. 1.1 Statement of compliance In accordance with European Regulation (EC) No. 1606/2002 dated July 19, 2002, the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 have been prepared in compliance with the International Financial Reporting Standards as adopted for use in the European Union as of June 30, 2020 and applicable at that date, with comparative information for the same period of 2019 and at December 31, 2019 prepared using the standards applicable at the reporting date. International Financial Reporting Standards comprise International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), IFRS Interpretations Committee (IFRS IC) Interpretations and Standard Interpretations Committee (SIC) Interpretations. All of the standards and interpretations endorsed by the European Union are published in the Official Journal of the European Union, which can be accessed in the EUR-Lex. At June 30, 2020, the standards and interpretations adopted for use in the European Union were the same as those published by the IASB and applicable at that date. 1.2 IFRSs and interpretations applied by the Group The accounting and measurement methods used to prepare the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 are the same as those used for the 2019 Consolidated Financial Statements, except for specific requirements of IAS 34 – Interim Financial Reporting (see Note 1.3) and the following standards, amendments and interpretations which were applicable as of January 1, 2020: Amendments to IAS 1 and IAS 8 – Definition of Material • Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest Rate Benchmark Reform • Amendments to IFRS 3 – Definition of a Business • Amendments to References to the Conceptual Framework in IFRS Standards. Application of these amendments had no material impact on the Group’s Consolidated Financial Statements. No standards, amendments or interpretations were adopted for use in the European Union and available for early adoption. Carrefour – Half-year Financial Report – June 30, 2020 31 Notes to the Condensed Consolidated Financial Statements Not yet adopted for use in the European Union Standards, amendments and interpretations Effective date(1) Amendment to IFRS 16 – Leases: Covid-19-Related Rent Concessions June 1, 2020 Amendments to IFRS 3 – Business Combinations, IAS 16 – Property, Plant and Equipment, IAS 37 – Provisions, Contingent Liabilities and Contingent Assets and Annual Improvements to IFRSs – 2018-2020 cycle January 1, 2022 IFRS 17 – Insurance Contracts January 1, 2023 Amendments to IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current January 1, 2023(2) (1) Subject to adoption by the European Union. (2) Subject to publication of the final version of the amendment. The Group is currently analysing the potential impacts of applying IFRS 17. It does not expect the application of the other standards, amendments or interpretations to have a material impact on its Consolidated Financial Statements. 1.3 Specific reporting treatments in the preparation of interim financial statements 1.3.1 Reporting principles The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 have been prepared in accordance with IAS 34 – Interim Financial Reporting. Condensed interim consolidated financial statements do not contain all of the disclosures that would be required in a complete set of annual financial statements. Consequently, these Interim Financial Statements should be read jointly with the Group’s Consolidated Financial Statements for the year ended December 31, 2019, as included in the Universal Registration Document filed with the AMF and available on request from the Company’s head office at 93 avenue de Paris – 91300 Massy, France, or on the Company’s website, www.carrefour.com. In light of the unusual context in first-half 2020 created by the Covid-19 health crisis, these Interim Consolidated Financial Statements include additional disclosures compared with prior periods (see Note 3.1 in particular). 1.3.2 Estimation of income tax expense In accordance with IAS 34, income tax expense for first-half 2020 is calculated based on the estimated weighted average annual income tax rate for full-year 2020 (the effective tax rate), for each entity and tax sub-group (see Note 9). The tax impact of specific transactions is reflected in income tax expense for the period. 1.3.3 Post-employment benefits and other long-term benefits The provision for pensions and other post-employment benefits is calculated using actuarial projections based on data from the previous period-end. The discount rate for the main contributing countries (eurozone) is reviewed at June 30 (see Note 10). The actuarial projections are updated to take into account any material changes to assumptions or one-off impacts (discount rates, applicable legislation, the population concerned, etc.) during the six-month period. Carrefour – Half-year Financial Report – June 30, 2020 32 Notes to the Condensed Consolidated Financial Statements 1.4 Use of estimates and judgement Preparation of Consolidated Financial Statements involves the use of Group Management estimates and assumptions that may affect the reported amounts of certain assets, liabilities, income and expenses, as well as the disclosures contained in the notes. These estimates and assumptions are reviewed at regular intervals by Group management to ensure that they are reasonable in light of past experience and the current economic situation. Depending on changes in those assumptions, actual results may differ from current estimates. In addition to using estimates, Group management exercises its judgement when determining the appropriate accounting treatment of certain transactions and activities and how it should be applied. The main estimates and judgements applied for the preparation of the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020 are the same as those described in the Consolidated Financial Statements for the year ended December 31, 2019, except as explained in Note 1.3. 1.5 Measurement bases The Consolidated Financial Statements have been prepared using the historical cost convention, except for: certain financial assets and liabilities measured using the fair value model (see Note 12); assets acquired and liabilities assumed in business combinations, measured using the fair value model; non-current assets held for sale, measured at the lower of their carrying amount and fair value less costs to sell. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with the hierarchy defined in IFRS 13 – Fair Value Measurement, there are three levels of inputs: Level 1 inputs: unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 inputs: models that use inputs that are observable for the asset or liability, either directly (i.e., prices) or indirectly (i.e., price-based data); Level 3 inputs: inputs that are intrinsic to the asset or liability and are not based on observable market data for the asset or liability. Argentina is classified as a hyperinflationary economy within the meaning of IFRS. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2020. Data for the comparative period presented have also been adjusted for inflation. NOTE 2: SEASONAL FLUCTUATIONS IN BUSINESS Like those of other retailers, Carrefour’s sales are subject to significant seasonal fluctuations, with the result that comparisons between the consolidated financial statements for the first and second halves of the year are not particularly meaningful. This is particularly the case for recurring operating income and cash flow generation between the two periods. The Group’s second-half sales are traditionally higher than those for the first half, due to increased activity in December. Most of the operating expenses on the other hand – such as payroll costs, depreciation and amortisation – are spread more or less evenly over the year. As a result, the Group’s recurring operating income is generally lower in the first half than in the second. Carrefour – Half-year Financial Report – June 30, 2020 33 Notes to the Condensed Consolidated Financial Statements Cash flows generated by the Group are also strongly impacted by seasonal trends, with working capital requirement rising sharply in the first half as a result of the large volume of supplier payments due at the beginning of the year for the purchases made ahead of the previous year’s peak selling period in December. NOTE 3: SIGNIFICANT EVENTS OF THE PERIOD 3.1 Covid-19 health crisis a. First-half 2020 context and business activity In the first half of 2020, the Covid-19 pandemic had a severe impact on the global economy and led to a serious, unprecedented situation. In response to the Covid-19 pandemic, Carrefour’s teams mobilised in an exceptional manner to ensure the continuity of food distribution and meet new consumer expectations in a complex and rapidly changing environment. The Group immediately implemented strong measures to protect the health of employees and customers. In most cases, these measures anticipated and went beyond the health rules recommended by the public authorities in each country. Carrefour also took social responsibility measures and carried out concrete solidarity initiatives, such as rolling out dedicated services for priority customers (particularly the elderly and caregivers), making donations via the Carrefour Foundation and supporting local producers. The unusual first half comprised three periods – pre-lockdown, lockdown and post-lockdown – each of which varied depending on the region. Thanks to its multi-format model, the Group was able to respond to each stage of the crisis. In January and February, sales were boosted by the success of the strategic initiatives launched in the past two years. In March, Carrefour recorded a strong increase in sales, with consumers making precautionary purchases ahead of lockdown, mainly in dry groceries and shelf stable products. All store formats and e-commerce benefited from this very sustained momentum in food. Across all geographies, fairly similar consumption behaviours were observed as the pandemic spread and governments took lockdown decisions. Once favoured convenience stores and supermarkets, which are closer to home and more accessible, at the expense of hypermarkets. Across all formats, the number of store visits was reduced, while average basket increased significantly. Food e-commerce kept up its strong momentum. The non-food market was penalised during lockdown, notably certain categories such as apparel, which was not considered a priority. Furthermore, in several Group countries, particularly Spain and Italy, the authorities also imposed the closure of non-food departments. lockdown measures were implemented, consumers From May onwards, European countries gradually began to ease lockdown measures. In Brazil, public health policy varies from one state to the next with lockdowns being applied on a local basis, while Argentina remains confined to this day. While the health situation and the timing of lockdown easing varies from country to country, certain trends emerged. In May and June, food markets where generally buoyant, benefiting in particular from repressed demand for consumption outside of the home. Convenience stores and supermarkets maintained their appeal, while hypermarkets – now fully reopened – enjoyed brisk sales. Carrefour – Half-year Financial Report – June 30, 2020 34 Notes to the Condensed Consolidated Financial Statements b. Solid balance sheet, enhanced liquidity and financial discipline Since 2018, Carrefour has shown great financial discipline and has strengthened its balance sheet and liquidity. Carrefour's solid balance sheet is an important asset in the context of the fast-changing food retail sector as well as in the face of the current pandemic. At June 30, 2020, the Group was rated Baa1 with a negative outlook by Moody’s and BBB with a stable outlook by Standard & Poor’s. These ratings were confirmed after the publication of the 2019 annual results. The main financing transactions in the first half of 2020 are detailed in Note 3.3. c. Impact of the Covid-19 pandemic on the Interim Financial Statements and implementation of additional work Business continuity As a food retailer, Carrefour is a provider of basic necessities. As such, it was able to continue operating normally throughout the various lockdowns. This was also the case for its franchisees. At the same time, the Group continued to secure its short- and long-term financing sources (see Note 3.3). As a result, the Group’s business continuity has not been called into question. Income statement Income and expenses for first-half 2020 have been recorded and are presented using the same principles as those applied in the 2019 Consolidated Financial Statements. As a result, the effects of the Covid-19 crisis are reflected at all levels of the income statement. The costs incurred in connection with the Covid-19 health crisis were recognised in recurring operating income for first-half 2020, including necessary costs relating to logistics or product distribution in stores or to customers’ homes, as well as costs relating to protecting the health of employees, customers and service providers. In accordance with the Group’s accounting principles, exceptional bonuses and similar benefits have been recognised in non-current expenses for a total amount of 128 million euros. Non-current assets At each interim closing, as prescribed by IAS 36 – Impairment of Assets, the Group determines whether there are any indications of impairment of the cash-generating units (CGUs) represented by the individual stores and of the goodwill allocated to groups of CGUs by country; if this is the case, additional impairment tests are performed. For goodwill, the main impairment indicators used by the Group are as follows: internal impairment indicator: a material deterioration in the ratio of recurring operating income before depreciation and amortisation to net revenues excluding petrol between the budget and the most recent forecast; external impairment indicators: a material increase in the discount rate and/or a severe downgrade in the GDP growth forecasts issued by the IMF or the OECD. Carrefour – Half-year Financial Report – June 30, 2020 35 Notes to the Condensed Consolidated Financial Statements In light of the unusual situation created by the Covid-19 pandemic, the methodology for goodwill impairment tests consisted in applying June 30, 2020 financial parameters to the tests performed at end-December 2019 and the following prudent assumptions: application of an enhanced market premium and long-term beta to determine the weighted average cost of capital (WACC); downgraded perpetual growth assumptions. Regarding the stores, a targeted review was performed on stores identified as offering limited headroom (recoverable amount – carrying amount) during the end-2019 impairment tests. In the case of investment property, special attention was paid to the properties identified as offering limited headroom (fair value – carrying amount) at December 31, 2019. Regarding investments in equity-accounted companies, the value of the investment in Carmila at June 30, 2020 was supported by the company’s EPRA NAV (European Public Real Estate Association Net Asset Value) at that date. No impairment loss was recorded during the period on the investment in Provencia (a group of Carrefour franchisees in the Rhône-Alpes region). In addition, the carrying amount of the investment in Showroomprivé at June 30, 2020 (as at December 31, 2019) was aligned with the company’s share price at that date. All told, the impairment tests carried out at June 30, 2020 led to the recognition of limited impairment losses concerning a handful of stores. No impairment losses were recognised at that date on goodwill, investment properties or investments in equity-accounted companies. Consumer credit granted by the financial services companies corresponds to customer receivables (credit card debt, consumer finance, etc.). The financial services companies granted repayment holidays to their customers in line with the measures announced by local authorities to help consumers during the Covid-19 crisis, or according to the terms of the contracts. The repayment holidays have not affected the existing classification of the consumer credit concerned and had no impact on the calculation of expected credit losses at June 30, 2020 (see Note 6.5). The credit risk associated with past-due repayments was assessed in light of the unusual situation created by the health crisis and the government support measures implemented in some of the Group’s regions. Credit commitments given to customers by the Group's financial services companies (off-balance sheet commitments) were limited in first-half 2020, in line with local regulations, particularly in Spain and Latin America. Concerning deferred tax assets, in the absence of new strategic and tax plans, deferred taxes on deductible temporary differences and tax loss carryforwards arising in first-half 2020 were not recognised, notably in France and Italy. Current assets The same impairment methods were applied to inventories – particularly non-food – and trade receivables as at previous period ends. Cash and cash equivalents consist primarily of term deposits with leading banks and units in mutual funds classified by the AMF as “money market” and “short-term money market” funds without any withdrawal restrictions. The classification of these investments was reviewed in light of the current environment and confirmed at June 30, 2020. Carrefour – Half-year Financial Report – June 30, 2020 36 Notes to the Condensed Consolidated Financial Statements Liabilities Concerning provisions and contingent liabilities, there were no material changes in first-half 2020 compared with the situations that existed when the 2019 Consolidated Financial Statements were drawn up or in the amounts involved, mainly because most of the Group’s host countries were in lockdown during this period. To the best of the Group’s knowledge, there were no significant claim or litigation at June 30, 2020. Concerning employee benefit obligations, in line with the accounting policies applied by the Group for the preparation of the Interim Consolidated Financial Statements, actuarial projections are updated to take into account any material changes to assumptions or one-off impacts (changes in discount rates, applicable legislation, the population concerned, etc.) during the six-month period. At June 30, 2020, a discount rate of 0.75% was used for France, Belgium and Italy, as at December 31, 2019. 3.2 Main acquisitions and disposals during the period Acquisition of Potager City and Dejbox (France) On January 8, 2020, Carrefour acquired a 50% controlling interest in Potager City, a company based in Lyon that delivers fruit and vegetable baskets directly from the farm to the consumer. At the end of March 2020, a shareholder’s advance from Carrefour was used to underwrite a share issue, giving Carrefour 56% of Potager City’s capital and voting rights. On January 24, 2020, Carrefour acquired a majority stake (68%) in the company Dejbox, a pioneer in lunch delivery for business employees located in suburban and outlying areas. Operating in Lille, Lyon, Paris, Bordeaux, Nantes and Grenoble, plus hundreds of other nearby towns and cities, Dejbox delivers over 400,000 meals each month. In accordance with IFRS 3 – Business Combinations, following the Group’s measurement of the assets acquired and liabilities assumed at the acquisition dates, provisional goodwill has been accounted for at June 30, 2020 in the amount of 20 million euros for the Potager City acquisition and 53 million euros for the Dejbox acquisition. The revenue and profit attributable to Potager City and Dejbox recorded in the consolidated statement of comprehensive income for the period were not material. Accelerated expansion of the growing Atacadão format (Brazil) On February 15, 2020, Atacadão signed an agreement with Makro Atacadista to acquire 30 Cash & Carry stores (including the real estate of 22 stores, which are fully owned, and eight leased stores) and 14 petrol stations, located in 17 states across Brazil, for a total price of 1.95 billion reals (approximately 325 million euros at the closing rate on June 30, 2020), to be paid entirely in cash. A downpayment of 195 million reals (approximately 35 million euros) was paid during the first quarter of 2020. The 30 stores represent a total retail surface area of over 165,000 sq.m. and annual sales of some 2.8 billion reals (2019 figure). Closing of the transaction remains subject to certain customary conditions, notably including agreement by the owners of the rented properties and approval by CADE, Brazil's anti-trust authority. The deal is expected to be completed during the second half of 2020. Carrefour – Half-year Financial Report – June 30, 2020 37 Notes to the Condensed Consolidated Financial Statements On-going acquisition of Wellcome (Taiwan) In June 2020, Carrefour signed an agreement with Dairy Farm for the acquisition of Wellcome Taiwan. The deal covers 224 convenience stores and a warehouse (including title to the land and buildings). Wellcome Taiwan has an enterprise value of around 97 million euros. It reported net sales of some 390 million euros in 2019. Closing of the transaction remains subject to the customary conditions and the deal is expected to be completed before the end of the year. Disposal of Rue du Commerce (France) On November 8, 2019, the Group announced that it had received a firm offer from Shopinvest for the acquisition of 100% of the share capital of Rue du Commerce. In accordance with IFRS 5, the subsidiary's assets and liabilities were classified within assets held for sale and related liabilities at December 31, 2019, and measured at the lower of their net carrying amount and fair value less costs to sell. In light of the financial terms of the unilateral promise given by Shopinvest, these assets were written down in full at December 31, 2019 against non-recurring operating income. The sale of Rue du Commerce was completed on April 30, 2020. The disposal loss recognised in 2020 amounts to approximatively 40 million euros. It was accounted for in non-recurring operating expense (see Note 6.3). Discontinuation of Carrefour Banque’s C-zam business (France) In April 2020, the Board of Directors of Carrefour Banque decided to discontinue the C-zam business (current account management services for retail banking customers), in order to focus on the bank’s core consumer finance business. This decision led to the write-down of non-current assets allocated to the C-zam business, against non-recurring operating expense (see Note 6.3). 3.3 Securing the Group’s long-term financing In early March 2020, the Covid-19 health crisis cut off access to the money market and the primary long-term bond market. The primary bond market re-opened on March 20, after a ten-day closure, with credit spreads at 200 bps versus 150 bps pre-closure. On March 25, 2020, Carrefour became the first BBB-rated issuer to tap the market, issuing 1 billion euros worth of 2.625% bonds maturing in around 7.5 years (due December 15, 2027). On April 9, 2020, the Group redeemed 802 million euros worth of 4% ten-year bonds. These transactions, which ensure the Group’s liquidity over the short- and medium-term, are part of the strategy to ensure the necessary financing is in place to meet Carrefour’s needs. They have also extended the average maturity of bond financing from 3.5 years at end-December 2019 to 4.1 years at June 30, 2020, while reducing Carrefour’s cost of debt. Furthermore, in May 2020, Carrefour exercised its option to extend its two credit facilities totalling 3.9 billion euros, from June 2024 to June 2025. This option has been applied to more than 95% of the Group's banking facilities. On April 16, 2020, the Brazilian subsidiary Atacadão obtained various types of financing in US dollars and euros that were immediately swapped for reals, for a total amount of 1.5 billion reals (representing approximately 250 million euros at the closing rate on June 30, 2020). These financing facilities have two and three year maturities. The above operations have ensured that the subsidiary’s short- and medium-term financing needs are met in the current health crisis. Carrefour – Half-year Financial Report – June 30, 2020 38 Notes to the Condensed Consolidated Financial Statements 3.4 2019 dividend payment with a dividend reinvestment option At the Annual Shareholders’ Meeting held on May 29, 2020, the shareholders decided to set the 2019 dividend at 0.23 euro per share with a dividend reinvestment option. The issue price of the shares to be issued in exchange for reinvested dividends was set at 12.19 euros per share, representing 95% of the average of the opening prices quoted on Euronext Paris during the 20 trading days preceding the date of the Annual Shareholders’ Meeting, less the net amount of the dividend of 0.23 euro per share and rounded up to the nearest euro cent. The option period was open from June 10 to June 23, 2020. At the end of this period, shareholders owning 69% of Carrefour's shares had elected to reinvest their 2019 dividends. June 29, 2020 was set as the date for: settlement/delivery of the 10,358,336 new shares corresponding to reinvested dividends, leading to a total capital increase including premiums of 126 million euros; payment of the cash dividend to shareholders who chose not to reinvest their dividends, representing a total payout of 57 million euros. NOTE 4: IMPACT OF CHANGES IN ACCOUNTING POLICIES There were no changes in the accounting policies applied to prepare the Interim Consolidated Financial Statements for the six months ended June 30, 2020 compared with those applied at December 31, 2019. IFRS 16 – Leases – IFRS IC decision of December 16, 2019 On December 16, 2019, the IFRS IC published its decision in response to a request for clarification on the following matters: determination of the enforceable period of an automatically renewable lease, or of an indefinite- term lease, that may be terminated by one of the parties subject to a specified notice period. The issue to be clarified concerned the notion of penalties on which the definition of the enforceable period is based; the relationship between the useful life of non-removable leasehold improvements and the lease term under IFRS 16. The IFRS IC: concluded that the economics of a lease (rather than just the legal form) should be taken into account to determine the enforceable period of a lease; provided clarification on the relationship between the lease term under IFRS 16 and the useful life of non-removable leasehold improvements. Note that Carrefour did not apply this decision when preparing its Consolidated Financial Statements for the year ended December 31, 2019, since it is currently analysing the potential impacts of the guidance. In view of the large number of leases entered into by the Group in the countries in which it does business, and the publication of this decision late in the financial year, the Group did not have sufficient time to analyse the decision and precisely determine its impacts. For the reasons explained at December 31, 2019 and in light of the additional work involved in drawing up the Interim Consolidated Financial Statements due to the Covid-19 crisis, the analyses required to determine the effects of the IFRS IC’s decision and implement it in the Group's financial and accounting systems had not been completed as of June 30, 2020. Consequently, the decision was not applied for Carrefour – Half-year Financial Report – June 30, 2020 39 Notes to the Condensed Consolidated Financial Statements the preparation of the Condensed Consolidated Financial Statements for the six months ended June 30, 2020. The Group’s analyses are still focusing mainly on leases: that are automatically renewable or can be cancelled at any time; that concern underlying assets (stores, warehouses) such as non-removable leasehold improvements and installations whose residual net carrying amount at the end of the IFRS 16 lease term could represent a significant penalty (within the meaning of the IFRS IC’s decision) for the Group. These cases could have led to an extension in the term of the corresponding leases under IFRS 16 and/or to an adjustment of the useful life of non-removable leasehold improvements and installations. Based on the analyses performed during the first half of 2020, the following rules are being considered: Confirmation of depreciation periods of non-removable leasehold improvements for all the underlying assets concerned. For the determination of reasonably certain periods of use under IFRS 16: o Application of a different approach taking into account the issues specific to each store format (convenience, hypermarket, supermarket, cash & carry) or warehouse format and the issues specific to each geographic area. o Adjustment to take into account the economic incentive associated with material non- removable leasehold improvements to leased supermarkets, hypermarkets and cash & carry stores, where this incentive could lead to an increase in the IFRS 16 lease term for a certain number of leases. o No change in IFRS 16 periods of use for other underlying assets (convenience stores, logistics warehouses and miscellaneous assets) due to the fact that existing leasehold improvements are not material. Analyses and discussions are in progress among users of IFRS 16 concerning the IFRS 16 periods of use to be applied to 3-6-9 year commercial leases in France (representing several hundred leases), which are currently determined in accordance with the guidelines issued by France’s accounting standards board, ANC, in February 2018. Concerning the preparation of the Condensed Consolidated Financial Statements for the six months ended June 30, 2020, as the IFRS IC's decision of December 16, 2019 was still being analysed, the IFRS 16 accounting policies applied in those financial statements were the same as those described in the Consolidated Financial Statements for the year ended December 31, 2019 (see Note 9). Carrefour – Half-year Financial Report – June 30, 2020 40 Notes to the Condensed Consolidated Financial Statements NOTE 5: SEGMENT INFORMATION 5.1 Segment results First-half 2020 (in millions of euros) Total France Europe Latin America Asia Global Functions Net sales 34 265 16 357 10 246 6 569 1 092 Other revenue 1 121 371 306 363 44 36 Recurring operating income before depreciation and amortisation 1 886 659 636 492 116 (17) Recurring operating income 718 125 199 373 49 (28) Capital expenditure Depreciation and amortisation expense (1) 485 (1 168) 204 (533) 104 (437) 168 (119) 2 (67) 6 (11) First-half 2019 (in millions of euros) Total France Europe Latin America Asia Global Functions Net sales 34 885 16 789 9 988 7 134 974 Other revenue 1 204 410 314 407 41 31 Recurring operating income before depreciation and amortisation 1 770 615 556 505 101 (7) Recurring operating income 624 120 126 362 40 (25) Capital expenditure Depreciation and amortisation expense (1) 628 (1 147) 297 (495) 112 (431) 206 (143) 6 (61) 8 (17) (1) Including the depreciation and amortisation relating to logistics equipment included in the cost of sales. Carrefour – Half-year Financial Report – June 30, 2020 41 Notes to the Condensed Consolidated Financial Statements 5.2 Segment assets and liabilities June 30, 2020 (in millions of euros) Total France Europe Latin America Asia Global Functions ASSETS Goodwill 7 930 5 034 2 498 333 64 1 Other intangible assets 1 370 632 540 123 17 58 Property and equipment 10 424 4 750 3 136 2 191 344 2 Investment property Right-of-use Assets (1) 277 4 052 11 1 551 129 1 918 85 178 53 399 5 Other segment assets 15 538 7 966 3 302 3 638 217 414 Total segment assets 39 591 19 944 11 523 6 549 1 094 480 Unallocated assets 6 462 Total Assets 46 053 LIABILITIES (excluding equity) Total segment liabilities (1) 23 233 11 655 6 863 3 488 951 277 Unallocated liabilities 12 056 Total Liabilities 35 290 December 31, 2019 (in millions of euros) Total France Europe Latin America Asia Global Functions ASSETS Goodwill 7 976 4 955 2 507 450 63 1 Other intangible assets 1 452 646 551 172 20 64 Property and equipment 11 370 4 908 3 281 2 806 373 2 Investment property Right-of-use Assets (1) 312 4 388 11 1 417 139 2 074 110 265 52 419 213 Other segment assets 16 971 8 328 3 216 4 638 270 519 Total segment assets 42 470 20 264 11 768 8 442 1 197 800 Unallocated assets 8 332 Total Assets 50 802 LIABILITIES (excluding equity) Total segment liabilities (1) 27 492 12 607 7 897 5 418 1 040 531 Unallocated liabilities 11 635 Total Liabilities 39 127 (1) The Massy lease was transferred in January 2020 from Carrefour SA (Global Functions segment) to Carrefour Administratif France (France segment). This transfer resulted in the reclassification of the right-of-use asset and the related lease liability for an amount of approximately 205 million euros. Carrefour – Half-year Financial Report – June 30, 2020 42 Notes to the Condensed Consolidated Financial Statements NOTE 6: OPERATING ITEMS 6.1 Revenue 6.1.1 Net sales (in millions of euros) First-half 2020 First-half 2019 % change Net sales 34 265 34 885 (1,8) % Excluding the currency effect, first-half 2020 net sales amounted to 36,239 million euros versus 34,885 million euros in first-half 2019, an increase of 3.9%. Changes in exchange rates reduced net sales by 1.97 billion euros in first-half 2020, almost exclusively attributable to the Latin America region. Restated for IAS 29 in Argentina, consolidated net sales for first-half 2020 would have increased by 3.8% at constant exchange rates. Net sales by country (in millions of euros) First-half 2020 First-half 2019 France 16 357 16 789 Rest of Europe 10 246 9 988 Spain 4 204 4 072 Italy 2 131 2 244 Belgium 2 058 1 847 Poland 875 892 Romania 978 933 Latin America 6 569 7 134 Brazil 5 632 6 153 Argentina 937 981 Asia 1 092 974 Taiwan 1 092 974 Total Net sales 34 265 34 885 6.1.2 Other revenue (in millions of euros) First-half 2020 First-half 2019 % change Financing fees and commissions (1) 667 728 (8,4)% Franchise and business lease fees 167 142 17,7% Rental revenue 71 95 (25,5)% Revenue from sub-leases Property development revenue (2) Other revenue (3) Total Other revenue 17 9 190 1 121 10 15 214 1 204 74,7% (38,8)% (11,1)% (6,9)% (1) Including net banking revenue and net insurance revenue generated by the Group’s financial services and insurance companies. (2) Corresponding to the sale price of properties developed by the Group for resale. After deducting development costs recorded in “Cost of sales”, the property development margin was equal to zero for first-half 2020 and 12 million euros for first-half 2019. (3) Other revenue includes sales commissions, commissions received from suppliers, revenue from ticket/travel agency sales and in-store advertising fees. Other income recorded for first-half 2020 was impacted by the Covid-19 health crisis from March 2020 onwards (see Note 3.1). Carrefour – Half-year Financial Report – June 30, 2020 43 Notes to the Condensed Consolidated Financial Statements 6.2 Sales, general and administrative expenses, and depreciation and amortisation (in millions of euros) First-half 2020 First-half 2019 % change Sales, general and administrative expenses (5 700) (6 015) (5,2)% Depreciation and amortisation of property and equipment, intangible assets, and investment property Amortisation of right-of-use assets (675) (364) (665) (363) 1,5% 0,2% Total SG&A expenses and depreciation and amortisation (6 739) (7 043) (4,3)% Sales, general and administrative expenses Sales, general and administrative expenses break down as follows: (in millions of euros) First-half 2020 First-half 2019 % change Employee benefits expense (3 629) (3 821) (5,0)% Fees (385) (410) (6,0)% Maintenance and repair costs (364) (344) 5,7% Taxes other than on income (328) (331) (0,8)% Advertising expense (277) (382) (27,4)% Energy and electricity (252) (265) (5,0)% Property rentals (excluding IFRS 16) (30) (24) 23,5% Other SG&A expenses (435) (438) (0,7)% Total SG&A expenses (5 700) (6 015) (5,2)% Depreciation and amortisation Including supply chain depreciation and amortisation recognised in cost of sales, total depreciation and amortisation expense recognised in the consolidated income statement amounted to 1,168 million euros in first-half 2020 (first-half 2019: 1,147 million euros), as follows: (in millions of euros) First-half 2020 First-half 2019 % change Property and equipment (540) (552) (2,2)% Intangible assets (128) (106) 21,2% Investment property (7) (7) (6,9)% Depreciation and amortisation of property and equipment, intangible assets, and investment property (675) (665) 1,5% Depreciation of right-of-use asset - Property and equipment and investment properties (364) (363) 0,2% Depreciation and amortisation of supply chain (27) (30) (11,8)% Depreciation of right-of-use asset - Supply chain (102) (88) 15,9% Total Depreciation and amortisation (1 168) (1 147) 1,8% 6.3 Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as impairment of non-current assets, gains and losses on sales of non-current assets, restructuring costs and provisions recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group’s attention during the reporting year. Carrefour – Half-year Financial Report – June 30, 2020 44 Notes to the Condensed Consolidated Financial Statements Non-recurring items represented a net expense of 234 million euros in first-half 2020, and the detailed breakdown is as follows: (in millions of euros) First-half 2020 First-half 2019 Net gains on sales of assets (31) 17 Restructuring costs (42) (342) Other non-recurring income and expenses Non-recurring income and expenses, net before asset impairments and write-offs (106) (180) (194) (518) Asset impairments and write-offs (55) (92) of which Impairments and write-offs of goodwill of which Impairments and write-offs of property and equipment, intangible assets and others (55) (92) Non-recurring income and expenses, net (234) (610) of which: Non-recurring income Non-recurring expense 86 (320) 262 (873) Gains and losses on disposals of assets include the loss incurred on the sale of Rue du Commerce, which was completed on April 30, 2020 (see Note 3.2). The costs incurred in connection with the Covid-19 health crisis were recognised in recurring operating income for first-half 2020, including necessary costs relating to logistics or product distribution in stores or to customers’ homes, as well as costs relating to protecting the health of employees, customers and service providers. In accordance with the Group’s accounting principles, exceptional bonuses and similar benefits have been recognised in non-current expenses for a total amount of 128 million euros. Asset impairments and write-offs recorded in first-half 2020 corresponded mainly to the write-down of non-current assets by Carrefour Banque, following the decision of its Board of Directors to discontinue the C-zam business (see Note 3.2), and impairment losses on certain Promocash stores in France. Main non-recurring items in first-half 2019 Restructuring costs recognised in first-half 2019 corresponded for the most part to employee severance costs incurred in connection with the hypermarket transformation plan in France. Other non-recurring income and expenses mainly concerned Brazil and resulted primarily from the following two rulings: in May 2019, the Brazilian Supreme Court handed down an unfavourable decision to adjust its ruling on inter-state transfers of ICMS tax credits relating to "basic products". As a result of this decision, a provision (including interest and penalties) was recognised in the Consolidated Financial Statements against the related non-recurring expenses in order to cover current tax disputes as well as possible new ones arising from years still potentially subject to tax audits; in June 2019, following a favourable and final ruling, PIS-COFINS credits from prior years were recognised against the related non-recurring income. Asset impairments and write-offs included a 52 million euro write-down of the investment in Showroomprivé to align its carrying amount with the company’s share price at June 30, 2019. Carrefour – Half-year Financial Report – June 30, 2020 45 Notes to the Condensed Consolidated Financial Statements 6.4 Change in working capital requirement The change in working capital reported in the consolidated statement of cash flows under "Net cash from operating activities" breaks down as follows: (in millions of euros) First-half 2020 First-half 2019 Change Change in inventories (65) (172) 106 Change in trade receivables (11) (146) 134 Change in trade payables (1 739) (1 323) (415) Change in loyalty program liabilities (15) 4 (19) Change in trade working capital requirement (1 830) (1 636) (194) Change in other receivables and payables (233) (486) 253 Change in working capital requirement (2 064) (2 123) 59 Working capital, like all other items in the statement of cash flows, is translated at the average rate for the year. 6.5 Banking and insurance businesses 6.5.1 Consumer credit granted by the financial services companies At June 30, 2020, consumer credit 6,290 million euros), breaking down as follows: totalled 5,250 million euros (December 31, 2019: (in millions of euros) June 30, 2020 December 31, 2019 Payment card receivables 4 272 5 129 Loans 1 960 2 050 Consumer credit (on purchases made in Carrefour stores) Other financing (1) Impairment 67 323 (1 373) 86 364 (1 339) Total Consumer credit granted by the financial services companies 5 250 6 290 Portion due in less than one year 3 179 4 007 Portion due in more than one year 2 070 2 283 (1) Other financing corresponds mainly to restructured loans and credit facilities. The significant reduction in consumer credit compared with December 31, 2019 reflects the sharp decline in credit financing in second-quarter 2020, related to weaker consumption (excluding Carrefour) and to lockdown in various countries. The reduction was amplified by the depreciation of the Brazilian real over the period. The increase in the impairment rate for consumer credit in first-half 2020 reflects the reassessment of risk in all countries in light of the Covid-19 health crisis. The increase concerns primarily Brazil and Spain and, to a lesser extent, France. The amount of impairment for consumer credit was estimated according to the rules and principles described in Note 3.1. At June 30, 2020, 62% of the gross value of consumer credit granted by the financial services companies was classified in category 1, 18% in category 2 and 21% in category 3. At December 31, 2019, categories 1, 2 and 3 represented 66%, 17% and 16%, respectively, of the gross value of consumer credit granted by the financial services companies. Carrefour – Half-year Financial Report – June 30, 2020 46 Notes to the Condensed Consolidated Financial Statements 6.5.2 Refinancing of consumer loans The related consumer credit financing amounted to 4,573 million euros at June 30, 2020 (December 31, 2019: 5,529 million euros), as follows: (in millions of euros) June 30, 2020 December 31, 2019 Bonds and notes (1) Debt securities (Neu CP and Neu MTN) (2) Bank borrowings 1 300 1 215 517 1 859 1 138 487 Customer passbook savings deposits Securitisations (3) Other refinancing debt to financial institutions 347 369 804 387 368 1 269 Other 21 20 Total Consumer credit financing 4 573 5 529 Portion due in less than one year 3 275 3 712 Portion due in more than one year 1 298 1 817 (1) In March 2020, Carrefour Banque redeemed 500 million euros worth of bonds. (2) Debt securities mainly comprised negotiable European commercial paper (NEU CP) and medium-term notes (NEU MTN) issued by Carrefour Banque. (3) This item corresponds to the “Master Credit Cards Pass” reloadable securitisation programme with compartments launched by Carrefour Banque in November 2013 for an asset pool: 560 million euros. Proceeds from the securitisation amounted to 400 million euros. The 300 million euros remaining at December 31, 2018 was repaid over first-half 2019. As a replacement for these securities, Carrefour Banque issued a new series of securities in October 2019 for 370 million euros, maturing in June 2022. NOTE 7: INTANGIBLE ASSETS, PROPERTY AND EQUIPMENT, INVESTMENT PROPERTY 7.1 Goodwill and other intangible assets Goodwill, which constitutes the main intangible asset, is reported separately from other intangible assets in the statement of financial position. (in millions of euros) June 30, 2020 December 31, 2019 Goodwill 7 930 7 976 Other intangible assets 1 370 1 452 Intangible assets 9 300 9 429 The carrying amount of goodwill is generally monitored at the level of the operating segments corresponding to the countries in which the Group conducts its business through its integrated store networks. The net carrying amount of goodwill can be broken down as follows: (in millions of euros) June 30, 2020 December 31, 2019 France 5 034 4 955 Belgium 955 956 Spain 952 952 Brazil 322 437 Italy 253 250 Poland 236 247 Romania 102 103 Taiwan 64 63 Argentina 11 13 Other 1 1 Total 7 930 7 976 Carrefour – Half-year Financial Report – June 30, 2020 47 Notes to the Condensed Consolidated Financial Statements The total net carrying amount of goodwill at June 30, 2020 was substantially the same as the amount at December 31, 2019. Goodwill recognised in first-half 2020 on acquisitions in France (Dejbox, Potager City) was offset by unfavourable translation adjustments to goodwill in Brazil. Impairment tests at June 30, 2020 In accordance with IAS 36 – Impairment of Assets, goodwill recognised on business combinations is not amortised but is tested for impairment every year, or more frequently if there is an indication that its carrying amount may not be recovered. At each interim closing, as prescribed by IAS 36, the Group determines whether there are any indications of impairment and, if this is the case, performs additional impairment tests. The main impairment indicators used by the Group are as follows: internal impairment indicator: a material deterioration in the ratio of recurring operating income before depreciation and amortisation to net revenues excluding petrol between the budget and the most recent forecast, external impairment indicators: a material increase in the discount rate and/or a severe downgrade in the GDP growth forecasts issued by the IMF or the OECD. In light of the unusual situation created by the Covid-19 pandemic, the methodology for goodwill impairment tests consisted in applying June 30, 2020 financial parameters to the tests performed at end-December 2019 and the following prudent assumptions: application of an enhanced market premium and long-term beta to calculate the weighted average cost of capital (WACC), downgraded perpetual growth assumptions. Perpetual growth assumptions and discount rates by country were as follows at June 30, 2020 and December 31, 2019: June 30, 2020 December 31, 2019 Country After-tax discount rate Perpetual growth rate After-tax discount rate Perpetual growth rate France Belgium Spain Brazil Italy Poland Romania Argentina Taiwan 5.9% 5.9% 6.5% 10.3% 7.9% 8.0% 9.8% 29.4% 6.2% 1.3% 1.5% 1.3% 3.3% 1.2% 2.9% 3.1% 17.0% 1.5% 5.6% 5.6% 6.2% 10.1% 7.3% 7.2% 8.6% 27.9% 5.5% 1.7% 1.8% 1.8% 3.5% 1.5% 2.8% 2.5% 17.0% 1.4% Italy In the impairment tests carried out at December 31, 2019, the recoverable amount of Italy was found to be close to – but still greater than – the net carrying amount. Note that an impairment loss of 700 million euros was recorded against Italian goodwill in 2017 to reflect the significant decline in the value in use of the Group’s operations in this country. The indications of impairment prompted the Group to carry out an in-depth analysis to determine the Italian operations’ fair value. This analysis adopted a multi-criteria valuation approach which took into account multiples observed for comparable companies in the retail sector in Europe, and the market value of Italian real estate assets, determined based on independent appraisals. The multi-criteria approach was also used to test Italian goodwill for impairment at June 30, 2020 (as at December 31, 2019 and 2018). The resulting fair value represented Executive Management’s best estimate and confirmed that the 253 million-euro carrying amount of goodwill at June 30, 2020 was reasonable. Ultimately, at June 30, 2020, the tests performed by the Group did not lead to the recognition of any goodwill impairment losses. Carrefour – Half-year Financial Report – June 30, 2020 48 Notes to the Condensed Consolidated Financial Statements 7.2 Property and equipment June 30, 2020 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land Buildings Equipment, fixtures and fittings Other fixed assets Assets under construction 2 540 10 416 14 741 417 509 (58) (5 721) (11 564) (304) - (71) (223) (254) (3) - 2 411 4 472 2 923 109 509 Total property and equipment 28 623 (17 647) (552) 10 424 December 31, 2019 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land Buildings Equipment, fixtures and fittings Other fixed assets Assets under construction 2 688 10 891 14 934 415 623 (55) (5 790) (11 513) (295) - (71) (208) (245) (3) - 2 562 4 893 3 176 117 623 Total property and equipment 29 550 (17 653) (527) 11 370 7.3 Investment property (in millions of euros) June 30, 2020 December 31, 2019 Investment property (gross carrying amount) Depreciation and impairment 470 (193) 507 (195) Total Investment property, net 277 312 Investment property consists mainly of shopping malls located adjacent to the Group’s stores. NOTE 8: LEASES 8.1 Right-of-use assets June 30, 2020 December 31, 2019 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Gross carrying amount Depreciation Impairment Net carrying amount Land & buildings Equipment, fixtures and fittings 5 395 133 (1 518) (27) (2) 3 875 106 5 321 134 (1 126) (13) (3) 4 192 121 Investment property 87 (16) 71 86 (10) 75 Right-of-use asset 5 615 (1 561) (2) 4 052 5 540 (1 149) (3) 4 388 Change in right-of-use assets (in millions of euros) Gross carrying amount June 30, 2020 Depreciation & Impairment Net carrying amount At January 1st, 2020 5 540 (1 152) 4 388 Increase 302 302 Decrease (144) 34 (110) Depreciation (465) (465) Translation adjustment (91) 17 (74) Changes in scope of consolidation, transfers and other movements 7 4 11 At June 30, 2020 5 615 (1 563) 4 052 Carrefour – Half-year Financial Report – June 30, 2020 49 Notes to the Condensed Consolidated Financial Statements 8.2 Lease commitments Lease commitments by maturity (in millions of euros) June 30, 2020 December 31, 2019 Due within 1 year Due in 1 to 2 years Due in 2 to 5 years Due beyond 5 years Lease commitments 892 764 1 687 896 4 239 912 820 1 801 1 038 4 573 NOTE 9: INCOME TAX The income tax expense for first-half 2020 amounted to 238 million euros, representing an effective tax rate of 77%, compared with the 192 million-euro expense recorded in first-half 2019, which corresponded to a negative effective tax rate of 125%. This mainly reflects the fact that no deferred tax assets were recognised on temporary differences or in respect of tax loss carryforwards arising on significant non-recurring expenses recognised during the period. The effective rate also reflects the inclusion of the CVAE tax in current tax. The probable recoverability of deferred tax assets recognised in the consolidated statement of financial position at December 31, 2019 was confirmed at June 30, 2020, based in particular on a comparison between the budgeted performance of the different countries and the most recent forecasts. NOTE 10: PROVISIONS AND CONTINGENT LIABILITIES 10.1 Changes in provisions (in millions of euros) December 31, 2019 Increases Reversals of surplus provisions Utilisations Discounting adjustment Translation adjustment (4) Other June 30, 2020 Employee benefits (3) 1 176 23 (38) (32) (0) (1) 1 1 130 Claims and litigation 1 094 90 (59) (44) 0 (219) (0) 861 Tax litigations 797 22 (37) (9) (181) (0) 591 Employee related disputes 147 46 (10) (21) (20) 0 143 Legal disputes 150 22 (12) (14) (19) (0) 127 Restructuring 548 2 (0) (159) (0) (1) 390 Provisions related to banking and insurance business (1) 231 14 (3) (6) (8) 2 230 Other (2) 249 20 (18) (9) 0 (0) 2 243 Total Provisions 3 297 149 (118) (248) (0) (228) 3 2 854 (1) Provisions relating to the banking and insurance businesses include provisions recognised for credit risk on loan commitments (off-balance sheet) in accordance with IFRS 9, and provisions set aside to cover insurance underwriting risk. (2) Other provisions mainly concern onerous contracts. They also include provisions for dismantling assets under property leases or for restoring assets to the requisite condition, recognised against the related right-of-use asset following application of IFRS 16. (3) Following publication of government order 2019-697 dated July 3, 2019, the Carrefour group’s supplementary defined benefit pension plan was cancelled by decision of the Board of Directors on April 20, 2020 and the provision carried in the consolidated statement of financial position at December 31, 2019 was reversed in full. (4) Unfavourable translation adjustments mainly correspond to the decrease in the value of the Brazilian real over the period. During the period, Atacadão SA notified the Group of two criminal proceedings initiated by a State of São Paolo public prosecutor (GEDEC) against public officials and company employees (dismissed or suspended since) concerning the conditions under which the operating licences for the company's headquarters and two stores were renewed. The two proceedings do not concern the company. On June 27, 2020, Atacadão SA was notified by the municipality of São Paolo that an administrative investigation had been initiated against the company in connection with one of the above two proceedings. At June 30, 2020, at this stage of the proceedings, no provision has been recognised. Carrefour – Half-year Financial Report – June 30, 2020 50 Notes to the Condensed Consolidated Financial Statements 10.2 Post-employment benefits The Group’s post-employment benefit obligation (defined benefit plans) is calculated on the basis of actuarial assumptions such as future salary levels, retirement age, mortality, staff turnover and the discount rate. A discount rate of 0.75% was used for France, Belgium and Italy at June 30, 2020, as at December 31, 2019. The discount rate is based on an index of AA-rated corporate bonds with maturities that correspond to the expected cash outflows of the plans. (in millions of euros) France Belgium Italy Other countries Group total Provision at December 31, 2019 793 233 116 35 1 176 Service costs Settlements and plan amendements (1) Interest cost (discount effect) Return on plan assets Other items Movements recorded in the income statement Benefit paid directly by the employer Effect of changes in scope of consolidation Change in actuarial gains and losses Other 20 (48) 3 (0) (5) (29) (6) (0) (0) 0 8 - 2 (1) - 9 (9) - - (4) 0 - 0 - - 1 (5) - - - 0 - 0 (0) 0 0 0 (0) - (3) 29 (48) 5 (1) (5) (19) (20) (0) (0) (7) Provision at June 30, 2020 757 229 112 32 1 130 (1) This line includes the impact of cancelling the supplementary defined benefit pension plan (see above). The cost of services rendered was recognised in employee benefits expense, and interest income and expenses were recognised in financial income and expenses. Sensitivity tests show that: a 25-bps increase in the discount rate would reduce the defined benefit obligation under the French, Belgian and Italian plans by around 32 million euros; a 25-bps increase in the inflation rate would increase the defined benefit obligation under the French, Belgian and Italian plans by around 34 million euros. 10.3 Performance share plan On February 26, 2020, based on the Compensation Committee's recommendation, the Board of Directors decided to use the authorisation given in the 25th resolution of the Annual Shareholders’ Meeting held on June 14, 2019 to grant new or existing performance shares. The plan provided for the grant of a maximum of 2,604,597 shares (representing 0.32% of the share capital).The shares will vest only if the grantee remains with the Group until the end of the vesting period and several performance conditions are met. The vesting period is three years from the date of the Board of Directors' meeting at which the rights were granted. The number of shares that vest will depend on the achievement of four performance conditions: two conditions linked to financial performance (recurring operating income growth for 25% and free cash flow growth for 25%); a condition linked to an external performance criterion (TSR), benchmarking the Carrefour share price against a panel of companies in the retail sector (for 25%); and a CSR-related condition for 25%. Carrefour – Half-year Financial Report – June 30, 2020 51 Notes to the Condensed Consolidated Financial Statements Details of the performance share plans are presented below. Plan 2020 Performance Shareholders' Meeting date Grant date (1) Vesting date (2) June 14, 2019 February 26, 2020 February 27, 2023 Total number of shares allotted at the grant date 2 604 597 Number of grantees at the grant date Fair value of each share (in €) (3) 516 13.05 (1) Date of the Board of Directors’ decision to grant shares. (2) The shares will vest only if the grantee remains with the Group until the end of the vesting period and several performance conditions are met. (3) The fair value of shares is determined according to a reference price adjusted for dividends expected during the vesting period. The reference price corresponds to the average of the three opening share prices preceding the Board of Directors’ decision. 10.4 Restructuring Provisions set aside at December 31, 2019 for restructuring in an amount of 548 million euros mainly comprised costs related to plans undertaken to streamline operating structures as part of the first pillar of the Group’s transformation plan, chiefly in France and Italy. These costs primarily corresponded to severance pay, early retirement benefits, costs of notice periods not served, and costs of training and other support measures offered to employees being made redundant under restructuring plans. Some of these provisions were used during first-half 2020. Carrefour – Half-year Financial Report – June 30, 2020 52 Notes to the Condensed Consolidated Financial Statements NOTE 11: OTHER COMPREHENSIVE INCOME AND EARNINGS PER SHARE 11.1 Other comprehensive income Group share (in millions of euros) First-half 2020 First-half 2019 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges 21 0 21 (28) 2 (26) Changes in the fair value of debt instruments through other comprehensive income (2) 0 (1) (3) (0) (3) Exchange differences on translating foreign operations (592) 0 (592) 53 0 53 Items that may be reclassified subsequently to profit or loss (573) 1 (572) 22 2 24 Remeasurements of defined benefit plans obligation Changes in the fair value of equity instruments through other comprehensive income (0) 0 0 (0) (0) 0 (104) 1 29 (0) (75) 1 Items that will not be reclassified to profit or loss (0) (0) (0) (103) 29 (74) Total other comprehensive income / (loss) - Group share (573) 1 (572) (81) 31 (50) Non-controlling interests (in millions of euros) First-half 2020 First-half 2019 Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges 0 (0) 0 (2) 1 (1) Changes in the fair value of debt instruments through other comprehensive income (2) 0 (1) 1 (0) 1 Exchange differences on translating foreign operations (289) 0 (289) 17 0 17 Items that may be reclassified subsequently to profit or loss (291) 0 (290) 16 0 16 Remeasurements of defined benefit plans obligation (0) (0) (0) (1) 0 (1) Changes in the fair value of equity instruments through other comprehensive income 0 0 0 0 0 0 Items that will not be reclassified to profit or loss (0) (0) (0) (1) 0 (1) Total other comprehensive income / (loss) - Non-controlling interests (291) 0 (290) 15 1 15 Carrefour – Half-year Financial Report – June 30, 2020 53 Notes to the Condensed Consolidated Financial Statements 11.2 Earnings per share (Group share) Basic earnings per share First-half 2020 First-half 2019 Net income / (loss) from continuing operations - Group share (23) (415) Net income / (loss) from discontinued operations - Group share 3 (43) Net income / (loss) for the period - Group share Weighted average number of shares outstanding (1) (21) 801 347 527 (458) 781 573 032 Basic income / (loss) from continuing operations - Group share - per share (in €) (0,03) (0,53) Basic income / (loss) from discontinued operations - Group share - per share (in €) 0,00 (0,06) Basic income / (loss) - Group share - per share (in €) (0,03) (0,59) (1) In accordance with IAS 33, the weighted average number of shares used to calculate 2019 earnings per share was adjusted to take into account the effect of the 2019 dividends paid in shares on June 29, 2020 (retrospective adjustment of the effect of the 5% discount on shares issued in payment of dividends, determined by the treasury stock method). Diluted earnings per share First-half 2020 First-half 2019 Net income / (loss) from continuing operations - Group share (23) (415) Net income / (loss) from discontinued operations - Group share 3 (43) Net income / (loss) for the period - Group share (21) (458) Weighted average number of shares outstanding, before dilution 801 347 527 781 573 032 Potential dilutive shares Performance shares Diluted weighted average number of shares outstanding Diluted income / (loss) from continuing operations - Group share - per share (in €) 801 347 527 (0,03) 781 573 032 (0,53) Diluted income / (loss) from discontinued operations - Group share - per share (in €) Diluted income / (loss) - Group share - per share (in €) 0,00 (0,03) (0,06) (0,59) Free shares awarded under the 2019 and 2020 plans are not considered to have a dilutive impact, since the Group reported a net loss from continuing operations in first-half 2020. Carrefour – Half-year Financial Report – June 30, 2020 54 Notes to the Condensed Consolidated Financial Statements NOTE 12: FINANCIAL ASSETS AND LIABILITIES, FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES 12.1 Financial instruments by category Breakdown by category At June 30, 2020 (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OC I Amortised cost Derivative instruments at fair value through profit or Derivative instruments at fair value through Fair value Investments in non-consolidated companies Other long-term investments 107 1 285 11 73 96 329 883 OC 107 1 285 Other non-current financial assets 1 393 84 425 883 1 393 C onsumer credit granted by the financial services companies 5 250 5 250 5 250 Trade receivables 2 532 2 532 2 532 Other current financial assets Other assets (1) 357 580 49 67 580 33 208 357 580 C ash and cash equivalents 2 750 2 750 2 750 ASSETS 12 861 2 834 474 9 312 33 208 12 861 Total borrowings 8 288 8 247 28 12 8 617 Total lease commitment 4 239 4 239 4 239 Total consumer credit financing 4 573 4 556 1 16 4 573 Suppliers and other creditors Other payables (2) 11 157 2 119 11 157 2 119 11 157 2 119 LIABILITIES 30 376 30 319 30 28 30 706 Breakdown by category At December 31, 2019 (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OC I Amortised cost Derivative instruments at fair value through profit or Derivative instruments at fair value through Fair value Investments in non-consolidated companies Other long-term investments 100 1 407 12 75 88 327 1 005 OC 100 1 407 Other non-current financial assets C onsumer credit granted by the financial services companies 1 507 6 290 87 415 1 005 6 290 1 507 6 290 Trade receivables 2 669 2 669 2 669 Other current financial assets Other assets (1) 252 439 4 66 59 439 43 81 252 439 C ash and cash equivalents 4 466 4 466 4 466 ASSETS 15 624 4 557 481 10 462 43 81 15 624 Total borrowings 7 300 7 241 43 16 7 566 Total lease commitment 4 573 4 573 4 573 Total consumer credit financing 5 529 5 513 1 15 5 529 Suppliers and other creditors Other payables (2) 13 646 2 556 13 646 2 556 13 646 2 556 LIABILITIES 33 603 33 529 44 31 33 869 (1) Excluding prepaid expenses. (2) Excluding deferred revenue. Carrefour – Half-year Financial Report – June 30, 2020 55 Notes to the Condensed Consolidated Financial Statements Analysis of assets and liabilities measured at fair value The table below shows assets and liabilities presented according to the fair value hierarchy provided for in IFRS 13 – Fair Value Measurement (see Note 1.5): (in millions of euros) June 30, 2020 Level 1 Level 2 Level 3 Total Investments in non-consolidated companies 11 96 107 Other long-term investments 402 402 Other current financial assets - Fair Value through OCI 49 49 Other current financial assets - Fair Value through profit or loss Other current financial assets - Derivative instruments 241 241 Cash and cash equivalents 2 750 2 750 Consumer credit financing - Derivative instruments recorded in liabilities (17) (17) Borrowings - Derivative instruments recorded in liabilities (40) (0) (41) (in millions of euros) December 31, 2019 Level 1 Level 2 Level 3 Total Investments in non-consolidated companies Other long-term investments Other current financial assets - Fair Value through OCI 402 66 12 88 100 402 66 Other current financial assets - Fair Value through profit or loss 4 4 Other current financial assets - Derivative instruments 124 124 Cash and cash equivalents 4 466 4 466 Consumer credit financing - Derivative instruments recorded in liabilities (15) (15) Borrowings - Derivative instruments recorded in liabilities (59) (0) (59) 12.2 Net debt 12.2.1 Net debt calculation Consolidated net debt at June 30, 2020 amounted to 5,218 million euros, breaking down as follows: (in millions of euros) June 30, 2020 December 31, 2019 Bonds and notes 7 047 6 981 Other borrowings 481 261 Commercial paper 719 Total borrowings excluding derivative instruments recorded in liabilities 8 247 7 241 Derivative instruments recorded in liabilities 41 59 TOTAL BORROWINGS [1] 8 288 7 300 of which borrowings due in more than one year 6 379 6 303 of which borrowings due in less than one year 1 909 997 Other current financial assets (1) Cash and cash equivalents 320 2 750 219 4 466 TOTAL CURRENT FINANCIAL ASSETS [2] 3 070 4 685 NET DEBT [1] - [2] 5 218 2 615 (1) Net debt does not include the current portion of amounts receivable from finance lease sub-letting arrangements (see Note 15.2 to the 2019 Consolidated Financial Statements). The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year- end figure being structurally lower due to the significant volume of business recorded during December. Carrefour – Half-year Financial Report – June 30, 2020 56 Notes to the Condensed Consolidated Financial Statements 12.2.2 Bonds and notes (in millions of euros) Face value Book value of the debt Maturity December 31, 2019 Issues Repayments Translation adjustments June 30, 2020 June 30, 2020 Public placements - Carrefour S.A. EMTN, EUR, 10 years, 4.00% 2020 6 564 802 1 000 (802) (802) 3 6 764 6 640 EMTN, EUR, 11 years, 3.875% 2021 871 871 870 EMTN, EUR, 8 years, 1.75% 2022 1 000 1 000 974 Cash-settled convertible bonds, USD 500 million, 6 years, 0% 2023 445 1 447 418 EMTN, EUR, 8 years, 0.750% 2024 750 750 746 EMTN, EUR, 10 years, 1.25% 2025 750 750 747 Cash-settled convertible bonds, USD 500 million, 6 years, 0% 2024 445 1 447 403 EMTN, EUR, 5 years, 0.88% 2023 500 500 497 EMTN, EUR, 7.5 years, 1.75% 2026 500 500 497 EMTN, EUR, 8 years, 1.00% 2027 500 500 497 EMTN, EUR, 7.5 years, 2.625% 2027 1 000 1 000 992 Placements - Atacadão S.A. Debentures, BRL 500 million, 5 years, 105.75% CDI 2023 552 110 (146) (29) 406 81 406 81 Debentures, BRL 1,000 million, 3 years, 104.4% CDI 2021 221 (58) 163 163 Debentures, BRL 450 millions, 3 years, 100% CDI 2022 99 (26) 73 73 Debentures, BRL 350 millions, 5 years, 100% CDI 2024 77 (20) 57 57 Debentures, BRL 200 millions, 7 years, 100% CDI 2026 44 (12) 33 33 Total Bonds and notes 7 116 1 000 (802) (143) 7 171 7 047 On March 25, 2020, Carrefour became the first BBB-rated issuer to tap the market, issuing 1 billion euros worth of 2.625% bonds maturing in around 7.5 years (due December 15, 2027). It has ensured that the Group’s short- and medium-term financing needs are met in the current health crisis. On April 9, 2020, the Group redeemed 802 million euros worth of 4% ten-year bonds. These transactions have also extended the average maturity of bond financing from 3.5 years at end- December 2019 to 4.1 years at June 30, 2020 while reducing Carrefour’s cost of debt. 12.2.3 Other borrowings (in millions of euros) June 30, 2020 December 31, 2019 Latin America borrowings 314 75 Other borrowings Accrued interest (1) 65 37 80 80 Other financial liabilities 66 26 Total Other borrowings 481 261 (1) Accrued interest on total borrowings, including bonds and notes. “Latin America borrowings” include in particular the financing facilities in US dollars and euros set up and swapped for reals by Brazilian subsidiary Atacadão in April 2020, for an amount of 1,500 million reals (approximately 250 million euros at the closing rate on June 30, 2020). These euro- and US dollar-denominated facilities, which were originally fixed-rate, were converted into Brazilian reals and indexed to the CDI rate at the time of issue through cross-currency swaps over the life of the borrowings. These instruments are documented and recognised as hedges (Fair Value Hedge). Carrefour – Half-year Financial Report – June 30, 2020 57 Notes to the Condensed Consolidated Financial Statements 12.2.4 Cash and cash equivalents (in millions of euros) June 30, 2020 December 31, 2019 Cash 1 389 1 286 Cash equivalents 1 361 3 180 Total Cash and cash equivalents 2 750 4 466 There are no material restrictions on the Group’s ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. 12.2.5 Other current financial assets (in millions of euros) June 30, 2020 December 31, 2019 Other current financial assets - Fair Value through OCI 49 66 Other current financial assets - Fair Value through profit or loss 4 Deposits with maturities of more than three months 16 12 Derivative instruments 241 124 Sub-lease receivable - less than one year 36 34 Other 14 12 Total Other current financial assets 357 252 12.3 Analysis of borrowings (excluding derivative instruments recorded in liabilities) 12.3.1 Analysis by interest rate June 30, 2020 December 31, 2019 (in millions of euros) Before hedging After hedging Before hedging After hedging Fixed rate borrowings 7 041 6 776 6 610 6 610 Variable rate borrowings 1 206 1 471 631 631 Total borrowings (excluding derivative instruments recorded in liabilities) 8 247 8 247 7 241 7 241 12.3.2 Analysis by currency (in millions of euros) June 30, 2020 December 31, 2019 Euro 7 522 6 609 Brazilian real 723 631 Argentine peso 0 0 Romanian leu 2 2 Total borrowings (excluding derivative instruments recorded in liabilities) 8 247 7 241 The above analysis includes the effect of hedging. Euro-denominated borrowings represented 91% of total borrowings (excluding derivative instruments recorded in liabilities) at June 30, 2020 (December 31, 2019: 91%). Carrefour – Half-year Financial Report – June 30, 2020 58 Notes to the Condensed Consolidated Financial Statements 12.3.3 Analysis by maturity (in millions of euros) June 30, 2020 December 31, 2019 Due within 1 year 1 868 939 Due in 1 to 2 years 170 1 127 Due in 2 to 5 years 4 171 3 368 Due beyond 5 years 2 039 1 808 Total borrowings (excluding derivative instruments recorded in liabilities) 8 247 7 241 12.4 Changes in liabilities arising from financing activities (in millions of euros) Other current financial assets (1) Borrowings Total Liabilities arising from financing activities At December 31, 2019 (219) 7 300 7 081 Changes from financing cash flows (106) 1 115 1 009 Change in current financial assets (106) (106) Issuance of bonds 1 000 1 000 Repayments of bonds (802) (802) Net financial interest paid Issuance of commercial paper (2) Other changes in borrowings (129) 719 327 (129) 719 327 Non-cash changes 4 (127) (123) Effect of changes in foreign exchange rates (3) (204) (206) Effect of changes in scope of consolidation (0) 6 6 Changes in fair values 27 (5) 22 Finance costs, net 91 91 Other changes (20) (16) (36) At June 30, 2020 (320) 8 288 7 967 (1) The current portion of amounts receivable from finance lease sub-letting arrangements is not included in this caption. (2) In first-half 2020, in light of the health crisis, the Group issued short-term commercial paper to secure its liquidity. 12.5 Other non-current financial assets (in millions of euros) June 30, 2020 December 31, 2019 Deposits and guarantees (1) 536 664 Financial services companies' portfolio of assets Sub-lease receivable - more than one year (2) Financial receivable (3) 403 130 138 403 143 138 Investments in non-consolidated companies 107 100 Other 78 60 Total Other non-current financial assets 1 393 1 507 (1) Deposits and guarantees include legal deposits paid in Brazil in connection with tax disputes (relating mainly to tax reassessments challenged by the Group) pending final court rulings, as well as security deposits paid to lessors under property leases. (2) Amounts receivable from finance lease sub-letting arrangements were recognised following the application of IFRS 16 from January 1, 2019. (3) This amount represents the financial receivable relating to the 20% stake in Carrefour China (see Note 2.2 to the 2019 Consolidated Financial Statements). Carrefour – Half-year Financial Report – June 30, 2020 59 Notes to the Condensed Consolidated Financial Statements 12.6 Finance costs and other financial income and expenses This item corresponds mainly to finance costs. In accordance with IFRS 16, from 2019 it also includes interest expenses on leases along with interest income on finance lease sub-letting arrangements. Other financial income and expenses consist for the most part of discounting adjustments, late payment fees payable on certain liabilities, and the impacts of hyperinflation in Argentina. (in millions of euros) First-half 2020 First-half 2019 Interest income from loans and cash equivalents Interest income from bank deposits Interest income from loans 4 4 (0) (1) 2 (3) Finance costs (95) (111) Interest expense on financial liabilities measured at amortised cost, adjusted for income and expenses from interest rate instruments Cost of receivables discounting in Brazil (84) (11) (97) (14) Finance costs, net (91) (112) Interest charge related to leases commitment (49) (61) Interest income related to financial sublease contracts 1 1 Net interest related to lease commitment (48) (60) Other financial income and expenses (34) 7 Interest expense on defined employee benefit debt (5) (11) Interest income on pension plan assets 1 2 Financial transaction tax Late interest due in connection with tax reassessments and employee- related litigation (10) (13) (11) (16) Dividends received on available-for-sale financial assets 2 1 Proceeds from the sale of available-for-sale financial assets 9 22 Cost of sold available-for-sale financial assets Exchange gains and losses Impact of hyperinflation in Argentina - application of IAS 29 (1) (5) (15) 12 (0) (3) 21 Cost of bond buybacks (5) (5) Changes in the fair value of interest rate derivatives 1 7 Other (5) 1 Finance costs and other financial income and expenses, net (173) (165) Financial expenses Financial income (332) 159 (221) 56 (1) In accordance with IAS 29 – Financial Reporting in Hyperinflationary Economies, results for the first halves of 2020 and 2019 include the impact of hyperinflation in Argentina (see Note 1.5). Carrefour – Half-year Financial Report – June 30, 2020 60 Notes to the Condensed Consolidated Financial Statements NOTE 13: OTHER INFORMATION 13.1 Scope of consolidation 13.1.1 Main changes in the scope of consolidation in first-half 2020 The Potager City and Dejbox acquisitions and the disposal of Rue du Commerce are described in Note 3.2. On February 26, 2020, Carrefour Italy signed an agreement with Conad for the acquisition of 28 Auchan stores in the Lombardy region, consisting mainly of convenience stores. In accordance with IFRS 3 – Business Combinations, following the Group’s measurement of the assets acquired and liabilities assumed at the acquisition dates, provisional goodwill in the amount of 3 million euros was recognised in the consolidated statement of financial position at June 30, 2020. The revenue and profit recorded in the consolidated statement of comprehensive income for the period was not material. With the exception of these transactions, there were no other material changes in the Carrefour group’s scope of consolidation in first-half 2020. 13.1.2 Main changes in the scope of consolidation in first-half 2019 The main change in the scope of consolidation in first-half 2019 concerned the acquisition of So.bio in France, leading to the recognition of final goodwill of 37 million euros at June 30, 2020. 13.2 Related parties Group transactions with related parties mainly concern: compensation and other benefits granted to members of the Group Executive Committee and the Board of Directors; transactions with companies over which the Group exercises significant influence. Related-party transactions are carried out on an arm’s length basis. There were no material changes in the nature of the Group’s related-party transactions in first-half 2020 compared with the situation at December 31, 2019. 13.3 Off-balance sheet commitments Commitments given and received by the Group that are not recognised in the statement of financial position correspond to contractual obligations whose performance depends on the occurrence of conditions or transactions after the period-end. There are four types of off-balance sheet commitments, related to cash transactions, retailing operations, acquisitions of securities and leases. Following the health crisis, credit commitments given to customers by the Group's financial services companies were limited in first-half 2020 in line with local regulations, particularly in Spain and Latin America. 13.4 Subsequent events There were no significant events after the balance sheet date requiring disclosure. Carrefour – Half-year Financial Report – June 30, 2020 61 CARREFOUR Société anonyme 93 AVENUE DE PARIS, MASSY 91300, ___________________________________ Statutory Auditors’ Review Report on the Half-yearly Financial Information For the period from January 1 to June 30, 2020 Carrefour – Half-year Financial Report – June 30, 2020 62 Deloitte & Associés KPMG S.A. Mazars 6, place de la Pyramide 2 avenue Gambetta 61 rue Henri Regnault 92908 Paris-La Défense Cedex 92066 Paris-La-Défense Cedex 92400 Courbevoie CARREFOUR Société anonyme 93 AVENUE DE PARIS, MASSY 91300 _______________________________ Statutory Auditors’ Review Report on the Half-yearly Financial Information For the period from January 1 to June 30, 2020 _______________________________ To the Shareholders In compliance with the assignment entrusted to us by Shareholders’s Meeting and in accordance with the requirements of article L. 451-1-2-III of the French Monetary and Financial Code ("Code monétaire et financier"), we hereby report to you on: the review of the accompanying (condensed) half-yearly consolidated financial statements of Carrefour, for the period from January 1 to June 30, 2020, the verification of the information presented in the half-yearly management report. These (condensed) half-yearly consolidated financial statements were prepared under the responsibility of the Board of Directors on July 28 on the basis of the information available at that date in the evolving context of the crisis related to Covid-19 and of difficulties in assessing its impact and future outlooks. Our role is to express a conclusion on these financial statements based on our review. Conclusion on the financial statements We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does Carrefour – Half-year Financial Report – June 30, 2020 63 not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-yearly consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 - standard of the IFRSs as adopted by the European Union applicable to interim financial information. Specific verification We have also verified the information presented in the half-yearly management report on the condensed half-yearly consolidated financial statements subject to our review prepared on July 28, 2020. We have no matters to report as to its fair presentation and consistency with the condensed half-yearly consolidated financial statements. Paris-La-Défense and Courbevoie, July 28, 2020 The Statutory Auditors French original signed by DELOITTE & ASSOCIES STEPHANE RIMBEUF BERTRAND BOISSELIER KPMG S.A. CAROLINE BRUNO DIAZ MAZARS EMILIE LOREAL JEROME DE PASTORS Carrefour – Half-year Financial Report – June 30, 2020 64 Declaration responsible by the persons Declaration by the persons responsible We hereby certify that, to the best of our knowledge, the condensed consolidated financial statements for the six-month period ended June 30, 2019 were prepared in accordance with applicable accounting standards and give a true and fair view of the assets and liabilities, financial situation and income of the company Carrefour and of all the consolidated companies, and that the attached half-year financial report gives a true and fair view of the significant events having occurred during the first six months of the financial year, of their impact on the financial statements, of the main related party transactions, as well as a description of the main risks and uncertainties for the remaining six months of the financial year. July 28, 2020 Mr. Alexandre Bompard Chairman and Chief Executive Officer Mr. Matthieu Malige Chief Financial Officer Carrefour – Half-year Financial Report – June 30, 2020 65 www.carrefour.com@GroupeCarrefourSociété anonyme with capital of 2,044,059,600 euros Head office: 93, avenue de Paris — 91300 Massy — France 652 014 051 RCS EvryUniversal registration document2019 Annual Financial Report

Semestriel, 2020, Retail, Carrefour

write me a financial report

Semestriel

Retail

Carrefour

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Condensed consolidated financial statements for the six-month period ended June 30, 2021 Contents Consolidated income statement page 3 Consolidated statement of comprehensive income page 4 Consolidated statement of financial position page 5 Consolidated statement of cash flows page 6 Consolidated statement of changes in shareholders' equity page 7 Notes to the Condensed Consolidated Financial Statements page 8 Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 2 - Consolidated income statement Comparative data for the six months ended June 30, 2020 have been restated (indicated as “restated” below) in the consolidated financial statements as of June 30, 2021 to reflect the decision by the IFRS Interpretation Committee (IFRS IC) published in December 2019 on leases falling within the scope of IFRS 16 (see Note 4). Argentina is classified as a hyperinflationary economy within the meaning of IFRSs. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the condensed consolidated half-year financial statements as of June 30, 2021: data for the comparative period presented have also been adjusted for inflation. The consolidated financial statements are presented in millions of euros, rounded to the nearest million. As a result, there may be rounding differences between the amounts reported in the various statements. (in millions of euros) Notes First-half 2021 First-half 2020 restated % change Net sales 6.1 34,462 34,265 0.6% Loyalty program costs (403) (317) 27.3% Net sales net of loyalty program costs 34,059 33,949 0.3% Other revenue 6.1 1,040 1,121 (7.2)% Total revenue 35,100 35,070 0.1% Cost of sales (27,734) (27,612) 0.4% Gross margin from recurring operations 7,365 7,458 (1.2)% Sales, general and administrative expenses, depreciation and amortisation 6.2 (6,625) (6,732) (1.6)% Recurring operating income 740 726 1.9% Net income/(loss) from equity-accounted companies 10.1 (10) (2) 382.1% Recurring operating income after net income from equity-accounted companies 730 724 0.8% Non-recurring income and expenses, net 6.3 (41) (239) (82.7)% Operating income 689 485 41.9% Finance costs and other financial income and expenses, net 13.6 (132) (185) (28.5)% Finance costs, net (80) (91) (12.8)% Net interests related to leases commitment (52) (59) (13.0)% Other financial income and expenses, net (1) (34) (96.6)% Income before taxes 556 300 85.2% Income tax expense 9 (187) (237) (20.9)% Net income/(loss) from continuing operations 369 64 479.5% Net income/(loss) from discontinued operations 23 3 676.7% Net income/(loss) for the period 392 67 488.1% Group share 298 (25) 1269.2% of which net income/(loss) from continuing operations - Group share 275 (28) 1069.2% of which net income/(loss) from discontinued operations - Group share Attributable to non-controlling interests 23 94 3 92 676.7% 2.0% of which net income/(loss) from continuing operations - attributable to non-controlling interests of which net income/(loss) from discontinued operations - attributable to non-controlling interests 94 92 2.0% Basic earnings per share (in euros) First-half 2021 First-half 2020 restated % change Net income/(loss) from continuing operations - Group share - per share 0.34 (0.04) 1066.3% Net income/(loss) from discontinued operations - Group share - per share 0.03 0.00 674.3% Net income/(loss) – Group share - per share 0.37 (0.03) 1265.7% Diluted earnings per share (in euros) First-half 2021 First-half 2020 restated % change Diluted Net income/(loss) from continuing operations - Group share - per share 0.34 (0.04) 1062.5% Diluted Net income/(loss) from discontinued operations - Group share - per share 0.03 0.00 671.3% Diluted Net income/(loss) – Group share - per share 0.37 (0.03) 1261.1% Details of earnings per share calculations are provided in Note 12.2. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 3 - Consolidated statement of comprehensive income (in millions of euros) Notes First-half 2021 First-half 2020 restated Net income/(loss) - Group share 298 (25) Net income - Attributable to non-controlling interests 94 92 Net income/(loss) for the period 392 67 Effective portion of changes in the fair value of cash flow hedges Changes in the fair value of debt instruments through other comprehensive income Exchange differences on translating foreign operations (1) Items that may be reclassified subsequently to profit or loss Remeasurements of defined benefit plans obligation (2) Changes in the fair value of equity instruments through other comprehensive income 12.1 12.1 12.1 12.1 12.1 31 (2) 251 280 49 21 (3) (880) (861) (0) 0 Items that will not be reclassified to profit or loss 49 (0) Other comprehensive income/(loss) after tax 329 (862) TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE PERIOD 721 (795) Group share 548 (597) Attributable to non-controlling interests 173 (198) These items are presented net of the tax effect (see Note 12.1). (1) Exchange differences recognised on translating foreign operations in first-half 2021 mainly reflect the slight increase in the value of the Brazilian real, in contrast to first-half 2020 during which the value of the Brazilian real decreased significantly. (2) Remeasurement of the net defined benefit liability recognised in first-half 2021 reflects the increase in discount rates applied for the eurozone, from 0.40% at end-December 2020 to 0.80% at end-June 2021. In first-half 2020, the discount rate had remained stable at 0.75%. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 4 - Consolidated statement of financial position ASSETS (in millions of euros) Notes June 30, 2021 December 31, 2020 Goodwill 7.1 8,100 8,034 Other intangible assets 7.1 1,312 1,325 Property and equipment 7.2 10,620 10,505 Investment property 7.3 298 259 Right-of-use assets 8.1 4,522 4,506 Investments in companies accounted for by the equity method 10.1 1,232 1,172 Other non-current financial assets 13.5 1,247 1,212 Consumer credit granted by the financial services companies – portion more than one year 6.5 1,827 1,933 Deferred tax assets 727 679 Other non-current assets 405 490 Non-current assets 30,291 30,115 Inventories 5,942 5,326 Trade receivables 2,698 2,526 Consumer credit granted by the financial services companies – portion less than one year 6.5 3,721 3,295 Other current financial assets 13.2 400 368 Tax receivables 727 608 Other current assets 1,134 788 Cash and cash equivalents 13.2 1,294 4,439 Assets held for sale 101 124 Current assets 16,018 17,473 TOTAL ASSETS 46,309 47,588 SHAREHOLDERS’ EQUITY AND LIABILITIES (in millions of euros) Notes June 30, 2021 December 31, 2020 Share capital 2,044 2,044 Consolidated reserves (including net income) 7,425 7,751 Shareholders’ equity, Group share 9,469 9,795 Shareholders’ equity attributable to non-controlling interests 1,593 1,502 Total shareholders' equity 11,063 11,297 Borrowings - portion more than one year 13.2 6,146 6,305 Lease commitments - portion more than one year 8.2 3,760 3,787 Provisions 11 2,806 2,670 Consumer credit financing – portion more than one year 6.5 1,630 1,506 Deferred tax liabilities 518 467 Tax payables - portion more than one year 215 214 Non-current liabilities 15,077 14,949 Borrowings - portion less than one year 13.2 1,038 1,084 Lease commitments - portion less than one year 8.2 977 936 Suppliers and other creditors 11,385 12,560 Consumer credit financing – portion less than one year 6.5 3,182 3,067 Tax payables - portion less than one year 1,167 1,039 Other current payables 2,421 2,617 Liabilities related to assets held for sale 39 Current liabilities 20,170 21,342 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 46,309 47,588 Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 5 - Consolidated statement of cash flows (in millions of euros) First-half 2021 First-half 2020 restated Income before taxes 556 300 CASH FLOWS FROM OPERATING ACTIVITIES Income tax (165) (227) Depreciation and amortisation expense 1,133 1,160 Gains and losses on sales of assets (281) 32 Change in provisions and impairment 152 (158) Finance costs, net 80 91 Net interests related to leases 52 59 Net income and dividends received from equity-accounted companies Impact of discontinued operations (1) Cash flow from operations Change in working capital requirement (2) Net cash (used in)/from operating activities (excluding financial services companies) Change in consumer credit granted by the financial services companies 48 (9) 1,566 (2,138) (572) (103) 3 (27) 1,233 (2,064) (831) (38) Net cash (used in)/from operating activities - total (675) (869) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets (3) Acquisitions of non-current financial assets (4) Acquisitions of subsidiaries and investments in associates (5) Proceeds from the disposal of subsidiaries and investments in associates (6) Proceeds from the disposal of property and equipment and intangible assets (558) (147) (87) 186 40 (485) (9) (77) 5 53 Proceeds from the disposal of non-current financial assets 2 9 Change in amounts receivable from disposals of non-current assets and due to suppliers of non-current assets (3) Investments net of disposals - subtotal (219) (782) (329) (834) Other cash flows from investing activities 44 (68) Net cash (used in)/from investing activities (739) (901) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from share issues to non-controlling interests Dividends paid by Carrefour SA (parent company) (7) Dividends paid by consolidated companies to non-controlling interests Change in treasury stock and other equity instruments (8) Change in current financial assets (9) Issuance of bonds (9) Repayments of bonds (9) Net financial interests paid Other changes in borrowings (9) Payments related to leases (principal) (10) Net interests paid related to leases (10) Net cash (used in)/from financing activities Net change in cash and cash equivalents before the effect of changes in exchange rates Effect of changes in exchange rates 0 (383) (90) (443) 15 (871) (82) 649 (480) (51) (1,735) (3,149) 4 1 (57) (88) (88) 1,000 (802) (129) 1,046 (469) (55) 358 (1,412) (304) NET CHANGE IN CASH AND CASH EQUIVALENTS (3,145) (1,717) Cash and cash equivalents at beginning of period 4,439 4,466 Cash and cash equivalents at end of period 1,294 2,750 (1) In accordance with IFRS 5, this item corresponds to the remaining cash flows related to the discontinued operations reported in 2018 (integrated convenience stores in France). (2) The change in working capital is set out in Note 6.4. (3) Acquisitions mostly include operational investments in growth formats, in particular the payment of 123 million Brazilian reals to acquire two additional Makro Atacadista stores in Brazil, (approximately 19 million euros, bringing the total to 27 acquired stores as of June 30, 2021), the Group’s digitalisation and the roll-out of a leading omni-channel offering. (4) This item mainly corresponds to the downpayment of 900 million Brazilian reals in March 2021 (approximately 139 million euros) relating to the ongoing acquisition of the BIG group in Brazil (see Note 3.3). (5) This item mainly corresponds to the acquisition of Supersol stores in Spain for 80 million euros (provisional amount, see Note 3.3). In first-half 2020, this item mainly corresponded to the acquisitions of Dejbox and Potager City in France and Sant’Ambroeus in Italy. (6) This line corresponds to the 189 million-euro cash payment (before transaction costs) received on the sale of 60% of Market Pay (see Note 3.3). (7) The dividend approved by the Shareholders’ Meeting of May 21, 2021 was paid entirely in cash on May 28, 2021 for an amount of 383 million euros (see Note 3.5). In 2020, the dividend was paid on June 29, 2020 (leading to a cash outflow of 57 million euros). (8) This item corresponds for to the share buyback programme (see Note 3.6). (9) Note 13.2 provides a breakdown of net debt. Changes in liabilities arising from financing activities are detailed in Note 13.4. (10) In accordance with IFRS 16, effective from January 1, 2019, payments under leases along with any related interest are flows. shown in financing cash Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 6 - Consolidated statement of changes in shareholders' equity Shareholders’ equity, Group share (in millions of euros) Share capital Translation reserve Fair value reserve (2) Other consolidated reserves and net income Total Shareholders’ equity, Group share Non-controlling interests Total Shareholders’ equity Shareholders' equity at December 31, 2019 2,018 (1,381) (33) 9,332 9,937 1,736 11,673 Net income/(loss) for the half-year 2020 restated Other comprehensive income/(loss) after tax (3) Total comprehensive income/(loss) for the half-year 2020 restated (591) (591) 20 20 (25) (0) (26) (25) (572) (597) 92 (290) (198) 67 (862) (795) Share-based payments 2019 dividend payment (1) Change in capital and additional paid-in capital 26 7 (83) 7 (57) 0 (73) 1 8 (130) 1 Effect of changes in scope of consolidation and other movements (14) (14) 13 (1) Shareholders' equity at June 30, 2020 restated 2,044 (1,972) (13) 9,217 9,276 1,478 10,754 Shareholders' equity at December 31, 2020 2,044 (2,078) (42) 9,870 9,795 1,502 11,297 Net income/(loss) for the half-year 2021 Other comprehensive income/(loss) after tax (3) Total comprehensive income/(loss) for the half-year 2021 172 172 29 29 298 49 347 298 250 548 94 79 173 392 329 721 Share-based payments Treasury stock (net of tax) (4) 2020 dividend payment (1) Change in capital and additional paid-in capital 13 (502) (383) 13 (502) (383) 0 (83) 0 13 (502) (466) 0 Effect of changes in scope of consolidation and other movements (1) (1) 0 (1) Shareholders' equity at June 30, 2021 2,044 (1,906) (13) 9,344 9,469 1,593 11,063 (1) The 2019 dividend distributed by Carrefour SA, totalling 183 million euros, was paid in first-half 2020: in cash for 57 million euros; and - in new shares for 126 million euros (corresponding to the aggregate par value of the new shares for 26 million euros and premiums for 100 million euros). The 2020 dividend distributed by Carrefour SA, totalling 383 million euros, was paid entirely in cash in first-half 2021. Dividends paid to non-controlling interests mainly concern to the Spanish and Brazilian subsidiaries for an amount of 83 million euros in first-half 2021, and to the Spanish and Taiwanese subsidiaries for a total amount of 73 million euros in first-half 2020. (2) This item comprises: the hedge reserve (effective portion of changes in the fair value of cash flow hedges); - the financial asset fair value reserve (changes in the fair value of financial assets carried at fair value through other comprehensive income). (3) Other comprehensive income after tax reflects the slight increase in the value of the Brazilian real compared to December, 31 2020 and, under other consolidated reserves and net income, the remeasurement of the net defined benefit liability following the increase in discount rates applied for the eurozone as of June 30, 2021. In first-half 2020, other comprehensive loss after tax chiefly reflected the significant decrease in the value of the Brazilian real over the period. (4) A share buyback programme was launched in first-half 2021 for a maximum amount of 500 million euros. At the date the agreement was signed with the investment services provider, a short-term financial liability of 500 million euros in shares and related fees of 2 million euros were recorded against shareholders’ equity (see Note 3.6). Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 7 - Notes to the Condensed Consolidated Financial Statements Notes to the Condensed Consolidated Financial Statements Note 1: Basis of preparation of the Condensed Consolidated Financial Statements page 9 Note 2: Seasonal fluctuations in business page 12 Note 3: Significant events of the period page 12 Note 4: Restatement of the 2020 Consolidated half-year Financial Statements page 18 Note 5: Segment information page 20 Note 6: Operating items page 21 Note 7: Intangible assets, property and equipment, investment property page 26 Note 8: Leases page 28 Note 9: Income tax page 29 Note 10: Investments in companies accounted for by the equity method page 30 Note 11: Provisions and contingent liabilities page 31 Note 12: Other comprehensive income and earnings per share page 34 Note 13: Financial assets and liabilities, finance costs and other financial page 36 income and expenses Note 14: Other information page 42 Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 8 - Notes to the Condensed Consolidated Financial Statements NOTE 1: BASIS OF PREPARATION OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2021 were approved for publication by the Board of Directors on July 28, 2021. Carrefour SA (the “Company”) is domiciled in France at 93, avenue de Paris, 91300 Massy. The Condensed Consolidated Financial Statements for the six-month period ended June 30, 2021 reflect the financial position and results of operations of the Company and its subsidiaries (together “Carrefour” or the “Group”), along with the Group's share of the profits and losses and net assets of equity-accounted associates and joint ventures. The presentation currency of the consolidated financial statements is the euro, which is the Company's functional currency. 1.1 Statement of compliance In accordance with European Regulation (EC) No. 1606/2002 dated July 19, 2002, the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2021 have been prepared in compliance with the International Financial Reporting Standards (IFRSs) as adopted for use in the European Union as of June 30, 2021 and applicable at that date, with comparative information for the same period of 2020 and at December 31, 2020 prepared using the standards applicable at the reporting date. All of the standards and interpretations endorsed by the European Union are published in the Official Journal of the European Union, which can be accessed in the EUR-Lex. At June 30, 2021, the standards and interpretations adopted for use in the European Union were the same as those published by the IASB and applicable at that date, except for the amendment to IFRS 16 – Leases: Covid-19-Related Rent Concessions beyond 30 June 2021, which has not yet been adopted by the European Union. 1.2 IFRSs applied by the Group The accounting and measurement methods used to prepare the Condensed Consolidated Financial Statements for the six-month period ended June 30, 2021 are the same as those used for the 2020 consolidated financial statements, except for specific requirements of IAS 34 – Interim Financial Reporting (see Note 1.3) and the following standards, amendments and interpretations which were applicable as of January 1, 2021: Amendments to IFRS 4 – Insurance Contracts: Extension of the Temporary Exemption from Applying IFRS 9; Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 – Interest Rate Benchmark Reform (Phase 2). The application of the IFRS 4 amendment did not have an impact on the Group's consolidated financial statements, as it extends a temporary exemption already applied by the Group's insurance companies. The objective of Phase 2 of the interest rate benchmark reform is to clarify the accounting impacts of the effective replacement of benchmarks. Its entry into force had no impact for the Group as the interest rate benchmarks had not changed in the Group’s contracts as of June 30, 2021. As a reminder, Phase 1 of the project, adopted by the Group in 2020, allowed it to set aside uncertainty over future interest rate benchmarks when assessing hedge effectiveness and/or determining whether the hedged risk meets the highly probable requirement, thereby providing assurance regarding existing and future hedging relationships until such point as the uncertainty is lifted. During the first half of 2021, the Group continued the identification process in order to ensure a smooth transition to the new benchmarks, with the additional aim of anticipating the impacts of the reform and initiating the adaptation process. Interest rate derivatives designated as hedges of debt indexed to benchmarks are presented in Note 13. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 9 - Notes to the Condensed Consolidated Financial Statements Note that the impacts of the IFRS IC decision published in December 2019 regarding the term of leases falling within the scope of IFRS 16 were applied to the 2020 consolidated financial statements, which led the Group to retrospectively restate comparative data for the six months ended June 30, 2020 (see Note 4). Furthermore, the IFRS IC published several final decisions over the first half of 2021, particularly with regard to the accounting treatment of configuration and customisation costs in a Software as a Service (SaaS) arrangement and the allocation of benefits to periods of service associated with a specific defined benefit plan. Carrefour did not apply these decisions when preparing its condensed consolidated half-year financial statements as of June 30, 2021, since their potential impacts are in the process of being analysed. Adopted by the European Union but not yet applicable Standards, amendments and interpretations Effective date Amendments to IFRS 3 – Business Combinations, IAS 16 – Property, Plant and Equipment, IAS 37 – Provisions, Contingent Liabilities and Contingent Assets and Annual Improvements to IFRSs – 2018-2020 cycle January 1, 2022 Not yet adopted by the European Union Standards, amendments and interpretations Effective date (1) Amendment to IFRS 16 – Leases: Covid-19-Related Rent Concessions beyond 30 June 2021 April 1, 2021 IFRS 17 – Insurance Contracts January 1, 2023 Amendments to IAS 1 – Presentation of Financial Statements: Classification of Liabilities as Current or Non-current January 1, 2023 Amendments to IAS 1 – Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies January 1, 2023 Amendments to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates January 1, 2023 Amendments to IAS 12 – Income taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction January 1, 2023 (1) Subject to adoption by the European Union. The Group is currently analysing the potential impacts of the amendments to IAS 12. It does not expect the application of the other standards, amendments or interpretations to have a material impact on its consolidated financial statements. 1.3 Specific reporting treatments in the preparation of interim financial statements 1.3.1 Reporting principles The condensed consolidated financial statements for the six-month period ended June 30, 2021 have been prepared in accordance with IAS 34 – Interim Financial Reporting. Condensed interim consolidated financial statements do not contain all of the disclosures that would be required in a complete set of annual financial statements. Consequently, these interim financial statements should be read jointly with the Group’s consolidated financial statements for the year ended December 31, 2020, as included in the Universal Registration Document filed with the AMF (French Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 10 - Notes to the Condensed Consolidated Financial Statements financial markets authority) and available on request from the Company’s head office at 93 avenue de Paris – 91300 Massy, France, or on the Company’s website, www.carrefour.com. 1.3.2 Estimation of income tax expense In accordance with IAS 34, income tax expense for first-half 2021 is calculated based on the estimated weighted average annual income tax rate for full-year 2021 (the effective tax rate), for each entity and tax sub-group (see Note 9). The tax impact of specific transactions is reflected in income tax expense for the period. 1.3.3 Post-employment benefits and other long-term benefits The provision for pensions and other post-employment benefits is calculated using actuarial projections based on data from the previous period-end. The discount rate for the main contributing countries (eurozone) is reviewed at June 30 (see Note 11.2). The actuarial projections are updated to take into account any material changes to assumptions or one-off impacts (discount rates, applicable legislation, the population concerned, etc.) during the six-month period. It should be noted that, needing sufficient time to analyse potential impacts, the Group did not apply the IFRS IC decision published in May 2021 relating to the allocation of benefits to periods of service associated with a specific defined benefit plan (see Note 1.2). 1.4 Use of estimates and judgement Preparation of consolidated financial statements involves the use of Group management estimates and assumptions that may affect the reported amounts of certain assets, liabilities, income and expenses, as well as the disclosures contained in the notes. These estimates and assumptions are reviewed at regular intervals by Group management to ensure that they are reasonable in light of past experience and the current economic situation. Depending on changes in those assumptions, actual results may differ from current estimates. In addition to using estimates, Group management exercises its judgement when determining the appropriate accounting treatment of certain transactions and activities and how it should be applied. The main estimates and judgements applied for the preparation of the condensed consolidated financial statements for the six-month period ended June 30, 2021 are the same as those described in the consolidated financial statements for the year ended December 31, 2020, except as explained in Note 1.3. 1.5 Measurement bases The consolidated financial statements have been prepared using the historical cost convention, except for: certain financial assets and liabilities measured using the fair value model (see Note 13); assets acquired and liabilities assumed in business combinations, measured using the fair value model; non-current assets held for sale, measured at the lower of their carrying amount and fair value less costs to sell. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with the hierarchy defined in IFRS 13 – Fair Value Measurement, there are three levels of inputs: Level 1 inputs: unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 inputs: models that use inputs that are observable for the asset or liability, either directly (i.e., prices) or indirectly (i.e., price-based data); Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 11 - Notes to the Condensed Consolidated Financial Statements Level 3 inputs: inputs that are intrinsic to the asset or liability and are not based on observable market data for the asset or liability. Argentina is classified as a hyperinflationary economy within the meaning of IFRSs. IAS 29 – Financial Reporting in Hyperinflationary Economies is therefore applicable to the condensed consolidated financial statements for the six-month period ended June 30, 2021; data for the comparative period presented have also been adjusted for inflation. NOTE 2: SEASONAL FLUCTUATIONS IN BUSINESS Like those of other retailers, Carrefour's sales are subject to significant seasonal fluctuations, with the result that comparisons between the consolidated financial statements for the first and second halves of the year are not particularly meaningful. This is particularly the case for recurring operating income and cash flow generation between the two periods. The Group's second-half sales are traditionally higher than those for the first half, due to increased activity in December. Most of the operating expenses on the other hand – such as payroll costs, depreciation and amortisation – are spread more or less evenly over the year. As a result, the Group's recurring operating income is generally lower in the first half than in the second. Cash flows generated by the Group are also strongly impacted by seasonal trends, with working capital requirement rising sharply in the first half as a result of the large volume of supplier payments due at the beginning of the year for the purchases made ahead of the previous year's peak selling period in December. NOTE 3: SIGNIFICANT EVENTS OF THE PERIOD 3.1 Covid-19 health crisis The effects of the health crisis were still present across our different geographies in first-half 2021. Thanks to its omni-channel model and the commitment of all its teams, the Group successfully adapted to the different phases of the crisis to ensure the continuity of food distribution and meet new consumer expectations in a complex and rapidly changing environment. Regarding 2020, the health crisis and its impacts are described in Note 2.1 to the consolidated financial statements as of December 31, 2020. Solid balance sheet, enhanced liquidity and financial discipline Since 2018, Carrefour has shown great financial discipline and has strengthened its balance sheet and liquidity. Carrefour's solid balance sheet is an important asset in the context of the fast- changing food retail sector as well as in the face of the current health crisis. At June 30, 2021, the Group was rated Baa1 with a stable outlook by Moody's and BBB with a stable outlook by Standard & Poor's. The main financing operations carried out in first-half 2021 are described in detail in Note 3.4. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 12 - Notes to the Condensed Consolidated Financial Statements Impact of the health crisis on the consolidated half-year financial statements as of June 30, 2021 Income statement Income and expenses for first-half 2021 have been recorded and are presented using the same principles as those applied in the 2020 consolidated financial statements. As a result, the effects of the Covid-19 health crisis are reflected at all levels of the income statement. The costs incurred in connection with the Covid-19 health crisis were recognised in recurring operating income for first-half 2021 (as in 2020), including necessary costs relating to logistics or product distribution in stores or to customers’ homes, as well as costs relating to protecting the health of employees, customers and service providers. As a reminder, in first-half 2020, in accordance with the Group's accounting principles, which were applied consistently, exceptional bonuses and similar benefits were recognised in non-recurring expenses for a total amount of 128 million euros. These bonuses did not compensate employees for their work as such. Rather, they represented an act of corporate social responsibility, offering tax and employee benefits. The exceptional bonuses supplemented the usual components of fixed and variable compensation awarded to the employees concerned (in respect of overtime pay, various types of bonuses, profit-sharing, etc.), i.e., without replacing said components (see Note 2.1 to the 2020 consolidated financial statements and Note 3.1.c to the 2021 condensed consolidated half- year financial statements). Balance sheet Impairment – review of indicators and tests At each interim closing, as prescribed by IAS 36 – Impairment of Assets, the Group determines whether there are any indications of impairment of the cash-generating units (CGUs) represented by the individual stores and of the goodwill allocated to groups of CGUs by country and performs additional impairment tests if such indicators are identified. For goodwill, the main impairment indicators used by the Group are as follows: internal impairment indicator: a material deterioration in the ratio of recurring operating income before depreciation and amortisation to net revenues excluding petrol between the budget and the most recent forecast; external impairment indicators: a material increase in the discount rate and/or a severe downgrade in the GDP growth forecasts issued by the IMF or the OECD. In light of the unusual situation created by the Covid-19 health crisis, the methodology used for goodwill impairment tests consisted in applying June 30, 2021 financial parameters to the tests performed at end-December 2020 (same methodology as applied as of June 30, 2020) and the following assumptions: application of an enhanced market premium and long-term beta to determine the weighted average cost of capital (WACC); forecast of perpetual growth rates from the recent data provided by the IMF. Regarding the stores, a targeted review was performed on stores identified as offering limited headroom (recoverable amount – carrying amount) during the end-2020 impairment tests. Regarding investments in equity-accounted companies, the value of the investment in Carmila at June 30, 2021 was supported by the company’s EPRA NAV (European Public Real Estate Association Net Asset Value) at that date. No impairment loss was recorded during the period on the investment in Provencia (a group of Carrefour franchisees in the Rhône-Alpes region). In addition, the carrying amount of the investment in Showroomprivé at June 30, 2021 (as at December 31, 2020) was aligned with the company’s share price at that date. Lastly, the shares retained following the sale of 60% of Market Pay and those obtained as part of the creation of SCI Cargan-LOG have just been accounted for in the consolidated balance sheet (see Note 3.3). Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 13 - Notes to the Condensed Consolidated Financial Statements Ultimately, at June 30, 2021, the tests performed by the Group did not lead to the recognition of any impairment losses on stores, goodwill, investment properties or investments in equity- accounted companies. Financial services companies Consumer credit granted by the financial services companies corresponds to customer receivables (credit card debt, personal loans, etc.). In 2020, the financial services companies granted repayment holidays to their customers in line with the measures announced by local authorities to help consumers during the Covid-19 health crisis, or according to the terms of the contracts. The repayment holidays did not affect the existing classification of the customer loans concerned and had no impact on the calculation of expected credit losses at June 30 and December 31, 2020. At June 30, 2021, the usual process has been resumed for classifying these outstanding loans and calculating the related allowances. In addition, credit risks continued to be assessed in light of the specific context associated with the health crisis. 3.2 Simplification of the organisation as part of the “Carrefour 2022” transformation plan During the first half of 2021, in pursuit of its operating performance and organisational efficiency objectives, Carrefour France launched a headquarters transformation plan. The project is part of a human resources and skills planning (GPEC) initiative which was set out in an agreement signed with the trade unions in late February 2021. It allows for the workforce to be adjusted to needs at headquarters via departures staggered through to the planned end date of the agreement in March 2022. A provision was set aside at June 30, 2021 for the cost of this plan, against a non-recurring expense. The amount of the provision was determined based on various assumptions and is the best estimate of the costs the Group expects to incur in relation to the roll-out of the programme (see Notes 6.3 and 11.4). 3.3 Main acquisitions, disposals and other transactions during the period Acquisition of 172 stores under the Supersol banner (Spain) – Business combination In August 2020, the Group entered into an agreement to acquire 172 convenience stores and supermarkets under the Supersol banner in Spain, located primarily in Andalucía and the Madrid area. The acquired stores generated net sales of around 480 million euros in 2020. At December 31, 2020, closing of the transaction was subject to the customary conditions. After receiving clearance from the local competition authority on January 12, 2021, the acquisition was completed on March 11, 2021 for a provisional price of 80 million euros. The purchase price allocation process stipulated in IFRS 3 – Business Combinations was implemented and led to the recognition of provisional goodwill in the amount of 76 million euros in the 2021 condensed consolidated half-year financial statements. Of the 172 stores, 127 Supersol stores will be converted into Carrefour store formats by the end of 2021, 42 stores are being disposed of and have been classified within assets held for sale at June 30, 2021 in accordance with IFRS 5 - 38 of these have already been disposed in July 2021 - and the 3 remaining stores will be closed. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 14 - Notes to the Condensed Consolidated Financial Statements Ongoing acquisition of Grupo BIG Brasil SA (Brazil) – Business combination On March 24, 2021, Carrefour Brazil entered into an agreement with Advent International and Walmart for the acquisition of Grupo BIG Brasil SA, Brazil’s third biggest food retailer. The acquiree reported net sales of around 22 billion Brazilian reals (approximately 3.7 billion euros) in 2020 and operates a multi-format network of 387 stores. The enterprise value is around 7 billion Brazilian reals (around 1.2 billion euros at the June 30, 2021 exchange rate), of which 70% will be paid in cash and 30% in new Carrefour Brazil shares. The agreement provides for an earn-out to be paid six months after completion of the transaction if the Carrefour Brazil share price exceeds the reference value of 19.26 Brazilian reals. The transaction remains subject to approval by the Brazilian competition authority (CADE) and is expected to be completed in 2022. Disposal of a controlling interest in Market Pay (Global functions) On October 30, 2020, the Group announced the sale of 60% of its Market Pay payment platform to AnaCap Financial Partners, a private equity firm focused on European financial services, with the aim of accelerating the platform's development and diversification. At December 31, 2020, in accordance with IFRS 5, Market Pay’s assets and liabilities were classified within assets held for sale and related liabilities and measured at their net carrying amount. The transaction was completed on April 29, 2021 and a resulting disposal gain of around 230 million euros (including a cash payment of 189 million euros) was recorded in non-recurring income (before tax) after taking into account the related costs. The Group's residual interest in Market Pay (around 40%) has been accounted for by the equity method in the consolidated financial statements as from April 29, 2021, for an amount of 73 million euros. Discontinuation of the business of Carrefour Banca (Italian branch of Carrefour Banque) In May 2021, the Board of Directors of Carrefour Banque decided to discontinue the business of its Italian branch. A process to dispose of the consumer credit portfolio began on June 30, 2021, notably with the receipt of firm purchase offers and buy-out option offers. In accordance with IFRS 5 and IFRS 9, the branch's financial assets were classified within assets held for sale and measured at the lower of their net carrying amount and fair value less costs to sell. This resulted in an expense being recorded in non-recurring expenses for first-half 2021 (see Note 6.3). Creation of a real estate company together with Argan for the development of warehouses – Equity method investment In May 2021, Carrefour and Argan created the real estate company Cargan-LOG, intended for developing future logistics warehouses, some of which are to be leased to Carrefour. The entity, which is 60%-owned by Argan and 40% by Carrefour (through the contribution of three warehouses), has been accounted for by the equity method in the consolidated financial statements as from May 2021, for an amount of 30 million euros. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 15 - Notes to the Condensed Consolidated Financial Statements Pinheiros project (Brazil) – Exchange of assets As part of the Pinheiros project, Carrefour Brazil proceeded with an exchange of assets with Wtorre in a transaction that took effect in February 2021, following the issuance of a building permit by the São Paulo city hall. With this transaction, Carrefour exchanged land on which its store is currently located (on Avenida Das Nações Unidas in the south of the city), for a new store, a shopping mall, a parking lot and offices in a new corporate tower which its partner has committed to build. The impacts of the transaction were defined in accordance with IAS 16 – Property, Plant and Equipment and led to the recognition of a capital gain in non-recurring operating income for an amount of 81 million euros. In line with the Group’s intention regarding the use of these assets, the offices of the corporate tower have been recognised in work-in-progress inventories (for an amount of 300 million Brazilian reals, or 51 million euros), the store in assets under construction (65 million Brazilian reals, or 11 million euros) and the shopping mall and the parking lot in investment property (173 million Brazilian reals, or 29 million euros). 3.4 Securing the Group's long-term financing On April 25, 2021, the Group redeemed 871 million euros worth of 3.875% 11-year bonds. The Group’s financial position and liquidity were solid at end-June 2021. The average maturity of bond debt of Carrefour SA was 3.6 years at end-June 2021, compared with 3.6 years at end- December 2020 and 4.1 years at end-June 2020. Furthermore, in May 2021, Carrefour exercised its option to extend its two credit facilities totalling 3.9 billion euros, from June 2025 to June 2026. This option has been applied to more than 99% of the Group’s banking facilities. Lastly, the Group updated its Euro-Medium Term Notes (EMTN) programme in June 2021 to include a CSR component. The Group prepared and published a Sustainability-Linked Bond-type framework aimed at increasing the consideration given to CSR issues in Carrefour SA’s bond financing. Following approval by the AMF, Carrefour SA is the first CAC 40 issuer to include an option of this type in its EMTN programme, further aligning its financing strategy with the Group’s CSR objectives and ambitions. 3.5 Payment of the 2020 dividend in cash In February 2021, the Group announced that dividend policy would be returning to normal following nearly ten years of dividends with a dividend reinvestment option. At the Shareholders' Meeting held on May 21, 2021, the shareholders decided to set the 2020 dividend at 0.48 euro per share to be paid entirely in cash. On May 28, 2021, the dividend was paid out in an amount of 383 million euros. 3.6 Share buyback programme As part of its share capital allocation policy, the Group commissioned an investment services provider to buy back shares corresponding to a maximum amount of 500 million euros, as authorised by the Shareholders’ Meetings of May 29, 2020 and May 21, 2021. The share buyback programme began on May 7, 2021 and ended on July 9, 2021. The objective of the share buyback programme is to allow the Group to hold the shares with a view to cancelling them subsequently. At the date the agreement was signed, a short-term financial liability (recorded in “Other current payables” in the consolidated balance sheet) of 500 million euros in shares was recorded against consolidated shareholders’ equity. At June 30, 2021, the liability was reduced by the effective amount of purchases made during the period, to represent 59 million euros. At that date, Carrefour held 36 233 955 treasury shares, i.e., Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 16 - Notes to the Condensed Consolidated Financial Statements 4.43% of the share capital, with an average price by share of 16.99 euros for the 26,776,416 shares bought back. At the completion of the share buyback programme, on July, 9 2021, Carrefour holds 38,932,764 treasury shares, i.e., 4.76% of the share capital, with an average price of 16.96 euros by share for the 29,475,225 shares bought back. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 17 - Notes to the Condensed Consolidated Financial Statements NOTE 4: RESTATEMENT OF THE 2020 CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS Following the December 2019 publication of the IFRS IC decision clarifying the rules for determining the term of leases within the scope of IFRS 16 – Leases, the Group conducted analyses to measure the corresponding impacts and then implemented them in its financial and accounting systems during the second half of 2020. These analyses also took into account the position statement published by the French accounting standards setter (Autorité des normes comptables – ANC) on July 3, 2020, which supersedes the previous statement dated February 16, 2018, to determine the IFRS 16 lease terms of “3/6/9”- type French commercial leases, notably those which have entered an automatic renewal period. The application of the IFRS IC decision had the effect of extending the IFRS 16 lease term of certain leases, which led to an increase in the right-of-use assets and related lease commitments. The impacts of this change in accounting method were recognised retrospectively with effect from the IFRS 16 transition date (i.e., January 1, 2019). For more details on the restatement, see Note 4 to the 2020 consolidated financial statements and Note 8 for the accounting principles relating to IFRS 16. The consolidated half-year financial statements as of June 30, 2020 have also been restated as a result of this decision. 4.1 Consolidated income statement for first-half 2020 (restated) (in millions of euros) First-half 2020 published First-half 2020 restated Change Net sales 34,265 34,265 Loyalty program costs (317) (317) Net sales net of loyalty program costs 33,949 33,949 Other revenue 1,121 1,121 Total revenue 35,070 35,070 Cost of sales (27,612) (27,612) 1 Gross margin from recurring operations 7,457 7,458 1 Sales, general and administrative expenses, depreciation and amortisation (6,739) (6,732) 7 Recurring operating income 718 726 8 Net income/(loss) from equity-accounted companies (2) (2) Recurring operating income after net income from equity-accounted companies 716 724 8 Non-recurring income and expenses, net (234) (239) (5) Operating income 482 485 4 Finance costs and other financial income and expenses, net (173) (185) (12) Finance costs, net (91) (91) Net interests related to leases commitment (48) (59) (11) Other financial income and expenses, net (34) (34) (0) Income before taxes 308 300 (8) Income tax expense (238) (237) 2 Net income/(loss) from continuing operations 70 64 (7) Net income/(loss) from discontinued operations 3 3 Net income/(loss) for the period 73 67 (7) Group share (21) (25) (5) of which net income/(loss) from continuing operations - Group share (23) (28) (5) of which net income/(loss) from discontinued operations - Group share 3 3 Attributable to non-controlling interests 94 92 (2) of which net income/(loss) from continuing operations - attributable to non-controlling interests of which net income/(loss) from discontinued operations - attributable to non-controlling interests 94 92 (2) Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 18 - Notes to the Condensed Consolidated Financial Statements 4.2 Consolidated statement of cash flows for first-half 2020 (restated) (in millions of euros) First-half 2020 published First-half 2020 restated Change Income before taxes 308 300 (8) CASH FLOWS FROM OPERATING ACTIVITIES Income tax (227) (227) Depreciation and amortisation expense 1,168 1,160 (8) Gains and losses on sales of assets 27 32 5 Change in provisions and impairment (158) (158) Finance costs, net 91 91 Net interests related to leases 48 59 11 Net income and dividends received from equity-accounted companies 3 3 Impact of discontinued operations (27) (27) Cash flow from operations 1,233 1,233 Change in working capital requirement (2,064) (2,064) Net cash (used in)/from operating activities (excluding financial services companies) (831) (831) Change in consumer credit granted by the financial services companies (38) (38) Net cash (used in)/from operating activities - total (869) (869) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment and intangible assets (485) (485) Acquisitions of non-current financial assets (9) (9) Acquisitions of subsidiaries and investments in associates (77) (77) Proceeds from the disposal of subsidiaries and investments in associates 5 5 Proceeds from the disposal of property and equipment and intangible assets 53 53 Proceeds from the disposal of non-current financial assets 9 9 Change in amounts receivable from disposals of non-current assets and due to suppliers of non- current assets (329) (329) Investments net of disposals - subtotal (834) (834) Other cash flows from investing activities (68) (68) Net cash (used in)/from investing activities (901) (901) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from share issues to non-controlling interests 1 1 Dividends paid by Carrefour SA (parent company) (57) (57) Dividends paid by consolidated companies to non-controlling interests (88) (88) Change in current financial assets (88) (88) Issuance of bonds 1,000 1,000 Repayments of bonds (802) (802) Net financial interests paid (129) (129) Other changes in borrowings 1,046 1,046 Payments related to leases (principal) (481) (469) 12 Net interests paid related to leases (44) (55) (12) Net cash (used in)/from financing activities 358 358 Net change in cash and cash equivalents before the effect of changes in exchange rates Effect of changes in exchange rates (1,412) (304) (1,412) (304) - NET CHANGE IN CASH AND CASH EQUIVALENTS (1,717) (1,717) Cash and cash equivalents at beginning of period 4,466 4,466 Cash and cash equivalents at end of period 2,750 2,750 Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 19 - Notes to the Condensed Consolidated Financial Statements NOTE 5: SEGMENT INFORMATION 5.1 Segment results First-half 2021 (in millions of euros) Total France Europe Latin America Asia Global Functions Net sales 34,462 16,889 10,158 6,208 1,208 Other revenue 1,040 374 270 318 43 35 Recurring operating income before depreciation and amortisation 1,873 710 648 414 126 (25) Recurring operating income 740 187 225 309 47 (28) Capital expenditure (1) Depreciation and amortisation expense (2) 558 (1,133) 217 (523) 97 (423) 220 (105) 18 (80) 5 (2) First-half 2020 restated (in millions of euros) Total France Europe Latin America Asia Global Functions Net sales 34,265 16,357 10,246 6,569 1,092 Other revenue 1,121 371 306 363 44 36 Recurring operating income before depreciation and amortisation 1,886 659 636 492 116 (17) Recurring operating income 726 129 200 377 49 (28) Capital expenditure (1) Depreciation and amortisation expense (2) 485 (1,160) 204 (530) 104 (436) 168 (115) 2 (67) 6 (11) (1) In first-half 2021, capital expenditure notably included the acquisition of two additional Makro Atacadista stores on a full ownership basis for approximately 19 million euros, bringing the total to 27 acquired stores at the reporting date. In first-half 2020, capital expenditure notably included the approximately 35 million-euro downpayment made in February 2020 in relation to the acquisition of these stores. (2) Including the depreciation and amortisation relating to logistics equipment included in the cost of sales. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 20 - Notes to the Condensed Consolidated Financial Statements 5.2 Segment assets and liabilities June 30, 2021 (in millions of euros) Total France Europe Latin America Asia Global Functions ASSETS Goodwill 8,100 5,153 2,464 342 139 1 Other intangible assets 1,312 589 552 142 22 6 Property and equipment 10,620 4,571 2,934 2,717 396 2 Investment property 298 11 116 120 52 Right-of-use Assets 4,522 1,739 2,001 353 424 5 Other segment assets 16,456 7,937 3,175 4,682 275 387 Total Segment assets 41,308 20,001 11,242 8,356 1,308 401 Unallocated assets 5,001 TOTAL ASSETS 46,309 LIABILITIES (excluding equity) Segment liabilities 24,523 11,800 6,999 4,152 1,106 466 Unallocated liabilities 10,724 TOTAL LIABILITIES 35,247 December 31, 2020 (in millions of euros) Total France Europe Latin America Asia Global Functions ASSETS Goodwill 8,034 5,149 2,388 319 176 1 Other intangible assets 1,325 615 551 130 23 6 Property and equipment 10,505 4,741 3,038 2,376 348 2 Investment property 259 11 119 80 50 Right-of-use Assets 4,506 1,865 1,982 324 330 5 Other segment assets 14,964 7,360 3,105 3,913 206 379 Total Segment assets 39,593 19,742 11,183 7,142 1,133 393 Unallocated assets 7,995 TOTAL ASSETS 47,588 LIABILITIES (excluding equity) Segment liabilities 25,512 12,034 7,672 4,604 888 315 Unallocated liabilities 10,779 TOTAL LIABILITIES 36,291 NOTE 6: OPERATING ITEMS 6.1 Revenue 6.1.1 Net sales (in millions of euros) First-half 2021 First-half 2020 % change Net sales 34,462 34,265 0.6% Excluding the currency effect, first-half 2021 net sales would have amounted to 36,010 million euros versus 34,265 million euros in first-half 2020, an increase of 5.1%. Changes in exchange rates reduced net sales by 1.5 billion euros in first-half 2021, almost exclusively attributable to the Latin America region. Restated for IAS 29 in Argentina, consolidated net sales for first-half 2021 would have increased by 5.0% at constant exchange rates. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 21 - Notes to the Condensed Consolidated Financial Statements Net sales by country (1) (in millions of euros) First-half 2021 First-half 2020 France 16,889 16,357 Rest of Europe 10,158 10,246 Spain 4,353 4,204 Italy 1,935 2,131 Belgium 1,998 2,058 Poland 872 875 Romania 1,000 978 Latin America 6,208 6,569 Brazil 5,271 5,632 Argentina 937 937 Asia 1,208 1,092 Taiwan 1,208 1,092 Total Net Sales 34,462 34,265 (1) Substantially all revenue is recognised on a specific date. Revenue recognised over time is not material at Group level. 6.1.2 Other revenue (in millions of euros) First-half 2021 First-half 2020 % change Financing fees and commissions (1) Franchise and business lease fees 549 185 667 167 (17.7)% 10.3% Rental revenue 75 71 6.2% Revenue from sub-leases Property development revenue (2) Other revenue (3) 15 4 212 17 9 190 (7.1)% (53.1)% 11.5% Total Other Revenue 1,040 1,121 (7.2)% (1) Including net banking revenue and net insurance revenue generated by the Group's financial services and insurance companies. (2) Corresponding to the sale price of properties developed by the Group for resale. Taking into account development costs recorded in "Cost of sales", the property development margin amounted to 3 million euros in first-half 2021 (zero in first-half 2020). (3) Other revenue notably includes sales commissions, commissions received from suppliers, revenue from ticket/travel agency sales and in-store advertising fees. Financing fees and commissions recognised in first-half 2021 continued to be impacted by the health crisis in Europe, in connection with the reduction in the gross value of consumer credit recorded over the period (see Note 6.5.1). In addition, growth observed in Brazil in local currency was compensated on translation into euros, given a more unfavourable average exchange rate over the period than in first-half 2020. 6.2 Sales, general and administrative expenses, and depreciation and amortisation (in millions of euros) First-half 2021 First-half 2020 restated % change Sales, general and administrative expenses (5,622) (5,700) (1.4)% Depreciation and amortisation of property and equipment, intangible assets, and investment property (633) (675) (6.2)% Amortisation of right-of-use assets Total SG&A expenses and depreciation and amortisation (369) (6,625) (357) (6,732) 3.6% (1.6)% Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 22 - Notes to the Condensed Consolidated Financial Statements Sales, general and administrative expenses Sales, general and administrative expenses break down as follows: (in millions of euros) First-half 2021 First-half 2020 % change Employee benefits expense (3,630) (3,629) 0.0% Taxes other than on income (350) (328) 6.8% Maintenance and repair costs (347) (364) (4.6)% Fees (319) (385) (17.3)% Advertising expense (300) (277) 8.4% Energy and electricity (219) (252) (13.1)% Property rentals (excluding IFRS 16) (36) (30) 18.6% Other SG&A expenses Total SG&A expenses (422) (5,622) (435) (5,700) (3.1)% (1.4)% Depreciation and amortisation Including supply chain depreciation and amortisation recognised in cost of sales, total depreciation and amortisation expense recognised in the consolidated income statement amounted to 1,133 million euros in first-half 2021 (first-half 2020 restated: 1,160 million euros), as follows: (in millions of euros) First-half 2021 First-half 2020 restated % change Property and equipment (507) (540) (6.1)% Intangible assets (122) (128) (4.9)% Investment property (5) (7) (30.8)% Depreciation and amortisation of property and equipment, intangible assets, and investment property (633) (675) (6.2)% Depreciation of right-of-use asset - Property and equipment and investment properties (369) (357) 3.6% Depreciation and amortisation of supply chain (29) (27) 7.3% Depreciation of right-of-use asset - Suppy chain (101) (101) (0.2)% Total Depreciation and amortisation (1,133) (1,160) (2.3)% 6.3 Non-recurring income and expenses This classification is applied to certain material items of income and expense that are unusual in terms of their nature and frequency, such as impairment of non-current assets, gains and losses on sales of non-current assets, restructuring costs and provisions recorded to reflect revised estimates of risks provided for in prior periods, based on information that came to the Group's attention during the period. Non-recurring items for first-half 2021 represented a net non-recurring expense of 41 million euros and broke down as follows: (in millions of euros) First-half 2021 First-half 2020 restated Gains and losses on disposals of assets 248 (31) Restructuring costs (260) (42) Other non-recurring income and expenses Non-recurring income and expenses, net before asset impairments and write-offs Asset impairments and write-offs 4 (9) (33) (106) (180) (59) of which Impairments and write-offs of goodwill of which Impairments and write-offs of property and equipment, intangible assets and others (33) (59) Non-recurring income and expenses, net (41) (239) of which: Non-recurring income Non-recurring expense 405 (446) 86 (325) Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 23 - Notes to the Condensed Consolidated Financial Statements Gains and losses on disposals of assets mainly include the gain arising on the loss of control of Market Pay in France for a net amount of around 230 million euros (see Note 3.3). Restructuring costs recognised in first-half 2021 result from continued work towards objectives to improve operating performance and organisational efficiency. The expense included in non- recurring items relates chiefly to severance paid or payable within the scope of the transformation plan concerning the headquarters in France (see Note 3.2). Other non-recurring income and expenses recorded in first-half 2021 resulted primarily from the following items in Brazil: the impact of the Pinheiros real estate transaction, which generated 81 million euros following an exchange of assets in the city of São Paulo (see Note 3.3); provision reversals (net of costs) on ICMS credits related to transfers between states on "basic products" were recognised for around 23 million euros (net of costs) following expiry of the limitation period for tax claims or further relief under tax amnesty programmes introduced by certain Brazilian states (see Note 6.3 to the 2020 consolidated financial statements); following the death of Mr Silveira Freitas, commitments have been made by Carrefour Brazil to public authorities and non-profit organisations as part of a settlement agreement (“Termo de ajustamento de Conduta”) signed on June 11, 2021. It led to the recognition of a provision for 17 million euros (see Note 11.1 to these financial statements and Note 11.3 to the 2020 consolidated financial statements). Other non-recurring income and expenses in first-half 2021 also included revised estimates of historical risks in Spain, and the impacts related to the decision taken in May 2021 to discontinue Carrefour Banque’s operations in Italy (see Note 3.3). Asset impairments and write-offs recorded in first-half 2021 include the retirement of a variety of non-current assets, in particular relating to IT in France for 23 million euros. Main non-recurring items in first-half 2020 Gains and losses on disposals of assets included the loss incurred on the sale of Rue du Commerce, which was completed on April 30, 2020. The costs incurred in connection with the Covid-19 health crisis were recognised in recurring operating expenses for first-half 2020, including necessary costs relating to logistics or product distribution in stores or to customers’ homes, as well as costs relating to protecting the health of employees, customers and service providers. In accordance with the Group's accounting principles, which have been applied consistently, exceptional bonuses and similar benefits were recognised in non-recurring expenses for a total amount of 128 million euros. These bonuses did not compensate employees for their work as such. Rather, they represented an act of corporate social responsibility, offering tax and employee benefits. The exceptional bonuses supplemented the usual components of fixed and variable compensation awarded to the employees concerned (in respect of overtime pay, various types of bonuses, profit-sharing, etc.), i.e., without replacing said components. Asset impairments and write-offs corresponded mainly to the write-down of non-current assets by Carrefour Banque following the decision of its Board of Directors to discontinue the C-zam business and impairment losses on certain Promocash stores in France. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 24 - Notes to the Condensed Consolidated Financial Statements 6.4 Change in working capital requirement The change in working capital requirement reported in the consolidated statement of cash flows under "Net cash from operating activities" breaks down as follows: (in millions of euros) First-half 2021 First-half 2020 Change Change in inventories (426) (65) (361) Change in trade receivables (103) (11) (91) Change in trade payables (1,448) (1,739) 290 Change in loyalty program liabilities 25 (15) 39 Change in trade working capital requirement (1,953) (1,830) (122) Change in other receivables and payables (186) (233) 48 Change in working capital requirement (2,138) (2,064) (75) These items, like all other items in the statement of cash flows, are translated at the average rate for the period. 6.5 Banking and insurance businesses 6.5.1 Consumer credit granted by the financial services companies At June 30, 2021, consumer credit totalled 5,549 million euros (December 31, 2020: 5,227 million euros), breaking down as follows: (in millions of euros) June 30, 2021 December 31, 2020 Payment card receivables 4,319 4,350 Loans 1,625 1,789 Consumer credit (on purchases made in Carrefour stores) Other financing (1) Impairment Short-term outstandings - loans and receivables on financial institutions (2) 41 199 (1,011) 375 73 233 (1,219) Total Consumer credit granted by the financial services companies 5,549 5,227 Portion due in less than one year 3,721 3,295 Portion due in more than one year 1,827 1,933 (1) Other financing corresponds mainly to restructured loans and credit facilities. (2) Securitisation instruments were closed out on July 12, 2021. Restated for securitisation instruments (see above), the gross value of consumer credit decreased by approximately 250 million euros compared with December 31, 2020. This reflects the decline in credit financing since the health crisis, particularly in France; unlike in Spain where credit financing remained stable and in Brazil where it increased over the first half of 2021. The decline in consumer credit was accentuated by the sale of category 3 consumer credit over the period in Spain and Brazil, and, by the reclassification of the Italian branch’s outstanding consumer credit as assets held for sale at June 30, 2021, taking into account the decision to discontinue its operations (see Note 3.3). By contrast, the decline was partially offset by the slight increase in value of the Brazilian real over the period. The decrease in the average impairment rate for consumer credit at June 30, 2021 was attributable to Spain and Brazil, following the sale of category 3 loans over first-half 2021, and from Italy, following the sale in progress of its entire client portfolio, including loans also classified in category 3 (see above). The amount of impairment for consumer credit was estimated according to the rules and principles described in Note 3.1. At June 30, 2021, 69% of the gross value of consumer credit granted by the financial services companies was classified in category 1, 15% in category 2 and 16% in category 3. At December 31, 2020, categories 1, 2 and 3 represented 66%, 14% and 20%, respectively, of the gross value of consumer credit granted by the financial services companies. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 25 - Notes to the Condensed Consolidated Financial Statements 6.5.2 Consumer credit financing The related consumer credit financing amounted to 4,813 million euros at June 30, 2021 (December 31, 2020: 4,574 million euros), as follows: (in millions of euros) June 30, 2021 December 31, 2020 Bonds and notes (1) Debt securities (Neu CP and Neu MTN) (2) Bank borrowings (3) Customer passbook savings deposits Securitisations (4) Other refinancing debt to financial institutions 1,215 1,305 510 313 369 1,097 1,298 1,042 516 323 369 1,020 Other 3 5 Total Consumer credit financing 4,813 4,574 Portion due in less than one year 3,182 3,067 Portion due in more than one year 1,630 1,506 (1) In April 2021, Carrefour Banque redeemed 500 million euros worth of bonds issued in 2016 (3-month Euribor +68 bps) and issued 400 million euros worth of bonds in June 2021 with a fixed rate swapped for the 3-month Euribor (4 years – June 2025 maturity, 3-month Euribor +49 bps). (2) Debt securities mainly comprised negotiable European commercial paper (NEU CP) and medium-term notes (NEU MTN) issued by Carrefour Banque. (3) This item mainly corresponds to the 360 million-euro financing operation with the European Central Bank expiring on March 24, 2021 and renewed on that same date for an equivalent amount over a period of three years, as well as credit line draw downs. (4) This item corresponds to the "Master Credit Cards Pass" reloadable securitisation programme with compartments launched by Carrefour Banque in November 2013 for an initial asset pool of 560 million euros. Proceeds from the securitisation amounted to 400 million euros. The current series was issued in October 2019 for 370 million euros, maturing in June 2022. NOTE 7: INTANGIBLE ASSETS, PROPERTY AND EQUIPMENT, INVESTMENT PROPERTY 7.1 Goodwill and other intangible assets Goodwill, which constitutes the main intangible asset, is reported separately from other intangible assets in the statement of financial position. (in millions of euros) June 30, 2021 December 31, 2020 Goodwill 8,100 8,034 Other intangible assets 1,312 1,325 Total Intangible assets 9,412 9,358 The carrying amount of goodwill is generally monitored at the level of the operating segments corresponding to the countries in which the Group conducts its business through its integrated store networks. The net carrying amount of goodwill can be broken down as follows: (in millions of euros) June 30, 2021 December 31, 2020 France 5,153 5,149 Spain 1,028 952 Belgium 956 956 Brazil 334 311 Poland 233 231 Italy 149 149 Taiwan 139 176 Romania 100 101 Argentina 8 9 Global Functions Total 1 8,100 1 8,034 Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 26 - Notes to the Condensed Consolidated Financial Statements The 67 million euro increase in goodwill over first-half 2021 reflects the following: Completion of the acquisition of the Supersol banner in Spain (see Note 3.3) including the recognition of provisional goodwill in the amount of 76 million euros. Regarding the acquisition of the Wellcome banner in Taiwan (see Note 2.2 to the 2020 consolidated financial statements), the preliminary implementation of the purchase price allocation required by IFRS 3 – Business Combinations led to the reduction of provisional goodwill from 119 million euros in the 2020 consolidated financial statements to 72 million euros in the 2021 consolidated half-year financial statements. As a reminder, the allocation process could not be implemented in December 2020 given the transaction's completion on the last day of the year and local regulations restricting the exchange of information between the Carrefour group and the acquired company Wellcome until the transaction completion date. The decrease in provisional goodwill in first-half 2021 chiefly reflects the fair value adjustment to a warehouse (including the building and the land) owned by Wellcome. A favourable translation adjustment of 23 million euros following the slight increase in value of the Brazilian real compared with December 31, 2020. Impairment tests at June 30, 2021 In accordance with IAS 36– Impairment of Assets, goodwill recognised on business combinations is not amortised but is tested for impairment every year, or more frequently if there is an indication that its carrying amount may not be recovered. At each interim closing, as prescribed by IAS 36, the Group determines whether there are any indications of impairment and, if this is the case, performs additional impairment tests. The main impairment indicators used by the Group are as follows: internal impairment indicator: a material deterioration in the ratio of recurring operating income before depreciation and amortisation to net revenues excluding petrol between the budget and the most recent forecast, external impairment indicators: a material increase in the discount rate and/or a severe downgrade in the GDP growth forecasts issued by the IMF or the OECD. Focus on Italy Note that an impairment loss of 700 million euros was recorded against Italian goodwill in 2017 to reflect the significant decline in the value in use of the Group's operations in this country. In light of this, an in-depth analysis was carried out to determine the Italian operations' fair value. This analysis adopted a multi-criteria valuation approach which took into account multiples observed for comparable companies in the retail sector in Europe, and the market value of Italian real estate assets, determined based on independent appraisals. In the impairment tests carried out at December 31, 2020, partial impairment of Italian goodwill was recorded in an amount of 104 million euros. This reflected a decrease in 2020 net sales, results, and the value of real estate assets in comparison with end-2019. The multi-criteria approach was also used to test goodwill for impairment at June 30, 2021 (as at December 31, 2019 and 2020). This approach did not lead to any additional impairment of Italian goodwill. Ultimately, at June 30, 2021, the tests performed by the Group did not lead to the recognition of any goodwill impairment losses. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 27 - Notes to the Condensed Consolidated Financial Statements 7.2 Property and equipment June 30, 2021 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land 2,763 (77) 2,686 Buildings 10,656 (5,886) (224) 4,547 Equipment, fixtures and fittings 15,150 (12,076) (302) 2,771 Other fixed assets 429 (323) (3) 104 Assets under construction 513 513 Total Property and equipment 29,512 (18,285) (607) 10,620 December 31, 2020 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land 2,672 (77) 2,595 Buildings 10,394 (5,772) (241) 4,381 Equipment, fixtures and fittings 14,741 (11,620) (315) 2,806 Other fixed assets 423 (307) (3) 113 Assets under construction 610 610 Total Property and equipment 28,840 (17,699) (636) 10,505 The increase in the net carrying amount of property, plant and equipment compared with December 31, 2020 mainly reflects the favourable translation adjustment associated with the slight increase in value of the Brazilian real at the reporting date. 7.3 Investment property (in millions of euros) June 30, 2021 December 31, 2020 Investment property (gross carrying amount) 503 448 Depreciation and impairment Total Investment property, net (204) 298 (189) 259 Investment property consists mainly of shopping malls located adjacent to the Group's stores. The increase in net carrying amount of investment property compared with December 31, 2020 mainly corresponds to the Pinheiros project (i.e., 29 million euros, see Note 3.3). NOTE 8: LEASES 8.1 Right-of-use assets June 30, 2021 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land & Buildings 6,677 (2,319) (2) 4,356 Equipment, fixtures and fittings 139 (33) 106 Investment property 87 (27) 60 Total Right-of-use asset 6,903 (2,379) (2) 4,522 December 31, 2020 (in millions of euros) Gross carrying amount Depreciation Impairment Net carrying amount Land & Buildings 6,258 (1,934) (2) 4,322 Equipment, fixtures and fittings 139 (17) 122 Investment property 83 (20) 63 Total Right-of-use asset 6,479 (1,971) (2) 4,506 Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 28 - Notes to the Condensed Consolidated Financial Statements Change in right-of-use assets (in millions of euros) Gross carrying amount June 30, 2021 Depreciation & Impairment Net carrying amount At December 31, 2020 6,479 (1,973) 4,506 Increase 416 416 Decrease (231) 79 (152) Depreciation (470) (470) Translation adjustment Changes in scope of consolidation and other movements (1) At June 30, 2021 61 177 6,903 (19) 2 (2,381) 42 180 4,522 (1) The amounts reported on this line include changes in scope of consolidation for 187 million euros (mainly relating to the acquisition of Supersol stores for 119 million euros and Wellcome for 67 million euros). 8.2 Lease commitments Lease commitments by maturity (in millions of euros) June 30, 2021 December 31, 2020 Due within 1 year 977 936 Due in 1 to 2 years 904 873 Due in 2 to 5 years 1,716 1,816 Due beyond 5 years 1,140 1,098 Total Lease commitments 4,738 4,723 NOTE 9: INCOME TAX The income tax expense for first-half 2021 amounted to 187 million euros, i.e., an effective tax rate of 34%, compared with the 237 million euro expense recorded in first-half 2020 as restated, which corresponded to an effective tax rate of 79%. This decrease over first-half 2021 reflects: • the 50% reduction in the CVAE rate (local business tax) in France from 2021 onwards, and the tax rate applied on the gains from the disposal of Market Pay in France and the Pinheiros exchange of assets in Brazil (see Note 3.3). This rate decrease in first-half 2021 was partially offset by the increase in the applicable tax rate in Argentina from this year, i.e., 35% versus 30% previously. As a reminder, the restated first-half 2020 rate mainly reflected the fact that no deferred tax assets were recognised on temporary differences or in respect of tax loss carryforwards arising on significant non-recurring expenses recognised during the period. Furthermore, the probable recoverability of deferred tax assets recognised in the consolidated statement of financial position at December 31, 2020 was confirmed at June 30, 2021, based in particular on a comparison between the budgeted performance of the different countries and the most recent forecasts. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 29 - Notes to the Condensed Consolidated Financial Statements NOTE 10: INVESTMENTS IN COMPANIES ACCOUNTED FOR BY THE EQUITY METHOD 10.1 Changes in investments in equity-accounted companies Changes in investments in equity-accounted companies can be analysed as follows: (in millions of euros) At December 31, 2020 1,172 Acquisitions and capital increases 103 Disposals Dividends (38) Share of net income (10) Translation adjustment 1 Other movements At June 30, 2021 4 1,232 10.2 Information about associates At June 30, 2021, the two main associates were Carmila with a carrying amount of 737 million euros (December 31, 2020: 782 million euros) and Provencia, with a carrying amount of 135 million euros (December 31, 2020: 130 million euros). These two associates represented 71% of the total value of equity-accounted companies at end-June 2021. Main transactions in first-half 2021 On April 29, 2021, the Group completed the sale of a 60% interest in Market Pay (see Note 3.3). The Group's residual interest in Market Pay (around 40%) was accounted for by the equity method in the consolidated financial statements as from April 29, 2021, for an amount of 73 million euros. In May 2021, Carrefour and Argan created the real estate company Cargan-LOG (see Note 3.3). This entity, which is 60%-owned by Argan and 40% by Carrefour (through the contribution of three warehouses), has been accounted for by the equity method in the consolidated financial statements as from May 2021, for a total amount of 30 million euros. A partial reversal of the existing provision of 4 million euros on the Showroomprivé shares, against non-recurring income, was carried out to align their value with the company's share price at June 30, 2021. Following transactions in Carmila’s capital in June 2021, the Group's ownership interest in Carmila decreased slightly from 35.40% to 35.37%. The associated dilutive effect, which was not material, was recognised in non-recurring income and expenses in accordance with the Group's accounting principles. As a reminder, Carmila is accounted for by the equity method because the governance established with the co-investors allows Carrefour to exercise significant influence over Carmila (see Note 9.2 to the 2020 consolidated financial statements). Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 30 - Notes to the Condensed Consolidated Financial Statements NOTE 11: PROVISIONS AND CONTINGENT LIABILITIES 11.1 Changes in provisions (in millions of euros) December 31, 2020 Increases Reversals of surplus provisions Utilisations Discounting adjustment Translation adjustment (3) Other (4) June 30, 2021 Employee benefits 1,152 33 (39) (28) (63) 2 7 1,063 Claims and litigation 788 131 (56) (40) 34 0 856 Tax litigations 524 12 (36) (16) 29 (0) 512 Employee related disputes 113 29 (9) (18) 2 (1) 117 Legal disputes 150 90 (11) (7) 3 1 227 Restructuring 245 262 (12) (96) 0 399 Provisions related to banking and insurance businesses (1) Other (2) 261 224 10 24 (2) (15) (6) (18) 4 1 4 268 219 Total Provisions 2,670 460 (125) (188) (63) 41 11 2,806 (1) Provisions relating to the banking and insurance businesses include provisions recognised for credit risk on loan commitments (off-balance sheet) in accordance with IFRS 9, and provisions set aside to cover insurance underwriting risk. (2) Other provisions mainly concern onerous contracts. They also include provisions for dismantling assets under property leases or for restoring assets to the requisite condition, recognised against the related right-of-use asset following application of IFRS 16. (3) Translation adjustments correspond almost entirely to the slight increase in the value of the Brazilian real over the period. (4) Other changes are not material over the period; they correspond mainly to the provisions booked in the preliminary opening balance sheets in connection with the acquisitions of Wellcome in Taiwan (see Note 2.2 to the 2020 consolidated financial statements) and Supersol in Spain (see Note 3.3). To the best of the Group's knowledge, there are no contingent liabilities that may be considered likely to have a material impact on the Group's results, financial position, assets and liabilities or business. The main material changes occurred during the first half of 2021, concerning the contingent liabilities mentioned in the Note 11.3 to the 2020 consolidated financial statements for the year, are described below. In its decision of April 28, 2021, the Belgian competition authority endorsed the commitments made by Carrefour Belgium and Provera as part of their purchasing alliance. The authority thereby ended the investigation that had been opened in May 2019. In its decision of April 26, 2021, the Court of Appeal for economic offences dismissed the indictment issued on October 1, 2019 against Carrefour Argentina (INC SA) for complicity in unauthorised financial intermediation for events which occurred between 2012 and 2015 in a context of hyperinflation. The case has again been referred to a court of first instance. Under the settlement agreement dated June 11, 2021 (“Termo de ajustamento de Conduta”), following the death of Mr Silveira Freitas after he was beaten by security guards employed by a third party at the Porto Alegre store, Carrefour Brazil has undertaken to take a variety of measures aimed at strengthening its initiatives against racism, discrimination and violence. The settlement has put an end to the various investigations and class actions brought by public authorities and non-profit organisations. In August 2019, Atacadão SA notified the Group of two criminal proceedings initiated by the State of São Paolo’s public prosecutor (GEDEC) against public officials and company employees (who have since been fired or suspended) concerning the conditions under which the operating licences for the company's headquarters and two stores were renewed. Atacadão SA is not party to these criminal proceedings but the municipality of São Paolo initiated two civil proceedings against the company on June 27, 2020 and May 25, 2021. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 31 - Notes to the Condensed Consolidated Financial Statements 11.2 Post-employment benefits The Group's post-employment benefit obligation (defined benefit plans) is calculated on the basis of actuarial assumptions such as future salary levels, retirement age, mortality, staff turnover and the discount rate. A discount rate of 0.80% was used for France, Belgium and Italy at June 30, 2021, compared with 0.40% at December 31, 2020. The discount rate is based on an index of AA-rated corporate bonds with maturities that correspond to the expected cash outflows of the plans. (in millions of euros) France Belgium Italy Other countries Group total Provision at December 31, 2020 771 243 106 33 1,152 Service costs Settlement and plan amendments (1) Interest cost (discount effect) 22 (38) 2 9 1 0 (0) 0 0 0 31 (39) 3 Return on plan assets (0) (0) (0) (0) Other items (1) (1) Movements recorded in the income statement (16) 10 (0) 0 (6) Benefit directly paid by the employer Effect of changes in scope of consolidation (2) Change in actuarial gains and losses (6) 0 (39) (8) (19) (6) (4) 7 (19) 7 (63) Other (4) (3) (7) Provision at June 30, 2021 710 222 96 36 1,063 (1) This line primarily includes the impact of curtailments recognised following the remeasurement of commitments made under the restructuring plans implemented in France (Note 3.2) and recognised in non-recurring income. (2) The amounts reported on this line include changes in scope of consolidation for 7 million euros relating to Wellcome in Taiwan (see Note 3.3). The cost of services rendered was recognised in employee benefits expense, and interest income and expenses were recognised in financial income and expenses. Sensitivity tests show that: a 25-bps increase in the discount rate would reduce the defined benefit obligation under the French, Belgian and Italian plans by around 31 million euros; a 25-bps increase in the inflation rate would increase the defined benefit obligation under the French, Belgian and Italian plans by around 32 million euros. 11.3 Performance share plan On February 17, 2021, based on the Compensation Committee's recommendation, the Board of Directors decided to use the authorisation given in the 25th resolution of the Annual Shareholders’ Meeting held on June 14, 2019 to grant new or existing performance shares. The plan provided for the grant of a maximum of 3,000,000 shares (representing 0.37% of the share capital). The shares will vest only if the grantee remains with the Group until the end of the vesting period and several performance conditions are met. The vesting period is three years from the date of the Board of Directors' meeting at which the rights were granted. The number of shares that vest will depend on the achievement of four performance conditions: two conditions linked to financial performance (recurring operating income growth for 25% and net free cash flow growth for 25%); a condition linked to an external performance criterion (TSR), benchmarking the Carrefour share price against a panel of companies in the retail sector (for 25%); and a CSR-related condition for 25%. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 32 - Notes to the Condensed Consolidated Financial Statements Details of the 2021 performance share plan are presented below. Shareholders' Meeting date Grant date (1) Vesting date (2) Total number of shares allotted at the grant date Plan 2021 Performance June 14, 2019 February 17, 2021 February 17, 2024 3,000,000 Number of grantees at the grant date Fair value of each share (in €) (3) 691 11.85 (1) Date of the Board of Directors' decision to grant shares. (2) The shares will vest only if the grantee remains with the Group until the end of the vesting period and several performance conditions are met. (3) The fair value of shares is determined according to a reference price adjusted for dividends expected during the vesting period. 11.4 Restructuring Provisions set aside at December 31, 2020 for restructuring in an amount of 245 million euros mainly comprised costs related to plans undertaken to streamline operating structures as part of the first pillar of the Group’s transformation plan, chiefly in France. These costs primarily corresponded to severance pay, early retirement benefits, costs of notice periods not served, and costs of training and other support measures offered to employees being made redundant under restructuring plans. Some of these provisions were used during first-half 2021 and additional provisions were set aside in respect of the transformation plan for the headquarters in France (see Note 3.2). Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 33 - Notes to the Condensed Consolidated Financial Statements NOTE 12: OTHER COMPREHENSIVE INCOME AND EARNINGS PER SHARE 12.1 Other comprehensive income Group share (in millions of euros) First-half 2021 First-half 2020 restated Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges 39 (9) 30 21 0 21 Changes in the fair value of debt instruments through other comprehensive income (1) 0 (1) (2) 0 (1) Exchange differences on translating foreign operations 172 0 172 (591) 0 (591) Items that may be reclassified subsequently to profit or loss 209 (8) 201 (572) 1 (572) Remeasurements of defined benefit plans obligation 63 (14) 49 (0) 0 (0) Changes in the fair value of equity instruments through other comprehensive income 0 0 0 0 (0) 0 Items that will not be reclassified to profit or loss 63 (14) 49 (0) (0) (0) Total Other comprehensive income/(loss) - Group share 272 (22) 250 (573) 1 (572) Non-controlling interests (in millions of euros) First-half 2021 First-half 2020 restated Pre-tax Tax Net Pre-tax Tax Net Effective portion of changes in the fair value of cash flow hedges 2 (1) 1 0 (0) 0 Changes in the fair value of debt instruments through other comprehensive income (1) 0 (1) (2) 0 (1) Exchange differences on translating foreign operations 79 0 79 (289) 0 (289) Items that may be reclassified subsequently to profit or loss 79 (1) 79 (290) 0 (290) Remeasurements of defined benefit plans obligation 1 0 1 (0) (0) (0) Changes in the fair value of equity instruments through other comprehensive income 0 0 0 0 0 0 Items that will not be reclassified to profit or loss 1 0 1 (0) (0) (0) Total Other comprehensive income/(loss) - Non-controlling interests 80 (0) 79 (291) 0 (290) Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 34 - Notes to the Condensed Consolidated Financial Statements 12.2 Earnings per share (Group share) Basic earnings per share First-half 2021 First-half 2020 restated Net income/(loss) from continuing operations 275 (28) Net income/(loss) from discontinued operations 23 3 Net income/(loss) for the period Weighted average number of shares outstanding (1) Basic income/(loss) from continuing operations - per share (in €) 298 803,785,482 0.34 (25) 801,347,527 (0.04) Basic income/(loss) from discontinued operations -per share (in €) 0.03 0.00 Basic income/(loss) - per share (in €) 0.37 (0.03) (1) In accordance with IAS 33, the weighted average number of shares used to calculate earnings per share as of June 30, 2021 was adjusted to take into account the impact of the share buyback programme (see Note 3.6). Diluted earnings per share First-half 2021 First-half 2020 restated Net income/(loss) from continuing operations 275 (28) Net income/(loss) from discontinued operations 23 3 Net income/(loss) for the period 298 (25) Weighted average number of shares outstanding, before dilution 803,785,482 801,347,527 Potential dilutive shares 3,165,431 Performance shares 3,165,431 Diluted weighted average number of shares outstanding 806,950,913 801,347,527 Diluted income/(loss) from continuing operations - per share (in €) 0.34 (0.04) Diluted income/(loss) from discontinued operations - per share (in €) 0.03 0.00 Diluted income/(loss) - per share (in €) 0.37 (0.03) Free shares awarded under the 2019 and 2020 plans were not considered to have a dilutive impact in first-half 2020, since the Group reported a net loss from continuing operations during that period. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 35 - Notes to the Condensed Consolidated Financial Statements NOTE 13: FINANCIAL ASSETS AND LIABILITIES, FINANCE COSTS AND OTHER FINANCIAL INCOME AND EXPENSES 13.1 Financial instruments by category Breakdown by category At June 30, 2021 (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OCI Amortised cost Derivative instruments not designated as hedges Derivative instruments designated as hedges Fair value Investments in non-consolidated companies 112 13 99 112 Other long-term investments 1,135 127 272 736 1,135 Other non-current financial assets 1,247 140 371 736 1,247 Consumer credit granted by the financial services companies 5,549 5,549 5,549 Trade receivables 2,698 2,698 2,698 Other current financial assets Other current assets (1) Cash and cash equivalents 400 732 1,294 1,294 61 201 732 34 103 400 732 1,294 ASSETS 11,920 1,433 432 9,916 34 103 11,920 Total borrowings 7,184 7,078 33 73 7,540 Total lease commitment 4,738 4,738 4,738 Total consumer credit financing 4,813 4,799 1 13 4,813 Suppliers and other creditors Other current payables (2) LIABILITIES 11,385 2,292 30,412 11,385 2,292 30,292 34 86 11,385 2,292 30,768 Breakdown by category At December 31, 2020 (in millions of euros) Carrying amount Fair value through profit or loss Fair value through OCI Amortised cost Derivative instruments not designated as hedges Derivative instruments designated as hedges Fair value Investments in non-consolidated companies 105 12 94 105 Other long-term investments 1,106 252 150 704 1,106 Other non-current financial assets 1,212 264 244 704 1,212 Consumer credit granted by the financial services companies 5,227 5,227 5,227 Trade receivables 2,526 2,526 2,526 Other current financial assets Other current assets (1) Cash and cash equivalents 368 484 4,439 4,439 57 191 484 20 101 368 484 4,439 ASSETS 14,256 4,703 300 9,132 20 101 14,256 Total borrowings 7,389 7,324 32 32 7,807 Total lease commitment 4,723 4,723 4,723 Total consumer credit financing 4,574 4,558 1 15 4,574 Suppliers and other creditors Other current payables (2) LIABILITIES 12,560 2,524 31,769 12,560 2,524 31,689 33 47 12,560 2,524 32,188 (1) Excluding prepaid expenses. (2) Excluding deferred revenue. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 36 - Notes to the Condensed Consolidated Financial Statements Analysis of assets and liabilities measured at fair value The table below shows assets and liabilities presented according to the fair value hierarchy provided for in IFRS 13 – Fair Value Measurement (see Note 1.5): (in millions of euros) June 30, 2021 Level 1 Level 2 Level 3 Total Investments in non-consolidated companies 13 99 112 Other long-term investments 399 399 Other current financial assets - Fair Value through OCI 61 61 Other current financial assets - Derivative instruments 137 137 Cash and cash equivalents 1,294 1,294 Consumer credit financing - Derivative instruments recorded in liabilities (14) (14) Borrowings - Derivative instruments recorded in liabilities (106) (0) (106) (in millions of euros) December 31, 2020 Level 1 Level 2 Level 3 Total Investments in non-consolidated companies 12 94 105 Other long-term investments 402 402 Other current financial assets - Fair Value through OCI 57 57 Other current financial assets - Derivative instruments 122 122 Cash and cash equivalents 4,439 4,439 Consumer credit financing - Derivative instruments recorded in liabilities (15) (15) Borrowings - Derivative instruments recorded in liabilities (64) (0) (64) 13.2 Net debt 13.2.1 Breakdown of net debt Consolidated net debt at June 30, 2021 amounted to 5,525 million euros, breaking down as follows: (in millions of euros) June 30, 2021 December 31, 2020 Bonds and notes 6,011 6,822 Other borrowings 442 503 Commercial paper 625 Total borrowings excluding derivative instruments recorded in liabilities 7,078 7,324 Derivative instruments recorded in liabilities 106 64 TOTAL BORROWINGS [1] 7,184 7,389 of which borrowings due in more than one year 6,146 6,305 of which borrowings due in less than one year 1,038 1,084 Other current financial assets (1) Cash and cash equivalents 365 1,294 334 4,439 TOTAL CURRENT FINANCIAL ASSETS [2] 1,659 4,773 NET DEBT [1] - [2] 5,525 2,616 (1) The current portion of amounts receivable from finance sub-leasing arrangements is not included in this caption (see Note 13.2.5). The increase in net debt between December 31 and June 30 is due to seasonal effects, with the year-end figure being structurally lower due to the significant volume of business recorded during December. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 37 - Notes to the Condensed Consolidated Financial Statements 13.2.2 Bond debt Face value Book value of the debt (in millions of euros) Maturity December 31, 2020 Issues Repayments Translation adjustments June 30, 2021 June 30, 2021 Public placements by Carrefour SA EMTN, EUR, 11 years, 3.875% EMTN, EUR, 8 years, 1.75% Cash-settled convertible bonds, USD 500 million, 6 years, 0% EMTN, EUR, 8 years, 0.750% EMTN, EUR, 10 years, 1.25% Cash-settled convertible bonds, USD 500 million, 6 years, 0% EMTN, EUR, 5 years, 0.88% EMTN, EUR, 7.5 years, 1.75% EMTN, EUR, 8 years, 1.00% EMTN, EUR, 7.5 years, 2.625% 2021 2022 2023 2024 2025 2024 2023 2026 2027 2027 6,686 871 1,000 407 750 750 407 500 500 500 1,000 - - - - - (871) (871) - - - - - 27 - 13 - 13 - - - 5,841 1,000 421 750 750 421 500 500 500 1,000 5,758 986 402 747 747 389 498 497 497 993 Placements by Atacadão SA Debentures, BRL 500 million, 5 years, 105.75% CDI Debentures, BRL 450 million, 3 years, 100% CDI Debentures, BRL 350 million, 5 years, 100% CDI Debentures, BRL 200 million, 7 years, 100% CDI 2023 2022 2024 2026 235 78 71 55 31 - - - - - - - - 18 6 5 4 2 253 84 76 59 34 253 84 76 59 34 Total Bonds and notes 6,921 (871) 44 6,095 6,011 On April 25, 2021, the Group redeemed 871 million euros worth of 3.875% 11-year bonds. The Group’s financial position and liquidity were solid at end-June 2021. The average maturity of bond debt of Carrefour SA was 3.6 years at end-June 2021, compared with 3.6 years at end- December 2020 and 4.1 years at end-June 2020. 13.2.3 Other borrowings (in millions of euros) June 30, 2021 December 31, 2020 Latin America borrowings 300 302 Other borrowings Accrued interest (1) Other financial liabilities Total Other borrowings 52 38 52 442 90 55 55 503 (1) Accrued interest on total borrowings, including bonds and notes. “Latin America borrowings” include in particular the financing facilities in US dollars and euros set up and swapped for Brazilian reals by Brazilian subsidiary Atacadão in April 2020, for an amount of 1,500 million Brazilian reals (approximately 253 million euros at the closing price on June 30, 2021). These euro- and US dollar-denominated facilities, which were originally fixed-rate, were converted into Brazilian reals and indexed to the CDI rate at the time of issue through cross-currency swaps over the life of the borrowings. These instruments are documented and recognised as fair value hedges. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 38 - Notes to the Condensed Consolidated Financial Statements 13.2.4 Cash and cash equivalents (in millions of euros) June 30, 2021 December 31, 2020 Cash 855 1,482 Cash equivalents 439 2,957 Total Cash and cash equivalents 1,294 4,439 There are no material restrictions on the Group's ability to recover or use the assets and settle the liabilities of foreign operations, except for those resulting from local regulations in its host countries. The local supervisory authorities may require banking subsidiaries to comply with certain capital, liquidity and other ratios and to limit their exposure to other Group parties. At June 30, 2021, as at December 31, 2020, there was no restricted cash. 13.2.5 Other current financial assets (in millions of euros) June 30, 2021 December 31, 2020 Derivative instruments Financial receivable (1) Other current financial assets - Fair Value through OCI 137 136 61 122 113 57 Sub-lease receivable - less than one year 34 34 Deposits with maturities of more than three months 22 33 Other 8 9 Total Other current financial assets 400 368 (1) This amount represents the financial receivable relating to the 20% stake in Carrefour China. The increase of 23 million euros in comparison with December 31, 2020 has been booked against net income from discontinued operations. 13.3 Analysis of borrowings (excluding derivative instruments recorded in liabilities) 13.3.1 Analysis by interest rate June 30, 2021 December 31, 2020 (in millions of euros) Before hedging After hedging Before hedging After hedging Fixed rate borrowings 6,158 5,895 7,047 6,785 Variable rate borrowings Total Borrowings (excluding derivative instruments recorded in liabilities) 920 7,078 1,183 7,078 278 7,324 539 7,324 13.3.2 Analysis by currency (in millions of euros) June 30, 2021 December 31, 2020 Euro 6,520 6,784 Brazilian real 556 539 Argentine peso 0 0 Polish zloty 1 Romanian lei 1 1 Total Borrowings (excluding derivative instruments recorded in liabilities) 7,078 7,324 The above analysis includes the effect of hedging. Euro-denominated borrowings represented 92% of total borrowings (excluding derivative instruments recorded in liabilities) at June 30, 2021 (December 31, 2020: 93%). Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 39 - Notes to the Condensed Consolidated Financial Statements 13.3.3 Analysis by maturity (in millions of euros) June 30, 2021 December 31, 2020 Due within 1 year 932 1,019 Due in 1 to 2 years 2,150 1,216 Due in 2 to 5 years 2,495 3,047 Due beyond 5 years 1,502 2,042 Total Borrowings (excluding derivative instruments recorded in liabilities) 7,078 7,324 13.4 Changes in liabilities arising from financing activities (in millions of euros) Other current financial assets (1) Borrowings Total Liabilities arising from financing activities At December 31, 2020 (334) 7,389 7,055 Changes from financing cash flows (3) (304) (307) Change in current financial assets (3) (3) Repayments of bonds (871) (871) Net financial interest paid Issuance of commercial paper (2) Other changes in borrowings (82) 625 24 (82) 625 24 Non-cash changes (28) 99 71 Effect of changes in foreign exchange rates (5) 44 39 Effect of changes in scope of consolidation (0) 10 10 Changes in fair values (5) (3) (8) Finance costs, net 80 80 Other changes (18) (32) (50) At June 30, 2021 (365) 7,184 6,819 (1) The current portion of amounts receivable from finance sub-leasing arrangements is not included in this caption. (2) In first-half 2021, the Group issued short-term commercial paper to secure its liquidity. 13.5 Other non-current financial assets (in millions of euros) June 30, 2021 December 31, 2020 Deposits and guarantees (1) Financial services companies' portfolio of assets Sub-lease receivable - more than one year (2) Investments in non-consolidated companies 571 400 92 112 518 403 108 105 Other 73 77 Total Other non-current financial assets 1,247 1,212 (1) Deposits and guarantees include legal deposits paid in Brazil in connection with tax disputes (relating mainly to tax reassessments challenged by the Group) pending final court rulings, as well as security deposits paid to lessors under property leases. (2) Amounts receivable from finance sub-leasing arrangements were recognised following the application of IFRS 16 from January 1, 2019. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 40 - Notes to the Condensed Consolidated Financial Statements 13.6 Finance costs and other financial income and expenses This item corresponds mainly to finance costs. In accordance with IFRS 16, from 2019 it also includes interest expenses on leases along with interest income on finance sub-leasing arrangements. Other financial income and expenses consist for the most part of late payment fees payable on certain liabilities, financial transaction taxes and the impacts of hyperinflation in Argentina. (in millions of euros) First-half 2021 First-half 2020 restated Interest income from loans and cash equivalents (5) 4 Interest income from bank deposits (5) 4 Interest income from loans 0 (0) Finance costs (74) (95) Interest expense on financial liabilities measured at amortised cost, adjusted for income and expenses from interest rate instruments (72) (84) Cost of receivables discounting in Brazil (3) (11) Finance costs, net (80) (91) Interest charge related to leases commitment (52) (60) Interest income related to financial sublease contracts 0 1 Net interest related to lease commitment (52) (59) Interest expense on defined employee benefit debt (3) (5) Interest income on pension plan assets 0 1 Financial transaction tax (10) (10) Late interest due in connection with tax reassessments and employee-related litigation (15) (13) Dividends received on available-for-sale financial assets 1 2 Proceeds from the sale of available-for-sale financial assets 2 9 Cost of sold available-for-sale financial assets 2 (5) Exchange gains and losses Impact of hyperinflation in Argentina - application of IAS 29 (1) Cost of bond buybacks 6 28 (6) (15) 12 (5) Changes in the fair value of interest rate derivatives (8) 1 Other 1 (5) Other financial income and expenses (1) (34) Finance costs and other financial income and expenses, net (132) (185) Financial expenses Financial income (257) 124 (344) 159 (1) In accordance with IAS 29 – Financial Reporting in Hyperinflationary Economies, results for the first halves of 2021 and 2020 include the impact of hyperinflation in Argentina (see Note 1.5). Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 41 - Notes to the Condensed Consolidated Financial Statements NOTE 14: OTHER INFORMATION 14.1 Scope of consolidation 14.1.1 Main changes in the scope of consolidation in first-half 2021 The acquisition of Supersol in Spain, the investment in Cargan-LOG in France accounted for by the equity method, and the 60% disposal of Market Pay in France are described in Note 3.3. With the exception of these transactions, there were no other material changes in the Carrefour group’s scope of consolidation in first-half 2021. 14.1.2 Main changes in the scope of consolidation in first-half 2020 The main changes in the scope of consolidation in first-half 2020 concerned the acquisitions of Potager City and Dejbox as well as the disposal of Rue du Commerce in France. 14.2 Related parties Group transactions with related parties mainly concern: compensation and other benefits granted to members of the Group Executive Committee and the Board of Directors; transactions with companies over which the Group exercises significant influence. Related-party transactions are carried out on an arm's length basis. There were no material changes in the nature of the Group’s related-party transactions in first-half 2021 compared with the situation at December 31, 2020. 14.3 Off-balance sheet commitments Commitments given and received by the Group that are not recognised in the statement of financial position correspond to contractual obligations whose performance depends on the occurrence of conditions or transactions after the period-end. There are four types of off-balance sheet commitments, related to cash transactions, retailing operations, acquisitions of securities and leases. 14.4 Subsequent events Completion of the 500 million-euro share buyback programme and reduction of Carrefour SA's share capital through the cancellation of treasury shares bought back under the programme On July 28, 2021, pursuant to the authorisation granted by the Extraordinary Shareholders’ Meeting of May 21, 2021, the Board of Directors decided to reduce the share capital of Carrefour SA by cancelling 29,475,225 treasury shares representing approximately 3.6% of the share capital. The shares were bought back between May 7, 2021 and July 9, 2021 as part of the 500 million- euro share buyback programme approved by the Board of Directors on April 20, 2021 (see Note 3.6). Following cancellation of the shares, Carrefour SA will have 788,148,615 shares outstanding and, consequently, 9,457,539 shares in treasury, representing approximately 1.2% of the share capital. Additional 200 million-euro share buyback programme Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 42 - Notes to the Condensed Consolidated Financial Statements On July 28, 2021, pursuant to the authorisation granted by the Shareholders’ Meeting of May 21, 2021, the Board of Directors approved additional transactions to buy back Carrefour shares for a maximum amount of 200 million euros, with a view to cancelling them in the future. Carrefour group – Condensed Consolidated half-year Financial Statements as of June 30, 2021 - 43 -

Semestriel, 2021, Retail, Carrefour

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Interim Report Second Quarter of 2017 Bayer Interim Report as of June 30, 2017 Key Data Bayer Group Key Data € million Q2 2016 Q2 2017 Change % H1 2016 H1 2017 Change % Sales 11,833 12,193 + 3.0 23,687 25,437 + 7.4 Change (adjusted for currency and portfolio effects) 1 + 1.9 + 5.7 Change in sales 1 Volume + 4.4% – 1.9% + 4.8% + 2.0% Price – 2.1% + 3.8% – 2.0% + 3.7% Currency – 3.8% + 1.0% – 3.3% + 1.7% Portfolio + 0.1% + 0.1% 0.0% 0.0% EBITDA 1 2,952 2,983 + 1.1 6,311 6,829 + 8.2 Special items 1 (102) (73) (130) (120) EBITDA before special items 1 3,054 3,056 + 0.1 6,441 6,949 + 7.9 EBITDA margin before special items 1 25.8% 25.1% 27.2% 27.3% EBIT 1 2,138 2,151 + 0.6 4,458 5,267 + 18.1 Special items 1 (104) (205) (376) (290) EBIT before special items 1 2,242 2,356 + 5.1 4,834 5,557 + 15.0 Financial result (314) (405) – 29.0 (629) (754) – 19.9 Net income (from continuing and discontinued operations) 1,380 1,224 – 11.3 2,891 3,307 + 14.4 Earnings per share (from continuing and discontinued operations) (€) 1 1.67 1.40 – 16.2 3.50 3.79 + 8.3 Core earnings per share (from continuing operations) (€) 1 2.07 1.81 – 12.6 4.42 4.44 + 0.5 Net cash provided by operating activities (from continuing and discontinued operations) 1,982 2,313 + 16.7 3,304 3,154 – 4.5 Cash outflows for capital expenditures 589 476 – 19.2 952 891 – 6.4 Research and development expenses 1,122 1,165 + 3.8 2,231 2,323 + 4.1 Depreciation, amortization and impairments 814 832 + 2.2 1,853 1,562 – 15.7 Number of employees at end of period 2 115,576 115,680 + 0.1 115,576 115,680 + 0.1 Personnel expenses (including pension expenses) 2,789 2,826 + 1.3 5,621 5,950 + 5.9 2016 figures restated 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Employees calculated as full-time equivalents (FTEs) 2 Full Year 2016 46,769 + 3.5% + 4.2% – 0.7% – 2.0% 0.0% 10,785 (517) 11,302 24.2% 7,042 (1,088) 8,130 (1,155) 4,531 5.44 7.32 9,089 2,578 4,666 3,743 115,200 11,357 Bayer Interim Report as of June 30, 2017 Contents Bayer Group Key Data Bayer Interim Group Management Report as of June 30, 2017 1. Overview of Sales, Earnings and Financial Position 1.1 Earnings Performance of the Bayer Group 1.2 Business Development by Segment 1.3 Asset and Financial Position of the Bayer Group 2. Research, Development, Innovation 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.2 Opportunities and risks Condensed Consolidated Interim Financial Statements as of June 30, 2017 Bayer Group Consolidated Income Statements Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Changes in Equity Notes to the Condensed Consolidated Interim Financial Statements Responsibility Statement Review Report Financial Calendar Masthead Reporting Principles The Bayer Interim Report complies with the requirements made of a half-year financial report in accord- ance with the applicable provisions of the German Securities Trading Act (WpHG) and, pursuant to Section 37w of the WpHG, comprises condensed consolidated interim financial statements and an interim group management report, as well as a responsibility statement. Bayer has prepared the condensed consolidated interim financial statements according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (E.U.). The condensed consolidated interim financial statements also comply with the IFRS published by the IASB. The interim group management report should be read in conjunction with our Annual Report 2016, which contains a detailed description of our business operations. Contents 2 4 5 5 9 21 24 28 28 29 30 30 31 32 33 34 35 52 53 55 55 3 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report Second quarter of 2017 Bayer: Group performance matches prior year despite declines at Crop Science > Group sales increase by 1.9% (Fx & portfolio adj.) to €12.2 billion > EBITDA before special items level with the prior year, at €3.1 billion (+ 0.1%) > Pharmaceuticals posts strong increase in earnings and margins > Brazil business weighs on Crop Science > Consumer Health encounters difficult market environment in the United States > Significant increase in sales and earnings at Covestro > Net income €1.2 billion (–11.3%) > Core earnings per share €1.81 (–12.6%) > Monsanto acquisition on track > Group outlook for 2017 adjusted 4 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Economic Position of the Bayer Group The Bayer Group increased sales by 1.9% (Fx & portfolio adj.) to €12.2 billion in the second quarter of 2017. EBITDA before special items matched the prior-year period, coming in at €3.1 billion (+ 0.1%). We achieved encouraging growth in earnings and margins at Pharmaceuticals and Animal Health. Business declined at Consumer Health, in particular due to the difficult market environment in the United States. Against the backdrop of high inventories in Brazil, the world’s second-largest agriculture market, we post- ed substantial declines in sales and earnings at Crop Science. As such, sales and earnings of our Life Science businesses were down. Covestro once again posted substantial growth in sales and earnings. Key Events On June 7, 2017, Bayer reduced its directly held interest in Covestro from 53.3% to 44.9%, by placing 17.25 million shares at a price of €62.25 per share. Bayer AG’s interest in Covestro was reduced by a further 4 percentage points through the contribution of Covestro shares to the Bayer Pension Trust e. V. In addition, Bayer has issued €1 billion in bonds maturing in 2020 that can be redeemed in cash, Covestro shares or a combination of the two. Covestro continues to be fully consolidated in Bayer’s financial state- ments, as, even with these transactions having been completed, Bayer will still hold the de facto majority at a Covestro stockholders’ meeting. On June 30, 2017, Bayer filed an application with the European Commission seeking approval for the planned acquisition of Monsanto, representing a further significant milestone in the transaction. Bayer also announced on June 30, 2017, that it was revising its annual guidance. 1. Overview of Sales, Earnings and Financial Position 1.1 Earnings Performance of the Bayer Group 1 Second quarter of 2017 Group sales Sales of the Bayer Group increased by 1.9% (Fx & portfolio adj.) to €12,193 million in the second quarter of 2017 (reported: + 3.0%). Germany accounted for €1,216 million of this figure. Sales of the Life Science businesses declined by 2.8% (Fx & portfolio adj.) to €8,714 million. Pharmaceuticals posted sales growth of 4.4% (Fx & portfolio adj.) to €4,304 million, mainly due to our key growth products continuing to deliver strong performance. Sales at Consumer Health declined year on year, falling by 2.2% (Fx. & portfolio adj.) to €1,542 million. Sales at Crop Science fell by a significant 15.8% (Fx & portfolio adj.) to €2,163 million, primarily due to its Brazil business. Excluding Brazil, sales matched the prior-year level. Animal Health achieved growth of 2.1% (Fx & portfolio adj.), with sales rising to €450 million. Sales at Covestro improved considerably, increasing by 15.8% (Fx & portfolio adj.) to €3,479 million. EBITDA before special items At €3,056 million, EBITDA before special items of the Bayer Group matched the prior-year level (+ 0.1%). EBITDA before special items at Pharmaceuticals improved by a very encouraging 9.5% to €1,481 million. At Consumer Health, EBITDA before special items declined by 4.3% to €314 million. EBITDA before spe- cial items at Crop Science decreased by a significant 52.2% to €317 million, mainly due to provisions for product returns in Brazil. EBITDA before special items of Animal Health climbed by 16.0% to €116 million. Overall, EBITDA before special items of our Life Science businesses declined by 10.5% to €2,247 million. Covestro raised EBITDA before special items by a considerable 49.0% to €809 million. 1 For a definition of alternative performance measures, see the Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 5 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Depreciation, amortization and special items Depreciation, amortization and impairment losses were 2.2% higher in the second quarter of 2017, at €832 million (Q2 2016: €814 million), comprising €422 million (Q2 2016: €447 million) in amortization and impairments on intangible assets and €410 million (Q2 2016: €367 million) in depreciation and impairments on property, plant and equipment. Impairment losses and impairment loss reversals amounted to €126 million, of which €122 million (Q2 2016: €0 million) constituted special items. In addition, an amount of €10 million was included in special items as accelerated depreciation. EBIT EBIT of the Bayer Group came to €2,151 million, matching the prior-year period (Q2 2016: €2,138 million; + 0.6%). This figure reflected net special charges of €205 million (Q2 2016: €104 million). These mainly comprised €118 million in value adjustments in the Pharmaceuticals segment, €47 million in charges in conjunction with the agreed acquisition of Monsanto, and €37 million in charges related to efficiency im- provement programs. EBIT before special items moved forward by 5.1% to €2,356 million (Q2 2016: €2,242 million). In the second quarter of 2017, the following special effects were taken into account in calculating EBIT and EBITDA: A 1 Special Items Reconciliation1 € million EBIT Q2 2016 EBIT Q2 2017 EBIT H1 2016 EBIT H1 2017 EBITDA Q2 2016 EBITDA Q2 2017 EBITDA H1 2016 EBITDA H1 2017 Before special items 2,242 2,356 4,834 5,557 3,054 3,056 6,441 6,949 Pharmaceuticals (11) (120) (242) (156) (10) (7) (10) (10) Consumer Health (32) (15) (64) (24) (31) (7) (50) (15) Crop Science (30) (95) (33) (132) (30) (84) (33) (108) Animal Health – – (1) – – – (1) – Reconciliation (31) (14) (36) (34) (31) (14) (36) (34) Restructuring (26) (14) (31) (29) (26) (14) (31) (29) Litigations (5) – (5) (5) (5) – (5) (5) Total special items Life Sciences (104) (244) (376) (346) (102) (112) (130) (167) Covestro – 39 – 56 – 39 – 47 Total special items (104) (205) (376) (290) (102) (73) (130) (120) of which cost of goods sold (16) (66) (199) (74) (14) (42) (22) (44) of which selling expenses (30) (40) (71) (41) (30) (8) (35) (9) of which research and development expenses (18) (77) (53) (113) (18) (3) (20) (6) of which general administration expenses (31) (58) (44) (93) (31) (58) (44) (93) of which other operating income / expenses (9) 36 (9) 31 (9) 38 (9) 32 After special items 2,138 2,151 4,458 5,267 2,952 2,983 6,311 6,829 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Net income Including a financial result of minus €405 million (Q2 2016: minus €314 million), income before income taxes was €1,746 million (Q2 2016: €1,824 million). After income tax expense of €417 million (Q2 2016: €431 million) and adjusting for income from discontinued operations after income taxes and noncontrolling interest, net income for the second quarter of 2017 amounted to €1,224 million (Q2 2016: €1,380 million). 6 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Core earnings per share Earnings per share (total) declined by 16.2% in the second quarter of 2017, to €1.40 (Q2 2016: €1.67), while core earnings per share from continuing operations fell by 12.6% to €1.81 (Q2 2016: €2.07). Material effects included the reduction of our interest in Covestro and the increased number of shares following the issuance of the mandatory convertible notes. A 2 Core Earnings per Share 1 € million Q2 2016 Q2 2017 H1 2016 H1 2017 EBIT (as per income statements) 2,138 2,151 4,458 5,267 Amortization and impairment losses / loss reversals on intangible assets 447 422 1,114 771 Impairment losses / loss reversals on property, plant and equipment, and accelerated depreciation included in special items (1) 33 17 39 Special items (other than amortization and impairment losses / loss reversals) 102 73 130 120 Core EBIT 2,686 2,679 5,719 6,197 Financial result (as per income statements) (314) (405) (629) (754) Special items in the financial result – 164 (10) 199 Income taxes (as per income statements) (431) (417) (905) (1,012) Special items in income taxes – – – – Tax effects related to amortization, impairment losses / loss reversals and special items (156) (195) (374) (332) Income after income taxes attributable to noncontrolling interest (as per income statements) (68) (253) (138) (441) Above-mentioned adjustments attributable to noncontrolling interest (5) 9 (7) 12 Core net income from continuing operations 1,712 1,582 3,656 3,869 Shares Weighted average number of shares 826,947,808 872,107,808 826,947,808 871,747,808 € Core earnings per share from continuing operations 2.07 1.81 4.42 4.44 Core earnings per share from discontinued operations 0.13 0.17 0.20 0.28 Core earnings per share from continuing and discontinued operations 2.20 1.98 4.62 4.72 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” In calculating net income and core earnings per share, the sale of a further 17.25 million shares in Covestro AG to institutional investors in the second quarter, at a price of €62.25 per share, was taken into consideration. In addition, 8 million shares of Covestro AG were deposited in Bayer Pension Trust e.V. at a price of €63.04 per share. Bayer thus reduced its interest from 53.3% to 40.9% of the issued stock. As of June 30, 2017, personnel expenses rose by 1.3% compared with June 30, 2016, to €2,826 million (Q2 2016: €2,789 million). As of the closing date, the number of employees in the Bayer Group was largely unchanged year on year, at 115,680 (June 30, 2016: 115,576; + 0.1%). 7 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position First half of 2017 Group sales Sales of the Bayer Group in the first half of 2017 increased by 5.7% (Fx & portfolio adj.) to €25,437 million (reported: + 7.4%), with Germany accounting for €2,610 million of this figure. Our Life Science businesses grew sales by 1.1% (Fx & portfolio adj.) to €18,394 million. Sales of Pharmaceuticals advanced by 5.8% (Fx & portfolio adj.) to €8,567 million. At Consumer Health, sales were flat year on year at €3,143 million (Fx & portfolio adj.: + 0.2%). Crop Science sales declined by 5.4% (Fx & portfolio adj.) to €5,283 million. Animal Health posted a 2.5% increase (Fx & portfolio adj.) in sales to €890 million. At Covestro, sales improved by a substantial 19.6% (Fx & portfolio adj.) to €7,043 million. EBITDA before special items EBITDA before special items of the Bayer Group advanced by 7.9% to €6,949 million (H1 2016: €6,441 million). Pharmaceuticals increased EBITDA before special items by a substantial 14.2% to €2,983 million. EBITDA before special items of Consumer Health came to €706 million, matching the prior- year period (– 0.7%). EBITDA before special items at Crop Science declined by a substantial 18.3% to €1,432 million, while Animal Health registered a significant earnings increase of 13.1% to €251 million. Overall, EBITDA before special items of the Life Science businesses declined slightly by 1.7% compared with the prior-year period, to €5,301 million. Covestro raised EBITDA before special items by a considerable 57.4% to €1,648 million. Depreciation, amortization and special items In the first half of 2017, depreciation, amortization and impairments amounted to €1,562 million (H1 2016: €1,853 million), comprising €771 million (H1 2016: €1,114 million) in amortization and impair- ments on intangible assets and €791 million (H1 2016: €739 million) in depreciation and impairments on property, plant and equipment. Impairment losses and impairment loss reversals amounted to €166 million (H1 2016: €298 million). Impairment losses and impairment loss reversals in the amount of €160 million (H1 2016: €244 million) as well as accelerated depreciation in the amount of €10 million constituted special items. EBIT EBIT of the Bayer Group rose by a substantial 18.1% to €5,267 million (H1 2016: €4,458 million), after net special charges of €290 million (H1 2016: €376 million). These mainly comprised €151 million in value adjustments, €68 million in charges in conjunction with the agreed acquisition of Monsanto, and €63 million in charges related to efficiency improvement programs. EBIT before special items moved for- ward by a significant 15.0% to €5,557 million (H1 2016: €4,834 million). Net income Including a financial result of minus €754 million (H1 2016: minus €629 million), income before income taxes amounted to €4,513 million (H1 2016: €3,829 million). The financial result comprised in particular a net interest expense of €268 million (H1 2016: €260 million), currency hedging costs in the amount of €233 million (H1 2016: €177 million), and interest cost of €115 million (H1 2016: €143 million) for pension and other provisions. After tax expense of €1,012 million (H1 2016: €905 million), income after income taxes was €3,501 million (H1 2016: €2,924 million). Adjusted for income from discontinued operations after income taxes and noncontrolling interest, net income came to €3,307 million (H1 2016: €2,891 million). Core earnings per share Earnings per share (total) increased to €3.79 (H1 2016: €3.50), while core earnings per share from continu- ing operations amounted to €4.44, in line with the prior-year period (H1 2016: €4.42). 8 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position 1.2 Business Development by Segment Pharmaceuticals A 3 Key Data – Pharmaceuticals Change % Change % € million Q2 2016 Q2 2017 Reported Fx & p adj. H1 2016 H1 2017 Reported Fx & p adj. Sales 4,104 4,304 + 4.9 + 4.4 7,993 8,567 + 7.2 + 5.8 Change in sales 1 Volume + 9.6% + 4.7% + 11.1% + 6.2% Price – 1.2% – 0.3% – 0.9% – 0.4% Currency – 2.9% + 0.5% – 2.9% + 1.4% Portfolio 0.0% 0.0% 0.0% 0.0% Reported Fx adj. Reported Fx adj. Sales by region Europe / Middle East / Africa 1,602 1,647 + 2.8 + 3.3 3,144 3,253 + 3.5 + 3.6 North America 1,027 1,101 + 7.2 + 5.3 2,016 2,174 + 7.8 + 5.1 Asia / Pacific 1,219 1,290 + 5.8 + 5.7 2,349 2,602 + 10.8 + 9.5 Latin America 256 266 + 3.9 + 1.6 484 538 + 11.2 + 5.8 EBITDA 1 1,342 1,474 + 9.8 2,603 2,973 + 14.2 Special items 1 (10) (7) (10) (10) EBITDA before special items 1 1,352 1,481 + 9.5 2,613 2,983 + 14.2 EBITDA margin before special items 1 32.9% 34.4% 32.7% 34.8% EBIT 1 988 1,102 + 11.5 1,686 2,321 + 37.7 Special items 1 (11) (120) (242) (156) EBIT before special items 1 999 1,222 + 22.3 1,928 2,477 + 28.5 Net cash provided by operating activities 310 528 + 70.3 1,044 1,501 + 43.8 2016 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2017 Sales Sales of Pharmaceuticals increased by 4.4% (Fx & portfolio adj.) to €4,304 million in the second quarter of 2017. Our key growth products Xarelto™, Eylea™, Xofigo™, Stivarga™ and Adempas™ once again delivered strong performance, with their combined sales rising by 16.6% (Fx adj.) to €1,555 million (Q2 2016: €1,332 million). Combined sales of the 15 best-selling Pharmaceuticals products advanced by 7.7% (Fx adj.). Our Pharmaceuticals business expanded in all regions. 9 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position A 4 Best-Selling Pharmaceuticals Products Change % Change % € million Q2 2016 Q2 2017 Reported Fx adj.1 H1 2016 H1 2017 Reported Fx adj.1 Xarelto™ 703 834 + 18.6 + 18.4 1,320 1,585 + 20.1 + 19.0 of which U.S.A.2 103 117 + 13.6 + 13.1 189 203 + 7.4 + 7.2 Eylea™ 418 458 + 9.6 + 10.6 790 904 + 14.4 + 14.7 of which U.S.A.3 0 0 . . 0 0 . . Xofigo™ 81 105 + 29.6 + 28.0 156 205 + 31.4 + 29.2 of which U.S.A. 56 62 + 10.7 + 7.6 106 124 + 17.0 + 12.8 Stivarga™ 67 83 + 23.9 + 20.8 134 158 + 17.9 + 14.9 of which U.S.A. 33 46 + 39.4 + 35.9 68 85 + 25.0 + 21.0 Adempas™ 63 75 + 19.0 + 17.9 119 148 + 24.4 + 22.2 of which U.S.A. 30 38 + 26.7 + 24.1 56 76 + 35.7 + 31.8 Total key growth products 1,332 1,555 + 16.7 + 16.6 2,519 3,000 + 19.1 + 18.2 Mirena™ product family 258 276 + 7.0 + 4.5 506 591 + 16.8 + 13.4 of which U.S.A. 168 176 + 4.8 + 2.2 337 395 + 17.2 + 13.6 Kogenate™ / Kovaltry™ 280 260 – 7.1 – 7.7 576 535 – 7.1 – 8.1 of which U.S.A. 87 91 + 4.6 + 2.8 183 185 + 1.1 – 1.3 Nexavar™ 221 229 + 3.6 + 2.1 434 436 + 0.5 – 1.7 of which U.S.A. 78 86 + 10.3 + 5.9 159 161 + 1.3 – 2.2 Betaferon™ / Betaseron™ 196 185 – 5.6 – 6.4 386 356 – 7.8 – 9.2 of which U.S.A. 111 108 – 2.7 – 4.1 211 202 – 4.3 – 6.6 Adalat™ 161 171 + 6.2 + 7.3 321 345 + 7.5 + 7.9 of which U.S.A. 0 0 . . 1 0 . . YAZ™ / Yasmin™ / Yasminelle™ 166 158 – 4.8 – 6.3 338 328 – 3.0 – 6.8 of which U.S.A. 31 25 – 19.4 – 20.7 71 45 – 36.6 – 38.3 Aspirin™ Cardio 138 148 + 7.2 + 8.0 275 305 + 10.9 + 10.9 of which U.S.A. 0 0 . . 0 0 . . Glucobay™ 128 139 + 8.6 + 10.5 267 297 + 11.2 + 12.6 of which U.S.A. 1 0 . . 2 1 . . Avalox™ / Avelox™ 88 87 – 1.1 + 0.1 186 187 + 0.5 + 1.2 of which U.S.A. 0 2 . . 0 5 . . Gadavist™ / Gadovist™ 89 97 + 9.0 + 7.9 171 186 + 8.8 + 7.1 of which U.S.A. 27 34 + 25.9 + 23.7 54 61 + 13.0 + 10.4 Total best-selling products 3,057 3,305 + 8.1 + 7.7 5,979 6,566 + 9.8 + 8.6 Proportion of Pharmaceuticals sales 74% 77% 75% 77% Total best-selling products in U.S.A. 725 785 1,437 1,543 1 Fx adj. = currency-adjusted; for definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Marketing rights owned by an affiliate of Johnson & Johnson, U.S.A. 3 Marketing rights owned by Regeneron Pharmaceuticals Inc., U.S.A. Sales by product > Our oral anticoagulant Xarelto™ once again achieved strong sales growth, primarily due to an expansion of volumes in Europe and China. Our license revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson, also developed positively. > We achieved a significant increase in sales of our eye medicine Eylea™, largely due to higher volumes in Europe and encouraging sales growth in Canada and Australia. > We once again recorded substantial sales gains for our cancer drug Xofigo™, with business benefiting from a successful market launch in Japan and growth in the United States and Europe. 10 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position > Sales of our cancer drug Stivarga™ increased substantially, primarily in the United States, where, among other things, we obtained approval for the drug as a second-line treatment for patients with hepatocellular carcinoma. > Sales of the pulmonary hypertension treatment Adempas™ advanced significantly on a currency- adjusted basis, and, as in the past, reflected the proportionate recognition of the one-time payment resulting from the sGC collaboration with Merck & Co., United States. Business continued to benefit mainly from positive performance in the United States. > We expanded our business with the hormone-releasing intrauterine devices of the Mirena™ product family (Mirena™, Kyleena™ and Jaydess™ / Skyla™), including in the United States, where we continued to benefit from the successful market launch of the Kyleena™ intrauterine device. > Sales of our Kogenate™ / Kovaltry™ blood-clotting medicines were lower than in the year-earlier quarter, due to order volumes placed by our distribution partner remaining significantly lower. > Sales of our cancer drug Nexavar™ edged higher, mainly as a result of positive performance in the United States and China. > As expected, business with our multiple sclerosis product Betaferon™ / Betaseron™ declined. This development was triggered in particular by lower demand in the United States and Latin America. > Adalat™, our product for the treatment of hypertension and coronary heart disease, once again achieved encouraging sales gains, particularly as a result of higher volumes in China. > Sales of our YAZ™ / Yasmin™ / Yasminelle™ line of oral contraceptives were down, primarily due to falling demand in Europe and generic competition in the United States. Positive business development in Asia was insufficient to offset this effect. > Sales of our diabetes treatment Glucobay™ and our Aspirin™ Cardio product for the secondary prevention of heart attacks advanced significantly as a result of a persistently favorable market environment in China. > We achieved an encouraging increase in sales of our MRI contrast agent Gadovist™, primarily due to the good development of business in the United States. Earnings EBITDA before special items of Pharmaceuticals improved by a very encouraging 9.5% to €1,481 million in the second quarter of 2017 (Q2 2016: €1,352 million). Positive earnings effects resulted primarily from higher volumes, while the cost of goods sold and expenses for research and development were lower. EBIT increased by a substantial 11.5% to €1,102 million, and included special charges of €120 million (Q2 2016: €11 million). These largely comprised €69 million in impairments on intangible assets in the area of oncology (OncoMed), and €49 million in value adjustments in the area of women’s health. A 5 Special Items 1 Pharmaceuticals € million EBIT Q2 2016 EBIT Q2 2017 EBIT H1 2016 EBIT H1 2017 EBITDA Q2 2016 EBITDA Q2 2017 EBITDA H1 2016 EBITDA H1 2017 Restructuring (10) (2) (12) (5) (9) (1) (11) (4) Litigations (1) – 1 – (1) – 1 – Value adjustments – (118) (231) (151) – (6) – (6) Total special items (11) (120) (242) (156) (10) (7) (10) (10) 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 11 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position First half of 2017 Sales Sales of Pharmaceuticals rose by 5.8% (Fx & portfolio adj.) to €8,567 million in the first half of 2017. Our key growth products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™ delivered strong perfor- mance, with their combined sales rising by 18.2% (Fx adj.) to €3,000 million (H1 2016: €2,519 million). Pharmaceuticals sales developed positively in all regions. Earnings EBITDA before special items improved by a substantial 14.2% in the first half of 2017, to €2,983 million. This positive earnings performance was the result of the good development of business, while the cost of goods sold and expenses for research and development were lower. In addition, selling expenses in- creased at a slower rate than sales. EBIT increased substantially, rising by 37.7% to €2,321 million. Special charges amounted to €156 million (H1 2016: €242 million) and were primarily the result of value adjustments. Consumer Health A 6 Key Data – Consumer Health Change % Change % € million Q2 2016 Q2 2017 Reported Fx & p adj. H1 2016 H1 2017 Reported Fx & p adj. Sales 1,553 1,542 – 0.7 – 2.2 3,073 3,143 + 2.3 + 0.2 Changes in sales 1 Volume + 1.2% – 4.6% – 0.1% – 2.2% Price + 2.8% + 2.4% + 3.2% + 2.4% Currency – 6.3% + 1.5% – 5.4% + 2.1% Portfolio 0.0% 0.0% 0.0% 0.0% Reported Fx adj. Reported Fx adj. Sales by region Europe / Middle East / Africa 480 503 + 4.8 + 2.7 962 1,041 + 8.2 + 5.8 North America 701 661 – 5.7 – 7.8 1,378 1,362 – 1.2 – 4.1 Asia / Pacific 201 195 – 3.0 – 3.0 402 415 + 3.2 + 1.7 Latin America 171 183 + 7.0 + 8.8 331 325 – 1.8 0.0 EBITDA 1 297 307 + 3.4 661 691 + 4.5 Special items 1 (31) (7) (50) (15) EBITDA before special items 1 328 314 – 4.3 711 706 – 0.7 EBITDA margin before special items 1 21.1% 20.4% 23.1% 22.5% EBIT 1 190 195 + 2.6 433 473 + 9.2 Special items 1 (32) (15) (64) (24) EBIT before special items 1 222 210 – 5.4 497 497 0.0 Net cash provided by operating activities 241 297 + 23.2 438 562 + 28.3 2016 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2017 Sales Sales of Consumer Health in the second quarter of 2017 fell by 2.2% (Fx & portfolio adj.) to €1,542 million. We recorded substantial declines in sales in North America, particularly in the United States, due to the difficult market environment. In contrast, we expanded our business in Latin America and Europe / Middle East / Africa. 12 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position A 7 Best-Selling Consumer Health Products Change % Change % € million Q2 2016 Q2 2017 Reported Fx adj.1 H1 2016 H1 2017 Reported Fx adj.1 Claritin™ 178 159 – 10.7 – 12.3 365 349 – 4.4 – 6.9 Aspirin™ 102 104 + 2.0 + 0.7 218 221 + 1.4 + 0.1 Bepanthen™ / Bepanthol™ 95 100 + 5.3 + 4.9 187 195 + 4.3 + 3.6 Aleve™ 110 101 – 8.2 – 10.5 200 183 – 8.5 – 11.1 Coppertone™ ² 94 80 – 14.9 – 16.7 175 182 + 4.0 + 0.8 Canesten™ 75 74 – 1.3 + 3.1 139 144 + 3.6 + 7.0 Alka-Seltzer™ product family 45 44 – 2.2 – 4.8 102 114 + 11.8 + 8.7 One A Day™ 55 55 0.0 + 0.2 99 110 + 11.1 + 8.7 Dr Scholl’s™ ² 65 65 0.0 – 3.2 125 106 – 15.2 – 17.8 Elevit™ 40 44 + 10.0 + 9.9 83 96 + 15.7 + 11.7 Total 859 826 – 3.8 – 4.9 1,693 1,700 + 0.4 – 1.5 Proportion of Consumer Health sales 55% 54% 55% 54% 1 Fx adj. = currency-adjusted; for definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Trademark rights and distribution only in certain countries outside the European Union Sales by product > Sales of our antihistamine Claritin™ declined substantially compared with a strong prior-year quarter, primarily in the United States and in China. In the United States, business was impacted by a weaker allergy season, among other factors. We had also benefited from the market launch of ClariSpray™ in 2016. > Sales of our analgesic Aspirin™ matched the strong prior-year quarter. Including business with Aspirin™ Cardio, which is reported under Pharmaceuticals, sales advanced by 4.9% (Fx adj.) to €252 million (Q2 2016: €240 million). > We increased sales of our Bepanthen™ / Bepanthol™ wound and skin care products, primarily in Asia / Pacific and Latin America. > Sales of our analgesic Aleve™ came in much lower than in the prior-year quarter, largely as a result of increased competitive pressure in the United States. > We recorded a substantial decline in sales of our sunscreen product Coppertone™, mainly due to increased competitive pressure and a weak season to date in the United States. > Sales of our Canesten™ skin and intimate health products advanced on a currency-adjusted basis, particularly in China. > Business with our Alka-Seltzer™ family of products to treat gastric complaints and cold symptoms declined, primarily in the United States. > Sales of our One A Day™ vitamin product matched the level of the strong prior-year quarter, with gains in Latin America offsetting declines in North America. > Sales of our Dr. Scholl’s™ foot care products were down slightly from the prior-year quarter on a currency-adjusted basis. Gains in the United States only partly offset declines in Latin America. > The considerable increase in sales of our prenatal vitamin Elevit™ was largely the result of demand remaining strong in Asia / Pacific, primarily in China. Earnings EBITDA before special items of Consumer Health declined by 4.3% to €314 million in the second quarter of 2017 (Q2 2016: €328 million). The fall in earnings is mainly attributable to lower volumes and the higher cost of goods sold, which resulted in part from inventory write-offs. EBIT increased by 2.6% to €195 million, and included special charges of €15 million (Q2 2016: €32 million). 13 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position A 8 Special Items 1 Consumer Health € million EBIT Q2 2016 EBIT Q2 2017 EBIT H1 2016 EBIT H1 2017 EBITDA Q2 2016 EBITDA Q2 2017 EBITDA H1 2016 EBITDA H1 2017 Restructuring (3) (15) (17) (24) (2) (7) (3) (15) Integration costs (29) – (47) – (29) – (47) – Total special items (32) (15) (64) (24) (31) (7) (50) (15) 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2017 Sales In the first half of 2017, Consumer Health posted sales of €3,143 million (Fx & portfolio adj. + 0.2%). Business developed positively in Europe in particular, while sales fell in North America due to a difficult market environment in the United States. Earnings EBITDA before special items decreased by 0.7% in the first half of 2017, to €706 million (H1 2016: €711 million). Earnings contributions from the development of business stood against the higher cost of goods sold, which was due in part to inventory write-offs. EBIT moved ahead by a clear 9.2% to €473 million (H1 2016: €433 million). Special charges amounted to €24 million (H1 2016: €64 million). Crop Science A 9 Key Data – Crop Science Change % Change % € million Q2 2016 Q2 2017 Reported Fx & p adj. H1 2016 H1 2017 Reported Fx & p adj. Sales 2,518 2,163 – 14.1 – 15.8 5,454 5,283 – 3.1 – 5.4 Change in sales 1 Volume – 1.0% – 13.7% – 0.8% – 4.3% Price + 1.4% – 2.1% + 1.6% – 1.1% Currency – 5.2% + 1.7% – 4.3% + 2.3% Portfolio + 0.3% 0.0% + 0.2% 0.0% Reported Fx adj. Reported Fx adj. Sales by region Europe / Middle East / Africa 897 908 + 1.2 – 0.2 2,317 2,370 + 2.3 + 1.4 North America 812 865 + 6.5 + 5.0 1,721 1,907 + 10.8 + 7.1 Asia / Pacific 455 459 + 0.9 – 2.0 797 825 + 3.5 + 0.3 Latin America 354 (69) . . 619 181 – 70.8 – 73.5 EBITDA 1 633 233 – 63.2 1,719 1,324 – 23.0 Special items 1 (30) (84) (33) (108) EBITDA before special items 1 663 317 – 52.2 1,752 1,432 – 18.3 EBITDA margin before special items 1 26.3% 14.7% 32.1% 27.1% EBIT 1 512 117 – 77.1 1,467 1,087 – 25.9 Special items 1 (30) (95) (33) (132) EBIT before special items 1 542 212 – 60.9 1,500 1,219 – 18.7 Net cash provided by operating activities 1,088 1,170 + 7.5 422 491 + 16.4 2016 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 14 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Second quarter of 2017 Sales Sales of Crop Science in the second quarter of 2017 fell by 15.8% (Fx & portfolio adj.) to €2,163 million. This decline is mainly due to significantly higher provisions for product returns – specifically crop-protection products – in Brazil. At the end of the harvest season, regular stocktaking revealed high channel invento- ries in the Brazilian market, requiring measures to be taken to normalize the situation. Excluding the €428 million decline in sales in Brazil, business at Crop Science was up slightly year on year on a currency- adjusted basis. Environmental Science delivered positive performance, in part due to the delivery of prod- ucts to the company that acquired our consumer business. A 10 Sales by Business Unit Change % Change % € million Q2 2016 Q2 2017 Reported Fx & p adj. H1 2016 H1 2017 Reported Fx & p adj. Crop Protection / Seeds 2,363 1,971 – 16.6 – 18.2 5,182 4,944 – 4.6 – 6.8 Crop Protection 2,055 1,637 – 20.3 – 21.6 4,237 3,888 – 8.2 – 9.8 Herbicides 769 742 – 3.5 – 6.0 1,614 1,654 + 2.5 + 0.2 Fungicides 840 502 – 40.2 – 40.2 1,667 1,289 – 22.7 – 23.3 Insecticides 302 256 – 15.2 – 16.9 586 557 – 4.9 – 6.7 SeedGrowth 144 137 – 4.9 – 6.3 370 388 + 4.9 + 1.9 Seeds 308 334 + 8.4 + 4.6 945 1,056 + 11.7 + 6.8 Environmental Science 155 192 + 23.9 + 20.6 272 339 + 24.6 + 21.0 Fx & p adj. = currency- and portfolio-adjusted; for definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Sales by region > Sales in Europe / Middle East / Africa matched the prior-year level at €908 million (Fx adj. – 0.2%). The Insecticides business delivered very positive performance due to higher pest pressure. This development stood against substantial declines at Fungicides due to lower infestation levels as a result of drought in western Europe, as well as increased competitive pressure. The Seeds business developed positively. > Sales in North America advanced by 5.0% (Fx adj.) to €865 million. We recorded strong gains at SeedGrowth, particularly with products to treat soybean seed in the United States and cereal seed in Canada. We also achieved growth in the Seeds business due to expanded oilseed rape / canola acreages in Canada, as well as at Fungicides. This was partly offset by a substantial decline at Insecticides in the United States. > Sales in the Asia / Pacific region fell by 2.0% (Fx adj.) to €459 million. Business at Insecticides declined noticeably, due to sales declines in China and restrained demand in India. In contrast, business at Fungicides and Herbicides expanded. > Sales in the Latin America region amounted to minus €69 million. This negative development is largely due to significantly higher provisions, primarily for product returns, as well as lower sell-in to the distribution channel in Brazil. At the end of the harvest season, regular stocktaking revealed high channel inventories of crop protection products in the Brazilian market. This situation was caused by weaker demand due to significantly lower insect and fungal infestation levels, while the level of inventory-building among distributors was high. We slightly increased sales in the other countries in the Latin America region overall. 15 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Earnings EBITDA before special items of Crop Science declined by 52.2% to €317 million in the second quarter of 2017 (Q2 2016: €663 million), in particular due to the situation in Brazil, where we recorded a substantial negative impact on earnings in the amount of €355 million in total. This included provisions for product returns in the amount of €173 million, impairment losses recognized on receivables in the amount of €53 million, inventory write-offs in the amount of €56 million, and other effects totaling €73 million. Exclud- ing our business in Brazil, earnings were up slightly year on year. EBIT decreased by 77.1% to €117 million, and included special charges in the amount of €95 million (Q2 2016: €30 million) related mainly to the agreed acquisition of Monsanto and the completion of a divestiture project. A 11 Special Items 1 Crop Science € million EBIT Q2 2016 EBIT Q2 2017 EBIT H1 2016 EBIT H1 2017 EBITDA Q2 2016 EBITDA Q2 2017 EBITDA H1 2016 EBITDA H1 2017 Restructuring (28) (6) (28) (22) (28) (5) (28) (8) Litigations (2) (2) (5) (2) (2) (2) (5) (2) Acquisition costs – (47) – (68) – (47) – (68) Divestments – (40) – (40) – (30) – (30) Total special items (30) (95) (33) (132) (30) (84) (33) (108) 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2017 Sales Sales of Crop Science in the first half of 2017 declined by 5.4% (Fx & portfolio adj.) to €5,283 million. Sales fell at Fungicides and Insecticides in particular due to the aforementioned adjustments made to pro- visions for product returns and weak business in Brazil. In contrast, we achieved gains at Seeds and Envi- ronmental Science. Higher sales in North America and Europe / Middle East / Africa were insufficient to offset the substantial decline in business in Latin America. Sales in Asia / Pacific came in at the prior-year level. Excluding Brazil, sales increased slightly overall. Earnings EBITDA before special items of Crop Science declined by 18.3% to €1,432 million (H1 2016: €1,752 million) in the first half of 2017, significantly weighed down by the aforementioned effects in Brazil. Excluding Brazil, earnings were higher than in the prior-year period. EBIT declined by 25.9% to €1,087 million. Earnings were held back by special charges of €132 million (H1 2016: €33 million) largely related to the agreed acquisition of Monsanto, the completion of a divestiture project and efficiency improvement programs. 16 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Animal Health A 12 Key Data – Animal Health Change % Change % € million Q2 2016 Q2 2017 Reported Fx & p adj. H1 2016 H1 2017 Reported Fx & p adj. Sales 426 450 + 5.6 + 2.1 834 890 + 6.7 + 2.5 Change in sales 1 Volume + 1.4% – 0.7% + 4.7% – 0.5% Price + 2.8% + 2.8% + 1.7% + 3.0% Currency – 4.7% + 1.6% – 3.9% + 2.3% Portfolio 0.0% + 1.9% 0.0% + 1.9% Reported Fx adj. Reported Fx adj. Sales by region Europe / Middle East / Africa 123 122 – 0.8 + 2.4 261 266 + 1.9 + 2.3 North America 193 208 + 7.8 + 4.7 355 385 + 8.5 + 5.1 Asia / Pacific 71 80 + 12.7 + 9.9 138 156 + 13.0 + 9.4 Latin America 39 40 + 2.6 – 2.6 80 83 + 3.8 – 1.3 EBITDA 1 100 116 + 16.0 221 251 + 13.6 Special items 1 – – (1) – EBITDA before special items 1 100 116 + 16.0 222 251 + 13.1 EBITDA margin before special items 1 23.5% 25.8% 26.6% 28.2% EBIT 1 93 107 + 15.1 207 233 + 12.6 Special items 1 – – (1) – EBIT before special items 1 93 107 + 15.1 208 233 + 12.0 Net cash provided by operating activities 48 97 + 102.1 28 66 + 135.7 2016 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2017 Sales Sales of Animal Health in the second quarter of 2017 moved ahead by 2.1% (Fx & portfolio adj.) to €450 million. The development of business in the Asia / Pacific region was encouraging. In North America, the Cydectin™ product portfolio that was acquired in January 2017 contributed to sales growth on a cur- rency-adjusted basis. We recorded a slight increase in sales in Europe / Middle East / Africa on a currency- adjusted basis, while the performance of our Latin America business matched the prior-year period. A 13 Best-Selling Animal Health Products Change % Change % € million Q2 2016 Q2 2017 Reported Fx adj.1 H1 2016 H1 2017 Reported Fx adj.1 Advantage™ product family 157 146 – 7.0 – 7.7 305 282 – 7.5 – 8.8 Seresto™ 67 81 + 20.9 + 17.4 121 157 + 29.8 + 26.6 Drontal™ product family 32 33 + 3.1 + 4.8 64 68 + 6.3 + 5.4 Baytril™ 24 31 + 29.2 + 25.8 52 58 + 11.5 + 8.9 Total 280 291 + 3.9 + 2.6 542 565 + 4.2 + 2.5 Proportion of Animal Health sales 66% 65% 65% 63% 1 Fx adj. = currency-adjusted; for definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 17 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Sales by product > Sales of our Advantage™ family of flea, tick and worm control products declined overall, primarily due to lower than expected demand in the United States. > We once again achieved double-digit percentage sales gains year on year with our Seresto™ flea and tick collar, thanks largely to strong demand in the United States and Europe. > Sales of our Drontal™ line of wormers increased again, buoyed by the good development of business in the United Kingdom, United States, China and elsewhere. > The strong sales gains recorded for our antibiotic Baytril™, primarily in the United States, were largely the result of a one-time effect due to changes in the distribution model. Intensified marketing activities also had a positive impact. Earnings EBITDA before special items of Animal Health increased by 16.0% to €116 million in the second quarter of 2017 (Q2 2016: €100 million). Positive earnings contributions resulted from price increases, the lower cost of goods sold as well as the Cydectin™ business that Bayer acquired. These more than offset a decline in volumes and slightly higher expenses for research and development. EBIT climbed by 15.1% to €107 million, with no special items (Q2 2016: €0 million) recorded. A 14 Special Items 1 Animal Health € million EBIT Q2 2016 EBIT Q2 2017 EBIT H1 2016 EBIT H1 2017 EBITDA Q2 2016 EBITDA Q2 2017 EBITDA H1 2016 EBITDA H1 2017 Restructuring – – (1) – – – (1) – Total special items – (1) – – – (1) – 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2017 Sales Sales of Animal Health rose by 2.5% (Fx & portfolio adj.) to €890 million in the first half of 2017. Develop- ment in the Asia / Pacific region was especially positive. We also recorded sales gains in North America and Europe / Middle East / Africa, while business in Latin America declined slightly on a currency-adjusted basis. Earnings EBITDA before special items increased by 13.1% to €251 million in the first half of 2017. Performance was driven by positive price effects and the newly acquired Cydectin™ business. This development stood against higher expenses for research and development. EBIT improved by 12.6% to €233 million, with no special items (Q2 2016: special charges of €1 million) recorded. 18 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Covestro A 15 Key Data – Covestro Change % Change % € million Q2 2016 Q2 2017 Reported Fx & p adj. H1 2016 H1 2017 Reported Fx & p adj. Sales 2,975 3,479 + 16.9 + 15.8 5,825 7,043 + 20.9 + 19.6 Change in sales 1 Volume + 5.0% + 0.6% + 5.4% + 5.3% Price – 8.9% + 15.2% – 9.7% + 14.3% Currency – 2.7% + 1.1% – 1.7% + 1.3% Portfolio 0.0% 0.0% 0.0% 0.0% Reported Fx adj. Reported Fx adj. Sales by region Europe / Middle East / Africa 1,254 1,380 + 10.0 + 9.9 2,464 2,793 + 13.4 + 13.2 North America 686 756 + 10.2 + 7.3 1,369 1,517 + 10.8 + 7.5 Asia / Pacific 866 1,129 + 30.4 + 29.8 1,659 2,311 + 39.3 + 38.2 Latin America 169 214 + 26.6 + 23.1 333 422 + 26.7 + 24.6 EBITDA 1 543 848 + 56.2 1,047 1,695 + 61.9 Special items 1 – 39 – 47 EBITDA before special items 1 543 809 + 49.0 1,047 1,648 + 57.4 EBITDA margin before special items 1 18.3% 23.3% 18.0% 23.4% EBIT1 367 688 + 87.5 703 1,377 + 95.9 Special items 1 – 39 – 56 EBIT before special items 1 367 649 + 76.8 703 1,321 + 87.9 Net cash provided by operating activities 309 415 + 34.3 478 690 + 44.4 2016 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2017 Sales Sales of Covestro in the second quarter of 2017 increased by 15.8% (Fx & portfolio adj.) to €3,479 million. Selling prices were much higher overall, especially at Polyurethanes, while volumes matched the prior-year period overall. A 16 Sales by Business Unit Change % Change % € million Q2 2016 Q2 2017 Reported Fx & p adj. H1 2016 H1 2017 Reported Fx & p adj. Polyurethanes 1,482 1,889 + 27.5 + 26.1 2,883 3,783 + 31.2 + 29.7 Polycarbonates 831 912 + 9.7 + 8.7 1,617 1,866 + 15.4 + 14.2 Coatings, Adhesives, Specialties 532 532 – – 0.8 1,044 1,096 + 5.0 + 3.9 Other Covestro business 130 146 + 12.3 + 12.4 281 298 + 6.0 + 5.7 Total 2,975 3,479 + 16.9 + 15.8 5,825 7,043 + 20.9 + 19.6 Fx & p adj. = currency- and portfolio-adjusted; for definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Sales by business unit > Sales at Polyurethanes increased by 26.1% (Fx & portfolio adj.) to €1,889 million, bolstered by significantly higher selling prices, while volumes remained stable. > Polycarbonates saw sales advance by 8.7% (Fx & portfolio adj.) to €912 million due to higher selling prices and slightly expanded volumes. > Sales at Coatings, Adhesives, Specialties were flat year on year at €532 million (Fx & portfolio adj. – 0.8%). A slight decline in volumes stood against stable selling prices. 19 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Earnings EBITDA before special items of Covestro improved by 49.0% to €809 million in the second quarter of 2017 (Q2 2016: €543 million). Substantially higher selling prices more than offset the effect of increased raw material prices. EBIT increased by 87.5% to €688 million, and included a special gain in the amount of €39 million (Q2 2016: €0 million) resulting from the sale of the segment’s North American spray polyurethane foam system house. A 17 Special Items 1 Covestro € million EBIT Q2 2016 EBIT Q2 2017 EBIT H1 2016 EBIT H1 2017 EBITDA Q2 2016 EBITDA Q2 2017 EBITDA H1 2016 EBITDA H1 2017 Divestitures – 39 – 39 – 39 – 39 Restructuring – – – 17 – – – 8 Total special items – 39 – 56 – 39 – 47 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2017 Sales Sales of Covestro increased by 19.6% (Fx & portfolio adj.) in the first half of 2017 compared with the prior- year period, to €7,043 million, due to significantly higher selling prices, especially at Polyurethanes. All business units reported higher volumes. Earnings EBITDA before special items of Covestro improved by 57.4% to €1,648 million in the first half of 2017 (H1 2016: €1,047 million). A significant increase in selling prices and higher volumes more than offset high- er raw material costs. EBIT climbed by 95.9% to €1,377 million, and included special gains of €56 million (H1 2016: €0 million) related to the aforementioned sale and the decision made in the first quarter of 2017 to postpone the clo- sure of a production facility until further notice. 20 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position 1.3 Asset and Financial Position of the Bayer Group Statement of Cash Flows A 18 Bayer Group Summary Statements of Cash Flows € million Q2 2016 Q2 2017 Change % H1 2016 H1 2017 Change % Net cash provided by (used in) operating activities, continuing operations 1,992 2,316 + 16.3 2,544 3,142 + 23.5 Net cash provided by (used in) operating activities, discontinued operations (10) (3) + 70.0 760 12 – 98.4 Net cash provided by (used in) operating activities (total) 1,982 2,313 + 16.7 3,304 3,154 – 4.5 Net cash provided by (used in) investing activities (total) (1,245) (1,178) + 5.4 (1,707) (2,314) – 35.6 Net cash provided by (used in) financing activities (total) (3,235) (549) + 83.0 (2,412) 62 . Change in cash and cash equivalents due to business activities (2,498) 586 . (815) 902 . Cash and cash equivalents at beginning of period 3,552 2,224 – 37.4 1,859 1,899 + 2.2 Change due to exchange rate movements and to changes in scope of consolidation 1 (37) . 11 (28) . Cash and cash equivalents at end of period 1,055 2,773 + 162.8 1,055 2,773 + 162.8 2016 figures restated Net cash provided by operating activities > In the second quarter of 2017, the net cash provided by operating activities (total) increased by 16.7% to €2,313 million. The net cash provided by operating activities in continuing operations rose by 16.3% to €2,316 million due to a less significant increase in cash tied up in working capital. This figure included the components of the payments received from Dow Chemical as part of a patent dispute that fall under operating activities. > The contribution of Covestro shares to Bayer Pension Trust e. V. in the amount of €504 million was a > noncash transaction and, as such, did not result in on operating cash outflow. In the first half of 2017, the net cash provided by operating activities (total) declined by 4.5% to €3,154 million. The prior-year figure included inflows from the divestiture of Diabetes Care. The net cash provided by operating activities in continuing operations climbed by a substantial 23.5% to €3,142 million, due mainly to the improvement in EBITDA. Net cash used in investing activities > In the second quarter of 2017, cash outflows for property, plant and equipment and intangible assets were 19.2% lower at €476 million (Q2 2016: €589 million), and included €142 million (Q2 2016: €236 million) at Pharmaceuticals, €31 million (Q2 2016: €48 million) at Consumer Health, €135 million (Q2 2016: €164 million) at Crop Science, €5 million (Q2 2016: €6 million) at Animal Health and €92 million (Q2 2016: €80 million) at Covestro. In total we invested €818 million in primarily current financial assets (Q2 2016: €697 million in noncurrent and current financial assets). In the first half of 2017, cash outflows for property, plant and equipment and intangible assets fell by 6.4% to €891 million (H1 2016: €952 million), and included €294 million (H1 2016: €377 million) at Pharmaceuticals, €55 million (H1 2016: €87 million) at Consumer Health, €234 million (H1 2016: €261 million) at Crop Science, €11 million (H1 2016: €11 million) at Animal Health and €166 million (H1 2016: €126 million) at Covestro. > > > Cash outflows for acquisitions in the amount of €158 million related to the acquisition of the Cydectin™ product portfolio in the United States in the Animal Health segment. > Overall we invested €1,455 million in primarily current financial assets (H1 2016: €841 million particularly in noncurrent financial assets). 21 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Net cash provided by (used in) financing activities > In the second quarter of 2017, the net cash outflow for financing activities amounted to €549 million, with inflows of €1,045 million from the sale of Covestro shares and net borrowings of €1,014 million (Q2 2016: net loan repayments of €950 million) standing against dividend payments of €2,361 million (Q2 2016: €2,120 million). > Net interest expense was €82 million higher at €247 million. > The contribution of Covestro shares to Bayer Pension Trust e. V., in the amount of €504 million, was a > noncash transaction and therefore did not result in a financing cash inflow. In the first half of 2017, there was a net cash inflow of €62 million for financing activities. There was a net inflow of €2,505 million from the sale of Covestro shares, while net borrowings came to €270 million (H1 2016: net loan repayments of €41 million). Cash outflows for dividend payments amounted to €2,361 million (H1 2016: €2,120 million). > Net interest expense rose by €101 million to €352 million. Liquid assets and net financial debt A 19 Net Financial Debt 1 € million Dec. 31, 2016 March 31, 2017 June 30, 2017 Change vs. March 31, 2017 (%) Bonds and notes / promissory notes 15,991 15,421 15,871 + 2.9 of which hybrid bonds 2 4,529 4,530 4,531 . Liabilities to banks 1,837 1,846 1,756 – 4.9 Liabilities under finance leases 436 435 412 – 5.3 Liabilities from derivatives 3 587 534 369 – 30.9 Other financial liabilities 730 751 797 + 6.1 Receivables from derivatives 3 (313) (235) (299) + 27.2 Financial liabilities 19,268 18,752 18,906 + 0.8 Cash and cash equivalents (1,899) (2,224) (2,773) + 24.7 Current financial assets 4 (5,591) (6,128) (6,691) + 9.2 Net financial debt 11,778 10,400 9,442 – 9.2 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Classified as debt according to IFRS 3 These include the market values of interest-rate and currency hedges of recorded transactions. 4 These include short-term loans and receivables with maturities between 3 and 12 months outstanding from banks and other companies as well as available-for-sale financial assets that were recorded as current on initial recognition. > Net financial debt of the Bayer Group decreased by €1.0 billion between March 31, 2017, and the end of the second quarter. Cash inflows from operating activities and positive currency effects offset the outflow for the dividend payment. The Group generated proceeds of approximately €1.0 billion from the sale of Covestro shares. > Net financial debt includes three subordinated hybrid bonds with a total volume of €4.5 billion, 50% of which is treated as equity by Moody’s and S & P Global Ratings. The hybrid bonds thus have a more limited effect on the Group’s rating-specific debt indicators than senior debt. In April and June 2017, Bayer Holding Ltd., Japan, redeemed at maturity two bonds with nominal volumes of JPY 30 billion and JPY 10 billion issued under its debt issuance program. That company also issued two bonds with volumes of JPY 10 billion each in May 2017. In June 2017, Bayer AG issued debt instruments with a nominal value of €1.0 billion that will mature in 2020. These bonds can be redeemed in cash, Covestro shares or a combination of the two. The annual interest rate is 0.05%. > > 22 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position > Other financial liabilities as of June 30, 2017, included €657 million in connection with the mandatory convertible notes issued in November 2016. > S & P Global Ratings and Moody’s give Bayer long-term issuer ratings of A– and A3, respectively. The short-term ratings are A–2 (S & P Global Ratings) and P–2 (Moody’s). These investment-grade ratings document good creditworthiness. In connection with the agreed acquisition of Monsanto, both rating agencies are currently reviewing the long-term issuer ratings with regard to a potential downgrade. In addition, Moody’s is currently reviewing its short-term P–2 rating. Asset and capital structure A 20 Bayer Group Summary Statements of Financial Position € million Dec. 31, 2016 March 31, 2017 June 30, 2017 Change vs. March 31, 2017 (%) Noncurrent assets 51,791 51,664 49,988 – 3.2 Current assets 30,437 33,362 32,649 – 2.1 Assets held for sale 10 28 3 – 89.3 Total current assets 30,447 33,390 32,652 – 2.2 Total assets 82,238 85,054 82,640 – 2.8 Equity 31,897 35,857 35,483 – 1.0 Noncurrent liabilities 31,804 29,625 28,397 – 4.1 Current liabilities 18,537 19,572 18,760 – 4.1 Liabilities 50,341 49,197 47,157 – 4.1 Total equity and liabilities 82,238 85,054 82,640 – 2.8 > Between March 31, 2017, and June 30, 2017, total assets decreased by €2.4 billion to €82.6 billion. > Noncurrent assets decreased by €1.7 billion to €50.0 billion due particularly to currency effects. Total current assets declined by €0.7 billion to €32.7 billion. > Equity decreased by €0.4 billion compared with March 31, 2017, to €35.5 billion. Income after income taxes of €1.5 billion was a positive factor here. The contribution of further Covestro AG shares to Bayer Pension Trust e. V. and the divestment of further Covestro AG shares had a total positive equity effect of €1.6 billion. On the other hand, the dividend payment reduced equity by €2.4 billion. Exchange rate differences – recognized outside profit or loss – reduced equity by €1.2 billion. The equity ratio (equity coverage of total assets) increased slightly to 42.9% as of June 30, 2017 (March 31, 2017: 42.2%). > Liabilities decreased by €2.0 billion to €47.2 billion in the second quarter of 2017. Provisions for pensions and other post-employment benefits fell by €0.9 billion to €9.6 billion. The contribution of further Covestro AG shares to Bayer Pension Trust e. V. led to a €0.5 billion reduction in provisions. There were also actuarial gains of €0.3 billion due to higher discounting factors that were mainly attributable to a slight increase in long-term capital market interest rates for high-quality corporate bonds in Germany. 23 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 2. Research, Development, Innovation 2. Research, Development, Innovation Bayer Group expenses for research and development rose by 3.0% (Fx adj.) to €1,165 million in the second quarter of 2017, with the Life Science businesses accounting for €1,097 million (Fx adj. +2,6%) of this figure. A 21 Research and Development Expenses R&D expenses R&D expenses before special items Change % Change % Change % Change % € million Q2 2016 Q2 2017 Fx. adj. H1 2016 H1 2017 Fx. adj. Q2 2016 Q2 2017 Fx. adj. H1 2016 H1 2017 Fx. adj. Pharmaceuticals 679 707 + 3.5 1,379 1,419 + 1.9 679 638 – 6.6 1,346 1,317 – 3.1 Consumer Health 71 65 – 8.6 129 124 – 5.5 60 59 – 3.3 116 116 – 2.1 Crop Science 272 275 – 0.4 533 558 + 2.6 265 273 + 1.5 526 555 + 3.5 Animal Health 34 38 + 10.3 64 71 + 9.2 34 38 + 10.3 64 71 + 9.2 Reconciliation 4 12 . 0 19 . 4 12 . 0 19 . Total Life Sciences 1 1,060 1,097 + 2.6 2,105 2,191 + 2.8 1,042 1,020 – 3.0 2,052 2,078 . Covestro 62 68 + 9.7 126 132 + 4.0 62 68 + 9.7 126 132 + 4.0 Total Group 1,122 1,165 + 3.0 2,231 2,323 + 2.8 1,104 1,088 – 2.4 2,178 2,210 + 0.2 Pharmaceuticals We are conducting clinical trials with a number of drug candidates from our research and development pipeline. The following table shows our most important drug candidates currently in Phase II of clinical testing: A 22 Research and Development Projects (Phase II) 1 Projects Indication Anetumab ravtansine (mesothelin ADC) Cancer BAY 1142524 (chymase inhibitor) Heart failure BAY 1193397 (AR alpha 2c Rec Ant.) Peripheral artery disease (PAD) BAY 2306001 (IONIS-FXIRx) Prevention of thrombosis 2 Copanlisib (PI3K inhibitor) Relapsed / refractory diffuse large B-cell lymphoma Molidustat (HIF-PH inhibitor) Renal anemia Neladenoson bialanate (BAY 1067197) Chronic heart failure Nesvacumab (previously: Ang2 antibody) + aflibercept Serious eye diseases 3 Radium-223 dichloride Breast cancer with bone metastases Radium-223 dichloride Cancer, various studies Regorafenib Cancer Riociguat Diffuse systemic sclerosis Riociguat Cystic fibrosis Vilaprisan (S-PRM) Endometriosis 1 As of July 3, 2017 2 Sponsored by Ionis Pharmaceuticals, Inc. 3 Sponsored by Regeneron Pharmaceuticals, Inc. The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. 24 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 2. Research, Development, Innovation Based on the results of the GEMINI trial conducted by Janssen Research & Development, LLC, which had investigated rivaroxaban (tradename: Xarelto™) used in connection with a single antiplatelet therapy (SAPT) for the secondary prophylaxis of acute coronary syndrome (ACS), the decision was made to no longer pursue the development of rivaroxaban in this indication. The following table shows our most important drug candidates currently in Phase III of clinical testing: A 23 Research and Development Projects (Phase III) 1 Projects Indication Amikacin Inhale Pulmonary infection Ciprofloxacin DPI Non-cystic fibrosis bronchiectasis Copanlisib (PI3K inhibitor) Various forms of non-Hodgkin lymphoma (NHL) Damoctocog alfa pegol (BAY 94-9027, long-acting rFVIII) Hemophilia A Darolutamide (previously: ODM-201, AR antagonist) Nonmetastatic castration-resistant prostate cancer Darolutamide (previously: ODM-201, AR antagonist) Metastatic hormone-sensitive prostate cancer Finerenone (MR antagonist) Diabetic kidney disease Radium-223 dichloride Combination treatment of castration-resistant prostate cancer Regorafenib Colon cancer, adjuvant therapy Rivaroxaban Prevention of major adverse cardiac events (MACE) Rivaroxaban Anticoagulation in patients with chronic heart failure 2 Rivaroxaban Prevention of venous thromboembolism in high-risk patients after discharge from hospital 2 Rivaroxaban Embolic stroke of undetermined source (ESUS) Rivaroxaban Peripheral artery disease (PAD) Tedizolid Pulmonary infection Vericiguat (BAY 1021189, sGC stimulator) Chronic heart failure 3 Vilaprisan (S-PRM) Symptomatic uterine fibroids 1 As of July 03, 2017 2 Sponsored by Janssen Research & Development, LLC 3 Sponsored by Merck & Co., Inc., USA The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. In July 2017, Bayer initiated the Phase III clinical trial program ASTEROID, which is investigating the devel- opment candidate vilaprisan in women with symptomatic uterine fibroids. The product of Bayer's research efforts, vilaprisan is a novel oral and selective progesterone receptor modulator that is aimed at treating uterine fibroids long term. 25 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 2. Research, Development, Innovation The most important drug candidates in the approval process are: A 24 Main Products Submitted for Approval 1 Projects Indication Copanlisib (PI3K inhibitor) USA: Recurrent / resistant non-Hodgkin lymphoma (NHL) Regorafenib Europe: second-line treatment for unresectable liver cancer Rivaroxaban Europe, U.S.A.: long-term prevention of venous thromboembolic events Rivaroxaban 2 U.S.A.: secondary prophylaxis of acute coronary syndrome (ACS), Rivaroxaban in combination with dual antiplatelet therapy (DAPT); ATLAS trial 1 As of July 3, 2017 2 Submitted by Janssen Research & Development, LLC In April 2017, Bayer and its development partner Janssen Research & Development submitted an addi- tional dose option for the oral Factor Xa inhibitor rivaroxaban (tradename: Xarelto™) to the U.S. Food and Drug Administration (FDA), seeking an expansion of indications. The application is supported by data from the EINSTEIN CHOICE trial. The new dose of 10mg of rivaroxaban once a day is to supplement the current therapy of 20mg once a day and is intended for use as an anticoagulation therapy to reduce the risk of recurrent venous thromboembolism after at least six months of standard therapy with anticoagulants. In May 2017, the FDA granted priority review status to the development candidate copanlisib in the regis- tration process, based on the Phase II data presented in the first quarter of 2017. The substance is being reviewed for the treatment of relapsed or refractory follicular lymphoma. In April and June 2017, Bayer received approvals from the FDA and Japanese Ministry of Health, Labour and Welfare (MHLW) for the use of its oral multikinase inhibitor Stivagra™ (active ingredient: regorafenib) for the second-line treatment of patients with hepatocellular carcinoma who previously had been treated with Nexavar™ (active ingredient: sorafenib). Stivarga™ is the first drug product to show a significant im- provement in overall survival in the second-line treatment of patients with hepatocellular carcinoma. In June 2017, the European Committee for Medicinal Products for Human Use recommended the approval of Bayer’s cancer drug Stivarga™ (active ingredient: regorafenib) for the treatment of adult patients with hepatocellular carcinoma in the European Union who had previously been treated with Nexavar™ (active ingredient: sorafenib). The European Commission is expected to make a decision in the third quarter of 2017. Collaborations On April 6, 2017, Bayer decided to not exercise its option to further develop and market Wnt signaling pathway inhibitors, a class of biologics, as part of its collaboration with OncoMed Pharmaceuticals Inc., United States. 26 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 2. Research, Development, Innovation Crop Science In April 2017, we received regulatory approval for the biological nematicide BioAct™ Prime DC in Greece. The new substance is intended for use in a variety of fruit and vegetables and directly targets eggs and larvae from nematode pests. The product is scheduled to be launched in Greece in 2017 and there are plans to gain approvals in other European countries, too. In June 2017, Bayer and KWS SAAT SE, Germany – in line with their research cooperation which began in 2012 – granted a long-term license to the Belgian company SESVanderHave for their new CONVISO™SMART sugar beet cultivation system. The technology, which is based on conventionally culti- vated sugar beet varieties that are tolerant to certain herbicides, makes weed management easier. It will initially be made available to farmers in 2018, mainly in Eastern and Northern Europe, and is to be intro- duced in the following years in Germany, France and Poland, among other countries. We also signed a two-year research agreement with the Shanghai Institutes for Biological Sciences (SIBS) of the Chinese Academy of Sciences in June 2017. The purpose of the agreement is to increase wheat yields using new mathematical models and computer simulations for more efficient photosynthesis. The improvement in photosynthesis is considered to be a promising approach to considerably increasing plant productivity. In June 2017, Bayer also signed an agreement with the Sumitomo Chemical Company, which is headquar- tered in Tokyo, Japan, for fungicide mixes used to control soybean diseases in Brazil. The companies plan to develop an effective substance to control widespread plant diseases such as soybean rust by combin- ing a new fungicide produced by Sumitomo Chemical with established Bayer fungicides. Both companies expect to file a product registration application at the end of 2017. Covestro Covestro and its partners have developed a new procedure for producing the basic chemical aniline using industrial sugar. The chemical is used in the production of plastics. This means that benzene, a raw material derived from crude oil, can be replaced by biomass. The laboratory-tested procedure is now to be transferred to a larger pilot facility with the goal of manufacturing aniline on an industrial scale using renewable raw materials. 27 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook A 25 Economic Outlook 1 Growth 2016 Growth forecast 2017 World + 2.5% + 3.0% European Union + 1.8% + 1.9% of which Germany + 1.8% + 2.0% United States + 1.6% + 2.3% Emerging Markets 2 + 3.8% + 4.5% 2016 figures restated 1 Real growth of gross domestic product, source: IHS Global Insight 2 Including about 50 countries defined by IHS Global Insight as emerging markets in line with the World Bank As of June 2017 The economic prospects further improved in the first half of 2017, and the global economy is likely to ex- pand at a faster pace than in the previous year. In the United States, particularly, we expect more favorable economic development. We now expect a slightly faster pace of growth in the European Union despite uncertainty surrounding future political development there. Economic output in the Emerging Markets will probably pick up considerably overall compared with the previous year. We continue to expect strong growth in China but at a slightly slower pace. A 26 Economic Outlook for the Segments 1 Growth 2016 Growth forecast 2017 Pharmaceuticals market + 5% + 4% Consumer health market + 4% + 3 – 4% Seed and crop protection market 0% + 1% Animal health market + 5% + 5% 2016 figures restated 1 Bayer’s estimate, except pharmaceuticals; source for pharmaceuticals market: 2017-2021 IMS Market Prognosis, Latest Update May 2017; all rights reserved; currency-adjusted As of June 2017 In 2017, Covestro expects a continuation of the growth trend in its main customer industries – construc- tion, electrical engineering and electronics, and furniture. Growth in the automotive industry is still ex- pected to be weaker than in the previous year. 3.1.2 Corporate Outlook Due to the current business and currency development, we are adjusting our forecast for the fiscal year 2017. The forecast for the second half is based on the exchange rates as of June 30, 2017, including a rate of US$1.14 (previously: US$1.07) to the euro. A 1% appreciation (depreciation) of the euro against all other currencies would decrease (increase) sales on an annual basis by €300 million and EBITDA before special items by €80 million. 28 Bayer Interim Report as of June 30, 2017 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks This results in the following changes overall for the Bayer Group: Sales are now expected to increase to more than €49 billion (previously: around €51 billion). This now corresponds to a mid-single-digit (previously: mid- to high-single-digit) percentage increase on a currency- and portfolio-adjusted basis. EBITDA before special items is now targeted to increase by a high-single-digit percentage (previously: low-teens percent- age). We now aim to grow core earnings per share from continuing operations by a low- to mid-single-digit percentage (previously: mid- to high-single-digit percentage). Here it must be noted that Bayer’s interest in Covestro amounts to only 41% as of June 2017 (previously: 53%). Excluding capital and portfolio measures, net financial debt is targeted to be around €7 billion at the end of 2017 (previously: around €8 billion). We are now budgeting for sales of between €35 billion and €36 billion (previously: approximately €37 bil- lion) for our Life Science businesses. This corresponds to a low-single-digit percentage (previously: mid- single-digit percentage) increase on a currency- and portfolio-adjusted basis. We expect EBITDA before special items to come in slightly above the level of the previous year (previously: rise by a mid- to high- single-digit percentage). Despite negative currency development, we confirm the forecast we published in February for Pharmaceu- ticals and continue to expect sales of more than €17 billion. This corresponds to a mid-single-digit per- centage increase on a currency- and portfolio-adjusted basis. As before, we plan to raise sales of our key growth products to more than €6 billion. We continue to expect a high-single-digit percentage increase in EBITDA before special items. There is no change in our expectation of further improving the EBITDA mar- gin before special items. For Consumer Health, we forecast a weak second half of the year and now expect to generate full-year sales of about €6 billion (previously: more than €6 billion). This would be in line with the prior-year level on both a reported and a currency- and portfolio-adjusted basis (previously: low- to mid-single-digit percent- age increase on a currency- and portfolio-adjusted basis). We now expect EBITDA before special items to decline by a high-single-digit percentage (previously: increase by a low- to mid-single-digit percentage). We are now budgeting for sales of below €10 billion (previously: more than €10 billion) for Crop Science. This corresponds to low-single-digit-percentage decline on a currency- and portfolio-adjusted basis (previ- ously: low-single-digit percentage increase). We now expect EBITDA before special items to decline by a mid-teens percentage (previously: at the prior-year level). We confirm the forecasts published in February and April 2017 for Animal Health, the Reconciliation and Covestro. This also applies to the forecasts for the other key data. 3.2 Opportunities and risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal or external developments and events that could significantly impact the achievement of our financial and nonfinancial objectives. Bayer regards opportunity and risk management as an integral part of corporate governance. Our risk management process and the opportunities / risks are outlined in detail in the Annual Report 2016 (Com- bined Management Report, A 3.2 “Opportunity and Risk Report”). For risks related to the acquisition of Monsanto Company, United States, we refer specifically to A 3.2.3 “Planned Acquisition of Monsanto.” There have been no material changes to Bayer’s overall risk situation. From the current perspective, no risks have been identified that could endanger the Bayer Group’s contin- ued existence. There are also no risks with mutually reinforcing dependencies that could combine to en- danger the Group’s continued existence. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2016 (Note [32] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” 29 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements as of June 30, 2017 Bayer Group Consolidated Income Statements B 1 € million Q2 2016 Q2 2017 H1 2016 H1 2017 Net sales 11,833 12,193 23,687 25,437 Cost of goods sold (5,028) (5,119) (10,072) (10,464) Gross profit 6,805 7,074 13,615 14,973 Selling expenses (3,092) (3,175) (5,980) (6,188) Research and development expenses (1,122) (1,165) (2,231) (2,323) General administration expenses (489) (608) (984) (1,180) Other operating income 159 271 362 446 Other operating expenses (123) (246) (324) (461) EBIT 1 2,138 2,151 4,458 5,267 Equity-method loss (6) (11) (11) (24) Financial income 42 101 79 136 Financial expenses (350) (495) (697) (866) Financial result (314) (405) (629) (754) Income before income taxes 1,824 1,746 3,829 4,513 Income taxes (431) (417) (905) (1,012) Income from continuing operations after income taxes 1,393 1,329 2,924 3,501 Income from discontinued operations after income taxes 55 148 105 247 Income after income taxes 1,448 1,477 3,029 3,748 of which attributable to noncontrolling interest 68 253 138 441 of which attributable to Bayer AG stockholders (net income) 1,380 1,224 2,891 3,307 € Earnings per share From continuing operations Basic 1.60 1.23 3.37 3.51 Diluted 1.60 1.23 3.37 3.51 From discontinued operations Basic 0.07 0.17 0.13 0.28 Diluted 0.07 0.17 0.13 0.28 From continuing and discontinued operations Basic 1.67 1.40 3.50 3.79 Diluted 1.67 1.40 3.50 3.79 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 30 Bayer Interim Report as of June 30, 2017 Bayer Group Consolidated Statements of Comprehensive Income € million Income after income taxes of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Remeasurements of the net defined benefit liability for post-employment benefit plans Income taxes Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans Other comprehensive income that will not be reclassified subsequently to profit or loss Changes in fair values of derivatives designated as cash flow hedges Reclassified to profit or loss Income taxes Other comprehensive income from cash flow hedges Changes in fair values of available-for-sale financial assets Reclassified to profit or loss Income taxes Other comprehensive income from available-for-sale financial assets Changes in exchange differences recognized on translation of operations outside the eurozone Reclassified to profit or loss Other comprehensive income from exchange differences Other comprehensive income relating to associates accounted for using the equity method Other comprehensive income that may be reclassified subsequently to profit or loss Total other comprehensive income 1 of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Total comprehensive income of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders 1 Total changes recognized outside profit or loss B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Comprehensive Income B 2 Q2 2016 Q2 2017 H1 2016 H1 2017 1,448 1,477 3,029 3,748 68 253 138 441 1,380 1,224 2,891 3,307 (844) 300 (3,407) 905 235 (132) 991 (327) (609) 168 (2,416) 578 (609) 168 (2,416) 578 (129) 10 (76) (78) (19) (27) (35) 27 49 8 49 23 (99) (9) (62) (28) 14 (27) 26 (34) – – – – (5) (1) (9) 8 9 (28) 17 (26) 301 (1,213) (208) (1,384) – – – – 301 (1,213) (208) (1,384) (6) 40 12 47 205 (1,210) (241) (1,391) (404) (1,042) (2,657) (813) (9) (86) (110) (63) (395) (956) (2,547) (750) 1,044 435 372 2,935 59 167 28 378 985 268 344 2,557 31 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Financial Position B 3 € million June 30, 2016 June 30, 2017 Dec. 31, 2016 Noncurrent assets Goodwill 15,982 15,823 16,312 Other intangible assets 14,167 12,685 13,567 Property, plant and equipment 12,275 12,672 13,114 Investments accounted for using the equity method 505 548 584 Other financial assets 1,246 1,402 1,281 Other receivables 398 526 583 Deferred taxes 6,238 6,332 6,350 50,811 49,988 51,791 Current assets Inventories 8,334 8,459 8,408 Trade accounts receivable 11,792 12,077 10,969 Other financial assets 913 7,233 6,275 Other receivables 2,074 1,652 2,210 Claims for income tax refunds 495 455 676 Cash and cash equivalents 1,055 2,773 1,899 Assets held for sale – 3 10 24,663 32,652 30,447 Total assets 75,474 82,640 82,238 Equity Capital stock 2,117 2,117 2,117 Capital reserves 6,167 9,658 9,658 Other reserves 14,435 20,875 18,558 Equity attributable to Bayer AG stockholders 22,719 32,650 30,333 Equity attributable to noncontrolling interest 1,316 2,833 1,564 24,035 35,483 31,897 Noncurrent liabilities Provisions for pensions and other post-employment benefits 13,838 9,618 11,134 Other provisions 1,586 1,631 1,780 Financial liabilities 16,488 14,168 16,180 Income tax liabilities 387 505 423 Other liabilities 1,095 985 957 Deferred taxes 989 1,490 1,330 34,383 28,397 31,804 Current liabilities Other provisions 5,243 5,631 5,421 Financial liabilities 3,220 5,037 3,401 Trade accounts payable 5,055 5,211 6,410 Income tax liabilities 983 935 884 Other liabilities 2,537 1,946 2,421 Liabilities directly related to assets held for sale 18 – – 17,056 18,760 18,537 Total equity and liabilities 75,474 82,640 82,238 32 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows B 4 € million Q2 2016 Q2 2017 H1 2016 H1 2017 Income from continuing operations after income taxes 1,393 1,329 2,924 3,501 Income taxes 431 417 905 1,012 Financial result 314 405 629 754 Income taxes paid (621) (524) (1,099) (1,046) Depreciation, amortization and impairments 814 832 1,853 1,562 Change in pension provisions (112) (65) (211) (119) (Gains) losses on retirements of noncurrent assets (3) (24) (5) (81) Decrease (increase) in inventories 190 (12) 71 (269) Decrease (increase) in trade accounts receivable 170 280 (1,498) (1,690) (Decrease) increase in trade accounts payable 39 (290) (854) (984) Changes in other working capital, other noncash items (623) (32) (171) 502 Net cash provided by (used in) operating activities from continuing operations 1,992 2,316 2,544 3,142 Net cash provided by (used in) operating activities from discontinued operations (10) (3) 760 12 Net cash provided by (used in) operating activities (total) 1,982 2,313 3,304 3,154 Cash outflows for additions to property, plant, equipment and intangible assets (589) (476) (952) (891) Cash inflows from the sale of property, plant, equipment and other assets 18 19 39 73 Cash inflows from divestitures 8 54 8 54 Cash inflows from (outflows for) noncurrent financial assets (356) (42) (608) (96) Cash outflows for acquisitions less acquired cash – – 2 (158) Interest and dividends received 15 43 37 63 Cash inflows from (outflows for) current financial assets (341) (776) (233) (1,359) Net cash provided by (used in) investing activities (total) (1,245) (1,178) (1,707) (2,314) Proceeds from shares of Covestro AG – 1,045 – 2,505 Dividend payments (2,120) (2,361) (2,120) (2,361) Issuances of debt 3,346 1,424 7,668 1,716 Retirements of debt (4,296) (410) (7,709) (1,446) Interest paid including interest-rate swaps (199) (275) (300) (389) Interest received from interest-rate swaps 34 28 49 37 Cash outflows for the purchase of additional interests in subsidiaries – – – – Net cash provided by (used in) financing activities (total) (3,235) (549) (2,412) 62 Change in cash and cash equivalents due to business activities (total) (2,498) 586 (815) 902 Cash and cash equivalents at beginning of period 3,552 2,224 1,859 1,899 Change in cash and cash equivalents due to changes in scope of consolidation (1) – (2) – Change in cash and cash equivalents due to exchange rate movements 2 (37) 13 (28) Cash and cash equivalents at end of period 1,055 2,773 1,055 2,773 2016 figures restated 33 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Changes in Equity Bayer Group Consolidated Statements of Changes in Equity B 5 € million Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity Dec. 31, 2015 2,117 6,167 15,981 24,265 1,180 25,445 Equity transactions with owners Capital increase / decrease Dividend payments (2,067) (2,067) (52) (2,119) Other changes 177 177 160 337 Total comprehensive income 344 344 28 372 June 30, 2016 2,117 6,167 14,435 22,719 1,316 24,035 Dec. 31, 2016 2,117 9,658 18,558 30,333 1,564 31,897 Equity transactions with owners Capital increase / decrease Dividend payments (2,233) (2,233) (129) (2,362) Other changes 1,993 1,993 1,020 3,013 Total comprehensive income 2,557 2,557 378 2,935 June 30, 2017 2,117 9,658 20,875 32,650 2,833 35,483 34 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements 35 Notes Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group as of June 30, 2017 Key Data by Segment and Region B 6 Key Data by Segment Pharmaceuticals Consumer Health Crop Science Animal Health € million Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Net sales (external) 4,104 4,304 1,553 1,542 2,518 2,163 426 450 Change 1 + 5.5% + 4.9% – 2.3% – 0.7% – 4.5% – 14.1% – 0.5% + 5.6% Currency-adjusted change 1 + 8.4% + 4.4% + 4.0% – 2.2% + 0.7% – 15.8% + 4.2% + 4.0% Intersegment sales 8 11 3 4 8 8 1 1 Net sales (total) 4,112 4,315 1,556 1,546 2,526 2,171 427 451 EBIT 1 988 1,102 190 195 512 117 93 107 EBIT before special items 1 999 1,222 222 210 542 212 93 107 EBITDA before special items 1 1,352 1,481 328 314 663 317 100 116 Net cash provided by operating activities 310 528 241 297 1,088 1,170 48 97 Depreciation, amortization, impairment losses / loss reversals 354 372 107 112 121 116 7 9 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” B 6 continued Key Data by Segment Reconciliation All Other Segments Corporate Functions and Consolidation Life Sciences Covestro Group € million Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Net sales (external) 256 252 1 3 8,858 8,714 2,975 3,479 11,833 12,193 Change 1 – 6.2% – 1.6% – – + 0.5% – 1.6% – 6.6% + 16.9% – 1.4% + 3.0% Currency-adjusted change 1 – 5.5% – 0.8% – – + 4.7% – 2.7% – 3.9% + 15.8% + 2.4% + 2.0% Intersegment sales 478 508 (516) (551) – – 18 19 – – Net sales (total) 734 760 (515) (548) – – 2,993 3,498 11,833 12,193 EBIT1 18 45 (30) (103) 1,771 1,463 367 688 2,138 2,151 EBIT before special items 1 40 58 (21) (102) 1,875 1,707 367 649 2,242 2,356 EBITDA before special items 1 88 118 (20) (99) 2,511 2,247 543 809 3,054 3,056 Net cash provided by operating activities 170 (74) (174) (117) 1,683 1,901 309 415 1,992 2,316 Depreciation, amortization, impairment losses / loss reversals 48 60 1 3 638 672 176 160 814 832 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements 36 Notes B 7 Key Data by Segment Pharmaceuticals Consumer Health Crop Science Animal Health € million H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 Net sales (external) 7,993 8,567 3,073 3,143 5,454 5,283 834 890 Change 1 + 7.3% + 7.2% – 2.3% + 2.3% – 3.3% – 3.1% + 2.5% + 6.7% Currency-adjusted change 1 + 10.2% + 5.8% + 3.1% + 0.2% + 1.0% – 5.4% + 6.4% + 4.4% Intersegment sales 15 21 4 9 17 16 2 2 Net sales (total) 8,008 8,588 3,077 3,152 5,471 5,299 836 892 EBIT 1 1,686 2,321 433 473 1,467 1,087 207 233 EBIT before special items 1 1,928 2,477 497 497 1,500 1,219 208 233 EBITDA before special items 1 2,613 2,983 711 706 1,752 1,432 222 251 Net cash provided by operating activities 1,044 1,501 438 562 422 491 28 66 Depreciation, amortization, impairment losses / loss reversals 917 652 228 218 252 237 14 18 Number of employees (as of June 30) 2 40,197 37,999 13,085 11,898 22,839 20,969 3,859 3,621 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents B 7 continued Key Data by Segment Reconciliation All Other Segments Corporate Functions and Consolidation Life Sciences Covestro Group € million H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 Net sales (external) 506 504 2 7 17,862 18,394 5,825 7,043 23,687 25,437 Change 1 – 6.5% – 0.4% – – + 1.5% + 3.0% – 6.0% + 20.9% – 0.5% + 7.4% Currency-adjusted change 1 – 5.9% + 0.6% – – + 5.3% + 1.2% – 4.3% + 19.6% + 2.8% + 5.7% Intersegment sales 903 1,218 (980) (1,307) – – 39 41 – – Net sales (total) 1,409 1,722 (978) (1,300) – – 5,864 7,084 23,687 25,437 EBIT1 21 19 (59) (243) 3,755 3,890 703 1,377 4,458 5,267 EBIT before special items 1 46 50 (48) (240) 4,131 4,236 703 1,321 4,834 5,557 EBITDA before special items 1 141 163 (45) (234) 5,394 5,301 1,047 1,648 6,441 6,949 Net cash provided by operating activities 167 (241) (33) 73 2,066 2,452 478 690 2,544 3,142 Depreciation, amortization, impairment losses / loss reversals 95 113 3 6 1,509 1,244 344 318 1,853 1,562 Number of employees (as of June 30) 2 19,114 24,640 752 593 99,846 99,720 15,730 15,960 115,576 115,680 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes B 8 Key Data by Region Europe / Middle East / Africa North America Asia / Pacific € million Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Net sales (external) – by market 4,599 4,806 3,417 3,591 2,816 3,156 Change 1 + 0.0% + 4.5% – 4.8% + 5.1% + 3.1% + 12.1% Currency-adjusted change 1 + 3.2% + 4.2% – 2.0% + 3.0% + 6.6% + 11.3% Net sales (external) – by point of origin 4,811 5,059 3,332 3,477 2,758 3,101 Change 1 + 0.5% + 5.2% – 5.9% + 4.4% + 3.2% + 12.4% Currency-adjusted change 1 + 3.5% + 4.9% – 3.1% + 2.1% + 6.8% + 11.6% Interregional sales 2,712 2,699 1,078 1,105 229 296 EBIT 1 1,391 1,601 431 408 336 530 2016 figures restated 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” B 8 continued Key Data by Region Latin America Reconciliation Total € million Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Net sales (external) – by market 1,001 640 – – 11,833 12,193 Change 1 – 7.7% – 36.1% – – – 1.4% + 3.0% Currency-adjusted change 1 + 2.9% – 37.9% – – + 2.4% + 2.0% Net sales (external) – by point of origin 932 556 – – 11,833 12,193 Change 1 – 6.9% – 40.3% – – – 1.4% + 3.0% Currency-adjusted change 1 + 4.7% – 42.1% – – + 2.4% + 2.0% Interregional sales 128 129 (4,147) (4,229) – – EBIT 1 10 (285) (30) (103) 2,138 2,151 2016 figures restated 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 37 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes B 9 Key Data by Region Europe / Middle East / Africa North America Asia / Pacific € million H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 Net sales (external) – by market 9,627 10,219 6,839 7,346 5,352 6,312 Change 1 + 1.0% + 6.1% – 1.3% + 7.4% + 2.5% + 17.9% Currency-adjusted change 1 + 3.6% + 5.8% 0.0% + 4.3% + 4.9% + 16.3% Net sales (external) – by point of origin 10,014 10,714 6,690 7,141 5,244 6,181 Change 1 + 1.2% + 7.0% – 2.1% + 6.7% + 3.0% + 17.9% Currency-adjusted change 1 + 3.8% + 6.6% – 0.8% + 3.5% + 5.4% + 16.2% Interregional sales 5,377 5,552 2,122 2,213 427 545 EBIT 1 2,977 3,643 920 1,077 568 1,126 Number of employees (as of June 30) 2 59,213 60,638 16,106 15,719 27,697 27,239 2016 figures restated 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents B 9 continued Key Data by Region Latin America Reconciliation Total € million H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 Net sales (external) – by market 1,869 1,560 – – 23,687 25,437 Change 1 – 11.5% – 16.5% – – – 0.5% + 7.4% Currency-adjusted change 1 + 3.1% – 19.2% – – + 2.8% + 5.7% Net sales (external) – by point of origin 1,739 1,401 – – 23,687 25,437 Change 1 – 12.1% – 19.4% – – – 0.5% + 7.4% Currency-adjusted change 1 + 3.7% – 22.1% – – + 2.8% + 5.7% Interregional sales 199 217 (8,125) (8,527) – – EBIT 1 52 (336) (59) (243) 4,458 5,267 Number of employees (as of June 30) 2 12,560 12,084 – – 115,576 115,680 2016 figures restated 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Full-time equivalents 38 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes Explanatory Notes Accounting policies The consolidated interim financial statements as of June 30, 2017, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the Interna- tional Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2016 fiscal year, particularly with regard to the main recognition and valuation principles. Published financial reporting standards that have not yet been applied IFRS 15 (Revenue from Contracts with Customers) is the new standard for revenue recognition that is to be applied for annual reporting periods beginning on or after January 1, 2018. Bayer will implement IFRS 15 on the basis of the modified retrospective method, accounting for the aggre- gate amount of any transition effects by way of an adjustment to retained earnings as of January 1, 2018, and presenting the comparative period in line with previous rules. All of the established business models for the Bayer Group’s Life Science divisions were examined in the course of the implementation project. The previous assessment that the new standard is not expected to materially affect the timing of revenue recognition for the transactions concerned or their components has been confirmed for companies exam- ined since then. The analysis has not yet been completed in a number of material consolidated companies. Possible but currently not quantifiable effects in the Covestro segment can result with regard to the timing of revenue recognition for certain storage agreements, a number of customer-specific products and the provision of services such as transport or freight services. Furthermore, the evaluation of certain individual licensing agreements has not yet been completed for Bayer. With regard to total Group sales, there are indications of immaterial transition effects due to the different accounting of milestone payments in con- nection with right-to-access licenses that would result in an increase in retained earnings on the transition date. IFRS 15 clarifies the allocation of individual topics to (new) line items in the statement of financial position and to functional cost items in the income statement, and whether gross or net amounts are to be presented. Determination of the effects on the level of sales or selling expenses has not yet been com- pleted. Based on current knowledge, however, we do not anticipate any material effects on these items. Overall, based on current knowledge, we do not anticipate any material effects on the presentation of the Life Science businesses’ financial position or results of operations, or on earnings per share. A similar statement concerning the Covestro segment cannot yet be made at the present point in time. Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. 39 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes The exchange rates for major currencies against the euro varied as follows: B 10 Exchange Rates for Major Currencies Closing rate Average rate €1 Dec. 31, 2016 June 30, 2016 June 30, 2017 H1 2016 H1 2017 BRL Brazil 3.43 3.59 3.76 4.13 3.43 CAD Canada 1.42 1.44 1.48 1.48 1.44 CHF Switzerland 1.07 1.09 1.09 1.10 1.08 CNY China 7.35 7.40 7.73 7.30 7.42 GBP United Kingdom 0.86 0.83 0.88 0.78 0.86 JPY Japan 123.36 114.05 127.72 124.50 121.60 MXN Mexico 21.78 20.63 20.57 20.12 20.99 RUB Russia 64.30 71.52 67.47 78.07 62.69 USD United States 1.05 1.11 1.14 1.12 1.08 The most important interest rates used to calculate the present value of pension obligations are given below: B 11 Discount Rate for Pension Obligations % Dec. 31, 2016 March 31, 2017 June 30, 2017 Germany 1.80 1.90 2.00 United Kingdom 2.65 2.55 2.60 United States 3.70 3.80 3.50 Segment reporting Since January 1, 2016, the Bayer Group has comprised the five reportable segments Pharmaceuticals, Consumer Health, Crop Science, Animal Health and Covestro. The following table shows the reconciliation of EBITDA before special items of the above-mentioned segments and the reconciliation to income before income taxes of the Group: 40 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes B 12 Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million Q2 2016 Q2 2017 H1 2016 H1 2017 EBITDA before special items of segments 3,074 3,155 6,486 7,183 EBITDA before special items of Corporate Functions and Consolidation (20) (99) (45) (234) EBITDA before special items 1 3,054 3,056 6,441 6,949 Depreciation, amortization and impairment losses before special items of segments (811) (697) (1,604) (1,386) Depreciation, amortization and impairment losses before special items of Corporate Functions and Consolidation (1) (3) (3) (6) Depreciation, amortization and impairment losses before special items (812) (700) (1,607) (1,392) EBIT before special items of segments 2,263 2,458 4,882 5,797 EBIT before special items of Corporate Functions and Consolidation (21) (102) (48) (240) EBIT before special items 1 2,242 2,356 4,834 5,557 Special items of segments (95) (204) (365) (287) Special items of Corporate Functions and Consolidation (9) (1) (11) (3) Special items 1 (104) (205) (376) (290) EBIT of segments 2,168 2,254 4,517 5,510 EBIT of Corporate Functions and Consolidation (30) (103) (59) (243) EBIT 1 2,138 2,151 4,458 5,267 Financial result (314) (405) (629) (754) Income before income taxes 1,824 1,746 3,829 4,513 1 For definition see Annual Report 2016, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2017, included 293 companies (December 31, 2016: 301 companies). As in the statements as of December 31, 2016, one of these companies was accounted for as a joint operation in line with Bayer’s interest in its assets, liabilities, revenues and expenses in ac- cordance with IFRS 11 (Joint Arrangements). Six (December 31, 2016: six) joint ventures and five (Decem- ber 31, 2016: five) associates were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). Acquisitions, divestitures and discontinued operations Acquisitions On January 3, 2017, Bayer acquired the Cydectin™ portfolio in the United States from Boehringer Ingel- heim Vetmedica Inc., St. Joseph, United States. The acquisition comprises the CYDECTIN Pour-On, CYDECTIN Injectable and CYDECTIN Oral Drench endectocides for cattle and sheep. The acquisition is intended to strengthen the antiparasitics portfolio in the United States, and will see endectocides added to the portfolio. A purchase price of €158 million was agreed, which is subject to the usual price adjustment mechanisms. The purchase price was provisionally allocated mainly to trademarks and goodwill. The pur- chase price allocation currently remains incomplete pending compilation and review of the relevant financial information. It is therefore possible that changes will be made in the allocation of the purchase prices to the individual assets. 41 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes The effects of this transaction – as of the acquisition date – on the Group’s assets and liabilities in the first half of 2017 are shown in the following table. The transaction resulted in the following cash outflow: B 13 Acquired Assets, Assumed Liabilities and Adjustments (Fair Values at the Respective Acquisition Dates) € million H1 2017 Goodwill 51 Trademarks 85 Production rights 4 Inventories 18 Net assets 158 Changes in noncontrolling interest – Purchase price 158 Net cash outflow for acquisitions 158 Planned acquisitions Details of the planned acquisition of Monsanto are given in our Annual Report 2016. Divestments On April 3, 2017, Covestro completed the sale of a North American spray polyurethane foam system house to Accella Polyurethane Systems LLC, Maryland Heights, United States. A purchase price of €47 million was agreed. Income of €39 million was reported in special items. On April 1, 2017, Consumer Health completed the sale of a production facility in Pointe-Claire, Canada, to Famar Montréal Inc., Montréal, Canada. The base sale price was CAD1 million. The effects of these divestments made in the first half of 2017 were as follows: B 14 Divested Assets and Liabilities € million H1 2017 Goodwill 2 Property, plant and equipment 3 Inventories 12 Other liabilities (3) Divested net assets 14 The divested assets were reported in previous quarters as assets held for sale. Discontinued operations The sale of the Diabetes Care business to Panasonic Healthcare Holdings Co., Ltd., Tokyo, Japan, for around €1 billion was completed on January 4, 2016. The sale includes the leading Contour™ portfolio of blood glucose monitoring meters and strips, as well as other products such as Breeze™2, Elite™ and Microlet™ lancing devices. The sale of the Diabetes Care business also comprises further significant obligations by Bayer that will be fulfilled over a period of up to two years subsequent to the date of divestment. The sale proceeds will be recognized accordingly over this period and reported as income from discontinued operations. Deferred income has been recognized in the statement of financial position and will be dissolved as the obligations are fulfilled. An amount of €287 million was recognized in sales in the first half of 2017. 42 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes The obligations to be fulfilled over a period of up to two years after the divestment of the Diabetes Care business are also reported as discontinued operations in the income statement and the statement of cash flows. They resulted in sales of €25 million in the first half of 2017. The items in the statement of financial position pertaining to the Diabetes Care business are shown in the segment reporting under “All Other Segments.” In addition to the aforementioned deferred income (€177 million), the statement of financial position includes other receivables (net: €60 million), deferred tax assets (net: €29 million), income tax liabilities (€56 million) and other provisions (€4 million). The sale of the Consumer business (CS Consumer) of Bayer’s Environmental Science unit to SBM Développement SAS, Lyon, France, was completed on October 4, 2016. These activities have been reported as discontinued operations since the second quarter of 2016. The income statements of the discontinued operations for the second quarter of 2017 are given below: B 15 Income Statements for Discontinued Operations Diabetes Care CS Consumer Total € million Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Net sales 146 184 79 – 225 184 Cost of goods sold (25) (7) (40) – (65) (7) Gross profit 121 177 39 – 160 177 Selling expenses (5) (1) (31) – (36) (1) Research and development expenses – – (3) – (3) – General administration expenses (3) (3) (2) – (5) (3) Other operating income / expenses (7) – (54) – (61) – EBIT 1 106 173 (51) – 55 173 Financial result – – – – – – Income before income taxes 106 173 (51) – 55 173 Income taxes (16) (25) 16 – – (25) Income after income taxes 90 148 (35) – 55 148 1 EBIT = income after income taxes, plus income taxes, plus financial result 43 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes The income statements of the discontinued operations for the first half of 2017 are given below: B 16 Income Statements for Discontinued Operations Diabetes Care CS Consumer Total € million H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 Net sales 295 312 166 – 461 312 Cost of goods sold (121) (14) (82) – (203) (14) Gross profit 174 298 84 – 258 298 Selling expenses (8) (2) (57) – (65) (2) Research and development expenses (2) – (4) – (6) – General administration expenses (10) (5) (4) – (14) (5) Other operating income / expenses (5) 5 (55) – (60) 5 EBIT 1 149 296 (36) – 113 296 Financial result – – – – – – Income before income taxes 149 296 (36) – 113 296 Income taxes (20) (49) 12 – (8) (49) Income after income taxes 129 247 (24) – 105 247 1 EBIT = income after income taxes, plus income taxes, plus financial result In the second quarter of 2017, the discontinued operations affected the Bayer Group statement of cash flows as follows: B 17 Statements of Cash Flows for Discontinued Operations Diabetes Care CS Consumer Total € million Q2 2016 Q2 2017 Q2 2016 Q2 2017 Q2 2016 Q2 2017 Net cash provided by (used in) operating activities (net cash flow) (41) (3) 31 – (10) (3) Net cash provided by (used in) investing activities – – – – – – Net cash provided by (used in) financing activities 41 3 (31) – 10 3 Change in cash and cash equivalents – – – – – – In the first half of 2017, the discontinued operations affected the Bayer Group statement of cash flows as follows: B 18 Statements of Cash Flows for Discontinued Operations Diabetes Care CS Consumer Total € million H1 2016 H1 2017 H1 2016 H1 2017 H1 2016 H1 2017 Net cash provided by (used in) operating activities (net cash flow) 778 12 (18) – 760 12 Net cash provided by (used in) investing activities – – – – – – Net cash provided by (used in) financing activities (778) (12) 18 – (760) (12) Change in cash and cash equivalents – – – – – – As no cash is assigned to discontinued operations, the balance of the cash provided is deducted again in financing activities. 44 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes Financial instruments B 19 Carrying Amounts and Fair Values of Financial Instruments June 30, 2017 Carried at amortized cost Carried at fair value 1] [Fair value for information Nonfinancial assets / liabilities Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the state- ment of financial position Trade accounts receivable 12,077 12,077 Loans and receivables 12,077 12,077 Other financial assets 5,195 379 2,271 790 8,635 Loans and receivables 5,097 [5,089] [15] 5,097 Available-for-sale financial assets 33 376 1,626 779 2,814 Held-to-maturity financial assets 65 [67] 65 Derivatives 3 645 11 659 Other receivables 602 64 1,512 2,178 Loans and receivables 602 [602] 602 Available-for-sale financial assets 64 64 Nonfinancial assets 1,512 1,512 Cash and cash equivalents 2,773 2,773 Loans and receivables 2,773 [2,773] 2,773 Total financial assets 20,647 379 2,271 854 24,151 of which loans and receivables 20,549 20,549 of which available-for-sale financial assets 33 376 1,626 843 2,878 Financial liabilities 17,781 1,055 369 19,205 Carried at amortized cost 17,781 [14,950] [3,478] 17,781 Carried at fair value (nonderivative) 1,055 1,055 Derivatives 369 369 Trade accounts payable 5,153 58 5,211 Carried at amortized cost 5,153 5,153 Nonfinancial liabilities 58 58 Other liabilities 773 2 268 13 1,875 2,931 Carried at amortized cost 773 [773] 773 Carried at fair value (nonderivative) 8 8 Derivatives 2 268 5 275 Nonfinancial liabilities 1,875 1,875 Total financial liabilities 23,707 1,057 637 13 25,414 of which carried at amortized cost 23,707 23,707 of which carried at fair value (nonderivative) 1,055 8 1,063 of which derivatives 2 637 5 644 1 Fair value of the financial instruments carried at amortized cost; the exemption provisions under IFRS 7.29(a) were applied for information on specific fair values. 45 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes B 20 Carrying Amounts and Fair Values of Financial Instruments Dec. 31, 2016 Carried at amortized cost Carried at fair value 1] [Fair value for information Nonfinancial assets / liabilities Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the state- ment of financial position Trade accounts receivable 10,969 10,969 Loans and receivables 10,969 10,969 Other financial assets 2,245 523 3,985 803 7,556 Loans and receivables 2,148 [2,145] [16] 2,148 Available-for-sale financial assets 32 520 3,283 794 4,629 Held-to-maturity financial assets 65 [68] 65 Derivatives 3 702 9 714 Other receivables 633 57 2,103 2,793 Loans and receivables 633 [633] 633 Available-for-sale financial assets 57 57 Nonfinancial assets 2,103 2,103 Cash and cash equivalents 1,899 1,899 Loans and receivables 1,899 [1,899] 1,899 Total financial assets 15,746 523 3,985 860 21,114 of which loans and receivables 15,649 15,649 of which available-for-sale financial assets 32 520 3,283 851 4,686 Financial liabilities 18,994 587 19,581 Carried at amortized cost 18,994 [16,040] [3,362] 18,994 Carried at fair value (nonderivative) Derivatives 587 587 Trade accounts payable 6,035 375 6,410 Carried at amortized cost 6,035 6,035 Nonfinancial liabilities 375 375 Other liabilities 840 2 252 25 2,259 3,378 Carried at amortized cost 840 [840] 840 Carried at fair value (nonderivative) 8 8 Derivatives 2 252 17 271 Nonfinancial liabilities 2,259 2,259 Total financial liabilities 25,869 2 839 25 26,735 of which carried at amortized cost 25,869 25,869 of which carried at fair value (nonderivative) 8 8 of which derivatives 2 839 17 858 1 Fair value of the financial instruments carried at amortized cost; the exemption provisions under IFRS 7.29(a) were applied for information on specific fair values. 46 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes The preceding two tables show the carrying amounts and fair values of financial assets and liabilities for each financial instrument category and a reconciliation to the corresponding line items in the statements of financial position. Since the line items “Other receivables,” “Trade accounts payable” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables or advance payments for services to be received in the future), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities.” The loans and receivables reflected in other financial assets and the liabilities measured at amortized cost also include receivables and liabilities under finance leases in which Bayer is the lessor or lessee and which are therefore measured in accordance with IAS 17. Because of the short maturities of most trade accounts receivable and payable, other receivables and liabilities and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. The fair values of loans and receivables, held-to-maturity financial investments and of financial liabilities carried at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price is available, however, this is deemed to be the fair value. The fair values of available-for-sale financial assets correspond to quoted prices in active markets (Level 1), are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are de- termined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit value adjustments are determined to allow for the con- tracting party’s credit risk. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into ac- count any foreign currency translation as of the closing date. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies to certain available-for-sale debt or equity instruments, in some cases to the fair values of embedded derivatives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as available-for-sale financial assets by the discounted cash flow method. Here the credit spreads of comparable issuers are applied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materially affect the fair value. 47 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes Embedded derivatives are separated from their respective host contracts. Such host contracts are general- ly sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. Within the financial liabilities, use was made of the fair value option according to IAS 39.11A for the debt instruments (exchangeable bond) issued in June 2017 that can be converted into Covestro shares. This exchangeable bond is a hybrid financial instrument containing a debt instrument as a nonderivative host contract and several embedded derivatives. Due to the application of the fair value option, the bond was designated as a financial liability at fair value through profit or loss at its initial recognition including the embedded derivatives. The changes in the amounts of financial assets and liabilities recognized at fair value based on unobserv- able inputs (Level 3) for each financial instrument category were as follows: B 21 Development of Financial Assets and Liabilities (Level 3) 2017 € million Available- for-sale financial assets Derivatives (net) Liabilities carried at fair value (non- derivative) Total Carrying amounts of net assets (net liabilities), January 1 851 (8) (8) 835 Gains (losses) recognized in profit or loss 8 14 – 22 of which related to assets / liabilities recognized in the statements of financial position 8 14 – 22 Gains (losses) recognized outside profit or loss (20) – – (20) Additions of assets (liabilities) 4 – – 4 Settlements of (assets) liabilities – – – – Carrying amounts of net assets (net liabilities), June 30 843 6 (8) 841 48 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes B 22 Development of Financial Assets and Liabilities (Level 3) 2016 € million Available- for-sale financial assets Derivatives (net) Liabilities carried at fair value (non- derivative) Total Carrying amounts of net assets (net liabilities), January 1 833 9 (37) 805 Gains (losses) recognized in profit or loss 9 (3) – 6 of which related to assets / liabilities recognized in the statements of financial position 9 (3) – 6 Gains (losses) recognized outside profit or loss 14 – – 14 Additions of assets (liabilities) 38 – – 38 Settlements of (assets) liabilities (3) – 5 2 Carrying amounts of net assets (net liabilities), June 30 891 6 (32) 865 The changes recognized in profit or loss were included in other operating income / expenses, interest in- come or exchange gains / losses. Interest held in Covestro reduced to 40.9% In the first quarter, Bayer sold 22 million shares of Covestro AG to institutional investors at a price of €66.50 per share. In the second quarter, Bayer sold a further 17.25 million shares of Covestro AG to insti- tutional investors at a price of €62.25 per share. In addition, 8 million shares of Covestro AG were deposit- ed in Bayer Pension Trust e. V. at a price of €63.04, thus reducing the pension provisions of Bayer AG by €504 million. The transactions had a €3.0 billion positive effect on Bayer Group equity, with €2.0 billion attributable to shareholders of Bayer AG and €1.0 billion to noncontolling interest. Bayer reduced its interest in Covestro AG from 64.2% to 40.9% of the issued shares. Legal risks To find out more about the Bayer Group’s legal risks, please see Note 32 to the consolidated financial statements in the Bayer Annual Report 2016, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2016, the following significant changes have occurred in respect of the legal risks: Mirena™: As of July 13, 2017, lawsuits from approximately 3,000 users of Mirena™, an intrauterine system providing long-term contraception, had been served upon Bayer in the United States. Plaintiffs allege per- sonal injuries resulting from the use of Mirena™, including perforation of the uterus, ectopic pregnancy or idiopathic intracranial hypertension, and seek compensatory and punitive damages. Additional lawsuits are anticipated. In April 2017, most of the cases pending in U.S. federal courts in which plaintiffs allege idio- pathic intracranial hypertension were consolidated in a second multidistrict litigation proceeding for com- mon pre-trial management. The first multidistrict litigation proceeding concerns perforation cases. 49 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes Xarelto™: As of July 13, 2017, U.S. lawsuits from approximately 19,900 recipients of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, had been served upon Bayer. Plaintiffs allege that users have suffered personal injuries from the use of Xarelto™, including cerebral, gastrointestinal or other bleeding and death, and seek compensatory and punitive damages. Additional lawsuits are antici- pated. In May and June 2017, the first two cases set for trial in the federal multidistrict litigation resulted in complete defense verdicts. Two further trials have been scheduled this year (one in the federal multi district litigation, one in the Pennsylvania state court). Bayer anticipates that additional trials will be scheduled. As of July 13, 2017, ten Canadian lawsuits relating to Xarelto™ seeking class action certification had been served upon Bayer. Essure™: As of July 13, 2017, U.S. lawsuits from approximately 5,700 users of Essure™, a medical device offering permanent birth control with a nonsurgical procedure, had been served upon Bayer. Plaintiffs allege personal injuries from the use of Essure™, including hysterectomy, perforation, pain, bleeding, weight gain, nickel sensitivity, depression and unwanted pregnancy, and seek compensatory and punitive damages. Addi- tional lawsuits are anticipated. As of July 13, 2017, two Canadian lawsuits relating to Essure™ seeking class action certification had been served upon Bayer. Related parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or joint control or have a significant influence. They include, in particular, nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate officers of Bayer AG. In the second quarter, Bayer AG increased the coverage of Bayer Pension Trust e.V. with the deposit of 8 million of the shares it held in Covestro AG. The number of shares deposited amounted to 4.0% of the issued shares of Covestro AG and had a value of €504 million. Sales to related parties were not material from the viewpoint of the Bayer Group. Goods and services in the amount of €0.3 billion were procured from the associate PO JV, LP, Wilmington, United States, mainly in the course of day-to-day business operations. There was no significant change in receivables vis-à-vis related parties compared with December 31, 2016. Liabilities declined by €0.1 billion to €0.2 billion, with the greater part of the decrease pertaining to Casebia Therapeutics Limited Liability Partnership, Ascot, United Kingdom, the newly established joint venture with CRISPR Therapeutics AG, Basel, Switzerland. 50 Bayer Interim Report as of June 30, 2017 B Condensed Consolidated Interim Financial Statements Notes Other information The Annual Stockholders’ Meeting on April 28, 2017, approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.70 per share be paid for the 2016 fiscal year. The actions of the members of the Board of Management and the Supervisory Board in office in 2016 were ratified in accordance with the proposals by the Board of Management and the Supervisory Board. Six stockholder representatives were elected to the Supervisory Board in accordance with the nominations submitted by the Supervisory Board. Furthermore, in accordance with the proposal by the Board of Management and the Supervisory Board, the Annual Stockholders’ Meeting approved the amendment to the Articles of Incorporation with regard to the compensation of the members of the Supervisory Board. The Annual Stockholders’ Meeting also approved the control agreement between Bayer AG and Bayer CropScience Aktiengesellschaft of February 21, 2017, as proposed by the Board of Management and the Supervisory Board. In accordance with the proposal by the Supervisory Board, Deloitte GmbH Wirtschaftsprüfungsgesell- schaft, Munich, was elected as the auditor of the annual and consolidated financial statements for the fiscal year 2017 and to review the condensed financial statements and interim management reports as of June 30, 2017, September 30, 2017 and March 31, 2018. Leverkusen, July 25, 2017 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Johannes Dietsch Dr. Hartmut Klusik Kemal Malik Erica Mann Dieter Weinand 51 Bayer Interim Report as of June 30, 2017 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim finan- cial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabili- ties, financial position and profit or loss of the Bayer Group, and the interim management report includes a fair review of the development and performance of the business and the position of the Bayer Group, together with a description of the principal opportunities and risks associated with the expected develop- ment of the Bayer Group for the remaining months of the financial year. Leverkusen, July 25, 2017 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Johannes Dietsch Dr. Hartmut Klusik Kemal Malik Erica Mann Dieter Weinand 52 Bayer Interim Report as of June 30, 2017 Review Report Review Report To Bayer Aktiengesellschaft, Leverkusen, Germany We have reviewed the condensed interim consolidated financial statements – comprising the income statement and the statement of comprehensive income, the statement of financial position, the statement of cash flows, the condensed statement of changes in equity as well as selected explanatory notes to the financial statements – and the interim group management report for the period from 1 January 2017 until 30 June 2017 of Bayer AG, which are components of the half-year financial report under § 37w WpHG (Wertpapierhandelsgesetz: German Securities Trading Act). Review Report on the Condensed Interim Consolidated Financial Statements Management Board’s Responsibility for the Condensed Interim Consolidated Financial Statements The preparation of the condensed interim consolidated financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU is the responsibility of the entity’s Manage- ment Board. The Management Board is also responsible for such internal control as the Management Board determines is necessary to enable the preparation of condensed interim consolidated financial statements that are free from material misstatement, whether due to fraud or error. Practitioner’s Responsibility for the Review of the Condensed Interim Consolidated Financial Statements Our responsibility is to express a conclusion on the condensed interim consolidated financial statements based on our review. We conducted our review in accordance with the German generally accepted stand- ards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) as well as in supplementary compliance with the International Standard on Review Engagements “Engagements to Review Historical Financial Statements” (ISRE 2400 (revised)). Those standards require that we plan and perform the review in compliance with professional standards such that we can preclude through critical evaluation, with limited assurance, that the condensed interim consolidated financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU. A review of the condensed interim consolidated financial statements in accordance with the German gen- erally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) as well as in supplementary compliance with ISRE 2400 (revised) is a limited as- surance engagement. A review is limited primarily to inquiries of personnel of the entity and analytical pro- cedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot issue an auditor’s report. Conclusion on the Condensed Interim Consolidated Financial Statements Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU. 53 Bayer Interim Report as of June 30, 2017 Review Report Other Legal and Regulatory Requirements Review Report on the Interim Group Management Report Management Board’s Responsibility for the Interim Group Management Report The preparation of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the entity’s Management Board. The Management Board is also responsible for such internal control as the Management Board determines is necessary to enable the preparation of an interim group management report that is free from material misstatement, whether due to fraud or error. Practitioner’s Responsibility for the Review of the Interim Group Management Report Our responsibility is to express a conclusion on the interim group management report based on our review. We conducted our review in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) as well as in supplementary compliance with the International Standard on Review Engagements “Engagements to Review Historical Financial Statements” (ISRE 2400 (revised)). Those standards require that we plan and perform the review in compliance with professional standards such that we can preclude through critical evaluation, with lim- ited assurance, that the interim group management report has not been prepared, in all material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review of the interim group management report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) as well as in supplementary compliance with ISRE 2400 (revised) is a limited assurance engagement. A review is limited primarily to inquiries of personnel of the entity and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot issue an auditor‘s report. Conclusion on the Interim Group Management Report Based on our review, no matters have come to our attention that cause us to presume that the interim group management report has not been prepared, in all material respects, in accordance with the require- ments of the WpHG applicable to interim group management reports. Munich, Germany, 26 July 2017 Deloitte GmbH Wirtschaftsprüfungsgesellschaft Heiner Kompenhans Prof. Dr. Frank Beine Wirtschaftsprüfer (German Public Auditor) Wirtschaftsprüfer (German Public Auditor) 54 Bayer Interim Report as of June 30, 2017 Financial Calender / Masthead Financial Calendar 1 Q3 2017 Interim Report Annual Report 2017 Q1 2018 Interim Report Annual Stockholders’ Meeting 2018 Q2 2018 Interim Report Q3 2018 Interim Report October 26, 2017 February 28, 2018 May 3, 2018 May 25, 2018 July 31, 2018 October 30, 2018 Masthead Published by Bayer AG, 51368 Leverkusen, Germany English edition Bayer Business Services GmbH Translation Services Editor Jörg Schäfer, phone +49 214 30 39136 Email: joerg.schaefer@bayer.com Date of publication Thursday, July 27, 2017 Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com Bayer on the internet www.bayer.com ISSN 0343 / 1975 Interim Group Management Report and Condensed Consolidated Interim Financial Statements produced in-house with FIRE.sys. Forward-Looking Statements Certain statements contained in this report may constitute “forward-looking statements.” Actual results could differ materially from those projected or forecast in the forward-looking statements. The factors that could cause actual results to differ materially include the following: uncertainties as to the timing of the transaction; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected time-frames or at all and to successfully integrate Monsanto’s operations into those of Bayer; such integration may be more difficult, time-consuming or costly than expected; revenues following the transaction may be lower than expected; operating costs, customer loss and business disruption (including, without limitation, difficulties in main- taining relationships with employees, customers, clients or suppliers) may be greater than expected following the announcement of the transaction; the retention of certain key employees at Monsanto; risks associated with the disruption of management’s attention from ongoing business operations due to the transaction; the conditions to the completion of the transaction may not be satisfied, or the regulatory approvals required for the transaction may not be obtained on the terms expected or on the anticipated schedule; the parties’ ability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger; the impact of the refinancing of the loans taken out for the transaction, the impact of indebtedness incurred by Bayer in connection with the transac- tion and the potential impact on the rating of indebtedness of Bayer; the effects of the business combination of Bayer and Monsanto, including the combined company’s future financial condition, operating results, strategy and plans; other factors detailed in Monsanto’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended August 31, 2016 and Monsanto’s other filings with the SEC, which are available at http://www.sec.gov and on Monsanto’s website at www.monsanto.com; and other factors discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. Bayer and Monsanto assume no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 1 As currently planned 55

Semestriel, 2017, Agrochemistry, BAYER

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Interim Report Second Quarter of 2015 Bayer significantly improves earnings 2 Bayer Interim Report Key Data Bayer Group Key Data 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change Full Year 2014 € million € million % € million € million % € million Sales 10,228 12,090 + 18.2 20,580 23,969 + 16.5 41,339 Change (adjusted for currency and portfolio effects) + 3.7 + 3.2 +7.7 Change in sales Volume + 6.0% + 4.9% + 7.4% + 3.8% + 7.1% Price + 0.8% – 1.2% + 0.4% – 0.6% + 0.6% Currency – 5.5% + 9.0% – 5.7% + 8.2% – 2.8% Portfolio + 0.1% + 5.5% + 0.2% + 5.1% + 0.7% EBIT1 Special items 1,435 (48) 1,833 (255) + 27.7 3,500 (41) 3,777 (499) + 7.9 5,395 (438) EBIT before special items2 1,483 2,088 + 40.8 3,541 4,276 + 20.8 5,833 EBIT margin before special items3 14.5% 17.3% 17.2% 17.8% 14.1% EBITDA4 Special items 2,135 (41) 2,648 (251) + 24.0 4,845 (34) 5,393 (447) + 11.3 8,315 (370) EBITDA before special items2 2,176 2,899 + 33.2 4,879 5,840 + 19.7 8,685 EBITDA margin before special items3 21.3% 24.0% 23.7% 24.4% 21.0% Financial result (173) (287) – 65.9 (332) (561) – 69.0 (981) Net income (from continuing and discontinued operations) 953 1,152 + 20.9 2,376 2,455 + 3.3 3,426 Earnings per share (from continuing and discontinued operations) (€)5 1.15 1.39 + 20.9 2.87 2.97 + 3.5 4.14 Core earnings per share (from continuing operations) (€)6 1.48 1.98 + 33.8 3.40 4.02 + 18.2 5.89 Gross cash flow7 1,665 2,173 + 30.5 3,683 4,184 + 13.6 6,707 Net cash flow8 1,601 1,959 + 22.4 1,764 2,683 + 52.1 5,810 Cash outflows for capital expenditures 529 601 + 13.6 886 946 + 6.8 2,371 Research and development expenses 841 1,036 + 23.2 1,653 1,982 + 19.9 3,537 Depreciation, amortization and impairments 700 815 + 16.4 1,345 1,616 + 20.1 2,920 Number of employees at end of period9 Personnel expenses (including pension expenses) 112,556 2,366 117,798 2,750 + 4.7 + 16.2 112,556 4,749 117,798 5,630 + 4.7 + 18.6 117,371 9,693 2014 figures restated In some cases, the sum of the figures given in this report may not precisely equal the stated totals and percentages may not be exact due to rounding. 1 EBIT = earnings before financial result and taxes 2 EBIT before special items and EBITDA before special items are not defined in the International Financial Reporting Standards and should therefore be regarded only as supplementary information. EBITDA before special items is a meaningful indicator of operating performance since it is not affected by depreciation, amortization, impairments or special items. By reporting this indicator, the company aims to give readers a clear picture of the results of operations and ensure comparability of data over time. See also Chapter 6 “Calculation of EBIT(DA) Before Special Items.” 3 The EBIT(DA) margin before special items is calculated by dividing EBIT(DA) before special items by sales. 4 EBITDA = EBIT plus amortization and impairment losses on intangible assets and depreciation and impairment losses on property, plant and equipment, minus impairment loss reversals 5 Earnings per share as defined in IAS 33 = net income divided by the average number of shares 6 Core earnings per share are not defined in the International Financial Reporting Standards. By reporting this indicator, the company aims to give readers a clear picture of the results of operations and ensure comparability of data over time. The calculation of core earnings per share is explained in Chapter 7 “Core Earnings Per Share." 7 Gross cash flow = income after income taxes, plus income taxes, plus financial result, minus income taxes paid or accrued, plus depreciation, amortization and impairment losses, minus impairment loss reversals, plus / minus changes in pension provisions, minus gains / plus losses on retirements of noncurrent assets, minus gains from the remeasurement of already held assets in step acquisitions. The change in pension provisions includes the elimination of non-cash components of EBIT. It also contains benefit payments during the year. For details see Chapter 8 “Financial Position of the Bayer Group.” 8 Net cash flow = cash flow from operating activities according to IAS 7 9 Full-time equivalents Bayer Interim Report Contents INTERIM GROUP MANAGEMENT REPORT AS OF JUNE 30, 2015 1. Overview of Sales, Earnings and Financial Position 2. Economic Outlook 3. Sales and Earnings Forecast 4. Corporate Structure 5. Business Development by Subgroup, Segment and Region 5.1 HealthCare 5.2 CropScience 5.3 MaterialScience 5.4 Business Development by Region 6. Calculation of EBIT(DA) Before Special Items 7. Core Earnings Per Share 8. Financial Position of the Bayer Group 9. Growth and Innovation 9.1 HealthCare 9.2 CropScience 9.3 MaterialScience 10. Employees 11. Opportunities and Risks 12. Events After the End of the Reporting Period INVESTOR INFORMATION CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF THE BAYER GROUP AS OF JUNE 30, 2015 Bayer Group Consolidated Income Statements Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Changes in Equity Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group as of June 30, 2015 Key Data per Segment and Region Explanatory Notes RESPONSIBILITY STATEMENT REVIEW REPORT Financial Calendar Masthead COVER PICTURE: Bayer researchers are working on new cancer treatments. Our cover picture shows laboratory technician Christina Scholl carrying out an experiment in the Bayer laboratory. 4 5 7 9 11 12 12 18 21 24 26 28 29 32 33 36 36 37 37 37 38 39 39 40 41 42 43 44 44 48 59 60 61 61 Contents 3 4 Bayer Interim Report Interim Group Management Report as of June 30, 2015 Second Quarter of 2015 Bayer significantly improves earnings // Very good business development at HealthCare // CropScience performance steady in a weaker market environment // MaterialScience posts robust earnings growth // Group sales €12.1 billion (+18.2%; Fx & portfolio adj. +3.7%) // ebitda before special items €2.9 billion (+33.2%) // ebit €1.8 billion (+27.7%) // Net income €1.2 billion (+20.9%) // Core earnings per share €1.98 (+33.8%) // Group forecast 2015 for operational performance of continuing operations confirmed and adjusted for currency effects The Bayer Group continued to grow sales in the second quarter of 2015 and significantly improved earnings. HealthCare posted considerable sales and earnings gains that were attributable to the further gratifying expansion of business with our recently launched pharmaceutical products and to the positive sales development in all Consumer Health divisions. Sales at CropScience matched the strong level of the prior-year quarter, while earnings improved. At MaterialScience, sales were level with the prior-year quarter. Earnings of the subgroup rose markedly, by almost 90%, particularly as a result of the improved demand situation and lower raw material costs. The preparations for the planned stock market flotation of MaterialScience are on schedule. We are confirming our Group forecast for the operational performance of continuing operations and adjusting our guidance to take account of the change in exchange rates as of June 30, 2015. Bayer Interim Report Interim Group Management Report as of June 30, 2015 1. Overview of Sales, Earnings and Financial Position 1. Overview of Sales, Earnings and Financial Position SECOND QUARTER OF 2015 Bayer Group Quarterly Sales [Graphic 1] € million Total Q1 2014 2015 1,329 1,341 9,023 10,538 10,352 11,879 Q2 2014 2015 1,217 1,249 9,011 10,841 10,228 12,090 Q3 2014 2015 1,174 8,793 9,967 Q4 2014 2015 1,084 9,708 10,792 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 Germany Other countries 2014 fi gures restated Following the signing of the divestiture agreement with Panasonic Healthcare Holdings Co., Ltd. in June 2015, the Diabetes Care business is no longer included in continuing operations. Figures for previous periods are restated accordingly. Sales of the Bayer Group moved ahead in the second quarter of 2015 by 3.7% after adjusting for cur- rency and portfolio effects (Fx & portfolio adj.) to €12,090 million (reported: + 18.2%; q2 2014: €10,228 million). HealthCare sales improved by 8.3% (Fx & portfolio adj.) to €5,908 million (reported: + 28.0%; q2 2014: €4,615 million). Sales at CropScience came in at the strong prior-year level, down by just 0.6% (Fx & portfolio adj.) to €2,723 million (reported: + 10.2%; q2 2014: €2,470 million). MaterialScience sales rose by 0.6% (Fx & portfolio adj.) to €3,185 million, also matching the level of the prior-year quarter (reported: + 11.2%; q2 2014: €2,864 million). Bayer Group Quarterly EBIT [Graphic 2] Bayer Group Quarterly EBITDA Before Special Items [Graphic 3] € million € million Q1 2014 2015 2,065 1,944 Q1 2014 2015 2,703 2,941 Q2 2014 2015 1,435 1,833 Q2 2014 2015 2,176 2,899 Q3 2014 2015 1,346 Q3 2014 2015 1,977 Q4 2014 2015 549 Q4 2014 2015 1,829 0 500 1,000 1,500 2,000 2,500 3,000 0 500 1,000 1,500 2,000 2,500 3,000 2014 fi gures restated 2014 fi gures restated 5 6 Bayer Interim Report Interim Group Management Report as of June 30, 2015 1. Overview of Sales, Earnings and Financial Position ebit of the Bayer Group climbed by a substantial 27.7% to €1,833 million (q2 2014: €1,435 million) after net special charges of €255 million (q2 2014: €48 million). These mainly comprised €74 million from the revaluation of other receivables and €55 million in costs for the integration of acquired busi- nesses. Also included under special items are expenses of €41 million for the planned stock market flotation of MaterialScience, €32 million for efficiency improvement measures and €28 million for the consolidation of production sites. ebit before special items rose by 40.8% to €2,088 million (q2 2014: €1,483 million). ebitda before special items came in 33.2% ahead of the prior-year period at €2,899 million (q2 2014: €2,176 million). The good sales development was accompanied by higher r&d and selling expenses. Positive currency effects buoyed earnings by about €260 million. At HealthCare, ebitda before special items rose by a considerable 27.5% to €1,675 million (q2 2014: €1,314 million). This was chiefly at- tributable to the continuing very good development of business at Pharmaceuticals and Consumer Health, the contribution from the acquired consumer care businesses, and currency effects of around €110 million. ebitda before special items of CropScience advanced by 19.2% to €733 million (q2 2014: €615 million), driven by a positive currency effect of around €70 million. MaterialScience registered a significant 87.4% increase in ebitda before special items to €506 million (q2 2014: €270 million). This was the result of considerably lower raw material costs – which more than compensated the decline in selling prices – higher volumes, and positive currency effects of €80 million. Earnings of the reconcilia- tion improved year on year largely on account of lower expenses for long-term stock-based compensa- tion. After a financial result of minus €287 million (q2 2014: minus €173 million), income before income taxes was €1,546 million (q2 2014: €1,262 million). After income tax expense of €405 million (q2 2014: €343 million) and non-controlling interest, net income in the second quarter of 2015 came to €1,152 million (q2 2014: €953 million). Earnings per share were €1.39 (q2 2014: €1.15). Core earnings per share advanced by 33.8% to €1.98 (q2 2014: €1.48), calculated as explained in Chapter 7 “Core Earnings Per Share.” Quarterly Gross Cash Flow From Continuing Operations [Graphic 4] Quarterly Net Cash Flow From Continuing Operations [Graphic 5] € million € million Q1 2014 2015 2,018 2,011 Q1 2014 2015 144 677 Q2 2014 2015 1,665 2,173 Q2 2014 2015 1,569 1,950 Q3 2014 2015 1,466 Q3 2014 2015 1,781 Q4 2014 2015 1,558 Q4 2014 2015 2,203 0 500 1,000 1,500 2,000 2,500 0 500 1,000 1,500 2,000 2,500 2014 fi gures restated 2014 fi gures restated Gross cash flow from continuing operations in the second quarter of 2015 advanced by 30.5% to €2,173 million (q2 2014: €1,665 million) due to the improvement in ebitda. Net cash flow (total) rose by 22.4% to €1,959 million (q2 2014: €1,601 million) despite an increase in cash tied up in working capi- tal. We paid income taxes of €352 million in the second quarter of 2015 (q2 2014: €360 million). Net financial debt declined slightly, from €21.3 billion on March 31, 2015, to €21.1 billion on June 30, 2015. Cash inflows from operating activities and positive currency effects offset the outflow for the dividend payment. The net defined benefit liability for post-employment benefits – the difference be- tween benefit obligations and plan assets – decreased from €13.6 billion to €11.1 billion over the same period due to a rise in long-term capital market interest rates for high-quality corporate bonds. Bayer Interim Report Interim Group Management Report as of June 30, 2015 2. Economic Outlook FIRST HALF OF 2015 Sales of the Bayer Group rose in the first half of 2015. Our HealthCare business was the main driver of this growth, while CropScience and MaterialScience matched the prior-year level. Group ebitda before special items improved significantly, with all subgroups, particularly HealthCare and MaterialScience, contributing to this improvement. Sales increased by 3.2% (Fx & portfolio adj.) to €23,969 million (reported: + 16.5%; h1 2014: €20,580 million). HealthCare sales grew by 7.7% on a currency- and portfolio-adjusted basis (reported: + 27.0%). Despite the difficult market environment, sales of CropScience were flat year on year (Fx & portfolio adj.: + 0.2%; reported: + 8.3%). Sales of MaterialScience also matched the prior-year level (Fx & portfolio adj.: minus 0.7%; reported: + 9.4%). ebit climbed by 7.9% to €3,777 million (h1 2014: €3,500 million). There were net special charges of €499 million (h1 2014: €41 million). ebit before special items rose by 20.8% to €4,276 million (h1 2014: €3,541 million). ebitda before special items increased by 19.7% to €5,840 million (h1 2014: €4,879 million), reflecting positive currency effects of about €300 million and additional r&d expenses of roughly €320 million. After a financial result of minus €561 million (h1 2014: minus €332 million), income before income taxes was €3,216 million (h1 2014: €3,168 million). The financial result mainly comprised net interest expense of €288 million (h1 2014: €86 million), interest cost of €148 million (h1 2014: €139 million) for pension and other provisions, and exchange losses of €122 million (h1 2014: €85 million). After tax expense of €811 million (h1 2014: €851 million), income after income taxes was €2,467 million (h1 2014: €2,380 million). After non-controlling interest, net income amounted to €2,455 million (h1 2014: €2,376 million). Earn- ings per share rose to €2.97 (h1 2014: €2.87), and core earnings per share (calculated as explained in Chapter 7) to €4.02 (h1 2014: €3.40). Gross cash flow from continuing operations climbed by 13.6% to €4,184 million (h1 2014: €3,683 million). Net cash flow (total) rose sharply by 52.1% to €2,683 million (h1 2014: €1,764 million) due to a reduction in cash tied up in working capital. This figure reflected income tax payments of €796 million (h1 2014: €735 million). Net financial debt rose to €21.1 billion as of June 30, 2015, com- pared with €19.6 billion on December 31, 2014. The net defined benefit liability for post-employment benefits declined from €12.2 billion on December 31, 2014, to €11.1 billion, mainly due to a rise in long- term capital market interest rates for high-quality corporate bonds. 2. Economic Outlook Economic Outlook [Table 1] Growth1 2014 Growth1 forecast 2015 World + 2.8% + 2.6% European Union + 1.4% + 1.8% of which Germany + 1.6% + 1.7% United States + 2.4% + 2.2% Emerging markets2 + 4.4% + 3.9% 1 real growth of gross domestic product, source: IHS Global Insight 2 including about 50 countries defined by IHS Global Insight as emerging markets in line with the World Bank as of July 2015 7 8 Bayer Interim Report Interim Group Management Report as of June 30, 2015 2. Economic Outlook The global economy is likely to grow in 2015 at the same pace as in the previous year, supported by a generally expansionary monetary policy and the sharp decline in oil prices. Following a weak first quar- ter, the pace of growth is expected to decline slightly in the United States. We expect the economic recovery in the European Union to continue, although significant risks still exist in the eurozone. The rate of expansion in the emerging countries is likely to weaken again slightly on average. Economic Outlook for the Subgroups [Table 2] Growth1 2014 Growth1 forecast 2015 HealthCare Pharmaceuticals market + 8% + 6% Consumer care market + 4% + 4% Medical care market – 1% + 1% Animal health market + 5% + 5% CropScience Seed and crop protection market + 6% ≤ 1% MaterialScience (main customer industries) Automotive + 3% + 3% Construction + 4% + 4% Electrical / electronics + 4% + 5% Furniture + 4% + 4% 1 Bayer’s estimate; except pharmaceuticals. Source for pharmaceuticals market: IMS Health, IMS Market Prognosis. Copyright 2015. All rights reserved; currency-adjusted; 2014 data provisional as of July 2015 The pharmaceuticals market is likely to grow slightly more slowly in 2015 than in the previous year, especially because of the lower growth rate predicted for this market in the United States. Following double-digit growth in the u.s. last year, which was driven by new product introductions and health system reforms, this market will probably expand at a slower rate in 2015, partly as a result of new patent expirations and launches of further generic products. We expect demand to be stable in the emerging economies. Growth in the consumer care market in 2015 is likely to be level with the previous year. At Medical Care – our business with contrast agents and medical devices – we anticipate slight market growth. The animal health market is anticipated to grow at about the same rate as in 2014. We expect the global seed and crop protection market to develop considerably more weakly in 2015 than in previous years. We anticipate stagnation or only very slight growth, mainly as a result of the low price level for agricultural commodities, which could have a negative effect on farmers’ yield expecta- tions and, in turn, their investment decisions. In view of the stable global economic climate, we continue to predict positive growth momentum in the main customer industries of MaterialScience in 2015. Bayer Interim Report Interim Group Management Report as of June 30, 2015 3. Sales and Earnings Forecast 3. Sales and Earnings Forecast The following forecast for 2015 is based on the business development described in this report, taking into account the potential risks and opportunities. BAYER GROUP We have adjusted the exchange rates on which our forecast is based to reflect current developments. With respect to the second half of 2015, we are now using the exchange rates prevailing on June 30, 2015. Following the signing of the divestiture agreement with Panasonic Healthcare Holdings Co., Ltd. in June 2015, the Diabetes Care business is no longer included in continuing operations and therefore is also not included in the updated forecast. The prior-year figures are restated. The Diabetes Care busi- ness was still included in the forecasts published in February and April 2015. The aforementioned ef- fects taken together result in an adjustment of the forecast; however, our expectation regarding the company’s operating performance remains largely unchanged. We are now planning sales in the region of €47 billion (previously: in the region of €48 billion to €49 billion, of which discontinued operations: approximately €0.9 billion). This still corresponds to a low-single-digit percentage increase on a currency- and portfolio-adjusted basis. We expect currency effects to boost sales by approximately 7% (previously: approximately 9%) compared with the prior year. It remains our aim to raise ebitda before special items by a high-teens percentage, allowing for expected positive currency effects of about 5% (previously: around 8%). We continue to target a high- teens percentage increase in core earnings per share (calculated as explained in Chapter 7), allowing for expected positive currency effects of around 5% (previously: around 7%). Forecast 2015 (April 2015) Revised forecast 2015 continuing operations Currency effects allowed for in the forecast2 Group sales Low-single-digit percentage increase1 Low-single-digit percentage increase1 €48 billion to €49 billion Approx. €47 billion Plus approx. 7% (previously: plus approx. 9%) ebitda before special items High-teens percentage increase High-teens percentage increase Plus approx. 5% (previously: plus approx. 8%) Core earnings per share High-teens percentage increase High-teens percentage increase Plus approx. 5% (previously: plus approx. 7%) 1 currency- and portfolio-adjusted 2 2015 forecast based for the fi rst half on average exchange rates and for the second half on June 30, 2015 closing rates We now expect to take special charges in the region of €900 million, with the integration of the acquired consumer care businesses, the planned stock market listing of MaterialScience and the optimization of production structures accounting for most of this amount. We continue to anticipate the financial result to come in at around minus €1 billion and the effective tax rate at around 25% in 2015. As before, we expect net financial debt at year end to be below €20 billion. Further details of the business forecast are given in Chapter 20.2 of the Annual Report 2014. 9 10 Bayer Interim Report Interim Group Management Report as of June 30, 2015 3. Sales and Earnings Forecast HEALTHCARE At HealthCare we now expect sales from continuing operations to rise to approximately €23 billion (previously: over €24 billion). This corresponds to a mid-single-digit percentage increase on a currency- and portfolio-adjusted basis. We predict positive currency effects of approximately 6% (previously: about 9%) compared with 2014. We plan to raise ebitda before special items by a low-twenties per- centage. We continue to expect sales in the Pharmaceuticals segment to move ahead to approximately €14 billion. This corresponds to a mid- to high-single-digit percentage increase on a currency- and portfolio-adjusted basis. We anticipate positive currency effects of approximately 6% (previously: about 9%) compared with 2014. We intend to raise sales of our recently launched products to over €4 billion. We plan to raise ebitda before special items by a mid-teens percentage. In the Consumer Health segment, we now expect sales of over €9 billion (previously: over €10 billion), including those of the acquired consumer care businesses but excluding the Diabetes Care business. We plan to grow sales by a mid-single-digit percentage on a currency- and portfolio-adjusted basis. We anticipate positive currency effects of approximately 7% (previously: about 9%) compared with 2014. We expect to raise ebitda before special items by a mid-thirties percentage, with the acquired consum- er care businesses contributing to the increase. CROPSCIENCE At CropScience we expect to continue growing faster than the market and aim to raise sales to approx- imately €10.5 billion (previously: around €11 billion). This corresponds to a low-single-digit percentage increase on a currency- and portfolio-adjusted basis (previously: a low- to mid-single digit percentage increase). We anticipate positive currency effects of about 8% (previously: about 11%) compared with 2014. In view of the weakened market environment, we now plan to improve ebitda before special items by a mid- to high-single-digit percentage (previously: a low- to mid-teens percentage). MATERIALSCIENCE At MaterialScience we continue to plan further volume growth in 2015 accompanied by declining sell- ing prices. This will lead to lower sales on a currency- and portfolio-adjusted basis. However, we con- tinue to expect to see a significant increase in ebitda before special items. We aim to return to earning the full cost of capital in 2015. After adjusting for currency and portfolio effects, we expect sales in the third quarter of 2015 to come in below the level of the prior-year quarter. We expect ebitda before special items to be above the level of the prior-year quarter but below the previous quarter. RECONCILIATION For 2015 we continue to expect sales on a currency- and portfolio-adjusted basis to be level with the previous year. We expect ebitda before special items to be in the region of minus €0.3 billion. Bayer Interim Report Interim Group Management Report as of June 30, 2015 4. Corporate Structure 4. Corporate Structure Bayer AG, headquartered in Leverkusen, Germany, is the strategic management holding company for the Bayer Group. Business operations are conducted by the HealthCare, CropScience and Material- Science subgroups. Sales in the 1st Half of 2015 [Graphic 6] 2% (2%) Reconciliation 26% (27%) MaterialScience 48% (43%) €24.0 billion (€20.6 billion) HealthCare Pharmaceuticals 28% (26%) 24% (28%) Consumer Health 20% (17%) CropScience Restated 2014 fi gures in parentheses Our subgroups are supported by the Business Services, Technology Services and Currenta service com- panies, which are reported in the reconciliation as “All Other Segments” along with “Corporate Center and Consolidation.” Key Data by Subgroup and Segment [Table 3] Sales EBIT EBITDA before special items1 2nd Quarter 2014 2nd Quarter 2015 2nd Quarter 2014 2nd Quarter 2015 2nd Quarter 2014 2nd Quarter 2015 € million € million € million € million € million € million HealthCare 4,615 5,908 927 1,068 1,314 1,675 Pharmaceuticals 2,960 3,492 656 706 927 1,077 Consumer Health 1,655 2,416 271 362 387 598 CropScience 2,470 2,723 470 571 615 733 MaterialScience 2,864 3,185 109 278 270 506 Reconciliation 279 274 (71) (84) (23) (15) Group 10,228 12,090 1,435 1,833 2,176 2,899 1st Half 2014 1st Half 2015 1st Half 2014 1st Half 2015 1st Half 2014 1st Half 2015 HealthCare 8,984 11,412 1,858 2,054 2,580 3,231 Pharmaceuticals 5,742 6,692 1,297 1,397 1,800 2,065 Consumer Health 3,242 4,720 561 657 780 1,166 CropScience 5,370 5,815 1,458 1,445 1,713 1,773 MaterialScience 5,667 6,199 328 497 636 930 Reconciliation 559 543 (144) (219) (50) (94) Group 20,580 23,969 3,500 3,777 4,879 5,840 2014 figures restated 1 For definition see Chapter 6 “Calculation of EBIT(DA) Before Special Items.” CHANGES IN CORPORATE STRUCTURE Following the signing of the divestiture agreement in June 2015, the Diabetes Care business is recog- nized under discontinued operations. The Medical Care Division now only comprises the business with contrast agents and medical devices. All data and prior-year figures are restated accordingly unless otherwise indicated. 11 12 Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region 5. Business Development by Subgroup, Segment and Region 5.1 HealthCare Key Data – HealthCare [Table 4] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change € million € million % Fx & p adj. % € million € million % Fx & p adj. % Sales 4,615 5,908 + 28.0 + 8.3 8,984 11,412 + 27.0 + 7.7 Change in sales Volume + 5.5% + 6.8% + 7.4% + 6.7% Price + 1.9% + 1.5% + 1.3% + 1.0% Currency – 6.3% + 7.9% – 6.7% + 7.9% Portfolio + 0.8% + 11.8% + 0.9% + 11.4% Sales Pharmaceuticals 2,960 3,492 + 18.0 + 10.7 5,742 6,692 + 16.5 + 9.0 Consumer Health 1,655 2,416 + 46.0 + 4.0 3,242 4,720 + 45.6 + 5.5 € million € million % Fx adj. % € million € million % Fx adj. % Sales by region Europe 1,689 1,857 + 9.9 + 9.7 3,331 3,664 + 10.0 + 11.0 North America 1,186 1,946 + 64.1 + 41.7 2,256 3,658 + 62.1 + 41.0 Asia / Pacific 1,070 1,382 + 29.2 + 14.4 2,128 2,651 + 24.6 + 10.7 Latin America / Africa / Middle East 670 723 + 7.9 + 17.0 1,269 1,439 + 13.4 + 15.8 EBIT 927 1,068 + 15.2 1,858 2,054 + 10.5 Special items (25) (145) (9) (290) EBIT before special items1 952 1,213 + 27.4 1,867 2,344 + 25.5 EBITDA1 1,293 1,533 + 18.6 2,575 2,966 + 15.2 Special items (21) (142) (5) (265) EBITDA before special items1 1,314 1,675 + 27.5 2,580 3,231 + 25.2 EBITDA margin before special items1 28.5% 28.4% 28.7% 28.3% Gross cash flow2 920 1,131 + 22.9 1,771 2,184 + 23.3 Net cash flow2 465 737 + 58.5 1,105 1,954 + 76.8 2014 figures restated Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 6 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 8 “Financial Position of the Bayer Group.” Sales of the HealthCare subgroup increased by 8.3% (Fx & portfolio adj.) to €5,908 million (reported: +28.0%) in the second quarter of 2015. This increase was largely due to the gratifying sales perfor- mance of our recently launched pharmaceutical products. Business also expanded in the Consumer Health segment, with all divisions contributing to growth. The considerable reported increase was chief- ly attributable to sales of products acquired from Merck & Co., Inc., United States, and to currency effects. Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region HealthCare Quarterly Sales [Graphic 7] € million Q1 2014 2015 4,369 5,504 Q2 2014 2015 4,615 5,908 Q3 2014 2015 4,740 Q4 2014 2015 5,351 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 2014 fi gures restated ebit of HealthCare improved by 15.2% in the second quarter of 2015 to €1,068 million (q2 2014: €927 million), reflecting special charges of €145 million (q2 2014: €25 million). ebit before special items improved considerably by 27.4% to €1,213 million (q2 2014: €952 million). ebitda before special items increased by a substantial 27.5% to €1,675 million (q2 2014: €1,314 million). The continued very good business development at Pharmaceuticals and Consumer Health – which at Consumer Care was due mainly to the acquired businesses – resulted in positive earnings contributions, as did currency effects of approximately €110 million. Earnings were held back in particular by an increase in research and development expenses at Pharmaceuticals. HealthCare Quarterly EBIT [Graphic 8] HealthCare Quarterly EBITDA Before Special Items [Graphic 9] € million € million Q1 2014 2015 931 986 Q1 2014 2015 1,266 1,556 Q2 2014 2015 927 1,068 Q2 2014 2015 1,314 1,675 Q3 2014 2015 1,062 Q3 2014 2015 1,368 Q4 2014 2015 550 Q4 2014 2015 1,409 0 200 400 600 800 1,000 1,200 0 500 1,000 1,500 2,000 2014 fi gures restated 2014 fi gures restated 13 14 Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region PHARMACEUTICALS Key Data – Pharmaceuticals [Table 5] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change € million € million % Fx & p adj. % € million € million % Fx & p adj. % Sales 2,960 3,492 + 18.0 + 10.7 5,742 6,692 + 16.5 + 9.0 € million € million % Fx adj. % € million € million % Fx adj. % Sales by region Europe 1,091 1,232 + 12.9 + 12.3 2,126 2,363 + 11.1 + 11.3 North America 671 864 + 28.8 + 8.0 1,262 1,625 + 28.8 + 9.1 Asia / Pacific 797 998 + 25.2 + 9.9 1,598 1,913 + 19.7 + 5.7 Latin America / Africa / Middle East 401 398 – 0.7 + 12.5 756 791 + 4.6 + 9.7 EBIT 656 706 + 7.6 1,297 1,397 + 7.7 Special items (12) (74) 4 (98) EBIT before special items1 668 780 + 16.8 1,293 1,495 + 15.6 EBITDA1 919 1,007 + 9.6 1,808 1,971 + 9.0 Special items (8) (70) 8 (94) EBITDA before special items1 927 1,077 + 16.2 1,800 2,065 + 14.7 EBITDA margin before special items1 31.3% 30.8% 31.3% 30.9% Gross cash flow2 662 720 + 8.8 1,236 1,410 + 14.1 Net cash flow2 292 433 + 48.3 739 1,185 + 60.4 Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 6 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 8 “Financial Position of the Bayer Group.” Sales of our Pharmaceuticals segment rose by a substantial 10.7% (Fx & portfolio adj.) to €3,492 million in the second quarter of 2015. Our recently launched products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™ continued to experience dynamic growth, posting combined sales of €1,051 million (q2 2014: €702 million). The Pharmaceuticals business grew in all regions on a currency-adjusted basis. Best-Selling Pharmaceuticals Products [Table 6] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change Fx adj. Fx adj. € million € million % % € million € million % % Xarelto™ 381 549 + 44.1 + 42.6 723 1,031 + 42.6 + 40.6 Kogenate™ 243 299 + 23.0 + 14.3 513 560 + 9.2 + 1.6 Eylea™ 194 301 + 55.2 + 49.1 351 554 + 57.8 + 51.8 Mirena™ product family 208 270 + 29.8 + 11.1 386 502 + 30.1 + 12.5 Betaferon™ / Betaseron™ 216 222 + 2.8 – 8.8 406 430 + 5.9 – 5.2 Nexavar™ 196 231 + 17.9 + 7.1 379 427 + 12.7 + 1.9 YAZ™ / Yasmin™ / Yasminelle™ 191 174 – 8.9 – 9.8 372 355 – 4.6 – 6.6 Adalat™ 156 168 + 7.7 – 3.9 296 330 + 11.5 – 0.7 Aspirin™ Cardio 117 127 + 8.5 – 2.3 232 263 + 13.4 + 3.0 Glucobay™ 106 129 + 21.7 – 0.3 208 259 + 24.5 + 3.9 Avalox™ / Avelox™ 92 99 + 7.6 + 0.7 200 209 + 4.5 – 4.1 Stivarga™ 61 92 + 50.8 + 33.0 115 163 + 41.7 + 24.0 Xofigo™ 43 65 + 51.2 + 30.5 79 119 + 50.6 + 29.4 Levitra™ 62 53 – 14.5 – 14.2 124 106 – 14.5 – 15.8 Fosrenol™ 33 47 + 42.4 + 37.7 80 85 + 6.3 + 0.9 Total 2,299 2,826 + 22.9 + 13.9 4,464 5,393 + 20.8 + 11.9 Proportion of Pharmaceuticals sales 78% 81% 78% 81% Fx adj. = currency-adjusted Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region Our new oral anticoagulant Xarelto™ maintained its strong growth momentum. We registered substan- tial volume increases in all regions, especially in Europe and Japan. Business with Xarelto™ also devel- oped very positively in the United States, where it is marketed by a subsidiary of Johnson & Johnson. We posted further robust gains for our eye medicine Eylea™ mainly as a result of very good business in Europe and Japan after marketing authorization was granted in further indications. Our cancer drug Stivarga™ benefited from positive development in the United States and particularly from the reversal of a rebate provision in France. A further positive contribution to sales development came from the cancer drug Xofigo™, particularly in Europe. Sales of Adempas™ to treat pulmonary hypertension amounted to €44 million (q2 2014: €23 million) and reflected the proportionate recognition of the one-time payment resulting from the sGC collaboration with Merck & Co., United States. Higher sales of our blood-clotting drug Kogenate™ were chiefly attributable to shifts in order patterns. The hormone-releasing intrauterine devices of the Mirena™ product family – Mirena™ and Jaydess™ / Skyla™ – posted encouraging development, largely as a result of higher volumes in the United States. We also registered sales gains for our cancer drug Nexavar™, particularly in the United States. Business with our multiple sclerosis drug Betaferon™ / Betaseron™ was down overall, due partly to increased competition in Europe and the United States. Receding sales of our yaz™ / Yasmin™ / Yasminelle™ line of oral contraceptives resulted from lower demand in Europe and the United States. ebit of the Pharmaceuticals segment rose by 7.6% in the second quarter of 2015 to €706 million. This figure reflected special charges of €74 million (q2 2014: €12 million) that mainly comprised €54 million from the revaluation of other receivables and €18 million in costs for efficiency improvement measures. ebit before special items increased by 16.8% to €780 million. ebitda before special items improved by 16.2% to €1,077 million. This earnings growth was primarily attributable to the ongoing good develop- ment of business, particularly for our recently launched products, and to positive currency effects of about €70 million. Earnings were diminished as expected by increased investment in research and development. Sales of the Pharmaceuticals segment rose by 9.0% (Fx & portfolio adj.) in the first half of 2015 to €6,692 million. This increase was driven by our recently launched products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™, which generated combined sales of €1,948 million (h1 2014: €1,300 million). Pharmaceutical sales moved ahead in all regions. ebit for the first half of 2015 advanced by 7.7% to €1,397 million after special charges of €98 million (h1 2014: special gains of €4 million) that mainly comprised €54 million from the revaluation of other receivables and €28 million in costs for efficiency improvement measures. ebit before special items advanced by 15.6% to €1,495 million. ebitda before special items improved by 14.7% to €2,065 million after positive currency effects of about €100 million. 15 16 Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region CONSUMER HEALTH Key Data – Consumer Health [Table 7] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change € million € million % Fx & p adj. % € million € million % Fx & p adj. % Sales 1,655 2,416 + 46.0 + 4.0 3,242 4,720 + 45.6 + 5.5 Consumer Care 932 1,590 + 70.6 + 3.2 1,855 3,146 + 69.6 + 5.8 Animal Health 358 428 + 19.6 + 6.4 688 814 + 18.3 + 6.3 Medical Care 365 398 + 9.0 + 3.8 699 760 + 8.7 + 4.0 € million € million % Fx adj. % € million € million % Fx adj. % Sales by region Europe 598 625 + 4.5 + 4.8 1,205 1,301 + 8.0 + 10.5 North America 515 1,082 + 110.1 + 85.4 994 2,033 + 104.5 + 81.5 Asia / Pacific 273 384 + 40.7 + 27.5 530 738 + 39.2 + 25.8 Latin America / Africa / Middle East 269 325 + 20.8 + 23.8 513 648 + 26.3 + 24.8 EBIT 271 362 + 33.6 561 657 + 17.1 Special items (13) (71) (13) (192) EBIT before special items1 284 433 + 52.5 574 849 + 47.9 EBITDA1 374 526 + 40.6 767 995 + 29.7 Special items (13) (72) (13) (171) EBITDA before special items1 387 598 + 54.5 780 1,166 + 49.5 EBITDA margin before special items1 23.4% 24.8% 24.1% 24.7% Gross cash flow2 258 411 + 59.3 535 774 + 44.7 Net cash flow2 173 304 + 75.7 366 769 + 110.1 2014 figures restated Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 6 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 8 “Financial Position of the Bayer Group.” Sales of the Consumer Health segment climbed by 4.0% (Fx & portfolio adj.) to €2,416 million in the second quarter of 2015, with all divisions contributing to this growth. The significant reported increase in sales in the Consumer Care Division resulted from the products added through the recent acquisitions. Following the signing of the divestiture agreement in June 2015, the Diabetes Care business is recognized under discontinued operations. The Medical Care Division now only comprises the business with contrast agents and medical devices. All data and prior-year figures are restated accordingly. Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region Best-Selling Consumer Health Products [Table 8] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change € million € million % Fx adj. % € million € million % Fx adj. % Claritin™ (Consumer Care)1 – 167 . . – 369 . . Advantage™ product family (Animal Health) 140 169 + 20.7 + 3.9 270 313 + 15.9 + 1.4 Aspirin™ (Consumer Care) 92 101 + 9.8 + 0.2 194 221 + 13.9 + 4.8 Aleve™ (Consumer Care) 83 120 + 44.6 + 19.9 157 215 + 36.9 + 14.7 Bepanthen™ / Bepanthol™ (Consumer Care) 91 88 – 3.3 + 6.9 177 182 + 2.8 + 10.4 Coppertone™ (Consumer Care)1 – 99 . . – 182 . . Ultravist™ (Medical Care) 76 84 + 10.5 + 2.9 145 157 + 8.3 + 1.2 Gadovist™ / Gadavist™ (Medical Care) 57 71 + 24.6 + 12.1 110 140 + 27.3 + 16.6 Dr Scholl’s™ (Consumer Care)1 – 78 . . – 136 . . Canesten™ (Consumer Care) 66 65 – 1.5 + 4.6 126 129 + 2.4 + 3.5 Total 605 1,042 + 72.2 + 53.5 1,179 2,044 + 73.4 + 55.0 Proportion of Consumer Health sales 37% 43% 36% 43% Fx adj.= currency-adjusted Total sales of Aspirin™ (including Aspirin™ Complex), also including Aspirin™ Cardio, which is reflected in sales of the Pharmaceuticals segment, increased by 9.1% (Fx adj. –1.1%) in Q2 2015 to €228 million (Q2 2014: €209 million). These total sales increased in the first half of 2015 by 13.6% (Fx adj. +12.9%) to €484 million (H1 2014: €426 million). 1 product acquired from Merck & Co., Inc. Sales of the Consumer Care Division improved by 3.2% (Fx & portfolio adj.) to €1,590 million. Business with our analgesic Aspirin™ was level with the prior-year period. A decline in sales in the United States was offset by the good development in Europe and Latin America / Africa / Middle East. Business with our analgesic Aleve™ improved, due mainly to sales being brought forward in the United States. Our Bepanthen™ / Bepanthol™ line of skincare products developed positively, especially in the Emerging Markets. We also registered an increase in sales of our antifungal Canesten™. Business with the products acquired from Merck & Co., Inc., United States, totaled €528 million in the second quarter of 2015. Sales of the Animal Health Division rose by 6.4% (Fx & portfolio adj.) to €428 million. Our Seresto™ flea and tick collar made a significant contribution to this development, particularly in the United States and Europe. The increase in sales of the Advantage™ family of flea, tick and worm control products was mainly attributable to gratifying development in the United States. Sales of the Medical Care Division improved by 3.8% (Fx & portfolio adj.) to €398 million, mainly as a result of gratifying development in the United States. We posted significant sales gains for our mri con- trast agent Gadovist™ / Gadavist™ following its registration in additional indications. ebit of the Consumer Health segment improved by a substantial 33.6% in the second quarter of 2015 to €362 million after special charges of €71 million (q2 2014: €13 million). The special items mainly included charges of €55 million for the integration of acquired businesses and €13 million for efficiency improvement measures. ebit before special items climbed by a robust 52.5% to €433 million. ebitda before special items improved by 54.5% to €598 million (q2 2014: €387 million). This growth in earn- ings was attributable to all divisions. The main contributions came from the acquired consumer care businesses and a positive currency effect of around €40 million. Sales of our Consumer Health segment in the first half of 2015 improved by 5.5% (Fx & portfolio adj.) to €4,720 million. All divisions contributed to this increase. The Consumer Care Division in particular grew sales on a currency- and portfolio-adjusted basis, especially in Latin America and Europe. ebit in the first half of 2015 climbed by 17.1% to €657 million, reflecting special charges of €192 million (h1 2014: €13 million) that were due mainly to integration costs. ebit before special items improved by 47.9% to €849 million (h1 2014: €574 million). ebitda before special items improved by a significant 49.5% to €1,166 million (h1 2014: €780 million) after positive currency effects of approxi- mately €60 million. 17 18 Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region 5.2 CropScience Key Data – CropScience [Table 9] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change € million € million % Fx & p adj. % € million € million % Fx & p adj. % Sales 2,470 2,723 + 10.2 – 0.6 5,370 5,815 + 8.3 + 0.2 Change in sales Volume + 7.5% – 0.7% + 9.0% – 1.6% Price + 3.0% + 0.1% + 2.2% + 1.8% Currency – 7.2% + 10.0% – 7.1% + 7.4% Portfolio 0.0% + 0.8% + 0.1% + 0.7% Sales Crop Protection / Seeds 2,273 2,472 + 8.8 – 1.3 5,007 5,361 + 7.1 – 0.2 Environmental Science 197 251 + 27.4 + 6.6 363 454 + 25.1 + 5.5 € million € million % Fx adj. % € million € million % Fx adj. % Sales by region Europe 887 894 + 0.8 + 0.9 2,126 2,272 + 6.9 + 10.3 North America 748 915 + 22.3 + 2.0 1,702 1,858 + 9.2 – 7.6 Asia / Pacific 371 443 + 19.4 + 4.9 700 803 + 14.7 + 0.6 Latin America / Africa / Middle East 464 471 + 1.5 – 8.8 842 882 + 4.8 – 6.3 EBIT 470 571 + 21.5 1,458 1,445 – 0.9 Special items 0 (28) 0 (75) EBIT before special items1 470 599 + 27.4 1,458 1,520 + 4.3 EBITDA1 615 705 + 14.6 1,713 1,703 – 0.6 Special items 0 (28) 0 (70) EBITDA before special items1 615 733 + 19.2 1,713 1,773 + 3.5 EBITDA margin before special items1 24.9% 26.9% 31.9% 30.5% Gross cash flow2 469 537 + 14.5 1,239 1,242 + 0.2 Net cash flow2 971 742 – 23.6 249 (81) . Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 6 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 8 “Financial Position of the Bayer Group.” Sales of the CropScience subgroup in the second quarter of 2015, at €2,723 million, were level with the strong prior-year period (Fx & portfolio adj.: –0.6%; reported: +10.2%). Crop Protection / Seeds posted a slight sales decline against the background of a persisting difficult market environment, particularly in Latin America. This was partly offset by substantial increases at Environmental Science. Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region CropScience Quarterly Sales [Graphic 10] € million Q1 2014 2015 2,900 3,092 Q2 2014 2015 2,470 2,723 Q3 2014 2015 1,929 Q4 2014 2015 2,195 0 500 1,000 1,500 2,000 2,500 3,000 3,500 Sales of Crop Protection / Seeds fell by 1.3% (Fx & portfolio adj.) to €2,472 million in the second quarter of 2015, mainly as a result of a sharp decline in business at Insecticides. By contrast, our Seeds busi- ness, which expanded by a double-digit figure, registered a positive trend – especially for vegetables and rice. We also significantly grew sales at Herbicides. Sales of Environmental Science advanced by 6.6% (Fx & portfolio adj.) to €251 million, mainly as a result of strong growth in products for professional users. Sales by Business Unit [Table 10] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change € million € million % Fx & p adj. % € million € million % Fx & p adj. % Herbicides 683 787 + 15.2 + 5.6 1,648 1,693 + 2.7 – 2.7 Fungicides 781 827 + 5.9 – 2.4 1,443 1,657 + 14.8 + 8.9 Insecticides 390 360 – 7.7 – 17.7 742 695 – 6.3 – 15.2 SeedGrowth 156 163 + 4.5 – 5.1 408 384 – 5.9 – 12.5 Crop Protection 2,010 2,137 + 6.3 – 2.9 4,241 4,429 + 4.4 – 1.9 Seeds 263 335 + 27.4 + 11.0 766 932 + 21.7 + 9.1 Crop Protection / Seeds 2,273 2,472 + 8.8 – 1.3 5,007 5,361 + 7.1 – 0.2 Environmental Science 197 251 + 27.4 + 6.6 363 454 + 25.1 + 5.5 Fx & p adj. = currency- and portfolio-adjusted The sales development of CropScience varied by region: Sales in Europe came in at €894 million in the second quarter of 2015, up 0.9% on a currency-adjusted basis. Our seed treatments were successful, particularly those for use in cereals. The vegetable seed business also registered strong, double-digit growth. Sales at Fungicides were down against the strong prior-year quarter following an early start to the season in the first quarter and lower pest pressure due to weather conditions. Sales in North America climbed by 2.0% (Fx adj.) to €915 million. This increase was mainly attributa- ble to sales of herbicides in the United States for use particularly in corn and cotton. Sales at Fungicides fell sharply due in part to dry weather in Canada. At Environmental Science, business with products for professional users developed positively. Sales in the Asia / Pacific region climbed by 4.9% (Fx adj.) to €443 million. The Seeds business regis- tered a significant expansion in sales, particularly for rice, cotton and vegetables. Herbicides and Fun- gicides also posted successful development. 19 20 Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region Sales in the Latin America / Africa / Middle East region moved back by 8.8% (Fx adj.) to €471 million. Crop Protection / Seeds registered a decline mainly in Insecticides in Brazil, where sales were weakened by lower pest pressure. Business at Herbicides and SeedGrowth also fell sharply in that region. At the same time, we posted strong sales gains at Fungicides, particularly for soybeans, and at Environmental Science. CropScience Quarterly EBIT [Graphic 11] CropScience Quarterly EBITDA Before Special Items [Graphic 12] € million € million Q1 2014 2015 988 874 Q1 2014 2015 1,098 1,040 Q2 2014 2015 470 571 Q2 2014 2015 615 733 Q3 2014 2015 157 Q3 2014 2015 278 Q4 2014 2015 191 Q4 2014 2015 369 0 200 400 600 800 1,000 1,200 0 200 400 600 800 1,000 1,200 ebit of CropScience rose by 21.5% in the second quarter of 2015 to €571 million, reflecting special charges of €28 million (q2 2014: €0 million) related to litigations and the revaluation of other receiva- bles. ebit before special items climbed by 27.4% to €599 million. ebitda before special items came in 19.2% above the prior-year quarter at €733 million (q2 2014: €615 million). This increase was driven by a positive currency effect of about €70 million. Sales of CropScience in the first half of 2015 were level year on year at €5,815 million (Fx & portfolio adj. +0.2%) despite the difficult market environment. At Crop Protection / Seeds, the positive overall development at Fungicides and Seeds offset lower sales at Insecticides and SeedGrowth. Environmental Science posted gratifying growth. In regional terms, we were particularly successful in the first half of 2015 in Europe, registering double-digit growth. By contrast, sales were down in North America and in Latin America / Africa / Middle East. ebit of CropScience for the first half of 2015 came in level with the prior-year period at €1,445 million (–0.9%). Earnings were diminished by special charges of €75 million (h1 2014: €0 million) that resulted mainly from the consolidation of production sites. ebit before special items climbed by 4.3% to €1,520 million. ebitda before special items came in 3.5% above the prior-year period at €1,773 million. Nega- tive effects of lower volumes and higher selling expenses were more than offset by an increase in selling prices and a positive currency effect of around €30 million. Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region 5.3 MaterialScience Key Data – MaterialScience [Table 11] 2nd Quarter 2014 2nd Quarter 2015 Change 1st Half 2014 1st Half 2015 Change € million € million % Fx & p adj. % € million € million % Fx & p adj. % Sales 2,864 3,185 + 11.2 + 0.6 5,667 6,199 + 9.4 – 0.7 Change in sales Volume + 5.6% + 7.0% + 6.6% + 4.7% Price – 2.0% – 6.4% – 2.4% – 5.4% Currency – 3.6% + 10.6% – 3.4% + 10.1% Portfolio – 0.4% 0.0% – 0.5% 0.0% Sales Polyurethanes 1,532 1,638 + 6.9 – 2.9 3,042 3,189 + 4.8 – 4.8 Polycarbonates 694 828 + 19.3 + 5.3 1,353 1,592 + 17.7 + 4.7 Coatings, Adhesives, Specialties 483 561 + 16.1 + 6.0 952 1,095 + 15.0 + 5.4 Industrial Operations 155 158 + 1.9 – 2.6 320 323 + 0.9 – 3.8 € million € million % Fx adj. % € million € million % Fx adj. % Sales by region Europe 1,142 1,158 + 1.4 + 1.6 2,283 2,251 – 1.4 – 1.2 North America 646 766 + 18.6 – 4.2 1,242 1,484 + 19.5 – 2.5 Asia / Pacific 746 904 + 21.2 – 0.4 1,482 1,760 + 18.8 – 1.0 Latin America / Africa / Middle East 330 357 + 8.2 + 8.8 660 704 + 6.7 + 4.8 EBIT 109 278 + 155.0 328 497 + 51.5 Special items (17) (59) (19) (101) EBIT before special items1 126 337 + 167.5 347 598 + 72.3 EBITDA1 256 448 + 75.0 620 851 + 37.3 Special items (14) (58) (16) (79) EBITDA before special items1 270 506 + 87.4 636 930 + 46.2 EBITDA margin before special items1 9.4% 15.9% 11.2% 15.0% Gross cash flow2 214 359 + 67.8 499 671 + 34.5 Net cash flow2 133 360 + 170.7 89 523 . Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 6 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 8 “Financial Position of the Bayer Group.” Sales of the MaterialScience subgroup in the second quarter of 2015, at €3,185 million, were level with the prior-year figures (Fx & portfolio adj.: +0.6%; reported +11.2%). Volumes expanded in all regions. Sales were diminished by negative price effects, particularly at Polyurethanes. Raw material prices were down steeply overall against the prior-year period. 21 22 Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region MaterialScience Quarterly Sales [Graphic 13] € million Q1 2014 2015 2,803 3,014 Q2 2014 2015 2,864 3,185 Q3 2014 2015 3,036 Q4 2014 2015 2,948 0 500 1,000 1,500 2,000 2,500 3,000 3,500 The Polyurethanes business unit saw sales fall by 2.9% (Fx & portfolio adj.) to €1,638 million. Higher volumes were not sufficient to offset the sharp decline in selling prices in the toluene diisocyanate (tdi) and diphenylmethane diisocyanate (mdi) product groups. For polyether (pet), on the other hand, a clear expansion of volumes coupled with only moderately lower prices led to an increase in sales. Business expanded in Latin America / Africa / Middle East, while the positive volume effects in the other regions were more than offset by lower selling prices. The Polycarbonates business unit raised sales by 5.3% (Fx & portfolio adj.) to €828 million. This growth was due to much higher volumes in all regions, which resulted particularly from greater demand in the automotive industry. Selling prices were down overall compared with the prior-year period. Sales in the Coatings, Adhesives, Specialties business unit moved forward by 6.0% (Fx & portfolio adj.) to €561 million, mainly as a result of higher volumes. Selling prices were down slightly overall compared with the prior-year period. Sales of Industrial Operations receded by 2.6% (Fx & portfolio adj.) to €158 million due to slightly lower selling prices and volumes. Bayer Interim Report Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region MaterialScience Quarterly EBIT [Graphic 14] MaterialScience Quarterly EBITDA Before Special Items [Graphic 15] € million € million Q1 2014 2015 219 219 Q1 2014 2015 366 424 Q2 2014 2015 109 278 Q2 2014 2015 270 506 Q3 2014 2015 184 Q3 2014 2015 334 Q4 2014 2015 43 Q4 2014 2015 217 0 50 100 150 200 250 300 0 100 200 300 400 500 ebit of MaterialScience in the second quarter of 2015 was well above the prior-year level at €278 million (+155.0%). This figure reflected special charges of €59 million (q2 2014: €17 million), chiefly for the consolidation of production sites and the planned stock market flotation of Materi- alScience. ebit before special items climbed by a substantial 167.5% to €337 million. ebitda before special items improved significantly by 87.4% to €506 million (q2 2014: €270 million). Considerably lower raw material prices more than offset the decline in selling prices. Earnings were additionally buoyed by higher volumes and positive currency effects of around €80 million. Sales of MaterialScience in the first half of 2015 were level year on year at €6,199 million (Fx & port- folio adj. –0.7%). Lower selling prices at Polyurethanes and Polycarbonates were offset by higher vol- umes at Polycarbonates, Coatings, Adhesives, Specialties and Polyurethanes. We registered higher volumes and lower selling prices in all regions. ebit advanced by a significant 51.5% to €497 million. ebitda before special items climbed by 46.2% to €930 million after about €130 million in positive currency effects. 23 24 Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region 5.4 Business Development by Region Sales by Region and Segment (by Market) Europe 2nd Quarter 2014 2nd Quarter 2015 Change € million € million % Fx adj. % HealthCare 1,689 1,857 + 9.9 + 9.7 Pharmaceuticals 1,091 1,232 + 12.9 + 12.3 Consumer Health 598 625 + 4.5 + 4.8 CropScience 887 894 + 0.8 + 0.9 MaterialScience 1,142 1,158 + 1.4 + 1.6 Group (incl. reconciliation) 3,980 4,167 + 4.7 + 4.7 1st Half 2014 1st Half 2015 Change € million € million % Fx adj. % HealthCare 3,331 3,664 + 10.0 + 11.0 Pharmaceuticals 2,126 2,363 + 11.1 + 11.3 Consumer Health 1,205 1,301 + 8.0 + 10.5 CropScience 2,126 2,272 + 6.9 + 10.3 MaterialScience 2,283 2,251 – 1.4 – 1.2 Group (incl. reconciliation) 8,265 8,693 + 5.2 + 6.5 2014 figures restated Fx adj. = currency-adjusted 2nd Quarter 2014 € million 1,186 671 515 748 646 2,582 1st Half 2014 € million 2,256 1,262 994 1,702 1,242 5,204 2nd Quarter 2015 € million 1,946 864 1,082 915 766 3,630 1st Half 2015 € million 3,658 1,625 2,033 1,858 1,484 7,005 Bayer Interim Report North America Change % Fx adj. % + 64.1 + 41.7 + 28.8 + 8.0 + 110.1 + 85.4 + 22.3 + 2.0 + 18.6 – 4.2 + 40.6 + 18.6 Change % Fx adj. % + 62.1 + 41.0 + 28.8 + 9.1 + 104.5 + 81.5 + 9.2 – 7.6 + 19.5 – 2.5 + 34.6 + 14.7 Bayer Interim Report 2nd Quarter 2014 2nd Quarter 2015 € million € million 1,070 1,382 797 998 273 384 371 443 746 904 2,192 2,732 1st Half 2014 1st Half 2015 € million € million 2,128 2,651 1,598 1,913 530 738 700 803 1,482 1,760 4,320 5,221 % + 29.2 + 25.2 + 40.7 + 19.4 + 21.2 + 24.6 % + 24.6 + 19.7 + 39.2 + 14.7 + 18.8 + 20.9 Asia / Pacific Change Fx adj. % + 14.4 + 9.9 + 27.5 + 4.9 – 0.4 + 7.6 Change Fx adj. % + 10.7 + 5.7 + 25.8 + 0.6 – 1.0 + 4.9 2nd Quarter 2014 € million 670 401 269 464 330 1,474 1st Half 2014 € million 1,269 756 513 842 660 2,791 Interim Group Management Report as of June 30, 2015 5. Business Development by Subgroup, Segment and Region [Table 12] Latin America / Africa / Middle East Total 2nd Quarter 2015 Change 2nd Quarter 2014 2nd Quarter 2015 Change € million % Fx adj. % € million € million % Fx adj. % 723 + 7.9 + 17.0 4,615 5,908 + 28.0 + 20.1 398 – 0.7 + 12.5 2,960 3,492 + 18.0 + 10.7 325 + 20.8 + 23.8 1,655 2,416 + 46.0 + 36.8 471 + 1.5 – 8.8 2,470 2,723 + 10.2 + 0.2 357 + 8.2 + 8.8 2,864 3,185 + 11.2 + 0.6 1,561 + 5.9 + 7.1 10,228 12,090 + 18.2 + 9.2 1st Half 2015 Change 1st Half 2014 1st Half 2015 Change € million % Fx adj. % € million € million % Fx adj. % 1,439 + 13.4 + 15.8 8,984 11,412 + 27.0 + 19.1 791 + 4.6 + 9.7 5,742 6,692 + 16.5 + 9.0 648 + 26.3 + 24.8 3,242 4,720 + 45.6 + 37.0 882 + 4.8 – 6.3 5,370 5,815 + 8.3 + 0.9 704 + 6.7 + 4.8 5,667 6,199 + 9.4 – 0.7 3,050 + 9.3 + 6.7 20,580 23,969 + 16.5 + 8.3 25 26 Bayer Interim Report Interim Group Management Report as of June 30, 2015 6. Calculation of EBIT(DA) Before Special Items 6. Calculation of EBIT(DA) Before Special Items Key performance indicators for the Bayer Group are ebit before special items and ebitda before special items. These indicators are reported in order to allow a more accurate assessment of business opera- tions. The special items – comprising effects that are non-recurring or do not regularly recur or attain similar magnitudes – are detailed in the following table. ebitda, ebitda before special items and ebit before special items are not defined in the International Financial Reporting Standards (ifrs) and should therefore be regarded only as supplementary information. ebitda before special items is a meaningful indicator of operating performance since it is not affected by depreciation, amortization, impairment losses, impairment loss reversals or special items. By reporting this indicator, the company aims to give readers a clear picture of the results of operations and to ensure comparability of data over time. The ebitda margin before special items, which is the ratio of ebitda before special items to sales, serves as a relative indicator for the internal and external comparison of operational earning power. Depreciation, amortization and impairments rose by 20.1% in the first half of 2015 to €1,616 million (h1 2014: €1,345 million), comprising €870 million (h1 2014: €711) in amortization and impairments of intangible assets and €746 million (h1 2014: €634 million) in depreciation and impairments of property, plant and equipment. Impairments totaled €67 million (h1 2014: €49 million), of which €52 million (h1 2014: €7 million) was included in special items. Bayer Interim Report Interim Group Management Report as of June 30, 2015 6. Calculation of EBIT(DA) Before Special Items Special Items Reconciliation [Table 13] EBIT¹ 2nd Quarter 2014 EBIT¹ 2nd Quarter 2015 EBIT¹ 1st Half 2014 EBIT¹ 1st Half 2015 EBITDA² 2nd Quarter 2014 EBITDA² 2nd Quarter 2015 EBITDA² 1st Half 2014 EBITDA² 1st Half 2015 € million € million € million € million € million € million € million € million Before special items 1,483 2,088 3,541 4,276 2,176 2,899 4,879 5,840 HealthCare (25) (145) (9) (290) (21) (142) (5) (265) Restructuring – (32) – (73) – (29) – (48) Litigations – (1) – (14) – (1) – (14) Integration costs (25) (55) (44) (146) (21) (55) (40) (146) Settlement of pre-existing relationship – – 35 – – – 35 – Divestitures – 3 – 3 – 3 – 3 Revaluation of other receivables – (60) – (60) – (60) – (60) CropScience – (28) – (75) – (28) – (70) Litigations – (17) – (18) – (17) – (18) Divestitures – – – (46) – – – (41) Revaluation of other receivables – (11) – (11) – (11) – (11) MaterialScience (17) (59) (19) (101) (14) (58) (16) (79) Restructuring (17) (57) (19) (99) (14) (56) (16) (77) Revaluation of other receivables – (2) – (2) – (2) – (2) Reconciliation (6) (23) (13) (33) (6) (23) (13) (33) Restructuring (6) (22) (13) (32) (6) (22) (13) (32) Revaluation of other receivables – (1) – (1) – (1) – (1) Total special items (48) (255) (41) (499) (41) (251) (34) (447) of which cost of goods sold (10) (51) (10) (237) (10) (48) (10) (191) of which selling expenses (7) (45) (11) (71) (7) (46) (11) (67) of which research and development expenses (2) (9) (2) (11) (2) (7) (2) (9) of which general administration expenses (17) (43) (27) (63) (13) (43) (23) (63) of which other operating income / expenses (12) (107) 9 (117) (9) (107) 12 (117) After special items 1,435 1,833 3,500 3,777 2,135 2,648 4,845 5,393 2014 figures restated 1 EBIT = earnings before financial result and taxes 2 EBITDA = EBIT plus amortization and impairment losses on intangible assets, plus depreciation and impairment losses on property, plant and equipment, minus impairment loss reversals 27 28 Bayer Interim Report Interim Group Management Report as of June 30, 2015 7. Core Earnings Per Share 7. Core Earnings Per Share Earnings per share according to ifrs are affected by the purchase price allocation for acquisitions and other special factors. To enhance comparability, we also determine core net income from continuing operations after eliminating amortization and impairment losses / impairment loss reversals on intangi- ble assets, impairment losses / impairment loss reversals on property, plant and equipment, and special items, along with the related tax effects. From this core net income we calculate core earnings per share in the same way as earnings per share. Core earnings per share form the basis for our dividend policy. Core earnings per share in the second quarter of 2015 increased by 33.8% to €1.98 (q2 2014: €1.48). Core Earnings per Share [Table 14] 2nd Quarter 2014 2nd Quarter 2015 1st Half 2014 1st Half 2015 € million € million € million € million EBIT (as per income statements) 1,435 1,833 3,500 3,777 Amortization and impairment losses / loss reversals on intangible assets 365 446 711 870 Impairment losses / loss reversals on property, plant and equipment 35 19 35 55 Special items (other than amortization and impairment losses / loss reversals) 41 251 34 447 Core EBIT 1,876 2,549 4,280 5,149 Financial result (as per income statements) (173) (287) (332) (561) Special items in the financial result (5) (6) (49) (9) Income taxes (as per income statements) (343) (405) (851) (811) Tax effects related to amortization, impairment losses / loss reversals and special items (129) (210) (235) (431) Income after income taxes attributable to non-controlling interest (as per income statements) (2) (6) (4) (12) Core net income from continuing operations 1,224 1,635 2,809 3,325 Shares Shares Shares Shares Number of issued ordinary shares 826,947,808 826,947,808 826,947,808 826,947,808 Core earnings per share from continuing operations (€) 1.48 1.98 3.40 4.02 Core earnings per share from discontinued operations (€) 0.05 0.02 0.08 0.08 Core earnings per share from continuing and discontinued operations (€) 1.53 2.00 3.48 4.10 2014 figures restated Core net income from continuing operations, core earnings per share from continuing operations and core ebit are not defined in ifrs. Bayer Interim Report Interim Group Management Report as of June 30, 2015 8. Financial Position of the Bayer Group 8. Financial Position of the Bayer Group Bayer Group Summary Statements of Cash Flows [Table 15] 2nd Quarter 2014 2nd Quarter 2015 1st Half 2014 1st Half 2015 € million € million € million € million Gross cash flow1 1,665 2,173 3,683 4,184 Changes in working capital / other non-cash items (96) (223) (1,970) (1,557) Net cash provided by (used in) operating activities (net cash flow), continuing operations 1,569 1,950 1,713 2,627 Net cash provided by (used in) operating activities (net cash flow), discontinued operations 32 9 51 56 Net cash provided by (used in) operating activities (net cash flow) (total) 1,601 1,959 1,764 2,683 Net cash provided by (used in) investing activities (total) (517) (527) (2,697) (1,123) Net cash provided by (used in) financing activities (total) (2,507) 334 512 (76) Change in cash and cash equivalents due to business activities (1,423) 1,766 (421) 1,484 Cash and cash equivalents at beginning of period 2,631 1,607 1,662 1,853 Change due to exchange rate movements and to changes in scope of consolidation 20 (126) (13) (90) Cash and cash equivalents at end of period 1,228 3,247 1,228 3,247 1 Gross cash flow = income after income taxes, plus income taxes, plus financial result, minus income taxes paid or accrued, plus depreciation, amortization and impairment losses, minus impairment loss reversals, plus / minus changes in pension provisions, minus gains / plus losses on retirements of noncurrent assets, minus gains from the remeasurement of already held assets in step acquisitions. The change in pension provisions includes the elimination of non-cash components of EBIT. It also contains benefit payments during the year. OPERATING CASH FLOW Gross cash flow from continuing operations in the second quarter of 2015 climbed by 30.5% against the prior-year period to €2,173 million due to the improvement in ebitda. Net cash flow (total) rose by 22.4% to €1,959 million despite an increase in cash tied up in working capital. Net cash flow (total) reflected income tax payments of €352 million (q2 2014: €360 million). Gross cash flow from continuing operations in the first half of 2015 advanced by 13.6% against the prior-year period to €4,184 million. Net cash flow (total) increased by a considerable 52.1% to €2,683 million due to a reduction in cash tied up in working capital, reflecting income tax payments of €796 million (h1 2014: €735 million). INVESTING CASH FLOW Net cash outflow for investing activities in the second quarter of 2015 amounted to €527 million. Dis- bursements for property, plant and equipment and intangible assets were 13.6% higher at €601 million (q2 2014: €529 million). Of this amount, HealthCare accounted for €263 million (q2 2014: €225 million), CropScience for €149 million (q2 2014: €125 million) and MaterialScience for €135 million (q2 2014: €139 million). Net cash outflow for investing activities in the first half of 2015 totaled €1,123 million. Disbursements for property, plant and equipment and intangible assets rose by 6.8% to €946 million (h1 2014: €886 million). Of this amount, HealthCare accounted for €373 million (h1 2014: €326 million), CropScience for €245 million (h1 2014: €240 million) and MaterialScience for €224 million (h1 2014: €237 million). Cash outflows for noncurrent and current financial assets amounted to €332 million (h1 2014: €60 million). FINANCING CASH FLOW In the second quarter of 2015, there was a net cash inflow of €334 million for financing activities, in- cluding net borrowings of €2,349 million (q2 2014: net loan repayments of €705 million). Net interest payments were 136.9% higher at €154 million (q2 2014: €65 million). The cash outflow for dividends amounted to €1,861 million (q2 2014: €1,737 million). In the first half of 2015, there was a net cash outflow of €76 million for financing activities, including net borrowings of €2,026 million (h1 2014: €2,373 million). Net interest payments increased by 91.9% to €236 million (h1 2014: €123 million). 29 30 Bayer Interim Report Interim Group Management Report as of June 30, 2015 8. Financial Position of the Bayer Group LIQUID ASSETS AND NET FINANCIAL DEBT Net Financial Debt [Table 16] Dec. 31, 2014 March 31, 2015 June 30, 2015 € million € million € million Bonds and notes / promissory notes 14,964 15,842 16,831 of which hybrid bonds1 4,552 4,544 5,824 Liabilities to banks 3,835 3,916 3,543 Liabilities under finance leases 441 476 458 Liabilities from derivatives 642 1,254 738 Other financial liabilities 1,976 1,943 3,278 Positive fair values of hedges of recorded transactions (258) (400) (334) Financial liabilities 21,600 23,031 24,514 Cash and cash equivalents (1,853) (1,607) (3,247) Current financial assets (135) (132) (133) Net financial debt 19,612 21,292 21,134 1 classified as debt according to IFRS Net financial debt of the Bayer Group declined by just 0.7% from €21.3 billion on March 31, 2015, to €21.1 billion on June 30, 2015. Cash inflows from operating activities and positive currency effects offset the outflow for the dividend payment. Financial debt included four subordinated hybrid bonds, which were reflected at a total amount of €5.8 billion. Net financial debt should be viewed against the fact that Moody’s and Standard & Poor’s treat 75% and 50%, respectively, of the hybrid bond with a nominal volume of €1.3 billion issued in July 2005 as equity. Moody’s and Standard & Poor’s treat 50% of the hybrid bonds with nominal vol- umes of €1.75 billion and €1.5 billion issued in July 2014 and of the hybrid bond with a nominal volume of €1.3 billion issued in April 2015 as equity. The hybrid bonds thus have a more limited effect on the Group’s rating-specific debt indicators than conventional borrowings. The other financial liabilities as of June 30, 2015, included commercial paper totaling €2.6 billion. Our noncurrent financial liabilities rose in the second quarter of 2015 from €16.9 billion to €17.2 billion. At the same time, current financial liabilities increased from €6.5 billion to €7.7 billion owing to an increase in commercial paper. Standard & Poor’s gives Bayer a long-term issuer rating of a– with stable outlook, while Moody’s gives us a long-term rating of a3 with stable outlook. The short-term ratings are a2 (Standard & Poor’s) and p2 (Moody’s). These investment-grade ratings document good creditworthiness. Bayer Interim Report Interim Group Management Report as of June 30, 2015 8. Financial Position of the Bayer Group ASSET AND CAPITAL STRUCTURE Bayer Group Summary Statements of Financial Position [Table 17] Dec. 31, 2014 March 31, 2015 June 30, 2015 € million € million € million Noncurrent assets 48,007 51,689 49,462 Current assets 22,227 24,951 25,975 Assets held for sale and discontinued operations – – 183 Total current assets 22,227 24,951 26,158 Total assets 70,234 76,640 75,620 Equity 20,218 21,863 22,423 Noncurrent liabilities 34,513 34,514 32,433 Current liabilities 15,503 20,263 20,650 Liabilities directly related to assets held for sale and discontinued operations – – 114 Total current liabilities 15,503 20,263 20,764 Liabilities 50,016 54,777 53,197 Total equity and liabilities 70,234 76,640 75,620 Total assets fell by €1.0 billion against March 31, 2015, to €75.6 billion. Noncurrent assets decreased by €2.2 billion to €49.5 billion, largely due to currency effects and lower deferred tax assets. Total current assets rose by €1.0 billion to €26.2 billion, mainly due to an increase in the cash position. Equity increased by €0.5 billion to €22.4 billion, lifted by income after income taxes of €1.1 billion, the €1.7 billion decrease – recognized outside profit or loss – in post-employment benefit obligations and changes of €0.1 billion in the cash flow hedges. The €1.9 billion dividend payment and €0.5 billion in negative exchange differences had an offsetting effect. The equity ratio (equity coverage of total assets) as of June 30, 2015, was 29.7% (March 31, 2015: 28.5%). Liabilities fell by €1.6 billion in the second quarter of 2015 to €53.2 billion. Provisions for pensions and other post-employment benefits declined by €2.4 billion, while other provisions moved back by €0.4 billion. The €1.4 billion increase in financial liabilities resulted partly from the hybrid bond issu- ance and the commercial paper. Net Defined Benefit Liability for Post-Employment Benefits [Table 18] Dec. 31, 2014 March 31, 2015 June 30, 2015 € million € million € million Provisions for pensions and other post-employment benefits 12,236 13,594 11,176 Net defined benefit asset (41) (41) (43) Net defined benefit liability for post-employment benefits 12,195 13,553 11,133 The net defined benefit liability for post-employment benefits declined by €2.5 billion in the second quarter of 2015 to €11.1 billion, mainly due to an increase in long-term capital market interest rates for high-quality corporate bonds. 31 32 Bayer Interim Report Interim Group Management Report as of June 30, 2015 9. Growth and Innovation 9. Growth and Innovation Our expenses for research and development rose by 13.6% (Fx adj.) in the first half of 2015 to €1,982 million (h1 2014: €1,653 million), including €1,036 million (Fx adj. + 16.2%) in the second quar- ter (q2 2014: €841 million). Capital expenditures for property, plant and equipment and intangible as- sets in the first half of 2015 amounted to €945 million (h1 2014: €883 million), including €600 million in the second quarter (q2 2014: €526 million). Research and Development Expenses in the First Half of 2015 [Graphic 16] €127 million (6%) €50 million (3%) Reconciliation MaterialScience €509 million (26%) CropScience €1,982 million €1,296 million (65%) HealthCare Subgroup shares in parentheses Capital Expenditures in the First Half of 2015 [Graphic 17] €104 million (11%) Reconciliation €224 million (24%) €372 million (39%) HealthCare MaterialScience €945 million €245 million (26%) CropScience Subgroup shares in parentheses The Emerging Markets once again accounted for a disproportionate share of currency-adjusted sales growth in the first half of 2015. For reporting purposes we have defined the Emerging Markets as Asia (excluding Japan), Latin America, Eastern Europe, Africa and the Middle East. Sales in the Emerging Markets advanced by 9.6% (Fx adj.) to €8,388 million in the first half of 2015 (h1 2014: €7,198 million), including €4,264 million in the second quarter (Fx adj. +8.0%; q2 2014: €3,695 million). All regions contributed to this development. The Emerging Markets’ share of total sales was unchanged compared with the prior-year period, at 35.0%. The respective figure for the second quarter of 2015 was 35.3% (q2 2014: 36.1%). Bayer Interim Report Interim Group Management Report as of June 30, 2015 9. Growth and Innovation Sales Development in the First Half of 2015 [Graphic 18] 35% (Fx adj. +10%) 65% (Fx adj. +8%) Emerging Markets Industrialized countries currency-adjusted changes in parentheses 9.1 HealthCare RESEARCH AND DEVELOPMENT Expenses for research and development at HealthCare rose by 18.4% (Fx adj.) in the first half of 2015 to €1,296 million (h1 2014: €1,052 million), including €678 million (Fx adj. + 22.3%) in the second quarter (q2 2014: €530 million). We made further progress with our research and development pipeline in the second quarter of 2015. The most important drug candidates in the approval process are: Products Submitted for Approval1 [Table 19] Indication Aflibercept E.U.; treatment of myopic choroidal neovascularization (mCNV) Bay 81-8973 (rFVIII) E.U., U.S.A., Japan; treatment of hemophilia A Rivaroxaban2 U.S.A.; secondary prophylaxis of acute coronary syndrome (ACS) Rivaroxaban Japan; treatment of deep vein thrombosis and pulmonary embolism, prevention of recurrent venous thromboembolism 1 as of July 16, 2015 2 submitted by Janssen Research & Development, LLC 33 34 Bayer Interim Report Interim Group Management Report as of June 30, 2015 9. Growth and Innovation The following table shows our most important drug candidates currently in Phase ii or iii of clinical testing: Research and Development Projects (Phases II and III) 1 [Table 20] Indication Status Amikacin Inhale Pulmonary infection Phase III Damoctocog alfa pegol (BAY 94-9027, long-acting rFVIII) Hemophilia A Phase III Ciprofloxacin DPI Pulmonary infection Phase III Copanlisib (PI3K inhibitor) Various forms of non-Hodgkin’s lymphoma (NHL) Phase III LCS-16 (ULD LNG Contraceptive System) Intrauterine contraception, duration of use: up to 5 years Phase III ODM-201 (AR antagonist) Prostate cancer Phase III Radium-223 dichloride Combination treatment of castration-resistant prostate cancer Phase III Regorafenib Refractory liver cancer Phase III Riociguat Pulmonary arterial hypertension (PAH) in patients who do not sufficiently respond to PDE-5i / ERA Phase III Rivaroxaban Prevention of major adverse cardiac events (MACE) Phase III Rivaroxaban Anti-coagulation in patients with chronic heart failure2 Phase III Rivaroxaban Long-term prevention of venous thromboembolism Phase III Rivaroxaban Prevention of venous thromboembolism in high-risk patients after discharge from hospital2 Phase III Rivaroxaban Embolic stroke of undetermined source (ESUS) Phase III Rivaroxaban Peripheral artery disease (PAD) Phase III Tedizolid Pulmonary infection3 Phase III Anetumab ravtansine (Mesothelin ADC) Cancer Phase II BAY 1067197 (partial adenosine A1 agonist) Heart failure Phase II BAY 1007626 (progestine IUS) Contraception Phase II BAY 1142524 (chymase inhibitor) Heart failure Phase II BAY 98-7196 (intravaginal ring) Endometriosis Phase II Copanlisib (PI3K inhibitor) Recurrent / resistant non-Hodgkin’s lymphoma (NHL) Phase II Finerenone (MR antagonist) Chronic heart failure Phase II Finerenone (MR antagonist) Diabetic nephropathy Phase II Molidustat (HIF-PH inhibitor) Anemia Phase II Radium-223 dichloride Bone metastases in cancer Phase II Refametinib (MEK inhibitor) Cancer Phase II Regorafenib Cancer Phase II Riociguat Pulmonary hypertension (IIP) Phase II Riociguat Raynaud’s phenomenon Phase II Riociguat Diffuse systemic sclerosis Phase II Riociguat Cystic fibrosis Phase II Rivaroxaban Secondary prevention of acute coronary syndrome (ACS)2 Phase II Roniciclib (CDK inhibitor) Small-cell lung cancer (SCLC) Phase II Vericiguat (BAY 1021189, sGC stimulator) Chronic heart failure Phase II Vilaprisan (S-PRM) Uterine fibroids Phase II Vilaprisan (S-PRM) Endometriosis Phase II 1 as of July 16, 2015 2 sponsored by Janssen Research & Development, LLC 3 Phase III for the treatment of complicated skin infections is completed; first submissions have been made The nature of drug discovery and development is such that not all compounds can be expected to meet the pre-defined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Bayer Interim Report Interim Group Management Report as of June 30, 2015 9. Growth and Innovation We have expanded our global clinical development program for the cancer drug copanlisib to include new studies. A Phase iii and a Phase ii trial began enrolling patients in May 2015, while a further Phase iii study started in June 2015. The new studies are designed to investigate the safety and efficacy of copanlisib in patients with recurring indolent non-Hodgkin’s lymphoma (nhl) and diffuse large B-cell lymphomas (dlbcl), an aggressive subtype of nhl. Copanlisib is a novel, intravenous phosphatidylinosi- tol 3-kinase (pi3k) inhibitor. In April 2015, we submitted an application to the Japanese Ministry of Health, Labour and Welfare (mhlw) for marketing authorization for radium-223 dichloride as an injection solution for the treatment of prostate carcinoma with bone metastases. Radium-223 dichloride is approved in more than 40 coun- tries worldwide under the brand name Xofigo™. In May 2015, the oral anticoagulant Xarelto™ (active ingredient: rivaroxaban) was approved by the China Food and Drug Administration (cfda) for the prevention of stroke and systemic embolism in pa- tients with atrial fibrillation and for the treatment of deep vein thrombosis (dvt). The approval also includes the use of Xarelto™ to reduce the risk of recurrent dvt and pulmonary embolism following acute dvt. In June 2015, the Japanese mhlw approved Eylea™ (active ingredient: aflibercept for injection into the eye) to treat of patients with macular edema secondary to retinal vein occlusion (rvo). This new approv- al includes branch retinal vein occlusion (brvo) in addition to the previously-approved indication of macular edema secondary to central retinal vein occlusion (crvo). In June 2015, we submitted an application to the Japanese mhlw for marketing authorization for the recombinant Factor viii compound bay 81-8973 for the treatment of hemophilia a. A Phase IIa clinical study with regorafenib eye drops did not show the desired results and the project is therefore being discontinued. The study investigated the use of regorafenib for the treatment of wet age-related macular degeneration (amd). CAPITAL EXPENDITURES, ACQUISITIONS AND COOPERATIONS In April 2015, we entered into an exclusive license agreement with Isis Pharmaceuticals, Inc., United States, pertaining to isis-fxiRx, an antisense drug in clinical development for the prevention of throm- bosis. Under the agreement, Bayer will further develop and commercialize isis-fxiRx in areas of high unmet medical need. Antisense drugs bind to the target mRNA molecules in the cell and inhibit the production of disease-causing proteins. The novel mechanism of inhibiting Factor xi synthesis through isis-fxiRx may offer a treatment option for patients for whom none is currently available. In June 2015, we entered into a strategic research alliance with Johns Hopkins University, United States, concerning the discovery and development of innovative drugs for the treatment of serious diseases of the posterior part of the eye that affect many people worldwide. The five-year collaboration will aim to develop new ophthalmic therapies for various retinal diseases. EMERGING MARKETS HealthCare raised sales in the Emerging Markets by 16.2% (Fx adj.) in the first half of 2015 to €3,603 million (h1 2014: €2,989 million), including €1,824 million (Fx adj. + 15.0%) in the second quar- ter of 2015 (q2 2014: €1,544 million). The largest increase in absolute terms in the second quarter was recorded in China, where, in addition to the positive development of our pharmaceutical products, we especially benefited from the acquired consumer care businesses. We posted double-digit sales growth in Latin America and Eastern Europe. The Emerging Markets’ share of total HealthCare sales was 31.6% in the first half of 2015 (h1 2014: 33.3%) and 30.9% in the second quarter (q2 2014: 33.5%). 35 36 Bayer Interim Report Interim Group Management Report as of June 30, 2015 9. Growth and Innovation 9.2 CropScience RESEARCH AND DEVELOPMENT Research and development expenses at CropScience rose by 4.2% (Fx adj.) in the first half of 2015 to €509 million (h1 2014: €452 million), including €269 million (Fx adj. + 4.2%) in the second quarter of 2015 (q2 2014: €238 million). CAPITAL EXPENDITURES, ACQUISITIONS AND COOPERATIONS In May 2015, CropScience entered into a strategic innovation partnership with Flagship Ventures that also includes an investment in Flagship Ventures Fund V. CropScience will contribute its strengths in science, innovation and regulatory affairs to help in the identification, funding and development of promising startup companies. In June 2015, CropScience announced the acquisition of SeedWorks India Pvt. Ltd., headquartered in Hyderabad, India, a company specialized in the breeding, production and marketing of hybrid seeds for tomatoes, hot peppers, okra and gourds. Existing and forthcoming varieties will be marketed under CropScience’s Nunhems™ brand. Also in June 2015, CropScience and the Grains Research & Development Corporation (grdc) based in Australia entered into a five-year innovation partnership aimed partly at the joint development of new technologies to manage resistant weeds. grdc will support the expansion of capacities at the Bayer CropScience herbicide research center in Frankfurt, Germany. EMERGING MARKETS CropScience raised sales in the Emerging Markets by 7.7% (Fx adj.) in the first half of 2015 to €2,097 million (h1 2014: €1,871 million), including €1,059 million in the second quarter (Fx adj. + 0.8%; q2 2014: €973 million). Strong gains were recorded in Africa / Middle East and Eastern Europe. Asia likewise developed favorably. Sales in Latin America declined substantially against the strong prior- year quarter. The Emerging Markets’ share of total CropScience sales was 36.1% in the first half of 2015 (h1 2014: 34.8%) and 38.9% in the second quarter of 2015 (q2 2014: 39.4%). 9.3 MaterialScience RESEARCH AND DEVELOPMENT Research and development expenses at MaterialScience rose by 2.7% (Fx adj.) in the first half of 2015 to €127 million (h1 2014: €111 million), including €68 million (Fx adj. + 19.6%) in the second quarter of 2015 (q2 2014: €51 million). This investment went mainly to explore new areas of application and im- prove process technologies and products. MaterialScience also invested an additional €82 million in the first half of 2015 (h1 2014: €37 million) in joint development projects with customers, including €21 million in the second quarter (q2 2014: €19 million). EMERGING MARKETS In the Emerging Markets, MaterialScience posted sales of €2,656 million in the first half of 2015 (Fx adj. + 2.6%; h1 2014: €2,309 million), including €1,368 million in the second quarter (Fx adj. + 4.6%; q2 2014: €1,163 million). Strong currency-adjusted growth was recorded in Africa and the Middle East. Business in Eastern Europe, Latin America and Asia expanded as well. The Emerging Markets’ share of total MaterialScience sales was 42.8% in the first half of 2015 (h1 2014: 40.7%) and 43.0% in the second quarter of 2015 (q2 2014: 40.6%). Bayer Interim Report Interim Group Management Report as of June 30, 2015 10. Employees 10. Employees On June 30, 2015, the Bayer Group employed 117,798 people in its continuing operations worldwide (December 31, 2014: 117,371). The workforce thus grew by 427 (+ 0.4%). HealthCare employed 58,658 people (December 31, 2014: 59,199). The number of employees at CropScience increased to 23,856 (December 31, 2014: 23,060). The number of employees at MaterialScience rose to 15,071 (December 31, 2014: 14,122), while the number of people mainly em- ployed in the service companies declined to 20,213 (December 31, 2014: 20,990). This was largely due to the transfer of around 790 employees in preparation for the planned stock market flotation of MaterialScience. Personnel expenses rose by 18.6% (Fx adj. 10.8%) in the first half of 2015 to €5,630 million (h1 2014: €4,749 million), partly due to portfolio adjustments, with the second quarter accounting for €2,750 million. 11. Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of inter- nal or external developments or events that could significantly impact the achievement of our financial and non-financial objectives. Bayer regards risk management as an integral part of corporate governance. Our risk management process and the opportunities / risks outlined in detail in the Annual Report 2014 (Combined Manage- ment Report, Chapter 20.3) are materially unchanged. No risks have been identified that could endan- ger the Bayer Group’s continued existence. There are also no risks with mutually reinforcing dependen- cies that could combine to endanger the Group’s continued existence. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2014 (Note [32] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” The Bayer Annual Re- port 2014 can be downloaded free of charge at www.bayer.com. 12. Events After the End of the Reporting Period After the end of the reporting period – on July 1, 2015 – the acquisition of SeedWorks India Pvt. Ltd., headquartered in Hyderabad, India, was closed. 37 38 Bayer Interim Report Interim Group Management Report as of June 30, 2015 Investor Information Investor Information Performance of Bayer Stock over the Past Twelve Months [Graphic 19] indexed; 100 = Xetra closing price on June 30, 2014 (source: Bloomberg) 150 140 130 120 110 100 90 80 July 14 Aug 14 Sept 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 June 15 Bayer +23.8 % dax +11.3 % dj euro stoxx +8.8 % Bayer stock closed the second quarter of 2015 at €125.55. Including the dividend of €2.25 per share paid on May 28, 2015, the yield on Bayer stock in the quarter was minus 8.8%. The benchmark indices also declined in the second quarter of 2015. The dax was down 8.5%, while the euro stoxx 50 (per- formance index) fell by 5.8%. The yield on Bayer stock for the first half of 2015, including the dividend, was 13.0%. The dax ended the first half of 2015 at 10,945 points, up 11.6%. The euro stoxx 50 (performance index) rose by 11.0% during this period, closing at 6,492 points. Bayer Stock Data [Table 21] 2nd Quarter 2014 2nd Quarter 2015 1st Half 2014 1st Half 2015 High for the period € 106.60 146.20 106.60 146.20 Low for the period € 91.51 124.00 91.51 109.20 Average daily trading volume million shares 1.8 2.4 2.0 2.4 June 30, 2014 June 30, 2015 Dec. 31, 2014 Change June 30, 2015 / Dec. 31, 2014 % Share price € 103.15 125.55 113.00 + 11.1 Market capitalization € million 85,300 103,824 93,445 + 11.1 Equity as per statements of financial position € million 19,541 22,423 20,218 + 10.9 Shares entitled to the dividend million shares 826.95 826.95 826.95 0.0 DAX 9,833 10,945 9,806 + 11.6 Xetra closing prices (source: Bloomberg) Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements of the Bayer Group as of June 30, 2015 Bayer Group Consolidated Income Statements [Table 22] 2nd Quarter 2014 2nd Quarter 2015 1st Half 2014 1st Half 2015 € million € million € million € million Net sales 10,228 12,090 20,580 23,969 Cost of goods sold (4,991) (5,312) (9,725) (10,788) Gross profit 5,237 6,778 10,855 13,181 Selling expenses (2,552) (3,177) (4,920) (6,097) Research and development expenses (841) (1,036) (1,653) (1,982) General administration expenses (427) (550) (835) (1,021) Other operating income 80 31 208 278 Other operating expenses (62) (213) (155) (582) EBIT1 1,435 1,833 3,500 3,777 Equity-method loss (3) (6) (8) – Financial income 98 85 190 97 Financial expenses (268) (366) (514) (658) Financial result (173) (287) (332) (561) Income before income taxes 1,262 1,546 3,168 3,216 Income taxes (343) (405) (851) (811) Income from continuing operations after income taxes 919 1,141 2,317 2,405 Income from discontinued operations after income taxes 36 17 63 62 Income after income taxes 955 1,158 2,380 2,467 of which attributable to non-controlling interest 2 6 4 12 of which attributable to Bayer AG stockholders (net income) 953 1,152 2,376 2,455 € € € € Earnings per share From continuing operations Basic 1.11 1.37 2.80 2.89 Diluted 1.11 1.37 2.80 2.89 From discontinued operations Basic 0.04 0.02 0.07 0.08 Diluted 0.04 0.02 0.07 0.08 From continuing and discontinued operations Basic 1.15 1.39 2.87 2.97 Diluted 1.15 1.39 2.87 2.97 1 EBIT = earnings before financial result and taxes 2014 figures restated 39 40 Condensed Consolidated Interim Financial Statements as of June 30, 2015 Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Comprehensive Income 2nd Quarter 2014 2nd Quarter 2015 € million € million Income after income taxes 955 1,158 of which attributable to non-controlling interest 2 6 of which attributable to Bayer AG stockholders 953 1,152 Remeasurements of the net defined benefit liability for post-employment benefit plans (1,195) 2,374 Income taxes 375 (705) Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans (820) 1,669 Other comprehensive income that will not be reclassified subsequently to profit or loss (820) 1,669 Changes in fair values of derivatives designated as cash flow hedges (67) 84 Reclassified to profit or loss (30) 76 Income taxes 27 (51) Other comprehensive income from cash flow hedges (70) 109 Changes in fair values of available-for-sale financial assets (1) 4 Reclassified to profit or loss – – Income taxes (1) 2 Other comprehensive income from available-for-sale financial assets (2) 6 Changes in exchange differences recognized on translation of operations outside the eurozone 121 (520) Reclassified to profit or loss – – Other comprehensive income from exchange differences 121 (520) Other comprehensive income that may be reclassified subsequently to profit or loss 49 (405) Effects of changes in scope of consolidation – – Total other comprehensive income1 (771) 1,264 of which attributable to non-controlling interest 2 (7) of which attributable to Bayer AG stockholders (773) 1,271 Total comprehensive income 184 2,422 of which attributable to non-controlling interest 4 (1) of which attributable to Bayer AG stockholders 180 2,423 1 total changes recognized outside profit or loss Bayer Interim Report [Table 23] 1st Half 2014 1st Half 2015 € million € million 2,380 2,467 4 12 2,376 2,455 (2,560) 1,169 806 (319) (1,754) 850 (1,754) 850 (53) (257) (76) 137 36 31 (93) (89) 1 18 – 1 (1) (1) – 18 (58) 826 – – (58) 826 (151) 755 – – (1,905) 1,605 4 8 (1,909) 1,597 475 4,072 8 20 467 4,052 Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Financial Position [Table 24] June 30, 2014 June 30, 2015 Dec. 31, 2014 € million € million € million Noncurrent assets Goodwill 10,322 16,870 16,168 Other intangible assets 10,056 15,686 15,653 Property, plant and equipment 10,061 11,873 11,428 Investments accounted for using the equity method 198 240 223 Other financial assets 1,267 1,136 1,107 Other receivables 441 404 447 Deferred taxes 1,604 3,253 2,981 33,949 49,462 48,007 Current assets Inventories 7,416 8,668 8,478 Trade accounts receivable 9,423 11,242 9,097 Other financial assets 617 816 723 Other receivables 1,480 1,496 1,488 Claims for income tax refunds 463 506 588 Cash and cash equivalents 1,228 3,247 1,853 Assets held for sale and discontinued operations 363 183 – 20,990 26,158 22,227 Total assets 54,939 75,620 70,234 Equity Capital stock of Bayer AG 2,117 2,117 2,117 Capital reserves of Bayer AG 6,167 6,167 6,167 Other reserves 11,165 14,013 11,822 Equity attributable to Bayer AG stockholders 19,449 22,297 20,106 Equity attributable to non-controlling interest 92 126 112 19,541 22,423 20,218 Noncurrent liabilities Provisions for pensions and other post-employment benefits 9,824 11,176 12,236 Other provisions 1,877 2,100 2,016 Financial liabilities 8,008 17,178 18,484 Other liabilities 305 1,095 1,088 Deferred taxes 714 884 689 20,728 32,433 34,513 Current liabilities Other provisions 5,368 5,716 4,912 Financial liabilities 3,589 7,676 3,376 Trade accounts payable 4,136 5,239 5,363 Income tax liabilities 85 74 63 Other liabilities 1,492 1,945 1,789 Liabilities directly related to assets held for sale and discontinued operations – 114 – 14,670 20,764 15,503 Total equity and liabilities 54,939 75,620 70,234 41 42 Condensed Consolidated Interim Financial Statements as of June 30, 2015 Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows 2nd Quarter 2014 2nd Quarter 2015 € million € million Income from continuing operations after income taxes 919 1,141 Income taxes 343 405 Financial result 173 287 Income taxes paid or accrued (395) (440) Depreciation, amortization and impairments 700 815 Change in pension provisions (69) (36) (Gains) losses on retirements of noncurrent assets (6) 1 Gross cash flow 1,665 2,173 Decrease (increase) in inventories 27 (212) Decrease (increase) in trade accounts receivable 183 (93) (Decrease) increase in trade accounts payable (68) 144 Changes in other working capital, other non-cash items (238) (62) Net cash provided by (used in) operating activities (net cash flow), continuing operations 1,569 1,950 Net cash provided by (used in) operating activities (net cash flow), discontinued operations 32 9 Net cash provided by (used in) operating activities (net cash flow) (total) 1,601 1,959 Cash outflows for additions to property, plant, equipment and intangible assets (529) (601) Cash inflows from the sale of property, plant, equipment and other assets 35 59 Cash inflows from divestitures 6 – Cash inflows from (outflows for) noncurrent financial assets (62) (77) Cash outflows for acquisitions less acquired cash – 36 Interest and dividends received 33 57 Cash inflows from (outflows for) current financial assets – (1) Net cash provided by (used in) investing activities (total) (517) (527) Dividend payments and withholding tax on dividends (1,737) (1,861) Issuances of debt 2,378 4,681 Retirements of debt (3,083) (2,332) Interest paid including interest-rate swaps (105) (195) Interest received from interest-rate swaps 40 41 Cash outflows for the purchase of additional interests in subsidiaries – – Net cash provided by (used in) financing activities (total) (2,507) 334 Change in cash and cash equivalents due to business activities (total) (1,423) 1,766 Cash and cash equivalents at beginning of period 2,631 1,607 Change in cash and cash equivalents due to changes in scope of consolidation – – Change in cash and cash equivalents due to exchange rate movements 20 (126) Cash and cash equivalents at end of period 1,228 3,247 Bayer Interim Report [Table 25] 1st Half 2014 1st Half 2015 € million € million 2,317 2,405 851 811 332 561 (935) (1,073) 1,345 1,616 (185) (123) (42) (13) 3,683 4,184 (312) (151) (1,707) (2,042) (384) (347) 433 983 1,713 2,627 51 56 1,764 2,683 (886) (946) 51 84 6 – (66) (336) (1,857) 3 49 68 6 4 (2,697) (1,123) (1,737) (1,866) 6,833 7,202 (4,460) (5,176) (166) (287) 43 51 (1) – 512 (76) (421) 1,484 1,662 1,853 – 3 (13) (93) 1,228 3,247 Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Bayer Group Consolidated Statements of Changes in Equity Bayer Group Consolidated Statements of Changes in Equity [Table 26] Capital stock of Bayer AG Capital reserves of Bayer AG Other reserves Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity € million € million € million € million € million € million Dec. 31, 2013 2,117 6,167 12,434 20,718 86 20,804 Equity transactions with owners Capital increase / decrease Dividend payments (1,737) (1,737) (1) (1,738) Other changes 1 1 (1) Total comprehensive income 467 467 8 475 June 30, 2014 2,117 6,167 11,165 19,449 92 19,541 Dec. 31, 2014 2,117 6,167 11,822 20,106 112 20,218 Equity transactions with owners Capital increase / decrease Dividend payments (1,861) (1,861) (6) (1,867) Other changes Total comprehensive income 4,052 4,052 20 4,072 June 30, 2015 2,117 6,167 14,013 22,297 126 22,423 43 44 Condensed Consolidated Interim Financial Statements as of June 30, 2015 Key Data by Segment Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group as of June 30, 2015 Key Data by Segment and Region Key Data by Segment Pharmaceuticals 2nd Quarter 2014 2nd Quarter 2015 € million € million Net sales (external) 2,960 3,492 Change + 4.6% + 18.0% Currency-adjusted change + 10.6% + 10.7% Intersegment sales 36 8 Net sales (total) 2,996 3,500 EBIT 656 706 EBIT before special items 668 780 EBITDA before special items 927 1,077 Gross cash flow1 662 720 Net cash flow1 292 433 Depreciation, amortization and impairments 263 301 1st Half 2014 1st Half 2015 Net sales (external) 5,742 6,692 Change + 6.4% + 16.5% Currency-adjusted change + 13.1% + 9.0% Intersegment sales 43 18 Net sales (total) 5,785 6,710 EBIT 1,297 1,397 EBIT before special items 1,293 1,495 EBITDA before special items 1,800 2,065 Gross cash flow1 1,236 1,410 Net cash flow1 739 1,185 Depreciation, amortization and impairments 511 574 Number of employees (as of June 30)² 38,834 39,994 2014 figures restated 1 For definition see chapter 8 “Financial Position of the Bayer Group.” 2 Full-time equivalents Bayer Interim Report HealthCare Consumer Health 2nd Quarter 2014 2nd Quarter 2015 € million € million 1,655 2,416 – 2.5% + 46.0% + 4.1% + 36.8% 4 – 1,659 2,416 271 362 284 433 387 598 258 411 173 304 103 164 1st Half 2014 1st Half 2015 3,242 4,720 – 2.8% + 45.6% + 3.9% + 37.0% 4 – 3,246 4,720 561 657 574 849 780 1,166 535 774 366 769 206 338 16,579 18,664 Bayer Interim Report CropScience CropScience 2nd Quarter 2014 2nd Quarter 2015 € million € million 2,470 2,723 + 3.3% + 10.2% + 10.5% + 0.2% 16 9 2,486 2,732 470 571 470 599 615 733 469 537 971 742 145 134 1st Half 2014 1st Half 2015 5,370 5,815 + 4.2% + 8.3% + 11.3% + 0.9% 31 19 5,401 5,834 1,458 1,445 1,458 1,520 1,713 1,773 1,239 1,242 249 (81) 255 258 22,222 23,856 MaterialScience MaterialScience 2nd Quarter 2014 2nd Quarter 2015 € million € million 2,864 3,185 – 0.4% + 11.2% + 3.2% + 0.6% 15 14 2,879 3,199 109 278 126 337 270 506 214 359 133 360 147 170 1st Half 2014 1st Half 2015 5,667 6,199 + 0.3% + 9.4% + 3.7% – 0.7% 28 27 5,695 6,226 328 497 347 598 636 930 499 671 89 523 292 354 14,128 15,071 All Other Segments 2nd Quarter 2014 2nd Quarter 2015 € million € million 275 273 – 5.8% – 0.7% – 4.8% + 0.4% 553 590 828 863 35 24 41 40 82 84 139 219 52 85 41 44 1st Half 2014 1st Half 2015 554 541 – 3.7% – 2.3% – 2.8% – 2.3% 1,072 1,130 1,626 1,671 59 43 72 65 151 154 321 268 200 57 79 89 20,035 19,482 Condensed Consolidated Interim Financial Statements as of June 30, 2015 Key Data by Segment [Table 27] Reconciliation Corporate Center and Consolidation Group 2nd Quarter 2014 2nd Quarter 2015 2nd Quarter 2014 2nd Quarter 2015 € million € million € million € million 4 1 10,228 12,090 – – + 1.4% + 18.2% – – + 7.0% + 9.2% (624) (621) – – (620) (620) 10,228 12,090 (106) (108) 1,435 1,833 (106) (101) 1,483 2,088 (105) (99) 2,176 2,899 (77) (73) 1,665 2,173 (52) 26 1,569 1,950 1 2 700 815 1st Half 2014 1st Half 2015 1st Half 2014 1st Half 2015 5 2 20,580 23,969 – – + 2.3% + 16.5% – – + 8.0% + 8.3% (1,178) (1,194) – – (1,173) (1,192) 20,580 23,969 (203) (262) 3,500 3,777 (203) (251) 3,541 4,276 (201) (248) 4,879 5,840 (147) (181) 3,683 4,184 70 174 1,713 2,627 2 3 1,345 1,616 758 731 112,556 117,798 45 46 Condensed Consolidated Interim Financial Statements as of June 30, 2015 Key Data by Region Key Data by Region Net sales (external) – by market Change Currency-adjusted change Net sales (external) – by point of origin Change Currency-adjusted change Interregional sales EBIT Net sales (external) – by market Change Currency-adjusted change Net sales (external) – by point of origin Change Currency-adjusted change Interregional sales EBIT Number of employees (as of June 30)1 2014 figures restated 1 Full-time equivalents 2nd Quarter 2014 € million 3,980 + 4.0% + 5.4% 4,385 + 3.9% + 5.1% 2,320 1,091 1st Half 2014 8,265 + 6.7% + 8.0% 9,062 + 6.5% + 7.6% 4,587 2,508 53,809 Europe 2nd Quarter 2015 € million 4,167 + 4.7% + 4.7% 4,587 + 4.6% + 4.6% 2,824 1,151 1st Half 2015 8,693 + 5.2% + 6.5% 9,512 + 5.0% + 6.2% 5,412 2,653 55,529 Bayer Interim Report North America 2nd Quarter 2014 2nd Quarter 2015 € million € million 2,582 3,630 + 2.8% + 40.6% + 8.8% + 18.6% 2,541 3,584 + 2.4% + 41.0% + 8.7% + 18.4% 808 1,047 243 549 1st Half 2014 1st Half 2015 5,204 7,005 + 0.5% + 34.6% + 6.2% + 14.7% 5,104 6,911 – 0.2% + 35.4% + 5.7% + 14.9% 1,597 2,007 677 900 15,103 16,246 Bayer Interim Report Asia / Pacific 2nd Quarter 2014 2nd Quarter 2015 € million € million 2,192 2,732 – 1.4% + 24.6% + 5.8% + 7.6% 2,134 2,672 – 2.0% + 25.2% + 5.4% + 7.7% 141 204 121 261 1st Half 2014 1st Half 2015 4,320 5,221 + 0.9% + 20.9% + 8.9% + 4.9% 4,214 5,092 + 0.7% + 20.8% + 8.9% + 4.5% 291 387 329 468 27,314 29,372 Latin America / Africa / Middle East 2nd Quarter 2014 2nd Quarter 2015 € million € million 1,474 1,561 – 3.3% + 5.9% + 9.5% + 7.1% 1,168 1,247 – 3.5% + 6.8% + 12.6% + 9.2% 141 182 86 (20) 1st Half 2014 1st Half 2015 2,791 3,050 – 4.0% + 9.3% + 10.1% + 6.7% 2,200 2,454 – 4.6% + 11.5% + 13.1% + 9.0% 253 315 189 18 16,330 16,651 2nd Quarter 2014 € million – – – – – – (3,410) (106) 1st Half 2014 – – – – – – (6,728) (203) – Reconciliation 2nd Quarter 2015 € million – – – – – – (4,257) (108) 1st Half 2015 – – – – – – (8,121) (262) – Condensed Consolidated Interim Financial Statements as of June 30, 2015 Key Data by Region [Table 28] Total 2nd Quarter 2014 2nd Quarter 2015 € million € million 10,228 12,090 + 1.4% + 18.2% + 7.0% + 9.2% 10,228 12,090 + 1.4% + 18.2% + 7.0% + 9.2% – – 1,435 1,833 1st Half 2014 1st Half 2015 20,580 23,969 + 2.3% + 16.5% + 8.0% + 8.3% 20,580 23,969 + 2.3% + 16.5% + 8.0% + 8.3% – – 3,500 3,777 112,556 117,798 47 48 Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Notes Explanatory Notes ACCOUNTING POLICIES Pursuant to Section 37w Paragraph 3 of the German Securities Trading Act, the consolidated interim financial statements as of June 30, 2015, were prepared in condensed form according to the Interna- tional Financial Reporting Standards (ifrs) – including ias 34 – of the International Accounting Stand- ards Board (iasb), London, which are endorsed by the European Union, and the Interpretations of the ifrs Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2014 fiscal year, particularly with regard to the main recognition and measurement principles, except where financial reporting standards have been applied for the first time in 2015. FINANCIAL REPORTING STANDARDS APPLIED FOR THE FIRST TIME IN 2015 The first-time application of the following amended financial reporting standards had no impact, or no material impact, on the presentation of the Group’s financial position or results of operations, or on earnings per share. In December 2013, the iasb published the fifth and sixth sets of “Annual Improvements to ifrss.” The amendments address details of the recognition, measurement and disclosure of business transactions and serve to standardize terminology. They consist mainly of editorial changes to existing standards. They are to be applied for annual periods beginning on or after July 1, 2014. Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 CHANGES IN UNDERLYING PARAMETERS Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: Exchange Rates for Major Currencies [Table 29] Closing Rate Average Rate €1 Dec. 31, 2014 June 30, 2014 June 30, 2015 1st Half 2014 1st Half 2015 BRL Brazil 3.22 3.00 3.47 3.15 3.30 CAD Canada 1.41 1.46 1.38 1.50 1.38 CHF Switzerland 1.20 1.22 1.04 1.22 1.06 CNY China 7.54 8.47 6.94 8.45 6.94 GBP United Kingdom 0.78 0.80 0.71 0.82 0.73 JPY Japan 145.23 138.44 137.01 140.50 134.14 MXN Mexico 17.87 17.71 17.53 17.98 16.88 RUB Russia 72.34 46.38 62.36 47.95 63.83 USD United States 1.21 1.37 1.12 1.37 1.12 The most important interest rates used to calculate the present value of pension obligations are given below: Discount Rate for Pension Obligations [Table 30] Dec. 31, 2014 March 31, 2015 June 30, 2015 % % % Germany 2.00 1.60 2.30 United Kingdom 3.60 3.30 3.80 United States 3.70 3.50 4.10 The data selection criteria used to determine the discount rate in the eurozone were modified at the beginning of 2015. The item “Remeasurements of the net defined benefit liability for post-employment benefit plans” contains gains resulting from the rise in market interest rates. The modification of the data selection criteria had an effect of €0.7 billion. The discount rate obtained by applying the previous data selection criteria would have been lower by 20 basis points as of June 30, 2015. The change in the way the discount rate is determined reduces the net pension expense for the 2015 fiscal year by €17 million. As before, the underlying bond portfolio consists entirely of high-quality corporate bonds with a minimum aa or aaa rating. It does not include government-guaranteed or covered bonds. Notes 49 50 Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Notes SEGMENT REPORTING The following table shows the reconciliation of ebitda before special items of the segments to income before income taxes of the Group. Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes [Table 31] 2nd Quarter 2014 2nd Quarter 2015 1st Half 2014 1st Half 2015 € million € million € million € million EBITDA before special items of segments 2,281 2,998 5,080 6,088 EBITDA before special items of Corporate Center (105) (99) (201) (248) EBITDA before special items 2,176 2,899 4,879 5,840 Depreciation, amortization and impairment losses before special items of segments (692) (809) (1,336) (1,561) Depreciation, amortization and impairment losses before special items of Corporate Center (1) (2) (2) (3) Depreciation, amortization and impairment losses before special items (693) (811) (1,338) (1,564) EBIT before special items of segments 1,589 2,189 3,744 4,527 EBIT before special items of Corporate Center (106) (101) (203) (251) EBIT before special items 1,483 2,088 3,541 4,276 Special items of segments (48) (248) (41) (488) Special items of Corporate Center – (7) – (11) Special items (48) (255) (41) (499) EBIT of segments 1,541 1,941 3,703 4,039 EBIT of Corporate Center (106) (108) (203) (262) EBIT 1,435 1,833 3,500 3,777 Financial result (173) (287) (332) (561) Income before income taxes 1,262 1,546 3,168 3,216 2014 figures restated COMPANIES CONSOLIDATED Changes in the scope of consolidation The consolidated financial statements as of June 30, 2015, included 295 companies (December 31, 2014: 302 companies). As in the statements as of December 31, 2014, one of these companies was accounted for as a joint operation in line with Bayer’s interest in its assets, liabilities, revenues and expenses in accordance with ifrs 11 (Joint Arrangements). Two (December 31, 2014: three) joint ven- tures and four (December 31, 2014: three) associates were accounted for in the consolidated financial statements using the equity method according to ias 28 (Investments in Associates and Joint Ventures). Acquisitions, divestitures and discontinued operations Acquisitions On March 2, 2015, MaterialScience successfully completed the acquisition of Thermoplast Composite GmbH, Germany, a technology leader specializing in the production of thermoplastic fiber composites. The aim of the acquisition is to expand the range of polycarbonate materials for major industries to include composites made from continuous fiber-reinforced thermoplastics. A purchase price of €18 million was agreed. This includes a variable component of €4 million. The purchase price pertained mainly to patents and goodwill. Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 The effects of this transaction and other, smaller transactions made in the first half of 2015 – along with adjustments to purchase prices and purchase price allocations made in the first half of 2015 relating to previous years’ / quarters’ transactions – on the Group’s assets and liabilities as of the respective acquisi- tion or adjustment dates are shown in the table. Net of acquired cash and cash equivalents, the transac- tions resulted in the following cash outflow: Acquired Assets, Assumed Liabilities and Adjustments (Fair Values at the Respective Acquisition Dates) [Table 32] 1st Half 2015 € million Goodwill (8) Patents and technologies 21 Other intangible assets 33 Property, plant and equipment 22 Inventories (24) Other current assets 8 Cash and cash equivalents – Deferred tax assets (2) Other provisions (34) Financial liabilities – Other liabilities 7 Deferred tax liabilities (3) Net assets 20 Changes in non-controlling interest – Purchase price 20 Acquired cash and cash equivalents – Liabilities for future payments (5) Purchase price adjustment (18) Payments for previous years’ / quarters’ acquisitions – Net cash outflow for acquisitions (3) On July 1, 2015, CropScience closed the acquisition of SeedWorks India Pvt. Ltd., based in Hyderabad, India. The company is specialized in the breeding, production and marketing of hybrid seeds of tomato, hot pepper, okra and gourds. It has research and seed processing locations in Bangalore and Hydera- bad, respectively. The purchase of SeedWorks India is intended to further strengthen CropScience’s vegetable seed business in India. A basic purchase price of €78 million was agreed. As part of the acquisition of the consumer care business of Merck & Co., Inc., Whitehouse Station, New Jersey, United States, the production facilities at the Pointe-Claire site in Canada were acquired on July 1, 2015. The global purchase price allocation for the consumer care business of Merck & Co., Inc. currently re- mains incomplete pending compilation and review of the relevant financial information. Significant changes may yet be made in the allocation of the purchase price to the individual assets and liabilities. Divestitures On March 2, 2015, Consumer Health completed the sale of two equine products, Legend / Hyonate and Marquis, to Merial, Inc. A purchase price of €120 million was agreed. The one-time payment is account- ed for as deferred income. The purchase prices for Legend / Hyonate and Marquis will be reflected in sales and earnings over a four-year and a three-year period, respectively. Notes 51 52 Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Notes Discontinued operations On June 8, 2015, an agreement was signed to sell the Diabetes Care business to Panasonic Healthcare Holdings Co., Ltd., Tokyo, Japan, for €1,022 million. The sale will include the leading Contour™ portfolio of blood glucose monitoring meters and strips, as well as other products such as Breeze™2, Elite™ and Microlet™ lancing devices. Closing of the transaction is subject to customary conditions, including relevant antitrust clearance, and is expected to occur in the first quarter of 2016. The Diabetes Care activities are reported as a discontinued operation. The respective information is provided from the standpoint of the Bayer Group and is not intended to present these activities as a separate entity. The income statements for the discontinued operation are given below: Income Statements for Discontinued Operations [Table 33] 2nd Quarter 2014 2nd Quarter 2015 1st Half 2014 1st Half 2015 € million € million € million € million Net sales 230 235 433 473 Cost of goods sold (89) (96) (170) (186) Gross profit 141 139 263 287 Selling expenses (88) (94) (163) (179) Research and development expenses (9) (12) (17) (22) General administration expenses (9) (6) (18) (18) Other operating income / expenses 1 (4) 2 7 EBIT1 38 20 69 74 Financial result – – – – Income before income taxes 38 20 69 74 Income taxes (2) (3) (6) (12) Income after income taxes 36 17 63 62 1 EBIT = earnings before financial result and taxes 2014 figures restated Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 The assets and liabilities of the discontinued operation are shown in the following table: Assets and Liabilities of Discontinued Operations [Table 34] June 30, 2015 € million Noncurrent assets Goodwill 34 Other intangible assets 10 Property, plant and equipment 8 Other financial assets – Other receivables – Deferred taxes – 52 Current assets Inventories 114 Trade accounts receivable – Other financial assets – Other receivables – Claims for income tax refunds – Cash and cash equivalents – 114 Total assets 166 Noncurrent liabilities Provisions for pensions and other post-employment benefits 24 Other provisions – Financial liabilities – Other liabilities – Deferred taxes – 24 Current liabilities Other provisions 81 Financial liabilities – Trade accounts payable – Income tax liabilities – Other liabilities 9 90 Total liabilities 114 In addition to the assets of the discontinued Diabetes Care business amounting to €166 million, the statement of financial position as of June 30, 2015, reflects a further €17 million in assets held for sale. Notes 53 54 Condensed Consolidated Interim Financial Statements as of June 30, 2015 Notes The discontinued operation affected the Bayer Group statements of cash flows as follows: Cash Flows of Discontinued Operations 2nd Quarter 2014 2nd Quarter 2015 € million € million Net cash provided by (used in) operating activities (net cash flow) 32 9 Net cash provided by (used in) investing activities (2) (1) Net cash provided by (used in) financing activities (30) (8) Change in cash and cash equivalents – – Bayer Interim Report [Table 35] 1st Half 2014 1st Half 2015 € million € million 51 56 (3) (1) (48) (55) – – Bayer Interim Report FINANCIAL INSTRUMENTS Carrying Amounts and Fair Values of Financial Instruments Carrying amount June 30, 2015 € million Trade accounts receivable 11,242 Loans and receivables 11,242 Other financial assets 1,022 Loans and receivables 928 Available-for-sale financial assets 31 Held-to-maturity financial assets 63 Derivatives Other receivables 595 Loans and receivables 595 Non-financial assets Cash and cash equivalents 3,247 Loans and receivables 3,247 Total financial assets 16,106 of which loans and receivables 16,012 Financial liabilities 24,110 Carried at amortized cost 24,110 Derivatives Trade accounts payable 5,174 Carried at amortized cost 5,174 Non-financial liabilities Other liabilities 793 Carried at amortized cost 793 Carried at fair value (non-derivative) Derivatives Non-financial liabilities Total financial liabilities 30,077 of which carried at amortized cost 30,077 of which derivatives Carried at amortized cost Fair value (for information) € million 11,242 928 64 595 3,247 25,773 5,174 793 Condensed Consolidated Interim Financial Statements as of June 30, 2015 Notes [Table 36] June 30, 2015 Carried at fair value Non-financial assets / liabilities Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the statement of financial position € million € million € million € million € million 11,242 11,242 358 522 50 1,952 928 358 8 397 63 522 42 564 1,305 1,900 595 1,305 1,305 3,247 3,247 358 522 50 17,036 16,012 744 24,854 24,110 744 744 65 5,239 5,174 65 65 247 47 1,953 3,040 793 39 39 247 8 255 1,953 1,953 991 47 31,115 30,077 991 8 999 55 56 Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Notes The table on the preceding page shows the carrying amounts and fair values of financial assets and liabilities by category of financial instrument and a reconciliation to the corresponding line item in the statements of financial position. Since the line items “Other receivables,” “Trade accounts payable” and “Other liabilities” contain both financial instruments and non-financial assets or liabilities (such as other tax receivables or advance payments for services to be received in the future), the reconciliation is shown in the column headed “Non-financial assets / liabilities.” The loans and receivables reflected in other financial assets and the liabilities measured at amortized cost also include receivables and liabilities under finance leases in which Bayer is the lessor or lessee and which are therefore measured in accordance with ias 17. Because of the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date did not significantly differ from the fair values. Receivables from government institutions and private customers in Greece are under special observa- tion in view of the government debt crisis. Although there were no material defaults on such receivables in 2015 or 2014, it is possible that future developments could result in payment delays and / or defaults. This could necessitate the recognition of impairment losses due to new occurrences. Receivables from government institutions and private customers in Greece as of June 30, 2015, totaled €138 million (June 30, 2014: €94 million). Based on our assessment of the situation in Venezuela, we recognized impairment losses of €74 million on other receivables. The fair value stated for noncurrent receivables, loans, held-to-maturity financial investments and non- derivative financial liabilities is the present value of the respective future cash flows. This was deter- mined by discounting the cash flows at a closing-date interest rate that takes into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price was availa- ble, however, this was deemed to be the fair value. The fair values of available-for-sale financial assets correspond to quoted prices in active markets for identical assets (Level 1). The fair values of derivatives for which no publicly quoted prices existed in active markets (Level 1) were determined using valuation techniques based on observable market data as of the end of the re- porting period (Level 2). In applying valuation techniques, credit value adjustments were determined to allow for the contracting party’s credit risk. The respective currency and commodity forward contracts were measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remain- ing terms of the instruments at market rates of interest, taking into account any foreign currency trans- lation as of the closing date. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierar- chy. This applies in some cases to the fair values of embedded derivatives or to obligations for contin- gent consideration in business combinations. Embedded derivatives were separated from their respective host contracts. Such host contracts are generally sales or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with fluctuations in exchange rates, commodity prices or other prices, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs (Level 3). These includ- ed planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 The changes in the net amount of financial assets and liabilities recognized at fair value based on unob- servable inputs (Level 3) were as follows: Changes in the Net Amount of Financial Assets and Liabilities Recognized at Fair Value Based on Unobservable Inputs [Table 37] 2015 € million Net carrying amounts, Jan. 1 (25) Gains (losses) recognized in profit or loss 13 of which related to assets / liabilities recognized in the statement of financial position 7 Gains (losses) recognized outside profit or loss – Additions of assets / (liabilities) – Settlements of (assets) / liabilities 9 Reclassifications to “Liabilities directly related to assets held for sale and discontinued operations” 6 Net carrying amounts, June 30 3 The changes recognized in profit or loss were included in other operating income or expenses. LEGAL RISKS To find out more about the Bayer Group’s legal risks, please see Note 32 to the consolidated financial statements in the Bayer Annual Report 2014, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2014, the following significant changes have occurred in respect of the legal risks: HEALTHCARE Yasmin™ / yaz™: As of July 17, 2015, the number of claimants in the pending lawsuits and claims in the United States totaled about 4,000 (excluding claims already settled). Claimants allege that they have suffered personal injuries, some of them fatal, from the use of Bayer’s drospirenone-containing oral contraceptive products such as Yasmin™ and / or yaz™ or from the use of Ocella™ and / or Gianvi™, ge- neric versions of Yasmin™ and yaz™, respectively, marketed by Barr Laboratories, Inc. in the United States. As of July 17, 2015, Bayer had reached agreements, without admission of liability, to settle approximate- ly 9,900 claims in the u.s. for venous clot injuries (deep vein thrombosis or pulmonary embolism) for a total amount of about us$1.97 billion. Bayer will continue to consider the option of settling such claims after a case-specific analysis of medical records. At present, about 590 such claims are under review. In July 2015, Bayer reached an agreement in principle to settle, without admission of liability, lawsuits and claims in which plaintiffs allege an arterial thromboembolic injury (strokes and heart attacks) for a total maximum aggregate amount of us$56.9 million. Bayer may withdraw from the settlement if fewer than 97.5 percent of those who are eligible choose to participate. As of July 17, 2015, about 1,200 of the 4,000 above-mentioned claimants alleged arterial thromboembolic injuries. Mirena™: As of July 17, 2015, lawsuits from approximately 3,350 users of Mirena™, an intrauterine system providing long-term contraception, had been served upon Bayer in the u.s. Additional lawsuits are anticipated. Plaintiffs allege personal injuries resulting from the use of Mirena™, including perfora- tion of the uterus, ectopic pregnancy, or idiopathic intracranial hypertension, and seek compensatory and punitive damages. Xarelto™: As of July 17, 2015, lawsuits of approximately 1,200 recipients of Xarelto™, an oral anticoag- ulant for the treatment and prevention of blood clots, had been served upon Bayer in the u.s. Plaintiffs allege personal injuries from the use of Xarelto™, including cerebral, gastrointestinal or other bleeding and death, and seek compensatory and punitive damages. Additional lawsuits are anticipated. As of July 17, 2015, six lawsuits relating to Xarelto™ seeking class action certification had been served upon Bayer in Canada. Notes 57 58 Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2015 Notes Staxyn™: In Bayer’s patent infringement suit in a u.s. federal court against Watson Laboratories, Inc., the court ruled in April 2015 that both of Bayer’s compound patents are valid and infringed. Watson may appeal. Bayer’s erectile dysfunction treatment Staxyn™ is an orodispersible (orally disintegrating) formulation of Levitra™. Both drug products contain the same active ingredient, which is protected in the u.s. by the compound patents upheld by the court. Bayer Pharma AG former shareholder litigation: In the special court proceedings initiated by former minority stockholders of Bayer Pharma AG (formerly named Bayer Schering Pharma AG), Berlin, Bayer still believes that the severance and compensation payments originally determined were adequate and that the decision that has since been taken by the District Court of Berlin in one such proceeding was incorrect. However, without acknowledging liability, Bayer has now offered a settlement providing for an increase of the compensation in both proceedings to a uniform amount. The offer is subject to all claimants in both proceedings agreeing to the settlement. RELATED PARTIES Related parties as defined in ias 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or have a significant influence. They include, in particular, non- consolidated subsidiaries, joint ventures, associates, post-employment benefit plans and the corpo- rate officers of Bayer AG. Sales to related parties were not material from the viewpoint of the Bayer Group. Goods and services to the value of €0.3 billion were procured from the associated company po jv, lp, Wilmington, Delaware, United States, mainly in the course of normal business operations. There was no significant change in receivables or payables vis-à-vis related parties compared with December 31, 2014. OTHER INFORMATION The Annual Stockholders’ Meeting on May 27, 2015, approved the proposal by the Board of Man- agement and the Supervisory Board that a dividend of €2.25 per share be paid for the 2014 fiscal year. The actions of the members of the Board of Management and the Supervisory Board were ratified. One stockholder representative was elected to the Supervisory Board in accordance with the nomina- tion submitted by the Supervisory Board. The object of the company stated in Section 2, Paragraph 1 of the Articles of Incorporation was amend- ed as proposed by the Board of Management and the Supervisory Board. PricewaterhouseCoopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Essen, was elected as auditor of the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group for the fiscal year 2015 and to perform the audit review of the 2015 half-year financial report. The Vice Chairman of the Supervisory Board, Thomas de Win, stepped down from the Supervisory Board, effective at the end of the day on June 30, 2015. He was succeeded as a member of the Super- visory Board by the respective replacement member elected by the employees, Heinz Georg Webers. The Supervisory Board elected Oliver Zühlke as its Vice Chairman. Leverkusen, July 27, 2015 Bayer Aktiengesellschaft The Board of Management Dr. Marijn Dekkers Werner Baumann Johannes Dietsch Michael König Kemal Malik Bayer Interim Report Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the group, and the interim management re- port of the group includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal opportunities and risks associated with the expected development of the group for the remaining months of the financial year. Leverkusen, July 27, 2015 Bayer Aktiengesellschaft The Board of Management Dr. Marijn Dekkers Werner Baumann Johannes Dietsch Michael König Kemal Malik Responsibility Statement 59 60 Review Report Bayer Interim Report Review Report To Bayer AG, Leverkusen We have reviewed the condensed consolidated interim financial statements – comprising the income statement, statement of comprehensive income, statement of financial position, statement of cash flows, condensed statement of changes in equity and selected explanatory notes – and the interim group management report of Bayer AG for the period from January 1, 2015 to June 30, 2015 which are part of the half-year financial report pursuant to § (Article) 37w Abs. (paragraph) 3 WpHG (“Wertpapierhandelsgesetz”: German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the ifrs applicable to interim financial reporting as adopted by the e.u. and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company’s Board of Management. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (idw) and additionally observed the International Standard on Review Engagements “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” (isre 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the ifrs applicable to interim financial reporting as adopted by the e.u. and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securi- ties Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assur- ance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Based on our review, no matters have come to our attention that cause us to presume that the con- densed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the ifrs applicable to interim financial reporting as adopted by the e.u. nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. Essen, July 28, 2015 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dr. Peter Bartels Wirtschaftsprüfer Eckhard Sprinkmeier Wirtschaftsprüfer Financial Calendar Q3 2015 Interim Report October 29, 2015 2015 Annual Report February 25, 2016 Q1 2016 Interim Report April 26, 2016 Annual Stockholders’ Meeting 2016 April 29, 2016 Q2 2016 Interim Report July 27, 2016 Q3 2016 Interim Report October 26, 2016 MASTHEAD Publisher Bayer A G, 51368 Leverkusen, Germany Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com Editor Jörg Schäfer, phone +49 214 30 39136 Email: joerg.schaefer@bayer.com Date of publication Wednesday, July 29, 2015 English edition Currenta GmbH & Co. OHG Language Service Bayer on the Internet www.bayer.com ISSN 0343 / 1975 Interim Group Management Report and Condensed Consolidated Interim Financial Statements produced in-house with FIRE.sys. Forward-Looking Statements This Interim Report may contain forward-looking statements based on current assumptions and forecasts made by Bayer Group or subgroup management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports, which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries.

Semestriel, 2015, Agrochemistry, BAYER

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Semestriel

Agrochemistry

BAYER

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Interim Report Second Quarter of 2016 Key Data Bayer Group Key Data € million Q2 2015 Sales 12,003 Change (adjusted for currency and portfolio effects) Change in sales Volume + 5.0% Price – 1.2% Currency + 9.0% Portfolio + 5.5% EBITDA 1 2,637 Special items (251) EBITDA before special items 2 2,888 EBITDA margin before special items 3 24.1% EBIT 4 1,823 Special items (255) EBIT before special items 5 2,078 Financial result (287) Net income (from continuing and discontinued operations) 1,164 Earnings per share (from continuing and discontinued operations) (€) 6 1.40 Core earnings per share (from continuing operations) (€) 7 1.99 Gross cash flow 8 2,165 Net cash flow from continuing and discontinued operations 9 1,959 Cash outflows for capital expenditures 601 Research and development expenses 1,035 Depreciation, amortization and impairments 814 Number of employees at end of period 10 117,534 Personnel expenses (including pension expenses) 2,743 2015 figures restated 1 EBITDA = EBIT plus the amortization of intangible assets and the depreciation of property, plant and equipment, plus impairment losses and minus impair- ment loss reversals, recognized in profit or loss during the reporting period. This indicator is not defined in the International Financial Reporting Standards. For details see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 2 EBITDA before special items = EBITDA plus special charges, minus special gains. This indicator is not defined in the International Financial Reporting Standards. For details see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 3 The EBITDA margin before special items is calculated by dividing EBITDA before special items by sales. This indicator is not defined in the International Financial Reporting Standards. For details see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 4 EBIT = income after income taxes, plus income taxes, plus financial result. This indicator is not defined in the International Financial Reporting Standards. 5 EBIT before special items = EBIT plus special charges, minus special gains. This indicator is not defined in the International Financial Reporting Standards. For details see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 6 Earnings per share as defined in IAS 33 = net income divided by the average number of shares Bayer Interim Report 2 Q2 2016 Change % H1 2015 H1 2016 Change % Full Year 2015 11,833 – 1.4 23,796 23,687 – 0.5 46,085 + 2.3 + 2.8 + 2.7% + 4.4% + 3.8% + 4.8% + 4.4% – 2.1% – 0.7% – 2.0% – 1.7% – 3.8% + 8.2% – 3.3% + 5.8% + 0.1% + 5.2% 0.0% + 3.6% 2,952 + 11.9 5,363 6,311 + 17.7 9,573 (102) (447) (130) (683) 3,054 + 5.7 5,810 6,441 + 10.9 10,256 25.8% 24.4% 27.2% 22.3% 2,138 + 17.3 3,748 4,458 + 18.9 6,241 (104) (499) (376) (819) 2,242 + 7.9 4,247 4,834 + 13.8 7,060 (314) – 9.4 (561) (629) – 12.1 (1,005) 1,380 + 18.6 2,498 2,891 + 15.7 4,110 1.67 + 19.3 3.02 3.50 + 15.9 4.97 2.07 + 4.0 4.05 4.42 + 9.1 6.82 2,366 + 9.3 4,162 4,930 + 18.5 6,993 1,982 + 1.2 2,683 3,304 + 23.1 6,890 589 – 2.0 946 952 + 0.6 2,517 1,122 + 8.4 1,979 2,231 + 12.7 4,274 814 . 1,615 1,853 + 14.7 3,332 115,576 – 1.7 117,534 115,576 – 1.7 116,583 2,789 + 1.7 5,616 5,621 + 0.1 11,176 7 Core earnings per share = earnings per share, plus / minus amortization and impairment losses / impairment loss reversals of intangible assets, impairment losses / impairment loss reversals on property, plant and equipment, plus special charges, minus special gains (other than amortization and impairment losses / impairment loss reversals), plus / minus the related tax effects and the share of the adjustments attributable to noncontrolling interest. This indicator facilitates the comparability of performance over time. It is not defined in the International Financial Reporting Standards. For details see Chapter 8 “Core Earnings Per Share.” 8 Gross cash flow = income after income taxes, plus income taxes, plus financial result, minus income taxes paid or accrued, plus depreciation, amortization and impairment losses, minus impairment loss reversals, plus / minus changes in pension provisions, minus gains / plus losses on retirements of noncurrent assets, minus gains from the remeasurement of already held assets in step acquisitions. The change in pension provisions includes the elimination of noncash components of EBIT. It also contains benefit payments during the year. Gross cash flow is not defined in the International Financial Reporting Standards. For details see Chapter 9.1 “Statements of Cash Flows.” 9 Net cash flow = cash flow from operating activities according to IAS 7 10 Full-time equivalents Bayer Interim Report Contents Bayer Group Key Data 2 Interim Group Management Report as of June 30, 2016 4 1. Overview of Sales, Earnings and Financial Position 2. Economic Outlook 3. Sales and Earnings Forecast 4. Changes to the Corporate Structure 5. Business Development by Segment and Region 6. Research, Development, Innovation 7. Calculation of EBIT(DA) Before Special Items 8. (Core) Earnings Per Share 9. Financial Position of the Bayer Group 10. Opportunities and Risks 5 7 8 9 10 20 24 25 27 30 Condensed Consolidated Interim Financial Statements as of June 30, 2016 31 Bayer Group Consolidated Income Statements Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Changes in Equity 31 32 33 34 35 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group as of June 30, 2016 36 Responsibility Statement 53 Review Report 54 Financial Calendar Masthead 55 55 Reporting Principles The Bayer Interim Report complies with the requirements made of a half-year financial report in accord- ance with the applicable provisions of the German Securities Trading Act (WpHG) and, pursuant to Sec- tion 37w of the WpHG, comprises condensed consolidated interim financial statements and an interim group management report, as well as a responsibility statement. Bayer has prepared the condensed consolidated interim financial statements according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (E.U.). The condensed consolidated interim financial statements also comply with the IFRSs pub- lished by the IASB. The interim group management report should be read in conjunction with our Annual Report 2015, which contains a detailed description of our business operations. 3 Interim Group Management Report as of June 30, 2016 Bayer Interim Report Second Quarter of 2016 Bayer Raises Sales and Earnings > Group sales increase by 2.3% (Fx & portfolio adj.) to €11.8 billion > Pharmaceuticals continues strong growth trend > Consumer Health increases sales > Crop Science business holds steady in a continuingly difficult market environment > EBITDA before special items up 5.7% to €3.1 billion > Net income €1.4 billion (+ 18.6%) > Core earnings per share €2.07 (+ 4.0%) > Group forecast raised The Bayer Group posted further growth in the second quarter of 2016. Adjusted for currency and port- folio effects (Fx & portfolio adj.), sales increased by 2.3% to €11.8 billion and EBITDA before special items by 5.7% to €3.1 billion. The Life Sciences recorded encouraging sales and earnings growth overall. At Pharmaceuticals, we benefited from the continued strong development of our recently launched products. Consumer Health increased sales, while EBITDA before special items receded. Sales of Crop Science held steady at the prior-year level despite a continuingly difficult market environment, while earn- ings decreased. EBITDA before special items at Animal Health declined despite sales growth. Covestro registered a substantial increase in EBITDA before special items, while sales fell as expected. We are raising the Group forecast. 4 Interim Group Management Report as of June 30, 2016 1. Overview of Sales, Earnings and Financial Position Bayer Interim Report 1. Overview of Sales, Earnings and Financial Position Second quarter of 2016 Sales of the Bayer Group increased by 2.3% to €11,833 million in the second quarter of 2016 after adjusting for currency and portfolio changes (Fx & portfolio adj.1; reported2: – 1.4%). Germany accounted for €1,177 million of this figure. Pharmaceuticals posted encouraging sales growth of 8.4% (Fx & portfolio adj.) to €4,104 million. Our recently launched products once again showed strong business development. Consumer Health also raised sales by 4.0% (Fx & portfolio adj.) to €1,553 million. Sales of Crop Science were level year on year (Fx & portfolio adj. + 0.4%) despite the weak market environment, at €2,518 million. Animal Health sales rose by 4.2% (Fx & portfolio adj.) to €426 million. Sales of the Life Science businesses amounted to €8,858 million overall (Fx & portfolio adj. + 4.6%). Sales of Covestro fell by 3.9% (Fx & portfolio adj.) to €2,975 million. Despite negative currency effects of €90 million, dissynergies from the Covestro IPO and the divestiture of Diabetes Care, Group EBITDA before special items improved by 5.7% to €3,054 million. Pharmaceuticals improved EBITDA before special items by 13.3% to €1,352 million, due mainly to the continued very good development of business. EBITDA before special items of Consumer Health receded by 9.4% to €328 million. The earnings contributions from the good business performance and cost synergies were not sufficient to offset the higher selling expenses as well as allocation and currency effects. As a result of the continuingly weak market environment, EBITDA before special items of Crop Science fell by 8.2% to €663 million. Animal Health posted a 16.7% decline in EBITDA before special items, to €100 million, that was attributable to factors including higher selling expenses. The Life Science businesses recorded EBITDA before special items of €2,511 million overall (+ 5.4%). Covestro raised EBITDA before special items by 7.3% to €543 million. Earnings of the reconciliation climbed sharply against the prior-year quarter, largely on account of the change to provisions for long-term stock-based compensation. EBIT of the Bayer Group advanced by 17.3% to €2,138 million (Q2 2015: €1,823 million) after special charges of €104 million (Q2 2015: €255 million). These mainly comprised €46 million for efficiency improvement measures, €29 million for the integration of acquired businesses and €21 million in connection with the realignment of the Bayer Group. EBIT before special items increased by 7.9% to €2,242 million (Q2 2015: €2,078 million). After a financial result of minus €314 million (Q2 2015: minus €287 million), income before income taxes was €1,824 million (Q2 2015: €1,536 million). After income tax expense of €431 million (Q2 2015: €390 million), income from discontinued operations after income taxes and noncontrolling interest, net income in the second quarter of 2016 came to €1,380 million (Q2 2015: €1,164 million). Earnings per share (overall) were €1.67 (Q2 2015: €1.40). Core earnings per share from continuing operations advanced to €2.07 (Q2 2015: €1.99). 1 The currency- and portfolio-adjusted sales growth shows the percentage change in sales excluding the impact of exchange rate effects and the acquisitions and divestitures material to each business entity. Exchange rate effects are generally calculated on the basis of the func- tional currency valid in the respective country. Exceptions exist in Brazil and Argentina, primarily at Crop Protection, where the respective functional currencies are restated in U.S. dollars for business-related reasons. 2 The (reported) sales growth is a relative indicator showing the percentage change in sales compared with the prior-year period. 5 Interim Group Management Report as of June 30, 2016 1. Overview of Sales, Earnings and Financial Position Bayer Interim Report Gross cash flow from continuing operations in the second quarter of 2016 climbed by a substantial 9.3% to €2,366 million (Q2 2015: €2,165 million). Despite an increase in cash tied up in working capital, net cash flow (total) edged forward by 1.2% to €1,982 million (Q2 2015: €1,959 million). We paid income taxes of €659 million in the second quarter of 2016 (Q2 2015: €352 million). Net financial debt increased by €1.5 billion, from €16.3 billion on March 31, 2016, to €17.8 billion on June 30, 2016. The net defined benefit liability for post-employment benefits – the difference between benefit obligations and plan assets – increased from €13.3 billion to €13.8 billion over the same period, due especially to a decline in long-term capital market interest rates for high-quality corporate bonds in Germany, the United Kingdom and the United States. The number of people employed by the Bayer Group declined by 1.7% from 117,534 on June 30, 2015, to 115,576 on June 30, 2016. Personnel expenses rose by 1.7% in the same period, from €2,743 million to €2,789 million. First half of 2016 Group sales in the first half of 2016 rose by 2.8% (Fx & portfolio adj.) to €23,687 million (reported: – 0.5%). The Life Science businesses contributed to this performance, growing sales by 5.3% (Fx & portfolio adj.) to €17,862 million. Pharmaceuticals posted significant sales gains of 10.2% (Fx & portfolio adj.) to €7,993 million. Sales of Consumer Health improved by 3.1% (Fx & portfolio adj.) to €3,073 million. Despite the difficult market environment, sales of Crop Science were flat year on year (Fx & portfolio adj.: + 0.8%) at €5,454 million. Sales of Animal Health moved forward by 6.4% (Fx & portfolio adj.) to €834 million. Covestro saw sales fall by 4.3% (Fx & portfolio adj.) to €5,825 million. EBITDA before special items of the Bayer Group advanced by 10.9% to €6,441 million (H1 2015: €5,810 million). The good sales development particularly in the Life Science businesses was accompa- nied by high R&D and selling expenses. Earnings were held back by negative currency effects of around €150 million. Pharmaceuticals increased EBITDA before special items by a substantial 14.7% to €2,613 million. EBITDA before special items of Consumer Health receded by 2.7% to €711 million. The earnings contributions from the good business performance and cost synergies were not sufficient to offset selling expenses as well as allocation and currency effects. EBITDA before special items was level year on year at Crop Science (+ 0.5%; €1,752 million) and Animal Health (0.0%; €222 million). The Life Science businesses increased EBITDA before special items by 10.5% to €5,394 million overall. EBITDA before special items of Covestro climbed by a substantial 12.6% to €1,047 million. EBIT of the Bayer Group advanced robustly, gaining 18.9% to €4,458 million (H1 2015: €3,748 million) after net special charges of €376 million (H1 2015: €499 million). EBIT before special items moved for- ward by a clear 13.8% to €4,834 million (H1 2015: €4,247 million). After a financial result of minus €629 million (H1 2015: minus €561 million), income before income taxes was €3,829 million (H1 2015: €3,187 million). The financial result mainly comprised net interest expense of €260 million (H1 2015: €288 million), interest cost of €143 million (H1 2015: €148 million) for pension and other provisions, and currency hedging costs of €177 million (H1 2015: €122 million). After tax ex- pense of €905 million (H1 2015: €759 million), income after income taxes was €2,924 million (H1 2015: €2,428 million). After income from discontinued operations after income taxes and noncontrolling interest, net income in the first half of 2016 came to €2,891 million (H1 2015: €2,498 million). Earnings per share improved to €3.50 (H1 2015: €3.02), and core earnings per share to €4.42 (H1 2015: €4.05). Gross cash flow from continuing operations climbed by 18.5% to €4,930 million (H1 2015: €4,162 million). Despite an increase in cash tied up in working capital, net cash flow (total) rose by 23.1% to €3,304 million (H1 2015: €2,683 million) due mainly to the inflow from the divestiture of the Diabetes Care business. This figure reflected income tax payments of €1,208 million (H1 2015: €796 million). Net financial debt increased by €0.4 billion compared with December 31, 2015 (€17.4 billion), to €17.8 billion 6 Interim Group Management Report as of June 30, 2016 2. Economic Outlook Bayer Interim Report as of June 30, 2016. The net defined benefit liability for post-employment benefits rose from €10.8 billion on December 31, 2015, to €13.8 billion, mainly due to a decrease in long-term capital market interest rates for high-quality corporate bonds. 2. Economic Outlook Economic Outlook 1 Table 1 Growth 2015 Growth forecast 2016 World + 2.6% + 2.5% European Union + 1.9% + 1.7% of which Germany + 1.4% + 1.6% United States + 2.4% + 1.9% Emerging Markets 2 + 3.8% + 3.8% 2015 figures restated 1 Real growth of gross domestic product, source: IHS Global Insight 2 Including about 50 countries defined by IHS Global Insight as emerging markets in line with the World Bank As of July 2016 Economic expectations slightly worsened overall in the first half of the year. We now anticipate somewhat slower growth for the global economy in 2016 than in the previous year. The British vote to leave the European Union will cause additional uncertainty, particularly for the European economy. A slower pace of growth is also expected in the United States, however, especially in view of the disappointing job mar- ket development. The Emerging Markets are likely to grow at the same pace as in the previous year. Economic Outlook for the Segments 1 Table 2 Growth 2015 Growth forecast 2016 Pharmaceuticals market + 10% + 7% Consumer health market + 5% + 4% Seed and crop protection market – 2% – 1% Animal health market + 5% + 4% 2015 figures restated 1 Bayer’s estimate, except pharmaceuticals and consumer health; source for pharmaceuticals market: IMS Health, IMS Market Prognosis, copyright 2016; source for consumer health market in 2015: Nicholas Hall, copyright 2015; all rights reserved; currency-adjusted As of July 2016 Covestro continues to anticipate an improved economic climate in 2016 for its main customer industries. 7 Interim Group Management Report as of June 30, 2016 3. Sales and Earnings Forecast Bayer Interim Report 3. Sales and Earnings Forecast The forecasts for the alternative performance indicators EBITDA before special items, core earnings per share and currency- and portfolio-adjusted sales changes have been calculated in line with the reporting principles applied in preparing the financial statements and the adjustments described in Chapters 7 and 8. We have adjusted the exchange rates relevant to our forecast to reflect current developments. For the second half of 2016 we are now using the exchange rates prevailing on June 30, 2016, including a EUR-USD rate of 1.11. A 1% appreciation (depreciation) of the euro against all other currencies would decrease (increase) sales on an annual basis by some €300 million and EBITDA before special items by about €90 million. Following the signing in May 2016 of an agreement to sell the Consumer business of Environmental Science in the Crop Science Division, this business is no longer included in continuing operations and therefore is no longer included in the forecast. The following forecast for the current fiscal year is based on the business development described in this report, taking into account the potential risks and opportunities and assuming the inclusion of the Covestro business for the full year. Bayer Group For 2016, we are now planning sales of €46 billion to €47 billion (previously: more than €47 billion) for the Bayer Group, including Covestro. This continues to correspond to a low-single-digit percentage increase on a currency- and portfolio-adjusted basis. We now plan to increase EBITDA before special items by a high-single-digit (previously: mid-single-digit) percentage. It is now our aim to increase core earnings per share from continuing operations (calculated as explained in Chapter 8 “Core Earnings Per Share”) by a mid- to high-single-digit percentage (previously: a mid-single-digit percentage). This takes into account Covestro’s inclusion at around 64% starting on April 19, 2016 (January 1 to April 18, 2016: around 69%). Life Sciences total We continue to plan sales of approximately €35 billion for the Life Science activities, i.e. the Bayer Group excluding Covestro. This still corresponds to a mid-single-digit percentage increase on a currency- and portfolio-adjusted basis as previously forecasted. We now plan to increase EBITDA before special items by a mid- to high-single-digit (previously: mid-single-digit) percentage. Our planning includes dissyner- gies of around €130 million from the legal independence of Covestro and from divestments. Pharmaceuticals For Pharmaceuticals, we now expect sales above €16 billion (previously: approximately €16 billion) de- spite some price decreases. This now corresponds to a high-single-digit (previously: mid-single-digit) percentage increase on a currency- and portfolio-adjusted basis. We now plan to raise sales of our re- cently launched pharmaceutical products toward €5.5 billion (previously: to more than €5 billion). We now expect a low-teens (previously: mid- to high-single-digit) percentage increase in EBITDA before special items. We aim to improve the EBITDA margin before special items. Consumer Health In the Consumer Health Division, we now expect sales to come in at approximately €6 billion (previously: more than €6 billion). We now plan to grow sales by a low- to mid-single-digit (previously: mid-single- digit) percentage on a currency- and portfolio-adjusted basis. We now expect EBITDA before special items to come in on the level of the prior year (previously: increase by a mid-single-digit percentage). 8 Interim Group Management Report as of June 30, 2016 4. Changes to the Corporate Structure Bayer Interim Report Crop Science In light of the continuingly weak market environment, we now expect Crop Science sales to be on the prior-year level (previously: increase by a low-single-digit percentage) on a currency- and portfolio- adjusted basis. This is equivalent to reported sales of about €10 billion. We now expect a low-single-digit percentage decrease (previously: low-single-digit percentage increase) in EBITDA before special items. Animal Health At Animal Health, we continue to expect sales to be slightly above the prior-year level. We are still planning a currency- and portfolio-adjusted sales gain and an increase in EBITDA before special items, each by a low- to mid-single-digit percentage. Reconciliation For 2016, we now expect sales to come in at approximately €1 billion (previously: to be level with the previous year; 2015: €1.1 billion). We are now planning EBITDA before special items of roughly minus €0.1 billion (previously: minus €0.2 billion). Covestro For 2016, Covestro is now expecting a sales decline (previously: sales at the prior-year level) and, for the second half of 2016, EBITDA after adjustment for special items at least at the prior-year level (previously: for the full year, a decline in EBITDA after adjustment for special items). Further key data for the Bayer Group We continue to expect special charges in the region of €0.5 billion in 2016, with the integration of the acquired consumer care businesses and charges in connection with the reorganization of the Bayer Group accounting for most of this amount. Our prediction for the financial result is unchanged at around minus €1.2 billion. The effective tax rate is still likely to be about 24%. We continue to expect net financial debt at below €16 billion at the end of 2016. Further details of the business forecast are provided in Chapter 18.2 of the Combined Management Report in our Annual Report 2015. 4. Changes to the Corporate Structure In April 2016, Bayer AG deposited 10 million shares, or 4.9% of the issued shares, of Covestro AG in Bayer Pension Trust e.V. Bayer therefore currently still owns around 64% of Covestro. In May 2016, Crop Science signed an agreement to divest the Consumer business of Environmental Science, which is now reported under discontinued operations. Environmental Science therefore now comprises only the business for professional users. The key data and prior-year figures are restated accordingly. 9 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report 5. Business Development by Segment and Region 5.1 Pharmaceuticals Key Data – Pharmaceuticals Change % € million Q2 2015 Q2 2016 Reported Fx & p adj. H1 2015 H1 2016 Reported Sales 3,890 4,104 + 5.5 + 8.4 7,452 7,993 + 7.3 Change in sales Volume + 8.5% + 9.6% + 7.9% + 11.1% Price + 1.4% – 1.2% + 0.6% – 0.9% Currency + 7.7% – 2.9% + 7.9% – 2.9% Portfolio – 0.7% 0.0% – 0.7% 0.0% Reported Fx adj. Reported Sales by region Europe 1,337 1,422 + 6.4 + 9.2 2,569 2,801 + 9.0 North America 1,009 1,027 + 1.8 + 4.3 1,908 2,016 + 5.7 Asia / Pacific 1,117 1,219 + 9.1 + 10.3 2,131 2,349 + 10.2 Latin America / Africa / Middle East 427 436 + 2.1 + 11.2 844 827 – 2.0 EBITDA1 1,119 1,342 + 19.9 2,180 2,603 + 19.4 Special items (74) (10) (98) (10) EBITDA before special items 1 1,193 1,352 + 13.3 2,278 2,613 + 14.7 EBITDA margin before special items 1 30.7% 32.9% 30.6% 32.7% EBIT 772 988 + 28.0 1,519 1,686 + 11.0 Special items (78) (11) (102) (242) EBIT before special items 1 850 999 + 17.5 1,621 1,928 + 18.9 Gross cash flow 2 807 871 + 7.9 1,561 1,832 + 17.4 Net cash flow 2 491 310 – 36.9 1,303 1,044 – 19.9 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 9.1 “Statements of Cash Flows.” Second quarter of 2016 Sales Sales of Pharmaceuticals rose by an encouraging 8.4% (Fx & portfolio adj.) to €4,104 million in the second quarter of 2016. Our recently launched products continued their strong development. Xarelto™, Eylea™, Xofigo™, Stivarga™ and Adempas™ posted total combined sales of €1,332 million (Q2 2015: €1,051 million; Fx adj. +28.8%). Our Pharmaceuticals business expanded in all regions on a currency- adjusted basis. 10 Table 3 Change % Fx & p adj. + 10.2 Fx adj. + 11.3 + 6.6 + 10.8 + 14.1 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report Best-Selling Pharmaceuticals Products Change % € million Q2 2015 Q2 2016 Reported Fx adj. H1 2015 H1 2016 Reported Xarelto™ 549 703 + 28.1 + 30.1 1,031 1,320 + 28.0 of which U.S.A. 88 103 + 17.0 + 17.7 166 189 + 13.9 Eylea™ 301 418 + 38.9 + 40.9 554 790 + 42.6 of which U.S.A.1 0 0 . . 0 0 . Kogenate™ / Kovaltry™ 299 280 – 6.4 – 5.6 560 576 + 2.9 of which U.S.A. 91 87 – 4.4 – 2.9 165 183 + 10.9 Mirena™ product family 270 258 – 4.4 – 0.8 502 506 + 0.8 of which U.S.A. 181 168 – 7.2 – 5.6 335 337 + 0.6 Nexavar™ 231 221 – 4.3 – 2.0 427 434 + 1.6 of which U.S.A. 84 78 – 7.1 – 4.9 155 159 + 2.6 Betaferon™ / Betaseron™ 222 196 – 11.7 – 8.7 430 386 – 10.2 of which U.S.A. 109 111 + 1.8 + 3.0 202 211 + 4.5 YAZ™ / Yasmin™ / Yasminelle™ 174 166 – 4.6 + 0.9 355 338 – 4.8 of which U.S.A. 31 31 . + 2.6 64 71 + 10.9 Adalat™ 168 161 – 4.2 + 1.0 330 321 – 2.7 of which U.S.A. 1 0 . . 2 1 – 50.0 Aspirin™ Cardio 127 138 + 8.7 + 16.4 263 275 + 4.6 of which U.S.A. 0 0 . . 0 0 . Glucobay™ 129 128 – 0.8 + 6.6 259 267 + 3.1 of which U.S.A. 1 1 . . 1 2 . Avalox™ / Avelox™ 99 88 – 11.1 – 9.1 209 186 – 11.0 of which U.S.A. 0 0 . . 0 0 . Gadavist™ / Gadovist™ 71 89 + 25.4 + 28.8 140 171 + 22.1 of which U.S.A. 22 27 + 22.7 + 26.4 43 54 + 25.6 Xofigo™ 65 81 + 24.6 + 26.7 119 156 + 31.1 of which U.S.A. 45 56 + 24.4 + 24.9 86 106 + 23.3 Ultravist™ 84 84 . . 157 155 – 1.3 of which U.S.A. 1 2 . . 3 3 . Stivarga™ 92 67 – 27.2 – 25.1 163 134 – 17.8 of which U.S.A. 48 33 – 31.3 – 29.7 94 68 – 27.7 Total best-selling products 2,881 3,078 + 6.8 + 10.1 5,499 6,015 + 9.4 Proportion of Pharmaceuticals sales 74% 75% 74% 75% Total best-selling products in U.S.A. 702 697 1,316 1,384 Fx adj. = currency-adjusted 1 Marketing rights owned by Regeneron Pharmaceuticals Inc., U.S.A. Sales by product > Our oral anticoagulant Xarelto™ once again posted encouraging sales gains, due mainly to volume increases in Europe and Japan. Business with Xarelto™ also developed positively in the United States, where it is marketed by a subsidiary of Johnson & Johnson. > We considerably raised sales of the eye medicine Eylea™ in all regions, particularly in Europe, Canada and Japan. > Fluctuations in the order volumes placed by our distribution partner resulted in lower sales of the blood-clotting medicines Kogenate™ / Kovaltry™. > Sales of the hormone-releasing intrauterine devices of the Mirena™ product family – Mirena™ and Jaydess™ / Skyla™ – were nearly level with the prior year despite lower volumes in the United States. > Business with our cancer drug Nexavar™ was slightly down against the prior-year level, particularly as a result of lower demand in the United States. > We registered an overall decline in sales of our multiple sclerosis product Betaferon™ / Betaseron™ that was attributable in part to weaker business performance in Europe. 11 Table 4 Change % Fx adj. + 30.7 + 14.0 + 44.5 . + 3.4 + 10.3 + 2.9 + 0.5 + 3.9 + 2.6 – 8.3 + 4.4 + 2.0 + 11.0 + 2.8 – 47.1 + 11.0 . + 8.3 . – 7.2 . + 24.5 + 24.1 + 31.2 + 23.1 + 4.8 . – 16.4 – 27.4 + 12.4 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report > Sales of our YAZ™ / Yasmin™ / Yasminelle™ line of oral contraceptives were roughly level with the prior-year quarter on a currency-adjusted basis. Positive development in China and the United States was offset by lower demand in Europe. > Sales increases for Adalat™ for the treatment of hypertension and coronary heart disease, Aspirin™ Cardio for secondary prevention of heart attacks and the oral diabetes treatment Glucobay™ resulted mainly from gains in China. > Sales of the antibiotic Avalox™ / Avelox™ fell as expected due to the expiration of its patent. Gratifying volume gains in China were not sufficient to offset the declines in nearly all other regions. > We achieved substantial volume gains in the United States and Japan with our MRI contrast agent Gadavist™ / Gadovist™. > Sales of our cancer drug Xofigo™ increased in the United States and Europe especially. > The growth in sales of our X-ray contrast agent Ultravist™ resulted from expanded volumes in Europe that were primarily attributable to a favorable competitive situation. > Sales of our cancer drug Stivarga™ receded substantially due to intensified competition in the United States. In the prior-year quarter, furthermore, we had benefited from the reversal of a rebate provision in France. > Sales of the pulmonary hypertension treatment Adempas™ amounted to €63 million (Q2 2015: €44 million; Fx adj. + 45.3%) and reflected the proportionate recognition of the one-time payment re- sulting from the sGC collaboration with Merck & Co., United States. Business developed positively, especially in the United States. Earnings EBITDA before special items of Pharmaceuticals increased by a substantial 13.3% to €1,352 million in the second quarter of 2016. As expected, the earnings contributions from the very good business devel- opment stood against high investments in research and development. Currency effects of around €40 million had a diminishing effect. EBIT grew by a robust 28.0% to €988 million, including special charges of €11 million (Q2 2015: €78 million) which largely resulted from efficiency enhancement programs. First half of 2016 Sales Sales of the Pharmaceuticals segment rose by 10.2% (Fx & portfolio adj.) in the first half of 2016, to €7,993 million. This increase was driven by our recently launched products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™, which generated combined sales of €2,519 million (H1 2015: €1,948 million). Pharmaceuticals sales developed positively in all regions. Earnings EBITDA before special items improved by a substantial 14.7% in the first half of 2016, to €2,613 million, driven by very good business performance. At the same time, higher investments in research and devel- opment as well as negative currency effects of around €80 million had a diminishing effect. EBIT advanced by a substantial 11.0% to €1,686 million, including special charges of €242 million (H1 2015: €102 million). These mainly comprised €231 million for impairment losses on intangible assets (Essure™). 12 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report 5.2 Consumer Health Key Data – Consumer Health Change % € million Q2 2015 Q2 2016 Reported Fx & p adj. H1 2015 H1 2016 Reported Sales 1,590 1,553 – 2.3 + 4.0 3,146 3,073 – 2.3 Changes in sales Volume + 0.3% + 1.2% + 2.9% – 0.1% Price + 2.9% + 2.8% + 2.9% + 3.2% Currency + 6.9% – 6.3% + 6.3% – 5.4% Portfolio + 60.5% 0.0% + 57.5% 0.0% Reported Fx adj. Reported Sales by region Europe 409 415 + 1.5 + 7.3 865 826 – 4.5 North America 744 701 – 5.8 – 3.2 1,425 1,378 – 3.3 Asia / Pacific 193 201 + 4.1 + 10.9 373 402 + 7.8 Latin America / Africa / Middle East 244 236 – 3.3 + 15.2 483 467 – 3.3 EBITDA 1 301 297 – 1.3 581 661 + 13.8 Special items (61) (31) (150) (50) EBITDA before special items 1 362 328 – 9.4 731 711 – 2.7 EBITDA margin before special items 1 22.8% 21.1% 23.2% 23.1% EBIT 191 190 – 0.5 365 433 + 18.6 Special items (61) (32) (150) (64) EBIT before special items 1 252 222 – 11.9 515 497 – 3.5 Gross cash flow 2 241 237 – 1.7 468 522 + 11.5 Net cash flow 2 161 241 + 49.7 446 438 – 1.8 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 9.1 “Statements of Cash Flows.” Second quarter of 2016 Sales Sales of Consumer Health rose by 4.0% (Fx & portfolio adj.) in the second quarter of 2016 to €1,553 million. Business developed well in the Latin America / Africa / Middle East, Europe and Asia / Pacific regions, while sales in North America were down compared with a strong prior-year quarter. Our Claritin™, Aspirin™, Bepanthen™ / Bepanthol™ and Canesten™ brands posted very high growth rates. 13 Table 5 Change % Fx & p adj. + 3.1 Fx adj. – 0.2 – 2.5 + 12.6 + 18.4 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report Best-Selling Consumer Health Products Change % € million Q2 2015 Q2 2016 Reported Fx adj. H1 2015 H1 2016 Reported Claritin™ 167 178 + 6.6 + 11.0 369 365 – 1.1 Aspirin™ 101 102 + 1.0 + 8.1 221 218 – 1.4 Aleve™ 121 110 – 9.1 – 5.1 218 200 – 8.3 Bepanthen™ / Bepanthol™ 88 95 + 8.0 + 20.7 182 187 + 2.7 Coppertone™ 99 94 – 5.1 – 0.9 182 175 – 3.8 Canesten™ 65 75 + 15.4 + 19.0 129 139 + 7.8 Dr Scholl’sTM 1 78 65 – 16.7 – 13.6 136 125 – 8.1 Alka-SeltzerTM product family 47 45 – 4.3 + 0.8 113 102 – 9.7 One A Day™ 52 55 + 5.8 + 5.8 95 99 + 4.2 Berocca™ 40 35 – 12.5 – 4.4 79 84 + 6.3 Total 858 854 – 0.5 + 4.8 1,724 1,694 – 1.7 Proportion of Consumer Health sales 54% 55% 55% 55% 2015 figure for Aleve™ restated; Fx adj. = currency-adjusted 1 Trademark rights and distribution only in certain countries outside the European Union Sales by product > Currency-adjusted sales of the antihistamine Claritin™ rose considerably, particularly in China. Despite a weak allergy season, business in the United States developed positively, due primarily to the launch of the ClariSpray™ nasal spray. > Sales of Aspirin™ were up in all regions year on year on a currency-adjusted basis, with especially attractive gains in Latin America and the United States. Including business with Aspirin™ Cardio, which is reported under Pharmaceuticals, sales climbed by 12.7% (Fx adj.) to €240 million (Q2 2015: €228 million). > Business with our analgesic Aleve™ declined overall, mainly as a result of the deteriorating economic situation in Brazil and increased competitive pressure in the United States. > We posted significant currency-adjusted sales gains for our Bepanthen™ / Bepanthol™ wound and skin care products, particularly in Europe. Intensified marketing activities in Russia and the expansion of the portfolio to include Bepanthen Sun™ in France played a major role in this increase. > Currency-adjusted sales of our sunscreen product Coppertone™ moved back slightly against the prior-year quarter, due primarily to a weather-related decline in sales in the United States that was only partially offset by sales gains in China. > The considerable increase in sales of the skin and intimate health brand Canesten™ is attributable to expanded volumes in all regions, particularly in China and Germany. > Our Dr. Scholl’s™ foot care products registered a decline in sales because of a weaker market envi- ronment and increased competitive pressure in the United States. > Business with our One A Day™ vitamin product benefited from factors including product line exten- sions in the United States. > Sales of our multivitamin product Berocca™ were down as expected, particularly in Asia / Pacific. This was attributable in part to higher sales in the previous quarter. Earnings EBITDA before special items of Consumer Health declined by 9.4% to €328 million in the second quarter of 2016 (Q2 2015: €362 million). The earnings contributions from the good business performance and cost synergies were not sufficient to offset the higher selling expenses as well as allocation and currency effects of around €25 million. EBIT was level year on year at €190 million (– 0.5%), including special charges of €32 million (Q2 2015: €61 million). These largely reflected costs of €29 million for the integration of acquired businesses. 14 Table 6 Change % Fx adj. + 0.9 + 4.7 – 5.4 + 15.4 – 1.8 + 20.1 – 6.9 – 8.1 + 4.3 + 13.5 + 2.8 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report First half of 2016 Sales Sales of Consumer Health in the first half of 2016 increased by 3.1% (Fx & portfolio adj.) to €3,073 million. Business development in Latin America and in the Asia / Pacific region was especially positive, whereas sales declined in the United States. Earnings EBITDA before special items decreased slightly by 2.7% in the first half of 2016, to €711 million (H1 2015: €731 million). The earnings contributions from the good business performance and cost syn- ergies were not sufficient to offset the higher selling expenses as well as allocation and currency effects of around €40 million. EBIT advanced by a substantial 18.6% to €433 million (H1 2015: €365 million), including special charges of €64 million (H1 2015: €150 million). These reflected charges of €47 million for the integration of ac- quired businesses and €17 million for efficiency improvement measures. 5.3 Crop Science Key Data – Crop Science Change % € million Q2 2015 Q2 2016 Reported Fx & p adj. H1 2015 H1 2016 Reported Sales 2,636 2,518 – 4.5 + 0.4 5,642 5,454 – 3.3 Change in sales Volume – 0.6% – 1.0% – 1.6% – 0.8% Price + 0.1% + 1.4% + 1.8% + 1.6% Currency + 10.1% – 5.2% + 7.4% – 4.3% Portfolio + 0.8% + 0.3% + 0.7% + 0.2% Reported Fx adj. Reported Sales by region Europe 851 808 – 5.1 + 0.9 2,179 2,113 – 3.0 North America 873 812 – 7.0 – 3.4 1,781 1,721 – 3.4 Asia / Pacific 442 455 + 2.9 + 8.4 802 797 – 0.6 Latin America / Africa / Middle East 470 443 – 5.7 – 0.2 880 823 – 6.5 EBITDA 1 694 633 – 8.8 1,673 1,719 + 2.7 Special items (28) (30) (70) (33) EBITDA before special items 1 722 663 – 8.2 1,743 1,752 + 0.5 EBITDA margin before special items 1 27.4% 26.3% 30.9% 32.1% EBIT 561 512 – 8.7 1,416 1,467 + 3.6 Special items (28) (30) (75) (33) EBIT before special items 1 589 542 – 8.0 1,491 1,500 + 0.6 Gross cash flow 2 529 468 – 11.5 1,220 1,234 + 1.1 Net cash flow 2 752 1,088 + 44.7 (29) 422 . 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 9.1 “Statements of Cash Flows.” 15 Table 7 Change % Fx & p adj. + 0.8 Fx adj. + 1.1 – 0.1 + 3.5 + 0.3 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report Second quarter of 2016 Sales In the second quarter of 2016, Crop Science posted sales of €2,518 million (Fx & portfolio adj. + 0.4%). Business at Crop Protection / Seeds was steady year on year despite an ongoing weak market environ- ment. Environmental Science posted a slight decline in sales. Following the conclusion in May 2016 of an agreement to divest the Consumer business of Environmen- tal Science, these activities are reported under discontinued operations. Environmental Science therefore now comprises only the business for professional users. The key data and prior-year figures are restated accordingly. Sales by Business Unit Change % € million Q2 2015 Q2 2016 Reported Fx & p adj. H1 2015 H1 2016 Reported Crop Protection / Seeds 2,472 2,363 – 4.4 + 0.5 5,361 5,182 – 3.3 Crop Protection 2,137 2,055 – 3.8 + 1.4 4,429 4,237 – 4.3 Herbicides 787 769 – 2.3 + 3.9 1,693 1,614 – 4.7 Fungicides 827 840 + 1.6 + 6.0 1,657 1,667 + 0.6 Insecticides 360 302 – 16.1 – 11.9 695 586 – 15.7 SeedGrowth 163 144 – 11.7 – 6.1 384 370 – 3.6 Seeds 335 308 – 8.1 – 4.8 932 945 + 1.4 Environmental Science 164 155 – 5.5 – 1.2 281 272 – 3.2 2015 figures restated; Fx & p adj. = currency- and portfolio-adjusted Sales by region > Sales in Europe were up slightly year on year at €808 million (Fx adj. + 0.9%). Sales increased by a double-digit percentage at SeedGrowth, Insecticides and Herbicides but declined considerably at Fungicides, particularly in Germany. We registered encouraging growth in business with vegetable seeds. Sales at Environmental Science came in well below the prior-year figure. > Sales in North America fell by 3.4% (Fx adj.) to €812 million. Compared with the prior-year quarter, > sales at Seeds decreased substantially due to seasonal effects. Higher sales of soybean seeds were not sufficient to offset the decline in business with oilseed rape / canola and cotton seeds. Sales of seed treatments were down significantly year on year, as was the Insecticides business. By contrast, we registered very pleasing growth at Fungicides. We also expanded business at Herbicides, while sales at Environmental Science declined slightly. In the Asia / Pacific region, we grew sales substantially (Fx adj. + 8.4%) to €455 million, driven espe- cially by very gratifying development in China and Australia. Business in the region expanded in all Crop Protection units, particularly SeedGrowth and Fungicides. Sales in the Seeds unit climbed by a double-digit percentage. On the other hand, Environmental Science posted a considerable decline in sales. > Sales in the Latin America / Africa / Middle East region were level year on year at €443 million (Fx adj. – 0.2%). Very gratifying performances at Fungicides and in the vegetable seeds business were more than offset by declines in sales at Herbicides and SeedGrowth and much lower sales at Insecticides in Brazil. Environmental Science posted double-digit percentage growth. Earnings EBITDA before special items of Crop Science declined by 8.2% to €663 million in the second quarter of 2016 (Q2 2015: €722 million). The higher cost of goods sold, slightly lower volumes and a negative currency effect of around €10 million were compensated only in part by higher selling prices and lower selling expenses. EBIT decreased by 8.7% to €512 million, after special charges of €30 million (Q2 2015: €28 million), due largely to restructuring measures. 16 Table 8 Change % Fx & p adj. + 0.8 – 0.2 – 0.1 + 4.5 – 12.1 + 0.3 + 5.9 + 1.1 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report First half of 2016 Sales Sales of Crop Science in the first half of 2016 were level year on year at €5,454 million (Fx & portfolio adj. + 0.8%) despite the difficult market environment. At Crop Protection / Seeds, the positive develop- ment of Fungicides compensated declining Insecticides sales. We expanded business at Seeds and Environmental Science. Sales increased in the Asia / Pacific and Europe regions, whereas business remained at the prior-year level in North America and Latin America / Africa / Middle East. Earnings EBITDA before special items of Crop Science in the first half of 2016 was level year on year at €1,752 million (+ 0.5%; H1 2015: €1,743 million). Positive earnings contributions from higher selling prices stood against increased R&D expenses, lower volumes and a negative currency effect of around €25 million. EBIT increased slightly by 3.6% to €1,467 million after special charges of €33 million (H1 2015: €75 million), which were largely attributable to restructuring measures. 5.4 Animal Health Key Data – Animal Health Change % € million Q2 2015 Q2 2016 Reported Fx & p adj. H1 2015 H1 2016 Reported Sales 428 426 –0.5 +4.2 814 834 +2.5 Change in sales Volume +8.1% +1.4% +6.6% +4.7% Price – 2.0% +2.8% – 0.3% +1.7% Currency +13.1% – 4.7% +12.1% – 3.9% Portfolio 0.0% 0.0% 0.0% 0.0% Reported Fx adj. Reported Sales by region Europe 111 114 +2.7 +7.2 230 242 +5.2 North America 193 193 . +2.6 325 355 +9.2 Asia / Pacific 72 71 –1.4 +4.2 147 138 – 6.1 Latin America / Africa / Middle East 52 48 –7.7 +3.8 112 99 – 11.6 EBITDA 1 113 100 –11.5 205 221 +7.8 Special items (7) – (17) (1) EBITDA before special items 1 120 100 –16.7 222 222 . EBITDA margin before special items 1 28.0% 23.5% 27.3% 26.6% EBIT 105 93 –11.4 170 207 +21.8 Special items (6) – (38) (1) EBIT before special items 1 111 93 – 16.2 208 208 . Gross cash flow 2 83 69 – 16.9 155 155 . Net cash flow 2 85 48 – 43.5 205 28 – 86.3 Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 9.1 “Statements of Cash Flows.” 17 Table 9 Change % Fx & p adj. +6.4 Fx adj. +8.3 +9.8 – 2.0 +3.6 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report Second quarter of 2016 Sales Sales of Animal Health in the second quarter of 2016 climbed by 4.2% (Fx & portfolio adj.) to €426 million. All regions developed positively on a currency-adjusted basis, the strongest gains being registered in Europe. Best-Selling Animal Health Products Change % € million Q2 2015 Q2 2016 Reported Fx adj. H1 2015 H1 2016 Reported Advantage™ product family 169 157 – 7.1 – 3.7 313 305 – 2.6 Seresto™ 48 67 + 39.6 + 44.6 76 121 + 59.2 Drontal™ product family 30 32 + 6.7 + 9.3 61 64 + 4.9 Baytril™ 27 24 – 11.1 – 5.8 57 52 – 8.8 Total 274 280 + 2.2 + 6.0 507 542 + 6.9 Proportion of Animal Health sales 64% 66% 62% 65% Fx adj. = currency-adjusted Sales by product > Sales of our Advantage™ family of flea, tick and worm control products declined, mainly as a result of higher competitive pressure. > Sales of our Seresto™ flea and tick collar rose strongly, thanks especially to higher demand in the United States. Sales also increased in Europe. > Business with our Drontal™ line of wormers benefited, among other factors, from higher volumes in the United States. > Sales of our antibiotic Baytril™ fell because of a weaker market environment overall and generic competition in the United States. Earnings EBITDA before special items of Animal Health declined by 16.7% to €100 million in the second quarter of 2016 (Q2 2015: €120 million), due especially to seasonal shifts in selling expenses and negative cur- rency effects of around €5 million. EBIT stood at €93 million, which was 11.4% lower than in the prior year (Q2 2015: €105 million) and included no special charges (Q2 2015: €6 million). First half of 2016 Sales Sales of Animal Health rose by 6.4% (Fx & portfolio adj.) in the first half of 2016 to €834 million. The strongest sales growth was recorded in the United States and Europe. Earnings EBITDA before special items in the first half of 2016 amounted to €222 million (H1 2015: €222 million) and was thus level with the prior year. Positive earnings contributions from the good business develop- ment stood against higher selling expenses and negative currency effects of around €10 million. EBIT of Animal Health advanced by 21.8% to €207 million (H1 2015: €170 million) after special charges of €1 million (H1 2015: €38 million). 18 Table 10 Change % Fx adj. – 0.4 + 61.7 + 8.2 – 4.4 + 9.5 Interim Group Management Report as of June 30, 2016 5. Business Development by Segment and Region Bayer Interim Report 5.5 Covestro Key Data – Covestro Change % € million Q2 2015 Q2 2016 Reported Fx & p adj. H1 2015 H1 2016 Reported Sales 3,185 2,975 – 6.6 – 3.9 6,199 5,825 – 6.0 Change in sales Volume + 7.0% + 5.0% + 4.7% + 5.4% Price – 6.4% – 8.9% – 5.4% – 9.7% Currency + 10.6% – 2.7% + 10.1% – 1.7% Portfolio 0.0% 0.0% 0.0% 0.0% Reported Fx adj. Reported Sales by region Europe 1,158 1,126 – 2.8 – 2.8 2,251 2,215 – 1.6 North America 766 686 – 10.4 – 8.4 1,484 1,369 – 7.7 Asia / Pacific 904 866 – 4.2 + 0.6 1,760 1,659 – 5.7 Latin America / Africa / Middle East 357 297 – 16.8 – 9.8 704 582 – 17.3 EBITDA 1 448 543 + 21.2 851 1,047 + 23.0 Special items (58) – (79) – EBITDA before special items 1 506 543 + 7.3 930 1,047 + 12.6 EBITDA margin before special items 1 15.9% 18.3% 15.0% 18.0% EBIT 278 367 + 32.0 497 703 + 41.4 Special items (59) – (101) – EBIT before special items 1 337 367 + 8.9 598 703 + 17.6 Gross cash flow 2 359 428 + 19.2 671 835 + 24.4 Net cash flow 2 360 309 – 14.2 523 478 – 8.6 Fx & p adj. = currency- and portfolio-adjusted; Fx adj. = currency-adjusted 1 For definition see Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 2 For definition see Chapter 9.1 “Statements of Cash Flows.” Second quarter of 2016 Sales Sales of Covestro fell by 3.9% (Fx & portfolio adj.) in the second quarter of 2016 compared with the prior-year period, to €2,975 million. Selling prices were down significantly, mainly due to raw material price development and primarily at Polyurethanes. Volumes were above the level of the prior-year quarter overall. Sales by Business Unit Change % € million Q2 2015 Q2 2016 Reported Fx & p adj. H1 2015 H1 2016 Reported Polyurethanes 1,638 1,482 – 9.5 – 6.7 3,189 2,883 – 9.6 Polycarbonates 828 831 + 0.4 + 3.7 1,592 1,617 + 1.6 Coatings, Adhesives, Specialties 561 532 – 5.2 – 3.0 1,095 1,044 – 4.7 Other Covestro business 158 130 – 17.7 – 18.4 323 281 – 13.0 Total 3,185 2,975 – 6.6 – 3.9 6,199 5,825 – 6.0 Fx & p adj. = currency- and portfolio-adjusted 19 Table 11 Change % Fx & p adj. – 4.3 Fx adj. – 1.6 – 7.7 – 2.7 – 9.9 Table 12 Change % Fx & p adj. – 7.7 + 3.6 – 3.5 – 13.0 – 4.3 Interim Group Management Report as of June 30, 2016 6. Research, Development, Innovation Bayer Interim Report 20 Sales by business unit > At Polyurethanes, much lower selling prices that were not offset by higher volumes led to a 6.7% (Fx & portfolio adj.) decline in sales to €1,482 million. > Polycarbonates improved sales by 3.7% (Fx & portfolio adj.) to €831 million, with higher volumes more than offsetting lower selling prices. > Sales at Coatings, Adhesives, Specialties fell by 3.0% (Fx & portfolio adj.) to €532 million, as selling prices were down slightly against the prior-year quarter. Volumes were level year on year. Earnings EBITDA before special items of Covestro improved by 7.3% to €543 million in the second quarter of 2016 (Q2 2015: €506 million). The impact of lower selling prices was more than compensated by the net effect of lower raw material prices and higher volumes. Earnings were diminished by a negative currency effect of around €5 million. EBIT rose year on year by a substantial 32.0% to €367 million. There were no special items (Q2 2015: minus €59 million). First half of 2016 Sales Sales of Covestro fell by 4.3% (Fx & portfolio adj.) in the first half of 2016 compared with the prior-year period, to €5,825 million. Selling prices declined in all three business units, especially at Polyurethanes. Volumes were above the level of the prior-year period overall, increasing at Polycarbonates and Polyurethanes but unchanged from a year earlier at Coatings, Adhesives, Specialties. Earnings EBITDA before special items increased by 12.6% to €1,047 million. Lower raw material costs compen- sated the decline in selling prices. Increased volumes also had a positive effect on earnings. EBIT advanced by 41.4% to €703 million. There were no special items (H1 2015: minus €101 million). 6. Research, Development, Innovation Bayer Group expenses for research and development rose by 9.4% (Fx adj.) to €1,122 million in the second quarter of 2016, with the Life Science businesses accounting for €1,060 million of this figure (Fx adj. plus 10.5%). Research and Development Expenses Table 13 R&D expenses R&D expenses before special items Change % Change % Change % Change % € million Q2 2015 Q2 2016 Fx adj. H1 2015 H1 2016 Fx adj. Q2 2015 Q2 2016 Fx adj. H1 2015 H1 2016 Fx adj. Pharmaceuticals 581 679 + 17.0 1,114 1,379 + 23.6 578 679 + 17.6 1,111 1,346 + 21.0 Consumer Health 65 71 + 10.8 117 129 + 11.1 60 60 + 3.3 110 116 + 7.3 Crop Science 268 272 + 3.7 506 533 + 6.9 268 265 + 1.1 506 526 + 5.5 Animal Health 32 34 + 9.4 65 64 . 32 34 + 9.4 65 64 . Total Life Sciences 1 967 1,060 + 10.5 1,852 2,105 + 14.1 959 1,042 + 9.6 1,842 2,052 + 11.9 Covestro 68 62 – 5.9 127 126 + 0.8 67 62 – 4.5 126 126 + 1.6 Total Group 1,035 1,122 + 9.4 1,979 2,231 + 13.3 1,026 1,104 + 8.6 1,968 2,178 + 11.2 2015 figures restated 1 Including reconciliation Interim Group Management Report as of June 30, 2016 6. Research, Development, Innovation Bayer Interim Report Capital expenditures for property, plant and equipment and intangible assets amounted to €589 million (Q2 2015: €601 million), including €509 million (Q2 2015: €466 million) in the Life Science businesses. In addition to the partnership concluded at the end of 2015 with CRISPR Therapeutics AG, Switzerland, Bayer and ERS Genomics, Ireland, signed an agreement in May 2016 that will grant Bayer access to the CRISPR-Cas9 genome editing patents of ERS. The agreement grants Bayer rights for defined research applications of this technology in selected core strategic areas. Pharmaceuticals We are conducting clinical trials with several drug candidates from our research and development pipeline. The following table shows our most important drug candidates currently in Phase II of clinical testing: Research and Development Projects (Phase II) 1 Table 14 Projects Indication Anetumab ravtansine (mesothelin ADC) Cancer Ang2 antibody + aflibercept Serious eye diseases 2 BAY 1142524 (chymase inhibitor) Heart failure BAY 2306001 (IONIS-FXIRx) Prevention of thrombosis 3 Copanlisib (PI3K inhibitor) Recurrent / resistant non-Hodgkin lymphoma (NHL) Molidustat (HIF-PH inhibitor) Renal anemia Neladenoson bialanate (BAY 1067197) Heart failure PDGFR-beta + aflibercept Wet age-related macular degeneration 2 Radium-223 dichloride Breast cancer with bone metastases Radium-223 dichloride Cancer, various studies Regorafenib Cancer Riociguat Diffuse systemic sclerosis Riociguat Cystic fibrosis Rivaroxaban Secondary prevention of acute coronary syndrome (ACS) 4 Vericiguat (BAY 1021189, sGC stimulator) Chronic heart failure Vilaprisan (S-PRM) Symptomatic uterine fibroids Vilaprisan (S-PRM) Endometriosis 1 As of July 18, 2016 2 Sponsored by Regeneron Pharmaceuticals, Inc. 3 Sponsored by Ionis Pharmaceuticals, Inc. 4 Sponsored by Janssen Research & Development, LLC The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. Following the recommendation of an independent data monitoring committee (DMC), we terminated our Phase II study investigating riociguat (tradename: Adempas™) in patients with pulmonary hypertension associated with idiopathic interstitial pneumonia (PH-IIP) in May 2016. We also will not further pursue the development of BAY 98-7196 + anastrozole (intravaginal ring) for the indication endometriosis. 21 Interim Group Management Report as of June 30, 2016 6. Research, Development, Innovation Bayer Interim Report The following table shows our most important drug candidates currently in Phase III of clinical testing: Research and Development Projects (Phase III) 1 Table 15 Projects Indication Amikacin Inhale Pulmonary infection BAY 1841788 (ODM-201, AR antagonist) Nonmetastatic castration-resistant prostate cancer BAY 1841788 (ODM-201, AR antagonist) Metastatic hormone-sensitive prostate cancer Damoctocog alfa pegol (BAY 94-9027, long-acting rFVIII) Hemophilia A Ciprofloxacin DPI Pulmonary infection Copanlisib (PI3K inhibitor) Various forms of non-Hodgkin lymphoma (NHL) Finerenone (MR antagonist) Diabetic kidney disease Radium-223 dichloride Combination treatment of castration-resistant prostate cancer Regorafenib Refractory liver cancer Regorafenib Colon cancer, adjuvant therapy Riociguat Pulmonary arterial hypertension (PAH) in patients who do not sufficiently respond to PDE-5i / ERA Rivaroxaban Prevention of major adverse cardiac events (MACE) Rivaroxaban Anticoagulation in patients with chronic heart failure 2 Rivaroxaban Long-term prevention of venous thromboembolism Rivaroxaban Prevention of venous thromboembolism in high-risk patients after discharge from hospital 2 Rivaroxaban Embolic stroke of undetermined source (ESUS) Rivaroxaban Peripheral artery disease (PAD) Tedizolid Pulmonary infection 1 As of July 18, 2016 2 Sponsored by Janssen Research & Development, LLC The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. In May 2016, a clinical Phase III study investigating regorafenib (tradename: Stivarga™) in unresectable liver cancer reached its primary endpoint, a statistically significant improvement of overall survival. The study investigated regorafenib in patients with hepatocellular carcinoma that had further progressed during prior treatment with sorafenib (tradename: Nexavar™). Based on these data, we plan to file for marketing authorization for regorafenib in the treatment of unresectable liver cancer before the end of 2016. In June 2016, we agreed with Orion Corporation, Espoo, Finland, to expand the global clinical develop- ment program for the novel androgen receptor (AR) antagonist BAY-1841788 (ODM-201). A new clinical Phase III study will evaluate BAY-1841788 in men with newly diagnosed metastatic hormone-sensitive prostate cancer (mHSPC) who are starting first line hormone therapy. Also in June 2016, we formed a new research partnership with the U.S. National Surgical Adjuvant Breast and Bowel Project (NSABP), a leading clinical trials cooperative group. A clinical Phase III study will investigate regorafenib as a single agent for adjuvant treatment following completion of standard adjuvant chemotherapy in patients with advanced but not yet metastatic colon cancer. 22 Interim Group Management Report as of June 30, 2016 6. Research, Development, Innovation Bayer Interim Report The most important drug candidates in the approval process are: Products Submitted for Approval 1 Table 16 Project Indication LCS-16 (ULD LNG Contraceptive System) E.U., U.S.A.; contraception Rivaroxaban 2 U.S.A.; secondary prophylaxis of acute coronary syndrome (ACS) 1 As of July 18, 2016 2 Submitted by Janssen Research & Development, LLC In May 2016, the U.S. Food and Drug Administration (FDA) approved Gadavist™ / Gadovist™ (active ingredient: gadobutrol) as the first contrast agent for use with magnetic resonance angiography (MRA) to evaluate known or suspected supra-aortic or renal artery disease in patients of all ages. Consumer Health In April 2016, we expanded our Claritin™ portfolio in the United States to include ClariSpray™, a 24-hour nasal spray to treat allergy symptoms. In June 2016, we began marketing Aleve™ Direct Therapy in the United States to expand our range of analgesic products. This product is a medical device for transcutaneous electrical nerve stimulation to help relieve lower back pain and tension. Crop Science In April 2016, Crop Science announced a five-year research partnership with the Institute of Geography and the Department of Informatics of the University of Hamburg that is aimed at jointly developing new digital solutions for agriculture based on geoinformatics methods and models. The project will leverage relevant geobasic data such as soil, climate, land relief and usage parameters for IT-based visualization of the consequences of agricultural processes. In May 2016, Crop Science and Planetary Resources, based in Redmond, Washington, United States, signed a memorandum of understanding about the development of applications and products based on satellite images. Animal Health In May 2016, we entered into an agreement with BioNTech AG, Germany, to develop novel mRNA vac- cines and therapeutics specifically for veterinary medicine applications. Also in May 2016, we signed a global license agreement with TransferTech Sherbrooke, Quebec, Cana- da, to advance a novel vaccine candidate developed at Université de Sherbrooke. The new vaccine is intended to help protect dairy cattle from mastitis caused by the bacterium Staphylococcus aureus. Covestro In June 2016, Covestro inaugurated a production facility at the Dormagen site that will manufacture a novel foam component with 20% CO2 content, enabling input of the traditional oil-based raw material to be reduced by an equal amount. The new plant with an annual capacity of 5,000 tons will allow the com- pany to manufacture plastics using carbon dioxide for the first time on an industrial scale. 23 Interim Group Management Report as of June 30, 2016 7. Calculation of EBIT(DA) Before Special Items Bayer Interim Report 7. Calculation of EBIT(DA) Before Special Items EBIT (income after income taxes, plus income taxes, plus financial result), which is not defined in the International Financial Reporting Standards, is influenced by special effects and by the amortization of intangible assets and depreciation of property, plant and equipment, along with impairment losses and impairment loss reversals. To elucidate the effects of these parameters on the operational business and facilitate the comparability of operational earning power over time, we determine additional indicators: EBITDA, EBIT before special items, EBITDA before special items and the EBITDA margin before special items. These indicators also are not defined in the International Financial Reporting Standards. Special Items Reconciliation € million EBIT Q2 2015 EBIT Q2 2016 EBIT H1 2015 EBIT H1 2016 EBITDA Q2 2015 EBITDA Q2 2016 EBITDA H1 2015 Before special items 2,078 2,242 4,247 4,834 2,888 3,054 5,810 Pharmaceuticals (78) (11) (102) (242) (74) (10) (98) Restructuring (26) (10) (35) (12) (22) (9) (31) Litigations (1) (1) (14) 1 (1) (1) (14) Integration costs – – (2) – – – (2) Impairment losses / impairment loss reversals – – – (231) – – – Divestitures 3 – 3 – 3 – 3 Revaluation of other receivables (54) – (54) – (54) – (54) Consumer Health (61) (32) (150) (64) (61) (31) (150) Restructuring – (3) – (17) – (2) – Integration costs (55) (29) (144) (47) (55) (29) (144) Revaluation of other receivables (6) – (6) – (6) – (6) Crop Science (28) (30) (75) (33) (28) (30) (70) Restructuring – (28) – (28) – (28) – Litigations (17) (2) (18) (5) (17) (2) (18) Divestitures – – (46) – – – (41) Revaluation of other receivables (11) – (11) – (11) – (11) Animal Health (6) – (38) (1) (7) – (17) Restructuring (6) – (38) (1) (7) – (17) Reconciliation (23) (31) (33) (36) (23) (31) (33) Restructuring (22) (26) (32) (31) (22) (26) (32) Litigations – (5) – (5) – (5) – Revaluation of other receivables (1) – (1) – (1) – (1) Total special items Life Sciences (196) (104) (398) (376) (193) (102) (368) Covestro (59) – (101) – (58) – (79) Restructuring (57) – (99) – (56) – (77) Revaluation of other receivables (2) – (2) – (2) – (2) Total special items (255) (104) (499) (376) (251) (102) (447) of which cost of goods sold (51) (16) (237) (199) (48) (14) (191) of which selling expenses (45) (30) (71) (71) (46) (30) (67) of which research and development expenses (9) (18) (11) (53) (7) (18) (9) of which general administration expenses (43) (31) (63) (44) (43) (31) (63) of which other operating income / expenses (107) (9) (117) (9) (107) (9) (117) After special items 1,823 2,138 3,748 4,458 2,637 2,952 5,363 2015 figures restated 24 Table 17 EBITDA H1 2016 6,441 (10) (11) 1 – – – – (50) (3) (47) – (33) (28) (5) – – (1) (1) (36) (31) (5) – (130) – – – (130) (22) (35) (20) (44) (9) 6,311 Interim Group Management Report as of June 30, 2016 8. (Core) Earnings Per Share Bayer Interim Report > EBITDA (EBIT plus the amortization of intangible assets and the depreciation of property, plant and equipment, plus impairment losses and minus impairment loss reversals, recognized in profit or loss during the reporting period) serves to characterize the operational business irrespective of the effects of amortization, depreciation or impairment losses / impairment loss reversals. > EBIT before special items and EBITDA before special items show the development of the operational business irrespective of the effects of special items, i.e. special effects for the company with regard to their nature and magnitude. These may include litigations, restructuring, integration costs, impairment losses and impairment loss reversals. In the calculation of EBIT before special items and EBITDA be- fore special items, special charges are added and special gains subtracted. They constitute relevant key data for Bayer. > The EBITDA margin before special items, which is calculated by dividing EBITDA before special items by sales, serves as an indicator of relative operational earning power for purposes of internal and ex- ternal comparison. In the second quarter of 2016, depreciation, amortization and impairments were level year on year at €814 million (Q2 2015: €814 million), comprising €447 million (Q2 2015: €446 million) in amortization and impairments on intangible assets and €367 million (H1 2015: €368 million) in depreciation and impair- ments on property, plant and equipment. The impairments totaled €39 million (Q2 2015: €19 million) and included no special items (Q2 2015: €4 million). Depreciation, amortization and impairments were 14.7% higher in the first half of 2016 at €1,853 million (H1 2015: €1,615 million), comprising €1,114 million (H1 2015: €870 million) in amortization and impair- ments on intangible assets and €739 million (H1 2015: €745 million) in depreciation and impairments on property, plant and equipment. The impairments totaled €298 million (H1 2015: €67 million), of which €244 million (H1 2015: €52 million) constituted special items. 8. (Core) Earnings Per Share Earnings per share according to IFRS are affected by the purchase price allocation for acquisitions and other special factors. To elucidate the impact of these effects on earnings and facilitate the comparability of our performance over time, we determine additional indicators – core EBIT, core net income and core earnings per share – which are not defined in the International Financial Reporting Standards. 25 Interim Group Management Report as of June 30, 2016 8. (Core) Earnings Per Share Bayer Interim Report Core Earnings Per Share € million Q2 2015 Q2 2016 H1 2015 EBIT (as per income statements) 1,823 2,138 3,748 Amortization and impairment losses / loss reversals on intangible assets 446 447 870 Impairment losses / loss reversals on property, plant and equipment 19 (1) 55 Special items (other than amortization and impairment losses / loss reversals) 251 102 447 Core EBIT 2,539 2,686 5,120 Financial result (as per income statements) (287) (314) (561) Special items in the financial result (6) – (9) Income taxes (as per income statements) (390) (431) (759) Tax effects related to amortization, impairment losses / loss reversals and special items (210) (156) (431) Income after income taxes attributable to noncontrolling interest (as per income statements) (6) (68) (12) Above-mentioned adjustments attributable to noncontrolling interest – (5) – Core net income from continuing operations 1,640 1,712 3,348 Shares Number of issued ordinary shares 826,947,808 826,947,808 826,947,808 € Core earnings per share from continuing operations 1.99 2.07 4.05 Core earnings per share from discontinued operations 0.02 0.13 0.10 Core earnings per share from continuing and discontinued operations 2.01 2.20 4.15 2015 figures restated Core EBIT is determined by first eliminating from EBIT (income after income taxes, plus income taxes, plus financial result), which is not defined in the International Financial Reporting Standards, all amortization and impairment losses / impairment loss reversals on intangible assets, impairment losses/ impairment loss reversals on property, plant and equipment, and special items (other than amortization and impairment losses / impairment loss reversals). This core EBIT is then used to calculate core net income, which comprises the financial result (as per income statements), income taxes (as per income statements), income after income taxes attributable to noncontrolling interest (as per income statements), special items in the financial result, special items in income taxes, tax effects related to amortization, impairment losses / impairment loss reversals and special items, and the above-mentioned adjustments attributable to noncontrolling interest. From this core net income we calculate core earnings per share in the same way as earnings per share. Core earnings per share form the basis for our dividend policy. They are determined for both continuing and discontinued operations. In the second quarter of 2016, we improved core earnings per share from continuing operations by 4.0% to €2.07 (Q2 2015: €1.99). Earnings per share rose by 19.3% in the same period to €1.67 (Q2 2015: €1.40). 26 Table 18 H1 2016 4,458 1,114 17 130 5,719 (629) (10) (905) (374) (138) (7) 3,656 826,947,808 4.42 0.20 4.62 Interim Group Management Report as of June 30, 2016 9. Financial Position of the Bayer Group Bayer Interim Report 27 9. Financial Position of the Bayer Group 9.1 Statements of Cash Flows Bayer Group Summary Statements of Cash Flows Table 19 € million Q2 2015 Q2 2016 Change % H1 2015 H1 2016 Change % Gross cash flow 1 2,165 2,366 + 9.3 4,162 4,930 + 18.5 Changes in working capital / other noncash items (205) (374) – 82.4 (1,483) (2,386) – 60.9 Net cash provided by (used in) operating activities (net cash flow), continuing operations 1,960 1,992 + 1.6 2,679 2,544 – 5.0 Net cash provided by (used in) operating activities (net cash flow), discontinued operations (1) (10) . 4 760 . Net cash provided by (used in) operating activities (net cash flow) (total) 1,959 1,982 + 1.2 2,683 3,304 + 23.1 Net cash provided by (used in) investing activities (total) (527) (1,245) – 136.2 (1,123) (1,707) – 52.0 Net cash provided by (used in) financing activities (total) 334 (3,235) . (76) (2,412) . Change in cash and cash equivalents due to business activities 1,766 (2,498) . 1,484 (815) . Cash and cash equivalents at beginning of period 1,607 3,552 + 121.0 1,853 1,859 + 0.3 Change due to exchange rate movements and to changes in scope of consolidation (126) 1 . (90) 11 . Cash and cash equivalents at end of period 3,247 1,055 – 67.5 3,247 1,055 – 67.5 2015 figures restated 1 Gross cash flow = income after income taxes, plus income taxes, plus financial result, minus income taxes paid or accrued, plus depreciation, amortization and impairment losses, minus impairment loss reversals, plus / minus changes in pension provisions, minus gains / plus losses on retirements of noncurrent assets, minus gains from the remeasurement of already held assets in step acquisitions. The change in pension provisions includes the elimination of noncash components of EBIT. It also contains benefit payments during the year. Gross cash flow is not defined in the International Financial Reporting Standards. Net cash provided by operating activities (net cash flow) > Gross cash flow from continuing operations in the second quarter of 2016 climbed by a substantial 9.3% to €2,366 million. > Net cash flow (total) was diminished by an increase in cash tied up in working capital but rose slightly by 1.2% to €1,982 million. > The net cash flow (total) reflected income tax payments of €659 million (Q2 2015: €352 million). > The transfer of Covestro shares with a value of €337 million to Bayer Pension Trust e.V. was a noncash transaction and therefore did not result in an operating cash outflow. > Gross cash flow from continuing operations in the first half of 2016 climbed by a substantial 18.5% to €4,930 million. > Net cash flow (total) was diminished by an increase in cash tied up in working capital but rose by 23.1% to €3,304 million, due above all to the inflow from the divestiture of the Diabetes Care business. > The net cash flow (total) reflected income tax payments of €1,208 million (H1 2015: €796 million). Interim Group Management Report as of June 30, 2016 9. Financial Position of the Bayer Group Bayer Interim Report Net cash provided by (used in) investing activities > Cash outflows for property, plant and equipment and intangible assets were 2.0% lower in the second quarter of 2016 at €589 million (Q2 2015: €601 million) and included €236 million (Q2 2015: €225 million) at Pharmaceuticals, €48 million (Q2 2015: €32 million) at Consumer Health, €164 million (Q2 2015: €149 million) at Crop Science, €6 million (Q2 2015: €6 million) at Animal Health and €80 million (Q2 2015: €135 million) at Covestro. > Cash outflows for property, plant and equipment and intangible assets were 0.6% higher in the first half of 2016 at €952 million (H1 2015: €946 million) and included €377 million (H1 2015: €320 million) at Pharmaceuticals, €87 million (H1 2015: €43 million) at Consumer Health, €261 million (H1 2015: €245 million) at Crop Science, €11 million (H1 2015: €10 million) at Animal Health and €126 million (H1 2015: €224 million) at Covestro. Net cash provided by (used in) financing activities > In the second quarter of 2016, there was a net cash outflow of €3,235 million for financing activities, including net loan repayments of €950 million (Q2 2015: net borrowings of €2,349 million). > Net interest payments were 7.1% higher at €165 million (Q2 2015: €154 million). > The cash outflow for dividends amounted to €2,120 million (Q2 2015: €1,861 million). > The transfer of Covestro shares with a value of €337 million to Bayer Pension Trust e.V. was a noncash transaction and therefore did not result in a financial cash inflow. > In the first half of 2016, there was a net cash outflow of €2,412 million for financing activities, including net loan repayments of €41 million (H1 2015: net borrowings of €2,026 million). > Net interest payments were 6.4% higher at €251 million (H1 2015: €236 million). 9.2 Liquid Assets and Net Financial Debt Net Financial Debt 1 Table 20 € million Dec. 31, 2015 March 31, 2016 June 30, 2016 Change vs. March 31, 2016 (%) Bonds and notes / promissory notes 15,547 16,153 16,165 + 0.1 of which hybrid bonds 2 4,525 4,526 4,527 . Liabilities to banks 2,779 2,805 2,182 – 22.2 Liabilities under finance leases 474 449 447 – 0.4 Negative fair values of hedges of recorded transactions 753 632 708 + 12.0 Other financial liabilities 369 255 175 – 31.4 Positive fair values of hedges of recorded transactions (350) (265) (287) + 8.3 Financial liabilities 19,572 20,029 19,390 – 3.2 Cash and cash equivalents (1,859) (3,552) (1,055) – 70.3 Current financial assets3 (264) (154) (495) . Net financial debt 17,449 16,323 17,840 + 9.3 1 Net financial debt is not defined in the International Financial Reporting Standards and is calculated as shown in this table. 2 Classified as debt according to IFRS 3 These include short-term loans and receivables with maturities between 3 and 12 months outstanding from banks and other companies as well as available-for-sale financial assets and held-to-maturity financial investments that were recorded as current on initial recognition. > Net financial debt of the Bayer Group increased by €1.5 billion between March 31, 2016, and the end of the second quarter. Cash inflows from operating activities only partially offset the outflow for the dividend payment. > Net financial debt includes three subordinated hybrid bonds with a total volume of €4.5 billion, 50% of which is treated as equity by Moody’s and Standard & Poor’s. The hybrid bonds thus have a more limited effect on the Group’s rating-specific debt indicators than conventional borrowings. In April 2016, Bayer Nordic SE redeemed at maturity a bond with a nominal volume of €200 million issued under its Debt Issuance Programme (previously known as the multi-currency European Medium Term Notes program). > 28 Interim Group Management Report as of June 30, 2016 9. Financial Position of the Bayer Group Bayer Interim Report > In June 2016, Bayer Capital Corporation B.V repaid ahead of schedule two loans with a nominal vol- ume of €500 million issued by the European Investment Bank. > The other financial liabilities as of June 30, 2016, included commercial paper of €80 million. > Standard & Poor’s gives Bayer a long-term issuer rating of A–, while Moody’s gives us a long-term rating of A3. The short-term ratings are A-2 (Standard & Poor’s) and P-2 (Moody’s). These investment- grade ratings document good creditworthiness. Both rating agencies are currently reviewing our rat- ings with regard to a potential downgrade. 9.3 Asset and Capital Structure Bayer Group Summary Statements of Financial Position Table 21 € million Dec. 31, 2015 March 31, 2016 June 30, 2016 Change vs. March 31, 2016 (%) Noncurrent assets 50,096 49,903 50,811 + 1.8 Current assets 23,624 26,718 24,663 – 7.7 Assets held for sale 197 8 . Total current assets 23,821 26,726 24,663 – 7.7 Total assets 73,917 76,629 75,474 – 1.5 Equity 25,445 24,773 24,035 – 3.0 Noncurrent liabilities 31,492 34,428 34,383 – 0.1 Current liabilities 16,868 17,428 17,038 – 2.2 Liabilities directly related to assets held for sale 112 – 18 . Total current liabilities 16,980 17,428 17,056 – 2.1 Liabilities 48,472 51,856 51,439 – 0.8 Total equity and liabilities 73,917 76,629 75,474 – 1.5 > Between March 31, 2016, and June 30, 2016, total assets decreased by €1.2 billion to €75.5 billion. Noncurrent assets were almost level year on year at €50.8 billion. The carrying amount of current as- sets declined by €2.1 billion to €24.7 billion, due mainly to a decrease in cash and cash equivalents. > Equity decreased by €0.7 billion compared with March 31, 2016, to €24.0 billion. Income after income taxes of €1.4 billion and currency effects of €0.3 billion were among the positive factors here and were offset mainly by the dividend payment of €2.1 billion and the €0.6 billion increase after taxes – recog- nized outside profit or loss – in post-employment benefit obligations. The equity ratio (equity coverage of total assets) as of June 30, 2016 was 31.8% (March 31, 2016: 32.3%). > Liabilities were largely unchanged in the second quarter of 2016 at €51.4 billion. Provisions for pen- sions and other post-employment benefits rose by €0.5 billion. Other provisions and financial liabilities declined by €0.4 billion and €0.6 billion, respectively. 29 Interim Group Management Report as of June 30, 2016 10. Opportunities and Risks Bayer Interim Report Net Defined Benefit Liability for Post-Employment Benefits Table 22 € million Dec. 31, 2015 March 31, 2016 June 30, 2016 Change vs. March 31, 2016 (%) Provisions for pensions and other post-employment benefits 10,873 13,343 13,838 + 3.7 Net defined benefit asset (30) (30) (32) + 6.7 Net defined benefit liability for post-employment benefits 10,843 13,313 13,806 + 3.7 > The net defined benefit liability for post-employment benefits increased by €0.5 billion overall in the second quarter of 2016, to €13.8 billion, due mainly to an effect of €0.8 billion resulting from the de- crease in long-term capital market interest rates for high-quality corporate bonds in Germany, the United Kingdom and the United States and to a contribution of €0.3 billion to Bayer Pension Trust e.V. 10. Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal or external developments or events that could significantly impact the achievement of our financial and nonfinancial objectives. Bayer regards opportunity and risk management as an integral part of corporate governance. Our risk management process and the opportunities / risks outlined in detail in the Annual Report 2015 (Combined Management Report, Chapter 18.3) are materially unchanged. No risks have been identified that could endanger the Bayer Group’s continued existence. There are also no risks with mutually reinforcing de- pendencies that could combine to endanger the Group’s continued existence. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2015 (Note [32] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” 30 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Bayer Group Consolidated Income Statements Bayer Interim Report Condensed Consolidated Interim Financial Statements as of June 30, 2016 Bayer Group Consolidated Income Statements Table 23 € million Q2 2015 Q2 2016 H1 2015 H1 2016 Net sales 12,003 11,833 23,796 23,687 Cost of goods sold (5,267) (5,028) (10,703) (10,072) Gross profit 6,736 6,805 13,093 13,615 Selling expenses (3,147) (3,092) (6,044) (5,980) Research and development expenses (1,035) (1,122) (1,979) (2,231) General administration expenses (548) (489) (1,018) (984) Other operating income 31 159 278 362 Other operating expenses (214) (123) (582) (324) EBIT1 1,823 2,138 3,748 4,458 Equity-method loss (6) (6) – (11) Financial income 85 42 97 79 Financial expenses (366) (350) (658) (697) Financial result (287) (314) (561) (629) Income before income taxes 1,536 1,824 3,187 3,829 Income taxes (390) (431) (759) (905) Income from continuing operations after income taxes 1,146 1,393 2,428 2,924 Income from discontinued operations after income taxes 24 55 82 105 Income after income taxes 1,170 1,448 2,510 3,029 of which attributable to noncontrolling interest 6 68 12 138 of which attributable to Bayer AG stockholders (net income) 1,164 1,380 2,498 2,891 € Earnings per share From continuing operations Basic 1.38 1.60 2.92 3.37 Diluted 1.38 1.60 2.92 3.37 From discontinued operations Basic 0.02 0.07 0.10 0.13 Diluted 0.02 0.07 0.10 0.13 From continuing and discontinued operations Basic 1.40 1.67 3.02 3.50 Diluted 1.40 1.67 3.02 3.50 2015 figures restated 1 EBIT = income after income taxes, plus income taxes, plus financial result 31 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Comprehensive Income € million Q2 2015 Q2 2016 Income after income taxes 1,170 1,448 of which attributable to noncontrolling interest 6 68 of which attributable to Bayer AG stockholders 1,164 1,380 Remeasurements of the net defined benefit liability for post-employment benefit plans 2,374 (844) Income taxes (705) 235 Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans 1,669 (609) Other comprehensive income that will not be reclassified subsequently to profit or loss 1,669 (609) Changes in fair values of derivatives designated as cash flow hedges 84 (129) Reclassified to profit or loss 76 (19) Income taxes (51) 49 Other comprehensive income from cash flow hedges 109 (99) Changes in fair values of available-for-sale financial assets 4 14 Reclassified to profit or loss – – Income taxes 2 (5) Other comprehensive income from available-for-sale financial assets 6 9 Changes in exchange differences recognized on translation of operations outside the eurozone (534) 301 Changes in exchange differences recognized on translation of operations outside the eurozone, relating to associates accounted for using the equity method 14 (6) Reclassified to profit or loss – – Other comprehensive income from exchange differences (520) 295 Other comprehensive income that may be reclassified subsequently to profit or loss (405) 205 Effects of changes in scope of consolidation – – Total other comprehensive income 1 1,264 (404) of which attributable to noncontrolling interest (7) (9) of which attributable to Bayer AG stockholders 1,271 (395) Total comprehensive income 2,434 1,044 of which attributable to noncontrolling interest (1) 59 of which attributable to Bayer AG stockholders 2,435 985 2015 figures restated 1 Total changes recognized outside profit or loss Bayer Interim Report Table 24 H1 2015 H1 2016 2,510 3,029 12 138 2,498 2,891 1,169 (3,407) (319) 991 850 (2,416) 850 (2,416) (257) (76) 137 (35) 31 49 (89) (62) 18 26 1 – (1) (9) 18 17 853 (208) (27) 12 – – 826 (196) 755 (241) – – 1,605 (2,657) 8 (110) 1,597 (2,547) 4,115 372 20 28 4,095 344 32 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Financial Position € million June 30, 2015 Noncurrent assets Goodwill 15,980 Other intangible assets 15,686 Property, plant and equipment 11,701 Investment property 172 Investments accounted for using the equity method 240 Other financial assets 1,136 Other receivables 404 Deferred taxes 4,186 49,505 Current assets Inventories 8,668 Trade accounts receivable 11,242 Other financial assets 816 Other receivables 1,496 Claims for income tax refunds 506 Cash and cash equivalents 3,247 Assets held for sale 183 26,158 Total assets 75,663 Equity Capital stock of Bayer AG 2,117 Capital reserves of Bayer AG 6,167 Other reserves 14,056 Equity attributable to Bayer AG stockholders 22,340 Equity attributable to noncontrolling interest 126 22,466 Noncurrent liabilities Provisions for pensions and other post-employment benefits 11,176 Other provisions 1,532 Financial liabilities 17,178 Income tax liabilities 581 Other liabilities 1,095 Deferred taxes 884 32,446 Current liabilities Other provisions 5,266 Financial liabilities 7,676 Trade accounts payable 5,239 Income tax liabilities 511 Other liabilities 1,945 Liabilities directly related to assets held for sale 114 20,751 Total equity and liabilities 75,663 2015 figures restated Bayer Interim Report Table 25 June 30, 2016 Dec. 31, 2015 15,982 16,096 14,167 15,178 12,225 12,251 50 124 505 246 1,246 1,092 398 430 6,238 4,679 50,811 50,096 8,334 8,550 11,792 9,933 913 756 2,074 2,017 495 509 1,055 1,859 – 197 24,663 23,821 75,474 73,917 2,117 2,117 6,167 6,167 14,435 15,981 22,719 24,265 1,316 1,180 24,035 25,445 13,838 10,873 1,586 1,740 16,488 16,513 387 475 1,095 1,065 989 826 34,383 31,492 5,243 5,045 3,220 3,421 5,055 5,945 983 923 2,537 1,534 18 112 17,056 16,980 75,474 73,917 33 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows € million Q2 2015 Q2 2016 Income from continuing operations after income taxes 1,146 1,393 Income taxes 390 431 Financial result 287 314 Income taxes paid or accrued (436) (471) Depreciation, amortization and impairments 814 814 Change in pension provisions (37) (112) (Gains) losses on retirements of noncurrent assets 1 (3) Gross cash flow 2,165 2,366 Decrease (increase) in inventories (233) 190 Decrease (increase) in trade accounts receivable (98) 170 (Decrease) increase in trade accounts payable 177 39 Changes in other working capital, other noncash items (51) (773) Net cash provided by (used in) operating activities (net cash flow) from continuing operations 1,960 1,992 Net cash provided by (used in) operating activities (net cash flow) from discontinued operations (1) (10) Net cash provided by (used in) operating activities (net cash flow) (total) 1,959 1,982 Cash outflows for additions to property, plant, equipment and intangible assets (601) (589) Cash inflows from the sale of property, plant, equipment and other assets 59 18 Cash inflows from divestitures – 8 Cash inflows from (outflows for) noncurrent financial assets (77) (356) Cash outflows for acquisitions less acquired cash 36 – Interest and dividends received 57 15 Cash inflows from (outflows for) current financial assets (1) (341) Net cash provided by (used in) investing activities (total) (527) (1,245) Dividend payments (1,861) (2,120) Issuances of debt 4,681 3,346 Retirements of debt (2,332) (4,296) Interest paid including interest-rate swaps (195) (199) Interest received from interest-rate swaps 41 34 Cash outflows for the purchase of additional interests in subsidiaries – – Net cash provided by (used in) financing activities (total) 334 (3,235) Change in cash and cash equivalents due to business activities (total) 1,766 (2,498) Cash and cash equivalents at beginning of period 1,607 3,552 Change in cash and cash equivalents due to changes in scope of consolidation – (1) Change in cash and cash equivalents due to exchange rate movements (126) 2 Cash and cash equivalents at end of period 3,247 1,055 2015 figures restated Bayer Interim Report Table 26 H1 2015 H1 2016 2,428 2,924 759 905 561 629 (1,063) (1,165) 1,615 1,853 (125) (211) (13) (5) 4,162 4,930 (170) 71 (1,985) (1,498) (315) (854) 987 (105) 2,679 2,544 4 760 2,683 3,304 (946) (952) 84 39 – 8 (336) (608) 3 2 68 37 4 (233) (1,123) (1,707) (1,866) (2,120) 7,202 7,668 (5,176) (7,709) (287) (300) 51 49 – – (76) (2,412) 1,484 (815) 1,853 1,859 3 (2) (93) 13 3,247 1,055 34 Condensed Consolidated Interim Financial Statements as of March 31, 2016 Bayer Group Consolidated Statements of Changes in Equity Bayer Group Consolidated Statements of Changes in Equity € million Capital stock of Bayer AG Capital reserves of Bayer AG Other reserves Dec. 31, 2014 2,117 6,167 11,822 Equity transactions with owners Capital increase / decrease Dividend payments (1,861) Other changes Total comprehensive income 4,095 June 30, 2015 2,117 6,167 14,056 Dec. 31, 2015 2,117 6,167 15,981 Equity transactions with owners Capital increase / decrease Dividend payments (2,067) Other changes 177 Total comprehensive income 344 June 30, 2016 2,117 6,167 14,435 2015 figures restated Bayer Interim Report Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest 20,106 112 (1,861) (6) 4,095 20 22,340 126 24,265 1,180 (2,067) (52) 177 160 344 28 22,719 1,316 35 Table 27 Equity 20,218 (1,867) 4,115 22,466 25,445 (2,119) 337 372 24,035 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report 36 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group as of June 30, 2016 Key Data by Segment and Region Key Data by Segment Table 28 Pharmaceuticals Consumer Health Crop Science Animal Health € million Q2 2015 Q2 2016 Q2 2015 Q2 2016 Q2 2015 Q2 2016 Q2 2015 Q2 2016 Net sales (external) 3,890 4,104 1,590 1,553 2,636 2,518 428 426 Change 1 + 17.0% + 5.5% + 70.6% – 2.3% + 10.3% – 4.5% + 19.6% – 0.5% Currency-adjusted change 1 + 9.3% + 8.4% + 63.7% + 4.0% + 0.3% + 0.7% + 6.4% + 4.2% Intersegment sales 8 8 1 3 8 8 6 1 Net sales (total) 3,898 4,112 1,591 1,556 2,644 2,526 434 427 EBIT2 772 988 191 190 561 512 105 93 EBIT before special items 2 850 999 252 222 589 542 111 93 EBITDA before special items 2 1,193 1,352 362 328 722 663 120 100 Gross cash flow 3 807 871 241 237 529 468 83 69 Net cash flow 3 491 310 161 241 752 1,088 85 48 Depreciation, amortization and impairments 347 354 110 107 133 121 8 7 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 3 For definition see Interim Group Management Report, Chapter 9.1 “Statement of Cash Flows.” Key Data by Segment Table 28 continued Reconciliation All Other Segments Corporate Functions and Consolidation Life Sciences Covestro Group € million Q2 2015 Q2 2016 Q2 2015 Q2 2016 Q2 2015 Q2 2016 Q2 2015 Q2 2016 Q2 2015 Q2 2016 Net sales (external) 273 256 1 1 8,818 8,858 3,185 2,975 12,003 11,833 Change 1 – 0.7% – 6.2% – – + 21.1% + 0.5% + 11.2% – 6.6% + 18.3% – 1.4% Currency-adjusted change 1 + 0.4% – 5.5% – – + 12.8% + 4.7% + 0.6% – 3.9% + 9.3% + 2.4% Intersegment sales 593 478 (630) (516) – – 14 18 – – Net sales (total) 866 734 (629) (515) – – 3,199 2,993 12,003 11,833 EBIT 2 24 18 (108) (30) 1,545 1,771 278 367 1,823 2,138 EBIT before special items 2 40 40 (101) (21) 1,741 1,875 337 367 2,078 2,242 EBITDA before special items 2 84 88 (99) (20) 2,382 2,511 506 543 2,888 3,054 Gross cash flow 3 219 321 (73) (28) 1,806 1,938 359 428 2,165 2,366 Net cash flow 3 85 170 26 (174) 1,600 1,683 360 309 1,960 1,992 Depreciation, amortization and impairments 44 48 2 1 644 638 170 176 814 814 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 3 For definition see Interim Group Management Report, Chapter 9.1 “Statement of Cash Flows.” Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report 37 Key Data by Segment Table 29 Pharmaceuticals Consumer Health Crop Science Animal Health € million H1 2015 H1 2016 H1 2015 H1 2016 H1 2015 H1 2016 H1 2015 H1 2016 Net sales (external) 7,452 7,993 3,146 3,073 5,642 5,454 814 834 Change1 + 15.7% + 7.3% + 69.6% – 2.3% + 8.2% – 3.3% + 18.3% + 2.5% Currency-adjusted change 1 + 7.8% + 10.2% + 63.3% + 3.1% + 0.8% + 1.0% + 6.3% + 6.4% Intersegment sales 18 15 2 4 18 17 7 2 Net sales (total) 7,470 8,008 3,148 3,077 5,660 5,471 821 836 EBIT2 1,519 1,686 365 433 1,416 1,467 170 207 EBIT before special items 2 1,621 1,928 515 497 1,491 1,500 208 208 EBITDA before special items 2 2,278 2,613 731 711 1,743 1,752 222 222 Gross cash flow 3 1,561 1,832 468 522 1,220 1,234 155 155 Net cash flow 3 1,303 1,044 446 438 (29) 422 205 28 Depreciation, amortization and impairments 661 917 216 228 257 252 35 14 Number of employees (as of June 30) 4 41,140 40,197 13,700 13,085 23,592 22,839 3,818 3,859 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 3 For definition see Interim Group Management Report, Chapter 9.1 “Statement of Cash Flows.” 4 Full-time equivalents Key Data by Segment Table 29 continued Reconciliation All Other Segments Corporate Functions and Consolidation Life Sciences Covestro Group € million H1 2015 H1 2016 H1 2015 H1 2016 H1 2015 H1 2016 H1 2015 H1 2016 H1 2015 H1 2016 Net sales (external) 541 506 2 2 17,597 17,862 6,199 5,825 23,796 23,687 Change1 – 2.3% – 6.5% – – + 19.3% + 1.5% + 9.4% – 6.0% + 16.5% – 0.5% Currency-adjusted change 1 – 2.3% – 5.9% – – + 11.8% + 5.3% – 0.7% – 4.3% + 8.4% + 2.8% Intersegment sales 1,130 903 (1,202) (980) – – 27 39 – – Net sales (total) 1,671 1,409 (1,200) (978) – – 6,226 5,864 23,796 23,687 EBIT 2 43 21 (262) (59) 3,251 3,755 497 703 3,748 4,458 EBIT before special items 2 65 46 (251) (48) 3,649 4,131 598 703 4,247 4,834 EBITDA before special items 2 154 141 (248) (45) 4,880 5,394 930 1,047 5,810 6,441 Gross cash flow 3 268 400 (181) (48) 3,491 4,095 671 835 4,162 4,930 Net cash flow 3 57 167 174 (33) 2,156 2,066 523 478 2,679 2,544 Depreciation, amortization and impairments 89 95 3 3 1,261 1,509 354 344 1,615 1,853 Number of employees (as of June 30) 4 19,482 19,114 731 752 102,463 99,846 15,071 15,730 117,534 115,576 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 3 For definition see Interim Group Management Report, Chapter 9.1 “Statement of Cash Flows.” 4 Full-time equivalents Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Key Data by Region Europe North America € million Q2 2015 Q2 2016 Q2 2015 Q2 2016 Net sales (external) – by market 4,124 4,128 3,588 3,417 Change 1 + 4.8% + 0.1% + 40.9% – 4.8% Currency-adjusted change 1 + 4.9% + 3.0% + 18.9% – 2.0% Net sales (external) – by point of origin 4,545 4,574 3,540 3,332 Change 1 + 4.7% + 0.6% + 41.3% – 5.9% Currency-adjusted change 1 + 4.8% + 3.2% + 18.6% – 3.0% Interregional sales 2,824 2,838 1,046 1,078 EBIT 2 1,145 1,370 544 431 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” Key Data by Region Latin America / Africa / Middle East Reconciliation € million Q2 2015 Q2 2016 Q2 2015 Q2 2016 Net sales (external) – by market 1,560 1,472 – – Change1 + 5.9% – 5.6% – – Currency-adjusted change 1 + 7.1% + 3.4% – – Net sales (external) – by point of origin 1,247 1,170 – – Change 1 + 6.9% – 6.2% – – Currency-adjusted change 1 + 9.3% + 5.2% – – Interregional sales 181 156 (4,255) (4,301) EBIT 2 (18) 31 (108) (30) 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” Bayer Interim Report Table 30 Asia / Pacific Q2 2015 Q2 2016 2,731 2,816 + 24.6% + 3.1% + 7.6% + 6.6% 2,671 2,757 + 25.2% + 3.2% + 7.7% + 6.8% 204 229 260 336 Table 30 continued Total Q2 2015 Q2 2016 12,003 11,833 + 18.3% – 1.4% + 9.3% + 2.4% 12,003 11,833 + 18.3% – 1.4% + 9.3% + 2.4% – – 1,823 2,138 38 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Key Data by Region Europe North America € million H1 2015 H1 2016 H1 2015 H1 2016 Net sales (external) – by market 8,600 8,676 6,928 6,839 Change 1 + 5.2% + 0.9% + 34.8% – 1.3% Currency-adjusted change 1 + 6.5% + 3.1% + 14.9% – Net sales (external) – by point of origin 9,419 9,493 6,833 6,690 Change 1 + 5.0% + 0.8% + 35.6% – 2.1% Currency-adjusted change 1 + 6.2% + 2.8% + 15.1% – 0.8% Interregional sales 5,411 5,658 2,006 2,122 EBIT 2 2,632 2,916 891 920 Number of employees (as of June 30) 3 55,319 56,116 16,192 16,106 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 3 Full-time equivalents Key Data by Region Latin America / Africa / Middle East Reconciliation € million H1 2015 H1 2016 H1 2015 H1 2016 Net sales (external) – by market 3,048 2,820 – – Change 1 + 9.2% – 7.5% – – Currency-adjusted change 1 + 6.6% + 4.7% – – Net sales (external) – by point of origin 2,453 2,260 – – Change 1 + 11.6% – 7.9% – – Currency-adjusted change 1 + 9.0% + 7.4% – – Interregional sales 314 250 (8,118) (8,457) EBIT 2 19 113 (262) (59) Number of employees (as of June 30) 3 16,651 15,657 – – 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 1 “Overview of Sales, Earnings and Financial Position.” 2 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 3 Full-time equivalents Bayer Interim Report Table 31 Asia / Pacific H1 2015 H1 2016 5,220 5,352 + 20.8% + 2.5% + 4.9% + 4.9% 5,091 5,244 + 20.8% + 3.0% + 4.5% + 5.4% 387 427 468 568 29,372 27,697 Table 31 continued Total H1 2015 H1 2016 23,796 23,687 + 16.5% – 0.5% + 8.4% + 2.8% 23,796 23,687 + 16.5% – 0.5% + 8.4% + 2.8% – – 3,748 4,458 117,534 115,576 39 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report Explanatory Notes Accounting policies The interim financial statements as of June 30, 2016, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Inter- pretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2015 fiscal year, particularly with regard to the main recognition and measurement principles, except where financial reporting standards have been applied for the first time in 2016 or an accounting policy has changed. Financial reporting standards applied for the first time in 2016 and changes in accounting methods The first-time application of the following amended financial reporting standards had no impact, or no material impact, on the presentation of the Group’s financial position or results of operations, or on earn- ings per share. In May 2014, the IASB published amendments to IAS 16 (Property, Plant and Equipment) and IAS 38 (Intangible Assets) entitled “Clarification of Acceptable Methods of Depreciation and Amortisation.” These amendments clarify that revenue-based depreciation of property, plant and equipment or amortization of intangible assets is inappropriate. The amendments are to be applied for annual periods beginning on or after January 1, 2016. In May 2014, the IASB published amendments to IFRS 11 (Joint Arrangements) entitled “Accounting for Acquisitions of Interests in Joint Operations.” The amendments clarify the accounting for the acquisition of an interest in a joint operation in which the activity constitutes a business. They are to be applied for annual periods beginning on or after January 1, 2016. In June 2014, the IASB issued amendments to IAS 16 (Property, Plant and Equipment) and IAS 41 (Agri- culture) entitled “Agriculture: Bearer Plants.” The amendments clarify that plants used solely to grow agricultural produce are to be accounted for according to IAS 16 (Property, Plant and Equipment). The amendments are to be applied for annual periods beginning on or after January 1, 2016. In September 2014, the IASB published “Annual Improvements to IFRSs 2012-2014 Cycle.” The amendments address details of the recognition, measurement and disclosure of business transactions and serve to standardize terminology. They consist mainly of editorial changes to existing standards. They are to be applied for annual periods beginning on or after January 1, 2016. In December 2014, the IASB published its Disclosure Initiative containing amendments to IAS 1 (Presen- tation of Financial Statements), which are intended to clarify the disclosure requirements. They relate to materiality, line-item aggregation, subtotals, the structure of the notes to the financial statements, the identification of significant accounting policies and the separate disclosure of the other comprehensive income of associates and joint ventures. The amendments are to be applied for annual periods beginning on or after January 1, 2016. 40 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report Financial reporting standards not applied in 2016 that the IASB had decided must be applied for annual periods beginning on or after January 1, 2016 In January 2014, the IASB issued IFRS 14 (Regulatory Deferral Accounts). This standard addresses the accounting for regulatory deferral account balances by first-time adopters of the IFRS and therefore does not apply to entities that already prepare their financial statements according to the IFRS. IFRS 14 is to be applied for annual periods beginning on or after January 1, 2016. As this standard will only apply for a transitional period until a final standard is published, the E.U. endorsement process will not begin until the final standard has been adopted by the IASB. IFRS 14 will have no impact on the presentation of the Group’s financial position or results of operations. In December 2014, the IASB issued amendments to IFRS 10 (Consolidated Financial Statements), IFRS 12 (Disclosure of Interests in Other Entities) and IAS 28 (Investments in Associates and Joint Ventures) entitled “Investment Entities: Applying the Consolidation Exception.” The amendments largely clarify which subsidiaries an investment entity must consolidate and which must be recognized at fair value through profit or loss. The amendments are to be applied for annual periods beginning on or after Janu- ary 1, 2016. They have not yet been endorsed by the European Union. The changes currently have no impact on the presentation of Bayer’s financial position or results of operations. Changes in accounting methods The legal and economic independence of Covestro results in changes to the global annual impairment tests for Covestro. In the future, from the perspective of the Bayer Group, the strategic business entities of Covestro will be subjected to impairment testing as a group of cash-generating units because the goodwill of Covestro will be monitored by Bayer Group management at this aggregated level from now on. Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: Exchange Rates for Major Currencies Table 32 Closing rate Average rate €1 Dec. 31, 2015 June 30, 2015 June 30, 2016 H1 2015 H1 2016 BRL Brazil 4.31 3.47 3.59 3.30 4.13 CAD Canada 1.51 1.38 1.44 1.38 1.48 CHF Switzerland 1.08 1.04 1.09 1.06 1.10 CNY China 7.06 6.94 7.40 6.94 7.30 GBP United Kingdom 0.73 0.71 0.83 0.73 0.78 JPY Japan 131.07 137.01 114.05 134.14 124.50 MXN Mexico 18.91 17.53 20.63 16.88 20.12 RUB Russia 80.67 62.36 71.52 63.83 78.07 USD United States 1.09 1.12 1.11 1.12 1.12 41 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report The most important interest rates used to calculate the present value of pension obligations are given below: Discount Rate for Pension Obligations Table 33 % Dec. 31, 2015 March 31, 2016 June 30, 2016 Germany 2.40 1.70 1.50 United Kingdom 3.80 3.45 2.80 United States 4.00 3.50 3.20 Segment reporting In September 2015, it was decided to introduce a new organizational structure effective January 1, 2016, in line with Bayer’s focus on the Life Science businesses. The former Bayer HealthCare subgroup was dissolved and the Radiology business is now assigned to the Pharmaceuticals Division. The Consumer Health Division now consists entirely of the Consumer Care business. Animal Health has become a sepa- rate reportable segment. The Bayer CropScience subgroup is now the Crop Science Division. Since January 1, 2016, therefore, the Bayer Group has comprised the five reportable segments Pharmaceuti- cals, Consumer Health, Crop Science, Animal Health and Covestro. The following table shows the reconciliation of EBITDA before special items of the above-mentioned segments and the reconciliation to income before income taxes of the Group: Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes Table 34 € million Q2 2015 Q2 2016 H1 2015 H1 2016 EBITDA before special items of segments 2,987 3,074 6,058 6,486 EBITDA before special items of Corporate Functions and Consolidation (99) (20) (248) (45) EBITDA before special items 1 2,888 3,054 5,810 6,441 Depreciation, amortization and impairment losses before special items of segments (808) (811) (1,560) (1,604) Depreciation, amortization and impairment losses before special items of Corporate Functions and Consolidation (2) (1) (3) (3) Depreciation, amortization and impairment losses before special items (810) (812) (1,563) (1,607) EBIT before special items of segments 2,179 2,263 4,498 4,882 EBIT before special items of Corporate Functions and Consolidation (101) (21) (251) (48) EBIT before special items 1 2,078 2,242 4,247 4,834 Special items of segments (248) (95) (488) (365) Special items of Corporate Functions and Consolidation (7) (9) (11) (11) Special items 1 (255) (104) (499) (376) EBIT of segments 1,931 2,168 4,010 4,517 EBIT of Corporate Functions and Consolidation (108) (30) (262) (59) EBIT 1 1,823 2,138 3,748 4,458 Financial result (287) (314) (561) (629) Income before income taxes 1,536 1,824 3,187 3,829 2015 figures restated 1 For definition see Interim Group Management Report, Chapter 7 “Calculation of EBIT(DA) Before Special Items.” 42 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2016, included 307 companies (December 31, 2015: 307 companies). As in the statements as of December 31, 2015, one of these companies was accounted for as a joint operation in line with Bayer’s interest in its assets, liabilities, revenues and ex- penses in accordance with IFRS 11 (Joint Arrangements). Four (December 31, 2015: three) joint ventures and five (December 31, 2015: four) associates were accounted for in the consolidated financial state- ments using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). Acquisitions, divestitures and discontinued operations Acquisitions In connection with the global purchase price allocation of SeedWorks India Pvt. Ltd., India, which was acquired in July 2015, improved information about the acquired assets led to a decline in intangible as- sets and a corresponding increase in goodwill in the opening statement of financial position in the first quarter of 2016. In addition, the purchase price declined by €2 million as a result of the final purchase price negotiations. The effects of this and other, smaller adjustments made in the first half of 2016 to purchase price alloca- tions relating to previous years’ transactions on the Group’s assets and liabilities as of the respective adjustment dates are shown in the table and resulted in the following cash outflow: Acquired Assets, Assumed Liabilities and Adjustments (Fair Values at the Respective Acquisition Dates) Table 35 € million H1 2016 Goodwill 9 Patents and technologies – Other intangible assets (23) Property, plant and equipment – Inventories – Other current assets – Cash and cash equivalents – Deferred tax assets – Provisions for pensions and other post-employment benefits 1 Other provisions – Financial liabilities – Other liabilities – Deferred tax liabilities 8 Net assets (5) Changes in noncontrolling interest – Purchase price (5) Acquired cash and cash equivalents – Settlement gain from pre-existing relationship – Liabilities for future payments 3 Purchase price adjustment – Payments for previous years’ / quarters’ acquisitions – Net cash outflow for acquisitions (2) Adjustment of purchase price allocation in the previous year The global purchase price allocation for the consumer care business of Merck & Co., Inc., United States, which was acquired in 2014, was completed in September 2015. For the first half of 2015, this resulted in an increase in deferred tax assets of €933 million and a corresponding decrease in goodwill of €890 million in the statement of financial position. In the income statement, income after income taxes increased by €43 million. For the first half of 2015, this adjustment led to an increase of €0.05 in earnings per share from continuing operations, to €2.92. 43 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report Divestitures and discontinued operations The sale of the Diabetes Care business to Panasonic Healthcare Holdings Co., Ltd., Tokyo, Japan, for around €1 billion was completed on January 4, 2016. The transaction includes the leading Contour™ portfolio of blood glucose monitoring meters and strips, as well as other products such as Breeze™2 and Elite™ along with Microlet™ lancing devices. The effect of this divestiture in the first half of 2016 is shown in the table: Divestitures Table 36 € million H1 2016 Assets held for sale 183 Liabilities directly related to assets held for sale (112) Divested net assets 71 The sale of the Diabetes Care business also comprises further significant obligations by Bayer that will be fulfilled over a period of up to two years subsequent to the date of divestiture. The sale proceeds will be recognized accordingly over a two-year period and reported as income from discontinued operations. Deferred income has been recognized in the statement of financial position and will be dissolved as the obligations are fulfilled. An amount of €250 million was recognized in sales in the first half of 2016. The €71 million outflow of net assets is shown in the cost of goods sold. The obligations to be fulfilled over the next two years in connection with the divestiture of the Diabetes Care business are also reported as discontinued operations in the income statement and statement of cash flows. They resulted in sales of €45 million in the first half of 2016. This information is provided from the standpoint of the Bayer Group and does not present these activities as a separate entity. It is there- fore not possible to compare these sales against the proceeds from operational product sales achieved in 2015. The items in the statement of financial position pertaining to the Diabetes Care business are shown in the segment reporting under other segments. In addition to the aforementioned deferred income (€718 million), the statement of financial position includes other receivables (net: €57 million), deferred tax assets (net: €84 million), income tax liabilities (€21 million) and provisions for restructuring expenses (€2 million). On May 19, 2016, an agreement was signed to sell the Consumer business (CS Consumer) of Bayer’s Environmental Science unit to SBM Développement SAS, Lyon, France. The Consumer business encom- passes the Bayer Garden and Bayer Advanced businesses in Europe and North America. Closing of the transaction is expected in October 2016. These activities are reported as a discontinued operation. 44 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report The income statements of the discontinued operations for the second quarter of 2016 are given below: Income Statements for Discontinued Operations Table 37 Diabetes Care CS Consumer Total € million Q2 2015 Q2 2016 Q2 2015 Q2 2016 Q2 2015 Q2 2016 Net sales 235 146 87 79 322 225 Cost of goods sold (96) (25) (45) (40) (141) (65) Gross profit 139 121 42 39 181 160 Selling expenses (94) (5) (30) (31) (124) (36) Research and development expenses (12) – (1) (3) (13) (3) General administration expenses (6) (3) (2) (2) (8) (5) Other operating income / expenses (7) (7) 1 (54) (6) (61) EBIT 1 20 106 10 (51) 30 55 Financial result – – – – – – Income before income taxes 20 106 10 (51) 30 55 Income taxes (3) (16) (3) 16 (6) – Income after income taxes 17 90 7 (35) 24 55 1 EBIT = income after income taxes, plus income taxes, plus financial result For the first half of 2016, the income statements of the discontinued operations are as follows: Income Statements for Discontinued Operations Table 38 Diabetes Care CS Consumer Total € million H1 2015 H1 2016 H1 2015 H1 2016 H1 2015 H1 2016 Net sales 473 295 173 166 646 461 Cost of goods sold (186) (121) (85) (82) (271) (203) Gross profit 287 174 88 84 375 258 Selling expenses (179) (8) (53) (57) (232) (65) Research and development expenses (22) (2) (3) (4) (25) (6) General administration expenses (18) (10) (3) (4) (21) (14) Other operating income / expenses 6 (5) – (55) 6 (60) EBIT1 74 149 29 (36) 103 113 Financial result – – – – – – Income before income taxes 74 149 29 (36) 103 113 Income taxes (12) (20) (9) 12 (21) (8) Income after income taxes 62 129 20 (24) 82 105 1 EBIT = income after income taxes, plus income taxes, plus financial result 45 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report The assets and liabilities of the Consumer business of Bayer’s Environmental Science unit that were held for sale are shown in the following table: Assets and Liabilities Held for Sale Table 39 € million June 30, 2016 Assets held for sale – Provisions for pensions and other post-employment benefits 5 Other provisions 13 Liabilities directly related to assets held for sale 18 In the second quarter of 2016, the discontinued operations affected the Bayer Group statements of cash flows as follows: Statements of Cash Flows for Discontinued Operations Table 40 Diabetes Care CS Consumer Total € million Q2 2015 Q2 2016 Q2 2015 Q2 2016 Q2 2015 Q2 2016 Net cash provided by (used in) operating activities (net cash flow) 9 (41) (10) 31 (1) (10) Net cash provided by (used in) investing activities (1) – – – (1) – Net cash provided by (used in) financing activities (8) 41 10 (31) 2 10 Change in cash and cash equivalents – – – – – – In the first half of 2016, the effects of the discontinued operations on the statements of cash flows were as follows: Statements of Cash Flows for Discontinued Operations Table 41 Diabetes Care CS Consumer Total € million H1 2015 H1 2016 H1 2015 H1 2016 H1 2015 H1 2016 Net cash provided by (used in) operating activities (net cash flow) 56 778 (52) (18) 4 760 Net cash provided by (used in) investing activities (1) – – – (1) – Net cash provided by (used in) financing activities (55) (778) 52 18 (3) (760) Change in cash and cash equivalents – – – – – – 46 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report Financial instruments Carrying Amounts and Fair Values of Financial Instruments Table 42 Jun. 30, 2016 Carried at amortized cost Carried at fair value 1] [Fair value for information Nonfinancial assets / liabilities Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobserv- able inputs (Level 3) € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the statement of financial position Trade accounts receivable 11,792 11,792 Loans and receivables 11,792 11,792 Other financial assets 649 215 459 836 2,159 Loans and receivables 535 [527] [17] 535 Available-for-sale financial assets 41 215 823 1,079 Held-to-maturity financial assets 73 [77] 73 Derivatives 459 13 472 Other receivables 551 68 1,853 2,472 Loans and receivables 551 [551] 551 Available-for-sale financial assets 68 68 Nonfinancial assets 1,853 1,853 Cash and cash equivalents 1,055 1,055 Loans and receivables 1,055 1,055 Total financial assets 14,047 215 459 904 15,625 of which loans and receivables 13,933 13,933 of which available-for-sale financial assets 41 215 891 1,147 Financial liabilities 18,969 739 19,708 Carried at amortized cost 18,969 [16,350] [3,227] 18,969 Derivatives 739 739 Trade accounts payable 4,986 69 5,055 Carried at amortized cost 4,986 4,986 Nonfinancial liabilities 69 69 Other liabilities 885 227 39 2,481 3,632 Carried at amortized cost 885 [885] 885 Carried at fair value (nonderivative) 32 32 Derivatives 227 7 234 Nonfinancial liabilities 2,481 2,481 Total financial liabilities 24,840 966 39 25,845 of which carried at amortized cost 24,840 24,840 of which derivatives 966 7 973 1 Fair value of the financial instruments carried at amortized cost; the exemption provisions under IFRS 7.29a were applied for information on specific fair values. 47 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report Carrying Amounts and Fair Values of Financial Instruments Table 43 Dec. 31, 2015 Carried at amortized cost Carried at fair value 1] [Fair value for information Nonfinancial assets / liabilities Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobserv- able inputs (Level 3) € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the statement of financial position Trade accounts receivable 9,933 9,933 Loans and receivables 9,933 9,933 Other financial assets 185 363 509 791 1,848 Loans and receivables 72 [64] [18] 72 Available-for-sale financial assets 40 363 774 1,177 Held-to-maturity financial assets 73 [74] 73 Derivatives 509 17 526 Other receivables 506 59 1,882 2,447 Loans and receivables 506 [506] 506 Available-for-sale financial assets 59 59 Nonfinancial assets 1,882 1,882 Cash and cash equivalents 1,859 1,859 Loans and receivables 1,859 1,859 Total financial assets 12,483 363 509 850 14,205 of which loans and receivables 12,370 12,370 of which available-for-sale financial assets 40 363 833 1,236 Financial liabilities 19,169 765 19,934 Carried at amortized cost 19,169 [15,440] [4,121] 19,169 Derivatives 765 765 Trade accounts payable 5,680 265 5,945 Carried at amortized cost 5,680 5,680 Nonfinancial liabilities 265 265 Other liabilities 606 117 45 1,831 2,599 Carried at amortized cost 606 [606] 606 Carried at fair value (nonderivative) 37 37 Derivatives 117 8 125 Nonfinancial liabilities 1,831 1,831 Total financial liabilities 25,455 882 45 26,382 of which carried at amortized cost 25,455 25,455 of which derivatives 882 8 890 1 Fair value of the financial instruments carried at amortized cost; the exemption provisions under IFRS 7.29a were applied for information on specific fair values. 48 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report The preceding two tables show the carrying amounts and fair values of financial assets and liabilities by category of financial instrument and a reconciliation to the corresponding line item in the statements of financial position. Since the line items “Other receivables,” “Trade accounts payable” and “Other liabilities” contain both financial instruments and non-financial assets or liabilities (such as other tax re- ceivables or advance payments for services to be received in the future), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities.” The loans and receivables reflected in other financial assets and the liabilities measured at amortized cost also include receivables and liabilities under finance leases in which Bayer is the lessor or lessee and which are therefore measured in accordance with IAS 17. Because of the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date did not significantly differ from the fair values. The fair values of loans and receivables, held-to-maturity financial investments and financial liabilities carried at amortized cost that are given for information are the present values of the respective future cash flows. The present values were determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price was available, however, this was deemed to be the fair value. The fair values of available-for-sale financial assets correspond to quoted prices in active markets (Level 1) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices existed in active markets (Level 1) were determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit value adjustments were determined to allow for the contracting party’s credit risk. Currency and commodity forward contracts were measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by dis- counting future cash flows over the remaining terms of the instruments at market rates of interest, taking into account any foreign currency translation as of the closing date. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies to certain available-for-sale debt or equity instruments, in some cases to the fair values of embedded derivatives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as available-for-sale financial assets by the discounted cash flow method. Reference is made here to the credit spreads of comparable issuers. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a 10% rela- tive change in the credit spread would not materially affect fair value. Embedded derivatives are separated from their respective host contracts, which are generally sales or purchase agreements relating to the operational business, and cause the cash flows from the contracts to vary with fluctuations in exchange rates or prices, for example. The internal measurement of embed- ded derivatives is mainly performed using the discounted cash flow method, which is based on unob- servable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. 49 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report The changes in the amount of financial assets and liabilities recognized at fair value based on unobserv- able inputs (Level 3) for each individual financial instrument category were as follows: Changes in the Amount of Financial Assets and Liabilities Recognized at Fair Value Based on Unobservable Inputs Table 44 2016 € million Available- for-sale financial assets Derivatives (net) Liabilities carried at fair value (non- derivative) Total Carrying amounts of net assets (net liabilities), Jan. 1 833 9 (37) 805 Gains (losses) recognized in profit or loss 9 (3) – 6 of which related to assets / liabilities recognized in the statements of financial position 9 (3) – 6 Gains (losses) recognized outside profit or loss 14 – – 14 Additions of assets (liabilities) 38 – – 38 Settlements of (assets) liabilities (3) – 5 2 Carrying amounts of net assets (net liabilities), June 30 891 6 (32) 865 The changes recognized in profit or loss were included in other operating income/expenses or in interest income. Contribution to the plan assets of Bayer Pension Trust e.V. The contribution of 4.9% of the issued shares of Covestro AG to Bayer Pension Trust e.V. led to a €337 million reduction in the pension provisions of Bayer AG. The equity of the Bayer Group rose accord- ingly. An amount equal to 4.9% of the equity of Covestro AG was allocated to noncontrolling interest. Legal risks To find out more about the Bayer Group’s legal risks, please see Note 32 to the consolidated financial statements in the Bayer Annual Report 2015, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2015, the following significant changes have occurred in respect of the legal risks: Pharmaceuticals Yasmin™ / YAZ™: As of July 14, 2016, the number of claimants in the pending lawsuits and claims in the United States totaled about 500 (excluding claims already settled). Claimants allege that users have suf- fered personal injuries, some of them fatal, from the use of Bayer’s drospirenone-containing oral contra- ceptive products such as Yasmin™ and / or YAZ™ or from the use of Ocella™ and / or Gianvi™, generic versions of Yasmin™ and YAZ™, respectively, marketed by Barr Laboratories, Inc. in the United States. As of July 14, 2016, Bayer had reached agreements, without admission of liability, to settle approximately 10,500 claims in the United States for venous clot injuries (primarily deep vein thrombosis or pulmonary embolism) for a total amount of about U.S. $2.08 billion. Bayer will continue to consider the option of settling such claims after a case-specific analysis of medical records. At present, about 100 such claims are under review. 50 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report In August 2015, Bayer reached an agreement to settle, without admission of liability, lawsuits and claims in which plaintiffs allege an arterial thromboembolic injury (primarily strokes and heart attacks) for a total maximum aggregate amount of U.S. $56.9 million. The participation thresholds have been met (97.5% of those who are eligible, and 96% of those who are eligible and allege death or catastrophic injuries) and the settlement was funded in May 2016. As of July 14, 2016, about 10 of the 500 above-mentioned claimants alleged arterial thromboembolic injuries. Xarelto™: As of July 14, 2016, U.S. lawsuits from approximately 11,500 recipients of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, had been served upon Bayer. Plaintiffs allege that users have suffered personal injuries from the use of Xarelto™, including cerebral, gastrointes- tinal or other bleeding and death, and seek compensatory and punitive damages. Additional lawsuits are anticipated. As of July 14, 2016, ten Canadian lawsuits relating to Xarelto™ seeking class action certifi- cation had been served upon Bayer. Betaferon™ / Betaseron™: Since 2010, Bayer and Biogen Idec have been litigating in U.S. federal court about the validity of a Biogen patent and its alleged infringement by the production and distribution of Betaseron™, Bayer’s drug product for the treatment of multiple sclerosis. In March 2016, the U.S. federal court decided a disputed issue regarding the scope of the patent in Biogen’s favor. Bayer disagrees with the decision, which may be appealed at the conclusion of the proceedings in the U.S. federal court. This development does not change Bayer’s belief that it has meritorious defenses in this dispute and that it will continue to defend itself vigorously. Beyaz™ / Safyral™: In the patent infringement proceedings against Watson Laboratories, Inc., the U.S. Court of Appeals for the Federal Circuit in May 2016 invalidated the patent claims asserted by Bayer and reversed last year’s judgment by a U.S. federal court. Bayer filed a petition for rehearing. Beyaz™ and Safyral™ are Bayer’s oral contraceptives containing folate. In September 2015, a U.S. federal court ruled in favor of Bayer regarding both the validity of the patent and the infringement thereof by Watson. Watson had filed Abbreviated New Drug Applications with a Paragraph IV certification (“ANDA IV”) seeking ap- proval of generic versions of both Beyaz™ and Safyral™ in the United States and appealed the decision. Finacea™: In May 2016, the U.S. Court of Appeals for the Federal Circuit affirmed last year’s decision by a U.S. federal court that Bayer’s patent relating to Finacea™ topical gel is valid and infringed by Glen- mark Generics Ltd. Glenmark had filed an ANDA IV seeking approval of a generic version of Finacea™ in the United States and appealed the U.S. federal court decision. Related parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural per- sons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its sub- sidiaries exercise control or have a significant influence. They include, in particular, nonconsolidated sub- sidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate officers of Bayer AG. On April 19, 2016, Bayer AG increased the coverage of Bayer Pension Trust e.V. with the deposit of 10 million of the shares it held in Covestro AG. The number of shares deposited amounted to 4.9% of the issued shares of Covestro AG and had a value of €337 million. Sales to related parties were not material from the viewpoint of the Bayer Group. Goods and services to the value of €0.2 billion were procured from the associated company PO JV, LP, Wilmington, Delaware, United States, mainly in the course of normal business operations. There was no significant change in receivables vis-à-vis related parties compared with December 31, 2015. Payables increased by €0.2 billion, primarily vis-à-vis the newly established joint venture with CRISPR Therapeutics AG, Basel, Switzerland. 51 Condensed Consolidated Interim Financial Statements as of June 30, 2016 Notes Bayer Interim Report Other information The Annual Stockholders’ Meeting on April 29, 2016, approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.50 per share be paid for the 2015 fiscal year. The actions of the members of the Board of Management and the Supervisory Board were ratified. Two stockholder representatives were elected to the Supervisory Board in accordance with the nominations submitted by the Supervisory Board. The compensation system for the members of the Board of Management was approved as proposed by the Board of Management and the Supervisory Board. PricewaterhouseCoopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Essen, was elected as the auditor of the annual and consolidated financial statements for the fiscal year 2016 and to review the con- densed financial statements and interim management report as of June 30, 2016 as well as to review the condensed financial statements and interim management report as of September 30, 2016. Deloitte & Touche GmbH, Wirtschaftsprüfungsgesellschaft, Munich, was elected to review the condensed financial statements and interim management report as of March 31, 2017. Leverkusen, July 25, 2016 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Johannes Dietsch Dr. Hartmut Klusik Kemal Malik Erica Mann Dieter Weinand 52 Responsibility Statement Bayer Interim Report Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabilities, fi- nancial position and profit or loss of the Bayer Group, and the interim management report includes a fair review of the development and performance of the business and the position of the Bayer Group, together with a description of the principal opportunities and risks associated with the expected development of the Bayer Group for the remaining months of the financial year. Leverkusen, July 25, 2016 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Johannes Dietsch Dr. Hartmut Klusik Kemal Malik Erica Mann Dieter Weinand 53 Review Report Bayer Interim Report Review Report To Bayer Aktiengesellschaft, Leverkusen We have reviewed the condensed consolidated interim financial statements – comprising the consolidated income statement and statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the condensed consolidated statement of changes in equity and selected explanatory notes – and the interim group management report of Bayer AG for the period from January 1, 2016 to June 30, 2016 which are part of the half-year financial report pursuant to § (Article) 37w WpHG (“Wertpapierhandelsgesetz”: German Securities Trading Act). The preparation of the condensed con- solidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Management. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review. We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW) and additionally observed the International Standard on Review Engagements “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” (ISRE 2410). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assur- ance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and therefore does not provide the assurance attainable in a financial statement audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion. Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU nor that the interim group manage- ment report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. Essen, July 26, 2016 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dr. Peter Bartels Wirtschaftsprüfer Eckhard Sprinkmeier Wirtschaftsprüfer 54 Financial Calendar / Masthead Financial Calendar Q3 2016 Interim Report Annual Report 2016 Q1 2017 Interim Report Annual Stockholders’ Meeting 2017 Q2 2017 Interim Report Q3 2017 Interim Report Masthead Published by Bayer AG, 51368 Leverkusen, Germany Editor Jörg Schäfer, phone +49 214 30 39136 Email: joerg.schaefer@bayer.com Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com English edition Currenta GmbH & Co. OHG Language Service Date of publication Wednesday, July 27, 2016 Bayer on the internet www.bayer.com ISSN 0343 / 1975 Bayer Interim Report October 26, 2016 February 22, 2017 April 27, 2017 April 28, 2017 July 27, 2017 October 26, 2017 Interim Group Management Report and Condensed Consolidated Interim Financial Statements produced in-house with FIRE.sys. Forward-Looking Statements This Interim Report may contain forward-looking statements based on current assumptions and forecasts made by Bayer Group management. Various known and unknown risks, uncertainties and other factors could lead to material differ- ences between the actual future results, financial situation, development or performance of the company and the esti- mates given here. These factors include those discussed in Bayer’s public reports, which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking state- ments or to conform them to future events or developments. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 55

Semestriel, 2016, Agrochemistry, BAYER

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Interim Report Second Quarter of 2018 Bayer Interim Report as of June 30, 2018 Key Data Bayer Group Key Data € million Q2 2017 Q2 2018 Change % H1 2017 H1 2018 Change % Sales 8,714 9,481 + 8.8 18,394 18,619 + 1.2 Change (adjusted for currency and portfolio effects) 1 + 8.5 + 5.1 Change in sales 1 Volume – 2.7% + 9.9% + 1.0% + 6.4% Price – 0.1% – 1.4% + 0.1% – 1.3% Currency + 1.1% – 5.8% + 1.8% – 6.7% Portfolio + 0.1% + 6.1% + 0.1% + 2.8% EBITDA1 2,135 2,017 – 5.5 5,134 4,835 – 5.8 Special items 1 (112) (318) (167) (396) EBITDA before special items 1 2,247 2,335 + 3.9 5,301 5,231 – 1.3 EBITDA margin before special items 1 25.8% 24.6% 28.8% 28.1% EBIT 1 1,463 1,351 – 7.7 3,890 3,661 – 5.9 Special items 1 (244) (363) (346) (441) EBIT before special items 1 1,707 1,714 + 0.4 4,236 4,102 – 3.2 Financial result (369) (322) – 12.7 (665) (192) + 71.1 Net income (from continuing and discontinued operations) 1,224 799 – 34.7 3,307 2,753 – 16.8 1 Earnings per share from continuing and discontinued operations (€) 1.38 0.87 – 37.0 3.74 3.06 – 18.2 Core earnings per share 1 from continuing operations (€) 1.52 1.54 + 1.3 3.80 3.77 – 0.8 Net cash provided by operating activities (from continuing and discontinued operations) 2,313 2,240 – 3.2 3,154 2,898 – 8.1 Cash outflows for capital expenditures 476 459 – 3.6 891 808 – 9.3 Research and development expenses 1,097 1,261 + 14.9 2,191 2,301 + 5.0 Depreciation, amortization and impairments 672 666 – 0.9 1,244 1,174 – 5.6 Number of employees at end of period 2 99,720 124,055 + 24.4 99,720 124,055 + 24.4 Personnel expenses (including pension expenses) 2,345 2,566 + 9.4 4,981 5,004 +0.5 2017 figures restated 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Employees calculated as full-time equivalents (FTEs) 2 Full Year 2017 35,015 + 1.5% + 2.3% – 0.8% – 1.4% + 0.1% 8,563 (725) 9,288 26.5% 5,903 (1,227) 7,130 (1,326) 7,336 8.29 6.64 8,134 2,418 4,504 2,660 99,820 9,528 Bayer Interim Report as of June 30, 2018 Contents Bayer Group Key Data ___________________________________________________________________________ 2 Interim Group Management Report as of June 30, 2018 ___________________________________________ 5 1. Overview of Sales, Earnings and Financial Position ____________________________________________ 8 1.1 Earnings Performance of the Bayer Group ____________________________________________________ 8 1.2 Business Development by Segment _________________________________________________________ 12 1.3 Asset and Financial Position of the Bayer Group ______________________________________________ 23 2. Research, Development, Innovation _________________________________________________________ 26 3. Report on Future Perspectives and on Opportunities and Risks ________________________________ 31 3.1 Future Perspectives _______________________________________________________________________ 31 3.2 Opportunities and Risks ____________________________________________________________________ 33 Condensed Consolidated Interim Financial Statements as of June 30, 2018 ________________________ 36 Bayer Group Consolidated Income Statements ___________________________________________________ 36 Bayer Group Consolidated Statements of Comprehensive Income __________________________________ 37 Bayer Group Consolidated Statements of Financial Position _______________________________________ 38 Bayer Group Consolidated Statements of Cash Flows _____________________________________________ 39 Bayer Group Consolidated Statements of Changes in Equity _______________________________________ 40 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group ______________ 41 Events After the End of the Reporting Period _____________________________________________________ 69 Responsibility Statement _______________________________________________________________________ 70 Review Report ________________________________________________________________________________ 71 Financial Calendar _____________________________________________________________________________ 72 Masthead _____________________________________________________________________________________ 72 Reporting Principles The Bayer AG Interim Report is a quarterly financial report that includes an interim group management report and condensed consol- idated interim financial statements and satisfies the requirements of Section 115, Paragraph 2, No. 1 and No. 2, Paragraph 3 and Paragraph 4 of the German Securities Trading Act (WpHG). Bayer has prepared the condensed consolidated interim financial state- ments according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (E.U.). The interim group management report should be read in conjunction with our Annual Report 2017, which contains a detailed description of our business operations. Contents 3 Bayer Interim Report as of June 30, 2018 Interim Group Management Report Second quarter of 2018 Bayer completes biggest acquisition in its history // Monsanto business included on prorated basis from June 7 // Group sales €9.5 billion (Fx & portfolio adj. + 8.5%) // EBITDA before special items increases to €2.3 billion (+ 3.9%) despite unfavorable currency effects // Pharmaceuticals registers higher sales (Fx & portfolio adj.) but lower earnings – substantial increase in R&D investment // Consumer Health business weak again // Crop Science achieves strong increase in sales and earnings after weak prior-year quarter // Animal Health improves sales (Fx & portfolio adj.) and earnings // Net income €0.8 billion // Core earnings per share €1.54 (+ 1.3%) // Group outlook for 2018 confirmed, with adjustments to reflect acquisition 4 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Interim Group Management Report as of June 30, 2018 Economic Position of the Bayer Group Sales of the Bayer Group increased by 8.5% (Fx & portfolio adj.) to €9.5 billion in the second quarter of 2018. Group EBITDA before special items rose by 3.9% to €2.3 billion, and was impacted by negative currency effects of around €130 million. At Pharmaceuticals we posted growth in sales on a currency- and portfolio-adjusted basis, largely because our key growth products continued to perform very well overall. EBITDA before special items declined, in particular due to higher R&D investment. Sales of Consumer Health came in slightly below the prior-year level after adjusting for currency and portfolio effects, while earnings fell substantially. Crop Science regis- tered a significant increase in sales on a currency- and portfolio-adjusted basis, which was largely attribut- able to the recognition of significantly higher provisions for crop protection product returns in Brazil in the prior-year quarter due to high inventory levels. Sales of Crop Science increased by 39.2% on a reported basis, thanks mainly to a portfolio effect of 25.0% (€543 million) from the acquisition of Monsanto. EBITDA before special items of Crop Science nearly doubled, due particularly to the aforementioned effect in Brazil and to the newly acquired business. Animal Health posted an encouraging increase in sales and earnings. We have adjusted our Group outlook to account for the sales and earnings contributions from Monsanto since the date of the acquisition. As the transaction closed later than we had anticipated, 2018 earnings will be lower than we had projected in our February forecast including Monsanto due to the seasonality of the agricultural business. Our outlook takes into account the financing costs for the acquisition of Monsanto shares as well as the higher number of shares of Bayer AG following the capital increases on a pro rata temporis basis. The businesses divested to BASF are no longer taken into account from the date of their respective sale. Key Events With the acquisition of 100% of the outstanding shares of Monsanto Company, St. Louis, Missouri, United States (Monsanto), for US$63 billion including debt on June 7, 2018, Bayer completed the biggest acquisi- tion in its history. The acquisition of Monsanto brings together two strong and highly complementary busi- nesses: Bayer’s innovative chemical and biological crop protection portfolio and Monsanto’s exceptional expertise in the field of seeds and traits. We are now a leader in the agricultural industry with a clear com- mitment to innovation and sustainability – for the benefit of our customers and society. In addition to lever- aging our employees’ extensive expertise in agriculture, we also have the strongest portfolio of seed and crop protection products for a wide range of crops and indications, the best research and development platform and the leading digital farming business. 5 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position In connection with the conditional approval granted by the European Commission in March 20181, Bayer concluded an agreement with BASF SE on April 26, 2018, concerning the sale of Bayer’s global vegetable seed business, certain seed treatments and its digital farming activities for approximately €1.7 billion. This agreement expanded on the agreement already concluded between Bayer and BASF in October 2017, which concerned, among other things, the sale of the global glufosinate ammonium business and the re- lated LibertyLink™ technology for herbicide tolerance, as well as a substantial part of the field crop seed business, for a base purchase price of €5.9 billion. On May 29, 2018, the U.S. Department of Justice conditionally approved Bayer’s acquisition of Monsanto. The conditions included a hold separate order that remained in place until all of the divestments to BASF had been completed. These transactions closed on August 1 and 16, 2018, which enabled the final inte- gration of the Monsanto business to commence on August 16, 2018. The total purchase price of €7.6 billion before taxes for the businesses divested to BASF is subject to purchase price adjustments typical for such transactions. Upon closing of the transaction, an amount of US$128 per share was paid out to the Monsanto stock- holders, and trading of Monsanto shares on the New York Stock Exchange ceased. The purchase price of US$63 billion for the acquisition of Monsanto includes net debt of approximately US$6 billion held by that company. In September 2016, Bayer secured bridge financing from a consortium of 26 banks for the remaining amount of US$57 billion. Between September 2016 and the first quarter of 20182, the required bridge financing was reduced to approximately US$43 billion through a range of equity and debt measures, such as the placement of mandatory convertible notes, the sale of Covestro shares and the acquisition of a 3.6% interest in Bayer (31 million newly issued Bayer shares) by the investment firm Temasek, Singapore. The bridge financing was drawn on June 7, 2018 to finance the acquisition. On May 4, 2018, Bayer sold 28.81 million shares, or 14.2%, of Covestro, at a price of €75.50 per share. The proceeds of this sale totaled €2.2 billion. Bayer AG now holds just 6.8% of Covestro shares to repay the exchangeable bond that matures in 2020. Bayer AG acquired these shares, which are recognized at fair value through profit or loss, from Bayer Pension Trust, which no longer holds any Covestro shares. After the acquisition closed, Bayer undertook further equity and debt measures: On June 7, 2018, we raised around €6 billion in net proceeds from a capital increase out of authorized capital against cash contributions and with subscription rights for existing Bayer stockholders. The move strengthened the company’s equity. As part of the capital increase, Bayer issued approximately 74.6 million new registered (no-par value) shares with entitlement to dividends from January 1, 2018. In late June 2018, Bayer issued bonds of US$15 billion via its subsidiary Bayer U.S. Finance II LLC, Pittsburgh, United States, and bonds of €5 billion via its subsidiary Bayer Capital Corporation B.V., Mijdrecht, Netherlands. All bonds are guaranteed by Bayer AG. In addition, Bayer signed an agreement on July 27, 2018, to divest the Consumer Health prescription der- matology business to LEO Pharma A/S, Ballerup, Denmark. The business will be transferred in two steps: on September 4, 2018, for the United States, and during the second half of 2019 for all other markets, subject to the satisfaction of customary closing conditions. The portfolio being divested comprises pre- scription brands including Advantan™, Skinoren™ and Travocort™. The purchase price amounts to €58 million for the U.S. business and €555 million for the rest of the global business, and is subject to customary purchase price adjustments. 1 Please see the Q1 2018 interim report for more information. 2 For details of the financial transactions in previous quarters, please see the 2016 and 2017 Annual Reports and the respective quarterly reports of the Bayer Group. 6 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position On August 10, 2018, a state court jury in San Francisco, United States, awarded US$39 million in com- pensatory and US$250 million in punitive damages to a plaintiff who claimed that a Monsanto product caused his non-Hodgkin lymphoma (NHL). The news impacted Bayer’s share price, which declined quite considerably at times. We disagree with the verdict and intend to seek trial court review and appeal, if necessary. More than 800 scientific studies – including an independent study which followed more than 50,000 licensed pesticide applicators and farm workers and their spouses for more than 20 years – and regulatory authorities all over the world confirm that glyphosate and glyphosate-based herbicides do not cause cancer and are safe for use when used according to label instructions. Please see the “Legal Risks” section for further details. Changes to the Corporate Structure In connection with the acquisition of Monsanto, the reporting structure of the Crop Science segment was adjusted to reflect the future relative sizes of the various strategic business entities. The figures for previous periods were adjusted accordingly. A 1 Realignment of Crop Science structure Previous reporting structure Reporting structure from Q2 2018 Herbicides Herbicides Corn Seed & Traits Soybean Seed & Traits Fungicides Fungicides Insecticides Insecticides SeedGrowth Environmental Science Environmental Science Vegetable Seeds Vegetable Seeds Other Other Crop Science Crop Science Due to the relative sizes of Monsanto’s “Corn seed and traits” and “Soybean seed and traits” businesses, we will report our corresponding strategic business entities Corn Seed & Traits and Soybean Seed & Traits separately from now on. Monsanto’s “Agricultural Productivity” business will be allocated among Herbi- cides, Environmental Science and Other, while “Cotton seed and traits” and “All other crops seeds and traits” will be reported under Other and the “Vegetable seeds” business will be allocated to our corre- sponding Vegetable Seeds business entity. Due to its relative size, we will no longer report our SeedGrowth business separately, but under Other. Regional reporting will not be impacted by these changes. 7 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position 1. Overview of Sales, Earnings and Financial Position 1.1 Earnings Performance of the Bayer Group3 Second quarter of 2018 Group sales Group sales in the second quarter of 2018 rose by 8.5% (Fx & portfolio adj.) to €9,481 million (reported: + 8.8%). Germany accounted for €959 million of this figure. Pharmaceuticals posted a sales gain of 3.1% (Fx & portfolio adj.) to €4,217 million. Sales at Consumer Health came in slightly below the prior-year quarter at €1,413 million (Fx & portfolio adj. – 1.4%). At Crop Science, sales climbed by 21.4% (Fx & portfolio adj.) to €3,011 million, which was largely attributable to the recognition of significantly higher provisions for product returns in the prior-year quarter due to high inventory levels in Brazil. On a reported basis, sales increased by 39.2%, thanks mainly to a portfolio effect of 25.0% (€543 million) from the acquisition of Monsanto. Animal Health sales grew by 7.6% (Fx & portfolio adj.) to €453 million. EBITDA before special items Group EBITDA before special items rose by 3.9% to €2,335 million. Negative currency effects held back earnings by around €130 million. EBITDA before special items at Pharmaceuticals declined by 8.0% to €1,363 million. At Consumer Health, EBITDA before special items fell by 18.5% to €256 million. Crop Science posted a 99.1% increase in EBITDA before special items to €631 million, which was attributable to the recognition of significantly higher provisions for product returns in Brazil in the prior-year quarter. The newly acquired business contributed €70 million to earnings. EBITDA before special items of Animal Health advanced by 10.3% to €128 million. Depreciation and amortization Depreciation, amortization and impairment losses declined by 0.9% in the second quarter of 2018 to €666 million (Q2 2017: €672 million). This figure comprised €416 million (Q2 2017: €416 million) in amor- tization and impairments on intangible assets and €251 million (Q2 2017: €255 million) in depreciation and impairments on property, plant and equipment. Depreciation and amortization of €55 million was attributable to assets that either resulted from remeasurements or were recognized for the first time in connection with the Monsanto purchase price allocation. Impairment losses totaled €54 million (Q2 2017: €126 million), including €2 million (Q2 2017: €23 million) on property, plant and equipment. A total of €45 million (Q2 2017: €122 million) in impairment losses and impairment loss reversals constituted special items. EBIT and special items EBIT of the Bayer Group fell by 7.7% to €1,351 million (Q2 2017: €1,463 million), after special charges of €363 million (Q2 2017: €244 million). The special charges resulted mainly from expenses of €287 million in connection with the acquisition of Monsanto, including €126 million associated with the sale of acquired inventories remeasured at fair value in connection with the purchase price allocation. There were further special charges of €43 million for impairment losses on intangible assets and of €32 million for efficiency improvement measures. EBIT before special items was up by 0.4% at €1,714 million (Q2 2017: €1,707 million), and thus came in at the level of the prior-year quarter. 3 For definition of alternative performance measures, see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 8 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position The following special effects were taken into account in calculating EBIT and EBITDA: A 2 Special Items Reconciliation by Segment 1 € million EBIT Q2 2017 EBIT Q2 2018 EBIT H1 2017 EBIT H1 2018 EBITDA Q2 2017 EBITDA Q2 2018 EBITDA H1 2017 EBITDA H1 2018 Before special items 1,707 1,714 4,236 4,102 2,247 2,335 5,301 5,231 Pharmaceuticals (120) (56) (156) (57) (7) (13) (10) (14) Consumer Health (15) 1 (24) (4) (7) 1 (15) (4) Crop Science (95) (280) (132) (341) (84) (278) (108) (339) Animal Health – (3) – (3) – (3) – (3) Reconciliation (14) (25) (34) (36) (14) (25) (34) (36) Restructuring (14) (13) (29) (18) (14) (13) (29) (18) Litigations / legal risks – – (5) (3) – – (5) (3) Acquisition costs – (12) – (15) – (12) – (15) Total special items (244) (363) (346) (441) (112) (318) (167) (396) Impairment losses / reversals (118) (43) (151) (43) (6) – (6) – Litigations / legal risks (2) (2) (7) (6) (2) (2) (7) (6) Acquisition costs (47) (287) (68) (348) (47) (285) (68) (346) Restructuring (37) (32) (80) (45) (27) (32) (56) (45) Divestitures (40) 1 (40) 1 (30) 1 (30) 1 After special items 1,463 1,351 3,890 3,661 2,135 2,017 5,134 4,835 2017 figures restated 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” A 3 Special Items Reconciliation by Functional Costs 1 € million EBIT Q2 2017 EBIT Q2 2018 EBIT H1 2017 EBIT H1 2018 EBITDA Q2 2017 EBITDA Q2 2018 EBITDA H1 2017 EBITDA H1 2018 Total special items (244) (363) (346) (441) (112) (318) (167) (396) of which cost of goods sold (66) (148) (91) (158) (42) (145) (53) (155) of which selling expenses (40) (16) (41) (18) (8) (16) (9) (18) of which research and development expenses (77) (50) (113) (53) (3) (7) (6) (10) of which general administration expenses (58) (149) (93) (207) (58) (149) (93) (207) of which other operating income / expenses (3) – (8) (5) (1) (1) (6) (6) 2017 figures restated 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Income after income taxes from discontinued operations Income after income taxes from discontinued operations was minus €8 million (Q2 2017: €641 million). Covestro was still included in the prior-year period. Net income After a financial result of minus €322 million (Q2 2017: minus €369 million), income before income taxes was €1,029 million (Q2 2017: €1,094 million). The financial result primarily consisted of net interest ex- pense of €270 million (Q2 2017: €133 million), as well as special charges of €106 million (Q2 2017: €164 million), mainly in connection with the bridge financing for the Monsanto acquisition. After income tax expense of €216 million (Q2 2017: €258 million) and adjusting for income from discontinued operations after income taxes and noncontrolling interest, net income for the second quarter of 2018 amounted to €799 million (Q2 2017: €1,224 million). 9 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Core earnings per share Earnings per share (total) were €0.87 in the second quarter of 2018 (Q2 2017: €1.38), while core earnings per share from continuing operations increased by 1.3% to €1.54 (Q2 2017: €1.52). A 4 Core Earnings per Share1 € million Q2 2017 Q2 2018 H1 2017 H1 2018 EBIT (as per income statements) 1,463 1,351 3,890 3,661 Amortization and impairment losses / loss reversals on intangible assets 416 416 758 713 Impairment losses / loss reversals on property, plant and equipment, and accelerated depreciation included in special items 33 2 46 9 Special items (other than accelerated depreciation, amortization and impairment losses / loss reversals) 112 318 167 396 Core EBIT 2,024 2,087 4,861 4,779 Financial result (as per income statements) (369) (322) (665) (192) Special items in the financial result 164 106 199 (130) Income taxes (as per income statements) (258) (216) (682) (710) Special items in income taxes – – – – Tax effects related to amortization, impairment losses / loss reversals and special items (214) (240) (352) (347) Income after income taxes attributable to noncontrolling interest (as per income statements) (2) (6) – (6) Above-mentioned adjustments attributable to noncontrolling interest – – – – Core net income from continuing operations 1,345 1,409 3,361 3,394 Shares Weighted average number of shares 2 885,186,889 915,694,644 884,826,889 900,704,047 € Core earnings per share from continuing operations 1.52 1.54 3.80 3.77 2017 figures restated 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 The weighted average number of shares (basic and diluted) was restated for all periods prior to June 2018 to reflect the effect of the bonus component of the subscription rights issued as part of the June 2018 capital increase In April 2018, the Singapore-based investment firm Temasek subscribed to 31 million new Bayer shares, for total gross proceeds of €3 billion. The subscription rights of existing stockholders were excluded from this capital increase. In June 2018, a capital increase with subscription rights for existing stockholders was implemented, raising around €6.0 billion in net proceeds. Approximately 74.6 million new shares were issued. As the sub- scription price of the new shares was below the market price of the existing shares, this capital increase contains a bonus component pursuant to IAS 33. The weighted average number of shares was adjusted to reflect the effect of this bonus component for all periods prior to June 2018. Personnel expenses and employee numbers Personnel expenses increased by 9.4%, in part due to currency effects and to the Monsanto acquisition, and totaled €2,566 million (Q2 2017: €2,345 million). As of the closing date, the number of employees in the Bayer Group was 124,055 (June 30, 2017: 99,720), up by 24.4%, due largely to the Monsanto acquisition. 10 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position First half of 2018 Group sales Group sales in the first half of 2018 rose by 5.1% (Fx & portfolio adj.) to €18,619 million (reported: + 1.2%). Germany accounted for €1,999 million of this figure. Sales of Pharmaceuticals advanced by 3.0% (Fx & portfolio adj.) to €8,292 million. Sales at Consumer Health were down slightly against the first half of 2017, declining by 1.8% (Fx & portfolio adj.) to €2,822 million. Sales at Crop Science climbed by 8.1% (Fx & portfolio adj.) to €5,872 million, primarily due to the previously described effect in Brazil. On a reported basis, sales increased by 11.1%, thanks mainly to a portfolio effect of 10.3% (€543 million) from the acquisition of Monsanto. Animal Health posted a 5.4% increase (Fx & portfolio adj.) in sales to €867 million. EBITDA before special items EBITDA before special items of the Bayer Group declined slightly year on year, falling by 1.3% to €5,231 million (H1 2017: €5,301 million). EBITDA before special items at Pharmaceuticals decreased by 6.9% to €2,778 million. EBITDA before special items of Consumer Health fell by 19.4% to €569 million. Crop Science posted a considerable increase in EBITDA before special items, which rose by 16.8% to €1,673 million. This was mainly attributable to the aforementioned effects in Brazil and to the earnings contribution of the newly acquired business. Earnings of Animal Health also increased, rising by 6.4% to €267 million. Depreciation and amortization Depreciation, amortization and impairment losses amounted to €1,174 million in the first half of 2018 (H1 2017: €1,244 million), comprising €712 million (H1 2017: €758 million) in amortization and impairments on intangible assets and €462 million (H1 2017: €486 million) in depreciation and impairments on property, plant and equipment. An amount of €55 million was related to remeasurements or to assets recognized for the first time in connection with the purchase price allocation of Monsanto. Impairment losses totaled €75 million (H1 2017: €173 million), including €9 million (H1 2017: €37 million) on property, plant and equipment. A total of €45 million (H1 2017: €168 million) in impairment losses and impairment loss reversals constituted special items. EBIT EBIT of the Bayer Group fell by 5.9% to €3,661 million (H1 2017: €3,890 million), after net special charges of €441 million (H1 2017: €346 million). The special charges resulted mainly from expenses of €348 million in connection with the acquisition of Monsanto, including €126 million associated with the sale of acquired inventories remeasured at fair value in connection with the purchase price allocation. Further special charges of €45 million were related to efficiency improvement programs, while charges of €43 million were connected with impairments on intangible assets. EBIT before special items declined by 3.2% to €4,102 million (H1 2017: €4,236 million). Income after income taxes from discontinued operations Income after income taxes from discontinued operations was €0 million (H1 2017: €1,205 million). Covestro was still included in the prior-year period. Net income After a financial result of minus €192 million (H1 2017: minus €665 million), income before income taxes was €3,469 million (H1 2017: €3,225 million). The financial result comprised income of €341 from the sale of Covestro shares, net interest expense of €362 million (H1 2017: €251 million), an exchange loss of €78 million (H1 2017: €190 million), and interest cost of €86 million (H1 2017: €99 million) for pension and other provisions. The financial result included special gains of €130 million (H1 2017: special charges of €199 million). After tax expense of €710 million (H1 2017: €682 million), income after income taxes was €2,759 million (H1 2017: €2,543 million). After adjusting for income from discontinued operations after income taxes and noncontrolling interest, net income came to €2,753 million (H1 2017: €3,307 million). Core earnings per share Earnings per share (total) declined to €3.06 (H1 2017: €3.74), while core earnings per share from continu- ing operations of the Bayer Group were level with the prior-year period at €3.77 (H1 2017: €3.80; –0.8%). 11 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 12 1. Overview of Sales, Earnings and Financial Position 1.2 Business Development by Segment Pharmaceuticals A 5 Key Data – Pharmaceuticals Change %1 Change %1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Sales 4,304 4,217 – 2.0 + 3.1 8,567 8,292 – 3.2 + 3.0 Change in sales 1 Volume + 4.7% + 5.8% + 6.2% + 5.7% Price – 0.3% – 2.7% – 0.4% – 2.7% Currency + 0.5% – 4.9% + 1.4% – 6.0% Portfolio 0.0% – 0.2% 0.0% – 0.2% Sales by region Europe / Middle East / Africa 1,647 1,653 + 0.4 + 3.2 3,253 3,264 + 0.3 + 2.9 North America 1,101 992 – 9.9 – 3.3 2,174 1,915 – 11.9 – 2.8 Asia / Pacific 1,290 1,323 + 2.6 + 6.8 2,602 2,626 + 0.9 + 7.3 Latin America 266 249 – 6.4 + 10.5 538 487 – 9.5 + 6.5 EBITDA1 1,474 1,350 – 8.4 2,973 2,764 – 7.0 Special items 1 (7) (13) (10) (14) EBITDA before special items 1 1,481 1,363 – 8.0 2,983 2,778 – 6.9 EBITDA margin before special items 1 34.4% 32.3% 34.8% 33.5% EBIT 1 1,102 1,053 – 4.4 2,321 2,216 – 4.5 Special items 1 (120) (56) (156) (57) EBIT before special items 1 1,222 1,109 – 9.2 2,477 2,273 – 8.2 Net cash provided by operating activities 528 629 + 19.1 1,501 1,861 + 24.0 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2018 Sales Sales of Pharmaceuticals rose by 3.1% (Fx & portfolio adj.) to €4,217 million in the second quarter of 2018. Our key growth products Xarelto™, Eylea™, Xofigo™, Stivarga™ and Adempas™ maintained their strong performance overall, with their combined sales rising by 13.2% (Fx and portfolio adj.) to €1,691 million (Q2 2017: €1,555 million). Combined sales of the 15 best-selling Pharmaceuticals products advanced by 4.8% (Fx & portfolio adj.). Sales of Kogenate™ again declined significantly, impacted by the termination of an agreement with a distribution partner at the end of 2017. After adjusting for this effect, sales of Pharmaceuticals rose by 4.2% (Fx & portfolio adj.). As expected, sales were also held back by temporary supply disruptions for some of our established products, such as Adalat™ and Aspirin™, as was the case in the first quarter. Bayer Interim Report as of June 30, 2018 Interim Group Management Report 13 1. Overview of Sales, Earnings and Financial Position A 6 Best-Selling Pharmaceuticals Products Change % 1 Change % 1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Xarelto™ 834 891 + 6.8 + 10.6 1,585 1,705 + 7.6 + 11.7 of which U.S.A.2 117 126 + 7.7 + 7.2 203 209 + 3.0 + 3.0 Eylea™ 458 540 + 17.9 + 22.5 904 1,044 + 15.5 + 20.9 of which U.S.A.3 0 0 . . 0 0 . . Xofigo™ 105 89 – 15.2 – 9.2 205 181 – 11.7 – 3.7 of which U.S.A. 62 52 – 16.1 – 10.3 124 103 – 16.9 – 7.1 Adempas™ 75 89 + 18.7 + 23.4 148 170 + 14.9 + 22.3 of which U.S.A. 38 41 + 7.9 + 16.2 76 78 + 2.6 + 15.5 Stivarga™ 83 82 – 1.2 + 7.5 158 152 – 3.8 + 5.5 of which U.S.A. 46 41 – 10.9 – 4.8 85 70 – 17.6 – 8.2 Subtotal key growth products 1,555 1,691 + 8.7 + 13.2 3,000 3,252 + 8.4 + 13.6 Mirena™ product family 276 276 0.0 + 7.4 591 593 + 0.3 + 10.7 of which U.S.A. 176 177 + 0.6 + 8.2 395 401 + 1.5 + 13.7 Kogenate™ / Kovaltry™ 260 213 – 18.1 – 13.7 535 427 – 20.2 – 14.9 of which U.S.A. 91 74 – 18.7 – 11.8 185 154 – 16.8 – 6.5 Nexavar™ 229 193 – 15.7 – 10.5 436 355 – 18.6 – 12.3 of which U.S.A. 86 59 – 31.4 – 24.8 161 102 – 36.6 – 29.1 Adalat™ 171 165 – 3.5 – 1.2 345 341 – 1.2 + 3.9 of which U.S.A. 0 0 . . 0 0 . . Glucobay™ 139 151 + 8.6 + 10.3 297 319 + 7.4 + 12.2 of which U.S.A. 0 1 . . 1 1 . . YAZ™ / Yasmin™ / Yasminelle™ 158 159 + 0.6 + 8.2 328 311 – 5.2 + 3.0 of which U.S.A. 25 22 – 12.0 – 7.6 45 37 – 17.8 – 10.1 Aspirin™ Cardio 148 139 – 6.1 – 3.1 305 287 – 5.9 – 0.9 of which U.S.A. 0 0 . . 0 0 . . Betaferon™ / Betaseron™ 185 142 – 23.2 – 18.6 356 272 – 23.6 – 17.6 of which U.S.A. 108 77 – 28.7 – 22.3 202 135 – 33.2 – 25.4 Gadavist™ / Gadovist™ 97 103 + 6.2 + 13.0 186 190 + 2.2 + 9.0 of which U.S.A. 34 38 + 11.8 + 21.8 61 63 + 3.3 + 15.2 Avalox™ / Avelox™ 87 77 – 11.5 – 6.6 187 174 – 7.0 – 1.2 of which U.S.A. 2 0 . . 5 3 . . Total best-selling products 3,305 3,309 + 0.1 + 4.8 6,566 6,521 – 0.7 + 5.3 Proportion of Pharmaceuticals sales 77% 78% 77% 79% Total best-selling products in U.S.A. 785 708 – 9.8 – 4.0 1,543 1,356 – 12.1 – 3.2 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Marketing rights owned by an affiliate of Johnson & Johnson, U.S.A.; transactional effects had a negative impact of €10 million. 3 Marketing rights owned by Regeneron Pharmaceuticals Inc., U.S.A. Sales by product // Sales of our oral anticoagulant Xarelto™ once again rose significantly, driven by higher volumes in Europe, Japan and China. Our license revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson, also developed positively. // We recorded substantial sales gains for our eye medicine Eylea™, due primarily to expanded volumes in Europe, Japan and Canada. Among other things, the differentiated clinical profile of Eylea™ had a positive impact. // Sales of our cancer drug Xofigo™ declined markedly as a result of lower volumes in the United States, Japan and other countries. This was also partly due to the Phase III trial of radium Ra 223 dichloride in combination with abiraterone acetate and prednisone / prednisolone being halted prematurely in November 2017. Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position // Sales of our pulmonary hypertension treatment Adempas™ increased significantly due to positive business development in the United States and Europe. As in the past, sales reflected the proportionate recognition of the upfront and milestone payments resulting from the sGC collaboration with Merck & Co., United States. // We posted encouraging growth in sales of our cancer drug Stivarga™ on a currency- and portfolio- adjusted basis. The increase resulted primarily from expanded volumes in Japan and China, where we benefited from the market launches in previous years. By contrast, sales in the United States came in below the level of the prior-year quarter due to intensified competitive pressure. // Sales of the hormone-releasing intrauterine devices of the Mirena™ product family (Mirena™, Kyleena™ and Jaydess™ / Skyla™) increased, especially in the United States, with the successful launch of Kyleena™ continuing to have a positive impact on sales. // We again registered significant sales declines for our Kogenate™ / Kovaltry™ blood-clotting medicines that resulted from the termination of an agreement with a distribution partner at the end of 2017. Adjusted for this effect, sales rose by 3.2% (Fx & portfolio adj.). // Sales of our cancer drug Nexavar™ fell considerably, with intensified competitive pressure in the United States and Japan weighing on performance. // We registered a decline in sales of Adalat™, our product for the treatment of hypertension and coronary heart disease, and of Aspirin™ Cardio, which is used for the secondary prevention of heart attacks. The continued strong expansion of volumes in China was not sufficient to offset declines in Europe. // We once again recorded encouraging sales gains for our diabetes treatment Glucobay™, with performance driven by expanded volumes in China. // Sales of our YAZ™ / Yasmin™ / Yasminelle™ line of oral contraceptives developed very positively, due primarily to good business performance in Russia, China and Japan. // Sales of our multiple sclerosis treatment Betaferon™ / Betaseron™ declined significantly. This was mainly due to the competitive market environment in the United States. // We posted robust growth in sales of our MRI contrast agent Gadavist™ / Gadovist™ that resulted especially from the good business performance in the United States. // We registered a decline in sales of our antibiotic Avalox™ / Avelox™, primarily due to generic competition in the United States. Earnings EBITDA before special items of Pharmaceuticals declined by 8.0% to €1,363 million in the second quarter of 2018 (Q2 2017: €1,481 million). Adjusted for negative currency effects in the amount of €54 million, earnings were down by 4.3%. The decline was mainly attributable to higher R&D and selling expenses, as well as to effects relating to temporary supply disruptions. An increase in the cost of goods sold also weighed on earnings. These effects were partly offset by a substantial expansion in volumes for our key growth products. EBIT declined by 4.4% to €1,053 million, after special charges of €56 million (Q2 2017: €120 million). These comprised €43 million in impairment losses on intangible assets and €13 million in expenses for efficiency improvement measures. Special Items 1 Pharmaceuticals € million EBIT Q2 2017 EBIT Q2 2018 EBIT H1 2017 EBIT H1 2018 EBITDA Q2 2017 EBITDA Q2 2018 EBITDA H1 2017 Restructuring (2) (13) (5) (14) (1) (13) (4) Impairment losses / reversals (118) (43) (151) (43) (6) – (6) Total special items (120) (56) (156) (57) (7) (13) (10) 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 14 A 7 EBITDA H1 2018 (14) – (14) Bayer Interim Report as of June 30, 2018 Interim Group Management Report 15 1. Overview of Sales, Earnings and Financial Position First half of 2018 Sales Sales of Pharmaceuticals rose by 3.0% (Fx & portfolio adj.) in the first six months of 2018, to €8,292 million. Our key growth products Xarelto™, Eylea™, Stivarga™, Xofigo™ and Adempas™ delivered strong performance, with their combined sales rising by 13.6% (Fx & portfolio adj.) to €3,252 million (H1 2017: €3,000 million). We registered a significant decline in sales of Kogenate™ due to the absence of orders from a distribution partner. After adjusting for this effect, sales of Pharmaceuticals rose by 4.4% (Fx & portfolio adj.). Earnings EBITDA before special items decreased by 6.9% in the first half of 2018, to €2,778 million (H1 2017: €2,983 million). Adjusted for negative currency effects in the amount of €123 million, earnings were down by 2.7%. Higher R&D and selling expenses, and a higher cost of goods sold were the primary factors that diminished earnings. Positive contributions primarily came from a substantial increase in volumes, espe- cially for our key growth products. EBIT declined by 4.5% to €2,216 million. Special charges amounted to €57 million (H1 2017: €156 million) and comprised €43 million in impairment losses on intangible assets and €14 million in expenses for effi- ciency improvement measures. Consumer Health A 8 Key Data – Consumer Health Change % 1 Change % 1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Sales 1,542 1,413 – 8.4 – 1.4 3,143 2,822 – 10.2 – 1.8 Changes in sales 1 Volume – 4.6% – 2.2% – 2.2% – 2.8% Price + 2.4% + 0.8% + 2.4% + 1.0% Currency + 1.5% – 7.0% + 2.1% – 8.4% Portfolio 0.0% 0.0% 0.0% 0.0% Sales by region Europe / Middle East / Africa 503 466 – 7.4 – 3.4 1,041 962 – 7.6 – 3.5 North America 661 595 – 10.0 – 2.7 1,362 1,191 – 12.6 – 2.4 Asia / Pacific 195 202 + 3.6 + 8.2 415 379 – 8.7 – 2.7 Latin America 183 150 – 18.0 – 1.1 325 290 – 10.8 + 6.8 EBITDA1 307 257 – 16.3 691 565 – 18.2 Special items 1 (7) 1 (15) (4) EBITDA before special items 1 314 256 – 18.5 706 569 – 19.4 EBITDA margin before special items 1 20.4% 18.1% 22.5% 20.2% EBIT 1 195 157 – 19.5 473 368 – 22.2 Special items 1 (15) 1 (24) (4) EBIT before special items 1 210 156 – 25.7 497 372 – 25.2 Net cash provided by operating activities 297 148 – 50.2 562 321 – 42.9 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2018 Sales Sales of Consumer Health declined slightly in the second quarter of 2018, falling by 1.4% (Fx & portfolio adj.) to €1,413 million. This was primarily due to a decline in business in Europe / Middle East / Africa and weaker business performance in North America. Business picked up in Asia / Pacific, returning to growth in the second quarter. Bayer Interim Report as of June 30, 2018 Interim Group Management Report 16 1. Overview of Sales, Earnings and Financial Position A 9 Best-Selling Consumer Health Products Change % 1 Change % 1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Claritin™ 159 140 – 11.9 – 5.7 349 307 – 12.0 – 2.7 Aspirin™ 104 93 – 10.6 – 2.2 221 202 – 8.6 + 0.7 Bepanthen™ / Bepanthol™ 100 97 – 3.0 + 2.7 195 197 + 1.0 + 6.6 Aleve™ 101 97 – 4.0 + 3.3 183 169 – 7.7 + 2.3 Coppertone™ 80 71 – 11.3 – 5.1 182 157 – 13.7 – 4.2 Canesten™ 74 69 – 6.8 – 3.4 144 121 – 16.0 – 12.0 Elevit™ 44 54 + 22.7 + 31.3 96 104 + 8.3 + 17.7 Dr Scholl’s™ ² 66 54 – 18.2 – 9.8 107 103 – 3.7 + 7.6 One A Day™ 55 50 – 9.1 – 1.8 110 96 – 12.7 – 2.4 Alka-Seltzer™ product family 44 41 – 6.8 + 0.5 114 93 – 18.4 – 8.7 Total 827 766 – 7.4 – 0.6 1,701 1,549 – 8.9 – 0.2 Proportion of Consumer Health sales 54% 54% 54% 55% Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Trademark rights and distribution only in certain countries outside the European Union Sales by product // The decline in sales of our antihistamine Claritin™ was driven by a change in ordering behavior in China and a significantly late start to the season in the United States. // Sales of our analgesic Aspirin™ were down slightly year on year, due primarily to anticipated temporary supply disruptions. Including business with Aspirin™ Cardio, which is reported under Pharmaceuticals, sales amounted to €232 million (Q2 2017: €252 million), representing a currency- and portfolio-adjusted decline of 2.7%. // We posted a slight increase in sales of our Bepanthen™ / Bepanthol™ wound and skin care products, thanks mainly to growth in Europe. // Business with our analgesic Aleve™ expanded, benefiting especially from a product line extension in the United States. // Sales of our Coppertone™ sunscreen were down, with the chief factors here being the late start to the suncare season and the persistently intensive competitive pressure in the United States. // We registered a decline in sales of our Canesten™ skin and intimate health products that was primarily attributable to anticipated temporary supply disruptions. // We once again significantly expanded business with our prenatal vitamin Elevit™ thanks to continuing strong demand in Asia / Pacific. // Our Dr. Scholl’s™ foot care products registered a substantial decline in sales, especially in the United States, where we had benefited in the prior-year quarter from inventory building by retailers. Overall, the repositioning of this brand in the United States is progressing positively. // Sales of our One A Day™ vitamin product decreased slightly. // Sales of the Alka-Seltzer™ family of products to treat gastric complaints and cold symptoms came in at the prior-year level. Earnings EBITDA before special items of Consumer Health declined by a substantial 18.5% to €256 million in the second quarter of 2018 (Q2 2017: €314 million). Adjusted for negative currency effects in the amount of €12 million, earnings were down by 14.6%. This decline is predominantly attributable to lower volumes and a higher cost of goods sold, in part due to a shift in the product mix. Earnings included one-time gains from the sale of a noncore brand in the amount of €14 million (Q2 2017: €0 million). EBIT decreased by 19.5% to €157 million, after special gains of €1 million (Q2 2017: special charges of €15 million). Bayer Interim Report as of June 30, 2018 Interim Group Management Report 17 1. Overview of Sales, Earnings and Financial Position A 10 Special Items 1 Consumer Health € million EBIT Q2 2017 EBIT Q2 2018 EBIT H1 2017 EBIT H1 2018 EBITDA Q2 2017 EBITDA Q2 2018 EBITDA H1 2017 EBITDA H1 2018 Restructuring (15) 1 (24) (4) (7) 1 (15) (4) Total special items (15) 1 (24) (4) (7) 1 (15) (4) 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2018 Sales Sales of Consumer Health fell slightly in the first six months of 2018, decreasing by 1.8% (Fx & portfolio adj.) to €2,822 million. The declines in Europe / Middle East / Africa, Asia / Pacific and North America were not offset by the positive business performance in Latin America. Earnings EBITDA before special items receded by 19.4% in the first half of 2018, to €569 million (H1 2017: €706 million). Adjusted for negative currency effects in the amount of €47 million, earnings were down by 12.7%. The decline is primarily due to lower volumes. In addition, one-time gains from the sale of noncore brands were significantly lower than in the prior-year period. EBIT decreased by 22.2% to €368 million (H1 2017: €473 million). Special charges amounted to €4 million (H1 2017: €24 million) and pertained to efficiency improvement measures. Crop Science A 11 Key Data – Crop Science Change % 1 Change % 1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Sales 2,163 3,011 + 39.2 + 21.4 5,283 5,872 + 11.1 + 8.1 Change in sales 1 Volume – 13.7% + 22.0% – 4.3% + 8.6% Price – 2.1% – 0.6% – 1.1% – 0.5% Currency + 1.7% – 7.2% + 2.3% – 7.3% Portfolio 0.0% + 25.0% 0.0% + 10.3% Sales by region Europe / Middle East / Africa 908 986 + 8.6 + 5.5 2,370 2,280 – 3.8 – 3.3 North America 865 1,076 + 24.4 – 1.9 1,907 2,045 + 7.2 + 1.6 Asia / Pacific 459 508 + 10.7 + 10.2 825 876 + 6.2 + 10.4 Latin America (69) 441 . . 181 671 . EBITDA1 233 353 + 51.5 1,324 1,334 + 0.8 Special items 1 (84) (278) (108) (339) EBITDA before special items 1 317 631 + 99.1 1,432 1,673 + 16.8 EBITDA margin before special items 1 14.7% 21.0% 27.1% 28.5% EBIT 1 117 154 + 31.6 1,087 1,046 – 3.8 Special items 1 (95) (280) (132) (341) EBIT before special items 1 212 434 + 104.7 1,219 1,387 + 13.8 Net cash provided by operating activities 1,170 1,653 + 41.3 491 950 + 93.5 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Interim Report as of June 30, 2018 Interim Group Management Report 18 1. Overview of Sales, Earnings and Financial Position Second quarter of 2018 Sales In the second quarter of 2018, Crop Science posted sales of €3,011 million. The businesses being divest- ed accounted for €468 million of this figure. Sales increased by 39.2% on a reported basis, thanks mainly to a positive portfolio effect of 25.0% (€543 million) from the acquisition of Monsanto. There was also a negative currency effect of 7.2%. On a currency- and portfolio-adjusted basis, sales increased by 21.4%. This development was largely attributable to significantly higher provisions for crop protection product returns recognized in the prior-year quarter due to high inventory levels in Brazil. Inventories in the distribu- tion channel there have normalized as a result of the measures undertaken. We considerably expanded our seed business through the acquisition of Monsanto as of June 7, 2018, particularly for corn and soybeans. In addition, our existing herbicides business was significantly enlarged. Against this backdrop, we have adjusted the reporting structure of the Crop Science segment as explained in the section “Changes in corporate structure” at the beginning of this interim report. In terms of regions, the transaction primarily expands our business in North America and Latin America. A 12 Sales by Business Unit Change % 1 Change % 1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Crop Science 2,163 3,011 + 39.2 + 21.4 5,283 5,872 + 11.1 + 8.1 Herbicides 741 1,028 + 38.7 + 12.7 1,653 1,828 + 10.6 + 2.1 Corn Seed & Traits 19 134 . 0.0 70 172 + 145.7 – 11.4 Soybean Seed & Traits 37 147 . + 37.8 105 206 + 96.2 + 13.3 Fungicides 502 709 + 41.2 + 47.8 1,289 1,437 + 11.5 + 17.4 Insecticides 256 329 + 28.5 + 37.1 557 628 + 12.7 + 21.4 Environmental Science 192 183 – 4.7 – 14.1 339 297 – 12.4 – 14.2 Vegetable Seeds 85 128 + 50.6 + 5.9 247 272 + 10.1 – 2.0 Other 331 353 + 6.6 + 12.7 1,023 1,032 + 0.9 + 9.9 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Sales by region // Sales in the Europe / Middle East / Africa region climbed by 12.7% (Fx adj.) to €986 million. The acquired Monsanto business contributed €65 million to this figure. Sales increased by 5.5% on a currency- and portfolio-adjusted basis. Fungicides performed particularly well, benefiting from catch-up effects from the delayed start to the season in France and a successful product launch in Germany. Sales also increased at Herbicides. By contrast, there was a decline at Environmental Science. // Sales in North America advanced by 31.0% (Fx adj.) to €1,076 million. The contribution of the acquired Monsanto business was €284 million. Sales fell by 1.9% on a currency- and portfolio-adjusted basis, due chiefly to intensified competitive pressure at Herbicides in the United States and to a significant decline at Environmental Science as a result of planned lower product deliveries to the company that acquired our consumer business in 2016. These effects were partly offset by higher license revenues for soybean seed in the United States. // In the Asia / Pacific region, sales increased by 18.7% (Fx adj.) to €508 million. The contribution by the acquired Monsanto business was €38 million. We posted an encouraging 10.2% sales increase on a currency- and portfolio-adjusted basis. We registered double-digit-percentage increases in sales at Insecticides, due particularly to the weak prior-year quarter in India, and at Fungicides, due to a product launch in China. We also considerably expanded business at Herbicides, especially in Australia. // Sales in the Latin America region increased to €441 million (Q2 2017: minus €69 million). The contribution by the acquired Monsanto business was €155 million. After a negative currency effect of €25 million, the currency- and portfolio-adjusted sales increase was largely attributable to the significantly higher provisions for crop protection product returns recognized in Brazil in the prior-year period due to high inventory levels. The related measures undertaken to normalize inventories of crop protection products were successfully completed at the end of the season during the second quarter. Excluding Brazil, the other countries in the region registered a slight increase overall. Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Earnings EBITDA before special items of Crop Science increased by 99.1% to €631 million in the second quarter of 2018 (Q2 2017: €317 million). The substantial increase is largely down to the aforementioned situation in Brazil in the prior-year quarter, when earnings were impacted by the recognition of provisions for product returns, impairment losses on receivables and inventory write-offs. The newly acquired business also provided a positive contribution of €70 million to earnings. By contrast, earnings were diminished by a negative currency effect of €52 million (excluding the acquired business). EBIT climbed by 31.6% to €154 million. Included in this figure is additional depreciation and amortization in the amount of €55 million resulting from remeasurements or the first-time recognition of assets in the course of the purchase price allocation. Earnings were also held back by special charges of €280 million (Q2 2017: €95 million), primarily in connection with the acquisition of Monsanto. Of this figure, €126 million pertained to the sale of acquired inventories that were remeasured at fair value in the course of the pur- chase price allocation. Special Items 1 Crop Science € million EBIT Q2 2017 EBIT Q2 2018 EBIT H1 2017 EBIT H1 2018 EBITDA Q2 2017 EBITDA Q2 2018 EBITDA H1 2017 Restructuring (6) (4) (22) (6) (5) (4) (8) Litigations (2) (2) (2) (3) (2) (2) (2) Acquisition costs (47) (275) (68) (333) (47) (273) (68) Divestments (40) 1 (40) 1 (30) 1 (30) Total special items (95) (280) (132) (341) (84) (278) (108) 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2018 Sales In the first half of 2018, Crop Science posted sales of €5,872 million. The businesses being divested ac- counted for €1,359 million of this figure. Sales increased by 11.1% on a reported basis, thanks mainly to a positive portfolio effect of 10.3% (€543 million) from the acquisition of Monsanto. There was also a nega- tive currency effect of 7.3%. On a currency- and portfolio-adjusted basis, sales increased by 8.1%, in a development that was mainly attributable to the Latin America region because of the aforementioned effect in Brazil, and to positive performance in the Asia / Pacific region. This was partly offset by a decline in the Europe / Middle East / Africa region that was mainly the result of unfavorable weather conditions in Western Europe and regulatory changes in France. Earnings EBITDA before special items of Crop Science increased by 16.8% to €1,673 million in the first half of 2018 (H1 2017: €1,432 million). The substantial increase is primarily due to the aforementioned effects in Brazil and the earnings contribution provided by the newly acquired business as detailed above. By contrast, earnings were diminished by slightly lower selling prices in the United States, a minor decline in volumes in Europe, and a negative currency effect of €96 million (excluding the acquired business). EBIT declined by 3.8% to €1,046 million. This figure included the above-mentioned depreciation and amor- tization as well as special charges in the amount of €341 million (H1 2017: €132 million), primarily in con- nection with the acquisition of Monsanto. 19 A 13 EBITDA H1 2018 (6) (3) (331) 1 (339) Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Pro forma sales by strategic business entity (unaudited) Due to the scope of the acquired activities and the seasonality of the business, we are presenting sales by strategic business entity on an unaudited, pro forma basis, to better show the operational business devel- opment for the combined business of Crop Science and Monsanto, among other reasons. In this context, sales are presented as if both the acquisition of Monsanto and the associated divestments had taken place as of January 1, 2017. Pro Forma Sales by Business Unit 1 Change % 2 € million Q2 2017 Q2 2018 Reported Fx adj. H1 2017 H1 2018 Reported Crop Science 5,013 5,095 + 1.6 + 10.0 11,980 11,243 – 6.2 Herbicides 1,402 1,454 + 3.7 + 11.4 2,954 2,757 – 6.7 Corn Seed & Traits 989 961 – 2.8 + 7.7 3,518 3,235 – 8.0 Soybean Seed & Traits 805 686 – 14.8 – 6.6 1,652 1,352 – 18.2 Fungicides 502 710 + 41.4 + 47.7 1,290 1,437 + 11.4 Insecticides 256 329 + 28.5 + 37.2 559 627 + 12.2 Environmental Science 320 283 – 11.6 – 4.6 617 521 – 15.6 Vegetable Seeds 185 175 – 5.4 + 0.3 382 351 – 8.1 Other 553 497 – 10.1 – 0.3 1,008 961 – 4.7 Fx adj. = currency-adjusted 1 The unaudited pro forma data are presented as if both the acquisition of Monsanto and the associated divestments had taken place as of January 1, 2017. Sales of Monsanto are presented in periods as per the Bayer fiscal year. One-time effects of business operations, the accounting for discontinued operations and the recognition and measurement of sales from certain business transactions have been adjusted in line with our accounting. Due to this simplified procedure, they explicitly do not reflect sales according to IFRS or IDW RH HFA 1.004. 2 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2018 Sales in the second quarter of 2018 increased by 10.0% (Fx adj.) on a pro forma basis. // The increase in sales at Corn Seed & Traits was predominantly attributable to a one-time effect and associated higher license revenues in Brazil, as well as expanded volumes due to a late start to the season in North America and eastern Europe. // Sales at Soybean Seed & Traits were down, primarily as a result of a challenging market environment in the United States. This was partly offset by the higher level of market penetration achieved by Roundup Ready 2 Xtend™ in North America and by Intacta RR2 PRO™ in Latin America. // Sales growth at Herbicides, Fungicides and Insecticides was largely attributable to the significantly higher provisions for crop protection product returns in Brazil recognized in the prior year, as previously outlined. Higher prices at Herbicides also had a positive impact. // We registered a decline in sales at Environmental Science as a result of planned lower product deliveries to the acquirer of our consumer business. First half of 2018 Sales in the first half of 2018 increased by 3.2% (Fx adj.) on a pro forma basis. Growth was driven by Fungicides and Insecticides due to the afformentioned effect in Brazil. Corn Seed & Traits also delivered encouraging performance, benefiting in particular from the positive development in the second quarter as well as catch-up effects from the prior year in the United States. This was partly offset by the decline at Soybean Seed & Traits and Environmental Science. 20 A 14 Change % 2 Fx adj. + 3.2 + 0.9 + 3.7 – 7.8 + 17.3 + 20.8 – 6.7 – 1.1 + 6.4 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 21 1. Overview of Sales, Earnings and Financial Position Animal Health A 15 Key Data – Animal Health Change % 1 Change % 1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Sales 450 453 + 0.7 + 7.6 890 867 – 2.6 + 5.4 Change in sales 1 Volume – 0.7% + 9.6% – 0.5% + 6.2% Price + 2.8% – 2.0% + 3.0% – 0.8% Currency + 1.6% – 6.9% + 2.3% – 8.0% Portfolio + 1.9% 0.0% + 1.9% 0.0% Sales by region Europe / Middle East / Africa 122 116 – 4.9 – 3.3 266 252 – 5.3 – 3.8 North America 208 220 + 5.8 + 14.9 385 380 – 1.3 + 9.9 Asia / Pacific 80 81 + 1.3 + 7.5 156 158 + 1.3 + 9.0 Latin America 40 36 – 10.0 + 5.0 83 77 – 7.2 + 6.0 EBITDA1 116 125 + 7.8 251 264 + 5.2 Special items 1 – (3) – (3) EBITDA before special items 1 116 128 + 10.3 251 267 + 6.4 EBITDA margin before special items 1 25.8% 28.3% 28.2% 30.8% EBIT 1 107 116 + 8.4 233 245 + 5.2 Special items 1 – (3) – (3) EBIT before special items 1 107 119 + 11.2 233 248 + 6.4 Net cash provided by operating activities 97 88 . 66 101 + 53.0 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2018 Sales Sales of Animal Health in the second quarter of 2018 increased by 7.6% (Fx & portfolio adj.) to €453 mil- lion, despite the negative impact of amended financial reporting standards (IFRS 15). We posted consider- able currency- and portfolio-adjusted sales increases in the North America region that resulted mainly from shifts in demand at the expense of subsequent quarters. We achieved encouraging sales gains (Fx & port- folio adj.) in the Asia / Pacific and Latin America regions. By contrast, sales declined in the Europe / Middle East / Africa region. A 16 Best-Selling Animal Health Products Change %1 Change %1 € million Q2 2017 Q2 2018 Reported Fx & p adj. H1 2017 H1 2018 Reported Fx & p adj. Advantage™ product family 146 156 + 6.8 + 13.8 282 270 – 4.3 + 3.2 Seresto™ 81 99 + 22.2 + 29.2 157 187 + 19.1 + 27.1 Drontal™ product family 33 30 – 9.1 – 3.2 68 61 – 10.3 – 3.8 Baytril™ 31 24 – 22.6 – 17.1 58 49 – 15.5 – 7.8 Total 291 309 + 6.2 + 12.8 565 567 + 0.4 + 7.8 Proportion of Animal Health sales 65% 68% 63% 65% Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Sales by product // Sales of our Advantage™ line of flea, tick and worm control products increased significantly, particularly in North America, due to substantial shifts in demand, primarily from the third quarter into the second quarter. In the Europe / Middle East / Africa region, business declined due to persistently high competitive pressure. // Business with our Seresto™ flea and tick collar once again expanded significantly, with sales increasing in all regions. Growth was chiefly attributable to increased demand in the United States and in the Europe / Middle East / Africa region. // We registered a decline in sales of our Drontal™ line of dewormers in the Europe / Middle East / Africa region. Price and volume increases in the other regions were not sufficient to offset this effect. // Sales of our Baytril™ antibiotic fell primarily in North America, following the positive effect of a change in the distribution model in the prior-year quarter, as well as in the Europe / Middle East / Africa region. Earnings EBITDA before special items of Animal Health increased by 10.3% to €128 million in the second quarter of 2018 (Q2 2017: €116 million). Adjusted for negative currency effects in the amount of €10 million, earnings were up by 19.0%. This development was attributable to significantly higher volumes, in part due to the aforementioned shifts in demand. By contrast, earnings were diminished by the application of IFRS 15, negative price effects, higher selling expenses and an increase in the cost of goods sold. EBIT improved by 8.4% to €116 million, after special charges of €3 million (Q2 2017: €0 million) Special Items 1 Animal Health € million EBIT Q2 2017 EBIT Q2 2018 EBIT H1 2017 EBIT H1 2018 EBITDA Q2 2017 EBITDA Q2 2018 EBITDA H1 2017 Restructuring – (3) – (3) – (3) – Total special items – (3) – (3) – (3) – 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2018 Sales Sales of Animal Health rose by 5.4% (Fx & portfolio adj.) in the first half of 2018, to €867 million. Growth was negatively impacted by the first-time application of IFRS 15, among other factors. We posted sales gains (Fx & portfolio adj.) in the North America region that were mainly driven by shifts in demand from the second half of the year into the first half. Business also developed positively in the Latin America and Asia / Pacific regions on a currency- and portfolio-adjusted basis, but declined in Europe / Middle East / Africa. Earnings EBITDA before special items of Animal Health increased by 6.4% to €267 million in the first half of 2018 (H1 2017: €251 million). Adjusted for negative currency effects in the amount of €20 million, earnings were up by 14.3%. Significantly higher volumes more than offset the diminishing effects of the application of IFRS 15, a higher cost of goods sold and negative price effects. EBIT increased by 5.2% to €245 million, after special charges of €3 million (H1 2017: €0 million). 22 A 17 EBITDA H1 2018 (3) (3) Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position 1.3 Asset and Financial Position of the Bayer Group Statement of Cash Flows A 18 Bayer Group Summary Statements of Cash Flows € million Q2 2017 Q2 2018 H1 2017 H1 2018 Net cash provided by (used in) operating activities, continuing operations 1,901 2,240 2,452 2,898 Net cash provided by (used in) operating activities, discontinued operations 412 – 702 – Net cash provided by (used in) operating activities (total) 2,313 2,240 3,154 2,898 Net cash provided by (used in) investing activities (total) (1,178) (37,925) (2,314) (39,983) Net cash provided by (used in) financing activities (total) (549) 35,746 62 35,165 Change in cash and cash equivalents due to business activities 586 61 902 (1,920) Cash and cash equivalents at beginning of period 2,224 5,338 1,899 7,436 Change due to exchange rate movements and to changes in scope of consolidation (37) (388) (28) (505) Cash and cash equivalents at end of period 2,773 5,011 2,773 5,011 2017 figures restated Net cash provided by operating activities // In the second quarter of 2018, the net cash provided by operating activities (total) declined by 3.2% to €2,240 million. Covestro was still included in the prior-year quarter. The net cash provided by operating activities in continuing operations rose by 17.8% to €2,240 million due mainly to a decline in cash tied up in working capital. // Operating cash flow (total) declined by 8.1% in the first half of 2018, to €2,898 million. Covestro was still included in the prior-year period. The net cash provided by operating activities in continuing operations rose by 18.2% to €2,898 million due mainly to lower additions to cash tied up in working capital. Net cash used in investing activities // Cash outflows for property, plant and equipment and intangible assets were 3.6% lower in the second quarter of 2018 at €459 million (Q2 2017: €476 million) and included €121 million (Q2 2017: €142 million) at Pharmaceuticals, €45 million (Q2 2017: €31 million) at Consumer Health, €174 million (Q2 2017: €135 million) at Crop Science and €9 million (Q2 2017: €5 million) at Animal Health. The prior- year figures included €92 million at Covestro. // There was an outflow of €45,290 million for the acquisition of Monsanto, net of €2,657 million in cash acquired from Monsanto. // There was a net cash inflow of €1,107 million from the acquisition and sale of Covestro shares. There was a net inflow of €2,162 million from the sale of Covestro shares, while the acquisition of shares held by the Bayer Pension Trust – to be used to repay the convertible bond maturing in 2020 – resulted in an outflow of €1,055 million. // The net cash inflow from current financial assets amounted to €6,424 million (Q2 2017: outflow of €776 million). // Cash outflows for property, plant and equipment and intangible assets were 9.3% lower in the first half of 2018 at €808 million (H1 2017: €891 million) and included €340 million (H1 2017: €294 million) at Pharmaceuticals, €73 million (H1 2017: €55 million) at Consumer Health, €237 million (H1 2017: €234 million) at Crop Science and €14 million (H1 2017: €11 million) at Animal Health. The prior-year figures included €166 million at Covestro. // There was a total net cash inflow of €2,909 million from the acquisition and sale of Covestro shares. // The net cash inflow from current financial assets amounted to €2,712 million (H1 2017: net cash outflow of €1,359 million). 23 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Net cash used in financing activities // In the second quarter of 2018, there was a net cash inflow of €35,746 million for financing activities, mainly from the issuance of bonds and from further net borrowings totaling €29,151 million (Q2 2017: €1,014 million). // Capital increases resulted in an inflow of €8,986 million. // There was an outflow of €2,403 million for dividend payments. // The figure for the prior-year quarter included a net inflow of €1,045 million from the sale of Covestro shares while that company remained fully consolidated. // In the first half of 2018, there was a net cash inflow of €35,165 million for financing activities, mainly from the issuance of bonds and from further net borrowings totaling €28,644 million (H1 2017: €270 million). // The figure for the prior-year period included a net inflow of €2,505 million from the sale of Covestro shares while that company remained fully consolidated. Liquid assets and net financial debt A 19 Net Financial Debt 1 € million Dec. 31, 2017 March 31, 2018 June 30, 2018 Change vs. March 31, 2018 (%) Bonds and notes / promissory notes 12,436 12,290 35,495 + 188.8 of which hybrid bonds 2 4,533 4,534 4,535 . Liabilities to banks 534 611 14,441 . Liabilities under finance leases 238 248 389 + 56.9 Liabilities from derivatives 3 240 199 201 + 1.0 Other financial liabilities 970 686 1,603 + 133.7 Receivables from derivatives 3 (244) (223) (355) + 59.2 Financial debt 14,174 13,811 51,774 . Cash and cash equivalents (7,581) (5,332) (4,981) – 6.6 Current financial assets 4 (2,998) (6,829) (1,042) – 84.7 Noncurrent financial assets 5 – – (1,054) . Net financial debt 3,595 1,650 44,697 . 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Classified as debt according to IFRS 3 These include the market values of interest-rate and currency hedges of recorded transactions. 4 These include short-term loans and receivables with maturities between 3 and 12 months outstanding from banks and other companies as well as financial investments in debt and equity instruments that were recorded as current on first-time recognition. 5 These solely comprise the remaining interest in Covestro that is to be used to repay the convertible bond issued in 2017 that will mature in 2020. // Net financial debt of the Bayer Group increased to €44.7 billion in the second quarter of 2018 due to the acquisition of Monsanto. // Measures undertaken to finance the acquisition included the issuance in June 2018 of US$15 billion and €5 billion in bonds via our subsidiaries Bayer U.S. Finance II LLC, Pittsburgh, United States, and Bayer Capital Corporation B.V., Mijdrecht, Netherlands, respectively. // Bonds with a nominal value of US$6.9 billion were acquired from Monsanto in connection with the acquisition. // The increase in liabilities to banks mainly resulted from the use of the bridge financing for the acquisition of Monsanto. // The other financial liabilities as of June 30, 2018, contained €530 million related to the mandatory convertible notes issued in November 2016 and €730 million in commercial paper. 24 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position // Net financial debt includes three subordinated hybrid bonds with a total volume of €4.5 billion, 50% of which is treated as equity by the rating agencies. As such, the hybrid bonds have a positive impact on the Group’s rating-specific debt indicators. // The table below illustrates how the rating agencies assess our creditworthiness following the acquisition of Monsanto, with the investment grade ratings from all three agencies demonstrating good creditworthiness: A 20 Rating Rating agency Long-term rating Short-term rating Outlook S&P Global Ratings BBB A–2 stable Moody’s Baa1 P–2 negative Fitch Ratings A– F2 stable Asset and capital structure A 21 Bayer Group Summary Statements of Financial Position € million Dec. 31, 2017 March 31, 2018 June 30, 2018 Change % Noncurrent assets 45,014 42,225 98,713 + 133.8 Assets held for sale 2,081 3,132 3,720 + 18.8 Other current assets 27,992 30,037 34,097 + 13.5 Current assets 30,073 33,169 37,817 + 14.0 Total assets 75,087 75,394 136,530 + 81.1 Equity 36,861 38,384 47,219 + 23.0 Noncurrent liabilities 24,633 23,912 62,549 + 161.6 Liabilities directly related to assets held for sale 111 520 669 + 28.7 Other current liabilities 13,482 12,578 26,093 + 107.4 Current liabilities 13,593 13,098 26,762 + 104.3 Liabilities 38,226 37,010 89,311 + 141.3 Total equity and liabilities 75,087 75,394 136,530 + 81.1 // Between March 31, 2018, and June 30, 2018, total assets increased by €61.1 billion to €136.5 billion, mainly due to the acquisition of Monsanto. // Noncurrent assets increased by €56.5 billion to €98.7 billion. Intangible assets of €27.1 billion – mainly comprising patents and technologies (€17.4 billion), research projects (€4.3 billion) and trademarks (€4.2 billion) – and property, plant and equipment of €6.3 billion were acquired in connection with the acquisition. Goodwill of €23 billion was additionally recognized. Investments accounted for using the equity method declined by €2.1 billion, largely through the sale of further Covestro shares. // Total current assets increased by €4.6 billion to €37.8 billion. Among the items acquired from Monsanto were receivables of €7.2 billion and inventories of €4.9 billion. Other financial assets declined by €5.8 billion to €1.6 billion, mainly due to their utilization in financing the acquisition. Assets held for sale, which were related to the acquisition of Monsanto and the planned divestment of the prescription dermatology business of Consumer Health, increased by €0.6 billion. 25 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 26 2. Research, Development, Innovation // Equity rose by €8.8 billion compared with March 31, 2018, to €47.2 billion. In April 2018, the investment firm Temasek subscribed to 31 million new Bayer shares, for total gross proceeds of €3 billion. In June 2018, we raised €6.0 billion in net proceeds from a capital increase out of authorized capital against cash contributions and with subscription rights for existing Bayer stockholders. Equity was increased by €0.8 billion through income after income taxes, by €1.0 billion through currency effects recognized outside profit or loss, by €0.3 billion through the change in the fair value of equity instruments recognized at fair value, and by €0.1 billion through the decline in pension provisions recognized outside profit or loss. By contrast, the dividend payment of €2.4 billion reduced equity. The equity ratio decreased to 34.6% as of June 30, 2018 (March 31, 2018: 50.9%). // Liabilities rose by €52.3 billion as of June 30, 2018, to €89.3 billion. Financial liabilities of €8.7 billion, reimbursement obligations of €3.3 billion and other liabilities of €2.9 billion were assumed in connection with the acquisition. Furthermore, deferred tax liabilities of €8.0 billion were recognized in connection with the acquisition due to the measurement of the acquired assets and liabilities at fair value. Noncurrent liabilities rose by €38.6 billion overall to €62.5 billion. In particular, the newly issued bonds and the loans obtained to finance the acquisition led to increases of €23.2 billion and €13.8 billion in the respective line items in the statement of financial position. Current liabilities increased by €13.7 billion to €26.8 billion. 2. Research, Development, Innovation Bayer Group expenses for research and development increased by 8.9% (Fx adj.) to €1,261 million in the second quarter of 2018. A 22 Research and Development Expenses R&D expenses R&D expenses before special items Change % Change % Change % Change % € million Q2 2017 Q2 2018 Fx adj. H1 2017 H1 2018 Fx. adj. Q2 2017 Q2 2018 Fx adj. H1 2017 H1 2018 Fx. adj. Pharmaceuticals 707 765 + 11.5 1,419 1,458 + 6.6 638 722 + 16.5 1,317 1,415 + 11.5 Consumer Health 65 55 – 9.7 124 110 – 4.1 59 57 + 2.9 116 112 + 4.1 Crop Science 275 390 + 7.5 558 647 + 1.8 273 383 + 5.5 555 637 + 0.5 Animal Health 38 37 – 0.3 71 67 – 1.8 38 35 – 5.0 71 65 – 4.8 Reconciliation 12 14 + 21.7 19 19 – 1.6 12 14 + 21.7 19 19 – 1.6 Total Group 1,097 1,261 + 8.9 2,191 2,301 + 4.4 1,020 1,211 + 12.0 2,078 2,248 + 7.5 Pharmaceuticals We are conducting clinical trials with several drug candidates from our research and development pipeline. Bayer Interim Report as of June 30, 2018 Interim Group Management Report 2. Research, Development, Innovation Progress in Phase II clinical projects The following table shows our most important drug candidates currently in Phase II of clinical testing: A 23 Research and Development Projects (Phase II) 1 Projects Indication Anetumab ravtansine (mesothelin ADC)2 Malignant pleural mesothelioma BAY 1093884 (anti-TFPI antibody) Hemophilia BAY 1128688 (AKR1C3 inhibitor) Endometriosis Fulacimstat (BAY 1142524, chymase inhibitor) Heart failure Fulacimstat (BAY 1142524, chymase inhibitor) Chronic kidney disease BAY 1193397 (AR alpha 2c rec ant.) Peripheral artery disease (PAD) BAY 1213790 (anti-FXIa antibody) Prevention of thrombosis BAY 1902607 (P2X3 antagonist) Chronic cough BAY 2253651 (TASK channel blocker) Obstructive sleep apnea BAY 2306001 (IONIS-FXIRx)3 Prevention of thrombosis Levonorgestrel + indomethacin combi IUS Contraception Neladenoson bialanate (BAY 1067197) Chronic heart failure with reduced (HFrEF) and preserved (HFpEF) ejection fraction Radium-223 dichloride Breast cancer with bone metastases Radium-223 dichloride Multiple myeloma Riociguat Systemic sclerosis Rogaratinib (pan-FGFR inhibitor) Urothelial cancer Vilaprisan (S-PRM) Endometriosis 1 As of August 27, 2018 2 This trial did not meet its primary endpoint. However, it has not yet been terminated. Additional studies investigating anetumab ravtansine as a treatment for different forms of solid tumors are ongoing. See the Bayer Annual Report 2017 for more information. 3 Sponsored by Ionis Pharmaceuticals, Inc. The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. The Phase II trials with nesvacumab plus aflibercept (tradename: Eylea™) in the indications diabetic macu- lar edema and wet age-related macular degeneration have been concluded. In August 2018, the first data from the Phase II PANTHEON trial with neladenoson bialanate (BAY 1067197) in patients with heart failure with reduced ejection fraction (HFrEF) were presented at the Euro- pean Society of Cardiology (ESC). Neladenoson bialanate is an oral selective partial adenosine A1 receptor agonist. The aim of the study was to investigate the safety, pharmacological profile and optimal dose of neladenoson bialanate in once-daily administration. The study did not achieve the defined primary end- point for efficacy. No safety concerns were identified. The study data are being further analyzed and the next steps considered. 27 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 2. Research, Development, Innovation Progress in Phase III clinical projects The following table shows our most important drug candidates currently in Phase III of clinical testing: A 24 Research and Development Projects (Phase III) 1 Projects Indication Copanlisib (PI3K inhibitor) Various forms of non-Hodgkin lymphoma (NHL) Darolutamide (ODM-201, AR antagonist) Castration-resistant nonmetastatic prostate cancer Darolutamide (ODM-201, AR antagonist) Hormone-sensitive metastatic prostate cancer Finerenone (MR antagonist) Diabetic kidney disease Molidustat (HIF-PH inhibitor) Renal anemia Radium-223 dichloride 2 Combination treatment of castration-resistant prostate cancer Rivaroxaban 3 Anticoagulation in patients with chronic heart failure Rivaroxaban 3 Prevention of venous thromboembolism in high-risk patients after discharge from hospital Rivaroxaban Peripheral artery disease (PAD) Rivaroxaban VTE treatment in children Vericiguat (sGC stimulator) 4 Chronic heart failure Vilaprisan (S-PRM) Symptomatic uterine fibroids 1 As of August 27, 2018 2 This trial was unblinded ahead of schedule and there are no patients who are still receiving the combination therapy. Otherwise, however, the trial is continuing, especially with regard to per protocol patient monitoring. The final assessment has not yet been completed. For more information, see the Bayer Annual Report 2017. 3 Sponsored by Janssen Research & Development, LLC 4 Sponsored by Merck & Co., Inc., U.S.A. The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. At the ESC congress in Munich in August 2018, Bayer and development partner Janssen Research & Development, LLC, United States, presented the results of the clinical Phase III COMMANDER HF and MARINER trials investigating the oral Factor Xa inhibitor rivaroxaban (tradename: Xarelto™). The COMMANDER HF trial investigated whether, when administered additionally to the standard therapy, rivaroxaban reduces the risk of cardiovascular events in coronary heart disease patients following an episode of worsening of heart failure. The data showed a reduction in thrombotic events in patients treat- ed with rivaroxaban, but this was outweighed by the high rate of nonthrombotic events in both study arms, resulting in failure to achieve the primary endpoint of the study. The MARINER trial investigated whether rivaroxaban is superior to placebo in the prevention of venous thromboembolism (VTE) after hospital discharge for medical patients at high risk of VTE. The evaluation showed that the VTE event rate after discharge in patients who had received adequate antithrombotic treatment in hospital was so low that there was no discernible difference. 28 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 2. Research, Development, Innovation Filings and approvals The most important drug candidates in the approval process are shown below. A 25 Main Products Submitted for Approval 1 Projects Indication Damoctocog alpha pegol (long-acting rFVIII) Europe, U.S.A., Japan: Hemophilia A Rivaroxaban U.S.A.: Prevention of major adverse cardiac events (MACE), COMPASS trial Rivaroxaban2 U.S.A.: secondary prophylaxis of acute coronary syndrome (ACS), Rivaroxaban in combination with dual antiplatelet therapy (DAPT), ATLAS trial Larotrectinib (LOXO-101, TRK fusion inhibitor) 3 U.S.A.: Solid tumors with NTRK gene fusions 1 As of August 27, 2018 2 Submitted by Janssen Research & Development, LLC 3 Submitted by Loxo Oncology, Inc. In May 2018, Eylea™ (active ingredient: aflibercept solution for injection into the eye) was approved by the Chinese regulatory authorities for the treatment of visual impairment due to neovascular (wet) age-related macular degeneration (nAMD). Also in May 2018, the United States Food and Drug Administration (FDA) granted priority review status for the development candidate larotrectinib. The registration application refers to the treatment of adult and pediatric cancer patients with locally advanced or metastatic solid tumors in which neurotrophic tyrosine receptor kinase (NTRK) genes that code for the tropomyosin receptor kinase (TRK) receptors have fused with other DNA segments. In August 2018, Bayer filed an application seeking approval of larotrectinib in the European Union as well. In July 2018, Kovaltry™ (active ingredient: octocog alfa) was approved by the Chinese regulatory authori- ties for use in adults and children with hemophilia A for routine prophylaxis, on-demand treatment and perioperative management of bleeding. Kovaltry™ is a full-length recombinant Factor VIII product. In August 2018, the European Commission approved a new treatment approach for Eylea™ that enables early extension of the injection interval for patients with neovascular age-related macular degeneration (nAMD) already in the first year of treatment. The new regimen allows clinicians to extend patients’ individ- ual injection intervals based on visual and/or anatomic outcomes. Also in August 2018, the European Commission approved a combination of Xarelto™ (rivaroxaban) 2.5 mg twice daily plus acetylsalicylic acid (ASA) 75 to 100 mg once daily for the prevention of atherothrombotic events in adults with coronary artery disease (CAD) or symptomatic peripheral artery disease (PAD) at high risk for ischemic events. The E.U. approval is based on the findings from the clinical Phase III COMPASS trial, which demonstrated that rivaroxaban in the specified dose reduced the risk of the composite of stroke, cardiovascular (CV) death and heart attack by a significant 24% (relative risk reduction) compared with ASA 100mg once daily alone in patients with CAD or PAD. Cooperations In May 2018, Bayer and the MD Anderson Cancer Center at the University of Texas in Houston, United States, signed a five-year collaboration agreement to accelerate the development of novel targeted treat- ments based on patient or tumor characteristics for which current therapies have not shown satisfactory clinical efficacy. 29 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 2. Research, Development, Innovation In June 2018, Bayer and the Broad Institute of the U.S. universities MIT and Harvard expanded their strategic research collaboration for the development of new therapies for patients with cardiovascular diseases such as heart failure. Researchers from the Broad Institute and the Bayer Group are working together in a joint Precision Cardiology Laboratory at the Broad Institute in Boston. The collaboration is focused on better understanding cardiovascular diseases on a molecular level and developing new therapies for patients. In August 2018, Bayer and Haplogen GmbH, Austria, entered into a multi-year research collaboration agreement to identify and develop new drug candidates for the treatment of pulmonary diseases such as chronic obstructive pulmonary disease (COPD). Crop Science Research and development pipeline The existing innovation activities of Crop Science are now complemented by the product innovation pipeline of Monsanto. The acquired pipeline includes multiple next generations of insect and weed control biotech plant traits, several new seed treatments to be launched through 2020, and more than 35 projects in the Climate FieldView pipeline. The table below shows Bayer’s current product innovation pipeline: A 26 Product Innovation Pipeline 1 Market launch Product group Indication / crop Product / trait 2019 Seeds Rice Salt and flood tolerance (native trait) 2019 Chemical crop protection Insecticide Tetraniliprole 2019 Chemical crop protection Fungicide Tiviant™ 2019 Seeds Rice Dual disease tolerance (native trait) 1 The product innovation pipeline comprises planned market launches of selected new products. As of August 1, 2018 An updated, integrated pipeline overview will be available in the next Annual Report. Cooperations, new products and registrations We signed the following cooperation agreements in the second quarter; activities related to the newly acquired business have been included since the transaction closed on June 7, 2018. In April we joined with International Finance Corporation (Washington D.C., United States), Netafim Ltd. (Tel Aviv, Israel) and Swiss Re Corporate Solutions Ltd. (Zürich, Switzerland) in launching a global alliance named “Better Life Farming.” The aim is to provide holistic and innovative solutions for smallholder farmers in the developing world with less than two hectares of land to enable them to grow their farms into sus- tainable businesses. In June, Bayer – through Monsanto Company (St. Louis, Missouri, United States) – and Corteva Agrisci- ence™ (Indianapolis, Indiana, United States), the agriculture division of DowDuPont Inc., reached an agreement on an expanded license for Roundup Ready 2 Xtend™ technology in soybeans. Through this license, Corteva Agriscience™ will offer U.S. and Canadian growers additional weed control flexibility through broader access to Roundup Ready 2 Xtend™ technology across its North America seed brand portfolio. Animal Health In July, Bayer Animal Health and Mitsui Chemicals Agro, Inc. (MCAG), Tokyo, Japan, signed a global license agreement to develop and commercialize novel parasiticides for companion animals based on intellectual property from MCAG. 30 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook A 27 Economic Outlook 1 Growth 2017 Growth forecast 2018 World + 3.3% + 3.3% European Union + 2.6% + 2.1% of which Germany + 2.5% + 2.2% United States + 2.3% + 3.0% Emerging Markets 2 + 4.8% + 4.8% 2017 figures restated 1 Real growth of gross domestic product, source: IHS Markit 2 Including about 50 countries defined by IHS Markit as Emerging Markets in line with the World Bank As of July 2018 We continue to expect the global economy to achieve strong growth. However, the risks for the world econ- omy have increased, especially due to the current conflicts over trade policy. We expect greater growth dynamics in the United States, while growth in Europe will likely be lower than in the prior year. As for the Emerging Markets, we anticipate a strong increase in economic output to match the pace of the prior year, while for China we continue to anticipate strong growth at a slightly slower rate than in the prior year. A 28 Economic Outlook for the Segments 1 Growth 2017 Growth forecast 2018 Pharmaceuticals market + 3% + 4% Consumer health market + 3– 4% + 3– 4% Seed and crop protection market + 1% + 2– 3% Animal health market + 2% + 4% 2017 figures restated 1 Bayer’s estimate, except pharmaceuticals; source for pharmaceuticals market: IQVIA Market Prognosis (May 2018); all rights reserved; currency-adjusted As of July 2018 3.1.2 Corporate Outlook Following the closing of the Monsanto acquisition on June 7, 2018, and taking into account the business development described in this report and the potential risks and opportunities, we have revised our expec- tations for fiscal 2018. Our outlook now includes the sales and earnings contributions from Monsanto since the date of acquisi- tion. As the transaction closed later than we had anticipated, 2018 earnings will be lower than we had projected in our February forecast including Monsanto due to the seasonality of the agricultural business. Our outlook takes into account the financing costs for the acquisition of Monsanto shares as well as the higher number of shares of Bayer AG following the capital increases on a pro rata temporis basis. The businesses divested to BASF are excluded as of their respective divestment dates. 31 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks The forecasts are based on the exchange rates as of June 30, 2018, and adjusted for currency effects4 to enhance the comparability of operating performance. We now expect Bayer Group sales of more than €39 billion (previously: below €35 billion), with more than €5 billion attributable to the acquired business. The divestment of selected businesses to BASF will reduce anticipated sales by approximately €1 billion. This forecast now corresponds to a mid-single-digit percent- age increase (previously: low- to mid-single-digit percentage increase) on a currency- and portfolio- adjusted basis. We now expect EBITDA before special items to increase by a low- to mid-single-digit percentage (previ- ously: decline by a low-single-digit percentage). On a currency-adjusted basis, this corresponds to an increase by a high-single-digit percentage (previously: increase by a mid-single-digit percentage). We now expect core earnings per share to come in at between €5.70 and €5.90 (previously: at the prior- year level). On a currency-adjusted basis, this corresponds to a decrease by a high-single-digit percentage (previously: increase by a mid-single-digit percentage). Prior-year core earnings per share were restated to €6.64 to reflect the bonus component of the capital increase with subscription rights, and this is taken into account here. A 29 Forecast for Key Financial Data of the Group for 2018 Closing rates on June 30, 2018 Currency-adjusted Sales More than €39 billion Increase by a mid-single-digit percentage 1 Development of EBITDA before special items Increase by a low- to mid-single-digit percentage Increase by a high-single-digit percentage Development of core earnings per share €5.70 – €5.90 Decrease by a high-single-digit percentage 1 Adjusted for currency and portfolio effects We aim to pay out a dividend for 2018 that is at least at the same level as in the prior year, which would represent an upward deviation from our existing dividend policy (30-40% of core earnings per share as a mathematical basis for calculating the dividend payout). Due to the late closing of the Monsanto acquisi- tion, anticipated core earnings per share for the full year will only include a small contribution from the acquired business. However, we will be able to utilize substantial operating cash flows from the acquired business due to seasonal trends. Bayer is also able to benefit from earnings contributions in the form of expected proceeds from the divestments to BASF and income from the sale of Covestro shares that has already been recognized. Overall, net financial debt at the end of the year will therefore be significantly lower than originally anticipated. Taking into account the cash flows and in view of the successful perfor- mance the combined business is expected to deliver, we want to enable our shareholders to share in our company’s success by paying out an attractive dividend. For Pharmaceuticals, we confirm our previous sales and earnings guidance. For Consumer Health, we confirm our expectations for sales and currency-adjusted EBITDA before special items. As for EBITDA before special items, we now anticipate a decline by a mid-single-digit percentage (previously: decline by a low-single-digit percentage) as a result of currency effects. For Crop Science, we now forecast sales of slightly more than €14 billion (previously: more than €9.5 bil- lion). As previously outlined, this includes a positive sales effect of more than €5 billion from the acquired business as well as a negative effect of approximately €1 billion from the divestment of selected business- es to BASF. We continue to expect a mid-single-digit percentage increase on a currency- and portfolio- 4 Using the average monthly exchange rates from 2017 (see B 4/1) 32 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks adjusted basis. As for EBITDA before special items, we anticipate an increase by a mid-twenties percent- age (previously: mid- to high-single-digit percentage). On a currency-adjusted basis, we now anticipate an increase of around 30% (previously: mid-teens percentage increase). For the Animal Health segment, the Reconciliation and Bayer AG, we confirm our sales and earnings guidance. A 30 Forecast for Other Key Data of the Group for 2018 Updated forecast Forecast as of Feb. 28, 2018 Special charges Special gain1 of around €1.9 billion Special charges of around €0.4 billion Research and development expenses Around €4.9 billion Around €4.1 billion Capital expenditures Around €2.8 billion Around €2.2 billion of which for intangible assets Around €0.6 billion Around €0.6 billion Depreciation and amortization Around €3.0 billion Around €2.2 billion of which on intangible assets Around €2.0 billion Around €1.2 billion Financial result Around minus €1.2 billion Around minus €1 billion Effective tax rate 21.0% 20.0% Net financial debt around €37 billion Net liquidity position 2 1 Mainly comprising income from disposals of certain Crop Science activities as required by antitrust authorities 2 Excluding capital and portfolio measures 3.2 Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal or external developments or events that could significantly impact the achievement of our financial and nonfi- nancial objectives. Bayer regards opportunity and risk management as an integral part of corporate governance. Our risk management process and the opportunity and risk status are outlined in detail in the Annual Report 2017, A 3.2 “Opportunity and Risk Report.” There have not been any material changes to Bayer’s risk profile compared with our description in the Annual Report 2017, without taking the Monsanto acquisition into account. Change in the risk portfolio due to the Monsanto acquisition Monsanto retained responsibility for managing Monsanto-related risks during the reporting period. These risks will be accounted for in our ERM process in the course of the coming integration measures. The fol- lowing risk overview therefore pertains to the risks identified and recently published by Monsanto. The risks were not evaluated with regard to their probability or damage potential. Risks that ceased to exist due to the closing of the transaction are not listed here. The following table shows an allocation of risks reported externally by Monsanto to Bayer’s main risk cate- gories. Each of these risks was allocated solely to what we regard as the primary risk category. The occur- rence of such risks could impact the entire Group and its reputation in the same way as risks pertaining to the original Bayer segments. 33 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks A 31 Material Risk Areas of Bayer and Risks Reported by Monsanto Bayer risk areas Extracts from Monsanto’s external risk report Strategic risks Business transactions Operational performance risks Intellectual property Development and commercialization of pipeline products Fluctuations in commodity prices Production Seasonal working capital needs and indebtedness Safety, quality and compliance risks Regulation of seed biotechnology, agricultural products, and research and manufacturing processes Public understanding and public acceptance of biotechnology and other agricultural products Compliance with quality controls and regulations Legal proceedings 1 External risks Competition Business operations outside the United States Weather, natural disasters, accidents and security breaches (incl. cybersecurity incidents) 1 Significant developments that have occurred in respect of the legal risks since publication of the Annual Report 2017 (Note [32] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks” The sections of Monsanto’s risk report that we currently do not believe were reported on in comparable form in the Bayer Annual Report 2017, A 3.2 “Opportunity and Risk Report,” are described below: Fluctuations in commodity prices Production is contracted with multiple growers at fair value, and the seed is retained in inventory until it is sold. These purchases constitute a significant portion of seed manufacturing costs. Additionally, chemical manufacturing operations use chemical intermediates and energy, which are subject to increases in price as the costs of oil and natural gas increase. Accordingly, increases in commodity prices may negatively affect the cost of goods sold or lead to seed or chemical price increases, which could adversely affect sales. Hedging strategies and raw material supply agreements are applied that contain terms designed to mitigate the risk of short-term changes in commodity prices. However, this is not possible with regard to medium- and long-term increases. Farmers’ incomes are also affected by commodity prices, fluctuations in which could impact the demand for seed and chemical products. 34 Bayer Interim Report as of June 30, 2018 Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks Seasonal working capital needs and current levels of indebtedness Current levels of indebtedness and seasonal working capital needs may reduce financial and operational flexibility. For example, credit is regularly extended to customers in certain areas of the world to enable them to acquire crop production products and seeds at the beginning of their growing seasons. Due to these credit practices as well as the seasonality of sales and costs, short-term debt may need to be issued at certain times of the year to fund cash flow requirements. Levels of short-term debt may be greater to the extent that customer receivables are unable to be collected when due. Overall assessment by the Board of Management Compared with our commentary in the Annual Report 2017, we see no material changes in our risk situa- tion, as we had anticipated an intensification of our risk situation as a result of the acquisition of Monsanto, which had been imminent at the time. Now that the transaction has closed, Monsanto’s risks have been transferred to Bayer. We currently are not aware of any individual risks, risk combinations or risk interdependencies that could endanger the Bayer Group’s continued existence. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2017 (Note [32] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” That section also contains Monsanto risks that appear material from the viewpoint of the Bayer Group. 35 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements as of June 30, 2018 Bayer Group Consolidated Income Statements B 1 € million Q2 2017 Q2 2018 H1 2017 H1 2018 Net sales 8,714 9,481 18,394 18,619 Cost of goods sold (2,783) (3,512) (5,770) (6,421) Gross profit 5,931 5,969 12,624 12,198 Selling expenses (2,831) (2,940) (5,498) (5,449) Research and development expenses (1,097) (1,261) (2,191) (2,301) General administration expenses (493) (573) (953) (1,000) Other operating income 185 185 344 337 Other operating expenses (232) (29) (436) (124) EBIT 1 1,463 1,351 3,890 3,661 Equity-method income (loss) (5) 27 (12) 98 Financial income 100 160 132 530 Financial expenses (464) (509) (785) (820) Financial result (369) (322) (665) (192) Income before income taxes 1,094 1,029 3,225 3,469 Income taxes (258) (216) (682) (710) Income from continuing operations after income taxes 836 813 2,543 2,759 of which attributable to noncontrolling interest 2 6 – 6 of which attributable to Bayer AG stockholders (net income) 834 807 2,543 2,753 Income from discontinued operations after income taxes 641 (8) 1,205 – of which attributable to noncontrolling interest 251 – 441 – of which attributable to Bayer AG stockholders (net income) 390 (8) 764 – Income after income taxes 1,477 805 3,748 2,759 of which attributable to noncontrolling interest 253 6 441 6 of which attributable to Bayer AG stockholders (net income) 1,224 799 3,307 2,753 Shares Weighted average number of shares 2 885,186,889 915,694,644 884,826,889 900,704,047 € Earnings per share From continuing operations Basic 0.94 0.88 2.87 3.06 Diluted 0.94 0.88 2.87 3.06 From discontinued operations Basic 0.44 (0.01) 0.87 0.00 Diluted 0.44 (0.01) 0.87 0.00 From continuing and discontinued operations Basic 1.38 0.87 3.74 3.06 Diluted 1.38 0.87 3.74 3.06 2017 figures restated 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Weighted average number of shares (basic and diluted) restated for all periods prior to June 2018 to reflect the effect of the bonus component of the subscription rights issued as part of the June 2018 capital increase 36 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Comprehensive Income B 2 € million Q2 2017 Q2 2018 H1 2017 H1 2018 Income after income taxes 1,477 805 3,748 2,759 of which attributable to noncontrolling interest 253 6 441 6 of which attributable to Bayer AG stockholders 1,224 799 3,307 2,753 Remeasurements of the net defined benefit liability for post-employment benefit plans 300 82 905 (94) Income taxes (132) 59 (327) 58 Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans 168 141 578 (36) Changes in fair values of equity instruments measured at fair value – 90 – 185 Income taxes – (2) – (2) Other comprehensive income from equity instruments measured at fair value – 88 – 183 Other comprehensive income relating to associates accounted for using the equity method – 17 – 4 Other comprehensive income that will not be reclassified subsequently to profit or loss 168 246 578 151 Changes in fair values of cash flow hedges 10 292 (78) 352 Reclassified to profit or loss (27) (26) 27 (57) Reclassified to goodwill – (37) – (37) Income taxes 8 (75) 23 (83) Other comprehensive income from cash flow hedges (9) 154 (28) 175 Changes in fair values of available-for-sale financial assets (27) – (34) – Reclassified to profit or loss – – – – Income taxes (1) – 8 – Other comprehensive income from available-for-sale financial assets (28) – (26) – Changes in exchange differences recognized on translation of operations outside the eurozone (1,213) 1,021 (1,384) 639 Reclassified to profit or loss – – – – Other comprehensive income from exchange differences (1,213) 1,021 (1,384) 639 Other comprehensive income relating to associates accounted for using the equity method 40 3 47 2 Other comprehensive income that may be reclassified subsequently to profit or loss (1,210) 1,178 (1,391) 816 Total other comprehensive income 1 (1,042) 1,425 (813) 968 of which attributable to noncontrolling interest (86) (1) (63) (5) of which attributable to Bayer AG stockholders (956) 1,426 (750) 973 Total comprehensive income 435 2,230 2,935 3,727 of which attributable to noncontrolling interest 167 5 378 1 of which attributable to Bayer AG stockholders 268 2,225 2,557 3,726 1 Total income and expense items (including reclassifications) that may not or must not be recognized through profit or loss according to other IFRS 37 Bayer Interim Report as of June 30, 2018 Bayer Group Consolidated Statements of Financial Position € million Noncurrent assets Goodwill Other intangible assets Property, plant and equipment Investments accounted for using the equity method Other financial assets Other receivables Deferred taxes Current assets Inventories Trade accounts receivable Other financial assets Other receivables Claims for income tax refunds Cash and cash equivalents Assets held for sale Total assets Equity Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to noncontrolling interest Noncurrent liabilities Provisions for pensions and other post-employment benefits Other provisions Refund liabilities Contract liabilities Financial liabilities Income tax liabilities Other liabilities Deferred taxes Current liabilities Other provisions Refund liabilities Contract liabilities Financial liabilities Trade accounts payable Income tax liabilities Other liabilities Liabilities directly related to assets held for sale Total equity and liabilities Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Financial Position B 3 June 30, 2017 June 30, 2018 Dec. 31, 2017 15,823 37,770 14,751 12,685 38,312 11,674 12,672 13,762 7,633 548 501 4,007 1,402 2,815 1,634 526 783 400 6,332 4,770 4,915 49,988 98,713 45,014 8,459 11,089 6,550 12,077 14,254 8,582 7,233 1,556 3,529 1,652 1,600 1,276 455 617 474 2,773 4,981 7,581 3 3,720 2,081 32,652 37,817 30,073 82,640 136,530 75,087 2,117 2,387 2,117 9,658 18,388 9,658 20,875 26,371 25,026 32,650 47,146 36,801 2,833 73 60 35,483 47,219 36,861 9,618 8,352 8,020 1,631 1,929 1,366 – 233 – – 889 – 14,168 42,593 12,483 505 810 495 985 291 1,116 1,490 7,452 1,153 28,397 62,549 24,633 5,631 2,424 4,344 – 5,920 – – 529 – 5,037 9,536 1,935 5,211 4,861 5,129 935 504 422 1,946 2,319 1,652 – 669 111 18,760 26,762 13,593 82,640 136,530 75,087 38 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows B 4 € million Q2 2017 Q2 2018 H1 2017 H1 2018 Income from continuing operations after income taxes 836 813 2,543 2,759 Income taxes 258 216 682 710 Financial result 369 322 665 192 Income taxes paid (491) (540) (984) (928) Depreciation, amortization and impairments 672 666 1,244 1,174 Change in pension provisions (82) (73) (145) (171) (Gains) losses on retirements of noncurrent assets 14 (40) (36) (60) Decrease (increase) in inventories 31 267 (69) 183 Decrease (increase) in trade accounts receivable 334 1,458 (1,311) 109 (Decrease) increase in trade accounts payable (117) (106) (845) (542) Changes in other working capital, other noncash items 77 (743) 708 (528) Net cash provided by (used in) operating activities from continuing operations 1,901 2,240 2,452 2,898 Net cash provided by (used in) operating activities from discontinued operations 412 – 702 – Net cash provided by (used in) operating activities (total) 2,313 2,240 3,154 2,898 Cash outflows for additions to property, plant, equipment and intangible assets (476) (459) (891) (808) Cash inflows from the sale of property, plant, equipment and other assets 19 23 73 82 Cash inflows from divestments 54 69 54 214 Cash inflows from (outflows for) noncurrent financial assets (42) 1,211 (96) 2,988 Cash outflows for acquisitions less acquired cash – (45,316) (158) (45,316) Interest and dividends received 43 123 63 145 Cash inflows from (outflows for) current financial assets (776) 6,424 (1,359) 2,712 Net cash provided by (used in) investing activities (total) (1,178) (37,925) (2,314) (39,983) Capital contributions – 8,986 – 8,986 Proceeds from shares of Covestro AG 1,045 – 2,505 – Dividend payments (2,361) (2,403) (2,361) (2,403) Issuances of debt 1,424 56,307 1,716 57,328 Retirements of debt (410) (27,156) (1,446) (28,684) Interest paid including interest-rate swaps (275) (361) (389) (444) Interest received from interest-rate swaps 28 373 37 382 Cash outflows for the purchase of additional interests in subsidiaries – – – – Net cash provided by (used in) financing activities (total) (549) 35,746 62 35,165 Change in cash and cash equivalents due to business activities (total) 586 61 902 (1,920) Cash and cash equivalents at beginning of year 2,224 5,338 1,899 7,436 Change in cash and cash equivalents due to changes in scope of consolidation – – – 1 Change in cash and cash equivalents due to exchange rate movements (37) (388) (28) (506) Cash and cash equivalents at end of year 2,773 5,011 2,773 5,011 2017 figures restated 39 Bayer Interim Report as of June 30, 2018 Bayer Group Consolidated Statements of Changes in Equity € million Capital stock Capital reserves Other reserves Dec. 31, 2016 2,117 9,658 18,558 Equity transactions with owners Capital increase / decrease Dividend payments (2,233) Other changes 1,993 Total comprehensive income 2,557 June 30, 2017 2,117 9,658 20,875 Dec. 31, 2017 2,117 9,658 25,026 Adjustment of retained earnings on adoption of IFRS 9 (net of tax) (60) Adjustment of retained earnings on adoption of IFRS 15 (net of tax) 86 Equity transactions with owners Capital increase / decrease 270 8,730 Dividend payments (2,402) Other changes (5) Total comprehensive income 3,726 June 30, 2018 2,387 18,388 26,371 Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Changes in Equity B 5 Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity 30,333 1,564 31,897 (2,233) (129) (2,362) 1,993 1,020 3,013 2,557 378 2,935 32,650 2,833 35,483 36,801 60 36,861 (60) (60) 86 86 9,000 9,000 (2,402) (2,402) (5) 12 7 3,726 1 3,727 47,146 73 47,219 40 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements 41 Notes Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Key Data by Segment B 6 Key Data by Segment Pharmaceuticals Consumer Health Crop Science Animal Health € million Q2 2017 Q2 2018 Q2 2017 Q2 2018 Q2 2017 Q2 2018 Q2 2017 Q2 2018 Net sales (external) 4,304 4,217 1,542 1,413 2,163 3,011 450 453 Change 1 + 4.9% – 2.0% – 0.7% – 8.4% – 14.1% + 39.2% + 5.6% + 0.7% Currency-adjusted change 1 + 4.4% + 2.9% – 2.2% – 1.4% – 15.8% + 46.4% + 4.0% + 7.6% Intersegment sales 11 10 4 1 8 12 1 3 Net sales (total) 4,315 4,227 1,546 1,414 2,171 3,023 451 456 EBIT 1 1,102 1,053 195 157 117 154 107 116 EBIT before special items 1 1,222 1,109 210 156 212 434 107 119 EBITDA before special items 1 1,481 1,363 314 256 317 631 116 128 Net cash provided by operating activities 528 629 297 148 1,170 1,653 97 88 Depreciation, amortization, impairment losses / loss reversals 372 297 112 100 116 199 9 9 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” B 6 continued Key Data by Segment Reconciliation All Other Segments Corporate Functions and Consolidation Group € million Q2 2017 Q2 2018 Q2 2017 Q2 2018 Q2 2017 Q2 2018 Net sales (external) 252 378 3 9 8,714 9,481 Change 1 – 1.6% + 50.0% – – – 1.6% + 8.8% Currency-adjusted change 1 – 0.8% + 52.5% – – – 2.7% + 14.6% Intersegment sales 508 624 (532) (650) – – Net sales (total) 760 1,002 (529) (641) 8,714 9,481 EBIT 1 45 24 (103) (153) 1,463 1,351 EBIT before special items 1 58 36 (102) (140) 1,707 1,714 EBITDA before special items 1 118 93 (99) (136) 2,247 2,335 Net cash provided by operating activities (74) 24 (117) (302) 1,901 2,240 Depreciation, amortization, impairment losses / loss reversals 60 57 3 4 672 666 2017 figures restated 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements 42 Notes B 7 Key Data by Segment Pharmaceuticals Consumer Health Crop Science Animal Health € million H1 2017 H1 2018 H1 2017 H1 2018 H1 2017 H1 2018 H1 2017 H1 2018 Net sales (external) 8,567 8,292 3,143 2,822 5,283 5,872 890 867 Change 1 + 7.2% – 3.2% + 2.3% – 10.2% – 3.1% + 11.1% + 6.7% – 2.6% Currency-adjusted change 1 + 5.8% + 2.8% + 0.2% – 1.8% – 5.4% + 18.4% + 4.4% + 5.4% Intersegment sales 21 19 9 2 16 20 2 5 Net sales (total) 8,588 8,311 3,152 2,824 5,299 5,892 892 872 EBIT 1 2,321 2,216 473 368 1,087 1,046 233 245 EBIT before special items 1 2,477 2,273 497 372 1,219 1,387 233 248 EBITDA before special items 1 2,983 2,778 706 569 1,432 1,673 251 267 Net cash provided by operating activities 1,501 1,861 562 321 491 950 66 101 Depreciation, amortization, impairment losses / loss reversals 652 548 218 197 237 288 18 19 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” B 7 continued Key Data by Segment Reconciliation All Other Segments Corporate Functions and Consolidation Group € million H1 2017 H1 2018 H1 2017 H1 2018 H1 2017 H1 2018 Net sales (external) 504 756 7 10 18,394 18,619 Change 1 – 0.4% + 50.0% – – + 3.0% + 1.2% Currency-adjusted change 1 + 0.6% + 50.3% – – + 1.2% + 7.9% Intersegment sales 1,218 1,219 (1,266) (1,265) – – Net sales (total) 1,722 1,975 (1,259) (1,255) 18,394 18,619 EBIT 1 19 46 (243) (260) 3,890 3,661 EBIT before special items 1 50 66 (240) (244) 4,236 4,102 EBITDA before special items 1 163 180 (234) (236) 5,301 5,231 Net cash provided by operating activities (241) (219) 73 (116) 2,452 2,898 Depreciation, amortization, impairment losses / loss reversals 113 114 6 8 1,244 1,174 2017 figures restated. 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Explanatory Notes Accounting policies The consolidated interim financial statements as of June 30, 2018, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the Interna- tional Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2017 fiscal year, particularly with regard to the main recognition and measurement principles, except where financial reporting standards have been applied for the first time in 2018 or an accounting policy has changed. Financial reporting standards applied for the first time in 2018 IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) were applied for the first time as of January 1, 2018. The effects resulting from their first-time application are detailed in this section. IFRS 9 is the new standard for accounting for financial instruments that Bayer applied in modified form retrospectively for the first time as of January 1, 2018, without restating the prior-year figures, accounting for the aggregate amount of any transition effects by way of an adjustment to equity and presenting the comparative period in line with previous rules. The effects that the first-time application of IFRS 9 and IFRS 15 had on retained earnings and other com- prehensive income in the statement of comprehensive income are detailed in the following tables: B 8 Retained Earnings Reconciliation: IFRS 9 and IFRS 15 € million Retained earnings incl. net income as at December 31, 2017 26,851 Effects of IFRS 9 (43) of which reclassification from other comprehensive income (fair-value measurement of financial instruments) 37 of which loss allowances established for trade accounts receivable (93) of which loss allowances established for other receivables (4) of which loss allowances established for cash and cash equivalents (1) of which deferred taxes 18 Effects of IFRS 15 86 Retained earnings incl. net income as at January 1, 2018 26,894 43 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes B 9 Other Comprehensive Income Reconciliation (Fair-Value Measurement of Financial Instruments) € million Fair-value measurement of financial instruments as at December 31, 2017 98 Reclassifications to retained earnings (37) Remeasurement due to change in measurement category 11 Deferred taxes 9 Fair-value measurement of financial instruments as at January 1, 2018 81 IFRS 9 introduces new provisions for the classification and measurement of financial assets and replaces the current rules on the impairment of financial assets. The new standard requires a change in accounting methods for the effects resulting from a change in the company’s own credit risk for financial liabilities classified at fair value and modifies the requirements for hedge accounting. The classification and meas- urement of financial liabilities are otherwise largely unchanged from the existing regulations. Under IFRS 9, the classification and measurement of financial assets is determined by the company’s business model and the characteristics of the cash flows of each financial asset. In the case of equity in- struments held as of January 1, 2018, that are not held for trading, Bayer has uniformly opted to recognize future changes in their fair value through other comprehensive income in the statement of comprehensive income and to continue to classify these as equity upon the derecognition of the financial instrument. As for new instruments, Bayer can opt to make use of this option on an instrument-by-instrument basis upon recognition, but it must continue to do so thereafter. The 6.8% interest in Covestro acquired from Bayer Pension Trust at the beginning of May 2018 to service the exchangeable bond maturing in 2020 is recog- nized at fair value through profit or loss. As at the date of first-time application, reclassifications primarily resulted from the characteristics of the cash flows from fund shares, investments in limited partnerships, and the loan capital and jouissance right capital (Genussrechtkapital) provided to Bayer Pensionskasse VVaG. These financial instruments were previously reported in the category “available for sale,” with changes in their fair value recognized in other comprehensive income in the statement of comprehensive income. They are now classified as debt in- struments, and changes in their fair values are recognized through profit or loss. 44 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements 45 Notes Changes in the classification and measurement of financial assets led to the following effects as at the date of first-time application: B 10 Financial Assets Reconciliation from IAS 39 to IFRS 9 € million Measurement category in accordance with IAS 39 Carrying amount (IAS 39) as of Dec. 31, 2017 Reclassifi- cation Remeasure- ment due to change in measurement category Remeasure- ment due to implementation of the expected loss model Carrying amount (IFRS 9) as of Jan. 1, 2018 Measurement category in accordance with IFRS 9 Trade accounts receivable Trade accounts receivable Loans and receivables 8,582 (93) 8,489 Measured at amortized cost Other financial assets Other financial assets Loans and receivables 1,731 1,731 Measured at amortized cost Available-for-sale financial assets – debt instruments 34 34 Measured at amortized cost Held-to-maturity financial assets 57 57 Measured at amortized cost Available-for-sale financial assets – equity instruments measured at amortized cost 35 11 46 Equity instruments measured at fair value through OCI (no recycling) Available-for-sale financial assets – equity instruments measured at fair value 191 191 Equity instruments measured at fair value through OCI (no recycling) Available-for-sale financial assets – equity instruments measured at fair value 39 39 Debt instruments measured at fair value through profit or loss Available-for-sale financial assets – debt instruments 2,429 145 2,574 Debt instruments measured at fair value through profit or loss Derivatives that qualify for hedge accounting 296 296 Derivatives that qualify for hedge accounting Derivatives that do not qualify for hedge accounting 351 351 Derivatives that do not qualify for hedge accounting Other receivables Other receivables Loans and receivables 380 (4) 376 Measured at amortized cost Available-for-sale financial assets – debt instruments 46 46 Debt instruments measured at fair value through profit or loss Cash and cash equivalents Cash and cash equivalents Loans and receivables 7,581 (145) (1) 7,435 Measured at amortized cost Total financial assets 21,752 0 11 (98) 21,665 There were no effects on financial liabilities. Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The following table shows the effects of the first-time application of IFRS 9 on retained earnings and other comprehensive income in the statement of other comprehensive income, broken down by measurement category: B 11 Effects of First-Time Application of IFRS 9 on Retained Earnings and Other Comprehensive Income € million Measurement category in accordance with IAS 39 Measurement category in accordance with IFRS 9 Retained earnings effect as of Jan. 1, 2018 OCI effect as of Jan 1, 2018 Trade accounts receivable Trade accounts receivable Loans and receivables Measured at amortized cost (93) Other financial assets Other financial assets Available-for-sale financial assets – equity instruments measured at amortized cost Equity instruments measured at fair value through OCI (no recycling) 11 Available-for-sale financial assets – equity instruments measured at fair value Debt instruments measured at fair value through profit or loss 10 (10) Available-for-sale financial assets – debt instruments Debt instruments measured at fair value through profit or loss 36 (36) Other receivables Other receivables Loans and receivables Measured at amortized cost (4) Available-for-sale financial assets – debt instruments Debt instruments measured at fair value through profit or loss (9) 9 Cash and cash equivalents Cash and cash equivalents Loans and receivables Measured at amortized cost (1) Total financial assets (61) (26) 46 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The following table shows the effects of the first-time application of IFRS 9 on financial assets and liabilities that are based on unobservable inputs and are measured at fair value (Level 3). The development of these assets and liabilities in the first half of 2018 is presented in Table B 27. B 12 Reconciliation of Financial Assets and Liabilities Measured at Fair Value (Level 3) from IAS 39 to IFRS 9 € million Measurement category in accordance with IAS 39 Carrying amount (IAS 39) as of Dec. 31, 2017 Reclassifi- cation due to change in fair value hierarchy Remeasure- ment due to change in measure- ment category Carrying amount (IFRS 9) as of Jan. 1, 2018 Measurement category in accordance with IFRS 9 Other financial assets Other financial assets Available-for-sale financial assets – equity instruments measured at amortized cost 35 11 46 Equity instruments measured at fair value through OCI (no recycling) Available-for-sale financial assets – equity instruments measured at fair value 18 4 22 Equity instruments measured at fair value through OCI (no recycling) Available-for-sale financial assets – equity instruments measured at fair value 18 18 Debt instruments measured at fair value through profit or loss Available-for-sale financial assets – debt instruments 757 757 Debt instruments measured at fair value through profit or loss Derivatives 10 10 Derivatives Other receivables Other receivables Available-for-sale financial assets – debt instruments 46 46 Debt instruments measured at fair value through profit or loss Total financial assets (Level 3) 849 39 11 899 Total financial assets (Level 3) Other liabilities Other liabilities Measured at fair value through profit or loss (non-derivative) (7) (7) Measured at fair value through profit or loss (non-derivative) Total financial liabilities (Level 3) (7) (7) Total financial liabilities (Level 3) Loss allowances for expected credit losses are recognized for financial assets measured at amortized cost. Expected lifetime credit losses for trade accounts receivable are recognized using the simplified approach. This is based on loss rates calculated from historical and forward-looking data, taking into account the business model, the respective customer and the economic environment of the geographical region. Re- ceivables that are overdue by a significant amount of time – in some cases exceeding 90 days due to the customer structure – and receivables from debtors against which insolvency or similar proceedings have been initiated are tested individually for impairment. Expected credit losses for other financial assets are determined upon their first-time recognition primarily on the basis of credit default swaps, with expected losses from defaults within the next 12 months calculated using the Monte Carlo simulation method. In the event of a significant increase in default risk, expected lifetime credit losses are taken into account. 47 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The effects from the increase in loss allowances from the first-time application of the new impairment model are presented in the following table: B 13 Reconciliation of Loss Allowances € million Measurement category in accordance with IAS 39 Closing loss allowances under IAS 39 as at Dec. 31, 2017 Remeasurement due to implementation of the expected loss model under IFRS 9 Opening loss allowances under IFRS 9 as at Jan 1, 2018 Measurement category in accordance with IFRS 9 Trade accounts receivable Trade accounts receivable Loans and receivables (425) (93) (518) Measured at amortized cost Other receivables Other receivables Loans and receivables (3) (4) (7) Measured at amortized cost Cash and cash equivalents Cash and cash equivalents Loans and receivables (1) (1) Measured at amortized cost Total (428) (98) (526) Changes in the fair values of financial liabilities measured at fair value through profit or loss resulting from Bayer’s own credit risk are now recognized through other comprehensive income in the statement of com- prehensive income rather than in the income statement. At Bayer, this change principally affects the debt instruments (exchangeable bond) issued in June 2017 which also can be exchanged into Covestro shares. As at the transition date, this accounting change did not have any material effects. For hedge accounting, Bayer has opted to prospectively apply IFRS 9 from January 1, 2018. If only the intrinsic value of an option is designated as a hedging instrument in a hedging relationship, IFRS 9 requires that changes in the fair value of the time value of the options during the hedging period initially be recog- nized as other comprehensive income in the statement of comprehensive income. The release of the ac- cumulated amounts, either in the form of a basis adjustment or directly through profit or loss, depends on the type of hedged transaction. In contrast to the other rules on hedge accounting, the revised accounting method is to be applied retrospectively. As at the transition date, these changes did not have any material impact on the presentation of the Group’s financial position and results of operations. In October 2017, the IASB published an amendment to IFRS 9 (Financial Instruments) under the title “Pre- payment Features with Negative Compensation.” It also published a clarification regarding the accounting for a modification of a financial liability that does not result in its derecognition. For these nonsubstantial modifications, modification gains or losses – including the costs of the modification – must be immediately recognized in profit or loss. This amendment to IFRS 9 is to be applied for annual periods beginning on or after January 1, 2018. As there were no past nonsubstantial modifications of liabilities, this amendment did not have any impact on the presentation of the Group’s financial position and results of operations. A bond exchange program constituting a nonsubstantial modification was initiated in June 2018 for the Monsanto bonds acquired as part of the Monsanto acquisition. In this connection, expenses of €13 million were rec- ognized in profit or loss in the second quarter of 2018. 48 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The IASB issued IFRS 15 (Revenues from Contracts with Customers) in May 2014 and provided clarifica- tions to the standard in April 2016. Both the standard and the clarifications have been endorsed by the European Union. IFRS 15 replaces the current IAS 18 (Revenue) and IAS 11 (Construction Contracts) reve- nue recognition standards and the related interpretations, and is applicable for annual reporting periods beginning on or after January 1, 2018. The new standard establishes a five-step model related to revenue recognition from contracts with customers. Under IFRS 15, revenue is recognized at amounts that reflect the consideration that an entity expects to be entitled to in exchange for transferring goods or services to a customer. Revenue is recognized when (or as) the entity transfers control of goods or services to a cus- tomer either over time or at a point in time. In addition, IFRS 15 clarifies the allocation of individual topics to (new) line items in the statement of financial position and to functional cost items in the income state- ment, and whether gross or net amounts are to be presented. As of January 1, 2018, Bayer transitioned to IFRS 15 on the basis of the modified retrospective method, accounting for the aggregate amount of the transition effects by way of an adjustment to retained earnings as of January 1, 2018, and presenting the comparative period in line with previous rules. Bayer has elected to retrospectively apply the standard only to contracts that are not completed contracts at the date of first- time application, and has opted to reflect the aggregate effect of all contract modifications that occurred prior to the date of first-time application in accordance with IFRS 15.C7A(b). The adoption of IFRS 15 has led to the following effects: Changes in the timing of recognition // IFRS 15 requires catch-up adjustments to revenue when milestone payments for right-to-access licenses become unconstrained, leading to earlier revenue recognition. This change resulted in an increase in retained earnings by €64 million after deferred taxes and a decrease in contract liabilities (under IAS 18, amounts were presented as deferred income in other liabilities) by €86 million. For the Pharmaceuticals segment, the introduction of IFRS 15 translates into a €5 million decrease in first-half net sales and a €3 million decrease in second-quarter net sales, as well as a €2 million decrease in first- half deferred tax expense and a €1 million decrease in second-quarter deferred tax expense compared with IAS 18. // IFRS 15 in conjunction with IAS 38 (Intangible Assets) generally requires the recognition of the purchase price related to a brand divestment net of associated carrying amounts in other operating income or expenses upon transfer of control. Some cases were identified where the purchase price was deferred under former policy in line with IAS 18, but would have been recognized in income earlier under IFRS 15, leading to a €21 million increase in retained earnings after deferred taxes and a €27 million decrease in contract liabilities (under IAS 18, amounts were presented as deferred income in other liabilities) on the date of transition. For the Pharmaceuticals and Animal Health segments, the introduction of IFRS 15 translates into a combined €23 million decrease in first-half net sales and a combined €8 million decrease in second-quarter net sales, as well as a €5 million decrease in first-half deferred tax expense and a €2 million decrease in second-quarter deferred tax expense as compared with IAS 18. // Including the effects described individually, the change in the timing of revenue recognition led to a €9 million decrease in first-half earnings and an €8 million decrease in second-quarter earnings as compared to revenue recognition under IAS 18. These earnings effects pertain to the Bayer Group prior to the first-time consolidation of the former Monsanto Group, whose financial information for the reference periods was prepared according to U.S. accounting standards and therefore does not permit an appropriate comparison with net sales as determined according to IAS 18. 49 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Presentational changes Bayer also changed the presentation of certain items in the statement of financial position and income statements to reflect the methodology of IFRS 15. // IFRS 15 changes the presentation of expected product returns within the statement of financial position from net to gross in cases where returns are expected to be resalable and Bayer will refund the purchase price. The right-of-return asset is reflected in inventories at the former carrying amount less expected costs to recover and potential impairment. The refund liabilities include amounts expected to be refunded upon product return. Prior to the adoption of IFRS 15, Bayer presented the margin of expected returns on a net basis in “other provisions.” In the statement of cash flows, the increase in inventories to be recorded under IFRS 15 is set against a decline in “other working capital, other noncash items.” // Amounts already received (or receivable), but expected to be refunded to the customer are presented as “refund liabilities” under IFRS 15. These amounts typically relate to expected volume rebates and expected product returns and were previously presented as “other provisions.” // Advance payments received (or receivable) in connection with product deliveries were previously recognized in trade accounts payable. Advance payments received (or receivable) relating to right-to- access licenses and service contracts recognized over time were previously presented under “deferred income” in “other liabilities.” With the introduction of IFRS 15, both are presented as contract liabilities. Within the statement of cash flows, the decline in trade accounts payable resulting from the presentational change is set against a corresponding change in “other working capital, other noncash items.” The effects of applying the modified retrospective method on the opening statement of financial position as of January 1, 2018, are shown in table B 14. The impact of the transition from IAS 18 to IFRS 15 on the consolidated statement of financial position as at June 30, 2018, which includes the former Monsanto Group, is presented in table B 15. 50 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes B 14 IFRS 15 Accounting Changes: Consolidated Statements of Financial Position as of January 1, 2018 Dec. 31, 2017 Jan. 1, 2018 Before accounting changes Presentational changes Changes in timing of recognition After accounting changes € million Noncurrent assets Deferred taxes 4,915 (5) 4,910 Other noncurrent assets 40,099 40,099 45,014 (5) 45,009 Current assets Inventories 6,550 76 6,626 Other current assets 23,523 23,523 30,073 76 30,149 Total assets 75,087 76 (5) 75,158 Equity Other reserves 25,026 86 25,112 Other equity 11,835 11,835 36,861 86 36,947 Noncurrent liabilities Other provisions 1,366 (152) 1,214 Refund liabilities – 152 152 Contract liabilities – 905 (78) 827 Other liabilities 1,116 (905) 211 Deferred taxes 1,153 24 1,177 Other noncurrent liabilities 20,998 20,998 24,633 0 (54) 24,579 Current liabilities Other provisions 4,344 (2,197) 2,147 Refund liabilities – 2,275 2,275 Contract liabilities – 740 (37) 703 Trade accounts payable 5,129 (561) 4,568 Other liabilities 1,652 (181) 1,471 Other Current liabilities 2,468 2,468 13,593 76 (37) 13,632 Total equity and liabilities 75,087 76 (5) 75,158 51 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes B 15 Reconciliation IFRS 15 to IAS 18 for Presentational Changes: Consolidated Statements of Financial Position as of June 30, 2018 IFRS 15 June 30, 2018 Presentational changes IAS 18 June 30, 2018 € million Noncurrent assets Deferred taxes 4,770 4,770 Other noncurrent assets 93,943 93,943 98,713 98,713 Current assets Inventories 11,089 (146) 10,943 Other current assets 26,728 26,728 37,817 (146) 37,671 Total assets 136,530 (146) 136,384 Equity Other reserves 26,371 26,371 Other equity 20,848 20,848 47,219 47,219 Noncurrent liabilities Other provisions 1,929 233 2,162 Refund liabilities 233 (233) – Contract liabilities 889 (889) – Other liabilities 291 750 1,041 Deferred taxes 7,452 7,452 Other noncurrent liabilities 51,755 51,755 62,549 (139) 62,410 Current liabilities Other provisions 2,424 5,774 8,198 Refund liabilities 5,920 (5,920) – Contract liabilities 529 (529) – Trade accounts payable 4,861 524 5,385 Other liabilities 2,319 144 2,463 Other current liabilities 10,709 10,709 26,762 (7) 26,755 Total equity and liabilities 136,530 (146) 136,384 Published financial reporting standards that have not yet been applied In January 2016, the IASB published the new standard for lease accounting, IFRS 16 (Leases), which re- places the existing rules contained in IAS 17 (Leases), IFRIC 4 (Determining Whether an Arrangement Con- tains a Lease), SIC-15 (Operating Leases – Incentives) and SIC-27 (Evaluating the Substance of Transac- tions Involving the Legal Form of a Lease). It was endorsed by the European Union in October 2017. The new standard is to be applied for annual periods beginning on or after January 1, 2019. The standard introduces a single lessee accounting model, requiring lessees to recognize assets for granted rights of use and corresponding lease liabilities. It will eliminate the current requirement for lessees to classify lease contracts as either operating leases – without recognizing the respective assets or liabilities – or as finance leases. However, IFRS 16 contains optional recognition exemptions. As in the previous standard, IAS 17, lessors still have to differentiate between finance and operating leases. 52 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Bayer will apply IFRS 16 for the first time as of January 1, 2019, retrospectively and without restating the prior-year figures, accounting for the aggregate amount of any transition effects by way of an adjustment to equity and presenting the comparative period in line with previous rules. In this connection, various practical expedients can be applied as of the transition date for lease agreements in which a Bayer com- pany is the lessee. Bayer will exercise the option of exempting intangible assets from the scope of applica- tion of IFRS 16. A Group-wide project is steering the implementation of this new standard. The analysis of the quantitative impact of IFRS 16 on the Group’s financial position and results of operations has not yet been completed. The following effects are anticipated: Instead of the minimum lease payments arising from operating leases being presented under other financial commitments as at present, application of IFRS 16 will increase non- current assets by requiring the recognition of rights of use assets. Similarly, financial liabilities will be in- creased by recognition of the corresponding lease liabilities. In the statement of comprehensive income, the amortization of rights of use assets and the interest expense for the liabilities will be recognized in place of the expenses for operating leases. In the statement of cash flows, IFRS 16 will probably lead to an im- provement in the operating cash flow by reducing cash outflows for operating activities, while the repayment component of lease payments and the interest expense will be recognized in the financing cash flow. The specific quantitative effects of the first-time application depend partly on the development of the in- cremental borrowing rate as of January 1, 2019, the composition of the lease portfolio as of that date, and the assessment then to be made as regards the exercise of extension or termination options, for instance. An assessment also has not yet been completed as to whether and how options and exemption rules will be applied. In June 2017, the IASB published IFRIC Interpretation 23 (Uncertainty over Income Tax Treatments) to clarify uncertainty relating to the accounting treatment of income taxes. IFRIC 23 is to be applied for annu- al periods beginning on or after January 1, 2019. It has not yet been endorsed by the European Union. Bayer is currently evaluating the impact the amendments will have on the presentation of its financial posi- tion and results of operations. Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: B 16 Exchange Rates for Major Currencies Closing rate Average rate €1 Dec. 31, 2017 June 30, 2017 June 30, 2018 H1 2017 H1 2018 BRL Brazil 3.98 3.76 4.48 3.43 4.13 CAD Canada 1.51 1.48 1.54 1.44 1.55 CHF Switzerland 1.17 1.09 1.16 1.08 1.17 CNY China 7.81 7.73 7.72 7.42 7.70 GBP United Kingdom 0.89 0.88 0.89 0.86 0.88 JPY Japan 135.01 127.72 128.93 121.60 131.61 MXN Mexico 23.66 20.57 22.86 20.99 23.07 RUB Russia 69.41 67.47 73.10 62.69 71.84 USD United States 1.20 1.14 1.17 1.08 1.21 Due to the economic situation in Argentina, we are in the process of assessing whether to apply IAS 29 for Argentina. 53 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The most important interest rates used to calculate the present value of pension obligations are given below: B 17 Discount Rate for Pension Obligations % Dec. 31, 2017 March 31, 2018 June 30, 2018 Germany 1.90 1.90 1.90 United Kingdom 2.50 2.60 2.80 United States 3.40 3.80 4.10 Bayer uses the Heubeck mortality tables to calculate pension obligations in Germany. The RT 2005 G tables were used in recent years. However, we have now switched to the RT 2018 G tables, as we believe that basing calculations on these new tables provides a more appropriate presentation of the actual eco- nomic impact on the respective closing date. If we had not switched to the Heubeck RT 2018 G tables, provisions would have been €364 million lower. When determining the discount rate for measuring pension obligations, we previously applied the Macauley Duration method as part of our calculations. However, Bayer decided to switch to the uniform discount rate method, which is used more frequently in the market and is mathematically superior. If we had not switched, the discount rate as of June 30, 2018, would have been 10 basis points lower, which would have led to provisions being €361 million higher. Segment reporting As of June 30, 2018, the Bayer Group comprises the four reportable segments Pharmaceuticals, Consumer Health, Crop Science and Animal Health. The following table shows the reconciliation of EBITDA before special items of the above-mentioned seg- ments and the reconciliation to income before income taxes of the Group from continuing operations: B 18 Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million Q2 2017 Q2 2018 H1 2017 H1 2018 EBITDA before special items of segments 2,346 2,471 5,535 5,467 EBITDA before special items of Corporate Functions and Consolidation (99) (136) (234) (236) EBITDA before special items1 2,247 2,335 5,301 5,231 Depreciation, amortization and impairment losses before special items of segments (537) (617) (1,059) (1,121) Depreciation, amortization and impairment losses before special items of Corporate Functions and Consolidation (3) (4) (6) (8) Depreciation, amortization and impairment losses before special items (540) (621) (1,065) (1,129) EBIT before special items of segments 1,809 1,854 4,476 4,346 EBIT before special items of Corporate Functions and Consolidation (102) (140) (240) (244) EBIT before special items1 1,707 1,714 4,236 4,102 Special items of segments (243) (350) (343) (425) Special items of Corporate Functions and Consolidation (1) (13) (3) (16) Special items1 (244) (363) (346) (441) EBIT of segments 1,566 1,504 4,133 3,921 EBIT of Corporate Functions and Consolidation (103) (153) (243) (260) EBIT1 1,463 1,351 3,890 3,661 Financial result (369) (322) (665) (192) Income before income taxes 1,094 1,029 3,225 3,469 2017 figures restated 1 For definition see Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 54 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2018, included 421 companies (December 31, 2017: 237 companies). Nine (December 31, 2017: eight) joint ventures and four (December 31, 2017: four) associates were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). As the parent company of the Covestro Group, Covestro AG was accounted for in the consolidated financial statements using the equity method until May 2018. Since May 2018, Bayer has been presenting its interest in Covestro as an equity instrument. Capital increase On April 16, 2018, the investment company Temasek subscribed to 31 million new shares of Bayer at an issue price that was close to market prices (total gross proceeds of around €3 billion). This corresponded to around 3.6% of the capital stock as of the acquisition date. The transaction increased Temasek’s inter- est in Bayer AG to approximately 4%. On June 3, 2018, with the consent of the Supervisory Board, the Board of Management of Bayer AG re- solved to execute a capital increase out of authorized capital against cash contributions and with subscrip- tion rights for existing Bayer stockholders. For this purpose, Bayer issued 74,604,156 new registered (no- par value) shares with an entitlement to dividends as of January 1, 2018. For every 23 Bayer shares they held, stockholders were able to acquire two new shares at a subscription price of €81.00 per new share by way of indirect subscription rights. This option was exercised for 73,343,177 shares. The 1,261,039 shares not subscribed to were purchased by institutional investors at an average placement price of €96.6437 per share as part of a private placement. After deducting transac- tion costs, net proceeds totaled around €6 billion. Together with the mandatory convertible notes issued in November 2016, the two capital increases con- clude the equity component, announced in September 2016, to finance the acquisition of Monsanto. Acquisitions, divestments and discontinued operations Acquisitions Bayer acquired 100% of the outstanding shares of Monsanto Company, St. Louis, Missouri, United States (Monsanto) on June 7, 2018. The acquisition of Monsanto brings together two strong and highly comple- mentary businesses: Bayer’s innovative chemical and biological crop protection portfolio and Monsanto’s exceptional expertise in the field of seeds and traits. Bayer is now a leader in the agricultural industry with a clear commitment to innovation and sustainability – for the benefit of its customers and society. In addi- tion to leveraging its employees’ extensive expertise in agriculture, Bayer also has the strongest portfolio of seed and crop protection products for a wide range of crops and indications, the best research and devel- opment platform and the leading digital farming business. Among the production sites maintained by Monsanto are facilities in St. Louis, Luling, Muscatine and Soda Springs (all United States), Antwerp (Belgium), Zarate (Argentina) and Camacari (Brazil). Monsanto’s portfo- lio of established brands includes DEKALB™, Asgrow™ and Roundup™. The purchase price of €48,029 million pertained mainly to intangible assets for technologies in the areas of seeds and traits (use- ful lives of between 9 and 30 years), herbicides (useful lives of 20 years) and digital platforms (useful lives of 15 years), as well as for R&D projects, brands (useful lives of between 10 and 30 years), property, plant and equipment, inventories and goodwill. No value was assigned to the company name “Monsanto.” The goodwill included expected synergies in administration processes and infrastructure, including cost savings in the cost of goods, selling, R&D and general administration functions, as well as expected sales synergies resulting from the combined offering of products. The goodwill is non-tax-deductible. 55 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Monsanto contributed €543 million to sales of the Bayer Group in the second quarter. An after-tax loss of €165 million was recorded for the acquired businesses since the date of first-time consolidation. The purchase price allocation for Monsanto currently remains incomplete pending compilation and review of the relevant financial information. It is therefore possible that changes will be made in the allocation of the purchase price to the individual assets and liabilities. In connection with its acquisition of Monsanto, Bayer had to submit a takeover offer for the noncontrolling interest in the company Monsanto India Limited. This offer was published in June. As of June 30, 2018, the noncontrolling interest is presented as a liability due to the offer made. The following bonds with total nominal volumes of US$15 billion and €5 billion in total were issued in June 2018 to finance the acquisition: B 19 Bonds and Notes Issuer Coupon (%) Nominal volume Issue date Maturity date Bayer U.S. Finance II LLC, U.S.A. 3.5 US$1,250 million Jun 25, 2018 Jun 25, 2021 3 month USD LIBOR + 0.63 US$1,250 million Jun 25, 2018 Jun 25, 2021 3.875 US$2,250 million Jun 25, 2018 Dec 15, 2023 3 month USD LIBOR + 1.01 US$1,250 million Jun 25, 2018 Dec 15, 2023 4.25 US$2,500 million Jun 25, 2018 Dec 15, 2025 4.375 US$3,500 million Jun 25, 2018 Dec 15, 2028 4.625 US$1,000 million Jun 25, 2018 Jun 25, 2038 4.875 US$2,000 million Jun 25, 2018 Jun 25, 2048 Bayer Capital Corporation B.V., Netherlands 3 month EURIBOR + 0.55 €750 million Jun 26, 2018 Jun 26, 2022 0.625 €1,000 million Jun 26, 2018 Dec 15, 2022 1.5 €1,750 million Jun 26, 2018 Jun 26, 2026 2.125 €1,500 million Jun 26, 2018 Dec 15, 2029 As part of the acquisition, bonds with a nominal volume of US$6.9 billion were taken over from Monsanto. On May 2, Bayer increased its interest in the joint venture Bayer Zydus Pharma Private Limited, Thane, India, from 50% to 75% plus one share. A purchase price of €28 million was agreed. Bayer is obligated to purchase the remaining 25% minus one share of Bayer Zydus Pharma by 2021 and has recognized a liabil- ity of €9 million in connection with this obligation. As a result, the accounting method used for this busi- ness changed from the equity method to full consolidation, with 100% of the shares of Bayer Zydus Phar- ma being consolidated. Remeasurement of the shares previously accounted for using the equity method resulted in an amount of €18 million. The gain of €15 million resulting from the derecognition of the shares previously accounted for using the equity method was recognized in the financial result. The purchase price pertained mainly to goodwill that in turn was based primarily on a control premium. Bayer Zydus Pharma is active in core segments of the Indian pharmaceutical market and focuses on women’s health, diagnostic imaging, cardiovascular disease, diabetes treatment and oncology. This acquisition increases Bayer’s presence in the Indian pharmaceutical market. 56 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The effects of these transactions on the Group’s assets and liabilities are shown in the table. Net of ac- quired cash and cash equivalents, they resulted in the following cash outflow: B 20 Acquired Assets, Assumed Liabilities and Adjustments (Fair Values at the Respective Acquisition Dates) € million H1 2018 of which Monsanto of which Zydus Goodwill 23,046 22,998 48 Patents and technologies 17,350 17,350 – Trademarks 4,195 4,195 – Marketing and distribution rights 821 821 – R&D projects 4,300 4,300 – Other rights 394 394 – Property, plant and equipment 6,293 6,293 – Investments accounted for using the equity method 52 52 – Other financial assets 253 250 3 Inventories 4,885 4,882 3 Receivables 7,203 7,201 2 Other assets 27 27 – Cash and cash equivalents 2,659 2,657 2 Deferred tax assets 1,550 1,548 2 Provisions for pensions and other post-employment benefits (367) (367) – Other provisions (1,530) (1,529) (1) Refund liabilities (3,322) (3,321) (1) Financial liabilities (8,657) (8,656) (1) Other liabilities (2,872) (2,870) (2) Deferred tax liabilities (8,019) (8,019) – Net assets 48,261 48,206 55 Changes in noncontrolling interest (177) (177) – Remeasurement of previously held equity interest and net assets (18) – (18) Consideration transferred 48,066 48,029 37 Acquired cash and cash equivalents (2,659) (2,657) (2) Noncash components (91) (82) (9) Net cash outflow for acquisitions 45,316 45,290 26 The fair value of the acquired receivables in the amount of €7.2 billion primarily comprises trade accounts receivable. As of the date of the acquisition, the gross amount of the contractual receivables amounted to €7.7 billion, with €0.4 billion of this figure assessed as irrecoverable. If the aforementioned acquisitions had already been made as of January 1, 2018, the Bayer Group would have had total sales of €25,321 million. Income after income taxes would have been €2,712 million, and earnings per share €2.85. This takes into account significant effects relating to financing costs and pur- chase price allocations for the half year. In particular, the remeasurement of inventories at fair value and their subsequent utilization as well as planned amortization had a negative impact. In addition, no adjust- ment for special items is included. 57 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Divestments and discontinued operations Bayer ceded de facto control of Covestro and deconsolidated the company at the end of September 2017. As of the loss of control, Covestro fulfills the conditions for presentation as a discontinued operation. In connection with the sale of Covestro AG shares in 2017, Bayer AG entered into derivative contracts. These resulted in Bayer AG retaining economic exposure to the price of Covestro AG shares until the second quarter of 2018. In the second quarter of 2018, Bayer recognized an after-tax loss of €8 million from these contracts: B 21 Income Statements for Discontinued Operations Covestro Diabetes Care Total € million Q2 2017 Q2 2018 Q2 2017 Q2 2018 Q2 2017 Q2 2018 Net sales 3,479 – 184 – 3,663 – Cost of goods sold (2,336) – (7) – (2,343) – Gross profit 1,143 – 177 – 1,320 – Selling expenses (344) – (1) – (345) – Research and development expenses (68) – – – (68) – General administration expenses (115) – (3) – (118) – Other operating income / expenses 72 (2) – – 72 (2) EBIT 1 688 (2) 173 – 861 (2) Financial result (36) – – – (36) – Income before income taxes 652 (2) 173 – 825 (2) Income taxes (159) (6) (25) – (184) (6) Income after income taxes 493 (8) 148 – 641 (8) of which attributable to noncontrolling interest 251 – – – 251 – of which attributable to Bayer AG stockholders (net income) 242 (8) 148 – 390 (8) 1 For definition see Bayer Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Income from discontinued operations in the first half of 2018 was as follows: B 22 Income Statements for Discontinued Operations Covestro Diabetes Care Total € million H1 2017 H1 2018 H1 2017 H1 2018 H1 2017 H1 2018 Net sales 7,043 – 312 – 7,355 – Cost of goods sold (4,694) – (14) – (4,708) – Gross profit 2,349 – 298 – 2,647 – Selling expenses (690) – (2) – (692) – Research and development expenses (132) – – – (132) – General administration expenses (227) – (5) – (232) – Other operating income / expenses 77 8 5 – 82 8 EBIT 1 1,377 8 296 – 1,673 8 Financial result (89) – – – (89) – Income before income taxes 1,288 8 296 – 1,584 8 Income taxes (330) (8) (49) – (379) (8) Income after income taxes 958 0 247 – 1,205 0 of which attributable to noncontrolling interest 441 0 – – 441 0 of which attributable to Bayer AG stockholders (net income) 517 0 247 – 764 0 1 For definition see Bayer Annual Report 2017, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 58 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes In the second quarter of 2018, the discontinued operations affected the Bayer Group statement of cash flows as follows: B 23 Statements of Cash Flows for Discontinued Operations Covestro Diabetes Care Total € million Q2 2017 Q2 2018 Q2 2017 Q2 2018 Q2 2017 Q2 2018 Net cash provided by (used in) operating activities 415 – (3) – 412 – Net cash provided by (used in) investing activities (275) – – – (275) – Net cash provided by (used in) financing activities (116) – 3 – (113) – Change in cash and cash equivalents 24 – – – 24 – The effect of discontinued operations on the statements of cash flows in the first half of 2018 was as follows: B 24 Statements of Cash Flows for Discontinued Operations Covestro Diabetes Care Total € million H1 2017 H1 2018 H1 2017 H1 2018 H1 2017 H1 2018 Net cash provided by (used in) operating activities 690 – 12 – 702 – Net cash provided by (used in) investing activities (387) – – – (387) – Net cash provided by (used in) financing activities (117) – (12) – (129) – Change in cash and cash equivalents 186 – – – 186 – As no cash was assigned to the discontinued operation Diabetes Care, the balance of the cash provided is deducted again in financing activities. Assets held for sale In connection with the acquisition of Monsanto, Bayer signed an agreement with BASF on October 13, 2017, concerning the sale of selected Crop Science businesses. The businesses to be sold comprised Bayer’s global glufosinate ammonium business and the related LibertyLink™ technology for herbicide tol- erance and a substantial part of the field crop seed business, including the related research and develop- ment capabilities. The seeds business to be divested included the global cotton seed business (excluding India and South Africa), the North American and European canola seed business, and the soybean seed business. In this connection, Bayer signed a further agreement with BASF on April 23, 2018, comprising its entire vegetable seeds business, its R&D platform for hybrid wheat, its remaining canola seed business, three research projects in the area of nonselective herbicides, its global digital farming business and business activities in the field of seed treatments. All of the transactions closed on August 1, 2018, apart from the divestment of the vegetable seed busi- ness, which closed on August 16, 2018. The total base purchase price of €7.6 billion before tax is subject to purchase price adjustments typical for such transactions. In accordance with the conditions imposed by antitrust authorities, the divestment of Crop Science busi- nesses to BASF also comprises further significant obligations by Bayer that will be fulfilled over a number of years subsequent to the date of divestment. Another one of these conditions is for deliveries under the supply agreement (finished products and active ingredients) to be made at prices based on the respective variable costs. The difference between these and customary sales prices will be recognized as deferred income in the statement of financial position, and this will be dissolved as the obligations are fulfilled. 59 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes On July 27, 2018, Bayer signed an agreement to divest its prescription dermatology business to LEO Pharma A/S, Ballerup, Denmark. Subject to the satisfaction of customary closing conditions, the business will be transferred on September 4, 2018, for the United States and during the second half of 2019 for all other markets. The portfolio being divested comprises prescription brands including Advantan™, Skinoren™ and Travocort™. The base purchase price amounts to €58 million for the U.S. business and €555 million for the rest of the global business and is subject to customary purchase price adjustments. The assets and liabilities held for sale are presented below: B 25 Assets and Liabilities Held for Sale € million June 30, 2018 Goodwill 800 Other intangible assets 440 Property, plant and equipment 1,384 Other assets 456 Deferred taxes 163 Inventories 447 Cash and cash equivalents 30 Assets held for sale 3,720 Provisions for pensions and other post-employment benefits 40 Other provisions 467 Other liabilities 107 Deferred taxes 55 Liabilities directly related to assets held for sale 669 On June 30, 2018, the Pharmaceuticals segment sold its MK Generics business in Central America and the Caribbean to Tecnoquímicas S.A. The divested business includes the Bonima production plant in El Salvador. The base purchase price was €44 million. Financial instruments The following table shows the carrying amounts and fair values of financial assets and liabilities by catego- ry of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the state- ments of financial position. Since the line items “Trade accounts receivable,” “Other receivables” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables or advance payments for services to be received in the future), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities.” The transition effects from the reclassification and remeasurement of financial assets upon the first-time application of IFRS 9 are detailed in the section “Financial reporting standards applied for the first time in 2018.” 60 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements 61 Notes B 26 Carrying Amounts and Fair Values of Financial Instruments June 30, 2018 Carried at amortized cost Carried at fair value 1] [Fair value for information Nonfinancial assets / liabilities Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the statement of financial position Trade accounts receivable 14,048 206 14,254 Carried at amortized cost 14,048 14,048 Nonfinancial assets 206 206 Other financial assets 153 2,458 696 1,064 4,371 Carried at amortized cost 153 [153] 153 Carried at fair value through profit or loss 2,165 137 857 3,159 Carried at fair value through OCI (no recycling) 292 186 478 Derivatives 1 559 21 581 Other receivables 429 53 1,901 2,383 Carried at amortized cost 429 [429] 429 Carried at fair value through profit or loss 53 53 Nonfinancial assets 1,901 1,901 Cash and cash equivalents 4,981 4,981 Carried at amortized cost 4,981 [4,981] 4,981 Total financial assets 19,611 2,458 696 1,117 23,882 of which carried at amortized cost 19,611 19,611 of which carried at fair value through profit or loss 2,165 137 910 3,212 Financial liabilities 50,791 1,137 201 52,129 Carried at amortized cost 50,791 [31,141] [22,857] 50,791 Carried at fair value through profit or loss (nonderivative) 1,137 1,137 Derivatives 201 201 Trade accounts payable 4,861 4,861 Carried at amortized cost 4,861 4,861 Other liabilities 1,384 3 234 15 974 2,610 Carried at amortized cost 1,384 [1,384] 1,384 Carried at fair value through profit or loss (nonderivative) 15 15 Derivatives 3 234 237 Nonfinancial liabilities 974 974 Total financial liabilities 57,036 1,140 435 15 58,626 of which carried at amortized cost 57,036 57,036 of which carried at fair value through profit or loss (nonderivative) 1,137 15 1,152 of which derivatives 3 435 438 1 Fair value of the financial instruments carried at amortized cost; the exemption provisions under IFRS 7.29(a) were applied for information on specific fair values. Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The category “measured at amortized cost” within other financial assets and in financial liabilities also in- cludes receivables and liabilities under finance leases in which Bayer is the lessor or lessee and which are therefore measured in accordance with IAS 17. Due to the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discount- ing the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price is available, however, this is deemed to be the fair value. The fair values of financial assets measured at fair value correspond to quoted prices in active markets (Level 1), or are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are de- termined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit value adjustments are determined to allow for the con- tracting party’s credit risk. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into ac- count any foreign currency translation as of the closing date. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies to certain debt or equity instruments, in some cases to the fair values of embedded deriva- tives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as measured at fair value by the discounted cash flow method. Here the credit spreads of comparable issuers are ap- plied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materi- ally affect the fair value. Embedded derivatives are separated from their respective host contracts, provided these are not financial instruments. Such host contracts are generally sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. 62 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The financial liabilities arising from the debt instruments (exchangeable bond) issued in June 2017 that can be converted into Covestro shares are measured at fair value through profit or loss. This exchangeable bond is a hybrid financial instrument containing a debt instrument as a nonderivative host contract and multiple embedded derivatives. The changes in the amount of financial assets and liabilities recognized at fair value based on unobserva- ble inputs (Level 3) for each financial instrument category were as follows: B 27 Development of Financial Assets and Liabilities (Level 3) 2018 € million Financial assets at fair value through profit or loss Financial assets at fair value through OCI (no recycling) Derivatives (net) Liabilities carried at fair value (non- derivative) Total Carrying amounts of net assets (net liabilities), January 1 821 68 10 (7) 892 Gains (losses) recognized in profit or loss 8 – (6) – 2 of which related to assets / liabilities recognized in the statements of financial position 8 – (6) – 2 Gains (losses) recognized outside profit or loss – (1) – – (1) Additions of assets (liabilities) 81 130 17 (10) 218 Settlements of (assets) liabilities – (1) – 1 – Transfers (IFRS 5) (6) 1 (5) Disposals from divestments / changes in scope of consolidation – (4) – – (4) Carrying amounts of net assets (net liabilities), June 30 910 186 21 (15) 1,102 The changes recognized in profit or loss were included in other operating income / expenses, as well as in the financial result in interest income and in other financial income and expenses. 63 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements 64 Notes The following table shows the carrying amounts and fair values of financial assets and liabilities by category of financial instrument as of December 31, 2017, under IAS 39. B 28 Carrying Amounts and Fair Values of Financial Instruments Dec. 31, 2017 Carried at amortized cost Carried at fair value 1] [Fair value for information Nonfinancial assets / liabilities Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the statement of financial position Trade accounts receivable 8,582 8,582 Loans and receivables 8,582 8,582 Other financial assets 1,823 452 2,085 803 5,163 Loans and receivables 1,731 [1.731] 1,731 Available-for-sale financial assets 35 448 1,452 793 2,728 Held-to-maturity financial assets 57 [58] 57 Derivatives 4 633 10 647 Other receivables 380 46 1,250 1,676 Loans and receivables 380 [380] 380 Available-for-sale financial assets 46 46 Nonfinancial assets 1,250 1,250 Cash and cash equivalents 7,581 7,581 Loans and receivables 7,581 [7.581] 7,581 Total financial assets 18,366 452 2,085 849 21,752 of which loans and receivables 18,274 18,274 of which available-for-sale financial assets 35 448 1,452 839 2,774 Financial liabilities 12,958 1,220 240 14,418 Carried at amortized cost 12,958 [11.327] [2.183] 12,958 Carried at fair value (nonderivative) 1,220 1,220 Derivatives 240 240 Trade accounts payable 4,568 561 5,129 Carried at amortized cost 4,568 4,568 Nonfinancial liabilities 561 561 Other liabilities 681 2 319 7 1,759 2,768 Carried at amortized cost 681 [681] 681 Carried at fair value (nonderivative) 7 7 Derivatives 2 319 321 Nonfinancial liabilities 1,759 1,759 Total financial liabilities 18,207 1,222 559 7 19,995 of which carried at amortized cost 18,207 18,207 of which derivatives 2 559 561 1 Fair value of the financial instruments carried at amortized cost; the exemption provisions under IFRS 7.29(a) were applied for information on specific fair values. Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes The following table shows the changes in the amounts of financial assets and liabilities recognized at fair value based on unobservable inputs (Level 3) for each financial instrument category for the comparative period under IAS 39: B 29 Development of Financial Assets and Liabilities (Level 3) 2017 € million Available-for- sale financial assets Derivatives (net) Liabilities carried at fair value (non- derivative) Total Carrying amounts of net assets (net liabilities), January 1 851 (8) (8) 835 Gains (losses) recognized in profit or loss 8 14 – 22 of which related to assets / liabilities recognized in the statements of financial position 8 14 – 22 Gains (losses) recognized outside profit or loss (20) – – (20) Additions of assets (liabilities) 4 – – 4 Settlements of (assets) liabilities – – – – Carrying amounts of net assets (net liabilities), June 30 843 6 (8) 841 Interest held in Covestro reduced to 6.8% In the first quarter, Bayer sold 21.0 million shares of Covestro AG to institutional investors at a price of €86.25 per share. A further 28.81 million shares of Covestro AG were sold to institutional investors in the second quarter at a price of €75.50 per share. In addition, 13.79 million shares of Covestro AG were ac- quired from Bayer Pension Trust e.V., which no longer holds any Covestro shares. Bayer AG thus now holds only a 6.8% interest in Covestro to service the exchangeable bond issued in 2017 that matures in 2020. Until May 2018, the interest in Covestro was accounted for in the Bayer Group consolidated financial statements as an associate using the equity method. The aforementioned share disposals led to the loss of significant influence on the financial and business policy decisions of Covestro. This in turn resulted in a change in the accounting method. Since May 2018, Bayer has reported the Covestro interest as an equity instrument. In this connection, Bayer exercised the option of recognizing future changes in its fair value through profit or loss. Contingent liabilities and other financial commitments The Group’s contingent liabilities amounted to €907 million as of June 30, 2018, and mainly comprised pending legal cases in a number of countries. There were also other financial commitments of €9,487 million. Compared with December 31, 2017, the decline in other financial commitments was predominantly attributable to the successful closing of the acquisition of the Monsanto Company, St. Louis, Missouri, United States. Legal Risks To find out more about the Bayer Group’s legal risks, please see Note 32 to the consolidated financial statements in the Bayer Annual Report 2017, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2017, the following significant changes have occurred in respect of the legal risks: Product-related litigation Mirena™: As of August 17, 2018, lawsuits from approximately 2,700 users of Mirena™, an intrauterine system providing long-term contraception, had been served upon Bayer in the United States. Plaintiffs allege personal injuries resulting from the use of Mirena™, including perforation of the uterus, ectopic pregnancy or idiopathic intracranial hypertension, and seek compensatory and punitive damages. Addi- tional lawsuits are anticipated. As of August 17, 2018, lawsuits from approximately 600 users of Mirena™ alleging idiopathic intracranial hypertension had been served upon Bayer in the United States. 65 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes In April 2018, the Master Settlement Agreement regarding the global settlement of the perforation cases for a total amount of US$12.2 million was executed. Bayer may withdraw from the agreement if fewer than 98% of those who are eligible choose to participate. As of August 17, 2018, a total of approximately 4,600 cases would be included in the settlement. Xarelto™: As of August 17, 2018, U.S. lawsuits from approximately 24,300 recipients of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, had been served upon Bayer. Plaintiffs allege that users have suffered personal injuries from the use of Xarelto™, including cerebral, gastrointestinal or other bleeding and death, and seek compensatory and punitive damages. Additional lawsuits are antici- pated. Essure™: As of August 17, 2018, U.S. lawsuits from approximately 17,000 users of Essure™, a medical device offering permanent birth control with a nonsurgical procedure, had been served upon Bayer. Plain- tiffs allege personal injuries from the use of Essure™, including hysterectomy, perforation, pain, bleeding, weight gain, nickel sensitivity, depression and unwanted pregnancy, and seek compensatory and punitive damages. Additional lawsuits are anticipated. Class actions over neonicotinoids in Canada: In February 2018, a court in Quebec certified a class pro- posed by plaintiffs. Plaintiffs are honey producers in Quebec claiming damages and punitive damages and alleging Bayer and another crop protection company were negligent in the design, development, marketing and sale of neonicotinoid pesticides. Patent disputes Betaferon™ / Betaseron™: Since 2010, Bayer and Biogen Idec MA Inc. have been engaged in a dispute in the United States about the validity of a patent issued to Biogen and whether Bayer’s production and dis- tribution of Betaseron™ would infringe such patent. Betaseron™ is Bayer’s drug product for the treatment of multiple sclerosis. In February 2018, a jury decided that Biogen’s patent is invalid at the end of a trial regarding Biogen’s claims against EMD Serono, Inc. and Pfizer Inc. for infringement of the same patent. Biogen has challenged the jury’s verdict. Unless the jury’s verdict is overturned, Biogen cannot assert its claims against Bayer. Xarelto™: In 2015, Bayer and Janssen Pharmaceuticals filed a patent infringement lawsuit in a U.S. federal court against Mylan Pharmaceuticals Inc. (“Mylan”), Prinston Pharmaceutical Inc. (“Prinston”), Sigmapharm Laboratories, LLC (“Sigmapharm”) and further defendants. Bayer had received notices of an ANDA IV ap- plication by Mylan, Sigmapharm and the other defendants, each seeking approval to market a generic version of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, in the United States. In July 2018, the court ordered that Bayer’s compound patent protection for Xarelto™ until 2024 is valid and that the patent is infringed. Prinston appealed. Mylan and Sigmapharm did not appeal. The other defendants may still appeal. Further Legal Proceedings Newark Bay Environmental Matters: In the United States, Bayer is one of numerous parties involved in a series of claims brought by federal and state environmental protection agencies. In the Lower Passaic River matter, a group of more than sixty companies including Bayer is investigating contaminated sedi- ments in the riverbed under the supervision of the United States Environmental Protection Agency (EPA) and other governmental authorities. Future remediation will involve some form of dredging, the nature and scope of which are not yet defined, and potentially other tasks. The cost of the investigation and the re- mediation work may be substantial if the final remedy involves extensive dredging and disposal of impact- ed sediments. In July 2018, Occidental Chemical Company, one of parties potentially liable for cleanup costs in the Lower Passaic River, filed a lawsuit in New Jersey federal court seeking contribution and cost recovery from dozens of other potentially responsible parties, including a Bayer subsidiary, for past and future cleanup costs. Bayer is currently unable to determine the extent of its liability in this matter. 66 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Monsanto Legal Risks In June 2018, Bayer became the sole shareholder of Monsanto Company, St. Louis, USA (“Monsanto”). However, the US Department of Justice ordered Bayer to hold Monsanto separately until certain divesti- tures required for antitrust clearance were completed. Therefore, the exchange of information on Monsan- to´s legal risks prior to the approval of this semi-annual report by the Bayer Board of Management was limited until August 16, 2018. Based on the information available to Bayer on August 30, 2018, Bayer considers the following legal proceedings of Monsanto to involve risks that are material for the Bayer Group. The legal proceedings referred to do not represent an exhaustive list. PCB: Monsanto has been named in lawsuits brought by various governmental entities in the United States claiming that Monsanto, Pharmacia and Solutia, collectively as a manufacturer of PCBs, should be respon- sible for a variety of damages due to PCBs in bodies of water, regardless of how PCBs came to be located there. PCBs are man-made chemicals that were widely used for various purposes until prohibited by the Environmental Protection Agency (EPA) in the United States in 1979. We believe that we have meritorious defenses and intend to defend ourselves vigorously. Roundup™ (Glyphosate): As of August 27, 2018, lawsuits from approximately 8,700 plaintiffs claiming to have been exposed to glyphosate-based products manufactured by Monsanto had been served upon Monsanto in the United States. Glyphosate is the active ingredient contained in certain of Monsanto´s herbicides, including Roundup™-branded products. Plaintiffs allege personal injuries resulting from expo- sure to those products, including non-Hodgkin lymphoma (NHL) and multiple myeloma, and seek compen- satory and punitive damages. Plaintiffs claim, inter alia, that Monsanto´s glyphosate-based herbicide prod- ucts are defective and that Monsanto knew, or should have known, of the risks associated with such products and failed to adequately warn its users. Additional lawsuits are anticipated. The majority of plain- tiffs have brought actions in state courts in Missouri, Delaware and California, while the remainder of plain- tiffs’ cases were filed in many different federal courts. In 2016, the Judicial Panel on Multi-District Litigation transferred to the Northern District of California all of the federal cases for pretrial purposes. In August 2018, a state court jury in San Francisco, California, awarded USD 39 million in compensatory and USD 250 million in punitive damages to a plaintiff who claimed that a Monsanto product caused his NHL. We disagree with the verdict and intend to seek trial court review and appeal, if necessary. In view of more than 800 scientific studies – including an independent study which followed more than 50,000 licensed pesticide applicators and farm workers and their spouses for more than 20 years – and regulatory authori- ties all over the world confirming that glyphosate does not cause cancer and is safe for use when used according to label instructions, we continue to believe that we have meritorious defenses and intend to defend ourselves vigorously in all of these lawsuits. In connection with the above-mentioned Monsanto proceedings, Monsanto is insured against statutory product liability claims against Monsanto to the extent customary in the respective industries and has, based on the information currently available, taken appropriate accounting measures for anticipated de- fense costs. 67 Bayer Interim Report as of June 30, 2018 Condensed Consolidated Interim Financial Statements Notes Notes to the Statements of Cash Flows Operating cash flows were reduced by the payout of the Monsanto stock options in the amount of €352 million. There was an outflow of €45,290 million for the acquisition of Monsanto, net of €2,657 million in cash from Monsanto. The sale of further Covestro shares resulted in a net cash inflow of €1,107 million. The issue of bonds and further net borrowings resulted in an inflow of €29,151 million, and capital increases in a net inflow of €8,986 million. In addition, there was an outflow of €2,403 million for dividend payments. Related parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or joint control or have a significant influence. They include, in particular, nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate officers of Bayer AG. Sales to related parties were not material from the viewpoint of the Bayer Group. As was the case on De- cember 31, 2017, liabilities to joint ventures amounted to €0.2 billion, and primarily pertained to the joint venture Casebia Therapeutics Limited Liability Partnership, Ascot, United Kingdom, which was established together with CRISPR Therapeutics AG, Basel, Switzerland. In May 2018, Bayer AG acquired a 6.8% interest in Covestro from Bayer Pension Trust at market value for a total amount of €1.1 billion to repay the exchangeable bond that matures in 2020. Covestro ceased to be recognized as an associate in May 2018. In this connection, receivables from asso- ciates declined by €0.1 billion to €0.0 billion Other information On May 25, 2018, the Annual Stockholders’ Meeting approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.80 per share be paid for the 2017 fiscal year. The actions of the members of the Board of Management and the Supervisory Board in office in 2017 were ratified in accordance with the proposals by the Board of Management and the Supervisory Board. One stockholder representative was elected to the Supervisory Board in accordance with the nomination submitted by the Supervisory Board. In accordance with the proposal by the Supervisory Board, Deloitte GmbH Wirtschaftsprüfungsgesell- schaft, Munich, was elected auditor of the financial statements of Bayer AG and the consolidated financial statements of the Bayer Group for the fiscal year 2018 and to review the condensed consolidated interim financial statements and interim management reports as of June 30, 2018, September 30, 2018, and March 31, 2019. 68 Bayer Interim Report as of June 30, 2018 Responsibility Statement Events After the End of the Reporting Period Bayer signed an agreement on July 27, 2018, to divest the Consumer Health prescription dermatology business to LEO Pharma A/S, Ballerup, Denmark. The business will be transferred in two steps: on Sep- tember 4, 2018, for the United States, and during the second half of 2019 for all other markets, subject to the satisfaction of customary closing conditions. The portfolio being divested comprises prescription brands including Advantan™, Skinoren™ and Travocort™. The purchase price amounts to €58 million for the U.S. business and €555 million for the rest of the global business, and is subject to customary pur- chase price adjustments. In connection with the acquisition of Monsanto, Bayer had concluded an agreement with BASF concerning the divestment of selected Crop Science businesses. All of the transactions closed on August 1, 2018, apart from the divestment of the vegetable seed business, which closed on August 16, 2018. The total purchase price of €7.6 billion is subject to customary purchase price adjustments. Repayment of financial liabilities The syndicated credit facility drawn in June 2018 as bridge financing for the acquisition of Monsanto was reduced by a further US$7.9 billion in July and August 2018, mainly with the proceeds from the divestment of Crop Science businesses to BASF. Leverkusen, August 30, 2018 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Dr. Hartmut Klusik Kemal Malik Wolfgang Nickl Heiko Schipper Dieter Weinand 69 Bayer Interim Report as of June 30, 2018 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim finan- cial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabili- ties, financial position and profit or loss of the Bayer Group, and the interim management report includes a fair review of the development and performance of the business and the position of the Bayer Group, together with a description of the principal opportunities and risks associated with the expected develop- ment of the Bayer Group for the remaining months of the financial year. Leverkusen, August 30, 2018 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Dr. Hartmut Klusik Kemal Malik Wolfgang Nickl Heiko Schipper Dieter Weinand 70 Bayer Interim Report as of June 30, 2018 Review Report To Bayer Aktiengesellschaft, Leverkusen / Germany We have reviewed the condensed interim consolidated financial statements – comprising the income statement and the statement of comprehensive income, the statement of financial position, the statement of cash flows, the condensed statement of changes in equity as well as selected explanatory notes to the financial statements – and the interim group management report for the period from 1 January until 30 June 2018 of Bayer Aktiengesellschaft, Leverkusen, that are part of the half-year financial report under § 115 WpHG (Wertpapierhandelsgesetz: German Securities Trading Act). The preparation of the con- densed interim consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group man- agement reports is the responsibility of the entity’s Management Board. Our responsibility is to issue a report on the condensed interim consolidated financial statements and on the interim group management report based on our review. We conducted our review of the interim consolidated financial statements and of the interim group man- agement report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) as well as in supplementary compliance with the International Standard on Review Engagements “Review of Interim Financial Information performed by the Independent Auditor of the Entity” (ISRE 2410). Those standards require that we plan and perform the review such that we can preclude through critical evalua- tion, with a limited level of assurance, that the condensed interim consolidated financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group manage- ment reports. A review is limited primarily to inquiries of personnel of the entity and analytical assessments and therefore does not provide the assurance attainable in a financial statement audit. Since, in accord- ance with our engagement, we have not performed a financial statement audit, we cannot issue an audi- tor’s report. Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements of Bayer Aktiengesellschaft, Leverkusen, have not been pre- pared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Munich, Germany, 31 August 2018 Deloitte GmbH Wirtschaftsprüfungsgesellschaft Heiner Kompenhans Wirtschaftsprüfer (German Public Auditor) Prof. Dr. Frank Beine Wirtschaftsprüfer (German Public Auditor) Review Report 71 Bayer Interim Report as of June 30, 2018 Financial Calender / Masthead Financial Calendar Q3 2018 Interim Report Annual Report 2018 Q1 2019 Interim Report Annual Stockholders’ Meeting 2019 Q2 2019 Interim Report Q3 2019 Interim Report November 13, 2018 February 27, 2019 April 25, 2019 April 26, 2019 July 30, 2019 October 30, 2019 Masthead Published by Bayer AG, 51368 Leverkusen, Germany English edition Bayer Business Services GmbH Translation Services Editor Meike Kneip, phone +49 214 30 20015 Email: meike.kneip@bayer.com Date of publication Wednesday, September 5, 2018 Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com Bayer on the internet www.bayer.com ISSN 0343 / 1975 Interim Group Management Report and Condensed Consolidated Interim Financial Statements produced in-house with FIRE.sys. Cautionary Statements Regarding Forward-Looking Information Certain statements contained in this communication may constitute “forward-looking statements.” Actual results could differ materially from those projected or forecast in the forward-looking statements. The factors that could cause actual results to differ materially include the following: the risk that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes (or at all) and to successfully integrate the operations of Monsanto Company (“Monsanto”) into those of Bayer Aktiengesellschaft (“Bayer”); such integration may be more difficult, time-consuming or costly than expected; revenues following the transaction may be lower than expected; operating costs, customer loss and business disruption (including difficulties in maintain- ing relationships with employees, customers, clients or suppliers) may be greater or more significant than expected following the trans- action; the retention of certain key employees at Monsanto; the parties’ ability to meet expectations regarding the accounting and tax treatments of the merger; the impact of refinancing the loans taken out for the transaction; the impact of indebtedness incurred by Bayer in connection with the transaction and the potential impact on Bayer’s rating of indebtedness; the effects of the business combi- nation of Bayer and Monsanto, including the combined company’s future financial condition, operating results, strategy and plans; other factors detailed in Monsanto’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) for the fiscal year ended August 31, 2017, and Monsanto’s other filings with the SEC, which are available at http://www.sec.gov and on Monsanto’s website at www.monsanto.com; and other factors discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. Bayer assumes no obligation to update the information in this communication, except as otherwise re- quired by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 72

Semestriel, 2018, Agrochemistry, BAYER

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Half-Year Financial Report 2020 Bayer: Solid performance despite COVID-19 impact // Group sales decline by 2.5% (Fx & portfolio adj.) to €10.1 billion // EBITDA before special items advances to €2.9 billion (+ 5.6%) // Crop Science reports operational growth // Sales and earnings at Pharmaceuticals down mainly due to volume-based procurement policy in China and COVID-19 // Sales at Consumer Health decline slightly (Fx & portfolio adj.) after strong demand in first quarter // Net loss of €9.5 billion due to special items for litigation – agreements in major legacy Monsanto litigation // Core earnings per share €1.59 (+ 5.3%) // Free cash flow rises to €1.4 billion // Outlook adjusted for COVID-19 impact // Ensuring employee safety and maintaining supply chains remain top priorities Bayer Half-Year Financial Report as of June 30, 2020 Contents Bayer Group Key Data _________________________________________________________________________ 3 Interim Group Management Report as of June 30, 2020 ________________________________________ 4 1. Overview of Sales, Earnings and Financial Position _________________________________________ 6 1.1 Earnings Performance of the Bayer Group __________________________________________________ 6 1.2 Business Development by Segment _______________________________________________________ 11 1.3 Asset and Financial Position of the Bayer Group ___________________________________________ 18 2. Research, Development, Innovation _______________________________________________________ 21 3. Report on Future Perspectives and on Opportunities and Risks _____________________________ 26 3.1 Future Perspectives ______________________________________________________________________ 26 3.2 Opportunities and Risks __________________________________________________________________ 28 Condensed Consolidated Interim Financial Statements as of June 30, 2020 ____________________ 29 Bayer Group Consolidated Income Statements _________________________________________________ 29 Bayer Group Consolidated Statements of Comprehensive Income _______________________________ 30 Bayer Group Consolidated Statements of Financial Position ____________________________________ 31 Bayer Group Consolidated Statements of Cash Flows __________________________________________ 32 Bayer Group Consolidated Statements of Changes in Equity ___________________________________ 33 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group _________ 34 Responsibility Statement _____________________________________________________________________ 53 Review Report ________________________________________________________________________________ 54 Financial Calendar ____________________________________________________________________________ 55 Reporting Principles __________________________________________________________________________ 55 Masthead _____________________________________________________________________________________ 55 Contents 2 Bayer Half-Year Financial Report as of June 30, 2020 Bayer Group Key Data € million Q2 2019 Q2 2020 Change % Sales 10,713 10,054 – 6.2 Change (adjusted for currency and portfolio effects)1 – 2.5 Change in sales1 Volume + 0.7% + 0.6% Price + 0.4% – 3.1% Currency + 1.1% – 2.0% Portfolio + 20.8% – 1.7% Sales by region Europe / Middle East / Africa 3,318 2,942 – 11.3 North America 3,985 3,858 – 3.2 Asia / Pacific 2,240 2,159 – 3.6 Latin America 1,170 1,095 – 6.4 EBITDA1 2,314 (9,604) . Special items1 (416) (12,487) EBITDA before special items1 2,730 2,883 +5.6 EBITDA margin before special items1 25.5% 28.7% EBIT1 785 (10,784) . Special items1 (834) (12,511) EBIT before special items1 1,619 1,727 + 6.7 Financial result (455) (276) – 39.3 Net income (from continuing and discontinued operations) 404 (9,548) . Earnings per share1 from continuing and discontinued operations (€) 0.41 (9.72) . Core earnings per share1 from continuing operations (€) 1.51 1.59 + 5.3 Net cash provided by operating activities (from continuing and discontinued operations) 1,600 2,414 + 50.9 Free cash flow (from continuing and discontinued operations) 751 1,402 + 86.7 Net financial debt (at end of period) 38,808 35,993 – 7.3 Cash outflows for capital expenditures and intangible assets (from continuing and discontinued operations) 458 585 + 27.7 Research and development expenses 1,304 1,167 – 10.5 Depreciation, amortization and impairment losses / loss reversals 1,529 1,180 – 22.8 Number of employees2 (at end of period) 106,231 101,168 – 4.8 Personnel expenses (including pension expenses) 2,838 2,423 – 14.6 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Employees calculated as full-time equivalents (FTEs) H1 2019 22,965 + 2.3% + 0.2% + 1.2% + 30.4% 7,271 9,041 4,363 2,290 5,253 (1,460) 6,713 29.2% 2,565 (1,877) 4,442 (753) 1,645 1.68 3.94 2,679 1,259 38,808 853 2,621 2,688 106,231 6,116 Key Data H1 2020 Change % 22,899 – 0.3 + 2.0 + 3.8% – 1.8% – 0.8% – 1.5% 7,180 – 1.3 9,175 + 1.5 4,271 – 2.1 2,273 – 0.7 (5,828) . (13,102) 7,274 + 8.4 31.8% (8,285) . (13,150) 4,865 + 9.5 (928) + 23.2 (8,059) . (8.20) . 4.26 + 8.1 2,185 – 18.4 609 – 51.6 35,993 – 7.3 976 + 14.4 2,469 – 5.8 2,457 – 8.6 101,168 – 4.8 5,183 – 15.3 3 Full Year 2019 43,545 + 3.5% + 2.6% + 0.9% + 1.5% + 13.5% 13,185 15,087 8,610 6,663 9,529 (1,945) 11,474 26.3% 4,162 (2,813) 6,975 (1,309) 4,091 4.17 6.38 8,207 4,214 34,068 2,650 5,301 5,367 103,824 11,788 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report Interim Group Management Report as of June 30, 2020 Key Events Agreements reached in major legacy Monsanto litigation On June 24, we announced a series of agreements in the Roundup™ (active ingredient: glyphosate) product liability litigation, the dicamba drift litigation and the PCB (polychlorinated biphenyls) water litigation (see the “Legal Risks” section of the Notes to the Consolidated Interim Financial Statements for further information). Glyphosate // In June 2020, Monsanto reached an agreement in principle with plaintiffs, without admission of liability, to settle most of the current Roundup™ litigation, involving approximately 75% of the total approximately 125,000 known filed and unfiled claims, and to put in place a mechanism to resolve potential future claims. // The total costs of the intended settlements for all outstanding claims are currently expected to be up to US$9.6 billion1. The company expects that a substantial number of the outstanding claims can be settled in the coming months. // The company intends to make an additional payment of US$1.25 billion2 to support a separate class agreement between Monsanto and plaintiffs’ counsel to address potential future litigation. // Monsanto may withdraw from the various settlement agreements if certain eligibility and participation rates are not satisfied. Plaintiffs who opt out of a settlement have the right to pursue their claims separately against the company. // On July 6, 2020, Judge Chhabria of the U.S. District Court for the Northern District of California, who is responsible for the agreement, issued a pre-trial order raising concerns about certain aspects of the class settlement agreement and stating that he is tentatively inclined to deny the motion. The parties have decided to withdraw their motion to be able to comprehensively address the court’s questions on the issue class proposal. Bayer remains strongly committed to a resolution that simultaneously addresses the current litigation on reasonable terms and provides a viable solution to manage and resolve future litigation. // The three cases that have so far gone to trial – Johnson, Hardeman and Pilliod – will continue through the appeals process and are not covered by the settlement. // On July 20, 2020, the Court of Appeal of the State of California (First Appellate District) affirmed the judgment in favor of Johnson but reduced the total judgment from US$78.5 million to approximately US$20.5 million. The court reduced the total compensatory damages award from US$39.3 million to approximately US$10.25 million and the punitive damages award to the same amount. Monsanto continues to believe that both the jury verdict and the damages award are not supported by the evidence at trial and the law and will consider its legal options, including an appeal to the Supreme Court of California. Dicamba // We have reached a mass tort agreement to settle the previously disclosed dicamba drift litigation involving alleged damage to crops. We will pay up to a total of US$400 million3 to resolve the multi- district litigation pending before a federal court in Missouri and claims for the 2015–2020 crop years. // The only dicamba drift case to go to trial – Bader Farms – is not included in this resolution. We believe the verdict in Bader Farms is inconsistent with the evidence and the law and will continue to pursue post-trial motions and an appeal, if necessary. 1 Equivalent to approx. €8.6 billion at the June 30, 2020, exchange rate 2 Equivalent to approx. €1.1 billion at the June 30, 2020, exchange rate 3 Equivalent to approx. €360 million at the June 30, 2020, exchange rate 4 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report PCBs // In the litigation concerning the effects of PCBs in bodies of water, we have reached an agreement for a nation-wide class settlement to settle claims of approximately 2,500 municipal government entities across the United States for a total payment, including class benefits and attorney fees, of approximately US$650 million4. This agreement will require court approval before it becomes effective. // At the same time, we have entered into separate agreements with the attorneys general of New Mexico, Washington and the District of Columbia to resolve similar PCB claims. For these agreements we will make payments that together total approximately US$170 million5. Financing Cash payments related to the settlements are expected to start in 2020. We currently assume that the potential cash outflow in 2020 will not exceed US$5 billion and that by far the larger part of the remaining amount will be disbursed in 2021. The great majority of these payments will be tax-deductible at the time of disbursement. To finance the settlement payments we can make use of existing surplus liquidity, future free cash flows and the proceeds from the Animal Health divestment. In addition, we issued bonds with a total volume of €6 billion at the beginning of July to ensure the financial flexibility needed to manage the settlement payments and address upcoming bond maturities. The issuance comprises four €1.5 billion tranches with maturities of 4 years, 6.5 years, 9.5 years and 12 years and exclusively targets institutional investors. It was approximately 2.5 times oversubscribed. The tranches carry coupons of 0.375% p.a., 0.75% p.a., 1.125% p.a. and 1.375% p.a. The bonds are rated Baa1, BBB and BBB+ by Moody’s, Standard & Poor’s and Fitch, respectively. New compensation system The compensation system for the Board of Management has been modified by resolution of the 2020 Annual Stockholders' Meeting. On the one hand, the new system places a stronger focus on sustainability, which already features as part of the short-term incentive (STI) in 2020 and will form a component of the long-term incentive (LTI) as well starting in 2021. In addition, greater emphasis is placed on liquidity and profitability as financial performance indicators. Thus the free cash flow now constitutes a further Group component of the STI in addition to the core earnings per share. Moreover, the LTI now takes into account the return on capital employed along with the total shareholder return. In determining target attainment, the Supervisory Board has the discretion to make adjustments for significant extraordinary effects for which no allowance could be made, or which could only be allowed for differently, when the targets were set and which are considered irrelevant to performance as far as incentivization is concerned. Further details of the new compensation system for the Board of Management are provided in the Notice of the Annual Stockholders' Meeting, which is available at www.bayer.com. Sustainability Council members appointed In May we announced the appointment of nine internationally recognized experts to the independent Sustainability Council, which will advise the Bayer AG Board of Management and other corporate functions in all sustainability matters in the future. Ruling on dicamba registration in the United States In early June 2020, the U.S. Court of Appeals for the Ninth Circuit issued a ruling that vacates current U.S. registrations of certain low-volatility dicamba products, including our XtendiMax™. In response to this ruling, the U.S. Environmental Protection Agency (EPA) issued an order in June providing, among other things, that growers and commercial applicators may use existing stocks according to the product label until the end of July 2020. The initial court ruling specifically relates to the EPA’s 2018 registration decision, which expires in December 2020. XtendiMax™ is currently in a new registration review process at the EPA for use in subsequent seasons. 4 Equivalent to approx. €580 million at the June 30, 2020, exchange rate 5 Equivalent to approx. €150 million at the June 30, 2020, exchange rate 5 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Divestment of Animal Health business unit The European Commission announced in early June that it had granted conditional approval to the planned acquisition of our Animal Health business unit by Elanco Animal Health Inc., Greenfield, United States. Conditional approval was also issued by the U.S. Federal Trade Commission in mid-July. The acquisition has also already been approved by the regulatory authorities in Australia, New Zealand, China and Canada, among other countries. The transaction is expected to close in early August. COVID-19 pandemic Our primary aim during the coronavirus pandemic remains to protect the safety and wellbeing of our employees and the society in which we live and work. At the same time we are taking the necessary steps to ensure the continuity of our operations in these challenging times and reliably supply our products and services to hospitals, physicians, patients, consumers and farmers. We are assisting in the global fight against COVID-19 with our expertise in the areas of health and nutrition. For example, we are collaborating with governments, regulatory authorities and other organizations to tackle the virus in a number of ways. Apart from providing financial aid, we are continuing to donate prescription drugs, over-the-counter medicines and medical protective equipment and make available diagnostic appliances and facilities. As in the first three months of the year, our business activities in the second quarter were affected in different ways by the pandemic and the associated uncertainties. The Pharmaceuticals Division was impacted by the cancellation or postponement of visits to the doctor due to the global protective measures and contact restrictions, as a result of which nonurgent treatments, in particular, were not carried out. After a very strong first quarter at Consumer Health, retailers’ high inventory levels and consumer stockpiling led to a slight decline in business. In the Crop Science Division, uncertainties led to shifts in demand in some regions and product groups, with negative effects likely to be increasingly reflected in the second half of the year. 1. Overview of Sales, Earnings and Financial Position6 In accordance with IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations), financial information is given for continuing operations unless otherwise explicitly indicated. Here it should be noted that the previously reportable Animal Health segment has been reported under discontinued operations since the divestment agreement was signed; the same applied to the Currenta business in 2019. The data for prior periods has been restated accordingly. As explained in the Annual Report 2019, we adjusted our internal value flows at the start of 2020. Information on the impact of this change in the second quarter and first six months is provided on pages 34 to 36 of the Notes to the Condensed Consolidated Interim Financial Statements (“Modified Value Flow Concept”). 1.1 Earnings Performance Second quarter of 2020 Group sales Group sales in the second quarter of 2020 declined by 2.5% (Fx & portfolio adj.) to €10,054 million (reported: – 6.2%). Germany accounted for €528 million of this figure. Crop Science achieved a 3.2% (Fx & portfolio adj.) increase in sales to €4,802 million, with declines in the Europe / Middle East / Africa region more than offset by growth in the other regions. Sales at Pharmaceuticals fell by 8.8% (Fx & portfolio adj.) to €3,992 million, with business adversely impacted both by canceled and postponed nonurgent treatments due to the COVID-19 pandemic and by the implementation of new tender procedures in China. At Consumer Health, sales declined by 1.9% (Fx & portfolio adj.) to €1,201 million, primarily due to destocking by retailers following the inventory buildup in the first quarter and to the effects of the quarantine and protective measures in various regions. 6For definition of alternative performance measures see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 6 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position EBITDA before special items Group EBITDA before special items rose by 5.6% to €2,883 million, net of €12 million in negative currency effects. EBITDA before special items at Crop Science rose by 28.4% to €1,365 million, mainly due to the accelerated realization of cost synergies as we progress with the integration of the acquired businesses, and to expanded volumes. EBITDA before special items at Pharmaceuticals decreased by 7.1% to €1,368 million, primarily on account of the decline in sales. EBITDA before special items at Consumer Health receded by 10.9% to €254 million, mainly because of COVID-19-related volume declines following the substantial inventory buildup in the first quarter and due to the absence of earnings contributions from the businesses divested in 2019. Depreciation, amortization and impairments Depreciation, amortization and impairment losses amounted to €1,180 million (Q2 2019: €1,529 million), with intangible assets accounting for €665 million (Q2 2019: €1,071 million) and property, plant and equipment for €515 million (Q2 2019: €458 million). Impairment losses, net of impairment loss reversals, were €36 million (Q2 2019: €430 million), including €9 million (Q2 2019: €424 million) on intangible assets. Impairment losses in the prior-year period mainly included €422 million recognized in connection with the divestment of the Dr. Scholl’s™ brand. Impairment losses on property, plant and equipment amounted to €27 million (Q2 2019: €6 million), including impairment losses of €26 million recognized on the dicamba production facility (Herbicides unit). Impairment losses of €24 million (Q2 2019: €418 million), net of impairment loss reversals, and accelerated depreciation of €1 million (Q2 2019: €1 million) were included in special items. EBIT and special items EBIT of the Bayer Group was minus €10,784 million (Q2 2019: €785 million) after net special charges of €12,511 million (Q2 2019: €834 million). The special charges mainly comprised provisions for the agreements reached with regard to glyphosate and dicamba (both in the Crop Science Division) and PCBs (in the Reconciliation). Other special charges resulted from expenses for litigations in Pharmaceuticals mainly in connection with EssureTM, the ongoing restructuring program, impairments in connection with the dicamba production facility, and the integration of Monsanto. EBIT before special items rose by 6.7% to €1,727 million (Q2 2019: €1,619 million). The following special items were taken into account in calculating EBIT and EBITDA: Special Items by Category1 € million EBIT Q2 2019 EBIT Q2 2020 EBIT H1 2019 EBIT H1 2020 EBITDA Q2 2019 EBITDA Q2 2020 EBITDA H1 2019 Total special items (834) (12,511) (1,877) (13,150) (416) (12,487) (1,460) Crop Science (100) (10,212) (716) (10,491) (99) (10,187) (715) Pharmaceuticals 14 (1,286) (2) (1,538) 13 (1,300) (3) Consumer Health (468) (11) (495) 32 (51) (11) (78) Reconciliation (280) (1,002) (664) (1,153) (279) (989) (664) Special items by category Restructuring (248) (237) (640) (367) (248) (238) (641) of which in the Reconciliation (250) (184) (615) (313) (249) (171) (615) Acquisition / integration (112) (53) (604) (156) (112) (54) (604) of which in the Reconciliation (8) – (14) – (8) – (14) Divestments 21 (7) (87) (21) 22 (7) (86) of which in the Reconciliation – (4) – (13) – (4) – Litigations / legal risks (77) (12,051) (128) (12,419) (77) (12,051) (128) of which in the Reconciliation (22) (814) (35) (827) (22) (814) (35) Impairment losses / loss reversals2 (418) (163) (418) (187) (1) (137) (1) 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Where not already included in the other special items categories 7 A 1 EBITDA H1 2020 (13,102) (10,388) (1,552) (22) (1,140) (368) (300) (156) – (21) (13) (12,419) (827) (138) Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Special Items by Functional Cost1 € million EBIT Q2 2019 EBIT Q2 2020 EBIT H1 2019 EBIT H1 2020 EBITDA Q2 2019 EBITDA Q2 2020 EBITDA H1 2019 Total special items (834) (12,511) (1,877) (13,150) (416) (12,487) (1,460) Cost of goods sold (64) (207) (506) (299) (64) (196) (507) Selling expenses (239) (25) (249) 9 (30) (25) (40) Research and development expenses – (10) (11) (30) – (10) (11) General administration expenses (259) (189) (731) (359) (258) (188) (730) Other operating income / expenses (272) (12,080) (380) (12,471) (64) (12,068) (172) 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Income after income taxes from discontinued operations Income from discontinued operations after income taxes amounted to €71 million (Q2 2019: €85 million) and was attributable to Animal Health. The prior-year figure also included the Currenta Group business. Sales at Animal Health rose by 8.4% (Fx & portfolio adj.) to €488 million following a weak prior-year quarter (Q2 2019: €454 million). This increase was primarily due to higher volumes for both the Advantage™ product family (€144 million, Fx & portfolio adj. + 7.0%) and Seresto™ (€122 million, Fx & portfolio adj. + 9.4%). Other contributory factors were inventory buildup effects, partly in connection with the ongoing COVID-19 pandemic. Sales in North America advanced by 9.5% (Fx & portfolio adj.) to €240 million. The business unit also recorded significant growth in Asia / Pacific (€96 million, Fx & portfolio adj. + 10.7%) and Europe / Middle East / Africa (€119 million, Fx & portfolio adj. + 7.4%). In Latin America, sales increased by 0.3% (Fx & portfolio adj.) to €33 million. EBITDA before special items at Animal Health advanced by 17.7% to €153 million (Q2 2019: €130 million), primarily due to sales growth resulting from expanded volumes. Net income After a financial result of minus €276 million (Q2 2019: minus €455 million), income before income taxes amounted to minus €11,060 million (Q2 2019: €330 million). The financial result mainly comprised income of €54 million from investments in affiliated companies (Q2 2019: loss of €32 million), net interest expense of €344 million (Q2 2019: €354 million) and interest cost of €1 million (Q2 2019: €82 million) for pension and other provisions. The financial result included net special gains of €67 million (Q2 2019: net special charges of €51 million) that mainly resulted from the change in the fair value of our interest in Covestro. Including income tax gains of €1,450 million (Q2 2019: income tax expense of €10 million) and accounting for noncontrolling interest, net income in the second quarter of 2020 came in at minus €9,548 million (Q2 2019: plus €404 million). Core earnings per share Core earnings per share from continuing operations rose by 5.3% to €1.59 (Q2 2019: €1.51), thanks mainly to the earnings contribution from Crop Science. Earnings per share (total) fell to minus €9.72 in the second quarter of 2020 (Q2 2019: plus €0.41), largely due to the special charges in connection with the aforementioned agreements in the Monsanto litigations. 8 A 2 EBITDA H1 2020 (13,102) (210) (45) (30) (358) (12,459) Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Core Earnings per Share1 € million Q2 2019 Q2 2020 H1 2019 EBIT (as per income statements) 785 (10,784) 2,565 Amortization and impairment losses / loss reversals on goodwill and other intangible assets 1,071 664 1,773 Impairment losses / loss reversals on property, plant and equipment, and accelerated depreciation included in special items 7 25 5 Special items (other than accelerated depreciation, amortization and impairment losses / loss reversals) 416 12,487 1,460 Core EBIT 2,279 2,392 5,803 Financial result (as per income statements) (455) (276) (753) Special items in the financial result 51 (67) (3) Income taxes (as per income statements) (10) 1,450 (368) Special items in income taxes – – – Tax effects related to amortization, impairment losses / loss reversals and special items (382) (1,925) (821) Income after income taxes attributable to noncontrolling interest (as per income statements) (1) (9) 4 Above-mentioned adjustments attributable to noncontrolling interest 1 – (1) Core net income from continuing operations 1,483 1,565 3,861 Shares (million) Weighted average number of shares 981.73 982.42 980.95 € Core earnings per share from continuing operations 1.51 1.59 3.94 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Personnel expenses and employee numbers The number of employees in the Bayer Group as of the closing date declined by 4.8% year on year to 101,168 (June 30, 2019: 106,231). Personnel expenses fell by 14.6% to €2,423 million in the second quarter (Q2 2019: €2,838 million). This was largely attributable to restructuring expenses and adjustments to provisions for variable compensation. First half of 2020 Group sales Group sales in the first half of 2020 rose by 2.0% (Fx & portfolio adj.) to €22,899 million (reported: – 0.3%). Germany accounted for €1,271 million of this figure. Sales at Crop Science advanced by 4.6% (Fx & portfolio adj.) to €11,636 million. Sales at Pharmaceuticals fell by 2.5% (Fx & portfolio adj.) to €8,538 million. Consumer Health increased sales by 5.7% (Fx & portfolio adj.) to €2,599 million. EBITDA before special items EBITDA before special items of the Bayer Group advanced by 8.4% to €7,274 million (H1 2019: €6,713 million), helped by positive currency effects of €29 million. EBITDA before special items at Crop Science rose by 18.2% to €3,976 million, mainly due to the realization of cost synergies as we progress with the integration of the acquired businesses, and to expanded volumes. EBITDA before special items at Pharmaceuticals was level year on year at €2,962 million (+ 0.1%). Consumer Health saw EBITDA before special items decrease by 3.5% to €555 million, with the absence of earnings contributions from the businesses divested in 2019 more than offsetting operational growth. 9 A 2 H1 2020 (8,285) 1,431 105 13,102 6,353 (928) 92 971 – (2,291) (8) (1) 4,188 982.42 4.26 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Depreciation, amortization and impairments Depreciation, amortization and impairment losses amounted to €2,457 million in the first six months of 2020 (H1 2019: €2,688 million). They comprised €1,432 million (H1 2019: €1,773 million) in amortization and impairments on intangible assets and €1,025 million (H1 2019: €915 million) in depreciation and impairments on property, plant and equipment. Impairment losses, net of impairment loss reversals, totaled €81 million (H1 2019: €428 million), including €26 million in net impairment loss reversals on intangible assets (H1 2019: impairment losses of €425 million). There was a €54 million impairment loss reversal for the Afrin™ brand, while a €103 million impairment loss was recognized on the dicamba production facility (Herbicides unit). Impairment losses in the prior-year period mainly included €422 million recognized in connection with the divestment of the Dr. Scholl’s™ brand. Impairment losses of €47 million (H1 2019: €418 million), net of impairment loss reversals, and accelerated depreciation of €1 million (H1 2019: €1 million) were included in special items. EBIT and special items EBIT of the Bayer Group was minus €8,285 million (H1 2019: plus €2,565 million) after net special charges of €13,150 million (H1 2019: net special charges of €1,877 million). The special charges mainly related to provisions for the aforementioned agreements in the Monsanto litigations, expenses for litigations in Pharmaceuticals mainly in connection with EssureTM, the ongoing restructuring program, and impairments in connection with the dicamba production facility. EBIT before special items rose by 9.5% to €4,865 million (H1 2019: €4,442 million). Income from discontinued operations after income taxes Income from discontinued operations after income taxes declined by 3.0% to €191 million (H1 2019: €197 million) and resulted from the business activities of Animal Health. The prior-year figure included the Currenta Group. Sales at Animal Health rose by 12.6% (Fx & portfolio adj.) to €984 million in the first six months of 2020, with growth in all regions. Other contributory factors were inventory buildup effects, partly in connection with the ongoing COVID-19 pandemic. We significantly expanded business in North America in particular (€454 million, Fx & portfolio adj. + 20.4%) following a decline in demand in the prior-year period. EBITDA before special items at Animal Health increased by 27.9% to €353 million (H1 2019: €276 million), primarily due to the positive development of business. Net income After a financial result of minus €928 million (H1 2019: minus €753 million), income before income taxes was minus €9,213 million (H1 2019: plus €1,812 million). The financial result comprised a loss of €112 million from investments in affiliated companies (H1 2019: income of €30 million), net interest expense of €708 million (H1 2019: €689 million) and interest cost of €66 million (H1 2019: €141 million) for pension and other provisions, as well as an exchange loss of €41 million (H1 2019: €8 million). The financial result included net special charges of €92 million (H1 2019: net special gains of €3 million) that mainly resulted from the change in the fair value of our interest in Covestro. Taking into account tax income of €971 million (H1 2019: tax expense of €368 million), income after income taxes was minus €8,242 million (H1 2019: plus €1,444 million). Adjusted for income from discontinued operations after income taxes and income attributable to noncontrolling interest, net income came to minus €8,059 million (H1 2019: plus €1,645 million). Core earnings per share Core earnings per share from continuing operations advanced by 8.1% to €4.26 (H1 2019: €3.94). Earnings per share (total) declined to minus €8.20 (H1 2019: €1.68). 10 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 11 1. Overview of Sales, Earnings and Financial Position 1.2 Business Development by Division Crop Science A 4 Key Data – Crop Science Change %1 Change %1 € million Q2 2019 Q2 2020 Reported Fx & p adj. H1 2019 H1 2020 Reported Fx & p adj. Sales 4,788 4,802 + 0.3 + 3.2 11,232 11,636 + 3.6 + 4.6 Change in sales1 Volume – 3.4% + 3.5% + 0.1% + 4.6% Price + 0.3% – 0.3% + 1.0% 0.0% Currency + 1.1% – 2.9% + 0.7% – 1.0% Portfolio + 61.0% 0.0% + 89.5% 0.0% Sales by region Europe / Middle East / Africa 1,092 958 – 12.3 – 9.6 2,856 2,852 – 0.1 + 1.1 North America 2,397 2,501 + 4.3 + 2.2 5,921 6,214 + 4.9 + 2.4 Asia / Pacific 533 575 + 7.9 + 11.4 921 991 + 7.6 + 10.0 Latin America 766 768 + 0.3 + 18.9 1,534 1,579 + 2.9 + 16.6 EBITDA1 964 (8,822) . 2,649 (6,412) . Special items1 (99) (10,187) (715) (10,388) EBITDA before special items1 1,063 1,365 + 28.4 3,364 3,976 + 18.2 EBITDA margin before special items1 22.2% 28.4% 30.0% 34.2% EBIT1 294 (9,600) . 1,272 (8,100) . Special items1 (100) (10,212) (716) (10,491) EBIT before special items1 394 612 + 55.3 1,988 2,391 + 20.3 Net cash provided by (used in) operating activities 872 1,537 + 76.3 387 (224) . Capital expenditures 197 322 + 63.5 420 485 + 15.5 Research and development expenses 576 511 – 11.3 1,140 1,071 – 6.1 2019 figures restated; Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2020 Sales Sales at Crop Science rose in the second quarter of 2020 by 3.2% (Fx & portfolio adj.) to €4,802 million. The Latin America, Asia / Pacific and North America regions contributed to growth, while sales in Europe / Middle East / Africa saw significant decreases. // We increased sales at Corn Seed & Traits, due in particular to significant volume expansion in Brazil. Sales in North America were level with the prior-year quarter, partly due to shifts in demand into the previous quarter. In addition, the recovery in acreage against the prior-year quarter, which was adversely impacted by unfavorable weather conditions, was weaker than expected. // Business at Herbicides expanded overall. We registered significant increases in Latin America, where we benefited from higher volumes and shifts in demand from the following quarter. Business in North America also expanded markedly, largely thanks to our combined product portfolio and gains in market share against the weak prior-year quarter. In Europe / Middle East / Africa, however, we saw marked decreases due to lower volumes, partly because of demand shifts into the previous quarter. // Sales also advanced at Fungicides. In Latin America, we benefited mainly from lower product returns in Brazil. We also successfully switched the market to Fox Xpro™. We recorded volume increases in North America, mainly on account of normalized weather conditions in Canada following the drought in the prior-year quarter. Sales in Asia / Pacific moved ahead, primarily due to the effects of COVID-19. Business in China expanded following restrictions in the previous quarter, while the uncertainty in India led to advance demand. In Europe / Middle East / Africa, sales were diminished by shifts in demand into the previous quarter. Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 12 1. Overview of Sales, Earnings and Financial Position // Sales showed an encouraging increase at Soybean Seeds & Traits. In North America, an increase in acreages along with demand shifts from the first quarter arising from uncertainties over COVID-19 led to a recovery following a weak prior-year quarter. In Latin America we benefited from greater market penetration. // At Insecticides we registered sales gains in the Latin America and Asia / Pacific regions that more than offset the declines in Europe / Middle East / Africa caused by demand shifts into the previous quarter. // We also increased sales at Environmental Science. We saw significant increases for the consumer lawn and garden business against the prior-year quarter due to weather factors, while business with professional users in North America and Europe / Middle East / Africa receded. // Sales at Vegetable Seeds declined, especially in the North America region, where shifts in demand into subsequent quarters and the COVID-19 pandemic had a negative impact. // Sales at the reporting unit Other declined slightly overall. Cotton seed sales in North America showed a marked decrease due to acreage reductions resulting from the effects of COVID-19 and a drop in commodity prices. Sales rose in connection with the supply agreements with BASF related to the divestments made in 2018. In addition, we substantially raised sales of canola seed in North America as a result of shifts in demand from the previous quarter. A 5 Sales by Strategic Business Entity Change %1 Change %1 € million Q2 2019 Q2 2020 Reported Fx & p adj. H1 2019 H1 2020 Reported Fx & p adj. Crop Science 4,788 4,802 + 0.3 + 3.2 11,232 11,636 + 3.6 + 4.6 Corn Seed & Traits 941 948 + 0.7 + 2.7 3,315 3,598 + 8.5 + 7.8 Herbicides 1,337 1,324 – 1.0 + 3.3 2,710 2,744 + 1.3 + 4.1 Fungicides 661 648 – 2.0 + 3.7 1,358 1,433 + 5.5 + 9.0 Soybean Seed & Traits 481 532 + 10.6 + 9.3 1,085 1,100 + 1.4 – 0.1 Insecticides 388 386 – 0.5 + 4.5 724 768 + 6.1 + 9.5 Environmental Science 286 296 + 3.5 + 3.8 538 579 + 7.6 + 7.2 Vegetable Seeds 178 167 – 6.2 – 5.0 346 313 – 9.5 – 9.1 Other 516 501 – 2.9 – 1.0 1,156 1,101 – 4.8 – 3.8 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items at Crop Science rose in the second quarter of 2020 by 28.4% to €1,365 million (Q2 2019: €1,063 million). The increase was primarily attributable to the accelerated realization of cost synergies as we progress with the integration of the acquired businesses, and to expanded volumes. Earnings were also helped by the aforementioned decline in product returns in Brazil. In addition, the prior-year quarter was adversely impacted by inventory write-downs and higher impairment losses on receivables. EBIT amounted to minus €9,600 million (Q2 2019: €294 million) after net special charges of €10,212 million (Q2 2019: €100 million) that mainly arose from the provisions established for the glyphosate and dicamba agreements. Other special charges resulted primarily from the recognition of impairment losses on the Herbicides unit’s dicamba production facility in Luling, Louisiana, United States, after its construction was halted, and from the integration of Monsanto. A 6 Special Items1 Crop Science € million EBIT Q2 2019 EBIT Q2 2020 EBIT H1 2019 EBIT H1 2020 EBITDA Q2 2019 EBITDA Q2 2020 EBITDA H1 2019 EBITDA H1 2020 Acquisition / integration (104) (53) (590) (156) (104) (54) (590) (156) Divestments 44 (3) (55) (8) 45 (3) (54) (8) Litigations / legal risks (40) (9,992) (71) (10,086) (40) (9,992) (71) (10,086) Impairment losses / loss reversals – (164) – (241) – (138) – (138) Total special items (100) (10,212) (716) (10,491) (99) (10,187) (715) (10,388) 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position First half of 2020 Sales Sales at Crop Science advanced by 4.6% (Fx & portfolio adj.) to €11,636 million in the first half of 2020. While business was up in all regions, we recorded significant sales gains in Latin America and Asia / Pacific. At Corn Seed & Traits, we recorded an increase in sales in Latin America, North America and Europe / Middle East / Africa in particular due to gains in market share. We also registered sales gains at Fungicides and Herbicides, benefiting from synergy effects from the combined product portfolio and normalized weather conditions in North America compared with the prior-year period, among other factors. At Fungicides, we also benefited from the successful market penetration of Fox Xpro™. Insecticides saw encouraging sales growth across all regions. Sales at Vegetable Seeds were down sharply, especially in North America, as a result of shifts in demand into the previous year and the impact of COVID-19. Within the reporting unit Other, cotton seed sales declined in North America in particular due to the effects of COVID-19. Earnings EBITDA before special items at Crop Science climbed by 18.2% in the first half of 2020 to €3,976 million (H1 2019: €3,364 million). The increase was mainly due to the realization of cost synergies as we progress with the integration of the acquired businesses, and to higher volumes. Earnings were also helped by the aforementioned decline in product returns in Brazil. In addition, lower impairment losses on receivables compared with the prior-year period and a positive currency effect of €36 million also contributed to the growth in earnings. EBIT amounted to minus €8,100 million (H1 2019: plus €1,272 million) after net special charges of €10,491 million (H1 2019: €716 million) that mainly arose from the provisions established for the glyphosate and dicamba agreements. Other special charges resulted primarily from the recognition of impairment losses on the dicamba production facility in the Herbicides unit and from the integration of Monsanto. 13 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 14 1. Overview of Sales, Earnings and Financial Position Pharmaceuticals A 7 Key Data – Pharmaceuticals Change %1 Change %1 € million Q2 2019 Q2 2020 Reported Fx & p adj. H1 2019 H1 2020 Reported Fx & p adj. Sales 4,422 3,992 – 9.7 – 8.8 8,776 8,538 – 2.7 – 2.5 Change in sales1 Volume + 4.0% – 0.8% + 5.2% + 2.9% Price – 0.1% – 8.0% – 0.6% – 5.4% Currency + 1.2% – 0.9% + 1.4% – 0.2% Portfolio – 0.2% 0.0% – 0.2% 0.0% Sales by region Europe / Middle East / Africa 1,695 1,554 – 8.3 – 7.3 3,370 3,353 – 0.5 – 0.2 North America 984 861 – 12.5 – 13.6 1,909 1,870 – 2.0 – 3.9 Asia / Pacific 1,499 1,387 – 7.5 – 8.1 3,028 2,891 – 4.5 – 5.4 Latin America 244 190 – 22.1 – 3.5 469 424 – 9.6 + 5.7 EBITDA1 1,486 68 – 95.4 2,955 1,410 – 52.3 Special items1 13 (1,300) (3) (1,552) EBITDA before special items1 1,473 1,368 – 7.1 2,958 2,962 + 0.1 EBITDA margin before special items1 33.3% 34.3% 33.7% 34.7% EBIT1 1,220 (165) 2,401 924 – 61.5 Special items1 14 (1,286) (2) (1,538) EBIT before special items1 1,206 1,121 – 7.0 2,403 2,462 + 2.5 Net cash provided by operating activities 719 531 – 26.1 1,989 1,488 – 25.2 Capital expenditures 135 187 + 38.5 215 307 + 42.8 Research and development expenses 670 595 – 11.2 1,366 1,281 – 6.2 2019 figures restated Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2020 Sales Sales at Pharmaceuticals receded by 8.8% (Fx & portfolio adj.) in the second quarter of 2020 to €3,992 million (Q2 2019: €4,422 million). The contact restrictions and protective measures introduced worldwide in connection with the COVID-19 pandemic led to a reduction in and postponement of nonurgent treatments in doctors’ offices and hospitals, which affected our women’s health, ophthalmology and radiology products in particular. However, we registered a slight recovery trend toward the end of the second quarter. In China, the implementation of new tender procedures continued to weigh on business development. // We registered an increase in sales of our oral anticoagulant Xarelto™, largely as a result of higher volumes in China, Russia and Germany. Our license revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson, were up slightly year on year. // Sales of our eye medicine Eylea™ were down against the prior-year period. This was attributable to a reduced number of treatments due to the closure of some eye hospitals and ophthalmology practices, as well as the extension of treatment intervals by patients due to the contact restrictions and stay-at- home measures in Europe. This development was partly offset by the launch of the Eylea™ prefilled syringe in Europe and Japan as well as an overall volume increase in Japan resulting from the changes in order patterns brought about by price reductions. // We registered a considerable decline in sales of our Mirena™ / Kyleena™ / Jaydess™ intrauterine systems. There were substantially fewer product insertions, especially in the United States, with many visits to the doctor canceled or postponed because of the pandemic. Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 15 1. Overview of Sales, Earnings and Financial Position // Business with our cancer drug Stivarga™ continued to grow significantly, mainly in the United States and China. Sales benefited from the product’s oral formulation, which enables treatment to continue outside of hospitals and doctors’ offices. // Sales of our pulmonary hypertension treatment Adempas™ rose significantly, with an increase in demand particularly in the United States. As in the past, sales reflected the proportionate recognition of the upfront and milestone payments resulting from the sGC collaboration with Merck & Co., United States. // Sales of our MRI contrast agents from the Gadovist™ product family fell significantly, especially in the United States and Europe, with fewer MRI scans being performed due to the pandemic. // We registered a sharp decline in sales of our diabetes treatment Glucobay™ that was chiefly attributable to the implementation of the volume-based procurement policy. This involves a substantial price reduction that cannot be offset by the resulting growth in volumes. A 8 Best-Selling Pharmaceuticals Products Change %1 Change %1 € million Q2 2019 Q2 2020 Reported Fx & p adj. H1 2019 H1 2020 Reported Fx & p adj. Xarelto™ 1,007 1,057 + 5.0 + 6.8 1,944 2,172 + 11.7 + 12.6 Eylea™ 604 568 – 6.0 – 6.4 1,187 1,161 – 2.2 – 2.7 Mirena™ / Kyleena™ / Jaydess™ 297 185 – 37.7 – 37.0 619 504 – 18.6 – 19.0 Kogenate™ / Kovaltry™ / Jivi™ 221 205 – 7.2 – 8.1 434 442 + 1.8 + 0.6 YAZ™ / Yasmin™ / Yasminelle™ 167 158 – 5.4 – 3.1 326 335 + 2.8 + 4.1 Nexavar™ 177 169 – 4.5 – 3.5 361 332 – 8.0 – 7.5 Adalat™ 170 154 – 9.4 – 7.6 345 316 – 8.4 – 7.9 Aspirin™ Cardio 142 145 + 2.1 + 5.4 298 316 + 6.0 + 8.3 Stivarga™ 103 129 + 25.2 + 24.8 200 250 + 25.0 + 24.3 Adempas™ 101 125 + 23.8 + 23.6 196 248 + 26.5 + 25.0 Betaferon™ / Betaseron™ 120 112 – 6.7 – 6.5 221 214 – 3.2 – 3.9 CT Fluid Delivery2 101 88 – 12.9 – 13.0 194 190 – 2.1 – 3.1 Gadovist™ product family 105 67 – 36.2 – 36.2 210 179 – 14.8 – 14.8 Glucobay™ 155 40 – 74.2 – 73.8 342 156 – 54.4 – 54.4 Ultravist™ 89 68 – 23.6 – 21.4 170 147 – 13.5 – 11.9 Total best-selling products 3,559 3,270 – 8.1 – 7.3 7,047 6,962 – 1.2 – 1.0 Proportion of Pharmaceuticals sales 80% 82% 80% 82% Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 The CT Fluid Delivery product family comprises injection systems marketed primarily under the Stellant™ brand. Earnings EBITDA before special items at Pharmaceuticals declined in the second quarter of 2020 by 7.1% to €1,368 million (Q2 2019: €1,473 million). This was primarily due to the decrease in sales. There was also a negative currency effect of €13 million. Lower marketing costs and a shift in research and development expenses due to the COVID-19 pandemic had an opposing effect. EBIT declined to minus €165 million (Q2 2019: plus €1,220 million) after net special charges of €1,286 million (Q2 2019: net special gains of €14 million) that mainly comprised expenses for the EssureTM litigation and for restructuring. A 9 Special Items1 Pharmaceuticals € million EBIT Q2 2019 EBIT Q2 2020 EBIT H1 2019 EBIT H1 2020 EBITDA Q2 2019 EBITDA Q2 2020 EBITDA H1 2019 EBITDA H1 2020 Restructuring 30 (42) 21 (32) 29 (56) 20 (46) Litigations / legal risks (15) (1,245) (22) (1,506) (15) (1,245) (22) (1,506) Impairment losses / loss reversals (1) 1 (1) – (1) 1 (1) – Total special items 14 (1,286) (2) (1,538) 13 (1,300) (3) (1,552) 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 16 1. Overview of Sales, Earnings and Financial Position First half of 2020 Sales Sales at Pharmaceuticals fell by 2.5% (Fx & portfolio adj.) in the first six months of 2020, to €8,538 million (H1 2019: €8,776 million). This decline was primarily attributable to the effects of the COVID-19 pandemic on our business, particularly as a result of canceled or postponed treatments. Business was also negatively impacted by the introduction and implementation of new tender procedures in China. Earnings EBITDA before special items at Pharmaceuticals amounted to €2,962 million in the first half of 2020, matching the prior-year period (H1 2019: €2,958 million). EBIT declined by 61.5% to €924 million after net special charges of €1,538 million (H1 2019: €2 million) that mainly comprised expenses in connection with the Essure™ litigation. Consumer Health A 10 Key Data – Consumer Health Change %1 Change %1 € million Q2 2019 Q2 2020 Reported Fx & p adj. H1 2019 H1 2020 Reported Fx & p adj. Sales 1,442 1,201 – 16.7 – 1.9 2,837 2,599 – 8.4 + 5.7 Changes in sales1 Volume + 0.2% – 4.3% – 0.5% + 3.4% Price + 1.9% + 2.4% + 0.9% + 2.3% Currency + 1.3% – 2.3% + 1.4% – 1.2% Portfolio – 1.3% – 12.5% – 1.3% – 12.9% Sales by region Europe / Middle East / Africa 476 384 – 19.3 – 8.2 936 874 – 6.6 + 2.9 North America 600 485 – 19.2 – 0.6 1,203 1,068 – 11.2 + 6.6 Asia / Pacific 207 196 – 5.3 + 1.3 413 388 – 6.1 + 3.7 Latin America 159 136 – 14.5 + 8.1 285 269 – 5.6 + 14.4 EBITDA1 234 243 + 3.8 497 533 + 7.2 Special items1 (51) (11) (78) (22) EBITDA before special items1 285 254 – 10.9 575 555 – 3.5 EBITDA margin before special items1 19.8% 21.1% 20.3% 21.4% EBIT1 (271) 162 . (90) 425 . Special items1 (468) (11) (495) 32 EBIT before special items1 197 173 – 12.2 405 393 – 3.0 Net cash provided by operating activities 208 386 + 85.6 447 533 + 19.2 Capital expenditures 32 24 – 25.0 57 51 – 10.5 Research and development expenses 50 46 – 8.0 101 96 – 5.0 2019 figures restated Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2020 Sales Sales at Consumer Health declined by 1.9% (Fx & portfolio adj.) in the second quarter of 2020, to €1,201 million. After a very strong first quarter, the second quarter showed destocking by retailers and consumers, as expected. Moreover, the quarantine and protective measures introduced in various regions were also a key factor in the decline in sales. Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position // Sales in Europe / Middle East / Africa fell by 8.2% (Fx & portfolio adj.) to €384 million. We registered considerable declines in the Digestive Health, Dermatology and Allergy & Cold categories due to destocking and to the quarantine and protective measures, which resulted in fewer physician consultations. Business in the Nutritionals category showed a continuous growth trajectory. // Sales in North America were level with the prior-year quarter at €485 million (Fx & portfolio adj. minus 0.6%). The Allergy & Cold category in particular saw substantial inventory buildup in the previous quarter before the start of the allergy season, resulting in a marked decline. The Nutritionals category showed continued strong demand with double-digit percentage growth, supported by product-line extensions for our One A Day™ vitamins. // Sales in Asia / Pacific advanced by 1.3% (Fx & portfolio adj.) to €196 million. We achieved significant increases in the Dermatology category after supply disruptions in the previous quarter related to COVID-19 in China. The Nutritionals category also showed significant growth built on continued strong demand, while Allergy & Cold and Pain & Cardio registered marked declines, especially in Australia, due to the quarantine and protective measures. // Sales in Latin America rose by 8.1% (Fx & portfolio adj.) to €136 million. The Nutritionals and Pain & Cardio categories in particular showed strong increases arising from strong demand. In addition, we recorded inflation-driven price increases across all categories in Argentina. A 11 Sales by Category Change %1 Change %1 € million Q2 2019 Q2 2020 Reported Fx & p adj. H1 2019 H1 2020 Reported Fx & p adj. Consumer Health 1,442 1,201 – 16.7 – 1.9 2,837 2,599 – 8.4 + 5.7 Nutritionals 288 318 + 10.4 + 14.4 554 669 + 20.8 + 23.7 Allergy & Cold 272 225 – 17.3 – 17.2 582 586 + 0.7 – 0.3 Dermatology 287 281 – 2.1 + 0.9 553 559 + 1.1 + 2.7 Pain & Cardio 205 193 – 5.9 – 1.3 387 407 + 5.2 + 8.5 Digestive Health 190 171 – 10.0 – 10.1 359 352 – 1.9 – 2.3 Other2 200 13 – 93.5 – 1.3 402 26 – 93.5 – 1.7 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 The divested sun care, prescription dermatology (outside the U.S.) and foot care businesses are included until their respective transfer dates (August 30, 2019, July 1, 2019, and November 1, 2019). Earnings EBITDA before special items declined by 10.9% in the second quarter of 2020 to €254 million (Q2 2019: €285 million). The decrease in earnings was primarily due to lower volumes as a result of COVID-19, the absence of a net amount of around €35 million from the businesses divested in 2019, and a negative currency effect of €9 million. Positive contributions from the efficiency program launched in late 2018 had a compensating effect. EBIT amounted to €162 million (Q2 2019: minus €271 million) after special charges of €11 million in connection with the aforementioned efficiency program (Q2 2019: net special charges of €468 million). A 12 Special Items1 Consumer Health € million EBIT Q2 2019 EBIT Q2 2020 EBIT H1 2019 EBIT H1 2020 EBITDA Q2 2019 EBITDA Q2 2020 EBITDA H1 2019 EBITDA H1 2020 Restructuring (28) (11) (46) (22) (28) (11) (46) (22) Divestments (23) – (32) – (23) – (32) – Impairment losses / loss reversals (417) – (417) 54 – – – – Total special items (468) (11) (495) 32 (51) (11) (78) (22) 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 17 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position First half of 2020 Sales Sales at Consumer Health increased by 5.7% (Fx & portfolio adj.) in the first six months of 2020, to €2,599 million. Growth was mainly buoyed by a substantial increase in demand in all regions, particularly in the Nutritionals and Pain & Cardio categories, impacted by the COVID-19 pandemic. Earnings EBITDA before special items at Consumer Health declined by 3.5% in the first half of 2020 to €555 million (H1 2019: €575 million). Earnings were held back mainly by the absence of a net amount of around €90 million from the businesses divested in 2019 and a negative currency effect of €11 million, while the underlying business performance and the aforementioned efficiency program developed positively. EBIT amounted to €425 million (H1 2019: minus €90 million) after net special gains of €32 million (H1 2019: net special charges of €495 million). Special gains from the reversal of impairment losses recognized on our Afrin™ brand stood against special charges in connection with the aforementioned efficiency program. 1.3 Asset and Financial Position of the Bayer Group Statement of Cash Flows A 13 Bayer Group Summary Statements of Cash Flows € million Q2 2019 Q2 2020 H1 2019 H1 2020 Net cash provided by (used in) operating activities from continuing operations 1,470 2,251 2,515 2,062 Net cash provided by (used in) operating activities from discontinued operations 130 163 164 123 Net cash provided by (used in) operating activities (total) 1,600 2,414 2,679 2,185 Net cash provided by (used in) investing activities (total) (544) (421) (467) (1,019) Net cash provided by (used in) financing activities (total) (1,735) (1,126) (2,903) (1,090) Change in cash and cash equivalents due to business activities (679) 867 (691) 76 Cash and cash equivalents at beginning of period 4,062 2,319 4,052 3,185 Change due to exchange rate movements and to changes in scope of consolidation (2) (31) 20 (106) Cash and cash equivalents at end of period 3,381 3,155 3,381 3,155 Net cash provided by operating activities // Net operating cash flow from continuing operations in the second quarter of 2020 amounted to €2,251 million (Q2 2019: €1,470 million). The increase compared with the prior-year quarter was driven by lower tax payments. Cash outflows in the prior-year quarter included tax payments on the gain from the divestments to BASF. // We also benefited from a smaller increase in receivables than in the prior-year period, coupled with high cash inflows from the settlement of trade accounts receivable. // In addition, the prior-year period included short-term incentive payments to employees in the United States that this year were rescheduled to the first quarter. // Total net operating cash flow came to €2,414 million (Q2 2019: €1,600 million). // Net operating cash flow from continuing operations in the first half of 2020 declined by 18.0% to €2,062 million. Net cash used in investing activities // Net investing cash flow in the second quarter of 2020 amounted to minus €421 million (Q2 2019: minus €544 million). // We invested €585 million (Q2 2019: €458 million) in property, plant and equipment and intangible assets. // Net cash inflows from noncurrent financial assets totaled €64 million (Q2 2019: €28 million). 18 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position // Net investing cash flow in the first half of 2020 amounted to minus €1,019 million (H1 2019: minus €467 million). The considerably higher outflows were primarily attributable to investments in money market funds. Net cash used in financing activities // There was a net cash outflow of €1,126 million for financing activities (Q2 2019: €1,735 million). // Net borrowings led to a cash inflow of €2,066 million (Q2 2019: €1,325 million). // We paid out a €2,751 million dividend in the second quarter. // Net interest payments amounted to €441 million (Q2 2019: €449 million). // The net cash outflow for financing activities in the first half of 2020 amounted to €1,090 million (H1 2019: €2,903 million). Free cash flow // Free cash flow (total), which is the total operating cash flow less capital expenditures plus interest and dividends received less interest paid, came in at €1,402 million in the second quarter of 2020 (Q2 2019: €751 million). // Free cash flow (total) in the first half of 2020 amounted to €609 million (H1 2019: €1,259 million). Net financial debt A 14 Net Financial Debt1 € million Dec. 31, 2019 March 31, 2020 June 30, 2020 Change vs. March 31 % Bonds and notes / promissory notes 33,569 34,150 32,678 – 4.3 of which hybrid bonds2 4,528 4,529 4,530 0.0 Liabilities to banks3 4,062 4,305 4,075 – 5.3 Lease liabilities 1,251 1,216 1,186 – 2.5 Liabilities from derivatives4 123 113 202 + 78.8 Other financial liabilities 89 228 3,178 . Receivables from derivatives4 (76) (371) (243) –34.5 Financial debt 39,018 39,641 41,076 + 3.6 Cash and cash equivalents (3,185) (2,289) (3,148) – 37.5 Current financial assets5 (1,765) (1,953) (1,935) – 0.9 Net financial debt 34,068 35,399 35,993 + 1.7 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Classified as debt according to IFRS 3 Including both financial and nonfinancial liabilities 4 Including the market values of interest-rate and currency hedges of recorded transactions 5 Including short-term receivables with maturities between 3 and 12 months outstanding from banks and other companies, financial investments in debt and equity instruments that were recorded as current on first-time recognition, and Covestro shares // Net financial debt of the Bayer Group increased by €0.6 billion to €36.0 billion in the second quarter of 2020 (March 31, 2020: €35.4 billion). Cash inflows from operating activities and positive currency effects largely offset the outflow for the dividend payment. // Net financial debt includes three subordinated hybrid bonds with a total volume of €4.5 billion, 50% of which is treated as equity by the rating agencies. As such, the hybrid bonds have a positive impact on the Group’s rating-specific debt indicators. // In June 2020, Bayer AG repaid debt instruments (exchangeable bond) with a nominal volume of €1.0 billion in cash. // The other financial liabilities as of June 30, 2020, included €2.9 billion in commercial paper. 19 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Taking into consideration the announced settlement agreements, the rating agencies assess Bayer as follows: A 15 Rating Rating agency Long-term rating Short-term rating Outlook S&P Global Ratings BBB A2 stable Moody’s Baa1 P2 stable Fitch Ratings BBB+ F2 stable Asset and capital structure A 16 Bayer Group Summary Statements of Financial Position € million Dec. 31, 2019 March 31, 2020 June 30, 2020 Change vs. March 31 % Noncurrent assets 93,735 92,477 90,916 – 1.7 Assets held for sale 1,137 1,264 1,192 – 5.7 Other current assets 31,302 31,733 31,559 – 0.5 Current assets 32,439 32,997 32,751 – 0.7 Total assets 126,174 125,474 123,667 – 1.4 Equity 47,433 48,781 35,866 – 26.5 Noncurrent liabilities 55,526 54,373 51,258 – 5.7 Liabilities directly related to assets held for sale 662 641 536 – 16.4 Other current liabilities 22,553 21,679 36,007 + 66.1 Current liabilities 23,215 22,320 36,543 + 63.7 Liabilities 78,741 76,693 87,801 + 14.5 Total equity and liabilities 126,174 125,474 123,667 – 1.4 // Between March 31, 2020, and June 30, 2020, total assets decreased by €1.8 billion to €123.7 billion. // Noncurrent assets declined by €1.6 billion to €90.9 billion, primarily due to depreciation and amortization as well as currency effects. // Total current assets decreased by €0.2 billion to €32.8 billion. This change was mainly the result of a €1.2 billion seasonal decline in trade accounts receivable and a €0.9 billion increase in cash and cash equivalents. // Equity declined by €12.9 billion compared with March 31, 2020, to €35.9 billion, primarily due to the net loss for the quarter and the dividend payment. The equity ratio fell to 29.0% as of June 30, 2020 (March 31, 2020: 38.9%). // Liabilities rose by €11.1 billion as of June 30, 2020, to €87.8 billion, with current liabilities expanding by €14.2 billion and noncurrent liabilities declining by €3.1 billion. The change was mainly attributable to a €12.0 billion increase in provisions for litigations. 20 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 2. Research, Development, Innovation 2. Research, Development, Innovation Leaps by Bayer In July we announced that we have joined with more than 20 other leading biopharmaceutical companies to launch the AMR Action Fund, a ground-breaking partnership that aims to bring two to four new antibiotics to patients by 2030 in collaboration with philanthropies, development banks and multilateral organizations. These treatments are urgently needed to address the rapid rise of infections that do not respond to treatment with existing antibiotics due to antimicrobial resistance (AMR). The companies have pledged to provide nearly US$1 billion in new funding to support the clinical development of innovative new antibiotics. We also announced in July 2020 that through “Leaps by Bayer” we are taking a stake in start-up Vesigen Therapeutics, Massachusetts, United States, to drive forward the development of efficient drug delivery technology for next-generation therapeutics, including cell and gene therapies. This technology has the potential to enable curative treatments across multiple disease areas. Crop Science Collaborations In January, Bayer and Atomwise Inc., which is active in the field of artificial intelligence (AI) for drug discovery, announced that they will continue the development of two crop protection programs. The collaboration is designed to supplement crop protection research with data science findings in order to transform established methods into an integrated system focused on accelerated hypothesis-driven discovery. In view of increasing resistances to current products, new mechanisms of action are needed to bolster integrated pest management systems. Bayer will utilize the compounds resulting from this partnership for field trials and further development. In February, Bayer and Meiogenix announced that they will continue the joint development of Meiogenix’s proprietary technologies related to plant breeding and genome editing applications. These technologies are used to induce the exchange of genomic regions between chromosomes of plant cells during meiosis, the natural process that generates genetic diversity during plant breeding. Technologies based on meiotic recombination provide commercial crops with access to broader genetic diversity, including complex traits for improved food quality, better plant resistance to diseases and pests, and higher yield potential. Research, development and production capacities In March, we opened our new, state-of-the-art and largely automated greenhouse facility in Marana, Arizona, United States. Home to researchers developing innovative solutions, the facility will soon begin supplying farmers with sustainable, high-quality seed. The approximately €89 million facility serves as a global product design center for corn. The breeding station will capitalize on innovation advancements in proprietary seed chipping, advanced marker technology, automation and data science. The greenhouses, which provide nearly 28,000 square meters of growing space, are designed for the sustainable use of inputs throughout the research process, with the facility recycling water, composting harvested materials and using beneficial insects to reduce pesticide applications. Locating the facility in the Arizona desert enables three to four crop cycles annually. 21 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 2. Research, Development, Innovation Pharmaceuticals We are conducting clinical trials with multiple drug candidates from our research and development pipeline. Phase II clinical projects The following table shows our most important drug candidates currently in Phase II of clinical testing: A 17 Research and Development Projects (Phase II)1 Project Indication High-dose aflibercept (VEGF inhibitor)2 Age-related macular degeneration (AMD) Fulacimstat (chymase inhibitor) Chronic kidney disease Osocimab (anti-FXIa antibody) Prevention of thrombosis BAY 1817080 (P2X3 antagonist) Chronic cough BAY 2306001 (IONIS-FXIRx)3 Prevention of thrombosis BAY 2433334 (FXIa inhibitor) Prevention of stroke in atrial fibrillation patients BAY 2433334 (FXIa inhibitor) Secondary prevention of stroke BAY 2433334 (FXIa inhibitor) Prevention of major adverse cardiac events (MACE) BAY 2586116 (task channel blocker) Obstructive sleep apnea Pecavaptan (vasopressin receptor antagonist) Congestive heart failure Levonorgestrel (progestin) + indomethacin (NSAID) combi IUS Contraception Regorafenib + nivolumab combination4 Metastatic colorectal cancer Rogaratinib (pan-FGFR inhibitor) Urothelial cancer Vilaprisan (S-PRM) Endometriosis 1 As of July 3, 2020 2 In collaboration with Regeneron Pharmaceuticals, Inc., United States 3 Sponsored by Ionis Pharmaceuticals, Inc., United States 4 In collaboration with Bristol-Myers Squibb, United States, and Ono Pharmaceutical Co., Ltd., Japan The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising Pharmaceuticals projects. In February, we discontinued the development of BAY 1902607, one of the two P2X3 antagonists. The project was terminated for scientific reasons based on the results of a Phase IIa trial that examined the efficacy and safety of BAY 1902607 in patients with refractory chronic cough. We continue to advance the development of our second P2X3 antagonist, BAY 1817080. In June, as part of the Heart Failure Association (HFA) Discoveries program, results of the Phase IIb VITALITY-HFpEF study, investigating our sGC stimulator vericiguat in patients with chronic heart failure and preserved ejection fraction, were presented. The primary endpoint was not met. 22 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 2. Research, Development, Innovation Phase III clinical projects The following table shows our most important drug candidates currently in Phase III of clinical testing: A 18 Research and Development Projects (Phase III)1 Project Indication Aflibercept (VEGF inhibitor)2 Retinopathy of prematurity High-dose aflibercept (VEGF inhibitor)2 Diabetic macular edema (DME) Copanlisib (PI3K inhibitor) Various types of non-Hodgkin lymphoma (NHL) Regorafenib (multikinase inhibitor) Newly diagnosed or recurrent glioblastoma Darolutamide (ODM-201, AR antagonist) Hormone-sensitive metastatic prostate cancer Darolutamide (ODM-201, AR antagonist) Adjuvant treatment for localized prostate cancer with very high risk of recurrence Finerenone (MR antagonist) Chronic kidney disease in patients with type 2 diabetes Rivaroxaban (FXa inhibitor) Peripheral artery disease (PAD) Vilaprisan (S-PRM) Symptomatic uterine fibroids 1 As of July 3, 2020 2 In collaboration with Regeneron Pharmaceuticals, Inc., United States The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. In March, we presented data from the Phase III VICTORIA study, which investigated the efficacy and safety of vericiguat in patients with worsening chronic heart failure and reduced ejection fraction, at the virtual Annual Scientific Session & Expo of the American College of Cardiology (ACC). The data confirmed that vericiguat significantly reduced the risk of the composite primary efficacy endpoint of cardiovascular death or heart failure hospitalization and was also well tolerated, while the incidence rate of adverse events was comparable to that of placebo. At the ACC congress, Bayer also presented data from the Phase III VOYAGER PAD study demonstrating that the Factor Xa inhibitor rivaroxaban (Xarelto™) in the vascular dose plus ASA 100 mg significantly lowered the combined risk of limb ischemia and major cardiovascular events in patients with symptomatic peripheral artery disease following revascularization. The study for rivaroxaban also demonstrated that the incidence rate of major bleeding was not elevated according to the TIMI definition, the main criteria for safety assessment in this trial. Also at the ACC scientific meeting, Bayer presented results from the clinical Phase IIIb trial PRONOMOS, which investigated rivaroxaban in comparison to enoxaparin in adult patients during a period of immobilization after nonmajor, moderate-risk lower limb orthopedic surgery. Rivaroxaban reduced the risk of major venous thromboembolism compared to enoxaparin. Bleeding rates were low and not statistically different between the two treatment groups. April saw the start of a Phase III trial investigating darolutamide in adjuvant prostate cancer, sponsored by the Australian and New Zealand Urogenital and Prostate Cancer Trials Group (ANZUP) and supported by Bayer. The purpose of this study is to determine the efficacy of darolutamide in combination with a luteinizing hormone-releasing hormone analogue (LHRHA) in men undergoing radiation therapy for localized prostate cancer who are at very high risk for recurrence. The study will include around 1,100 participants from Australia, New Zealand, Europe and North America. In May, we presented the final data from the Phase III ARAMIS trial at the virtual ASCO Annual Meeting showing that darolutamide, a nonsteroidal androgen receptor antagonist, in combination with androgen deprivation therapy (ADT) significantly improves overall survival in men with nonmetastatic castration- resistant prostate cancer (nmCRPC) compared to placebo plus ADT. 23 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 2. Research, Development, Innovation At the ASCO congress we also presented new data on larotrectinib (Vitrakvi™) that demonstrates high efficacy and good tolerability of this precision oncology medication and a sustained improvement in quality of life in patients with TRK fusion cancer. In June, we launched the Phase III PHOTON trial together with Regeneron Pharmaceuticals, Inc., evaluating extended treatment intervals with a new aflibercept 8mg formulation for intravitreal injection in adults with visual impairment due to diabetic macular edema (DME). Aflibercept 2mg is already approved under the brand name Eylea™ in more than 100 countries for five indications. In July, we announced that our Phase III FIDELIO-DKD study evaluating the efficacy and safety of the investigational drug finerenone versus placebo had met its primary endpoint. The results showed that finerenone delayed the progression of chronic kidney disease by significantly reducing the combined risk of time to first occurrence of kidney failure, a sustained decrease of estimated glomerular filtration rate greater than or equal to 40% from baseline over a period of at least four weeks, or renal death. Finerenone also significantly reduced the risk of the key secondary endpoint, a composite of time to first occurrence of cardiovascular death or nonfatal cardiovascular events (nonfatal myocardial infarction, nonfatal stroke, or heart failure hospitalization). Filings and approvals The most important drug candidates in the approval process are shown below. A 19 Main Products Submitted for Approval1 Project Indication Darolutamide (ODM-201, AR antagonist) China2: Castration-resistant nonmetastatic prostate cancer Larotrectinib (LOXO-101, TRK fusion inhibitor) Japan: Solid tumors with NTRK gene fusions Radium-223 dichloride China2: Castration-resistant prostate cancer Rivaroxaban (FXa inhibitor) China2: Prevention of major adverse cardiac events (MACE) Rivaroxaban (FXa inhibitor) E.U., Japan: VTE treatment in children Molidustat (HIF-PH inhibitor) Japan: Renal anemia Vericiguat (sGC stimulator)3 E.U., U.S.A, Japan: Chronic heart failure with reduced ejection fraction (HFrEF) 1 As of July 3, 2020 2 Filings in China are included in this table starting in the second quarter of 2020. The projects were already submitted in prior quarters for approval in the respective indications. 3 Co-development with Merck & Co., Inc., United States In January, darolutamide was approved in Japan under the brand name Nubeqa™ for the treatment of patients with nonmetastatic castration-resistant prostate cancer (nmCRPC). The approval is based on the Phase III ARAMIS trial evaluating the efficacy and safety of darolutamide plus androgen deprivation therapy (ADT) compared to placebo plus ADT. Darolutamide is a nonsteroidal androgen receptor inhibitor that Bayer developed together with Finnish pharmaceutical company Orion Corporation. In February, we submitted an application to the Japanese drug regulatory authorities for approval of molidustat, which we are developing as a new therapeutic option for renal anemia. Molidustat stimulates the production of erythrocytes by imitating the physiological reaction that occurs when the human body adapts to hypoxic conditions such as those prevailing at high altitudes. The marketing authorization application was based on data from clinical trials including the Japanese clinical Phase III MIYABI trial program in nondialysis patients with chronic kidney disease and dialysis patients. Also in February, we filed an application with the Japanese drug regulatory authorities for marketing authorization for rivaroxaban (Xarelto™) to treat venous thromboembolism in children. In March, we received marketing authorization in the European Union for darolutamide to treat patients with nonmetastatic castration-resistant prostate cancer who are at high risk of developing metastatic disease. 24 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 2. Research, Development, Innovation In April 2020, the European Medicines Agency (EMA) approved Eylea™ (aflibercept) injection solution in a prefilled syringe form for all registered indications. The prefilled syringe was also launched on the Japanese market in June 2020. In May, we applied for registration in Japan for the precision oncology treatment larotrectinib, an oral TRK inhibitor that has been developed specifically to treat adults and children with locally advanced or metastatic solid tumors that have a rare genomic alteration called neurotrophic tyrosine receptor kinase (NTRK) gene fusion. The product is already approved under the brand name Vitrakvi™ in several countries, including the United States, Brazil, Canada and countries of the European Union (E.U.). In June, we announced the submission of marketing authorization applications in the E.U. and Japan for vericiguat to treat patients with chronic heart failure. In July, we announced that the United States Food and Drug Administration (FDA) had accepted the New Drug Application for priority review. Developed by Bayer in collaboration with MSD (a trade name of Merck & Co., Inc., Kenilworth, United States), vericiguat is an oral, once-daily active substance that demonstrated positive results in combination with available heart failure therapies in the Phase III VICTORIA study in patients with symptomatic chronic heart failure and reduced ejection fraction of less than 45% who have had a previous worsening heart failure event. Collaborations In addition to the collaborations entered into in January with Evotec SE, Hamburg, Germany, Exscientia Ltd., Oxford, United Kingdom, and Daré Bioscience, Inc., San Diego, United States, which we already reported in the Annual Report 2019, the following collaborations were initiated in the first half of 2020: In March, we signed a research collaboration and licensing agreement with the Indian drug discovery company Curadev Pvt. Ltd., for Curadev’s Stimulator of Interferon Genes (STING) antagonist program. The collaboration aims to discover and develop new drug candidates for the treatment of lung, cardiovascular and other inflammatory diseases. In May, we announced a collaboration with ArcherDX, Inc., a diagnostics company headquartered in Boulder, Colorado, United States, which will focus on the global development and commercialization of therapy-accompanying diagnostic tests – also known as companion diagnostics (CDx) – for Vitrakvi™ (larotrectinib), based on next-generation sequencing. Consumer Health In March, we launched a total of four product line extensions for our One A Day™ vitamins on the U.S. market. One is based on natural fruits, another contains essential vitamins to strengthen the immune system, and the third involves a smaller tablet that is easier to swallow. The fourth contains the active ingredient choline, expanding our range of prenatal vitamins that support cognitive development. 25 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook A 20 Economic Outlook1 Growth 2019 Growth forecast 2020 World + 2.6% – 5.5% European Union2 + 1.5% – 8.2% of which Germany + 0.6% – 6.0% United States + 2.3% – 6.1% Emerging Markets3 + 4.1% – 3.5% 1 Real growth of gross domestic product, source: IHS Markit 2 E.U. excluding United Kingdom, 2019 figures restated 3 Including about 50 countries defined by IHS Markit as Emerging Markets in line with the World Bank As of July 2020 The effects of the COVID-19 pandemic plunged the global economy into a deep recession in the second quarter of 2020. Trade and consumption declined sharply and unemployment increased significantly. Although a modest recovery is anticipated in many countries in the further course of the year, due in part to massive stimulus from monetary and fiscal policy, the effects of the recession are expected to linger for some time to come. A significant decline in global economic output is forecast for the full year, especially in Europe and the United States and also in many of the Emerging Markets. However, all of the economic forecasts, including those for the divisions, involve considerable uncertainties as the effects of COVID-19 still cannot be reliably estimated. A 21 Economic Outlook for Division-Specific Markets Growth 2019 Growth forecast 2020 Seed and crop protection market1 + 1% + 1% Pharmaceuticals market2 + 6% + 3% Consumer health market3 + 4% + 4% 1 Bayer’s estimate (as of July 2020) 2 Source: IQVIA Market Prognosis (as of May 2020), all rights reserved; currency-adjusted 3 Source for forecast: Nicholas Hall (as of July 2020), all rights reserved; 2019: Bayer’s estimate; both currency-adjusted We now expect reduced growth of 1% (previously + 2%) for 2020 in the seed and crop protection market. This is primarily attributable to the outbreak and development of the COVID-19 pandemic, which has substantially impacted demand patterns for biofuels and to a certain extent for animal feed. In light of current developments, especially as a result of the COVID-19 pandemic, we presently expect the pharmaceuticals market as a whole to grow by 1 to 2% (previously + 5%) in 2020 based on our own estimates. This reflects measures taken at local level worldwide to prevent the spread of the pandemic, such as contact restrictions, stay-at-home measures and the postponement of elective, nonurgent treatments, along with possible delays to the launch of new products. We continue to anticipate growth of 4% in the consumer health market in 2020. The tangible growth in the first half of the year was based to a great extent on stockpiling by consumers due to COVID-19. Coupled with protective and quarantine measures and reduced liquidity, this stockpiling is likely to have an impact on the second half of the year. 26 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks 3.1.2 Corporate Outlook The forecast published in February 2020 did not take into account the effects of the COVID-19 pandemic, the financial impact of which remains difficult to predict. We are therefore adjusting the forecast as follows, based on the business development in the first half of the year and assumptions for the rest of the year that involve uncertainties: We anticipate that business at Pharmaceuticals and Consumer Health will normalize overall, although the growth originally envisaged for Pharmaceuticals is not expected to be achieved. In the Crop Science Division we foresee a restrained start in the fourth quarter to the 2021 North America season as a result of pandemic-related reduced demand for biofuel, feed and fiber driving an expected reduction in 2021 planted acres, as well as from ongoing soy market dynamics. This results in the following changes for the Bayer Group’s financial indicators. We are now targeting currency-adjusted growth in sales to €43 billion to €44 billion (previously €44 billion to €45 billion). This corresponds to an increase of 0 to 1% (previously: increase of about 3% to 4%) on a currency- and portfolio-adjusted basis. We continue to target an increase in the EBITDA margin before special items to around 28% on a currency-adjusted basis. Based on the sales target, this would correspond to EBITDA before special items of around €12.1 billion (previously: €12.3 billion to €12.6 billion) on a currency- adjusted basis. We anticipate raising core earnings per share to between €6.70 and €6.90 (previously: increase to between €7.00 and €7.20) on a currency-adjusted basis. The adjusted forecasts for the divisions along with other indicators are contained in the following table: A 16 Forecast for 2020 Initial forecast 2020 from Annual Report Adjusted forecast 2020 € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) Sales1 44 to 45 + 3 to 4 43 to 44 0 to + 1 Crop Science ~ + 4 ~ + 2 Pharmaceuticals + 3 to 4 ~ – 1 Consumer Health + 2 to 3 ~ + 4 Margin (%) Margin (%) EBITDA before special items1 ~ 28 ~ 28 Crop Science ~ 26 ~ 25 Pharmaceuticals ~ 33 34 to 35 Consumer Health 22 to 23 22 to 23 Financial result (core)2 ~ – 1.5 ~ – 1.6 Tax rate (core)3 ~ 23% ~ 23% Free cash flow1 ~ 5 – 0.5 to 0 Net financial debt1 ~ 27 ~ 33 Special items in EBITDA ~ – 0.9 ~ – 14 € € Core earnings per share1 7.00 to 7.20 6.70 to 6.90 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Financial result before special items 3 (Income taxes + special items in income taxes + tax effects on adjustments)/(core EBIT + financial result + special items in financial result) We now plan to take total currency-adjusted special charges of about €14 billion (previously: about €0.9 billion) in 2020, of which we expect €11.5 billion to pertain to the aforementioned agreements in connection with the legacy Monsanto litigation and about €0.8 billion to be spent on restructuring. 27 Bayer Half-Year Financial Report as of June 30, 2020 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks We now expect that payments to resolve litigations will diminish the free cash flow by an amount of €4.5 billion that did not yet feature in our original planning and is to be regarded as extraordinary and nonrecurring. Taking into account the financing of these payments, we now only expect to reduce net financial debt to around €33 billion (previously: to about €27 billion). 3.2 Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal or external developments or events that could significantly impact the achievement of our financial and nonfinancial objectives. Opportunity and risk management at Bayer forms an integral part of the Group-wide corporate governance system. Our opportunity and risk management process and the fundamental opportunity and risk status are outlined in detail in the Annual Report 2019, A 3.2 “Opportunity and Risk Report.” The general risk of a pandemic was described under the risk category “Security” in the Annual Report 2019. The ongoing COVID-19 pandemic has resulted in global containment actions leading to the sudden suspension of various economic activities worldwide. The current pandemic bears risks such as a continued significant decline in global consumption as well as unfavorable geopolitical and macroeconomic effects. Such developments could lead to consequences for Bayer such as a further decline in sales, disruptions in our supply chain including the inability to source certain materials, an increase in input prices, delays to product registrations or an intensification of regulatory pressure. Our earnings, working capital, cash flow and ability to achieve strategic objectives might be negatively impacted. Overall assessment by the Board of Management We see an intensification of our risk status compared with the assessment given in the Annual Report 2019 due to increasing volatility in our environment coupled with the declining predictability of changes, especially in connection with the COVID-19 pandemic. We currently are not aware of any individual risks, risk combinations or risk interdependencies that could endanger the Bayer Group’s continued existence. Significant developments that have occurred in respect of the legal risks since the publication of the Annual Report 2019 (Note [29] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” We also refer to the information provided in the “Key Events” section of this Interim Group Management Report. 28 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements as of June 30, 2020 Bayer Group Consolidated Income Statements B 1 € million Q2 2019 Q2 2020 H1 2019 H1 2020 Net sales 10,713 10,054 22,965 22,899 Cost of goods sold (4,043) (4,018) (8,910) (8,674) Gross profit 6,670 6,036 14,055 14,225 Selling expenses (3,392) (2,907) (6,359) (5,930) Research and development expenses (1,304) (1,167) (2,621) (2,469) General administration expenses (832) (769) (1,915) (1,583) Other operating income 343 299 476 722 Other operating expenses (700) (12,276) (1,071) (13,250) EBIT1 785 (10,784) 2,565 (8,285) Equity-method income (loss) (18) (16) (37) (24) Financial income 66 44 236 80 Financial expenses (503) (304) (952) (984) Financial result (455) (276) (753) (928) Income before income taxes 330 (11,060) 1,812 (9,213) Income taxes (10) 1,450 (368) 971 Income from continuing operations after income taxes 320 (9,610) 1,444 (8,242) of which attributable to noncontrolling interest 1 9 (4) 8 of which attributable to Bayer AG stockholders 319 (9,619) 1,448 (8,250) Income from discontinued operations after income taxes 85 71 197 191 of which attributable to noncontrolling interest – – – – of which attributable to Bayer AG stockholders 85 71 197 191 Income after income taxes 405 (9,539) 1,641 (8,051) of which attributable to noncontrolling interest 1 9 (4) 8 of which attributable to Bayer AG stockholders (net income) 404 (9,548) 1,645 (8,059) € Earnings per share From continuing operations Basic 0.32 (9.79) 1.48 (8.40) Diluted 0.32 (9.79) 1.48 (8.40) From discontinued operations Basic 0.09 0.07 0.20 0.20 Diluted 0.09 0.07 0.20 0.20 From continuing and discontinued operations Basic 0.41 (9.72) 1.68 (8.20) Diluted 0.41 (9.72) 1.68 (8.20) 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 29 Bayer Half-Year Financial Report as of June 30, 2020 Bayer Group Consolidated Statements of Comprehensive Income € million Income after income taxes of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Remeasurements of the net defined benefit liability for post-employment benefit plans Income taxes Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans Changes in the fair value of own credit risk component of financial liabilities measured at fair value Income taxes Other comprehensive income relating to own credit risk component of financial liabilities measured at fair value Changes in the fair value of equity instruments measured at fair value Income taxes Other comprehensive income from equity instruments measured at fair value Other comprehensive income that will not be reclassified subsequently to profit or loss Changes in the fair value of cash flow hedges Reclassified to profit or loss Income taxes Other comprehensive income from cash flow hedges Other comprehensive income from exchange differences Other comprehensive income relating to associates accounted for using the equity method Other comprehensive income that may be reclassified subsequently to profit or loss Total other comprehensive income1 of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Total comprehensive income of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders 1 Other comprehensive income is recognized outside profit or loss in equity. B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Comprehensive Income B 2 Q2 2019 Q2 2020 H1 2019 H1 2020 405 (9,539) 1,641 (8,051) 1 9 (4) 8 404 (9,548) 1,645 (8,059) (1,009) 238 (1,201) 905 345 (25) 421 (312) (664) 213 (780) 593 (1) – (3) – – – 1 – (1) – (2) – 56 34 105 (6) (3) (3) (5) (3) 53 31 100 (9) (612) 244 (682) 584 64 140 (120) 38 38 (112) 108 21 (24) (3) 10 (11) 78 25 (2) 48 (400) (880) 449 (1,384) 1 – – – (321) (855) 447 (1,336) (933) (611) (235) (752) (1) (5) 4 (13) (932) (606) (239) (739) (528) (10,150) 1,406 (8,803) – 4 – (5) (528) (10,154) 1,406 (8,798) 30 Bayer Half-Year Financial Report as of June 30, 2020 Bayer Group Consolidated Statements of Financial Position € million Noncurrent assets Goodwill Other intangible assets Property, plant and equipment Investments accounted for using the equity method Other financial assets Other receivables Deferred taxes Current assets Inventories Trade accounts receivable Other financial assets Other receivables Claims for income tax refunds Cash and cash equivalents Assets held for sale Total assets Equity Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to noncontrolling interest Noncurrent liabilities Provisions for pensions and other post-employment benefits Other provisions Refund liabilities Contract liabilities Financial liabilities Income tax liabilities Other liabilities Deferred taxes Current liabilities Other provisions Refund liabilities Contract liabilities Financial liabilities Trade accounts payable Income tax liabilities Other liabilities Liabilities directly related to assets held for sale Total equity and liabilities 2019 figures restated B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Financial Position B 3 Jan. 1, 2019 June 30, 2019 Dec. 31, 2019 June 30, 2020 38,442 38,368 39,126 38,466 36,696 34,904 34,709 33,722 12,943 13,689 12,479 11,850 515 629 522 524 2,212 2,227 1,536 1,498 526 572 751 745 4,369 5,262 4,612 4,111 95,703 95,651 93,735 90,916 11,012 10,271 10,650 10,128 11,714 14,243 11,678 13,103 1,166 869 2,326 2,560 1,958 1,537 1,811 1,465 809 778 1,652 1,155 4,052 3,343 3,185 3,148 234 1,609 1,137 1,192 30,945 32,650 32,439 32,751 126,648 128,301 126,174 123,667 2,387 2,387 2,515 2,515 18,388 18,388 18,261 18,261 25,118 23,917 26,477 14,928 45,893 44,692 47,253 35,704 171 171 180 162 46,064 44,863 47,433 35,866 8,717 9,799 8,213 7,390 3,418 4,012 3,766 5,108 160 164 105 142 986 892 733 647 37,712 36,652 36,912 33,947 1,433 1,567 1,603 1,644 366 323 439 525 4,667 4,567 3,755 1,855 57,459 57,976 55,526 51,258 3,365 3,023 3,251 13,714 3,622 6,668 4,134 6,378 3,235 816 3,319 787 3,682 6,676 2,182 7,372 6,038 5,384 6,426 5,098 1,050 735 758 835 2,121 2,127 2,483 1,823 12 33 662 536 23,125 25,462 23,215 36,543 126,648 128,301 126,174 123,667 31 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows B 4 € million Q2 2019 Q2 2020 H1 2019 H1 2020 Income from continuing operations after income taxes 320 (9,610) 1,444 (8,242) Income taxes 10 (1,450) 368 (971) Financial result 455 276 753 928 Income taxes paid (886) (314) (1,367) (289) Depreciation, amortization and impairments 1,529 1,180 2,688 2,457 Change in pension provisions (107) (78) (203) (144) (Gains) losses on retirements of noncurrent assets (62) (12) 51 (4) Decrease (increase) in inventories 138 (177) 613 219 Decrease (increase) in trade accounts receivable (81) 915 (2,224) (2,034) (Decrease) increase in trade accounts payable (279) (184) (427) (1,256) Changes in other working capital, other noncash items 433 11,705 819 11,398 Net cash provided by (used in) operating activities from continuing operations 1,470 2,251 2,515 2,062 Net cash provided by (used in) operating activities from discontinued operations 130 163 164 123 Net cash provided by (used in) operating activities 1,600 2,414 2,679 2,185 Cash outflows for additions to property, plant, equipment and intangible assets (458) (585) (853) (976) Cash inflows from the sale of property, plant, equipment and other assets 51 82 65 121 Cash inflows from (outflows for) divestments less divested cash (57) (62) (8) (65) Cash inflows from noncurrent financial assets 148 114 148 321 Cash outflows for noncurrent financial assets (120) (50) (199) (77) Cash outflows for acquisitions less acquired cash (64) – (64) (106) Interest and dividends received 58 14 82 37 Cash inflows from (outflows for) current financial assets (102) 66 362 (274) Net cash provided by (used in) investing activities (544) (421) (467) (1,019) Dividend payments (2,611) (2,751) (2,611) (2,751) Issuances of debt 3,678 3,276 4,171 4,731 Retirements of debt (2,353) (1,210) (3,814) (2,433) Interest paid including interest-rate swaps (453) (448) (659) (654) Interest received from interest-rate swaps 4 7 10 17 Net cash provided by (used in) financing activities (1,735) (1,126) (2,903) (1,090) Change in cash and cash equivalents due to business activities (679) 867 (691) 76 Cash and cash equivalents at beginning of period 4,062 2,319 4,052 3,185 Change in cash and cash equivalents due to changes in scope of consolidation – – (1) (7) Change in cash and cash equivalents due to exchange rate movements (2) (31) 21 (99) Cash and cash equivalents at end of period 3,381 3,155 3,381 3,155 2019 figures restated 32 Bayer Half-Year Financial Report as of June 30, 2020 Bayer Group Consolidated Statements of Changes in Equity € million Capital stock Capital reserves Other reserves Adjustment of value flow concept (84) Jan. 1, 2019 2,387 18,388 25,118 Equity transactions with owners Dividend payments (2,611) Other changes 4 Total comprehensive income 1,406 June 30, 2019 2,387 18,388 23,917 Jan. 1, 2020 2,515 18,261 26,477 Equity transactions with owners Dividend payments (2,751) Other changes Miscellaneous other changes Total comprehensive income (8,798) June 30, 2020 2,515 18,261 14,928 2019 figures restated B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Changes in Equity B 5 Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity (84) (84) 45,893 171 46,064 (2,611) (2,611) 4 4 1,406 1,406 44,692 171 44,863 47,253 180 47,433 (2,751) (14) (2,765) 1 1 (8,798) (5) (8,803) 35,704 162 35,866 33 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Explanatory Notes Accounting policies The consolidated interim financial statements as of June 30, 2020, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2019 fiscal year, particularly with regard to the main recognition and measurement principles, except where financial reporting standards have been applied for the first time in 2020 or an accounting policy has changed. A modified value flow concept was introduced throughout the Bayer Group on January 1, 2020, necessitating the restatement of prior-period data. This is explained in detail below. Modified Value Flow Concept The reason for the new value flow concept being applied throughout the Bayer Group is the Bayer 2022 efficiency program. As part of this program, steering and controlling principles and responsibilities have been revised and simplified. For example, the enabling functions now have global responsibility for their primary costs. The services provided by the enabling functions are therefore to be planned and coordinated at the divisional rather than the country level in the future. To facilitate this steering, the primary costs of the enabling functions are now being passed through to the income statements of the divisions or segments using a standardized, centrally implemented allocation logic in place of multiple local allocation keys. This gives rise to shifts in the cost allocations to the divisions or to “Other Segments / Consolidation” and between the functional cost items. This does not affect Group earnings as a whole – with the exception of a very small proportion related to the change in the amount of capitalized inventories. 34 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements 35 Notes The effects on the functional costs and their allocation to the divisions are shown in the following tables: B 6 Crop Science Pharmaceuticals Consumer Health As reported Restated As reported Restated As reported Restated € million Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Cost of goods sold (2,567) (2,600) (853) (854) (517) (518) Gross profit 2,221 2,188 3,569 3,568 925 924 Selling expenses (964) (1,018) (1,495) (1,493) (889) (874) Research and development expenses (597) (576) (663) (670) (53) (50) General administration expenses (315) (261) (137) (150) (55) (50) Other operating income 224 224 37 38 16 16 Other operating expenses (265) (263) (73) (73) (237) (237) EBIT 304 294 1,238 1,220 (293) (271) EBIT before special items 405 394 1,224 1,206 175 197 EBITDA 974 964 1,513 1,486 219 234 EBITDA before special items 1,075 1,063 1,500 1,473 270 285 Income after income taxes 413 403 1,152 1,134 (209) (187) Net cash provided by (used in) operating activities 880 872 741 719 198 208 B 6 (continued) Reconciliation All Other Segments Enabling Functions and Consolidation Group Discontinued operations As As As As reported Restated reported Restated reported Change Restated reported Change Restated € million Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Q2 2019 Cost of goods sold (35) (35) (39) (36) (4,011) 32 (4,043) (388) (1) (387) Gross profit 14 14 (27) (24) 6,702 (32) 6,670 384 1 385 Selling expenses (2) (2) 7 (5) (3,343) 49 (3,392) (169) (5) (164) Research and development expenses 0 1 (2) (9) (1,315) (11) (1,304) (36) 0 (36) General administration expenses (22) (35) (365) (336) (894) (62) (832) (41) 0 (41) Other operating income 43 9 22 56 342 1 343 4 0 4 Other operating expenses (72) (3) (54) (124) (701) (1) (700) (7) 0 (7) EBIT (40) (17) (418) (441) 791 (6) 785 135 6 141 EBIT before special items (17) (19) (160) (159) 1,627 (8) 1,619 158 6 164 EBITDA (23) 0 (364) (370) 2,319 (5) 2,314 167 6 173 EBITDA before special items 0 1 (108) (92) 2,737 (7) 2,730 190 6 196 Income after income taxes (336) (310) (697) (720) 323 (3) 320 81 4 85 Net cash provided by (used in) operating activities 572 594 (916) (923) 1,475 (5) 1,470 125 5 130 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements 36 Notes B 7 Crop Science Pharmaceuticals Consumer Health As reported Restated As reported Restated As reported Restated € million H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 Cost of goods sold (5,981) (6,046) (1,748) (1,749) (1,000) (1,005) Gross profit 5,251 5,186 7,028 7,027 1,837 1,832 Selling expenses (1,859) (1,967) (2,879) (2,883) (1,524) (1,495) Research and development expenses (1,180) (1,140) (1,352) (1,366) (107) (101) General administration expenses (686) (585) (273) (291) (103) (92) Other operating income 307 307 72 73 28 28 Other operating expenses (533) (529) (159) (159) (263) (262) EBIT 1,300 1,272 2,437 2,401 (132) (90) EBIT before special items 2,019 1,988 2,439 2,403 364 405 EBITDA 2,678 2,649 3,009 2,955 470 497 EBITDA before special items 3,397 3,364 3,012 2,958 549 575 Income after income taxes 1,503 1,475 2,420 2,384 (60) (18) Net cash provided by (used in) operating activities 409 387 2,034 1,989 430 447 B 7 (continued) Reconciliation All Other Segments Enabling Functions and Consolidation Group Discontinued operations As As As As reported Restated reported Restated reported Change Restated reported Change Restated € million H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 H1 2019 Cost of goods sold (61) (61) (59) (49) (8,849) 61 (8,910) (806) (1) (805) Gross profit 37 37 (37) (27) 14,116 (61) 14,055 729 1 730 Selling expenses (2) (2) 10 (12) (6,254) 105 (6,359) (294) (10) (284) Research and development expenses 0 1 (3) (15) (2,642) (21) (2,621) (65) 0 (65) General administration expenses (59) (59) (921) (888) (2,042) (127) (1,915) (62) (2) (60) Other operating income 53 19 15 49 475 1 476 5 0 5 Other operating expenses (74) (5) (46) (116) (1,075) (4) (1,071) (15) 0 (15) EBIT (46) (10) (981) (1,008) 2,578 (13) 2,565 298 13 311 EBIT before special items (11) (12) (351) (342) 4,460 (18) 4,442 325 13 338 EBITDA (12) 24 (880) (872) 5,265 (12) 5,253 359 12 371 EBITDA before special items 23 24 (252) (208) 6,729 (16) 6,713 386 12 398 Income after income taxes (905) (866) (1,504) (1,531) 1,454 (10) 1,444 191 6 197 Net cash provided by (used in) operating activities 568 604 (917) (912) 2,524 (9) 2,515 155 9 164 The above value flow changes also led to a change in the allocation of overheads to inventories. All other things being equal, this resulted in a €120 million reduction in the amount of capitalized overheads and a €36 million increase in deferred tax assets. These figures were restated accordingly as of January 1, 2019, along with equity. They had no material impact on subsequent quarters. Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Impact of COVID-19 In December 2019, a novel strain of coronavirus (SARS-CoV-2) was first identified, and in March 2020, the World Health Organization categorized the disease it causes, COVID-19, as a pandemic. The pandemic has significantly impacted the global economy. Public health efforts to mitigate the impact of the pandemic include government actions such as travel restrictions, limitations on public gatherings, shelter-in-place orders and mandatory closures. As in the first three months of the year, our business activities in the second quarter were affected in different ways by the pandemic and the associated uncertainties. The Pharmaceuticals Division was impacted by the cancellation or postponement of visits to the doctor due to the global protective measures and contact restrictions, as a result of which nonurgent treatments, in particular, were not carried out. After a very strong first quarter at Consumer Health, retailers’ high inventory levels and consumer stockpiling led to a slight decline in business. In the Crop Science Division, uncertainties led to shifts in demand in some regions and product groups, with negative effects likely to be increasingly reflected in the second half of the year. We assessed goodwill and intangible assets for potential impairment during the fourth quarter of 2019. Due to the overall uncertainty and changes in the weighted average cost of capital resulting from the pandemic, we re-evaluated goodwill and intangible assets for potential impairment. No impairments of our cash generating units or intangible assets were found. We also evaluated our further assets, particularly trade accounts receivable and inventories. Our accounts receivable are mainly comprised of net unpaid invoices for product sales. Based on this review, we made no observations in relation to our receivables portfolio that would indicate a significant increase in impairments during the first six months of 2020. We will continue to monitor our trade accounts receivable for potential deterioration resulting from the COVID-19 outbreak. Inventories are stated at the lower of cost or net realizable value. During the first six months, we did not identify increases in slow moving, obsolete, or expired inventory that would indicate a significant deterioration in the net realizable value of inventories. In response to the pandemic and in coordination with local government requirements, we temporarily closed certain offices, with affected employees working remotely. These closures are primarily limited to administrative offices, as production, distribution and logistics remained in operation. The COVID-19 pandemic remains an evolving situation, which may lead to increased risks concerning value creation and asset valuation, such as potential impairment of goodwill and intangible assets, trade accounts receivable and inventories. The uncertainties in the global economy may adversely impact suppliers, customers, and other business partners, which may interrupt our supply chain, limit the ability to collect receivables and require other changes to operations. However, is it not possible to reliably estimate the long-term effects of the pandemic at this time. We will continue to closely monitor the effects of the pandemic, including the impact on inventories, customer receivables and significant estimates regarding goodwill and other intangible assets. 37 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: B 8 Exchange Rates for Major Currencies Closing rate Average rate €1 Dec. 31, 2019 June 30, 2019 June 30, 2020 H1 2019 H1 2020 BRL Brazil 4.52 4.35 6.09 4.34 5.33 CAD Canada 1.46 1.49 1.53 1.51 1.50 CNY China 7.82 7.82 7.92 7.68 7.76 GBP United Kingdom 0.85 0.90 0.91 0.87 0.87 JPY Japan 121.87 122.52 120.63 124.33 119.22 RUB Russia 69.94 71.57 79.56 73.78 76.19 USD United States 1.12 1.14 1.12 1.13 1.10 Argentina’s economy has been considered hyperinflationary since July 1, 2018, and we therefore applied IAS 29 (Financial Reporting in Hyperinflationary Economies) for Bayer S.A., Argentina. The resulting effects in ongoing accounting have so far been immaterial for the Group. The most important interest rates used to calculate the present value of pension obligations are given below: B 9 Discount Rate for Pension Obligations % Dec. 31, 2019 March 31, 2020 June 30, 2020 Germany 1.00 1.70 1.50 United Kingdom 1.95 2.10 1.35 United States 3.20 3.00 2.60 Segment reporting As of June 30, 2020, the Bayer Group comprised the three reportable segments Crop Science, Pharmaceuticals and Consumer Health. B 10 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million Q2 2019 Q2 2020 Q2 2019 Q2 2020 Q2 2019 Q2 2020 Net sales (external) 4,788 4,802 4,422 3,992 1,442 1,201 Currency-and portfolio adjusted change1 – 3.1% + 3.2% + 3.9% – 8.8% + 2.1% – 1.9% Intersegment sales 10 1 11 2 2 – Net sales (total) 4,798 4,803 4,433 3,994 1,444 1,201 EBIT1 294 (9,600) 1,220 (165) (271) 162 EBITDA before special items1 1,063 1,365 1,473 1,368 285 254 Net cash provided by operating activities 872 1,537 719 531 208 386 Depreciation, amortization, impairment losses / loss reversals 670 778 266 233 505 81 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 38 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes B 10 (continued) Key Data by Segment Reconciliation All Other Segments Enabling Functions and Consolidation Group € million Q2 2019 Q2 2020 Q2 2019 Q2 2020 Q2 2019 Q2 2020 Net sales (external) 49 42 12 17 10,713 10,054 Currency- and portfolio-adjusted change1 – 12.2% – 4.5% – – + 1.2% – 2.5% Intersegment sales 45 41 (68) (44) – – Net sales (total) 94 83 (56) (27) 10,713 10,054 EBIT1 (17) (10) (441) (1,171) 785 (10,784) EBITDA before special items1 1 8 (92) (112) 2,730 2,883 Net cash provided by operating activities 594 392 (923) (595) 1,470 2,251 Depreciation, amortization, impairment losses / loss reversals 18 18 70 70 1,529 1,180 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 11 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million H1 2019 H1 2020 H1 2019 H1 2020 H1 2019 H1 2020 Net sales (external) 11,232 11,636 8,776 8,538 2,837 2,599 Currency- and portfolio-adjusted change1 + 1.1% + 4.6% + 4.6% – 2.5% + 0.4% + 5.7% Intersegment sales 24 4 21 2 3 0 Net sales (total) 11,256 11,640 8,797 8,540 2,840 2,599 EBIT1 1,272 (8,100) 2,401 924 (90) 425 EBITDA before special items1 3,364 3,976 2,958 2,962 575 555 Net cash provided by operating activities 387 (224) 1,989 1,488 447 533 Depreciation, amortization, impairment losses / loss reversals 1,377 1,688 554 486 587 108 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 11 (continued) Key Data by Segment Reconciliation All Other Segments Enabling Functions and Consolidation Group € million H1 2019 H1 2020 H1 2019 H1 2020 H1 2019 H1 2020 Net sales (external) 98 96 22 30 22,965 22,899 Currency-and portfolio adjusted change1 – 14.0% + 5.0% – – + 2.6% + 2.0% Intersegment sales 78 79 (126) (85) – – Net sales (total) 176 175 (104) (55) 22,965 22,899 EBIT1 (10) (23) (1,008) (1,511) 2,565 (8,285) EBITDA before special items1 24 13 (208) (232) 6,713 7,274 Net cash provided by operating activities 604 303 (912) (38) 2,515 2,062 Depreciation, amortization, impairment losses / loss reversals 34 36 136 139 2,688 2,457 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” To simplify the consolidation process, leases between fully consolidated companies continue to be recognized as operating leases under IAS 17 within the segment data in the consolidated financial statements of the Bayer Group even after the first-time application of IFRS 16 as of January 1, 2019. This does not have any relevant impact on the respective key data used in the steering of the company and internal reporting to the Board of Management as the chief operating decision maker. 39 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes The following table shows the reconciliation of EBITDA before special items of the above-mentioned segments and the reconciliation to income before income taxes of the Group from continuing operations: B 12 Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million Q2 2019 Q2 2020 H1 2019 H1 2020 EBITDA before special items of segments 2,822 2,995 6,921 7,506 EBITDA before special items of Enabling Functions and Consolidation (92) (112) (208) (232) EBITDA before special items1 2,730 2,883 6,713 7,274 Depreciation, amortization and impairment losses / loss reversals before special items of segments (1,044) (1,098) (2,137) (2,282) Depreciation, amortization and impairment losses / loss reversals before special items of Enabling Functions and Consolidation (67) (58) (134) (127) Depreciation, amortization and impairment losses / loss reversals before special items (1,111) (1,156) (2,271) (2,409) EBIT before special items of segments 1,778 1,897 4,784 5,224 EBIT before special items of Enabling Functions and Consolidation (159) (170) (342) (359) EBIT before special items1 1,619 1,727 4,442 4,865 Special items of segments (552) (11,510) (1,211) (11,998) Special items of Enabling Functions and Consolidation (282) (1,001) (666) (1,152) Special items1 (834) (12,511) (1,877) (13,150) EBIT of segments 1,226 (9,613) 3,573 (6,774) EBIT of Enabling Functions and Consolidation (441) (1,171) (1,008) (1,511) EBIT1 785 (10,784) 2,565 (8,285) Financial result (455) (276) (753) (928) Income before income taxes 330 (11,060) 1,812 (9,213) 2019 figures restated 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” The special items reported for the second quarter of 2020 include a total of €12,050 million in legal costs for settlements and defense costs pertaining to the glyphosate (Crop Science), dicamba (Crop Science), Essure™ (Pharmaceuticals) and PCB (Reconciliation) litigations, that are reflected in other operating expenses. Provisions were established in the corresponding amount. A deferred tax asset of €1,727 million (US$1,943 million) on future tax-deductible expenses was recognized in the second quarter of 2020 for costs arising from the settlements. Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2020, included 382 companies (December 31, 2019: 392 companies). Five joint ventures (December 31, 2019: five) and 15 associates (December 31, 2019: 12) were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). 40 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Acquisitions, divestments and discontinued operations Acquisitions in 2019 On September 20, 2019, Bayer raised its stake in the joint venture BlueRock Therapeutics L.P., Cambridge, Massachusetts, United States, from 40.8% to 100%. Bayer made an upfront payment of €201 million for the remaining stake. Further amounts totaling up to €325 million are payable upon the achievement of pre-defined research-based milestones. A liability of €185 million was recognized for this purpose. This company, previously accounted for using the equity method, was therefore fully consolidated. Remeasurement of the shares previously accounted for using the equity method resulted in an amount of €296 million. The gain of €245 million resulting from the derecognition of the shares previously accounted for using the equity method was recognized in the financial result. The consideration transferred pertained to goodwill of €505 million, internally developed IP R&D of €114 million and other net assets of €63 million. The goodwill primarily pertains to the expected innovation potential. BlueRock Therapeutics is allocated to the Pharmaceuticals segment and focuses on the development of cell therapies across neurology, cardiology and immunology indications using its proprietary CELL+GENE™ platform for induced pluripotent stem cells (iPSC). Sales of €0 million and after-tax income of minus €14 million were recorded for the acquired business since the date of first-time consolidation. Had the above-mentioned acquisition already been made as of January 1, 2019, this would have had no effect on sales, after-tax income or earnings per share of the Bayer Group owing to the way the joint venture agreement governing profit realization had been structured. On June 21, 2019, Bayer acquired 28% of the shares of Century Therapeutics LLC, Philadelphia, Pennsylvania, United States. The purchase price was €129 million, comprising an initial payment of €67 million and an assumed liability of €62 million. A further payment of €62 million will be made upon the achievement of certain milestones, bringing Bayer’s interest in Century Therapeutics LLC to 36%. In view of Bayer’s significant influence, the investment is accounted for in the consolidated financial statements as an associate using the equity method. Century Therapeutics LLC, founded in 2018 by U.S. companies Versant Ventures, San Francisco, and Fujifilm Cellular Dynamics, Inc., Madison, develops allogeneic immune cell therapies for cancer. The foundational technology is built on induced pluripotent stem cells that have unlimited self-renewing capacity. Assets held for sale and discontinued operations On August 20, 2019, Bayer and Elanco Animal Health LLC (Elanco), Greenfield, Indiana, United States, signed an agreement for Bayer to sell its Animal Health business to Elanco for a purchase price of €6,845 million consisting of €4,792 million in cash, subject to customary purchase price adjustments, and €2,053 million in Elanco stock based on the unaffected 30-day volume-weighted average price of US$33.60 as of August 6, 2019. The value of the equity consideration is fixed within a 7.5% collar. This means that the number of Elanco shares that Bayer receives increases (decreases) in the event of share price decreases (increases) within the corridor of US$31.26 to US$36.32. In light of Elanco’s share price of US$21.45 as of June 30, 2020, the value of the equity consideration would have declined by €654 million. Based on this share price, Bayer would receive 73 million Elanco shares. On November 29, 2019, Bayer completed the sale of its shares in the chemical park operator Currenta. Bayer had signed an agreement on August 6, 2019, to sell the stake in Currenta to InfraChem Holdings S.à r.l., Luxembourg, Luxembourg, a company managed by Macquarie Infrastructure and Real Assets. Currenta manages and operates infrastructure, energy supply and other essential services across the chemical parks in Leverkusen, Dormagen and Krefeld-Uerdingen. The preliminary sale price for Bayer’s interest in Currenta is €1,104 million. In addition, Bayer sold a real estate and infrastructure portfolio to Currenta for €180 million. Other divested net assets mainly included pension provisions of €1,584 million. The provisional divestment gain amounts to €1,637 million. Animal Health and Currenta are presented as discontinued operations in the income statements from the third quarter of 2019 onward and for all prior periods. 41 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements 42 Notes The income statements for the discontinued operations are given below: B 13 Income Statements for Discontinued Operations Currenta Animal Health Total € million Q2 2019 Q2 2020 Q2 2019 Q2 2020 Q2 2019 Q2 2020 Net sales 318 – 454 488 772 488 Cost of goods sold (262) – (125) (134) (387) (134) Gross profit 56 – 329 354 385 354 Selling expenses (2) – (162) (162) (164) (162) Research and development expenses (1) – (35) (35) (36) (35) General administration expenses (13) – (28) (50) (41) (50) Other operating income / expenses (2) – (1) 5 (3) 5 EBIT1 38 – 103 112 141 112 Financial result (23) – – (5) (23) (5) Income before income taxes 15 – 103 107 118 107 Income taxes (9) – (24) (35) (33) (36) Income after income taxes 6 – 79 71 85 71 of which attributable to noncontrolling interest – – – – – – of which attributable to Bayer AG stockholders (net income) 6 – 79 71 85 71 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 14 Income Statements for Discontinued Operations Currenta Animal Health Total € million H1 2019 H1 2020 H1 2019 H1 2020 H1 2019 H1 2020 Net sales 660 – 875 984 1,535 984 Cost of goods sold (557) – (248) (273) (805) (273) Gross profit 103 – 627 711 730 711 Selling expenses (5) – (279) (286) (284) (286) Research and development expenses (1) – (64) (67) (65) (67) General administration expenses (18) – (42) (103) (60) (103) Other operating income / expenses (4) – (6) 9 (10) 9 EBIT1 75 – 236 264 311 264 Financial result (39) – (1) (6) (40) (6) Income before income taxes 36 – 235 258 271 258 Income taxes (15) – (59) (67) (74) (67) Income after income taxes 21 – 176 191 197 191 of which attributable to noncontrolling interest – – – – – – of which attributable to Bayer AG stockholders (net income) 21 – 176 191 197 191 1 For definition see Annual Report 2019, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes The cash flows from the discontinued operations in the second quarter of 2020 were as follows: B 15 Cash Flows from Discontinued Operations Currenta Animal Health Total € million Q2 2019 Q2 2020 Q2 2019 Q2 2020 Q2 2019 Q2 2020 Net cash provided by (used in) operating activities 52 – 78 163 130 163 Net cash provided by (used in) investing activities (31) – (16) (14) (47) (14) Net cash provided by (used in) financing activities (21) – (62) (149) (83) (149) Change in cash and cash equivalents – – – – – – The cash flows from the discontinued operations for the first half of 2020 are given in the table below: B 16 Cash Flows from Discontinued Operations Currenta Animal Health Total € million H1 2019 H1 2020 H1 2019 H1 2020 H1 2019 H1 2020 Net cash provided by (used in) operating activities 64 – 100 123 164 123 Net cash provided by (used in) investing activities (54) – (29) (26) (83) (26) Net cash provided by (used in) financing activities (10) – (71) (97) (81) (97) Change in cash and cash equivalents – – – – – – As no cash is assigned to the discontinued operations, the balance of the cash provided is deducted again in financing activities. The assets and liabilities held for sale were mainly those of the businesses to be divested to Elanco, and were comprised as follows: B 17 Assets and Liabilities Held for Sale € million June 30, 2020 Goodwill 97 Other intangible assets 139 Property, plant and equipment 356 Deferred taxes 107 Inventories 337 Trade accounts receivable 8 Other receivables 43 Claims for income tax refunds 98 Cash and cash equivalents 7 Assets held for sale 1,192 Provisions for pensions and other post-employment benefits 193 Other provisions 64 Refund liabilities 54 Financial liabilities 8 Income tax liabilities 142 Deferred taxes 10 Other liabilities 16 Trade accounts payable 49 Liabilities directly related to assets held for sale 536 43 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Divestments in 2020 On February 11, 2020, Bayer announced an agreement with Nuvisan ICB GmbH, Neu-Ulm, Germany, to transfer a large part of the Berlin-based small molecule research unit to Nuvisan. The Nuvisan group is an international service provider for clinical studies, laboratory services and contract manufacturing for the pharmaceuticals industry. The agreement will support Bayer’s increased focus on the flexibility and productivity of its R&D operating model. The transaction closed on June 30, 2020. The provisional base selling price was €0 million, and the provisional divestment loss amounted to €19 million. Divestments in 2019 On December 13, 2019, Bayer and CRISPR Therapeutics AG, Zug, Switzerland, agreed to terminate their collaboration in the joint venture Casebia, which was established in 2015. As part of the agreement, Bayer transferred its interest in the joint venture to CRISPR and received co-marketing rights and a payment of €14 million. A capital contribution of €59 million, previously recognized in liabilities, to which Bayer had committed but was still outstanding, must no longer be made. Bayer completed the sale of its Dr. Scholl’s business on November 1, 2019. Yellow Wood Partners LLC, Boston, United States, had signed an agreement with Bayer on July 19, 2019, to acquire this business. Under IFRS 5 the assets and liabilities pertaining to the business were recognized as held for sale from the second quarter of 2019. Impairment losses of €429 million on the disposal groups, including €208 million on goodwill, were recognized through profit or loss. The final purchase price amounts to €516 million and corresponds to the carrying amount of the derecognized net assets. On August 30, 2019, Bayer completed the sale of the Coppertone™ business to Beiersdorf AG, Hamburg, Germany, the two companies having signed a purchase agreement in May 2019. Under IFRS 5 the assets and liabilities pertaining to the business were recognized in the second quarter of 2019 as held for sale. The final purchase price amounts to €498 million and corresponds to the carrying amount of the derecognized net assets. On July 27, 2018, Bayer signed the agreements to sell the prescription dermatology business of its Consumer Health segment to LEO Pharma A/S, Ballerup, Denmark. The U.S. prescription dermatology business was transferred to the acquirer on September 4, 2018. The final purchase price amounted to €58 million and the final divestment gain to €35 million. The remaining global business outside the United States was transferred to the acquirer on July 1, 2019. The divested portfolio comprises prescription brands including Advantan™, Skinoren™ and Travocort™. The final purchase price amounted to €617 million and the final divestment gain to €347 million. 44 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements 45 Notes Financial instruments The following tables show the carrying amounts and fair values of the individual financial assets and liabilities by category of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the statements of financial position. Since the line items “Trade accounts receivable,” “Other receivables,” “Financial liabilities” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities.” B 18 Carrying Amounts and Fair Values of Financial Instruments June 30, 2020 Measured at fair value [fair value for information4] Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets / liabilities € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Total Trade accounts receivable 12,998 105 13,103 AC 12,998 12,998 Nonfinancial assets 105 105 Other financial assets 197 2,207 457 1,197 4,058 AC 197 [197] 197 FVTPL, mandatory2 2,168 18 926 3,112 FVTOCI (no Recycling), designated3 37 259 296 Derivatives 2 439 12 453 Other receivables 316 66 1,828 2,210 AC 316 [316] 316 FVTPL, mandatory2 66 66 Nonfinancial assets 1,828 1,828 Cash and cash equivalents 3,148 3,148 AC 3,148 [3,148] 3,148 Total financial assets 16,659 2,207 457 1,263 20,586 of which AC 16,659 16,659 of which FVTPL 2,168 18 992 3,178 Financial liabilities 41,041 202 76 41,319 AC 41,041 [31,566] [12,897] 41,041 Derivatives 202 202 Nonfinancial liabilities 76 76 Trade accounts payable 5,098 5,098 AC 5,098 5,098 Other liabilities 1,060 2 238 204 844 2,348 AC 1,060 [1,060] 1,060 FVTPL (nonderivative), mandatory2 198 198 Derivatives 2 238 6 246 Nonfinancial liabilities 844 844 Total financial liabilities 47,199 2 440 204 47,845 of which AC 47,199 47,199 of which derivatives 2 440 6 448 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9, paragraph 5.7.5 4 Fair value of the financial instruments at amortized cost under IFRS 7, paragraph 29(a) Bayer Half-Year Financial Report as of June 30, 2020 Carrying Amounts and Fair Values of Financial Instruments Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) € million Carrying amount Carrying amount Trade accounts receivable 11,430 AC 11,430 FVTPL, mandatory2 Nonfinancial assets Other financial assets 809 1,692 AC 809 FVTPL, mandatory2 1,353 FVTOCI (no Recycling), designated3 336 Derivatives 3 Other receivables 287 AC 287 FVTPL, mandatory2 Nonfinancial assets Cash and cash equivalents 3,185 AC 3,185 Total financial assets 15,711 1,692 of which AC 15,711 of which FVTPL 1,353 Financial liabilities 37,896 1,001 AC 37,896 [33,285] FVTPL (nonderivative), designated4 1,001 Derivatives Nonfinancial liabilities Trade accounts payable 6,426 AC 6,426 Other liabilities 1,156 3 AC 1,156 FVTPL (nonderivative), mandatory2 Derivatives 3 Nonfinancial liabilities Total financial liabilities 45,478 1,004 of which AC 45,478 of which FVTPL (nonderivative) 1,001 of which derivatives 3 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9, paragraph 5.7.5 4 Designated as FVTPL upon first-time recognition under IFRS 9 5 Fair value of the financial instruments at amortized cost under IFRS 7, paragraph 29(a) B Condensed Consolidated Interim Financial Statements 46 Notes B 19 Dec. 31, 2019 Measured at fair value [fair value for information5] Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets / liabilities Carrying amount Carrying amount Carrying amount Total 80 168 11,678 11,430 80 80 168 168 195 1,166 3,862 [809] 809 29 922 2,304 232 568 166 12 181 65 2,210 2,562 [287] 287 65 65 2,210 2,210 3,185 [3,185] 3,185 275 1,231 18,909 15,711 109 987 2,449 123 74 39,094 [6,774] 37,896 1,001 123 123 74 74 6,426 6,426 211 198 1,354 2,922 [1,156] 1,156 193 193 211 5 219 1,354 1,354 334 198 47,014 45,478 193 1,194 334 5 342 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes The category “AC – measured at amortized cost” within other financial assets and in financial liabilities also includes finance lease receivables and lease liabilities in which Bayer is the lessor or lessee and which were therefore measured according to IFRS 16. Due to the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and also the creditworthiness of the counterparty in certain cases. Where a market price is available, however, this is deemed to be the fair value. The fair values of financial assets measured at fair value correspond to quoted prices in active markets (Level 1), or are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit or debt value adjustments are determined to account for the credit risk of the contractual party or Bayer. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into account any foreign currency translation as of the closing date in certain cases. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies to certain debt or equity instruments, in some cases to the fair values of embedded derivatives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as “FVTPL – at fair value through profit or loss” by the discounted cash flow method. Here the credit spreads of comparable issuers are applied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materially affect the fair value. Embedded derivatives are separated from their respective host contracts, provided these are not financial instruments. Such host contracts are generally sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. In June 2020, Bayer AG repaid in cash the exchangeable bond with a nominal volume of €1.0 billion that was measured at fair value through profit or loss. 47 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes The changes in the amount of financial assets and liabilities recognized at fair value based on unobservable inputs (Level 3) for each financial instrument category were as follows: Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI1 (no recycling) Derivatives (net) Liabilities – FVTPL1 (nonderivative) Carrying amounts (net), January 1, 2020 987 232 7 (193) Gains (losses) recognized in profit or loss 4 – (1) (6) of which related to assets / liabilities recognized in the statements of financial position 4 – (1) (6) Gains (losses) recognized outside profit or loss – 19 – – Additions of assets (liabilities) 1 2 – – Settlements of (assets) liabilities – (1) – 1 Disposals from divestments / changes in scope of consolidation – 7 – – Carrying amounts (net), June 30, 2020 992 259 6 (198) 1 See table B 18 for definitions of measurement categories. Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI1 (no recycling) Derivatives (net) Liabilities – FVTPL1 (nonderivative) Carrying amounts (net), January 1, 2019 937 186 32 (20) Gains (losses) recognized in profit or loss 25 – 30 – of which related to assets / liabilities recognized in the statements of financial position 25 – 30 – Gains (losses) recognized outside profit or loss – 2 – – Additions of assets (liabilities) – 25 – – Settlements of (assets) liabilities – – – 6 Carrying amounts (net), June 30, 2019 962 213 62 (14) 1 See table B 19 for definitions of measurement categories. The changes recognized in profit or loss were included in other operating income / expenses, as well as in the financial result in interest income, exchange gains or losses and other financial income and expenses. Contingent liabilities as of June 30, 2020, amounted to approximately €3.1 billion as at the end of 2019. They primarily related to tax and labor law as well as other matters in countries such as the United States, Brazil, India, Greece and Italy. Legal Risks To find out more about the Bayer Group’s legal risks, please see Note 30 to the consolidated financial statements in the Bayer Annual Report 2019, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2019, the following significant changes have occurred in respect of the legal risks: Product-related litigation Essure™: As of July 24, 2020, U.S. lawsuits from approximately 32,000 users of Essure™, a medical device offering permanent birth control with a nonsurgical procedure, had been served upon Bayer. Plaintiffs allege personal injuries from the use of Essure™, including hysterectomy, perforation, pain, bleeding, weight gain, nickel sensitivity, depression and unwanted pregnancy, and seek compensatory and punitive damages. Recently discussions on potential settlements have intensified which made good progress in recent weeks. At the same time, we continue to support the safety and efficacy of the Essure™ device and are prepared to vigorously defend it in litigation. 48 B 20 Total 1,033 (3) (3) 19 3 – 7 1,059 B 21 Total 1,135 55 55 2 25 6 1,223 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Roundup™ (glyphosate): As of July 24, 2020, lawsuits from approximately 56,200 plaintiffs claiming to have been exposed to glyphosate-based products manufactured by Bayer’s subsidiary Monsanto had been served upon Monsanto in the United States. Glyphosate is the active ingredient contained in a number of Monsanto’s herbicides, including Roundup™-branded products. Plaintiffs allege personal injuries resulting from exposure to those products, including non-Hodgkin lymphoma (NHL) and multiple myeloma, and seek compensatory and punitive damages. Additional lawsuits are anticipated. In June 2020, Monsanto reached an agreement in principle with plaintiffs, without admission of liability, to settle most of the current Roundup™ litigation, involving approximately 75% of the total approximately 125,000 known filed and unfiled claims, and to put in place a mechanism to resolve potential future claims. The total costs of the executed and additional inventory settlements for all outstanding claims are currently expected to be up to US$9.6 billion. Monsanto expects that a substantial number of the outstanding claims can be settled in the coming months. The company intends to make an additional payment of US$1.25 billion to support a separate class agreement between Monsanto and plaintiffs’ counsel to address potential future litigation. Monsanto may withdraw from the various settlement agreements if certain eligibility and participation rates are not satisfied. Plaintiffs who opt out of a settlement have the right to pursue their claims separately against the company. On July 6, 2020, Judge Chhabria of the U.S. District Court for the Northern District of California issued a pre-trial order raising concerns about certain aspects of the class settlement agreement and stating that he is tentatively inclined to deny the motion. The parties have decided to withdraw their motion to be able to comprehensively address the court’s questions on the issue class proposal. Bayer remains strongly committed to a resolution that simultaneously addresses the current litigation on reasonable terms and provides a viable solution to manage and resolve future litigation. The three cases that have so far gone to trial – Johnson, Hardeman and Pilliod – will continue through the appeals process and are not covered by the settlement. On July 20, 2020, the Court of Appeal of the State of California (First Appellate District) affirmed the judgment in favor of Johnson but reduced the total judgment from US$78.5 million to approx. US$20.5 million. The court reduced the total compensatory damages award from US$39.3 million to approx. US$10.25 million and the punitive damages award to the same amount. Oral argument before the Ninth Circuit Court of Appeal in the first federal case to go to trial (Hardeman) will likely be scheduled in September-November 2020. The briefing is still ongoing in the third appeal. We believe that the verdicts are not supported by the evidence at trial and the law and therefore intend to pursue the appeals vigorously. As of July 24, 2020, nine Canadian lawsuits relating to Roundup™ seeking class action certification had been served upon Bayer. Bayer believes it has meritorious defenses and intends to defend the safety of glyphosate and our glyphosate-based formulations vigorously. Dicamba: As of July 24, 2020, lawsuits involving approximately 250 plaintiffs have been served upon Bayer’s subsidiary Monsanto and co-defendant BASF in both state and federal court in the United States alleging that Monsanto’s Xtendimax™ herbicide as well as other products containing dicamba, applied over dicamba-tolerant Xtend crops, caused crop damage from off-target movement. Plaintiffs claim, inter alia, that Monsanto and BASF knew or should have known that the application of dicamba to Xtend crops would cause such damage and failed to prevent it. Additional lawsuits are anticipated. In 2018, 35 separate cases were coordinated in a multidistrict litigation (“MDL”) before a federal court in Missouri; the number of cases in the MDL as of July 24, 2020, is approximately 40. In February 2020, the first trial in the MDL proceeding (Bader Farms) resulted in a US$265 million award to the plaintiff, consisting of compensatory damages of US$15 million and punitive damages of US$250 million. Monsanto and co- defendant BASF are jointly and severally liable for the total US$265 million award. We disagree with the decision and have filed post-trial motions asking the court to vacate the entire verdict, order a new trial, and / or significantly reduce the punitive damages amount. In the case of Bader Farms there was no competent evidence presented which showed that Monsanto’s products were present on the farm and / or were responsible for the alleged losses. We believe that we have meritorious defenses and intend to defend ourselves vigorously in these matters. If the trial court does not grant the requested relief in the post-trial motions we have filed, we will appeal. 49 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes In June 2020, Monsanto reached a global agreement with the plaintiffs to settle the dicamba litigation. The settlement provides for the payment of substantiated claims by soybean growers in crop years 2015–2020 who can demonstrate a yield loss due to the application of dicamba products over an Xtend crop. That portion of the settlement is capped at US$300 million. The settlement also provides additional funds of up to US$100 million to pay for claims of dicamba damage by growers of other, non-soybean crops, as well as attorneys’ fees, litigation costs, and settlement administration. The settlement assumes a minimum participation rate of 97% of the existing dicamba cases and claims, failing which Monsanto has an option to cancel the settlement agreement. The Bader Farms case is not included in the settlement. The parties expect the claims process to begin in the fourth quarter of 2020. Insurance against statutory product liability claims In connection with the product-related litigations mentioned above and in the Bayer Annual Report 2019, Bayer is insured against statutory product liability claims to the extent customary in the respective industries and has, based on the information currently available, taken appropriate accounting measures for anticipated defense costs and will do so in due course for the settlements reported above. However, the accounting measures relating to Essure™, dicamba and Roundup™ (glyphosate) claims exceed the available insurance coverage. Patent disputes Xarelto™: In May 2020, Bayer and Janssen Pharmaceuticals filed a patent infringement lawsuit in a U.S. federal court against Unichem, Inc. and Unichem Pharmaceuticals (USA), Inc. (together “Unichem”). In March 2020, Bayer had received notice of an Abbreviated New Drug Application with a paragraph IV certification pursuant to which Unichem seeks approval of a generic version of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, in the United States prior to expiration of Bayer’s compound patent protection until 2024. Bayer believes it has meritorious arguments and intends to defend itself vigorously. Further Legal Proceedings PCBs: Bayer’s subsidiary Monsanto has been named in lawsuits brought by various governmental entities in the United States claiming that Monsanto, Pharmacia and Solutia, collectively as a manufacturer of PCBs, should be responsible for a variety of damages due to PCBs in the environment, including bodies of water, regardless of how PCBs came to be located there. PCBs are man-made chemicals that were widely used for various purposes until the manufacture of PCBs was prohibited by the EPA in the United States in 1979. We believe that we have meritorious defenses and intend to defend ourselves vigorously. In June 2020, Bayer reached an agreement for a nation-wide class settlement to settle claims of approximately 2,500 municipal government entities across the United States for a total payment, including class benefits and attorney fees, of approximately US$650 million. This settlement assumes a minimum participation rate of 98% of all qualified municipal entities, failing which Monsanto will have the option to cancel the settlement agreement. This agreement will require court approval before it becomes effective. Additionally, in June 2020, Bayer reached agreements to settle individual suits brought by the Attorney Generals of the States of New Mexico and Washington, as well as the District of Columbia for a total amount of approximately US$170 million. If these settlements proceed, they will dispose of the majority of the pending suits brought by government entities. Bayer will continue its vigorous defense of any case that remains pending. Monsanto also faces numerous lawsuits claiming personal injury and / or property damage due to use of and exposure to PCB products. We believe that we also have meritorious defenses in these matters and intend to defend ourselves vigorously. 50 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Notes to the Statements of Cash Flows Net operating cash flow from continuing operations in the second quarter of 2020 amounted to €2,251 million (Q2 2019: €1,470 million). The increase was driven by lower tax payments. Changes in other working capital were mainly due to the recognition of provisions for the aforementioned agreements to resolve the litigation. These changes neutralize the corresponding EBIT effect. Total net operating cash flow in the second quarter came to €2,414 million (Q2 2019: €1,600 million). The net cash outflow for investing activities in the second quarter amounted to €421 million (Q2 2019: €544 million). We invested €585 million (Q2 2019: €458 million) in property, plant and equipment and intangible assets. The cash inflow from current financial assets came to €66 million (Q2 2019: €102 million outflow). There was a net cash outflow of €1,126 million for financing activities (Q2 2019: €1,735 million), including net borrowings of €2,066 million (Q2 2019: €1,325 million). We made a dividend payment of €2,751 million. Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or joint control or have a significant influence. They include, in particular, nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate officers of Bayer AG. Sales to related parties were not material from the viewpoint of the Bayer Group. Liabilities for post- employment benefit plans increased by €0.2 billion compared with year-end 2019 (€0.2 billion). Other information On April 28, 2020, the Annual Stockholders’ Meeting approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.80 per share entitled to the dividend be paid for the 2019 fiscal year. The actions of the members of the Board of Management and the Supervisory Board serving in 2019 were ratified in accordance with the proposals by the Board of Management and the Supervisory Board. The Annual Stockholders’ Meeting elected three representatives of the stockholders to the Supervisory Board in accordance with the proposals by the Supervisory Board and approved the compensation system for the members of the Board of Management resolved upon by the Supervisory Board to take effect from January 1, 2020. The compensation of the members of the Supervisory Board defined in Article 12 of the company’s Articles of Incorporation was confirmed by the Annual Stockholders’ Meeting in line with the proposal by the Board of Management and the Supervisory Board. The Annual Stockholders’ Meeting resolved to amend Article 8, Paragraph 2 of the company’s Articles of Incorporation with respect to the term of office of the Supervisory Board members according to the proposal by the Board of Management and the Supervisory Board. In accordance with the proposal by the Supervisory Board, Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, Germany, was elected auditor of the annual and consolidated financial statements for 2020, and also to review, if applicable, the condensed financial statements and interim management report as of June 30, 2020, and if applicable, the condensed financial statements and interim management reports as of September 30, 2020, and March 31, 2021, if these are prepared. 51 Bayer Half-Year Financial Report as of June 30, 2020 B Condensed Consolidated Interim Financial Statements Notes Events After the End of the Reporting Period Bond issue Bayer AG placed bonds with a total volume of €6 billion on July 6, 2020. The issuance comprises four €1.5 billion tranches with maturities of 4 years, 6.5 years, 9.5 years and 12 years. The coupons on the notes are 0.375% p.a., 0.75% p.a., 1.125% p.a. and 1.375% p.a., respectively. Leverkusen, July 27, 2020 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Wolfgang Nickl Stefan Oelrich Heiko Schipper 52 Bayer Half-Year Financial Report as of June 30, 2020 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group in line with generally accepted accounting principles, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the financial year. Leverkusen, July 27, 2020 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Wolfgang Nickl Stefan Oelrich Heiko Schipper 53 Bayer Half-Year Financial Report as of June 30, 2020 Review Report To Bayer Aktiengesellschaft, Leverkusen / Germany We have reviewed the condensed interim consolidated financial statements – comprising the consolidated income statement and the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the condensed consolidated statement of changes in equity as well as selected explanatory notes to the financial statements – and the interim group management report for the period from 1. January until 30. June 2020 of Bayer Aktiengesellschaft, Leverkusen, that are part of the half-year financial report under § 115 WpHG (Wertpapierhandelsgesetz: German Securities Trading Act). The preparation of the interim consolidated financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the entity’s Management Board. Our responsibility is to express a conclusion on the interim consolidated financial statements and on the interim group management report based on our review. We conducted our review of the interim consolidated financial statements and of the interim group management report in compliance with German generally accepted standards for Reviews of Financial Statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) as well as in supplementary compliance with the International Standard on Review Engagements 2410 “Review of Interim Financial Information performed by the Independent Auditor of the Entity”. Those standards require that we plan and perform the review to obtain a certain level of assurance to preclude through critical evaluation, with, that the interim consolidated financial statements are not prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the interim group management report is not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of personnel of the entity and analytical procedures applied to financial data and thus provides less assurance than an audit. Since, in accordance with our engagement, we have not performed an audit, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial statements of Bayer Aktiengesellschaft, Leverkusen, are not prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the group management report is not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Munich / Germany, 28 July 2020 Deloitte GmbH Wirtschaftsprüfungsgesellschaft Prof. Dr. Frank Beine Michael Mehren German Public Auditor German Public Auditor Review Report 54 Bayer Half-Year Financial Report as of June 30, 2020 Financial Calendar / Masthead / Reporting Principles Financial Calendar Financial Calendar Q3 2020 Quarterly Statement 2020 Annual Report Annual Stockholders’ Meeting 2021 Q1 2021 Quarterly Statement November 3, 2020 February 25, 2021 April 27, 2021 May 12, 2021 Masthead Published by Bayer AG, 51368 Leverkusen, Germany Date of publication Tuesday, August 4, 2020 Editor Jörg Schäfer, phone +49 214 30 39136 Email: joerg.schaefer@bayer.com English edition Bayer Translation Services Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com Bayer on the internet www.bayer.com Reporting Principles This Bayer AG Interim Report is a half-year financial report that satisfies the requirements of Section 115, Paragraph 2, No. 1 and No. 2, Paragraph 3 and Paragraph 4 of the German Securities Trading Act (WpHG). Bayer has prepared the condensed consolidated interim financial statements according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (E.U.). This report should be read in conjunction with the Annual Report for the 2019 fiscal year and the additional information about the company provided therein. The Annual Report 2019 is available on our website at www.bayer.com. Forward-Looking Statements This half-year financial report may contain forward-looking statements based on current assumptions and forecasts made by Bayer management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 55

Semestriel, 2020, Agrochemistry, BAYER

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Half-Year Financial Report 2019 Bayer on track in operational business // Group sales increase to €11.5 billion (Fx & portfolio adj. + 0.9%) // EBITDA before special items advances to €2.9 billion (+ 24.7%) // Crop Science sales decline (Fx & portfolio adj. and pro forma) in challenging envi- ronment; substantial earnings growth due to acquired business // Pharmaceuticals posts higher sales and strong earnings growth // Consumer Health increases sales and earnings // Net income €0.4 billion (--- 49.1%), held back by special items for restructuring and impairments // Core earnings per share €1.62 (+ 5.9%) // Group outlook confirmed yet ambitious Bayer Half-Year Financial Report as of June 30, 2019 Contents Bayer Group Key Data ___________________________________________________________________________ 3 Interim Group Management Report as of June 30, 2019 ___________________________________________ 4 1. Overview of Sales, Earnings and Financial Position ____________________________________________ 5 1.1 Earnings Performance of the Bayer Group ____________________________________________________ 5 1.2 Business Development by Segment __________________________________________________________ 9 1.3 Asset and Financial Position of the Bayer Group ______________________________________________ 19 2. Research, Development, Innovation _________________________________________________________ 22 3. Report on Future Perspectives and on Opportunities and Risks ________________________________ 25 3.1 Future Perspectives _______________________________________________________________________ 25 3.2 Opportunities and Risks ____________________________________________________________________ 26 Condensed Consolidated Interim Financial Statements as of June 30, 2019 ________________________ 27 Bayer Group Consolidated Income Statements ___________________________________________________ 27 Bayer Group Consolidated Statements of Comprehensive Income __________________________________ 28 Bayer Group Consolidated Statements of Financial Position _______________________________________ 29 Bayer Group Consolidated Statements of Cash Flows _____________________________________________ 30 Bayer Group Consolidated Statements of Changes in Equity _______________________________________ 31 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group ______________ 32 Responsibility Statement _______________________________________________________________________ 48 Review Report ________________________________________________________________________________ 49 Financial Calendar _____________________________________________________________________________ 50 Reporting Principles ____________________________________________________________________________ 50 Masthead _____________________________________________________________________________________ 50 Contents 2 Bayer Financial Half-Year Report as of June 30, 2019 Bayer Group Key Data € million Q2 2018 Q2 2019 Change % Sales 9,481 11,485 + 21.1 Change (adjusted for currency and portfolio effects) 1 + 0.9 Change in sales 1 Volume + 9.9% +0.4% Price – 1.4% +0.5% Currency – 5.8% +1.2% Portfolio + 6.1% + 19.0% Sales by region Europe / Middle East / Africa 3,603 3,750 +4.1 North America 2,887 4,200 +45.5 Asia / Pacific 2,113 2,326 +10.1 Latin America 878 1,209 +37.7 EBITDA 1 2,031 2,486 + 22.4 Special items 1 (317) (441) EBITDA before special items 1 2,348 2,927 + 24.7 EBITDA margin before special items 1 24.8% 25.5% EBIT 1 1,346 926 – 31.2 Special items 1 (362) (859) EBIT before special items 1 1,708 1,785 + 4.5 Financial result (323) (477) – 47.7 Net income (from continuing and discontinued operations) 794 404 – 49.1 Earnings per share discontinued operations (€) 1 from continuing and 0.87 0.41 – 52.9 Core earnings per share operations (€) 1 from continuing 1.53 1.62 + 5.9 Net cash provided by operating activities (from continuing and discontinued operations) 2,240 1,600 – 28.6 Cash outflows for capital expenditures 459 458 – 0.2 Research and development expenses 1,267 1,351 + 6.6 Depreciation, amortization and impairment losses / loss reversals 685 1,560 + 127.7 Number of employees at end of period 2 124,055 115,498 – 6.9 Personnel expenses (including pension expenses) 2,566 3,029 + 18.0 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Employees calculated as full-time equivalents (FTEs) H1 2018 18,619 + 6.4% – 1.3% – 6.7% + 2.8% 7,510 5,541 4,040 1,528 4,849 (395) 5,244 28.2% 3,656 (440) 4,096 (193) 2,748 3.05 3.76 2,898 808 2,307 1,193 124,055 5,004 Key Data H1 2019 Change % 24,500 + 31.6 + 2.4 + 1.9% + 0.5% + 1.2% + 28.0% 8,193 + 9.1 9,409 + 69.8 4,530 + 12.1 2,368 + 55.0 5,624 + 16.0 (1,491) 7,115 + 35.7 29.0% 2,876 – 21.3 (1,909) 4,785 + 16.8 (793) . 1,645 – 40.1 1.68 – 44.9 4.17 + 10.9 2,679 – 7.6 853 + 5.6 2,707 + 17.3 2,748 + 130.3 115,498 – 6.9 6,504 + 30.0 3 Full Year 2018 39,586 + 4.5% + 5.3% – 0.8% – 4.1% + 12.7% 14,143 11,569 8,115 5,759 10,266 719 9,547 24.1% 3,914 (2,566) 6,480 (1,596) 1,695 1.80 5.94 7,917 2,593 5,246 6,352 116,998 11,548 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report Interim Group Management Report as of June 30, 2019 Key Events In May, we announced the conclusion of an agreement to divest the Coppertone™ business to Beiersdorf AG for a purchase price of US$0.6 billion. The transaction includes the global product rights to Coppertone™, the transfer of the approximately 450 employees in the United States, Canada and China, and the production facility in Cleveland, Ohio, United States. The transaction is expected to close in the third quarter of 2019 subject to the customary closing conditions, including approval by the antitrust authorities. In June, Bayer announced it would set itself higher standards for transparency, sustainability and commu- nication with all stakeholder groups. We also intend to considerably cut the ecological footprint of our agricultural products and are targeting a 30% reduction in environmental impact by 2030.1 We will invest some €5 billion in additional weed control methods over the next 10 years. Also in June, the Supervisory Board of Bayer AG decided on measures in connection with the glyphosate litigations. Among them are the establishment of a new Supervisory Board committee to monitor the current litigations including trial and mediation activities, consult with the Board of Management and make recommendations on the litigation strategy. In addition, U.S. lawyer and product liability litigation expert John H. Beisner has been retained to advise the Supervisory Board on matters related to the glyphosate litigations on an ongoing basis. On July 1, 2019, the sale of the global prescription dermatology business of Consumer Health to LEO Pharma A/S, Ballerup, Denmark, was completed following the transfer of the U.S. business in September 2018. The divested portfolio comprises prescription brands such as Advantan™, Skinoren™ and Travocort™. A production site in Segrate, Italy, and 347 employees were also transferred. The base purchase price for the remaining global business was €0.6 billion and is subject to customary purchase price adjustments. The divestment gain is provisionally estimated at €0.3 billion. The base purchase price for the divested business as a whole was therefore approximately €0.6 billion, with the divestment gain estimated at around €0.4 billion. On July 19, 2019, Bayer entered into an agreement with Yellow Wood Partners, Boston, United States, regarding the sale of the Dr. Scholl’s™ business of Consumer Health for a purchase price of US$0.6 billion. The transaction is expected to close in the fourth quarter of 2019 subject to the satisfaction of customary closing conditions, including approval by antitrust authorities. 1 Calculated by comparing the Environmental Impact Quotient (EIQ), which relates volume to toxicity, against the current market standards. 4 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position 1. Overview of Sales, Earnings and Financial Position 1.1 Earnings Performance of the Bayer Group The purchase price allocation for the Monsanto acquisition was finalized in the second quarter of 2019. The financial information for prior periods has been adjusted accordingly. Details on the adjustments are given in this report under “Acquisitions in 2018” in B Notes to the Condensed Consolidated Interim Financial Statements. 2 Second quarter of 2019 Group sales Group sales in the second quarter of 2019 rose by 0.9% (Fx & portfolio adj.) to €11,485 million (reported: + 21.1%). Germany accounted for €933 million of this figure. Crop Science registered a 3.1% (Fx & portfolio adj.) decline in sales to €4,788 million that resulted primarily from the extreme weather conditions in North America. On a reported basis, sales of Crop Science climbed by 59.0%, thanks mainly to portfolio effects of 61.0% (€1,835 million). Pharmaceuticals posted sales growth of 3.9% (Fx & portfolio adj.) to €4,422 million, with business in China developing especially positive- ly. Sales of Consumer Health increased by 2.1% (Fx & portfolio adj.) to €1,442 million, due largely to growth in the Latin America and Europe / Middle East / Africa regions. At Animal Health, sales declined by 2.7% (Fx & portfolio adj.) to €454 million. EBITDA before special items Group EBITDA before special items rose by 24.7% to €2,927 million. Negative currency effects arising primarily from hedging diminished earnings by €59 million compared with the previous year. There was a positive effect of approximately €100 million from IFRS 16, which has been applied since January 1, 2019. Under the new standard, lease expenses are no longer recognized in operating income. Crop Science posted a 66.9% increase in EBITDA before special items to €1,075 million, mainly due to the acquired business. EBITDA before special items at Pharmaceuticals rose by 10.1% to €1,500 million, largely as a result of higher demand. At Consumer Health, EBITDA before special items increased by 5.5% to €270 million. EBITDA before special items of Animal Health declined by 3.1% to €124 million. Depreciation and amortization Depreciation, amortization and impairment losses amounted to €1,560 million in the second quarter of 2019 (Q2 2018: €685 million). The increase was primarily due to the acquisition of Monsanto and the relat- ed depreciation and amortization of acquired assets, and to the depreciation of right-of-use assets recog- nized for the first time within property, plant and equipment under IFRS 16. Amortization and impairments on intangible assets were €1,075 million (Q2 2018: €409 million), while depreciation and impairments on property, plant and equipment amounted to €485 million (Q2 2018: €275 million). Impairment losses totaled €430 million (Q2 2018: €54 million), including €424 million (Q2 2018: €52 million) on intangible assets. Of this figure, €421 million pertained to the agreed divestment of our Dr. Scholl’s™ foot care portfolio and partly resulted from the impairment of the proportionate goodwill to be transferred. 2 For definition of alternative performance measures see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 5 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position EBIT and special items EBIT of the Bayer Group fell by 31.2% to €926 million (Q2 2018: €1,346 million) after net special charges of €859 million (Q2 2018: €362 million). The special charges mainly comprised the above-mentioned impairment losses in connection with the agreed divestment of our Dr. Scholl’s™ foot care portfolio and €249 million related to the announced restructuring measures. EBIT before special items increased by 4.5% to €1,785 million (Q2 2018: €1,708 million). The following special effects were taken into account in calculating EBIT and EBITDA: Special Items by Category 1 € million EBIT Q2 2018 EBIT Q2 2019 EBIT H1 2018 EBIT H1 2019 EBITDA Q2 2018 EBITDA Q2 2019 EBITDA H1 2018 Total special items (362) (859) (440) (1,909) (317) (441) (395) Impairment losses / loss reversals (43) (418) (43) (418) – (1) – Litigations / legal risks (2) (77) (6) (128) (2) (77) (6) of which in the Reconciliation – (22) (3) (35) – (22) (3) Acquisition and integration costs (287) (112) (348) (604) (285) (112) (346) of which in the Reconciliation (12) (8) (15) (14) (12) (8) (15) Restructuring (31) (249) (44) (642) (31) (248) (44) of which in the Reconciliation (13) (251) (18) (616) (13) (249) (18) Divestments 1 (3) 1 (117) 1 (3) 1 of which in the Reconciliation – (6) – (6) – (6) – 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Special Items by Functional Cost 1 € million EBIT Q2 2018 EBIT Q2 2019 EBIT H1 2018 EBIT H1 2019 EBITDA Q2 2018 EBITDA Q2 2019 EBITDA H1 2018 Total special items (362) (859) (440) (1,909) (317) (441) (395) Cost of goods sold (147) (64) (157) (506) (144) (65) (154) Selling expenses (16) (240) (18) (250) (16) (31) (18) Research and development expenses (50) – (53) (11) (7) – (10) General administration expenses (149) (281) (207) (756) (149) (280) (207) Other operating income / expenses – (274) (5) (386) (1) (66) (6) 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Income after income taxes from discontinued operations Income after income taxes from discontinued operations was €0 million (Q2 2018: minus €8 million). Net income Including a financial result of minus €477 million (Q2 2018: minus €323 million), income before income taxes was €449 million (Q2 2018: €1,023 million). The financial result mainly comprised a net loss of €32 million from investments in affiliated companies (Q2 2018: net income of €56 million), net interest expense of €372 million (Q2 2018: €270 million) and interest cost of €87 million (Q2 2018: €42 million) for pension and other provisions. Reflected in the financial result are net special charges of €56 million (Q2 2018: €106 million) that resulted mainly from a change in the fair value of the interest in Covestro. After income tax expense of €44 million (Q2 2018: €215 million) and adjusted for income attributable to noncontrolling interest, net income for the second quarter of 2019 amounted to €404 million (Q2 2018: €794 million). 6 A 1 EBITDA H1 2019 (1,491) (1) (128) (35) (604) (14) (641) (614) (117) (6) A 2 EBITDA H1 2019 (1,491) (507) (41) (11) (755) (178) Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Core earnings per share Earnings per share (total) declined in the second quarter of 2019 to €0.41 (Q2 2018: €0.87), largely because of the acquisition and integration costs and restructuring expenses recognized as special items, as well as the acquisition-related increase in amortization of intangible assets. Core earnings per share from continuing operations rose by 5.9% to €1.62 (Q2 2018: €1.53). A 3 Core Earnings per Share 1 € million Q2 2018 Q2 2019 H1 2018 H1 2019 EBIT (as per income statements) 1,346 926 3,656 2,876 Amortization and impairment losses / loss reversals on goodwill and other intangible assets 409 1,075 706 1,781 Impairment losses / loss reversals on property, plant and equipment, and accelerated depreciation included in special items 2 7 9 5 Special items (other than accelerated depreciation, amortization and impairment losses / loss reversals) 317 441 395 1,491 Core EBIT 2,074 2,449 4,766 6,153 Financial result (as per income statements) (323) (477) (193) (793) Special items in the financial result 106 56 (130) 2 Income taxes (as per income statements) (215) (44) (709) (442) Special items in income taxes – – – – Tax effects related to amortization, impairment losses / loss reversals and special items (236) (387) (343) (828) Income after income taxes attributable to noncontrolling interest (as per income statements) (6) (1) (6) 4 Above-mentioned adjustments attributable to noncontrolling interest – (1) – (1) Core net income from continuing operations 1,400 1,595 3,385 4,095 Shares (million) Weighted average number of shares 2 915.69 981.73 900.70 980.95 € Core earnings per share from continuing operations 1.53 1.62 3.76 4.17 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 The weighted average number of shares (basic and diluted) was restated pursuant to IAS 33 for all periods prior to June 2018 to reflect the effect of the bonus component of the subscription rights issued as part of the June 2018 capital increase, because the subscription price of the new shares was below the market price of the existing shares. Personnel expenses and employee numbers The number of employees in the Bayer Group as of the closing date declined year on year by 6.9% to 115,498 (June 30, 2018: 124,055). The prior-year total included the employees of the businesses since divested to BASF. Personnel expenses rose by 18.0% to €3,029 million (Q2 2018: €2,566 million). This was mainly due to the higher average number of employees as a result of the Monsanto acquisition closing in June of the previous year. Furthermore, additions to provisions were made in connection with the an- nounced restructuring measures. First half of 2019 Group sales Group sales in the first half of 2019 rose by 2.4% (Fx & portfolio adj.) to €24,500 million (reported: + 31.6%). Germany accounted for €1,995 million of this figure. Sales of Crop Science advanced by 1.1% (Fx & portfolio adj.) to €11,232 million. On a reported basis, sales increased by 91.3%, thanks mainly to the portfolio effects of 89.5% (€5,256 million). Sales of Pharmaceuticals rose by 4.6% (Fx & portfolio adj.) to €8,776 million. Sales at Consumer Health came in level with the prior-year period at €2,837 million (Fx & portfolio adj. + 0.4%). Animal Health posted a 1.8% decrease (Fx & portfolio adj.) in sales to €875 million. 7 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position EBITDA before special items EBITDA before special items of the Bayer Group advanced by 35.7% to €7,115 million (H1 2018: €5,244 million). Negative currency effects arising primarily from hedging diminished earnings by €169 million. There was a positive effect of approximately €190 million from IFRS 16, which has been ap- plied since January 1, 2019. Under the new standard, lease expenses are no longer recognized in operat- ing income. At Crop Science, EBITDA before special items increased by 101.5% to €3,397 million. This was mainly attributable to the earnings contribution from the acquired business. EBITDA before special items at Pharmaceuticals advanced by 8.4% to €3,012 million. Consumer Health saw EBITDA before spe- cial items decrease by 3.5% to €549 million. At Animal Health, earnings declined by 1.1% to €264 million. Depreciation and amortization Depreciation, amortization and impairment losses amounted to €2,748 million in the first half of 2019 (H1 2018: €1,193 million). The increase was primarily due to the acquisition of Monsanto and the related depreciation and amortization of acquired assets and to the depreciation of right-of-use assets that were recognized for the first time within property, plant and equipment in the first quarter of 2019 under IFRS 16. This figure comprised €1,781 million (H1 2018: €706 million) in amortization and impairments on intangible assets and €967 million (H1 2018: €487 million) in depreciation and impairments on property, plant and equipment. Net impairment losses totaled €429 million (H1 2018: €75 million), including €425 million (H1 2018: €66 million) in impairment losses on intangible assets. Of this figure, €421 million pertained to the agreed divestment of our Dr. Scholl’s™ foot care portfolio and partly resulted from the impairment of the propor- tionate goodwill to be transferred. A total of €418 million (H1 2018: €45 million) in impairment losses and impairment loss reversals constituted special items. EBIT and special items EBIT of the Bayer Group fell by 21.3% to €2,876 million (H1 2018: €3,656 million) after net special charges of €1,909 million (H1 2018: €440 million). The special charges mainly comprised €662 million in connection with the acquisition and integration of Monsanto, including €483 million from the remeasurement of inven- tories, as well as €642 million associated with the announced restructuring, and impairments related to the agreed divestment of our Dr. Scholl’s™ foot care portfolio. EBIT before special items increased by 16.8% to €4,785 million (H1 2018: €4,096 million). Net income After a financial result of minus €793 million (H1 2018: minus €193 million), income before income taxes was €2,083 million (H1 2018: €3,463 million). The financial result comprised income from investments in affiliated companies of €30 million (H1 2018: €402 million), mainly from the interest in Covestro, along with net interest expense of €717 million (H1 2018: €362 million), an exchange loss of €8 million (H1 2018: €78 million) and interest cost of €153 million (H1 2018: €87 million) for pension and other provisions. The financial result included net special charges of €2 million (H1 2018: net special gains of €130 million). After tax expense of €442 million (H1 2018: €709 million), income after income taxes was €1,641 million (H1 2018: €2,754 million). After adjusting for income from discontinued operations after income taxes and income attributable to noncontrolling interest, net income came to €1,645 million (H1 2018: €2,748 million). Core earnings per share Earnings per share (total) declined by 44.9% to €1.68 (H1 2018: €3.05), while core earnings per share from continuing operations advanced by 10.9% to €4.17 (H1 2018: €3.76). 8 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 9 1. Overview of Sales, Earnings and Financial Position 1.2 Business Development by Segment Crop Science A 4 Key Data – Crop Science Change % 1 Change % 1 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Sales 3,011 4,788 + 59.0 – 3.1 5,872 11,232 + 91.3 + 1.1 Change in sales 1 Volume + 22.0% – 3.4% + 8.6% + 0.1% Price – 0.6% + 0.3% – 0.5% + 1.0% Currency – 7.2% + 1.1% – 7.3% + 0.7% Portfolio + 25.0% + 61.0% + 10.3% + 89.5% Sales by region Europe / Middle East / Africa 986 1,092 + 10.8 – 1.8 2,280 2,856 + 25.3 0.0 North America 1,076 2,397 + 122.8 – 13.5 2,045 5,921 + 189.5 – 4.6 Asia / Pacific 508 533 + 4.9 – 1.7 876 921 + 5.1 – 1.7 Latin America 441 766 + 73.7 + 17.7 671 1,534 + 128.6 + 25.8 EBITDA 1 367 974 + 165.4 1,348 2,678 + 98.7 Special items 1 (277) (101) (338) (719) EBITDA before special items 1 644 1,075 + 66.9 1,686 3,397 + 101.5 EBITDA margin before special items 1 21.4% 22.5% 28.7% 30.2% EBIT 1 149 304 + 104.0 1,041 1,300 + 24.9 Special items 1 (279) (101) (340) (719) EBIT before special items 1 428 405 – 5.4 1,381 2,019 + 46.2 Net cash provided by operating activities 1,653 880 – 46.8 950 409 – 56.9 Capital expenditures 174 197 + 13.2 237 420 + 77.2 Research and development expenses 396 597 + 50.8 653 1,180 + 80.7 2018 figures restated; fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2019 Sales Crop Science posted sales of €4,788 million in the second quarter of 2019. Sales rose by 59.0% on a reported basis, thanks mainly to a positive portfolio effect of 61.0% due to the acquisition of Monsanto (€2,320 million) less the prorated contribution from the divested businesses in the prior-year period (€484 million). Overall, business at Crop Science in the second quarter was significantly impacted by ex- treme weather conditions. In particular, flooding and heavy rains in the Midwestern United States and drought in large parts of Europe and in Canada had a negative effect. The ongoing trade disputes involving the United States also weighed on business. Sales were down by 3.1% after adjusting for currency and portfolio effects, with the acquired business only taken into account for the period June 7 to June 30. This decline was mainly the result of a considerable drop in sales in North America. Significant gains in Latin America did not offset this effect. // Sales in Europe / Middle East / Africa rose by 11.0% (Fx adj.) to €1,092 million. The portfolio effect amounted to €126 million. Adjusted for currency and portfolio effects, business declined by 1.8%. SeedGrowth (Other) saw lower sales following a loss of registrations in Europe, and business at Fungicides also receded due to the exceptionally dry weather conditions in parts of Europe. Insecticides, however, posted encouraging gains. // Sales in North America advanced by 120.2% (Fx adj.) to €2,397 million. There was a portfolio effect of €1,438 million. The 13.5% decline after adjusting for currency and portfolio effects was primarily due to the extreme weather conditions. Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 10 1. Overview of Sales, Earnings and Financial Position // Sales in the Asia / Pacific region increased by 4.2% (Fx adj.) to €533 million. The portfolio effect here was €30 million. Adjusted for currency and portfolio effects, business declined by 1.7%. Sales of Herbicides and Insecticides in India moved back as a result of anticipated shifts in demand into the third quarter. // Sales in Latin America advanced by 72.4% (Fx adj.) to €766 million. The portfolio effect was €241 million. Adjusted for currency and portfolio effects, sales moved ahead by 17.7%. Growth in this region came from volume increases for Herbicides, Fungicides and Insecticides in Brazil. A 5 Sales by Strategic Business Entity Change % 1 Change % 1 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Crop Science 3,011 4,788 + 59.0 – 3.1 5,872 11,232 + 91.3 + 1.1 Herbicides 1,028 1,337 + 30.1 – 1.5 1,828 2,710 + 48.2 + 3.5 Corn Seed & Traits 134 941 . – 25.9 172 3,315 . – 19.0 Soybean Seed & Traits 147 481 . – 31.0 206 1,085 . – 21.9 Fungicides 709 661 – 6.8 – 7.3 1,437 1,358 – 5.5 – 6.0 Insecticides 329 388 + 17.9 + 16.3 628 724 + 15.3 + 14.5 Environmental Science 183 286 + 56.3 + 8.9 297 538 + 81.1 + 3.8 Vegetable Seeds 128 178 + 39.1 + 17.9 272 346 + 27.2 + 8.4 Other 353 516 + 46.2 – 10.3 1,032 1,156 + 12.0 + 3.9 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items of Crop Science rose in the second quarter of 2019 by 66.9% to €1,075 million (Q2 2018: €644 million). The increase was largely attributable to the earnings contribution from the newly acquired business. Earnings were diminished by the decline in sales, the absence of the earnings contribution from the businesses divested to BASF, inventory write-downs and a negative currency effect of €26 million. EBIT doubled to €304 million (Q2 2018: €149 million) after net special charges of €101 million (Q2 2018: €279 million), mainly including a total of €61 million in connection with the acquisition and integration of Monsanto and the divestments to BASF – of which €55 million comprised prorated reversals of inventory step-ups – as well as legal fees in connection with the glyphosate litigations. First half of 2019 Sales Crop Science posted sales of €11,232 million in the first half of 2019. Sales climbed by 91.3% on a reported basis, thanks mainly to a positive portfolio effect of 89.5% from the acquisition of Monsanto (€6,649 million) less the prorated contribution from the divested businesses in the prior-year period (€1,393 million). Adjusted for currency and portfolio effects, business expanded by 1.1%. Sales rose markedly in Latin America due to demand shifts from the fourth quarter of 2018 and lower sales in the prior-year period in connection with the normalization of inventories for crop protection products in Brazil. By contrast, business in North America was down due to the weather conditions. Earnings EBITDA before special items of Crop Science doubled to €3,397 million in the first half of 2019 (H1 2018: €1,686 million). The increase was largely attributable to the earnings contribution from the newly acquired business. Earnings were diminished by the decline in sales, the absence of the earnings contribution from the businesses divested to BASF, inventory write-downs and a negative currency effect of €93 million. Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position EBIT increased by 24.9% to €1,300 million (H1 2018: €1,041 million) after net special charges of €719 million (H1 2018: €340 million), mainly including a total of €648 million in connection with the acquisi- tion and integration of Monsanto and the divestments to BASF – of which €483 million comprised prorated reversals of inventory step-ups – as well as legal fees in connection with the glyphosate litigations. Special Items 1 Crop Science € million EBIT Q2 2018 EBIT Q2 2019 EBIT H1 2018 EBIT H1 2019 EBITDA Q2 2018 EBITDA Q2 2019 EBITDA H1 2018 Restructuring (3) – (5) – (3) – (5) Litigations / legal risks (2) (40) (3) (71) (2) (40) (3) Acquisition and integration costs (275) (104) (333) (590) (273) (104) (331) Divestments 1 43 1 (58) 1 43 1 Total special items (279) (101) (340) (719) (277) (101) (338) 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Pro-forma sales by strategic business entity Due to the scope of the acquired activities and the seasonality of the business, we are presenting sales by strategic business entity on a pro-forma basis in order to more transparently reflect the underlying opera- tional business development for the combined business of Crop Science and Monsanto, among other reasons. In this context, sales are presented as if both the acquisition of Monsanto and the associated divestments had already taken place as of January 1, 2018. Sales from the aforementioned service agree- ments with BASF after the divestments closed are not included. Pro-Forma Sales by Strategic Business Entity 1 Change % 2 € million Q2 2018 Q2 2019 Reported Fx adj. H1 2018 H1 2019 Reported Crop Science 5,095 4,758 – 6.6 – 9.9 11,243 11,112 – 1.2 Herbicides 1,454 1,319 – 9.3 – 11.4 2,757 2,663 – 3.4 Corn Seed & Traits 961 941 – 2.1 – 7.8 3,235 3,315 + 2.5 Soybean Seed & Traits 686 482 – 29.7 – 34.4 1,352 1,085 – 19.7 Fungicides 710 659 – 7.2 – 7.4 1,437 1,357 – 5.6 Insecticides 329 389 + 18.2 + 17.1 627 724 + 15.5 Environmental Science 283 287 + 1.6 – 3.2 521 535 + 2.7 Vegetable Seeds 175 178 + 1.5 0.0 351 346 – 1.4 Other 497 501 + 0.8 – 4.7 961 1,085 + 12.9 Fx adj. = currency-adjusted 1 The unaudited pro-forma data are presented as if both the acquisition of Monsanto and the associated divestments had taken place as of January 1, 2018. Sales of Monsanto are presented in periods as per the Bayer fiscal year. One-time effects of business operations, the accounting for discontinued operations and the recognition and measurement of sales from certain business transactions have been adjusted in line with our accounting. Due to this simplified procedure, they explicitly do not reflect sales according to IFRS or IDW RH HFA 1.004. 2 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2019 Sales in the second quarter of 2019 on a pro-forma basis fell by a currency-adjusted 9.9%. // The decline for Herbicides was largely the result of high inventories at distributors as well as extreme weather conditions in the United States, where flooding and heavy rains in the Midwest delayed sowing and led to lower volumes from an overall reduction in acreages planted and fewer pre-plant applications, especially for Roundup™. // Corn Seed & Traits sales were down, mainly because of the drop in acreages planted caused by the weather conditions mentioned and as a result of an unfavorable product mix compared with the prior- year period. In addition, business in Latin America in the prior-year quarter benefited from higher than normal license revenues in Brazil. 11 A 6 EBITDA H1 2019 – (71) (590) (58) (719) A 7 Change % 2 Fx adj. – 4.6 – 5.1 – 2.9 – 25.1 – 5.9 + 14.6 – 2.1 – 3.1 + 7.6 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 12 1. Overview of Sales, Earnings and Financial Position // The drop in sales of Soybean Seed & Traits was due to lower volumes resulting from the effects of the weather conditions described and to trade disputes involving the United States. Increased competitive pressure also had a negative effect. // Business at Fungicides was adversely impacted by the above-mentioned effects in Canada, in particular, while in Latin America we benefited from volume gains and the registration of Xpro™ in Brazil. // Sales of Insecticides rose sharply in the Europe / Middle East / Africa and Latin America regions as a result of higher prices and volumes. They also increased in North America due to phasing from the third quarter. // The decline for Other primarily resulted from the loss of registrations for SeedGrowth in Europe. In the United States, however, we achieved significant sales growth for Cotton Seed as the result of higher volumes due to higher market share and an anticipated increase in acreages. First half of 2019 Sales in the first half of 2019 on a pro-forma basis decreased by 4.6% (Fx adj.). This was mainly due to the extreme weather conditions in the United States, which led to lower sales of Soybean Seed & Traits, Corn Seed & Traits and Herbicides. Pharmaceuticals A 8 Key Data – Pharmaceuticals Change % 1 Change % 1 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Sales 4,217 4,422 + 4.9 + 3.9 8,292 8,776 + 5.8 + 4.6 Change in sales 1 Volume + 5.8% + 4.0% + 5.7% + 5.2% Price – 2.7% – 0.1% – 2.7% – 0.6% Currency – 4.9% + 1.2% – 6.0% + 1.4% Portfolio – 0.2% – 0.2% – 0.2% – 0.2% Sales by region Europe / Middle East / Africa 1,653 1,695 + 2.5 + 2.8 3,264 3,370 + 3.2 + 3.8 North America 992 984 – 0.8 – 5.4 1,915 1,909 – 0.3 – 5.7 Asia / Pacific 1,323 1,499 + 13.3 + 11.9 2,626 3,028 + 15.3 + 12.9 Latin America 249 244 – 2.0 + 5.2 487 469 – 3.7 + 5.1 EBITDA 1 1,350 1,513 + 12.1 2,764 3,009 + 8.9 Special items 1 (13) 13 (14) (3) EBITDA before special items 1 1,363 1,500 + 10.1 2,778 3,012 + 8.4 EBITDA margin before special items 1 32.3% 33.9% 33.5% 34.3% EBIT 1 1,053 1,238 + 17.6 2,216 2,437 + 10.0 Special items 1 (56) 14 (57) (2) EBIT before special items 1 1,109 1,224 + 10.4 2,273 2,439 + 7.3 Net cash provided by operating activities 629 741 + 17.8 1,861 2,034 + 9.3 Capital expenditures 121 135 + 11.6 340 215 – 36.8 Research and development expenses 765 663 – 13.3 1,458 1,352 – 7.3 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 13 1. Overview of Sales, Earnings and Financial Position Second quarter of 2019 Sales Sales of Pharmaceuticals rose by 3.9% (Fx & portfolio adj.) to €4,422 million in the second quarter of 2019 (Q2 2018: €4,217 million). Business in China remained strong, and our products Xarelto™ and Eylea™ also continued to achieve robust growth. // Sales of our oral anticoagulant Xarelto™ rose significantly thanks to expanded volumes in China and Europe / Middle East / Africa, particularly Russia and France. License revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson, were down year on year, holding back overall growth. // Business with our eye medicine Eylea™ continued to expand in all regions, with sales developing especially positively in Europe, primarily in the United Kingdom, and in Canada. // We registered a decline in sales of our cancer drug Nexavar™, owing mainly to the competitive market environments in the United States and Japan. Growth in China and Italy partly offset this development. // The decline in sales of our multiple sclerosis treatment Betaferon™ / Betaseron™ was again mainly driven by strong competition in the United States. // We reported substantial sales gains for our cancer drug Stivarga™ that resulted primarily from expanded volumes in China and Russia. // There was an encouraging increase in sales of our pulmonary hypertension treatment Adempas™, especially in the United States and Europe. As in the past, sales reflected the proportionate recognition of the upfront and milestone payments resulting from the sGC collaboration with Merck & Co., United States. A 9 Best-Selling Pharmaceuticals Products Change % 1 Change % 1 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Xarelto™ 891 1,007 + 13.0 + 12.5 1,705 1,944 + 14.0 + 13.6 Eylea™ 540 604 + 11.9 + 11.2 1,044 1,187 + 13.7 + 12.8 Mirena™ / Kyleena™ / Jaydess™ 276 297 + 7.6 + 3.6 593 619 + 4.4 – 0.2 Kogenate™ / Kovaltry™ / Jivi™ 213 221 + 3.8 + 0.8 427 434 + 1.6 – 1.5 Nexavar™ 193 177 – 8.3 – 9.4 355 361 + 1.7 + 0.1 Adalat™ 165 170 + 3.0 + 3.7 341 345 + 1.2 + 0.6 Glucobay™ 151 155 + 2.6 + 3.8 319 342 + 7.2 + 7.0 YAZ™ / Yasmin™ / Yasminelle™ 159 167 + 5.0 + 4.9 311 326 + 4.8 + 4.9 Aspirin™ Cardio 139 142 + 2.2 + 4.2 287 298 + 3.8 + 4.5 Betaferon™ / Betaseron™ 142 120 – 15.5 – 17.9 272 221 – 18.8 – 21.0 Stivarga™ 82 103 + 25.6 + 23.9 152 200 + 31.6 + 28.8 Adempas™ 89 101 + 13.5 + 11.0 170 196 + 15.3 + 11.9 Gadavist™ / Gadovist™ 103 97 – 5.8 – 6.7 190 193 + 1.6 + 0.5 Avalox™ / Avelox™ 77 81 + 5.2 + 5.8 174 185 + 6.3 + 5.8 Stellant™ 84 95 + 13.1 + 9.6 163 182 + 11.7 + 7.0 Total best-selling products 3,304 3,537 + 7.1 + 6.1 6,503 7,033 + 8.2 + 6.8 Proportion of Pharmaceuticals sales 78% 80% 78% 80% Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Earnings EBITDA before special items of Pharmaceuticals rose in the second quarter of 2019 by 10.1% to €1,500 million (Q2 2018: €1,363 million). Negative currency effects diminished earnings by €30 million. The robust increase in earnings was primarily attributable to higher demand and a decrease in the cost of goods sold. In addition, research and development expenses were down compared with the high level of the prior-year period and because the recognition of study costs is being phased differently across the year. EBIT increased by 17.6% to €1,238 million after net special gains of €14 million (Q2 2018: net special charges of €56 million). The special gains mainly comprised €30 million in connection with restructuring measures, primarily from the adjustment of provisions. Earnings were diminished by €15 million in litiga- tion-related expenses. Special Items1 Pharmaceuticals € million EBIT Q2 2018 EBIT Q2 2019 EBIT H1 2018 EBIT H1 2019 EBITDA Q2 2018 EBITDA Q2 2019 EBITDA H1 2018 Restructuring (13) 30 (14) 21 (13) 29 (14) Litigations / legal risks – (15) – (22) – (15) – Impairment losses / loss reversals (43) (1) (43) (1) – (1) – Total special items (56) 14 (57) (2) (13) 13 (14) 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” First half of 2019 Sales Sales of Pharmaceuticals rose by 4.6% (Fx & portfolio adj.) in the first six months of 2019, to €8,776 million (H1 2018: €8,292 million). As in the second quarter, growth in the first six months was primarily driven by the positive development in China and the expansion of business with Xarelto™ and Eylea™. Earnings EBITDA before special items of Pharmaceuticals rose in the first half of 2019 by 8.4% to €3,012 million (H1 2018: €2,778 million). Negative currency effects diminished earnings by €74 million. The earnings growth resulted primarily from the very good development of business and a decrease in the cost of goods sold. In addition, research and development expenses were down compared with the high level of the prior-year period and because the recognition of study costs is being phased differently across the year. EBIT climbed by 10.0% to €2,437 million. 14 A 10 EBITDA H1 2019 20 (22) (1) (3) Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 15 1. Overview of Sales, Earnings and Financial Position Consumer Health A 11 Key Data – Consumer Health Change %1 Change %1 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Sales 1,413 1,442 + 2.1 + 2.1 2,822 2,837 + 0.5 + 0.4 Changes in sales 1 Volume – 2.2% + 0.2% – 2.8% – 0.5% Price + 0.8% + 1.9% + 1.0% + 0.9% Currency – 7.0% + 1.3% – 8.4% + 1.4% Portfolio 0.0% – 1.3% 0.0% – 1.3% Sales by region Europe / Middle East / Africa 466 476 + 2.1 + 3.1 962 936 – 2.7 – 1.3 North America 595 600 + 0.8 – 1.5 1,191 1,203 + 1.0 – 2.4 Asia / Pacific 202 207 + 2.5 + 2.2 379 413 + 9.0 + 7.8 Latin America 150 159 + 6.0 + 13.5 290 285 – 1.7 + 7.8 EBITDA 1 257 219 – 14.8 565 470 – 16.8 Special items 1 1 (51) (4) (79) EBITDA before special items 1 256 270 + 5.5 569 549 – 3.5 EBITDA margin before special items 1 18.1% 18.7% 20.2% 19.4% EBIT 1 157 (293) . 368 (132) . Special items 1 1 (468) (4) (496) EBIT before special items 1 156 175 + 12.2 372 364 – 2.2 Net cash provided by operating activities 148 198 + 33.8 321 430 + 34.0 Capital expenditures 45 32 – 28.9 73 57 – 21.9 Research and development expenses 55 53 – 3.6 110 107 – 2.7 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2019 Sales Sales of Consumer Health increased by 2.1% (Fx & portfolio adj.) in the second quarter of 2019 to €1,442 million. // Sales in the Europe / Middle East / Africa region rose by 3.1% (Fx & portfolio adj.) to €476 million. We registered sales gains in the Dermatology category, particularly in Russia and Turkey, and in the Nutritionals category, where we benefited from a product line extension in Italy. In addition, an improved supply situation began to have a positive impact. // In the North America region, sales declined by 1.5% (Fx & portfolio adj.) to €600 million. We posted a decrease in sales particularly in the Pain & Cardio category, where lower demand for Aspirin™ was one of the factors that had a negative impact. By contrast, sales increased in the Allergy & Cold category, driven primarily by our antihistamine Claritin™. Following a weak allergy season in the prior-year period, this product benefited from increased demand and investment support. // Sales in the Asia / Pacific region rose by 2.2% to €207 million, with business expanding for another consecutive quarter. The Nutritionals category saw an encouraging development, with a significant contribution by our product Elevit™. Sales were down only in the Dermatology category following a strong prior-year quarter in China. // We recorded strong growth in Latin America, where sales rose by 13.5% to €159 million. We posted double-digit-percentage growth particularly in the Pain & Cardio category. Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position A 12 Sales by Category 1 Change % 2 Change % 2 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Consumer Health 1,413 1,442 + 2.1 + 2.1 2,822 2,837 + 0.5 + 0.4 Nutritionals 276 288 + 4.3 + 4.0 547 554 + 1.3 + 1.4 Allergy & Cold 236 272 + 15.3 + 10.8 546 582 + 6.6 + 1.9 Dermatology 298 287 – 3.7 – 4.2 543 553 + 1.8 + 1.6 Pain & Cardio 215 205 – 4.7 – 3.2 405 387 – 4.4 – 2.6 Digestive Health 173 190 + 9.8 + 7.9 348 359 + 3.2 + 0.9 Other 3 215 200 – 6.9 – 0.4 433 402 – 7.1 – 2.0 Fx & p adj. = currency- and portfolio-adjusted 1 In line with the internal financial management system implemented on January 1, 2019, the sales commentary for Consumer Health is now based primarily on regions and categories rather than products. These categories comprise Nutritionals (e.g. Elevit™, One A Day™), Allergy & Cold (e.g. Claritin™, Alka-Seltzer™ Plus, Aspirin™ Cold), Dermatology (e.g. Bepanthen™, Canesten™), Pain & Cardio (e.g. Aleve™, Aspirin™) and Digestive Health (e.g. MiraLAX™, Alka-Seltzer™). 2 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 3 Including our foot care business, the sun care business divested in May that is yet to be transferred, and the prescription dermatology business divested to LEO Pharma that was transferred on July 1, 2019. The divested U.S. prescription dermatology business is included until September 4, 2018, the date the business was transferred. Earnings EBITDA before special items of Consumer Health increased by 5.5% to €270 million in the second quarter of 2019 (Q2 2018: €256 million). Positive contributions to earnings came primarily from the efficiency pro- gram initiated at the end of 2018, which led to a significant decrease in selling expenses, as well as from sales growth. Earnings were diminished by the absence of the contribution from the divested U.S. pre- scription dermatology business. EBIT came in at minus €293 million (Q2 2018: plus €157 million) after net special charges of €468 million (Q2 2018: net special gains of €1 million). These mainly comprised €421 million in impairment losses in connection with the agreed divestment of our Dr. Scholl’s™ foot care portfolio, as well as charges related to the aforementioned efficiency program and expenses in connection with the divestment of the remaining global prescription dermatology business. A 13 Special Items 1 Consumer Health € million EBIT Q2 2018 EBIT Q2 2019 EBIT H1 2018 EBIT H1 2019 EBITDA Q2 2018 EBITDA Q2 2019 EBITDA H1 2018 EBITDA H1 2019 Restructuring 1 (28) (4) (47) 1 (28) (4) (47) Impairment losses / loss reversals – (417) – (417) – – – – Divestments – (23) – (32) – (23) – (32) Total special items 1 (468) (4) (496) 1 (51) (4) (79) 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 16 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 17 1. Overview of Sales, Earnings and Financial Position First half of 2019 Sales Sales of Consumer Health were level year on year in the first six months of 2019 at €2,837 million (Fx & portfolio adj. + 0.4%). We again achieved encouraging growth in Asia / Pacific and in Latin America but posted declines in North America. Sales came in below the prior-year level in Europe / Middle East / Africa, primarily due to supply disruptions in the first quarter of 2019. Earnings EBITDA before special items of Consumer Health declined by 3.5% in the first half of 2019 to €549 million (H1 2018: €569 million). Positive contributions to earnings came primarily from the efficiency program initi- ated at the end of 2018, which led to a significant decrease in selling expenses, as well as from sales growth. Earnings were held back by a higher cost of goods sold and the absence of the contribution from the divested U.S. prescription dermatology business. EBIT amounted to minus €132 million (H1 2018: plus €368 million) after net special charges of €496 million (H1 2018: €4 million). As was the case in the second quarter, these were mainly attributable to the afore- mentioned divestment-related impairments and the efficiency program. Animal Health A 14 Key Data – Animal Health Change % 1 Change % 1 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Sales 453 454 + 0.2 – 2.7 867 875 + 0.9 – 1.8 Change in sales 1 Volume + 9.6% – 6.5% + 6.2% – 4.7% Price – 2.0% + 3.8% – 0.8% + 2.9% Currency – 6.9% + 2.9% – 8.0% + 2.7% Portfolio 0.0% 0.0% 0.0% 0.0% Sales by region Europe / Middle East / Africa 116 113 – 2.6 – 0.3 252 262 + 4.0 + 5.1 North America 220 215 – 2.3 – 8.4 380 368 – 3.2 – 9.7 Asia / Pacific 81 87 + 7.4 + 5.5 158 167 + 5.7 + 3.4 Latin America 36 39 + 8.3 + 8.8 77 78 + 1.3 + 3.8 EBITDA 1 125 107 – 14.4 264 243 – 8.0 Special items 1 (3) (17) (3) (21) EBITDA before special items 1 128 124 – 3.1 267 264 – 1.1 EBITDA margin before special items 1 28.3% 27.3% 30.8% 30.2% EBIT 1 116 97 – 16.4 245 223 – 9.0 Special items 1 (3) (17) (3) (21) EBIT before special items 1 119 114 – 4.2 248 244 – 1.6 Net cash provided by operating activities 88 71 – 19.3 101 53 – 47.5 Capital expenditures 9 15 + 66.7 14 29 + 107.1 Research and development expenses 37 35 – 5.4 67 64 – 4.5 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 18 1. Overview of Sales, Earnings and Financial Position Second quarter of 2019 Sales Sales of Animal Health fell by 2.7% (Fx & portfolio adj.) to €454 million in the second quarter of 2019, due especially to substantial volume declines in the United States following a strong prior-year quarter. The positive developments in Asia / Pacific and Latin America were insufficient to fully offset this effect. // Sales of our Advantage™ family of flea, tick and worm control products were down as expected, mainly as a result of the strong prior-year quarter which had benefited from shifts in demand in the United States. Expanded volumes and price increases in the United Kingdom and China only partially offset these declines. // Business with our Seresto™ flea and tick collar expanded, driven by price and volume increases in the United States, improved demand in Italy and a successful product launch in China. A 15 Best-Selling Animal Health Products Change % 1 Change % 1 € million Q2 2018 Q2 2019 Reported Fx & p adj. H1 2018 H1 2019 Reported Fx & p adj. Advantage™ product family 156 134 – 14.1 – 16.8 270 238 – 11.9 – 14.8 Seresto™ 99 111 + 12.1 + 8.0 187 211 + 12.8 + 9.2 Drontal™ product family 30 32 + 6.7 + 0.8 61 64 + 4.9 + 1.6 Baytril™ 24 26 + 8.3 + 7.5 49 53 + 8.2 + 6.3 Total 309 303 – 1.9 – 5.3 567 566 – 0.2 – 3.3 Proportion of Animal Health sales 68% 67% 65% 65% Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items of Animal Health declined by 3.1% to €124 million in the second quarter of 2019 (Q2 2018: €128 million). Lower demand had a negative effect that was partly offset by price increas- es and reduced spending, including selling expenses. EBIT declined by 16.4% to €97 million after net special charges of €17 million (Q2 2018: €3 million) that were related to the intended separation of the segment from Bayer. A 16 Special Items 1 Animal Health € million EBIT Q2 2018 EBIT Q2 2019 EBIT H1 2018 EBIT H1 2019 EBITDA Q2 2018 EBITDA Q2 2019 EBITDA H1 2018 EBITDA H1 2019 Restructuring (3) – (3) – (3) – (3) – Divestments – (17) – (21) – (17) – (21) Total special items (3) (17) (3) (21) (3) (17) (3) (21) 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position First half of 2019 Sales Sales of Animal Health fell by 1.8% (Fx & portfolio adj.) in the first six months of 2019 to €875 million. Lower demand in North America was not offset by sales gains in the other regions. Earnings EBITDA before special items of Animal Health decreased by 1.1% to €264 million in the first half of 2019 (H1 2018: €267 million). Lower volumes were nearly offset, in particular by price increases and a reduced cost of goods sold. EBIT declined by 9.0% to €223 million after net special charges of €21 million (H1 2018: €3 million) in connection with the intended separation of the segment from Bayer. 1.3 Asset and Financial Position of the Bayer Group Statement of Cash Flows A 17 Bayer Group Summary Statements of Cash Flows € million Q2 2018 Q2 2019 H1 2018 H1 2019 Net cash provided by (used in) operating activities (total) 2,240 1,600 2,898 2,679 Net cash provided by (used in) investing activities (total) (37,925) (544) (39,983) (467) Net cash provided by (used in) financing activities (total) 35,746 (1,735) 35,165 (2,903) Change in cash and cash equivalents due to business activities 61 (679) (1,920) (691) Cash and cash equivalents at beginning of period 5,338 4,062 7,435 4,052 Change due to exchange rate movements and to changes in scope of consolidation (388) (2) (504) 20 Cash and cash equivalents at end of period 5,011 3,381 5,011 3,381 Previous periods restated Net cash provided by operating activities // In the second quarter of 2019, the net cash provided by operating activities declined by 28.6% to €1,600 million. // The significant decline is due to the seasonality of the newly acquired Crop Science business. Since the acquisition closed in June 2018, the high cash outflows in April and May 2018 were not taken into account, whereas the cash inflows from trade accounts receivable were included in both years. // Cash outflows for the second quarter of 2019 also included the payment of tax on the gain arising from the divestments to BASF. // In the first half of 2019, operating cash flow decreased by 7.6% to €2,679 million. // The first-time application of IFRS 16 had a slightly positive effect on the operating cash flow because lease expenses were no longer recognized in operating income. Net cash used in investing activities // Cash outflows for property, plant and equipment and intangible assets were level year on year in the second quarter of 2019, at €458 million (Q2 2018: €459 million). // Net cash outflows for current and noncurrent financial assets totaled €74 million (Q2 2018: inflow of €7,635 million). // The figure for the prior-year period included cash outflows of €45,290 million for the acquisition of Monsanto. // Cash outflows for property, plant and equipment and intangible assets were 5.6% higher in the first half of 2019, at €853 million (H1 2018: €808 million). // Net cash inflows for current and noncurrent financial assets totaled €311 million (H1 2018: €5,700 million). 19 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Net cash used in financing activities // In the second quarter of 2019, there was a net cash outflow of €1,735 million for financing activities, mainly for the dividend payment of €2,611 million (Q2 2018: €2,403 million). Net borrowings resulted in an inflow of €1,325 million (Q2 2018: €29,151 million). The figure for the prior-year period included cash received as part of the financing activities for the Monsanto acquisition. // The net cash outflow for financing activities in the first half of 2019 amounted to €2,903 million, with net borrowings resulting in an inflow of €357 million (H1 2018: €28,644 million). // The cash outflow increased slightly as a result of the first-time application of IFRS 16 because the repayment component of lease payments and the interest expense were recognized in the financing cash flow. Free cash flow // Free cash flow, which is the total operating cash flow less capital expenditures plus interest and dividends received less interest paid, was €751 million in the second quarter of 2019 (Q2 2018: €1,916 million). As already indicated, this significant decline is due to the seasonality of the newly acquired Crop Science business. Since the acquisition closed in June 2018, the high cash outflows in April and May 2018 were not taken into account. // For the first six months, free cash flow was €1,259 million (H1 2018: €2,173 million). Liquid assets and net financial debt A 18 Net Financial Debt 1 € million Dec. 31, 2018 March 31, 2019 June 30, 2019 Change % Bonds and notes / promissory notes 35,402 35,840 35,482 – 1.0 of which hybrid bonds 2 4,537 4,538 4,539 0.0 Liabilities to banks 3 4,865 4,150 4,420 + 6.5 Lease liabilities 399 1,370 1,308 – 4.5 Liabilities from derivatives 4 172 113 127 + 12.4 Other financial liabilities 556 664 1,991 + 199.8 Receivables from derivatives 4 (137) (181) (89) – 50.8 Financial debt 41,257 41,956 43,239 + 3.1 Cash and cash equivalents (4,052) (4,062) (3,343) – 17.7 Current financial assets 5 (930) (478) (567) + 18.6 Shares in Covestro 6 (596) (676) (521) – 22.9 Net financial debt 35,679 36,740 38,808 + 5.6 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Classified as debt according to IFRS 3 These include both financial and nonfinancial liabilities. 4 These include the market values of interest-rate and currency hedges of recorded transactions. 5 These include short-term receivables with maturities between 3 and 12 months outstanding from banks and other companies as well as financial investments in debt and equity instruments that were recorded as current on first-time recognition. 6 Covestro shares are held for risk management purposes relating to the exchangeable bond issued in 2017 that matures in 2020. // Net financial debt of the Bayer Group increased by €2.1 billion in the second quarter of 2019, due mainly to the dividend payment. // The other financial liabilities as of June 30, 2019, contained €312 million related to the mandatory convertible notes issued in November 2016 and €1.2 billion in commercial paper. // Net financial debt includes three subordinated hybrid bonds with a total volume of €4.5 billion, 50% of which is treated as equity by the rating agencies. As such, the hybrid bonds have a positive impact on the Group’s rating-specific debt indicators. // Our credit standing with the rating agencies is outlined in the table below, with the investment-grade ratings from all three agencies demonstrating good creditworthiness. 20 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position A 19 Rating Rating agency Long-term rating Short-term rating Outlook S&P Global Ratings BBB A2 stable Moody’s Baa1 P2 negative Fitch Ratings BBB+ F2 negative Asset and capital structure A 20 Bayer Group Summary Statements of Financial Position € million Dec. 31, 2018 March 31, 2019 June 30, 2019 Change % Noncurrent assets 95,667 97,811 95,615 – 2.2 Assets held for sale 234 232 1,609 . Other current assets 30,831 32,395 31,161 – 3.8 Current assets 31,065 32,627 32,770 + 0.4 Total assets 126,732 130,438 128,385 – 1.6 Equity 46,148 48,081 44,947 – 6.5 Noncurrent liabilities 57,459 58,378 58,047 – 0.6 Liabilities directly related to assets held for sale 12 14 33 + 135.7 Other current liabilities 23,113 23,965 25,358 + 5.8 Current liabilities 23,125 23,979 25,391 + 5.9 Liabilities 80,584 82,357 83,438 + 1.3 Total equity and liabilities 126,732 130,438 128,385 – 1.6 Previous periods restated // Between March 31, 2019, and June 30, 2019, total assets decreased by €2.1 billion to €128.4 billion. // Noncurrent assets fell by €2.2 billion to €95.6 billion. This development is primarily attributable to a €1.7 billion decline in other intangible assets due to higher amortization and impairment losses and a reclassification to assets held for sale, as well as to a €0.7 billion decline in the value of goodwill. // In connection with the divestment of Dr. Scholl’s™, we recognized impairment losses of €0.4 billion that partly resulted from the impairment of the proportionate goodwill to be transferred. // Total current assets increased by €0.1 billion to €32.8 billion. This change was mainly the result of a €1.4 billion increase in assets held for sale, which was partly offset by a €0.7 billion decline in cash and cash equivalents and a €0.3 billion decrease in other receivables. // Equity was down by €3.1 billion compared with March 31, 2019, at €44.9 billion. The equity ratio (equity coverage of total assets) as of June 30, 2019, was 35.0% (March 31, 2019: 36.9%). // Liabilities rose by €1.1 billion as of June 30, 2019, to €83.4 billion, with current liabilities increasing by €1.4 billion and noncurrent liabilities declining by €0.3 billion. 21 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 2. Research, Development, Innovation 2. Research, Development, Innovation Leaps by Bayer We acquired a 28% interest in Century Therapeutics LLC., Philadelphia, United States in June through Leaps by Bayer, our innovation and collaboration model. Founded in 2018 by U.S. companies Versant Ventures, San Francisco, and Fujifilm Cellular Dynamics, Inc., Madison, Century Therapeutics develops allogeneic immune cell therapies for cancer. The foundational technology is built on induced pluripotent stem cells that have unlimited self-renewing capacity. The company secured an investment of US$250 million, with Bayer committing US$215 million as an integral partner. The proceeds will enable Century Therapeutics to advance multiple programs into the clinic for hematologic and solid malignancies. Crop Science Planned investment in research and development As announced in June, we plan to invest some €5 billion in additional weed control methods over the next 10 years as part of our research and development expenses. This includes research into resistance mechanisms, the discovery and development of new modes of action, and more precise application rec- ommendations with the aid of digital technologies. Collaborations In February 2019, we announced a three-year research collaboration with Netafim Ltd., Tel Aviv, and BGN Technologies, the technology company of Ben-Gurion University of the Negev, Israel. The purpose of this project is to combine soil research, digital prediction tools and drip irrigation technologies – which are also the focus of an existing collaboration with Netafim – to develop best practices for the use of drip irrigation as a delivery system for the nematicide Velum™ Prime under typical conditions in arid regions. Also in February, Bayer and KWS SAAT SE, Germany, granted a long-term license for their joint cultivation system Conviso™ Smart to MariboHilleshög ApS, Holeby, Denmark, a business unit of Danish seed com- pany DLF. With this agreement, another top global sugarbeet breeder can provide farmers worldwide with the innovative Conviso™ Smart technology, which is based on conventionally bred sugarbeet varieties that are tolerant to certain herbicides. In addition to the system’s broad spectrum weed control, the amount of herbicide used can be significantly reduced compared with current standards. In June, we announced a collaboration with Arvinas, Inc., a U.S. biopharmaceutical company based in New Haven, Connecticut. Concluded in July, the agreement involves both our Crop Science and our Pharmaceuticals businesses. The collaboration aims to utilize Arvinas’ novel PROTAC™ technology, which harnesses the naturally occurring protein degradation system of the cell to selectively remove target pro- teins by proteolysis, the breakdown of proteins into amino acids. In the Crop Science segment, we will form a joint venture with Arvinas as the first company to explore the technology's potential for agriculture and crop protection. At Pharmaceuticals, meanwhile, it will be used to develop new drug products. Also in June, Bayer and AlphaBio Control, Cambridge, United Kingdom, signed a distribution agreement to market Flipper™, an innovative biological pest control product developed by AlphaBio. Under the terms of this agreement, AlphaBio grants Bayer a worldwide exclusive right (except France) to commercialize Flipper™ for agricultural and nonagricultural uses. Pharmaceuticals We are conducting clinical trials with multiple drug candidates from our research and development pipeline. 22 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 2. Research, Development, Innovation Phase II clinical projects The following table shows our most important drug candidates currently in Phase II of clinical testing: A 21 Research and Development Projects (Phase II) 1 Projects Indication BAY 1093884 (anti-TFPI antibody) Hemophilia Fulacimstat (BAY 1142524, chymase inhibitor) Chronic kidney disease BAY 1193397 (AR alpha 2c rec ant.) Peripheral artery disease (PAD) Osocimab (BAY 1213790, anti-FXIa antibody) Prevention of thrombosis BAY 1817080 / BAY 1902607 (P2X3 antagonist) Chronic cough BAY 2253651 (TASK channel blocker) Obstructive sleep apnea BAY 2306001 (IONIS-FXIRx) 2 Prevention of thrombosis BAY 1753011 (vasopressin receptor antagonist) Congestive heart failure Levonorgestrel (progestin) + indomethacin (NSAID) combi IUS Contraception Rogaratinib (pan-FGFR inhibitor) Urothelial cancer Vericiguat (sGC stimulator) Chronic heart failure with preserved ejection fraction (HFpEF) Vilaprisan (S-PRM) Endometriosis 1 As of June 26, 2019 2 Sponsored by Ionis Pharmaceuticals, Inc. The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. Phase III clinical projects The following table shows our most important drug candidates currently in Phase III of clinical testing: A 22 Research and Development Projects (Phase III) 1 Projects Indication Copanlisib (PI3K inhibitor) Various types of non-Hodgkin lymphoma (NHL) Regorafenib (multikinase inhibitor) Newly diagnosed and recurrent glioblastoma Darolutamide (ODM-201, AR antagonist) Hormone-sensitive metastatic prostate cancer Finerenone (MR antagonist) Chronic kidney disease in patients with type 2 diabetes Molidustat (HIF-PH inhibitor) Renal anemia Rivaroxaban (FXa inhibitor) Peripheral artery disease (PAD) Rivaroxaban (FXa inhibitor) VTE treatment in children Vericiguat (sGC stimulator) 2 Chronic heart failure with reduced ejection fraction (HFrEF) Vilaprisan (S-PRM) Symptomatic uterine fibroids 1 As of June 26, 2019 2 Sponsored by Merck & Co., Inc., U.S.A. The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceuticals projects. In May, the U.S. Food and Drug Administration (FDA) granted Bayer Breakthrough Therapy designation for copanlisib (Aliqopa™) for the treatment of adult patients with relapsed marginal zone lymphoma (MZL) who have received at least two prior therapies. MZL is a form of indolent non-Hodgkin lymphoma (iNHL). Also in May, Bayer presented further data from the Phase III ARAMIS trial at the ASCO Annual Meeting in Chicago showing that darolutamide, a nonsteroidal androgen receptor antagonist, in combination with androgen deprivation therapy (ADT) delays worsening of disease-related symptoms in men with nonmetastatic castration-resistant prostate cancer (nmCRPC) compared with placebo plus ADT. 23 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 2. Research, Development, Innovation At the ASCO Annual Meeting, Bayer also presented new data confirming the efficacy of the precision on- cology development candidate larotrectinib (Vitrakvi™) in both adults and children with TRK fusion cancer and brain metastases or primary tumors of the central nervous system. Also in June, Bayer initiated a Phase III trial of its anti-VEGF treatment aflibercept (Eylea™) for intravitreal injection in retinopathy of prematurity, an eye condition in premature infants. The enrollment of patients in the GBM AGILE trial, an international platform trial sponsored by the Global Coalition for Adaptive Research (GCAR), also began in the U.S. in June. In a multi-arm cooperation trial in brain cancer patients, Bayer is providing the active substance regorafenib, which will be evaluated first. The trial will investigate several therapies for patients with newly diagnosed or recurrent glioblastoma. In early July, Bayer presented the findings of its Phase III EINSTEIN-Jr. trial with rivaroxaban at the International Society on Thrombosis and Haemostasis (ISTH) Congress in Melbourne, Australia. The results showed the efficacy and safety profile of rivaroxaban in children with venous thromboembolism, and were similar to those seen in previous studies in adults. A timely filing and review for the use of Xarelto™ in children in the E.U. or the United States as agreed with the European Medicines Agency (EMA) and the U.S. Food and Drug Administration (FDA), respectively, would allow for an application of the extension of the compound patent protection by six months in each case. Filings and approvals The most important drug candidates in the approval process are shown below. A 23 Main Products Submitted for Approval 1 Projects Indication Darolutamide (ODM-201, AR antagonist) U.S.A., Europe, Japan: castration-resistant nonmetastatic prostate cancer Rivaroxaban (FXa inhibitor) 2 U.S.A.: prevention of venous thromboembolism in high-risk patients after discharge from hospital Larotrectinib (LOXO-101, TRK fusion inhibitor) Europe: solid tumors with NTRK gene fusions 1 As of June 26, 2019 2 Submitted by Janssen Research & Development, LLC In February, Bayer completed the submission of a rolling New Drug Application for the active substance darolutamide to the U.S. Food and Drug Administration (FDA). The submission was initiated in December 2018 and is based on data from the Phase III ARAMIS trial in men with nonmetastatic castration-resistant prostate cancer (nmCRPC). In April, the U.S. FDA accepted the new drug application and granted priority review status. In March, Bayer submitted a marketing authorization application to the European Medicines Agency (EMA) for darolutamide for the treatment of patients with nmCRPC. Also in March, Bayer submitted an application for marketing authorization to the Ministry of Health, Labor and Welfare (MHLW) in Japan for darolutamide for the treatment of patients with castration-resistant prostate cancer (CRPC). In July, Bayer received approval from the U.S. FDA for Gadavist™ as the first and only contrast agent for use in cardiac magnetic resonance (MR) imaging to assess myocardial perfusion and late gadolinium en- hancement in adult patients with known or suspected coronary artery disease (CAD). 24 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks Collaborations In May 2019, Bayer and Foundation Medicine Inc., Cambridge, Massachusetts, United States, signed a global collaboration agreement for the development and commercialization of therapy-accompanying diagnostic tests, also known as companion diagnostics (CDx), based on next-generation sequencing for new cancer drugs developed by Bayer. The agreement allows for collaboration across multiple treatment programs and covers Foundation Medicine’s full portfolio of tests, including FoundationOne™ CDx. The first project will be to develop a CDx test in the United States for larotrectinib (Vitrakvi™), a precision- oncological active substance from Bayer that is already approved in the United States and has been sub- mitted for marketing authorization in Europe. At Pharmaceuticals, Bayer's focus as part of the aforementioned collaboration with Arvinas, Inc., is on developing next-generation drug candidates for the treatment of cardiovascular, oncological and gyneco- logical diseases. Under the terms of the agreement, Arvinas will receive an upfront payment and pharma- ceutical R&D support over the next four years, as well as a direct equity investment by Bayer. Consumer Health In April, we launched our product Menevit™ on the Chinese market. Menevit™ is a product line extension of our prenatal vitamin Elevit™ that was developed for men and features an improved formulation fortified with plant-based ingredients. Animal Health In April, we signed a global collaboration agreement with adivo GmbH, Germany, to develop therapeutic antibodies for veterinary medicine. 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook A 24 Economic Outlook 1 Growth 2018 Growth forecast 2019 World + 3.2% + 2.8% European Union + 2.0% + 1.4% of which Germany + 1.5% + 0.8% United States + 2.9% + 2.5% Emerging Markets 2 + 4.8% + 4.5% 1 Real growth of gross domestic product, source: IHS Markit 2 Including about 50 countries defined by IHS Markit as Emerging Markets in line with the World Bank As of July 2019 We continue to expect global economic growth to slow over the course of 2019 compared with the previ- ous year. Economic growth is being restrained by the intensifying trade disputes, particularly in the United States and China. Growth in Europe is also being held back by political uncertainties such as those related to Brexit. The economic outlook has weakened, primarily in Germany. In the Emerging Markets, too, eco- nomic expansion is likely to be slower than in the previous year. In addition to the trade disputes, political uncertainties are also having an impact, especially in a number of Latin American countries. 25 Bayer Half-Year Financial Report as of June 30, 2019 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks A 25 Economic Outlook for the Segments 1 Growth 2018 Growth forecast 2019 Seed and crop protection market + 3% 0% Pharmaceuticals market + 5% + 6% Consumer health market + 4% + 4% Animal health market + 5% + 4% 2018 figures restated 1 Bayer’s estimate, except pharmaceuticals; source for pharmaceuticals market: IQVIA Market Prognosis 2019-2023 (May 2019 update); all rights reserved; currency-adjusted. As of July 2019 We no longer anticipate any growth in the seed and crop protection market in 2019 (previously: + 3%). This is mainly due to the weather conditions in the Midwestern United States, where flooding and heavy rains led to delayed sowing and an overall reduction in acreages, as well as to the trade dispute between the United States and China, which is particularly impacting planting decisions for corn and soybeans. In addi- tion, the outbreak of African swine fever in China is reducing demand for animal feed, particularly soy- beans. 3.1.2 Corporate Outlook Based on the business development described in this report and our internal planning, we confirm the outlook published in February in our Annual Report 2018 for the Bayer Group and its segments for fiscal 2019 with regard to currency- and portfolio-adjusted sales growth and the further key data. However, this outlook is becoming increasingly ambitious in view of the challenging environment for our Crop Science business. 3.2 Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal or external developments or events that could significantly impact the achievement of our financial and nonfi- nancial objectives. Opportunity and risk management at Bayer forms an integral part of the Group-wide corporate governance system. Our opportunity and risk management process and the fundamental opportunity and risk status are outlined in detail in the Annual Report 2018, A 3.2 “Opportunity and Risk Report.” Overall assessment by the Board of Management We currently have not identified any material changes in the risk situation compared with the assessment given in the Annual Report 2018. We currently are not aware of any individual risks, risk combinations or risk interdependencies that could endanger the Bayer Group’s continued existence. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2018 (Note [29] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” 26 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements as of June 30, 2019 Bayer Group Consolidated Income Statements B 1 € million Q2 2018 Q2 2019 H1 2018 H1 2019 Net sales 9,481 11,485 18,619 24,500 Cost of goods sold (3,507) (4,399) (6,416) (9,655) Gross profit 5,974 7,086 12,203 14,845 Selling expenses (2,942) (3,512) (5,451) (6,548) Research and development expenses (1,267) (1,351) (2,307) (2,707) General administration expenses (576) (935) (1,003) (2,104) Other operating income 185 346 337 480 Other operating expenses (28) (708) (123) (1,090) EBIT 1 1,346 926 3,656 2,876 Equity-method income (loss) 27 (18) 98 (37) Financial income 160 68 530 238 Financial expenses (510) (527) (821) (994) Financial result (323) (477) (193) (793) Income before income taxes 1,023 449 3,463 2,083 Income taxes (215) (44) (709) (442) Income from continuing operations after income taxes 808 405 2,754 1,641 of which attributable to noncontrolling interest 6 1 6 (4) of which attributable to Bayer AG stockholders 802 404 2,748 1,645 Income from discontinued operations after income taxes (8) – – – of which attributable to noncontrolling interest – – – – of which attributable to Bayer AG stockholders (8) – – – Income after income taxes 800 405 2,754 1,641 of which attributable to noncontrolling interest 6 1 6 (4) of which attributable to Bayer AG stockholders (net income) 794 404 2,748 1,645 Shares (million) Weighted average number of shares 2 915.69 981.73 900.70 980.95 € Earnings per share From continuing operations Basic 0.88 0.41 3.05 1.68 Diluted 0.88 0.41 3.05 1.68 From discontinued operations Basic (0.01) 0.00 0.00 0.00 Diluted (0.01) 0.00 0.00 0.00 From continuing and discontinued operations Basic 0.87 0.41 3.05 1.68 Diluted 0.87 0.41 3.05 1.68 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” 2 Weighted average number of shares (basic and diluted) restated for all periods prior to June 2018 to reflect the effect of the bonus component of the subscription rights issued as part of the June 2018 capital increase 27 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Comprehensive Income B 2 € million Q2 2018 Q2 2019 H1 2018 H1 2019 Income after income taxes 800 405 2,754 1,641 of which attributable to noncontrolling interest 6 1 6 (4) of which attributable to Bayer AG stockholders 794 404 2,748 1,645 Remeasurements of the net defined benefit liability for post-employment benefit plans 82 (1,009) (94) (1,201) Income taxes 59 345 58 421 Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans 141 (664) (36) (780) Changes in the fair value of own credit risk component of financial liabilities measured at fair value – (1) – (3) Income taxes – – – 1 Other comprehensive income relating to own credit risk component of financial liabilities measured at fair value – (1) – (2) Changes in the fair value of equity instruments measured at fair value 90 56 185 105 Income taxes (2) (3) (2) (5) Other comprehensive income from equity instruments measured at fair value 88 53 183 100 Other comprehensive income relating to associates accounted for using the equity method 17 – 4 – Other comprehensive income that will not be reclassified subsequently to profit or loss 246 (612) 151 (682) Changes in the fair value of cash flow hedges 292 64 352 (120) Reclassified to profit or loss (26) 38 (57) 108 Reclassified to goodwill (37) – (37) – Income taxes (75) (24) (83) 10 Other comprehensive income from cash flow hedges 154 78 175 (2) Changes in exchange differences recognized on translation of operations outside the eurozone 1,021 (400) 639 449 Reclassified to profit or loss – – – – Other comprehensive income from exchange differences 1,021 (400) 639 449 Other comprehensive income relating to associates accounted for using the equity method 3 1 2 – Other comprehensive income that may be reclassified subsequently to profit or loss 1,178 (321) 816 447 Total other comprehensive income1 1,424 (933) 967 (235) of which attributable to noncontrolling interest (1) (1) (5) 4 of which attributable to Bayer AG stockholders 1,425 (932) 972 (239) Total comprehensive income 2,224 (528) 3,721 1,406 of which attributable to noncontrolling interest 5 – 1 – of which attributable to Bayer AG stockholders 2,219 (528) 3,720 1,406 2018 figures restated 1 Total income and expense items (including reclassifications) that may not or must not be recognized through profit or loss according to other IFRS 28 Bayer Half-Year Financial Report as of June 30, 2019 Bayer Group Consolidated Statements of Financial Position € million Noncurrent assets Goodwill Other intangible assets Property, plant and equipment Investments accounted for using the equity method Other financial assets Other receivables Deferred taxes Current assets Inventories Trade accounts receivable Other financial assets Other receivables Claims for income tax refunds Cash and cash equivalents Assets held for sale Total assets Equity Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to noncontrolling interest Noncurrent liabilities Provisions for pensions and other post-employment benefits Other provisions Refund liabilities Contract liabilities Financial liabilities Income tax liabilities Other liabilities Deferred taxes Current liabilities Other provisions Refund liabilities Contract liabilities Financial liabilities Trade accounts payable Income tax liabilities Other liabilities Liabilities directly related to assets held for sale Total equity and liabilities Previous periods restated B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Financial Position B 3 June 30, 2018 June 30, 2019 Dec. 31, 2018 39,518 38,368 38,442 38,154 34,904 36,696 13,098 13,689 12,943 501 629 515 2,761 2,227 2,212 783 572 526 5,072 5,226 4,333 99,887 95,615 95,667 10,950 10,391 11,132 14,281 14,243 11,714 1,557 869 1,166 1,628 1,537 1,958 617 778 809 4,981 3,343 4,052 3,719 1,609 234 37,733 32,770 31,065 137,620 128,385 126,732 2,387 2,387 2,387 18,388 18,388 18,388 26,367 24,001 25,202 47,142 44,776 45,977 73 171 171 47,215 44,947 46,148 8,374 9,799 8,717 2,442 4,012 3,418 225 164 160 889 892 986 42,593 36,723 37,712 1,210 1,567 1,433 307 323 366 7,334 4,567 4,667 63,374 58,047 57,459 2,597 3,023 3,365 5,920 6,668 3,622 444 816 3,235 9,536 6,605 3,682 4,969 5,384 6,038 504 735 1,050 2,392 2,127 2,121 669 33 12 27,031 25,391 23,125 137,620 128,385 126,732 29 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows B 4 € million Q2 2018 Q2 2019 H1 2018 H1 2019 Income from continuing operations after income taxes 808 405 2,754 1,641 Income taxes 215 44 709 442 Financial result 323 477 193 793 Income taxes paid (540) (914) (928) (1,399) Depreciation, amortization and impairments 685 1,560 1,193 2,748 Change in pension provisions (73) (115) (171) (223) (Gains) losses on retirements of noncurrent assets (40) (59) (60) 56 Decrease (increase) in inventories 253 132 169 588 Decrease (increase) in trade accounts receivable 1,458 (66) 109 (2,316) (Decrease) increase in trade accounts payable (39) (250) (475) (438) Changes in other working capital, other noncash items (810) 386 (595) 787 Net cash provided by (used in) operating activities (total) 2,240 1,600 2,898 2,679 Cash outflows for additions to property, plant, equipment and intangible assets (459) (458) (808) (853) Cash inflows from the sale of property, plant, equipment and other assets 23 51 82 65 Cash inflows from divestments 69 (57) 214 (8) Cash inflows from (outflows for) noncurrent financial assets 1,211 28 2,988 (51) Cash outflows for acquisitions less acquired cash (45,316) (64) (45,316) (64) Interest and dividends received 123 58 145 82 Cash inflows from (outflows for) current financial assets 6,424 (102) 2,712 362 Net cash provided by (used in) investing activities (total) (37,925) (544) (39,983) (467) Capital contributions 8,986 – 8,986 – Dividend payments (2,403) (2,611) (2,403) (2,611) Issuances of debt 56,307 3,678 57,328 4,171 Retirements of debt (27,156) (2,353) (28,684) (3,814) Interest paid including interest-rate swaps (361) (453) (444) (659) Interest received from interest-rate swaps 373 4 382 10 Net cash provided by (used in) financing activities (total) 35,746 (1,735) 35,165 (2,903) Change in cash and cash equivalents due to business activities (total) 61 (679) (1,920) (691) Cash and cash equivalents at beginning of period 5,338 4,062 7,435 4,052 Change in cash and cash equivalents due to changes in scope of consolidation – – 1 (1) Change in cash and cash equivalents due to exchange rate movements (388) (2) (505) 21 Cash and cash equivalents at end of period 5,011 3,381 5,011 3,381 Previous periods restated 30 Bayer Half-Year Financial Report as of June 30, 2019 Bayer Group Consolidated Statements of Changes in Equity € million Capital stock Capital reserves Other reserves Dec. 31, 2017 2,117 9,658 25,026 Adjustment of retained earnings on adoption of IFRS 9 (net of tax) (60) Adjustment of retained earnings on adoption of IFRS 15 (net of tax) 86 Equity transactions with owners Capital increase / decrease 270 8,730 Dividend payments (2,402) Other changes (4) Total comprehensive income 3,721 June 30, 2018 2,387 18,388 26,367 Dec. 31, 2018 2,387 18,388 25,202 Equity transactions with owners Capital increase / decrease Dividend payments (2,611) Other changes 4 Miscellaneous other changes Total comprehensive income 1,406 June 30, 2019 2,387 18,388 24,001 Previous periods restated B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Changes in Equity B 5 Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity 36,801 60 36,861 (60) (60) 86 86 9,000 9,000 (2,402) (2,402) (4) 12 8 3,721 1 3,722 47,142 73 47,215 45,977 171 46,148 (2,611) (2,611) 4 4 1,406 1,406 44,776 171 44,947 31 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Explanatory Notes Accounting policies The consolidated interim financial statements as of June 30, 2019, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2018 fiscal year, particularly with regard to the main recognition and measurement principles, except where financial reporting standards have been applied for the first time in 2019 or an accounting policy has changed. Financial reporting standards applied for the first time in 2019 Details of the new standards whose first-time application has a material impact on the Group’s financial position and results of operations are given below. In January 2016, the IASB published the new standard for lease accounting, IFRS 16 (Leases), which re- places the rules contained in IAS 17 (Leases) along with the associated interpretations. The new standard is to be applied for annual periods beginning on or after January 1, 2019. The standard introduces a single lessee accounting model, requiring lessees to recognize right-of-use assets for granted rights of use and corresponding lease liabilities. It eliminates the requirement for lessees to differentiate between operating leases – without recognizing the respective assets or liabilities – and finance leases. However, IFRS 16 con- tains the option of exercising exemptions for the recognition of short-term leases and those pertaining to low-value assets. As under the previous standard, IAS 17, lessors still have to differentiate between operat- ing and finance leases. According to IFRS 16, subleases are classified with reference to the right-of-use asset arising from the sublease in relation to the head lease. Bayer applied IFRS 16 for the first time as of January 1, 2019, retrospectively without restating the prior- year figures. In this connection, various options and practical expedients were exercised as of the transition date for lease agreements in which a Bayer company is the lessee. No additional assessment was under- taken upon the first-time application of the new standard with regard to whether a contract represents or contains a leasing relationship. For contracts previously classified as operating leases, Bayer measured the lease liabilities as of the date of first-time application of IFRS 16 at the present value of the outstanding lease payments, using as the discount rate the respective incremental borrowing rate as of that date. On the date of first-time application, right-of-use assets were generally measured at the amount of the lease liability, adjusted by the amounts of any prepaid or accrued lease payments and / or provisions for onerous leases recognized in the statement of financial position as of December 31, 2018. Initial direct costs were not taken into account in the measurement of right-of-use assets as of the date of first-time application. The current state of knowledge as of the date of first-time application was taken into account in making discretionary decisions. Bayer exercised the option of exempting intangible assets from the scope of application of IFRS 16 and applying the exemptions for short-term leases to certain leases ending in 2019. It is also applying these exemptions for short-term leases beginning after December 31, 2018. The first-time application of IFRS 16 as of January 1, 2019, resulted in the recognition of additional lease liabilities of €1.0 billion and a corresponding increase in net financial debt. Right-of-use assets, including those recognized as finance leases according to IAS 17 until December 31, 2018, rose in line with the lease liabilities by €1.0 billion as of January 1, 2019, after the adjustments resulting from the first-time application of IFRS 16. Notes 32 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements The significant effects on the individual items in the statement of financial position that were recognized as of December 31, 2018, in line with previous requirements were as follows: B 6 IFRS 16 Accounting Changes: Consolidated Statements of Financial Position as of January 1, 2019 € million Dec. 31, 2018 Adjustments due to IFRS 16 Jan. 1, 2019 Property, plant and equipment 12,943 1,012 13,955 Deferred tax assets 4,333 229 4,562 Financial liabilities 41,394 1,012 42,406 Deferred tax liabilities 4,667 232 4,899 The following right-of-use assets, including those recognized as finance leases according to IAS 17 until December 31, 2018, were recognized in property, plant and equipment as of the date of first-time applica- tion of IFRS 16: B 7 Right-of-use assets € million Jan. 1, 2019 Land and buildings 985 Plant installations and machinery 195 Furniture, fixtures and other equipment 344 Total 1,524 In the statement of comprehensive income, Bayer ceased recognizing expenses for operating leases in operating income and instead recognized the depreciation of the right-of-use assets and the interest ex- pense for the lease liabilities under IFRS 16. An analogous effect occurred in the statement of cash flows, where IFRS 16 had a positive effect on the operating cash flow by reducing cash outflows for operating activities, while the repayment component of lease payments and the interest expense were recognized in the financing cash flow. Material items in connection with the reconciliation of operating lease commitments as of December 31, 2018, to the lease liabilities recognized as of January 1, 2019, comprised €399 million in finance leases already recognized as liabilities, the €187 million discount on the lease liabilities initially recognized under IFRS 16 and €35 million in lease commitments not recognized under IFRS 16 that pertained to intangible assets. The weighted average incremental borrowing rate for leases initially recognized upon the first-time applica- tion of IFRS 16 was 5.0%. Notes 33 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: B 8 Exchange Rates for Major Currencies Closing rate Average rate €1 Dec. 31, 2018 June 30, 2018 June 30, 2019 H1 2018 H1 2019 BRL Brazil 4.44 4.48 4.35 4.13 4.34 CAD Canada 1.56 1.54 1.49 1.55 1.51 CNY China 7.87 7.72 7.82 7.70 7.68 GBP United Kingdom 0.89 0.89 0.90 0.88 0.87 JPY Japan 125.87 128.93 122.52 131.61 124.33 RUB Russia 79.76 73.10 71.57 71.84 73.78 USD United States 1.15 1.17 1.14 1.21 1.13 Argentina’s economy has been considered hyperinflationary since July 1, 2018, and we therefore applied IAS 29 (Financial Reporting in Hyperinflationary Economies) for Bayer S.A., Argentina. The resulting effects in ongoing accounting have so far been immaterial for the Group. The most important interest rates used to calculate the present value of pension obligations are given below: B 9 Discount Rate for Pension Obligations % Dec. 31, 2018 March 31, 2019 June 30, 2019 Germany 1.90 1.60 1.20 United Kingdom 2.80 2.40 2.30 United States 4.20 3.90 3.50 Segment reporting As of June 30, 2019, the Bayer Group comprises the four reportable segments Crop Science, Pharmaceuticals, Consumer Health and Animal Health. B 10 Key Data by Segment Crop Science Pharmaceuticals Consumer Health Animal Health € million Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019 Net sales (external) 3,011 4,788 4,217 4,422 1,413 1,442 453 454 Currency- adjusted change 1 + 46.4% + 57.9% + 2.9% + 3.7% – 1.4% + 0.8% + 7.6% – 2.7% Intersegment sales 12 10 10 11 1 2 3 1 Net sales (total) 3,023 4,798 4,227 4,433 1,414 1,444 456 455 EBIT 1 149 304 1,053 1,238 157 (293) 116 97 EBITDA before 1 special items 644 1,075 1,363 1,500 256 270 128 124 Net cash provided by operating activities 1,653 880 629 741 148 198 88 71 Depreciation, amortization, impairment losses / loss reversals 218 670 297 275 100 512 9 10 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Notes 34 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements B 10 continued Key Data by Segment Reconciliation All other segments Corporate functions and consolidation Group € million Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019 Net sales (external) 378 375 9 4 9,481 11,485 Currency-adjusted change 1 + 52.5% – 1.9% – – + 14.6% + 19.9% Intersegment sales 624 631 (650) (655) 0 0 Net sales (total) 1,002 1,006 (641) (651) 9,481 11,485 EBIT 1 24 2 (153) (422) 1,346 926 EBITDA before special items 1 93 119 (136) (161) 2,348 2,927 Net cash provided by operating activities 24 617 (302) (907) 2,240 1,600 Depreciation, amortization, impairment losses / loss reversals 57 89 4 4 685 1,560 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” B 11 Key Data by Segment Crop Science Pharmaceuticals Consumer Health Animal Health € million H1 2018 H1 2019 H1 2018 H1 2019 H1 2018 H1 2019 H1 2018 H1 2019 Net sales (external) 5,872 11,232 8,292 8,776 2,822 2,837 867 875 Currency- adjusted change 1 + 18.4% + 90.6% + 2.8% + 4.4% – 1.8% – 0.9% + 5.4% – 1.8% Intersegment sales 20 24 19 21 2 3 5 2 Net sales (total) 5,892 11,256 8,311 8,797 2,824 2,840 872 877 EBIT 1 1,041 1,300 2,216 2,437 368 (132) 245 223 EBITDA before 1 special items 1,686 3,397 2,778 3,012 569 549 267 264 Net cash provided by operating activities 950 409 1,861 2,034 321 430 101 53 Depreciation, amortization, impairment losses / loss reversals 307 1,378 548 572 197 602 19 20 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” B 11 continued Key Data by Segment Reconciliation All other segments Corporate functions and consolidation Group € million H1 2018 H1 2019 H1 2018 H1 2019 H1 2018 H1 2019 Net sales (external) 756 774 10 6 18,619 24,500 Currency-adjusted change 1 + 50.3% + 1.9% – – + 7.9% + 30.4% Intersegment sales 1,219 1,316 (1,265) (1,366) 0 0 Net sales (total) 1,975 2,090 (1,255) (1,360) 18,619 24,500 EBIT 1 46 (30) (260) (922) 3,656 2,876 EBITDA before special items 1 180 197 (236) (304) 5,244 7,115 Net cash provided by operating activities (219) 616 (116) (863) 2,898 2,679 Depreciation, amortization, impairment losses / loss reversals 114 168 8 8 1,193 2,748 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Notes 35 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements To simplify the consolidation process, leases between fully consolidated companies continue to be recog- nized as operating leases under IAS 17 within the segment data in the consolidated financial statements of the Bayer Group even after the first-time application of IFRS 16 as of January 1, 2019. This does not have any relevant impact on the respective key data used in the steering of the company and internal reporting to the Board of Management as the chief operating decision-maker. The following table shows the reconciliation of EBITDA before special items of the above-mentioned seg- ments and the reconciliation to income before income taxes of the Group from continuing operations: B 12 Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million Q2 2018 Q2 2019 H1 2018 H1 2019 EBITDA before special items of segments 2,484 3,088 5,480 7,419 EBITDA before special items of corporate functions and consolidation (136) (161) (236) (304) EBITDA before special items 1 2,348 2,927 5,244 7,115 Depreciation, amortization and impairment losses / loss reversals before special items of segments (636) (1,140) (1,140) (2,324) Depreciation, amortization and impairment losses / loss reversals before special items of corporate functions and consolidation (4) (2) (8) (6) Depreciation, amortization and impairment losses / loss reversals before special items (640) (1,142) (1,148) (2,330) EBIT before special items of segments 1,848 1,948 4,340 5,095 EBIT before special items of corporate functions and consolidation (140) (163) (244) (310) EBIT before special items 1 1,708 1,785 4,096 4,785 Special items of segments (349) (600) (424) (1,297) Special items of corporate functions and consolidation (13) (259) (16) (612) Special items 1 (362) (859) (440) (1,909) EBIT of segments 1,499 1,348 3,916 3,798 EBIT of corporate functions and consolidation (153) (422) (260) (922) EBIT 1 1,346 926 3,656 2,876 Financial result (323) (477) (193) (793) Income before income taxes 1,023 449 3,463 2,083 2018 figures restated 1 For definition see Annual Report 2018, A 2.4 “Alternative Performance Measures Used by the Bayer Group.” Prior to April 1, 2019, special items pertaining to the integration of Monsanto’s corporate functions were reported in the category “acquisition and integration costs” at Crop Science. Since April 1, 2019, we have reported these special items in the category “restructuring” as part of the Bayer 2022 platform program (Reconciliation). Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2019, included 412 companies (December 31, 2018: 420 companies). Ten joint ventures (December 31, 2018: ten) and seven associates (December 31, 2018: five) were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). As the parent company of the Covestro Group, Covestro AG was accounted for in the consolidated financial statements using the equity method until May 2018. Since May 2018, Bayer has reported its interest in Covestro as an equity instrument. Acquisitions, divestments and discontinued operations Acquisitions in 2019 On June 21, 2019, Bayer acquired 28% of the shares of Century Therapeutics LLC, Philadelphia, Pennsylvania, United States. The purchase price was US$145 million, comprising an initial payment of US$75 million and an assumed liability of US$70 million. A further payment of US$70 million will be made upon the achievement of certain milestones, bringing Bayer’s interest in Century Therapeutics LLC to 36%. In view of Bayer’s significant influence, the investment is accounted for in the consolidated financial state- ments as an associate using the equity method. Century Therapeutics LLC, founded in 2018 by U.S. com- Notes 36 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements panies Versant Ventures, San Francisco, and Fujifilm Cellular Dynamics, Inc., Madison, develops allogeneic immune cell therapies for cancer. The foundational technology is built on induced pluripotent stem cells that have unlimited self-renewing capacity. Acquisitions in 2018 On June 7, 2018, Bayer acquired 100% of the outstanding shares of Monsanto Company, St. Louis, Missouri, United States. The acquisition of Monsanto brings together two strong and highly complemen- tary businesses: Bayer’s innovative chemical and biological crop protection portfolio and Monsanto’s exceptional expertise in the field of seeds and traits. Among the production sites maintained by Monsanto are facilities in Luling, Muscatine and Soda Springs (all United States), Antwerp (Belgium), Zarate (Argentina) and Camacari (Brazil). Monsanto’s portfolio of established brands includes DEKALB™, Asgrow™ and Roundup™, among others. The purchase price of €48,029 million pertained mainly to intangible assets for technologies in the areas of seeds and traits (useful lives of between 9 and 30 years), herbicides (useful lives of 20 years) and digital platforms (useful lives of 15 years), as well as for R&D projects and brands (useful lives of between 10 and 30 years), property, plant and equipment, inventories and goodwill. No value was assigned to the company name “Monsanto.” The goodwill included expected synergies in administration processes and infrastructure, including cost savings in the selling, R&D and general administration functions, as well as expected sales synergies resulting from the combined offering of products. The goodwill is non-tax-deductible. The following bonds with total nominal volumes of US$15 billion and €5 billion were issued in June 2018 to finance the acquisition: B 13 Newly issued bonds Issuer Coupon (%) Nominal volume Issue date Maturity date Bayer U.S. Finance II LLC, U.S.A. 3.5 US$1,250 million June 25, 2018 June 25, 2021 3-month USD LIBOR + 0.63 US$1,250 million June 25, 2018 June 25, 2021 3.875 US$2,250 million June 25, 2018 Dec. 15, 2023 3-month USD LIBOR + 1.01 US$1,250 million June 25, 2018 Dec. 15, 2023 4.25 US$2,500 million June 25, 2018 Dec. 15, 2025 4.375 US$3,500 million June 25, 2018 Dec. 15, 2028 4.625 US$1,000 million June 25, 2018 June 25, 2038 4.875 US$2,000 million June 25, 2018 June 25, 2048 Bayer Capital Corporation B.V., Netherlands 3-month EURIBOR + 0.55 €750 million June 26, 2018 June 26, 2022 0.625 €1,000 million June 26, 2018 Dec. 15, 2022 1.5 €1,750 million June 26, 2018 June 26, 2026 2.125 €1,500 million June 26, 2018 Dec. 15, 2029 As part of the acquisition, bonds with a nominal volume of US$6.9 billion were taken over from Monsanto. Notes 37 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements The purchase price allocation for Monsanto was completed on June 6, 2019. The effects of adjustments to the purchase price allocation in 2018 and through June 6, 2019, on the Group’s assets, liabilities and cash outflows – net of acquired cash and cash equivalents – were as follows: B 14 Acquired Assets, Assumed Liabilities and Adjustments (Fair Values at the Respective Acquisition Dates) (Monsanto) € million Prior to adjustment of the purchase price allocation Adjustment of the purchase price allocation After adjustment of the purchase price allocation Goodwill 22,998 1,746 24,744 Patents and technologies 17,350 (212) 17,138 Trademarks 4,195 (254) 3,941 Marketing and distribution rights 821 24 845 Production rights – 11 11 R&D projects 4,300 302 4,602 Other rights 394 (34) 360 Property, plant and equipment 6,293 (639) 5,654 Investments accounted for using the equity method 52 – 52 Other financial assets 250 (52) 198 Inventories 4,882 (153) 4,729 Receivables 7,201 54 7,255 Other assets 27 (1) 26 Cash and cash equivalents 2,657 – 2,657 Deferred tax assets 1,548 302 1,850 Provisions for pensions and other post-employment benefits (367) (22) (389) Other provisions (1,297) (632) (1,929) Refund liabilities (3,321) 8 (3,313) Financial liabilities (8,656) 1 (8,655) Other liabilities (3,102) (566) (3,668) Deferred tax liabilities (8,019) 117 (7,902) Net assets 48,206 – 48,206 The effects of the adjustments to the purchase price allocation for Monsanto in the second quarter of 2018 on the income statement were immaterial. On May 2, 2018, Bayer increased its interest in the joint venture Bayer Zydus Pharma Private Limited, Thane, India, from 50% to 75% plus one share. A purchase price of €28 million was agreed. Bayer is obli- gated to purchase the remaining 25% minus one share of Bayer Zydus Pharma by 2021 and has recog- nized a liability of €9 million in connection with this obligation. As a result, the accounting method used for this business changed from the equity method to full consolidation, with 100% of the shares of Bayer Zydus Pharma being consolidated. Remeasurement of the shares previously accounted for using the equi- ty method resulted in an amount of €18 million. The gain of €15 million resulting from the derecognition of the shares previously accounted for using the equity method was recognized in the financial result. The purchase price pertained mainly to goodwill, which in turn is largely based on a control premium. Bayer Zydus Pharma is active in core segments of the Indian pharmaceutical market and focuses on women’s health, diagnostic imaging, cardiovascular disease, diabetes treatment and oncology. This acquisition in- creases Bayer’s presence in the Indian pharmaceutical market. Notes 38 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Assets held for sale On July 27, 2018, Bayer signed the agreements to sell the prescription dermatology business to LEO Pharma A/S, Ballerup, Denmark. The global prescription dermatology business outside the United States was transferred to the acquirer on July 1, 2019. The divested portfolio, comprising prescription brands including Advantan™, Skinoren™ and Travocort™, was recognized as held for sale as of June 30, 2019. The base purchase price amounts to €0.6 billion and is subject to customary purchase price adjustments. The divestment gain is provisionally estimated at €0.3 billion. On May 13, 2019, Bayer and Beiersdorf signed an agreement for Beiersdorf to acquire Bayer’s Coppertone™ business for a purchase price of US$550 million. The business is expected to be transferred to the acquirer in the second half of 2019 subject to the fulfillment of the closing conditions. On July 19, 2019, Bayer entered into an agreement with Yellow Wood Partners, Boston, United States, regarding the sale of the Dr. Scholl’s™ business of Consumer Health for a purchase price of US$585 million. The trans- action is expected to close in the fourth quarter of 2019 subject to the satisfaction of customary closing conditions, including approval by antitrust authorities. Impairment losses of €421 million, including €208 million on goodwill, were recognized through profit or loss upon the reclassification of the disposal groups. The assets and liabilities held for sale were as follows: B 15 Assets and Liabilities Held for Sale € million June 30, 2019 Goodwill 352 Other intangible assets 677 Property, plant and equipment 127 Other assets 9 Deferred taxes 307 Inventories 99 Cash and cash equivalents 38 Assets held for sale 1,609 Provisions for pensions and other post-employment benefits 11 Other liabilities 13 Deferred taxes 9 Liabilities directly related to assets held for sale 33 Divestments and discontinued operations in 2018 Bayer ceded de facto control of Covestro and deconsolidated the company at the end of September 2017. As of the loss of control, Covestro fulfills the conditions for presentation as a discontinued operation. In connection with the sale of Covestro AG shares in 2017, Bayer AG entered into derivative contracts. These resulted in a total of €8 million in losses through the second quarter of 2018. The discontinued operation had no impact on the Bayer Group statement of cash flows in 2018. Notes 39 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements In connection with the acquisition of Monsanto, Bayer had signed an agreement with BASF on October 13, 2017, concerning the sale of selected Crop Science businesses. All of the respective transactions closed on August 1, 2018, except for the sale of the vegetable seed business, which closed on August 16, 2018. Final agreement on the purchase price was reached in the first half of 2019. In accordance with the condi- tions imposed by antitrust authorities, the divestment of Crop Science businesses to BASF also comprises further significant obligations by Bayer that will be fulfilled over a number of years subsequent to the date of divestment. Another of these conditions is for deliveries under the supply agreement (finished products and active ingredients) to be made at prices based on the respective variable costs. In this connection, a contract liability of €0.2 billion was determined based on customary sales prices and recognized in the statement of financial position. It will be dissolved as the obligations are fulfilled. The final purchase price amounts to approximately €7.3 billion, and income before taxes to €4.0 billion. The divested net assets amounted to €2.8 billion and pertained mainly to property, plant and equipment, goodwill and other assets and provisions. On September 4, 2018, the prescription dermatology business of the Consumer Health segment in the United States was transferred to the acquirer LEO Pharma A/S, Ballerup, Denmark. The base purchase price amounted to €58 million. On June 30, 2018, the Pharmaceuticals segment sold its MK Generics business in Central America and the Caribbean to Tecnoquímicas S.A., Cali, Colombia. The divested business includes the Bonima produc- tion plant in El Salvador. The base purchase price was €44 million. Financial instruments The following tables show the carrying amounts and fair values of financial assets and liabilities by catego- ry of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the state- ments of financial position. Since the line items “Trade accounts receivable,” “Other receivables,” “Financial liabilities” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables or advance payments for services receivable in the future), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities.” Notes 40 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements B 16 Carrying Amounts and Fair Values of Financial Instruments June 30, 2019 Carried at amortized cost Carried at fair value 2] [Fair value for information Nonfinancial assets / liabilities Measurement category (IFRS 9) 1 Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount in the statement of financial position Trade accounts receivable 13,870 210 163 14,243 AC 13,870 13,870 FVTPL 210 210 Nonfinancial assets 163 163 Other financial assets 175 1,378 360 1,183 3,096 AC 175 [175] 175 FVTPL 1,134 172 905 2,211 FVTOCI (no recycling) 238 213 451 Derivatives 6 188 65 259 Other receivables 318 57 1,734 2,109 AC 318 [318] 318 FVTPL 57 57 Nonfinancial assets 1,734 1,734 Cash and cash equivalents 3,343 3,343 AC 3,343 [3,343] 3,343 Total financial assets 17,706 1,378 570 1,240 20,894 of which AC 17,706 17,706 of which FVTPL 1,134 382 962 2,478 Financial liabilities 42,133 997 127 71 43,328 AC 42,133 [35,276] [7,592] 42,133 FVTPL (nonderivative) 997 997 Derivatives 127 127 Nonfinancial liabilities 71 71 Trade accounts payable 5,384 5,384 AC 5,384 5,384 Other liabilities 1,104 7 355 17 967 2,450 AC 1,104 [1,104] 1,104 FVTPL (nonderivative) 14 14 Derivatives 7 355 3 365 Nonfinancial liabilities 967 967 Total financial liabilities 48,621 1,004 482 17 50,124 of which AC 48,621 48,621 of which FVTPL (nonderivative) 997 14 1,011 of which derivatives 7 482 3 492 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Fair value of the financial instruments at amortized cost; IFRS 7.29(a) was applied for information on specific fair values. Notes 41 Bayer Half-Year Financial Report as of June 30, 2019 Carrying Amounts and Fair Values of Financial Instruments Carried at amortized cost Measurement category (IFRS 9) 1 Based on quoted prices in active markets (Level 1) € million Carrying amount Carrying amount Trade accounts receivable 11,564 AC 11,564 Nonfinancial assets Other financial assets 440 1,584 AC 440 FVTPL 1,432 FVTOCI (no Recycling) 144 Derivatives 8 Other receivables 614 AC 614 FVTPL Nonfinancial assets Cash and cash equivalents 4,052 AC 4,052 Total financial assets 16,670 1,584 of which AC 16,670 of which FVTPL 1,432 Financial liabilities 40,226 996 AC 40,226 [32,395] FVTPL (nonderivative) 996 Derivatives Trade accounts payable 6,038 AC 6,038 Other liabilities 1,136 7 AC 1,136 FVTPL (nonderivative) Derivatives 7 Nonfinancial liabilities Total financial liabilities 47,400 1,003 of which AC 47,400 of which FVTPL (nonderivative) 996 of which derivatives 7 2018 figures restated 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a) B Condensed Consolidated Interim Financial Statements B 17 Dec. 31, 2018 Carried at fair value 2] [fair value for information Nonfinancial assets / liabilities Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Carrying amount Carrying amount Carrying amount Carrying amount in the statement of financial position 150 11,714 11,564 150 150 241 1,113 3,378 [441] 440 28 895 2,355 186 330 213 32 253 42 1,828 2,484 [614] 614 42 42 1,828 1,828 4,052 [4,052] 4,052 241 1,155 19,650 16,670 28 937 2,397 172 41,394 [7,091] 40,226 996 172 172 6,038 6,038 320 20 1,004 2,487 [1,136] 1,136 20 20 320 327 1,004 1,004 492 20 48,915 47,400 20 1,016 492 499 Notes 42 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements The category “AC – measured at amortized cost” within other financial assets and in financial liabilities also includes finance lease receivables and lease liabilities in which Bayer is the lessor or lessee and which were therefore measured according to IFRS 16 (in 2019) or IAS 17 (in 2018). Due to the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discount- ing the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and the creditworthiness of the counterparty. Where a market price is available, however, this is deemed to be the fair value. The fair values of financial assets measured at fair value correspond to quoted prices in active markets (Level 1), or are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are de- termined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit value adjustments are determined to allow for the con- tracting party’s credit risk. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into ac- count any foreign currency translation as of the closing date. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies to certain debt or equity instruments, in some cases to the fair values of embedded deriva- tives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as “FVTPL – at fair value through profit or loss” by the discounted cash flow method. Here the credit spreads of compara- ble issuers are applied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materially affect the fair value. Embedded derivatives are separated from their respective host contracts, provided these are not financial instruments. Such host contracts are generally sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. The financial liabilities arising from the debt instruments (exchangeable bond) issued in June 2017 that can be converted into Covestro shares are measured at fair value through profit or loss. This exchangeable bond is a hybrid financial instrument containing a debt instrument as a nonderivative host contract and multiple embedded derivatives. Notes 43 Bayer Half-Year Financial Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements The changes in the amounts of financial assets and liabilities recognized at fair value based on unobserv- able inputs (Level 3) for each financial instrument category (see table B 17 for definitions) were as follows: B 18 Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI 1 (no recycling) Derivatives (net) Liabilities – FVTPL1 (non- derivative) Total Carrying amounts (net), January 1, 2019 937 186 32 (20) 1,135 Gains (losses) recognized in profit or loss 25 – 30 – 55 of which related to assets / liabilities recognized in the statements of financial position 25 – 30 – 55 Gains (losses) recognized outside profit or loss – 2 – – 2 Additions of assets (liabilities) – 25 – – 25 Settlements of (assets) liabilities – – – 6 6 Transfers (IFRS 5) – – – – – Disposals from divestments / changes in scope of consolidation – – – – – Carrying amounts (net), June 30, 2019 962 213 62 (14) 1,223 1 See table B 17 for definition of measurement category.. B 19 Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI1 (no recycling) Derivatives (net) Liabilities – FVTPL1 (non- derivative) Total Carrying amounts (net), January 1, 2018 821 68 10 (7) 892 Gains (losses) recognized in profit or loss 8 – (6) – 2 of which related to assets / liabilities recognized in the statements of financial position 8 – (6) – 2 Gains (losses) recognized outside profit or loss – (1) – – (1) Additions of assets (liabilities) 65 95 17 (10) 167 Settlements of (assets) liabilities – (1) – 1 – Transfers (IFRS 5) – (6) – 1 (5) Disposals from divestments / changes in scope of consolidation – (4) – – (4) Carrying amounts (net), June 30, 2018 894 151 21 (15) 1,051 2018 figures restated 1 See table B 17 for definition of measurement category.. The changes recognized in profit or loss were included in other operating income / expenses, as well as in the financial result in interest income, exchange gains or losses and in other financial income and expenses. Contingent liabilities as of June 30, 2019, amounted to approximately €1.1 billion (June 30, 2018: €0.8 billion) and primarily related to tax and labor law as well as other matters in countries such as the United States, Brazil, India, Greece and Italy. Notes 44 Bayer Half-Year Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Legal Risks To find out more about the Bayer Group’s legal risks, please see Note [29] to the consolidated financial statements in the Bayer Annual Report 2018, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2018, the following significant changes have occurred in respect of the legal risks: Mirena™: As of July 11, 2019, lawsuits from approximately 2,700 users of Mirena™, a levonorgestrel- releasing intrauterine system providing long-term contraception, had been served upon Bayer in the United States (excluding lawsuits no longer pending). Plaintiffs allege personal injuries resulting from the use of Mirena™, including perforation of the uterus, ectopic pregnancy or idiopathic intracranial hypertension, and seek compensatory and punitive damages. In June 2019, the multidistrict litigation (“MDL”) court oversee- ing the federal court cases in which plaintiffs allege idiopathic intracranial hypertension granted summary judgment dismissing all approximately 730 cases pending before that court. Plaintiffs are appealing the decision. Xarelto™: As of July 11, 2019, U.S. lawsuits from approximately 28,600 recipients of Xarelto™, an oral anticoagulant for the treatment and prevention of blood clots, had been served upon Bayer and Janssen Pharmaceuticals, Inc., the company distributing Xarelto™ in the United States. Plaintiffs allege that users have suffered personal injuries from the use of Xarelto™, including cerebral, gastrointestinal or other bleed- ing and death, and seek compensatory and punitive damages. In March 2019, Bayer and Janssen reached an agreement in principle with plaintiffs to resolve the Xarelto™ litigation in the United States, without ad- mission of liability, for an amount of US$775 million. The settlement amount will be shared equally between the two companies. It is expected that Bayer’s share will be partially offset by product liability insurance. Bayer and Janssen may withdraw from the agreement if certain participation rates are not satisfied. If the settlement proceeds, it will resolve virtually all of the currently pending Xarelto™ claims. Bayer does not expect the net financial burden to have a material adverse impact on the consolidated financial statements of the Bayer Group. Essure™: As of July 11, 2019, U.S. lawsuits from approximately 31,600 users of Essure™, a medical de- vice offering permanent birth control with a nonsurgical procedure, had been served upon Bayer. Plaintiffs allege personal injuries from the use of Essure™, including hysterectomy, perforation, pain, bleeding, weight gain, nickel sensitivity, depression and unwanted pregnancy, and seek compensatory and punitive damages. As of July 11, 2019, two Canadian lawsuits relating to Essure™ seeking class action certifica- tion had been served upon Bayer. In March 2019, one of the proposed class actions was certified. Roundup™ (Glyphosate): As of July 11, 2019, lawsuits from approximately 18,400 plaintiffs claiming to have been exposed to glyphosate-based products manufactured by Bayer’s subsidiary Monsanto had been served upon Monsanto in the United States. Glyphosate is the active ingredient contained in a num- ber of Monsanto’s herbicides, including Roundup™-branded products. Plaintiffs allege personal injuries resulting from exposure to those products, including non-Hodgkin lymphoma (NHL) and multiple myeloma, and seek compensatory and punitive damages. Cases pending in U.S. federal courts have been consoli- dated in a multi district litigation (“MDL”) in the Northern District of California for common pre-trial man- agement. In March 2019, in the first trial conducted in the MDL, a jury awarded around US$5 million in compensa- tory and US$75 million in punitive damages to a plaintiff who claimed that a Monsanto product caused his NHL. We disagree with the verdict and sought trial court review in May 2019. In July 2019, the trial judge decided to reduce the punitive damages from US$ 75 million to US$ 20 million. The roughly US$ 5 million compensatory damages were not reduced. The decision to reduce the punitive damage award by US$ 55 million is a step in the right direction, but we plan to file an appeal with the United States Court of Appeals for the Ninth Circuit. In May 2019, in the third trial in this litigation, a California state court jury in Alameda County (Oakland) awarded the two plaintiffs a total of US$55 million in com- pensatory and US$2 billion in punitive damages. Again, we disagree with the jury’s verdict and have filed post-trial motions seeking to reverse the jury verdict and enter judgment for Monsanto, or in the alterna- tive, order a new trial. We continue to believe that we have meritorious defenses and we intend to defend ourselves vigorously in all of these lawsuits. Another three trials are currently scheduled in Missouri state court for the remainder of 2019. However, trial dates in all venues remain subject to change depending on Notes 45 Bayer Half-Year Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements court schedules and rulings. In parallel to the continued litigation, Bayer will constructively engage in the mediation process ordered by the judge presiding over the MDL. As of July 11, 2019, five Canadian lawsuits relating to Roundup™ seeking class action certification had been served upon Bayer. Bayer believes it has meritorious defenses and intends to defend itself vigorously. One A Day™ vitamins: Bayer has been named in a class action lawsuit in the United States alleging Bayer’s claims on its One A Day™ vitamins regarding the support of heart health, immunity and physical energy are false and misleading. In February 2019, the jury returned a verdict for Bayer and found that Bayer’s claims on its vitamins are not false or misleading. The plaintiffs did not appeal the verdict, and therefore, the verdict is final. Notes to the Statements of Cash Flows Dividend payments amounted to €2,611 million and net interest payments to €649 million. Net borrowings came to €357 million. Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural per- sons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its sub- sidiaries exercise control or joint control or have a significant influence. They include, in particular, non- consolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate offic- ers of Bayer AG. Sales to related parties were not material from the viewpoint of the Bayer Group. Liabilities to joint ventures declined by €0.1 billion compared with December 31, 2018, and primarily per- tained to the joint venture Casebia Therapeutics Limited Liability Partnership, Ascot, United Kingdom, which was established together with CRISPR Therapeutics AG, Basel, Switzerland. Liabilities for post- employment benefit plans increased by €0.2 billion. Services rendered to associates declined by €0.2 billion to €0.0 billion as Covestro ceased being an asso- ciate in May 2018. Notes 46 Bayer Half-Year Report as of June 30, 2019 B Condensed Consolidated Interim Financial Statements Other information On April 26, 2019, the Annual Stockholders’ Meeting approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.80 per share entitled to the dividend be paid for the 2018 fiscal year. The actions of the members of the Board of Management serving in 2018 were not ratified. The actions of the members of the Supervisory Board serving in 2018 were ratified in accordance with the proposal by the Board of Management and the Supervisory Board. One stockholder representative was elected to the Supervisory Board in accordance with the nomination submitted by the Supervisory Board. In accordance with the proposal by the Board of Management and the Supervisory Board, the Annual Stockholders’ Meeting once again authorized the Board of Management to acquire and use own shares, and in the course of such acquisition to employ derivatives and to disapply subscription and other tender rights. In accordance with the proposal by the Supervisory Board, Deloitte GmbH Wirtschaftsprüfungsgesell- schaft, Munich, Germany, was elected auditor of the annual and consolidated financial statements for 2019, and also to review, if applicable, the condensed financial statements and interim management report as of June 30, 2019, and if applicable, the condensed financial statements and interim manage- ment reports as of September 30, 2019, and March 31, 2020, if these are prepared. Leverkusen, July 25, 2019 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Dr. Hartmut Klusik Kemal Malik Wolfgang Nickl Stefan Oelrich Heiko Schipper Notes 47 Bayer Half-Year Financial Report as of June 30, 2019 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for financial reporting, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Bayer Group, and the combined management report includes a fair review of the development and performance of the business and the position of the Bayer Group and Bayer AG, together with a description of the principal opportunities and risks associated with the expected develop- ment of the Bayer Group and Bayer AG. Leverkusen, July 25, 2019 Bayer Aktiengesellschaft The Board of Management Werner Baumann Chairman Liam Condon Dr. Hartmut Klusik Kemal Malik Wolfgang Nickl Stefan Oelrich Heiko Schipper 48 Bayer Half-Year Financial Report as of June 30, 2019 Review Report To Bayer Aktiengesellschaft, Leverkusen / Germany We have reviewed the condensed interim consolidated financial statements – comprising the income statement and the statement of comprehensive income, the statement of financial position, the statement of cash flows, the condensed statement of changes in equity as well as selected explanatory notes to the financial statements – and the interim group management report for the period from 1 January until 30 June 2019 of Bayer Aktiengesellschaft, Leverkusen, that are part of the half-year financial report under § 115 WpHG (Wertpapierhandelsgesetz: German Securities Trading Act). The preparation of the con- densed interim consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group man- agement reports is the responsibility of the entity’s Management Board. Our responsibility is to issue a report on the condensed interim consolidated financial statements and on the interim group management report based on our review. We conducted our review of the interim consolidated financial statements and of the interim group man- agement report in accordance with the German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) as well as in supplementary compliance with the International Standard on Review Engagements “Review of Interim Financial Information performed by the Independent Auditor of the Entity” (ISRE 2410). Those standards require that we plan and perform the review such that we can preclude through critical evalua- tion, with a certain level of assurance, that the condensed interim consolidated financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group manage- ment reports. A review is limited primarily to inquiries of personnel of the entity and analytical assessments and therefore does not provide the assurance attainable in a financial statement audit. Since, in accord- ance with our engagement, we have not performed a financial statement audit, we cannot issue an audi- tor’s report. Based on our review, no matters have come to our attention that cause us to presume that the condensed interim consolidated financial statements of Bayer Aktiengesellschaft, Leverkusen, have not been pre- pared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Munich / Germany, 26 July 2019 Deloitte GmbH Wirtschaftsprüfungsgesellschaft Heiner Kompenhans Wirtschaftsprüfer (German Public Auditor) Prof. Dr. Frank Beine Wirtschaftsprüfer (German Public Auditor) Review Report 49 Bayer Half-Year Financial Report as of June 30, 2019 Financial Calendar / Masthead Financial Calendar Q3 2019 Quarterly Statement 2019 Annual Report Q1 2020 Quarterly Statement Annual Stockholders’ Meeting 2020 October 30, 2019 February 27, 2020 April 27, 2020 April 28, 2020 Reporting Principles This Bayer AG Interim Report is a half-year financial report that satisfies the requirements of Section 115, Paragraph 2, No. 1 and No. 2, Paragraph 3 and Paragraph 4 of the German Securities Trading Act (WpHG). Bayer has prepared the condensed consolidated interim financial statements according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (E.U.). This report should be read in conjunction with the Annual Report for the 2018 fiscal year and the additional information about the company provided therein. The Annual Report 2018 is available on our website at www.bayer.com. Masthead Published by Bayer AG, 51368 Leverkusen, Germany Date of publication Tuesday, July 30, 2019 Editor Meike Kneip, phone +49 214 30 20015 Email: meike.kneip@bayer.com English edition Bayer Business Services GmbH Translation Services Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com Bayer on the internet www.bayer.com Half-year financial report produced in-house with firesys. Forward-Looking Statements This half-year financial report may contain forward-looking statements based on current assumptions and forecasts made by Bayer management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 50

Semestriel, 2019, Agrochemistry, BAYER

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Half-Year Financial Report 2021 Bayer: Strong growth, guidance upgrade // Group sales at €10.9 billion (Fx & p adj. + 12.9%) --- double-digit percentage growth (Fx & p adj.) at all divisions // EBITDA before special items at €2.6 billion (--- 10.6%), burdened by currency effects of €0.2 billion // Crop Science posts strong sales growth, earnings impacted by higher costs and currency effects // Pharmaceuticals reports significant recovery after COVID-19 effects in prior year // Consumer Health continues growth momentum // Core earnings per share €1.61 (+ 1.3%) // Net income at minus €2.3 billion; additional €3.5 billion in provisions established for glyphosate litigations // Strong free cash flow of €1.2 billion // Full-year guidance upgraded // Good pipeline news: Kerendia™ gains U.S. approval; acquisition of Vividion Therapeutics agreed; start of first clinical study for Parkinson’s cell therapy treatment Bayer Half-Year Financial Report as of June 30, 2021 Contents Bayer Group Key Data _________________________________________________________________________ 3 Interim Group Management Report as of June 30, 2021 ________________________________________ 4 Key Events ____________________________________________________________________________________ 4 1. Overview of Sales, Earnings and Financial Position _________________________________________ 5 1.1 Earnings Performance of the Bayer Group __________________________________________________ 5 1.2 Business Development by Division ________________________________________________________ 10 1.3 Asset and Financial Position of the Bayer Group ___________________________________________ 17 2. Research, Development, Innovation _______________________________________________________ 19 Crop Science _____________________________________________________________________________ 19 Pharmaceuticals __________________________________________________________________________ 20 Consumer Health _________________________________________________________________________ 23 Leaps by Bayer ___________________________________________________________________________ 23 3. Report on Future Perspectives and on Opportunities and Risks _____________________________ 23 3.1 Future Perspectives ______________________________________________________________________ 23 3.2 Opportunities and Risks __________________________________________________________________ 25 Condensed Consolidated Interim Financial Statements as of June 30, 2021 ____________________ 26 Bayer Group Consolidated Income Statements _________________________________________________ 26 Bayer Group Consolidated Statements of Comprehensive Income _______________________________ 27 Bayer Group Consolidated Statements of Financial Position ____________________________________ 28 Bayer Group Consolidated Statements of Cash Flows __________________________________________ 29 Bayer Group Consolidated Statements of Changes in Equity ___________________________________ 30 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group _________ 31 Events after the end of the reporting period ____________________________________________________ 46 Responsibility Statement _____________________________________________________________________ 47 Review Report ________________________________________________________________________________ 48 Financial Calendar ____________________________________________________________________________ 49 Reporting Principles __________________________________________________________________________ 49 Masthead _____________________________________________________________________________________ 49 2 Bayer Half-Year Financial Report as of June 30, 2021 Bayer Group Key Data € million Q2 2020 Q2 2021 Reported Sales 10,054 10,854 + 8.0 Change in sales1 Volume + 0.6% + 11.3% Price – 3.1% + 1.6% Currency – 2.0% – 5.2% Portfolio – 1.7% + 0.3% Sales by region Europe / Middle East / Africa 2,942 3,245 + 10.3 North America 3,858 4,066 + 5.4 Asia / Pacific 2,159 2,302 + 6.6 Latin America 1,095 1,241 + 13.3 EBITDA1 (9,604) (891) – 90.7 Special items1 (12,487) (3,468) EBITDA before special items1 2,883 2,577 – 10.6 EBITDA margin before special items1 28.7% 23.7% EBIT1 (10,784) (2,281) – 78.8 Special items1 (12,511) (3,901) EBIT before special items1 1,727 1,620 – 6.2 Financial result (276) (99) – 64.1 Net income (from continuing and discontinued operations) (9,548) (2,335) – 75.5 Earnings per share1 from continuing and discontinued operations (€) (9.72) (2.38) – 75.5 Core earnings per share1 from continuing operations (€) 1.59 1.61 + 1.3 Net cash provided by (used in) operating activities (from continuing and discontinued operations) 2,414 1,997 – 17.3 Free cash flow 1,402 1,152 – 17.8 Net financial debt (at end of period) 35,993 34,361 – 4.5 Cash flow-relevant capital expenditures (from continuing and discontinued operations) 585 493 – 15.7 Research and development expenses 1,167 1,638 + 40.4 Depreciation, amortization and impairment losses / loss reversals 1,180 1,390 + 17.8 Number of employees2 (at end of period) 101,168 99,439 – 1.7 Personnel expenses (including pension expenses) 2,423 2,931 + 21.0 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Employees calculated as full-time equivalents (FTEs) Key Data Change % Fx. & p adj. H1 2020 H1 2021 Reported + 12.9 22,899 23,182 + 1.2 + 3.8% + 6.7% – 1.8% + 0.5% – 0.8% – 6.4% – 1.5% + 0.4% + 12.3 7,180 7,318 + 1.9 + 13.0 9,175 8,964 – 2.3 + 9.9 4,271 4,481 + 4.9 + 20.5 2,273 2,419 + 6.4 (5,828) 3,278 . (13,102) (3,417) 7,274 6,695 – 8.0 31.8% 28.9% (8,285) 802 . (13,150) (3,886) 4,865 4,688 – 3.6 (928) (447) – 51.8 (8,059) (246) – 96.9 (8.20) (0.25) – 97.0 4.26 4.20 – 1.4 2,185 (768) . 609 (2,074) . 35,993 34,361 – 4.5 976 822 – 15.8 2,469 2,836 + 14.9 2,457 2,476 + 0.8 101,168 99,439 – 1.7 5,183 5,751 + 11.0 3 Change % Fx. & p adj. + 7.2 + 5.3 + 4.6 + 8.1 + 22.1 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report Key Events Interim Group Management Report as of June 30, 2021 Key Events Approval granted for Kerendia™ (finerenone) in the United States and Verquvo™ (vericiguat) in the European Union and Japan In July, the U.S. Food and Drug Administration (FDA) approved finerenone for the treatment of adult patients with chronic kidney disease and type 2 diabetes under the brand name Kerendia™. Also in July, the European Commission approved vericiguat in the European Union for the treatment of symptomatic chronic heart failure in adult patients under the brand name Verquvo™. We also obtained approval for Verquvo™ in Japan in June. For further details, see Chapter 2. Research, Development, Innovation – Pharmaceuticals. Acquisitions agreed to strengthen the oncology portfolio In June, we concluded an agreement to acquire Noria Therapeutics Inc. and PSMA Therapeutics Inc. to broaden our oncology platform of targeted alpha therapies. Through this acquisition, we will obtain exclusive rights to a differentiated alpha radionuclide therapy based on actinium-225 and a small molecule targeting the prostate-specific membrane antigen. Acquisition of Vividion Therapeutics, Inc. agreed, strengthening our drug discovery capabilities In August, we announced that we had entered into an agreement to acquire the U.S. biopharmaceutical company Vividion Therapeutics, Inc. Through the acquisition, we will gain access to a cutting-edge chemoproteomics platform that is able to identify previously unknown binding pockets in undruggable targets to generate first-in-class novel compounds in indications of high unmet medical need. Vividion’s technology has already proven its applicability pre-clinically in oncology and immune-related diseases, with potential to expand into additional therapeutic areas. As part of the acquisition, we will make an upfront payment of US$1.5 billion along with success-based milestone payments of up to US$0.5 billion. Closing of the transaction is contingent on customary closing conditions and is expected to take place in third quarter of 2021. Crop Science launches Carbon Initiative in Europe At the end of June, our Crop Science Division initiated the European launch of its global Carbon Initiative program for the agricultural industry, after it had already kicked off in the United States and Brazil in 2020. The decarbonization program is aimed at permanently reducing CO2 emissions in the agricultural value chain. As part of this initiative, farmers are given incentives to adopt climate-friendly practices to increase the resilience and sustainability of the food system. 4 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Updated plan announced to resolve glyphosate litigations – Bayer now more in control going forward At the end of May, we announced a series of measures to resolve potential future glyphosate litigation, combining both legal and commercial actions. The responsible court had previously denied the motion to approve the class settlement agreement. In July, we provided an update on the progress made and announced additional details to provide clarity for investors. We have developed two scenarios based on a potential ruling by the Supreme Court of the United States in the Hardeman case. // If the Supreme Court accepts the petition, which we plan to file in August, for review and rules in our favor, it would effectively end potential future litigation. // The second scenario assumes that the Supreme Court either refuses to hear the Hardeman case or issues a ruling in favor of the plaintiff, in which case we would activate our own claims administration program. We have implemented corresponding accounting measures for this scenario, resulting in a discounted allocation to provisions for litigations of €3.5 billion in the second quarter of 2021 on top of the existing provisions. We are confident that this provides an effective path to manage and address any risks from potential future Roundup™ litigation, while simultaneously giving Bayer more control going forward. We continue to believe there is no reason for safety concerns in connection with these products. See the Legal Risks section of the Notes for further details. 1. Overview of Sales, Earnings and Financial Position1 1.1 Earnings Performance Second quarter of 2021 Group sales Group sales in the second quarter of 2021 increased by 12.9% (Fx & portfolio adj.) to €10,854 million (Q2 2020: €10,054 million; reported: + 8.0%) after the prior-year period had been significantly impacted by the restrictions introduced in response to COVID-19. Sales in all divisions increased by a double-digit percentage after adjusting for currency and portfolio effects. Negative currency effects impacted sales by €524 million. Sales in Germany amounted to €554 million (Q2 2020: €528 million). Crop Science achieved encouraging sales growth, with strong gains registered in Latin America and Asia / Pacific in particular. Business also expanded considerably in North America. Pharmaceuticals posted a significant increase in sales, with the division benefiting from a robust recovery from the COVID-19 restrictions in the women’s healthcare, ophthalmology and radiology businesses, and also achieving substantial gains for other products, such as Xarelto™. Business at Consumer Health expanded significantly, with growth in all regions and categories. EBITDA before special items Group EBITDA before special items fell by 10.6% to €2,577 million. This figure included a negative currency effect of €153 million and allocations to provisions for variable compensation of €411 million, after the second quarter of 2020 had seen the reversal of €56 million in provisions for variable compensation due to COVID-19 effects. Crop Science posted a decline in EBITDA before special items due to an increase in the cost of goods sold and negative currency effects. The increase in EBITDA before special items at Pharmaceuticals was largely attributable to the division's very good sales performance. At Consumer Health, EBITDA before special items was up substantially against the prior-year period, mainly due to its positive business performance. 1 For definition of alternative performance measures see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 5 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Depreciation, amortization and impairments Depreciation, amortization and impairment losses – net of impairment loss reversals – amounted to €1,390 million (Q2 2020: €1,180 million), with intangible assets accounting for €1,025 million (Q2 2020: €665 million) and property, plant and equipment for €365 million (Q2 2020: €515 million). There were net impairment losses of €458 million (Q2 2020: €36 million), including €466 million (Q2 2020: €9 million) on intangible assets, after unscheduled impairment testing resulted in the recognition of net impairment losses of €437 million on intangible assets in the Crop Science Division. These concerned the Corn Seed & Traits cash-generating unit, with an impairment loss of €818 million, mainly on account of changes in the interest rate and currency environment. In addition, an impairment loss reversal of €381 million was recognized for the glyphosate unit, primarily as a result of improved business prospects. Net impairment losses of €427 million (Q2 2020: €24 million) were included in special items. EBIT and special items EBIT of the Bayer Group came in at minus €2,281 million (Q2 2020: minus €10,784 million) after net special charges of €3,901 million (Q2 2020: €12,511 million) that mainly resulted from the discounted allocation to provisions in connection with the glyphosate litigations as well as the net impairment losses at the Crop Science Division mentioned above. Other special charges were attributable to an allocation to provisions related to the accelerated transformation of the company announced the previous fall. There were special gains in the Pharmaceuticals Division from a patent dispute involving Jivi™ and from the sale of a building in Berlin. EBIT before special items declined by 6.2% to €1,620 million (Q2 2020: €1,727 million). The following special items were taken into account in calculating EBIT and EBITDA: Special Items by Category1, 2 € million EBIT Q2 2020 EBIT Q2 2021 EBIT H1 2020 EBIT H1 2021 EBITDA Q2 2020 EBITDA Q2 2021 EBITDA H1 2020 Total special items (12,511) (3,901) (13,150) (3,886) (12,487) (3,468) (13,102) Restructuring (286) (212) (496) (301) (289) (210) (498) of which in the Reconciliation (183) (144) (312) (210) (171) (144) (300) Acquisition / integration (3) (7) (26) (4) (3) (7) (26) of which in the Reconciliation – (1) – (1) – (1) – Divestments (7) 78 (21) 68 (7) 78 (21) of which in the Reconciliation (4) – (13) – (4) – (13) Litigations / legal risks (12,051) (3,334) (12,419) (3,193) (12,051) (3,334) (12,419) of which in the Reconciliation (814) 45 (827) 59 (814) 45 (827) Impairment losses / loss reversals3 (163) (433) (187) (463) (137) (2) (138) Other – 7 – 7 – 7 – 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Prior to December 31, 2020, special items pertaining to the integration of Monsanto Functions were reported in the category “acquisition and integration costs.” Effective January 1, 2021, these special items have been included in the category “restructuring.” The prior-year figures have been restated accordingly. 3 Where not already included in the other special items categories 6 A 1 EBITDA H1 2021 (3,417) (292) (210) (4) (1) 68 – (3,193) 59 (3) 7 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Special Items by Functional Cost1 € million EBIT Q2 2020 EBIT Q2 2021 EBIT H1 2020 EBIT H1 2021 EBITDA Q2 2020 EBITDA Q2 2021 EBITDA H1 2020 Total special items (12,511) (3,901) (13,150) (3,886) (12,487) (3,468) (13,102) Cost of goods sold (207) (288) (299) (324) (196) (28) (210) Selling expenses (25) 77 9 65 (25) (32) (45) Research and development expenses (10) (279) (30) (271) (10) 5 (30) General administration expenses (189) (173) (359) (255) (188) (173) (358) Other operating income / expenses (12,080) (3,238) (12,471) (3,101) (12,068) (3,240) (12,459) 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Income from discontinued operations after income taxes Income from discontinued operations after income taxes amounted to €0 million (Q2 2020: €71 million). Net income After a financial result of minus €99 million (Q2 2020: minus €276 million), income before income taxes amounted to minus €2,380 million (Q2 2020: minus €11,060 million). The financial result mainly comprised income of €209 million from investments in affiliated companies (Q2 2020: €54 million), which primarily included gains from the remeasurement of a Leaps investment, and net interest expense of €253 million (Q2 2020: €344 million). The financial result included net special gains of €16 million (Q2 2020: €67 million). After income from income taxes of €52 million (Q2 2020: €1,450 million) and accounting for noncontrolling interest, net income amounted to minus €2,335 million (Q2 2020: minus €9,548 million). Core earnings per share Core earnings per share came in at €1.61 (+1.3%; Q2 2020: €1.59), with the improvement in the financial result having a positive effect. Earnings per share (total) amounted to minus €2.38 (Q2 2020: minus €9.72), mainly due to the special charges related to the glyphosate litigations. 7 A 2 EBITDA H1 2021 (3,417) (29) (44) 13 (255) (3,102) Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Core Earnings per Share1 € million Q2 2020 Q2 2021 H1 2020 EBIT (as per income statements) (10,784) (2,281) (8,285) Amortization and impairment losses / loss reversals on goodwill and other intangible assets 664 1,025 1,431 Impairment losses / loss reversals on property, plant and equipment, and accelerated depreciation included in special items 25 3 105 Special items (other than accelerated depreciation, amortization and impairment losses / loss reversals) 12,487 3,468 13,102 Core EBIT 2,392 2,215 6,353 Financial result (as per income statements) (276) (99) (928) Special items in the financial result2 (67) (16) 92 Income taxes (as per income statements) 1,450 52 971 Special items in income taxes – – – Tax effects related to amortization, impairment losses / loss reversals and special items (1,925) (563) (2,291) Income after income taxes attributable to noncontrolling interest (as per income statements) (9) (7) (8) Above-mentioned adjustments attributable to noncontrolling interest – – (1) Core net income from continuing operations 1,565 1,582 4,188 Shares (million) Weighted average number of shares 982.42 982.42 982.42 € Core earnings per share from continuing operations 1.59 1.61 4.26 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Primarily comprising changes in the fair value of our interests in Elanco and Covestro Personnel expenses and employee numbers The number of employees in the Bayer Group as of the closing date declined by 1.7% year on year to 99,439 (June 30, 2020: 101,168). Personnel expenses increased by 21.0% to €2,931 million in the second quarter (Q2 2020: €2,423 million). This was partly attributable to higher allocations to provisions for variable compensation. First half of 2021 Group sales Group sales in the first half of 2021 rose by 7.2% (Fx & portfolio adj.) to €23,182 million (H1 2020: €22,899 million; reported: +1.2%). There was a negative currency effect of €1,462 million. Sales in Germany amounted to €1,215 million (H1 2020: €1,271 million). Sales at the Crop Science Division increased substantially, with growth in all regions. The Pharmaceuticals Division registered an increase in sales due to a normalization in the frequency and course of treatments in the areas that were particularly impacted by the pandemic in the previous year and to further operational growth. We also reported sales in the area of cell and gene therapy for the first time, with these sales recorded as a portfolio effect. Sales also rose in the Consumer Health Division, as the growth momentum carried over from the previous year. Continued strong demand for nutritional supplements in particular led to significant gains. 8 A 3 H1 2021 802 1,697 46 3,417 5,962 (447) (53) (593) – (734) (8) – 4,127 982.42 4.20 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position EBITDA before special items EBITDA before special items of the Bayer Group fell by 8.0% to €6,695 million (H1 2020: €7,274 million), diminished by negative currency effects of €490 million and allocations to provisions for variable compensation of €777 million (H1 2020: allocations of €243 million). At Crop Science, EBITDA before special items declined due to an increase in the cost of goods sold and negative currency effects. EBITDA before special items at Pharmaceuticals declined year on year, mainly as a result of negative currency effects and an increase in the cost of goods sold. Consumer Health posted an encouraging increase in EBITDA before special items due to the positive development of business. Depreciation, amortization and impairments Depreciation, amortization and impairment losses – net of impairment loss reversals – amounted to €2,476 million in the first six months of 2021 (H1 2020: €2,457 million). They comprised €1,697 million (H1 2020: €1,432 million) in amortization and impairments on intangible assets and €779 million (H1 2020: €915 million) in depreciation and impairments on property, plant and equipment. Impairment losses, net of impairment loss reversals, totaled €524 million (H1 2020: €81 million) and included €487 million in net impairment losses on intangible assets (H1 2020: net impairment loss reversals of €26 million) that were primarily attributable to the net impairment loss in the Crop Science Division detailed above. Impairment losses of €463 million (H1 2020: €47 million), net of impairment loss reversals, and accelerated depreciation of €6 million (H1 2020: €1 million) were included in special items. EBIT and special items EBIT of the Bayer Group in the first half of 2021 was €802 million (H1 2020: minus €8,285 million) after net special charges of €3,886 million (H1 2020: €13,150 million). The special charges mainly related to the discounted allocation to provisions for the glyphosate litigations as well as to the net impairment losses at the Crop Science Division mentioned above. Special charges relating to restructuring also had a negative impact. By contrast, we registered a special gain from a patent dispute involving the pharmaceutical product Jivi™. EBIT before special items declined by 3.6% to €4,688 million (H1 2020: €4,865 million). Income from discontinued operations after income taxes Income from discontinued operations after income taxes was €0 million (H1 2020: €191 million). Net income After a financial result of minus €447 million (H1 2020: minus €928 million), income before income taxes in the first six months of the year came in at €355 million (H1 2020: minus €9,213 million). The financial result especially comprised income of €217 million from investments in affiliated companies (H1 2020: loss of €112 million), net interest expense of €521 million (H1 2020: €708 million) and interest cost of €37 million (H1 2020: €66 million) for pension and other provisions, as well as an exchange loss of €171 million (H1 2020: €41 million). The financial result included net special gains of €53 million (H1 2020: net special charges of €92 million) that mainly resulted from the change in the fair value of our interests in Covestro and Elanco. After income tax expense of €593 million (H1 2020: tax income of €971 million), income after income taxes was minus €238 million (H1 2020: minus €8,242 million). Adjusted for income from discontinued operations after income taxes and income attributable to noncontrolling interest, net income came to minus €246 million (H1 2020: minus €8,059 million). Core earnings per share Core earnings per share declined by 1.4% to €4.20 (H1 2020: €4.26), while earnings per share (total) came in at minus €0.25 (H1 2020: minus €8.20). 9 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 10 1. Overview of Sales, Earnings and Financial Position 1.2 Business Development by Division Crop Science A 4 Key Data – Crop Science Change %1 Change %1 € million Q2 2020 Q2 2021 Reported Fx & p adj. H1 2020 H1 2021 Reported Fx & p adj. Sales 4,802 5,021 + 4.6 + 10.6 11,636 11,667 + 0.3 + 8.1 Change in sales1 Volume + 3.5% + 7.4% + 4.6% + 5.8% Price – 0.3% + 3.2% 0.0% + 2.3% Currency – 2.9% – 6.0% – 1.0% – 7.8% Portfolio 0.0% 0.0% 0.0% 0.0% Sales by region Europe / Middle East / Africa 958 1,003 + 4.7 + 6.4 2,852 2,884 + 1.1 + 5.5 North America 2,501 2,532 + 1.2 + 9.6 6,214 5,963 – 4.0 + 4.0 Asia / Pacific 575 627 + 9.0 + 12.5 991 1,142 + 15.2 + 19.3 Latin America 768 859 + 11.8 + 17.7 1,579 1,678 + 6.3 + 22.0 EBITDA1 (8,822) (2,496) – 71.7 (6,412) (69) – 98.9 Special items1 (10,187) (3,514) (10,388) (3,535) – 66.0 EBITDA before special items1 1,365 1,018 – 25.4 3,976 3,466 – 12.8 EBITDA margin before special items1 28.4% 20.3% 34.2% 29.7% EBIT1 (9,600) (3,483) – 63.7 (8,100) (1,730) – 78.6 Special items1 (10,212) (3,945) (10,491) (3,997) – 61.9 EBIT before special items1 612 462 – 24.5 2,391 2,267 – 5.2 Net cash provided by (used in) operating activities 1,537 1,734 + 12.8 (224) (2,403) . Cash-flow relevant capital expenditures 322 187 – 41.9 485 303 – 37.5 Research and development expenses 511 819 + 60.3 1,071 1,282 + 19.7 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2021 Sales Crop Science posted a 10.6% increase in sales (Fx & portfolio adj.) to €5,021 million in the second quarter of 2021. Sales grew in all regions, with double-digit gains in Latin America and Asia / Pacific. We also registered significant sales growth in North America. // Business at Corn Seed & Traits expanded in all regions, and especially in Latin America thanks to volume increases. The growth in sales in North America was attributable to higher prices. // Herbicides posted double-digit percentage growth in all regions due to increased volumes and prices, and especially in North America, where business benefited from higher volumes for our XtendiMax™ product and increased selling prices for Roundup™. // Sales also rose substantially at Fungicides, mainly as a result of higher volumes in Latin America for our Fox Xpro™ product and in North America due to the launch of new products such as Delaro Complete™. // The sales increase at Soybean Seed & Traits was mainly driven by volume gains in North America. // Sales at Insecticides declined in the Europe / Middle East / Africa region following a loss of registrations for thiacloprid-based crop protection products. By contrast, sales developed positively in the Asia / Pacific and Latin America regions as a result of expanded volumes. // Environmental Science registered a significant increase in sales, particularly in North America due to strong demand for Roundup™. // Sales at Vegetable Seeds continued to increase in the Asia / Pacific and Latin America regions thanks to expanded volumes. // Sales in the reporting unit “Other” declined, due especially to earlier product returns in our cotton seed business in North America, which in the prior year had come in the third quarter. Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 11 1. Overview of Sales, Earnings and Financial Position A 5 Sales by Strategic Business Entity Change %1 Change %1 € million Q2 2020 Q2 2021 Reported Fx & p adj. H1 2020 H1 2021 Reported Fx & p adj. Crop Science 4,802 5,021 + 4.6 + 10.6 11,636 11,667 + 0.3 + 8.1 Corn Seed & Traits 948 962 + 1.5 + 8.6 3,598 3,356 – 6.7 + 2.0 Herbicides 1,324 1,468 + 10.9 + 16.2 2,744 2,956 + 7.7 + 14.7 Fungicides 648 774 + 19.4 + 22.9 1,433 1,654 + 15.4 + 22.4 Soybean Seed & Traits 532 530 – 0.4 + 9.1 1,100 1,059 – 3.7 + 6.1 Insecticides 386 364 – 5.7 – 1.4 768 724 – 5.7 + 1.4 Environmental Science 296 316 + 6.8 + 13.9 579 601 + 3.8 + 11.7 Vegetable Seeds 167 168 + 0.6 + 5.9 313 325 + 3.8 + 9.6 Other 501 439 – 12.4 – 6.3 1,101 992 – 9.9 – 2.7 2020 figures restated; Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items at Crop Science decreased to €1,018 million in the second quarter of 2021 (Q2 2020: €1,365 million), giving a margin of 20.3%. Higher prices and volumes along with contributions from ongoing efficiency programs only partly offset an increase in costs, and particularly in the cost of goods sold. Earnings were also diminished by a negative product mix, currency effects of €111 million, and the later receipt of license revenues. EBIT came in at minus €3,483 million (Q2 2020: minus €9,600 million) after net special charges of €3,945 million (Q2 2020: €10,212 million) that were mainly attributable to the discounted allocation to provisions in connection with the Roundup™ litigation as part of the glyphosate litigations. A 6 Special Items1,2 Crop Science € million EBIT Q2 2020 EBIT Q2 2021 EBIT H1 2020 EBIT H1 2021 EBITDA Q2 2020 EBITDA Q2 2021 EBITDA H1 2020 EBITDA H1 2021 Restructuring (50) (44) (130) (40) (51) (44) (130) (38) Acquisition / integration (3) (4) (26) (1) (3) (4) (26) (1) Divestments (3) (8) (8) (18) (3) (8) (8) (18) Litigations / legal risks (9,992) (3,458) (10,086) (3,477) (9,992) (3,458) (10,086) (3,477) Impairment losses / loss reversals (164) (431) (241) (461) (138) – (138) (1) Total special items (10,212) (3,945) (10,491) (3,997) (10,187) (3,514) (10,388) (3,535) 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Prior to December 31, 2020, special items pertaining to the integration of Monsanto Functions were reported in the category “acquisition and integration costs.” Effective January 1, 2021, these special items have been included in the category “restructuring.” The prior-year figures have been restated accordingly. First half of 2021 Sales Sales at Crop Science increased by 8.1% (Fx & portfolio adj.) to €11,667 million in the first six months of 2021, with all regions contributing to this performance. We achieved significant gains in Latin America and Asia / Pacific in particular. Sales at Corn Seed & Traits increased in the Europe / Middle East / Africa region due in particular to higher prices but declined in North America following the expiration of a license agreement. At Herbicides, we posted sales gains in all regions due to increased volumes and prices. Thanks to an increase in volumes, Fungicides registered higher sales in Latin America and Soybean Seed & Traits reported growth in North America. At Insecticides, sales increased in the Asia / Pacific and Latin America regions as a result of higher volumes but declined in Europe / Middle East / Africa due to the loss of a registration. Sales at Environmental Science and Vegetable Seeds rose in all regions. In the reporting unit “Other,” our cotton seed business registered a decline in sales in North America in particular as a result of earlier product returns, which in the prior year had come in the third quarter. Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 12 1. Overview of Sales, Earnings and Financial Position Earnings EBITDA before special items at Crop Science declined by 12.8% in the first half of 2021 to €3,466 million (H1 2020: €3,976 million). As detailed above, higher price and volumes along with contributions from ongoing efficiency programs only partly offset an increase in costs, and especially in the cost of goods sold. Earnings were also diminished by a negative product mix, currency effects of €363 million, the expiration of a license agreement, and the later receipt of license revenues. The EBITDA margin before special items declined to 29.7%. EBIT amounted to minus €1,730 million (H1 2020: minus €8,100 million) after net special charges of €3,997 million (H1 2020: €10,491 million) that were mainly attributable to the discounted allocation to provisions in connection with the Roundup™ litigation as part of the glyphosate litigations. Pharmaceuticals A 7 Key Data – Pharmaceuticals Change %1 Change %1 € million Q2 2020 Q2 2021 Reported Fx & p adj. H1 2020 H1 2021 Reported Fx & p adj. Sales 3,992 4,494 + 12.6 + 16.2 8,538 8,859 + 3.8 + 7.4 Change in sales1 Volume – 0.8% + 16.5% + 2.9% + 9.8% Price – 8.0% – 0.3% – 5.4% – 2.4% Currency – 0.9% – 4.0% – 0.2% – 4.3% Portfolio 0.0% + 0.4% 0.0% + 0.7% Sales by region Europe / Middle East / Africa 1,554 1,774 + 14.2 + 15.8 3,353 3,469 + 3.5 + 5.9 North America 861 1,032 + 19.9 + 26.2 1,870 2,028 + 8.4 +12.5 Asia / Pacific 1,387 1,460 + 5.3 + 8.9 2,891 2,915 + 0.8 + 4.0 Latin America 190 228 + 20.0 + 28.5 424 447 + 5.4 + 20.1 EBITDA1 68 1,564 . 1,410 3,192 + 126.4 Special items1 (1,300) 155 (1,552) 285 EBITDA before special items1 1,368 1,409 + 3.0 2,962 2,907 – 1.9 EBITDA margin before special items1 34.3% 31.4% 34.7% 32.8% EBIT1 (165) 1,312 . 924 2,681 + 190.2 Special items1 (1,286) 152 (1,538) 277 EBIT before special items1 1,121 1,160 + 3.5 2,462 2,404 – 2.4 Net cash provided by operating activities 531 570 + 7.3 1,488 1,381 – 7.2 Cash flow-relevant capital expenditures 187 236 + 26.2 307 392 + 27.7 Research and development expenses 595 762 + 28.1 1,281 1,443 + 12.6 Fx & portfolio adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 13 1. Overview of Sales, Earnings and Financial Position Second quarter of 2021 Sales Sales at Pharmaceuticals rose significantly in the second quarter of 2021, increasing by 16.2% (Fx & portfolio adj.) to €4,494 million. Our business showed a robust recovery from the COVID-19 restrictions, particularly in the areas of ophthalmology, women’s healthcare and radiology, while other products such as Xarelto™ and the launch of our cancer drug Nubeqa™ also generated tangible growth. // We achieved a strong increase in sales of our oral anticoagulant Xarelto™, largely as a result of significantly expanded volumes in China and Russia. License revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson, were down against the prior-year quarter due to currency effects. // Business with our ophthalmology drug Eylea™ expanded significantly, primarily as a result of very strong growth due to high demand in Europe. In Japan, on the other hand, we registered a decline in sales that was mainly attributable to a change in ordering behavior compared with the prior year. // The considerable growth in sales of our long-term contraceptives in the Mirena™ product family was largely due to the recovery of business in the United States. // Sales of our YAZ™ / Yasmin™ / Yasminelle™ oral contraceptives advanced, owing to the expansion of sales activities in China and strong growth in volumes in Japan. // Due to strong competition especially in the United States and China, sales of our cancer drug Nexavar™ fell substantially. // Our radiology business, comprising the CT Fluid Delivery, Gadovist™ and Ultravist™ product lines, expanded significantly due to a normalization in the number of radiological treatments being carried out following the substantial COVID-19 restrictions in the prior-year quarter. // We registered a decline in sales of our multiple sclerosis treatment Betaferon™ / Betaseron™ on account of continued competitive pressure, especially in the United States. A 8 Best-Selling Pharmaceuticals Products Change %1 Change %1 € million Q2 2020 Q2 2021 Reported Fx & p adj. H1 2020 H1 2021 Reported Fx & p adj. Xarelto™ 1,057 1,164 + 10.1 + 12.6 2,172 2,302 + 6.0 + 9.5 Eylea™ 568 711 + 25.2 + 27.4 1,161 1,382 + 19.0 + 21.5 Mirena™ / Kyleena™ / Jaydess™ 185 293 + 58.4 + 68.3 504 612 + 21.4 + 30.1 Kogenate™ / Kovaltry™ / Jivi™ 205 211 + 2.9 + 7.8 442 396 – 10.4 – 6.0 YAZ™ / Yasmin™ / Yasminelle™ 158 191 + 20.9 + 27.1 335 376 + 12.2 + 19.3 Adalat™ 154 174 + 13.0 + 12.7 316 349 + 10.4 + 11.6 Aspirin™ Cardio 145 159 + 9.7 + 11.7 316 343 + 8.5 + 12.0 Adempas™ 125 140 + 12.0 + 17.7 248 268 + 8.1 + 14.2 Stivarga™ 129 112 – 13.2 – 8.2 250 233 – 6.8 – 1.1 Nexavar™ 169 110 – 34.9 – 32.8 332 231 – 30.4 – 27.3 CT Fluid Delivery2 87 111 + 27.6 + 35.2 188 214 + 13.8 + 20.8 Gadovist™ product family 67 104 + 55.2 + 62.2 179 204 + 14.0 + 19.7 Ultravist™ 68 90 + 32.4 + 35.4 147 170 + 15.6 + 19.9 Betaferon™ / Betaseron™ 112 80 – 28.6 – 23.7 214 169 – 21.0 – 15.9 Xofigo™ 61 65 + 6.6 + 14.6 139 130 – 6.5 + 0.4 Total best-selling products 3,290 3,715 + 12.9 + 16.6 6,943 7,379 + 6.3 + 10.5 Proportion of Pharmaceuticals sales 82% 83% 81% 83% Fx & portfolio adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 2020 figures restated; the CT Fluid Delivery product family comprises injection systems marketed primarily under the Stellant™ brand. Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Earnings EBITDA before special items at Pharmaceuticals advanced by 3.0% in the second quarter of 2021 to €1,409 million (Q2 2020: €1,368 million), mainly due to the strong growth in sales. Research and development expenses increased against the low prior-year figure and were partly attributable to our cell and gene therapy unit. Earnings were also diminished by an increase in the cost of goods sold, expenses for product launches, and a negative currency effect of €26 million. The EBITDA margin before special items receded by 2.9 percentage points to 31.4%. EBIT came in at €1,312 million (Q2 2020: minus €165 million) after net special gains of €152 million (Q2 2020: net special charges of €1,286 million) that primarily related to a patent dispute involving our product Jivi™ and the sale of an office building. Special Items1 Pharmaceuticals € million EBIT Q2 2020 EBIT Q2 2021 EBIT H1 2020 EBIT H1 2021 EBITDA Q2 2020 EBITDA Q2 2021 EBITDA H1 2020 Restructuring (42) (16) (32) (37) (56) (13) (46) Acquisition / integration – (2) – (2) – (2) – Divestments – 86 – 86 – 86 – Litigations / legal risks (1,245) 79 (1,506) 225 (1,245) 79 (1,506) Impairment losses / loss reversals 1 (2) – (2) 1 (2) – Other – 7 – 7 – 7 – Total special items (1,286) 152 (1,538) 277 (1,300) 155 (1,552) 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” First half of 2021 Sales Sales at Pharmaceuticals rose by 7.4% (Fx & portfolio adj.) to €8,859 million in the first six months of the year. This was primarily attributable to a normalization in the frequency and course of treatments in the areas of ophthalmology, women’s healthcare and radiology, which had been especially impacted by pandemic-related restrictions in the previous year. We also significantly expanded business with Eylea™, particularly in Europe. Sales of Xarelto™ were up against the prior-year period, mainly as a result of considerable growth in China. The launch of our cancer drug Nubeqa™ also resulted in encouraging sales gains. We also generated sales in the area of cell and gene therapy for the first time. These sales, which were attributable to the AskBio business acquired in the previous year, were reported under portfolio effects and included a milestone payment from a development collaboration. Ergebnis EBITDA before special items at Pharmaceuticals declined by 1.9% to €2,907 million in the first half of 2021 (H1 2020: €2,962 million). Earnings were diminished by negative currency effects of €83 million and an increase in the cost of goods sold. These negative effects were largely offset by the division’s good business performance. The EBITDA margin before special items receded by 1.9 percentage points to 32.8%. EBIT increased to €2,681 million (H1 2020: €924 million) after net special gains of €277 million (H1 2020: net special charges of €1,538 million) that primarily related to a patent dispute involving our product Jivi™ and the sale of an office building. 14 A 9 EBITDA H1 2021 (29) (2) 86 225 (2) 7 285 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 15 1. Overview of Sales, Earnings and Financial Position Consumer Health A 10 Key Data – Consumer Health Change %1 Change %1 € million Q2 2020 Q2 2021 Reported Fx & p adj. H1 2020 H1 2021 Reported Fx & p adj. Sales 1,201 1,290 + 7.4 + 12.8 2,599 2,542 – 2.2 + 3.5 Changes in sales1 Volume – 4.3% + 10.8% + 3.4% + 0.9% Price + 2.4% + 2.0% + 2.3% + 2.6% Currency – 2.3% – 6.4% – 1.2% – 6.7% Portfolio – 12.5% + 1.0% – 12.9% + 1.0% Sales by region Europe / Middle East / Africa 384 419 + 9.1 + 13.5 874 852 – 2.5 + 2.3 North America 485 503 + 3.7 + 9.7 1,068 973 – 8.9 – 3.6 Asia / Pacific 196 214 + 9.2 + 10.0 388 423 + 9.0 + 10.5 Latin America 136 154 + 13.2 + 25.4 269 294 + 9.3 + 25.5 EBITDA1 243 269 + 10.7 533 555 + 4.1 Special items1 (11) (9) (22) (15) EBITDA before special items1 254 278 + 9.4 555 570 + 2.7 EBITDA margin before special items1 21.1% 21.6% 21.4% 22.4% EBIT1 162 187 + 15.4 425 388 – 8.7 Special items1 (11) (8) 32 (14) EBIT before special items1 173 195 + 12.7 393 402 + 2.3 Net cash provided by operating activities 386 165 – 57.3 533 406 – 23.8 Cash flow-relevant capital expenditures 24 43 + 79.2 51 67 + 31.4 Research and development expenses 46 47 + 2.2 96 92 – 4.2 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2021 Sales Sales at Consumer Health increased by a substantial 12.8% (Fx & portfolio adj.) to €1,290 million in the second quarter of 2021, with growth in all regions and categories. After the prior-year period had seen a slight decline in sales due to destocking by retailers and consumers, business in this quarter benefited primarily from continued high demand in Nutritionals as well as a strong allergy season in North America. // Sales in Europe / Middle East / Africa were up significantly against the soft prior-year quarter. We registered encouraging performance in the Dermatology category, partly due to a product line extension for Bepanthen™ for daily treatment of dry skin. Growth was also attributable to continued strong demand in Nutritionals and to sales gains in the Digestive Health category that resulted partly from the addition of Iberogast™ Advance to our product portfolio. // Our business in North America performed very well this quarter, with growth driven primarily by the strong allergy season. We also benefited from continued high demand in Nutritionals. In addition, a product line extension for Aleve™ had a positive effect on our business and marked our entry into the segment for topical pain relief. // Sales in Asia / Pacific increased substantially. Business performance in the Nutritionals category was especially strong, partly due to gains recorded for Elevit™ in China. In addition, we successfully integrated our consumer business in India in line with our growth strategy, which had previously been run via a third party. // Sales in Latin America advanced significantly, mainly as a result of continued high demand for products in the Pain & Cardio and Nutritionals categories. Business in the Dermatology category benefited from a product line extension for Bepanthen™, among other factors. Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 16 1. Overview of Sales, Earnings and Financial Position A 11 Sales by Category Change %1 Change %1 € million Q2 2020 Q2 2021 Reported Fx & p adj. H1 2020 H1 2021 Reported Fx & p adj. Consumer Health 1,201 1,290 + 7.4 + 12.8 2,599 2,542 – 2.2 + 3.5 Nutritionals 318 357 + 12.3 + 15.7 669 710 + 6.1 + 9.9 Allergy & Cold 225 244 + 8.4 + 15.8 586 479 – 18.3 – 12.5 Dermatology 281 288 + 2.5 + 6.3 559 568 + 1.6 + 6.4 Pain & Cardio 193 198 + 2.6 + 12.3 407 389 – 4.4 + 5.8 Digestive Health 171 185 + 8.2 + 14.2 352 363 + 3.1 + 9.2 Other 13 18 + 38.5 + 14.3 26 33 + 26.9 + 22.5 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items increased significantly in the second quarter of 2020, rising 9.4% to €278 million (Q2 2020: €254 million). As a result, the EBITDA margin before special items improved by 0.5 percentage points to 21.6%. The growth in earnings was primarily driven by our strong business performance and continuous cost management efforts. By contrast, earnings were diminished by investments in marketing as part of new product launches and by negative currency effects of €20 million. EBIT amounted to €187 million (Q2 2020: €162 million) after special charges of €8 million that related to restructuring measures (Q2 2020: €11 million). A 12 Special Items1 Consumer Health € million EBIT Q2 2020 EBIT Q2 2021 EBIT H1 2020 EBIT H1 2021 EBITDA Q2 2020 EBITDA Q2 2021 EBITDA H1 2020 EBITDA H1 2021 Restructuring (11) (8) (22) (14) (11) (9) (22) (15) Impairment losses / loss reversals – – 54 – – – – – Total special items (11) (8) 32 (14) (11) (9) (22) (15) 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” First half of 2021 Sales Sales at Consumer Health increased by 3.5% (Fx & portfolio adj.) to €2,542 million in the first six months of 2021, continuing the growth momentum from the previous year. We registered substantial gains primarily as a result of the continued high demand for products in the Nutritionals category. Sales were also boosted by product line extensions for brands such as Bepanthen™, for daily treatment of dry skin, and Aleve™, with our entry into the segment for topical pain relief. In the Allergy & Cold category, the increase in sales due to the strong allergy season in North America only partly offset the substantial declines for cough and cold products as a result of the increased protective and hygiene measures. Earnings EBITDA before special items increased to €570 million in the first half of 2021 (H1 2020: €555 million), while the EBITDA margin before special items improved significantly, rising by 1.0 percentage points to 22.4%. The growth in earnings was mainly driven by the positive development of business, our continuous cost management efforts and one-time gains from the sale of noncore brands. Earnings were diminished by currency effects of €46 million. EBIT amounted to €388 million (H1 2020: €425 million) after special charges of €14 million that related to restructuring measures (H1 2020: net special gains of €32 million). Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position 1.3 Asset and Financial Position of the Bayer Group Statement of Cash Flows A 13 Bayer Group Summary Statements of Cash Flows € million Q2 2020 Q2 2021 H1 2020 H1 2021 Net cash provided by (used in) operating activities from continuing operations 2,251 1,997 2,062 (768) Net cash provided by (used in) operating activities from discontinued operations 163 – 123 – Net cash provided by (used in) operating activities (total) 2,414 1,997 2,185 (768) Net cash provided by (used in) investing activities (total) (421) 447 (1,019) 4,392 Net cash provided by (used in) financing activities (total) (1,126) (4,603) (1,090) (4,490) Change in cash and cash equivalents due to business activities 867 (2,159) 76 (866) Cash and cash equivalents at beginning of period 2,319 5,550 3,185 4,191 Change due to exchange rate movements and to changes in scope of consolidation (31) (2) (106) 64 Cash and cash equivalents at end of period 3,155 3,389 3,155 3,389 Net cash provided by operating activities // Net operating cash flow from continuing operations in the second quarter of 2021 amounted to €1,997 million (Q2 2020: €2,251 million). The decline compared with the prior-year period was due in particular to payments of €0.9 billion to resolve litigations. Cash inflows from the patent dispute surrounding our product Jivi™ were among the factors that had a positive impact. // Net operating cash flow from continuing operations in the first half of 2021 amounted to minus €768 million (H1 2020: €2,062 million). Net cash used in investing activities // Net investing cash flow in the second quarter of 2021 amounted to €447 million (Q2 2020: minus €421 million). // This figure included net cash inflows from current financial assets of €930 million (Q2 2020: €66 million) that resulted particularly from the sale of investments in money market funds. // Net investing cash flow in the first half of 2021 amounted to €4,392 million (H1 2020: minus €1,019 million). Net cash used in financing activities // There was a net cash outflow of €4,603 million for financing activities in the second quarter of 2021 (Q2 2020: €1,126 million). // This figure included net loan repayments of €2,255 million (Q2 2020: net borrowings of €2,066 million). // Net interest payments amounted to €383 million (Q2 2020: €441 million). // The Bayer Group paid out €1,965 million in dividends (2020: €2,751 million). // The net cash outflow for financing activities in the first half of 2021 amounted to €4,490 million (H1 2020: €1,090 million). Free cash flow // Free cash flow (total), which is the total operating cash flow less capital expenditures plus interest and dividends received less interest paid, came in at €1,152 million in the second quarter of 2021 (Q2 2020: €1,402 million). // Free cash flow (total) in the first half of 2021 amounted to minus €2,074 million (H1 2020: €609 million), with this figure including net cash outflows of €3.1 billion to resolve litigations. 17 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Net financial debt A 14 Net Financial Debt1 € million Dec. 31, 2020 March 31, 2021 June 30, 2021 Change vs March 31 (%) Bonds and notes 36,745 40,878 38,423 – 6.0 of which hybrid bonds2 4,532 4,534 4,535 0.0 Liabilities to banks3 3,671 639 620 – 3.0 Lease liabilities 1,137 1,148 1,120 – 2.4 Liabilities from derivatives4 136 74 149 + 101.4 Other financial liabilities 77 126 60 – 52.4 Receivables from derivatives4 (141) (215) (183) – 14.9 Financial debt 41,625 42,650 40,189 – 5.8 Cash and cash equivalents (4,191) (5,550) (3,389) – 38.9 Current financial assets5 (7,393) (3,167) (2,439) – 23.0 Net financial debt 30,041 33,933 34,361 + 1.3 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Classified as debt according to IFRS 3 Including both financial and nonfinancial liabilities 4 Including the market values of interest-rate and currency hedges of recorded transactions 5 Including short-term receivables with maturities between 3 and 12 months outstanding from banks and other companies, financial investments in debt, and equity instruments that were recorded as current on first-time recognition // Net financial debt of the Bayer Group increased by €0.4 billion to €34.4 billion in the second quarter of 2021. Cash inflows from operating activities and positive currency effects were unable to fully offset the outflow for the dividend payment and the settlement payments for the litigations in the United States. // Financial debt included three subordinated hybrid bonds with a total volume of €4.5 billion, 50% of which is treated as equity by the rating agencies. As such, the hybrid bonds have a positive impact on the Group’s rating-specific debt indicators. // Bayer U.S. Finance II LLC, United States, repaid two bonds with a total volume of US$2.5 billion in May and June 2021, respectively. Furthermore, in May 2021, Bayer Holding Ltd., Japan, redeemed at maturity a bond with a nominal volume of JPY10 billion. // The rating agencies currently assess Bayer as follows: A 15 Rating Rating agency Long-term rating Short-term rating Outlook S&P Global Ratings BBB A2 stable Moody’s Baa2 P2 stable Fitch Ratings BBB+ F2 stable 18 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 2. Research, Development, Innovation Asset and capital structure A 16 Bayer Group Summary Statements of Financial Position € million Dec. 31, 2020 March 31, 2021 June 30, 2021 Change vs. March 31 (%) Noncurrent assets 81,386 82,980 81,976 – 1.2 Assets held for sale 113 135 32 – 76.3 Other current assets 35,547 35,662 32,419 – 9.1 Current assets 35,660 35,797 32,451 – 9.3 Total assets 117,046 118,777 114,427 – 3.7 Equity 30,699 34,772 30,578 – 12.1 Noncurrent liabilities 49,619 55,073 55,923 + 1.5 Current liabilities 36,728 28,932 27,926 – 3.5 Liabilities 86,347 84,005 83,849 – 0.2 Total equity and liabilities 117,046 118,777 114,427 – 3.7 // Between March 31, 2021, and June 20, 2021, total assets decreased by €4.4 billion to €114.4 billion. // Noncurrent assets declined in the second quarter by €1.0 billion to €82.0 billion, primarily due to the impairment charges detailed above. // Total current assets fell by €3.3 billion to €32.5 billion. This decrease was mainly attributable to a decline in other financial assets and a decrease in cash and cash equivalents. // Equity declined by €4.2 billion compared with March 31, 2021, to €30.6 billion, primarily due to the net loss and the dividend payment. The equity ratio fell to 26.7% as of June 30, 2021 (March 31, 2021: 29.3%). // Liabilities declined by €0.2 billion in the second quarter to €83.8 billion. Adjustments to provisions for litigations were a key factor, with a €3.5 billion allocation due to a remeasurement of provisions for the glyphosate litigations. The repayment of bonds and a decline in deferred tax liabilities had an opposing effect. 2. Research, Development, Innovation Crop Science Collaborations In February, we announced a global platform agreement with the German company Horsch, a manufacturer of on-farm technology. As a result, farmers around the world will have new ways to connect their Horsch seeders, planters and other implements to our Climate FieldView™ platform, making it easier for them to apply digital tools and data science on their farming operations. In April, we announced a collaboration with the French company RAGT. We intend to work together to advance the development of hybrid wheat technology and provide an innovative wheat-growing system by combining our leading position in wheat crop protection, expertise in seed production systems and digital solutions in agriculture with RAGT’s wide range of varietal seed innovations. Also in April, we announced a collaboration with U.S.-based Kebotix to equip farmers with innovative crop protection tools powered by faster data-driven systems. Kebotix uses artificial intelligence and robotics to accelerate the discovery of new chemicals. Those discoveries can then be used by our researchers to develop new crop protection solutions. 19 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 2. Research, Development, Innovation Pharmaceuticals We regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceutical projects. Phase II and III clinical projects The following table shows our most important drug candidates currently in Phase II of clinical testing: A 17 Research and Development Projects (Phase II)1 Project Indication Adrenomedullin Pegol (BAY 1097761, PEG-ADM inhale) Acute respiratory syndrome Asundexian (BAY 2433334, FXIa inhibitor) Prevention of stroke in atrial fibrillation patients Asundexian (BAY 2433334, FXIa inhibitor) Secondary prevention of stroke Asundexian (BAY 2433334, FXIa inhibitor) Prevention of major adverse cardiac events (MACE) BAY 1747846 (high relaxivity contrast agent) Magnetic resonance imaging BAY 2586116 (task channel blocker) Obstructive sleep apnea BAY 2976217 (FXI LICA, IONIS-FXI-LRX)2 Prevention of thrombosis in end-stage renal disease (ESRD) Eliapixant (BAY 1817080, P2X3 antagonist) Chronic cough Eliapixant (BAY 1817080, P2X3 antagonist) Overactive bladder Eliapixant (BAY 1817080, P2X3 antagonist) Endometriosis Eliapixant (BAY 1817080, P2X3 antagonist) Neuropathic pain Elinzanetant (neurokinin-1,3 receptor antagonist) Vasomotor symptoms Osocimab (anti-FXIa antibody) Prevention of thrombosis in end-stage renal disease (ESRD) Pecavaptan (dual vasopressin receptor antagonist) Congestive heart failure Regorafenib + nivolumab combination3 Metastatic colorectal cancer Regorafenib + nivolumab combination3 Recurrent or metastatic solid tumors Regorafenib + pembrolizumab combination Second-line therapy of unresectable hepatocellular carcinoma Rogaratinib (pan-FGFR inhibitor) Urothelial cancer Runcaciguat (sGC activator) Chronic kidney disease Runcaciguat (sGC aktivator) Nonproliferative diabetic retinopathy 1 As of July 15, 2021 2 In collaboration with Ionis Pharmaceuticals, Inc., United States 3 In collaboration with Bristol-Myers Squibb, United States, and Ono Pharmaceutical Co., Ltd., Japan The following table shows our most important drug candidates currently in Phase III of clinical testing: A 18 Research and Development Projects (Phase III)1 Project Indication Aflibercept (VEGF inhibitor)2 Retinopathy of prematurity High-dose aflibercept (VEGF inhibitor)2 Diabetic macular edema (DME) High-dose aflibercept (VEGF inhibitor)2 Neovascular age-related macular degeneration (nAMD) Copanlisib (PI3K inhibitor) + chemotherapy combination Second-line therapy of indolent non-Hodgkin lymphoma (iNHL) Darolutamide (ODM-201, AR antagonist) Hormone-sensitive metastatic prostate cancer Darolutamide (ODM-201, AR antagonist) Adjuvant treatment for localized prostate cancer with very high risk of recurrence Finerenone (MR antagonist) Heart failure with mid-range or preserved ejection fraction Regorafenib (multikinase inhibitor) Newly diagnosed or recurrent glioblastoma 1 As of July 15, 2021 2 In collaboration with Regeneron Pharmaceuticals, Inc., United States The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and / or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceutical projects. 20 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 2. Research, Development, Innovation The following material developments occurred in the first half of 2021: Finerenone // We published results from the Phase III FIGARO-DKD trial evaluating the efficacy and safety of the investigational drug finerenone versus placebo when added to standard of care in patients with chronic kidney disease and type 2 diabetes. The results of the trial, which met its primary endpoint, show that finerenone significantly reduced the combined risk of time to first occurrence of cardiovascular death or nonfatal cardiovascular events (nonfatal myocardial infarction, nonfatal stroke, or heart failure hospitalization). Darolutamide // In February, we began enrolling patients in the Phase III ARANOTE trial evaluating the efficacy and safety of darolutamide plus androgen deprivation therapy (ADT) in comparison to placebo plus ADT in men with metastatic hormone-sensitive prostate cancer. Combi IUS LNG/IND // In April, we decided to discontinue the further development of the Combi IUS LNG/IND program. This will enable us to use our resources efficiently and remain focused on impactful innovations addressing women’s healthcare needs. Combi IUS was a new intrauterine system (IUS) that combined levonorgestrel (LNG) and indomethacin (IND) for five-year contraception and had completed Phase II development. Fulacimstat CKD // In March, we decided to halt the development of the chymase inhibitor fulacimstat in the indication chronic kidney disease as the criteria in the Phase II proof-of-concept trial had not been met. Filings and approvals The most important drug candidates in the approval process are: A 19 Main Products Submitted for Approval1 Project Region Indication Copanlisib (PI3K inhibitor) + rituximab combination EU, U.S.A., Japan Second-line therapy of indolent non-Hodgkin lymphoma (NHL) Finerenone (MR antagonist) EU, Japan, China Chronic kidney disease in patients with type 2 diabetes Larotrectinib (LOXO-101, TRK fusion inhibitor) China Solid tumors with NTRK gene fusions Rivaroxaban (FXa inhibitor) U.S.A., China VTE treatment in children EU2, U.S.A., China Peripheral artery disease (PAD) Vericiguat (sGC stimulator)3 China Heart failure with reduced ejection fraction (HFrEF) 1 As of July 21, 2021 2 Submission of data from an additional Phase III study 3 Co-development with Merck & Co., Inc., United States Finerenone // In July, the U.S. Food and Drug Administration approved finerenone under the brand name Kerendia™ to reduce the risk of sustained estimated glomerular filtration rate decline, end-stage kidney disease, cardiovascular death, nonfatal myocardial infarction and heart failure hospitalization in adult patients with chronic kidney disease and type 2 diabetes. 21 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 2. Research, Development, Innovation Rivaroxaban (FXa inhibitor) // In January, the Japanese Ministry of Health, Labour and Welfare (MHLW) granted regulatory approval for the oral Factor Xa inhibitor rivaroxaban (Xarelto™) in the treatment of venous thromboembolism (VTE) including catheter-related thrombosis and cerebral venous sinus thrombosis and for the prevention of recurrent VTE in pediatric patients. The suspension for oral administration was likewise approved. This means that rivaroxaban, which is already routinely used in adult patients with VTE, is now the first oral Factor Xa inhibitor to be licensed for the treatment and prevention of recurrent VTE in children. Vericiguat // In June, the Japanese Ministry of Health, Labour, and Welfare approved soluble guanylate cyclase (sGC) stimulator vericiguat under the brand name Verquvo™ for the treatment of patients with chronic heart failure who are receiving standard treatment for chronic heart failure. // In July, the European Commission granted marketing authorization for vericiguat under the brand name Verquvo™ in the European Union for the treatment of symptomatic chronic heart failure in adult patients with reduced ejection fraction who are stabilized after a recent decompensation event requiring intravenous therapy. Larotrectinib // In March, the Japanese Ministry of Health, Labor and Welfare granted marketing authorization for the precision oncology drug Vitrakvi™ (active ingredient: larotrectinib) for the treatment of neurotrophic tyrosine receptor kinase (NTRK) fusion-positive advanced or recurrent solid tumors. Larotrectinib is a highly selective TRK inhibitor exclusively designed to treat tumors that have developed an NTRK gene fusion. Molidustat // In January, the Japanese health authorities granted us regulatory approval for molidustat, a new therapeutic option for renal anemia. Cell and gene therapy Cell and gene therapies are the next step in the evolution of drug development. They address the root cause of disease and are geared toward preventing, treating and potentially even curing illnesses. That applies not only to rare genetic diseases but also to more common diseases such as certain immune disorders, cancer and degenerative diseases. Our aim is to further broaden our long-term innovation strategy by investing in this area. Our strategy goes well beyond single investments or individual assets – instead, we invest holistically in entire fields of technology, so-called technology platforms. This enables a better understanding, more flexible optimization and promising development of new therapies, and will also speed up the development of individual products, giving Bayer a competitive edge. We are therefore focused on establishing four technology platforms: induced pluripotent stem cell (iPSC) therapy, adeno-associated virus (AAV) gene therapy, oncological cell therapies and gene editing. Combining our internal capabilities and expertise with external collaborations and acquisitions is the cornerstone of our new cell and gene therapy strategy. Examples of this include the acquisition of BlueRock Therapeutics and AskBio, as well as the strategic partnership with Atara Biotherapeutics, Inc. Our development portfolio already comprises seven candidates in various stages of clinical development that cover several therapeutic areas with a high unmet medical need – with leading programs in Parkinson’s disease, Pompe disease, hemophilia A and congestive heart failure. We also achieved the following milestones in the first half of 2021: // In June, a Phase I study was initiated by BlueRock for the treatment of Parkinson’s disease patients using pluripotent stem cell-derived dopaminergic neurons. In July, the U.S. Food and Drug Administration (FDA) granted Fast Track designation for this therapy. That status enables the accelerated development and subsequent marketing authorization process for therapies of significant medical interest. 22 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks // In June, the FDA also granted Fast Track designation for AskBio’s AAV-based gene therapy to treat limb-girdle muscular dystrophy type 2I/R9. The Phase I clinical trial is scheduled to begin in the first half of 2022. // Also in June, we strengthened the contract development and manufacturing organization of our subsidiary Viralgen Vector Core SL with the inauguration of a new AAV-based gene therapy production facility in San Sebastián, Spain. External innovation As previously described, we concluded an agreement in June to acquire Noria Therapeutics Inc. and PSMA Therapeutics Inc. In August, we announced the acquisition of Vividion Therapeutics, Inc., as detailed earlier in this report. Consumer Health In the first half of the year, we launched AleveX™ in North America, representing Bayer’s first products in the topical pain relief segment. The topical treatments added to the portfolio come in three presentations: a massage roller, a lotion and a fast-drying spray. During the first six months of the year, we also launched the Bepanthen™ Derma range for daily treatment of dry and sensitive skin in several countries, including Brazil, Turkey and Greece. The range is based on a unique derma repair complex of five ingredients, and treats the causes of dry skin by regenerating skin from within. The range includes a number of cleansing and care products. We will launch the range in additional countries over the course of this year. Leaps by Bayer In May, our impact investment unit Leaps by Bayer participated in a Series B financing round in the Berlin-based digital health company Ada Health GmbH. Ada Health combines medical knowledge with powerful artificial intelligence to revolutionize possibilities for personal health. The investment will support the advancement of Ada’s symptom assessment and care navigation platform. 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook A 20 Economic Outlook1 Growth 2020 Growth forecast 2021 World – 3.5% + 5.8% European Union2 – 6.1% + 4.9% of which Germany – 5.1% + 3.8% United States – 3.5% + 6.6% Emerging Markets3 – 1.6% + 6.5% 1 Real GDP growth, source: IHS Markit (as of July 2021) 2 EU excluding United Kingdom, 2020 figures restated 3 Including about 50 countries defined by IHS Markit as Emerging Markets in line with the World Bank The global economy is recovering faster than was expected at the beginning of the year. The number of people vaccinated against COVID-19 is increasing, protective measures and contact restrictions are being relaxed, labor market conditions are improving, and private consumption is picking up again. Companies are also investing more in view of rising demand and favorable financing conditions. The pace of the upswing has been especially brisk in the United States, but a strong recovery is also expected in Europe. 23 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks The same applies to the Emerging Markets, and particularly China. At the same time, COVID-19 outbreaks like the one in India and the fourth waves looming in many other countries show that setbacks can be expected at any time. The economic outlook therefore remains clouded with significant uncertainty. A 21 Economic Outlook for Division-Specific Markets Growth 2020 Growth forecast 2021 Seed and crop protection market1 + 4% + 5% Pharmaceuticals market2 + 3% + 5% Consumer health market3 + 4% + 2% 1 Bayer’s estimate (as of July 2021) 2 Source: IQVIA Market Prognosis (as of May 2021), all rights reserved; currency-adjusted 3 Source for outlook: Bayer’s estimate (as of July 2021), taking into account external sources; currency-adjusted We now expect increased growth of 5% (previously: +2%) in the seed and crop protection market for 2021, mainly due to global demand for corn and soybeans remaining strong, leading to an expected increase in planted acres, particularly in Latin America. We also foresee higher prices for nonselective herbicides. We continue to expect the pharmaceuticals market to expand by around 5%. In the consumer health market, we continue to anticipate growth of around 2% for 2021. The development of the market remains volatile and is heavily dependent on the trajectory of the global pandemic. The potential continuation of increased protective and hygiene measures in the second half of the year will impact the cough and cold segment in particular. 3.1.2 Corporate Outlook Following the good business performance in the first half of 2021, we are also optimistic for the remainder of the year and are raising our guidance accordingly. This upgraded guidance was prepared using the closing rates on June 30, 2021. A 1% appreciation (depreciation) of the euro against all other currencies would decrease (increase) sales on an annual basis by some €350 million and EBITDA before special items by about €100 million. For fiscal 2021, we now expect to generate sales of approximately €43 billion (previously: approximately €41 billion). This now corresponds to an increase of approximately 6% on a currency- and portfolio- adjusted basis (previously: approximately 3%). We are now targeting an EBITDA margin before special items of approximately 25% (previously: approximately 26%). Based on the aforementioned sales figure, this would now correspond to EBITDA before special items of €10.6 billion to €10.9 billion (previously: €10.5 billion to €10.8 billion). We now expect core earnings per share to come in at approximately €6.00 to €6.20 (previously: approximately €5.60 to €5.80). To enhance the comparability of operating performance, we are presenting our forecast on a currency- adjusted basis as well. We now expect to post currency-adjusted sales of approximately €44 billion (previously: approximately €42 billion to €43 billion). This now corresponds to an increase of around 6% on a currency- and portfolio- adjusted basis (previously: about 3%). We now expect to generate an EBITDA margin before special items of around 26% on a currency-adjusted basis (previously: around 27%). Based on the currency-adjusted sales forecast, this would continue to correspond to EBITDA before special items of €11.2 billion to €11.5 billion on a currency-adjusted basis. We now anticipate core earnings per share of approximately €6.40 to €6.60 on a currency-adjusted basis (previously: approximately €6.10 to €6.30). 24 Bayer Half-Year Financial Report as of June 30, 2021 A Interim Group Management Report 25 3. Report on Future Perspectives and on Opportunities and Risks A 22 Forecast for 2021 Original forecast for 2021 at closing rates on Dec. 31, 2020 Revised forecast for 2021 at closing rates on June 30, 2021 Original currency-adjusted forecast for 2021 Revised currency- adjusted forecast for 2021 € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) Sales ~ 41 ~ + 3 ~ 43 ~ + 6 ~ 42 to 43 ~ + 3 ~ 44 ~ + 6 Crop Science ~ + 2 ~ + 7 ~ + 2 ~ + 7 Pharmaceuticals ~ + 4 ~ + 6 ~ + 4 ~ + 6 Consumer Health ~ + 2 to 3 ~ + 3 to 4 ~ + 2 to 3 ~ + 3 to 4 Margin (%) Margin (%) Margin (%) Margin (%) EBITDA before special items1 ~ 26 ~ 25 ~ 27 ~ 26 Crop Science ~ 23 ~ 23 ~ 24 ~ 24 Pharmaceuticals ~ 32 ~ 32 ~ 32 ~ 32 Consumer Health ~ 22 to 23 ~ 22 to 23 ~ 23 ~ 22 to 23 Financial result (core)2 – 1.5 – 1.3 – 1.6 – 1.3 Tax rate (core)3 23.0% 23.0% 23.0% 23.0% Free cash flow1 ~ – 3 to – 4 ~ – 2 to – 3 ~ – 3 to – 4 ~ – 2 to – 3 Net financial debt1 ~ 35 to 36 ~ 35 ~ 36 to 37 ~ 36 Special items in EBIT1 – 1.5 ~ – 4.8 – 1.5 ~ – 4.8 € € € € Core earnings per share1 5.60 to 5.80 6.00 to 6.20 6.10 to 6.30 6.40 to 6.60 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Financial result before special items 3 (Income taxes + special items in income taxes + tax effects on adjustments) / (core EBIT + financial result + special items in financial result) We now plan to take total special charges (currency-adjusted) of approximately €4.8 billion (previously: about €1.5 billion) in 2021 in connection with provisions for litigations as well as restructuring and integration measures. Potential estimation risks regarding special charges in connection with litigations are referenced in the 2020 Annual Report, A 3.2 Opportunity and Risk Report. 3.2 Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal or external developments or events that could significantly impact the achievement of our financial and nonfinancial objectives. Opportunity and risk management at Bayer forms an integral part of the Group-wide corporate governance system. Our opportunity and risk management process and the fundamental opportunity and risk status are outlined in detail in the Annual Report 2020, A 3.2 “Opportunity and Risk Report.” Overall assessment by the Board of Management We currently have not identified any material changes in the risk situation compared with the assessment given in the 2020 Annual Report. We currently are not aware of any individual risks, risk combinations or risk interdependencies that could endanger the Bayer Group’s continued existence. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2020 (Note [30] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements as of June 30, 2021 Bayer Group Consolidated Income Statements B 1 € million Q2 2020 Q2 2021 H1 2020 H1 2021 Net sales 10,054 10,854 22,899 23,182 Cost of goods sold (4,018) (4,546) (8,674) (9,244) Gross profit 6,036 6,308 14,225 13,938 Selling expenses (2,907) (2,964) (5,930) (5,843) Research and development expenses (1,167) (1,638) (2,469) (2,836) General administration expenses (769) (783) (1,583) (1,425) Other operating income 299 537 722 887 Other operating expenses (12,276) (3,741) (13,250) (3,919) EBIT1 (10,784) (2,281) (8,285) 802 Equity-method income (loss) (16) 105 (24) 79 Financial income 44 271 80 369 Financial expenses (304) (475) (984) (895) Financial result (276) (99) (928) (447) Income before income taxes (11,060) (2,380) (9,213) 355 Income taxes 1,450 52 971 (593) Income from continuing operations after income taxes (9,610) (2,328) (8,242) (238) of which attributable to noncontrolling interest 9 7 8 8 of which attributable to Bayer AG stockholders (9,619) (2,335) (8,250) (246) Income from discontinued operations after income taxes 71 – 191 – of which attributable to noncontrolling interest – – – – of which attributable to Bayer AG stockholders 71 – 191 – Income after income taxes (9,539) (2,328) (8,051) (238) of which attributable to noncontrolling interest 9 7 8 8 of which attributable to Bayer AG stockholders (net income) (9,548) (2,335) (8,059) (246) € Earnings per share From continuing operations Basic (9.79) (2.38) (8.40) (0.25) Diluted (9.79) (2.38) (8.40) (0.25) From discontinued operations Basic 0.07 – (0.20) – Diluted 0.07 – (0.20) – From continuing and discontinued operations Basic (9.72) (2.38) (8.20) (0.25) Diluted (9.72) (2.38) (8.20) (0.25) 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 26 Bayer Half-Year Financial Report as of June 30, 2021 Bayer Group Consolidated Statements of Comprehensive Income € million Income after income taxes of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Remeasurements of the net defined benefit liability for post-employment benefit plans Income taxes Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans Changes in the fair value of equity instruments measured at fair value Income taxes Other comprehensive income from equity instruments measured at fair value Other comprehensive income relating to associates accounted for using the equity method Other comprehensive income that will not be reclassified subsequently to profit or loss Changes in the fair value of cash flow hedges Reclassified to profit or loss Income taxes Other comprehensive income from cash flow hedges Changes in time value of options used as hedging instrument Income taxes Other comprehensive income from time value of options Other comprehensive income from exchange differences Other comprehensive income relating to associates accounted for using the equity method Other comprehensive income that may be reclassified subsequently to profit or loss Total other comprehensive income1 of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Total comprehensive income of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders 1 Other comprehensive income is recognized outside profit or loss in equity. B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Comprehensive Income B 2 Q2 2020 Q2 2021 H1 2020 H1 2021 (9,539) (2,328) (8,051) (238) 9 7 8 8 (9,548) (2,335) (8,059) (246) 238 50 905 1,128 (25) (4) (312) (312) 213 46 593 816 34 135 (6) 212 (3) (4) (3) (4) 31 131 (9) 208 – 25 – 25 244 202 584 1,049 140 (62) 38 (13) (112) 5 21 (50) (3) 20 (11) 20 25 (37) 48 (43) – – – (2) – – – 1 – – – (1) (880) (68) (1,384) 1,076 – (4) – (2) (855) (109) (1,336) 1,030 (611) 93 (752) 2,079 (5) (6) (13) 3 (606) 99 (739) 2,076 (10,150) (2,235) (8,803) 1,841 4 1 (5) 11 (10,154) (2,236) (8,798) 1,830 27 Bayer Half-Year Financial Report as of June 30, 2021 Bayer Group Consolidated Statements of Financial Position € million Noncurrent assets Goodwill Other intangible assets Property, plant and equipment Investments accounted for using the equity method Other financial assets Other receivables Deferred taxes Current assets Inventories Trade accounts receivable Other financial assets Other receivables Claims for income tax refunds Cash and cash equivalents Assets held for sale Total assets Equity Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to noncontrolling interest Noncurrent liabilities Provisions for pensions and other post-employment benefits Other provisions Refund liabilities Contract liabilities Financial liabilities Income tax liabilities Other liabilities Deferred taxes Current liabilities Other provisions Refund liabilities Contract liabilities Financial liabilities Trade accounts payable Income tax liabilities Other liabilities Liabilities directly related to assets held for sale Total equity and liabilities 2020 figures restated B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Financial Position B 3 June 30, 2020 Dec. 31, 2020 June 30, 2021 38,652 36,080 36,965 33,722 26,029 25,308 11,850 11,710 11,830 524 491 576 1,498 1,555 1,625 745 835 1,199 3,925 4,686 4,473 90,916 81,386 81,976 10,128 10,961 10,125 13,103 9,555 13,075 2,560 7,940 3,109 1,465 1,667 1,539 1,155 1,233 1,182 3,148 4,191 3,389 1,192 113 32 32,751 35,660 32,451 123,667 117,046 114,427 2,515 2,515 2,515 18,261 18,261 18,261 14,928 9,748 9,613 35,704 30,524 30,389 162 175 189 35,866 30,699 30,578 7,390 8,454 7,512 5,108 4,322 7,262 142 8 142 647 720 650 33,947 33,196 36,664 1,644 247 1,638 525 1,341 1,215 1,855 1,331 840 51,258 49,619 55,923 13,714 10,127 7,967 6,378 4,455 6,877 787 3,592 1,303 7,372 8,570 3,708 5,098 5,683 5,118 835 2,269 905 1,823 2,032 2,048 536 – – 36,543 36,728 27,926 123,667 117,046 114,427 28 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows B 4 € million Q2 2020 Q2 2021 H1 2020 H1 2021 Income from continuing operations after income taxes (9,610) (2,328) (8,242) (238) Income taxes (1,450) (52) (971) 593 Financial result 276 99 928 447 Income taxes paid (314) (687) (289) (1,140) Depreciation, amortization and impairment losses (loss reversals) 1,180 1,390 2,457 2,476 Change in pension provisions (78) (70) (144) (185) (Gains) losses on retirements of noncurrent assets (12) (104) (4) (119) Decrease (increase) in inventories (177) 308 219 841 Decrease (increase) in trade accounts receivable 915 (64) (2,034) (3,335) (Decrease) increase in trade accounts payable (184) (63) (1,256) (680) Changes in other working capital, other noncash items 11,705 3,568 11,398 572 Net cash provided by (used in) operating activities from continuing operations 2,251 1,997 2,062 (768) Net cash provided by (used in) operating activities from discontinued operations 163 – 123 – Net cash provided by (used in) operating activities 2,414 1,997 2,185 (768) Cash outflows for additions to property, plant, equipment and intangible assets (585) (493) (976) (822) Cash inflows from the sale of property, plant, equipment and other assets 82 115 121 272 Cash outflows for divestments less divested cash (62) – (65) (57) Cash inflows from noncurrent financial assets 114 4 321 357 Cash outflows for noncurrent financial assets (50) (121) (77) (267) Cash outflows for acquisitions less acquired cash – (19) (106) (23) Interest and dividends received 14 31 37 41 Cash inflows from (outflows for) current financial assets 66 930 (274) 4,891 Net cash provided by (used in) investing activities (421) 447 (1,019) 4,392 Dividend payments (2,751) (1,965) (2,751) (1,965) Issuances of debt 3,276 282 4,731 4,495 Retirements of debt (1,210) (2,537) (2,433) (6,495) Interest paid including interest-rate swaps (448) (391) (654) (547) Interest received from interest-rate swaps 7 8 17 22 Net cash provided by (used in) financing activities (1,126) (4,603) (1,090) (4,490) Change in cash and cash equivalents due to business activities 867 (2,159) 76 (866) Cash and cash equivalents at beginning of period 2,319 5,550 3,185 4,191 Change in cash and cash equivalents due to changes in scope of consolidation – – (7) – Change in cash and cash equivalents due to exchange rate movements (31) (2) (99) 64 Cash and cash equivalents at end of period 3,155 3,389 3,155 3,389 29 Bayer Half-Year Financial Report as of June 30, 2021 Bayer Group Consolidated Statements of Changes in Equity € million Capital stock Capital reserves Other reserves Jan. 1, 2020 2,515 18,261 26,477 Equity transactions with owners Dividend payments (2,751) Other changes Total comprehensive income (8,798) June 30, 2020 2,515 18,261 14,928 Jan. 1, 2021 2,515 18,261 9,748 Equity transactions with owners Dividend payments (1,965) Other changes Total comprehensive income 1,830 June 30, 2021 2,515 18,261 9,613 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Changes in Equity B 5 Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity 47,253 180 47,433 (2,751) (14) (2,765) 1 1 (8,798) (5) (8,803) 35,704 162 35,866 30,524 175 30,699 (1,965) – (1,965) 3 3 1,830 11 1,841 30,389 189 30,578 30 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Explanatory Notes Accounting policies The consolidated interim financial statements as of June 30, 2021, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2020 fiscal year, particularly with regard to the main recognition and valuation principles. Impact of COVID-19 The global economy is recovering faster than was expected at the beginning of the year, and the number of people vaccinated against COVID-19 is increasing. In addition, protective measures and contact restrictions are starting to be relaxed. Uncertainties remain, however, with the prospect of further COVID outbreaks as a result of new variants, for instance. In the first half of the year, our Pharmaceuticals Division showed a robust recovery in women’s healthcare, ophthalmology and radiology, areas that in the prior year had been hit particularly hard by restrictions introduced in response to the pandemic. In our Consumer Health Division, the increased protective and hygiene measures primarily impacted sales of cough and cold products. We currently do not see any further material COVID-19 effects. We will continue to closely monitor the effects of the pandemic, including the impact on inventories, customer receivables and significant estimates regarding goodwill and other intangible assets. Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: B 6 Exchange Rates for Major Currencies Closing rate Average rate €1 Dec. 31, 2020 June 30, 2020 June 30, 2021 H1 2020 H1 2021 BRL Brazil 6.37 6.09 5.90 5.33 6.49 CAD Canada 1.56 1.53 1.47 1.50 1.50 CNY China 7.98 7.92 7.69 7.76 7.80 GBP United Kingdom 0.90 0.91 0.86 0.87 0.87 JPY Japan 126.46 120.63 131.47 119.22 129.76 RUB Russia 91.46 79.56 86.75 76.19 89.58 USD United States 1.23 1.12 1.19 1.10 1.21 Argentina’s economy has been considered hyperinflationary since July 1, 2018, and we therefore applied IAS 29 (Financial Reporting in Hyperinflationary Economies) for Bayer S.A., Argentina. The resulting effects in ongoing accounting have so far been immaterial for the Group. 31 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The most important interest rates used to calculate the present value of pension obligations are given below: B 7 Discount Rate for Pension Obligations % Dec. 31, 2020 March 31, 2021 June 30, 2021 Germany 0.90 1.20 1.10 United Kingdom 1.30 1.95 1.80 United States 2.50 3.10 2.70 Segment reporting As of June 30, 2021, the Bayer Group comprised the three reportable segments Crop Science, Pharmaceuticals and Consumer Health. B 8 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million Q2 2020 Q2 2021 Q2 2020 Q2 2021 Q2 2020 Q2 2021 Net sales (external) 4,802 5,021 3,992 4,494 1,201 1,290 Currency- and portfolio-adjusted change1 + 3.2% + 10.6% – 8.8% + 16.2% – 1.9% + 12.8% Intersegment sales 1 3 2 3 – – Net sales (total) 4,803 5,024 3,994 4,497 1,201 1,290 EBIT1 (9,600) (3,483) (165) 1,312 162 187 EBITDA before special items1 1,365 1,018 1,368 1,409 254 278 Net cash provided by operating activities 1,537 1,734 531 570 386 165 Depreciation, amortization, impairment losses / loss reversals 778 987 233 252 81 82 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 8 (continued) Key Data by Segment Reconciliation All other segments Enabling functions and consolidation Group € million Q2 2020 Q2 2021 Q2 2020 Q2 2021 Q2 2020 Q2 2021 Net sales (external) 42 40 17 9 10,054 10,854 Currency- and portfolio-adjusted change1 – 4.5% – 16.0% – – – 2.5% + 12.9% Intersegment sales 41 – (44) (6) – – Net sales (total) 83 40 (27) 3 10,054 10,854 EBIT1 (10) 7 (1,171) (304) (10,784) (2,281) EBITDA before special items1 8 25 (112) (153) 2,883 2,577 Net cash provided by operating activities 392 35 (595) (507) 2,251 1,997 Depreciation, amortization, impairment losses / loss reversals 18 18 70 51 1,180 1,390 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 32 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group B 9 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million H1 2020 H1 2021 H1 2020 H1 2021 H1 2020 H1 2021 Net sales (external) 11,636 11,667 8,538 8,859 2,599 2,542 Currency- and portfolio-adjusted change1 + 4.6% + 8.1% – 2.5% + 7.4% + 5.7% + 3.5% Intersegment sales 4 5 2 5 – – Net sales (total) 11,640 11,672 8,540 8,864 2,599 2,542 EBIT1 (8,100) (1,730) 924 2,681 425 388 EBITDA before special items1 3,976 3,466 2,962 2,907 555 570 Net cash provided by operating activities (224) (2,403) 1,488 1,381 533 406 Depreciation, amortization, impairment losses / loss reversals 1,688 1,661 486 511 108 167 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 9 (continued) Key Data by Segment Reconciliation All other segments Enabling functions and consolidation Group € million H1 2020 H1 2021 H1 2020 H1 2021 H1 2020 H1 2021 Net sales (external) 96 96 30 18 22,899 23,182 Currency- and portfolio-adjusted change1 + 5.0% – 9.3% – – + 2.0% + 7.2% Intersegment sales 79 – (85) (10) – – Net sales (total) 175 96 (55) 8 22,899 23,182 EBIT1 (23) (9) (1,511) (528) (8,285) 802 EBITDA before special items1 13 26 (232) (274) 7,274 6,695 Net cash provided by operating activities 303 84 (38) (236) 2,062 (768) Depreciation, amortization, impairment losses / loss reversals 36 35 139 102 2,457 2,476 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” To simplify the consolidation process, leases between fully consolidated companies continue to be recognized as operating leases under IAS 17 within the segment data in the consolidated financial statements of the Bayer Group even after the first-time application of IFRS 16 as of January 1, 2019. This does not have any relevant impact on the respective key data used in the steering of the company and internal reporting to the Board of Management as the chief operating decision maker. 33 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The following table shows the reconciliation of EBITDA before special items of the above-mentioned segments and the reconciliation to income before income taxes of the Group from continuing operations: B 10 Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million Q2 2020 Q2 2021 H1 2020 H1 2021 EBITDA before special items of segments 2,995 2,730 7,506 6,969 EBITDA before special items of enabling functions and consolidation (112) (153) (232) (274) EBITDA before special items1 2,883 2,577 7,274 6,695 Depreciation, amortization and impairment losses / loss reversals before special items of segments (1,098) (906) (2,282) (1,905) Depreciation, amortization and impairment losses / loss reversals before special items of corporate functions and consolidation (58) (51) (127) (102) Depreciation, amortization and impairment losses / loss reversals before special items (1,156) (957) (2,409) (2,007) EBIT before special items of segments 1,897 1,824 5,224 5,064 EBIT before special items of enabling functions and consolidation (170) (204) (359) (376) EBIT before special items1 1,727 1,620 4,865 4,688 Special items of segments (11,510) (3,801) (11,998) (3,734) Special items of enabling functions and consolidation (1,001) (100) (1,152) (152) Special items1 (12,511) (3,901) (13,150) (3,886) EBIT of segments (9,613) (1,977) (6,774) 1,330 EBIT of enabling functions and consolidation (1,171) (304) (1,511) (528) EBIT1 (10,784) (2,281) (8,285) 802 Financial result (276) (99) (928) (447) Income before income taxes (11,060) (2,380) (9,213) 355 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” In the second quarter of 2021, the establishment of provisions for settlements and defense costs within the Crop Science Division, mainly in connection with the glyphosate litigation, gave rise to other operating expenses of €3,458 million that were reported as special items. In the previous year, there were special charges of €12,050 million for the glyphosate (Crop Science), dicamba (Crop Science), Essure™ (Pharmaceuticals) and PCB (Reconciliation) litigations. In the second quarter of 2021, the additional expenses for settlements and the utilization of provisions previously established for this purpose resulted in a €271 million net increase in deferred tax assets (Q2 2020: €1,727 million) on future tax-deductible expenses. 34 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2021, included 376 companies (December 31, 2020: 385 companies). Six joint ventures (December 31, 2020: six) and 26 associates (December 31, 2020: 21) were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). Acquisitions, divestments and discontinued operations Acquisitions in 2021 On June 2, 2021, Bayer completed the acquisition of 100% of the shares in two biotech companies: Noria Therapeutics Inc., New York City, New York, United States, and PSMA Therapeutics Inc., New York City, New York, United States. Through this acquisition, Bayer will obtain exclusive rights to a differentiated alpha radionuclide therapy based on actinium-225 and a small molecule targeting prostate-specific membrane antigen (PSMA), and in doing so will broaden its oncology portfolio of targeted alpha therapies (TAT). Bayer paid an upfront consideration of €8 million, and will make potential milestone payments of up to around €120 million until launch followed by potential additional sales-based milestone payments that will also amount to up to around €120 million. The acquisition does not fall within the scope of IFRS 3 and is presented as a capital expenditure for intangible assets relating to R&D projects. The two companies have been assigned to the Pharmaceuticals segment. Acquisitions in 2020 On December 1, 2020, Bayer acquired 100% of the shares in Asklepios BioPharmaceutical, Inc. (AskBio), Durham, North Carolina, United States. This company has been fully consolidated since that date. AskBio specializes in the research, development and manufacturing of gene therapies across different therapeutic areas. Its development portfolio includes investigational preclinical and clinical stage development candidates for the treatment of neuromuscular, central nervous system, cardiovascular and metabolic diseases. The acquisition gives Bayer full rights to AskBio’s gene therapy platform, including a broad intellectual property portfolio and an established contract development and manufacturing organization (CDMO). Bayer paid an upfront consideration of around €1,633 million. Further amounts totaling up to around €1,627 million are payable upon the achievement of pre-defined milestones. The purchase price primarily pertains to goodwill and intangible assets such as technologies for preclinical and clinical-stage development candidates as well as technologies and customer relationships in connection with AskBio’s CDMO. The purchase price allocation for AskBio has not yet been concluded. On November 16, 2020, Bayer increased its interest in Noho Health, Inc. (NoHo), New York, United States, from 11.9% to 70%. The company was fully consolidated as of that date. The remaining shares in circulation are likely to be purchased in early 2022 through the exercise of an agreed put and call option. The purchase price is based on the sales actually achieved in relation to projected sales, and mainly pertains to the Care/Of brand, under which NoHo offers consumers a personalized regimen of nutritional supplements. The acquisition strengthens Bayer’s presence and digital capabilities in this fast-growing business within its Consumer Health segment. The purchase price allocation has not yet been concluded. Assets held for sale and discontinued operations There are no discontinued operations to report in 2021. In the prior year, the Animal Health business was reported as a discontinued operation in view of its sale to Elanco Animal Health LLC (Elanco), Greenfield, Indiana, United States, on the basis of the purchase agreement of August 20, 2019. The business was transferred to Elanco on August 1, 2020. The final purchase price, including adjustments typical for this type of transaction, was determined in the first quarter of 2021. 35 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The income statements for the discontinued operations in the prior year are given below: B 11 Income Statements for Discontinued Operations Animal Health € million Q2 2020 Q2 2021 Net sales 488 – Cost of goods sold (134) – Gross profit 354 – Selling expenses (162) – Research and development expenses (35) – General administration expenses (50) – Other operating income / expenses 5 – EBIT1 112 – Financial result (5) – Income before income taxes 107 – Income taxes (36) – Income after income taxes 71 – of which attributable to noncontrolling interest – – of which attributable to Bayer AG stockholders (net income) 71 – 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 12 Income Statements for Discontinued Operations Animal Health € million H1 2020 H1 2021 Net sales 984 – Cost of goods sold (273) – Gross profit 711 – Selling expenses (286) – Research and development expenses (67) – General administration expenses (103) – Other operating income / expenses 9 – EBIT1 264 – Financial result (6) – Income before income taxes 258 – Income taxes (67) – Income after income taxes 191 – of which attributable to noncontrolling interest – – of which attributable to Bayer AG stockholders (net income) 191 – 1 For definition see Annual Report 2020, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” The cash flows from the discontinued operations in the prior year were as follows: B 13 Cash Flows from Discontinued Operations Animal Health € million Q2 2020 Q2 2021 Net cash provided by (used in) operating activities 163 – Net cash provided by (used in) investing activities (14) – Net cash provided by (used in) financing activities (149) – Change in cash and cash equivalents – – 36 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group B 14 Cash Flows from Discontinued Operations Animal Health € million H1 2020 H1 2021 Net cash provided by (used in) operating activities 123 – Net cash provided by (used in) investing activities (26) – Net cash provided by (used in) financing activities (97) – Change in cash and cash equivalents – – As no cash was assigned to the discontinued operations, the balance of the cash provided was deducted again in financing activities. The assets and liabilities held for sale totaled around €32 million as of June 30, 2021, and were attributable entirely to property, plant and equipment. They primarily related to the planned sale of a production facility in Brazil in the Pharmaceuticals segment. Divestments in 2020 On February 11, 2020, Bayer announced an agreement with Nuvisan ICB GmbH, Neu-Ulm, Germany, to transfer a large part of the Berlin-based small molecule research unit to Nuvisan. The Nuvisan group is an international service provider for clinical studies, laboratory services and contract manufacturing for the pharmaceuticals industry. The agreement supports Bayer’s increased focus on the flexibility and productivity of its R&D operating model. The transaction closed on June 30, 2020. The base selling price was €0 million, and the divestment loss amounted to €19 million. Other intangible assets Unscheduled impairment testing was performed in the second quarter of 2021 due to the details of the accelerated transformation program for central administrative functions becoming more concrete and the allocation to provisions for restructuring made in this connection, as well as updated corporate planning. The impairment testing did not give rise to any material impairment losses or impairment loss reversals in the Pharmaceutical and Consumer Health segments. Within the Crop Science segment, it resulted in the recognition of net impairment losses of €437 million on intangible assets. These concerned the cash-generating unit Corn Seed & Traits, with an impairment loss of €818 million (comprising €155 million on R&D projects, €526 million on patents and technologies, €117 million on brands and €20 million on marketing and distribution rights). The impairment loss was primarily attributable to changes in carrying amounts due to exchange rate fluctuations and an increase in the weighted average cost of capital at the end of the second quarter. In addition, an impairment loss reversal of €381 million was recognized for the glyphosate cash-generating unit (comprising €135 million on patents and technologies, and €246 million on brands), mainly due to improved business prospects. The impairment losses and impairment loss reversals on the assets of the cash-generating units were allocated to the cost of goods sold, selling expenses, and research and development expenses. 37 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The table below indicates the capital cost factors used in the impairment testing on the cash-generating units in the fourth quarter of 2020 and second quarter of 2021. B 15 Impairment Testing Parameters After-tax cost of capital % Q4 2020 Q2 2021 Corn Seed & Traits 7.4 7.6 Soybean Seed & Traits 7.0 7.3 Glyphosate 8.0 8.2 Dicamba 5.7 6.1 Cotton 6.0 6.9 Canola 5.7 6.4 Vegetable Seeds 8.9 9.3 The growth rates and capital cost factors used in the impairment testing of goodwill in the fourth quarter of 2020 and the second quarter of 2021 are shown in the following table: B 16 Impairment Testing Parameters Growth rate After-tax cost of capital % Q4 2020 Q2 2021 Q4 2020 Q2 2021 Crop Science 2.0 2.0 7.8 8.0 Pharmaceuticals 0.0 0.0 5.3 5.1 Consumer Health 1.0 1.0 6.3 6.2 Testing goodwill for impairment involves calculating the fair value less costs to sell. No impairment losses were recognized on goodwill in the second quarter of 2021. In the prior year, impairment charges of €2,238 million were recognized on goodwill in the third quarter, and no impairment charges were recognized on goodwill in the fourth quarter. Financial instruments The following tables show the carrying amounts and fair values of the individual financial assets and liabilities by category of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the statements of financial position. Since the line items “Trade accounts receivable,” “Other receivables,” “Financial liabilities” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables), the reconciliation is shown in the column headed “Nonfinancial assets / liabilities.” 38 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Carrying Amounts and Fair Values of Financial Instruments Measured at fair value [fair value for information4] Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets / liabilities € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Trade accounts receivable 12,673 163 239 AC 12,673 FVTPL, mandatory2 163 Nonfinancial assets 239 Other financial assets 420 2,773 234 1,307 AC 390 [390] FVTPL, mandatory2 2,534 15 942 FVTOCI (no recycling), designated3 229 353 Derivatives 10 219 12 Lease receivables 30 [30] Other receivables 285 74 2,379 AC 285 [285] FVTPL, mandatory2 74 Nonfinancial assets 2,379 Cash and cash equivalents 3,389 AC 3,389 [3,389] Total financial assets 16,767 2,936 234 1,381 of which AC 16,737 of which FVTPL 2,697 15 1,016 Financial liabilities 40,139 149 84 AC 39,019 [34,977] [7,056] Derivatives 149 Lease liabilities 1,120 [1,145] Nonfinancial liabilities 84 Trade accounts payable 5,118 AC 5,118 Other liabilities 850 40 265 1,222 886 AC 850 [850] FVTPL (nonderivative), mandatory2 1,221 Derivatives 40 265 1 Nonfinancial liabilities 886 Total financial liabilities 46,107 40 414 1,222 of which AC 44,987 of which derivatives 40 414 1 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9, paragraph 5.7.5 4 Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a) 39 B 17 June 30, 2021 Total 13,075 12,673 163 239 4,734 390 3,491 582 241 30 2,738 285 74 2,379 3,389 3,389 21,318 16,737 3,728 40,372 39,019 149 1,120 84 5,118 5,118 3,263 850 1,221 306 886 47,783 44,987 455 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Carrying Amounts and Fair Values of Financial Instruments Measured at fair value [fair value for information4] Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets / liabilities € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Trade accounts receivable 9,120 246 189 AC 9,120 FVTPL, mandatory2 246 Nonfinancial assets 189 Other financial assets 1,416 3,714 3,078 1,287 AC 1,414 [1,414] FVTPL, mandatory2 3,642 2,813 931 FVTOCI (no recycling), designated3 55 344 Derivatives 17 265 12 Lease receivables 2 [2] Other receivables 323 77 2,102 AC 323 [323] FVTPL, mandatory2 77 Nonfinancial assets 2,102 Cash and cash equivalents 4,191 AC 4,191 [4,191] Total financial assets 15,050 3,960 3,078 1,364 of which AC 15,048 of which FVTPL 3,888 2,813 1,008 Financial liabilities 41,560 136 70 AC 40,423 [34,189] [9,824] Derivatives 136 Lease liabilities 1,137 [1,175] Nonfinancial liabilities 70 Trade accounts payable 5,683 AC 5,683 Other liabilities 858 56 224 1,248 987 AC 858 [858] FVTPL (nonderivative), mandatory2 1,247 Derivatives 56 224 1 Nonfinancial liabilities 987 Total financial liabilities 48,101 56 360 1,248 of which AC 46,964 of which derivatives 56 360 1 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9, paragraph 5.7.5 4 Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a) 40 B 18 Dec. 31, 2020 Total 9,555 9,120 246 189 9,495 1,414 7,386 399 294 2 2,502 323 77 2,102 4,191 4,191 23,452 15,048 7,709 41,766 40,423 136 1,137 70 5,683 5,683 3,373 858 1,247 281 987 49,765 46,964 417 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Due to the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and also the creditworthiness of the counterparty in certain cases. Where a market price is available, however, this is deemed to be the fair value. The fair values of financial assets measured at fair value correspond to quoted prices in active markets (Level 1), or are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit or debt value adjustments are determined to account for the credit risk of the contractual party or Bayer. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into account any foreign currency translation as of the closing date in certain cases. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This applies to certain debt or equity instruments, in some cases to the fair values of embedded derivatives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as “FVTPL – at fair value through profit or loss” by the discounted cash flow method. Here the credit spreads of comparable issuers are applied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materially affect the fair value. When determining the fair values of contingent consideration from acquisitions recognized as financial liabilities within the “FVTPL (nonderivative) – at fair value through profit or loss” category, the principal unobservable input is the estimation of the probability that, for example, pre-defined milestones for research and development projects will be achieved or that sales targets will be attained, as well as the timing of the payments. Changes in these estimates may lead to significant increases or decreases in fair value. Embedded derivatives are separated from their respective host contracts, provided these are not financial instruments. Such host contracts are generally sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. 41 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The changes in the amount of financial assets and liabilities recognized at fair value based on unobservable inputs (Level 3) for each financial instrument category were as follows: Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI (no recycling)1 Derivatives (net) Liabilities – FVTPL (nonderivative)1 Carrying amounts (net), January 1, 2021 1,008 344 11 (1,247) Gains (losses) recognized in profit or loss 1 – (1) 41 of which related to assets / liabilities recognized in the statements of financial position 1 – (1) 41 Gains (losses) recognized outside profit or loss – 25 – – Additions of assets (liabilities) 5 20 – – Settlements of (assets) liabilities (1) (1) – 23 Transfer into Level 1 – (42) – – Exchange differences 3 7 1 (38) Carrying amounts (net), June 30, 2021 1,016 353 11 (1,221) 1 See table B 17 for definitions of measurement categories. Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI (no recycling)1 Derivatives (net) Liabilities – FVTPL (nonderivative)1 Carrying amounts (net), January 1, 2020 987 232 7 (193) Gains (losses) recognized in profit or loss 4 – (1) (6) of which related to assets / liabilities recognized in the statements of financial position 4 – (1) (6) Gains (losses) recognized outside profit or loss – 19 – – Additions of assets (liabilities) 1 2 – – Settlements of (assets) liabilities – (1) – 1 Disposals from divestments / changes in scope of consolidation – 7 – – Carrying amounts (net), June 30, 2020 992 259 6 (198) 1 See table B 18 for definitions of measurement categories. The changes recognized in profit or loss were included in other operating income / expenses, as well as in the financial result in interest income, exchange gains or losses, and other financial income and expenses. Equity instruments Equity instruments are generally held for medium- to long-term strategic purposes and are therefore measured at fair value through other comprehensive income. Otherwise they are measured at fair value through profit or loss, as was the case with our interests in Covestro AG, Elanco Animal Health Inc., and Century Therapeutics LLC. The latter company was accounted for in the Bayer Group consolidated financial statements as an associate using the equity method until June 2021. Its IPO in June 2021 led to the loss of significant influence and resulted in a change in accounting method. Since then, the shares held by Bayer have been measured at fair value through profit or loss. Changes in the fair value of equity instruments measured at fair value through other comprehensive income resulted in the recognition of a net gain of €212 million (before tax) in other comprehensive income. Changes in the fair value of equity instruments measured at fair value through profit or loss led to the recognition of a net gain of €129 million (before tax) in the financial result. 42 B 19 Total 116 41 41 25 25 21 (42) (27) 159 B 20 Total 1,033 (3) (3) 19 3 – 7 1,059 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Repayment of financial liabilities Bayer AG redeemed at maturity a bond with a nominal volume of €750 million in January 2021. Bayer U.S. Finance II LLC, United States, repaid two bonds with a combined volume of US$2.5 billion (€2.1 billion) in May and June 2021, respectively. In addition, Bayer Holding Ltd., Japan, redeemed at maturity a bond with a nominal volume of JPY10 billion (€75 million) in May 2021. Sale of interests in Covestro and Elanco The Bayer Group sold its remaining shares in Covestro AG and Elanco Animal Health Inc. over the course of the first half of the year. Contingent liabilities As of June 30, 2021, other contingent liabilities declined by approximately €0.4 billion. Contingent liabilities primarily related to tax and labor law as well as other matters in countries such as Germany, the United States, Brazil and Italy. Legal Risks To find out more about the Bayer Group’s legal risks, please see Note [30] to the consolidated financial statements in the Bayer Annual Report 2020, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2020, the following significant changes have occurred in respect of the legal risks: Product-related litigation Roundup™ (glyphosate): A large number of lawsuits from plaintiffs claiming to have been exposed to glyphosate-based products manufactured by Bayer’s subsidiary Monsanto have been served upon Monsanto in the United States. Glyphosate is the active ingredient contained in a number of Monsanto’s herbicides, including Roundup™-branded products. Plaintiffs allege personal injuries resulting from exposure to those products, including non-Hodgkin lymphoma (NHL) and multiple myeloma, and seek compensatory and punitive damages. Additional lawsuits are anticipated. In 2020, Monsanto reached an agreement in principle with plaintiffs, without admission of liability, to settle most of the current Roundup™ litigation and to put in place a mechanism to resolve potential future claims. Monsanto continues to make progress and per July 2021 has reached settlements and/or is close to settling in a substantial number of cases; including non-eligible cases this amounts to approximately 96,000 cases out of the approximately 125,000 cases reported in the Annual Report 2020. The mechanism to resolve potential future claims involved a class settlement agreement between Monsanto and plaintiffs’ counsel. This agreement required approval by Judge Chhabria of the U.S. District Court for the Northern District of California. In May 2021, Judge Chhabria denied the class agreement. Following the judge’s denial, in May 2021 Bayer announced a series of measures to resolve potential future glyphosate litigation, combining both legal and commercial actions. In July, Bayer provided an update on the progress made and announced additional details. Bayer has developed two scenarios based on a potential ruling by the Supreme Court of the United States in the Hardeman case. If the Supreme Court accepts the petition, which Bayer plans to file in August, for review and rules in favor of Bayer, it would effectively end potential future litigation. The second scenario assumes that the Supreme Court either refuses to hear the Hardeman case or issues a ruling in favor of the plaintiff, in which case Bayer would activate its own claims administration program. Bayer has implemented corresponding accounting measures for this scenario, resulting in a discounted allocation to provisions for litigations of €3.5 billion in the second quarter of 2021 on top of the existing provisions. Bayer is confident that this provides an effective path to manage and address any risks from potential future Roundup™ litigation, while simultaneously giving Bayer more control going forward. Bayer continues to believe there is no reason for safety concerns in connection with these products. 43 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The three cases that have so far gone to trial – Johnson, Hardeman and Pilliod – are not covered by the settlement. In May 2021, the 9th Circuit ruled against Monsanto in the Hardeman appeal. The company will petition the Supreme Court of the United States for review in Hardeman. The Pilliod appeal remains pending before the California Court of Appeal. The Johnson case was concluded with payment of the US$20.5 million final judgment plus interest in March 2021. As of July 13, 2021, a total of 22 Canadian lawsuits relating to Roundup™ and 11 seeking class action certification had been served upon Bayer. Dicamba: As of July 13, 2021, lawsuits from approximately 230 plaintiffs had been served upon Bayer’s subsidiary Monsanto and co-defendant BASF in both state and federal courts in the United States alleging that Monsanto’s XtendiMax™ herbicide as well as other products containing dicamba caused crop damage from off-target movement. In 2020, Monsanto reached a global agreement with the plaintiffs to settle the dicamba litigation. Following the dicamba settlement, two additional dicamba lawsuits were filed and served upon Bayer: In May 2021, a honey producer (Coy’s Honey Farms) filed suit in the Eastern District of Arkansas against Bayer and BASF alleging damages to his honey business caused by dicamba. The case will be transferred to the Dicamba MDL in Missouri. In June 2021, approximately 60 Texas vineyard growers filed a single lawsuit in Jefferson County, Texas state court alleging dicamba damage to their vineyards. The lawsuit names Bayer, Monsanto and BASF as defendants. In July 2021, the lawsuit was removed to the Eastern District of Texas and was listed on a tag-along letter seeking transfer to the Dicamba MDL. Patent disputes Betaferon™ / Betaseron™: In Bayer’s patent litigation against Biogen MA Inc. in a U.S. federal court regarding Betaseron™, Bayer’s drug product for the treatment of multiple sclerosis, the U.S. federal court entered final judgment in favor of EMD Serono, Inc. and Pfizer Inc. and, separately, in favor of Bayer and Novartis Pharmaceuticals Corporation (“Novartis”) in March 2021. This terminates the patent dispute regarding Betaseron™ and Extavia™, another drug product for the treatment of multiple sclerosis which is manufactured by Bayer, but distributed in the United States by Novartis. Jivi™ (BAY94-9027): In 2018, Nektar Therapeutics (“Nektar”), Baxalta Incorporated and Baxalta U.S., Inc. (together “Baxalta”) filed a complaint in a U.S. federal court against Bayer alleging that BAY94-9027, approved as Jivi™ in the United States for the treatment of hemophilia, infringes five patents by Nektar. In parallel proceedings before the same U.S. federal court over infringement of a Bayer patent by Baxalta’s hemophilia treatment Adynovate™, the court ordered Baxalta in 2019 to pay US$182 million to Bayer. In March 2021, the U.S. Court of Appeals for the Federal Circuit affirmed the order in favor of Bayer. In May 2021, Bayer, Baxalta and Nektar agreed to settle their patent disputes. Bayer and Baxalta will both be able to continue to market their respective hemophilia treatments. Further legal proceedings PCBs: Bayer’s subsidiary Monsanto has been named in lawsuits brought by various governmental entities in the United States claiming that Monsanto, Pharmacia and Solutia, collectively as a manufacturer of PCBs, should be responsible for a variety of damages due to PCBs in the environment, including bodies of water, regardless of how PCBs came to be located there. PCBs are chemicals that were widely used for various purposes until the manufacture of PCBs was prohibited by the EPA in the United States in 1979. Monsanto also faces numerous lawsuits claiming personal injury and/or property damage due to use of and exposure to PCB products. In July 2021, a jury in King County, Washington, awarded a total amount of US$185 million (compensatory and punitive damages) to three plaintiffs alleging personal injury from allegedly being exposed to PCB in their workplace, the Sky Valley Education Center. Bayer disagrees with the verdict and plans to pursue post-trial motions and, if necessary, an appeal. The undisputed evidence in this case does not support the conclusions that plaintiffs were exposed to unsafe levels of PCBs or that any exposure could have possibly caused their claimed injuries. There are approximately 200 possible plaintiffs in connection with the relevant building. We believe that we also have meritorious defenses in these matters and intend to defend ourselves vigorously. 44 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Notes to the Statements of Cash Flows Net operating cash flow from continuing operations in the first half of 2021 amounted to minus €768 million (H1 2020: €2,062 million). The decline compared with the prior-year period was due in particular to net cash outflows of €3.1 billion to resolve litigations. Cash inflows from the patent dispute surrounding our product Jivi™ were among the factors that had a positive impact. The high, positive change in other working capital in the second quarter of 2021 pertained in particular to the €3.5 billion discounted allocation to provisions for the glyphosate litigations, which neutralizes the corresponding effect in EBIT. The net cash inflow for investing activities in the first half of the year amounted to €4,392 million (H1 2020: net cash outflow of €1,019 million). We invested €822 million (H1 2020: €976 million) in property, plant and equipment and intangible assets. Cash outflows for divestments came to €57 million (H1 2020: €65 million) and were attributable to the final purchase price adjustment from the sale of the Animal Health business. Cash outflows for acquisitions amounted to €23 million (H1 2020: €106 million) and mainly comprised a payment for the achievement of a research-based milestone. Net cash inflows from current financial assets totaled €4,891 million (H1 2020: net cash outflows of €274 million) and primarily arose from the sale of investments in money market funds. There was a net cash outflow of €4,490 million for financing activities (H1 2020: €1,090 million). This included net loan repayments of €2,000 million (H1 2020: net borrowings of €2,298 million). Net interest payments came to €525 million (H1 2020: €637 million). We paid out €1,965 million in dividends (H1 2020: €2,751 million). Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or joint control or have a significant influence. They include, in particular, nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate officers of Bayer AG. Related-party transactions were not material from the viewpoint of the Bayer Group. Other information On April 27, 2021, the Annual Stockholders’ Meeting approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.00 per share entitled to the dividend be paid for the 2020 fiscal year. The actions of the members of the Board of Management and the Supervisory Board serving in 2020 were ratified in accordance with the proposals by the Board of Management and the Supervisory Board. Two stockholder representatives were elected to the Supervisory Board in accordance with the nominations submitted by the Supervisory Board. The proposal by the Board of Management and Supervisory Board to amend the compensation of the Supervisory Board, which is set forth in Article 12 of the company’s Articles of Incorporation, was approved by the Annual Stockholders’ Meeting. In accordance with the proposal by the Supervisory Board, Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, Germany, was elected auditor of the annual and consolidated financial statements for 2021, and also to review, if applicable, the condensed financial statements and interim management report as of June 30, 2021, and, if applicable, the condensed financial statements and interim management reports as of September 30, 2021, and March 31, 2022, if these are prepared. 45 Bayer Half-Year Financial Report as of June 30, 2021 B Condensed Consolidated Interim Financial Statements Events after the end of the reporting period Events after the end of the reporting period Acquisition of Vividion Therapeutics, Inc. Bayer AG announced in August 2021 that it had entered into an agreement to acquire the biopharmaceutical company Vividion Therapeutics, Inc., San Diego, California, United States. Through the acquisition, Bayer will gain access to a cutting-edge chemoproteomics platform that is able to identify previously unknown binding pockets in undruggable targets. As part of the acquisition, Bayer will make an upfront payment of around €1,260 million along with success-based milestone payments of up to around €420 million. Closing of the transaction is contingent on customary closing conditions and is expected to take place in third quarter of 2021. Repayment of financial liabilities In July 2021, Bayer U.S. Finance II LLC, United States, and Monsanto Company, United States, repaid two bonds with a combined volume of US$500 million (€423 million). Leverkusen, August 3, 2021 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Sarena Lin Wolfgang Nickl Stefan Oelrich Heiko Schipper 46 Bayer Half-Year Financial Report as of June 30, 2021 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group in line with generally accepted accounting principles, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the financial year. Leverkusen, August 3, 2021 Bayer Aktiengesellschaft The Board of Management Werner Baumann Liam Condon Sarena Lin Wolfgang Nickl Stefan Oelrich Heiko Schipper 47 Bayer Half-Year Financial Report as of June 30, 2021 Review Report To Bayer Aktiengesellschaft, Leverkusen / Germany We have reviewed the condensed interim consolidated financial statements – comprising the consolidated income statement and the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the condensed consolidated statement of changes in equity as well as selected explanatory notes to the financial statements – and the interim group management report for the period from 1. January until 30. June 2021 of Bayer Aktiengesellschaft, Leverkusen, that are part of the half-year financial report under § 115 WpHG (Wertpapierhandelsgesetz: German Securities Trading Act). The preparation of the interim consolidated financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the entity’s Management Board. Our responsibility is to express a conclusion on the interim consolidated financial statements and on the interim group management report based on our review. We conducted our review of the interim consolidated financial statements and of the interim group management report in compliance with German generally accepted standards for Reviews of Financial Statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) as well as in supplementary compliance with the International Standard on Review Engagements 2410 “Review of Interim Financial Information performed by the Independent Auditor of the Entity”. Those standards require that we plan and perform the review to obtain a certain level of assurance to preclude through critical evaluation, that the interim consolidated financial statements are not prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the interim group management report is not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of personnel of the entity and analytical procedures applied to financial data and thus provides less assurance than an audit. Since, in accordance with our engagement, we have not performed an audit, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial statements of Bayer Aktiengesellschaft, Leverkusen, are not prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the group management report is not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. München / Germany, 4. August 2021 Deloitte GmbH Wirtschaftsprüfungsgesellschaft Prof. Dr. Frank Beine Michael Mehren Wirtschaftsprüfer Wirtschaftsprüfer Review Report 48 Bayer Half-Year Financial Report as of June 30, 2021 Financial Calendar Financial Calendar Q3 2021 Quarterly Statement 2021 Annual Report Annual Stockholders’ Meeting 2022 Q1 2022 Quarterly Statement November 9, 2021 March 1, 2022 April 29, 2022 May 10, 2022 Reporting Principles This Bayer AG Interim Report is a half-year financial report that satisfies the requirements of Section 115, Paragraph 2, No. 1 and No. 2, Paragraph 3 and Paragraph 4 of the German Securities Trading Act (WpHG). Bayer has prepared the condensed consolidated interim financial statements according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). This report should be read in conjunction with the Annual Report for the 2020 fiscal year and the additional information about the company provided therein. The Annual Report 2020 is available on our website at www.bayer.com. Masthead Published by Bayer AG, 51368 Leverkusen, Germany Date of publication Thursday, August 5, 2021 Editor Jörg Schäfer, phone +49 214 30 39136 Email: joerg.schaefer@bayer.com English edition Employee Support Services SCGermany Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com Bayer on the internet www.bayer.com Forward-Looking Statements This half-year financial report may contain forward-looking statements based on current assumptions and forecasts made by Bayer management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 49

Semestriel, 2021, Agrochemistry, BAYER

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Half-Year Financial Report 2022 Strong growth, outlook raised // Group sales of €12.8 billion (Fx & p adj. + 9.6%) // EBITDA before special items rises to €3.3 billion (+ 30.0%) // Crop Science and Consumer Health achieve strong sales and earnings growth // Pharmaceuticals reports slight increase in sales and earnings // Core earnings per share €1.93 (+ 19.9%) // Net income at minus €0.3 billion // Free cash flow of €1.1 billion // Improved ESG rating from MSCI // Full-year Group outlook raised Bayer Half-Year Financial Report as of June 30, 2022 Contents Bayer Group Key Data _________________________________________________________________________ 3 Interim Group Management Report as of June 30, 2022 ________________________________________ 4 Key Events ____________________________________________________________________________________ 4 1. Overview of Sales, Earnings and Financial Position _________________________________________ 5 1.1 Earnings Performance of the Bayer Group __________________________________________________ 5 1.2 Business Development by Division _________________________________________________________ 9 1.3 Asset and Financial Position of the Bayer Group ___________________________________________ 16 2. Research, Development, Innovation _______________________________________________________ 19 Crop Science _____________________________________________________________________________ 19 Pharmaceuticals __________________________________________________________________________ 19 Consumer Health _________________________________________________________________________ 22 Leaps by Bayer ___________________________________________________________________________ 22 3. Report on Future Perspectives and on Opportunities and Risks _____________________________ 23 3.1 Future Perspectives ______________________________________________________________________ 23 3.2 Opportunities and Risks __________________________________________________________________ 25 Condensed Consolidated Interim Financial Statements as of June 30, 2022 ____________________ 26 Bayer Group Consolidated Income Statements _________________________________________________ 26 Bayer Group Consolidated Statements of Comprehensive Income _______________________________ 27 Bayer Group Consolidated Statements of Financial Position ____________________________________ 28 Bayer Group Consolidated Statements of Cash Flows __________________________________________ 29 Bayer Group Consolidated Statements of Changes in Equity ___________________________________ 30 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group _________ 31 Events After the End of the Reporting Period ___________________________________________________ 45 Responsibility Statement _____________________________________________________________________ 46 Review Report ________________________________________________________________________________ 47 Financial Calendar ____________________________________________________________________________ 48 Reporting Principles __________________________________________________________________________ 48 Masthead _____________________________________________________________________________________ 48 Contents 2 Bayer Half-Year Financial Report as of June 30, 2022 Bayer Group Key Data Change (%) € million Q2 2021 Q2 2022 Reported Fx. & p adj. Sales 10,854 12,819 + 18.1 + 9.6 Change in sales1 Volume + 11.3% + 0.1% Price + 1.6% + 9.5% Currency – 5.2% + 8.4% Portfolio + 0.3% + 0.1% Sales by region Europe/Middle East/Africa 3,245 3,639 + 12.1 + 10.6 North America 4,066 4,817 + 18.5 + 5.7 Asia/Pacific 2,302 2,492 + 8.3 + 3.1 Latin America 1,241 1,871 + 50.8 + 31.8 EBITDA1 (891) 2,651 . Special items1 (3,468) (698) EBITDA before special items1 2,577 3,349 + 30.0 EBITDA margin before special items1 23.7% 26.1% EBIT1 (2,281) 169 . Special items1 (3,901) (2,111) EBIT before special items1 1,620 2,280 + 40.7 Financial result (99) (692) . Net income (from continuing and discontinued operations) (2,335) (298) – 87.2 Earnings per share from continuing and discontinued operations (€) (2.38) (0.30) – 87.4 Core earnings per share1 from continuing operations (€) 1.61 1.93 + 19.9 Net cash provided by (used in) operating activities (from continuing and discontinued operations) 1,997 2,104 + 5.4 Free cash flow1 1,152 1,140 – 1.0 Net financial debt (at end of period) 34,365 36,575 + 6.4 Cash flow-relevant capital expenditures (from continuing and discontinued operations) 493 550 + 11.6 Research and development expenses 1,638 1,928 + 17.7 Depreciation, amortization and impairment losses/loss reversals 1,390 2,482 + 78.6 Number of employees (at end of period)2 99,439 101,914 + 2.5 Personnel expenses (including pension expenses) 2,931 3,391 + 15.7 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Employees calculated as full-time equivalents (FTEs) H1 2021 23,182 + 6.7% + 0.5% – 6.4% + 0.4% 7,318 8,964 4,481 2,419 3,278 (3,417) 6,695 28.9% 802 (3,886) 4,688 (447) (246) (0.25) 4.20 (768) (2,074) 34,365 822 2,836 2,476 99,439 5,751 H1 2022 27,458 + 3.0% + 9.1% + 6.2% + 0.1% 8,153 10,779 4,903 3,623 7,943 (657) 8,600 31.3% 4,381 (2,071) 6,452 (1,182) 2,993 3.05 5.46 1,378 (47) 36,575 899 3,382 3,562 101,914 6,562 Key Data 3 Change (%) Reported Fx. & p adj. + 18.4 + 12.1 + 11.4 + 12.1 + 20.2 + 9.7 + 9.4 + 4.5 + 49.8 + 34.7 + 142.3 + 28.5 . + 37.6 + 164.4 . . + 30.0 . – 97.7 + 6.4 + 9.4 + 19.3 + 43.9 + 2.5 + 14.1 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report Key Events Interim Group Management Report as of June 30, 2022 Key Events Russia’s invasion of Ukraine The safety of our 700 colleagues in Ukraine and their families is our top priority. In addition to establishing a disaster relief fund, we are also donating products such as antibiotics and seed for growing food. Together, Russia and Ukraine accounted for about 3% of our sales in 2021. Energy provision and global supply chains may also be disrupted as a result of the war. At Bayer, energy costs only accounted for about 3% of the total cost of goods sold in 2021. We are well prepared to contain the impact of any potential gas shortages to the greatest degree possible. We have realigned our processes to significantly reduce our reliance on natural gas, which involved switching to alternative sources of energy and launching programs to save energy. At the same time, we are expanding our network of suppliers and building up additional inventories where possible. Group sales and earnings were only marginally impacted by the war and its direct consequences in the second quarter. We also do not currently see any material financial impact in full-year 2022. Portfolio changes In July, we entered into an agreement with Grünenthal regarding the sale of Nebido™ (testosterone undecanoate) for a purchase price of up to €500 million, subject to customary closing adjustments. Grünenthal will acquire the global product rights to Nebido™, including the contract business in the United States, where Endo Pharmaceuticals has licensed the compound under the name Aveed. The transaction is expected to close by the end of 2022. ESG rating We have made important progress in a major ESG rating: MSCI ESG Research recently updated their ESG Controversies Report and lifted the red flag related to “environmental concerns over GMO crops” as well as their related allegation of a breach of the UN Global Compact Principles. Following the removal of the Institutional Shareholder Services (ISS) red flag related to neonicotinoid insecticides last year, this is another important improvement in our ESG rating profile. 4 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position 1. Overview of Sales, Earnings and Financial Position1 1.1 Earnings Performance of the Bayer Group Second quarter of 2022 Group sales Group sales in the second quarter of 2022 increased by 9.6% (Fx & portfolio adj.) to €12,819 million (Q2 2021: €10,854 million; reported: +18.1%). There was a positive currency effect of €915 million (Q2 2021: negative currency effect of €524 million). Sales in Germany amounted to €610 million (Q2 2021: €554 million). Crop Science saw sales rise significantly due to a substantial improvement in the market environment. Business at Pharmaceuticals was up slightly in the second quarter. Growth was driven by sales gains for Eylea™ in particular, but was held back by price- and volume-related declines for Xarelto™ that were largely due to tender procedures in China and the expiration of our patent in Brazil. Consumer Health posted a strong increase in sales, with growth in all regions. EBITDA before special items Group EBITDA before special items advanced by 30.0% to €3,349 million. This figure included a positive currency effect of €300 million (Q2 2021: negative currency effect of €153 million). At Crop Science, EBITDA before special items rose significantly, mainly due to the division’s very strong performance. Pharmaceuticals posted an increase in EBITDA before special items, primarily as a result of the growth in sales. EBITDA before special items at Consumer Health was up significantly, mainly driven by the strong growth in sales. The Group EBITDA margin before special items was 26.1%. Depreciation, amortization and impairments Depreciation, amortization, impairment losses and impairment loss reversals led to net expenses of €2,482 million (Q2 2021: €1,390 million), with intangible assets accounting for €2,082 million (Q2 2021: €1,025 million) and property, plant and equipment for €400 million (Q2 2021: €365 million). Impairment losses, net of impairment loss reversals, totaled €1,460 million (Q2 2021: €458 million) and included €1,453 million in net impairment losses on intangible assets (Q2 2021: €466 million). A strong rise in capital market interest rates necessitated impairment testing, resulting in the recognition of impairment losses on intangible assets, especially at the Crop Science Division (€1,322 million). A total of €1,413 million in impairment losses, net of impairment loss reversals, were included in special items (Q2 2021: €427 million). EBIT and special items EBIT of the Bayer Group came in at €169 million (Q2 2021: minus €2,281 million) after net special charges of €2,111 million (Q2 2021: €3,901 million) that were mainly related to the impairment losses in the Crop Science Division mentioned above, as well as ongoing litigations and restructuring measures. By contrast, special gains from divestments, especially at the Pharmaceuticals Division, had a positive impact. EBIT before special items rose by 40.7% to €2,280 million (Q2 2021: €1,620 million). 1 For definition of alternative performance measures see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 5 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position The following special items were taken into account in calculating EBIT and EBITDA: A 1 Special Items by Category1 € million EBIT Q2 2021 EBIT Q2 2022 EBIT H1 2021 EBIT H1 2022 EBITDA Q2 2021 EBITDA Q2 2022 EBITDA H1 2021 EBITDA H1 2022 Total special items (3,901) (2,111) (3,886) (2,071) (3,468) (698) (3,417) (657) Restructuring (212) (184) (301) (261) (210) (183) (292) (260) of which in the Reconciliation (144) (25) (210) (55) (144) (24) (210) (54) Acquisition/integration (7) (3) (4) (3) (7) (3) (4) (3) of which in the Reconciliation (1) – (1) – (1) – (1) – Divestments 78 169 68 154 78 169 68 154 of which in the Reconciliation – (10) – (10) – (10) – (10) Litigations/legal risks (3,334) (690) (3,193) (603) (3,334) (690) (3,193) (603) of which in the Reconciliation 45 (694) 59 (699) 45 (694) 59 (699) Impairment losses/loss reversals2 (433) (1,416) (463) (1,417) (2) (3) (3) (3) Other 7 13 7 59 7 12 7 58 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Where not already included in the other special items categories A 2 Special Items1 by Functional Cost € million EBIT Q2 2021 EBIT Q2 2022 EBIT H1 2021 EBIT H1 2022 EBITDA Q2 2021 EBITDA Q2 2022 EBITDA H1 2021 EBITDA H1 2022 Total special items (3,901) (2,111) (3,886) (2,071) (3,468) (698) (3,417) (657) Cost of goods sold (288) (842) (324) (854) (28) (25) (29) (36) Selling expenses 77 (282) 65 (300) (32) (125) (44) (143) Research and development expenses (279) (452) (271) (462) 5 (14) 13 (24) General administration expenses (173) (59) (255) (120) (173) (59) (255) (120) Other operating income/(expenses) (3,238) (476) (3,101) (335) (3,240) (475) (3,102) (334) 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Net income After a financial result of minus €692 million (Q2 2021: minus €99 million), income before income taxes amounted to minus €523 million (Q2 2021: minus €2,380 million). The financial result mainly comprised a loss of €96 million from investments in affiliated companies (Q2 2021: income of €209 million), net interest expense of €307 million (Q2 2021: €253 million) and interest cost of €136 million (Q2 2021: €18 million) for pension and other provisions, as well as net miscellaneous financial expenses of €113 million (Q2 2021: net miscellaneous financial income of €107 million). The financial result included net special charges of €127 million (Q2 2021: net special gains of €16 million). After income from income taxes of €234 million (Q2 2021: €52 million) and accounting for noncontrolling interest, net income amounted to minus €298 million (Q2 2021: minus €2,335 million). Core earnings per share Core earnings per share rose by 19.9% to €1.93 (Q2 2021: €1.61), mainly due to the very good business performance at the Crop Science Division, while the negative development of the financial result before special items had an opposing effect. Earnings per share (total) came in at minus €0.30 (Q2 2021: minus €2.38) and, in comparison with core earnings per share, were primarily diminished by the impairment losses described above. 6 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position A 3 Core Earnings per Share1 € million Q2 2021 Q2 2022 H1 2021 H1 2022 EBIT1 (as per income statements) (2,281) 169 802 4,381 Amortization and impairment losses/loss reversals on goodwill and other intangible assets 1,025 2,082 1,697 2,781 Impairment losses/loss reversals on property, plant and equipment, and accelerated depreciation included in special items 3 8 46 15 Special items (other than accelerated depreciation, amortization and impairment losses/loss reversals) 3,468 698 3,417 657 Core EBIT1 2,215 2,957 5,962 7,834 Financial result (as per income statements) (99) (692) (447) (1,182) Special items in the financial result2 (16) 127 (53) 198 Income taxes (as per income statements) 52 234 (593) (194) Special items in income taxes – – – – Tax effects related to amortization, impairment losses/loss reversals and special items (563) (724) (734) (1,282) Income after income taxes attributable to noncontrolling interest (as per income statements) (7) (9) (8) (12) Above-mentioned adjustments attributable to noncontrolling interest – – – – Core net income from continuing operations 1,582 1,893 4,127 5,362 Shares (million) Weighted average number of shares 982.42 982.42 982.42 982.42 € Core earnings per share from continuing operations1 1.61 1.93 4.20 5.46 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Includes in particular the changes in the fair value of the interests in Century Therapeutics and Pyxis Oncology, as well as interest cost for the provisions for litigations/legal risks. The prior-year figure mainly comprises changes in the fair value of our interests in Elanco and Covestro. Personnel expenses and employee numbers The number of employees in the Bayer Group as of the closing date rose by 2.5% year on year to 101,914 (June 30, 2021: 99,439). Personnel expenses increased by 15.7% to €3,391 million in the second quarter (Q2 2021: €2,931 million). This was partly attributable to currency effects and higher compensation. First half of 2022 Group sales Group sales in the first half of 2022 rose by 12.1% (Fx & portfolio adj.) to €27,458 million (H1 2021: €23,182 million; reported: +18.4%). There was a positive currency effect of €1,444 million. Sales in Germany amounted to €1,345 million (H1 2021: €1,215 million). The Crop Science Division saw sales increase substantially, with double-digit-percentage growth in all regions. Business at Pharmaceuticals was up slightly in the first six months. Growth was mainly driven by higher sales for Eylea™ across all regions, but was held back by price- and volume-related declines for Xarelto™ that were largely due to tender procedures in China. Sales at Consumer Health increased significantly, with growth in all regions and categories. EBITDA before special items EBITDA before special items at the Bayer Group advanced by 28.5% to €8,600 million (H1 2021: €6,695 million). This figure included a positive currency effect of €367 million. The EBITDA margin before special items increased to 31.3%, with currency effects having a dilutive effect of 0.3 percentage points. 7 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position At Crop Science, EBITDA before special items rose year on year, mainly due to the division’s very strong performance. We also benefited from higher volumes, as well as from contributions from ongoing efficiency programs. Pharmaceuticals posted a slight decline in EBITDA before special items as a result of high marketing investments in new products. EBITDA before special items at Consumer Health increased, mainly due to the considerable growth in sales. Depreciation, amortization and impairments Depreciation, amortization and impairment losses – net of impairment loss reversals – amounted to €3,562 million in the first six months of 2022 (H1 2021: €2,476 million). They comprised €2,781 million (H1 2021: €1,697 million) in amortization and impairments on intangible assets and €781 million (H1 2021: €779 million) in depreciation and impairments on property, plant and equipment. Impairment losses, net of impairment loss reversals, totaled €1,515 million (H1 2021: €524 million) and included €1,501 million in net impairment losses on intangible assets (H1 2021: €487 million) that were primarily attributable to the impairment losses in the Crop Science Division mentioned above. A total of €1,414 million (H1 2021: €463 million) in impairment losses, net of impairment loss reversals, and accelerated depreciation of €0 million (H1 2021: €6 million) were included in special items. EBIT and special items EBIT at the Bayer Group in the first half of 2022 came in at €4,381 million (H1 2021: €802 million) after net special charges of €2,071 million (H1 2021: €3,886 million). The special charges were mainly related to the impairment losses in the Crop Science Division mentioned above, as well as ongoing litigations and restructuring measures. By contrast, special gains from divestments, especially at the Pharmaceuticals Division, had a positive impact. EBIT before special items rose by 37.6% to €6,452 million (H1 2021: €4,688 million). Net income After a financial result of minus €1,182 million (H1 2021: minus €447 million), income before income taxes in the first half of the year came in at €3,199 million (H1 2021: €355 million). The financial result largely comprised a loss of €163 million from investments in affiliated companies (H1 2021: income of €217 million), net interest expense of €583 million (H1 2021: €521 million) and interest cost of €210 million (H1 2021: €37 million) for pension and other provisions, as well as net miscellaneous financial expenses of €162 million (H1 2021: net miscellaneous financial income of €65 million). The financial result included net special charges of €198 million (H1 2021: net special gains of €53 million). After income tax expense of €194 million (H1 2021: €593 million), income after income taxes was €3,005 million (H1 2021: minus €238 million). After adjusting for income from discontinued operations after income taxes and income attributable to noncontrolling interest, net income came to €2,993 million (H1 2021: minus €246 million). Core earnings per share Core earnings per share rose by 30.0% to €5.46 (H1 2021: €4.20), mainly due to the very strong performance of the Crop Science Division, while the negative development of the financial result before special items had an opposing effect. Earnings per share (total) came in at €3.05 (H1 2021: minus €0.25) and, in comparison with core earnings per share, were mainly diminished by the impairment losses described above. 8 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 9 1. Overview of Sales, Earnings and Financial Position 1.2 Business Development by Division Crop Science A 4 Key Data – Crop Science Change (%)1 Change (%)1 € million Q2 2021 Q2 2022 Reported Fx & p adj. H1 2021 H1 2022 Reported Fx & p adj. Sales 5,021 6,461 + 28.7 + 17.2 11,667 14,908 + 27.8 + 19.7 Change in sales1 Volume + 7.4% – 2.4% + 5.8% + 2.2% Price + 3.2% + 19.6% + 2.3% + 17.5% Currency – 6.0% + 11.5% – 7.8% + 8.1% Portfolio 0.0% 0.0% 0.0% 0.0% Sales by region Europe/Middle East/Africa 1,003 1,255 + 25.1 + 24.8 2,884 3,388 + 17.5 + 19.7 North America 2,532 3,056 + 20.7 + 7.8 5,963 7,417 + 24.4 + 13.8 Asia/Pacific 627 704 + 12.3 + 5.7 1,142 1,328 + 16.3 + 11.2 Latin America 859 1,446 + 68.3 + 44.8 1,678 2,775 + 65.4 + 46.5 EBITDA1 (2,496) 1,701 . (69) 5,416 . Special items1 (3,514) (48) (3,535) (2) EBITDA before special items1 1,018 1,749 + 71.8 3,466 5,418 + 56.3 EBITDA margin before special items1 20.3% 27.1% 29.7% 36.3% EBIT1 (3,483) (258) – 92.6 (1,730) 2,770 . Special items1 (3,945) (1,369) (3,997) (1,324) EBIT before special items1 462 1,111 + 140.5 2,267 4,094 + 80.6 Net cash provided by (used in) operating activities 1,734 2,551 + 47.1 (2,403) 164 . Cash flow-relevant capital expenditures 187 239 + 27.8 303 389 + 28.4 Research and development expenses 819 997 + 21.7 1,282 1,575 + 22.9 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2022 Sales Crop Science posted a significant 17.2% rise in sales (Fx & portfolio adj.) to €6,461 million in the second quarter of 2022, driven by a substantial improvement in the market environment. We recorded double-digit percentage growth in Latin America and Europe/Middle East/Africa, and also registered a strong expansion of business in North America and Asia/Pacific. // Sales at Corn Seed & Traits were up year on year, mainly due to price increases in North America, Europe/Middle East/Africa and Latin America. We also benefited from expanded volumes in all regions except North America, where a decrease in planted acres led to a decline in volumes. // Herbicides posted considerable gains, especially in Latin and North America and in Europe/Middle East/Africa, as a result of prices for our glyphosate-based products remaining high. // Sales at Fungicides advanced in all regions except North America, where volumes declined as a result of unfavorable weather conditions. // Soybean Seed & Traits saw a decline in sales, largely due to the significant reduction in sales from overproduction in North America as well as our withdrawal from the Argentinian market. // Sales at Insecticides rose year on year, mainly due to the launch of our new product Movento™ in Europe/Middle East/Africa and expanded volumes in Latin America. Our business in North America was negatively impacted by shifts in demand into the previous year. // Sales at Environmental Science came in at the prior-year level. We further increased sales in Latin America due to price increases but recorded a decline in volumes in North America. Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 10 1. Overview of Sales, Earnings and Financial Position // Vegetable Seeds registered double-digit growth in all regions, with significant gains in Europe/Middle East/Africa in particular thanks to advance demand. // We recorded an increase in sales in the reporting unit “Other”, driven by the growth of our cotton seed business in North and Latin America. A 5 Sales by Strategic Business Entity Change (%)1 Change (%)1 € million Q2 2021 Q2 2022 Reported Fx & p adj. H1 2021 H1 2022 Reported Fx & p adj. Crop Science 5,021 6,461 + 28.7 + 17.2 11,667 14,908 + 27.8 + 19.7 Corn Seed & Traits 962 1,165 + 21.1 + 9.5 3,356 3,920 + 16.8 + 9.8 Herbicides 1,468 2,455 + 67.2 + 51.3 2,956 4,939 + 67.1 + 55.6 Fungicides 774 858 + 10.9 + 4.3 1,654 1,921 + 16.1 + 11.9 Soybean Seed & Traits 530 503 – 5.1 – 16.1 1,059 1,077 + 1.7 – 7.6 Insecticides 364 413 + 13.5 + 6.4 724 826 + 14.1 + 9.0 Environmental Science 316 353 + 11.7 + 1.1 601 730 + 21.5 + 12.1 Vegetable Seeds 168 210 + 25.0 + 18.8 325 372 + 14.5 + 10.1 Other 439 504 + 14.8 + 3.5 992 1,123 + 13.2 + 4.4 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items at Crop Science increased to €1,749 million in the second quarter (Q2 2021: €1,018 million), mainly driven by the substantial improvement in business performance. We also benefited from contributions from ongoing efficiency programs. By contrast, earnings were diminished by an increase in costs, particularly in the cost of goods sold, which was mainly due to high inflation. We recorded a positive currency effect of €215 million (Q2 2021: minus €111 million). The EBITDA margin before special items increased by 6.8 percentage points to 27.1%. EBIT came in at minus €258 million (Q2 2021: minus €3,483 million) after special charges of €1,369 million (Q2 2021: €3,945 million). These special charges mainly comprised impairments arising from an increase in the cost of capital in the cash-generating units Vegetable Seeds (€269 million) and Corn Seed & Traits (€202 million), as well as in the cash-generating unit cotton seed (€851 million), where updated business expectations were also a factor. A 6 Special Items1 Crop Science € million EBIT Q2 2021 EBIT Q2 2022 EBIT H1 2021 EBIT H1 2022 EBITDA Q2 2021 EBITDA Q2 2022 EBITDA H1 2021 EBITDA H1 2022 Restructuring (44) (11) (40) (34) (44) (11) (38) (34) Acquisition/integration (4) (2) (1) (1) (4) (2) (1) (1) Divestments (8) (29) (18) (48) (8) (29) (18) (48) Litigations/legal risks (3,458) – (3,477) 91 (3,458) – (3,477) 91 Impairment losses/loss reversals (431) (1,324) (461) (1,325) – (3) (1) (3) Other – (3) – (7) – (3) – (7) Total special items (3,945) (1,369) (3,997) (1,324) (3,514) (48) (3,535) (2) 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position First half of 2022 Sales Sales at Crop Science increased by 19.7% (Fx & portfolio adj.) to €14,908 million in the first six months of 2022, with double-digit growth recorded across all regions. Corn Seed & Traits reported an increase in sales, largely as a result of higher prices. We also benefited from expanded volumes in all regions except North America, where a decrease in planted acres led to a decline in volumes. Sales at Herbicides rose significantly in all regions, mainly due to prices for our glyphosate-based products remaining high. Fungicides achieved a further expansion of business in Latin America, Europe/Middle East/Africa and Asia/Pacific thanks to an increase in volumes, but posted a decline in North America due to lower volumes. Sales at Soybean Seed & Traits were down due to lower volumes in North and Latin America. Sales at Insecticides rose in Latin America and Europe/Middle East/Africa, largely due to an increase in volumes, but declined in North America as a result of lower volumes. Sales at Environmental Science and Vegetable Seeds increased in all regions. Within the reporting unit “Other,” our cotton seed business performed particularly well, especially in North and Latin America. Earnings EBITDA before special items at Crop Science rose by 56.3% to €5,418 million in the first half of 2022 (H1 2021: €3,466 million), mainly due to the substantial improvement in business performance. We also benefited from higher volumes, as well as contributions from ongoing efficiency programs. As in the second quarter, earnings were diminished by a mainly inflation-related increase in the cost of goods sold. In addition, there was a positive currency effect of €313 million (H1 2021: minus €363 million). The EBITDA margin before special items advanced to 36.3%, with currency effects having a dilutive effect of 0.2 percentage points. EBIT amounted to €2,770 million (H1 2021: minus €1,730 million) after special charges of €1,324 million (H1 2021: €3,997 million) that primarily comprised the impairments mentioned above. 11 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 12 1. Overview of Sales, Earnings and Financial Position Pharmaceuticals A 7 Key Data – Pharmaceuticals Change (%)1 Change (%)1 € million Q2 2021 Q2 2022 Reported Fx & p adj. H1 2021 H1 2022 Reported Fx & p adj. Sales 4,494 4,818 + 7.2 + 2.1 8,859 9,442 + 6.6 + 2.4 Change in sales1 Volume + 16.5% + 2.4% + 9.8% + 3.1% Price – 0.3% – 0.3% – 2.4% – 0.7% Currency – 4.0% + 5.1% – 4.3% + 4.0% Portfolio + 0.4% 0.0% + 0.7% + 0.2% Sales by region Europe/Middle East/Africa 1,774 1,878 + 5.9 + 4.3 3,469 3,713 + 7.0 + 6.8 North America 1,032 1,149 + 11.3 – 0.6 2,028 2,169 + 7.0 – 3.2 Asia/Pacific 1,460 1,550 + 6.2 + 2.1 2,915 3,085 + 5.8 + 1.4 Latin America 228 241 + 5.7 – 2.9 447 475 + 6.3 – 0.6 EBITDA1 1,564 1,559 – 0.3 3,192 2,996 – 6.1 Special items1 155 81 285 129 EBITDA before special items1 1,409 1,478 + 4.9 2,907 2,867 – 1.4 EBITDA margin before special items1 31.4% 30.7% 32.8% 30.4% EBIT1 1,312 1,206 – 8.1 2,681 2,408 – 10.2 Special items1 152 (10) 277 38 EBIT before special items1 1,160 1,216 + 4.8 2,404 2,370 – 1.4 Net cash provided by operating activities 570 35 – 93.9 1,381 1,059 – 23.3 Cash flow-relevant capital expenditures 236 229 – 3.0 392 360 – 8.2 Research and development expenses 762 864 + 13.4 1,443 1,656 + 14.8 Fx & portfolio adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Second quarter of 2022 Sales Sales at Pharmaceuticals rose by 2.1% (Fx & portfolio adj.) to €4,818 million in the second quarter of 2022. Our new products, especially Nubeqa™ and Kerendia™, continued their successful market launch, with sales of our cancer treatment Nubeqa™ doubling compared with the prior-year quarter. However, overall sales growth was held back by additional tender procedures in China, particularly for Xarelto™ and Nexavar™. // Sales of our oral anticoagulant Xarelto™ decreased, largely due to lower prices and volumes in China as a result of tender procedures, as well as the expiration of our patent in Brazil. License revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson, were up against the prior-year quarter on a currency-adjusted basis. // Business with our ophthalmology drug Eylea™ expanded by a double-digit percentage, with gains in all regions. We were able to capture market share, particularly in Europe, thanks in part to the ongoing launch of Eylea™ prefilled syringes. // The decline in sales of our long-term contraceptives in the Mirena™ product family was largely attributable to a temporary change in usage patterns brought on by the pandemic. // We registered strong volume growth in China for Adalat™, our heart disease treatment, and Aspirin™ Cardio, our product for secondary prevention of heart attacks. // Sales of our pulmonary hypertension treatment Adempas™ continued to increase, particularly in the United States. As in the past, sales reflected the proportionate recognition of the upfront and milestone payments resulting from the sGC collaboration with Merck & Co., United States. Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 13 1. Overview of Sales, Earnings and Financial Position // The increase in sales of our cancer drug Stivarga™ was mainly attributable to expanded volumes in China and the United States. // Our radiology business, comprising the Gadovist™ and Ultravist™ product lines, posted a considerable increase in sales, largely driven by higher volumes in Europe, North and Latin America, and Asia/Pacific. A 8 Best-Selling Pharmaceuticals Products Change (%)1 Change (%)1 € million Q2 2021 Q2 2022 Reported Fx & p adj. H1 2021 H1 2022 Reported Fx & p adj. Xarelto™ 1,164 1,113 – 4.4 – 6.4 2,302 2,200 – 4.4 – 5.7 Eylea™ 711 807 + 13.5 + 11.7 1,382 1,581 + 14.4 + 12.8 Mirena™/Kyleena™/Jaydess™ 293 306 + 4.4 – 5.4 612 601 – 1.8 – 9.2 Adalat™ 174 212 + 21.8 + 11.2 349 451 + 29.2 + 18.6 Kogenate™/Kovaltry™/Jivi™ 211 212 + 0.5 – 5.6 396 420 + 6.1 + 0.4 YAZ™/Yasmin™/Yasminelle™ 191 212 + 11.0 + 4.4 376 410 + 9.0 + 5.0 Aspirin™ Cardio 159 201 + 26.4 + 18.9 343 388 + 13.1 + 6.9 Adempas™ 140 162 + 15.7 + 7.8 268 315 + 17.5 + 11.2 Stivarga™ 112 155 + 38.4 + 27.6 233 299 + 28.3 + 20.0 Gadovist™ product family 104 128 + 23.1 + 17.5 204 236 + 15.7 + 12.9 CT Fluid Delivery 111 118 + 6.3 – 2.4 214 235 + 9.8 + 2.6 Ultravist™ 90 112 + 24.4 + 18.4 170 217 + 27.6 + 22.2 Nubeqa™ 49 105 + 114.3 + 101.5 93 181 + 94.6 + 82.3 Nexavar™ 110 83 – 24.5 – 29.5 231 165 – 28.6 – 32.2 Betaferon™/Betaseron™ 80 75 – 6.3 – 14.2 169 158 – 6.5 – 11.7 Total best-selling products 3,699 4,001 + 8.2 + 3.2 7,342 7,857 + 7.0 + 3.1 Proportion of Pharmaceuticals sales 82% 83% 83% 83% Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items at Pharmaceuticals rose by 4.9% to €1,478 million in the second quarter of 2022 (Q2 2021: €1,409 million). Increased raw material costs and higher marketing investments in our new products were largely offset by the growth in sales. We also generated income from the sale of noncore businesses. There were positive currency effects of €41 million (Q2 2021: minus €26 million). The EBITDA margin before special items amounted to 30.7%. EBIT came in at €1,206 million (Q2 2021: €1,312 million) after net special charges of €10 million (Q2 2021: net special gains of €152 million), comprising special gains from the sale of our lormetazepam-based products and special charges from impairments on intangible assets due to changes in interest rates. A 9 Special Items1 Pharmaceuticals € million EBIT Q2 2021 EBIT Q2 2022 EBIT H1 2021 EBIT H1 2022 EBITDA Q2 2021 EBITDA Q2 2022 EBITDA H1 2021 EBITDA H1 2022 Restructuring (16) (145) (37) (151) (13) (145) (29) (151) Acquisition/integration (2) (1) (2) (2) (2) (1) (2) (2) Divestments 86 208 86 212 86 208 86 212 Litigations/legal risks 79 4 225 5 79 4 225 5 Impairment losses/loss reversals (2) (92) (2) (92) (2) – (2) – Other 7 16 7 66 7 15 7 65 Total special items 152 (10) 277 38 155 81 285 129 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 14 1. Overview of Sales, Earnings and Financial Position First half of 2022 Sales Sales at Pharmaceuticals rose by 2.4% (Fx & portfolio adj.) to €9,442 million in the first six months of 2022. This was mainly attributable to the expansion of business with our ophthalmology drug Eylea™ in all regions, and especially in Europe due to the ongoing launch of Eylea™ prefilled syringes. Sales of Xarelto™ declined, mainly due to tender procedures in China and the expiration of our patent in Brazil. We posted significant gains for Nubeqa™, largely thanks to expanded volumes in the United States. Earnings EBITDA before special items at Pharmaceuticals declined slightly in the first half of 2022, falling 1.4% to €2,867 million (H1 2021: €2,907 million), largely due to increased raw material costs and higher marketing investments in our new products. We also incurred higher research and development expenses compared to the prior-year period, which benefited from the proportionate recognition of €52 million in proceeds from the sale of a priority review voucher in the United States. By contrast, earnings benefited from the growth in sales, as well as income from the sale of noncore businesses. We also recorded a positive currency effect of €7 million (H1 2021: minus €83 million). The EBITDA margin before special items came in at 30.4%, with currency effects having a dilutive effect of 1.1 percentage points. EBIT amounted to €2,408 million (H1 2021: €2,681 million) after net special gains of €38 million (H1 2021: €277 million). Special gains from the sale of our lormetazepam-based products and from the measurement of contingent considerations at fair value were partly offset by special charges arising from impairments on intangible assets due to changes in interest rates. Consumer Health A 10 Key Data – Consumer Health Change (%)1 Change (%)1 € million Q2 2021 Q2 2022 Reported Fx & p adj. H1 2021 H1 2022 Reported Fx & p adj. Sales 1,290 1,496 + 16.0 + 6.8 2,542 3,008 + 18.3 + 11.9 Changes in sales1 Volume + 10.8% + 2.5% + 0.9% + 6.9% Price + 2.0% + 4.3% + 2.6% + 5.0% Currency – 6.4% + 8.7% – 6.7% + 5.9% Portfolio + 1.0% + 0.5% + 1.0% + 0.5% Sales by region Europe/Middle East/Africa 419 462 + 10.3 + 6.4 852 953 + 11.9 + 11.6 North America 503 611 + 21.5 + 7.7 973 1,192 + 22.5 + 11.3 Asia/Pacific 214 238 + 11.2 + 3.0 423 490 + 15.8 + 8.5 Latin America 154 185 + 20.1 + 10.3 294 373 + 26.9 + 20.1 EBITDA1 269 327 + 21.6 555 697 + 25.6 Special items1 (9) (3) (15) (21) EBITDA before special items1 278 330 + 18.7 570 718 + 26.0 EBITDA margin before special items1 21.6% 22.1% 22.4% 23.9% EBIT1 187 239 + 27.8 388 523 + 34.8 Special items1 (8) (3) (14) (21) EBIT before special items1 195 242 + 24.1 402 544 + 35.3 Net cash provided by operating activities 165 116 – 29.7 406 429 + 5.7 Cash flow-relevant capital expenditures 43 35 – 18.6 67 58 – 13.4 Research and development expenses 47 51 + 8.5 92 104 + 13.0 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 15 1. Overview of Sales, Earnings and Financial Position Second quarter of 2022 Sales Consumer Health posted strong growth in the second quarter of 2022. Sales advanced by 6.8% (Fx & portfolio adj.) year on year to €1,496 million, with business up in all regions. Sales of our cough and cold products grew significantly, especially in Europe and North America, due to continuously elevated cold incidence rates. In June, we also started selling Astepro™, a product that we switched from Rx to OTC status. It is the first and only steroid-free antihistamine nasal spray available over the counter on the U.S. market. After posting substantial gains since 2020, our Nutritionals category saw a slight decline but remained at a high level overall. // Sales in Europe/Middle East/Africa advanced markedly year on year, with our cough and cold products performing particularly well, especially Aspirin™. The Digestive Health and Dermatology categories also grew on the back of strong sales of Rennie™ and Bepanthen™. The Nutritionals business declined against a very strong prior-year quarter. // Our business in North America performed very well, largely driven by our cough and cold products, especially our Alka Seltzer™ product range. We also benefited from sales gains in the Digestive Health category, primarily due to continued strong demand for MiraLAX™. Sales in our Nutritionals business declined against a strong prior-year quarter. // We recorded moderate sales growth in Asia/Pacific, in a business environment that was adversely impacted by steps taken in China to contain the pandemic. While this particularly impacted the Digestive Health category with a strong decline in sales, we were able to more than offset this with increased sales in the Dermatology and Nutritionals categories, especially with Redoxon™. // We recorded strong sales growth in Latin America, with high demand for our cough and cold products. Sales were also up in the Pain & Cardio and Digestive Health categories. Following a very strong first quarter, the Nutritionals business saw a decline in sales. A 11 Sales by Category Change (%)1 Change (%)1 € million Q2 2021 Q2 2022 Reported Fx & p adj. H1 2021 H1 2022 Reported Fx & p adj. Consumer Health 1,290 1,496 + 16.0 + 6.8 2,542 3,008 + 18.3 + 11.9 Nutritionals 357 378 + 5.9 – 3.7 710 797 + 12.3 + 5.8 Allergy & Cold 244 315 + 29.1 + 16.9 479 659 + 37.6 + 27.6 Dermatology 288 329 + 14.2 + 8.0 568 642 + 13.0 + 9.7 Pain & Cardio 198 233 + 17.7 + 7.3 389 443 + 13.9 + 7.3 Digestive Health 185 226 + 22.2 + 13.1 363 439 + 20.9 + 14.3 Other 18 15 – 16.7 – 10.8 33 28 – 15.2 – 15.9 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items advanced by 18.7% to €330 million (Q2 2021: €278 million) in the second quarter of 2022. The growth in earnings was largely due to the strong rise in sales, as well as our continuous cost and price management efforts, which more than offset inflation-related increases in costs. Furthermore, we recorded one-time gains from the sale of a minor, nonstrategic brand. There were also positive currency effects of €49 million (Q2 2021: minus €20 million). The EBITDA margin before special items rose by 0.5 percentage points to 22.1%. EBIT came in at €239 million (Q2 2021: €187 million) after special charges of €3 million (Q2 2021: €8 million) relating to restructuring measures. Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Special Items1 Consumer Health € million EBIT Q2 2021 EBIT Q2 2022 EBIT H1 2021 EBIT H1 2022 EBITDA Q2 2021 EBITDA Q2 2022 EBITDA H1 2021 Restructuring (8) (3) (14) (21) (9) (3) (15) Total special items (8) (3) (14) (21) (9) (3) (15) 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” First half of 2022 Sales Sales at Consumer Health advanced by a substantial 11.9% (Fx & portfolio adj.) to €3,008 million in the first half of 2022. Our business grew in all regions and categories, with market-based demand shifts also contributing to this development. The major tailwinds came from the recovery of our business with cough and cold products following the lifting of heightened protection and hygiene measures, and the gains from continuously elevated cold incidence rates in the second quarter. The Dermatology and Digestive Health categories also performed well on the back of strong sales of Bepanthen™ and MiraLAX™. The Nutritionals category likewise contributed to the positive development of business. Earnings EBITDA before special items increased to €718 million (H1 2021: €570 million) in the first half of 2022. The growth in earnings was largely due to the strong rise in sales, as well as our continuous cost and price management efforts, which more than offset the impact of additional investment in marketing our innovative products and inflation-related increases in costs. Furthermore, we recorded one-time gains from the sale of minor, nonstrategic brands. There were also positive currency effects of €55 million (H1 2021: minus €46 million). The EBITDA margin before special items improved significantly, rising by 1.5 percentage points to 23.9%. Currency effects had a positive effect of 0.7 percentage points. EBIT came in at €523 million (H1 2021: €388 million) after special charges of €21 million (H1 2021: €14 million) relating to restructuring measures. 1.3 Asset and Financial Position of the Bayer Group Statement of Cash Flows A 13 Bayer Group Summary Statements of Cash Flows € million Q2 2021 Q2 2022 H1 2021 H1 2022 Net cash provided by (used in) operating activities (total) 1,997 2,104 (768) 1,378 Net cash provided by (used in) investing activities (total) 447 (2,771) 4,392 (2,029) Net cash provided by (used in) financing activities (total) (4,603) (1,814) (4,490) (739) Change in cash and cash equivalents due to business activities (2,159) (2,481) (866) (1,390) Cash and cash equivalents at beginning of period 5,550 5,790 4,191 4,564 Change due to exchange rate movements and to changes in scope of consolidation (2) 106 64 241 Cash and cash equivalents at end of period 3,389 3,415 3,389 3,415 Net cash provided by operating activities // Net operating cash flow in the second quarter of 2022 amounted to €2,104 million (Q2 2021: €1,997 million). This figure included settlement payments of €326 million (Q2 2021: €877 million) in connection with the glyphosate, PCB and Essure™ litigations. Net cash used in investing activities // Net investing cash flow in the second quarter of 2022 amounted to minus €2,771 million (Q2 2021: €447 million). // Net cash outflows for current financial assets totaled €2,261 million (Q2 2021: inflows of €930 million). The high outflows in the second quarter of this year were mainly attributable to investments in money market funds. 16 A 12 EBITDA H1 2022 (21) (21) Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Net cash used in financing activities // There was a net cash outflow of €1,814 million for financing activities in the second quarter of 2022 (Q2 2021: €4,603 million). // Net borrowings led to a cash inflow of €588 million (Q2 2021: net loan repayments of €2,255 million). // Net interest payments amounted to €436 million (Q2 2021: €383 million). // The Bayer Group paid out €1,966 million (2021: €1,965 million) in dividends. Free cash flow // Free cash flow (total) came in at €1,140 million in the second quarter of 2022 (Q2 2021: €1,152 million). Net financial debt A 14 Net Financial Debt1 € million Dec. 31, 2021 March 31, 2022 June 30, 2022 Change vs March 31 (%) Bonds and notes 37,593 39,225 38,088 – 2.9 of which hybrid bonds2 4,537 5,824 4,526 – 22.3 Liabilities to banks3 773 890 3,928 . Lease liabilities 1,165 1,146 1,194 + 4.2 Liabilities from derivatives4 69 142 106 – 25.4 Other financial liabilities 1,272 1,144 1,318 + 15.2 Receivables from derivatives4 (114) (129) (207) + 60.5 Financial debt 40,758 42,418 44,427 + 4.7 Cash and cash equivalents (4,564) (5,785) (3,412) – 41.0 Current financial assets5 (3,057) (2,106) (4,440) + 110.8 Net financial debt1 33,137 34,527 36,575 + 5.9 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Classified as debt according to IFRS 3 Including both financial and nonfinancial liabilities 4 Including the market values of interest-rate and currency hedges of recorded transactions 5 Including short-term receivables with maturities between 3 and 12 months outstanding from banks and other companies, financial investments in debt, and equity instruments that were recorded as current on first-time recognition // Net financial debt of the Bayer Group increased by €2.1 billion in the second quarter of 2022 to €36.6 billion (March 31, 2022: €34.5 billion). Cash inflows from operating activities did not fully offset the outflows for the dividend payment and negative currency effects. // Bayer AG placed new hybrid bonds with a total volume of €1.3 billion in March 2022. The proceeds were used for general corporate purposes, including financing the early repayment of the €1.3 billion hybrid bond that was callable on October 2, 2022. The repayment took place in April and May 2022. In addition, two bonds with a total volume of US$250 million (€229 million) were redeemed before maturity, while one bond with a nominal volume of €750 million and one with a nominal volume of JPY10 billion (€73 million) were redeemed at maturity in the second quarter of 2022. // In May 2022, Bayer AG agreed and drew on a credit line of €3 billion. The liquidity is invested in money market funds and is intended to help the company manage risks in the event that the current geopolitical situation deteriorates. 17 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position // The rating agencies currently assess Bayer as follows: A 15 Rating Rating agency Long-term rating Short-term rating Outlook S&P Global Ratings BBB A2 stable Moody’s Baa2 P2 negative Fitch Ratings BBB+ F2 stable Asset and capital structure A 16 Bayer Group Summary Statements of Financial Position € million Dec. 31, 2021 March 31, 2022 June 30, 2022 Change vs. March 31 % Noncurrent assets 87,663 87,536 89,244 + 2.0 Assets held for sale 76 1,359 1,600 + 17.7 Other current assets 32,502 36,887 37,950 + 2.9 Current assets 32,578 38,246 39,550 + 3.4 Total assets 120,241 125,782 128,794 + 2.4 Equity 33,168 37,607 38,204 + 1.6 Noncurrent liabilities 57,670 57,156 56,947 – 0.4 Current liabilities 29,403 31,019 33,643 + 8.5 Liabilities 87,073 88,175 90,590 + 2.7 Total equity and liabilities 120,241 125,782 128,794 + 2.4 Prior-period figures restated // Between the first quarter and June 30, 2022, total assets increased by €3.0 billion to €128.8 billion. // Noncurrent assets rose by €1.7 billion to €89.2 billion in the second quarter. This effect was mainly attributable to the foreign currency measurement as of the closing date, particularly for goodwill (€1.9 billion) and other intangible assets (€1.3 billion). At the same time, impairment losses at the Crop Science and Pharmaceuticals divisions caused noncurrent assets to drop by €1.5 billion. // Total current assets rose by €1.3 billion to €39.6 billion. Here as well, the foreign currency measurement as of June 30, 2022, was a factor, particularly for inventories and trade accounts receivable. While financial assets increased by €2.2 billion driven by investments in money market funds, cash and cash equivalents decreased due to the dividend payment. // Equity rose by €0.6 billion compared with March 31, 2022, to €38.2 billion. This effect resulted from the currency translation of equity items recognized outside profit or loss (+€2.2 billion) and changes – recognized outside profit or loss – in the pension discount rate and in the fair value measurement of plan assets (+€0.7 billion, taking deferred taxes into account). By contrast, the dividend payment had a negative effect (€2.0 billion) as did the net loss for the quarter after income taxes (€0.3 billion). The equity ratio fell to 29.7% as of June 30, 2022 (March 31, 2022: 29.9%). // Liabilities rose by €2.4 billion in the second quarter to €90.6 billion. Of particular note were the €2.1 billion increase in financial liabilities (+€1.3 billion from currency translation of USD bonds as of June 30, 2022, –€1.3 billion from repayment of the previous hybrid bond in April and May, –€1.1 billion from repayment of JPY, USD, and EUR bonds, as well as +€3.0 billion for the utilization of an additional credit facility), the €0.8 billion rise in provisions for litigations, and additional effects from foreign currency measurement (€1.8 billion). A drop in advance payments received led to a €0.9 billion rise in refund liabilities for expected rebates at our Crop Science business. This was primarily offset by the reduction in provisions for pensions due to an increase in the discount rate (€1.3 billion) and the utilization of pension provisions in connection with variable, performance-related one-time payments to employees (€1.4 billion). 18 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 2. Research, Development, Innovation 2. Research, Development, Innovation Crop Science Collaborations In April, we announced the expansion of our strategic partnership with Ginkgo Bioworks. Under the agreement, the U.S. biotech company will acquire our West Sacramento Biologics Research & Development (R&D) site and internal discovery and lead optimization platform. The transaction will also bring the nitrogen-fixing technologies of the joint venture Joyn Bio to our company. Ginkgo Bioworks will become a multi-year strategic partner in our work to develop biological solutions in fields like nitrogen optimization, carbon sequestration and next-generation crop protection. The transaction will enable us to expand our leading biologicals position, strengthen our access to key enabling technology in synthetic biology, and maintain our role as the preferred research, development and commercial partner in the biologics segment. Pharmaceuticals We regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceutical projects. Phase II and III clinical projects The following table shows our most important drug candidates currently in Phase II of clinical testing: A 17 Research and Development Projects (Phase II) Project Indication Adrenomedullin Pegol (PEG-ADM inhale) Acute respiratory syndrome Asundexian (FXIa inhibitor) Prevention of stroke in atrial fibrillation patients Asundexian (FXIa inhibitor) Secondary prevention of stroke Asundexian (FXIa inhibitor) Prevention of major adverse cardiac events (MACE) Gadoquatrane (BAY 1747846, high relaxivity contrast agent) Magnetic resonance imaging BAY 2395840 (BDKRB1 antagonist) Neuropathic pain Fesomersen (BAY 2976217, FXI LICA, IONIS-FXI-LRX)1 Prevention of thrombosis in end-stage renal disease (ESRD) Osocimab (anti-FXIa antibody) Prevention of thrombosis in end-stage renal disease (ESRD) Regorafenib + nivolumab combination2 Recurrent or metastatic solid tumors Regorafenib + pembrolizumab combination Second-line therapy of unresectable hepatocellular carcinoma Runcaciguat (sGC activator) Chronic kidney disease Runcaciguat (sGC activator) Non-proliferative diabetic retinopathy As of June 17, 2022 1 In collaboration with Ionis Pharmaceuticals, Inc., United States 2 In collaboration with Bristol-Myers Squibb Company Co., United States, and Ono Pharmaceutical Co., Ltd., Japan 19 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 2. Research, Development, Innovation The following table shows our most important drug candidates currently in Phase III of clinical testing: A 18 Research and Development Projects (Phase III) Project Indication High-dose aflibercept (VEGF inhibitor)1 Diabetic macular edema (DME) High-dose aflibercept (VEGF inhibitor)1 Neovascular age-related macular degeneration (nAMD) Copanlisib (PI3K inhibitor) + chemotherapy combination Second-line therapy of indolent non-Hodgkin lymphoma (iNHL) Darolutamide (ODM-201, AR antagonist) Hormone-sensitive metastatic prostate cancer Darolutamide (ODM-201, AR antagonist)/ADT without chemotherapy Adjuvant treatment for localized prostate cancer with very high risk of recurrence Elinzanetant (neurokinin 1,3 receptor antagonist) Vasomotor symptoms Finerenone (MR antagonist) Heart failure with mid-range or preserved ejection fraction Finerenone (MR antagonist) Non-diabetic chronic kidney disease Regorafenib (multikinase inhibitor) Newly diagnosed or recurrent glioblastoma Vericiguat (sGC activator)2 Stable heart failure with reduced ejection fraction (HFrEF) As of June 17, 2022 1 In collaboration with Regeneron Pharmaceuticals, Inc., United States 2 In collaboration with Merck & Co., Inc., United States The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and/or commercial reasons and will not result in commercialized products. It is also possible that the requisite U.S. Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceutical projects. The following material developments occurred in the first half of 2022: Asundexian // In April, we presented positive results from the first Phase IIb trial, PACIFIC-AF, on the safety of asundexian in patients with atrial fibrillation. By selectively modulating coagulation, once-daily FXIa inhibitor asundexian is being investigated to become a new treatment option in thrombosis prevention. TASK channel blocker // In April, based on the results of the Spray Smart study, we decided to not pursue further development activities for the TASK (TWIK-related Acid-Sensitive K+) channel blocker in the indication of obstructive sleep apnea. Pecavaptan // In March, we decided to not pursue further development activities for pecavaptan, a dual vasopressin receptor antagonist, in the indication of heart failure due to scientific reasons. Filings and approvals The most important drug candidates in the approval process are: A 19 Main Products Submitted for Approval Project Region Indication Aflibercept (VEGF inhibitor)1 EU, Japan Retinopathy of prematurity Darolutamide (ODM-201, AR antagonist)/ ADT with chemotherapy U.S.A., EU, Japan, China Hormone-sensitive metastatic prostate cancer Rivaroxaban (FXa inhibitor) China Peripheral artery disease (PAD) As of June 21, 2022 1 In collaboration with Regeneron Pharmaceuticals, Inc., United States 20 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 2. Research, Development, Innovation Finerenone // In February, based on the positive results of the Phase III FIDELIO-DKD study, we received marketing authorization in the European Union for Kerendia™ (finerenone) for the treatment of chronic kidney disease (stage 3 and 4 with albuminuria) associated with type 2 diabetes in adults. In March, this product was approved in Japan for the treatment of chronic kidney disease and type 2 diabetes in adults, excluding patients with end-stage renal disease or on dialysis. The approval was based on the results of the Phase III FIDELIO-DKD and FIGARO-DKD studies. In June, we received marketing authorization for finerenone in China under the brand name Kerendia™ for the treatment of chronic kidney disease (eGFR of ≥ 25 to 75 mL/min/1.73 m2 with albuminuria) associated with type 2 diabetes in adults, to reduce the risk of sustained eGFR decline and end-stage kidney disease. The approval of finerenone in China is based on the results of the Phase III FIDELIO-DKD study. // In March, based on positive data from the Phase III FIGARO-DKD study, we submitted a type II variation application in the European Union to seek an extension of the finerenone marketing authorization to include early stages of chronic kidney disease associated with type 2 diabetes. Rivaroxaban (FXa inhibitor) // In June, the oral Factor Xa inhibitor rivaroxaban (Xarelto™) was approved in Japan for the treatment of patients with peripheral artery disease (PAD) after revascularization (twice daily, used in combination with aspirin). The approval is based on data from the Phase III VOYAGER PAD trial. Vericiguat // In May, vericiguat was approved in China under the brand name Verquvo™ for the treatment of adults with symptomatic chronic heart failure and reduced ejection fraction (less than 45%) who are stabilized after a recent decompensation event with intravenous therapy. In clinical studies, the drug lowered the risk of heart failure hospitalization or the need for intravenous diuretics in emergency care. Darolutamide // In March, based on positive data from the Phase III ARASENS trial, we submitted a supplemental new drug application in the United States for the oral androgen receptor inhibitor Nubeqa™ for the treatment of metastatic hormone-sensitive prostate cancer (mHSPC), and were granted priority review status for this product. We also submitted applications in the European Union and Japan to expand the product’s approval in this indication. // The ARASENS trial demonstrated a statistically significant improvement in overall survival for darolutamide plus androgen deprivation therapy (ADT) and docetaxel in patients with mHSPC compared with patients who had only received ADT plus docetaxel. Calantic radiology platform // In June, we announced the launch of Calantic™ Digital Solutions, a new platform delivering access to digital applications, including artificial intelligence enabled programs for medical imaging. The vendor- neutral, cloud-hosted platform expands the company’s radiology portfolio beyond contrast media, injection systems, software and services. It includes a growing number of medical imaging applications designed to aid in prioritization, lesion detection and quantification, as well as apps that automate routine tasks and measurements, improve the radiology suites’ workflow, and free up time for radiologists and their teams. First launch markets will include the United States and several European countries including Germany, with more regions to follow upon local regulatory approvals. 21 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 2. Research, Development, Innovation Cell and gene therapy We have invested more than €2.5 billion in recent years to assemble a cell and gene therapy platform. This includes the acquisitions of BlueRock and AskBio, as well as strategic collaborations (such as the partnership with Mammoth Biosciences), enabling us to establish a future-oriented innovation base and pipeline. Our development portfolio already comprises seven projects in various stages of clinical development that cover several therapeutic areas with a high unmet medical need – with leading programs in Parkinson’s disease, Pompe disease, hemophilia A and congestive heart failure. The following material developments occurred in the first half of 2022: // In May, BlueRock completed enrollment of its Phase I trial of BRT-DA01, a novel cell therapy for the treatment of Parkinson’s disease. // Also in May, we ended our collaboration with Atara Biotherapeutics (Atara), which had been based on a license agreement for mesothelin-targeted CAR-T cell therapies to treat solid tumors. // In June, we announced the establishment of the BlueRock site for cell therapy innovation on our campus in Berlin to enable the expansion and acceleration of the company’s clinical trials in Europe. Consumer Health In the first half of the year, we launched One-A-Day™ Multi+, a line of complete gummy multivitamins, on the North American market. These four additions to our portfolio make it easy to get daily nutritional support plus a choice of boost for immunity defense (Adults or Teens versions), brain support, and healthy hair, skin and nails. We also switched Astepro™ from Rx to OTC status. Astepro™ relieves nasal congestion, sneezing and a runny or itchy nose due to hay fever or other upper respiratory allergies. The OTC switch for Astepro™ means that we are marketing the first and only steroid-free antihistamine nasal spray on the U.S. market that is available over the counter for adults and children aged six and above that works in 30 minutes and lasts 24 hours. Leaps by Bayer Leaps by Bayer, our impact investment unit, invested in six healthcare ventures in the first half of 2022. In January 2022, Leaps announced its investment in a financing round of Cellino Biotech. Cellino’s next- generation manufacturing platform combines artificial intelligence (AI) and laser technology to automate cell therapy manufacturing with the aim of reducing expenditures, overcoming scaling limitations and thereby expanding patient access. Affini-T Therapeutics, Leaps’ largest investment in the first half of the year, is leveraging the characteristics of T cells and targeting core oncogenic driver mutations to develop potentially curative medicines for patients with difficult-to-treat solid tumor cancers. With the addition of Woebot Health to its portfolio, Leaps expanded its investment areas and made its first investment in the mental health space. Woebot is developing scalable, engaging therapeutic solutions by combining AI, decades of clinically proven therapeutic research and an engaging relational agent. 22 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook A 20 Economic Outlook1 Growth 2021 Growth forecast 2022 World + 5.8% + 2.7% European Union2 + 5.3% + 2.6% of which Germany + 2.9% + 1.7% United States + 5.7% + 1.4% Emerging Markets3 + 6.9% + 3.4% 1 Real GDP growth, source: IHS Markit (as of July 2022) 2 EU excluding United Kingdom 3 Including about 50 countries defined by IHS Markit as Emerging Markets in line with the World Bank The global economic climate has worsened considerably since the beginning of the year. The war in Ukraine has shaken industry and consumer confidence and driven up energy prices, particularly in Europe. Further lockdowns in China as a result of the country’s zero-COVID policy have additionally hampered the already strained global supply chains and intensified the cost pressure. In view of high inflation rates, the central banks are compelled to end their expansionary monetary policy and hike interest rates. These developments are leading to much lower growth expectations worldwide. Some regions, including Europe and the United States, may even see a recession over the further course of the year. The economic outlook continues to involve a considerable degree of uncertainty, especially with respect to factors relating to the war in Ukraine. A 21 Economic Outlook for Division-Specific Markets Growth 2021 Growth forecast 2022 Seed and crop protection market1 + 9% + 10% Pharmaceuticals market2 + 8% + 6% Consumer health market3 + 6% + 5% 1 Bayer’s estimate (as of July 2022) 2 Source: IQVIA Market Prognosis (as of May 2022), all rights reserved; currency-adjusted 3 Source for outlook: Bayer’s estimate (as of May 2022), taking into account external sources; currency-adjusted We now expect increased growth of 10% (previously: +5%) in the seed and crop protection market for 2022, driven by continuously high commodity prices encouraging investment in high-quality seeds as well as inflation-related price increases for both seeds and crop protection products. We expect the pharmaceuticals market to expand by about 6% (previously: +5%) in 2022. Innovative products will continue to drive growth and more than offset losses due to the expiration of patents. We now expect growth of 5% (previously: +4%) in the consumer health market for 2022, mainly due to economic conditions resulting in price increases and consumers’ continued focus on health and wellness. 23 Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 24 3. Report on Future Perspectives and on Opportunities and Risks 3.1.2 Corporate Outlook Following the positive development of our business in the first half of 2022, we remain optimistic for the remainder of the year. We are therefore raising our guidance for the Crop Science and Consumer Health divisions, and thus also for the Group as a whole. To enhance the comparability of operational performance, we are presenting this guidance based on the average monthly exchange rates from 2021. We do not currently see any material financial impact on the development of our business in 2022 as a result of the uncertain geopolitical situation and gas supplies. For fiscal 2022, we now expect to generate currency-adjusted sales of €47 billion to €48 billion (previously: approximately €46 billion). This now corresponds to an increase of about 8% on a currency- and portfolio- adjusted basis (previously: about 5%). We are now targeting an EBITDA margin before special items of around 26% to 27% (previously: around 26%) on a currency-adjusted basis. Based on the aforementioned sales figure, this would now correspond to EBITDA before special items of around €12.5 billion (previously: around €12.0 billion) on a currency-adjusted basis. We now expect core earnings per share to come in at approximately €7.30 (previously: approximately €7.00) on a currency-adjusted basis. Based on the closing exchange rates as of June 30, 2022, we now expect to generate sales of €50 billion to €51 billion (previously: approximately €47 billion). This now corresponds to an increase of about 8% on a currency- and portfolio-adjusted basis (previously: about 5%). We are now targeting an EBITDA margin before special items of approximately 26% to 27% (previously: approximately 26%). Based on the aforementioned sales figure, this would now correspond to EBITDA before special items of around €13.0 billion (previously: around €12.0 billion). We now expect core earnings per share to come in at approximately €7.70 (previously: approximately €7.10). A 22 Forecast for 2022 Initial currency-adjusted forecast for 2022 Revised currency- adjusted forecast for 2022 Initial forecast for 2022 at closing rates on Dec. 31, 2021 Revised forecast for 2022 at closing rates on June 30, 2022 € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) Sales ~46 ~+5 47 to 48 ~+8 ~47 ~+5 50 to 51 ~+8 Crop Science ~+7 ~+13 ~+7 ~+13 Pharmaceuticals ~+3 to 4 ~+3 to 4 ~+3 to 4 ~+3 to 4 Consumer Health ~+4 to 5 ~+6 to 7 ~+4 to 5 ~+6 to 7 Margin (%) Margin (%) Margin (%) Margin (%) EBITDA before special items1 ~26 ~26 to 27 ~26 ~26 to 27 Crop Science ~25 to 26 ~27 ~25 to 26 ~27 Pharmaceuticals ~32 ~32 ~32 ~31 Consumer Health ~22 to 23 ~22 to 23 ~22 to 23 ~22 to 23 Financial result (core)2 ~-1.5 ~-1.8 ~-1.5 ~-1.8 Tax rate (core)3 23% 23% 23% 23% Free cash flow1 ~2.0 to 2.5 ~2.5 ~2.0 to 2.5 ~2.5 Net financial debt1 ~33 to 34 ~33 to 34 ~33 to 34 ~34 to 35 Special items in EBIT ~-1.0 ~-2.5 ~-1.0 ~-2.5 € € € € Core earnings per share1 ~7.00 ~7.30 ~7.10 ~7.70 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Financial result before special items 3 (Income taxes + special items in income taxes + tax effects on adjustments) / (core EBIT + financial result + special items in financial result) Bayer Half-Year Financial Report as of June 30, 2022 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks We now plan to take total special charges (currency-adjusted) in EBIT of around €2.5 billion (previously: around €1 billion). As before, we expect to take special charges in EBITDA of around €1.0 billion. Potential estimation risks regarding litigations are referenced in the 2021 Annual Report, Note [30] “Legal Risks” and Chapter A 3.2 “Opportunity and Risk Report.” 3.2 Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal and external developments and events that could significantly impact the achievement of our financial and nonfinancial objectives. Opportunity and risk management at Bayer forms an integral part of the Group- wide corporate governance system. Our opportunity and risk management process and the fundamental opportunity and risk status are outlined in detail in the Annual Report 2021, A 3.2 “Opportunity and Risk Report.” In comparison to our Annual Report 2021, further geopolitical risks are arising in connection with Russia’s war in Ukraine. Both the direct influence of the war as well as the influence due to applicable sanctions may negatively impact our business, for example, our (energy) costs, availability of energy – especially in case of a gas embargo/gas supply suspension – supply chain (disruptions), sales, earnings and cash flows. Generally, the implications of the war are unpredictable and have the potential to significantly impact financial markets and economies, leading, for example, to high volatility of foreign exchange rates and an economic slowdown. Thus, our market environment and, consequently, our business performance may be negatively impacted. We are preparing for these challenges with global and local operational crisis management, energy-related task forces and other interdisciplinary teams setting up mitigation measures such as building additional financial buffers and diversification of energy sources. Overall assessment by the Board of Management We currently have identified an increase in our risk situation compared with the assessment given in the 2021 Annual Report, as a result of Russia’s war in Ukraine. In the opinion of the Board of Management, the Bayer Group’s continued existence remains unendangered. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2021 (Note [30] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” 25 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements as of June 30, 2022 Bayer Group Consolidated Income Statements B 1 € million Q2 2021 Q2 2022 H1 2021 H1 2022 Net sales 10,854 12,819 23,182 27,458 Cost of goods sold (4,546) (5,680) (9,244) (10,856) Gross profit 6,308 7,139 13,938 16,602 Selling expenses (2,964) (3,736) (5,843) (7,020) Research and development expenses (1,638) (1,928) (2,836) (3,382) General administration expenses (783) (736) (1,425) (1,397) Other operating income 537 780 887 1,289 Other operating expenses (3,741) (1,350) (3,919) (1,711) EBIT1 (2,281) 169 802 4,381 Equity-method income (loss) 105 (39) 79 (59) Financial income 271 50 369 117 Financial expenses (475) (703) (895) (1,240) Financial result (99) (692) (447) (1,182) Income before income taxes (2,380) (523) 355 3,199 Income taxes 52 234 (593) (194) Income after income taxes (2,328) (289) (238) 3,005 of which attributable to noncontrolling interest 7 9 8 12 of which attributable to Bayer AG stockholders (net income) (2,335) (298) (246) 2,993 € Earnings per share Basic (2.38) (0.30) (0.25) 3.05 Diluted (2.38) (0.30) (0.25) 3.05 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 26 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Comprehensive Income Bayer Group Consolidated Statements of Comprehensive Income B 2 € million Q2 2021 Q2 2022 H1 2021 H1 2022 Income after income taxes (2,328) (289) (238) 3,005 of which attributable to noncontrolling interest 7 9 8 12 of which attributable to Bayer AG stockholders (2,335) (298) (246) 2,993 Remeasurements of the net defined benefit liability for post-employment benefit plans 50 1,100 1,128 1,286 Income taxes (4) (406) (312) (511) Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans 46 694 816 775 Changes in the fair value of equity instruments measured at fair value 135 (47) 212 (104) Income taxes (4) 14 (4) 15 Other comprehensive income from equity instruments measured at fair value 131 (33) 208 (89) Other comprehensive income relating to associates accounted for using the equity method 25 – 25 – Other comprehensive income that will not be reclassified subsequently to profit or loss 202 661 1,049 686 Changes in the fair value of cash flow hedges (62) (185) (13) (182) Reclassified to profit or loss 5 139 (50) 147 Income taxes 20 6 20 13 Other comprehensive income from cash flow hedges (37) (40) (43) (22) Changes in time value of options used as hedging instrument – (1) (2) (8) Income taxes – 3 1 3 Other comprehensive income from time value of options – 2 (1) (5) Other comprehensive income from available-for-sale financial assets – – – 1 Other comprehensive income from exchange differences (70) 2,226 1,077 3,333 Other comprehensive income relating to associates accounted for using the equity method (4) 1 (2) 2 Other comprehensive income that may be reclassified subsequently to profit or loss (111) 2,189 1,031 3,309 Total other comprehensive income1 91 2,850 2,080 3,995 of which attributable to noncontrolling interest (6) 6 3 7 of which attributable to Bayer AG stockholders 97 2,844 2,077 3,988 Total comprehensive income (2,237) 2,561 1,842 7,000 of which attributable to noncontrolling interest 1 15 11 19 of which attributable to Bayer AG stockholders (2,238) 2,546 1,831 6,981 2021 figures restated resulting from the completion of the purchase price allocation for AskBio in the fourth quarter of 2021 1 Other comprehensive income is recognized outside profit or loss in equity. 27 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Financial Position Bayer Group Consolidated Statements of Financial Position B 3 € million June 30, 2021 Dec. 31, 2021 June 30, 2022 Noncurrent assets Goodwill 37,316 40,106 41,583 Other intangible assets 24,684 26,258 25,367 Property, plant and equipment 11,843 12,688 13,275 Investments accounted for using the equity method 576 629 762 Other financial assets 1,625 2,026 2,030 Other receivables 1,199 1,376 1,155 Deferred taxes 4,470 81,713 4,580 87,663 5,072 89,244 Current assets Inventories 10,125 11,314 11,371 Trade accounts receivable 13,071 10,047 14,785 Other financial assets 3,109 3,342 4,782 Other receivables 1,559 1,709 1,815 Claims for income tax refunds 1,182 1,526 1,785 Cash and cash equivalents 3,389 4,564 3,412 Assets held for sale 32 32,467 76 32,578 1,600 39,550 Total assets 114,180 120,241 128,794 Equity Capital stock 2,515 2,515 2,515 Capital reserves 18,261 18,261 18,261 Other reserves Equity attributable to Bayer AG stockholders 9,613 30,389 12,244 33,020 17,243 38,019 Equity attributable to noncontrolling interest 166 30,555 148 33,168 185 38,204 Noncurrent liabilities Provisions for pensions and other post-employment benefits 7,512 7,175 5,665 Other provisions 7,182 8,776 8,294 Refund liabilities 142 283 166 Contract liabilities 650 770 635 Financial liabilities 36,669 36,481 38,061 Income tax liabilities 1,638 1,601 1,672 Other liabilities 1,184 1,653 1,618 Deferred taxes 679 55,656 931 57,670 836 56,947 Current liabilities Other provisions 7,947 6,823 7,152 Refund liabilities 6,877 4,564 7,985 Contract liabilities 1,305 4,052 2,174 Financial liabilities 3,707 4,391 6,573 Trade accounts payable 5,113 6,792 6,097 Income tax liabilities 926 686 1,036 Other liabilities 2,094 2,095 2,513 Liabilities directly related to assets held for sale – 27,969 – 29,403 113 33,643 Total equity and liabilities 114,180 120,241 128,794 2021 figures restated resulting from the completion of the purchase price allocation for AskBio in the fourth quarter of 2021 28 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows B 4 € million Q2 2021 Q2 2022 H1 2021 H1 2022 Income after income taxes (2,328) (289) (238) 3,005 Income taxes (52) (234) 593 194 Financial result 99 692 447 1,182 Income taxes paid (687) (526) (1,140) (968) Depreciation, amortization and impairment losses (loss reversals) 1,390 2,482 2,476 3,562 Change in pension provisions (70) (76) (185) (147) (Gains) losses on retirements of noncurrent assets (104) (296) (119) (339) Decrease (increase) in inventories 308 (225) 841 219 Decrease (increase) in trade accounts receivable (64) 353 (3,335) (3,833) (Decrease) increase in trade accounts payable (63) 68 (680) (990) Changes in other working capital, other noncash items 3,568 155 572 (507) Net cash provided by (used in) operating activities 1,997 2,104 (768) 1,378 Cash outflows for additions to property, plant, equipment and intangible assets (493) (550) (822) (899) Cash inflows from the sale of property, plant, equipment and other assets 115 261 272 457 Cash outflows for divestments less divested cash – – (57) – Cash inflows from noncurrent financial assets 4 3 357 3 Cash outflows for noncurrent financial assets (121) (231) (267) (314) Cash outflows for acquisitions less acquired cash (19) (15) (23) (15) Interest and dividends received 31 22 41 47 Cash inflows from (outflows for) current financial assets 930 (2,261) 4,891 (1,308) Net cash provided by (used in) investing activities 447 (2,771) 4,392 (2,029) Capital contributions – – – 15 Dividend payments (1,965) (1,966) (1,965) (1,966) Issuances of debt 282 4,192 4,495 6,471 Retirements of debt (2,537) (3,604) (6,495) (4,686) Interest paid including interest-rate swaps (391) (441) (547) (614) Interest received from interest-rate swaps 8 5 22 41 Net cash provided by (used in) financing activities (4,603) (1,814) (4,490) (739) Change in cash and cash equivalents due to business activities (2,159) (2,481) (866) (1,390) Cash and cash equivalents at beginning of period 5,550 5,790 4,191 4,564 Change in cash and cash equivalents due to changes in scope of consolidation – – – 3 Change in cash and cash equivalents due to exchange rate movements (2) 106 64 238 Cash and cash equivalents at end of period 3,389 3,415 3,389 3,415 29 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Bayer Group Consolidated Statements of Changes in Equity Bayer Group Consolidated Statements of Changes in Equity B 5 € million Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity Jan. 1, 2021 2,515 18,261 9,747 30,523 152 30,675 Total comprehensive income Income after income taxes (246) (246) 8 (238) Other comprehensive income 2,077 2,077 3 2,080 Miscellaneous other changes Equity transactions with owners Dividend payments (1,965) (1,965) (1,965) Other changes 3 3 June 30, 2021 2,515 18,261 9,613 30,389 166 30,555 Jan. 1, 2022 2,515 18,261 12,244 33,020 148 33,168 Total comprehensive income Income after income taxes 2,993 2,993 12 3,005 Other comprehensive income 3,988 3,988 7 3,995 Miscellaneous other changes Equity transactions with owners Dividend payments (1,965) (1,965) (1) (1,966) Other changes (17) (17) 19 2 June 30, 2022 2,515 18,261 17,243 38,019 185 38,204 2021 figures restated resulting from the completion of the purchase price allocation for AskBio in the fourth quarter of 2021 30 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Explanatory Notes Accounting policies The consolidated interim financial statements as of June 30, 2022, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2021 fiscal year, particularly with regard to the main recognition and valuation principles. As regards those Notes’ listed standards, amendments and interpretations to be applied for the first time in fiscal 2022, none had any material impact on the Bayer Group this fiscal year. Impact of COVID-19 Protective measures and contact restrictions have largely been lifted. Uncertainties remain, however, with the prospect of further COVID outbreaks as a result of new variants, for instance. We do not currently see any material negative impact on our business operations and thus the Group’s financial position or results of operations. We will continue to closely monitor the effects of the pandemic, including in particular the impact on inventories, customer receivables and significant estimates regarding goodwill and other intangible assets. Impact of Russia’s invasion of Ukraine Group sales and earnings as well as its financial position and results of operations were only marginally impacted by the war and its direct consequences in the second quarter. We did not register any major increase in past-due receivables in Russia or Ukraine. Based on a risk analysis conducted at the level of individual customers, we wrote down the value of receivables by €35 million. Gas and energy provision as well as global supply chains may also be disrupted as a result of the war. At Bayer, energy costs accounted for about 3% of the total cost of goods sold in fiscal 2021. We are in the process of analyzing the specific effects of various scenarios on our business and potential solutions and cannot yet conclusively quantify these. We have meanwhile developed a series of measures to reduce our natural gas needs and have already implemented some of these. We are also expanding our network of suppliers and building up additional inventories to continue to ensure supply security. The stability of payment transactions both within Russia and at an international level is subject to considerable uncertainties, and we are evaluating suitable risk mitigation measures. We are continually analyzing the future direct and indirect effects of economic developments and sanctions on the valuation of individual assets and liabilities. 31 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: B 6 Exchange Rates for Major Currencies Closing rate Average rate €1 Dec. 31, 2021 June 30, 2021 June 30, 2022 H1 2021 H1 2022 BRL Brazil 6.31 5.90 5.42 6.49 5.53 CAD Canada 1.44 1.47 1.34 1.50 1.39 CNY China 7.20 7.69 6.97 7.80 7.09 GBP United Kingdom 0.84 0.86 0.86 0.87 0.84 JPY Japan 130.41 131.47 141.63 129.76 134.08 RUB Russia 85.35 86.75 56.38 89.58 81.00 USD United States 1.13 1.19 1.04 1.21 1.09 B 7 Application of IAS 29 (Financial Reporting in Hyperinflation Economies) Company name Place of business Applied since Bayer S. A. Buenos Aires, Argentina July 1, 2018 Bayer Türk Kimya Sanayii Limited Sirketi Istanbul, Turkey April 1, 2022 Monsanto Gida Ve Tarim Ticaret Ltd Sirketi Istanbul, Turkey April 1, 2022 The effects in initial and ongoing accounting have so far been immaterial for the Group. The most important interest rates used to calculate the present value of pension obligations are given below: B 8 Discount Rate for Pension Obligations % Dec. 31, 2021 June 30, 2021 June 30, 2022 Germany 1.20 1.10 3.30 United Kingdom 1.80 1.80 3.60 United States 2.80 2.70 4.60 The long-term trend for pensions in Germany was adjusted due to higher inflation expectations and had an impact of €1,400 million in the first half of 2022. Changes in discount rates had an opposing effect of €6,111 million. 32 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Segment reporting As of June 30, 2022, the Bayer Group comprised the three reportable segments Crop Science, Pharmaceuticals and Consumer Health. B 9 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million Q2 2021 Q2 2022 Q2 2021 Q2 2022 Q2 2021 Q2 2022 Net sales (external) 5,021 6,461 4,494 4,818 1,290 1,496 Currency- and portfolio-adjusted change1 + 10.6% + 17.2% + 16.2% + 2.1% + 12.8% + 6.8% Intersegment sales 3 2 3 (2) – – Net sales (total) 5,024 6,463 4,497 4,816 1,290 1,496 EBIT1 (3,483) (258) 1,312 1,206 187 239 EBITDA before special items1 1,018 1,749 1,409 1,478 278 330 Net cash provided by operating activities 1,734 2,551 570 35 165 116 Depreciation, amortization, impairment losses/loss reversals 987 1,959 252 353 82 88 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 9 (continued) Reconciliation All other segments Enabling functions and consolidation Group € million Q2 2021 Q2 2022 Q2 2021 Q2 2022 Q2 2021 Q2 2022 Net sales (external) 40 42 9 2 10,854 12,819 Currency- and portfolio-adjusted change1 – 16.0% – 10.8% – – + 12.9% + 9.6% Intersegment sales – 1 (6) (2) – – Net sales (total) 40 43 3 0 10,854 12,819 EBIT1 7 (30) (304) (988) (2,281) 169 EBITDA before special items1 25 (11) (153) (197) 2,577 3,349 Net cash provided by (used in) operating activities 35 (8) (507) (590) 1,997 2,104 Depreciation, amortization, impairment losses/loss reversals 18 19 51 63 1,390 2,482 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 10 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million H1 2021 H1 2022 H1 2021 H1 2022 H1 2021 H1 2022 Net sales (external) 11,667 14,908 8,859 9,442 2,542 3,008 Currency- and portfolio-adjusted change1 + 8.1% + 19.7% + 7.4% + 2.4% + 3.5% + 11.9% Intersegment sales 5 4 5 3 – – Net sales (total) 11,672 14,912 8,864 9,445 2,542 3,008 EBIT1 (1,730) 2,770 2,681 2,408 388 523 EBITDA before special items1 3,466 5,418 2,907 2,867 570 718 Net cash provided by (used by) operating activities (2,403) 164 1,381 1,059 406 429 Depreciation, amortization, impairment losses/loss reversals 1,661 2,646 511 588 167 174 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 33 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group B 10 (continued) Reconciliation All other segments Enabling functions and consolidation Group € million H1 2021 H1 2022 H1 2021 H1 2022 H1 2021 H1 2022 Net sales (external) 96 88 18 12 23,182 27,458 Currency- and portfolio-adjusted change1 – 9.3% – 13.0% – – + 7.2% + 12.1% Intersegment sales – 1 (10) (8) – – Net sales (total) 96 89 8 4 23,182 27,458 EBIT1 (9) (29) (528) (1,291) 802 4,381 EBITDA before special items1 26 7 (274) (410) 6,695 8,600 Net cash provided by (used in) operating activities 84 – (236) (274) (768) 1,378 Depreciation, amortization, impairment losses/loss reversals 35 36 102 118 2,476 3,562 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” To simplify the consolidation process, leases between fully consolidated companies continue to be recognized as operating leases under IAS 17 within the segment data in the consolidated financial statements of the Bayer Group even after the first-time application of IFRS 16 as of January 1, 2019. This does not have any relevant impact on the respective key data used in the steering of the company and internal reporting to the Board of Management as the chief operating decision maker. The following table shows the reconciliation of EBITDA before special items of the above-mentioned segments and the reconciliation to income before income taxes of the Group from continuing operations: B 11 Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million Q2 2021 Q2 2022 H1 2021 H1 2022 EBITDA before special items of segments 2,730 3,546 6,969 9,010 EBITDA before special items of enabling functions and consolidation (153) (197) (274) (410) EBITDA before special items1 2,577 3,349 6,695 8,600 Depreciation, amortization and impairment losses/loss reversals before special items of segments (906) (1,007) (1,905) (2,031) Depreciation, amortization and impairment losses/loss reversals before special items of corporate functions and consolidation (51) (62) (102) (117) Depreciation, amortization and impairment losses/loss reversals before special items (957) (1,069) (2,007) (2,148) EBIT before special items of segments 1,824 2,539 5,064 6,979 EBIT before special items of enabling functions and consolidation (204) (259) (376) (527) EBIT before special items1 1,620 2,280 4,688 6,452 Special items of segments (3,801) (1,382) (3,734) (1,307) Special items of enabling functions and consolidation (100) (729) (152) (764) Special items1 (3,901) (2,111) (3,886) (2,071) EBIT of segments (1,977) 1,157 1,330 5,672 EBIT of enabling functions and consolidation (304) (988) (528) (1,291) EBIT1 (2,281) 169 802 4,381 Financial result (99) (692) (447) (1,182) Income before income taxes (2,380) (523) 355 3,199 1 For definition see Annual Report 2021, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” The balance of other operating expenses and other operating income of minus €570 million in the second quarter of 2022 (Q2 2021: minus €3,204 million) was due to special charges of €476 million (Q2 2021: €3,238 million), which primarily related to ongoing legal proceedings. The special items in the second quarter of 2021 were mainly related to the glyphosate litigations. 34 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2022, included 369 companies (December 31, 2021: 374 companies). Six joint ventures (December 31, 2021: six) and 36 associates (December 31, 2021: 33) were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). Acquisitions, divestments and discontinued operations Acquisitions in 2022 On June 28, 2022, Bayer acquired 30% of the shares in Natsana GmbH, Germany, for a purchase price of around €96 million. The acquired shares are accounted for using the equity method. Natsana is an online- only provider focused on the sale and development of natural supplements such as vitamins, minerals, nutrients and probiotics. Its portfolio comprises over 100 products under its three main brands: Feel Natural, Nature Love and Natural Elements. Bayer will acquire the other 70% of shares in 2025 based on a buy-out mechanism agreed to when closing the transaction. The company will be assigned to the Consumer Health segment. Acquisitions in 2021 On June 2, 2021, Bayer completed the acquisition of 100% of the shares in two biotech companies: Noria Therapeutics Inc., United States, and PSMA Therapeutics Inc., United States. Through these acquisitions, Bayer obtained exclusive rights to a differentiated alpha radionuclide therapy based on actinium-225 and a small molecule targeting prostate-specific membrane antigen (PSMA), and in doing so broadened its oncology portfolio of targeted alpha therapies (TAT). Bayer paid an upfront consideration of €8 million in total and will make potential milestone payments of up to around €120 million until launch followed by potential additional sales-based milestone payments that will also amount to up to around €120 million. Neither acquisition falls within the scope of IFRS 3 such that both are presented as a capital expenditure for intangible assets relating to R&D projects. The two companies have been assigned to the Pharmaceuticals segment. Assets held for sale and discontinued operations There were no discontinued operations to report in 2022 or 2021. The assets held for sale, net of directly related liabilities, totaled around €1,487 million as of June 30, 2022. They primarily related to the planned sale of our Environmental Science Professional business to Cinven, United Kingdom, for around €2.4 billion. Environmental Science Professional is a global leader offering solutions to control pests, disease and weeds in nonagricultural areas such as vector control, professional pest management, vegetation management, forestry, and turf and ornamentals. The transaction is expected to be concluded in the second half of 2022 and relates to the Crop Science segment. Initial classification as assets and liabilities held for sale took effect March 31, 2022. Assets held for sale also included an amount of around €51 million from the sale of office and administrative space in St. Louis, United States. These were attributable entirely to property, plant and equipment. In addition, assets held for sale contained intangible assets amounting to a total of some €38 million. These included around €16 million due to the divestment of our product Nebido™ to Grünenthal GmbH, Germany, as well as around €22 million for the planned divestment of the Marvelon™ and Mercilon™ trademarks in China, Hong Kong, Macau and Vietnam within the Pharmaceuticals segment. The transaction was completed for China, Hong Kong and Macau, and is expected to be completed for Vietnam in the third quarter of 2022. 35 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The assets and liabilities held for sale as of June 30, 2022, were as follows: B 12 Assets and Liabilities Held for Sale € million June 30, 2021 June 30, 2022 Goodwill – 1,337 Other intangible assets – 75 Property, plant and equipment 32 80 Deferred taxes – 5 Inventories – 92 Trade accounts receivable – 4 Other receivables – 2 Claims for income tax refunds – 2 Cash and cash equivalents – 3 Assets held for sale 32 1,600 Provisions for pensions and other post-employment benefits – 5 Other provisions – 2 Refund liabilities – 84 Financial liabilities – 8 Deferred taxes – 13 Trade accounts payable – 1 Liabilities directly related to assets held for sale – 113 In 2021, recognition primarily related to the planned sale of a production facility in Brazil in the Pharmaceuticals segment. The transaction was completed in the second quarter of 2022. Other intangible assets Impairment testing was conducted in the second quarter of 2022 due to current interest-rate developments and their related impact on the weighted average cost of capital. In the Pharmaceuticals segment, impairment testing resulted in impairment losses on R&D projects totaling around €92 million, particularly due to an increase in the weighted average cost of capital. The impairment losses were allocated to research and development expenses in each case. The impairment testing did not give rise to any material impairment losses or impairment loss reversals in the Consumer Health segment. Within the Crop Science segment, it resulted in the recognition of impairment losses of €1,322 million on intangible assets. This included impairment losses in the cash-generating units cotton seed (€851 million, comprising €67 million on research and development projects, €696 million on patents and technologies, €75 million on trademarks and €13 million on marketing and distribution rights), Vegetable Seeds (€269 million, comprising €78 million on research and development projects, €157 million on patents and technologies, €24 million on trademarks and €10 million on marketing and distribution rights) and Corn Seed & Traits (€202 million, comprising €37 million on research and development projects, €130 million on patents and technologies, €30 million on trademarks and €5 million on marketing and distribution rights). Whereas the impairment loss in the cash-generating unit cotton seed was primarily attributable to a change in business prospects as well as an increase in the cost of capital, the impairment losses in the cash-generating units Vegetable Seeds and Corn Seed & Traits were mostly due to a significant increase in the weighted average cost of capital. The impairment losses on the assets of the cash-generating units were allocated to the cost of goods sold, selling expenses, and research and development expenses, with the respective figures determined on the basis of fair value less costs of disposal. 36 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The table below indicates the capital cost factors used in the impairment testing on the cash-generating units in the fourth quarter of 2021 and second quarter of 2022. B 13 Impairment Testing Parameters After-tax cost of capital % Q4 2021 Q2 2022 Corn Seed & Traits 8.5 9.7 Soybean Seed & Traits 8.1 9.1 Glyphosate 9.0 10.3 Dicamba 6.6 7.3 Cotton seed 6.8 7.3 Canola 7.1 8.2 Vegetable Seeds 8.5 10.1 The growth rates and capital cost factors used in the impairment testing of goodwill in the fourth quarter of 2021 and the second quarter of 2022 are shown in the following table: B 14 Impairment Testing Parameters Growth rate After-tax cost of capital % Q4 2021 Q2 2022 Q4 2021 Q2 2022 Crop Science 2.0 2.0 8.7 9.7 Pharmaceuticals 0.0 0.0 5.1 6.4 Consumer Health 1.0 1.0 6.3 8.6 Testing goodwill for impairment involves calculating the fair value less costs to sell. No impairment losses were recognized on goodwill in the second quarter of 2022 or 2021. Financial instruments The following tables show the carrying amounts and fair values of the individual financial assets and liabilities by category of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the statements of financial position. Since the line items “Trade accounts receivable”, “Other receivables”, “Financial liabilities” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables), the reconciliation is shown in the column headed “Nonfinancial assets/liabilities.” 37 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Carrying Amounts and Fair Values of Financial Instruments Measured at fair value [fair value for information4] Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets/liabilities € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Trade accounts receivable 14,268 165 352 AC 14,268 FVTPL, mandatory2 165 Nonfinancial assets 352 Other financial assets 673 4,406 352 1,381 AC 643 [643] FVTPL, mandatory2 4,330 46 905 FVTOCI (no recycling), designated3 61 461 Derivatives 15 306 15 Lease receivables 30 [30] Other receivables 420 39 2,511 AC 420 [420] FVTPL, mandatory2 39 Nonfinancial assets 2,511 Cash and cash equivalents 3,412 AC 3,412 [3,412] Total financial assets 18,773 4,571 352 1,420 of which AC 18,743 of which FVTPL 4,495 46 944 Financial liabilities 44,434 106 94 AC 43,240 [29,895] [10,341] Derivatives 106 Lease liabilities 1,194 Nonfinancial liabilities 94 Trade accounts payable 6,097 AC 6,097 Other liabilities 914 36 393 1,831 957 AC 914 [914] FVTPL (nonderivative), mandatory2 1,824 Derivatives 36 393 7 Nonfinancial liabilities 957 Total financial liabilities 51,445 36 499 1,831 of which AC 50,251 of which derivatives 36 499 7 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9, paragraph 5.7.5 4 Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a) 38 B 15 June 30, 2022 Total 14,785 14,268 165 352 6,812 643 5,281 522 336 30 2,970 420 39 2,511 3,412 3,412 25,116 18,743 5,485 44,634 43,240 106 1,194 94 6,097 6,097 4,131 914 1,824 436 957 53,811 50,251 542 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Carrying Amounts and Fair Values of Financial Instruments Measured at fair value [fair value for information4] Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets/liabilities € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Trade accounts receivable 9,663 188 196 AC 9,663 FVTPL, mandatory2 188 Nonfinancial assets 196 Other financial assets 760 1,856 1,391 1,361 AC 731 [731] FVTPL, mandatory2 1,745 1,236 942 FVTOCI (no recycling), designated3 98 406 Derivatives 13 155 13 Lease receivables 29 [29] Other receivables 303 67 2,715 AC 303 [303] FVTPL, mandatory2 67 Nonfinancial assets 2,715 Cash and cash equivalents 4,564 AC 4,564 [4,564] Total financial assets 15,290 2,044 1,391 1,428 of which AC 15,261 of which FVTPL 1,933 1,236 1,009 Financial liabilities 40,708 69 95 AC 39,543 [32,202] [9,999] Derivatives 69 Lease liabilities 1,165 Nonfinancial liabilities 95 Trade accounts payable 6,792 AC 6,792 Other liabilities 771 31 260 1,771 915 AC 771 [771] FVTPL (nonderivative), mandatory2 1,769 Derivatives 31 260 2 Nonfinancial liabilities 915 Total financial liabilities 48,271 31 329 1,771 of which AC 47,106 of which derivatives 31 329 2 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9, paragraph 5.7.5 4 Fair value of the financial instruments at amortized cost under IFRS 7 paragraph 29(a) 39 B 16 Dec.31, 2021 Total 10,047 9,663 188 196 5,368 731 3,923 504 181 29 3,085 303 67 2,715 4,564 4,564 20,153 15,261 4,178 40,872 39,543 69 1,165 95 6,792 6,792 3,748 771 1,769 293 915 50,402 47,106 362 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Due to the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and also the creditworthiness of the counterparty in certain cases. Where a market price is available, however, this is deemed to be the fair value. The fair values of financial assets measured at fair value correspond to quoted prices in active markets (Level 1) or are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2) or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit or debt value adjustments are determined to account for the credit risk of the contractual party or Bayer. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into account any foreign currency translation as of the closing date in certain cases. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This essentially applies to certain debt or equity instruments, in some cases to the fair values of embedded derivatives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as “FVTPL – at fair value through profit or loss” by the discounted cash flow method. Here the credit spreads of comparable issuers are applied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materially affect the fair value. When determining the fair values of other liabilities for contingent consideration within the “FVTPL (nonderivative) – at fair value through profit or loss” category, the principal unobservable input is the estimation of the probability that, for example, predefined milestones for research and development projects will be achieved or that sales targets will be attained, as well as the timing of the payments. Changes in these estimates may lead to significant increases or decreases in fair value. Embedded derivatives are separated from their respective host contracts, provided these are not financial instruments. Such host contracts are generally sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations, for example. The internal measurement of embedded derivatives is mainly performed using the discounted cash flow method, which is based on unobservable inputs. These include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. 40 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The changes in the amount of financial assets and liabilities recognized at fair value based on unobservable inputs (Level 3) for each financial instrument category were as follows: Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI (no recycling)1 Derivatives (net) Liabilities – FVTPL (nonderivative)1 Carrying amounts (net), January 1, 2022 1,009 406 11 (1,769) Gains (losses) recognized in profit or loss (72) – (5) 68 of which related to assets/liabilities recognized in the statements of financial position (72) – (5) 68 Gains (losses) recognized outside profit or loss – (33) – – Additions of assets (liabilities) 13 74 – – Settlements of (assets) liabilities – (13) – 29 Changes in scope of consolidation (18) – – – Exchange differences 12 27 2 (152) Carrying amounts (net), June 30, 2022 944 461 8 (1,824) 1 See table B 15 for definitions of measurement categories. Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI (no recycling)1 Derivatives (net) Liabilities – FVTPL (nonderivative)1 Carrying amounts (net), January 1, 2021 1,008 344 11 (1,261) Gains (losses) recognized in profit or loss 1 – (1) 40 of which related to assets/liabilities recognized in the statements of financial position 1 – (1) 40 Gains (losses) recognized outside profit or loss – 25 – – Additions of assets (liabilities) 5 20 – – Settlements of (assets) liabilities (1) (1) – 23 Transfers to Level 1 – (42) – – Exchange differences 3 7 1 (39) Carrying amounts (net), June 30, 2021 1,016 353 11 (1,237) 2021 figures restated resulting from the completion of the purchase price allocation for AskBio in the fourth quarter of 2021 1 See table B 16 for definitions of measurement categories. The changes recognized in profit or loss were included in other operating income/expenses, as well as in the financial result in interest income, exchange gains or losses and other financial income and expenses. Financial liabilities Bayer AG placed new hybrid bonds with a total volume of €1.3 billion in March 2022. The proceeds were used for general corporate purposes including financing the early repayment of the €1.3 billion hybrid bond that was callable on October 2, 2022. The repayment took place in April and May 2022. In addition, two bonds with a total volume of US$250 million (US$229 million) were redeemed before maturity, while one bond with a nominal volume of €750 million and one with a nominal volume of JPY10 billion (€73 million) were redeemed at maturity in the second quarter of 2022. In May 2022, Bayer AG agreed and drew on a credit line of €3 billion. The liquidity is invested in money market funds and is intended to help the company manage risks in the event the current geopolitical situation deteriorates. The investments in money market funds are measured at fair value through profit or loss (Level 1 of the fair value hierarchy) and recognized under “Other financial assets”. 41 B 17 Total (343) (9) (9) (33) 87 16 (18) (111) (411) B 18 Total 102 40 40 25 25 21 (42) (28) 143 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Legal Risks To find out more about the Bayer Group’s legal risks, please see Note 30 to the consolidated financial statements in the Bayer Annual Report 2021, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2021, the following significant changes have occurred in respect of the legal risks: Roundup™ (glyphosate): A large number of lawsuits from plaintiffs claiming to have been exposed to glyphosate-based products manufactured by Bayer’s subsidiary Monsanto have been served upon Monsanto in the United States. Glyphosate is the active ingredient contained in a number of Monsanto’s herbicides, including Roundup™-branded products. Plaintiffs allege personal injuries resulting from exposure to those products, including non-Hodgkin lymphoma (NHL), and seek compensatory and punitive damages. Additional lawsuits are anticipated. In 2020, Monsanto reached an agreement in principle with plaintiffs, without admission of liability, to settle most of the current Roundup™ litigation and to put in place a mechanism to resolve potential future claims. The three adverse verdicts – Johnson, Hardeman and Pilliod – are not covered by the settlement. The Company petitioned the Supreme Court for review in both the Hardeman and Pilliod cases. In Hardeman, the Supreme Court invited the U.S. Solicitor General to file a brief in the matter; that brief recommended the Supreme Court deny review of the Hardeman appeal. In June 2022, the Supreme Court denied review of both Hardeman and Pilliod. There may be future cases in the Roundup™ litigation (or other unrelated actions) that present the Supreme Court with preemption questions, and the Company will continue to review its legal options regarding further proceedings. In June 2022, juries in two state court cases – Shelton (Circuit Court for Jackson County, Missouri (Kansas City)) and Larry Johnson (Circuit Court for Jackson County, Oregon) – issued verdicts in Monsanto’s favor, determining that Roundup™ did not cause either plaintiff’s cancer. These cases are the third and fourth consecutive trial wins for the company. Dicamba: In 2016, Bader Peach Farms filed a lawsuit against Monsanto and BASF in Missouri state court. Bader claims that off-target movement from the dicamba herbicide and/or the Xtend™ system has damaged Bader’s crops. In 2020, the jury rendered a verdict for plaintiffs in the amount of US$15 million in compensatory damages and US$250 million in punitive damages, jointly and severally against defendants Monsanto and BASF. Monsanto filed post-trial motions resulting in the punitive damages being reduced to US$60 million, thereby reducing the total verdict to US$75 million. Monsanto appealed. In July 2022, the 8th Circuit Court of Appeals affirmed all aspects of the trial court judgment except for the finding of joint liability for punitive damages between BASF and Monsanto. Monsanto disagrees with the decision and is considering its legal options. BASF arbitration: In 2019, Bayer was served with a request for arbitration by BASF SE. BASF maintained to have indemnification claims under the asset purchase agreements signed in 2017 and 2018 related to the divestment of certain Crop Science businesses to BASF. We expect the decision by the arbitral tribunal to be issued shortly. PCBs: Bayer’s subsidiary Monsanto has been named in lawsuits brought by various governmental entities in the United States claiming that Monsanto, Pharmacia and Solutia, collectively as a manufacturer of PCBs, should be responsible for a variety of damages due to PCBs in the environment, including bodies of water, regardless of how PCBs came to be located there. In 2020, Bayer reached an agreement for a nationwide class settlement to settle claims of approximately 2,500 municipal government entities across the United States for a total payment, including class benefits and attorney fees, of approximately US$650 million. In March 2022, the court preliminarily approved the settlement. In July 2022, the Superior Court of Delaware dismissed, in its entirety, the Delaware State Attorney General’s individual lawsuit that alleged environmental damages from PCBs. With regard to Oregon, we are considering a settlement with the Attorney General reflecting the unique circumstances in that state. 42 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Monsanto also faces numerous lawsuits claiming personal injury and/or property damage due to use of and exposure to PCB products. In the Sky Valley Education Center (“SVEC”) personal injury cases, a third trial concluded in June 2022 with the jury awarding a total of approximately US$21.3 million (compensatory and punitive damages) in total to four plaintiffs. Bayer disagrees with this verdict based on many of the same errors seen in the first two trials and plans to appeal. A fourth SVEC trial (Soley), which concluded in July 2022, resulted in a mistrial when the jury was unable to reach a verdict. It is unknown whether there will be a retrial. A fifth SVEC trial (Allison) is currently scheduled to begin in August 2022. Shareholder litigation concerning Monsanto acquisition: In Germany and the United States, investors have filed lawsuits against Bayer claiming damages based on allegedly flawed capital market communication in connection with the acquisition of Monsanto Company. In Germany, as of June 30, 2022, 30 claims by approximately 340 plaintiffs had been filed and served upon Bayer. In July 2022, the Regional Court Cologne initiated a model case proceeding in accordance with the Capital Markets Model Case Act. This does not include a decision on the merits of the matter. Notes to the Statements of Cash Flows Net operating cash flow in the first half of 2022 amounted to €1,378 million (H1 2021: minus €768 million). The increase compared with the prior-year period was due in particular to lower net settlement payments of €791 million (H1 2021: €3,103 million) to resolve glyphosate, PCB, Essure™ and dicamba litigations. The net cash outflow for investing activities in the first half of the year amounted to €2,029 million (H1 2021: net cash inflow of €4,392 million). The net cash outflow for current financial assets came to €1,308 million (H1 2021: inflow of €4,891 million). These cash outflows were largely attributable to investments in money market funds. There was a net cash outflow of €739 million for financing activities (H1 2021: €4,490 million). This included net borrowings of €1,785 million (H1 2021: net loan repayments of €2,000 million). Net interest payments came to €573 million (H1 2021: €525 million). We paid out €1,966 million in dividends (H1 2021: €1,965 million). 43 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities and natural persons that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or joint control or have a significant influence. They include, in particular, nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate officers of Bayer AG. Business transactions involving related parties were not material from the viewpoint of the Bayer Group. Other information On April 29, 2022, the Annual Stockholders’ Meeting approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.00 per share carrying dividend rights be paid for the 2021 fiscal year and that the remaining amount of €90,197,520.07 be allocated to other retained earnings. The actions of the members of the Board of Management and the Supervisory Board serving in 2021 were ratified in accordance with the proposals by the Board of Management and the Supervisory Board. Three stockholder representatives were elected to the Supervisory Board in accordance with the nominations submitted by the Supervisory Board. The proposal by the Board of Management and the Supervisory Board to approve the Compensation Report for the 2021 fiscal year prepared and audited in accordance with Section 162 of the German Stock Corporation Act (AktG) was rejected. The Annual Stockholders’ Meeting accepted the proposal by the Board of Management and the Supervisory Board to approve the revised Control and Profit and Loss Transfer Agreement between the company and Bayer Chemicals GmbH dated February 18, 2022. In accordance with the proposal by the Supervisory Board, Deloitte GmbH Wirtschaftsprüfungs- gesellschaft, Munich, Germany, was elected auditor of the annual and consolidated financial statements for 2022, and also to review, if applicable, the condensed financial statements and interim management report as of June 30, 2022, and if applicable, the condensed financial statements and interim management reports as of September 30, 2022, and March 31, 2023, if these are prepared. 44 Bayer Half-Year Financial Report as of June 30, 2022 B Condensed Consolidated Interim Financial Statements Events After the End of the Reporting Period Events After the End of the Reporting Period Acquisition of CoverCress Inc. On August 1, 2022, Bayer acquired an additional 59% of the shares in CoverCress Inc., United States, for a purchase price of around US$118 million. Bayer had already held 6.3% of the shares outstanding. CoverCress Inc. is an innovative startup company developing a new winter oilseed crop under the CoverCress™ brand. CoverCress™ has the potential to decrease nitrogen loss, help store carbon in the soil and improve soil health. Leverkusen, August 2, 2022 Bayer Aktiengesellschaft The Board of Management Werner Baumann Sarena Lin Wolfgang Nickl Stefan Oelrich Rodrigo Santos Heiko Schipper 45 Bayer Half-Year Financial Report as of June 30, 2022 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group in line with generally accepted accounting principles, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the financial year. Leverkusen, August 2, 2022 Bayer Aktiengesellschaft The Board of Management Werner Baumann Sarena Lin Wolfgang Nickl Stefan Oelrich Rodrigo Santos Heiko Schipper 46 Bayer Half-Year Financial Report as of June 30, 2022 Review Report To Bayer Aktiengesellschaft, Leverkusen We have reviewed the condensed interim consolidated financial statements of Bayer Aktiengesellschaft, Leverkusen, which comprise the consolidated income statement and the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity as well as selected explanatory notes to the consolidated financial statements, and the interim group management report for the period from 1 January to 30 June 2022, that are part of the semi-annual financial information under Section 115 German Securities Trading Act (WpHG). The preparation of the interim consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the executive directors of the Company. Our responsibility is to issue a review report on the interim consolidated financial statements and on the interim group management report based on our review. We conducted our review of the interim consolidated financial statements and of the interim group management report in compliance with the German Generally Accepted Standards for Reviews of Financial Statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and in supplementary compliance with the International Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”. Those standards require that we plan and perform the review to obtain a certain level of assurance to preclude through critical evaluation that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and to analytical procedures applied to financial data and thus provides less assurance than an audit. Since, in accordance with our engagement, we have not performed an audit, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial statements of Bayer AG, Leverkusen, have not been prepared, in material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Munich, 2 August 2022 Deloitte GmbH Wirtschaftsprüfungsgesellschaft (Andreas Wermelt) (Michael Mehren) Wirtschaftsprüfer Wirtschaftsprüfer (German Public Auditor) (German Public Auditor) Review Report 47 Bayer Half-Year Financial Report as of June 30, 2022 Financial Calendar / Reporting Principles / Masthead Financial Calendar Q3 2022 Quarterly Statement 2022 Annual Report Annual Stockholders’ Meeting 2023 Q1 2023 Quarterly Statement November 8, 2022 February 28, 2023 April 28, 2023 May 11, 2023 Reporting Principles This Bayer AG Interim Report is a half-year financial report that satisfies the requirements of Section 115, Paragraph 2, No. 1 and No. 2, Paragraph 3 and Paragraph 4 of the German Securities Trading Act (WpHG). Bayer has prepared the condensed consolidated interim financial statements according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). This report should be read in conjunction with the Annual Report for the 2021 fiscal year and the additional information about the company provided therein. The Annual Report 2021 is available on our website at www.bayer.com. Masthead Published by Bayer AG, 51368 Leverkusen, Germany Date of publication Thursday, August 4, 2022 Editor Danielle Staudt-Gersdorf, phone +49 214 30 46309 Email: danielle.staudt-gersdorf@bayer.com English edition Translation Operations SCGermany Investor Relations Peter Dahlhoff, phone +49 214 30 33022 Email: peter.dahlhoff@bayer.com Bayer on the internet www.bayer.com Forward-Looking Statements This half-year financial report may contain forward-looking statements based on current assumptions and forecasts made by Bayer management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 48

Semestriel, 2022, Agrochemistry, BAYER

write me a financial report

Semestriel

Agrochemistry

BAYER

Below is an instruction that describes a reporting task, paired with the specifics of the report. Write a response that appropriately completes the reporting task. ### Instruction: Write a detailed financial report on the given subject and company. ### Subject: Agrochemistry ### Company: BAYER ### Response:

Half-Year Financial Report 2023 Second quarter impacted by declines in glyphosate business // Group sales fall to €11.0 billion (Fx & p adj. – 8.2%) // EBITDA before special items: €2.5 billion (– 24.5%) // Crop Science business down significantly, mainly due to sharp decline in glyphosate volumes and prices // Stable sales at Pharmaceuticals (Fx & p adj.), earnings below prior year // Consumer Health records higher sales (Fx & p adj.), earnings up slightly // Core earnings per share at €1.22 (– 36.8%) // Net income at minus €1.9 billion, weighed down by impairment losses of €2.3 billion // Free cash flow at minus €0.5 billion // Group outlook for 2023 lowered Bayer Half-Year Financial Report as of June 30, 2023 Contents Bayer Group Key Data _________________________________________________________________________ 3 Interim Group Management Report as of June 30, 2023 ________________________________________ 4 Key Events ____________________________________________________________________________________ 4 1. Overview of Sales, Earnings and Financial Position _________________________________________ 4 1.1 Earnings Performance of the Bayer Group __________________________________________________ 4 1.2 Business Development by Division _________________________________________________________ 8 1.3 Asset and Financial Position of the Bayer Group ___________________________________________ 15 2. Research, Development, Innovation _______________________________________________________ 18 Crop Science ____________________________________________________________________________ 18 Pharmaceuticals __________________________________________________________________________ 18 Consumer Health ________________________________________________________________________ 21 Leaps by Bayer ___________________________________________________________________________ 22 3. Report on Future Perspectives and on Opportunities and Risks _____________________________ 22 3.1 Future Perspectives ______________________________________________________________________ 22 3.2 Opportunities and Risks __________________________________________________________________ 24 Condensed Consolidated Interim Financial Statements as of June 30, 2023 ____________________ 25 Bayer Group Consolidated Income Statements ________________________________________________ 25 Bayer Group Consolidated Statements of Comprehensive Income _______________________________ 26 Bayer Group Consolidated Statements of Financial Position ____________________________________ 27 Bayer Group Consolidated Statements of Cash Flows __________________________________________ 28 Bayer Group Consolidated Statements of Changes in Equity ___________________________________ 29 Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group _________ 30 Responsibility Statement _____________________________________________________________________ 44 Review Report ________________________________________________________________________________ 45 Financial Calendar ____________________________________________________________________________ 46 Reporting Principles __________________________________________________________________________ 46 Masthead _____________________________________________________________________________________ 46 Contents 2 Bayer Half-Year Financial Report as of June 30, 2023 Bayer Group Key Data Change (%) € million Q2 2022 Q2 2023 Reported Fx & p adj. H1 2022 H1 2023 Sales 12,819 11,044 – 13.8 – 8.2 27,458 25,433 Change in sales1 Volume + 0.1% – 7.4% + 3.0% – 6.6% Price + 9.5% – 0.8% + 9.1% + 2.1% Currency + 8.4% – 4.3% + 6.2% – 1.7% Portfolio + 0.1% – 1.3% + 0.1% – 1.2% Sales by region Europe/Middle East/Africa 3,639 3,307 – 9.1 – 2.4 8,153 7,946 North America 4,817 4,038 – 16.2 – 12.3 10,779 9,944 Asia/Pacific 2,492 2,235 – 10.3 – 1.6 4,903 4,416 Latin America 1,871 1,464 – 21.8 – 18.0 3,623 3,127 EBITDA1 2,651 2,331 – 12.1 7,943 6,649 Special items1 (698) (196) (657) (349) EBITDA before special items1 3,349 2,527 – 24.5 8,600 6,998 EBITDA margin before special items1 26.1% 22.9% 31.3% 27.5% EBIT1 169 (956) . 4,381 2,017 Special items1 (2,111) (2,490) (2,071) (2,921) EBIT before special items1 2,280 1,534 – 32.7 6,452 4,938 Financial result (692) (618) – 10.7 (1,182) (985) Net income (from continuing and discontinued operations) (298) (1,887) . 2,993 291 Earnings per share from continuing and discontinued operations (€) (0.30) (1.92) . 3.05 0.30 Core earnings per share1 from continuing operations (€) 1.93 1.22 – 36.8 5.46 4.17 Net cash provided by (used in) operating activities (from continuing and discontinued operations) 2,104 484 – 77.0 1,378 (3,066) Free cash flow1 1,140 (473) . (47) (4,575) Net financial debt (at end of period) 36,575 39,620 + 8.3 36,575 39,620 Cash flow-relevant capital expenditures (from continuing and discontinued operations) 550 606 + 10.2 899 1,072 Research and development expenses2 1,928 1,228 – 36.3 3,382 2,799 Depreciation, amortization and impairment losses/loss reversals 2,482 3,287 + 32.4 3,562 4,632 Number of employees (at end of period)3 101,914 102,048 + 0.1 101,914 102,048 Personnel expenses (including pension expenses) 3,391 2,480 – 26.9 6,562 5,739 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 The decline in research and development expenses is largely due to special items in connection with impairment charges in the prior-year period. 3 Employees calculated as full-time equivalents (FTEs) Key Data 3 Change (%) Reported Fx & p adj. – 7.4 – 4.5 – 2.5 + 1.9 – 7.7 – 7.2 – 9.9 – 2.9 – 13.7 – 12.7 – 16.3 – 18.6 – 54.0 – 23.5 – 16.7 – 90.3 – 90.2 – 23.6 . . + 8.3 + 19.2 – 17.2 + 30.0 + 0.1 – 12.5 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report Key Events Interim Group Management Report as of June 30, 2023 Key Events Financing activities In May, we placed new senior bonds with a total volume of €3 billion. The issuance comprised three tranches and was multiple times covered. The proceeds were used for general corporate purposes. 1. Overview of Sales, Earnings and Financial Position1 1.1 Earnings Performance of the Bayer Group Second quarter of 2023 Group sales Group sales decreased by 8.2% (Fx & portfolio adj.) to €11,044 million in the second quarter of 2023 (Q2 2022: €12,819 million; reported: – 13.8%). There was a negative currency effect of €553 million (Q2 2022: positive currency effect of €915 million). Sales in Germany amounted to €638 million (Q2 2022: €610 million). Crop Science registered a significant decrease in sales that was mainly due to lower volumes and prices for our glyphosate-based products. Sales at Pharmaceuticals were level with the prior-year period. The division recorded significant gains for Nubeqa™ and Kerendia™ as well as a strong performance in the Radiology business, but registered declines particularly for Adalat™ and Aspirin™ Cardio in China. Sales at Consumer Health rose, with substantial growth in the Dermatology and Pain & Cardio categories in particular. EBITDA before special items Group EBITDA before special items decreased by 24.5% to €2,527 million. This figure included a negative currency effect of €120 million (Q2 2022: positive currency effect of €300 million). By contrast, there was a positive effect of around €481 million arising from out-of-period income and a business-related reduction in allocations to provisions for the quarter in connection with the Group-wide Short-Term Incentive (STI) program. Crop Science registered a decline in EBITDA before special items that was mainly due to the fall in sales of our glyphosate-based products. Earnings were additionally diminished by a mainly inflation- related increase in the cost of goods sold. EBITDA before special items at Pharmaceuticals decreased, mainly due to higher R&D investments before special items. At Consumer Health, EBITDA before special items increased thanks in part to cost and price management efforts. The Group EBITDA margin before special items came in at 22.9%. 1 For definition of alternative performance measures see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 4 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Depreciation, amortization and impairments Depreciation, amortization, impairment losses and impairment loss reversals led to net expenses of €3,287 million (Q2 2022: €2,482 million), with intangible assets accounting for €2,610 million (Q2 2022: €2,082 million) and property, plant and equipment for €677 million (Q2 2022: €400 million). Impairment losses, net of impairment loss reversals, totaled €2,301 million (Q2 2022: €1,460 million), with intangible assets accounting for €2,035 million (Q2 2022: €1,453 million). As a result of a further deterioration in business prospects and updated long-term corporate planning, it became necessary to conduct impairment testing in the Crop Science Division in the second quarter of 2023. This resulted in the recognition of impairment losses of €2,436 million on goodwill and of €277 million on property, plant and equipment, as well as a net impairment loss reversal of €416 million on other intangible assets. A total of €2,298 million in impairment losses, net of impairment loss reversals, were included in special items (Q2 2022: €1,413 million). EBIT and special items EBIT of the Bayer Group came in at minus €956 million (Q2 2022: €169 million) after net special charges of €2,490 million (Q2 2022: €2,111 million) that primarily related to the unscheduled impairment testing in the Crop Science Division. EBIT before special items decreased by 32.7% to €1,534 million (Q2 2022: €2,280 million). The following special items were taken into account in calculating EBIT and EBITDA: A 1 Special Items1 by Category € million EBIT Q2 2022 EBIT Q2 2023 EBIT H1 2022 EBIT H1 2023 EBITDA Q2 2022 EBITDA Q2 2023 EBITDA H1 2022 EBITDA H1 2023 Total special items (2,111) (2,490) (2,071) (2,921) (698) (196) (657) (349) Restructuring (184) (166) (261) (281) (183) (166) (260) (281) of which in the Reconciliation (25) (27) (55) (54) (24) (27) (54) (54) Acquisition/integration (3) (16) (3) (18) (3) (16) (3) (18) Divestments 169 (2) 154 (50) 169 (2) 154 (50) of which in the Reconciliation (10) – (10) – (10) – (10) – Litigations/legal risks (690) (35) (603) (81) (690) (35) (603) (81) of which in the Reconciliation (694) (28) (699) (88) (694) (28) (699) (88) Impairment losses/loss reversals2 (1,416) (2,298) (1,417) (2,576) (3) (4) (3) (4) Other 13 27 59 85 12 27 58 85 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Where not already included in the other special items categories A 2 Special Items1 by Functional Cost € million EBIT Q2 2022 EBIT Q2 2023 EBIT H1 2022 EBIT H1 2023 EBITDA Q2 2022 EBITDA Q2 2023 EBITDA H1 2022 EBITDA H1 2023 Total special items (2,111) (2,490) (2,071) (2,921) (698) (196) (657) (349) Cost of goods sold (842) (46) (854) (342) (25) (15) (36) (33) Selling expenses (282) (91) (300) (129) (125) (106) (143) (144) Research and development expenses (452) 148 (462) 128 (14) (10) (24) (30) General administration expenses (59) (37) (120) (82) (59) (37) (120) (82) Other operating income/(expenses) (476) (2,464) (335) (2,496) (475) (28) (334) (60) 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 5 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Net income After a financial result of minus €618 million (Q2 2022: minus €692 million), income before income taxes amounted to minus €1,574 million (Q2 2022: minus €523 million). The improvement in the financial result was largely due to positive changes in the fair value of financial investments. After income tax expense of €315 million (Q2 2022: income from income taxes of €234 million) and accounting for noncontrolling interest, net income amounted to minus €1,887 million (Q2 2022: minus €298 million). A 3 Financial Result1 € million Q2 2022 Q2 2023 H1 2022 H1 2023 Income (loss) from investments in affiliated companies (96) (53) (163) (100) Net interest expense (307) (327) (583) (540) Other financial income/expenses (289) (238) (436) (345) of which interest portion of discounted provisions (136) (102) (210) (216) of which exchange gain (loss) (40) (72) (64) (57) of which miscellaneous financial income/expenses (113) (64) (162) (72) Total (692) (618) (1,182) (985) of which special items (net) (127) (74) (198) (166) 1 Further information on the financial result is given in Note [10] of the Annual Report 2022. Core earnings per share Core earnings per share decreased by 36.8% to €1.22 (Q2 2022: €1.93), mainly due to the decline in earnings at the Crop Science Division. Earnings per share (total) came in at minus €1.92 (Q2 2022: minus €0.30) and, in comparison with core earnings per share, was mainly impacted by the impairment losses mentioned above. A 4 Core Earnings per Share1 € million Q2 2022 Q2 2023 H1 2022 H1 2023 EBIT1 (as per income statements) 169 (956) 4,381 2,017 Amortization and impairment losses/loss reversals on goodwill and other intangible assets 2,082 2,610 2,781 3,276 Impairment losses/loss reversals on property, plant and equipment, and accelerated depreciation included in special items 8 271 15 555 Special items (other than accelerated depreciation, amortization and impairment losses/loss reversals) 698 196 657 349 Core EBIT1 2,957 2,121 7,834 6,197 Financial result (as per income statements) (692) (618) (1,182) (985) Special items in the financial result2 127 74 198 166 Income taxes (as per income statements) 234 (315) (194) (739) Special items in income taxes – – – – Tax effects related to amortization, impairment losses/loss reversals and special items (724) (57) (1,282) (529) Income after income taxes attributable to noncontrolling interest (as per income statements) (9) 2 (12) (2) Above-mentioned adjustments attributable to noncontrolling interest – (12) – (12) Core net income from continuing operations 1,893 1,195 5,362 4,096 Shares (million) Weighted average number of shares 982.42 982.42 982.42 982.42 € Core earnings per share from continuing operations1 1.93 1.22 5.46 4.17 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Includes in particular the changes in the fair value of the interests in Century Therapeutics and Pyxis Oncology, as well as interest cost for the provisions for litigations/legal risks 6 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Personnel expenses and employee numbers The number of employees in the Bayer Group as of the closing date rose by 0.1% year on year to 102,048 (June 30, 2022: 101,914). Personnel expenses decreased by 26.9% to €2,480 million in the second quarter (Q2 2022: €3,391 million), mainly due to the aforementioned adjustment of provisions for the Group-wide Short-Term Incentive (STI) program as well as currency effects. First half of 2023 Group sales Group sales in the first half of 2023 fell by 4.5% (Fx & portfolio adj.) to €25,433 million (H1 2022: €27,458 million; reported: – 7.4%). There was a negative currency effect of €451 million (H1 2022: positive currency effect of €1,444 million). Sales in Germany amounted to €1,406 million (H1 2022: €1,345 million). Crop Science registered a significant decrease in sales that was mainly due to lower volumes and prices for our glyphosate-based products. Sales at Pharmaceuticals declined slightly in the first half of the year. The division recorded significant gains for Nubeqa™ and Kerendia™ but posted declines due to tender procedures for Xarelto™ and Adalat™ as well as lower demand for Aspirin™ Cardio in China. Sales at Consumer Health increased, largely due to gains in the Allergy & Cold, Dermatology and Pain & Cardio categories. EBITDA before special items EBITDA before special items at the Bayer Group dropped by 18.6% to €6,998 million (H1 2022: €8,600 million). This figure included a negative currency effect of €124 million. By contrast, there was a positive effect of around €398 million arising from lower-than-expected allocations to provisions for the Group-wide Short-Term Incentive (STI) program due to business-related factors. The Group EBITDA margin before special items fell to 27.5%. Crop Science registered a significant decline in EBITDA before special items, mainly due to the fall in sales of our glyphosate-based products. Earnings were also diminished by an increase in costs, particularly in the cost of goods sold, which was mainly due to high inflation. Pharmaceuticals posted a substantial decline in EBITDA before special items that was partly attributable to higher R&D investments before special items, the product mix and an inflation-related increase in procurement costs. EBITDA before special items at Consumer Health was level year on year, with higher sales offset by an increase in costs due to inflation and investments in product marketing. Depreciation, amortization and impairments Depreciation, amortization and impairment losses – net of impairment loss reversals – amounted to €4,632 million in the first six months of 2023 (H1 2022: €3,562 million). They comprised €3,275 million (H1 2022: €2,781 million) in amortization and impairments on intangible assets and €1,357 million (H1 2022: €781 million) in depreciation and impairments on property, plant and equipment. Impairment losses, net of impairment loss reversals, totaled €2,635 million (H1 2022: €1,515 million) and included €2,074 million in net impairment losses on intangible assets (H1 2022: €1,501 million), of which €2,436 million on goodwill. The impairment losses were primarily attributable to the impairment losses in the Crop Science Division mentioned above. A total of €2,576 million (H1 2022: €1,414 million) in impairment losses, net of impairment loss reversals, were included in special items. EBIT and special items EBIT of the Bayer Group amounted to €2,017 million in the first half of the year (H1 2022: €4,381 million) after net special charges of €2,921 million (H1 2022: €2,071 million). The special charges were mainly related to the impairment losses in the Crop Science Division mentioned above. EBIT before special items decreased by 23.5% to €4,938 million (H1 2022: €6,452 million). 7 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 8 1. Overview of Sales, Earnings and Financial Position Net income After a financial result of minus €985 million (H1 2022: minus €1,182 million), income before income taxes in the first half of the year came in at €1,032 million (H1 2022: €3,199 million). The improvement in the financial result was largely due to higher interest income from investments in money market funds and to positive changes in the fair value of financial investments. After income tax expense of €739 million (H1 2022: €194 million), income after income taxes was €293 million (H1 2022: €3,005 million). After adjusting for income from discontinued operations after income taxes and income attributable to noncontrolling interest, net income came to €291 million (H1 2022: €2,993 million). Core earnings per share Core earnings per share decreased by 23.6% to €4.17 (H1 2022: €5.46), mainly due to the decline in earnings at the Crop Science and Pharmaceuticals divisions. Earnings per share (total) came in at €0.30 (H1 2022: €3.05) and, in comparison with core earnings per share, were mainly diminished by the impairment losses described above. 1.2 Business Development by Division Crop Science A 5 Key Data – Crop Science Change (%)1 Change (%)1 € million Q2 2022 Q2 2023 Reported Fx & p adj. H1 2022 H1 2023 Reported Fx & p adj. Sales 6,461 4,924 – 23.8 – 18.5 14,908 13,275 – 11.0 – 8.6 Change in sales1 Volume – 2.4% – 15.1% + 2.2% – 11.2% Price + 19.6% – 3.4% + 17.5% + 2.6% Currency + 11.5% – 3.3% + 8.1% – 0.6% Portfolio 0.0% – 2.0% 0.0% – 1.8% Sales by region Europe/Middle East/Africa 1,255 973 – 22.5 – 13.5 3,388 3,270 – 3.5 + 2.4 North America 3,056 2,273 – 25.6 – 21.4 7,417 6,455 – 13.0 – 12.1 Asia/Pacific 704 651 – 7.5 + 4.7 1,328 1,283 – 3.4 + 7.4 Latin America 1,446 1,027 – 29.0 – 28.2 2,775 2,267 – 18.3 – 20.5 EBITDA1 1,701 666 – 60.8 5,416 3,915 – 27.7 Special items1 (48) (59) (2) (77) EBITDA before special items1 1,749 725 – 58.5 5,418 3,992 – 26.3 EBITDA margin before special items1 27.1% 14.7% 36.3% 30.1% EBIT1 (258) (2,207) . 2,770 112 – 96.0 Special items1 (1,369) (2,353) (1,324) (2,649) EBIT before special items1 1,111 146 – 86.9 4,094 2,761 – 32.6 Net cash provided by (used in) operating activities 2,551 338 – 86.8 164 (3,026) . Cash flow-relevant capital expenditures 239 283 + 18.4 389 491 + 26.2 Research and development expenses2 997 382 – 61.7 1,575 982 – 37.7 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 The decline in research and development expenses is largely due to special items in connection with impairment charges in the prior-year period. Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 9 1. Overview of Sales, Earnings and Financial Position Second quarter of 2023 Sales Sales at Crop Science fell by a significant 18.5% (Fx & portfolio adj.) to €4,924 million in the second quarter of 2023, mainly driven by lower volumes and prices for our glyphosate-based products. This effect particularly impacted business in North and Latin America as well as in Europe/Middle East/Africa. // Sales at Corn Seed & Traits were up, largely due to higher prices in all regions as well as increased acreages in North America. This was partly offset by perceived shifts in demand into the third quarter in Latin America and lower acreages in Europe/Middle East/Africa. // Our Herbicides business saw a significant decline in sales due to lower volumes and prices for our glyphosate-based products in particular. Overall, the decrease in volumes was driven by destocking and unfavorable weather conditions. // Sales at Fungicides were level with the prior-year quarter. Increased prices in all regions and higher volumes in North America were mainly offset by lower volumes due to unfavorable weather in Europe/Middle East/Africa and perceived shifts in demand into the third quarter in Latin America. // Sales at Soybean Seed & Traits were down, mainly due to decreased acreages and a decline in license revenues in North America. // Our Insecticides business registered a decline in sales. Lower volumes in Europe/Middle East/Africa and North America, largely due to weather-related factors, were only partly offset by higher prices. // Sales at Cotton Seed decreased sharply, mainly because of lower planted acreages and a decline in license revenues in North America. // Sales at Vegetable Seeds came in at the prior-year level. // The reporting unit “Other” recorded a slight decrease in sales. Sales were down at Industrial Turf & Ornamental (IT&O), while our SeedGrowth business benefited from higher prices. A 6 Sales by Strategic Business Entity Change (%)1 Change (%)1 € million Q2 2022 Q2 2023 Reported Fx & p adj. H1 2022 H1 2023 Reported Fx & p adj. Crop Science 6,461 4,924 – 23.8 – 18.5 14,908 13,275 – 11.0 – 8.6 Corn Seed & Traits 1,165 1,232 + 5.8 + 10.6 3,920 4,500 + 14.8 + 14.2 Herbicides 2,455 1,276 – 48.0 – 45.6 4,939 3,165 – 35.9 – 34.9 Fungicides 858 819 – 4.5 – 0.4 1,921 1,873 – 2.5 – 0.3 Soybean Seed & Traits 503 446 – 11.3 – 9.3 1,077 1,054 – 2.1 – 3.6 Insecticides 413 348 – 15.7 – 11.2 826 808 – 2.2 + 0.7 Cotton Seed2 227 137 – 39.6 – 38.7 532 451 – 15.2 – 17.6 Vegetable Seeds 210 195 – 7.1 – 0.5 372 376 + 1.1 + 4.5 Other3 630 471 – 25.2 – 2.5 1,321 1,048 – 20.7 – 0.4 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Starting in 2023, the cash-generating unit Cotton Seed is no longer reported under “Other” and is instead presented separately. 3 Following the partial sale of Environmental Science, the remaining parts of that business – Industrial Turf & Ornamental (IT&O) and Lawn & Garden – are being reported under “Other” from 2023 onwards. Earnings EBITDA before special items at Crop Science decreased by 58.5% to €725 million in the second quarter of 2023, primarily due to the decline in sales of our glyphosate-based products. Earnings were also diminished by a mainly inflation-related increase in the cost of goods sold. By contrast, there was a positive effect of around €215 million arising from out-of-period income and a business-related reduction in allocations to provisions for the quarter in connection with the Group-wide Short-Term Incentive (STI) program. There was a negative currency effect of €96 million (Q2 2022: positive currency effect of €215 million). The EBITDA margin before special items declined by 12.4 percentage points to 14.7%. Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position EBIT came in at minus €2,207 million (Q2 2022: minus €258 million) after special charges of €2,353 million (Q2 2022: €1,369 million) that primarily related to impairment losses. A net impairment loss of €2,436 million was recognized on goodwill due to reduced business prospects overall, largely driven by substantially lower price expectations for glyphosate. In addition, an impairment loss of €579 million was recognized in the cash-generating unit Corn Seed & Traits, mainly due to the anticipated long-term normalization of commodity prices. Moreover, impairment losses of €392 million and €277 million, respectively, were recorded in the cash-generating units Cotton Seed and glyphosate. We also recognized impairment loss reversals. These mainly included an impairment loss reversal of €1,253 million in the cash- generating unit Soybean Seed & Traits that was largely due to a decrease in the cost of goods sold as a result of lower commodity prices. Special Items1 Crop Science € million EBIT Q2 2022 EBIT Q2 2023 EBIT H1 2022 EBIT H1 2023 EBITDA Q2 2022 EBITDA Q2 2023 EBITDA H1 2022 Restructuring (11) (26) (34) (53) (11) (26) (34) Acquisition/integration (2) (16) (1) (18) (2) (16) (1) Divestments (29) (4) (48) (22) (29) (4) (48) Litigations/legal risks – (8) 91 22 – (8) 91 Impairment losses/loss reversals (1,324) (2,298) (1,325) (2,576) (3) (4) (3) Other (3) (1) (7) (2) (3) (1) (7) Total special items (1,369) (2,353) (1,324) (2,649) (48) (59) (2) 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” First half of 2023 Sales Sales at Crop Science decreased by 8.6% (Fx & portfolio adj.) to €13,275 million in the first half of 2023, mainly driven by lower volumes and prices for our glyphosate-based products, especially in North and Latin America as well as in Europe/Middle East/Africa. Sales at Corn Seed & Traits increased substantially due to higher prices. Our Herbicides business saw sales of glyphosate-based products decline significantly in North and Latin America as well as in Europe/Middle East/Africa. Sales at Fungicides were level with the prior-year period, after higher prices in all regions were offset by lower volumes in Latin America and Europe/Middle East/Africa. Soybean Seed & Traits registered a decline in sales, mainly due to lower volumes in North America. Our Insecticides business was level with the prior-year period, with increased sales in Europe/Middle East/Africa and Latin America due primarily to higher prices, while business in North America in particular was adversely impacted by lower volumes. Our Cotton Seed business recorded a decline in sales, mainly due to lower volumes in North America. Sales at Vegetable Seeds increased, with business growing particularly in Europe/Middle East/Africa due to higher prices. Sales in the reporting unit “Other” came in at the prior-year level. Earnings EBITDA before special items at Crop Science declined by 26.3% to €3,992 million in the first half of 2023, primarily due to the decline in sales of our glyphosate-based products. Earnings were also diminished by an increase in costs, particularly in the cost of goods sold, which was mainly due to high inflation. By contrast, there was a positive effect of around €164 million arising from lower-than-expected allocations to provisions for the Group-wide Short-Term Incentive (STI) program due to business-related factors. There was a negative currency effect of €42 million (H1 2022: positive currency effect of €313 million). The EBITDA margin before special items declined to 30.1%. EBIT came in at €112 million (H1 2022: €2,770 million) after net special charges of €2,649 million (H1 2022: €1,324 million) that primarily related to the impairment losses mentioned above. 10 A 7 EBITDA H1 2023 (53) (18) (22) 22 (4) (2) (77) Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 11 1. Overview of Sales, Earnings and Financial Position Pharmaceuticals A 8 Key Data – Pharmaceuticals Change (%)1 Change (%)1 € million Q2 2022 Q2 2023 Reported Fx & p adj. H1 2022 H1 2023 Reported Fx & p adj. Sales 4,818 4,557 – 5.4 + 0.2 9,442 8,964 – 5.1 – 1.4 Change in sales1 Volume + 2.4% + 0.9% + 3.1% – 0.7% Price – 0.3% – 0.7% – 0.7% – 0.7% Currency + 5.1% – 4.8% + 4.0% – 2.8% Portfolio 0.0% – 0.8% + 0.2% – 0.9% Sales by region Europe/Middle East/Africa 1,878 1,789 – 4.7 + 0.4 3,713 3,560 – 4.1 – 0.9 North America 1,149 1,171 + 1.9 + 5.0 2,169 2,281 + 5.2 + 5.2 Asia/Pacific 1,550 1,356 – 12.5 – 5.2 3,085 2,661 – 13.7 – 8.0 Latin America 241 241 0.0 + 9.7 475 462 – 2.7 + 6.7 EBITDA1 1,559 1,304 – 16.4 2,996 2,368 – 21.0 Special items1 81 (75) 129 (117) EBITDA before special items1 1,478 1,379 – 6.7 2,867 2,485 – 13.3 EBITDA margin before special items1 30.7% 30.3% 30.4% 27.7% EBIT1 1,206 1,047 – 13.2 2,408 1,853 – 23.0 Special items1 (10) (75) 38 (117) EBIT before special items1 1,216 1,122 – 7.7 2,370 1,970 – 16.9 Net cash provided by operating activities 35 442 . 1,059 1,149 + 8.5 Cash flow-relevant capital expenditures 229 245 + 7.0 360 450 + 25.0 Research and development expenses2 864 794 – 8.1 1,656 1,674 + 1.1 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 The decline in research and development (R&D) expenses in the second quarter of 2023 is largely due to special items in the prior-year period; R&D expenses before special items increased by 3.8% in the second quarter and 6.8% in the first half of the year. Second quarter of 2023 Sales Sales at Pharmaceuticals in the second quarter of 2023 were level year on year at €4,557 million (Fx & portfolio adj. + 0.2%). Our new products Nubeqa™ and Kerendia™ achieved significant gains and our Radiology business continued to grow. By contrast, sales in China declined, partly due to tender procedures for Adalat™ and lower demand for Aspirin™ Cardio. // As expected, sales of our oral anticoagulant Xarelto™ were down. Business was impacted by competitive pressure from generic products as well as lower prices, particularly in Asia/Pacific and Latin America. License revenues – recognized as sales – in the United States, where Xarelto™ is marketed by a subsidiary of Johnson & Johnson, were up year on year on a currency-adjusted basis. // Business with our ophthalmology drug Eylea™ expanded, driven by higher volumes in all regions and particularly in North America and Asia/Pacific. Falling prices in Europe were largely offset by higher volumes in France and Spain in particular. // Sales of our cancer drug Nubeqa™ nearly doubled, with gains in all regions. The product therefore maintained its growth momentum, especially in the United States and Europe, with significant increases in volumes. // We also achieved significant gains with Kerendia™, our product for the treatment of patients with chronic kidney disease associated with type 2 diabetes, mainly thanks to the successful market launch in the United States. We recorded encouraging growth in China thanks to the introduction of drug reimbursement for Kerendia™ in March. // Our Radiology business continued to post substantial gains, especially for CT Fluid Delivery and Ultravist™, with business benefiting from increased volumes and prices in nearly all regions. Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 12 1. Overview of Sales, Earnings and Financial Position A 9 Best-Selling Pharmaceuticals Products Change (%)1 Change (%)1 € million Q2 2022 Q2 2023 Reported Fx & p adj. H1 2022 H1 2023 Reported Fx & p adj. Xarelto™ 1,113 1,039 – 6.6 – 3.3 2,200 1,982 – 9.9 – 8.0 Eylea™ 807 814 + 0.9 + 5.6 1,581 1,603 + 1.4 + 5.1 Mirena™/Kyleena™/Jaydess™ 306 296 – 3.3 + 0.5 601 599 – 0.3 + 0.7 Kogenate™/Kovaltry™/Jivi™ 212 192 – 9.4 – 7.0 420 384 – 8.6 – 7.6 Nubeqa™ 105 201 + 91.4 + 95.7 181 379 + 109.4 + 110.2 YAZ™/Yasmin™/Yasminelle™ 212 180 – 15.1 – 4.7 410 332 – 19.0 – 12.7 Adalat™ 212 144 – 32.1 – 26.1 451 321 – 28.8 – 24.9 Adempas™ 162 164 + 1.2 + 4.0 315 316 + 0.3 + 0.8 Aspirin™ Cardio 201 131 – 34.8 – 29.3 388 312 – 19.6 – 15.2 Stivarga™ 155 145 – 6.5 – 0.5 299 278 – 7.0 – 3.9 CT Fluid Delivery2 120 125 + 4.2 + 8.0 237 249 + 5.1 + 5.6 Ultravist™ 112 124 + 10.7 + 19.6 217 242 + 11.5 + 17.4 Gadovist™ product family 128 115 – 10.2 – 4.3 236 233 – 1.3 + 2.5 Kerendia™ 20 67 + 235.0 + 249.9 31 119 + 283.9 + 289.7 Betaferon™/Betaseron™ 75 60 – 20.0 – 17.5 158 117 – 25.9 – 25.5 Total best-selling products 3,940 3,797 – 3.6 + 1.0 7,725 7,466 – 3.4 – 0.7 Proportion of Pharmaceuticals sales 82% 83% 82% 83% Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 2022 figures restated; the CT Fluid Delivery product family comprises injection systems marketed primarily under the Stellant™ product family. Earnings EBITDA before special items at Pharmaceuticals decreased by 6.7% to €1,379 million in the second quarter of 2023. The decline was largely due to higher R&D investments in cell and gene therapy and chemoproteomics technologies, as well as in projects in advanced clinical development. In addition, the prior-year quarter had received a significant boost from the sale of noncore businesses. By contrast, there was a positive effect of around €126 million arising from out-of-period income and a business-related reduction in allocations to provisions for the quarter in connection with the Group-wide Short-Term Incentive (STI) program. There was a negative currency effect of €40 million (Q2 2022: positive currency effect of €41 million). The EBITDA margin before special items declined by 0.4 percentage points to 30.3%. EBIT came in at €1,047 million (Q2 2022: €1,206 million) after net special charges of €75 million (Q2 2022: €10 million) that related to restructuring. By contrast, special gains arose from the measurement of contingent considerations at fair value. A 10 Special Items1 Pharmaceuticals € million EBIT Q2 2022 EBIT Q2 2023 EBIT H1 2022 EBIT H1 2023 EBITDA Q2 2022 EBITDA Q2 2023 EBITDA H1 2022 EBITDA H1 2023 Restructuring (145) (106) (151) (161) (145) (106) (151) (161) Acquisition/integration (1) – (2) – (1) – (2) – Divestments 208 2 212 (28) 208 2 212 (28) Litigations/legal risks 4 1 5 (15) 4 1 5 (15) Impairment losses/loss reversals (92) – (92) – – – – – Other 16 28 66 87 15 28 65 87 Total special items (10) (75) 38 (117) 81 (75) 129 (117) 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 13 1. Overview of Sales, Earnings and Financial Position First half of 2023 Sales Sales at Pharmaceuticals fell by 1.4% (Fx & portfolio adj.) to €8,964 million in the first half of 2023. The slight decline was mainly related to tender procedures in China, particularly for Xarelto™ and Adalat™, as well as lower demand for Aspirin™ Cardio. Xarelto™ sales were additionally impacted by competitive pressure from generic products as well as lower prices. Our business with Eylea™ developed positively, with higher volumes more than offsetting lower prices. Nubeqa™ sales more than doubled, with significant volume increases in the United States and Europe in particular. We also registered substantial gains for Kerendia™ that were primarily attributable to the product’s successful market launch in the United States. Our Radiology business continued to post gains, especially for CT Fluid Delivery and Ultravist™, with business benefiting from increased volumes and prices in all regions. Earnings EBITDA before special items at Pharmaceuticals declined by a substantial 13.3% to €2,485 million in the first half of 2023. We increased our R&D investments in cell and gene therapy and chemoproteomics technologies, as well as in projects in advanced clinical development. In addition, the prior-year period had received a significant boost from the sale of noncore businesses. Earnings were also diminished by the product mix and higher costs due to increased procurement prices. By contrast, there was a positive effect of around €120 million arising from lower-than-expected allocations to provisions for the Group-wide Short-Term Incentive (STI) program due to business-related factors. There was a negative currency effect of €46 million (H1 2022: positive currency effect of €7 million). The EBITDA margin before special items declined by 2.7 percentage points to 27.7%. EBIT amounted to €1,853 million (H1 2022: €2,408 million) after net special charges of €117 million (H1 2022: net special gains of €38 million) that primarily related to restructuring. By contrast, special gains arose from the measurement of contingent considerations at fair value. Consumer Health A 11 Key Data – Consumer Health Change (%)1 Change (%)1 € million Q2 2022 Q2 2023 Reported Fx & p adj. H1 2022 H1 2023 Reported Fx & p adj. Sales 1,496 1,466 – 2.0 + 5.4 3,008 3,039 + 1.0 + 4.7 Changes in sales1 Volume + 2.5% – 4.4% + 6.9% – 4.2% Price + 4.3% + 9.8% + 5.0% + 8.9% Currency + 8.7% – 7.0% + 5.9% – 3.5% Portfolio + 0.5% – 0.4% + 0.5% – 0.2% Sales by region Europe/Middle East/Africa 462 448 – 3.0 + 5.2 953 964 + 1.2 + 5.5 North America 611 594 – 2.8 + 0.7 1,192 1,206 + 1.2 + 1.0 Asia/Pacific 238 228 – 4.2 + 3.0 490 472 – 3.7 + 0.9 Latin America 185 196 + 5.9 + 24.1 373 397 + 6.4 + 20.1 EBITDA1 327 328 + 0.3 697 701 + 0.6 Special items1 (3) (7) (21) (13) EBITDA before special items1 330 335 + 1.5 718 714 – 0.6 EBITDA margin before special items1 22.1% 22.9% 23.9% 23.5% EBIT1 239 239 0.0 523 521 – 0.4 Special items1 (3) (7) (21) (13) EBIT before special items1 242 246 + 1.7 544 534 – 1.8 Net cash provided by operating activities 116 52 – 55.2 429 235 – 45.2 Cash flow-relevant capital expenditures 35 35 0.0 58 55 – 5.2 Research and development expenses 51 53 + 3.9 104 105 + 1.0 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 14 1. Overview of Sales, Earnings and Financial Position Second quarter of 2023 Sales Consumer Health increased sales by 5.4% (Fx & portfolio adj.) to €1,466 million in the second quarter of 2023 compared to a strong prior-year period, with contributions from all regions. We posted significant growth in the Dermatology business, thanks partly to continued high demand for Bepanthen™, as well as in the Pain & Cardio category. We also significantly increased sales of cough and cold products amid a persistently strong cold season. Our allergy business expanded slightly despite a weaker allergy season due to weather-related factors. We continued to experience supply constraints overall in the second quarter, especially in the Digestive Health category. // Sales in Europe/Middle East/Africa increased, largely thanks to growth in our Dermatology business that was driven by Bepanthen™ and Canesten™. The Nutritionals category also delivered strong performance with contributions from the GloryFeel™ product family, one of our recent strategic acquisitions. The Allergy & Cold category registered double-digit percentage growth that was largely driven by the Aspirin™ product family. Business at Digestive Health declined markedly due to the aforementioned supply constraints. // Sales in North America were level with the strong prior-year quarter. We registered gains in our cough and cold business, driven in part by Afrin™, and at Digestive Health, thanks partly to MiraLAX™. However, we achieved lower sales in the Pain & Cardio and Nutritionals categories. In addition, sales of allergy products were dampened by the weaker allergy season. // We recorded a moderate expansion of business in Asia/Pacific. We posted significant growth in the Dermatology category that was partly driven by gains for our Kang Wang™ and Pi Kang Wang™ products, which are marketed in China. The Pain & Cardio and Digestive Health categories also registered double-digit percentage growth. Sales in the Nutritionals category fell significantly, partly due to a normalization of demand. // We recorded strong sales growth in Latin America. Business expanded substantially in the Pain & Cardio, Nutritionals, Dermatology and Allergy & Cold categories, with Redoxon™ and Bepanthen™ among the growth drivers. A 12 Sales by Category Change (%)1 Change (%)1 € million Q2 2022 Q2 2023 Reported Fx & p adj. H1 2022 H1 2023 Reported Fx & p adj. Consumer Health 1,496 1,466 – 2.0 + 5.4 3,008 3,039 + 1.0 + 4.7 Nutritionals 378 348 – 7.9 + 1.0 797 723 – 9.3 – 4.8 Allergy & Cold 315 323 + 2.5 + 5.7 659 733 + 11.2 + 11.0 Dermatology 329 337 + 2.4 + 10.9 642 682 + 6.2 + 10.6 Pain & Cardio 233 229 – 1.7 + 10.0 443 445 + 0.5 + 9.1 Digestive Health 226 216 – 4.4 – 0.4 439 426 – 3.0 – 1.4 Other 15 13 – 13.3 + 2.8 28 30 + 7.1 + 24.2 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” Earnings EBITDA before special items at Consumer Health increased by 1.5% to €335 million in the second quarter of 2023 following a very strong prior-year period, partly driven by our continuous cost and price management efforts. There was also a positive effect of around €23 million arising from out-of-period income and a business-related reduction in allocations to provisions for the quarter in connection with the Group-wide Short-Term Incentive (STI) program. In addition, we generated higher proceeds from the sale of minor, nonstrategic brands. By contrast, earnings were diminished by an inflation-driven rise in costs as well as investments in marketing our innovative products. There was a negative currency effect of €31 million (Q2 2022: positive currency effect of €49 million). The EBITDA margin before special items increased by 0.8 percentage points to 22.9%. EBIT came in at €239 million (Q2 2022: €239 million) after special charges of €7 million (Q2 2022: €3 million) relating to restructuring. Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Special Items1 Consumer Health € million EBIT Q2 2022 EBIT Q2 2023 EBIT H1 2022 EBIT H1 2023 EBITDA Q2 2022 EBITDA Q2 2023 EBITDA H1 2022 Restructuring (3) (7) (21) (13) (3) (7) (21) Total special items (3) (7) (21) (13) (3) (7) (21) 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” First half of 2023 Sales Sales at Consumer Health advanced by 4.7% (Fx & portfolio adj.) to €3,039 million in the first half of 2023, with contributions from all regions. We posted double-digit percentage growth in the Allergy & Cold category. The Dermatology and Pain & Cardio categories also performed well, mainly driven by gains for Bepanthen™ and Saridon™. We experienced supply constraints overall, and especially in the Digestive Health category. Sales at Nutritionals declined due to a normalization of demand. Earnings EBITDA before special items at Consumer Health came in at €714 million in the first half of 2023, and was therefore in line with the strong prior-year period (– 0.6%). Earnings benefited from the increase in sales as well as our continuous cost and price management efforts. There was also a positive effect of around €19 million arising from lower-than-expected allocations to provisions for the Group-wide Short-Term Incentive (STI) program due to business-related factors. In addition, we generated higher proceeds from the sale of minor, nonstrategic brands. By contrast, earnings were diminished by an inflation-driven rise in costs as well as investments in marketing our innovative products. Earnings were also held back by a negative currency effect of €35 million (H1 2022: positive currency effect of €55 million). The EBITDA margin before special items declined by 0.4 percentage points to 23.5%. EBIT came in at €521 million (H1 2022: €523 million) after special charges of €13 million (H1 2022: €21 million) relating to restructuring. 1.3 Asset and Financial Position of the Bayer Group Statement of Cash Flows A 14 Bayer Group Summary Statements of Cash Flows € million Q2 2022 Q2 2023 H1 2022 H1 2023 Net cash provided by (used in) operating activities (total) 2,104 484 1,378 (3,066) Net cash provided by (used in) investing activities (total) (2,771) (1,097) (2,029) 505 Net cash provided by (used in) financing activities (total) (1,814) 272 (739) 1,934 Change in cash and cash equivalents due to business activities (2,481) (341) (1,390) (627) Cash and cash equivalents at beginning of period 5,790 4,854 4,564 5,171 Change due to exchange rate movements and to changes in scope of consolidation 106 (32) 241 (63) Cash and cash equivalents at end of period 3,415 4,481 3,415 4,481 Net cash provided by (used in) operating activities // Net operating cash flow in the second quarter of 2023 amounted to €484 million (Q2 2022: €2,104 million). This significant decrease against the prior-year quarter was primarily attributable to the decline in business in the Crop Science Division. Payments to resolve proceedings in the litigations surrounding glyphosate, PCBs and dicamba resulted in a net outflow of €153 million (Q2 2022: €369 million). // In the first half of 2023, net operating cash flow came in at minus €3,066 million (H1 2022: €1,378 million). This was mainly due to the decline in business in the Crop Science Division as well as a higher net outflow for payments to resolve proceedings in the litigations surrounding glyphosate, dicamba, Essure™ and PCBs. 15 A 13 EBITDA H1 2023 (13) (13) Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position Net cash provided by (used in) investing activities // Net investing cash flow in the second quarter of 2023 amounted to minus €1,097 million (Q2 2022: minus €2,771 million). // Cash outflows for acquisitions came in at €353 million (Q2 2022: €15 million). This figure included milestone payments in connection with the acquisitions of the US companies Asklepios BioPharmaceutical, Inc. (AskBio) and Vividion Therapeutics, Inc. // Net cash inflows for current financial assets totaled €12 million (Q2 2022: outflows of €2,261 million). The high outflows in the prior-year period were mainly attributable to investments in money market funds. // In the first half of 2023, net investing cash flow came in at €505 million (H1 2022: minus €2,029 million). This was largely driven by inflows from current financial assets due to the sale of investments in money market funds to cover operational liquidity needs. Net cash provided by financing activities // There was a net cash inflow of €272 million from financing activities in the second quarter of 2023 (Q2 2022: outflow of €1,814 million). // Net borrowings led to a cash inflow of €3,025 million that was mainly attributable to the issuance of new senior bonds for general corporate purposes (Q2 2022: €588 million). // Net interest payments amounted to €416 million (Q2 2022: €436 million). // The Bayer Group paid out €2,360 million (2022: €1,966 million) in dividends. // In the first half of 2023, there was a net cash inflow of €1,934 million from financing activities (H1 2022: outflow of €739 million). This was mainly due to an increase in net borrowings that was partly attributable to the issuance of new senior bonds for general corporate purposes as well as the dividend payout for the Bayer Group. Free cash flow // Free cash flow (total) came in at minus €473 million in the second quarter of 2023 (Q2 2022: €1,140 million), mainly due to the significant decline in operating cash flow. // In the first half of 2023, free cash flow (total) amounted to minus €4,575 million (H1 2022: minus €47 million). This was mainly attributable to the significant fall in operating cash flow. Net financial debt A 15 Net Financial Debt1 € million Dec. 31, 2022 March 31, 2023 June 30, 2023 Change vs. March 31 (%) Bonds and notes 36,602 36,287 39,297 + 8.3 of which hybrid bonds2 4,528 4,529 4,531 0.0 Liabilities to banks3 3,484 3,549 3,701 + 4.3 Lease liabilities 1,234 1,227 1,202 – 2.0 Liabilities from derivatives4 190 155 128 – 17.4 Other financial liabilities 142 2,081 2,189 + 5.2 Receivables from derivatives4 (61) (82) (152) + 85.4 Financial debt 41,591 43,217 46,365 + 7.3 Cash and cash equivalents (5,171) (4,854) (4,481) – 7.7 Current financial assets5 (4,611) (2,286) (2,264) – 1.0 Net financial debt1 31,809 36,077 39,620 + 9.8 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Classified as debt according to IFRS 3 Including both financial and nonfinancial liabilities 4 Including the market values of interest-rate and currency hedges of recorded transactions 5 Including short-term receivables with maturities between 3 and 12 months outstanding from banks and other companies as well as financial investments in debt and equity instruments that were recorded as current on first-time recognition 16 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 1. Overview of Sales, Earnings and Financial Position // Net financial debt of the Bayer Group increased by €3.5 billion to €39.6 billion in the second quarter of 2023 (March 31, 2023: €36.1 billion), mainly due to the outflow for the dividend payment. // In April 2023, Bayer AG exercised its option to extend, by an additional six months, the new €3 billion credit line with banks that it had agreed and drawn on in May 2022. // In May 2023, Bayer AG placed new senior bonds with a total volume of €3 billion under its Debt Issuance Program. The three tranches with volumes of €750 million, €750 million and €1.5 billion have maturities of 3.25 years, 6.25 years and 10 years, respectively. The coupons of the notes are 4.000%, 4.250% and 4.625%, respectively. // The rating agencies currently assess Bayer as follows: A 16 Rating Rating agency Long-term rating Short-term rating Outlook S&P Global Ratings BBB A-2 positive Moody’s Baa2 P-2 stable Fitch Ratings BBB+ F2 stable Asset and capital structure A 17 Bayer Group Summary Statements of Financial Position € million Dec. 31, 2022 March 31, 2023 June 30, 2023 Change vs. March 31 (%) Noncurrent assets 87,117 85,429 82,890 – 3.0 Assets held for sale 3 3 14 . Other current assets 37,757 39,620 38,763 – 2.2 Current assets 37,760 39,623 38,777 – 2.1 Total assets 124,877 125,052 121,667 – 2.7 Equity 38,926 41,017 37,124 – 9.5 Noncurrent liabilities 50,867 49,644 52,356 + 5.5 Current liabilities 35,084 34,391 32,187 – 6.4 Liabilities 85,951 84,035 84,543 + 0.6 Total equity and liabilities 124,877 125,052 121,667 – 2.7 // Between the first quarter and June 30, 2023, total assets decreased by €3.4 billion to €121.7 billion. // Noncurrent assets fell by €2.5 billion to €82.9 billion in the second quarter, mainly due to the aforementioned impairment losses. // Total current assets declined by €0.8 billion to €38.8 billion. This figure primarily reflected the reduction in trade accounts receivable, which encompassed a €0.7 billion decrease in the Crop Science Division due to seasonal factors. // Equity declined by €3.9 billion compared with March 31, 2023, to €37.1 billion, mainly due to the negative net income and the dividend payment. The equity ratio fell to 30.5% as of June 30, 2023 (March 31, 2023: 32.8%). // Liabilities rose by €0.5 billion in the second quarter to €84.5 billion. The placement of new senior bonds for general corporate purposes (€3.0 billion) was a major factor in this respect. This effect was mainly offset by the reduction in personnel-related provisions (€1.3 billion) in connection with the Group-wide Short-Term Incentive (STI) program, and the decline in other liabilities (€0.5 billion) due to the disbursement of milestone payments to Vividion Therapeutics, Inc., United States, and fair value adjustments pertaining to future milestone payments for Asklepios BioPharmaceutical, Inc. (AskBio), United States, and BlueRock Therapeutics LP, United States. 17 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 2. Research, Development, Innovation 2. Research, Development, Innovation Crop Science Collaborations In January, we announced a partnership with the French company M2i Group to supply fruit and vegetable growers around the world with pheromone-based biological crop protection products. Through the agreement, we will become the exclusive distributor of select M2i products targeting Lepidoptera pests in crops that include stone and pome fruits, tomatoes and grapes. In February, we announced a strategic partnership with Kimitec to accelerate the development and commercialization of biological solutions in agriculture. The collaboration focuses on crop protection products that address pests, diseases and weeds, as well as on biostimulants to promote plant growth. The partnership involves building integrated crop management solutions that can scale and develop through our company's global infrastructure backbone. This includes field testing, product support and commercialization. Pharmaceuticals We regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceutical projects. Phase II and III clinical projects The following table shows our most important drug candidates currently in Phase II of clinical testing: A 18 Research and Development Projects (Phase II) Project Indication Asundexian (FXIa inhibitor) Prevention of major adverse cardiac events (MACE) Regorafenib + nivolumab combination1 Recurrent or metastatic solid tumors Runcaciguat (sGC activator) Non-proliferative diabetic retinopathy Zabedosertib (IRAK4 inhibitor) Atopic dermatitis As of July 24, 2023 1 In collaboration with Bristol-Myers Squibb Company, United States, and Ono Pharmaceutical Co., Ltd., Japan 18 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 2. Research, Development, Innovation The following table shows our most important drug candidates currently in Phase III of clinical testing: A 19 Research and Development Projects (Phase III) Project Indication Aflibercept 8 mg (VEGF inhibitor)1 Macular edema secondary to retinal vein occlusion Asundexian (FXIa inhibitor) Prevention of stroke and systemic embolism in atrial fibrillation patients Asundexian (FXIa inhibitor) Secondary prevention of ischemic stroke Copanlisib (PI3K inhibitor) + chemotherapy combination Second-line therapy of indolent non-Hodgkin lymphoma (iNHL) Darolutamide (ODM-201, AR antagonist) Hormone-sensitive metastatic prostate cancer Darolutamide (ODM-201, AR antagonist) / ADT without chemotherapy Adjuvant treatment for localized prostate cancer with very high risk of recurrence Darolutamide (ODM-201, AR antagonist) / ADT Hormone-sensitive prostate cancer in patients with a high risk of biochemical recurrence (BCR) Elinzanetant (neurokinin 1,3 receptor antagonist) Vasomotor symptoms associated with menopause Finerenone (MR antagonist) Heart failure with mid-range or preserved ejection fraction Finerenone (MR antagonist) Non-diabetic chronic kidney disease Gadoquatrane (MRI contrast agent) Magnetic resonance imaging Vericiguat (sGC stimulator)2 Stable heart failure with reduced ejection fraction (HFrEF) As of July 24, 2023 1 In collaboration with Regeneron Pharmaceuticals, Inc., United States 2 In collaboration with Merck & Co., Inc., United States The nature of drug discovery and development is such that not all compounds can be expected to meet the predefined project goals. It is possible that any or all of the projects listed above may have to be discontinued due to scientific and/or commercial reasons and will not result in commercialized products. It is also possible that the requisite US Food and Drug Administration (FDA), European Medicines Agency (EMA) or other regulatory approvals will not be granted for these compounds. Moreover, we regularly review our research and development pipeline so that we can give priority to advancing the most promising pharmaceutical projects. The following material developments occurred in the first half of 2023: Asundexian // In May, the US Food and Drug Administration (FDA) granted Fast Track Designation for our investigational drug asundexian as a potential treatment to prevent stroke and systemic embolism in people with atrial fibrillation. This is the second Fast Track Designation for the oral Factor XIa (FXIa) inhibitor. Fast Track Designation is intended to facilitate the development and expedite the review of drug candidates to treat serious medical conditions and fulfill unmet medical needs. Darolutamide // In March, we further expanded the global clinical development program for darolutamide in prostate cancer with the new Phase III clinical study ARASTEP. This study is investigating the efficacy of darolutamide plus androgen deprivation therapy (ADT) versus ADT alone in hormone-sensitive prostate cancer in patients with high-risk biochemical recurrence (BCR) who have no evidence of metastatic disease by conventional imaging and a positive PSMA PET/CT at baseline. Aflibercept // In May, we initiated the Phase III QUASAR study, designed to evaluate the efficacy and safety of aflibercept 8 mg dosed at extended treatment intervals compared to the standard of care, Eylea™ (aflibercept 2 mg), in macular edema secondary to retinal vein occlusion (RVO). 19 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 2. Research, Development, Innovation Gadoquatrane // In June, we announced the start of the Phase III clinical development program QUANTI with gadoquatrane, a next-generation gadolinium-based contrast agent for magnetic resonance imaging (MRI) which has the potential to enable a substantially lower clinical gadolinium dose for patients. The program aims to evaluate the efficacy and safety of the development candidate in contrast-enhanced MRI in two multinational Phase III studies and one pediatric study across all body regions and all ages. Adrenomedullin Pegol // In May, we decided not to pursue further development activities for the Phase II program Adrenomedullin Pegol (PEG-ADM), developed for the treatment of acute respiratory distress syndrome, for scientific reasons. BDKRB1 receptor antagonist // In March, we decided not to further pursue the development of our BDKRB1 receptor antagonist based on the Phase IIa results in the indication neuropathic pain. Runcaciguat // In April, we decided to discontinue further development of runcaciguat, a soluble guanylate cyclase (sGC) activator in Phase II clinical development, in the indication chronic kidney disease (CKD). We will continue the sGC activator/CKD development program with the oral sGC activator BAY3283142, a follow-up compound to runcaciguat which shows an improved PK/PD profile (pharmacokinetic/ pharmacodynamic) and is currently completing Phase I clinical development. Filings and approvals The most important drug candidates currently in the approval process are: A 20 Main Products Submitted for Approval Project Region Indication Aflibercept 8mg (VEGF inhibitor)1 USA2, EU, Japan Diabetic macular edema (DME) Aflibercept 8mg (VEGF inhibitor)1 USA2, EU, Japan, China Neovascular age-related macular degeneration (nAMD) As of June 29, 2023 1 In collaboration with Regeneron Pharmaceuticals, Inc., United States 2 Submitted by Regeneron Pharmaceuticals, Inc., United States Finerenone // In May, the Chinese National Medical Products Administration granted approval for a label update to extend the indication of Kerendia™ to early stages of chronic kidney disease associated with type 2 diabetes based on findings from the Phase III FIGARO-DKD cardiovascular outcomes study. Aflibercept // In March, we submitted an application to the Japanese Ministry of Health, Labor, and Welfare (MHLW) seeking approval of aflibercept 8 mg for the treatment of two major retinal diseases: neovascular (wet) age-related macular degeneration (nAMD) and diabetic macular edema (DME). // In May, we submitted an application to the Center for Drug Evaluation (CDE) of the Chinese National Medical Products Administration seeking approval of aflibercept 8 mg for the treatment of neovascular (wet) age-related macular degeneration (nAMD). Darolutamide // In February, we received approval in Japan for an additional indication for our cancer drug Nubeqa™ in patients with metastatic hormone-sensitive prostate cancer (mHSPC). Approval for this label extension was then also granted by the European Commission and the Chinese regulatory authorities in March. 20 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 2. Research, Development, Innovation Calantic™ Digital Solutions // In February, we received approval in Japan for Calantic Viewer, which is the regulatory-relevant part of the Calantic™ Digital Solutions digital platform. The platform offers access to AI-enabled and digital applications for radiological imaging. Ultravist™ // In May, our Ultravist™-300 and -370 contrast agent was approved in the United States for use in contrast-enhanced mammography, an imaging procedure with growing potential that combines digital mammography with the administration of an iodinated contrast agent. Cell and gene therapy Our development portfolio comprises seven projects in various stages of clinical development that cover a number of therapeutic areas with a high unmet medical need, with innovative programs in Parkinson’s disease, rare diseases and congestive heart failure. The following material developments occurred in the first half of 2023: // In June, together with our subsidiary BlueRock Therapeutics LP, United States, we announced first positive results from the Phase I study of bemdaneprocel, BlueRock’s investigational neuronal stem cell therapy in Parkinson’s disease. A Phase II study is planned to begin enrolling patients in the first half of 2024. // Our subsidiary Asklepios Biopharmaceutical Inc., (AskBio), United States, has initiated a Phase I study with a gene therapy that is being developed for the treatment of Huntington’s disease. // AskBio has also initiated a Phase I/II study with a gene therapy that is being developed for the treatment of limb-girdle muscular dystrophy 2I/R9 (LGMD2I/R9). External innovation In the area of external innovation, progress was made as follows in the first half of 2023. // In March, BlueRock announced a collaboration with US companies Rune Labs, Inc. and Emerald Innovations, Inc., focused on integrating wearable and invisible contactless digital health technologies in a clinical trial in Parkinson’s disease. // In May, we entered into a collaboration with BicycleTx Limited, United Kingdom, in the field of novel targeted radionuclide therapies in oncology. // Likewise in May, we inaugurated an incubator in Cambridge, Massachusetts, United States, that specializes in cell and gene therapy. The aim is to offer startup entrepreneurs access to our enterprise- wide expertise and state-of-the art laboratory and office space. // In June, we announced the acquisition of an exclusive license from Cedilla Therapeutics, Inc., United States, in the field of precision oncology. // Likewise in June, we announced a collaboration with Acuitas Therapeutics, Inc., Canada, in the area of lipid nanoparticle technology, to strengthen our gene editing programs. Consumer Health In the first half of the year, we partnered with UK digital health company Huma Therapeutics Limited to launch the Bayer Aspirin Heart Risk Assessment on the US market. This online tool quickly assesses an individual’s risk factors for developing cardiovascular disease over the next 10 years, and the results can be shared with a healthcare professional as part of ongoing health management. The digital tool was developed using UK Biobank data with over 450,000 participants. It only takes five minutes and does not require invasive measurements which are a barrier for patients to understand their heart health risk. 21 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks In the Asia/Pacific region, we expanded the Elevit™ brand in China from prenatal to infant with the launch of two new supplements: DHA for healthy brain and eye development, and a probiotic powder to support gut health. These additions are critical to Elevit™’s mission of delivering nutrition for the healthiest start in the first 1,000 days of life. We also expanded our range of Talcid™ products in China to address gut wellbeing and overall wellness needs with the launch of probiotics for women and seniors. These science- backed products are aimed at consumers who actively seek non-medicated solutions in the Digestive Health category. Leaps by Bayer Our impact investment arm Leaps by Bayer invested in four new companies in the first half of 2023. At the beginning of the year, Leaps co-led a financing round for NextPoint Therapeutics, Inc., United States, a biotechnology company working on the development of novel monotherapies in immuno-oncology. Leaps also invested in Boundless Bio, Inc., United States, a next-generation precision oncology company. Furthermore, Leaps also co-led a financing round for Paratus Sciences Corporation, United States, a company which is seeking to develop new therapies for some of the most challenging health issues facing humanity on the basis of its studies of bat biology. Unlike humans, bats have a natural ability to control inflammation, tolerate viral infection and resist cancer. In the area of agriculture, Leaps has invested in ChrysaLabs Inc., Canada, a startup which combines artificial intelligence with a sampling probe in order to provide real-time measurements of soil nutrients, delivering findings faster and more cost-effectively than is possible with conventional methods. In addition, at the beginning of the year the Crop Science Division announced a new collaboration with Oerth Bio LLC, United States, a company already listed in the Leaps portfolio, aimed at developing environmentally friendly crop protection products using Oerth’s PROTAC™ protein degradation technology. 3. Report on Future Perspectives and on Opportunities and Risks 3.1 Future Perspectives 3.1.1 Economic Outlook A 21 Economic Outlook Growth1 2022 Growth forecast1 2023 World + 3.1% + 2.4% European Union + 3.6% + 0.7% of which Germany + 1.9% – 0.3% United States + 2.1% + 1.5% Emerging Markets2 + 3.7% + 4.0% 1 Real GDP growth, source: S&P Global Market Intelligence 2 Including about 50 countries defined by S&P Global Market Intelligence as Emerging Markets in line with the World Bank As of June 2023 As before, global economic growth is expected to decline year on year in 2023. However, the slowdown is likely to be less pronounced overall than initially anticipated. Persisting inflation and further rises in interest rates are expected to dampen economic development in many parts of the world. While growth in the United States is forecast to decline substantially against the prior year, a recession is no longer expected there. Only modest growth is predicted in Europe, with Germany’s economic output in particular now expected to decline. The pace of growth in the Emerging Markets will likely accelerate overall compared with the previous year. 22 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 3. Report on Future Perspectives and on Opportunities and Risks A 22 Economic Outlook for Division-Specific Markets Growth 2022 Growth forecast 2023 Seed and crop protection market1 + 12% – 2% Pharmaceuticals market2 + 8% + 7% Consumer health market3 + 9% + 5% 1 Source: Bayer’s estimate (as of June 2023) 2 Source: IQVIA Market Prognosis (as of May 2023), all rights reserved; currency-adjusted 3 Source: Bayer’s estimate (as of June 2023), taking into account external sources; currency-adjusted We now expect the seed and crop protection market to contract by 2% (previously: grow by 3%) in 2023 due to a fall in glyphosate prices. The seed and crop protection market excluding glyphosate is projected to grow by a low single-digit percentage, mainly driven by seeds and in particular corn, with commodity prices remaining above historical levels. We now expect the pharmaceuticals market to expand by 7% (previously: + 6%) in 2023. Innovative products will continue to drive growth and more than offset losses due to the expiration of patents. We now expect growth of 5% (previously: + 4%) in the consumer health market for 2023, mainly due to economic conditions resulting in price increases and consumers’ continued focus on health and wellness. 3.1.2 Corporate Outlook Based on the current development of business and our internal planning, we have lowered our outlook for full-year 2023. This is mainly due to a further significant decline in sales of glyphosate-based products. For full-year 2023, we now anticipate sales of between €48.5 billion and €49.5 billion on a currency- adjusted basis (previous forecast: €51 billion to €52 billion). This now corresponds to a decline of 2% to 3% on a currency- and portfolio-adjusted basis (previous forecast: increase of 2% to 3%). EBITDA before special items is now expected to come in at €11.3 billion to €11.8 billion on a currency-adjusted basis (previous forecast: €12.5 billion to €13.0 billion). In addition, we now anticipate core earnings per share of €6.20 to €6.40 on a currency-adjusted basis (previous forecast: €7.20 to €7.40). Compared with the currency-adjusted forecast above, our guidance based on the closing rates as of June 30, 2023, only projects a significant impact from currency effects with respect to sales. Based on these exchange rates, we now expect to generate sales of €46.8 billion to €47.8 billion in 2023 (previous forecast: €50 billion to €51 billion), which now corresponds to a decline of 2% to 3% on a currency- and portfolio-adjusted basis (previous forecast: increase of 2% to 3%). Overall, it should be noted that a 1% appreciation (depreciation) of the euro against all other currencies would decrease (increase) sales by some €400 million on an annual basis. 23 Bayer Half-Year Financial Report as of June 30, 2023 A Interim Group Management Report 24 3. Report on Future Perspectives and on Opportunities and Risks A 23 Forecast for 2023 Initial currency-adjusted forecast for 2023 Revised currency- adjusted forecast for 2023 Initial forecast for 2023 at closing rates on Dec. 31, 2022 Revised forecast for 2023 at closing rates on June 30, 2023 € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) € billion Fx & p adj. change (%) Sales 51 to 52 + 2 to + 3 48.5 to 49.5 – 2 to – 3 50 to 51 + 2 to + 3 46.8 to 47.8 – 2 to – 3 Crop Science ~ + 3 ~ – 5 ~ + 3 ~ – 5 Pharmaceuticals ~ + 1 ~ 0 ~ + 1 ~ 0 Consumer Health ~ + 5 ~ + 5 ~ + 5 ~ + 5 Margin (%) Margin (%) Margin (%) Margin (%) EBITDA before special items1 12.5 to 13.0 11.3 to 11.8 12.5 to 13.0 11.3 to 11.8 Crop Science 25 to 26 ~ 21 25 to 26 ~ 21 Pharmaceuticals slightly above 29 ~ 28 ~ 30 ~ 29 Consumer Health ~ 23 ~ 23 ~ 23 ~ 23 Financial result (core)2 ~ – 1.9 ~ – 1.9 ~ – 1.9 ~ – 1.9 Tax rate (core)3 ~ 23% ~ 23% ~ 23% ~ 23% Free cash flow1 ~ 3.0 ~ 0 ~ 3.0 ~ 0 Net financial debt1 32 to 33 ~ 36 32 to 33 ~ 36 Special items in EBIT1 ~ – 1.0 ~ – 3.5 ~ – 1.0 ~ – 3.5 € € € € Core earnings per share1 7.20 to 7.40 6.20 to 6.40 7.20 to 7.40 6.20 to 6.40 Fx & p adj. = currency- and portfolio-adjusted 1 For definition see A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 Financial result before special items 3 (Income taxes + special items in income taxes + tax effects on adjustments) / (core EBIT + financial result + special items in financial result) As before, we plan to take total special charges of about €1.0 billion (currency-adjusted) in EBITDA in 2023 in connection with restructuring measures. 3.2 Opportunities and Risks As a global enterprise with a diversified portfolio, the Bayer Group is exposed to a wide range of internal and external developments and events that could significantly impact the achievement of our financial and nonfinancial objectives. Opportunity and risk management at Bayer forms an integral part of the Group-wide corporate governance system. Our opportunity and risk management process and opportunity and risk status are outlined in detail in the Annual Report 2022, A 3.2 “Opportunity and Risk Report.” Overall assessment by the Board of Management We currently have not identified any material changes in our risk status compared with the assessment given in the Annual Report 2022. In the opinion of the Board of Management, the Bayer Group’s continued existence remains unendangered. Significant developments that have occurred in respect of the legal risks since publication of the Bayer Annual Report 2022 (Note [30] to the Consolidated Financial Statements) are described in the Notes to the Condensed Consolidated Interim Financial Statements under “Legal Risks.” Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Bayer Group Consolidated Income Statements Condensed Consolidated Interim Financial Statements as of June 30, 2023 Bayer Group Consolidated Income Statements B 1 € million Q2 2022 Q2 2023 H1 2022 H1 2023 Net sales 12,819 11,044 27,458 25,433 Cost of goods sold (5,680) (4,718) (10,856) (10,451) Gross profit 7,139 6,326 16,602 14,982 Selling expenses (3,736) (3,196) (7,020) (6,590) Research and development expenses (1,928) (1,228) (3,382) (2,799) General administration expenses (736) (489) (1,397) (1,147) Other operating income 780 614 1,289 998 Other operating expenses (1,350) (2,983) (1,711) (3,427) EBIT1 169 (956) 4,381 2,017 Equity-method income (loss) (39) (45) (59) (82) Financial income 50 63 117 212 Financial expenses (703) (636) (1,240) (1,115) Financial result (692) (618) (1,182) (985) Income before income taxes (523) (1,574) 3,199 1,032 Income taxes 234 (315) (194) (739) Income after income taxes (289) (1,889) 3,005 293 of which attributable to noncontrolling interest 9 (2) 12 2 of which attributable to Bayer AG stockholders (net income) (298) (1,887) 2,993 291 € Earnings per share Basic (0.30) (1.92) 3.05 0.30 Diluted (0.30) (1.92) 3.05 0.30 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 25 Bayer Half-Year Financial Report as of June 30, 2023 Bayer Group Consolidated Statements of Comprehensive Income € million Income after income taxes of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Remeasurements of the net defined benefit liability for post- employment benefit plans Income taxes Other comprehensive income from remeasurements of the net defined benefit liability for post-employment benefit plans Changes in the fair value of equity instruments measured at fair value Income taxes Other comprehensive income from equity instruments measured at fair value Other comprehensive income relating to associates accounted for using the equity method Other comprehensive income that will not be reclassified subsequently to profit or loss Changes in the fair value of cash flow hedges Reclassified to profit or loss Income taxes Other comprehensive income from cash flow hedges Changes in time value of options used as hedging instrument Income taxes Other comprehensive income from time value of options Other comprehensive income from available-for-sale financial assets Other comprehensive income from exchange differences Other comprehensive income relating to associates accounted for using the equity method Other comprehensive income that may be reclassified subsequently to profit or loss Total other comprehensive income1 of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders Total comprehensive income of which attributable to noncontrolling interest of which attributable to Bayer AG stockholders 1 Other comprehensive income is recognized outside profit or loss in equity. B Condensed Consolidated Interim Financial Report Bayer Group Consolidated Statements of Comprehensive Income B 2 Q2 2022 Q2 2023 H1 2022 H1 2023 (289) (1,889) 3,005 293 9 (2) 12 2 (298) (1,887) 2,993 291 1,100 234 1,286 744 (406) (64) (511) (196) 694 170 775 548 (47) 1 (104) (13) 14 (4) 15 (3) (33) (3) (89) (16) – – – – 661 167 686 532 (185) (49) (182) (66) 139 (20) 147 (1) 6 16 13 14 (40) (53) (22) (53) (1) (1) (8) (7) 3 – 3 2 2 (1) (5) (5) – – 1 – 2,226 243 3,333 (199) 1 – 2 (2) 2,189 189 3,309 (259) 2,850 356 3,995 273 6 3 7 1 2,844 353 3,988 272 2,561 (1,533) 7,000 566 15 1 19 3 2,546 (1,534) 6,981 563 26 Bayer Half-Year Financial Report as of June 30, 2023 Bayer Group Consolidated Statements of Financial Position € million Noncurrent assets Goodwill Other intangible assets Property, plant and equipment Investments accounted for using the equity method Other financial assets Other receivables Deferred taxes Current assets Inventories Trade accounts receivable Other financial assets Other receivables Claims for income tax refunds Cash and cash equivalents Assets held for sale Total assets Equity Capital stock Capital reserves Other reserves Equity attributable to Bayer AG stockholders Equity attributable to noncontrolling interest Noncurrent liabilities Provisions for pensions and other post-employment benefits Other provisions Refund liabilities Contract liabilities Financial liabilities Income tax liabilities Other liabilities Deferred taxes Current liabilities Other provisions Refund liabilities Contract liabilities Financial liabilities Trade accounts payable Income tax liabilities Other liabilities Liabilities directly related to assets held for sale Total equity and liabilities B Condensed Consolidated Interim Financial Report Bayer Group Consolidated Statements of Financial Position B 3 June 30, 2022 Dec. 31, 2022 June 30, 2023 41,583 39,648 36,922 25,367 24,183 23,438 13,275 13,674 13,177 762 893 930 2,030 2,049 1,867 1,155 1,065 1,212 5,072 5,605 5,344 89,244 87,117 82,890 11,371 13,636 13,768 14,785 10,312 13,717 4,782 5,208 3,149 1,815 1,923 2,079 1,785 1,507 1,569 3,412 5,171 4,481 1,600 3 14 39,550 37,760 38,777 128,794 124,877 121,667 2,515 2,515 2,515 18,261 18,261 18,261 17,243 17,997 16,172 38,019 38,773 36,948 185 153 176 38,204 38,926 37,124 5,665 4,388 3,596 8,294 8,591 8,296 166 10 194 635 561 517 38,061 33,791 36,557 1,672 1,672 1,451 1,618 1,127 1,028 836 727 717 56,947 50,867 52,356 7,152 5,092 3,618 7,985 5,583 8,014 2,174 4,163 1,657 6,573 7,861 9,960 6,097 7,545 5,970 1,036 1,056 799 2,513 3,784 2,169 113 – – 33,643 35,084 32,187 128,794 124,877 121,667 27 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Bayer Group Consolidated Statements of Cash Flows Bayer Group Consolidated Statements of Cash Flows B 4 € million Q2 2022 Q2 2023 H1 2022 H1 2023 Income after income taxes (289) (1,889) 3,005 293 Income taxes (234) 315 194 739 Financial result 692 618 1,182 985 Income taxes paid (526) (406) (968) (872) Depreciation, amortization and impairment losses (loss reversals) 2,482 3,287 3,562 4,632 Change in pension provisions (76) (139) (147) (247) (Gains) losses on retirements of noncurrent assets (296) (20) (339) (42) Decrease (increase) in inventories (225) (163) 219 (194) Decrease (increase) in trade accounts receivable 353 856 (3,833) (3,532) (Decrease) increase in trade accounts payable 68 (300) (990) (1,458) Changes in other working capital, other noncash items 155 (1,675) (507) (3,370) Net cash provided by (used in) operating activities 2,104 484 1,378 (3,066) Cash outflows for additions to property, plant, equipment and intangible assets (550) (606) (899) (1,072) Cash inflows from the sale of property, plant, equipment and other assets 261 60 457 102 Cash outflows for divestments less divested cash – (20) – (14) Income tax payments related to divestments and asset sales – (290) – (355) Cash inflows from noncurrent financial assets 3 130 3 130 Cash outflows for noncurrent financial assets (231) (95) (314) (246) Cash outflows for acquisitions less acquired cash (15) (353) (15) (482) Interest and dividends received 22 65 47 162 Cash inflows from (outflows for) current financial assets (2,261) 12 (1,308) 2,280 Net cash provided by (used in) investing activities (2,771) (1,097) (2,029) 505 Capital contributions – 23 15 23 Dividend payments (1,966) (2,360) (1,966) (2,360) Issuances of debt 4,192 3,750 6,471 5,936 Retirements of debt (3,604) (725) (4,686) (1,066) Interest paid including interest-rate swaps (441) (422) (614) (605) Interest received from interest-rate swaps 5 6 41 6 Net cash provided by (used in) financing activities (1,814) 272 (739) 1,934 Change in cash and cash equivalents due to business activities (2,481) (341) (1,390) (627) Cash and cash equivalents at beginning of period 5,790 4,854 4,564 5,171 Change in cash and cash equivalents due to changes in scope of consolidation – (1) 3 (1) Change in cash and cash equivalents due to exchange rate movements 106 (31) 238 (62) Cash and cash equivalents at end of period 3,415 4,481 3,415 4,481 28 Bayer Half-Year Financial Report as of June 30, 2023 Bayer Group Consolidated Statements of Changes in Equity € million Capital stock Capital reserves Other reserves Jan. 1, 2022 2,515 18,261 12,244 Total comprehensive income Income after income taxes 2,993 Other comprehensive income 3,988 Miscellaneous other changes Equity transactions with owners Dividend payments (1,965) Other changes (17) June 30, 2022 2,515 18,261 17,243 Jan. 1, 2023 2,515 18,261 17,997 Total comprehensive income Income after income taxes 291 Other comprehensive income 272 Miscellaneous other changes Equity transactions with owners Dividend payments (2,358) Other changes (30) June 30, 2023 2,515 18,261 16,172 B Condensed Consolidated Interim Financial Report Bayer Group Consolidated Statements of Changes in Equity B 5 Equity attributable to Bayer AG stockholders Equity attributable to non- controlling interest Equity 33,020 148 33,168 2,993 12 3,005 3,988 7 3,995 (1,965) (1) (1,966) (17) 19 2 38,019 185 38,204 38,773 153 38,926 291 2 293 272 1 273 (2,358) (2) (2,360) (30) 22 (8) 36,948 176 37,124 29 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Explanatory Notes Accounting policies The consolidated interim financial statements as of June 30, 2023, were prepared in condensed form in compliance with IAS 34 according to the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB), London, which are endorsed by the European Union, and the Interpretations of the IFRS Interpretations Committee in effect at the closing date. Reference should be made as appropriate to the Notes to the Consolidated Financial Statements for the 2022 fiscal year, particularly with regard to the main recognition and valuation principles. As regards those Notes’ listed standards, amendments and interpretations to be applied for the first time in fiscal 2023, none have had any material impact on the Bayer Group this fiscal year. Impact of Russia’s invasion of Ukraine We do not currently see any material impact of Russia’s invasion of Ukraine on our business operations and thus the Group’s financial position or results of operations. We are continually analyzing the future direct and indirect effects of economic developments and sanctions on the valuation of assets and liabilities, such as possible impacts on supply chains and energy supplies. Impact of climate risks We are still looking at the impact of transitional and physical climate-related risks from various perspectives to better evaluate them in relation to our company and the Group’s financial position or results of operations. We do not currently see any fundamentally changed expectations with regard to the Group’s financial position or results of operations. Changes in underlying parameters Changes in the underlying parameters relate primarily to currency exchange rates and the interest rates used to calculate pension obligations. The exchange rates for major currencies against the euro varied as follows: B 6 Exchange Rates for Major Currencies Closing rate Average rate €1 / Dec. 31, 2022 June 30, 2022 June 30, 2023 H1 2022 H1 2023 BRL Brazil 5.64 5.42 5.30 5.53 5.48 CAD Canada 1.44 1.34 1.44 1.39 1.46 CNY China 7.37 6.97 7.90 7.09 7.49 GBP United Kingdom 0.89 0.86 0.86 0.84 0.88 JPY Japan 140.72 141.63 157.08 134.08 145.51 RUB Russia 77.92 56.38 96.47 81.00 83.07 USD United States 1.07 1.04 1.09 1.09 1.08 30 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group B 7 Application of IAS 29 (Financial Reporting in Hyperinflationary Economies) Company name Place of business Applied since Bayer S. A. Buenos Aires, Argentina July 1, 2018 Bayer Türk Kimya Sanayii Limited Sirketi Istanbul, Turkey April 1, 2022 Monsanto Gida Ve Tarim Ticaret Ltd Sirketi Istanbul, Turkey April 1, 2022 Bayer Tohumculuk ve Tarim Limited Sirketi Istanbul, Turkey March 7, 2023 The effects in initial and ongoing accounting have so far been immaterial for the Group. The most important interest rates used to calculate the present value of pension obligations are given below. Provisions for pensions and other post-employment benefits declined by €792 million to €3,596 million compared with December 31, 2022. This was mainly the result of changes in discount rates and the development of the fair value of plan assets. B 8 Discount Rate for Pension Obligations % Dec. 31, 2022 June 30, 2022 June 30, 2023 Germany 3.90 3.30 4.20 United Kingdom 4.50 3.60 5.00 United States 5.30 4.60 5.10 Segment reporting As of June 30, 2023, the Bayer Group comprised the three reportable segments Crop Science, Pharmaceuticals and Consumer Health. B 9 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million Q2 2022 Q2 2023 Q2 2022 Q2 2023 Q2 2022 Q2 2023 Net sales (external) 6,461 4,924 4,818 4,557 1,496 1,466 Currency- and portfolio-adjusted change1 + 17.2% – 18.5% + 2.1% + 0.2% + 6.8% + 5.4% Intersegment sales2 2 0 3 8 0 2 Net sales (total)2 6,463 4,924 4,821 4,565 1,496 1,468 EBIT1 (258) (2,207) 1,206 1,047 239 239 EBITDA before special items1 1,749 725 1,478 1,379 330 335 Net cash provided by operating activities 2,551 338 35 442 116 52 Depreciation, amortization, impairment losses/loss reversals 1,959 2,873 353 257 88 89 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 2022 figures restated 31 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group B 9 (continued) Key Data by Segment All other segments Enabling functions and consolidation Group € million Q2 2022 Q2 2023 Q2 2022 Q2 2023 Q2 2022 Q2 2023 Net sales (external) 42 94 2 3 12,819 11,044 Currency- and portfolio-adjusted change1 – 10.8% + 120.5% – – + 9.6% – 8.2% Intersegment sales2 1 0 (6) (10) – – Net sales (total)2 43 94 (4) (7) 12,819 11,045 EBIT1 (30) 4 (988) (39) 169 (956) EBITDA before special items1 (11) 20 (197) 68 3,349 2,527 Net cash provided by operating activities – – – – 2,104 484 Depreciation, amortization, impairment losses/loss reversals 19 16 63 52 2,482 3,287 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” 2 2022 figures restated B 10 Key Data by Segment Crop Science Pharmaceuticals Consumer Health € million H1 2022 H1 2023 H1 2022 H1 2023 H1 2022 H1 2023 Net sales (external) 14,908 13,275 9,442 8,964 3,008 3,039 Currency- and portfolio-adjusted change1 + 19.7% – 8.6% + 2.4% – 1.4% + 11.9% + 4.7% Intersegment sales2 4 1 3 9 0 4 Net sales (total)2 14,912 13,276 9,445 8,973 3,008 3,043 EBIT1 2,770 112 2,408 1,853 523 521 EBITDA before special items1 5,418 3,992 2,867 2,485 718 714 Net cash provided by (used in) operating activities 164 (3,026) 1,059 1,149 429 235 Depreciation, amortization, impairment losses/loss reversals 2,646 3,803 588 515 174 180 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” B 10 (continued) Key Data by Segment All other segments Enabling functions and consolidation Group € million H1 2022 H1 2023 H1 2022 H1 2023 H1 2022 H1 2023 Net sales (external) 88 145 12 10 27,458 25,433 Currency- and portfolio-adjusted change1 – 13.0% + 55.5% – – + 12.1% – 4.5% Intersegment sales2 1 1 (8) (14) – – Net sales (total)2 89 146 4 (4) 27,458 25,433 EBIT1 (29) 18 (1,291) (487) 4,381 2,017 EBITDA before special items1 7 51 (410) (244) 8,600 6,998 Net cash provided by (used in) operating activities – – – – 1,378 (3,066) Depreciation, amortization, impairment losses/loss reversals 36 33 118 101 3,562 4,632 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” To simplify the consolidation process, leases between fully consolidated companies continue to be recognized as operating leases under IAS 17 within the segment data in the consolidated financial statements of the Bayer Group even after the first-time application of IFRS 16 as of January 1, 2019. This does not have any relevant impact on the respective key data used in the steering of the company and internal reporting to the Board of Management as the chief operating decision maker. 32 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The following table shows the reconciliation of EBITDA before special items of the above-mentioned segments and the reconciliation to income before income taxes of the Group from continuing operations: B 11 Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes € million Q2 2022 Q2 2023 H1 2022 H1 2023 EBITDA before special items of segments 3,546 2,459 9,010 7,242 EBITDA before special items of enabling functions and consolidation (197) 68 (410) (244) EBITDA before special items1 3,349 2,527 8,600 6,998 Depreciation, amortization and impairment losses/loss reversals before special items of segments (1,007) (941) (2,031) (1,959) Depreciation, amortization and impairment losses/loss reversals before special items of corporate functions and consolidation (62) (52) (117) (101) Depreciation, amortization and impairment losses/loss reversals before special items (1,069) (993) (2,148) (2,060) EBIT before special items of segments 2,539 1,518 6,979 5,283 EBIT before special items of enabling functions and consolidation (259) 16 (527) (345) EBIT before special items1 2,280 1,534 6,452 4,938 Special items of segments (1,382) (2,435) (1,307) (2,779) Special items of enabling functions and consolidation (729) (55) (764) (142) Special items1 (2,111) (2,490) (2,071) (2,921) EBIT of segments 1,157 (917) 5,672 2,504 EBIT of enabling functions and consolidation (988) (39) (1,291) (487) EBIT1 169 (956) 4,381 2,017 Financial result (692) (618) (1,182) (985) Income before income taxes (523) (1,574) 3,199 1,032 1 For definition see Annual Report 2022, A 2.3 “Alternative Performance Measures Used by the Bayer Group.” The balance of other operating expenses and other operating income of minus €2,369 million in the second quarter of 2023 (Q2 2022: minus €570 million) included expenses of €2,436 million arising from an impairment loss on goodwill in the Crop Science Division. These expenses are reported as special items in segment reporting. The special items in the second quarter of 2022 were mainly in connection with litigations. Scope of consolidation Changes in the scope of consolidation The consolidated financial statements as of June 30, 2023, included 351 companies (December 31, 2022: 354 companies). Five joint ventures (December 31, 2022: five) and 42 associates (December 31, 2022: 43) were accounted for in the consolidated financial statements using the equity method according to IAS 28 (Investments in Associates and Joint Ventures). Acquisitions, divestments and discontinued operations Acquisitions in 2023 On February 13, 2023, we completed the acquisition of 100% of the shares in Blackford Analysis Ltd., United Kingdom, a global provider of radiology AI platform technology, for a purchase price of approximately €75 million. The purchase price allocation has not yet been concluded. Blackford provides platform infrastructure and access to a rich clinical application (ClinApp) ecosystem focused on medical imaging and analytics. The acquisition follows a development and license agreement between the two companies in 2020 that laid the foundation for Bayer’s recently launched medical imaging platform, Calantic™ Digital Solutions. The acquired companies are assigned to the Pharmaceuticals segment. 33 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Acquisitions in 2022 On June 28, 2022, Bayer acquired 30% of the shares in Natsana GmbH, Germany, for a purchase price of around €96 million. The acquired shares are accounted for using the equity method. Natsana is an online-only provider focused on the sale and development of natural supplements such as vitamins, minerals, nutrients and probiotics. Its portfolio comprises over 100 products under its three main brands: Feel Natural, Nature Love and Natural Elements. Bayer will acquire the other 70% of shares in 2025 based on a buyout mechanism agreed to when closing the transaction. The company is assigned to the Consumer Health segment. Assets held for sale and discontinued operations There were no discontinued operations to report in 2023 or 2022. The assets held for sale, net of directly related liabilities, totaled around €14 million as of June 30, 2023. They primarily related to the planned sale of a production facility in Spain. The prior-year figure mainly related to the sale of the Environmental Science Professional business to the private equity firm Cinven, United Kingdom. Environmental Science Professional is a global leader offering solutions to control pests, disease and weeds in nonagricultural areas such as vector control, professional pest management, vegetation management, forestry, and turf and ornamentals. The transaction was completed on October 4, 2022. The purchase price paid for the business amounted to approximately €2,299 million before customary purchase price adjustments. The divestment gain of €785 million was recognized in other operating income. Assets held for sale in the previous year also included an amount of around €51 million from the sale of office and administrative space in St. Louis, United States. These were attributable entirely to property, plant and equipment. In addition, assets held for sale contained intangible assets amounting to some €38 million in total. These included around €16 million due to the divestment of the product Nebido™ to Grünenthal GmbH, Germany, as well as around €22 million for the divestment of the Marvelon™ and Mercilon™ trademarks in China, Hong Kong, Macau and Vietnam within the Pharmaceuticals segment. The assets and liabilities held for sale as of June 30, 2023, were as follows: B 12 Assets and Liabilities Held for Sale € million June 30, 2022 June 30, 2023 Goodwill 1,337 – Other intangible assets 75 – Property, plant and equipment 80 14 Deferred taxes 5 – Inventories 92 – Trade accounts receivable 4 – Other receivables 2 – Claims for income tax refunds 2 – Cash and cash equivalents 3 – Assets held for sale 1,600 14 Provisions for pensions and other post-employment benefits 5 – Other provisions 2 – Refund liabilities 84 – Financial liabilities 8 – Deferred taxes 13 – Trade accounts payable 1 – Liabilities directly related to assets held for sale 113 – 34 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Goodwill, other intangible assets and property, plant and equipment Unscheduled impairment testing was conducted in the first quarter of 2023 for the Crop Science segment’s cash-generating unit glyphosate after a weak start to 2023 led to revised full-year expectations, mainly due to significantly reduced market price expectations for glyphosate. In addition, lower expectations for volumes also had an impact. Impairment testing gave rise to impairment losses of approximately €278 million, attributable entirely to property, plant and equipment. The impairment losses were allocated to the cost of goods sold, with the respective figures determined on the basis of fair value less costs of disposal while applying an after-tax cost of capital rate of 11.5%. Impairment testing was conducted in the second quarter of 2023 in the Crop Science segment due to a further deterioration in business prospects and updated long-term corporate planning. In the Pharmaceuticals and Consumer Health segments, updated long-term corporate planning did not necessitate impairment testing. The unscheduled impairment testing in the Crop Science segment resulted in net impairment losses on intangible assets totaling €2,020 million. An impairment loss of €2,436 million was recognized on goodwill. There were additional impairment losses on property, plant and equipment in the cash-generating unit glyphosate amounting to €277 million. The impairment losses on goodwill were due to reduced business prospects overall, largely driven by significantly lower price expectations for glyphosate. The impairment testing resulted in the recognition of impairment loss reversals in the cash-generating units Soybean Seed & Traits (€1,253 million, comprising €140 million on research and development projects, €971 million on patents and technologies, €114 million on trademarks and €28 million on marketing and distribution rights) and Vegetable Seeds (€134 million, comprising €37 million on research and development projects, €81 million on patents and technologies, €13 million on trademarks and €3 million on marketing and distribution rights). The impairment loss reversal for Soybean Seed & Traits was largely due to a decrease in the cost of goods sold as a result of lower commodity prices. The impairment loss reversal for Vegetable Seeds was due to improved market penetration and growing market share in Asia. In contrast, impairment losses were recognized in the cash-generating units Corn Seed & Traits (€579 million, comprising €99 million on research and development projects, €376 million on patents and technologies, €89 million on trademarks and €15 million on marketing and distribution rights), Cotton Seed (€392 million, comprising €22 million on research and development projects, €330 million on patents and technologies, and €40 million on trademarks), and glyphosate (€277 million, comprising €277 million on property, plant and equipment). The impairment loss at Corn Seed & Traits was mainly driven by the anticipated long-term normalization of commodity prices. The impairment loss for Cotton Seed was primarily attributable to persistent competitive pressure. The impairment loss for glyphosate was mainly due to significant further declines in market price expectations. In addition, further reductions in expectations with regard to volumes also had an impact. The impairment losses and impairment loss reversals reflected the difference between the respective carrying amounts and their fair value less costs of disposal. 35 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group The table below indicates the capital cost factors used in the impairment testing on the cash-generating units in the fourth quarter of 2022 and second quarter of 2023. A long-term growth rate of 2% (Q4 2022: 2%) and an after-tax cost of capital of 10.1% (Q4 2022: 10.0%) were applied in the testing of goodwill for impairment in the Crop Science segment in the second quarter of 2023. B 13 Impairment Testing Parameters After-tax cost of capital % Q4 2022 Q2 2023 Corn Seed & Traits 10.5 10.6 Soybean Seed & Traits 9.9 10.0 Glyphosate 11.5 11.3 Dicamba 7.7 7.7 Cotton Seed 7.6 7.8 Canola 8.3 8.2 Vegetable Seeds 9.9 10.2 Financial instruments The following tables show the carrying amounts and fair values of the individual financial assets and liabilities by category of financial instrument under IFRS 9 and a reconciliation to the corresponding line items in the statements of financial position. Since the line items “Trade accounts receivable,” “Other receivables,” “Financial liabilities” and “Other liabilities” contain both financial instruments and nonfinancial assets or liabilities (such as other tax receivables), the reconciliation is shown in the column headed “Nonfinancial assets/liabilities.” 36 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Carrying Amounts and Fair Values of Financial Instruments Measured at fair value [fair value for information4] Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets/ liabilities € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Trade accounts receivable 12,791 129 501 296 AC 12,791 FVTPL, mandatory2 129 FVTOCI (recycling) 501 Nonfinancial assets 296 Other financial assets 223 2,562 494 1,737 AC 193 [182] FVTPL, mandatory2 2,491 59 1,432 FVTOCI (no recycling), designated3 55 284 Derivatives 16 435 21 Lease receivables 30 [30] Other receivables 384 64 2,843 AC 384 [384] FVTPL, mandatory2 64 Nonfinancial assets 2,843 Cash and cash equivalents 4,481 AC 4,481 [4,481] Total financial assets 17,879 2,691 995 1,801 of which AC 17,849 of which FVTPL 2,620 59 1,496 Financial liabilities 46,303 128 86 AC 45,101 [33,140] [8,981] Derivatives 128 Lease liabilities 1,202 Nonfinancial liabilities 86 Trade accounts payable 5,970 AC 5,970 Other liabilities 873 14 212 1,199 899 AC 873 [873] FVTPL (nonderivative), mandatory2 1,197 Derivatives 14 212 2 Nonfinancial liabilities 899 Total financial liabilities 53,146 14 340 1,199 of which AC 51,944 of which derivatives 14 340 2 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9.5.7.5 4 Fair value of the financial instruments at amortized cost under IFRS 7.29 (a) 37 B 14 June 30, 2023 Total 13,717 12,791 129 501 296 5,016 193 3,982 339 472 30 3,291 384 64 2,843 4,481 4,481 23,366 17,849 4,175 46,517 45,101 128 1,202 86 5,970 5,970 3,197 873 1,197 228 899 54,699 51,944 356 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Carrying Amounts and Fair Values of Financial Instruments Measured at fair value [fair value for information4] Measurement category (IFRS 9)1 Measured at amortized cost Based on quoted prices in active markets (Level 1) Based on observable market data (Level 2) Based on unobservable inputs (Level 3) Nonfinancial assets/ liabilities € million Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Trade accounts receivable 9,881 177 254 AC 9,881 FVTPL, mandatory2 177 Nonfinancial assets 254 Other financial assets 259 1,459 3,746 1,793 AC 230 [219] FVTPL, mandatory2 1,395 3,524 1,440 FVTOCI (no recycling), designated3 55 340 Derivatives 9 222 13 Lease receivables 29 [29] Other receivables 406 33 2,549 AC 406 [406] FVTPL, mandatory2 33 Nonfinancial assets 2,549 Cash and cash equivalents 5,171 AC 5,171 [5,171] Total financial assets 15,717 1,636 3,746 1,826 of which AC 15,688 of which FVTPL 1,572 3,524 1,473 Financial liabilities 41,377 190 85 AC 40,143 [28,340] [8,298] Derivatives 190 Lease liabilities 1,234 Nonfinancial liabilities 85 Trade accounts payable 7,545 AC 7,545 Other liabilities 2,124 9 143 1,734 901 AC 2,124 [2,124] FVTPL (nonderivative), mandatory2 1,729 Derivatives 9 143 5 Nonfinancial liabilities 901 Total financial liabilities 51,046 9 333 1,734 of which AC 49,812 of which derivatives 9 333 5 1 AC: at amortized cost FVTOCI: at fair value through other comprehensive income FVTPL: at fair value through profit or loss 2 Measured at fair value through profit or loss as required by IFRS 9 3 Measured at fair value through other comprehensive income under IFRS 9.5.7.5 4 Fair value of the financial instruments at amortized cost under IFRS 7.29 (a) 38 B 15 Dec. 31, 2022 Total 10,312 9,881 177 254 7,257 230 6,359 395 244 29 2,988 406 33 2,549 5,171 5,171 22,925 15,688 6,569 41,652 40,143 190 1,234 85 7,545 7,545 4,911 2,124 1,729 157 901 53,122 49,812 347 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Due to the short maturities of most trade accounts receivable and payable, other financial receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not significantly differ from the fair values. Trade accounts receivable are measured at fair value through other comprehensive income if they can potentially be transferred as part of factoring agreements. The fair values of financial assets and liabilities measured at amortized cost that are given for information are the present values of the respective future cash flows. The present values are determined by discounting the cash flows at a closing-date interest rate, taking into account the term of the assets or liabilities and also the creditworthiness of the counterparty in certain cases. Where a market price is available, however, this is deemed to be the fair value. The fair values of financial assets measured at fair value correspond to quoted prices in active markets (Level 1), or are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2), or are the present values of the respective future cash flows, determined on the basis of unobservable inputs (Level 3). The fair values of derivatives for which no publicly quoted prices exist in active markets (Level 1) are determined using valuation techniques based on observable market data as of the end of the reporting period (Level 2). In applying valuation techniques, credit or debt value adjustments are determined to account for the credit risk of the contractual party or Bayer. Currency and commodity forward contracts are measured individually at their forward rates or forward prices on the closing date. These depend on spot rates or prices, including time spreads. The fair values of interest-rate hedging instruments and cross-currency interest-rate swaps were determined by discounting future cash flows over the remaining terms of the instruments at market rates of interest, taking into account any foreign currency translation as of the closing date in certain cases. Fair values measured using unobservable inputs are categorized within Level 3 of the fair value hierarchy. This essentially applies to certain debt or equity instruments, in some cases to the fair values of embedded derivatives, and to obligations for contingent consideration in business combinations. Credit risk is frequently the principal unobservable input used to determine the fair values of debt instruments classified as “FVTPL – at fair value through profit or loss” by the discounted cash flow method. Here the credit spreads of comparable issuers are applied. A significant increase in credit risk could result in a lower fair value, whereas a significant decrease could result in a higher fair value. However, a relative change of 10% in the credit spread does not materially affect the fair value. When determining the fair values of contingent consideration within the “FVTPL (nonderivative) – at fair value through profit or loss” category, the principal unobservable input is the estimation of the probability that, for example, pre-defined milestones for research and development projects will be achieved or that sales targets will be attained, as well as the timing of the payments. Changes in these estimates may lead to significant increases or decreases in fair value. Embedded derivatives are separated from their respective host contracts if the contracts do not represent financial assets and are not closely related to them. Such host contracts are generally sale or purchase agreements relating to the operational business. The embedded derivatives cause the cash flows from the contracts to vary with exchange-rate or price fluctuations, for example. The internal measurement of embedded derivatives is performed using appropriate valuation models, such as discounted cash flow models, which are based on unobservable inputs. The relevant models include planned sales and purchase volumes, and prices derived from market data. Regular monitoring is carried out based on these fair values as part of quarterly reporting. 39 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group In May 2023, Bayer announced the signing of a long-term structured renewable energy credit (REC) purchase agreement. The agreement contains a contract for difference, which meets the definition of an embedded derivative measured at fair value through profit and loss. At inception, the fair value of the embedded derivative equaled the transaction price of zero. Fair value changes over the contract term are mostly influenced by future energy prices and are recognized in other operating income or expenses. As of June 30, 2023, the positive fair value was €9 million. The changes in the amount of financial assets and liabilities recognized at fair value based on unobservable inputs (Level 3) for each financial instrument category were as follows: Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI (no recycling)1 Derivatives (net) Liabilities – FVTPL (nonderivative)1 Carrying amount, January 1, 2023 1,473 340 8 (1,729) Gains (losses) recognized in profit or loss 15 – 11 74 of which related to assets/liabilities recognized in the statements of financial position 15 – 11 74 Gains (losses) recognized outside profit or loss – (10) – – Additions of assets (liabilities) 136 20 – (31) Settlements of (assets) liabilities (126) – – 463 Changes in scope of consolidation – (61) – – Exchange differences (2) (5) – 26 Carrying amount, June 30, 2023 1,496 284 19 (1,197) 1 See table B 14 for definitions of measurement categories. Development of Financial Assets and Liabilities (Level 3) € million Assets – FVTPL1 FVTOCI (no recycling)1 Derivatives (net) Liabilities – FVTPL (nonderivative)1 Carrying amount, January 1, 2022 1,009 406 11 (1,769) Gains (losses) recognized in profit or loss (72) – (5) 68 of which related to assets/liabilities recognized in the statements of financial position (72) – (5) 68 Gains (losses) recognized outside profit or loss – (33) – – Additions of assets (liabilities) 13 74 – – Settlements of (assets) liabilities – (13) – 29 Changes in scope of consolidation (18) – – – Exchange differences 12 27 2 (152) Carrying amount, June 30, 2022 944 461 8 (1,824) 1 See table B 15 for definitions of measurement categories. The changes recognized in profit or loss were included in other operating income/expenses, as well as in the financial result in interest income, exchange gains or losses and other financial income and expenses. 40 B 16 Total 92 100 100 (10) 125 337 (61) 19 602 B 17 Total (343) (9) (9) (33) 87 16 (18) (111) (411) Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Financial liabilities In April 2023, Bayer AG exercised its option to extend, by an additional six months, the new €3 billion credit line with banks that it had agreed and drawn on in May 2022. In May 2023, Bayer AG placed new senior bonds with a total volume of €3 billion under its Debt Issuance Program. The three tranches with volumes of €750 million, €750 million and €1.5 billion have maturities of 3.25 years, 6.25 years and 10 years, respectively. The coupons of the notes are 4.000%, 4.250% and 4.625%, respectively. To find out more about the maturities of financial liabilities, please see the table on maturities in Note [24] to the consolidated financial statements in the Bayer Annual Report 2022. Legal Risks To find out more about the Bayer Group’s legal risks, please see Note 30 to the consolidated financial statements in the Bayer Annual Report 2022, which can be downloaded free of charge at www.bayer.com. Since the Bayer Annual Report 2022, the following significant changes have occurred in respect of the legal risks: Dicamba: Since 2016, a number of lawsuits have been filed against Bayer’s subsidiary Monsanto in the United States. The general claims are that off-target movement from the dicamba herbicide and/or the Xtend™ system has damaged non-dicamba tolerant soybean and other crops. We continue to receive new dicamba-related claims that could be potential future lawsuits. The most significant of those was a claim by Frey Farms, which is a producer of watermelons, pumpkins and other vegetables. In April 2023, the parties entered into an agreement to resolve all of the claims of Frey Farms. BASF arbitration: In 2019, Bayer was served with a request for arbitration by BASF SE. BASF alleged indemnification claims under asset purchase agreements related to the divestment of certain Crop Science businesses to BASF. In August 2022, the arbitral tribunal dismissed BASF’s claims in their entirety and awarded Bayer approximately two-thirds of its arbitration fees and costs. In April 2023, the Higher Regional Court of Frankfurt (Main) issued a decision rejecting BASF’s motion to set aside the award. However, the court found that the arbitral award technically was invalid because it did not comply with a German procedural rule regarding the signatures of the tribunal members. According to the court decision the original arbitration proceedings have not yet come to an end and still have to be concluded by a valid arbitration award that fully complies with the procedural rules. Bayer disagrees with the court decision. Both parties have appealed the decision. Mine permit Idaho: In 2019, the United States Bureau of Land Management (BLM) granted a permit to Bayer’s subsidiary P4 Production, LLC, for a new phosphate mine in Idaho. Phosphorus is needed for glyphosate, which is contained in a number of Bayer’s herbicides, including Roundup™ agricultural herbicides. In 2021, three non-governmental organizations (NGOs) challenged the permit in the United States District Court for the District of Idaho. P4 Production joined the proceeding as an intervenor. In June 2023, the court vacated the permit. We are preparing a new mine permit application, and we are evaluating other options, including appeal and other phosphate ore supplies that are not impacted by the court’s decision. PCBs: Bayer’s subsidiary Monsanto has been named in lawsuits brought by various governmental entities in the United States claiming that Monsanto, Pharmacia and Solutia, collectively as a manufacturer of PCBs, should be responsible for a variety of damages due to PCBs in the environment, including bodies of water, regardless of how PCBs came to be located there. PCBs are chemicals that were widely used for various purposes until the manufacture of PCBs was prohibited by the EPA in the United States in 1979. In June 2023, the Vermont Attorney General filed suit in state court alleging claims for damages related to PCB contamination of the state’s environment and its school buildings. The same month, a second and similar complaint (Addison Central School District) was filed in federal court (District of Vermont) by private lawyers representing 93 Vermont school districts alleging PCB contamination in school buildings. Also in June 2023, the Delaware Supreme Court affirmed, in part, and reversed, in part, the Delaware Superior Court’s prior complete dismissal of the Delaware State Attorney General’s lawsuit alleging environmental damages from PCBs. The Delaware AG’s suit will now proceed again in Superior Court consistent with the 41 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Delaware Supreme Court’s opinion. Monsanto also faces numerous lawsuits claiming personal injury and/or property damage due to use of and exposure to PCB products. There is one group of cases with approximately 200 plaintiffs claiming a wide variety of personal injuries allegedly due to PCBs in the building products of a school (Sky Valley Education Center “SVEC”) in King County, Washington. In July 2023, the jury in the Clinger SVEC trial returned a verdict awarding both compensatory and punitive damages to two plaintiffs in the total amount of US$72 million, but a mistrial was declared for the five remaining plaintiffs after the jury was unable to reach a decision on their claims. Bayer disagrees with each of the adverse verdicts and plans to pursue post-trial motions and an appeal based on multiple legal errors. Shareholder litigation concerning Monsanto acquisition: In Germany and the United States, investors have filed lawsuits claiming damages suffered due to the drop in the company’s share price. Plaintiffs allege that the company’s capital market communication in connection with the acquisition of Monsanto Company was flawed. In the proceeding in the United States, the United States District Court for the Northern District of California certified a class in May 2023. Notes to the Statements of Cash Flows Net operating cash flow in the first half of 2023 amounted to minus €3,066 million (H1 2022: €1,378 million). The decrease compared with the prior-year period was due in part to a decline in business in our Crop Science Division and to higher payments overall to resolve proceedings in the litigations surrounding glyphosate, PCBs, Essure™ and dicamba, which resulted in a net outflow of €1,689 million (H1 2022: €897million). Net operating cash flow included payments from banks of €318 million from the transfer of trade receivables that were not yet due or settled by customers as of June 30, 2023. The net cash inflow for investing activities in the first half of the year amounted to €505 million (H1 2022: net cash outflow of €2,029 million). The net cash inflow for current financial assets came to €2,280 million (H1 2022: net cash outflow of €1,308 million). These cash inflows were largely attributable to the sale of investments in money market funds. There was a net cash inflow of €1,934 million for financing activities (H1 2022: net cash outflow of €739 million). This included net borrowings of €4,870 million (H1 2022: €1,785 million). Net interest payments came to €599 million (H1 2022: €573 million). We paid out €2,360 million in dividends (H1 2022: €1,966 million). Related Parties Related parties as defined in IAS 24 (Related Party Disclosures) are those legal entities, natural persons and close members of their family that are able to exert influence on Bayer AG and its subsidiaries or over which Bayer AG or its subsidiaries exercise control or joint control or have a significant influence. They include, in particular, nonconsolidated subsidiaries, joint ventures and associates included in the consolidated financial statements at cost of acquisition or using the equity method, post-employment benefit plans and the corporate officers of Bayer AG. Business transactions involving related parties were not material from the viewpoint of the Bayer Group. 42 Bayer Half-Year Financial Report as of June 30, 2023 B Condensed Consolidated Interim Financial Report Notes to the Condensed Consolidated Interim Financial Statements of the Bayer Group Other information On April 28, 2023, the Annual Stockholders’ Meeting approved the proposal by the Board of Management and the Supervisory Board that a dividend of €2.40 per share carrying dividend rights be paid for the 2022 fiscal year and that the remaining amount of €24,488,742.85 be allocated to other retained earnings. The actions of the members of the Board of Management and the Supervisory Board serving in 2022 were ratified in accordance with the proposals by the Board of Management and the Supervisory Board. Two stockholder representatives were elected to the Supervisory Board in accordance with the nominations submitted by the Supervisory Board. The proposal by the Board of Management and the Supervisory Board to approve the Compensation Report for the 2022 fiscal year prepared and audited in accordance with Section 162 of the German Stock Corporation Act (AktG) was approved. In accordance with the proposals by the Board of Management and the Supervisory Board, the Annual Stockholders’ Meeting authorized the Board of Management to allow for the conduct of virtual annual stockholders’ meetings (amendment of Section 13 of the Articles of Incorporation) and permitted the members of the Supervisory Board to participate in virtual annual stockholders’ meetings by way of video and audio transmission (amendment of Section 15 of the Articles of Incorporation). In accordance with the proposal by the Supervisory Board, Deloitte GmbH Wirtschaftsprüfungs- gesellschaft, Munich, Germany, was elected by the Annual Stockholders’ Meeting as auditor of the annual and consolidated financial statements for 2023, and also to review, if applicable, the condensed financial statements and interim management report as of June 30, 2023, and if applicable, the condensed financial statements and interim management reports as of September 30, 2023, and March 31, 2024, if these are prepared. Leverkusen, August 4, 2023 Bayer Aktiengesellschaft The Board of Management Bill Anderson Sarena Lin Wolfgang Nickl Stefan Oelrich Rodrigo Santos Heiko Schipper 43 Bayer Half-Year Financial Report as of June 30, 2023 Responsibility Statement Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group in line with generally accepted accounting principles, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the financial year. Leverkusen, August 4, 2023 Bayer Aktiengesellschaft The Board of Management Bill Anderson Sarena Lin Wolfgang Nickl Stefan Oelrich Rodrigo Santos Heiko Schipper 44 Bayer Half-Year Financial Report as of June 30, 2023 Review Report To Bayer Aktiengesellschaft, Leverkusen We have reviewed the condensed interim consolidated financial statements of Bayer Aktiengesellschaft, Leverkusen, which comprise the consolidated income statement and the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity as well as selected explanatory notes to the consolidated financial statements, and the interim group management report for the period from 1 January to 30 June 2023, that are part of the semi-annual financial information under Section 115 German Securities Trading Act (WpHG). The preparation of the interim consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the requirements of the WpHG applicable to interim group management reports is the responsibility of the executive directors of the Company. Our responsibility is to issue a review report on the interim consolidated financial statements and on the interim group management report based on our review. We conducted our review of the interim consolidated financial statements and of the interim group management report in compliance with the German Generally Accepted Standards for Reviews of Financial Statements promulgated by the Institut der Wirtschaftsprüfer (IDW) and in supplementary compliance with the International Standard on Review Engagements 2410 “Review of Interim Financial Information Performed by the Independent Auditor of the Entity”. Those standards require that we plan and perform the review to obtain a certain level of assurance to preclude through critical evaluation that the condensed interim consolidated financial statements have not been prepared, in material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU, or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and to analytical procedures applied to financial data and thus provides less assurance than an audit. Since, in accordance with our engagement, we have not performed an audit, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the interim consolidated financial statements of Bayer AG, Leverkusen, have not been prepared, in material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU or that the interim group management report has not been prepared, in material respects, in accordance with the requirements of the WpHG applicable to interim group management reports. Munich, 4 August 2023 Deloitte GmbH Wirtschaftsprüfungsgesellschaft (Andreas Wermelt) (Michael Mehren) Wirtschaftsprüfer Wirtschaftsprüfer (German Public Auditor) (German Public Auditor) Review Report 45 Bayer Half-Year Financial Report as of June 30, 2023 Financial Calendar / Reporting Principles / Masthead Financial Calendar Q3 2023 Quarterly Statement 2023 Annual Report Annual Stockholders’ Meeting 2024 Q1 2024 Quarterly Statement November 8, 2023 March 5, 2024 April 26, 2024 May 14, 2024 Reporting Principles This Bayer AG Interim Report is a half-year financial report that satisfies the requirements of Section 115, Paragraph 2, No. 1 and No. 2, Paragraph 3 and Paragraph 4 of the German Securities Trading Act (WpHG). Bayer has prepared the condensed consolidated interim financial statements according to the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) and endorsed by the European Union (EU). This report should be read in conjunction with the Annual Report for the 2022 fiscal year and the additional information about the company provided therein. The Annual Report 2022 is available on our website at www.bayer.com. Masthead Published by Bayer AG, 51368 Leverkusen, Germany Date of publication Tuesday, August 8, 2023 Editor Danielle Staudt-Gersdorf, phone +49 214 30 46309 Email: danielle.staudt-gersdorf@bayer.com English edition Translation Services Global Business Services – Germany Investor Relations Peter Dahlhoff, phone +49 214 60001494 Email: peter.dahlhoff@bayer.com Bayer on the internet www.bayer.com Forward-Looking Statements This half-year financial report may contain forward-looking statements based on current assumptions and forecasts made by Bayer management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. Legal Notice The product names designated with ™ are brands of the Bayer Group or our distribution partners and are registered trademarks in many countries. 46

Semestriel, 2023, Agrochemistry, BAYER

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